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Corporate Financial Reporting · Borrowing Costs (Ind AS 23)

Scope and Definitions under Ind AS 23 Borrowing Costs

Updated 11 October 2026 · Fact-checked

Ind AS 23 applies to all borrowing costs. Borrowing costs are interest and other costs an entity incurs in connection with borrowing funds. A qualifying asset is one that necessarily takes a substantial period to get ready for its intended use or sale. To solve questions, test the cost, then the asset, then the scope exclusions.

Understand Scope and Definitions under Ind AS 23

Ind AS 23 deals with the accounting for borrowing costs. The standard defines them as interest and other costs that an entity incurs in connection with the borrowing of funds. Its main idea is that when borrowing costs relate to building or acquiring a long-term asset, they become part of that asset's cost instead of being charged to profit or loss at once.

The standard says an entity shall apply it in accounting for borrowing costs. So the starting point is to decide whether a cost is a borrowing cost at all. The standard says borrowing costs may include:

  • interest expense calculated using the effective interest method under Ind AS 109;
  • interest in respect of lease liabilities recognised under Ind AS 116;
  • exchange differences arising from foreign currency borrowings, to the extent they are regarded as an adjustment to interest costs.

The list says "may include". It is not a closed list. Other costs connected with borrowing, such as loan processing charges, can also be borrowing costs when they are part of the cost of borrowing, and under the effective interest method they are usually already inside the interest expense.

The second key idea is the qualifying asset: an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Two tests matter. The asset must need a substantial period to get ready, and that period must be unavoidable, not a result of delay. A factory under construction usually qualifies. Goods bought ready for sale do not.

The standard also allows an entity not to apply it in two cases: borrowing costs directly attributable to a qualifying asset measured at fair value (for example a biological asset under Ind AS 41), and inventories manufactured or produced in large quantities on a repetitive basis. Note the wording: the entity is "not required" to apply the standard, so this is a relief, not a ban.

On exchange differences, Ind AS 23 adds guidance that IAS 23 lacks. The adjustment to interest is limited to the extent the exchange loss does not exceed the difference between the cost of borrowing in functional currency and the cost of borrowing in the foreign currency. If an unrealised loss was treated as an interest adjustment and a later gain arises on the same borrowing, the gain up to the earlier loss is also treated as an interest adjustment.

Key rules to remember

Definition of borrowing costs
Borrowing costs = interest and other costs incurred in connection with the borrowing of funds
Includes effective-interest-method interest, lease liability interest and exchange differences treated as an interest adjustment.
Definition of qualifying asset
Qualifying asset = asset that necessarily takes a substantial period of time to get ready for its intended use or sale
Both parts matter: the period must be substantial and it must be necessary.
Exchange difference limit (para 6A(i))
Adjustment to interest ≤ Exchange loss, and the loss counted ≤ (Cost of borrowing in functional currency − Cost of borrowing in foreign currency)
Read as: the loss is treated as interest only up to the difference between the two borrowing costs. The excess stays in profit or loss.
Reversal of exchange gain (para 6A(ii))
Later gain on same borrowing treated as interest adjustment up to the loss earlier treated as interest adjustment
Gain beyond that amount is not an adjustment to interest.
Scope exclusions (para 4)
Not required: (a) qualifying asset measured at fair value; (b) inventories made in large quantities on a repetitive basis
These are optional exclusions for borrowing costs directly attributable to such assets.

How to solve Scope and Definitions under Ind AS 23 questions

Use this order for any scope or definition question. It stops you from capitalising what should be expensed or applying the standard where it is not needed.

  1. 1Identify each cost in the question and ask if it arises from borrowing funds. Interest, lease liability interest and loan costs usually do.
  2. 2Check for foreign currency borrowings. If there is an exchange loss, compare it with the difference between the functional currency borrowing cost and the foreign currency borrowing cost, and treat only that part as borrowing cost.
  3. 3Identify the asset. Ask whether it necessarily takes a substantial period to get ready for its intended use or sale.
  4. 4Check the scope exclusions: fair value assets and inventories produced in large quantities on a repetitive basis.
  5. 5Conclude on each item: borrowing cost or not, qualifying asset or not, within scope or not.
  6. 6Note that this topic decides only the definitions. Eligible amounts, start, suspension and end of capitalisation come from the later rules, so refer to them if the question asks for amounts.
  7. 7Write a one-line reason for each conclusion, quoting the definition wording.

Quickest way: Three-question screen

When to use it: Use in MCQs and in the first part of a long answer when you must classify items fast.

  1. Is it a cost of borrowing funds? If not, stop: it is not a borrowing cost.
  2. Is the asset one that necessarily needs a substantial period? If not, it is not a qualifying asset and the costs are expensed.
  3. Is it a fair value asset or repetitively produced inventory? If so, the entity need not apply the standard.

Common mistakes in Scope and Definitions under Ind AS 23

  • Treating every asset under construction as a qualifying asset.

    Students focus on the word construction and ignore the substantial period test.

    Fix: Check that the time to get ready is substantial and necessary. A short job does not qualify.

  • Treating the whole exchange loss on a foreign currency loan as a borrowing cost.

    Para 6(e) is remembered but the limit in para 6A is forgotten.

    Fix: Capitalise only up to the difference between the cost of borrowing in functional currency and in foreign currency. The rest goes to profit or loss.

  • Saying the scope exclusions are compulsory.

    The word exclusion is read as a ban.

    Fix: The standard says the entity is not required to apply it. Use the same wording.

  • Forgetting lease liability interest as a borrowing cost.

    Students link borrowing costs only with bank loans.

    Fix: Remember interest on lease liabilities under Ind AS 116 is listed in the standard.

  • Treating the list of borrowing costs as exhaustive.

    The list is memorised as a fixed set.

    Fix: The standard says borrowing costs may include these items. The base definition is interest and other costs incurred in connection with borrowing.

  • Ignoring a later exchange gain on the same borrowing.

    Only the loss rule is learnt.

    Fix: A later gain is treated as an interest adjustment up to the loss earlier treated that way.

Worked examples

Example 1

Rani Textiles Ltd is building a new plant that will take about 2 years to complete. It also bought finished readymade garments for resale and funded both with loans. Which asset is a qualifying asset under Ind AS 23, and why?

Show the solution
  1. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
  2. The plant needs about 2 years to build. That is a substantial period and it is necessary to complete the plant.
  3. The readymade garments are bought in finished form and are ready for sale on purchase. They need no substantial period.
  4. So borrowing costs on the garment loan are not capitalised and are expensed.

Answer: The plant is a qualifying asset. The readymade garments are not.

Example 2

Sagar Ltd, whose functional currency is the rupee, took a foreign currency loan to build a warehouse. The interest cost on a similar rupee loan would have been ₹8,00,000. Interest on the foreign currency loan was ₹5,00,000. The exchange loss on the loan for the year was ₹4,00,000. How much of the exchange loss is treated as borrowing cost?

Show the solution
  1. Difference in borrowing costs = ₹8,00,000 − ₹5,00,000 = ₹3,00,000.
  2. Para 6A(i) allows the exchange loss to be an adjustment to interest only to the extent it does not exceed this difference.
  3. The exchange loss is ₹4,00,000, which exceeds ₹3,00,000, so the adjustment is limited to ₹3,00,000.
  4. The balance ₹4,00,000 − ₹3,00,000 = ₹1,00,000 is not borrowing cost and goes to profit or loss.

Answer: ₹3,00,000 of the exchange loss is treated as borrowing cost. The remaining ₹1,00,000 is recognised in profit or loss.

Exam tips

  • Quote the definitions in the standard's own words. Examiners give marks for the exact tests.
  • In case scenarios, first list which items are borrowing costs and which assets are qualifying assets, then move to numbers.
  • For foreign currency loans, always compute the difference between the two interest costs before deciding the exchange loss to treat as borrowing cost.
  • Remember that the scope exclusions use the words not required to apply.

Practice questions from Borrowing Costs (Ind AS 23)

Scope and Definitions under 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.

Scope and Definitions under 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. Examples are a factory or power plant under construction. The period must be substantial and unavoidable.

What costs are borrowing costs under Ind AS 23?

Borrowing costs are interest and other costs an entity incurs in connection with borrowing funds. They may include effective interest method interest, interest on lease liabilities and exchange differences treated as an adjustment to interest.

Is Ind AS 23 applicable to inventories?

An entity is not required to apply the standard to borrowing costs directly attributable to inventories manufactured or produced in large quantities on a repetitive basis. Other inventories that take a substantial period to get ready can be qualifying assets.

How is an exchange difference treated as a borrowing cost?

Para 6A limits it to the extent the exchange loss does not exceed the difference between the cost of borrowing in functional currency and the cost in foreign currency. A later gain on the same borrowing is also treated as an interest adjustment up to the loss earlier treated that way.