Thursday, July 24, 2008 Tax rules, new financial reporting standards need to be reconciled
WHILE the adoption of International Financial Reporting Standards (IFRS) may pose a challenge to the Bureau of Internal Revenue (BIR), the IFRS was designed to ensure more transparency in financial reporting and encourage more investors to the country.
This was explained by Wendell Ganhinhin, branch manager of Punongbayan and Araullo, a company of certified public accountants.
Ganhinhin said the IFRS, whose implementation in the country is known as the Philippine Financial Reporting Standards (PFRS), was adopted worldwide to prevent a repeat of financial reporting controversies, like the Enron scandal in the United States.
He said under the new standards, foreign investors will also find financial reports of Philippine companies easier to analyze and their adoption, therefore, is meant to attract more investors to the country.
“It (adoption) also came as a result of globalization,” he said in an interview yesterday.
But he admitted that the PFRS also raises the need to reconcile the new standards of financial reporting with tax rules.
Ganhinhin said that under the PFRS, a company’s assets and liabilities will be valued according to fair or market value. But under existing tax rules, the same assets and liabilities will be valued based on actual cost.
If not reconciled, he said, the taxpayer and the BIR would end up quarreling.
He cited the case of a building that is built at a cost of P1 billion but has a fair value that is less the said amount. Under the PFRS, the fair value of the building will be stated in the financial report of the company that owns the structure. However, for tax purposes, the BIR will take into consideration the cost of the building not the fair value.
In assessing a company’s taxes, the BIR requires the submission of an income tax return and a financial report.
“The BIR and the taxpayer have to know the differences in the PFRS and the tax rules so these (differences) will be stated in the reconciling items (under the income tax return),” he said.
The challenges in reconciling the PFRS with existing tax rules prompted the BIR 13 Cebu City to ask Punongbayan and Araullo to give the tax agency’s personnel an update on the new financial reporting standards last Monday.
“We have to keep up with the times. This is one way to avoid conflicts with the taxpayers. We want to contact companies in the right and legal way,” said BIR Regional Director Jose Tan.
Not all companies are mandated to adopt the PFRS, however.
Ganhinhin said the adoption of the PFRS is only compulsory to companies that are publicly listed, have assets amounting to P250 million and above or liabilities of P150 million and more. (NRC with LAP)
