AS-16 – Borrowing Cost :

Borrowing costs are interest and other costs incurred by an enterprise in connection with borrowing of funds e.g. interest and commitment charges on bank borrowings and other short-term and long-term borrowings; amortization of discounts or premiums relating to borrowings; amortization of ancillary costs incurred in connection with the arrangement of borrowings etc.

Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in which they are incurred. To the extent that funds are borrowed especially for the purpose of obtaining a qualifying asset, the amount of borrowing cost eligible for capitalization on that asset should be determined as the actual borrowing costs incurred on that borrowing. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization should be determined by applying a capitalization rate to the expenditure on that asset. The capitalization rate would be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period. When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realizable value, the carrying amount is written down or written off in accordance with requirements of other accounting demands. In certain circumstances, the amount of the written down or written off is written back in accordance with those of other accounting standards.

Capitalisation of borrowing costs should be suspended during the extended period in which active development is interrupted. Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete. The financial statements should disclose (a) the accounting policy adopted for borrowing costs and (b) the amount of borrowing costs capitalized during the period.