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ASC 805-20-30-1 requires identifiable assets, including inventories, to be measured at their acquisition date fair values. As such, at the time of purchase, for financial reporting purposes, a new base year is established and all previous LIFO layer history is eliminated. However, in a nontaxable transaction, the tax basis of the acquired LIFO inventories may differ from fair value, in which case the historical LIFO layers for tax purposes may remain intact.
If LIFO inventory acquired in a business combination is combined with an acquirer’s existing pool, the acquired inventory should be treated as an inventory purchase of the current year. If there is an increment as a result of this acquisition, or otherwise, the acquired inventory will be included in the measurement of the increment. Otherwise, the cost of the acquired inventory would be included in the measurement of the decrement charged to cost of sales in the period of the acquisition.
A LIFO increment that occurs in the year of a business combination will impact the calculation of the current year index. The current year index should not consider the step-up to fair value of the acquired company’s inventory to avoid distortion. However, if acquired LIFO inventory is considered a new pool (e.g., because it is in a different business), the cost (i.e., the fair value purchase price) of the inventory should be treated as the base inventory value.
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