BORROWING COST

Under PAS 23, paragraph 5, borrowing costs are def

ined as "interest and other costs that an entity incurs
in connection with borrowing of funds ".

Paragraph 6 provides that borrowing costs spec

ifically INCLUDE:
a. Interest expense (effective interest method)
b. Finance charge with respect to a finance leas
e.
c. Exchange difference arising from foreign cur
rency borrowing to the extent that it is regar
ded as an adjustment to interest cost.

Qualifying asset
-is an asset that necessarily takes a
substantial period of time to get ready
for the intended use or sale.
Examples:
1. Manufacturing plant
2. Power generation facility
3. Intangible asset
4. Investment property

Exclude from
capitalization
PAS 23 DOES NOT require
capitalization of borrowing cost relating
to the following :
1. Assets measured at fair value, such
as biological assets.
2. Inventories that are manufactured or
produced in large quantities on a
repetitive basis, such as maturing
whisky, even if thay take a
substantial period of time to get
ready for sale.

Accounting for
borrowing cost
PAS 23, paragraph 8, mandates the
following rules on borrowing cost:
1. The capitalization of borrowing cost
is mandatory for a qualifying assets
that are directly attributable.
2. All other borrowing costs shall be
expensed as incurred specifically
those qualifying assets that are NOT
directly attributable.

Asset 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 those borrowings.

Asset 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.
CR/AIR= total amount borrowing cost

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 capitalizable borrowing
cost.
Thus,
Capitalizable borrowing cost= average
expenditures on the asset x average

Commencement of
capitalization
a. When the entity incurs expenditures for
the asset.
b. When the entity incurs borrowing cost.
c. When the entity undertakes activities
that are necessary to prepare the asset
"Activities"
to
for tge intendednecessary
use or sale.

prepare

1. encompass more than the physical

construction of the asset. These include
technical and administrative work prior to
the commencement of physical
construction, such as drawing up plans

2. Assets for use or development without

any associated development activity
DOES NOT QUALIFY FOR
CAPITALIZATION.

Suspension of
capitalization
Capitalization of borrowing cost shall be
suspended during extended periods in
which active development is interrupted.
However, capitalization of borrowing cost is
not normally suspended during a period
a. when substantial technical and
administrative work is being carried
out.

Cessation of capitalization
Capitalization of borrowing costs shall
cease when substantially all the activities
necessary to prepare the qualifying asset
for its intended use or sale are
physically complete.

Disclosures related to
borrowing costs
a. The amount of borrowing costs
capitalized during the period.
b. The capitalization rate used to
determine the amount of borrowing