How Is the Financing Element in Deferred-Payment Inventory Purchases Accounted For?

A deferred-payment inventory purchase is one in which the supplier grants time to pay and usually prices that time into the deal. The difference between the cash price and the deferred price is, economically, the cost of financing rather than the cost of the goods. How the financing element is accounted for therefore changes both the inventory amount and the split between gross profit and finance costs. This article explains the IAS 2 (TMS 2) approach to deferred-payment inventory purchases, its link to IFRS 9, and the one-year threshold in BOBİ FRS, with a worked example.

Short Answer

Under IAS 2 (TMS 2), when inventories are purchased on deferred settlement terms and the arrangement effectively contains a financing element, that element (for example, the difference between the purchase price for normal credit terms and the amount paid) is recognised as interest expense over the period of the financing (TMS 2, paragraph 18). Inventory is recognised at the price excluding the financing element. The payable to the supplier is a financial liability: it is measured at fair value on initial recognition and subsequently at amortised cost (IFRS 9, paragraphs 5.1.1 and 4.2.1). IAS 2 contains no time threshold comparable to the one-year practical expedient that IFRS 15 gives sellers (IFRS 15, paragraph 63). BOBİ FRS, by contrast, does not separate the financing element for purchases with terms of one year or less (BOBİ FRS, paragraph 6.8).

Requirements that apply

When is there a financing element?

TMS 2, paragraph 18 asks two questions: was the purchase made on deferred settlement terms, and does the arrangement effectively contain a financing element? If the supplier quotes both a cash price and a deferred price for the same goods, the difference is clear. If there is only a deferred price, the entity needs to estimate a cash price based on normal credit terms in the market. That estimate leads to the same result as determining the fair value of the payable on initial recognition (IFRS 9, paragraph 5.1.1). In practice, the estimate uses the market rate the entity would pay for a similar term and risk; this is an area of judgement and should be documented.

For purchases within normal trade credit terms without a separate price difference, there may be no significant financing element to separate. Materiality is decisive here, but IAS 2 does not tie it to a time threshold.

Subsequent measurement: the effective interest method

The supplier payable is measured at amortised cost, apart from exceptions such as liabilities at fair value through profit or loss (IFRS 9, paragraph 4.2.1). The liability is accreted each period at the effective interest rate and the increase is recognised as interest expense. The liability reaches the amount payable at maturity, and the financing cost is allocated over the term.

Worked example

The example is hypothetical; interest rates and prices are chosen only to illustrate the mechanics.

Assumptions

• On 1 October 2026 Company C buys merchandise. The supplier’s cash price is TRY 1,000,000 and the 6-month deferred price is TRY 1,180,000. The company chooses deferred payment, due on 1 April 2027.
• The reporting period ends on 31 December. The goods are still unsold at year end.

Formula and calculation

Financing element = 1,180,000 − 1,000,000 = TRY 180,000 (18% for 6 months)

Monthly effective interest rate = 1.18^1/6 − 1 ≈ 2.797%

Interest expense to 31 December (3 months) = 1,000,000 × (1.18^3/6 − 1) = 1,000,000 × 0.086278 = TRY 86,278

Interest expense 1 January – 1 April 2027 = 180,000 − 86,278 = TRY 93,722

Independent check

At 31 December the liability is TRY 1,086,278. Accreting it for the remaining 3 months at the same rate gives 1,086,278 × 1.086278 ≈ TRY 1,180,000, the amount payable at maturity. Straight-line allocation (TRY 30,000 per month) would have charged TRY 90,000 in the first period; under the effective interest method the first-period charge is lower and the second higher, because interest is calculated on a growing balance.

Illustrative journal entries (TFRS)

Turkish uniform chart of accounts codes are used only as a familiar frame; the standards do not prescribe account codes.

In practice the payable can also be recorded at the gross amount with the financing element tracked in a separate adjustment account; the net amount in the statement of financial position and the interest expense are the same.

Effect on the financial statements

• Inventory stays at TRY 1,000,000; cost of sales will be TRY 1,000,000 when the goods are sold.
• Finance costs of TRY 86,278 arise in 2026 and TRY 93,722 in 2027.
• Without separation, inventory and cost of sales would be TRY 180,000 higher and finance costs nil. Total expense would be the same, but gross profit and operating profit would be understated and finance costs omitted.

Position under BOBİ FRS

BOBİ FRS, paragraph 6.8 sets an explicit threshold: inventories purchased on payment terms of one year or less are measured at the cash paid or payable without separating the financing element. For terms longer than one year, the financing element is separated, inventory is measured at the cash price and the difference is recognised as interest expense using the effective interest method. The effective interest method computes interest as the opening carrying amount multiplied by the effective interest rate (BOBİ FRS, paragraph 9.15). BOBİ FRS is a Turkish framework and is not equated with IFRS.

Because the term in the example is 6 months, an entity applying BOBİ FRS would record inventory at TRY 1,180,000 with no separate interest expense:

This is a typical case where the same transaction produces a different gross profit under the two frameworks. Entities moving between TFRS and BOBİ FRS, or using both in group reporting, should track this difference in their reconciliations.

Common mistakes in practice

• Applying the BOBİ FRS one-year threshold as a default rule in an entity that reports under TFRS.
• Leaving the financing element in inventory cost and understating gross profit.
• Allocating interest on a straight-line basis instead of the effective interest method without assessing materiality.
• Discounting at a rate that does not reflect market conditions when the cash price is unknown.
• Not assessing whether the payable from a deferred purchase affects the classification of cash flows.

Checklist

• Does the supplier quote cash and deferred prices? If not, is the market rate used documented?
• Which framework applies, TFRS or BOBİ FRS? Under BOBİ FRS, does the term exceed one year?
• Is interest allocated using the effective interest rate?
• Is the payable carried at amortised cost at year end?
• Is the classification between finance costs and cost of sales consistent?

For the components of cost see which costs are included in inventory; for the effective interest method see amortised cost and the effective interest method.

Sources

• KGK, TMS 2 Inventories, TFRS 2026 Set (Blue Book) (Turkish)
• KGK, TFRS 9 Financial Instruments, TFRS 2026 Set (Blue Book) (Turkish)
• KGK, TFRS 15 Revenue from Contracts with Customers, TFRS 2026 Set (Blue Book) (Turkish)
• KGK, BOBİ FRS, 2021 version (Turkish)

This article is for general information. The standard text and professional judgement should be applied to the specific facts of an entity.