When must borrowing costs be capitalized under IAS 23, and how do you calculate the amount for a project financed from the group's general borrowings?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Borrowing costs directly attributable to acquiring or constructing a qualifying asset — one that necessarily takes a substantial period to get ready, like a plant, a development property or certain intangibles — MUST be capitalized; expensing is not a choice under IFRS. Specific borrowings are simple: actual interest incurred minus investment income on temporarily surplus funds. General borrowings need the capitalization rate: the weighted average rate on the group's general debt pool, applied to the expenditure on the asset — with capitalized amounts capped at total borrowing costs actually incurred. Time boundaries matter: capitalization starts when expenditure, borrowing costs and preparation activities are all underway; it SUSPENDS during extended periods where active development pauses; and it CEASES when the asset is substantially ready — not when it starts operating profitably. Group nuance: in consolidated statements the rate comes from external group debt, since intragroup interest eliminates — a subsidiary capitalizing interest on an intercompany loan reverses at group level and re-measures against the group's external rate. Inventory manufactured in large quantities on a repetitive basis is the standard exclusion worth naming.
WHAT INTERVIEWERS LISTEN FOR
- ✓mandatory for qualifying assets — no policy choice
- ✓specific: actual interest minus temporary investment income
- ✓general: weighted-average rate × expenditure, capped
- ✓start/suspend/cease boundaries
- ✓group view: external debt rate, intragroup interest eliminates
COMMON MISTAKES
- ✗treating capitalization as optional
- ✗capitalizing intragroup interest at consolidated level
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