✒ The use of last-in, first-out (LIFO) accounting is permitted under US GAAP but not under IFRS. LIFO is a cost assumption companies make on financial statements, but doesn’t reflect the actual flow of inventory in their operations.
According to Credit Suisse, in 2021 ~15% of companies in the S&P 500 used LIFO as their primary inventory method and 50% used FIFO. The rest used an average-cost method, a combination of methods, or methods that couldn’t be determined.
While the use of LIFO can negatively affect financial results, it leads to lower taxable income. In the past the effect of LIFO has been relatively small and stable, but the recent inflationary environment in the US has driven the impact meaningfully higher.
Kroger expects to take a full-year LIFO charge of $300 million this year, compared with a $197 million LIFO charge during the prior year, due to higher inflation. The company raised its full-year earnings guidance, citing strong sales, but said higher LIFO-related costs will be a drag on earnings in the year ahead.
As Ron Graziano, a managing director at Credit Suisse, says: “It really matters when it matters, and it matters a lot right now”.