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Excerpt from ASC 835-20-30-3
September
|
$100,000
|
October
|
$400,000
|
November
|
$400,000
|
December
|
$400,000
|
Date |
Qualifying expenditures (A) |
Capitalization period (B) |
Weighted average qualifying expenditures (A × B) |
---|---|---|---|
September
|
$100,000
|
3.5/12
|
$29,167
|
October
|
$400,000
|
2.5/12
|
$83,333
|
November
|
$400,000
|
1.5/12
|
$50,000
|
December
|
$400,000
|
0.5/12
|
$16,667
|
Total |
$1,300,000 |
$179,167 |
In concept, interest cost is capitalizable for all assets that require a period of time to get them ready for their intended use (an acquisition period). However, in many cases, the benefit in terms of information about the entity's resources and earnings may not justify the additional accounting and administrative cost involved in providing the information. The significance of the effect of interest capitalization in relation to the entity's resources and earnings is the most important consideration in assessing its benefit. The ease with which qualifying assets and related expenditures can be separately identified and the number of assets subject to interest capitalization are important factors in assessing the cost of implementation.
Interest capitalization is required only when the balance of the informational benefit and the cost of implementation is favorable. A favorable balance is most likely to be achieved where an asset is constructed or produced as a discrete project for which costs are separately accumulated and where construction of the asset takes considerable time, entails substantial expenditures, and is likely to involve a significant amount of interest cost. A favorable balance is unlikely in the case of inventory items that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Accordingly, this Subtopic proscribes interest capitalization on those types of inventories (that is, inventory items that are routinely manufactured or produced in large quantities on a repetitive basis) and provides for interest capitalization on assets that are constructed or produced as discrete projects.
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