Financial Accounting · Borrowing Costs (AS 16)

Commencement, Suspension and Cessation of Capitalisation under AS 16

Updated 10 October 2026 · Fact-checked

Under AS 16, you capitalise borrowing costs on a qualifying asset only during the capitalisation period. It begins when expenditure is incurred, borrowing costs are incurred and activities to prepare the asset are in progress. It is suspended during extended interruptions, and it ceases when the asset is substantially ready for its intended use or sale.

Understand Commencement, Suspension and Cessation of Capitalisation

AS 16 allows borrowing costs that are directly attributable to acquiring, constructing or producing a qualifying asset to be capitalised as part of its cost. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. But not every day of borrowing counts. Only the period in which the asset is actually being prepared qualifies. This period is the capitalisation period.

Capitalisation commences when all three conditions are met together. First, expenditure on the asset is being incurred. Second, borrowing costs are being incurred. Third, activities necessary to prepare the asset for its intended use or sale are in progress. If any one is missing, capitalisation has not started. For example, if you have borrowed money but only bought land and nothing is happening on it, the third condition is not met.

Activities include more than physical construction. They cover technical and administrative work before construction starts, such as obtaining permits. They do not include simply holding an asset when no production or development that changes its condition is going on. Land held idle, for instance, does not qualify just because interest is accruing.

Capitalisation is suspended during extended periods in which active development is interrupted. Borrowing costs in that period are expensed to the Statement of Profit and Loss. Capitalisation is not suspended when a brief interruption is a necessary part of the process, when substantial technical and administrative work is going on, or when a temporary delay is a necessary part of getting the asset ready. A delay due to high water levels that is common in the region during construction of a bridge is an example.

Capitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete. The asset is usually ready then, even if routine administrative work continues. Minor modifications, such as decoration to the buyer's or user's specification, do not prevent cessation. If a asset is completed in parts and each part can be used while construction continues on others, capitalisation for a part ceases when that part is substantially complete.

Key rules to remember

Conditions for commencement: Expenditure incurred + Borrowing costs incurred + Activities in progress; All three must be met. The date the last one is met is the commencement date.
Suspension rule: Extended interruption of active development → stop capitalising; expense the borrowing cost; Do not suspend for brief interruptions, for substantial technical or administrative work, or for a delay that is a necessary part of the process.
Cessation rule: Substantially all activities complete → stop capitalising; Minor modifications or routine administrative work do not delay cessation.
Part-by-part completion: Each part usable while the rest is under construction → cease for that part when it is substantially complete; Applies only when the part can be used independently.
Capitalised cost in a period: Borrowing cost × (months in capitalisation period ÷ total months); Use for simple time apportionment of interest on a specific loan.

How to solve Commencement, Suspension and Cessation of Capitalisation questions

Treat every question as a timeline. Mark the dates, test each date against the rules, then compute interest only for the qualifying months.

1Confirm the asset is a qualifying asset: it must take a substantial period to get ready.
2Write the timeline of events: loan drawn, expenditure made, work started, interruptions, completion.
3Find the commencement date: the first date on which expenditure, borrowing cost and active preparation are all present.
4Check each interruption. Is it extended and a break in active development? If yes, suspend. If it is brief, a necessary part of the process, or involves substantial technical work, do not suspend.
5Find the cessation date: when substantially all activities are complete, even if minor work remains.
6Count the months in the capitalisation period, excluding suspended months.
7Compute interest for those months and capitalise it. Expense the interest of the other months to the Statement of Profit and Loss.
8State your reasoning in one line against each date, as this earns step marks.

Quickest way: Three-test timeline scan

When to use it: Use in MCQs and short numerical questions where dates and interruptions are given.

Draw a line with the dates.
Start the clock only when all three commencement conditions are true.
Cross out months with an extended interruption of active work.
Stop the clock at substantial completion.
Multiply monthly interest by the remaining months; the rest is an expense.

Common mistakes in Commencement, Suspension and Cessation of Capitalisation

Starting capitalisation on the date the loan is taken.
Students link capitalisation only to borrowing.
Fix: Check all three conditions. Without expenditure and active preparation, the interest is an expense.
Suspending capitalisation for every interruption.
The word suspension is applied mechanically to any gap.
Fix: Suspend only for extended interruptions of active development. Brief gaps, necessary delays and periods of substantial technical or administrative work continue to be capitalised.
Continuing capitalisation until the asset is actually put to use.
Students confuse completion with commissioning.
Fix: Stop when substantially all activities are done. Interest after that date is an expense, even if the asset is not yet used.
Treating minor pending work as a reason to continue capitalising.
The word substantially is overlooked.
Fix: Minor modifications or routine administrative work do not delay cessation.
Capitalising interest for the suspension months and then expensing it elsewhere, or ignoring it completely.
The treatment of suspended months is not stated clearly.
Fix: Interest in suspended months is charged to the Statement of Profit and Loss. Show it separately in your answer.

Worked examples

Example 1

Sharda Infra Ltd borrowed ₹1,20,00,000 at 10% p.a. on 1 April to construct a factory. Construction began on 1 June, and payments to the contractor were made from 1 June. Construction was substantially complete on 31 December. Assume the loan was fully used for the factory. Compute the interest to be capitalised and the interest to be expensed for the period 1 April to 31 December.

Show the solution

Monthly interest = ₹1,20,00,000 × 10% ÷ 12 = ₹1,00,000.
April and May: the loan exists, but no expenditure on the asset and no active work. Capitalisation has not commenced. 2 months × ₹1,00,000 = ₹2,00,000 is an expense.
Commencement is 1 June, when expenditure and work began along with borrowing costs.
Cessation is 31 December, when the factory is substantially complete.
Capitalisation period = June to December = 7 months. Interest capitalised = 7 × ₹1,00,000 = ₹7,00,000.

Answer: Interest capitalised is ₹7,00,000 and interest expensed is ₹2,00,000.

Example 2

Kaveri Power Ltd took a specific loan of ₹60,00,000 at 12% p.a. on 1 January for building a plant. Active construction ran from 1 January to 31 May. From 1 June to 30 September, work stopped fully because of a dispute with the labour union, which was an extended interruption. Work resumed on 1 October and the plant was substantially complete on 31 December. Compute the interest to be capitalised and charged to profit and loss for the year from 1 January to 31 December.

Show the solution

Monthly interest = ₹60,00,000 × 12% ÷ 12 = ₹60,000.
Capitalisation from 1 January to 31 May: 5 months.
1 June to 30 September: an extended interruption of active development, so capitalisation is suspended. 4 months.
1 October to 31 December: 3 months of active work, so capitalisation resumes.
Capitalised months = 5 + 3 = 8. Interest capitalised = 8 × ₹60,000 = ₹4,80,000.
Interest expensed = 4 × ₹60,000 = ₹2,40,000.
Check: total interest = 12 × ₹60,000 = ₹7,20,000 = ₹4,80,000 + ₹2,40,000.

Answer: Interest capitalised is ₹4,80,000 and interest charged to the Statement of Profit and Loss is ₹2,40,000.

Exam tips

Always draw the timeline first. Most numerical questions are decided by two or three dates.
In MCQs, look for words like extended, brief, necessary and substantially. They decide whether to suspend or cease.
In written answers, state the rule before applying it. For example, write the three commencement conditions, then say which date satisfied them.
Show the expensed interest separately. Examiners often award a mark for it.
Check that capitalised plus expensed interest equals total interest for the period.

Practice questions from Borrowing Costs (AS 16)

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 commence under AS 16?

It commences when expenditure on the qualifying asset is incurred, borrowing costs are incurred and activities to prepare the asset for its intended use or sale are in progress. All three conditions must be met. The latest of these dates is the commencement date.

When is capitalisation suspended under AS 16?

It is suspended during extended periods in which active development of the qualifying asset is interrupted. Borrowing costs in that period are expensed. Brief interruptions, necessary delays and periods of substantial technical or administrative work do not cause suspension.

When does capitalisation cease under AS 16?

It ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete. Minor modifications or routine administrative work do not delay it. Interest after that date goes to the Statement of Profit and Loss.

Is interest on a loan taken before construction starts capitalised?

No, not for the period before the three conditions are met. If the loan is taken earlier but there is no expenditure on the asset or no active preparation, the interest for that time is an expense.