E-Portfolio

CHAPTER 8

PAS 23 – Borrowing Costs

Borrowing costs are defined as interest and other costs that an

entity incurs in connection with borrowing of funds.
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.

Core Principle under PAS 23

Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset are capitalized as cost of
that asset. Other borrowing costs are expensed when incurred.

Qualifying Assets

An asset that necessarily takes a substantial period of time to get

ready for its intended use or sale.
Examples:
a. Inventories that take long period of time to produce
b. Items of PPE (e.g., building) that take a long period of time to
construct or to get ready for their intended use.
c. Intangible assets that take a long period of time to develop
d. Investment property

Not Qualifying Assets

e. Financial assets
f. Inventories that are routinely produced over a short period of time
or are mass-produced on a repetitive basis
g. Assets that are ready foe their intended use or sale when acquired
h. Assets measured at fair value
 Capitalization of Borrowing Costs

Borrowing costs are capitalized if they are avoidable, meaning

they would not have been incurred if the expenditure on the
qualifying asset had not been made.
Capitalization of borrowing costs starts when all of the
following conditions are met:
a. Expenditures for the asset are being incurred;
b. Borrowing costs are being incurred; and
c. Activities necessary to prepare the asset for its intended
use or sale are being undertaken.

Capitalization is suspended during extended periods which

active development is interrupted. Borrowing costs during these
periods are expensed.
Capitalization is not suspended if substantial technical and
administrative work is being performed or a temporary delay is
necessary part of the development process.
Capitalization of borrowing costs ceases when the qualifying
asset is substantially complete. If the construction of a qualifying
asset is completed in parts, capitalization ceases for each part
that is completed and ready for its intended use. Capitalization
continues for the uncompleted parts.

Refers to funds borrowed specifically for the purpose of

Specific obtaining a qualifying asset. The capitalizable borrowing costs on
specific borrowing are computed as follows:
Borrowing
Capitalizable BC = Actual Borrowing Cost – Investment Income

Those obtained for more than one purpose, e.g., the acquisition or
construction of a qualifying asset and some other purposes. The
capitalizable borrowing costs on general borrowings are computed as
follows:
Capitalizable BC = Average Expenditures x Capitalization Rate
General
Borrowing Capitalization rate can be computed as follows:
Capitalization Rate = Total interest expense on general borrowings
Total general borrowings

The borrowing cost to be capitalized is the lower of the amount

computed using the formula above and the actual borrowing costs.

Credits:

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