How do you treat capitalized interest in the cash flow statement?

Interest directly attributable to a qualifying asset (e.g. a construction project taking > 12 months to build) MUST be capitalized — it does NOT run through the income statement as interest expense, but is capitalized into PP&E and depreciated over the useful life. Cash-flow-statement effect:

• The cash out for the interest payment runs through investing as part of capex (instead of through OCF/financing as an interest payment) — OCF is reported higher accordingly.
• Reported interest expense in the income statement is lower than the actual interest burden. Impact on valuation adjustments: (a) EBIT/EBITDA is reported higher (interest sits outside the income statement). (b) Coverage ratios (EBIT/interest) are artificially overstated. (c) Capex is reported higher, so FCF is lower. Adjustment in the model: back capitalized interest out of PP&E, or at least show it in a sensitivity.