Extended Supplier Credit and Inventory Cost Under Ind AS 2

1. Query

Delta Manufacturing Limited is engaged in the production of specialised industrial equipment and regularly imports critical raw materials from overseas suppliers. During the financial year, the company entered into an agreement with a foreign vendor for the purchase of a key component required in its manufacturing process.

Under the supplier’s standard commercial terms, the raw materials were available at a cash purchase price of Rs. 50 lakh, payable immediately upon delivery. However, due to temporary working capital constraints and an ongoing expansion project, Delta Manufacturing Limited opted for an alternative payment arrangement offered by the supplier. Under this arrangement, the supplier agreed to provide an extended credit period of 24 months, under which the company would pay Rs. 58 lakh at the end of the credit period without any separate interest billing.

The materials were delivered immediately and were consumed in the company’s production cycle. At the time of recording the purchase transaction, the finance team recognised inventory at the entire invoice value of Rs. 58 lakh. The rationale adopted was that Rs. 58 lakh represented the legally enforceable contractual amount payable to the supplier and no separate borrowing arrangement had been entered into by the company.

During the year-end financial reporting process, the statutory auditors questioned this accounting treatment. They observed that the supplier had quoted a substantially lower cash price and that the higher deferred payment amount appeared to compensate the supplier for providing long-term credit.

This led to an accounting debate within the organisation. The management sought clarity on whether the full deferred settlement amount of Rs. 58 lakh should be included in inventory cost merely because it forms part of the supplier agreement, or whether the difference between the cash price and deferred payment amount should be treated separately as a financing component under Ind AS 2.

2. Relevant Provisions

Ind AS 2 – Inventories

Para 10 of Ind AS 2

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Para 11 of Ind AS 2

The costs of purchase of inventories 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 deducted in determining the costs of purchase.

Para 18 of Ind AS 2

An entity may purchase inventories on deferred settlement terms. When 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 recognised as interest expense over the period of the financing.

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