Corporate Accounting and Financial Management · Accounting Standards

AS 16, AS 19 and AS 20: Borrowing Costs, Leases and EPS

Updated 11 October 2026 · Fact-checked

AS 16 says borrowing costs directly attributable to a qualifying asset are capitalised; others are expensed. AS 19 classifies a lease as finance or operating by whether risks and rewards of ownership transfer. AS 20 computes basic EPS as profit for equity shareholders divided by weighted average equity shares; diluted EPS adds potential equity shares.

Understand AS 16, AS 19 and AS 20 Borrowing Costs, Leases and EPS

These three standards apply to companies not following Ind AS. Level I entities must comply in full with all the Accounting Standards, including AS 16, AS 19 and AS 20. Level II, III and IV non-company entities and Small and Medium Sized Companies get the relaxations that the compendium sets out. For example, Small and Medium Sized Companies get relief in AS 19 (certain disclosures) and AS 20 (no diluted EPS disclosure).

AS 16 Borrowing Costs. Interest and related costs on borrowings are normally an expense. But if you borrow to build or acquire a qualifying asset, one that takes a substantial period to get ready for its intended use or sale, the borrowing costs directly attributable to it form part of its cost. Capitalisation starts when expenditure is being incurred, borrowing costs are being incurred and activities to prepare the asset are under way. It is suspended during extended interruption of active development and stops when substantially all the activities are complete. For specific borrowings, capitalise actual cost less income earned on temporary investment of the unspent amount. For general borrowings, apply a capitalisation rate (weighted average rate on general borrowings) to the expenditure on the asset.

AS 19 Leases. A lease is finance if it transfers substantially all the risks and rewards of ownership. Otherwise it is operating. Title may or may not pass. Typical finance-lease signs: ownership passes at the end, a bargain purchase option, lease term covering most of the asset's economic life, or present value of minimum lease payments close to the fair value of the asset. The lessee in a finance lease records an asset and a liability at the lower of fair value and present value of minimum lease payments, and splits each payment into finance charge and reduction of liability. In an operating lease the lessee charges rentals to profit and loss, normally on a straight-line basis over the lease term.

AS 20 Earnings Per Share. EPS shows profit earned per equity share. Basic EPS uses the weighted average number of equity shares outstanding. Diluted EPS adjusts for potential equity shares such as convertible debentures, convertible preference shares and share warrants or options, but only where they reduce EPS (are dilutive). Bonus issues and share splits are applied as if they happened at the start of the earliest period presented.

Key rules to remember

Basic EPS: Basic EPS = (Net profit after tax − preference dividend) ÷ Weighted average number of equity shares; Preference dividend includes any cumulative dividend for the year, whether or not declared.
Weighted average shares: Σ (Shares outstanding × Months outstanding ÷ 12); Weight shares from the date consideration is receivable, usually the date of issue. Bonus shares are treated as outstanding from the start.
Diluted EPS: Diluted EPS = (Earnings for basic EPS + post-tax interest saved on convertibles + preference dividend saved) ÷ (Weighted average shares + potential equity shares); Include potential shares only if they reduce EPS from continuing ordinary operations.
Capitalisation rate (general borrowings): Rate = Total borrowing cost on general borrowings ÷ Weighted average general borrowings outstanding × 100; Amount capitalised = Rate × Expenditure on the qualifying asset, weighted for time.
Specific borrowing: Capitalised cost = Actual borrowing cost − Income from temporary investment of unspent funds; Applies only to funds borrowed specifically for the qualifying asset.
Finance lease initial value (lessee): Lower of fair value and present value of minimum lease payments; Discount at the interest rate implicit in the lease if practicable, else the lessee's incremental borrowing rate.

How to solve AS 16, AS 19 and AS 20 Borrowing Costs, Leases and EPS questions

Identify which standard the question tests, then follow its logic in order.

1Read the question and mark the standard: interest on a project (AS 16), lease payments (AS 19) or per-share profit (AS 20).
2For AS 16, confirm the asset is a qualifying asset and fix the capitalisation period: start date, any suspension, completion date.
3Separate specific borrowings from general borrowings. Compute specific cost net of investment income; compute the capitalisation rate for general borrowings.
4For AS 19, test the lease against the finance-lease indicators. State your classification and reason first.
5Then pass entries: finance lease as asset and liability with finance charge split; operating lease as rent expense, straight-line.
6For AS 20, adjust profit for preference dividend, then build the weighted average shares with a time-line, treating bonus shares as outstanding from the start.
7For diluted EPS, add back post-tax interest or preference dividend, add potential shares, and check that the result is lower than basic EPS.
8Write a one-line conclusion with the final figure.

Quickest way: Three-line check for each standard

When to use it: When the question is numerical and time is short.

AS 16: Capitalise only for the period work is active; interest cost minus investment income for specific loans; rate × spend for general loans. Expense the rest.
AS 19: Ask one question: does ownership risk and reward pass to the lessee? Yes means finance lease, no means operating.
AS 20: Draw a month time-line of shares, weight each block, divide earnings by the total. For diluted, add back after-tax interest and extra shares, then compare with basic.

Common mistakes in AS 16, AS 19 and AS 20 Borrowing Costs, Leases and EPS

Capitalising interest during a suspension period or after the asset is ready.
Students capitalise the whole loan period.
Fix: Capitalise only while active development is on; stop when substantially all activities are complete. Expense the rest.
Forgetting to deduct income earned on temporary investment of specific borrowings.
Students take the interest paid as the amount to capitalise.
Fix: Always deduct such income from the actual interest on specific loans.
Classifying a lease as finance or operating by its legal form or by whether title passes.
Ownership is confused with risks and rewards.
Fix: Judge by substance. Title passing is only one indicator; a finance lease can exist without it.
Not weighting shares for time, or not treating bonus shares as outstanding from the start.
Students use the year-end share count.
Fix: Use a time-line. Adjust bonus shares and splits as if they were issued at the start of the earliest period presented. Shares issued for consideration are still weighted from the date of issue.
Subtracting preference dividend in diluted EPS even when convertible preference shares are included.
The basic EPS adjustment is copied across.
Fix: If convertible preference shares are treated as converted, add back the dividend and include the shares.
Adding back interest on convertible debentures without tax effect.
Students overlook that interest saved is taxed.
Fix: Add back interest net of tax at the given rate.

Worked examples

Example 1

Alpha Ltd borrowed ₹50,00,000 at 10% p.a. on 1 April to construct a factory (a qualifying asset). Construction began immediately and was completed on 31 December of the same year. Unspent funds of ₹20,00,000 were invested for 3 months at 6% p.a. Compute borrowing cost to be capitalised.

Show the solution

Period of construction: 1 April to 31 December = 9 months.
Interest on the specific loan = ₹50,00,000 × 10% × 9 ÷ 12 = ₹3,75,000.
Investment income = ₹20,00,000 × 6% × 3 ÷ 12 = ₹30,000.
Amount capitalised = ₹3,75,000 − ₹30,000 = ₹3,45,000.

Answer: ₹3,45,000 is capitalised as part of the cost of the factory.

Example 2

Beta Ltd had net profit after tax of ₹12,00,000 and 4,00,000 equity shares at the start of the year (1 April to 31 March). On 1 October it issued 1,00,000 more shares for cash. It has ₹10,00,000 of 10% convertible debentures, outstanding for the whole year, convertible into 50,000 equity shares. Assume the debentures are converted at the start of the year. Tax rate is 25%. Compute basic and diluted EPS.

Show the solution

Weighted average shares = 4,00,000 + 1,00,000 × 6 ÷ 12 = 4,50,000.
Basic EPS = ₹12,00,000 ÷ 4,50,000 = ₹2.67 (rounded to two decimals).
Interest on debentures = ₹10,00,000 × 10% = ₹1,00,000; after tax = ₹1,00,000 × (1 − 0.25) = ₹75,000.
Diluted earnings = ₹12,00,000 + ₹75,000 = ₹12,75,000.
Diluted shares = 4,50,000 + 50,000 = 5,00,000 (debentures assumed converted from the start of the year).
Dilution test: incremental EPS on conversion = ₹75,000 ÷ 50,000 = ₹1.50, which is below basic EPS of ₹2.67, so the debentures are dilutive and are included.
Diluted EPS = ₹12,75,000 ÷ 5,00,000 = ₹2.55.

Answer: Basic EPS is ₹2.67 and diluted EPS is ₹2.55.

Exam tips

Numerical questions on AS 16 and AS 20 are common. Show the time-line and each computation line, since method earns marks.
For lease questions, write the classification and the reason first, then the entries.
State the standard's rule in one line before the working. ICSI answers reward provision, analysis, then conclusion.
Always check the dilution test in diluted EPS and say so in your answer.
If the question names a Small and Medium Sized Company, remember diluted EPS disclosure is exempted and AS 19 has reduced disclosures.

Practice questions from Accounting Standards

AS 16, AS 19 and AS 20 Borrowing Costs, Leases and EPS in other exams

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

AS 16, AS 19 and AS 20 Borrowing Costs, Leases and EPS: frequently asked questions

What is a qualifying asset under AS 16?

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples are a factory under construction or inventories that take long to mature. Assets ready for use when bought are not qualifying assets.

How do I tell a finance lease from an operating lease?

Ask whether substantially all risks and rewards of ownership pass to the lessee. Indicators include ownership transfer at the end, a bargain purchase option, a lease term covering most of the asset's life, and present value of payments close to fair value. If these are absent, it is an operating lease.

When are potential equity shares ignored in diluted EPS?

They are ignored when including them would increase EPS or reduce a loss per share, because they are then anti-dilutive. Diluted EPS must never be higher than basic EPS from the same earnings.

Do I deduct preference dividend in basic EPS?

Yes. Profit attributable to equity shareholders is net profit after tax less preference dividend for the year, including cumulative dividend whether or not declared.