Advanced Accounting · AS 16 Borrowing Costs

AS 16 Borrowing Costs: Commencement, Suspension and Cessation of Capitalisation

Updated 4 October 2026 · Fact-checked

Under AS 16, capitalisation of borrowing costs on a qualifying asset starts when expenditure is incurred, borrowing costs are incurred and activities to prepare the asset are in progress. It is suspended during extended interruptions of active development. It stops when substantially all activities needed to make the asset ready for use or sale are complete.

Understand Commencement, Suspension and Cessation of Capitalisation

A qualifying asset is one that takes a substantial period to get ready for its intended use or sale. Borrowing costs on money used to build it are added to its cost, but only for the period when the asset is actually being prepared. AS 16 therefore sets three timing rules: when to start, when to pause and when to stop.

Commencement. Capitalisation begins only when all three conditions are met together: (a) expenditure on the asset is being incurred, (b) borrowing costs are being incurred, and (c) activities necessary to prepare the asset for its intended use or sale are in progress. If any one is missing, the interest is charged to the Statement of Profit and Loss. Activities include physical construction and also technical and administrative work before construction, such as obtaining permits. Merely holding the asset with no development activity does not count.

Suspension. Capitalisation is suspended during extended periods in which active development is interrupted. Interest during that time is expensed. Capitalisation is not suspended when a temporary delay is a necessary part of getting the asset ready, for example a river-level delay in bridge construction, or when the interruption is short, or when substantial technical and administrative work is still going on.

Cessation. Capitalisation ceases when substantially all activities needed to prepare the asset for its intended use or sale are complete. An asset is normally ready when physical construction is finished, even if minor routine work such as decoration to the buyer's specification is pending. If the asset is completed in parts and each part can be used while construction continues on other parts, capitalisation on a part ceases when substantially all activities for that part are complete. If the part cannot be used until the whole is complete (for example an industrial plant where processes occur in sequence), capitalisation continues until the whole is ready.

After cessation, interest on the same loan is an expense. Remember also the disclosure: the accounting policy for borrowing costs, and the amount of borrowing costs capitalised during the period.

Key rules to remember

Conditions for commencement: Expenditure incurred + Borrowing costs incurred + Activities in progress = start capitalising; All three must be met. Missing any one means expense the interest.
Suspension rule: Extended interruption of active development → suspend and expense; No suspension for short or temporary delays, or when substantial technical or administrative work continues, or when the delay is a necessary part of the process.
Cessation rule: Substantially all activities complete → stop capitalising; Minor pending work does not delay cessation.
Part-completed asset: Each part usable on its own → cease for that part when it is ready. Part not usable until the whole is done → cease when the whole is ready; Test whether the completed part can be used while work continues on the rest.
Capitalised interest for a period: Borrowing cost × (months of active development ÷ months in period); Use only for the months when capitalisation is allowed, where interest accrues evenly.
Disclosure: Accounting policy adopted + Amount of borrowing costs capitalised during the period; Both are required in the financial statements.

How to solve Commencement, Suspension and Cessation of Capitalisation questions

Use a timeline. Mark each date, decide the status of each period, then compute interest only for the capitalisation periods.

1Confirm the asset is a qualifying asset: it must take a substantial period to get ready.
2Find the commencement date: the first date when expenditure, borrowing cost and development activity all exist.
3List every interruption. For each, decide if it is extended active-development interruption (suspend) or a temporary, short or necessary delay (continue).
4Find the cessation date: when substantially all activities are complete. Ignore minor pending work.
5For part-completed assets, test whether each part is usable independently and fix separate cessation dates.
6Compute interest for each period as principal × rate × time, and split it into capitalised and expensed amounts.
7Write the capitalised amount as part of the asset cost and the rest to the Statement of Profit and Loss.
8State the disclosure: the policy and the amount capitalised.

Quickest way: Timeline-and-tick method

When to use it: Use for any question with dates, delays or a completed-in-parts asset, in both MCQs and written answers.

Draw a line with the months and write Start, Pause and Stop above it.
Tick the three commencement conditions. If one is unticked, the start date moves later.
Ask of each delay: extended and active work stopped? If yes, pause. If it is short or necessary, continue.
In an MCQ, eliminate options that capitalise during suspension or after the asset is ready.
In a written answer, give the rule in one line, apply it to the facts, then show the amount capitalised and the amount expensed. This earns step marks even if the figure is wrong.

Common mistakes in Commencement, Suspension and Cessation of Capitalisation

Starting capitalisation on the loan drawdown date.
Students link interest to borrowing alone and ignore the other two conditions.
Fix: Start only when expenditure is incurred and development activity is in progress, as well as borrowing cost being incurred.
Suspending capitalisation for every delay.
Students read any pause as an interruption.
Fix: Suspend only for extended interruptions. Short delays, necessary delays and periods of substantial technical or administrative work are not suspended.
Continuing capitalisation until the asset is actually put to use.
Ready for use and actually used are confused.
Fix: Stop when substantially all activities are complete, even if use starts later.
Capitalising on the whole plant until the last part is done even when parts are independently usable.
Students ignore the part-completed rule.
Fix: Check if each part can be used while the rest is built. If so, cease for that part when it is ready.
Forgetting disclosure.
Students stop after the computation.
Fix: Add the policy and the amount of borrowing costs capitalised during the period.

Worked examples

Example 1

Anand Ltd took a specific loan of ₹50,00,000 at 12% p.a. on 1 April 2026 to build a factory (a qualifying asset). Construction started on 1 May 2026 and was completed on 31 December 2026. A labour dispute caused an extended interruption from 1 July to 31 August 2026. During these two months, all development activities, including technical and administrative work, stopped completely. Compute the borrowing cost to be capitalised and expensed for the year ended 31 March 2027, ignoring any investment income.

Show the solution

Total interest for 12 months = ₹50,00,000 × 12% = ₹6,00,000, so ₹50,000 per month.
1 April to 30 April 2026: no development activity yet. Commencement conditions are not all met, so 1 month is expensed.
1 May to 30 June 2026: active development, so 2 months are capitalised.
1 July to 31 August 2026: development stopped completely for an extended period, so capitalisation is suspended and 2 months are expensed.
1 September to 31 December 2026: active development, so 4 months are capitalised.
After 31 December 2026 the factory is ready, so 3 months (January to March 2027) are expensed.
Capitalised months = 2 + 4 = 6, so ₹50,000 × 6 = ₹3,00,000.
Expensed months = 1 + 2 + 3 = 6, so ₹50,000 × 6 = ₹3,00,000.

Answer: ₹3,00,000 is capitalised to the factory cost and ₹3,00,000 is charged to the Statement of Profit and Loss. Disclose the policy and the ₹3,00,000 capitalised.

Example 2

Beta Ltd is building a complex of two independent buildings, A and B, using a specific loan of ₹1,20,00,000 at 10% p.a. from 1 April 2026. Building A can be used on its own and is complete on 30 September 2026. Building B is completed on 31 March 2027. Construction of both started on 1 April 2026 with no interruptions. Assume the loan is allocated 50:50 between the two buildings throughout the year. Compute the interest capitalised for the year ended 31 March 2027 and state the treatment.

Show the solution

Annual interest = ₹1,20,00,000 × 10% = ₹12,00,000.
The loan is allocated equally (the stated assumption), so each building is notionally charged ₹12,00,000 ÷ 2 = ₹6,00,000 per year.
Building A is independently usable, so capitalisation ceases when it is complete on 30 September 2026. Active period is 6 months.
Interest capitalised for A = ₹6,00,000 × 6 ÷ 12 = ₹3,00,000.
Interest on A's share for October to March = ₹3,00,000, charged to the Statement of Profit and Loss.
Building B is under construction for the whole year and is completed on 31 March 2027, so capitalisation runs for all 12 months: ₹6,00,000.
Total capitalised = ₹3,00,000 + ₹6,00,000 = ₹9,00,000. Expensed = ₹3,00,000. Check: ₹9,00,000 + ₹3,00,000 = ₹12,00,000.

Answer: ₹9,00,000 is capitalised (₹3,00,000 to Building A and ₹6,00,000 to Building B). ₹3,00,000 is expensed. Disclose the policy and ₹9,00,000 capitalised.

Exam tips

Always write the three commencement conditions in a theory answer. Examiners look for all three.
In numerical questions, build a month-by-month table. It shows the examiner your logic and secures step marks.
When a question says a delay is temporary or part of the process, do not suspend. Read the exact wording.
Check whether the asset is a qualifying asset before computing anything.
End the answer with the disclosure line: the policy and the amount capitalised.

Practice questions from AS 16 Borrowing Costs

Commencement, Suspension and Cessation of Capitalisation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Commencement, Suspension and Cessation of Capitalisation: frequently asked questions

When does capitalisation of borrowing costs begin under AS 16?

It begins when expenditure on the asset is incurred, borrowing costs are incurred and activities to prepare the asset for use or sale are in progress. All three must be present. Until then, interest is an expense.

Is capitalisation always suspended when work stops?

No. It is suspended only during extended periods when active development is interrupted. Short delays, delays that are a necessary part of the process and periods of substantial technical or administrative work do not cause suspension.

When does capitalisation cease?

It ceases when substantially all activities needed to make the qualifying asset ready for its intended use or sale are complete. Minor pending work does not delay this. If parts can be used independently, it ceases for each part as it is ready.

What must be disclosed for borrowing costs under AS 16?

You must disclose the accounting policy adopted for borrowing costs and the amount of borrowing costs capitalised during the period.