Professional Documents
Culture Documents
Under PAS 23, paragraph 5, borrowing costs are defined as interest and other costs that an entity incurs in connection
with borrowing of funds.
QUALIFYING ASSET
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for the intended use or sale.
1. If the borrowing is directly attributable to the acquisition, construction or production of a qualifying asset, the
borrowing cost is required to be capitalized as cost of the asset. In other words, the capitalization of borrowing cost is
mandatory for a qualifying asset.
The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are
borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.
2. All other borrowing costs shall be expensed as incurred. In other words, if the borrowing is not directly attributable to
a qualifying asset, the borrowing cost is expensed immediately.
PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a qualifying asset,
the amount of capitalizable borrowing cost is the actual borrowing cost incurred during the period less any investment
income from the temporary investment of those borrowings.
Illustration
At the beginning of the current year, an entity obtained a loan of P4,000,000 at an interest rate of 10%, specifically to
finance the construction of a new building. Availments from the loan were made quarterly in equal amounts. Total
borrowing cost incurred amounted to P250,000 for the current year.
Prior to their disbursement, the proceeds of the borrowing were temporarily invested and earned interest income of
P40,000. The building was completed at the current year-end.
PAS 23, paragraph 14, provides that 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.
At the beginning of the current year, an entity borrowed P1, 500,000 at an interest of 10% specifically for the
construction of a new building. The actual borrowing cost on this loan P150,000.
The entity had also outstanding during the year a 5-year 8% general borrowing of P7,000,000.
The construction of the building started on January 1 and was completed on December 31 of the current year.
Expenditures on the construction were:
January 1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total cost 5,000,000
An entity had the following loans outstanding during 2020 an, 2021.
The entity began the self-construction of a new building January 1, 2020 and the building was completed on December
31, 2021. The following expenditures were made during 2020 and 2021:
January 1, 2020 2,000,000
July 1, 2020 4,000,000
November 1, 2020 3,000,000
July 1, 2021 1,000,000
10,000,000
Assume the same data in the preceding illustration, except that the building was completed on August 31, 2021. The
capitalizable borrowing cost for 2020 would be the same.
If the asset is financed by specific borrowing but a portion is used for working capital purposes, the borrowing shall be
treated as a general borrowing in determining capitalizable borrowing cost.
Thus, the capitalizable borrowing cost is equal to the average expenditures on the asset multiplied by the average
interest rate.
COMMENCEMENT OF CAPITALIZATION
The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when the following three
conditions are present:
The activities necessary to prepare the asset for the intended use or sale encompass more than the physical
construction of the asset.
These include technical and administrative work prior to the commencement of physical construction, such as drawing
up plans and obtaining permit for a building.
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.
SUSPENSION OF CAPITALIZATION
Capitalization of borrowing costs shall be suspended during extended periods in which active development is interrupts
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 costs is not also 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 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 georgraphical region involved.
CESSATION OF CAPITALIZATION
Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare the qualifying
asset for the intended use or sale are complete.
As asset is normally ready for the intended use or sale when the physical construction of the asset is complete even
though routine administrative work might still continue.
b. The capitalization rate used to determine the amount of borrowing costs eligible for capitalization.
Segregation of assets that are "qualifying assets" from other assets in the statement of financial position is not required
to be disclosed