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 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.

There are essentially three major categories of hog inventory: (1) live (i.e., mature) hogs, (2) developing hogs, and (3) processed pork products. Some of the Companys live hogs and developing hogs are internally processed and others are sold to third parties.

Farmer Joe, CEO of the Company, has represented that the market prices for its processed pork products are sufficient to cover the costs of producing such products (i.e., the wholesale prices of processed pork products, such as loins, hams, and bacon exceed the cost to bring such products to market). As a result, management believes that there is no lower of cost or market (LCM) issue related to hogs (whether fully mature or still developing) that will be internally processed and sold as processed pork products.

However, there are live hogs in other locations that cannot be easily transported and processed at the Companys main processing plants. As a result, these live hogs must be sold to third parties at spot market prices, which have declined. During the Companys fiscal year 2016 (the Companys year-end is March 31), pork prices were severely impacted by several factors, including, the capture of the Big Bad Wolf, which led to an increased supply of pork. In the second quarter ending September 30, 2015, a further decline in futures prices for the third quarter for live hogs has led management to believe that there may be LCM issues related to the Companys inventory of live hogs and developing animals held for sale to third parties. However, Farmer Joe swears by the hair of his chinny-chin-chin that a write-down 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 hogs in the fourth quarter reflect a recovery in prices, and should be sufficient to recover the cost of the Companys inventory.

As discussed above, at September 30, 2015, the Company had live hogs and developing hogs (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, 2015, 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:

Carrying Costs for Developing Hogs:

Expected Month of Maturity Carrying Cost as of Sept. 30, 2015*

October 2015	$31
November 2015	$23
December 2015	$16
January 2016	$10
February 2016	$5
March 2016	$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 2016) currently have an average carrying cost of $10/cwt, which is expected to increase to $38/cwt by January 2016 (i.e., at maturity).

The futures prices, at September 30, 2015, for the sale of live hogs/cwt are as follows:

Month of Maturity Estimated Future Market Price

October 2015	$29
November 2015	$30
December 2015	$33
January 2016	$37
February 2016	$42
March 2016	$45

Despite the fact that current spot market prices for live hogs are below the Companys cost, management has indicated that, based on current spot market prices for the various products, they expect to recover all production costs of the entire hog inventory on hand (i.e., live hogs and developing hogs to be internally processed and sold to third parties) at September 30, 2015. In other words, total revenues for the pork products and total revenues for the sale of the live hogs to third parties, based on current spot prices, will exceed the sum of the current capitalized cost of producing and processing those hogs and the expected cost to complete for hogs in development.

Required:

Answer the following questions. Be sure to fully discuss the accounting options available to Three Little Pigs and provide your recommendations for the best accounting treatments. Your responses should be supported by the FASB Codification and any other resources you find helpful (e.g., Conceptual Framework, real-world examples, etc.). Note: As stated in the syllabus,

The second and third cases present you with a problem for which you will describe potential solutions available to management, cite relevant accounting standards (using the FASB Codification website), and recommend a course of action. Your solutions are limited to three double-spaced typed pages (i.e., they can be shorter than 3-pages, but not longer).

1.)How should the Company evaluate whether an inventory impairment exists at September 30, 2015? Specifically, should the LCM analysis be applied on a total inventory basis, on an individual item basis (i.e., at the individual hog level), or by using certain categories of hog inventory? If you believe the Company should apply LCM to categories of inventory, be sure to specify what categories the company should use for its analysis.

2.)If the company determines that an impairment of inventory is necessary, should the impairment be recognized in an interim period if prices are expected to recover before year-end?