📘 CONCEPT – Borrowing Costs under Ind AS 23

Core Principle:
1. Borrowing Costs that are directly attributable to the acquisition, construction, or
production of a Qualifying Asset (QA) must be capitalized as part of the cost of that
asset.

2. Other borrowing costs are to be expensed as incurred.

What are Borrowing Costs?

Defined under Para 3:

● Interest expense calculated using effective interest method (Ind AS 109).

● Interest on lease liabilities (Ind AS 116).

● Exchange differences from foreign currency borrowings to the extent they are
considered an adjustment to interest costs.

🔑 KEY NOTES (Memory Tips)

1. CAP if QA + Substantial Time = Capitalise Borrowing Cost

2. EXP if not QA or fast-built = Expense in P&L

3. Direct Attribution is mandatory

4. Not applicable to equity capital, preference shares (not liabilities) – as per Ind AS
32

5. BIO assets @ FV (Ind AS 41) & Inventory @ mass scale = Not eligible

🔍 Memory Code: “Q–CAP, F–EXP”

(Qualifying asset = CAPitalise, else = EXPense)

🧪 PRACTICAL EXAMPLES
✅ EASY EXAMPLE (ICAI Style):
Q: ABC Ltd borrowed funds to construct a warehouse. The project takes 14 months. Can
interest be capitalised?

A:
Yes. Since:

● Construction period > 12 months = substantial time,

● Direct attribution exists (loan used for warehouse),

→ Thus, warehouse is a qualifying asset and borrowing cost should be
capitalised till ready for intended use.

🔁 MEDIUM EXAMPLE (ICAI Illustration 2):

Q: XYZ Ltd is developing computer software (intangible asset) for in-house use. It takes
18 months to develop. Should borrowing costs be capitalised?

A:
Yes, if:

● Development phase takes substantial time, and

● Recognition criteria for intangible assets is met under Ind AS 38.

Hence, software qualifies as a QA, and borrowing costs must be capitalised during the
development phase.

🧩 TOUGH EXAMPLE (ICAI Illustration 3):

Q: A telecom company acquires a 3G license. It will take 2 years to develop network infra.
Can interest on borrowed funds be capitalised until the network is ready?

A:

● License alone ≠ QA.

● However, if license is step 1 in network construction (QA), and

● Network takes substantial time to complete,

→ Then borrowing cost is capitalised as part of the network cost (qualifying asset).
📌 Judgment is based on intent of use and whether license is integral to the QA.

🧠 THINGS TO REMEMBER (with Exam Tips)

1. Substantial Period = NOT DEFINED, but 12 months is a good threshold.

2. Borrowing costs stop being capitalised when:

○ Asset is ready for intended use, even if not used.

3. Inventory Exception – Capitalisation not allowed if mass produced routinely.

4. Foreign Exchange Loss = Capitalised only if treated as adjustment to interest.

🧠 Mnemonic: “READY → STOP, ROUTINE → EXP”

⚖️EXCLUSION ZONE (As per SS)

❌ Borrowing cost NOT capitalised for:

● Biological assets measured at FV (Ind AS 41)

● Inventory produced on a repetitive basis (mass dairy production etc.)

● Financial assets
🔑 KEY NOTES (Memory Tips)
1. CAP if QA + Substantial Time = Capitalise Borrowing Cost

2. EXP if not QA or fast-built = Expense in P&L

3. Direct Attribution is mandatory

4. Not applicable to equity capital, preference shares (not liabilities) – as per Ind AS
32

5. BIO assets @ FV (Ind AS 41) & Inventory @ mass scale = Not eligible

🔍 Memory Code: “Q–CAP, F–EXP”

(Qualifying asset = CAPitalise, else = EXPense)

🧪 PRACTICAL EXAMPLES
✅ EASY EXAMPLE (ICAI Style):
Q: ABC Ltd borrowed funds to construct a warehouse. The project takes 14 months. Can
interest be capitalised?

A:
Yes. Since:

● Construction period > 12 months = substantial time,

● Direct attribution exists (loan used for warehouse),

→ Thus, warehouse is a qualifying asset and borrowing cost should be
capitalised till ready for intended use.

🔁 MEDIUM EXAMPLE (ICAI Illustration 2):

Q: XYZ Ltd is developing computer software (intangible asset) for in-house use. It takes
18 months to develop. Should borrowing costs be capitalised?

A:
Yes, if:

● Development phase takes substantial time, and

 ● Recognition criteria for intangible assets is met under Ind AS 38.

Hence, software qualifies as a QA, and borrowing costs must be capitalised during the
development phase.

🧩 TOUGH EXAMPLE (ICAI Illustration 3):

Q: A telecom company acquires a 3G license. It will take 2 years to develop network infra.
Can interest on borrowed funds be capitalised until the network is ready?

A:

● License alone ≠ QA.

● However, if license is step 1 in network construction (QA), and

● Network takes substantial time to complete,

→ Then borrowing cost is capitalised as part of the network cost (qualifying asset).

📌 Judgment is based on intent of use and whether license is integral to the QA.

🧠 THINGS TO REMEMBER (with Exam Tips)

1. Substantial Period = NOT DEFINED, but 12 months is a good threshold.

2. Borrowing costs stop being capitalised when:

○ Asset is ready for intended use, even if not used.

3. Inventory Exception – Capitalisation not allowed if mass produced routinely.

4. Foreign Exchange Loss = Capitalised only if treated as adjustment to interest.

🧠 Mnemonic: “READY → STOP, ROUTINE → EXP”

⚖️EXCLUSION ZONE (As per SS)

❌ Borrowing cost NOT capitalised for:
 ● Biological assets measured at FV (Ind AS 41)

● Inventory produced on a repetitive basis (mass dairy production etc.)

● Financial assets

CONCEPT: Capitalisation of Borrowing Costs – Qualifying Assets

As per Ind AS 23, borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset shall be capitalised as part of the cost of that asset. All other
borrowing costs are expensed.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for
its intended use or sale.

Borrowing costs may relate to:

● Permits (if linked to a qualifying asset),

● Leased assets (e.g., crane/dockyard used solely for qualifying asset construction),

● But not to general equipment already ready for use.

KEY NOTES (Memory Aid: “CAP-QA” Rule)

1. Capitalisation applies only to qualifying assets (QA).

2. A permit specific to one building is part of building cost = QA.

3. Plant/equipment ready for use = Not QA.

4. Qualifying asset = Takes substantial time to construct (e.g., ship, building).

5. Asset-specific lease interest = Capitalised till construction completion.

PRACTICAL EXAMPLES
✅ EASY EXAMPLE (Based on Illustration 4 - Permit)

Q: XYZ Ltd incurred borrowing cost to acquire a government permit for a specific building
project. Can the interest be capitalised?
A: Yes, because permit is directly attributable to the construction of a specific building, which is
a qualifying asset.

Journal Entry:

scss
CopyEdit
Building (Qualifying Asset) Dr.
To Interest Payable (Borrowing Cost)

✅ MEDIUM EXAMPLE (Based on Illustration 4 - Equipment)

Q: XYZ Ltd also acquired excavators used across multiple projects. Can interest on loan for
excavators be capitalised?

A: No. Equipment is already ready for intended use and is not directly linked to a specific
qualifying asset. Hence, interest must be expensed.

✅ TOUGH EXAMPLE (Based on Illustration 5 - Lease Interest)

Q: A dockyard is leased by a company only for constructing a ship (a QA). Should interest on
lease be capitalised?

A: Yes. The lease is specific to the construction of a qualifying asset. Borrowing cost is
capitalised until construction is complete.

THINGS TO REMEMBER (Memory Aid: “LEASE-PERMITS-USE”)

1. Lease-specific borrowing → capitalised if linked to QA.

2. Permit for a single building → capitalised.

3. Ready-to-use assets/equipment → NOT capitalised (even if used in QA construction).

4. Capitalisation stops when the asset is ready for intended use.

5. If doubt exists, assess management’s intention at acquisition.

🎯 CONCEPT: Exchange Differences as Borrowing Cost

(Ind AS 23)
🔸 If a company borrows in foreign currency, it may face exchange gain or loss due to
change in exchange rates.
🔸 Ind AS 23 says: Exchange differences (usually losses) can be added to borrowing cost,
but only up to the amount that makes the total borrowing cost equal to the cost had the
company borrowed in Indian rupees (functional currency).

✅ EASY EXAMPLE – FULL

CAPITALISATION ALLOWED
📌 Scenario:
● Company needs ₹40,000

● Borrows $1,000 at 4% interest on 1st April 20X1

● ₹/$ exchange rate on loan date = ₹40

● So, ₹40,000 = $1,000 (functional currency equivalent)

● On 31st March 20X2, exchange rate becomes ₹50

✅ Step-by-Step:
1. Interest Paid in Foreign Currency:

○ $1,000 × 4% = $40

○ $40 × ₹50 = ₹2,000 → Actual interest paid in INR = ₹2,000

2. Exchange Loss:
Loan not repaid yet, but value increased in INR:

○ $1,000 × (₹50 – ₹40) = ₹10,000

3. Total cost in foreign currency terms:

○ Interest = ₹2,000

○ Exchange Loss = ₹10,000

₹Total = ₹12,000
 4. If company borrowed in INR:

○ ₹40,000 × 12% = ₹4,800 → This is the maximum allowed borrowing

cost

5. So what is allowed to capitalise?

○ Already paid interest = ₹2,000

○ Eligible exchange loss = ₹4,800 – ₹2,000 = ₹2,800

✅ Answer: Borrowing cost allowed = ₹4,800 (₹2,000 interest + ₹2,800 exchange loss)

⚖️MEDIUM EXAMPLE – PARTIAL

CAPITALISATION
📌 Scenario Change:
● Same company and loan

● This time, exchange rate = ₹41 on 31st March 20X2

✅ Step-by-Step:
1. Interest Paid:

○ $1,000 × 4% = $40

○ $40 × ₹41 = ₹1,640

2. Exchange Loss:

○ $1,000 × (₹41 – ₹40) = ₹1,000

3. Total cost in foreign currency = ₹1,640 + ₹1,000 = ₹2,640

4. If company borrowed in INR: ₹40,000 × 12% = ₹4,800

Since ₹2,640 < ₹4,800 → ✅ Full ₹2,640 can be capitalised

📌 Answer: Capitalise ₹2,640 as borrowing cost

🔍 HARD EXAMPLE – UNREALISED GAIN
IN NEXT YEAR
📌 Scenario:
● In Year 1, exchange rate moved from ₹40 → ₹50 → ₹2,800 of exchange loss
was capitalised.

● Now in Year 2, rate falls to ₹44

● Exchange gain = $1,000 × (₹50 – ₹44) = ₹6,000

● Interest = $1,000 × 4% × ₹44 = ₹1,760

✅ Step-by-Step:
1. Borrowing Cost This Year = ₹1,760

2. What happens to the ₹6,000 gain?

○ Out of ₹6,000, we adjust only ₹2,800, because only ₹2,800 was capitalised in
previous year

○ That means ₹2,800 goes to reduce borrowing cost

○ The remaining ₹3,200 goes to P&L as exchange gain

✅ Answer:

● Borrowing cost for year = ₹1,760

● ₹2,800 exchange gain = reverse earlier capitalised loss

● ₹3,200 goes to profit

💡 MEMORY TIP:
 Rule Memory Code

You can only capitalise up to INR loan cost “Cap = Cost in Rupees”

Future exchange gain? Reverse only what was earlier “Reverse what you added”
capitalised

Capitalise unrealised losses only if within limits “Loss yes, but within cap”

🧠 BASIC IDEA (in simple terms)

When a company borrows in foreign currency to build something like a plant (i.e., a qualifying
asset), there are two types of borrowing costs:

1. Interest Cost on the loan — always capitalised.

2. Exchange Loss on principal amount — only partly allowed to be capitalised.

But ICAI says:

Only the lower of actual exchange loss or interest difference between foreign
and local loan is allowed to be added to the asset cost.

📦 GIVEN (From Illustration 6):

Particulars Value

Loan Taken USD 20,000

Date of Loan 1st April, 20X1

Foreign Interest Rate 5% p.a.

Exchange rate at borrowing ₹45/USD

Exchange rate at year-end ₹48/USD

(reporting)

Indian Loan Rate (Comparable) 11% p.a.

🔍 STEP-BY-STEP EXPLANATION
1Step 1 – Calculate actual foreign interest cost
1️⃣

USD 20,000 × 5% = USD 1,000

Convert it into ₹:
USD 1,000 × ₹48 = ₹48,000
✅ This is always allowed to be capitalised.

Step – Calculate interest if loan was taken in India

2️⃣

Loan in ₹ = USD 20,000 × ₹45 = ₹9,00,000

Interest = ₹9,00,000 × 11% = ₹99,000
✅ This is the maximum total borrowing cost ICAI allows.

Step – Find out how much exchange loss is eligible

3️⃣

Total possible borrowing cost (₹99,000)

− Already capitalised interest (₹48,000)
= ✅ ₹51,000 can be capitalised as exchange loss

🚫 Remaining exchange loss will go to P&L.

Step – Calculate actual exchange loss on principal

4️⃣

Loan principal = USD 20,000

Exchange rate increased from ₹45 to ₹48
So loss = USD 20,000 × ₹3 = ₹60,000

Step – What will be capitalised?

5️⃣
Component Amount Treatment

Interest cost ₹48,000 Capitalised ✅

Eligible exchange loss ₹51,000 Capitalised ✅

Remaining exchange ₹9,000 Expense ❌ P&L

loss
✅ Final Borrowing Cost to Capitalise:
Particular ₹
Amount

Interest cost ₹48,000

Exchange loss (eligible portion) ₹51,000

Total Capitalised ₹99,000

Remaining ₹9,000 is not allowed and will go to Finance Cost in P&L.

🎯 EASY, MEDIUM, HARD EXAMPLES (CA Final Exam

Style)

🔹 Easy Example
Indian loan ₹10,00,000 at 12%, used to construct a bridge.

● Interest = ₹1,20,000 → ✅ Fully capitalised.

🔸 Medium Example
Foreign loan USD 10,000 at 6%
₹ rate: 70 (start), 75 (end)
Indian rate = 13%

1. Interest = USD 600 × ₹75 = ₹45,000

2. Indian equivalent: ₹7,00,000 × 13% = ₹91,000

3. Eligible FX loss = ₹46,000

4. Actual FX loss = USD 10,000 × ₹5 = ₹50,000

✅ Capitalise: ₹45,000 + ₹46,000 = ₹91,000
❌ Expense: ₹4,000
🔴 Hard Example (ICAI style)
Foreign loan USD 25,000 at 5%
₹ rate: 60 (start), 75 (end)
Indian loan rate: 14%

1. Interest = USD 1,250 × ₹75 = ₹93,750

2. Indian equivalent = ₹15,00,000 × 14% = ₹2,10,000

3. Max eligible exchange diff = ₹1,16,250

4. Actual FX loss = 25,000 × 15 = ₹3,75,000

✅ Capitalise: ₹93,750 + ₹1,16,250 = ₹2,10,000
❌ Expense: ₹2,58,750

💡 MEMORY TRICK: “I-FEEL”

● I → Interest (always capitalised)

● F → Functional currency interest (local interest)

● E → Exchange difference

● E → Eligible = Difference between local and foreign

● L → Loss excess to be sent to P&L

📝 ICAI Answering Format (Shortcut Template)

markdown
CopyEdit
As per Ind AS 23, borrowing cost includes:

1. Actual interest on foreign currency = ₹xx → Capitalised

2. Exchange difference = ₹yy
- Compare with local interest (₹zz)
- Eligible difference = zz – xx = ₹aa
- Actual exchange loss = ₹bb
- Lower of ₹aa and ₹bb = capitalised
 - Balance goes to P&L

Hence, total borrowing cost capitalised = ₹xx + ₹aa = ₹total

CONCEPT (As per Ind AS 23)

Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset must be capitalised, i.e., added to the cost of the asset.

Capitalisation is allowed only when both conditions are met:

1. It is probable that future economic benefits will flow to the entity; and

2. The borrowing costs can be measured reliably.

There are two types of borrowings:

● Specific Borrowings: Directly taken for a qualifying asset.

● General Borrowings: Used generally and apportioned to assets.

Notional interest or imputed borrowing cost is not allowed for capitalisation (e.g.,
opportunity cost of internal funds).

KEY NOTES (Memory Tools for Exams)

1. CAP Test for Capitalisation Conditions:

○ C = Cost measurable reliably

○ A = Asset must be qualifying

○ P = Probable future economic benefits

2. Formula (Specific Borrowing):

Eligible Borrowing Cost=Actual Interest−Investment Income (if any)\
text{Eligible Borrowing Cost} = \text{Actual Interest} - \text{Investment
Income (if any)}Eligible Borrowing Cost=Actual Interest−Investment Income
(if any)
3. No capitalisation for:

○ Financial assets
 ○ Inventories manufactured in large quantities on repetitive basis

4. Interest on idle funds (temporary investment) = Deducted

PRACTICAL EXAMPLES
✅ EASY EXAMPLE (Direct Concept Application)
Q:
Company takes ₹20,00,000 loan @10% for constructing a plant. ₹5,00,000 is temporarily
invested @6% for 6 months. What is the capitalisable borrowing cost?

A:

● Borrowing Cost = ₹20,00,000 × 10% = ₹2,00,000

● Less: Investment Income = ₹5,00,000 × 6% × 6/12 = ₹15,000

● Net Borrowing Cost to Capitalise = ₹1,85,000

✅ MEDIUM EXAMPLE (Investment Income, Timing)

Q:
Alpha Ltd borrowed ₹30 lakhs @9% on 1st April 20X1. Construction started the same day. The
loan was disbursed:

Date Factory Bldg Office Bldg

1st Apr 20X1 ₹5L ₹10L

1st Oct 20X1 ₹5L ₹10L

The remaining funds were temporarily invested @7%.

Answer:
Use this formula for each building:

Borrowing Cost=Borrowing Cost Incurred−Investment Income\text{Borrowing Cost}

= \text{Borrowing Cost Incurred} - \text{Investment Income}Borrowing
Cost=Borrowing Cost Incurred−Investment Income

As per screenshot, the solution is:

 ● Factory Bldg:

○ Interest = ₹10L × 9% = ₹90,000

○ Investment = ₹5L × 7% × 6/12 = ₹17,500

○ Capitalised: ₹72,500

● Office Bldg:

○ Interest = ₹20L × 9% = ₹1,80,000

○ Investment = ₹10L × 7% × 6/12 = ₹35,000

○ Capitalised: ₹1,45,000

✅ HARD EXAMPLE (Exam Style)

Q:
XYZ Ltd borrowed USD 20,000 @5% on 1 April 20X1 when $1 = ₹45 for constructing a plant.
On 31 March 20X2, $1 = ₹48.
Equivalent INR loan would cost 11% interest.
Compute capitalisable borrowing cost.

Step-by-step:

● Interest in foreign currency = USD 20,000 × 5% = USD 1,000

→ In ₹ = 1,000 × ₹48 = ₹48,000

● Equivalent interest in ₹ = ₹9,00,000 (₹45 × 20,000) × 11% = ₹99,000

● Difference = ₹99,000 - ₹48,000 = ₹51,000 → eligible as adjustment to interest

● Exchange loss = USD 20,000 × (48-45) = ₹60,000

→ But only ₹51,000 allowed for capitalisation

Final Capitalised Cost:

● Interest: ₹48,000

● Exchange Difference: ₹51,000

● Total: ₹99,000 capitalised

● Remaining ₹9,000 (₹60,000 - ₹51,000) → to Profit & Loss as Finance Cost

THINGS TO REMEMBER
🔸 Interest Income on idle funds = reduce capitalised amount
🔸 No capitalisation of:

● Notional cost (imputed)

● Financial assets

● Inventories (mass, repetitive production)

🔸 Two Tests for Capitalisation:

1. Future economic benefit probable

2. Measurable reliably

🔸 Only actual borrowing cost eligible (no internal fund imputed)

👉 General Borrowing and Capitalisation

Rate Calculation

🔍 1. CONCEPT: General Borrowing & Capitalisation Rate (CR)

When borrowings are not for any specific qualifying asset but are used generally, we use a
capitalisation rate (CR) to compute the borrowing cost to be capitalised.

📌 Key Rule:

“Capitalisation rate = Weighted Average Cost of Borrowings”

Only actual costs are capitalised — no notional or opportunity costs.

⚙️2. STEPS TO CALCULATE CR (Weighted Average Method)

🧩 Step 1: Identify all general borrowings outstanding during the year
🧩 Step 2: Compute the interest on each loan for the period it was outstanding
🧩 Step 3: Add total interest and divide by average borrowings
🧩 Step 4: Apply CR to actual expenditure on Qualifying Assets (QA)

📘 3. ICAI-Style EXAMPLES

✅ EASY EXAMPLE: Capitalisation Rate Application

Q. ABC Ltd. has two general borrowings:

● Loan A: ₹10 lakhs @10% for full year

● Loan B: ₹20 lakhs @12% for full year

● Expenditure on Qualifying Asset = ₹15 lakhs

🧮 Step 1: Total Interest =

● Loan A: ₹10L × 10% = ₹1,00,000

● Loan B: ₹20L × 12% = ₹2,40,000

Total Interest = ₹3,40,000

🧮 Step 2: Total Borrowing = ₹30L

🧮 Capitalisation Rate (CR) = ₹3,40,000 / ₹30,00,000 = 11.33%

🧮 Borrowing Cost to Capitalise = ₹15L × 11.33% = ₹1,69,950

🟡 MEDIUM EXAMPLE: Weighted Average Time Based Capitalisation

Q. XYZ Ltd. had:

● Loan A: ₹10L @10% (1st Apr to 31st Dec = 9 months)

● Loan B: ₹20L @12% (1st July to 31st Mar = 9 months)

● Expenditure on QA = ₹18 lakhs

🧮 Loan A Interest = ₹10L × 10% × 9/12 = ₹75,000

🧮 Loan B Interest = ₹20L × 12% × 9/12 = ₹1,80,000
🧮 Total Interest = ₹2,55,000
🧮 Weighted Average Borrowing =
= ₹10L × 9/12 + ₹20L × 9/12 = ₹7.5L + ₹15L = ₹22.5L
🧮 CR = ₹2,55,000 / ₹22,50,000 = 11.33%
🧮 Capitalise = ₹18L × 11.33% = ₹2,03,940

🔴 HARD EXAMPLE: Excluding Specific Borrowings from CR

Data:

● ₹30L borrowed @ 9% on 1st April

● ₹20L used for Qualifying Asset A — specific borrowing

● Balance ₹10L → invested temporarily at 7%

● ₹10L used for QA-B

● Construction for QA-B started on 1st Oct

🧮 Specific borrowing (₹20L) is excluded from CR

Only general ₹10L is considered for capitalisation rate

Step 1: Borrowing Cost = ₹10L × 9% = ₹90,000

Investment income (April–Sept) = ₹10L × 7% × 6/12 = ₹35,000
Net Borrowing Cost = ₹55,000

Capitalisation Rate = ₹55,000 / ₹10L = 5.5%

If QA-B cost ₹15L, capitalised borrowing = ₹15L × 5.5% = ₹82,500

📚 4. SPECIAL RULES (VERY IMPORTANT FOR EXAMS)

🛑 Do not include:

● Borrowings for assets that are not QAs

● Notional cost of capital (e.g., equity cost)

● Funds invested in financial assets

✅ Include only:

● Actual interest on borrowings used for QAs

 ● Capitalise up to point when asset is ready for intended use

🔑 MEMORY TECHNIQUE:
💡 “WAE Formula”

Weighted Average of interest / Eligible expenditure

💡 Borrowing Cost Capitalised = QA Expenditure × CR

🔶 CONCEPT: Commencement of Capitalisation under Ind AS 23

Borrowing costs are capitalised as part of the cost of a qualifying asset if:

● ✔️The asset takes a substantial period to get ready for use/sale

● ✔️Borrowing cost is directly attributable

● ✔️Both economic benefit and reliable measurement exist

Capitalisation begins only when all 3 conditions are met:

Condition Explanation

(a) Expenditure incurred Includes cash, transfer of assets, or assumption of

liabilities

(b) Borrowing cost incurred From specific or general loans

(c) Asset development activities Includes permits, admin work, approvals—not idle
started land holding

🧠 KEY NOTES (Memory Techniques):

● 3Cs to Remember Capitalisation Start:
→ Cost, Credit (loan), Construction activities

● If ANY 1 is missing, capitalisation does not start.

💡 PRACTICAL EXAMPLES:

✅ EASY EXAMPLE – Factory Construction Loan (Specific Borrowing)

Scenario:
A Ltd. takes a ₹20 lakh loan @ 9% to build a factory starting 1st April. Work starts immediately.

Analysis:

● Qualifying Asset → Yes

● Borrowing cost = ₹1,80,000

● All 3 conditions met → Capitalisation starts 1st April

🔶 MEDIUM EXAMPLE – Land Purchase but Work Delayed

Scenario:
A Ltd. buys land on 1st April but starts construction only on 1st Dec. Loan is taken in April.

Analysis:

● Expenditure and borrowing done: ✅

● No construction until Dec: ❌

🟨 Capitalisation starts only from December, not April

🔴 TOUGH EXAMPLE – Idle Holding of Asset & Permit Approval Delay

Scenario:
X Ltd. purchases a 3-acre plot with loan on 1st April, planning to build a shopping mall.
However, it takes 6 months to get government permit. No other activity happens.

Analysis:

● No technical/admin activities started

● Merely holding the asset → NOT a qualifying activity

🛑 No capitalisation allowed during this idle phase.
⚠️THINGS TO REMEMBER:
1. Idle period? No capitalisation.

2. Activity required ≠ physical construction — permits, designs also qualify.

3. Three-point condition (cost, loan, activity) must be simultaneously satisfied.

4. Commencement = only when all 3 overlap.

🔶 CONCEPT: Commencement Date for Capitalisation of

Borrowing Costs
As per Para 17 of Ind AS 23, borrowing costs are capitalised only when all 3 conditions are
met simultaneously:

1. ✅ Expenditure for the qualifying asset is incurred

 2. ✅ Borrowing costs are incurred

3. ✅ Activities necessary to prepare the asset have commenced

🧩 Illustration 10 Summary:
Event Date

Borrowing cost incurred (Loan interest) 15th May, 20X1

Activities started (Technical site planning) 2nd June, 20X1

Expenditure incurred on project 19th June, 20X1

Physical construction started 18th July, 20X1

✅ Analysis:
● Borrowing cost started on 15th May

● Technical work (qualifying activity) began on 2nd June

● Expenditure incurred on 19th June

🔷 Capitalisation starts only when all 3 conditions are met together, i.e. 19th June, 20X1

🧠 Memory Tip: Use the "LEA Rule"

● Loan cost

● Expenditure

● Activities
Capitalisation starts at the latest of the 3.

💡 Examples (ICAI Pattern)

✅ EASY EXAMPLE
Q: A Ltd. takes a loan on 1st April. Technical drawings start on 10th April. Expenditure incurred
on 15th April.

🟢 Answer: All 3 conditions met on 15th April → Capitalisation starts from 15th April

🔶 MEDIUM EXAMPLE
Q: B Ltd. takes a loan on 1st March. Incurs ₹10 lakh on land on 15th March. Construction
approval (a necessary admin activity) obtained on 1st April.

🟢 Answer:

● Loan cost: 1st March

● Expenditure: 15th March

● Activities (approval): 1st April

➡️Capitalisation begins on 1st April

🔴 HARD EXAMPLE
Q: C Ltd. takes a loan on 1st May. Buys idle land on 15th May. No admin or physical activity
starts until 1st August.

🟢 Answer:

● Expenditure and borrowing started in May ✅

● But no activity until August ❌

➡️Capitalisation starts on 1st August

📌 THINGS TO REMEMBER (Exam Tips):

1. ✅ "Construction" is not mandatory for activities — site planning, permits, etc. also
qualify

2. ❌ Idle asset = no capitalisation

3. 📅 Commencement Date = Latest of the 3 conditions

4. 🔁 Do not confuse with suspension or cessation — those are separate rules

📘 CONCEPT: Suspension, Cessation, and Group
Capitalisation of Borrowing Costs (Ind AS 23)
🔸 Suspension of Capitalisation (Para 20)
Borrowing cost capitalisation must be suspended during extended interruptions in the
active development of a qualifying asset.

BUT: If delay is temporary and necessary (e.g. permits, weather), capitalisation

continues.

🔸 Cessation of Capitalisation (Para 22–24)

Capitalisation ends when substantially all activities needed to prepare the asset for use/sale
are complete. Minor admin work or minor modifications do not delay cessation.

🔸 Group Financial Statements

When borrowings are taken by one company and qualifying asset is developed by another
within the group:

● ✅ Borrowing cost can be capitalised in the group financial statements if from

external party.

● ❌ The developer cannot capitalise in its own FS if it has no borrowing.

● ✅ If intra-group loan exists, developer can capitalise in its own FS to the extent of
actual cost.

🔸 Maturing Inventories (Para 25)

For inventories with unclear production duration, capitalisation period is hard to determine.
Capitalisation should stop once active development stops.

📌 KEY NOTES
 1. Suspension = Long halt in construction (e.g., equipment shifted offsite).

2. Not suspended = Delay is inherent (e.g., wine maturing or weather).

3. Cessation when substantially done – minor finishing/admin work ignored.

4. Group companies can't capitalise unless they bear cost via borrowing.

5. Intra-group loan must reflect actual interest paid.

🧮 PRACTICAL EXAMPLES
✅ EASY ICAI-STYLE EXAMPLE
Q: X Ltd. suspends building construction from Oct to Jan due to machinery shift.
Should capitalisation of borrowing cost continue?

A: No. Capitalisation must be suspended as active development is interrupted.

✅ MEDIUM ICAI-STYLE EXAMPLE

Q: ABC Ltd. completes commercial complex on 31-May-20X1. Only 10% is rented
out by 31-Mar-20X2. Can they capitalise borrowing till 31-Mar-20X2?

A: No, capitalisation stops on 31-May-20X1 as asset was ready for use. Usage is irrelevant.

✅ TOUGH ICAI-STYLE EXAMPLE

Q: Subsidiary A constructs a plant using intercompany loan from Parent B. Can A
capitalise the borrowing cost in its own books?

A: Yes. Since A incurred borrowing cost (intra-group), it can capitalise up to the actual
interest incurred.

Note: In group consolidated statements, interest can also be capitalised if from external
parties and directly attributable to QA.

🧠 THINGS TO REMEMBER (Memory Aids)

 Mnemonic Concept

SCC-DIS Suspension if delay is long, Cessation when activity ends, Constructed by one,
borrowed by another, Delay okay if Inherent or Short

F.I.R.E. For Fairly allocated cost in Intra-group, Real interest needed for Eligible
capitalisation

📝 SUMMARY
Situation Capitalise Reason
?

Delay due to permit processing ✅ Temporary, necessary

step

Delay due to machinery shifting ❌ Extended interruption

Only 10% of property used by year-end ❌ Was ready for use

Asset built by subsidiary, loan from parent ✅ If subsidiary bears cost

Maturing wine barrels ✅ Delay part of process

📘 CONCEPT: Capitalisation of Borrowing Cost for

Maturing Inventories (Ind AS 23 – Para 25 & Example 7)
This example deals with inventories that take a long time to mature – such as whisky,
cheese, or wine – which increase in value with age.

🧩 WHAT THE EXAMPLE SAYS

Whisky becomes "mature" after 3 years but continues to increase in value with
time. If the entity’s business model is to hold and sell aged whisky, and if it's
provable that value increases only due to age (not inflation) — then
capitalisation of borrowing cost can continue.
✅ REQUIREMENTS for CONTINUED Capitalisation
You can continue to capitalise borrowing cost only if BOTH conditions are met:

1. 🧠 Entity’s intention: Business model is to hold inventory for long periods (not quick
sale).

2. 📈 Demonstrable value increase: Value increases only due to ageing, not due to
market hype, inflation, etc.

If these are not proven → 🛑 Inventory = "held for sale" → Stop capitalising
borrowing cost.

🧮 ICAI-STYLE EXAMPLES
✅ EASY ICAI Example
An alcohol company matures whisky for 5 years. Can it capitalise borrowing cost till
the end of 5th year?

Answer: Yes, if:

● It intends to hold till maturity

● It can demonstrate value increase is due to age, not inflation.

✅ MEDIUM ICAI Example

Whisky matures in 3 years. After that, it’s sold. Entity holds it for 6 more years for
branding. Can borrowing cost be capitalised during extra 6 years?

Answer: No, unless:

● The whisky’s value demonstrably increases due to age (not branding/market).

● Otherwise, treat as "held for sale" → Stop capitalisation after 3rd year.

✅ TOUGH ICAI Example

 Entity produces aged cheese. Market value rose due to rising dairy inflation. Can
borrowing cost be capitalised for 4 years?

Answer: No – the increase is due to market inflation, not ageing. Hence, capitalisation not
allowed.

🧠 MEMORY AID
“AGE = ALLOWED”
If value ↑ only due to AGE, and it’s in the business model, then
capitalisation = ✅
If value ↑ due to Market/Inflation, capitalisation = ❌

📌 THINGS TO REMEMBER
Point Rule

📅 Maturing inventory Capitalise borrowing cost only if ageing improves value

🎯 Business Model Must be intended to hold until fully aged

🔍 Audit Evidence Must prove value ↑ = Ageing ONLY

❌ If not provable Inventory = held for sale = Stop capitalisation