AgriStability: Inventory Valuation
Crop and livestock inventories for market commodities are valued using both a beginning-of-year price (P1) and end-of-year price (P2), referred to as the PI/P2 hybrid inventory valuation method. With this method, changes in the value of your crop and/or livestock inventories will reflect not only changes in quantities over the course of the fiscal period, but also variations in the price of each commodity during the fiscal period.
The hybrid inventory valuation method is not applied to non-market commodities or perishable commodities. Productive assets (non-market commodities) are valued using a P2 price only. Perishable commodities are valued on a receivables basis.
The increase/decrease in value of inventory is included in the calculation of a producer's production margin for the year, and are reflected in a producer's payment.
What is the difference between market commodities and productive assets?
Market commodities are intended for sale. Examples include feeding and finished livestock, as well as in-field and harvested grains.
Productive assets (non-market commodities) are intended for use in the production of other commodities and are commonly kept-over for several production periods. Examples include breeding livestock and culled breeding livestock.
The hybrid inventory valuation method is not applied to productive assets because breeding livestock is not intended for market and therefore no actual market loss can be realized. For this reason, non-market commodities are valued using a P2 price only.
Note: Producers who report to the Canada Revenue Agency on the accrual basis must provide additional information to ensure that an end-of-year (P2) price is applied to their non-market commodities.
The hybrid inventory valuation method is not used to value perishable commodities. Because perishable commodities spoil or decay easily and cannot be stored for more than 10 months (e.g., potatoes, apples, carrots), they are valued using actual sales.
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