borrowing costs are capitalized when it is probable that they will result in future
economic benefits or service potential for the entity and when the costs can be
measured reliably.
6.4 The standard further states that the financial statements should disclose the
accounting policy adopted for borrowing costs and where an entity adopts the
allowed alternative treatment, that treatment shall be applied consistently to all
borrowing costs that are directly attributable to the acquisition, construction, or
production of all qualifying assets of the entity.
6.5 In line therewith, Note 3.9 of the Notes to the Financial Statements of the
Provincial Government for CY 2024 disclosed that borrowing costs are
capitalized against qualifying assets as part of property, plant and equipment.
Such borrowing costs are capitalized over the period during which the asset is
being acquired or constructed and borrowings have been incurred.
Capitalization ceases when the construction of the asset is complete.
6.6 An examination of the accounts of the Provincial Government revealed that
during the year, the Province obtained various loans from Land Bank of the
Philippines (LBP) and Development Bank of the Philippines (DBP) to finance
the construction of qualifying assets, as defined under IPSAS 5. The
corresponding interest charges incurred in CY 2024 are as follows:
Start of Released Interest
Purpose
Term Amount Expense
Improvement of Perdices Coliseum 11/20/24 ₱ 5,967,743.41 ₱ 22,379.04
Construction of New Govt. Center 07/30/24 218,923,324.27 4,186,908.58
Installation of Solar Streetlights 10/17/24 44,392,991.47 71,150.41
Installation of Solar Streetlights 07/30/24 66,591,938.90 755,316.79
Total ₱335,875,998.05 ₱5,035,754.82
6.7 Review of the FMIS revealed that all interest on loans incurred during the year
were recorded as outright expense, contrary to the capitalization requirement.
As stated in the standard, the interest incurred on term loan, as well as interest
to be incurred until the completion of the physical construction of the projects,
should be capitalized as part of the cost of the qualifying assets.
6.8 The disclosure in the Province’s Notes to Financial Statements stated that
borrowing costs were treated in accordance with the requirements of IPSAS 5.
However, the audit revealed otherwise. The Provincial Accountant’s oversight
to capitalize the aforementioned borrowing costs resulted in the overstatement
of Interest Expense account and the understatement of the Equity and
Construction in Progress accounts by ₱5,035,754.82.
6.9 We recommended and the Provincial Accountant agreed to prepare the
necessary adjustments in the books to capitalize the borrowing costs
incurred in the construction of the qualifying assets in adherence to the
requirement of IPSAS 5.
53
