Interest capitalization

[sachin_patel]

I always had trouble digesting this.
Interest costs are yearly costs. what to capitalize?
do you calculate total interest over the life and capitalize it since beginning?
How does it actually work?
Thanks

 

[Galli]

You capitalize interest cost during the same period in which you have FCINV spend.

 

[sachin_patel]

So its like
in first year you capitalize first year’s interest. (say your asset’s life if 10 years)
second year you depreciate 10% of first year’s interest and capitalize second year’s interest.
in third year you depriciate 10% first year’s and 10% of second year’s interest.. and capitilize 3rd year’s interst.
and so on….
is this understanding correct?

 

[Galli]

I think you got it but just to provide some additional clarity, capitalizing is putting the cost on your books to later be amortized/depreciated (expensed to the I/S). You don’t capitalize year 2/3 interest cost, you amortize (expense) the capitalized interest from year 1.
Additionally, if you incur interest expenses in any year after the capex period, you expense it. Unless of course it’s related to new cap ex spend

 

[cfa_mixer]

check out s2000magicians amortization table read. It helps with this type of confusion.

 

[sachin_patel]

Galli wrote:
I think you got it but just to provide some additional clarity, capitalizing is putting the cost on your books to later be amortized/depreciated (expensed to the I/S). You don’t capitalize year 2/3 interest cost, you amortize (expense) the capitalized interest from year 1.
Additionally, if you incur interest expenses in any year after the capex period, you expense it. Unless of course it’s related to new cap ex spend

ok so lets say if you borrowed 1,000,000 for building a property.
and it takes 2 years to build the roperty
so the interest expense for year 1 and year 2 will be capitalized according to the way I said.
remaining years, I will expense as it comes..+ depreciation of capitalized during years 1 and 2.
sounds right?

 

[sachin_patel]

cfa_mixer wrote:
check out s2000magicians amortization table read. It helps with this type of confusion.

I did look at the link and its good but thats not what I am confused about… i understand amortization completely… this is slightly different..

 

[Galli]

sachin_patel]</p> <p>

wrote:
I think you got it but just to provide some additional clarity, capitalizing is putting the cost on your books to later be amortized/depreciated (expensed to the I/S). You don’t capitalize year 2/3 interest cost, you amortize (expense) the capitalized interest from year 1.
Additionally, if you incur interest expenses in any year after the capex period, you expense it. Unless of course it’s related to new cap ex spend

yep

 

[sachin_patel]

great! thank you