Inventory conformity rule
/What is the Inventory Conformity Rule?
The inventory conformity rule states that, if a business elects to use the LIFO cost flow assumption for its tax reporting, it must also use LIFO for its financial reporting. This rule was enacted by the Internal Revenue Service, because companies were using LIFO to report a lower level of taxable income, while using other cost flow assumptions (such as FIFO) to report a higher level of income in their financial statements. This resulted in a disparity in reported income levels between the two methods of accounting, as well as a disparity in the amount of inventory reported on a firm’s balance sheet.
This rule has tended to result in a lower usage rate of LIFO by businesses.