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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Sundaram Textiles Ltd. borrowed Rs 2,00,000 at 12% p.a. specifically to build a warehouse. The construction took 2 years and 3 months to complete and is a qualifying asset. The company says the borrowing cost for the whole period is capitalised. Which statement best describes the treatment under AS 16?

Under AS 16, borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset are capitalised as part of the asset's cost. A warehouse taking over two years qualifies, as there is no fixed three-year test and fixed assets are covered.

  1. ABorrowing costs directly attributable to acquisition, construction or production of a qualifying asset are capitalised as part of its costCorrect
  2. BAll borrowing costs are charged to the Statement of Profit and Loss as incurred
  3. CBorrowing costs are capitalised only if the asset takes more than 3 years to get ready
  4. DBorrowing costs are capitalised only for inventories and never for fixed assets

Explanation

AS 16 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of its cost. A substantial period of time is needed, and 2 years 3 months is clearly substantial. The other options misstate the rule: there is no 3-year threshold, and fixed assets can be qualifying assets.

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