Accounting Standards Part 1

By: Abhinav Singh Khanduja (208/2012) Aayush Sharma (209/2012) Nalini Katiyar (215/2012) Mohit Rathi (220/2012) Kriti Singh (236/2012) Keshav Kishore (261/2012)

Structure of Presentation
1. Objective 2. Introduction 3. Accounting Standards illustrated with examples

Objective
To explain Accounting Standards 1 to 16

Introduction
Accounting Standards developed to harmonies diverse accounting practices and policies Accounting Standards developed by ASB (Accounting Standards Board) and established by ICAI (Institute of Chartered Accountants of India) Accounting Standards apply in respect of any enterprise (whether organised in corporate, co-operative or other forms) engaged in commercial, industrial or business activities, irrespective of whether it is profit oriented or it is established for charitable or religious purposes Presently 31 Accounting Standards in India AS 1 to AS 32 with AS 8 now incorporated in AS 26

ACCOUNTING STANDARD-1

DISCLOSURE OF ACCOUNTING POLICIES

INTRODUCTION
Objective is to promote better understanding of Financial Statements Compliance Facilitates better more meaningful comparison between Financial Statements of different enterprises and the Financial Statements of same enterprise at different times. Fundamental Assumptions: Going Concern, Consistency, Accrual Basis of Accounting. Selection of Accounting Policy: Financial Statements to be prepared to portray true and fair view of affairs of an enterprise. Selection of Accounting Policy to be governed by: Prudence, Substance over form, Materiality. Manner of Disclosure: All significant accounting policies adopted in the preparation of financial statements should be disclosed and should be disclosed at one place. Disclosure of change in accounting policies: Any change in accounting policies which has a material effect in the current period or which is expected to have a material effect in a later period should be disclosed.

Example illustrating Prudence as per AS-1

Raj, a trader, purchased 500 units of pens @ Rs. 10 per unit. He sold 400 pens @ Rs. 15 per unit. If the net realizable value per unit of the unsold pens is Rs. 15, Raj shall value his stock at Rs. 10 per unit and thus ignoring the profit of Rs. 500 that he may earn in the next accounting period by selling 100 pens. If the net realizable value per unit of the unsold pens is Rs. 8, Raj shall value his stock at Rs. 8 per unit and thus recognizing possible loss Rs. 200 that he may incur in the next accounting period by selling 100 units of unsold pens. This illustrates that, as specified in AS-1, the prudence principle shall be followed

ACCOUNTING STANDARD-2

Valuation of inventories

INTRODUCTION
Basic Principle: Inventory to be valued at lower of cost and net realizable value (based on Principle of Prudence). Standard specifies what cost of inventory should consist of and how to calculate Net Realizable Value. Inventories are defined as assets held for sale in the ordinary course of business, in the process of production for such sale or the raw materials for production of materials for sale. These do not form a part of Inventory: WIP arising in the business of service providers, Financial Instruments held as stock-in-trade, Producers stocks of agricultural and forest products, livestock, mineral oils. Cost of Inventory = Cost of Purchase + Cost of Conversion + Other costs incurred to bring inventories to their present location. NRV to be estimated on the most reliable evidence available at the time.

Example illustrating AS-2

Cost of a partly finished Table at the end of the year is Rs. 8000. The table can be finished next year by a further expenditure of Rs. 1000. The finished table can be sold for Rs. 2500, subject to payment of 4% brokerage on selling price. The value of inventory is determined as following: Net Selling Price 2500 Less: Estimated Cost of Completion 1000 -------1500 Less: Brokerage (4% of 2500) 100 -------Net Realizable value 1400 -------Cost of Inventory 8000 Value of Inventory (Lower of Cost and Net Realizable Value) 1400

ACCOUNTING STANDARD-3

Cash Flow Statements

SCOPE
This standard applies to the enterprises:
Having turnover more than Rs. 50 Crores in a financial year; Listed companies This Accounting Standard is not mandatory for Small and Medium Sized Companies and noncorporate entities falling in Level II and Level III as defined in Appendix 1 to this Compendium Applicability of Accounting Standards to Various Entities.

Introduction
Cash flow statement is additional information to user of financial statement This statement exhibits the flow of incoming and outgoing cash This statement assesses the ability of the enterprise to generate cash and cash equivalents It also assesses the needs of the enterprise to utilize the cash and cash equivalents generated. Non-cash transactions should be excluded from the cash flow statement. These transactions should be disclosed in the financial statements

Definitions
Cash comprises cash on hand and demand deposits with banks.

Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents. Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowings of the enterprise.

Features of Cash Flow Statement

The cash flow statement should report cash flows during the period classified by1.Operating activities:-These are principal revenue producing activities of the enterprise. For example- cash receipts from the sale of goods and the rendering of services, royalties, fees, commissions and other revenue, cash payments to suppliers for goods and services. 2.Investment activities:-The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. For example- making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc. 3. Financing activities:-Those activities that result in changes in size and composition of owners capital and borrowing of the organization. For example- receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.

ACCOUNTING STANDARD-4

CONTINGENCIES AND EVENTS OCCURING AFTER THE BALANCE SHEET DATE

CONTINGENCIES
A.S.4 defines a contingency as a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events. The term Contingency is restricted to conditions or situation at the balance sheet date. For example- obligation arousing from discounted bills of exchange, amount of guarantees, warranties for product sold IT DOES NOT COMPRISES FOLLOWING KINDS OF CONTINGENCIESLiabilities of general and life insurance enterprises arising from policies issued, obligations under retirement benefit plans, depreciation on assets.

ACCOUNTING TREATMENT
CONTINGENT LOSSESIt can be disclosed in two ways1. By making provisions for contingencies- when contingencies are specified and not remote. 2. By showing a footnote under balance sheet- when contingencies are general or unspecified and do not relate to conditions or situations existing at the balance sheet date.
CONTINGENT GAINSContingency gains are not recognized in financial statements since those gains may not even realize. Estimation of financial effect of contingenciesIt is generally determined by judgment of management of enterprise with help of information available up to the balance sheet date and reports of experts.

EVENTS OCCURRING AFTER THE BALANCE SHEET DATE According to A.S.-4, events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the board of directors . Two types of events can be identified1. Those which provide further evidence of conditions that existed at the balance sheet date. 2. Those which are indicative of conditions that arose subsequent to the balance sheet date.

For example- loss on trade receivable because of insolvency of a customer which occur after the balance sheet date, dividend declared or proposed after the balance sheet date.

ACCOUNTING STANDARD-5

Net profit or loss for the period, prior period items and changes in accounting policies

20

OBJECTIVE
To prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis.

Scope
This Standard deals in presenting profit or loss from ordinary activities, extraordinary items and prior period items in the statement of profit and loss, in accounting for changes in accounting estimates, and in enclosure of changes in accounting policies. This Standard does not deal with the tax implications of extraordinary items, prior period items, changes in accounting estimates, and changes in accounting policies for which appropriate adjustments will have to be made depending on the circumstances.

21

DISCLOSURE
Net Profit or Loss for the Period
All items of income and expense which are recognized in a period should be included in the determination of net profit or loss for the period. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss: (a) profit or loss from ordinary activities; and (b) extraordinary items. For example, losses sustained as a result of an earthquake.

Prior Period Items

The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. The term prior period items, as defined in this Standard , refers only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. The term does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period.

22

ACCOUNTING STANDARD-6

Depreciation accounting

INTRODUCTION
A measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.
24

Scope
Expected to be used during more than one accounting period. Have a limited useful life . Held by an enterprise for use in production or supply of goods and services, for rental to others or for administrative purposes and not for the purpose of sale in the ordinary course of business . NOT APPLICABLE IN: Forests, plantations and similar regenerative natural resources. Wasting assets such as oils, natural gas and similar non-regenerative resources . Expenditure on research and development . Goodwill and other intangible assets .

25

Assessment
Assessment of depreciation and the amount to be charged in respect of in an accounting period are usually based on the following three factors: (i) historical cost or other amount substituted for the historical cost of the depreciable asset when the asset has been revalued; (ii) expected useful life of the depreciable asset; and (iii) estimated residual value of the depreciable asset.
26

DEPRECIABLE ASSETS LIFE

The useful life of a depreciable asset is shorter than its physical life and is: Pre-determined by legal or contractual limits. Directly governed by extraction or consumption; Dependent on the extent of use and physical deterioration on account of wear and tear Reduced by obsolescence arising from such factors as:
(a) technological changes; (b) improvement in production methods; (c) change in market demand for the product or service output of the asset; or (d) legal or other restrictions.
27

Methods of allocating depreciation

The most commonly employed in industrial and commercial enterprises 1. Straight line method 2. The reducing balance method The management of a business selects the most appropriate method(s) based on various important factors 1. type of asset 2. the nature of the use of such asset 3. circumstances prevailing in the business

28

Disclosure
The following information should be disclosed in the financial statements: (i) the historical cost or other amount substituted for historical cost of each class of depreciable assets; (ii) total depreciation for the period for each class of assets; and (iii) the related accumulated depreciation. The following information should also be disclosed in the financial statements along with the disclosure of other accounting policies: (i) depreciation methods used; and (ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the enterprise.

29

ACCOUNTING STANDARD-7

Accounting for construction contracts

Objective
Objective of A.S. 7 is to prescribe the accounting treatment of revenue and costs associated with construction contracts

Scope
It should be applied in accounting for construction contracts in the financial statements of contractors.

Definition
A construction contract is a contract specifically negotiated for the construction of a single asset such as a bridge, building or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use such as construction of refineries.
Contract revenue a. The initial amount of revenue agreed in the contracts b. Variations in contract work, claims and incentive payments.

Contract cost A. Costs that relate directly to the specific contract. B. Costs that are attributable to contracts activity in general. C. Other costs chargeable to customer under terms of contract.

Recognition of contract revenue and cost

Steps of percentage of completion method 1. Estimate total revenue and cost of contract. 2. Compute cost incurred up to reporting date. 3. Calculate % of cost incurred to total cost. 4. Revenue for the period will be that % of total revenue. 5. Show the amount of revenue and cost in P&L a/c of the period.

Example
Contract period of building a bridge is 3 years. Total estimated revenue and cost are respectively Rs.10000 and Rs.9000.Cost incurred in 1st year is Rs.2700, 2nd year is Rs.3600, 3rd year is Rs.2700. find out revenue and % of completion of contract in 3 years.

So, % of completion of project in 1st year is 2700/9000*100 = 30%, 2nd year is 3600/9000*100 = 40%, 3rd year is 2700/9000*100 = 30% So, revenue for 1st year will be 30% of 10000 = 3000, 2nd year 40% 0f 10000 = 4000 and 3rd year 30% of 10000 = 3000.

ACCOUNTING STANDARD - 9

Revenue recognition

Objective A.S. 9 is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise scope It is concerned only with recognition of revenue arising in the course of the ordinary activities of the enterprise from The sale of goods The rendering of services The use by others of enterprise resources yielding interest, royalties and dividends.

It does not deal with followings 1. revenue arising from construction contracts 2. revenue arising from hire purchase lease agreements 3 .revenue arising from govt. grants and similar subsidies 4. revenue of insurance companies arising from insurance contracts for example appreciation in value of fixed assets, natural increase in forest products, change in foreign exchange.

Definition
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the renderings of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.

Timing of recognition of revenue from a) Sale of goods when seller has transferred the property in the goods to the buyer for a consideration.

b) Rendering of services when service is performed proportionately or completely. c) Interest on the time basis taking into account the amount outstanding and the rate applicable.
d) Royalties on the accrual basis in accordance with the terms of the relevant agreement. a) Dividend when the owners right to receive payment is established.

ACCOUNTING STANDARD-10

Accounting for fixed assets

Objective Objective of A.S. 10 is to prescribe the accounting treatment of fixed assets .

Scope Fixed assets included under it are such as land, building, plant and machinery, vehicles, furniture and fittings, goodwill, patents ,trademarks and designs.
It does not deal with following assets Forests, plantations etc. Livestock. Expenditure on real state development. Other non regenerative natural resources.

Definition Fixed asset is an asset held with the attention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Some points to be considered while accounting for fixed assets Gains and losses arising from disposal of fixed assets should be recognized in P&L a/c If expenditure on fixed asset is of capital nature then it should be added to its book value. If expenditure on fixed asset is of revenue nature then it should be written in P&L a/c. In balance sheet depreciation (if applicable) should be reduced from book value of asset.

ACCOUNTING STANDARD-11

The effects of changes in foreign exchange rates

Scope
An enterprise may have transactions in foreign currencies or it may have foreign operations. These transactions must be expressed in the enterprises reporting currency in the financial statements. This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts.

It does not deal with This Standard does not specify the currency in which an enterprise presents its financial statements. However, an enterprise normally uses the currency of the country in which it is domiciled. This Standard does not deal with the restatement of an enterprises financial statements from its reporting currency into another currency for the convenience of users accustomed to that currency or for similar purposes. This Standard does not deal with the presentation in a cash flow statement of cash flows arising from transactions in a foreign currency and the translation of cash flows of a foreign operation. This Standard does not deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Foreign Currency Transactions

A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse(ex: unrealistic closing rate), such item should be recorded in the reporting currency at the amount which is likely to be realized from, or required to disburse, such item at the balance sheet date. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction.

Contd
Non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined. Exchange differences arising on the settlement of monetary items or on reporting an enterprises monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise. For non-integral foreign operation , however, the exchange differences forms a part of an enterprises net investment and should be accumulated in a foreign currency translation reserve in the enterprises financial statements until the disposal of the net investment, at which time they should be recognized as income or as expenses.

Financial Statements
Integral Foreign Operations The financial statements of an integral foreign operation should be translated using the principles and procedures discussed for foreign currency transactions as if the transactions of the foreign operation had been those of the reporting enterprise itself. Non-integral Foreign Operations In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements, the reporting enterprise should use the following procedures: (a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the closing rate. (b) income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions. (c) all resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment.

ACCOUTING STANDARD-12

Accounting for government grants

Scope
This Standard deals with accounting for government grants. Government Grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc. It does not deal with: The special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature Government assistance other than in the form of government grants Government participation in the ownership of the enterprise

Accounting Treatment
Government grants should not be recognized until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. Two broad approaches may be followed for the accounting treatment of government grants: the capital approach, under which a grant is treated as part of shareholders funds, and the income approach, under which a grant is taken to income over one or more periods. It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. Grants which have the characteristics similar to those of promoters contribution should be treated as part of shareholders funds. Income approach may be more appropriate in the case of other grants. Government grants of the nature of promoters contribution should be credited to capital reserve and treated as a part of shareholders funds.

Contd
Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Government grants related to revenue should be recognized on a systematic basis in the profit and loss statement over the periods necessary to match them with the related cost which they are intended to compensate. Such grants should either be shown separately under other income or deducted in reporting the related expense. Government grants in the form of non-monetary assets, given at a concessional rate, should be accounted for on the basis of their acquisition cost. In case a non-monetary asset is given free of cost, it should be recorded at a nominal value.

Contd
Government grants that are receivable as compensation for expenses or losses incurred in a previous accounting period or for the purpose of giving immediate financial support to the enterprise with no further related costs, should be recognized and disclosed in the profit and loss statement of the period in which they are receivable, as an extraordinary item if appropriate Government grants that become refundable should be accounted for as an extraordinary item. The amount refundable in respect of a grant related to revenue should be applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount should be charged to profit and loss statement. The amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing the capital reserve Government grants in the nature of promoters contribution that become refundable should be reduced from the capital reserve

Accounting Standard-13
Accounting for Investments

Scope
This Standard deals with accounting for investments in the financial statements of enterprises and related disclosure requirements.

It does not deal with The bases for recognition of interest, dividends and rentals earned on investments

Operating or finance leases

Investments of retirement benefit plans and life insurance enterprises Mutual funds and venture capital funds and/or the related asset management companies, banks and public financial institutions formed under a Central or State Government Act or so declared under the Companies Act, 1956

Investment: Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Investments by a firm can be in a different forms and for different motives. We can classify investment in two parts:1) Current investment. 2) Long Term Investment.

Cost of Investment:The cost of an investment includes acquisition charges such as brokerage, fees and duties. If an investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost is the fair value of the securities issued. If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up.

Carrying Amount of Investment:1) Current Investment: The carrying amount is the lower of cost and fair value. Any reduction to fair value and any reversals of such reductions are included in the profit and loss statement. 2) Long Term Investment:These are usually of individual importance to the investing enterprise. The carrying amount of long-term investments is therefore determined on an individual investment basis.

Reclassification of investments: Where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer. Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair value at the date of transfer.

Accounting Standard-14

Accounting for Amalgamations

Introduction
This standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This standard does not deal with cases of acquisitions which arise when there is a purchase by one company of the whole or part of the shares, or the whole or part of the assets, of another company in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other.

Types of Amalgamation
Nature of Merger. Nature of Purchase.

Methods of Accounting for Amalgamations

The pooling of interests method. The purchase method.

The pooling of interests method:In this method all assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts.

The purchase method: In this method assets and liabilities are recorded at their existing carrying amounts. By allocating the consideration to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.

Consideration:1. Securities. 2. Cash. 3. Other Assets In determining the value of the consideration, an assessment is made of the fair value of its element.

Balance of P&L Account

1) Nature of merger- in this type of Amalgamation we aggregate balances of both the company. 2) Nature of Purchase- In this type of Amalgamation we do not consider P&L Balance.

ACCOUNTING STANDARD-15

Employee Benefits

Introduction
Employee benefits are all forms of consideration given by an enterprise in exchange for service rendered by employees. Scope:It Covers all employee Benefits as per: Formal agreement Legislative requirement Informal practice It does not cover: Accounting and reporting by employee benefit plans. Employee benefits include:1. Short term employee benefits (STEB):- Employee benefits which are expected to be paid or transferred to employee within 12 months.

Examples of Short Term Employee Benefits: Wages and Salaries. Leave Compensation. Bonus. Non Monetary Benefits. Accounting treatment of STEB: Accounted on Accrual Basis. No discounting for STEB. 2. Post Employment-Employee benefits (PEEB): Retirement benefits- Gratuity and Pension. other benefits- Insurance and Post Employment Medical care.

Types of PEEB:1. Defined Contribution Plan (DCP). 2. Defined Benefit Plan (DBP).

Defined Contribution Plan (DCP):The Enterprise obligation is limited to contribute to the fund and there are no further obligation that arise on the event of any shortfall in the fund. Accounting treatment of DCP: If Obligation falls due within 12 months adopt accrual basis of accounting. If obligation does not falls due with in 12 months adopt present value concepts. Defined Benefit Plan (DBP). The benefits are determined by the length of service or the other variable factors. The Company should pay additional contribution as when needed. Accounting treatment of DBP:In this plan obligations are measured on a Present value(discounted) basis.

3.

Other Long Term Employee Benefit(LTEB):Long Term Compensated Absences. long-service benefits. profit-sharing and bonuses. deferred compensation.

4. Termination Benefits. This Standard deals with termination benefits separately from other employee benefits because the event which gives rise to an obligation is the termination rather than employee service. The enterprise has a present obligation as a result of a past event.

ACCOUNTING STANDARD-16

Borrowing costs

ACCOUNTING
This Standard is used to prescribe the accounting treatment for borrowing costs This Standard does not deal with the actual or imputed cost of owners equity, including preference share capital not classified as a liability Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this Standard Other borrowing costs should be recognized as an expense in the period in which they are incurred

Contd
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.

Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted
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

Example
XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the currencies was Rs. 45 per USD. The exchange rate, as at March 31, 20X4, is Rs. 48 per USD. The corresponding amount could have been borrowed by XYZ Ltd. in local currency at an interest rate of 11 per cent annum as on April 1, 20X3.

Contd
The following computation would be made to determine the amount of borrowing costs for the purposes of AS 16: Interest for the period = USD 10,000 5% Rs. 48/USD =Rs. 24,000 Increase in the liability towards the principal amount = USD 10,000 (48 45) = Rs. 30,000 Interest that would have resulted if the loan was taken in Indian currency = USD 10,000 45 11% = Rs. 49,500 Difference between interest on local currency borrowing and foreign currency borrowing = Rs. 49,500 Rs. 24,000 = Rs.25,500 Therefore, out of Rs. 30,000 increase in the liability towards principal amount, only Rs. 25,500 will be considered as the borrowing cost

Contd
Thus, total borrowing cost would be Rs. 49,500 being the aggregate of interest of Rs. 24,000 on foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of Rs. 25,500 Thus, Rs. 49,500 would be considered as the borrowing cost to be accounted for as per AS 16 and the remaining Rs. 4,500 would be considered as the exchange difference to be accounted for as per AS 11, The Effects of Changes in Foreign Exchange Rates.

In the above example, if the interest rate on local currency borrowings is assumed to be 13% instead of 11%, the entire exchange difference of Rs. 30,000 would be considered as borrowing costs, since in that case the difference between the interest on local currency borrowings and foreign currency borrowings [i.e. Rs. 34,500 (Rs. 58,500 Rs. 24,000)] is more than the exchange difference of Rs. 30,000
Therefore, in such a case, the total borrowing cost would be Rs. 54,000 (Rs. 24,000 + Rs. 30,000) which would be accounted for under AS 16 and there would be no exchange difference to be accounted for under AS 11, The Effects of Changes in Foreign Exchange Rates

THANK YOU