BIR Ruling [DA-413-04]

July 30, 2004 BIR RULING [DA-413-04] Rev. Regs. No. 2; IAS 16 BIR Ruling No. DA10-98 & DA-267-98 Castelo Law Office 4/F, Rgc Bldg., 219 Apo St. Mandaluyong City Attention: Atty. Eduardo G. Castelo Gentlemen : This refers to your letters dated June 30, 2004 and July 15, 2004 requesting on behalf of your client, Solid Shipping Lines Corporation , for a ruling that your client can use and reflect on their books of accounts the appraisal fair market values of their property and equipment used in business as determined and reported by an independent appraiser and depreciate the same based on their estimated useful life (straight-line method of depreciation). It is represented that your client noted that the present book values of their property and equipment no longer reflect the true present values; that it engaged the professional services of eValue Philippines, Inc., a duly licensed and independent appraiser and property consultant, to reappraise and determine their true and fair market values; and that an appraisal report was submitted by the aforesaid appraiser to your client which reflects the present, true and fair values of the company's property and equipment, particularly its land, buildings and other improvements and ships or vessels. In reply, please be informed that the accounting principles under the International Accounting Standard (IAS) No. 16, on Property, Plant and Equipment , issued by the International Accounting Standards Committee (IASC), which, in January 2001, was duly adopted by the Accounting Standards Council as generally accepted "accounting principles in the Philippines, specifically paragraphs 29, 30, 31 and 32 thereof, provide as follows: "29. Subsequent to initial recognition as an asset, an item of property, plant and equipment should be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation should be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date." cTECHI "30. The fair value of land and buildings is usually its market value. This value is determined by appraisal normally undertaken by professionally qualified valuers." "31. The fair value of items of plant and equipment is usually their market value determined by appraisal." "32. The frequency of revaluations depends upon the movements in the fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. Some items of property, plant and equipment may experience significant and volatile movements in fair value thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant movements in fair value. Instead, revaluation every three or five years may be sufficient." On the other hand, pursuant to Section 34(F)(1) of the Tax Code of 1997, there shall be allowed as depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. The term "reasonable allowance" shall include (but not limited to) an allowance computed in accordance with regulations prescribed by the Secretary of Finance, under any of the following methods: 1) The straight-line method; 2) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F)(1); 3) The sum-of-the-years-digit method; and 4) Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. Moreover, pursuant to 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 installment or in accordance with any other recognized trade practices, 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 the 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 and shorter than the useful life as originally estimated under all the then known facts, the portion of the cost or other basis of the property not already provided for through depreciation allowances should be spread over the remaining useful life of the property as reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly." The proper allowance for depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount so set aside, plus the salvage value, will, at the end of the useful life of the property in business, equal the basis of the property. Due regard must be given to expenditures for current upkeep (Section 105, Revenue Regulations No. 2) [cited in BIR Rulings No. DA-10-98 dated January 21, 1998 and DA-267-98 dated June 24, 1998]. Based on the foregoing, your client, Solid Shipping Lines Corporation, is hereby allowed to use the appraisal fair market values of their property, plant and equipment used in business as determined and reported by an independent appraiser and depreciate the same based on their remaining useful life as reestimated in the light of the subsequent facts or the straight-line method of depreciation pursuant to Section 109 of Revenue Regulations No. 2. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service