PAS 23 Borrowing Costs

Learning Objectives
1. State the core principle under
PAS 23.
costs that
2. Compute for borrowing are
eligible for

capitalization.

Core principle under PAS 23

Borrowing costs that are directly attributable to the acquisito

construction or production of a qualifying asset are capitalized as

cost of that asset. Other borrowing costs are expensed when

incurred.

> costs (interest or finance costs) are costs incurred in

Borrowing
relation to the borrowing of funds. Examples:
or lease
expense on liabilities
a. interest financial liabilities

method; and
computed using the effective interest
b. exchange differences on foreigrn borrowings that are

costs.
regarded as an adjustment to interest

actual or imputed cost of

Borrowing costs do not include

equity or capital.
takes a

Qualifying asset - is "an asset that necessarily

intended uSe

time to get ready for

its
period of
substantial
sale." (PAS 23.5)

Examples of qualifying assets: produce time to

of time to of
Inventories that take a long period
a.
period
take along
b. Items of PPE (e-g., building) that
use
for theirintended
Construct or to get ready develop
of time to
c. Intangible assets that take a long
long period
 Borrowing Costs 279

The following are not qualifying assets:

a. Finandal assets
h Inventories that are routinely produced over a short period of
timeor are mass-produced on a repetitive basis
Assets that are ready for their intended use or sale when
acquired
d. Assets measured at fair value.

Capitalization of Borrowing Costs

Borrowing costs are capitalized if they are avoidable, meaning they
would not have been incurred if the expenditure on the qualifying
asset had not been made.

Capitalization of borrowing costs starts when all of the

following conditions are met:

expenditures for the asset are being incurred;

b. borrowing costs are being incurred, and
C. activities necessary to prepare the asset for its intended use or
sale are being undertaken.

Capitalization is suspended during extended periods in

which active development is interrupted. Borrowing costs during
these periods are expensed.
Capitalization, however, is not suspended if substantial
technical and administrative work is being performed or a
temporary delay is a necessary part of the development process.
For example, capitalization of borrowing costs is not suspended
when construction is temporarily stopped due to a typhoon.
Capitalization of borrowing costs ceases when the

qualifying asset is substantially complete. If the construction of a

in parts, capitalization ceases for
qualifying asset is completed
that completed and ready for its intended use.
each part is

Capitalization continues for the uncompleted parts.

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PAS3
Specific borrowing

Specific borrowing refers to funds borrowed

specifically for
purpose of obtaining a qualifying asset. the
The capitalizable borrowing costs on specific

are computed as follows: borrowing

Capitalizable BC = Actual borrowing costs - Investment

income

Illustration:
On January 1, 20x1, Entity A obtained a 10%. P1M
loan,
specificallyto financethe construction of a building.
The proceds
of the loan were temporarily
invested and earned interest income
of P20,000. The construction was
completed on December 31, 20x1.

> Capitalizable BC- (1M x 10%)-20,000 =80,000

General borrowing
General borrowings are those obtained for more. than one

purpose, e.g., the acquisition or construction of a qualifying asset

and some other purposes.

The capitalizable borrowing costs on general borrowty
are computed as follows:

Capitalizable BC =Ave. Expenditure x Capitalization Rate

of the
The borrowing to be lower
cost capitalized is the
actual
amount computed using the formula above and the
borrowing costs.
 PAS 23
280

Specific borrowing
to funds borrowed
Specific borrowing refers specifically for
the
asset.
a qualifying
purpose of obtaining
costs on
borrowing costs specific
The capitalizable
borrowings
are computedas
follows:

BC Actual borrowing costs-Investmentincome

Capitalizable

llustration:

On January 1, 20x1, Entity A obtained a 10%, M

specifically to finance the construction ofa building. The proceeds
of the loan were temporarily invested and earned interest income

of P20,000. The construction was completed on December 31, 20x1.

Capitalizable BC = (1M x 10%)-20,000 =80,000

General borrowing
General borrowings are those obtained for more than one

purpose, e.g, the acquisition or construction of a qualifying aser

and some otherpurposes.
The capitalizable borrowing costs on general borowing
are computed as follows:

Capitalizable BC =Ave. Expenditure x Capitalization Rate

The ofthe
borrowing cost to be capitalized is the lower l

amount computed using the formula above and the act

borrowing costs.
 ustration:
1, 20x1, Entity
On January
A had the following
general
A part of the
borrowings. proceeds was used to finance the
a qualifying asset.
construction of

Principal
note P 10,000,000
12% short-term
14% bank loan (3-year) 18,000,000
16% note payable (5-year) 22,000,000

bypenditures made on the qualifying asset were as follows:

Jan. 1 P 4,800,000
Mar. 31 2,200,000

July 31 3,500,000
October 1
5,400,000
December 31 300,000

The capitalization rate is computed as follows:

> Capitalizable BC =Ave. Expenditure x Capitalization Rate

The average expenditure is computed as follows:

Month outstanding over Average
Date Expenditures 12 Months expenditure
(a) () (c)= (a)x (b)

Jan.1 4,800,000 12/12 4,800,000

Mar.31 2,200,000 9/12 1,650,000

July 31 3,500,000 5/12 1,458,333

Oct. 1 3/12 1,350,000

5,400,000
Dec. 31 300,000 o/12
9,258,333

The asfollows:
capitalization rate is computed

Capitalization Total interest expense on general borrowings

rate Total general borrowings
282 PAS
on general borrowings
Total interest expense

(10Mx 12%) (18M+ +

x14%) (22M x 16%)
borrowings (10M(++ 18M-+ 7,240,009
Divide by: Total general 22M)
rate
Capitalization 1448%
1340.607
Capitalizable BC -9,258,333x 14.48%

Theamount computed above is compared with the

the period. The actual actual
costs incurred during actual
borrowing intereg
P7,240,000
is
(see
general borrowing
expense on the computation
the borrowing cost eligible for
above). Therefore, capitalizationis

P1,340,607, the loweramount.

Disclosure
a. The amount of borrowing costs capitalized during the period.
b. The capitalization rate used to determine the capitalizabile
borrowing costs.

Summary:
Borroying costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are capitalizd
cost of that asset. Other borrowing costs are expensed when
incurred.

For specific borrowings, the capitalizable borrowing cost s

Computed as: "Actual borrowing costs - Investment income"

isthe
For general borrowings, the capitalizable borrowing cost 15

x
lower of the actual borrowing costs
costs and "Average
Expenditure

Capitalization Rate."