BIR Ruling [DA-062-04]

February 12, 2004 BIR RULING [DA-062-04] 43; DA-068-03 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander B. Cabrera Partner Tax Services Gentlemen : This refers to your letter dated June 16, 2003 in behalf of your client, Accenture, Inc. (AI, formerly Andersen Consulting, Inc.) requesting for authority to change the modified cash basis currently being employed by the company to accrual basis of accounting. It is represented that AI is a domestic corporation authorized primarily to provide management consulting and management information consulting services, including but not limited to business integration, strategic service, change management services, systems integration, systems management, development/sale or licensing of software and the sale of hardware and related products, either as principal or agent; that in the preparation of your client's financial statements, its revenue and cost and expenses are recognize under the modified cash basis of accounting that has been consistently applied in prior years; that certain liabilities and related accounts arising from trade obligations, tax accruals, net billings and charges to/from affiliates and loans payable are recognized as incurred; that effective September 1, 2003, AI will adopt the full accrual method of accounting to recognize revenue and cost and expenses on services rendered or billed although the same are not yet collected or paid; that this will result to a possible increase in reported net revenue during the initial year of its implementation, which is due mainly to timing difference in income and expense reporting; and that in support of your request, you submit copies of the following documents of AI, to wit: 1) Certificate of Registration No. AS091-1999207 dated November 15, 2000 issued by the Securities and Exchange Commission 2) Amended Articles of Incorporation; and 3) Certificate of Registration No. 98-50-00643 dated February 2, 1998 issued by the Bureau of Internal Revenue. In reply please be informed that Section 43 of the Tax Code of 1997 provides that the taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer: but if no such method of accounting has been employed, or if the method employed does not clearly reflect the income the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. In this particular case, however, the request is for the authority to change the modified cash basis currently being employed by the company to accrual basis of accounting. Thus, for as long as the proposed method to be employed would clearly reflect the true income of the taxpayer, the same may be allowed subject to the discretionary power of the Commissioner of Internal Revenue of granting or denying such application and further, to the terms and conditions under which the change will be effected as set forth under Sections 167 and 168 of Revenue Regulations No. 2, otherwise known as the "Income Tax Regulations", viz : "Section 167. Methods of Accounting . It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting which reflects taxpayer's income may be adopted. Among the essentials are the following: (1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise on hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year in accordance with sections 144 to 151 of these regulations; (2) Expenditures made during the year should be properly classified as between capital and income; that is to say, expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion or obsolescence, any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses. aIcSED "Section 168. Changes in accounting methods . The true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change from cash receipts and disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see sections 144 to 151 of these regulations); a change from the cash or accrual method to the long-term contract method, or vice versa; a change in the long term contract method from the percentage of completion basis to the completed contract basis, or vice versa (see section 44 of these regulations) or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the returns. The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal Revenue agree to the terms and conditions under which the change will be effected." In view thereof, we would like you to submit to us in the meantime a statement specifying all the amounts that would be duplicated or omitted as a result of the proposed change or the classes of items which would be differently treated under the two systems. ( BIR Ruling No. DA-068-03 dated March 15, 2003 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group