Borrowing costs

I’m assuming the question was something like “Interest of $x was paid on borrowings made in order to build the asset. This has now been determined to meet the criteria for capitalisation under IAS 23. Determine the adjustments required”

Normally, when you pay interest on borrowings, this is a finance cost, an expense for the year, and this goes to the P&L. The journal is:

Cr Cash (balance sheet) x
Dr Finance costs (P&L) x

However, if it is then determined to meet the criteria for capitalisation, it is no longer an expense on the P&L, but part of the value of the asset. This will then be expensed over the life of the asset as part of depreciation.

Therefore the journal should actually have been

Cr Cash (balance sheet) x
Dr Non-current asset (balance sheet) x

If the first journal was already posted, and it is later determined that it should have been the second one, the correcting journal will be

Cr Finance costs (P&L) x
Dr Non-current asset (balance sheet) x

There you can see the profit has been credited by x, and therefore increased, because in fact the asset has a carrying value x higher than we thought.

Because of the line

Cr Finance costs (P&L) x

This reduces finance costs and hence increases profit. We are doing this because the interest is not being treated as an expense, but part of the cost of the asset.

I think, the doubt was about why reduce finance cost of the subsidiary ?
Could you please explain who the subsidiary’s finance cost would get impacted, unless we are doing a consolidation.