Accounting Today - August 16 2010

If CAP had required FIFO, then it would have denied taxpayers the LIFO tax savings they were otherwise entitled to take. But if CAP had required LIFO, managers would have been forced to publish incomplete financials. The committee ducked the issue by telling managers to decide for themselves. The Financial Accounting Standards Board will remain in the same untenable position unless Congress repeals the conformity rule.

But what about IFRS? Because the International Accounting Standards Board doesn’t allow LIFO to be used, one might think LIFO would fade away if the U.S. were to adopt international standards. That would be true, except that the stricture against LIFO could be “carved out” along with other inconvenient and other wise undesirable parts of IFRS. Despite convergence advocates’ claims that IFRS are worldwide standards, such carve-outs are the norm for most developed countries. However, our regular readers know we don’t think much of convergence as it is currently envisioned, and we really don’t put any stock in the possibility that the Securities and Exchange Commission will (or even can) switch its endorsement to IFRS. Accordingly, we’re convinced there is no point in counting on convergence to make the conformity rule irrelevant.

Instead, we think it’s more feasible
to persuade Congress to eliminate
the conformity rule to allow GAAP
to at last contain a useful inventory
standard. We envision a new meth-
od that would combine FIFO and
LIFO to report three things:
A FIFO balance sheet valuation
that approximates the inventory’s
current wholesale value;

A LIFO cost of goods sold that
approximates replacement cost;
and,
A realized holding gain or loss
for the difference between the FIFO
and LIFO cost of goods sold (net of
deferred taxes).

This theoretical but easily implemented (no new information has to be developed that doesn’t already exist) method has been around for quite awhile. For those who want to learn more, we wrote about it in the June 2004 issue of Strategic Finance

FROM PAGE 14

(“It’s Time to Get Rid of LIFO Conformity”). We think it makes great sense for FASB and the IASB to issue a joint standard to that effect.

A NO-BRAINER
So, there you have it. The key to
more useful information about
inventory is getting Congress out
of the accounting standard-setting
arena. They’ve messed it up for 70
years, which is 70 years too long.