Land purchased
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 July 2013
Dear Sir,
We have a office land in NCR for which the period of construction expires on 30 th April 2012 during the audit period of FY 2012-13 . We have paid Rs. 10 lakh to Authority for extension of period for 3 years for constructing our building for office usage.
We have to expense the payment of Rs. 10 lakh as Rate and taxes or else we can capitalise to Building – Capital WIP.
Please advise.
We have a office land in NCR for which the period of construction expires on 30 th April 2012 during the audit period of FY 2012-13 . We have paid Rs. 10 lakh to Authority for extension of period for 3 years for constructing our building for office usage.
We have to expense the payment of Rs. 10 lakh as Rate and taxes or else we can capitalise to Building – Capital WIP.
Please advise.
23 July 2013
YOU CAN CAPITALIZED IN LAND AMOUNT
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 July 2013
Thanks for the information.
Would request if you can refer the answer with AS 10 Fixed asset to strengthen the view.
Relevant extract for information
Would request if you can refer the answer with AS 10 Fixed asset to strengthen the view.
Relevant extract for information
02 August 2024
Under **Accounting Standard (AS) 10 - Property, Plant and Equipment**, the treatment of expenses related to the acquisition of an asset, including costs incurred to extend the construction period, needs careful consideration. Here’s how to handle the payment for the extension of the construction period according to AS 10:
### **Accounting Standard (AS) 10: Key Points**
**AS 10 - Property, Plant and Equipment** deals with the accounting for tangible fixed assets. The standard provides guidance on the recognition, measurement, and disclosure of property, plant, and equipment.
#### **Capitalization Criteria**
According to AS 10, costs directly attributable to bringing an asset to the condition and location necessary for its intended use should be capitalized. These costs include:
- **Cost of Construction**: Includes expenditures for the construction of the building, such as materials, labor, and overheads.
- **Directly Attributable Costs**: Costs necessary to prepare the asset for use, such as site preparation, installation, and legal fees directly associated with the acquisition or construction of the asset.
#### **Treatment of Extension Payment**
**1. Extension of Construction Period**
When you pay ₹10 lakh to extend the period for construction of your building, this payment is made to retain the right to complete the construction and is directly related to the construction of the building. According to AS 10, such payments are typically capitalized because they are necessary to complete the construction of the building and make it ready for use.
**2. Capitalization to Building – Capital WIP**
Since the payment of ₹10 lakh is related to the construction period extension, it should be treated as part of the cost of bringing the building to its intended use. Therefore, it should be capitalized as part of the cost of the building.
**Accounting Treatment:**
**Journal Entry for Capitalizing the Payment**:
```plaintext
Building - Capital WIP (Asset) 10,00,000
Bank/Cash 10,00,000
```
This entry reflects that the extension payment is part of the construction costs and should be added to the capital work in progress (Capital WIP) account.
#### **Relevant Extract from AS 10**
**AS 10.9** states:
“Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management should be included in the cost of the asset.”
**AS 10.12** further elaborates:
“Subsequent expenditures on an item of property, plant, and equipment are added to the carrying amount of the asset if they are directly attributable to bringing the asset to its intended use.”
### **Summary**
- **Payment of ₹10 lakh for extension**: Should be capitalized as part of the cost of the building under "Capital WIP" rather than expensed as "Rate and Taxes."
- **Reasoning**: The payment is necessary to complete the construction and bring the asset into use, thus meeting the capitalization criteria under AS 10.
For accurate application of accounting standards and to ensure compliance, consulting with a professional accountant or auditor is recommended, particularly for significant transactions and financial reporting.
### **Accounting Standard (AS) 10: Key Points**
**AS 10 - Property, Plant and Equipment** deals with the accounting for tangible fixed assets. The standard provides guidance on the recognition, measurement, and disclosure of property, plant, and equipment.
#### **Capitalization Criteria**
According to AS 10, costs directly attributable to bringing an asset to the condition and location necessary for its intended use should be capitalized. These costs include:
- **Cost of Construction**: Includes expenditures for the construction of the building, such as materials, labor, and overheads.
- **Directly Attributable Costs**: Costs necessary to prepare the asset for use, such as site preparation, installation, and legal fees directly associated with the acquisition or construction of the asset.
#### **Treatment of Extension Payment**
**1. Extension of Construction Period**
When you pay ₹10 lakh to extend the period for construction of your building, this payment is made to retain the right to complete the construction and is directly related to the construction of the building. According to AS 10, such payments are typically capitalized because they are necessary to complete the construction of the building and make it ready for use.
**2. Capitalization to Building – Capital WIP**
Since the payment of ₹10 lakh is related to the construction period extension, it should be treated as part of the cost of bringing the building to its intended use. Therefore, it should be capitalized as part of the cost of the building.
**Accounting Treatment:**
**Journal Entry for Capitalizing the Payment**:
```plaintext
Building - Capital WIP (Asset) 10,00,000
Bank/Cash 10,00,000
```
This entry reflects that the extension payment is part of the construction costs and should be added to the capital work in progress (Capital WIP) account.
#### **Relevant Extract from AS 10**
**AS 10.9** states:
“Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management should be included in the cost of the asset.”
**AS 10.12** further elaborates:
“Subsequent expenditures on an item of property, plant, and equipment are added to the carrying amount of the asset if they are directly attributable to bringing the asset to its intended use.”
### **Summary**
- **Payment of ₹10 lakh for extension**: Should be capitalized as part of the cost of the building under "Capital WIP" rather than expensed as "Rate and Taxes."
- **Reasoning**: The payment is necessary to complete the construction and bring the asset into use, thus meeting the capitalization criteria under AS 10.
For accurate application of accounting standards and to ensure compliance, consulting with a professional accountant or auditor is recommended, particularly for significant transactions and financial reporting.
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