Interest on borrowed capital

This query is : Resolved

Venkat (Querist)
Follow

29 January 2010 A public Ltd co take loan to purchase plant and machinery to enhance the production. The plant and machinery purchased is ready to use. Pls suggest me whether upfront fee of loan and interest on loan can be treated as Borrowed costs or not. Give me ur suggestion with ref to AS10, AS16

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

29 January 2010 As per AS - 16 borrowing costs spent to purchase an asset which has long gestation period or takes time to being put to use can be capitalised.

If the asset purchased is ready to use at the time of purchase then no borrowing cost can be capitalised.

So upfront fee of loan and interest on loan cannot be treated as Borrowed costs for purchase of machine ready to use

Venkat

Venkat (Querist)
Follow

29 January 2010 is it not incidental expenses to capitalise as per AS 10?

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

29 January 2010 Incidental expenses are expenses which are incurred to bring the asset to its present location and use.

Fees paid for loan facility or interest cannot be treated as incidental expenses to put the machinery for use

Venkat

Venkat (Querist)
Follow

30 January 2010 That means we have to charge off the interest if the interest relates to the period Date of Purchase of Machinery and Date of put to use. Is it Right?

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

30 January 2010 Borrowing cost as per AS - 16 can be capitalised only on qualifying asset

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Explanation:

What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.

If the above condition is satasfied then the same can be capitalised, otherwise not.

Aditya Maheshwari

Aditya Maheshwari (Expert)
Follow

30 January 2010 And Borrowing costs may include:

1. interest and commitment charges on bank borrowings and other short-term and long-term borrowings;

2. amortisation of discounts or premiums relating to borrowings;

3. amortisation of ancillary costs incurred in connection with the arrangement of borrowings;

4. finance charges in respect of assets acquired under finance leases or under other similar arrangements; and

5. exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Venkat

Venkat (Querist)
Follow

30 January 2010 ThanQ

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now

Join the CA Students WhatsApp Community for ICAI Updates, Trending Courses & Notes!

Similar Resolved Queries

Unanswered Queries

Popular
Recent

Trending Online Classes

Direct Tax Laws & International Taxation May 26,Sept 26 & Jan 27

CA Arvind Tuli

Enroll Now
Audit Fast Track Recorded Batch For May 26,Sept 26 & Jan 27

CA Aarti Lahoti

Enroll Now
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English

CA Bhanwar Borana & CA Shubham Keswani

Enroll Now

view all classess

Meet our CAclubindia PRO Members

Somnath Maiti

Shantaveeresh Manur

S D Kannan

adarsh chaturvedi

Dinesh kumar

Subscribe Now

Interest on borrowed capital

Similar Resolved Queries

Trending Online Classes

Meet our CAclubindia PRO Members

Quick Links

Browse by Category

Latest Job Openings

Senior Executive

Manager- Finance and Compliance

GST CONSULTANT

GST CONSULTANCY

Accountant

CA Final

Article Assistant

Associate CA