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CMA Intermediate · Financial Accounting · Borrowing Costs (AS 16)

Sundaram Builders borrowed funds at 12% p.a. and bought land for building purposes on 1 April. No development activity took place on the land until 1 October, when site development began. Which statement about interest on the loan for April to September is correct under AS 16?

The interest for April to September is charged to the Statement of Profit and Loss. Land held for building purposes with no associated development activity does not meet the commencement condition that preparatory activities be in progress, so capitalisation can begin only when development starts on 1 October.

  1. AIt is capitalised, because the land is a qualifying asset from the date of purchase
  2. BIt is capitalised in proportion to the land cost only
  3. CIt is charged to the Statement of Profit and Loss, because holding land without any associated development activity does not qualify for capitalisationCorrect
  4. DIt is carried forward as deferred revenue expenditure until development starts

Explanation

AS 16 states that borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalisation. Activities necessary to prepare the asset must be in progress, and they began only on 1 October. Interest for April to September is therefore expensed, and capitalisation can start from October.

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