Interest on Loan before the operations-
1.If am capitalising it to the fixed assets?
2. If am treating as pre operative expenses and writing it off/
Which is a better option give your view with pros and cons for a pvt ltd company?
thanks
CA.Sonia (professional) (517 Points)
22 April 2010Interest on Loan before the operations-
1.If am capitalising it to the fixed assets?
2. If am treating as pre operative expenses and writing it off/
Which is a better option give your view with pros and cons for a pvt ltd company?
thanks
Nicky
(Chartered Accountant)
(245 Points)
Replied 22 April 2010
As Per AS-16: Borrowing cost if directly attributable to qualifying assets need to be capatalized...
So better option is No. 1 or I guess the only option is No. 1 since it is a private limited company
Ankit
(CA)
(45 Points)
Replied 22 April 2010
it sould always be op.-1 as per AS -16 & Also as per income tax Act follwed the same
Anurag Sureka
(Officer)
(32 Points)
Replied 22 April 2010
Under any circumstances the following paragraphs of AS 16 should be kept in mind:
8. The borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are those borrowing costs
that would have been avoided if the expenditure on the qualifying asset had
not been made. When an enterprise borrows funds specifically for the
purpose of obtaining a particular qualifying asset, the borrowing costs that
directly relate to that qualifying asset can be readily identified.
9. It may be difficult to identify a direct relationship between particular
borrowings and a qualifying asset and to determine the borrowings that could
otherwise have been avoided. Such adifficultyoccurs, for example,when the
financing activity of an enterprise is co-ordinated centrally or when a range
of debt instruments are used to borrow funds at varying rates of interest and
such borrowings are not readily identifiable with a specific qualifying asset.
As a result, the determination of the amount of borrowing costs that are
directly attributable to the acquisition, construction or production of a
qualifying asset is often difficult and the exercise of judgement is required.
10. 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.
11. The financing arrangements for a qualifying asset may result in an
enterprise obtaining borrowed funds and incurring associated borrowing
costs before some or all of the funds are used for expenditure on the
qualifying asset. In such circumstances, the funds are often temporarily
invested pending their expenditure on the qualifying asset. In determining
the amount of borrowing costs eligible for capitalisation during a period, any
income earned on the temporary investment of those borrowings is deducted
from the borrowing costs incurred.
12. To the extent that funds are borrowed generally and used for the
purpose of obtaining a qualifying asset, the amount of borrowing costs
eligible for capitalisation should be determined by applying a
capitalisation rate to the expenditure on that asset. The capitalisation
rate should be the weighted average of the borrowing costs applicable
to the borrowings of the enterprise that are outstanding during the
period, other than borrowings made specifically for the purpose of
obtaining a qualifying asset. The amount of borrowing costs capitalised
during a period should not exceed the amount of borrowing costs
incurred during that period.
Therefore the Interest on Loan should be capitalized.
Also the following paragraph regarding applicability of AS indicates that since the organization is covered under Companies Act, 1956, AS 16 needs to be followed:
6.2 Ensuring compliance with the Accounting Standards while preparing
the financial statements is the responsibility of the management of the
enterprise. Statutes governing certain enterprises require of the enterprises
that the financial statements should be prepared in compliance with the
Accounting Standards, e.g., the Companies Act, 1956 (section 211), and
the Insurance Regulatory and Development Authority (Preparation of
Financial Statements and Auditor’s Report of Insurance Companies)
Regulations, 2000.
Further as per the notification of the Ministry of Corporate Affairs AS 16- Borrowing Cost has been given due recognition.
Therefore there's no route of escaping AS 16.
CA LOVELY ARORA
(C.A. B.Com (H) Graduate)
(2151 Points)
Replied 23 April 2010
of course, better option is 1st......... but the it's attribution to qualifying asset need to be considered for this purpose...........
sandeepverma
(don't make exuse for study)
(304 Points)
Replied 23 April 2010
its should be capitalize
CA Devender Chauhan
(Group Financial Accountant)
(1526 Points)
Replied 23 April 2010
| Originally posted by : Ankit | ||
 |
it sould always be op.-1 as per AS -16 & Also as per income tax Act follwed the same |
 |
agree
CA.Sonia
(professional)
(517 Points)
Replied 23 April 2010
The amount was borrowed for the construction , Acquisition of Fixed Assets then what should be done if am opting for 2 option wht the pros and cons?
Thanks
Nicky
(Chartered Accountant)
(245 Points)
Replied 24 April 2010
I stick to my stand Option 1 is the only option even after this tweek
Amir
(Learner)
(4016 Points)
Replied 26 April 2010
HI Mam,
Sorry for joining late in this query....
I feel there can only be one treatment & there is no choice/option as such. {afterall Standards are made to bring uniformity}
Query says - Interest on Loan before operations - It will be capitalized for sure.
Going with the reference of AS-16 - One thing I want to say that it is independent of the fact whether organization has commenced its operations or not. So if conditions under AS-16 are fulfilled then interest shall be capitalised to the cost of Asset (but only till the time the aset is not brought into existense & any interest after that period shall be capitalized as pre-operative expenses)
If Loan amount is not used for the purpose of any asset then interest shall be capitalized as "Pre-operative expenses"
So Final answer from my side, treatment can either of the following depending upon facts of the case --
1) Interest to be capitalized to the cost of Fixed assets
2) As pre-oprative expenses
3) Both the above.(Loan amount was used for acquisition of asset but operations had not commenced even after the acquisition of asset)
Landmark Judgments: Important Provisions of the EPF & ESI Act interpreted by the Honorable Supreme Court of India
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