BORROWING COSTS

Prepared by: Cristopherson A. Perez, CPA

Assets Financed by Specific Borrowing
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 the borrowing.
Illustration: Assets Financed by Specific Borrowing

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 the new building.
Availments from the loan were made quarterly in equal amounts. The proceeds of
the borrowings were temporarily invested and earned interest income of P40,000.
Assuming calendar year, how much is the capitalizable borrowing cost at year-end?

To compute for the interest expense of the loan

Loan Amount per Interest Time from availment Interest
rate
availments quarter till year-end incurred

First quarter 1,000,000 10% 12/12 100,000

Second 1,000,000 10% 9/12 75,000
quarter
Third quarter 1,000,000 10% 6/12 50,000
Fourth 1,000,000 10% 3/12 25,000
quarter
TOTAL 4,000,000 250,000
Illustration: Assets Financed by Specific Borrowing

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 the new building.
Availments from the loan were made quarterly in equal amounts. The proceeds of
the borrowings were temporarily invested and earned interest income of P40,000.
Assuming calendar year, how much is the capitalizable borrowing cost at year-end?

To compute for the capitalizable borrowing:

Actual interest expense incurred 250,000
Less: Interest income earned (40,000)
Capitalizable borrowing cost 210,000
Assets Financed by General Borrowing
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.
However, the capitalizable borrowing cost shall NOT EXCEED THE
ACTUAL INTEREST INCURRED.
The capitalization rate or average interest rate is equal to the total
annual borrowing cost divided by the total general borrowings outstanding
during the period.
Since there is no specific guidance on investment income, any investment
income will not be deducted from the capitalizable borrowing cost.
Illustration: Assets Financed by General Borrowing

An entity had the following loans on January 1 of the current year. The borrowings
were made for general purposes and the proceeds were partly used to finance the
construction of a new building.
Principal Interest rate
Bank loan 2,800,000 10%
Short-term note 1,600,000 10%
Long-term note 2,000,000 12%
The construction of the building was started on January 1 and was completed on
December 31 of the current year. Expenditures on the building were made as follows:
January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000

Compute for the capitalizable borrowing cost, the interest expense to be recognized,
and the cost of the qualifying asset at year-end. Assume calendar year.
Illustration: Assets Financed by General Borrowing
First, we compute for the average carrying amount of the asset
Date Actual expenditure Months outstanding Weighted amount
January 1 400,000 12/12 400,000
March 31 1,000,000 9/12 750,000
June 30 1,200,000 6/12 600,000
September 30 1,000,000 3/12 250,000
December 31 400,000 0/12 -
Total average carrying amount 2,000,000

Second, we compute for the average interest rate:

Principal Interest rate Annual interest
Bank loan 2,800,000 10% 280,000
Short-term note 1,600,000 10% 160,000
Long-term note 2,000,000 12% 240,000
Total 6,400,000 680,000
Average interest rate: 680,000 / 6,400,000 = 10.625%
Illustration: Assets Financed by General Borrowing
Third, we determine the capitalizable borrowing cost. Note that this shall not
exceed the actual interest incurred of 680,000.
Average carrying amount 2,000,000
Multiply by: average rate 10.625%
Capitalizable borrowing cost 212,500

Compare this with the actual interest of 680,000. Since the computed capitalizable
borrowing cost is less than actual interest, the whole P212,500 will be capitalized. Any
excess of the actual interest incurred over the capitalizable borrowing cost will be
charged to INTEREST EXPENSE.
To record the interest expense accrued/paid:
Building 212,500
Interest expense 467,500
Interest payable/Cash 680,000
Cost of the asset: 4,000,000 actual expenditures + 212,500 capitalizable borrowing cost
= 4,212,500