Punongbayan & Araullo

December 19, 2007 BIR RULING [DA-666-07] Section 43; DA-062-04 Punongbayan & Araullo 19th Floor, Tower One The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated August 16, 2007 in behalf of your client, Hemisphere Leo-Burnette, Inc. (Hemisphere) requesting for authority to change the modified cash basis being used by the company to full accrual basis of accounting. DAHEaT It is represented that Hemisphere is a domestic corporation engaged primarily in general advertising agency and sales promotion business; that for financial reporting purposes, Hemisphere has consistently applied the full accrual basis of accounting in prior years, under which revenue is recognized as earned and cost and expenses are recorded as incurred; that for purposes of computing its taxable income, however, the modified cash basis of accounting has been consistently used, so that commissions and fees are recognized when received rather than when earned, and certain expenses are recognized when paid rather than when incurred; that as a result, Hemisphere is monitoring the differences in the amounts reported under accrual basis and modified cash basis; that for the taxable year 2007 onwards, Hemisphere will adopt the full accrual method of accounting in order to truly reflect its taxable income; that in support of your request, you submit photocopies of Certificate of Registration No. 8RC0000015738, dated June 30, 1994 issued by the Bureau of Internal Revenue as well as the Audited Financial Statements for the years 2005 and 2006. In reply please be informed that Section 43 of the Tax Code of 1997 provides that "Sec. 43. General Rule. 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 so 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. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year." THacES In relation to this, Section 167 of Revenue Regulations No. 2, recognizes 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." Applying the above provisions, a taxpayer is undoubtedly given by law the right to use a system of accounting that would clearly reflect its true income because there can be no uniform method of accounting that can be prescribed for all taxpayers. The accrual method is required under the Framework for the Preparation and Presentation of Financial Statements and may be used for tax purposes. Thus, the effects of transactions and other events are recognized when they occur, and not as cash or its equivalent is received or paid. They are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Financial statements prepared using this method inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. The purpose of Hemisphere's change in accounting method is to reflect its true net income for tax purposes. More importantly, this will enable the company to eliminate the monitoring of differences in the amounts reported under modified cash and full accrual. IN VIEW OF THE FOREGOING, this Office holds that the full accrual method, which is a generally accepted principle of accounting, may be used by Hemisphere to reflect its true income for tax purposes, beginning the taxable year 2007. 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. DHITSc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service