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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sahyadri Infra Ltd. completed a toll plaza (qualifying asset) in stages. The administrative block was ready for use on 31 December 2025 while the remaining construction continued till 31 March 2026. The administrative block can be used independently, and a specific loan of Rs 1,20,00,000 at 10% p.a. financed the entire project, of which Rs 40,00,000 related to the administrative block. Following AS 16, how should interest on the Rs 40,00,000 portion for January to March 2026 be treated?

The interest is charged to profit and loss. AS 16 says that when a part of a qualifying asset is completed and usable independently, capitalisation of borrowing costs for that part stops, even though construction of other parts continues.

  1. ACapitalised, as the whole project is incomplete
  2. BCharged to profit and loss, as that part is ready for intended useCorrect
  3. CDeferred and amortised over 5 years
  4. DAdded to the cost of the remaining project

Explanation

When a part of a qualifying asset is completed and can be used independently while construction of other parts continues, capitalisation of borrowing costs for that part ceases. Interest on Rs 40,00,000 for 3 months = Rs 1,00,000 is therefore charged to the statement of profit and loss. Capitalising it because the whole project is incomplete would contradict AS 16.

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