George White


Why the impediment?

June 12, 2008
by George White, CPA

IFRS is the acronym for International Financial Reporting Standards. The U.S. Securities and Exchange Commission (SEC) is committed to supporting IFRS, which calls for uniform international reporting standards. Conforming Generally Accepted Accounting Principles (GAAP) to IFRS is known as “convergence.”

One impediment to smooth convergence is LIFO (last in, first out), an inventory accounting, method used by companies throughout the U.S. economy to determine both book income and tax liability. Long accepted for GAAP, LIFO has little acceptance internationally.

If the U.S. accounting standard-setting body, Financial Accounting Standards Board (FASB), were to embrace IFRS fully, LIFO would no longer be acceptable for GAAP. Given the non-parallel aims of GAAP and tax, there would seem to be little connection between the fate of LIFO for financial statement purposes (F/S LIFO) and LIFO for tax reporting (tax LIFO). However, Code § 472(c) links the two: a taxpayer cannot use tax LIFO unless it also uses F/S LIFO.

There had been speculation that FASB, as part of its agreement to converge, would insist upon having an exception for LIFO. That speculation turns out to have been unfounded. In a lengthy letter to the SEC, the FASB stated that it “strongly oppose(s)” any such exception.

What the FASB Position Means for Tax LIFO

No imagination is required to see what the FASB position means for tax LIFO. Once F/S LIFO loses its legitimacy in IFRS, it cannot be used for U.S. tax purposes. That would occur without Congress ever lifting a finger to repeal LIFO. However, it’s extremely unlikely that Congress would remain passive and watch tax LIFO disappear as a result of the demise of F/S LIFO. That’s because the revenue pick-up from taxing LIFO reserves (estimated at more than $100B in Chairman Rangel’s comprehensive corporate reform bill, H.R. 3970) as a consequence of §472(c) would be considered to result from existing law. As such, it cannot be considered as increased revenue in a tax bill. Under Congressional budget procedures, tax reductions (the Holy Grail of politicians) must be “paid for” with new tax raisers. Accordingly, it’s a virtual certainty that Congress would act affirmatively to repeal tax LIFO once convergence becomes a reality.

One can anticipate a major push-back from LIFO taxpayers (ranging from major oil companies to automobile dealers). They’re undoubtedly more interested in saving taxes than reaching convergence.

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George White a CPA and attorney, is with the AICPA Tax Division, Washington, D.C. office. His duties include acting as liaison to the Tax Accounting Technical Resource Panel and Corporations and Shareholders Technical Resource Panel. He is a retired tax partner from Ernst & Young, and a prolific author and editor. He holds a B.A. from Holy Cross College, an M.B.A. from the University of Pennsylvania and an LL.B. from Harvard University.