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Plain‑English explainer of HKAS 23 / IAS 23 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 23 Borrowing Costs (equivalent to IAS 23) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
When “interest” becomes a battlefield of judgment
If you read the annual reports of large property developers in Hong Kong or Mainland China, you will often see a big line item: capitalised borrowing costs. Some groups disclose tens of billions of Hong Kong dollars of interest added into properties under development, while the finance costs in profit or loss look relatively small. A natural question for analysts, auditors and even internal management is:
Are these capitalised interest amounts really “fair and reasonable”, or is the company simply hiding expenses inside assets?
On paper, HKAS 23 (equivalent to IAS 23) sounds straightforward: borrowing costs directly attributable to a qualifying asset are capitalised; all other borrowing costs are expensed. In practice, once you add group‑level centralised financing, multiple debt instruments, idle land, construction delays and interactions with other standards, that “simple line” becomes the centre of professional judgment and debate.
This article walks you through these grey areas so you can see that HKAS 23 / IAS 23 is not only an exam topic, but a real set of rules that gets pulled out and argued over in boardrooms and audit committees.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Develop a sharper understanding of what “directly attributable” really means in HKAS 23 / IAS 23, beyond “if there is borrowing, then capitalise”.
- Understand the thinking behind allocating borrowing costs where there is centralised group funding and multiple debt instruments, instead of treating formulas as black boxes.
- Distinguish, especially for land, which activities are genuine “capitalisation activities” and which are just passive holding or waiting.
- See how HKAS 23 links with HKFRS 9 and HKFRS 16, and why you cannot read HKAS 23 in isolation.
- Recognise common mistakes and exam traps, and know which areas deserve extra attention in working papers or revision.
1. Directly attributable and centralised financing: moving beyond the textbook
HKAS 23 / IAS 23 describe borrowing costs as directly attributable to a qualifying asset if they are borrowing costs that would have been avoided if the expenditure on the asset had not been made. Behind that wording, there are two important layers:
- It is not only formally “specific borrowings” that can be directly attributable. Even when the company has a basket of general borrowings, a portion of the interest may, in substance, arise because funds are used for a qualifying asset, and that portion can be treated as directly attributable.
- The reverse is also true: simply having borrowings does not automatically justify capitalisation. If the company would have raised the same debt on the same terms even without the qualifying asset (for example, to support a fixed long‑term capital structure), then you cannot simply say all that interest is “because of the asset”.
In simple cases – for example, a single factory financed by one dedicated bank loan – judgment is relatively easy: nearly all the interest on that loan is directly attributable while the factory is under construction. But things quickly become more complicated once you move up to the group level with centralised financing.
Centralised treasury: when the money circulates inside the group
Many large groups raise funds centrally at the parent or treasury company level, through bond issues or syndicated loans, then push the funds down to subsidiaries via internal loans, capital injections or other intra‑group arrangements. This creates several difficulties:
- The external borrowings sit on the parent’s statement of financial position, while the qualifying assets (for example, property projects or power plants) sit in subsidiaries.
- The same pool of external funding may support several uses at once: acquisitions, general operations, refinancing old debt and constructing new projects.
- It becomes unrealistic to point to one slice of external interest and prove it is “exactly” caused by a specific project under construction.
HKAS 23 / IAS 23 do not expect the company to chase a perfect one‑to‑one link in these situations. Instead, the standard encourages the use of reasonable, consistently applied and well‑documented allocation methods. Examples include:
- Treating certain central borrowings as part of a general borrowing pool, and allocating interest based on the proportion of qualifying asset expenditure to total relevant expenditure.
- Where there is a clearly project‑focused internal funding arrangement (for example, the parent on‑lends almost the entire proceeds of a particular bond to one project company), treating that internal structure as an economic equivalent of specific borrowing at the group level, with clear disclosure of the policy and method.
Auditors often test these approaches by asking three key questions:
- Is the allocation method reasonable and applied consistently across periods?
- Is there sufficient documentary support (for example, board minutes, internal loan agreements) for how funds were assigned to projects?
- If estimates or proportional allocations are used, has the company tested the sensitivity to ensure the method does not heavily favour one project without justification?
In other words, “directly attributable” is not a pure legal‑form game; it is a judgment that must combine commercial reality, financing structure and documentary evidence.
2. Land and capitalisation activities: the grey zone explained
Land is one of the most controversial asset types under HKAS 23 / IAS 23. On the surface, it seems simple:
- Land with an active building under construction → under development → borrowing costs are typically capitalised.
- Land held purely for long‑term appreciation or with no concrete development plan → held land → borrowing costs are expensed.
In real life, there is a big grey area in between, such as:
- Land has been purchased and the company is doing design work, environmental studies, zoning change applications and other preparatory tasks.
- Land has been levelled or subject to initial groundwork, but due to a weak market the board deliberately delays the main construction phase.
- Land was originally planned for self‑use, for example a factory, but later management decides to hold it for a future sale, leaving it in a “to be decided” status for some time.
The spirit of HKAS 23 / IAS 23 can be summarised as:
As long as the company is carrying out necessary activities to bring the asset to the condition required for its intended use or sale, the asset is in a capitalisation phase. If the company is merely passively holding the land, waiting for the market to improve, delaying applications or still undecided internally, then borrowing costs generally should not be capitalised.
So, land is not automatically a qualifying asset just because the company has development dreams. There must be concrete, directed activity that pushes the asset towards its intended state.
Technical and administrative activities: where to draw the line?
Another subtle boundary involves technical and administrative work. Consider:
- Detailed design work, soil testing, pre‑tender technical evaluations.
- Active engagement with government authorities on planning and approvals, where formal processes have begun.
- Early‑stage feasibility and market studies to decide whether to proceed with a project at all.
In practice:
- Technical and administrative work that is closely tied to a specific asset under development (for example, detailed design for a particular plot or factory) and follows a clear decision by the board to proceed is usually viewed as part of the necessary activities for capitalisation.
- Purely exploratory work to decide “do we want to do this project at all?” is still part of strategy setting and project screening, and generally does not yet mark the beginning of capitalisation.
The most practical way to assess this is to go back to project documentation:
- Has the board or management already approved a concrete development plan and timetable?
- Are the expenditures clearly tied to a specific asset (for example, a specified plot, plant or project company)?
- If management changes its mind later, could those expenditures easily be reinterpreted as general research or business development costs rather than asset‑specific costs?
Using the company’s internal decision trail helps turn a fuzzy “feeling” about capitalisation into a more defensible judgment.
3. Cost‑benefit debates: is mandatory capitalisation really worth it?
When the international standard‑setter moved from “policy choice” (capitalise or expense) to a more mandatory capitalisation model, not everyone agreed. Dissenting opinions and criticisms tend to centre on two themes.
Rising measurement and monitoring costs
To capitalise borrowing costs correctly under HKAS 23 / IAS 23, the company must:
- Decide which assets are qualifying assets, and for which periods capitalisation conditions are met.
- Determine when to start, suspend and stop capitalisation.
- Track which borrowing costs relate to which assets, and deduct investment income on temporary investments of specific borrowings where relevant.
In large groups, this often means more sophisticated systems and internal controls to track construction‑in‑progress spending and its funding sources, which is non‑trivial. Auditors also need extra work to test assumptions, allocation methods and timing judgments, increasing compliance costs.
Some board members and preparers question whether, for smaller projects or modest capital‑intensive activities, this level of detail really benefits users, or whether it simply produces more complex calculations “for the sake of compliance”.
Do users really get enough extra information?
Supporters of mandatory capitalisation argue that:
- If borrowing costs are not capitalised, the cost of assets under construction will be understated, future depreciation will be lower, and performance metrics such as return on assets will be distorted.
- In capital‑intensive industries like property, infrastructure and heavy industry, capitalised borrowing costs can change key ratios materially, so investors genuinely care about them.
Critics respond that:
- Even without capitalisation, companies could disclose finance costs incurred during construction in the notes, and users could adjust the numbers themselves if they wish.
- Moving interest from finance costs into asset cost can make some performance indicators harder to compare, for example interest coverage ratios versus asset return measures.
Understanding this debate is helpful because it shows that accounting standards are the result of policy trade‑offs, not purely technical truth. When you apply HKAS 23 / IAS 23 in practice, you are applying rules designed to balance usefulness and cost, not just reciting formulas.
4. Links to other standards: why HKAS 23 cannot stand alone
To fully understand what counts as “borrowing costs” in HKAS 23 / IAS 23, you have to look at other standards that HKAS 23 explicitly relies on.
HKFRS 9 Financial Instruments: effective interest rate
Under HKFRS 9, many borrowings do not have interest expense equal to “coupon rate × nominal principal”. Instead, the effective interest method spreads discounts, premiums and transaction costs over the life of the instrument. This means that:
- Borrowing costs usually include cash interest paid plus the effective interest amortisation of fees, discounts and premiums.
- When calculating borrowing costs eligible for capitalisation, you look at the effective interest expense, not just the cash interest.
So, a bond issued at a discount with significant issuance costs can have a much higher effective interest rate than the coupon. If that bond forms part of the general borrowing pool, the capitalisation rate under HKAS 23 / IAS 23 must reflect that higher effective rate, not the simple coupon.
HKFRS 16 Leases: interest on lease liabilities
HKFRS 16 introduces lease liabilities and treats the interest on those liabilities as part of finance costs. For companies with many long‑term leases, this can significantly increase reported borrowing costs. Practically, this means:
- Where a lease liability is directly used to obtain or construct a qualifying asset (for example, a long‑term land lease integral to a construction project), its interest may need to be considered in capitalisation.
- In some infrastructure or land‑use arrangements, lease liabilities and their interest effectively become part of the cost of assets under construction.
HKAS 23 / IAS 23 also interact with HKAS 40 Investment Property and HKAS 41 Agriculture. Once assets are measured at fair value, with changes recognised in profit or loss, the value of capitalising borrowing costs diminishes or disappears. This is one reason HKAS 23 explicitly scopes out some fair‑value‑measured assets.
5. Common mistakes in exams and practice – a last‑minute checklist
Whether in exam scripts or real working papers, errors around borrowing costs tend to cluster in a few familiar places. Use this list as a quick final check.
- Treating short‑term inventories as qualifying assets For example, inventories produced on a normal production line in a few weeks being incorrectly capitalised with interest. Remember: the key is whether the asset takes a substantial period of time to be ready for its intended use or sale.
- Ignoring the three conditions for starting capitalisation Sometimes candidates see “expenditure + interest” and immediately capitalise, without checking whether necessary activities have actually started, especially when land is still in a passive holding phase.
- Getting suspension of capitalisation the wrong way round Classic situations:
- Short‑term interruptions due to weather or normal construction cycles wrongly treated as requiring suspension.
- Long, management‑driven project pauses where capitalisation is incorrectly continued as if work was still ongoing.
- Forgetting to deduct temporary investment income on specific borrowings Capitalising the full interest on a specific borrowing while ignoring interest income from temporarily invested unused funds, leading to overstated asset costs.
- Failing to apply the capitalisation ceiling for general borrowings Calculating a theoretical capitalisable interest amount from the capitalisation rate and qualifying expenditure, but forgetting to compare it with actual interest on the general borrowing pool. This can produce the impossible result of capitalising more than the real borrowing costs.
When reviewing working papers or exam answers, deliberately ask yourself:
- Does this asset really meet the definition of a qualifying asset?
- Are the three “start capitalisation” conditions clearly met?
- Is there any period where capitalisation should be suspended or stopped?
- Are specific and general borrowings clearly separated, and is the calculation method supported by documentation?
- If I were a user of the financial statements, would the disclosed capitalised borrowing costs and policies feel logical and traceable?
Key Takeaways for Students and Junior Accountants
- When you see large balances for “assets under construction” or “properties under development”, read the borrowing cost note and ask: does the pattern of capitalisation make sense given what you know about the projects and timing?
- In working papers, do not just show numbers; add one or two clear sentences explaining why you believe particular interest is directly attributable, and why your allocation method is reasonable.
- Before doing calculations, sketch a simple timeline: mark when expenditure starts, when necessary activities begin, any deliberate long pauses, and when the asset becomes ready for its intended use; only then decide which periods’ interest are eligible for capitalisation.
- For exams, train yourself to spot key trigger words in the scenario: “centralised financing”, “project suspended”, “land held for future development”, “phased completion”, “temporary investment of unused funds”; each of these usually points to one of the judgment areas discussed above.
- When reading any standard (not just HKAS 23 / IAS 23), remind yourself that behind each rule there was a debate about cost, benefit and comparability; thinking this way will make your answers sound more like a professional and less like a formula machine.
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