What is the effect of borrowing costs on qualifying assets?

When a company incurs borrowing costs for financing the acquisition or construction of qualifying assets, these costs are capitalized as part of the cost of those assets. This means that instead of recognizing borrowing costs as an immediate expense in the income statement, they are added to the balance sheet value of the asset. This approach reflects the notion that the interest expense incurred is part of the cost necessary to bring that asset to the condition and location for its intended use.

Qualifying assets typically include assets that require a substantial period of time to prepare for their intended use, such as property, plant, and equipment or certain types of intangible assets. Capitalizing borrowing costs ensures that the total expenditure associated with acquiring or constructing an asset is properly reflected in its carrying amount. This approach aligns with the accrual basis of accounting, where costs related to an asset are matched against the revenues generated by that asset over its useful life.

By adding borrowing costs to the cost of the qualifying asset, the financial statements reflect a more accurate view of the total investment made by the company in that asset, which can impact financial ratios, depreciation schedules, and overall financial performance reporting.