Interest on lc
Querist : Anonymous
I want to ask whether Interest cost on LC should be added to the carrying value of inventory ?
If yes then please provide the references as well.
Querist : Anonymous
Querist : Anonymous
So in the light of the given facts pls reply accordingly.
2. specifically when AS-2 on Valuation of inventories excludes finance cost then this int on lc being finance in nature , how it can be added to cost of inventories?
what reasons is he giving to include the same in inventory?
Querist : Anonymous
### **Principle and References:**
1. **Nature of LC Interest Cost:**
- **Interest on LC:** The interest on an LC is considered a financing cost or borrowing cost, not a cost directly attributable to the production or acquisition of inventory. It is related to the cost of financing rather than the cost of purchasing or producing inventory.
2. **Accounting Standards:**
- **India:** Under **Indian Accounting Standards (Ind AS) 2 - Inventories**, costs that are included in the carrying amount of inventories are those that are directly attributable to bringing the inventories to their present location and condition. This generally includes:
- Costs of purchase (including import duties and transport costs)
- Costs of conversion (including labor and manufacturing overheads)
- Other costs incurred in bringing the inventories to their present location and condition
- **International:** According to **International Accounting Standard (IAS) 2 - Inventories**, similar principles apply. Only costs that are directly attributable to the acquisition or production of inventories are included in their carrying amount. Interest or financing costs are typically excluded.
3. **Specific Guidance:**
- Interest costs related to obtaining financing (such as LC interest) are usually treated as finance costs. They are not included in the cost of inventory but are expensed as incurred or capitalized in accordance with the relevant accounting standards dealing with borrowing costs.
4. **Relevant Guidance:**
- **Ind AS 23 - Borrowing Costs** (for India): This standard specifies that borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset (such as inventories) can be capitalized. However, the LC interest in your case does not directly relate to the production or acquisition of inventory but rather to the financing of purchases. Therefore, it would typically be expensed.
- **IAS 23 - Borrowing Costs**: Similar to Ind AS 23, this standard allows for the capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of qualifying assets. Since LC interest is considered a general financing cost, it would not usually be included in inventory costs.
### **Conclusion:**
The interest cost on an LC should generally **not** be added to the carrying value of inventory. Instead, it should be recognized as a finance cost in the income statement. The cost of inventory should only include direct costs such as purchase costs, conversion costs, and other costs directly attributable to bringing the inventory to its present location and condition.
If the interest cost is being added to inventory, it may not align with the standard accounting principles unless specifically directed by industry practices or specific contractual terms that require such treatment. Always ensure compliance with the relevant accounting standards and consult with a professional accountant or auditor if in doubt.
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