Difference between ‘Ind AS-23’ and ‘AS 16’

Major differences between ‘Ind AS-23: Borrowing Costs’ and ‘AS-16: Borrowing Costs’ are as under:

(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 AS 16 does not provide for such scope exclusion.

(ii) Ind AS 23 also does not require 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 AS 16 does not provide for such scope exclusion 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 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 109. Items (b) and (c) above are not mentioned in Ind AS 23, as some of these components of borrowing costs are considered as the components of interest expense calculated using the effective interest rate method. Also, Ind AS 23 includes interest in respect of lease liabilities (recognised as per Ind AS 116), while, AS 16 includes finance charges in respect of assets acquired under finance lease as part of borrowing costs.

Ind AS 23 provides that where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation
of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest. AS 16 does not explicitly deal with such scenario.

(iv) AS 16 gives explanation for meaning of ‘substantial period of time’ appearing in the definition of the term ‘qualifying asset’ as twelve months whereas under Ind AS 23, there is no such explanation.

(v) Ind AS 23 provides that when Ind AS 29, 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). AS 16 does not contain a similar clarification because at present, in India, under AS regime, there is no Standard on Financial Reporting in Hyperinflationary Economies.

(vi) 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 AS 16.

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

(viii) For the purpose of computing borrowing cost under Ind AS 23 in regard to foreign currency borrowing, the difference is to be computed with reference to functional currency whereas under AS 16 read with AS 11, the difference is between the local currency and foreign currency.

ICAI’s Educational Material on Ind AS 23, Borrowing Costs

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