Wiley Not-for-Profit GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles

30 CAPITALIZATION OF INTEREST COSTS

Perspective and Issues

Concepts, Rules, and Examples

The Amount of Interest Capitalized

Determining the Time Period for Interest Capitalization

Capitalization of Interest Costs Incurred on Tax-Exempt Borrowings

Assets Acquired with Gifts or Grants

Land

Summary of Interest Capitalization Requirements

Disclosure Requirements

PERSPECTIVE AND ISSUES

The cost of an asset should include all of the costs necessary to get the asset set up and functioning properly for its intended use. FASB ASC 835-20 provides the GAAP requirements concerning the capitalization of interest. While the requirements for interest capitalization are generally the same for not-for-profit organizations as for commercial enterprises, not-for-profit organizations need to pay particular attention to the rules discussed in this section for capital assets acquired through gifts or grants.

The principal purposes to be accomplished by the capitalization of interest costs are:

1. Achieve a more accurate original asset investment cost.
2. Achieve a better matching of costs deferred to future periods with revenues of those future periods.

CONCEPTS, RULES, AND EXAMPLES

All assets that require a time period to get ready for their intended use should include a capitalized amount of interest costs. However, accomplishing this level of capitalization would usually violate a reasonable cost/benefit test because of the added accounting and administrative costs generated. In many situations, the ...