Direct answer: Under Ind AS 23, general-borrowing capitalisation uses a weighted average of applicable borrowing costs, applied to qualifying-asset expenditure for the relevant period. A simple average of loan rates is usually wrong. A borrowing raised specifically for an asset is excluded from the general pool until substantially all necessary preparation activities for that asset are complete; an outstanding balance can then enter the general pool.
This article applies Ind AS 23, Borrowing Costs, in ICAI’s 2025–26 Ind AS compendium to FY 2025–26 examples for an entity required to follow Ind AS. The standard and examples were checked on 23 October 2026. This is a detailed general-pool working paper, not an AS 16 applicability guide or a conclusion that all construction expenditure qualifies for capitalisation.
Establish an eligible asset and a capitalisation window
A qualifying asset necessarily takes a substantial period to get ready for its intended use or sale. Assets ready for use or sale when acquired, and financial assets, are not qualifying assets merely because borrowing funds their acquisition. Check the standard’s scope exceptions, including the specified treatment of qualifying assets measured at fair value and inventories produced in large quantities on a repetitive basis.
Paragraph 17 starts capitalisation only when all three conditions exist: expenditure on the asset, borrowing costs, and activities necessary to prepare the asset for intended use or sale. Necessary technical and administrative work can precede physical construction; conversely, simply holding land without preparation activity does not establish an active capitalisation period.
Paragraphs 20–22 distinguish an extended suspension of active development from a necessary temporary delay or continuing substantial technical or administrative work. Stop capitalisation when substantially all necessary preparation activities are complete. Outstanding invoices or minor routine work do not automatically prolong that date. Where independent parts can be used while construction of others continues, assess the separate-part rule in paragraph 24.
Build the borrowing pool by period, not by year-end labels
Borrowing costs can include effective-interest-method interest under Ind AS 109, relevant lease interest, and exchange differences only to the extent treated as an adjustment to interest costs under Ind AS 23. A coupon rate is not always the accounting borrowing cost when fees or other effective-interest adjustments exist. The illustrations assume no such differences unless expressly stated.
For specific borrowings, paragraph 12 uses actual borrowing costs for the eligible period less income from temporary investment of those borrowings. For general borrowings, paragraph 14 uses a capitalisation rate based on the weighted average borrowing costs applicable to outstanding borrowings during the period. Specific funding is excluded until substantially all activities necessary to prepare its identified asset are complete. Keep an explicit migration date when the asset becomes ready and the debt remains outstanding.
A completed asset’s outstanding loan does not remain excluded forever merely because the bank originally described its purpose as project finance. Rebuild the pool from the readiness date. Equally, do not insert that loan into earlier periods while its original qualifying asset was still being prepared. For a group calculation, paragraph 15 requires judgement about using parent-and-subsidiary borrowings or each subsidiary’s own borrowing costs; do not select whichever rate gives the larger asset value.
Weight expenditure and apply the ceiling as a control
Under paragraph 18, qualifying expenditure reflects payments of cash, transfers of other assets or assumption of interest-bearing liabilities, reduced by relevant progress payments and grants received in connection with the asset. Paragraph 18 permits an average carrying amount, including previously capitalised borrowing costs, as a reasonable approximation in appropriate circumstances. Document the method, opening balances and timing rather than multiplying year-end capital work in progress by a full-year rate.
The examples use expressly assumed monthly weighting and constant balances. Actual transactions may require more granular time segments to reflect drawdowns, repayment, readiness or suspension. A time-weighted rate and time-weighted expenditure must use compatible periods: an annualised half-year borrowing rate still needs half-year application to the expenditure.
Paragraph 14 also limits the capitalised amount during a period to borrowing costs incurred during that period. This is a ceiling, not authority to capitalise every rupee up to it. The qualifying asset, expenditure linkage, timing and other recognition conditions must still support the amount. Reconcile capitalised plus expensed borrowing costs to the ledger and disclose the amount capitalised and the capitalisation rate under paragraph 26.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Weight the borrowing costs, not just the two rates
Assume general loans of ₹8,000,000 at 8% and ₹12,000,000 at 10% remain outstanding throughout FY 2025–26. Accounting borrowing costs equal interest and there are no fees. Costs are ₹640,000 + ₹1,200,000 = ₹1,840,000. The annual capitalisation rate is ₹1,840,000 / ₹20,000,000 = 9.2%, not the unweighted 9% average.
Illustrative example 2: Apply the rate to time-weighted qualifying expenditure
Using the general pool in example 1, assume ₹5,000,000 eligible expenditure on 1 April 2025 and a further ₹5,000,000 on 1 October 2025. All commencement conditions exist on 1 April and preparation continues through 31 March 2026. On the assumed monthly basis, weighted expenditure is ₹5,000,000 × 12/12 + ₹5,000,000 × 6/12 = ₹7,500,000. At 9.2%, eligible capitalisation is ₹690,000, subject to all remaining conditions.
Illustrative example 3: Reduce expenditure for linked grants and progress payments
Modify example 2: a linked ₹1,000,000 grant is received with the April expenditure and a linked ₹2,000,000 progress payment with the October expenditure. Assume both meet paragraph 18’s reduction requirement. Weighted net expenditure becomes ₹4,000,000 + ₹3,000,000 × 6/12 = ₹5,500,000. Applying 9.2% gives ₹506,000, which is ₹184,000 below example 2. Do not reduce it again elsewhere for the same receipts.
Illustrative example 4: Keep a specific loan outside the general pool during preparation
Assume a ₹6,000,000 specific loan finances a qualifying asset throughout an eligible construction period. Actual borrowing costs are ₹600,000 and qualifying temporary investment income from those funds is ₹60,000. The paragraph 12 amount is ₹540,000. This specific borrowing remains excluded from the general pool while its identified asset is still being prepared.
Illustrative example 5: Use the actual-cost ceiling without creating entitlement
Assume a worksheet mechanically applies example 1’s 9.2% rate to ₹30,000,000 weighted expenditure, producing ₹2,760,000. Actual borrowing costs in the relevant period are only ₹1,840,000. Capitalisation cannot exceed ₹1,840,000, and may be lower after examining funding, qualifying expenditure and timing. The ₹920,000 excess is a warning to review the calculation, not an amount that can be capitalised.
Illustrative example 6: Suspend an extended inactive development period
Assume a ₹10,000,000 specific loan incurs ₹1,200,000 evenly over twelve months, with no investment income. The qualifying project has an extended July–September suspension with no substantial necessary technical or administrative work. Assuming all other months qualify, three months’ ₹300,000 is expensed and nine months’ ₹900,000 is capitalised. A necessary temporary delay could lead to different treatment; do not apply this result to every construction pause.
Illustrative example 7: Move an outstanding completed-asset loan into the later general pool
A ₹6,000,000 specific loan at 10% relates to an asset substantially ready on 30 September 2025 and remains outstanding thereafter. Assume it enters the general pool on 1 October alongside an ₹8,000,000 general loan at 8%. For October–March, costs are ₹300,000 + ₹320,000 = ₹620,000 on constant principal of ₹14,000,000. The six-month rate is 4.428571%, equivalent to an annualised 8.857143%. For another qualifying asset with ₹4,000,000 eligible expenditure outstanding throughout those six months, capitalisation is ₹4,000,000 × (₹620,000 / ₹14,000,000) = ₹177,142.86, rounded to paise. Applying the annualised rate for a full year would double count time.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm the entity applies Ind AS and the asset is within scope. | Reporting-framework and qualifying-asset assessment. |
| 2 | Identify actual borrowing costs, including effective-interest adjustments. | Loan ledger, amortisation schedules and cost components. |
| 3 | Separate specific and general borrowings by time segment. | Funding-purpose evidence and pool membership schedule. |
| 4 | Verify the three commencement conditions and their first common date. | Expenditure, financing and preparation-activity records. |
| 5 | Calculate eligible expenditure net of relevant receipts. | Payment dates, grants and progress-payment reconciliation. |
| 6 | Document consistent time-weighting for balances, costs and expenditure. | Rate calculation and independent recomputation. |
| 7 | Assess suspension and readiness dates, including usable separate parts. | Project evidence and reasoned status assessment. |
| 8 | Move outstanding specific debt into the general pool when required. | Asset readiness sign-off and dated loan migration entry. |
| 9 | Apply the actual-cost ceiling and reconcile capitalised plus expensed costs. | Ledger bridge, exceptions and ceiling calculation. |
| 10 | Prepare the required amount and capitalisation-rate disclosures. | Paragraph 26 disclosure support and final working paper. |
Sixteen practitioner FAQs
1. Can every long-term asset attract capitalised interest?
No. Establish a qualifying asset, scope and the recognition conditions. Financing alone does not make an asset qualify.
2. Is a simple average of loan rates acceptable?
It will be wrong when loan sizes or applicable periods differ. Calculate the relevant weighted borrowing costs.
3. Is the bank coupon always the accounting cost?
No. Effective-interest adjustments and eligible components may change the accounting borrowing cost.
4. Are all exchange losses eligible?
No. Only the portion treated as an adjustment to interest costs under the standard qualifies as a borrowing-cost component.
5. When does capitalisation begin?
When expenditure, borrowing costs and necessary preparation activities all exist. Identify their first common date.
6. Must physical construction have begun?
Not necessarily. Necessary technical and administrative activities can count, depending on the facts.
7. Can land held without active preparation qualify throughout the holding period?
Not merely because interest is incurred. Evaluate the necessary preparation activities and commencement conditions.
8. How is temporary investment income treated on a specific loan?
Paragraph 12 deducts relevant income from temporary investment of those specific borrowings when determining the capitalisable amount.
9. Do customer progress payments affect expenditure?
Relevant progress payments reduce expenditure under paragraph 18. Identify timing and avoid duplicate adjustments.
10. Does every construction delay require suspension?
No. Distinguish an extended suspension of active development from necessary temporary delay or ongoing substantial necessary work.
11. Can capitalisation continue until every supplier invoice is paid?
Not simply for that reason. Cessation is linked to substantially completing preparation for intended use or sale.
12. Is a specific loan excluded forever?
No. Once the identified asset is substantially ready, an outstanding loan can enter the general pool under paragraph 14.
13. Can the half-year annualised rate be used for twelve months?
Only if the underlying period supports that application. A half-year exposure requires compatible half-year weighting.
14. Does the borrowing-cost ceiling establish the capitalised amount?
No. It limits an otherwise supported amount. Recognition, timing and qualifying expenditure may produce a lower amount.
15. Can group borrowing rates be chosen freely?
No. Assess the appropriate basis under paragraph 15 and document the entity or group facts supporting it.
16. What must the disclosure working paper support?
The borrowing-cost amount capitalised during the period and the capitalisation rate used, reconciled to the underlying computation.
Conclusion
A defensible general-borrowing schedule follows the asset’s preparation period and the changing loan pool. Weight both financing and eligible expenditure, distinguish suspension from completion, and reconcile the final amount to actual costs and disclosures.