Accounting Concepts for Borrowing Costs

Accounting Concepts for Borrowing Costs Abstract To prescribe the accounting treatment for borrowing cost incurred irrespective of its nature either capital or revenue and to interpret the said accounting standard in a fairly manner with the help of accounting standard interpretation as issued by ICAI. Introduction With the advent of Industrialisation, Organisations need more resources so as to compete in the Industry which it pertains as well as to achieve its vision. Among those resources, Money is foremost and it is needed for various reasons which may include meeting its working capital requirement, construction of asset, etc. Most of the organisation opts for borrowings from banks, other financial institutions for the same. Borrowings may include some outflow of cash even before such borrowings are made, which we may call as borrowing cost such as interest, loan processing charges by banks, other charges other than the principal amount while repaying. Definitions Borrowing Cost Interest charges on bank borrowings including short term and long term borrowingsBorrowing cost can be illustrated with many interpretations. But AS 16 provides an inclusive definition comprising of, Amortisation of discounts, premiums Ancillary costs in connection with arrangement of borrowings Finance charges in respect of assets acquired on finance lease Exchange difference arising in foreign currency borrowings to the extent they are regarded as an adjustment to interest costs. Qualifying asset There are certain exceptions to qualifying asset. They are, Investments other than investment properties Inventories that are routinely manufactured over a short period of time How to interpret? In order to guide for a proper interpretation ICAI has issued ACCOUNTING STANDARD INTERPRETATION (ASI). With reference to ASI-1, Substantial period of time dependents on the facts and circumstances of each case. However, ordinarily, a period of 12 months is considered, unless a shorter or longer period can be justified on the basis of circumstances of the case. With reference to ASI-10, Adjustment to interest cost means the difference between the interest cost on foreign currency loan and interest that would have been paid on local currency loan had this loan been in local currency Recognition: Borrowing cost will be recognised only if such cost or expense is absolutely and directly attributable to acquisition, construction or production of qualifying asset and its is also important that the cost incurred only be capitalised when it is probable that they will result in future economic benefits to enterprise and can be measured reliably Borrowing cost that are not recognised and as a result it is not eligible for capitalisation can be charged to the profit and loss account in the period which it occurs. Interrelation of AS-16 with other accounting standards AS-11 Exchange differences arising from foreign currency borrowing are considered as borrowing cost for which the increase in liability towards principal amount should be capitalised to the extent of increase in the interest would be paid if loan was taken in Indian currency and the balance has to be treated as exchange difference as per AS-11, The effects of changes in foreign exchange rates. Illustration: ABC ltd Company has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an interest rate of 5% p.a. On April 1, 20X3, the exchange between the currencies was Rs.45 per USD. The exchange rate as at March 31,20X4 was Rs.48 per USD. The corresponding amount could have been borrowed by ABC ltd in local currency at an interest rate of 11% p.a. Solution: (i) Interest = USD 10,000 X 5% X Rs.48 = Rs.24000 (ii) Increase in liability towards the principal amount = USD 10,000 X (48-45) = Rs.30,000. (iii) Interest that would have resulted if the loan was taken in Indian currency =USD 10,000 X 45 X 11% = 49,500 (iv) Difference between (iii) and (i) = 49500 – 24000 = 25,500. 30000 AS-16 AS-11 25,500 4,500 Therefore out of Rs.30,000 increase in liability towards principal amount, only Rs.25,500 will be considered as borrowing cost and the remaining Rs.4,500 will be considered as exchange difference and charged to Profit and Loss as per AS-11 Total Borrowing cost as per AS-16 = 24,000+25,500 = Rs.49,500 Additional Illustration How will you answer change in the above case it the local interest rate is 13% Solution: (i) Interest = USD 10,000 X 5% X Rs.48 = Rs.24,000 (ii) Increase in liability towards the principal amount = USD 10,000 X (48-45) = Rs.30,000. (iii) Interest that would have resulted if the loan was taken in Indian currency =USD 10,000 X 45 X 13% = Rs.58,500 (iv) Difference between (iii) and (i) = 58,500 – 24,000 = Rs.34,500. Therefore, whole 30,000 will be considered as borrowing cost. Total Borrowing cost as per AS-16 = 24,000+30,000 = Rs.54,000 What will be the situation under Income-tax act? Sec.43A Income-tax act explains how to deal with exchange rate differences arising from acquiring asset from a country outside India for the purposes of business or profession as a result increase or reduction in liability for making payment or for repayment of loan borrowed in foreign currency specially acquiring for asset. It clearly states that exchange difference has to be treated in Income tax only in relation to payment, and not on accrual basis as required under AS-16. Therefore, only the exchange differences arising from the assets acquired or loan borrowed from outside India is to be capitalised. It never speaks about the concept of adjustment of interest costs. So, even if one has followed AS-16 for treating exchange difference as an adjustment to interest cost, it has to be nullify that effect while arriving at the block of assets as per Income tax act and instead, adjustment of assets only to the extent of exchange differences has to be made. AS-12 Expenditure on a qualifying asset comprises of only those that has resulted in payments of cash, transfers of other assets or the assumption of interest bearing liabilities. Such expenditure has to be decreased for any progress payment received and grants received in connection with asset .This is also similar in the case of Accounting standard-12, Government grants, as it prescribes that asset has to be accounted after deducting the amount of monetary grant received from the gross value of the asset. AS-19 In the inclusive definition of borrowing cost, it says that finance charge arising on account of assets acquired on financial lease is to be capitalised to the extent of such finance charges. Such finance charges will be computed as per the Accounting standard-19, Leases. Measurement Measurement of borrowing costs includes such costs incurred in both specific and general borrowing. In case of specific borrowing, the money borrowed is used particularly for the purpose of acquiring a qualifying asset. Such cost has to be capitalised less any income on temporary investment made on such borrowings On the other hand, it is general borrowing for which the money is borrowed generally for the purpose of various qualifying assets, the amount of borrowing cost to be capitalised to be determined by applying an appropriate capitalisation rate on the expenditure of the capitalisation rate. Capitalisation rate is the weighted average of the borrowing cost applicable to the borrowings of the enterprise outstanding during the period other than the borrowings made specifically for the purpose of obtaining qualifying asset. Capitalisation Rate = Total Interest on borrowing Total Borrowings Therefore, the relationship is, Specific borrowings one loan with one asset or many assets General borrowings – Many loans with many assets Expenditure on qualifying asset Payment of cash XX Transfer of other assets XX Interest bearing liabilities XX Less: Receipt of progress payment (XX) Grant received in connection with asset (XX) ________ Expenditure XX Another important note is that the amount of borrowing costs capitalised during the period should not exceed the amount of borrowing cost incurred during the period. Commencement Capitalisation of borrowing coast will be commenced on the basis of three conditions. They include that the expenditure for acquisition, production of asset has been actually incurred and activities necessary to prepare the asset for which the asset has been originally assessed to be used and actual borrowing cost has been incurred for the same. Suspension Borrowing costs in relation to qualifying assets are normally continuous for capitalisation. But in certain case they are suspended as prescribed when there is interruption in the active development of the asset. But there is exception to such suspension is not necessary in these cases, When substantial technical and administrative work is being carried out. When temporary delay is a necessary part of process of getting an asset ready for its intended use or sale. (E.g. Interest on loan taken to finance working capital requirement for a vineyard) Cessation There is a point in which the capitalisation of borrowing cost should to be stopped. Such capitalisation should be ceased if construction of a certain portion of the asset is completed and such asset can be used independently for its intended use or sale. On the other hand, if the assets are completed in parts and cannot be used independently, then the capitalisation should continue till the asset is ready for its intended use. The other kind of situation is that the capitalisation should be stopped if the asset is physically completed and only the routine administrative work is going on. Even if decoration work is remaining then the asset is deemed to be completed and the capitalisation of borrowing cost should be stopped for such asset. Disclosure Borrowing costs are disclosed in financial statements in terms of the particular accounting policy adopted and the amount of borrowing costs capitalised during the financial year. What are the significant differences between AS-16, IAS, and US GAAP? There is a marked difference in the way US GAAP and IAS deal with capitalisation of borrowing costs. Under IAS-23, there are two treatments that are allowed, The benchmark treatment which requires borrowing cost to be expensed when incurred Alternative treatment which requires capitalisation of borrowing cost when certain rules and conditions are fulfilled. But AS-16 does not allow dual treatment, i.e. borrowing costs are compulsorily capitalised when certain conditions are fulfilled and compulsorily not capitalised when certain conditions are not fulfilled. The same situation exists in the case of US GAAP-FAS-34 interest cost is capitalisable for all assets that require a period of time for their intended use, unless they are not material. Conclusion In spite of various accounting policies and financial reporting framework, AS-16, Borrowing costs are important to prepare those financial statements and so that the accounting information presented to the management is accurate and discloses material facts.

The Impact of the 1920’s

The decade of the 1920's was a period of American prosperity, new technology, and a new role for women. As World War I came to an end, society began bursting into many different things. The twenties were a time when people laughed more often than cried, partied more often than worked, and dreamed more often than faced reality. Athletes were looked up to as heroes, authors helped people escape into a different life, and women dressed as flappers and started voting. The Harlem Renaissance, the model T, prohibition, sports heroes, the role of women, and new technologies all helped influence the social changes in the â€Å"Roaring Twenties†. In the 1920's, African Americans were â€Å"roaring† in their culture. African American music, literature, dance, art, and social commentary all boomed in Harlem, New York. Their culture movement was known to be called â€Å"The New Negro Movement† and later called the Harlem Renaissance. The Harlem Renaissance showed the different cultures of African American. One of the main factors leading to the rise of the Harlem Renaissance was the urban migration. There were different people of the arts, such as Nora Thurston Zeale who was an anthropologist, Countee Cullen who was a romantic poet, Langston Hughes who was a poet as well as a playwright. Marcus Garvey, James Weldon Johnston, and W. E. B. Dubois were three political figures who helped people have hope of freedom for African Americans and made the Harlem Renaissance what it came to be known for, all the arts, literature, and music. Marcus Garvey was the leader of the Universal Negro Improvement Association, the first African American leader in the American history to organize masses of people in a political movement. He advocated â€Å"black nationalism† and financial independence for African Americans. W. E. B.  Dubois was an author and a teacher who helped found the National Association for the Advancement of Colored People and helped African Americans try to improve their lives. James Weldon Johnston also helped found the National Association for the Advancement of Colored People and was also the secretary. He was also an influential poet that influenced jazz music. Another black famous figure in the 1920's was Louis Armstrong. He was an amazing trumpet player who played jazz for the first time ever heard north of the Mason-Dixon Line. Langston Hughes was a great writer who wrote funny poems, stories, essays, and poetry. The Harlem Renaissance was a time period which had a huge influence across America and even around the world. The automobile really changed the way people lived in the 1920's. The automobile became the backbone of the American economy. It altered the American landscape and American's society, and it was only one of the several factors in the country's business boom in the 1920's. The automobile changed the way people lived their lives, the way the city was run, and how the economy was dealt with. The automobile changed the way everyday people lived their lives. Rural families now could travel to the city for shopping and entertainment. It also gave families the opportunity to take a vacation in places far away. Automobiles also gave younger people and women additional opportunities to be more independent. It allowed people to live far away from their jobs causing the urban sprawl. The automobile changed the way the city was run in a few ways. It was evident in the construction of the paved roads suitable for driving in all weather. Houses were being built with garages or carports and a driveway and a smaller lawn due to more people having automobiles. Gas stations, repair shops, public garages, motels, tourist camps, traffic signals, and shopping centers were all being built as well. The economy also had a big change when the automobile came into power. The industry provided an economic underpinning for cities like Akron and Detroit. It drew people to oil-producing states like California and Texas. The automobile industry also helped promote the free enterprise system. In the late 1920's, about one in every five people owned a vehicle in America. On January 16, 1920, the 18th amendment went to affect which banned all consumption, distribution, and creation of any alcoholic beverages. This created uproar, because people really did not like being told what they could or could not drink. The soul purpose was to reduce the quantity of alcohol consumed. It at first worked, it began to be very difficult to get alcohol, plus the prices went up a lot, and the quantity consumed was less than it used to be. At that time, most bootleggers were from the mafia, which were families that controlled areas of a city. Speakeasies were made to keep people happy when the alcohol was banned. They gave out alcohol illegally. Besides speakeasies, the American population came up with different kind of ways to get around the 18th Amendment, such as putting alcohol in hot water bottles, coconut shells, garden hoses, and other unique things to get alcohol. The mafia saw the amendment as a way to make money. The time between 1920 until 1933 when prohibition ended, mafia families, such as Al Capone, were taking in about sixty million dollars. It was pretty hard to uphold the Prohibition law. So in 1933, the Prohibition law came to an end. There were many sports heroes in the 1920's, such as George Herman Ruth, Jack Dempsey, Johnny Weismuller, Steve Donoghue, Harold Edward Grange, Helen Newington Wills, and William Tilden. George Herman Ruth, later dubbed Babe Ruth from his fans, set the baseball record of sixty home runs in one season in 1927. This record stood until 1961 when Roger Maris hit 61 home runs. He might have been the best baseball player who ever played the game. He led the Yankees to seven World Series and made two million dollars in his career. Jack â€Å"the Manassa Mauler† Dempsey was one of the best heavyweight boxers of all time. He was a heavyweight champion and fought and won against Georges Carpentier. The battle was later called â€Å"The Battle of the Century† and they were the first people to be paid more than one million dollars for promotion of the fight. Johnny Weismuller was a swimmer who won a lot of Olympic gold medals. He won 52 United States titles and 28 world distance records. He also starred in many films as Tarzan Lord of the Jungle. Steve Donoghue won several Derby's. He won six total Derby's and was named the champion jockey from 1914-1923. Harold Edward Grange was a college football hero who helped get the game of American football popular. Helen Newington Wills was a woman's tennis champion. She won Wimbledon for the first time in 1927. She had won two Olympic gold medals and 19 singles championships. She was later inducted into the U. S. Lawn Tennis Hall of Fame. William â€Å"Big Bill† Tilden was a men's tennis champion. He was the first American to win the Wimbledon title in 1920. These two champions helped get the game of tennis popular during the twenties. On August 26th, 1920, President Wilson ratified the Nineteenth Amendment. The Nineteenth Amendment was for women suffrage. In the twenties, many roles changed for women. Women were declared the right to vote, their styles changed, they began doing other jobs such as doctors, bankers, lawyers, and other different jobs which were usually reserved for men. Women's style changed from wearing clothes that went all the way down to their ankles and with long hair all pinned up to short â€Å"bob† hair cuts and short skirts. These women were called â€Å"flappers†. In the twenties, the jobs that were usually seen as womanly such as household things dropped. Women started doing jobs that men usually did. It was still seen that women were to be in the home and men brought home the money. A lot of new technology thrived in the 1920's. In 1927, Philo Farnsworth patented the â€Å"dissector tube† which turned out to be important to inventing the television. Late in 1922, the first movie with sound, â€Å"The Jazz Singer† came out. Television's first drama came out on September 11, 1928, which was called â€Å"The Queen's Messenger†. In 1926, the first movie with sound and color came out. The Harlem Renaissance, the model T, prohibition, sports heroes, the role of women, and new technologies all helped influence the social changes in the â€Å"Roaring Twenties†. The prosperity and experiences that America went through in the â€Å"Roaring Twenties† looked like they would go on forever. There were not any signs that the country that was thriving would go into a complete and total economic depression. New inventions, new advancements, and new discoveries helped make life better in America. Life seemed so easy in the twenties thanks to all the new advancements. No one would have guessed what laid ahead for the powerful country.

How to Create Behavior Contracts for Students

Every teacher has at least one challenging student in her class, a child who needs extra structure and incentive to change bad behavior habits. These arent bad kids; they often just need a little extra support, structure, and discipline. Behavior contracts can help you mold the behavior of these students so that they no longer disrupt learning in your classroom. What Is a Behavior Contract? A behavior contract is an agreement between the teacher, student, and the students parents that sets limits for student behavior, rewards good choices, and outlines consequences for bad choices. This type of program sends a clear message to the child by communicating with them that their disruptive behavior cannot continue. It lets them know your expectations and what the consequences of their actions, both good and bad, will be.   Step 1, Customize the Contract First, make a plan for change. Use this behavior contract form as a guide for the meeting you will soon have with the student and his/her parents. Tailor the form to your particular situation, taking into consideration the personality and preferences of the child you are helping. Step 2, Set Up A Meeting Next, hold a meeting with the involved parties. Perhaps your school has an assistant principal in charge of discipline; if so, invite this person to the meeting. The student and his/her parents should attend as well. Focus on 1 to 2 particular behaviors that you would like to see change. Dont try to change everything at once. Take baby steps toward major improvement and set goals that the student will perceive as achievable. Make it clear that you care about this child and want to see him/her improve in school this year. Emphasize that the parent, student, and teacher are all part of the same team.   Step 3, Communicate the Consequences Define the tracking method to be used on a daily basis for monitoring student behavior. Describe the rewards and consequences that correlate with behavior choices. Be very specific and clear in this area and use quantitative explanations whenever possible. Involve the parents in designing a system of rewards and consequences. Make sure that the chosen consequences are truly important to this particular child; you can even ask the child for input which will make him/her buy into the process even further. Have all involved parties sign the agreement and end the meeting on a positive note. Step 4, Schedule a Follow-Up Meeting Schedule a follow-up meeting 2 to 6 weeks from your initial meeting to discuss progress and make adjustments to the plan as needed. Let the child know that the group will be meeting again soon to discuss their progress. Step 5, Be Consistent in the Classroom In the meantime, be very consistent with this child in the classroom. Stick to the wording of the behavior contract agreement as much as you can. When the child makes good behavior choices, offer praise. When the child makes poor choices, do not be apologetic; if needed, pull out the contract and review the terms that the child agreed upon. Emphasize the positive consequences that can come as a result of good behavior and enforce any negative consequences of the childs bad behavior that you agreed upon in the contract.   Step 6, Be Patient and Trust the Plan Most of all, be patient. Do not give up on this child. Misbehaved children often need extra love and positive attention and your investment in their well-being can go a long way.   In Conclusion You might be surprised at the huge feeling of relief that all involved parties feel just by having an agreed-upon plan. Use your teachers intuition to start yourself on a more peaceful and productive path with this child.

Analysis of Patrick Henrys Speech to the Virginia...

â€Å"Give me liberty or give me death!† This statement from Patrick Henry’s â€Å"Speech to the Virginia Convention,† delivered to the House of Burgesses, has been quoted by many, becoming almost clichà ©. However, the declaration is truly understood by a select few. The unjust Stamp Act passed by the British crown in 1765, brought fame and notoriety to Henry as he spoke out against the unjust taxation without representation. Ten years later on the eve of revolution, Henry calls upon the Colonial government of which he is part, to act for the betterment of the people. Patrick Henry attempts to persuade the House of Burgesses to revolt and declare war against Britain by logically convincing them that it is their natural right to be free and calling on†¦show more content†¦As he goes on in his speech, he says that to not be free, would be worse than death. Therefore, according to Patrick Henry’s logical argument, and substitution, they must revolt , or face a condition worse than death. Pathos or, playing on the emotions of the leaders of colonial America, is another tactic Henry draws on to convince them that revolution is essential. He uses the patriotism and pride of the colonial leaders to make them see how the British crown is taking away their natural rights as human beings. He states that outsiders say the colonies are â€Å"weak† because they would be â€Å"unable to cope with Britain as their adversary.† The leaders of the colonies are not used to being called weak, because they are of the upper classes of the Americas. Therefore this would ignite them to revolution, because the British would be against them, they who had dared question the strength of the members of the colonial Americas. Also, this statement of colonial American weakness would make the members of the House feel slighted because they have been working towards strengthening the Americas and saying they are weak is saying they are failing as leaders of the colonies. 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