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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Godavari Pharma Ltd. is constructing a manufacturing plant that is a qualifying asset. Construction of the plant was completed and the asset was ready for its intended use on 31 December 2025, although commissioning formalities and the first trial sales took place later. The company continued to pay interest on the specific loan until 31 March 2026. How should interest from 1 January 2026 to 31 March 2026 be treated?

The interest is charged to profit and loss. AS 16 stops capitalisation once substantially all activities needed to prepare the qualifying asset for its intended use are complete. Since the plant was ready on 31 December 2025, interest for January to March 2026 is an expense of the period.

  1. ACapitalised, because the loan is still outstanding
  2. BCapitalised, because trial sales have not yet started commercially
  3. CCharged to profit and loss, because capitalisation ceases when substantially all activities are complete and the asset is ready for intended useCorrect
  4. DDeferred and amortised over the useful life of the plant

Explanation

AS 16 requires capitalisation to cease when substantially all activities necessary to prepare the qualifying asset for its intended use are complete. Since the plant was ready on 31 December 2025, later interest is a period cost charged to profit and loss. Outstanding loan or later formalities do not extend capitalisation.

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