- 10 Marks
PSAF – L2 – Q9.1 – International Public Sector Accounting Standards
Account for borrowing costs for a tunnel project by the Ministry of Transport under IPSAS 5 for 2023.
Question
The Ministry of Transport decided to construct a tunnel that will link two major cities in the country to ease traffic congestion. The project, which commenced in January 2023, is expected to take two years to complete. The financing for the project includes the following borrowings:
- Bank Term Loans: GHc50 million at 7% interest per annum
- Institutional Borrowings: GHc70 million at 8% interest per annum
- Corporate Bonds: GHc100 million at 9% interest per annum
The total borrowings amount to GHc220 million, of which GHc20 million was used for routine maintenance of existing roads, and the remaining was for the tunnel construction. During the year, the Ministry earned GHc5 million from temporary investments of the borrowed funds.
Required:
(a) Explain the accounting treatment for the borrowing costs under the benchmark treatment option (expense recognition) for the year ended 31st December 2023.
(b) Explain the accounting treatment for the borrowing costs under the alternative treatment option (capitalization of borrowing costs) for the year ended 31st December 2023.
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