1004.8 Capitalization of Interest
Subject Area: Accounting
Responsible Office: Financial Services
Sponsor: Associate Vice President for Finance
Originally Issued: March 1997
Revised: January 2010, June 2012
Refer Questions To: James Ribikawskis, 773-702-3690
Purpose: To properly account for capitalization of interest costs.
Interest cost shall be capitalized as part of the historical cost of acquiring certain assets. (See Financial Policy No. 1008.) To qualify for interest capitalization, assets must require a period of time to get them ready for their intended use. (For example, assets the University constructs for its own use such as facilities). Interest capitalization is required if its effect, compared with the effect of expensing interest, is material. If the net effect is not material, interest capitalization is not required. However, interest cannot be capitalized for assets constructed or acquired using gifts or grants that are restricted by the donor or grantor to construction or acquisition of those assets to the extent that funds are available from such gifts or grants.
In situations involving qualifying assets financed with the proceeds of restricted tax-exempt borrowings, the amount of interest cost to be capitalized shall be all interest cost of those borrowings less any interest earned on temporary investment of the proceeds of those borrowings from the date of borrowing until the specified qualifying assets acquired with those borrowings are ready for their intended use. For qualifying buildings exceeding $25 million in construction costs, interest will be capitalized through the month the building is placed into service and/or occupied.
In all other situations, the interest cost eligible for capitalization shall be the interest cost recognized on borrowings and other obligations. The amount capitalized is to be an allocation of the interest cost incurred during the period required to complete the asset. The interest rate for capitalization purposes is to be based on the rates of the University’s outstanding borrowings. If the University associates a specific new borrowing with the asset, it may apply the rate on that borrowing to the appropriate portion of the expenditures for the asset. A weighted average of the rates on other borrowings is to be applied to expenditures not covered by specific new borrowings. Judgment is required in identifying the borrowings on which the average rate is based.