Monetary Foods Corporation

March 12, 2009 BIR RULING [DA-(TAR-006) 148-09] Sec. 43; Sec. 167 & 168, RR 2; DA-666-07; DA-062-04 Monetary Foods Corporation 17/F JMT Corporate Condominium, ADB Avenue 1605 Ortigas Center, Pasig City Attention: Mr. Rolando T. Lorica Finance Officer Gentlemen : This refers to your letter dated January 13, 2009 requesting for approval for a change in accounting method, from Modified Cash Basis to Accrual Basis, by Monterey Foods Corporation to clearly reflect its income for income tax purposes beginning January 1, 2009. It is represented that Monterey Foods Corporation ("Monterey") is a domestic corporation with integrated operations that include breeding, growing, slaughtering, cutting and further processing of beefs and hogs for food purposes in various Company-owned and contract breeder/grower farms and processing plants. It is a 95.5% owned subsidiary of San Miguel Pure Foods Company Inc. Currently, Monterey uses the modified cash basis of tax reporting in computing its income tax by virtue of a ruling from the Bureau of Internal Revenue (BIR) dated March 9, 1971. This method was subsequently reconfirmed by the BIR in its ruling dated September 25, 1997 (BIR Ruling No. 325-97) where the BIR held that Monterey (formerly G & G Meat and Livestock Corporation) may continue using modified cash basis of accounting for tax purposes, and to use the accrual basis of accounting to comply with the requirements of the Securities and Exchange Commission (SEC). For tax purposes, under the modified cash basis method, Monterey reports its profit and loss on the basis of actual cash receipts and disbursements, except that it has provisions for depreciation of property, plant and equipment and the net operating loss incurred in the prior year, if any. Consequently, Monterey recognizes revenues and related assets at the time when the same are received rather than when earned. On the other hand, expenses and the related obligations are recognized when paid rather than when incurred. Under the abovementioned modified cash basis of reporting, Monterey has balances of NOLCO and MCIT that can be claimed as deduction from future taxable income, and from corporate income tax due, respectively. Monterey is requesting for the approval of the change in accounting method from Modified Cash Basis to Accrual Basis for tax purposes in order to clearly reflect its income beginning January 1, 2009, and realign its practice with those of San Miguel Corporation (SMC) group of companies. Moreover, the adoption of accrual method of accounting for tax reporting will also be in harmony with financial accounting standards. This would simplify Monterey's activities/procedures by using only a single accounting method for financial and tax reporting purposes. Monitoring the differences between tax and financial accounting will also be reduced. Once the above request for change of accounting method will be approved, Monterey's income tax return, in its initial year of implementation (January 1, 2009), shall include the net effect of the following reconciling items: (i) uncollected sales, (ii) paid purchases of inventories remaining on hand, (iii) uncollected long term receivable on sale of land, (iv) expenses paid in advance, (v) paid expenses incurred in maintaining breeding stocks and (vi) unpaid expenses and purchases. Based on the foregoing, Monterey therefore is requesting for the approval of the change in its accounting method from Modified Cash Basis to Accrual Basis for tax purposes in order to clearly reflect its income beginning January 1, 2009; further it is requesting confirmation of its understanding of the effects of its change in accounting method, as follows: 1). For income tax purposes, the net effect/adjustment on profit and loss, as a result of the conversion, can be reported starting 1st quarter of` taxable year 2009 as a separate item under other income or expense and also in the computation of MCIT; 2). Monterey's income tax position for year 2009, which includes the net effect of the conversion mentioned earlier, will be taxed at 30% (as provided under Republic Act (R.A.) No. 9337); and 3). The tax benefit of NOLCO and MCIT as reflected in Monterey's income tax return (ITR), for the taxable year ending December 31, 2008, can be carried forward/over in taxable year 2009. In reply please be informed that Section 43 of the Tax Code of 1997, as amended, provides as follows: "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 with the books of such taxpayer but if no such method of accounting has been 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 . . . ." 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. (BIR Ruling No. DA-666-07 dated December 19, 2007) On the other hand, pursuant to Section 168 of Revenue Regulations No. 2, the change in accounting method shall be effective at the beginning of the taxable year when the application was filed. It states: "Section 168. Change in Accounting Methods. xxx xxx xxx Application for permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return . . . ." Considering that the purpose of Monterey's change in accounting method is to clearly reflect its income for tax purposes, and more importantly, to enable it to reduce or eliminate the monitoring of differences in the amounts reported under the modified cash and accrual basis, this Office hereby holds that the full accrual method, which is a generally accepted principle of accounting, may be used by Monterey to reflect its true income for tax purposes, beginning the taxable year 2009 in accordance with Sections 167 and 168 of Revenue Regulations No. 2. In connection therewith, Monterey is hereby required to submit a statement specifying all the amounts that would be duplicated or omitted as a result of the change in accounting method, or the classes of items which would be differently treated under the two systems. (BIR Ruling No. DA-068-03 dated March 15, 2003) Relative thereto, Monterey's understanding of the effects brought about by the change in its accounting method employed, from modified cash basis to accrual basis, is hereby confirmed as follows: (1) For income tax purposes, the net effect/adjustment on profit and loss, as a result of the conversion, shall be reported by Monterey starting the 1st quarter of taxable year 2009 as a separate item under other income or expense and also in its computation of the minimum corporate income tax (MCIT); (2) Monterey's income tax position for year 2009, which includes the net effect of the conversion mentioned earlier, shall be taxed at 30% as provided under Republic Act (R.A.) No. 9337); and (3) The tax benefit of Net Operating Loss Carry-Over (NOLCO) and MCIT as reflected in Monterey's ITR, for the taxable year ending December 31, 2008, can be carried forward/over in taxable year 2009. TcEaAS 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service