FASB Interpretation No. 1

FIN 1: Accounting Changes Related to the Cost of Inventory an interpretation of APB Opinion No. 20

INTRODUCTION
1. Accounting Principles Board (APB) Opinion No. 20 specifies how changes in accounting principles should be reported in financial statements and what is required to justify such changes. Under that Opinion, the term accounting principle includes «not only accounting principles and practices but also the methods of applying them.»

2. Paragraph 5 of Chapter 4 of Accounting Research Bulletin No. 43 states «there is a presumption that inventories should be stated at cost,» which is «understood to mean acquisition and production cost.» It further states that «the exclusion of all overheads from inventory costs does not constitute an accepted accounting procedure.»

3. Internal Revenue Service (IRS) Regulation 1.471-11, adopted in September 1973, specifies how certain costs should be treated in determining inventory costs for income tax reporting. Under IRS Reg. 1.471-11, some costs must be included in inventory or excluded from inventory for income tax reporting regardless of their treatment for financial reporting. Other costs must be included in inventory or excluded from inventory for income tax reporting depending upon their treatment for financial reporting, «but only if such treatment is not inconsistent with generally accepted accounting principles.» Among the costs listed in IRS Reg. 1.471-11 in this last category are taxes other than income taxes, depreciation, cost depletion, factory administrative expenses, and certain insurance costs.

4. Taxable income and accounting income are based on common information about transactions of an enterprise. However, the objectives of income determination for Federal income taxation and the objectives of income determination for financial statements of business enterprises are not always the same.