There are explicit financial statement presentation and disclosure requirements related to inventory. Refer to FSP 8.4 for these considerations.

Additionally, questions arise as to whether to present the purchase and subsequent re-sale of raw materials that are entered in contemplation of each other as gross or net. Example UP 21-1 addresses this question.

EXAMPLE UP 21-1
Contemplative transactions

Independent Power Producer (IPP) operates a gas fired generation facility. It procures gas from Supplier A under a fixed price forward contract that is below current market rates. The supply contract has no restrictions on resale. IPP purchases gas from Supplier A under its contract in excess of what it needs for generation. Given the excess in market price above the contract purchase price, IPP has decided to sell its excess gas in the market to a third party.

Should the cost of the excess purchased gas and the proceeds from the resale be presented on a gross or net basis in the financial statements of IPP?

The transactions should be presented as net fuel expense in the financial statements. The facts and circumstances in this transaction would indicate that the purchase and sale of the excess gas were entered into in contemplation of one another to reduce the overall fuel cost of the facility. The most analogous accounting literature for this circumstance is found in ASC 845-10, Purchases and Sales of Inventory with the Same Counterparty, which indicates that separate transactions should be treated as a single exchange when certain indicators are present. The following table includes a discussion of the indicators.