This report analyzes the extent to which Palestinian companies apply the international standard IAS 23 on borrowing costs. It examines the financial statements of three Palestinian companies from 2017-2019. The results found that most companies report the amounts for construction work-in-progress without details on capitalized borrowing costs. One company disclosed capitalizing interest on a specific loan in 2018, but not general loans. Overall, Palestinian companies either do not apply the standard or do not disclose its application, possibly due to being an overload or high conservatism in Palestinian accounting. More research is needed to verify borrowing costs practices in Palestine.

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An-Najah National University
College of Graduate Studies
Master of accounting program
Report Title: The extent of application of the
international standard for borrowing costs (IAS
23) in Palestine.
Student preparation:
Ro’ya Nser Abd El-hafez
Presented to a doctor:
Dr. Muiz Abu-Alia
This report was submitted to complete the
“International Accounting and International
Financial Reporting Standards" course.

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Table of Content
PART ONE: ...................................................................................... 3
Introduction:.................................................................................... 3
Report problem: .............................................................................. 3
Report objective:............................................................................. 4
Literature review ............................................................................. 4
Arab Studies................................................................................... 4
Foreign Studies .............................................................................. 5
PART TWO....................................................................................... 7
Borrowing costs in IAS/IFRS regulations...................................... 7
PART THREE ................................................................................... 9
Methodology.................................................................................... 9
Sample ............................................................................................. 9
Discussion and results:.................................................................. 9
Conclusion: ................................................................................... 11
REFERENCES................................................................................ 12

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Part One:
Introduction:
International accounting standards aim to improve accounting
practice by identifying matters related to accounting practices from
presentation, disclosure, and measurement, in order to serve users of
this information and financial statements. Through their reliance on
financial statements prepared according to these standards, in addition
to subjecting these statements to scrutiny in accordance with
international auditing standards, these users' confidence in the
financial statements will increase.
One of the important accounting standards that should be
guided and applied when preparing financial statements, especially in
the era of globalization, in order to serve users, is the international
standard (IAS 23 — Borrowing Costs, 2007) which indicated the need
to follow a unified policy regarding the application of capitalization of
borrowing costs. He has laid down a set of specific rules that must be
followed in the event that the company applies capitalization of
borrowing costs. And clearly indicating importance of Adhere disclose
the capitalization.
Report problem:
The report problem has been identified by raising the
following question:
1- To what extent do Palestinian companies apply the
standard of borrowing costs capitalization?
2- To what extent does the Palestinian companies that
apply the standard of capitalizing borrowing costs
disclose the accounting treatment used for
capitalization of borrowing costs?

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Report objective:
This report aims to identify and r discover the extent of
Palestinian companies application of the standard of
capitalizing borrowing costs, in addition to the extent of these
companies' disclosure of the accounting treatment for the
capitalization of borrowing costs.
Literature review
Arab Studies
The main objective of the research (Durgam, 2008) is to
study the possibility of applying the standard of capitalization
of borrowing costs by industrial Palestinian public joint-stock
companies listed in the Palestine Stock Exchange. The
researcher used a questionnaire distributed to employees of
the Financial Department who are involved in preparing the
financial statements in 10 Palestinian industrial companies to
arrive at the results. Among the most important results
indicated by this research is that the Palestinian public
industrial companies have a great awareness the importance
of applying the standard of capitalizing borrowing costs, in
addition to the fact that these companies largely apply the
standard of capitalizing borrowing costs. And the Palestinians
companies whose apply capitalization borrowing costs are
largely tied by the capitalization rules stipulated in
international accounting standards. Finally, the research
showed that companies apply clear accounting treatment in
standard of borrowing costs.

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While the research of (Al-A'bsey, 2012) aims to shed
light on the accounting standard related to capitalization
borrowing costs (IAS 23 — Borrowing Costs, 2007). By
standing on the accounting treatments for a cost Borrowing
and the changing in accounting treatment because of the
borrowing cost standard and the consequences of it on the
financial statements. By examining, the impact of the
company’s shift to adopting Capitalization of borrowing costs
that related of qualified assets in the cases permitted in the
standard instead dealing these cost as expense. The
researcher used a financial analysis of the financial
statements of the Paltel Company science 1998-2007. By
extracting some important financial ratios and indicators. The
research showed through its results that the ratios of the
financial indicators during the period of establishing the
qualifying asset improved by following a policy of capitalizing
borrowing costs instead of the policy of considering interest
as a expense, with higher profitability ratios, net profit figure,
and a marked decrease in debt ratios.
Foreign Studies
While the main purpose of research (Dragu & Tudor, 2011)is
to define and estimate a statistical function that must relate
the measured disclosure index to the requests of (IAS 23 —
Borrowing Costs, 2007)and the specific variables that
characterize the company's activity: Which are country of
origin, return on assets, total assets, turnover, and return on
equity. This research is empirical used a sample consisting of
92 companies that develop activities and use a unified
database for theirs financial reports in 10 European countries
from 2005 to 2009. So that the results of the research
indicated that there is evidence of a relationship linking the
level of compliance in the disclosure of information Contained

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in (IAS 23 — Borrowing Costs, 2007) and the variables
mentioned.
The aim of research ( Prewysz-Kwinto, 2018) is to
present the impact of tax and accounting law on evaluating
the effect of financial leverage with respect to borrowing costs.
Since in some cases legal regulations require that borrowing
costs be recognized in the value of the assets and not as an
expense. It uses the study to reach the results of the
accounting and tax law regulations, including international
accounting standards, as well as the available literature, as
these are considered to be a study of a theoretical nature. He
concluded that the methods that were used before the
borrowing costs standard was adopted to determine the effect
of leverage do not always allow correct conclusions to be
drawn.

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Part Two
Theoretical Framework
Borrowing costs in IAS/IFRS regulations
The issue of recognizing borrowing costs is regulated by the
International Accounting Standard (IAS 23 — Borrowing Costs, 2007),
so that borrowing costs are defined through this standard as costs that
include interest on overdrafts, bank loans and exchange differences on
loans in foreign currencies as they are considered as an adjustment to
interest costs and fees. finance charges on finance leases. While this
standard does not deal with the imputed or actual cost of equity. This
standard applies to all assets that need a substantial period of time in
order to be ready for sale or intended use, which the standard called
qualifying assets. While there are qualifying assets that are measured
at fair value, and inventories that are produced or manufactured in
another way, which take a substantia period to be ready for sale, and
are in large quantities on a repetitive basis, they are excluded from this
standard.
This standard provides for the recognition of capitalization of
borrowing costs that make the qualifying assets ready for use or sale
through construction, acquisition or production. Other borrowing costs
are recognized as an expense.
Capitalization should begin when borrowing costs, costs of
expenditures are incurred and activities necessary to prepare the asset
for its intended use or sale are in progress and may include some
activities before starting physical production, as capitalization should
stop upon completion of all activities necessary to prepare the
qualifying asset, and this does not include the pending minor
modification. It should be noted that this capitalization is suspended

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during the periods in which active development is interrupted. Among
the things that should also be noted when the construction is in stages,
the capitalization of borrowing costs must stop at the completion of
each stage, including the completion of all the activities related to it. It
must not begin the capitalization of borrowing costs until the next
phase begins, where borrowing costs are not capitalized in the period
between stages.
The standard considered the actual costs incurred minus any
income earned from the temporary investment of these loans as the
costs eligible for capitalization when the loan is specific to bring the
asset ready.
In the case of funds that are part of a general pool, the eligible
amount is determined by applying the capitalization rate to the
expenditure on that asset. The capitalization rate will be the weighted
average of borrowing costs applied to the general pool.
When the recoverable amount or net recoverable value is less
than the book value of the qualifying asset, including the capitalized
interest cost, it is necessary to record an adjustment to write the asset
carrying amount down so that it is considered the excess in the interest
cost is impairment and recognized as an expense.
Finally, the standard stated that the disclosure should include
the capitalization rate used and the amount of borrowing costs
capitalized during the period.

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Part Three
Methodology
The report is an exploratory one and seeks to capture the
current situation in Palestine with regard to the of borrowing costs that
related to (IAS 23 — Borrowing Costs, 2007).and it use the available
literature review as well as financial statement for the sample to reach
to results.
Sample
The financial statements of three listed Palestinian companies
in Palestine exchange from 2017-2019 were used, which are The
Vegetable Oil Industries, Sanad Construction, The National Carton
Industry Resources to reach results. These companies were selected
on the basis that it was mentioned in their financial statements that
they capitalize the financing costs related to the eligible projects in
Process, and there is a Clarification in their financial statements of the
projects in Process.
Discussion and results:
By examining the financial statements of three companies in the
sample with regard to borrowing costs, the nature of the disclosure in
their financial statement can be summarized as follows:
1- The Vegetable Oil Industries: in 2017. The total amount of the
construction work-in -progress was (zero Jordanian dinars), in
2018, the amount of construction work-in -progress was (28960
Jordanian dinars (so that this amount represent as additions add
to account. and it was not disclosure that these additions
included a capitalized amount related to borrowing costs. Finally
in 2019. The total amount of the construction work-in -progress
was (374677 Jordanian dinars), so that this amount included
additions of an amount (345717 Jordanian dinars). And it was

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not disclosure that these additions included a capitalized amount
related to borrowing costs.
2- Sanad Construction: In the year 2017, the total amount of the
construction work-in -progress was (7234216 dollars) so that this
amount included additions of an amount (4,358,647 dollars) and
it was not disclosed that these additions included a capitalized
amount related to borrowing costs. In 2018, the amount of
construction work-in -progress was (1,777,642 dollars( so that
this amount included additions of an amount (3,123,456 dollars).
And it was not disclosed that these additions included a
capitalized amount related to borrowing costs. Finally in 2019.
The total amount of the construction work-in -progress was
(2,692,210), so that this amount included additions of an amount
(2,453,042). And it was not disclosed that these additions
included a capitalized amount related to borrowing costs.
3- The National Carton Industry Resources: In the year 2017,
the total amount of the construction work-in -progress was
(282574 dollars) so that this amount included additions of an
amount (449954) and it was not disclosed that these additions
included a capitalized amount related to borrowing costs. In
2018, the amount of construction work-in -progress was (106233
dollars) so that this amount included additions of an amount
(1192165 dollars). It has been disclosed that these additions
include bank interest capitalized at an amount of (48048 dollars),
and the difference in capitalized currency was also disclosed with
its amount (4058 dollars). Finally in 2019. The total amount of the
construction work-in -progress was (zero dollars), because
residual amount of construction work-in -progress had
transferred to property plant and equipment account.
Based on the above, we notice that the Palestinian companies
show only the full amount of construction work-in –progress, and what
becomes ready to transfer it to the property plant and equipment
account, And the additions appear to the account of construction work-
in -progress without any details, and without showing the interest
related to it capitalized except the National Carton Industry Resources

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company that showed in 2018 that it is capitalizing interest in an
amount (48048 dollars) It is the benefit of a loan taken specifically for
this construction work-in -progress, but did not appear to have
capitalized any interest from general loans.
Conclusion:
The main objective of this report was to find out the
extent to which Palestinian companies apply and disclose the
standard of borrowing costs. By examining the financial
statements of the sample companies of the report, it was
found that most of these companies show the amounts of
construction work-in -progress without any details related to
borrowing costs. This is due to one of two reasons: The first,
which is that Palestinian companies do not apply the
standard, since it is considered an overload on the nature of
Palestinian companies. The second reason is that they apply
but do not disclose, considering that (Durgam, 2008) research
shows that Palestinian industrial companies apply the
standard for capitalizing borrowing costs, may the reason for
Palestinian companies do not disclose is Palestine state has
cultural dimensions that make its accounting systems
characterized by high conservatism based on (Gray, 1988)
research. In order to verify this, a more in-depth research must
be done regarding borrowing costs in Palestine, and contains
a larger sample in the future.

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References
Prewysz-Kwinto, P. (2018). THE IMPACT OF ACCOUNTING AND
TAX LAW CONCERNING BORROWING COSTS ON THE
ASSESSMENT OF THE FINANCIAL LEVERAGE EFFECT.
FINANCIAL SCIENCES NAUKI O FINANSACH, pp. 47-59.
Al-A'bsey, B. H. (2012). The Impact of the Accounting Treatment for
Borrowing Costs to the Informational Content of Financial
Statements in Accordance with International Accounting
Standard (23): Case Study of the Palestinian
Telecommunications Company. Iraqi Academic Scientific
Journals_TANMIYAT AL-RAFIDAIN, 34, pp. 65-90.
Dragu, I.-M., & Tudor, A. T. (2011). DEVELOPING AN
ECONOMETRIC MODEL FOR MEASURING THE EVOLUTION
OF INFORMATION DISCLOSURE - IAS 23 BORROWING
COSTS –. Annales Universitatis Apulensis Series Oeconomica,
pp. 254-259.
Durgam, M. M. (2008). The Study of the Possibility of Applying the
Standard of Borrowing Costs by the Palestinian General
Contributing Manufacturing Companies (PGCMC)(Analytical
Study). Iraqi Academic Scientific Journals_TANMIYAT AL-
RAFIDAIN, pp. 189-223.
Gray, S. J. (1988, March 1). Towards a Theory of Cultural Influence on
the Development of Accounting Systems Internationally. Abacus,
pp. 1-15.
IAS 23 — Borrowing Costs. (2007, March 29). Retrieved from
www.iasplus.com:
https://www.iasplus.com/en/standards/ias/ias23