Borrowing cost are defined as interests and other costs that an entity incurs in connection with

borrowing funds.

It encompasses interests on all types of borrowing including finance lease and ancillary costs incurred in
connection with the arrangement of borrowing.

Borrowing cost specifically include:

a. Interest expense calculated using the effective interest method

b. Finance charge with respect to finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as
an adjustment to interest cost

Qualifying asset

It is an asset that necessarily takes a substantial period of time to get ready for the intended use or sale.

Excluded from Capitalization

1. Assets measured at fair value, such as biological assets

2. Inventories produced in large quantities on a repetitive basis, even if they take substantial
period of time to get ready for sale
3. Assets that are ready for their intended use or sale when acquired

 When borrowing costs are capitalized, they are added to the cost of the asset and gradually
depreciated or amortized over the asset's useful life.

Accounting for borrowing cost

a. 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 ---
Mandatory for a qualifying asset
b. “Capitalizing” means costs are treated as an investment in an asset rather than being
immediately expensed on the income statement)
c. Capitalizing costs involves adding them to the value of the asset on the balance sheet,
which is then gradually depreciated or amortized over the asset's useful life.
d. Capitalizing costs has the effect of spreading the expense of these costs over time,
matching them with the revenue generated by the asset.
2. When borrowing is not directly attributable to a qualifying asset, borrowing cost shall be
expensed as incurred.

Asset finance by specific borrowing

If funds are borrowed specifically for the purpose of acquiring a qualifying asset, the amount
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 its 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. The amount of capitalizable borrowing cost is
computed as follows:

Actual borrowing cost 250,000

Less: Interest income from investment of proceeds 40,000
Capitalized borrowing cost 210,000

Asset financed by general borrowing

If