IPSAS 5: Borrowing Costs

PREPARED BY: DR RASHID S. J

(Ph.D ECONOMY & FINANCE, CPA(T), IPSAS & MASTERY IN DIRECTORSHIP
Agenda
Objective

Accounting for borrowing cost

The standard

Concept involve

Accounting treatment

Disclosure requirement
 Objective Benchmark
Treatment
Borrowing cost (Expensed)
• .Objective defined

Prescribes
accounting treatment Are interest and other
of borrowing costs expenses incurred by
for acquisition, an entity in connection
construction or with the borrowing of
production of funds
qualifying asset
Alternative
Treatment
(Capitalization)
 Qualifying Asset
• Qualifying Asset is an asset requires a substantial period of
time to bring them to a condition ready for its intended use or
sale.
• Assets that are ready for their intended use or sale when
acquired are not qualifying assets
Examples of Qualifying assets
Borrowing costs
Capitalization of Borrowing Costs
 Eligibility Criterion
Are those borrowing costs that would have been avoided if the
outlays on the qualifying asset had not been made.

The amount of borrowing costs capitalized during a period shall

not exceed the amount of borrowing costs incurred during that
period.

Borrowing cost = Borrowing Costs incurred – Investment Income

 Illustration 1
ZSSF borrowed TZS 1,000,000 on 1st July 2021 from Peoples Bank of
Zanzibar LTD to construct a building at Mbweni Zanzibar (which meets
the requirements of a qualifying asset). The reporting date is 30th June
2022. An amount of TZS.400,000 was spent immediately on the
qualifying asset and another TZS.250,000 was spent on 30th November
2021. The interest rate on the loan is 20% per annum. The surplus funds
are invested at an interest rate of 15% per annum. Interest is paid and
received annually on 30th June.
REQUIRED:
Show the treatments and the required journal entries for borrowing cost
incurred.
 Illustration 2
Tumaini Authority borrowed TZS 2,000,000 on 1 st September 2020 from
Twiga Bancorp to construct a building (which meets the requirements of
a qualifying asset). The reporting date is 30 th June 2021. An amount of
TZS 800,000 was spent immediately on the qualifying asset and another
TZS 400,000 was spent on 30th January 2021. The interest rate on the
loan is 25% per annum. The surplus funds are invested at an interest rate
of 15% per annum. Interest is paid and received annually on 30 th June.
REQUIRED:
Show the treatments and the required journal entries for borrowing cost
incurred.
 Specific and Nonspecific Borrowing Costs
• Specific Borrowing Costs: 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.
• Nonspecific Borrowing Costs: Funds borrowed generally and
used for purpose of obtaining a qualifying asset the amount of
borrowing costs eligible for capitalization shall be determined
by applying a CAPITALIZATION RATE to the outlays on
that asset.
 Illustration 3

Agency Four-Five started with the construction of a qualifying asset that is expected to take two
years to complete. The reporting date is 30th June 2022.
The following information relates to the asset under construction
Expenditure incurred during the period:
30th July 2020 200,000
1st April 2021 300,000
Borrowing raised at 1st July 2020:
Bank Overdraft at 15% 1,500,000
Bank Loan at 18% 1200,000
2,700,000
Total interest for the period ended:
15% X 1,500,000 225,000
18% X 1,200,000 216,000
441,000
REQUIRED:
Compute borrowing cost to be capitalized and pass necessary journal entries.
 Illustration 4

Zanzibar House Corporation started with the construction of a qualifying asset that is
expected to take one year to complete. The reporting date is 30th June 2022. The
following information relates to the asset under construction.
Expenditure incurred during the period:
30th July 2021 400,000
1st February 2022 600,000
Borrowing raised at 1st July 2021:
Bank Overdraft at 15% 1,500,000
Bank Loan at 10% 1,200,000

REQUIRED:
Compute borrowing cost to be capitalized and pass
necessary journal entries.
 Transfers within economic entity
• When a controlling entity transfers fund at a partial cost to a
controlled entity, the controlled entity may capitalize may capitalize
that portion of borrowing costs which it itself has incurred.
• 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
• When a controlling 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.
 Commencement and suspension of capitalization
Commencement of capitalization
The capitalization of borrowing costs as
part of a qualifying asset should
commence when:
a. Outlays for the assets are being
incurred
b. Borrowing costs are being incurred,
and
c. Activities that are necessary to
prepare the asset for its intended use are
in progress
Suspension of capitalization
Capitalization of borrowing costs should be
suspended during the extended period which active
development is interrupted.
However borrowing costs is not normally
suspended during a period when technical and
administrative work is being carried out.
Further it is not suspended when a temporary
delay is a necessary as part of the process of getting
an assets ready for its intended use.
E.g.: High water levels delay construction of a
bridge, (if that is a common characteristic of the
area)
 Cessation of Capitalization
 When construction of a qualifying
Capitalization of assets is completed in parts and
borrowing costs each part is capable of being used
should cease when for its intended purpose, for that
substantially all the part capitalization should be ceased
activities necessary  E.g: office development comprises
to prepare the several buildings.
qualifying assets for
 A completed building can be used
its intended use are
completed individually
Accounting Treatments
 Benchmark Treatment
Borrowing costs shall be recognized as an expense in the
period in which they are incurred.
Recognize as an expense regardless of how the borrowing are
used.
Under this treatment costs should be charged to statement of
financial performance.
 Illustration
5. TZ Authority borrowed TZS 1,000,000 at an interest rate of 20%
on 1st July 2021 from Twiga Bancorp to construct a an office
building (which does not meet the requirements of a qualifying asset).
Pass the journal entry at the reporting date is 30th June 2022.
6. TZ Authority borrowed TZS 1,000,000 at an interest rate of 20%
on 1st July 2021 from Twiga Bancorp to construct a an office
building (which meets the requirements of a qualifying asset). Pass
the journal entry at the reporting date is 30th June 2022.
 Alternative Treatment
Allowed Alternative Treatment:
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.
Consistency application to all borrowing costs directly
attributable all qualifying assets of the entity.
Conditions for use of Accounting for Alternative Treatment

Allowed Alternative Treatment:

a) it is probable that they will result in future economic benefits
or service potential to the entity; and
b) the costs can be measured reliably.
c) Other borrowing costs are recognized as an expense in the
period in which they are incurred
 Disclosure Requirements
Followings should be disclosed in the Financial Statements.
a) Accounting policy adopted for Borrowing Costs
b) Amount of borrowing costs capitalized during the period c.
The capitalization rate used to determined the amount of
borrowing costs
 ASSIGNMENT
1. On 1st July 2021, X began to construct office building. It purchased a
land for TZS 25,000,000. The construction of the building cost TZS
9,000,000 and the fixtures and fittings cost TZS 6,000,000. The
construction of the office building was completed on 30 th March 2021
and it was available for use from 1st July 2022. X borrowed TZS
40,000,000 on 1st July 2021 in order to finance this project. The loan
carried interest at 10% per annum. It was repaid on 30 th December 2022.
Required:
Calculate the total amount to be included in property, plant and
equipment in respect of the development at 30 th June 2022.
Cont.
2. Department A borrowed TZS 10m from NMB for a period of
one year to finance the acquisition of a qualifying asset costing a
total of TZS 10m and the borrowing interest rate is at 5%. Before
the commencement of operations, Department A invested the
borrowings in a short term investment for 6 months yielding 2%
interest.
Cont.
3. Department Z borrowed TZS 15,000,000 for a term of one year,
exclusively to finance the construction of a block of offices. The interest
rate on the loan is 5% and is payable on maturity of the loan. The loan
was borrowed on 1st February 2022 and the construction commenced on
1st April 2022. Unfortunately no construction took place between 1 st
May 2022 to 31st August 2022, however construction was then resumed
- asset was completed and ready for use on 31 st December 2022.
Construction cost was TZS 15,000,000. What is the carrying amount of
the office block in Department Z’s statement of financial position as at
31st December 2022?