Project Pages

Capitalization of Interest Cost

Project Description: The objective of this project is to reconsider the accounting and financial reporting standards for capitalization of interest cost, with the goal of enhancing the relevance of capital asset information and potentially simplifying financial reporting. In particular, the guidance will be reviewed in light of the definitions of financial statement elements now established in the GASB’s conceptual framework.

Status:
Added to Current Agenda: December 2016

Capitalization of Interest Cost—Project Plan

Background:

Accounting guidance for capitalization of interest cost historically has been based upon FASB Statement No. 34, Capitalization of Interest Cost, as amended, and FASB Statement No. 62, Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants. This guidance was incorporated into the GASB literature by Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.

Paragraph 7 of Statement 62 requires that interest cost that is incurred during the time when a government is bringing a capital asset related to business-type activities to the condition and location necessary for its intended use should be included in the historical cost of the capital asset. Although the Board modified the FASB guidance to be consistent with GASB standards—specifically, excluding capital assets related to governmental activities—the guidance was essentially incorporated into Statement 62 as is, without reexamination.

Concepts Statement No. 4, Elements of Financial Statements, was issued in June 2007. It defines assets as “resources with present service capacity that the government presently controls.” In general, interest cost is reported as an outflow of resources—an expense or expenditure, depending on the basis of accounting. Concepts Statement 4 states, “An outflow of resources is a consumption of net assets by the government that is applicable to the reporting period.” [footnote omitted]

Finally, a stakeholder requested the reexamination of the capitalization of interest guidance as a potential simplification project.

Accounting and Financial Reporting Issues: The project is considering the following issues:
  • Should interest cost that is capitalized under existing standards instead be reported as an outflow of resources?
  • If capitalization of interest cost were to be retained:
    • Should the beginning of capitalization differ depending on whether a borrowing is taxable or tax exempt?
    • What are the most suitable criteria for determining when capitalization should begin?
Project History:
  • Added to current technical agenda: December 2016
  • Deliberations began: July 2017
Current Developments: In July and August 2017, the Board had initial deliberations regarding (1) whether interest costs should be capitalized and (2) effective date and transition provisions.

Work Plan:

Board Meetings

Topics to be considered

October 2017: Review preballot draft of an Exposure Draft.
November 2017 (T/C): Review ballot draft and consider Exposure Draft for issuance.
December 2017–February 2018: Comment period.
April 2018: Redeliberations.
May 2018: Review preballot draft of a final Statement.
June 2018 (T/C): Review ballot draft and consider a final Statement for approval.

Capitalization of Interest Cost—RECENT MINUTES


Minutes of Meetings, September 27 and 28, 2017

The Board reviewed a draft of the Standards section of a proposed Exposure Draft for the capitalization of interest cost project and discussed clarifying edits.

The Board also discussed whether the expected benefits of the proposed requirements to users and other stakeholders justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements justify the perceived implementation and ongoing costs.

The Board also discussed the characteristics of the financial information that would be provided as a result of the requirements to be proposed in the Exposure Draft. The Board tentatively agreed that the proposed requirements to be included in the Exposure Draft would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, August 10 and 11, 2017

The Board deliberated transition and effective date provisions for the proposed requirements related to the capitalization of interest cost. The Board tentatively decided that the proposed requirements should be applied prospectively at the proposed effective date for all capital assets. The Board also tentatively decided that the proposed requirements should be effective for periods beginning after December 15, 2018, and that earlier application should be encouraged.

Minutes of Teleconference, July 17, 2017

The Board began its deliberations on the Capitalization of Interest Cost project by discussing whether construction-period interest should be (a) capitalized, (b) reported as a deferred outflow of resources, or (c) reported as an outflow of resources. The Board tentatively decided to propose that construction-period interest be reported as an outflow of resources and recognized as an expense/expenditure in the period in which it is incurred.

Capitalization of Interest Cost—TENTATIVE BOARD DECISIONS TO DATE


The Board tentatively decided to propose that:
  • Construction-period interest cost be accounted for as an outflow of resources (expense/expenditure) in the period in which it is incurred, subject to the measurement focus.
  • The requirements be applied prospectively at the effective date for all capital assets.
  • The requirements be effective for periods beginning after December 15, 2018.
  • Earlier application be encouraged.