Must LIFO Go to Make Way for IFRS?
Is it time for Congress to sever the link between tax and financial reporting of inventory?
by Michael Hoffman and Karen McKenzie/The Tax Adviser
The Internal Revenue Code has rarely linked itself to financial reporting. One significant instance in which such a link does exist is Sec.472(c), the LIFO conformity requirement. Interestingly, as financial reporting standard setters around the globe work toward one high-quality set of standards, the use of LIFO for financial reporting purposes may be in jeopardy, at least for U.S. entities required to issue financial statements in accordance with generally accepted accounting principles (GAAP).
According to the Code, inventories must be accounted for if such accounting "is necessary in order clearly to determine the income of any taxpayer." Further, the basis on which inventories are valued must "[conform] as nearly as may be to the best accounting practice... and as most clearly reflecting the income." To bolster this conformity, the Revenue Act of 1939 included the requirement that taxpayers electing to use LIFO for income tax purposes must also use it for financial accounting purposes. Thus, the LIFO conformity requirement has been in place for as long as LIFO has been allowed for income tax purposes.
From the financial reporting perspective, companies publicly traded in the United States must follow the will of the Securities and Exchange Commission (SEC), which has delegated standard-setting authority to the Financial Accounting Standards Board (FASB) in determining GAAP. However, there is a strong movement toward international convergence of accounting standards — that is, to bring GAAP under one set of international standards (iGAAP).
This article has been excerpted from the The Tax Adviser.
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