What happens to borrowing cost capitalization when construction of a qualifying asset is suspended for an extended period?

Under IAS 23, borrowing costs must be expensed during extended periods when active development of the qualifying asset is suspended. This is a commonly tested exception to the capitalization rule.

The Rule:

Capitalization of borrowing costs shall be suspended during extended periods in which active development is interrupted. However, capitalization is NOT suspended during a period in which substantial technical and administrative work is being carried out, or when a temporary delay is a necessary part of the process.

Example:

Magellan Construction is building a waterfront mixed-use complex. Total project-specific borrowing = $40,000,000 at 6% annually. Timeline:

Monthly borrowing cost = $40M x 6% / 12 = $200,000

Accounting treatment:

• Jan–Jun 2025: Capitalize $200,000/month x 6 = $1,200,000 added to asset cost
• Jul 2025–Feb 2026: Expense $200,000/month x 8 = $1,600,000 in profit or loss
• Mar–Dec 2026: Capitalize $200,000/month x 10 = $2,000,000 added to asset cost

When suspension does NOT stop capitalization:

1. Technical and administrative work — if architects are redesigning during the pause, or engineers are testing foundations, capitalization continues because development work is ongoing.
2. Seasonal delays — a road project in northern Canada that cannot proceed during winter months may continue capitalizing because the delay is an inherent, expected part of the construction process.
3. Brief delays — a two-week work stoppage for routine equipment maintenance would not typically be considered "extended."

Analyst perspective:

The distinction matters significantly. During the 8-month suspension, Magellan's income statement absorbs $1.6M in interest expense that would otherwise have been capitalized. This reduces reported earnings and could affect debt covenants tied to interest coverage ratios.

Comparison with US GAAP:

ASC 835-20 contains a similar requirement — interest capitalization ceases when activities necessary to get the asset ready for its intended use are deliberately suspended. Both frameworks converge on this point.

Exam tip: Look for keywords like "halted," "suspended," "delayed due to litigation/strike/funding shortfall" as signals that capitalization must stop. Keywords like "engineering studies in progress" or "seasonal suspension" signal that capitalization continues.

Explore more IAS 23 scenarios in our CFA Level I FRA question bank.