IAS 2, para 36, inventory disclosures

Hunting PLC – Annual report – 31 December 2019

Industry: oil and gas

40. Principal Accounting Policies (extract)
(m) Inventories
• Inventories are stated at the lower of cost and net realisable value.
• Cost is determined using the first-in-first-out method and net realisable value is the estimated selling price less costs of disposal in the ordinary course of business. The cost of inventories includes direct costs plus production overheads

20. Inventories

hunting14

The Group’s inventory is highly durable and is well maintained. It can, therefore, hold its value well with the passing of time. When volume demand falls, or prices are reduced, management has to assess whether the carrying value of inventory can still be achieved. For some markets and product lines there may a limited number, or even no sales, to form a benchmark in the current year. In these cases, management look at historic activity levels and have to form a judgement as to likely future demand in the light of market forecasts and likely competitor activities. As a result of such judgements, the net inventory balance comprises $301.4m of inventory carried at cost (2018 – $295.2m) and $49.4m carried at net realisable value which represents 14% of net inventories (2018 – $53.0m at NRV representing 15% of net inventories). Provisions for inventories held at NRV are subject to change if expectations change.

Gross inventories have increased $4.6m from $372.7m at 31 December 2018 to $377.3m at 31 December 2019. Additions to inventories were $673.1m (2018 – $670.4m), inventories from acquisitions of $0.4m (2018 – $nil) and foreign exchange movements of $3.0m (2018 – $6.8m reduction) were offset by inventories expensed to cost of sales of $667.5m (2018 – $592.8m) and inventories written off of $4.3m (2018 – $7.3m) against the inventory provision and inventories transferred to PPE of $0.1m (2018 – $nil).

The inventory provision has increased by $2.0m from $24.5m at 31 December 2018 to $26.5m at 31 December 2019, as a result of an impairment charge included in cost of sales of $7.5m (2018 – $6.2m) and foreign exchange movements of $0.4m (2018 – $0.6m increase) offset by $4.3m (2018 – $7.3m) of the provision being utilised in the year against inventories written off and the reversal of previous write-downs of $1.6m (2018 – $2.0m) also included in cost of sales. The reversal of previous write-downs occurred when inventory was sold for an amount higher than its net realisable value and also where older inventories, which had previously been written off, were sold as market conditions improved in the oil and gas sector. Overall, Hunting’s provision for inventory losses has remained static at 7% of gross inventory balances at 31 December 2019.

The Group expects that $293.0m (2018 – $290.0m) of the Group’s inventories of $350.8m (2018 – $348.2m) will be realised within 12 months of the balance sheet date and $57.8m (2018 – $58.2m) will be realised after 12 months.

In accordance with the amendments made to the Group’s core committed bank facility in July 2016, security has been granted over inventories in certain subsidiaries in the UK, US and Canada, which have a gross value of $229.9m (2018 – $234.1m).