Rolling-Average Inventory Method Now Allowed by Internal Revenue Service

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October 1, 2008

The Internal Revenue Service has changed its stance on whether or not rolling-average inventory valuation method of accounting clearly reflects income for a business. In the past the IRS has held that the rolling-average inventory method does not clearly reflect income. But, with Revenue Procedure 2008-43 the IRS has changed its stance and now will allow businesses to use the rolling-average inventory method.

Revenue Procedure 2008-43 states that "this revenue procedure announces that the Service generally will view a rolling-average method that is used to value inventories for financial accounting purposes as clearly reflecting income for federal income tax purposes." The procedure seems to imply that if you are going to use the rolling-average inventory method for federal income tax purposes you should be using it for financial reporting purposes also. In the procedure the IRS warns that "if a taxpayer does not use a rolling-average method for financial accounting purposes then the rolling-average method may not accurately determine costs or clearly reflect income for federal income tax purposes."

Because of the change in the IRS stance on the rolling-average inventory method the following revenue rulings and procedures have been modified:

1. Revenue Ruling 71-234
2. Revenue Ruling 77-480
3. Revenue Procedure 2002-9

Those businesses looking to change to the rolling-average inventory method should consult with their accountant. Additional information can be found on the IRS website www.IRS.gov.

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William B. Riccio, CPA/CITP is a certified public accountant. He is president of Riccio & Associates and can be reached at (216) 255-6913 or by e-mail at william@ohiocpa.net.