Treatment under Ind AS 23 | Borrowing Costs for Subsidiary Investment by Parent Company
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- Last Updated on 1 April, 2023
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As per para 8 of Ind AS 23, 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. A company acquires 60% stake in another company which is financed through market borrowings. The subsidiary company is holding a participating interest in the asset under development (a qualifying asset as per Ind AS 23). While consolidating, the interest cost on market borrowings is charged as an expense in the statement of profit and loss instead of capitalising on the cost of the asset.
However, the auditor objects to the above accounting treatment of expensing the borrowing cost to profit and loss. As per the auditor, interest payment on a loan taken by the holding company for equity investment in a subsidiary company and where the proceeds of the loan are to finance the construction of a qualifying asset by the subsidiary company, the same should be included in the cost of the asset in the consolidated financial statements of the holding company. The company sought the opinion of EAC as to whether the company is correct in not capitalising the borrowing costs associated with the borrowings made for the acquisition of shares in subsidiary
The Expert Advisory Committee (EAC) noted that at the time of the acquisition of shares in the subsidiary company, it was already holding an interest in the asset under development. There is no direct relationship between the borrowings made by the reporting entity (viz., the Group) and the expenditure incurred on the acquisition/construction/development of the qualifying asset. Accordingly, Committee is of the opinion that the borrowing costs incurred on the acquisition of shares of the subsidiary company cannot be capitalised in the consolidated financial statements.
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