If GAAP goes, say hello to higher taxes and cyclicality

Mar 19, 2009 | 04:35 AM |

Several years ago, William T. Gimbel, the late chief executive officer of Reliance Steel & Aluminum Co., opened the quarterly financial report of another service center. Thumbing through the Earle M. Jorgensen Co. document—Jorgensen at the time was publicly held and the largest holding in Reliance's retirement fund—he called a visitor's attention to a figure near the back of the report Jorgensen's substantial last-in, first-out (Lifo) inventory reserve.

"There's the value in that company," Gimbel declared, pointing to the Lifo reserve, which gave a fuller picture of Jorgensen's profitability than its net income. Today, Jorgensen is a subsidiary of Reliance, which itself in now publicly held.

For more than 70 years, Lifo—as opposed to first-in, first-out (Fifo) inventory valuation—has been a tool for companies to dampen the tax impact of inflation. Meanwhile, an Internal Revenue Service (IRS) "conformity rule" requires a company that employs Lifo for tax purposes to also use it for financial reporting. While some executives think Lifo can help reduce the volatility of reported earnings due to wildly fluctuating raw material prices, some on Wall Street think it's confusing and would just as soon see it eliminated. And in recent years it's been the target of congressional revenue raisers.....