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LETTERS
Flaw in non-LIFO balance sheet  
By Mike Bohan, CPA
November 2012

I enjoyed the LIFO article in the August 2012 issue of the JofA (“Avoiding Missteps in the LIFO Conformity Rule,” page 60). I did note one flaw in the presentation of the non-LIFO balance sheet information in Exhibits 1 and 2, and in the balance sheet and supplement presentation in Exhibit 4. From what I can see in each of these presentations, there is no income tax effect provided for the switch to a non-LIFO presentation.

The only place where such an adjustment is made is in the non-LIFO income statement column in Exhibit 1, but this is not carried to the balance sheet presentation in that exhibit. I was chairman of the task force that prepared the 1984 AICPA Accounting Standards Division issues paper, Identification and Discussion of Certain Financial Accounting and Reporting Issues Concerning LIFO Inventories (available at tinyurl.com/8j3f8t7). According to that paper (see Section 7, “The LIFO Conformity Requirement”), it appears that the following adjustments should have been reflected in the exhibits contained in the article:

Exhibit 1. The non-LIFO balance sheet should have included a deferred income tax liability of $52,500 (assuming a 35% tax rate applied to a cumulative LIFO difference of $150,000) and a reduction in retained earnings of the same amount.

Exhibit 2. The parenthetical retained earnings comment should have been reduced by the $52,500, and total liabilities should have included a parenthetical comment regarding the added deferred taxes from the LIFO IFRS adjustment.

Exhibit 4. The amount of other comprehensive income should have been reduced by the $52,500 of deferred income taxes on the LIFO to non-LIFO adjustment. (I don’t know what, if anything, the authors did regarding the tax effects of the unrealized holding gains item.)

It also seems that the AICPA resources cited in the article should have made reference to the above-mentioned issues paper.

Mike Bohan, CPA (retired)
University Heights, Ohio

Authors’ reply: We viewed the purpose of our article as to illustrate the allowable presentation formats under the IRS rules rather than to provide a comprehensive example of the effects on the financial statements under the financial accounting rules, so we modeled our exhibits on the examples provided in the IRS documents that were referenced. We should have stated, but failed to, that the exhibits were simplified and ignored deferred tax effects in order to be clear that they were not comprehensive in regards to the financial accounting rules. We thank Mr. Bohan for his feedback on the article.

Mollie T. Adams, CPA, Ph.D.
assistant professor of accounting,
MSA Program coordinator,
Bradley University, Peoria, Ill.

Coleen S. Troutman, CPA, Ph.D.
associate professor of accounting,
Bradley University, Peoria, Ill.


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