IAS 23 Borrowing Costs explains when finance costs must be added to the cost of a qualifying asset and when they must be expensed. This practical guide covers qualifying assets, specific and general borrowings, the capitalisation rate, commencement, suspension, cessation, journal entries, disclosures and worked examples.
What is a qualifying asset under IAS 23?
A qualifying asset is an asset that necessarily takes a substantial period of time to become ready for its intended use or sale. IAS 23 does not prescribe a fixed number of months. Management applies judgement consistently, based on the nature of the asset and the preparation process.
| May be a qualifying asset | Normally not a qualifying asset |
|---|---|
| A manufacturing plant constructed over an extended period | A financial asset |
| A power-generation facility | An asset ready for use or sale when acquired |
| Investment property under substantial development | Inventory produced over a short period |
| Certain intangible assets developed over time | An asset merely held without active development |
| Certain inventories requiring a long production period | Routine, repetitively produced inventory where the IAS 23 scope exemption is applied |
IAS 23 is not required to be applied to borrowing costs directly attributable to a qualifying asset measured at fair value, such as certain biological assets, or to inventories manufactured in large quantities on a repetitive basis. These are scope exemptions, not a general choice to expense directly attributable costs for other qualifying assets.
What counts as borrowing costs?
Borrowing costs are interest and other costs incurred in connection with borrowing funds. Depending on the facts, they may include:
- interest expense calculated using the effective interest method under IFRS 9;
- interest on lease liabilities recognised under IFRS 16; and
- foreign-exchange differences on foreign-currency borrowings, but only to the extent they are treated as an adjustment to interest costs.
Foreign-exchange differences require judgement and a consistent accounting policy. An entity should disclose significant judgements when they are material to understanding the financial statements.
When does capitalisation begin?
Capitalisation starts only when all three conditions are met:
- the entity incurs expenditures for the asset;
- the entity incurs borrowing costs; and
- the entity undertakes activities necessary to prepare the asset for its intended use or sale.
Necessary activities include more than physical construction. Technical and administrative work, such as obtaining essential permits, may qualify. Simply holding land or another asset without development activity does not.
Specific borrowings: formula and example
A specific borrowing is obtained specifically to finance a qualifying asset. The eligible amount is the actual borrowing cost incurred during the capitalisation period, less investment income earned by temporarily investing unused funds.
Worked example: specific construction loan
A company obtains a loan specifically to construct a factory. Interest incurred during the qualifying period is $72,000. Until payments are due, part of the loan is temporarily invested and earns $7,000.
| Actual borrowing costs | $72,000 |
|---|---|
| Less: temporary investment income | ($7,000) |
| Borrowing costs eligible for capitalisation | $65,000 |
The $65,000 is added to the cost of the factory, provided the relevant IAS 23 recognition and timing conditions are satisfied.
General borrowings: capitalisation rate and example
When a qualifying asset is financed from an entity's general borrowings, a capitalisation rate is applied to the qualifying expenditures. The rate is the weighted average borrowing cost on relevant general borrowings outstanding during the period. Specific borrowings for a qualifying asset are excluded from that general-borrowing rate until substantially all activities necessary to prepare that asset are complete.
The amount capitalised for a period cannot exceed the borrowing costs incurred during that period.
Worked example: weighted expenditure
An entity has average general borrowings of $800,000 and incurs $70,000 of borrowing costs during the year. Its capitalisation rate is therefore 8.75%.
Qualifying-asset expenditure is $200,000 on 1 January, $150,000 on 1 April and $100,000 on 1 October. Using months as a practical time-weighting convention:
| Expenditure | Capitalisation period | Weighted expenditure |
|---|---|---|
| $200,000 | 12/12 | $200,000 |
| $150,000 | 9/12 | $112,500 |
| $100,000 | 3/12 | $25,000 |
| Total weighted expenditure | $337,500 | |
Borrowing costs eligible for capitalisation: $337,500 × 8.75% = $29,531.25. This is below the $70,000 borrowing-cost cap, so the full $29,531.25 is eligible, subject to the facts supporting direct attribution.
Suspension and cessation of capitalisation
Extended suspension
Capitalisation is suspended during an extended period in which active development is suspended. Borrowing costs incurred during that inactive period are generally holding costs and are expensed. Capitalisation normally continues during substantial technical or administrative work and during a temporary delay that is a necessary part of preparing the asset.
When capitalisation stops
Capitalisation stops when substantially all activities necessary to prepare the asset for its intended use or sale are complete. Routine administration or minor modifications do not normally delay cessation. If a project is completed in independently usable parts, capitalisation stops for each part when that part is ready.
IAS 23 journal entries
Capitalising eligible borrowing costs
| Account | Debit | Credit |
|---|---|---|
| Qualifying asset / construction in progress | Eligible amount | — |
| Finance cost / interest payable / cash | — | Eligible amount |
The exact credit depends on how interest was initially recorded and whether it has been paid or accrued.
Expensing non-eligible borrowing costs
| Account | Debit | Credit |
|---|---|---|
| Finance cost | Non-eligible amount | — |
| Interest payable / cash | — | Non-eligible amount |
Impairment and recoverability
Capitalising borrowing costs does not protect an asset from impairment or inventory write-down requirements. If the carrying amount or expected final cost exceeds the asset's recoverable amount or net realisable value, the entity applies the relevant IFRS Accounting Standard to recognise any necessary reduction.
Required disclosures
IAS 23 requires disclosure of:
- the amount of borrowing costs capitalised during the period; and
- the capitalisation rate used to determine eligible borrowing costs.
Clear accounting-policy and judgement disclosures may also be necessary, particularly for foreign-exchange differences, group financing arrangements or difficult qualifying-asset assessments.
Common IAS 23 mistakes
- capitalising all interest simply because construction is in progress;
- starting before expenditures, borrowing costs and preparation activities all exist;
- failing to deduct temporary investment income from specific borrowing costs;
- including qualifying-asset specific debt in the general borrowing pool too early;
- ignoring time weighting of asset expenditure;
- exceeding the borrowing costs actually incurred in the period;
- continuing capitalisation during an extended inactive suspension; and
- continuing after substantially all preparation activities are complete.
IAS 23 decision checklist
- Identify the asset and its intended use or sale.
- Determine whether preparation necessarily takes a substantial period.
- Identify specific and general financing separately.
- Confirm the three commencement conditions.
- Remove suspended periods that do not qualify.
- Calculate specific borrowing costs net of temporary investment income.
- Calculate the general borrowing capitalisation rate and weighted expenditure.
- Apply the period borrowing-cost cap.
- Stop when substantially all preparation activities are complete.
- Record the journal entries and prepare the required disclosures.
Frequently asked questions
Can an entity choose to expense borrowing costs on a qualifying asset?
Not when the costs are directly attributable and IAS 23 applies. Eligible costs are capitalised; other borrowing costs are expensed.
Is land automatically a qualifying asset?
No. The entity considers the intended use and whether active development is needed. Land held without development activity does not qualify merely because borrowing costs are incurred.
Does IAS 23 define “substantial period”?
No fixed duration is specified. The assessment requires consistent judgement based on the asset and the preparation process.
Can borrowing costs exceed actual interest incurred?
No. The amount capitalised during a period cannot exceed the borrowing costs incurred during that period.
Are exchange losses always borrowing costs?
No. Only the portion regarded as an adjustment to interest costs may be included, and applying that principle requires judgement.
Authoritative references
- IFRS Foundation: IAS 23 Borrowing Costs (2026 issued standard)
- IFRS Interpretations Committee: qualifying-asset expenditure and land agenda decisions
Educational note: This guide and calculator support learning and preliminary analysis. They do not replace the complete IFRS Accounting Standards, entity-specific professional judgement or advice from a qualified accountant or auditor.