Georgia Tech Financial Analysis Lab Releases LIFO Study

One of the more significant differences between U.S. GAAP and IFRS is in the area of inventory.  IFRS does not permit use of the last-in, first-out (LIFO) inventory method of accounting.  Because of the LIFO Conformity Rule in the U.S. tax code, a switch from LIFO to the first-in, first-out (FIFO) or average cost methods of accounting would require discontinuance of the use of LIFO for tax reporting. 

The Georgia Tech Financial Analysis Lab released a study titled The Potential Consequences of the Elimination of LIFO as part of IFRS Convergence that examines the income, balance sheet, cash flow and tax effects of a move from LIFO to FIFO.  According to the study, approximately 36% of U.S. companies use LIFO for a least a portion of their inventories.  The study examined 30 companies with the greatest LIFO exposure and revealed that if FIFO had been used in 2007, on average, pre-tax income would have been higher by 11.97%.  The study estimates that the cumulative taxes due on the switch to LIFO, to be paid over a four-year period, would total over $15 billion for the 30 sample companies.

The Georgia Tech Financial Analysis Lab conducts unbiased stock market research and is part of the College of Management Georgia Institute of Technology in Atlanta, GA.  The report can be downloaded from the Georgia Tech College of Management website.