Corresponding Reserve for Depreciation Shall Not be Charged to Expense Account but to the Appraisal Increase Surplus of the Stockholders Equity

September 11, 1991 BIR RULING NO. 184-91 29 (f) 33 000-00 184-91 Gentlemen : This refers to your letter dated June 5, 1991 stating that you have a pending loan application from a bank which have appraised your machinery, tools, and equipment with an appraisal increase of P1,700,000.00; that the bank would like you to reflect the appraisal increase in your balance sheet as follows: Machinery, tools, and equipment P1,700,000.00 Appraisal Increase P1,700,000.00 that to record appraisal increase of machineries, tools, and equipment under assets and stockholder's equity the corresponding reserve for depreciation shall not be charged to expense account but to the appraisal increase of the stockholder's equity. cdti In reply, please be informed that for financial reporting purposes, it is a generally accepted accounting practice to reflect in the financial statements the increase in value of fixed assets as a result of appraisal. This is in conformity with the Statement of Accounting Standards No. 12 issued by the Board of Accountancy which establishes the standards of financial accounting and reporting when an entity elects to revalue its plant, property and equipment through appraisal. The appraisal increase or excess increment on the property over the stated cost is credited to an account called appraisal surplus to show that such is the result of an estimated increase in the value of the property (SEC opinion, May 14, 1970). In accordance with the foregoing rule, we hereby confirm your opinion that the corresponding reserve for depreciation shall not be charged to expense account but to the appraisal increase surplus of the stockholders equity as follows: Reserved for depreciation Machinery, tools, equipment P1,700,000.00 Incremental Surplus (Appraisal income in Machinery, tools, equipment) P1,700,000.00 In other words, mere appraisal increase in the value of your machinery and equipment will not result in the recognition of taxable gain. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner (Officer-in-Charge)