Capitalization of Interest, ASC 835

Capitalization of interest

SFAS 34, October 1979
“Capitalization of Interest”

Qualifying assets for interest capitalization
1. Assets that are constructed or produced
–> for the entity’s own use

2. Assets that are constructed or produced
–> for sale or lease as discrete projects

Interest cost is not capitalized
–> for inventories

Amount of interest to be capitalized
1. Amount to be capitalized
–> average accumulated expenditures x capitalization rate

2. Total amount of interest cost capitalized
–> cannot exceed the total interest cost incurred

Capitalization rate
1. Specific borrowings for the construction
–> interest rate for specific borrowings

2. For the average accumulated expenditures over the specific borrowings
–> weighted average interest rate of other borrowings

Capitalization period
1. Capitalization begins when (1), (2), (3) occur
(1) Interest cost is incurred
(2) Construction activities are in progress
(3) Expenditures are incurred

2. Capitalization ends when (4) and (5) occur
(4) The asset is substantially complete
(5) The asset is ready for its intended use