3.72 Overview of Accounting Standards Chap.

3
Particulars `
Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2017-18- to 2019-20 on Straight Line Method) 12,00,000
8,00,000
Less: Grant received (16,00,000)
Balance (8,00,000)
You are required to explain how should the company deal with this asset in its accounts for 2020-21?
(RTP, November 2021)
Answer
From the above account, it is inferred that the Company has deducted grant from the book value of asset for accounting
of Government Grants. Accordingly, out of the ` 16,00,000 that has been received, ` 8,00,000 (being the balance in
Machinery A/c) should be credited to the machinery A/c.
The balance ` 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the tune of ` 12,00,000 had
been debited to P&L A/c in the earlier years by way of depreciation charge, and ` 8,00,000 transferred to P&L A/c now
would be partial recovery of that cost.
There is no need to provide depreciation for 2020-21 or 2021-22 as the depreciable amount is now Nil.

AS 16: Borrowing Costs

Question 188
PRM Ltd. obtained a loan from a bank for 50 lakhs on 30-04-20X1. It was utilised as follows:
Particulars Amount ( in lakhs)
Construction of a shed 50
Purchase of a machinery 40
Working Capital 20
Advance for purchase of truck 10
Construction of shed was completed in March 20X2. The machinery was installed on the date of acquisition.
Delivery of truck was not received. Total interest charged by the bank for the year ending 31-03-20X2 was
18 lakhs. Show the treatment of interest.
(Study Material)
Answer
Qualifying Asset as per AS 16 = ` 50 lakhs (construction of a shed)
Borrowing cost to be capitalised = 18 x 50/120 = ` 7.5 lakhs
Interest to be debited to Profit or Loss account = ` (18 7.5) lakhs = ` 10.5 lakhs
Question 189
X Ltd. began construction of a new building on 1st January, 20X1. It obtained 1 lakh special loan to finance
the construction of the building on 1
outstanding two non-specific loans were:
Amount Rate of Interest
5,00,000 11%
9,00,000 13%
The expenditures that were made on the building project were as follows:

January 20X1 2,00,000

April 20X1 2,50,000
July 20X1 4,50,000
December 20X1 1,20,000
Chap. 3 AS 16: Borrowing Costs 3.73
Building was completed by 31st

and borrowing cost in respect of the building.

(Study Material)
Answer
(i) Computation of weighted average accumulated expenses
`
` 2,00,000 x 12 / 12 = 2,00,000
` 2,50,000 x 9 / 12 = 1,87,500
` 4,50,000 x 6 / 12 = 2,25,000
` 1,20,000 x 1 / 12 = 10,000
6,22,500
(ii) Calculation of weighted average interest rate other than for specific borrowings
Amount of loan (` ) Rate of Amount of interest (`)
interest
5,00,000 11% = 55,000
9,00,000 13% = 1,17,000
14,00,000 1,72,000

Weighted average rate of interest 1,72,000 = 12.285% (approx)

×100
14,00,000

(iii) Interest on weighted average accumulated expenses

`
Specific borrowings (` 1,00,000 x 10%) = 10,000
Non-specific borrowings (` 5,22,500 x 12.285%) = 64,189
Amount of interest to be capitalised = 74,189

(iv) Total expenses to be capitalised for building

Cost of building ` (2,00,000 + 2,50,000 + 4,50,000 + 1,20,000) 10,20,000

Add: Amount of interest to be capitalised 74,189
10,94,189

(v) Journal Entry

Date Particulars Dr. (`) Cr. (`)

31.12. 20X1 Building account Dr. 10,94,189
To Bank account 10,94,189
(Being amount of cost of building and borrowing
cost thereon capitalised)

(` 6,22,500 ` 1,00,000)
3.74 Overview of Accounting Standards Chap. 3

Question 190
The company has obtained Institutional Term Loan of 580 lakhs for modernisation and renovation of its
Plant & Machinery. Plant & Machinery acquired under the modernisation scheme and installation completed
on 31st March, 20X2 amounted to 406 lakhs, 58 lakhs has been advanced to suppliers for additional
assets and the balance loan of 116 lakhs has been utilised for working capital purpose. The Accountant is
on a dilemma as to how to account for the total interest of 52.20 lakhs incurred during 20X1-20X2 on the
entire Institutional Term Loan of 580 lakhs.
(Study Material)
Answer
borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Other
borrowing costs should be recognised as an expense in the period in which they are incurred.
A qualifying asset is an asset that necessary takes a substantial period of time* to get ready for its intended
use or sale.
The treatment for total interest amount of ` 52.20 lakhs can be given as:
Purpose Nature Interest to be capitalised Interest to be charged to
profitand loss account
in lakhs in lakhs
Modernisation Qualifying asset
and renovation of plant 406
and machinery * * 52.20 × = 36.54
580
58
* * 52.20 × = 5.22
580
Advance to supplies Qualifying asset 116
for additional assets * * 52.20 × = 10.44
580
Working Capital Not a qualifying asset
41.76 10.44
* A substantial period of time primarily depends on the facts and circumstances of each case. However,
ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer
period can be justified on the basis of the facts and circumstances of the case.
** It is assumed in the above solution that the modernisation and renovation of plant and machinery will take
substantial period of time (i.e. more than twelve months). Regarding purchase of additional assets, the nature
of additional assets has also been considered as qualifying assets. Alternatively, the plant and machinery and
additional assets may be assumed to be non-qualifying assets on the basis that the renovation and
installation of additional assets will not take substantial period of time. In that case, the entire amount of
interest, 52.20 lakhs will be recognised as expense in the profit and loss account for year ended 31st
March, 20X2.
Question 191
Take Ltd. has borrowed 30 lakhs from State Bank of India during the financial year 20X1-20X2. The
borrowings are used to invest in shares of Give Ltd., a subsidiary company of Take Ltd., which is
implementing a new project, estimated to cost 50 lakhs. As on 31st March, 20X2, since the said project was
not complete, the directors of Take Ltd. resolved to capitalise the interest accruing on borrowings amounting
to 4 lakhs and add it to the cost of investments. Comment.
(Study Material)
Answer
As per AS 13 (Revised) "Accounting for Investments", the cost of investment includes acquisition charges
such as brokerage, fees and duties. In the present case, Take Ltd. has used borrowed funds for purchasing
shares of its subsidiary company Give Ltd. ` 4 lakhs interest payable by Take Ltd. to State Bank of India
cannot be called as acquisition charges, therefore, cannot be constituted as cost of investment.
Further, as per para 3 of AS 16 "Borrowing Costs", a qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale. Since, shares are ready for its intended use
Chap. 3 AS 16: Borrowing Costs 3.75
at the time of sale, it cannot be considered as qualifying asset that can enable a company to add the
borrowing cost to investments. Therefore, the directors of Take Ltd. cannot capitalise the borrowing cost as
part of cost of investment. Rather, it has to be charged to the Statement of Profit and Loss for the year ended
31st March, 20X2.

QUESTION BANK
Question 192
M/s First Ltd. began construction of a new factory building on 1st April, 2017. It obtained ` 2,00,000 as a special loan to
fiancé the construction of the factory building on 1 st April, 2017 at an interest rate of 8% per annum. Further expenditure
on construction of the factory building was financed through other non-specific loans. Details of other outstanding non-
specific loans were:
Amount (`) Rate of Interest per annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)
1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31 st March, 2018. As per the provisions of AS-16, you are required
to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory building.
(May 2019) (5 Marks)
Answer
(i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 2,40,000 x 10 / 12 = 2,00,000
` 4,00,000 x 8 / 12 = 2,66,667
` 3,60,000 x 3 / 12 = 90,000
8,56,667
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of
interest (`)
4,00,000 9% = 36,000
5,00,000 12% = 60,000
3,00,000 14% = 42,000
1,38,000
Weighted average rate of interest = 11.5%
1,38,000
×100
12,00,000
(iii) Amount of interest to be capitalized
`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) = 16,000
Non-specific borrowings (` 6,56,667* x 11.5%) = 75,517
Amount of interest to be capitalized = 91,517
* (` 8,56,667 ` 2,00,000)
3.76 Overview of Accounting Standards Chap. 3
(iv) Total expenses to be capitalised for building

Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000

Add: Amount of interest to be capitalized 91,517
13,91,517
(v) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.3.2018 Building A/c Dr. 13,91,517
To Building WIP** A/c 13,00,000
To Borrowing costs A/c 91,517
(Being amount of cost of building and borrowing
cost thereon capitalised)
** Considering that 13,00,000 was debited to Building WIP A/c earlier.

Similar Question
Question 192A
Zebra Limited began construction of a new plant on 1st April, 2021 and obtained a special loan of ` 20,00,000 to finance
the construction of the plant. The rate of interest on loan was 10%.
The expenditure that was incurred on the construction of plant was as follows:
`
1st April, 2021 10,00,000
1st August, 2021 24,00,000
1st January, 2022 4,00,000
The company's other outstanding non-specific loan was ` 46,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 2022.
You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS-16 "Borrowing Cost".
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
(Question Paper, May 2022) (5 Marks)
Question 193
Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath ` 50 crores
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles ` 1crore
(v) Advances for tools/cranes etc . ` 1crore
(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year ending 31 st March, ` 1.6 crores
2018
Show the treatment of Interest according to Accounting Standard by Zen Bridge Construction Limited.
(RTP May 2019)
Answer:

ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred. Capitalization of borrowing costs is
also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended
use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Asset capitalized charged to
` in crores Profit & Loss
A/c ` in crores
Construction of hill road* Yes 1.25 1.6/64 x 50
Purchase of equipment and
machineries No 0.15 1.6/64 x 6
Chap. 3 AS 16: Borrowing Costs 3.77
Qualifying Interest to be Interest to be
Asset capitalized charged to
` in crores Profit & Loss
A/c ` in crores
Working capital No 0.10 1.6/64 x 4
Purchase of vehicles No 0.025 1.6/64 x 1
Advance for tools, cranes etc. No 0.025 1.6/64 x 1
Purchase of technical know-how No ___ 0.05 1.6/64 x 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time), hence
considered as qualifying asset.
Question 194
A company incorporated in June 2017, has setup a factory within a period of 8 months with borrowed funds. The
construction period of the assets had reduced drastically due to usage of technical innovations by the company. Whether
interest on borrowings for the period prior to the date of setting up the factory should be capitalized although it has taken
less than 12 months for the assets to get ready for use. You are required to comment on the necessary treatment with
reference to AS 16.
(RTP November 2018) (MTP April, 2022) (5 Marks)
Answer:
As per para 3.2 to AS 16 'Borrowing Costs', a qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial period of time primarily depends on the
facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period
of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating
the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is
considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of time.
Under present circumstances where construction period has reduced drastically due to technical innovation, the 12
months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that an
asset under normal circumstances may take more than 12 months to complete. However, an enterprise that completes
the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial interest
cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The interest on
borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to use.
Question 195
In May, 2016, Capacity Ltd. took a bank loan to be used specifically for the construction of a new factory building. The
construction was completed in January, 2017 and the building was put to its use immediately thereafter. Interest on the
actual amount used for construction of the building till its completion was ` 18 lakhs, whereas the total interest payable to
the bank on the loan for the period till 31st March, 2017 amounted to ` 25 lakhs.
Can ` 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that the loan was
specifically taken for the construction of factory building? Explain the treatment in line with the provisions of AS 16.
(RTP May 2018)
Answer:
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use are completed. Therefore, interest on the amount that has been used for
the construction of the building up to the date of completion (January, 2017) i.e. ` 18 lakhs alone can be capitalized. It
cannot be extended to ` 25 lakhs.
Question 196
Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016-17 for its residential
project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment exchange rate was ` 56
per US $ and the rate as on31st March, 2017 was ` 62 per US $. If Omega Limited borrowed the loan in India in Indian
Rupee equivalent, the pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March, 2017 as per
applicable Accounting Standards.
(MTP March 2019) (5 Marks)
Answer:
(i) Interest for the period 2016-17
= US $ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
3.78 Overview of Accounting Standards Chap. 3
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = ` 58.80 lakhs - `
24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34 lakhs will be considered as the
borrowing cost. Thus, total borrowing cost would be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on
foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency
borrowing and interest on foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and the remaining ` 26
lakhs (60 - 34) would be considered as the exchange difference to be accounted for as per AS 11.
Question 197
Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2016, to be utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2017, construction of the factory building was completed and machinery was installed and ready for it's intended
use. Total interest on debentures for the financial year ended 31.03.2017 was `11,00,000. During the year 2016-17, the
company had invested idle fund out of money raised from debentures in banks' fixed deposit and had earned an interest
of `2,00,000.
Explain the treatment of interest under Accounting Standard 16 and also explain nature of assets.
(MTP August, 2018) (5 Marks)
Answer
As
of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for
capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an
expense in the period in which they are incurred.
e purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual
borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those
borrowings.
Thus, eligible borrowing cost
= ` 11,00,000 ` 2,00,000
= ` 9,00,000
Sr. Particulars Nature of assets Interest to be Interest to be
No. Capitalized (`) charged to Profit &
Loss Account (`)
(i) Construction of Qualifying Asset* 9,00,000x40/100 NIL
factory building = ` 3,60,000
(ii) Purchase of Not a Qualifying Asset NIL 9,00,000 x 35/100
Machinery = ` 3,15,000
(iii) Working Capital Not a Qualifying Asset NIL 9,00,000 x 25/100
__________ = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Question 198
Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2016, to be utilized as under:
Particulars Amount ( in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2017, construction of the factory building was completed and machinery was installed and ready for it's intended
use. Total interest on debentures for the financial year ended 31.03.2017 was ` 11,00,000. During the year 2016 -17, the
company had invested idle fund out of money raised from debentures in banks' fixed deposit and had earned an interest
of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
(MTP October, 2018) (5 Marks)
Chap. 3 AS 16: Borrowing Costs 3.79
Answer:

production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs
eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be
recognised as an expense in the period in which they are incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 11,00,000 ` 2,00,000
= ` 9,00,000
Sr. Particulars Nature of assets Interest to be Capitalized Interest to be
No. ( ) charged to Profit &
Loss Account
( )
(i) Construction of Qualifying Asset* 9,00,000x40/100 NIL
factory building = ` 3,60,000
(ii) Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
(iii) Working Capital Not a Qualifying NIL 9,00,000x25/100
Asset _________ = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Question 199
Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016-17 for its residential
project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment exchange rate was ` 56
per US $ and the rate as on 31st March, 2017 was ` 62 per US $. If Omega Limited borrowed the loan in India in Indian
Rupee equivalent, the pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March, 2017 as per
applicable Accounting Standards.
(MTP March 2018) (5 Marks)
Answer:
(i) Interest for the period 2016-17
= US $ 10 lakhs x 4% x ` 62 per US$ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs x ` (62 - 56) = `60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs x `56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing
= `58.80 lakhs 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34 lakhs will be considered as the
borrowing cost. Thus, total borrowing cost would be `58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on
foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency
borrowing and interest on foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and the remaining ` 26
lakhs (60 - 34) would be considered as the exchange difference to be accounted for as per AS 11.
Question 200
Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath: (work was held up totally for a ` 50 crores
month during the year due to heavy rain which are common in the
geographic region involved)
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles ` Icrore
(v) Advances for tools/cranes etc. ` Icrore
(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year ending 31st March, 2016 ` 1.6 crores
You are required to show the treatment of Interest according to Accounting Standard by Zen Bridge Construction Limited.
(MTP April, 2018) (5 Marks)
3.80 Overview of Accounting Standards Chap. 3
Answer:
According to AS 16 'Borrowing costs', qualifying asset is an asset that necessarily takes substantial period of time to get
ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred. Capitalization of borrowing costs is
also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended
use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be charged to
Asset Capitalized Profit & Loss A/c
` in crores ` in crores
Construction of hill road* Yes 1.25 1.6/64 x 50
Purchase of equipment and No 0.15 1.6/64x6
machineries
Working capital No 0.10 1.6/64x4
Purchase of vehicles No 0.025 1.6/64x1
Advance for tools, cranes etc. No 0.025 1.6/64x1
Purchase of technical know-how No 0.05 1.6/64x2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time), hence
considered as qualifying asset.
Question 201
In May, 2018, Capacity Ltd. took a bank loan to be used specifically for the construction of a new factory building. The
construction was completed in January, 2019 and the building was put to its use immediately thereafter. Interest on the
actual amount used for construction of the building till its completion was ` 18 lakhs, whereas the total interest payable to
the bank on the loan for the period till 31st March, 2019 amounted to ` 25 lakhs.
Can ` 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that the loan was
specifically taken for the construction of factory building? Explain the treatment in line with the provisions of AS 16.
(RTP November 2019)
Answer
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use are completed. Therefore, interest on the amount that has been used for
the construction of the building up to the date of completion (January, 2019) i.e. ` 18 lakhs alone can be capitalized. It
cannot be extended to ` 25 lakhs.
Question 202
Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be utilized as under:
Particulars Amount ( in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed and ready for its intended
use. Total interest on debentures for the financial year ended 31.03.2019 was ` 12,00,000. During the year 2018-19, the
company had invested idle fund out of money raised from debentures in banks' fixed deposit and had earned an interest
of ` 3,00,000.
You are required to show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
[RTP May 2020]

Answer

production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs
eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be
recognised as an expense in the period in which they are incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 12,00,000 ` 3,00,000
= ` 9,00,000
Chap. 3 AS 16: Borrowing Costs 3.81
Sr. Particulars Nature of assets Interest to be capitalized Interest to be charged
No. ( ) to Profit & Loss
Account
( )
(i) Construction Qualifying 9,00,000x40/100 NIL
of factory building Asset = ` 3,60,000
(ii) Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
(iii) Working Not a Qualifying NIL 9,00,000x25/100
Capital Asset = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
Question 203
Vital Limited borrowed an amount of `150 crores on 1.4.2019 for construction of boiler plant @ 10% p.a. The plant is
expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., the accountant of Vital Ltd.
capitalized ` 19.50 crores for the accounting period ending on 31.3.2020. Due to surplus fund out of `150 crores, an
income of ` 1.50 crores was earned and credited to profit and loss account. Comment on the above treatment of
accountant with reference to relevant accounting standard.
[RTP, November 2020]
Answer

obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined
as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment
of those borrowings. The capitalisation rate should be the weighted average of the borrowing costs applicable to the
borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset. Hence, in the above case, treatment of accountant of Vital Ltd. is incorrect. The
amount of borrowing costs capitalized for the financial year 2019-20 should be calculated as follows:
Actual interest for 2019-20 (10% of ` 150 crores) ` 15.00 crores
Less: Income on temporary investment from specific borrowings (` 1.50 crores)
Borrowing costs to be capitalized during year 2019-2020 ` 13.50 crores
Question 204
When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain in brief.
[RTP, November 2020]
Answer
Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete. An asset is normally ready for its intended use or sale when its physical
construction or production is complete even though routine administrative work might still continue. If minor modifications
ally
all the activities are complete. When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a
part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are
complete.
Question 205
A company incorporated in June 2020, has setup a factory within a period of 8 months with borrowed funds. The
construction period of the assets had reduced drastically due to usage of technical innovations by the company and the
company is able to justify the reasons for the same. Whether interest on borrowings for the period prior to the date of
setting up the factory should be capitalized although it has taken less than 12 months for the assets to get ready for use.
You are required to comment on the necessary treatment with reference to AS 16.
(5 Marks)
Answer

ready for its intended use or sale. Further, the standard states that what constitutes a substantial period of time primarily
depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as
substantial period of time unless a shorter or longer period can be jus tified on the basis of facts and circumstances of the
case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended
use or sale is considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of time.
Under present circumstances where construction period has reduced drastically due to technical innovation, the 12
months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that an
asset under normal circumstances may take more than 12 months to complete. However, an enterprise that completes
the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and vice versa.
3.82 Overview of Accounting Standards Chap. 3
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial interest
cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The interest on
borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to use.
Question 206
When capitalisation of borrowing cost should cease as per Accounting Standard 16? Explain in brief.
Answer
Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete. An asset is normally ready for its intended use or sale when its physical
construction or production is complete even though routine administrative work might still continue. If minor modifications
g, this indicates that substantially
all the activities are complete. When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a
part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are
complete.
Question 207
On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ` 320 lakhs to be utilized as under:
` (in lakhs)
Construction for factory shed 240
Purchase of Machinery 30
Working capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6
In March, 2020 construction of shed was completed and machinery was installed. Total interest charged by the bank for
the year ending 31st March, 2020 was ` 40 lakhs.
In the context of provisions of AS 16 'Borrowing Costs', show the treatment of interest and also explain the nature of
Assets.
(5 Marks) (November 2020)
Answer
As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale. Other investments and those inventories that are routinely manufactured or otherwise produced in large
quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their
intended use or sale when acquired also are not qualifying assets. Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other
borrowing costs should be recognized as an expense in the period in which they are incurred.
Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given case. The interest for this amount
during the year will be added to the cost of factory shed. All others (purchase of machinery, vehicles and technical know
how, working capital, advance for tools/cranes) are non-qualifying assets and related borrowing cost will be charged to
Profit and Loss statement.
Qualifying Asset as per AS 16 (construction of a shed) = ` 240 lakhs Borrowing cost to be capitalized = ` 40 lakhs x
240/320 = ` 30 lakhs Interest to be debited to Profit or Loss account: ` (40 30) = ` 10 lakhs.
Note: Assumed that construction of factory shed completed on 31st March, 2020.
Question 208
When capitalisation of borrowing cost should cease as per Accounting Standard 16?
(Study Material)
Answer
Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete. An asset is normally ready for its intended use or sale when its physical
construction or production is complete even though routine administrative work might still continue. If minor modifications
bstantially
all the activities are complete. When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a
part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are
complete.
Question 209
On 1st April, 20X1, Amazing Construction Ltd. obtained a loan of ` 32 crores to be utilised as under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year due to high water levels) : ` 25crores
(ii) Purchase of equipments and machineries : ` 3 crores
Chap. 3 AS 16: Borrowing Costs 3.83
(iii) Working capital : ` 2 crores
(iv) Purchase of vehicles : ` 50,00,000
(v) Advance for tools/cranes etc. : ` 50,00,000
(vi) Purchase of technical know-how : ` 1 crores
(vii) Total interest charged by the bank for the year ending 31st March, 20X2 : ` 80,00,000
Show the treatment of interest by Amazing Construction Ltd.
(Study Material)
Answer
According to AS
ready for its intended use.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be
capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in
which they are incurred.
The treatment of interest by Amazing Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Asset capitalised charged to
Profit & Loss
A/c

Construction of sea-link Yes 62,50,000 [80,00,000x(25/32)]

Purchase of equipments and machineries No 7,50,000 [80,00,000x(3/32)]
Working capital No 5,00,000 [80,00,000x(2/32)]
Purchase of vehicles No 1,25,000 [80,00,000x(0.5/32)]
Advance for tools, cranes etc. No 1,25,000 [80,00,000x(0.5/32)]
Purchase of technical know- how No 2,50,000 [80,00,000x(1/32)]
Total 62,50,000 17,50,000
Question 210
Suhana Ltd. issued 12% secured debentures of `100 Lakhs on 01.05.2018, to be utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed and ready for its intended
use. Total interest on debentures for the financial year ended 31.03.2019 was `11,00,000. During the year 2018-19, the
company had invested idle fund out of money raised from debentures in banks' fixed deposit and had earned an interest
of `2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
[MTP October, 2019, 5 marks]
Answer
According to AS 16 "Borrowing Costs", borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs
eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be
recognised as an expense in the period in which they are incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 11,00,000-` 2,00,000
= ` 9,00,000
Sr. Particulars Nature of assets Interest to be Interest to be charged to
No. Capitalized Profit & Loss Account
(`) (`)
i Construction of factory Qualifying Asset* 9,00,000x40/100 = `3,60,000 Nil
building
ii Purchase of Machinery Not a Qualifying Asset Nil 9,00,000x35/100 = `3,15,000
iii Working Capital Not a Qualifying Asset Nil 9,00,000x25/100 = `2,25,000
Total ` 3,60,000 ` 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
3.84 Overview of Accounting Standards Chap. 3
Question 211
Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2019-20 for its residential
project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment of loan exchange rate was
` 56 per US $ and the rate as on 31st March, 2020 was ` 62 per US $. If Omega Limited had borrowed the loan in India in
Indian Rupee equivalent, the pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March, 2020 as per
applicable Accounting Standards. (4 Marks)
Answer
(i) Interest for the period 2019-20
= US $ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = ` 58.80 lakhs - `
24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34 lakhs will be considered as the
borrowing cost. Thus, total borrowing cost would be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on
foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency
borrowing and interest on foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and the remaining ` 26
lakhs (60 - 34) would be considered as the exchange difference to be accounted for as per AS 11.
Question 212
ABC Limited has started construction of an asset on 1st December, 2020, which continues till 31st March, 2021 (and is
expected to go beyond a year). The entity has not taken any specific borrowings to finance the construction of the asset
but has incurred finance costs on its general borrowings during the construction period. The directly attributable
expenditure at the beginning of the month on this asset was ` 10 lakh in December 2020 and ` 4 lakh in each of the
months of January to March 2021. At the beginning of the year, the entity had taken Inter Corporate Deposits of ` 20 lakh
at 9% rate of interest and had an overdraft of ` 4 lakh, which increased to ` 8 lakh on 1st March, 2021. Interest was paid
on the overdraft at 10% until 1st January, 2021 and then the rate was increased to 12%. You are required to calculate the
annual capitalization rate for computation of borrowing cost in accordance with AS 16 'Borrowing Costs'.
(MTP, November, 2021) (5 Marks)
Answer
Calculation of capitalization rate on borrowings other than specific borrowings
Nature of general Period of Amount of loan Rate of interest Weighted average amount
borrowings outstanding balance ( ) p.a. of interest
( )
a b c d = [(b x c) x (a/12)]
9% Debentures 12 months 20,00,000 9% 1,80,000
Bank overdraft 9 months 4,00,000 10% 30,000
2 months 4,00,000 12% 8,000
1 month 8,00,000 12% 8,000
36,00,000 2,26,000
Weighted average cost of borrowings
= {20,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)} = 24,33,334
Capitalisation rate = [(Weighted average amount of interest/Weighted average of general borrowings) x 100] =
[(2,26,000/24,33,334) x 100] = 9.29% p.a.
Question 213
In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used specifically for the construction of a
new factory building. The construction was completed in January, 2021 and the building was put to its use immediately
thereafter. Interest on the actual amount used for construction of the building till its completion was ` 18 lakhs, whereas
the total interest payable to the bank on the loan for the period till 31st March, 2021 amounted to ` 25 lakhs. The
company wants to treat ` 25 lakhs as part of the cost of factory building and thus capitalize it on the plea that the loan was
specifically taken for the construction of factory building? Explain the treatment in line with the provisions of AS 16.
(RTP, November 2021)
Answer
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use are completed. Therefore, interest on the amount that has been used for
the construction of the building up to the date of completion (January, 2021) i.e. ` 18 lakhs alone can be capitalized. It
cannot be extended to ` 25 lakhs.
Chap. 3 AS 16: Borrowing Costs 3.85
Question 214
(a) An enterprise has constructed a complex piece of equipment (qualifying asset) that is to be installed on the
production line of a manufacturing plant. The equipment has been constructed over a period of 15 months. However,
on installation, certain calibrations are required to achieve the desired level of production before it is finally
commissioned. This process is expected to take approximately 2 months during which test runs will be made. Should
the borrowing costs attributable to borrowings pertaining to the 2 months test run period be capitalized?
(b) Should capitalization of borrowing costs be continued when the qualifying asset has been constructed but marketing
activities to sell the asset are still in progress?
(RTP May, 2022)
Answer
(a) s

an evaluation has to be made to conclude whether substantially all the activities necessary to prepare the asset are
complete. After an equipment has been installed it is usually tested and adjusted for commercial production before it
is finally commissioned. The calibrations and adjustments required during this period are performed in order to bring
the equipment up to the stage at which it is ready to commence commercial production. Until the asset reaches the
stage when it is ready to support commercial levels of production, it is not appropriate to conclude that substantially
all the activities necessary to prepare the asset are complete. Thus, the borrowing cost incurred during the normal
period of test runs (after the installation) are required to be capitalized.
(b) As per provisions of AS 16, capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. Further, the standard also

complete even though routine administrative work might sill continue. If minor modifications, such as the decoration

not the actual activity of sale. Therefore, where the physical construction of the asset is complete, substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale are complete. Therefore, in the given
case, the borrowing costs pertaining to the period during which the marketing activities to sell the asset are still in
progress should not be capitalized as part of the cost of the asset.

Test Your Knowledge

MCQ
1. Which item of inventory is under the scope of AS 2 (Revised)?
(a) WIP arising under construction contracts
(b) Raw materials
(c) Shares, Debentures held as stock in trade.
Answer: (b)
2. Crown Ltd. wants to prepare its cash flow statement. It sold equipment of book value of ` 60,000 at a gain
of ` 8,000. The amount to be reported in its cash flow statement under operating activities is
(a) Nil
(b) ` 8,000
(c) ` 68,000
Answer: (a)
3. While preparing cash flows statement, an entity (other than a financial institution) should disclose the
dividends received from its investment in shares as
(a) operating cash inflow
(b) investing cash inflow
(c) financing cash inflow
Answer: (b)
4.
carrying amount of an item of PPE
(a) Costs of site preparation
(b) Costs of relocating
(c) Installation and assembly costs.
Answer: (b)
5. n enterprise holding investment properties
should value Investment property
3.86 Overview of Accounting Standards Chap. 3
(a) as per fair value
(b) under discounted cash flow model.
(c) under cost model
Answer: (c)
6. As per AS 11 assets and liabilities of non-integral foreign operations should be converted at _ rate.
(a) Opening
(b) Average
(c) Closing
Answer: (c)
7.
(a)
(b)
(c) -
Answer: (b)
8. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible fixed asset is
translated at
(a) Average exchange rate
(b) Closing exchange rate
(c) Exchange rate at the date of purchase of asset
Answer: (c)
9. To encourage industrial promotion, IDCI offers subsidy worth ` 50 lakhs to all new industries set up in the
uch subsidy should
be accounted in the books?
(a) Credit it to capital reserve
(b)
operations
(c) Both (a) and (b) are permitted
Answer: (a)
10. As per AS 16, all of the following are qualifying assets except
(a) Manufacturing plants and Power generation facilities
(b) Inventories that require substantial period of time
(c) Assets those are ready for sale.
Answer: (c)
11. Materials and other supplies held for use in the production of inventories are not written down below cost
if the finished products in which they will be incorporated are expected to be
(a) sold above cost.
(b) sold less than cost.
(c) sold at or above cost.
Answer: (c)
12. All of the following costs are excluded while computing value of inventories except?
(a) Selling and Distribution costs
(b) Allocated fixed production overheads based on normal capacity.
(c) Abnormal wastage
Answer: (b)
13. If an investment is acquired in exchange for another asset, it will be valued at
(a) Fair value of the asset given up.
(b) Fair value of the investment acquired.
(c) Either (a) or (b), whichever is more clearly evident.
Answer: (c)
14. XYZ Co. is a financial enterprise. In its cash flow statement, interest paid and dividends received should
be
(a) classified as operating cash flows.
(b) classified as financing cash flows.
(c) Not shown in cash flow statement.
Answer: (a)