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The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together toward the convergence of accounting standards to provide a single set of high quality global standards. Companies who are currently in compliance with Generally Accepted Accounting Principles (GAAP) will need to make necessary adjustments as those standards converge with International Standards. GAAP uses a rules based approach while the IFRS is more principle based. These contrasting approaches create differences that need to be reconciled at various levels of the two standards’ applications. Perhaps the most telling example, under AIS 2 Inventories, the last-in, first-out (LIFO) inventory method is prohibited by IASB Standards. This inventory method, however, has been permitted by the Internal Revenue Service since the 1930s. In fact, it is preferred by companies who hold inventory during inflationary periods as it minimizes their income tax liability. The issue is the present conformity rule, where if the LIFO method is used for income tax purposes, it also must be used for financial reporting purposes. The “conformity” rule, as presently enforced, will not allow LIFO tax and financial accounting if international rules are followed. This paper identifies the economic effects of the elimination of the LIFO inventory method (hereafter referred to as the LIFO reserve rollover). Findings revealed that multiple advocacy attempts to eliminate the reserve impose an inevitably to its disallowance. Additional costs to companies and the economy are outlined. The recommended course of action for companies is to lobby for a longer tax deferment period.
Eubanks, Michael, "Economic Effects of a LIFO Reserve Rollover" (2012). Honors Theses. 2343.
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