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FINA XX-XXXX
LIFO Inventory Accounting
CORPORATE FINANCE POLICY
SECTION:
Inventory Accounting
TITL
TITLE:
LIFO Inventory Accounting Policy
NUMB
NUMBER:
FINA XX-XXXX (Supersedes Corporate Finance Release XX-XXXX
dated July 19XX)
SUBJ
SUBJECT:
This release establishes the Company’s policy for last-in, first-out (LIFO)
inventory accounting and reporting. This policy applies to all consolidated
entities on LIFO.
COUN
COUNSEL:
The EXECUTIVE DIRECTOR - ACCOUNTING should be consulted if
any questions arise concerning this release.
POLICY
LIFO Inventory Accounting:
Definition - LIFO is an inventory calculation technique which assumes that the earliest acquired stock
is still in inventory and the latest acquired stock is used for the cost of goods sold.
Applicability to the Company – The Company adopted the dollar value LIFO method of inventory
accounting in 19XX for certain of its manufacturing facilities to match current cost of goods sold with
current revenue.
Flow-Through Method:
Definition - The flow-through method of accounting for manufacturing variances considers all manufacturing variances to be treated as period costs and the variances flow through cost of goods sold on
an as-incurred basis.
Applicability to the Company - Effective July 6, 19XX, all entities on the LIFO method of accounting
account for manufacturing variances using the flow-through method.
Method of Calculation - The flow-through method of accounting for manufacturing variances limits
the LIFO entries made during the year to monthly allocations of the annual requirement for inventory
mix changes. Mix is defined as the percentage relationship of extended base-year cost dollars to extended standard cost. The anticipated mix change for the year should be based on historical experience
coupled with known changes of inventory content (mixture) during the year.
The net change in valuation reserves during the year is labeled “Contra LIFO Reserve” and accumulated in a valuation reserve contra account during the year and closed out to the LIFO reserve at year-end.
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Review Process:
As part of the quarterly risk and operations review (QROR) process, each entity recalculates the LIFO
reserve requirement for the year. This calculation should be based on the assumptions relative to the
year-end inventory levels in the latest forecast.
Write Down to NRV:
When cost is determined on a LIFO basis and that cost exceeds the estimated net amount subsequently
realizable, a provision should be made to reduce the LIFO cost to market. Any write-downs to net realizable value (NRV) should not be recorded at the plant level. Supporting calculations should be forwarded to Corporate Accounting and Consolidation.
New Parts:
Establishment of base-year costs on new parts is accomplished by the substitution methodology. This
theory assumes that base-year cost of an existing part that is most like the new part will be substituted
in the LIFO master file for the new part.
LIFO Management:
Inventory management programs designed to achieve desired inventory levels and mixture for LIFO
purposes is the joint responsibility of Unit Controllers and the Executive Director - Accounting.
Unit Controllers have the responsibility of ensuring that operations groups are informed properly to
achieve LIFO management objectives.
The Executive Director - Accounting has responsibility for providing analysis and detailed objectives
to ensure that Corporate goals are maintained.
Internal Reporting Requirements:
Monthly - Applicable manufacturing entities submitting a UCA should record and report LIFO journal
entries in conjunction with the monthly financial close.
Quarterly - As part of the QROR, Unit Controllers will report, where applicable, the detailed information specified on Schedule A 100-2. LIFO accrual calculations will be made on a quarterly basis
with adjustments recorded at the entity level.
RESPONSIBILITY
The UNIT CONTROLLERS are responsible for: (a) ensuring that the monthly LIFO journal entries,
quarterly LIFO calculations and annual LIFO calculations are prepared on an accurate and timely basis and
in compliance with the existing methodology and objective; (b) providing LIFO QROR detail via Schedule
A 100-2; (c) explaining all manufacturing variances for their operation divisions; and (d) providing Corporate Accounting and Consolidation with supporting calculations for any recommended write-downs to NRV.
The EXECUTIVE DIRECTOR - ACCOUNTING is responsible for: (a) reviewing LIFO reserve adjustments and supporting details; (b) researching any issues requiring further study; (c) communicating approved adjustments back to the Unit Controllers after obtaining concurrence; and (d) establishing base-deck
costs and recording valuation adjustments.
APPR
APPROVAL:
_____ _____
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Vice President - Corporate Controller
ISSU
ISSUE DATE:
May 19XX
REVI
REVIEW DATE:
June 19XX
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