Is Capitalized Interest an Asset?

If you are like most CPAs, the automatic answer to the title question of this blog is of course capitalized interest is an asset.  That is what the FASB says, and it is what I was taught in school.  The Governmental Accounting Standards Board (GASB), which is also run under the same parent organization as the FASB, has recently come to a different conclusion.  In a November 20, 2017 exposure draft, the GASB proposed eliminating the capitalization of interest related to assets being prepared for use.  Many of you might have an immediate reaction that the proposal is for governmental accounting; and governmental accounting has nothing to do with financial accounting for business, so why does it matter?  My response to such a question is that the GASB revision specifically applies to capital assets reported in a “business-type activity or enterprise fund.”  These are the governmental “entities” that most closely resemble a business that is subject to the FASB standards, so it is closer to business reporting than you might first think.

The GASB supported their decision to stop capitalizing interest based on two primary considerations.  The first is that if capitalized interest was considered discretely, it would not meet the conceptual definition of an asset.  Per GASB Concepts Statement No. 4, paragraph 8, an asset is defined as “resources with present service capacity that the government presently controls.”   Capitalized interest by itself does not provide any “service capacity.”  The GASB further determined that interest cost “does not enhance the present service capacity of an asset because, regardless of whether interest cost is incurred during the period of construction, the asset will have the same ability to provide services.”

The second consideration was that capitalized interest could not be considered similar to an ancillary charge that is considered capitalizable costs.  Ancillary charges include items like freight charges, site preparation costs and certain professional fees, without which the asset could not be placed into service. The GASB took this position a step further in pointing out that unlike ancillary charges where the entity has no choice to incur them in order to get the asset into service, how or whether to finance the construction of an asset is a discrete choice of the entity.

I haven’t had the time to line up the GASB conceptual position against the FASB’s conceptual framework, but I do wonder how different they could be when it comes to defining an asset and what it takes to get the asset ready for its intended use?

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