To: Professor KomissarovSubject: Current Events #3Date: April 5th, 2011Cutting LIFO SupportBy following the U.S. Generally Accepted Accounting Principles (GAAP), the last-in first-out (LIFO) inventory accounting method has been used by many companies to report net income at desirable levels. However under the International Financial Reporting Standards (IFRS) LIFO is not an acceptable inventory accounting practice which brings the question: why is the IFRS not allowing LIFO to be used? LIFO is an accounting method that assumes only the newest purchases are being sold. In turn, this assumption then raises the cost of goods sold (COGS), reducing net income levels, and lowering the income tax imposed on the company. The IFRS does not agree with this method because in most instances first-in first-out (FIFO) is more applicable, and a more accurate inventory level report. LIFO also misrepresents the long-term value of inventories for some companies because it is possible under LIFO that some inventory purchases will never be sold[ CITATION Blo09 \l 1033 ]. With the IFRS trying to converge into GAAP for a universal inventory accounting method, let’s examine how LIFO practices may not need to be cut, but definitely revised.Net Income: LIFO vs. FIFOAs of right now, companies that use LIFO inventory accounting practices are able to report lower net income levels than if the FIFO method is used. Looking at the corporation Mavity Inc., net income levels under LIFO amounted to $1,295 (Sales Revenue: $3,625 – COGS: $2,330). Recalculated under FIFO, net income rose $80 to $1,375 (Sales Revenue: $3,625 – COGS: $2,250). Granted this is a smaller company dealing with fewer transactions, but when looking at major corporations such as SherwinWilliams Co. the difference between LIFO and FIFO is $40.8 million [ CITATION Blo09 \l 1033 ]. Both Mavity Inc. and SherwinWilliams Co. are still reporting inventory that could date back many years by using the LIFO inventory accounting method, when in reality this is not likely. Not only does LIFO essentially understate net income levels, but it also lowers the income tax rate for these companies. However some companies are able to use LIFO methods accurately and honestly, so next are the advantages and disadvantages of going global with IFRS. Universal Standard: Pros and ConsSome companies currently following GAAP and using the LIFO method for inventory accounting may have to change practices by 2014; the projected date that the IFRS will convergewith GAAP [ CITATION Blo09 \l 1033 ]. The downside to this transition is the large increase that will occur in company taxes and liabilities reported [ CITATION Blo09 \l 1033 ]. In additionto this, some companies that can use LIFO properly will be left without an effective inventory accounting practice. Coal distributors currently use LIFO because the supply that is shipped out is usually the last received [ CITATION Alb11 \l 1033 ]. Some major positive aspects to the convergence of the IFRS and GAAP stems from the increased integrity the universal guidelines would add to financial reporting. Under GAAP, companies that don’t realistically use LIFO in practice are protected and allowed to understate the COGS. This is not only dishonest and inaccurate, but it also takes away from private saving (government income). Even though 1convergence sounds like the best option to fix LIFO issues, there are some complications with the applicability of an international standard.Universal Standard: ApplicabilityThe IFRS implementation would correct misuse of LIFO reporting in large companies, but what about the small companies like Mavity Inc.? Under the IFRS, smaller companies wouldnot need to conform to the guidelines set [ CITATION Blo09 \l 1033 ] and this could pose an issue when it comes to a global scale. Another issue is for the large companies that could accurately use LIFO in their inventory accounting practices. If these companies were forced to follow FIFO and Average Cost inventory methods, they would now be inaccurately reporting financial data. Without a revision to IFRS principles, the guidelines they set would not have to beuniversally followed and may not be applicable to all fields. SolutionLIFO is an effective way of inventory accounting when it is applied properly. In order to ensure this, the IFRS has to devise certain criteria that a company needs to meet in order to be allowed LIFO status. Additionally, the IFRS needs to devise criteria that are applicable in the same order to smaller firms. Realistically many of the large companies may deal with the smallerfirms; if one is following IFRS guidelines while the other is not, there will be inaccuracy in the reports of both even though both are reporting the same transaction. Redefining the guidelines to include smaller companies, and allowing LIFO practices for a small group of companies that could actually use it effectively, would give IFRS the dimensions it needs to be a universally accepted set of financial reporting