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CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)

Anita Textiles is building a factory. The building and machinery are complete and the factory is ready for use, except that minor interior finishing work remains. Which statement is correct about capitalisation of borrowing costs under AS 16?

Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Minor remaining finishing work does not extend capitalisation, and neither revenue generation nor loan repayment is the criterion under AS 16.

  1. ACapitalisation continues until the finishing work is fully complete, however small
  2. BCapitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use are completeCorrect
  3. CCapitalisation ceases only when commercial production actually generates revenue
  4. DCapitalisation ceases when the loan is fully repaid

Explanation

AS 16 requires capitalisation to cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Minor outstanding work does not extend capitalisation. Revenue generation or loan repayment is not the test.

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