How to Capitalize Construction Loan Interest into the CIP Asset Under IAS 23
Adding monthly interest on a construction loan to the CIP asset during the build period as a qualifying borrowing cost.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Construction in Progress (CIP) | Asset (+) | 8,000.00 | - |
| Interest Payable / Cash | Liability/Asset (-) | - | 8,000.00 |
💡 Accountant's Note
Under IAS 23, interest on borrowings specifically used to finance a qualifying asset must be capitalized until the asset is ready for use.
Practitioner & Systems Framework
💻 ERP Architecture
A construction in progress asset qualifies for IAS 23 borrowing cost capitalization because it takes a substantial period to prepare for use. For specific construction loans: capitalize actual interest cost on the drawn balance, net of any investment income earned on temporarily investing undrawn funds. For general borrowings: apply the weighted average borrowing rate to the qualifying asset expenditure. Capitalization begins when (a) expenditures are being incurred, (b) borrowing costs are being incurred, and (c) activities to prepare the asset are in progress. Capitalization ceases when the asset is substantially complete (transferred from CIP to the fixed asset).
⚠️ Audit Flags
Auditors test that capitalization begins and ends on the correct dates. A common error is continuing to capitalize interest after the building has received its occupancy certificate but before it is transferred in the ERP (delaying the transfer date inflates the asset and reduces interest expense). The amount capitalized must not exceed total borrowing costs incurred in the period. Investment income earned on temporarily investing the construction loan drawdown must be deducted.
📄 Required Documentation
Construction loan agreement (confirming the loan is specifically for the qualifying asset), monthly interest calculation (drawn balance × rate), investment income earned on temporary deposits (netted), capitalization period (start and end dates with supporting evidence), CIP roll-forward showing capitalized interest separately, IAS 23 accounting policy disclosure, and occupancy certificate date (capitalization cessation trigger).
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.