The Current French Approach to Inventory Price Level Problems.

Abstract The article reports that the accounting and taxation related to price changes present interesting problems whose solutions may be attempted in a multitude of ways. The study of various approaches used in foreign countries can be a valuable source of ideas. Professors H. Peter Hoizer and H.M. Schonfeld recently described German and French practices related to the price level problem, but they failed to describe the current French approach to inventory price level problems. It is the purpose of this article to describe this approach, and to compare it to LIFO. The tax reform act of December 28, 1959 put into effect a system which in broad terms allows the firm to postpone for six years the payment of income tax on inventory profits which exceed 5% per year over two consecutive years or 10% in one year. It must be noted, however, that LIFO's indefinite postponement of taxes on price increases in inventories is based on the number of units in inventory at the beginning of the period. The French tax reserve, in contrast, is based on the number of units in inventory at the end of the period. In times of increasing physical inventories, therefore, the French system can actually provide a tax shield superior to that provided by LIFO.