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Fixed assets releated query

CA.Sonia (professional) (517 Points)

22 April 2010

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

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9 Replies

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

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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

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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)