IPSAS 5
Borrowing Costs
IPSAS 5 prescribes the accounting treatment for borrowing costs. It sets out a benchmark treatment and an allowed alternative treatment, together with recognition, measurement, commencement, suspension, cessation and disclosure requirements.
Under the benchmark treatment, borrowing costs are recognised as an expense in the period in which they are incurred. Under the allowed alternative treatment, borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset.
- Benchmark treatment
- Recognise borrowing costs as an expense when incurred
- Allowed alternative
- Capitalise directly attributable borrowing costs
- Policy consistency
- Apply the allowed alternative consistently to all qualifying assets
- Qualifying asset
- An asset that necessarily takes a substantial period to become ready for intended use or sale
- Reporting boundary
- Entity-level and economic-entity borrowing costs may differ
- Disclosure
- Policy and, when capitalising, amount and capitalisation rate
1. Benchmark treatment
Under the benchmark treatment, borrowing costs are recognised as an expense in the period in which they are incurred, regardless of how the borrowings are applied. The entity discloses the accounting policy adopted for borrowing costs.
Example 1: benchmark treatment
A public-sector entity incurs GH¢480,000 of borrowing costs on financing used to construct a hospital. If the entity applies the benchmark treatment, it recognises the full GH¢480,000 as an expense for the period. The fact that the hospital is a qualifying asset does not override the selected benchmark treatment.
2. Allowed alternative treatment
Under the allowed alternative treatment, borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of that asset’s cost. Other borrowing costs are recognised as an expense. When an entity adopts the allowed alternative, it applies that treatment consistently to all borrowing costs directly attributable to all qualifying assets of the entity.
Borrowing costs are directly attributable when they would have been avoided if the expenditure on the qualifying asset had not been made.
Example 2: consistency of policy
An entity applies the allowed alternative and constructs both a hospital and a bridge that meet the definition of a qualifying asset. It cannot capitalise directly attributable borrowing costs for the hospital while electing to expense otherwise eligible costs for the bridge merely to achieve a preferred result. The policy is applied consistently to both qualifying assets.
3. Definitions
Borrowing costs are interest and other expenses incurred by an entity in connection with the borrowing of funds. They may include interest expense calculated using the effective interest method, interest in respect of lease liabilities and exchange differences arising from foreign-currency borrowings to the extent that they are regarded as an adjustment to interest costs.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples may include office buildings, hospitals, roads, bridges, power-generation facilities and inventories that require a substantial period to become ready. Assets ready for use or sale when acquired and assets routinely produced over short periods are not qualifying assets.
Example 3: service potential and qualifying assets
| Asset | Assessment | Reason |
|---|---|---|
| Road requiring two years to construct | Normally qualifying | It requires a substantial period to become ready to deliver service potential |
| Completed ambulance acquired for immediate use | Not qualifying | It is ready for intended use when acquired |
| Routine supplies produced within days | Not qualifying | The production period is not substantial |
4. Measurement under the allowed alternative
For funds borrowed specifically to obtain a qualifying asset, the amount eligible for capitalisation is the actual borrowing costs incurred during the period less investment income from temporarily investing those borrowings.
For general borrowings, the entity applies a capitalisation rate to outlays on the qualifying asset. The rate is the weighted average of borrowing costs applicable to borrowings outstanding during the period, excluding borrowings made specifically for another qualifying asset until substantially all activities necessary to prepare that other asset are complete. The amount capitalised cannot exceed borrowing costs incurred during the period.
Example 4: specific borrowing
An entity applying the allowed alternative incurs GH¢720,000 of borrowing costs on a loan raised specifically to construct a road. Temporarily unused proceeds earn GH¢45,000. Subject to the recognition and timing conditions, GH¢675,000 is eligible for capitalisation: GH¢720,000 − GH¢45,000.
Example 5: general borrowings
Relevant general borrowings are GH¢8,000,000 at 9% and GH¢2,000,000 at 13%, producing a weighted-average rate of 9.8%. If weighted qualifying outlays are GH¢4,000,000, the amount eligible for capitalisation is GH¢392,000, subject to the ceiling of borrowing costs incurred during the period.
5. Centralised borrowings and the economic entity
Public-sector financing may be coordinated centrally. A controlled entity capitalises only borrowing costs that it has incurred. A transfer of funds does not, by itself, create a borrowing cost in the recipient’s separate financial statements merely because the transferor financed the transfer from borrowings.
At the economic-entity level, borrowing costs incurred externally by a controlling entity may be considered in consolidated financial statements when they are attributable to a qualifying asset of the economic entity and appropriate consolidation adjustments are made.
Example 6: centralised financing at separate-entity and economic-entity levels
A ministry borrows GH¢20,000,000 externally at 10% on 1 January specifically to finance a hospital constructed by a controlled hospital authority. The ministry transfers the full amount to the authority without charging interest. The hospital is a qualifying asset, all capitalisation conditions are satisfied throughout the year, and no temporary investment income is earned.
| Reporting level and policy | Analysis | Outcome |
|---|---|---|
| Hospital authority’s separate financial statements | The authority received a transfer and incurred no borrowing cost. | No borrowing cost is available for capitalisation by the authority. |
| Ministry’s separate financial statements | The ministry incurred GH¢2,000,000 of external borrowing costs but does not recognise the hospital asset in its separate financial statements. | The ministry does not capitalise the borrowing costs to the hospital asset in its separate financial statements. |
| Economic entity — benchmark treatment | The consolidated financial statements include the external borrowing and the hospital asset. | Recognise the GH¢2,000,000 borrowing cost as an expense. |
| Economic entity — allowed alternative | The external borrowing cost is directly attributable to the economic entity’s qualifying asset and the capitalisation conditions are satisfied. | Capitalise GH¢2,000,000 through the appropriate consolidation adjustment. |
Application point: the accounting outcome depends on both the IPSAS 5 policy and the reporting boundary. It is incorrect to impute borrowing costs to the hospital authority merely because the ministry financed the transfer from an external loan.
6. Commencement of capitalisation
Under the allowed alternative, capitalisation commences when all three conditions are satisfied: outlays 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.
Activities necessary to prepare the asset include more than physical construction and may include technical and administrative work undertaken before construction. Holding an asset without associated development activity does not satisfy the activity condition.
Example 7: commencement date
Outlays and borrowing costs begin on 1 February, but the entity holds the site without development activity until engineering work begins on 1 April. Capitalisation commences on 1 April, when all commencement conditions are first satisfied.
7. Suspension of capitalisation
Capitalisation is suspended during extended periods in which active development is interrupted. It is not normally suspended while substantial technical or administrative work is being performed or when a temporary delay is a necessary part of the process of preparing the asset for its intended use or sale.
Example 8: extended interruption
Construction of a bridge stops for five months because of a contractual dispute, and no relevant technical or administrative work continues. Capitalisation is suspended during that period. A normal seasonal delay that is necessary in the construction process would not automatically require suspension.
8. Cessation of capitalisation
Capitalisation ceases when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete. Routine administrative work or minor modifications do not normally delay cessation.
When construction is completed in parts and each part is capable of being used while work continues on other parts, capitalisation ceases for each part when substantially all preparation activities for that part are complete.
Example 9: physical completion, independent use and cessation by component
A transport authority applying the allowed alternative constructs two road sections. Each section is financed by a separate GH¢12,000,000 loan at 10%, with borrowing costs incurred evenly at GH¢100,000 per month. All capitalisation conditions are satisfied from 1 January, and no temporary investment income is earned.
| Component | Facts and assessment | Cessation and amount capitalised |
|---|---|---|
| Section A | The road is physically complete and capable of operating independently on 30 June. Only routine administrative close-out continues in July. | Capitalisation ceases on 30 June. Six months × GH¢100,000 = GH¢600,000. |
| Section B | The road surface is complete on 31 August, but the section cannot deliver its intended service potential until a connecting bridge is completed on 31 December. | Capitalisation continues to 31 December. Twelve months × GH¢100,000 = GH¢1,200,000. |
Application point: physical completion alone is not decisive. Section A is ready for intended use despite routine close-out work, whereas Section B is not capable of independent use before the connecting bridge is complete.
9. Disclosure
An entity discloses the accounting policy adopted for borrowing costs. An entity applying the allowed alternative also discloses the amount of borrowing costs capitalised during the period and the capitalisation rate used to determine the amount eligible for capitalisation.
Common application errors
- Assuming that IPSAS 5 makes capitalisation compulsory.
- Applying the allowed alternative selectively rather than consistently to all qualifying assets.
- Treating a transfer as an entity-level borrowing cost when the recipient incurred no borrowing cost.
- Ignoring the economic-entity boundary in consolidated reporting.
- Commencing capitalisation before all three conditions are satisfied.
- Omitting the borrowing-cost accounting policy from the disclosures.
Official sources and review basis
This educational guide was checked against current primary IPSASB sources. Source status was last reviewed 17 August 2026.
- IPSASB — 2025 Handbook of International Public Sector Accounting PronouncementsOfficial handbook containing pronouncements published as of 31 January 2025
- IPSASB — IPSAS 5 Borrowing CostsOfficial standard in the 2025 handbook
- IPSASB — Amendments to IPSAS 5: Non-Authoritative GuidanceOfficial 2021 implementation guidance and illustrative examples
