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Interest Capitalisation

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Nikita Khandelwal (Querist)

19 February 2010 If i have purchased a land taking a loan of 20 lacs. then what are the possible treatments available to me for the interest. Can i capitalise the interest paid on loan after aquisition of land & before repayment of loan. Or i can claim it as a deduction in P&L.. Plz tell.. if 1st option is possible as its preferable..
Thank U

Pradeep Kumar

Pradeep Kumar (Expert)

25 February 2010 See, the question of capitalisation comes when something has the nature of adding value to the asset.
Like installation charges of machinery, they add value to the product.
Interest as such does not add value.

Matching principle of accounting requires that cost of borrowing(interest)for an asset should be matched against the revenue that the asset generates.

This is the fundamental base of AS 16 on Borrowing Costs. Further AS 16 states that when an asset takes substantial time for getting ready to use, the interest should be capitalised.

In your case Land is not getting developed as such ans is always held ready to use.

For that matter Interest should not be capitalised.

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