Which statement is true regarding the capitalization of interest for a construction project financed with a grant?

In accounting for construction projects financed through grants, the key principle is that interest incurred during the construction period should generally not be capitalized. This aligns with the guidelines set forth by relevant accounting standards, particularly for governmental entities. When a project is financed with a grant, the funds received do not typically include the costs related to borrowing, which means there’s no interest expense that would be associated with loans or bonds used to finance the project.

Thus, in this context, any interest incurred is usually treated as an expense in the period it is incurred rather than being added to the cost of the asset. The rationale is that the use of grant money does not involve borrowing in the traditional sense that would usually justify interest capitalization. This treatment reflects a straightforward approach aimed at simplifying the accounting process for grants, which are intended to support the costs associated with the project rather than to generate profit or return on investment.

Understanding that interest capitalization relies heavily on the source of financing is crucial. Since a grant is not a loan that incurs interest, the interest should not be capitalized for projects funded through grants.