Case: 10 2 Eagle Impairment Loss Essay

1018 words - 5 pages

Case 04-4 Three Little Pigs, Inc. Three Little Pigs, Inc. (PIGS), a public entity, is a vertically-integrated provider of pork products to the wholesale and retail food service and institutional markets in the United States. The Company produces approximately 4.1 million hogs per year and processes the majority of the hogs in its own facilities. The Company also sells a portion of the hogs produced (live hogs) to outside third parties. PIGS does not have any firm commitments to sell live hogs to third parties, nor does it hedge its live hogs through commodity futures contracts. There are essentially three major categories of hog inventory—live hogs ready for sale, developing animals, and ...view middle of the document...

However, Farmer Joe swears by the hair of his chinny-chin-chin that a writedown is not necessary. He asserts that the price decline reflected in the futures market is due to seasonal price fluctuations, and, therefore, any impairment, if present, would be temporary. As support, he points out that the futures prices for lean hogs in the fourth quarter reflect a recovery in prices, and should be sufficient to recover the cost of the Company’s inventory. As discussed above, at September 30, 2002, the Company had live hogs and developing animals (in various stages of production) held for sale to third parties. The cost of producing a hog is currently $38/cwt ($38 per 100 pounds). As a result, the live hogs that are ready for sale are carried at approximately $38/cwt. The carrying cost for developing animals, at September 30, 2002, varies based on the stage of production (which lasts approximately six months). For example, the average carrying costs per cwt of developing animals to be sold to third parties, classified by month in which maturity of the animal is expected, are as follows:

Copyright 2003 Deloitte Development LLC All Rights Reserved.

Case 04-4: Three Little Pigs, Inc.

Page 2

Month of Maturity October 2002 November 2002 December 2002 January 2003 February 2003 March 2003

Carrying cost* $31 $23 $16 $10 $5 $3

*All pools of developing animals are expected to have a carrying cost of $38/cwt at maturity

Developing animals that are in their second month of development (i.e. will come to market in January 2003) currently have an average carrying cost of $10/cwt, which is expected to increase to $38/cwt at maturity. The futures prices, at September 30, 2002, for lean hogs/cwt are as follows: October 2002 November 2002 December 2002 January 2003 February 2003 March 2003 $29 $30 $33 $37 $42 $45

Despite the fact that current spot market prices for lean hogs are below the Company’s cost, management has indicated that, based on current spot...

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