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PAS 23
- Under PAS 23, paragraph 5, borrowing costs are defined as
interest and other costs that an entity incurs in connection with
borrowing of funds.
Borrowing costs specifically include:
a. Interest expense calculated using the effective interest
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.
Core principle under PAS 23
Borrowing costs that are directly
attributable to the acquisition,
construction or production of a
qualifying asset are capitalized as cost
of that asset. Other borrowing costs are
expensed when incurred.
Qualifying asset
-is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
a. Inventories that take a long period of time to produce
b. Items of PPE (e.g., building) that take a long period of time to
construct or to get ready for their intended use.
c. Intangible assets that take a long period of time to develop
d. Investment property
The following are not qualifying assets:
a. Financial assets
b. Inventories that are routinely produced over a
short period of time or are mass-produced on a
repetitive basis
c. Assets that are ready for their intended use or
sale when acquired.
d. Assets measured at fair value.
Borrowing costs are capitalized if they are avoidable, meaning
they would not have been incurred if the expenditure on the
qualifying asset had not been made.
Capitalization of borrowing costs starts when all of the following
conditions are met:
a. expenditures for the asset are being incurred;
b. borrowing costs are being incurred; and
c. activities necessary to prepare the asset for its intended use
or sale are being undertaken.
* Capitalization is suspended during extended periods which active development
is interrupted. Borrowing costs during these periods are expensed.
* Capitalization is not suspended if substantial technical and administrative work
is being performed or a temporary delay is necessary part of the development
* Capitalization of borrowing costs ceases when the qualifying asset is
substantially complete. If the construction of a qualifying asset is completed in
parts, capitalization ceases for each part that is completed and ready for its
intended use. Capitalization continues for the uncompleted parts.
-Refers to funds borrowed specifically for the purpose
of obtaining a qualifying asset. The capitalizable
borrowing costs on specific borrowings are computed
as follows:
Capitalizable BC= Actual borrowing cost- Investment income
- Are those obtained for more than one purpose, e.g., the
acquisition or construction of a qualifying asset and some other
purposes. The capitalizable borrowing costs on general
borrowings are computed as follows:
Capitalizable BC= Ave. Expenditures x Capitalization Rate

- the borrowing cost to be capitalized is the lower of the

amount computed using the formula above and the actual
borrowing costs.
Capitalization rate can be computed as follows:

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑛 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔𝑠

Capitalization Rate=
𝑇𝑜𝑡𝑎𝑙 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔𝑠