Inventory Costs including lease under IFRS 16

[spideyocd]

Hi Marek and friends,

My inventory costs consists of Factory rent which is covered under IFRS 16
Therefor should I account only Dep on ROU asset as part of Inventory or both Dep on ROU asset plus interest on lease liability since in substance the rent expense has been replaced by dep on ROU plus interest on lease liability which will equalise in total at the end of the lease period.

however this means my cost (to the extent of rent earlier which was fixed) will fluctuate because of interest on lease liability which changes year on year.

For me the rent isn't a material part of the cost but i'd like to know what is the correct approach

if i only take dep on ROU my cost is undervalued

[pub_acco]

That's covered by IAS 23, which specifically mentions lease interests as an example of borrowing costs. Generally, borrowing costs are not capitalized as part of inventories, but if the inventories in your case meet the definition of qualifying assets in IAS 23, the lease interest could be included in the cost of inventories.

[Marek Muc]

Plus, depending on your circumstances, you may be able to take advantage of the relief in IAS 23.4(b) and not apply IAS 23 altogether.

[Ketan Marwah]

Gents,

Agreed on the accounting points but I am also thinking about the point that @spideyocd raised i.e. the impact IFRS 16 has on inventory accounting (mainly for the inventories which is manufactured, or otherwise produced, in large quantities on a repetitive basis).

Pre IFRS 16 transition, the entire factory rent was considered a manufacturing overhead and included in the cost of the inventory and post IFRS 16 transition, it would just be ROU's depreciation which would be eligible thereby also impacting inventory costing. I am trying to think of a logical explanation to this specific change besides just accepting it as a consequence of transitioning to IFRS 16. Maybe it is too late to try to stretch out my dried brain batteries anymore so I will give it another thought tomorrow

[Marek Muc]

It's simply a consequence of adopting a completely different accounting approach. In general, part of lease expenses moved out of operating income and became finance costs. Here, these operating expenses were previously presented as costs of sold inventory.