In accounting and US tax, the conformity rule usually refers to the inventory conformity rule, better known as the LIFO conformity rule. It requires a taxpayer that uses the last in, first out (LIFO) method to calculate taxable income to use LIFO as well when reporting income to shareholders and creditors. The main entry covers the rule's legal basis, what it permits and an example.
Why the shorter name is used
Because LIFO is the main area where US tax law dictates how a company prepares its published financial statements, accountants and tax advisers often just say "the conformity rule" when the context is inventory. The rule appears in section 472 of the Internal Revenue Code and is enforced by the Internal Revenue Service (IRS), which can end a company's LIFO election if the rule is broken.
The rule explains why US companies that want LIFO's tax deferral during periods of rising prices must also accept lower reported profits and lower inventory values. Many therefore disclose a LIFO reserve, showing what inventory would be under first in, first out (FIFO) or current cost.
The phrase is sometimes used more loosely for any requirement that tax and book treatment match, and some countries apply broader book-tax conformity to all taxable profits. In US accounting usage, however, it nearly always means the LIFO rule.