International Accounting Standard 23 (IAS 23) defines qualifying asset as “an asset that necessarily takes a substantial period of time to get ready for its intended use or sale”.
The concept of qualifying assets is important for the implementation of IAS 23. IAS 23 allows capitalization of borrowing costs for the qualifying assets. Borrowing costs can be of material amount and their proper accounting treatment is important for the preparation of financial statements. Therefore it is important to understand the concept of qualifying assets when applying IAS 23 for capitalizing borrowing costs.
Qualifying assets are the assets which are being built by an entity and it takes a substantial time to build them. Assets which are ready for their intended use or sale, when they are acquired, are not qualifying assets for the purpose of IAS 23.
Following are some of the examples of assets which can be classified as qualifying assets.
- A power plant which will take a substantial period of time to get ready to generate electricity
- A hydroelectric dam that serves the needs of a town and can take several years to construct
- A toll bridge which takes can take a couple of years to construct before it can be opened for the public to use
Inventories which are normally manufactured by an entity on a repetitive basis over a short period of time are obviously not qualifying assets. But the inventories which take a considerable period of time to bring to a salable condition can be regarded as qualifying assets.
Often the concept of qualifying assets is misunderstood and miscomprehended. Some entities regard or insist to regard expensive assets as qualifying assets. They think that the quantum of the borrowing costs relating to high cost of an asset justifies such an asset to be regarded as qualifying asset. They argue that the borrowing costs relating to an expensive asset are significant therefore it would not be appropriate to expense them. But, according to IAS 23, an asset cannot be regarded as a qualifying asset on the basis of this justification.