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Questions and Answers
What is the core principle under PAS 23 regarding borrowing costs for a qualifying asset?
What does 'incurred' mean in accounting terms?
Which of the following is included in borrowing costs according to PAS 23?
What type of assets are considered qualifying assets under PAS 23?
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Which of the following is NOT considered a borrowing cost according to PAS 23?
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What is the treatment of other borrowing costs that are not directly attributable to a qualifying asset?
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When does capitalization of borrowing costs start according to the text?
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Under what circumstances is capitalization of borrowing costs suspended according to the text?
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What refers to funds borrowed specifically for obtaining a qualifying asset according to the text?
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How are capitalizable borrowing costs on general borrowings computed?
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When does capitalization of borrowing costs cease according to the text?
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What are not considered qualifying assets according to the text?
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Study Notes
Borrowing Costs under PAS 23
- Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the asset's cost.
- Other borrowing costs are expensed when incurred.
- Borrowing costs refer to the expense of taking out loan expenses, including interest payments, lease liabilities, and exchange differences on foreign borrowings.
Qualifying Asset
- A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.
- Examples of qualifying assets include:
- Inventories that take a long period to produce.
- Items of property, plant, and equipment (PPE) that take a long period to construct or get ready for use.
- Intangible assets that take a long period to develop.
Capitalization of Borrowing Costs
- 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 rate is the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period.
- Capitalization of borrowing costs starts when:
- Expenditures for the asset are being incurred.
- Borrowing costs are being incurred.
- Activities necessary to prepare the asset for its intended use or sale are being undertaken.
- Capitalization is suspended during extended periods in which active development is interrupted.
- Capitalization of borrowing costs ceases when the qualifying asset is substantially complete.
Specific Borrowing
- Specific borrowing refers to funds borrowed specifically for the purpose of obtaining a qualifying asset.
- Capitalizable borrowing costs on specific borrowings are computed as:
- Capitalizable BC = Actual borrowing costs - Investment income
General Borrowing
- General borrowings are those obtained for more than one purpose.
- Capitalizable borrowing costs on general borrowings are computed as:
- Capitalizable BC = Ave. Expenditure x Capitalization Rate
- The capitalization rate is computed as:
- Capitalization Rate = Ave. Borrowing Costs / Ave. Outstanding Borrowings
Disclosure
- The amount of borrowing costs capitalized during the period should be disclosed.
- The capitalization rate used to determine the capitalizable borrowing costs should also be disclosed.
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Description
Test your knowledge on the core principle under PAS 23 regarding borrowing costs for qualifying assets. Learn when to capitalize borrowing costs and when to expense them in the acquisition, construction, or production of assets.
