The LIFO conformity rule

The LIFO conformity rule states that, if the LIFO cost flow method is used to compile taxable income, it must also be used in the financial statements. The rule is designed to prevent organizations from using LIFO accounting to reduce the amount of their taxable income, while using a different inventory cost flow method (such as FIFO) to derive a higher income figure in their financial statements.

An adverse effect of the conformity rule is that organizations electing to use LIFO are essentially reporting lower financial results to their lenders, investors, and creditors than is really the case. This could result in a reduced market value for a business, and possibly the denial of credit from lenders and creditors.

The rule has tended to reduce the adoption of the LIFO method by businesses.