Compute the base from qualifying expenditure, not from gross project invoices
Ind AS 23 paragraph 18 includes expenditure on a qualifying asset only when it results in cash payments, transfers of other assets or assumption of interest-bearing liabilities. Reduce that expenditure by progress payments and grants received in connection with the asset. Trace the link and date of each receipt; do not net unrelated deposits or use an approved but unreceived grant as if it were a cash receipt under this paragraph.
Read the applicable text: MCA Ind AS 23, paragraphs 12–18 and capitalisation timing MCA Ind AS 20, grants and assistance.
Keep the base, funding and presentation tests separate
Identify the qualifying asset. Under paragraph 17, capitalisation starts only when the entity incurs asset expenditure, incurs borrowing costs and undertakes activities necessary to prepare the asset for use or sale. Review suspension and cessation separately. Where general borrowings finance the asset, paragraph 14 applies a capitalisation rate to qualifying expenditure and limits the amount capitalised to borrowing costs incurred during the period. For specific borrowings, paragraph 12 uses actual borrowing costs incurred on those funds during the period, less income from temporarily investing those borrowings. For general borrowings, use the weighted-average rate under paragraph 14; keep borrowings made specifically for a qualifying asset out of that pool until substantially all the activities to prepare that asset are complete. A funding receipt reduces the paragraph 18 expenditure base where relevant; the grant's financial-statement presentation and income recognition are assessed separately under Ind AS 20.
Build a dated expenditure bridge
Record the event and date for every paid amount, transferred asset or interest-bearing liability. Separately log progress receipts and linked grants. Reconcile payments against previously qualifying interest-bearing liabilities so their settlement does not enter a second time. Keep unpaid non-interest-bearing invoices out of the base until an applicable expenditure event occurs. Distinguish the date a milestone is invoiced from the actual receipt for the reduction.
Use a reasonable average only when it reflects the period
Paragraph 18 notes that the average asset carrying amount during the period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the rate is applied. Where receipts or costs are concentrated, compare an average with a dated schedule and document material differences. The following examples assume an eligible, active asset, simple monthly weighting and a supported illustrative general-borrowing rate where used; apply the period cap independently.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Unpaid invoice is not yet expenditure
Project invoices total ₹70 lakh. ₹45 lakh is paid, ₹10 lakh is an assumed qualifying interest-bearing liability, and ₹15 lakh remains unpaid and non-interest-bearing. The qualifying base before connected receipts is ₹55 lakh.
Illustrative example 2: Same-date net funding
Qualifying expenditure of ₹60 lakh, project progress receipt of ₹18 lakh and linked grant receipt of ₹6 lakh occur at the start of the illustrative year. The net base is ₹36 lakh. At an assumed 10% annual rate, ₹3.6 lakh results before the cap.
Illustrative example 3: Mid-year progress receipt
The opening qualifying expenditure is ₹48 lakh and a linked ₹12 lakh progress payment arrives at the beginning of month seven. The simple weighted base is ₹42 lakh: six months at ₹48 lakh and six at ₹36 lakh. At 10%, the amount before the cap is ₹4.2 lakh.
Illustrative example 4: Approved but not yet received
A company has ₹55 lakh of qualifying expenditure and receives a linked ₹5 lakh grant. A separate approved ₹8 lakh grant has not been received. On these facts the paragraph 18 base is ₹50 lakh; analyse the separate grant receivable under Ind AS 20.
Illustrative example 5: Receipt belongs to another asset
Asset A has ₹42 lakh eligible expenditure and a linked ₹7 lakh receipt. A further ₹4 lakh received belongs to asset B. Asset A's supported base is ₹35 lakh, not ₹31 lakh.
Illustrative example 6: Apply the period cap
An assumed 10% rate on a ₹50 lakh weighted base gives ₹5 lakh, but only ₹4.4 lakh of borrowing costs were incurred during the period. With no competing asset claim on the stated facts, capitalisation is limited to ₹4.4 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Define the qualifying asset | Project and timeline file |
| 2 | Verify commencement conditions | Activity, expenditure and financing evidence |
| 3 | Identify qualifying expenditure events | Cash, transfers and interest-bearing obligations |
| 4 | Exclude unsupported invoices | Supplier balance and terms |
| 5 | Trace connected progress receipts | Contract and bank match |
| 6 | Trace grants actually received | Grant and bank ledger |
| 7 | Prevent repeat inclusion on settlement | Liability movement schedule |
| 8 | Compute time weighting | Dated expenditure and receipt bridge |
| 9 | Apply the financing method and cap | Borrowing pool and actual costs |
| 10 | Reconcile reporting and disclosures | Asset, borrowing cost and grant schedules |
Sixteen practitioner FAQs
1. Does every supplier invoice enter the base immediately?
Check the expenditure events specified in paragraph 18.
2. Can a non-cash asset transfer qualify?
Yes, if it is a qualifying expenditure event under the paragraph.
3. What about an interest-bearing supplier liability?
Assess whether assumption of that liability meets the provision.
4. Does eventual payment create a second expenditure event for the same amount?
Reconcile to avoid including it twice.
5. Do unrelated customer receipts reduce the base?
Use the connection to the qualifying asset.
6. When is a progress receipt relevant?
Use actual receipt and document its link to the asset.
7. What if a grant is approved but unpaid?
Do not assume it is received for the paragraph 18 reduction.
8. Does this decide grant income recognition?
No. Apply Ind AS 20 separately.
9. Can a late receipt be deducted for the entire year automatically?
Reflect the supported period and chronology.
10. When is an average carrying amount useful?
Where it reasonably approximates the weighted expenditure.
11. Is the general-borrowing rate always the correct method?
Identify general and specific borrowings separately.
12. What limits the general-borrowing calculation?
Apply the borrowing costs incurred ceiling for the period.
13. Does the base determine when capitalisation starts?
Apply the separate commencement conditions.
14. How should a shared receipt be allocated?
Use a supported link or allocation rather than an arbitrary split.
15. What about costs already capitalised last year?
Consider the paragraph's average carrying amount guidance and reconcile the opening base.
16. What closes the calculation?
Evidence of qualifying events, connected receipts, dates, rate and the actual borrowing cost cap.
Official sources
MCA Ind AS 23, paragraphs 12–18 and capitalisation timing MCA Ind AS 20, grants and assistance