LIFO liquidation
AccountingThe margin distortion that appears when a LIFO reporter sells more units than it buys and eats into old, cheap cost layers.
Under LIFO, inventory is stacked in layers by the year it was acquired, and in normal trading only the newest layer flows through cost of sales. When sales exceed purchases the company runs out of new layer and starts charging out old ones, bought at prices nobody could obtain today.
The effect on the accounts is a collapse in cost of sales and a spike in gross margin that has nothing whatever to do with trading. It is a one off, it is not repeatable, and it is disclosed in the notes precisely because analysts are expected to strip it out before using the period as a base.
The cause is usually worth as much attention as the accounting. Liquidations accompany destocking, a supply interruption, a plant shutdown, or a deliberate working capital squeeze ahead of a sale process, so a liquidation gain is frequently a signal about volumes or about how the business is being run for a transaction.
A European target cannot produce one. IAS 2 prohibits LIFO, so there are no cost layers to liquidate, and the whole phenomenon belongs on the US side of a comp set rather than in a target's own numbers.
Worked example
A US manufacturer holds layers bought at €10 several years ago and at €15 currently, and sells 500 units more than it buys.
Those 500 units are charged out at €10 rather than €15, so cost of sales is €2,500 lower and gross profit €2,500 higher than normal trading would produce.
Using that year's margin as the base for a comparable multiple would flatter the peer and make a European target look weaker than it is.