The guidance in this Subtopic applies to all entities.
Interest capitalization is required only when the balance of the informational benefit and the cost of implementation is favorable. A favorable balance is most likely to be achieved where an asset is constructed or produced as a discrete project for which costs are separately accumulated and where construction of the asset takes considerable time, entails substantial expenditures, and is likely to involve a significant amount of interest cost. A favorable balance is unlikely in the case of inventory items that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Accordingly, this Subtopic proscribes interest capitalization on those types of inventories (that is, inventory items that are routinely manufactured or produced in large quantities on a repetitive basis) and provides for interest capitalization on assets that are constructed or produced as discrete projects.
Minimum threshold levels are common in inventory and property, plant, and equipment accounting. Many entities do not include the costs of minor items in inventory, and many entities do not capitalize individual items of property, plant, and equipment, the costs of which are less than a specified threshold. Such thresholds are designed to minimize the burden of capitalizing large numbers of assets and accounting for those costs as the assets are used. Those thresholds are justified on the grounds that the assets whose costs are charged to expense as purchased are immaterial both individually and in the aggregate. This Subtopic does not affect the use of threshold levels established in conformity with such materiality tests.
Land that is not undergoing activities necessary to get it ready for its intended use is not a qualifying asset. If activities are undertaken for the purpose of developing land for a particular use, the expenditures to acquire the land qualify for interest capitalization while those activities are in progress. The interest cost capitalized on those expenditures is a cost of acquiring the asset that results from those activities. If the resulting asset is a structure, such as a plant or a shopping center, interest capitalized on the land expenditures is part of the acquisition cost of the structure. If the resulting asset is developed land, such as land that is to be sold as developed lots, interest capitalized on the land expenditures is part of the acquisition cost of the developed land.