Borrowing Costs

PAS 23
Definition
• Under PAS 23, par 5, borrowing costs are defined as “interest and
other costs that an entity incurs in connection with borrowing of
funds”.
Qualifying Asset
• A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for the intended use or sale.

Examples:
a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property
Excluded from Capitalization
PAS 23 does not require capitalization of borrowing costs relating to the
following:
• Assets measured at fair value, such as biological assets.
• Inventories that are manufactured or produces in large quantities on a
repetitive basis, such as maturing whisky, even if they take a
substantial period of of time to get ready for sale.
• Assets that are ready for their intended use or sale when incurred.
Accounting for borrowing cost
• PAS 23, par 8, mandates the following rules on borrowing cost:
1. If the borrowing is directly attributable to the acquisition,
constructions or production of a qualifying asset, the borrowing
cost is required to be capitalized as cost of the asset. The
borrowing costs that are directly attributable to the acquisition,
construction or production of qualifying asset are borrowing costs
that would have been avoided if the expenditure on the qualifying
asset had not been made.
2. All other borrowing costs shall be expensed as incurred.
Specific Borrowing
• PAS 23, par 12, provides that if the funds are borrowed specifically for
the purpose of acquiring a qualifying asset, the amount capitalizable
borrowing cost is the actual borrowing cost incurred during the period
less any investment income from the temporary investment of those
borrowings.
Specific Borrowing
• Problem 19-15
General Borrowing
• PAS 23, par 14, provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalizable borrowing costs is equal to
the average carrying amount of the asset during the period multiplied by a
capitalization rate or average interest rate.

• The capitalizable borrowing cost shall not exceed the actual interest incurred.

• The capitalization rate or average interest rate is equal to the total annual borrowing
cost divided by the total general borrowings outstanding during the period.

• No specific guidance is provided for general borrowing with respect to investment

income. Any investment income is not deducted from capitalizable borrowing cost.
Illustration Problem 19-17
Specific and General Borrowing
• Problem 19-18
Cessation of capitalization
• Capitalization of borrowing costs shall cease when substantially all the
activities necessary to prepare the qualifying asset for the intended
use or sale are complete.