Capitalizing Interest as a Construction Cost

How To Capitalize Interest as a Construction Cost

As construction begins on a facility, many churches finance the costs with external debt. The debt is not free since interest is paid periodically to the bank. The interest is also a cost of the construction of the asset and should be capitalized as part of the cost of the facility. The facility cost, including capitalized interest, is then depreciated over the estimated useful life of the asset – 40, 50, 70 years, or more.

To qualify for interest capitalization, assets must require a period of time to get them ready for their intended use. (FAS34). Interest shall begin when three conditions are met:

1. Expenditures have been made.

2. Activities are in progress to get the asset ready for its use.

3. Interest cost is being incurred.

The amount capitalized during the accounting period is determined by applying the interest rate to the average amount of accumulated expenditures for the asset during the period. In order words, calculate the average “accumulated” expenditures for the year (PY accumulated total + CY accumulated total)/2 = average x interest rate of related debt or designated borrowings. This additional cost, is considered “capitalized interest” for the period and should be added to construction in progress.

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For more information see FASB Statement 34; FASB Statement 42; FASB Statement 58; FASB Statement 62;