LIFO Distortions in the Manufacturing Industry

Abstract

For years, LIFO (Last in First Out) inventory method has been used by the U.S. companies for its tax advantages as long as LIFO is also used for financial reporting purposes (the “conformity rule”).  However, LIFO is prohibited under IFRS (the International Financial Reporting Standards).  With the impending acceptance of IFRS by the SEC and the Obama administration’s budget proposals (2010, 2011 and 2012) which contained a provision to eliminate LIFO for tax purposes, LIFO is expected to be repealed.   This study examines the use of LIFO in the manufacturing industry from 2008 (the start of recession) through 2014 with a focus on income distortions & liquidity measurements.  This study provides transparency of LIFO accounting information in the manufacturing industry.