Rev. Proc. 76-3

Section 1. Purpose.

The purpose of this Revenue Procedure is to amplify Rev. Proc. 75-10, 1975-1 C.B. 651, relating to last-in, first-out (LIFO) inventories, with respect to the type of footnotes or commentary on annual reports and financial statements that are acceptable to the Internal Revenue Service under section 3.03 of Rev. Proc. 75-10.

Sec. 2. Background.

With respect to reports or statements to shareholders, partners, other proprietors, beneficiaries, or for credit purposes covering the first taxable year for which the LIFO method is to be used, section 472(c) of the Internal Revenue Code of 1954 requires that no procedure other than the LIFO procedure be used in inventorying goods to ascertain the income, profit, or loss in such taxable year. Section 472(e)(2) imposes the same requirement for subsequent taxable years, and authorizes the Secretary of the Treasury or the Secretary's delegate to require the taxpayer to change to another method of inventory identification and valuation when this requirement is not complied with.

Rev. Proc. 72-29, 1972-1 C.B. 757, provides that the Service would not terminate a LIFO election if there were variations between the LIFO method for financial and tax purposes that were caused by the application of certain financial accounting principles with respect to certain types of business combinations.

Rev. Proc. 73-37, 1973-2 C.B. 501, provides similarly when a taxpayer was required to provide certain supplemental financial statement information in the taxable year in which the LIFO was elected.

Rev. Proc. 73-37 was amplified by Rev. Proc. 75-10 to provide that a LIFO election will not be terminated solely because a taxpayer is subject to and complies with certain financial disclosure requirements of the Financial Accounting Standards Board and the Securities and Exchange Commission that requires that footnotes or commentary on annual reports and financial statements disclose the effect of the change in method on income provided such disclosure is made solely for the taxable year of the change.

Section 3.03 of Rev. Proc. 75-10 provides, in part, that for purposes of such disclosures, a statement that the effect of the change to LIFO was to decrease reported earnings by $xxxx, or $xxx per share would be acceptable to the Service.

In addition to making such a statement, a taxpayer may wish to amplify such statement by presenting itemized listings of operating profits by product lines or division lines.

Sec. 3. Application.

.01 The itemized listing, by product lines or division lines, of the taxpayer's operating profits is merely a more detailed means of describing the item considered acceptable by the Service in Rev. Proc. 75-10. Accordingly, such listing may be used subject to the limitations of Section 3 of Rev. Proc. 75-10, without violating the requirements of sections 472(c) and 472(e) of the Code.

.02 Section 3.03 of Rev. Proc. 75-10 is amplified to read as follows:

For purposes of the disclosures permissible under 3.01 above with respect to A.P.B. 20 and A.S.R. 159, language similar to either or both of the following paragraphs, in each example, is acceptable to the Service:

Footnotes in Financial Statements--

(1) The company has changed its method of accounting for inventories to a last-in, first-out (LIFO) method. This was done because the rapid increase in prices during the year would result in an over-statement of profits if use of the first-in, first-out (FIFO) method were continued since inventories sold were replaced at substantially higher prices. The effect on reported earnings for the year was a decrease of $xxxx, or $xxx per share.

(2) Operating profits at December 31, 19 have been calculated, for the first time, to reflect the valuation of certain domestic inventories on the LIFO basis. The change to LIFO reduced operating profits, by Major Product (or Division) Groups, as follows: Product (or Division) A, $10x; Product (or Division) B, $7x; Product (or Division) C, $9x; Product (or Division) D, $6x; and Product (or Division) E, $4x.

Excerpt in Management's Analysis of Summary of Earnings--

(1) In order not to overstate reported profits as a result of inflation during the year, the company changed its method of accounting for inventory from first-in, first-out (FIFO) to last-in, first-out (LIFO). This was necessary because of the rapid increase in prices in 197 which caused inventories sold to be replaced at substantially higher prices. The effect of the change was to decrease reported earnings by $xxxx, or $xxx per share.

(2) Operating profits at December 31, 19 have been calculated, for the first time, to reflect the valuation of certain domestic inventories on the LIFO basis. The change to LIFO reduced operating profits, by Major Product (or Division) Groups, as follows: Product (or Division) A, $10x; Product (or Division) B, $7x; Product (or Division) C, $9x; Product (or Division) D, $6x; and Product (or Division) E, $4x.

Sec. 4. Effect on Other Documents.

Rev. Proc. 75-10 is amplified.

¹ Also released as TIR-1428, dated December 23, 1975.