A foreign-currency loan financing construction does not make its entire exchange loss part of the asset cost. First calculate the portion treated as an adjustment to interest under Ind AS 23 paragraphs 6(e) and 6A. Then apply the qualifying-asset and capitalisation-period requirements. A later exchange gain on the same borrowing must also be tested against the earlier unrealised loss recognised as an interest adjustment.
This article uses Ind AS 23 in ICAI’s 2025–26 compendium, particularly paragraphs 5–9, 6A, 17–22 and 26, checked on 25 October 2026. It is an Ind AS reporting working for entities applying that framework, using fictional FY 2025–26 facts. It addresses exchange-difference adjustments on foreign borrowings; it does not recalculate general-pool capitalisation rates, determine tax capitalisation or establish FEMA permission for a borrowing.
Apply two tests in the correct order
Paragraph 6(e) includes exchange differences arising from foreign-currency borrowings only to the extent regarded as an adjustment to interest costs. Paragraph 6A(i) limits that adjustment to the extent the exchange loss does not exceed the difference between functional-currency borrowing cost and foreign-currency borrowing cost. Use comparable amounts in the functional currency for the same relevant funding and period. Do not compare a full-year domestic quote with a partial-year foreign interest amount.
For a rupee-functional entity, retain the basis for a comparable rupee borrowing cost, the actual foreign borrowing cost expressed in rupees and the relevant loan exchange loss. A convenient deposit rate or unrelated group loan rate is not automatically a suitable borrowing comparator. Coupon alone may not equal accounting borrowing cost: paragraph 6 includes effective-interest-method expense, so reconcile fees and other applicable accounting components before calculating the differential.
A useful computation control for the simple positive-loss cases is: eligible exchange adjustment equals the smaller of the relevant exchange loss and the positive comparable borrowing-cost difference. A negative difference does not create a negative exchange-loss capitalisation allowance. The examples use independently established comparable costs; they do not supply market benchmarks or resolve a disputed comparator.
An eligible borrowing-cost component still needs an eligible asset and period
Paragraph 8 requires directly attributable borrowing costs of a qualifying asset to form part of its cost; other borrowing costs are expensed. Paragraph 5 defines a qualifying asset by the substantial period necessarily needed to prepare it for intended use or sale. A loan used to buy an asset already ready for use does not pass that test solely because it is foreign or long term. Review paragraph 4’s scope relief for the specified fair-value assets and repetitively produced inventories.
Paragraph 17 requires expenditure, borrowing costs and necessary preparation activities to coexist before capitalisation starts. Extended inactive development may require suspension under paragraphs 20–21; paragraph 22 stops capitalisation when substantially all necessary preparation activities are complete. Therefore identifying a paragraph 6A adjustment is not by itself permission to capitalise that adjustment in every month. All amounts described as capitalised in the examples assume full satisfaction of the asset, attribution, timing and other requirements, with no temporary-investment income or other complications.
Maintain a same-borrowing history for subsequent gains
Under paragraph 6A(ii), where an unrealised exchange loss was treated as an adjustment to interest and a subsequent realised or unrealised exchange gain arises on settlement or translation of the same borrowing, the gain is also an interest adjustment to the extent of that earlier loss. Track the prior qualifying loss, later qualifying gain and remaining tracked balance by borrowing. Do not reverse a different loan’s prior adjustment just because a group-level foreign-exchange ledger nets to a gain.
The prior-loss register should distinguish amounts recognised as an adjustment to interest from exchange losses recognised elsewhere. It should also distinguish the adjustment’s borrowing-cost classification from whether it was capitalised or expensed in the relevant period. A gain greater than the tracked prior adjustment does not turn the whole gain into a paragraph 6A(ii) interest adjustment. The remainder requires the applicable exchange-difference treatment, including the normal Ind AS 21 analysis where relevant.
For ordinary monetary items, Paragraphs 28–29 of Ind AS 21 supply the general exchange-difference framework, subject to its exceptions. The illustrations exclude hedge accounting, net-investment issues, transition elections and other special treatments; they show ordinary profit-or-loss treatment for a remainder only on that assumption. They do not authorise reopening a completed asset’s cost automatically when a later gain occurs.
Reconcile the borrowing-cost bridge and disclosures
Show foreign accounting borrowing cost, exchange loss or gain, the paragraph 6A adjustment, other exchange result, and the capitalised-versus-expensed allocation. This prevents the same exchange difference appearing both in capital work in progress and again as an unadjusted foreign-exchange charge. Reconcile the ledger and retain the paragraph 26 disclosure support for borrowing costs capitalised and the capitalisation rate used where applicable. Common mistakes are capitalising every loss, using mismatched periods, ignoring a later gain, and pooling unrelated loans’ history.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Exchange loss exceeds the interest differential
Assume a rupee-functional entity has comparable functional-currency borrowing cost ₹12,00,000, foreign borrowing cost expressed in rupees ₹8,00,000 and exchange loss ₹6,00,000 for the same eligible period. Difference ₹4,00,000 limits the exchange adjustment to ₹4,00,000. Borrowing costs are ₹12,00,000 including that adjustment; the remaining ₹2,00,000 exchange loss is outside this borrowing-cost component and follows the assumed ordinary exchange accounting.
Illustrative example 2: Exchange loss is below the differential
Keep comparable costs ₹12,00,000 and ₹8,00,000, but exchange loss is ₹3,00,000. The ₹4,00,000 difference does not permit an invented extra loss: adjustment is only ₹3,00,000. Eligible borrowing costs on the stated assumptions are ₹11,00,000, with no exchange-loss remainder.
Illustrative example 3: No positive borrowing-cost difference
Assume comparable functional-currency cost ₹7,00,000, foreign cost ₹8,00,000 and exchange loss ₹2,00,000. The cost difference is negative ₹1,00,000, so no positive loss allowance arises under this model. Exchange adjustment is ₹0; the ₹2,00,000 follows the assumed ordinary exchange accounting. The separate ₹8,00,000 borrowing cost still needs the ordinary capitalisation tests.
Illustrative example 4: A later gain reverses part of a prior unrealised adjustment
The same borrowing has ₹3,00,000 of earlier unrealised loss tracked as an interest adjustment. A later ₹2,00,000 exchange gain is treated as a reduction of borrowing costs to that extent. Current foreign borrowing cost ₹8,00,000 less ₹2,00,000 gives ₹6,00,000 before other adjustments. The tracked earlier loss remaining for this working is ₹1,00,000.
Illustrative example 5: A gain exceeds the tracked prior adjustment
Assume the same borrowing has a tracked earlier unrealised interest adjustment of ₹3,00,000 and a later exchange gain of ₹5,00,000. The paragraph 6A(ii) adjustment is ₹3,00,000, leaving ₹2,00,000 for the assumed ordinary exchange treatment. Current borrowing cost ₹8,00,000 less the ₹3,00,000 adjustment is ₹5,00,000, not ₹3,00,000. The tracked prior balance is exhausted.
Illustrative example 6: Do not use another loan’s history
Loan A has a tracked earlier unrealised loss adjustment of ₹3,00,000. Loan B, with no such prior adjustment, has a ₹2,00,000 exchange gain. B’s gain does not reverse ₹2,00,000 of A’s history. A’s tracked balance remains ₹3,00,000; B’s ₹2,00,000 requires its own ordinary exchange treatment on the stated assumptions.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm reporting framework | Ind AS applicability and relevant accounting period. |
| 2 | Identify each foreign borrowing | Loan identity, functional currency and principal history. |
| 3 | Measure actual borrowing cost | Effective-interest schedule and rupee-equivalent cost. |
| 4 | Support the comparator | Comparable functional-currency borrowing cost for the same period. |
| 5 | Calculate the loss limit | Actual exchange loss versus positive cost differential. |
| 6 | Maintain earlier unrealised adjustments | Same-borrowing prior-loss and reversal register. |
| 7 | Classify subsequent gains | Adjustment limited to the relevant tracked loss; remainder separately reviewed. |
| 8 | Test capitalisation eligibility | Qualifying asset, attribution, start, suspension and completion dates. |
| 9 | Reconcile all ledger destinations | Borrowing costs, other exchange results and capitalised/expensed allocation. |
| 10 | Prepare reporting support | Paragraph 26 disclosures and independently recalculated working. |
Sixteen practitioner FAQs
1. Does every foreign-loan exchange loss qualify?
No. Paragraphs 6(e) and 6A restrict the borrowing-cost component.
2. What is the basic loss limit?
The relevant positive difference between comparable functional-currency and foreign borrowing costs, limited by the actual loss.
3. Can a higher cost differential create a fictional loss?
No. It cannot produce an adjustment greater than the actual relevant exchange loss.
4. Can a negative differential become a positive allowance?
No. The simple loss-limit model does not create a positive adjustment in that case.
5. Must both cost inputs relate to the same period?
Yes. Mismatched periods make the comparison unreliable.
6. Is a bank coupon always the accounting cost?
No. Reconcile the applicable effective-interest and other borrowing-cost components.
7. Does paragraph 6A itself prove asset eligibility?
No. Qualifying-asset, attribution and timing tests remain necessary.
8. Can a ready-for-use purchased asset qualify solely because it is foreign funded?
No. Apply the qualifying-asset definition and other requirements.
9. Are extended development stoppages relevant?
Yes. Assess suspension under paragraphs 20–21 rather than capitalising automatically.
10. Does a loan staying outstanding extend capitalisation indefinitely?
No. Assess cessation when substantially all necessary preparation is complete.
11. When does a later gain become an interest adjustment?
On the same borrowing, to the extent required by paragraph 6A(ii) against the earlier unrealised loss adjustment.
12. Can the register combine unrelated loans for convenience?
It must preserve same-borrowing history; netting cannot replace that test.
13. Is an entire later gain always a borrowing-cost reduction?
No. Test the amount against the relevant tracked earlier adjustment.
14. What happens to the remainder of a gain or loss?
Apply the relevant exchange accounting, including Ind AS 21 and any applicable special treatment.
15. Do these examples govern hedge or transition cases?
No. Those require their own applicable accounting analysis.
16. Does accounting capitalisation establish a tax deduction or FEMA permission?
No. Tax and foreign-exchange regulatory compliance are separate assessments.
Conclusion
Ind AS 23 paragraph 6A limits exchange losses treated as borrowing costs by the functional-currency borrowing-cost difference. Track later gains on the same borrowing against earlier unrealised losses so that the eligible adjustment is reversed consistently.