PAS 23

Borrowing Cost

EXPENSE CAPITALIZE
if not related to a if it relates to a
qualifying asset qualifying asset

QUALIFYING BORROWING COST

capitalized borrowing cost that relate to costs directly
attributable to the acquisition,
construction or production of a qualifying asset and
if future economic benefits are probable and costd can be
reliably measured

QUALIFYING ASSET
those that take a long time to get ready

MEASUREMENT

GENERAL BORROWINGS
1. capitalized borrowing costs using the
following formula:
capitalization rate x the expenditure
2. but limit to the actual borrowing costs
incurred
3. capitalization rate = weighted average
borrowing costs divided by the general
outstanding borrowings

SPECIFIC BORROWINGS
1. capitalized the total amount of borrowing costs
actually incurred less any interest income earned
on the temporary investment of any surplus
borrowings
Sample Problem:

Swan Limited borrowed a loan from bank @ 12% per annum amounting to Rs.1, 000,000
for the construction of power generation facilities of the company. The loan
was received on January 01 and utilized Rs. 300,000 on Qualifying Asset. On January
1, the company deposited the remaining amount in a bank yielding interest @ 6%.
Whole of the amount is withdrawn and paid to contractor on March 01. The company
returned the loan to bank after 9 months i.e. on October 01. You are required to
calculate the amount of borrowing cost eligible for capitalization.

Solution:
Hint: Borrowing period 9 months
Investment period 2 months

Interest paid to bank 1,000,000 x 12% x 9/12 90,000

Less: Interest income 700,000 x 6% x 2/12 (7,000)

Borrowing cost eligible for capitalization 83,000

Capital expenditure (Rs. 1,000,000 + 83,000) 1,083,000

Sample Problem:

MCQ (Private) Limited has the following loans outstanding as at December 31, 2005. Rs.

Loan 1 @ 6% (Due since opening date) 300,000

Loan 2 @ 8% (Taken on 1 April, 2005) 200,000
Loan 3 @ 9% (Taken on 1 July, 2005) 150,000

The company spent following amounts on construction of an asset.

January 31, 2005 70,000
April 1, 2005 80,000
December 1, 2005 10,000

Required:
i) Capitalization Rate

(ii) Borrowing cost eligible for capitalization

Capitalization Rate.
Loan Amount W Avg. Rate Interest
Rs. Rs. Rs.
Loan 1 300,000 300,000 6% 18,000
Loan 2 200,000 (9/12) 150,000 8% 12,000
Loan 3 150,000 (6/12) 75,000 9% 6,750
650,000 525,000 36,750
Total Interest
Capitalization rate = x100
Weighted Average Loan

36,750
x100
525,000
Capitalization rate = 7%
Expenditure Incurred on Rate Period Capitalization

70,000 January 31, 2005 7% 11/12 4,492

80,000 April 01, 2005 7% 9/12 4,200
10,000 December 01, 2005 7% 1/12 58
160,000 8,750

Rupees

Total borrowing cost 36,750

Borrowing cost eligible for capitalization (8,750)
Borrowing cost chargeable as expense 28,000

Capital Expenditure
Incurred cost 160,000
Borrowing cost eligible for capitalization 8,750
Total 168.750