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.
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