The formula
Average accumulated expenditures = Σ (expenditure × days outstanding in the period ÷ days in the period). Avoidable interest = specific borrowing rate × the lesser of the average expenditures and the specific borrowing + weighted average rate of other borrowings × any excess. Interest capitalized = the lesser of avoidable interest and total interest incurred. The framework is ASC 835-20.
When to use it
Use it to recompute a client's capitalized interest on a construction project, test the weighting of draws, or see how much of the interest cost goes to the balance sheet.
Limits
The weighted average rate uses principal-weighted nominal rates that you list. Deciding which borrowings belong in it is a judgment the tool does not make. The rates are prorated on a 365-day year. The opening balance of accumulated expenditures is whatever you enter, so apply your own policy to it.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the capitalized interest formula?
Interest capitalized = capitalization rate × average accumulated expenditures for the period. Where a specific new borrowing is tied to the asset, its rate applies to the part of the average expenditures up to that borrowing. The excess takes the weighted average rate of the entity's other borrowings.
Is there a cap?
Yes. The total interest capitalized in a period cannot exceed the total interest cost incurred in that period.
How are expenditures weighted?
Each expenditure is weighted by the fraction of the period it was outstanding, from the date paid to the end of the period. This tool uses days. Expenditures are measured on a cash basis, so accruals that bear no interest are left out, and progress payments received from customers reduce them.
Which assets qualify?
Assets constructed or produced for the entity's own use, and those constructed or produced as discrete projects for sale or lease, among others in ASC 835-20. Inventory routinely manufactured in large quantities and assets already in use or ready for use do not qualify.
When does capitalization stop?
It continues while activities to prepare the asset for its intended use are in progress and interest cost is being incurred. It ends when the asset is substantially complete and ready for its intended use, so set the period to that window.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.