AS-16 Treatment of Borrowing cost for land and building

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Megha.B (Querist)
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08 April 2025 My client has obtained a specific term loan for acquisition of land and subsequent construction of building on it. Land being a non-qualifying asset, should i charge interest on loan related to land to P&L and capitalize the interest related to building as part of cost of Building? Please guide. If not what is the appropriate accounting treatment as per AS-16.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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12 April 2025 As per Accounting Standard (AS) 16 - Borrowing Costs, the treatment of interest costs for a loan taken to acquire land and construct a building depends on whether the asset is a qualifying asset.
If the loan is specifically taken for both land and building, you should allocate borrowing costs based on:

The proportion of land cost vs. construction cost, or

A reasonable basis (e.g., relative fair values at acquisition or usage of funds).

Interest related to land (non-qualifying portion) → Expensed in P&L.

Interest related to construction → Capitalized as part of the building cost.
Exception:
If the land is held for development (e.g., for constructing a building), then interest during construction period may be capitalized as part of the total project cost (including land).

So, If land is part of development (building construction):

Capitalize interest as part of the total project cost until completion.