PAS 23 ACCOUNTING FOR BORROWING COSTS

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Reference: CFAS – Millan (285)

Intermediate Accounting 1 – Valix (685)

Capitalized Directly attributable to the

acquisition, construction or
BORROWING
production of QA
COSTS
Expensed

Definition: Defined as interest and other cost that an entity incurs in connection with
borrowing of funds.
Specifically include:
a. Interest expense calculated using the EIM.
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 costs.

QUALIFYING ASSET → assets that necessarily takes a substantial period of time to get
ready.
Examples:
Inventories, PPE, Intangible assets that takes long period of time to produce,
construct or to develop such as;
a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

NOT A QUALIFYING ASSET OR EXCLUDED FROM CAPITALIZATION

Examples: NOT QA
Financial assets, Inventories (Short-period or Mass produced on a repetitive basis)
and Assets measured at FV.

a. Assets measured at FV such as biological assets.

b. Assets that are ready for their intended use or sale when acquired.

RULES ON BORROWING COST

a. Directly attributable to a qualifying asset

→ Required to capitalized
→ BC that would have been avoided if the expenditure on a QA had not been
made.
 In other words, the capitalization of borrowing cost is mandatory for a qualifying
asset.
b. Not directly attributable
→ shall be expensed immediately when incurred

ASSET FINANCED BY SPECIFIC BORROWING

Actual borrowing cost xxx

Interest income from investment of proceeds (xxx)
Capitalizable borrowing cost xxx

ASSET FINANCED BY GENERAL BORROWING

- The capitalizable borrowing cost shall not exceed the actual borrowing costs.
- No specific guidance is provided for general borrowing with respect to investment
income.
- Accordingly, any investment income from general borrowing is not deducted from
the capitalizable borrowing costs.

(a) (b) (c)

Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Capitalization rate = Total Annual borrowing cost / Total general borrowings

Capitalizable borrowing cost = Average Expenditures/Carrying amount x Capitalization rate

ASSET FINANCED BY BOTH SPECIFIC and GENERAL BORROWING

Capitalizable borrowing cost

Average expenditures xxx
Less: Specific borrowing xxx
General borrowing xxx

Specific borrowing (IR x TSB) xxx

General borrowing (IR x TGB) xxx
Total Capitalizable borrowing cost xxx

SPECIFIC BORROWING FOR ASSET USED FOR GENERAL PURPOSES

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 the
capitalizable borrowing costs.
SPECIFIC and GENERAL BORROWING

SPECIFIC BORROWING GENERAL BORROWING

funds borrowed specifically for the obtained for more than one purpose.
purpose of obtaining QA.

CBC = ABC – II CBC = AE x CR

Whereas; AE = E x Months outstanding (12)

CBC – Capitalizable borrowing costs
ABC – Actual borrowing costs CR = TIEOGB / TGB
II – Investment Income
Whereas;
CBC – Capitalizable borrowing costs
AE – Average Expenditures
CR – Capitalization rate
E – Expenditures
TIEOGB – Total Interest Expense on
General Borrowing
TGB – Total general borrowing

General Rule: The borrowing cost to be

capitalized is the LOWER of the
amount computed using the CBC
formula and Actual Borrowing
costs.

COMMENCEMENT OF CAPITALIZATION
Conditions:
a. Expenditures for the asset are being incurred.
b. BC are being incurred.
c. Activities necessary to prepare the asset are undertaken.

ACTIVITIES NECESSARY TO PREPARE

- encompass more than the physical construction of the asset.
- Technical and administrative work prior to the commencement of physical
construction such as drawing up plans and obtaining permit for the building.
General Rule: Holding assets for use or development without any associated
development activity does not qualify for capitalization.

SUSPENSION OF CAPITALIZATION
General rule: Capitalization is suspended during extended periods, BC are
expensed.
Exception:
• Fortuitous Events (Events beyond the Entity’s Control)
• Substantial technical and administrative work is being carried out.

- When temporary delay is necessary part of the development process,

capitalization is not suspended.
CEASATION OF CAPITALIZATION

General Rule: As asset is normally intended use or sale when the physical
construction of the asset is complete even though routine administrative work might
still continue.

DISCLOSURES RELATED TO BORROWING COSTS

a. Amount of borrowing cost capitalized during the period.
b. Capitalization rate used to determine the amount of borrowing costs

PROBLEMS – ANSWER KEY

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Refer to: CFAS (290-292)

1. A – they relate directly to the acquisition, construction or production of a qualifying asset.

2. B – expensed
3. D – an application software (intangible asset) that takes 3 years to develop
4. D – all of the above conditions are met
5. D – The construction of a building is discontinued because it is condemned by the
government. The resumption of development is uncertain.
6. C – A second -hand heavy machinery that takes 2 years to refurbish and customize for its
intended use.
7. A – 540,000

CBC = ABC – II

= 6M x 12% - 180K

= 540,000

8. D – 920,000

General Rule: The borrowing cost to be capitalized is the LOWER of the amount
computed using the Capitalizable Borrowing costs formula and the
Actual borrowing costs.

9. C – 14,920,000

Costs = Expenditures made on the qualifying asset + Capitalizable Borrowing Cost

= 14M + 920K

10. C – separate presentation of qualifying asset from other assets either on the face of the SFP
or in the notes.
 Refer to: Intermediate 1 – Valix (699-704)

1. Compute the cost of the building

General borrowing:
CBC = AE x CR

ABC = 1,060,000
TGB = 8M
CR = 1,060,000/8M = 13.25%

(a) (b) (c)

Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Jan. 1 2,000,000 12/12 2,000,000

June 30 2,000,000 6/12 1,000,000
Dec. 31 1,000,000 0/12 -
Total 5,000,000 3,000,000

CBC = AE x CR
= 3M x 13.25%
= 397,500

C = AE + CBC
= 5M + 397,500
= P5,397,500

2. Compute the cost of the new building.

Asset financed by both specific and general borrowings
(a) (b) (c)
Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Jan. 1 2,000,000 12/12 2,000,000

March 31 1,000,000 9/12 750,000
Sept. 30 3,000,000 3/12 750,000
Total 6,000,000 3,500,000

AE 3,500,000
SB (2,000,000)
GB 1,500,000
CBC
SB (12% x 2M) 240,000
GB (11.25% x 1.5M) 168,750
408,750

C = AE + CBC
= 6M + 408,750
= P6,408,750

3. Compute the cost of the new building.

Asset financed by both specific and general borrowings
(a) (b) (c)
Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Jan. 1 1,000,000 12/12 1,000,000

July 1 4,000,000 6/12 2,000,000
Nov. 1 3,000,000 2/12 500,000
Total 8,000,000 3,500,000

AE 3,500,000
SB (2,000,000)
GB 1,500,000

CBC
SB (10% x 2M) 200,000
GB (12% x 1.5M) 180,000
380,000

C = AE + CBC
= 8M + 380,000
= P8,380,000
 4.
a. Compute the cost of the new building on Dec. 31, 2019 and June 30, 2020.
Construction period more than one year but less than 2 years
Computation: Dec. 31, 2019
(a) (b) (c)
Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Jan. 1 4,000,000 12/12 4,000,000

April 1 5,000,000 9/12 3,750,000
Dec. 31 3,000,000 1/12 250,000
Total 12,000,000 8,000,000

AE 8,000,000
SB (3,000,000)
GB 5,000,000

CBC
SB (10% x 3M) 300,000
GB (12% x 5M) 600,000
900,000

C (2019) = AE + CBC
= 12M + 900,000
= P12,900,000

Computation: June 30, 2020

(a) (b) (c)
Date Expenditures Months Average
Outstanding/ Expenditures/Carrying
Fraction amount

Jan. 1, 2020 12,900,000 6/6 12,900,000

March 1, 2020 6,000,000 4/12 4,000,000
Total 18,900,000 16,900,000

AE - 2020 16,900,000
SB (3,000,000)
GB 13,900,000

CBC
SB (10% x 3M) 300,000
GB (12% x 13.9M) 1,668,000
1,968,000
 C (2020) = CAE + CBC
= 18.9M + 1,968,000
= P20,868,000

b. Compute the interest expense for 2019 and 2020.

2019
SB (3M x 10%) 300K
GB (25M x 12%) 3M
TIE 3.3M
2020
SB (3M x 10% x 6/12) 150K
GB (25M x 12% x 6/12) 1.5M
TIE 1.650M