Interest capitalization in accounting is an essential tool that allows companies to incorporate a portion of financial expenses directly into the cost of a qualifying asset, rather than immediately recording them in the profit and loss account. Well applied, this accounting figure helps to more accurately reflect the company's real investment effort, which has a direct impact on the company's results, its assets, financial structure and the image perceived by banks and investors.
What is interest capitalization in the PGC?
Within the framework of General Accounting Plan (PGC), the interest capitalization consists of including in the acquisition price or production cost of certain assets, those financial expenses corresponding to the financing of the acquisition, manufacture or construction of said assets, which have been accrued until they are put into operating condition.
Instead of recording those interests as "Financial expenses" in the company's income statement, they are incorporated into the value of the immobilized, which will subsequently be amortized based on its useful life.
Assets that allow interest to be capitalized according to the PGC
The interest capitalization It only applies to those assets that require a period of time more than one year to be in usable condition, such as:
- Construction or major renovation of buildings, warehouses or facilities.
- Implementation of production lines or complex infrastructures.
- Internal software development or long-term technological projects.
- R&D projects that culminate in an identifiable and usable asset.
- Stocks with a production period of more than one year.
When can financial expenses be capitalized?
The interest capitalization It is carried out when the following conditions are simultaneously met, which must be strictly documented:
- There is an asset that requires a period of time more than one year to be in usable condition.
- have been accrued financial expenses directly attributable to the project (supplier transfers, loans or other type of external, specific or generic financing).
- The activities necessary for the acquisition, manufacturing or construction of the asset have begun.
- The cost of acquisition, manufacture or construction of the asset plus the capitalized financial expenses does not exceed market value of said asset.
Phases of the capitalization period
The period during which the financial expenses at the cost of the asset is governed by the following rules:
- Get started when expenses occur at the same time on the asset, financial expenses and activity in the project.
- It is suspended if execution stops significantly for reasons beyond the normal project cycle.
- Finish when the asset is in operating conditions. From that moment on, interest is recorded directly in the income statement.
Accounting impact on the results and balance sheet
The policy of capitalization of interest in accounting has relevant effects on the company's financial statements:
| Financial Statement | Short Term Impact | Long Term Impact |
| Result | Improve results and profitability by not recording interest as a financial expense. | The result will be affected by the depreciation of the asset with the increased cost. |
| Balance | Increases the value of assets and equity of the company. | Improves the solvency ratio of society. |
The increase in results and the increase in assets improves the situation for financial covenants and facilitates the ability to obtain additional financing. It is essential to explain the capitalization criteria in the annual accounts.
Good practices for capitalization in growing companies
For companies with investment projects relevant, it is advisable to establish strict control:
- Defined Accounting Policy: Define in writing an accounting policy for interest capitalization, aligned with the PGC, assessing the effect of the application of standards IFRS and US Gaap in the case of multinationals.
- Team Coordination: Coordinate finance, accounting and technical area teams to determine beginning and end of the capitalization period.
- Rigorous Documentation: Document financing contracts, project milestones, applied interest rates and capitalization calculations.
- External Review: Review the criteria with the auditor before consolidating the policy.
Expert advice: how Afianza can help with capitalization
At Afianza we advise companies that undertake significant investment projects to ensure the correct application of the interest capitalization:
- Identify which assets are eligible and determine the period and capitalizable financial expenses.
- Design the accounting policy and calculation models, ensuring coherence.
- Properly document the criteria applied, reducing audit risks and tax inspections.
- Analyze the impact on the result, financial statements and financial structure before making investment decisions.
- Analyze the impact of the capitalization of financial expenses under PGC, IFRS and US Gaap regulations.
one correct capitalization of interest in accounting It allows the company's financial image to be aligned with its investment reality and facilitates dialogue with banks, investors and auditors.
