tHi Patak,
Below please find an abstract from an official website in US:
"Since August 2008, when former Securities Exchange Commission (SEC) chairman, Christopher Cox,
presented a timeline for public companies to transition away from US GAAP (generally accepted accounting
principles) to (IFRS) international financial reporting standards, many executives and policy-makers have
been concerned about the implications of the differences between the two standards of reporting. The goal
of the SEC and the International Accounting Standards Board (IASB) is ultimately to put both US and other
international public companies on a consistent, comparable financial reporting basis. This, in turn, would
enable analysts, shareholders, and company management to evaluate financial performance among industry
competitors, no matter where they are domiciled around the globe.
However, as Mary Smyth, Controller for United Technologies Corp., warned in CFO Magazine recently,
"The transition from US GAAP to IFRS is not an accounting-standard adoption exercise, but rather a global
project, impacting every facet of a company's operations." One of those facets is the method of inventory
valuation used by US companies. Under US GAAP, US companies are allowed to use an inventory valuation
method referred to as LIFO (last in, first out). Under IFRS, LIFO is not permitted as a basis for valuing
inventory for financial reporting purposes. This has many implications for US businesses that currently
employ LIFO, one of the most significant of which is the potential acceleration of deferred tax liabilities that
have accumulated on their balance sheets over many years of operations.
LIFO Defined
LIFO implies that as inventories turn over, companies using this method to account for their inventory
transactions will use their most recent purchases of inventory to sell first. This enables companies to deduct
the most recent costs associated with their inventory from their sales proceeds. Consequently, companies
using LIFO better match current revenues with current costs. This concept rarely reflects that actual flow of
inventory. Most companies prefer to sell their oldest purchases of inventory first-called FIFO (first in, first
out). LIFO has been permitted for US companies since the early 1970s. During this period of high inflation in
the United States, many companies adopted LIFO to lower their taxable earnings, and thereby, lower their
then-current tax payments. Under current IRS tax regulations, a company that uses LIFO for tax reporting
must also use it for financial reporting purposes. This is referred to as the LIFO conformity rule.
The computation of cost of goods sold (COGS) is:
COGS =
Beginning Inventory + Purchases # Ending Inventory
A recent study performed at the Georgia Tech Financial Analysis Lab examined the tax effect, among
other impacts, of changing from the LIFO valuation of inventory to FIFO. It revealed that 36% of US
companies use LIFO in valuing all or a portion of their inventories. Further, the study reviewed a sample
of 30 companies with the largest percentage of LIFO reserves to total assets, and found that their pretax
income would be higher on average by 10% and 12% in 2006 and 2007, respectively, if they used FIFO
in valuing their inventories. More importantly, the study revealed that these same companies would have
more than US$15 billion of cumulative federal income taxes due if they switched from LIFO to FIFO. Under
current IRS regulations, most of these companies would be allowed to spread their tax payments over four
years. This seems fair and equitable at first glance, until one realizes the gravity of these tax payments. For
example, Exxon Mobil Corporation had a LIFO reserve balance of US$25.4 billion at the end of its fiscal year
2007. At a 35% effective tax rate, the company would be forced to pay the IRS approximately US$2.2 billion
a year for four years (approximately US$8.9 billion in total, or 4% of its total assets)."
As far as I understand, the method of valuing as per LIFO, FIFO and MAP, does not adopt standard price
and then adjust at year end the varinace. It reasonably mean valuing at purchase price.
Regards,
ARI
PS: Please refer the underlined message more closely
| | | ---------------Original Message---------------
From: jrpatak
Sent: Wednesday, December 01, 2010 11:51 AM
Subject: Moving Average Prices update in Material Master for data migration
Here's your companies, Maybe you heard of them
Dell, Intel, Anheuser-Busch, HP, IBM, Avanex, parts of ABB, Compaq, Storage Tek, Sun, Fender, Madix, Lucent, and that is only half the companies that I have worked for.
STD price has its place so does MAP.
As you get more global experience in life and business you learn to be tolerant of different opinions. |
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| |  ARI
SAP Accounting Helper
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