Accounting treatment of borrowing costs incurred by parent company in respect of borrowings made for acquisition of investments in subsidiary company

A. Facts of the Case

A company is a wholly owned subsidiary of a listed government company and is in the business of exploration and production (E&P) of oil and gas and other hydrocarbon related activities outside India. During the financial year (F.Y.) 2013-14, the Company acquired 60% shares in an overseas company (subsidiary company X) which was having 10% participating interest (PI) in an overseas discovered oil and gas project under development (Project-A).
As noted above, at the time of acquisition of the shares in subsidiary company X, the subsidiary company was holding 10% PI in an oil and gas asset under development with assets under construction in the form of Capital Work in Progress (CWIP) and Exploratory Wells in Progress (EWIP). The purchase consideration for the acquisition was financed partly by market borrowings and partly by internal accruals.
In the consolidated financial statements, the assets under construction of the subsidiary company X are combined with like items as per line by line consolidation method. Similarly, the borrowings costs charged off as expense in the standalone financial statements are also combined with like items of expenditure and, therefore, are treated as expense in the consolidated financial statements as well.

B. Query

The company has sought the opinion on the following issues arising from the above:

Whether the Company’s accounting treatment for not capitalising the borrowing costs associated with the borrowings made for acquisition of shares in subsidiary X with the costs of in-progress assets held by the subsidiary company and charging off the same as expenditure in the separate as well as consolidated financial statements is correct.

C. Opinion

On the basis of the above, the opinion in respect of the issues raised by the company:

• Since in the extant case, the Company has acquired the shares of the subsidiary company X in a secondary transaction, the subsidiary company did not receive any funds from the Company as a result of this acquisition.
• Thus, even from the Group perspective, the funds paid by the Company for acquisition of shares in subsidiary X were not directly used to acquire participating interest in oil and gas project (Project A) under development or for development activities on the project A.
• As per Ind AS 23, charging off the borrowing cost in the separate as well as consolidated financial statement is appropriate accounting treatment.

The above opinion was affirmed by the ICAI-Expert Advisory Committee.

Deepak Kumar, Audit Associate, SW India