When would interest incurred during construction NOT be included in a capital asset's historical cost?

Interest incurred during construction is typically included in a capital asset's historical cost as it directly contributes to the total cost necessary to prepare the asset for its intended use. However, in the context of internal service funds, interest capitalized during construction generally does not apply.

Internal service funds operate like enterprise funds but serve other governmental departments, and typically, the underlying economic activities do not justify the capitalization of interest. This is primarily due to the nature of internal service funds, which tend to provide services rather than generate profits, making it less relevant to include interest costs in the asset valuations for internal services.

In contrast, capital assets in enterprise funds, which are designed for business-type activities, would normally include interest during construction as part of the asset's historical cost since these funds are aimed at generating revenues. Similarly, if a capital asset transitions from an enterprise fund to governmental activities, it retains its original inclusion of interest costs from construction unless the specific context of usage changes its classification.

Thus, the rationale is that internal service funds typically do not capitalize interest costs, standing apart from the practices associated with enterprise funds and other governmental activities where capitalizing interest is standard.