Accounting Standard 23 provides guidance on how to account for borrowing costs. It states that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognized as an expense. The standard outlines which assets are considered qualifying assets and provides an example to illustrate how borrowing costs are accounted for and the required journal entries and disclosures.

1. HOW BORROWING COST IS ACCOUNTED
AS PER ACCOUNTING STANDARD 23
Submitted By :
Sintu Parekh (01)
Radhika Kewlani (18)
Patel Khushbu (08)
Swati Shukla(37)
Hardik Shah (23)
2013
[ACCOUNTING STANDARD 23]

2. How Borrowing cost Accounted as per Accounting Standard 23 1
1. Terms:
 Borrowing costs :
 According to AS-23 :
“Borrowing costs are interest and other costs that an entity incurs in connection with the
borrowing of funds.”
 Qualifying asset :
 According to AS-23 :
“A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale. “
A. Inventories
B. Manufacturing Plants
C. Power Generation Facilities
D. Intangible Assets
E. Investment Properties.

3. How Borrowing cost Accounted as per Accounting Standard 23 2
2. Borrowing Cost:
 Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an
expense.
 A qualifying asset measured at fair value.
 Doesn’t deal with actual or imputed cost of owners’ equity including preference share capital.
 Financial assets, and inventories that are manufactured, produced, over a short period of time,
are not qualifying assets.
 Assets that are ready for their intended use or sale when acquired are not qualifying assets.
 An entity shall cease capitalizing borrowing costs when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.

4. How Borrowing cost Accounted as per Accounting Standard 23 3
3. Accounting Standard 23:
 Come in the existence on or after 1-4-2000
 Mandatory in nature
 It includes :
a) Interest & commitment charges on bank, short-term & long term borrowings
b) Paying back of discounts or premiums related to borrowings
c) paying back of subsidiary costs incurred in connection with the arrangement of borrowing
d) Financial charges for acquiring assets under the finance leases or similar arrangements.
e) Exchange differences arising from foreign currency borrowings.

5. How Borrowing cost Accounted as per Accounting Standard 23 4
4. Who can apply:
 An entity is not required to apply the Standard to borrowing costs directly attributable to the
acquisition, construction or production of:
a) A qualifying asset measured at fair value
Or
b) Inventories thatare manufactured, on a repetitive basis.

6. How Borrowing cost Accounted as per Accounting Standard 23 5
5. Example :
 A telecom company has acquired a 3G license. The license could be sold or licensed to a third
party. However, management intends to use it to operate a wireless network. Development of
the network starts when the license is acquired.
 Borrowing costs should be on the acquisition of the 3G license be capitalized until the network
is ready for its intended use.

7. How Borrowing cost Accounted as per Accounting Standard 23 6
6. How Cost is Accounted:
 Suppose the Jaihind Projects Limited wants to construct a building & invested in plants &
machinery 10,00,000
 Loan = Rs 12,00,000.
 Interest rate=10%
 Company use the asset for 10 moths
 So, actual interest is 1,20,000Rs.
 But
 (12,00,000X10%X10/12 months) =1,00,000Rs. Is
Debited to interest on Loan A/c
 And capitalized amount of
20,000Rs. Is
Debited to the Machinery A/c

8. How Borrowing cost Accounted as per Accounting Standard 23 7
7. Journal Entries
Machinery A/c Dr. 20,000
Interest on loan A/c Dr. 1,00,000
To loan A/c 1,20,000
Profit & Loss A/c Dr. 1,00,000
To Interest on loan A/c 1,00,000

9. How Borrowing cost Accounted as per Accounting Standard 23 8
8. Disclosure
 An entity shall disclose:
1. Amount of borrowing costs capitalized
2. Capitalization rate