Should interest expense be capitalized
Assets that are routinely manufactured or otherwise produced in large quantities should also be excluded. What is the beginning and ending of the capitalization period? What interest should be capitalized to the asset? All interest a company incurs is potentially subject to being capitalized no matter what the purpose is for the borrowings.
In this example the components of the assets end up as follows: As shown the percentage of the total is small but considering the total funds involved even a low percentage can amount to significant dollars. SB — Memo ». The Board tentatively decided that the expected benefits of a final Statement justify the perceived costs of implementation and ongoing compliance. The Board also discussed the characteristics of the financial information that would be provided as a result of the requirements of a final Statement.
The Board tentatively agreed that the requirements would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.
The Board reviewed a preballot draft of a final Statement, Accounting for Interest Cost Incurred before the End of a Construction Period and discussed clarifying edits.
The Board then agreed that the project staff should present a ballot draft of a final Statement, Accounting for Interest Cost Incurred before the End of a Construction Period, at the June teleconference meeting. Minutes of Meetings, April 17 and 18, The Board began redeliberations on the Exposure Draft, Accounting for Interest Cost during the Period of Construction , by discussing general feedback from respondent comments.
The Board first discussed requests received from some stakeholders for a public hearing. Based on follow-up discussions with some of those respondents, the Board tentatively decided that respondent feedback to the Exposure Draft does not necessitate a public hearing. The Board then discussed the recognition and measurement of interest cost based on respondent feedback to the Exposure Draft.
The Board tentatively decided that the requirements proposed in paragraphs 4 and 5 of the Exposure Draft regarding the recognition of construction-period interest as an expense or expenditure should be carried forward to the final Statement.
The Board tentatively agreed that the scope of the requirements should be clarified to include interest incurred prior to construction that was previously capitalized in accordance with Statement No. Also, capitalization of interests is not permitted on inventory that is routinely manufactured by an organization. Capitalization of interest is only required if the effect is material to the financial statements, otherwise, interest can be expensed as usual. Generally speaking, interest capitalization is most appropriate on projects with a large amount of expenditures and an extensive period of completion.
However, in many cases, the benefit in terms of information about the entity's resources and earnings may not justify the additional accounting and administrative cost involved in providing the information.
The significance of the effect of interest capitalization in relation to the entity's resources and earnings is the most important consideration in assessing its benefit. The ease with which qualifying assets and related expenditures can be separately identified and the number of assets subject to interest capitalization are important factors in assessing the cost of implementation. Interest capitalization is required only when the balance of the informational benefit and the cost of implementation is favorable.
A favorable balance is most likely to be achieved where an asset is constructed or produced as a discrete project for which costs are separately accumulated and where construction of the asset takes considerable time, entails substantial expenditures, and is likely to involve a significant amount of interest cost. A favorable balance is unlikely in the case of inventory items that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Accordingly, this Subtopic proscribes interest capitalization on those types of inventories that is, inventory items that are routinely manufactured or produced in large quantities on a repetitive basis and provides for interest capitalization on assets that are constructed or produced as discrete projects.
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The cause-and-effect relationship between acquiring an asset and the incurrence of interest costs makes interest cost analogous to a direct cost that is readily and objectively assignable to the acquired asset. ASC defines qualifying assets while ASC lists those assets for which interest should not be capitalized. ASC Interest shall not be capitalized for the following types of assets:.
Assets that are in use or ready for their intended use in the earning activities of the entity. Assets that are not being used in the earning activities of the entity and that are not undergoing the activities necessary to get them ready for use.
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