The Future of LIFO
38 Construction Equipment Distribution www.cedmag.com September 2009 Accounting In CED's February issue, we introduced you to the impending convergence of U.S. generally accept-ed accounting principles (GAAP) with the International Financial Report-ing Standards (IFRS). That article addressed the future of the operating lease concept upon adoption of IFRS. While the operating lease concept and its future is important to the equip-ment distribution industry, there are other accounting principle differences between GAAP and IFRS that could have significant impact on both your financial statements and cash balanc-es following IFRS adoption in the U.S. One such principle relates to inventory valuation accounting, more specifically, the future of the last-in-first-out (LIFO) method. Under the LIFO method, it is presumed that the most recent purchases of inventory are sold first; this is based on the notion that during periods of infla-tion dealers are reinvesting money into their business by purchasing inventory at current market prices rather than saving money by selling older, less expensive inventory. As a result, in order to value ending inventory, a dealer utilizing LIFO must establish a reserve that essentially represents the amount reinvested into inventory by the dealer. Presently, IFRS does not recognize LIFO as an acceptable inventory valu-ation method; therefore, adoption of current IFRS in the U.S. would end the allowance of LIFO as a valid inventory valuation method for book and tax purposes. Generally, a dealer can have different methods for book and tax inventory, except if LIFO is used, as the IRS requires book and tax conformity if LIFO is the elected inventory valua-tion methodology for tax purposes. Similar to the operating lease concept, in addition to the potential changes resulting from adoption of IFRS, there are other forces at work that threaten the future of LIFO. The White House has proposed repealing LIFO in order to generate tax revenues to offset the costs of other programs they are proposing. Due to the tax advantages gener-ated by the use of LIFO during times of economic inflation (by matching increasing inventory costs with increasing sales prices, thus lowering taxable income), it has historically enjoyed widespread use within the equipment distribution industry. Dealers commonly utilize LIFO to value both new equipment and parts inven-tory. However, in the face of these threats to LIFO's future, it is important for dealers to contemplate the effects that changing from LIFO to another inventory valuation method (such as first-in-first-out [FIFO] method) would have on their tax reporting, account-ing information systems, and financial reporting. This article is intended to shed light on what these changes could mean to your dealership. LIFO faces threats both domestic and international, and in the event of its demise, dealers using this inventory valuation method must prepare for tax repercussions following different sets of rules. By sCott staFForD AnD CathErInE Fox-sImpson (continued on page 40) The Future of and the Accounting Impacts of Making a Change LIFO