Question

Client X operates in the US currently and is planning to expand operations globally next year. As a result, management is considering preparing financial statements in accordance with IFRS rather than with US GAAP.

Client X contacted you for clarification and recommendations regarding the following issues:

Whether interest cost on construction of a new warehouse may be included in the cost of the new warehouse.

Answer 1

Whether interest cost on the construction of a new warehouse may be included in the cost of the new warehouse GAAP requires the interest capitalization given the proper circumstances, it should not be an option. Interest capitalized should equal the funds that could have been avoided if these were utilised to pay off the debt instead of constructing the asset. Any interest incurred post completion will not qualify for interest capitalization.

The following conditions must be met to qualify for capitalization:

--Interest costs are being incurred. Further, cost of interest during the extended period in which active construction of warehouse was interrupted should not be capitalized.

--Activities that are needed to prepare the warehouse for its intended use are either completed or in progress

--Expenditure for the asset (construction of warehouse) must have been made

Apart from these, interest costs can be capitalized as part of the warehouse cost when it is probable that it will reap economic benefits in future to the business and the costs can be also be reliably measured reliably