Accounting Techniques Hurting Competition, Small Businesses

Source: NCPA

“Last In First Out” valuation hinders the ability of investors to understand the true financial condition of the firms they’re investing in and puts small companies at a severe disadvantage, according to a new report by National Center for Policy Analysis Research Associate Santiago Bello.

Since August 2008, the U.S. Securities and Exchange Commission has promised greater congruence between its Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. The most controversial aspect of the debate is the elimination of the Last In First Out (LIFO) method of inventory valuation.

Unlike First In First Out, LIFO allows companies to stockpile inventory purchased over time, and use the sale of more recently acquired goods to create “layers” of inventory to vastly increase their recorded profits.

“Last In First Out Inventory allows companies to minimize taxable income and attract equity by exerting control over their financial statements,” warns Bello. “Despite mounting international and domestic pressure for standardization, LIFO inventory valuation – a measure protected under principles of GAAP – will not go quietly.”

Yet aligning GAAP and International Financial Reporting Standards (IFRS) would have benefits across the globe:

  • Standardized financial statements across borders would greatly facilitate the merger and acquisition (M&A) activities of multinational corporations, or businesses that wish to become multinational.

  • Multinational corporations would no longer face the time and cost intensive process of “translating” international financial statements into GAAP-compliant documents.

  • IFRS improves the ability of global investors to compare information across countries.

“In today’s global economy having two separate sets of standards does not serve anyone well. It creates additional costs for companies having to translate financials from one standard to another, it makes M&A activity significantly more difficult and, perhaps most importantly, the individual investor is not able to compare apples to apples when evaluating companies,” said NCPA Research Associate Matt Caffrelli. “Establishing a universal set of standards would require some work, but would serve everyone much better in the long run.” 

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