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CA Intermediate · Advanced Accounting · AS 16 Borrowing Costs

Kaveri Engineering Ltd took a foreign currency loan equivalent to ₹2,00,00,000 on 1 April 2026 to build a qualifying asset, and the asset was under active construction for the full year. Interest on the foreign loan at 4% p.a. was ₹8,00,000. Had the company borrowed the same amount in rupees, interest at 9% p.a. would have been ₹18,00,000. The exchange loss on the loan for the year was ₹15,00,000. What amount is capitalised as borrowing cost for the year?

The capitalised borrowing cost is ₹18,00,000. Interest of ₹8,00,000 is added to the exchange difference treated as an interest adjustment, which is limited to the ₹10,00,000 gap between rupee-loan interest and foreign-loan interest. The remaining ₹5,00,000 of exchange loss is not borrowing cost.

  1. A₹8,00,000
  2. B₹18,00,000Correct
  3. C₹23,00,000
  4. D₹10,00,000

Explanation

Exchange differences count as borrowing cost only to the extent they adjust interest cost. This is the excess of rupee-loan interest over foreign-loan interest: 18,00,000 − 8,00,000 = ₹10,00,000, which is less than the ₹15,00,000 loss. Borrowing cost capitalised = 8,00,000 + 10,00,000 = ₹18,00,000. The remaining ₹5,00,000 of exchange loss is not borrowing cost. Capitalising the full loss would give the wrong figure of ₹23,00,000.

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