Presentation

of the
Philippine Public Sector
Accounting Standards
(PPSAS)

1
PPSAS 5
Borrowing Costs

2
 PPSAS 5 — BORROWING COSTS

OUTLINE
• BACKGROUND
• OBJECTIVE
• SCOPE
• DEFINITIONS
• IPSAS SALIENT PROVISIONS
ADOPTED
• ILLUSTRATIVE ENTRIES

3
 BACKGROUND

 IPSAS 5 - “Borrowing Costs,”

 Philippine Application
Guidance (PAG)

PPSAS 5 —
Borrowing Cost 4
OBJECTIVE
At the end of the session, the
participant shall be able to identify
the accounting treatment for
borrowing costs and the disclosure
requirements.

PPSAS 5 —
Borrowing Cost 5
 SCOPE (PAG1)
This Standard applies to:
 National Government Agencies (NGAs),
 Local Government Units (LGUs), and
 Government-Owned and/or Controlled
Corporations not considered as GBEs.

PPSAS 5 —
Borrowing Cost 6
DEFINITIONS
Par. 5
• Borrowing costs - interest and other expenses
incurred by an entity in connection with the
borrowing of funds.
• Qualifying asset - an asset that necessarily takes a
substantial period of time to get ready for its
intended use or sale.

PPSAS 5 —
Borrowing Cost 7
SALIENT PROVISIONS ADOPTED
Par. 6
Borrowing costs include:
(a) Interest on bank overdrafts and short-term and long-
term borrowings;
(b) Amortization of discounts or premiums relating to borrowings;
(c) Amortization of ancillary costs incurred in connection with the
arrangement of borrowings;
(d) Finance charges in respect of finance leases; and

PPSAS 5 —
Borrowing Cost 8
SALIENT PROVISIONS ADOPTED

Borrowing Costs
Cont. . .
(e) Exchange differences arising from foreign
currency borrowings, to the extent that
they are regarded as an adjustment to
interest costs.

PPSAS 5 —
Borrowing Cost 9
counting Treatment of Borrowing
Cost
1. Benchmark Treatment
Recognition
Par. 14
Borrowing costs shall be recognized as an
expense in the period in which they are
incurred.

PPSAS 5 —
Borrowing Cost 10
sclosure for Benchmark Treatment

Disclosure
Par. 16
The financial statements shall disclose the
accounting policy adopted for borrowing
costs.

PPSAS 5 —
Borrowing Cost 11
counting Treatment for Borrowing
Cost
2. Allowed Alternative Treatment
Recognition:
Par. 18
Borrowing costs that are directly attributable to
the acquisition, construction or production of a
qualifying asset shall be capitalized as part of
the cost of the asset.

PPSAS 5 —
Borrowing Cost 12
PPSAS 5, PAG 2
Borrowing Costs –
PAG 2
Provides supplemental guidance as follows:
For borrowing costs pertaining to loans
borrowed by the National Government (NG)
which are recorded by the Bureau of the
Treasury, the benchmark treatment shall be
used.

PPSAS 5 —
Borrowing Cost 13
PPSAS 5

PAG 2 Cont’d.
For loans borrowed directly by the
LGUs and GOCCs not a GBE, the
allowed alternative treatment shall be
used.

PPSAS 5 —
Borrowing Cost 14
 SALIENT PROVISIONS ADOPTED

Borrowing Costs—Allowed Alternative Treatment

Par. 19
Such borrowing costs can be capitalized when:
It is probable that they will result in future
economic benefits to the entity; and
These costs can be measured reliably.

PPSAS 5 —
Borrowing Cost 15
 Allowed Alternative Treatment
Borrowing costs eligible for capitalization:
Par. 21
Borrowing costs that would have been avoided if the expenditure
on the qualifying asset had not been made;

Par. 23 (Specific Borrowing)

The amount of borrowing costs eligible for capitalization shall be
determined as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the
temporary investment of these borrowings.

PPSAS 5 —
Borrowing Cost 16
 Allowed Alternative Treatment

Par. 25 (General Borrowing)

• To the extent that funds are borrowed generally
and used for the purpose of obtaining a qualifying
asset, the amount of borrowing cost eligible for
capitalization shall be determined by applying a
capitalization rate to the outlays on that asset.

PPSAS 5 —
Borrowing Cost 17
 Allowed Alternative Treatment
Borrowing costs eligible for capitalization:
Par. 25
capitalization rate = Total annual borrowing
cost divided by total general borrowings
outstanding during the period

PPSAS 5 —
Borrowing Cost 18
 Allowed Alternative Treatment

Par. 25
The amount of borrowing costs
capitalized during a period shall not
exceed the amount of borrowing costs
incurred during that period.

PPSAS 5 —
Borrowing Cost 19
ILLUSTRATIVE TRANSACTION
Agency A made the following disbursements totaling P35
million in relation to the construction of its building which
started on January 1 and was completed on December 31.
January 1 12,000,000
March 31 7,000,000
June 1 8,000,000
August 1 5,000,000
December 31 3,000,000

PPSAS 5 —
Borrowing Cost 20
 Specific borrowing
Illustrative problem:
On January 1, 2013, Department A obtained a loan
for P10,000,000 at an interest rate of 10%,
specifically to finance the construction of a building.
Prior to their disbursements, the
proceeds of the loan were temporarily invested and
earned interest income amounting to P120,000.

PPSAS 5 —
Borrowing Cost 21
ILLUSTRATIVE TRANSACTION

Actual interest on specific borrowing

( 10,000,000 x 10%) 1,000,000
Less interest earned 120,000
Total interest added to be
the cost of the building 880,000
=======
Total cost of the self constructed asset
35,000,000 + 880,000 = 35,880,000

PPSAS 5 —
Borrowing Cost 22
 ILLUSTRATIVE ENTRY
Account Title Account Debit Credit
Code
Construction in Progress - Buildings
and Other Structures 10610030 1,000,000
1,000,000
Interest Payable 20101050
To record interest of borrowing

Cash in Bank – Local Currency,

Current Account 10102020 120,000
Construction in Progress -
Buildings
10610030 120,000
and Other Structures
PPSASTo5 — record interest on temporary
Borrowing Cost 23
 General Borrowings

Agency A had the following general borrowings

during 2013 that were used to finance the
construction of the its new building:
Date Term Interest Rate Amount
Jan. 1, 2013 5 yrs. 7.5 % 20,000,000
Jan. 1, 2013 2 yrs. 12% 30,000,000

PPSAS 5 —
Borrowing Cost 24
 A) Actual interest incurred:

Interest rateLoan amount Interest cost

7.5% 20,000,000 1,500,000
12% 30,000,000 3,600,000
5,100,000

PPSAS 5 —
Borrowing Cost 25
ILLUSTRATIVE TRANSACTION
Agency A made the following disbursements totaling P35
million in relation to the construction of its building which
started on January 1 and was completed on December 31.
January 1 12,000,000
March 31 7,000,000
June 1 8,000,000
August 1 5,000,000
December 31 3,000,000

PPSAS 5 —
Borrowing Cost 26
Weighted average accumulated expenditure

12,000,000 x 12/12 12,000,000 .00

7,000,000 x 9/12 5,250,000.00
8,000,000 x 7/12 4,666,666.67
5,000,000 x 5/12 2,083,333.33
3,000,000 x 0/12 ------------------
24,000,000.00

PPSAS 5 —
Borrowing Cost 27
 Weighted average accumulated expenditure

12,000,000 x 12 144,000,000.00
7,000,000 x 9 63,000,000.00
8,000,000 x 7 56,000,000.00
5,000,000 x 5 25,000,000.00
3,000,000 x 0 ------------------
288,000,000.00/12
• Weighted average
accumulated expenditure 24,000,000

PPSAS 5 —
Borrowing Cost 28
 Weighted average interest rate:

Total interest cost on general borrowing 5,100,000

Total general borrowings 50,000,000
= 10.2%
B) Weighted average accumulated
Expenditure 24,000,000
x weighted average interest
rate 10.2
Borrowing Cost for capitalization 2,448,000

PPSAS 5 —
Borrowing Cost 29
 ILLUSTRATIVE ENTRY
Account Title Account Debit Credit
Code
Construction in Progress - Buildings
and Other Structures 10610030 2,448,000
Interest Expenses 50301020 2,652,000
Interest Payable 20101050 5,100,000
To record interest of borrowings

PPSAS 5 —
Borrowing Cost 30
 Commencement of Capitalization

Allowed Alternative Treatment

Par. 31
The capitalization process shall begin when:
(a) expenditures are incurred for that asset;
(b) borrowing costs are incurred; and
(c) activities that are necessary to prepare the asset
for its intended use or sale are undertaken and
in progress.

PPSAS 5 —
Borrowing Cost 31
 Suspension of Capitalization

Allowed Alternative Treatment

Par. 34
extended periods - active
development is interrupted.

32
PPSAS 5 —
Borrowing Cost 32
 Cessation of Capitalization

Allowed Alternative Treatment

Par. 36
• when substantially all the activities necessary
to prepare the qualifying asset for its intended
use or sale are complete

33
PPSAS 5 —
Borrowing Cost 33
 Cessation of Capitalization

Allowed Alternative Treatment

Par. 38
• When the construction of a qualifying asset is
completed in parts, and each part is capable of being
used while construction continues on other parts -
when substantially all the activities necessary to
prepare that part for its intended use or sale are
completed.

34
PPSAS 5 —
Borrowing Cost 34
 Relevant Accounts Per
Revised Chart of Accounts

Account Code Account Title

2 01 01 040 Notes Payable
2 01 01 050 Interest Payable
2 01 01 070 Finance Lease Payable
2 01 02 040 Loans Payable-Domestic
2 01 02 050 Loans Payable-Foreign
5 03 01 020 Interest Expenses
5 03 01 030 Guarantee Fees
5 03 01 050 Commitment Fees

PPSAS355 —
Borrowing Cost 35
 Disclosure – Allowed Alternative Treatment

Par. 40

(a) Accounting policy adopted for borrowing

costs;
(b) Amount of borrowing costs capitalized during
the period; and
(c) Capitalization rate used.

PPSAS 5 —
Borrowing Cost 36
 What is borrowing cost?

PPSAS 5 —
Borrowing Cost 39
 Give examples of
borrowing costs

PPSAS 5 —
Borrowing Cost 40
 What are the two
accounting treatment
for borrowing costs?

PPSAS 5 —
Borrowing Cost 41
 What is the treatment of
investment income from
temporary investment?

PPSAS 5 —
Borrowing Cost 42
 Explain commencement of
capitalization of borrowing
cost.

PPSAS 5 —
Borrowing Cost 43
 Explain suspension of
capitalization of
borrowing costs.

PPSAS 5 —
Borrowing Cost 44
 Explain cessation of
capitalization of
borrowing cost

PPSAS 5 —
Borrowing Cost 45
 What are the necessary
disclosures related to
borrowing cost?

PPSAS 5 —
Borrowing Cost 46
 What are the 3
Philippine Application
Guidance of PPSAS 5?

PPSAS 5 —
Borrowing Cost 47
EFFECTIVITY (PAG3)

An entity shall apply this PPSAS for annual

financial statements covering periods
beginning on January 1, 2014.

PPSAS 5 —
Borrowing Cost 48
 “One can pay back the loan of gold, but one
lies forever in debt to those who are in kind”
-Malcolm Forbes

PPSAS 5 —
Borrowing Cost 49
 THANK YOU!

Kristine Joy L. Magat,CPA,MBA

State Auditing Examiner
Commission on Audit
Cordillera Administrative Region

PPSAS 5 —
Borrowing Cost 50