After seven decades of implementation, the 21st
Century has brought some of the most serious challenges for
last-in, first-out (Lifo) accounting. But in the long run, its
biggest test might be on the international front.
In 2006, Sen. Bill Frisk (R., Tenn.) proposed
compensating Americans for rising gasoline costs with a $100
tax rebate. Due to pay-as-you-go budgeting requirements, the
cost of the rebate would have been offset by repealing Lifo, a
method of accounting that businesses use to help mitigate the
impact of inflation on inventory.
This caught the business community "completely by
surprise," said Jade C. West, senior vice president of
government relations at the National Association of
Wholesaler-Distributors (NAW) in Washington, and a hurriedly
called weekend meeting of various trade association executives
resulted in the formation of the ad hoc Lifo Coalition.
The effort to eliminate Lifo failed-as did an
earlier attempt to abolish its use by major oil
companies-following a threatened veto by the Bush
administration. Unfortunately, the genie was out of the bottle
and a potential source of tax revenue that West says is "barely
understood" by its critics was in the arsenal of legislators
looking for new sources of revenue.
Today, managed by the NAW with West as its
executive secretary, the 120-member Lifo Coalition is still in
business defending Lifo, especially from opponents on the House
Ways and Means Committee and the Senate Finance Committee.
The Lifo method simply assumes that the goods most
recently produced or acquired by a company are the first to be
sold, according to SaveLifo.org, a service of the Associated
Equipment Distributors (AED), an Oak Brook, Ill.-based trade
association representing companies involved in the sale, rental
and servicing of construction, mining, forestry, agricultural
and industrial equipment, as well as related services. AED is a
member of the Lifo Coalition.
"The major advantage to Lifo is that it matches
current revenue with current costs. Since 1938, Lifo has been
used by thousands of companies to avoid paying taxes on phantom
profits attributable to inflationary increases in inventory
values," according to the Web site, although when prices fall
companies using Lifo generally are faced with higher tax
Among Lifo's most influential opponents has been
Edward D. Kleinbard, chief of staff of the Congressional Joint
Committee on Taxation, a non-partisan group that advises the
House Ways and Means and the Senate Finance committees. In an
October 2006 paper, Kleinbard and two colleagues said that
without the elimination of Lifo "what hope do we have of ever
getting serious about fundamental business tax reform?"
They argued that Lifo "benefits only a narrow range
of businesses" that use it for tax benefits. "The purpose and
effect of Lifo is to provide eligible taxpayers with a
deduction for an expense that is never incurred," Kleinbard and
his colleagues contended, claiming "there simply is no room in
a principled income tax for Lifo accounting."
In the long run, however, the most serious threat
to Lifo might be a move to bring U.S. companies into a global
accounting framework called the International Financial
Reporting Standards (IFRS) used in 85 countries, ranging from
European Union nations, Russia and Turkey to South Africa,
India, Pakistan, Malaysia, Singapore and Australia.
Christopher Cox, former chairman of the U.S.
Securities and Exchange Commission (SEC), was a strong
proponent of moving U.S. companies to IFRS from the Generally
Accepted Accounting Principles (GAAP) that currently determine
how publicly owned U.S. companies report their financial
In a "roadmap" released last November, the SEC
proposed to determine by 2011 whether it is "in the public
interest and promotes investor protection" to require public
companies in the United States to adopt IFRS by 2014.
The SEC roadmap noted that IFRS doesn't allow Lifo,
and companies that report in accordance with IFRS would be
required to use a method of accounting for inventory that is
acceptable under IFRS, such as the first-in, first-out method.
Presumably, the tax hit to companies forced to abandon Lifo
would be spread over a number of years.
The implications of IFRS haven't been lost in
Congress. "To the extent that the U.S. adopts IFRS, Lifo will
be gone," said John Barrick, an accountant with the
Congressional Joint Committee on Taxation.
But this year IFRS has been questioned in an
important quarter amid indications that the Obama
administration has serious doubts, not only about the SEC
roadmap but about IFRS itself, judging by comments by its new
chairwoman, Mary L. Schapiro. She told a Senate committee
during her confirmation hearing earlier this year that she
"will not necessarily feel bound by the existing roadmap" and
said the SEC would "proceed with great caution" to adopt IFRS
under her leadership.
While Schapiro didn't mention issues connected with
Lifo, she cited concerns about the cost to companies of
shifting to IFRS from GAAP, the international system's
less-stringent standards and the independence of the
International Accounting Standards Board that oversees
But whether this means Schapiro, who suggested in
her testimony that adoption of IFRS' less-detailed rule
structure might trigger "a race to the bottom," is likely to
push out the timetable remains unclear. The SEC spokesman
declined to comment on the matter. Frank