IDC on project which is temporarily suspended - capitalised or not ?

AS 438 views 3 replies

Hi Friends,

Please give suggestions whether or not to capitalize Interest During Construction (IDC) on construction project which is temporarily suspended..

a) An amount of 60 crs were given as advance to contractor XYZ on 01.01.2018 for construction of the project, the said amount was borrowed from project specific loan sanctioned by Financial Institution (F.I)..

b) Interest paid to F.I on the above loan was capitalized in the books of accounts for the FY 2018-19

c) New Govt came into power after April 2019 elections..

d) Contract with XYZ was terminated by the new Govt on August 2019, citing the reason that the contract value is too high and revised tenders were called for...

f) F.I has been charging interest on the above loan for the FY 2019-20 and our company has paid the interest promptly..

please suggest us whether to capitalize the interest paid during the period from August 2019 to March 2020 in the books of accounts

Replies (3)

The company paying interest charges between 19-20 is the correct treatment because the borrowing costs can be capitalised to the cost of the project as long as the construction work is in progress. These interest expenses cannot be capitalised under two circumstances:

1. When the work is halted, interrupted temporarily

2. When the project is ceased. 

So, for this period, these are expensed to profit and loss. When the work resumes, from that date till the end of project date, Interest can be capitalised again. 

Hi,

Is there any reference point in Ind AS 23, that I can use as basis for the above reason.

“In accordance with Ind AS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with that Standard.” This is from IndAS 11 which prescribes borrowing costs treatment. 

Then IND AS 23 (19-22) gives a clear insight into the principle’s criteria of capitalising borrowing costs. 

 


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