Ind AS 23 does not allow a company to capitalise every interest cost simply because it is building or buying an asset. Capitalisation applies only to borrowing costs that are directly attributable to a qualifying asset. Other borrowing costs are recognised as an expense.
A good working paper therefore needs two things: a timeline showing when the asset was actively being prepared, and a calculation showing how much borrowing cost relates to that period.
Use the current Ind AS 23 text
ICAI's 2025–26 Ind AS 23 text contains the current recognition, measurement, commencement, suspension, cessation and disclosure requirements. ICAI's educational-material announcement also explains the purpose of its practical FAQs.
Borrowing costs can include effective-interest expense, interest on lease liabilities and certain foreign-currency exchange differences treated as an adjustment to interest. Each component still has to satisfy the standard before it is capitalised.
Does the asset qualify?
A qualifying asset necessarily takes a substantial period of time to become ready for its intended use or sale. Ind AS 23 does not set one fixed number of months. The answer depends on the asset and the entity's facts.
| Item | Usual Ind AS 23 conclusion | Reason |
|---|---|---|
| Manufacturing plant being constructed | May be a qualifying asset | It normally needs substantial preparation before use. |
| Investment property under lengthy construction | May be a qualifying asset | Construction can take a substantial period. |
| Machine ready for use when purchased | Not a qualifying asset | No substantial preparation period is needed. |
| Inventory produced quickly | Not a qualifying asset | It is produced over a short period. |
| Inventory made in large quantities on a repetitive basis | Application is optional for directly attributable borrowing costs | Ind AS 23 gives a specific scope exemption. |
The asset's accounting category and cost boundary should also be documented. For a tangible fixed asset, the related capital-versus-revenue expenditure guide explains which purchase, installation, training and operating costs normally enter or stay outside the asset's cost.
Specific borrowings
For funds borrowed specifically for one qualifying asset, start with the actual borrowing cost incurred during the eligible period. Deduct investment income earned from temporarily investing the unused specific borrowing.
| Specific-loan calculation | Amount |
|---|---|
| Borrowing cost during the eligible period | ₹12.00 lakh |
| Less: income from temporary investment of unused funds | ₹1.50 lakh |
| Borrowing cost eligible for capitalisation | ₹10.50 lakh |
This calculation assumes the asset qualifies and the commencement conditions are satisfied throughout the period. The investment income is not ignored or shown as unrelated income for this Ind AS 23 calculation.
General borrowings: complete weighted-rate example
When general borrowings fund the qualifying asset, apply a capitalisation rate to qualifying expenditure. The rate is the weighted average borrowing cost on the relevant general borrowings outstanding during the period. Borrowings made specifically for another qualifying asset are excluded until that other asset is substantially ready.
Assume the company has no specific project loan. General borrowings outstanding for the full year are ₹40 lakh at 9% and ₹60 lakh at 11%.
| Step | Calculation | Result |
|---|---|---|
| Annual borrowing cost | ₹40 lakh × 9% + ₹60 lakh × 11% | ₹10.20 lakh |
| Capitalisation rate | ₹10.20 lakh ÷ ₹100 lakh | 10.20% |
| Time-weighted project expenditure | ₹30 lakh × 12/12 + ₹20 lakh × 6/12 | ₹40.00 lakh |
| Eligible borrowing cost | ₹40.00 lakh × 10.20% | ₹4.08 lakh |
The ₹20 lakh expenditure is assumed to be incurred on 1 October, so it receives six months' weighting in a 31 March year-end example. The ₹4.08 lakh result is below the ₹10.20 lakh borrowing cost actually incurred, so the overall cap is not breached. Real calculations should use actual expenditure dates, progress payments, grants and the entity's funding facts.
When capitalisation starts, pauses and stops
| Stage | Ind AS 23 test | Evidence to retain |
|---|---|---|
| Start | Expenditure is incurred, borrowing costs are incurred, and necessary preparation activities are underway. | Invoices or payments, loan schedule, approvals, permits and project-activity records. |
| Suspend | Active development is stopped for an extended abnormal period. | Site reports, contractor correspondence, management decision and restart date. |
| Continue through a delay | Substantial technical or administrative work continues, or the delay is a necessary part of preparation. | Engineering, permit or project-management evidence explaining the delay. |
| Stop | Substantially all activities needed to prepare the asset for intended use or sale are complete. | Completion certificate, readiness assessment, handover and separately usable component dates. |
A loan sanction or drawdown alone does not start capitalisation. Similarly, management cannot continue capitalising until commercial production merely because the formal launch happens later. The relevant point is when the asset is substantially ready.
Parts completed at different times
If separately usable parts are completed while work continues elsewhere, capitalisation stops for each usable part when that part is substantially ready. A business park with buildings usable independently is a common example. A plant whose processes must operate together may need to be completed as a whole.
Month-end review checklist
- Identify assets that genuinely need a substantial preparation period.
- Separate specific and general borrowings.
- Use actual project-expenditure dates, reduced for relevant progress payments and grants.
- Deduct temporary investment income from eligible specific-borrowing costs.
- Reproduce the weighted-average rate for general borrowings.
- Document the first date on which all three commencement conditions are met.
- Explain every extended project stoppage and whether capitalisation was suspended.
- Stop capitalisation for the whole asset or a separately usable part when substantially ready.
- Ensure the period's capitalised amount does not exceed borrowing costs incurred.
- Reconcile the calculation to CWIP or the relevant asset ledger.
Required disclosures
Ind AS 23 requires disclosure of the borrowing costs capitalised during the period and the capitalisation rate used for general borrowings. A reviewer should be able to reproduce both numbers from the supporting schedule.
The safest approach is to separate the asset test, funding test, timeline and calculation. That prevents interest from being capitalised merely because a capital project exists.
Regulatory details may change. Confirm current official guidance before acting.
