ASC 835
Active
Interest
Addresses the recognition, measurement, and disclosure of interest costs and interest income.
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Conceptual Framework Linkage
Matching the cost of borrowing with the benefit of the asset
ASC 835 embodies the matching principle: interest costs incurred to acquire or construct a qualifying asset should be CAPITALISED as part of the asset's cost, rather than expensed immediately. This ensures that the cost of the asset reflects all expenditures necessary to bring it to the condition and location necessary for its intended use – including the cost of financing that acquisition or construction.
Broadly converged with IAS 23
ASC 835 and IAS 23 are substantially converged on the core principle of interest capitalisation. Both standards require qualifying assets to carry the capitalised interest cost, both define qualifying assets similarly, and both use the same avoidable interest approach to determine the amount to capitalise. The differences are primarily in the details of implementation rather than in substance.
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Scope & Applicability
Qualifying assets and the timing of capitalisation
ASC 835 applies to interest costs incurred during the period when an entity is acquiring, constructing, or producing a QUALIFYING ASSET – an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples include buildings, power generation facilities, and custom-manufactured equipment. The standard does NOT apply to inventories that are routinely manufactured or produced in large quantities on a repetitive basis, nor to assets that are ready for their intended use when acquired.
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Interest Capitalisation – Qualifying Assets
Assets requiring a substantial period to be ready for use
A qualifying asset is one that takes a SUBSTANTIAL period of time to complete or ready for its intended use. The determination of 'substantial' depends on the circumstances: a custom-designed manufacturing facility taking 18 months to build is clearly qualifying; inventory produced on an assembly line over a few days is not. Qualifying assets excluded from ASC 835 – and instead accounted for under other standards – include assets held by lessees under ASC 842 (right-of-use assets) and investment property measured at fair value under ASC 980.
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The Amount of Capitalisable Interest
Avoidable interest – the interest that could have been avoided
The amount of interest to capitalise is the AVOIDABLE INTEREST – the interest cost that could have been avoided if expenditures for the qualifying asset had not been made. Avoidable interest is calculated as the weighted-average accumulated expenditures multiplied by the weighted-average interest rate on borrowings. The capitalisable amount cannot exceed actual interest incurred during the period. For borrowings that are specifically for the qualifying asset, the interest rate on that borrowing is used. For general borrowings, a weighted-average rate across all outstanding borrowings is applied.
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Suspension of Capitalisation
Capitalisation pauses during periods of inactivity
Interest capitalisation must be SUSPENDED during periods when active construction or development activities are intentionally interrupted. A brief, predictable interruption (such as a planned construction strike or seasonal weather delay) does not require suspension if the entity has not suspended other construction-related activities. However, an extended suspension of all activities necessary to prepare the asset for its intended use requires capitalisation to cease until activities resume. Capitalisation is also suspended for excess cash not yet needed for construction.
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Interest Expense Recognition
Expensed as incurred, except for capitalisable amounts
Interest expense that is NOT capitalised is recognised in the income statement as incurred, using the effective interest method for debt measured at amortised cost. This includes interest on general borrowings not related to qualifying asset construction, interest on operating leases, and interest on trade payables. The total interest expense recognised in the income statement therefore has two components: (1) capitalised interest, included in the cost of the qualifying asset; and (2) expensed interest, recognised in the period incurred.
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Imputed Interest and Below-Market Loans
When no explicit interest rate exists
When a receivable or payable is issued at a below-market interest rate – for example, an interest-free note payable to a related party or a zero-coupon bond – ASC 835 requires imputing interest at a market rate. The imputed interest represents the difference between the face amount and the present value of the note, discounted at a market rate. The implied interest is recognised over the life of the instrument, even though no explicit interest payments are made. This ensures that the economic cost of borrowing is reflected in the financial statements.
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Discounting of Long-Term Liabilities
Present value as the initial measurement basis
Long-term liabilities that do not bear an explicit interest rate, or bear an unrealistic rate, must be recorded at the present value of the payments discounted at a market rate. ASC 835 requires using the imputed rate when the stated interest rate is negligible compared to the market rate. This imputation applies to transactions such as long-term purchase contracts, deferred compensation arrangements, and contingent consideration in business combinations. The present value discount is accreted over the life of the liability as additional interest expense.
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Worked Example – Interest Capitalisation
Calculating capitalisable interest on an asset under construction
Example: Capitalising interest on a new factory
An entity begins construction of a factory on 1 January, with completion expected on 30 June. Expenditures incurred are: $2,000,000 on 1 January, $3,000,000 on 1 April, and $1,000,000 on 1 June. The entity has a 6%, $5 million specific construction loan and a 4%, $10 million general revolving credit facility. The weighted-average accumulated expenditures = $2M × 6/6 + $3M × 3/6 + $1M × 1/6 = $3,500,000.
Specific loan interest: $2M × 6% = $120,000
Remaining expenditures: $3.5M − $2M = $1.5M
General rate on excess: 4%
Avoidable interest: $120,000 + ($1.5M × 4%) = $120,000 + $60,000 = $180,000
If actual interest incurred exceeds $180,000, only $180,000 is capitalised; if actual interest is less, the entire amount is capitalised. The $180,000 is added to the factory's cost on the balance sheet and depreciated over the factory's useful life, matching the financing cost with the periods that benefit from the asset.
Remaining expenditures: $3.5M − $2M = $1.5M
General rate on excess: 4%
Avoidable interest: $120,000 + ($1.5M × 4%) = $120,000 + $60,000 = $180,000
If actual interest incurred exceeds $180,000, only $180,000 is capitalised; if actual interest is less, the entire amount is capitalised. The $180,000 is added to the factory's cost on the balance sheet and depreciated over the factory's useful life, matching the financing cost with the periods that benefit from the asset.
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Disclosure Requirements
What ASC 835 requires
Amount of interest cost capitalised during the period, and the total interest cost incurredThe interest rate(s) used to determine capitalisable interest for the periodFor entities with qualifying assets: the weighted-average accumulated expenditures and the capitalization rateImputed interest recognised for below-market loans, including the imputed rate and the face amount of the instrument
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether an asset qualifies as a qualifying asset under ASC 835When to suspend and resume interest capitalisation during construction delaysWhether a below-market loan requires imputed interest calculation
SIGNIFICANT ESTIMATES
Weighted-average accumulated expenditures and timing of cash outflowsAppropriate capitalisation rate when using general borrowingsMarket rate for imputing interest on below-market instruments
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ASC 835 vs IAS 23 – Comprehensive Comparison
Comparison – ASC 835 vs IAS 23
FeatureUS GAAP (ASC 835)IFRS (IAS 23)
Core principleCapitalise interest on qualifying assets as part of costIdentical principle – fully converged
Qualifying assetsAssets taking a substantial period of time to get ready for useSame definition and scope
Capitalisation rateWeighted-average rate on borrowings; specific borrowings firstSame approach – fully converged
Suspension criteriaSuspended during prolonged periods of inactivitySame suspension criteria – fully converged
DisclosureCapitalised amount, capitalization rate, and total interest costSame disclosure requirements – fully converged
ASC 835 and IAS 23 are among the most closely converged standards in the US GAAP/IFRS landscape. The two frameworks use identical capitalisation principles, with no remaining substantive differences.
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Statement Mapping
Where every ASC 835 event lands
EventStatement(s) affectedNotes
Interest capitalised on qualifying assetBSAdded to cost of qualifying asset; depreciated over useful life
Interest expense (non-capitalisable)BS ISRecognised in earnings as incurred
Imputed interest on below-market loanBS ISDiscount accreted over loan term as interest expense
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Related Topics
Cross-reference map
TopicConnection
ASC 360Property, Plant, and Equipment – capitalised interest becomes part of depreciable asset cost
ASC 470Debt – interest accruals on short-term borrowings not related to qualifying assets
ASC 470-50Debt with Conversion and Other Options – imputed interest on convertible debt
IAS 23Borrowing Costs – IFRS counterpart
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Quick-Reference Glossary
Qualifying asset
An asset that necessarily takes a substantial period of time to complete or ready for its intended use or sale.
Avoidable interest
The interest cost that could have been avoided if expenditures for the qualifying asset had not been made.
Imputed interest
Interest cost inferred for a below-market loan where no explicit interest rate exists or the stated rate is unrealistic.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows