When borrowing costs enter an asset’s cost
Ind AS 23 requires an entity within its scope to capitalise borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset. Other borrowing costs are expensed as incurred. A qualifying asset necessarily takes a substantial time to get ready for its intended use or sale. Ind AS 23 gives no fixed 12-month cut-off: assess the nature of the asset and the work required. An off-the-shelf asset already ready for use, financial assets and short-cycle inventories are not qualifying assets. Long-maturing inventory, an unfinished power plant, investment property, and certain intangible assets may qualify. The standard does not require application to a qualifying asset measured at fair value or to inventories manufactured in large quantities on a repetitive basis.
Borrowing costs may include interest measured using the effective interest method under Ind AS 109, interest on Ind AS 116 lease liabilities, and foreign currency borrowing differences to the extent treated as an interest adjustment. Identify integral loan fees, discounts, premiums and eligible transaction costs under the relevant measurement rules. The standard does not treat actual or imputed equity costs as borrowing costs.
Specific and general borrowings
| Question | Specific borrowing | General borrowing |
|---|---|---|
| Amount attributable | Actual costs incurred on the specific borrowing during the eligible period, less income from temporarily investing that borrowing. | Apply the weighted capitalisation rate to eligible, time-weighted asset expenditure financed generally. Exclude expenditure already covered by specific borrowings to avoid duplication. |
| Rate or calculation | Trace the financing and temporary investment. Unborrowed, undrawn commitments do not produce temporarily invested proceeds. | Compute the weighted average costs of relevant outstanding borrowings. Exclude specific qualifying-asset borrowing costs until substantially all activities needed to prepare that asset are complete; thereafter consider outstanding borrowing in the general pool. |
| Controls | Do not assume all interest for the life of the loan is eligible. Reconcile active, suspended and completed periods. | Paragraph 14 limits borrowing costs capitalised during the period to borrowing costs incurred during the period. Reconcile the pool and ensure allocation across projects does not double count costs. |
Paragraph 18 limits the expenditure base to cash payments, transfers of other assets or assumption of interest-bearing liabilities, reduced by relevant progress payments and grants. The average carrying amount during the period, including borrowing costs previously capitalised, is normally a reasonable approximation. Use consistent weights for financing and expenditure and document where group or individual borrowing pools are appropriate.
Foreign exchange differences and other standards
Paragraphs 6(e) and 6A cover exchange differences from foreign currency borrowings. For a loss, the interest adjustment is limited to the positive difference between the comparable functional-currency cost and the foreign-currency borrowing cost. Estimate the comparable borrowing on supported terms, rather than assuming an arbitrary domestic rate. An exchange loss outside that adjustment follows the applicable foreign-currency accounting; for an ordinary unhedged loan, that generally means profit or loss. If a later gain relates to the same borrowing, paragraph 6A also addresses reversal up to the qualifying unrealised loss previously treated as interest. This analysis determines which amounts are borrowing costs; capitalisation still requires a qualifying asset and eligible period.
| Dimension | AS 16 where applicable | Ind AS 23 |
|---|---|---|
| Substantial period | AS 16 explains why 12 months is ordinarily regarded as substantial, subject to the facts. | Apply the definition and facts without a prescribed minimum. |
| Interest measurement | AS 16 includes interest, amortisation of relevant borrowing discounts or premiums and ancillary costs, and finance charges on finance leases under its framework. | Includes effective interest under Ind AS 109 and interest on lease liabilities under Ind AS 116, where directly attributable. |
| Foreign currency | Check AS 16 and its applicable explanation for the adjustment to interest. | Use paragraphs 6(e) and 6A, including the functional-currency comparison. |
| Disclosure | Disclose the accounting policy adopted and borrowing costs capitalised. | Paragraph 26 requires the amount capitalised and the capitalisation rate used to determine eligible costs. |
Start, suspend and stop by project phase
| Phase | Decision |
|---|---|
| Before commencement | Start only when the entity incurs asset expenditure and borrowing costs and undertakes activities needed to prepare the asset. Necessary technical and administrative work can precede physical construction. Passive holding is insufficient. |
| Extended idle period | Suspend while active development is suspended for an extended period. Expense costs of holding a partly completed asset during such a period. |
| Necessary delay or substantial preparatory work | Do not normally suspend during substantial technical or administrative work, or a temporary delay inherent in preparing the asset. Do not classify every seasonal stoppage in the same way. |
| Ready for use or sale | Stop when substantially all necessary activities are complete. Minor modifications or routine administration usually do not postpone cessation; essential commissioning or testing may. Stop for a separately usable part once ready, and continue only on other qualifying parts. |
Six worked examples
1. Specific loan with temporary investment income
Zenon borrows ₹50 crore at an effective annual rate of 10% on 1 April 2024 for an 18-month 50 MW solar project. Assume no principal repayments, qualifying development throughout FY 2024–25, and exact half-year weights. It spends ₹20 crore in April, ₹20 crore in October and the last ₹10 crore at the end of March. At 6%, temporary income on ₹30 crore for six months is ₹90 lakh and on ₹10 crore for six months is ₹30 lakh. From gross borrowing costs of ₹5 crore, deduct ₹1.20 crore: ₹3.80 crore is capitalisable. This calculation does not prescribe an automatic presentation of all related income and expenses in profit or loss.
2. General borrowing pool
Bharat has weighted balances of ₹30 crore at 11%, ₹50 crore at 9% and ₹20 crore at 12%. Interest is ₹3.30 crore, ₹4.50 crore and ₹2.40 crore, totalling ₹10.20 crore on ₹100 crore: the rate is 10.20%. With no specific financing or offsetting receipts and qualifying activity throughout, its opening ₹10 crore, July ₹12 crore and January ₹8 crore expenditures contribute ₹10 crore, ₹9 crore and ₹2 crore on the stated monthly weights. Capitalise 10.20% of ₹21 crore, or ₹2.142 crore (₹2,14,20,000). With no other qualifying allocations, ₹8.058 crore (₹8,05,80,000) remains as finance cost.
3. US dollar debt and the functional-currency comparator
Global Steel borrows USD 10 million for an eligible mill. At ₹80 per dollar initial principal is ₹80 crore. Annual interest is USD 600,000 at 6%. Assume ₹84 appropriately measures that interest in this simplified example, giving ₹5.04 crore, and the principal retranslation loss is ₹4 crore (USD 10 million × ₹4). Together these total ₹9.04 crore of cost and exchange movement, not necessarily cash paid. A documented equivalent INR rate of 10.5% on ₹80 crore gives ₹8.40 crore. The eligible exchange adjustment is the lower of ₹4 crore and ₹3.36 crore (₹8.40 crore less ₹5.04 crore), leaving ₹64 lakh to follow the ordinary exchange accounting. If the other capitalisation conditions are met, ₹8.40 crore enters CWIP. In practice verify accrual-date translation and use of any representative rate.
4. Abnormal six-month suspension
Apex incurs ₹20 lakh a month on specific debt. Assume eligible work from April to June and January to March, no relevant temporary investment income and no active or substantial preparatory work during an abnormal July–December stoppage. Each three-month active period adds ₹60 lakh to CWIP. Six idle months give ₹1.20 crore of expense. Of ₹2.40 crore incurred, capitalise ₹1.20 crore and expense ₹1.20 crore.
5. Two towers and shared utilities
Metro's Tower A has ₹60 crore of expenditure and is usable on 30 September 2024, including access to necessary shared services. Tower B has incurred ₹80 crore and remains under active development. Stop capitalisation on A when substantially all necessary activities for A are complete; continue for qualifying expenditure on B. At a 10% pool rate, exact borrowing costs for each tower cannot be computed without a dated expenditure and borrowing schedule. Determine the classification of completed assets under the relevant standard, such as Ind AS 16 or Ind AS 40.
6. Lease used to construct a tunnel
MegaRail's lease liability is ₹10 crore at the start of the year, at 9%. Assume no payment or remeasurement before the year-end interest accrual, and qualifying use throughout. First-year interest is ₹90 lakh. In a lease with intra-year payments, recompute using the actual outstanding liability schedule. The directly attributable qualifying interest may be capitalised. Assess any directly attributable right-of-use depreciation separately under Ind AS 116 and the applicable asset standard.
Closing controls and common questions
- How should the capitalisation memo work? Document eligibility and dates; tie financing, capex, grants and temporary investment income to the ledgers; reconcile project allocations; and disclose the paragraph 26 amount and rate.
- Can interest be capitalised on development land? Check whether land and development form a qualifying asset and whether preparatory activities are under way. Merely holding land without development activity does not qualify for capitalisation during that period.
- Can six-month inventory qualify? Apply the substantial-period definition and check the repetitive large-volume scope relief. Six months is not an automatic exclusion.
- What if capitalised costs exceed recoverable amount or net realisable value? Paragraph 16 points to the appropriate write-down rules, such as Ind AS 36 for relevant assets or Ind AS 2 for inventory.
- What if the original project loan remains after completion? Stop capitalising it to that asset. Consider including it in the general borrowing pool for other qualifying assets; any unallocated cost is expensed.
- What about intra-group interest and loan fees? Test qualifying borrowing costs in the borrower’s standalone accounts. Eliminate intra-group balances and interest on consolidation and assess eligible external costs from the group perspective. Include integral fees and eligible transaction costs through the effective interest method where applicable; not every service fee is integral.