The Impending Demise Of LIFO: History, Threats, Implications, And Potential Remedies

Abstract

Since its approval by congress in 1939, the last-in-last-out (LIFO) inventory cost flow assumption has historically been utilized by a significant portion of U.S. companies for both tax and financial reporting purposes. However, despite its extensive use and wide acceptance in practice, the LIFO inventory method is currently endangered by two powerful movements that make its future existence far from certain. The first of these movements is the ongoing convergence of U.S. and international accounting standards. Whether future global harmonization of accounting practice come from continued convergence or outright adoption of international accounting standards, this harmonization poses a threat to the continued use of LIFO since LIFO is prohibited under international accounting rules. The second movement is grounded in governmental attempts to lessen the current federal budget deficit. The elimination of LIFO has been targeted as a way of reducing the deficit within the Obama administration’s deficit reduction efforts. The momentum of these two threats to LIFO makes the topic of LIFO’s future ripe for discussion. This study discusses the history of LIFO, illuminates the current threats the method faces, and outlines the most common remedies that have been proposed to mitigate the financial impact faced by companies that will be negatively affected by any such elimination of the method.