In one sentenceFinance costs a business incurs on money it has borrowed; they are added to the cost of an asset if they finance an asset that takes a long time to get ready.
Simply put
An asset that takes a long time to build, such as a building or a factory, is called a qualifying asset. The cost of financing it during construction is part of its cost (international standard IAS 23).
Once the asset is ready for use, capitalization stops, and finance costs after that are recorded as an expense in the income statement.
Worked example
A company took financing of 2,000,000 SAR to build a warehouse that took a full year, with a finance cost of 6% per year (an assumed rate for illustration).
Finance cost during the construction year: 2,000,000 × 6%120,000 SAR
Construction cost2,000,000 SAR
Cost of the warehouse in the books: 2,000,000 + 120,0002,120,000 SAR
Don't confuse it with
ExpenseCosts of financing normal operations or ready assets are an immediate expense, and are capitalized only for a qualifying asset during its construction.