Determining the time period for capitalization of borrowing costs

An entity should begin capitalizing borrowing costs on the commencement date.

Three conditions must be met before the capitalization period should begin :

1. Expenditures for the asset are being incurred
2. Borrowing costs are being incurred
3. Activities that are necessary to prepare the asset for its intended use are in progress

As long as these conditions continue, borrowing costs can be capitalized.

Expenditures incurred for the asset include only those that have resulted in payments of cash, transfer of other assets or the assumption of interest-bearing liabilities, and are reduced by any progress payments and grants received for that asset.

(The principle in IAS 23 par. 17(a) is that borrowing costs are capitalized only when the entity requires funding for its expenditures on the qualifying asset. IAS 23 par. 18 states that expenditures on a qualifying asset include only those expenditures that have resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities (reduced by progress payments and certain grants). Accordingly, capitalization of borrowing costs is deferred until this condition is met).

Necessary activities are interpreted in a very broad manner. They start with the planning process and continue until the qualifying asset is substantially complete and ready to function as intended. These activities may include technical and administrative work prior to actual commencement of physical work, such as obtaining permits and approvals, and may continue after physical work has ceased. Brief, normal interruptions do not stop the capitalization of interest cost. However, if the entity intentionally suspends or delays the activities for some reason, interest costs should not be capitalized from the point of suspension or delay until substantial activities in regard to the asset resume.

If the asset is completed in a piecemeal fashion, the capitalization of interest cost stops for each part as it becomes ready to function as intended. An asset that must be entirely complete before the parts can be used as intended can continue to capitalize interest costs until the total asset becomes ready to function (Hrd).