What is NIFO inventory valuation method?

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NIFO – Next in, First out is an inventory valuation technique in which issues to the production hall are valued at the current market price i.e. current cost or replacement cost instead of the cost at which material was bought i.e. historical cost.

This valuation method attempts to keep the production cost accurate according to the prices prevailing in the accounting period in which material was consumed and not on the basis of the prices prevailing in the period when material was bought. This way the measurement of production cost for internal use and cost of goods sold for external use is more accurate and the users of information has the figures according to latest market position and can make better decisions.

However, International Accounting Standards (IASs) and Generally Accepted Accounting Principles (GAAPs) does not allow the use of current cost i.e. replacement cost and for majority of the asset historical cost concept i.e. cost at which asset was bought is required to be used. Therefore, use of Next in, First out is in contradiction to the principles of two of the major Accounting Frameworks.

In addition to the that, under International Accounting Standard (IAS) 2 – Inventories, entities are allowed to use either FIFO – First in, First out method or AVCO – Average value of cost method for cost assignment purposes. Therefore, use of NIFO is ruled out altogether.

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