IAS 23 borrowing costs: what to capitalise

Building a plant or a property with borrowed money raises a simple question: is the interest an expense of the year or part of the cost of the asset? Under IFRS the answer is often the second, which lifts profit during construction and raises depreciation afterwards. This guide explains what counts as a qualifying asset and a borrowing cost, how to calculate the amount to capitalise from specific and general borrowings, works through a factory build, and covers when capitalisation starts and stops and how IAS 23 compares with US GAAP.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 4 minute read.

Short answer

IAS 23 Borrowing Costs requires a company to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the asset's cost, and to expense all other borrowing costs. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale, such as a factory, power station, investment property under construction or a property built for sale on completion. For funds borrowed specifically for the asset, the company capitalises the actual borrowing costs incurred, less any income from temporarily investing those funds. For funds borrowed generally, it applies a capitalisation rate, the weighted average cost of its general borrowings, to the expenditure on the asset, capped at the borrowing costs actually incurred. Capitalisation starts when expenditure and borrowing costs are being incurred and the work to prepare the asset has begun, is suspended during extended periods when active development stops, and ends when substantially all the work is complete. In this guide's example, a company capitalises CU 510 thousand of interest into a new factory.

At a glance

Capitalise
On qualifying assets
Qualifying asset
Takes substantial time
Specific loans
Actual cost less income
General loans
Capitalisation rate
Stop when
Work substantially done
US GAAP
ASC 835-20, similar
IAS 23 borrowing costs: what to capitaliseCapitalise: On qualifying assets; Qualifying asset: Takes substantial time; Specific loans: Actual cost less income; General loans: Capitalisation rate; Stop when: Work substantially done; US GAAP: ASC 835-20, similar.KEY FACTS AT A GLANCEIAS 23 borrowing costs: what to capitaliseCapitaliseOn qualifying assetsQualifying assetTakes substantial timeSpecific loansActual cost less incomeGeneral loansCapitalisation rateStop whenWork substantially doneUS GAAPASC 835-20, similarTax BakersIAS 23 borrowing costs: what to capitaliseCapitalise: On qualifying assets; Qualifying asset: Takes substantial time; Specific loans: Actual cost less income; General loans: Capitalisation rate; Stop when: Work substantially done; US GAAP: ASC 835-20, similar.KEY FACTS AT A GLANCEIAS 23 borrowing costs: what tocapitaliseCapitaliseOn qualifying assetsQualifying assetTakes substantial timeSpecific loansActual cost less incomeGeneral loansCapitalisation rateStop whenWork substantially doneUS GAAPASC 835-20, similarTax Bakers
Key facts at a glance, as set out in this guide.

What does IAS 23 require?

Borrowing costs directly attributable to a qualifying asset are capitalised as part of its cost; other borrowing costs are expensed as incurred. Borrowing costs include interest calculated using the effective interest method, finance charges on lease liabilities, and exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs. Capitalisation is required, not a policy choice. See the effective interest method and IAS 16 property, plant and equipment.

What is a qualifying asset?

An asset that necessarily takes a substantial period of time to get ready for its intended use or sale: manufacturing plants, power generation facilities, intangible assets being developed, investment properties under construction, and inventories that take a long time to produce, such as apartments built for sale on completion. Financial assets, inventories produced quickly or in large quantities on a repetitive basis, and assets that are ready for use when acquired are not qualifying assets. IAS 23 also lets companies choose not to apply it to assets measured at fair value, such as biological assets. A contractor that recognises revenue over time usually has no qualifying asset, because its contract assets and receivables are not; see borrowing costs in construction.

How much is capitalised?

  • Specific borrowings: the actual borrowing costs incurred on the loan during the period, less any investment income earned on the funds while they are temporarily invested.
  • General borrowings: the expenditure on the asset funded from general borrowings multiplied by the capitalisation rate, the weighted average borrowing cost of the general borrowings outstanding in the period, excluding specific borrowings until the asset they fund is substantially complete.
  • Cap: the amount capitalised from general borrowings cannot exceed the borrowing costs actually incurred in the period.

IAS 23 in practice: borrowing costs on a new factory

A company builds a factory during 2026. It takes a CU 5,000 thousand loan at 8% specifically for the project, and earns CU 100 thousand by investing the unspent part until it is needed. Expenditure beyond the specific loan, averaging CU 3,000 thousand over the year, is funded from its general borrowings. All figures are in CU thousand.

General borrowingsAmountRateInterest
Bank loan10,0006%600
Bond5,0009%450
Total and capitalisation rate15,0007.0%1,050
Borrowing costs capitalised into the factory (CU thousand)Borrowing costs capitalised into the factory (CU thousand)+400Specific loaninterest-100Investmentincome+210Generalborrowings510Capitalised
Specific borrowings net of investment income, plus general borrowings at the capitalisation rate.

From the specific loan, the company capitalises interest of 400 less investment income of 100, 300. From general borrowings, it capitalises 3,000 at 7%, 210, well below the 1,050 of general interest incurred. The total of 510 is added to the factory's cost and depreciated over its life once it is in use; the rest of the year's interest is expensed.

When does capitalisation start, pause and stop?

It starts when the company is incurring expenditure on the asset, incurring borrowing costs and undertaking the activities needed to prepare the asset, which can include technical and administrative work before construction, such as obtaining permits. It is suspended during extended periods in which active development is paused, but not during temporary delays that are a necessary part of the process, such as a planned drying period. It stops when substantially all the activities needed to prepare the asset for use or sale are complete; where parts of a project, such as buildings in a business park, can be used separately, capitalisation stops for each part as it is completed. See IAS 40 investment property.

How does IAS 23 compare with ASC 835-20?

US GAAP also capitalises interest on assets that take time to get ready, and the approach is similar. Differences include that US GAAP generally does not deduct investment income on temporarily invested borrowings, except for certain tax-exempt borrowings, does not capitalise exchange differences, and gives companies more judgement in choosing the borrowings used for the capitalisation rate. See IFRS vs US GAAP key differences.

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Questions people ask

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, a power station or property built for sale on completion.

How is the capitalisation rate calculated?

As the weighted average of the borrowing costs on the company's general borrowings outstanding during the period, excluding borrowings made specifically for qualifying assets until those assets are substantially complete.

Is investment income deducted from borrowing costs capitalised?

Yes, for specific borrowings: income earned on temporarily investing the borrowed funds is deducted.

When does capitalisation of borrowing costs stop?

When substantially all the activities needed to prepare the asset for its intended use or sale are complete.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 23 Borrowing Costs
  2. Financial Accounting Standards Board: Accounting Standards Codification

Rules and fees change. If you are reading this long after October 21, 2026, confirm the figures with the source before you rely on them.

ConstructionBorrowing costs on construction projectsIAS 16IAS 16 property, plant and equipment explainedIFRS 9Amortised cost and the effective interest method under IFRS 9

More in IAS 23

TopicThe IAS 23 topic page

This guide is general information. It is not tax or legal advice for your situation.