A SMALL BUSINESS OWNER'S GUIDE TO QUALIFYING ASSETS

A Small Business Owner's Guide to Qualifying Assets

A Small Business Owner's Guide to Qualifying Assets

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As a business owner, you're constantly investing in the future. Maybe you're building a new workshop, developing a custom software platform, or installing a major production line. These big projects require significant time and, often, a significant loan.

But what do you do with the interest you're paying on that loan while the project is still a work-in-progress? Most people think it's just another monthly expense. 

What if you could turn that interest cost into an asset?

That’s the power of understanding a crucial accounting concept: the qualifying asset. This isn't just jargon for accountants; it's a financial strategy that can make your business look healthier and more valuable during periods of growth.

Key Takeaways:

  • A "qualifying asset" is a major asset that takes a substantial amount of time to build or prepare.
  • The interest ("borrowing costs") from loans used to finance it can be added to the asset's total value on your balance sheet. This is called capitalisation.
  • Capitalising these costs reduces your expenses in the short term, which can improve your reported profitability.
  • There are specific rules for when to start, pause, and stop this process.

What is a Qualifying Asset?

In simple terms, a qualifying asset is any asset that requires a substantial period of time to get ready for its intended use or for sale.

The Checklist: Does Your Asset Qualify?

Not every asset you build or buy qualifies. Run your project through this simple checklist, which is based on international accounting standards (like IAS 23).

Ask yourself these three questions:

  1. Does it take a long time to prepare? The key here is "substantial period." Buying and setting up a laptop doesn't count. Constructing a building or developing a complex software system does.
  2. What is its purpose? The asset must be intended for your business's own use (like a factory), to be sold (like a real estate development), or to generate income (like an investment property under construction).
  3. Is it ready for use yet? If the asset is already complete and ready for its job, it no longer qualifies. The process only applies during the preparation and construction phase.

Examples of Qualifying Assets:

  • Buildings under construction
  • A new manufacturing or production line being installed
  • Custom software or an app during its development phase
  • Power generation facilities or infrastructure projects

Examples of Assets That DO NOT Qualify:

  • Ready-to-use machinery or vehicles bought off the shelf
  • Assets that are already in use or ready for use
  • Land (generally, land itself doesn't qualify, though developments on the land do)
  • Inventory that is manufactured routinely or in large quantities in a short period.

The Timeline: When to Start, Pause, and Stop Capitalising Costs

The rules are logical. You can't just add interest costs to your asset forever.

▶️ START when all three of these are true:

  1. You are actively spending money on the asset (e.g., paying contractors).
  2. You are incurring borrowing costs (e.g., the bank is charging you interest).
  3. You are actively working to prepare the asset (e.g., construction is underway).

⏸️ PAUSE if...

  • Active development is interrupted for an extended period. For example, if a key permit is delayed for three months and all work stops, you should typically pause capitalising the interest costs during that time. Normal, short administrative delays don't count.

⏹️ STOP when...

  • The asset is substantially complete and ready for its intended use. This is crucial: it doesn’t have to be in use, just ready for use. Once it's ready, any further borrowing costs are treated as a normal expense.

Frequently Asked Questions (FAQ)

Q: Is this mandatory?
A: It depends on the accounting standards your business follows (like IFRS or local GAAP). For many, it is the required treatment, as it more accurately reflects the true cost of acquiring the asset.

Q: This seems complicated. Why bother?
A: By capitalising borrowing costs, you shift an expense from your Profit & Loss Statement to your Balance Sheet. This increases the value of your assets and reduces your short-term expenses, making your company appear more profitable during the construction period.

Q: Does this apply to my small business, or just huge corporations?
A: The principle applies to any business, regardless of size. If you have a loan for an asset that takes a long time to build, you should speak to your accountant about this.

The Bottom Line or Key Takeaways for Your Business

Understanding qualifying assets is about smart financial management. It ensures that the cost of your major projects is represented accurately on your books and provides a more realistic picture of your company's financial health during periods of intense investment.

Before making any decisions, always discuss your specific situation with a qualified accountant. They can help you navigate the rules and apply them correctly to your business.

References & Further Reading

For a more detailed, technical breakdown of the accounting standard IAS 23, this article from ProbizFinance provides an excellent overview.

Disclaimer

The information provided in this article is for general informational and educational purposes only and is not a substitute for professional advice.

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