CMA Final · Corporate Financial Reporting

Borrowing Costs (Ind AS 23): formula sheet

Full chapter guide

Key formulas

Definition of borrowing costs: Borrowing costs = interest and other costs incurred in connection with the borrowing of funds; Includes effective-interest-method interest, lease liability interest and exchange differences treated as an interest adjustment.
Definition of qualifying asset: Qualifying asset = asset that necessarily takes a substantial period of time to get ready for its intended use or sale; Both parts matter: the period must be substantial and it must be necessary.
Exchange difference limit (para 6A(i)): Adjustment to interest ≤ Exchange loss, and the loss counted ≤ (Cost of borrowing in functional currency − Cost of borrowing in foreign currency); Read as: the loss is treated as interest only up to the difference between the two borrowing costs. The excess stays in profit or loss.
Reversal of exchange gain (para 6A(ii)): Later gain on same borrowing treated as interest adjustment up to the loss earlier treated as interest adjustment; Gain beyond that amount is not an adjustment to interest.
Scope exclusions (para 4): Not required: (a) qualifying asset measured at fair value; (b) inventories made in large quantities on a repetitive basis; These are optional exclusions for borrowing costs directly attributable to such assets.
Core rule: Directly attributable to a qualifying asset → capitalise; all other borrowing costs → expense; Paragraph 8. Capitalise when probable future economic benefits and reliably measurable (paragraph 9).
Specific borrowings: Eligible cost = Actual borrowing cost incurred in the period − Investment income on temporary investment of those funds; Paragraph 12. Applies to funds borrowed specifically for the qualifying asset.
General borrowings: Eligible cost = Capitalisation rate × Expenditure on the asset; Paragraph 14. Expenditure is usually weighted for the period outstanding.
Capitalisation rate: Weighted average of borrowing costs on all general borrowings outstanding during the period; Exclude specific borrowings for the asset until substantially all activities to prepare it are complete.
Ceiling: Amount capitalised in a period ≤ Borrowing costs incurred in that period; Paragraph 14. Applies to the general-borrowings calculation.
Exchange differences: Capitalisable exchange loss ≤ Interest cost in foreign currency borrowing − Interest cost on equivalent functional-currency borrowing; Paragraph 6A(i). Later gains are adjusted to interest to the extent of the loss previously so treated (6A(ii)).
Specific borrowings: eligible cost: Eligible cost = Actual borrowing cost incurred in the period − Investment income on temporary investment of the unused funds; Para 12 and 13. Apply only for the period the asset qualifies for capitalisation.
Capitalisation rate (general borrowings): Capitalisation rate = (Borrowing costs on general borrowings for the period ÷ Weighted average general borrowings outstanding) × 100; Para 14. Exclude borrowings made specifically for a qualifying asset while that asset is still being prepared.
Eligible cost (general borrowings): Eligible cost = Weighted average expenditure on the asset (funded by general borrowings) × Capitalisation rate; Weight each expenditure by months outstanding ÷ months in the period.
Ceiling: Amount capitalised ≤ Borrowing costs actually incurred in the period; Para 14. Apply separately to the general borrowings pool.
Expenditure: Expenditure = Cash paid + other assets transferred + interest-bearing liabilities assumed − progress payments and grants received; Para 18. The average carrying amount is normally a reasonable approximation.
Commencement date (para 17): Expenditure incurred AND borrowing costs incurred AND necessary activities undertaken; All three must be met. The commencement date is the date the last of them is first satisfied.
Suspension (paras 20-21): Suspend during extended periods of suspended active development; Do not suspend for substantial technical or administrative work, or for temporary delays that are a necessary part of the process.
Cessation (para 22): Stop when substantially all activities to prepare the asset are complete; Minor remaining work does not delay cessation.
Cap on amount (para 14): Borrowing costs capitalised in a period ≤ borrowing costs incurred in that period; Applies to general borrowings computed using a capitalisation rate.
Specific borrowing (para 12): Eligible cost = actual borrowing costs incurred − investment income on temporary investment; Calculate only for the capitalisation period.
Disclosure under Ind AS 23 (para 26): Disclose (a) borrowing costs capitalised in the period; (b) capitalisation rate used; Both items are required. Mention the rate even when you only show the amount.
Capitalisation rate (para 14): Capitalisation rate = Σ borrowing costs on general borrowings ÷ Σ weighted average general borrowings outstanding; Exclude specific borrowings for a qualifying asset until substantially all activities are complete.
Eligible cost on general borrowings: Expenditure on asset × capitalisation rate; Average carrying amount including borrowing costs already capitalised is normally a reasonable approximation of expenditure (para 18).
Ceiling on capitalisation: Amount capitalised ≤ borrowing costs incurred in the period; Para 14 states this ceiling for the borrowing costs an entity capitalises in a period. It is not limited to general borrowings.
Exchange difference adjustment (para 6A(i)): Adjustment = exchange loss, to the extent it does not exceed the difference between the cost of borrowing in functional currency and the cost of borrowing in a foreign currency; This is a limit on the exchange loss. Only the part of the exchange loss within this limit is treated as an adjustment to interest.

Quick revision

Borrowing costs are interest and other costs incurred in connection with borrowing funds.
A qualifying asset necessarily takes a substantial period of time to get ready for its intended use or sale.
Directly attributable borrowing costs are those that would have been avoided if the expenditure had not been made.
Capitalise when future economic benefits are probable and the cost can be measured reliably.
Specific borrowings: actual cost less investment income on temporary investment.
General borrowings: capitalisation rate × expenditure on the asset.
The capitalisation rate is the weighted average of borrowing costs on all borrowings outstanding in the period, excluding specific borrowings for the asset until it is substantially complete.
Capitalised cost can never exceed the borrowing costs incurred in the period.
Commencement needs all three: expenditure, borrowing costs and preparation activities.
Suspend capitalisation during extended periods when active development is suspended.
Expenditure is reduced by progress payments and grants received.
Disclose the amount capitalised in the period and the capitalisation rate used.

Common mistakes

Treating every asset under construction as a qualifying asset. Fix: Check that the time to get ready is substantial and necessary. A short job does not qualify.
Treating the whole exchange loss on a foreign currency loan as a borrowing cost. Fix: Capitalise only up to the difference between the cost of borrowing in functional currency and in foreign currency. The rest goes to profit or loss.
Capitalising interest on every loan, regardless of purpose. Fix: Capitalise only costs that would have been avoided had the asset expenditure not been made.
Forgetting to deduct investment income on unspent specific borrowings. Fix: Always apply the formula: actual cost less temporary investment income for specific borrowings.
Capitalising full specific interest and ignoring income on idle funds Fix: Always ask whether any money was parked in deposits before it was spent. If yes, deduct the income.
Including the specific loan in the capitalisation rate Fix: Exclude loans taken specifically for the qualifying asset while it is being prepared (para 14).
Starting capitalisation on the date the loan is drawn. Fix: Check all three conditions. Loan drawn but no expenditure or activity means no capitalisation yet.
Ignoring permit and design work as qualifying activity. Fix: Remember para 19: technical and administrative work before construction, such as obtaining permits, counts.
Listing extra disclosures such as interest expense by loan or qualifying asset names as mandatory under Ind AS 23. Fix: Limit the mandatory list to the two items in paragraph 26.
Forgetting to disclose the capitalisation rate. Fix: Always write the rate as a separate line in your answer.

Exam tips

Quote the definitions in the standard's own words. Examiners give marks for the exact tests.
In case scenarios, first list which items are borrowing costs and which assets are qualifying assets, then move to numbers.
For foreign currency loans, always compute the difference between the two interest costs before deciding the exchange loss to treat as borrowing cost.
Remember that the scope exclusions use the words not required to apply.
Start every answer by confirming the asset is a qualifying asset. Examiners give marks for this reasoning.
Show the specific and general borrowing workings separately so partial marks are secure.
In MCQs, look for traps: investment income deduction, the ceiling on capitalised amount, and the exclusion of specific loans from the rate.
For exchange differences, quote the idea that only the portion adjusting interest cost is capitalised, and state the limit.