Next-In, First-Out (NIFO): The Inventory Method for 2025

Inventory management isn’t just about keeping shelves stocked—it’s a key driver of financial performance and tax efficiency. As Australian businesses face tighter margins and shifting global supply chains in 2025, innovative inventory valuation methods are gaining attention. One such approach, Next-In, First-Out (NIFO), is making waves for its forward-looking take on inventory costs and its strategic impact on profit reporting and tax obligations.

What is NIFO and Why is It Gaining Traction?

NIFO stands for Next-In, First-Out. Unlike traditional methods such as FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), which value inventory based on historical purchase costs, NIFO values inventory using the cost of the next expected purchase. In other words, the items sold are assumed to be replaced at the price of the next incoming shipment, not the price actually paid for the stock on hand.

This forward-looking approach can paint a more current picture of inventory value—especially relevant in times of fluctuating supply costs or volatile markets. In 2025, with ongoing global supply chain disruptions and inflationary pressures, NIFO is particularly attractive for industries dealing with rapidly changing input costs, such as electronics, automotive parts, and construction materials.

How Does NIFO Impact Financial Reporting?

Financial reporting under NIFO can look markedly different from more conventional inventory methods:

• Profit Fluctuations: By using the cost of the next purchase (which may be higher due to inflation or supply shortages), NIFO can result in higher cost of goods sold (COGS) and lower reported profits during periods of rising prices.
• Inventory Valuation: Closing inventory on the balance sheet reflects future replacement costs rather than historical ones, potentially offering a more accurate snapshot for decision-makers.
• Tax Implications: Lower reported profits can reduce taxable income in the short term, but the ATO currently does not recognise NIFO for tax purposes. Businesses must reconcile their management accounts with tax-compliant methods like FIFO or weighted average.

For example, consider an auto parts importer in Melbourne. If brake pads are purchased in January at $50/unit, but the next shipment in March is expected to cost $65/unit due to supply chain issues, NIFO would value outgoing inventory at $65—even if the physical goods sold were from the January batch. This can dramatically alter both reported profits and the perceived health of the business.

2025 Regulatory and Practical Considerations in Australia

While NIFO is not officially recognised by the Australian Taxation Office (ATO) for statutory financial reporting, it’s increasingly being used for internal management reporting and strategic planning. The adoption of International Financial Reporting Standards (IFRS) in Australia still mandates the use of historical cost-based methods for official accounts, but businesses can use NIFO for budgeting, forecasting, and performance analysis.

Key 2025 updates affecting inventory management include:

• IFRS Guidance: The AASB reaffirmed in early 2025 that NIFO is not permissible for external reporting, but many CFOs are using NIFO-adjusted figures to navigate price volatility in real time.
• Supply Chain Volatility: The ongoing effects of global shipping delays and commodity price swings are forcing more businesses to consider NIFO for internal decision-making, especially those with thin margins or high inventory turnover.
• Technology Integration: Modern ERP and inventory management systems are increasingly supporting NIFO calculations, enabling businesses to model different scenarios and better hedge against future price shocks.

Some large retailers and importers in Sydney and Brisbane are already using NIFO analytics to inform their purchasing and pricing strategies, even if their official accounts must stick to FIFO or weighted average methods. This dual approach is helping finance teams anticipate cash flow needs and respond faster to market changes.

Should Your Business Consider NIFO?

NIFO isn’t for every business. Its greatest value is in industries where input costs are highly volatile and where future purchase prices are materially different from current holdings. If your business operates with stable supply chains and predictable costs, traditional methods may suffice. But if you’re facing unpredictable supplier pricing—or you want a sharper lens on future profitability—NIFO is worth exploring for internal analysis.

• High-volume importers
• Construction and manufacturing with volatile raw material prices
• Retailers managing large, fast-moving inventories

For these sectors, NIFO can be a powerful tool in the 2025 financial toolkit, helping you stay agile and competitive in a changing market.