Capitalisation of Borrowing Costs: Foreign Exchange Gains and Losses under Ind AS 23

A practical framework for applying the exchange-difference provisions

Under Ind AS 23, foreign exchange differences from borrowings can be capitalised as borrowing costs if they are considered interest adjustments to interest costs for qualifying assets. This adjustment is capped at the difference between local and foreign currency borrowing costs. Any excess exchange loss is recognised in profit or loss. Subsequent exchange gains must first reverse previously recognised losses before being treated as gains under Ind AS 21. For multi-year loans, entities choose between discrete-period or cumulative approaches. The cumulative approach is often preferred to maintain consistency with gain treatment.

1. BACKGROUND AND INTRODUCTION

Foreign currency borrowings can create an accounting issue that is easy to overlook: the borrowing cost is not limited to the interest paid on the loan. Under Ind AS 23, certain exchange differences arising on foreign currency borrowings may also be regarded as an adjustment to interest costs. Where the borrowing is directly attributable to the acquisition, construction or production of a qualifying asset, the eligible borrowing costs are capitalised as part of the cost of that asset, subject to the general requirements