## AS 16 – Specific Borrowings: How to Capitalise
When a loan is taken specifically to finance a qualifying asset, the treatment is straightforward but has one important adjustment.
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### Step-by-Step Approach
Step 1 – Identify net borrowing cost
```
Actual Interest on Specific Borrowing
LESS: Income earned by temporarily investing idle loan funds
= Net Borrowing Cost eligible for capitalisation
```
> Only for specific borrowings is this income deducted. For general borrowings the income offset does not apply.
Step 2 – Allocate proportionately across purposes
If the specific loan funds both QA and non-QA purposes, split the net BC in proportion to the amounts used for each purpose.
Step 3 – Capitalise the QA portion; expense the rest
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### Formula
```
BC to Capitalise = Net BC × (Expenditure on QA / Total Expenditure)
```
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### Key Rule
| Item | Specific Borrowing Treatment |
|---|---|
| Income from idle funds | Deduct before capitalising |
| Actual interest on loan | Starting point |
| BC for Non-QA portion | Charge to P&L |
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### Journal Entry
```
Dr. Asset (QA) – Cost of Qualifying Asset [BC capitalised]
Dr. P&L – Finance Cost [BC on Non-QA]
Cr. Interest Payable / Bank [Total interest]
```