CA Final FR AS 16 & 11 NMQs

Question --
Sun Co-operative Society Ltd. has borrowed a sum of US$12.50 million at the commencement of the financial year 2014-15 for its solar energy project at LIBOR (London Interbank Offered
Rate) of 1% + 4% . The interest is payable at the end of the respective financial year. The loan was availed at the then rate of ` 45 to the US dollar while the rate as on 31st March, 2015 is ` 48 to the US dollar. Had Sun Co-operative Society Ltd. borrowed the Rupee equivalent in India, the interest would have been 11%. You are required to compute Borrowing Cost‘. Also show the amount of exchange difference as per prevailing Accounting
Standards.
ANSWER--
Computation of Borrowing Cost as per para 4(e) of AS 16” Borrowing Costs” and Amount of Exchange Difference as per AS 11 “The Effects of Changes in Foreign Exchange Rates”:
(a) Interest for the period 2014-15
= US$ 12.5 million x 5% × ` 48 per US$ = ` 30 million
(b) Increase in the liability towards the principal amount
= US $ 12.5 million × ` (48 - 45) = ` 37.5 million
(c) Interest that would have resulted if the loan was taken in Indian currency
= US$ 12.5 million × ` 45 x 11% = ` 61.875 million
(d) Difference between interest on local currency borrowing and foreign currency borrowing = ` 61.875 million - ` 30 million = ` 31.875 million.

Therefore, out of ` 37.5 million increase in the liability towards principal amount, only ` 31.875 million will be considered as the borrowing cost.

Thus, total borrowing cost would be ` 61.875 million being the aggregate of interest of ` 30 million on foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of ` 31.875 million.

Hence, ` 61.875 million would be considered as the borrowing cost to be accounted for as per AS 16 and the remaining ` 5.625 million (37.5 - 31.875) would be considered as the exchange difference to be accounted for as per AS 11.