How to approach it
- Fix the capitalisation window: start when physical work (not just preliminary design) and borrowing are both under way; end at substantial completion.
- Subtract any extended stoppage from the window.
- Specific loan: interest for the window less temporary investment income.
- General borrowings: work out the weighted capitalisation rate, then apply it to the amounts not funded by the specific loan, for the months each was outstanding in the window.
Key rules to apply
- IAS 23: capitalisation rate = general borrowing costs ÷ weighted average general borrowings outstanding.
- Activities that start capitalisation include technical and administrative work before physical construction, such as obtaining permits.
- Suspend capitalisation for extended periods when active development stops.
- Cease when substantially all activities are complete; minor decorative work does not extend the period.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Using 12, 11 or 9.5 months for the specific loan instead of the actual window (examiners' point).
- Capitalising up to the date decorative work finished.
- Applying the general rate to the whole payment instead of the part exceeding the specific loan.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q2 without copying it.
Original practice question
Specific and general borrowings with a stoppage
Construction of a qualifying warehouse started on 1 March 2025; work stopped for all of July 2025 because of a strike. The warehouse was substantially complete on 31 October 2025; painting continued until 30 November 2025.
Payments: 1 March Rs 200m, 1 June Rs 300m, 1 September Rs 250m. A specific loan of Rs 300m at 9% was drawn on 1 March; unused specific funds earned Rs 3m. General borrowings outstanding all year: Rs 400m at 8% and Rs 600m at 11%.
Required: Calculate borrowing costs to capitalise.
Worked solution
Window: 1 March–31 October less July = 7 months. Capitalisation rate = (32 + 66) ÷ 1,000 = 9.8%.
| Working | Rs m |
|---|---|
| Specific: 300 × 9% × 7/12 | 15.75 |
| Less investment income | (3.00) |
| General on 1 June payment beyond specific funds: 200 × 9.8% × 4/12 (Jun, Aug–Oct) | 6.53 |
| General on 1 September payment: 250 × 9.8% × 2/12 | 4.08 |
| Total capitalised | 23.37 |
Answer: Capitalise about Rs 23.37m.