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CMA Final · Corporate Financial Reporting · Borrowing Costs (Ind AS 23)

Ramesh Industries Ltd (parent) and its subsidiary Ganga Power Ltd both have borrowings. Ganga Power is building a qualifying asset using funds from general borrowings. According to Ind AS 23, how should the capitalisation rate be determined in a group context?

Ind AS 23 allows judgement: in some circumstances the weighted average covers all borrowings of the parent and its subsidiaries, while in other circumstances each subsidiary uses a weighted average of its own borrowings. No single approach applies always, and no simple average of extreme rates is prescribed.

  1. AAlways use the parent's weighted average rate, ignoring the subsidiary's own borrowings
  2. BAlways use only the subsidiary's own weighted average rate
  3. CIn some circumstances use a weighted average of all borrowings of the parent and subsidiaries; in others, the subsidiary's weighted average of its own borrowingsCorrect
  4. DUse the simple average of the highest and lowest rates in the group

Explanation

The standard says that in some circumstances it is appropriate to include all borrowings of the parent and its subsidiaries in the weighted average, and in others each subsidiary should use a weighted average of its own borrowings. Options fixing one approach always are therefore wrong, and no simple highest/lowest average is prescribed.

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