KPMG Capitalization of Interest: Accounting Explained

KPMG does not have one universal rule that automatically capitalizes interest for every entity; the applicable accounting framework and facts determine the treatment. Under U.S. GAAP, interest cost is generally capitalized while an entity constructs or produces a qualifying asset, following ASC 835-20; IFRS has related but not identical requirements in IAS 23.

What “capitalization of interest” means

Capitalized interest is borrowing cost included in the cost of an asset rather than recognized as interest expense immediately. The amount becomes part of the asset’s carrying value and is generally recognized as expense later through depreciation, amortization, cost of sales, or impairment, depending on the asset and its use. Capitalizing interest changes the timing and classification of expense; it does not make the borrowing cost disappear.

The phrase “KPMG capitalization of interest” may refer to KPMG guidance, a KPMG publication, or the accounting treatment applied by a KPMG audit client. KPMG is an accounting and advisory firm, not the standard setter. Its publications explain accounting requirements and their application; authoritative requirements come from the relevant accounting standards and other applicable guidance.

U.S. GAAP: when interest is capitalized

Under ASC 835-20, an entity generally capitalizes interest cost that is directly attributable to acquiring, constructing, or producing a qualifying asset for its own use or for sale or lease in certain circumstances. The asset must take a substantial period of time to get ready for its intended use or sale. Common examples can include a building under construction, a major self-constructed facility, or certain qualifying inventory produced over an extended period.

Not every asset or project qualifies. Assets ready for use when acquired, assets produced routinely in short periods, and certain assets not undergoing the activities needed to prepare them may fall outside capitalization. The detailed rules and exceptions depend on the facts and the authoritative guidance; an entity should not treat every borrowing during a project as capitalizable.

Capitalization generally starts only when all three conditions are met:

• The entity has made expenditures for the asset.
• Activities necessary to prepare the asset for its intended use or sale are in progress.
• The entity is incurring interest cost.

Capitalization is suspended during extended periods when active development is interrupted, subject to the specific guidance and circumstances. It ends when substantially all activities necessary to prepare the asset for its intended use or sale are complete. Routine remaining tasks do not necessarily prevent completion, but the conclusion requires judgment.

How the amount is calculated

The U.S. GAAP calculation is based on avoidable interest: the interest cost that theoretically could have been avoided if the entity had not made the qualifying asset expenditures. An entity determines weighted-average accumulated expenditures for the capitalization period and applies an appropriate interest rate. Specific borrowings for the project are considered first; a rate based on other borrowings may apply to expenditures not covered by those specific borrowings.

The amount capitalized for a period cannot exceed the entity’s actual interest cost for that period. The calculation is more involved than simply multiplying the entire project cost by a loan rate: the timing of expenditures, specific debt, general borrowings, and the length of the capitalization period matter.

Illustration: Suppose a company spends money on a qualifying building at different points during a year and has both a construction loan and other debt. It weights each expenditure for the portion of the year outstanding, applies the construction-loan rate to the appropriate portion, and uses a relevant rate on any remaining weighted expenditures. It then compares the computed avoidable interest with actual interest cost and capitalizes no more than the applicable limit. This is a simplified illustration, not a complete accounting calculation.

IFRS and the key differences

IAS 23, Borrowing Costs, requires capitalization of borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are generally recognized as expense when incurred.

The broad idea resembles U.S. GAAP, but details are not interchangeable. For example, the standards may differ in scope, the treatment of particular borrowing costs, and how certain project circumstances are handled. Companies reporting under IFRS should apply IAS 23; companies reporting under U.S. GAAP should apply ASC 835-20. Multinational groups may need to reconcile the two frameworks rather than assume a single calculation works for both.

Presentation, depreciation, and disclosures

Capitalized interest is included in the asset’s cost and is subsequently accounted for as part of that asset. If the asset is depreciable, the capitalized amount typically affects depreciation once the asset is available for its intended use. For inventory, it may be recognized in cost of sales when the inventory is sold, subject to the applicable accounting rules. An asset’s carrying amount may also be affected by impairment requirements.

Financial statement disclosures can include the amount of interest cost capitalized during a period and the interest rate used to determine the amount, as required by the applicable framework. Entities should maintain support for qualifying expenditures, dates, project activity, interest incurred, rates applied, and the start, suspension, and end of capitalization. The precise disclosure requirements depend on the reporting framework and facts.

Common errors and judgment points

• Capitalizing all borrowing costs: Only costs meeting the applicable criteria are included; unrelated debt does not automatically qualify.
• Starting too early: Borrowing alone is not enough. Qualifying expenditures and active preparation activities must also be present.
• Continuing too long: Capitalization generally ends when substantially all necessary preparation is complete, not necessarily when the asset first generates revenue or reaches full capacity.
• Ignoring interruptions: A prolonged pause in development may require suspension, depending on what is happening and why.
• Confusing book treatment with tax treatment: Financial reporting and tax accounting are distinct systems. This explanation does not determine tax treatment.
• Using a simplified rate calculation as a conclusion: The applicable framework, debt arrangements, expenditure timing, and project facts all matter.

These judgments can materially affect reported asset values and interest expense across periods. For a specific company or project, the accounting policy and calculation should be evaluated against the relevant authoritative standards and reviewed by qualified accounting professionals.

Frequently Asked Questions

Does KPMG require companies to capitalize interest?
KPMG does not set accounting standards. Under the applicable framework, capitalization may be required when the asset and project meet the relevant criteria—for example, under ASC 835-20 or IAS 23.

Is capitalized interest an expense?
It is a borrowing cost, but while capitalized it is recorded as part of an asset rather than as immediate interest expense. It can affect later expenses through depreciation, amortization, cost of sales, or impairment.

When does interest capitalization begin?
Under U.S. GAAP, it generally begins when qualifying asset expenditures have been made, preparation activities are in progress, and interest cost is being incurred. The exact conclusion depends on the circumstances.

When does interest capitalization stop?
It generally stops when substantially all activities necessary to prepare the asset for its intended use or sale are complete. An extended interruption may also mean capitalization must be suspended during the pause.

Are U.S. GAAP and IFRS rules the same?
No. ASC 835-20 and IAS 23 share the basic concept of capitalizing qualifying borrowing costs, but their detailed requirements can differ. Apply the framework the entity reports under.

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