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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Meridian Infra Ltd is evaluating the following items to decide whether borrowing costs may be capitalised under AS 16. Which one is a qualifying asset?

The captive power plant taking about 18 months to build is the qualifying asset. AS 16 defines it as an asset that necessarily takes a substantial period, ordinarily twelve months, to get ready for intended use or sale. Ready stock, quickly produced goods and share investments do not meet this test.

  1. AReadymade shirts purchased and held by a retailer for sale within two weeks
  2. BA captive power plant that will take about 18 months to construct before it can be usedCorrect
  3. CEquity shares of another company held as a long-term investment
  4. DPackaged biscuits produced daily in a routine factory run lasting a few hours

Explanation

AS 16 defines a qualifying asset as one that necessarily takes a substantial period of time to get ready for its intended use or sale. ICAI treats a period of twelve months as ordinarily substantial. The power plant fits this, while ready stock, routine short-cycle production and investments in shares do not.

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