CMA Final · Corporate Financial Reporting

Borrowing Costs (Ind AS 23) for CMA Final

Ind AS 23 says borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset must be capitalised as part of its cost. Other borrowing costs are expensed. To solve a question, identify the qualifying asset, split specific and general borrowings, compute eligible cost, and check the start, suspension and end dates.

What this chapter covers

This chapter covers one question: when does interest become part of an asset's cost instead of an expense? Ind AS 23 defines borrowing costs as interest and other costs an entity incurs in connection with borrowing funds. It applies the capitalisation rule to a qualifying asset, which is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

The chapter is small, but it is mostly numerical. You work out eligible cost for specific borrowings (actual cost less investment income on temporary investment) and for general borrowings (a capitalisation rate applied to expenditure). You also decide the period: capitalisation begins on the commencement date, is suspended during extended breaks in active development, and stops when the asset is ready.

It connects to the rest of Corporate Financial Reporting through the cost of property, plant and equipment, construction of assets, and government grants under Ind AS 20, because expenditure is reduced by grants and progress payments received. It also links to the interest and finance cost lines in the financial statements and to disclosure. Expect it as MCQs and as a short working inside a larger question on assets.

Borrowing costs give you a predictable, rule-based numerical. The method is the same every time, so a student who practises it can score full marks on a working that many others get wrong through small slips in dates, rates or the cap. The chapter also feeds into questions on PPE cost, so mastering it helps you in other parts of Paper 18. In Section A, a single precise point, such as what counts as expenditure or when capitalisation is suspended, can win you 2 marks quickly.

Borrowing Costs (Ind AS 23): topics in the order to study them

1Scope and Definitions under Ind AS 23You need the meaning of borrowing costs and qualifying asset before any rule or calculation makes sense.
2Recognition and Capitalisation of Borrowing CostsThis sets the core principle: directly attributable costs are capitalised when future economic benefits are probable and the cost can be measured reliably.
3Specific and General Borrowings: Computing Eligible CostThis is the main numerical area, so study it once the principle is clear and give it the most practice time.
4Commencement, Suspension and Cessation of CapitalisationDates decide the period of capitalisation, so learn them after you know how to compute the amount, then combine both in full problems.
5Disclosure Requirements and Ind AS 23 vs AS 16It is short and theory-based, so finish with it and revise it close to the exam.

How to prepare Borrowing Costs (Ind AS 23)

Treat this as a rule chapter with one repeatable calculation. Learn the rules in plain words first, then drill the method until it is automatic.

Write the two definitions in your own words: borrowing costs and qualifying asset. Test yourself with examples of assets that do and do not qualify.
Learn the three commencement conditions: expenditure incurred, borrowing costs incurred, and activities necessary to prepare the asset under way. All three must be met.
For specific borrowings, practise: actual borrowing cost for the period less investment income on temporary investment of the unused funds.
For general borrowings, practise the capitalisation rate: the weighted average of borrowing costs on all borrowings outstanding in the period, excluding specific borrowings until the asset is substantially complete. Apply it to expenditure, and remember that the amount capitalised cannot exceed the borrowing costs actually incurred.
Remember that expenditure includes only cash payments, transfers of other assets or assumption of interest-bearing liabilities, and is reduced by progress payments and grants received. The average carrying amount of the asset is normally a reasonable approximation.
Solve timeline-based problems with a suspension period, and write the months or days of capitalisation clearly in your working.
Finish with disclosure and the Ind AS 23 vs AS 16 comparison, then do a mixed set of MCQs.

Common mistakes in Borrowing Costs (Ind AS 23)

Forgetting to deduct investment income on temporarily invested specific borrowings.
Fix: For every specific loan, check whether any funds sat idle. If yes, deduct the income earned on them from the actual cost.
Capitalising more than the interest actually incurred.
Fix: Always compare your computed amount with total borrowing costs for the period and cap it.
Including specific borrowings in the weighted average rate for general borrowings.
Fix: Exclude loans taken specifically for the asset until it is substantially complete, then compute the rate on the rest.
Starting capitalisation from the date the loan is drawn.
Fix: Fix the commencement date as the first date on which expenditure, borrowing costs and preparation activities all exist.
Continuing capitalisation through a long break in work.
Fix: Suspend capitalisation during extended periods of suspended active development, and show the months excluded.
Using the gross payment as expenditure without adjusting for grants or progress payments.
Fix: Reduce expenditure by progress payments and grants received, and count only cash, asset transfers or assumed interest-bearing liabilities.

Last-day revision: Borrowing Costs (Ind AS 23)

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.

Borrowing Costs (Ind AS 23) practice questions

Borrowing Costs (Ind AS 23) in other exams

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

Borrowing Costs (Ind AS 23): frequently asked questions

What is a qualifying asset under Ind AS 23?

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. A factory under construction is a typical example. An asset ready for use on purchase does not qualify.

How do I compute the capitalisation rate for general borrowings?

Take the weighted average of borrowing costs applicable to all borrowings outstanding during the period. Leave out borrowings made specifically for the qualifying asset until the asset is substantially complete. Apply the rate to the expenditure on the asset.

When does capitalisation of borrowing costs begin?

It begins on the commencement date, which is when you first meet all three conditions: you incur expenditure on the asset, you incur borrowing costs, and you undertake activities necessary to prepare the asset for its intended use or sale.

Is there a limit on the amount that can be capitalised?

Yes. The amount capitalised in a period cannot exceed the borrowing costs incurred in that period. Check this limit in every general borrowings problem.