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    CHAPTER 17 - PAS 23 Borrowing Costs

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    Marriel Fate Cullano
    This document discusses PAS 23 Borrowing Costs. It states that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset, while other borrowing costs are recognized as an expense. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. The document provides examples of qualifying and non-qualifying assets and outlines the accounting treatment for capitalizing eligible borrowing costs depending on whether the borrowing is specific or general in nature.

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    CHAPTER 17 - PAS 23 Borrowing Costs

    Uploaded by

    Marriel Fate Cullano
    516 views16 pages
    This document discusses PAS 23 Borrowing Costs. It states that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset, while other borrowing costs are recognized as an expense. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. The document provides examples of qualifying and non-qualifying assets and outlines the accounting treatment for capitalizing eligible borrowing costs depending on whether the borrowing is specific or general in nature.

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    This document discusses PAS 23 Borrowing Costs. It states that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset, while other borrowing costs are recognized as an expense. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. The document provides examples of qualifying and non-qualifying assets and outlines the accounting treatment for capitalizing eligible borrowing costs depending on whether the borrowing is specific or general in nature.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    516 views16 pages

    CHAPTER 17 - PAS 23 Borrowing Costs

    Uploaded by

    Marriel Fate Cullano
    This document discusses PAS 23 Borrowing Costs. It states that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset, while other borrowing costs are recognized as an expense. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale. The document provides examples of qualifying and non-qualifying assets and outlines the accounting treatment for capitalizing eligible borrowing costs depending on whether the borrowing is specific or general in nature.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 16

    PAS 23 BORROWING

    COSTS
    Learning Competencies
     State the core principle under PAS 23.
     Compute for borrowing costs that are eligible for
    capitalization.
    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)
    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
    using the effective interest method
    2. Finance charge with respect to a finance
    lease
    3. Exchange differences arising from foreign
    currency borrowings to the extent that they
    are regarded as an adjustment to interest
    costs.
    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
    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, such as biological asset
    Accounting for borrowing
    cost

    PAS 23, paragraph 8, mandates the


    following rules on borrowing cost:
    1. 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.
    2. All other borrowing costs shall be expensed
    as incurred.
    6
    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
    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 new building. The building
    was completed at the current year-end.
    Availments from the loan were made quarterly in equal
    amounts. Total borrowings cost incurred amounted to
    P250,000 for the current year.
    Prior to their disbursement, the proceeds for the borrowing
    were temporarily invested and earned interest income of
    P40,000.

    Actual borrowing cost 250,000


    Interest income from investment of proceeds (40,000)
    Capitalizable borrowing cost 210,000
    8
    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.
    Illustration
    An entity had the following borrowings 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 Borrowing cost
    10% bank loan 3,000,000 300,000
    12% short-term note 1,500,000 180,000
    8% long-term loan 3,500,000 280,000
    8,000,000 760,000
    The construction of the building was started on January 1 and was completed
    on December 31 of the current year.
    Jan 1 400,000
    March 31 1,000,000
    June 30 1,200,000
    September 30 1,000,000
    December 31
    400,000
    Total expenditures on the building
    4,000,000
    10
    Average carrying amount of the building
    (a) (b) (a x b)
    Date Expenditures Monthly outstanding Amount
    Jan 1 400,000 12 4,800,000
    Mar 31 1,000,000 9 9,000,000
    Jun 30 1,200,000 6 7,200,000
    Sep 30 1,000,000 3 3,000,000
    Dec 30 400,000 0 -
    24,000,000

    Average carrying amount (24,000,000 / 12) 2,000,000

    Borrowing cost (2,000,000 x 9.5%) 190,000

    11
    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.
    Suspension of capitalization

     Capitalization of borrowing costs shall be


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

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