28/04/2022

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS

PAS 23 BORROWING COSTS

Learning Competencies
• State the core principle under PAS 23.
• Compute for borrowing costs that are eligible for
capitalization.

Conceptual Framework & Acctg.

2
Standards (by: Zeus Vernon B. 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)

Conceptual Framework & Acctg.

3
Standards (by: Zeus Vernon B. Millan)

1
 28/04/2022

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 on financial liabilities or lease liabilities
computed using the effective interest method
2. Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.

Conceptual Framework & Acctg.

4
Standards (by: Zeus Vernon B. 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
Conceptual Framework & Acctg.
5
Standards (by: Zeus Vernon B. 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.

Conceptual Framework & Acctg.

6
Standards (by: Zeus Vernon B. Millan)

2
 28/04/2022

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.

Conceptual Framework & Acctg.

7
Standards (by: Zeus Vernon B. Millan)

Suspension of capitalization

• Capitalization of borrowing costs shall be suspended

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

Conceptual Framework & Acctg.

8
Standards (by: Zeus Vernon B. 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.

Conceptual Framework & Acctg.

9
Standards (by: Zeus Vernon B. Millan)

3
 28/04/2022

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

Conceptual Framework & Acctg.

10
Standards (by: Zeus Vernon B. 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.

Conceptual Framework & Acctg.

11
Standards (by: Zeus Vernon B. 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.

Conceptual Framework & Acctg.

12
Standards (by: Zeus Vernon B. Millan)