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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sahyadri Distillers Ltd is considering how AS 16 treats different items. Which of the following is most clearly a qualifying asset for the purpose of capitalising borrowing costs?

The plant being constructed over about 18 months is the qualifying asset. AS 16 defines a qualifying asset as one that necessarily takes a substantial period to get ready for intended use or sale. Ready-made vans, quickly produced inventory and long-term share investments do not meet that test.

  1. AA ready-to-use delivery van bought from a dealer and put to use the same week
  2. BA manufacturing plant that the company is constructing over a period of about 18 monthsCorrect
  3. CShares of a listed company purchased as a long-term investment
  4. DFinished goods inventory that is produced in two weeks and sold immediately

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. A plant under construction for 18 months fits. A ready-to-use van and quick-turnaround inventory do not take a substantial period, and investments are not qualifying assets.

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