The Hindu Business Line : Mumbai floods

I AM a CA Final student. I had gone through the solutions for the November 2005 CA (Final) paper on auditing, which appeared in these columns (Business Line, November 14). I have an alternative solution to Question No. 1.

Accounting Standard 16 lays down the circumstances under which capitalisation should be suspended (Para Nos 16 and 17). Accordingly, capitalisation can be suspended:

* During extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted.

* Temporary delay, where the delay is a necessary part of the process of getting an asset ready for its intended use or sale.

The action of the company (ABC Ltd) by non-capitalising the borrowing costs is justified. The reasons are as follows:

* Though the delay is temporary in nature (due to rain), it is not a part of the process of getting an asset ready for its intended use or sale.

* As per Para number 16, capitalisation should be suspended during any extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted.

In the present case/situation, during the month of July, the period of construction is extended because of rain. The activities necessary to prepare an asset for its intended use or sale are also interrupted. So capitalisation should be suspended.

If the activity necessary to prepare an asset is interrupted, then capitalisation should be suspended as per AS-16. As per the authors view, there is no need for identifying/ascertaining whether the interruption (in this case, rain) is within or beyond the scope of the management.

The crux of the AS-16 regarding suspension of capitalisation is that, if there is any abnormality, capitalisation should be suspended for that period. Identifying the cause and effect of the abnormality and its control are not dealt in this Standard.

The author's view of capitalising the borrowing costs is not justified.

In other words, ABC Ltd did the right job and its auditors need not advise/insist on capitalising the borrowing cost.

V. Ganapathy Subramanian, Chennai

The author, M.V. Kali Prasad, clarifies as follows: Paragraphs 17 and 18, and not 16, deal with suspension of capitalisation. The reader mentions that "it is not part of the process of getting an asset ready... " In the third point, he says that "if the activity necessary to prepare an asset is interrupted, then capitalisation is to be suspended." Therefore, since there is no interruption in the process of getting an asset ready, suspension of capitalisation is not justified.

He also goes on to say that capitalisation is to be suspended if there is any abnormality. In Mumbai, rains are not abnormal in July, the time when the monsoon sets in. Therefore, capitalisation need not be suspended.

The answer lies in the relevant points quoted by the reader. Further, Paragraph 18 of the standard states: "Capitalisation of borrowing cost is not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalisation continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographic region involved."

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