Introduction
Ind AS 23, Borrowing Costs, requires entities to capitalise borrowing costs directly attributable to qualifying assets. A critical safeguard is the ceiling rule: capitalised borrowing costs cannot exceed the actual borrowing costs incurred during the period.
The interpretational challenge arises when applying this principle to general borrowings. Specifically, should the capitalisation rate be computed for the entire financial year or only for the eligible capitalisation period? Some accountants adopt the former, but the bare text of Ind AS 23 supports the latter.
Bare Extracts from Ind AS 23
- Paragraph 6 (Recognition):
“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 they are incurred.”
- Paragraph 14 (General Borrowings):
“To 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 the entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.”
The phrase “during the period” is the source of two interpretations.
How Two Approaches Arise
Interpretation 1: Entire Financial Year Basis
- Reading: “During the period” refers to the entire reporting year.
- Outcome: Weighted average rate is computed using borrowings outstanding across the full year.
- Issue: May lead to capitalisation exceeding actual borrowing costs incurred in the eligible window.
Interpretation 2: Eligible Period Basis
- Reading: “During the period” refers to the specific window when the asset is being prepared for use.
- Outcome: Weighted average rate is computed using borrowings outstanding only during the eligible capitalisation period.
- Strength: Aligns with the ceiling rule in Paragraph 6.
Numerical Example
Borrowings During FY 2024–25
- Loan A: ₹10,00,000 at 15% interest, outstanding April–December 2024 (repaid on 31 Dec 2024).
- Loan B: ₹5,00,000 at 5% interest, outstanding April 2024–March 2025.
Weighted Average Rate – Entire FY
- Loan A interest: ₹1,12,500
- Loan B interest: ₹25,000
- Total interest = ₹1,37,500
- Time-weighted borrowings = ₹12,50,000
- Rate = 11%
Weighted Average Rate – Eligible Period (Jan–Mar 2025)
- Loan A: Nil (repaid).
- Loan B interest: ₹6,250
- Borrowings = ₹5,00,000
- Rate = 5%
Application to Asset Expenditure
Expenditure on qualifying asset during Jan–Mar 2025 = ₹5,00,000.
| Basis | Capitalisation Rate | Capitalised Cost | Actual Cost Incurred |
| Entire FY | 11% | ₹55,000 | ₹25,000 |
| Eligible Period | 5% | ₹25,000 | ₹25,000 |
Conclusion
The two approaches stem from di erent readings of “during the period.” Some Ind AS practitioners and teachers adopt the full-year basis for simplicity, but this can conflict with the ceiling rule. The Eligible Period Basis would be the correct interpretation under Ind AS 23, ensuring capitalised borrowing costs never exceed actual borrowing costs incurred.
Best practice: Use borrowings outstanding during the eligible capitalisation period, not the entire financial year. This reconciles the standard’s text with its principle and avoids distortion in financial reporting.
Author Bio
Indeed insightful and practically very relevant