Chapter 17

BORROWING COSTS

Sec. 1. Scope. This chapter covers the definition, recognition and measurement, presentation and
the adequate disclosures required in accordance with PPSAS (PHILIPPINE PUBLIC SECTOR ACCOUNTING
STANDARDS) 5 on Borrowing Costs. It also includes the policies and guidelines in accounting for
borrowing costs.

Sec. 2. Definition of Terms. For the purpose of this manual and this chapter, the terms used as
stated below shall be construed to mean as follows:

a. Borrowing costs – are interest and other expenses incurred by an entity in connection with the
borrowing of funds. (Par. 5, PPSAS 5)
b. Qualifying asset – is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale. (Par. 5, PPSAS 5)

Examples of Qualifying Asset:

a. Manufacturing plant
b. Intangible asset
c. Investment property
d. Infrastructure assets such as roads, bridges and power generation facilities that require a
substantial period of time to bring them to a condition ready for use or sale.

Not a qualifying asset:

 Assets that are routinely produced over a short period of time.

 Assets that are ready for their intended use or sale when acquired.

Sec. 3. Composition of Borrowing Costs. Borrowing costs may include:

a. Interest on bank overdrafts and short-term and long-term borrowings;

b. Amortization of discounts or premiums relating to borrowings;
c. Amortization of ancillary costs incurred in connection with the arrangement of borrowings;
d. Finance charges in respect of finance leases and service concession arrangements; and
e. Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs. (Par. 6, PPSAS 5)

Sec. 4. Recognition: Benchmark Treatment. Borrowing costs shall be recognized as an expense in

the period in which they are incurred. (Par. 14, PPSAS 5).

 Under the benchmark treatment, borrowing costs are recognized as an expense in the
period in which they are incurred, regardless of how the borrowings are applied.

For the borrowing costs pertaining to loans borrowed by the NG (national government) which
are recognized by the Bureau of the Treasury, the benchmark treatment shall be used. (PAG2, PPSAS 5).
 Sec. 5. Recognition: Allowed Alternative Treatment. Borrowing costs that are directly attributable
to the acquisition, construction, or production of a qualifying asset shall be capitalized as part of the cost
of that asset.

Capitalization of borrowing costs that are directly attributable to the acquisition, construction, or
production of a qualifying asset as part of the cost of the asset is possible only if both these conditions
are met:
 It is probable that they will result in future economic benefits to the entity.
 The costs can be measured reliably.

If borrowing costs do not meet these criteria, then they are expensed. In other words, if the
borrowing is not directly attributable to a qualifying asset, the borrowing cost is expensed immediately.

For loans borrowed directly by the NGAs and LGUs, the allowed alternative treatment shall be used
and applied consistently to all borrowing costs that are directly attributable to the acquisition,
construction, or production of all qualifying assets of the entity. (Par. 20, PPSAS 5).

Sec. 6. Borrowing Costs Eligible for Capitalization.

The amount of borrowing costs that are capitalizable will depend upon whether the borrowing is:
Specific Borrowings and General Borrowings.

 SPECIFIC BRROWINGS

When borrowings are taken specifically to acquire, construct, or produce an asset, the
borrowing costs that relate to that particular qualifying asset are readily identifiable. In such
circumstances, it is easy to quantify the borrowing costs that would need to be capitalized by using the
process of elimination, that is, capitalizing the borrowing costs that would have been avoided had the
expenditure on the qualifying asset not been made.

To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying
asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the
actual borrowing costs incurred on that borrowing during the period, less any investment income on the
temporary investment of those borrowings.

 GENERAL BORROWINGS

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 capitalization rate or average interest rate is equal to the total annual borrowing cost
divided by the total general borrowings outstanding during the period.

The capitalizable borrowing cost shall not exceed the actual interest incurred.

The capitalizable borrowing cost is the lower between:

(1) the actual interest cost incurred during the period of construction and
(2) weighted average accumulated expenditures multiplied by the weighted average interest rate.
 Sec. 7. Commencement of Capitalization.

The capitalization of borrowing cost will start right from the date when entity meets all the following
conditions:

a. When the expenditure on the asset has been started.

b. When the borrowing cost is being incurred.
c. When the activities necessary to complete the asset are in progress.

Activities necessary to prepare:

The borrowing cost can only be capitalized, during the period when activities necessary to complete
the asset are in progress.

The activities necessary to complete the asset includes not only the physical construction of the
asset, it also encompasses any technical working, administrative work and taking planning permission
from related authorities before the start of physical construction work.

However, merely holding assets 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.

Sec. 8. Suspension of Capitalization.

Capitalization of borrowing costs shall be suspended during extended periods in which active
development is interrupted, and expensed. (Par. 34, PPSAS 5)

However, capitalization of borrowing costs is not normally suspended during a period when
substantial technical and administrative work is being carried out.

Capitalization of borrowing cost is also not suspended when a temporary delay is a necessary part of
the process of getting an asset ready for its intended use or sale. For example, capitalization of
borrowing cost 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.

Sec. 9. Cessation of Capitalization.

Capitalization of borrowing costs shall cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.

There are cases when the construction of a qualifying asset is completed in parts, and each part is
capable of being used while construction continues on other parts, capitalization of borrowing costs
shall cease when substantially all the activities necessary to prepare that part for its intended use or sale
are completed.

Sec. 10. Disclosures. The financial statements shall disclose:

a. The accounting policy adopted for borrowing costs;
b. The amount of borrowing costs capitalized during the period; and
c. The capitalization rate used to determine the amount of borrowing costs eligible for
capitalization. (Pars. 16 and 40, PPSAS 5)