Am i reading it right. There is a mention in the material of level 2 financial statement and analysis the SEC has proposed starting 2014 the companies need to comply with IFRS. since IFRS does not allow LIFO inventory valuation, they would have to migrate to either weighted average or FIFO. If so is the case, why LIFO still is given so much weightage in the course material ?
Because it’s very likely that there will be an extension. Moving away from LIFO means a lot of tax liabilities, which given the current economic environment, is not feasible for a lot of companies. Especially, manufacturing.
Even if there’s no extension, things will probably fall into place over multiple years.
This is similar to the elimination of the pooling of interest method (M&A) around 2000. Even though the method’s gone, there are lot of leftovers on companies’ B/S as a result of that method. And you still need to know it for financial analysis.
When analyzing historical records for years to come there will be LIFO in the books, this makes being able to convert even more important as it’s a near certainty that in 2-5 years from now, if you do a 10 year trend for example, for the same company you will have a mix of LIFO and FIFI at some point.
Companies also often release 2 sets of results, GAAP/IFRS compliant and one that’s not and that they feel more accurately represents their company these could have LIFO for the millennia’s to come.
You might also encounter private companies that do not use LIFO for their own internal reporting, especially outside the US.
^yes, not every company has to comply with IFRS and there are always exceptions, so i am not surprised they keep it in the curriculum for a little while.
The important thing is that LIFO FIFO are not too difficult, i find weighted average waaaay more cumbersome to calculate, don’t you agree?
^Meh. I don’t think L2 exam is going to ask you a trivial FIFO/LIFO/WAC calculation. Most likely, I’d screw around with candidates by posing questions on LIFO liquidations, LIFO layers, and multiple tax rates. Oh, and allowances and writedowns, too :).
So much fun!!!
oh i totally forgot about allowances and writedowns!! all those corridors and stuff… @_@
Tax deferred assets/liabilities will screw anyone over…
Yeah, when I first saw that I was totally tempted to wait until next year to take the exam as the material would probably be half the length However I’m sure you’ll still need to know how to convert old financial statements under LIFO for years to come…
This will create huge tax implications causing bottom lines to decrease, stock market will not be happy with this adjustment.
Quite the opposite: eliminating LIFO will, at least initially, increase net income (the old, low prices will go into COGS, reducing expenses), increase equity (through higher retained earnings), and increase assets (old, low inventory prices will be replaced by higher, new inventory prices.) Bottom lines (net income, total assets) will increase, not decrease.
The proposal to migrate with IFRS has been ongoing for many years with soft “deadlines” contantly being pushed back. When I was in school it was supposed to take effect in 2011 and yet here we are with no resolution. I wouldn’t hold my breath.
Thanks every one for the interesting replies. Yes it makes sense now especially the ones on need for extensions, comparability and the complexities in migration. !! Thanks again.