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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
30.Capitalization of interest incurred on loans received to fund research
and development
Relevant guidance
Company A has obtained a loan from Company B, another
pharmaceutical company, to finance the late-stage development
of a drug to treat cancer.
Interest shall be capitalized for the following types of assets
(“qualifying assets”) [ASC 835–20–15–5]:
• Assets that are constructed or otherwise produced for an
entity’s own use, including assets constructed or produced for
the entity by others for which deposits or progress payments
have been made.
• Assets intended for sale or lease that are constructed or
otherwise produced as discrete projects…
• Investments (equity, loans, and advances) accounted for
by the equity method while the investee has activities in
progress necessary to commence its planned principal
operations provided that the investee’s activities include the
use of funds to acquire qualifying assets for its operations.
The investor’s investment in the investee, not the individual
assets or projects of the investee, is the qualifying asset for
purposes of interest capitalization.
Can Company A capitalize
the interest incurred for
borrowings obtained to
finance research and
development activities? 
Borrowing costs associated with costs for research and development projects are expensed as incurred as development costs as they
do not qualify as assets.
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