The Death of LIFO Accounting ?

IAS 2 Inventories does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of inventories of a company. This regulation has left the first-in, first-out (FIFO) and the weighted-average methods as the only two acceptable costing methods under IFRS.

In connection with the prohibition of LIFO formula, CFO.com on July 15, 2010 published an article titled “Sucking the LIFO Out of Inventory”. Written by Marie Leone, Senior Editor of CFO.com, this article described why companies still prefer LIFO method to measure the cost of inventories.

Here is the quotation from the article,

LIFO allows companies to calculate the cost of goods sold based on the price of the most recently purchased (“last-in”) inventory, rather than inventory that was purchased more cheaply in the past and has been sitting on the shelf. 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. Read further

The LIFO method has long been acceptable in the US for tax purposes, and, within the condition of rising prices, LIFO costing method resulted in lower reportable income and therefore in lower taxes.

Read also : Method of Inventory Costing under IAS 2