Governments currently are required to capitalize interest cost incurred during the period of construction in business-type activities and enterprise funds. Governments are not allowed to capitalize interest cost in governmental activities. This discrepancy stems from the history of the Governmental Accounting Standards Board (GASB), whereby governments followed certain Financial Accounting Standards Board (FASB) pronouncements for their business-type activities and enterprise funds. When these legacy FASB pronouncements were directly incorporated into the GASB literature in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, they retained their applicability only to those certain financial statements. GASB then decided to re-examine the capitalized interest guidance in a separate project. That project has resulted in the current Exposure Draft.
The Exposure Draft is quite short for a GASB standard. The proposal is for governments to recognize all interest cost as an expense or expenditure of the period. This would apply to business-type and governmental activities as well as all fund financial statements.
There are several factors behind this proposed change:
- Does construction-period interest meet the definition of an asset?
- GASB issued Concepts Statement No. 4, Elements of Financial Statements, in 2007, which established definitions of financial statement elements, including the definition of an asset and a deferred outflow of resources. The existing guidance predates that definition and should be reassessed in light of it. GASB concluded that interest cost incurred during the construction period is a financing activity rather than an asset or a deferred outflow of resources.
- Consistency between governmental activities and business-type activities
- Existing guidance requires capitalization of interest in business-type activities but prohibits it in governmental activities. GASB wanted to provide consistent treatment, if warranted from a conceptual standpoint.
- Capitalization of interest continues to be a struggle for many governments. The existing standards are complex and it can be difficult to determine the appropriate amount to capitalize.
The Exposure Draft proposals would not change the capitalization of ancillary charges incurred in the acquisition of capital assets. The proposals also would not change the applicability of capitalization of qualifying interest cost as a regulatory asset for business-type activities that have regulated operations, as set forth in GASB 62.
The proposed effective date is for periods beginning after December 15, 2018. Governments would discontinue capitalizing interest at implementation but would not be required to revalue assets to which interest was capitalized in the past.
Comments on the Exposure Draft are due March 5, 2018. GASB expects to issue a final standard in the summer of 2018.
BKD will continue to monitor this and other GASB projects. Visit BKD’s Hot Topic page to learn more.