The Last-In, First-Out (LIFO) inventory cost flow assumption is not permitted under International Financial Reporting Standards (IFRS). Specifically, IAS 2 Inventories prohibits LIFO because it does not represent actual physical inventory flows and can distort financial statements by leaving outdated costs on the balance sheet.
LIFO in Accounting Standards
Under IFRS and ASPE, the use of the last-in, first-out method is prohibited.
The LIFO method is available only under U.S. Generally Accepted Accounting Principles (GAAP) — it's not permitted under International Financial Reporting Standards (IFRS).
While the last in, first out (LIFO) inventory method is permitted under U.S. generally accepted accounting principles (GAAP), it is prohibited under IFRS because of how it affects financial statements.
LIFO is allowed under GAAP in the U.S. but prohibited under IFRS followed outside the U.S. FIFO is considered the better method for accurately presenting inventory costs and profits. But U.S. firms can elect to use LIFO for tax benefits provided they meet GAAP reporting requirements.
Which of the following is not permitted under IFRS? The use of the LIFO cost flow assumption.
The LIFO method permitted under U.S. GAAP is not permitted under IFRS. Any organization using the LIFO inventory method for book and tax purposes would need to select a different method as part of its conversion to IFRS, which could result in a significant tax impact.
Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS.
IAS 2 prohibits LIFO; US GAAP allows its use.
The International Accounting Standards Board (IASB® Board) eliminated the use of LIFO because of its lack of representational faithfulness of inventory flows.
Investors understand that older costs leave first, making the income statement easier to read. If you sell across borders, IFRS requires FIFO or weighted average—never LIFO.
GAAP (US Standard) permits all four costing methods: FIFO, LIFO, Weighted Average, and Specific Identification. IFRS (International Standard) prohibits LIFO entirely, requiring businesses to use FIFO, Weighted Average, or Specific Identification.
IFRS mandates that LIFO is not a permissible method of inventory cost calculation or recognizing cost as an expense under the International Accounting Standards (IAS) – 2. LIFO is prohibited because it creates a misleading picture of an organization's financial statements and profitability.
Explanation of Correct Answer:
LIFO (Last In, First Out) is prohibited under International Financial Reporting Standards (IFRS) because it does not accurately reflect the physical flow of inventory in most businesses.
LIFO understates profits for the purposes of minimizing taxable income, results in outdated and obsolete inventory numbers, and can create opportunities for management to manipulate earnings through a LIFO liquidation. Due to these concerns, LIFO is prohibited under IFRS.
The four most common inventory costing methods are:
FIFO. LIFO. Weighted average. Specific identification.
The standard IAS 2 Inventories does not permit using LIFO (last-in-first-out).
FIFO is compliant with both GAAP and IFRS, making it widely accepted internationally. LIFO, however, is only allowed under GAAP and is prohibited by IFRS, meaning businesses using LIFO cannot comply with international financial reporting standards.
Choosing the Right Inventory Valuation Method
The main difference between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) is that IFRS does not allow the LIFO method.
LIFO is prohibited by the IFRS because it can misrepresent a business's financial statements – particularly its income statement and balance sheet.
Direct Write-off Method: General accepted accounting principles (GAAP) do not recognized the direct write-off method. Under the direct write-off method, bad debt expense is recorded when the customer's account is determine to be uncollectible.
The complete form of LIFO is last in, first out. IFRS prohibits LIFO due to potential distortions. It can understate a company's earnings or profits to keep taxable income low. Under this method, the valuation of inventory can be outdated.
With a higher COGS, profits and income taxes are generally lower under LIFO. Important note: The LIFO method is available only under U.S. Generally Accepted Accounting Principles (GAAP) — it's not permitted under International Financial Reporting Standards (IFRS).
IFRS and US GAAP allow companies the choice of using either of the following inventory valuation methods: specific identification; first-in, first-out (FIFO); and weighted average cost. US GAAP also allows the use of the last-in, first-out (LIFO) method.
Last in first out (LIFO) is not permitted. When inventory is sold, the carrying amount is recognised as an expense in the period in which the related revenue is recognised. Write-downs to NRV are recognised as an expense in the period the loss occurs.
Direct Write-Off Method
The write-off method violates the matching principle under U.S. GAAP since the expense is recognized in a different period as when the revenue was earned.