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Loan interest on contruction project

Loan interest on contruction project

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Dear AW members

I have received a professional clearance for a new client on Friday. The client bought a property last year, demolished it and is developing houses on the land which will be sold once complete. The project is to be funded from savings as well as some very expensive loan borrowings.

The loan interest is 2% per month so the interest charged is very significant. The previous accountant has reflected this as a an expense which is resulting in a huge loss for the first year financial statement. I am more of the view this should have been included within cost of the construction project and eliminated as development work in progress. The revenue recognition on the project is not an issue.

I shall appreciate if someone is able to provide a second opinion on this. Am I correct in thinking this should have been / can be included within cost of the construction project?

Many thanks

 

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By Biggsy2020
21st Sep 2020 09:24

This should be reported under IAS 23 Borrowing Costs. Therefore, capitalise. It should only be expensed at the point the construction is completed, during a period where work is suspended or the recoverable amount falls below the cost capitalised (however, unlikely I expect).

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By seopin
21st Sep 2020 09:35

Biggsy2020 wrote:

. Therefore, capitalise.

Thanks. Do you mean include in cost of sales? The property purchase and the costs incurred in demolishing the property is not capitalised as the aim is to develop and sell so is not capitalised as fixed asset on the balance sheet.

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Replying to seopin:
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By Biggsy2020
21st Sep 2020 10:05

Right with you, so its relates to trading activity.

In which case profit or loss - cost of sales or finance costs.

Remember though this will also need to be accounted for in Stock, if not sold at the yearend.

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By Bobbo
21st Sep 2020 09:31

See section 25 of FRS 102 - essentially it is your (the client's) choice!

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By Biggsy2020
21st Sep 2020 10:02

In relation to above, are the accounts prepared under IFRS or FRS?

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By seopin
21st Sep 2020 10:10

The accounts are prepared under FRS.

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