IPSAS 5

Borrowing Costs

Acknowledgment
This International Public Sector Accounting Standard is drawn primarily from
International Accounting Standard IAS 23, Borrowing Costs published by the
International Accounting Standards Committee (IASC). The International
Accounting Standards Board (IASB) and the International Accounting Standards
Committee Foundation (IASCF) were established in 2001 to replace the IASC.
The International Accounting Standards (IASs) issued by the IASC remain in
force until they are amended or withdrawn by the IASB. Extracts from IAS 23
are reproduced in this publication of the Public Sector Committee of the
International Federation of Accountants with the permission of IASB.
The approved text of the International Accounting Standards (IASs) is that
published by IASB in the English language, and copies may be obtained directly
from IASB Publications Department, 7th floor, 166 Fleet Street, London EC4A
2DY, United Kingdom.
E-mail: [email protected]
Internet: http://www.iasb.org.uk
IASs, Exposure Drafts and other publications of the IASC and IASB are
copyright of the IASCF.
“IAS,” “IASB,” “IASC,” “IASCF” and “International Accounting Standards” are
Trade Marks of the IASCF and should not be used without the approval of the
IASCF.

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May 2000

Borrowing Costs

CONTENTS

Paragraphs
OBJECTIVE
SCOPE ............................................................................................. 1-4
DEFINITIONS................................................................................. 5-13
Borrowing Costs ......................................................................... 6
Economic Entity ......................................................................... 7-9
Future Economic Benefits or Service Potential ............................ 10
Government Business Enterprises ............................................... 11
Net Assets/Equity........................................................................ 12
Qualifying Assets........................................................................ 13
BORROWING COSTS — BENCHMARK TREATMENT ........ 14-16
Recognition....................................................................................... 14-15
Disclosure ......................................................................................... 16
BORROWING COSTS — ALLOWED ALTERNATIVE
TREATMENT ............................................................ 17-40
Recognition....................................................................................... 17-39
Borrowing Costs Eligible for Capitalization ................................ 21-29
Excess of the Carrying Amount of the Qualifying Asset
Over Recoverable Amount.................................................... 30
Commencement of Capitalization ............................................... 31-33
Suspension of Capitalization ....................................................... 34-35
Cessation of Capitalization.......................................................... 36-39

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Disclosure ......................................................................................... 40
TRANSITIONAL PROVISIONS .................................................... 41
EFFECTIVE DATE ......................................................................... 42-43
COMPARISON WITH IAS 23

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INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARD IPSAS 5

BORROWING COSTS
The standards, which have been set in bold italic type, should be read in the
context of the commentary paragraphs in this Standard which are in plain type, and
in the context of the “Preface to International Public Sector Accounting
Standards.” International Public Sector Accounting Standards are not intended to
apply to immaterial items.

OBJECTIVE
This Standard prescribes the accounting treatment for borrowing costs. This
Standard generally requires the immediate expensing of borrowing costs. However,
the Standard permits, as an allowed alternative treatment, the capitalization of
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset.

SCOPE
1. This Standard should be applied in accounting for borrowing costs.
2. This Standard applies to all public sector entities other than Government
Business Enterprises.
3. Government Business Enterprises (GBEs) are required to comply with
International Accounting Standards (IASs) issued by the International
Accounting Standards Committee. The Public Sector Committee’s Guideline
No. 1 Financial Reporting by Government Business Enterprises notes that
IASs are relevant to all business enterprises, regardless of whether they are
in the private or public sector. Accordingly, Guideline No. 1 recommends
that GBEs should present financial statements that conform, in all material
respects, to IASs.
4. This Standard does not deal with the actual or imputed cost of net
assets/equity. Where jurisdictions apply a capital charge to individual
entities, judgment will need to be exercised to determine whether the charge
meets the definition of borrowing costs or whether it should be treated as an
actual or imputed cost of net assets/equity.

DEFINITIONS
5. The following terms are used in this Standard with the meanings
specified:
Accounting policies are the specific principles, bases, conventions, rules
and practices adopted by an entity in preparing and presenting financial
statements.

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Accrual basis means a basis of accounting under which transactions and

other events are recognized when they occur (and not only when cash or
its equivalent is received or paid). Therefore, the transactions and events
are recorded in the accounting records and recognized in the financial
statements of the periods to which they relate. The elements recognized
under accrual accounting are assets, liabilities, net assets/equity, revenue
and expenses.
Assets are resources controlled by an entity as a result of past events and
from which future economic benefits or service potential are expected to
flow to the entity.
Borrowing costs are interest and other expenses incurred by an entity in
connection with the borrowing of funds.
Cash comprises cash on hand and demand deposits.
Contributions from owners means future economic benefits or service
potential that has been contributed to the entity by parties external to the
entity, other than those that result in liabilities of the entity, that establish
a financial interest in the net assets/equity of the entity, which:
(a) conveys entitlement both to distributions of future economic benefits
or service potential by the entity during its life, such distributions
being at the discretion of the owners or their representatives, and to
distributions of any excess of assets over liabilities in the event of the
entity being wound up; and/or
(b) can be sold, exchanged, transferred or redeemed.
Control is the power to govern the financial and operating policies of
another entity so as to benefit from its activities.
Controlled entity is an entity that is under the control of another entity
(known as the controlling entity).
Controlling entity is an entity that has one or more controlled entities.
Distributions to owners means future economic benefits or service
potential distributed by the entity to all or some of its owners, either as a
return on investment or as a return of investment.
Economic entity means a group of entities comprising a controlling entity
and one or more controlled entities.
Exchange difference is the difference resulting from reporting the same
number of units of a foreign currency in the reporting currency at
different exchange rates.
Exchange rate is the ratio for exchange of two currencies.
Expenses are decreases in economic benefits or service potential during
the reporting period in the form of outflows or consumption of assets or
incurrences of liabilities that result in decreases in net assets/equity, other
than those relating to distributions to owners.

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Foreign currency is a currency other than the reporting currency of an

entity.
Government Business Enterprise means an entity that has all the
following characteristics:
(a) is an entity with the power to contract in its own name;
(b) has been assigned the financial and operational authority to carry on
a business;
(c) sells goods and services, in the normal course of its business, to other
entities at a profit or full cost recovery;
(d) is not reliant on continuing government funding to be a going
concern (other than purchases of outputs at arm’s length); and
(e) is controlled by a public sector entity.
Liabilities are present obligations of the entity arising from past events,
the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits or service potential.
Net assets/equity is the residual interest in the assets of the entity after
deducting all its liabilities.
Qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
Revenue is the gross inflow of economic benefits or service potential
during the reporting period when those inflows result in an increase in net
assets/equity, other than increases relating to contributions from owners.

Borrowing Costs
6. Borrowing costs may include:
(a) interest on bank overdrafts and short-term and long-term borrowings;
(b) amortization of discounts or premiums relating to borrowings;
(c) amortization of ancillary costs incurred in connection with the
arrangement of borrowings;
(d) finance charges in respect of finance leases; and
(e) exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Economic Entity
7. The term “economic entity” is used in this Standard to define, for financial
reporting purposes, a group of entities comprising the controlling entity and
any controlled entities.
8. Other terms sometimes used to refer to an economic entity include
“administrative entity, “financial entity,” “consolidated entity” and “group.”

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9. An economic entity may include entities with both social policy and
commercial objectives. For example, a government housing department may
be an economic entity which includes entities that provide housing for a
nominal charge, as well as entities that provide accommodation on a
commercial basis.

Future Economic Benefits or Service Potential

10. Assets provide a means for entities to achieve their objectives. Assets that
are used to deliver goods and services in accordance with an entity’s
objectives but which do not directly generate net cash inflows are often
described as embodying “service potential.” Assets that are used to generate
net cash inflows are often described as embodying “future economic
benefits.” To encompass all the purposes to which assets may be put, this
Standard uses the term “future economic benefits or service potential” to
describe the essential characteristic of assets.

Government Business Enterprises

11. Government Business Enterprises (GBEs) include both trading enterprises,
such as utilities, and financial enterprises, such as financial institutions.
GBEs are, in substance, no different from entities conducting similar
activities in the private sector. GBEs generally operate to make a profit,
although some may have limited community service obligations under which
they are required to provide some individuals and organizations in the
community with goods and services at either no charge or a significantly
reduced charge. International Public Sector Accounting Standard IPSAS 6
Consolidated Financial Statements and Accounting for Controlled Entities
provides guidance on determining whether control exists for financial
reporting purposes, and should be referred to in determining whether a GBE
is controlled by another public sector entity.

Net Assets/Equity
12. “Net assets/equity” is the term used in this Standard to refer to the residual
measure in the statement of financial position (assets less liabilities). Net
assets/equity may be positive or negative. Other terms may be used in place
of net assets/equity, provided that their meaning is clear.

Qualifying Assets
13. Examples of qualifying assets are office buildings, hospitals, infrastructure
assets such as roads, bridges and power generation facilities, and inventories
that require a substantial period of time to bring them to a condition ready
for use or sale. Other investments, and those assets that are routinely
produced over a short period of time, are not qualifying assets. Assets that
are ready for their intended use or sale when acquired also are not qualifying
assets.

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BORROWING COSTS — BENCHMARK TREATMENT

Recognition
14. Borrowing costs should be recognized as an expense in the period in
which they are incurred.
15. Under the benchmark treatment, borrowing costs are recognized as an
expense in the period in which they are incurred, regardless of how the
borrowings are applied.

Disclosure
16. The financial statements should disclose the accounting policy adopted for
borrowing costs.

BORROWING COSTS — ALLOWED ALTERNATIVE TREATMENT

Recognition
17. Borrowing costs should be recognized as an expense in the period in
which they are incurred, except to the extent that they are capitalized in
accordance with paragraph 18.
18. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as
part of the cost of that asset. The amount of borrowing costs eligible for
capitalization should be determined in accordance with this Standard.
19. Under the allowed alternative treatment, borrowing costs that are directly
attributable to the acquisition, construction or production of an asset are
included in the cost of that asset. Such borrowing costs are capitalized as
part of the cost of the asset when it is probable that they will result in future
economic benefits or service potential to the entity and the costs can be
measured reliably. Other borrowing costs are recognized as an expense in
the period in which they are incurred.
20. Where an entity adopts the allowed alternative treatment, that treatment
should be applied consistently to all borrowing costs that are directly
attributable to the acquisition, construction or production of all qualifying
assets of the entity.

Borrowing Costs Eligible for Capitalization

21. The borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset are those borrowing costs
that would have been avoided if the outlays on the qualifying asset had not
been made. When an entity borrows funds specifically for the purpose of
obtaining a particular qualifying asset, the borrowing costs that directly
relate to that qualifying asset can be readily identified.

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22. It may be difficult to identify a direct relationship between particular

borrowings and a qualifying asset and to determine the borrowings that
could otherwise have been avoided. Such a difficulty occurs, for example,
when the financing activity of an entity is co-ordinated centrally.
Difficulties also arise when an economic entity uses a range of debt
instruments to borrow funds at varying rates of interest, and transfers those
funds on various bases to other entities in the economic entity. Funds which
have been borrowed centrally may be transferred to other entities within the
economic entity as a loan, a grant or a capital injection. Such transfers may
be interest-free or require that only a portion of the actual interest cost be
recovered. Other complications arise through the use of loans denominated
in or linked to foreign currencies, when the economic entity operates in
highly inflationary economies, and from fluctuations in exchange rates. As
a result, the determination of the amount of borrowing costs that are directly
attributable to the acquisition of a qualifying asset is difficult and the
exercise of judgment is required.
23. To the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalization on that asset should be determined as the actual borrowing
costs incurred on that borrowing during the period less any investment
income on the temporary investment of those borrowings.
24. The financing arrangements for a qualifying asset may result in an entity
obtaining borrowed funds and incurring associated borrowing costs before
some or all of the funds are used for outlays on the qualifying asset. In such
circumstances, the funds are often temporarily invested pending their outlay
on the qualifying asset. In determining the amount of borrowing costs
eligible for capitalization during a period, any investment income earned on
such funds is deducted from the borrowing costs incurred.
25. To the extent that funds are borrowed generally and used for the purpose
of obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalization should be determined by applying a capitalization rate to the
outlays on that asset. The capitalization rate should be the weighted
average of the borrowing costs applicable to the borrowings of the entity
that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. The amount of
borrowing costs capitalized during a period should not exceed the amount
of borrowing costs incurred during that period.
26. Only those borrowing costs applicable to the borrowings of the entity may be
capitalized. When a controlling entity borrows funds which are passed on to
a controlled entity with no, or only partial, allocation of borrowing costs, the
controlled entity may capitalize only those borrowing costs which it itself
has incurred. Where a controlled entity receives an interest-free capital
contribution or capital grant, it will not incur any borrowing costs and
consequently will not capitalize any such costs.
27. When a controlling entity transfers funds at partial cost to a controlled
entity, the controlled entity may capitalize that portion of borrowing costs
which it itself has incurred. In the financial statements of the economic

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entity, the full amount of borrowing costs can be capitalized to the qualifying
asset, provided that appropriate consolidation adjustments have been made
to eliminate those costs capitalized by the controlled entity.
28. When a controlling entity has transferred funds at no cost to a controlled
entity, neither the controlling entity nor the controlled entity would meet the
criteria for capitalization of borrowing costs. However, if the economic
entity met the criteria for capitalization of borrowing costs, it would be able
to capitalize the borrowing costs to the qualifying asset in its financial
statements.
29. In some circumstances, it is appropriate to include all borrowings of the
controlling entity and its controlled entities when computing a weighted
average of the borrowing costs; in other circumstances, it is appropriate for
each controlled entity to use a weighted average of the borrowing costs
applicable to its own borrowings.

Excess of the Carrying Amount of the Qualifying Asset

Over Recoverable Amount
30. When the carrying amount or the expected ultimate cost of the qualifying
asset exceeds its recoverable amount or net realizable value, the carrying
amount is written down or written off in accordance with the requirements
of other international and/or national accounting standards. In certain
circumstances, the amount of the write-down or write-off is written back in
accordance with those other standards.

Commencement of Capitalization
31. The capitalization of borrowing costs as part of the cost of a qualifying
asset should commence when:
(a) outlays for the asset are being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use
or sale are in progress.
32. Outlays on a qualifying asset include only those outlays that have resulted in
payments of cash, transfers of other assets or the assumption of interest-
bearing liabilities. The average carrying amount of the asset during a
period, including borrowing costs previously capitalized, is normally a
reasonable approximation of the outlays to which the capitalization rate is
applied in that period.
33. The activities necessary to prepare the asset for its intended use or sale
encompass more than the physical construction of the asset. They include
technical and administrative work prior to the commencement of physical
construction, such as the activities associated with obtaining permits.
However, such activities exclude the holding of an asset when no production
or development that changes the asset’s condition is taking place. For
example, borrowing costs incurred while land is under development are

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capitalized during the period in which activities related to the development

are being undertaken. However, borrowing costs incurred while land
acquired for building purposes is held without any associated development
activity do not qualify for capitalization.

Suspension of Capitalization
34. Capitalization of borrowing costs should be suspended during extended
periods in which active development is interrupted, and expensed.
35. Borrowing costs may be incurred during an extended period in which the
activities necessary to prepare an asset for its intended use or sale are
interrupted. Such costs are costs of holding partially completed assets and
do not qualify for capitalization. However, capitalization of borrowing costs
is not normally suspended during a period when substantial technical and
administrative work is being carried out. Capitalization of borrowing costs
is also not suspended when a temporary delay is a necessary part of the
process of getting an asset ready for its intended use or sale. For example,
capitalization continues during an extended period needed for inventories to
mature or an extended period during which high water levels delay
construction of a bridge, if such high water levels are common during the
construction period in the geographic region involved.

Cessation of Capitalization
36. Capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare the qualifying asset for its intended use or
sale are complete.
37. An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete even though routine administrative
work might still continue. If minor modifications, such as the decoration of
a property to the purchaser’s or user’s specification, are all that is
outstanding, this indicates that substantially all the activities are complete.
38. When the construction of a qualifying asset is completed in parts and each
part is capable of being used while construction continues on other parts,
capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare that part for its intended use or sale are
completed.
39. An office development comprising several buildings, each of which can be
used individually, is an example of a qualifying asset for which each part is
capable of being used while construction continues on other parts. Examples
of qualifying assets that need to be complete before any part can be used
include an operating theatre in a hospital when all construction must be
complete before the theatre may be used; a sewage treatment plant where
several processes are carried out in sequence at different parts of the plant;
and a bridge forming part of a highway.

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Disclosure
40. The financial statements should disclose:
(a) the accounting policy adopted for borrowing costs;
(b) the amount of borrowing costs capitalized during the period; and
(c) the capitalization rate used to determine the amount of borrowing
costs eligible for capitalization (when it was necessary to apply a
capitalization rate to funds borrowed generally).

TRANSITIONAL PROVISIONS
41. When the adoption of this Standard constitutes a change in accounting
policy, an entity is encouraged to adjust its financial statements in
accordance with International Public Sector Accounting Standard IPSAS
3 Net Surplus or Deficit for the Period, Fundamental Errors and Changes
in Accounting Policies. Alternatively, entities following the allowed
alternative treatment should capitalize only those borrowing costs incurred
after the effective date of this Standard which meet the criteria for
capitalization.

EFFECTIVE DATE
42. This International Public Sector Accounting Standard becomes effective
for annual financial statements covering periods beginning on or after 1
July 2001. Earlier application is encouraged.
43. When an entity adopts the accrual basis of accounting, as defined by
International Public Sector Accounting Standards, for financial reporting
purposes, subsequent to this effective date, this Standard applies to the
entity’s annual financial statements covering periods beginning on or after
the date of adoption.

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COMPARISON WITH IAS 23

International Public Sector Accounting Standard IPSAS 5, Borrowing
Costs, is drawn primarily from International Accounting Standard
IAS 23, Borrowing Costs. The main differences between IPSAS 5 and
IAS 23 are as follows:
• Commentary additional to that in IAS 23 has been included in
IPSAS 5 to clarify the applicability of the standards to accounting by
public sector entities.
• IPSAS 5 uses different terminology, in certain instances, from IAS 23.
The most significant examples are the use of the terms “entity,”
“revenue,” “statement of financial performance,” “statement of
financial position” and “net assets/equity” in IPSAS 5. The equivalent
terms in IAS 23 are “enterprise,” “income,” “income statement,”
“balance sheet” and “equity.”
• IPSAS 5 contains a different set of definitions of technical terms from
IAS 23 (paragraph 5).

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