Frost, PLLC Doug Richardson. Inventory Valuation Methodologies for Agriculture Inventories

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1 Frost, PLLC Doug Richardson Inventory Valuation Methodologies for Agriculture Inventories

2 Agriculture Inventories Inventories of agricultural producers include: - Growing crops - Production (grow-out) animals - Crops such as corn, rice, cotton; both growing and harvested - Animal products such as wool, processed poultry and meats - Supporting supply inventory supplies

3 Inventory Valuation General guidance for inventory valuation states that inventories should be stated at the lower of cost or market when all of the following conditions exist: 1 The product has a reliable, readily determinable, and realizable market price; 2 The product has a relatively insignificant and predictable cost of disposal; 3 The product is available for immediate delivery.

4 Market valuation of inventory is permitted in exceptional cases in which it is not practicable to determine an appropriate cost basis for products. Market basis is acceptable if all of the following criteria are met: A - the products have immediate marketability at quoted market price that cannot be influenced by the producer B - the product has characteristics of unit interchangeability C - the product has relatively insignificant cost of disposal

5 Normal inventory costs would include: The cost of seeds; fertilizer, finished feed, vaccinations, direct labor, purchased live animals, other medication, and production related overhead such as facility depreciation, utilities, etc.

6 Normal inventory cost would not include: Abnormal amounts of idle facility expense, handling cost, spoilage, abnormal animal mortality, interest cost, or other indirect overhead such as G&A costs.

7 What is market value? Market value for inventory valuation is the net realizable value. This is calculated as open market value less disposal costs. Disposal costs include handling, packing, commissions and possibly the cost of transportation depending on the agreement

8 Sources of market related information: 1 Urner Barry Publications; 2 Crop reporting services; 3 USDA livestock and grain markets; 4 Contracts for sell of goods; 5 Existing derivative positions

9 Market values or Net Realizable Values are generally difficult to obtain for agriculture products due to: 1 Grade / Yield / moisture factors; 2 Projection of future completion costs; 3 Volatility of the underlying markets; 4 variability in the cost of disposition between customers

10 FASB Codification states because of the many variations of circumstances encountered in inventory pricing, the definition of market is intended as a guide rather than a literal rule. It further states.if a business is expected to lose money for a sustained period, the inventory shall not be written down to offset a loss inherent in the subsequent operations.

11 FASB Codification states The cost basis of recording inventory ordinarily achieves the objective of proper matching of costs and revenues. However, under certain circumstances cost may not be the amount properly chargeable against the revenues of future periods. A departure from cost is required in these circumstances because cost is satisfactory only if the utility of goods has not diminished since their acquisition; a loss of utility shall be reflected as a charge against the revenues of the period in which it occurs. Thus, in accounting for inventories, a loss shall be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price levels or other causes.

12 The nature of production costs and the market value of growing crops and live animals is typically dependent on commodity markets that are difficult to predict. Due to these factors, a great amount of thought and consideration must be utilized when recording any mark to market adjustment during a period for any growing stage agriculture products which will not be marketable until a future period.