GASB 89: How capitalized interest changes impact utility rate cost recovery

GASB 89 requires that utilities that follow GASB standards expense construction period interest costs

The Governmental Accounting Standards Board (GASB) recently issued Statement No. 89, Accounting for Interest Cost Incurred Before the End of a Construction Period, which is effective for reporting periods beginning after Dec. 15, 2019. GASB 89 states, “In financial statements prepared using the economic resources measurement focus, interest cost incurred before the end of a construction period should be recognized as an expense in the period in which the cost is incurred. These interest costs should not be capitalized as part of the historical cost of a capital asset.”

The requirements of GASB 89 may not always meet the business model of public sector utilities for rate recovery. Utilities finance long-term infrastructure projects with long-term debt. Capitalizing construction period interest is a common industry practice. The logical leap: incurring interest costs stems from the need to borrow for projects, so the interest on those borrowings should be part of the construction project and utilities include these costs in their rates over the life of the related assets. Also, it is common for regulated utilities to capitalize their internal cost of capital when using internal funds for construction activities, utilizing the standards under GASB Statement No. 62, Regulated Operations.

During the exposure draft phase of finalizing GASB 89, the GASB Board heard concerns and has made provisions for the situations where construction period interest is recovered in utility rates. 

GASB exceptions for expensing construction period interest

The GASB added language in GASB 89 that the provisions of regulatory accounting still apply under the new GASB 89 standard.[1] The board stated, “If the criteria for regulated operations are met and the entity has elected to apply the related provisions of GASB 62…the requirements…regarding capitalization of qualifying interest cost as a regulatory asset should remain applicable.” In the GASB Codification[2], the GASB goes further stating, “the amounts capitalized for rate-making purposes as part of the cost of acquiring the assets should be capitalized as a regulatory asset for financial reporting purposes.”