Under IAS 23, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised as part of the cost of that asset. This is a mandatory requirement — IAS 23 removed the option to expense all borrowing costs following its 2007 revision (effective 1 January 2009).

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What is a Qualifying Asset?

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale (IAS 23.5). Common examples include:

• Manufacturing plants and power generation facilities
• Intangible assets under development
• Investment properties under construction
• Inventories requiring lengthy production processes (e.g., whisky, real estate developments)

Assets that are ready for use or sale when acquired, or routinely manufactured in large quantities over short periods, do not qualify (IAS 23.7).

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Commencement of Capitalisation

Capitalisation begins when all three of the following conditions are met (IAS 23.17):

• Expenditures on the asset are being incurred
• Borrowing costs are being incurred
• Activities necessary to prepare the asset for its intended use or sale are in progress

"Activities" is interpreted broadly and includes technical and administrative work, not just physical construction (IAS 23.19).

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Suspension of Capitalisation

Capitalisation must be suspended during extended periods of active development suspension (IAS 23.20). For example, if construction is halted for several months due to a management decision, borrowing costs incurred during that interruption are expensed. However, temporary delays that are a necessary part of the process (e.g., a technical review period) do not trigger suspension.

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Cessation of Capitalisation

Capitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete (IAS 23.22). Key points:

• If different parts of an asset are completed separately and can be used independently, capitalisation ceases for each completed part individually (IAS 23.24)
• Minor outstanding items (e.g., decorating a building) do not prevent cessation if the asset is substantially complete

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Calculating the Amount to Capitalise

• For specific borrowings, the actual borrowing costs incurred less any investment income earned on temporary surplus funds are capitalised (IAS 23.12)
• For general borrowings, a capitalisation rate is applied — calculated as the weighted average of borrowing costs on all outstanding borrowings, excluding specific borrowings (IAS 23.14)
• The amount capitalised must not exceed the total borrowing costs incurred in the period (IAS 23.14)

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Disclosure Requirements

Entities must disclose (IAS 23.26):

• The amount of borrowing costs capitalised during the period
• The capitalisation rate used for general borrowings

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Practical Consideration

A common area of judgement is determining what constitutes a "substantial period of time." IAS 23 provides no specific threshold, leaving it to professional judgement — though in practice many entities use 12 months as an informal benchmark.