Considering Life After LIFO

Elizabeth Plummer, PhD, CPA, and Robert L. Vigeland, PhD, CPA

The last-in, first-out (LIFO) inventory method faces threats from several directions, and several factors point toward LIFO's eventual elimination for both financial and tax purposes. First, LIFO is not permitted by International Financial Reporting Standards (IFRS). Given the ongoing efforts to converge U.S. GAAP with IFRS, this would lead to the elimination of LIFO from U.S. GAAP unless standards setters provided for an exception that allowed businesses to continue using LIFO. Second, under current federal tax law, companies may only use LIFO for tax purposes if they also use it for financial reporting purposes. Unless the tax law is changed, eliminating LIFO for financial reporting purposes would effectively eliminate it for tax purposes. Finally, due to the significant budget pressures facing the federal government, there is considerable interest among lawmakers in repealing LIFO for tax purposes in order to increase tax revenues.