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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Gupta Developers Ltd is constructing a residential complex of three towers with a specific loan. Tower A has been completed and is ready for occupation, with only minor interior decoration left. Construction on Towers B and C continues. Each tower can be used independently while the others are under construction. How should borrowing costs relating to Tower A be treated after it is ready for occupation?

Capitalisation stops for Tower A once it is ready for occupation. AS 16 requires cessation for a part of a qualifying asset that can be used independently while construction continues on other parts, and minor decoration work does not delay this. Borrowing costs for Towers B and C continue to be capitalised.

  1. AContinue capitalising until the entire complex is completed
  2. BStop capitalising for Tower A, because each part is usable while construction continues on the other partsCorrect
  3. CContinue capitalising until Tower A is actually sold or occupied
  4. DExpense all borrowing costs on the whole complex from that date

Explanation

AS 16 says that when a qualifying asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalisation ceases for the part when substantially all activities needed to prepare it for use are complete. Minor outstanding work such as interior decoration does not delay cessation. So borrowing costs relating to Tower A are expensed from that point, while those for Towers B and C continue to be capitalised.

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