Query No. 42 Subject: Notional saving of interest – whether to be accounted for.1
A. Facts of the Case
1. A public sector company having operations all over India manages its funds through a centrally controlled bank account. All receipts/expenditures are transferred to the bank account on daily basis. All the borrowings, whether specific for projects or general, are deposited into a common pool of funds.
2. The company allocates the interest on specific borrowings to the projects irrespective of its utilisation from the date of borrowings. As a result the interest on unutilised loan amount which is actually used for other purposes (through common pool of funds) also gets capitalised.
3. The querist has referred to paragraph 10 of Accounting Standard (AS) 16, ‘Borrowing Costs’, which states as below:
"10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation 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.”
4. The querist has also referred to paragraph 11 of AS 16 which states that where the funds are temporarily invested out of the funds specifically borrowed for projects pending their expenditure on qualifying asset, in determining the amount of borrowing cost eligible for capitalisation during a period, any income earned on such temporary investment is to be deducted from the borrowing cost incurred.
5. In the case of the company, the funds are not specifically invested and no income is earned on the unutilised funds. However, the funds borrowed specifically for projects are deposited in common pool and the surplus funds are utilised for meeting working capital requirement on short term basis resulting in reduction in overdraft in cash credit account.
B. Queries
6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
C. Points Considered by the Committee
7. The Committee restricts itself to the specific issue raised by the querist relating to the deduction of notional savings in interest from the costs of borrowings for specific assets for the purpose of capitalisation. The Committee has not examined any other accounting issue contained in the query.
8. The Committee notes the requirements of AS 16 as stated in paragraphs 3 and 4 above.
9. The Committee notes that in the case of the company, there is no income from the temporary investment of funds as such. There is only a notional income in the form of savings in interest cost that would have been otherwise incurred on cash credit account.
10. From the above, the Committee is of the view that under the present accounting framework notional saving in interest from the temporary use of funds for the company’s working capital requirements can not be construed as ‘income’ from the temporary investment of borrowings as contemplated in AS 16. Therefore, such notional savings can not be deducted from the borrowing costs for the purpose of capitalistion.
D. Opinion
11. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6:
________ 1Opinion finalised by the Committee on 17.1.2001. |