Case Study on Capitalization of Borrowing Cost When Construction Activity Is Being Carried Out by Another Co.
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- Last Updated on 23 February, 2024
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Para 17 of Ind AS 23, Borrowing Costs, states that an entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions-
(a) It incurs expenditures for the asset;
(b) It incurs borrowing costs; and
(c) It undertakes activities that are necessary to prepare the asset for its intended use or sale.
This story discusses a case where a company has given a contract for the construction of the plant and machinery to a third party. The company has taken a loan for payment to such third party and incurs finance cost on that. The accountants wants to know whether this contract for construction of plant to a third party will qualify as a qualifying asset. If yes, from which date the borrowing be capitalized to the cost of the plant.
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