Capitalized Interest

tl;drThe cost of borrowing money to finance the construction or development of long-term assets, which is added to the asset's cost basis rather than being expensed immediately.

This accounting treatment recognizes that interest costs during construction are part of making the asset ready for its intended use. The capitalization period typically runs from the beginning of construction until the asset is substantially complete. For example, when a utility company borrows $100 million at 5% interest to build a power plant over two years, the $10 million in interest costs during construction is capitalized as part of the plant's total cost rather than being recorded as interest expense. This capitalized interest becomes part of the asset's depreciable base once the plant begins operation. Managing capitalized interest requires careful tracking of qualifying assets, borrowing costs, and construction timelines. Organizations must follow specific accounting guidelines regarding when to start and stop interest capitalization.