How is the cost of imported goods built up: contract, freight, duty and exchange difference

"Sarbon Maishiy" LLC bought 2 500 electric kettles from abroad. The contract amount is 20 000 US dollars. The director said, "so the goods cost 20 000 dollars". Chief accountant Jasur worked the calculation through to the end and arrived at a different figure.

What is included in cost?

Under NAS No. 4, the cost of goods consists of the amount payable to the supplier and all costs related to the purchase (paragraph 14). It includes (paragraph 15): - customs duties and fees - taxes and fees related to the purchase, if they are not recoverable (not offset) - intermediary fees paid to supplier and intermediary organisations - costs of certification and testing in accordance with technical conditions - transport and procurement costs: procurement, loading and unloading, freight, insurance of risks in transit

Paragraph 15 also says that other costs related to the purchase may be included in cost.

Paragraph 17, on the other hand, does not include the following in cost; they are expensed in the period in which they arise: - bank services related to paying for the goods: opening a letter of credit, transfer commission, currency exchange commission and other bank services - costs of preparing, registering and closing the purchase contract - other costs not directly related to the purchase of the asset

Recoverable (accepted for offset) taxes are deducted from cost (paragraph 23).

The exchange rate rule: inventories purchased in foreign currency are translated into soum, based on the amount in the primary document (accompanying document or CCD), at the Central Bank rate on the date of recognition. The part covered by an advance payment is an exception (paragraph 24).

Why do customs value and accounting cost differ?

They are calculated for different purposes. Customs value is based on the transaction value, that is, the price at the moment of crossing the border (Customs Code, Article 303). If not included in the price, carriage, loading and unloading and insurance up to the place of importation are added to it (Article 304). Carriage after entry into the country, if shown separately from the price, is deducted (Article 305). For customs purposes, foreign currency is translated at the rate on the day the declaration is accepted (Article 326).

Accounting cost, on the other hand, takes all costs of bringing the goods to their condition in the warehouse. It includes carriage within the country as well as duty and fees.

Jasur's calculation

All figures are hypothetical. The exchange rate, duty rate and fee are not real; compiled by the author.

Conditions: the contract is 20 000 USD. Carriage and insurance to the border were provided by one forwarder for 1 700 USD (carriage 1 500, insurance 200). A local carrier charged 4 000 000 soum from the border to the warehouse. The rate on the day the CCD was accepted and the goods were recognised was 12 500 soum. Duty is a hypothetical 10%, and the clearance fee is a hypothetical 1 000 000 soum. The bank charged a 300 000 soum commission for the currency transfer. The company has not chosen the method in paragraph 30 of NAS No. 4 in its accounting policy, that is, purchase costs are accumulated in cost.

Step 1. Customs value: (20 000 + 1 500 + 200) × 12 500 = 21 700 × 12 500 = 271 250 000 soum.

Step 2. Customs payments: duty 271 250 000 × 10% = 27 125 000 soum. VAT base 271 250 000 + 27 125 000 = 298 375 000 soum (Customs Code, Article 322), VAT at 12% = 35 805 000 soum. Fee 1 000 000 soum. Total paid to customs 63 930 000 soum.

Step 3. Cost:

The bank commission (300 000) is not included in the table in any case (paragraph 17). With import VAT (35 805 000) there are two cases, because the right to offset it is determined by the Tax Code:

In the first case, behind the 20 000 dollar invoice there are goods worth 303 375 000 soum in the warehouse. This is 21.35% more than the soum value of the contract price: 53 375 000 / 250 000 000.

Which journal entries are made?

Entries that have a model line in NAS No. 21:

For the remaining amounts the standard has no model journal entry line: the forwarder's bill for carriage and insurance to the border (21 250 000), the local carrier's bill (4 000 000), duty and fee (28 125 000), import VAT (35 805 000). Here the standard only describes the accounts: paragraph 145 says goods are received on the debit of 2910 «together with the costs related to the purchase of goods», paragraph 252 says liabilities for transport services are kept in 6010, and paragraph 273 says liabilities to the budget are summarised in 6410. The company sets out in its accounting policy which accounts these amounts are recorded through. Payment to the forwarder may also be in foreign currency; for simplicity, the example assumes it was paid on the day of the bill.

Is the exchange difference included in cost?

No. Jasur transferred the money to the supplier a week later, when the rate was 12 600 soum. The debt is now 20 000 × 12 600 = 252 000 000 soum. The difference of 2 000 000 soum does not change the value of the goods. A payable in foreign currency is a monetary item (NAS No. 22, paragraph 9). The exchange difference arising from its remeasurement is recorded in the result of financial activities (paragraph 11).

Practical tips

• Paragraph 30 of NAS No. 4 also allows goods acquired for resale to be accounted for at purchase price. In that case the costs in paragraph 15 are charged to selling expenses of that period. Write down in the accounting policy which method you have chosen
• Keep a "cost card" for each import batch: invoice, forwarder, CCD, local carriage. The bills arrive on different days, and the card keeps them in one place
• If a batch contains different goods, set the basis for allocating common costs (value, weight or volume) in advance