Recording the cost of machinery: Payment in instalments and on delivery
Scenario
Company A entered into an agreement to purchase machinery from an overseas company in 2022. The total cost of the machinery was USD 1 million, which Company A agreed to pay in three instalments: A first instalment of USD 300,000 upon signing the contract on 15 November 2022, a second instalment of USD 300,000 on 15 December 2022, and a final instalment of USD 400,000 upon delivery of the machinery. The machinery was delivered on 15 January 2023. The instalments were non-refundable.
Company A entered into an agreement to purchase machinery from an overseas company in 2022. The total cost of the machinery was USD 1 million, which Company A agreed to pay in three instalments: A first instalment of USD 300,000 upon signing the contract on 15 November 2022, a second instalment of USD 300,000 on 15 December 2022, and a final instalment of USD 400,000 upon delivery of the machinery. The machinery was delivered on 15 January 2023. The instalments were non-refundable.
Keywords: Mazars, Thailand, Accounting, Machinery, Instalment
On 15 November 2022, Company A signed the contract and paid the first instalment of USD 300,000. The exchange rate of the Bank of Thailand on that date was USD 1 = THB 35.
As a result, on that date, Company A recognized this transaction as follows:
Debit (in Thai baht) | Credit (in Thai baht) | |
Prepayment for machinery | 10,500,000 | |
Cash at bank | 10,500,000 | |
Record prepayment for machinery (USD 300,000 x 35) | ||
On 15 December 2022, Company A paid the second instalment of USD 300,000. The exchange rate of the Bank of Thailand on that date was USD 1 = THB 36.
As a result, on that date, Company A recognized this transaction as follows:
Debit (in Thai baht) | Credit (in Thai baht) | |
Prepayment for machinery | 10,800,000 | |
Cash at bank | 10,800,000 | |
Record prepayment for machinery (USD 300,000 x 35) | ||
On January 15, 2023, Company A received the machinery and paid the final instalment of USD 400,000. The exchange rate of the Bank of Thailand on that date was USD 1 = THB 37.
Issue
How should Company A record the total cost of the machinery, as the exchange rates on the instalment payment dates differed?
Response
Page 2 of the manual published by the TFAC on TAS 16, ‘Property, Plant and Equipment’, states the following:
“Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other TFRSs, e.g., TFRS 2, ‘Share-based Payment’.”
Because the total instalments of USD 600,000 for the machinery are non-refundable, the machinery is considered a non-monetary asset. This means that Company A should not convert the total amount using the closing rate at the end of 2022. Instead, Company A must use the cost in Thai baht at the foreign exchange rate applicable on the date of the transaction.
At the date on which the machinery was delivered (15 January 2023), Company A should record the sum of the instalments previously paid (recorded at the exchange rate applicable on the date of payment) and the final instalment in foreign currency converted using the exchange rate applicable on the delivery date as the total cost, as shown in the table below:
Debit (in Thai baht) | Credit (in Thai baht) | |
Machinery | 36,100,000 | |
Prepayment for machinery (USD 300,000 x 36) | 10,500,000 | |
Record prepayment for machinery (USD 300,000 x 35) | 10,800,000 | |
Cash at bank (USD 400,000 x 37) | 14,800,000 |
Reference: Manual on TAS 16, ‘Property, Plant and Equipment’, published on 27 February 2020 (in Thai) https://acpro-std.tfac.or.th/uploads/files/TAS16-Manual.pdf
For more information on accounting for a prepayment in foreign currency, refer our article from February 2021.
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