BORROWING COSTS

IPSAS 25

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Learning Objectives
At the completion of studying this chapter,
you will be able to:
Define qualifying assets
Identify what borrowing costs are

Identify pre-conditions for the capitalization of

borrowing costs

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The Objectives of IPSAS 25
 The Objective of IPSAS 25 is to prescribe
the criteria for determining whether borrowing
costs can be capitalized

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What are borrowing costs?
Borrowing costs are interest and other
costs that an organisation incurs in
connection with the borrowing of funds.
For example:
• Loan interest
• Finance lease interest charges
• Amortisation of discounts or premiums
related to borrowing.
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What are borrowing costs?
 Usually borrowing costs are recognised as an
expense in the statement of comprehensive
income. This is known as the Benchmark
Treatment.
 However,IPSAS 5 states that those borrowing
costs that are directly attributable to the
acquisition, construction or production of a
qualifying asset may be included in the cost of
that asset, i.e. capitalised. This is known as the
Allowed Alternative Treatment.
Treatment
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 Spe ci fic borrow ing co sts
The amount of borrowing costs eligible for
capitalisation will be the actual borrowing costs
incurred on that borrowing during the period
less any investment income earned on the
temporary investment of these funds.

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 Spe ci fic borrow ing co sts
Specific borrowing costs

An organisation incurred borrowing costs for the year of

£30m, of which £7m related specifically to the construction
of a qualifying asset. Investment income received on the
funds during the year amounted to £750,000 of which
£160,000 relates to the borrowing for the qualifying asset.

How should the £30m borrowing costs be recorded in the

organisation’s financial statements for that year?

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Spe ci fic borrow ing co sts

Debit Non-current asset (£7m – £0.16m) £6.84m

Debit Statement of financial performance – finance £23m

costs

Credit Statement of financial performance – £0.59m

investment income

Credit Bank (£30m – £0.75m) £29.25m

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Ge n eral borrow ing co sts
Where funds are borrowed generally and
applied in part to a qualifying asset, we need to
calculate a weighted average cost of borrowing
to determine the amount of borrowing costs to
capitalise.

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Ge n eral borrow ing co sts
General borrowing costs
An organisation has the following loans in
place:

1 Jan 20X0 31 Dec 20X0

(£m) (£m)

10% bank loan 120 120

9.5% bank loan 80 80

200 200

On 1 January 20X0 the organisation began to build a qualifying

asset using existing borrowings. Expenditure incurred on the
construction was £30m on 1 January 20X0 and £20m on 1 October
20X0.
How should the borrowing costs be recorded in the organisation’s
financial statements for that year?
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Ge n eral borrow ing co sts
The total interest charge for the year is:
(10% x £120m) + (9.5% x £80m) =
£19.6m

We need to calculate the borrowing costs relating to the qualifying

asset
– to do this we need to calculate the weighted average borrowing
rate and apply it to the borrowing for the qualifying asset.

Weighted average rate:

(10% x 120/200) + (9.5% x 80/200) = 9.8%

Qualifying asset borrowing costs:

(£30m x 9.8% x 12/12) + (£20m x 9.8% x 3/12) = £3.43m
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Ge n eral borrow ing co sts

Debit Non-current asset £3.43m

Debit Statement of financial performance – finance £16.17m

costs

Credit Bank £19.6m

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QUALIFYING ASSETS
 A qualifying asset is “ an asset that necessarily take a
substantial period of time to get ready for its intended
use or sale”
 Assets that are ready for their intended use or sale when
acquired are NOT qualifying assets.
 IPSAS 25 does not define ‘ substantial period of time’
 However, an asset that normally takes twelve months or more to
be ready for its intended use will usually be a qualifying asset.

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 QUALIFYING ASSETS: What do you
think ?
 Which of the following may not be considered a “
Qualifying asset “ under IPSAS 25 ?
a) GIBE IV power generation plant that normally takes two
years to construct
b) An expensive sugar cane crasher that can be purchased
by sugar corporation from abroad
c) A bridge on Wabi Shebele River at Somali Regional that
usually takes more than a year to build
d) A ship ordered by Ethiopian Shipping Lines that normally
takes one to two years to complete

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ELEMENTS OF BORROWING COSTS
 Borrowing costs, as understood generally ,
refer to interest costs
 Rather, borrowing costs also include other
related costs, such as:
 Exchange differences arising from foreign
currency borrowings to the extent they are
regarded as an adjustment to interest costs
 Finance Charges in respect to finance leases
recognized in accordance with Leases
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ELEMENTS OF BORROWING
COSTS : What do you think?
 Which of the following costs may not be eligible
capitalization as borrowing costs under IPSAS 25?
a) Interest on bonds issued to finance the construction of a
qualifying asset
b) The cost of a preferred stock that is not classified as a
liability
c) Imputed cost of equity
d) Exchange differences arising from foreign currency
borrowing to the extent they are regarded as an
adjustment to interest costs pertaining to a qualifying
asset.
e) B&C
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Borrowing Costs…ctd
 IPSAS 25 does NOT deal with the actual or
imputed Cost of equity, including preferred
capital not classified as a liability.

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 COMMENCEMENT OF
CAPITALIZATION
 Capitalization of borrowing costs shall
commence when
 Expenditures for the asset are being incurred
 Borrowing costs are being incurred; and
 Activities necessary to prepare the asset for its
intended use or sale are in progress

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SUSPENSION OF CAPITALIZATION
 Capitalization shall be suspended during
extended periods in which active
development is interrupted
 Question:
 Should capitalization be suspended during a
interruption to the construction of a bridge during
very high water levels?

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SUSPENSION OF CAPITALIZATION :
What do you think?
 Capitalization of borrowing costs:
a) Shall be suspended during temporary periods of delay
b) May be suspended only during extended periods of
delays in which active development is delayed
c) Should never be suspended once capitalization
commences
d) Shall be suspended only during extended period of
delays in which active development is delayed

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CESSATION OF CAPITALIZATION
 Capitalization of borrowing costs ceases when
substantially all the activities are complete
 The asset is considered to be substantially
complete if all that is left are minor modifications
 When parts of a qualifying asset become ready
for use in stages, capitalization ceases on those
parts that are ready for use.

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DISCOSURE
 An entity shall disclose:
 Its accounting policy for the recognition of
borrowing costs
 The amount of borrowing cists capitalized during
the periods, and
 The capitalization rate used to determine the
amount of borrowing costs eligible for
capitalization

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Questions

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Thank You

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