ACCA Strategic Business Reporting (SBR) Practice Exam

Under IAS 23, when is capitalisation of finance costs required?

1. For all assets purchased

2. Only for non-qualifying assets

3. For any qualifying asset

4. When assets are financed through government grants

The correct answer is: For any qualifying asset

Under IAS 23, capitalisation of finance costs is specifically required for any qualifying asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. For example, this would typically apply to assets like buildings or large machinery that require significant time to be constructed or assembled. When an entity borrows funds to finance the construction or production of these assets, the finance costs that are directly attributable to the acquisition, construction, or production of the qualifying asset can be included in the cost of that asset. This treatment is in line with the matching principle of accounting, which aims to align expenses with the revenues they help generate over time. This capitalisation is mandated to better reflect the true cost of purchasing or producing an asset and ensures that these costs are not expensed immediately but instead amortised over the useful life of the asset, providing a more accurate representation of financial performance and position in the financial statements. In contrast, the other options do not align with the guidance provided under IAS 23. For instance, not all assets purchased qualify for capitalization under this standard, and government grants facilitate assets but do not directly relate to capitalising finance costs.