When a company borrows to build a factory or develop a large asset, it pays interest long before the asset earns anything. International Accounting Standard (IAS) 23 Borrowing Costs says when that interest becomes part of the cost of the asset and when it is an expense.
This topic covers what counts as a borrowing cost and a qualifying asset, how to measure the amount to capitalise on specific and general borrowings, and when capitalisation starts, pauses and stops. The next topic covers investment property.
In the diets reviewed for this page none of the questions read tests the topic directly. It is a calculation topic that sits inside the cost of property, plant and equipment, and it is easy to score on with a clear method. Read government grants and government assistance first.
In 30 seconds
Borrowing costs are interest and other costs an entity incurs in connection with borrowing funds. They are capitalised when they are directly attributable to acquiring, building or producing a qualifying asset, which is an asset that necessarily takes a substantial period to get ready for use or sale. All other borrowing costs are expensed.
On a specific loan the amount capitalised is the actual interest less any investment income on temporarily unspent funds. On general borrowings it is the expenditure on the asset multiplied by a capitalisation rate, the weighted average rate on the general borrowings. It cannot exceed the interest actually incurred.
Capitalisation starts when expenditure, borrowing costs and preparation activity all exist, pauses during extended suspension and stops when the asset is substantially complete.
Borrowing costs and qualifying assets
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. They include interest expense calculated by the effective interest method, finance charges on leases and exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs. The cost of equity, such as dividends, is not a borrowing cost.
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 facts, inventories, items of property, plant and equipment and intangible assets can all be qualifying assets. They are usually self-constructed non-current assets. These are not qualifying assets:
- inventories that are manufactured, or otherwise produced, over a short period of time; and
- assets that are ready for their intended use or sale when acquired.
Capitalisation is required, not optional. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of its cost. All other borrowing costs are recognised as an expense when incurred. Directly attributable costs are those that would have been avoided if the expenditure on the qualifying asset had not been made.
That includes costs on specific loans taken for the asset and costs on general borrowings, because without the project the entity would have needed less cash.
Measuring the amount to capitalise
Funds borrowed specifically
When a loan is taken specifically to obtain a qualifying asset, the amount capitalised is the actual borrowing costs incurred on that loan in the period, less any investment income earned on the temporary investment of the unspent funds. For example, a company borrows ₦40,000,000 at 10% on 1 January 20X7 to build a plant. It spends ₦12,000,000 on 1 January and ₦18,000,000 on 1 July, and invests unspent funds at 6% a year.
- Interest incurred.
₦40,000,000 × 10% = ₦4,000,000. - Investment income, January to June.
(₦40,000,000 − ₦12,000,000) × 6% × 6/12 = ₦840,000. - Investment income, July to December.
(₦40,000,000 − ₦30,000,000) × 6% × 6/12 = ₦300,000. - Amount capitalised.
₦4,000,000 − ₦1,140,000 = ₦2,860,000.
Cost of the asset at 31 December: ₦30,000,000 + ₦2,860,000 = ₦32,860,000.
General borrowings
When funds are borrowed generally and used to obtain a qualifying asset, the amount capitalised is found by applying a capitalisation rate to the expenditure on that asset. The rate is the weighted average of the borrowing costs on the borrowings outstanding during the period, other than borrowings made specifically for a qualifying asset. The weighted average is total interest on those borrowings divided by their average balance.
The amount capitalised cannot exceed the borrowing costs actually incurred in the period. The rate applies from the date each item of expenditure is incurred.
For example, general borrowings are a ₦20,000,000 loan at 8% and a ₦30,000,000 loan at 12%. Interest is ₦1,600,000 + ₦3,600,000 = ₦5,200,000 on ₦50,000,000, so the rate is 10.4%. The company spends ₦6,000,000 on a qualifying asset on 1 February and ₦9,000,000 on 1 August, and the year end is 31 December.
- ₦6,000,000 × 10.4% × 11/12 = ₦572,000.
- ₦9,000,000 × 10.4% × 5/12 = ₦390,000.
- Amount capitalised: ₦962,000, which is below the ₦5,200,000 interest incurred, so the cap is not reached. The remaining interest is an expense.
When capitalisation starts, pauses and stops
- Commencement. Capitalisation starts only when all three conditions are met: expenditure on the asset is being incurred, borrowing costs are being incurred, and the activities needed to prepare the asset for use or sale have started.
- Suspension. Capitalisation is suspended during extended periods in which active development is suspended. Short delays that are a necessary part of the work, such as waiting for a regulatory approval that is part of the process, do not suspend it.
- Cessation. Capitalisation stops when substantially all the activities needed to prepare the asset for use or sale are complete. Costs already capitalised stay in the cost of the asset, and no more is added. If the asset is built in parts and each part can be used while the others are built, capitalisation stops for each part as it is completed.
Disclosure
The notes disclose the amount of borrowing costs capitalised in the period and the capitalisation rate used to determine it.
The ideas in more depth
Why capitalise?
The cost of an asset should include every cost needed to bring it to the condition and place in which it can earn income. Interest paid on money used to build the asset is such a cost. Expensing it would lower profit in the building years, and overstate profit later when the finished asset earns income but has a lower cost to depreciate.
Specific and general together
An asset can be funded partly from a specific loan and partly from general borrowings. The specific loan is capitalised first on its own terms. The general capitalisation rate is applied only to expenditure that exceeds the specific funds.
Sources and references
- IAS 23 Borrowing Costs: definitions, the amount eligible for capitalisation and the period of capitalisation.
- IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 2 Inventories, for the assets the standard applies to.
These points are stated as at 5 November 2026.
Worked examples
Example 1: a specific loan. On 1 January 20X7 a company borrows ₦40,000,000 at 10% for a plant. It spends ₦12,000,000 on 1 January and ₦18,000,000 on 1 July. Unspent funds earn 6% a year. Required: the interest capitalised and the cost of the plant at 31 December 20X7.
- Interest.
₦40,000,000 × 10% = ₦4,000,000. - Investment income.
First half: ₦28,000,000 × 6% × 6/12 = ₦840,000.
Second half: ₦10,000,000 × 6% × 6/12 = ₦300,000.
Total ₦1,140,000. - Capitalised.
₦4,000,000 − ₦1,140,000 = ₦2,860,000. - Cost.
₦30,000,000 + ₦2,860,000 = ₦32,860,000.
Example 2: general borrowings. A company has general borrowings of ₦20,000,000 at 8% and ₦30,000,000 at 12%. It spends ₦6,000,000 on a qualifying asset on 1 February and ₦9,000,000 on 1 August. Required: the interest capitalised for the year to 31 December.
- Rate.
(₦1,600,000 + ₦3,600,000) ÷ ₦50,000,000 = 10.4%. - First expenditure.
₦6,000,000 × 10.4% × 11/12 = ₦572,000. - Second expenditure.
₦9,000,000 × 10.4% × 5/12 = ₦390,000. - Total. ₦962,000. The cap of ₦5,200,000 total interest is not reached.
How to answer in the exam
- Define. Give borrowing costs and qualifying asset, and one example that is not a qualifying asset.
- Calculate. Separate specific and general. For specific: interest less investment income. For general: rate, then expenditure × rate × months outstanding ÷ 12.
- Period. Count months only from the date the three start conditions are met, less any months of suspension, and to the date of substantial completion.
- Total cost. Add the capitalised interest to the expenditure and state the result.
Common mistakes in the exam
- Forgetting to deduct investment income on a specific loan.
- Using the rate of the specific loan for expenditure funded by general borrowings.
- Capitalising more than the interest actually incurred.
- Capitalising during an extended suspension.
- Applying a full year’s interest to expenditure incurred part-way through the year.
- Treating capitalisation as a choice. It is required for qualifying assets.
Quick revision
- Capitalise borrowing costs directly attributable to a qualifying asset; expense the rest.
- Specific loan: actual interest less temporary investment income.
- General: rate = total interest ÷ average balance; amount = expenditure × rate × time; capped at interest incurred.
- Start: expenditure, borrowing costs and preparation activity all present. Suspend: extended suspension. Stop: substantially complete.
- Disclose the amount capitalised and the rate.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. A qualifying asset is one that:
- Is bought for cash
- Qualifies for a government grant
- Necessarily takes a substantial period of time to get ready for use or sale
- Is held for more than a year
Show the answer
C. That is the definition.
Question 2. Which of the following is NOT a qualifying asset?
- Inventory that is produced over a short period
- A power station under construction
- A self-constructed warehouse
- A ship under construction
Show the answer
A. Inventory produced over a short period is not a qualifying asset, nor is an asset ready for use when bought.
Question 3. Borrowing costs directly attributable to a qualifying asset are:
- Expensed
- Shown in other comprehensive income
- Capitalised as part of its cost
- Deferred and released over the loan term
Show the answer
C. Capitalisation is required.
Question 4. The amount capitalised on a specific loan is the actual borrowing cost:
- Plus investment income on unspent funds
- Less investment income on unspent funds
- Multiplied by the capitalisation rate
- Ignoring investment income
Show the answer
B. Investment income on temporarily unspent funds is deducted.
Question 5. The capitalisation rate for general borrowings is:
- The rate of the largest loan
- The weighted average rate on the general borrowings outstanding
- The average bank rate
- The rate on the specific loan
Show the answer
B. It excludes borrowings made specifically for a qualifying asset.
Question 6. Capitalisation of borrowing costs must be suspended when:
- Active development is suspended for an extended period
- The loan is repaid
- A new director is appointed
- The year end arrives
Show the answer
A. Extended suspension stops capitalisation.
Question 7. Capitalisation ceases when:
- The loan is fully drawn
- The asset is first used by a customer
- The first payment is made
- The asset is substantially complete
Show the answer
D. Capitalised costs remain in cost but no more is added.
Question 8. Borrowing of ₦2,000,000 at 10% is capitalised for a full year. The amount capitalised is:
- ₦100,000
- ₦400,000
- ₦200,000
- ₦20,000
Show the answer
C. ₦2,000,000 × 10% = ₦200,000, assuming no investment income.
Question 9. The amount capitalised from general borrowings cannot exceed:
- The cost of the asset
- The interest actually incurred in the period
- The amount of equity
- Nothing, as there is no limit
Show the answer
B. It is capped at the borrowing costs incurred.
Question 10. The notes must disclose:
- The amount capitalised and the capitalisation rate used
- The names of the lenders only
- The date of each drawdown only
- The loan agreements
Show the answer
A. The amount capitalised in the period and the rate used.
Section B style: written questions
Question 11 (10 marks). (a) Define borrowing costs and a qualifying asset. (3 marks) (b) Give TWO examples of assets that are not qualifying assets. (2 marks) (c) State when capitalisation of borrowing costs starts, is suspended and ceases. (5 marks)
Question 12 (15 marks). Oyo Builders borrows ₦60,000,000 at 9% on 1 January 20X5 to build a factory, a qualifying asset. It spends ₦20,000,000 on 1 January, ₦25,000,000 on 1 April and ₦15,000,000 on 1 October. Unspent funds are invested at 5% a year. (a) Calculate the borrowing cost incurred. (2 marks) (b) Calculate the investment income earned in 20X5. (6 marks) (c) Calculate the amount capitalised and the cost of the factory at 31 December 20X5.
(4 marks) (d) State how the ₦875,000 would be treated if the loan were a general borrowing. (3 marks)
A further written question
Question 13 (20 marks). Ikorodu Plastics has general borrowings of a 12% debenture of ₦40,000,000 and a 15% bank loan of ₦10,000,000, both outstanding all year. On 1 March 20X6 it borrows ₦24,000,000 at 11% specifically to build a plant, and spends all of it that day. On 1 September 20X6 it spends a further ₦8,000,000 on the plant, funded from general borrowings. The year end is 31 December.
Construction is suspended for two months, from 1 October to 30 November 20X6, because of a licence dispute.
(a) Calculate the capitalisation rate for general borrowings. (3 marks)
(b) Calculate the borrowing costs capitalised on the specific loan, with and without the suspension. (5 marks)
(c) Calculate the borrowing costs capitalised on the general borrowings, with and without the suspension. (5 marks)
(d) State the cost of the plant at 31 December 20X6 allowing for the suspension, and the interest on the specific loan that is expensed. (4 marks)
(e) Explain why the suspension matters. (3 marks)
Model answers
Show the model answer to Question 11
(a) Borrowing costs are interest and other costs an entity incurs in connection with the borrowing of funds. (1.5) A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. (1.5)
(b) (1 mark each, any two) Inventory made over a short period; an asset that is ready for use or sale when bought.
(c) Start: when expenditure on the asset is being incurred, borrowing costs are being incurred and preparation activities have started. (2) Suspension: if active development is suspended for an extended period. (1.5) Cessation: when the asset is substantially complete; amounts already capitalised stay in cost. (1.5)
Show the model answer to Question 12
(a) ₦60,000,000 × 9% = ₦5,400,000 (2).
(b)
- January to March.
₦60,000,000 − ₦20,000,000 = ₦40,000,000 unspent (1) - ₦40,000,000 × 5% × 3/12 = ₦500,000 (2).
- April to September.
₦60,000,000 − ₦45,000,000 = ₦15,000,000 unspent (1) - ₦15,000,000 × 5% × 6/12 = ₦375,000 (1).
- October to December: all funds spent, so nil (1).
- Total ₦875,000.
(c)
- Capitalised.
₦5,400,000 − ₦875,000 = ₦4,525,000 (2). - Cost.
₦60,000,000 + ₦4,525,000 = ₦64,525,000 (2).
(d) Investment income on general borrowings is not deducted when applying a capitalisation rate to expenditure (1). The amount capitalised would be expenditure × the weighted average rate (1), capped at the interest incurred (1).
Show the model answer to Question 13
(a)
- Interest.
₦40,000,000 × 12% = ₦4,800,000 and ₦10,000,000 × 15% = ₦1,500,000, total ₦6,300,000 (2). - Rate.
₦6,300,000 ÷ ₦50,000,000 = 12.6% (1).
(b)
- Without suspension.
₦24,000,000 × 11% × 10/12 = ₦2,200,000 (2). - With suspension.
eight months of active development, ₦24,000,000 × 11% × 8/12 = ₦1,760,000 (3).
(c)
- Without suspension.
₦8,000,000 × 12.6% × 4/12 = ₦336,000 (2). - With suspension.
two months, ₦8,000,000 × 12.6% × 2/12 = ₦168,000 (3).
(d)
- Cost.
₦24,000,000 + ₦8,000,000 + ₦1,760,000 + ₦168,000 = ₦33,928,000 (2). - Specific loan interest expensed for the suspension.
₦24,000,000 × 11% × 2/12 = ₦440,000 (2).
(e) Costs incurred during an extended suspension are not costs of getting the asset ready (1), so they are expensed instead of being added to the asset (1). Capitalising them would overstate the asset and profit. (1)
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