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When should I capitalize interest cost?

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Question added by Mohamed Seifeldin , Finance Manager , Mashareq & Maghareb For Construction, Yazeed Al Rajhi & Brothers Holding
Date Posted: 2016/06/27
SHAHZAD Yaqoob
by SHAHZAD Yaqoob , SENIOR ACCOUNTANT , ABDULLAH H AL SHUWAYER

When should I capitalize interest cost?

You capitalize interest cost in order to obtain a more complete picture of the total acquisition cost associated with an asset, since an entity may incur a significant interest expense during the acquisition and start-up phases of an asset.

You should include interest expense in the cost of acquiring an asset during the period when an entity is carrying out those activities needed to bring the asset to its designated condition and location. The amount of interest capitalized should be the amount incurred during the period because of expenditures for the asset.

It is not always necessary to capitalize interest cost. The most optimum situation for doing so is when an asset requires substantial expenditures and a substantial period to construct, thereby accumulating a significant amount of interest cost. However, if there is a significant additional accounting and administrative cost associated with capitalizing interest cost, and the benefit of the additional information is minimal, you do not have to capitalize it.

You should capitalize the associated interest cost for the following assets:

  • Assets constructed for an entity’s own use.
  • Assets constructed for an entity by a supplier, with deposits or progress payments having been made.
  • Assets intended for sale or lease that are constructed as discrete projects (such as a cruise ship).
  • Investments that the investor accounts for under the equity method, where the investee has activities in progress to start up its principal operations, and is using funds to acquire assets for those operations. In this case, the interest cost to be capitalized is based on the investment in the investee, not the underlying assets of the investee.

You should not capitalize the associated interest cost for the following assets:

  • Assets that are either in use already or ready for their intended use.
  • Assets that are not being prepared for use.
  • Assets that are not being used in an entity’s earnings activities.
  • Assets that are not included in the consolidated balance sheet of the parent entity.
  • Investments that the investor accounts for under the equity method, when the principal activities of the investee have already begun.
  • Investments in regulated investees that are capitalizing the cost of debt and equity capital.
  • Assets acquired with gifts or grants from donors, where the gift or grant is restricted to the acquisition of those assets.
  • Inventories that are routinely manufactured on a repetitive basis.

You can only capitalize the interest cost associated with land if it is undergoing those activities necessary to prepare it for its intended use. If so, the expenditure to acquire the land qualifies for interest capitalization.

If an entity constructs a building on a newly-acquired land parcel, then the interest cost associated with the building should be capitalized as part of the building asset, rather than the land asset.

Entire Interest Cost during Construction period should be capitalized once the Project gets commissioned.

Ex: If your project construction starts on Jan 01, 2016 and ends on July 31, 2017. Interest paid to banks during this construction period should be capitalized on July 31, 2017

manaf almas
by manaf almas , Auditor , DAR AL NUZUM PUBLIC ACCOUNTANTS

Interest cost is eligible to be capitalised only for qualifying assets."Qualifying assets are those assets which takes substancial time to get ready for its intended to use..                

Interest incured up to the time of use of asset you can capitalise

Asset a/c

TO Bank /cash

Interest incured after start to use you can treated as expense and transfered to profit and loss account

profit and loss a/c  

To        Interest ac/c

 

Interest capitalise only that part which related to construction .acquisition or production of a asset

Dhruthi Shah
by Dhruthi Shah , Senior Controller , Expro Overseas

One should capitalise interest cost for those qualifying assets which are still in creation and which takes substantial time to get created. In such situation interest cost needs to be added to the cost of the asset. 

capitalisation should occur when expenditure is incurred. 

Mahmoud Hamid
by Mahmoud Hamid , Finance Manager , Corp. Fin.

Interest cost should be capitalized when it relates to an asset the company acquring and carrying out the activities needed to bring the asset to its designated conditon. This could include the following cases:

Assets constructed for the company's own use, either by the company itself or be a supplier with depoists or progress payments having been made.

Assets intended for sale or lease that are constructed as discrete projects.

Investments that the investor accounts for under the equity method, where the investee has activities in progress to start up it principal operations, and is using funds to acquire assets for those operations. In this case, the interest cost should be capitalized based on the investment in the investee, not the underlying assets of the investss.

 

Zaheer uddin Raja
by Zaheer uddin Raja , Accounts Supervisor , Pakistan International Airlines

Many fixed assets require carrying out necessary activities to be ready for intented use.

Assume that funds are borrowed to acquire / construct those assets.

Total asset cost (capitalised cost) would be:

A) Borrowed funds utilised for this purpose, PLUS

b) Interest thereon, for the period when those necessary activities were being performed (excluding any significant period when performance was discontinued) upto the date when asset is ready for intended use. LESS

c) Income from investing borrowed funds during this period.

 

IBRAHIM MOHAMMED - CMA
by IBRAHIM MOHAMMED - CMA , Senior Accountant , Ajal Finance & Investment K.S.C.C

when asset is constructed or acquiring for business activities.

 

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