makalah ifrs

CONVERGENCE OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND US GAAP: LAST-IN, FIRST-OUT (LIFO) METHOD: ACCOUNTING AND TAX IMPLICATIONS

Ament, Joseph D.

Professor-Accounting and Taxation

Walter E. Heller College of Business Administration

Roosevelt University

Chicago, Illinois

Proceedings of ASBBS

Volume 18 Number 1

ABSTRACT

FAS 157 requires firms to value all items in the financial statements at fair value. Lifo values the inventory at the oldest market prices, resulting in higher cost of goods sold and lower net income and deferred income tax liability.

The convergence of International Financial Reporting Standards (IFRS) and Financial Accounting Standards Board (FASB) Generally Accepted Accounting Principles (GAAP) is currently in process in regular monthly meetings with the objective of attaining a Summer 2011 deadline for resolution of all differences between International and US standards.

LIFO will be a major topic to be discussed and resolved because of the significant arguments of its use both for accounting and for taxation purposes.

Reporting cost of goods sold at fair market value would not appear to be consistent with “fair value” as set forth in FAS 157, since it would result in ending inventory being valued at historical costs, which in most situations would be substantially below current market values.

The Internal Revenue Code provides that to adopt LIFO as a tax accounting method, it must also be used as a financial accounting method for inventory valuation and financial statement purposes.

Various database information indicates that LIFO Reserves significantly exceed $100 Billion. If current US tax law were to remain in effect, a mandatory change from LIFO to a method approved by the convergence, would require a payment of the deferred tax liability/reserve over a period of four years to the Internal Revenue Service, a burden most corporations could not effectively meet within the framework of their operating budgets and expected growth. A proposal would apparently be required to call upon the Congress to amend the Internal Revenue Code to permit the payment of deferred income tax liability attributable to LIFO over, say, eight to ten years. Even under that scenario many companies would be hard pressed to meet all their liquidity needs for operations, growth, current tax liabilities, and capital expenditures. Certain industries have particularly benefitted by LIFO reserves and postponement of tax liabilities, such as the oil, petroleum and other natural resources, distilleries and other long-term assets held in inventory.

Major financial sources would be called upon in the banking and related industries to assist entities by lending to them and/or developing an equity stake in their businesses to provide substantial tax payments as a result of the termination of the LIFO method for accounting and tax purposes.