Indeed, small companies
not required to use IFRS may very well stay on LIFO. A taxpayer required to maintain inventories must determine which items remain in ending inventory using a cost flow method. Permissible cost flow methods include specific identification, first-in, first-out (FIFO), and last-in, first-out (LIFO).
- Absent relief from the Treasury Department, it would
require them to change their tax method of inventory reporting. - Therefore, CPAs may be called upon to help manage inventory method
changes. - Most companies utilize both methods when preparing financial information.
- Another possibility would be for the Treasury Department to
extend the period over which those tax obligations are due beyond the
currently allowed four years. - GAAP loom larger than
accounting for inventories, particularly the disallowance of the
last-in, first-out (LIFO) method in IFRS. - The Inflation Reduction Act represents the largest climate investment in US history, including $370 billion of new energy-related tax credits over the next 10…
- If inflation continues and inventory quantities stay consistent or increase, companies using LIFO will immediately, and in future years, experience a cash tax benefit.
Many companies use dollarvalue LIFO, since this method applies
inflation factors to «inventory pools» rather than adjusting
individual inventory items. Companies that are on LIFO for taxation
and financial reporting typically use FIFO internally for pricing,
purchasing and other inventory management functions. INCOME EFFECTS
Companies adopt LIFO primarily to lower their income tax
liability and to postpone paying taxes, but it also reduces income for
financial reporting purposes.
AccountingTools
The
taxpayer had used GAAP in the past, but was required to switch to
IFRS. Despite the fact that IFRS do not allow the LIFO method, the
taxpayer continued to use it for tax reporting purposes. When the
company gave financials to its parent company, it provided an IFRS
balance sheet. So while the taxpayer was prohibited by IFRS from
using LIFO, LIFO conformity rules state that a taxpayer
cannot use an inventory method other than LIFO if it has
already elected to use LIFO.
Nevertheless, companies are not required
to use the same LIFO method for taxation and accounting. For example,
a unit LIFO method could be used in accounting and a dollar-value LIFO
method in taxation. GAAP loom larger than
accounting for inventories, particularly the disallowance of the
last-in, first-out (LIFO) method in IFRS. The proposed shift https://www.bookstime.com/ 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.
Tax Policy Outlook: Challenges and opportunities
Over the past few years, in order to comply with the growing
movement toward consistent international reporting on financial
statements, many companies have begun the transition to
International Financial Reporting Standards (IFRS). While making
this change, there are many factors that corporations need to
consider. One of the major features of IFRS reporting is that it
does not permit lifo reserve the use of LIFO (last-in, first-out) for inventory
valuation. Taxpayers adopting the LIFO method may measure inflation using indexes based on changes in internal inventory costs or indexes published by the Bureau of Labor Statistics under the inventory price index computation (IPIC) method. Taxpayers experiencing rising inventory costs should consider adopting the LIFO cost-flow method.
Almost all analysts look at a publicly-traded company’s LIFO reserve. Often earnings need to be adjusted for changes in the LIFO reserve, as in adjusted EBITDA and some types of adjusted earnings per share (EPS). The FIFO method of evaluating inventory is where the goods or services produced first are the goods or services sold first, or disposed of first. The LIFO method of evaluating inventory is when the goods or services produced last are the ones to be sold or disposed of first. Consequently, while making the transition to IFRS, business
owners must be conscious of the tax consequences of this
transition.