Borrowing costs on hotel/outlet construction

Getting capitalization timing wrong on hotel or flagship outlet construction - starting too early, continuing through a construction suspension, or capitalizing past substantial completion - directly misstates both the capitalized asset cost and the current period's finance expense, and is a frequent source of audit adjustment for developers with significant construction-period debt.

Does the asset under construction (new hotel, major outlet build-out) take a substantial period of time to get ready for its intended use, making it a qualifying asset under IAS 23? Is the construction funded by specific borrowings (allowing direct capitalization net of any investment income on temporary surplus funds) or by general borrowings (requiring a weighted-average capitalization rate)? Has capitalization been suspended during any period of extended interruption to construction activity, and stopped once the asset is substantially complete and ready for use?

1. Confirm the asset is a 'qualifying asset' - one that necessarily takes a substantial period of time to get ready for its intended use (a new hotel build or major outlet build-out typically qualifies; a routine short fit-out generally does not).
2. Identify whether financing is specific (a loan raised specifically for the project) or general borrowings used partly to fund the project.
3. Confirm all three capitalization commencement conditions are met simultaneously: (a) expenditures on the asset are being incurred, (b) borrowing costs are being incurred, and (c) activities necessary to prepare the asset for its intended use are in progress.
4. Begin capitalizing borrowing costs from the date all three conditions are first met - not from loan drawdown date or contract signing date if construction activity has not yet started.
5. Suspend capitalization during extended periods in which active development is interrupted (e.g., a permitting dispute halting all site activity) - routine, temporary delays inherent to the construction process (e.g., normal weather delays) do not require suspension.
6. Resume capitalization when active development resumes.
7. Cease capitalization when substantially all the activities necessary to prepare the asset for its intended use are complete - typically physical completion and readiness for occupancy/trading, even if minor finishing work or normal administrative work remains; interest thereafter (including any 'dark period' before opening) is expensed.
8. Where a project is completed in parts capable of independent use (e.g., a phased hotel with a wing that opens ahead of the rest), cease capitalization on that part when it is substantially complete and ready for use, even though other parts continue.

For specific borrowings, capitalize the actual borrowing costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of unspent proceeds. For expenditure funded by general borrowings, capitalize an amount determined by applying a weighted-average capitalization rate (the weighted average of borrowing costs on all outstanding general borrowings during the period) to the qualifying asset expenditure; the amount capitalized in a period should not exceed the total borrowing costs actually incurred during that period. Continue this measurement each period until the cessation criteria are met, then expense all subsequent borrowing costs on the (now non-qualifying) completed asset as incurred.

Disclose the amount of borrowing costs capitalized during the period; disclose the capitalization rate used to determine borrowing costs eligible for capitalization on general borrowings; identify the qualifying asset(s) for which capitalization occurred; disclose the accounting policy for borrowing costs including the point of cessation; where material judgment was applied on suspension/resumption of capitalization, disclose the circumstances.

• Continuing to capitalize interest after the hotel/outlet is substantially complete and ready to trade, simply because the grand opening or soft-launch has not yet occurred
• capitalizing borrowing costs on routine, short-duration outlet fit-outs that do not meet the '
• substantial period'
• qualifying asset test
• failing to suspend capitalization during a genuine, extended construction halt (e.g., permitting or contractor dispute lasting many months)
• applying the wrong capitalization rate by including borrowings unrelated to general corporate funding, or by not weighting the rate correctly across multiple general facilities
• capitalizing costs from the loan drawdown date rather than from when all three IAS 23 commencement conditions are actually met.