PAS 23 BORROWING COSTS Learning Competencies • • State the core principle under PAS 23. Compute for borrowing costs that are eligible for capitalization. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 2 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) Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 3 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 or lease liabilities computed using the effective interest method 2. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 4 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 Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 5 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. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 6 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. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 7 Suspension of capitalization • Capitalization of borrowing costs shall be suspended during extended periods of suspension of active development of a qualifying asset. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 8 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. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 9 Determining borrowing costs eligible for capitalization 1. Qualifying assets financed through Specific borrowing Interest expense on specific borrowing Less: Investment income earned on specific borrowing Borrowing cost eligible for capitalization Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) ₱ xx xx ₱ xx 10 Determining borrowing costs eligible for capitalization 2. Qualifying assets financed through General borrowing Total interest expense on general borrowings Divide by: Total general borrowings ₱ xx xx Capitalization rate % Average expenditure on the asset Multiply by: Capitalization rate Borrowing cost that may be eligible for capitalization ₱ xx % ₱ 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. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 11 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. Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 12 APPLICATION OF CONCEPTS PROBLEM 2: FOR CLASSROOM DISCUSSION Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 13 QUESTIONS???? REACTIONS!!!!! Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 14 END Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 15