CA Final · Financial Reporting

Ind AS 23 Borrowing Costs: formula sheet

Full chapter guide

Key formulas

Core principle: Borrowing costs directly attributable to a qualifying asset → capitalise; all other borrowing costs → expense; Capitalisation is mandatory, not optional, when the asset is within scope and the conditions are met. The two scope exclusions are covered below.
Borrowing costs may include: Interest (effective interest method, Ind AS 109) + interest on lease liabilities (Ind AS 116) + exchange differences on foreign currency borrowings to the extent regarded as an adjustment to interest costs + other costs incurred in connection with the borrowing of funds; The list is illustrative, not closed. Cost of equity, including non-liability preference capital, is not a borrowing cost.
Qualifying asset test: Asset necessarily takes a substantial period of time to get ready for intended use or sale; Judgement-based. Time must be inherent, not due to delay. Financial assets and assets ready when acquired do not qualify.
Scope exclusions (not required to apply): Qualifying assets measured at fair value; inventories made in large quantities on a repetitive basis; The standard need not be applied to these. This is a scope exclusion, not a failure of the qualifying asset test.
Specific borrowings: Capitalise = Actual borrowing cost incurred in the period − Income from temporary investment of the unspent borrowing; Income is deducted only for the period the money is not yet spent on the asset.
Expenditure on the asset: Weighted expenditure = Σ (Expenditure × Months outstanding ÷ Months in period); Expenditure means payments in cash, transfer of other assets or interest-bearing liabilities. Reduce it by progress payments and grants received.
Capitalisation rate: Rate = Total borrowing cost on general borrowings ÷ Weighted average amount of those general borrowings × 100; Use only general borrowings outstanding in the period. If borrowings were outstanding for the whole period, the weighted average equals the outstanding amount; otherwise compute the weighted average of borrowings outstanding during the period.
General borrowings: Capitalise = Weighted expenditure on the asset (funded from general borrowings) × Capitalisation rate; Deduct only the weighted amount of expenditure actually funded by specific borrowings, matched to the timing of that spending. Do not deduct the whole specific loan if it was only partly spent or spent late.
Ceiling: Amount capitalised ≤ Borrowing costs incurred in the period; Apply separately to general borrowings, and check the total.
Foreign currency borrowings: Capitalisable exchange difference ≤ Interest at the rate on equivalent rupee borrowing − Interest on the foreign currency borrowing; Only the part regarded as an adjustment to interest cost is borrowing cost. The rest is a normal exchange difference in profit or loss.
Commencement date: Date when (expenditure incurred) AND (borrowing costs incurred) AND (activities in progress) are all met; The latest date on which the three conditions are met is the start. Borrowing costs must have been incurred, for example interest has begun to accrue on the loan. Missing even one condition means no capitalisation.
Suspension rule: Extended period with active development suspended → stop capitalising, expense the borrowing costs; Do not suspend for temporary delays that are a necessary part of the process, or while substantial technical and administrative work continues.
Cessation rule: Cease when substantially all activities to prepare the asset for intended use or sale are complete; Minor modifications and routine administrative work do not defer cessation.
Assets completed in parts: Part usable while other parts continue → cease for that part when it is substantially complete; If a part cannot be used until the whole is complete, cease only when the whole is substantially complete.
Capitalisation period: Months capitalised = months from commencement date to cessation date − months of extended suspension; Use this to weight the amount of borrowing cost in month-based questions.
Capitalisation rate for general borrowings: Capitalisation rate = Σ (borrowing costs of general borrowings for the period) ÷ Σ (weighted average of those general borrowings outstanding in the period); Use only general borrowings. Exclude borrowings made specifically for another qualifying asset until that asset is substantially ready for use or sale.
Borrowing cost eligible on general borrowings: Eligible cost = Weighted average expenditure on the qualifying asset (funded by general borrowings) × Capitalisation rate; The amount capitalised cannot exceed the borrowing costs actually incurred in the period.
Borrowing cost eligible on specific borrowings: Eligible cost = Actual borrowing cost incurred on the specific borrowing − Income earned on temporary investment of unused funds; Deduct investment income only for the specific borrowing.
Required disclosures: (a) Accounting policy on borrowing costs; (b) Amount of borrowing costs capitalised during the period; (c) Capitalisation rate used for general borrowings; Items (b) and (c) come from the standard. Item (a) comes from the general policy disclosure requirement.

Quick revision

Borrowing costs directly attributable to a qualifying asset are capitalised; all others are expensed in the period.
A qualifying asset necessarily takes a substantial period to get ready for its intended use or sale.
Financial assets and inventories made routinely in large quantities over a short period are not qualifying assets.
Specific borrowings: capitalise actual cost less investment income on temporary surplus.
General borrowings: capitalisation rate × expenditure on the asset, using weighted averages.
Capitalisation rate is the weighted average of borrowing costs on general borrowings outstanding in the period.
Capitalised general borrowing cost cannot exceed actual borrowing costs incurred in the period.
Capitalisation commences when you incur expenditure on the asset, incur borrowing costs and undertake the activities necessary to prepare the asset for its intended use or sale.
Suspend capitalisation during extended periods when active development is interrupted.
Do not suspend for a temporary delay that is a necessary part of the process.
Capitalisation ceases when substantially all activities needed for intended use or sale are complete.
Disclose the amount capitalised in the period and the capitalisation rate used for general borrowings.

Common mistakes

Treating dividend on equity or non-liability preference shares as a borrowing cost. Fix: Ind AS 23 excludes the cost of equity. Only liability-type finance costs qualify.
Quoting a fixed period such as 12 months as the meaning of substantial period. Fix: The standard states no number. Say it is a matter of judgement based on the facts.
Not deducting investment income on specific borrowings Fix: Always check if the loan was drawn before it was spent. If so, deduct the income earned on the idle funds for that period.
Deducting investment income on general borrowings Fix: The deduction applies only to specific borrowings. For general borrowings you simply apply the capitalisation rate.
Starting capitalisation on the date the loan is taken. Fix: Check all three conditions. If no expenditure has been incurred or no activity has started, the borrowing costs are expensed.
Suspending capitalisation for every stoppage, even a short one. Fix: Suspend only for extended periods when active development is suspended. Short delays, or delays inherent in the process, stay capitalised.
Disclosing the capitalisation rate even when only specific borrowings were used. Fix: State that the rate is disclosed when funds were borrowed generally and used to obtain a qualifying asset.
Treating the whole exchange loss on a foreign currency loan as a borrowing cost. Fix: Capitalise only the part regarded as an adjustment to interest cost. Treat the rest as an ordinary exchange difference under Ind AS 21.

Exam tips

In case-scenario MCQs, first strike out equity costs and financial assets, then test the remaining asset.
Write 'necessarily takes a substantial period' in your answer. Examiners look for this phrase.
Do not quote a fixed month count for substantial period. Say it depends on the facts.
If a question lists components, name interest under the effective interest method, interest on lease liabilities, and exchange differences adjusting interest cost, each with its condition.
End every answer with a clear verdict: capitalise or expense.
Start with a one-line table: loan, rate, dates, amounts. Most marks are for the correct split between specific and general borrowings.
State the capitalisation rate as a percentage and show its working. Examiners award marks for the rate even if the final figure has an error.
In case-scenario MCQs, check the dates first. Suspension, idle periods and completion dates often change the answer.