AS 16

I had decided to put up a factory. I had purchased a land for that and constructed a building.  In addition i was able to purchase 50% of my plant and machinery . These costs were my own funds.

Since i ran short of own funds, i borrowed money to finance the rest of plant and machinery. I am paying interest and other charges on such borrowing costs and capitalising it,

Note:

1)Activities are in the factory cannot be carried out unless the entire machinery is installed.

2) I cannot use the land, bldg and 50% p&m unless the other part of 50% P&M is installed.

Can my qualifying asset include the land and building and 50% of my plant and machinery purchased out of own funds? Or should the qualyfying asset (on which i can capitalise my borrowing cost) consist of only the 50% of the P&M that i purchased out of Borrowed funds.

Please clarify..

 

Replies (2)

If you can cleary identify the source and application of funds then go ahead with such classification and capitalise the interest on the qualifying asset i. e. 50% on P & M. Even otherwise since it is WIP the entire interest cost will be capitalise and there will not be any differentiation between the assest funded by u or by finance.

As per AS 16 borrowing costs shall be capitalised if  :-

(1)the asset takes substantial period of time(1 year) to get ready for its intended use  

(2) activities for purchase or construction are in progress

(3) borrowing costs are incurred

(4) expenses for purchase of asset are being incurred

 

Thus,borrowing costs cannot be cappitalised in case of Land & Bldg & 50% of P&M. Only other 50% can be capitalised subject to above conditions. 

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