KPMG Three Little Pigs Inc. Solution :: Business, Finance, case study, solution

KPMG Three Little Pigs Inc. Solution Several factors including increased supply have caused declining prices for live hogs on the spot market. Also as shown below, 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 end of the fiscal year. Futures prices will surpass cost in February and remain above cost for the remainder of the fiscal year. The future prices support claims that the price fluctuations are only temporary in nature, and do not reflect a permanent downward shift in hog prices. Since inventories once impaired cannot be marked up to reflect changes in market conditions, this strategy could be beneficial to the company later on. In this case inventory would not be shown on the books at an unfairly low value. Alternative 2: Mark down all live hog inventories AICPA Audit Procedures for Agricultural Producers Pt.1 Ch5.02 ?Growing crops and developing animals to be held for sale should be valued at the lower of cost or market.? ARB43, Ch.4 Par.8 ?A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as its cost.