Full explanation
Overview
Two companies build the exact same factory. One shows one hundred and sixty thousand euros of depreciation. The other shows two hundred thousand. Same factory, same grant, same true cost — just a different place to put the same number.
IAS twenty and IAS twenty-three are two short standards that both change the cost side of an asset — one lowers it with government money, the other raises it with borrowed money.
Who does what
IAS twenty covers government grants — recognised only with reasonable assurance you'll meet the conditions AND receive the money. IAS twenty-three covers borrowing costs — capitalised onto a qualifying asset instead of expensed.
Same effect, different balance sheet
Meridian builds a new factory for four million euros and receives an eight-hundred-thousand-euro government grant toward it. Deduct-from-asset method: carrying amount three million two hundred thousand, depreciated over twenty years — one hundred and sixty thousand euros a year. Deferred income method: the asset stays at four million, depreciation two hundred thousand a year, but the grant releases forty thousand a year to profit or loss. Net effect: one hundred and sixty thousand either way — identical to the cent, completely different balance sheet.
Same choice, income side
Income grants get the same two-way choice. A one-hundred-and-fifty-thousand-euro wage subsidy tied to new hires can sit as separate other income, or net against the staff costs it compensates for. And a grant that has to be repaid is a change in accounting estimate under IAS eight, not a prior-period error — handled going forward, not restated.
Two companies, identical economics, and an analyst comparing them needs to know which choice each one made.
A real comparability trap
From an investor's chair, this is a real comparability trap. One company nets its grant against expenses, so its revenue and cost lines look smaller but cleaner. Another shows the same grant as separate income, inflating both a revenue-based metric and reported other income. Same economics, different optics — the accounting POLICY note, not the headline number, is where the real comparison happens.
Capitalise, or expense
IAS twenty-three: borrowing costs directly attributable to a qualifying asset — one that necessarily takes a substantial period to get ready for use or sale — are capitalised into its cost. Every other borrowing cost is simply expensed.
€97,500 capitalised
Meridian borrows two million euros at six percent, specifically for the factory, over a ten month build. Five hundred thousand euros of the loan sits unused for two months, earning three percent while it waits. Interest for ten months: one hundred thousand euros. Less the investment income: two thousand five hundred. Capitalised borrowing cost: ninety-seven thousand five hundred euros — added straight to the factory's cost, not expensed.
Weight the rate
For general borrowings — funds raised for the business as a whole, not one specific asset — you weight the rate instead: each loan's rate, multiplied by its balance, divided by total borrowings. Blend an eight percent loan with a five-point-five percent loan and the weighted capitalisation rate comes out around seven point three one percent, applied to the actual spend on the asset.
Three conditions start the clock, and two more rules decide when it stops.
Three conditions, two rules
Capitalisation starts only when all three are true: expenditure on the asset is being incurred, borrowing costs are being incurred, and activities to prepare the asset are actually in progress. It's suspended during genuine extended interruptions — not normal delays that are part of the process. And it ceases once substantially all the work to get the asset ready is complete — never simply when the loan is repaid.
It moves profitability
This one moves reported profitability directly. Capitalising interest instead of expensing it keeps borrowing costs out of profit or loss during construction, inflating near-term EBIT and EBITDA and lifting the asset's carrying value — an analyst comparing a heavy-capex, high-debt builder against an asset-light peer has to adjust for this, or the margins simply aren't comparable.
Financing, then operating
Under IFRS eighteen, borrowing costs sit in the FINANCING category by default — that's true whether they're expensed immediately or capitalised into an asset first. Once capitalised, they leave financing behind entirely and travel through depreciation, in the OPERATING category, for the rest of the asset's life. Government grants land in the same category as the item they offset — an operating grant sits in operating, full stop. IFRS eighteen states that same follow-the-item principle explicitly for foreign exchange differences too, under IAS twenty-one.
Both standards keep the disclosure short — but skip it, and a reader can't tell which choice you made.
Four required items
IAS twenty disclosure: the accounting policy adopted, the nature and extent of grants recognised, any unfulfilled conditions or contingencies attached, and other forms of government assistance received that don't meet the grant definition.
Two numbers
IAS twenty-three disclosure: the amount of borrowing costs capitalised during the period, and the capitalisation rate used to determine it — the exact seven point three one percent figure, if general borrowings were involved.
Four industries, real judgement
Where this actually bites. Renewable energy and infrastructure projects live on both standards at once — construction grants plus years of capitalised interest on project debt. Property developers capitalise interest across multi-year builds. Manufacturers relocating to subsidised regions choose grant presentation carefully for local reporting optics. And any capital-intensive start-up capitalising interest can show a healthier near-term EBITDA than its cash burn actually supports.
Put it all together on Meridian's own numbers.
One asset, two standards
Meridian's factory, deduct-from-asset method: cost four million, less the eight-hundred-thousand-euro grant, carrying amount three million two hundred thousand euros — plus the ninety-seven-thousand-five-hundred-euro capitalised borrowing cost, three million two hundred and ninety-seven thousand five hundred euros total. Annual depreciation, one hundred and sixty-four thousand eight hundred and seventy-five euros. One asset, two standards, one final number.