Interesting question regarding AS 16

AS 550 views 1 replies

I have a question regarding suspension of borrowing cost. According to me capitalistion of borrowing cost should be be suspended when avoidable activities stands suspended for extended period of time. While in case of unavoidable activities we should continue capitalisation. 

However according to my friend suspension of capitalisation of borrowing should be made when active development is interrupted due to abnormal activities. While capitalisation should be continued while normal activities are being carried on.

We have an argument that whether we should continue capitalisation when activities are stopped due to earthquake. 

In my opinion we should be allowed to capitalise as this is unavoidable activity and interruption is not on account of our default. According to my friend we should not capitalise as this is an abnormal activity. 

Please give your opinion.

Replies (1)

When the delay is normal or is caused due to technical or administrative work, interest cessation need not take place. However, if it is due to extraordinary events like earthquake, interest should not be capitalized. Logic is that you factored for interest also as a cost in constructing an asset but unreasonable delay in time due to some unforseen events cannot be attributed to ur asset cost.. that wont reflect the true value of the asset.

I hope this makes it clear


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