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

Which statement best describes the limit on borrowing costs capitalised for a period when funds are borrowed generally?

The amount capitalised in a period must not exceed the borrowing costs actually incurred in that period. Under AS 16, the capitalisation rate is the weighted average of general borrowings, applied to expenditure on the asset, but the result is capped at total borrowing costs incurred.

  1. ACapitalised amount may exceed borrowing costs incurred if the asset is large
  2. BCapitalised amount must not exceed borrowing costs incurred during that periodCorrect
  3. CCapitalised amount equals the highest rate on any loan applied to expenditure
  4. DCapitalised amount is the interest on equity share capital employed

Explanation

AS 16 states that the amount of borrowing costs capitalised during a period should not exceed the borrowing costs incurred during that period. The capitalisation rate is a weighted average, not the highest rate, and equity is not borrowing.

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