LIBRARY OF ADJUSTMENTS – AS 16 – The CA Classroom

1. AS 16 Bali limited has borrowed a sum of US $ 10,00,000 at the beginning of Concept Tested
{MTP 5
Financial Year 2021-22 for its residential project at 4%. The interest is payable ( AS 11 along
Marks
at the end of the Financial Year. At the time of availment of loan, the with AS 16) –
Sep'22,
exchange rate was Rs 56 per US$ and the rate as on 31st March, 2022 was Rs Forex borrowing
Mar'18,
62 per US$. If Bali Limited had borrowed the loan in India in Indian Rupee Mar'19,
equivalent, the pricing of loan would have been 10.50%. You are required to Hint Solution MTP 4
compute Borrowing Cost and exchange difference for the year ending 31st Increase in Marks
March, 2022 as per applicable Accounting Standards Liability = 60 March 21
Lakhs & Oct '23,
(In that 34 Lakhs RTP May
is BC and 26 '21}
Lakhs is taken as
AS 11 Exchange
difference)
2. AS 16 Rainbow Limited borrowed an amount of Rs 150 crores on 1.4.20X1 for Concept Tested: ICAI – SM
construction of boiler plant @ 11% p.a. The plant is expected to be Temporary – Test
completed in 4 years. Since the weighted average cost of capital is 13% p.a., Income from your
the accountant of Rainbow Ltd. capitalized Rs 19.50 crores for the accounting Specific knowledg
period ending on 31.3.20X2. Due to surplus fund out of Rs 150 crores, income borrowing e–
of Rs 3.50 crores were earned and credited to profit and loss account. Hint Solution: Question
Comment on the above treatment of accountant with reference to relevant Int at 11% Only, 10
accounting standard. CAPEX = 16.5 –
3.5 = 13 Crores
 3. AS 16 On 1st April, 2023, 360 Degrees Limited started the construction of an Office Concept Tested : PYP MAY
Building (qualified asset). The land under the building is regarded as a - Specific and 24
separate asset and is not a part of qualifying asset. For the purpose of General
construction of building, the company raised a specific loan of Rs 14 lakhs borrowing
from a Bank at an interest rate of 12% per annum. An interest income of Rs - Income from
15,000 was earned on this loan while it was held in anticipation of payments. Specific
The company's other outstanding loans on lstApril, 2023 were as follows: Borrowing

Amount of loan 20 Lakhs 30Lakhs Hint:

Rate of Interest per 15% 8% 1. WACB :
annum 10.8%
2. Capitalised
The construction of building started on 1st April, 2023 and was completed on Amount :
st
31 January,2024 when it was ready for its intended use. Upto the date of 1,70,000
completion, the folowing paymnets were made to the contractor: 3. Dep :
PAYMENT DATE AMOUNT IN RS 38,083.33
1st April 2023 4,00,000 4. Carrying
st
1 August 2023 10,00,000 Value :
1st December 2023 25,00,000 45,31,917
31st January 2024 5,00,000
to be 20 years and depreciation is calculated on straight line method.
You are required to:
(i) Calculate the amount of borrowing cost to be capitalized.
(ii) Pass Initial Journal entry to recognise the cost of building.
(iii) Depreciation on building for the year ending 31st March, 2024.
(iv) Carrying value of building as on 31st March, 2024.

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 4. AS 16 Pushpa Ltd deals in purchase and sale of timber. Maturity period of timber for Concept:
sale is 5 years, the company has taken loan to meet the cost of holding of Period of
timber upto maturity. The company has included the interest charged in value Capitalisation
of stock of time as at the balance sheet, can they do that? Hint: Yes,
Pushpa is always
correct
5. AS 16 Propotionate Ltd incurred expenses in three phases of contruction of project Concept
of power plant are given below Case where
usage amount is
Particulars Phase A Phase B Phase C Total more than the
(Rs in Lakhs) loan.
Cash 50 70 85
Payments Hint:
Transfer of 45 12 10 Proportionately
Assets split interest
Total 95 82 95 272 with Total of
each phase.
Total Money Borrowed at 14% is Rs 250 Lakhs, the Phase A is completed, how
the borrowing cost should be capitalised? What if case,
split in ratio of
What if there is a also a Specific borrowing of 10 lakhs at 12% used fully for totals after
Phase A reducing 10
lakhs from
Phase A (95-10)

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 6. AS 16 X Ltd is commencing a new construction project, which is to be financed by Concept : When ICAI – SM
borrowing. The key dates are as follows: to Start – MCQ - 5
(i) 15th May, 20X1: Loan interest relating to the project starts to be Capitalization
incurred
(ii) 2nd June, 20X1: Technical site planning commences Hint: After all
(iii) 19th June, 20X1: Expenditure on the project started to be incurred conditions are
(iv) 18th July, 20X1: Construction work commences Identify the met, 19th June is
commencement date for capitalisation under AS 16. the Answer

7. AS 16 On 1st April, 20X1, Amazing Construction Ltd. obtained a loan of Rs 32 crores Concept : ICAI –
to be utilised as under: Suspension of Practical
Capitalization Question
Construction of sealink across two 25 Crores AND –9
cities: (work was held up totally for a To evaluate if
month during the year due to high something is a
water levels) Qualifying asset
Purchase of equipments and 3 Crores or not
machineries
Working Capital 2 Crores Hint : Only
Purchase of Vehicle 50 Lakhs Construction of
Advance for tools/cranes etc 50 Lakhs Sea link is a QA
Purchase of technical know-how 1 Crore
Total interest charged by the bank 80 Lakhs
for the year ending 31st March,
20X2
Show the treatment of Interest by Amazing Construction Ltd

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 8. Concept :
Substantial Period
of Time
Hint :
Yes allowed,
reward companies
for good work.

9. AS 16 Concept Tested: ICAI Study

Cessation of Material –
Capitalization Last
for Multiple practical
Independent question
Assets
Particulars Phase I Phase II Phase III Phase IV
Hint Solution:
(Rs in Lakhs)
For the first 2
Cash 10 30 25 30
Expenditure Phases stop
Building 24 34 30 38
capitalization
Purchased after 6 Months
Total 34 64 55 68 and for the
Expenditure remaining two
Total 221 phases (3 & 4)
Expenditure on continue
all Phases capitalization for
Loan taken at 200 the whole year
15% at the
beginning of
the year

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 During the Mid of the year Phase I and Phase II have become operational,
find out the total amount to be capitalized and expensed during the year?

Zero Marks Zone: Red Flags to consider in AS 16

1. In case of Specific Borrowing, Charge interest for the whole period from the date of loan and from when the activity
has started, even if part of the loan is not yet used, However in case of General borrowing, interest to be charged
only for that component where loan is used (360 Degrees Ltd Sum)
2. Remember that Borrowing cost is a much wider definition that includes Interest and other elements.
3. You have to start capitalization only after ALL 3 Specific and 2 General Conditions are Met.
4. Common Mistake -> Where Amount used for QA is more than amount of Loan, (eg QA = 100, Loan = 70), ensure you
don’t apply interest rate on 100 and apply on 70 only. i.e Amount of interest to be capitalised cannot exceed the
amount of Interest Itself
5. For Computing WACB, remember not to include Specific borrowing and INLCUDE ONLY ACTUAL INTEREST Incurred
for general borrowing.
6. Substantial period of time in Qualifying Asset definition is NOT DEFINED as 12 months, but generally considered as
12 months, hence we are allowed to deviate based on actual scenario.
7. Interest on Inventory if It meets the definition of Qualifying asset, can also be capitalised. Basically BC on any asset
can be capitalised ( AS 2 AS 10 AS 26 )
8. Intended Use means Ready for use and not actual use.
9. Advance for Truck – NOT QA , Advance for Other Assets = You can take assumption whether it is QA or Not.

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