IAS 23 Borrowing Costs decides when interest and other financing costs become part of the cost of an asset instead of being expensed. Its core principle: borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset, and other borrowing costs are recognised as an expense (IAS 23.1). Since the March 2007 revision, entities no longer have the option of expensing borrowing costs on qualifying assets immediately (IFRS Foundation: IAS 23).
Scope and the definition of borrowing costs
An entity applies the Standard in accounting for borrowing costs (IAS 23.2). It does not deal with the actual or imputed cost of equity (IAS 23.3). An entity is not required to apply it to borrowing costs directly attributable to (IAS 23.4):
- a qualifying asset measured at fair value, such as a biological asset within the scope of IAS 41; or
- inventories manufactured or otherwise produced in large quantities on a repetitive basis.
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds (IAS 23.5). They may include (IAS 23.6):
- interest expense calculated using the effective interest method under IFRS 9;
- interest on lease liabilities recognised under IFRS 16; and
- exchange differences on foreign currency borrowings, to the extent they are regarded as an adjustment to interest costs.
What is a qualifying asset?
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (IAS 23.5). The Standard does not quantify a "substantial period of time", so assessing it is a matter of judgement based on the nature of the asset.
Depending on the circumstances, inventories, manufacturing plants, power generation facilities, intangible assets, investment properties and bearer plants can all be qualifying assets. Financial assets, inventories produced over a short period, and assets that are ready for their intended use or sale when acquired are not (IAS 23.7).
What is capitalised?
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of its cost; other borrowing costs are expensed in the period in which they are incurred (IAS 23.8). Directly attributable costs are those that would have been avoided if the expenditure on the asset had not been made (IAS 23.10). Linking particular borrowings to an asset can be difficult — for example when financing is coordinated centrally in a group — and judgement is then required (IAS 23.11).
Specific borrowings
When an entity borrows funds specifically to obtain a qualifying asset, the amount eligible for capitalisation is the actual borrowing costs on that borrowing during the period, less any investment income on the temporary investment of those funds (IAS 23.12). Such funds are often invested temporarily until they are spent on the asset (IAS 23.13).
General borrowings and the capitalisation rate
When an asset is financed from general borrowings, the eligible amount is found by applying a capitalisation rate to the expenditures on the asset (IAS 23.14):
- The capitalisation rate is the weighted average of the borrowing costs applicable to all the entity's borrowings outstanding during the period.
- Borrowings made specifically for a qualifying asset are excluded until substantially all the activities necessary to prepare that asset are complete; after that they join the general pool.
- Borrowing costs capitalised in a period cannot exceed the borrowing costs incurred in that period.
The average may be computed across the parent and its subsidiaries or, in other circumstances, for each subsidiary on its own borrowings (IAS 23.15). Expenditures count only if they resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities, and they are reduced by progress payments and grants received. The asset's average carrying amount for the period, including borrowing costs previously capitalised, is normally a reasonable approximation of those expenditures (IAS 23.18).
If the asset's carrying amount or expected ultimate cost exceeds its recoverable amount or net realisable value, it is written down in accordance with other Standards (IAS 23.16).
When does capitalisation start, pause and stop?
| Stage | Rule | Reference |
|---|---|---|
| Start | The first date on which all three conditions are met: expenditures on the asset are incurred, borrowing costs are incurred, and activities necessary to prepare the asset are under way | (IAS 23.17) |
| Necessary activities | Include technical and administrative work before construction, such as obtaining permits, but not merely holding an asset with no development that changes its condition; borrowing costs on land held for building without development activity are not capitalised | (IAS 23.19) |
| Suspension | During extended periods in which active development is suspended. Capitalisation is not normally suspended during substantial technical and administrative work, and it is not suspended for a temporary delay that is a necessary part of the process — such as high water levels, common in the region, that delay a bridge | (IAS 23.20–21) |
| Cessation | When substantially all the activities necessary to prepare the asset are complete. An asset is normally ready once physical construction is complete, even if routine administrative work continues; if only minor modifications such as decoration remain, this indicates that substantially all the activities are complete | (IAS 23.22–23) |
| Completion in parts | Capitalisation stops for each part that can be used while construction continues on the others, such as a business park of separate buildings — unlike a steel mill, no part of which can be used until the whole is complete | (IAS 23.24–25) |
Disclosure
The Standard requires two disclosures (IAS 23.26):
- the amount of borrowing costs capitalised during the period; and
- the capitalisation rate used to determine the amount eligible for capitalisation.
Worked example
The figures are illustrative. During 2026 an entity constructs a building that is a qualifying asset. The conditions for starting capitalisation are met from 1 January, and construction continues without suspension beyond 31 December.
1. Specific borrowing. On 1 January it borrows 2,000,000 at 7% specifically for the building; the loan is outstanding all year. It spends 1,200,000 immediately and invests the remaining 800,000 temporarily at 3% until it spends it on 1 July.
- Interest on the loan = 2,000,000 × 7% = 140,000.
- Income on the temporary investment = 800,000 × 3% × 6/12 = 12,000.
- Amount capitalised = 140,000 − 12,000 = 128,000 (IAS 23.12).
2. General borrowings. Throughout the year the entity has two general loans: 3,000,000 at 6% and 2,000,000 at 8%. On 1 October it spends 1,500,000 of these funds on the building.
- Interest on general borrowings = 180,000 + 160,000 = 340,000.
- Capitalisation rate = 340,000 ÷ 5,000,000 = 6.8%. The specific loan is excluded because the building is not yet complete (IAS 23.14).
- Weighted expenditure = 1,500,000 × 3/12 = 375,000.
- Amount capitalised = 375,000 × 6.8% = 25,500, below the general borrowing costs incurred (340,000).
Result: 153,500 (128,000 + 25,500) is capitalised in the building, and 314,500 — the rest of the general borrowing interest (340,000 − 25,500) — is charged to profit or loss. The temporary investment income has already been deducted from the amount capitalised, so it does not appear as separate income.
Assuming the interest is paid and the investment income received in cash during the year, the entry in summary is:
| Account | Debit | Credit |
|---|---|---|
| Construction in progress (building) | 153,500 | |
| Finance costs | 314,500 | |
| Cash (interest 480,000 less temporary investment income 12,000) | 468,000 |
If the building is completed while the specific loan is still outstanding, its interest then enters the capitalisation rate for any other qualifying asset (IAS 23.14). The entity discloses 153,500 as the amount capitalised and 6.8% as the capitalisation rate (IAS 23.26).
IFRS Interpretations Committee agenda decisions
The IFRS Interpretations Committee has published three decisions that help in practice. In each it concluded that the principles and requirements in the Standards provide an adequate basis, so it did not add the matter to its standard-setting agenda:
- Expenditures on a qualifying asset (September 2018). If construction starts before the entity takes out general borrowings, capitalisation begins only once borrowing costs are incurred. The entity then does not disregard expenditures incurred before it obtained the general borrowings when applying the capitalisation rate (IFRS Foundation: agenda decision).
- Borrowing costs on land (September 2018). The entity considers the intended use of the land: owner-occupation, rental or capital appreciation, or sale. If the land cannot be used for that purpose while the building is under construction, capitalisation on the land expenditures continues until substantially all the activities to prepare both the land and the building are complete (IFRS Foundation: agenda decision).
- Over time transfer of constructed good (March 2019). In the fact pattern — a developer selling units in a residential building and recognising revenue over time under IFRS 15 Revenue from Contracts with Customers — neither the receivable nor the contract asset is a qualifying asset, and nor is the inventory of unsold units that the developer intends to sell in their current condition as soon as it finds buyers (IFRS Foundation: agenda decision).
What has changed in IAS 23?
- March 2007. The International Accounting Standards Board (IASB) issued a revised IAS 23 that eliminated the option of immediately expensing borrowing costs (IFRS Foundation: IAS 23).
- December 2017. Annual Improvements to IFRS Standards 2015–2017 Cycle amended IAS 23 to clarify which borrowing costs are eligible for capitalisation in particular circumstances (IFRS Foundation: project page). The current text is explicit that a specific borrowing joins the general capitalisation rate once substantially all the activities to prepare its asset are complete (IAS 23.14).
- Consequential amendments. Other Standards have made minor amendments to IAS 23, including IFRS 9 (July 2014) and IFRS 16 (January 2016) (IFRS Foundation: IAS 23). That is why paragraph 6 now refers to the effective interest method in IFRS 9 and to interest on lease liabilities recognised under IFRS 16 (IAS 23.6).
- 2026 and 2027. IAS 23 is not among the Standards amended by the requirements that apply to annual periods beginning on or after 1 January 2026. Nor is it amended by any of the three pronouncements issued but not yet effective at that date — IFRS 18, IFRS 19 and the amendments to IAS 21 on translation to a hyperinflationary presentation currency — which apply to annual periods beginning on or after 1 January 2027 (IFRS Foundation: changes in the 2026 edition).
Related reading and a practical tool
- Capitalised borrowing costs are part of the cost of the asset: IAS 16 Property, Plant and Equipment explained and Asset or expense? Capitalisation rules.
- Interest on lease liabilities: IFRS 16 Leases.
- To track asset cost, movements and depreciation: the Fixed Assets Register with Movement Schedule for the Note and Tax Depreciation.
Sources
- IFRS Foundation: IAS 23 Borrowing Costs. References in brackets are to paragraphs of the Standard.
- IFRS Foundation: Borrowing costs eligible for capitalisation (Amendments to IAS 23), Annual Improvements 2015–2017 Cycle.
- IFRS Foundation, IFRS Interpretations Committee agenda decisions: Expenditures on a qualifying asset, Borrowing costs on land and Over time transfer of constructed good.
- IFRS Foundation: Changes in this edition (2026).