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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Lotus Realty Ltd is constructing a residential complex with two towers financed by a term loan. Tower A is complete and can be used independently while construction on Tower B continues. As per AS 16, when should capitalisation of borrowing costs for Tower A cease?

Capitalisation for Tower A stops when substantially all activities needed to prepare it for its intended use are complete. AS 16 treats a part that is usable independently separately, so waiting for Tower B, the year-end or loan repayment is incorrect.

  1. AWhen all activities necessary to prepare Tower A for its intended use are substantially completeCorrect
  2. BWhen construction of Tower B is also completed
  3. CAt the end of the financial year in which construction started
  4. DWhen the term loan is fully repaid

Explanation

AS 16 provides that when a part of a qualifying asset is completed and can be used while construction of other parts continues, capitalisation ceases for that part once substantially all activities needed to prepare it for intended use are complete. The completion of Tower B, the year-end or the repayment date are irrelevant to Tower A.

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