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Scope of IAS 23


An entity shall apply this standard in accounting for borrowing costs


Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:


  • Qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture
  • Inventories that are manufactured or otherwise produced, in large quantities on a repetitive basis and that take a substantial period to get ready for sale.


Borrowing cost


Borrowing cost is the cost that is directly attributable to the acquisition, construction, or production of a qualifying asset is added to the cost of asset.


Qualifying Asset


Asset that require substantial period of time to get ready for its intended use.

Time period should be at least in months. E.g Building Construction, Plant & Machinery, Internally Generated Intangible, Inventories.


Borrowings include           Loan, Bank Overdraft/Running Finance, Redeemable Preference Shares, Term Finance Certificate/Loan notes.


Borrowing Costs        Markup, Preference dividend, Processing Cost/Commitment fees, Discounts/Premium on redemption, Documentation charges.


Recognizing Borrowing Costs         Borrowing costs directly related to acquisition, contribution, construction & manufacturing of qualifying asset is capitalized and Other than that cost is recognized in Profit & loss.



Formula to calculate Capitalization =                                                      






                                                                         Amount to be Capitalized             Capitalization Period






Capitalization Period 


Capitalization period starts when all of the following conditions are met


  • Entity incurs Expenditure on Assets. I.e. Payments
  • Entity incurs borrowing cost. I.e. Loan Obtained
  • Entity undertakes necessary Activities (Activities include Technical and administrative work prior to physical construction


Capitalization period is stopped only if suspension of work is abnormal. If suspension of work is a part to complete the asset then capitalization period continues.


An entity shall not suspend capitalization when temporary delay is necessary or an entity carries out substantial technical and administrative work.


Two types of borrowing


  • Specific Borrowing
  • General Borrowing


Specific Borrowing


In specific borrowing loan is obtained specifically for that asset, so interest rate is applied on that specific loan with the boundary of capitalization and if a part of loan is invested somewhere and income is received from there then that temporary investment income received is reduced from the interest cost of capitalization.


General Borrowing


The loan amount is obtained for other activities but it is also used for the construction of asset, so in that case capitalization to expenditure on asset is applied on time proportionate basis.


The amount which is used out of general borrowing is capitalized by applying the rate of interest.


If there is more than one loan then capitalization rate is the weighted average interest rate of general borrowing outstanding during the period.


For example      Loan                            Interest                             WX

240                                 11%                           26.4

360                                 14%                           50.4

200                                 16%                           32


Total                     800                                           




108.8/800 = 13.6%       Capitalization Rate

Note:  All amounts are in millions




General loans do not remain same through the period. They may be obtained in different months so capitalization will start from the month when loan is obtained and capitalization conditions are met.


If any general loan is repaid then capitalization of borrowing cast on asset will be stopped.


If loan amount is not specified that it is general loan or specific loan then see if loan amount is much greater than amount spent on asset then it is general loan OR If amount spent is near to expenditure on asset then it is specific.


In general loan Investment income is not reduced from borrowing cost amount added in cost of asset rather than it is recorded as other income in profit & loss.


Adil Ihsan

October 19, 2020

 AI BLOG 19102020