CHAPTER

BLUE NOTES
19 S
L
Borrowing Costs are “interest and other costs that an entity incurs in connection with borrowing of funds. (PAS 23)
Note: This definition encompasses interest on all types of borrowing including finance leases and ancillary costs incurred in connection
with the arrangement of borrowing.

Paragraph 6 provides that borrowing costs specifically include:

 Interest expense calculated using the effective interest method.
 finance charges in respect of finance leases recognised 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

Qualifying Assets
An asset that takes a substantial period of time to get ready for its intended use or sale. That could be property,
plant, and equipment and investment property during the construction period, intangible assets during the
development period, or "made-to-order" inventories.
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 - Agriculture
 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
 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
Specific Borrowing General Borrowing
Where funds are borrowed specifically, costs eligible for Where funds are part of a general pool, the eligible
capitalization are the actual costs incurred less any amount is determined by applying a capitalization rate
income earned on the temporary investment of such to the expenditure on that asset. The capitalization rate
borrowings. will be the weighted average of the borrowing costs
applicable to the general pool.
Note: However, 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.
Note: Under PAS 23, no specific guidance is provided for
general borrowing with respect to investment income.
Accordingly, any investment income from general borrowing is
not deducted from capitalizable borrowing cost.

Practical Accounting 1 Theory of Accounts

Chapter 19 – Borrowing Costs USL Blue Notes 71

Asset financed by specific and general borrowing, the capitalizable borrowing cost is equal to the sum of the
following:
 Actual borrowing cost on specific borrowing minus any investment income from the temporary investment of
the proceeds from borrowing.
 Average expenditure of the asset minus the specific borrowing equals amount related to general borrowing
multiplied by the capitalization rate equals capitalizable borrowing cost.

Asset financed by specific borrowing but a portion is used for working capital purposes:
 The borrowing shall be treated as a general borrowing in the determining capitalizable borrowing cost.
 Thus, the capitalizable borrowing cost is equal to the average expenditures on the asset multiplied by the
average interest rate.

Capitalization shall commence when all of the following are present:

 When the entity incurs expenditures for the asset.
 When the entity incurs borrowing cost
 When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale

Other issues:
 Capitalization should be suspended during periods in which active development is interrupted. [PAS 23.20]
 Capitalization should cease when substantially all of the activities necessary to prepare the asset for its
intended use or sale are complete. [PAS 23.22]
 If only minor modifications are outstanding, this indicates that substantially all of the activities are complete.
[PAS 23.23]
 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 activities necessary to
prepare that part for its intended use or sale are complete. [PAS 23.24]

Disclosures [PAS 23.26]

a. amount of borrowing cost capitalized during the period
b. capitalization rate used

Theory of Accounts Practical Accounting 1