Out With the Old

Should LIFO reserves be eliminated after the sale of a company? StaffJune 29, 2001

Q: How is last-in-first-out reserve on the books handled after the sale of a company? We’re still showing it even after we were sold to another company. We are a U.S. company, sold to a U.K. firm. Should not the LIFO reserve be eliminated and a new basis started?

Ric Calme
Fairfield, Ohio

A: If the U.K. parent bought the stock of your company and has not folded your company into the parent, then on the separate records and financial statements (if any) of the U.S. subsidiary there is no change to the carrying values of the various assets and liabilities of that entity, including a LIFO reserve (i.e., the contra-inventory account used to reduce first-in-first-out cost to LIFO basis).

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This assumes that the purchase cost (the price paid by the new parent to acquire the U.S. entity’s stock) was not “pushed down” to the subsidiary. “Push down” accounting, usually not required (except under certain conditions for SEC-reporting entities), adjusts the carrying values of the various assets and liabilities to reflect the price paid in an arm’s-length transaction to acquire the entity, which may be the most objective indicator of value, and thus may result in more meaningful financial reporting. However, “push down” has not gained wide acceptance at this time.

The foregoing addresses separate financial reporting by the U.S. company. On a consolidated basis, however, the new parent must “step up” (or down) the various assets and liabilities of the U.S. company to reflect the price paid for the company, including, if pertinent, the recognition of any goodwill purchased.

For parent-level consolidated reporting, you are correct that a new LIFO reserve must be established. More accurately: the allocated purchase cost creates a new, base period LIFO layer, and the only possible LIFO reserve to be established against this at the end of the first period would reflect the difference between end of year costs (FIFO) and the allocated purchase cost at the time of the business combination (LIFO). In later years, as more inventory is added and new LIFO cost layers are established, the LIFO reserve determination becomes more complex.

Thus, you are correct — for consolidated financial reporting purposes — in your belief that the “old” LIFO reserve is eliminated because of the business acquisition..

Barry Jay Epstein, Ph.D., CPA
Partner, Gleeson Skar Sawyers & Cumpata, LLP

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