AS-16 Treatment of Borrowing cost for land and building

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When a loan is taken for both land and building construction, AS-16 requires careful treatment of borrowing costs. Generally, interest related to land, a non-qualifying asset, should be expensed in the Profit & Loss account. However, interest related to the building's construction should be capitalised as part of the building's cost. An exception exists if the land is held specifically for development, in which case the entire borrowing cost can be capitalised as part of the total project cost until the building is ready for use.

Megha.B

Megha.B (Querist)
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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.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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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.

Megha.B

Megha.B (Querist)
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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.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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10 May 2025 You are welcome.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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29 September 2025 Good luck..

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