EOC 2012, Reading 21, page 112, #8 Interest Coverage ratio - capitalized or expensed interests

Hi, I have not found the awnser on the forum.

The question is if capitalization of interests instead of expensing results in lower, higher or unchanged Interest Coverage Ratio

The awnser according to CFAI is that IntCov rario is unchanged.

I hoped that the awnser is that it will be higher…

Maybe there is special context but I am not able to find it…

Anybody please could explain me why is unchanged.

This is very interesting.

I know Interest expense is not the same under both method. to prove my point you can look at page 89 and see that you dont have interest cost under a operating lease.

looking at the answer, CFAi says that _ you have to adjust your interest expenditure and both the expensed portion and capitalized portion should be used _. so even if it’s not reported as a interest expense on the operating lease, you should adjust for it.

hope this help

Look into solutions, they write that this ratio is based on interest payments not interest expenses, that’s why there is no changes. Formula 32 on page 4 - interest coverage=EBIT/Interest payments.


wouldn’t capitalising affect EBIT though? because of the depreciation? or do you adjust for that…

even i have the same question as kiakaha , coz as far as i know capitalizing interest would change the EBIT but not the interest cost…coz in the years interest is capitalized its a allocated to Income statement thru deprecation and would also result in lower int exp which would increase the interest coverage ratio??? correct me if m wrong ?

If we analyse payments, there is no change …but

The point is that we know this after look at the awnser … I will not see the awnser during the exam.

So the regular interest coverage is based on interests payments or expenses ?

Interest payments

i guess we have to adj EBIt for depreciation of interest.

Is there a difference between an interest payment and an interest expense?

I assumed interest expense for a year would be the sum total of, interest payments made over the accounting time period?

interest expense - this is what in Income Statement, interest payments - this is both from inc statement and capitalized on bs.