Tuesday, July 03, 2007 Tax notes: Book value computation
IN computing the book value of the shares of a company for purposes of establishing the fair market value for tax purposes, unrealized foreign exchange gains that have been recognized and reflected in the financial statements should be excluded. (BIR Ruling No. DA-187-2007, March 27, 2007)
Unrealized foreign exchange gains, similar to the appreciation in value of property, do not yet constitute taxable income unless these are realized.
Under the “realization” principle in taxation, income is recognized only when (a) the earning process is complete or virtually complete, and (b) an exchange has taken place.
Foreign exchange gains shall be realized only upon actual conversion of one currency to another currency. Recognition of unrealized foreign exchange gains in the financial statements is merely for financial reporting purposes, pursuant to Philippine Accounting Standards (PAS) 21.
