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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Raghavendra Textiles Ltd is reviewing which of its assets are qualifying assets under AS 16 for capitalising borrowing costs. Which of the following is a qualifying asset?

The captive power plant taking about 18 months to build is the qualifying asset. AS 16 treats an asset as qualifying when it necessarily takes a substantial period to get ready for its intended use or sale. Ready-to-use items, stationery and quickly sold goods need no such period.

  1. ATrading goods purchased on credit and sold within a week
  2. BA captive power plant that will take about 18 months to construct and commissionCorrect
  3. COffice stationery bought for immediate use
  4. DA ready-to-use delivery van purchased from a dealer and put to use the same day

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. An 18-month construction of a power plant meets this. Goods sold in a week, stationery and a ready van are ready at once, so no substantial period is needed.

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