CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Bharat Heavy Fabricators Ltd is considering four items for borrowing-cost capitalisation under AS 16: (i) a machine purchased ready for use, financed by a bank loan; (ii) a batch of finished goods that will be ready for sale within 2 months of production; (iii) a captive power plant that will take about 18 months to build; (iv) a small shed that will be built in 3 months. Which item is ordinarily a qualifying asset?

The captive power plant is the qualifying asset because it needs about 18 months to get ready for use. AS 16 treats an asset as qualifying when it necessarily takes a substantial period, ordinarily twelve months, to be made ready. The other items are ready-made or take only a few months.

AThe ready-to-use machine
BThe batch of finished goods ready within 2 months
CThe captive power plant taking 18 months to buildCorrect
DThe shed built in 3 months

Explanation

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale, ordinarily taken as 12 months unless justified otherwise. Only the power plant (18 months) meets this. The ready machine needs no preparation period, and the 2-month goods and 3-month shed are short-duration items.

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