Issue Number: RR-2012-01
Revenue Ruling 2012-01 clarifies the treatment of certain liabilities under the section 461(h)(3) recurring item exception to the economic performance requirement of the all events test. Under the all events test, an accrual method taxpayer can accrue a liability in the year in which the liability is fixed and determinable and economic performance has occurred. Under the recurring item exception, a taxpayer can accrue a liability in the year it is fixed and determinable, regardless of economic performance, if the taxpayer satisfies certain conditions, including that either the liability (1) is not material, or (2) better matched to the related income in the earlier year. The revenue ruling clarifies the "not material" and "better matching" requirements in the context of a one-year lease liability and a one-year service contract liability. For service contract type liabilities, the recurring item exception applies differently depending on whether the contract is for the provision of services as distinguished from insurance or warranty type contracts. For liabilities arising out of the provision of services to the taxpayer, the revenue ruling makes clear that the taxpayer must satisfy either the "not material" or "better matching" requirement. For liabilities arising out of the provision of insurance, warranty or similar service contract liabilities, the better matching requirement is deemed to be met.