Ind AS 23: Borrowing Costs Eligible for Capitalisation

Understand Borrowing Costs Eligible for Capitalisation

Key rules to remember

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.

How to solve Borrowing Costs Eligible for Capitalisation questions

1. 1Confirm the asset is a qualifying asset and note the dates when capitalisation starts, is suspended and ends. Only the active period counts.
2. 2Separate the borrowings into specific (linked to this asset) and general.
3. 3For specific borrowings, compute interest for the active period. Deduct investment income earned on unspent funds in that period.
4. 4Work out the expenditure on the asset and how long each amount was outstanding. Deduct amounts met from specific borrowings and any grants or progress payments.
5. 5For general borrowings, compute the capitalisation rate as total interest ÷ weighted average general borrowings.
6. 6Multiply weighted expenditure funded from general borrowings by the rate.
7. 7Compare with the total interest actually incurred and cap the amount if needed. Add specific and general amounts.
8. 8Show the journal or the cost of the asset, and state that the balance of interest is charged to profit and loss.

Quickest way: Split, weigh, rate, cap

Common mistakes in Borrowing Costs Eligible for Capitalisation

• Not deducting investment income on specific borrowings

  Students stop once they calculate interest on the loan.

  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

  The deduction rule is applied to every loan by habit.

  Fix: The deduction applies only to specific borrowings. For general borrowings you simply apply the capitalisation rate.

• Including specific borrowings in the capitalisation rate

  Students average all loans in the balance sheet.

  Fix: Exclude loans taken specifically for a qualifying asset, but only until substantially all the activities to prepare that asset are complete. After that, those loans join the general pool and enter the rate.

• Applying the rate to the full cost instead of weighted expenditure

  Time weighting is skipped, so late payments get a full year of interest.

  Fix: Weight each payment by the months it was outstanding in the period.

• Capitalising more than the interest actually incurred

  The ceiling check is forgotten when the expenditure is large.

  Fix: Compare the computed amount with the borrowing cost incurred in the period and capitalise the lower.

• Capitalising the whole exchange loss on a foreign currency loan

  Students treat any forex difference as a borrowing cost.

  Fix: Capitalise only the part regarded as an adjustment to interest cost, measured against the interest on a comparable rupee borrowing. Take the rest to profit and loss.

Worked examples