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23 Com. Lending Rev. 39 (2008)
Classification, Cost Basics, Write-Downs and Disclosures

handle is hein.journals/cmlrv23 and id is 197 raw text is: INVENTORY ACCOUNTING FRAMEWORK Classification, Cost Basis, Write-Downs and Disclosures By Adrian P. Fitzsimons and Gerard A. Lange What loan officers should know about the for inventory. he current financial accounting and reporting guidance for inventory was first promulgated by the Committee on Accounting Procedure (the Committee) in Chapter 3A and Chapter 4 of Accounting Research Bulletin No. 43 (ARB-43), Inventory Pricing. The Financial Accounting Stan- dards Board (FASB) amended that guidance through Statements of Financial Ac- counting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS-133), and FAS-151, Inventory Costs. The Emerging Issues Task Force (EITF) has also provided consensuses that address aspects of the financial accounting and reporting of inventory through such supplemental guidance as (a) EITF Issue No. 84-10, LIFO Conformity of Companies Rely- ing on Insilco Tax Court Decision; (b) EITF Issue No. 84-24, LIFO Accounting Issues; (c) EITF Issue No. 86-46, Uniform Capitalization Rules for Inventory under the Tax Reform Act of 1986; (d) EITF Issue No. 96-6, Classification of Inventory Markdowns and Other Costs Associated with a Restructuring; (e) EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products); (f) EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller)for Certain Consideration Received from a Vendor; (g) EITF Issue No. 04-6, Ac- counting for Stripping Costs Incurred during Production in the Mining Industry; and (h) EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. accounting In addition, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) has issued Statement of Position (SOP) 85-3, Accounting by Agricultural Producers and Agricultural Cooperatives; SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties; and Practice Bulletin 2, Elimination of Profits Resulting from Intercompany Transfers of LIFO Inventories. The complexity of the financial accounting for inventory arises because of its classification, its high volume of activity and turnover, its various cost flow assumptions and the determination of its market value. Credit analysts should understand the financial accounting and reporting of inventory from a dual perspective. This guidance is important to loan officers in mak- ing decisions regarding short-term working capital and seasonal loans. Inventory loans are often used to provide entities with temporary capital in excess of their normal needs. These loans help finance seasonal requirements and are often repaid at the end of the cycle by converting inventory into cash. Credit analysts also need to understand the finan- cial accounting and reporting of inventory, because inventory is generally one of the most significant Adrian P. Fitzsimons is a Professor of Accounting and Taxation at St. John's University, Queens, New York. Contact him at fitzsima@stjohns.edu. Gerard A. Lange is an Associate Professor of Accounting and Taxation at St. John's University. He can be reached at langeg@stjohns.edu. COMMERCIAL LENDING RE'VMEW 39 The major objective in accounting for the goods in the inventory according to ARB-43 is the matching of appropriate costs against revenues in order that there can be a proper determination of income. Ju y-AuGUST 2008