1. What IND AS 23 Covers — Objective and Scope
IND AS 23 requires an entity to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, as part of the cost of that asset. All other borrowing costs are expensed in the period they are incurred. The standard does not apply to the actual or imputed cost of equity, including preference share capital not classified as a liability, or (unless an entity chooses to apply IND AS 23) to qualifying assets measured at fair value, such as biological assets, or inventories manufactured in large quantities on a repetitive basis.
2. What Is a Qualifying Asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances, this can include manufacturing plants, power generation facilities, investment properties under construction, and inventories that require a substantial production period (e.g. maturing whisky or wine).
Financial assets, and inventories manufactured or otherwise produced in large quantities on a repetitive basis over a short period, are not qualifying assets — a standard production run of consumer goods completed in days or weeks doesn't meet the "substantial period" test, regardless of how it's financed. Assets that are ready for their intended use or sale when acquired are also not qualifying assets.
3. What Counts as a Borrowing Cost
Borrowing costs are interest and other costs incurred in connection with the borrowing of funds, and may include: interest expense calculated using the effective interest method under IND AS 109; finance charges on lease liabilities recognised under IND AS 116; and exchange differences arising from foreign currency borrowings, to the extent they are regarded as an adjustment to interest costs.
4. Specific Borrowings vs General Borrowings
Specific borrowings
Where funds are borrowed specifically for the purpose of obtaining a particular qualifying asset, the amount eligible for capitalisation is the actual borrowing costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of those funds before they are spent on the asset.
General borrowings
Where funds are borrowed generally and used, in part, to obtain a qualifying asset, the amount eligible for capitalisation is determined by applying a weighted average capitalisation rate to the expenditure on that asset — the rate being the weighted average of borrowing costs applicable to all borrowings outstanding during the period, other than borrowings made specifically for a particular qualifying asset. The amount capitalised in a period cannot exceed the total borrowing costs actually incurred in that period.
5. When to Start, Suspend and Cease Capitalisation
Capitalisation begins when all three of these conditions are met simultaneously:
- Expenditure for the asset is being incurred
- Borrowing costs are being incurred
- Activities necessary to prepare the asset for its intended use or sale are in progress
Capitalisation is suspended during extended periods in which active development is interrupted — but not for temporary delays that are a necessary part of the process (e.g. a monsoon-season pause that is normal for a particular construction project in that geography, or the time taken for inventory to mature or age as part of the production process). Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete — routine administrative work or minor finishing touches don't extend the capitalisation period. Where a qualifying asset is completed in parts that can each be used independently while construction continues on the rest, capitalisation ceases for each completed part as it becomes ready, even though the whole project isn't finished.
6. Worked Example — General Borrowings Capitalisation
Scenario: Meridian Infra Ltd is constructing a factory (a qualifying asset), funded from its general pool of borrowings — no loan was taken specifically for this project. Outstanding general borrowings during the year: a ₹3,00,00,000 term loan at 11% p.a., and a ₹2,00,00,000 working capital facility at 13% p.a., both outstanding the full year. Expenditure on the factory during the year: ₹40,00,000 on 1 April, ₹60,00,000 on 1 July, and ₹20,00,000 on 1 October (financial year 1 April – 31 March).
Step 1 — Weighted Average Capitalisation Rate
| Borrowing | Amount (₹) | Rate | Interest (₹) |
|---|---|---|---|
| Term loan | 3,00,00,000 | 11% | 33,00,000 |
| Working capital facility | 2,00,00,000 | 13% | 26,00,000 |
| Total (₹5,00,00,000 borrowings) | 59,00,000 |
Weighted average capitalisation rate = ₹59,00,000 ÷ ₹5,00,00,000 = 11.8%
Step 2 — Weighted Average Accumulated Expenditure
| Expenditure date | Amount (₹) | Months outstanding | Weighted amount (₹) |
|---|---|---|---|
| 1 April | 40,00,000 | 12/12 | 40,00,000 |
| 1 July | 60,00,000 | 9/12 | 45,00,000 |
| 1 October | 20,00,000 | 6/12 | 10,00,000 |
| Weighted average accumulated expenditure | 1,20,00,000 | 95,00,000 |
Step 3 — Borrowing Costs to Capitalise
Borrowing costs eligible for capitalisation = ₹95,00,000 × 11.8% = ₹11,21,000 — well within the ₹59,00,000 total borrowing costs actually incurred, so the full amount can be capitalised.
The remaining ₹47,79,000 (₹59,00,000 − ₹11,21,000) of interest for the year — relating to borrowings that funded working capital and other general purposes, not this qualifying asset — is expensed as finance cost in the normal course.
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| Aspect | Old IGAAP (AS 16) | IND AS 23 |
|---|---|---|
| Core capitalisation principle | Similar — capitalise borrowing costs directly attributable to a qualifying asset | Unchanged in substance, broadly converged |
| Suspension during interruptions | Less detailed guidance on what counts as a "necessary" delay vs a genuine interruption | More explicit examples distinguishing normal process delays from extended interruptions requiring suspension |
| Investment income on specific borrowings | Similar treatment — deducted from capitalisable cost | Same, unchanged |
| Exchange differences on foreign currency borrowings | Historically allowed a broader capitalisation option in some circumstances | Capitalised as a borrowing cost adjustment only to the extent they represent an adjustment to interest costs |
| Scope for fair-valued qualifying assets | Less explicit | Explicit carve-out (capitalisation optional) for qualifying assets measured at fair value, e.g. certain biological assets |
8. Disclosures Required
An entity discloses the amount of borrowing costs capitalised during the period, and the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation where that rate was calculated by reference to general borrowings (i.e. the weighted average rate, not a specific borrowing's actual rate).
9. Common Mistakes CAs Make
Error 1 — Capitalising borrowing costs on inventory produced in short, repetitive production runs. Even if financed by debt, standard inventory manufactured in a matter of days or weeks doesn't meet the "substantial period" test and is not a qualifying asset.
Error 2 — Continuing to capitalise interest after construction is substantially complete. Once substantially all the activities to get the asset ready are done, capitalisation must stop — waiting for a formal completion certificate or minor finishing work to conclude before ceasing capitalisation overstates the asset's cost.
Error 3 — Not deducting investment income earned on temporarily parked specific-borrowing funds. Interest income earned while unspent loan proceeds sit in a bank account reduces the net borrowing cost eligible for capitalisation — it isn't separately recognised as investment income.
Error 4 — Capitalising the full interest on a specific loan rather than only the amount actually incurred on funds already spent. The capitalisation calculation should track expenditure incurred, not the entire facility drawn — over-capitalising by ignoring undrawn or unspent portions inflates the asset's cost.
Error 5 — Treating a routine, expected construction pause (e.g. a seasonal weather delay typical for the project) as requiring suspension of capitalisation. Only extended interruptions to active development trigger suspension — delays that are a normal part of the asset-preparation process do not.
10. FAQs
What is a qualifying asset under IND AS 23?
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale — typical examples include manufacturing plants, power generation facilities, investment properties, and inventories that require a substantial production period. Financial assets, and inventories that are manufactured or produced in large quantities on a repetitive basis over a short period, are not qualifying assets.
How is the capitalisation rate determined for general borrowings?
Where funds are borrowed generally and used to obtain a qualifying asset, the capitalisation rate is the weighted average of the borrowing costs applicable to all borrowings outstanding during the period, other than borrowings made specifically for the purpose of obtaining a particular qualifying asset. The amount of borrowing costs capitalised cannot exceed the total borrowing costs actually incurred during the period.
What are the three conditions for capitalising borrowing costs?
Capitalisation begins only when all three conditions are met simultaneously: expenditure for the qualifying asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress. Capitalisation is suspended during extended periods in which active development is interrupted, and ceases when substantially all the activities necessary to prepare the asset are complete.
How is income earned on temporarily investing specific borrowings treated?
Where funds are borrowed specifically for a qualifying asset, any investment income earned on the temporary investment of those funds (before they are spent on the asset) is deducted from the borrowing costs eligible for capitalisation for that period, not recognised separately as investment income.
When does capitalisation of borrowing costs cease?
Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete, even if routine administrative work continues or minor modifications remain outstanding. Where a qualifying asset is completed in parts that can be used independently while construction continues on other parts, capitalisation ceases for each part as it is completed.
Is IND AS 23 the same as IAS 23?
IND AS 23 is India's converged version of IAS 23 and follows the same qualifying asset definition, the specific vs general borrowing capitalisation methodology, and the start/suspend/cease rules. It replaces the older Indian AS 16, which was largely similar in substance but did not mandate capitalisation as tightly as IAS 23/IND AS 23 and had less detailed guidance on suspension during extended interruptions.