Name: Vivian Diaphenia

Class: AC XV-24
NIM: 1853020019

Why LIFO is not permissible under IFRS?

LIFO was prohibited to be used by International Accounting Standards (IAS) after the revision
of IAS in 2003 in preparation and presenting financial statements. One of the reason that LIFO is
not allowed because reduction in tax burden under inflationary economies. This can happen
because LIFO assumes that inventory will be consumed in the production process. As a result
higher value inventory will be included in cost of sales figure which will show in larger cost and
ultimately lesser profits and lesser tax. Some people argue that LIFO is the tools to save tax
expenses. However, the major reason is not because of the impact on tax. The main reason for
excluding the LIFO is because IFRS shifted its focus on balance sheet instead of income
statement. This method known as balance sheet approach. The impact of this turn in focus from
income statement to statement of financial that requires the figure in statement of financial must
be according to present market conditions. LIFO inventory is expensed out as cost of sales and
old inventory is kept in the store. Thus, the figure that will be reported in the statement of
financial will be according to the inventory in store that might be not relevant for the users of
financial statements. So the main reason for abandoning LIFO inventory valuation method
because the outdated information in the financial statement. The impact of its effect not only for
one period, but also for the next year accounting records. Therefore, the implications in its
accounting are vital. In USA, LIFO is allowed because of income tax purposes.
After the revision of IAS 2 Inventories in 2003, LIFO was explicitly prohibited to be used by the
entities following International Accounting Standards to prepare and present financial
statements. Before this revision LIFO was available as allowed alternative i.e. an option if
company wishes to use the inventory valuation method other than the preferred method. One of
the reason that can easily be understood is that LIFO cause reduction in tax burden under
inflationary economies i.e. in the times of rising prices. This happens because LIFO assumes that
inventory which is bought latest will be sent to production hall to be consumed in the production
process and thus higher value inventory will be included in cost of sales figure which will result
in larger cost and ultimately lesser profits and thus lesser tax. So, many argue that LIFO is one of
the tools to save tax “expenses”.
The focus of IFRS from the income statement to the balance sheet and, therefore, away from
LIFO. Under the last-in, first-out (LIFO) method of inventory valuation, the last inventory
purchased is assumed to be the first sold. Ending inventory, therefore, is assumed to be made of
purchases from earlier periods. Of the inventory valuation methods, LIFO most closely follows
the matching principle (i.e., matching current costs with current revenues very well, but may
results in unrealistic ending inventory valuation in times on changing costs.
During periods of rising prices (inflation), ending inventory is assumed to consist of earlier
purchases at lower prices, which may undervalue ending inventory. During periods of falling
prices (deflation), ending inventory is assumed to consist of earlier purchases at higher prices,
which may overvalue ending inventory. In general, inventory valuation under LIFO might be too
old to be relevant for the users of financial statements. Because LIFO most closely follows the
matching principle of revenues and expenses, it can be said to focus more upon the income
statement. FIFO, on the other hand, provides a more up-to-date ending inventory figure for the
balance sheet because its ending inventory is assumed to be the most recent purchased.
Therefore, LIFO is prohibited under IFRS because the focus of IFRS shifted away from the
income statement to the balance sheet and, therefore, away from LIFO.
CONCLUSION
Lifo is banned because when prices are increasing (which is most of the time), companies can
inflate COGS to lower their tax burden. It’s worth nothing that LIFO is prohibited under IFRS,
but it’s still permitted in the United States. Whether U.S. GAAP should continue to allow LIFO
is complex discussion that has persisted for many years.