أنشئ حسابًا أو سجّل الدخول للانضمام إلى مجتمعك المهني.
Assalam -o-Alikum vrvb
Dear M. Owais,
After the revision of IAS2 Inventories in, LIFO was explicitly prohibited to be used by the entities following International Accounting Standards to prepare and present financial statements. Before this revision LIFO was available as allowed alternative i.e. an option if company wishes to use the inventory valuation method other than the preferred method.
One of the reason that can easily be understood is that LIFO cause reduction in tax burden under inflationary economies i.e. in the times of rising prices. This happens because LIFO assumes that inventory which is bought latest will be sent to production hall to be consumed in the production process and thus higher value inventory will be included in cost of sales figure which will result in larger cost and ultimately lesser profits and thus lesser tax. So, many argue that LIFO is one of the tools to save tax “expenses”.
However, the major reason is not the impact on tax. The main reason for excluding the LIFO is because IFRSs shifted its focus on balance sheet instead of income statement which is also known as balance sheet approach. The impact of this turn in focus from income statement to statement of financial position (SoFP) requires that the figures in the SoFP should be according to present market conditions i.e. it should provide the most relevant information with respect to time and if the statement of financial position items are measured according to up to date information only then financial position can be ascertained reliably.
Now under LIFO as Last-in inventory is expensed out as cost of sales and old inventory is kept in the store therefore, the figure that will be reported in the SoFP, which will be according to the inventory in store, might be too old to be relevant for the users of financial statements. That was the main reason for abandoning the LIFO inventory valuation method as it was causing outdated information in the statement of financial position.
