A company is constructing a new headquarters building for its own use, partly funded with a construction loan. Under ASC 835-20, which of the following is NOT one of the three conditions that must be met simultaneously for interest cost to qualify for capitalization during the construction period?
- Expenditures for the asset have been made
- Activities necessary to prepare the asset for its intended use are in progress
- Interest cost is being incurred
- The asset's total construction cost exceeds a $1 million capitalization threshold
Why D? And why not the others?
Correct answer: D. The asset's total construction cost exceeds a $1 million capitalization threshold
ASC 835-20-25-3 requires all three of the following to be met simultaneously before interest cost qualifies for capitalization on a qualifying asset: expenditures for the asset have been made, activities necessary to prepare the asset for its intended use are in progress, and interest cost is being incurred. There is no dollar threshold in the standard — capitalization applies to any qualifying asset meeting the three conditions, regardless of the size of its total construction cost. Options A, B, and C are each genuine, correctly stated conditions from ASC 835-20-25-3, so selecting any of them as 'not a condition' would be incorrect since they are exactly the tests the standard requires. Option D is correct precisely because no such capitalization-threshold rule exists anywhere in ASC 835-20; it is a fabricated condition.
Source: FASB ASC 835-20-25-3 (conditions for capitalization of interest)