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For most companies, a detailed LIFO calculation is performed only once a year, at year-end. However, ASC 270-10-45-2 requires that accounting principles applied to interim periods conform to those used in preparing the annual financial statements. Thus, companies that apply LIFO must report interim results of operations using LIFO.
Two acceptable methods are commonly used in practice to estimate the effect of LIFO on interim periods: (a) an allocation of the projected year-end LIFO calculation, and (b) an interim year-to-date LIFO calculation based on actual changes in inventory levels (but excluding the effects of decrements expected to be reinstated by year-end).
Separate, discrete interim LIFO calculations that include recognition of the effects of decrements expected to be reinstated by year-end are inappropriate because that approach would change the valuation of any layers liquidated and reinstated during the year.
A change in the method of recognizing the effect of either increments or decrements is a change in accounting principle covered by ASC 250, which is acceptable only if preferable. See FSP 30.

3.7.1 LIFO — interim decrements

Companies that use LIFO may encounter a liquidation of a layer at an interim date that is expected to be replaced by year-end. In this situation, under ASC 270-10-45-6, the inventory at the interim reporting date should not give effect to the LIFO liquidation, and cost of sales for the interim reporting period should include the expected cost of replacement of the liquidated LIFO base. The authoritative literature does not, however, state either how the adjustment for such liquidation should be determined or how it should be reflected in the balance sheet.
There are two acceptable methods for determining the amount of the adjustment to eliminate the effect of an interim liquidation that is expected to be replaced by year-end:
  • The deferral approach. The objective of this approach is to adjust cost of sales to what it would have been if there had been no liquidation. The adjustment is determined by comparing the current replacement cost in the period of liquidation with the LIFO inventory cost of the liquidated layers.
  • The liability approach. The objective of this approach is to charge cost of sales in the liquidation period for the expected future replacement cost of the liquidated layers. The adjustment is determined based on projections of the prices that a company estimates will be paid to replace the inventory in the future period.

The liability approach more closely parallels the requirement in ASC 270, Interim Reporting and minimizes the distortion of future income that will result from the charge or credit in the future period for any difference between the amount accrued and the actual replacement cost. On the other hand, the deferral approach is less subjective and may be the only practical approach when future inventory prices cannot be reasonably estimated. Under the liability approach, futures contracts may be a source to estimate replacement cost. Under either approach, actual internal production costs should be considered if that is the expected method of replacement.
There are also two acceptable ways to reflect this adjustment in the balance sheet: (a) record it as a credit in the current liabilities section of the balance sheet or (b) record it as a credit (reserve) in the inventory account. Either balance sheet presentation may be used with either of the measurement methods.
A company that applies LIFO in interim periods through an allocation of the projected year-end LIFO calculation may include the effect of a LIFO inventory liquidation as part of the year-end LIFO adjustment that is allocated to all interim periods. Other companies that prepare year-to-date calculations at interim reporting dates should recognize the effect of LIFO liquidations that are not expected to be replaced by year-end in the interim period in which the liquidation occurs. Interim periods should generally be accounted for as discrete accounting periods. Therefore, interim LIFO liquidations that are determined to be permanent (not expected, based on substantial evidence, to be replaced by year end) should be recognized in the discrete accounting periods in which they occur. This position is supported by ASC 330-10-55-2.

3.7.2 LIFO — interim increments

Increments that occur in an interim period that are not expected to reverse by year-end should be valued based on the company’s annual increment valuation method (i.e., earliest, average, or latest purchase price method). Depending on the method, an increment that occurs early in the year may have to be revalued later in the year if prices change.
Companies may use a different approach to value temporary interim increments that are expected to reverse by year-end to avoid distorting interim results of operations. Since cost of sales of the quarter in which an increment occurs is charged for the difference between current quarter costs and the costs used to value the increment, the most reasonable matching of costs and revenues in interim periods can be obtained by pricing temporary increments at current quarter costs.
Companies that apply LIFO in interim periods through an allocation of the projected year-end LIFO calculation are not required to identify and account for interim increments separately. On the other hand, these companies should periodically update their estimates of the year-end LIFO adjustment (including the valuation of a projected increment).
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