LIFO

LIFO charges the most recently purchased cost to cost of sales and leaves the oldest cost in closing inventory. With prices rising that produces higher cost of sales, lower reported profit, and a balance sheet carrying goods at prices the company could not obtain today.

IAS 2 prohibits it. The IFRS objection is about the balance sheet: inventory carried at cost layers laid down years or even decades earlier tells a reader almost nothing about what the goods are worth, and the standard setters preferred a faithful balance sheet to a convenient income statement.

US GAAP still permits it, and the reason companies elect it is cash tax rather than presentation. Lower taxable profit in a rising price environment defers real cash tax, and the US tax code will only grant that benefit to a company that also uses LIFO in its published accounts. That conformity requirement is why a tax decision ends up dictating what the financial statements look like.

For a European analyst the consequence is comparability rather than choice. A US peer on LIFO shows lower gross margin, lower inventory, a lower current ratio and a faster looking inventory turnover than an identical IFRS reporter. The LIFO reserve is the disclosed bridge back, and using it is expected rather than optional.