Atty. NELSON M. ASPEDeputy Commissioner, Operations Group

PICPA National Annual Convention Butuan City November 30, 2012

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IFRS / PFRS IMPACT on TAXATION

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PFRS and Tax LawsPhilippine Financial Reporting Standards(PFRS) - set of rules to govern therecognition, measurement and reporting offinancial transactions of an entity

National Internal Revenue Code(NIRC/Tax Code) - set of laws governinginternal revenue taxes imposed in thePhilippines

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PFRS and Tax Laws- For tax purposes, revenue and expenses are

generally determined based on the accountingmethod followed by the taxpayer (Sec. 43,NIRC)

Exception - if accounting method is not reflective of true

income, a different method may be used.

If the NIRC provides for specific treatmentof income or expenses, this should befollowed.

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What BIR says about the new accounting standards - Generally accepted accounting principles (GAAP)

and Generally accepted accounting standards(GAAS) approved by the Accounting StandardsCouncil (ASC) may, from time to time, differfrom the provisions of the Tax Code of 1997 andits implementing regulations.

- In such cases, the provisions of the Tax Code andits implementing rules and regulations shallprevail.

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What BIR says about the new accounting standards ....

- Taxpayers must maintain books and records thatwould show clearly the reconciling items ordifferences between the amounts shown in ataxpayers financial statements and the figuresreported in its income tax return.

- Rev. Regulations No. 8-2007

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Importance of Financial Records

Audited financial statements arerequired to be submitted with ITR (Sec232, NIRC).

Financial records are reviewed duringtax examination

Courts also rely on financial records inevaluating the completeness andcorrectness of tax information.

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What should taxpayers do Understand changes brought about by these

standards and evaluate if they are contrary toexisting tax rules.

If not contrary and will reflect true income, adoptthem.

Comply with the requirements relating to theadoption of such change!1. Approval for changes in accounting methods2. Tax ruling to confirm acceptability of

accounting treatment for tax purposes

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What should taxpayers do If contrary, recognize that information shall be

treated differently for tax purposes. Differenceshould be reported as reconciling accountsbetween tax and book income.

Establish system to track and capture thedifferences

Track differences for every affectedtransaction

Calculate differences at the end of theyear

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New Standards Effective 2005PAS 1 Presentation in Financial StatementsPAS 2 InventoriesPAS 8 Changes in Accounting Policy, Prior Period

Errors and EstimatesPAS 10 Events After Balance Sheet DatePAS 16 Property, Plant and EquipmentPAS 17 LeasesPAS 19 Employee BenefitsPAS 21 Effects of Changes in Foreign Exchange RatesPAS 24 Related Party TransactionsPAS 27 Consolidated and Separate Financial StatementsPAS 29 Investment Associates

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New Standards Effective 2005PAS 31 Interest in Joint VenturesPAS 32 Financial Instruments: Presentation and

DisclosuresPAS 33 Earnings Per SharePAS 36 Impairment of AssetsPAS 38 Intangible AssetsPAS 39 Financial Instruments: Recognition and

MeasurementsPAS 40 Investment PropertiesPFRS 2 Share-based PaymentsPFRS 3 Business CombinationsPFRS 5 Non-current assets held for sales

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After 2005

Additional standards and interpretations issued by the IASB and the IFRIC

- 37 standards (8 PFRSs; 29 x PASs)- 24 interpretations (13 x IFRICs; 11 x SICs)

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Understanding Differences

ACCOUNTING TAX

Fair value Cost

Substance Form

Matching Income and Expenses

Contractual Rights and Obligations

Accounting Standards Legal Provisions

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Fair Value vs Cost

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PAS 2: Inventories

Inventories are required to be stated at the lower of:

Cost or Net realizable value (NRV)

NRV = Estimated selling priceLess : Estimated cost to sell

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PAS 2 : InventoriesAccounting Tax

Inventory shall be adjusted to NRV if the latter is lower than cost

Write-down to NRV expense during the period

Reversal of write-down-reduction in inventories recognized as expense during the period

Inventory shall remain to be valued at cost

Not valid additions to Cost of Sales

Reversals should not decrease Cost of Sales

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PAS 36: Impairment of AssetsAccounting Policy Tax Treatment / Issues

Impairment loss is charged as an expense.

A reversal of an impairment loss for an asset shall be recognized immediately as income (or reduction of expense).

Any reversal of an impairment loss of a revalued asset is credited directly to equity under the heading revaluation surplus.

Losses recognized due to impairment are not deductible.

Gains from reversal of impairment loss are not taxable.

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PAS 40: Investment Property Applies to property (land or building) used to

Earn rentals or For capital appreciation or Both

Rather than for use in the production ofsupply goods or for administrativepurposes, or sale in the ordinary course ofbusiness.

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PAS 40: Investment PropertyAn entity is given the option to choose either:

a fair value model, under which aninvestment property is measured at fair valuewith changes in fair value recognized in profitor loss

a cost model, which requires an investmentproperty to be measured after initialmeasurement at depreciated cost.

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PAS 36: Investment PropertyAccounting Tax

Fair value model

Increase in FV property is reported as income

Decrease in FV is reported as expense

For tax, property shall be valued at cost.

Income/Expense recognized due to changes in the value of the property will not be considered as taxableincome/deductible expense.

If a property is used in business, taxpayer can claim deduction for depreciation. Depreciation shall be based on cost.

If the property is sold, gains or losses to be considered shall be based on the unadjusted carrying value (without adjustment of fair value effects).

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Measurement of Cost - AccountingIncludes:

Cost of purchase Cost of conversion Other costs to bring inventories to present location and

condition

Excludes:

x Abnormal wastex Storage costx Unrelated administrative overheadx Selling costsx Deferred Payment Costx Foreign exchange differences

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Example Deferred paymentBuyer Side

Product was invoiced for P100, payable after a year. If cashpayment, price will be P90.

Purchases 90Deferred Interest Expense 10

Accounts Payable 100

Accounts Payable 100Interest Expense 10

Cash 100Deferred Interest Expense 10

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PAS 2: InventoriesAccounting Tax

Cash discounts and settlement discounts are recognized when the purchase is booked.

Contractual discounts shall be recognized once probable.

If the discount has not been granted at the time of purchase, the purchase price shall be recorded based on the invoice amount

Only actual discounts are reported as reduction from gross sales. Cash discount time of

purchase Settlement discount when

received Rebates when granted

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PAS 2: InventoriesAccounting Tax

If not availed, the foregonediscount is recognized as finance cost.

Such finance cost shall not be deductible.

Useful to use a different account title to record

- discounts recognized upon purchase but not yet granted under a different account title

- finance costs relating to unavailed discounts

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PAS 18: Revenue Recognition

Goods Recognize revenue when:

Services

Transfer of risks& rewards

Managementinvolvement

Substance of thetransaction

1. Measured reliably

2. Flow of economicbenefits

probable3. Costs measured

reliably

Performance of obligations

Percentage ofcompletion

method PAS 11

construction contracts

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PAS 17: Leases

Classification of Leases

1. Financial Lease is a lease that transferssubstantially all the risks and rewardsincident to ownership of an asset. Titlemay or may not eventually be transferred.

2. Operating Lease is a lease other than thefinance lease.

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Definition Tax (RR 19-86)

1. Lease an agreement between the lessorand lessee giving lessee possession and useof a specific property upon payment ofrentals over a period of time.

2. Conditional Sale one of the partiesobligates himself or transfer ownership ofand deliver a determinate thing while theother pays a price certain.

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PAS 17 : Leases

Accounting TaxOperating Lease Operating LeaseFinance Lease Operating LeaseFinance Lease Conditional Sale

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PAS 32: Financial Instruments: Presentation and Disclosures

Financial Liability - When issuer is or can berequired to deliver eithercash or another financialasset to the holder (prsenceof contractual obligation)

Equity Equipment - When it represents a residualinterest in the net asset ofthe issuer

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PAS 18 : Revenue Recognition

Accounting TaxThe substance of a financial instrument governs its classification rather than its legal form

Based on LEGAL FORM

Treated as obligation if covered by PN, Loan agreements, etc.

Treated as equity if representing ownership in company. Normally covered by shares of stocks.

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Financial Liabilities vs Equity InstrumentsInstrment Classification

For Accounting

TreatmentFor Tax

Payout

Common Shares Equity Equity Dividends

Redeemable preferredshares with 50% fixed dividend each year subject to availability of distributable profits

Liability EquityAccounting:

InterestTax : Dividends

Convertible bond which converts into fixed number of shares

Liabitlity for bond and equity for option

Liability Accounting : Interest and Dividend

Tax : InterestConvertible bond which converts into shares t the value of the liability

LiabilityLiability until converted to shares

Interest

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PAS 32: Financial Instruments Presentation and Disclosures

Financial Liabilities vs. Equity Instruments

Example:

Company A issued on May 5, 2005 preferred shares with 10%dividend per year and are redeemable in May 2010.

Accounting: The preferred shares are to be presented in theB/S of Company A as liabilities because they representcontractual obligations of the company to deliver cash at afixed maturity date.

Tax : The preferred shares are treated as equity. Payout isdividend not interest.

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Tax Treatment: Interest vs.Dividend

Interest DividendDeductibility Deductible Non-deductibleWithholdingTax

Interest paid to foreign creditor is subject to 20% FT or tax treaty rate, if applicable

- 0% if intercorporate

- 32% if NRFC unless Treaty rate

- 15% if Resident if tax-sparing provision applies

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Matching Income and Expenses

VS.

Contractual Rights and Obligations

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PAS 18 : Revenue Recognition

Fair Value of consideratio received or receivable

If cosideration is receivable inthe future, use present value andrecognize interest income asdiscount unwinds

0% Finance Buy now PAY LATER

$X= (1+r)t

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PAS 18: Revenue RecognitionExample : Seller Side

Product was invoiced for P100, payable after 18 months. If cash payment, price will be P90.

Accounts Receivable 100Sales 90Deferred Interest Income 10

Cash 100Deferred Interest Income 10

Accounts Receivable 100Interest Income 10

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PAS 18: Revenue Recognition

Accounting TaxWhen inventories are soldwith deferred settlementterms, the differencebetween the sales price fornormal credit terms and theamount received is recognizedas interest income over theperiod of financing.

Taxpayer should report assales the full invoice amount,both for income and VATpurposes.

Implicit interest income ontransaction is not taxable.

For tracking purposes, adifferent account may be usedto record this type f interest.

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PAS 16: Property, Plant and Equipment (PPE)

PPE are initially measured at cost.

Components of the cost of PPE: Purchase price, including import duties Directly attributable goods Initial estimate of the costs of dismatling and

removing the item and restoring the site

Exludes interest and financing cost to acquire property, except for qualifying assets.

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PAS 16: Property, Plant and Equipment (PPE)

Accounting TaxCost shall include initial estimate of

cost of dismantlement or removal or

cost of restoration incurred to install an item

Not qualified as part of the cost of PPE.This difference affects:- Depreciation- Book value of PPE when

disposed Such costs are deductible

only when actually incurred (upon dismatling restoration)

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PAS 16: Property, Plant and Equipment (PPE)

Accounting TaxCost shall include initial estimate of

cost of dismantlement or removal or

cost of restoration incurred to install an item

Withholding tax based n actual acquisition of PPE.

VAT purchase should be reported at acquisition cost.

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Example: Accounting for Estimated Dismantling and Restoration Costs

FS Tax

Acquisition Cost:Purchase priceInstallation costPV Est. dismantling cost

P 1,500,000100,000250,000

P 1,500,000 100,000

-Total Acquisition Cost P 1,850,000 P 1,600,000Annual Depreciation P 370,000 P 320,000

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PAS 17: LeasesOperating Lease : Lessor

Accounting Policy Tax Treatment / Issues

Lease income fromoperating leases shall berecognized as income on astraight-line basis overthe lease term, even ifthe receipts are not onsuch a basis.

Income to be reportedshall be the amount to bereceived by the Lessorbased on the provisions ofthe agreement. Hence,the income to be reportedby the lessor is just therent actually earned.

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Operating Lease with unequal rental paymentsAnnual rental:Y1 - P1,000; Lease term = 4 yearsY2 - P1,100; Total rent for 4 years = P4,600 Y3 - P1,200; Average annual rent = P1,500 Y4 - P1,300;

Accounting entry upon receipt / payment of rent: Years 1 and 2Lessors Books Lessees Books

Year 1

Dr. Cash P1,000 Dr. Rent Expense P1,150

Dr. Receivable 150 Cr. Payable 150

Cr. Rent Income 1,150 Cr. Cash P1,000

Year 2

Dr. Cash P1,000 Dr. Rent Expense P1,150

Dr. Receivable 150 Cr. Payable 150

Cr. Rent Income 1,150 Cr. Cash P1,000

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Standards vs. Laws

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PAS 8: Changes in Accounting Policy

Accounting TaxAccounting error should be adjusted retrospectively

Tax return in affected yearshould be amended to reporttrue income or expense.

However, this can only be donewithin three years from thedate of filing of such returnand provided no notice for auditor investigation has beenserved to the taxpayer.

- Sec. 6, NIRC, as amended

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PAS 16: Property, Plant andEquipment

Interest and financing charges relating toacquisition of property are treated as periodexpense, unless said interest are opted to becapitalized for being related to acquisition ofqualifying assets.

Qualifying asset - pertain to a property thatnecessarily takes a substantial period of time toget ready for its intended use or sale.

Manufacturing plant Power generation facilities Buildings Warehouse

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PAS 16 : Property, Plant andEquipment

Accounting TaxInterest and financing charges relating to acquisition of property

Non-qualifying treated as an expense

Qualifying option to either recognize as period expense or to capitalize as part of the cost of the asset.

If incurred in connection with theacquisition of property used inbusiness, taxpayer is given theoption to either:

Treat interest as part ofthe cost of the property(and thereof be part of thedepreciable base) or

Claim interest as deductionin the year incurred.

- Sec. 34(B)(1), NIRC, as amended

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PAS 36 : Impairment of Assets

Accounting TaxImpairment loss

Charged to profit and loss.

Gain or loss is recognized onlywhen the asset is sold ordisposed.

- Sec. 96, Rev. Regs. 2

Non-deductible losses. Gainsfrom reversal of impairmentloss are not taxable.

- BIR Ruling DA-403-03Nov. 10, 2003

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PAS 38 : Intangible Assets

Accounting TaxExpenditure on research

- Recognized as an expense when it is incurred.

Development expenditures

Option to

- Expense in the year incurred, or

- Capitalize as an intangible asset.

Option to

Deduct in the year incurred or

Deferred expenses and claim asdeduction ratably distributedover a period of not less than 60months, beginning with themonth in which the taxpayerfirst realizes benefits from suchexpenditures.

- Sec. 34(l), NIRC, as amended

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Example Impact of Impairmenton Depreciation

Calculation of the Impairment loss at the end of 2005

Carrying amount before impairment loss P 150,000

Impairment loss (P 28,872)

Recoverable amount P 121,128========

Depreciation each year (straight line basis) P 12,113

Deductible depreciation P 15,000

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Reconciling Tax and Book Income

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Reconciling Items to be shown in ITR Non-deductible loss on write-down of inventory to net

realizable value (PAS 2)

Non-deductible / non-taxable implicit interestexpense / income recognized on purchase of inventoryof deferred installment term (PAS 2)

Non-taxable / non-deductible gains / losses arisingfrom the recognition of biological assets / agriculturalproduce at FV less point-of-sale costs (PAS 41)

Difference between the gains / loss on disposal ofbiological assets / agricultural produce computed usingstated at FV less point-of-sale costs vs. unadjustedcosts (PAS 41)

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Reconciling Items -- Additional Non-deductible depreciation on dismantlement, restoration

costs and / or revaluation increment (PAS 16)

Non-deductible impairment losses (PAS 16,38,17,36,40,PFRS 5)

Non-deductible depreciation on dismantlement, restorationcosts and / or revaluation increment (PAS 16)

Non-deductible impairment losses (PAS 16,38,17,376,40,PFRS 5)

Non-taxable gain on reversal of impairment loss (PAS 16,38, 17,36,40, PFRS 5)

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Reconciling Items -- Additional Additional depreciation on proceeds from samples

deducted form the cost of equipment (PAS 16)

Difference between the gain / loss on disposal of propertycomputed using the carrying value vs. BV based on cost(PAS 16,17,36,40, PFRS 5)

Non-deductible loss on assets de-recognized (PAS16,36,40, PFRS 5)

Amortization of research costs capitalized for taxpurposes (PAS 38)

Loss on write-off of research costs (PAS 38)

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Reconciling Items -- Additional Difference between the lease expense per contract and

per expense recorded (PAS 17)

Difference in depreciation expense per accounting and pertax on capitalized leased assets (PAS 17)

Gain / loss on assets sold through sale-leasebackagreement (PAS 17)

Amortization of gain / loss on assets sold through sale-leaseback agreement (PAS 17)

Non-taxable / non-deductible revaluation gain / loss (PAS38,32)

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Reconciling Items -- Additional Non-deductible / non-taxable implicit interest expenses / income

recognized on financial instruments (PAS 32)

Interest expense financial instrument recorded as dividends(PAS 32)

Non-deductible / non-taxable interest expense / incomepertaining to dividends declared / received (PAS 32)

Non-taxable / non-deductible gains / losses on measurement ofderivatives / hedging (PAS 32)

Non-deductible accrual of employee benefits (PAS 19, PFRS 2)

Employee benefits paid in the current taxable year but accruedin previous year/s (PAS 19, PFRS 2)

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Challenge for business entities Are their accounting personnel familiar with the

differences with tax and accounting rules to be able tomake valuable suggestions to management?

Did their employees who are responsible for thepreparation of income tax return undergo training on theimpact of the new accounting standards on tax reporting?

Has the entity reviewed its information system todetermine if it effectively captures the relevant tax andaccounting differences to ensure availability of correctinformation when required?

Does the entity maintain records to support thesedifferences and which are retained and will be readilyavailable in case of a BIR tax audit?

THANK YOU and

Have a Blessed Day!

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