Capitalised Interest: How Companies Park Borrowing Costs in Assets and What It Hides

A company announces a new plant, borrows heavily to build it, and yet the finance cost line in its quarterly results barely moves. Where did the interest go? Very often the answer is capitalised interest: borrowing costs that never hit the profit and loss statement in the year they are paid, because the accounting rules let the company add them to the cost of the asset it is building. It is perfectly legal, and it makes economic sense. It can also make a heavily indebted company look a lot more comfortable than it really is, which is why we think every results reader should know how to spot it.

This guide covers what the rules say, three worked examples in rupees, and the specific places in an annual report where capitalised interest tends to hide. All company figures below are hypothetical and chosen to keep the arithmetic simple.

What capitalised interest actually means

Investopedia defines capitalised interest as the cost of borrowing to acquire or construct a long-term asset. Unlike ordinary interest, it is not expensed straight away. It is added to the cost of the asset on the balance sheet, and it reaches the income statement slowly, in instalments, through depreciation over the asset’s useful life.

The logic is the matching principle. A power plant earns nothing while it is being built. If the interest on the loan that paid for it is charged against profit during construction, the costs land years before the revenue the plant will eventually produce. Capitalising the interest ties the cost of the asset, financing included, to the period in which the asset actually earns.

In India, listed companies following Ind AS deal with this under Ind AS 23, Borrowing Costs. It is built on the international standard, IAS 23, and its own comparison appendix lists only a handful of differences, chiefly extra guidance on how foreign exchange losses on foreign currency loans can be treated as an adjustment to interest. The core principle is the same in both: borrowing costs that are directly attributable to acquiring, constructing or producing a “qualifying asset” form part of that asset’s cost, and all other borrowing costs are expensed.

One point that surprises people: under the current rules this is not optional. The IFRS Foundation’s summary of IAS 23 notes that the revised standard issued in March 2007 removed the option of simply expensing such borrowing costs immediately. If the asset qualifies, the interest goes into the asset.

What counts as a qualifying asset

The standard defines a qualifying asset as one that “necessarily takes a substantial period of time to get ready for its intended use or sale.” The word “necessarily” does a lot of work there. An asset that is ready to use the day you buy it is not a qualifying asset, however much you borrowed to pay for it.

IAS 23 lists the kinds of assets that may qualify depending on the circumstances:

• manufacturing plants
• power generation facilities
• investment properties
• intangible assets
• inventories
• bearer plants

Financial assets do not qualify, and neither do inventories produced over a short period. The standard also does not require capitalisation for inventories made in large quantities on a repetitive basis. In practice, the sectors where you meet capitalised interest most often are the ones building big things slowly: power, roads and infrastructure, cement and steel capacity, telecom networks, and real estate.

Real estate has a wrinkle worth knowing. An IFRS Interpretations Committee agenda decision from March 2019, printed with the IAS 23 text, looked at a developer that sells flats in a building while it is still being built and recognises revenue over time. In that fact pattern, the committee concluded that the receivables, the contract assets and even the unsold part-built units were not qualifying assets, because the developer intended to sell the unsold units in their current condition as soon as it found buyers. The conclusion depends on the facts, so we would not generalise it to every developer, but it shows the rules are narrower than many people assume.

When capitalisation starts, pauses and stops

The timing rules matter because they decide how long interest can be kept off the income statement.

Start. A company begins capitalising on the date it first meets all three conditions: it is spending on the asset, it is incurring borrowing costs, and it is carrying out the activities needed to get the asset ready. Those activities can include technical and administrative work before physical construction, such as obtaining permits.

Pause. If active development stops for an extended period, capitalisation must be suspended. The standard describes interest during such a halt as the cost of holding a partially completed asset, which does not qualify. There are exceptions. Capitalisation continues during substantial technical and administrative work, and during temporary delays that are a normal part of the process. The standard’s own example is a bridge whose construction is held up by high water levels that are common in that region during the construction period.

Stop. Capitalisation ends when substantially all the activities needed to prepare the asset are complete. Routine administrative work or minor decoration to a buyer’s specification does not keep it going. If an asset is built in parts and each part can be used on its own, capitalisation stops part by part. Ind AS 23 gives a business park of separately usable buildings as one example, and a steel mill whose processes run in sequence, so the whole plant must be finished before any part is usable, as the other.

Capitalised interest does not make borrowing cheaper. It only changes the year in which the cost shows up in profit.

Worked example 1: a specific loan for a new plant

Say a mid-sized cement maker borrows ₹500 crore at 9% a year specifically to build a new grinding unit. Construction takes two years, and we will assume all of it qualifies.

• Annual interest on the loan: ₹500 crore × 9% = ₹45 crore.
• In year 1, the company has not spent all the money yet. It parks the unspent portion in short-term deposits and earns ₹3 crore on them.

For loans taken specifically for a qualifying asset, the standard says the amount capitalised is the actual borrowing cost for the period minus any investment income earned on temporarily invested funds. So:

• Year 1 capitalised interest: ₹45 crore − ₹3 crore = ₹42 crore
• Year 2 capitalised interest (no idle funds left): ₹45 crore
• Total capitalised over construction: ₹42 crore + ₹45 crore = ₹87 crore

When the unit starts operating, its book cost is ₹500 crore of construction spending plus ₹87 crore of capitalised interest, or ₹587 crore. If it is depreciated straight-line over 25 years with no residual value, the annual depreciation charge is ₹587 crore ÷ 25 = ₹23.48 crore. Of that, ₹87 crore ÷ 25 = ₹3.48 crore a year is really the old interest, now arriving dressed as depreciation.

Notice what happened to the ₹87 crore. During the two building years it never appeared as a finance cost. Over the next 25 years it trickles into profit at ₹3.48 crore a year, below EBITDA, inside the depreciation line. Investopedia makes the same point with a dollar example: over the long run, capitalised and expensed interest have the same total effect on the financial statements. Only the timing differs.

Worked example 2: how it changes the ratios you look at

Timing sounds harmless until you look at the ratios analysts use to judge debt. Take a company in a building year with these hypothetical numbers:

• Operating profit (EBIT): ₹120 crore
• Interest on the project loan, all capitalised: ₹40 crore
• Interest on other loans, expensed: ₹15 crore
• Total interest the company actually incurred: ₹55 crore

The income statement shows a finance cost of only ₹15 crore. Profit before tax comes to ₹120 crore − ₹15 crore = ₹105 crore. Had all the interest been expensed, profit before tax would have been ₹120 crore − ₹55 crore = ₹65 crore.

Now the interest coverage ratio. On reported numbers it is ₹120 crore ÷ ₹15 crore = 8 times, which looks very safe. Measured against the full interest bill it is ₹120 crore ÷ ₹55 crore, about 2.2 times. Same company, same lenders, same cash leaving the bank. The capitalised version simply leaves most of the interest out of the denominator.

That gap is not a trick. The plant really will earn later. But the lenders want their ₹55 crore this year, from this year’s profits and cash. If the project is delayed, or earns less than planned, the reported coverage number gives you very little warning.

On paper the company covers its interest eight times. Against the bill it actually pays, it is closer to two.

Worked example 3: general borrowings and the capitalisation rate

Most large companies do not borrow neatly project by project. Money comes from a pool of loans and bonds. For that case, IAS 23 and Ind AS 23 say the company applies a capitalisation rate to its spending on the qualifying asset. The rate is the weighted average cost of all borrowings outstanding during the period, excluding loans taken specifically for a qualifying asset until that asset is substantially complete. And the amount capitalised cannot exceed the borrowing costs actually incurred in the period.

A hypothetical example. A company has two general loans outstanding all year:

• ₹200 crore at 8%, costing ₹16 crore
• ₹300 crore at 10%, costing ₹30 crore

Total cost ₹46 crore on total borrowings of ₹500 crore gives a capitalisation rate of ₹46 crore ÷ ₹500 crore = 9.2%.

If the average spending on its new warehouse project during the year was ₹150 crore, the capitalised interest is ₹150 crore × 9.2% = ₹13.8 crore. That is well below the ₹46 crore ceiling, so the full ₹13.8 crore goes into the asset and the remaining ₹32.2 crore is expensed. The standard notes that the average carrying amount of the asset during the period, including interest already capitalised, is normally a reasonable approximation of the spending figure to use.

Here is where judgement creeps in. The standard itself admits that working out which borrowing costs are directly attributable can be difficult and needs judgement, for example when financing is managed centrally across a group. Two companies with similar projects can end up capitalising quite different amounts.

Where capitalised interest hides in an annual report

You will rarely find capitalised interest on the face of the income statement. Here is where we look instead:

1. The borrowing costs note. Both standards require two disclosures: the amount of borrowing costs capitalised during the period, and the capitalisation rate used. Search the notes for “borrowing costs capitalised” and compare the figure with the finance cost line.
2. Capital work in progress. Interest capitalised during construction sits inside CWIP until the asset is ready. A large CWIP balance that keeps ageing is a cue to ask how much interest is piling up inside it. Our explainer on reading CWIP and its ageing schedule walks through the disclosure.
3. The property, plant and equipment schedule. When a project is commissioned, the capitalised interest moves out of CWIP into the asset’s gross block and starts depreciating.
4. The accounting policy note. This tells you which assets the company treats as qualifying and how it handles foreign currency loans.

Red flags worth checking

Capitalised interest is normal for a company in a building phase. What deserves a second look is a pattern that does not fit the story.

• Stalled projects with interest still being capitalised. The rules require capitalisation to be suspended during extended periods when active development stops. If a project has clearly slowed but the capitalised amount keeps rising, ask management why.
• A capitalised share that keeps growing. If capitalised interest becomes a bigger and bigger slice of total interest year after year, without a matching jump in projects, the reported finance cost is understating the debt burden.
• Coverage ratios that look too comfortable. Recalculate interest coverage using total borrowing costs, capitalised plus expensed. If the two numbers are far apart, lean on the more conservative one.
• Projects that stay in CWIP for years. When the asset finally starts up, depreciation jumps, and some of that jump is old interest catching up with the income statement.

For a fuller checklist on reading a results release, from revenue quality to debt, see our pillar guide on how to analyse quarterly results of a company. Because capitalised interest also shapes the gap between accounting profit and cash, it pairs well with our piece on operating cash flow vs net profit.

Does capitalised interest change the cash?

No. As Investopedia points out, if the interest is due now, the cash outflow is the same whether the company capitalises it or expenses it. Capitalisation changes where and when the cost is reported, not how much the company pays its lenders this year. That is exactly why it matters for debt analysis: the cash obligation is real today, while the profit impact is spread across the asset’s life.

The short version

Capitalised interest is the borrowing cost a company adds to the value of a long-lived asset it is building, instead of charging it to profit straight away. Under Ind AS 23 and IAS 23 it is required for qualifying assets, starts when spending, borrowing and preparation are all under way, pauses when work genuinely stops, and ends when the asset is substantially ready. It does not change the total cost or the cash paid. It changes timing, and timing changes the ratios. When you study a company in the middle of a big capex cycle, find the borrowing costs note, add the capitalised amount back to the finance cost, and see whether the balance sheet still looks as relaxed.

Disclaimer: This article is for education and information only. It is not investment advice or a recommendation to buy or sell any security. All company figures in the worked examples are hypothetical. Accounting treatment depends on each company’s facts and policies; consult a SEBI-registered adviser before making investment decisions.