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Financial Accounting · Borrowing Costs (AS 16)

AS 16 Disclosure Requirements for Borrowing Costs

Updated 10 October 2026 · Fact-checked

AS 16 requires an enterprise to disclose two things in its financial statements: (a) the accounting policy adopted for borrowing costs, and (b) the amount of borrowing costs capitalised during the period. Exam answers should state both, with the figure taken from the capitalisation working.

Understand Disclosure Requirements under AS 16

Disclosure is the last step of AS 16. You first decide which borrowing costs are capitalised and which are expensed. Then you tell the reader of the financial statements what you did and how much you capitalised.

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. Those directly attributable to a qualifying asset are capitalised as part of its cost. Other borrowing costs are recognised as an expense in the period in which they are incurred.

The standard asks for exactly two disclosures:

  • (a) the accounting policy adopted for borrowing costs; and
  • (b) the amount of borrowing costs capitalised during the period.

The policy disclosure tells the reader the rule you follow. For example, that borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset are capitalised, and other borrowing costs are charged to the Statement of Profit and Loss as incurred. The amount disclosure gives the figure for the current period.

The amount you disclose must come from a correct working. That means actual interest on specific borrowings less income from temporary investment of those borrowings, plus the capitalisation rate applied to expenditure on general borrowings. Capitalised cost must not exceed the borrowing costs incurred in the period. So a wrong working gives a wrong disclosure.

Key rules to remember

Disclosure (a): accounting policy
State the policy adopted for borrowing costs
Mention capitalisation of costs directly attributable to a qualifying asset and expensing of other borrowing costs.
Disclosure (b): amount capitalised
Borrowing costs capitalised during the period = specific borrowings amount + general borrowings amount
Disclose the total figure for the period.
Specific borrowings
Actual borrowing cost incurred − income on temporary investment of those borrowings
Rule in paragraph 10, with the deduction in paragraph 11.
General borrowings
Capitalisation rate × expenditure on the asset
Rate is the weighted average of borrowing costs on general borrowings outstanding in the period (paragraph 12).
Ceiling
Amount capitalised ≤ borrowing costs incurred in the period
Paragraph 12. Check this before disclosing.

How to solve Disclosure Requirements under AS 16 questions

For a disclosure question, work out the figure first, then write the two required disclosures.

  1. 1Identify the qualifying asset and the period for which capitalisation applies. Check for suspension (paragraph 18) and cessation.
  2. 2Separate specific borrowings from general borrowings.
  3. 3For specific borrowings, take actual interest for the period and deduct income from temporary investment of the unspent funds.
  4. 4For general borrowings, compute the weighted average capitalisation rate and apply it to expenditure on the asset, net of progress payments and grants received.
  5. 5Add both amounts and check the total does not exceed the total borrowing costs incurred in the period.
  6. 6Write disclosure (a): the accounting policy for borrowing costs.
  7. 7Write disclosure (b): the amount of borrowing costs capitalised during the period.
  8. 8Show the remaining borrowing costs as an expense in the Statement of Profit and Loss.

Quickest way: Two-line disclosure template

When to use it: Use when the question asks only what must be disclosed, or when the amount is already given.

  1. Write: Disclosure (a) - accounting policy adopted for borrowing costs.
  2. Write: Disclosure (b) - amount of borrowing costs capitalised during the period, with the figure.
  3. Add one sentence of the policy wording, then move on.

Common mistakes in Disclosure Requirements under AS 16

  • Disclosing only the amount capitalised and forgetting the accounting policy.

    Numerical questions focus on the calculation, so the narrative part is overlooked.

    Fix: Always give both (a) policy and (b) amount. Treat them as a pair.

  • Disclosing total interest instead of interest capitalised.

    Students confuse borrowing costs incurred with borrowing costs capitalised.

    Fix: Disclose only the part capitalised to the asset. The rest is an expense.

  • Not deducting income on temporary investment of specific borrowings.

    Students stop at actual interest.

    Fix: Deduct such income from the actual cost, as paragraphs 10 and 11 require.

  • Capitalising more than the interest incurred in the period.

    Applying a rate to a large expenditure base gives a figure above actual interest.

    Fix: Cap the amount at borrowing costs incurred during the period.

  • Including interest for a period when active development was interrupted for an extended time.

    Students capitalise for the whole year by habit.

    Fix: Exclude extended interruptions. Capitalisation is not normally suspended for substantial technical and administrative work or a necessary temporary delay.

Worked examples

Example 1

Ananya Textiles Ltd is building a plant. For the year it took a specific loan of ₹1,00,00,000 at 10% p.a. Interest incurred on this loan for the year is ₹10,00,000. Unspent funds were temporarily invested and earned ₹1,50,000. The whole year qualifies for capitalisation. State the amount of borrowing costs capitalised and the disclosures required.

Show the solution
  1. The loan is a specific borrowing, so capitalise actual cost less temporary investment income.
  2. Actual borrowing cost = ₹10,00,000.
  3. Less income on temporary investment = ₹1,50,000.
  4. Amount capitalised = ₹10,00,000 − ₹1,50,000 = ₹8,50,000.
  5. Check the ceiling: ₹8,50,000 does not exceed ₹10,00,000 incurred.
  6. Disclosure (a): the policy that borrowing costs directly attributable to a qualifying asset are capitalised and other borrowing costs are expensed as incurred.
  7. Disclosure (b): borrowing costs capitalised during the year ₹8,50,000.

Answer: Capitalise ₹8,50,000. Disclose the accounting policy and the amount of ₹8,50,000 capitalised during the period.

Example 2

Bharat Engineering Ltd constructs a qualifying asset using general borrowings. The weighted average capitalisation rate is 9%. Expenditure on the asset to which the rate applies is ₹80,00,000 for the year. Total borrowing costs incurred in the year are ₹30,00,000. Compute the amount to disclose as capitalised and the amount charged to profit and loss.

Show the solution
  1. General borrowings: amount = capitalisation rate × expenditure.
  2. ₹80,00,000 × 9% = ₹7,20,000.
  3. Check the ceiling: ₹7,20,000 is less than ₹30,00,000 incurred, so it is allowed.
  4. Balance expensed = ₹30,00,000 − ₹7,20,000 = ₹22,80,000.
  5. Disclosure (a): the accounting policy adopted for borrowing costs.
  6. Disclosure (b): borrowing costs capitalised during the period ₹7,20,000.

Answer: Disclose ₹7,20,000 as capitalised, along with the accounting policy. ₹22,80,000 is charged to the Statement of Profit and Loss.

Exam tips

  • In theory questions, write the two disclosures as (a) and (b) so the examiner sees both at once.
  • In MCQs, watch for options that mix up disclosure of the amount capitalised with total interest paid.
  • In numerical questions, show the capitalisation working first. The disclosed figure then earns marks even if the narrative is brief.
  • Quote the policy in one clear sentence: capitalise directly attributable costs of qualifying assets, expense the rest.

Practice questions from Borrowing Costs (AS 16)

Disclosure Requirements under AS 16 in other exams

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

Disclosure Requirements under AS 16: frequently asked questions

What does AS 16 require an enterprise to disclose?

It requires disclosure of the accounting policy adopted for borrowing costs and the amount of borrowing costs capitalised during the period. These two items are the full disclosure list in the standard.

Do I disclose total interest or only interest capitalised?

You disclose the amount of borrowing costs capitalised during the period. Borrowing costs not capitalised are recognised as an expense when incurred.

How is the amount capitalised determined before disclosure?

For specific borrowings, it is actual cost less income on temporary investment. For general borrowings, it is the capitalisation rate applied to expenditure on the asset. It cannot exceed borrowing costs incurred in the period.

Is disclosure asked as a theory or numerical question?

Both are possible. Theory questions ask you to list the disclosures. Numerical questions ask you to compute the amount and then state what is disclosed.