Module 6
PAS 23 BORROWING COST
Introduction
PAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition,
construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of
time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing
costs are recognized as an expense.
Learning Outcomes:
a. State the core principle under PAS 23.
b. Compute for borrowing costs that are eligible for capitalization.
PAS 23 Borrowing Cost
Core principle
“Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.” (PAS 23.1)
Borrowing costs are interest and other costs incurred by an entity in connection with the
borrowing of funds. Borrowing costs may include:
• interest expense on financial liabilities or lease liabilities computed using the effective
interest method
• exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
Borrowing costs do not include actual or imputed cost of equity or capital.
Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. Depending on the circumstances, any of the following may be qualifying
assets:
a. Inventories that take a long time period of time to produce;
b. Items of PPE (e.g. Building) that take long a period of time to construct or to get ready for
its instended use; and
c. Intangible assets that take a long time period of time to produce.
Example 1
A telecom company has acquired a 3G licence. The licence could be sold or
licensed to a third party. However, management intends to use it to operate
a wireless network. Development of the network starts when the licence is
acquired.
Should borrowing costs on the acquisition of the 3G licence be capitalised until
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the network is ready for its intended use?
Solution
Yes. The licence has been exclusively acquired to operate the wireless network.
The fact that the licence can be used or licensed to a third party is irrelevant.
The acquisition of the licence is the first step in a wider investment project
(developing the network). It is part of the network investment, which meets the
definition of a qualifying asset.
Example 2
A real estate company has incurred expenses for the acquisition of a permit
allowing the construction of a building. It has also acquired equipment that will
be used for the construction of various buildings.
Can borrowing costs on the acquisition of the permit and the equipment be
capitalised until the construction of the building is complete?
Solution
Yes for the permit, which is specific to one building. It is the first step in a wider
investment project. It is part of the construction cost of the building, which meets
the definition of a qualifying asset.
No for the equipment, which will be used for other construction projects. It is
ready for its ‘intended use’ at the acquisition date. It does not meet the definition
of a qualifying asset.
The following are not qualifying assets:
a. Financial assets;
b. Inventories that are manufactured, or otherwise produced, over a short period of time;
c. Assets that are ready for their intended use or sale when acquired;
d. Assets that are routinely manufactured or otherwise produced in large quantities on a
repetitive basis; and
e. 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.
Commencement of Capitalization
The capitalization of borrowing costs as part of the cost of a qualifying asset commences on the
date when all of the following conditions are met:
a. The entity incurs expenditures for the asset;
b. The entity incurs borrowing costs; and
c. It undertakes activities that are necessary to prepare the asset for its intended use or sale.
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Suspension of Capitalization
Capitalization of borrowing costs shall be suspended during extended periods of suspension of
active development of a qualifying asset. 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 is not suspended when construction is temporarily stopped due to a typhoon.
Cessation of Capitalization
An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete. If the construction of a
qualifying asset is completed in parts, capitalization ceases for each part that is completed and
ready for its intended use. Capitalization continues for the uncompleted parts.
Specific Borrowing
Specific borrowing refers to funds borrowed specifically for the purpose of obtaining a qualifying
asset.
The capitalizable borrowing costs on specific borrowings are computed as follows:
Capitalizable BC = Actual borrowing costs – Investment Income
Illustration:
On January 1, 2019, XYZ Corporation obtained a 10%, ₱1M loan, specifically to finance the
construction of the building. The proceeds of the loan were temporarily invested and earned
interest income of ₱20,000. The construction was completed on December 31, 2019.
Capitalizable BC = ( 1M x 10%) – 20,000
= 80,000
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General Borrowing
General borrowings are those obtained for more that one purpose, e.g., the acquisition or
construction of a qualifying asset and some other purpose.
The capitalizable borrowing costs on general borrowings are computed as follows:
Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %
Average expenditure on the asset ₱ xx
Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx
The borrowing cost to be capitalized is the lower of the amount computed using the formula
above and the actual borrowing costs.
Illustration:
On January 1, 2019, ABC Corporation had the following general borrowings. A part of the
proceeds was used to finance the construction of a qualifying asset.
Principal
12% short-tem note ₱10,000,000
14% bank loan (3-year) 18,000,000
16% note payable (5-year) 22,000,000
Expenditures made on the qualifying asset were as follows:
January 1 ₱4,800,000
March 31 2,200,000
July 31 3,500,000
October 31 5,400,000
December 31 300,000
Capitalizable BC = Average Expenditure x Capitalization Rate
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The average expenditure is computed as follows:
Months outstanding
Expenditures Average Expenditure
Date over 12 Months
(a) (c) = (a) x (b)
(b)
January 1 4,800,000 12/12 4,800,000
March 31 2,200,000 9/12 1,650,000
July 31 3,500,000 5/12 1,458,000
October 31 5,400,000 3/12 1,350,000
December 31 300,000 0/12 –
9,258,333
The capitalization rate is computed as follows:
Principal Principal x Interest Rate Interest Expense
12% short-tem note ₱10,000,000 10,000,000 x 12% ₱1,200,000.00
14% bank loan (3-year) 18,000,000 18,000,000 x 14% ₱2,520,000.00
16% note payable (5-year) 22,000,000 22,000,000 x 16% ₱3,520,000.00
₱50,000,000 ₱7,240,000.00
Total interest expense on general borrowings
Capitalization Rate =
Total general borrowings
₱7,240,000
Capitalization Rate =
₱50,000,000
Capitalization Rate = 14.48%
Capitalizable BC = Average Expenditure x Capitalization Rate
Capitalizable BC = ₱9,258,333 x 14.48%
Capitalizable BC = ₱1,340,607
* The computed capitalizable borrowing cost (₱1,340,607) is lower than the actual borrowing cost
(₱7,240,000). Therefore, the borrowing cost eligible for capitalization is ₱1,340,607.
Disclosure
a. The amount of borrowing costs capitalized during the period.
b. The capitalization rate used to determine the capitalizable borrowing costs.
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REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
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Financial Statement Presentation
Qualifying assets are not segregated from other assets in the financial statements. They are
presented as regular assets under their normal classification as provided under other standards.
References:
Millan, Z. V. (2018). PAS 23 Barrowing Costs. In Conceptual Framework and Accounting
Standards (2018 Edition, pp. 285-289). Bandolin Enterprise.
IAS 23- Investment Property & Related Party Disclosures
(2020).http://www.iasplus.com/.https://www.iasplus.com.en/standards/oas/ais23
Activity:
Activity 1: Answer Problem 1 and Problem 2 (No. 1 and 5), PAS 23 Barrowing Costs (pp. 290-
292) in your textbook.
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REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
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