The correct inventory accounting method that is not permitted under IFRS is the LIFO (Last-In, First-Out) method.
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.
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.
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 LIFO can understate company earnings and lead to outdated inventory values. Under LIFO, tax liabilities are reduced but at the cost of outdated inventory values.
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.
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 four main inventory valuation methods are FIFO or First-In, First-Out; LIFO or Last-In, First-Out; Specific Identification; and Weighted Average Cost.
LIFO in Accounting Standards
The inventory valuation method is prohibited under IFRS and ASPE due to potential distortions on a company's profitability and financial statements.
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.
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 is prohibited by the IFRS because it can misrepresent a business's financial statements – particularly its income statement and balance sheet.
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.
The four main types of inventory are Raw Materials (components for production), Work-in-Progress (WIP) (partially finished goods), Finished Goods (ready for sale), and Maintenance, Repair, & Overhaul (MRO) Supplies (items for operational upkeep). Managing these categories effectively helps businesses control costs, streamline operations, and meet customer demand efficiently.
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.
The guidance in IFRS 13 does not apply to transactions dealt with by certain IFRS® Accounting Standards, for example, share-based payment transactions in IFRS 2 Share-based Payment, leasing transactions in IFRS 16 Leases, or to measurements that are similar to fair value but are not fair value, for example, net ...
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).
Generally, LIFO lowers both taxable income and financial income, while FIFO raises both taxable income and financial income. Choosing LIFO inventory accounting might be more economically sound, but it can lead to lower reported income to shareholders, which can push managers to adopt FIFO inventory accounting.
Inventory accounting methods are the ways in which revenue and expenses are recorded – more specifically, when they are recorded. The two main inventory accounting methods are cash basis accounting and accrual basis accounting.
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.
There are three general categories of inventory: raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP), and finished goods—those that are ready for sale.
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.
Three widely used valuation techniques are the market approach, the cost approach and the income approach. The main aspects of those approaches are summarised in paragraphs B5–B11. An entity shall use valuation techniques consistent with one or more of those approaches to measure fair value.
a) The use of IFRS does not provide an outflow of capital to foreign countries. U.S. Companies are encouraged to transition to IFRS to ensure that companies in the U.S. will also be using the common language used by the others and this will help especially in stock exchanges. As such, it is not a disadvantage.