BIR Ruling No. 019-10

July 28, 2010 BIR RULING NO. 019-10 Bank of Makati 44 Sen. Gil Puyat Avenue Makati City Attention: Luis M. Chua Controller Gentlemen : This refers to your letter dated December 29, 2009 wherein you requested that Bank of Makati ("Bank") be allowed to change its method of accounting for interest income and expense for income tax purposes from straight line method to effective interest method. It is represented that the Bank's operations are regulated by the Bangko Sentral ng Pilipinas (BSP); that it is required to comply with rules and regulations of the BSP, such as those relating to the adoption of accounting policies and procedures that are in accordance with the PFRS and PAS; that previously, the Bank has consistently used the straight line method of computing and recognizing interest income on loans receivable and interest expense on deposits and loans payable; that PAS 39, Financial Instruments-Recognition and Measurement requires that the Bank allocate interest income or interest expense over the life or term of the loan/investment or deposit/loans payable using the formula: principal x rate x time (PRT); that the effective interest rate is the rate arrived at by discounting estimated future cash receipts from the loans receivable/investments or cash payments on the deposits or loans payable over the life or term of the loans/investments/deposits; that the Bank intends to change its method of computing and recognizing interest income on loans receivable and interest expense on deposits and loans payable from straight line method to effective interest method pursuant to Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS); In reply, please be informed that the change of accounting method from one system to another is specifically allowed under the provision of Section 43 of the National Internal Revenue Code, in relation to Section 167 of Revenue Regulations No. 2, the pertinent portion of which 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 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. . ." Section 167 of Revenue Regulations No. 2 provides: ". . . It is recognized 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 for his purpose. . . . Any approved standard method of accounting which reflects taxpayer's income may be adopted. . . ." In view of the foregoing, Bank of Makati is hereby granted permission to change its method of computing interest income and interest expense from straight line method to effective interest method. This approval shall apply only for income taxation purposes and shall not automatically apply to all other taxes, including, but not limited to percentage tax. cDHAES 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue