Capitalized interest — plain-language definition
– Capitalized interest is borrowing cost that a company adds to the recorded cost of a long-lived asset (for example, a building or ship) while the asset is being acquired or built. Instead of recognizing that interest as an immediate period expense, the company increases the asset’s carrying amount on the balance sheet. The interest then flows through the income statement later as the asset is depreciated (or amortized) over its useful life.
Why accountants allow capitalization
Why accountants allow capitalization
Accountants permit capitalizing interest to align costs with the benefits those costs produce — a reflection of the matching principle. Borrowing costs incurred to acquire or construct a long‑lived asset are viewed as part of the asset’s cost because the asset will generate economic benefits over multiple future periods. Capitalization postpones recognition of interest expense until the asset is placed in service and its cost is allocated to periods that benefit from the asset (through depreciation or amortization).
Key accounting rules and scope
– U.S. GAAP: Refer to ASC 835‑20 (Interest — Capitalization of Interest). The standard requires capitalizing the lesser of (a) actual interest incurred and (b) avoidable interest (the interest that could have been avoided if expenditures for the asset had not been made).
– IFRS: IAS 23 (Borrowing Costs) requires capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale).
– Qualifying asset: An asset under
asset that requires a substantial period of time to get ready for its intended use or sale. Common qualifying assets include large buildings, long‑lead‑time manufacturing plants, ships, and certain inventories produced over extended periods. Short‑term assets (for example, inventory produced quickly) and assets