Inventory accounting - FIFO vs LIFO - Is this disclosed in ARs?

[HyperionTree]

Lower value of Oil Inventories/ Valuation and Impact on Results

Can anyone explain to me how lower oil prices impact valuation of inventories and how this is handled from an accounting standpoint?

As I understand it, lower inventory valuations caused by the drop in oil prices would be recorded via the income statement

as a loss and thus reduce EPS.Or is it possible to treat this via the balance sheet and record this simply as a lower NAV?

PGL

Hi PGL,

Hyperion and Tree here.

The Singapore Financial Reporting Standards to be applied after 1 Jan 2014, for inventories, is call FRS 2 and can be found at the Accounting Standards Council Singapore's website for free.

Assume that Hyperion runs a oil trading company call Hyper Bad Luck Oil Trading Company, and the company holds inventory before selling to clients. Let's say Hyperion buys the 10 barrels of shipping bunkering oil from Mr Tree at USD100 per barrel from Tapis in Malaysia and transport to his Singapore bunker at transport cost of USD10 per barrel. Tree says since you such a good loyal customer and buy so much volume, I give you USD5 discount per barrel. Singapore custom say I wana tax your oil at USD3 per barrel. Page 8 of FRS 2, para 10 says cost of inventory shall compromise the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their location and condition.

The cost of inventory is 10 x (100+10-5+3)= USD 1080

Since Hyperion has a customer and he thinks he can sell to the customer at USD 1200 which is the net realisable value, he record in balance sheet the inventory at cost which is USD 1080 because he is suppose to record at lower of cost(USD1080) or net realisable value(USD1200).

Unfortunately since then, oil price drop till USD60 per barrel. His customer say I won't pay you USD1200, because I can just buy from Tapis Malaysia at 10X(60+10+3) = USD730 with USD60 per barrel, USD10 transportation costs, and USD3 pay to Singapore custom within 3 weeks. So his customer says I only willing to buy from you now at USD 750 which has a USD20 premium for immediate availability of oil. Hyperion has to write down his oil inventory to USD 750.

Debit Impairment loss on inventory SGD 330 (Expense into P&L)
Credit Oil Inventory in bunker SGD 330 (Balance Sheet Inventory reduce value)

In page 12, para 34 says write down of inventory to net realisable value shall be recognised as an expense in the period of write down. So I guess it means going into the P&L with no excuses. So it is unlikely that a company can treat this via the balance sheet simply as a lower NAV without a corresponding line item in P&L.

Thus, EPS and NAV would be reduced.