ACPACI PFRS vs.

Tax Significant Differences*

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Agenda

Introduction Summary of key differences Questions and answer

Introduction

Introduction

About the contents of this material: IFRS keeps on evolving and changes are expected in the future. The contents of this presentation are just some of the more common differences as of December 31, 2006. It is not possible to include all differences for the purpose of this presentation due to time constraints.

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key differences

Key changes

PFRS 3
Goodwill

PFRS provisions
Goodwill required to be reviewed for impairment annually. If impaired, a charge to profit and loss for impairment loss is required Negative goodwill will have to be credited to profit and loss.

Tax Provisions
Impairment of goodwill Not deductible Deduction may be claimed upon disposal of related assets acquired Negative goodwill credited to P&L: Not taxable .

. Negative goodwill

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key Changes

PAS 2
Inventory valuation

PFRS provisions
Inventory needs to be carried at lower of cost of net realizable value (selling price less cost to sell/completion). If the NRV is lower than cost, the difference is charge to impairment loss.

Tax provision
Impairment loss deductible for tax purposes? Provisions to adjust inventories at NRV is not yet deductible (should be realized) The bases of valuation most commonly used by business concerns and which meet the requirements of the Income Tax Law are (Revenue Regulation 2) : (a) cost price or (b) net realizable value, whichever is lower.

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key Changes

PAS 2
Inventory valuation

PFRS provisions

Tax provision
Any goods in an inventory which are unsalable at normal prices or unusable in the normal way, including second hand goods taken in exchange, should be valued at "bona fide" selling prices whether basis (a) or (b) is used, or if such goods consist of raw materials or partly finished goods held for use or consumption, they should be valued upon a reasonable basis, taking into consideration the usability and the condition of the goods, but in no case shall such value be less than the scrap value.

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Key changes

PAS 17 - Leases
Capital leases

PFRS provisions
A lease is capital lease if following indicators exist:
a)

Tax Provisions

b)

c)

d)

e)

Transfer of ownership of assets to the lessee at the end of the lease term Lessee has the option to purchase the asset at a price that is lower than fair value of the asset The lease term is for the major part of the economic life of the asset Present value of minimum lease payments amounts to or substantially equal to the fair value of the asset Leased assets are of such a specialized nature that only lessee can use the asset without modification.

For income tax purposes, such capital lease shall be treated as sale (conditional) Amounts to be received by lessor/vendor will be considered to be payments of sales price to the extent such amounts do not represent interest and other charges (RR 19-86) The gain on sale of asset = total lease payments receivable net of interest component less carrying value Lessee/Vendee shall be allowed to claim depreciation plus interest (if not capitalized) For GRT, gross receipts of banks and non-bank financial intermediaries shall consist of interest income (RR 9-04) For VAT, taxable base shall be the total amount to be paid by the lessee/vendee under the contract (RR 16-05)
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PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

Key changes
PAS 17 - Leases PFRS provisions Tax Provisions UPDATE For tax purposes, BIR classified capital leases as (BIR Ruling 92007): (1) Full payout lease conditional sale (2) FMV lease finance lease
Full payout lease is one where the monthly lease payments (MLPs) during the noncancellable term of the lease are sufficient to pay for the leased equipment; at the end of the lease term, the leased equipment has no more residual value and the customer is given the option to purchase the equipment at nominal consideration of Php500. FMV lease is one where the total MLPs during the non-cancellable term of the lease, which in no case less than 730 days, is not sufficient to pay for the leased equipment; at the end of the term the leased equipment will have a Page 10 residual value and the customer is
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Capital leases

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

Key changes

PAS 17 - Leases
Capital leases

PFRS provisions

Tax Provisions
granted the option to either (1) return the equipment; (2) renew the lease ; or (3) purchase the equipment at its fair market value (normally about 30% of the original cost). Tax implications: Full payout lease (Conditional Sale)

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

MLPs are considered as part of sales price Invoice the total MLPs upfront The MLPs are considered installment payments (reporting of the income depends on the accounting method of the seller, e.i. as installment sales or deferred sales) The total MLPs are subject to VAT upfront Subject to 1% EWT (if the lessee is one of the top 10,000 companies)
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Key changes

PAS 17 - Leases
Capital leases

PFRS provisions

Tax Provisions
FMV lease (Finance lease)

Generally, tax treatment is similar to operating lease MLPs are considered rental to be reported as income periodically MLPs are subject to VAT periodically Subject to 5% EWT

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key changes

PAS 17 - Leases
Operating leases

PFRS provisions
Lease income/expense, including lease incentives such as free rent, will be recognized under the straight-line method over the term of the lease

Tax provisions
For income tax purposes, gross income of lessor shall consist of: Rental actually earned but uncollected and Advance rentals received No rent income to be recognized during rent-free period Allowable deductions to lessee
Rent paid or accrued including all

expenses lessee is required to pay to or for the account of the lessor (such as insurance expenses) Advance payment to be amortized Amount arising from straightlining of lease cost/expense not taxable income/deductible expense
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Key Changes

PAS 12 Income tax

Temporary differences

PFRS provisions
Requires recognition of deferred income tax liability on appraisal increase arising from revaluation of property, plant and equipment.
The requirement to recognize deferred income tax liability is mandatory whether or not the entity intends to dispose the asset

Tax Implications
Depreciation of appraisal increase not deductible

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key changes

IAS 18 Revenue recognition

Changes
Sale of goods and services

Accounting Implications
Revenue recognition should be applied to individual separately identifiable components of a single transaction. For sale of services, revenue recognition should be based on percentage of completion method. Certain deflators (ie display rental paid to retailers) need to be presented as sales deduction rather than advertising and promotions. Currently covered by PIC 20 for local accounting purposes. Recognition of revenue is allowed under the percentage of completion method provided certain conditions are met (note PIC 20 will be superseded by draft IFRIC interpretation 12 which does not allow recognition until risk of rewards over the sold unit is transferred to the buyer)

Tax Implications
If sale is billed thru a single invoice, entire invoice amount (net of VAT) shall be recognized as revenue for income tax & VAT purposes at time of sale. Sale of services to be recognized as revenue for income tax purposes when earned (upon billing or accrual) subject to VAT upon collection of bills. Sale of real properties for installment or deferred payment plan schemes, under RR 16-2005, if collections for the initial year exceed 25% of the selling price, the entire gross profit is taxable. Otherwise, installment method applies.
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Sale of services

Accounting for deflators (display rental, vendor incentives, free goods)

Sale of pre-developed condominium units

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Key changes

PAS 19 Employee benefits

Composition of retirement expense

PFRS provisions
Annual pension cost charge now composed of:
1) 2) 3) 4) 5) 6)

Tax Provisions
Deductible pension costs: Actual contribution for pension liability for current year One-tenth of reasonable amount paid to the trust to cover pension liability for prior years or to place the trust on sound financial basis

Current service cost Interest cost on liabilities Return on plan asset Recognized actuarial gains and losses Past service costs Amortization of transition liability, if any

All other components of pension cost ?

Past service costs

Past service costs need to be amortized over the vesting period (used to be amortized over the average remaining lives of employees) Credit to income for pension asset surplus allowed.
Credit to income for excess pension asset not taxable Deductible for tax purposes as long as the same is already incurred
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Excess pension asset Bonus and incentives

Profit sharing and bonus can be recognized if legal or PICPA: Tax Implications of New Accounting Standards constructive obligation exists
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Key changes

PAS 32/39
Definition of financial instruments

PFRS provisions
Some equity securities (ie fixed redeemable preferred shares) classified as liability instruments. These are presented as liabilities in the balance sheet (classification will depend on maturity date). Dividend payments are treated as interest expense (not dividend) Long term financial assets and liabilities which are noninterest bearing need to be stated at present value by discounting the balance using a rate that is implicit to the agreement/balance Portion of the non-interest bearing assets/liabilities will be treated either as an interest expense or income using the effective interest method

Tax Provisions
Tax follows the legal form of the instrument. If issued as preferred shares, it is treated as preferred shares. Dividends are treated as dividend income and not interest. Interest recognized on redeemable preferred shares not deductible for tax purposes. Accretion income/expense arising from discounting of long term assets and liabilities are not taxable. Note however, interest maybe imputed by BIR on noninterest bearing inter-company advances/loans.

Financial assets and liabilities are carried at fair value

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Key changes

PAS 36 Impairment
Requires long term assets and investments to be tested for impairment. Impairment exist when the carrying value of the asset is less than its recoverable value.

PFRS provisions
Impairment loss requires to be recognized on the following:

Tax Provisions
Impairment loss Not deductible as the general rule is losses must be evidenced by close and completed transaction fixed by identifiable event (e.g,. sale) Possible Exceptions (Income Tax Regulations): 1) Loss sustained when the usefulness of the asset is suddenly terminated due to change in business conditions such that the taxpayer discontinues the business or discards the assets permanently from use in such business (Sec. 98).

Underutilized, unused or obsolete assets Investments in shares/assets Financial assets Intangible assets Other long term assets

Tax impact
Impairment loss deductible for tax purposes? Reversal of impairment losses taxable gain?

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key changes

PAS 36 Impairment of assets Changes

Accounting Implications

Tax Implications
2) If the whole or any portion of a physical property is clearly shown as being affected by economic conditions that will result in the asset being abandoned at a prior date prior to end of its normal useful life, so that depreciation deductions are insufficient to return the cost, a reasonable allowance for obsolescence may be allowed, in addition to depreciation (Sec 110). If a patent becomes obsolete prior to its expiration, the remaining proportionate depreciable amount may be deducted subject to CIR approval (Sec. 111).

3)

Note: Impairment gain/loss shall be treated as temporary difference

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key changes

IAS 37 Provisions, contingent assets and contingent liabilities PAS 37

Accounting Implications

Tax Implications

Provisions and contingencies

Need to record a provision or loss contingency if probable and a reliable estimate can be made.

Mere provisions are not deductible.

PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers

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Key changes

PAS 40 Investment PFRS provisions properties

Classification in the balance sheet

Tax provisions
Gain or loss arising from changes in fair value not taxable/deductible Depreciation charge on appraisal surplus not deductible; basis should be historical cost.

Requires assets that are held for appreciation or for rental be classified as Investment properties. Movement in fair value should be treated either as impairment loss or fair value gain in profit and loss.

Investment properties can either be carried at cost (with annual depreciation charges) or fair value (subject to annual impairment PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers testing)
Treatment of movement in fair value.

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Question and answer

Thank you.

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