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Companies ranging from oil giant Exxon Mobil to steelmaker AK Steel and firearms manufacturer Sturm Ruger could see big tax increases and hits to operating cash flow resulting from the convergence of U.S. generally accepted accounting principles with international accounting standards, according to a report released by the Georgia Tech Financial Analysis lab.
Starting in 2010, large U.S. companies would have to adopt international financial reporting standards, which will eliminate the use of so-called last-in, first-out (LIFO) accounting for inventory unless the Internal Revenue Service changes its rules. The change would likely have the biggest impact on companies in the petroleum, metals and chemical industries, but retailers and technology companies would also be affected, the lab’s findings show.
While the impact of the change to first-in, first-out accounting would increase the value of their inventories, boosting pretax income, earnings, and shareholder equity, it would also lead to higher tax liabilities and lower operating cash flow.
Overall, the study found that more than a third of U.S. companies currently use LIFO accounting. Of the 30 companies whose results were examined, the change would produce a 2% to 3% increase in taxes (as a percentage of total assets) for a number of companies, including Allegheny Technologies, Eastman Chemical, Grainger, Graybar Electric, Marathon Oil, Solutia, Spartan Stores, Standard Register, Tennant, Twin Disc, United Refining, and Winnebago Industries.
The dumping of LIFO would be even harsher for AK Steel, Sturm Ruger and Sunoco. The taxes for those companies would rise anywhere from 11% to 16% (based on 2007 results).
Exxon Mobil would see the biggest dollar increase in taxes from the switch, with its liability for the year rising by almost $9 billion.
Actual differences will depend on the course of commodity prices. But Charles Mulford, an accounting professor who directs the Georgia Tech lab, noted that oil prices, for example, which saw a big run-up in early 2008, are now about at the same level they were in 2007.
He also noted that while the IRS could grant companies an exemption from its effects on tax liabilties, the federal government may come to regard the switch as a stealthy way to boost revenue. “Congress may come to see it as a windfall profits tax,” Mr. Mulford said.
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