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11.3 Firm purchase commitments for inventory
Publication date: 20 Jul 2016
us Utilities guide
Reporting entities may enter into firm purchase commitments for their fuel or other inventory. ASC 330 provides guidance regarding potential losses that a reporting entity may sustain as a result of firm purchase commitments for inventory.
A net loss on firm purchase commitments for goods for inventory, measured in the same way as are inventory losses, shall be recognized in the accounts. The recognition in a current period of losses arising from the decline in the utility of cost expenditures is equally applicable to similar losses which are expected to arise from firm, uncancelable, and unhedged commitments for the future purchase of inventory items.
In some cases, forward purchase contracts for fuel, or emission allowances to be classified as inventory, are accounted for as derivatives and measured at fair value. The reporting entity should record any reduction in the fair value associated with those contracts through a fair value adjustment. However, if such forward inventory purchase commitments are accounted for as executory contracts, the reporting entity should evaluate whether future sales related to the inventory commitments will be sufficient to cover any potential losses. In accordance with ASC 330-10-35-18, if a reporting entity has firm sales contracts or other circumstances that indicate it will be protected from an adverse purchase commitment, it should not record a loss.
The utility of such commitments is not impaired, and hence there is no loss, when the amounts to be realized from the disposition of the future inventory items are adequately protected by firm sales contracts or when there are other circumstances that reasonably assure continuing sales without price decline.
For example, if the reporting entity has firm commitments for the sale of power at a price in excess of its fuel cost, such that no loss will be sustained related to the purchase of the fuel, then no impairment should be recognized. However, if a reporting entity cannot demonstrate protection as indicated in ASC 330-10-35-18, it should record a reserve for anticipated losses.
Question 11-3
Are reporting entities required to record losses associated with adverse purchase commitments for items not accounted for as inventory?
Are reporting entities required to record losses associated with adverse purchase commitments for items not accounted for as inventory?
PwC response
No. A reporting entity may have firm purchase commitments for items that are not considered inventory, such as renewable energy credits or emission allowances accounted for under an intangible asset model. The guidance in ASC 330-10-35-17 and 35-18 only applies to firm purchase commitments for inventory.
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