Educational Material on Ind AS 23,

Borrowings Costs

Educational Material on Ind AS 23, Borrowings Costs

ISBN : 978-81-8441-976-4
 Educational Material on
Indian Accounting Standard (Ind AS) 23,
Borrowing Costs

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
NEW DELHI
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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Accountants of lndia and IFRS Foundation. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, or transmitted,
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This Educational Material has been formulated in accordance with the Ind AS
notified by the Ministry of Corporate Affairs (MCA) as Companies (Indian
Accounting Standards) Rules, 2015 vide Notification dated February 16,
2015 and other amendments finalised and notified till July 2020.

Edition : January 2021

Committee/Department : Accounting Standards Board

E-mail : [email protected], [email protected]

Website : www.icai.org

Price : INR 80/-

Published by : The Publication Department on behalf of the

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January/2021/500 copies
 Foreword
The Financial Reporting environment in India has undergone significant
reform with the advent of the IFRS converged Indian Accounting Standards.
This set of new accounting standards has made the financial reporting in
India on par with the financial reporting across the globe. ICAI is playing a
paramount role in this new era of accounting reforms in India. This has
resulted in the enhancement of comparability of the Financial Statements of
Indian Companies with the Companies all over the World. Comparability
between entities and consistency in the application of principles over time
increases the informational value of comparisons of relative economic
opportunities or performance. We at the ICAI are committed and playing
leading role for smooth implementation of Ind AS and have been taking
various initiatives for training of accounting professionals, creating
awareness and providing guidance. Stakeholders are benefitted by our
various related initiatives to enhance their skill-sets and capabilities and
making this ongoing major accounting reform in India a big success.
In light of the objectives for providing guidance on implementation of Ind AS,
the Accounting Standards Board of the Institute of Chartered Accountants of
India has formulated an Educational Material on Ind AS 23, Borrowing Costs
which provides adequate guidance on the implementation of the Standard for
recognising the borrowing costs incurred by entities. This publication
contains a summary of the Standard and Frequently Asked Questions
(FAQs) that are likely to be encountered while applying the Standard.
I would like to offer my sincere gratitude and appreciation for the efforts put
in by CA. M P Vijay Kumar, Chairman, CA. Sanjeev Singhal, Vice-Chairman,
and other members of the Accounting Standards Board for their immense
efforts to formulate this publication for the benefit of the stakeholders and the
members of the Institute, keeping in mind the practical aspects of the Indian
accounting system.
I am sure that the publication would be of immense use to professionals and
other stakeholders while implementing and applying the Ind AS for fulfilling
their financial reporting requirements.
New Delhi CA. Atul Kumar Gupta
January 10, 2021 President, ICAI
 Preface
In the era of highly competitive global economy, it is imperative for the
businesses to have financial reports comparable across the world. To
achieve this comparability, the Institute of Chartered Accountants of India
(ICAI) have formulated the IFRS-converged Indian Accounting Standards
(Ind AS) pursuant to the provisions of Section 133 of the Companies Act,
2013. Implementation of Ind AS has been driven by tireless efforts of the
ICAI to make sure that the principles are consistently applied in the
preparation of the financial statements. For this purpose, ICAI is actively
engaged in providing guidance to members and other stakeholders through
its various collective efforts in programs and publications.
The Accounting Standards Board has been making relentless efforts to
ensure effective implementation of Ind AS through its various endeavours.
The Board has been working tirelessly to provide guidance to the members
and other stakeholders on the notified Ind AS. For this purpose, Educational
Materials on various Ind AS covering various issues have been issued. Apart
from this, the Board has also launched Online Certificate Course on Ind AS
and it conducts In-house training programmes on Ind AS for regulatory
bodies such as RBI, C&AG, IRDAI, CBDT etc. and other corporate entities,
develops video lectures on Ind AS, organises seminars, awareness
programmes on Ind AS and series of webcasts on Ind AS.
The Ind ASs provide accounting and financial reporting guidance in respect
of various aspects of the financial transactions of the entities. One such
aspect is the borrowings of entities and the costs incurred by entities on such
borrowings for financing its various activities. Ind AS 23, Borrowing Costs
lays down the principles relating to accounting of same. To provide guidance
on application and implementation of Ind AS 23, Borrowing Costs, the
Accounting Standards Board has formulated this Educational Material which
provides guidance on various practical issues in the form on Frequently
Asked Questions (FAQs) that the preparers of the financial statements face
while applying the Standard.
I would like to convey my sincere gratitude to our Honourable President, CA.
Atul Kumar Gupta and Vice-President, CA. Nihar Jambusaria for providing us
the opportunity of bringing out this publication. We are also thankful to the
Vice Chairman CA (Dr) Sanjeev Singhal as well as convenor of the study
group for his active guidance in formulation of this publication. I would also
like to thank all the members of the Accounting Standards Board for their
valuable contribution in various endeavours of the Board.
I acknowledge with thanks the technical contribution made by the members
of the study group, CA. Nikhil Agrawal, CA. Neeraj Bansal, CA. Kulbhushan
Sharma, CA. Hari Nagrani, CA. Charan Gupta, CA. Anuradha Jain, CA.
Shabadjeet Singh Soin in drafting the Educational material and CA.
Parminder Kaur, Secretary, CA. Ruchika Gupta, Assistant Project Officer,
CA. Prachi Jain, Executive Officer and CA. Choshal Patil, Consultant,
Accounting Standards Board in bringing out this publication.
I believe that this publication would be of great help to the members and
other stakeholders for overall understanding and implementation of Ind AS
23.

CA. M P Vijay Kumar

Chairman
Accounting Standards Board
 Contents

Sr. Particulars Page No.

No.
I Ind AS 23 - Summary 1
II Frequently Asked Questions (FAQs) 5
III Appendix I: Major Differences between Ind AS 23, 34
Borrowing Costs and AS 16, Borrowing Costs
Appendix II: Major Differences between Ind AS 23, 36
Borrowing Costs and IAS 23, Borrowing Costs
Educational Material on
Indian Accounting Standard (Ind AS) 23,
Borrowing Costs

I. Summary
Definition
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 recognised as an expense.
Scope
This standard is not required to be applied to borrowing costs directly
attributable to the acquisition, construction or production of:
(a) a qualifying asset measured at fair value, for example, a biological
asset within the scope of Ind AS 41, Agriculture; or
(b) inventories that are manufactured, or otherwise produced, in large
quantities on a repetitive basis.
The actual or imputed cost of equity, including preferred capital not classified
as a liability is also not dealt with in this standard.
Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds. It may include:
• interest expense calculated using the effective interest method as
described in Ind AS 109, Financial Instruments;
• interest in respect of lease liabilities recognised 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.
With regard to exchange difference required to be treated as borrowing
costs, the standard lays down the following manner of arriving at the stated
adjustments mentioned above:

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(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 foreign currency.
(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 recognised as
an adjustment should also be recognised as an adjustment to interest.
Qualifying Assets
A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
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.
Recognition
An entity should capitalise borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset as part of the
cost of that asset. An entity should recognise other borrowing costs as an
expense in the period in which it incurs them.
Directly attributable costs are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made. When
an entity borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing costs that directly relate to that qualifying
asset can be readily identified.
Specific Borrowings
When an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, it determines 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.
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.

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General Borrowings
When an entity borrows funds generally and uses them for the purpose of
obtaining a qualifying asset, it determines the eligible borrowing costs by
applying a capitalisation rate to the expenditure on that asset.
The capitalisation rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period.
In some circumstances, it is appropriate to include all borrowings of the
parent and its subsidiaries when computing a weighted average rate of the
borrowing costs; in other circumstances, it is appropriate for each subsidiary
to use a weighted average rate of the borrowing costs applicable to its own
borrowings.
The amount of borrowing costs that an entity capitalises during a period
should not exceed the amount of borrowing costs it incurred during that
period.
Commencement of capitalisation
An entity shall begin capitalising borrowing costs as part of the cost of a
qualifying asset on the commencement date, which is the date when it first
meets all of the following conditions:
(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.
The activities necessary to prepare the asset for its intended use or sale
encompass more than the physical construction of the asset. They include
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.
Suspension of capitalisation
Capitalisation should be suspended during extended periods in which it
suspends active development of a qualifying asset.
Borrowing costs may incur during an extended period in which the activities

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necessary to prepare an asset for its intended use or sale are suspended.
Such costs are costs of holding partially completed assets and do not qualify
for capitalisation.
Normally, when substantial technical and administrative work is being carried
out capitalisation is not suspended.
Borrowing costs are not suspended when a 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, as such high-water levels are
common during the construction period in the geographical region involved.
Cessation of capitalisation
Capitalisation should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale 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 should cease capitalising borrowing costs when it completes
substantially all the activities necessary to prepare that part for its intended
use or sale. For example: A business park comprising several buildings,
each of which can be used individually.
Disclosure
The following disclosures are required:
(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.

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II. Frequently Asked Questions (FAQs)

Question 1
Grapewine Ltd. is in the business of producing wine in large quantities on
repetitive basis in its wine making facilities. It finances the production of wine
through external loans. Should interest costs incurred by it to finance the
production of wine be capitalised as per Ind AS 23?
Response
Certain items of inventories may require a substantial period of time for its
production due to the processes the products undergo. For example,
production of wine requires ageing process which may require a substantial
period of time, say more than 12 months for wine to be ready for sale. During
this period an entity bears the financing costs for production of such
inventory.
Paragraph 2 of Ind AS 23 specifically states that:
“2 An entity shall apply this Standard in accounting for borrowing
costs.”
Further, the core principle of Ind AS 23 given in paragraph 1 state:
“1 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 recognised as an expense.”
However, paragraph 4 of Ind AS 23 states that, “An entity is not required to
apply the Standard to borrowing costs directly attributable to the acquisition,
construction or production of:
(a) a qualifying asset measured at fair value, for example, a biological
asset within the scope of Ind AS 41, Agriculture; or
(b) inventories that are manufactured, or otherwise produced, in large
quantities on a repetitive basis.”
A combined reading of the above paragraphs indicates that Ind AS 23
prescribes accounting for all borrowing costs depending upon the nature of
the borrowing costs. According to the standard, where borrowing costs are
directly attributable to the acquisition, construction or production of a
qualifying asset, these shall form part of the cost of that asset otherwise
these will be recognised as expense. However, in case the borrowing costs

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are directly attributable to the acquisition, construction or production of

inventories that are manufactured, or otherwise produced, in large quantities
on a repetitive basis, paragraph 4 of Ind AS 23 provides that an entity is not
required to capitalise borrowing costs on such inventories. The entity is not
required, considering costs and efforts involved in allocating the borrowing
costs to such inventories and monitoring such costs until the inventories are
sold may exceed the potential benefits derived from doing such exercise.
Where an entity elects to apply the requirements of Ind AS 23 to such assets,
then it shall capitalise the borrowing costs that are directly attributable to the
acquisition, construction or production of such assets subject to fulfillment of
other requirements of the standard. The entity should consistently follow the
approach and disclose in the notes to financial statements.
In the given case, since Grapewine Ltd. is producing wine (which takes
substantial period of time to get ready for sale) in large quantities on a
repetitive basis, therefore as per paragraph 4(b) of Ind AS 23, it may elect
to either apply Ind AS 23 and capitalise the interest costs directly
attributable to production of wine or it may choose to expense these costs
in profit or loss. It should disclose the same in the notes to accounts and
must follow the same consistently.
Question 2
PQR Ltd. is in the process of constructing a large manufacturing plant in a
backward area. Due to the unavailability of housing resources in the
backward area, it has also purchased a residential building, which is to be
used for housing the workers engaged in the construction of the plant. The
purchase cost of the building is met by raising a long-term loan from a bank.
The company intends to dispose off the building once the construction of the
manufacturing plant is complete. Assuming that the manufacturing plant
meets the definition of a qualifying asset, would the borrowing costs incurred
on funds borrowed to purchase the residential building be eligible for
capitalisation as per Ind AS 23?
Response
In the given scenario, PQR Ltd. is constructing a manufacturing plant in a
backward area where the resources to station the construction workers are
not available. Therefore, PQR Ltd. has borrowed funds and purchased a
residential building in the backward area to house the workers for the
construction of its manufacturing plant.

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Paragraph 5 of the Standard defines a qualifying asset as an asset that

necessarily takes a substantial period of time to get ready for its intended
use or sale.
In the above scenario, manufacturing plant is a qualifying asset and
residential building itself is not a qualifying asset.
Paragraph 8 of Ind AS 23 gives guidance on the recognition of borrowing
costs which inter-alia states that:
“8 An entity shall capitalise borrowing costs that are directly
attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in which it
incurs them.”
Further, paragraph 10 of Ind AS 23 explains what borrowing costs are
eligible for capitalisation which inter-alia states that:
“10 The borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are those borrowing costs
that would have been avoided if the expenditure on the qualifying asset had
not been made. When an entity borrows funds specifically for the purpose of
obtaining a particular qualifying asset, the borrowing costs that directly relate
to that qualifying asset can be readily identified.”
It is a matter for careful consideration as to whether a certain expenditure is
directly related and incidental to construction of a qualifying asset, or
whether it would be more appropriate to treat it as an item of other indirect
expenditure not related to qualifying asset and therefore not eligible for
ultimate inclusion in the cost of that asset.
In the given case, the expenditure incurred to construct the residential
building is related to construction of a qualifying asset and is incidental
thereto. Furthermore, PQR Ltd. intends to dispose off the residential building
on completion of the construction of manufacturing plant and the only reason
it has purchased the said residential building is for the construction of the
manufacturing plant. Therefore, it can be said that the finance costs incurred
by PQR Ltd. on the funds borrowed to purchase the residential building are
borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset i.e. manufacturing plant and thus are eligible
for capitalisation. Hence, such borrowing costs should be capitalised as a

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part of the cost of manufacturing plant according to the requirements of Ind

AS 23, Borrowing Costs.
Question 3
M Ltd. entered into a contract with a ship builder company S Ltd and ordered
it to construct 3 ships for its fleet on April 1, 2018. The terms of the contract
are commercially negotiated as per which M Ltd. makes a down payment of
25% of the contract value of each of the ship. The balance amount is to be
paid at the time of delivery. The contract also specifies that the construction
activity for all the three ships should be completed by not later than financial
year 2023. On March 1, 2019, the ship builder informs that planning and
designing activity (being substantive activities) for the said ships is in
progress but, construction activity has not commenced for any of the three
ships. M Ltd. pays the down payment out of long-term borrowings taken from
a scheduled bank and is incurring borrowing costs on the same. Is it
permissible for M Ltd. to capitalise borrowing costs for the financial year
ended March 31, 2019 or March 31, 2020?
Response
As per paragraph 5 of Ind AS 23:
“5 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:
“17 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; and
(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.
M Ltd. borrows funds and incurs expenditure in the form of down payment on
April 1, 2018. Thus, condition (a) and (b) are met. Regarding the meeting of

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condition (c), it may be noted that the standard provides that the entity must
undertake activities to prepare the asset to be able to commence
capitalisation. In this regard, it is pertinent to note that in the given case,
although the construction activity is not being undertaken by M Ltd. itself as it
has given contract to a third party to do the same. However, this cannot
preclude M Ltd. from capitalising the borrowing costs that it is incurring for
the said asset because it has made down payment to third party so that the
third party can commence construction of the asset. Further, the said party is
also undertaking activities that are necessary to prepare the asset on behalf
of M Ltd. Therefore, it would be acceptable to capitalise the borrowing cost
even if these activities are being carried out by a third party.
Hence, in the given case condition (c) for M Ltd. is also met on April 1, 2018
itself, as S Ltd, is undertaking planning and designing activities. Accordingly,
M Ltd. can commence capitalising borrowing costs relating to all the three
ships from the period ending March 2019 itself.
Question 4
X Ltd. 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 March 31, 2020, the Company commenced the
construction of a qualifying asset and incurred the following expenses:

Date Amount (Rs)

July 1, 2019 2,50,000
December 1, 2019 3,00,000
The details of borrowings and interest thereon are as under:

Particulars Average Balance Interest (Rs.)

(Rs.)
Long term loan @ 10% 10,00,000 1,00,000
Working Capital Loan 5,00,000 65,000
Total 15,00,000 1,65,000
Compute the borrowing costs that should be capitalised as per Ind AS 23.
Response
The Standard provides guidance for capitalisation of borrowing costs of the

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funds generally borrowed in paragraph 14 which states as follows:

“14 1To the extent that an entity borrows funds generally and uses them
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 asset. The
capitalisation rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period. However, an entity shall exclude from this calculation borrowing
costs applicable to borrowings made specifically for the purpose of
obtaining a qualifying asset until substantially all the activities
necessary to prepare that 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.”
Therefore, based on the above guidance the interest to be capitalised is
computed as follows:
Computation of Capitalisation rate:
(Amount of borrowing 1 x Interest rate 1) + (Amount of borrowing 2 x
Interest rate 2)
×100
Total amount of borrowings outstanding during the year
= (1,00,000) + (65,000)
15,00,000 × 100 = 11%

Interest will be capitalised as under:

─ On Rs. 2,50,000 @ 11% p.a. for 9 months = Rs. 20,625
─ On Rs. 3,00,000 @ 11% p.a. for 4 months = Rs. 11,000
Question 5
X Ltd. commenced the construction of a plant (qualifying asset) on
September 1, 2019, estimated to cost Rs. 10 crores. For this purpose, X has
not raised any specific borrowings, rather it intends to use general
borrowings, which have a weighted average cost of 11%. Total borrowing
costs incurred during the period, viz., September 1, 2019 to March 31, 2020

1 Substituted vide Notification No. G.S.R. 274(E) dated 30th March, 2019

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were Rs. 0.5 crore.

The other relevant details are as follows:
(Rs. in crore)
Month Cost of construction Cash outflows
accrued (paid in advance at the start of
each month)
September 1.50 3.00
October 0.50 1.70
November 1.50 2.50
December 0.50 —
January 1.80 1.00
February 0.70 —
March 3.00 1.50
What is the amount of interest that should be capitalised to the cost of the
plant in the financial statements for the year ended March 31, 202 0?
Response
Paragraph 14 of Ind AS 23, inter-alia, states:
“14 2To the extent that an entity borrows funds generally and uses them
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 asset. The
capitalisation rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period. However, an entity shall exclude from this calculation borrowing
costs applicable to borrowings made specifically for the purpose of
obtaining a qualifying asset until substantially all the activities
necessary to prepare that 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.”
In this context, a question arises whether such expenditure should be based
on costs accrued or actual cash outflows. To contrast these two alternatives,

2 Substituted vide Notification No. G.S.R. 274(E) dated 30th March, 2019

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presented below is the computation of borrowing costs based on both the

alternatives:

Month Costs Average capital Cash Average capital

accrued expenditure outflows expenditure
September 1.50 1.50x7/12 = 0.875 3.00 3.00x7/12=1.75
October 0.50 0.50x6/12 = 0.25 1.70 1.70x6/ 12 = 0.85
November 1.50 1 .50x5/12 = 0.625 2.50 2.50x5/12 = 1.04
December 0.50 0.50x4/12 = 0.17 - -
January 1.80 1.80x3/12 = 0.45 1.00 1x3/12 = 0.25
February 0.70 0.70x2/12 = 0.12 - -
March 3.00 3.00x1/12 = 0.25 1.50 1.50x1/12 = 0.125
9.50 2.74 9.70 4.02
If the average capital expenditure on the basis of costs accrued is taken, the
borrowing costs eligible to be capitalised would be Rs. 2.74 crore x 11% =
0.30 crore. Whereas if average capital expenditure on the basis of cash
flows is taken, the borrowing costs eligible to be capitalised would be Rs.
4.02 crore x 11% = 0.44 crore. Thus, there is a wide variance in the amount
of borrowing cost to be capitalised, based on the accrual basis and on
actual cash flows basis. This divergence is often experienced during the
implementation of large projects, for example, an advance given to a
supplier involves an upfront cash outflow while the actual expenditure
accrues in later periods (with the receipt of goods and services).
In this regard, paragraph 18 of Ind AS 23 states that:
“18 Expenditures 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.”
Where cash has been paid but the corresponding cost has not yet accrued

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interest becomes payable on payment of cash. Therefore, the amount so

paid should be considered for determining the amount of interest eligible for
capitalisation, subject to the fulfillment of other conditions prescribed in
paragraph 16 of Ind AS 23. Accordingly, in the present case, interest should
be computed on the basis of the cash flows rather than on the basis of costs
accrued. Therefore, the amount of interest eligible for capitalisation would be
Rs. 0.44 crore.
Another important factor to be noted is that paragraph 14 requires, inter alia,
that “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.” Thus, the amount of borrowing costs to be capitalised should not
exceed the total borrowing costs incurred during the period, that is Rs. 0.5
crore.
Question 6
On 1 January 2019, A Ltd. entered into a contract for the construction of a
building for Rs. 35,00,000. The building was completed at the end of March
2020. During the period, the following payments were made to the contractor:

Payment date Amount (Rs.)

01-Apr-19 5,00,000
30-Jun-19 10,00,000
31-Dec-19 15,00,000
31-Mar-20 5,00,000
Total 35,00,000
Details of borrowings are as below:
(i) Loan from Bank D specifically for the project on Rs. 7,00,000
April 1, 2019
Simple interest payable annually 10%
Interest for the year Rs. 70,000
Income earned while loans were held in Rs. 20,000
anticipation of payment
(ii) 12% Debentures with simple interest payable Rs. 20,00,000
annually

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Amount did not change during the year

(iii) 10% Bond with simple interest payable annually Rs. 20,00,000
Amount did not change during the year

How the amount of borrowing costs eligible for capitalisation is determined

when a qualifying asset is financed by a combination of borrowings that are
specific to the asset and by general borrowings?
Response
Paragraphs 12 and 14 of Ind AS 23 state as follows:
“12 To the extent that an entity borrows funds specifically for the
purpose of obtaining a qualifying asset, the entity shall 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.”
“14 3To the extent that an entity borrows funds generally and uses them
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 asset. The
capitalisation rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period. However, an entity shall exclude from this calculation borrowing
costs applicable to borrowings made specifically for the purpose of
obtaining a qualifying asset until substantially all the activities
necessary to prepare that 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.”
In accordance with the above, the amount of borrowing costs eligible for
capitalisation is as follows:
• The actual borrowing costs incurred on a specific borrowing during the
period less any investment income on the temporary investment of
those borrowings.
• For general borrowings it is determined by applying a capitalisation

3 Substituted vide Notification No. G.S.R. 274(E) dated 30th March, 2019

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 Educational Material on Ind AS 23, Borrowing Costs

rate to the expenditure on qualifying assets. The capitalisation rate is

the weighted average of the borrowing costs applicable to the
borrowings of the entity that are outstanding during the period other
than borrowings made specifically for the purpose of obtaining a
qualifying asset.
Expenditure incurred in obtaining a qualifying asset are first allocated to any
specific borrowings. The remaining expenditure is allocated to general
borrowings
Analysis of expenditure
(Amounts in Rs.)

Amount Amount Weighted

allocated allocated for period
to specific to general outstanding
Amount borrowing borrowing
01-Apr-19 5,00,000 5,00,000 - -
30-Jun-19 10,00,000 2,00,000 8,00,000 6,00,000*
31-Dec-19 15,00,000 - 15,00,000 3,75,000**
31-Mar-20 5,00,000 - 5,00,000 -
Total 35,00,000 7,00,000 28,00,000 9,75,000
Specific borrowings of Rs. 7,00,000 are fully utilised; remainder of
expenditure is therefore allocated to general borrowings.
* Rs. 8,00,000 x 9 months / 12 months = Rs. 6,00,000/-
** Rs. 15,00,000 x 3 months / 12 months = Rs. 3,75,000/-
Capitalisation rate
The capitalisation rate relating to general borrowings (12% Debentures and
10% Bonds) is 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.
Weighted average borrowing cost:
Therefore, based on the above guidance the interest to be capitalised is
computed as follows:
Computation of Capitalisation rate:

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(Amount of borrowing 1 × Interest rate 1) + (Amount of

borrowing 2 × Interest rate 2)
______________________________________________
× 100
Total amount of borrowings outstanding during the year
(20,00,000 x 12%) + (20,00,000 x 10%)
________________________________
= × 100 = 11%
(20,00,000 + 20,00,000)

Borrowing cost to be capitalised (Rs.)

On Specific loan 70,000
Less: Income earned on specific borrowings (20,000)
50,000
On General borrowings (9,75,000*11%) 1,07,250
Amount eligible for capitalisation 1,57,250

Therefore, the borrowing costs to be capitalised are Rs. 1,57,250

Question 7
H Ltd. incurs borrowing costs for the purpose of construction of a qualifying
asset for its own use. The construction gets completed on May 31, 2020.
However, decoration work is under process which is expected to be
completed by November 2020 after which H Ltd. will be able to start using
the said asset for its own use. H Ltd. wants to capitalise the eligible
borrowing costs incurred up to November 2020.
Response
Paragraph 22 and 23 of Ind AS 23 states as follows:
“22 An entity shall cease capitalising borrowing costs when
substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete.
23 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

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outstanding, this indicates that substantially all the activities are complete.”
In accordance with the above, the capitalisation of borrowing costs shall
cease when substantially all the activities necessary to prepare the qualifying
assets for its intended use or sale is completed.
In the given case, H Ltd. should capitalise borrowing costs only up to May
31, 2020. The borrowing cost incurred thereafter cannot be capitalised as the
asset was ready for its intended use on May 31, 2020. The fact that
decoration work was being carried out should not be considered as the asset
was ready for its intended use on May 31, 2020.
Question 8
ABC Ltd. is in the process of getting an entertainment park constructed. For
this purpose, it has taken loan from a bank. The said park consists of several
rides and facilities, each of which can be used individually. Three fourth part
of the park has been constructed and can be opened up for public, while
construction on the remaining part is continuing. Whether the capitalisation of
borrowing cost should continue for the whole park until construction
continues?
Response
ABC Ltd. is in process of constructing an entertainment park which consists
of several rides and facilities that can operate independently for their
intended use. Even though the park as whole is not complete, the individual
facilities are ready for their intended use. The guidance regarding capitalising
borrowing costs in such scenario is provided in paragraph 24 of Ind AS 23
which states as follows:
“24 Where 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.”
The cessation of capitalisation depends upon the nature of the qualifying
assets, particularly where the qualifying assets consists of various parts.
There are qualifying assets where each part is capable of being used while
the construction continues on other parts. There are qualifying assets where
all parts have to be completed before any earlier completed part can be put
to use.

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Since in the given scenario, the individual facilities are capable of operating
independently and are ready for their intended use, therefore the borrowing
costs shall cease to be capitalised for the three-fourth part of the project.
Question 9
As part of the capital management process of XYZ Ltd., all specific
borrowings for projects in excess of the current requirements of the
company, are deposited into the cash credit account of the company to
reduce the overdraft balance. The company proposes to capitalise the
interest on these borrowings. Should saving of interest on the cash credit
account be deducted from the borrowing costs before capitalisation?
Response
Paragraph 12 of Ind AS 23 states that:
“12 To the extent that an entity borrows funds specifically for the
purpose of obtaining a qualifying asset, the entity shall 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.”
In the given case, the company has no income from the temporary
investment of funds as such. There is only a saving in interest cost that
would have been otherwise incurred on cash credit account.
In the absence of any specific provision to this effect, such saving should
not be construed as “income” from the temporary investment of
borrowings. Consequently, the saving of interest on cash credit account
should not be deducted from the borrowing costs for the purpose of
capitalisation.
In view of paragraph 14 of Ind AS 23, it should, however, be ensured that
the amount of borrowing costs that XYZ Ltd. capitalises during a period
shall not exceed the amount of borrowing costs it incurred during that
period.
Question 10
XYZ Ltd. has completed the construction of a building (a qualifying asset) but
is not permitted to use it until certain safety approvals are obtained as per
the government regulations. Should capitalisation of borrowing costs be
continued when the qualifying asset has been constructed and is ready for

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use but is not permitted to be used until safety approvals are obtained?
Response
As per paragraph 22 of Ind AS 23:
"22 An entity shall cease capitalising borrowing costs when
substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete".
Further, paragraph 23 explains that:
"23 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.”
It is pertinent to note that an asset can be considered to be ready for its
intended use only on receipt of approvals and after compliance with
regulatory requirements such as in case of building obtaining certificates like
“Occupancy Certificate” or “Fire Clearances” etc. These are very important to
declare the asset as ready for its scheduled operation.
In the given case, obtaining the safety approval is a necessary condition that
needs to be complied with strictly and before obtaining the same the entity
will not be able to use the building, accordingly, it is appropriate to continue
capitalisation until the said approvals are obtained subject to there being no
abnormal delay in seeking these approvals.
Question 11
An enterprise has constructed a complex piece of equipment (qualifying
asset) that is to be installed on the production line of a manufacturing
plant. The equipment has been constructed over a period of 15 months.
However, on installation, certain calibrations are required to achieve the
desired level of production before it is finally commissioned. This process
is expected to take approximately 2 months during which test runs will be
met.
Should the borrowing costs pertaining to the 2 months period be
capitalised?
Response

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As per paragraph 22 of Ind AS 23:

“22 An entity shall cease capitalising borrowing costs when
substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete.”
On installation of the equipment, an evaluation has to be made to conclude
whether substantially all the activities necessary to prepare the asset are
complete. After an equipment has been installed it is usually tested and
adjusted for commercial production before it is finally commissioned. The
calibrations and adjustments required during this period are performed in
order to bring the equipment up to the stage at which it is ready to
commence commercial production.
Until the asset reaches the stage when it is ready to support commercial
levels of production, it is not appropriate to conclude that substantially all the
activities necessary to prepare the asset are completed. Thus, the borrowing
costs incurred during the normal period of test runs (after the installation) are
capitalised.
Accordingly, in the given case, borrowing costs pertaining to the 2 months
period should be capitalised.
Question 12
S Ltd. financed the construction of a qualifying asset with an inter -
company loan taken from its parent company P Ltd. with an interest rate of
7% p.a. P Ltd. in-turn has obtained the said loan from a Bank at the same
rate of interest of 7% p.a. for the specific purpose of providing it to S Ltd.
Since, the qualifying asset is in the subsidiary company and the
borrowings in the parent company, how is this treated in the financial
statements as per Ind AS 23?
Response
In the separate financial statements of:
• the subsidiary S Ltd., the borrowing costs are capitalised to the
extent of the actual costs incurred by the subsidiary;
• the parent company P Ltd., the parent recognises only the inter-
company loan given to the subsidiary. There is no qualifying asset
in the separate financial statements of P Ltd., so the borrowing
costs cannot be capitalised in the separate financial statements of
the parent company P Ltd.

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In the consolidated financial statements of the parent P Ltd., capitalisation of

borrowing costs is required. However, the amount of the borrowing costs
incurred by the subsidiary in the case of inter-company loans should be
adjusted to reflect how the qualifying asset was financed from the
perspective of the group as a whole:
• if the group uses external general borrowings, the borrowing costs
capitalised by the subsidiary are adjusted if the capitalisation rate at
the group level is different from the rate used by the subsidiary.
• if the group uses specific external borrowings, the borrowing costs are
adjusted if the borrowing costs on the external borrowings vary from
the amount of borrowing costs capitalised by a subsidiary.
Borrowing costs calculated and capitalised in accordance with Ind AS 23
cannot exceed the amount of borrowing costs incurred by the group.
In the given case, since the parent has taken specific borrowing for the
purpose of lending it to subsidiary at the same rate of interest, hence the
borrowing cost will not be required to be adjusted and will be the same as
incurred by P Ltd.
Question 13
Z Ltd. commenced construction of a manufacturing plant which takes 3
years to be ready for its intended use. It incurred expenditure for the
manufacturing plant but halfway through the construction, it availed a
general loan from Bank and utilised the funds from such loan to incur
expenditure for construction of the manufacturing plant. The manufacturing
plant meets the definition of a qualifying asset as per Ind AS 23. Z Ltd.
incurs expenditures on the qualifying asset both before and after it incurs
borrowing costs on the general borrowings. Whether Z Ltd. should include
expenditures on construction of the plant incurred before obtaining general
borrowings in determining the amount of borrowing costs eligible for
capitalisation?
Response
Paragraph 17 of Ind AS 23 states that:
“17 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

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meets all of the following conditions:

(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.”
Based on the above, it can be interpreted that in order to capitalise the
borrowing costs incurred to finance a qualifying asset, the entity must:
(a) incur actual expenditures for the asset;
(b) incur actual borrowing costs to finance the said qualifying asset;
and
(c) undertake such activities that are necessary to prepare the asset for
its intended use or sale.
Therefore, the entity would not begin capitalising borrowing costs until it
incurs borrowing costs. Once the entity incurs borrowing costs and
therefore satisfies all three conditions in paragraph 17 of Ind AS 23, it then
applies paragraph 14 of Ind AS 23 to determine the expenditure on the
qualifying asset to which it applies the capitalisation rate. However, the
entity Z Ltd. should apply the capitalisation rate on all the expenditure
incurred towards the construction of the manufacturing plant even if the
expenditure was incurred prior to availing the loan for financing the
construction of the manufacturing plant.
In view of paragraph 14 of Ind AS 23, it should, however, be ensured that
the amount of borrowing costs that Z Ltd. capitalises during a period shall
not exceed the amount of borrowing costs it incurred during that period.
Question 14
C Ltd. a real estate developer entity constructs the building and sells the
individual units in the building to customers. It undertook a project to
develop a residential building and borrows funds specifically for the
purpose of constructing the building and incurs borrowing costs in
connection with that borrowing. Due to high demand for residential flats, C
Ltd. was able to sell some of the units in the building to customers even
before the construction commenced. For the rest of the unsold units, it
intends to enter into a contract to sell as soon as it finds a suitable buyer.

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The terms of, and relevant facts and circumstances relating to, the C Ltd.’s
contracts with customers (for both the sold and unsold units) are such that,
applying paragraph 35(c) of Ind AS 115, Revenue from Contracts with
Customers, the entity transfers control of each unit over time and,
therefore, recognises revenue over time. The consideration promised by
the customer in the contract is in the form of cash or another financial
asset.
Whether C Ltd. has a qualifying asset as defined in Ind AS 23 and,
therefore, capitalises any directly attributable borrowing costs to the
asset?
Response
According to paragraph 8 of Ind AS 23:
“8 An entity shall capitalise borrowing costs that are directly
attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in
which it incurs them.”
A qualifying asset is defined as ‘an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale’.
An entity shall assess if the underlying asset meets the definition of
qualifying asset for capitalising borrowing costs. Based on facts and
circumstances of each case, the underlying asset may be:
a) an unsold inventory;
b) a receivable where entity has transferred fully constructed property ;
c) a contract asset where entity is in the process of completing
construction.
In the given case,
a) Unsold inventory is not a qualifying asset as it may be sold in the
current condition (even partly constructed unit)
b) Receivable, being a financial asset is not a qualifying asset
(Paragraph 7 of Ind AS 23)
c) Contract asset (as defined in Ind AS 115) representing entity’s right
to receive consideration that is conditional on something other than

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the passage of time in exchange for transferring control of a unit.

The intended use of the contract asset to collect cash or another
financial asset is not a use for which it necessarily takes a
substantial period of time to get ready.
Accordingly, in the given case, the entity does not have a qualifying asset
and hence no borrowing cost is eligible for capitalisation as per Ind AS 23.
Question 15
X Ltd. acquires and develops a piece of land. After the development of the
land, X Ltd. commences construction of a building on the piece of land. To
finance both the activities, X Ltd. relies on its general borrowings. Both the
land and the building meet the definition of a qualifying asset. Developing
the piece of land and the construction of the building on the land, both the
activities take a substantial period of time for its completion. Can X Ltd.
continue to capitalise the borrowing costs incurred is respect of the
expenditure incurred for developing the land while it constructs a building
on the same land?
Response
The guidance on cessation of capitalisation of borrowing costs has been
provided in paragraph 22 of Ind AS 23 which states that:
“22 An entity shall cease capitalising borrowing costs when
substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete.”
Therefore, to determine when to cease capitalising borrowing costs
incurred on land expenditure an entity considers the intended use of the
land. The intended use of land cannot be said to be solely for the purpose
of construction of a building. The land and building together may be used
for:
a) conducting the business activities of the entity from that premises in
which case such land and building will be recognised as Property,
Plant and Equipment under Ind AS 16;
b) earning rent revenue or capital appreciation in which case the land
and the building will be recognised as Investment Property under
Ind AS 40; or
c) for sale in which case the land and building will be recognised as

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inventory under Ind AS 2.

Further, paragraph 19 and 24 of Ind AS 23 states as follows:
“19 The activities necessary to prepare the asset for its intended use or
sale encompass more than the physical construction of the asset. They
include 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. However,
such activities exclude 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.
24 Where 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.”
It should be assessed whether the land (part of qualifying asset) is
capable of being used for its intended purpose while construction of the
building continues. If the land is not capable of being used for its intended
purpose while construction of the building continues, then the land and
building should be considered together to assess when to cease
capitalising borrowing costs on the land expenditures.
In the given case, X Ltd. shall cease capitalising borrowing costs when it
completes substantially all activities necessary to prepare land for its
intended use and for this purpose the land can be said to be ready for its
intended use or sale when it substantially completes all the activities
necessary to prepare both the land and building for that intended use or
sale
Thus, X Ltd. should continue to capitalise borrowing costs incurred on the
expenditure for developing land while it constructs the building on it.
Question 16
MNO Ltd. which is a wholly owned subsidiary of a listed Government

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company is in the business of exploration and production of oil and gas and
other hydrocarbon related activities outside India. The overseas oil and gas
operations are generally conducted in joint ventures with other partners.
MNO Ltd. acquires oil and gas properties/blocks by way of acquisition of
participating interest (PI) in these joint ventures through acquiring shares of
an overseas subsidiary company which ultimately holds the PI in the same
oil and gas joint venture project.
The company had financed the above acquisition in the oil and gas joint
venture project partly by external borrowings and partly by internal accruals.
The project is currently under development and would be taking substantial
time for commencement of oil and gas production.
Whether the borrowing cost incurred in acquiring interest in the oil and gas
joint venture project be capitalised as per Ind AS 23?
Response
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.”
Paragraph 7 of Ind AS 23 provides that:
“7 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.”
Paragraph 8 of Ind AS 23 states that:

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“8 An entity shall capitalise borrowing costs that are directly

attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in which it
incurs them.”
Paragraph 17 of Ind AS 23 states that:
“17 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; and
c) it undertakes activities that are necessary to prepare the asset for
its intended use or sale.”
In the given case, the company is acquiring the oil and gas assets through
subsidiary, the company is acquiring only the investment in overseas
subsidiary and not the qualifying asset (viz., oil and gas asset) as such and
accordingly, considering the above requirements, borrowing costs incurred
on such acquisitions cannot be capitalised in the separate financial
statements of the company. Since the capitalised asset itself does not
appear in the books of the company, the question of capitalisation of
borrowing costs with such asset does not arise in the separate financial
statements of the company.
It may be noted that as per the above reproduced principles of Ind AS 23,
borrowing costs can be capitalised only when all the conditions as per
paragraph 17 of Ind AS 23, are satisfied.
Question 17
S Ltd. (subsidiary co.) obtained an interest-free loan from P Ltd. (parent
co.) and used it for the construction of a qualifying asset. P Ltd. arranged
for the said money by obtaining loan from a bank. S Ltd. is required to
repay back the loan to P Ltd. after 3 years. S Ltd. initially recognised this
loan as a financial liability at fair value in accordance with Ind AS 109,
Financial Instruments. S Ltd. has recognised the difference between the
fair value of the loan (as per Ind AS 109) and the funds received from P

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Ltd. as ‘equity’ contribution from P Ltd. in its separate financial statements.

Whether S Ltd. can capitalise the interest accrued determined using the
effective interest rate method as borrowing costs as per Ind AS 23?
Response
Paragraph 6 of Ind AS 23 provides that:
“6 Borrowing costs may include:
(a) interest expense calculated using the effective interest method as
described in Ind AS 109, Financial Instruments;
(b) [Refer Appendix 1]
(c) [Refer Appendix 1]
(d) 4interest
in respect of lease liabilities recognised in accordance with
Ind AS 116, Leases; and
(e) exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs ”
In the given case, the loan liability will be subsequently measured at
amortised cost, with interest accrued using the effective interest rate method
as per Ind AS 109. In accordance with paragraph 6(a) of Ind AS 23, the
interest determined using the effective interest method is an element of the
borrowing costs and should be considered for determining the costs eligible
for capitalisation in separate financial statements of S Ltd.
Question 18
Z Ltd. issued preference shares that are mandatorily redeemable at par in 10
years to raise funds of Rs. 10,00,000 for the purpose of obtaining a qualifying
asset. It carries cumulative 10 per cent dividend payments to be made
annually. Provided that 10 per cent is the market rate of interest for this type
of instrument when issued, Z Ltd. has assumed a contractual obligation to
make a future stream of 10 per cent interest payments. Z Ltd. has classified
the preference shares as financial liability as per Ind AS 32, Financial
Instruments: Presentation.
Whether Z Ltd. can capitalise dividend payable to preference shareholders
as borrowing costs as per Ind AS 23?

4
Substituted vide Notification No. G.S.R. 273(E) dated 30 th March, 2019.

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Response
As per paragraph 5 of Ind AS 23:
“Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.”
Many entities issues preference shares to finance their operations. Under Ind
AS, the liability vs. equity classification of these shares is decided based on
principles laid down in Ind AS 32, Financial Instruments: Presentation. The
accounting treatment of dividends depends on the classification of
preference shares. When preference shares are classified as a liability,
dividends in substance represent interest costs and are included in borrowing
costs. For preference shares classified as equity, dividends are not included
in borrowing costs.
Accordingly, in the given case, since the preference shares have been
classified as liability, accordingly Z Ltd. should capitalise the amount of
dividend which is in substance interest charge as part of the borrowing cost.
Question 19
R Ltd. obtained borrowings amounting Rs. 50,00,000 with a rate of interest of
10 per cent p.a. from a bank generally to finance its operations. It used part
of the said funds to obtain a qualifying asset and some part to meet its other
requirements. After a few months, R Ltd. invested temporarily the excess
cash that it had and earned income from it. Management of R Ltd. is of the
view that it can deduct investment income from the borrowing costs available
for capitalisation?
Whether income from the temporary investment of excess cash be reduced
from the borrowing costs on general borrowings that are eligible for
capitalisation?
Response
Paragraph 12 of Ind AS 23 states that:
“12 To the extent that an entity borrows funds specifically for the
purpose of obtaining a qualifying asset, the entity shall 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.”

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The above paragraph explicitly requires that the amount of borrowing costs
eligible for capitalisation is determined after deducting any investment
income of specific borrowings. However, paragraph 14 of Ind AS 23, which
deals with capitalisation of borrowing costs on general borrowings, does not
provide for the same. There is no specific guidance given in Ind AS 23 about
general borrowings, unlike specific borrowings. The funds invested
‘temporarily’ cannot be considered to be those from the general borrow ings
rather these could be from other sources (e.g. equity or cash generated
from operating activities). It cannot therefore be demonstrated that the
income is earned from the general borrowings.
Accordingly, income from the temporary investment of excess cash should
not be deducted from the borrowing costs eligible for capitalisation in case of
general borrowings.

Question 20
Zebra Ltd. uses its own cash resources to finance the construction of a
qualifying asset. It did not borrow any funds. Management of A Ltd. is of the
view that interest that could have been earned on the cash that has been
used for the qualifying asset represents forgone benefit and could be
capitalised as Borrowing costs as per Ind AS 23? Whether the contention of
the management is correct?
Response
As per paragraph 5 of Ind AS 23:
“Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.”
Further paragraph 3 of Ind AS 23 states that:
“3 The Standard does not deal with the actual or imputed cost of equity,
including preferred capital not classified as a liability.”
The Standard uses the term ‘incurs’ and hence the amount that can be
capitalised is the actual borrowing costs incurred by an entity. ‘Notional’
borrowing cost cannot be capitalised as per Ind AS 23.
Hence, in the given case, Z Ltd. cannot capitalise the ‘Notional’ borrowing
cost or foregone interest income that could have been earned by investing

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the excess cash instead of using it for the construction of a qualifying asset.
Question 21
XYZ Ltd. is engaged in the business of construction and development of
Shopping Malls and leasing out shops/spaces in the mall to customers. It has
an ongoing project of construction of a mall in Kolkata for which it has
borrowed Rs. 75 crores from a bank to meet the project expenses. The
project of construction of mall meets the definition of a qualifying asset as
per Ind AS 23. Please suggest appropriate accounting treatment with regard
to capitalisation of borrowing costs in the following scenarios:
(a) The construction of the Mall was suspended for a period of 10 days on
completion of each floor for the concrete to settle. Further, there was a
delay of two months due to extreme floods in Kerala during which the
active development of the project (Mall) was interrupted.
There was a further delay of 15 days (with such delay being
considered as normal part of the construction) in completion due to
rectification of the faulty electric wirings which was discovered during
final inspection. When should the capitalisation of borrowing cost
related to the construction of the mall be suspended?
(b) The development of the project of construction of the Mall comprised
of five phases. XYZ Ltd. has substantially completed all the work with
regard to Phase I, II and III on March 5, 2019 and with regard to Phase
IV and Phase V on March 20, 2019. Each phase wise construction is
capable of being leased out independently, irrespective of the
completion of construction of other phases. XYZ Ltd. expects that
minor modifications may be required to be done based on customers
specifications.
It actually carries out minor modifications based on specifications of
the lessee and handed over the shops to lessees of Phase I, II and III
on April 10, 2019 and to the lessees of Phase IV and V on April 15,
2019.
When should XYZ Ltd. cease to capitalise the borrowing costs incurred
with respect to the Mall?
Response
(a) The guidance regarding suspension of capitalisation of borrowing

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costs has been provided in paragraph 20 which states as:

“20 An entity shall suspend capitalisation of borrowing costs
during extended periods in which it suspends active development
of a qualifying asset.”
Further, as per paragraph 21, an entity does not suspend
capitalisation of borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended
use or sale. Delays due to suspension of construction for settlement of
concrete (10 days) or rectification of faulty electric wirings (15 days)
are necessary and/or normal for getting the asset ready for its
intended use and accordingly borrowing costs should not be
suspended during this period.
In the given case, the XYZ Ltd suspended the active development of
the Mall for extended periods during the floods (which are not common
in the area) for 2 months and therefore, the borrowing costs will be
suspended to be capitalised only during those 2 months.
(b) In the given case, XYZ Ltd. is constructing a mall in phases and each
constructed part as completed in a phase is capable of being leased
out. Further on completion of construction of the shops, it makes minor
changes to the shops for leasing them out to its customer.
The guidance on cessation of capitalisation of borrowing costs has
been provided in paragraphs 22, 23 and 24 of Ind AS which states as:
“22 An entity shall cease capitalising borrowing costs when
substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
23 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.
24 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

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substantially all the activities necessary to prepare that part

for its intended use or sale.”
Accordingly, XYZ Ltd. should cease to capitalise the borrowing costs
for phase I, II & III on March 5, 2019 and for phase IV & V on March
20, 2019 i.e., when the construction of the asset is complete and it is
ready for its intended use. The fact that minor changes are expected
to be made later as per the specification of the customers should not
be considered as all the substantial activities have been completed in
March 2019.

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Educational Material on Ind AS 23, Borrowing Costs

Appendix I
Note: The purpose of this Appendix is only to bring out the major
differences, if any, between Indian Accounting Standard (Ind AS) 23,
Borrowing Costs and Accounting Standard (AS) 16, Borrowing Costs
Major differences between Ind AS 23, Borrowing Costs
and AS 16, Borrowing Costs
(i) Ind AS 23 does not require an entity to apply this standard to
borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset measured at fair value, for example, a
biological asset whereas AS 16 does not provide for such scope
exclusion.
(ii) Ind AS 23 also does not require application of this Standard to
borrowing costs directly attributable to the acquisition, construction or
production of inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis whereas AS 16 does
not provide for such scope exclusion and is applicable to borrowing
costs related to all inventories that require substantial period of time to
bring them in saleable condition.
(iii) As per AS 16, Borrowing Costs, inter alia, include the following:
(a) interest and commitment charges on bank borrowings and other
short-term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with the
arrangement of borrowings.
Ind AS 23 requires to calculate the interest expense using the effective
interest rate method as described in Ind AS 109. Items (b) and (c)
above are not mentioned in Ind AS 23, as some of these components
of borrowing costs are considered as the components of interest
expense calculated using the effective interest rate method. Also, Ind
AS 23 includes interest in respect of lease liabilities (recognised as per
Ind AS 116), while, AS 16 includes finance charges in respect of
assets acquired under finance lease as part of borrowing costs.
Ind AS 23 provides that where there is an unrealised exchange loss

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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
recognised as an adjustment should also be recognised as an
adjustment to interest. AS 16 does not explicitly deal with such
scenario.
(iv) AS 16 gives explanation for meaning of ‘substantial period of time’
appearing in the definition of the term ‘qualifying asset’ as twelve
months whereas under Ind AS 23, there is no such explanation.
(v) Ind AS 23 provides that when Ind AS 29, Financial Reporting in
Hyperinflationary Economies, is applied, part of the borrowing costs
that compensates for inflation should be expensed as required by that
Standard (and not capitalised in respect of qualifying assets). AS 16
does not contain a similar clarification because at present, in India,
under AS regime, there is no Standard on Financial Reporting in
Hyperinflationary Economies.
(vi) Ind AS 23 specifically provides that in some circumstances, it is
appropriate to include all borrowings of the parent and its 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. This specific provision is not there in AS 16.
(vii) Ind AS 23 requires disclosure of capitalisation rate used to determine
the amount of borrowing costs eligible for capitalisation. AS 16 does
not have this disclosure requirement.
(viii) For the purpose of computing borrowing cost under Ind AS 23 in
regard to foreign currency borrowing, the difference is to be computed
with reference to functional currency whereas under AS 16 read with
AS 11, the difference is between the local currency and foreign
currency.

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Educational Material on Ind AS 23, Borrowing Costs

Appendix II
Note: The purpose of this Appendix is only to bring out the major
differences, if any, between Indian Accounting Standard (Ind AS) 23,
Borrowing Costs and the corresponding International Accounting
Standard (IAS) 23, Borrowing Costs issued by the International
Accounting Standards Board.
Major differences between Ind AS 23, Borrowing Costs
and IAS 23, Borrowing Costs
IAS 23 provides no guidance as to how the adjustment prescribed in
paragraph 6(e) is to be determined. Ind AS 23 provides guidance (paragraph
6A) in this regard.

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