BORROWING COSTS

Question 1

What are borrowing costs?

Answer 1

Borrowing costs are “interests and other costs that an entity incurs in connection with borrowing of funds, SPECIFICALLY:

a. Interest expense using effective interest method
b. Finance charges with respect to finance lease
c. Exchange differences arising from foreign currency borrowing

Question 2

What is a qualifying asset?

Answer 2

Qualifying assets are assets that NECESSARILY TAKE A SUBSTANTIAL PERIOD OF TIME TO GET READY FOR THE INTENDED USE OR SALE, such as factory plants, and other investment properties.

Question 3

What PAS number discusses borrowing costs?

Answer 3

PAS 23.

Question 4

What acquisitions cannot capitalize its borrowing costs?

Answer 4

The following CANNOT CAPITALIZE its related borrowing costs:

1. Assets measured at FV
2. Inventories
3. GENERALLY, ASSETS THAT ARE READY FOR THEIR INTENDED USE OR SALE WHEN ACQUIRED.

Question 5

How are borrowing costs accounted for?

Answer 5

PAS 23 sets the following rules on borrowing costs:
1. If the borrowing is DIRECTLY ATTRIBUTABLE TO THE ACQUISITION/CONSTRUCTION/PRODUCTION OF A QUALIFYING ASSET, the borrowing cost is REQUIRED TO BE CAPITALIZED as cost of the asset.

2. All other borrowing costs are to be EXPENSED AS INCURRED.

There are 2 types of borrowing, namely:

1. SPECIFIC BORROWING
2. GENERAL BORROWING

Question 6

What is specific borrowing and how is it accounted for?

Answer 6

SPECIFIC BORROWING means that the funds borrowed are specifically intended for the purpose of acquiring a qualifying asset, and said SPECIFIC BORROWING COST IS CAPITALIZED, LESS ANY INVESTMENT INCOME FROM ANY TEMPORARY INVESTMENT OF THOSE BORROWINGS.

Question 7

What is general borrowing and how is it accounted for?

Answer 7

GENERAL BORROWING means that funds are borrowed “generally” and a portion of the funds are used to acquire a qualifying asset. The following rules apply:

1. A portion of the general borrowing costs related to the qualifying asset are CAPITALIZED as part of its cost.
2. The capitalizable borrowing cost is equal to the AVERAGE CARRYING AMOUNT OF THE ASSET DURING THE PERIOD MULTIPLIED BY A “CAPITALIZATION OR AVERAGE INTEREST RATE”.
3. However the capitalizable borrowing cost SHALL NOT exceed the actual interest incurred.
4. The capitalization rate is equal to the TOTAL ANNUAL BORROWING COST DIVIDED BY THE TOTAL GENERAL BORROWINGS OUTSTANDING DURING THE PERIOD.
5. Any investment income from general borrowing is not deducted from capitalizable borrowing cost.

Question 8

What happens when a qualifying asset is financed both by general and specific borrowing?

Answer 8

The average expenditures less total amount of specific borrowings is the portion related to general borrowing.

The portion related to the general borrowing is then multiplied by the capitalization rate to the the capitalizable general borrowing cost.

Question 9

What happens when construction period of a qualifying asset takes more than one period?

Answer 9

The expenditures incurred for the first year, including the capitalizable borrowing costs from both specific and general borrowing, will be carried forward in the succeeding periods when computing for the capitalizable borrowing costs.

Question 10

What happens when a specific borrowing for asset is used for general purposes?

Answer 10

The borrowing shall be treated as a general borrowing in determining capitalizable cost.

Question 11

When shall the capitalization of borrowing costs commence?

Answer 11

It shall commence when the following conditions are present:

1. When the entity incurs expenditures for the asset
2. When the entity incurs the borrowing costs
3. When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale.

Question 12

What are “activities necessary to prepare” the qualifying asset?

Answer 12

The activities necessary to prepare the qualifying asset encompasses more than the physical construction of the asset, and includes technical and administrative work prior to the commencement of physical construction.

Question 13

When is capitalization of borrowing costs ceased?

Answer 13

When the asset is normally ready for its intended use or sale or when the construction of the asset is complete.

Question 14

What are the required disclosures related to borrowing costs?

Answer 14

1. Amount of borrowing costs capitalized during the period
2. Capitalization rate used to determine amount of borrowing costs eligible for capitalization
3. Accounting policy adopted for borrowing costs

Question 15

T or F
Segregation of assets that are QUALIFYING ASSETS from other assets in the statement of financial position is REQUIRED TO BE DISCLOSED.

Answer 15

False, it is not required.

Question 16

When is capitalization of borrowing costs suspended?

Answer 16

Only during EXTENDED PERIODS OF DELAY IN WHICH ACTIVE DEVELOPMENT IS DELAYED.