INDIAN ACCOUNTING STANDARD 23 6.

101

UNIT 3 :
INDIAN ACCOUNTING STANDARD 23 :
BORROWING COSTS

LEARNING OUTCOMES

After studying this unit, you will be able to:

 Identify the core principle and scope of the standard
 Define borrowing cost, qualifying asset and other related terms
 Examine various conditions and pre-conditions for capitalisation of
borrowing costs
 Recognize suspension and cessation of capitalization of borrowing cost
 Comply with the disclosure requirements of the standard
 Differentiate between Ind AS 23 and AS 16.

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UNIT OVERVIEW

Core Principle
Capitalisation of borrowing
costs that are directly
attributable to the acquisition,
construction or production of a
qualifying asset

Scope - Exclusions
• qualifying asset measured at
fair value
Disclosures • inventories produced in large
quantities
• actual or imputed cost of
equity

Borrowing costs eligible for

Period of capitalisation: capitalisaion
# Commencement • Specific borrowings
# Suspension • General borrowings
# Cessation • Calculation of capitalisation
rate

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3.1 CORE PRINCIPLE

The core principle of Ind AS 23 states that:
a. Borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset are included in the cost of that asset i.e. must be capitalised.
b. Other borrowing costs are recognized as an expense in the period in which they are incurred.

Borrowing Costs

Interest and other costs Other borrowing costs

Capitalised as part of cost

Recognized as expense
of asset if directly
when incurred
attributable to

Acquisition of Construction Production of

qualifying of qualifying qualifying
asset asset asset

3.2 SCOPE OF THE STANDARD

 An entity shall apply this standard in accounting for borrowing costs.
 The Standard does not apply to actual or imputed cost of equity, including preferred capital
not classified as a liability.

Example 1
Dividend paid on equity shares, cost of issuance of equity shares, cost of preference share
capital (not classified as liability as per Ind AS 32) will not be included as borrowing cost
within the purview of this standard.

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 The general requirement of this standard (to capitalise directly attributable borrowings cost)
is not required to be applied to:
(a) qualifying assets that are measured at fair value, for example, a biological asset
accounted for under Ind AS 41 - If the assets are held under fair value model with all
changes going to statement of profit or loss, then capitalisation would not affect
measurement in the balance sheet and would involve only reallocation between finance
cost and fair value movement in the Statement of profit and loss.
(b) inventories that are manufactured, or otherwise produced, in large quantities on
a repetitive basis – This exemption acknowledges the difficulty both in allocating
borrowing costs to such inventories and monitoring those borrowing costs until the
inventories are sold.

3.3 KEY DEFINITIONS

Following are the terms defined in the standard:
1. Borrowing costs: These are interest and other costs that an entity incurs in connection with
the borrowing of funds. Borrowing costs may include:
 interest expense calculated using the effective interest rate method as described in
Ind AS 109 Financial Instruments;
 interest in respect of lease liabilities recognized in accordance with Ind AS 116, Leases;
and
 exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs

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• Calculated using the effective interest

Interest expense method as described in Ind AS 109

Interest in respect of • Recognized in accordance with Ind AS 116

lease liabilities

Exchange differences • Recognized to the extent

arising from foreign that they are regarded as an
currency borrowings adjustment to interest costs

2. Qualifying asset: Qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale. Examples of qualifying assets are
manufacturing plants, real estate and infrastructure assets such as bridges and railways etc.
Ind AS 23 does not provide any guidance on what constitutes a 'substantial period of time'.
The specific facts and circumstances should be considered in each case. For example, it is
likely that a period of twelve months or more might be considered 'substantial'.
Depending on the circumstances, any of the following may be qualifying assets:
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
(f) bearer plants.
Financial assets and inventories that are manufactured, or otherwise produced, over a short
period of time, are not qualifying assets.

Assets that are ready for their intended use or sale when acquired are not qualifying assets.

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Excludes
• Inventories produced
Includes in large quantities on
repititive basis
• Inventories • Assets ready for
Qualifying asset • Manufacturing plant intended use or sale
• Power generation when acquired
• Takes substantial
facilities • Financial assets
period of time to get
ready for its intended • Intangible assets
use or sale. • Bearer plants

Illustration 1
A company deals in production of dairy products. It prepares and sells various milk products like
ghee, butter and cheese. The company borrowed funds from bank for manufacturing operation.
The cheese takes substantial longer period to get ready for sale.
State whether borrowing costs incurred to finance the production of inventories (cheese) that have
a long production period, be capitalised?
Solution

Ind AS 23 does not require the capitalisation of borrowing costs for inventories that are
manufactured in large quantities on a repetitive basis. However, interest capitalisation is
permitted as long as the production cycle takes a ‘substantial period of time’, as with cheese.
*****
Illustration 2
A company is in the process of developing computer software. The asset has been qualified for
recognition purposes. However, the development of computer software will take substantial period
of time to complete.
(i) Evaluate whether computer software can be termed as a ‘qualifying asset’ under Ind AS 23?
(ii) Analyse whether management intention should be considered for assessment of the asset
as a qualifying asset?
Solution
(i) Yes. An intangible asset that takes a substantial period of time to get ready for its intended
use or sale is a ‘qualifying asset’. This would be the case for an internally generated

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computer software in the development phase when it takes a ‘substantial period of time’ to
complete.
(ii) Yes. Management should assess whether an asset, at the date of acquisition, is ‘ready for
its intended use or sale’. The asset might be a qualifying asset, depending on how
management intends to use it. For example, when an acquired asset can only be used in
combination with a larger group of fixed assets or was acquired specifically for the
construction of one specific qualifying asset, the assessment of whether the acquired asset
is a qualifying asset is made on a combined basis.
*****
Illustration 3
A telecom company has acquired a 3G license. The licence could be sold or licensed to a third
party. However, management intends to use it to operate a wireless network. Development of the
network starts when the license is acquired.
Identify whether the borrowing costs on the acquisition of the 3G license be capitalised until the
network is ready for its intended use.
Solution
Yes. The license has been exclusively acquired to operate the wireless network. The fact that
the license can be used or licensed to a third party is irrelevant. The acquisition of the license is
the first step in a wider investment project (developing the network). It is part of the network
investment, which meets the definition of a qualifying asset under Ind AS 23.
*****
Illustration 4

A real estate company has incurred expenses for the acquisition of a permit allowing the
construction of a building. It has also acquired equipment that will be used for the construction of
various buildings.
Examine whether the borrowing costs on the acquisition of the permit and the equipment be
capitalised until the construction of the building is complete.
Solution
With respect to Permit
Yes, since permit is specific to one building. It is the first step in a wider investment project. It is
part of the construction cost of the building, which meets the definition of a qualifying asset.

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With respect to Equipment
No, since the equipment will be used for other construction projects. It is ready for its ‘intended
use’ at the acquisition date. Hence, it does not meet the definition of a qualifying asset.
*****
Illustration 5
Is interest on a finance lease of a qualifying asset capitalised as borrowing costs?
Solution
Yes, interest incurred for a finance lease is specific to an asset. Interest is capitalised if the asset
is a qualifying asset or is used solely for the construction of a qualifying asset. For example, a
crane or a dockyard is leased for the purpose of constructing a ship. The ship is a qualifying
asset. The interest on the finance lease of the crane or dockyard is capitalised as borrowing
costs. Borrowing costs on the finance lease can only be capitalised up to the point when the
construction of the qualifying asset is complete.
*****

3.4 EXCHANGE DIFFERENCE TO BE INCLUDED IN

BORROWING COSTS
The extent to which exchange differences can be considered as borrowing cost depends on the
terms and conditions of the foreign currency borrowing.
The gains and losses that are an adjustment to interest costs include the interest rate differential
between borrowing costs that would be incurred if the entity borrowed funds in its functional
currency and borrowing costs actually incurred on foreign currency borrowings. An entity may
borrow funds in a currency that is not its functional currency e.g. A Company with INR functional
currency may take US dollar loan for financing asset development project in a company.
This may have been done on the basis that, over the period of the development of asset, the
borrowing costs, even after allowing for exchange differences, were expected to be less than the
interest cost of an equivalent INR loan.
Following approach is to be followed for determining the extent to which the exchange difference
should be treated as borrowing costs:
(i) the adjustment should be of an amount which is equivalent to the extent to which the
exchange loss does not exceed the difference between the cost of borrowing in functional
currency when compared to the cost of borrowing in a foreign currency.

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Example 2
An entity can borrow funds in its functional currency ( ) @ 12%. It borrows $ 1,000
@ 4% on 1 st April, 20X1 when $ 1 = 40. The equivalent amount in functional currency is
40,000. Interest is payable on 31 st March, 20X2. On 31 st March, 20X2, exchange rate is
$ 1 = 50. The loan is not due for repayment. The exchange loss in this case is 10,000
[$ 1,000 x ( 50- 40)]. The borrowing cost is 2,000 ($ 1,000 x 4% x 50).
Had the entity borrowed funds in functional currency the borrowing cost would have been
4,800 ( 40,000 x 12%).
The entity will treat exchange difference upto 2,800 ( 4,800 – 2,000) as a borrowing
cost that may be eligible for capitalisation under this Standard.
Thus, the total eligible borrowing cost is 4,800 ( 2,000 + 2,800) equivalent to the
borrowing cost in functional currency.
If the exchange rate on 31 st March, 20X2, is $ 1 = 41. The exchange loss is
1,000 [$ 1,000 – ( 41 – 40)]. The entity will treat the entire exchange loss as an eligible
borrowing cost as total cost of the borrowing 2,640 [( 1,000 x 4% x 41) +
1,000] in foreign currency does not exceed the cost of borrowings in functional currency,
i.e., 4,800.

(ii) where there is an unrealised exchange loss which is treated as an adjustment to interest and
subsequently there is a realised or unrealised gain in respect of the settlement or translation
of the same borrowing, the gain to the extent of the loss previously recognized as an
adjustment should also be recognized as an adjustment to interest.
Example 3: Continuing with the aforesaid example 2:
If the exchange rate on 31 st March, 20X3, is $ 1 = 48; the exchange rate on
st
31 March, 20X2, being $ 1= 50, the borrowings are still not due for payment. The entity
will recognize a borrowing cost of 1,920 ($ 1,000 x 4% x 48). There is an exchange gain
of 2,000 ($ 1,000 x ( 50 – 48)). This will be adjusted in the borrowing cost as there is
unrealized exchange loss and the adjustment is less than the exchange loss of 2,800
recognized in earlier year.
If the exchange rate on 31 st March, 20X3, is $ 1 = 44; the exchange rate on
st
31 March, 20X2, being $ 1 = 50, the borrowings are still not due for payment. The entity
will recognize a borrowing cost of 1,760 ($ 1,000 x 4% x 44). There is an exchange gain
of 6,000 [$ 1,000 x ( 50 – 44)]. This will be adjusted in the borrowing cost upto 2,800
as there is unrealized exchange loss and the adjustment of the exchange loss recognized in
earlier years is of 2,800.

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If the exchange rate on 31 st March, 20X3, is $ 1 = 44 and part of loan is repaid; the
exchange rate on 31 st March, 20X2, being $ 1 = 50; $ 600 of the borrowings was paid on
31 st March, 20X2, $ 400 of the borrowings are still not due for payment. The entity will
recognize a borrowing cost of 704 ($ 400 x 4% x 44). There is an exchange gain of
2,400 [$ 400 x ( 50 – 44)]. The unrealised exchange loss of earlier year is 4,000
[$ 400 x ( 50 – 40)] out of which 1,120 ( 2,800 x $ 400 / $ 1000) was charged in
31 st March, 20X2, as borrowing cost. Thus, there will be an adjustment in the borrowing cost
upto 1,120 as this is unrealised exchange loss.

Illustration 6
ABC Ltd. has taken a loan of USD 20,000 on 1 st April, 20X1 for constructing a plant at an interest
rate of 5% per annum payable on annual basis.
On 1 st April, 20X1, the exchange rate between the currencies i.e. USD vs Rupees was 45 per
USD. The exchange rate on the reporting date i.e. 31 st March, 20X2 is 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd. from State Bank of India in
local currency at an interest rate of 11% per annum as on 1 st April, 20X1.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd. for the
period ending 31 st March, 20X2.
Solution
In the above situation, the borrowing cost needs to determine for interest cost on such foreign
currency loan and eligible exchange loss difference if any.
(a) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in : USD 1,000 x 48/USD = 48,000
(b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x 45/USD x 11% = 99,000
(c) Difference between interest on foreign currency borrowing and local currency borrowing:
99,000 - 48,000 = 51,000
Increase in liability due to change in exchange difference: USD 20,000 x (48 - 45) = 60,000
Hence, out of exchange loss of 60,000 on principal amount of foreign currency loan, only
exchange loss to the extent of 51,000 is considered as borrowing costs.

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Total borrowing cost to be capitalized is as under:

(a) Interest cost on borrowing 48,000
(b) Exchange difference to the extent considered to be an adjustment to Interest cost 51,000
99,000
The exchange difference of 51,000 has been capitalized as borrowing cost and the remaining
9,000 will be expensed off in the Statement of Profit and Loss.
*****

3.5 RECOGNITION
 Borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset are capitalised as part of the cost of the qualifying asset.
 Such borrowing cost are capitalised when below two conditions are satisfied:
- it is probable that it will result in future economic benefits to the entity; and
- the costs can be measured reliably.
 Other borrowing costs are recognized as an expense in the period in which they are incurred.
 When an entity applies Ind AS 29 Financial Reporting in Hyperinflationary Economies, it
recognizes as an expense the part of borrowing costs that compensates for inflation during
the same period.
3.5.1 Borrowing costs eligible for capitalisation
The borrowing costs that are eligible for capitalisation are those borrowing costs that would have
been avoided if the expenditure on the qualifying asset had not been made.
Since it may not always be easy to identify a direct relationship between particular borrowings and
a qualifying asset and to determine the borrowings that could otherwise have been avoided, the
standard includes separate requirements for specific borrowings and general borrowings.
[Link] Specific borrowing costs
 If an entity borrows funds specifically to obtain a qualifying asset, the borrowing costs that
are directly related to that qualifying asset can be readily identified.
 The borrowings cost eligible for capitalisation would be the actual borrowing costs incurred
during the period less any investment income on the temporary investment of those
borrowings.
Note: A ‘notional’ borrowing cost cannot be capitalised. Ind AS 23 limits the amount that can
be capitalised to the actual borrowing costs incurred. The standard does not address actual
or imputed cost of equity. Where an entity has no borrowings and uses its own cash

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resources to finance the construction of property, plant and equipment, the entity cannot
assume that interest that could have been earned on that cash represents forgone benefit
and could be capitalised.

 An entity may obtain borrowed funds specifically and incur associated borrowing costs before
some or all of the funds are used for expenditures on the qualifying asset. In such
circumstances, the funds are often temporarily invested pending their expenditure on the
qualifying asset. In determining the amount of borrowing costs eligible for capitalisation
during a period, any investment income earned on such funds is deducted from the borrowing
costs incurred.

Borrowing Actual borrowing Investment income on

costs eligible costs incurred on the temporary
for that borrowing investment of those
capitalisation during the period borrowings, if any.

Illustration 7
Alpha Ltd. on 1 st April, 20X1, borrowed 30,00,000 @ 9% to finance the construction of two
qualifying assets. Construction started on 1 st April, 20X1. The loan facility was availed on 1 st
April, 20X1 and was utilized as follows with remaining funds invested temporarily at 7%:
Factory Building Office Building
1st April, 20X1 5,00,000 10,00,000
1st October, 20X1 5,00,000 10,00,000
Calculate the cost of the asset and the borrowing cost to be capitalized.

Solution:

Particulars Factory Building Office Building

Borrowing Costs (10,00,000 x 9%) 90,000 (20,00,000 x 9%) 1,80,000
Less: Investment Income (5,00,000 x 7% x 6/12) (17,500) (10,00,000x7% x 6/12) (35,000)
72,500 1,45,000
Cost of the asset:
Expenditure incurred 10,00,000 20,00,000
Borrowing Costs 72,500 1,45,000
Total 10,72,500 21,45,000

*****

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[Link] General borrowing costs

 All borrowings that are not specific represents general borrowings.
 When funds are borrowed specifically for a qualifying asset, costs in relation to that borrowing
are accounted for as specific borrowing costs until the asset is ready for its intended use or
sale; if the borrowing remains outstanding after the related asset is ready for its intended use
or sale, it becomes part of 'general borrowings'.
Illustration 8
On 1 st April, 20X1, A Ltd. took 8% loan of 50,00,000 for construction of building A which is
repayable after 6 years ie on 31 st March, 20X7. The construction of building was completed on
31 st March, 20X3. A Ltd. started constructing a new building B in the year 20X3-20X4, for which
he used his existing borrowings. He has outstanding general-purpose loan of 25,00,000, interest
on which is payable @ 9% and 15,00,000, interest on which is payable @ 7%.
Recommend whether the specific borrowing should be transferred to the general borrowings pool
once the respective qualifying asset is completed.
Solution
Yes. If specific borrowings were not repaid once the relevant qualifying asset was completed, they
become general borrowings for as long as they are outstanding.
The borrowing costs that are directly attributable to obtaining qualifying assets are those
borrowing costs that would have been avoided if the expenditure on the qualifying asset had not
been made. If cash was not spent on other qualifying assets, it could be directed to repay this
specific loan. Thus, borrowing costs could be avoided (that is, they are directly attributable to
other qualifying assets).
*****
 When general borrowings are used for qualifying assets, Ind AS 23 requires that, borrowing
costs eligible for capitalisation is calculated by applying a capitalisation rate to the
expenditures on qualifying assets.
 The amount of borrowing costs eligible for capitalisation is always limited to the amount of
actual borrowing costs incurred during the period.
3.5.2 Calculation of capitalisation rate
 When the funds are borrowed generally for the purpose of obtaining a qualifying asset, the
entity shall determine the amount of borrowing costs eligible for capitalisation by applying a
capitalisation rate to the expenditures on that qualifying asset.

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 The capitalisation rate is the weighted average of the borrowing costs applicable to all the
general borrowings of the entity that are outstanding during the period.
 Borrowing costs in respect of specific funds borrowed for the purpose of obtaining a qualifying
asset shall be excluded from calculation of capitalisation rate until substantially all the
activities necessary to prepare that qualifying asset for its intended use or sale are complete.
 The amount of borrowing costs that an entity capitalises during a period shall not exceed the
amount of borrowing costs it incurred during that period.

Calculation of Borrowing Cost

Borrowing cost on funds Borrowing cost on funds borrowed for general

borrowed for specific use use but applied on qualifying asset

Step 1 : Calculate Capitalisation Rate (CR)*

Expenditure incurred on
QA** x Interest rate on
such specific borrowings
Step 2 : Calculation of Borrowing cost to be
capitalised
Expenditure incurred on QA x Capitalisation
rate

Total Borrowing Cost

Weighted average borrowing costs on outstanding borrowings of the entity (excluding specific borrowings cost)
*CR =
Total outstanding borrowings of the entity during the period (excluding specific borrowings)

** QA = Qualifying Asset

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Illustration 9
Beta Ltd. had the following loans in place at the end of 31 st March, 20X2:
(Amounts in 000s)

Loan 1 st April, 20X1 31 st March, 20X2

18% Bank Loan 1,000 1,000
16% Term Loan 3,000 3,000
14% Debentures - 2,000

14% Debentures were issued to fund the construction of office building on 1 st July, 20X1 but
the development activities has yet to be started.
On 1 st April, 20X1, Beta Ltd. began the construction of a Plant being a qualifying asset using
the existing borrowings. Expenditure drawn down for the construction was: 5,00,000 on
1 st April, 20X1 and 25,00,000 on 1 st January, 20X2.
Calculate the borrowing cost that can be capitalised for the plant.

Solution

Capitalisation rate (18% x 1,000) (16% x 3,000) 16.5%


1,000  3,000 1,000  3,000

Borrowing Costs (5,00,000 x 16.5%) + (25,00,000 x16.5% x 3/12) 1,85,625

Capitalisation rate for above illustration could also be calculated with the following approach by
assigning weights to the borrowings:

Particulars Loan Weighted Interest rate Capitalisation rate

average (a) (b) (a*b)
18% Bank Loan 1,000 25% 18% 4.5%
16% Term Loan 3,000 75% 16% 12%
Total 4,000 100% 16.5%

Answer in both the approaches would be same as can be seen from the above two solutions.
*****

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3.5.3 Expenditure to which capitalisation rate is applied
 In determining the borrowing costs to be capitalised, the amount of expenditure on a
qualifying asset include only those expenditures that have resulted in payments of cash,
transfers of other assets or the assumption of interest-bearing liabilities.
 Expenditures are reduced by any progress payments received and grants received in
connection with the asset (see Ind AS 20 Accounting for Government Grants and Disclosure
of Government Assistance).
 The average carrying amount of the asset during a period, including borrowing costs
previously capitalised, is normally a reasonable approximation of the expenditures to which
the capitalisation rate is applied in that period.
3.5.4 Excess of the carrying amount over recoverable amount
When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its
recoverable amount or net realisable value, the carrying amount is written down or written off in
accordance with the requirements of other Standards. In certain circumstances, the amount of the
write-down or write-off is written back in accordance with those other Standards.

3.6 PERIOD OF CAPITALISATION

3.6.1 Commencement of capitalisation
 An entity is required to begin the capitalisation of borrowing costs as part of the cost of a
qualifying asset on the commencement date.
 The commencement date is the date when the entity first meets all of the following conditions
cumulatively on a particular date:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or
sale.

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It incurs expenditures
for the asset

Starts from the date

Commencement of when the entity first It incurs borrowing
capitalisation meets all of the costs
following conditions:

It undertakes activities
that are necessary to
prepare the asset for its
intended use or sale.

Explanation to the three conditions for commencement date

 Expenditures on a qualifying asset include:
- Those expenditures that have resulted in payments of cash
- transfers of other assets
- assumption of interest-bearing liabilities
Expenditures are reduced by any progress payments received and grants received in
connection with the asset.
 Activities necessary to prepare asset for its intended use or sale:
- Includes technical and administrative work prior to the commencement of physical
construction, such as the activities associated with obtaining permits prior to the
commencement of the physical construction.
- excludes the holding of an asset when no production or development that changes the
asset’s condition is taking place.
For example, borrowing costs incurred while land is under development are capitalised during
the period in which activities related to the development are being undertaken. However,
borrowing costs incurred while land acquired for building purposes is held without any
associated development activity do not qualify for capitalisation.
Illustration 10 : Commencement Date
X Ltd. is commencing a new construction project, which is to be financed by borrowing. The key
dates are as follows:
(i) 15 th May, 20X1: Loan interest relating to the project started incurring

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(ii) 2 nd June, 20X1 : Technical site planning commenced
(iii) 19 th June, 20X1 : Expenditure on the project started incurring
(iv) 18 th July, 20X1 : Construction work commenced
Identify the commencement date for capitalisation of borrowing cost.
Solution
In the above case, the three conditions to be tested for commencement date would be:
Borrowing cost has been incurred on : 15 th May, 20X1
Expenditure has been incurred for the asset on : 19 th June, 20X1
Activities necessary to prepare asset for its intended use or sale: 2 nd June, 20X1
Commencement date would be the date when the above three conditions would be satisfied in all
i.e. 19 th June, 20X1
*****
3.6.2 Suspension of capitalisation
 Capitalisation of borrowing costs shall be suspended during the extended periods in which
the active development of a qualifying asset is suspended. Such costs are costs of holding
partially completed assets and do not qualify for capitalisation. However, the standard
distinguishes between extended periods of interruption (when capitalisation would be
suspended) and periods of temporary delay that are a necessary part of preparing the asset
for its intended purpose (when capitalisation is not normally suspended).
 Capitalisation of borrowing cost is not suspended when temporary delay is a necessary part
of the process of getting an asset ready for its intended use or sale. For example,
capitalisation continues during the extended period when high water levels delay construction
of a bridge, if such high-water levels are common during the construction period in the
geographical region involved. Similarly, capitalisation continues during periods when
inventory is undergoing slow transformation – the example is given of inventories taking an
extended time to mature (presumably such products as Scotch whisky or Cognac, although
the relevance of this may be limited as these products are likely to meet the optional
exemption for ‘routinely manufactured’ products.

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Example 4: Suspension of Capitalisation

(a) Construction suspended between October, 20X1 to January, 20X2 during which period
certain heavy construction equipment under use was shifted to another site.
In this case, capitalization of borrowing costs needs to be suspended since active
development is interrupted.
(b) When Qualifying Asset construction is about to complete, there was temporary delay
of 20 days on account of some technical reasons.
In this case, capitalization of borrowing costs shall be continued.

3.6.3 Cessation of capitalisation

 Capitalisation of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
 An asset is normally ready for its intended use or sale when the physical construction of the
asset is complete even though routine administrative work might still continue. If minor
modifications, such as the decoration of a property to the purchaser’s or user’s specification,
are all that are outstanding, this indicates that substantially all the activities are complete.
 When an entity completes the construction of a qualifying asset in parts and each part is
capable of being used while construction continues on other parts, the entity shall cease
capitalising borrowing costs when it completes substantially all the activities necessary to
prepare that part for its intended use or sale.
For e.g. A business park comprising several buildings, each of which can be used
individually, is a qualifying asset for which each part is capable of being usable while
construction continues on other parts.
For a qualifying asset that needs to be complete in its entirety before any part can be used
as intended, it would be appropriate to capitalise related borrowing costs until all the activities
necessary to prepare the entire asset for its intended use or sale are substantially complete.
An example of this is an industrial plant, such as a steel mill, involving several processes
which are carried out in sequence at different parts of the plant within the same site.

Example 5
H Limited, a real estate company, gives immovable property on rent. It has completed on
31 st May, 20X1, a commercial complex consisting of various offices that could be rented out.
It expects that the commercial complex will be completely rented out by 30 th June, 20X1.
However, due to adverse market conditions, only 10% of the commercial complex could be

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rented out by its reporting date of 31 st March, 20X2. H Limited wants to capitalise the eligible
borrowing costs incurred up to 31 st March, 20X2.
H Limited should capitalise borrowing costs only up to 31 st May, 20X1. The borrowing cost
incurred thereafter cannot be capitalised as the asset was ready for its intended use on
31 st May, 20X1. The fact that only a small portion could be rented out by 31 st March, 20X2,
is not relevant.

3.7 DISCLOSURE
Entities are required to disclose:

(a) the amount of borrowing costs capitalised during the period; and

(b) the capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation

3.8 OTHER RELEVANT CONCEPTS

3.8.1 Dividends payable on shares classified as financial liabilities
 An entity might finance its operations in whole or in part by the issue of preference shares
and in some circumstances these will be classified as financial liabilities (as per Ind AS
32). Dividends payable on these instruments would meet the definition of borrowing
costs, subject to the fulfillment of certain conditions.

Example 6

An entity might have funded the development of a qualifying asset by issuing redeemable
preference shares that are redeemable at the option of the holder and so are classified as
financial liabilities under Ind AS 32. In this case, dividend would be treated as interest and
meet the definition of borrowing costs and so should be capitalised following the principles
on specific borrowings as discussed in a separate section [Link] above.

3.8.2 Capitalising borrowing cost in group financial statements

 There may be a situation when the borrowings are taken by one company and qualifying
asset is developed by another company within a group.

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 It may be appropriate to capitalise interest in the group financial statements on

borrowings that appear in the financial statements of a different group entity from that
carrying out the development.

 Based on the underlying principle of Ind AS 23, capitalisation in such circumstances would
only be appropriate if the amount capitalised fairly reflected the interest cost of the group on
borrowings from third parties that could have been avoided if the expenditure on the
qualifying asset were not made.

 However, the entity carrying out the development should not capitalise any interest in
its own financial statements as it has no borrowings.

 If, however, the entity has intra-group borrowings then interest on such borrowings may be
capitalised in its own financial statements.

Illustration 11

A subsidiary (or jointly controlled entity or associate) finances the construction of a qualifying
asset with an inter-company loan. Are borrowing costs incurred on the inter-company loan
capitalised in the separate financial statements of the subsidiary (or jointly controlled entity
or associate)?

Solution

Yes. Borrowing costs are capitalised to the extent of the actual costs incurred by the
subsidiary (or jointly controlled entity or associate).

*****

3.8.3 Cessation of capitalisation for maturing inventories

 For maturing inventories, it is sometimes difficult to determine when the 'period of production'
ends, i.e. when inventories are being held for sale as opposed to being held to mature.

Example 7

Whisky is 'mature' after three years but goes on improving with age for many more years.
Provided that it is consistent with the entity's business model to hold such items so that they
mature further, it would seem acceptable to continue to add borrowing costs to the value of
such maturing inventories for as long as it can be demonstrated that the particular item of

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inventory continues to increase in value solely on account of increasing age, rather than
because of market fluctuations or inflation.

 If this cannot be demonstrated, then the inventories should be regarded as held for sale and
no further borrowing costs should be capitalised.

3.9 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITY
Following is the extract from the financial statements of the listed entity ‘Larsen & Toubro
Limited’ for the financial year 2021-2022 with respect to ‘Borrowing Costs’.

Note in Property, Plant and Equipment & Capital work-in-progress

- Additions during the year and capital work-in-progress of buildings include ` 8.83 crore
(previous year: ` 27.75 crore) being borrowing cost capitalised in accordance with
Accounting Standard (Ind AS) 23 “Borrowing Costs”.
- The rate used to determine the amount of borrowing costs eligible for capitalisation is
6.23% (previous year: 5.71%).

ACCOUNTING POLICY

Borrowing Costs
Borrowing costs include finance costs calculated using the effective interest method,
finance charges in respect of assets acquired on lease and exchange differences arising
on foreign currency borrowings, to the extent they are regarded as an adjustment to
finance costs. In cases where hedging instruments are acquired for protection against
exchange rate risk related to borrowings and are accounted as hedging a time-period
related hedge item, the borrowing costs also include the amortisation of premium
element of the forward contract and foreign currency basis spread as applicable, over
the period of the hedging instrument.

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Borrowing costs net of any investment income from the temporary investment of related
borrowings that are attributable to the acquisition, construction or production of a
qualifying asset are capitalised / inventoried as part of cost of such asset till such time
the asset is ready for its intended use or sale. A qualifying asset is an asset that
necessarily requires a substantial period of time to get ready for its intend ed use or sale.
All other borrowing costs are recognized in profit or loss in the period in which they are
incurred. .

(Source: Annual Report 2021-2022 - ‘Larsen & Toubro Limited’)

3.10 SIGNIFICANT DIFFERENCES IN IND AS 23 VIS-À-VIS

AS 16
S. Particular Ind AS 23 AS 16
No.
1. Qualifying Asset Ind AS 23 does not require an AS 16 does not provide for
measured at Fair entity to apply this standard to such scope exclusion
Value borrowing costs directly
attributable to the acquisition,
construction or production of a
qualifying asset measured at fair
value, for example, a biological
asset
2. Applicability to Ind AS 23 does not require the AS 16 does not provide for
Inventories application of this Standard to such scope exclusion and
borrowing costs directly is applicable to borrowing
attributable to the acquisition, costs related to all
construction or production of inventories that require
inventories that are manufactured, substantial period of time to
or otherwise produced, in large bring them in saleable
quantities on a repetitive basis condition
3. Inclusion as Ind AS 23 requires calculation of AS 16, Borrowing Costs,
Borrowing Costs interest expense using the effective inter alia, include the
interest rate method as described following:
in Ind AS 109. Items (b) and (c) are (a) interest and
not mentioned as some of those commitment charges on
components of borrowing costs are bank borrowings and

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considered as the components of other short-term and
interest expense calculated using long-term borrowings;
the effective interest rate method. (b) amortisation of
discounts or premiums
relating to borrowings;
(c) amortisation of ancillary
costs incurred in
connection with the
arrangement of
borrowings
4. Interest on leases Ind AS 23 includes interest in AS 16 includes finance
respect of lease liabilities charges in respect of
(recognized as per Ind AS 116) assets acquired under
finance lease as part of
borrowing costs
5. Unrealized Ind AS 23 provides that where AS 16 does not explicitly
exchange loss there is an unrealized exchange deal with such scenario.
loss which is treated as an
adjustment to interest and
subsequently there is a realized or
unrealized gain in respect of the
settlement or translation of the
same borrowing, the gain to the
extent of the loss previously
recognized as an adjustment
should also be recognized as an
adjustment to interest.
6. Explanation of This explanation is not included in AS 16 gives explanation for
Substantial Period Ind AS 23. meaning of ‘substantial
of Time period of time’ appearing in
the definition of the term
‘qualifying asset’ as twelve
months

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7. Reporting in Ind AS 23 provides that when Ind AS 16 does not contain a

Hyperinflationary AS 29, ‘Financial Reporting in similar clarification
Economies Hyperinflationary Economies’, is because at present, in
applied, part of the borrowing costs India, there is no Standard
that compensates for inflation on ‘Financial Reporting in
should be expensed as required by Hyperinflationary
that Standard (and not capitalized Economies’.
in respect of qualifying assets).
8. Borrowings of the Ind AS 23 specifically provides that This specific provision is
Parent and its in some circumstances, it is not there in AS 16.
Subsidiaries for appropriate to include all
Computing borrowings of the parent and its
Weighted Average subsidiaries when computing a
weighted average of the borrowing
costs while in other circumstances,
it is appropriate for each subsidiary
to use a weighted average of the
borrowing costs applicable to its
own borrowings.
9. Disclosure of Ind AS 23 requires disclosure of AS 16 does not have this
capitalisation rate capitalization rate used to disclosure requirement.
determine the amount of borrowing
costs eligible for capitalization.
10. Borrowing cost in For the purpose of computing Under AS 16 read with
regard to foreign borrowing cost under Ind AS 23 in AS 11, the difference is
currency borrowing regard to foreign currency between the local currency
borrowing, the difference is to be and foreign currency.
computed with reference to
functional currency

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. Marine Transport Limited ordered 3 ships for its fleet on 1 st April, 20X0. It pays a down
payment of 25% of the contract value of each of the ship out of long-term borrowings from a
scheduled bank. The delivery has to commence from the financial year 20X7. On
1 st March, 20X2, the ship builder informs that it has commenced production of one ship.
There is no progress on other 2 ships. Marine Transport Limited prepares its financial
statements on financial year basis.
Advise whether it is permissible for Marine Transport Limited to capitalise any borrowing
costs for the financial year ended 31 st March, 20X1 or 31 st March, 20X2.
2. X Limited has a treasury department that arranges funds for all the requirements of the
Company including funds for working capital and expansion programs. During the year
ended 31 st March, 20X2, the Company commenced the construction of a qualifying asset and
incurred the following expenses:
Date Amount ( )
1 st July, 20X1 2,50,000
1 st December, 20X1 3,00,000
The details of borrowings and interest thereon are as under:
Particulars Average Balance ( ) Interest ( )
Long term loan @ 10% 10,00,000 1,00,000
Working capital loan 5,00,000 65,000
15,00,000 1,65,000

Compute the borrowing costs that need to be capitalised.

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3. An entity constructs a new head office building commencing on 1 st September 20X1, which
continues till 31 st December 20X1. Directly attributable expenditure at the beginning of the
month on this asset are 1,00,000 in September 20X1 and 2,50,000 in each of the months
of October to December 20X1.
The entity has not taken any specific borrowings to finance the construction of the asset but
has incurred finance costs on its general borrowings during the construction period. During
the year, the entity had issued 10% debentures with a face value of 20 lacs and had an
overdraft of 5,00,000, which increased to 7,50,000 in December 20X1. Interest was paid
on the overdraft at 15% until 1 October 20X1, then the rate was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance with
Ind AS 23 ‘Borrowing Costs’.
4. K Ltd. began construction of a new building at an estimated cost of 7 lakh on
1 st April, 20X1. To finance construction of the building it obtained a specific loan of 2 lakh
from a financial institution at an interest rate of 9% per annum.
The company’s other outstanding loans were:

Amount Rate of Interest per annum

7,00,000 12%
9,00,000 11%

The expenditure incurred on the construction was:

April, 20X1 1,50,000

August, 20X1 2,00,000
October, 20X1 3,50,000
January, 20X2 1,00,000

The construction of building was completed by 31 st January, 20X2.

Following the provisions of Ind AS 23 ‘Borrowing Costs’, calculate the amount of interest to
be capitalized and pass necessary journal entry for capitalizing the cost and borrowing cost
in respect of the building as on 31 st January, 20X2.
5. On 1 st April, 20X1, entity A contracted for the construction of a building for 22,00,000. The
land under the building is regarded as a separate asset and is not part of the qualifying
assets. The building was completed at the end of March, 20X2, and during the period the
following payments were made to the contractor:

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Payment date Amount ( ’000)

1 st April, 20X1 200
30 th June, 20X1 600
31 st December, 20X1 1,200
31 st March, 20X2 200
Total 2,200

Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to the
project; debt outstanding on 31 st March, 20X2 amounted to 7,00,000. Interest of
65,000 was incurred on these borrowings during the year, and interest income of
20,000 was earned on these funds while they were held in anticipation of payments.
b. 12.5% 10-year note with simple interest payable annually; debt outstanding at
1 st April, 20X1 amounted to 1,000,000 and remained unchanged during the year; and
c. 10% 10-year note with simple interest payable annually; debt outstanding at
1 st April, 20X1 amounted to 1,500,000 and remained unchanged during the year.
Determine the amount of the borrowing costs which can be capitalized at the year end as per
relevant Ind AS.
6. In a group with Parent Company “P” there are 3 subsidiaries with following business:
“A” – Real Estate Company
“B” – Construction Company
“C” – Finance Company
 Parent Company has no operating activities of its own but performs management
functions for its subsidiaries.
 Financing activities and cash management in the group are coordinated centrally.
 Finance Company is a vehicle used by the group solely for raising finance.
 All entities in the group prepare Ind AS financial statements.
The following information is relevant for the current reporting period 20X1-20X2:
Real Estate Company
 Borrowings of 10,00,000 with an interest rate of 7% p.a.

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 Expenditures on qualifying assets during the period amounted to 15,40,000.

 All construction works were performed by Construction Company. Amounts invoiced to
Real Estate Company included 10% profit margin.
Construction Company
 No borrowings during the period.
 Financed 10,00,000 of expenditures on qualifying assets using its own cash resources.
Finance Company
 Raised 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for
general corporate purposes at the rate of 8%.
Parent Company
 Used loan from Finance Company to acquire a new subsidiary.
 No qualifying assets apart from those in Real Estate Company and Construction
Company.
 Parent Company did not issue any loans to other entities during the period.
Compute the amount of borrowing costs eligible for capitalisation in the financial statements
of each of the four entities for the current reporting period 20X1-20X2.
7. Examine how will you capitalise the interest, when qualifying assets are funded by borrowings
in the nature of bonds that are issued at discount.
Y Ltd. issued at the start of year 1, 10% (interest paid annually and having maturity period of
4 years) bonds with a face value of 2,00,000 at a discount of 10% to finance a qualifying
asset which is ready for intended use at the end of year 2.
Compute the amount of borrowing costs to be capitalized if the company amortizes discount
using Effective Interest Rate method by applying 13.39% p.a. of EIR.
8. Nikka Limited has obtained a term loan of 620 lacs for a complete renovation and
st
modernisation of its Factory on 1 April, 20X1. Plant and Machinery was acquired under the
modernisation scheme and installation was completed on 30 th April, 20X2. An expenditure
of 510 lacs was incurred on installation of Plant and Machinery, 54 lacs has been
advanced to suppliers for additional assets (acquired on 25 th April, 20X1) which were also
installed on 30 th April, 20X2 and the balance loan of 56 lacs has been used for working
capital purposes. Management of Nikka Limited considers the 12 months period as
substantial period of time to get the asset ready for its intended use.

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The company has paid total interest of 68.20 lacs during financial year 20X1-20X2 on the
above loan. The accountant seeks your advice how to account for the interest paid in the
books of accounts. Will your answer be different, if the whole process of renovation and
modernization gets completed by 28 th February, 20X2?

Answers
1. As per paragraph 5 of Ind AS 23, a qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale.
As per paragraph 17 of Ind AS 23, an entity shall begin capitalising borrowing costs as part
of the cost of a qualifying asset on the commencement date. The commencement date for
capitalisation is the date when the entity first meets all of the following conditions:
(a) It incurs expenditures for the asset.
(b) It incurs borrowing costs.
(c) It undertakes activities that are necessary to prepare the asset for its intended use or
sale.
The ship is a qualifying asset as it takes substantial period of time for its construction. Thus,
the related borrowing costs should be capitalised.
Marine Transport Limited borrows funds and incurs expenditures in the form of down payment
on 1 st April, 20X0. Thus, condition (a) and (b) are met. However, condition (c) is met only on
1 st March, 20X2, and that too only with respect to one ship. Thus, there is no capitalisation
of borrowing costs during the financial year ended 31 st March, 20X1. Even during the
financial year ended 31 st March, 20X2, borrowing costs relating to the ‘one’ ship whose
construction had commenced from 1 st March, 20X2 will be capitalised from 1 st March, 20X2
to 31 st March, 20X2. All other borrowing costs are expensed.
2. The capitalisation rate is calculated as below:
Total borrowing costs / Weighted average total borrowings: 1,65,000/15,00,000 = 11%.
Interest to be capitalised is calculated as under:
— On 2,50,000 @ 11% p.a. for 9 months = 20,625
— On 3,00,000 @ 11% p.a. for 4 months = 11,000
Total interest capitalised for the year ended 31 st March 20X2 is 31,625

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3. Since the entity has only general borrowing hence first step will be to compute the
capitalisation rate. The capitalisation rate of the general borrowings of the entity during the
period of construction is calculated as follows:

Finance cost on 20 lacs 10% debentures during September – December 66,667

20X1
Interest @ 15% on overdraft of 5,00,000 in September 20X1 6,250
Interest @ 16% on overdraft of 5,00,000 in October and November 20X1 13,333
Interest @ 16% on overdraft of 7,50,000 in December 20X1 10,000
Total finance costs in September – December 20X1 96,250

Weighted average borrowings during period

(20,00,000 × 4) + (500,000 × 3) + (750,000 × 1)
= 4 = 25,62,500
Capitalisation rate = Total finance costs during the construction period / Weighted average
borrowings during the construction period
= 96,250 / 25,62,500 = 3.756%
4. (i) Calculation of capitalization rate on borrowings other than specific borrowings

Amount of loan ( ) Rate of Amount of interest

interest ( )
7,00,000 12% = 84,000
9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100

(ii) Computation of borrowing cost to be capitalized for specific borrowings and

general borrowings based on weighted average accumulated expenses

Date of Amount Financed Calculation

incurrence of spent through
expenditure
1 st April, 20X1 1,50,000 Specific 1,50,000 x 9% x 10/12 11,250
borrowing

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1 st August, 20X1 2,00,000 Specific 50,000 x 9% x 10/12 3,750

borrowing
General 1,50,000x11.4375% x 6/12
borrowing 8,578.125
1 st October, 3,50,000 General 3,50,000x11.4375% x 4/12
20X1 borrowing 13,343.75
1 st January, 1,00,000 General 1,00,000x11.4375% x 1/12
20X2 borrowing 953.125
37,875

Note: Since construction of building started on 1 st April, 20X1, it is presumed that all
the later expenditures on construction of building had been incurred at the beginning of
the respective month.
(iii) Total expenses to be capitalized for building

Cost of building (1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000

Add: Amount of interest to be capitalized 37,875
8,37,875

(iv) Journal Entry

Date Particulars
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,00,0000
To Interest payable (borrowing cost) 37,875
(Being expenditure incurred on construction of
building and borrowing cost thereon
capitalized)

Note: In the above journal entry, it is assumed that interest amount will be paid at the
year end. Hence, entry for interest payable has been passed on 31.1.20X2.

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Alternatively, following journal entry may be passed if interest is paid on the date
of capitalization:

Date Particulars
31.1.20X2 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on
construction of building and borrowing
cost thereon capitalized)

5. As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the period less
any investment income on the temporary investment of those borrowings.
The amount of borrowing costs eligible for capitalization, in cases where the funds are
borrowed generally, should be determined based on the capitalisation rate and expenditure
incurred in obtaining a qualifying asset. The costs incurred should first be allocated to the
specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in Weighted for period
general borrowings outstanding
( ’000) ( ’000) ( ’000)
1 st April 20X1 200 0 0
30 th June 20X1 600 100* 100 × 9/12 = 75
31 st Dec 20X1 1,200 1,200 1,200 × 3/12 = 300
31 st March 20X2 200 200 200 × 0/12 = 0
Total 2,200 375

*Specific borrowings of 7,00,000 fully utilized on 1 st April & on 30 th June to the extent of
5,00,000 hence remaining expenditure of 1,00,000 allocated to general borrowings.
The capitalisation rate relating to general borrowings should be the weighted average of the
borrowing costs applicable to the entity’s borrowings that are outstanding during the period,
other than borrowings made specifically for the purpose of obtaining a qualifying asset.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) = 11%
10,00,000 + 15,00,000

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Borrowing cost to be capitalized: Amount
( )
On specific loan 65,000
On General borrowing (3,75,000 × 11%) 41,250
Total 1,06,250
Less: interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are 86,250.

6. Following is the treatment as per Ind AS 23:

Finance Company
No expenditure on qualifying assets have been incurred, so Finance Company cannot
capitalise anything.
Real Estate Company
Total interest costs in the financial statements of Real Estate Company is 70,000.
Expenditures on qualifying assets exceed total borrowings, so the total amount of interest
can be capitalised.
Construction Company
No interest expense has been incurred, so Construction Company cannot capitalise anything.
Consolidated financial statements of Parent Company:
Total general borrowings of the group: 10,00,000 + 20,00,000 = 30,00,000
Although Parent Company used proceeds from loan to acquire a subsidiary, this loan cannot
be excluded from the pool of general borrowings.
Total interest expenditures for the group = 30,00,000 x 7% = 2,10,000
Total expenditures on qualifying assets for the group are added up. Profit margin charged
by Construction Company to Real Estate Company is eliminated:
Real Estate Company – 15,40,000/1.1 = 14,00,000
Construction Co – 10,00,000
Total consolidated expenditures on qualifying assets:
(14,00,000 + 10,00,000) = 24,00,000
Capitalisation rate = 7%

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Borrowing costs eligible for capitalisation = 24,00,000 x 7% = 1,68,000

Total interest expenditures of the group are higher than borrowing costs eligible for
capitalisation calculated based on the actual expenditures incurred on the qualifying assets.
Therefore, only 1,68,000 can be capitalised.
7. Capitalisation Method
As per the Standard, borrowing costs may include interest expense calculated using the
effective interest method. Further, capitalisation of borrowing cost should cease where
substantially all the activities necessary to prepare the qualifying asset for its intended use
or sale are complete.
Thus, only that portion of the amortized discount should be capitalised as part of the cost of
a qualifying asset which relates to the period during which acquisition, construction or
production of the asset takes place.
Capitalisation of Interest
Hence, based on the above explanation the amount of borrowing cost of year 1 & 2 are to be
capitalised and the borrowing cost relating to year 3 & 4 should be expensed.
Quantum of Borrowing
The value of the bond to Y Ltd. is the transaction price ie 1,80,000 (2,00,000 – 20,000)
Therefore, Y Ltd will recognize the borrowing at 1,80,000.
Computation of the amount of Borrowing Cost to be Capitalised
Y Ltd will capitalise the interest (borrowing cost) using the effective interest rate of 13.39%
for two years as the qualifying asset is ready for intended use at the end of the year 2, the
details of which are as follows:

Year Opening Interest expense Total Interest Closing

Borrowing @ 13.39% to be paid Borrowing
capitalised
(1) (2) (3) (4) (5) = (3) – (4)
1 1,80,000 24,102 2,04,102 20,000 1,84,102
2 1,84,102 24,651 2,08,753 20,000 1,88,753
48,753

Accordingly, borrowing cost of 48,753 will be capitalized to the cost of qualifying asset.

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8. As per Ind AS 23, Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset form part of the cost of that asset. Other borrowing costs
are recognized as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.
Accordingly, the treatment of Interest of 68.20 lakh occurred during the year
20X1-20X2 would be as follows:
(i) When construction of asset completed on 30 th April, 20X2
The treatment for total borrowing cost of 68.20 lakh will be as follows:
Purpose Nature Interest to be Interest to be charged
capitalised to profit and loss
account
in lakh in lakh
Modernisation and Qualifying [68.20 x (510/620)] = Nil
renovation of plant asset 56.10
and machinery
Advance to Qualifying [68.20 x (54/620)] = Nil
suppliers for asset 5.94
additional assets
Working Capital Not a [68.20 x (56/620)] = 6.16
qualifying
asset
62.04 6.16

(ii) When construction of assets is completed by 28 th February, 20X2

When the process of renovation gets completed in less than 12 months, the plant and
machinery and the additional assets will not be considered as qualifying assets (until
and unless the entity specifically considers that the assets took substantial period for
completing their construction). Accordingly, the whole of interest will be charged off /
expensed off to Profit and Loss account.

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