Kimberly-Clark Philippines, Inc.

September 21, 2007 BIR RULING [DA-504-07] R.R. 2 DA-033-2004 Kimberly-Clark Philippines, Inc. 32/F Tower I, The Enterprise Center 6766 Ayala Avenue cor. Paseo de Roxas 1226 Makati City Attention: Ms. Rhodora R. Battad Finance Director Gentlemen : This refers to your letter March 28, 2007 requesting permission to change the inventory costing method used by Kimberly-Clark Philippines, Inc. (KCPI) for the purchased raw materials, finishing supplies and purchased finished goods inventories from Standard Costing to Moving Average method beginning October 1, 2007. However, manufactured finished goods shall be valued at standard cost. It is represented that KCPI is a corporation authorized to engage in the business of manufacturing and selling of facial and bathroom tissues, paper towels and napkins for household and away-from-home use, disposable diapers, feminine pads/liners, and baby toiletries; that its principal place of business is located at 32nd Floor, The Enterprise Center, Ayala Avenue corner Paseo de Roxas, Makati City with manufacturing site located at Maharlika Drive, USPS, San Pedro, Laguna; that KCPI will adopt Systems, Applications and Products (SAP) in data processing of its new ERP system; that the system will automatically compute for the average cost of each materials or inventory purchased; that the cost will include the purchase price plus estimated duties (excluding VAT), freight and other handling cost net of trade discounts received; that if the inventory will be further converted and processed, an estimated conversion cost will be attached to the cost of the products; that moving average method of inventory costing is acceptable under Philippine Accounting Standards 2; that KCPI prefers to use Moving Average Method for purchased materials and finished goods because this will give KCPI valuation of inventory close to actual cost at any given time and the system can immediately capture the frequent changes in prices; that however, KCPI prefer to use the standard costing method for manufactured finished goods because the conversion cost need not be changed frequently as most of the cost are fixed in nature; that in addition, standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilization; and that they are regularly reviewed and, if necessary, revised in the light of current conditions. In reply, please be informed that on the basis of the above representations, KCPI is hereby granted permission to change its inventory costing method from standard costing to moving average for the purchased raw materials, finishing supplies and purchased finished goods inventory while maintaining standard costing for manufactured finished goods 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 portions of which provide, viz : CacTIE "Section 41. Inventories . Whenever in the judgment of the Commissioner, the use of 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, after 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: Provided, further, That any change in an inventory valuation method must be subject to approval by the Secretary of Finance." SCEDAI "Section 145. Valuation of Inventories . The law provides two tests to which each inventory must conform. (1) it must conform as nearly as possible to the best accounting practice in the trade or business; and (2) it must clearly reflect the income. It follows, therefore, that inventory rules cannot 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." Considering that the purpose of KCPI's change on its inventory costing will best conform to its accounting practice as said valuation will clearly reflect the income of the said corporation, this Office hereby grants authority to KCPI the use of moving average method for its inventory of purchased raw materials, finishing supplies and purchased finished goods inventory and the use of standard costing for its manufactured finished goods inventory, provided proper disclosure will be reflected in its financial statements. (BIR Ruling No. DA-033-2004 dated January 19, 2004) This ruling is being issued on the basis of the foregoing fact as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. cHCIEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service