Capitalization of borrowing costs on qualifying assets

Interest on borrowings directly attributable to constructing a warehouse, terminal, or vessel that necessarily takes a substantial period to get ready for use must be capitalized as part of the asset's cost rather than expensed as incurred. Incorrect capitalization (too much or too little) directly misstates both the constructed asset's cost/future depreciation and current-period finance costs, affecting both the balance sheet and reported profitability during major infrastructure build-outs.

Is the asset under construction (e.g., a terminal, depot, or vessel) genuinely a 'qualifying asset' that necessarily takes a substantial period to get ready for its intended use, as opposed to a routine short-build item? Are the borrowings specific to this project, or general borrowings requiring a weighted average capitalization rate? Has any investment income earned on temporarily investing unused specific-loan proceeds been deducted from capitalized borrowing costs, and has capitalization been suspended during any extended period of inactive development?

1) Confirm the asset under construction is a 'qualifying asset', one that necessarily takes a substantial period to get ready for its intended use or sale (a warehouse or vessel typically qualifies; routine short-build assets do not). 2) Identify whether borrowings are specific to the project or general-purpose. 3) Begin capitalization only when all three conditions are met: expenditures on the asset are being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for use are in progress. 4) Suspend capitalization during extended periods in which active development is interrupted (not brief, normal delays). 5) Cease capitalization when substantially all activities necessary to prepare the asset for its intended use are complete, even if minor finishing work remains. 6) For specific borrowings, capitalize actual costs incurred less any investment income earned on temporary investment of unspent funds.

For specific borrowings, measure capitalized borrowing costs as actual interest incurred on the specific loan during the capitalization period, less any investment income earned on temporarily investing the unused loan proceeds. For general borrowings used partly to fund the qualifying asset, apply a weighted average capitalization rate (calculated on the entity's general borrowings outstanding during the period) to the expenditure on the asset that exceeds any specific borrowings. Do not capitalize more borrowing costs than were actually incurred during the period.

Disclose: (1) the amount of borrowing costs capitalized during the period; (2) the capitalization rate used to determine the amount of general borrowing costs eligible for capitalization; (3) the qualifying assets for which capitalization occurred; (4) any period of suspension of capitalization and the reason; (5) total borrowing costs incurred (capitalized plus expensed) for context.

• Capitalizing interest during long delays unrelated to active construction activity (e.g. permitting disputes with no site work occurring), when capitalization should be suspended
• capitalizing borrowing costs on routine fleet or working-capital financing that is not linked to a genuinely qualifying asset
• continuing to capitalize after the asset is substantially ready for use, just because final minor works remain
• failing to net specific-borrowing interest against temporary investment income earned on undrawn project funds.