Accounting for borrowing costs by the Government of Malta

Abstract

Purpose: The objectives of this study were to identify the types of borrowing taken by the Government and to analyse the accounting treatment of its borrowing costs under the cash-based system and the accrual-based accounting system. Furthermore, this study compares the requirements of IPSAS 5 and IAS 23, and discloses the benefits and drawbacks of the Maltese Government if it decides to account for borrowing costs under the former. Design: The objectives of this research were achieved through the use of a qualitative approach. Semi-structured interviews with three government officials and two accounting practitioners were conducted. Secondary data collection was also used to complement the findings from the interviews. Findings: The main borrowing costs of the Maltese Government are interests on MGSs. Currently, the Government is using the cash-based accounting system where borrowing costs are reported as paid. However, the budget requires estimates of future borrowing costs to be made. IPSAS 5 seems an out-dated version of IAS 23 because it retains the choice to either capitalise or write off borrowing costs. However, the latter is considered to be the benchmark treatment, and this is appropriate in a public sector context given that governments normally borrow to sustain daily operations or to refinance debts. As the Maltese Government moves to the accrual accounting system, it has decided to ignore the application of IPSAS 5, and to expense all borrowing costs in its Income Statement since the Government very rarely borrows for a specific project. Contrastingly, it is expected that the adoption of IPSAS 5 would be beneficial for the Government since it retains the recognition option and enhances comparability. Conclusions: The reaction of the Maltese Government to ignore IPSAS 5 seems rather exaggerated. Having said this, taking the definitive position to expense all borrowing costs eliminates the risk of manipulation of financial results and dependence on subjectivity, which should ensure accountability and transparency in the reporting of borrowing costs. Value: It is likely that this dissertation will be found helpful by officials within the Treasury Department and the NSO who deal with accounting of borrowing costs. Also this study can help justify the temporary position taken by the Treasury regarding IPSAS.