BALIUAG UNIVERSITY

Integrated Accounting Course II

Summer 2017
MODULE 3: Borrowing Costs LVC

 RELATED STANDARDS: IAS 23 – Borrowing Costs

 Definition of Terms
Borrowing costs – Interest and other costs that an entity incurs in connection with the borrowing of funds.
Capitalization – Recognizing a cost as part of the cost of an asset.
Qualifying asset – An asset that necessarily takes a substantial period of time to get ready for its intended use or
sale.
 Scope
 Borrowing cost may include:
 Interest expense calculated by the effective interest method under IAS 39
 Finance charges in respect of finance leases recognized in accordance with IAS 17 Leases; and
 Exchange differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs.
 This standard does not deal with the actual or imputed cost of equity, including any preferred
capital not classified as a liability pursuant to IAS 32.
 A qualifying asset could be
 Property, plant, and equipment and investment property during the construction period
 Intangible assets during the development period
 "made-to-order" inventories.
 Assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:
 Qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agricul-
ture.
 Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and
that take a substantial period to get ready for sale (for example, maturing whisky)
 Assets that are ready for their intended use or sale when acquired.
 Recognition
 Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are
recognized as an expense.
 Measurement
 Where funds are borrowed specifically (specific borrowing)
 Borrowing costs eligible for capitalization are the actual costs incurred less any income earned on the
temporary investment of such borrowings.
 Where funds are part of a general pool (general borrowing)
 Borrowing cost eligible for capitalization is determined by applying a capitalization rate to the expendi-
ture on that asset.
 The capitalization rate will be the weighted average of the borrowing costs applicable to the general
pool.
 The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount
of borrowing costs it incurred during that period.
 Income earned on the temporary investment of such borrowings is not deducted from borrowing cost.
 Capitalization
 Commencement of capitalization
 Capitalization should commence when expenditures are being incurred, borrowing costs are being
incurred and activities that are necessary to prepare the asset for its intended use or sale are in
progress.
 Suspension of capitalization
 Capitalization should be suspended during periods in which active development is interrupted.
 Cessation of capitalization
 Capitalization should cease when substantially all of the activities necessary to prepare the asset for its
intended use or sale are complete.
 If only minor modifications are outstanding, this indicates that substantially all of the activities are
complete.
 Where construction is completed in stages, which can be used while construction of the other parts
continues, capitalization of attributable borrowing costs should cease when substantially all of the ac-
tivities necessary to prepare that part for its intended use or sale are complete.
 Disclosure
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Borrowing Costs LVC

 Amount of borrowing cost capitalized during the period

 Capitalization rate used to determine the amount of borrowing cost eligible for capitalization

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Illustrative Problems

1. Defined by IAS 23 as Interest and other costs that an entity incurs in connection with the borrowing of
funds.
A. Finance costs B. Borrowing cost C. Interest cost D. Costs of debt
2. Defined by IAS 23 as an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
B. Capital asset B. Long-term asset C. Qualifying asset D. Capital expenditure
3. For purposes of capitalization of borrowing costs, which of the following is least likely to be considered as
qualifying asset?
A. Biological asset B. Intangible asset C. Manufacturing plant D. Power generation facility
4. IAS 23 does not require capitalization of borrowing cost relating to the following assets, except
A. Assets measured at fair value
B. Inventories manufactured in large quantities on repetitive basis even if they take substantial period of
time to get ready for sale.
C. Noncurrent assets that are ready for their intended use or sale when acquired.
D. Real properties classified as investment properties
5. Under IAS 23, borrowing costs incurred in acquiring, producing or constructing a qualifying asset are
A. Expensed in the period incurred.
B. Capitalized as part of the cost of the qualifying asset.
C. Expensed as benchmark treatment; capitalized as allowed alternative treatment.
D. Capitalized as benchmark treatment; expensed as allowed alternative treatment.
6. Investment income from the temporary investment of borrowing attributable to the acquisition,
construction or production of a qualifying asset is
A. Deducted from the borrowing cost related to both specific and general borrowing.
B. Deducted from the borrowing cost related to specific borrowing.
C. Deducted from the borrowing cost related to general borrowing.
D. Recognized as investment income for both specific and general borrowing.
7. If a qualifying asset is financed by general borrowing, the borrowing cost capitalized is equal to
A. Actual borrowing costs incurred during the construction period.
B. Total expenditure on the qualifying asset multiplied by a capitalization rate.
C. Average expenditures on the qualifying asset multiplied by a capitalization rate or actual borrowing
costs, whichever is higher.
D. Average expenditures on the qualifying asset multiplied by a capitalization rate or actual borrowing
costs, whichever is lower.
8. Which of the following is not part of the disclosure requirement under IAS 23?
A. Borrowing cost capitalized during the period.
B. Capitalization rate used to determine the borrowing cost to be capitalized.
C. Amount of specific and general borrowings used to finance the acquisition, construction or production
of a qualifying asset.
D. None of the foregoing.
9. On April 1, Year 1, Bootleg Inc. obtained a one-year loan of P4 million specifically to finance the
construction of its new building. Borrowing costs for year 1 amounted to P300,000. Part of the proceeds of
the loan was invested to earn P40,000 interest The building as completed on December 31, Year 1. What
would be the amount of borrowing cost eligible for capitalization?
A. 260,000 B. 300,000 C. 340,000 D. none
10. On October 1, Year 1, Ali-Fu-Nga Corp. obtained a two-year, 12% loan of P6 million specifically to finance
the construction of its new building. The building was completed on November 30, Year 2. Pertinent details
about the construction and the loan are as follows:
Construction Investment Income
Period Costs (excluding earned from Loan
borrowing costs) Proceeds
Oct 1 to Dec 31, Year 1 P 2,000,000 P 10,000
Jan 1 to Nov 30, Year 2 5,000,000 40,000
What would be the total cost of the new building as of December 31, Year 2?
A. 7,720,000 B. 7,670,000 C. 7,790,000 D. 7,840,000
11. Refer to no. 9. What would be the interest expense of Ali-Fu-Nga for Year 1 and Year 2, respectively?
A. 0 and 60,000 C. 540,000 and 60,000
B. 180,000 and 660,000 D. 720,000 and 0
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Borrowing Costs LVC

12. Tug Yah Watt Enterprise had several general borrowings which were partly used to finance the
construction of a warehouse. Idle funds from the loans proceeds were invested to earn interest income.
The construction began on January 1, Year 1 and ended on December 31, Year 1. Details of the general
borrowings are as follows:
Loan Principal Borrowing Costs Investment Income
10% Bank loan P 2,800,000 P 280,000 P 80,000
10% Short-term loan 1,600,000 160,000 50,000
12% Mortgage 2,000,000 240,000 70,000
Construction costs incurred during Year 1 are as follows:
Date Amount
January 01 P 4,000,000
March 31 2,000,000
June 30 4,000,000
September 30 2,000,000
December 31 1,000,000
What would be the amount of borrowing cost eligible for capitalization?
A. 480,000 B. 650,000 C. 680,000 D. 850,000
13. Agyhuff Inc. began the construction of its building on February 1, Year 1 and ended on September 30, Year
1. The construction cost of P18 million was funded from general borrowings. Details of the general
borrowings during Year 1 are as follows:
Bank Loan Principal
DBO – 6% P 8,000,000
PBI – 6.6% 10,000,000
RBCC – 7% 30,000,000
What would be the amount of borrowing cost eligible for capitalization?
A. 810,000 B. 911,250 C. 1,215,000 D. none
14. Bal-Ah-Kubak Corp. had loans outstanding during Year 1 and Year 2 as follows:
Loan Principal Interest
Specific for construction P 2,000,000 10%
General borrowing 15,000,000 12%
The construction of the self-constructed factory building began on January 1, Year 1 and ended on
December 31, Year 2. Expenditures incurred during the construction period are as follows:
Date Amount
January 1, Year 1 P 2,000,000
July 1, Year 1 4,000,000
November 1, Year 1 3,000,000
July 1, Year 2 1,000,000
What would be the cost of the building under construction Bal-Ah-Kubak as of December 31, Year 1?
A. 10,280,000 B. 11,000,000 C. 9,740,000 D. 9,500,000
15. Refer to no. 13. What would be the cost of the building of as of December 31, Year 2?
A. 10,000,000 B. 11,660,000 C. 11,700,000 D. 11,500,000
16. Cool Logo Company borrowed a 3-year, 10% loan of P20 million partly for the construction of its building
and partly for administrative purposes on January 01, Year 1. The construction was started on January 1,
Year 1 and was completed on December 31, Year 1. Construction expenditures incurred evenly throughout
the year amounted to P12 million. Cool Logo earned P200,000 interest from investing a portion of the loan
proceeds. What would be the amount of borrowing cost eligible for capitalization?
A. 400,000 B. 600,000 C. 1,000,000 D. 1,200,000
17. Boony Corp. obtained a general borrowing to partly finance a construction of a manufacturing plant on
April 1, Year 1. The construction began on April 1, Year 1 and ended on December 31, Year 1. Actual
borrowing cost was P1.2 million while the amount capitalized to the qualifying asset was P720,000.
Average construction expenditures totalled P12 million. What would be the amount of the general
borrowing (principal of the loan)?
A. 20,000,000 30,000,000 C. 15,000,000 D. 25,000,000

- End of discussion

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