The Last-In, First-Out (LIFO) method of inventory valuation is not permitted under IND AS 2.
LIFO is banned under IFRS due to potential financial distortions. LIFO can understate company earnings and lead to outdated inventory values.
Last in first out (LIFO) is not permitted.
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.
IAS 2 requires that inventories are measured at the lower of cost and net realisable value. 'Cost' includes all costs of bringing the item to its current location and condition. The cost of inventories should be assigned using either the first-in first-out or weighted average cost method.
FIFO (First In, First Out): Uses oldest costs; higher profit margin. LIFO (Last In, First Out): Uses newest costs; lowers taxable profit (U.S. only). WAC (Weighted Average Cost): Averages all item costs; smooth for high volumes. Specific Identification: Uses exact cost per item; best for unique products.
However, the Last-In, First-Out (LIFO) method is not an acceptable method under IAS 2/AASB 102. This method assumes that the most recently purchased or produced items are the first ones to be sold.
Exclusions to the Scope of this Standard
This standard also does not apply to the measurement of the following inventories: Agricultural and forest products, agricultural produce after harvest, and minerals and mineral products that are measured at net realisable value.
Inventory Valuation Methods in Europe
The use of LIFO is prohibited under IFRS rules. Therefore, corporations across Europe adopt FIFO for financial reporting purposes in alignment with accepted international accounting principles.
The LIFO method is available only under U.S. Generally Accepted Accounting Principles (GAAP) — it's not permitted under International Financial Reporting Standards (IFRS).
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.
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.
As per AS - 2, INVENTORIES ARE TO BE VALUED AT LOWER OF COST OF INVENTORY OR NET REALIZABLE VALUE(NRV) OF THE INVENTORY. Such selection of lower value is considered on item by item basis (not on global basis). Examples of Selling Expenses:- Commission on sale, Delivery Expenses, etc.
AS2 (Applicability Statement 2) is a popular protocol for secure and reliable transmission of structured business data over the internet — including EDI documents. It enables encryption, digital signatures, and delivery receipts (MDNs), making it ideal for B2B communication across industries.
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).
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.
The five most commonly used inventory valuation methods are FIFO (First In, First Out), LIFO (Last In, First Out), FEFO (First Expired, First Out), Weighted Average, and Specific Identification.
IAS 2 requires inventories to be measured at the lower of cost and net realisable value. other costs incurred in bringing the inventories to their present location and condition, excluding the cost of abnormal wastage, storage, administration and selling.
This Standard deals with the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Limitations of Indian Accounting Standards
This complexity can lead to inconsistent interpretations and potential misapplication. It may affect the comparability and reliability of financial statements.
The four most common inventory costing methods are:
FIFO. LIFO. Weighted average. Specific identification.
The cost of inventories is assigned by: specific identification of cost for items of inventory that are not ordinarily interchangeable; and. the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable (generally large quantities of individually insignificant items).
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.