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capitalisation of interest in case of a running business

atul (student) (48 Points)

19 January 2008

In a running business, suppose a fixed asset has been purchased and a loan has been taken for that purpose. Interest is also being paid on that loan. Now, if the asset is being put to use after sometime, should the interest for the period (till it is not been put to use) be capitalised??or should it be transferred to P and L A/c???

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3 Replies

Sathish Karunakaran (ACA) (614 Points)
Replied 19 January 2008

Qualifying asset for purpose of capitalisation of interest (as per AS 16) is that which takes substantial period of time to get ready for its use or for sale. In ur case the machinery after commissioning will be ready for use and here the date put to use by you is irrelevant. Hence the date ready for use is relevant and int. paid should be transferred to P&L A/c.

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Samir (Chartered Accountant) (145 Points)
Replied 19 January 2008

In your case, Interest in consideration is for a period between Purchase and 'Put to use', the capitalisation criteria reconize 'put to use' in a commercially ready for use condition, although it is not used by the business owner. So, according to me, if asset is in 'ready for use' condition (although not used), it shall be considered as 'Put to use'. Interest for this period is to be debited to Profit/(Loss) Account.