INTEREST CAPITALIZATION

As per AS 16 interest on borrowed amount can be capitalised in case of qualifying asset. Qualifying asset is an asset which takes a considerable time to get ready.(considerable time is 1 yr).

puchase of land for construction of building is a investment and AS-16 does not apply to investment ......

but when you will take the loan to contruct the building then the interest paid on that amt will be capitalised.......

i think According to AS -16 investment properties are covered in the meaning of qualifying assets( Land and building), but other investment like shares and debentures are not in the scope of Q.A.

if borrowing cost is related Q.A. then such borrowing cost shud be capitilized to cost of such Q.A.

if borrowing cost is not related to Q.A. then  such interest or cost shud be transfer to P/L acoount

There can be two cases. 

1. if the property is purchased and its possession has not been taken by the company then interest paid on loan can be capitalised but if possession has been taken then it cannot be capitalised and it is to debited to the profit and loss account. 

2. If the property is under construction then the whole interest payable would be capitalised. and after construction is complete then interest paid will be debited to the profit and loss account.

Dear All,

As per AS-16 "Borrowing Cost", interest paid on loan taken for acquisition a "qualifying assets" should be capitalized. Qualifying asset means, asset which takes  considerable time i.e One or more years. Capitalization should be stopped when, it is ready to use or sale.

In the present query, the asset did not take one or more years to bring it ready for use or sale, hence interest paid should not be capitalized.

Now what should be the accounting treatment of Interest Paid:

Interest paid on the amount borrowed the acquisition of non-qualifying asset should be charged against its revenue.

Thanks

Dear sir,

Principles of BC capitalization (AS-16)

Which BC to capitalize

Conditions :

BCs that are directly attributable to acquisition construction or production of QA should    be capitalized only

-                     When likely to result in future economic benefits to enterprise

-                     Can be reliability measured

Stress :

BCs incurred upto the stage the asset is put to use are capitalized

All other BCs are charged to P&L A/c. (If the above conditions are not satified)

QA : (Qualifying Assets)

Asset that necessarily takes substantial period of time to get ready for its intended use or sale.

 Example of QA

Manufacturing Plants

Pioneer generation facilities

Inventories that require a substantial period of time to bring them to a separate condition.

Investment properties.

Construction contracts.

Internally developed intangible assets.

Substantial period of time – Generally 12 months

could be shorter or longer also

justified on the basis of facts and circumstances of the case.

The following are not QAs.

Investments other than investment properties

Inventories that are routinery manufactured or otherwise produced in large quantities on a repetitive basis over a period of time.

Assets that are ready for their intended use or sale when acquired are not QA.

Regards

K.Ilayaraja.