Write a 260- to 350-word summary of this week’s readings.
Describe major concepts you learned.
Explain how you can apply what you learned to your current or future workplace.
For accounting flexibility, LIFO provides key
solutions
AMM staff . American Metal Market ; New York (Nov/Dec 2013): n/a.
ProQuest document link
ABSTRACT
“For the large amount of tax savings provided by lifo, many companies have not assigned a high-enough priority to
the accuracy of their lifo calculations,” said a spokesman for Omaha, Neb.-based Lifo Pro Inc., a company that
produces inventory software. “It is ironic that most companies spend a great deal of time gathering data to use in
the lifo calculations but then make errors–and no lifo error is small–in the final part of their lifo calculations. They
also do not provide adequate documentation for their lifo layers history.
“One of the unique aspects of lifo calculations is that lifo inventory amounts are accumulations of layers from
numerous years and link-chain indexes are the products of all past years’ inflation indexes,” the spokesman said.
“The accuracy of the lifo inventory balance today depends on lifo calculations made in all the years since lifo
adoption. Because of this, the IRS requirements of’adequate books and records’ with respect to lifo are more
demanding than normal.”
“The use of lifo provides a different impression of a firm’s financial position and performance than if, for example,
the first-in, first out (fifo) method were used,” a former tax partner with a prominent national accounting firm said.
“These differences arise because the lifo method assumes that the costs of the most recently purchased goods
are expensed as part of cost of goods sold for the period. As a result, older costs remain in inventory on the
balance sheet. When inventory costs are rising, lifo will result in a higher cost of goods sold, lower earnings and
lower measures of inventory. In contrast, the fifo method assumes that the most recent purchases remain in
inventory and older costs are expensed through cost of goods sold. With rising inventory costs, fifo will result in a
lower cost of goods sold, higher earnings and higher measures of inventory.”
FULL TEXT
The last-in, first-out accounting method provides many tax benefits, but for metal companies of all sizes it also
presents a number of challenges related to internal processes, the use of staff time, management expertise and
the limits of some IT systems.
One of the major tools that metal manufacturers and distributors use to help boost cash flow and on-the-ledger
profitability has nothing to do with the plant floor or a piece of equipment; it is an accounting measure known as
last-in, first-out (lifo).
But for companies big and small–especially for those that are bigger–lifo presents accounting, spreadsheet,
information technology and even public policy and political challenges. (As to the latter, the Obama administration
has attempted to do away with the practice.)
“Lifo isn’t something new; rather, lifo has been used and accepted as a legitimate accounting method by
accountants, tax lawyers, the IRS and Congress since the 1930s,” a spokesman for Washington-based trade
advocacy group Lifo Coalition said. “In fact, when lifo was officially recognized almost three-quarters of a century
ago, Congress imposed a financial reporting conformity requirement making the use of lifo for financial reporting a
condition of its use for tax purposes.
Lifo allows companies to calculate the cost of goods sold based on the price of the most recently purchased (lastPDF GENERATED BY SEARCH.PROQUEST.COM
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in) inventory, rather than inventory that was purchased more cheaply in the past and has been sitting on the shelf,
according to the Georgia Tech College of Management. That boosts the cost of goods sold, which lowers profits-and, thus, taxable income. Lifo is particularly important to companies that have slow-moving inventory–such as
industrial manufacturers and distributors–and are therefore vulnerable to rising prices.
Lifo is used in numerous industries, including metal producers and service centers, where large inventories are
commonplace. In fact, New York-based ratings agency Moody’s Investors Service Inc. estimates that the metal and
mining industries are among the top sectors benefiting from the use of lifo.
“For the large amount of tax savings provided by lifo, many companies have not assigned a high-enough priority to
the accuracy of their lifo calculations,” said a spokesman for Omaha, Neb.-based Lifo Pro Inc., a company that
produces inventory software. “It is ironic that most companies spend a great deal of time gathering data to use in
the lifo calculations but then make errors–and no lifo error is small–in the final part of their lifo calculations. They
also do not provide adequate documentation for their lifo layers history.
“One of the unique aspects of lifo calculations is that lifo inventory amounts are accumulations of layers from
numerous years and link-chain indexes are the products of all past years’ inflation indexes,” the spokesman said.
“The accuracy of the lifo inventory balance today depends on lifo calculations made in all the years since lifo
adoption. Because of this, the IRS requirements of’adequate books and records’ with respect to lifo are more
demanding than normal.”
“The use of lifo provides a different impression of a firm’s financial position and performance than if, for example,
the first-in, first out (fifo) method were used,” a former tax partner with a prominent national accounting firm said.
“These differences arise because the lifo method assumes that the costs of the most recently purchased goods
are expensed as part of cost of goods sold for the period. As a result, older costs remain in inventory on the
balance sheet. When inventory costs are rising, lifo will result in a higher cost of goods sold, lower earnings and
lower measures of inventory. In contrast, the fifo method assumes that the most recent purchases remain in
inventory and older costs are expensed through cost of goods sold. With rising inventory costs, fifo will result in a
lower cost of goods sold, higher earnings and higher measures of inventory.”
This means the income, cash-flow and balance-sheet effects of lifo are far different than those of fifo. Although
there is little in the way of off-the-shelf software available to help metal companies with lifo needs, several firms
offer programs, processes and consulting to help boost the use, and efficacy, of these accounting measures.
Accenture Plc, a Dublin-based IT and business consulting company that provides finance and accounting
solutions, said a businesswide approach to lifo could lead to many benefits but cautioned that, “historically,
problems with inventory valuation–such as inaccurate accruals, revenue recognition and asset impairment–have
been a major factor behind financial restatements.”
A spokesman for New York-based Deloitte LLP, an audit, financial advisory, risk management and tax consulting
firm, said companies can be at risk of calculating their lifo internal inflation index incorrectly, using resources
inefficiently and missing value-added opportunities. This is especially true if a company has implemented a new
enterprise resource planning (ERP) system, employs a statistical sampling method or an outdated process to
calculate lifo, spends weeks or more of employees’ time preparing rather than analyzing the lifo calculation, has
documentation issues with lifo, has had a personnel ownership change in its lifo process or is often surprised at
year-end with the results of a lifo calculation and cannot explain the cause of the results.
New York-based accounting and consulting firm Crowe Horwath LLP offers what it calls a “cost-effective
technology-enabled lifo processing solution that reduces the cost to perform lifo computations that help to comply
with IRS rules and procedures; frees up internal resources needed during busy times of the year; and provides
calculations that have been reviewed by lifo professionals.”
Although numerous companies use the lifo method, President Obama’s current tax proposal would repeal it. The
proposal is not new, but industry lobbying over the past few years has stalled prior attempts to repeal it.
Lifo is a specifically authorized tax accounting method under a section of the U.S. tax code. There are two ways it
could be eliminated. The first would be an outright ban, such as that proposed under Obama’s corporate tax reform
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proposals. The other would be through the adoption of international financial reporting standards (IFRS), globally
accepted accounting standards for financial reporting that do not allow the use of lifo. The U.S. government is
considering adopting IFRS, which is administered globally by the International Accounting Standards Board and by
the Financial Accounting Standards Board within the United States.
The U.S. Treasury Department recently estimated that by adopting either proposal to drop lifo, the government
would see about $60 billion in additional annual tax revenue, while the Joint Committee on Taxation put the
revenue pickup at about $80 billion. Both estimates are less than an estimate in excess of $100 billion in a House
bill.
“The transition from lifo to an alternate inventory method will have a direct impact on many companies’ cash
taxes,” a study by New York-based PricewaterhouseCoopers LLP (PwC) said. “Many U.S. companies with a foreign
parent that have already converted, or are in the process of converting, to IFRS have already faced this issue.”
“Even if lifo somehow survives another year of federal budgeting, it still faces the long-term threat of being wiped
out if the U.S. adopts IFRS,” a spokesman for advocacy group SaveLIFO said. “That would stop companies from
using lifo entirely, because companies that use the method to reduce taxable income reported to the IRS must also
use it for financial reporting rather than potentially more-flattering methods, such as fifo or average cost
“Unfortunately, Obama sent a 2014 budget proposal to Congress which once again proposed lifo repeal. Repealing
lifo would force companies currently using this method to report their lifo reserves as income, resulting in a
massive tax increase for large and small businesses across the country. Additionally, repealing lifo would mean
potentially higher future tax bills and would make it harder for companies to manage inflation,” SaveLIFO said.
“Regardless of whether a company changes from lifo to fifo as a result of adopting IFRS or because of legislative
repeal, such change is likely to have a significant impact on its cash taxes,” the PwC study said. “Assuming lifo is
not repealed through legislation, in certain situations a company may qualify for an exception from the lifo
conformity requirement. As a result, the company may be able to continue to use lifo for tax reporting purposes
even after they convert to IFRS for financial reporting purposes.”
DETAILS
Subject:
Accounting; Metalworking industry; Distributors
Location:
United States–US
Classification:
8660: Metalworking industry; 9190: United States
Publication title:
American Metal Market; New York
Pages:
n/a
Publication year:
2013
Publication date:
Nov/Dec 2013
Publisher:
Euromoney Institutional Investor PLC
Place of publication:
New York
Country of publication:
United Kingdom, New York
Publication subject:
Metallurgy
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ISSN:
00029998
Source type:
Trade Journals
Language of publication:
English
Document type:
News
ProQuest document ID:
1477858243
Document URL:
https://search.proquest.com/docview/1477858243?accountid=35812
Copyright:
( (c) Euromoney Institutional Investor PLC Nov 2013)
Last updated:
2014-04-05
Database:
ProQuest Central
Database copyright ? 2020 ProQuest LLC. All rights reserved.
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How Do Your Borrowers’ Inventory Practices Stack Up: Asset-Based Financial Services Industry
Rein, Howard, CPA, CFE;Costello, John, CPA
The Secured Lender; Jan/Feb 2010; 66, 1; ProQuest Central
pg. 34
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Headnote
This article is based on a study supported by the IMA® Research Foundation.
The Securities & Exchange Commission (SEC) is in the process of deciding whether U.S. companies can
issue financial statements using International Financial Reporting Standards (IFRS). For management
accountants, inventory valuation is of special concern. Though IFRS and U.S. Generally Accepted
Accounting Principles (U.S.GAAP) have commonalities in inventory valuation requirements, they differ in
initial measurement, subsequent measurement, disclosure requirements, and tax impact. Switching to
IFRS wouldn’t only require coordinating many regulatory authorities, such as the Public Company
Accounting Oversight Board (PCAOB), the Internal Revenue Service (IRS), and the SEC, but it would also
put pressure on changes to company information systems, internal controls, and tax planning.
We’ll review the major milestones on the road to possible convergence, summarize the differences in
inventory valuation between IFRS and GAAP, and identify major issues that companies switching to IFRS
have to contend with.
According to the 2008 IFRS roadmap, the SEC was supposed to decide in 2011 whether U.S. companies
can issue financial statements using IFRS from 2015 onward. In September 2009, the leaders of the G20
nations requested that the international accounting bodies create a single set of global accounting
standards by June 2011. In November 2009, the International Accounting Standards Board (IASB) and
the Financial Accounting Standards Board (FASB) reaffirmed that they would continue to harmonize
their respective standards and try to meet the 2011 deadline. In February 2010, the SEC issued a
“Statement in Support of Convergence and Global Standards” and issued a Work Plan highlighting six
areas of concern commentators raised.
Although the SEC didn’t decide by June 30, 2011, they sponsored a roundtable on July 7, 2011, to further
analyze issues related to investor analysis and knowledge of IFRS, as well as the impact of IFRS on
smaller public companies and the regulatory environment. In addition, the Office of the Chief
Accountant at the SEC issued working papers in May and November 2011 on implementation issues,
differences in GAAP vs. IFRS, and analysis of foreign issuers already using IFRS. In November 2011, the
Division of Corporate Finance at the SEC also issued an analysis of IFRS in practice.
Currently, most U.S. companies aren’t expected to be filing with IFRS for the next five years. Yet the SEC
requires three years of comparative statements, which implies that if IFRS becomes applicable by 2015
(as per the SEC statement above), some companies may need to adopt the new standards in 2012. In a
speech to the American Institute of Certified Public Accountants (AICPA) on December 5, 2011, SEC
Chief Accountant James Kroeker indicated that they “are in the final stages of completion of the majority
of the field work related to the Work Plan (2010).” He also said the SEC does need more time and that
they are many months away from finalizing any decision related to IFRS (www.sec.gov/news/
speech/2011/spch120511jlk.htm).
But the move to converge to IFRS has tentatively been set. Accounting practitioners and educators need
to prepare for the transition now and learn the differences between these two sets of
standards.Management accountants in particular need to educate themselves about inventory
valuation. In manufacturing and merchandising industries with significant inventories, different
valuation methods not only affect assets on a balance sheet, but they also result in different cost of
goods sold (COGS) reported and have implications for tax planning. For example, Exxon Mobil Corp.
reported that its replacement cost of inventories at 2010 and 2009 yearends exceeded its last-in, firstout (LIFO) inventories by $21.3 billion and $17.1 billion, respectively. Because IFRS doesn’t allow for the
LIFO inventory valuation method, companies like Exxon Mobil, which adopts LIFO under GAAP, would
face tremendous difficulty in the transition.
GAAP-Initial Measurement
GAAP primarily values inventory just like other assets- at cost of acquisition or production (Accounting
Standards Codification® paragraph 330-10-30). Valuation for cost of acquisition includes all the costs
incurred to bring inventory to a saleable condition and location, and production includes all variable
overheads and allocation of fixed overheads. Interest can’t be allocated to the cost of inventory during
routine production. If the inventory items are specific and separately identifiable, the costs can be
uniquely allotted, but if the inventory items are identical and interchangeable, then an assumption of
the flow of costs can be made-first-in, first-out (FIFO), average costs, or LIFO. The method chosen should
be the one that best reflects income. Standard costs are also accepted provided the company adjusts
them to reflect current conditions. GAAP also requires the company to value inventory using the same
procedure year after year (Codification paragraph 330-10-15).
GAAP-Subsequent Measurements
If there’s evidence that disposing of inventory in the normal course of business will be at lower than
cost, then the difference between cost and expected disposal price will be recognized as a loss in the
current period (Codification paragraph 330-10-35). To do so, a company values inventory at market
value (lower than cost), which is called the lower-of-cost-or-market rule. The market value is the current
replacement cost subject to the following conditions:
* It doesn’t exceed net realizable value (selling price in normal business minus reasonable costs of
completion and disposal), and
* It isn’t less than net realizable value minus a normal profit margin.
One exception to the lower-of-cost-or-market rule is that if there’s any evidence that sales would occur
at a fixed price, even if current replacement cost is lower than actual cost, then such a loss won’t be
recognized. If a company used fair value hedges to fix inventory costs, it should adjust the cost of
inventory. If inventory has been written down under the lower-of-cost-or-market rule, then the new
value would be the cost of inventory in the subsequent period. The lower-of-cost-or-market rule also
applies to firm purchase commitments the company can’t cancel. Also, the SEC StaffAccounting Bulletin
(paragraph 330-10-S99-2) has interpreted that once the inventory has been written down below cost to
a new value, it can’t be written back up again to historical costs if facts and circumstances change.
GAAP considers income to have accrued at the time of sale, so profits can’t be anticipated by valuing
inventory at the current selling price (paragraph 330-10-35-15). But there are exceptions.When the
selling price is controlled and costs aren’t easily obtained, such as in agricultural products, metals, or
minerals, a company can value such inventory at market price minus disposal costs.
GAAP-Disclosure Requirements
Regulation S-X rule 5 provides the disclosure requirements for balance sheet items (paragraph 210-10S99-1). Inventories are disclosed under current assets. The classes of inventory and the basis of
valuation are stated separately. If any costs are allotted to inventory, they have to be disclosed
separately, and if a company uses the LIFO method, then it has to disclose the difference between the
stated and current value, which is the LIFO reserve.
GAAP-Tax Impact of Inventory Valuation
The IRS tax conformity rule IRC §472(c) requires that companies using LIFO for tax purposes have to use
LIFO for income measurement in financial accounting, too. Typically, companies using LIFO tend to have
lower tax expenses, but they also have lower financial income. A change in inventory methods can affect
the company’s taxable income. If the change results in lower taxes, then the company can deduct the
entire change in the year of the change, but if the change results in the company owing taxes, then the
IRS allows the company to defer the taxes for three years (IRC §481). Also, a gain on sale of inventory
and any tax effects on such a gain between related companies can’t be recognized until the inventory is
sold to an outside party.
Switch to IFRS
IFRS adopted International Accounting Standard (IAS) 2, Inventories, which provides guidance on
inventory valuation and applies to companies beginning January 1, 2005. Although the standard is
similar to GAAP, the differences can result in substantially different inventory values. Table 1
summarizes the main differences in inventory valuation between GAAP and IFRS.
IFRS-Initial Measurement

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