Rolling average cost inventory method.

In Jan. 19, 2006 continents, the AICPA proposed that the IRS and Treasury should allow the use of the rolling average cost method in valuing inventories when this method approximates actual cost. Revenue rulings issued in 1971 and 1977 held that average cost determinations could not consider costs incurred before the beginning of the year (i.e., roiling average costs). Because inventory costing systems at that time were less sophisticated, the averaging process took place infrequently; in periods of rapidly increasing prices, an averaged cost for ending inventory items could be lower than any cost incurred during the current year. It was for this reason that the IILS rejected the rolling average cost method.

Because today's accounting systems are much more sophisticated, "the weight accorded to the costs incurred in prior years is so slight that the ending inventory cost more nearly approximates first in, first out (FIFO)." In addition, because there is an increasing number of inventory costing systems that use a rolling average cost, a continuation of the ban puts taxpayers at risk. Noting two recent revenue procedures that allowed a replacement cost method that approximated actual cost, the AICPA urged the IRS and Treasury to "allow the use of rolling average cost whenever it approximates actual cost consistent" with these rulings.

Lesli S. Laffie, J.D., LL.M.