| Paragraph
Number |
FASB Statement No. 34 |
Issued:
October, 1979
|
| 1 | Establishes standards of financial accounting and reporting for capitalizing interest cost as a part of the historical cost of acquiring certain assets | |
| Interest cost may be: | ||
| a. | interest recognized on obligations having explicit interest rates. | |
| b. | interest imputed on certain types of payables in accordance with APB Opinion No. 21, "Interest on Receivables and Payables" | |
| c. | interest related to a capital lease | |
| 3 | Diversity in practice existed prior to Statement N0. 34: Some enterprises charged all interest cost to expense when incurred; others capitalized interest cost in some circumstances; and some enterprises, primarily public utilities, also capitalized a cost for equity funds in some circumstances. | |
| 6 | The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset. | |
| 7 | Objectives of capitalizing interest cost: | |
| a. | to obtain a measure of acquisition cost that more clearly reflects the enterprise's total investment in the asset | |
| b. | to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the periods benefitted. | |
| 9 | Qualifying assets (assets for which interest should be capitalized): | |
| a. | Assets that are constructed or otherwise produced for an enterprise's own use | |
| b. | Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (e.g., ships or real estate developments) | |
| 10 | Interest cost shall not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. (informational benefit does not justify the cost of so doing). | |
| Interest shall not be capitalized for the following types of assets: | ||
| a. | Assets that are in use or ready for their intended use in the earning activities of the enterprise | |
| b. | Assets that are not being used in the earning activities of the enterprise and that are not undergoing the activities necessary toget them ready for use. | |
| 11 | Land is not a qualifying asset if it is not undergoing activities necessary to get it ready for its intended use. | |
| If activities are undertaken to develop land for a particular use, the expenditures to acquire the land qualify for interest capitalization while those activities are in progress. | ||
| The interest cost capitalized on those expenditures is a cost of acquiring the asset that results from those activities. | ||
| a. | If a structure results, such as a plant or a shopping center, interest capitalized is part of the acquisition cost of the structure. | |
| b. | If developed land results, the interest capitalized in part of the acquisition cost of the developed land. | |
| 12 | The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the assets' acquisition periods that theoretically could have been avoided if the expenditures for the assets had not been made. | |
| 13 | The amount capitalized in an accounting period shall be determined by applying an interest rate(s) ("the capitalization rate") to the average amount of accumulated expenditures for the asset during the period. | |
| Capitalization rates used in an accounting period shall be based on the rates applicable to borrowings outstanding during the period. | ||
| a. | If financing plans associate a specific new borrowing with a qualifying asset, the enterprise may use that rate as the capitalization rate to be applied to that portion of the average accumulated expenditures for the asset that does not exceed the amount of that borrowing. | |
| b. | If average accumulated expenditures for the asset exceed the amounts of specific new borrowings associated with the asset, the capitalization rate to be applied to such excess shall be a weighted average of the rates applicable to other borrowings of the enterprise. | |
| 15 | The total amount of interest cost capitalized in an accounting period shall not exceed the total amount of interest cost incurred by the enterprise in that period. | |
| 16 | Expenditures are capitalized expenditures for the qualifying asset that have required the payment of cash, the transfer of other assets, or the incurring of a liability on which interest is recognized. Reasonable approximations of net capitalized expenditures may be used. | |
| 17 | The capitalization period begins when three conditions are present: | |
| a. | Expenditures for the asset have been made. | |
| b. | Activities that are necessary to get the asset ready for its intended use are in progress. | |
| c. | Interest cost is being incurred. | |
| Interest capitalization continues as long as those three conditions are present. The term activities is to be construed broadly. It encompasses more than physical construction; it includes all the steps required to prepare the asset for its intended use. If substantially all activities related to the acquisition of the asset are suspended, interest capitalization shall cease until activities are resumed. Brief interruptions in activities, interruptions that are externally imposed, adn delays that are inherent in the acquisition process shall not require cessation of interest capitalization. | ||
| 18 | Capitalization period shall end when the asset is substantially complete and ready for its intended use. | |
| a. | Some assets are completed in parts and each part is capable of being used independently while work is continuing on other parts. (example--condominium) For such assets, interest capitalization shall stop on each part when it is substantially complete and ready for use. | |
| b. | Some assets must be completed in their entirety before any part of the asset can be used. (example--facility designed to manufacture products by sequential processes). For such assets, interest capitalization shann continue until the entire asset is substantially complete and ready for use. | |
| c. | Some assets cannot be used effectively until a separate facility has been completed. (Example-oil wells drilled in Alaska before completion of the pipeline) For such assets, interest capitalization shall continue until the separate facility is substantially complete and ready for use. | |
| 19 | Interest capitalization shall not cease when present accounting principles require recognition of a lower value for the asset than acquisition cost; the provision required to reduce acquisition cost to such lower value shall be increased appropriately. | |
| 20 | Disposition of capitalized interest cost shall be the same as that of other components of asset cost. | |
| 21 | Disclosures | |
| a. | For an accounting period in which no interest cost is capitalized, the amount of interest cost incurred and charged to expense during the period. | |
| b. | For an accounting period in which some interest cost is capitalized, the total amount of interest cost incurred during the period and the amount thereof that has been capitalized. | |
| 22 | Effective Date and Transition | |
| This Statement shall be applied prospectively in fiscal years beginning after December 15, 1979. | ||