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Borrowing Cost on Land

Vidya (Service) (40 Points)

09 November 2007

Hi,

We have a client who have purchased a land from a ECB loan borrowed for this purpose. Can the Interest on ECB loan be capitalised? Is "Land" a qualifying asset under AS 16 for capitalisation of Borrowing Cost?

Vidya

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Sathish Karunakaran (ACA) (614 Points)
Replied 09 November 2007

If such ECB Loan have been obtained solely for the purpose of land, then I feel that interest on such loan cannot be capitalised to the cost of land on the grounds that purchase of land do not take substantial period of time to make use of it either for production or for sale. But if loan taken for any venture or project or endeavour as a whole, which comprises of purchase of land, construction of building, commissioning or installation of machinery, that altogether takes substantial period of time to start generating revenue, then interest on loan to the extent utilised for purchase of land which is the part of the project can be capitalised to the cost of that project. However capitalisation of interest must cease on, as soon as the asset is ready for use and on the date not put to use. Anyway consider others' opinion also, as well post this query in "expert's column". Best Wishes.