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Understanding Borrowing Costs (PAS 23)

Borrowing costs are expenses incurred by an entity when borrowing funds, including interest and finance charges. These costs must be capitalized if directly attributable to qualifying assets, while other costs are expensed. Capitalization begins when expenditures and borrowing costs are incurred and activities to prepare the asset commence, and it should cease when the asset is ready for use or sale.

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28 views1 page

Understanding Borrowing Costs (PAS 23)

Borrowing costs are expenses incurred by an entity when borrowing funds, including interest and finance charges. These costs must be capitalized if directly attributable to qualifying assets, while other costs are expensed. Capitalization begins when expenditures and borrowing costs are incurred and activities to prepare the asset commence, and it should cease when the asset is ready for use or sale.

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BORROWING COSTS (PAS 23)

Definition
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

Borrowing cost may include:


• interest expense calculated using the effective interest rate method as described in PAS 39;
• finance charges in respect of finance leases recognized in accordance with PAS 17; and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment
to interest costs.

Accounting Treatment
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of
the cost of that asset and, therefore, should be capitalized. Other borrowing costs are recognized as an expense.

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use. That could be property,
plant, and equipment and investment property during the construction period, intangible assets during the development
period, or "made-to-order" inventories.

How much should be capitalized?


Specific borrowings - Actual borrowing costs incurred less any income on the temporary investment of those borrowings.

General borrowings – Lower of:


• Average expenditures x capitalization rate; and
• Actual borrowing costs incurred.
The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that
are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Commencement of capitalization
The commencement date for capitalization is the date when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Suspension and cessation of capitalization


Capitalization should be suspended during periods in which active development is interrupted.
Capitalization should cease when substantially all of the activities necessary to prepare the asset for its intended use or
sale are complete. If only minor modifications are outstanding, this indicates that substantially all of the activities are
complete.

Where construction is completed in stages, which can be used while construction of the other parts continues, capitalization
of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its
intended use or sale are complete.

Disclosure
An entity shall disclose:
(a) the amount of borrowing costs capitalized during the period; and
(b) the capitalization rate used to determine the amount of borrowing costs eligible for capitalization

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