Final answer:
Companies should not always offset interest revenue against interest cost when capitalizing interest. Interest capitalization involves adding interest on loans to the cost of assets and is subject to specific accounting standards. Interest payments on loans are considered explicit costs, representing direct financial expenses.
Step-by-step explanation:
Companies should not always offset interest revenue against interest cost when determining the amount of interest to be capitalized as part of the construction cost of assets. Capitalizing interest is a method used in accounting that involves adding the cost of interest on loans to the cost of a constructed asset. This process is guided by specific accounting standards such as the International Accounting Standard (IAS) 23 or the US GAAP. The purpose of capitalizing interest is to obtain a more accurate reflection of the total cost of the asset and spread the interest expense over the useful life of the asset.
When a company incurs interest expense on borrowing that is directly attributable to the acquisition, construction, or production of a qualifying asset, part of that interest may be capitalized. However, if the company also earns interest revenue from temporary investment of borrowed funds, then depending on the accounting standards being followed, it may offset only the excess revenue over the attributed interest cost or not offset at all.
Explicit costs are out-of-pocket expenses that involve direct payment, such as rent, wage, and material costs. Implicit costs signify non-cash expenses that reflect opportunity costs, such as the cost of the owner's time or use of owned equipment. An interest payment on a loan would be considered an explicit cost because it's a direct financial expense the firm incurs.