Dave Roads

Companies using the IPIC LIFO method must choose between using final or preliminary Producer Price Indexes. The most important differences between these two options is availability & timing. The BLS releases preliminary indexes around the 15th of the month for the previous month based on price surveys returned from companies and then follows up with the release of the final indexes four months after to include any additional surveys received after the preliminary release. For example, preliminary December 2019 PPI will be available January 15th, 2020, but the final indexes won’t be available until May 13th, 2020. The two biggest reasons why this matters are as follows:

  1. Companies will typically need to have their LIFO calculation completed prior to issuing their financial statements – If you have a December year end, it’s more likely than not that that you’ll want to issue financial statements sometime between January – March. The problem with final indexes is that you’ll be unable to do so unless your company uses a September, October or November appropriate month.
  2. Companies will typically want or need to have a LIFO estimate completed prior to calculating their year end tax provision. Lets say once again that you have a December year end & a tax provision is made sometime between November & January. Ideally, you’d likely want to make a LIFO estimate using the most recently released inflation data. The problem with final indexes is that you’ll be unable to do so unless your company uses a July, August or September appropriate month.

Because of the above, the most rational train of thought would be to use preliminary indexes as it allows companies to accomplish both #1 & #2 listed above. But many companies elect to use final indexes despite this being the case. The only logical reason we believe that companies may elect to use final indexes is that they believe they’re more accurate than the preliminary indexes. Although this sometimes may be the case in the short term, the long term differences are negligible. This is because any differences realized in one period will almost always reverse themselves in subsequent periods. The table below compares historical preliminary vs. final index inflation rates for six different BLS major commodity groups to prove that this is in fact true (commodity groups range between 01 – 15; first two digits falling between those numbers represent a major commodity group).

PPI CodePPI Category DescriptionIndex Type1Y '181Y '171Y '161Y '151Y '141Y '131Y '121Y '111Y '101Y '091Y '083Y AVG5Y AVG10Y AVG
02Processed foods & feedsPrelim0.7%0.4%0.5%-6.2%4.2%-0.8%4.1%7.2%5.0%-0.7%5.6%0.6%-0.1%1.4%
Difference: Prelim. Vs. Final-0.1%-0.3%0.5%-0.1%0.4%-0.2%-0.3%0.1%0.1%-0.8%0.7%0.0%0.1%-0.1%
06Chemicals & allied productsPrelim1.1%7.2%2.5%-4.8%0.0%0.5%0.8%7.2%7.3%2.7%2.5%3.5%1.1%2.4%
Difference: Prelim. Vs. Final-0.7%0.8%-1.1%-0.4%1.0%-0.3%-0.2%0.8%-0.3%-1.3%1.2%-0.4%-0.1%-0.2%
07Rubber & plastics productsPrelim3.1%3.1%0.3%-2.6%0.4%1.7%0.8%6.7%4.1%-2.4%8.3%2.2%0.8%1.5%
Difference: Prelim. Vs. Final0.1%0.0%0.1%-0.1%0.1%0.0%-0.1%0.1%-0.1%-0.3%0.5%0.1%0.0%0.0%
10Metal productsPrelim7.3%5.6%6.0%-11.3%-0.5%-1.8%-2.3%3.6%9.7%3.8%-2.8%6.3%1.2%1.8%
Difference: Prelim. Vs. Final-0.3%-0.3%0.3%-0.1%-0.1%0.0%-0.1%0.1%0.1%0.4%-0.5%-0.1%-0.1%0.0%
11Machinery & equipmentPrelim2.5%0.9%0.0%0.3%0.7%1.0%0.6%1.9%-0.3%0.3%2.7%1.1%0.9%0.8%
Difference: Prelim. Vs. Final-0.2%0.0%0.1%0.1%-0.1%0.0%0.0%0.2%-0.3%0.2%-0.1%0.0%0.0%0.0%
15Miscellaneous productsPrelim2.0%2.4%1.8%1.9%1.4%1.5%2.5%3.6%2.9%0.1%2.6%2.1%1.9%2.0%
Difference: Prelim. Vs. Final-0.7%0.2%-0.2%0.0%0.1%0.0%0.0%0.2%-0.1%0.0%-0.6%-0.3%-0.1%-0.1%

As seen above, the 12 months ended preliminary vs. final index inflation rates for the selected BLS PPIs are fairly close for the most part, but occasionally differed by up to 1%. But when comparing the preliminary vs. final 3, 5 & 10 year averages, the differences were negligible. This is because the short term differences are eventually reversed in future years. In summary, use of the preliminary indexes allows a company to complete their LIFO calculation four months earlier and typically produces virtually the same results as waiting for final indexes.

For tax purposes, switching from final to preliminary indexes is an automatic approval change #62. As with all other LIFO submethod changes as this one, the change is made on a cutoff basis, meaning it is done prospectively & no prior period adjustments are required. Contact LIFO-PRO or use our request form to inquire about our IRS Forms preparation services.