Another year, another administrative budget proposal to banish last-in-first-out accounting for inventory. As he has each year in office, President Obama is suggesting Congress do away with LIFO accounting as a way to raise revenue and align with international standards.

The Treasury explanation of the president's 2012 budget proposal says repealing LIFO would not only raise tax revenue, but would also clear an obstacle for the adoption of international accounting standards in the United States. “International Financial Reporting Standards do not permit the use of the LIFO method, and their adoption by the Securities and Exchange Commission would cause violations of the current LIFO book/tax conformity requirement,” Treasury wrote. “Repealing LIFO would remove this possible impediment to the implementation of these standards in the United States." Obama's proposed framework for tax reform also plugs a repeal of LIFO.

LIFO is a method of accounting for inventory that assigns costs to goods sold based on the most recent – and therefore usually the highest – prices paid to acquire inventory or raw materials. When a taxpayer is faced with rising inventory or material costs, LIFO produces a tax benefit because it increases the expense that is deducted from income.

Treasury says repealing LIFO would eliminate an opportunity for taxpayers to defer tax and would simplify the Tax Code by removing a method that is seen as complex, burdensome, and controversial, leading to disputes between taxpayers and the Internal Revenue Service. It also would align U.S. accounting rules with international rules, where LIFO is not permitted. According to the proposal, taxpayers that currently follow LIFO should be required to write up their beginning LIFO inventory balance as if they were following first-in-first-out accounting, with the resulting one-time increase in gross income spread out over 10 years.

Armando Gomez, a tax partner with law firm Skadden, Arps, Slate, Meagher & Flom, says tax laws allow a taxpayer to follow LIFO for tax purposes only if they also follow it for their financial statements. “If the rules for financial statements would no longer permit LIFO, then companies could not use it for taxes any longer,” he says. “The budget materials suggest that the continuing availability of LIFO has been an impediment to the SEC approving a switch to IFRS.”

In a recent talk to the IFRS Advisory Council, SEC Chief Accountant Jim Kroeker described LIFO as one of several issues the SEC must address in deciding whether, when and how the United States would transition to IFRS. Kroeker's staff is finishing a report to the commission to recommend a path for U.S. adoption of IFRS over a period of many years.