I currently work for a US division of a Canadian oil company. For US tax and book, we are on LIFO. Since LIFO is not allowed in IFRS or Canadian GAAP, an entry is booked each month bringing the US inventory to FIFO value for the consolidated books. My questions are around LIFO reserve.
- Since we are revaluing inventory from LIFO to FIFO on a consolidated basis, there is no need for a LIFO reserve but would a reserve ever exist on the US books if the whole point of a reserve is to recognize the difference between LIFO cost and FIFO cost?
- We currently book a reserve when drawing into prior year's layers and replacement cost is higher than layer we are drawing into. The entry for this is Dr Inv (we drew at too low a cost given current month replacement) and Cr Reserve which does make a lot of sense to me. Should we only book this at year-end when the draw is considered permanent and layer changes are "realized"?
- We also revalue Reserve for change in current LIFO price. Ex. Last month reserve was calculated with difference between layer and current of $5/bbl whereas current month, that difference is only $3/bbl/ Historical reserve is now too high so reserve is revaulued...Dr Reserve and Cr COS.
- We treat current year layers in that we build at current and draw at prior - example, we drew into February's "layer" in March and costed this at February's LIFO price. If we build in April, we will build at April LIFO instead of rebuilding February.
- I am also confused around the theory - given "normal" commodity conditions, rising prices give higher COGS so therefore lower income and lower taxes which seems to be the major benefit of LIFO. If the entry to record the reserve is to cr Inv and dr COGS, what benefit does it provide because doesn't that do the exact same thing? Or are there two income statements - one LIFO and one FIFO?
- We have not booked a reserve in quite a few years given low oil prices and I had not been here very long when the plummet started so I just want to make sure I understand the concept I was told is actually correct. Sorry this is so long but I am working on LIFO presentation to give in Canada and want to make sure that I know what I am talking about. TIA!