IND AS 23 says that
The average carrying amount of the asset during a period, including borrowing
costs previously capitalised, is normally a reasonable approximation of the
expenditures to which the capitalisation rate is applied in that period.
then what is logic behind applying rate on amount which includes previous year's capitalised borrowing cost ( though it is already paid)
As per Para 14 of Ind AS 23: ' 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, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. The amount of
borrowing costs that an entity capitalises during a period shall not exceed the
amount of borrowing costs it incurred during that period.'
According to this, term "during the period" here may be full Financial Year under concern or Period of Capitalisation. It is Weighted avg of borrowing outstanding during the period.
Borrowing cost incurred need Not be ullu capitalised, only that portion is capitalised which doesn't exceed amount after applying Capitalisation Rate. However if amount after applying capitalisation rate exceeds actual borrowing costs incurred, then Capitalisation will be restricted to actual amount.
Hope your doubt is cleared
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