Borrowing costs: which months of interest belong in the asset
A company borrows 1,000,000 to build a facility and pays 5,000 of interest every month. Under IAS 23 as adopted in the UK, only part of that interest becomes cost of the asset. Capitalisation needs a qualifying asset. It starts when expenditure, borrowing costs and necessary preparation activities all exist, is suspended during an extended interruption of active development, and stops once substantially all the work to make the asset ready is complete. Interest outside those dates is an expense, whatever the lender calls the facility.
First, check the asset and the framework
Borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset form part of its cost. Other borrowing costs are expensed. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale (IAS 23, paragraphs 1, 5 and 7 to 10). The standard sets no fixed twelve-month test. Financial assets and assets ready for use when acquired are not qualifying assets, so a machine bought ready to run does not qualify. The standard need not be applied to qualifying assets measured at fair value or to inventories produced in large quantities on a repetitive basis (paragraphs 4 and 7).
The reporting framework matters too. HM Treasury's Government Financial Reporting Manual for 2026/27 requires public-sector entities within its scope to expense borrowing costs on qualifying assets held at fair value. That is a narrow interpretation for those entities, not the rule for private IFRS reporters, but it shows why the measurement basis is checked first. IAS 23's core principle has applied since annual periods beginning on or after 1 January 2009, so none of this is a 2026 change.
Start, suspend, stop
Capitalisation starts only when three things all exist: expenditure on the asset, borrowing costs, and activities necessary to prepare it. Necessary technical and administrative work before physical construction can count. Simply holding an asset with no development work does not (paragraphs 17 to 19).
Suspend during an extended period in which active development is interrupted. Do not normally suspend while substantial technical and administrative work continues, or when a temporary delay is a necessary part of getting the asset ready, so not every site closure stops capitalisation. Stop when substantially all the activities needed to prepare the asset are complete. If parts are finished and usable separately while work continues on others, stop for each completed part (paragraphs 20 to 25).
The amount depends on the funding. For a specific borrowing, capitalise the actual borrowing costs less any income from temporarily investing the funds. For general borrowings, apply a weighted average capitalisation rate to the expenditure on the asset, capped at the borrowing costs actually incurred, rather than to the whole loan balance (paragraphs 12 to 15). Disclose the amount capitalised and the capitalisation rate used (paragraph 26).
Sources and context, checked :
A hypothetical project year
This example is hypothetical and uses generic currency units. A specific 1,000,000 loan is outstanding all year at a simple 6% annual rate, so interest is 5,000 a month, with no fees and no temporary investment income. Enough project expenditure has been incurred, and all three start conditions first hold on 1 March. Necessary work is active from March to June. July and August are an extended shutdown with no substantive technical or administrative work and no delay that is part of the process. Work resumes in September and the asset is ready on 30 November.
In capitalised months the journal is Dr asset under construction 5,000, Cr interest payable 5,000. In other months it is Dr finance cost 5,000, Cr interest payable 5,000. Capitalised plus expensed interest equals the 60,000 charged on the loan, and the loan principal is the same either way. If the 1,000,000 was the only other eligible project cost, the asset's cost is 1,035,000 before depreciation or impairment. Capitalised interest does not protect the asset from an IAS 36 or IAS 2 write-down.
Fees, effective interest, currency differences, general borrowing pools, grants that reduce eligible expenditure and staged spending all need more work than this simple case. Tax deductibility and FRS 102 policy choices are separate questions.
| Hypothetical period | Status | Interest capitalised | Interest expensed |
|---|---|---|---|
| January to February | Start conditions not yet met | 0 | 10,000 |
| March to June | Active preparation | 20,000 | 0 |
| July to August | Extended shutdown, no substantive work | 0 | 10,000 |
| September to November | Active preparation, ready 30 November | 15,000 | 0 |
| December | Asset ready | 0 | 5,000 |
| Total | 60,000 of interest | 35,000 | 25,000 |
A timeline finance and the project share
We suggest a project timeline maintained jointly by finance and project management. Keep the qualifying asset and scope conclusion, project payment dates, loan terms and effective interest support, evidence of necessary activity, periods of active work, the reason for each interruption, completion dates for the asset or separately usable parts, temporary investment returns and the calculation. Review the dates with the project lead monthly, and reconcile capitalised plus expensed interest to the borrowing cost records.
At completion
Ask the project lead for a dated confirmation that the asset is ready. From that date, stop capitalising, even if final invoices or minor administration are still outstanding.