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Borrowing Cost

Borrowing costs – interest and other cost that entity incurs in connection with borrowing of
funds. (PAS 23) It specifically includes:
a) Interest expense calculated using the effective interest method.
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 cost.
Qualifying asset – is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale. Examples include the following:
Manufacturing plant
Power generation facility
Intangible asset
Investment property
PAS 23 does not require capitalization of borrowing costs relating to the following.
1. Asset measured at fair value, such as biological asset.
2. Inventories that are manufactured or produced in large quantities on a repetitive basis.
3. Assets that is ready for their intended use or sale when acquired.
If the borrowing is directly attributable to the acquisition, construction or production of
a qualifying asset. (mandatory)
If not directly attributable, other borrowing costs shall be EXPENSED as incurred.
Asset finance by:
1. Specific Borrowing – funds are borrowed specifically for purpose of acquiring a
qualifying asset.
Actual borrowing cost less any investment income
2. General Borrowing - funds are borrowed generally and used for acquiring a qualifying
Average carrying amount of asset multiplied by a capitalization rate or average interest
The capitalizable borrowing cost shall not exceed the actual interest incurred.
Capitalization Rate = Total Annual Borrowing Cost/Total General Borrowing
If asset is financed by specific borrowing but a portion is used for working capital
purposes, the borrowing shall be treated as a general borrowing
Commencement of capitalization
The capitalization of borrowing costs as part of cost of a qualifying asset shall commence when
the following three conditions are present:
a) Entity incurs expenditure for the asset
b) Entity incurs borrowing cost
c) Entity undertakes activities that are necessary to prepare the asset for the intended use
or sale.
Suspension of Capitalization
During extended periods in which active development is interrupted.
Not suspended during a period when substantial technical and administrative work is
being carried out.
Not suspended temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
Cessation of Capitalization
Shall cease when substantially all acivities necessary to prepare the qualifying asset for
the intended use or sale are complete. (when physical construction of the asset is
Disclosures related to borrowing costs
a. Amount of borrowing costs capitalized during the period.
b. Capitalization rate used to determine the amount of borrowing costs eligible for
Intermediate Accounting Volume 1 (2020 edition) by Conrado T. Valix, Jose F. Peralta and
Christian Aris M. Valix