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Several factors including increased supply have caused declining prices for live hogs on the spot market. Also as shown bellow futures prices will remain below the carrying cost for live hogs until nearly the end of the fiscal year. However processed pork products such as bacon, loins, and ham remain above the current cost of production. Three Little Pigs Inc. is capable of processing hogs into these products internally at some locations. Unfortunately, not all hogs can be transported and processed at the main processing plants and must be sold as live hogs to third parties at spot market prices. There are four potential alternatives for dealing with the possible need to impair the value of Three Little Pigs Inc.'s inventories.
Alternative 1: Continue to carry all inventories at cost basis.
ARB28, Par.14c "Such temporary market declines need not be recognized at the interim date since no loss is expected."
EITF, 86-13 Discussion "? option 28 requires inventory be written to lower of cost or market unless (1) substantial evidence exists that market prices will recover before the inventory is sold?Write down is generally required unless the decline is due to seasonal pricing fluctuation."
ARB43, Ch.4, Par.9 "Where evidence indicates that cost will be recovered with an approximately normal profit upon sale in the ordinary course of business, no loss should be recognized..."
If it can be determined that the depressed prices for lean hogs are only temporary, inventories could and should be kept at cost basis. In this case, adjusting prices to match current market prices would not be necessary. Future prices indicate a recovery before the ...