AS 16 Borrowing Costs: Trace Funding to the Qualifying Asset

A project is partly funded by a specific loan and partly through general borrowings. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.

Scope and applicable period

Financial reporting for FY 2025–26 under the applicable Accounting Standards (AS) framework. Assess entity-specific applicability and relief. Ind AS requirements are a separate analysis.

Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.

The key principle

AS 16 capitalisation applies to borrowing costs directly attributable to a qualifying asset when its conditions are met. Other borrowing costs are expensed. Specific and general borrowings need different calculation inputs, and commencement, suspension and cessation must be examined. The fact that a loan exists does not mean all interest belongs in CWIP.

Worked example

Check when expenditures, borrowing costs and necessary preparation activities occur. Determine any adjustment for temporary investment income on specific borrowings and assess interruption periods. General-borrowing calculations require the relevant capitalisation rate and expenditure base, not simply the specific-loan formula. Reconcile capitalised costs with project expenditure and expense the remaining amounts appropriately. Retain evidence of the ready-for-use date that ends qualifying capitalisation.

A practical sequence

Identify the qualifying asset and trace the borrowing and expenditure dates. Assess when capitalisation begins, any suspension and when the asset is substantially ready for intended use.

Calculate eligible specific or general borrowing costs under AS 16 and reconcile investment-income adjustments where applicable. Match capitalised interest with the asset register and remaining finance expense.

A loan labelled project finance does not make all interest capitalisable throughout its entire tenure.

Choose the framework before drafting the note

Recognition, measurement, presentation and disclosure are related but distinct. First establish whether the entity follows AS or Ind AS and whether company Schedule III or ICAI non-corporate guidance governs presentation. Then determine the accounting treatment and assemble the applicable disclosure. A well-formatted note cannot cure an unsupported asset, liability or income figure. Reconcile note schedules to the trial balance and preserve comparative information. Where relief applies to an entity, assess the particular standard or guidance rather than assuming that small size removes every requirement. Record significant judgement with the supporting facts.

Evidence checklist

Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.

• Qualifying-asset and project assessment
• Borrowing terms and cost records
• Expenditure and activity timeline
• Suspension, investment-income and readiness evidence
• Specific/general capitalisation and expense reconciliation

Common mistakes and how to avoid them

• Capitalising all interest because the entity has CWIP. Compare the conclusion with the qualifying-asset and project assessment and resolve any conflicting facts.
• Ignoring prolonged suspension. Trace the affected item to the expenditure and activity timeline before finalising the working.
• Continuing capitalisation after readiness for intended use. Use the specific/general capitalisation and expense reconciliation to make the final position and remaining exceptions clear.

Before you finalise

Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the specific/general capitalisation and expense reconciliation should agree with the conclusion presented to the client, reviewer or authority.

Frequently asked question

Can the loan date alone start capitalisation? No. The commencement conditions concerning expenditure, borrowing costs and preparation activities must be examined.

Sources and further reading

• ICAI Accounting Standard AS 16
• ICAI AS 10 — Property, Plant and Equipment

Related guide: Schedule iii cwip ageing completion working.