1. Arguments for and against LFO abolition in the US a) What are the arguments in favour of retaining LIFO? The arguments are being made on a number of different grounds so be clear to separate these out. b) What are the arguments in favour of the US abolishing LIFO? c) Should decisions on matters such as this be made on the basis of what is the most appropriate from an accounting perspective (i.e. principles) or from the perspective of the impact of the decision on the real economy (i.e. profits, jobs, growth)? d) Decide which of these two arguments you support on balance and justify your choice.

a. What are the arguments in favour of retaining LIFO? The arguments are beint made on a number of different grounds so be clear to separate these out. Some business community in favour of retaining LIFO. Especially manufacturers, oil and gas companies, and other business that carry large inventories. Their taxes could increase a lot if they could no longer use LIFO. LIFO is particularly important to companies that have slow-moving inventory – such as industrial manufacturers and distributors – and are therefore vulnerable to rising prices. LIFO accounting is a “timing issue”, rather than a tax gimmick. LIFO accounting reverses itself when demand drops. When companies reach lower-cost inventory layers last year as demand solwed, and at that point, profits rose under LIFO accounting and the company had to pay more in taxes. The same is true when deflation sets in. As the price of replacement inventory drops, taxable income increases, and so does a company’s tax obligation. Without LIFO, there is a “mismatch between what it’s going to cost us to put inventory back on the shelf and what we bought it for six months ago, when it may have cost less.” The elimination of LIFO is a cash-flow issue. Smaller companies with high LIFO reserves and low cash flows could run into problems. Some large companies say the change would still hurt, because if they pay more money in taxes, they won’t have enough money to pay money in wages. So “LIFO REPEAL” is an anti-employment move. The sting of LIFO repeal also will be felt by smaller companies that don’t have robust information-technology systems. Companies may also need to hire more cost accountants to ferret through the inventory layers.

b. What are the arguments in favour of the US abolishing LIFO? The White House made the proposal part of a loophole-closing package and had hoped that Republicans would b able to convince themselves that the change didn’t constitute a tax increase. Although LIFO accounting saves the company money, it does so by making the company’s profit seem smaller. Management would rather have a higher profit on paper, even at the cost of lower real return for the stockholders once taxes are paid. IFRS do not allow using LIFO for accounting. Larger companies with strong cash flows likely will weather the one-time charge of converting from LIFO to FIFO of another methodology without much problem. That is because for the largest companies, the charge represents a small percentage of their annual cash flow.

c. Should decisions on matters such as this be made on the basis of what is the most appropriate from an accounting perspective (i.e. principles) or from the perspective of the impact of the decision on the real economy (i.e. profits, jobs, growth)? The decisions should be made on the basis of what is the most appropriate from the perspective of the impact of the decision on the real economy. Once a decision was made, it may make a big impact on the economy. Of course, accounting principle is important, but the aim of making principles is to stimulate the economy. So the profit will increase, there will be more job opportunities and there can be a economic growth. No matter what decision will be made, it should be made from the perspective of the impact of the decision on the real economy. Only in this way can we make the best and most appropriate decision for the economy.

d. Decide which of these two arguments you support on balance and justify your choice. In my opinion, FIFO may be the best choice. In general, the FIFO method provides is applicable for more business scenarios than LIFO and also provides better accounting. Advantages include: * Goods are sold or disposed in a logical and systematic manner. * The uniform and single file flow of goods provides efficient control of materials. This control is needed for goods that can be subjected to decay, deterioration, and quality or style change. * The LIFO method is not supported by the IFRS. Many countries follow IFRS framework. * More records have to be maintained and for a longer duration using the LIFO method. Most businesses carry at least some inventory at all times. With LIFO this could mean using records of goods acquired several years ago. * When older goods are finally sold, the price could be significantly different from the cost of these goods. This could result in unexpectedly large paper gains or losses, which could have tax implications. In general, LIFO accounting is not recommended, for the following reasons: * It is not allowed under IFRS, and a large part of the world uses the IFRS framework. * The number of layers to track can be substantially larger than would be the case under FIFO. * If old layers are accessed, costs may be charged to expense that vary substantially from current costs. * In essence, the primary reason for using LIFO is to defer the payment of income taxes in an inflationary environment.