IAS 23
Borrowing Costs
IAS 23 prescribes the accounting treatment for borrowing costs. Its requirements address qualifying assets, directly attributable borrowing costs, measurement, commencement, suspension, cessation and disclosure.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense.
- Core treatment
- Capitalise directly attributable borrowing costs; expense other borrowing costs
- Qualifying asset
- An asset that necessarily takes a substantial period to become ready for intended use or sale
- Specific borrowings
- Actual borrowing costs less temporary investment income
- General borrowings
- Apply a weighted-average capitalisation rate to qualifying expenditures
- Commencement
- Expenditures, borrowing costs and preparation activities must all be present
- Disclosure
- Amount capitalised and capitalisation rate
1. Objective, scope and core principle
IAS 23 applies to the accounting for borrowing costs. An entity is not required to apply the standard to borrowing costs directly attributable to a qualifying asset measured at fair value, or to inventories manufactured or otherwise produced in large quantities on a repetitive basis.
The standard requires capitalisation of borrowing costs that are directly attributable to acquiring, constructing or producing a qualifying asset. Borrowing costs that do not meet the recognition requirements are recognised in profit or loss in the period in which they are incurred.
Example 1: scope and core principle
An entity incurs interest on a loan used for general working-capital purposes and cannot demonstrate that the interest is directly attributable to a qualifying asset. The interest is recognised as an expense. If part of the general borrowing pool is used to finance expenditure on a qualifying asset, an amount may be eligible for capitalisation using the general-borrowing requirements explained below.
2. Definitions
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. They may include interest expense calculated using the effective interest method, interest in respect of lease liabilities and exchange differences arising from foreign-currency borrowings to the extent that they are regarded as an adjustment to interest costs.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances, qualifying assets may include inventories, manufacturing plants, power-generation facilities, intangible assets, investment properties and bearer plants. Financial assets, assets ready for use or sale when acquired, and inventories produced over a short period are not qualifying assets.
Example 2: qualifying and non-qualifying assets
| Asset | Assessment | Reason |
|---|---|---|
| Purpose-built factory requiring 18 months of construction | Normally a qualifying asset | It necessarily takes a substantial period to become ready for use |
| Completed office building purchased for immediate occupation | Not a qualifying asset | It is ready for its intended use when acquired |
| Inventory produced in a two-week routine cycle | Not a qualifying asset | It does not require a substantial preparation period |
3. Recognition and directly attributable borrowing costs
Borrowing costs are directly attributable when they would have been avoided if the expenditure on the qualifying asset had not been made. The determination can be straightforward for funds borrowed specifically for one qualifying asset, but may require judgement where financing is coordinated centrally or a range of debt instruments is used.
The amount capitalised during a period cannot exceed the amount of borrowing costs incurred during that period. If the carrying amount of a qualifying asset exceeds its recoverable amount or net realisable value, the carrying amount is written down or written off in accordance with the requirements of other applicable standards.
4. Measurement: specific borrowings
When an entity borrows funds specifically to obtain a qualifying asset, the borrowing costs eligible for capitalisation are the actual borrowing costs incurred on that borrowing during the period, less any investment income earned from temporarily investing those funds.
Example 3: specific borrowing
- On 1 January, an entity borrows GH¢10,000,000 at 12% specifically to construct a facility.
- All commencement conditions are satisfied throughout the year.
- Temporarily unused proceeds earn GH¢80,000.
| Calculation | Working | Amount |
|---|---|---|
| Borrowing costs incurred | GH¢10,000,000 × 12% | GH¢1,200,000 |
| Less investment income | Given | (GH¢80,000) |
| Eligible for capitalisation | GH¢1,200,000 − GH¢80,000 | GH¢1,120,000 |
5. Measurement: general borrowings
When a qualifying asset is financed from general borrowings, the entity applies a capitalisation rate to expenditures on that asset. The rate is the weighted average of the borrowing costs applicable to borrowings outstanding during the period, excluding borrowings made specifically to obtain another qualifying asset until substantially all activities necessary to prepare that other asset are complete.
Expenditures are generally reduced by progress payments received and grants received in connection with the asset. A weighted-average carrying amount of the asset during the period, including previously capitalised borrowing costs, may be a reasonable approximation of the expenditures to which the capitalisation rate is applied.
Example 4: general borrowings, staged expenditure and a grant
An entity constructs a qualifying asset from its general borrowing pool. The following borrowings are outstanding throughout the year: GH¢8,000,000 at 9% and GH¢4,000,000 at 13%. Construction expenditures are GH¢3,000,000 on 1 January, GH¢4,000,000 on 1 April and GH¢2,000,000 on 1 October. On 1 July, the entity receives a GH¢1,000,000 grant in connection with the asset. Capitalisation conditions are satisfied throughout the year.
| Step | Working | Amount |
|---|---|---|
| Annual borrowing costs | (GH¢8,000,000 × 9%) + (GH¢4,000,000 × 13%) | GH¢1,240,000 |
| Capitalisation rate | GH¢1,240,000 ÷ GH¢12,000,000 | 10.33% (using the unrounded rate) |
| Weighted expenditure: 1 January | GH¢3,000,000 × 12/12 | GH¢3,000,000 |
| Weighted expenditure: 1 April | GH¢4,000,000 × 9/12 | GH¢3,000,000 |
| Weighted expenditure: 1 October | GH¢2,000,000 × 3/12 | GH¢500,000 |
| Less weighted grant: 1 July | GH¢1,000,000 × 6/12 | (GH¢500,000) |
| Weighted qualifying expenditures | GH¢3,000,000 + GH¢3,000,000 + GH¢500,000 − GH¢500,000 | GH¢6,000,000 |
| Eligible borrowing costs | GH¢6,000,000 × unrounded rate | GH¢620,000 |
Accounting outcome: GH¢620,000 is capitalised and the remaining GH¢620,000 of the year’s borrowing costs is recognised as an expense. The capitalised amount is below the GH¢1,240,000 period ceiling. The entity discloses GH¢620,000 as the amount capitalised and 10.33% as the capitalisation rate.
6. Commencement of capitalisation
Capitalisation commences on the date when the entity first meets all three conditions: it incurs expenditures for the asset, it incurs borrowing costs, and it undertakes activities necessary to prepare the asset for its intended use or sale.
Necessary activities include more than physical construction. Technical and administrative work performed before physical construction, such as obtaining permits, may qualify. Holding an asset without associated development activity does not qualify.
Example 5: commencement date
Land is purchased on 1 February using borrowed funds. Design and permit work begins on 1 March, while physical construction begins on 1 June. If expenditures and borrowing costs are already being incurred, capitalisation commences on 1 March because the technical and administrative activities necessary to prepare the asset are then in progress. It does not wait automatically for physical construction.
7. Suspension of capitalisation
Capitalisation is suspended during extended periods in which active development of a qualifying asset is interrupted. Borrowing costs incurred during such a period are costs of holding a partially completed asset and do not normally qualify for capitalisation.
Capitalisation is not normally suspended during a period in which substantial technical and administrative work is being carried out, or when a temporary delay is a necessary part of the process of preparing the asset for its intended use or sale.
Example 6: interruption, necessary delay and eligible period
A qualifying asset incurs borrowing costs of GH¢1,200,000 evenly throughout a 12-month year, equivalent to GH¢100,000 per month. Active construction takes place from January to April. Work stops from 1 May to 31 August because of a contractual dispute, and no substantial technical or administrative work is performed. Construction resumes in September. During November, concrete undergoes a curing period that is necessary before the next construction stage, and the asset is completed on 31 December.
| Period | Assessment | Treatment |
|---|---|---|
| January–April | Active development is in progress | Capitalise GH¢400,000 |
| May–August | Extended interruption with no qualifying activity | Suspend capitalisation; expense GH¢400,000 |
| September–October | Active development resumes | Capitalise GH¢200,000 |
| November | Temporary delay is a necessary part of preparing the asset | Continue capitalisation; capitalise GH¢100,000 |
| December | Active development continues until completion | Capitalise GH¢100,000 |
Accounting outcome: GH¢800,000 is capitalised and GH¢400,000 is recognised as an expense. Treating every pause in physical construction as a suspension would incorrectly exclude the necessary curing period.
8. Cessation of capitalisation
Capitalisation ceases when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete. An asset is normally ready when physical construction is complete, even if routine administrative work continues or minor modifications remain outstanding.
If an entity completes construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, capitalisation ceases for each part when substantially all activities necessary to prepare that part are complete.
Example 7: completion in parts
A business park consists of three independent buildings. Building A is completed and available for use on 30 September, while work on Buildings B and C continues. Capitalisation for Building A ceases on 30 September because it can be used independently. Capitalisation may continue for Buildings B and C while the relevant conditions remain satisfied.
9. Carrying amount and disclosure
Capitalised borrowing costs form part of the cost of the qualifying asset and are subsequently accounted for under the standard applicable to that asset. Other borrowing costs are recognised as an expense.
An entity discloses the amount of borrowing costs capitalised during the period and the capitalisation rate used to determine the amount eligible for capitalisation.
Common application errors
- Treating every asset financed by a loan as a qualifying asset.
- Capitalising costs that would have been incurred even without expenditure on the qualifying asset.
- Failing to deduct temporary investment income from specific borrowing costs.
- Using a specific borrowing rate for expenditure financed from the general borrowing pool.
- Commencing capitalisation before all three commencement conditions are met.
- Continuing capitalisation during an extended interruption in active development.
- Continuing capitalisation after substantially all necessary preparation activities are complete.
Official sources and review basis
This educational guide was checked against primary IFRS Foundation sources. Source status was last reviewed 17 August 2026.
- IFRS Foundation — IAS 23 Borrowing CostsOfficial issued-standard overview and history
- IFRS Foundation — IAS 23 supporting materialOfficial implementation-support index
