Question

The LIFO inventory cost flow assumption is not permitted under international financial reporting standards. The primary reason for the disallowance of LIFO appears to be that international standards have a strong balance sheet measurement focus and efforts have been made to eliminate accounting methods that do not support this approach. During inflationary times LIFO assigns to inventory the costs of the oldest items acquired by the company, thus causing balance sheet values to become outdated as the company grows.

Approximately 30% of U.S. companies currently utilize LIFO. Think about what the implication would be for these companies if the LIFO cost flow assumption were no longer available as a reporting alternative under U.S. GAAP. Do you think U.S. GAAP should follow IFRS and disallow LIFO? Why or why not? You may search additional sites to help form an opinion. One site that may be of interest is savelifo.org. (1-2 Paragraphs)

Answer 1

Under US GAAP, Companies have the option to choose from FIFO or LIFO Inventory valuation methods whereas under International IFRS, only FIFO method is prescribed. This creates a financial inconsistency between Financial Reporting and makes comparison difficult for US Firm adopting LIFO and while Non US Firm adopting FIFO.

In the light of International Standards, FIFO is seen as the most appropriate method towards Inventory Valuation.The primary reason for the following is the results obtained using FIFO are consistent with the other Accounting Concepts such as Fair Valuation, Matching Concept of Costs and Revenes. FIFO valuation represents closing inventory at most recently purchased prices and hence is representative of Fair Value.

If FIFO method is adopted by US Firms, it will be a move towards appropriate valuation of Inventory, Cost of Goods Sold and overally Financial reporting. The Cost of Goods Sold will show decline while Closing Stock valuation would rise. Net Profit Margin may rise in the beginning due to lower Cost of goods sold in the beginning but the same would neutralize after 1-2 years.

Considering the above points, US GAAP shall incline towards IFRS and adopt FIFO method only towards Inventory Valuation to bring Uniformity, Consistency and Comparability in Financials. FIFO method shall be made mandatory.