Strategic Business Reporting (International) · Non-current assets

IAS 23 Borrowing Costs: Capitalisation Rules for SBR

Updated 11 October 2026 · Fact-checked

IAS 23 requires an entity to capitalise borrowing costs that are directly attributable to acquiring, constructing or producing a qualifying asset. Capitalise from the start date until the asset is ready for use or sale. Pause during extended suspension. Deduct investment income on specific borrowings. Expense all other borrowing costs.

Understand IAS 23 Borrowing Costs

Borrowing costs are interest and other costs an entity incurs in connection with borrowing funds. They include interest calculated using the effective interest method, interest on lease liabilities recognised under IFRS 16, and exchange differences from foreign currency borrowings to the extent regarded as an adjustment to interest costs.

The core idea is simple. If you borrow money to build an asset that takes a long time to get ready, the finance cost is part of the cost of getting that asset ready. So IAS 23 says you must add it to the asset's cost instead of expensing it. This is not a choice. Capitalisation is required for qualifying assets.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples are factories, power plants, ships, and inventories that take a long time to produce. Assets that are ready when bought, or that are produced quickly and routinely, do not qualify. Financial assets do not qualify. Inventories made in large quantities on a repetitive basis over a short period do not qualify. Assets measured at fair value through profit or loss, such as investment property under the fair value model, are also outside the requirement.

Capitalisation has three stages. It commences when you incur expenditure on the asset, incur borrowing costs, and begin activities necessary to prepare the asset. It is suspended during extended periods when active development is interrupted. It ceases when substantially all activities needed to prepare the asset for use or sale are complete. If the asset is built in parts and each part can be used while others continue, stop capitalising for each part as it is completed.

The amount depends on how the money was funded. For specific borrowings taken to fund the asset, capitalise actual borrowing costs less any investment income earned on temporary investment of the unspent funds. For general borrowings, apply a capitalisation rate to the expenditure on the asset. The rate is the weighted average of borrowing costs on general borrowings outstanding in the period. The amount capitalised can never exceed the borrowing costs actually incurred in the period.

Key rules to remember

Specific borrowings: Capitalise = actual borrowing costs in the capitalisation period − investment income on temporary investment of unspent funds; Investment income is deducted when you work out the amount capitalised. The income itself is still earned and recognised in profit or loss, where it offsets the interest left in finance costs.
General borrowings: Capitalise = weighted average expenditure on the asset (funded by general borrowings) × capitalisation rate; Weight each expenditure by the time outstanding in the period. The result cannot exceed total general borrowing costs incurred.
Capitalisation rate: Rate = total borrowing costs on general borrowings ÷ weighted average general borrowings outstanding; Exclude borrowings made specifically to obtain a qualifying asset from the general pool until substantially all activities to prepare that asset are complete. Use the weighted average if balances changed in the period.
Commencement: Start when: expenditure incurred AND borrowing costs incurred AND activities to prepare the asset in progress; All three conditions must be met. Paying a deposit with no work started does not meet the third.
Suspension: Suspend capitalisation during extended periods of interrupted active development; Do not suspend for a temporary delay that is a necessary part of the process, such as waiting for concrete to cure or for high water levels on a bridge project.
Cessation: Stop when substantially all activities necessary to prepare the asset for use or sale are complete; Minor modifications, such as decorating to the buyer's specification, do not stop the asset being ready.

How to solve IAS 23 Borrowing Costs questions

Use this order for any IAS 23 requirement, calculation or discussion question.

1Decide if the asset is a qualifying asset. Ask whether it necessarily takes a substantial period to get ready. If not, expense the borrowing costs.
2Find the capitalisation period. Mark the start date (expenditure, borrowing costs and activity all present), any suspension, and the end date.
3Split the funding. Identify specific borrowings and general borrowings. Match each expenditure to the funding source.
4Calculate specific borrowing costs for the capitalisation period only. Use the actual rate and the months outstanding.
5Deduct investment income earned on any unspent specific funds in the same period.
6For any expenditure not covered by specific borrowings, calculate the capitalisation rate on general borrowings and apply it to the weighted expenditure. Use months as the weights.
7Check the cap. Capitalised general borrowing costs must not exceed actual general borrowing costs for the period.
8Record the double entry: debit the asset and credit finance costs to reverse the amount first expensed, or credit bank or accrued interest if the interest is capitalised directly. The investment income is not part of this entry; it is recognised separately in profit or loss when earned. Expense the remainder. Then add a short comment if the question asks for treatment or judgement.

Quickest way: Timeline and two-bucket method

When to use it: Use this when the question gives dates, drawdowns and several loans, and you have limited time.

Draw a timeline with months. Mark start, suspension and end.
Create two buckets: specific loan and general loans.
For the specific loan, compute interest for the capitalisation months. Subtract investment income. Write the net figure.
Work out how much spend is not covered by the specific loan. Weight it by months outstanding.
Compute the general rate. Multiply it by the weighted uncovered spend.
Add both buckets. Compare the general bucket total with actual general interest. Take the lower.
Write the journal and the expensed balance in one line each. Debit the asset and credit finance costs (reversing the amount first expensed), or credit bank or accrued interest if the interest is capitalised directly.

Common mistakes in IAS 23 Borrowing Costs

Capitalising interest during a suspension period
Students see interest still being paid and assume it belongs in the asset.
Fix: Interest still accrues, but it is expensed during extended suspension. Check whether active development stopped for a long period and was not a normal part of the process.
Adding investment income to the amount capitalised or ignoring it
Students treat it as a separate gain, or forget it because it is a small figure.
Fix: For specific borrowings, deduct investment income earned on unspent funds from the borrowing costs capitalised. Do it for the same period only.
Using the full year's interest when capitalisation covers part of the year
The loan runs all year, so students use the annual figure without thinking about dates.
Fix: Time-apportion by the capitalisation months. Interest outside that window goes to profit or loss.
Applying the general rate to total expenditure instead of only the part not funded specifically
Students forget that specific borrowings already cover part of the spend.
Fix: Subtract the specific funding from the weighted expenditure first. Apply the general rate only to the remainder.
Treating a quickly produced or ready-to-use asset as qualifying
Students assume that any asset funded by a loan qualifies.
Fix: Ask whether the asset necessarily takes a substantial period to get ready. Routine, short-cycle inventory and ready-to-use assets do not qualify.
Capitalising more than the interest actually incurred
Students multiply a rate by expenditure and do not check the result against the total interest.
Fix: Always compare the general borrowing amount with actual general borrowing costs for the period. Capitalise the lower figure.

Worked examples

Example 1

Alpha Co began constructing a factory on 1 April 20X1. It took a specific loan of $4 million on 1 April 20X1 at 6% a year for the project. The loan was drawn in full on 1 April 20X1. Alpha spent $2.5 million immediately and held the remaining $1.5 million on deposit until 1 October 20X1, earning 3% a year from 1 April to 30 September. Construction was completed on 31 December 20X1 and the factory was ready for use then. Year end is 31 December 20X1. Calculate the borrowing cost to capitalise.

Show the solution

The factory is a qualifying asset because it takes a substantial period to build. Capitalisation starts on 1 April 20X1 and ends on 31 December 20X1. That is 9 months.
Borrowing cost on the specific loan: $4,000,000 × 6% × 9/12 = $180,000. This is first recognised in full as finance cost.
Investment income on the unspent funds: $1,500,000 × 3% × 6/12 = $22,500.
Net amount to capitalise: $180,000 − $22,500 = $157,500.
Journal to capitalise: Dr property, plant and equipment $157,500, Cr finance costs $157,500. This leaves $22,500 of the interest in finance costs. The $22,500 investment income is earned and recognised separately in profit or loss (Dr bank $22,500, Cr investment income $22,500). The net effect on profit or loss is finance cost of $22,500 less investment income of $22,500 = nil.

Answer: Capitalise $157,500 as part of the cost of the factory. After the gross $180,000 interest is recognised as finance cost, debit property, plant and equipment $157,500 and credit finance costs $157,500. The $22,500 interest left in finance costs is matched by $22,500 investment income, so the net charge to profit or loss is nil.

Example 2

Beta Co constructs a plant. Expenditure was $2 million on 1 January 20X2 and $3 million on 1 July 20X2. Construction ran for the whole year to 31 December 20X2, with no suspension. Beta has no specific loan for the plant. Its general borrowings during the year were a $10 million loan at 5% and a $5 million loan at 8%, both outstanding all year. Calculate the amount capitalised and the amount expensed.

Show the solution

The plant is a qualifying asset and capitalisation covers the whole year.
Total general borrowing costs: $10,000,000 × 5% = $500,000 plus $5,000,000 × 8% = $400,000. Total is $900,000.
Weighted average general borrowings: $10,000,000 + $5,000,000 = $15,000,000.
Capitalisation rate: $900,000 ÷ $15,000,000 = 6%.
Weighted expenditure: $2,000,000 × 12/12 = $2,000,000 plus $3,000,000 × 6/12 = $1,500,000. Total is $3,500,000.
Amount to capitalise: $3,500,000 × 6% = $210,000.
Check the cap: $210,000 is below actual borrowing costs of $900,000, so no restriction applies.
Amount expensed: $900,000 − $210,000 = $690,000.

Answer: Capitalise $210,000 into the cost of the plant. Expense $690,000 in profit or loss as finance costs.

Exam tips

Write the dates first. Most marks in this topic go to getting the start, suspension and end months right.
Show the qualifying asset test in one sentence before any numbers. Markers look for it.
If the scenario mentions a pause, say whether it is an extended interruption or a normal part of the process, and give a reason from the facts.
Label specific and general borrowings clearly and show the capitalisation rate working. Method marks are available even if arithmetic slips.
In discussion parts, link the answer to the scenario: explain how capitalising changes profit, gearing and interest cover, and note any pressure on management to capitalise more.

Practice questions from Non-current assets

IAS 23 Borrowing Costs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 23 Borrowing Costs: frequently asked questions

What is a qualifying asset under IAS 23?

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples include factories, ships and power stations. Assets ready on purchase and routinely produced short-cycle inventories do not qualify.

How do I calculate capitalised borrowing costs for general borrowings?

Find the capitalisation rate as total general borrowing costs divided by weighted average general borrowings. Multiply it by the weighted average expenditure on the asset not funded by specific loans. The result cannot exceed actual general borrowing costs for the period.

When must capitalisation be suspended?

Suspend it during extended periods when active development is interrupted. Do not suspend for temporary delays that are a necessary part of getting the asset ready. Costs in a suspension period go to profit or loss.

What happens to investment income on specific borrowings?

Deduct it from the borrowing costs eligible for capitalisation. This applies to income earned on temporary investment of the funds before they are spent on the asset, for the same period as the capitalisation.