The government said on the process of converging Indian accounting standards with those used globally would continue.

The move would help Indian companies in tapping international markets with reduced cost of compliance. According to an official statement, the government has already notified 28 accounting standards for Indian corporate and would assess more standards for notification. "The government would examine further accounting standards to be followed by companies on the basis of the standards proposed by Institute of Charted Accountants of India ( ICAI), subject to the recommendations of National Advisory Committee of Accounting Standards (NACAS) thereon, for notification in accordance with the procedure laid down under the Companies Act, 1956," it said. In the process, the approach of convergence with International Financial Reporting Standards (IFRS) would be continued so that the financial information disclosed by Indian companies compares well with that disclosed by non-Indian companies in compliance with IFRS, it added. The development assumes significance as Indian companies listed on European stock exchanges will have to comply with both IFRS and Indian accounting standards (IAS) from next year, in case the two set of standards are not converging. Time till 2011 would be given for IAS to converge with IFRS, in case India makes a declaration that the two standards are synchronizing. Recently, ICAI president Ved Jain had said the European Commission wanted India to make a declaration by June 30 this year that IAS are converging with IFRS. He said of the 38 IAS, 7 have absolutely converged with IFRS, while work is going on for upgrading the remaining 31 standards. The change in the accounting standards would be advantageous for the shareholders and stakeholders as it would allow the users of financial statements to re-evaluate the operations. Further, the costs of information on the financial statements would be available to its users on a timely basis.

Accounting Standards 23
Accounting Standard (As) 23 - Accounting for Investments in Associates in Consolidated Financial Statements Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2002. An enterprise that presents consolidated financial statements should account for investments in associates in the consolidated financial statements in accordance with this Standard. The following is the text of the Accounting Standard. Objective The objective of this Statement is to set out principles and procedures for recognizing, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group. Scope 1. This Statement should be applied in accounting for investments in associates in the preparation and presentation of consolidated financial statements by an investor. 2. This Statement does not deal with accounting for investments in associates in the preparation and presentation of separate financial statements by an investor. Definitions 3. For the purpose of this Statement, the following terms are used with the meanings specified: An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture3 of the investor. Significant influence is the power to participate in the financial and/or operating policy decisions of the invested but not control over those policies. Control: (a) The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

y y y y

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent). A parent is an enterprise that has one or more subsidiaries. A group is a parent and all its subsidiaries. Consolidated financial statements are the financial statements of a group presented as those of a single enterprise.

The equity method is a method of accounting whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investors share of net assets of the investee. The consolidated statement of profit and loss reflects the investors share of the results of operations of the investee. Equity is the residual interest in the assets of an enterprise after deducting all its liabilities. 4. For the purpose of this Statement, significant influence does not extend to power to govern the financial and/or operating policies of an enterprise. Significant influence may be gained by share ownership, statute or agreement. As regards share ownership, if an investor holds, directly or indirectly through subsidiary(ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiary(ies), less than 20% of the voting power of the invested, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. 5. The existence of significant influence by an investor is usually evidenced in one or more of the following ways: (a)Representation on the board of directors or corresponding governing body of the investee; (b)participation in policy making processes; (c)material transactions between the investor and the investee; (d)interchange of managerial personnel; or (e)provision of essential technical information. 6. Under the equity method, the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition and the carrying amount is increased or decreased to recognize the investors share of the profits or losses of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for alterations in the investors proportionate interest in the investee arising from changes in the investees equity that have not been included in the statement of profit and loss. Such changes include those arising from the revaluation of fixed assets and investments, from foreign exchange translation differences and from the adjustment of differences arising on amalgamations. Accounting for Investments - Equity Method

7. An investment in an associate should be accounted for in consolidated financial statements under the equity method except when: (a) the investment is acquired and held exclusively with a view to its subsequent disposal in the near future; or (b) the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. Investments in such associates should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments. The reasons for not applying the equity method in accounting for investments in an associate should be disclosed in the consolidated financial statements. 8. Recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate because the distributions received may bear little relationship to the performance of the associate. As the investor has significant influence over the associate, the investor has a measure of responsibility for the associates performance and, as a result, the return on its investment. The investor accounts for this stewardship by extending the scope of its consolidated financial statements to include its share of results of such an associate and so provides an analysis of earnings and investment from which more useful ratios can be calculated. As a result, application of the equity method in consolidated financial statements provides more informative reporting of the net assets and net income of the investor. 9. An investor should discontinue the use of the equity method from the date that: (a)it ceases to have significant influence in an associate but retains, either in whole or in part, its investment; or (b)the use of the equity method is no longer appropriate because the associate operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor. From the date of discontinuing the use of the equity method, investments in such associates should be accounted for in accordance with Accounting Standard (AS) 13, Accounting for Investments. For this purpose, the carrying amount of the investment at that date should be regarded as cost thereafter. Application of the Equity Method 10. Many of the procedures appropriate for the application of the equity method are similar to the consolidation procedures set out in Accounting Standard (AS) 21, Consolidated Financial Statements. Furthermore, the broad concepts underlying the consolidation procedures used in the acquisition of a subsidiary are adopted on the acquisition of an investment in an associate.

An investment in an associate is accounted for under the equity method from the date on which it falls within the definition of an associate. On acquisition of the investment any difference between the cost of acquisition and the investors share of the equity of the associate is described as goodwill or capital reserve, as the case may be. 12. Goodwill/capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but should be disclosed separately. 13. In using equity method for accounting for investment in an associate, unrealized profits and losses resulting from transactions between the investor (or its consolidated subsidiaries) and the associate should be eliminated to the extent of the investors interest in the associate. Unrealized losses should not be eliminated if and to the extent the cost of the transferred asset cannot be recovered. 14. The most recent available financial statements of the associate are used by the investor in applying the equity method; they are usually drawn up to the same date as the financial statements of the investor. When the reporting dates of the investor and the associate are different, the associate often prepares, for the use of the investor, statements as at the same date as the financial statements of the investor. When it is impracticable to do this, financial statements drawn up to a different reporting date may be used. The consistency principle requires that the length of the reporting periods, and any difference in the reporting dates, are consistent from period to period. 15. When financial statements with a different reporting date are used, adjustments are made for the effects of any significant events or transactions between the investor (or its consolidated subsidiaries) and the associate that occur between the date of the associates financial statements and the date of the investors consolidated financial statements. 16. The investor usually prepares consolidated financial statements using uniform accounting policies for the like transactions and events in similar circumstances. In case an associate uses accounting policies other than those adopted for the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to the associates financial statements when they are used by the investor in applying the equity method. If it is not practicable to do so, that fact is disclosed along with a brief description of the differences between the accounting policies. 17. If an associate has outstanding cumulative preference shares held outside the group, the investor computes its share of profits or losses after adjusting for the preference dividends whether or not the dividends have been declared. 18. If, under the equity method, an investors share of losses of an associate equals or exceeds the carrying amount of the investment, the investor ordinarily discontinues recognizing its share of further losses and the investment is reported at nil value. Additional losses are provided for to the extent that the investor has incurred obligations or made payments on behalf of the associate to satisfy obligations of the associate that the investor has guaranteed or to which the investor is

otherwise committed. If the associate subsequently reports profits, the investor resumes including its share of those profits only after its share of the profits equals the share of net losses that have not been recognised. 19. Where an associate presents consolidated financial statements, the results and net assets to be taken into account are those reported in that associates consolidated financial statements. 20. The carrying amount of investment in an associate should be reduced to recognize a decline, other than temporary, in the value of the investment, such reduction being determined and made for each investment individually. Contingencies 21. In accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring after the Balance Sheet Date, the investor discloses in the consolidated financial statements: (a) its share of the contingencies and capital commitments of an associate for which it is also contingently liable; and (b) those contingencies that arise because the investor is severally liable for the liabilities of the associate. Disclosure 22. In addition to the disclosures required by paragraph 7 and 12, an appropriate listing and description of associates including the proportion of ownership interest and, if different, the proportion of voting power held should be disclosed in the consolidated financial statements. 23. Investments in associates accounted for using the equity method should be classified as longterm investments and disclosed separately in the consolidated balance sheet. The investors share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss. The investors share of any extraordinary or prior period items should also be separately disclosed. 24. The name(s) of the associate(s) of which reporting date(s) is/are different from that of the financial statements of an investor and the differences in reporting dates should be disclosed in the consolidated financial statements. 25. In case an associate uses accounting policies other than those adopted for the consolidated financial statements for like transactions and events in similar circumstances and it is not practicable to make appropriate adjustments to the associates financial statements, the fact should be disclosed along with a brief description of the differences in the accounting policies.

Accounting Standard (AS) 30 - Financial Instruments: Recognition and Measurement

Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory2 in respect of accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below: There has been so much noise about accounting policies, but none of it has been music to either companies or investors in listed entities. Business Line attempted to get in touch with tax and accounting AS-30 (Accounting Standard 30 titled Financial Instruments: Recognition and Measurement) of the ICAI is excruciatingly complex, and is pretty much rule driven. Essentially the rules relate to classification of financial instruments in one of the four prescribed categories to which different valuation rules apply. The other important aspect of the standard is the application of hedge accounting. What types of financial instruments are we talking about here? The four categories of financial assets are Fair value through Profit and Loss Account (FVTP), Available for Sale (AFS) instruments, Held to Maturity (HTM) instruments and Loans and Receivables (L&R). The FVTP classification is used in case of financial assets that are traded or managed as a portfolio or a derivative. In the FVTP classification, the fair value changes in each reporting period are taken to the income statement. The FVTP classification is not used for unquoted equity investments, for which fair value cannot be reliably measured. These instruments would be valued at cost with a provision made for impairment. AFS category is a residual category, and would apply to instruments that do no fall in any of the other three categories, for example, an equity investment in a listed company, which is not held with the intention of trading. The fair value changes in the AFS-categorized financial instruments are taken to the retained earnings, and recognised in the profit and loss (P&L) account only when they are sold. The HTM classification can be only used for assets that have a maturity period and there is intention to hold the asset to its maturity. The accounting is done to reflect the inherent IRR (internal rate of return) in the instrument. A breach of the intention subjects an entity to a tainting provision that precludes any further HTM classification for a period of two years. L&R classification would be applicable for debtors, advances, deposits, etc. In the case of debtors that are receivable on demand, there is no discounting. However there would be discounting, if the payments to be received from a debtor are scheduled and are not on demand.

There are various other detailed rules, for example, on impairment, classification of financial liabilities, recognition and de-recognition of financial instruments, securitization, restructuring of loans, etc in AS-30. With such instruments, is it easy to do both accounting and hedging? AS-30 has a whole set of rules on hedge accounting. These rules relate to the hedged item, hedge instrument, hedging documentation, hedge effectiveness, etc. The rules are pretty stringent and in many cases it may be impossible to apply hedge accounting because the rules cannot be complied with. This may be so, even if there was a perfect economic hedge. Give us an example of hedging effectiveness To give an example, the rules require hedge effectiveness in the bounds of 80-125 per cent. Airline companies may have a need to protect themselves from future fuel price increases. Since there is no futures market in jet fuel, they may hedge themselves for oil price changes. Now, generally the oil prices changes should move in tandem with the jet fuel. However, some ineffectiveness could creep in because oil needs considerable processing before it can be converted to jet fuel. The ineffectiveness could be beyond the 80-125 per cent bound and therefore consequently the airline company may not be successful in applying hedge accounting. What happens in case the hedging activity fails? When hedging fails, the hedge instrument (in the above case it is the forward purchase of oil) is marked to market at each reporting period and the effect is taken to the income statement, which could cause considerable volatility in the income statement. Coming back to the standard, tell us what impact it could have on different parties. Banks and other financial institutions would be severely affected by the standard. Almost everything contained in the standard will impact these entities. It is however too early or difficult to say whether those impacts would be positive or negative to the net worth. In fact, no generalizations can be made, and the effect would depend on a case-bycase basis. Any severe negative effect could cause capital adequacy problems. Off-balance-sheet items such as various types of derivatives will now have to be fully accounted for. What about the effect on companies?

Companies that have issued FCCBs (foreign currency convertible bonds) will have to take an interest charge to the income statement, even if the FCCBs are presumably zero coupon bonds. FCCBs will also be subjected to split accounting, which requires splitting of a debt component and the option derivative at fair value. What would be the problems in implementation? Generally hedge accounting would be difficult to apply, and hence the underlying hedge instrument (example, a derivative such as a forward foreign exchange contract) would have to be marked to market (MTM) at each reporting period with the effect being taken to the income statement. Right now, under AS-11 (on the effects of changes in foreign exchange rates), there are no strict hedge rules, and for hedging to be applied it is enough to demonstrate that the forward was not for speculation purposes.

Accounting Standard (AS) - 24 Discontinuing Operations

Discontinuing operation is a component of an enterprise: 1. that the enterprise, pursuant to a single plan, is: o disposing substantially in its entirety, such as by selling the component in a single transaction or by demerger or spin-off of ownership of the component to the enterprise's shareholders; or o disposing of piecemeal, such as by selling off the component's assets and settling its liabilities individually; or o terminating through abandonment; and 2. that represents a separate major line of business or geographical area of operations; and 3. that can be distinguished operationally and for financial reporting purposes. Initial Disclosure event 1. the enterprise has entered into a binding sale agreement for substantially all of the assets attributable to the discontinuing operation; or 2. the enterprise's board of directors or similar governing body has both o approved a detailed, formal plan for the discontinuance and o made an announcement of the plan. o terminating through abandonment; and 3. that represents a separate major line of business or geographical area of operations; and 4. that can be distinguished operationally and for financial reporting purposes. Recognition and Measurement Recognition and measurement principles established in other accounting standards should be followed in the accounting of changes in assets, liabilities, revenue, expenses, losses, and cash flow relating to a discontinuing operation. Presentation and Disclosure Initial Disclosure The following information should be included in the financial statements beginning with the financial statements for the period in which the initial disclosure event occurs: 1. a description of the discontinuing operation(s); 2. the business or geographical segment(s) in which it is reported as per AS 17Segment Reporting; 3. the date and nature of the initial disclosure event; 4. the date or period in which the discontinuance is expected to be completed if known or determinable; 5. the carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total liabilities to be settled;

6. the amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing operation during the current financial reporting period; 7. the amount of pre-tax profit or loss form ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense related thereto; and 8. the amounts of net cash flows attributable to the operation, investing and financing activities of the discontinuing operation during the current financial reporting period. If an initial disclosure event occurs between the balance sheet date and the date of approval of accounts, disclosures as required by AS 4 - Contingencies and Events Occurring after the Balance Sheet Date, are made. Other Disclosures The following information pertaining to asset disposals, liability settlements, and binding sale agreements pertaining to a discontinuing operation should be included in the financial statements when the events occur: 1. for any gain or loss recognised on asset disposal or liability settlement attributable to the discontinuing operation, o the amount of the pre-tax gain or loss and o income tax expense relation to the gain or loss; and 2. the net selling price or range of prices(which is after deducting expected disposal costs) of those net assets for which the enterprise has entered into one or more binding sale agreements, the expected timing of receipt of those cash flows and the carrying amount of those net assets on the balance sheet date. Updating the Disclosures The financial statements for periods subsequent to the one in which the initial disclosure event occurs should include a description of any significant changes in the amount or timing of cash flows relation to the assets to be disposed or liabilities to be settled and the events causing those changes. The above disclosures should continue for periods up to and including the period in which the discontinuance is completed (though full payments from the buyer(s) may not yet have been received). The fact, reasons and effect of an abandoned or withdrawn plan previously reported as a discontinuing operation should be disclosed.

Accounting Standard (AS) 30 - Financial Instruments: Recognition and Measurement

Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory2 in respect of accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below: There has been so much noise about accounting policies, but none of it has been music to either companies or investors in listed entities. Business Line attempted to get in touch with tax and accounting AS-30 (Accounting Standard 30 titled Financial Instruments: Recognition and Measurement) of the ICAI is excruciatingly complex, and is pretty much rule driven. Essentially the rules relate to classification of financial instruments in one of the four prescribed categories to which different valuation rules apply. The other important aspect of the standard is the application of hedge accounting. What types of financial instruments are we talking about here? The four categories of financial assets are Fair value through Profit and Loss Account (FVTP), Available for Sale (AFS) instruments, Held to Maturity (HTM) instruments and Loans and Receivables (L&R). The FVTP classification is used in case of financial assets that are traded or managed as a portfolio or a derivative. In the FVTP classification, the fair value changes in each reporting period are taken to the income statement. The FVTP classification is not used for unquoted equity investments, for which fair value cannot be reliably measured. These instruments would be valued at cost with a provision made for impairment. AFS category is a residual category, and would apply to instruments that do no fall in any of the other three categories, for example, an equity investment in a listed company, which is not held with the intention of trading. The fair value changes in the AFS-categorized financial instruments are taken to the retained earnings, and recognised in the profit and loss (P&L) account only when they are sold. The HTM classification can be only used for assets that have a maturity period and there is intention to hold the asset to its maturity. The accounting is done to reflect the inherent IRR (internal rate of return) in the instrument. A breach of the intention subjects an entity to a tainting provision that precludes any further HTM classification for a period of two years. L&R classification would be applicable for debtors, advances, deposits, etc. In the case of debtors that are receivable on demand, there is no discounting. However there would be discounting, if the payments to be received from a debtor are scheduled and are not on demand.

There are various other detailed rules, for example, on impairment, classification of financial liabilities, recognition and de-recognition of financial instruments, securitization, restructuring of loans, etc in AS-30. With such instruments, is it easy to do both accounting and hedging? AS-30 has a whole set of rules on hedge accounting. These rules relate to the hedged item, hedge instrument, hedging documentation, hedge effectiveness, etc. The rules are pretty stringent and in many cases it may be impossible to apply hedge accounting because the rules cannot be complied with. This may be so, even if there was a perfect economic hedge. Give us an example of hedging effectiveness To give an example, the rules require hedge effectiveness in the bounds of 80-125 per cent. Airline companies may have a need to protect themselves from future fuel price increases. Since there is no futures market in jet fuel, they may hedge themselves for oil price changes. Now, generally the oil prices changes should move in tandem with the jet fuel. However, some ineffectiveness could creep in because oil needs considerable processing before it can be converted to jet fuel. The ineffectiveness could be beyond the 80-125 per cent bound and therefore consequently the airline company may not be successful in applying hedge accounting. What happens in case the hedging activity fails? When hedging fails, the hedge instrument (in the above case it is the forward purchase of oil) is marked to market at each reporting period and the effect is taken to the income statement, which could cause considerable volatility in the income statement. Coming back to the standard, tell us what impact it could have on different parties. Banks and other financial institutions would be severely affected by the standard. Almost everything contained in the standard will impact these entities. It is however too early or difficult to say whether those impacts would be positive or negative to the net worth. In fact, no generalizations can be made, and the effect would depend on a case-bycase basis. Any severe negative effect could cause capital adequacy problems. Off-balance-sheet items such as various types of derivatives will now have to be fully accounted for. What about the effect on companies?

Companies that have issued FCCBs (foreign currency convertible bonds) will have to take an interest charge to the income statement, even if the FCCBs are presumably zero coupon bonds. FCCBs will also be subjected to split accounting, which requires splitting of a debt component and the option derivative at fair value. What would be the problems in implementation? Generally hedge accounting would be difficult to apply, and hence the underlying hedge instrument (example, a derivative such as a forward foreign exchange contract) would have to be marked to market (MTM) at each reporting period with the effect being taken to the income statement. Right now, under AS-11 (on the effects of changes in foreign exchange rates), there are no strict hedge rules, and for hedging to be applied it is enough to demonstrate that the forward was not for speculation purposes.

Accounting Standard (AS) 16 - Borrowing Costs

Accounting Standard (AS) 16, Borrowing Costs, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature. Paragraph 9.2 and paragraph 20 (except the first sentence) of Accounting Standard (AS) 10, Accounting for Fixed Assets, stand withdrawn from this date. Objective The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Scope 1. This Statement should be applied in accounting for borrowing costs. 2. This Statement does not deal with the actual or imputed cost of owners equity, including preference share capital not classified as a liability. Definitions 3. The following terms are used in this Statement with the meanings specified:
y y

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

4. Borrowing costs may include: (a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (b) amortization of discounts or premiums relating to borrowings; (c) amortization of ancillary costs incurred in connection with the arrangement of borrowings; (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. 5. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets.

Recognition 6. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred. 7. Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred. Borrowing Costs Eligible for Capitalization 8. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. 9. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an enterprise is co-ordinate centrally or when a range of debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is often difficult and the exercise of judgement is required. 10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. 11. The financing arrangements for a qualifying asset may result in an enterprise obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalization during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred. 12. 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 should 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 capitalised during a period should not exceed the amount of borrowing costs incurred during that period. Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount 13. When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value, the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards. In certain circumstances, the amount of the write-down or write-off is written back in accordance with those other Accounting Standards. Commencement of Capitalization 14. The capitalization of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred; (b) borrowing costs are being incurred; and (c) activities that are necessary to prepare the asset for its intended use or sale are in progress. 15. Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see Accounting Standard 12, Accounting for Government Grants). The average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalization rate is applied in that period. 16. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the assets condition is taking place. For example, borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization. Suspension of Capitalization 17. Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted.

18. Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalization. However, capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalization continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographic region involved. Cessation of Capitalization 19. 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. 20. An asset is normally ready for its intended use or sale when its physical construction or production is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the users specification, are all that are outstanding, this indicates that substantially all the activities are complete. 21. 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. 22. A business park comprising several buildings, each of which can be used individually, is an example of a qualifying asset for which each part is capable of being used while construction continues for the other parts. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill. Disclosure 23. The financial statements should disclose:
y y

the accounting policy adopted for borrowing costs; and the amount of borrowing costs capitalised during the period.