Which method is not allowed under IFRS?

Why LIFO Is Not Allowed Under IFRS

When it comes to inventory valuation, businesses following International Financial Reporting Standards (IFRS) must adhere to specific guidelines. One key restriction is the prohibition of the LIFO method—which stands for "Last In, First Out."

LIFO assumes that the most recently acquired inventory items are the first to be sold. While this method is permitted under U.S. Generally Accepted Accounting Principles (GAAP), it’s explicitly disallowed under IFRS. The reasoning behind this ban lies in how LIFO can distort a company’s financial picture, especially during periods of inflation.

When prices rise, LIFO tends to report lower net income because the cost of goods sold reflects higher, more recent prices. This reduces taxable income in the short term but can understate inventory values on the balance sheet over time. IFRS aims for transparency and comparability across global markets, and LIFO’s potential to misrepresent inventory value conflicts with that goal.

Instead, IFRS permits only First In, First Out (FIFO) and the weighted average cost method, both of which better reflect the actual flow of goods and provide a more accurate representation of inventory on hand. FIFO, in particular, matches older costs with revenues, offering a clearer view of profitability over time.

This difference is especially important for multinational companies that report under IFRS. They must adjust their accounting practices accordingly, even if they operate in countries like the United States where LIFO is still an option.

In short, while LIFO may offer tax benefits in some jurisdictions, its exclusion under IFRS underscores the framework’s focus on consistency, clarity, and economic reality in financial reporting. For global compliance, businesses must look beyond short-term advantages and align with internationally accepted practices.