IAS 23 Borrowing Costs: Qualifying Assets, Capitalisation Period and Suspension
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Sai Manikanta Pedamallu
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IAS 23 Borrowing Costs: Qualifying Assets, Capitalisation Period and Suspension
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
IAS 23 is a short standard with one core rule and a great deal of practical difficulty hidden inside it. The rule: borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Everything else goes to profit or loss as incurred.
The first thing to establish is that this is not a choice. Capitalisation of borrowing costs on qualifying assets is mandatory. An entity building a power plant over four years cannot elect to expense the interest for the sake of a simpler set of accounts, and equally cannot capitalise interest on an asset that does not qualify simply to protect reported profit. The standard removes the discretion entirely, and the audit attention that follows is focused almost exclusively on whether the boundaries have been drawn honestly.
Where the difficulty lives is in three questions: which assets qualify, over what period capitalisation runs, and how much of the interest cost is genuinely attributable. Indian infrastructure developers, real estate companies, and capital-intensive manufacturers deal with all three constantly, and the answers move material amounts between the balance sheet and the income statement.
What Makes an Asset Qualifying
A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
Both halves of that definition carry weight. "Necessarily" means the time taken must be inherent to the nature of the asset and its preparation, not the result of avoidable delay or inefficiency. "Substantial period of time" is deliberately undefined in the standard itself, though Indian guidance has settled on twelve months or more as the ordinary benchmark, subject to the facts and complexity of the specific asset.
Assets that typically qualify: manufacturing plants under construction, power generation facilities, infrastructure assets such as roads, bridges and ports, real estate developments, intangible assets under development, investment properties under construction, and bearer plants during their maturation period.
Assets that do not qualify: financial assets, inventories manufactured or produced over a short period, and, importantly, assets that are ready for their intended use or sale when acquired. A company purchasing a completed office building holds no qualifying asset, however it finances the purchase, because no substantial period of preparation is required.
Inventory deserves a specific note. Inventory produced in large quantities on a repetitive basis over a short period is not a qualifying asset. Inventory that necessarily takes a substantial period to bring to a saleable condition can be. Aged spirits and wine maturing over years is the classic international example; in India, real estate inventory in a long-duration residential or commercial development is the more common case, and it does qualify.
What Counts as a Borrowing Cost
Borrowing costs are interest and other costs an entity incurs in connection with the borrowing of funds. Specifically:
Interest expense calculated using the effective interest method under IFRS 9. This means the amortisation of any discount, premium, or transaction costs on the borrowing is included, not just the coupon.
Finance charges in respect of leases recognised under IFRS 16.
Exchange differences arising from foreign currency borrowings, to the extent they are regarded as an adjustment to interest costs. This last item is where Ind AS provides specific additional guidance that IAS 23 does not, discussed below.
Specific Borrowings: The Direct Calculation
Where funds are borrowed specifically to obtain a qualifying asset, the amount eligible for capitalisation is the actual borrowing costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of those borrowings.
The deduction of investment income is mandatory and frequently overlooked. A developer drawing down a Rs. 500 crore project loan in a single tranche, but spending it over eighteen months, will typically park the undeployed balance in liquid funds or fixed deposits. The income earned on that parked money reduces the borrowing cost eligible for capitalisation.
IAS 23 does not address investment losses on temporary investment, and the general view is that deducting a loss (thereby increasing the amount capitalised) would contradict the definition of borrowing costs and is not appropriate.
General Borrowings: The Capitalisation Rate
Where an entity funds a qualifying asset from its general pool of borrowings rather than a dedicated facility, the amount eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on that asset.
The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, excluding borrowings made specifically for the purpose of obtaining a qualifying asset.
Two constraints apply. First, the amount capitalised during a period cannot exceed the total borrowing costs actually incurred during that period. An entity cannot capitalise more interest than it has paid. Second, the rate is applied to the expenditures on the asset, weighted for the portion of the period each expenditure was outstanding, not to the full budgeted cost of the project.
Illustration of the weighting. An entity with a general borrowing capitalisation rate of 5% incurs expenditure on a qualifying asset of Rs. 100,000 with ten months remaining in the period, Rs. 300,000 with seven months remaining, and Rs. 600,000 with three months remaining.
Capitalised amount = (Rs. 100,000 x 10/12 + Rs. 300,000 x 7/12 + Rs. 600,000 x 3/12) x 5%
= (Rs. 83,333 + Rs. 175,000 + Rs. 150,000) x 5%
= Rs. 408,333 x 5% = Rs. 20,417
The weighting matters. Applying 5% to the full Rs. 1,000,000 would produce Rs. 50,000, overstating the capitalised amount by roughly two and a half times.
The Expenditure Test: What Actually Counts
IAS 23 restricts eligible expenditures to those that have resulted in cash payments, transfers of other assets, or the assumption of interest-bearing liabilities.
This has a specific and often-missed consequence: borrowing costs relating to amounts owed to contractors and suppliers under ordinary non-interest-bearing trade payables cannot be capitalised. The expenditure only qualifies once the payment is actually made, or once an interest-bearing liability is assumed.
In most cases the timing gap between incurring a trade payable and settling it is short enough to be immaterial. For a large infrastructure project with substantial contractor retentions and extended payment terms, the gap can be significant enough to require attention.
Progress payments and advances to contractors do count, since cash has moved. Grants received in respect of the asset are deducted from the expenditure base, since to that extent the entity has not funded the asset from its own resources.
Commencement: Three Conditions, All Required
Capitalisation begins on the date the entity first meets all three of the following conditions:
It incurs expenditures for the asset.
It incurs borrowing costs.
It undertakes activities necessary to prepare the asset for its intended use or sale.
The third condition is broader than physical construction. It encompasses technical and administrative work prior to the commencement of physical construction: obtaining permits, finalising designs, securing regulatory clearances. For an Indian infrastructure project, the period spent obtaining environmental clearances and land use approvals, with expenditure being incurred on consultants and application fees, can satisfy this condition well before any earth is moved.
What it does not include: merely holding an asset without any production or development activity. Land acquired and held while the entity decides what to do with it generates no capitalised borrowing cost, because no activity to prepare it is underway.
The conjunctive nature of the test is the exam point. An entity that has drawn its loan and is incurring interest, but has not yet begun any preparatory activity, cannot capitalise. Equally, an entity actively designing an asset but not yet incurring any expenditure on it cannot capitalise.
Suspension: Extended Interruptions Only
Capitalisation is suspended during extended periods in which active development of a qualifying asset is interrupted.
The word "extended" is doing significant work. Capitalisation is not suspended for temporary delays that are a necessary part of the process of getting an asset ready. Nor is it suspended during a period when substantial technical and administrative work is being carried on, even if physical construction has paused.
Where it is suspended: an extended cessation of active development, such as when the entity redirects its workforce and resources to another project, or when a project is mothballed pending funding or a regulatory decision with no ongoing preparatory work.
The distinction is genuinely difficult in practice, and Indian infrastructure projects supply a steady stream of borderline cases. A road project halted for eight months by a land acquisition dispute, with the entity's project team reassigned elsewhere and no design or approval work continuing, is a suspension. The same project halted for the same eight months while the entity's legal and technical teams actively work through the dispute and refine designs for the revised alignment is arguably not, since substantial administrative work continues.
Monsoon delays in Indian construction illustrate the "necessary part of the process" carve-out well. A four-month monsoon pause is an inherent feature of the construction cycle in much of India, anticipated in the project schedule, and does not trigger suspension.
Cessation: Substantially All Activities Complete
Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
"Substantially all" means the asset is physically complete even if routine administrative work continues. Minor modifications outstanding, such as decoration or finishing to a purchaser's specification, do not extend the capitalisation period.
This is a common source of overstatement. A manufacturing plant that is mechanically complete and capable of operating, awaiting only final regulatory sign-off or the arrival of initial raw material inventory, has reached cessation. Continuing to capitalise interest during a commissioning or ramp-up period after the asset is capable of operating in the manner intended by management is not supportable.
Phased Completion
Where construction is completed in parts and each part is capable of being used while construction continues on other parts, capitalisation ceases on each part as it is completed.
A residential township developed in phases, where Phase 1 towers are complete and occupied while Phase 2 is under construction, requires capitalisation to cease on Phase 1 while continuing on Phase 2. Indian real estate developers with multi-phase projects need to track this at the phase level, not the project level.
Conversely, where an asset must be complete in its entirety before any part can be used, capitalisation continues until the whole asset is ready. A steel plant where the rolling mill cannot operate until the blast furnace is commissioned is a single qualifying asset for this purpose, not a series of separately completed components.
The Land and Building Question
The IFRS Interpretations Committee considered a scenario directly relevant to Indian real estate: an entity acquires and develops land, then constructs a building on it, with both land and building being qualifying assets, funded from general borrowings. The question was whether capitalisation on the land expenditure should cease when building construction commences, or continue throughout the construction phase.
The reasoning turns on what the land is being prepared for. Where the land's intended use is as the site for the building, the activities necessary to prepare the land for its intended use are not complete until the building is complete, and capitalisation on the land expenditure continues. Where the land was independently developed and made ready for its own intended use before building construction began, capitalisation on the land ceases at that earlier point.
Worked Example: A Mixed-Funding Project
An Indian company constructs a manufacturing facility. Construction begins 1 April 2025 and the facility is ready for use on 31 January 2026.
Funding:
Specific loan of Rs. 60 crore drawn 1 April 2025 at 9% per annum, dedicated to the project.
General borrowings outstanding throughout the year: Rs. 200 crore at 8%, Rs. 100 crore at 11%.
Expenditure: Rs. 60 crore on 1 April 2025 (funded by the specific loan), Rs. 40 crore on 1 October 2025 (funded from general borrowings).
Other information: Rs. 25 crore of the specific loan was temporarily invested from 1 April to 30 June 2025, earning Rs. 0.45 crore. Construction was suspended for the whole of December 2025 following a contractor dispute, with the project team reassigned and no work of any kind continuing.
Step 1: Capitalisation period. Commences 1 April 2025 (all three conditions met). Suspended for December 2025. Ceases 31 January 2026. Total capitalisation period: nine months (April to November 2025, plus January 2026).
Step 2: Specific borrowing.
Interest for nine months: Rs. 60 crore x 9% x 9/12 = Rs. 4.05 crore
Less investment income: Rs. 0.45 crore
Eligible from specific borrowing: Rs. 3.60 crore
Step 3: Capitalisation rate on general borrowings.
(Rs. 200 crore x 8% + Rs. 100 crore x 11%) / Rs. 300 crore
= (Rs. 16 crore + Rs. 11 crore) / Rs. 300 crore = 9%
Step 4: General borrowing capitalisation.
The Rs. 40 crore expenditure was incurred on 1 October 2025. Within the capitalisation period, it was outstanding for October, November, and January: three months.
Rs. 40 crore x 9% x 3/12 = Rs. 0.90 crore
Total borrowing costs capitalised: Rs. 3.60 crore + Rs. 0.90 crore = Rs. 4.50 crore
Interest incurred during December 2025, the suspension month, is expensed rather than capitalised.
The Ind AS 23 Exchange Difference Carve-In
Here is a genuine difference between Ind AS 23 and IAS 23, and it is worth being precise about because it is a rare case of Ind AS providing guidance that IAS does not.
Both standards include, within the definition of borrowing costs, exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Neither standard's core text explains how to determine that extent. In practice, this left considerable diversity internationally.
Ind AS 23 adds specific guidance. The adjustment is limited to an amount equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in the functional currency and the cost of borrowing in the foreign currency.
The logic is that an entity borrowing in a foreign currency at a lower nominal rate is, in economic substance, accepting exchange risk in place of the higher domestic interest rate. To the extent the exchange loss represents that trade-off, it is genuinely a cost of borrowing. Beyond that point, it is a currency loss, not an interest cost.
Illustration. An Indian company with INR functional currency borrows USD 10 million at 3% to fund a qualifying asset. Equivalent INR borrowing would have cost 9%. The exchange rate moves from Rs. 82 to Rs. 87 per USD during the year.
Notional INR interest at 9%: USD 10 million x Rs. 82 x 9% = Rs. 7.38 crore
Actual USD interest at 3%, translated: USD 10 million x Rs. 87 x 3% = Rs. 2.61 crore
Difference (the ceiling for exchange loss capitalisation): Rs. 4.77 crore
Actual exchange loss on the principal: USD 10 million x (Rs. 87 less Rs. 82) = Rs. 5.00 crore
The exchange loss of Rs. 5.00 crore exceeds the ceiling of Rs. 4.77 crore. Only Rs. 4.77 crore is regarded as an adjustment to interest cost and therefore eligible for capitalisation as a borrowing cost. The remaining Rs. 0.23 crore is an exchange loss under Ind AS 21, recognised in profit or loss.
The guidance also addresses reversal: where a gain arises on subsequent settlement or translation, the gain is recognised as an adjustment to interest to the extent of any loss previously recognised as such an adjustment.
For Indian companies funding infrastructure and manufacturing projects through external commercial borrowings, which is common precisely because foreign currency rates have historically been lower than domestic rates, this calculation is a routine and material part of the year-end close.
Disclosure
IAS 23's disclosure requirements are brief but specific: the amount of borrowing costs capitalised during the period, and the capitalisation rate used to determine the amount eligible for capitalisation.
Where an entity uses multiple capitalisation rates for different asset classes or different segments, the rates should be disclosed with sufficient granularity for a user to understand the basis.
Ind AS 23 vs IAS 23
| Area | IAS 23 | Ind AS 23 |
|---|---|---|
| Capitalisation mandatory for qualifying assets | Same | Same |
| Definition of qualifying asset | Same | Same |
| "Substantial period of time" | Undefined | Undefined in the standard; Indian guidance treats twelve months as the ordinary benchmark |
| Specific borrowings less investment income | Same | Same |
| General borrowings weighted average rate | Same | Same |
| Commencement, suspension, cessation | Same | Same |
| Exchange differences as borrowing costs | Included "to the extent regarded as an adjustment to interest costs"; no computational guidance | Same inclusion, plus specific guidance capping the adjustment at the differential between functional currency and foreign currency borrowing cost |
| Reversal of previously adjusted exchange loss | No specific guidance | Gains recognised as an adjustment to interest to the extent of losses previously so recognised |
| AS 16 comparison | Not applicable | AS 16 permitted broader exchange difference capitalisation; Ind AS 23's differential cap is narrower |
What Big 4 Auditors Focus On
Qualifying asset determination. Auditors challenge whether assets on which borrowing costs have been capitalised genuinely require a substantial period of preparation. Capitalising interest on a completed asset acquired ready for use, or on inventory produced on a short repetitive cycle, is a straightforward error that nonetheless recurs.
Cessation timing. This is the single highest-risk area, because delaying cessation defers cost from the income statement to the balance sheet. Auditors test the date the asset became capable of operating in the manner intended by management, using commissioning records, regulatory approvals, and operational readiness documentation, rather than accepting the date the entity chose to begin commercial production.
Suspension identification. Auditors probe for extended interruptions that should have triggered suspension, particularly where a project timeline has slipped materially. Board papers, project status reports, and evidence of workforce redeployment are tested. An entity that has capitalised interest continuously through a project that visibly stalled for months requires explanation.
Investment income deduction on specific borrowings. Auditors verify that income earned on temporarily invested specific borrowings has been deducted. Where a large project loan is drawn in a single tranche and deployed over an extended period, this deduction can be material and is frequently missed.
The expenditure weighting for general borrowings. Auditors recalculate the weighted average expenditure base, testing that expenditures have been weighted for the portion of the period they were actually outstanding rather than the full period, and that the capitalisation rate excludes specific borrowings.
Exchange difference computation under Ind AS 23. For entities with foreign currency project borrowings, auditors test the differential calculation specifically, since capitalising the full exchange loss rather than the capped amount is a common and material error.
Dip IFRS Exam Angle
IAS 23 is a reliably examined standard, usually as a calculation with several deliberate complications embedded.
Most tested areas:
Determining the capitalisation period by applying the three commencement conditions, identifying any suspension period, and establishing the cessation date.
Calculating capitalised borrowing costs on specific borrowings, remembering to deduct investment income on temporary investment.
Computing the weighted average capitalisation rate for general borrowings, excluding specific borrowings from the calculation.
Applying the rate to expenditures weighted for the period each was outstanding within the capitalisation period.
Common traps:
Treating capitalisation as optional. It is mandatory for qualifying assets.
Forgetting to deduct investment income earned on temporarily invested specific borrowings.
Including specific borrowings in the general borrowings weighted average rate calculation.
Applying the capitalisation rate to the full expenditure without time-weighting.
Continuing to capitalise through a suspension period, or through a period after the asset became ready for its intended use.
Capitalising more than the total borrowing costs actually incurred in the period.
Suspending capitalisation for a temporary delay that is a necessary part of the preparation process, or during a period when substantial technical and administrative work continues.
FAQ
Is capitalisation of borrowing costs ever optional under IAS 23?
No. Where an asset meets the definition of a qualifying asset and directly attributable borrowing costs exist, capitalisation is required. The optionality that existed under earlier versions of the standard was removed.
Can inventory be a qualifying asset?
Yes, where it necessarily takes a substantial period to bring to a saleable condition. Inventory produced in large quantities on a repetitive basis over a short period is explicitly excluded. Long-duration real estate inventory in an Indian residential development qualifies; fast-moving manufactured goods do not.
Does a monsoon shutdown trigger suspension of capitalisation?
Generally no. Capitalisation is not suspended for temporary delays that are a necessary part of the process of preparing the asset. A seasonal construction pause anticipated in the project schedule falls into this category, unlike an extended interruption caused by a dispute or funding failure with no ongoing preparatory work.
What happens to interest incurred during a suspension period?
It is recognised as an expense in profit or loss for that period. It is not capitalised, and it is not deferred for capitalisation once the project resumes.
If a project is completed in phases, when does capitalisation cease?
On each phase individually, as that phase becomes capable of being used, provided the phases are capable of independent use. Where the asset must be complete in its entirety before any part can operate, capitalisation continues until the whole is ready.
Why does Ind AS 23 cap the exchange difference adjustment when IAS 23 does not?
IAS 23 includes exchange differences "to the extent regarded as an adjustment to interest costs" without explaining how to measure that extent, which produced diversity in practice. Ind AS 23 adds a computational rule capping the adjustment at the differential between functional currency and foreign currency borrowing cost, on the basis that only that portion represents a genuine substitute for interest.
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This is Post 65 of the Global Fin X IFRS Series. Previous: IAS 12 vs Ind AS 12: Treatment of MAT Credit and Other Differences. Next: Post 66: IAS 33 Earnings Per Share: Basic, Diluted and Antidilutive Securities.