How will interest be capitalized when qualifying assets are funded by borrowings in the nature of bonds that are issued at a discount? X Ltd. issued…

As per AS 16, “Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds". Further, as per para 4 (b) of the standard, "amortization of discounts or premiums relating to borrowings” as a component of borrowing costs. Thus, the borrowing costs comprise the periodic interest payable on the bonds in question and the amount of discount amortised during the period. Paragraph 6 of the Statement, inter-alia, states that "Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset". Further, paragraph 19 states that "Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete". Thus, only that portion of the amortised discount should be capitalised as part of the cost of a qualifying asset which relates to the period during which acquisition, construction or production of the asset takes place. Straight line basis Years Interest Amortisation of discount Total borrowing costs Year 1 10,000 3,333 13,333 Year 2 10,000 3,333 13,333 Year 3 10,000 3,334 13,334 In the above case, the amount of borrowing costs capitalized would be - 13,333 in Year 1 and Year 2. The borrowing costs of 13,334 incurred in Year 3 would be expensed since the asset is ready for its intended use at the end of Year 2.