When you expense previously capitalized interest, how is the cash flow statement affected?

Net income is lower. But how is this expense added back on the cash flow statement? Where does it show up? How does it show up?

I’m going to say its expensed as depreciation… Since capitalied interest is an asset you are then depreciating it back annually - that’s the expense. Hence, its not a cash flow item… Net Income is affected but not cash flows. Since NI is lower, RE and equity is lower as well., and obviously noncurrent assets will decrease as well.

That’s how I have it in my head atm, and hope I’m right, but if someone can confirm would be great.

You would treat this at the time of capitalization, most likely. So if I built an asset for $100 and capitalized $5 in interest expense to the asset, then I would treat it as an $105 outflow for CFI.

The deprecation over the course of the assets life is a non-cash charge and won’t change Cash Flows. If you want to get particular about it then if you were to capitalize interest eventually in subsequent periods you would actually have higher CFO due to the reduction in taxes, but that’s about it

There is no cash flow change in expensing a non-cash flow item.

right, it is a non-cash flow item, but I mean it lowers net income so in order for the cash flow statement to adjust for it, they have to add it back to net income. I think included as depreciation is the answer, but not really sure.

Maybe you didn’t get it the first time.

There is no cash flow change in expensing a non-cash flow item.

Net income = 100

Pre-capitalized interest = 5

Cash flow is the same

I decide to expense it

Net income = 95

Cash flow is the same, but using indirect cash flow statement you start from 95. How is that 5 added back in order to make cash flow the same? Is it part of depreciation?

So I am also saying cash flow is the same, but I want to know how it looks like. If your reply is the same, actually try and explain it to me other than repeating it.

You should re-state your earlier reporting: diminish your asset from the capitalized interest, move your capitalized interest in CFI into CFO, and expense your interest in income statement, and remove the depreciation of capitalized interest over the years.

I don’t think it makes much sense to do such an adjustment prospectively only (AFAIK, the only income statement adjustment that can be madee prospectively is depreciation method changes).

thank you

Reason why I bring it up is this answer from the Practice Assessment Piezo:

The expensing of the previously capitalised interest is a non-cash amount (the cash outflow was in a previous period when the expense was incurred) and therefore does not affect operating cash flow. Net income is lower as a result of the previously capitalized amount being expensed, but as it is a non-cash expense it is added back to determine cash from operations. (Lower net income but higher add back = no change in CFO).

So as I said before I know that CFO does not change, but how does the “higher add back” appear on the CFO? I’m pretty sure it doesn’t show up as “add back.” It doesn’t say anything about re-stating? This looks prospective right or am I looking at this wrong?

The higher added back doesn’t appear on the Cash Flow statement. It’s just referring to the way to calculate CFO from NI using the indirect method.

You’d be adding back a higher deprecation expense relative to if you did not capitalize the expense, but your NI is lower in that period anyway, so net net no change

I know it’s net net no change. The answer I am looking for because you also said it, is: added back via depreciation expense.

I think the keyword is previously capitalized. And ignoring the tax effect.

When you capitalize interest, you also have to take into account depreciation. So you reduce CFI and you add back depreciation to CFO. Remember, CFO adjusts for non-cash charges.

When you expense previously capitalized interest, you basically back out of it. So you reduce CFI and remove the depreciation that you added to CFO.

The net effect on the CFO is unchanged.