Capitalization of Interest on long-term borrowings: are Its benefits worth the costs in professional standards?

Abstract

The practice of capitalizing the interest due over the contracted period on long-term borrowings as part of the value of fixed assets has spread widely in the last three years. In this study, the author examines the rationale and motives of corporate management in adopting this practice and brings out its merits and demerits. While the practice provides immediate tax gains and an opportunity for window-dressing, it has far-reaching, implications for professional management and accounting in the corporate sector in India. It is argued that while tax incentives can be provided through other m'eans, the practice of capitalization of interest affects the standards of practice in accounting and management. He suggests that the Government of India or the Supreme Court should take a firm stand against it and do it quickly.