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SEC in talks with IRS about preserving tax breaks for LIFO Print E-mail
Tuesday, 17 November 2009

By Ronald Fink

The Securities and Exchange Commission has held discussions with the Internal Revenue Service about how the tax liabilities of U.S. companies may change as a result of the convergence of U.S. and international accounting standards, the SEC's chief accountant told CFOZone on Tuesday.

The SEC first raised the matter with the IRS even before it became clear that some of the accounting changes, including one involving an accounting technique for inventory, known as last-in, first-out, or LIFO, might increase the tax bills of U.S. companies, SEC chief accountant James Kroeker said in an interview during Financial Executive International's annual reporting conference in New York City.

Kroeker was quick to point out, however, that the SEC was not recommending that the IRS take any specific course of action. He insisted that the commission was simply pointing out to the IRS that, "hey, you may want to take a look at this." He added that it's quite possible that the IRS may decide, for example, to get rid of LIFO anyway.

Under LIFO, which is currently allowed under U.S. GAAP, taxes on gains on the sale of inventory are generally minimized because newer materials are usually more costly than older ones. But LIFO could not be used under International Accounting Standards as currently proposed, and the U.S. standards setter, the Financial Accounting Standards Board, has said it would go along with a change. As a result, U.S. companies as well as foreign ones would have to use the first-in, first out method of valuing inventory.

A study last year by the Financial Analysis Lab of Georgia Institute for Technology found that the oil, metal and chemical industries would be hardest hit by the end of LIFO, with Exxon Mobil's tax bill rising by $9 billion as a result.

The issue was first raised during a panel discussion at the conference on Monday, when members of international and U.S. accounting standards boards were asked whether they had any plans to revisit the issue as a result of opposition from U.S. companies.

"As of now, I don't see us adding a project in the next 19 months," said Patrick Finnegan, a member of the International Accounting Standards Board, referring to the deadline for converging U.S. and international standards. Finnegan said LIFO was "not considered a burning issue at the IASB."

That prompted FASB Chairman Robert Herz to observe that the end of LIFO might not result in an increase in tax liabilities for U.S. companies if the IRS changed its own rules. "There may be other ways to skin that cat," said Herz, and he pointed out that other countries allow tax deductions for gains on the sale of inventory.

But Kroeker indicated that the IRS may not be amenable to such a change. "The IRS may decide that they've wanted to get rid of LIFO all along," he said.

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