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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Malabar Constructions Ltd. was building a bridge-linked office complex, a qualifying asset. Active development was suspended for 4 months because of a prolonged labour dispute that is an extended, non-essential interruption. Interest incurred during these 4 months was Rs 1,20,000. How should this interest be treated under AS 16?

The Rs 1,20,000 interest is charged to the Statement of Profit and Loss. AS 16 requires capitalisation to be suspended during extended periods when active development of a qualifying asset is interrupted, as with a prolonged labour dispute.

  1. ACapitalised, because the asset is still under construction
  2. BCharged to the Statement of Profit and Loss for the periodCorrect
  3. CDeferred and amortised over the asset's life
  4. DCapitalised only if the dispute is later resolved

Explanation

AS 16 requires capitalisation to be suspended during extended periods in which active development is interrupted. Interest of Rs 1,20,000 for those 4 months is therefore recognised as an expense in the Statement of Profit and Loss. Suspension does not apply to temporary delays that are a necessary part of the process, but a labour dispute is not one.

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