On November 20, 2017, the GASB issued an exposure draft of a proposed Statement, Accounting for Interest Cost during the Period of Construction (the proposed Statement). Historically, governments, following GASBS No. 62, capitalized interest costs incurred during construction for their business-type activities and enterprise funds. In an effort to enhance the relevance and comparability of information and to simplify the accounting for interest cost incurred during the construction period, the GASB studied the topic and issued this proposed Statement.
Considerations by the Board
In considering the Statement, the Board evaluated both the capitalization of interest cost during construction for business-type activities and enterprise funds and also for government-wide statements and fund statements. Consequently, the proposed Statement includes requirements both for financial statements prepared using the economic resources measurement focus and the current financial resources measurement focus.
What Were They Thinking?
The Board, after careful consideration, discussion and study, concluded that ancillary charges, such as freight and transportation costs, site preparation and certain professional fees (e.g., for architects and engineers), are directly attributable to acquiring the asset and the asset could not be placed into service without incurring those costs. Therefore, ancillary costs are to be included in the historical cost of the asset.
On the other hand, the Board determined that interest costs incurred during construction is a factor in the decision to purchase versus construct a capital asset, which is separate from the decision to acquire the asset. To put it another way, the Board decided that after a decision is made to either buy or construct an asset, ancillary charges would be incurred no matter how the asset is paid for and therefore, would be capitalized. However, interest costs are associated with the financing of an asset and not with the preparation of the asset for use. Therefore, interest costs would not be capitalized.
The Proposed Requirements
The proposed Statement would require interest cost during the construction period to be classified as an expense in the period the interest cost is incurred for financial statements using the economic resources measurement focus. Therefore, business-type activity or enterprise funds would no longer include the construction period interest in the historical cost of the capital asset. Financial statements prepared using the current financial resources measurement focus would recognize construction period interest as an expenditure consistent with governmental fund accounting principles.
The proposed Statement would be effective for reporting periods beginning after December 15, 2018, with earlier application encouraged. The requirements would be applied prospectively.
Why Is This Better?
The Board believes the proposed Statement would improve financial reporting by giving users of financial statements more relevant and more comparable information about the cost of borrowing and the capital assets for a reporting period of both governmental activities and business-type activities. It also believes the expected results from implementing the proposed Statement outweigh the initial and ongoing costs and that such costs would generally be less costly to apply than the current requirements.
Though the comment period is not over, the proposed Statement is available at www.gasb.org