Complying with new accounting standards
Complying with new accounting standards
by Edward L. Roguel
Since the adoption of several new accounting standards in 2005 in the Philippines and further introduction of additional accounting standards and interpretations in 2006 and 2007, businesses, specially those which adopted these standards, are increasingly realizing the potential differences in the way transactions are reported under these new accounting principles and existing tax rules.
This year, BIR issued Revenue Regulations No. 8-07 requiring taxpayers to maintain books and records that would show clearly the reconciling items or differences between the amounts shown in a taxpayer’s financial statements and the figures reported in its income tax return. Thus, it has now become urgent for taxpayers to establish mechanisms to identify and track these differences and set up the necessary records.
To reduce the differences in the recording and treatment of transactions, several taxpayers had been considering the possibility of adopting these new accounting principles in reporting their transactions for tax purposes. Unfortunately, it is not clear at the moment whether certain new accounting principles can be applied for tax reporting. To date, BIR had only addressed specific issues raised by taxpayers by way of tax rulings.
Be that as it may, these rulings provide guidance on the position of the BIR and may be used as reference by taxpayers who may be in similar situations. Hence, it would be beneficial for taxpayers to review and understand these rulings.
A number of such rulings issued by the BIR tackle the acceptability of new accounting principles in establishing the cost of property used in business.
In one ruling, BIR addressed the tax treatment of the sale of samples produced from the commissioning of equipment. Under Philippine Accounting Standard 16, which covers the accounting standards on the recognition and measurement of property, plant and equipment, the proceeds from selling of samples produced when testing the equipment are deductible from the cost of that asset. In the said ruling, the BIR held that the proceeds from sale of output manufactured from the commissioning period are treated as taxable income rather than deduction from the cost of the asset.
Thus, if a taxpayer earned proceeds from the sale of products produced from the testing of an equipment or machine, it should report the same as revenues subject to the corporate income tax. The difference in the treatment of the sales proceeds should be presented as one of the reconciling items in the taxpayer’s income tax return.
By ruling that the proceeds from the sale should not be treated for tax purposes as a reduction from the cost of the property, the BIR effectively recognized that a property may have a different cost basis for accounting and tax purposes.
In such cases, the taxpayer should note that the annual depreciation that it will recognize for accounting purposes will be different from the tax depreciation. Moreover, when the property is sold or transferred, the book value of the property for accounting and tax purposes shall be different. To properly account for these differences, the taxpayer must be able to determine the sources of these differences (i.e., cost and depreciation) and monitor these differences until the asset has been fully depreciated or disposed.
Another interesting tax ruling dealt with the treatment of the estimated cost of dismantling a property. Under PAS 16, the estimated cost to remove or dismantle a property or to restore a place to its condition prior to the installation of the property, if such commitment had been made, is recognized as part of the cost of the property.
A good example is a contract of lease wherein the lessee committed to restore the leased property, e.g., building, back to its condition before it constructs or installs equipment and other improvements on the property. In the ruling, the BIR held that the
estimated dismantling cost may be considered part of the acquisition cost of the asset.
Many had been surprised by the position taken by the BIR as it is a basic rule in income taxation that expenses, to be deductible, must actually be incurred. Future expenses that will be incurred, even highly certain, are not allowed as deduction.
Rulings issued by the BIR may be used as guide but prudence must be exercised before following the treatment prescribed in these rulings.
Rulings are generally intended to address the facts presented by the requesting taxpayer. If a taxpayer’s situation does not squarely fall within the same facts, the ruling may not be applicable. I
In case a ruling seems inconsistent with an existing regulation, the more that the taxpayer should approach the issue cautiously.
Since the BIR has yet to come up with comprehensive guidelines on the impact of the new accounting principles to tax reporting, taxpayers meanwhile must learn to critically analyze accounting and tax rules to recognize possible differences.
(The author is a senior tax manager of Punongbayan & Araullo, a member firm of Grant Thornton International. For comments and inquiries, please email the author or call 8865511.)