Accounting Standard 16: Borrowing Costs - Vocabulary Review

This set of vocabulary flashcards covers key terminology and definitions from Accounting Standard 16 (AS 16) regarding Borrowing Costs and Qualifying Assets.

Borrowing costs

Interest and other costs incurred by an enterprise in connection with the borrowing of funds.

Qualifying asset

An asset (Tangible or intangible) that necessarily takes a substantial period of time to get ready for its intended use or sale.

Substantial period of time

A duration primarily depending on the facts and circumstances of each case, ordinarily considered to be a rebuttable presumption of twelve months.

Specific borrowings

Funds borrowed specifically for the purpose of obtaining a particular qualifying asset.

General borrowings

Funds borrowed generally and used for the purpose of obtaining a qualifying asset, where a direct relationship between particular borrowings and the asset is difficult to identify.

Capitalization rate

$$\text{Capitalization Rate} = \frac{\text{Borrowing cost on general borrowings}}{\text{Weighted average of general borrowings outstanding during the period}} \times 100$$

Commencement of capitalisation

The stage when capitalization begins, requiring three conditions: expenditure for the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress.

Suspension of capitalisation

The pausing of borrowing cost capitalization during extended periods in which active development is interrupted.

Cessation of capitalisation

The point at which capitalization should stop because substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Exchange differences (under AS 16)

Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

AS 11

The Accounting Standard titled 'The Effect of Changes in Foreign Exchange Rates', which handles exchange differences not covered by AS 16.

Amount eligible for capitalisation (Specific Borrowings)

$$\text{Actual borrowing costs incurred} - \text{Any income on the temporary investment of those borrowings}$$

Investment Properties

Buildings meant for capital appreciation and earning rental income; these are considered qualifying assets under AS 16.

Recognition criteria (Borrowing Costs)

Borrowing costs are capitalized when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably.

AS 16 Disclosures

Financial statements must disclose the accounting policy adopted for borrowing costs and the amount of borrowing costs capitalised during the period.