June 28, 2022

Financial Reporting: Companies Using LIFO Face Investor Scrutiny

We’ve been operating in a low inflation environment for so long that I think the last time anybody cared about the impact of inflation on inventory accounting was when I was taking my undergrad Financial Accounting 101 class – and in case anybody from the Division of Enforcement is reading, I want to point out that this was my only accounting class. Unfortunately, inflation is back, and according to this WSJ article, so are investor concerns about its impact on companies that use the “Last In, First Out” (LIFO) method of accounting for inventories:

In 2021, approximately 15% of companies in the S&P 500 used LIFO as their primary inventory method and 50% used FIFO, according to Credit Suisse Group AG , citing annual reports. The remainder used an average-cost method, a combination of methods, or methods that couldn’t be determined, Credit Suisse said.

Investors are scrutinizing accounting methods like the use of LIFO amid recent declines in the stock market to ensure they fully understand business models in their portfolios, said Ron Graziano, a managing director at Credit Suisse. “It really matters when it matters, and it matters a lot right now,” he said.

The article cites examples of some LIFO companies that reported big reserve increases associated with LIFO for their most recent reporting period and providing forward-looking disclosure about the potential impact of LIFO accounting for their full fiscal years.

John Jenkins