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:
Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period

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
  • Exposure Draft of a proposed Statement approved: November 2017
  • Comment period: December 2017–March 2018
  • Redeliberations of an Exposure Draft began: April 2018  

Capitalization of Interest Cost—RECENT MINUTES


Minutes of Teleconference, June 18, 2018
 
The Board reviewed and provided clarifying edits on the ballot draft of the final Statement, Accounting for Interest Cost Incurred before the End of a Construction Period. The Board then voted unanimously to approve the issuance of Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period.

Minutes of Meetings, May 29–31, 2018
 
The Board discussed whether the expected benefits of a final Statement to users and other stakeholders justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits of a final Statement justify the perceived costs of implementation and ongoing compliance.
 
The Board also discussed the characteristics of the financial information that would be provided as a result of the requirements of a final Statement. The Board tentatively agreed that the requirements 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.
 
The Board reviewed a preballot draft of a final Statement, Accounting for Interest Cost Incurred before the End of a Construction Period and discussed clarifying edits. The Board then agreed that the project staff should present a ballot draft of a final Statement, Accounting for Interest Cost Incurred before the End of a Construction Period, at the June teleconference meeting.
 
Minutes of Meetings, April 17 and 18, 2018

The Board began redeliberations on the Exposure Draft, Accounting for Interest Cost during the Period of Construction, by discussing general feedback from respondent comments.
 
The Board first discussed requests received from some stakeholders for a public hearing. Based on follow-up discussions with some of those respondents, the Board tentatively decided that respondent feedback to the Exposure Draft does not necessitate a public hearing.
 
The Board then discussed the recognition and measurement of interest cost based on respondent feedback to the Exposure Draft. The Board tentatively decided that the requirements proposed in paragraphs 4 and 5 of the Exposure Draft regarding the recognition of construction-period interest as an expense or expenditure should be carried forward to the final Statement. The Board tentatively agreed that the scope of the requirements should be clarified to include interest incurred prior to construction that was previously capitalized in accordance with Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
 
The Board then discussed other considerations raised by respondents, including the appropriate use of an enterprise fund and the presentation of interest expense as an operating or nonoperating expense. The Board tentatively agreed that those issues are outside the scope of this project and that no modifications should be made to the proposed requirements. The Board also considered whether the proposed requirements should be modified to clarify that the interest expense recognized should not be reduced by interest income earned. The Board tentatively decided that no modifications should be made to the proposed requirements as a result of that feedback.
 
The Board then discussed effective date and transition provisions for the proposed requirements. The Board tentatively decided that the effective date for the proposed requirements should be modified to be effective for periods beginning after December 15, 2019, rather than as proposed in the Exposure Draft (for periods beginning after December 15, 2018). The Board also tentatively decided to carry forward the provisions that earlier application be encouraged and that the proposed requirements be applied prospectively at the proposed effective date (or the earlier implementation date) for all capital assets.

Minutes of Teleconference, November 20, 2017

The Board reviewed a ballot draft of the Exposure Draft of a proposed Statement, Accounting for Interest Cost during the Period of Construction, and made clarifying edits on the draft document. The Board then voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, October 31 - November 2, 2017

The Board reviewed a preballot draft of the Exposure Draft, Accounting for Interest Cost during the Period of Construction, and discussed clarifying edits. The Board then agreed to move forward with a ballot draft of the Exposure Draft, Accounting for Interest Cost during the Period of Construction.

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


Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period, was approved in June 2018.