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Restrictions on the use of LIFO

Though the Obama administration has lobbied since 2011 for the repeal of the LIFO
standard, talks are still ongoing in 2015. Regardless, the accounting method is still subject
to increased restrictions both in the United States and internationally. Basically, once you
use LIFO, you can't use any other method that year.

"If LIFO is used on a taxpayer's tax return, then no other method can be used to value
inventory to calculate income, profit or loss in any report or statement covering the same
tax year that is provided to shareholders and other owners or to creditors," Melwani said.

In the United States, the IRS strictly enforces this rule. Meanwhile, LIFO is banned by
International Financial Reporting Standards (IFRS), a set of common rules for
accountants who work across international borders. While many nations have adopted
IFRS, the United States still operates under the guidelines of Generally Accepted
Accounting Principles (GAAP). If this country were to ban LIFO, the United States
would clear an obstacle to adopting IFRS, thus streamlining accounting for global
corporations.

Because of the current discrepancy, however, U.S.-based companies that use LIFO must
convert their statements to FIFO in the footnotes of their financial statements. This
difference is known as the LIFO reserve, and is calculated between the cost of goods
sold (COGS) under LIFO and FIFO, Melwani said. This increases the comparability of
LIFO and FIFO firms.

In general, standards both in the United States and internationally are moving away from
LIFO and FIFO. Many U.S.-based companies have switched to FIFO; some companies
still use LIFO within the United States as a form of inventory management, but translate
it to FIFO for tax reporting. Only a select few large companies within the United States
are still able to use LIFO for the purpose of tax reporting.

Many companies believe the repeal of LIFO would result in a tax increase for both large
and small businesses, though many other companies use FIFO with little financial
repercussion.

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