Capitalization of interest
SFAS 34, October 1979
“Capitalization of Interest”
“Capitalization of Interest”
Qualifying assets for interest capitalization
1. Assets that are constructed or produced
–> for the entity’s own use
–> for the entity’s own use
2. Assets that are constructed or produced
–> for sale or lease as discrete projects
–> 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
–> average accumulated expenditures x capitalization rate
2. Total amount of interest cost capitalized
–> cannot exceed the total interest cost incurred
–> cannot exceed the total interest cost incurred
Capitalization rate
1. Specific borrowings for the construction
–> interest rate for specific borrowings
–> interest rate for specific borrowings
2. For the average accumulated expenditures over the specific borrowings
–> weighted average interest rate of other 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
(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
(4) The asset is substantially complete
(5) The asset is ready for its intended use