by Ind AS 23, Borrowing Costs, prescribes the accounting treatment for borrowing costs incurred by an entity. The standard requires borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset to be capitalised as part of the cost of that asset. Borrowing costs that are not directly attributable to a qualifying asset are recognised as an expense in the period in which they are incurred. The objective of Ind AS 23 is to ensure that the total cost of a qualifying asset includes the borrowing costs incurred during its construction or production. This improves the accuracy, reliability, and comparability of financial statements and aligns Indian accounting practices with international accounting standards.
Meaning of Borrowing Costs
Borrowing costs are the interest and other costs incurred by an entity in connection with borrowing funds. These costs arise when an entity obtains loans, overdrafts, debentures, bonds, or other borrowings to finance business operations or acquire assets. Borrowing costs include interest expense calculated using the effective interest method, finance charges on lease liabilities, amortisation of discounts or premiums relating to borrowings, ancillary costs incurred in arranging borrowings, and certain foreign exchange differences treated as an adjustment to interest costs. Under Ind AS 23, borrowing costs directly attributable to qualifying assets are capitalised, while all other borrowing costs are recognised as expenses.
Definitions under Ind AS 23
- Borrowing Costs
Borrowing costs are the interest and other expenses incurred by an entity in connection with borrowing funds. They include interest on loans, finance charges on lease liabilities, amortisation of discounts or premiums, and other related borrowing expenses.
- 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. Examples include factories, office buildings, power plants, and large infrastructure projects.
- Capitalisation
Capitalisation is the process of adding borrowing costs directly attributable to a qualifying asset to the cost of that asset instead of recognising them as an immediate expense.
- Interest Expense
Interest expense is the cost incurred by an entity for using borrowed funds. It is calculated using the effective interest method prescribed under Ind AS.
- Specific Borrowings
Specific borrowings are loans obtained exclusively to finance the acquisition, construction, or production of a particular qualifying asset.
- General Borrowings
General borrowings are funds borrowed for general business purposes that may also be used to finance qualifying assets.
- Capitalisation Rate
The capitalisation rate is the weighted average of borrowing costs applicable to general borrowings used to determine the amount of borrowing costs eligible for capitalisation.
- Commencement of Capitalisation
Commencement of capitalisation is the date when an entity begins capitalising borrowing costs after meeting the required conditions, including incurring expenditures, borrowing costs, and activities necessary to prepare the asset.
- Suspension of Capitalisation
Suspension of capitalisation occurs when active development of a qualifying asset is interrupted for an extended period. During this period, borrowing costs are generally not capitalised.
Objectives of Ind AS 23 – Borrowing Costs
- To Prescribe Accounting Treatment for Borrowing Costs
The primary objective of Ind AS 23 is to prescribe the accounting treatment for borrowing costs incurred by an entity. It establishes principles for recognising, measuring, and capitalising borrowing costs that are directly attributable to the acquisition, construction, or production of qualifying assets. Borrowing costs that do not qualify for capitalisation are recognised as expenses in the Statement of Profit and Loss. This objective ensures consistency in accounting practices and enables organisations to present reliable financial information regarding financing costs associated with qualifying assets in their financial statements with greater transparency and accuracy.
- To Ensure Proper Capitalisation of Borrowing Costs
Ind AS 23 aims to ensure that borrowing costs directly attributable to qualifying assets are capitalised as part of the asset’s cost. This treatment reflects the true expenditure incurred in bringing the asset to its intended use or sale. By capitalising eligible borrowing costs, the standard prevents immediate recognition of these costs as expenses, thereby presenting a more accurate value of the asset. Proper capitalisation improves financial reporting and ensures that the cost of qualifying assets includes all relevant expenditures necessary for their construction, acquisition, or production during the qualifying period.
- To Improve Accuracy of Asset Valuation
Another important objective of Ind AS 23 is to improve the accuracy of asset valuation. Including eligible borrowing costs in the cost of qualifying assets ensures that the carrying amount reflects the total investment made to acquire or construct the asset. This provides a realistic representation of the asset’s value in the financial statements. Accurate valuation assists management in assessing asset performance and supports investors and creditors in evaluating the financial position of the entity. It also reduces the risk of understating the cost of long-term assets significantly.
- To Promote Consistency in Financial Reporting
Ind AS 23 promotes consistency by prescribing uniform accounting principles for borrowing costs across all entities following Indian Accounting Standards. Every organisation applies the same criteria for recognising, capitalising, and expensing borrowing costs. This consistency reduces differences in accounting practices and improves the comparability of financial statements among various entities. Investors, regulators, lenders, and analysts can compare financial performance with greater confidence. Uniform accounting treatment also strengthens the credibility and reliability of financial reports prepared under Ind AS, benefiting all users of financial statements.
- To Distinguish Capitalisable and Non-Capitalisable Borrowing Costs
An important objective of Ind AS 23 is to distinguish borrowing costs that qualify for capitalisation from those that must be recognised as expenses. Only borrowing costs directly attributable to qualifying assets are capitalised, while all other borrowing costs are charged to the Statement of Profit and Loss. This distinction prevents incorrect accounting treatment and ensures that expenses and asset values are reported appropriately. Proper classification enhances the quality of financial statements and provides stakeholders with a clear understanding of financing costs related to business operations and asset development.
- To Enhance Transparency Through Proper Disclosure
Ind AS 23 aims to enhance transparency by requiring entities to disclose information relating to borrowing costs. Organisations must disclose the amount of borrowing costs capitalised during the reporting period and the capitalisation rate used for general borrowings. These disclosures provide stakeholders with a clear understanding of how borrowing costs have affected the cost of qualifying assets. Transparent reporting increases confidence in financial statements, supports effective decision-making, and enables users to evaluate the entity’s financing activities and accounting practices more accurately and efficiently.
- To Support Better Financial Decision-Making
Ind AS 23 provides reliable and relevant financial information that supports informed decision-making by management, investors, creditors, and regulators. Proper accounting of borrowing costs enables users to evaluate the true cost of qualifying assets, financing strategies, and overall financial performance. Accurate information regarding capitalised borrowing costs helps management plan future investments and financing decisions. Investors and lenders can assess the entity’s financial strength and investment efficiency more effectively. Thus, the standard contributes significantly to sound financial planning and economic decision-making in business organisations.
- To Align Indian Accounting with International Standards
One of the major objectives of Ind AS 23 is to align Indian accounting practices with International Financial Reporting Standards relating to borrowing costs. This alignment improves the quality, consistency, and comparability of financial statements prepared by Indian entities. It enhances the confidence of domestic and international investors by ensuring globally accepted accounting practices. Harmonisation with international standards also facilitates cross-border investment, improves access to global capital markets, and strengthens the credibility of Indian financial reporting. Consequently, Ind AS 23 supports the global acceptance and competitiveness of Indian businesses.
Scope of Ind AS 23 – Borrowing Costs
- Borrowing Costs Directly Attributable to Qualifying Assets
The scope of Ind AS 23 includes borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. Such borrowing costs form part of the cost of the qualifying asset and are capitalised instead of being recognised immediately as an expense. This treatment ensures that the total cost of the asset reflects all expenditures incurred in bringing it to its intended use or sale. Capitalisation continues only while the asset is under construction or production. This scope improves the accuracy of asset valuation and ensures consistency in financial reporting across entities.
- Qualifying Assets Covered by the Standard
Ind AS 23 applies to qualifying assets that necessarily take a substantial period of time to get ready for their intended use or sale. Examples include manufacturing plants, office buildings, power stations, bridges, ships, and certain inventories requiring lengthy production periods. Borrowing costs incurred for financing these assets fall within the scope of the standard and are eligible for capitalisation. By defining qualifying assets clearly, the standard ensures that only eligible assets receive capitalised borrowing costs. This promotes uniform accounting treatment and enhances the reliability of financial statements prepared by business entities.
- Specific Borrowings within the Scope
The scope of Ind AS 23 includes specific borrowings obtained exclusively for acquiring, constructing, or producing a qualifying asset. Interest and other borrowing costs arising from these loans are capitalised to the extent that they relate directly to the qualifying asset. Any temporary investment income earned from unused borrowed funds is deducted from the borrowing costs eligible for capitalisation. This treatment ensures that only the actual borrowing costs incurred for financing the qualifying asset become part of its cost. It also prevents overstatement of asset values and improves financial reporting accuracy.
- General Borrowings within the Scope
Ind AS 23 also covers general borrowings used to finance qualifying assets. When an entity uses general loans instead of specific borrowings, borrowing costs eligible for capitalisation are determined by applying a capitalisation rate to the expenditure incurred on the qualifying asset. The capitalisation rate is based on the weighted average borrowing costs of the entity’s general borrowings. This provision ensures that borrowing costs are allocated fairly when multiple sources of finance exist. It promotes consistency and provides a systematic method for calculating borrowing costs eligible for capitalisation.
- Borrowing Costs Included under the Standard
The scope of Ind AS 23 includes various types of borrowing costs incurred in connection with borrowed funds. These include interest expense calculated using the effective interest method, finance charges on lease liabilities, amortisation of discounts or premiums relating to borrowings, ancillary costs incurred in arranging borrowings, and certain foreign exchange differences treated as adjustments to interest costs. Including these costs within the scope ensures that all relevant financing expenses directly attributable to qualifying assets are appropriately capitalised, leading to accurate asset valuation and reliable financial reporting.
- Borrowing Costs Excluded from Capitalisation
Although Ind AS 23 covers borrowing costs, not all borrowing costs qualify for capitalisation. Borrowing costs that are not directly attributable to a qualifying asset are outside the capitalisation scope and must be recognised as expenses in the Statement of Profit and Loss. Similarly, borrowing costs relating to assets that do not require a substantial period to become ready for use or sale are not capitalised. This distinction prevents incorrect inclusion of routine financing costs in asset values and ensures compliance with the principles of accurate financial reporting and prudent accounting practices.
- Exclusions from the Scope of Ind AS 23
Ind AS 23 does not require capitalisation of borrowing costs for assets measured at fair value, such as certain biological assets covered by other accounting standards. It also excludes inventories that are manufactured or produced in large quantities on a repetitive basis over a short period. Borrowing costs relating to these assets are recognised as expenses when incurred. These exclusions ensure that the standard is applied only to qualifying assets requiring substantial time for completion. This maintains consistency and avoids unnecessary complexity in accounting for routine business transactions.
- Disclosure Requirements within the Scope
The scope of Ind AS 23 also includes disclosure requirements relating to borrowing costs. Entities must disclose the amount of borrowing costs capitalised during the reporting period and the capitalisation rate used to determine the amount eligible for capitalisation from general borrowings. These disclosures improve transparency and help users understand the impact of borrowing costs on the cost of qualifying assets. Proper disclosure enables investors, creditors, regulators, and other stakeholders to assess the entity’s financing activities and accounting policies. It also enhances comparability and reliability of financial statements across organisations.
Components of Borrowing Costs (Ind AS 23)
- Interest Expense on Borrowings
Interest expense is the primary component of borrowing costs under Ind AS 23. It represents the amount paid by an entity for using borrowed funds obtained through loans, debentures, bonds, bank overdrafts, or other financing arrangements. Interest is calculated using the effective interest method prescribed under Ind AS 109. When the borrowing is directly attributable to the acquisition, construction, or production of a qualifying asset, the interest expense is capitalised as part of the asset’s cost. Otherwise, it is recognised as an expense in the Statement of Profit and Loss during the period in which it is incurred.
- Finance Charges on Lease Liabilities
Finance charges arising on lease liabilities recognised under Ind AS 116 also form part of borrowing costs. When an entity acquires the right to use an asset through a lease, it recognises a lease liability that attracts finance charges over the lease term. If the leased asset is a qualifying asset requiring a substantial period to become ready for its intended use or sale, the related finance charges may be capitalised. Otherwise, they are recognised as finance expenses. This treatment ensures that financing costs associated with leased qualifying assets are accounted for consistently and accurately.
- Amortisation of Discounts on Borrowings
Borrowing costs include the amortisation of discounts relating to borrowings. A discount arises when debt instruments such as bonds or debentures are issued below their face value. The discount represents an additional financing cost that is spread over the borrowing period using the effective interest method. This amortised amount forms part of borrowing costs under Ind AS 23. Where the borrowing relates directly to a qualifying asset, the amortised discount is capitalised as part of the asset’s cost. This ensures that all financing costs are recognised appropriately throughout the borrowing period.
- Amortisation of Premiums on Borrowings
Borrowing costs also include the amortisation of premiums relating to borrowings. A premium may arise when borrowings are redeemed at an amount higher than their carrying value or when other financing arrangements involve premium payments. The premium is allocated over the borrowing period using the effective interest method and forms part of the total borrowing cost. If the borrowing is directly attributable to a qualifying asset, the amortised premium is capitalised. This treatment ensures that the complete cost of financing is reflected in the cost of qualifying assets and financial statements.
- Ancillary Costs Incurred for Borrowings
Ancillary costs directly incurred in arranging borrowings are another important component of borrowing costs. These expenses include loan processing fees, legal charges, documentation fees, commitment charges, guarantee fees, underwriting fees, and other costs directly related to obtaining finance. Such costs are treated as part of the effective interest cost over the borrowing period. When the borrowing finances a qualifying asset, these costs are capitalised as part of the asset’s cost. Including ancillary costs ensures comprehensive recognition of all expenses incurred in securing borrowed funds.
- Foreign Exchange Differences
Certain foreign exchange differences arising from foreign currency borrowings are treated as borrowing costs when they are regarded as an adjustment to interest costs. If an entity borrows funds in a foreign currency and exchange rate fluctuations increase or decrease the effective borrowing cost, the eligible exchange differences may be included as borrowing costs. However, only the portion considered an adjustment to interest qualifies under Ind AS 23. This provision ensures that foreign currency borrowings used for qualifying assets are accounted for fairly and consistently while reflecting their actual financing cost.
- Effective Interest Method
The effective interest method is an important element in determining borrowing costs under Ind AS 23. This method allocates interest expense and related borrowing costs over the life of the borrowing based on a constant periodic rate of return. It includes interest payments, discounts, premiums, and transaction costs in calculating the effective borrowing cost. Using this method ensures that borrowing costs are recognised systematically throughout the borrowing period. It provides a more accurate representation of financing costs and supports consistent measurement and capitalisation of borrowing costs relating to qualifying assets.
- Importance of Borrowing Cost Components
Understanding the components of borrowing costs is essential for applying Ind AS 23 correctly. Each component, including interest expense, lease finance charges, amortisation of discounts and premiums, ancillary borrowing costs, and eligible foreign exchange differences, contributes to the total financing cost incurred by an entity. Proper identification and accounting of these components ensure accurate capitalisation of borrowing costs for qualifying assets and correct recognition of other borrowing costs as expenses. This improves asset valuation, enhances transparency, strengthens compliance with accounting standards, and provides reliable financial information for stakeholders and decision-makers.
Measurement of Borrowing Costs (Ind AS 23)
Measurement of borrowing costs refers to the process of determining the amount of borrowing costs eligible for capitalisation or recognition as an expense under Ind AS 23. The measurement depends on whether the borrowing is a specific borrowing or a general borrowing. Only borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are capitalised. Other borrowing costs are recognised as expenses in the Statement of Profit and Loss. Proper measurement ensures accurate valuation of qualifying assets and promotes consistency, reliability, and transparency in financial reporting across different accounting periods and entities.
- Measurement of Specific Borrowings
When an entity obtains a loan specifically for acquiring, constructing, or producing a qualifying asset, the borrowing costs eligible for capitalisation are measured based on the actual borrowing costs incurred during the period. However, if any portion of the borrowed funds is temporarily invested, the investment income earned is deducted from the borrowing costs eligible for capitalisation. This ensures that only the net borrowing costs directly attributable to the qualifying asset are included in its cost. The method provides an accurate measurement of financing costs associated with the specific qualifying asset under development.
- Measurement of General Borrowings
If an entity finances a qualifying asset using general borrowings, borrowing costs are measured by applying a capitalisation rate to the expenditures incurred on the qualifying asset. The capitalisation rate is calculated as the weighted average of borrowing costs applicable to the entity’s outstanding general borrowings during the reporting period. This method ensures a fair allocation of borrowing costs when funds are obtained for overall business purposes rather than a specific project. It provides a systematic and consistent approach to measuring borrowing costs eligible for capitalisation under Ind AS 23.
- Capitalisation Rate in Measurement
The capitalisation rate plays a significant role in measuring borrowing costs related to general borrowings. It is determined by calculating the weighted average borrowing cost of all general borrowings outstanding during the accounting period, excluding borrowings specifically obtained for qualifying assets. This rate is then applied to the expenditure incurred on the qualifying asset during the construction or production period. The use of a capitalisation rate ensures consistent allocation of financing costs and prevents arbitrary calculation of borrowing costs. It enhances the reliability and comparability of financial statements prepared under Ind AS 23.
- Deduction of Investment Income
While measuring borrowing costs for specific borrowings, any income earned from temporarily investing unused borrowed funds must be deducted from the borrowing costs eligible for capitalisation. For example, if loan proceeds are invested in short-term deposits before being utilised for constructing a qualifying asset, the interest income received reduces the borrowing costs capitalised. This treatment ensures that only the actual net financing cost incurred for the qualifying asset forms part of its carrying amount. It prevents overstatement of asset cost and promotes accurate financial reporting under Ind AS 23.
- Measurement During Capitalisation Period
Borrowing costs are measured only during the period in which capitalisation is permitted under Ind AS 23. Capitalisation begins when expenditures on the qualifying asset are incurred, borrowing costs are incurred, and activities necessary to prepare the asset for use or sale are in progress. It continues while active development is taking place and ceases when substantially all activities are completed. Measuring borrowing costs only during this eligible period ensures that financing costs unrelated to asset construction are recognised as expenses, thereby maintaining accuracy and compliance with the accounting standard.
- Measurement of Foreign Currency Borrowings
When borrowings are obtained in foreign currencies, measurement of borrowing costs includes eligible foreign exchange differences that are regarded as an adjustment to interest costs. Only the portion of exchange differences qualifying under Ind AS 23 is included in borrowing costs. Other exchange differences are accounted for according to the relevant accounting standards. This treatment ensures that the measured borrowing costs accurately reflect the true financing cost of foreign currency loans used for qualifying assets. It also promotes consistency and fairness in accounting for international financing arrangements.
Disclosure Requirements under Ind AS 23 – Borrowing Costs
- Disclosure of Accounting Policy
Ind AS 23 requires an entity to disclose the accounting policy adopted for borrowing costs. The financial statements should clearly explain whether borrowing costs directly attributable to qualifying assets are capitalised and how other borrowing costs are recognised as expenses. The accounting policy should also describe the principles followed for measuring borrowing costs and identifying qualifying assets. This disclosure enables users of financial statements to understand the entity’s accounting practices and ensures consistency and transparency in financial reporting. It also facilitates comparison between different entities following the same accounting standard.
- Disclosure of Amount of Borrowing Costs Capitalised
An entity must disclose the total amount of borrowing costs capitalised during the reporting period. This amount represents the borrowing costs included in the cost of qualifying assets instead of being recognised as an expense. Disclosure of the capitalised amount helps investors, creditors, and other stakeholders understand the financial impact of borrowings on asset values. It also provides information regarding the extent to which financing costs have contributed to the acquisition, construction, or production of qualifying assets during the accounting period and supports informed financial analysis.
- Disclosure of Capitalisation Rate
When general borrowings are used to finance qualifying assets, Ind AS 23 requires the disclosure of the capitalisation rate applied. The capitalisation rate is the weighted average borrowing cost of general borrowings used to determine the amount eligible for capitalisation. Disclosing this rate enables users to understand the basis used in calculating capitalised borrowing costs. It improves transparency, enhances comparability among financial statements, and demonstrates that borrowing costs have been measured consistently in accordance with the requirements of the accounting standard and accepted accounting principles.
- Disclosure of Qualifying Assets
Entities should disclose information regarding the qualifying assets for which borrowing costs have been capitalised. A qualifying asset is one that requires a substantial period to become ready for its intended use or sale. Examples include manufacturing plants, office buildings, infrastructure projects, and certain inventories. Disclosure of qualifying assets enables stakeholders to identify where capitalised borrowing costs have been applied. It provides greater clarity regarding long-term investments and helps users evaluate the relationship between financing costs and the assets under development within the organisation.
- Disclosure of Borrowing Cost Recognition
Ind AS 23 requires entities to disclose how borrowing costs have been recognised during the reporting period. The financial statements should distinguish between borrowing costs capitalised as part of qualifying assets and borrowing costs recognised immediately as expenses in the Statement of Profit and Loss. This disclosure provides users with a clear understanding of the accounting treatment applied to financing costs. It also ensures transparency by explaining how different categories of borrowing costs have affected both asset values and the entity’s financial performance during the reporting period.
- Disclosure of Judgements and Estimates
Entities should disclose significant judgements and estimates made while applying Ind AS 23 whenever they materially affect the financial statements. These may include determining whether an asset qualifies for capitalisation, calculating the capitalisation period, identifying eligible borrowing costs, or estimating the capitalisation rate for general borrowings. Such disclosures help users understand the assumptions used by management in applying the standard. They also improve the credibility of financial reporting by providing greater transparency regarding complex accounting decisions and estimation processes followed by the entity.
- Importance of Disclosure Requirements
The disclosure requirements under Ind AS 23 enhance the transparency and reliability of financial statements by providing detailed information about borrowing costs. Proper disclosures enable investors, lenders, regulators, and other stakeholders to understand the accounting treatment of financing costs and evaluate their impact on asset values and profitability. Comprehensive disclosure also improves accountability, strengthens confidence in financial reporting, and promotes better comparison between different organisations. It ensures that financial statement users receive complete information necessary for making sound economic and investment decisions based on reliable accounting data.
- Compliance with Ind AS 23
Compliance with the disclosure requirements of Ind AS 23 ensures that financial statements meet the prescribed accounting standards and present a true and fair view of borrowing costs. Proper disclosure demonstrates that the entity has followed recognised accounting principles while capitalising and expensing borrowing costs. Compliance also enhances the credibility of financial statements, reduces the risk of regulatory issues, and supports audit requirements. By adhering to Ind AS 23, organisations improve the quality of financial reporting, maintain stakeholder confidence, and ensure consistency with national and international accounting practices.
Importance of Ind AS 23 – Borrowing Costs
- Ensures Proper Accounting of Borrowing Costs
Ind AS 23 is important because it provides a clear framework for accounting for borrowing costs incurred by an entity. It explains which borrowing costs should be capitalised and which should be recognised as expenses. This prevents inconsistent accounting practices and ensures that financing costs are recorded appropriately. Proper accounting improves the quality and reliability of financial statements. It also helps management and stakeholders understand how borrowed funds have been utilised in acquiring, constructing, or producing qualifying assets. Consequently, the standard promotes accurate financial reporting and enhances confidence in accounting information provided by business entities.
- Improves Accuracy of Asset Valuation
Ind AS 23 improves the accuracy of asset valuation by requiring borrowing costs directly attributable to qualifying assets to be included in their cost. This ensures that the carrying amount of the asset reflects the total expenditure incurred in bringing it to its intended use or sale. Without capitalisation, the cost of qualifying assets would be understated. Accurate valuation provides a true and fair view of the entity’s financial position. It also enables management, investors, and creditors to assess the value of long-term assets more effectively and make better financial decisions.
- Promotes Consistency in Financial Reporting
Ind AS 23 establishes uniform principles for recognising, measuring, and capitalising borrowing costs. All entities applying the standard follow the same accounting treatment for qualifying assets and borrowing costs. This consistency eliminates variations in accounting practices and improves the comparability of financial statements across organisations. Investors, lenders, analysts, and regulators can compare the financial performance and asset values of different companies with greater confidence. Uniform reporting also enhances the credibility of financial information and strengthens trust in financial statements prepared according to Indian Accounting Standards and accepted accounting principles.
- Distinguishes Capitalisable and Non-Capitalisable Costs
An important benefit of Ind AS 23 is that it clearly distinguishes borrowing costs eligible for capitalisation from those that should be recognised as expenses. Only borrowing costs directly attributable to qualifying assets are capitalised, while all other financing costs are charged to the Statement of Profit and Loss. This distinction prevents incorrect asset valuation and avoids overstating the cost of assets. Proper classification ensures compliance with accounting standards, improves financial statement quality, and provides users with accurate information regarding financing expenses and investment costs incurred by the entity during the reporting period.
- Enhances Transparency Through Disclosure
Ind AS 23 enhances transparency by requiring entities to disclose important information relating to borrowing costs. Financial statements must disclose the amount of borrowing costs capitalised, the capitalisation rate applied, and the accounting policies followed. These disclosures help investors, creditors, regulators, and other stakeholders understand how borrowing costs have affected asset values and financial performance. Transparent reporting improves accountability and builds confidence in financial statements. It also enables users to evaluate the entity’s financing decisions and compare its accounting practices with those of other organisations effectively and reliably.
- Supports Better Financial Decision-Making
Ind AS 23 provides reliable financial information that assists management, investors, lenders, and regulators in making informed decisions. Accurate accounting of borrowing costs enables users to assess the true cost of qualifying assets and evaluate the efficiency of financing strategies. Management can use this information for budgeting, capital investment planning, and resource allocation. Investors and creditors benefit by understanding the impact of financing costs on profitability and asset values. Reliable financial information ultimately supports sound economic decisions, efficient business management, and sustainable organisational growth over the long term.
- Facilitates Compliance with International Standards
Ind AS 23 aligns Indian accounting practices with International Financial Reporting Standards relating to borrowing costs. This alignment improves the comparability and credibility of financial statements prepared by Indian entities in global markets. International investors, lenders, and multinational companies can easily understand and compare financial reports prepared under Ind AS. Compliance with internationally accepted standards also enhances the reputation of Indian businesses, encourages foreign investment, and facilitates cross-border business activities. Thus, Ind AS 23 contributes significantly to the global acceptance of Indian financial reporting practices and accounting quality.
- Strengthens Stakeholder Confidence
Ind AS 23 strengthens the confidence of investors, creditors, shareholders, auditors, and regulatory authorities by ensuring accurate accounting and transparent reporting of borrowing costs. Proper recognition, capitalisation, measurement, and disclosure reduce the risk of misleading financial information and improve the reliability of financial statements. Stakeholders gain a clearer understanding of the entity’s financing activities, investment costs, and long-term asset values. This confidence promotes stronger business relationships, easier access to finance, improved corporate governance, and greater trust in the entity’s financial reporting, contributing to sustainable business success and growth.
Limitations of Ind AS 23 – Borrowing Costs
- Complexity in Identifying Qualifying Assets
One major limitation of Ind AS 23 is the difficulty in identifying qualifying assets. The standard requires borrowing costs to be capitalised only for assets that take a substantial period to become ready for use or sale. However, determining what constitutes a substantial period may involve judgement and can vary between entities and industries. This creates uncertainty in applying the standard. Different interpretations may lead to differences in accounting treatment, reducing comparability between financial statements. The complexity of classification increases the burden on accounting professionals and management while preparing financial reports.
- Difficulty in Calculating Capitalisation Amount
Ind AS 23 requires entities to calculate the amount of borrowing costs eligible for capitalisation, which can be complicated. The calculation becomes especially difficult when an entity uses multiple borrowings, different interest rates, and various funding sources for several projects. Determining the correct amount attributable to a specific qualifying asset requires detailed financial analysis and accurate records. Errors in calculation may result in overstatement or understatement of asset values. Therefore, the measurement process under Ind AS 23 can increase accounting complexity and require significant professional judgement and expertise.
- Dependence on Management Judgement
Ind AS 23 involves several areas where management judgement is required, such as determining whether an asset qualifies for capitalisation, identifying the capitalisation period, and deciding whether foreign exchange differences represent borrowing costs. Excessive reliance on judgement may create differences in accounting practices among entities. Management decisions can also influence the timing and amount of capitalised borrowing costs. This may affect the comparability and reliability of financial statements. Although professional judgement is necessary in accounting, excessive subjectivity remains a limitation of Ind AS 23.
- Increased Accounting and Administrative Burden
Application of Ind AS 23 increases the accounting and administrative workload for entities. Organisations must maintain detailed records of borrowings, interest expenses, qualifying assets, capitalisation periods, and related calculations. Entities with multiple projects and financing arrangements may face difficulties in tracking eligible borrowing costs accurately. The additional documentation and monitoring requirements increase compliance costs and require skilled accounting personnel. Small and medium-sized enterprises may find the implementation of these requirements challenging due to limited resources and technical expertise available for complex accounting procedures.
- Difficulty in Determining Capitalisation Period
Another limitation of Ind AS 23 is the difficulty in determining the exact period during which borrowing costs should be capitalised. Capitalisation begins only when specific conditions are satisfied and ends when substantially all activities necessary to prepare the asset are completed. Delays, interruptions, or changes in project plans can create uncertainty regarding the appropriate capitalisation period. Incorrect determination of this period may result in improper recognition of borrowing costs. Therefore, entities must carefully evaluate project progress to ensure accurate application of the standard.
- Exclusion of Certain Borrowing Costs
Ind AS 23 does not allow capitalisation of all borrowing costs, even when they relate to business activities. Only costs directly attributable to qualifying assets are eligible for capitalisation, while other borrowing costs must be recognised as expenses. This limitation may result in differences between the actual financing costs incurred by an entity and the cost recorded for its assets. In some cases, entities may feel that certain financing costs contribute to asset development but cannot be included due to the strict requirements of the standard.
- Challenges in Foreign Currency Borrowings
Accounting for foreign currency borrowing costs under Ind AS 23 can be challenging. The standard allows certain foreign exchange differences to be treated as borrowing costs only when they represent an adjustment to interest costs. Determining the eligible portion of exchange differences requires careful analysis and professional judgement. Changes in currency rates can create uncertainty and complexity in measurement. Entities involved in international borrowing arrangements may face difficulties in applying the rules consistently, increasing the possibility of variations in accounting treatment and financial reporting outcomes.
- Limited Applicability for Short-Term Assets
Ind AS 23 mainly focuses on qualifying assets that require a substantial period for completion. Assets that are completed quickly or produced regularly in large quantities generally do not qualify for capitalisation of borrowing costs. This limitation means that some financing costs related to business activities cannot be reflected in asset values even though they contribute to production processes. As a result, the standard may not fully represent the economic relationship between borrowing costs and certain short-term or repetitive production activities, limiting its applicability in some business situations.
Illustrations on Borrowing Cost Capitalisation (Ind AS 23)
Illustration 1: Capitalisation of Specific Borrowing
Question: A Ltd. borrowed ₹10,00,000 on 1 April 2025 at an interest rate of 10% per annum for constructing a factory. The construction was completed on 31 March 2026. Calculate the borrowing cost to be capitalised.
Solution:
Loan Amount = ₹10,00,000
Interest Rate = 10% per annum
Period of Construction = 1 Year
Borrowing Cost = Loan Amount × Interest Rate
= ₹10,00,000 × 10%
= ₹1,00,000
Accounting Treatment: Since the loan was specifically taken for constructing a qualifying asset, the entire interest cost of ₹1,00,000 will be capitalised as part of the cost of the factory.
Journal Entry:
Factory Account Dr. ₹1,00,000
To Interest Payable Account ₹1,00,000
Thus, the cost of the factory will increase by ₹1,00,000.
Illustration 2: Specific Borrowing with Temporary Investment Income
Question: B Ltd. borrowed ₹20,00,000 on 1 April 2025 at 12% interest for constructing a building. The company temporarily invested unused funds and earned interest income of ₹30,000. Calculate borrowing cost to be capitalised.
Solution:
Total Interest on Borrowing:
₹20,00,000 × 12% = ₹2,40,000
Less: Temporary Investment Income = ₹30,000
Borrowing Cost Eligible for Capitalisation:
₹2,40,000 – ₹30,000 = ₹2,10,000
Accounting Treatment: Only ₹2,10,000 will be capitalised as part of the building cost because Ind AS 23 requires deduction of income earned from temporary investment of borrowed funds.
Illustration 3: Capitalisation of General Borrowings
Question: C Ltd. has the following borrowings:
- Loan A: ₹50,00,000 at 10% interest
- Loan B: ₹30,00,000 at 12% interest
The company used ₹20,00,000 from these general borrowings for constructing a qualifying asset. Calculate borrowing cost to be capitalised.
Solution:
Step 1: Calculate Total Borrowing Cost
Loan A Interest = ₹50,00,000 × 10% = ₹5,00,000
Loan B Interest = ₹30,00,000 × 12% = ₹3,60,000
Total Interest = ₹8,60,000
Step 2: Calculate Capitalisation Rate
Total Borrowings = ₹80,00,000
Capitalisation Rate:
= ₹8,60,000 ÷ ₹80,00,000 × 100
= 10.75%
Step 3: Calculate Borrowing Cost Capitalised
Amount Used for Asset = ₹20,00,000
Capitalised Borrowing Cost:
= ₹20,00,000 × 10.75%
= ₹2,15,000
Amount Capitalised = ₹2,15,000
Illustration 4: Suspension of Capitalisation
Question: D Ltd. started construction of a plant on 1 April 2025. Due to a labour strike, construction was suspended for three months. The total interest incurred during the year was ₹6,00,000. Calculate borrowing cost eligible for capitalisation.
Solution:
Total Construction Period = 12 months
Suspension Period = 3 months
Active Construction Period = 9 months
Borrowing Cost Capitalised:
= ₹6,00,000 × 9/12
= ₹4,50,000
Accounting Treatment: Borrowing cost of ₹4,50,000 will be capitalised. The remaining ₹1,50,000 relating to the suspension period will be recognised as an expense.
Illustration 5: Cessation of Capitalisation
Question: E Ltd. borrowed ₹15,00,000 for constructing a warehouse. Construction was completed on 31 December 2025, but the loan continued until 31 March 2026. Total interest for the year was ₹1,80,000. Determine the amount to be capitalised.
Solution:
Construction Period:
1 April 2025 to 31 December 2025 = 9 months
Borrowing Cost for 9 months:
= ₹1,80,000 × 9/12
= ₹1,35,000
Amount Capitalised = ₹1,35,000
Interest for January to March 2026:
= ₹1,80,000 × 3/12
= ₹45,000
This amount will be treated as an expense.
Illustration 6: Capitalisation of Foreign Currency Borrowing Cost
Question: F Ltd. borrowed foreign currency funds for constructing a factory. During the year, interest paid was ₹5,00,000 and exchange loss was ₹80,000. The exchange difference related to interest adjustment was ₹50,000. Calculate borrowing cost.
Solution:
Interest Cost = ₹5,00,000
Eligible Foreign Exchange Difference = ₹50,000
Total Borrowing Cost:
= ₹5,00,000 + ₹50,000
= ₹5,50,000
Accounting Treatment: ₹5,50,000 will be considered for capitalisation if the borrowing relates directly to a qualifying asset.
