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3.1 LIFO inventories overview
Publication date: 31 Dec 2021
us Inventory guide
LIFO has long been considered an acceptable inventory method under generally accepted accounting principles. However, authoritative accounting literature does not provide specific definitive guidance on how to apply LIFO or specify the financial statement disclosures that should be made by companies using LIFO. Although the SEC and other professional bodies have issued a number of releases and publications dealing with LIFO, many LIFO accounting and disclosure practices are derived principally from Internal Revenue Service (IRS) regulations.
The use of the LIFO cost flow assumption for tax purposes is conditioned on a company’s use of LIFO for the purpose of reports or primary financial statements issued to shareholders, partners, other proprietors, beneficiaries, or for credit purposes. If a company violates this financial conformity requirement, the IRS may terminate the entity’s LIFO election.
The IRS LIFO conformity requirement requires that only the primary financial statements be issued on a LIFO basis. Supplemental disclosure of non-LIFO information is allowed, as long as it accompanies the primary financial statement, and is clearly labeled as being supplemental (see IV 3.4.2). In addition, a different LIFO method may be used for book and tax purposes.
In Financial Reporting Policies (FRP) Section 205, the SEC staff has provided guidance for the disclosure of non-LIFO information by LIFO inventory companies that differs in some respects from the IRS requirements (see IV 3.4.2 for information on the SEC guidance).
Another source of guidance on LIFO is the issues paper issued by the AICPA Financial Reporting Executive Committee (FinREC), Identification and Discussion of Certain Financial Accounting and Reporting Issues Concerning LIFO Inventories (the “FinREC LIFO guidance”), which, while technically non-authoritative, in view of the general lack of authoritative accounting guidance on the topic, was endorsed by the SEC staff in SAB Topic 5.L.
In the absence of existing authoritative literature on LIFO accounting, the staff believes that registrants and their independent accountants should look to the [FinREC LIFO guidance] for guidance in determining what constitutes acceptable LIFO accounting practice.... In the event that the registrant and its independent accountants conclude that the registrant’s LIFO practices are preferable in the circumstances [to the advisory conclusions set forth in the FinREC LIFO guidance], they should be prepared to justify their position in the event that a question is raised by the staff.
Companies should refer to the FinREC LIFO guidance and be prepared to justify any departures. Significant conclusions from the LIFO guidance relevant to financial reporting are summarized in the following sections.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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