Understanding FIFO First In First Out Inventory Method in Malta

Malta’s regulatory and tax framework requires businesses to follow internationally recognised accounting standards. For companies involved in trading, retail, manufacturing, or distribution, inventory valuation is a key component of accurate financial reporting and tax compliance. One of the most commonly used and fully accepted inventory valuation methods in Malta is FIFO – First In, First Out.

This article explains how FIFO works, why it is widely used in Malta, and how it compares, briefly, to alternative methods such as LIFO.

What Is the FIFO Inventory Method

FIFO (First In, First Out) assumes that the first items purchased or produced are the first ones sold. Under this method, older inventory costs are matched against current revenues, while newer inventory remains on the balance sheet.

FIFO reflects the natural flow of inventory for many businesses, particularly where goods are perishable or subject to obsolescence.

How FIFO Works in Practice

Consider the following example:

If the business sells 100 units using First in – first out system:

• The €10 units purchased in January are assumed to be sold first
• Cost of goods sold = €1,000
• Remaining inventory is valued at €12 per unit

This results in inventory values that are closer to current market prices.

FIFO and Accounting Standards in Malta

Malta follows International Financial Reporting Standards (IFRS). Under IAS 2 – Inventories, FIFO is an approved and widely used inventory valuation method.

This means:

• FIFO is fully acceptable for statutory financial statements in Malta
• It aligns with EU accounting requirements
• It is suitable for both SMEs and larger corporate entities

Because FIFO is IFRS-compliant, it is also recognised by auditors and tax authorities.

Tax Implications in Malta

Maltese corporate tax is calculated based on accounting profits prepared in accordance with accepted standards. Since FIFO is IFRS-compliant:

• It is accepted for corporate tax purposes
• Inventory valuations under FIFO are generally not challenged by the Inland Revenue Department
• It supports transparent and defensible tax reporting

In periods of rising prices, FIFO may result in higher reported profits compared to other methods, as older, lower-cost inventory is expensed first.

Why FIFO Is Commonly Used in Malta

FIFO is widely used in Malta because it fits the country’s accounting rules. Malta follows IFRS, which is the International Financial Reporting Standards used throughout the EU for company reporting. One of these standards, IAS 2, sets the rules for how inventories must be valued. IAS 2 allows FIFO but does not allow methods like LIFO (Last In, First Out). Since Maltese companies must follow these standards, FIFO becomes the natural choice. It also reflects how many local businesses physically manage their stock, making it both compliant and practical.

This is particularly popular in Malta because it:

• Reflects actual stock movement for most businesses
• Produces balance sheet values close to current replacement costs
• Simplifies compliance with IFRS and tax rules
• Is suitable for regulated and audited entities

Sectors such as retail, hospitality, pharmaceuticals, and manufacturing frequently rely on FIFO.

Brief Note on LIFO

LIFO (Last In, First Out) assumes that the most recent inventory purchases are sold first. While LIFO is permitted under certain non-EU accounting frameworks, it is not allowed under IFRS and therefore cannot be used in Malta for statutory or tax reporting purposes.

Businesses operating internationally may encounter LIFO at group level, but Maltese entities must convert such figures to FIFO or another IFRS-compliant method.

FIFO Compared to Other Methods

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