Our Client’s Problem
The claimant carried an extensive inventory of electronic switching equipment and kept track of the inventory using an Oracle software system that listed each item at its manufactured cost. However, due to industry changes and technological advances much of the inventory was obsolete. When a fire broke out in the claimant’s warehouse, some of the inventory was destroyed, but most suffered only minor smoke damage or no damage at all. The claimant demanded the hypothetical cost to remanufacture the inventory, but the legal standard of value was the reduction in fair market value. We were hired to help establish the fair market value of the inventory immediately before and after the fire.
Robson Lenhart, PC's Approach
Generally Accepted Accounting Principals require a company to carry its inventory at the lower of cost or market value. And, since it was a publicly traded company, the claimant had written its inventory (on the company’s financial statements, but not in the Oracle system) down to market value just two months before the fire. By year-end, the claimant had written its inventory down to a value less than one percent of its manufactured cost. Utilizing information obtained from its SEC filings and relevant deposition testimony of key witnesses, we estimated the inventory value on the date of the fire to be one-tenth of its manufactured cost.
Result
Our client defended the claim at trial. The plaintiff vigorously disputed our opinion that the fair market value of the damaged inventory in proportion to its cost was consistent with the relationship of fair market value to cost in the company’s inventory taken as a whole. The jury found in our client’s favor.