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AS 16: Borrowing Costs

A professional application note for accounts teams: what the standard controls, where it appears in company accounting, how to apply it and what evidence reviewers expect. Animated notes with Play, Pause, Replay, English and Hindi voice options are included below.

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AS 16: Borrowing Costs: interactive explanation

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Professional scope: This is an implementation-oriented explanation for accountants, finance managers, controllers and reviewers responsible for company accounts.

1. What this standard controls

Borrowing costs directly attributable to acquisition, construction or production of a qualifying asset are capitalised, while other borrowing costs are expensed.

Current position: Included in the ICAI Accounting Standards framework, subject to entity applicability, notified rules and later amendments.

2. Where it appears in the real accounting world

01Plant construction and real-estate development
02Specific and general borrowings
03Temporary investment of borrowed funds
04Suspension and cessation of capitalisation

3. Practical application workflow

  1. Identify qualifying assets that take substantial time to become ready.
  2. Determine specific and general borrowing-cost pools.
  3. Commence when expenditure, borrowing cost and development activity exist.
  4. Suspend during extended interruption not necessary to prepare the asset.
  5. Cease when substantially all activities are complete.

4. Real-world application example

A factory project is funded partly from a specific loan and partly from general borrowings. Eligible interest is capitalised while active construction continues, reduced by applicable temporary investment income, and stops when the plant is substantially ready.

5. Journal-entry and accounting record pattern

CapitalisationDr CWIP / qualifying asset / Cr Interest payable or finance cost transfer.
Non-qualifying interestDr Finance cost / Cr Interest payable.

Entry wording is illustrative. Actual accounts, tax effects, dimensions and narration depend on the entity’s chart of accounts and facts.

6. Month-end and year-end control file

Controls to operate

  • Project-wise expenditure and financing schedule.
  • Capitalisation commencement/suspension/cessation memo.
  • General borrowing-rate calculation.
  • Reconciliation to lender statements.
  • Review of idle or delayed projects.

Common errors and red flags

  • Capitalising interest on all debt.
  • Continuing capitalisation after asset readiness.
  • Ignoring suspension during abnormal delay.
  • Including costs unrelated to financing.
  • No linkage between expenditure timing and borrowing cost.

7. Reviewer questions

  1. Is the asset a qualifying asset?
  2. When did active preparation begin?
  3. Which borrowing costs are directly attributable?
  4. Was any suspension period required?
  5. When was the asset substantially ready?

Related standards: AS 10, AS 11, AS 26

Authoritative reference:

Before approving a material conclusion, check the latest ICAI compendium, notified Companies (Accounting Standards) Rules, entity applicability and subsequent amendments.

ICAI Accounting Standards Compendium →
Companies (Accounting Standards) Rules and amendments →

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Professional note: This educational resource does not replace entity-specific analysis, the latest notified standard, law, regulation, audit judgment or professional advice.