IAS 23 requires borrowing costs that are directly attributable to acquiring, constructing or producing a qualifying asset to be capitalized as part of that asset's cost. A qualifying asset is one that necessarily takes a substantial period of time to get ready for use or sale, such as a factory under construction. All other borrowing costs are expensed as they are incurred.
It is a short standard with one rule: when borrowing funds a long construction project, the interest during construction is part of the cost of getting that asset ready. The questions are about which interest, which assets, and over what period. This guide covers each with worked examples for specific and general borrowings.
The core rule
Borrowing costs directly attributable to a qualifying asset form part of its cost and must be capitalized. Capitalization is not optional: IAS 23 removed the old choice to expense these costs. Borrowing costs include interest calculated by the effective interest method, interest on lease liabilities, and some exchange differences on foreign currency borrowings.
What is a qualifying asset?
| Usually qualifying | Not qualifying |
|---|---|
| Manufacturing plants and power stations under construction | Assets ready for use or sale when bought, such as a finished building |
| Investment property under construction | Inventory made routinely in large quantities, even if production takes time |
| Intangible assets with a long development period | Financial assets |
| Inventory needing a long production process, such as maturing whisky | Assets measured at fair value, such as biological assets (capitalization optional) |
Specific and general borrowings
The calculation depends on how the project was funded.
Specific borrowings are taken out specifically to obtain the asset. Capitalize the actual borrowing costs incurred in the period, less any investment income earned on temporarily investing the funds. That deduction is required and is often forgotten.
General borrowings are borrowed for general purposes and used partly for the asset. Apply a capitalization rate, the weighted average cost of the company's general borrowings in the period, to the spending on the asset. The amount capitalized cannot be more than the total borrowing costs incurred.
Worked example: specific borrowing
On January 1, 2026, a company borrows $4,000,000 at 8% specifically to build a factory. Construction runs all year. $1,000,000 of the loan is not needed until April, so it is invested for three months at 3%.
| $ | |
|---|---|
| Borrowing costs incurred ($4,000,000 × 8%) | 320,000 |
| Less: investment income ($1,000,000 × 3% × 3/12) | (7,500) |
| Amount capitalized | 312,500 |
| Account | Debit | Credit |
|---|---|---|
| Factory under construction | 312,500 | |
| Cash or investment income receivable | 7,500 | |
| Cash or interest payable | 320,000 |
Only the net cost of financing the factory goes into the asset. The income on the temporary investment offsets it, because the company was not really out of pocket on that part of the loan for those three months.
Worked example: general borrowings
A company has general borrowings throughout the year of $2,000,000 at 6% and $3,000,000 at 9%. The weighted average amount it spends on a qualifying asset during the year is $1,500,000.
| $ | |
|---|---|
| Interest on $2,000,000 at 6% | 120,000 |
| Interest on $3,000,000 at 9% | 270,000 |
| Total interest on $5,000,000 | 390,000 |
| Capitalization rate ($390,000 ÷ $5,000,000) | 7.8% |
| Amount capitalized ($1,500,000 × 7.8%) | 117,000 |
The other $273,000 of interest is expensed. The rate must be a weighted average: using the higher rate of 9%, or a simple average of 7.5%, are both wrong.
When capitalization starts, pauses and stops
| Stage | Rule |
|---|---|
| Commencement | Starts only when all three hold: spending on the asset is being incurred, borrowing costs are being incurred, and work to get the asset ready is in progress |
| Suspension | Paused during extended periods when active development stops; not paused for temporary delays that are a normal part of the process |
| Cessation | Stops when substantially all the work to get the asset ready is complete, not when it is first used or sold |
A loan drawn down in January for a project whose site work starts in March is capitalized from March. A bridge delayed by high water in a region where that is expected each year keeps capitalizing; a project stopped for six months by a funding dispute does not. A building that is complete apart from minor decoration stops capitalizing even if it is not yet occupied.
A note on US GAAP
US GAAP (ASC 835-20) also requires interest to be capitalized on qualifying assets, using similar specific and weighted-average approaches. One difference: US GAAP generally does not reduce capitalized interest by income earned on temporarily invested borrowings, except for certain tax-exempt borrowings. IFRS always requires that deduction for specific borrowings.
Common borrowing cost mistakes
- Not deducting investment income on specific borrowings. This is the most common single error in IAS 23 calculations.
- Starting at the date the loan is drawn. All three commencement conditions must be met, including work actually being in progress.
- Carrying on after the asset is substantially complete. Capitalization stops at completion of the work, not at occupation or sale.
- Pausing for a normal, expected delay. Only extended interruptions to active development count.
- Using a simple average rate. The capitalization rate is weighted by the borrowings.
- Capitalizing interest on mass-produced inventory. Routine production is excluded even if it takes time.
Practice it
IAS 23 questions reward drawing the timeline before touching the numbers. The capitalization window is where the marks are, and the interest arithmetic is easy once its boundaries are fixed. Accountely's borrowing costs challenges test the window and the rate separately, so a date error does not cancel out correct interest work. Because capitalized interest becomes part of the asset's depreciable cost, IAS 16 property, plant and equipment picks up where this standard stops. It's free to start.
Frequently Asked Questions
What is a qualifying asset under IAS 23?
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale, such as a factory, power station or investment property under construction, or inventory that needs a long production process.
Is capitalizing borrowing costs optional under IAS 23?
No. Borrowing costs directly attributable to a qualifying asset must be capitalized. The only optional cases are qualifying assets measured at fair value and inventory produced in large quantities on a repetitive basis.
How is the capitalization rate calculated for general borrowings?
Divide the total borrowing costs on the company's general borrowings for the period by the weighted average general borrowings outstanding. Apply that rate to the weighted average spending on the qualifying asset.
When does capitalization of borrowing costs stop?
When substantially all the activities needed to get the asset ready for its intended use or sale are complete, even if the asset has not yet been used or sold.