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Borrowing Cost

Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized, while other borrowing costs are expensed. Qualifying assets include inventories, property, plant, and equipment, and intangible assets that take a long time to prepare for use. Capitalization begins when expenditures and borrowing costs are incurred, and ceases when the asset is substantially complete or ready for use.

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3 views

Borrowing Cost

Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized, while other borrowing costs are expensed. Qualifying assets include inventories, property, plant, and equipment, and intangible assets that take a long time to prepare for use. Capitalization begins when expenditures and borrowing costs are incurred, and ceases when the asset is substantially complete or ready for use.

Uploaded by

ma.pauline.dacanay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Borrowing Costs (PAS 23)

- Interest and other costs that an en.ty incurs in connec.on with borrowing of funds which
forms part of the cost of a qualifying asset.
- Directly a<ributable to the acquisi.on, construc.on or produc.on of a 1qualifying asset
are CAPITALIZED as cost of that asset.
- Other borrowing costs are EXPENSED when incurred.

Scope:
1. Interest expense on financial liabili.es or lease liabili.es computed using the EFFECTIVE
INTEREST METHOD
2. Exchange differences on foreign borrowings that are regarded as an adjustment to interest
costs
- Do NOT include actual or imputed cost of equity or capital.

Example of Qualifying Assets:


1. Inventories that take a long period of .me to produce
2. PPE that takes a long period of .me to construct or to get ready for its intended use
3. Investment property measured under the cost model that takes a long period of .me to
construct
4. Intangible assets that take a long period of .me to develop

Exclusion from Capitaliza.on:


1. Financial Assets
2. Inventories that are rou.nely produced over a short period of .me or mass-produced on
a repe..ve basis
3. Assets that are ready for their intended use or sale when acquired
4. Assets measured at fair value, such as biological asset

Capitaliza.on:
- Borrowing Costs are capitalized if they are avoidable, would not have been incurred if the
expenditure on the qualifying asset had not been made

Start of Capitaliza.on:
1. Expenditures for the asset are being incurred
2. Borrowing costs are being incurred
3. Ac.vi.es necessary to prepare the asset for its intended use or sale are being undertaken

Suspension of Capitaliza.on:
- During extended periods in which ac.ve development is INTERRUPTED.
- Borrowing costs are EXPENSED.
- NOT suspended if substan.al technical and administra.ve work is being performed or a
temporary delay is necessary part of the development process.

Cessa.on of Capitaliza.on:
- When the qualifying asset is SUBSTANTIALLY COMPLETE/READY FOR USE.
- If the construc.on is completed in parts, capitaliza.on CEASES for each part that is
completed and ready for its intended use.
- Capitaliza.on CONTINUES for the uncompleted parts.

Accoun.ng for Borrowing Costs:


1. 2(Pure) Specific Borrowing
Capitalized Borrowing Costs = Actual Borrowing Cost – Investment Income
3
2. Pure General Borrowing
Capitalized Borrowing Costs = Lower between Actual BC and Maximum BC
*Maximum BC = Weighted Average Expenditure x Capitaliza.on Rate

1
An asset that necessarily takes a substan1al period of 1me to get ready for its intended use or sale.
2
Refers to funds borrowed specifically for the purpose of obtaining a qualifying asset.
3
Those obtained for more than one purpose, and some other purposes.
*Capitaliza.on Rate = Total Interest Pure General BC/Total General BC
3. Mixed Borrowings
a. 4Tradi.onal Method – Average Accumulated Expenditure Method
Total Borrowing Costs = Specific BC + General BC
*Specific BC = Actual Borrowing Cost – Investment Income
*General BC = Weighted Average Expenditures – Specific Borrowing x Capitaliza.on Rate
b. 5Contemporary Method – Avoidable Interest Method
Total Borrowing Costs = Specific BC + General BC
*Specific BC = Actual Borrowing Cost – Investment Income
*General BC = Weighted Average Expenditure x Capitaliza.on Rate
4. Specific Borrowing used for General Purposes
Capitalized Borrowing Costs = Net Average Expenditure x CapitalizaJon Rate
*Net Average Expenditure = Average Expenditure – Investment Income

Limita.ons on Expenditures:
- Expenditure on a qualifying asset include ONLY those that have resulted in:
1. Payments of Cash
2. Transfers of Other Assets
3. The Assump.on of Interest-Bearing Liabili.es
- Expenditures are reduced by any progress payments and grants received in connec.on
with the asset.

Capitaliza.on during Extended Period of Construc.on:


- In subsequent periods of construc.on, the borrowing cost is computed by applying the
capitaliza.on rate to the average carrying amount of the asset, which includes the
borrowing costs that were previously capitalized.

Financial Statement Presenta.on:


- Qualifying assets are NOT segregated from other assets in the financial statements.
- Presented as regular assets under their nominal classifica.on as provided under other
standards.

4
It is simply a combina1on of the specific and general borrowing formulas but with one modifica1on.
5
The method suggested by interna1onal audit firms that places a greater emphasis on the avoidable cost concept
of PAS 23. Furthermore, it is similar to the tradi1onal method except that expenditures are allocated first to specific
borrowings and the excess is allocated to the general borrowings, and only the expenditures allocated to the laGer
are averaged.

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