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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Himalaya Textiles Ltd is considering four items for the year ended 31 March 2027. Which one is a qualifying asset under AS 16 (Borrowing Costs), assuming no special justification is offered for treating any period as 'substantial'?

The spinning plant needing 18 months to construct and install is the qualifying asset. AS 16 defines a qualifying asset as one that necessarily takes a substantial period, normally twelve months, to be ready for use or sale. The other items are ready quickly or are routinely produced in a short time.

  1. AA spinning plant that will take 18 months to construct and install before it can be usedCorrect
  2. BPackaged yarn inventory that is manufactured routinely and takes about 3 months to complete
  3. CA ready-to-use generator purchased from a dealer and installed within a week
  4. DA completed office building bought from another company and occupied immediately

Explanation

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Substantial is normally taken as 12 months. Only the plant taking 18 months to construct meets this test. Routine inventory taking 3 months and assets ready for use on purchase do not qualify.

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