Three types of asset capitalization

The first condition is that asset expenditure has occurred. This condition refers to the expenses incurred by an enterprise for purchasing and constructing fixed assets, including the expenses incurred in the form of paying cash, transferring non-cash assets and undertaking interest-bearing debts.

The second condition is that the borrowing cost has already occurred. This condition refers to the borrowing cost of special loans incurred by enterprises for purchasing, constructing or producing assets that meet capitalization conditions, or the borrowing cost of general loans occupied.

The third condition is that the construction or production activities necessary to make the assets reach the predetermined usable or saleable state have begun. Here, "the purchase, construction or production activities necessary to make the assets usable or salable have started" mainly refers to the fact that the physical construction or production of assets that meet the capitalization conditions has started, such as the installation of major equipment and the actual construction of factories. It includes not only holding assets, but also substantive construction or production activities that change the shape of assets.

Only when the above three conditions are met at the same time can the enterprise start to capitalize the relevant borrowing costs, and as long as one of the conditions is not met, the borrowing costs cannot start to be capitalized.

Capitalization means that as an asset (especially fixed assets and intangible assets), it can only be amortized by stages and cannot be directly included in the current profit and loss. For example, if the borrowing cost is included in the construction in progress, it will be capitalized, recorded in the fixed assets and amortized in installments.

Accounting standards stipulate the time to suspend the capitalization of borrowing costs. If the assets that meet the capitalization conditions are abnormally interrupted in the process of purchase, construction or production, and the interruption lasts for more than 3 months, the capitalization of borrowing costs shall be suspended. The reason of interruption must be abnormal interruption, which belongs to normal interruption, and the relevant borrowing costs can still be capitalized.

Abnormal interruption is usually caused by enterprise management decisions or other unforeseeable reasons. For example, a quality dispute between the enterprise and the construction party, or the supply of engineering and production materials is not timely, or the capital turnover is difficult, or a safety accident occurs in construction production, or a labor dispute related to the purchase, construction and production of assets is an abnormal interruption.