CHANGING TO THE
LIFO INVENTORY METHOD
Leonard W. Rothschild, Jr. Manager, San Francisco Office
Presented at special meetings for Kaiser Aluminum & Chemical Corporation, Oakland and Stauffer Chemical Company, San Francisco-November 1974
The following discussion outlines the advantages and disadvantages of the LIFO inventory method and some of the major tax considerations involved in changing to LIFO.
The advantage of LIFO is the deferral of federal and state income tax. In a growing company this could actually become a permanent tax deferral.
There are a number of good reasons for changing to LIFO this year. In the first place, rapidly increasing prices will maximize the tax deferral in 1974. Secondly, this tax deferral, combined with the current high interest rates, makes any current tax reduction especially beneficial. For a large publicly held company the opportunity to change to LIFO is very favorable at this time.
The fact that several large companies have decided to change to LIFO has increased the discussion of LIFO in financial circles and financial publications.
As a result of this publicity the public has been educated to realize that reduced earnings per share may not be detrimental when the change to LIFO results in a large tax deferral. In fact, some commentators have said that the adoption of LIFO is an indication of prudent management regardless of LIFO's effect on reported earnings. The fact that most stock prices are at depressed levels may help to insulate the company electing LIFO against the effects of an unexpected drop in its stock price. For these reasons, 1974 is a favorable time for a change to LIFO for many companies.
To be weighed against the current tax deferral in the adoption of LIFO are the negative aspects of the election. The following disadvantages must be carefully studied before LIFO is adopted: