When can borrowing costs be capitalized according to UK GAAP?

The capitalization of borrowing costs under UK GAAP is appropriate when those costs are directly attributable to the acquisition, construction, or production of a qualifying asset. A qualifying asset generally includes substantial projects that take a significant amount of time to prepare for use.

The correct answer indicates that capitalization is based on the average carrying amount of expenditure, which aligns with UK GAAP requirements. This means that the borrowing costs that can be capitalized should be proportionate to the amount of expenditure incurred during the asset's development phase. This alignment ensures that the borrowing costs are properly recorded as part of the overall cost of the asset, thereby accurately reflecting the total expenses incurred in bringing an asset to its usable state.

In this context, if borrowing costs are incurred on a project and it is determined that those costs can be allocated based on the average carrying amounts, they would be capitalized proportionately to that expenditure—supporting the principle that such costs should only be recognized in relation to the financed asset itself.

The other options do not fully capture the nuance of this requirement. Capitalization does not exclusively pertain to tangible assets or long-term projects over one year, nor is it limited to costs incurred in cash. Each of these points lacks the broader application of considering the overall