BIR Ruling [DA-185-03]

June 16, 2003 BIR RULING [DA-185-03] 41, 145; RR 2; DA-248-2002 International Flavors & Fragrances (Philippines), Inc . 28th Floor, Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas Center Pasig City Attention: Ms. Nelia G. Corpuz Financial Controller Gentlemen : This refers to your letter dated May 6, 2002, requesting for an authority to change the inventory valuation method of Bush Boake Allen Philippines, Inc. (BBA for brevity) and now International Flavors & Fragrances (Philippines), Inc. (IFF for brevity) from standard to moving average method effective January 1, 2003. Documents submitted disclosed that IFF is a domestic corporation engaged in the manufacture of compound flavourings, fragrances, essences, seasonings, spice, products and other product lines and in the distribution and sale thereof on wholesale basis; that the Securities and Exchange Commission (SEC) has approved on September 30, 2002 the merger of BBA and IFF, where the former corporation is the surviving entity; that for business purposes, BBA shall change its corporate name and assume the corporate name of IFF; that since 1983, BBA's imported and locally purchased raw materials and non-manufactured finished goods are valued at standard cost; that with the aforesaid method of valuation, there is still a need to monitor the actual versus standard cost for necessary cost update and recording of price variances; that when the Peso started to depreciate in 1997 coupled by the unstableness of foreign exchange rates and the continuous fluctuation of prices by the suppliers depending on supply and demand, you are of the opinion that the standard cost is no longer applicable in your case; and that it is IFF's first-time to request a change in its accounting method from standard to moving average method. In reply, please be informed that on the basis of the above representations, IFF is hereby granted permission to change its accounting method of inventory costing from standard to moving average method beginning calendar year 2003, pursuant to the provisions of Section 41 of the Tax Code of 1997, in relation to Section 145 of Revenue Regulations No. 2, the pertinent portion of which provides, viz. : "Section 41. Inventories. Whenever in the judgment of the Commissioner, the use or inventories is necessary in order to determine clearly the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulations, prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. "If a taxpayer, having complied with the terms and conditions prescribed by the Commissioner, uses a particular method of valuing its inventory for any taxable year, then such method shall be used in all subsequent taxable years, unless: "(i) with the approval of the Commissioner, a change to a different method is authorized; or "(ii) the Commissioner finds that the nature of the stock on hand ( e.g. , its scarcity, liquidity, marketability and price movements) is such that inventory gains should be considered realized for tax purposes and, therefore, it is necessary to modify the valuation method for purposes of ascertaining the income, profits, or loss in a more realistic manner; Provided, however , That the Commissioner shall not exercise its authority to require a change in inventory method more often than once every three (3) years: . . . "Section 145. Valuation of Inventories . The law provides two tests to which inventory must conform. (1) it must conform as nearly as possible to the best accounting practice in the trade of business, and (2) it must clearly reflect the income. It follows, therefore, that inventory rules can not be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any particular method of inventory or basis of valuation, as long as the method or basis used is substantially in accord with these regulations, an inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer is, as a general rule, regarded as clearly reflecting his income." TcAECH Considering that the purpose of IFF's change of its accounting method is for the company to eliminate the close monitoring of standard versus actual cost, periodic cost updates, price variances, tedious process flow of transactions and other related activity, and that the moving average method will conform to the best accounting practice in its trade or business, this Office hereby grants authority to IFF the use of moving average method in its inventory costing. ( BIR Ruling No. DA-248-2002 dated December 18, 2002 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MARIO C. BUAG Deputy Commissioner Legal and Inspection Group