Borrowing costs on development projects

Interest capitalization directly shifts finance costs from the current period's P&L into inventory, so getting the qualifying-asset, suspension and phase-cessation judgments wrong either overstates margins on units sold now or understates current profitability, both are recurring regulatory and audit findings given the scale of land banking regionally. A further recurring error is continuing to capitalize on units sold off-plan whose revenue is recognized over time, which a 2019 IFRIC agenda decision indicates is generally not appropriate.

Can each borrowing facility be mapped to the specific project(s) or phases it funds, distinguishing specific from general borrowings? Is each project/phase actively under development (a genuine qualifying asset), or is any part idle land with no development activity? Has capitalization been suspended during any extended interruption (permit disputes, funding halts, litigation), and resumed only when substantial activity restarts? Is revenue on sold units recognized over time under IFRS 15 and, if so, has capitalization on those units stopped, since the related receivable or contract asset and the inventory relating to units already sold are generally not qualifying assets? Is capitalization ceased phase-by-phase as each phase reaches readiness for sale, rather than only when the entire master project completes?

1) Map each borrowing facility (bank loan, murabaha, ijara, sukuk) to the specific project(s) it funds; where a facility funds multiple projects/phases, treat it as a general borrowing for allocation purposes. 2) Confirm each project/phase is a 'qualifying asset', i.e. it necessarily takes a substantial period to get ready for its intended sale, land held with no development activity is not a qualifying asset and does not qualify for capitalization. 2a) Where units are sold off-plan and revenue is recognized over time under IFRS 15, consistent with a 2019 IFRIC agenda decision, generally do not capitalize borrowing costs on those units: the developer's resulting balance is a receivable or contract asset (a receivable is a financial asset and neither is a qualifying asset), and the inventory relating to units already sold is no longer an asset being prepared for its intended sale. In the fact pattern of that decision, part-constructed unsold units that the developer intends to sell in their current condition as soon as it finds buyers were not qualifying assets either, so assess each project's facts. Capitalization continues on qualifying assets, such as unsold units and land under active development in projects whose revenue is recognized at a point in time (on handover). 3) Identify the capitalization start date: when expenditure on the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for sale are in progress. 4) Suspend capitalization during extended periods in which active development is interrupted (e.g. permit disputes, litigation, funding halts), routine short delays inherent to the construction process do not require suspension. 5) Cease capitalization phase-by-phase (not project-wide) when substantially all the activities necessary to prepare that phase for its intended sale are complete, even if other phases continue; document each phase's stop date with the project timeline/completion certificate.

Measurement base: for borrowings taken specifically to fund a project, capitalize the actual profit/interest cost incurred on that borrowing during the capitalization period, net of any investment income earned on temporary investment of unused proceeds; for general borrowings, apply a weighted-average capitalization rate (total general borrowing costs for the period divided by the weighted-average general borrowings outstanding) to the qualifying spend on the asset, capped at actual borrowing costs incurred. Subsequent measurement: capitalized borrowing costs become part of the development property's cost base and are subsequently carried at the lower of cost and NRV like any other inventory cost component (see RECON-002/RECON-008), releasing to cost of sales as the related units are sold. Borrowing costs relating to units whose revenue is recognized over time are generally expensed as finance costs rather than capitalized (see recognition step 2a).

Disclose the amount of borrowing costs capitalized during the period, by project/phase where material; disclose the capitalization rate used for general borrowings; reconcile total finance costs incurred to the amounts capitalized versus expensed; disclose qualifying assets for which capitalization was suspended during the period and the reason; disclose the accounting policy for determining capitalization start/suspension/cessation dates, including at the phase level for multi-phase projects.

• Continuing to capitalize borrowing costs on units sold off-plan whose revenue is recognized over time, although the related receivable or contract asset and the inventory relating to sold units are generally not qualifying assets
• capitalizing profit/interest on idle land banks held for years with no active development activity (fails the qualifying-asset test entirely)
• continuing capitalization on projects that are effectively stalled (permit disputes, funding freezes, disputes with contractors) rather than suspending during the halt
• missing phase-by-phase cessation dates in multi-phase communities, capitalizing costs on completed phases as if the whole master plan were still '
• in progress'
• treating Islamic finance profit charges (murabaha/ijara) as outside IAS 23 scope merely because they are not labelled '
• interest'
• , the economic substance of a financing cost is what matters
• using an incorrect weighted-average rate that includes borrowings unrelated to development activity.