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Capitalisation of borrowing cost

Sairam Lakkimsetti (Article Assistant) (32 Points)

25 July 2013

Dear All,

Please clarify my following Query,

My client has taken loan on qualifying asset for which interest on loan is being capitalised as per AS 16 .

But where as the company took another loan to repay the existing interest on loan from consortium of banks, Later it was mutually agreed by banks and company to convert" interest on loan caluclated for 2 years " to another fresh "Funded Interest Term Loan"

Can the company can capitalise the interest on fresh loan "Funded Interest Term Loan " taken to repay the existing loan-interst for a Qualifying asset as per AS 16.

Thanks in Advance

Ram

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Prakash Jha (Executice Accounts) (36 Points)
Replied 25 July 2013

Ram

A company can only capitalise only those expenditure which is incurred by the company at the time of acquiring the goods and put it to use or any expenditure which improve the current condition of the asset and enhance its performance and life.

In the case you mentioned it is not advisable for your to capitalise the capitalise the interest on fresh loan "Funded Interest Term Loan " taken to repay the existing loan-interst.