Income Computation and Disclosure Standard (ICDS) IX – Borrowing Costs
ICDS-IX provides guidelines for the recognition, measurement, and treatment of borrowing costs. It specifies when such costs should be capitalized as part of an asset’s cost and when they should be charged to profit and loss.
- Scope– Borrowing costs include:
Interest expense on loans and borrowings.
Commitment charges, processing fees, and finance lease charges.
Amortized discounts/premiums on borrowings.
Bill discounting charges (as clarified by CBDT Circular No. 10/2017, dated 23-03-2017).
Borrowing costs disallowed under specific provisions of the Income-tax Act (e.g., expenses related to exempt income under Section 14A) cannot be capitalized.
- Capitalization of Borrowing Costs– Borrowing costs are capitalized if they are directly attributable to the acquisition, construction, or production of a qualifying asset, including:
Tangible Assets – Land, building, plant, and machinery, etc.
Intangible Assets – Patents, trademarks, copyrights, etc.
Inventories – If they require 12 months or more for saleable condition.
- Computation of Capitalization Amount
For Specific Borrowings: The entire borrowing cost incurred on funds directly used for a qualifying asset is capitalized.
For General Borrowings: The amount to be capitalized is computed using the following formula:
Capitalized Borrowing Cost = Total General Borrowing Cost × Average Cost of Qualifying Assets /Average Cost of Total Assets
Where:
➢ Average Cost of Qualifying Assets depends on whether the asset was in existence at the beginning of the year, acquired during the year, or put to use during the year.
➢ Average Cost of Total Assets is calculated excluding assets funded through specific borrowings.
- Period of Capitalization
For Specific Borrowings: From the date funds are borrowed until the asset is first put to use.
For General Borrowings: From the date funds are utilized for a qualifying asset until the asset is first put to use.
For Inventories: Until all activities necessary to make them saleable are substantially completed.
For Construction in Phases: Capitalization stops individually for each phase when it is put to use.
- Disclosures inForm 3CD
Accounting policy for borrowing costs.
Amount of borrowing costs capitalized during the year.