(Intermediate Accounting 1B)

LECTURE AID

2020

ZEUS VERNON B. MILLAN

Chapter 19 BORROWING COSTS
Related standard:
PAS 23 Borrowing Costs

Learning Objectives

• State the core principle of PAS 23.

• Compute for capitalizable borrowing costs.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Core principle
• “Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset form part of the cost of that asset. Other
borrowing costs are recognized as an expense.” (PAS 23.1)

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Borrowing costs

Borrowing costs are interest and other costs incurred by an

entity in connection with the borrowing of funds.
Borrowing costs may include:
1. Interest expense calculated using the effective interest
method
2. Finance charges in respect of finance leases
3. Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Qualifying asset

• Qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended
use or sale. Depending on the circumstances, any of the
following may be qualifying assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost model
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Qualifying asset - continuation

• The following are not qualifying assets

a. Financial assets, and inventories that are manufactured, or
otherwise produced, over a short period of time.
b. Assets that are ready for their intended use or sale when
acquired are not qualifying assets.
c. Assets that are routinely manufactured or otherwise
produced in large quantities on a repetitive basis.
d. assets measured at fair value.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Commencement of capitalization

• The capitalization of borrowing costs as part of the cost

of a qualifying asset commences on the date when all of
the following conditions are met:
a. The entity incurs expenditures for the asset;
b. The entity incurs borrowing costs; and
c. It undertakes activities that are necessary to prepare
the asset for its intended use or sale.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 Suspension of capitalization

• Capitalization of borrowing costs shall be suspended

during extended periods of suspension of active
development of a qualifying asset.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cessation of capitalization
• An entity shall cease capitalizing borrowing costs when
substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Determining borrowing costs eligible for
capitalization

1. Qualifying assets financed through Specific

borrowing
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost eligible for capitalization ₱ xx

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Determining borrowing costs eligible for capitalization

2. Qualifying assets financed through General borrowing

Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %

Average expenditure on the asset ₱ xx

Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx

The amount computed in the formula above shall be compared with the actual
borrowing costs incurred during the period. The amount to be capitalized is the
lower amount.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
3. Qualifying assets financed through both Specific & General borrowing

3.1 Average accumulated expenditure method (Traditional)

Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx

General Borrowing:
Average expenditures xx
Less: Specific borrowing xx
Expenditures financed by general borrowing xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
Total ₱ xx

Again, the amount computed in the formula is compared with the actual borrowing costs incurred during
the period. The borrowing cost to be capitalized is the lower amount.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
3. Qualifying assets financed through both Specific & General borrowing

3.2 Avoidable interest method (Contemporary)

Specific Borrowing:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost from specific borrowing xx

General Borrowing:
Average expenditures xx
Multiply by: Capitalization rate %
Borrowing cost from general borrowing xx
Total ₱ xx

Again, the amount computed in the formula is compared with the actual borrowing costs incurred during
the period. The borrowing cost to be capitalized is the lower amount.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Financial statement presentation

• Qualifying assets are not segregated from other assets in the

financial statements. They are presented as regular assets under
their normal classification as provided under other standards.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1B (by: MILLAN)

  QUESTIONS????
 REACTIONS!!!!!

INTERMEDIATE ACCTG 1B (by: MILLAN)

INTERMEDIATE ACCTG 1B (by: MILLAN)