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Treatment of Storage Costs

15 February 2009 44,789 views 17 Comments

Hi All,

Can someone advice the correct treatment of the below case under IFRS.

A company is trading in Fuel Oil. It purchases fuel oil, stores it in tanks and sells it.
As a result it incurs fuel costs and also storage costs (tank rentals).
In a particular transaction, the company purchased fuel oil in Dec 2008 and stored it in tanks hired particularly for this transaction and sold the fuel in Jan 2009.

The question is on the treatment of the storage costs (tank rentals) of the particular tank for the month of Dec 08.
Option 1 : The tank rental is a cost to sell as the purchase leg is complete when the fuel oil
hits the tank and the fuel oil is stored only for the purpose of sale. Also because the tank rental has already been incurred, it has to be treated as expenses in 2008 though the sale of fuel occurs only in 2009.
Option 2 : The tank rental is paid to store fuel oil and is easily identified to the inventory that is meant for sale and hence should be part of inventory cost and should be shown under Inventory in Balance sheet.
Option 3 : The tank rental is cost to sell as it is stored only for the purpose of sale. As the sale occurs only in 2009, and as the tank rental is easily identifiable to the particular sale, the tank rental should be considered under deferred costs in Balance sheet as of 2008 and should not be considered in PNL in 2008. It should be part of 2009 costs and is matched to the sales revenue in 2009.

Request your opinion on which option is the correct treatment of the tank rental under IFRS.

Please provide documentary evidence like extracts of accounting standards, if available.



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  • admin (author) said:

    Message from IFRSLIST member:

    hi the option one is correct. this cost is a storage cost and this cost does not increase the value of the inventory thus should be written off to income statements. The other points to be noted is the inventory is should be accounted lower of cost and NRV at the balnce sheet date. If you add the storage cost than it will not be in accordance with the IFRS.

  • admin (author) said:

    Message from IFRSLIST member


    I’m preferring option 2 as the inventory cost considered as a part of
    the carrying cost of the inventory. Hence in should be considered as
    part of the inventory cost, and should be recognized in B.S. This
    treatment is consistent with the US GAAP and IFRS. Moreover, assume we
    are talking about storage cost for many references of inventory that
    are purchased for trading or manufacturing purposes, this cost is
    considered as overhead which should be allocated to all inventory
    references and should be included in the inventoriable cost.

    The IFRS & GAAP didn’t differentiate between storage cost that relates
    to trading references or manufacturing references.

    Hope this will help

  • admin (author) said:

    Message from IFRSLIST member:


    Option 2 is not allowed according to IAS2.16(b)

    “Examples of costs excluded from the cost of inventories and recognised as
    expenses in the period in which they are incurred are:

    b. storage costs, unless those costs are necessary in the production
    process before a further production stage;”


  • admin (author) said:

    Message from IFRSLIST member


    I would rather expense this to P&L as period cost. Such storge cost
    are the part of selling and distribution cost to me.

    Hesham refers to storage cost of raw materials which ends up in
    finished product valuation as the part of overheads. This is true for
    raw materials only.

    You should not capitalise any storge cost for finished products (and
    trade goods), unless those costs are necessary in the production process
    (eg. whiskey aging).


  • admin (author) said:

    Message from IFRSLIST member

    Hi Ganesh,


    Storage costs are more closely associated with specific accounting periods in which they are incurred. You need to establish the associating cause and effect to defer this cost to match up with your future revenue.

    Should your Tank Rentals be a fixed sum for the month irrespective of the quantity stored, then it should be expensed out. Option 1

    Alternatively, if it is paid on the basis of the quantity stored in the tanks, then you can directly associate them with the inventory intended for future benefit. Option 2

    I doubt whether Option 3 can be applied in your case.

    The general approach is first to attempt to match costs with the related revenues. Next, a method of systematic and rational allocation should be attempted. If neither of these measurement principles is beneficial, the cost should be immediately expensed.

    Please refer to the quote below

    Quote from Wiley Interpretation of IFRS 2007
    “ Expenses. According to the IASB’s Framework

    Expenses are decreases in economic benefits during an accounting period in the form of out-flows or depletions of assets or incurrences of liabilities, other than those relating to distributions to equity participants. Expenses are expired costs, or items that were assets but are no longer assets because they have no future value. The matching principle requires that all expenses incurred in the generating of revenue be recognized in the same accounting period as the related revenues are recognized. Costs such as materials and direct labor consumed in the manufacturing process are relatively easy to identify with the related revenue elements. These cost elements are included in inventory and expensed as cost of sales when the product is sold and revenue from the sale is recognized. This is associating cause and effect.

    Some costs are more closely associated with specific accounting periods. In the absence of a cause and effect relationship, the asset’s cost should be allocated to the benefitted accounting periods in a systematic and rational manner. This form of expense recognition involves assumptions about the expected length of benefit and the relationship between benefit and cost of each period. Depreciation of fixed assets, amortization of intangibles, and allocation of rent and insurance are examples of costs that would be recognized by the use of a systematic and rational method. All other costs are normally expensed in the period in which they are incurred. This would include those costs for which no clear-cut future benefits can be identified, costs that were recorded as assets in prior periods but for which no remaining future benefits can be identified, and those other elements of administrative or general expense for which no rational allocation scheme can be devised. The general approach is first to attempt to match costs with the related revenues. Next, a method of systematic and rational allocation should be attempted. If neither of these measurement principles is beneficial, the cost should be immediately expensed.”

  • admin (author) said:

    Message from IFRSLIST members

    Hi all,

    As Storage is specifically excluded IAS 16 It can not consider for calculating inventory but it Should be consider as expenditure in Financials in year it incurred even though sale may be done in next period. It can be consider as selling exp in provided case.

    As Per IAS 2 Para 16
    Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are:
    (a) abnormal amounts of wasted materials, labour or other production costs;
    (b) storage costs, unless those costs are necessary in the production process before a further production stage;
    (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and
    (d) selling costs.

    Warm Regards

  • admin (author) said:

    Message from other members

    Sundar is correct. The idea here is to apply the accrual basis of accounting. This means that expenses and revenues must be matched (the matching principle) in the period of incurrence and earning respectively.

    Ontion 1 is therefore correct. You can read on the concept of accrual and matching principle in the framework.

  • asadlarik3 said:

    ok lets compare it to a hypothetical example

    a car dealer has a showroom taken on rent the showroom can accomodate only one car.

    he buys a car for 100000 and sells it after month for 220000

    now some of the above replies would then be proposing that rent should be added in the cost of car!

    As for the matching principle its debatable but is there a concept of “deferred cost” in IFRS, and how doest it relates to “prepaid expense”.

    These all matters are certainly objective

    as for as theory is considered IAS2 specifically denies to make storage cost as part of inventory.

  • asadlarik3 said:

    i just got something on matching principle

    How would you then propose the application of matching principle on advertisement expenses that should be charged to P & L.

  • sajjadkhan said:

    I agree with the opinion of asadlarik

  • admin (author) said:

    Message from Ganesh:

    Hi All,

    Thanks a lot for your opinions. It is now clear to me that Option 1 is the correct option and is also the view of the majority.




  • admin (author) said:

    Hi All

    Please note that if we rent a car to sell aproduct that we already know that the product si going to be sold the following fiscal year of the rent payment.
    Can we charge the car rent to expense to diffierent year than the sales year?
    ofcourse not and the rent of the tank is a similar prepaid expense to the next year.
    I think Option 3 is the best to clear that please refer to the matching principles in GAAP or IFRS or any pronouncement world wide.

    Regarding option 1 it is clearly violates the matching principle, we already know that we are paying an expense related to next year sales and it is associated to the product.



  • admin (author) said:


    The matching principle under GAAP is confined to time/period and not revenue/earnings/sales. This means that expenses should be matched against revenues in the same period they are incurred and earned respectively. Thus, if a car is rented for 6 months to sell bread and all the bread was sold in 3 months, only three months of the 6 months rental is incurred for bread sold. The remaining rental expense will be charge to the following 3 months even if bread was not sold as long as the business is a going concern.

    Therefore, even under GAAP the best option is No. 1.

    Financial Analyst

  • admin (author) said:

    William is correct. Option 1 is the best option.

    My first inclination was to select option 2. In a manufacturing company this would clearly be a cost of production and would be capitalized to inventory. The cost would then be recognized in the correct period when the product was sold; thus maintaining the integrity of the matching principle. After reading IAS 2, paragraph 16, however, it is obvious that this is clearly prohibited. Option 2 is incorrect.

    This leaves us with options 1 & 3.

    Although this may seem counter intuitive to some, option 3 actually violates the matching principle. Under option 3 you would defer the expense by treating it as some type of prepaid item. There are two problems with this logic. First, a prepaid item is something that is paid for in advance – like an insurance policy. Second, prepaid items are expensed when the benefit is received. Clearly, the storage tank was used in December. Therefore, the cost is not a prepaid item and you must recognize the expense in December to properly match the benefit received to the expense incurred.

    This leaves us with option 1.

    Under option 1 you would record revenue on the sale and your cost of sale would be the cost of the fuel oil. The storage expenses paid in December for use of the storage tank in December would be recognized in December. This appears to be the best option given the facts provided.

    Good luck,


  • admin (author) said:

    Message from Ganesh

    Hi All,

    As an annexure to my earlier query on the storage costs, Request your valuable opinion on the below case.

    The terminal rental / Storage costs mentioned in my earlier query is of two forms 1. Fixed 2. Variable.
    The variable portion is a percentage on the profit / (loss) (P/L) derived from the sale of the fuel oil stored in the specified tanks. The P/L is arrived at after considering the fixed portion of the tank rental and also the hedging P/L.
    During Dec 08, the hedging transaction has occured though the physical fuel sale occurs only in Jan 09.
    (Hedge accounting not applied here). As Option 1 below is the correct option, as is the views of majority,the terminal rental (fixed) is to be considered in Dec08.
    Under IFRS as the inventory is stored in tanks as on the last day of the year 2008, the Market value of the inventory is considered as the sale price and the resulting PNL after hedge is arrived at to derive at the variable portion of the terminal rental.

    Now the question is under IFRS Will Option 1 be applicable to the variable portion of the terminal rental?

    Also, under USGAAP, as there is no sale (also inventory not marked up), there is no physical profits. The only componenst in P/L are the hedging profits and fixed portion of the terminal rental.

    Now the questions are
    1. Under USGAAP will Option 1 be applicable to the variable portion of the terminal rental?
    If the answer to Question 1 above is Yes, then
    2. Which one of the below would be the correct method of computation of the terminal rental (variable)
    A. Reduce fixed terminal rental from hedging profit and arrive at the variable portion of the terminal rental.
    B.Consider the market value of inventory as the sale price (for this calculation only) and arrive at the P/L
    (which is the same method used for IFRS) and arrive at the variable portion of the terminal rental as it is the best available estimate as on the date of the financials.

    Thanks for your help.

    Best Regards


  • stl1231 said:

    Expense storage costs, paragraph 16b of IAS 2. No capitalization of costs unless necessary in the production process. Clearly, this is not the case.

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