When interest on a loan becomes part of the cost of what you're building, and when it stays an everyday expense.
Quick answer: a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, such as a factory, a power plant or a property being developed.
Under the Australian accounting standard AASB 123 Borrowing Costs (the local version of IAS 23), interest and other borrowing costs directly attributable to building, buying or producing a qualifying asset are added to that asset's cost. All other borrowing costs are expensed in the period they are incurred.
If your business is borrowing to build something that takes time, such as premises, a production line or a development, the accounting treatment of that interest affects your profit and your balance sheet. Here's how the rule works, with a worked example.
"An asset that necessarily takes a substantial period of time to get ready for its intended use or sale."
AASB 123 Borrowing Costs, paragraph 5
The meaning of a qualifying asset comes down to three tests. An asset needs to pass all three.
Getting it ready involves a substantial period. The standard doesn't set a number of months, so this is a judgement call.
The delay comes from the work itself, such as construction, permits or production, not from choosing to hold the asset idle.
An asset that's ready for use or sale the day you buy it isn't a qualifying asset, however expensive it is.
AASB 123 lists the kinds of assets that may be qualifying assets, depending on the circumstances. It also names what never qualifies.
The standard also lets businesses choose not to apply it to assets measured at fair value (for example biological assets under AASB 141) and to inventories produced in large quantities on a repetitive basis.
Borrowing costs are interest and other costs a business incurs in connection with borrowing funds. Under AASB 123 they can include:
The cost of equity, such as dividends to shareholders, isn't a borrowing cost.
Capitalisation of borrowing costs only runs while the asset is being actively prepared. The standard sets clear points for when it starts, pauses and stops.
Capitalisation starts on the date the business first meets all three conditions: it's spending money on the asset, it's incurring borrowing costs, and it's carrying out the activities needed to get the asset ready. Those activities can include technical and administrative work before construction, such as obtaining permits.
If active development is suspended for an extended period, capitalisation is suspended too, and interest for that period is expensed. A temporary delay that's a normal part of the process doesn't stop capitalisation. The standard's example is a bridge build held up by high water levels that are common in that region.
Capitalisation stops once substantially all the work to get the asset ready is complete, usually when physical construction is finished, even if minor touches such as decoration remain. If the asset is completed in parts that can each be used, such as separate buildings in a business park, each part stops separately.
Figures are made up to show how the rule works. They aren't current interest rates or a quote.
A business takes out a construction loan specifically to build a new warehouse. The project takes 12 months from start to completion, including a 2-month period when the business halts work while it renegotiates a supplier contract. During the build, it parks undrawn loan funds in a term deposit.
| Item | Amount | Treatment |
|---|---|---|
| Interest on the construction loan over the 12 months | $70,000 | Starting point |
| Less interest for the 2-month voluntary halt | −$9,000 | Expensed: work was suspended for an extended period |
| Less interest earned on undrawn funds in the term deposit | −$3,000 | Deducted from the amount capitalised |
| Borrowing costs added to the warehouse's cost | $58,000 | Capitalised |
Once the warehouse is substantially complete, interest on the loan is expensed each period like any other interest. The $58,000 becomes part of the warehouse's cost and is depreciated over the building's useful life.
Where a business funds the asset from its general borrowings rather than a specific loan, the standard applies a capitalisation rate: the weighted average cost of its general borrowings, applied to the spending on the asset. The amount capitalised can't exceed the borrowing costs actually incurred in the period.
Source: AASB 123 Borrowing Costs, paragraphs 7, 17 and 26. AASB 123 incorporates IAS 23, so for-profit entities complying with AASB 123 also comply with IAS 23. Smaller entities using simplified disclosures (Tier 2) are exempt from the two disclosures.
The accounting is your accountant's area. The finance behind it is ours. If your business is planning large-scale projects or long-term investments, the loan structure matters as much as how the interest is recorded. That includes progressive drawdowns, interest-only periods during construction and the timing of when the facility converts to repayments.
Not sure whether a project is better funded as asset finance or project finance? Read deciding between asset finance and project finance.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Borrowing costs directly attributable to acquiring, building or producing it are added to its cost under AASB 123 and IAS 23.
AASB 123 doesn't define a set number of months, so it's a matter of judgement for the business and its auditor based on the facts. Assets that take only a short time to produce or prepare aren't qualifying assets.
Interest on land is capitalised only while development activities are under way on it. If land bought for building is held with no development activity, the interest is expensed.
For assets within its scope, AASB 123 requires capitalisation of directly attributable borrowing costs. It's optional for assets measured at fair value, for inventories produced in large quantities on a repetitive basis, and for not-for-profit public sector entities, which may choose to expense borrowing costs.
AASB 123 incorporates IAS 23, and for-profit entities that comply with AASB 123 also comply with IAS 23. AASB 123 adds some Australian-specific paragraphs, mainly for not-for-profit public sector entities.
Not necessarily. AASB 123 governs accounting treatment in financial statements. Tax treatment of interest is a separate question, so check it with your tax adviser.
Talk through funding options for construction, premises or equipment with Pooja Choudhary, Founder and Director of Probiz Finance. Probiz has helped fund 100+ businesses and settled $50M+ in finance.
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Sources
Australian Accounting Standards Board, AASB 123 Borrowing Costs (compiled standard, applies to annual periods beginning on or after 1 July 2021), checked 26 October 2026.
Federal Register of Legislation, AASB 123 Borrowing Costs, latest version, checked 26 October 2026.
General information only. This article explains an accounting standard in plain terms and isn't accounting, tax, financial or legal advice. Speak to your accountant about how AASB 123 applies to your business. Any lending is subject to lender assessment and approval.
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