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ASC 330 sets forth general principles applicable to the determination of the cost of inventories and subsequent measurement at lower-of-cost-or-market or lower-of-cost-and-net realizable value.

Excerpt from ASC 330-10-20

Inventory: The aggregate of those items of tangible personal property that have any of the following characteristics:

  1. Held for sale in the ordinary course of business
  2. In the process of production for such sale
  3. To be currently consumed in the production of goods or services to be available for sale.

The determination of which specific costs (or portion thereof) would be acceptable for capitalization as inventory costs cannot be addressed generally, but will vary by industry and will depend on the individual facts and circumstances of a reporting entity’s operations.

1.2.1 Consignment arrangements

In some situations, a reporting entity may enter into “consignment” agreements with vendors related to the purchase of raw materials used in the production of finished goods. CON 6 defines assets as probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. In the context of inventory purchases, we generally believe control is conveyed through title transfer; however, consistent with the discussion in SAB Topic 13.A.2, Question 3, a company may have an asset before the title transfers because substantial risks and rewards of ownership, as well as the control of the asset, have been transferred. The following are some of the factors that an entity should consider in determining whether they hold substantial risk and rewards of ownership, as well as control of the asset:
  • Who is responsible for the goods if they are stolen, destroyed or become obsolete?
  • Who bears the market risk as it relates to price fluctuation/volatility of the inventory?
  • Does the company have a fixed or determinable obligation to pay for such product?
  • Can a vendor unilaterally take back the inventory?
  • Can a vendor unilaterally swap out the inventory/change the mix?
  • Can the company return the inventory, other than due to defects?
  • Can the company utilize the inventory, without any restrictions from a vendor?
  • Who has physical control of the inventory?
  • At what point do payment terms (if any) begin for the inventory (i.e., upon delivery or from the point that the inventory is utilized)?

Refer to RR 6 for considerations on the transfer of control and RR 8.6 for guidance on consignment arrangements.

1.2.1.1 Consignment arrangements involving certain commodities

Certain industries use precious metals (e.g., gold, silver, platinum) as raw materials in their production processes. Due to the significant cost of these precious metals, companies have explored ways to reduce the amount of their investment in inventory, such as implementing precious metals consignment arrangements with a financial institution or other vendor.
In these arrangements, title typically remains with the financial institution or vendor, although risk of loss is generally transferred to the manufacturer upon delivery to the manufacturer’s location. Some arrangements require that the manufacturer segregate the precious metal as property of the financial institution/vendor, while others allow the manufacturer to commingle the precious metal with company-owned inventory. The financial institution/vendor generally charges an interest-like “consignment fee,” which is generally a stated percentage of the current value of the quantity on hand. At the end of the consignment period, the company can generally contractually settle with the financial institution/vendor by either delivering an equivalent volume of precious metal or by delivering an amount of cash equal to the current value of the precious metal.
Determining whether the precious metals under this type of arrangement should be recognized as inventory of the company requires a holistic evaluation of the terms of the arrangement and application of judgment. It also may require a detailed understanding of the manner in which the company manages the precious metals inventory and its specific manufacturing processes. The ability of the financial institution/vendor to unilaterally demand return of the inventory may indicate that control remains with the financial institution/vendor. However, this factor alone is not determinative and all other provisions of the arrangement should be considered.
Often, these arrangements allow the financial institution/vendor to terminate the arrangement with a reasonable notice period. In these cases, these arrangements may provide the company with the option to either physically return the precious metal to the financial institution/vendor or deliver an amount of cash equal to the current value of the precious metal on consignment. However, consideration should be given to whether the company has the ability to return the physical product and the practicality of extracting the precious metal from work-in-process or finished goods inventory. For example, the cost of extracting the precious metal from the work-in-process or finished goods inventory could be considered so significant that it is impracticable for the company to return precious metals already incorporated into the production cycle. If the likelihood of returning the precious metals to the financial institution/vendor is considered remote, the company should recognize the inventory on its balance sheet when the precious metal is incorporated into the work in process or finished goods.
If the company determines that it has control of the precious metal, and accordingly should record inventory, the company would record a corresponding liability. Consistent with ASC 330-10-30-1, the inventory asset and corresponding liability would be recorded at cost, which would generally be the fair value of the precious metal on the date control was obtained by the company (spot price). The company should also evaluate whether the liability is indexed to precious metals prices, including evaluating whether a derivative is present in the arrangement pursuant to ASC 815.
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