Accounting Standards Interpretation (ASI) 1
Substantial Period of Time
Accounting Standard (AS) 16, Borrowing Costs
Accounting Standard (AS) 16,
Borrowing Costs, defines the term 'qualifying asset' as "an asset that
necessarily takes a substantial period of time to get ready for its
intended use or sale".
The issue is what is the meaning of
the expression 'substantial period of time' for the purpose of this
The issue as to what constitutes a
substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve
months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances
of the case. In estimating the period, time which an asset takes,
technologically and commercially, to get it ready for its intended use
or sale should be considered.
The following assets ordinarily take
twelve months or more to get ready for intended use or sale unless the
contrary can be proved by the enterprise:
assets that are constructed or
otherwise produced for an enterprise's own use, e.g., assets
constructed under major capital expansions.
assets intended for sale or lease
that are constructed or otherwise produced as discrete projects (for
example, ships or real estate developments).
In case of inventories, substantial
period of time is considered to be involved where time is the major
factor in bringing about a change in the condition of inventories. For
example, liquor is often required to be kept in store for more than
twelve months for maturing.
BASIS FOR CONCLUSIONS
Paragraph 6 of AS 16 provides that
"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. The amount of borrowing costs
eligible for capitalisation should be determined in accordance with
this Statement. Other borrowing costs should be recognised as an
expense in the period in which they are incurred".
This paragraph recognises that borrowing costs should be expensed
except where they are directly attributable to acquisition,
construction or production of a qualifying asset. To qualify for
capitalisation of borrowing costs, the asset should take a long period
of time to get ready for its intended use or sale.
Paragraph 5 of AS 16 gives examples
of manufacturing plants, power generation facilities etc. as
qualifying assets. In these cases, normally a period of more than
twelve months is required for getting them ready for their intended
use. Therefore, a rebuttable presumption of a period of twelve months
is considered "substantial" period of time.
Paragraph 5 of AS 16 provides, inter
alia, that "inventories that are routinely manufactured or
otherwise produced in large quantities on a repetitive basis over a
short period of time, are not qualifying assets." Paragraph 12 of
Accounting Standard (AS) 2, Valuation of Inventories, provides that
"Interest and other borrowing costs are usually considered as not
relating to bringing the inventories to their present location and
condition and are, therefore, usually not included in the cost of
inventories". It is only in exceptional cases, where time is a
major factor in bringing about change in the condition of inventories
that borrowing costs are included in the valuation of inventories.