## AS 16 – What is a Qualifying Asset (QA)?

Core Rule (AS 16)

Borrowing costs incurred on acquisition, construction, or production of a Qualifying Asset must be capitalised to the cost of that asset. All other borrowing costs are charged to Profit & Loss (P&L).

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### Definition of Qualifying Asset

A Qualifying Asset (QA) is an asset that takes a substantial period of time to get ready for its intended use or sale.

> Exam rule of thumb: 12 months is the standard benchmark for "substantial period." However, in ICAI exam questions, even 6–10 months of construction may qualify as substantial unless the question explicitly states it does not.

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### Quick Classification Table

Asset	QA?	Reason
Construction of building / shed	Yes	Takes time to construct
Advance paid for an asset being constructed	Yes	Underlying asset takes time
Purchase of ready machinery	No	Ready immediately on purchase
Purchase of furniture	No	Ready immediately
Purchase of truck / vehicle	No	Ready immediately
Working capital	No	Not an asset being readied for use

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### Treatment Summary

```

Borrowing Cost on QA → Capitalise (add to cost of asset)

Borrowing Cost on Non-QA → Charge to P&L

```

When a single loan funds multiple purposes, allocate borrowing cost proportionately to each purpose, then apply the QA/Non-QA rule.

Worked example

### Example 1

Example – Mixed Loan Allocation (Specific Borrowing)

A company takes a loan. Net borrowing cost after deducting income on temporary investments = ₹9,50,000. Funds used:

Purpose	Proportion	QA?	BC Capitalised	BC to P&L
Construction of Building	40%	Yes	3,80,000	–
Working Capital	30%	No	–	2,85,000
Purchase of Machinery	15%	No	–	1,42,500
Purchase of Furniture	2%	No	–	19,000
Purchase of Truck	13%	No	–	1,23,500
Total	100%		3,80,000	5,70,000

Journal Entry:

```

Dr. PPE – Building 3,80,000

Dr. P&L (Finance Cost) 5,70,000

Cr. Interest Payable 9,50,000

```

### Example 2

Example – Identifying QA vs Non-QA (Short)

A company borrows ₹5,80,000 for: (i) Plant & Machinery ₹4,06,00,000, (ii) Advance for additional assets, (iii) Working capital ₹1,16,00,000.

Plant & Machinery purchased ready → Not QA (available immediately)
Advance for asset under construction → QA (asset takes time to get ready)
Working Capital → Not QA

Only borrowing cost attributable to the advance portion qualifies for capitalisation.

⚠️ Common exam mistakes

Treating all long-term assets as qualifying assets — only assets that take substantial time to be READY qualify; a machine bought off-the-shelf does not qualify even if it is expensive.
Forgetting to deduct income earned on temporary investment of idle specific-borrowing funds before capitalising — the standard requires netting off this income.
Assuming 6 months never qualifies as substantial period — in most ICAI problems 6+ months is treated as qualifying unless the question explicitly says otherwise.
Capitalising borrowing costs on working capital or inventory that turns over quickly — these do not meet the qualifying asset definition.

Bare-Act text Paragraphs 5 and 10 · AS 16 – Borrowing Costs · click to expand

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. Other borrowing costs should be recognised as an expense in the period in which they are incurred. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

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AS 16 – Qualifying Asset: Definition and Identification

Worked example

⚠️ Common exam mistakes