Bankers Try To Save LIFO Accounting

Commercial bank lenders are trying to block a proposed international accounting standard that would eliminate a method by which most U.S. companies account for inventory costs.

Bankers said ending the last-in, first-out method, known as LIFO, would make it more costly and time consuming to assess prospective borrowers' credit quality.

Extra Costs

If banks cannot get data they need from a borrower's financial statement, more laborious and expensive due diligence would be required.

"We don't need more costs in the financial markets today," said Frank Bozick, senior vice president of Huntington National Bank, Columbus, Ohio.

Using the LIFO method, companies apply their most recent inventory costs to determine the cost of goods that they sell. In inflationary times, this method boosts the stated costs of goods sold, reducing reported profits.

At the same time, LIFO results in less taxable income, which is why companies in this country tend to favor the method over an alternative, called FIFO (for first-in, first-out), with the opposite effect.

Banks' Preference

Banks like the LIFO method because it links a company's current costs with its revenues, providing a truer picture of cash flow and ability to repay loans.

"The ability to repay is one of the basic principles of lending," said Robert Greene, executive vice president of First Interstate Bancorp, Los Angeles.

Ending LIFO was proposed by the International Accounting Standards Committee, a London-based group that has been working to establish internationally accepted accounting rules.

Letter of Objection

Robert Morris Associates, a Philadelphia-based trade group representing bank loan and credit officers, objected to the proposal in a strongly worded letter to the accounting body last month.

First Interstate's Mr. Greene, who also is RMA president, called the proposal "fatally flawed."

For now, the Financial Accounting Standards Board, which sets accounting standards for U.S. companies, has no position on the proposal to end LIFO. But because capital markets have become increasingly global, U.S. companies might feel compelled to scrap LIFO, regardless of what FASB decides.

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