Sucking the LIFO Out of Inventory

The government sees billions of dollars in potential tax revenue sitting on the shelves of company warehouses.

But some large companies say the change would still hurt. Graybar, with $4.3 billion in revenue, reported a LIFO reserve of $107 million in its most recent 10-K. Assuming a 35% tax rate, and a single payment that is not stretched out over time, D’Alessandro estimates that Graybar’s tax bill would amount to $37.5 million on the day it converted from LIFO to FIFO — or a $19 million tax obligation if the company switched to average-cost accounting. More important, a switch from LIFO could mean up to 500 fewer jobs, says the CFO, who figures that, on average, salary and benefits cost the company $70,000 per person. “If we pay it in taxes, we can’t pay it in wages. It is as simple as that. [LIFO repeal] is an anti-employment move,” insists D’Alessandro.

The demise of LIFO also could affect a company’s net operating losses — the deferred tax asset that is recorded by a company and held to offset taxable income in the future. Rabinowitz notes that taking the LIFO reserve into income could reduce the amount of NOL carryforwards.

The sting of LIFO repeal also will be felt by smaller companies that don’t have robust information-technology systems, says Stephanie Anderson, a managing director at consultancy AlixPartners. That’s because sorting and valuing layer after layer of LIFO inventory is a complex task. That kind of “unwinding” is mandatory before an accurate valuation can be recorded for book and tax purposes. Anderson says companies may also need to hire more cost accountants to ferret through the inventory layers.

Is the End Near?

The brightest hope for LIFO proponents is the possibility that the accounting method could yet survive. It is too early yet to tell how strong industry pushback will be on the Administration’s proposed repeal, but lobbying efforts have stopped it before. Similarly, if the Securities and Exchange Commission does make IFRS the accounting system of the land, nonpublic companies won’t have to use the standards. Indeed, if the IRS itself isn’t the force behind a LIFO prohibition, it might even prove willing, as it has in the past, to water down conformity regulations requiring that certain methods be used consistently for both tax and financial reporting.

Perhaps the biggest wild card affecting the government’s decision will be the economy. “It’s always a terrible time to look at repealing LIFO,” says Jones, “but right now it’s just another nail in many corporate coffins.”

Marie Leone is senior editor for accounting at CFO.

Businesses with strong cash flows may be minimally affected by moving off of LIFO.

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