BIR Ruling [DA-122-97]

March 21, 1997 BIR RULING [DA-122-97] East Asia Power Corporation (EAPC) 7th Floor, Hongkong Bank Centre Exchange Road corner San Miguel Avenue 1605 Ortigas Centre, Pasig Attention: Ms . L . R . A . Orteza Group Controller Gentlemen : This refers to your letter dated January 5, 1996, requesting for authority to change your method of computing depreciation expense for your two (2) power barges from Straight Line Method to Output/Unit Production Method effective January 1, 1996. LexLib It is represented that East Asia Power Corporation (EAPC) is an independent power producer generating energy for sale to the National Power Corporation (NPC) through 2 x 66 megawatt (MW) power barges moored in Navotas, Marikina; that full commercial operations of the power barges began on September 25, 1994, producing energy measured in terms of kilowatt hours (KwH); that you have been using the Straight Line Method of depreciation for the power barges, resulting in an estimated lifespan of twenty (20) years at their maximum total production of 109 MW; that the Straight Line Method is an inaccurate formula for the depreciation of the engines because of the inconsistent demand by NPC from EAPC for electricity; that the life of the assets are reckoned by the running hours, so if the engine is not running, the lifespan of the engine is extended by a number of hours; that preventive maintenance operations regularly undertaken to ensure that the engines are kept in optimum running condition; that the depreciable life of the engines is largely dependent on the hours that the engines are kept running; that in support of your request you have submitted a recomputation of depreciation of the power barges showing the actual generation for electricity for 1994 and 1995 and a recomputation for 1996; and that verification conducted in this case disclosed that the demand for electricity for the prior years 1994 and 1995 has been inconsistent, thus resulting in periods when the engines were not continuously running. In reply, please be informed that on the basis of the above representations, and the memorandum report submitted by Revenue District Office No. 43 (Pasig), as endorsed by the Revenue Regional Director, Revenue Region No. 7 (Quezon City), recommending approval of your request, East Asia Power Corporation is hereby granted permission to change its method of computing depreciation expense for its two (2) power barges from the Straight Line Method to the Output/Unit Production Method, effective January 1, 1996, pursuant to the provisions of Section 109 of Revenue Regulations No. 2 which provides viz.: "Section 109. Method of computing depreciation allowance . The capital sum to be replaced should be charged off over the useful life of the property, either in equal annual installments or in accordance with any other recognized trade practice, such as apportionment of the capital sum over units of production. Whatever plan or method of apportionment is adopted must be reasonable and must have due regard to operating conditions during the taxable period. While burden of proof must rest upon the taxpayer to sustain the deductions taken by him, such deductions must not be disallowed unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim for depreciation shall be determined upon the conditions known to exist at the end of the period for which the return is made. If it develops that the useful life of the property will be longer or shorter than the useful life as originally estimated under the then known facts, the portion of the cost or other basis of the properties not already provided for through depreciation allowances should be spread over the remaining useful life of the property as reestimate in the light of the subsequent facts, and depreciation deductions taken accordingly. (BIR Ruling No. 52-96 dated April 24, 1996; BIR Ruling No. 48-96, dated pril 10, 1996; BIR Ruling No. 146-94, dated September 28, 1994). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)