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In the AUC (Asset Under Construction) capitalization process, the first step is the acquisition of the asset. This phase involves gathering all the costs related to the construction or acquisition of an asset before it is capitalized. During this step, the expenses incurred in the construction process are recorded as they arise, reflecting expenditures such as materials, labor, and overhead costs.

This initial phase is crucial as it lays the foundation for the subsequent steps in the capitalization process, which involves moving the recorded costs to the fixed asset register once the construction is completed and the asset is ready for use. The other options, while part of the overall lifecycle of asset management, do not represent the first step in the AUC capitalization process. For example, distribution relates to allocating costs to different projects or departments, settlement refers to finalizing costs charging to the fixed asset, and retirement involves disposing of an asset once it is no longer in use. Hence, the correct focus on the acquisition as the first step emphasizes the importance of recording initial costs in preparing for capitalization.