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11.4 Accounting for inventory at fair value
Publication date: 20 Jul 2016
us Utilities guide
Some reporting entities may hold inventory such as natural gas, coal, and environmental assets for the purpose of executing trading strategies. Because of the fungible nature of commodities and depending on reporting objectives, some may question whether it is appropriate to report these items held in inventory at fair value. ASC 330 provides guidance on this question.
Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate approximate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability.
It is generally recognized that income only accrues at the time of sale and that gains may not be anticipated by reflecting assets at their current sales prices. However, exceptions for reflecting assets at selling prices are permissible for both of the following:
- Inventories of gold and silver, when there is an effective government controlled market at a fixed monetary value
- Inventories representing agricultural, mineral, and other products, with all of the following criteria:
- Units of which are interchangeable
- Units of which have an immediate marketability at quoted prices
- Units for which appropriate costs may be difficult to obtain.
Consistent with this guidance, recording inventory above cost would only be appropriate in exceptional cases. Furthermore, the SEC staff has stated that it will object to the use of mark-to-market accounting for inventories except in extremely rare cases, when all of the criteria in ASC 330-10-35-15 and 35-16 are met. We would not expect inventory held by utilities and power companies to meet the criteria as fuel and environmental assets do not meet the “exceptional” criterion. Reporting entities would be expected to be able to determine appropriate approximate costs. Therefore, such items should not be reported at fair value.
In addition, ASC 932 provides accounting guidance for oil and gas companies and specifically prohibits measuring physical inventory at fair value, except when indicated by guidance in the authoritative literature (ASC 932-330-35-1). Reporting entities may report commodity inventories above cost only when they operate in an industry that specifically permits it. For example, if a reporting entity is a broker dealer and within the scope of ASC 940, Financial Services—Broker and Dealers (ASC 940), certain of its commodity inventories may be reported at fair value. However, the reporting entity should be specifically within the scope of ASC 940 and other reporting entities cannot analogize to the guidance if outside its scope.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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