03-26-2009, 08:14 PM
Kanwar,
I refer you to paragraph 11, 16, 17 and 18 of IAS-2 'INVENTORIES' and paragraphs 4, 7 and BC6 of IAS-23 'BORROWING COST' to get the guidance.
COST OF INVENTORIES
Paragraph 11 OF IAS-2 provides guidelines about what costs have to make part of the cost of the inventories. These comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are excluded/deducted in determining the costs of purchase. Paragraph 16 of IAS-2 enlists examples of various costs which cannot make part of cost of inventoroes. These include abnormal amounts of wasted materials, labour or other production costs, storage costs (unless those costs are necessary in the production process before a further production stage), administrative overheads (that do not contribute to bringing inventories to their present location and condition) and selling costs.
BORROWING COST AND FINANCE CHARGES ETC
Paragraph 17 of IAS-2 clearly states that "IAS 23 Borrowing Costs identifies limited circumstances where borrowing costs are included in the cost of inventories." So, for including finance cost in inventories there are very limited situations. Paragraph 4 of IAS-23 clarifies that borrowing cost cannot be capitalized in the cost of inventories that are produced in large quantities on repetitve basis. (Paragraph BC6 is relevant to understand it.) Moreover, paragraph 7 of IAS-23 also stipulates that the inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets for capitalizing the borrowing costs.
This leaves very rare and unique circumstances where borrowing costs could be capitalized in any sort of inventories.
Apart from the above, even where some inventories are purchased on deferred settlement terms, where the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognized as interest expense over the period of the financing. This clarified by paragraph 18 of IAS-2.
If you need to know what does mean by borrowing cost, you may study paragraph 6 of IAS-23.
To sum up the above, in my view, the costs at import stage which you have pointed out in your first post cannot be included in the cost of inventories.
Regards,
KAMRAN.
