4.18 Capitalized Interest
ASC 835-20 — Glossary
Interest Cost
Interest cost includes interest recognized on obligations having explicit
interest rates, interest imputed on certain types
of payables in accordance with Subtopic 835-30,
and interest related to a finance lease determined
in accordance with Topic 842. With respect to
obligations having explicit interest rates,
interest cost includes amounts resulting from
periodic amortization of discount or premium and
issue costs on debt.
Interest costs are the only costs that are eligible for capitalization under ASC
835-20. Further, AICPA Technical Q&As Section 2210.27 states that if a
foreign-currency-denominated loan is obtained to construct a building, “the
transaction gains and losses are not part of the cost of the building, but are a
result of the change in the exchange rate and are included in income each period in
which the exchange rate fluctuates.” That is, transaction gains or losses are
precluded from capitalization under ASC 835-20.
SEC Considerations
The SEC staff presented its views on this issue in a March 20, 1995, letter to the Accounting Principles Commission of the Mexican Institute of Public Accountants. The staff stated, in part:
The staff believes that the amount subject to capitalization on USD borrowings should be the stated rate on such borrowings. Therefore, both the foreign exchange loss and the monetary gain are excluded from the amount subject to capitalization. Under this policy, the amount subject to capitalization on USD borrowings would be the same if the Mexican entity were a reporting company or a subsidiary of a U.S. company.