Capitalization of Interest Costs

7 Pages Posted: 16 Jul 2009 Last revised: 24 Sep 2009

See all articles by Bernard Enya Edu

Bernard Enya Edu

Cross River University of Technology

Agba D. O. Otonkue

Cross River University of Technology

Orok Ekpo Orok-Duke

Cross River University of Technology (CRUTECH)

Date Written: July 15, 2009

Abstract

Capitalization of interest, from the financial stand-point, refers to the cost associated with the borrowing of funds, or obtaining a loan in order to finance the acquisition of certain fixed assets. The focal point of this paper is an examination of the nature of the costs of fixed assets that can be capitalized Consequently, discussions revolve around the meaning of capitalization of interest or borrowing costs; steps that are involved in the computation of capitalization of interest costs; the arguments in favour and against interest costs capitalization. Technical difficulties or problems that confront an organization‘s policy on capitalization of interest costs such as the identification of the amount of financing costs that should be capitalized are also discussed. The paper concludes that there are finely balanced arguments in favour and against capitalisation. Furthermore, enterprises should be allowed to decide whether or not to capitalize their borrowing costs on fixed assets that take a substantial period of time to bring into service; and the requirements that are applicable to those enterprises that do not capitalize borrowing costs are aimed at ensuring that a consistent capitalization policy is adopted within the enterprise. Again, through disclosure the impact of capitalization on the results and financial position of the enterprise are understood; and that there is comparability between enterprises capitalizing interest costs

Keywords: interest, capitalisation, fixed assets, borrowing, cost

JEL Classification: G31

Suggested Citation

Edu, Bernard Enya and Otonkue, Agba D. O. and Orok-Duke, Orok Ekpo, Capitalization of Interest Costs (July 15, 2009). Available at SSRN: https://ssrn.com/abstract=1434417 or http://dx.doi.org/10.2139/ssrn.1434417

Bernard Enya Edu (Contact Author)

Cross River University of Technology ( email )

P.M.B 1123
Calabar,
Cross River State, WA Cross River 234
Nigeria

Agba D. O. Otonkue

Cross River University of Technology ( email )

P.M.B 1123
Calabar,
Cross River State, WA Cross River 234
Nigeria

Orok Ekpo Orok-Duke

Cross River University of Technology (CRUTECH) ( email )

P.M.B 1123
Calabar,
Cross River State, WA Cross River 234
Nigeria

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