Ways to treat borrowing expenses
This query is : Resolved
26 June 2016
A land has been purchased..and shown in books as inventory according to its business of buying and sale of property...the borrowing interest according to AS-2 cant be capitalised...
So according to rules the interest expenses would be taken to P&L account which results in huge net loss for company...
suggest any way to deal with it by not showing it as p&l expenses..!!!!!!!!!!!!!!!!!!!!
26 June 2016
Dear Ananya,
The question of capitalisation of borrowing cost does not arise since this is a question of stock and not fixed asset. you'll need to take it to p and l account. the said loss can be set off in next 8 years. what's the harm in that?!
26 June 2016
Harm is my current net profit goes to (-) 1 crore...which affects the image of comapany...so i was seeking to get an advice of anything through which i could change the accounting....!!!!!!
03 August 2025
Hey! I get why you want to avoid showing a big loss—makes sense from a business image perspective. But here’s the thing:
Accounting Standards (AS-2) are pretty clear: borrowing costs for inventory (like land held for sale) cannot be capitalized. They must be expensed in the Profit & Loss (P&L) for the period.
What are your options (legally)?
Reclassify the Land (if possible):
If the land is held for long-term investment or development (not for sale), maybe it can be treated as a fixed asset or capital asset instead of inventory.
Then borrowing costs could be capitalized as part of cost of asset under AS-16 (Borrowing Costs).
But if the business is clearly property trading (buy & sell), this may not be justifiable.
Adjust Financing Structure:
Consider using other forms of financing (equity or unsecured loans) which may not attract capitalizing or be treated differently.
Tax Planning / Deferred Tax:
You can recognize deferred tax assets for the losses to offset future taxable income, which helps with cash flow and tax burden.
Disclose in Notes:
Be transparent in financial statements’ notes explaining the situation—sometimes this can ease concerns from stakeholders.
Profit smoothing with Reserves:
Depending on the jurisdiction, some companies use reserves or other accounting measures—but not recommended if it contradicts accounting principles and laws.
What NOT to do:
Do not try to manipulate accounting treatment against AS rules — can lead to audit issues, penalties, or loss of credibility.
If you want, I can help you draft disclosures or work on future projections showing recovery of losses. Also, consulting a Chartered Accountant or auditor for your specific case would be best.
Accounting Standards (AS-2) are pretty clear: borrowing costs for inventory (like land held for sale) cannot be capitalized. They must be expensed in the Profit & Loss (P&L) for the period.
What are your options (legally)?
Reclassify the Land (if possible):
If the land is held for long-term investment or development (not for sale), maybe it can be treated as a fixed asset or capital asset instead of inventory.
Then borrowing costs could be capitalized as part of cost of asset under AS-16 (Borrowing Costs).
But if the business is clearly property trading (buy & sell), this may not be justifiable.
Adjust Financing Structure:
Consider using other forms of financing (equity or unsecured loans) which may not attract capitalizing or be treated differently.
Tax Planning / Deferred Tax:
You can recognize deferred tax assets for the losses to offset future taxable income, which helps with cash flow and tax burden.
Disclose in Notes:
Be transparent in financial statements’ notes explaining the situation—sometimes this can ease concerns from stakeholders.
Profit smoothing with Reserves:
Depending on the jurisdiction, some companies use reserves or other accounting measures—but not recommended if it contradicts accounting principles and laws.
What NOT to do:
Do not try to manipulate accounting treatment against AS rules — can lead to audit issues, penalties, or loss of credibility.
If you want, I can help you draft disclosures or work on future projections showing recovery of losses. Also, consulting a Chartered Accountant or auditor for your specific case would be best.
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