Squeezed by inflationary pressure on their earnings, companies are moving away from “last-in, first-out” (LIFO) accounting, and toward “first-in, first-out” (FIFO) accounting for their inventory, The Wall Street Journal reported.

The producer price index rose by 4.6 percent in February from a year earlier. FIFO can allow businesses to align their inventory accounting across global operations. It can boost a company’s profitability because older inventory acquired at a lower cost is used to value the cost of goods sold on the income statement. It is also allowed under International Financial Reporting Standards, which LIFO is not.

LIFO allows companies to use additional cash up front from their lower tax bills to invest in their businesses, but it also increases reported costs of goods sold and hit earnings.

About 30 U.S. companies in 2021 and 2022 switched their inventory accounting method to FIFO from LIFO, the Journal reported, according to a review of public filings from investment research firm Bedrock AI. That number is up from a combined 13 companies in 2019 and 2020, when inflation was less of a concern. No companies have switched to LIFO from FIFO since 2019, Bedrock AI found. 

On average, an estimated 55 percent of companies in the S&P 500 used FIFO as their primary inventory method and 15 percent used LIFO, according to Credit Suisse Group AG, citing annual reports from 2021 and 2022.

Some companies could view a switch as less costly since the Tax Cuts and Jobs Act (TCJA) of 2017 lowered the corporate tax rate to 21 percent from 35 percent, Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology’s Sloan School of Management, told the Journal. 

Bellevue, Wash.-based truck maker Paccar Inc. switched to FIFO for the roughly 40 percent of its inventory that was located in the United States in order to align more with its competitors in Europe and elsewhere, as well as other firms that do not use LIFO. 

“When inflation popped up, we said we’re taking hits to our margin that make us noncomparable. And for what?” Paccar Controller Michael Barkley told the Journal. “It made a lot of sense just to switch over. In periods of low inflation, [a switch to FIFO] doesn’t make that big a difference, but in periods of high inflation, it obviously makes a bigger difference.”

Oshkosh Corp. switched to FIFO last year for its U.S. inventory, or 80 percent of its total.

“Certainly inflation plays into it,” its CFO, Michael Pack, told the Journal. “We think FIFO does result in a much better presentation on our balance sheet.” 

Newell Brands, the owner of Yankee Candle, Sharpie and other consumer brands, shifted certain U.S. inventory to FIFO from LIFO to conform all of its supply to a single method of accounting. That resulted in its cost of goods sold under FIFO in the quarter that ended on Dec. 31 to be $4 million higher than it would have been under LIFO.

Switching could be costly, as leaving LIFO requires submitting a cash payment to the IRS over four years. For some companies, such as Katy, Tex.-based sporting-goods retailer Academy Sports & Outdoors Inc., which is evaluating and expecting such a move, it could be a justifiable cost.

“As inflation keeps going up, it’s something we’ve got to keep watching,” its CFO, Michael Mullican, told the Journal.