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' ANNEX “A” - Illustrative Example on Tax Treatment of Lease Accounting by Lessee

ILLUSTRATION

ABC Company entered into a lease agreement with JBL Company on January 1, 2019 for a 5-
year lease of real property, with annual rental payment of P l 00,000.00 (excluding VAT and
EWT). For income tax purposes, the lease shall not be classified as a finance lease since there
is no substantial transfer of all the risks and rewards incident to ownership of an asset.

1. Assuming a discount rate of 3% in computing for the present value of the lease liability,
the following illustrates the computation of the lease liability and its related amortization
based on PFRS 16:

Periodic Lease PV Factor @ PV of Lease

Period
Payments 3% Payments
2019 100,000.00 0.97087 97,087.38
2020 100,000.00 0.94260 94,259.59
2021 100,000.00 0.91514 91,514.17
2022 100,000.00 0.88849 88,848.70
2023 100,000.00 0.86261 86,260.88
Total 500,000.00 457,970.72

Journal Entry:

Account Title DR CR
ROUA 457,970.72
Lease Liability° 457,970.72
T o record R O U A and Lease Liability

2. The lease liability is then amortized over the lease period at the rate of 3%. Interest expense
is then recognized based on the outstanding amount of Lease Liability. At the end of the
lease term, the outstanding balance of the Finance Lease Liability should be zero or nil.
Financial depreciation is then recognized based on the useful life of the leased asset.

Payments
Lease Liability, Lease Payments, Lease Liability,
Period Interest related to
Beginning Balance exclusive of VAT Ending Balance
Principal
[A] [B] [C = Ax3%] [D = B - C] [E = A - D ]
P
2019 P 457,970.72 P 100,000.00 P 13,739.12 P 86,260.88
371,709.84
2020 371,709.84 100,000.00 11,151.30 88,848.70 282,861.14
2021 282,861.14 100,000.00 8,485.83 91,514.17 191,346.97
2022 191,346.97 100,000.00 5,740.41 94,259.59 97,087.38
2023 97,087.38 100,000.00 2,912.62 97,087.38 -
Total P 500,000.00 P 42,029.28 P 457,970.72

BUT

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? ‘ A N N E X “ A ” - Illustrative Example o n T a x Treatment o f Lease Accounting b y Lessee

Journal Entries:

J
2019

Account Title DR CR
Lease Liability 86,260.88
Input V A T 12,000.00 ■
Interest Expense 13,739.12
Expanded Withholding Tax - Liab (ROUA)* 5,000.00
Cash 107,000.00
*P100,000.00 (actual lease payment) x 5 %
I
To record pityinent o f Lease Liability and
recognition o f Interest Expense for 2019

Depreciation - R O U A 91,594.14
Accum. Dep'n - R O U A 91,594.14
To record depreciation of ROUA for 2019

•
2020
* «•

Lease Liability 88,848.70

Input V A T 12,000.00
Interest Expense 11,151.30
Expanded Withholding T a x - Liab (ROUA)* 5,000.00
Cash 107,000.00
*P100,000.00 (actual leasepayment) x 5 %
T o record payment o f Lease Liability and
recognition o f Interest Expense for 2020

Depreciation - R O U A 91,594.14
Accum. Dep'n - R O U A 91,594.14
T o record depreciation o f R O U A for 2020

2021

Lease Liability 91,514.17

Input V A T 12,000.00
Interest Expense o n Lease Liability 8,485.83
Expanded Withholding Tax - Liab (ROUA)* 5,000.00
Cash 107,000.00
To record payment of Lease Liability and
recognition of Interest Expense for 2021

Depreciation - R O U A -■ 91,594.14
Accum. Dep'n - R O U A 91,594.14
To record depredation o f ROUA for 2021

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 ANNEX “A” - Illustrative Example on Tax Treatment of Lease Accounting by Lessee

2022

Lease Liability 94,259.59

Input VAT 12,000.00
Interest Expense o n Lease Liability 5,740.41
Expanded Withholding Tax- Liab (ROUA)* 5,000.00
Cash 107,000.00
To record payment o f Lease Liability and
recognition o f Interest Expense for 2022

Depreciation - ROUA5 91,594.14

Accum. Dep'n - ROUA 91,594.14
To record depreciation of ROUA for 2022

2023

Lease Liability 91,W13Z

Input VAT 12,000.00
Interest Expense o n Lease Liability 2,912.62
Expanded Withholding Tax- Liab (ROUA)* 5,000.00
Cash 107,000.00
T o record payment o f Lease Liability and
recognition o f Interest Expense for 2023

Depreciation - ROUA 91,594.14

Accum. Dep'n - ROUA 91,594.14
To record depreciation of ROUA for 2023

3. However, for income tax purposes, only the actual periodic lease payments shall be
considered as deductible expenses. In summary, the difference between the sum o f interest
expense on lease liabilities and the depreciation pertaining to the ROUA and the annual
lease payments shall form part of the year-end reconciling items in computing ABC
Company’s annual taxable income.

Deductible Difference
Non-deductible Expenses
Expense (Year-end
Period
Depreciation Total of Financial Annual Lease reconciling
Interest Expense
(ROUA/ 5 years) Expenses Payments item)
2019 P 13,739.12 P 91,594.14 P 105,333.27 P 100,000.00 P 5,333.27
2020 11,151.30 91,594.14 102,745.44 100,000.00 2,745.44
2021 8,485.83 91,594.14 100,079.98 100,000.00 79.98
2022 5,740.41 91,594.14 97,334.55 100,000.00 (2,665.45)
2023 2,912.62 91,594.14 94,506.77 100,000.00 (5,493.23)
Total P 42,029.28 P 457,970.72 P 500,000.00 P 500,000.00 _P _____________-_
1
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