FASB Technical Bulletin No. 81-5

Transcription

1 FASB Technical Bulletin No Note: This Technical Bulletin has been completely superseded FTB 81-5 Status Page Offsetting Interest Cost to Be Capitalized with Interest Income February 1981 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT

2 Copyright 1981 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2

3 FTB 81-5: Offsetting Interest Cost to be Capitalized with Interest Income Reference: FASB Statement No. 34, Capitalization of Interest Cost, paragraphs 1, 7, 12, 13, and 14 Question 1. In determining the amount of interest cost to be capitalized as part of the cost of acquiring qualifying assets, under what circumstances, if any, should interest income earned from investments be offset or netted against interest cost incurred? Background 2. In certain circumstances, proceeds from borrowings may be temporarily invested in designated interest-bearing securities prior to funding construction projects. Those proceeds are typically restricted as to use and may be held in escrow or in the custody of a trustee. Interest income earned may exceed the amount of interest cost on the borrowing for a period of time prior to or during the early stages of construction. 3. Paragraph 1 of Statement 34 states:...interest cost includes interest recognized on obligations having explicit interest rates,...interest imputed on certain types of payables,...and interest related to a capital lease Paragraph 7 of Statement 34 states: The objectives of capitalizing interest are (a) to obtain a measure of acquisition cost that more closely reflects the enterprise's total investment in the asset and (b) to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the periods benefited. Page 3

4 5. Paragraph 12 of Statement 34 states: The amount of interest cost to be capitalized for qualifying assets is intended to be that portion of the interest cost incurred during the assets' acquisition periods that theoretically could have been avoided (for example, by avoiding additional borrowings or by using the funds expended for the assets to repay existing borrowings) if expenditures for the assets had not been made. 6. Paragraph 13 of Statement 34 states: The capitalization rates used in an accounting period shall be based on the rates applicable to borrowings outstanding during the period. 7. Paragraph 14 of Statement 34 states: However, the use of judgment in determining capitalization rates shall not circumvent the requirement that a capitalization rate be applied to all capitalized expenditures for a qualifying asset to the extent that interest cost has been incurred during an accounting period. Response 8. The method to be used in determining the rate at which interest is capitalized and the limitations on the amount of interest to be capitalized are specified in Statement 34. The provisions for determining the amount of interest cost to be capitalized deal solely with the interest cost incurred and the rates applicable to borrowings outstanding. Temporary or short-term investment decisions are not related to the determination of the acquisition cost of the asset or to the allocation of that cost against revenues of the periods benefited by the asset. Accordingly, netting or offsetting of interest income against interest cost is not permitted by Statement The following example illustrates the computation of the avoidable interest cost as set forth in Statement 34 using the following assumptions: a. Borrowing proceeds of $10,000,000 are received in advance of beginning construction, placed in escrow, and temporarily invested until used for the restricted purpose of constructing a plant. Interest is paid on the borrowings at a rate of 8 percent or $800,000 per year. The enterprise has no other debt. Therefore, the limit on the amount of capitalizable interest for the year is $800,000. b. The average accumulated qualifying expenditures for the year are $5,500,000. The $10,000,000 construction project is completed at the end of the year. The enterprise has no other qualifying expenditures during the year. Page 4

5 c. Temporary investments average $4,500,000 ($10,000,000 proceeds minus average accumulated qualifying expenditures of $5,500,000) during the year and yield a 14 percent annual rate. Interest income earned during the year is $630,000 ($4,500,000 x.14). The amount of interest cost to be capitalized in accordance with the avoidable interest concept in paragraph 12 of Statement 34 is $40,000 ($5,500,000 x.08). The amounts expended for qualifying assets are amounts that could have been used to repay the outstanding borrowing thereby avoiding the related interest cost. The amounts held in temporary investments and the related interest income of $630,000 do not affect the computation of avoidable interest cost. 10. The Addendum to APB Opinion No. 2, Accounting for the "Investment Credit," (paragraph 2) states that "... differences may arise in the application of generally accepted accounting principles as between regulated and nonregulated businesses, because of the effect in regulated businesses of the rate-making process,..." and discusses the application of generally accepted accounting principles to regulated industries. Accordingly, the provisions of the Addendum shall govern the application of this Bulletin to those operations of an enterprise that are regulated for rate-making purposes on an individual-company-cost-of-service basis. The Financial Accounting Standards Board has authorized its staff to issue FASB Technical Bulletins to provide guidance on certain financial accounting and reporting problems on a timely basis. Although Board Members are provided with copies of proposed Bulletins prior to issuance, the Board does not approve them. Page 5