In this article, we will explain about ICDS IX and its difference with respective Notified AS.
ICDS IX Borrowing Costs
ICDS IX deals with the treatment of borrowing costs and other costs which are incurred in relation to borrowing of funds.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset*, shall be capitalized as cost of that asset.
*qualifying asset means land, building, plant and machinery, furniture, inventories, patents, know-how, licenses, trademarks, copyrights, any other business or commercial rights.
Capitalization of Borrowing Costs:
1. The borrowing costs should be capitalized to an extent to which it is incurred during the reporting period on the borrowed funds, specifically for the purpose of acquisition, construction or production of qualifying asset
2. The capitalization will commence from the date when the funds have been borrowed, in case funds have been borrowed for the purpose of acquisition, construction or production of qualifying asset. In case of inventory, it will commence from the date, the utilization of borrowed funds have been started
3. The capitalization of borrowing cost will cease when the qualifying asset is first put to use. In case of inventory, it will cease when the activities necessary to prepare such inventory, for its sale, are substantially completed
4. When the construction of qualifying asset is taken up in parts and a substantially completed part is capable of being used then, the capitalization of borrowing costs will cease:
i. in case of part of qualifying asset, when such part of qualifying asset is first put to use
ii. in case of part of inventory, when the activities necessary to prepare such part of inventory, for its sale, are substantially completed
The following should be disclosed in the financial statements:
i. the accounting policy adopted for borrowing costs
ii. the amount of borrowing costs capitalized during the year
Comparison of ICDS IX and AS 16
|Sl. No.||Basis||ICDS IX||AS 16|
|1.||Qualifying Asset||Qualifying assets are any tangible and intangible asset and inventory which require time of 12 months or more to bring them in saleable condition||An asset that necessarily takes a substantial period of time to get ready for its intended use or sale|
|2.||Income from temporary investment||ICDS does not specify about the treatment of income earned from temporary investment made out of borrowed funds||If borrowed funds are investments then the income earned from it will be reduced from the actual borrowing cost|
|3.||Commencement of Capitalization||Capitalization will commence from the date when funds are utilized in case of inventories, otherwise, from the date when funds are borrowed||Capitalization will commence when activities, to prepare the asset for sale, have begun and borrowing costs are being incurred|
|4.||Suspension of capitalization||There is no condition mentioned for suspension of capitalization||Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted|
For further reading on these series, check out our next article on ICDS X