CORPORATE FINANCIAL REPORTING

IND AS 23 BORROWING COSTS

Core Principle
The core principle of Ind AS 23 states that:
a. Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset are included in the cost of that asset i.e. must be capitalised.
b. Other borrowing costs are recognized as an expense in the period in which they are
incurred.

Scope
1. This standard applies to accounting for borrowing costs but excludes actual or imputed
costs of equity, such as preferred capital not classified as a liability.
Example: Dividend on equity shares, cost of issuing equity shares, and preference share
capital (if not classified as a liability) are not included as borrowing costs under this
standard.

2. The requirement to capitalize borrowing costs does not apply to:

o Qualifying assets that are measured at fair value, for example, a biological asset
accounted for under Ind AS 41
o Inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis

Borrowing Costs
Borrowing costs are interest and other expenses incurred when an entity borrows funds. These
may include:
• Interest expense calculated using the effective interest rate method (Ind AS 109 -
Financial Instruments).
• Interest on lease liabilities recognized as per Ind AS 116 (Leases).
• Exchange differences from foreign currency borrowings, to the extent that they are
regarded as an adjustment to interest costs.

Qualifying Assets [Q 1]
A qualifying asset is one that takes a substantial period of time to be ready for its intended
use or sale. Examples include manufacturing plants, real estate, infrastructure (like bridges
and railways), power generation facilities, and intangible assets.

Ind AS 23 doesn't define "substantial period," but generally, a period of 12 months or more
may be considered substantial.

Depending on the circumstances, any of the following may be qualifying assets:

• Inventories
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties
• Bearer plants

Examples of assets which are not qualifying assets:

• Financial assets
• Inventories produced in a short time
• Assets ready for use or sale when acquired.

CA BISHNU KEDIA 1 IND AS 23

CORPORATE FINANCIAL REPORTING

Example 1

A company deals in production of dairy products. It prepares and sells various milk products
like ghee, butter and cheese. The company borrowed funds from bank for manufacturing
operation. The cheese takes substantial longer period to get ready for sale.
State whether borrowing costs incurred to finance the production of inventories (cheese) that
have a long production period, be capitalised?

Solution

Ind AS 23 does not require the capitalisation of borrowing costs for inventories that are
manufactured in large quantities on a repetitive basis. However, interest capitalisation is
permitted as long as the production cycle takes a ‘substantial period of time’, as with cheese.

Example 2

A company is in the process of developing computer software. The asset has been qualified
for recognition purposes. However, the development of computer software will take
substantial period of time to complete.
(i) Can computer software be termed as a ‘qualifying asset’ under Ind AS 23?
(ii) Is management intention considered when assessing whether an asset is a qualifying
asset?

Solution

i. Yes. An intangible asset that takes a substantial period of time to get ready for its
intended use or sale is a ‘qualifying asset’. This would be the case for an internally
generated computer software in the development phase when it takes a ‘substantial
period of time’ to complete.
ii. Yes. Management should assess whether an asset, at the date of acquisition, is ‘ready
for its intended use or sale’. The asset might be a qualifying asset, depending on how
management intends to use it. For example, when an acquired asset can only be used
in combination with a larger group of fixed assets or was acquired specifically for the
construction of one specific qualifying asset, the assessment of whether the acquired
asset is a qualifying asset is made on a combined basis.

Example 3

A telecom company has acquired a 3G license. The licence could be sold or licensed to a third
party. However, management intends to use it to operate a wireless network. Development of
the network starts when the license is acquired.
Should borrowing costs on the acquisition of the 3G license be capitalised until the network is
ready for its intended use?

IND AS 23 2 2 CA BISHNU
BISHNU KEDIA
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 CORPORATE FINANCIAL REPORTING

Solution

Yes. The license has been exclusively acquired to operate the wireless network. The fact that
the license can be used or licensed to a third party is irrelevant. The acquisition of the license
is the first step in a wider investment project (developing the network). It is part of the network
investment, which meets the definition of a qualifying asset under Ind AS 23.

Example 4

A real estate company has incurred expenses for the acquisition of a permit allowing the
construction of a building. It has also acquired equipment that will be used for the construction
of various buildings.
Can borrowing costs on the acquisition of the permit and the equipment be capitalised until
the construction of the building is complete?

Solution

Yes, since permit is specific to one building. It is the first step in a wider investment project.
It is part of the construction cost of the building, which meets the definition of a qualifying
asset.
With respect to Equipment
No, since the equipment will be used for other construction projects. It is ready for its ‘intended
use’ at the acquisition date. Hence, it does not meet the definition of a qualifying asset.

Example 5

Is interest on a finance lease of a qualifying asset capitalised as borrowing costs?

Solution

Yes, interest incurred for a finance lease is specific to an asset. Interest is capitalised if the
asset is a qualifying asset or is used solely for the construction of a qualifying asset. For
example, a crane or a dockyard is leased for the purpose of constructing a ship. The ship is a
qualifying asset. The interest on the finance lease of the crane or dockyard is capitalised as
borrowing costs. Borrowing costs on the finance lease can only be capitalised up to the point
when the construction of the qualifying asset is complete.

Exchange Differences in Borrowing Costs [Q 2]

Exchange differences can be included in borrowing costs depending on the foreign currency
borrowing's terms. If a company borrows in a currency different from its functional currency
(e.g., an Indian company taking a USD loan for a project), exchange rate differences may
affect borrowing costs.

To decide how much of the exchange difference should be treated as borrowing costs:
1. Compare the cost of borrowing in the functional currency (INR) with the cost in the foreign
currency (USD). The exchange loss included in borrowing costs should not exceed the
difference between these two borrowing costs.

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2. If an unrealized exchange loss was treated as an adjustment to interest and later a gain
occurs (either realized or unrealized), that gain should also be treated as an adjustment to
interest, matching the earlier loss.

Example 6
An entity can borrow funds in its functional currency (`) @ 12%. It borrows $ 1,000 @ 4%
on 1st April, 2021 when $ 1 = ` 40. The equivalent amount in functional currency is ` 40,000.
Interest is payable on 31st March, 2022. On 31st March, 2022, exchange rate is $ 1 = ` 50.
The loan is not due for repayment. The exchange loss in this case is ` 10,000 [$ 1,000 x ( 50-
40)]. The borrowing cost is ` 2,000 ($ 1,000 x 4% x 50).

Had the entity borrowed funds in functional currency the borrowing cost would have been `
4,800 ( 40,000 x 12%).

The entity will treat exchange difference upto ` 2,800 ( 4,800 – 2,000) as a borrowing cost
that may be eligible for capitalisation under this Standard.

Thus, the total eligible borrowing cost is ` 4,800 ( 2,000 + 2,800) equivalent to the borrowing
cost in functional currency.

If the exchange rate on 31st March, 2022, is $ 1 = 41. The exchange loss is 1,000 [$ 1,000 – (
41 – 40)].

The entity will treat the entire exchange loss as an eligible borrowing cost as total cost of the
borrowing ` 2,640 [( 1,000 x 4% x 41) + 1,000] in foreign currency does not exceed the cost
of borrowings in functional currency, i.e., ` 4,800.

Example 7
Continuing with the aforesaid example 6:
If the exchange rate on 31st March, 2023 is $ 1 = ` 48; the exchange rate on 31st March, 2022,
being $ 1= ` 50, the borrowings are still not due for payment. The entity will recognize a
borrowing cost of ` 1,920 ($ 1,000 x 4% x 48). There is an exchange gain of ` 2,000 ($ 1,000
x ( 50 – 48)). This will be adjusted in the borrowing cost as there is unrealized exchange loss
and the adjustment is less than the exchange loss of ` 2,800 recognized in earlier year.

If the exchange rate on 31st March, 2023, is $ 1 = ` 44; the exchange rate on 31st March,
2022, being $ 1 = ` 50, the borrowings are still not due for payment. The entity will recognize
a borrowing cost of ` 1,760 ($ 1,000 x 4% x 44). There is an exchange gain of ` 6,000 [$ 1,000
x ( 50 – 44)]. This will be adjusted in the borrowing cost upto ` 2,800 as there is unrealized
exchange loss and the adjustment of the exchange loss recognized in earlier years is of ` 2,800.

If the exchange rate on 31st March, 2023, is $ 1 = ` 44 and part of loan is repaid; the exchange
rate on 31st March, 2022, being $ 1 = 50; $ 600 of the borrowings was paid on 31st March,
2022, $ 400 of the borrowings are still not due for payment. The entity will recognize a
borrowing cost of 704 ($ 400 x 4% x 44).

There is an exchange gain of ` 2,400 [$ 400 x ( 50 – 44)]. There will be an adjustment in the
borrowing cost upto ` 1,120 (2,800 x $ 400 / $ 1000) as this is unrealised exchange loss.

IND AS 23 4 4 CA BISHNU
BISHNU KEDIA
KEDIA
 CORPORATE FINANCIAL REPORTING

Recognition of Borrowing Costs

Borrowing costs are capitalized as part of the cost of a qualifying asset when both of the
following conditions are met:
1. It's probable that future economic benefits will flow to the entity.
2. The costs can be measured reliably.
If these conditions are not met, borrowing costs are recognized as an expense in the period
incurred.

Borrowing Costs Eligible for Capitalisation [Q 3, 4, 5, 6, 7, 8, 9]

Aspect Details
1. Specific Borrowing Borrowing costs capitalised if directly linked to a qualifying
Costs asset.
Amount eligible for capitalisation = Actual borrowing cost
incurred - Investment income from temporary investments.
Only actual borrowing costs can be capitalised (imputed costs
like equity cannot be included).
2. General Borrowing General borrowings refer to all borrowings not tied to a specific
Costs qualifying asset.
Borrowings initially specific but remain outstanding after the
asset is ready, become general borrowing.
Capitalisation = Applying a capitalisation rate to the expenditure
on the qualifying asset.
General borrowing costs can be treated as borrowing costs that
are directly attributable to obtaining qualifying assets because it
could had been avoided if the expenditure on the qualifying asset
had not been made.
3. Capitalisation Rate Capitalisation rate = Weighted average of general borrowing
Calculation costs during the period.
Costs related to specific borrowings are excluded from this rate
until the asset is ready for use.
Total capitalised borrowing costs ≤ Actual borrowing costs
incurred during the period.
4. Expenditure for Expenditures include cash payments, asset transfers, or interest-
Capitalisation bearing liabilities related to the asset.
Expenditures reduced by progress payments or grants received.
Average carrying amount of the asset during the period is used to
apply the capitalisation rate.
5. Excess of Carrying If the asset's carrying amount exceeds its recoverable amount, it
Amount Over is written down or off, following relevant standards. This can be
Recoverable Amount reversed if conditions improve.

Period of Capitalisation: [Q 10, 11, 12]

Aspect Details
1. Commencement Capitalisation starts when the entity meets all of the following
of Capitalisation conditions:
(a) Expenditures: Cash payments, asset transfers, or interest-bearing
liabilities for the asset.

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Aspect Details
(b) Borrowing Costs: The entity incurs borrowing costs.
(c) Asset Preparation: Activities necessary to prepare the asset for use
or sale (e.g., obtaining permits). Excludes holding the asset without any
productive development.
2. Suspension of Capitalisation is suspended during extended inactivity (e.g.,
Capitalisation development halted).
Capitalisation continues during necessary temporary delays (e.g.,
weather delays or slow inventory transformation like whiskey aging).
Examples:
(a) Construction suspended between October, 2021 to January, 2022
during which period certain heavy construction equipment under use
was shifted to another site. In this case, capitalization of borrowing
costs needs to be suspended since active development is interrupted.

(b) When Qualifying Asset construction is about to complete, there was

temporary delay of 20 days on account of some technical reasons. In
this case, capitalization of borrowing costs shall be continued.
3. Cessation of Capitalisation ceases when substantially all activities needed to prepare
Capitalisation the asset for use or sale are complete.
- Example: Construction is complete, even if minor work (e.g.,
decoration) continues.
For assets built in phases, capitalisation ends when each phase is ready
(e.g., a business park).
For assets that must be completed entirely before use (e.g., a steel mill),
capitalisation continues until all parts are fully ready.
Example:
H Limited, a real estate company, gives immovable property on rent.
It has completed on 31st May, 2021, a commercial complex consisting
of various offices that could be rented out.
It expects that the commercial complex will be completely rented out
by 30th June, 2021. However, due to adverse market conditions, only
10% of the commercial complex could be rented out by its reporting
date of 31st March, 2022. H Limited wants to capitalise the eligible
borrowing costs incurred up to 31st March, 2022.
H Limited should capitalise borrowing costs only up to 31st May, 2021.
The borrowing cost incurred thereafter cannot be capitalised as the
asset was ready for its intended use on 31st May, 2021. The fact that
only a small portion could be rented out by 31st March, 2022, is not
relevant.

Disclosure Requirements
Entities must disclose the following regarding borrowing costs:
1. Amount Capitalised: The total borrowing costs capitalised during the period.
2. Capitalisation Rate: The rate used to calculate the amount of borrowing costs eligible
for capitalisation.

IND AS 23 6 6 CA BISHNU
BISHNU KEDIA
KEDIA
 CORPORATE FINANCIAL REPORTING

Question 1

Nikka Limited has obtained a term loan of Rs.620 lacs for a complete renovation and
modernisation of its Factory on 1st April, 2011. Plant and Machinery was acquired under the
modernisation scheme and installation was completed on 30th April, 2012. An expenditure of
Rs.510 lacs was incurred on installation of Plant and Machinery, Rs.54 lacs has been advanced
to suppliers for additional assets (acquired on 25th April, 2011) which were also installed on
30th April, 2012 and the balance loan of 56 lacs has been used for working capital purposes.
Management of Nikka Limited considers the 12 months period as substantial period of time
to get the asset ready for its intended use.

The company has paid total interest of Rs. 68.20 lacs during financial year 2011-2012 on the
above loan. The accountant seeks your advice how to account for the interest paid in the books
of accounts. Will your answer be different, if the whole process of renovation and
modernization gets completed by 28th February, 2012?

Solution
As per Ind AS 23, 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 recognized as an expense.

Where, a qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
Accordingly, the treatment of Interest of Rs.68.20 lakh occurred during the year 2011-2012
would be as follows:
When construction of asset completed on 30th April, 2012
The treatment for total borrowing cost of 68.20 lakh will be as follows:
Purpose Nature Interest to be capitalised Interest to be charged to
profit and loss account

in lakh in lakh
Modernisation and Qualifying [68.20x (510/620)] = Nil
renovation of plant and asset 56.10
machinery

Advance to suppliers for Qualifying [68.20 x (54/620)] = Nil

additional assets asset 5.94
Working Capital Not a qualifying [68.20x (56/620)] = 6.16
asset -
62.04 6.16

When construction of assets is completed by 28th February, 2012

When the process of renovation gets completed in less than 12 months, the plant and
machinery and the additional assets will not be considered as qualifying assets (until and
unless the entity specifically considers that the assets took substantial period for completing

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CORPORATE FINANCIAL REPORTING

their construction). Accordingly, the whole of interest will be charged off / expensed off to
Profit and Loss account.

Question 2

ABC Ltd. has taken a loan of USD 20,000 on 1 st April, 2011 for constructing a plant at an
interest rate of 5% per annum payable on annual basis.
On 1st April, 2011, the exchange rate between the currencies i.e. USD vs Rupees was ₹45 per
USD. The exchange rate on the reporting date i.e. 31 st March, 2012 is ₹48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India
in local currency at an interest rate of 11% per annum as on 1 st April, 2011.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd. for
the period ending 31st March, 2012.

Solution

In the above situation, the borrowing cost needs to determine for interest cost on such foreign
currency loan and eligible exchange loss difference if any.
a) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000

Converted in: USD 1,000 x 48/USD = 48,000

b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x 45/USD x 11% = 99,000
c) Difference between interest on foreign currency borrowing and local currency
borrowing: 99,000 - 48,000 = 51,000
Increase in liability due to change in exchange difference: USD 20,000 x (48 - 45) = Rs.60,000
Hence, out of exchange loss of Rs.60,000 on principal amount of foreign currency loan, only
exchange loss to the extent of 51,000 is considered as borrowing costs.
Total borrowing cost to be capitalized is as under:
a) Interest cost on borrowing = ` 48,000
b) Exchange difference to the extent considered to be an adjustment to Interest cost = `
51,000
Total Borrowing Cost = ` 99,000
The exchange difference of Rs.51,000 has been capitalized as borrowing cost and the
remaining Rs.9,000 will be expensed off in the Statement of Profit and Loss.

IND AS 23 8 8 CA BISHNU
BISHNU KEDIA
KEDIA
 CORPORATE FINANCIAL REPORTING

Question 3

Alpha Ltd. on 1st April, 2011 borrowed 9% ₹ 30,00,000 to finance the construction of two
qualifying assets. Construction started on 1 st April, 2011. The loan facility was availed on 1 st
April, 2011 and was utilized as follows with remaining funds invested temporarily at 7%.
Factory Building Office Building
st
1 April, 2011 5,00,000 10,00,000
st
1 October, 2011 5,00,000 10,00,000
Calculate the cost of the asset and the borrowing cost to be capitalized.

Solution

Particulars Factory Building Office Building

Borrowing Costs (10,00,000 x 9%) = 90,000 (20,00,000 x 9%) = 1,80,000
Less: Investment Income (5,00,000 x 7% x 6/12) (10,00,000x7% x 6/12) (35,000)
(17,500)
72,500 1,45,000
Cost of the asset:
Expenditure incurred 10,00,000 20,00,000
Borrowing Costs 72,500 1,45,000
Total 10,72,500 21,45,000

Question 4

X Limited 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
31st March, 2012, the Company commenced the construction of a qualifying asset and incurred
the following expenses:
Date Amount (₹)
st
1 July, 2011 2,50,000
1st December, 2011 3,00,000
The details of borrowings and interest thereon are as under:

Particulars Average Balance (₹) Interest (₹)

Long term loan @ 10% 10,00,000 1,00,000
Working capital loan 5,00,000 65,000
15,00,000 1,65,000
Compute the borrowing costs that need to be capitalised.

Solution

The capitalisation rate is calculated as below:

Total borrowing costs / Weighted average total borrowings: 1,65,000/15,00,000 = 11%.

Interest to be capitalised is calculated as under:

CA BISHNU KEDIA 9 IND AS 23

CORPORATE FINANCIAL REPORTING

On 2,50,000 @ 11% p.a. for 9 months = 20,625

On 3,00,000 @ 11% p.a. for 4 months = 11,000
Total interest capitalised for the year ended 31st March 2012 is 31,625

Question 5

On 1st April, 2011, A Ltd. took 8% loan of ₹ 50,00,000 for construction of building A which
is repayable after 6 years i.e. on 31st March 2017. The construction of building was completed
on 31st March 2013. A Ltd. started constructing a new building B in the year 2013-2014, for
which company used existing borrowings. The company also has outstanding general-purpose
loan of ₹ 25,00,000, interest on which is payable @ 9% and ₹15,00,000, interest on which is
payable @ 7%.
Is the specific borrowing transferred to the general borrowings pool once the respective
qualifying asset is completed? Why?

Solution

Yes. If specific borrowings were not repaid once the relevant qualifying asset was
completed, they become general borrowings for as long as they are outstanding.
The borrowing costs that are directly attributable to obtaining qualifying assets are those
borrowing costs that would have been avoided if the expenditure on the qualifying asset
had not been made. If cash was not spent on other qualifying assets, it could be directed to
repay this specific loan. Thus, borrowing costs could be avoided (that is, they are directly
attributable to other qualifying assets).

Question 6

Beta Ltd had the following loans in place at the end of 31 st March, 2012:
(Amounts in ₹ 000)
Loan 1 April, 2011 31st March, 2012
st

18% Bank Loan 1,000 1,000

16% Term Loan 3,000 3,000
14% Debentures - 2,000
14% debenture was issued to fund the construction of Office building on 1 st July, 2011 but the
development activities has yet to be started.
On 1st April, 2011, Beta ltd began the construction of a Plant being qualifying asset using the
existing borrowings. Expenditure drawn down for the construction was: ₹500,000 on 1 st April,
2011 and ₹ 25,00,000 on 1st January, 2012.
Calculate the borrowing cost that can be capitalised for the plant.

IND AS 23 10 10 CA BISHNU
BISHNU KEDIA
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 CORPORATE FINANCIAL REPORTING

Solution

Capitalisation rate (18% x1,000) + (16% x 3,000) 16.5%

1,000+ 3,000 1,000+ 3,000
Borrowing Costs (5,00,000 x 16.5%) + (25,00,000 x16.5% x 3/12) 1,85,625

Capitalisation rate for above illustration could also be calculated with the following approach
by assigning weights to the borrowings:
Particulars Loan Weighted average (a) Interest rate (b) Capitalisation rate (a*b)
18% Bank Loan 1,000 25% 18% 4.5%
16% Term Loan 3,000 75% 16% 12%
Total 4,000 100% 16.5%
Answer in both the approaches would be same as can be seen from the above two solutions.

Question 7

An entity constructs a new head office building commencing on 1 st September 2011, which
continues till 31st December 2011. Directly attributable expenditure at the beginning of the
month on this asset are ₹100,000 in September 2011 and ₹ 250,000 in each of the months of
October to December 2011.
The entity has not taken any specific borrowings to finance the construction of the asset but
has incurred finance costs on its general borrowings during the construction period. During
the year, the entity had issued 10% debentures with a face value of ₹ 20 lacs and had an
overdraft of ₹500,000, which increased to ₹750,000 in December 2011. Interest was paid on
the overdraft at 15% until 1 October 2011, then the rate was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance with Ind AS
23 ‘Borrowing Costs’.

Solution

Since the entity has only general borrowing hence first step will be to compute the
capitalisation rate. The capitalisation rate of the general borrowings of the entity during the
period of construction is calculated as follows:

Finance cost on 20 lacs 10% debentures during September – December2011 66,667

Interest @ 15% on overdraft of 5,00,000 in September 2011 6,250
Interest @ 16% on overdraft of 5,00,000 in October and November 2011 13,333
Interest @ 16% on overdraft of 7,50,000 in December 2011 10,000
Total finance costs in September – December 2011 96,250

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CORPORATE FINANCIAL REPORTING

Weighted average borrowings during period

= (20,00,000 × 4) + (500,000 × 3) + (750,000 × 1) = Rs.25,62,500
4

Capitalisation rate = Total finance costs during the construction period / Weighted average
borrowings during the construction period = 96,250 / 25,62,500 = 3.756%

Note: The above capitalisation rate is for 4 months period from September – December 2011

Annualised Capitalisation Rate = 3.756*12/4 = 11.268% p.a.

Question 8

K Ltd. began construction of a new building at an estimated cost of ₹7 lakh on 1 st April, 2011.
To finance construction of the building it obtained a specific loan of ₹2 lakh from a financial
institution at an interest rate of 9% per annum.

The company’s other outstanding loans were:

Amount Rate of Interest per annum
₹7,00,000 12%
₹9,00,0001 11%

The expenditure incurred on the construction was:

April, 2011 ₹1,50,000
August, 2011 ₹2,00,000
October, 2011 ₹3,50,000
January, 2012 ₹1,00,000

The construction of building was completed by 31 st January, 2012. Following the provisions
of Ind AS 23 ‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass
necessary journal entry for capitalizing the cost and borrowing cost in respect of the building
as on 31st January, 2012.

Solution
1. Calculation of capitalization rate on borrowings other than specific borrowings
Amount of loan Rate of interest Amount of interest
7,00,000 12% = 84,000
9,00,000 11% = 99,000
16,00,000 1,83,000
Weighted average rate of interest = 11.4375%
(1,83,000/16,00,000) x 100

2. Computation of borrowing cost to be capitalized for specific borrowings and general

borrowings based on weighted average accumulated expenses

IND AS 23 12 12 CA BISHNU
BISHNU KEDIA
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 CORPORATE FINANCIAL REPORTING

Date of
Amount
incurrence of Financed through Calculation
spent Amount
expenditure
1st April, 2011 1,50,000 Specific borrowing 1,50,000 x 9% x 10/12 11,250
1st August, 2011 2,00,000 Specific borrowing 50,000 x 9% x 10/12 3,750

General borrowing 1,50,000x11.4375% x

6/12 8,578.125
1st October, 3,50,000 General borrowing 3,50,000x11.4375% x 4/12
2011 13,343.75
1st January, 1,00,000 General borrowing 1,00,000x11.4375% x 1/12
2012 953.125
37,875
Note: Since construction of building started on 1st April, 2011, it is presumed that all
the later expenditures on construction of building had been incurred at the beginning
of the respective month.

3. Total expenses to be capitalized for building

Particulars Amount
Cost of building (1,50,000 + 2,00,000 + 3,50,000 + 1,00,000) 8,00,000
Add: Amount of interest to be capitalized 37,875
8,37,875

4. Journal Entry
Date Particulars Dr Cr
31.1.2012 Building account Dr. 8,37,875
To Bank account 8,00,0000
To Interest payable (borrowing cost) 37,875
(Being expenditure incurred on construction of building and
borrowing cost thereon capitalized)
Note: In the above journal entry, it is assumed that interest amount will be paid at the
year end. Hence, entry for interest payable has been passed on 31.1.2012.

Alternatively, following journal entry may be passed if interest is paid on the date of
capitalization:

Date Particulars Dr Cr
31.1.2012 Building account Dr. 8,37,875
To Bank account 8,37,875
(Being expenditure incurred on construction of building and
borrowing cost thereon capitalized)

CA BISHNU KEDIA 13 IND AS 23

CORPORATE FINANCIAL REPORTING

Question 9

On 1st April, 2011, entity A contracted for the construction of a building for ₹22,00,000. The
land under the building is regarded as a separate asset and is not part of the qualifying assets.
The building was completed at the end of March, 2012, and during the period the following
payments were made to the contractor:

Payment date Amount (₹ ,000)

1st April, 2011 200
th
30 June, 2011 600
st
31 December, 2011 1,200
31st March, 2012 200
Total 2,200
Entity A’s borrowings at its year end of 31 st March, 2012 were as follows:
(a) 10%, 4-year note with simple interest payable annually, which relates specifically to the
project; debt outstanding on 31st March, 2012 amounted to ₹7,00,000. Interest of ₹65,000
was incurred on these borrowings during the year, and interest income of ₹20,000 was
earned on these funds while they were held in anticipation of payments.
(b) 12.5% 10-year note with simple interest payable annually; debt outstanding at 1 st April,
2011 amounted to ₹1,000,000 and remained unchanged during the year; and
(c) 10% 10-year note with simple interest payable annually; debt outstanding at 1 st April,
2011 amounted to ₹1,500,000 and remained unchanged during the year.

What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS?

Solution

As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, the entity should 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.

The amount of borrowing costs eligible for capitalization, in cases where the funds are
borrowed generally, should be determined based on the capitalisation rate and expenditure
incurred in obtaining a qualifying asset. The costs incurred should first be allocated to the
specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in general Weighted for period
(’000) borrowings (’000) outstanding (’000)
1st April 2011 200 0 0
30th June 2011 600 100* 100 × 9/12 = 75
31st Dec 2011 1,200 1,200 1,200 × 3/12 = 300
31st March 2012 200 200 200 × 0/12 = 0
Total 2,200 375
*Specific borrowings of 7,00,000 fully utilized on 1st April & on 30th June to the extent of
5,00,000 hence remaining expenditure of 1,00,000 allocated to general borrowings.

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The capitalisation rate relating to general borrowings should 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.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) = 11%
10,00,000 + 15,00,000
Borrowing cost to be capitalized: Amount
On specific loan 65,000
On General borrowing (3,75,000 × 11%) 41,250
Total 1,06,250
Less: interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are Rs. 86,250.

Question 10

X Ltd is commencing a new construction project, which is to be financed by borrowing. The

key dates are as follows:
(i) 15th May, 2011: Loan interest relating to the project starts to be incurred
(ii) 2nd June, 2011: Technical site planning commences

(iii) 19th June, 2011: Expenditure on the project started to be incurred

(iv) 18th July, 2011: Construction work commences
Identify commencement date.

Solution

In the above case, the three conditions to be tested for commencement date would be:
Borrowing cost has been incurred on: 15th May, 2011
Expenditure has been incurred for the asset on: 19th June, 2011
Activities necessary to prepare asset for its intended use or sale: 2nd June, 2011
Commencement date would be the date when the above three conditions would be satisfied in
all i.e. 19th June, 2011

Question 11

Marine Transport Limited ordered 3 ships for its fleet on 1 st April, 2010. It pays a down
payment of 25% of the contract value of each of the ship out of long-term borrowings from a
scheduled bank. The delivery has to commence from the financial year 2017. On 1 st March,
2012, the ship builder informs that it has commenced production of one ship. There is no
progress on other 2 ships. Marine Transport Limited prepares its financial statements on
financial year basis.
Is it permissible for Marine Transport Limited to capitalise any borrowing costs for the
financial year ended 31st March, 2011 or 31st March, 2012?

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CORPORATE FINANCIAL REPORTING

Solution

1. 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.
As per paragraph 17 of Ind AS 23, 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.
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.
Marine Transport Limited borrows funds and incurs expenditures in the form of down
payment on 1st April, 2010. Thus, condition (a) and (b) are met. However, condition (c) is met
only on 1st March, 2012, and that too only with respect to one ship. Thus, there is no
capitalisation of borrowing costs during the financial year ended 31st March, 2011. Even
during the financial year ended 31st March, 2012, borrowing costs relating to the ‘one’ ship
whose construction had commenced from 1st March, 2012 will be capitalised from 1st March,
2012 to 31st March, 2012. All other borrowing costs are expensed.

Question 12 [June 23]

GARLIC TULSI Ltd. began construction of a new building on 1st April, 2022. It obtained `
2 lakh special loan to finance the construction of the building on 1st April, 2022 at an interest
rate of 10%. The company's other outstanding non-specific loans were as follows:
Date on which Funds borrowed Funds Borrowed (`) Rate of Interest
01/04/2022 12,00,000 13%
01/07/2022 40,00,000 14%
01/10/2022 16,00,000 15.5%

Date on which it is incurred Expenditure incurred on construction of a building (`)

01/04/2022 6,00,000
01/05/2022 1,50,000
01/07/2022 3,00,000
01/12/2022 12,00,000

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The construction of the building completed on 31.12.2022. However, it was put to use only on
01.04.2023. A sum of ` 20 lakhs has been advanced for purchase of Plant & machinery which was
installed by 31st March, 2023. ` 29 lakhs has been utilized for working capital requirements.
Required: Show the treatment of Interest as per Ind AS 23 and pass the Journal Entries relating to
Interest.

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