Repeal of LIFO: Analysis Based on Industry Data

Abstract

We discuss the potential consequence of a repeal of the Last-in, First-out (LIFO) inventory method. In 2012, U.S. companies reported a total of 3,207 million LIFO reserves. Assuming a 35% tax rate, this reserve reflects approximately 1,122 million in tax savings. More importantly, there has been a significant increase in LIFO reserves during the past decade. If LIFO is repealed, the substantial tax burden might destroy some firms. Although it is crucial to converge toward International Financial Reporting Standards (IFRS), we suggest that regulators be cautious about the potential repeal of LIFO.