Financial Reporting and Tax Strategies of Major Korean Oil Refinery Companies in Response to LIFO Abandonment Mandated by K-IFRS

Abstract

After K-IFRS roadmap was announced in March 2007, using LIFO method as an inventory valuation method is expected to be prohibited under the new standard. The main issue is that major oil refinery companies who previously used LIFO method anticipated the temporary hike in earnings and tax liability triggered by massive restoration of LIFO reserves, when LIFO is abandoned. Thus, this paper analyzes the companies financial reporting and tax strategies in response to the restoration of LIFO reserve. According to the results, it turned out that companies liquidated significant amount of LIFO inventory over the period before IFRS adoption in order to avoid volatile financial reporting earnings and conduct smooth income. For lowering the increased tax liability, companies temporary boosted the investment in tax-favored equipment and utilized tax credit as a means of lessening tax burden. After the IFRS adoption, it is confirmed that companies reduced the inventory level since the risk of LIFO inventory liquidation and decrease in after-tax cash flow disappeared.