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    Borrowing Cost 0

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    1. Borrowing costs are interest and other costs incurred in connection with borrowing of funds. They can be capitalized as part of the cost of a qualifying asset. 2. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale, like a manufacturing plant. 3. Borrowing costs must be accounted for properly by either capitalizing them to the cost of qualifying assets or expensing them directly in the period they are incurred. The amount capitalized depends on whether the borrowing is specific or general.

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    Borrowing Cost 0

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    pam pam
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    1. Borrowing costs are interest and other costs incurred in connection with borrowing of funds. They can be capitalized as part of the cost of a qualifying asset. 2. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale, like a manufacturing plant. 3. Borrowing costs must be accounted for properly by either capitalizing them to the cost of qualifying assets or expensing them directly in the period they are incurred. The amount capitalized depends on whether the borrowing is specific or general.

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    1. Borrowing costs are interest and other costs incurred in connection with borrowing of funds. They can be capitalized as part of the cost of a qualifying asset. 2. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale, like a manufacturing plant. 3. Borrowing costs must be accounted for properly by either capitalizing them to the cost of qualifying assets or expensing them directly in the period they are incurred. The amount capitalized depends on whether the borrowing is specific or general.

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    © All Rights Reserved
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    Download as pdf or txt
    36 views22 pages

    Borrowing Cost 0

    Uploaded by

    pam pam
    1. Borrowing costs are interest and other costs incurred in connection with borrowing of funds. They can be capitalized as part of the cost of a qualifying asset. 2. A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale, like a manufacturing plant. 3. Borrowing costs must be accounted for properly by either capitalizing them to the cost of qualifying assets or expensing them directly in the period they are incurred. The amount capitalized depends on whether the borrowing is specific or general.

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    of 22

    BORROWING COST

    Unit Learning Outcomes:


    At the end of this lesson, you should be able to:

    1 2 3 4
    Identify items Explain the concept of Account for borrowing Determine the amount
    included in borrowing a qualifying asset in costs properly. of borrowing costs to
    costs. relation to be capitalized from
    capitalization of either specific or
    borrowing costs. general borrowing.
    Borrowing Costs - Defined
    Are interest and other costs that an entity incurs in
    connection with borrowing of funds (PAS 23). It includes the
    following:

    Interest Interest expense calculated using effective interest method


    Expense

    Finance Finance charge with respect to finance lease.


    Charge

    Exchange Exchange difference arising from foreign currency borrowing to the


    Difference extent that it is regarded as an adjustment to interest cost.
    Qualifying Asset
    An asset that takes a substantial period of time to get ready
    for the intended use or sale. Examples include:

    Manufacturing plant

    Power generation facility

    Intangible asset

    Investment property
    Excluded from Capitalization
    PAS 23 does not require capitalization of borrowing costs
    related to the following:

    •
    •

    •
    Accounting for Borrowing Costs
    PAS 23 mandates the following rules on borrowing cost:

    •
    Asset Financed by Specific Borrowing
    PAS 23 provides that if the funds are borrowed specifically
    for the purpose of acquiring a qualifying asset, the amount
    of capitalizable is the actual borrowing cost incurred during
    the period less any investment income from the temporary
    investment of those borrowings.
    Illustration:
    •

    Capitalizable borrowing cost is computed as follows:

    Actual borrowing cost P500,000


    Less: Interest income from temporary investment 50,000
    Capitalizable borrowing cost P450,000
    Asset Financed by General Borrowing
    PAS 23 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.

    Capitalizable Borrowing Cost =


    Average Carrying Amount of the Asset x Capitalization rate
    Asset Financed by General Borrowing

    Capitalizable borrowing cost shall NOT exceed the actual interest


    incurred.

    Capitalization rate / Average interest rate =


    Total Annual Borrowing Cost /
    Total general borrowings Outstanding during the period

    Investment income is NOT deducted from capitalizable borrowing


    cost.
    Illustration
    Asset Financed Both by Specific and General Borrowing
    Illustration:
    At the beginning of the current year, an entity borrowed P1,500,000
    at an interest of 10% specifically for the construction of a new
    building. The actual borrowing cost on this loan is P150,000.

    The entity had also an outstanding during the year of 5-year 8%


    general borrowing of P7,000,000.

    The construction of the building started on January 1 and was


    completed on December 31 of the current year.
    Illustration
    Construction period is more than one year
    Illustration:
    Construction period is more than one year
    Construction period is more than one year but less than 2 years
    Assume that the same data except that the building was completed on August 31, 2020. The
    capitalizable cost for 2019 would be the same, P600,000. However, capitalizable borrowing
    cost for 2020 would be determined as follows:
    Specific Borrowing for Asset Used for General Purpose

    Borrowing shall be treated as General Borrowing in determining


    the capitalizable borrowing cost.

    Thus, capitalizable borrowing cost is equal to the average


    expenditures on the asset multiplied by the average interest rate.
    Commencement of Capitalization
    Capitalization of borrowing costs shall commence when the 3
    conditions are present:

    • When the entity incurs expenditures for the asset.

    • When the entity incurs borrowing costs.

    • When the entity undertake activities that are necessary to


    prepare the asset for the intended use or sale.
    Suspension of Capitalization
    Capitalization of borrowing costs shall be suspended during
    extended periods in which active development is interrupted.

    However, capitalization of borrowing costs is not normally


    suspended during a period when substantial technical and
    administrative work is being carried out.

    Capitalization of borrowing cost is not also suspended when there


    is temporary delay which is necessary part of the process of getting
    an asset ready for its intended use or sale.
    Cessation of Capitalization
    Capitalization of borrowing costs shall cease when substantially
    all of the activities necessary to prepare the qualifying asset for the
    intended use or sale are complete.

    An asset is normally ready for the intended use or sale when the
    physical construction of the asset is complete even though routine
    administrative work might still continue.
    Disclosures related to borrowing costs
    • The amount of borrowing costs capitalized during the period.

    • The capitalization rate used to determine the amount of


    borrowing cost eligible for capitalization.

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