Question

On asset acquisition costs, what is FASB's requirement on the treatment of interest costs incurred in financing discrete self-constructed assets?

Answer 1

There are certain Standards for capitalizing interest cost as part of the historical cost of acquiring certain assets. To qualify for interest capitalization, assets must require a period of time to get them ready for their intended use.for ex: assets that an enterprise constructs for its own use and assets intended for sale or lease that are constructed as discrete projects . Interest capitalization is required for those assets if its effect, compared with the effect of expensing interest, is material. If the net effect is not material, interest capitalization is not required. However, interest cannot be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis.

The interest cost eligible for capitalization shall be the interest cost recognized on borrowings and other obligations that may be attached. The amount capitalized is to be an allocation of the interest cost incurred during the period required to complete the asset. The interest rate for capitalization purposes is to be based on the rates on the enterprise's outstanding borrowings. If the enterprise associates a specific new borrowing with the asset, it may apply the rate on that borrowing to the appropriate portion of the expenditures for the asset.

Hence if in asset acquisition cost the interest costs should be capitalised if the amount is material and the asset should be intended to sale/lease.