When reconciling a local GAAP reporting package to IFRS for consolidation, you find that the subsidiary uses the LIFO method for inventory, which is not allowed under IFRS. How would you adjust this, and what is the deferred tax impact?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
I would adjust the inventory to FIFO or weighted average cost, which are allowed under IFRS. The adjustment increases inventory and reduces cost of goods sold, increasing pre-tax profit. A deferred tax liability is recognized on the temporary difference between the tax base (LIFO) and the IFRS carrying amount (FIFO), as the reversal will result in higher taxable income in the future. The adjustment is recorded through retained earnings for prior periods and P&L for the current period.
WHAT INTERVIEWERS LISTEN FOR
- ✓Convert LIFO to FIFO
- ✓Increase inventory, reduce COGS
- ✓Recognize deferred tax liability
COMMON MISTAKES
- ✗Ignoring deferred tax
- ✗Using LIFO under IFRS
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