Final answer:
Under IFRS, an entity is not allowed to choose the LIFO method for inventory costs, whereas under US GAAP it can. The LIFO method assumes the most recently acquired inventory is sold first, resulting in lower reported profits and lower tax liabilities in periods of rising prices under US GAAP.
Step-by-step explanation:
Under IFRS (International Financial Reporting Standards), an entity is not allowed to choose the LIFO method of accounting for inventory costs. However, under US GAAP (Generally Accepted Accounting Principles), an entity is allowed to use the LIFO method.
The LIFO method assumes that the most recently acquired inventory is sold first, which means the cost of goods sold reflects the most recent costs. Under IFRS, the primary method for accounting for inventory costs is the first-in, first-out (FIFO) method, which assumes that the oldest inventory is sold first, resulting in the cost of goods sold reflecting older costs.
The use of the LIFO method under US GAAP can result in lower reported profits and lower income tax liabilities in periods of rising prices compared to the use of the FIFO method. This is because the LIFO method matches the current costs of inventory with current revenues, resulting in a higher cost of goods sold and lower ending inventory value. However, some countries do not allow the use of LIFO for tax purposes, which may limit its practical application.