The Death of LIFO?

Changing inventory method requires managing the accounting-tax differences.

January 2009
by Robert Bloom and William Cenker/Journal of Accountancy

Few differences between IFRS and U.S. GAAP loom larger than accounting for inventories, particularly the disallowance of the last-in, first-out (LIFO) method in IFRS. The proposed shift of U.S. public companies to IFRS could affect many companies currently using LIFO for both financial reporting and taxation. This is because the conformity rule of IRC § 472(c) requires taxpayers who apply LIFO for tax purposes to also apply it for income measurement in financial reporting, and IFRS does not permit LIFO for book accounting.

Therefore, CPAs may be called upon to help manage inventory method changes. Companies using LIFO would have to switch to FIFO or average cost. The change would place companies in violation of the conformity requirement. Absent relief from the Treasury Department, it would require them to change their tax method of inventory reporting.

This article highlights the impact of LIFO accounting, widely used in the U.S. but scarcely used elsewhere. It could be eliminated if U.S. GAAP were to fully conform to IFRS inventory accounting. If LIFO were to disappear, many U.S. companies could face large income tax liabilities from accelerated income recognition. In 2007, Exxon Mobil Corp. reported its aggregate replacement cost of inventories at year-end exceeded the inventories’ LIFO carrying value by $25.4 billion. The Sherwin-Williams Co. reported that if it had used FIFO instead of LIFO, its net income for 2005 would have been $40.8 million higher (Exxon Mobil Corp., 2007 SEC Form 10-K; The Sherwin-Williams Co., 2007 SEC Form 10-K).

This has been excerpted from the Journal of Accountancy. View the full article here.