Why is LIFO banned under IFRS?

IFRS prohibits LIFO because it can produce balance sheet inventory values that significantly diverge from current market prices, reducing the usefulness of financial statements. IFRS prioritises presenting a faithful representation of financial position, which FIFO achieves more reliably than LIFO.

Does FIFO always result in higher taxes?

During inflation, yes, because FIFO reports higher profits. However, during deflation or stable prices, the difference narrows. In African economies with volatile input costs, the impact varies by period. FIFO's tax cost should be weighed against its benefits in accurate financial reporting.

Is there a third option beyond FIFO and LIFO?

Yes. The weighted average cost method calculates cost of goods sold using the average cost of all inventory available during the period. This smooths out price fluctuations and is permitted under IFRS. It is popular among businesses with large volumes of similar items.

Inventory & Supply ChainIntermediate4 min read

FIFO vs LIFO: What's the Difference?

Learn how FIFO and LIFO inventory valuation methods differ, how each affects your financial statements, and which suits your business.

Key Takeaways

FIFO assumes the oldest inventory is sold first, while LIFO assumes the newest inventory is sold first.
FIFO results in lower cost of goods sold and higher profits during inflationary periods, while LIFO does the opposite.
Most African countries follow IFRS, which prohibits LIFO, making FIFO the standard method for inventory valuation across the continent.

What is FIFO?

FIFO, or First In First Out, is an inventory valuation method that assumes the oldest stock is sold or used first. When calculating cost of goods sold, FIFO assigns the cost of the earliest purchased items to sales. The remaining inventory on the balance sheet reflects the most recent purchase prices. This method mirrors the natural physical flow of most businesses: a Kenyan supermarket rotates stock so older products sell before newer arrivals, reducing spoilage and waste.

What is LIFO?

LIFO, or Last In First Out, assumes that the most recently purchased inventory is sold first. Cost of goods sold reflects the latest purchase prices, while remaining inventory is valued at older, typically lower costs. LIFO is used primarily in the United States for tax advantages during inflation. A US-based fuel distributor using LIFO would assign the most recent, higher fuel purchase prices to cost of goods sold, reducing taxable profit during periods of rising prices.

Key differences

During inflation, FIFO reports lower cost of goods sold and higher profits because older, cheaper inventory costs are matched against current revenue. LIFO reports higher cost of goods sold and lower profits by matching current, higher costs against revenue. FIFO produces a balance sheet inventory value closer to current market prices. LIFO can significantly understate inventory value over time. The tax implications differ substantially, which is why the method choice matters.

When to use each

African businesses should use FIFO, as International Financial Reporting Standards adopted across the continent prohibit LIFO. FIFO also aligns with best practices for perishable goods common in African commerce, from fresh produce to pharmaceuticals. Even if LIFO were permitted, FIFO better reflects the physical movement of most inventory. Understanding LIFO remains valuable for African businesses trading with US-based partners or analysing US company financial statements where LIFO is prevalent.

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