Case Study on Capitalization of Borrowing Cost When Construction Activity Is Being Carried Out by Another Co.

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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