Are Exchange Differences on Inventory Purchases Added to Inventory Cost?
Do exchange differences on foreign currency inventory purchases go to inventory or profit or loss? IAS 21, IAS 23, IFRIC 22 and BOBİ FRS, with an advance-payment example and illustrative entries.
Importers often ask whether exchange differences on inventory purchases are added to inventory cost. In most cases the answer is no. Under TFRS, the exchange difference arises on the foreign currency payable, not on the inventory, and it goes to profit or loss. This article explains the requirements of IAS 21 (TMS 21) and IAS 2 (TMS 2), IFRIC 22 for purchases with advance payments, and the narrow case in which exchange differences can be capitalised as borrowing costs, with a worked example.
Short Answer
A foreign currency inventory purchase is recorded in the functional currency at the spot rate on the transaction date (TMS 21, paragraph 21). Inventory is a non-monetary item and, while measured at historical cost, stays at the transaction-date rate (TMS 21, paragraph 23). The unpaid foreign currency payable is a monetary item; it is translated at the closing rate and the resulting exchange differences are recognised in profit or loss (TMS 21, paragraph 28). Exchange differences on trade payables are therefore not added to inventory cost. Only for qualifying inventories financed by foreign currency borrowings may exchange differences regarded as an adjustment to interest costs be capitalised under IAS 23 (TMS 23, paragraphs 6 and 8).
Requirements that apply
| Requirement | Content |
|---|---|
| TMS 21, 21–22 | Initial recognition: spot rate at the transaction date; average rate as a practical expedient |
| TMS 21, 23 | Period end: monetary items at closing rate, historical-cost non-monetary items at transaction-date rate |
| TMS 21, 28 | Exchange differences on monetary items in profit or loss |
| TMS 2, 11 | Components of costs of purchase |
| TMS 23, 6–8 | Exchange differences as an interest adjustment and qualifying assets |
| TFRS Yorum 22, 8–9 | Transaction date when consideration is paid in advance |
Transaction date and initial recognition
Under TMS 21, paragraph 21, a foreign currency transaction is recorded by applying the spot exchange rate at the transaction date. The transaction date is the date on which the transaction first qualifies for recognition under TFRS (TMS 21, paragraph 22). For an inventory purchase, this is the date control of the goods passes to the entity and the inventory is recognised; it need not be the order or invoice date. Delivery terms such as Incoterms matter. A weekly or monthly average rate may be used if rates do not fluctuate significantly; if they do, an average rate is inappropriate (TMS 21, paragraph 22).
Why only the payable is retranslated at period end
Under TMS 21, paragraph 23, at the end of each reporting period monetary items are translated at the closing rate, while non-monetary items measured at historical cost remain at the transaction-date rate. Inventory is non-monetary; the foreign currency payable is monetary. When rates move, only the payable is retranslated. Exchange differences on retranslation or settlement are recognised in profit or loss in the period they arise (TMS 21, paragraph 28). The components of costs of purchase listed in TMS 2, paragraph 11 do not include later exchange differences on a trade payable.
Advance payments: IFRIC 22
When an advance is paid to a supplier in foreign currency, the prepayment is a non-monetary asset. When the inventory is later recognised, the transaction date for the portion covered by the advance is the date the advance was first recognised (IFRIC 22, paragraph 8). If there are multiple advances, a transaction date is determined for each (IFRIC 22, paragraph 9). Inventory cost is therefore based on the advance-date rate for the prepaid portion and the delivery-date rate for the remainder.
Exception: exchange differences as borrowing costs
TMS 23, paragraph 6 includes in borrowing costs exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. These amounts are capitalised only when directly attributable to the acquisition, construction or production of a qualifying asset (TMS 23, paragraph 8). Inventories can be qualifying assets, but inventories produced over a short period are not (TMS 23, paragraph 7). The exception applies to financing borrowings, not trade payables, and measuring the “interest adjustment” limit is a matter of accounting policy and judgement.
Worked example
Rates and amounts are hypothetical and do not reflect actual market rates.
Assumptions
- Company B’s functional currency is the Turkish lira (TRY). It buys goods for USD 100,000 from abroad.
- 1 February: an advance of 20% of the order, USD 20,000, is paid. Rate 37.00.
- 10 March: the goods are received and control passes to Company B. Rate 38.00. The remaining USD 80,000 is recognised as a payable.
- 31 March: interim close. Closing rate 38.60.
- 30 April: the payable is settled. Rate 39.50.
Calculation
Inventory cost = Prepaid portion (20,000 × 37.00) + Remainder (80,000 × 38.00) = 740,000 + 3,040,000 = TRY 3,780,000
Without the advance, inventory would be recognised at 100,000 × 38.00 = TRY 3,800,000. The TRY 20,000 difference arises because, under IFRIC 22, the prepaid portion is measured at the advance-date rate.
Exchange difference at 31 March = 80,000 × (38.60 − 38.00) = 3,088,000 − 3,040,000 = TRY 48,000 (loss)
Exchange difference at 30 April = 80,000 × (39.50 − 38.60) = 3,160,000 − 3,088,000 = TRY 72,000 (loss)
Independent check
The total exchange difference must equal the change between the initial and settlement rates on the payable: 80,000 × (39.50 − 38.00) = TRY 120,000. The interim and settlement differences also add up to 48,000 + 72,000 = TRY 120,000. Inventory stays at TRY 3,780,000 throughout.
Illustrative journal entries
Turkish uniform chart of accounts (Tekdüzen Hesap Planı) codes are used as a familiar frame; IAS 21 does not prescribe account codes.
| Account | Debit | Credit |
|---|---|---|
| 159 Advances given for purchases | 740,000 | |
| 102 Bank | 740,000 |
| Account | Debit | Credit |
|---|---|---|
| 153 Merchandise | 3,780,000 | |
| 159 Advances given for purchases | 740,000 | |
| 320 Trade payables | 3,040,000 |
| Account | Debit | Credit |
|---|---|---|
| 656 Foreign exchange losses | 48,000 | |
| 320 Trade payables | 48,000 |
| Account | Debit | Credit |
|---|---|---|
| 320 Trade payables | 3,088,000 | |
| 656 Foreign exchange losses | 72,000 | |
| 102 Bank | 3,160,000 |
Effect on the financial statements
- Inventory remains at TRY 3,780,000; this amount is transferred to cost of sales when the goods are sold.
- A total exchange loss of TRY 120,000 is recognised in profit or loss. The line item used is a matter of accounting policy and should be applied consistently.
- Had the exchange loss been added to inventory, inventory and gross profit would reflect the timing of financing rather than the purchasing decision.
Position under BOBİ FRS
BOBİ FRS also requires the spot rate at the transaction date for initial recognition of foreign currency transactions (BOBİ FRS, paragraph 20.8). Exchange differences on monetary items are recognised in profit or loss in the period they arise; those on trade receivables and payables are presented in “other income/expenses from main operations” (BOBİ FRS, paragraph 20.14). Unlike TFRS, BOBİ FRS also specifies the presentation line.
On borrowing costs, BOBİ FRS explicitly lists exchange differences on loans used for inventories that normally take more than one year to get ready for their intended use or sale as an example of borrowing costs (BOBİ FRS, paragraph 17.2). Here too, the relevant liability is a financing loan, not a trade payable. BOBİ FRS is a Turkish framework and is not equated here with IFRS.
Valuation and cost rules in Turkish tax legislation are a separate matter and outside the scope of this article. Differences between tax and financial reporting are considered in deferred tax where the relevant conditions are met.
Common mistakes in practice
- Adding exchange differences incurred up to the settlement date to inventory cost.
- Retranslating inventory at the closing rate at period end.
- Translating the prepaid portion at the delivery-date rate as well.
- Using the invoice date as the transaction date and ignoring delivery terms.
- Capitalising exchange differences on trade payables as if they were borrowing costs under IAS 23.
- Using a monthly average rate when exchange rates are volatile.
Checklist
- Is the transaction date based on the transfer of control?
- Are advances and their dates tracked separately?
- Were only monetary items translated at the closing rate?
- Is the presentation line for exchange differences consistent with accounting policy?
- Has an IAS 23 assessment been made for long-production inventories financed by foreign currency loans?
- If BOBİ FRS applies, are presentation lines consistent with the BOBİ FRS formats?
For the components of cost see which costs are included in inventory; for the general framework see which exchange rate to use for foreign currency transactions.
Sources
- KGK, TMS 21 The Effects of Changes in Foreign Exchange Rates, TFRS 2026 Set (Blue Book) (Turkish)
- KGK, TMS 23 Borrowing Costs, TFRS 2026 Set (Blue Book) (Turkish)
- KGK, TFRS Yorum 22 Foreign Currency Transactions and Advance Consideration (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.