GASB 89 Update: Accounting for Interest Costs Incurred before the End of a Construction Period

Introduction

The Governmental Accounting Standards Board (GASB) issued GASB Statement No. 89 in June 2018. This standard establishes accounting requirements for interest costs incurred before the end of a construction period. The new standard will make it easier to compare information about capital assets and borrowing costs for government activities and business-type activities by state and local governments.

Prior to the issuance of GASB 89, governments would capitalize interest costs in accordance with GASB 34 “Capitalization of Interest Cost” and GASB 62 “Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants”.

Objectives of GASB 89

• Enhance relevance and comparability of information about capital assets and the cost of borrowing for a reporting period.
• Simplify accounting for interest incurred before the end of a construction period.

Key Takeaways/Changes

• For financial statements being prepared using the economic resources measurement focus, GASB 89 requires that interest cost incurred before the end of a construction period be recognized as an expense during the period the cost is incurred. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund.
• For financial statements being prepared using the current financial resources measurement focus, GASB 89 requires that interest cost incurred before the end of a construction period should be recognized as an expenditure according to governmental fund accounting principles.
• For construction in progress (CIP), interest costs incurred after the first applicable report period (which is effective for year ends beginning after December 15, 2019), should not be capitalized.
• Local Public Housing Authorities (PHA’s) are continuously seeking funding (i.e. tax credits and other programs offered by the federal/state/and local agencies), in order to maintain and grow housing of low-income and disabled families. This will require those PHA’s to expense the interest during the construction period, rather than capitalizing the interest (or becoming part of the assets value). GASB made this change in order to simplify reporting and properly classify the “true” cost of borrowing.

When Is GASB 89 Effective?

The requirements of this Statement become effective for audits of financial statements/reporting periods beginning after December 15, 2019. Earlier implementation is however encouraged but is up to the discretion of the state or local government.

What Should Be Done Now?

Assess the impacts to your organization and the changes to your financial statement presentation as a result of implementation. This Statement is intended to simplify financial statement reporting.

Please note this summary is not meant to substitute for reading the Statement in its entirety.