IAS 23 Borrowing Costs: Capitalization Policy Framework

IAS 23 — Borrowing Costs

 Source: IAS 23 (IASB, revised March 2007, updated 2019)  |  DipIFR Scope: Full — no exclusions
IAS 23 requires borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of that asset's cost. All other borrowing costs are expensed in the period they are incurred. Capitalisation is mandatory — there is no longer any option to expense all borrowing costs.

Key Takeaways

  • Borrowing costs directly attributable to a qualifying asset must be capitalised — expensing them all is not permitted.
  • A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
  • Capitalisation starts only when all three conditions are met simultaneously: expenditure is being incurred, borrowing costs are being incurred, and active preparation of the asset is underway.
  • For specific borrowings: capitalise actual borrowing costs incurred, less any investment income earned on temporary investment of unspent loan proceeds.
  • For general borrowings: apply a capitalisation rate (weighted average cost of general borrowings) to the weighted average expenditure on the qualifying asset.
  • Capitalisation is suspended during extended periods of no active development — but not for necessary temporary delays.
  • Capitalisation ceases when substantially all activities to prepare the asset for its intended use or sale are complete — not when the entity chooses to start using it.
  • Total borrowing costs capitalised must never exceed total borrowing costs incurred in the period.
  • If capitalised costs push the carrying amount above recoverable amount, write down the excess under IAS 36.
  • ⚠️ Inventories produced in large quantities on a repetitive basis and assets measured at fair value are excluded from the IAS 23 capitalisation requirement.

Table of Contents

  1. Objective & Why It Matters
  2. Scope and Exclusions
  3. Key Definitions
  4. Recognition — The Core Rule
  5. Specific Borrowings
  6. General Borrowings & Capitalisation Rate
  7. The Capitalisation Lifecycle
  8. Special Issues & Complex Areas
  9. Presentation, Disclosure & Group Issues
  10. Worked Examples
  11. Examiner Feedback & Key Themes
  12. Knowledge Check
  13. Exam Tips & Common Pitfalls
Objective & Why It Matters

When a company builds a factory, constructs a ship or develops investment property, it often borrows money to finance the work. Those interest costs accumulate over months or years before the asset generates any return. IAS 23 answers a fundamental question: should those interest costs go straight to the income statement, or should they be added to the cost of the asset being built?

The answer under current IFRS is clear — if the borrowing is directly linked to a qualifying asset, the costs must be capitalised. This matches economic reality: interest is as much a cost of bringing the asset into existence as the bricks and labour. Before the 2007 revision, entities had a free choice to expense everything. That option no longer exists.

Why DipIFR Students Need This IAS 23 consistently appears in exam questions alongside IAS 16 (PPE), IAS 40 (Investment Property) and IAS 37 (Provisions). The examiner tests your ability to identify the correct capitalisation period — getting the start date, suspension periods and end date precisely right — and to distinguish between specific and general borrowings. Precision with dates and rates earns marks; vague statements about "capitalising interest" do not.

The standard was originally issued in 1993. The Board revised it in March 2007 to eliminate the option of expensing all borrowing costs. It was subsequently updated by IFRS 9 (2014), IFRS 16 (2016) and Annual Improvements 2015–2017 Cycle (effective 1 January 2019). The effective date for the revised standard is annual periods beginning on or after 1 January 2009.

Scope and Exclusions

IAS 23 applies to all entities when accounting for borrowing costs. However, two categories of qualifying asset are explicitly excluded from the mandatory capitalisation requirement.

Area Treatment under IAS 23 Exam Note
Qualifying assets (buildings, plants, investment property under construction, intangibles in development) Mandatory capitalisation of directly attributable borrowing costs Core area — tested in every exam cycle
Qualifying assets measured at fair value (e.g. biological assets under IAS 41) Capitalisation not required — borrowing costs expensed ⚠️ Exclusion — the fair value measurement triggers the exemption
Inventories produced in large quantities on a repetitive basis Capitalisation not required — borrowing costs expensed ⚠️ Exclusion — e.g. mass-produced goods; contrast with maturing whisky which IS a qualifying asset
Financial assets Not qualifying assets — never capitalise borrowing costs to these Not examinable as qualifying assets
Assets ready for use or sale when acquired Not qualifying assets — borrowing costs expensed A completed asset purchased outright cannot become a qualifying asset
Actual or imputed cost of equity Outside scope of IAS 23 entirely Ordinary share dividends are never borrowing costs
⚠️ DipIFR Scope Note IAS 23 is fully examinable with no DipIFR-specific exclusions. However, be careful not to confuse the two scope exclusions (fair value assets and mass-produced inventories) with the general capitalisation principle. Both are practical exemptions, not accounting theory exceptions.
Key Definitions
Borrowing Costs
Interest and other costs an entity incurs in connection with borrowing funds. Includes EIR-based interest, IFRS 16 lease interest, and qualifying exchange differences on foreign currency borrowings.
Qualifying Asset
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Short production time = not a qualifying asset.
Specific Borrowings
Funds borrowed specifically to finance a particular qualifying asset. Eligible costs = actual borrowing costs incurred minus investment income on temporarily invested unspent proceeds.
General Borrowings
Funds borrowed for general purposes but partly used to finance a qualifying asset. Eligible costs = capitalisation rate applied to weighted average expenditure on the asset.
Capitalisation Rate
The weighted average of borrowing costs applicable to all general borrowings outstanding during the period. Specific project borrowings are excluded from this calculation.
Commencement Date
The date when all three conditions are first met simultaneously: expenditure is being incurred, borrowing costs are being incurred, and activities to prepare the asset are underway.
Suspension of Capitalisation
Capitalisation must stop during extended periods of no active development. It does not stop for brief, necessary delays that are part of the normal construction process.
Cessation of Capitalisation
Capitalisation stops when substantially all activities to prepare the asset for its intended use or sale are complete — even if the entity has not yet started using the asset.
Recoverable Amount
The higher of fair value less costs to sell and value in use. Capitalised borrowing costs must not push the carrying amount of the asset above this figure.
Investment Income (Specific Loans)
Interest earned by temporarily investing specific loan proceeds before they are spent on the qualifying asset. Must be deducted from borrowing costs before capitalising.
Most Important Distinction in IAS 23 Specific vs. General Borrowings — the calculation method is completely different. For specific loans: actual costs minus investment income. For general borrowings: capitalisation rate times weighted average expenditure. In exam questions, both types can exist in the same scenario. Always deal with specific borrowings first, then apply the general rate to any remaining expenditure.
Recognition — The Core Rule
Key Rule — IAS 23 Core Principle Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of that asset's cost. All other borrowing costs are expensed in the period incurred. There is no policy choice — capitalisation is mandatory.

The test for "directly attributable" is whether the borrowing costs would have been avoided if the expenditure on the qualifying asset had not been made. For specific borrowings, this link is direct and clear. For general borrowings, judgement is required to determine what portion of the pool relates to the qualifying asset.

Borrowing Type Eligible Cost Formula Cap / Limit
Specific borrowings Actual borrowing costs incurred − investment income on temporary investment of unspent proceeds Cannot exceed actual costs incurred on that specific loan
General borrowings Capitalisation rate × weighted average expenditure on the qualifying asset during the period Cannot exceed total general borrowing costs incurred in the period
Mixed (specific + general) Apply specific rule first; apply general rate to expenditure exceeding the specific borrowing amount Overall cap: total borrowing costs incurred in the period
What Counts as Borrowing Costs?
  • Interest expense calculated using the effective interest rate method (per IFRS 9)
  • Interest on lease liabilities recognised under IFRS 16
  • Exchange differences on foreign currency borrowings, to the extent they are an adjustment to interest costs
  • Debt issue costs amortised over the life of the instrument via the effective interest method
Dividends on ordinary shares and dividends on preference shares classified as equity are NOT borrowing costs.
Specific Borrowings

When an entity borrows funds specifically to finance a qualifying asset, the relationship is direct and clear. The amount eligible for capitalisation is the actual borrowing costs incurred on that loan during the capitalisation period, minus any investment income earned while unspent funds are temporarily held.

Specific Borrowings Formula Eligible capitalisation = Actual borrowing costs on specific loan − Investment income on temporary investment of unspent loan proceeds

The investment income deduction is non-negotiable. When a company draws down a large loan at the start of a project but does not spend all the funds immediately, it typically places the surplus in a short-term deposit. Any interest earned on that deposit reduces the net borrowing cost eligible for capitalisation.

⚠️ Investment Income Must Always Be Deducted This is one of the most commonly missed adjustments in DipIFR answers. If the question states that idle loan proceeds were temporarily invested and earned interest, that amount must be deducted from borrowing costs before capitalising. The examiner specifically allocates marks for this deduction.
Effective Interest Rate vs. Coupon Rate For complex instruments like convertible bonds, the borrowing cost eligible for capitalisation is based on the effective interest rate — the market rate for an equivalent non-convertible debt instrument — not the lower coupon (cash) rate. The effective rate represents the true economic cost of the borrowing. This was specifically tested in the December 2020 DipIFR paper.
General Borrowings & Capitalisation Rate

Many entities finance qualifying assets from their general pool of borrowings — overdrafts, revolving credit facilities, term loans — rather than a dedicated project loan. In this case, calculate a capitalisation rate and apply it to the weighted average expenditure incurred on the qualifying asset during the period.

General Borrowings — Two-Step Calculation Step 1: Capitalisation rate = Weighted average interest cost ÷ Weighted average balance of ALL general borrowings outstanding (excluding specific project borrowings)

Step 2: Eligible capitalisation = Capitalisation rate × Weighted average expenditure on the qualifying asset

How to calculate weighted average expenditure: Each payment is weighted by the fraction of the year it has been outstanding. A payment on 1 January is outstanding for 12/12; a payment on 1 July is outstanding for 6/12; a payment on 31 December is outstanding for 0/12.

Expenditure Date Amount Months Remaining in Year Weighted Amount
1 January $200,000 12/12 $200,000
1 April $600,000 9/12 $450,000
1 October $1,000,000 3/12 $250,000
31 December $200,000 0/12 $0
Total $2,000,000 $900,000
⚠️ The Overall Cap — Never Exceed Actual Costs No matter what the formula produces, total borrowing costs capitalised in any period cannot exceed the total borrowing costs actually incurred in that period. If your calculated capitalisation exceeds actual costs, cap it at actual costs incurred.
Mixed Specific & General Borrowings When both types exist, always allocate expenditure to the specific borrowing first. Once the specific borrowing is fully consumed, apply the general capitalisation rate to the remaining expenditure. This mixed approach is a common exam scenario — use an allocation table to present the calculation clearly.
The Capitalisation Lifecycle

Three critical dates govern whether borrowing costs can be capitalised at any point during construction. Getting these dates right is the single most tested skill in IAS 23 exam questions.

Phase Rule Key Points
Commencement Capitalisation starts when ALL THREE conditions are first met simultaneously (1) Expenditure is being incurred on the asset; (2) Borrowing costs are being incurred; (3) Activities are underway to prepare the asset for use or sale
Continuation Capitalisation continues while all three conditions remain satisfied Technical and administrative work (e.g. obtaining permits) counts as activity. Simply holding land without development does NOT.
Suspension Must suspend during extended periods of no active development Brief, necessary delays that are part of the process do not trigger suspension (e.g. expected seasonal weather). Extended unexplained stoppages do.
Cessation Stop when substantially all activities to prepare the asset are complete Physical completion is the trigger — not first use, not commercial launch, not completion of minor administrative snagging
The Three Conditions to Start Capitalising All three must be met at the same time. Failing any one means capitalisation cannot begin:
  1. Expenditure is being incurred for the asset (cash payments, asset transfers, or assumption of interest-bearing liabilities)
  2. Borrowing costs are being incurred
  3. Activities necessary to prepare the asset for its intended use or sale are actively underway
⚠️ The End Date Trap — Cessation Capitalisation stops when the asset is substantially ready — not when the entity decides to use it. If a building is physically complete but the company delays moving in for commercial reasons, capitalisation still stops on the date of physical completion. Minor decorating or snagging that does not delay readiness does not extend the capitalisation period.
Suspension vs. Temporary Delay — The Distinction Do NOT suspend capitalisation for:
  • Seasonal weather delays that are normal and planned for the region (e.g. monsoon season)
  • Periods of substantial technical and administrative work
  • Brief interruptions that are a necessary part of the normal construction process
DO suspend capitalisation for:
  • Extended periods of no active development (e.g. a prolonged labour dispute that halts all work)
  • Periods where nothing is being done to change the condition of the asset
Special Issues & Complex Areas

Multi-Part Assets

When a qualifying asset is completed in separate parts and each part can be used independently while construction continues on the others, capitalisation for each part ceases when that part is substantially complete — not when the entire project finishes. A business park of individual buildings works this way. Contrast this with an integrated steel mill where no part can operate until all sequential processes are complete — capitalise until the whole asset is ready.

Business Park vs. Steel Mill — The Key Test Ask: can each part function independently while the rest is still being built?
Yes (business park, housing development) → cease capitalisation part by part.
No (sequential industrial processes, integrated pipeline) → capitalise until the whole is complete.

Recoverable Amount Cap

Capitalised borrowing costs can inflate an asset's carrying amount. If the carrying amount (or expected ultimate cost) of the qualifying asset exceeds its recoverable amount or net realisable value, write the excess down under IAS 36 Impairment of Assets. Any subsequent reversal also follows IAS 36 rules.

Group Financing Structures

In group scenarios, determining the capitalisation rate requires judgement. In some cases, the weighted average of all group borrowings is appropriate. In others, each subsidiary uses only its own borrowings. If a parent lends to a subsidiary at a rate above the parent's own external borrowing cost, the subsidiary uses the external rate — not the inflated inter-company rate — to avoid overstating the asset's cost.

Government Grants and Progress Payments

The expenditure base to which the capitalisation rate is applied is reduced by any progress payments received from customers and any government grants received in connection with the asset. This prevents over-capitalisation by inflating the base above the net cost actually borne by the entity.

⚠️ Idle Land Without Active Development Borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalisation. The third condition — active preparation — is not met. Capitalisation can only begin once development activities actually commence on the land.
Presentation, Disclosure & Group Issues

Required disclosures:

  • The amount of borrowing costs capitalised during the period.
  • The capitalisation rate used to determine the amount eligible for capitalisation (relevant for general borrowings).

Presentation in the financial statements:

  • Capitalised borrowing costs are added to the cost of the qualifying asset on the statement of financial position — they are not shown separately.
  • They are subsequently depreciated as part of the asset's total cost over its useful life.
  • Borrowing costs expensed appear in finance costs in the statement of profit or loss.
  • The accounting policy for borrowing costs should be explained in the notes, identifying any significant qualifying assets where capitalisation has been applied.

Group / Consolidation issues:

  • IAS 23 applies at consolidated level using the same principles as for individual entities.
  • The capitalisation rate may be calculated using all group borrowings or only the individual subsidiary's borrowings — use whichever best reflects the actual financing of the asset.
  • Inter-company loans that re-price external debt should reference the external borrowing rate, not the internal transfer price, to avoid inflating asset cost.
Worked Examples

Example 1 — Specific Borrowing with Investment Income

BASIC

Scenario

Alpha commenced construction of a factory on 1 January 20X5. To fund the project, Alpha took out a specific loan of $5,000,000 at 8% per annum on 1 January 20X5. The full proceeds were received on 1 January, but only $3,000,000 was needed immediately — the remaining $2,000,000 was placed on short-term deposit at 3% per annum for the first six months. The factory was completed on 31 December 20X5.

Requirement

Calculate the borrowing costs eligible for capitalisation for the year ended 31 December 20X5.

Analysis

All three conditions are met from 1 January 20X5. For specific borrowings, deduct investment income earned on temporarily invested surplus funds before capitalising.

Solution

Gross borrowing costs on specific loan = $5,000,000 × 8% = $400,000

Investment income on surplus funds = $2,000,000 × 3% × 6/12 = $30,000

Eligible capitalisation = $400,000 − $30,000 = $370,000

This $370,000 is added to the cost of the factory on the statement of financial position and depreciated over the factory's useful life.

Example 2 — General Borrowings: Weighted Average Expenditure

INTERMEDIATE

Scenario

Beta is constructing a new office building (a qualifying asset) during the year ended 31 December 20X5. There is no specific loan — Beta funds construction from its general borrowings. Payments to the contractor during the year:

  • 1 January 20X5: $200,000
  • 1 April 20X5: $600,000
  • 1 October 20X5: $1,000,000
  • 31 December 20X5: $200,000

Beta's general borrowings outstanding throughout the year: a $1,000,000 loan at 12.5% p.a. and a $1,500,000 loan at 10% p.a.

Requirement

Calculate the borrowing costs eligible for capitalisation for the year.

Solution

Step 1 — Capitalisation rate:

Loan Balance Rate Annual Interest
12.5% loan $1,000,000 12.5% $125,000
10% loan $1,500,000 10.0% $150,000
Total $2,500,000 $275,000

Capitalisation rate = $275,000 ÷ $2,500,000 = 11%

Step 2 — Weighted average expenditure:

Date Amount Months Weighted
1 January $200,000 12/12 $200,000
1 April $600,000 9/12 $450,000
1 October $1,000,000 3/12 $250,000
31 December $200,000 0/12 $0
Total $2,000,000 $900,000

Step 3 — Eligible capitalisation:

$900,000 × 11% = $99,000

Cap check: total borrowing costs incurred = $275,000. $99,000 < $275,000 ✓ No issue.

Capitalise $99,000 to the cost of the building.

Example 3 — Commencement, Suspension & Cessation Dates

INTERMEDIATE

Scenario

Gamma began constructing a new manufacturing plant on 1 February 20X5. A specific loan of $3,000,000 at 9% p.a. was drawn down on 1 January 20X5. From 1 January to 31 January, the full proceeds were held on deposit earning 4% p.a. Construction commenced 1 February and proceeded normally until 1 May, when a labour dispute completely halted all work for three months. Work restarted on 1 August. The plant was substantially complete on 30 November 20X5. Commissioning engineers carried out administrative sign-off visits during December.

Requirement

Identify the capitalisation periods and calculate total eligible borrowing costs for the year ended 31 December 20X5.

Solution

Step 1 — Identify the periods:

Period Treatment Reason
1 Jan – 31 Jan No capitalisation Condition 3 not met — no activities on the asset yet
1 Feb – 30 Apr (3 months) Capitalise All three conditions met — active construction
1 May – 31 Jul (3 months) Suspend Extended halt — labour dispute is not a temporary necessary delay
1 Aug – 30 Nov (4 months) Capitalise All three conditions met again
1 Dec – 31 Dec No capitalisation Substantially complete 30 Nov — administrative sign-off does not extend the period

Step 2 — Investment income (January — idle period):

$3,000,000 × 4% × 1/12 = $10,000

Step 3 — Gross interest on specific loan for capitalisation periods only (Feb–Apr + Aug–Nov = 7 months):

$3,000,000 × 9% × 7/12 = $157,500

Step 4 — Eligible capitalisation:

$157,500 − $10,000 = $147,500

⚠️ Note on January Interest January interest ($3,000,000 × 9% × 1/12 = $22,500) is expensed to profit or loss — not capitalised — because active preparation of the asset had not yet commenced. The investment income is still deducted because it was earned on the specific loan proceeds.

Example 4 — Mixed Specific & General Borrowings

INTERMEDIATE

Scenario

Delta is building a new power station (qualifying asset) during the year ended 31 December 20X5. Payments to contractors:

  • 1 January: $200,000
  • 1 April: $600,000
  • 1 July: $500,000

Delta has a specific loan of $700,000 at 10% p.a. for this project. Interest on the specific loan for the year = $70,000. Investment income earned on temporarily invested specific loan proceeds = $20,000.

General borrowings: $1,000,000 at 12.5% p.a. and $1,500,000 at 10% p.a. (both outstanding all year).

Requirement

Calculate total borrowing costs eligible for capitalisation.

Solution

Step 1 — Capitalisation rate on general borrowings:

($1,000,000 × 12.5%) + ($1,500,000 × 10%) = $125,000 + $150,000 = $275,000

Rate = $275,000 ÷ $2,500,000 = 11%

Step 2 — Weighted average expenditure:

Date Amount Months Weighted
1 January $200,000 12/12 $200,000
1 April $600,000 9/12 $450,000
1 July $500,000 6/12 $250,000
Total $900,000

Step 3 — Allocate to specific borrowing first:

Specific loan covers first $700,000 of weighted expenditure.

Remaining weighted expenditure for general rate = $900,000 − $700,000 = $200,000

Step 4 — Total eligible capitalisation:

Source Calculation Amount
Specific loan $70,000 − $20,000 investment income $50,000
General borrowings $200,000 × 11% $22,000
Total eligible $72,000

Cap check: total borrowing costs incurred = $70,000 + $275,000 = $345,000. $72,000 < $345,000 ✓

Example 5 — Convertible Loan, Construction Delay & Date Analysis ⭐

⭐ EXAM LEVEL

Scenario (June 2023 / December 2020 DipIFR Style)

Theta is constructing a new chemical plant. The following information is available for the year ended 30 June 20X5:

  • Construction began on 1 January 20X5 when the first payment of $500,000 was made to the contractor.
  • A second payment of $1,200,000 was made on 1 March 20X5.
  • In June 20X5, a technical error was discovered. Construction was completely halted from 1 June to 30 June 20X5 while the error was investigated and corrected.
  • The plant was not yet complete at 30 June 20X5.

Financing: Theta issued a convertible bond on 1 January 20X5 specifically for this project. Face value: $2,000,000. Coupon rate: 6% p.a. Market rate for an equivalent non-convertible bond: 9% p.a. During January and February, $300,000 of the proceeds were held on short-term deposit earning 3% p.a. before being deployed on the construction.

Requirement

Calculate the borrowing costs eligible for capitalisation for the year ended 30 June 20X5. Clearly identify any periods of suspension.

Examiner Hint Use the effective interest rate (9%), not the coupon rate (6%) — the examiner deliberately provides both rates to test which one you select. The convertible bond is a specific borrowing, so deduct investment income on temporarily invested proceeds. The one-month June stoppage is an extended halt — identify it as a suspension and exclude that month. Work step by step through the periods.

Solution

Step 1 — Correct interest rate:

The convertible bond's capitalisation rate = effective interest rate = 9% p.a. (not the 6% coupon). Annual interest = $2,000,000 × 9% = $180,000; monthly = $15,000.

Step 2 — Identify capitalisation periods:

Period Months Treatment Reason
1 Jan – 31 May 20X5 5 Capitalise All three conditions met — active construction underway
1 Jun – 30 Jun 20X5 1 Suspend Technical error halted all work — extended stoppage, not a temporary necessary delay

Step 3 — Gross borrowing costs for capitalisation periods (Jan–May = 5 months):

$2,000,000 × 9% × 5/12 = $75,000

Step 4 — Investment income on idle proceeds (Jan–Feb = 2 months):

$300,000 × 3% × 2/12 = $1,500

Step 5 — Eligible capitalisation:

$75,000 − $1,500 = $73,500

Step 6 — June interest — expensed to profit or loss:

$2,000,000 × 9% × 1/12 = $15,000 recognised as finance cost

Summary Capitalised to plant (Jan–May): $73,500  |  Expensed (June suspension): $15,000
Cross-check: $73,500 + $1,500 investment income + $15,000 = $90,000 = $2,000,000 × 9% × 6/12 ✓
Examiner Feedback & Key Themes
What Examiners Keep Testing IAS 23 is examined through construction scenarios that combine precise date analysis with rate calculations. The examiner always builds in at least one trap: a suspension period, a missed investment income deduction, or the wrong interest rate on a complex instrument. Accuracy with dates and rates is the key to scoring well.
[June 2023] Construction Delay, Specific Loan & Investment Income Theta's construction involved a technical error that halted work. Many candidates failed to deduct investment income earned on temporarily invested loan proceeds — a mandatory adjustment. The examiner noted: "Candidates must deduct investment income on temporarily invested specific loan funds. This is not optional — it is a requirement of the standard, and marks are specifically allocated for this step."
[December 2020] Convertible Loan — Effective Rate vs. Coupon Rate Gamma used a convertible loan to fund a qualifying asset. Many candidates used the 8% coupon rate instead of the 10% market rate. The examiner was disappointed: "In DipIFR, multiple rates are provided as a deliberate test. The effective interest rate — the rate for equivalent non-convertible debt — represents the true economic cost and must be used for capitalisation. Using the coupon rate is incorrect."
[June 2021] General Borrowings for Property Renovation Gamma renovated a property using general borrowings with no specific project loan. A common error was continuing to capitalise interest on the land component indefinitely beyond the renovation period. The examiner highlighted: "IAS 23 capitalisation stops when the asset is substantially ready. Once renovation is complete, all further interest must be expensed to profit or loss — regardless of whether the property is yet in use."
Most Common Student Mistakes
  • Forgetting to deduct investment income on specific loan proceeds that are temporarily invested.
  • Using the coupon rate instead of the effective interest rate for complex instruments like convertible bonds.
  • Capitalising for the full period without identifying correct start dates, suspension periods and cessation dates.
  • Continuing to capitalise after the asset is physically complete simply because the entity has not yet started using it.
  • Suspending capitalisation for temporary, necessary delays (e.g. planned seasonal weather) rather than only for extended unexplained stoppages.
  • Failing to cap total capitalised costs at total borrowing costs actually incurred in the period.
  • Including specific project borrowings in the weighted average rate calculation for general borrowings.
3 Questions to Ask Yourself in Every IAS 23 Exam Scenario
  1. What is the correct capitalisation period? → Identify the start date (all three conditions met), any suspension (extended halt), and the end date (substantially complete).
  2. Is this a specific or general borrowing? → Specific: actual costs minus investment income. General: capitalisation rate × weighted average expenditure.
  3. Is the correct interest rate being used? → For complex or convertible instruments, use the effective rate, not the coupon rate.

✓ Knowledge Check — 5 Questions

1. An entity borrows $4,000,000 specifically to construct a qualifying asset at 8% p.a. During the first three months, $1,000,000 of the proceeds are temporarily invested at 4% p.a. before being spent. What are the borrowing costs eligible for capitalisation for those three months?

  1. $80,000
  2. $70,000
  3. $10,000
  4. $80,000 — investment income is not deducted for specific borrowings
Show Answer
Correct Answer: B — $70,000

Gross borrowing costs = $4,000,000 × 8% × 3/12 = $80,000. Investment income = $1,000,000 × 4% × 3/12 = $10,000. Eligible capitalisation = $80,000 − $10,000 = $70,000. Investment income on temporarily invested specific loan proceeds must always be deducted.

2. Which of the following is NOT a qualifying asset under IAS 23?

  1. A ship under construction expected to take 18 months to complete
  2. Maturing whisky that requires 10 years to reach a saleable condition
  3. Inventory of soft drinks manufactured and ready for sale within 3 days
  4. An investment property undergoing a 2-year renovation before being let
Show Answer
Correct Answer: C — Soft drinks inventory

A qualifying asset takes a substantial period of time to get ready. Soft drinks are produced in a very short time — they are not qualifying assets. The ship, maturing whisky and investment property under renovation all require a substantial period of preparation and can each be qualifying assets.

3. Capitalisation of borrowing costs must be suspended when:

  1. A seasonal weather delay occurs that is typical for the construction region at that time of year
  2. Active development is suspended for an extended period due to a prolonged labour dispute
  3. Substantial technical and administrative work is being carried out but no physical construction is taking place
  4. Minor snagging work is outstanding after the building is physically complete
Show Answer
Correct Answer: B — Prolonged labour dispute

Capitalisation must be suspended during extended periods of no active development. A prolonged labour dispute that halts all work qualifies. Seasonal weather delays that are expected and part of the normal construction process do not trigger suspension. Technical and administrative work counts as active preparation. Minor snagging after physical completion means the asset is already substantially complete and capitalisation has already ceased.

4. An entity has two general loans outstanding throughout the year: Loan A of $2,000,000 at 10% p.a. and Loan B of $3,000,000 at 8% p.a. It also has a specific project loan of $1,000,000 at 12% p.a. What capitalisation rate should be applied to general borrowings?

  1. 10.0% (simple average of all three loans)
  2. 8.8% (weighted average of Loan A and Loan B only)
  3. 9.6% (weighted average of all three loans including the specific loan)
  4. 12.0% (the specific loan rate)
Show Answer
Correct Answer: B — 8.8%

The capitalisation rate is the weighted average of GENERAL borrowings only — specific project borrowings are excluded. Loan A: $2,000,000 × 10% = $200,000. Loan B: $3,000,000 × 8% = $240,000. Total interest = $440,000. Total general borrowings = $5,000,000. Rate = $440,000 ÷ $5,000,000 = 8.8%.

5. A company completes the physical construction of a qualifying asset on 1 October. Minor administrative snagging documentation is finalised on 31 October. The company does not begin using the asset until 1 December. When does capitalisation of borrowing costs cease?

  1. 1 October — when physical construction is substantially complete
  2. 31 October — when all documentation is finalised
  3. 1 December — when the company starts using the asset
  4. 31 December — at the period end
Show Answer
Correct Answer: A — 1 October

Capitalisation ceases when substantially all activities to prepare the qualifying asset for its intended use or sale are complete. The asset is substantially complete when physical construction finishes on 1 October. Routine administrative documentation and the entity's commercial decision not to use the asset immediately do not extend the capitalisation period.
Exam Tips & Common Pitfalls
Top 5 Exam Tips
  1. Draw a timeline first. Mark the commencement date, any suspension periods, and the cessation date before picking up a calculator. Marks are awarded for correctly identifying periods, not just producing a final number.
  2. For specific borrowings, always deduct investment income on temporarily invested proceeds — even if the amount is small, the examiner allocates marks specifically for this step.
  3. Use the effective interest rate for complex instruments. When the question gives both a coupon rate and a market/effective rate, the effective rate is always correct for capitalisation purposes.
  4. When calculating the capitalisation rate for general borrowings, exclude all specific project loans from the weighted average — use only truly general borrowings.
  5. Always state the cap explicitly: confirm that capitalised costs do not exceed total borrowing costs incurred in the period.
Common Pitfalls to Avoid
  • Missing the investment income deduction on specific borrowings — it is mandatory, not optional.
  • Including specific project borrowings in the weighted average rate calculation for general borrowings.
  • Continuing to capitalise during a genuine suspension period (prolonged stoppage) or after physical completion.
  • Capitalising interest on idle land being held without any active development work underway.
  • Using a convertible bond's coupon rate as the eligible borrowing cost — always use the effective rate.
  • Forgetting to reduce the expenditure base by government grants and progress payments received.
  • Capitalising an amount that exceeds total borrowing costs actually incurred in the period.
Related Standards to Study Alongside IAS 23
  • IAS 16 — Property, Plant & Equipment: capitalised borrowing costs form part of the cost of PPE and are depreciated over its useful life
  • IAS 40 — Investment Property: borrowing costs during construction or development are capitalised until the property is ready for its intended use
  • IAS 38 — Intangible Assets: development-phase intangibles that meet IAS 38 recognition criteria can be qualifying assets
  • IAS 36 — Impairment of Assets: if capitalised costs push carrying amount above recoverable amount, write down under IAS 36
  • IFRS 9 — Financial Instruments: the effective interest method determines the interest component eligible for capitalisation
  • IAS 32 — Financial Instruments Presentation: determines whether preference dividends are borrowing costs (liability classification) or equity distributions
  • IFRS 16 — Leases: interest on lease liabilities is a borrowing cost eligible for capitalisation if the leased asset is a qualifying asset

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