If investors are scrutinizing LIFO companies more carefully, it almost goes without saying that those companies need to be prepared for the Staff to take a close look at disclosure practices as well. In addition to addressing the potential impact of inflation on LIFO inventory valuations and their current and future results of operations in the Risk Factors & MD&A sections of their filings, companies should keep an eye out for potential comment trends on LIFO issues.
I did a quick search on EDGAR and haven’t found any 2022 comment letters referencing LIFO that have been released yet, but I did find a handful of comment letters from 2021 that raised issues that are likely to be relevant this year as well. These include:
– Comments directed at non-GAAP presentations that exclude changes in LIFO reserves, which the Staff has challenged as potentially involving “tailored accounting.” The company in question was able to successfully resolve this comment.
– Comments seeking clarification (see comment # 3) as to whether LIFO inventory was reported at the lower of cost or market or lower of cost or net realizable value in accordance with ASC330-10-35-1B through -7. Here’s the company’s response with the requested clarifying disclosure.
– The usual “equal prominence” comment on non-GAAP measures that exclude changes in LIFO reserves.
LIFO accounting may be an issue for only a relatively small percentage of public companies, but it’s a subpart of the much broader issue of how inflation is affecting all public companies’ results of operations and financial condition. In that regard, although the SEC’s 2020 Regulation S-K modernization rules eliminated specific line-item disclosure requirements concerning the impact of inflation and changes in prices, discussion of these matters is still required if they are part of a known trend or if they have had or the company reasonably expects them to have a material impact on key income statement line-items.
– John Jenkins