(Intermediate Accounting 1B)
LECTURE AID
2019
ZEUS VERNON B. MILLAN
Chapter 19 BORROWING COSTS
Related standard:
PAS 23 Borrowing Costs
Learning Objectives
• State the core principle of PAS 23.
• Compute for capitalizable borrowing costs.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
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)
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Borrowing costs
Borrowing costs are interest and other costs incurred by an
entity in connection with the borrowing of funds. Borrowing
costs may include:
1. Interest expense calculated using the effective interest
method
2. Finance charges in respect of finance leases
3. Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Qualifying asset
• 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
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost model
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Qualifying asset - continuation
• The following are not qualifying assets
a. Financial assets, and inventories that are manufactured, or
otherwise produced, over a short period of time.
b. Assets that are ready for their intended use or sale when
acquired are not qualifying assets.
c. Assets that are routinely manufactured or otherwise
produced in large quantities on a repetitive basis.
d. assets measured at fair value.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
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.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Suspension of capitalization
• Capitalization of borrowing costs shall be suspended
during extended periods of suspension of active
development of a qualifying asset.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
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.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Determining borrowing costs eligible for capitalization
1. Qualifying assets financed through Specific
borrowing
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost eligible for capitalization ₱ xx
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Determining borrowing costs eligible for capitalization
2. Qualifying assets financed through General borrowing
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 amount computed in the formula above shall be compared with the actual
borrowing costs incurred during the period. The amount to be capitalized is the
lower amount. INTERMEDIATE ACCTG 1B (by:
MILLAN)
3. Qualifying assets financed through both Specific & General borrowing
3.1 Average accumulated expenditure method (Traditional)
Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx
General Borrowing:
Average expenditures xx
Less: Specific borrowing xx
Expenditures financed by general borrowing xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
Total ₱ xx
Again, the amount computed in the formula is compared with the actual borrowing costs incurred during the period. The
borrowing cost to be capitalized is the lower amount.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
3. Qualifying assets financed through both Specific & General borrowing
3.2 Avoidable interest method (Contemporary)
Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx
General Borrowing:
Average expenditures xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
Total ₱ xx
Again, the amount computed in the formula is compared with the actual borrowing costs incurred during
the period. The borrowing cost to be capitalized is the lower amount.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
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.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
APPLICATION OF CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION
INTERMEDIATE ACCTG 1B (by: MILLAN)
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
INTERMEDIATE ACCTG 1B (by: MILLAN)
END
INTERMEDIATE ACCTG 1B (by: MILLAN)
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. FALSE
PROBLEM 2: THEORY & COMPUTATIONAL
6. B
7. A
8. C
9. D
10. Answer: (12% x 1,000,000) – 18,000 = 102,000
INTERMEDIATE ACCTG 1B (by:
MILLAN)
6.
Solution:
The average expenditures are computed as follows:
Date Expenditures Mos. Outstanding Average
1/1/x1 1,500,000 12/12 1,500,000
6/1/x1 600,000 7/12 350,000
11/30/x1 300,000 1/12 25,000
Totals 2,400,000 1,875,000
The capitalization rate is computed as follows:
[(3M x 10%) + (1M x 8%)] ÷ (3M + 1M) = (300K + 80K) ÷ 4M = 9.5%
1,875,000 x 9.5% = 178,125
Actual = 380,000
Borrowing costs eligible for capitalization = 178,125 (the lower amount)
INTERMEDIATE ACCTG 1B (by:
MILLAN)
7. Solutions:
Requirement (a): Ave. accumulated expenditure method
(Traditional)
The capitalization rate is computed as follows:
Total interest expense on general borrowings
(400K x 10%) + (900K x 8%) 112,000
Divide by: Total general borrowings (400K + 900K) 1,300,000
Capitalization rate 8.62%
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Fraction
of the Year Capitalized
Expenditure Date Amount Outstanding Interest
January 2, 2002 ₱500,000 12/12 ₱500,000
May 1, 2002 500,000 8/12 333,333
November 1, 2002 400,000 2/12 66,667
Total weighted average expenditures for 2002 ₱900,000
Specific Borrowing:
Interest expense on specific borrowing (800K x 12%) 96,000
Less: Investment income earned on specific borrowing ( - )
Borrowing cost from specific borrowing 96,000
General Borrowing:
Average expenditures 900,000
Less: Specific borrowing ( 800,000)
Expenditures financed by general borrowing 100,000
Multiply by capitalization rate 8.62%
Borrowing cost from general borrowing 8,620
Total 104,620
The total actual borrowing cost is ₱208,000 (96K + 112K see computation above).
The amount eligible for capitalization is ₱104,620 - the lower amount.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Requirement (b): Avoidable interest method (Contemporary)
The expenditures are allocated to the specific and general borrowings and the amounts
allocated to the general borrowings are averaged.
Mos.
Date Expenditures Specific General Average
Outstanding
2-Jan-02 500,000 500,000 N/A
1-May-02 500,000 300,000 200,000 N/A; 8/12 133,333
1-Nov-02 400,000 400,000 2/12 66,667
Totals 1,400,000 800,000 700,000 200,000
Specific Borrowing:
Interest expense on specific borrowing (800K x 12%) 96,000
Less: Investment income earned on specific borrowing ( - )
Borrowing cost from specific borrowing 96,000
General Borrowing:
Average expenditure 200,000
Multiply by: Capitalization rate (see req’mt. a) 8.62%
Borrowing cost from general borrowing 17,240
Total 113,240
The total actual borrowing cost is ₱208,000 (96K + 112K).
The amount eligible for capitalization is ₱113,240 - the lower amount.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
