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IAS 23

Borrowing Costs

IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the cost of that asset, with all other borrowing costs recognised as an expense in the period incurred. [S1]

Effective 2009-01-01Related: IAS 16 · IAS 2 · IAS 40 · IAS 21 · IFRS 9

Overview

The core principle of IAS 23 is narrow but consequential: borrowing costs that would have been avoided if the expenditure on a qualifying asset had not been made are capitalised as part of that asset's cost, rather than expensed as incurred. [S1] A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale — typically property under construction, manufacturing plant being built, or certain inventories requiring a long production process — while assets already ready for use or sale, and assets measured at fair value, are not qualifying assets. [S2] Borrowing costs include interest calculated using the effective interest method, finance charges on lease liabilities, and exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.

Why it matters

For any Nigerian business undertaking a significant capital project — a new factory, a commercial property development, a power plant — financed wholly or partly by borrowing, whether interest is capitalised into the asset's cost or expensed immediately can materially shift reported profit during the construction period and change the asset's carrying amount (and therefore future depreciation) for years afterwards. In a high-interest-rate environment, this is not a marginal, technical distinction: it can be one of the largest single accounting judgements affecting a construction-heavy company's reported results during a build phase.

Scope

Applies to accounting for borrowing costs; it does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability. An entity is not required to apply IAS 23 to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset measured at fair value (for example, biological assets), or to inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis over a short period of time.

Key definitions

term
Borrowing costs
definition
Interest and other costs incurred by an entity in connection with the borrowing of funds, including interest expense calculated using the effective interest method, finance charges on lease liabilities, and exchange differences from foreign currency borrowings to the extent regarded as an adjustment to interest costs.
term
Qualifying asset
definition
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
term
Capitalisation rate
definition
The weighted average of the borrowing costs applicable to an entity's general borrowings outstanding during a period, used to determine borrowing costs eligible for capitalisation when general (rather than specific) borrowings fund a qualifying asset.
term
Substantial period of time
definition
Not specifically defined by IAS 23 as a fixed duration, requiring judgement based on the facts and circumstances, though assets ready for use or sale in a short period would not typically qualify.

Recognition

An entity capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset, once capitalisation conditions are met: expenditures for the asset are being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress (which includes technical and administrative work prior to physical construction, but not periods during which an asset is held without any development activity changing its condition). Capitalisation is suspended during extended periods in which active development is interrupted, and ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete, even if minor administrative work continues or routine maintenance remains outstanding.

Initial measurement

Where funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is the actual borrowing costs incurred on that specific borrowing during the period, less any investment income earned on the temporary investment of those borrowed funds pending their expenditure on the asset. Where funds are borrowed generally and used, in part, to obtain a qualifying asset, the amount eligible for capitalisation is determined by applying a capitalisation rate (the weighted average of borrowing costs applicable to the entity's general borrowings outstanding during the period) to the expenditures on that asset, with the amount capitalised in a period not exceeding the total borrowing costs actually incurred during that period.

Subsequent measurement

Capitalisation continues to be assessed each period against the same three conditions (expenditure being incurred, borrowing costs being incurred, and preparation activities in progress), with capitalisation suspended during extended periods of interrupted development and resumed once activity restarts. Where the carrying amount of a qualifying asset (including capitalised borrowing costs) exceeds its recoverable amount or net realisable value, the asset is written down or off in accordance with the applicable Standard for that asset (e.g. IAS 36 or IAS 2).

Presentation

Capitalised borrowing costs are included within the cost of the qualifying asset in the statement of financial position (as part of PPE, inventory, or an intangible asset, as applicable), and are subsequently depreciated, amortised, or expensed through cost of sales along with the rest of the asset's cost. Borrowing costs not eligible for capitalisation are recognised as a finance expense in profit or loss in the period incurred.

Disclosure checklist

  • The amount of borrowing costs capitalised during the period.
  • The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation, where general borrowings have been used for the purpose of obtaining a qualifying asset.

Practical treatment

The practical discipline is applying the three capitalisation conditions rigorously each period, not simply capitalising all interest incurred during a construction project's overall timeline: if a project stalls for an extended period (e.g. awaiting a regulatory permit, or paused for funding reasons) with no active development work, capitalisation should be suspended for that period, and interest instead expensed. For general borrowings funding a mix of qualifying and non-qualifying expenditure (common where a company draws on a general working capital facility that partly funds a capital project), the capitalisation rate calculation needs to be maintained carefully, since it directly determines how much interest is capitalised versus expensed. See nigeria_notes for the Nigerian interest rate environment and tax interaction relevant to this calculation.

Common mistakes

  • Capitalising borrowing costs for the entire construction period without suspending capitalisation during extended periods when active development work has stopped.
  • Continuing to capitalise borrowing costs after substantially all activities necessary to prepare the asset for its intended use are complete, simply because minor administrative or finishing work remains.
  • Failing to net off investment income earned on temporarily invested specific borrowings before determining the amount eligible for capitalisation.
  • Applying an incorrect or stale capitalisation rate for general borrowings, not reflecting the actual weighted average cost of the entity's outstanding general borrowings during the period.
  • Treating inventories manufactured repetitively over a short period, or fair-value-measured assets, as qualifying assets eligible for interest capitalisation.
  • Capitalising borrowing costs in excess of the total borrowing costs actually incurred during the period, when using the general borrowings capitalisation rate method.

CFO checklist

  • Maintain a project-by-project log of capitalisation start, suspension and cessation dates, with evidence supporting each.
  • Calculate and document the capitalisation rate for general borrowings each period, reconciling it to actual outstanding general borrowing costs.
  • Net off any investment income on temporarily invested specific borrowings before capitalising borrowing costs.
  • Confirm capitalisation ceases once substantially all activities to prepare the asset for use or sale are complete, not when the project is formally 'closed out' administratively.
  • Separate genuine interest-cost-adjustment exchange differences on foreign currency borrowings from ordinary IAS 21 translation gains and losses.
  • Model Nigerian thin capitalisation and interest deductibility limits alongside the IAS 23 capitalisation calculation, since the two produce different numbers for different purposes.

FAQs

q
We paused construction of our new warehouse for four months while renegotiating a supplier contract — do we keep capitalising interest during that period?
a
No, not if the pause represents an extended period during which active development of the asset is interrupted; capitalisation should be suspended during that period, with the related borrowing costs expensed, and resumed once development activity restarts.
q
Our new factory is physically complete and operating, but final landscaping and minor snagging work is still ongoing — do we keep capitalising interest?
a
No. Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are complete; minor, ongoing finishing work does not extend the capitalisation period, even if some administrative or snagging tasks remain outstanding.
q
We used our general working capital facility to partly fund a capital project alongside day-to-day operations — how much interest do we capitalise?
a
Apply the entity's capitalisation rate (the weighted average borrowing cost on general borrowings outstanding during the period) to the expenditures incurred on the qualifying asset, capped at the total borrowing costs actually incurred on general borrowings during that period.

Nigeria application notes

Regulatory overlay

IAS 23 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] There is no Nigeria-specific carve-out from the capitalisation model itself; Nigerian-specific complexity arises mainly from the high and often volatile domestic interest rate environment and the separate Nigerian tax interest deductibility rules that apply alongside (not instead of) the IAS 23 accounting capitalisation requirement.

Tax interaction (Nigeria)

Nigerian thin capitalisation rules limit the tax deductibility of interest expense on connected-party debt (which the Nigeria Tax Act 2025 extends to cover all connected-party arrangements, not only foreign-party loans) to 30% of EBITDA in a given tax year, with excess interest carried forward for up to five years; this tax deductibility limit is an entirely separate question from whether the same interest is capitalised into a qualifying asset's cost under IAS 23, and a company should not assume the accounting-capitalised amount and the tax-deductible amount will be the same figure. [S4][S_TAX1][S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, pension contribution rates, and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, the Pension Reform Act 2014, PenCom guidance, and current NRS practice at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

Where a Nigerian company borrows in a foreign currency to fund a qualifying asset (common for large capital projects seeking lower foreign interest rates), exchange differences on that borrowing are included within borrowing costs eligible for capitalisation only to the extent they are regarded as an adjustment to interest costs — broadly, the portion of the exchange difference that compensates for a lower foreign interest rate compared to what an equivalent naira borrowing would have cost, referencing the CBN NFEM rate for translation. Naira volatility can otherwise generate large exchange differences on foreign-currency project debt that are not genuine interest-cost adjustments and should be recognised under IAS 21 rather than capitalised under IAS 23. [S6][S5]

SME practical note

Nigerian SME and mid-market clients undertaking capital projects financed by bank loans often either expense all interest during construction (missing a legitimate capitalisation opportunity that would better match cost to the asset's productive life) or capitalise interest for the entire nominal project duration regardless of actual construction activity levels; Outliers recommends maintaining a simple capitalisation log from the start of any material capital project to support a defensible IAS 23 position at year-end.

Common Nigerian pitfalls

  • Expensing all project finance interest by default, missing legitimate IAS 23 capitalisation opportunities for qualifying assets.
  • Continuing capitalisation through funding-driven construction delays without suspending it, since these delays typically do not meet the 'necessary' development-interruption exception.
  • Confusing the Nigerian thin capitalisation tax deduction limit (30% of EBITDA) with the IAS 23 accounting capitalisation calculation, assuming they must produce the same capitalised/deductible amount.
  • Capitalising the full exchange difference on foreign-currency project debt rather than isolating only the portion that is genuinely an adjustment to interest costs.

FRC pronouncements

No FRCN pronouncement specific to IAS 23 has been identified; the relevant FRCN context is its overarching mandate to promote IFRS compliance. [S3]

Worked examples

Capitalising interest on a specific borrowing for a qualifying asset

A Nigerian company borrows ₦600,000,000 specifically to fund construction of a new manufacturing plant (a qualifying asset), at an annual interest rate of 20%. Construction begins immediately and continues without interruption for the first six months of the year, during which the loan proceeds are fully drawn and spent on construction (no funds are temporarily invested).

Facts

Workings

Annual interest on the specific borrowing: 600,000,000 x 20% = 120,000,000

Interest for 6 months (the eligible capitalisation period): 120,000,000 x 6/12 = 60,000,000

No investment income to net off, since funds were fully and immediately applied to construction.

Journal entries

Capitalise the borrowing costs directly attributable to the qualifying asset under construction.

AccountDr (₦)Cr (₦)
Property, plant and equipment – plant under construction60,000,000
Interest payable / cash60,000,000

Capitalising interest using a capitalisation rate for general borrowings

A Nigerian company funds a warehouse construction project (a qualifying asset) partly from general borrowings, having no funds borrowed specifically for the project. During the year, the company's general borrowings outstanding were: a ₦400,000,000 loan at 18% per annum, and a ₦200,000,000 loan at 22% per annum. Expenditures on the warehouse during the period totalled ₦250,000,000.

Facts

Workings

Weighted average capitalisation rate: [(400,000,000 x 18%) + (200,000,000 x 22%)] / (400,000,000 + 200,000,000) = (72,000,000 + 44,000,000) / 600,000,000 = 116,000,000 / 600,000,000 = 19.33% (rounded)

Borrowing costs eligible for capitalisation: 250,000,000 x 19.33% = 48,333,333 (rounded to the nearest naira for illustration: 48,333,000)

This amount does not exceed total borrowing costs actually incurred during the period (72,000,000 + 44,000,000 = 116,000,000), so the full calculated amount is capitalised.

Journal entries

Capitalise borrowing costs on the qualifying asset using the weighted average capitalisation rate for general borrowings.

AccountDr (₦)Cr (₦)
Property, plant and equipment – warehouse under construction48,333,000
Interest payable / cash48,333,000

Sources & citations

  1. [S1]IAS 23 Borrowing Costs — IFRS Foundationaccessed 2026-07-18
  2. [S2]Borrowing Costs (IAS 23) — IFRS Communityaccessed 2026-07-18
  3. [S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  4. [S4]Nigeria - Corporate - Deductions — PwC Worldwide Tax Summariesaccessed 2026-07-18
  5. [S5]Monetary Policy Decisions — Central Bank of Nigeriaaccessed 2026-07-18
  6. [S6]Exchange Rates (NFEM, official) — Central Bank of Nigeriaaccessed 2026-07-18
  7. [S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
  8. [S_TAX2]The Nigerian Tax Reform Acts — PwC Nigeriaaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)