Which projects are eligible for capitalization of borrowing costs?

• A. All ongoing projects.
• B. Only projects that are ready for use.
• C. Only projects whose costs are fully funded by equity.
• D. Qualifying assets that require substantial period to prepare for intended use or sale.

Answer: (D)

Borrowing costs are added to the cost of an asset only when that asset qualifies as something that takes a substantial time to get ready for use or sale. This means the project must be a qualifying asset—one that inherently requires a long development period before it can be used or sold. If a project is just under construction for a long time, the interest or other borrowing costs incurred during that period can be capitalized as part of the asset’s cost. Once the asset is ready for use, capitalization stops.

This rules out all-inclusive statements like capitalizing for all ongoing projects or only for assets that are already ready for use. It also isn’t about how the project is financed in general—whether by debt or by equity—the key factor is whether the asset qualifies and requires a substantial period to prepare. A typical example is a new office tower or a factory being constructed over many months or years; those borrowing costs are capitalized. In contrast, a short-term project or an asset that is not destined to take a long time to prepare would not qualify for capitalization.