How to approach it
- Build a funding table: each payment date, amount, and which source paid for it, following the order the question gives.
- Specific loan: interest for the capitalisation period less income earned on funds not yet spent.
- Own funds (e.g. investments drawn down) carry no borrowing cost; they only push general borrowing later.
- General or running-finance funding: amount × rate × months used, stopping during any suspension and at completion.
- Reduce the general borrowing balance from the date any grant or other receipt was used to repay it.
Key rules to apply
- IAS 23: capitalise borrowing costs directly attributable to a qualifying asset from the date expenditure, borrowing costs and activities have all started.
- Deduct investment income earned on temporarily surplus specific funds.
- Suspend capitalisation during extended periods when active development stops (a management decision to pause, for example).
- Stop capitalising when substantially all activities to get the asset ready are complete.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Ignoring the drawdown of the company's own investments, which overstates the general borrowing used (examiners' point).
- Forgetting that a grant used to repay the running finance reduces the balance from that date.
- Capitalising interest during the paused period.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q4 without copying it.
Original practice question
Order of funding with a suspension
Work on a qualifying plant ran from 1 January to 31 December 2025, except for August 2025 when management paused it to redesign the layout. Payments: 1 March Rs 400m, 1 July Rs 500m, 1 November Rs 300m.
Funding order: a specific loan of Rs 600m at 12% drawn on 1 March (surplus kept on deposit at 8%), then a running finance facility at 15%.
Required: Calculate borrowing costs to capitalise for 2025.
Worked solution
Capitalisation runs 1 March to 31 December, excluding August: 9 months for the specific loan.
| Working | Rs m |
|---|---|
| Specific loan: 600 × 12% × 9/12 | 54.00 |
| Less deposit income: surplus 200 × 8% × 4/12 (Mar–Jun) | (5.33) |
| Running finance on 1 July payment: 300 × 15% × 5/12 (Jul, Sep–Dec) | 18.75 |
| Running finance on 1 Nov payment: 300 × 15% × 2/12 | 7.50 |
| Borrowing costs capitalised | 74.92 |
The 1 July payment of Rs 500m used the remaining Rs 200m of the specific loan and Rs 300m of running finance.
Answer: Capitalise Rs 74.92m.