Accounting for end-users

End-users are different because financial instruments are only part of the business.
While financial instruments can easily be marked to market since the assets are
fungible and there are more or less liquid two-way markets, this does not apply to
assets such as factories or work in progress. Thus such entities use historical cost
accounting as a default. However, they may use accrual accounting or mark to
market for their trading assets.

The pure historical cost method does not recognize the cost of borrowing in the
trading accounts because that is included with all the other borrowing costs for the
organization, and delays recognizing the profit until the sales invoice is due. The
accrual method includes all the costs, but at their final cash value, and spreads the
profit over the period of the deal. The mark to market method calculates the net
present value of all income and costs, but recognizes the gain immediately. As the
spot and forward prices of oil move over the following six months, the mark to market
method would recognize any net differences each day, but with such a cleanly hedged
position the effect would be unlikely to be much different from the smooth drip
shown which represents the interest on the net profit (592*6%/2ó18).
Profit is recognized earlier in the mark to market method. Losses are recognized at
the same time under all methods, since the historical cost and accrual methods are
not symmetrical, because they embrace the concept of prudency. Applying such lack
of uniformity requires more human judgement. This illustrates the higher risk
associated with longer-term trades, where the acceleration in the recognition of profit
is most marked.