# Converting LIFO to FIFO for comparison to IFRS

This is regarding page 697 of FSA in the CFAI book. To convert LIFO to FIFO, you perform the following: To convert the LIFO inventory to FIFO, you take LIFO Inv. + LIFO Reserve. To convert COGS LIFO to COGS FIFO, you take COGS FIFO and subtract the increase in LIFO reserve. This would imply that your new net income is higher in an inflationary environment, given that FIFO COGS is a lower expense. The increase in net income would be calculated as (1 - taxrate)*increase in LIFO reserve. That would also increase taxes on the income statement to tax rate * increase in LIFO reserve. So far so good… Now, because the firm under US GAAP paid taxes in the tax return under LIFO, a conversion to FIFO would mean that pretax income is now higher than what it was before the conversion, therefore you would trigger a increase in deferred tax liabilities. Intuitively, I would think this deferred tax liability increase would be equal to the increase in taxes (taxrate*increase in LIFO reserve). HOWEVER, the book says the increase in deferred tax liabilities is the ending LIFO reserve*tax rate (NOT THE CHANGE). Am I fundamentally misunderstanding something here? Thanks, Ali

TheAliMan Wrote: ------------------------------------------------------- > This is regarding page 697 of FSA in the CFAI > book. > > To convert LIFO to FIFO, you perform the > following: > > To convert the LIFO inventory to FIFO, you take > LIFO Inv. + LIFO Reserve. > To convert COGS LIFO to COGS FIFO, you take COGS > FIFO and subtract the increase in LIFO reserve. sorry, haven’t read all of the post… but to convert COGS LIFO to COGS FIFO, you take COGS FIFO and add change in LIFO reserve.

Sorry, I messed up that line, thanks for pointing that out. COGS FIFO = COGS LIFO - increase in LIFO reserve. Anyone have the answer to my tax question?

inventory method LIFO / FIFO won’t create deferred tax asset / Liability at least under US GAAP. (IMO) Both Taxes payable and income tax expense will change by the same amount and there will not be any change in DTL or DTA

Nope, there is a change when you take a US GAAP company and compare it to an IFRS company. It’s not an actual change, but it’s a “what if” change for comparative reasons. Open up your CFAI FSA text to page 697.

Good question AliMan, I’m having real trouble getting my head around this one too. I can’t nail down the specifics but conceptually I think it has something to do with the fact that the change in LIFO reserves represents only that years difference in COGS, however the deferred tax liability must take into account all future years tax differences, that is until the LIFO reserve is exhausted.

Where are map1, CP, and Joey when you need 'em?

What did your asset increase by? Inv FIFO = Inv LIFO + End LIFO Reserve. What did your Net Income increase by? *which becomes equity —> (1-Tax Rate) (End LIFO Res - Beg LIFO Reserve). Given that A = L + E for this incremental scenario – and you are looking at the change in DTL… Delta DTL = Inv LIFO + End LIFO Reserve - (1-Tax Rate)(End LIFO Reserve - Beg LIFO Reserve) = INV LIFO + (1-Tax Rate) * Beg LIFO Reserve + Tax Rate * End LIFO Reserve = INV FIFO + Tax Rate * End LIFO Reserve…

AliMan, Yeah you are correct. I looked at Example 3 on 696. Assets overall increased by \$64 mill (LIFO Reserve) simple enough… The same should be increase in L+ E But …they just multiplied 64 mill x 30% (tax rate) = 19.2 --> increased deferred tax liability by 19.2 and remaining is adjusted in Retained Earnings = 44.8 Good question is How ? and Why ? example does not provide tht explanation… We need cp or Joey … I need to re-read that reading …

cpk123 Wrote: ------------------------------------------------------- > What did your asset increase by? > Inv FIFO = Inv LIFO + End LIFO Reserve. > > What did your Net Income increase by? *which > becomes equity —> > (1-Tax Rate) (End LIFO Res - Beg LIFO Reserve). > > Given that A = L + E for this incremental scenario > – and you are looking at the change in DTL… > > Delta DTL = Inv LIFO + End LIFO Reserve - (1-Tax > Rate)(End LIFO Reserve - Beg LIFO Reserve) > = INV LIFO + (1-Tax Rate) * Beg > LIFO Reserve + Tax Rate * End LIFO Reserve > = INV FIFO + Tax Rate * End LIFO > Reserve… Thanks !! Great explanation

Genius. So let me clarify here. Assets (higher inventory value) - Equity (increase in income) = Liabilities (what I need to balance and I do this with an increase in deferred tax liabilities) Delta DTL = Inv LIFO + End LIFO Reserve - (1-Tax Rate)(End LIFO Reserve - Beg LIFO Reserve) Thanks

Hmm, I’m a little confused going from the 2nd to the the 3rd line in your math = INV LIFO + (1-Tax Rate) * Beg LIFO Reserve + Tax Rate * End LIFO Reserve How do we reduce “INV LIFO + (1-tax rate)*Beg LIFO Reserve” to simply INV FIFO

This doesn’t make sense to me. Assets should only increase by LIFO reserve, not (LIFO Inv + LIFO reserve) Since LIFO Inv must have been included in assets in the first place