Inventories must be shown at the lower of cost or market. LIFO (last in, first
out) is expressly permitted by the Income Tax Act, unless it would be in conflict
with German accounting principles.
However, once LIFO has been applied, it
must be continued with in subsequent years, unless the tax office agrees
otherwise. Losses in value must be deducted from the original cost if they can
be specifically determined. General provisions for technical obsolescence or
reduced marketability on account of age or further developments are permitted
in principle, although the attitude of the tax authorities tends to be sceptical.
Those making generalised calculations or global provisions must expect to be
asked to justify the deduction by reference to specific facts and circumstances
and/or to the past history of the business.