Accounting Treatment of Incidental Income Derived From Interest-free Funds

Para 21 of Ind AS 16, Property, Plant and Equipment, states that some operations not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management are excluded from the cost of the asset. In pursuance of the above provision of Ind AS 16, a company has not capitalised the incidental interest income derived from funds pending utilisation for the project asset. These funds are provided by government, however, terms and conditions are not finalised between the Company and Govt. and govt. do not charge any financing cost/borrowing costs on funds released to the Company. Since, the funds does not have any borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, there is no possibility of reduction of incidental interest income from the borrowing cost.

However, the auditor objected to the above accounting treatment and referred to the para 6 and 13 of Ind AS 23, Borrowing Cost, which states that borrowing costs may include interest expense calculated using the effective interest method as described in Ind AS 109, Financial Instruments and in determining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on such funds is deducted from the borrowing costs incurred. Thus, the company is required to recognise the borrowing cost and also reduce the incidental income on the funds pending utilisation for the project asset.

Feeling aggrieved, the management of the company approached the Expert Advisory Committee (EAC) of ICAI for their opinion on the correct treatment of incidental income derived from interest-free funds.

Click Here To Read The Full Story