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Motor Vehicle Industry Overview - Accounting Principles, Information Systems, & Industry Operating Procedures - June 2004

Affected IRM: X.XX.X

"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

Accounting Principles


Accounting Manuals

To facilitate the detailed and specific accounting practices and procedures, manufacturers and distributors provide step by step accounting manuals to dealers.
The National Auto Dealers Association (NADA) and other professional organizations also publish engagement manuals and other guides to the industry.

Last in First Out (LIFO) Inventory Method

A cost flow concept that assumes for purposes of determining the value of ending inventory, the last inventory items purchased or produced are the first to be sold.
Form 970 is used to elect the LIFO method and changes to the method must receive the Commissioner’s permission prior to the change.
Form 3115 is used to request permission to change a method of accounting.
Motor vehicle and parts manufacturers, distributors, wholesalers, and dealers frequently elect the LIFO method of inventory valuation.

Alternative LIFO for Auto Dealerships

A simplified method of computing LIFO available to dealers in automobiles and light trucks.
First available in 1992 (R. P. 92-79 superceded by R. P. 97-36), Alternative LIFO waives the full comparability requirements of traditional LIFO.
Alternative LIFO must be properly elected and dealers must agree to certain simplifying concepts.
Many auto dealers availed themselves of the simplified method, however it is not safe to assume that all dealers use Alternative LIFO.
The method is not available to dealers in heavy trucks, equipment dealers, or farm implement dealers.

LIFO Conformity

Taxpayers that elect LIFO many use no method other than LIFO for purposes of statements to shareholders and creditors.
(See Rev. Rul. 97-42, Rev. Proc. 97-44, and Rev. Proc. 98-46 for special rules related to dealers.)

Service Warranty Income Method (SWIM)

Revenue Procedure 97-38 (Previously Rev. Proc. 92-98) provides a method of accounting by which the obligor on an extended service contract can defer the reporting of a portion of the sales proceeds.
The method must be properly elected and the taxpayer must agree to certain conditions and criteria to order to use the SWIM method. (See Rev. Proc. 92-98 and Rev. Proc. 97-38)

Percentage of Completion

Technical Advice Memorandum 199925002 (March 8, 1999) ruled that molds used in automobile parts production are unique items for purposes of IRC §460(f). 
The manufacturer must account for the related long-term contracts using the percent­age-of-completion accounting method.

Alternative LIFO for Used Vehicle Dealers

Revenue Procedure 2001-23
A simplified method of computing LIFO available to dealers of used autos and used light trucks.
An elective method effective for tax years ending on or after December 21, 2000,
A link-chain method encompassing several special rules and required sub-methods.
LIFO indexes are computed using base costs and an “official used vehicle guide.”
Indexes are then applied to the value of ending inventory including options, condition, mileage and accessories.

Information Systems 


  • The manufacturers and distributors mandate the specifications of dealership accounting systems. 
  • Dealerships have a limited number of hardware and software vendors from which to choose.
  • The transfer of data from one vendor’s product to another is difficult or impossible.
  • Information systems are typically relatively small and do not store information from prior cycles.
    • Back up tapes might be made but typically are not retained for an extended period.
    • If back up information is available, it generally cannot be loaded back onto the dealer’s system without removal of the current activity. 
  • Information systems contain proprietary software that usually cannot be accessed by a Computer Audit Specialist.
  • Dealers communicate with manufacturers through a Dealer Communication System (DCS) that generally allows a dealership to order vehicles and parts, submit warranty claims, and send other communications to the factory.
  • Dealerships increasingly use the Internet and e-mail to communicate with customers, manufacturers, and other partners.
    • Some dealers have entire departments devoted to providing e-mail responses to prospective clients.



  • Most companies have sophisticated a system that provides data archiving and allows Computer Audit Specialist to download data and produce reports.
  • Manufacturers and Distributors communicate with their dealership body through a computer network.   
  • Manufacturers order parts through automatic replacement Systems.

Industry Operating Procedures


  • Motor vehicle companies manufacture and assemble vehicles at locations throughout the world.
  • Some parts are produced at manufacturer-owned facilities (OEM parts) and others are purchased from a supplier.
    • The supply chain consists of several tiers of companies manufacturing various parts or components.
      • Tier One suppliers provide products directly to the motor vehicle companies while Tier Two and Three companies provide product to a company one step higher in the supply chain.
  • Motor vehicle products are typically marketed through a network of franchised dealerships.
    • Some imports are distributed through a network of independent and company owned distributorships.
      • Vehicles move from the manufacturer to the distributor to the dealership to the ultimate consumer.
  • The manufacturer/distributor’s relationship with dealerships is governed by a personal service contract called a Sales and Service Agreement. 
    • Manufacturers and distributors retain the right to appoint all dealerships operators and to approve all transfers.
  • Manufacturers/Distributors and dealerships sometimes have competing interests that cause tensions between the parties.
    • Tensions can include vehicle allocations, location and condition of dealership facilities, and availability and cost of credit.
  • Manufacturers allocate vehicles based on a dealership’s previous sales records and based on the dealership’s special customer orders. 
  • Vehicles are generally shipped directly from the factory to the dealership without a warehouse operation.
  • Some manufacturers are test marketing sales to the ultimate consumer (Europe) however, some state laws prohibit the manufacturer from selling directly to the consumer.
  • The Internet is increasingly a sales outlet with distribution at local dealerships.
  • Manufacturers are testing full and partial ownership of dealerships.
    • Manufacturer owned dealerships would provide a distribution outlet for vehicles sold over the Internet.
  • Large and small companies located throughout the world also produce aftermarket parts.
    • Parts are distributed through wholesalers or jobbers to retail parts stores or dealerships that sell parts to the ultimate consumer.

Chapter 4 | Table of Contents | Chapter 8

Page Last Reviewed or Updated: 06-Nov-2014