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Overview

IPSAS 5 is based on IAS 23 Borrowing Costs (Revised 1993).


IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing costs. Generally IPSAS 5 requires the immediate expensing of borrowing costs. Capitalization of borrowing costs is allowed if they are directly related to the acquisition, construction or production of a qualifying asset.


IPSAS 5 was issued in May 2000 and applies to annual periods beginning on or after 1 July 2001.


History of IPSAS 5









Effective date

Annual periods beginning on or after 1 July 2001.


Full text

Refer to IFAC website here


Summary of IPSAS 5 Borrowing Costs

Objective

The objective of IPSAS 5 is to prescribe the accounting treatment for borrowing costs.


Scope

IPSAS 5 shall be applied in the accounting for borrowing costs and applies to all public sector entities other than GBEs [IPSAS 5.2].

The standard explicitly excludes the actual or imputed cost of equity [IPSAS 5.4].


Key definitions

Borrowing costs: interest and other expenses incurred by an entity in connection with the borrowing of funds[IPSAS 5.5]. Borrowing costs may include [IPSAS 5.6]:

(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 service concession arrangements

(e) Exchange differences arising from foreign currency borrowings, to the extent that they are regarded as an adjustment to interest costs.


Qualifying asset: an asset that necessarily takes a substantial period of time to get ready for its intended use or sale [IPSAS 5.5]. Examples of qualifying assets are [IPSAS 5.13]:

i. property, plant, and equipment and investment property during the construction period

ii.  intangible assets during the development period

iii. inventories that may require a substantial amount of time to bring them in the condition of intended use or sale


Recognition

Generally the Standard describes the immediate expensing of borrowing costs [IPSAS 5.14] as the “Benchmark Treatment”.

The Standard allows borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized, this is called the “Allowed Alternative Treatment” [IPSAS 5.18].

If the alternative treatment is adopted by an entity, this treatment will be applied consistently to all borrowing costs [IPSAS 5.20].


Measurement

Specific borrowings: borrowing costs eligible for capitalization are the actual costs incurred less any income earned on the temporary investment of these borrowings [IPSAS 5.23].

General borrowings: the amount eligible for capitalization is determined by applying a capitalization rate to the outlays on that asset. The capitalization rate will be the weighted average of the borrowing costs applicable to the general borrowings (i.e. excl the specific borrowings) [IPSAS 5.25].


Capitalization should start when [IPSAS 5.31]:

• outlays are being incurred

• borrowing costs are being incurred

• activities that are necessary to prepare the asset for its intended use or sale are in progress


Capitalization is suspended during periods in which active development is interrupted [IPSAS 5.34].


Cessation of capitalization is required when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete [IPSAS 5.36]. If there are only minor modifications outstanding, this indicates that substantially all of the activities are complete. [IPSAS 5.37].

In case a construction of an asset is completed in stages, and the part can be used while construction of the other parts continues, capitalization of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its intended use or sale are complete. [IPSAS 5.38].


Disclosures

Following disclosures are required:

• the accounting policy adopted (under benchmark [IPSAS 5.16] and alternative treatment [IPSAS 5.40])

• amount of borrowing cost capitalized during the period [IPSAS 5.40]

• capitalization rate used [IPSAS 5.40]

May 2000

IPSAS 5: Borrowing Costs was issued

1 July 2001

Effective date of IPSAS 5

1 January 2014

Effective date of Amendments from IPSAS 32, Service Concession Arrangements:  Grantor (issued October 2011)

IPSAS 5: Borrowing Costs