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Interest Capitalization

15 December 2008 2,088 views No Comment
The Company has taken a loan for construction of projects. A part of
amount is kept in FD with the Bank. Interest is capitalized on the
amount paid as per payment certificates like draw down. If the project
is capitalized and 2 payment certificates received after the
capitalization date. Now question is whether interest will be
capitalized on amount paid after capitalization date or expensed out.

Hemant


I think after the project is completed, the interest expenses, is charged to
P&L.

Krishnendu


Query is not clear:


1. If the loan was taken for construction, interest component to the date of capitalization should have been capitalized, lator on it should be expensed out.
2. However, you referred that amount is kept in FD in Bank (whether of borrower or lender) and if it is with the borrower, interest will be earned on FD (Fixed Deposit) and will therefore, not termed as expense BUT as income.
regards
I agree with ashutosh gupta
 

–
Hesham


Hi Hemant,
 
Capitalisation of interest should cease whem most of activites needed to bring the asset into use have been completed. If the interest relates to period before this it can be capitalised otherwise it should be expensed (date of certificate can be after and it may cover both before and after period in which case you would apportion eligible amount of interest to be capitalised)
 
Hope this helps,
Aida

Hi friends,

I go with Respected Aida on this interest capitalization.

jatinder


Dear All

I would like to clarify something:

The capitalization of interest should begian when all of the following
three conditions have been met:
A. There is actual interset payment
B. There actual construction payments
C. The actual Construction activities had been commenced

If the dates of the above conditions are different, we have to
capitalize interest cost occured after the latest date of those.

All other interest ocst occured before the date of the capitalization
should be expensed immediately.

All interest expense occured after the date where the asset becomes
availabe for use, should also be expensed immediately

Hope this will help.

–
Hesham


 

a Financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
>(lets break its component parts and define)
A contract (as para  of IAS 32 it need not be writting also) is an agreement enforceable by law.
Financial asset is cash (cash), right to receive cash (receivables, Bank Deposits),right to exchange any financial asset or financial liability favorably.
Financial Liability is a contratrual obligation to deliver cash (payables)or other financial asset, exchange unfavourably….
Equity instrument is one where there is no contractual obligation to deliver cash or other financial asset
 
Regards
jatinder

 

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