Accounting Period

• Accounting period is the length of time

over which income is measured and
reported.
• Types: (1) Regular accounting period and
(2) Short accounting period.
o Regular accounting Period – 12
months in length; can either be (a)
Calendar year or (b) Fiscal year
o Short accounting period – less than 12
months
 Calendar Year
• Starts from January 1 and ends on December 31.
• Available for both corporate taxpayers and individual taxpayers
• Under the Tax Code, the calendar year shall be used when the:

2. Taxpayer
1. Taxpayer’s
annual has no
3. Taxpayer
accounting annual
does not
period is other accounting 4. Taxpayer is
keep
than a fiscal period (less an individual.
year (longer accounting
than 12
than 12 months books.
months in
in length)
length)
 Fiscal Year
● Any 12—month period that ends on any day other than
December 31.
● The fiscal accounting period is available only to
corporate income taxpayers and is not allowed to
individual income taxpayers.
 Deadline of Filing the ITR
● Under the Tax Code, the return is due for filing on the
15th day of the 4th month following the close of the
taxable year of the taxpayer.
● Illustrations:
○ If taxpayer is following the calendar year (ends on December
31, 2020), the taxpayer must file his/her/its income tax
return on or before April 15, 2021.
○ If taxpayer is following the fiscal year (ends on June 30,
2020), the taxpayer must file his/her/its income tax return on
or before October 15, 2021.
 Instances of Short Accounting Period
1. Newly commenced business
● The accounting period covers the date of the start of the
business until the designated year-end of the business.
● Example: Fresh Corporation started its business operation
on June 30, 2020 and opted to use the calendar year
accounting period. Because of this, Fresh should file its first
income tax return covering June 30, 2020 to December 31,
2020. As a result, A Corporation must file its return on or
before April 15, 2021.
 Instances of Short Accounting Period
2. Dissolution of business
● The accounting period covers the start of the current year to the date of
dissolution of the business.
● Example: Nalugi Corporation is following the fiscal year accounting period
ending every March 31. However, due to financial difficulties, it ceased
business operation on August 15, 2020. Because of this, Nalugi should file
its income tax return covering April 1, 2020 to August 15, 2020.
NOTE:
o The income tax return on this case shall be filed on or before
September 15, 2020 or 30 days after the cessation of activities.
o However, for individuals, the income tax return shall be due on or
before April 15, 2020 since there is not requirement for early filing
under the Tax Code.
 Instances of Short Accounting Period
3. Change of accounting period by corporate taxpayers

● Accounting period covers the start of the previous accounting period up to the
designated year-end of the new accounting period (BIR approval is required in
changing an accounting period)

● Examples:
○ Effective February 2020, Nagpalit Corporation changed its calendar accounting
period to a fiscal year ending every June 30.
■ As a result of this change, Nagpalit should file an adjustment return
covering its income from January 1, 2020 to June 30, 2020 on or before
October 15, 2020 (i.e. 4 months after the end of the period)
○ Effective August 2020, Gaya Gaya Corporation changed its fiscal year
accounting period ending every June 30 to the calendar year.
■ As a result of this change, Gaya Gaya should file an adjustment return
covering its income from July 1, 2020 to December 31, 2020 on or before
April 15, 2020 (i.e. 4 months after the end of the period)
 Instances of Short Accounting Period
4. Death of the taxpayer
● The accounting period covers the start of the calendar year until the death
of the taxpayer.
● Example:
Mr. Rip died on November 2, 2020. His heirs or estate administrator
shall file Mr. Rip’s last income tax return covering his income from January 1,
2020 to November 2, 2020.
NOTES:
o There is no requirement for early filing in case of death of
taxpayers. Hence, the return shall be filed on or before April 15,
2021.
o The cut-off of income must be made at the time of death of the
decedent (in this case November 2) because properties accruing
before death are part of the estate of Mr. Rip subject to estate tax.
 Instances of Short Accounting Period
5. Termination of the accounting period of the taxpayer by the CIR
● The accounting period covers the start of the current year
until the date of the termination of the accounting period.
● Example:
The CIR terminated Tapos Na Tayo Corporation’s
accounting period on August 2, 2020. Tapos Na Tayo follows
the calendar year.
As such, Tapos Na Tayo must file its income tax return
covering January 1, 2020 to August 2, 2020. The income tax
return and the tax shall be due and payable immediately in
accordance with the Tax Code.
 Instances of Short Accounting Period
5. Termination of the accounting period of the taxpayer by the CIR
● Accordingly, Section 6 (D) of the Tax Code, as amended,
provides the following grounds when the CIR may terminate
the accounting period of the taxpayer:
1. When it shall come to the knowledge of the CIR that a taxpayer is
retiring from business subject to tax;
2. The taxpayer is intending to leave the Philippines or to remove
his/her property therefrom or to hide or conceal his/her property;
3. The taxpayer is performing any act tending to obstruct the
proceedings for the collection of the tax for the past or current
quarter or year or to render the same totally or partly ineffective,
unless such proceedings are begun immediately.
 Accounting Methods
I. General III.
II. Installment
Methods Percentage
and Deferred
(Cash Basis of
Payment
or Accrual Completion
Method
Basis) Method

IV. Outright
and Spread- V. Crop Year
Out Method Basis
 General Methods

Accrual Basis Cash Basis

● Income is recognized when ● Income is recognized when
earned, regardless of when received, regardless of when
received. earned.
● Expense is recognized when ● Expense is recognized when paid,
incurred, regardless of when paid. regardless of when incurred.
● Income is said to have accrued
when the right to receive is
established or when an enforceable
right to secure payment is created
against another party.
Cash Basis and Accrual Basis
The financial accounting concept of accrual basis and cash basis are similar to their tax
counterparts, except only for the following tax rules:

Advanced Advanced income is taxable upon receipt pursuant to the lifeblood doctrine and ability to pay
theory. The subsequent taxation of advanced income in the period earned will expose the
Income government to risk of non-collection. Applicable to sale of services, but not on sale of goods.

Prepaid Prepaid expenses are NOT DEDUCTIBLE against gross income in the year paid. They are
deducted against gross income in the future period they expire or are used in the
Expense business, trade or profession of the taxpayer.

There are cases where the law itself provides for a specific accounting treatment or
Special Tax expense. The specified method must be observed even if it departs from the basis
Accounting regularly used by the taxpayer keeping his/her/its books.
 TAX ACCRUAL BASIS TAX CASH BASIS

Gross Income Gross Income

Cash Income P XXXX Cash Income P XXXX

Add: Accrued Income XXXX Add: Advanced Income XXXX

Add: Advanced Income XXXX

Gross Income P XXXX Gross Income P XXXX

Deductions Deductions

Cash Expenses P XXXX Cash Expenses P XXXX

Add: Accrued Expenses XXXX

Add: Amortization of Prepayments/
XXXX
Depreciation of Capital Expenditures
Add: Amortization of Prepayments/
XXXX
Depreciation of Capital Expenditures

Deductions P XXXX Deductions P XXXX

 Illustration: Cash Basis and Accrual Basis
Mr. Boo Wis requested for the computation of his net income both under the accrual basis and
cash basis for taxable years 2020 and 2021:
2020 2021

Collections from services rendered 500,000 800,000

Accrued Income from services rendered 500,000 400,000

Collection from accrued income of 2020 - 470,000

Collection for services not yet rendered 300,000 200,000

Payment of expenses of current period 400,000 600,000

Accrued expenses 100,000 150,000

Payment of accrued expenses of 2020 - 100,000

Payment for expenses of the following year 200,000 300,000

 NOTES:
Answer: Accrual Basis ● In the accrual basis of
2020 2021 accounting, income is
recognized when earned
even if not yet received.
Cash Income P 500,000 P 800,000 Following this, advanced
income is not included in
Accrued Income 500,000 400,000 net income. However, for
purposes of taxation,
Collection for future services (Advances) 300,000 200,000 advanced income is
taxable. Hence, it must
Total Gross Income P 1,300,000 P 1,400,000 be added to accrual
basis of gross income.
Less: Deductions ● Similarly, under the
accrual basis of
Cash Expenses P 400,000 P 600,000 accounting, expense is
recognized when
Accrued Expense 100,000 150,000 accrued even if not yet
paid. Following this,
prepaid expenses are not
Amortization of 2020 prepaid expense - 200,000 deducted. No
adjustments for
Total Deductions P 500,000 P 950,000 prepayments is
necessary under accrual
NET INCOME P 800,000 P 450,000 basis.
 Answer: Cash Basis NOTES:
● In the cash basis of
2020 2021 accounting, income is
recognized when
received even if not yet
Collections from services rendered P 500,000 P 1,270,000
rendered. Following this,
advanced income is
Collection for future services (Advances) 300,000 200,000 included in net income.
No adjustment for
Total Gross Income P 800,000 P 1,470,000 advances is necessary
under cash basis.
Less: Deductions ● Similarly, under the cash
basis of accounting,
Payment for Expenses P 400,000 P 700,000
expense is recognized
when paid, including
Amortization of 2020 prepaid expense - 200,000 prepaid expenses, even if
not yet incurred.
Total Deductions P 400,000 P 900,000 Following this, deducted
prepaid expenses that
NET INCOME P 400,000 P 570,000 were previously paid, if
any, must be reversed for
purposes of taxation.
Seller of Goods
Gross Income NOTES:
Sales P XXXX ● The expensing of the purchases does
Less: Cost of Goods Sold XXXX not properly and fairly reflect the
Gross Income P XXXX income of the taxpayer, particularly
when there are significant
Cost of Goods Sold
fluctuations in inventory levels
Beginning Inventory P XXXX between accounting periods.
Add: Purchases XXXX ● This possibly exposes the taxpayer to
risk of BIR assessment. The use of
Total Goods Available for Sale P XXXX
the accrual method is suggested but
Less: Ending Inventory XXXX of course subject to practical and
Cost of Goods Sold P XXXX
cost considerations.
 Hybrid Basis

The gross income

Hybrid basis is any determined by cash basis
Example: Ms. Mayaman
combination of accrual in the service business
has two sole
basis, cash basis and/or and the gross income as
proprietorship
other methods of determined by the accrual
businesses: a service
basis in the trading
accounting. This is used business that uses cash
business are simply
when the taxpayer has method of accounting and
combined; there is no
several businesses, a trading business that
requirement to measure
which employ different uses accrual method of
the gross income under a
accounting methods. accounting.
single accounting
method.
 IIA. Installment Method
4. Casual sale of non-dealers in
property, real or personal,
when: (i) their selling price
exceeds P1,000; and (ii) their
initial payment DOES NOT
EXCEED 25% of the selling
price.

1. Dealers of personal properties

on the sale of properties they
2. Dealers of real properties if their
regularly sell.
initial payment DOES NOT EXCEED
25% of the selling price.

Gross income is
recognized and reported in
proportion to the collection
from the installment sales.
This is available in three
circumstances.
 IIA. Installment Method (Terms)

Initial payment made by the buyer when he/she/ purchases something, which is
Down payment bought on credit.

Total payments by the BUYER, whether in cash or property, DURING THE

Initial Payment TAXABLE YEAR when the sale was made. This is broader than down payment as
initial payment includes the installment payments in the year of sale.

Refers to the ENTIRE AMOUNT for which the buyer is obligated to the seller. It is the
sum of: (1) cash received/receivable by the seller; (2) FMV of property
Selling Price received/receivable by the seller; and (3) mortgage or any indebtedness assumed by the
buyer.

Refers to the amount receivable in cash or other property from the BUYER. It is usually
the selling price in the absence of an agreement. But if the BUYER assumes the
Contract Price mortgage or any indebtedness from the property sold, the amount of said
mortgage/indebtedness must be deducted from the selling price to get the contract
price.
IIA. Installment Method (Comprehensive Illustration)
PROBLEM 1: Hulugan Corporation, a
car dealer, sold a machine with a tax
basis of P1,200,000 on installment on
January 3, 2020. Hulugan received a
P200,000 cash down payment and a
P1,800,000 promissory note for the
balance, which is payable in six
installments of P300,000 every July 3
and January 3 thereafter.
PROBLEM 1: Hulugan Corporation, a car dealer, sold a machine with a tax basis of P1,200,000 on installment on
January 3, 2020. Hulugan received a P200,000 cash down payment and a P1,800,000 promissory note for the
balance, which is payable in six installments of P300,000 every July 3 and January 3 thereafter.

If Hulugan used the accrual basis, its gross profit from this transaction is computed as follows:

Cash Down payment P 200,000

Add: Notes Receivable 1,800,000

Selling Price P 2,000,000

Less: Cost of Machinery/Tax basis
1,200,000
of machine sold
Gross Profit P 800,000

Under the accrual basis, the entire P800,000 gross profit from this transaction shall be reported by Hulugan as part
of its gross income for taxable year 2020.
PROBLEM 1: Hulugan Corporation, a car dealer, sold a machine with a tax basis of P1,200,000 on installment on
January 3, 2020. Hulugan received a P200,000 cash down payment and a P1,800,000 promissory note for the
balance, which is payable in six installments of P300,000 every July 3 and January 3 thereafter.

If Hulugan wants to use the installment basis, the ratio of initial payment to the selling price must be determined
first since Hulugan is a car dealer and it sold a machine in this case. The ratio of initial payment to the selling price
is computed as follows:

Cash Down payment (January 3, 2020) P 200,000

First Installment (July 3, 2020) 300,000

Initial Payment P 500,000

Divided by: Selling Price 2,000,000

Ratio of Initial Payment 25%

NOTES:
1. Considering that the ratio of initial payment is not more than 25%, Hulugan may use the installment method.
2. Moreover, considering that there is no mortgage or indebtedness assumed by the buyer, the selling price is
considered as the contract price.
PROBLEM 1: Hulugan Corporation, a car dealer, sold a machine with a tax basis of P1,200,000 on installment on
January 3, 2020. Hulugan received a P200,000 cash down payment and a P1,800,000 promissory note for the
balance, which is payable in six installments of P300,000 every July 3 and January 3 thereafter.

The gross profit of Hulugan for shall be computed as follows:

Gross Profit at the Date of Sale

P 80,000
(P200K/P2M x P800,000)
Gross Profit Upon every installment
P 120,000
(P300K/P2M x P800,000)

NOTES:
1. If it was asked ”how much gross profit shall be recognized for taxable year 2020, the answer should be
P200,000, which is the total amount of: (a) P80,000 gross profit at the date of sale; and (b) P120,000 gross
profit on the July 3, 2020, the first installment.
2. If it was asked “how much gross profit shall be recognized for taxable year 2021, the answer should be
P240,000, which is the total amount of: (a) P120,000 gross profit on the January 1, 2021 installment; and (b)
P120,000 gross profit on the July 3, 2021 installment.
IIA. Installment Method (Comprehensive Illustration)
PROBLEM 2: On January 3, 2020,
Parent, Inc., a real property dealer, sold
a lot costing P1,400,000 for P2,000,000.
The lot was subject to a P1,000,000
mortgage, which was assumed by the
buyer. The buyer paid P200,000 down
payment. The balance is payable over
four installments of P200,000 every July
3 and January 3 thereafter.
PROBLEM 2: On January 3, 2020, Parent, Inc., a real property dealer, sold a lot costing P1,400,000 for P2,000,000.
The lot was subject to a P1,000,000 mortgage, which was assumed by the buyer. The buyer paid P200,000 down
payment. The balance is payable over four installments of P200,000 every July 3 and January 3 thereafter.

If Parent, Inc. used the accrual basis, its gross profit from this transaction is computed as follows:

Selling Price P 2,000,000

Less: Cost of lot/Tax basis of
1,400,000
machine sold
Gross Profit P 600,000

Under the accrual basis, the entire P600,000 gross profit from this transaction shall be reported by Parent, Inc. as
part of its gross income for taxable year 2020.
PROBLEM 2: On January 3, 2020, Parent, Inc., a real property dealer, sold a lot costing P1,400,000 for P2,000,000. The lot
was subject to a P1,000,000 mortgage, which was assumed by the buyer. The buyer paid P200,000 down payment. The
balance is payable over four installments of P200,000 every July 3 and January 3 thereafter.

If Parent, Inc. wants to use the installment basis, the ratio of initial payment to the selling price must be determined
first since dealers of real properties are subject to the 25% limitation. The ratio of initial payment to the selling price
is computed as follows:

Cash Down payment (January 3, 2020) P 200,000

First Installment (July 3, 2020) 200,000

Initial Payment P 400,000

Divided by: Selling Price 2,000,000

Ratio of Initial Payment 20%

NOTES:
1. Considering that the ratio of initial payment is not more than 25%, Parent, Inc. may use the installment method.
2. Now, a mortgage is assumed by the buyer. This must be considered in computing for the contract price. Recall
that contract price is selling price less the amount of mortgage assumed. Hence, the contract price is
P1,000,000.
3. Alternatively, the contract price can be computed by the sum of the down payment (P200,000) and the total
receivable from the buyer (P200,000 in four installments), which is also equal to P1,000,000.
PROBLEM 2: On January 3, 2020, Parent, Inc., a real property dealer, sold a lot costing P1,400,000 for P2,000,000.
The lot was subject to a P1,000,000 mortgage, which was assumed by the buyer. The buyer paid P200,000 down
payment. The balance is payable over four installments of P200,000 every July 3 and January 3 thereafter.

The gross profit of Hulugan for shall be computed as follows:

Gross Profit at the Date of Sale

P 120,000
(P200K/P1M x P600,000)
Gross Profit Upon every installment
P 120,000
(P200K/P1M x P600,000)

NOTES:
1. There will be a change in the denominator of the fraction used in determining the gross profit to be recognized.
In the previous example, P2M was used as denominator considering that the selling price is equal to the
contract price (see slide 34). Hence, it can be said that the denominator to be used must be the contract price.
2. If it was asked ”how much gross profit shall be recognized for taxable year 2020, the answer should be
P240,000, which is the total amount of: (a) P120,000 gross profit at the date of sale; and (b) P120,000 gross
profit on the July 3, 2020, the first installment.
3. If it was asked “how much gross profit shall be recognized for taxable year 2021, the answer should be
P240,000, which is the total amount of: (a) P120,000 gross profit on the January 3, 2021 installment; and (b)
P120,000 gross profit on the July 3, 2021 installment.
IIA. Installment Method (Comprehensive Illustration)
PROBLEM 3: On July 1, 2020, Palugi
Corporation made a casual sale of its
property with a tax basis of P1,300,000
for P2,000,000. The property was
subject to a P1,500,000 mortgage,
which is to be assumed by the buyer.
The buyer paid P100,000 down
payment, with the balance due in two
installments of P200,000 on December
31, 2020 and January 1, 2021.
PROBLEM 3: On July 1, 2020, Palugi Corporation made a casual sale of its property with a tax basis of P1,300,000
for P2,000,000. The property was subject to a P1,500,000 mortgage, which is to be assumed by the buyer. The
buyer paid P100,000 down payment, with the balance due in two installments of P200,000 on December 31, 2020
and January 1, 2021.

Analyzing the problem:

1. Here, the indebtedness assumed by the buyer (P1,500,000) is more than the tax
basis or cost of the property sold (P1,300,000).
2. The excess amount (P200,000) is to be considered as an indirect receipt to be
realized by the seller. It is an indirect down payment, which must be added as
part of the contract price and the initial payment.
3. Under this type of transaction, all collection from the contract, including the
excess mortgage, is a collection of income.
PROBLEM 3: On July 1, 2020, Palugi Corporation made a casual sale of its property with a tax basis of P1,300,000
for P2,000,000. The property was subject to a P1,500,000 mortgage, which is to be assumed by the buyer. The
buyer paid P100,000 down payment, with the balance due in two installments of P200,000 on December 31, 2020
and January 1, 2021.

If Palugi Corporation used the accrual basis, its gross profit from this transaction is computed as follows:

Selling Price P 2,000,000

Less: Cost of lot/Tax basis of
1,300,000
machine sold
Gross Profit P 700,000

Under the accrual basis, the entire P700,000 gross profit from this transaction shall be reported by Palugi
Corporation as part of its gross income for taxable year 2020.
PROBLEM 3: On July 1, 2020, Palugi Corporation made a casual sale of its property with a tax basis of P1,300,000
for P2,000,000. The property was subject to a P1,500,000 mortgage, which is to be assumed by the buyer. The
buyer paid P100,000 down payment, with the balance due in two installments of P200,000 on December 31, 2020
and January 1, 2021.

If Palugi Corporation wants to use the installment basis, the ratio of initial payment to the selling price must be
determined first. The ratio of initial payment to the selling price is computed as follows:

Down payment P 100,000

Add: Cash received in the year of sale
200,000
(December 31, 2020 installment)
Add: Excess of mortgage over cost of the
200,000
asset/tax basis
Initial Payment P 500,000

Divided by: Selling Price 2,000,000

Ratio of initial payment 25%

NOTES:
1. Considering that the ratio of initial payment is not more than 25%, Palugi Corporation may use the installment method.
2. The P200,000 excess of mortgage over the cost of the asset/tax basis must be added to the cash received during the
taxable year as the excess is considered as an indirect down payment that is part of the initial payment.
PROBLEM 3: On July 1, 2020, Palugi Corporation made a casual sale of its property with a tax basis of P1,300,000
for P2,000,000. The property was subject to a P1,500,000 mortgage, which is to be assumed by the buyer. The
buyer paid P100,000 down payment, with the balance due in two installments of P200,000 on December 31, 2020
and January 1, 2021.

Consequently, the contract price from the transaction is computed as follows:

Selling Price P 2,000,000

Less: Mortgage assumed by the buyer 1,500,000

Cash collectible by the seller P 500,000

Add: Excess of mortgage over cost of the
200,000
asset/tax basis
Contract Price P 700,000

NOTES:
1. Similar to the computation of initial payment, the P200,000 excess of mortgage over the cost of the asset/tax basis must
be added to the cash collectible by the seller to get the contract price.
2. The gross profit on sale (P2,000,000 less P1,300,000; see slide 41) Is similar to the contract price. Hence, any collection
from the contract, including the excess mortgage, shall be recognized as gross income upon collection.
PROBLEM 3: On July 1, 2020, Palugi Corporation made a casual sale of its property with a tax basis of P1,300,000
for P2,000,000. The property was subject to a P1,500,000 mortgage, which is to be assumed by the buyer. The
buyer paid P100,000 down payment, with the balance due in two installments of P200,000 on December 31, 2020
and January 1, 2021.

The gross profit of Palugi for shall be computed as follows:

Gross Profit at the Date of Sale

(P300K/P700K x P700K) or P 300,000
(P100K Down + P200K Excess)
Gross Profit upon receipt of 1st installment
P 200,000
(P200K/P700K x P700K)
Gross Profit upon receipt of 1st installment
P 200,000
(P200K/P700K x P700K)

NOTE:
1. There will be a change in the denominator of the fraction used in determining the gross profit to
be recognized. The denominator to be used must be the contract price.
 IIB. Deferred Payment Method

Variant of the accrual basis and is used in reporting income when a

What? non-interest bearing note is received as consideration in a sale.

How The gross income is computed based on the present value

computed? (discounted value) of a note receivable from the contract.

The discount interest on the note is amortized (i.e. spread) as

Manner? interest income over the installment term.
IIB. Deferred Payment (Comprehensive Illustration)

PROBLEM: On December 31, 2020, Mr. Mabenta

sold an office building costing P1,400,000 for
P2,000,000. The buyer made P1,000,000 down
payment and the balance, evidenced by a note, is
due in 2 annual installments of P500,000 every
December 31 starting December 31, 2021.

Assume that the note is non-interest bearing but can

be discounted at a local bank for P900,000.

Note that the installment method cannot be allowed since the ratio
of initial payment is already 50% (P1M/P2M)
PROBLEM: On December 31, 2020, Mr. Mabenta sold an office building costing P1,400,000 for P2,000,000. The
buyer made P1,000,000 down payment and the balance, evidenced by a note, is due in 2 annual installments of
P500,000 every December 31 starting December 31, 2021. Assume that the note is non-interest bearing but can be
discounted at a local bank for P900,000.

Under the deferred payment method, the reportable gross income for each year shall be:

2020 2021 2022

Cash down payment P 1,000,000

PV of the Note 900,000

Selling Price P 1,900,000

Less: Tax Basis of the Property 1,400,000

Gross Income P 500,000

Interest income (P1,000,000-P900,000) P 50,000 P 50,000

NOTES:
1. The difference between the face value and the present value of the note, known as discount, will not be recognized in gross income
at the date of sale but will be deferred and recognized as interest income.
2. The discount is amortized as interest income upon every collection on the balance of the note as follows: P500,000
installment/P1,000,000 total note balance X P100,000 discount.
3. In the case of interest-bearing notes, the use of the deferred payment method will bear the same result as the accrual basis of
accounting.
 III. Percentage of Completion Method

● Under this method, the estimated gross income from

construction is reported based on the percentage of
completion of the construction project.
● There are several methods of estimating project completion in
practice; but the output method based on engineering survey
is prescribed by the Tax Code.
 III. Percentage of Completion (Illustration)
PROBLEM: In 2020, Semento Construction
Company accepted a P5,000,000 fixed-price
construction contract. Semento provided the
following details of its construction activities:

2020 2021

Construction Expenses P 3,000,000 P 1,200,000

Engineer’s estimate
70% 100%
percentage of completion

Expenses during the year 3,000,000 1,200,000

PROBLEM: In 2020, Semento Construction Company accepted a P5,000,000 fixed-price construction contract.
Semento provided the following details of its construction activities:

2020 2021
Construction Expenses P 3,000,000 P 1,200,000
Engineer’s estimate
70% 100%
percentage of completion

The reportable gross income for 2020 and 2021 using the percentage of completion is computed as follows:
2020 2021
Contract Price P 5,000,000 P 5,000,000

Multiply by: Percentage of Completion 70% 100%

Construction revenue P 3,500,000 P 5,000,000

Less: Construction revenue recognized in the prior year - 3,500,000

Construction revenue for the current year P 3,500,000 P 1,500,000

Less: Expense during the year 3,000,000 1,200,000

Construction gross income P 500,000 P 300,000

IV. Outright Method and Spread-Out Method
• Leasehold improvements are tangible improvements
made by the LESSEE to the property of the lessor.
• These improvements will ultimately benefit the
lessor when their useful life is beyond the lease
term.
• This benefit is referred to as income from leasehold
improvement.
• Under the RR No. 2, the income from leasehold
improvement can be reported using either the (a)
outright method or (b) spread-out method.
 IV. Outright Method and Spread-Out Method
Outright Method Spread-Out Method

The LESSOR may report The LESSOR may spread over

as income the FMV of the life of the lease the
such buildings or estimated depreciated value of
improvements, subject to such buildings or improvements
at the termination of the lease
the lease at the time
and report as income for each
when such buildings or year of the lease an aliquot part
improvements are thereof.
completed.

𝐸𝑥𝑐𝑒𝑠𝑠 𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑣𝑒𝑟 𝑙𝑒𝑎𝑠𝑒 𝑡𝑒𝑟𝑚

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑒𝑎𝑠𝑒ℎ𝑜𝑙𝑑 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 𝑋
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡
IV. Outright and Spread-Out Method (Illustration)
PROBLEM: On January 1, 2020, Lanlord
Cruz leased a vacant lot to Bea under a 20-
year lease contract. Captivated by the beauty
of Bea, Lanlord immediately constructed a
building on the lot at a total cost of
P4,500,000. The building has a useful life of
30 years.
 IV. Outright Method (Solution)
Under Section 49 of Revenue Regulation No.
2, Landlord shall recognize the entire
P4,500,000 fair value of the improvement as
gross income upon completion of the
improvement in 2020.
 IV. Spread-Out Method (Solution)
The depreciated value of the property at the termination of the lease is the value of the years of
usage of the lessor. This can be computed by splitting the value of the improvement as follows:

Years of
Allocation Allocated Cost
Usage
Lessee 20 20/30 x P4,500,000 P 3,000,000

Lessor 10 10/30 x P4,500,000 1,500,000

30 P 4,500,000

The P1,500,000 depreciated value of the improvement at the termination of the lease is an income
from leasehold improvement by the lessor.

Under the spread-out method, Landlord shall spread the P1,500,000 income over 20 period or
recognize an annual income of P75,000 from the leasehold improvement from year 2020 through
year 2039.
 IV. Outright and Spread-Out Method (Comments and Issues)
• Please take note that the rule only exists in a revenue regulation, and not
provided under the Tax Code. As such, there are some taxpayers
questioning the validity of the rule due to lack of legal basis.
• But accounting-wise, it is fair to consider the depreciated value of the
improvement using the Spread-Out Method as income by the lessor as
this value remains to the lessor, and therefore this benefits him/her
(Landlord Cruz in our example).
• On the other hand, the Outright Method is viewed to be unfair and
abusive, considering the entire value of the improvement is recognized as
income of the lessor. However, this method applies best in the following:
o When the lessee (e.g. Bea) pay the lessor (e.g. Landlord) rentals in the form
of leasehold improvement; or
o When the leasehold improvement made by the lessee is treated as reduction
to his/her cash rentals.
 V. Crop Year Basis
• Farming income is commonly measured using the
cash basis or accrual basis. This pertains to
perennial crops, which are those that yield harvests
through the years. However, one-time crops, which are
those harvested once after several years, are
accounted using the crop year basis.
• Under the crop year basis, farming income is
recognized as the difference between the proceeds
of harvest and expenses of the particular crop
harvested. The expenses of each crop are
accumulated and deducted upon the harvest of the
crop.
 V. Crop-Year Basis (Illustration)
PROBLEM: Andres Bukid, a farmer, plants a
certain crop that takes more than a year to
harvest. The following data on Andres’
farming operations show the following:
2019 2020 2021

1st Proceeds of Harvest P - P 750,000 P -

2nd Proceeds of Harvest - 1,000,000

1st Cropping Expenses 400,000 200,000 -

2nd Cropping Expenses - 500,000 300,000

 V. Crop-Year Basis (Solutions)
The reportable farming income using the crop
year method would be computed as follows:
2019 2020 2021

Proceeds of Harvest P - P 750,000 P 1,000,000

Less: Cropping expenses - - -

Incurred the previous year - 400,000 500,000

Incurred the current year - 200,000 300,000

Farming Gross Income P - P 150,000 P 200,000

Use of Different Accounting Methods
● Taxpayers with more than one type
of business using different
accounting methods can
consolidate the income reported
using the different methods.
● There is no need to restate the
income to a common accounting
method.
● However, the methods applied to
each business should be applied
consistently from period to period.
Change in Accounting Methods
● Under the Tax Code, the change in
accounting methods by any
taxpayer and the change in
accounting period by corporate
taxpayers require prior BIR notice.
● Hence, change in accounting
method is allowed provided that
the BIR approves such change.