CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Vihaan Steel Ltd. is constructing a blast furnace, a qualifying asset. Active development was suspended for 4 months because of a prolonged labour strike at the site, which is an extended period of suspension not part of the necessary process. Interest on the specific loan during these 4 months was Rs 6,00,000. How should this interest be treated?

The Rs 6,00,000 interest is charged to the statement of profit and loss. AS 16 requires capitalisation to be suspended during extended periods when active development is interrupted, and a labour strike is not a necessary part of preparing the asset for use.

ACapitalised, as the loan was taken for the furnace
BCapitalised, but disclosed separately as a suspension cost
CCharged to the statement of profit and loss for those 4 monthsCorrect
DDeferred and amortised over the useful life of the furnace

Explanation

AS 16 requires capitalisation to be suspended during extended periods in which active development is interrupted. A labour strike is not a necessary part of the process of getting the asset ready. Interest for those months is therefore expensed in the statement of profit and loss.

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