Deloitte Three Little Pigs

Topics: Market price, Price, Pig Pages: 3 (759 words) Published: October 15, 2012
The Three Little Pigs Inc

1)How should the Company determine whether an inventory impairment exists at September 30, 2002? More specifically, how should management evaluate impairment?

The main goal of evaluating impairment of inventory is to provide users of financial statements an accurate assessment of how the company stands. PIGS has three categories of inventory – live hogs ready for sale, developing animals, and processed pork products. Within these categories, PIGS has inventory of live hogs and developing animals which are to be internally processed into pork products, and also live hogs and developing animals which are held for sale to third parties. The issue of holding inventory at lower of cost of market is with the hogs sold to third parties (PIGS feels that the internally processed products cover costs sufficiently and will not have a LCM issue). However, with the Big Bad Wolf being captured, market prices for lean pork have decreased due to the increased supply of pork. The carrying cost of the live and developing hogs is now (and for the next few months) more expensive than the market value. However, the CEO believes that this is just a seasonal fluctuation.

I feel that the way to best represent periodic income is to evaluate for impairment of each end product category. Since the internally processed hogs do not have a LCM issue, the live hogs and developing hogs for sale to outside parties should be tested for impairment. This is supported by the FASB codification in section 330-10-35-8 as well as 330-10-35-10. 35-8 states: Depending on the character and composition of the inventory, the rule of lower of cost or market may properly be applied either directly to each item or to the total of the inventory (or, in some cases, to the total of the components of each major category). The method shall be that which most clearly reflects periodic income.

I would classify the inventory into two categories, outside parties and internally...
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