CABRIA CPA REVIEW CENTER

BORROWING COSTS Tel. Nos. (043) 980-6659

ERNIE M. LAT II

LECTURE
IAS 23 Borrowing Costs requires that borrowing costs
directly attributable to the acquisition, construction or Accounting treatment
production of a 'qualifying asset' (one that necessarily takes
a substantial period of time to get ready for its intended use Recognition
or sale) are included in the cost of the asset. Other
borrowing costs are recognized as an expense. Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset
Objective of IAS 23 form part of the cost of that asset and, therefore, should be
capitalized. Other borrowing costs are recognized as an
The objective of IAS 23 is to prescribe the accounting expense. [IAS 23.8]
treatment for borrowing costs. Borrowing costs include
interest on bank overdrafts and borrowings, finance charges Measurement
on finance leases and exchange differences on foreign
currency borrowings where they are regarded as an Where funds are borrowed specifically, costs eligible for
adjustment to interest costs. capitalization are the actual costs incurred less any income
Key definitions earned on the temporary investment of such borrowings.
[IAS 23.12] Where funds are part of a general pool, the
Borrowing cost may include: eligible amount is determined by applying a capitalization
rate to the expenditure on that asset. The capitalization rate
 interest expense calculated by the effective interest will be the weighted average of the borrowing costs
method under IAS 39, applicable to the general pool. [IAS 23.14]
 finance charges in respect of finance leases
recognized in accordance with IAS 17 Leases, and Capitalization should commence when expenditures are
 exchange differences arising from foreign currency being incurred, borrowing costs are being incurred and
borrowings to the extent that they are regarded as activities that are necessary to prepare the asset for its
an adjustment to interest costs intended use or sale are in progress (may include some
activities prior to commencement of physical production).
This standard does not deal with the actual or imputed cost [IAS 23.17-18] Capitalization should be suspended during
of equity, including any preferred capital not classified as a periods in which active development is interrupted. [IAS
liability pursuant to IAS 32. 23.20] Capitalization should cease when substantially all of
the activities necessary to prepare the asset for its intended
A qualifying asset is an asset that takes a substantial period use or sale are complete. [IAS 23.22] If only minor
of time to get ready for its intended use or sale. [IAS 23.5] modifications are outstanding, this indicates that
That could be property, plant, and equipment and substantially all of the activities are complete. [IAS 23.23]
investment property during the construction period,
intangible assets during the development period, or "made- Where construction is completed in stages, which can be
to-order" inventories. [IAS 23.6] used while construction of the other parts continues,
Scope of IAS 23 capitalization of attributable borrowing costs should cease
when substantially all of the activities necessary to prepare
Two types of assets that would otherwise be that part for its intended use or sale are complete. [IAS
qualifying assets are excluded from the scope of IAS 23.24]
23:
 qualifying assets measured at fair value, such as Disclosure
biological assets accounted for under IAS 41
Agriculture  amount of borrowing cost capitalized during the
 inventories that are manufactured, or otherwise period
produced, in large quantities on a repetitive basis  capitalization rate used
and that take a substantial period to get ready for
sale (for example, maturing whisky)

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CABRIA CPA REVIEW CENTER
REVIEW QUESTIONS 6. Which of the following is not a condition that must
be satisfied before interest capitalization can begin
1. PAS 23 does not apply to on a qualifying asset?
a. Actual or imputed cost of equity, including a. Interest cost is being incurred.
preferred capital not classified as a liability. b. Expenditures for the assets have been made.
b. Borrowing costs directly attributable to the c. Activities that are necessary to get the asset
acquisition, construction or production of a ready for its intended use are in progress.
qualifying asset measured at fair value. d. The interest rate is equal to or greater than the
c. Borrowing costs directly attributable to the company's cost of capital.
acquisition, construction or production of
inventories that are manufactured, or otherwise 7. Which of the following is not considered a
produced, in large quantities on a repetitive “borrowing cost” under IAS 23?
basis. a. Interest expense calculated by the effective
d. All of the above. interest method under IAS 39
b. Finance charges in respect of finance leases
2. Borrowing costs are interest and other costs that an recognised in accordance with IAS 17 Leases
entity incurs in connection with the borrowing of c. Exchange differences arising from foreign
funds. Borrowing costs may include currency borrowings to the extent that they are
a. Interest expense calculated using the effective regarded as an adjustment to interest costs
interest method as described in PAS 39. d. Principal repayments on a loan for property,
b. Finance charges in respect of finance leases plant and equipment
recognized in accordance with PAS 17.
c. Exchange differences arising from foreign 8. Which of the following is not a “qualifying asset”
currency borrowings to the extent that they are under IAS 23 – Borrowing Costs?
regarded as an adjustment to interest costs. a. Mass produced inventory
d. All of the above. b. Manufacturing plants
c. Made to order inventory
3. A qualifying asset is an asset that necessarily takes d. Investment property
a substantial period of time to get ready for its
intended use or sale. This may include 9. When activities to prepare an asset for its sale or
a. Financial assets use are suspended, borrowing costs must be…
b. Inventories that are manufactured, or a. Capitalized
otherwise produced, over a short period of b. Expensed
time. c. Ignored
c. Assets that are ready for their intended use or d. Charged to equity
sale when acquired.
d. Intangible assets 10. Which of the following is not a condition to
commence capitalization of borrowing costs?
4. A qualifying asset is an asset that necessarily takes a. Expenditures are being incurred
a substantial period of time to get ready for its b. Borrowing costs are being incurred
intended use or sale. Which of the following may c. Repayment of borrowings has commenced
not be considered a “qualifying asset” under PAS d. Activities to produce the asset for its intended
23? use or sale have commenced
a. A power generation plant that normally takes
two years to construct 11. What is the correct treatment for all eligible
b. A toll bridge that usually takes more than a year borrowing costs under IAS 23?
to build a. Expensed
c. A ship that normally takes one to two years to b. Capitalized
complete c. None of these
d. An expensive private jet that can be purchased
from a local vendor 12. Big Group is constructing an office building and is
capitalizing borrowing costs in accordance with IAS
5. Borrowing costs that are directly attributable to the 23 – Borrowing Costs. The office is almost
acquisition, construction or production of a complete; the only remaining work is to install
qualifying asset shall be recognized as furniture.
a. Part of the cost of asset.
b. Expense in the period incurred Is Big Group allowed to continue capitalizing the
c. Either a or b borrowing costs?
d. Neither a nor b a. Yes
b. No

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CABRIA CPA REVIEW CENTER
borrowed at 10% on January 1, 2016, and funds
13. Lodi Department Stores, Inc., constructs its own not needed for construction were temporarily
stores. Management’s policy is to include interest as invested in short-term securities, yielding P45,000
part of the cost of new store just being completed. in interest revenue. Other than the construction
Additional information follows: funds borrowed, the only other debt outstanding
Total construction expenditures during the year was a P2,500,000, 10-year, 9%
Jan 2, 2015 notes payable P600,000
dated January 1, 2016.
May 1, 2015 What is the amount
600,000of interest that should be
November 1, 2015 capitalized by Bing
500,000
during 2016?
March 1, 2016 a. P250,000 700,000
September 1, 2016 b. P243,000 400,000
December 31, 2016 c. P198,000 500,000
Total d. P135,000 3,300,000

Outstanding company debt: 17. Ging Company borrowed P4,000,000 on a 10%

Mortgage related directly to new store; interest rate, 12%; term,
note payableP1,000,000
to finance a new warehouse Ging is
5 years from beginning of construction constructing for its own use. The only other debt
General liability: on Ging’s books is a P6,000,000, 12% mortgage
Bonds issued just prior to construction of store; interest rate,payable on an office
500,000
building. The construction of
10% for 10 years the warehouse was completed in six months and
Bonds issued just prior to construction; interest rate , 8%, mature
the average accumulated
1,000,000 expenditures amounted
in 5 years to P4,750,000.
Estimated cost of equity capital 14%
What is the amount of interest that Ging Company
The capitalizable borrowing cost for 2015 is should capitalize?
a. P138,850 a. P200,000
b. P127,250 b. P237,500
c. P122,850 c. P245,000
d. P250,000 d. P490,000

14. The capitalizable borrowing cost for 2016 is 18. G Kong Company decided to construct its own
a. P255,330 building. The total expenditures until completion
b. P254,321 amounted to P5,000,000, of which P1,000,000 was
c. P253,938 paid on January 2, 2016 and the remaining amount
d. P250,000 of P4,000,000 was incurred evenly through out the
year.
15. On 1 October 20X1, Bash Co borrowed P6,000,000
for a term of one year, exclusively to finance the A 10% note directly related to the project (specific
construction of a new piece of production borrowing) was issued on January 2, 2016 with a
equipment. The interest rate on the loan is 6% and face value of P2,000,000. During 2016, borrowings
is payable on maturity of the loan. The construction not directly related to the project were: P5,000,000,
commenced on 1 November 20X1 but no 5-year, 12% note and P2,000,000, 3-year, 8.5%
construction took place between 1 December 20X1 note.
to 31 January 20X2 due to employees taking
industrial action. The asset was available for use on How much is the capitalized interest for 2016?
30 September 20X2 having a construction cost of a. P970,000
P6,000,000. What is the carrying amount of the b. P530,000
production equipment in Bash Co’s statement of c. P310,000
financial position as at 30 September 20X2? d. P200,000
a. P5,016,000
b. P6,270,000
c. P6,330,000
d. P6,360,000

16. During 2016, Bing Company constructed its own

equipment costing P5,000,000. The weighted
average accumulated expenditure on the on these
ssets during 2016 was P2,500,000. To help finance
the these assets during 2016 was P2,500,000. To
help finance the construction, P1,800,000 was

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