7 Borrowing Costs Reviewer IN INTERMEDIATE ACCOUNTING 2 PDF

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BORROWING COSTS PAS 23PAS 23 BORROWING COSTSu interest and other costs that an entity incurs in connection with borrowing of funds. include: o Interest expense calculated using the effective interest method o Finance charge with respect to a finance lease. o Exchange difference arising from foreign ...

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BORROWING COSTS PAS 23 PAS 23 BORROWING COSTS u interest and other costs that an entity incurs in connection with borrowing of funds. include: o Interest expense calculated using the effective interest method o Finance charge with respect to a finance lease. o Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an adjustment to interest cost. Qualifying asset u an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples: o Manufacturing plant o Power generation facility o Intangible asset o Investment property Excluded from capitalization u Assets measured at fair value, such as biological assets. u Inventories that are manufactured or produced in large quantities on a repetitive basis, even if they take a substantial period of time to get ready for sale (i.e. wine) u Assets that are ready for their intended use or sale when acquired (i.e. machinery, equipment purchased) Accounting for borrowing cost u If the borrowing is directly attributable to the acquisition, construction or production of a qualifying asset, the borrowing cost is required to be capitalized as cost of the asset. u The capitalization of borrowing cost is mandatory for a qualifying asset. u All other borrowing costs shall be expensed as incurred. u If the borrowing is not directly attributable to a qualifying asset,

the borrowing cost is expensed immediately. Asset financed by "specific borrowing" u 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 Investment Income from the temporary investment of those borrowings. Specific Borrowing Cost (SB) Actual borrowing cost XX Less: Interest Income (XX) Capitalizable borrowing cost XX Asset financed by "general borrowing" u 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. General Borrowing Cost (GB) Average expenditure XX Less: Amount related to SB (XX) Amount related to GB XX Multiply: capitalizable rate X% Capitalizable borrowing cost XX u The capitalizable borrowing cost shall NOT exceed actual interest incurred. u The capitalization rate or average interest rate is equal to the Total annual borrowing cost divided by the Total general borrowings

Computing for the capitalizable rate Loan

Interest

Borrowing

XX XX XXtotal

Rate X% X%

cost xx xx xxtotal/ XXtotal = capitalizable interest

Computing for the average expenditure and total expenditure Expenditu re

EE1 EE2 EEtotal

months before the last day accountin g period or completio n of the asset N N

EE(N)1 EE(N)2 EE(N)total/12 *= Average Expenditur e ****remember that 12 is not constant, 12 is used as the divisor when the commencement started on January 1st and ended on December 31; it varies on the commencement and the cessation u Any investment income from specific borrowing is deducted from the capitalizable borrowing cost. u No specific guidance is provided for general borrowing with respect to investment income. u Accordingly, any investment income from general borrowing is NOT deducted from capitalizable borrowing cost. Asset financed both by specific and general borrowing The capitalizable borrowing cost is computed as follows:

Specific Borrowing Cost (SB)

Actual borrowing cost Less: Interest Income

XX (XX ) General Borrowing Cost (GB) Average expenditure XX Less: Amount related to (XX SB ) Amount related to GB XX Multiply: Capitalizable X% rate Total Capitalizable Borrowing Cost

XX

XX

XX

Construction period more than one year u The average expenditures during a period shall include the borrowing costs previously capitalized. MORE THAN ONE YEAR BUT LESS THAN 2 YEARS u If the construction period in the 2nd year is only 8 months (i.e. building is completed on August 31st), the average expenditures should be only for 8 months only. Specific borrowing for asset used for general purposes u If the asset is financed by specific borrowing but a portion is used for working capital purposes, the borrowing shall be treated as a general borrowing in determining capitalizable borrowing cost. u The capitalizable borrowing cost is equal to the average expenditures on the asset multiplied by the average interest rate. u For purposes of determining the capitalizable borrowing cost, the loan would be considered as a general borrowing rather than a specific borrowing. 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: u When the entity incurs expenditures for the asset. u When the entity incurs borrowing costs.

u When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale. "Activities" necessary to prepare u The activities necessary to prepare the asset for the intended use or sale encompass more than the physical construction of the asset. u These include technical and administrative work prior to the commencement of physical construction, such as: o drawing up plans and o obtaining permit for a building u Merely holding assets for use or development without any associated development activity does NOT qualify for capitalization. Example u Borrowing costs incurred while land is under development are capitalized during the period in which development activities are being undertaken. u But borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization.

Suspension of capitalization u Capitalization of borrowing costs shall be suspended during extended periods in which active development is interrupted. u Capitalization of borrowing costs is NOT normally suspended during a period when substantial technical and administrative work is being carried out. u Capitalization of borrowing costs is not also suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

Cessation of capitalization u Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. u An asset is normally ready for its intended use or sale when o the physical construction of the asset is complete even though routine administrative work might still continue. *********notes from problem solving******** *If the problem states that total expenditures during the year (the construction period) were incurred evenly throughout the year, then Average expenditures = Total expenditures / 2 *2 in the denominator is constant THINGS TO ALWAYS REMEMBER u identify if specific and general borrowing u total expenditure is not the same as average expenditure o total expenditure is for the cost of the asset o average expenditure is for the capitalizable borrowing cost for general borrowing u be careful of the dates, especially the 1st of the month and the 30th or 31st of the month u In interest expense, the capitalizable borrowing cost is being subtracted to the total actual borrowing cost, in order to know the interest expense to be carried. u Be observant of the commencement and the cessation of the construction. u Be observant on the time period of the interest u If the capitalizable borrowing cost for GB exceeds the actual interest incurred, then there is no interest expense to be charged, since all

of it has been capitalized for the borrowing cost u If the amount related to GB is negative, then just continue getting the capitalizable borrowing cost for GB and subtract it to the SB u Be observant about the time for specific borrowing cost, remember that date for the completion of the asset is also the cessation for the SB u Computing for future value o 1.N→N is equal rate o Press multiply sign twice o Press the equal sign according to number of periods minus 1 Computing the total cost of the asset Specific Borrowing Cost (SB) Actual borrowing cost XX Less: Interest Income (XX ) General Borrowing Cost (GB) Average expenditure XX Less: Amount related to (XX SB ) Amount related to GB XX Multiply: Capitalizable X% rate Total Capitalizable Borrowing Cost Add: Total Expenditure Cost of the asset

XX

XX XX XX XX

Computing for the charged to interest expense Actual Specific Borrowing Cost Actual General Borrowing Cost Total borrowing cost Less: Total capitalizable Borrowing cost Charged to the expense

XX XX XX (XX) XX...