Nestfarms, Inc.

February 22, 2024 BIR RULING NO. OT-011-2024 Sec. 41, Tax Code; Sec. 145, Rev. Regs. No. 2-40; BIR Ruling No. OT-359-21 Nestfarms, Inc. Brgy. Tibungol, Panabo City Davao del Norte Attention: Mr. Alfred E. Samson Chief Financial Officer Gentlemen : This refers to your request for an authority to change the accounting method on inventory costing of Nestfarms, Inc. (the "Company") from First-In, First-Out (FIFO) method to Moving Average method for the following inventory items (1) agriculture supplies; (2) construction supplies; (3) spare parts; (4) fuel, oil and lubricants; (5) office supplies; (6) livestock supplies; (7) manufacturing supplies and (8) other supplies effective January 1, 2022. aDSIHc Background Nestfarms, Inc. is a corporation duly organized and existing under and by virtue of Philippine laws. It is engaged in the business of established agricultural settlements, to acquire, lease, buy, develop, occupy and exploit agricultural lands of the public domain or of private persons and entities; to engage in the production of and sale of farm and animal products; promote and encourage scientific methodical production, cooperative marketing, selling and exportation of the same. Consequently, per Corporate Secretary's Certificate dated July 12, 2022, the Board of Directors approved and authorized the Company to change its inventory costing method for the following items from their respective previous costing methods under Microsoft GP ERP (Enterprise Resource Planning) Software to new costing methods under SAP (Systems Applications and Products) ERP Software: Item From To Agriculture Supplies FIFO Moving Average Construction Supplies FIFO Moving Average Spare Parts FIFO Moving Average Fuel, Oil and Lubricants FIFO Moving Average Office Supplies FIFO Moving Average Livestock Supplies FIFO Moving Average Manufacturing Supplies FIFO Moving Average Other Supplies FIFO Moving Average From the time of its incorporation, the Company has consistently adopted the FIFO method in costing the above-mentioned inventories. In order to facilitate its cost accounting and optimize the use of its computerized system, the Company will install computerized cost accounting system (CAS). The computerized accounting system to be adopted is Systems Applications and Products (SAP) Enterprise Resource Planning (ERP) Software which recognizes the Moving Average method for the above-mentioned inventories. ATICcS Discussion/Ruling Section 41 of the National Internal Revenue Code of 1997 (Tax Code), as amended, provides: "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." (Emphasis provided.) In relation to the above section of the Tax Code, as amended, Section 145 of Revenue Regulations (RR) No. 2-40 states: "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 can not 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." ETHIDa Considering that the change in Nestfarms, Inc.'s accounting method is needed because of its adoption of the new CAS, which system uses the Moving Average method rather than the FIFO method of inventory costing, Nestfarms, Inc. is hereby granted permission to change its accounting method from FIFO method to Moving Average method for agriculture supplies, construction supplies, spare parts, fuel, oil and lubricants, office supplies, livestock supplies, manufacturing supplies and other supplies effective January 1, 2022 pursuant to the provision of Section 41 of the Tax Code, as amended. Such change in inventory valuation is subject to post-audit by the Bureau of Internal Revenue to check whether the new method of valuation conforms to the best accounting practice applicable to the Company; and that it clearly reflects the income of the Company. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) ROMEO D. LUMAGUI, JR. Commissioner of Internal Revenue