CA P S Beniwal ACCA - IAS 23 (F7-FR) – Chapter 3

1. Borrowing costs: are interest and other costs that an entity incurs in connection
with the borrowing of funds. It includes:
(i) interest expense calculated using the effective interest method as per IFRS 9.
(ii) interest in respect of lease liabilities recognised as per IFRS 16, Leases; and
(iii) exchange differences arising from foreign currency borrowings equivalent to the extent
 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.
In simple words foreign exchange loss shall be capitalized at lower of two:
(a) Foreign exchange loss. Or
(b) Local borrowing cost in excess of foreign borrowing cost.
2. Capitalisation/Recognition of Borrowing cost:
 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.
 Other borrowing costs are recognised as an expense (P&L A/c) in the period in
which they are incurred.
3. A qualifying asset: is an asset
 that necessarily takes
 a substantial period of time
 to get ready for its intended use or sale.
4. Meaning of Substantial Period: For this purpose entity make its Accounting Policy and
disclosed into Notes to Account. Generally substantial period is a period of 12 months.
5. Commencement date of capitalization: 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.
Note: 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.
 exclude the holding of an asset when no production or development that changes
the asset’s condition is taking place.
6. Suspension of capitalization: if active development is interrupted, then
 Capitalization of borrowing costs is to be suspended
 during extended periods in which it suspends active development of a qualifying asset.

 In case there is a temporary delay, which is a necessary part of the process of

getting an asset ready for its intended use or sale then capitalising of borrowing
costs does not suspended.
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 CA P S Beniwal ACCA - IAS 23 (F7-FR) – Chapter 3
7. Cessation of capitalisation If any one condition is fulfilled out of following two:-
(a) when substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete, or
(b) Borrowing has been repaid.
Note: 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.
8. Calculation of amount of borrowing cost capitalized:
= Expenditure/Amount incurred on Q.A. X Borrowing Rate X Period
* 1. Expenditures on a qualifying asset include:
Those expenditures that have resulted in payments of cash XXX
Transfers of other assets XXX
Assumption of interest bearing liabilities XXX
(-)Any progress payments received and grants received (XXX)
XXX
*2 Borrowing cost/Rate: These are of two types
(a) Specific borrowing cost:
Actual borrowing cost incurred on Any income on temporary
- investment of borrowed funds
specific borrowing
(b) General Borrowing Rate/Capitalisation Rate:
Total general borrowing costs for the period(excluding specific borrowings) X100
Weighted average total general borrowings(excluding specific borrowings)
*3 In case period is not given then borrowing rate/cost shall be taken for the whole year.
Notes:
1) Borrowing cost does not include notional cost of capital.
2) Always use first specific borrowing then use general borrowing.
3) Borrowing cost capitalised cannot exceeds actual borrowing cost.
9. Some relevant points
(i) No borrowing cost shall be capitalized once asset get ready for its intended use
or sale.
(ii) In case there are any prepayment charges then such charges shall be charged into
SPL because its nature is not usage of borrowing rather it is compensate in nature.
(iii) IAS 23 does not require the capitalisation of borrowing costs for inventories that
are manufactured in large quantities on a repetitive basis.
(iv) If specific borrowings were not repaid once the relevant qualifying asset was
completed, they become general borrowings for as long as they are outstanding.
(v) Qualifying Assets may be any of the following(Depending on the circumstances)
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
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 CA P S Beniwal ACCA - IAS 23 (F7-FR) – Chapter 3
(e) investment properties
(f) bearer plants.
Followings are not qualifying assets:
(a) Financial Assets
(b) Inventories that are manufactured, or otherwise produced, over a short period
of time.
(c) Assets that are ready for their intended use or sale when acquired are not
qualifying assets.

10. Disclosure Requirement

(a) the amount of borrowing costs capitalised during the period; and
(b) the capitalisation rate.
PRACTICAL QUESTIONS
1. X Ltd is commencing a new construction project, which is to be financed by borrowing. The key dates are as follows:
(i) 15 May 20X1: Loan interest relating to the project starts to be incurred
(ii) 2 June 20X1 : Technical site planning commences
(iii) 19 June 20X1 : Expenditure on the project started to be incurred
(iv) 18 July 20X1 : Construction work commences
The commencement date would be

2. Paras Ltd. had the following borrowings during a year in respect of capital expansion.
Plant Cost of Asset($) Remarks
P 100 lakhs No specific borrowings
Q 125 lakhs Bank loan of $ 65 lakhs at 10%
R 175 lakhs 9% Debentures of $ 125 lakhs were issued.
In addition to the specific borrowings stated above, the Company had obtained term loans from two banks (1) $ 100 lakhs at
10% from Corporation Bank and (2) $ 110 lakhs at 11.50% from State Bank of India, to meet its capital expansion
requirements. Determine the amount of borrowing costs to be capitalized in each of the above plants, as per IAS 23.

3. M/s First Ltd began construction of a new factory building on 1 st April, 2017. It obtained $ 2,00,000 as a special loan to
finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum. Further, expenditure on
construction of the factory building was financed through other non-specific loans. Detailed of other outstanding non-specific
loans were:

Amounts ($) Rate of Interest per annum

4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory loading construction were as follows:
Date Amounts ($)
1st April, 2017 3,00,000
31st May 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3.60,000
The constriction of factory building was completed by 31st March 2018. As per the provisions of IAS-23, you are required
to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass journal entry for capitalizing the cost and borrowing cost in respect of the factory building.
Solution: As per IAS-23, “Borrowing Cost”
(1) Calculation of amount of borrowing cost capitalized ($)
Date Amount ($) Nature of Borrowing Amount of Borrowing Cost Capitalised
(Periods used in Months)
01/04/2017 3,00,000 Specific $ 2,00,000 2,00,000 x 8% x 12/12 = $ 16,000
General $ 1,00,000 1,00,000 x 11.50% x 12/12=$ 11,500
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 CA P S Beniwal ACCA - IAS 23 (F7-FR) – Chapter 3
31/05/2017 2,40,000 General 2,40,000 x 11.50% x 10/12=$ 23,000
01/08/2017 4,00,000 General 4,00,000 x 11.50% x 8/12=$ 30,667
31/12/2017 3,60,000 General 3,60,000 x 11.50% x 3/12=$ 10,350
Total 13,00,000 $ 91,517
(2) Journal Entry
Date Particulars Dr. ($) Cr. ($)
31.03.18 Building account Dr. 13,91,517
To Bank account (13,00,000 + 91,517) 13,91,517
(Being amount of cost of building and borrowing cost thereon capitalised)

Working Note: Calculation of average interest rate other than for specific borrowings
(4,00,000 x 9%) + (5,00,000 x 12%) + (3,00,000 x 14%)
4,00,000 + 5,00,000 + 3,00,000
= 11.50%

4. Alpha Ltd on 1st April 20X1 borrowed 9% $ 30,00,000 to finance the construction of two qualifying assets. Construction
started on 1st April 20X1. The loan facility was availed on 1st 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.

5. Beta Ltd had the following loans in place at the end of 31st March 20X2: ($ ‘000)
Loan 1st April 20X1 31st March 20X2
18% Bank Loan $ 1,000 $ 1,000
16% Term Loan $ 3,000 $ 3,000
14% Debentures - $ 2,000
14% debenture was issued to fund the construction of Office building on 1st July 20X1 but the development activities has yet
to be started.
On 1st April 20X1, Beta ltd began the construction of a Plant being qualifying asset using the existing borrowings.
Expenditure drawn down for the construction was: $ 500,000 on 1st April 20X1 and $ 2,500,000 on 1st January 20X2.
Required: Calculate the borrowing cost that can be capitalised for the plant.

6. In May, 2004 Speed Ltd. took a bank loan to be used specifically for the construction of a new factory building. The
construction was completed in January, 2005 and the building was put to its use immediately thereafter. Interest on the actual
amount used for construction of the building till its completion was $ 18 Millions, whereas the total interest payable to the
bank on the loan for the period till 31st March, 2005 amounted to $ 25 Millions.
Amount of borrowing cost capitalised by $

7. X Ltd. has borrowed $ 10 million @ 9% per annum to finance the construction of a factory. Construction is expected to take
takes a substantial period of time to get ready for its intended use. The loan was drawn down on 1 April 2023 and work began
on 1st July 2023. Loan amount of $3 million was not utilised until 1st September 2023. Accordingly X Ltd. invested surplus
funds at 7% per annum. Calculate the borrowing costs to be capitalised for the year ended 31 December 2023.
(a) $ 4,15,000 (b) $ 4,50,000 (c) $ 3,15,000 (d) $ 6,40,000.

8. Detailed of outstanding non-specific loans for the whole year ended 31 st Dec. 2022 were as follows:

Amounts ($) Rate of Interest per annum

4,00,000 10%
5,00,000 11%
3,00,000 12%

The company began construction of a new factory building as on 1st February 2022 and withdrawal fund of $ 300,000 and
used to construction on the same day. On 1st May 2022 an additional $ 1,00,000 was withdrawn and used for the same
purpose. Calculate the amount of borrowing cost to be capitalized.
(a) $ 40,040 (b) $ 37,310 (c) $ 43,680 (d) $ 29,120

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 CA P S Beniwal ACCA - IAS 23 (F7-FR) – Chapter 3
9. Which asset is not a qualifying asset?
(a) inventories (b) Financial Assets (c) manufacturing plants (d) investment properties

10. Which condition is not relevant for commencement of capitalization of borrowing cost?
(a) the holding of an asset when no production or development that changes the asset’s condition is taking place.
(b) it incurs expenditures for the asset;
(c) it incurs borrowing costs;
(d) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

11. Take Ltd. has borrowed $ 30 lakhs from State Bank of India during the financial year 2023-24. The borrowings are used to
invest in shares of Give Ltd., a subsidiary company of Take Ltd., which is implementing a new project, estimated to cost $ 50
lakhs. As on 31st March, 2024, since the said project was not complete, the directors of Take Ltd. resolved to capitalize the
interest accruing on borrowings amounting tò $ 4 lakhs and add it to the cost of investments. Comment.
Solution: A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or
sale. Since, shares are ready for its intended use at the time of sale, it cannot be considered as qualifying asset that can enable
a company to add the borrowing cost to investments. Therefore, the directors of Take Ltd. cannot capitalise the borrowing
cost as part of cost of investment. Rather, it has to be charged to the Statement of Profit and Loss for the year ended 31st
March, 2024.

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