Asset capitalisation

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Hariprasad (Querist)
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22 February 2013 1. Whether Interest paid on borrowed bank loan for construction of building to be capitalised or not? If to be capitalised on what basis & what are accounting entries involved?
2. How new & old outstanding expenese to be treated in accounting

CA LLB Shailendra Kumar Lal

CA LLB Shailendra Kumar Lal (Expert)
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22 February 2013 Borrowing costs may include:
(a) interest and commitment charges on bank borrowings and other short-term and long-term
borrowings;

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 Standard.
Other borrowing costs
should be recognised as an expense in the period in which they are incurred.

To the extent that funds are borrowed specifically
for the purpose of obtaining a qualifying asset,
the amount of borrowing costs eligible for capitalisation on that asset
should be determined
as the actual borrowing costs incurred on that borrowing during the period
less
any income on the temporary investment of those borrowings.

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.

When the construction of a qualifying asset is completed in parts
and a completed part is capable of being used while construction continues for the other parts,
capitalisation of borrowing costs in relation to a part should cease
when substantially all the activities necessary to prepare
that part for its intended use or sale are
complete.