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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Kaveri Power Ltd took a foreign currency loan of USD 1,00,000 on 1 April 2025 to finance a plant that is a qualifying asset and remained under construction throughout the year. The exchange rate was Rs 80 per USD on 1 April 2025 and Rs 83 on 31 March 2026. The loan carries interest at 5% p.a., and the interest for the year is translated at an average rate of Rs 81 per USD. Interest on a comparable rupee loan would have been 10% p.a. What amount of borrowing cost is capitalised for the year as per AS 16?

The capitalised borrowing cost is Rs 7,05,000. Interest is Rs 4,05,000, and the exchange loss of Rs 3,00,000 is included because it is within the Rs 3,95,000 gap between rupee-loan interest and foreign-loan interest. AS 16 allows exchange differences as an interest adjustment only up to that limit.

  1. ARs 4,05,000
  2. BRs 7,05,000Correct
  3. CRs 8,00,000
  4. DRs 3,00,000

Explanation

Interest on the foreign loan = USD 5,000 x 81 = Rs 4,05,000. Interest on a comparable rupee loan = Rs 80,00,000 x 10% = Rs 8,00,000, so the interest difference is Rs 3,95,000. The exchange loss is USD 1,00,000 x (83-80) = Rs 3,00,000. This is below Rs 3,95,000, so all of it is treated as an adjustment to interest cost. Capitalised amount = 4,05,000 + 3,00,000 = Rs 7,05,000. Rs 4,05,000 wrongly ignores the exchange difference.

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