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When an asset such as a building is constructed, there is often a considerable period between the start of a project and its completion. Because the cost of an asset should include all costs incurred to prepare it for use or readiness for sale, interest costs related to the construction are generally included in the cost of the asset, that is, capitalized.
FASB Statement No. 34, Capitalization of Interest Cost, provides guidelines for the calculation of the amount of interest to be capitalized and for the disclosures required in the financial statements. The statement specifies that three conditions are necessary capitalization of interest costs:
* qualifying expenditures must already have been made;
* the activities that will prepare the assets for use must already be in progress; and
* the company must actually be paying interest.
The capitalization period ends when the asset is ready for use or when these three conditions no longer exist.
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