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Under PAS 23, paragraph 5, borrowing costs are defined as interest and other costs that an entity incurs
in connection with borrowing of funds.
c. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an
adjustment to interest cost.
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.
a. Manufacturing plant
c. Intangible asset
d. Investment property
PAS 23 does not require capitalization of borrowing costs relating to the following:
b. Inventory that is manufactured in large quantity on repetitive basis, such as maturing whisky, even if it
take a substantial period of time to get ready for sale
c. Asset that is ready for the intended use or sale when acquired
Accounting for borrowing cost
In other words, the capitalization of borrowing cost is mandatory for a qualifying asset.
Borrowing cost can be capitalized when the asset is a qualifying asset and it is probable that the
borrowing cost will result to future economic benefit and the cost can be measured reliably
In other words, if the borrowing is not directly attributable to a qualifying asset, the borrowing cost is
expensed immediately.
PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a
qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing cost incurred during
the period less any investment income from the temporary investment of those borrowings.
PAS 23. paragraph 14. 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.
However, 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
Accordingly, any investment income from general borrowing is not deducted from capitalizable
borrowing cost.
Commencement of capitalization
The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when the
following three conditions are present:
c. When the entity undertakes activities that are necessary to prepare the asset for the intended use or
sale.
The activities necessary to prepare the asset for the intended use or sale encompass more than the
physical construction of the asset.