SYNOPSIS

We examine MD&A disclosure practices concerning the positive transitory impact that LIFO liquidations have on reported earnings. This issue is particularly relevant in light of the recent calls to eliminate LIFO for tax revenue reasons and the controversy surrounding the proposed shift to IFRS, which does not permit LIFO inventory valuation. Our analysis of companies with income-increasing LIFO liquidations between 1993 and 2010 shows that, after controlling for materiality, MD&A disclosure tendencies were not as reliable as disclosures of this issue in financial statement footnotes. Also, MD&A disclosure rates did not significantly increase in the periods after the introduction of SEC regulations calling for more transparency in the MD&A. Contrary to expectations, companies whose incomes were negative disclosed at a higher rate than companies with positive incomes. Results may indicate a need for greater auditor involvement with MD&A disclosures.

Data Availability: Data are available from the sources listed in the paper.

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