FRS 23 Borrowing Costs: Capitalising Interest on Qualifying Assets in Singapore

When a Singapore company borrows to fund the construction of a factory, the fit-out of new premises, or the development of a property for sale, the interest on that loan does not automatically hit the profit and loss account as it accrues. FRS 23 Borrowing Costs requires — not merely permits — certain borrowing costs to be capitalised as part of the cost of the asset they finance, provided the asset meets the definition of a “qualifying asset.” Get this wrong and the consequences run in both directions: capitalise interest that should have been expensed and profits look artificially strong during the construction period; expense interest that should have been capitalised and the balance sheet understates the true cost of the asset while the P&L takes an unnecessary hit. This guide sets out how FRS 23 works in practice for Singapore construction, property development and manufacturing businesses undertaking capital projects, including a worked example and where the tax treatment under the Income Tax Act diverges from the accounting treatment.

What FRS 23 Requires

FRS 23 draws a firm line: borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset must be capitalised as part of the cost of that asset. All other borrowing costs are expensed as incurred, in the period they arise. There is no accounting policy choice here for a qualifying asset — capitalisation is mandatory once the recognition criteria are met, which is a common source of confusion for finance teams used to treating interest as a straightforward P&L item.

“Borrowing costs” under FRS 23 covers interest expense calculated using the effective interest method, finance charges on finance leases, and exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs. Arrangement fees, commitment fees and other borrowing costs that are not interest itself are dealt with separately, and in most cases follow the debt itself rather than the asset.

What Counts as a Qualifying Asset

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. FRS 23 does not fix a bright-line number of months, but in practice most preparers in Singapore treat projects taking longer than around 12 months as qualifying, while shorter projects are assessed on the specific facts. Common qualifying assets for Singapore SMEs include property under construction, whether for owner-occupation, investment or sale — a factory building, warehouse, large-scale office fit-out, or a residential or commercial development held for sale; self-constructed plant and equipment with a long lead time, such as a purpose-built production line fabricated and commissioned over many months; and intangible assets under development, such as internally generated software, where development spans a substantial period.

Assets that are ready for use or sale when acquired — off-the-shelf equipment, land held without development activity, or inventory routinely manufactured in large quantities over a short period — do not qualify, and borrowing costs relating to their acquisition are expensed as incurred.

Calculating the Capitalisation Rate: Specific vs General Borrowings

Specific Borrowings

Where a company borrows specifically to fund a qualifying asset — for example, a construction loan taken out expressly to build a factory — the borrowing costs eligible for capitalisation are the actual costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of unused loan proceeds. If a company draws down S$5 million for a project but only spends S$3 million in the first quarter, parking the remaining S$2 million in a short-term deposit, the interest earned on that deposit reduces the amount of interest capitalised, rather than being recognised separately as investment income.

General Borrowings and the Weighted Average Rate

Where a qualifying asset is funded out of a company’s general pool of borrowings rather than a specific loan, FRS 23 requires a weighted average capitalisation rate to be applied to the expenditure on the asset. The rate is calculated as total borrowing costs on the general pool of borrowings outstanding during the period, divided by the weighted average of those borrowings — and the amount capitalised in a period cannot exceed the total borrowing costs actually incurred during that period. This calculation needs to be redone, or at least reviewed, every reporting period as the mix and cost of borrowings changes.

When to Start, Suspend and Stop Capitalising

Capitalisation does not run automatically for the life of a loan. FRS 23 requires three specific conditions to be met before capitalisation commences: expenditure on the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress. All three must be present simultaneously.

Capitalisation must be suspended during extended periods in which active development is interrupted — for example, a lengthy delay caused by a dispute with a contractor, a stop-work order, or a deliberate pause in the project. It is not suspended for brief, routine interruptions such as public holidays or short technical delays that are a normal part of the construction process. Capitalisation ceases entirely once substantially all the activities necessary to prepare the asset for its intended use or sale are complete, even if minor administrative work remains, such as obtaining a Temporary Occupation Permit for a completed building where only cosmetic finishing is outstanding.

Worked Example: Capitalising Interest on a S$10 Million Warehouse Development

A logistics company draws a S$10,000,000 construction loan at a fixed rate of 4.5% per annum specifically to build a new warehouse. Construction starts on 1 January and the loan is drawn down progressively as expenditure is incurred. By 30 June, S$6,000,000 has been drawn and spent on the project; the remaining S$4,000,000 is drawn in the second half of the year. Assume for simplicity that the average outstanding balance for the year works out to S$7,000,000.

The S$303,000 is added to the warehouse’s carrying cost on the balance sheet rather than being expensed through the P&L during the construction year, and it will subsequently be depreciated over the warehouse’s useful life once it is brought into use — see our companion guide on accounting for fixed assets and depreciation. Only once construction is substantially complete does interest on any remaining drawdown revert to being expensed as incurred.

Tax Treatment: Where FRS 23 and IRAS Diverge

This is where many Singapore SMEs get caught out, because the accounting and tax treatments do not automatically align. For income tax purposes, IRAS’s long-standing position is that interest expense is deductible where it is incurred on capital employed in acquiring income — broadly, where the borrowed funds are used to produce taxable income — with detailed guidance set out under IRAS’s guidance on the tax treatment of business expenses. Where a loan finances a capital asset used to generate income once completed, such as a warehouse the company will use in its own trade, the interest is typically deductible on an accrual basis against income once the asset starts producing income — it is not automatically added to the tax written-down value of the asset the way it is capitalised for accounting purposes.

This creates a timing difference: the accounting cost of the asset includes capitalised interest and is depreciated over its useful life for FRS purposes, while for tax purposes the same interest may be deducted as it accrues rather than being folded into the qualifying cost for capital allowances under Section 19 or 19A. The result is very often a deferred tax adjustment, since the accounting carrying amount of the asset differs from its tax base — see our guide to FRS 12 Income Taxes and deferred tax for Singapore SMEs for how that difference is computed and disclosed. Companies claiming capital allowances on the completed asset under Section 19A should check with their tax adviser whether capitalised interest forms part of the qualifying cost for allowances purposes in their specific fact pattern, since the answer depends on how the borrowing and the asset are structured.

Common Mistakes Singapore SMEs Make

Capitalising interest on assets that do not qualify. Routine equipment purchases, inventory, and land banked without active development do not meet the “substantial period of time” test, and capitalising interest on them overstates asset values.

Forgetting to net off investment income on specific borrowings. Where loan proceeds are drawn in advance of need and temporarily invested, the income earned must reduce the amount capitalised — it cannot be recognised as separate investment income while the gross interest cost is capitalised in full.

Not suspending capitalisation during genuine work stoppages. A three-month halt caused by a contractor dispute or a regulatory stop-work order should pause capitalisation; continuing to capitalise interest through an idle period overstates the asset.

Failing to stop capitalisation at practical completion. Interest continuing to be capitalised after the asset is substantially ready for use — waiting, for example, for a final fit-out of common areas that is incidental to the asset’s principal use — is a frequent audit finding.

Treating the tax and accounting positions as identical. Assuming capitalised interest automatically qualifies for capital allowances, or that a deduction claimed for tax purposes needs no deferred tax entry, misses the divergence described above.

A Practical Compliance Checklist

Before finalising accounts for a business with capital projects in progress, finance teams should confirm: every asset under construction has been assessed against the “substantial period of time” qualifying asset test, with the conclusion documented; the capitalisation rate has been correctly computed as either the actual rate on a specific borrowing (net of investment income on temporarily invested proceeds) or the weighted average rate on the general borrowings pool; capitalisation start, suspension and cessation dates are supported by project records, not assumed to run for the life of the loan; the total amount capitalised in the period does not exceed total borrowing costs actually incurred; and a deferred tax position has been assessed where the tax and accounting treatment of the same interest cost diverge. Businesses funding qualifying assets through government-supported facilities should also check current terms under Enterprise Singapore’s Enterprise Financing Scheme – SME Fixed Assets Loan, and confirm the current text of the standard against ACRA’s Financial Reporting Standards pronouncements before finalising treatment on a material project.

— The Editorial Team, Raffles Corporate Services