I was listening to the Wiley Audios and they mentioned that when a company has a purchase contract to buy goods over multiple years at a fixed price with a minimum required purchase each year and the value of the goods drops significantly, a loss is recognized.

Is the loss recognized for just the goods that have already been received in the current year, or is the entire minimum purchase from each year totaled and used in determining the loss? Like is the purchaser required to buy the minimum amount each year?

Or am I misinterpreting this altogether and do they mean to say that they get to take advantage of the fixed price if they purchase at least the minimum amount for that year? If so, does that mean the only contractual obligation is the seller to keep the price fixed if the buyer buys at least the agreed upon quantity?

This is my understanding. I think is the conservatism approach that you take. When you have a fixed commitment to purchase in the future and you know the price was dropped permanently then you recognized a loss immediately.

YOu'll have a loss for the total fixed price commitment that you have. Because you could buy the same item at a lower market price if you did't have a fixed price commitment. Your competitor will buying cheaper than you are.

the loss/liability is booked for the total estimated items to be purchased in the future.

Or as you said "entire minimum purchase from each year"

This however, should not include items already purchased as that will be taken care of in an inventory adjustment and not this "liability on future purchases"

so lets say you were going to purchase 100 units at $10 but now you realize that you can only sell them for $2 each.  Your contract tells you that you have to purchase 100 units...

so you book a liability for the difference.

dr. Estimated loss on commitments 800

cr Estimated liability on commitments 800