As per IAS 23, borrowing costs on qualifying assets should be capitalised:

To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period.

What if a company has interest free loans from shareholders in addition to interest-bearing loans from financial institutions? Do you take into account the effective interest income due to the interest-free loan (effectively lowering the WACC)? This is quite common as banks often only finances a construction project partially, and the rest of the funds are added by shareholders.

Your feedback would be must appreciated!

Best regards                

Dear Allan

To apply IAS23;

For borrowings taken out specifically to finance the asset in question, the borrowing costs are those that arise directly i.e. interest, arrangement fees, premiums on borrowings, net of any income earned on the temporary investment of the borrowings. Where the funds used are taken from a general pool of borrowings, a ‘capitalisation rate’ must be calculated in order to determine the interest element that may be capitalised. This rate is the weighted average of the borrowing costs that arise on the general pool of funds. 

Then you should include borrowings from shareholders in the pool in order to calculate Capitalisation Rate. If these borrowings are specifically to construction.




As accounting prudence and standardisation require, only ‘ALIKE’ types of liabilities and assets should be grouped for any accounting purpose. Interest bearing loans can only be grouped with other interest bearing loans. Interest free loans can not be treated as on ‘arms-length’. Thus if you group interest free loans with interest bearing ones to calculate capitalizable borrowing costs, those would become diluted and capitalized costs may be much lower. So it would not be prudent to consider interest free loans to calculate capitalizable costs. If for any purpose you intend to do this then’Opportunity Cost’ born by the shareholders (which may be average net of tax dividends received by them over a certain reasonable period in the past) or if no dividends were paid by the company in the past, then ‘industry average dividend payout’ may be considered. But, considering opportunity cost may be quite an extreme situation which could arise just for pure literary or hypothetical reasons. Simple, logical and prudent approach would be ‘NOT TO CONSIDER’ interest free loans for such purposes.


These interest free loans from the shareholders would anyway be subject to the valuation requirements of IAS 39 and treated as concessionary loans and hence measured at amortised cost. If the loans have been granted specifically for a qualifying asset then perhaps one could capitalise the same with adequate disclosures explaining the reduction in WACC. However, the same would need to be removed from the asset when calculating deferred tax since I doubt any taxman in any jurisdiction would accept the same.   
Dear Allan
On what basis the IAS 39 is required for valuation, since the valuation is supposedly sought help from the valuer, I view that the amortised cost is measured by input discount model, what do you think?
Let go ahead to explore further this topic
Thanks and regards
Such loans would fall within the scope of IAS 39 and as financial liabilities would either be measured at fair value through profit and loss or at amortised cost.


The question is whether they could be capitalised under IAS 23, which mentions in its scope that it does not deal with the actual or imputed cost of equity including preferred capital not classified as liability. Whether the charge for imputed interest should or should not be capitalised would require judgement based on the specifics of the case, the financing policy of the entity and the interpretation of IAS 23 recognition rules which is silent on the subject being discussed.

Hi Vatsla


I agree with your deferred tax assessment. But, I do not understand what you mean by concessionary loans. An interest-free loan from shareholders may be designated as FV through P and L, or as loans and receivables, i.e measured at amortized cost (AC). The AC should approximate the FV and therefore there will be an element of imputed interest income.


Do you agree that in the situation where generally borrowed funds are used to determine the capitalisation rate, then these loans will lower the Weighted Average Cost of Borrowings (WACB)?


Best regards

Dear Allan


An interest free or a low interest loan would be concessionary – just a usage of language since both types are at a ‘concession’. The use of English language being taken care of, let us get to the point!

In actual practice, I have never come across a situation where the concession has been capitalised or used to reduce the interest cost capitalised in a ‘qualifying asset’. Fellow IFRS Listers may have and I would be keen to hear from them on this one!

Assuming that your query was of an actual case and not one of academic interest per se, I suggest you look at the terms of the shareholder loan for actual classification. If it is an interest free loan with no repayment terms, then the fair value on intial recognition would pose a problem as one needs a repayment date. If they are on demand loans, then they would be classifed as current liabilities and the fair value of a demand loan is its fair value at transaction price.

An analysis of this issue would help you to determine whether to lower the WACC or not and I am loathe to answer the question with a yes or no unless all facts are known as the analysis and interpretations would be affected.

If anyone has come across this situation before, I would welcome their input.

Welcome to the world of IFRS!


Dear Allan,
I would suport Mr. Zulfiqar Sheikh hypothesis regarding the opportunity cost while I disagree with Mr.Zulfiqar Sheikh that it will be dividents, I assume that the opportunity cost will be the market return on investment for similar financing transaction related to similar project natur…
Any way the oportunity cost related to this particular situation is economic reality while Mr.
Zulfiqar Sheikh assumed it is academic thery or research.
While to have the proper answer to the case we need to account for the cost of capital without any consideration to further analysis beyond the accounting wich is related to economics analysis, unless we are preparing feasibility study or other analytical research for planning.
Example :
When we aquire a fixed asset we account for the total cost of the fixed asset without consideration to the imputed cost of the money (or any opportunity cost for the money)- tied up to OR committed to purchase the asset.although we can consider that in economic analysis but accounting practice is transactional as per GAAP and IFRS and doesn’t take any lost chance, alternative cost, imputed cost into account for this.
Mohammed Abdul Hadi