Borrowing costs are not automatically a finance expense under Ind AS. When borrowing costs are directly attributable to acquiring, constructing or producing a qualifying asset, Ind AS 23 requires them to be included in the cost of that asset; other borrowing costs are recognised as an expense. The practical difficulty is deciding what qualifies, when capitalisation starts, how specific and general borrowings are handled, and when capitalisation must stop.
ICAI's 2025-26 Compendium of Indian Accounting Standards includes Ind AS 23 in the current standards collection. ICAI also provides a dedicated Educational Material on Ind AS 23 explaining the standard through a summary and practical FAQs.
What is 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. That definition is more important than the asset label. A major manufacturing plant under construction may qualify; an asset that is ready for use when purchased normally does not. Financial assets and inventories produced over a short period are not qualifying assets.
Ind AS 23 also states that an entity is not required to apply the standard to borrowing costs directly attributable to a qualifying asset measured at fair value, such as a biological asset within Ind AS 41, or to inventories manufactured or otherwise produced in large quantities on a repetitive basis. That scope point matters in industries where production cycles are long but repetitive.
Specific borrowings: the direct calculation
If funds are borrowed specifically for one qualifying asset, the eligible borrowing cost is based on the actual borrowing cost incurred on that borrowing during the relevant period, reduced by investment income earned from temporarily investing the unused funds.
Example: assume a company takes a project loan specifically for a qualifying plant and incurs ₹12 lakh of borrowing cost during the capitalisation period. Before the funds are fully deployed, temporary investment of the unspent amount earns ₹1.5 lakh. Subject to the other Ind AS 23 conditions, the amount considered for capitalisation from that specific borrowing is ₹10.5 lakh. The temporary investment income is not ignored.
General borrowings: use a capitalisation rate
Where an entity uses general borrowings to finance a qualifying asset, Ind AS 23 requires a capitalisation rate to be applied to the expenditure on that asset. The capitalisation rate is based on the weighted average borrowing costs applicable to the entity's outstanding borrowings for the period, subject to the standard's treatment of specific borrowings. The total amount capitalised for a period cannot exceed the borrowing costs actually incurred during that period.
This prevents a common shortcut: applying the rate of whichever loan happens to be easiest to identify even though the project is being funded from a general financing pool. Finance teams should retain the borrowing schedule, rate computation, project-expenditure dates and reconciliation to the amount capitalised.
When does capitalisation begin?
Capitalisation does not start merely because a loan has been sanctioned or because management has approved a project. Ind AS 23 says capitalisation begins when all three conditions are first met:
- the entity incurs expenditure for the asset;
- the entity incurs borrowing costs; and
- the entity undertakes activities necessary to prepare the asset for its intended use or sale.
The necessary activities are not limited to physical construction. Technical and administrative work before construction, including activities connected with obtaining permits, can be part of preparing the asset. This is why a project file should document not only site work but also substantive pre-construction activity.
When should capitalisation be suspended?
Capitalisation should be suspended during extended periods in which active development of the qualifying asset is suspended. Borrowing costs incurred while a partially completed asset is simply being held without active development generally do not qualify for capitalisation.
However, not every delay causes suspension. If substantial technical or administrative work continues, capitalisation is not normally suspended. Likewise, a temporary delay that is a necessary part of getting the asset ready for use or sale does not automatically stop capitalisation. The key question is whether the delay represents an abnormal interruption in active development or is part of the normal preparation process.
When does capitalisation stop?
Capitalisation ceases when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete. This point can be earlier than the date on which management formally puts the asset into use. ICAI's material specifically distinguishes readiness for intended use from a later operational or administrative milestone.
If a qualifying asset is completed in parts and each part can be used while work continues on other parts, capitalisation should cease for a completed part once substantially all activities necessary to prepare that part for use or sale are complete.
What must be disclosed?
Ind AS 23 requires disclosure of the amount of borrowing costs capitalised during the period and the capitalisation rate used to determine borrowing costs eligible for capitalisation. These disclosures are easier to support when the year-end file contains a clear roll-forward rather than a single journal entry with no calculation trail.
Practical month-end and year-end checklist
- Identify all assets under acquisition, construction or production that may take a substantial period to become ready.
- Separate specific project borrowings from general borrowings.
- Track project expenditure dates rather than using only the closing capital-work-in-progress balance.
- For specific borrowings, deduct qualifying temporary investment income from borrowing costs considered for capitalisation.
- For general borrowings, document the weighted-average capitalisation rate and the expenditure base to which it is applied.
- Confirm the commencement date using all three Ind AS 23 conditions.
- Document project stoppages and decide whether they are normal process delays or extended suspensions of active development.
- Stop capitalisation when the asset, or a separately usable completed part, is substantially ready for intended use or sale.
- Reconcile the amount capitalised to the general ledger, fixed-asset or CWIP schedule, and borrowing-cost disclosures.
Common mistakes to avoid
- Capitalising all interest merely because the entity has capital expenditure.
- Starting capitalisation on the loan drawdown date without checking project expenditure and preparatory activity.
- Ignoring temporary investment income on specific project borrowings.
- Using one arbitrary loan rate for a project funded from general borrowings.
- Continuing capitalisation through an abnormal extended project shutdown.
- Stopping only when commercial production begins even though the asset was already substantially ready for intended use.
- Failing to support the disclosed capitalisation rate with a reproducible calculation.
Practical takeaway
Ind AS 23 is best applied as a timeline-and-funding exercise. First decide whether the asset is genuinely a qualifying asset. Then identify whether funding is specific or general, establish the correct commencement date, monitor interruptions, and stop capitalisation when the asset is substantially ready. A well-supported calculation should let a reviewer trace every capitalised rupee back to borrowing costs, project expenditure and the period during which active preparation of the asset was taking place.
