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Tax – Significant Differences*
Introduction Summary of key differences Questions and answer
The contents of this presentation are just some of the more common differences as of December 31. 2006. PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co.Introduction Introduction About the contents of this material: IFRS keeps on evolving and changes are expected in the future. It is not possible to include all differences for the purpose of this presentation due to time constraints./PricewaterhouseCoopers Page 4 17 July 2006 .
Key differences Key changes PFRS 3 Goodwill PFRS provisions Goodwill required to be reviewed for impairment annually./PricewaterhouseCoopers Page 6 17 July 2006 . Negative goodwill PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co. 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 .
including second hand goods taken in exchange. should be valued at "bona fide" selling prices whether basis (a) or (b) is used. they should be valued upon a reasonable basis. whichever is lower./PricewaterhouseCoopers Page 7 17 July 2006 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. 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. taking into consideration the usability and the condition of the goods. the difference is charge to impairment loss. If the NRV is lower than cost.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). but in no case shall such value be less than the scrap value. or if such goods consist of raw materials or partly finished goods held for use or consumption./PricewaterhouseCoopers Page 8 17 July 2006 . PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co. PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co.
/PricewaterhouseCoopers . taxable base shall be the total amount to be paid by the lessee/vendee under the contract (RR 16-05) Page 9 17 July 2006 PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co.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.Leases PFRS provisions Tax Provisions UPDATE • For tax purposes. FMV lease is one where the total MLPs during the non-cancellable term of the lease. • • • • • For income 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. the leased equipment has no more residual value and the customer is given the option to purchase the equipment at nominal consideration of Php500. which in no case less than 730 days. at the end of the lease term. is not sufficient to pay for the leased equipment.Key changes PAS 17 . at the end of the term the leased equipment will have a Page 10 residual value and the customer is 17 July 2006 Capital leases PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co. gross receipts of banks and non-bank financial intermediaries shall consist of interest income (RR 9-04) For VAT. 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./PricewaterhouseCoopers Key changes PAS 17 .
Leases Capital leases PFRS provisions Tax Provisions granted the option to either (1) return the equipment./PricewaterhouseCoopers Page 12 17 July 2006 .i.000 companies) Page 11 17 July 2006 Key changes PAS 17 . or (3) purchase the equipment at its fair market value (normally about 30% of the original cost). (2) renew the lease . Tax implications: Full payout lease (Conditional Sale) • • • • • PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co. e. 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. 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.Leases Capital leases PFRS provisions Tax Provisions FMV lease (Finance lease) • • • • Generally./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.Key changes PAS 17 .
/PricewaterhouseCoopers Page 14 17 July 2006 . will be recognized under the straight-line method over the term of the lease Tax provisions For income tax purposes. including lease incentives such as free rent./PricewaterhouseCoopers Page 13 17 July 2006 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. 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. plant and equipment.Key changes PAS 17 .Leases Operating leases PFRS provisions Lease income/expense. 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 PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co.
free goods) Sale of pre-developed condominium units PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers . 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. Page 15 17 July 2006 Sale of services Accounting for deflators (display rental.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. Credit to income for excess pension asset not taxable Deductible for tax purposes as long as the same is already incurred Page 16 17 July 2006 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 Isla Lipana & Co. For sale of services. 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. entire invoice amount (net of VAT) shall be recognized as revenue for income tax & VAT purposes at time of sale. 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. 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. revenue recognition should be based on percentage of completion method. Sale of real properties – for installment or deferred payment plan schemes. installment method applies. if collections for the initial year exceed 25% of the selling price./PricewaterhouseCoopers 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. vendor incentives. under RR 16-2005. the entire gross profit is taxable. Otherwise.
Note however. Dividends are treated as dividend income and not interest. it is treated as preferred shares. 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. 98)./PricewaterhouseCoopers Page 17 17 July 2006 Key changes PAS 36 Impairment Requires long term assets and investments to be tested for impairment. 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. 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. If issued as preferred shares. 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. Impairment exist when the carrying value of the asset is less than its recoverable value. Interest recognized on redeemable preferred shares not deductible for tax purposes. interest maybe imputed by BIR on noninterest bearing inter-company advances/loans. Financial assets and liabilities are carried at fair value PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co..Key changes PAS 32/39 Definition of financial instruments PFRS provisions Some equity securities (ie fixed redeemable preferred shares) classified as liability instruments.g. Underutilized. These are presented as liabilities in the balance sheet (classification will depend on maturity date). Accretion income/expense arising from discounting of long term assets and liabilities are not taxable./PricewaterhouseCoopers Page 18 17 July 2006 .
a reasonable allowance for obsolescence may be allowed. PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co. 3) Note: Impairment gain/loss shall be treated as temporary difference PICPA: Tax Implications of New Accounting Standards Isla Lipana & Co./PricewaterhouseCoopers Page 19 17 July 2006 Key changes IAS 37 – Provisions. so that depreciation deductions are insufficient to return the cost. 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. in addition to depreciation (Sec 110). Mere provisions are not deductible. 111). the remaining proportionate depreciable amount may be deducted subject to CIR approval (Sec./PricewaterhouseCoopers Page 20 17 July 2006 .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. If a patent becomes obsolete prior to its expiration.
Movement in fair value should be treated either as impairment loss or fair value gain in profit and loss./PricewaterhouseCoopers testing) Treatment of movement in fair value. basis should be historical cost. 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. Page 21 17 July 2006 Question and answer . Requires assets that are held for appreciation or for rental be classified as Investment properties.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.
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