Two prices for the same barrel.
A company that holds a physical commodity usually carries it at the lower of cost or net realizable value under Topic 330. To manage the price risk on that inventory, it holds derivatives, and those derivatives are usually measured at fair value through earnings. So the barrel sits at cost and the hedge on it moves with the market. When the price changes, the hedge shows a gain or a loss and the inventory shows nothing, and the income statement swings for a reason that has little to do with how the business is actually doing. The economics are steady. The accounting is not.
The FASB has decided that gap is worth closing. On 4 February 2026 it added a project, Accounting for Commodities, to its technical agenda, to improve the accounting for certain tangible commodities inventories. The idea under development is an option to measure tangible commodity inventory at fair value, so the inventory and the derivative that hedges it can move together in earnings rather than pulling against each other. Its technical agenda overview, revised 20 August 2026, lists the next milestone as an Exposure Draft expected in the fourth quarter of 2026.
The timing is why this is worth reading now rather than when the standard is final. A proposed Update is a few months out, and the shape of it is already visible in the board papers. The measurement is an option, not a requirement, and the Board has been working through who can elect it, what counts as a commodity, at what level the election is made, and how it is disclosed. None of that is settled, which is exactly why the sensible move is to build the capability rather than to wait for the paragraph numbers.
The constructive point is that the work this asks for is worth doing whichever way the scope lands, and some of it pays off today. A subledger that can carry a governed market price for a commodity lot next to its cost gives management a live, economic view of the inventory it already wants, tells the true story of the hedged position, and happens to be the same record the standard will need. This is not a compliance chore waiting for a deadline. It is a better picture of the inventory, with an accounting change arriving to reward the teams that already keep it.
Why the volatility is artificial.
The source of the problem is a measurement mismatch, and it is worth stating precisely because the fix follows from it. In June 2021 the North America Accounting Committee of the International Swaps and Derivatives Association asked the Board to expand the fair value option in Topic 825 to commodity inventories and to the executory contracts around them, such as storage, transportation, and nonderivative purchase and sale agreements, that are managed on a fair value basis. The request set out the mechanics plainly. The commodity is measured at cost and the hedging instrument is measured at fair value, so the change in fair value of the hedge lands in current income while the offsetting change in the value of the commodity does not. The financial statements do not capture the economics of the hedge.
Fair value hedge accounting is the tool that exists to solve this today, and it often does not fit. The specific identification requirements in Topic 815 are demanding, and there is a basis difference between the physical commodity and the instrument that hedges it. A barrel in a specific tank at a specific location, of a specific grade, is not the standard contract the exchange quotes. That quality and location basis is real, and it is one of the reasons a hedge relationship can fail to qualify or become costly to maintain. Several stakeholders told the Board that if the commodity itself could be measured at fair value, much of the hedge accounting machinery would no longer be needed to keep earnings from swinging.
It helps to know that parts of GAAP already carry commodities at fair value. Entities that apply the industry guidance in Topic 905, Agriculture, or Topic 940 for brokers and dealers already record certain commodities at net realizable value or fair value, and under IFRS a commodity broker-trader can measure inventory at fair value less costs to sell. So this is not a leap into the unknown. It is an extension of a measurement that already exists in specific corners, to a defined population that manages physical commodities the same way. A fair value option here would also move US GAAP closer to IFRS on the point, which several stakeholders noted as a benefit.
What the Board is actually building.
The 27 May 2026 board meeting handout lays the proposed Update out as a set of design issues, and reading them together is the fastest way to see what a finance system will have to do. Each row below is a decision the Board has been working through on the way to the exposure draft. None of them is final, and that is the point of showing them: the capability you build should be able to absorb whichever way each one lands.
| The decision | Where it sits | What it means for the data |
|---|---|---|
| Which entities | Issue A, Topic 942 | The Board framed the population around entities within Topic 942, Financial Services, Depository and Lending Institutions, including their subsidiaries, for both consolidated and standalone statements. Stakeholders across oil and gas, agriculture, metals and mining, and energy asked for it to reach them too, so the breadth of the population is the open question the exposure draft will answer. |
| What is a commodity | Issue B | One path names tangible commodities held in inventory without defining the term. The other adds a characteristics-based definition to the Master Glossary. There is no Master Glossary definition of commodity today, so whatever the Board publishes will become the boundary a finance system has to apply lot by lot. |
| Which activity qualifies | Issue C | The activity criteria under discussion are commodities managed as part of trading activities, commodities managed on a fair value basis, or commodities that will not undergo processing or conversion, with a fourth option of no activity test at all. This is the line between inventory you hold to sell as it is and inventory you hold to convert. |
| Option or requirement | Issue D, Topic 825 | The measurement is an option, not a requirement, designed like the fair value option in Topic 825. The election is made when the commodity is first recognised and is irrevocable, so the decision belongs at the point a lot enters the books, not at a later reporting date. |
| At what level | Issue D, election level | The election could be available at the level of all tangible commodities, a class such as all precious metals, a type such as all gold, or an individual eligible item such as a single purchase or a portion of one. Whatever level ships, the subledger has to record the election at that grain. |
| What to disclose | Issue E, Topic 820 and Topic 825 | Fair value measurement disclosures under Topic 820 would apply, alongside the reasons for electing the option, a description where the option is elected for some but not all similar items, the gains and losses from fair value changes by income statement line, and the methods and assumptions used to estimate fair value. |
| How to transition | Issue F | The transition alternatives are a prospective approach, a cumulative-effect adjustment to opening retained earnings, or full retrospective application. Each one implies a different history to carry, and the first period of adoption is where the cost basis and the fair value basis have to reconcile. |
One line deserves emphasis because it changes how you read all the others. This is an option, not a requirement. That means the normal state of a book is a mix: some lots elected to fair value, some carried at cost, some outside the scope entirely. A system that can only hold one measurement per commodity cannot represent that mix, so the option is what makes the two-basis record necessary rather than a nicety. Whatever the Board decides on scope, an option always produces a population where cost and fair value coexist.
The election, read as a sequence of data questions.
A measurement option sounds like a policy choice and behaves like a data pipeline. Reading it as a sequence of questions asked of each lot makes the design fall out of it, and it keeps the work honest while the standard is still a proposal, because every question here is answered by a field you can build now.
| The question | Where it is answered | What it means in practice |
|---|---|---|
| Is this lot a commodity in scope? | Issues A, B and C | The scope turns on the entity, on what counts as a commodity, and on the activity the commodity is held for. Until the exposure draft settles those, the safe build is a scope flag on the lot that can be set from entity, commodity classification and holding intent, so the answer is a field rather than a memo. |
| Has the option been elected, and at what level? | Issue D | The election is irrevocable and made at initial recognition, at a level from all commodities down to a single purchase. Record it on the lot at the level it was made, with the date and the person, because a later reader has to know why one gold lot sits at fair value and the one beside it sits at cost. |
| Where does the fair value come from? | Topic 820 | A fair value basis needs a governed price source per commodity, with the quality and location basis that separates the physical lot from the exchange quote. Fair value hedging fails so often precisely because of that basis difference, so the price feed and its adjustments are the load-bearing data, not an afterthought. |
| Where do the gains and losses land? | Issue E | A remeasurement to fair value produces a gain or loss that has to be reported on a specific income statement line, and disclosed by line. Decide that mapping once, in the subledger, so the same posting rule runs every period and the disclosure is a query rather than a reconstruction. |
| Is the cost basis still available? | Issue F and tax | Cost does not go away. It is still needed for lots outside the election, for entities outside the scope, and for tax, where the fair value option does not follow. The subledger carries both bases in parallel, which is the whole design, rather than replacing one with the other. |
The question that catches teams out is the third one, the price. A fair value basis is only as trustworthy as the price behind it, and the price of a physical lot is not the raw exchange quote. It is the quote adjusted for the grade and the delivery point, and that adjustment is exactly the basis difference that makes fair value hedging hard. Treating the price source and its basis adjustment as governed, versioned data, rather than a lookup at close, is what turns a fair value number into one an auditor can trace and a controller can defend.
One lot, two bases, carried in parallel.
The object worth building is an inventory lot that carries both a cost basis and, where the option is elected, a fair value basis, and knows which one drives the balance sheet in this period. Cost never leaves, because it is still needed for lots outside the election, for entities outside the scope, and for tax, which does not follow a book fair value option. The fair value basis is added, sourced from a governed price with its documented adjustment, and the remeasurement is mapped to a fixed income statement line. Store it as data, version the inputs, and both the balance sheet and the disclosure read from the same record.
A commodity inventory lot, expressed as data
# Commodity inventory lot: two bases carried in parallel
# Amounts and codes are placeholders for shape, not real figures
lot:
id: LOT-CU-2026-0442
commodity:
name: "Copper cathode, Grade A"
classification: "base metal" # feeds the in-scope test, Issue B
uom: "metric ton"
quantity: 250.000
entity: ENT-METALS-TRADING-01
scope:
in_scope: true # entity + commodity + activity, Issues A-C
activity: "held for trading" # or held_for_conversion -> out of scope
basis_of_conclusion: "trading book, no processing planned"
cost_basis: # always maintained
method: "specific identification"
unit_cost: 8150.00
carrying_value_lcnrv: 2037500.00 # lower of cost or NRV, Topic 330
retained_for: ["tax", "non-elected lots", "reconciliation"]
fair_value_option: # Topic 825 style, Issue D
elected: true
level: "type" # all / class / type / individual item
elected_at_initial_recognition: true
irrevocable: true
elected_on: 2026-11-03
elected_by: "cost.accounting@entity"
fair_value_basis: # only when elected
price_source: "LME copper cash settlement"
quality_location_basis: -35.00 # per ton, physical vs exchange, Topic 820
unit_fair_value: 8290.00
carrying_value_fv: 2072500.00
level_820: 2
method_and_assumptions: "screen price less documented grade and location basis"
remeasurement: # each period the option is in effect
period: 2026-Q4
fv_change: 35000.00 # 2,072,500 less 2,037,500
income_statement_line: "Other commodity revenue, net" # disclosed by line, Issue E
disclosure:
reason_for_election: "managed on a fair value basis with the hedging book"
partial_election_note: "elected for all copper; not elected for concentrate lots"
fv_carrying_amount: 2072500.00
non_fv_carrying_amount_same_group: 410000.00 # concentrate lots at costThe election block in the middle is the part that is easy to underrate. Because the election is made at initial recognition and is irrevocable, it is a permanent fact about a lot, and the level of election, whether all commodities, a class, a type or a single purchase, decides which other lots it binds. If that metadata lives in an email rather than on the record, a later close cannot explain why two copper lots that look identical are measured differently. Recording the election, its level, its date and its author on the lot is what keeps a mixed book legible for the life of the inventory.
An implementation checklist.
- 1.Put a scope flag on the lot, not in a memo. The exposure draft will decide which entities, which commodities and which activities are eligible. Build the flag now so it can be set from entity, commodity classification and holding intent, and the answer for any lot is a field you can query rather than a judgement you have to reconstruct.
- 2.Record the election where it is made, at the level it is made. The option is irrevocable and made at initial recognition, and it could be available for all commodities, a class, a type or a single purchase. Store the election on the lot with its level, its date and the person who made it, so a mixed book of elected and non-elected lots explains itself.
- 3.Stand up a governed price source per commodity before you need it. A fair value basis is only as good as the price behind it. Name the source for each commodity, capture the quality and location basis that separates the physical lot from the exchange quote, and version it, because that basis difference is exactly what makes fair value hedging hard today.
- 4.Decide the income statement line once, in the subledger. A remeasurement produces a gain or loss that has to be reported on a specific line and disclosed by line under the disclosures the Board is considering. Fix the posting rule so every period runs the same way and the disclosure falls out of a query.
- 5.Keep the cost basis alive in parallel. Cost is still needed for lots outside the election, entities outside the scope, and tax, where the fair value option does not follow. The design carries both bases at once. A migration that overwrites cost with fair value loses the number half the ledger and the tax return still depend on.
- 6.Model the transition as a reconciliation, not a switch. Prospective, cumulative-effect to retained earnings, and full retrospective each imply a different opening position. Whichever the Board lands on, the first period is where cost and fair value have to meet, so build the reconciliation between the two bases before adoption rather than during it.
- 7.Separate the physical position from the hedge, then let them meet in earnings. The whole point of the option is that the inventory and the derivative that hedges it can move together. Keep the derivative accounting where it already lives, and use the inventory fair value basis to close the mismatch rather than to re-run hedge designation.
- 8.Write down why each lot is in or out of scope. The scope tests are judgements about the entity, the commodity and the activity. A short, stored basis for the conclusion on each lot is cheap to keep now and is the first thing an auditor will ask for once the standard is live.
Failure modes, framed so you can avoid them.
- Treating fair value as a replacement for cost rather than a second basis. The proposal is an option elected lot by lot, so a book will hold elected and non-elected lots side by side, and cost is still required for tax and for everything outside the election. A system that carries only one number cannot represent the population the standard actually creates.
- Sourcing fair value from an exchange quote with no basis adjustment. The exchange price is for a standard grade at a standard delivery point. A physical lot has a quality and a location that differ, and that difference is measurable. Marking a lot to a raw screen price without the documented basis overstates the precision of the number and understates the work Topic 820 expects.
- Deciding the income statement geography late. If the line where fair value changes are reported is chosen at close instead of at design, the disclosure of gains and losses by line becomes a manual exercise every period, and two periods can end up inconsistent. The mapping belongs in the subledger, set once.
- Assuming the option will reach every commodity-holding company on day one. The Board framed the population around entities within Topic 942 and is still weighing how far beyond that it goes. Building as though a broad election is certain risks electing where the final scope does not allow it. Build the capability, and gate the election on the scope the standard actually grants.
- Losing the election metadata. An irrevocable election made at initial recognition is a fact about a lot that has to survive for the life of that lot. If the election, its level, its date and its rationale live in an email rather than on the record, a future close cannot tell why two identical looking lots are measured differently.
- Running the fair value basis without change control on the price source. If the source, the basis adjustment or the method changes silently, the remeasurement changes with it and nobody can explain the movement. Version the price source and the assumptions the same way you would version any input to an audited number.
- Confusing this with hedge accounting and re-opening designations. The option exists partly because hedge accounting for commodity inventory is costly and often unavailable. Using the inventory fair value basis to close the mismatch is the simpler path, and dragging hedge designation back into it defeats the reason the Board is offering the option.
- Forgetting the lots that are not elected still need a described story. Where the option is elected for some but not all similar items, the Board is considering a disclosure that describes those items and the reason for the partial election. A book that cannot show, per group, what was elected and what was not will struggle to write that description.
What this asks of the data model.
- The unit of account is the lot, and it needs to carry two bases at once. Cost at the lower of cost or net realizable value, and, where elected, fair value. Most inventory subledgers were built to carry one. The whole design of this change is a record that holds both and knows which one drives the balance sheet for this lot in this period.
- The scope decision is data, not prose. Whether a lot is eligible depends on the entity, on what counts as a commodity, and on the activity it is held for. Capturing entity, commodity classification and holding intent as attributes on the lot turns the scope test into a query and keeps the answer consistent across a large book.
- The election is an attribute of the lot with a level and a lineage. Recorded at initial recognition, irrevocable, and made at a level from all commodities down to a single purchase. Store the election, its level, its date and its author on the record, because the mix of elected and non-elected lots is the normal state, not an edge case.
- A fair value basis needs a price source with a documented adjustment. The exchange quote is the start, and the quality and location basis is what makes it the price of this lot. Hold the source, the basis and the method as versioned data so the fair value is reproducible and the Topic 820 disclosures come from the same place the number does.
- The remeasurement needs a fixed income statement mapping. Each period a lot is measured at fair value, the change is a gain or loss on a specific line, disclosed by line. Storing that mapping on the subledger rather than deciding it at close is what makes the posting repeatable and the disclosure automatic.
- Cost has to survive for tax and for non-elected positions. The fair value option is a book measurement, and the tax basis does not follow it. A design that keeps cost in parallel serves the tax computation, the lots outside the election and the entities outside the scope without a separate system.
- Transition is a reconciliation between the two bases. Prospective, cumulative-effect and full retrospective each define a different opening position, and all three require the cost basis and the fair value basis to be reconciled at the adoption date. Build that reconciliation as a stored artefact rather than a one-time spreadsheet.
- The physical position and the hedge should be linkable but separate. The mismatch the change addresses is between an inventory lot and the derivative that hedges it. Keeping a link from the lot to its hedge, while measuring each under its own guidance, is what lets a reader see the net economic position the option is meant to reveal.
The audit evidence to keep.
- The scope conclusion for each lot, showing the entity, the commodity classification and the activity that put it in or out of scope, with a short basis for the conclusion.
- The election record for each elected lot: that it was made at initial recognition, the level of election, the date, the person, and that it was treated as irrevocable thereafter.
- The price source and the basis adjustment used to measure fair value, with the version in effect for the period and the method and significant assumptions behind the estimate.
- The remeasurement for each period, tying the change in fair value to the income statement line where it was reported, so the disclosure of gains and losses by line can be traced.
- The parallel cost basis for every lot, including elected ones, and the reconciliation between the cost basis and the fair value basis at the adoption date and at each period end.
- The Topic 820 fair value measurement disclosures for the elected commodities, drawn from the same data that produced the carrying amounts rather than assembled separately.
- The partial election evidence, per group of similar items, showing which items were elected and which were not and the reason, to support the description the standard is expected to require.
- The link between each hedged inventory lot and the derivative that hedges it, so the net economic position and the reason for electing the option are both visible in the file.
Questions worth asking in your own review.
- Could our inventory subledger carry a fair value basis for a lot alongside its cost today, or would fair value have to overwrite cost?
- For any physical commodity lot, can we say from data whether it would be in scope, or would that be a manual judgement each time?
- Do we have a governed price source per commodity, with the quality and location basis that separates our physical lot from the exchange quote?
- If we elected the option for some lots and not others, would the system show, per group, what was elected and why?
- Where would a fair value gain or loss be reported in our income statement, and is that mapping decided or improvised?
- Does our current earnings volatility come partly from carrying inventory at cost while its hedge sits at fair value, and can we quantify that today?
- If the option required a cumulative-effect or retrospective transition, could we reconcile the cost basis and the fair value basis at the adoption date?
- Would electing this option pull commodity price marks into our close, and is our price governance ready to be an input to audited numbers?
What this adds up to.
The Accounting for Commodities project is, at heart, a chance to make the balance sheet agree with how a commodity business already thinks. The trader knows the barrel is worth today price, the risk desk hedges it at today price, and only the ledger insists on a cost that stopped being the story the moment the market moved. Letting eligible inventory be measured at fair value lines the accounting up with the economics, and it takes a lot of the strain off hedge accounting in the process.
What lands on a finance systems team is a record, not a rewrite. An inventory lot that carries cost and, where elected, fair value. A scope flag set from entity, commodity and activity. An election captured at recognition, at the level it is made, and kept. A governed price with its quality and location basis. A remeasurement mapped to an income statement line and disclosed by line. Cost retained in parallel for tax and for everything outside the election. Those are ordinary things to build, and they are the same record before and after the standard is final.
If there is one place to start, start by asking whether your inventory subledger could hold a fair value for a lot next to its cost at all. If it could, you are most of the way there, and you can give management a market-priced view of inventory now while the exposure draft catches up. If it could not, that is the whole job, and it is a good job to do early, because the payoff arrives twice: a clearer picture of the position today, and a standard that rewards the record when it lands.
Sources.
- Financial Accounting Standards Board, Board Meeting Handout, Accounting for Commodities, 4 February 2026. Downloaded as a PDF and read directly rather than through a summariser. Source for the current measurement of commodities under Topic 330 at the lower of cost or net realizable value, the industry exceptions in Topic 905, Agriculture, and Topic 940, Financial Services, Brokers and Dealers, the absence of a Master Glossary definition of commodity, the accounting mismatch with fair value derivatives, and the two scope alternatives the staff analysed
- Financial Accounting Standards Board, Board Meeting Handout, Accounting for Commodities, 27 May 2026. Downloaded as a PDF and read directly. Source for the seven design issues (entities within Topic 942, whether to define commodity, the activity-based scope alternatives, an option modelled on Topic 825, the level of election, disclosures, and transition), the 2021 ISDA agenda request, and the outreach industries of oil and gas, agriculture, banks, metals and mining, and energy
- Financial Accounting Standards Board, Technical Agenda Overview, revised 20 August 2026. Downloaded and read directly. Source for the Accounting for Commodities project carrying a next milestone of an Exposure Draft with an expected date in the fourth quarter of 2026
- Deloitte, FASB Holds February 4 Meeting. A near-primary recap used to confirm that the Board added a project to its technical agenda to improve the accounting for certain tangible commodities inventories
- KPMG, Inventory accounting: IFRS Accounting Standards vs US GAAP, 2026. Used as a cross check on the lower of cost and net realizable value measurement, on the point that a write-down to net realizable value is not reversible under US GAAP while it can reverse under IFRS, and on the existing routes by which some commodities are already carried at fair value
- Centri Consulting, Bridging the GAAP: May 2026. A near-primary monthly recap used only to confirm that the 27 May 2026 Board meeting continued deliberations on the Accounting for Commodities project across scoping, disclosure, and transition
Every date, issue and design detail above was read from the primary FASB board meeting handouts rather than from a summary of them. The 4 February 2026 and 27 May 2026 Accounting for Commodities handouts and the technical agenda overview revised 20 August 2026 were each downloaded and read directly. They are the source for the current measurement under Topic 330, the industry exceptions in Topics 905 and 940, the absence of a Master Glossary definition of commodity, the accounting mismatch and the 2021 ISDA agenda request, the seven design issues including the Topic 942 framing and the Topic 825 style option, the election levels, the disclosures, the transition alternatives, and the next milestone of an Exposure Draft expected in the fourth quarter of 2026. Because a proposed Update is still forthcoming, the scope and every requirement here are subject to change, and this article treats them as a work in progress rather than settled GAAP. The Deloitte recap, the KPMG comparison of inventory accounting under IFRS and US GAAP, and the Centri monthly recap were used only to cross check that the project was added, how inventory is measured today, and that the 27 May meeting continued the deliberations, and no fact here rests on them alone. No embedded posts from X appear in this article, because no public post on this project could be verified as current, relevant and authentic at the time of writing, and an unverified embed is worse than none. Nothing here is accounting, legal or tax advice for a specific company, and the treatment of any particular commodity position turns on the facts of that entity and the standard as finally issued.