Chapter 5
AS - 16 Borrowing Costs
Question 1
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. Other borrowing costs should be recognised as an expense
in the period in which they are incurred.
Also, AS 16 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 capitalisa-
tion 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
Sl. No. Particulars Nature of assets Interest to be Interest to be
Capitalized (`) charged to Profit &
Loss A/c(`)
i Construction of factory Qualifying As- 9,00,000x40/100 NIL
building set* = `3,60,000
ii Purchase of Machinery Not a Qualifying NIL 9,00,000x35/100
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.
CA CS Avinash Sancheti 1
Accounting
Question 2
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. Other borrowing costs should be recognised as an expense
in the period in which they are incurred. A qualifying asset is an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale.
Qualifying Asset as per AS 16 = `28 lakhs (construction of a shed).
Borrowing cost to be capitalised = `12 lakhs*`28 lakhs/`70 lakhhs= `4.8 lakhs.
Interest to be debited to Profit or Loss account = `(12-4.8) lakhs = `7.2lakhs.
Question 3
Refer Text of AS and explanation.
Question 4
AS 16 ‘Borrowing Costs’ states “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.”
Hence, in the above case, treatment of accountant of Rainbow Ltd. is incorrect. The
amount of borrowing costs capitalized for the financial year 2016-2017 should be cal-
culated as follows:
Particulars `(in crores)
Actual interest for 2016-2017 (11% of `150 crores) 16.5
Less: Income on temporary investment from specific borrow- -3.5
ings
Borrowing costs to be capitalized during year 2016-2017 13
Question 5
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. Other borrowing costs should be recognised as an expense
in the period in which they are incurred.
The Accounting Standard Board (ASB) has opined that investments other than invest-
ment properties are not qualifying assets as per AS-16, Borrowing Costs. Therefore,
interest cost of holding such investments cannot be capitalized. Further, even interest
in respect of investment properties can only be capitalized if such properties meet the
definition of qualifying assets that it necessarily takes a substantial period of time to get
ready for its intended use or sale.
Therefor, accounting treatment made by the company is incorrect as per AS-16.
2 CA CS Avinash Sancheti
