Borrowing Costs

As per Ind AS 23 BorrowingCosts, an entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them. Though this appears simple, in practice, numerous complicated situations arise, particularly, with respect to allocation of interest on general borrowings, treatment of interest income, foreign exchange gains and losses, etc. Here, we take a look at the treatment of interest income earned on the mobilisation advances made to vendors involved in the construction of a project.

QUERY

1. Dixon is a debt-free company. For the purposes of constructing a new manufacturing plant, it has used internally generated funds that are currently deposited in fixed deposits with banks. The funds will be used to provide advances to vendors involved in the construction of the plant. These advances carry interest at applicable market rates. Since the fixed deposits are withdrawn, Dixon will no longer earn the interest income on fixed deposits. However, Dixon will earn interest income on the mobilisation advance. How is the interest income on mobilisation advance accounted for? Can Dixon capitalise as project cost the notional intere