Michael Redemske
Will Companies Be Required to Repay Their LIFO Tax Savings?

How IFRS could increase taxes.

January 12, 2012
by Michael Redemske, CPA

Unless you are a CPA working in a larger public accounting firm or employed by a multinational business enterprise, you may not have paid a lot of attention to International Financial Reporting Standards (IFRS). And if your primary professional focus is in the tax arena, your eyes probably glaze over at the mention of IFRS. However, if your clients or your employer uses the LIFO inventory method, you had better pay attention, even if IFRS does not directly affect your business.

Most CPAs are generally aware of the movement afoot to find a common set of accounting principles to govern financial reporting on a worldwide basis. How closely the various governing bodies can come to achieving such uniformity remains to be seen. But it is clear that in the U.S., the U.S. Securities Exchange Commission (SEC) is pushing financial reporting for public companies toward some type of internationally accepted standards.

Most smaller privately-owned companies seem to hope that they will not be required to adopt international accounting principles that are significantly different from those available under current U.S. generally accepted accounting principles (GAAP). But companies currently using the LIFO method of accounting for inventories should take notice of the growing debate.

LIFO Conformity Requirement

As most CPAs are aware, the federal income tax law contains a LIFO conformity requirement. In essence, any company that uses the LIFO method for federal income tax purposes must also use that method for financial accounting purposes. And as many CPAs are also aware, the LIFO method is not a permissible accounting method under IFRS.

Under current federal income tax law, it seems clear that a company using the LIFO method for federal income tax purposes will be in violation of the LIFO conformity requirement if it issues financial statements under IFRS. In fact, the Internal Revenue Service (IRS) reached just such a conclusion in an internal memorandum issued May 13, 2011, and released to the public on November 25, 2011 (LAFA  20114702F).

Consequently, most large, multinational companies have become convinced that they will eventually lose the ability to use LIFO for federal income tax purposes unless:

  1. LIFO becomes an acceptable accounting method under IFRS;
  2. The IRS can be convinced to carve out an “IFRS exception” to the LIFO conformity requirement; or
  3. Congress can be convinced to repeal the LIFO conformity requirement.

On the other hand, most privately-owned companies remain hopeful that they will be able to continue to issue financial statements under principles akin to current U.S. GAAP, in which the LIFO method will still be permitted, thus preserving their ability to use LIFO for tax-reporting purposes.

Pay-Go Rules

But here is the rub. Under the current pay-go rules that Congress uses (and remember, Congress created these rules and Congress can change them), offsetting legislation that decreases spending and/or increases taxes must accompany any legislation that reduces taxes or increases spending.

By various estimates, the revenue impact of a repeal of the LIFO method for federal income tax purposes could exceed $60 billion to $100 billion. Congress could use that revenue to pay for a lot of tax cuts (think permanent fix for the alternative minimum tax (AMT)) and spending proposals.

Unfortunately, the current pay-go rules only allow Congress to “spend” this tax windfall if LIFO is actually repealed. If companies are required to repay the accumulated LIFO tax savings solely as a result of having violated the existing LIFO conformity requirement (because they adopted IFRS, for example), Congress would not — under current pay-go rules — be able to “spend” the additional revenue. That creates quite an incentive for Congress to initiate a repeal of LIFO prior to IFRS taking effect.

Of course, Congress could carve out an exception that allows companies below a certain size to continue to use LIFO. But as is usually the case, there are no guarantees.

What CPAs Can Do

So what should you do as a CPA with clients or an employer who uses or is considering the adoption of the LIFO inventory method? Realistically, there is little the individual CPA can do. The future of LIFO is in the hands of politicians and other policy makers.

However, there are steps you can take, on behalf of yourself, your clients or your employer:

  1. Become knowledgeable about the issues relating to IFRS;
  2. Help your clients or your employer quantify the tax cost if they are no longer permitted to use LIFO for income tax reporting purposes; or
  3. Consult with management to determine the extent to which they may desire to get involved in the LIFO debate through trade or industry associations.


The future of LIFO as a tax accounting method is in doubt. But the outcome has yet to be written. There is still time to influence the political process.

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Michael R. Redemske, CPA, is an instructor in residence at the University of Connecticut where he teaches federal income taxes and personal financial planning.