Good LIFO-PRO Software Candidates
Common LIFO-PRO Software Company Profiles
Publicly traded companies – There have been several LIFO related cases of material or significant weaknesses in internal control since the advent of the Sarbanes-Oxley regulations. Use of LIFO software eliminates the possibility of errors within the scope of the calculations performed by the software. Our clients have told us that documentation of both book and tax LIFO calculation internal controls is much simpler when our software is used.
Many pools – Automation of LIFO calculations is obviously more desirable the more pools a company has. LIFO-PRO is useful for companies with many pools because of the speed with which projection variables can be input and multiple projections run for different scenarios very quickly. These companies are typically retailers selling a number of product or merchandise lines who typically have from 10 to 30 LIFO pools. The IRS has dictated pooling practices for some industries to create more than one might normally expect. An example of this would be supermarket chains (not using the IPIC method) who must use 10 or more pools.
Retail Inventory Method – Using LIFO in conjunction with the Retail Inventory Method considerably complicates the calculations because the retail dollars must be reduced to cost using a cost complement calculated specifically for the LIFO calculation. Calculation of the LIFO provision also involves the stock ledger cost complement. Any additional complications of the LIFO calculations such as this makes professional software more applicable.
IPIC Method – There are a lot of different errors that are possible when the Inventory Price Index Computation (IPIC) LIFO method is applied using manual methods, especially for retailers and others with numerous types of inventory. Errors are especially likely when the 10% method is used. All calculations including automatic down loads of PPI and CPI indexes and replacement of discontinued PPI categories is completely automated with the LIFO-PRO software thereby eliminating calculation errors.
Multiple companies on LIFO – The IRS requires separate LIFO calculations for separate corporate entities. Because of this, companies, especially large acquisition-oriented ones that have multiple companies using LIFO, are good candidates for automated LIFO software, particularly if LIFO planning is coordinated at the consolidated group’s headquarters.
Product mix planning – Companies in certain industries, especially those with commodity type inventories, which turn their inventories quickly and whose unit prices may change quickly and by large amounts. This type of situation can lead to significant LIFO index inflation or deflation from year to year. Companies fitting this profile that are on LIFO often try to manage their overall inventory level and product mix at year-end not only to prevent costly layer erosions but to achieve as high a LIFO index as possible.
Companies falling into the categories listed above tend to want to automate their LIFO calculations more as a means of having a good way to quickly “crunch numbers”.
Reasons other companies would use LIFO-PRO include
Error “insurance” – Most companies use spreadsheets for LIFO calculations. These are prone to error and usually lack documentation. Using LIFO-PRO cannot prevent errors in accumulating FIFO dollars and internal index data but we find many errors in companies’ LIFO spreadsheets because the formulas are not set up correctly or are not the same from year-to-year. We also find a high error rate in application of UNICAP(Section 263A) costs correctly to the different years’ layers. Companies’ LIFO reserves are usually large dollar amounts and using LIFO-PRO is a very cheap way of buying LIFO calculation error “insurance”.
Very quick planning capability – Because LIFO reserves and provisions are usually large dollar amounts, companies want to know what impact LIFO will have on their financial statements. Public companies are often more concerned about the impact on quarterly and annual book earnings while private companies are usually much more concerned about tax savings (preserving prior years’ saving and maximizing current year savings) and are likely to do year-end level planning. The LIFO-PRO planning functionality enables companies to run planning reports in a matter of minutes that provide comprehensive analysis of situations where layer erosions are possible and relatively small changes in inventory levels can produce big swings in the LIFO provision.
Documentation which is comprehensive, consistent & easy to understand – Many companies’ LIFO documentation is poorly organized and may change from year to year. This makes it more difficult for outside CPAs to review and for Sarbanes-Oxley internal controls documentation. Numerous LIFO report formats are produced by LIFO-PRO, eliminating the need for users to develop additional LIFO reports.