are defined as (1) assets that are constructed or otherwise produced for an enterprise's own use and (2) assets intended for sale or lease that are constructed or otherwise produced as discrete projects. The FASB ASC 835-20-15-6 guidance excludes interest capitalization for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Assets that are in use or are not being readied for use are also excluded.
An additional issue addressed is the determination of the proper amount of interest to capitalize. The FASB ASC 835-20-30 guidance indicates that the amount of interest to be capitalized is the amount that could have been avoided if the asset had not been constructed. Two interest rates may be used: the weighted average rate of interest charges during the period and the interest charge on a specific debt instrument issued to finance the project. The amount of avoidable interest is determined by applying the appropriate interest rate to the average amount of accumulated expenditures for the asset during the construction period. The specific interest is applied first; then, if there are additional average accumulated expenditures, the average rate is applied to the balance. The capitalized amount is the lesser of the calculated “avoidable” interest and the actual interest incurred. In addition, only actual interest costs on present obligations may be capitalized, not imputed interest on equity funds. Removal of Existing Assets When a firm acquires property containing existing structures that are to be removed, a question arises concerning the proper treatment of the cost of removing these structures. Current practice is to assign removal costs less any proceeds received from the sale of the assets to the land, because these costs are necessary to put the site in a state of readiness for construction. Assets Acquired in Noncash Transactions In addition to cash transactions, assets may also be acquired by trading equity securities, or one asset may be exchanged in partial or full payment for another (trade-in). When equity securities are exchanged for assets, the cost principle dictates that the recorded value of the asset is the amount of consideration given. This amount is usually the market value of the securities exchanged. If the market value of the securities is not determinable, cost should be assigned to the property on the basis of its fair market value. This procedure is a departure from the cost principle and can be viewed as an example of the use of replacement cost in current practice. When assets are exchanged—for example, in trade-ins—additional complications arise. Accountants have long argued the relative merits of using the fair market value versus the book value of the exchanged asset. In 1973, the APB released Opinion No. 29 , “Accounting for Nonmonetary Transactions” (see FASB ASC 845), which maintains that fair value should (generally) be used as the basis of accountability. 3 Therefore the cost of an asset acquired in a straight exchange for another asset is the fair market value of the surrendered asset.