Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Other Considerations Discussion of other areas of pertinence regarding Alternative LIFO are summarized as follows: 1. Audit Protection If an automobile dealer timely files a Form 3115, Application for Change in Accounting Method, under the procedures provided in this revenue procedure and effects the change to the Alternative LIFO Method in accordance with all of the requirements and conditions of this revenue procedure, an examining agent may not propose that the automobile dealer change the same method of accounting for a year prior to a year of change required under this revenue procedure. 2. Conformity Automobile dealers who elect the LIFO method of inventory valuation are required to meet certain conformity requirements. See Chapter 8 for in-depth discussion. Financial statements and reports issued by the automobile dealer must be issued on a LIFO basis. Alternative LIFO does not provide audit protection for conformity violations. 3. Item Category Without Consideration of Model Year New models are generally introduced in the fall of each year. An automobile dealer may have 2 model years of a single vehicle with the same model code. The revenue procedure does not distinguish an item category by model year. Therefore, if an automobile dealer’s inventory contains 2 model years of a single vehicle they will be included in one item category to arrive at an average cost for this item category. 4. IPI Computation Method Changes An automobile dealer that uses the IPI computation method must also change from the IPI computation method to another acceptable method for its goods other than new automobiles and new light duty trucks. For parts and accessories, the automobile dealer must change to the dollar value, index method. For used vehicles, the automobile dealer must change to the dollar value, link chain method. 5. Restating the Base Year Section 9.02(8) of Rev. Proc. 92-79 and section 5.03(8) of Rev. Proc. 97-36 require that the year of change become the new base year and that the cumulative index at the beginning of the year of change must be restated to 1.0000. Prior years’ layer valuation indices are converted to less than 1.0000, assuming a period of rising prices. The mechanics of restating the base year are illustrated in the following example. In this example, 1992, is the year of change. 9-9
1991 Inventory Value at Current Year and Base Year Cost Year Base Year Cost Current Year Cost [1] Index 12/31/91 $116,774 $128,451 1.1000 [1] Taken from the general ledger. LIFO Inventory Layers Before the Year of Change Year Base Year Cost Index LIFO Value 01/01/90 $105,798 1.0000 $105,798 12/31/90 9,062 1.0400 9,424 12/31/91 1,914 1.1000 2,105 $116,774 $117,327 Restating the Existing LIFO Layers as of January 1, 1992 Old Base New Base Year Year Cost Year Cost Ratio LIFO Value 01/01/90 $105,798 $116,378 .9091 $105,798 12/31/90 9,062 9,968 .9454 9,424 12/31/91 1,914 2,105 1.0000 2,105 $116,774 $128,451 $117,327 To determine the new base year cost, multiply the existing base year cost of each layer by the ratio of the cumulative index preceding the year of change. In this example, the ratio is 1.1000. The LIFO layer values remain the same. After the new base year cost is determined, the restated indices are computed by dividing the LIFO value of each layer by its new base year cost. In this example, the ratio for 1990 is .9454 ($9,424 divided by 9,968). Information to request when examining the Alternative LIFO Method A pro-forma Information Document Request relating to this Revenue procedure appears on the next page. 9-10
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1991 Inventory Value at Current Year and Base Year Cost<br />
Year Base Year Cost Current Year Cost [1] Index<br />
12/31/91 $116,774 $128,451 1.1000<br />
[1] Taken from the general ledger.<br />
LIFO Inventory Layers Before the Year of Change<br />
Year Base Year Cost Index LIFO Value<br />
01/01/90 $105,798 1.0000 $105,798<br />
12/31/90 9,062 1.0400 9,424<br />
12/31/91 1,914 1.1000 2,105<br />
$116,774 $117,327<br />
Restating the Existing LIFO Layers as of January 1, 1992<br />
Old Base New Base<br />
Year Year Cost Year Cost Ratio LIFO Value<br />
01/01/90 $105,798 $116,378 .9091 $105,798<br />
12/31/90 9,062 9,968 .9454 9,424<br />
12/31/91 1,914 2,105 1.0000 2,105<br />
$116,774 $128,451 $117,327<br />
To determine the new base year cost, multiply the existing base year cost of each layer by<br />
the ratio of the cumulative index preceding the year of change. In this example, the ratio<br />
is 1.1000. The LIFO layer values remain the same. After the new base year cost is<br />
determined, the restated indices are computed by dividing the LIFO value of each layer by<br />
its new base year cost. In this example, the ratio for 1990 is .9454 ($9,424 divided by<br />
9,968).<br />
Information to request when examining the Alternative LIFO Method<br />
A pro-forma Information Document Request relating to this Revenue procedure appears on the<br />
next page.<br />
9-10
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