The AS 16 will restrict corporates from capitalising the borrowing cost, which, in the past, has been used to boost the net profit, as the capitalised borrowing cost was not shown as a deduction from profit before interest, depreciation and tax (PBIDT) in the profit & loss account.

Further, the new provisions will restrict the corporates from charging undue depreciation on assets by boosting the asset values through capitalisation of borrowing cost.

The AS would be applicable for all accounting periods commencing on or after April 1, 2000, and will be mandatory in nature.

The AS will bring about a significant change in the generally accepted accounting practices in India (Indian GAAPs), as the accounting standards clearly define as to what can be included in the borrowing cost.

The corporates will now have to give details regarding the accounting policy adopted for the borrowing cost and the amount of borrowing cost capitalised during the accounting period. This information will form part of the financial statements.

The ICAI has made it mandatory for the companies to stop capitalising borrowing cost when substantially all the activities necessary to put the asset to commercial use are complete.

The ICAI has said that only funds specifically borrowed for the purpose of obtaining a qualifying asset can be capitalised. Further, capitalisation will have to be suspended during the extended period in which active development of assets is interpreted.

The ICAI has stated that items like commitment charge, discount of premium relating to borrowings, ancillary cost for arrangement of borrowing, finance charges on finance lease, and exchange difference on foreign currency borrowings are eligible for capitalisation.

The AS has also put restriction on the assets eligible for availing of the capitalisation benefit. It will include assets which take a substantial period of time to get ready for its actual commercial use.

Experts feel by capitalising the borrowing cost, many corporates have been deriving multiple benefits in the past. By capitalising the borrowing cost, corporates have been able to boost their asset values to claim higher depreciation, thus showing higher net profit. Further, it has also helped them improve leverage and borrow more, feel the experts.

This will also restrict the companies from capitalising interest for a long period, substantially in those cases where the development activities have been suspended for time overruns.