Hunting PLC – Annual report – 31 December 2020
Industry: oil and gas
41. Principal Accounting Policies (extract)
- 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.
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 be a limited number, or even no sales, to form a benchmark in the current year. In these cases, management looks at historical activity levels and has to form a judgement as to likely future demand in the light of market forecasts and likely competitor activities. Management has considered the judgements and estimates made in each of the Group’s businesses and has not identified any individual estimates which, in the event of a change, would lead to a material change in the next financial period.
As a result of such judgements, the net inventory balance comprises $240.6m of inventory carried at cost (2019 – $301.4m) and $47.8m carried at net realisable value (“NRV”), which represents 17% of net inventories (2019 – $49.4m at NRV representing 14% of net inventories). Provisions for inventories held at NRV are subject to change if expectations change.
Gross inventories decreased by $51.7m from $377.3m at 31 December 2019 to $325.6m at 31 December 2020. Additions to inventories were $465.7m (2019 – $673.1m), additions from acquisitions of $0.7m (2019 – $0.4m) and foreign exchange movements of $4.8m (2019 – $3.0m) were offset by inventories expensed to cost of sales of $505.7m (2019 – $667.5m) and inventories written off of $14.9m (2019 – $4.3m) against the inventory provision, inventories transferred to PPE of $0.6m (2019 – $0.1m) and $1.7m in relation to the disposal of US Drilling Tools’ assets.
The inventory provision increased by $10.7m from $26.5m at 31 December 2019 to $37.2m at 31 December 2020, as a result of impairment charges included in cost of sales of $37.4m (2019 – $7.5m) and foreign exchange movements of $0.2m (2019 – $0.4m) offset by $14.9m (2019 – $4.3m) of the provision being utilised in the year against inventories written off and $12.0m (2019 – $1.6m) released to the consolidated income statement 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 increased to 11% (2019 – 7%) of gross inventory balances at 31 December 2020 following the downturn in the oil and gas sector. Details of the impairment review can be found in note 16.
Inventories of $165.0m are expected to be realised within 12 months of the balance sheet date (2019 – $293.0m) and $123.4m will be realised after 12 months (2019 – $57.8m).
In accordance with the requirements of the Group’s committed bank facility, security has been granted over inventories in certain subsidiaries in the UK, US and Canada, which have a gross value of $198.2m (2019 – $229.9m).