The goal of Thomas Foods is to insulate the company from the financial blow of large increases in the prices of produce from local farmers. The main factor that would cause this change in price that Thomas Foods should be concerned with is the possible fluctuation of weather conditions. Thomas Foods is interested in determining whether or not hedge accounting would be the best solution to protect the company’s operating income, and they have hired me as a consultant to further investigate this issue. My thorough research process on the topic has led me to conclude that hedge accounting works best when the transaction is made with the original source such as the farmer, implementing a Purchase Order system will be the most beneficial method for Thomas Foods to mitigate the risks of rising prices, and the Controller will require minimal training on accounting for a purchase order system on either a cash or an accrual basis.
If done correctly, implementing hedge accounting in order to offset potential fluctuations in the market price can be very advantageous for an investor. In order to successfully exploit a hedging strategy, there must be control over one aspect. In this particular situation, the control for Thomas Foods would be the resale value because their business operates by purchasing produce from the local farmers and then reselling the produce to local grocery stores. Thomas Foods has control of the selling price of the goods that are purchased, but the farmer determines the original selling price of the produce. Therefore, Thomas Foods is left with uncertainty when it comes to determining the company’s profit because the base price of the produce is not concrete.
Thomas Foods cannot sell produce to local grocery stores unless they can guarantee a certain amount of produce in stock. This means that if Thomas Foods wishes to successfully implement a hedging strategy, they must first establish a contract with each farmer they purchase from discussing purchase prices fro certain quantities of produce. Doing so will help Thomas Foods gain more control of the selling prices determined by the farmers. Given that Thomas Foods is a third party entity, it is recommended that the company execute a Purchase Order system rather than reworking their accounting procedures in order to better suit the elected hedging strategy. With a Purchase Order in place, the farmer guarantees to sell a set amount of goods to Thomas Foods for a set price over a set amount of time. This will allow Thomas Foods to account for their purchase costs and also utilize the savings when reselling the produce to the local markets.
If Thomas Foods agrees to apply a purchase order system, the company’s accounting system would not suffer any significant costs to train the current Controller. This is because Thomas Foods will be able to simplify their budgeting system when applying the purchase order system. Thomas Foods can take comfort in knowing that there will be a set price that they will purchase the crops for, and from there they will be able to decide on a resell price.
References
FASB (Financial Accounting Standards Board). (2010). ASC 815-20-25.
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FASB (Financial Accounting Standards Board). (2010). ASC 815-20-35.
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FASB (Financial Accounting Standards Board). (2010). ASC 815-25-35.
Retrieved August 8, 2015, from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (2010). ASC 815-30. Retrieved
August 8, 2015, from FASB Accounting Standards Codification database.
Self-Study Guide to Hedging with Grain and Oilseed Futures and Options.
(2014). Retrieved August 8, 2015.
Wisner, R., & Hofstrand, D. (2015, July 1). Grain Price Hedging Basics | Ag
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