KPMG 3 pigs Solution Essay

This essay has a total of 1104 words and 6 pages.

KPMG 3 pigs Solution

Several factors including increased supply have caused declining prices for live hogs on
the spot market. Also as shown bellow 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."

ARB43, Ch.4 Par.9 "The rule of cost or market whichever is lower is intended to provide a
means of measuring the remaining usefulness of an inventory expenditure."

ARB43, Ch.4 Par.16 "Only in exceptional cases may inventories properly be stated above cost."
ARB43, Par.14 "Inventory losses from market declines should not be deferred beyond the
interim period in which the decline occurs."

ARB43, Par.11 "…If there is only one end-product category the cost utility of the total
stock---The inventory in its entirety---may have the greatest significance for accounting

Current market prices reflect an inventory impairment of the live hogs held for sale. The
depressed prices will likely remain through the end of the fiscal quarter based off option
prices. Any later adjustment will defer losses from market declines beyond this fiscal
period if prices do not recover. Adjusting inventory value during the current period is in
conjuncture with the periodicity assumption as well as timeliness of information. The
AICPA states clearly those inventories of crops and developing animals held for sale
should be valued at the lower of cost or market. The AICPA does not provide any provisions
for the anticipation of recovering prices. Marking inventories down better reflects the
conservative nature within the conceptual framework.

All hogs regardless of whether they will be converted into processed products internally,
or sold to third parties shall be marked down. We come about this method based on all hogs
being essentially interchangeable and therefore one category up until the time of sale or
processing. This is based on the assumption that processing is a significant value added
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