Corporate Financial Reporting · Borrowing Costs (Ind AS 23)

Ind AS 23 Recognition and Capitalisation of Borrowing Costs

Updated 11 October 2026 · Fact-checked

Under Ind AS 23, borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset are capitalised as part of that asset's cost. All other borrowing costs are expensed when incurred. Directly attributable means costs that would have been avoided if the asset expenditure had not been made.

Understand Recognition and Capitalisation of Borrowing Costs

A borrowing cost is interest and other costs an entity incurs in connection with borrowing funds. Ind AS 23 asks one question: did this cost arise because you spent money on a qualifying asset?

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. A plant under construction is one. Inventory made in a few days is not.

The core principle is simple. Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of its cost. Other borrowing costs are recognised as an expense in the period incurred (paragraphs 1 and 8). Capitalisation is not optional once the conditions are met.

The test for "directly attributable" is avoidability. These are the costs that would have been avoided if the expenditure on the asset had not been made (paragraph 10). Capitalisation also needs it to be probable that the cost brings future economic benefits and that it can be measured reliably (paragraph 9).

Borrowing costs may include effective-interest-method interest under Ind AS 109, interest on lease liabilities under Ind AS 116, and exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs (paragraph 6). Where the link between borrowings and the asset is hard to see, for example with central financing, judgement is required (paragraph 11).

Key rules to remember

Core rule: Directly attributable to a qualifying asset → capitalise; all other borrowing costs → expense; Paragraph 8. Capitalise when probable future economic benefits and reliably measurable (paragraph 9).
Specific borrowings: Eligible cost = Actual borrowing cost incurred in the period − Investment income on temporary investment of those funds; Paragraph 12. Applies to funds borrowed specifically for the qualifying asset.
General borrowings: Eligible cost = Capitalisation rate × Expenditure on the asset; Paragraph 14. Expenditure is usually weighted for the period outstanding.
Capitalisation rate: Weighted average of borrowing costs on all general borrowings outstanding during the period; Exclude specific borrowings for the asset until substantially all activities to prepare it are complete.
Ceiling: Amount capitalised in a period ≤ Borrowing costs incurred in that period; Paragraph 14. Applies to the general-borrowings calculation.
Exchange differences: Capitalisable exchange loss ≤ Interest cost in foreign currency borrowing − Interest cost on equivalent functional-currency borrowing; Paragraph 6A(i). Later gains are adjusted to interest to the extent of the loss previously so treated (6A(ii)).

How to solve Recognition and Capitalisation of Borrowing Costs questions

Use this order for any question on recognition and capitalisation.

1Check that the asset is a qualifying asset: does it necessarily take a substantial period to get ready for use or sale?
2Identify each borrowing as specific (taken for this asset) or general (used generally).
3For specific borrowings, take actual interest for the period and deduct income earned on temporary investment of unspent funds.
4For general borrowings, compute the capitalisation rate as the weighted average cost of all general borrowings outstanding, excluding specific ones for this asset.
5Multiply the rate by the weighted expenditure on the asset funded from general borrowings.
6Apply the ceiling: capitalised amount cannot exceed the borrowing costs actually incurred in the period.
7Treat any foreign currency exchange difference only up to the interest-cost adjustment limit.
8Add the capitalised amount to the asset cost and charge the balance of borrowing costs to profit or loss.

Quickest way: Split-and-cap method

When to use it: Use when a question mixes a specific loan, general loans and a long list of expenditures.

Write the specific loan interest, then subtract investment income.
Find the unfunded expenditure: total spend on the asset minus the specific loan used.
Compute the weighted average rate on general loans as total interest ÷ weighted average amount.
Apply the rate to the weighted unfunded expenditure.
Compare with total general interest incurred and take the lower figure.
Everything not capitalised goes to profit or loss.

Common mistakes in Recognition and Capitalisation of Borrowing Costs

Capitalising interest on every loan, regardless of purpose.
Students assume all interest during construction is capitalised.
Fix: Capitalise only costs that would have been avoided had the asset expenditure not been made.
Forgetting to deduct investment income on unspent specific borrowings.
The question mentions the income in a side note.
Fix: Always apply the formula: actual cost less temporary investment income for specific borrowings.
Including the specific loan in the capitalisation rate.
Students average all loans together.
Fix: Exclude specific borrowings for the asset from the weighted average until the asset is substantially ready.
Capitalising more than the interest actually incurred.
The rate times expenditure gives a larger number and is used without checking.
Fix: Compare with total general borrowing cost for the period and cap at that figure.
Capitalising the whole exchange loss on a foreign currency loan.
The loss is treated as part of borrowing cost automatically.
Fix: Capitalise only the part that adjusts interest cost, limited by the difference between foreign and functional-currency borrowing costs.
Treating a quickly produced asset as qualifying.
Students skip the definition.
Fix: State why the asset takes a substantial period before capitalising anything.

Worked examples

Example 1

On 1 April 2026, Surya Infra Ltd borrowed ₹10,00,000 at 10% p.a. specifically to build a warehouse. Construction continued for the whole year to 31 March 2027. Only ₹6,00,000 was spent immediately; the unspent ₹4,00,000 was invested for the entire year at 6% p.a. Compute the borrowing cost to be capitalised.

Show the solution

The warehouse takes a substantial period, so it is a qualifying asset.
Actual interest for the year = ₹10,00,000 × 10% = ₹1,00,000.
Investment income = ₹4,00,000 × 6% = ₹24,000.
Eligible cost = ₹1,00,000 − ₹24,000 = ₹76,000.

Answer: ₹76,000 is capitalised as part of the warehouse cost.

Example 2

Kaveri Ltd is building a plant during 2026-27. General borrowings outstanding all year: ₹20,00,000 at 9% and ₹30,00,000 at 11%. Expenditure on the plant, all from general borrowings, was a weighted average of ₹15,00,000 for the year. Compute the amount capitalised.

Show the solution

Total general interest incurred = ₹1,80,000 + ₹3,30,000 = ₹5,10,000.
Total general borrowings = ₹50,00,000.
Capitalisation rate = ₹5,10,000 ÷ ₹50,00,000 = 10.2%.
Eligible cost = ₹15,00,000 × 10.2% = ₹1,53,000.
Ceiling check: ₹1,53,000 is below ₹5,10,000 incurred, so no restriction.
Balance ₹5,10,000 − ₹1,53,000 = ₹3,57,000 is expensed.

Answer: ₹1,53,000 is capitalised and ₹3,57,000 is charged to profit or loss.

Exam tips

Start every answer by confirming the asset is a qualifying asset. Examiners give marks for this reasoning.
Show the specific and general borrowing workings separately so partial marks are secure.
In MCQs, look for traps: investment income deduction, the ceiling on capitalised amount, and the exclusion of specific loans from the rate.
For exchange differences, quote the idea that only the portion adjusting interest cost is capitalised, and state the limit.
Write the final accounting split clearly: amount added to asset cost and amount expensed.

Practice questions from Borrowing Costs (Ind AS 23)

Recognition and Capitalisation of 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.

Recognition and Capitalisation of Borrowing Costs: frequently asked questions

Which borrowing costs are eligible for capitalisation under Ind AS 23?

Costs directly attributable to acquiring, constructing or producing a qualifying asset. These are the costs that would have been avoided if the asset expenditure had not been made. All other borrowing costs are expensed.

What is a qualifying asset?

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples include a factory under construction or a large plant being built.

Are exchange differences on foreign currency borrowings capitalised?

Only to the extent they are regarded as an adjustment to interest costs. The amount is limited by the difference between borrowing cost in the functional currency and in the foreign currency. Later gains are adjusted to interest up to the loss previously treated that way.

How is investment income treated on specific borrowings?

Income earned on temporary investment of unspent specific borrowings is deducted from the actual borrowing cost. The net figure is what you capitalise.