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    Borrowing Costs

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    Crizel Dario
    1) PAS 23 defines borrowing costs as interest and other costs incurred from borrowing funds. Borrowing costs must be capitalized if the funds were borrowed for a qualifying asset, which is an asset that takes substantial time for intended use. 2) Specific borrowings for a qualifying asset require capitalization of actual borrowing costs less any investment income. General borrowings use a capitalization rate based on average expenditures and interest rate. 3) Capitalization begins when expenditures and activities to prepare the asset begin, and ends when the asset is substantially complete. Borrowing costs are expensed as incurred if not eligible for capitalization.

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    Borrowing Costs

    Uploaded by

    Crizel Dario
    36 views13 pages
    1) PAS 23 defines borrowing costs as interest and other costs incurred from borrowing funds. Borrowing costs must be capitalized if the funds were borrowed for a qualifying asset, which is an asset that takes substantial time for intended use. 2) Specific borrowings for a qualifying asset require capitalization of actual borrowing costs less any investment income. General borrowings use a capitalization rate based on average expenditures and interest rate. 3) Capitalization begins when expenditures and activities to prepare the asset begin, and ends when the asset is substantially complete. Borrowing costs are expensed as incurred if not eligible for capitalization.

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    1) PAS 23 defines borrowing costs as interest and other costs incurred from borrowing funds. Borrowing costs must be capitalized if the funds were borrowed for a qualifying asset, which is an asset that takes substantial time for intended use. 2) Specific borrowings for a qualifying asset require capitalization of actual borrowing costs less any investment income. General borrowings use a capitalization rate based on average expenditures and interest rate. 3) Capitalization begins when expenditures and activities to prepare the asset begin, and ends when the asset is substantially complete. Borrowing costs are expensed as incurred if not eligible for capitalization.

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    Download as pptx, pdf, or txt
    36 views13 pages

    Borrowing Costs

    Uploaded by

    Crizel Dario
    1) PAS 23 defines borrowing costs as interest and other costs incurred from borrowing funds. Borrowing costs must be capitalized if the funds were borrowed for a qualifying asset, which is an asset that takes substantial time for intended use. 2) Specific borrowings for a qualifying asset require capitalization of actual borrowing costs less any investment income. General borrowings use a capitalization rate based on average expenditures and interest rate. 3) Capitalization begins when expenditures and activities to prepare the asset begin, and ends when the asset is substantially complete. Borrowing costs are expensed as incurred if not eligible for capitalization.

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    of 13

    Borrowing Costs

    PAS 23
    Definition
    • Under PAS 23, par 5, borrowing costs are defined as “interest and
    other costs that an entity incurs in connection with borrowing of
    funds”.

    • Interest expense calculated using the effective interest method.


    • Finance charge with respect to a finance lease.
    • Exchange difference arising from foreign currency borrowing to the
    extent that it is regarded as an adjustment to interest cost.
    Qualifying Asset
    • A qualifying asset is an asset that necessarily takes a substantial
    period of time to get ready for the intended use or sale.

    Examples:
    a. Manufacturing plant
    b. Power generation facility
    c. Intangible asset
    d. Investment property
    Excluded from Capitalization
    PAS 23 does not require capitalization of borrowing costs relating to the
    following:
    • Assets measured at fair value, such as biological assets.
    • Inventories that are manufactured or produces in large quantities on
    a repetitive basis, such as maturing whisky, even if they take a
    substantial period of of time to get ready for sale.
    • Assets that are ready for their intended use or sale when incurred.
    Accounting for borrowing cost
    • PAS 23, par 8, mandates the following rules on borrowing cost:
    1. If the borrowing is directly attributable to the acquisition,
    constructions or production of a qualifying asset, the borrowing
    cost is required to be capitalized as cost of the asset. The
    borrowing costs that are directly attributable to the acquisition,
    construction or production of qualifying asset are borrowing costs
    that would have been avoided if the expenditure on the qualifying
    asset had not been made.
    2. All other borrowing costs shall be expensed as incurred.
    Specific Borrowing
    • PAS 23, par 12, provides that if the funds are borrowed specifically for
    the purpose of acquiring a qualifying asset, the amount capitalizable
    borrowing cost is the actual borrowing cost incurred during the period
    less any investment income from the temporary investment of those
    borrowings.
    General Borrowing
    • PAS 23, par 14, provides that if the funds are borrowed generally and used for
    acquiring a qualifying asset, the amount of capitalizable borrowing costs is equal to
    the average carrying amount of the asset during the period multiplied by a
    capitalization rate or average interest rate.

    • The capitalizable borrowing cost shall not exceed the actual interest incurred.

    • The capitalization rate or average interest rate is equal to the total annual borrowing
    cost divided by the total general borrowings outstanding during the period.

    • No specific guidance is provided for general borrowing with respect to investment


    income. Any investment income is not deducted from capitalizable borrowing cost.
    Specific Borrowing used for General
    Purposes
    • If the asset is financed by specific borrowing but a portion is used for
    working capital purposes, the borrowing shall be treated as a general
    borrowing in determining capitalizable borrowing cost.

    • Thus, the capitalizable borrowing cost is equal to the average


    expenditures on the asset x average interest rate.
    Commencement of Capitalization
    The capitalization of borrowing costs as part of the cost of a qualifying
    asset shall commence when the following three conditions are present:

    • When the entity incurs expenditures for the asset


    • When the entity incurs borrowing costs
    • When the entity undertakes activities that are necessary to prepare
    the asset for the intended use or sale.
    Activities necessary to prepare
    • The activities necessary to prepare the asset for the intended use or
    sale encompass more than the physical construction of the asset.

    • These include technical and administrative work prior to the


    commencement of physical construction, such as drawing up plans
    and obtaining permit for a building.

    • However, merely holding assets for use or development without any


    associated development activity does not qualify for capitalization.
    Suspension of capitalization
    • Capitalization of borrowing costs shall be suspended during extended
    periods in which active development is interrupted.

    • However, capitalization of borrowing costs is not normally suspended


    during a period when substantial technical and administrative work is
    being carried out.

    • Capitalization of borrowing costs is not also suspended when a


    temporary delay is a necessary part of the process of getting an asset
    ready for its intended use or sale.
    Cessation of capitalization
    • Capitalization of borrowing costs shall cease when substantially all the
    activities necessary to prepare the qualifying asset for the intended
    use or sale are complete.
    Disclosure related to borrowing costs
    • The amount of borrowing cost capitalized during the period.

    • The capitalization rate used to determine the amount of borrowing


    cost eligible for capitalization.

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