Which statement is correct regarding interest incurred during the period of construction of capital projects?

• A. Interest cannot be capitalized as part of the cost of general capital assets reported in governmental activities.
• B. Interest can be capitalized as part of the cost of general capital assets reported in governmental activities.
• C. Interest must be expensed in the year incurred.
• D. Interest is capitalized only for enterprise funds.

Answer: (A)

Interest incurred during the construction of capital assets for governmental activities is not added to the asset’s cost. Instead, it is treated as an expense in the period it is incurred. This aligns with how GASB generally handles capitalization of interest: it is typically limited to assets associated with enterprise funds (where the asset’s cost is financed by user charges and will generate revenues). For general capital assets of the government, the cost reported in government-wide (governmental activities) financial statements does not include interest. Therefore, the correct statement is that interest cannot be capitalized as part of the cost of general capital assets reported in governmental activities. The alternative that interest could be capitalized for general assets, or that it must always be expensed, would not fit this policy, and the enterprise-fund exception explains why capitalization is possible in some cases but not for general governmental assets.