Introduction
Every CWIP question eventually lands on a standard: can this cost be capitalized, must this part be depreciated separately through componentization, and when do borrowing costs stop? CWIP is governed by the property, plant and equipment standards: IAS 16 fixed assets internationally, Ind AS 16 for Ind AS reporters in India, and AS 10 for other Indian companies.
Borrowing costs follow IAS 23 or Ind AS 23. Ultimately, these standards determine which costs enter CWIP, how organizations apply componentization, and what they must present through CWIP disclosure in the financial statements.
In this guide
- What accounting standards govern CWIP and how they affect capitalization, borrowing costs, component depreciation, and financial reporting.
- How to apply key CWIP rules for cost recognition, componentization, trial-run proceeds, and borrowing cost capitalization.
- Why framework-specific disclosures and internal controls are essential for compliance, audit readiness, and accurate financial reporting.
- How to implement standards-compliant CWIP processes, from recognition and capitalization to readiness, transfer, and required disclosures.
Which standards govern CWIP?
Four standards do the work, in two pairs, one for the asset’s cost, one for the interest on funds financing it:
Framework | PP&E / CWIP standard | Borrowing costs standard | Applies to |
| IFRS | IAS 16 fixed assets, Property, Plant and Equipment | IAS 23, Borrowing Costs | IFRS reporters worldwide, incl. UK-listed |
| Ind AS (India) | Ind AS 16 converged with IAS 16 | Ind AS 23 converged with IAS 23 | Listed and large Indian companies |
| Indian GAAP (non-Ind AS) | AS 10, Property, Plant and Equipment (revised 2016) | AS 16, Borrowing Costs | Other Indian companies |
The AS 16 naming trap. In India, ‘AS 16’ means Borrowing Costs, while ‘IAS 16‘ means Property, Plant and Equipment. The two are unrelated standards that share a number. Citing ‘AS 16’ for a PP&E question or ‘IAS 16’ for an Indian borrowing-cost question is a genuine and common error in policy documents.
US GAAP runs a parallel framework (ASC 360 and ASC 835-20), covered with a full interest computation in construction in progress under US GAAP.
Recognition: when costs start entering CWIP
IAS 16.7 sets two recognition conditions, and both must hold before any cost is capitalized:
- Future economic benefits associated with the item will probably flow to the entity.
- The cost of the item can be measured reliably.
For a construction project, a company normally meets these conditions when its board approves the project, and it begins incurring costs. From that point, eligible costs accumulate in CWIP.
Recognition also ends somewhere specific. Capitalization stops when the asset reaches the location and condition necessary to operate as management intends; every cost after that point is an expense or a new asset.
Directly attributable costs under IAS 16.16–17
IAS 16.16 defines the cost of an item of PP&E as three elements:
- The purchase price, including import duties and non-refundable purchase taxes, after trade discounts and rebates.
- Costs directly attributable to bringing the asset to the location and condition necessary for it to operate as management intends.
- The initial estimate of dismantling, removal and site-restoration costs, where an obligation exists.
IAS 16.17 provides examples that finance teams code against every day, including employee benefits arising directly from construction, site preparation, delivery and handling, installation and assembly, testing costs, and professional fees.
By contrast, IAS 16.19–20 identifies the costs that must be excluded. This is where CWIP balances often become polluted:
- Costs of opening a new facility, and advertising or promotional costs.
- Staff training and costs of conducting business in a new location.
- Administration and general overheads.
- Initial operating losses and costs while an asset capable of operating awaits use or runs below capacity.
- Relocation and reorganization costs.
The third dismantling element is routinely missed in CWIP builds. If decommissioning or site restoration is obligatory, its present-value estimate enters the asset’s cost on day one with a corresponding provision.
Proceeds before intended use: the amendment that changed test-run accounting
Until 2022, sale proceeds from items produced during testing trial-run output, samples were deducted from the asset’s cost. That treatment is gone for IFRS and Ind AS reporters.
The IASB’s May 2020 amendment, Property, Plant and Equipment: Proceeds before Intended Use, prohibits deducting such proceeds from cost. The proceeds and the cost of producing them are recognised in profit or loss instead.
India amended Ind AS 16 to match, effective for annual periods beginning 1 April 2022. AS 10 was not amended: non-Ind AS companies still deduct test proceeds from cost.
The practical consequences are sharper than they look:
- Production during commissioning must now be measured quantities, cost per IAS 2, and revenue not just netted away.
- A plant that sells meaningful pre-readiness output can report revenue before it reports a fixed asset.
- Groups with both Ind AS and AS 10 entities run two different treatments for the same event.
AS 10: where non-Ind AS India differs
AS 10 (revised 2016) mirrors much of Ind AS 16, but the differences matter for the large population of Indian companies outside Ind AS:
Point | Ind AS 16 / IAS 16 | AS 10 + AS 16 (India, non-Ind AS) |
| Test-output sale proceeds | Recognised in profit or loss (post-amendment) | Deducted from the asset’s cost |
| Component depreciation | Mandatory for significant parts (para 43) | Required via Schedule II where cost is high, and life differs |
| Revaluation | Revaluation model permitted for a whole class, kept current | Revaluation permitted (revised AS 10) with class-level discipline |
| Borrowing costs standard | Ind AS 23 / IAS 23 | AS 16 same core principle, qualifying-asset based |
The convergence is close enough to lull teams into copying policies across frameworks. The proceeds row above is exactly where that copy-paste now produces a misstatement.
Componentization: the rule, the mandate, and a worked example
IAS 16.43 sets a clear rule: companies must depreciate each significant part of an item of PP&E separately.
Two companions complete it. IAS 16.45 allows organizations to group significant asset components when they have the same useful life and depreciation method. Meanwhile, IAS 16.46 requires organizations to combine individually insignificant components into a single “remainder” and depreciate them together.
India made the mandate explicit. Since FY 2015–16, Schedule II to the Companies Act has required organizations to determine a separate useful life for any significant asset component whose cost is material to the total asset cost and whose useful life differs from that of the main asset.
The judgement is the significance threshold. The standards do not set a percentage; entities commonly document something in the region of 10% of total cost and apply it consistently.
Worked example: a steam boiler plant of $0.83 million
A process plant commissions a boiler. Applying a 10% significance threshold to its parts:
Part | Cost ($ million) | % of total | Life (yrs) | Verdict |
| Boiler shell and structure | 0.42 | 51.2% | 20 | Principal part separate |
| Burners and firing system | 0.12 | 14.6% | 8 | Separate component |
| Control and instrumentation | 0.08 | 9.8% | 6 | Separate component |
| Refractory lining | 0.10 | 12.2% | 5 | Separate component |
| Feedwater pumps | 0.06 | 7.3% | 10 | Fold into remainder |
| Insulation and integral piping | 0.04 | 4.9% | 20 | Fold into remainder |
Why it matters shows up in year one. Depreciating the whole $0.82 million over the shell’s 20-year life charges $0.04 million.
Componentized, the charge is $0.07 million; the burners, controls and refractory consume their value far faster than the shell. The single-asset shortcut understates year-1 depreciation by $0.03 million and overstates profit by the same amount.
Componentization also fixes replacement accounting. When organizations reline the refractory in year five, they derecognize the old component and capitalize the new one. As a result, they avoid recording the relining as a repair expense while continuing to depreciate a “ghost” component that no longer exists.
Where componentization fails in practice is rarely the rule; it is inconsistency. Multi-quantity purchases capitalized as one asset, components grouped one way at one site and another way elsewhere, late costs allocated to the wrong part.
That is a policy-enforcement problem, and its home is a written capitalization policy applied by a rules engine rather than by memory covered in fixed asset capitalization policy.
Borrowing costs under IAS 23 / Ind AS 23
IAS 23.8 states the core principle: borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of that asset’s cost. All other borrowing costs are expensed.
A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Most CWIP projects qualify; routine equipment installed in weeks does not.
The lifecycle has three gates, each assessed on facts rather than posted by habit:
Gate | The rule | What it means in CWIP practice |
| Commencement (IAS 23.17) | Capitalization begins when expenditures are incurred, borrowing costs are incurred, AND activities necessary to prepare the asset are in progress | All three at once approving a project or drawing a loan alone does not start capitalization |
| Suspension (IAS 23.20) | Capitalization is suspended during extended periods in which active development is interrupted | A stalled project stops absorbing interest; document the pause and the restart |
| Cessation (IAS 23.22–23) | Capitalization ceases when substantially all activities necessary to prepare the asset are completed, assessed per part, where parts are completed separately | Interest stops at readiness, part by part, which pairs directly with partial capitalization |
The part-by-part cessation rule is the one teams miss. If one production line is ready in February, borrowing costs on that line’s expenditures stop in February even though the project loan runs on.
These are the governing rules. The arithmetic for capitalized interest, including weighted-average accumulated expenditures, capitalization rates, and the interest ceiling test, is covered separately. One key IFRS distinction is that IAS 23.12 requires organizations to deduct investment income earned on specific borrowings from capitalizable borrowing costs.
CWIP disclosures
IAS 16.74(b) requires disclosure of the expenditures recognised in the carrying amount of assets under construction, the CWIP balance itself.
IAS 23.26 adds two more: the borrowing costs capitalized in the period, and the capitalization rate used.
Standards-to-controls mapping
Accounting standards define the requirements, but auditors also evaluate whether appropriate controls are in place and whether sufficient evidence supports CWIP accounting. This table is the bridge:
Requirement (reference) | Control that satisfies it | Evidence that proves it |
| Only directly attributable costs capitalized (IAS 16.16–20) | Cost-eligibility review at invoice coding, with reclassification workflow for failures | Coding checklist; reclass entries with reasons |
| Test proceeds to P&L, not cost (IAS 16 amendment) | Trial-run output measured and billed through revenue, with production cost tracked per IAS 2 | Trial-run log; sales invoices; cost working |
| Dismantling estimate included (IAS 16.16(c)) | Decommissioning-obligation assessment at project approval | Provision computation; legal/contract reference |
| Significant parts depreciated separately (IAS 16.43; Schedule II) | Componentization decision at asset formation, against a documented threshold | Decision matrix; approved component structure |
| Borrowing costs: three commencement conditions (IAS 23.17) | Qualifying-asset assessment and commencement memo per project | Assessment memo; first-capitalization date support |
| Suspension during inactivity (IAS 23.20) | Project-status review each close, flagging extended pauses | Status log; suspension and restart entries |
| Cessation at readiness, per part (IAS 23.22–23) | Ready-for-use certification wired to the interest cut-off | RFU certificate; interest cut-off working |
| Ageing and completion disclosure (Schedule III) | Monthly ageing refresh with owner-wise exception review | Ageing schedule; exception queue history |
When you read down the evidence column, one pattern becomes clear: project teams generate almost every supporting document during the project, not at year-end. As a result, organizations either build a standards-compliant CWIP file as part of the project workflow or rebuild it during the audit; there is no third option.
That is the design premise of AssetCues: readiness certification, evidence capture, componentization decisions and exception queues live against each capitalization case as it happens, while your ERP remains the book of record.
How to apply IAS 16 to CWIP: 6 steps
- Confirm recognition: future economic benefits are probable and cost is reliably measurable normally at project approval.
- Capitalize only IAS 16.16–17 costs; route 16.19–20 items to expense at coding, and include any dismantling obligation at present value.
- Treat test-output proceeds per your framework: profit or loss under Ind AS 16 / IAS 16, deducted from cost under AS 10.
- Assess borrowing-cost qualification, then run the three gates: commencement, suspension, cessation on facts each period.
- Decide the component structure against your documented significance threshold before the asset is created.
- Stop capitalizing at readiness, transfer per part, and prepare the IAS 16.74(b), IAS 23.26 and Schedule III disclosures.
Key takeaways
- A cost enters CWIP only if it is directly attributable to bringing the asset to the location and condition needed to operate as management intends (IAS 16.16).
- Since the Proceeds before Intended Use amendment, IAS 16 fixed assets and Ind AS 16 prohibit deducting test-output sale proceeds from cost; AS 10 still nets them. Groups reporting under both must run two treatments.
- Componentization is mandatory, not optional. Organizations must depreciate each asset component separately when its cost is high relative to the total asset cost, as required by IAS 16.43 and Schedule II of the Companies Act in India.
- Borrowing costs capitalize only on qualifying assets, and only between commencement and cessation suspension applies when active development pauses (IAS 23.17–23).
- India’s ‘AS 16’ is Borrowing Costs, not PP&E. Confusing it with IAS 16 fixed assets is the most common citation error in this area.
Conclusion
Applying IAS 16 fixed assets requirements consistently helps organizations capitalize costs correctly, depreciate significant components accurately through componentization, and strengthen financial reporting.
Furthermore, recognize borrowing costs only within the permitted capitalization period and prepare complete CWIP disclosure to support transparency and compliance. This disciplined approach improves audit readiness and keeps CWIP records accurate throughout the asset lifecycle.
FAQs on CWIP accounting standards
Q1: When do you stop capitalizing borrowing costs?
Ans: Borrowing cost capitalization ceases when substantially all activities necessary to prepare the qualifying asset for its intended use are complete (IAS 23.22). Capitalize each completed part of a project as soon as it is ready for use (IAS 23.23).
Q2: Does IAS 16 require a CWIP ageing schedule?
Ans: No. IAS 16.74(b) requires disclosure of the amount of expenditure on assets under construction, but the CWIP ageing schedule in four time buckets is an Indian requirement under Schedule III to the Companies Act, not an IFRS one.
Q3: How are sale proceeds from trial runs treated?
Ans: Under the amended IAS 16 fixed assets and Ind AS 16, organizations recognize proceeds from selling items produced before an asset is ready for use in profit or loss, along with the related production costs. They do not deduct these proceeds from the asset’s cost. In contrast, AS 10 requires organizations to deduct such proceeds from the asset’s cost.
CA Sunny Shah
