## Specific Borrowings – Definition

Borrowings taken specifically and exclusively for the acquisition, construction, or production of a particular qualifying asset.

---

## Formula for Eligible Borrowing Cost

```

Borrowing Cost Eligible for Capitalisation

= Actual Borrowing Cost during Construction Period

LESS: Income earned on Temporary Investment of idle loan funds

```

---

## Why Deduct Temporary Investment Income?

When a loan is drawn but funds are not yet fully deployed (temporarily idle), the entity may invest those funds. Income earned on such investment reduces the net cost of the borrowing — the asset is effectively partially self-financing during that period.

---

## Period of Capitalisation

Event	Effect
Expenditure on asset begins AND borrowing costs are being incurred AND preparatory activities are in progress	Capitalisation starts
Substantially all activities to prepare the asset are complete	Capitalisation stops
Active development suspended for extended period	Suspend capitalisation

> Capitalisation must stop at completion — even if the loan continues.

Worked example

### Example 1

Specific Borrowing — Basic:

Loan taken on 01-Apr-Y1: ₹100 cr @ 12% p.a. for 12 months

Building completed: 31-Mar-Y2

Idle funds temporarily invested → Income earned: ₹0.50 cr

	₹ Cr
Total borrowing cost (₹100 × 12% × 12/12)	12.00
Less: Income from temporary investment of idle funds	(0.50)
Borrowing cost eligible for capitalisation	11.50

Journal: Dr. Building A/c ₹11.50 cr, Cr. Interest A/c ₹11.50 cr

⚠️ Common exam mistakes

Forgetting to deduct income earned on temporary investment of idle specific borrowing funds
Including full loan period interest even if construction was completed before loan maturity — stop at completion date
Capitalising borrowing cost even when active construction is suspended — suspension requires capitalisation to pause
Not tracking the specific loan separately from general borrowings — specific loans must be accounted for independently

Bare-Act text Para 9 · AS 16 – Borrowing Costs · click to expand

To the extent funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

AS 16 – Specific Borrowings: Calculation of Eligible Borrowing Costs

Worked example

⚠️ Common exam mistakes