Advanced Accounting · AS 16 Borrowing Costs

AS 16 Borrowing Costs: Specific and General Borrowings, Computing Capitalisation

Updated 4 October 2026 · Fact-checked

Under AS 16, borrowing costs on a qualifying asset are capitalised. For specific borrowings, capitalise actual cost less income from temporary investment of unused funds. For general borrowings, apply a weighted average capitalisation rate to the expenditure on the asset funded from general funds. Capitalised general costs cannot exceed the actual general borrowing costs.

Understand Specific and General Borrowings: Computing Capitalisation

A qualifying asset is one that takes a substantial period to get ready for its intended use or sale. Borrowing costs that are directly attributable to acquiring, constructing or producing such an asset form part of its cost. AS 16 says you capitalise them. All other borrowing costs are an expense of the period.

Start by asking where the money came from. Specific borrowings are funds borrowed specifically to obtain the qualifying asset. The link is direct, so you capitalise the actual borrowing cost incurred during the period. If you park unused specific funds in a temporary investment, the income earned on it is deducted from the cost you capitalise.

Sometimes funds are borrowed generally, and you use them for the asset. These are general borrowings. There is no direct link, so AS 16 uses a rate. You compute a weighted average capitalisation rate over all general borrowings outstanding in the period. You multiply that rate by the expenditure on the asset that was financed from general funds. Do not deduct temporary investment income here, because that deduction applies to specific borrowings only.

There is a cap. The borrowing cost you capitalise in a period must not exceed the borrowing cost incurred in that period. For specific borrowings this holds automatically, because you capitalise actual cost less investment income. The check matters mainly for general borrowings, where a rate-based figure could come out higher than the interest actually incurred.

In exam problems, expenditure is spread across the year, so you weight each amount by the months it was outstanding. The result is the amount capitalised. The balance of the borrowing cost goes to the Statement of Profit and Loss.

Key rules to remember

Specific borrowings: amount to capitalise: Actual interest on specific borrowings during the period − Income earned on temporary investment of unused specific funds; Capitalise only while capitalisation is active. Interest outside the capitalisation period is expensed.
Weighted average capitalisation rate: Total interest on general borrowings for the period ÷ Weighted average amount of general borrowings outstanding × 100; Weight each loan by months outstanding ÷ 12. If all loans are outstanding for the full year, the weighted average principal equals total principal, so the rate equals total interest ÷ total principal × 100.
General borrowings: amount to capitalise: Weighted average expenditure on the asset financed from general funds × Capitalisation rate; Expenditure financed by specific funds is excluded. Weight each outlay by the months it was on the asset.
Cap on capitalisation: Amount capitalised ≤ Borrowing cost actually incurred in the period; Apply the cap to general borrowings; the capitalised amount cannot exceed total interest on the general pool.
Expense to Statement of Profit and Loss: Total borrowing cost incurred − Amount capitalised; Check that capitalised plus expensed equals total incurred.

How to solve Specific and General Borrowings: Computing Capitalisation questions

Use the same order every time. It keeps specific and general borrowings separate and stops you double counting.

1Confirm the asset is a qualifying asset and note the period during which capitalisation is active (not suspended, not after the asset is ready).
2List each loan and mark it as specific (raised for the asset) or general.
3Specific loans: compute interest for the capitalisation period, then deduct income from temporary investment of any unused funds.
4Work out how much of each outlay on the asset was met from specific funds, and how much from general funds. Outlay beyond the specific loan is treated as met from general funds.
5General loans: compute the weighted average capitalisation rate from the general pool, weighting by months outstanding.
6Compute the weighted average of the general-funded expenditure on the asset and multiply by the rate. Then apply the AS 16 cap: the borrowing cost capitalised in the period must not exceed the borrowing cost incurred in that period. The check matters mainly for general borrowings.
7Add the specific and general amounts to get the total capitalised. Show the balance as an expense in the Statement of Profit and Loss.
8Write the final entry or cost of the asset with the borrowing cost added.

Quickest way: Split, weight, cap

When to use it: Use this for any numerical with a mix of loans, staged payments and idle funds when you have about 10 to 12 minutes.

Draw a small timeline of months with the loans and payments marked on it.
Do the specific loan first in one line: interest − investment income.
Compute the capitalisation rate as interest ÷ weighted average principal. Write it as a percentage.
Convert each payment into a rupee-months figure (amount × months on the asset ÷ 12), add them, then multiply by the rate.
Do a quick cap check: the capitalised amount must not exceed the interest actually incurred.
For MCQs, eliminate options that deduct investment income from general borrowings, or ones that use a simple average rate when the loans run for unequal periods.
In the written answer, show each of these lines separately with headings so that step marks are available even if one figure is wrong.

Common mistakes in Specific and General Borrowings: Computing Capitalisation

Deducting temporary investment income from general borrowing cost.
Students remember the deduction and apply it everywhere.
Fix: The deduction applies to specific borrowings only. For general borrowings use the weighted average rate and no deduction.
Using a simple average of interest rates instead of a weighted average.
It is faster and looks right when the loans have similar rates.
Fix: Divide total general interest by the weighted average general principal. Weight by months outstanding when loans are not outstanding for the full year.
Applying the general rate to the whole cost of the asset.
Students forget that part of the cost was financed by the specific loan.
Fix: Apply the rate only to expenditure beyond what the specific loan funded, weighted by time on the asset.
Ignoring the cap of actual interest incurred.
The rate calculation gives a number, and students accept it.
Fix: Always compare the amount you capitalise with the borrowing cost incurred in the period. It cannot be higher. The check matters mainly for general borrowings; if the rate-based figure is higher, capitalise only the interest actually incurred.
Capitalising interest for months when capitalisation was suspended or after the asset was ready.
Students compute interest for the full year by default.
Fix: Read the dates. Capitalise only for the active period and expense the rest.
Forgetting to charge the uncapitalised interest to the Statement of Profit and Loss.
The question asks for the capitalised amount, so the rest is dropped.
Fix: Finish with total interest − capitalised amount and show it as a finance cost.

Worked examples

Example 1

On 1 April 2026, Alpha Ltd began constructing a plant that is a qualifying asset. It took a specific loan of ₹50,00,000 at 10% p.a. on that date. The loan was used as follows: ₹30,00,000 was spent on 1 April 2026 and the remaining ₹20,00,000 was kept in a short-term deposit earning 6% p.a. for 6 months, then spent on 1 October 2026. Construction continued to 31 March 2027. Compute the borrowing cost to be capitalised for the year.

Show the solution

Interest on the specific loan for the year = ₹50,00,000 × 10% = ₹5,00,000.
Income from temporary investment = ₹20,00,000 × 6% × 6/12 = ₹60,000.
Borrowing cost to capitalise = ₹5,00,000 − ₹60,000 = ₹4,40,000. The investment income is deducted from the borrowing cost eligible for capitalisation, so it reduces the capitalised amount and is not added to the cost of the plant.
Check: the amount is below actual interest of ₹5,00,000, so the cap is met.
Reconcile: the full interest of ₹5,00,000 is first recognised as finance cost. Of this, ₹4,40,000 is transferred to the cost of the plant, which leaves ₹60,000 of interest as finance cost in the Statement of Profit and Loss. The ₹60,000 investment income offsets this ₹60,000 charge, so the net effect on profit is nil, while ₹4,40,000 is capitalised.

Answer: ₹4,40,000 (interest of ₹5,00,000 less investment income of ₹60,000) is capitalised to the cost of the plant. Interest of ₹60,000 remains as finance cost in profit and loss. The ₹60,000 investment income offsets it, so the net effect on profit is nil.

Example 2

Beta Ltd constructed a building from 1 April 2026 to 31 March 2027 (qualifying asset). The total cost of the building was ₹58,00,000. Of this, ₹40,00,000 was met from a specific loan at 9% p.a., used in full on 1 April 2026. The balance of ₹18,00,000 was paid from general funds: ₹12,00,000 on 1 April 2026 and ₹6,00,000 on 1 October 2026. General borrowings outstanding all year: ₹30,00,000 at 10% and ₹20,00,000 at 11.5%. Compute the borrowing cost to be capitalised.

Show the solution

Specific loan: ₹40,00,000 × 9% = ₹3,60,000 (no unused funds, so no investment income).
Check: the specific amount of ₹3,60,000 does not exceed the actual specific interest of ₹3,60,000, so the cap is met.
General interest = ₹30,00,000 × 10% + ₹20,00,000 × 11.5% = ₹3,00,000 + ₹2,30,000 = ₹5,30,000.
General principal = ₹30,00,000 + ₹20,00,000 = ₹50,00,000.
Capitalisation rate = ₹5,30,000 ÷ ₹50,00,000 × 100 = 10.6%.
Weighted expenditure from general funds = ₹12,00,000 × 12/12 + ₹6,00,000 × 6/12 = ₹12,00,000 + ₹3,00,000 = ₹15,00,000.
General borrowing cost to capitalise = ₹15,00,000 × 10.6% = ₹1,59,000.
Check: ₹1,59,000 is below actual general interest of ₹5,30,000.
Total capitalised = ₹3,60,000 + ₹1,59,000 = ₹5,19,000.
Expensed = (₹3,60,000 + ₹5,30,000) − ₹5,19,000 = ₹8,90,000 − ₹5,19,000 = ₹3,71,000.

Answer: ₹5,19,000 is capitalised (₹3,60,000 specific plus ₹1,59,000 general). ₹3,71,000 is charged to the Statement of Profit and Loss.

Exam tips

Mark the loan type before you calculate. Many ICAI-style questions hide a general loan among specific ones.
Always show the capitalisation rate as a percentage with its working. Examiners give marks for the rate even if the final figure is off.
Read the dates for suspension or completion of the asset. A shortened period changes every figure.
In MCQs, check the cap first. If an option exceeds actual interest incurred, it is wrong.
Write a closing line showing the amount capitalised and the amount expensed. It proves the totals reconcile.

Practice questions from AS 16 Borrowing Costs

Specific and General Borrowings: Computing Capitalisation in other exams

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

Specific and General Borrowings: Computing Capitalisation: frequently asked questions

Do I deduct temporary investment income for general borrowings?

No. AS 16 deducts income from temporary investment only for specific borrowings, where funds are drawn ahead of need. For general borrowings you use the weighted average capitalisation rate and no deduction.

How do I find the weighted average capitalisation rate?

Divide the total interest on general borrowings for the period by the weighted average amount of those borrowings, then multiply by 100. Weight each loan by the months it was outstanding. Do not include the specific loan in this pool.

What if the specific loan is less than the cost of the asset?

The specific loan covers its own share of the outlay. The balance of the expenditure is treated as financed from general funds, and you apply the capitalisation rate to that balance, weighted by time.

Can the capitalised amount exceed interest actually incurred?

No. The borrowing cost capitalised in a period cannot exceed the borrowing cost incurred in that period. Compute the figure and compare it with actual interest before finalising.