IAS 23 Borrowing Costs
What does IAS 23 Borrowing Costs say?
The core principle of IAS 23 Borrowing Costs is that you should capitalize borrowing costs if they are directly
attributable to the acquisition, construction or production of a qualifying asset.
Other borrowing costs are expensed in profit or loss.
What are qualifying assets?
Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale.
Substantial period of time = Normally, if an asset takes more than 1 year to be ready, then it would be qualifying.
Examples of Qualifying Assets:
Inventories.
Manufacturing plants.
Power generation facilities.
Intangible assets.
Investment properties.
Bearer plants.
Non-qualifying assets:
Assets ready for use or sale when purchased.
Inventories manufactured over a short period.
What can we capitalize?
IAS 23 specifically mentions 3 types of borrowing costs that can be capitalized:
1. Interest expenses (refer to the effective interest method under IFRS 9/IAS 39);
2. Finance charges on leases under IFRS 16 Leases; and
3. Exchange differences on borrowings in foreign currencies, but only those representing the adjustment to interest costs.
How do you capitalize?
IAS 23 differentiates between capitalizing borrowing costs on general borrowings and specific borrowings.
Specific borrowings
If you borrowed some funds specifically for the acquisition of a qualifying asset, then the capitalization is easy:
You simply capitalize the actual costs incurred less any income earned on the temporary investment of such borrowings.
General borrowings
General borrowings are those funds that are obtained for various purposes and they are used (apart from these other purposes) also for
the acquisition of a qualifying asset.
In this case, you need to apply capitalization rate to the borrowing funds on that asset, calculated as the weighted average of the
borrowing costs applicable to general pool.
Weighted Average Rate= (Total Interests / Total borrowings) x 100
When to Start Capitalization?
Start capitalizing borrowing costs when ALL the following conditions are met:
✅ Expenditures on the qualifying asset have been incurred.
✅ Borrowing costs are being incurred.
✅ Activities necessary to prepare the asset for its intended use or sale are in progress.
🔹 Example:
A company starts constructing a factory on 1 Jan 2024 and takes a loan for the construction. Capitalization starts on 1 Jan 2024 if
work has begun.
When to Suspend Capitalization?
Suspend capitalization only if there is a prolonged interruption in asset development.
Short or normal delays (e.g., bad weather, minor supply issues) do not require suspension.
Only long-term suspensions (e.g., legal disputes, major economic crises) stop capitalization.
🔹 Example:
Construction stops from 1 July 2024 to 31 Dec 2024 due to a legal issue. Borrowing costs during this period must be expensed, not
capitalized.
When to Cease Capitalization?
Cease capitalization when the asset is ready for use or sale.
The asset is substantially complete even if minor work (e.g., finishing touches, testing) continues.
If only small parts remain incomplete, capitalization must stop.
🔹 Example:
A factory is ready for production on 1 Oct 2025 but minor interior painting continues. Borrowing cost capitalization stops on 1 Oct
2025, and further costs are expensed.
Partial Completion:
✅ If a part of the asset is ready for use and can function independently, stop capitalization for that part.
✅ If the part is not yet ready or dependent on other unfinished sections, continue capitalization.
Disclosure Requirements:
Financial statements must disclose:
1. Amount of borrowing costs capitalized during the period.
2. Capitalisation rate used to determine the borrowing costs eligible for capitalization.
