Financial Reporting · Ind AS 23 Borrowing Costs

Ind AS 23 Scope, Definitions and Qualifying Asset

Updated 5 October 2026 · Fact-checked

Ind AS 23 says an entity must capitalise borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset, and expense all other borrowing costs. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. To solve questions, identify the cost, then the asset, then apply the test.

Understand Ind AS 23 Scope, Definitions and Qualifying Asset

Ind AS 23 deals with one question: when does interest on borrowed money become part of the cost of an asset instead of an expense? The core principle is that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they are incurred.

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. Ind AS 23 says they may include the items below. This is an illustrative list, not a closed one:

interest expense calculated using the effective interest method as per Ind AS 109
interest on lease liabilities recognised in accordance with Ind AS 116
exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs
other costs incurred in connection with the borrowing of funds, for example ancillary costs of arranging the borrowing, to the extent they are not already part of the effective interest rate

Do not treat the three named items as the only possible borrowing costs. Test any other cost by asking whether it was incurred in connection with borrowing funds.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Two words matter: *necessarily* and *substantial*. The time must be inherent in the asset, not caused by delay. Substantial period is a matter of judgement. The standard gives no fixed number of months, so do not quote one as a rule.

Examples of qualifying assets are inventories that need a substantial period to bring to saleable condition, manufacturing plants, power generation facilities, intangible assets, bearer plants, and investment properties measured at cost. Investment properties measured at fair value under Ind AS 40 are not caught by the capitalisation requirement, because they fall within the scope exclusion below. Financial assets are not qualifying assets. Assets that are ready for their intended use or sale when acquired are also not qualifying assets.

Scope: Ind AS 23 applies to borrowing costs of all entities that apply Ind AS. It does not deal with the actual or imputed cost of equity, including preference capital not classified as a liability. An entity is not required to apply the standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset measured at fair value (for example a biological asset under Ind AS 41, or an investment property measured at fair value under Ind AS 40), and to inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis, even if they take a substantial period. These are scope exclusions, not a finding that the assets fail the qualifying asset test.

Key rules to remember

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.

How to solve Ind AS 23 Scope, Definitions and Qualifying Asset questions

Use this order for any scope, definition or qualifying asset question. Always conclude with capitalise or expense.

1List each cost in the question: interest, other finance charges, exchange differences, dividends on preference shares, lease interest.
2Decide for each cost whether it is a borrowing cost under Ind AS 23. Equity-type costs are out.
3Identify the asset on which the funds are used.
4Check scope exclusions: fair value measured assets, and inventories made in large quantities repetitively.
5Test the asset: does it necessarily take a substantial period to get ready for intended use or sale? Ignore delays caused by the entity.
6Check that the cost is directly attributable to the acquisition, construction or production of that asset.
7Write the conclusion: capitalise or expense, and the reason in one line.

Quickest way: Three-question filter

When to use it: Use for MCQs and for short-note style parts when you have under two minutes.

Is the cost interest or an interest-like cost on borrowed funds (not equity)?
Is the asset one that necessarily takes a substantial time to be ready, and not excluded from scope?
Was the borrowing used for that asset? If all three are yes, capitalise. Otherwise expense.

Common mistakes in Ind AS 23 Scope, Definitions and Qualifying Asset

Treating dividend on equity or non-liability preference shares as a borrowing cost.
Students link any financing cost to borrowing.
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.
Many students remember a number from practice and treat it as a rule.
Fix: The standard states no number. Say it is a matter of judgement based on the facts.
Calling an asset a qualifying asset because construction was delayed.
Focus on the actual time taken, not the nature of the asset.
Fix: The word 'necessarily' means the time is inherent. Delay from the entity's own issues does not create a qualifying asset.
Treating a financial asset or a ready-to-use asset as qualifying.
Students see a large amount borrowed and assume capitalisation.
Fix: Financial assets and assets ready for use or sale when acquired never qualify.
Forgetting that exchange differences can be borrowing costs.
Students stop at interest as the only component.
Fix: Include exchange differences on foreign currency borrowings only to the extent they are an adjustment to interest cost.
Capitalising on a fair value measured asset or repetitively produced inventory as a must.
Students read capitalisation as always mandatory.
Fix: For these two categories the entity is not required to apply Ind AS 23, so state that scope exclusion explicitly.

Worked examples

Example 1

Sunrise Ltd borrowed ₹10,00,00,000 at 10% p.a. to build a captive power plant that will take about two years to complete. It also pays a dividend of ₹20,00,000 on its equity shares. Separately, it bought a ready-to-use machine, funded by a bank loan with annual interest of ₹6,00,000. Identify what is a borrowing cost and which items can be capitalised.

Show the solution

Annual interest on the plant loan = ₹10,00,00,000 × 10% = ₹1,00,00,000. This is a borrowing cost (interest under the effective interest method).
The equity dividend of ₹20,00,000 is the cost of equity. It is not a borrowing cost under Ind AS 23.
The power plant takes about two years because of its nature, so it necessarily takes a substantial period. It is a qualifying asset.
The interest of ₹1,00,00,000 a year is directly attributable to the plant. It is capitalised only during the qualifying period, that is from commencement of capitalisation until substantially all activities needed to prepare the plant for its intended use are complete. Capitalisation is suspended during any extended period in which active development is interrupted.
The machine is ready for use when acquired, so it is not a qualifying asset. Interest of ₹6,00,000 is an expense.

Answer: Interest of ₹1,00,00,000 a year (₹10,00,00,000 × 10%) on the plant loan is capitalised, but only from commencement until substantially all activities are complete, and subject to suspension rules. The equity dividend of ₹20,00,000 is not a borrowing cost. Interest of ₹6,00,000 on the ready-to-use machine is expensed.

Example 2

Greenfield Ltd has these items: (a) a residential complex built for sale, taking three years; (b) a batch of packaged biscuits produced in large quantities repetitively, each lot taking six weeks; (c) an investment in debentures of another company. Funds were borrowed for all three. Which are qualifying assets to which Ind AS 23 capitalisation applies?

Show the solution

(a) The complex is inventory that necessarily takes a substantial period to get ready for sale. It is a qualifying asset.
(b) The biscuits are inventory manufactured in large quantities on a repetitive basis. This is a scope exclusion: the entity is not required to apply Ind AS 23 to such inventories. The question is not whether the biscuits pass the qualifying asset test. Under its policy the entity may expense these borrowing costs.
(c) Debentures are a financial asset. Financial assets are not qualifying assets, so the borrowing costs are expensed.

Answer: (a), the residential complex held for sale, is a qualifying asset, and its directly attributable borrowing costs are capitalised. For (b), the entity is not required to apply Ind AS 23 because of the scope exclusion for repetitively produced inventories; under its policy it may expense the costs. For (c), the costs are expensed because a financial asset is not a qualifying asset.

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.

Practice questions from Ind AS 23 Borrowing Costs

Ind AS 23 Scope, Definitions and Qualifying Asset: frequently asked questions

What are the components of borrowing costs under Ind AS 23?

Borrowing costs are interest and other costs incurred in connection with the borrowing of funds. They may include interest expense using the effective interest method under Ind AS 109, interest on lease liabilities under Ind AS 116, and exchange differences on foreign currency borrowings to the extent regarded as an adjustment to interest costs. The list is not closed, and the cost of equity is not included.

What is a substantial period of time under Ind AS 23?

The standard does not give a number. It is a judgement based on the facts. What matters is that the asset necessarily takes that time to be ready for intended use or sale.

Is inventory ever a qualifying asset?

Yes, if it necessarily takes a substantial period to get ready for sale, such as a large real estate project. Inventories made in large quantities on a repetitive basis are a scope exclusion, so the entity is not required to apply Ind AS 23 to them.

Is capitalisation of borrowing costs optional?

No. For a qualifying asset, directly attributable borrowing costs must be capitalised. The only exceptions are the scope items, such as fair value measured assets and repetitive large-quantity inventories, where the entity is not required to apply the standard.