1.30 Query: Capitalisation of the interest cost attributable to acquisition of fixed assets.
1. The querist feels that the interpretation of para 20 of Accounting Standard (AS) 10 leads to several interpretations whereby the constituent companies face difficulties, depending upon whether the interpretation is very strictly made or not.
2. According to the querist, the general guidance arising out of para 20 dictates that “the cost of a fixed asset should comprise its purchase price and any attributable costs of bringing the asset to its working condition for its intended use”. In other works, financial charges which are attributable to bringing the fixed asset to its working condition should only be capitalised. Any financial charges incurred after the asset is put to use have to be written off and not capitalised. The problem, as the querist sees it, arises in interpreting the word “attributable”.
3. The querist has stated that if a specific loan has been taken for purchasing a fixed asset, there is a clear cut demarcation of the funds and, therefore, no ambiguity arises in working out the attributable financial charges. However, where specific loan or financial arrangement has not been made to the full value of the fixed asset, this leads to, and is a subject matter of interpretation. It is difficult in such cases, to come to an amicable solution because the funds borrowed for the general running of the business are at times sought to be included for the purpose of strict interpretation of the word “attributable”.
4. The querist has further stated that if a company has financial arrangements for working capital, there is really no basis for attributing the interest on such borrowings since it could not pertain to utilisation for buying a fixed asset. Also, in case of a common pool account where all sundry receivables are credited, such clear cut demarcation of its utilisation is next to impossible.
5. Many questions, as per the querist, can arise in such a situation, namely: -
(i) Which funds were actually used for paying for the fixed asset?
(ii) Whether the funds actually used were out of collection from company’s own business?
(iii) Did the monies come out of the common cash credit account where collection from debtors as well as the monies from borrowings for working capital requirements are credited?
(iv) Did the monies come out of the cash contribution from operations, namely, profit after tax plus depreciation?
6. The querist has contemplated that when many such alternatives are possible, no interpretation is foolproof. Therefore, the companies should not be made to undergo elaborate calculations for interest when any such interpretation is anyway not free from doubt. Under the given circumstances, the best fall back can be to allow capitalisation of financial charges, upto the completion of construction or acquisition of fixed asset only where a separate loan, earmarked for the acquisition or construction of a fixed asset is taken.
7. The querist has sought the opinion of the Expert Advisory Committee with regard to the interpretation of term ‘attributable cost’ used in Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’ in the context of capitalisation of the interest cost.
Opinion December 8, 1992
1. The Committee notes para 20 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which states as follows:
“The cost of a fixed asset should comprise its purchase piece and any attributable cost of bringing the asset to its intended use. Financing costs relating to deferred credits or to borrowed funds attributable to construction or acquisition of fixed assets for the period upto the completion of construction or acquisition of fixed assets should also be included in the gross book value of the asset to which they relate. However, the financing costs (including interest) on fixed assets purchased on a deferred credit basis or on monies borrowed for construction or acquisition of fixed assets should not be capitalised to the extent that such costs relate to periods after such assets are ready to be put to use.”
2. The Committee is of the view that the term ‘attributable cost’ used in AS 10 should be interpreted to mean the cost that can logically be identified with the construction or acquisition of a fixed asset keeping in view the facts and circumstances of each case. In most of the cases, documentary evidence to support this relationship is also available. For example, the prospectus or letter of offer for issue of debentures contains the objective(s) for which the monies being raised are going to be used. The loan agreements with banks and financial institutions also invariably mention the purpose for which the funds being availed by way of loan are going to be employed. However, if in a particular case, on the basis of facts and circumstances, it is not possible to relate the financing of the asset from the borrowings, capitalisation of interest should not be made. Also, no notional interest should be capitalised.
3. On the basis of the above, the Committee is of the opinion that financing cost (including interest) relating to construction or acquisition of a fixed asset should be capitalised as a part of the cost of the asset, upto the date the asset is brought in working condition, only if the corresponding borrowings can be specifically identified with the construction or acquisition of the asset, keeping in view the facts and circumstances of each case. ________________________ |