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

Under AS 16, which of the following sets of conditions must ALL be satisfied for capitalisation of borrowing costs on a qualifying asset to commence?

Capitalisation begins when expenditure on the qualifying asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress. All three conditions must be met together; none of the other listed requirements appear in AS 16.

  1. AExpenditure on the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for intended use or sale are in progressCorrect
  2. BThe loan has been sanctioned, the asset has been physically delivered, and the asset has been put to use
  3. CExpenditure on the asset is being incurred and the enterprise has earned a profit in the previous year
  4. DBorrowing costs are being incurred and construction of the asset has been physically completed

Explanation

Capitalisation commences only when three conditions hold together: expenditure on the qualifying asset is being incurred, borrowing costs are being incurred, and activities needed to prepare the asset for its intended use or sale are in progress. The other options add conditions not in the standard or require completion, which would be the point of cessation.

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