Can We Live Without LIFO?

 


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1st it was Sarbanes Oxly - The Sarbanes-Oxley Act of 2002 commonly called SOX or Sarbox; is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, and WorldCom. The legislation is wide ranging and establishes new or enhanced standards for all U. S. public company boards, management, and public accounting firms. Some believe the legislation was necessary and useful, others believe it does more economic damage than it prevents, and yet others observe how essentially modest the Act is compared to the heavy rhetoric accompanying it. At any rate even privately held companies are paying much closer attention to their accounting systems as a result.

Now Government wants to eliminate LIFO. LIFO stands for Last In, First Out. It is an inventory costing methodology. The last in, first out, or LIFO method, selects the most recent purchases whose quantities add up to the total number of items sold during the year. The last in, or most recent purchases, are the first charged out to expense. The primary theory of the LIFO method is that products sold have to be replaced to continue in business and that the most recent (i. e. , the last in) costs are the closest to the costs of replacing the products sold. From a tax standpoint, LIFO minimizes tax consequences by using the highest cost of inventory which reduces reported profit.

Congress is toying with the idea that the elimination of LIFO can put billions of dollars into the Tax coffers. If the elimination of LIFO becomes a reality we are in for a devastating impact on our industry. In distribution most of the profit is made on the buy side of the equation and the ability to manage inventory. For many of you, inventory management is your key core competence.

Can This Be Real

Official statements made by Congress indicate that the issue of eliminating LIFO is no longer part of anyone’s agenda. The question becomes, “Can we believe that?" Congress authorized the use of LIFO in 1930. Can you imagine the number of companies that have adopted the LIFO system since 1930? Can you imagine the LIFO reserve that is built up just in our industry? (LIFO reserve is the difference between actual inventory cost based on FIFO (First In First Out) and the LIFO cost.

Currently these reserves are merely an accounting transaction. That means they are identified but they do not impact current reported profits. However, if the LIFO system was eliminated these reserves could become taxable as profit. This could be a significant tax liability for most companies that have adopted LIFO. Many of these companies may not be able to pay these taxes and it could threaten their very existence.

Estimates of the tax revenue the elimination of the LIFO system could produce have exceeded twenty billion dollars according to a Senate committee. That estimate included only publicly traded companies. Imagine what the number could be if it included the vast majority of privately held companies in the United States.

Fortunately this issue never got off the ground. The President threatened to veto it. However, discussions continue to take place even though they may be outside the realm of real meetings and official agendas. It’s scary. Just the thought of government discussing this issue is alarming in my opinion. Remember it can mean billions of dollars and money talks. This country has always had a propensity to spend. It seems to be part of our heritage and we live a tremendous life style in this country because of it. (At least in part) However, this country thrives because business and free enterprise is our platform – our foundation. It just scares me when we start talking about messing with any part of that foundation.

Eliminating LIFO would be especially harmful to older industries that have adopted LIFO in the earliest years of its existence. So, keep your ears to the ground and pay attention to what is going on in Congress. LIFO has become a business life style for many companies. We can not afford to eliminate it now. It can’t possibly do anything but damage our economy.

http://www.ceostrategist.com – Sign up to receive “The Howl" a free monthly newsletter that addresses real world industry issues. – Straight talk about today’s issues. Rick Johnson, expert speaker, wholesale distribution’s “Leadership Strategist", founder of CEO Strategist, LLC a firm that helps clients create and maintain competitive advantage. Need a speaker for your next event, E-mail rick@ceostrategist.com . Don’t forget to check out the Lead Wolf Series that can help you put more profit into your business. E-mail rick@ceostrategist.com for your special Howl discount order form. Get the CEO Strategist Interview Guide and Conducting an Effective Sales Training Session Guide just for signing up for “The Howl". Don’t forget to check out the Lead Wolf Series that can help you put more profit into your business. E-mail rick@ceostrategist.com for your special Howl discount order form.

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