Ind AS 23 — Borrowing Costs

Ind AS 23 prescribes the accounting treatment for borrowing costs. Its core principle is short and settled: borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset and are capitalised; all other borrowing costs are recognised as an expense. This standard is one of the most closely converged with its AS counterpart (AS 16), so for most situations the accounting outcome is the same under both.

Objective and scope

The objective is to prescribe the accounting treatment for borrowing costs. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. They include interest expense calculated using the effective interest method (under Ind AS 109), and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs. The standard need not be applied to borrowing costs directly attributable to the acquisition, construction, or production of certain assets measured at fair value, or to inventories manufactured in large quantities on a repetitive basis.

The core rule

Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalised as part of the cost of that asset. Other borrowing costs are recognised as an expense in the period in which they are incurred. So capitalisation is the exception, available only for qualifying assets and only for the borrowing costs directly attributable to them.

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. Examples include manufacturing plants, power generation facilities, intangible assets under development, investment properties under construction, and inventories that require a substantial period to bring to a saleable condition. Assets ready for their intended use or sale when acquired, and assets routinely produced over a short period in large quantities, are not qualifying assets. The "substantial period of time" test is the same as under AS 16.

The amount eligible for capitalisation

Where funds are borrowed specifically to obtain a 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 borrowings.

Where funds are borrowed generally and used to obtain a qualifying asset, the amount eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount capitalised during a period must not exceed the amount of borrowing costs incurred during that period.

Commencement, suspension, and cessation

Commencement. Capitalisation begins on the commencement date, which is when the entity first meets all of the following: it incurs expenditures for the asset; it incurs borrowing costs; and it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Suspension. Capitalisation is suspended during extended periods in which active development of a qualifying asset is suspended. (Temporary delays that are a necessary part of the process, or brief interruptions, do not trigger suspension.)

Cessation. Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Where construction is completed in parts and each part is capable of being used while construction continues on others, capitalisation of borrowing costs ceases for a part when substantially all the activities necessary to prepare that part are complete.

Disclosure

The 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. These disclosures let users understand how much financing cost has been added to asset values rather than expensed.

A full worked example

Unlike a specific loan, general borrowings need a capitalisation rate. A company funds construction of a qualifying asset partly from its general borrowing pool. During the year it spends ₹60,00,000 on the asset (assume evenly, so average ₹30,00,000). Its general borrowings are: a ₹50,00,000 loan at 9% and a ₹30,00,000 loan at 11%. How much is capitalised?

Step 1 — Compute the weighted-average capitalisation rate of the general borrowing pool.

Loan	Amount (₹)	Rate	Interest (₹)
Loan A	50,00,000	9%	4,50,000
Loan B	30,00,000	11%	3,30,000
Total	80,00,000	—	7,80,000
Capitalisation rate	—	7,80,000 / 80,00,000	9.75%

Step 2 — Apply the rate to the expenditure on the asset. The rate is applied to the average carrying amount of the asset during the period.

Item	Working	Amount (₹)
Average expenditure on asset	—	30,00,000
Capitalisation rate	—	9.75%
Borrowing cost capitalised	30,00,000 × 9.75%	2,92,500

Step 3 — The journal entry.

Account	Debit (₹)	Credit (₹)
Capital work-in-progress	2,92,500
Interest expense / payable		2,92,500

The key mechanic for general borrowings is the capitalisation rate — the weighted average cost of the borrowing pool (9.75% here) — applied to the money tied up in the qualifying asset. The amount capitalised is capped at the actual borrowing costs incurred in the period. For a specific loan the actual rate is used instead. Ind AS 23 aligns closely with AS 16.

How Ind AS 23 compares with AS 16

Ind AS 23 and AS 16 are very closely aligned — the same core principle (capitalise borrowing costs directly attributable to a qualifying asset, expense the rest), the same definition of a qualifying asset, the same treatment of specific and general borrowings with a capitalisation rate, and the same rules on commencement, suspension, and cessation. This is one of the most converged pairs in the two frameworks. The differences are in detailed drafting — for example, Ind AS 23 refers to interest computed using the effective interest method under Ind AS 109 (whereas AS 16 refers to interest and other costs more generally), and there are differences in the detailed treatment of certain foreign exchange differences on borrowings. For most situations, however, the capitalised amount is the same under both.

Common pitfalls

Recurring issues include capitalising borrowing costs on assets that are not qualifying assets; failing to deduct investment income earned on the temporary investment of specific borrowings; not suspending capitalisation during extended interruptions; continuing to capitalise after the asset is substantially complete; and misapplying the capitalisation rate for general borrowings.

Why this is cleaner on a unified system

Determining which borrowing costs to capitalise requires linking specific and general borrowings to expenditure on qualifying assets over time — far more reliable when the loan records, project or asset costs, and the ledger sit in one connected system. When borrowing costs and asset expenditure flow through a single source of truth, applying the capitalisation rate, tracking commencement and cessation, and reflecting the capitalised amount in the asset's cost is more straightforward than reconciling separate loan and project schedules against the accounts.

This article is a detailed educational summary of Ind AS 23 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 23 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.