Hi guys, i have encountered some issues regarding about interest expense. i came across a question which states that the company is a manufacturing company. Therefore should i classify its interest expense as operating item or non-operating item? The ans states that since the company is a manufacturing company (not a financial company), i should classify the interest expense as non operating item. In the schweser notes under the capitalise interest section, it states that if interest is capitalised, it is classified as CFI. Interest expense is reported as outflow from operating activities. It did not state if whether the interest expense is from financial or non financial companies. Therefore i will take it as it is an operating item So my question is, should i classified interest expense based on if it is a financial or non financial company? what does CFA level 1 standardize to classify interest expense as? Thanks:)
Interest expense is an operating item for Finance companies (they earn through interest so this is their source of income) For others, it is a non-operating item.
The capitalizing of interest you’re referring to only happens during construction projects, where the company has to pay interest on the construction loan prior to the project being completed. Those interest costs get rolled into the value of the asset. In this case, there is no “interest expense” that flows through the income statement, it all gets capitalized and goes directly onto the balance sheet as a long-term asset (hence being classified as CFI). As anish was saying, for a general manufacturing company, interest expense would be a non-operating item.
We should also know the amount that will be capitalized according to IFRS and USGAAP.(contruction project) IFRS has some exception with reinvestment of amount borrowed. USGAAP capitalizes entire amount.