Avoidable interest

The amount of interest that an organization would have avoided if it had not made the expenditures for an asset.  Avoidable interest is usually calculated when an entity is self- constructing an asset.  The cost of the asset can include materials, labor, and overhead plus some interest. The company is allowed to capitalize the lesser of the actual interest on borrowings for the project, or the avoidable interest. The business calculates avoidable interest based on weighted average expenditures for the project and on a rate.  For the amount up to the actual borrowing, the entity uses the actual borrowing rate, and for the remainder it uses a weighted average rate.  Interest cannot be capitalized if the entity takes on debt to purchase the completed asset; it can only be capitalized in the case of self-constructed assets.  The Financial Accounting Standards Board allows this because a contractor would borrow to build the project, adding the interest into the cost of the project, so a purchased asset may include the builder

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