AS 16 (Borrowing Costs) is the Indian Accounting Standard that requires entities to capitalise borrowing costs directly attributable to qualifying assets and expense all other borrowing costs. This standard ensures that only relevant financing costs are included in the cost of long-term assets.

The Institute of Chartered Accountants of India (ICAI) issued AS 16 through the Companies (Accounting Standards) Rules, 2006, reaffirmed by the Ministry of Corporate Affairs (MCA) in the Companies (Accounting Standards) Rules, 2021. It has been mandatory for accounting periods beginning on or after 1 April 2000. The predecessor was the ICAI’s March 2000 standard.

For FY 2026-27, capital-intensive industries such as infrastructure and real estate remain most affected by AS 16. For example, road and port projects must track borrowing costs during construction and cease capitalisation once operations commence.

AS 16 at a Glance

AS 16 mandates that borrowing costs directly attributable to qualifying assets must be capitalised as part of asset cost; all other borrowing costs are expensed. This standard is primarily used by finance teams in manufacturing, infrastructure, and real estate sectors where large assets are constructed or acquired over time.

What is AS 16: Borrowing Costs?

AS 16 prescribes how entities account for borrowing costs incurred while acquiring or constructing long-term assets. The core principle is that only those borrowing costs directly related to qualifying assets are added to the asset’s cost; all others must be recognised as an expense immediately.

ICAI introduced this standard to align Indian practice with international norms and ensure consistency across industries. The predecessor was an earlier ICAI standard from March 2000; convergence with IAS 23/Ind AS 23 now ensures comparability with global financial reporting.

Statutory auditors, CFOs of capital-intensive companies, and CA students use this standard regularly when reviewing project financing or preparing annual accounts.

Objective of AS 16

• Prescribe the accounting treatment for borrowing costs.
• Require borrowing costs directly attributable to acquisition, construction or production of a qualifying asset to be capitalised as part of that asset’s cost.
• Require all other borrowing costs to be recognised as an expense in the period incurred.

By enforcing these objectives, AS 16 supports the “true and fair view” principle required by Section 129 of the Companies Act, 2013. Accurate allocation between asset cost and profit or loss ensures stakeholders can rely on reported results and asset values.

Who Must Apply AS 16?

Entities covered

All Level I, Level II, and Level III enterprises preparing financial statements under the Accounting Standards framework must apply AS 16 if they have qualifying assets. Ind AS-applicable companies follow Ind AS 23 instead.

*Level III includes small and medium-sized enterprises not covered by Levels I or II.

Scope exclusions

Borrowing costs outside scope:

• Actual or imputed cost of equity (including preferred capital).
• Borrowing costs not directly attributable to qualifying assets (these are expensed).

When the standard does not apply

Where a company is required to comply with Ind AS (e.g., listed companies per MCA roadmap), Ind AS 23 applies instead of AS 16. Preference share dividends classified as equity fall outside this standard’s scope, these are not treated as borrowing costs under any circumstances.

Key Definitions under AS 16

Recognition and Measurement under AS 16

When to recognise

An entity begins capitalising borrowing costs as part of a qualifying asset’s cost when three conditions are met:

Expenditure on acquisition/construction/production has started.

Borrowing costs are being incurred.

Activities necessary to prepare the asset for intended use or sale are underway.

(Refer Para 14.)

Capitalisation stops when substantially all activities needed to prepare the asset are complete (Para 19). If construction is interrupted for extended periods not related to bringing the asset ready for use/sale (for example, labour strikes), capitalisation must be suspended during such periods.

Initial measurement

For specific borrowings:

The entity must capitalise actual interest incurred during the period less any income earned from temporarily investing those funds before deployment.

Capitalised amount = Actual interest cost, Investment income from temporary deployment

(Refer Para 10.)

For general borrowings:

A capitalisation rate, weighted average cost of general borrowings outstanding, is applied to expenditure on qualifying assets during the period.

Capitalised amount = Weighted average expenditure × Capitalisation rate

The total amount capitalised cannot exceed total actual borrowing costs incurred in that period (Para 12).

Subsequent measurement

Once capitalised as part of a qualifying asset’s cost, such as property, plant and equipment, the amount is depreciated or amortised along with that underlying asset over its useful life per revised AS 10 or charged off if impaired/disposed.

Other borrowing costs not eligible for capitalisation must be recognised immediately as an expense in profit or loss in accordance with accrual principles.

Capitalisation Mechanism for Qualifying Assets

AS 16 adopts a dual approach similar to Ind AS 23:

• For specific borrowings, the actual interest cost less any investment income from idle funds is capitalised.
• For general borrowings, a weighted average capitalisation rate applies across relevant expenditures.

Suspension rules apply if there are significant interruptions; cessation occurs when substantial completion is achieved.

Unlike Ind AS/IFRS standards, which explicitly exclude inventories produced repetitively, AS 16 does not provide separate guidance here; professional judgement may be required regarding such inventory items’ eligibility for capitalisation.

In our audit practice we frequently observe confusion regarding cessation dates, entities must ensure that no further borrowing cost gets added once an asset is substantially ready for use/sale even if formal commissioning lags behind physical completion.

Worked Examples on AS 16

Example 1: Specific borrowing for plant construction

Scenario:

Sundaram Engineering Pvt Ltd borrows Rs 30 crore at 10% interest on 1 April 2025 specifically to construct a new fabrication unit. Construction begins 1 May 2025 after regulatory approval delay; completes 31 March 2026. Funds temporarily invested at 6% from 1-30 April resulting in Rs 0.15 crore investment income.

Computation Table

Journal Entry:

Dr CWIP Rs 2.75 crore

Dr Interest Expense (P&L) Rs 0.25 crore

Cr Interest Payable Rs 3 crore

Investment income Rs 0.15 crore credited separately to Other Income.

Example 2: General borrowings for qualifying asset

Scenario:

Ramesh Textiles Ltd undertakes a Rs 12 crore expansion using general-purpose loans outstanding at two rates as at 1 April 2025, Rs 25 crore at 9%, Rs 15 crore at 11%. Expenditure schedule: Rs 4 crore each on April/October/January; completion by March-end.

Computation Table

Journal Entry:

Dr CWIP Rs 0.683 crore

Cr Interest Expense (P&L) Rs 0.683 crore

Disclosure required regarding method/capitalisation rate used per Schedule III notes.

These examples illustrate both specific loan tracking and weighted-average approaches mandated by AS 16 compliance requirements in India’s regulatory environment.

Disclosure Requirements under AS 16

AS 16 requires entities to provide clear disclosures on borrowing costs in their financial statements, aligning with Schedule III to the Companies Act, 2013. Proper disclosure ensures transparency for users of financial statements and supports auditor conclusions under SA 700. The following table summarises mandatory disclosures:

Auditors must ensure that these disclosures are complete and consistent with underlying records, as required by SA 700.

Common Mistakes & Industry-Specific Considerations

Common errors auditors flag

• Failing to identify a qualifying asset and continuing to expense borrowing costs that should be capitalised.
• Capitalising borrowing costs beyond the date of substantial completion of the asset.
• Including ancillary borrowing costs (such as processing fees) without amortising them over the life of the borrowing.
• Failure to suspend capitalisation during extended interruptions.
• Capitalising on inventory items where AS 16 nominally applies but the inventory is produced repetitively (judgement-based exclusion may be appropriate).
• Treating preference share dividends as borrowing costs (preference shares classified as equity are outside AS 16 scope).

Industry application notes

Real estate:

Real estate developers typically meet AS 16 capitalisation criteria. The ICAI Guidance Note on Real Estate Transactions provides detailed guidance on when sales of units have been recorded and when capitalisation must cease. Developers must track project-wise expenditure and ensure cessation aligns with control transfer.

Infrastructure (BOT projects):

Borrowing costs during construction of BOT roads, ports, or power projects are capitalised to the concession asset under AS 16. Once operations commence, only further qualifying capex attracts capitalisation. Detailed tracking is essential for audit trail integrity.

Capital-intensive manufacturing:

Greenfield plants and major capacity expansions generally qualify for capitalisation. Auditors require dedicated project sub-ledgers to monitor expenditure versus borrowing periods. Entities must document interruptions and cessation dates carefully to avoid overcapitalisation.

AS 16 vs Ind AS 23 vs IFRS: Key Differences

The table below compares key aspects of AS 16, Ind AS 23, and IFRS (IAS 23):

India's carve-outs from IFRS primarily relate to inventories produced in large quantities on a repetitive basis and fair value measured assets. Ind AS aligns closely with IFRS but introduces explicit exclusions not present in legacy AS 16. Entities transitioning between frameworks must review these differences carefully.

Latest Amendments to AS 16 (FY 2026-27)

No amendments have been notified to AS 16 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.

Related Standards You Should Know

• [Ind AS 23](/ind-as-23-borrowing-costs/), Equivalent borrowing costs standard for Ind AS-applicable companies; substantively similar.
• [AS 10](/as-10-property-plant-and-equipment/), Capitalised borrowing costs become part of cost of PPE under revised AS 10.
• [AS 26](/as-26-intangible-assets/), Borrowing costs on internally developed intangible assets capitalised under AS 16.
• [AS 11](/as-11-foreign-exchange-rates/), Foreign exchange differences on borrowings; AS 16 cross-references AS 11 for translation principles.

Need Help with AS 16 Compliance?

Patron Accounting LLP supports Indian enterprises with end-to-end compliance on borrowing cost recognition and disclosure under AS 16. Our team brings decades of experience across statutory audit, financial reporting, and regulatory advisory.

Our services include:

• Statutory Audit
• Financial Reporting & Schedule III
• Disclosure Review
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About This Article

Reviewed by CA & CS Team · Patron Accounting LLP

Technical reviewer: CA Sundram Gupta, FCA

Last reviewed: 2026-05-02

Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021)) · IFRS Foundation