Pas 23

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23 IN
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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:

d. Financial assets
e. Inventories that are routinely produced over a short period of
time or are mass-produced on a repetitive basis
f. Assets that are ready for their intended use or sale when
acquired
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.

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T S

Borrowing costs that are directly attributable to the acquisition,

 Borrowing costs (interest or finance costs) are costs incurred in

Borrowing costs do not include actual or imputed cost of equity or

Examples of qualifying asses:

The following are not qualifying assets:

Borrowing costs are capitalized if they are avoidable,

Capitalization of borrowing costs starts when all of the

a. Expenditures for the asset are being incurred;

Capitalization, however, is not suspended if substantial

Capitalization of borrowing costs ceases when the qualifying

Specific borrowing refers to funds borrowed specifically for the purpose of

The capitalizable borrowing costs on specific borrowings are computed as

Capitalizable BC = Actual borrowing costs – investment income

 Capitalizable BC = (1M x 10%) – 20,000 = 80,000

General borrowings are those obtained for more than one

The capitalizable borrowing costs on general borrowings

Capitalizable BC = Ave. Expenditure x Capitalization Rate

 The borrowing cost to be capitalized is the lower of the

Expenditures made on the qualifying asset were as follows:

The capitalization rate is computed as follows:

 Capitalizable BC = Ave. Expenditure x Capitalization Rate

Date Expenditures Months outstanding over 12 mos. Ave. expenditure

The capitalization rate is computed as follows:

Capitalization Rate = Total interest expense on general borrowings

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

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

a. The amount of borrowing costs capitalized during

b. The capitalization rate used to determine the

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