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Impact of Lifo - Ifrs vs Gaap

In: Business and Management

Submitted By dianas
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Impact of LIFO Accounting When discussing IFRS vs. GAAP regarding inventory, LIFO Accounting is one of the most controversial topics. Although LIFO is hardly used globally, it is heavily used in the United States. A shift from LIFO would have a significant effect on US companies specifically because tax law requires any company that uses LIFO for tax purposes to also use it for book accounting according to Internal Revenue Code (IRC) §472(c). Since IFRS disallows LIFO Accounting, US companies will either be in non-compliance with US tax code or accounting standards according to IFRS. By disallowing LIFO Accounting, US companies will not only have larger tax liabilities because of accelerated income recognition but they must also account for a change in inventory methods (Bloom & Cenker, 2009). GAAP provides guidance under Statement 154- Accounting Changes and Errors Corrections which states when a change in inventory method occurs; the company must retrospectively apply the change to prior financial statements presented in effected annual reports. Only if change is unfeasible can the company apply the new principle prospectively. When an inventory method change is made, the company can deduct the change for tax purposes. According to IRC §481(a), the company can deduct the entire change in the year of the change if the change is favorable to the entity. However if they change is unfavorable, the company can apply the change of a period of four years starting with the year the change was made. Is the likelihood of LIFO’s last days imminent? At this point, it is still hard to tell. There have been several suggestions provided as a form of compromise for US companies to conform to IFRS and still have the benefits from LIFO. The suggestions are as follows (Bloom & Cenker, 2009): 1. Allow LIFO for tax purposes and IFRS for book accounting, 2.

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