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Is land a qualifying asset

jassi (ACA) (181 Points)

20 June 2010

Hi.....

a Co. acquired land for which part payment shall be made over next 3 years together with interest. Whether interest cost should be capitalised because of fact that it will take 4 years for completing installations and start for production.

Thanks

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6 Replies

SIVASIVA (FCA, Future CA) (4935 Points)
Replied 20 June 2010

Hi Jassi,

There are few points to share:

1. In my personal view, Finance charges in respect of assets acquired under installments are like FINANCE LEASE. Hence, these interest component will be qualifying for Borrowing Cost.

2. Further, any asset which is taking substantial period time for its intended use is only a Qualifing Asset. In your given case, the land is already ready for its intended use, meaning the land is in a good condition. Hence, it is NOT a Qualifying Asset.

3. HENCE, THE ANSWER IS YOU CANNOT CAPITALIZE IT.

4. The following is the part extracts of AS 16-Borrowing Cost :

It explains what is Borrowing Cost:

"4. Borrowing costs may include:

(a) interest and commitment charges on bank borrowings and other

short-term and long-term borrowings;

(b) amortisation of discounts or premiums relating to borrowings;

(c) amortisation of ancillary costs incurred in connection with the

arrangement of borrowings;

(d) finance charges in respect of assets acquired under finance

leases or under other similar arrangements; and

(e) exchange differences arising from foreign currency borrowings

to the extent that they are regarded as an adjustment to interest

costs4 ."

5. The following is the part extracts of AS 16:

"A qualifying asset is an asset that necessarily takes a substantial period

of time3 to get ready for its intended use or sale."

6. Presumed: that the land is ready when you pay the very first installment.

CA Anshu Agarwal (B€ @LW@¥$ ]-[@Pp¥) (1832 Points)
Replied 20 June 2010

agreed with sivasiva

1 Like

varun gupta (Senior Accounts Officer) (89 Points)
Replied 20 June 2010

Agree with Sivasiva

Hemu Kapoor (CA - Final Student) (158 Points)
Replied 09 September 2010

PRESUMPTION OF Shri Sivasia is wrong as land is a ready to use asset as soon as purchased

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 09 September 2010

HI ALL,

FIRST OF ALL, LAND IS AQUIRED AND THERE IS NO LEASE ELEMENT INVOLVED IN IT. IT IS JUST SIMPLY A CREDIT TRANSACTION. AS FAR AS SUBJECT PROVIDED BY JASSI, THE OWNERSHIP IN PROPERTY TRANSFERRED TO PURCHASER AND TO MAKE THE PAYMENT IN NEXT 3 YEARS IS JUST THE FACILITY PROVIDED BY THE SELLER TO PURCHASED AS CREDIT PERIOD.

SECONDLY, QUALIFYING ASSET IS A ASSET WHICH TAKE THE SUBSTANTIAL PERIOD OF TIME TO GET READY FOR IT'S INTENDED USE AND PURPOSE. SINCE, LAND IS READY TO BE USED FOR INTENDED USE I.E FOR CONSTRUCTION OF FACTORY OR OFFICE BUILDING. THUS, SINCE LAND IS NOT A QUALIFYING ASSET, NO SUCH INTEREST COST SHOULD BE CAPITALISED. FURTHER, THE FACTORY OR OFFICE PREMISE WHICH IS GOING TO BE CONSTRUCTED ON LAND IS A QUALIFYING ASSET, AND THUS, INTEREST COST INCURRED THEREFORE SHOULD BE CAPITALISED UNDER FACTORY BUILDING OR OFFICE BUILDING.

REGARDS,

MANOJ

Dinesh Kumar Agarwal (Article clerk) (117 Points)
Replied 14 September 2010

As u are purchasing the land and this purchase in on credit. Further it seems that title deeds were transfrred in ur name.

Land should be valued at purchase price as mentioned in deed together with deed, leagal and incidental expenses.

now the land is used for some commercial activity and thus some years will take for installation of building, machinery etc and start of production.

During this period all expenses incurred will be clubbed as pre operative expenses which are not specially attributed to specific assets.

So. interest expensed during this period for repayment of loan clubbed in pre operative expenses and when commercial production begins total of pre operative expenses allocated on reasonable basis to all asstes.