FRS 102 Section 25: borrowing costs

Section 25 of FRS 102 gives a policy choice: a business can expense all borrowing costs as they arise, or capitalise the borrowing costs directly attributable to building or producing a qualifying asset as part of that asset’s cost. If it chooses to capitalise, the policy must be applied consistently to a class of qualifying assets, and paragraphs 25.2A to 25.2D set strict rules on how much interest is capitalised and for how long.

What are borrowing costs?

The FRS 102 glossary defines borrowing costs as interest and other costs incurred in connection with the borrowing of funds. Paragraph 25.1 says they include:

• interest expense calculated using the effective interest method under Section 11, so arrangement fees spread over a loan’s life are part of the cost;
• interest expense on lease liabilities under Section 20;
• exchange differences on foreign currency borrowings, to the extent they are regarded as an adjustment to interest costs.

The reference to lease liabilities is more significant from 2026, because the Periodic Review 2024 amendments bring most leases onto the lessee’s balance sheet. A business that capitalises borrowing costs needs to consider whether interest on a lease used to fund a qualifying asset falls within its policy. The wider lease changes are explained in the FRS 102 amendments from 2026.

What is a qualifying asset?

A qualifying asset is defined in the glossary as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances, the glossary says it may be inventories, manufacturing plants, power generation facilities, intangible assets, investment properties or biological assets. Three things are expressly excluded:

• financial assets;
• inventories produced over a short period of time;
• assets that are ready for their intended use or sale when acquired.

The standard does not put a number on “substantial period”. In practice the typical candidates are a company building its own premises, a property developer constructing houses or flats for sale, a manufacturer making large bespoke items over many months and a business developing software over a long period. Buying a finished building or a ready to use machine with a loan does not create a qualifying asset, so the interest is simply an expense.

Is capitalisation compulsory?

No. Paragraph 25.2 says an entity may adopt a policy of capitalising directly attributable borrowing costs. If it does, the policy must be applied consistently to a class of qualifying assets; if it does not, all borrowing costs are recognised in profit or loss in the period incurred. A company could, for example, capitalise interest on property developments held as stock but not on internally developed software, provided each class is treated consistently.

Micro entities have no choice. Paragraph 20.2 of FRS 105 requires a micro entity to recognise all borrowing costs as an expense in the period in which they are incurred. See FRS 105 micro entity accounts.

How much interest can be capitalised?

The borrowing costs eligible are those that would have been avoided if the expenditure on the qualifying asset had not been made (paragraph 25.2A). The calculation depends on how the asset is funded.

Specific borrowings

Where funds are borrowed specifically to obtain the asset, the amount capitalised is the actual borrowing cost on that loan during the period, less any investment income earned on temporarily investing the funds before they are spent (paragraph 25.2B).

General borrowings

Where the asset is funded from general borrowings, paragraph 25.2C requires a capitalisation rate to be applied to the expenditure on the asset. The expenditure is the average carrying amount of the asset during the period, including borrowing costs previously capitalised. The rate is the weighted average of rates on the general borrowings outstanding in the period, excluding loans taken out specifically for other qualifying assets until those assets are substantially complete. The amount capitalised in a period cannot exceed the borrowing costs actually incurred in that period.

When does capitalisation start, pause and stop?

Paragraph 25.2D sets three points in time:

1. Start when the entity first incurs both expenditure on the asset and borrowing costs, and is undertaking the activities needed to prepare it for its intended use or sale.
2. Suspend during extended periods when active development has paused.
3. Cease when substantially all the activities needed to prepare the asset for use or sale are complete.

Holding a plot while waiting for planning permission, with no development activity, does not justify capitalisation. A long stoppage because finance has dried up is an extended pause, so interest during that time is expensed. Once a building is substantially complete, interest stops being capitalised even if the owner has not yet moved in or the units have not yet sold.

What does a worked example look like?

Illustration only. A company builds a new warehouse for its own use over one accounting year and has a policy of capitalising borrowing costs on self constructed premises. It takes a specific £1,000,000 loan at 6%, drawn on day one, and earns £5,000 interest on the undrawn balance before contractors are paid. Part of the build is also funded from the company’s overdraft and other general loans, on which the weighted average rate is 5%, and the average amount of the warehouse funded from those borrowings over the year is £400,000.

Element	Calculation	Capitalised
Specific loan	£60,000 interest less £5,000 investment income	£55,000
General borrowings	£400,000 at 5%	£20,000
Total added to cost		£75,000

The £20,000 is only capitalised if the company actually incurred at least that much interest on its general borrowings in the year. The capitalised interest then forms part of the warehouse’s cost under paragraph 17.10(d) and is depreciated with the building over its useful life, as described in property, plant and equipment under FRS 102.

How does it interact with stock, investment property and impairment?

For inventories, paragraph 13.7 says the financing element of goods bought on deferred terms is interest and is not added to inventory cost unless the inventory is a qualifying asset and the entity capitalises borrowing costs. A developer that capitalises interest into its housing stock still has to test that stock against selling price less costs to complete and sell, as explained in stock valuation.

Adding interest to a building’s cost raises its carrying amount, which can bring it closer to triggering a write down. The indicators and the recoverable amount test are covered in FRS 102 Section 27: impairment of assets.

What must be disclosed?

When no capitalisation policy is adopted, Section 25 requires no extra disclosure beyond the general interest disclosures referred to in paragraph 25.3. Where a policy is adopted, paragraph 25.3A requires the amount of borrowing costs capitalised in the period and the capitalisation rate used. A small entity using Section 1A must state in a note that interest has been included in determining the cost of the asset and the amount included (paragraph 1AC.19, reflecting Schedule 1, paragraph 27(3) of the small company accounts regulations).

How is capitalised interest treated for tax?

For companies, section 320 of the Corporation Tax Act 2009 generally brings interest capitalised into an asset into account as a loan relationship debit in the period it is capitalised, where the profit or loss on that asset is not itself calculated under generally accepted accounting practice. HMRC’s Corporate Finance Manual at CFM33130 explains that relief for interest capitalised into a capital asset is given when capitalised, with adjustments later so the same amount is not relieved again through depreciation. Where the asset is trading stock, such as a developer’s houses, section 320 does not apply and the accounts are simply followed, so relief comes as the stock is sold.

Common mistakes include capitalising interest on assets that were ready for use when bought, carrying on capitalising after the asset is substantially complete or during a long pause, forgetting to deduct investment income on specific loans, and applying the policy to some assets in a class but not others.

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Related Accountapedia entries

• Property developers: stock or investment property
• Can start up costs be capitalised
• FRS 102 explained
• Can I capitalise staff time on fixed assets
• Capitalising development costs under FRS 102

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• Financial Reporting Council: FRS 105 September 2024
• legislation.gov.uk: Act 2009 c. 4, section 320
• GOV.UK: Manual page CFM33130

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.