Were you hoping to stop capitalizing interest on construction projects? If so, you’re in luck. In June, the Governmental Accounting Standards Board (GASB) issued Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period.
Under current governmental accounting standards, GASB universities, colleges, hospitals, and governments with a business-type activity or enterprise fund are required to capitalize interest costs incurred before the end of a construction period as part of the cost of the related capital asset. With the application of this statement, organizations and funds will now expense this type of interest cost as incurred. No more interest cost capitalization!
GASB believes the change will result in simplified reporting of better and more comparable information. GASB also believes the practice of capitalizing interest cost doesn’t align with the definition of an asset, because it doesn’t possess present service capacity. In addition, GASB also concluded that interest cost shouldn’t be reported as a deferred outflow since it views interest costs as a current period cost. In reaching a conclusion, GASB discussed other related considerations, including whether ancillary charges should still be included as part of the historical cost of an asset (they will).
Key details of Statement 89
- Effective date? Reporting periods beginning after Dec. 15, 2019
- Early application allowed? Yes! (Less accounting!)
- Application method? Prospective
With the application of this statement, organizations and funds will now expense this type of interest cost as incurred. No more interest cost capitalization!
This is the one GASB standard you may want to adopt early. As with any new standard, governmental entities should consider the effect of adopting the standard prior to the required implementation date. Adopting early could save time. Expensing interest in the period it was incurred (economic resources measurement focus) is straightforward and easy to record. However, this will result in additional expenses being recognized. The impact of that additional expense on covenant calculations or budget-related matters is also important to consider.
As a reminder, this statement doesn’t change the recording of interest costs incurred before the end of a construction period for financial statements prepared using the current financial resources measurement focus (modified accrual). Nor does it change the accounting for these related activities within the governmental activities column of governmental financial statements, where capitalizing interest was never allowed. Therefore, as it relates to accounting for interest costs incurred during construction, Statement 89 brings accounting within governmental activities and business-type activities into alignment.
Have questions? Give us a call.