Facts
(i) A closely held company is engaged in the business of providing cable TV (both analog and digital services) and broadband Internet service in the State of Orissa and its neighbouring states. The company plans to expand its operations to different States of India in near future. The company, therefore, is entering into new locations and is also expanding in its locations, and for this, it is incurring borrowing costs.
(ii) The company, as per its business plan, mixed the funding requirement of both equity and debt to meet the capital expenditure including the preoperational expenses at new locations and expansion and upgradation in its existing locations. The nature of activity is such that the same materials are used both for capital expenditure and the repair and maintenance activities. It is also difficult to bifurcate the loan and equity amount that is spent to purchase fixed assets for different locations. The total assets requirement for all locations is pulled and then loan is arranged for the entire lot. The company has stated that it is difficult to identify direct relationship between the loan and the capital item purchased.
(iii) On these facts, the company has sought the opinion of the Expert Advisory Committee (EAC) of ICAI that considering the nature of the business and assets of the company, whether
(a) the company ought to capitalise borrowing cost for the period, when commercial operation is not feasible for certain period initially, and
(b) charging off fully the interest to the profit and loss account will not be proper in view of applicability of AS-16. Opinion The committee observed that the ‘qualifying asset(s)’ in the company’s case is not clear hence the committee is laying down the broad principles to be kept in mind while capitalising the borrowing costs.
(a) Broadly stated, such borrowing costs can be classified into two categories, viz.;
(i) those borrowing costs that are directly attributable to construction/creation of an asset and
(ii) those borrowing costs that are not directly attributable to such constructions/creation.
(b) According to paragraph 6 of AS-16, the borrowing costs that are not directly attributable to construction/creation of an asset (e.g., borrowing costs related to repair charges of an already existing centre or for expenses relating to deployment of manpower) should be expensed in the period in which these are incurred.
(c) The assets which are ready for use when acquired, cannot be considered as ‘qualifying asset’ within the meaning of AS-16, although there may be some time lag between their acquisition and actual use.
(d) The company should evaluate what constitutes a substantial period of time (according to AS-16, ordinarily a period of twelve months is considered as substantial period of time, unless a shorter or longer period can be justified on the basis of facts and circumstances of the case) considering the peculiarities of the facts and circumstances of the case, such as nature of the asset being constructed. In this regard, time which is taken by an asset, technologically and commercially to get ready for its intended use or sale should be considered. When a facility is technologically and commercially ready for distribution to the end customers, the subsequent activities do not add value to the asset and therefore, the borrowing costs incurred thereafter should not be capitalised.
(e) In case the interest incurred is not directly attributable to constructions/creation of an asset, it should be fully expensed in the period in which it is incurred. However. If the interest incurred is directly attributable to construction/creation of a qualifying asset as per the provisions of AS-16, charging it off to the profit and loss account will not be proper in view of AS-16.
