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Capitalise or expense off the rent during construction

ravi kiran (student) (151 Points)

05 January 2015

Dear Friends,

We are paying rent to the land lord for 4th floor (which is in addition to other floors) which is under construction ,whether rent paid for the particular floor to be expensed off or to be capitalised in books . For other three floors already paying rent those completed long back. Pl. quote relevant Accounting standard or guide lines in this regard.

Ravi

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2 Replies

CA Ganesh Agarwala (Audit Senior Manager) (239 Points)
Replied 08 January 2015

Dear Ravi,

If the floors are identified as separate components and the amount has been capitalised on the construction of floor basis then the rent from particular floor should be revenue or capital on the basis of the completion of construction. in your case the rent should be charged off from the cost of construction assuming the entire building is one aset and will be capitalised on completion of the asset.

please refer AS 16 borrowing cost. where it says any income arising from the borrowed fund used for construction of qualified asset needs to be reduced from borrowing cost.

Thats my take.

thaks and regards

Ganesh

CA Janani (ACA ACS DISA(ICAI)) (359 Points)
Replied 18 May 2016

The payments are made for two type of transactions

1. as an expense

2. as an investment

If the 4th floor is available for you to use(during the construction period) for your own purpose, then you can take it as an expense. Bcoz you are getting the benefit of using the 4th floor for business purposes and also you are not going to get that money back in any other form

If the amount paid will be reimbursed back or will be adjusted withn future rent or will be taken as advance for building, you can take it as an asset and capitalise..