Capitalized interest

How are we supposed to handle Capitalized interest? Is it different under US GAAP and IFRS? I couldn’t understand this question in the 2006 CFA exam in Book 7 IF company A retains Company B’s existing accounting principles except where prohibited by US GAAP, what will be the impact of converting Company B’s IFRS statements to US GAAP? - COmpany B uses FIFO for Inventory and COmpany A uses LIFO - Company B expenses all interests costs and classifies them as CFO. Company A capitalizes interest costs attributable to self-constructed assets. A. CFO- Increase Net Income - Increase B. CFO - Increase Net Income - Decrease C. CFO - Decrease Net Income - Increase D. CFO - Decrease Net Income - Decrease I just don’t get this!



The answer is A and i dont understand!!

can’t help you here bro

**me backs out too** FSA is crap!

if company A retains company’s B principles why would you convert B’s statements??

if you convert B’s statements then it means you don’t expense interest and you capitalize it so you add back to cfo by capitalizing also capitalizing means that you spread the cost for more than 1 year so net income will be higher but really does not make sense the first part of question with the second one

I cant see why NI increases. The CFO is higher because you dont have a rent expense under CFO.

I thought NI would only be higher in the later years. In the early years the interest + dep cost exceeds what the rent expense would have been

it’s not a lease so you would not have a rent expense any ways you don’t expense the whole amt the first year but spread it over a series of years or maybe i need to go to bed too

Under capitalizing, doesn’t NI decrease short term, but is higher long term vs. expensing? Also I am forgetting a basic here, when capitalizing, what cash flows go where when you break it into its two components? I can’t believe I forget this. Edit: Dapper is thinking the same thing I am.

I think it’s just interest expense- cfo versus depreciation- cfo also the difference is increase in depreciation is less

nobody else for this one we are kinda hanging on in here …

I have no idea.

At least the CFO part makes sense.

The answer says: "He will have to capitalize interest costs (rather than expense it), this will increase Net Income (interest costs is no longer an expense) and increase CFO (the negative CFO under IFRS becomes a negative CFI in US GAAP). What I dont understand: The difference between US GAAP and IFRS? Why is CFO higher when you capitalize interest?

I think under ifrs you can expense it and under gaap you need to capitalize cfo is higher because… let’s take an example you have 100 mil in interest 1. expense it - 100 mil expense in year 1 2. capitalize it - add it to the value of the fixed asset produced let’s say if you depreciate over a 10 years and using linear for example - depreciation expense of interest would be only 10 mil it;s a stupid example but it’s late