Why Use LIFO & How it Works

The LIFO method (last-in, first-out) is the most beneficial inventory-based tax savings strategy because it uses inflation to create material long-term benefits (LIFO creates a tax benefit when there’s inflation), and tens of thousands of companies use LIFO because of this (most companies use LIFO in perpetuity  after an election is made since the tax benefits become bigger for every subsequent inflationary period). Since the LIFO tax benefit amount is primarily tied to the amount of inflation measured in a given period (for example, a 5x bigger LIFO tax benefit will occur in a period with 10% inflation compared to a period with 2% inflation), thousands of companies have elected LIFO because of the unprecedented inflation that’s occurred over the last few years. When there’s inflation, LIFO creates a tax benefit by lowering the inventory value and increasing cost of goods sold, which in turn reduces taxable income.

• Election year LIFO tax benefit formula
  • Current year taxable income reduction from LIFO (aka LIFO expense) = Prior year end inventory balance * Current year inflation rate
  • Current year LIFO tax benefit = Current year LIFO expense * Combined federal + state tax rate
• Election year LIFO tax benefit example
  • Inputs
    • Prior year end inventory balance at cost: $10M
    • Current year inflation rate: 5%
    • Combined federal & state tax rate: Federal (21%) + State (9%) = 30%
  • Outputs
    • Current year LIFO expense: $10M * 5% = $500K
    • Current year LIFO tax benefit: $500K * 30% = $150K

LIFO can be easily implemented and maintained with minimal administrative burden and costs when the calculation is outsourced to LIFOPro. Learn more about at our Turnkey outsourcing solutions page!

How LIFO Works & LIFOPro's Offerings

Effect of Inflation on Financial Statements & Tax Return

Does the Chosen Inventory Valuation Method Need to Match the Physical Flow of Goods?

The actual flow or physical movement of goods does not need to match the inventory costing method used to value inventory (aka cost flow assumption). The most two most predominant inventory valuation methods can be simplified as follows:

• LIFO:
  • Matches current costs with current revenues, thereby reducing income & providing a better measure of current earnings
  • Commonly called the income statement approach as it provides the clearest reflection of income & costs of goods sold (removes inflation component from income)
• FIFO (first-in, first out):
  • Ending inventory most closely matches the current costs since it consists of most recent purchases
  • Commonly called the balance sheet approach because it most closely matches physical flow of goods
  • Charges oldest costs against more current revenue, and creates artificial inventory profits

Are Unit Costs Required to be Tracked on a LIFO Basis in Accounting Systems Incident & Subsequent to Adoption?

Because of the advantages of the dollar-value method & disadvantages of the unit LIFO method, almost all companies using LIFO track and value inventories in their accounting system on a FIFO, average cost or standard cost basis for the following reasons:

• They use the dollar-value method which requires for unit costs to be tracked and valued on a non-LIFO basis
• Most accounting systems are designed to track and value inventories using FIFO, average cost or standard cost
• Companies often base their pricing decisions on a FIFO, average cost or standard cost assumption
• Recordkeeping on a non-LIFO basis is easier since LIFO does usually not approximate the physical flow of goods
• Profit-sharing & other bonus arrangements often depend on a non-LIFO cost flow assumption

One of the biggest misconceptions is item/unit costs must be tracked and valued on a last-in, first out basis once LIFO is adopted. Although this is not true, it’s a misnomer that causes many companies to not to use LIFO. The reality is there are two methods or options how goods are to be tracked and valued on a LIFO basis, which are as follows:

• Dollar-value method: The dollar-value method measures inflation in terms of the total dollar value of the inventories at a FIFO, average cost or standard cost basis, not by the physical quantity & unit cost on a LIFO basis. Under this method, inventories continue being tracked and valued on a non-LIFO basis in perpetuity even incident & subsequent to adopting LIFO. When the dollar-value method is used, a top-side adjustment is recorded to account for the difference between the inventory value at cost (FIFO, average cost etc.) & the LIFO inventory value. When using the dollar-value LIFO method, item/unit costs are never “LIFO-ized”. What instead occurs is that goods continue to be tracked and valued under a company’s existing method, and at the end of the year, an inventory report showing the quantities and item/unit costs on a non-LIFO basis is generated and exported out of the accounting system in order to calculate inflation & perform the total LIFO inventory value. Once this occurs, inflation is calculated outside of the accounting system, layer at base year cost and LIFO cost are determined, the total LIFO inventory value is determined, the change between the current & prior period’s LIFO reserve is computed, and a top-side journal entry is recorded to adjust cost of goods sold and LIFO reserve (many companies outsource this work to LIFOPro or license our software to automate their in-house dollar-value LIFO calculation). Simply put, the dollar-value method avoids LIFO’s most undesirable characteristics by allowing companies to maintain their existing accounting systems on a non-LIFO basis, and only requiring for a top-side journal entry to be made annually. Because of this, the vast majority of companies on LIFO use the dollar-value method.
• Specific goods method (aka unit LIFO): The unit LIFO method is most often illustrated in tutorials and taught in college accounting courses because the underlying concept is simpler to illustrate than the dollar-value LIFO method. In reality, integrating the unit LIFO method in a perpetual accounting information system is extremely burdensome & sometimes to costly to implement. Under this method, item costs are tracked on a LIFO basis, and the accounting system must be set up in a manner to assume a last-in, first out basis cost flow assumption, meaning the sales of goods must be set up in a manner where the newest goods are sold first and the oldest items remain in stock. Said another way, each item’s unit cost must be LIFO-ized & the total inventory value on a LIFO basis is determined by taking the sum of the extended LIFO cost of all items. Under this method, companies often maintain two separate cost flow assumptions within their accounting information system: 1. Costing method used in the existing accounting system 2. unit LIFO method. One additional shortfall of the unit LIFO method is that it creates a materially lower tax benefit over a long period of time when compared to the dollar-value LIFO method. This is due to the fact that when new items enter into inventory and other items are no longer stocked (due to being discontinued or new items replacing them), the LIFO reserve associated with the items no longer stocked is recaptured under the unit LIFO method, but is retained under the dollar-value LIFO method as long as the total dollar value of the new or replacement goods is greater than or equal to the total value of the goods no longer carried. Because of this, very few companies use the unit LIFO method.

IRS Regs. §1.472-2(e) requires income to be reported and inventories to be valued on a LIFO basis on the face of the income statement and balance sheet beginning in the same year that LIFO is adopted for tax purposes. This is commonly referred to as the LIFO conformity rule. An overview of the LIFO financial reporting disclosure rules and alternatives are listed below.

• LIFO Disclosures
  • Face of the annual or year end income statement must present income, profit or loss using the LIFO method beginning no later than the year that LIFO is adopted for tax purposes
  • Once LIFO has been elected for tax purposes, income, profit or loss must be computed using LIFO on the face of all subsequent annual financial statements (unless LIFO is terminated for tax purposes)
• Non-LIFO Disclosures: The following non-LIFO disclosures and information are allowed within financial statements while also maintaining LIFO conformity compliance (see IRS Regs. §1.472-2(e)):
  • Supplemental and explanatory information using a non-LIFO method – Includes anything other than the primary presentation of the income statement, which includes the following:
    • Notes to the income statement
    • Appendices & supplements to the income statement
  • Other reports included in the financial reports, such as:
    • Management’s discussion and analysis
    • Statement of changes in financial position
    • Letters to shareholders, partners or other stakeholders
    • Summary of key figures
  • Inventory asset value disclosures
• Internal Management & Interim Reports
  • Internal Management Reports – The use of a non-LIFO method is allowed on all portions of internal management reports as long as the reports will not be issued or released to parties outside of the organization. Examples include earnings projections, budgets, and sales forecasts.
  • Interim reports – If issued in accordance with GAAP, same LIFO disclosure rules described above apply. If not issued in accordance with GAAP, then interim reports are not required to be presented on a LIFO basis (exception – series of interim reports that can be used to ascertain income, profit & loss by combining those reports)

Interim LIFO Estimate Best Practices

• Companies that don’t issue interim financial reports are not required to perform interim LIFO estimates
• Companies that issue non-GAAP interim reports are also not required to perform interim LIFO estimates
• Companies perform interim LIFO estimates for a wide array of reasons, including:
  • Financial reporting compliance – Under Generally Accepted Accounting Principles, an estimate for the interim cost of sales is required for interim reporting purposes. Because of this, companies issuing GAAP financial statements include an estimated LIFO adjustment in their interim reports.
  • Tax – Although tax law defines LIFO as an annual calculation, many companies perform interim estimates in order to incorporate the LIFO effect into their quarterly estimated tax payments
  • Forecasting and planning – Many companies perform at least one interim LIFO estimate in order to properly forecast and plan the estimated LIFO effect on their bottom line. An added benefit of doing so is to smooth out the effect of the estimated LIFO reserve change over the course of the year as opposed to booking a single LIFO adjustment at year end. An added benefit of forecasting & planning is that one can avoid material or unexpected surprises from LIFO at year end.
  • Maximize the LIFO reserve increase (or minimize the decrease) –When there’s inflation, a minimum “Current-year cost” balance is required to avoid what is known as layer erosion effect LIFO income (Current-year cost can be thought of as inventory at cost i.e., FIFO or average cost). If the Current-year cost balance is below the minimum required amount, layer erosion effect LIFO income can erode or completely wipe out the LIFO expense created by inflation for that period (or in some cases, a net LIFO reserve decrease can occur from substantial layer erosion income). Because of this, some companies will plan their year end purchases to achieve the most desirable LIFO results to minimize the effects of layer-erosion LIFO income.

• Misconception #1: Item costs & the physical flow of goods must be tracked on a LIFO basis
  • Under the specific goods or unit LIFO submethodology, the value of ending inventory is determined by tracking item costs & the physical flow of goods on a LIFO basis.
  • Although taxpayers are allowed to use unit LIFO, the vast majority of businesses that are on LIFO use what’s called dollar-value LIFO because it avoids all the undesirable characteristics of unit LIFO.
  • Under dollar-value LIFO, the method used to determine the value of ending inventory is completely decoupled & independent from the method used to track item costs & the physical flow of goods. In other words, item costs & the physical flow of goods are tracked & valued within your accounting system under the same cost flow method used prior to going on LIFO when dollar-value is used.
  • For example, a company who used FIFO prior to adopting dollar-value LIFO would continue tracking item costs using FIFO after switching to LIFO. The same can be said for companies using average cost, weighted average cost or standard cost & subsequently adopt dollar-value LIFO.
  • This is because under dollar value LIFO, a side calculation is made at the end of the year to adjust the value of ending inventory from cost to LIFO. After this side calculation is made, a journal entry is recorded to adjust the cost of goods sold & LIFO reserve balances. Under dollar value LIFO, the only change that’s made to your accounting system after adopting LIFO is to add a contra-inventory subledger account called the LIFO reserve. This balance sheet account represents the difference between the value of inventory at cost & inventory at LIFO. It’s the vehicle for reducing the ending inventory balance, increasing cost of goods sold, reducing pre-tax income & generating tax savings from LIFO.
  • Under dollar-value LIFO, the LIFO reserve balance is never allocated at the item level, and no changes are required in terms of how item costs are valued or how the physical flow of goods are tracked.
• Misconception #2: Management forecasting & planning functions will be severely complicated by using LIFO
  • A frequent fear of management & cost accountants is that LIFO will impair their abilities to perform essential forecasting & planning functions related to purchasing decisions, sales projections & forecasted profits.
  • Under dollar-value LIFO, this misconception is proven wrong. Management & cost accountants can continue forecasting & planning their purchases, sales & profit margins using the cost flow methods that are most representative of current or projected item costs, such as FIFO, average or standard costs.
  • Under dollar-value LIFO, the effect of LIFO is never felt at the item level, so management can rest assured that key internal business decisions related to inventory will remain unaffected & be made using the same historical costing methods.
• Misconception #3: Gross margins & profit-based incentives will be negatively impacted by implementing LIFO
  • Although LIFO effects the balance sheet & income statement, many companies choose to categorize the change in the LIFO reserve as a selling, general & administrative expense on the income statement, which prevents it from effecting gross profit.
  • As a result, companies with incentives & bonuses tied to sales & profit margins can effectively avoid LIFO from affecting profit-based compensation.
  • Furthermore, companies often present financial measures such as gross margins, EBITDA & EPS showing both including & excluding LIFO on their financial statements in order to accommodate financial results to be compared to other companies that don’t use LIFO.
• Misconception #4: Internal costs must be used to measure LIFO inflation
  • Although there are legitimate reasons for not wanting to measure price changes using internal costs for LIFO calculations, this misconception ignores the fact that taxpayers are allowed to measure LIFO inflation using externally published government inflation indexes, which is often referred to as the IPIC method, which stands for Inventory Price Index Computation.
  • Under the IPIC method, Bureau of Labor Statistics Consumer or Producer Price Index inflation categories are assigned to items & represents the sole source for measuring LIFO inflation. The benefits of using government indexes include the following:
    • External indexes may result in higher inflation being measured than internal indexes because all BLS indexes are based on domestic production. For example, under the use of PPI, surveys are taken from U.S. based producers based on net domestic sales receipts, which often creates more inflation than imported goods due to the differences of domestic vs. outsourced labor & overhead costs. The result of the higher inflation measured from using external indexes is that LIFO will create more tax savings than internal indexes.
    • Also, external indexes are often less volatile than internal indexes since the BLS indexes are measured using surveys of multiple producers. Accordingly, external indexes are based on a weighted average of the net revenues submitted by survey respondents. This causes any above & below average price changes to be pooled into a single index, which insulates external indexes against extreme price changes more so than any single internally calculated inflation index.
• Misconception #5: Administrative burden & costs of LIFO will outweigh the potential tax benefits
  • For companies using dollar-value LIFO who manage their calculations in-house using Excel schedules, LIFO can be very complicated for the following reasons:
    • The Inflation calculation can be time-intensive. For manufacturers & companies with many unique goods & product lines, the exercise of calculating inflation manually within Excel can be especially complex & time-intensive.
    • The LIFO layer & reserve calculations can also be complicated & error-prone for the following reasons:
      • For one, in any given year, a totally different set of math steps are required to be used to calculate the LIFO layers & LIFO reserve. This is because the LIFO math steps required are different when there’s an increment versus when there’s a decrement.
      • Furthermore, companies with multiple LIFO pools, business units or entities have to manage multiple LIFO calculations
      • No one-size fits all Excel LIFO template or macro exists to automate the LIFO layer & reserve computations
  • Although LIFO calculations can & often are truly complicated because of the reasons just mentioned, LIFOPro’s mission is to make being on LIFO as simple as possible.
  • By outsourcing your calculation to LIFOPro, companies can maintain the tax savings of LIFO & avoid the hassle by letting LIFOPro do all the work.
  • By licensing the LIFOPro software, companies & CPA firms can minimize the amount of time & effort required to maintain LIFO calculations in-house.
  • The costs of either solution are nominal compared to the tax savings achieved from LIFO & also is a fraction of the cost of other LIFO service providers
  • As a result, companies can accumulative material long term tax savings from LIFO with a minimal amount of administrative burden

For dollar-value LIFO method users, a company will continue tracking inventory costs within their accounting database using the same method that was used prior to adopting LIFO. This means that beginning inventory, purchases, sales & cost of goods sold recorded during the reporting period continues to be valued any of the available non-LIFO methods (i.e. FIFO, average cost, earliest acquisitions etc.). Illustration 1 below provides an example of common inventory activity occurring during the course of a reporting period using FIFO or average cost:

Illustration 1. Accounting for Inventory Activity Under LIFO – Year 1 on LIFO

The LIFO reserve contra account is shown with a zero balance because this example assumes that the company will be adopting LIFO for the 2021 year end. The main consideration is to realize that companies on LIFO continue using some non-LIFO method such as FIFO or average cost to account for current period inventory activity. Once the period has been closed and all inventory related activity has been posted, the side calculation to compute the required LIFO values can now be made. Once the current year index is computed, the ending inventory balance at cost (i.e. FIFO, average cost etc.) is used along with the current period inflation index to compute the current period LIFO inventory, LIFO expense & reserve values. Using the same inventory data from Illustration 1, an example is shown below of the period end side calculation made to compute the LIFO inventory, expense & reserve balances as well as the general ledger adjusting journal entry required to account for the difference between inventory at cost & LIFO (LIFO expense is the difference in cost of goods sold between LIFO vs. cost & is the difference between the current & prior period’s LIFO reserve):

Illustration 2. LIFO Calculation & General Ledger Adjusting Journal Entry Year 1 on LIFO

Note: Above figures portrays a simplified version of a LIFO calculation & does not show the detailed math required to calculate current period inflation index, LIFO inventory & LIFO reserve/expense balances.

As shown in the calculation summary above, the LIFO inventory balance is between $2 – $3 million less than the current period end inventory balance at cost. This difference represents the LIFO expense (current – prior period LIFO reserve) & LIFO reserve balances (inventory at cost – LIFO inventory). It also represents how LIFO transfers inflationary inventory costs from the balance sheet (inventory) to the income statement (cost of goods sold). The debits and credits in the journal entry shown above represent increases to both cost of goods sold and the LIFO reserve contra inventory account. Since the LIFO reserve account is a contra inventory account, ending inventory gross of LIFO reserve represents inventory at cost & while ending inventory net of LIFO reserve represents inventory at LIFO. The cost of goods sold account is essentially the vehicle that allows for LIFO taxpayers to reduce their taxable income. Using the data from the illustrations above, the example below shows the 2021 year end balances after the LIFO general ledger adjusting journal entry has been made:

Illustration 3. Post LIFO Calculation Inventory Balances Year 1 on LIFO

As shown above in Illustration 3, the cost of goods sold account is now $2 – $3 million higher after the LIFO calculation. Aside from any other adjusting entries required after the LIFO calculation, this will be the amount used for financial reporting and tax purposes. Although the cost of goods sold account balance will be closed out after recording the closing entries, the LIFO reserve contra inventory account is a permanent account that will be carried forward into the next reporting period.

LIFOPro’s 2024 Top LIFO Election Candidates List

LIFOPro’s 2024 top LIFO election candidates list provides you with the ability to quickly accomplish the following:

• Determine if a company or industry is a good LIFO candidate
• Determine if a company or industry is a top LIFO election candidate for the 2024 year end
• Estimate election year & long-term LIFO tax benefits
• Perform LIFO risk assessment
• Estimate election year LIFO reserve (which can be used to record a LIFO adjustment, present upcoming year end financial statements on a LIFO basis & ensure IRS LIFO conformity rule compliance)

LIFO Tax Savings Opportunities Abound

Although inflation has returned to a more normalized level, there are many industries with inflation at or above the historical levels & will be good LIFO election candidates for the 2024 year end. The best opportunities will be in the following areas:

• Food and beverages
• Paper & paper products
• Machinery & equipment
• Nonmetallic materials & products
• Transportation equipment (including auto dealers)
• Miscellaneous products, including toys, sporting goods, tobacco, photographic equipment, mobile homes, medical/surgical/personal aid devices & safety equipment

How to Use LIFOPro’s 2024 Top LIFO Election Candidates List

• Step 1:
  • Locate a single BLS group/subgroup/product class that most closely matches your company/client’s product mix or industry & proceed to Step 3
  • If multiple BLS PPIs were identified, proceed to step 2
• Step 2: If multiple PPIs match your company’s or client’s industry or product mix, take one the following steps:
  • Use one of the less-detailed BLS tables – For example, if multiple product classes were found that include a portion of but not all of your company or client’s product mix or industry (but no product class was found that included 100% of your goods), review the subgroup table to determine if there is a single subgroup that contains all goods & excludes most or all goods not carried. If no such subgroup can be found, review the major commodity group table and perform the same steps.
  • Use the most predominant group/subgroup/product class in your company/client’s industry or product mix – For example, if your product mix includes 70% of one product class, 20% of another product class & 10% of third product class, select the product class that represents the largest proportion of the total inventory balance.
• Step 3: Locate the Good LIFO Candidate field entry for the selected PPI & take the following steps:
  • If the Good LIFO Candidate entry is “Yes” – Your company is a goods LIFO candidate. Proceed to Step 4 and/or contact LIFOPro to obtain a free LIFO election benefit analysis.
  • If the Good LIFO Candidate entry is “No” – Your client or company is not a good LIFO candidate & LIFOPro recommends not using LIFO (or contact LIFOPro to obtain confirmation of this)
• Step 4: Locate the Top 2024 Election Candidate field entry for the selected PPI & take the following steps:
  • If the Top 2024 Election Candidate entry is “Yes” – LIFOPro recommends exploring a 2024 LIFO election and obtaining a complimentary benefit analysis from LIFOPro ASAP. Proceed to Step 5.
  • If the Top 2024 Election Candidate entry is “No” – Although your company/client is a good LIFO candidate, it is likely that current year LIFO election should be deferred to a future period in time. Consider obtaining a free election benefit analysis from LIFOPro this year, or defer doing so until next year.
• Step 5: Take any of the following steps to further explore electing LIFO:
  • Estimate 2024 LIFO tax benefit:
    • 2024 taxable income reduction from LIFO (2024 LIFO expense/reserve): Multiply the higher of the two inflation rates shown in the 2024 inflation rate fields by last year’s inventory balance
    • 2024 LIFO tax benefit (2024 LIFO after-tax savings): Multiply the 2024 LIFO expense by your combined federal & state tax rate
  • Contact your client & inform them of the following:
    • High likelihood that LIFO will create meaningful tax benefit for the upcoming year end
    • They can attend a free LIFO discovery call to learn more about LIFO, how to get a free benefit analysis & learn about our turnkey outsourcing solutions which makes being on LIFO as simple as possible
    • They can obtain a free, comprehensive benefit analysis to obtain a more accurate estimate and essential information on how LIFO works, election requirements and method alternatives
  • Schedule a free LIFO discovery call to learn more about LIFO, how to obtain a free election benefit analysis & LIFOPro’s outsourcing solutions:
    • Email or call Jamie Pentagulio at jamie@lifopro.com or 531-999-3147
    • Use our online scheduling tool: Schedule a call with LIFOPro

LIFOPro's Top 2024 LIFO Election Candidates List Excel File

Table 1. Top 2024 LIFO Election Candidates by BLS PPI Major Commodity Group

Table 2. Top 2024 LIFO Election Candidates by BLS PPI Subgroup

Table 3.1 Top 2024 LIFO Election Candidates by BLS PPI Product Class

Table 3.2 Top 2024 LIFO Election Candidates by BLS PPI Product Class

Table 3.3 Top 2024 LIFO Election Candidates by BLS PPI Product Class

Does the Timing of the LIFO Election Matter?

Although LIFO can create meaningful short and long term tax benefits, there are many considerations that should be made prior to and during the implementation process. Most importantly, the timing of adopting LIFO is key for the following reasons:

• For tax purposes, LIFO must be applied prospectively (beginning in year LIFO is adopted), and the tax benefits are directly tied to the amount of inflation measured in the year of adoption (high inflation that recently occurred in a prior period can’t be applied in the LIFO election period)
• The size of the first year tax benefit is primarily dependent on the amount of inflation measured in the year the LIFO election is made, so the higher the inflation measured in the election year, the bigger the LIFO tax benefit will be
• Higher tax benefits are being forfeited when electing during a low inflation period instead of doing so during a period where inflation was greater than or equal to historical levels

How is a Good LIFO Candidate & Top LIFO Election Candidate Determined?

LIFOPro uses proprietary inflation metrics and a standard grading system to establish whether or not LIFO is a preferable method for a company or given industry. From this grading system, a determination can be made regarding if a company is a good LIFO candidate, and subsequent recommendations are also provided regarding the proper timing of when to elect LIFO. Our grading system & scoring criteria is organized as follows:

• Historical Preferability (Good LIFO candidate criteria): These criteria use past pricing metrics sourced from the Bureau of Labor Statistics Consumer/Producer Price Indexes (BLS CPI/PPI) to establish preferability as of the time of exploring a LIFO election. These are also called our “good LIFO candidate” criteria, which are as follows:
  • Inflation level – How much inflation has there been historically?
    • The inflation level is the most fundamental metric used to establish LIFO as a preferable method because higher the historical inflation level, the higher the likelihood that LIFO will create a material tax benefit and be more clearly reflective of income than other non-LIFO methods in the future.
    • LIFOPro’s inflation level requirement is to have a long-term average annual inflation rate of 1% or more. Auto dealers and supermarkets (predominant users of LIFO) have 20 year average annual inflation rates of around 1% – 2%, which is more than sufficient to establish preferability because over a 20 year period, there will have been 20% – 40% cumulative inflation, and in most cases, inflation at this level will yield material long-term LIFO tax benefits.
  • Inflation frequency – How often has inflation occurred historically?
    • Inflation frequency is another key metric used to establish LIFO as a preferable method because the more often there has been inflation in the past, the higher the likelihood that LIFO will be most clearly reflective of income & create a tax benefit in the future
    • Inflation frequency is a key LIFO risk assessment metric because there is an inverse relationship between the amount of LIFO risk and inflation frequency rate. More specifically, the lower the inflation frequency rate, the higher amount of LIFO risk. Conversely, the higher inflation frequency rate, the lower the risk. Certain industries have 20 year inflation frequency rates of 100% (inflation measured in all of the last 20 years), meaning there is little or no LIFO risk in these areas.
    • LIFOPro’s inflation frequency requirement is to have a rate of greater than or equal to 50% over the last 20 years (inflation measured in 10 or more of the last 20 years)
  • Both historical preferability criteria must be met for LIFO to be a preferable method and for a company/industry to be a good LIFO candidate. LIFO is not a preferable method and a company/industry is not a good LIFO candidate if neither or only one of the two historical preferability criteria is met.
• Present Preferability (Current year LIFO election candidate): These criteria provide the basis of recommending either a current year LIFO election, or deferring the LIFO election to a later period, which are as follows:
  • Both historical preferability criteria met
  • Current year vs. Historical average inflation multiplier – Is the current period inflation rate greater/less than or equal to the historical average inflation rate?
    • Inflation multiplier is calculated by taking the quotient of the Current year inflation rate and the Historical average annual inflation rate
    • Current year inflation rate uses the higher of the following two options:
      • Year to date inflation: For a December year end, the year to date inflation rate at the time of this publication is 9 months ended September 2024 PPI (Sep. ’24 ÷ Dec. ’23) since the last BLS release was September PPI.
      • 1 Year inflation: For a December year end, the 1 year inflation at the time of this publication is  12M ended September 2024 PPI since the last BLS release was September PPI
    • Historical average annual inflation rate computed using the BLS PPI 20 year average annual inflation rate as of September 2024 (if available; 3/5/10 year average annual inflation rates used for BLS PPIs that have existed for less than 20 years)
    • LIFOPro’s inflation multiplier requirement is to have an inflation multiplier of greater than or equal to 1. For example, if there’s 5% inflation in 2024 & a 20 year average annual inflation rate of 2%, the inflation multiplier would be 2.5, and a current year LIFO election would be recommended.
  • Both present preferability criteria must be met for a current period LIFO election to be recommended. If the inflation multiplier is less than 1, a LIFO election recommendation is deferred to the next period where the inflation multiplier is greater than or equal to 1.