AGA Government Financial Manager GAFRB Question # 4 Topic 1 Discussion

Comprehensive Detailed Explanation:

Capitalization of interest begins when three conditions are met:

Expenditures for the asset have been made (i.e., costs are being incurred)

Activities necessary to prepare the asset for use are in progress

Interest cost is being incurred

Signing a contract does not trigger capitalization — the actual incurrence of costs and activities must begin.

This rule is based on GAAP and FASB/GASB guidance for capital asset construction.

Relevant References:

GASB Statement No. 62 – Capitalization of Interest

FASB ASC 835-20 – Interest Capitalization

GFOA – Capital Asset Accounting Guidelines

Answer: A. the contract is signed for purchasing the asset