Interest is the textbook example of an expense: you borrow money, you pay for it, it reduces your profit. Except when it does not. While a company is building a large asset, the accounting standards let it take the interest on the money borrowed for that asset off the income statement and stick it onto the balance sheet instead. Same cash out the door, very different reported profit.
Why it flatters the numbers
Picture two identical companies, both borrowing heavily. One has finished its plants; its interest hits the income statement in full, so its profit and its interest-coverage ratio look modest. The other is mid-construction, capitalising most of its interest; its reported profit is higher and its coverage looks healthier — not because it is a better business, but because a real cost is sitting on its balance sheet instead of its P&L. The moment construction finishes, the capitalised interest reappears as depreciation and the flattery reverses.
- It is legitimate — required by the standards for qualifying assets, not a manipulation.
- It shifts cost, not removes it — capitalised interest returns later as higher depreciation.
- It lifts current profit and coverage — which flatters comparisons with a non-constructing peer.
- It concentrates in capex-heavy sectors — infrastructure, real estate, power, heavy manufacturing.
A power company building a large plant reports ₹200 cr interest in its P&L, but its cash-flow statement shows ₹500 cr of interest paid. What is happening?
Interest aam taur pe P&L expense hai. Par jab company bada asset bana rahi ho, Ind AS 23 kehta hai us loan ka interest balance sheet pe daalo, expense mat karo — cash toh ja hi raha, par profit mein cost nahi dikhti. Isse construction ke saalon mein reported profit aur interest coverage zyada dikhte hain — company achhi lagti hai, jabki asset banne ke baad wahi interest depreciation ban ke wapas aata hai. Legit hai, manipulation nahi — par sahi comparison ke liye adjust karna padta hai. Quick check: P&L ka interest vs cash-flow mein diya gaya interest — bada gap = capitalisation; exact amount notes mein.
- Capitalised borrowing costs are interest added to an asset’s cost instead of expensed.
- Ind AS 23 requires it for qualifying assets under construction — it is legitimate.
- It lifts reported profit and interest coverage while the asset is being built.
- The cost returns later as higher depreciation — it is shifted in time, not removed.
- Cross-check P&L interest against cash interest paid; the gap is what is capitalised.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- what are capitalised borrowing costs
- Capitalised borrowing costs are interest expenses that a company adds to the cost of an asset it is building rather than charging to the profit and loss account. Under Ind AS 23, interest on money borrowed to construct a qualifying asset — a plant, a large project, a property under development — is capitalised while construction continues, becoming part of the asset’s book value instead of a current expense. The interest is still being paid in cash; it simply does not appear as a cost in the profit for that period.
- how does capitalising interest affect profit
- It raises reported profit in the years the asset is being built, because the interest that would normally reduce profit is parked on the balance sheet instead. The same interest comes back later as higher depreciation once the asset is complete and starts being written down, so capitalising interest shifts the cost from now to later rather than removing it. A company with heavy construction can therefore look more profitable than its cash reality while the building goes on.
- where do i find capitalised interest in financial statements
- Look in the notes to the accounts — companies disclose the amount of borrowing costs capitalised during the year, usually in the property, plant and equipment or capital work-in-progress note. A quicker cross-check is to compare the interest expense shown in the profit and loss with the interest actually paid in the cash-flow statement: if cash interest is far higher than the P&L charge, a chunk is being capitalised. Capex-heavy sectors like infrastructure, real estate and manufacturing are where it matters most.
- is capitalising interest allowed
- Yes — it is required, not optional, under the accounting standards when interest relates to a qualifying asset under construction, so it is not by itself a red flag or manipulation. The issue is analytical, not ethical: it makes reported profit and interest coverage look better than the cash picture while the asset is being built, so you have to adjust for it to compare such a company honestly with one that is not mid-construction. Read it as a distortion to correct, not a rule being broken.