AS-16 Treatment of Borrowing cost for land and building
This query is : Resolved
08 April 2025
My client has obtained a specific term loan for acquisition of land and subsequent construction of building on it. Land being a non-qualifying asset, should i charge interest on loan related to land to P&L and capitalize the interest related to building as part of cost of Building? Please guide. If not what is the appropriate accounting treatment as per AS-16.
12 April 2025
As per Accounting Standard (AS) 16 - Borrowing Costs, the treatment of interest costs for a loan taken to acquire land and construct a building depends on whether the asset is a qualifying asset.
If the loan is specifically taken for both land and building, you should allocate borrowing costs based on:
The proportion of land cost vs. construction cost, or
A reasonable basis (e.g., relative fair values at acquisition or usage of funds).
Interest related to land (non-qualifying portion) → Expensed in P&L.
Interest related to construction → Capitalized as part of the building cost.
Exception:
If the land is held for development (e.g., for constructing a building), then interest during construction period may be capitalized as part of the total project cost (including land).
So, If land is part of development (building construction):
Capitalize interest as part of the total project cost until completion.
If the loan is specifically taken for both land and building, you should allocate borrowing costs based on:
The proportion of land cost vs. construction cost, or
A reasonable basis (e.g., relative fair values at acquisition or usage of funds).
Interest related to land (non-qualifying portion) → Expensed in P&L.
Interest related to construction → Capitalized as part of the building cost.
Exception:
If the land is held for development (e.g., for constructing a building), then interest during construction period may be capitalized as part of the total project cost (including land).
So, If land is part of development (building construction):
Capitalize interest as part of the total project cost until completion.
09 May 2025
Thank u sir. The land is acquired and held for the purpose of development of building, accordingly I will capitalise the entire borrowing cost until it is ready for use as part of cost.
10 May 2025
You are welcome.
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