IAS 23 Borrowing Costs Explained (2025) + Free Checklist & Video

Updated: May 2025

Capitalizing borrowing costs under IAS 23 can be surprisingly tricky — especially with general borrowings, foreign currency loans, or intercompany financing.

In this guide, we will dive in to learn the key rules, give you worked examples, and help you avoid common traps.

💡 Bonus: Download the free IAS 23 Practical Checklist and watch a free video lecture.

Jump to section:

1. Free VIDEO lecture: Overview of IAS 23 in 7 minutes
2. Core Principle: What does IAS 23 Borrowing Costs say?
3. What are qualifying assets?
4. What are the borrowing costs?
5. How to capitalize borrowing costs?

• 5.1 Specific borrowings + example
• 5.2 General borrowings + example

6. Three burning questions related to IAS 23

• 6.1 Question #1: Can you capitalize interest cost in the cost of inventories?
• 6.2 Question #2: Can you capitalize foreign exchange loss on specifically borrowed money in a foreign currency?
• 6.3 Question #3: Can you capitalize interest cost on intercompany loan for qualifying assets?

7. DOWNLOAD IAS 23 Practical Capitalization Checklist (including disclosures)
8. Further reading & learning

 
 
Return to top

The core principle of IAS 23 Borrowing Costs is that you should capitalize borrowing costs if they are directly attributable to the acquisition, construction or production of a qualifying asset.

Other borrowing costs are expensed in profit or loss.

Let’s break this down.

Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale.

Note here that IAS 23 does not say it must necessarily be an item of a property, plant and equipment under IAS 16. It can also include some inventories or intangibles, too!

But what is a “substantial period of time”?

Well, that’s not defined in IAS 23, so here you need to apply some judgment. Normally, if an asset takes more than 1 year to be ready, then it would be qualifying.
 
Return to top

IAS 23 specifically mentions 3 types of borrowing costs that can be capitalized:

1. Interest expenses (refer to the effective interest method under IFRS 9/IAS 39);
2. Finance charges on leases under IFRS 16 Leases; and
3. Exchange differences on borrowings in foreign currencies, but only those representing the adjustment to interest costs.

However, IAS 23 is pretty silent on some types of expenses and there are doubts whether they are borrowing costs or not, for example:

• Interest cost on derivatives used to manage interest rate risk on borrowings;
• Dividends payable on preference shares (or other types of shares classified as liabilities);
• Gains or losses arising from early repayment of borrowings, etc.

Here again, we need to apply our knowledge from other IFRS standards and sometimes, make a judgment, too.
 
Return to top

IAS 23 differentiates between capitalizing borrowing costs on general borrowings and specific borrowings.

If you borrowed some funds specifically for the acquisition of a qualifying asset, then the capitalization is easy:

You simply capitalize the actual costs incurred less any income earned on the temporary investment of such borrowings.

Let me give you a short example:

Question:

On 1st May 20X1, DEF took a loan of CU 1 000 000 from a bank at the annual interest rate of 5%. The purpose of this loan was to finance a construction of a production hall.

The construction started on 1 June 20X1. DEF temporarily invested CU 800 000 borrowed money during the months of June and July 20X1 at the rate of 2% p.a.

What borrowing cost can be capitalized in 20X1? (Assume all interest was paid).

Answer:

Although the funds were withdrawn on 1st May, the capitalization can start only on 1st June 20X1 when all criteria were met (the construction had not started until 1st June).

Calculation:

• Interest expense: CU 1 000 000 x 5% x 7/12 = CU 29 167
  Note: this is very simplified calculation and if the loan is repayable in installments, then you need to take the real interest incurred (by the effective interest method).
• Less investment income: CU 800 000 x 2% x 2/12 = CU 2 667
• Total borrowing cost to capitalize in 20X1: CU 26 500

Just don’t forget that the borrowing cost in May 20X1 is expensed in profit or loss, as the capitalization criteria were not met in that period.

Now, there’s more trouble with capitalizing general borrowings, as you need to prepare a bit more calculations.

General borrowings are those funds that are obtained for various purposes and they are used (apart from these other purposes) also for the acquisition of a qualifying asset.

In this case, you need to apply so-called capitalization rate to the borrowing funds on that asset, calculated as the weighted average of the borrowing costs applicable to general pool.

To illustrate it, let me give you an example about capitalizing borrowing costs on general borrowings.

Question:

KLM had the following loans in place at the beginning and end of 20X1:

The bank loan at 6% p.a. was taken in July 20X1 to finance the construction of a new production hall (construction began on 1 March 20X1).

The bank loan at 8% p.a. and debenture stock were taken for no specific purpose and KLM used them to finance general spending and the construction of a new machinery.

KLM used CU 60 000 for the construction of the machinery on 1 February 20X1 and CU 25 000 on 1 September 20X1.

What borrowing cost should be capitalized for the new machinery?

Answer:

You ignore bank loan at 6% p.a., because it is a specific borrowing for another asset.

Only general borrowings relate to the financing of the new machinery and therefore, we need to calculate the capitalization rate:

• Weighted average rate = (8% x 130 000 /(130 000+50 000)) + (5.5% x 50 000/(130 000+50 000)) = 5.78%+ 1.53% = 7.31%
• Borrowing costs for the new machinery in 20X1 = CU 60 000 x 7.31% x 11/12 + CU 25 000 x 7.31% x 4/12 = CU 4 021 + CU 609 = CU 4 630.

 
Return to top

6. Three burning questions in capitalizing borrowing cost

After we know the basics, let me give you my opinion on 3 the most common and often questions I get in relation to capitalizing borrowing cost.

I receive these questions quite often, so let me shed some light there.
 

It depends.

In most cases, inventories do not take a substantial period to get ready and in this case no, you cannot capitalize.

But here, there are some examples of inventories that can take a substantial period to complete:

• Wine, cheese or whiskey that matures in bottle or cask for a long period of time;
• Large items of equipment, such as aircraft, ships etc.

In this case, you can capitalize borrowing cost, but it’s up to you if you will or won’t.

While you have no choice for PPE (you have to capitalize), you have a choice for inventories: either you capitalize, or expense in profit or loss.
 
Return to top

No, you cannot do it fully.

Yes, IAS 23 says that exchange differences on foreign currency borrowings are a borrowing cost to the extent that they are regarded as an adjustment of interest cost.

Simply speaking – you can capitalize the difference between the interest on the foreign currency loan and the hypothetical interest expense in your own (functional currency), because that’s regarded as borrowing cost.

The rest must be expensed in profit or loss.
 
Return to top

Yes, in the separate financial statements of the borrowing company.

However, be a bit careful about the consolidated financial statements, because based on the intercompany relationship (subsidiary or associate?), the intercompany loan might be eliminated.

Also, let me point out one more issue in relation to intercompany loans: often, they are provided interest-free.

Under IFRS 9, you should recognize almost all financial instruments at their fair value (sometimes plus transaction cost) and if a subsidiary gets an interest-free loan from a parent, it’s nominal amount is not at fair value.

Therefore, a subsidiary needs to set the fair value of the loan received using the market interest rates and book the difference between the loan’s fair value and the cash received in profit or loss (based on the substance of a transaction).

Then, interest expense calculated by the effective interest method is capitalized.

I know, this might sound odd: the loan is interest-free, but you still need to capitalize some borrowing cost on it. Careful!
 
Return to top

Return to top

Explore more on IAS 23: Visit this page to access the full library of all IAS 23-related articles, videos, and examples published by CPDbox.

Learn IFRS with real examples – not just theory.

Return to top