Companies using the LIFO method to value inventory are likely aware of the challenges the 71-yearold accounting method currently faces. What they may not know, however, is that now is the perfect time for LIFO users to evaluate an alternative LIFO method that could potentially increase their LIFO benefit. This methodology is an IRS-approved LIFO method known as the Inventory Price Index Computation (IPIC) method, and it has helped thousands of companies increase their LIFO benefit.
Unlike traditional LIFO methods, IPIC measures inflation based on published indexes that are tracked and maintained by the Bureau of Labor Statistics (BLS). In most cases, the published indexes result in higher inflation than companies experience internally.
In addition to increased tax savings, there are other significant benefits to the IPIC method. First, companies that switch to the IPIC method are afforded audit protection by the IRS for their prior LIFO method. Second, since inflation is not measured based on changes in actual costs for each item under IPIC, the complexities of determining an appropriate year beginning cost for new items each year is eliminated. Third, moving to the IPIC method is an automatic change in accounting method, thus LIFO taxpayers have until the extended due date of their tax return to make this change.
With all of the advantages offered by the IPIC method, I still have companies ask if changing to the IPIC method makes sense given the current challenges LIFO faces. What many consider to be the greatest threat to LIFO is the looming International Financial Reporting Standards (IFRS) convergence. Since IFRS does not recognize LIFO, many assume that IFRS adoption will mean an immediate end to LIFO.
Chandry Jimenez, Director of LIFO Services
While there is currently no timetable for convergence of privately-held companies, there is hope for LIFO users if convergence does transpire. The first possibility is that an exception to IFRS in the U.S. could be made to allow companies to continue using LIFO for financial reporting. While IFRS is a world-wide reporting standard, what you may not know is that most developed countries using IFRS have made exceptions to the “standards” by editing or removing portions deemed undesirable. Another possibility in favor of LIFO is an elimination of the conformity requirement altogether. Such a proposal was recently presented to the Treasury Department and is currently under review.
In spite of the challenges LIFO faces, we continue to evaluate the IPIC LIFO method for companies to help increase their cash flow. We’re seeing more advantageous results in a variety of industries, most recently in manufacturing, distribution and retail sales of food, fuel, chemical products and metal products. If you’re on LIFO and pressed for cash, now is the perfect time to consider the IPIC method.