The Last-In, First-Out (LIFO) inventory costing method is strictly prohibited under International Financial Reporting Standards (IFRS). While LIFO is allowed under U.S. GAAP, IFRS requires inventory to be valued using First-In, First-Out (FIFO), Specific Identification, or Weighted Average Cost methods to ensure more accurate, current, and consistent financial reporting.
Under IFRS and ASPE, the use of the last-in, first-out method is prohibited. However, under GAAP, the use of Last-In First-Out is permitted. The inventory valuation method is prohibited under IFRS and ASPE due to potential distortions on a company's profitability and financial statements.
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.
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 LIFO method is available only under U.S. Generally Accepted Accounting Principles (GAAP) — it's not permitted under International Financial Reporting Standards (IFRS).
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 is banned under IFRS due to potential financial distortions. LIFO can understate company earnings and lead to outdated inventory values. Under LIFO, tax liabilities are reduced but at the cost of outdated inventory values.
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.
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.
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 Under this method, the valuation of inventory can be outdated.
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.
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.
The four most common inventory costing methods are:
FIFO. LIFO. Weighted average. 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.
Four common methods for reporting inventory under GAAP are:
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.
As LIFO inventory costing is not permitted under IFRS, companies that utilize the LIFO costing methodology under US GAAP might experience significantly different operating results as well as cash flows.
Globally accepted: FIFO is allowed under Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS).
There are two common accounting methods used to value inventory: First In First Out (FIFO) and Last In Last Out (LIFO). Only FIFO is permitted under both IFRS and US GAAP. LIFO liquidation is the process of companies quickly selling down their inventory balance without replacing the sold stock.
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.
IMPORTANT: LIFO is only an acceptable inventory valuation method in the United States using the Generally Accepted Accounting Principles (GAAP). LIFO is specifically prohibited under International Financial Reporting Standards (IFRS).
LIFO is prohibited by the IFRS because it can misrepresent a business's financial statements – particularly its income statement and balance sheet.
Is LIFO an allowable inventory costing method under IFRS Accounting Standards? IAS 2 prohibits the use of the last in first out (LIFO) method [IAS 2 para 25].
IFRS 15 does not apply to wholly unperformed contracts where all parties have the enforceable right to end the contract without penalty. These contracts do not affect an entity's financial position until either party performs under the contract.