Borrowing Cost (PAS 23)
Borrowing Cost (PAS 23)
Borrowing Cost (PAS 23)
Interest and other costs that an entity incurs in connection with borrowing of funds, which includes:
1. Interest expense calculated using the effective interest method
2. Finance charge with respect to a finance lease
3. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as
an adjustment to interest cost.
Qualifying Asset – as asset that necessarily takes substantial period of time to get ready for the intended
use or sale including:
a. Manufacturing plant c. Intangible asset
b. Power generation facility d. Investment property
Illustration: On Jan. 1, an entity obtained a loan of P4,000,000 at an interest rate of 10%, specifically to
finance the construction of a new building. Availments from the loan were made quarterly in equal
amounts. Total borrowing costs 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. The building was completed at the current year-end.
Capitalization rate – total annual borrowing cost divided by total general borrowings outstanding during
the period
Illustration: An entity had the following borrowings on Jan. 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
The construction of the building was started on Jan. 1 and was completed on Dec. 31 of the current year.
Expenditures on the building were:
Jan. 1 400,000
Mar. 31 1,000,000
June 30 1,200,000
Sept. 30 1,000,000
Dec. 31 400,000
Total Cost 4,000,000
Another approach
Date Expenditures (a) Fraction (b) Amount (a x b)
Jan. 1 400,000 12/12 400,000
Mar. 31 1,000,000 9/12 750,000
June 30 1,200,000 6/12 600,000
Sept. 30 1,000,000 3/12 250,000
Dec. 31 400,000 0 -
2,000,000
The construction of the building started on Jan. 1 and was completed on Dec. 31 of the current year.
Expenditures on the construction were:
Jan. 1 500,000
Apr. 1 1,000,000
May 1 1,500,000
Sept. 1 1,500,000
Dec. 31 500,000
Total Cost 5,000,000
The entity began the self-construction of a new building on Jan. 1, 20202 and the building was
completed on Dec. 31, 2020. The following expenditures were made during 2020 and 2021:
Computation for 2021: The average and capitalizable borrowing cost for 2021 are determined as follows:
PAS 23, par. 18, provides that the average expenditures during a period shall include the borrowing cost
previously capitalized.
Commencement of Capitalization
The capitalization of borrowing as part 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
However, merely holding for use or development without any associated development activity
does not qualify for capitalization. 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.
Suspension of capitalization
Capitalization of borrowing costs shall be suspended during extended periods in which active
development is interrupted.
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.
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.
As 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.
DISCLOSURES
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 assets" from other assets in the statement of financial
position is not required to be disclosed.