How to Capitalize Borrowing Costs on Project Finance Funding a Qualifying Development Asset Under IAS 23
Capitalizing interest on a project finance facility used exclusively to fund a qualifying offshore development asset.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Development Assets — AUC (Borrowing Cost) | Asset (+) | 12,000,000.00 | - |
| Interest Expense (Capitalized — IAS 23) | Expense (-) | - | 12,000,000.00 |
💡 Accountant's Note
Under IAS 23, borrowing costs directly attributable to a qualifying development asset are capitalized. For large offshore projects funded by project finance, this can be a substantial addition to the asset cost.
Practitioner & Systems Framework
💻 ERP Architecture
A qualifying asset under IAS 23 is one that takes a substantial period of time to get ready for its intended use — large offshore platforms, LNG plants, and pipeline systems all qualify. For specific project finance: capitalize actual borrowing costs on the project facility, net of any investment income on temporary investment of the loan proceeds. Capitalization commences when construction activities begin and ceases when the asset is substantially complete. Calculate monthly: loan drawn × interest rate = interest expense → credit to interest expense (reversing the P&L charge) and debit to AUC.
⚠️ Audit Flags
Capitalized borrowing costs are a significant line item on large offshore projects — on a $5 billion LNG project with a 5-year construction period, capitalized borrowing costs could exceed $500 million. Auditors verify: (a) the borrowing cost is attributable to the qualifying asset (specific vs. general borrowing calculations), (b) capitalization has ceased at the correct commissioning date, and (c) investment income on temporary fund balances is correctly netted. The commencement and cessation of capitalization dates are critical.
📄 Required Documentation
Project finance facility agreement (confirming the facility is specifically for the development asset), monthly draw-down schedule, interest calculation (drawn amount × rate), investment income earned on temporary deposits of undrawn funds (to be netted), AUC balance roll-forward showing capitalized borrowing cost separately, commissioning date (capitalization cessation), and IAS 23 accounting policy disclosure.
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