MODULE 3: Borrowing Costs

 RELATED STANDARDS: PAS 23 – Borrowing Costs

 Definition of Terms
Borrowing costs – Interest  and other costs that an entity incurs in connection with the borrowing of funds.
Capitalization – Recognizing a cost as part of the cost of an asset.
Qualifying asset – An asset that necessarily takes a substantial period of time to get ready for its intended use
or sale.
 Scope
 Borrowing cost may include:
 Interest expense calculated by the effective interest method under PAS 39
 Finance charges in respect of finance leases recognized in accordance with PAS 17 Leases; and
 Exchange differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs.
 This standard does not deal with the actual or imputed cost of equity, including any preferred capital
not classified as a liability pursuant to PAS 32.
 A qualifying asset  could be
 Property, plant, and equipment and investment property during the construction period
 Intangible assets during the development period
 "made-to-order" inventories.
 Assets that would otherwise be qualifying assets are excluded from the scope of PAS 23:
 Qualifying assets measured at fair value, such as biological assets accounted for under PAS 41 Agricul-
ture.
 Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and
that take a substantial period to get ready for sale (for example, maturing whisky)
 Assets that are ready for their intended use or sale when acquired.
 Recognition
 Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are
recognized as an expense.
 Measurement
 Where funds are borrowed specifically (specific borrowing)
 Borrowing costs eligible for capitalization are the actual costs incurred less any income earned on the
temporary investment of such borrowings.
 Where funds are part of a general pool (general borrowing)
 Borrowing cost eligible for capitalization is determined by applying a capitalization rate to the expendi-
ture on that asset.
 The capitalization rate will be the weighted average of the borrowing costs applicable to the general
pool.
 The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of
borrowing costs it incurred during that period.
 Income earned on the temporary investment of such borrowings is not deducted from borrowing cost.
 Capitalization
 Commencement of capitalization
 Capitalization should commence when expenditures are being incurred, borrowing costs are being
incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress.
 Suspension of capitalization
 Capitalization should be suspended during periods in which active development is interrupted.
 Cessation of capitalization
 Capitalization should cease when substantially all of the activities necessary to prepare the asset for its
intended use or sale are complete.
 If only minor modifications are outstanding, this indicates that substantially all of the activities are
complete.
 Where construction is completed in stages, which can be used while construction of the other parts
continues, capitalization of attributable borrowing costs should cease when substantially all of the ac-
tivities necessary to prepare that part for its intended use or sale are complete.
 Disclosure
 Amount of borrowing cost capitalized during the period
 Capitalization rate used to determine the amount of borrowing cost eligible for capitalization

*************************************************

Module 3 Page 1 of 1