Ind AS 23, Borrowing Costs, provides guidance on the accounting treatment of borrowing costs incurred by an entity. The standard aims to ensure that borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets are appropriately capitalized.
According to Ind AS 23, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset. Qualifying assets are those that take a substantial period of time to get ready for their intended use or sale. The capitalization of borrowing costs ceases when the asset is substantially ready for its intended use or sale.
If funds are specifically borrowed for the purpose of obtaining a qualifying asset, the borrowing costs incurred are typically easy to determine and directly attributable to that asset. However, when funds are borrowed generally and used for multiple purposes, the determination of borrowing costs to be capitalized requires the application of a capitalization rate based on the weighted average of borrowing costs applicable to the entity’s outstanding borrowings.
Ind AS 23 also requires entities to disclose the accounting policy adopted for borrowing costs, the capitalization rate used, and the amount of borrowing costs capitalized during the period.
