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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Nilgiri Power Ltd. is constructing a plant that is a qualifying asset. Part of the plant, Unit A, was completed and put to use on 1 January 2026, while construction of Unit B continues. Unit A can be used independently while the rest of the construction goes on. Which statement correctly describes the treatment of borrowing costs under AS 16 after 1 January 2026?

Borrowing costs for Unit A cease to be capitalised from 1 January 2026. AS 16 provides that when a part of a qualifying asset is completed and can be used independently while other parts are still under construction, capitalisation stops for the completed part, though it continues for Unit B.

  1. ABorrowing costs relating to Unit A should cease to be capitalised from 1 January 2026, as it is substantially complete and ready for useCorrect
  2. BBorrowing costs for the whole plant continue to be capitalised until Unit B is completed
  3. CBorrowing costs for Unit A should be capitalised until the end of the financial year
  4. DBorrowing costs of both units should be expensed from 1 January 2026

Explanation

AS 16 states that when part of a qualifying asset is completed and usable while construction of other parts continues, capitalisation of borrowing costs for that part ceases once substantially all activities needed to prepare it for use are complete. Hence Unit A stops from 1 January 2026, while Unit B continues to attract capitalisation. Continuing for the whole plant would wrongly capitalise costs on an asset already in use.

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