Governments capitalizing interest, a thing of the past

The Latest Rules and Regulations That Impact Your Government Entity

capitalizing interest, government, accountingIn the beginning there was capitalized interest, and some found it was good. Then, GASB decided to shed some light on this topic – now, capitalizing interest is just a thing of the past. While governmental activities generally don’t incur capitalized interest on projects in the construction phase, business-type activities were permitted to do so, until the GASB Statement 89. The GASB Statement 89 has changed the rules on capitalizing interest cost incurred before the end of a construction period in business-type activities. Effective for periods beginning after December 15, 2019, CAFRs will no longer be permitted to capitalize interest.

What is the reasoning behind making this change? The GASB Board examined the Concept Statement Number 4 for capital assets which says, capital assets are resources with present service capacity that the government controls. Which asks the question, is interest cost prior to the completion of construction of an asset considered an asset? The answer the board decided on was, NO – it doesn’t meet the criteria of Concept Statement Number 4. They also concluded the interest cost is not considered inseparable from the asset being constructed, as it is considered a separate financing transaction. The final decision of the GASB Board is interest cost should not be capitalized in either governmental or business-type activities after December 15, 2019.

Don’t worry though! GASB Statement 89 is a prospective statement only. Going back to figure out how many capital assets are in service that were derived from interest cost will not be necessary. If you are looking to learn more on this change, visit GASB’s website and read Statement 89.

Brian Hemmerle, CPA, CFE