While this issue bears relevance to PFRS 15 execution, it arises more directly in connection with Philippine Accounting Standard ( PAS ) 23 – Borrowing Cost and the IFRIC Agenda Decision on the matter. basically, borrowing cost is comprised of the interest and other costs incurred in obtaining finance or a loanword. Capitalization means that these costs are added to the cost footing of a specify asset on a company ’ s Balance Sheet, and amortized over a period of time, rather than reflected in the Income Statement in their entirety as expense in the period they were incurred. When capitalizing costs, a company is following the matching principle of accounting, which calls for the record of expenses in the same time period that the related revenues are recognized. When high rate items are capitalized, expenses are efficaciously smoothed out over multiple periods. This allows a company to not present large jumps in expense in any one period. PAS 23 provides that borrowing costs that are immediately attributable to the learning, construction or production of a “ qualify asset ” form part of the price of that asset and, consequently, should be capitalized. other borrowing costs are recognized as an expense.

A qualify asset is defined as an asset that takes a hearty period of fourth dimension to get ready for its intended habit or sale. PAS 23 further provides that where construction is completed in stages, and the completed stages can be used while construction of the other parts continues, capitalization of attributable borrow costs should cease when well all of the activities necessity to prepare that stage for its intended use or sale are accomplished.

The IFRIC concluded that developers cannot capitalize borrowing cost because what they produce are not “ qualifying assets ”. The IFRIC reason, basically, is that the asset – real property inventory whether completed or work-in-progress – is ready for its intended sale in its current condition, since it is sold american samoa soon as a desirable customer is found and, on signing a contract with a customer, the developer transfers control of any work-in-progress relate to that unit to the customer.

The basis for this reason is apparently the fact that the developer signs sales contracts with buyers even before construction begins – i.e. pre-selling. The Industry propounded the opposite view that actual estate inventory or work in advancement, both sold and unsold, should be treated as a qualify asset, and consequently capitalization of borrowing price should be allowed, on the play along grounds :

  1. Immediately recognizing borrowing costs as an expense does not faithfully or accurately present the cost of the real estate asset. As the Basis for Conclusions of PAS 23 itself states, the cost of the asset should include all costs necessarily incurred to get the asset ready for its intended use or sale, including the cost incurred in financing the expenditures as a part of the asset’s acquisition cost.
  2. With respect to pre-sold units, signing a sales contract or completing a certain development stage does not mean that the unit is ready for its intended use – the intended use being habitation.
  3. Regardless of when the sales contract is signed, borrowing cost is continuously incurred by the Developer as necessary to finance the long-term construction of the asset. Capitalization should only stop when the real estate asset is ready for its intended use.
  4. Allowing the capitalization of borrowing cost is consistent with the standards relative to over time revenue recognition. These standards demand the matching of revenue recognized with the costs incurred at each stage of construction or development, when such costs directly contribute to an entity’s progress in satisfying the performance obligation – in this case, delivery of a fully completed, ready to use or habitable unit, under the provisions of law and regulation.

RESOLUTION STATUS : During the 17 October 2019 touch between the Industry groups and the PIC, the latter recommended that the matter be elevated to the SEC .

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