Under IFRS (specifically IAS 2), the permitted inventory cost flow methods are First-In, First-Out (FIFO) and the Weighted Average Cost method. The Specific Identification method is also required for items that are not ordinarily interchangeable or for goods produced and segregated for specific projects. The Last-In, First-Out (LIFO) method is strictly prohibited.
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.
LIFO in Accounting Standards
Under IFRS and ASPE, the use of the last-in, first-out method is prohibited.
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.
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.
LIFO understates profits for the purposes of minimizing taxable income, results in outdated and obsolete inventory numbers, and can create opportunities for management to manipulate earnings through a LIFO liquidation.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.
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.
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.
In the U.S., the common cost flow assumptions are First-in, First-out (FIFO), Last-in, First-out (LIFO), and average.
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.
The LIFO method is available only under U.S. Generally Accepted Accounting Principles (GAAP) — it's not permitted under International Financial Reporting Standards (IFRS).
The four most common inventory costing methods are:
FIFO. LIFO. Weighted average. Specific identification.
LIFO is not permitted by IFRS, but it is still acceptable in the US. In situations with both rising costs and increasing inventory levels, LIFO results in the higher, more recent costs flowing through cost of sales with the lower, older costs in inventories.
LIFO is prohibited by the IFRS because it can misrepresent a business's financial statements – particularly its income statement and balance sheet.
In terms of investing in accounting inventory, FIFO is usually a better method for inventory when prices are rising, and LIFO accounting is better when prices fall because more expensive products are sold first.
Which of the following is not permitted under IFRS? The use of the LIFO cost flow assumption.
There are four generally accepted methods for assigning costs to ending inventory and cost of goods sold: specific cost; average cost; first‐in, first‐out (FIFO); and last‐in, first‐out (LIFO).
The International Financial Reporting Standards (IFRS) only permits the use of either the First-In, First-Out (FIFO) or the Weighted Average Cost flow assumption for inventory valuation.
Answer: The most common costing methods are process costing, job costing, direct costing, and Throughput costing. Each of these approaches can be used in various production and decision-making situations.
The FIFO inventory method satisfies International Financial Reporting Standards requirements, making it the only acceptable inventory valuation method under IFRS. This global standardization simplifies accounting for multinational companies and ensures consistent financial reporting across different jurisdictions.
Globally accepted: FIFO is allowed under Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS).
IFRS prohibits LIFO because it can misrepresent inventory values and financial performance. By endorsing methods like FIFO, weighted average, and specific identification, IFRS promotes accurate and fair valuation practices.
GAAP allows LIFO, FIFO, and weighted-average methods, while IFRS prohibits LIFO. IFRS measures inventory at the lower of cost or net realizable value. Only IFRS allows reversals of inventory write-downs; GAAP prohibits it. GAAP provides leeway for inventory costing methods, while IFRS is more consistent.
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.
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.