PAS 23

BORROWING COSTS

Core Principle under PAS 23

Borrowing costs that are directly attributable to the acquisition, construction or

production of a qualifying asset are capitalized as cost of that asset. Other borrowing costs
are expensed, when incurred.

 Borrowing costs (interest or finance costs) are costs incurred in relation to the
borrowing of funds. Examples:

a. Interest expense on financial liabilities or lease liabilities computed using the effective
interest method; and

b. Exchange differences on foreign borrowings that are regarded as an adjustment to

interest cost.

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”. (PAS 23.5)

Examples of qualifying asses:

a. Inventories that take a long period of time to produce

b. Items of PPE (e.g., building) that take a long period of time to construct or to get ready
for their intended use

c. Intangible assets that take a long period of time to develop

The following are not qualifying assets:

a. Financial assets

b. Inventories that are routinely produced over a short period of time or are mass-
produced on a repetitive basis

c. 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:

a. 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 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 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, 20x1, Entity A obtained a 10%, ₱1M loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned
interest income of ₱20,000. 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 borrowings are computed as follows:

Capitalizable BC = Ave. Expenditure x Capitalization Rate

 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, 20x1, Entity A had the following general borrowings. A part of the
proceeds was used to finance the construction of a qualifying asset.

Principal

12% short-term 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:

Jan. 1 ₱ 4,800,000

Mar. 31 2,200,000

July 31 3,500,000

October 31 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:

Date Expenditures Months outstanding over 12 mos. Ave. expenditure

(a) (b) (c) = (a) x (b)

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

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

Jul. 31 3,500,000 5/12 1,458,333

Oct. 1 5,400,000 3/12 1,350,000

Dec 31 300,000 0/12 -______

9,258,333

The capitalization rate is computed as follows:

Capitalization Rate = Total interest expense on general borrowings

Total general borrowings

Total interest expense on general borrowings

(10M x 12%) + (18M x 14%) + (22M x 16%) 7,240,000

Divide by: Total general borrowings (10M + 18M + 22M) 50,000,000

Capitalization rate 14.48%

Capitalizable BC = 9,258,333 x 14.48% = 1,340,607

The amount computed above is compared with the actual borrowing costs incurred
during the period. The actual interest expense on the general borrowing is ₱7,240,000 (see
computation above). Therefore, the borrowing cost eligible for capitalization is ₱1,340,607,
the lower amount.

Disclosure

a. The amount of borrowing costs capitalized during the period.

b. The capitalization rate used to determine the capitalizable borrowing costs.