CHAPTER 17

BORROWING
COSTS
PAS 23
FELECITAS C. TUAZON

Department of Accountancy - Accounting 5 CFAS

 TECHNICAL KNOWLEDGE
• To know the concept of qualifying asset for
purposes of capitalization of borrowing costs.
• To understand the proper accounting treatment
of borrowing costs.
• To distinguish specific borrowing and general
borrowing in relation to capitalization of
borrowing costs.

Department of Accountancy - Accounting 5 CFAS

 BORROWING
COSTS

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BORROWING COSTS
• Under PAS 23, paragraph 5, borrowing costs are defined as interest and
other costs that an entity incurs in connection with borrowing of funds.
• Paragraph 6 provides that borrowing costs specifically include.
a. Interest expense calculated using the effective interest method.
b. Finance charge with respect to a finance lease.
c. Exchange difference arising from foreign currency borrowing to the
extent that it is regarded as an adjustment to interest cost.

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QUALIFYING ASSET
• A qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for the intended use of sale.
• Examples include the following:
a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Department of Accountancy - Accounting 5 CFAS

EXCLUDED FROM CAPITALIZATION
• PAS 23 does not require capitalization of borrowing costs relating to the
following:
a. Asset measured at fair value, such as biological asset
b. Inventory that is manufactured in large quantity on a repetitive
basis, such as maturing whisky, even if it takes a substantial period
of time to get ready for sale
c. Asset that is ready for the intended use or sale when acquired

Department of Accountancy - Accounting 5 CFAS

ACCOUNTING FOR BORROWING COST
• PAS 23, paragraph 8, mandates the following rules on borrowing cost:
1. -If the borrowing is directly attributable to the acquisition,
construction or production of a qualifying asset, the borrowing
cost is required to be capitalized as cost of the asset.
-In other words, the capitalization of borrowing cost is mandatory
for a qualifying asset.
-Borrowing cost can be capitalized when the asset is a qualifying
asset and it is probable that the borrowing cost will result to future
economic benefit and the cost can be measured reliably.

Department of Accountancy - Accounting 5 CFAS

ACCOUNTING FOR BORROWING COST
• PAS 23, paragraph 8, mandates the following rules on borrowing cost:
2. -All other borrowing costs shall be expensed as incurred.
-In other words, if the borrowing is not directly attributable to a
qualifying asset, the borrowing cost is expensed immediately.

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ASSET FINANCED BY SPECIFIC BORROWING
• PAS 23, paragraph 12, provides that if the funds are borrowed
specifically for the purpose of acquiring a qualifying asset, the amount
of capitalizable borrowing cost is the actual borrowing cost incurred
during the period less any investment income from the temporary
investment of those borrowings.

Department of Accountancy - Accounting 5 CFAS

ASSET FINANCED BY SPECIFIC BORROWING
(ILLUSTRATION)
• At the beginning of the current year, an entity obtained a loan of
P4,000,000 at an interest rate of 10%, specifically to finance the
construction of new building. The building was completed at the current
year-end.
• Availments from the loan were made quarterly in equal amounts. Total
borrowing cost incurred amounted to P250,000 for the current year.
• Prior to their disbursement, the proceeds of the borrowing were
temporarily invested and earned interest income of P40,000.
Actual borrowing cost 250,000
Interest income from investment of proceeds ( 40,000)
Capitalizable borrowing cost 210,000

Department of Accountancy - Accounting 5 CFAS

ASSET FINANCED BY GENERAL BORROWING
• PAS 23, paragraph 14, provides that if the funds are borrowed generally
and used for acquiring a qualifying asset, the amount of capitalizable
borrowing cost is equal to the average carting amount of the asset
during the period multiplied by a capitalization rate or average interest
rate.
• However, the capitalizable borrowing cost shall not exceed the actual
interest incurred.
• The capitalization rate or average interest rate is equal to the total
annual borrowing cost divided by the total general borrowings
outstanding during the period.

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ASSET FINANCED BY GENERAL BORROWING
• No specific guidance is provided for general borrowing with respect to
investment income.
• Accordingly, any investment income from general borrowing is not
deducted from capitalizable borrowing cost.

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ASSET FINANCED BY GENERAL BORROWING
(ILLUSTRATION)
• An entity had the following borrowings on January 1 of the current year.
The borrowings were made for general purposes and the proceeds were
partly used to finance the construction of a new building.
Principal Borrowing cost
10% bank loan 3,000,000 300,000
12% short-term note 1,500,000 180,000
8% long-term loan 3,500,000 280,000
8,000,000 760,000

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ASSET FINANCED BY GENERAL BORROWING
(ILLUSTRATION)
• The construction of the building was started on January 1 and was
completed on December 31 of the current year.

January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Total expenditures on the building 4,000,000

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AVERAGE CARRYING AMOUNT OF THE BUILDING

(a) (b) (a x b)
Date Expenditures Months outstanding Amount
January 1 400,000 12 4,800,000
March 31 1,000,000 9 9,000,000
June 30 1,200,000 6 7,200,000
September 30 1,000,000 3 3,000,000
December 31 400,000 0 -
24,000,000

Average carrying amount (24,000,000/12) 2,000,000

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AVERAGE CARRYING AMOUNT OF THE BUILDING
ANOTHER APPROACH
(a) (b) (a x b)
Date Expenditures Fraction Average
January 1 400,000 12 / 12 400,000
March 31 1,000,000 9 / 12 750,000
June 30 1,200,000 6 / 12 600,000
September 30 1,000,000 3 / 12 250,000
December 31 400,000 - -
2,000,000

The capitalization rate is computed by dividing the total annual borrowing cost by the
total general borrowings.
Thus, P760,000 divided by P8,000,00 equals 9.5%.

Department of Accountancy - Accounting 5 CFAS

AVERAGE CARRYING AMOUNT OF THE BUILDING
ANOTHER APPROACH

• The amount of capitalizable borrowing cost is the average carrying

amount of the building multiplied by the capitalization rate.
• Thus, P2,000,000 x 9.5% equals P190,000.
• The capitalizable borrowing cost shall not exceed the actual borrowing
cost.
• The amount P190,000 is the proper capitalizable borrowing cost
because it is less than the actual borrowing cost of P760,000.
• The excess of P760,000 over P190,000 or P570,000 is charged to
interest expense.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
ASSET FINANCED BOTH BY SPECIFIC AND GENERAL
BORROWING
• At the beginning of the current year, an entity borrowed P1,500,000 at
an interest of 10% specifically for the construction of a new building.
The actual borrowing cost on this loan is P150,000.
• The entity had also outstanding during the year a 5-year 8% general
borrowing of P7,000,000.
• The construction of the building started on January 1 and was
completed on December 31 of the current year.
January 1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total cost 5,000,000

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
ASSET FINANCED BOTH BY SPECIFIC AND GENERAL
BORROWING
(a) (b) (a x b)
Date Expenditures Fraction Average
January 1 500,000 12 / 12 500,000
March 1 1,000,000 9 / 12 750,000
June 1 1,500,000 8 / 12 1,000,000
September 1 1,500,000 4 / 12 500,000
December 31 500,000 - -
Average expenditures 2,750,000

Average expenditures 2,750,000

Specific borrowing (1,500,000)
Applicable to general borrowing 1,250,000

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
CAPITALIZABLE INTEREST

Specific borrowing (10% x 1,500,000) 150,000

General borrowing ( 8% x 1,250,000) 100,000
Total capitalizable interest 250,000

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
COMMENCEMENT OF CAPITALIZATION

• The capitalization of borrowing costs as parts of the cost of a qualifying

asset shall commence when the following three conditions are present:
a. When the entity incurs expenditures for the asset.
b. When the entity incurs borrowing costs.
c. When the entity undertakes activities that are necessary to
prepare the asset for the intended use or sale.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
ACTIVITIES NECESSARY TO PREPARE

• The activities necessary to prepare the asset for the intended use or
sale encompass more than the physical construction of the asset.
• These include technical and administrative work prior to do
commencement of physical construction, such as drawing up plans and
obtaining permit for a building.
• However, merely holding assets for use or development without any
associated development activity does not qualify for capitalization.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
ACTIVITIES NECESSARY TO PREPARE

• For example, borrowing costs incurred while land is under development

are capitalized during the period in which development activities are
being undertaken.
• But borrowing costs incurred while land acquired for building purposes
is held without any associated development activity do not qualify for
capitalization.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
SUSPENSE OF CAPITALIZATION
• Capitalization of borrowing costs shall be suspended during extended periods
in which active development is interrupted.
• However, capitalization of borrowing costs is not normally suspended during
a period when substantial technical and administrative work is being carried
out.
• Capitalization of borrowing costs is not also suspended when a temporary
delay is a necessary part of the process of getting an asset ready for its
intended use or sale.
• For example, capitalization continues during the extended period that high
water levels delay the construction of a bridge, if such high water levels are
common during the construction period in the geographical region involved.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
CESSATION OF CAPITALIZATION

• Capitalization of borrowing costs shall cease when substantially all the

activities necessary to prepare the qualifying asset for the intended use
or sale are complete.
• An asset is normally ready for the intended use or sale when the
physical construction of the asset is complete even though routine
administrative work might still continue.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
DISCLOSURES RELATED TO BORROWING COSTS

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

b. The capitalization rate used to determine the amount of borrowing
costs eligible for capitalization.
Segregation of assets that are “qualifying needs” from other assets in the
statement of financial position is not required to be disclosed.

Department of Accountancy - Accounting 10 & 11 Intermediate

Accounting Part 2
 THANK YOU
STAY SAFE

Department of Accountancy - Accounting 5 CFAS