Capitalisation vs interest capitalisation

Hi,

I am on an assignment at an Infra financing NBFC which is using an application provided by one of India's leading & largest IT companies.

From what we all have learned, Capitalisation "In accounting, it is where costs to acquire an asset are included in the price of the asset.

Read more: https://www.investopedia.com/terms/c/capitalization.asp#ixzz1qQZAqxbx" - Ref. Investop

Now my query here is,

1. The application uses "Intersest Capitalisation" as the word for "Interest Demand" on due date, which the borrower is liable to pay.

2. It also has another internal transaction of "Interest Demand" and on the due date the same is "Interest Capitalised".

3. The NBFC has accepted this as a practice & I fail to understand how a lender would "Capitalise" the interest due. It becomes difficult at times to comprehend what we are referring to when analysing the Repayment Schedule or considering the a/c for NPA and other transactions.

 

Please help. Is this the correct way of using "Interest Capitalisation"?

Any help will be appreciated.

Replies (1)

This is the normal practice across various countries.

The logic is suppose you have an interest due on 31st March of an year and that happens to be a Holiday or you are not allowed to make payment by exraordinary circumstances beyond your control though you have repayment capacity,it does not mean it is not expenditure for you .

So to take care of such situations the due date payment is accepted to be capitalized,but please remember Income Tax does not allow it as expenditure,unless you pay it.

Hope I am clear.

kkm

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