Page 7 - 9. COMPILER QB - INDAS 23

Q5 (RTP Nov. 21)

Nikka Limited has obtained a term loan of Rs. 620 lacs for a complete renovation and modernisation of its
Factory on 1st April, 20X1. Plant and Machinery was acquired under the modernisation scheme and
installation was completed on 30th April, 20X2. An expenditure of Rs. 510 lacs was incurred on installation
of Plant and Machinery, Rs. 54 lacs has been advanced to suppliers for additional assets (acquired on 25th

April, 20X1) which were also installed on 30th April, 20X2 and the balance loan of Rs. 56 lacs has been
used for working capital purposes. Management of Nikka Limited considers the 12 months period as a
substantial period of time to get the asset ready for its intended use.
The company has paid total interest of Rs. 68.20 lacs during financial year 20X1-20X2 on the above loan.
The accountant seeks your advice on how to account for the interest paid in the books of accounts. Will
th
your answer be different, if the whole process of renovation and modernization gets completed by 28
February, 20X2?
Solution

As per Ind AS 23, 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 recognised as
an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its

intended use or sale.
Accordingly, the treatment of Interest of Rs. 68.20 lacs occurred during the year 20X1-20X2 would be as
follows:

(i) When construction of asset completed on 30th April, 20X2

The treatment for total borrowing cost of Rs. 68.20 lakhs will be as follows:
Purpose Nature Interest to be Interest to be
capitalised charged to profit
and loss account
Rs. in lakhs Rs. in lakhs
Modernisation and renovation Qualifying [68.20 x
of plant and Machinery asset (510/620)] = 56.10
Advance to Qualifying [68.20 x (54/620)]
Suppliers for additional assets asset = 5.94
Working Capital Not a [68.20 x
qualifying (56/620)]
asset = 6.16
62.04 6.16
(ii) When construction of assets is completed by 28th February, 20X2

When the process of renovation gets completed in less than 12 months, the plant and machinery and the
additional assets will not be considered as qualifying assets (until and unless the entity specifically
considers that the assets took a substantial period of time for completing their construction). Accordingly,
the whole of interest will be required to be charged off / expensed off to Profit and loss account.

9. 6