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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Meera Engineers Ltd. completed a factory building on 31 December, though some minor interior finishing remained pending, which would not prevent its intended use. The specific loan interest for January to March was Rs 90,000. How should this interest be treated?

The Rs 90,000 interest is charged to the statement of profit and loss. Under AS 16, capitalisation ceases once substantially all activities needed to prepare the asset for its intended use are complete, and minor pending finishing work does not extend the capitalisation period.

  1. ACapitalised, since the asset is still under construction
  2. BAdded to the cost of the building until the finishing is done
  3. CCharged to the statement of profit and loss, as capitalisation ceases when substantially all activities are completeCorrect
  4. DDeferred and amortised over the building's life

Explanation

AS 16 requires capitalisation to cease when substantially all activities necessary to prepare the asset for intended use are complete. Minor modifications such as interior finishing do not prevent this. Hence interest of Rs 90,000 is expensed.

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