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Last-in, first-out Are its days finally numbered?


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, 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 bills.

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 results.

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 IFRS.

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 Haflich

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