Summary of Statement No. 34
Summary of Statement No. 34
Capitalization of Interest Cost (Issued 10/79)
Summary
This Statement establishes 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. Examples are
assets that an enterprise constructs for its own use (such as
facilities) and assets intended for sale or lease that are
constructed as discrete projects (such as ships or real estate
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. 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. A weighted average of the rates on
other borrowings is to be applied to expenditures not covered by
specific new borrowings. Judgment is required in identifying the
borrowings on which the average rate is based.