LIFO conformity rule definition
/What is the LIFO Conformity Rule?
The LIFO conformity rule requires that, if the LIFO cost flow method is used to compile taxable income , it must also be used in the financial statements . The rule is designed to prevent organizations from using LIFO accounting to reduce the amount of their taxable income, while using a different inventory cost flow method (such as FIFO ) to derive a higher income figure in their financial statements.
An adverse effect of the conformity rule is that organizations electing to use LIFO are essentially reporting lower financial results to their lenders , investors , and creditors than is really the case. This could result in a reduced market value for a business, and possibly the denial of credit from lenders and creditors.
The rule has tended to reduce the adoption of the LIFO method by businesses.
