ACA ICAEW Financial Accounting and Reporting Practice Exam

The capitalization of borrowing costs under IAS 23 begins when expenditure for the asset is incurred and the necessary activities to prepare the asset for its intended use or sale commence. This is based on the principle that borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets should be capitalized as part of the asset’s cost.

Specifically, the standard outlines that the process of capitalization starts when the organization begins incurring expenditures related to the asset and those activities essential to readying the asset for its intended use have started. Thus, this reflects the dual condition of incurring costs and commencing the preparatory activities, which makes the asset ready for its intended future economic benefits.

Other scenarios mentioned, such as selling the asset or completing all activities, do not align with the criteria set forth in IAS 23, as they occur after the critical phase of preparing the asset. Additionally, acquiring the asset alone does not trigger capitalization; the onset of preparatory activities combined with incurring costs is essential for the start of the borrowing cost capitalization period.