In Reading 16 EOC #8, I came across some confusion regarding how capitalised interest costs are impacting the Interest Coverage Ratio (=EBIT/Interest Expenses).
In the solution, it said that when capitalising interest costs, only “interest payments” will impact the Interest Coverage Ratio, not “Interest expenses”…
However, isn’t Interest Payments and Interest Expenditure the same thing? Since Interest Expenditure includes Interest payments.
Therefore, shouldn’t the ICRatio become smaller due to ICRatio = (EBIT - Depreciation expense)/(Interest expense)? The numerator becomes smaller and the denominator will not include Interest Expense (or payment?…) compared to if the interest cost was just expensed, rather than capitalised in this scenario?
In the solution, it said that when capitalising interest costs, only “interest payments” will impact the Interest Coverage Ratio, not “Interest expenses”…
However, isn’t Interest Payments and Interest Expenditure the same thing? Since Interest Expenditure includes Interest payments.
Therefore, shouldn’t the ICRatio become smaller due to ICRatio = (EBIT - Depreciation expense)/(Interest expense)? The numerator becomes smaller and the denominator will not include Interest Expense (or payment?…) compared to if the interest cost was just expensed, rather than capitalised in this scenario?