Häufig gestellte Fragen
What does LIFO mean?
LIFO stands for "Last In First Out", meaning in essence "last in, first out": it is assumed that the units stored or procured most recently are consumed or sold first. As a result, the remaining stock stays on the balance sheet valued at the oldest acquisition or production costs. LIFO is the counterpart to FIFO (oldest goods first) and is used primarily in balance-sheet inventory valuation, less as a physical picking rule. In ERP systems it is stored as a value-based valuation method and must be distinguished from the physical warehouse movement.
Is LIFO permitted in Germany?
Under German commercial law, LIFO is permitted under Section 256 sentence 1 HGB as a cost flow assumption for similar inventory items, provided the assumed consumption sequence does not contradict the actual operational process. Under German tax law, LIFO is in fact the only permitted cost flow assumption (Section 6 (1) no. 2a EStG), while the FIFO consumption fiction is generally not recognised for tax purposes. Under IFRS (IAS 2), by contrast, LIFO has no longer been permitted since the 2003 revision, effective for financial years from 2005. Companies with international financial reporting must therefore distinguish between commercial, tax and IFRS accounts.
Why do companies use LIFO for valuation?
In periods of rising purchase prices, LIFO assumes consumption of the most expensive stock — because it was procured most recently — so the cost of materials is higher and the reported profit lower. This reduces the tax burden and is considered an accounting policy advantage during inflation, because it dampens inflation-driven paper profits. At the same time, the method more closely reflects current replacement costs in expenses. The effect reverses, however, when purchase prices fall.
What is the difference between LIFO and FIFO?
FIFO ("First In First Out") values or issues the oldest goods first, whereas LIFO consumes the most recently received goods first. When prices rise, FIFO shows a higher inventory value and profit, while LIFO shows a lower profit and balance sheet value. Physically, FIFO is the practical standard, especially for perishable goods; LIFO is physically rare and primarily a balance-sheet valuation method under HGB and EStG. There is also FEFO, which controls picking by expiry date rather than by receipt date.
Why is LIFO not permitted under IFRS?
With the revision of IAS 2 in 2003, the IASB prohibited the LIFO method; the rule applies to financial years beginning on or after 1 January 2005. The main justification was that LIFO does not reliably reflect the actual flow of goods, since in most industries older stock is sold first. In addition, LIFO leads to outdated balance sheet values because the remaining stock stays valued at historically low costs, which contradicts the IFRS focus on current values. Under IFRS, therefore, only FIFO and the weighted average method are permitted.
What conditions apply to LIFO under tax law?
For tax purposes, LIFO is only permissible if profit is determined under Section 5 EStG and its application complies with the German commercial-law principles of proper accounting (Section 6 (1) no. 2a EStG). Moreover, the assumed consumption sequence must not contradict the actual operational process, which is why the method is regularly ruled out for goods with a shelf life of less than one year. If the individual acquisition costs can readily be determined technically, for instance via modern IT systems and labelling, LIFO is likewise inadmissible. It can only be applied to similar assets within current inventory.
What do LIFO layers and hidden reserves mean?
The LIFO method builds value layers: if the stock at period end exceeds the prior-period level, a new layer is created at current prices, while when stock decreases the most recent layers are dissolved first. Over the years, old, low-valued layers can remain at the bottom of the stock and build up hidden reserves, because their book value lies well below current replacement costs. A sharp reduction in stock can expose these old layers and abruptly release the hidden reserves as additional profit. Depending on configuration, ERP systems manage these layers under perpetual or periodic LIFO.
Can LIFO and FIFO be combined in an ERP system?
Yes, because ERP systems separate the physical picking principle from balance-sheet valuation. The warehouse can, for example, ship according to FIFO or FEFO while financial accounting values inventory according to LIFO. The valuation method is usually configured per material, valuation class or valuation area in the material master and affects stock accounts, the balance sheet and the profit and loss statement. Clean master data maintenance is a prerequisite for the chosen method being applied consistently across all postings and evaluations.