Borrowing Costs

Definition
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.
 Qualifying Asset
A qualifying asset is an asset that
necessarily takes a substantial period of
time to get ready for the intended use or
sale.

Examples:
A. Manufacturing plant
B. Power generation facility
C. Intangible asset
D. Investment property
 Excluded From
Capitalization
PAS 23 does not require capitalization
of borrowing costs relating to the
following:
A. Assets measured at fair value, such
as biological assets.
B. Inventory manufactured or
produced in large quantity on a
repetitive basis.
C. Assets that are ready for their
intended use or sale when acquired.
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.

2. All other borrowing costs shall be

expensed as incurred.
 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.
 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 a
new building. 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.

 The building was completed at the current year end.

Computation:
Actual borrowing cost
250,000
Interest income from investment of
proceeds (40,000)
Capitalizable borrowing cost
210,000
 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 carrying amount of the
asset during the period multiplied by a
capitalization rate or average interest
rate.

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.

Any investment income from general

borrowing is not deducted from
capitalizable borrowing cost.
 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
 The construction of the building was started on January 1 and
was completed on December 31 of the current year.
Expenditures on the building were:
 January 1
400,000
 March 31
1,000,000
 June 30
1,200,000
 September 30
1,000,000
 December 31
400,000
 Total cost
4,000,000
Average Carrying Amount of the
Building
 (a) (b) (axb)
 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
 Another Approach
 (a) (b)
(axb)
 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
 Computations:
 Capitalization Rate = Total Annual Borrowing Cost/ Total
General Borrowings
 = P760,000/P8,000,000
 Capitalization Rate = 9.5%

 Amount of Capitalizable Borrowing Cost = Average

Carrying Amount of the Building x Capitaliztion Rate
 = P2,000,000 x
9.5%
 Amount of Capitalizable Borrowing Cost =
P190,000 ( does not exceed the actual borrowing cost
of P760,000 ).
 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. Expenditures
on the construction were:
 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
 Amount of Average
Expenditures
 (a) (b) (
axb)
 Date Expenditures Fraction
Average
 January 1 500,000 12/12
500,000
 April 1 1,000,000 9/12
750,000
 May 1 1,500,000 8/12
1,000,000
 September 1 1,500,000 4/12
500,000
 December 31 500,000 - -

2,750,000
 Capitalizable Borrowing
Cost
 Average expenditures
2,750,000
 Specific borrowing
(1,500,000)
 General borrowing
1,250,000

 Specific borrowing ( 10% x

1,500,000) 150,000
 General borrowing ( 8% x
1,250,000) 100,000
 Total Capitalizable Borrowing Cost
250,000
 Construction Period More Than
One Year
 An entity had the following loans outstanding during 2020 and
2021:
 Specific construction loan 2,000,000 15%
 General loan 15,000,000 12%

 The entity began the self-construction of a new building on January 1,

2020 and the building was completed on December 31, 2021. The
following expenditures were made during 2020 and 2021:
 January 1, 2020 2,000,000
 July 1, 2020 4,000,000
 November 1, 2020 3,000,000
 July 1, 2021 1,000,000
 10,000,000
 Computation - 2020
 The average expenditures and capitalizable borrowing cost for 2020 are as
follows:
 Expenditures Fraction
Average
 January 1, 2020 2,000,000 12/12 2,000,000
 July 1, 2020 4,000,000 6/12 2,000,000
 November 1, 2020 3,000,000 2/12 500,000
 9,000,000 4,500,000

 Average expenditures in 2020 4,500,000

 Applicable to specific loan
(2,000,000)
 Applicable to general loan
2,500,000
 Actual expenditures in 2020
9,000,000
 Capitalizable borrowing cost in 2020:
 Specific ( 2,000,000 x 15% )
300,000
 General ( 2,500,000 x 12% )
300,000
 Total cost of new building to date – December 31,
2020 9,600,000
 Computation - 2021
 PAS 23, paragraph 18, provides that the average expenditures during
a period shall include the borrowing cost previously capitalized.

 The average expenditures and capitalizable borrowing cost for 2021 are
as follows:
 Expenditures Fraction
Average
 January 1, 2021 9,600,000 12/12 9,600,000
 July 1, 2021 1,000,000 6/12 500,000
 10,600,000
10,100,000

 Average expenditures in 2021

10,100,000
 Applicable to specific loan
(2,000,000)
 Applicable to general loan
8,100,000
 Cumulative actual expenditures in 2021
 ( 9,600,000 + 1,000,000)
10,600,000
 Capitalizable borrowing cost in 2021:
 Specific ( 2,000,000 x 15% )
300,000
 General ( 8,100,000 x 12% )
972,000
 Total Cost of New Building – December 31, 2021
11,872,000
 More Than One Year But Less Than
Two Years
 Assume the same data in the preceding illustration,
except that the building was completed on August 31,
2021:

 Actual expenditures in 2020

9,000,000
 Capitalizable borrowing cost in 2020:
 Specific (2,000,000 x 15% )
300,000
 General (2,500,000 x 12% )
300,000
 Total cost of building to date – December 31, 2020
9,600,000
 Computation - 2021
 The average expenditures and capitalizable borrowing cost for 2021
are as follows:
 Expenditures Fraction
Average
 January 1, 2021 9,600,000 8/8 9,600,000
 July 1. 2021 1,000,000 2/8 250,000
 10,600,000
9,850,000

 Average expenditures in 2021

9,850,000
 Applicable to specific loan
(2,000,000)
 Applicable to general loan
7,850,000
 Cumulative actual expenditures in 2021
10,600,000
 Capitalizable borrowing cost in 2021:
 Specific (2,000,000 x 15% x 8/12 )
200,000
 General ( 7,850,000 x 12% x 8/12 )
628,000
 Total Cost of Building – August 31, 2021
11,428,000
 Specific Borrowing for Asset Used for
General Purposes
If the asset is financed by specific
borrowing but a portion is used for
working capital purposes, the borrowing
shall treated as a general borrowing in
determining capitalizable borrowing cost.
 Commencement of
Capitalization
The capitalization of borrowing costs as part
of the cost of a qualifying asset shall
commence when the following three
conditions are met:
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.
 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.

Merely holding assets for use or

development without any associated
development activity does not qualify for
capitalization.
 Suspension of
Capitalization
Capitalization of borrowing costs shall be
suspended during extended periods in
which active development is interrupted.

Capitalization of borrowing costs is not

suspended when temporary delay is a
necessary part of the process of getting
an asset ready for its intended use or sale.
 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.
 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.
 End of
Presentation