When Do You Capitalize Interest on a Self-Constructed Asset?
Interest is capitalized only when the asset and construction period meet the applicable qualifying conditions.
Qualifying asset
Certain assets constructed for an entity's own use or for discrete projects can qualify for interest capitalization while activities necessary to prepare the asset are underway.
Capitalization period
Capitalization generally begins when expenditures are being made, construction activities are in progress, and interest cost is being incurred.
Avoidable interest
Weighted-average accumulated expenditures are paired with appropriate interest rates to estimate the interest that could have been avoided if the construction spending had not occurred.
End of capitalization
Interest capitalization stops when the asset is substantially complete and ready for its intended use.
The takeaway
Capitalize the lesser of avoidable interest and actual interest incurred during the qualifying construction period.
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FAQ
Do you capitalize all company interest during construction?
No.
Can weighted-average accumulated expenditures matter?
Yes.
Does capitalization continue after the asset is ready for use?
Generally no.