Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 23 - Borrowing Costs

Indian equivalent: Ind AS 23 - Borrowing Costs

Objective and scope

IAS 23 decides whether the interest and other costs of borrowing money should be added to the cost of an asset (capitalised) or charged straight to profit as an expense - the answer depends on whether the money funded a qualifying asset.

Core principle

Normally interest is just an expense. But if you borrow to build something that takes a long time - a factory, a ship, a power plant - IAS 23 says the interest during construction is part of the cost of that asset, because it was genuinely necessary to bring the asset into existence.

Defined terms and technical terminology

Term	Technical meaning
Borrowing costs	Interest and other costs an entity incurs in borrowing funds (interest, amortisation of discounts, certain finance charges).
Qualifying asset	An asset that necessarily takes a substantial period of time to get ready for its intended use or sale (e.g., a building, a large machine, inventories that take long to produce).
Capitalisation	Adding the borrowing cost to the carrying amount of the asset instead of expensing it.
Capitalisation rate	The weighted-average borrowing rate applied when general (not specific) borrowings fund the asset.

Application and worked illustrations

The core rule

Borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset must be capitalised as part of that asset's cost. All other borrowing costs are expensed in the period incurred. Capitalisation begins when expenditure and borrowing costs are being incurred and activities to prepare the asset are underway; it is suspended during extended interruptions; and it ceases when the asset is substantially ready.

Worked example 1 - specific borrowing

A company borrows ₹1,00,00,000 at 10% specifically to build a factory that takes 18 months. During the year it incurs ₹10,00,000 interest. Because the factory is a qualifying asset and the loan is specific to it, the ₹10,00,000 is capitalised into the factory's cost (less any income earned from temporarily investing unused loan funds). Once the factory is ready, later interest is expensed.

Journal entry - Capitalise construction-period interest
Account	Debit (₹)	Credit (₹)
Factory under construction (asset)	10,00,000
Interest payable / Cash		10,00,000

Worked example 2 - general borrowing

If the company funds construction from its general pool of borrowings rather than a specific loan, it applies the capitalisation rate (the weighted-average rate on its general borrowings) to the expenditure on the asset. If ₹40,00,000 was spent on the qualifying asset and the weighted-average rate is 9%, it capitalises ₹40,00,000 × 9% = ₹3,60,000.

Common mistake: capitalising interest on an asset that is ready for use or bought off-the-shelf. Only qualifying assets (needing a substantial period) attract capitalisation, and only during the active construction period.

IND AS LINK

Ind AS 23 is aligned with IAS 23 - capitalisation of borrowing costs on qualifying assets is mandatory, not optional.

Further worked illustrations

Extra numeric example - interest earned on unused loan funds

A company borrows ₹2,00,00,000 specifically to build a plant, incurring ₹18,00,000 interest during construction. While waiting to spend it, it temporarily parks part of the loan and earns ₹2,00,000 interest income. IAS 23 says capitalise the interest cost net of this investment income: ₹18,00,000 − ₹2,00,000 = ₹16,00,000 capitalised into the plant.

INDIAN REGULATORY CONTEXT

For Indian infrastructure and real-estate companies, borrowing-cost capitalisation under Ind AS 23 is a big number - interest during the multi-year construction of a highway, power plant or township is added to the asset. When a project is paused (say, due to a permit delay) for an extended period, capitalisation must be suspended for that time.

TECHNICAL EDGE CASE

Borrowing costs aren't only for fixed assets. A whisky distiller ages spirits for 12 years, and a shipbuilder takes 3 years per vessel - these inventories take a substantial period to get ready, so they are qualifying assets and their construction-period interest is capitalised into inventory. But ordinary stock produced quickly and in bulk does not qualify.