| Borrowing | Principal | Rate | Interest |
|---|---|---|---|
| Term loan A | 600.00 | 10.00% | 60.00 |
| Working capital facility | 300.00 | 11.50% | 34.50 |
| NCDs | 400.00 | 9.00% | 36.00 |
| Total / weighted rate | 1300.00 | 10.04% | 130.50 |
Ind AS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the cost of that asset; all other borrowing costs are expensed as incurred. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale — the standard does not define a bright-line duration, though roughly 12 months has long been used as a practical, rebuttable yardstick carried over from the erstwhile AS 16 guidance. Financial assets, and inventories that are routinely manufactured or produced in large quantities on a repetitive basis over a short period, do not qualify regardless of how long production takes.
For borrowings taken specifically for the purpose of obtaining a qualifying asset, the capitalisable amount is the actual borrowing costs incurred on that borrowing during the period, less any income earned on the temporary investment of those borrowings pending their expenditure on the asset. For borrowings that are not specific — the general pool — the entity determines a capitalisation rate: the weighted average of the borrowing costs applicable to all borrowings outstanding during the period, other than borrowings made specifically for a qualifying asset. That rate is applied to the expenditure on the asset funded from the general pool, and the resulting capitalised amount is capped at the actual borrowing costs incurred on the general pool during the period — it can never exceed the total general borrowing costs actually incurred.
Capitalisation begins only when all three conditions are met simultaneously: expenditure on the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress. It is suspended during extended periods in which active development is interrupted — but not for routine technical or administrative work, or for a temporary delay that is a necessary part of the process of getting the asset ready. Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete, even if minor finishing modifications remain outstanding — further borrowing costs from that point are expensed.
A company builds a qualifying plant. It has a ₹800 L loan taken specifically for the project at 9.5% for the full year, earning ₹6 L on temporarily parked funds. Its general pool is a ₹600 L term loan at 10%, a ₹300 L working-capital facility at 11.5%, and ₹400 L of NCDs at 9% (total ₹1,300 L, ₹126.5 L interest). ₹500 L of expenditure on the asset was funded from the general pool.
