IPSAS 5
Active
Borrowing Costs
Prescribes the accounting treatment for borrowing costs. Generally requires immediate expensing, but PERMITS – as an allowed alternative – capitalizing borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset. Covers the benchmark and allowed-alternative treatments, eligible costs for specific and general borrowings, and commencement, suspension, and cessation of capitalization.
Active Standard
IPSAS 5 Borrowing Costs is the current, active standard issued by the IPSASB. It is effective for annual financial statements covering periods beginning on/after 1 July 2001 (earlier application encouraged). The current Standard comprises paras. 1–43, all of equal authority (paras. 2–3 deleted).
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Objective, Scope & Definitions (paras. 1–13)
Objective & scope
Prescribes the accounting treatment for borrowing costs. GENERALLY requires immediate expensing, but PERMITS, as an allowed alternative, capitalizing borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset.
Applied in accounting for borrowing costs generally
Does NOT deal with the actual or imputed cost of net assets/equity – e.g. jurisdictional capital charges require judgment on whether they meet the borrowing-costs definition or are an imputed equity cost (para. 4)
Paras. 2–3 [Deleted]. All paragraphs, objective + 1–43, have equal authority.
Key definitions (para. 5)
Borrowing costs
Interest and other expenses incurred by an entity in connection with the borrowing of funds.
Qualifying asset
An asset that necessarily takes a SUBSTANTIAL period of time to get ready for its intended use or sale.
BORROWING COSTS MAY INCLUDE (PARA. 6)
Interest expense per the effective interest method (IPSAS 41) Interest on lease liabilities and service concession arrangements FX differences on foreign currency borrowings, to the extent regarded as an interest-cost adjustment
What is (and isn't) a qualifying asset (para. 13)
EXAMPLES OF QUALIFYING ASSETS
Office buildings, hospitalsInfrastructure – roads, bridges, power generation facilitiesInventories requiring a substantial period to bring to a sellable/usable condition
NOT QUALIFYING ASSETS
Other investmentsAssets routinely produced over a SHORT periodAssets ready for intended use/sale WHEN ACQUIRED
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Benchmark vs Allowed Alternative Treatment (paras. 14–20)
Benchmark treatment (paras. 14–16)
Borrowing Costs → expensed in the period incurred, REGARDLESS of how the borrowings are applied
The financial statements disclose the accounting policy adopted for borrowing costs (para. 16) – this disclosure applies under EITHER treatment.
Allowed alternative treatment (paras. 17–20)
Directly attributable borrowing costs are CAPITALIZED as part of the qualifying asset's cost Capitalization occurs when (a) future economic benefits/service potential are PROBABLE, and (b) costs can be measured RELIABLY Other borrowing costs are still expensed as incurred
Once adopted, the allowed alternative treatment must be applied CONSISTENTLY to all borrowing costs directly attributable to acquiring, constructing, or producing ALL qualifying assets of the entity (para. 20) – not selectively per project.
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Borrowing Costs Eligible for Capitalization (paras. 21–30)
Specific borrowings (para. 23)
Eligible cost = Actual borrowing costs incurred − Investment income on temporary investment of those funds
Where funds are borrowed SPECIFICALLY for a qualifying asset, directly attributable costs are readily identifiable – "avoided cost" if the outlay hadn't been made.
General borrowings (para. 25)
Eligible cost = Capitalization rate × Outlays on the qualifying asset (capped at costs actually incurred in the period)
Capitalization rate = WEIGHTED AVERAGE of borrowing costs on all outstanding entity borrowings during the period – excluding specific-purpose borrowings until substantially all activities to ready that asset are complete.
Centralized / intra-economic-entity borrowing (paras. 22, 26–29)
Difficulty arises when financing is coordinated centrally, or funds are transferred at varying/no cost across the economic entity. Key rules:
A controlled entity may capitalize only the borrowing costs IT ITSELF has incurred Interest-free capital contributions/transfers → no borrowing costs incurred → NOTHING to capitalize at that entity's level Partial-cost transfers → the controlled entity capitalizes its own portion; the ECONOMIC ENTITY can capitalize the FULL amount in consolidated statements, with elimination adjustments for costs already capitalized at the controlled-entity level No-cost transfers at BOTH levels → neither capitalizes; but the economic entity as a whole could still capitalize if it independently meets the criteria
Depending on circumstances, it may be appropriate to use ALL economic-entity borrowings in the weighted average, or each controlled entity's OWN borrowings only (para. 29). Where carrying amount/expected ultimate cost exceeds recoverable amount or NRV, the excess is written down under IPSAS 21 or IPSAS 26, as appropriate (para. 30).
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Commencement, Suspension & Cessation of Capitalization (paras. 31–39)
Commencement (para. 31) – ALL THREE conditions
Outlays for the asset are being incurred Borrowing costs are being incurred Activities necessary to prepare the asset for use/sale are IN PROGRESS
"Activities" cover more than physical construction – technical/administrative work before construction starts (e.g. obtaining permits) counts. Simply HOLDING an asset with no active development does NOT qualify (para. 33).
Suspension & cessation (paras. 34–39)
SUSPENDED
During EXTENDED periods when active development is interrupted – those costs are expensed. NOT suspended during substantial technical/admin work, or a temporary delay that's a NECESSARY part of the process (e.g. high water levels routinely delaying bridge construction).
CEASES
When substantially all activities to ready the asset are COMPLETE – even if minor/routine admin work continues. For assets completed in usable PARTS (e.g. a multi-building office park), capitalization ceases PART BY PART as each becomes usable; for assets needing full completion before any use (e.g. a hospital operating theatre, a bridge), capitalization continues until the whole is done.
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Worked Examples (Illustrative Examples IE1–IE16)
Example 1 – specific borrowing, qualifying asset over time
Municipality XYZ builds a tunnel; CU100m bond at 5% funds it specifically; 3% earned on temporary investment
CU20m paid to the contractor at construction start and each anniversary. By Dec 31, 20X1 (9 months in), accrued borrowing cost = CU100m × 5% × 9/12 = CU3.75m.
Capitalized work-in-progress = CU20m + CU3.75m − (CU80m unused × 3% × 9/12) = CU21.95 million – the cash transferred, plus borrowing cost incurred, less investment income earned on the temporarily-idle CU80m.
Example 3 – general borrowing, weighted average rate
State Government T funds an airport from a general pool: bonds CU1,000m @5%, Loan A CU300m @7%, Loan B CU600m @9%
Total pool = CU1,900m. Weighted contribution: Bonds 1,000/1,900 × 5% = 2.63%; Loan A 300/1,900 × 7% = 1.11%; Loan B 600/1,900 × 9% = 2.84%.
Weighted average capitalization rate = 2.63 + 1.11 + 2.84 = 6.58%, applied to outlays on the airport during the period (capped at costs actually incurred that period).
Example 2 – centralized borrowing, market-rate loan
Dept of Infrastructure borrows from Dept of Finance at 3% p.a. – the market rate
Dept of Infrastructure has no visibility into how Dept of Finance itself sources funds or its weighted average cost.
Since the loan is at ARM'S-LENGTH market terms with no concessionary element, Dept of Infrastructure capitalizes borrowing costs using the contracted 3% rate – it does not need to trace back to Dept of Finance's own funding mix.
Example 4 – specific borrowing exceeding outlays
State Government C: CU500m federal grant + CU250m loan @5% for a road network; 3% earned on excess funds
By Dec 31, 20X1, outlays = CU200m (paid in one lump sum at construction start), but CU250m was borrowed for the project – leaving CU50m of excess borrowed funds temporarily invested.
Capitalized cost = CU200m outlays + [(CU250m × 5%) − (CU50m × 3%)] = CU200m + CU11 million in net borrowing costs (CU12.5m incurred less CU1.5m investment income).
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Disclosure Requirements (para. 40)
Required disclosures – regardless of treatment chosen
The accounting policy adopted for borrowing costs (benchmark or allowed alternative) The amount of borrowing costs CAPITALIZED during the period The capitalization rate used to determine eligible borrowing costs, WHEN a rate had to be applied to general borrowings
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Effective Date & Amendment Timeline (paras. 41–43)
Amendment history at a glance
Base Standard: periods beginning on/after 1 July 2001 (earlier application encouraged). Para. 41 [Deleted].
EffectiveChange
1 Jan 2014Para. 6 – IPSAS 32, Service Concession Arrangements: Grantor (Oct 2011)
1 Jan 2017Paras. 41, 43 – IPSAS 33, First-time Adoption
1 Jan 2018Paras. 2, 3, 11 deleted – The Applicability of IPSAS (Apr 2016)
1 Jan 2019Para. 25 amended, new para. 41A – Improvements to IPSAS, 2018
1 Jan 2023 (deferred from 2022 for COVID-19)Para. 6 – Improvements to IPSAS, 2019
1 Jan 2025Para. 6 – IPSAS 43, Leases (Jan 2022)
1 Jan 2026Para. 26 – IPSAS 47, Revenue (May 2023)
The IPSASB's 2019 Measurement Consultation Paper proposed REMOVING the capitalization option entirely (for centralized-borrowing comparability and GFSM alignment) – the IPSASB ultimately decided to RETAIN both options, citing consistency with the Conceptual Framework's measurement principles (Basis for Conclusions).
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Relationship to IAS/IFRS – Comparison with IAS 23
Comparison – IPSAS 5 vs IAS 23
IPSAS 5 is drawn primarily from IAS 23 (1993), Borrowing Costs.
TopicIPSAS 5IAS 23
Terminology"Revenue," "statement of financial performance," "net assets/equity""Income," "income statement," "equity"
Definitions (para. 5)Distinct set of technical-term definitionsDifferent definition set
IAS 23 (as revised in 2007) eliminated the expensing option and REQUIRES capitalization. IPSAS 5 has diverged from the current IAS 23 by retaining BOTH the benchmark (expense) and allowed alternative (capitalize) treatments as a policy choice – a deliberate public-sector-specific decision reaffirmed as recently as the IPSASB's 2019 Measurement project.
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Statement / Process Mapping
Capitalization decision map (allowed alternative treatment)
- Is the asset a QUALIFYING ASSET – takes a substantial period to ready for use/sale? If no → always expense.
- Are outlays being incurred, borrowing costs being incurred, AND preparation activities in progress? → capitalization COMMENCES
- Is the borrowing SPECIFIC to this asset? → eligible cost = actual cost incurred less temporary-investment income. Otherwise → apply the WEIGHTED AVERAGE capitalization rate to outlays
- Is active development interrupted for an EXTENDED period (not a necessary technical delay)? → SUSPEND capitalization, expense costs during the interruption
- Are substantially all activities to ready the asset (or a usable PART of it) complete? → capitalization CEASES for that asset/part
Concept-to-statement mapping table
IPSAS 5 conceptStatement(s)Notes
Benchmark treatment – expensed borrowing costsSOFPerfFinance costs line, per period incurred
Allowed alternative – capitalized borrowing costsSOFPAdded to the qualifying asset's carrying amount
Investment income on temporary investment of borrowed fundsSOFPDeducted from capitalized cost, not shown as separate revenue
Write-down to recoverable amount / NRVSOFPerfUnder IPSAS 21 or IPSAS 26, as appropriate
Accounting policy, capitalized amount, capitalization rateNotesMandatory disclosures under either treatment
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Related Standards – Cross-Reference Map
How IPSAS 5 connects across the IPSAS body of literature
StandardNature of the connection
IPSAS 2Total interest paid is disclosed in the cash flow statement whether expensed or capitalized (§6)
IPSAS 12Inventories requiring a substantial period to ready for sale can be qualifying assets (§1)
IPSAS 13 / 17Leased and other PP&E-adjacent assets referenced in the IPSAS 32 amendment history (§7)
IPSAS 21 / 26Impairment write-down when carrying amount exceeds recoverable amount/NRV (§3)
IPSAS 32Service Concession Arrangements: Grantor – amended the borrowing-costs component definition (§7)
IPSAS 41Effective interest method for calculating interest expense (§1 definitions)
IPSAS 43Interest on lease liabilities can be a borrowing cost component (§1)
IPSAS 45Qualifying assets are typically items of property, plant, and equipment under construction
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Quick-Reference Glossary
Borrowing costs
Interest and other expenses incurred in connection with borrowing funds.
Qualifying asset
An asset needing a substantial period of time to get ready for its intended use or sale.
Capitalization rate
The weighted average of borrowing costs applicable to all of the entity's outstanding general borrowings during the period.
Benchmark treatment
Expensing all borrowing costs as incurred, regardless of how the borrowed funds are applied.
Allowed alternative treatment
Capitalizing directly attributable borrowing costs as part of a qualifying asset's cost.
Economic entity
A controlling entity and its controlled entities, for financial reporting purposes.
Financial statement key
SOFP Statement of financial position
SOFPerf Statement of financial performance