IAS 2 inventories - Letter of Credit

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Asnake E
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IAS 2 inventories - Letter of Credit

Post by Asnake E »

Hi,

Should the service fee payable to the banks for letter of credit processing (in our country it is usually 2.5% of the invoice value of the imported item) be included in cost of inventory or charged to profit or loss?
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JRSB
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Re: IAS 2 inventories

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Para 11 says all directly attributable costs so if that facility was obtained solely to acquire inventory then I'd say so.

It wouldn't seem to fall into para 16.
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Asnake E
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Re: IAS 2 inventories

Post by Asnake E »

Thank you.
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Marek Muc
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Re: IAS 2 inventories

Post by Marek Muc »

I'm not so sure about that... Letter of credit is more like a bank fee for processing the payment. You could probably avoid it by paying upfront. Anyway, I'm more inclined into making an analogy to para. IAS 2.18, but I'm open to a discussion on this ;)
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JRSB
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Re: IAS 2 inventories - Letter of Credit

Post by JRSB »

I would agree that it's not clear cut. I've certainly seen some quite specific purchases that can only be done on a LoC basis.
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Asnake E
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Re: IAS 2 inventories - Letter of Credit

Post by Asnake E »

Thank you. Very helpful
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nauman
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Re: IAS 2 inventories - Letter of Credit

Post by nauman »

It is a bit of a grey area but in your case, I would call it directly attributable to procurement of goods so would include the fee as part of cost of inventory.

Usually, when I have dealt with letter of credits (as a procuring entity), the bank does not charge separate fee for each LC issued and LC facility forms an unfunded (sub limit) part of a broader line of credit (usually OD) extended by the bank. Once the bank receives all the documents and issues payment to the supplier, the amount forms part of the funded facility and normal interest rate is charged on the outstanding balance. Of course in such a scenario the finance cost / interest charge would not form part of cost of inventory.
Last edited by nauman on 16 Jun 2020, 09:51, edited 1 time in total.
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Marek Muc
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Re: IAS 2 inventories - Letter of Credit

Post by Marek Muc »

I see, but when your letter of credit was part of a broader line of credit, then did you allocate these fees to cost of inventory on some systematic basis?
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nauman
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Re: IAS 2 inventories - Letter of Credit

Post by nauman »

Sorry edited my reply to make it more specific. As I mentioned, once the bank makes the payment the amount to be recovered from purchasing entity becomes part of the main credit facility and interest is charged. This of course is not allocated to or forms part of the cost of inventory.
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Marek Muc
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Re: IAS 2 inventories - Letter of Credit

Post by Marek Muc »

ok thank you!
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JRSB
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Re: IAS 2 inventories - Letter of Credit

Post by JRSB »

It seems you should capitalise borrowing costs into inventories, but not if they are produced over a short period of time.

But not required to where produced in large quantities on a repetitive basis.

IAS 23, 4 and 7.
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nauman
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Re: IAS 2 inventories - Letter of Credit

Post by nauman »

What I was referring to was retail inventory, so there is no capitalization period as such. I understand that if I was importing material to construct real estate inventory etc. then yes, this cost would be eligible for capitalization.
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