July 1, 2008


The SEC's push for International Financial Reporting Standards could mean an end for LIFO in the not-too-distant future.

If the Securities and Exchange Commission (SEC) continues along its current path, U.S. companies may have no choice but to abandon LIFO, the “last in, first out” inventory accounting method. The push to move U.S. companies away from the current Generally Accepted Accounting Principles (GAAP), which embrace LIFO as a method for determining inventory costs, and toward the International Financial Reporting Standards (IFRS), which prohibit it, has strengthened in recent months.

Currently, more than 100 countries, including all members of the European Union, India, Russia and Australia, require or permit IFRS, and Canada has announced its move to the global reporting standards by 2011.

The United States appears to be close behind its neighbor to the north. Since November, the SEC has allowed foreign private issuers to submit financial statements prepared in accordance with IFRS without reconciliation to GAAP, but it may soon do so for U.S. issuers, as well. In April, SEC Chairman Christopher Cox announced that the Division of Corporation Finance and the Office of the Chief Accountant later this year will propose to the SEC a roadmap that “lays out a schedule, and appropriate milestones on which the schedule will be conditioned, for continuing the progress that the United States is making in moving to accept IFRS in this country.”

Eight months earlier, in August, the SEC began seeking public opinion about giving U.S. issuers the choice between IFRS and GAAP. The comment period closed in November, and the SEC is reviewing submissions. “These comments will be helpful as we further consider the path of convergence between IFRS and GAAP,” said SEC Commissioner Paul S. Atkins in a March speech to the Institute of International Bankers.

The SEC says the move to IFRS, and away from GAAP and LIFO, will translate into lower costs for U.S.-based multinational corporations with a large number of subsidiaries reporting in accordance with IFRS. Adopting a single set of globally accepted accounting standards, the commission argues, will improve investor confidence and, therefore, continue the expansion of capital markets across borders. And SEC Chief Accountant Conrad Hewitt says that, if all other countries have adopted IFRS by 2011 as expected, the United States won't be able to compete in the global marketplace using GAAP.

All of this may be good news for those in Washington who have fought to repeal LIFO (See “Long Live LIFO,” Forward, January/February 2007). If LIFO were repealed, those companies using it as their method of inventory measurement would be taxed on their reserves, potentially amounting to billions of dollars in new federal revenues. In 2006, members of the Senate Finance Committee tried unsuccessfully to repeal LIFO for oil companies amidst rising gas prices. And in October 2007, House Ways and Means Committee Chairman Charles Rangel (D-New York) revealed a tax plan that would, among other things, repeal LIFO. The bill, H.R. 3970, remains in committee.

Certainly, there are those in the metals industry who see the advantage to adopting universal accounting standards. Although critical of IFRS and the speed with which many countries have adopted them, Michael H. Hoffman, president and CEO of Macsteel Service Centers USA in Newport Beach, California, says, “Shareholders, bankers and all stakeholders should be on the same playing field. They should understand that the platform used to generate numbers is similar and the numbers mean the same thing.”

But many cyclical industries depend on LIFO, because it helps a business better measure the impact of inflation and price volatility. The costs to replace inventory are more closely aligned with current market prices. Those companies—Minneapolis-based accounting firm RSM McGladrey reports as many as 40% of all manufacturing and distribution companies use LIFO—would not fare as well in a LIFO-less world.

The National Association of Manufacturers (NAM), which opposes any effort to repeal LIFO, is closely following the IFRS developments because of the potential impact on the use of LIFO by its members. “There’s a misperception that LIFO is only used by a few industries,” says Dorothy Coleman, vice president, tax and domestic economic policy, for NAM in Washington, D.C. “The fact of the matter is, a lot of manufacturers in a lot of different industry sectors do use LIFO—industrial equipment, food manufacturers, metals fabricators, transportation equipment—it’s widespread. And it’s not just large companies; a lot of our smaller members use it.”

However, while a move to IFRS would prohibit the use of LIFO for book purposes, it would not necessarily prohibit it for tax purposes. “Under the current tax code, there is a conformity requirement that says if you use LIFO for tax purposes, you also need to use it for book purposes,” Coleman says. “[If IFRS were required], if you repealed the conformity requirement, there may be a way to use it for tax purposes even if you can’t use it for book purposes, albeit a long shot.”