Difference between Ind AS 23 on Borrowing Costs and existing AS 16 on Borrowing Costs

(i) Ind AS 23 does not require an entity to apply this standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset measured at fair value, for example, a biological asset whereas the existing AS 16 does not provide for such scope relaxation.

(ii) Ind AS 23 excludes the application of this Standard to borrowing costs directly attributable to the acquisition, construction or production of inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis whereas existing AS 16 does not provide for such scope relaxation and is applicable to borrowing costs related to all inventories that require substantial period of time to bring them in saleable condition.

(iii) As per existing AS 16, Borrowing Costs, inter alia, include the following:

(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;

(b) amortisation of discounts or premiums relating to borrowings;

(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings; Ind AS 23 requires to calculate the interest expense using the effective interest rate method as described in Ind AS 39 Financial Instruments: Recognition and Measurement. Items (b) and (c) above have been deleted, as some of these components of borrowing costs are considered as the components of interest expense calculated using the effective interest rate method.

(iii) Existing AS 16 gives explanation for meaning of ‘substantial period of time’ appearing in the definition of the term ‘qualifying asset’. This explanation is not included in the Ind AS 23.

(iv) Ind AS 23 provides that when the Standard on Financial Reporting in Hyperinflationary Economies is applied, part of the borrowing costs that compensates for inflation should be expensed as required by that Standard (and not capitalised in respect of qualifying assets). The existing AS 16 does not contain a similar clarification because at present, in India, there is no Standard on Financial Reporting in Hyperinflationary Economies.

(v) Ind AS 23 specifically provides that in some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowing costs while in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings. This specific provision is not there in the existing AS 16.

(vi) Ind AS 23 requires disclosure of capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. The existing AS 16 does not have this disclosure requirement. (ICAI)