Case 07-2
Case 07-2: Western Aluminum
Introduction Western Aluminum, INC expanded its operations through the acquisition of Smelter. By the end of 2007, Smelter is projected to produce 30% of Western Aluminum’s inventory. Western Aluminum evaluated its current practices in comparison to Smelters current FIFO Inventory management system and issued a proposal to change their inventory valuation method from LIFO to FIFO.
Factors to Consider Western Aluminum addressed multiple topics to validate their proposal idea. As mentioned above, the acquisition of Smelter and its projected out puts is one consideration made. The high-value LIFO layers and commodity price swings has resulted in large non-cash adjustments to Inventory. Switching to FIFO will allow for period end valuations that will match revenue and expenses and give a more accurate measure of replacement cost without the additional adjustments. This change will allow for similar inventory valuation when compared to other competitors. Additional factors that should be considered are Westerns Aluminum’s position in the current market. ASC 250-10-S99-4(b)(1) suggests that it is important to consider general economic trends in the industry, customer growth, and increased demand on the products offered. Future price trends for their materials are another area that should be looked at. Western Aluminum recognized that competitors in the industry used other valuation methods for their industry and by making similar choices there would be better cross comparison. It is also important to look at the tax affects that will take place as a result of your changing income. The engagement team might also reference ASC 250-10-45-16 which encourages a company whenever possible to adopt any accounting changes during the first interim period of the fiscal year.
Dealing with Extraordinary Items If Western Aluminum determined the new method to be preferable there would be a $100 increase in accrued bonus by December 31,
Introduction Western Aluminum, INC expanded its operations through the acquisition of Smelter. By the end of 2007, Smelter is projected to produce 30% of Western Aluminum’s inventory. Western Aluminum evaluated its current practices in comparison to Smelters current FIFO Inventory management system and issued a proposal to change their inventory valuation method from LIFO to FIFO.
Factors to Consider Western Aluminum addressed multiple topics to validate their proposal idea. As mentioned above, the acquisition of Smelter and its projected out puts is one consideration made. The high-value LIFO layers and commodity price swings has resulted in large non-cash adjustments to Inventory. Switching to FIFO will allow for period end valuations that will match revenue and expenses and give a more accurate measure of replacement cost without the additional adjustments. This change will allow for similar inventory valuation when compared to other competitors. Additional factors that should be considered are Westerns Aluminum’s position in the current market. ASC 250-10-S99-4(b)(1) suggests that it is important to consider general economic trends in the industry, customer growth, and increased demand on the products offered. Future price trends for their materials are another area that should be looked at. Western Aluminum recognized that competitors in the industry used other valuation methods for their industry and by making similar choices there would be better cross comparison. It is also important to look at the tax affects that will take place as a result of your changing income. The engagement team might also reference ASC 250-10-45-16 which encourages a company whenever possible to adopt any accounting changes during the first interim period of the fiscal year.
Dealing with Extraordinary Items If Western Aluminum determined the new method to be preferable there would be a $100 increase in accrued bonus by December 31,