interest capitalization?

Question

what effect does interest capitalization have on financial statements besides income taxes? thanks

Answer 1

Interest is a borrowing cost.

The Benchmark treatment is : All borrowing costs should be expensed in the period in which they are incurred. [IAS 23.7]

The Allowed alternative treatment : Borrowing costs in relation to the acquisition, construction and production of a qualifying asset should be treated as part of the cost of the relevant asset. [IAS 23.10-11]
Under the allowed alternative treatment, borrowing costs that are directly attributable to the acquisition, construction or production of an asset are included in the cost of that asset. Such borrowing costs are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.

If you have capitalised some interest, the effect is that the income for the period would be higher than if you had expensed the interest. But if you've capitalised the interest in a depreciable asset, the depreciation in future would be higher than if you hadn't capitalised the interest into that asset.