RR 19-86.doc

November 10, 1986

January 1, 1987

REVENUE REGULATIONS NO. 19-86 SUBJECT

:

TO

All Internal Revenue Officers and Others Concerned

:

Taxation of Leases

SECTION 1. Purpose. — These regulations pursuant to Section 277 of the National Internal Revenue Code, prescribe the rules to govern the tax treatment of lease agreements and provide guidelines for determining whether certain transactions purporting to be leases of tangible personal property are in reality conditional sales contracts. PART A INCOME TAX SECTION 2. Reporting of Income and Deductions by a Lessor or a Vendor. 2.01 Lessor if contract is a lease — The amount paid for the use of property under an agreement which is determined under these regulations to be a lease shall be considered as rental ( and therefor includible in gross income) of the lessor. Such lessor may deduct all ordinary and necessary expenses paid or incurred during the taxable year which are attributable to the earning of the income. In addition, the lessor, with respect to properties subject to an "operating lease" as defined in subparagraph 2.01/1 of this Section, will be allowed a deduction for depreciation determined pursuant to Section 30 (f) of the National Internal Revenue Code (NIRC) and the Regulations thereunder: Provided, however, that tangible personal properties listed in Annex "A" of these Regulations which are subject to "finance lease" (as defined in subparagraph 2.01/2 of this Section) may be depreciated during the primary lease period but such period shall not be less than 60% of the depreciable life of the property as indicated in Annex "A". If, under the agreement, the lessee pays to the lessor a stipulated rental, and in addition pays certain other expenses which are properly payable by the lessor, the lessor is deemed to have received as rental income not only the stipulated rental but also the amount of such other expenses paid by the lessee to, or for the account of, the lessor. 2.01/1Operating lease defined — An "operating lease" is a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period. 2.01/2Finance lease defined — "Finance lease" or full payout lease is a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessor's property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor's borrowing

costs and profits. The obligatory period refers to the primary or basic noncancellable period of the lease which in no case shall be less than 730 days. The lessee, not the lessor, exercises the choice of the asset and is normally responsible for maintenance, insurance and such other expenses pertinent to the use, preservation and operation of the asset. Finance leases may be extended, after the expiration of the primary period, by non-cancellable secondary or subsequent periods with the rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%) of the lessor's acquisition cost of the leased asset. 2.02 "Packaged lease" not taxable as a corporation — A "package lease" or "lease package" shall not be considered as a joint venture or association taxable as a corporation as defined in Section 20(b) of the National Internal Revenue Code. 2.03 "Packaged Lease" or "Lease Package" defined — A lease package refers to that type of finance lease which has two or more lessors, particularly if the size of the lease facility is substantial relative to the exposure limits of a lessor. Under a lease package, the lead lessor either invites one or more lessors to participate as a co-lessor in the funding lease. Consequently, two or more lessors may have co-ownership of a single leased item, proportionate to their participation. For the purpose of this subparagraph, the lessors in a lease package shall be limited to finance and leasing companies registered under Republic Act No. 5980. 2.04 Taxation of income derived from "'package leases" — The rental income derived from a packaged lease shall be taxable directly to each of the participating lessors in their individual capacity, the respective shares of which shall be determined in accordance with their sharing agreement. Any gain or loss derived by the lessor who sells the lease contracts or lease receivables to one or more buyers shall be taxed as ordinary gain or loss. To compute ordinary gain or loss, the outstanding principal value of the lease as determined in Annex "B" shall be deducted from the selling price. 2.05 Vendor, if contract is a conditional sale — If the agreement is determined to be a sale, the amounts received under the contract by the vendor will be considered to be payments which are part of the sales price to the extent such amounts do not represent interest other charges. SECTION 3. Deductions Allowable to Lessee or Purchaser. 3.01 Lessee, if contract is a lease — If under the criteria set forth in these Regulations, an agreement constitutes a lease, the lessee may deduct the amount of rent paid or accrued, including all expenses which under the terms of the agreement the lessee is required to pay to, or for the account of, the lessor. If the payments are so arranged as to constitute advance rentals, such payments shall be duly apportioned over the lease term. In computing the term of the lease, all options to renew, shall be taken into consideration if there is a reasonable expectation that such options will be exercised.

3.02 Vendee, if contract is a conditional sale — If under the provisions of these Regulations, the agreement is to be treated as a sale, the amounts paid to the vendor will be considered as payments which are part of the purchase price to the extent such amounts do not represent interest or other charges. acd SECTION 4. General criteria for characterizing an agreement as a conditional sale. 4.01 Statutory basis for distinguishing a lease from a sale — A lease is a contract whereby one of the parties (lessor) binds himself to give to another (lessee) the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite (Article 1643, Civil Code ). In other words, a lease is an agreement between a lessor and a lessee giving the lessee possession and use of a specific property upon payment of rentals over a period of time. The lessor retains ownership of the asset so that it shall not become the property of the lessee or any related third party during the term of the lease. On the other hand, a sale is a contract whereby one of the contracting parties (seller or vendor) obligates himself to transfer ownership of and to deliver a determinate thing while the other party (buyer or vendee) obligates himself to pay for said thing a price certain in money or its equivalent. (Article 1458, Civil Code.) 4.02 Characterizing a transaction that does not readily fit statutory concepts — In cases where the true character of the transaction cannot be definitely determined from the terms and conditions of the agreement, the Commissioner shall make the determination on the basis of all relevant facts and circumstances of each transaction, among which are (but not limited) those indicated in the following subparagraphs. 4.03

Factors to be considered.

4.03/1In general. Whether an agreement, which in form is a lease, is in substance a conditional sales contract depends upon the intent of the parties as evidenced by the provisions of the agreement, read in the light of the facts and circumstances existing at the time the agreement was executed. In ascertaining such intent no single test or any special combination of tests is absolutely determinative. No general rule, applicable to all cases can be laid down. 4.03/2Compelling persuasive factors. A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasive factors are present: (A) The lessee is given the option to purchase the asset at anytime during the obligatory period of the lease, notwithstanding that the option price is equivalent to or higher than the current fair market value of the asset; (B) The lessee acquires automatic ownership of the asset upon payment of the stated amount of "rentals" which under the contract he is required to make;

(C) Portions of the periodic rental payments are credited to the purchase price of the asset; cdtai (D) The receipts of payment indicate that the payment made were partial or full payments of the asset. 4.03/3Absence of compelling persuasive factors. — In the absence of the above compelling persuasive factors or contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase and sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present: (a) Portions of the periodic payments are made specifically applicable to an equity to be acquired by the lessee. (b) The property may be acquired under a purchase option, at a price which is nominal in relation to the value of the property at the time when the option may be exercised, as determined at the time entering into the original agreement, or which is a relatively small amount when compared with the total payments which are required to be made. SECTION 5. Advance Ruling Required to Recognize Existence of a lease. — The parties to a lease agreement may secure from the Commissioner an advance ruling recognizing the fact that an agreement actually constitutes a lease for tax purposes. In cases where a lessor is engaged in the leasing business and frequently enters into a contract with various lessees under the same or essentially similar terms and conditions, the lessor may submit a model lease agreement on which to base an advance ruling. Thereafter, any specific lease agreement entered into by the lessor and a lessee which does not substantially deviate from the terms and conditions of the model contract on the basis which the advance ruling had been secured, need not be submitted for advance ruling. casia PART B GROSS RECEIPTS TAX SECTION 6. Basis of the Gross Receipts Tax 6.01 The rental amounts received by a lessor from a lessee under an agreement qualifying as a finance lease as defined in Section 2.01/2 of these Regulations shall be divided into two components, namely principal and interest to be arrived at using either the Annuity or the Sum-of-the-Years-Digits method of accounting. The amount representing interest shall be determined in accordance with the formulae prescribed in Annex "B". 6.02 The amount of interest, if the same is derived by a finance and leasing company registered under R.A. 5980 shall be subject to the gross receipts tax prescribed in Sections 260 and 261 (as amended by PD 1739 ) of the National Internal Revenue Code based on the remaining maturity of the lease. Amounts

which the lessee, under the agreement, pays to the lessor (in addition to a stipulated rental) for certain other expenses properly payable by the lessor (as described in Section 2.01) shall be excluded for purposes of the gross receipts tax determined under this subparagraph. 6.03 If the lessor is a person other than a finance and leasing company registered under R.A. 5980, then the rentals resulting from the lease agreement shall be subjected too the 4% contractor's tax imposed under Section 205 of the National Internal Revenue Code. 6.04 If the lessor is a finance and leasing company registered under R.A. 5980 and sells its lease contract or merely sells its receivables (and therefore retains title to the equipment), the rental amount received by the buyer shall be subjected to the pertinent provisions governing corporate taxation under the NIRC without prejudice to the exemptions and benefits allowed by special laws. casia SECTION 7. Effectivity. — These regulations shall take effect on January 1, 1987 and shall be applicable to all leases written on or after the said date." (SGD.) JAIME V. ONGPIN Minister of Finance Recommending Approval: (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue ANNEX "A" SCHEDULE OF DEPRECIATION Asset classification Depreciable Life 1.

Land Transportation Equipment 4 years

2.

Water Transport Equipment

3.

Air Transport Equipment 8 years

4.

Industrial Equipment

5 years

5.

Agricultural Equipment

4 years

6.

Construction Equipment 5 years

7.

Telecommunication Equipment 5 years

8.

Office Machines

9.

Main Frame Computer

8 years

3 years 5 years

10.

Materials Handling Equipment

11.

Auxiliary Equipment

5 years

5 years

(Please refer to subsequent pages for details of various asset classification) 1.

LAND TRANSPORT EQUIPMENT

1.1

Automotive Vehicles

1.2

Passenger Bus

1.3

Tourist Bus

1.4

Asian Utility Vehicles

1.5

Light-Duty Trucks (Such as Pick-ups)

1.6

Medium-Duty Trucks (Such as Dump Trucks)

1.7

Heavy-Duty Trucks (Prime Mover)

1.8

Locomotives

1.9

Trailers (Flatbed & Skeletal)

1.10

Tankers (Bulk Carriers)

1.11

Motorcycles

AEIHaS

1.12 And such other similar or related equipment, as may be mutually agreed upon from time to time. 2.

WATER TRANSPORT EQUIPMENT

2.1

Tugboats

2.2

Barges

2.3

Tankers

2.4

Purse Seiner

2.5

Reefer Vessels

2.6

Container Vessels

2.7

Passenger Vessels

2.8 And such other similar or related equipment, as may be mutually agreed upon from time to time. 3.

AIR TRANSPORT EQUIPMENT

3.1

Helicopters

3.2

Prop Aircraft

3.3

Turbo-Prop Aircraft

3.4

Jet Aircraft

3.5 And such other similar or related equipment, as may be mutually agreed upon from time to time. TaCIDS 4.

INDUSTRIAL EQUIPMENT

4.1

Injection Moulding Machines

4.2

Extruding Machines

4.3

Foundry Equipment

4.3

Metal Fabrication Equipment

4.5

Welding Equipment

4.6

Logging Equipment

4.7

Sawmill Equipment

4.8

Woodworking Equipment

4.9

Kiln Drying Equipment

4.10

Refrigerating Equipment

4.11

Mining and Quarrying Equipment

4.12

Printing Equipment

4.13

Textile Machines

4.14

Refractory Equipment

4.15

Boilers

4.16

Industrial Pumps

4.17

Industrial Gas Manufacturing Equipment

4.18

Distilling Equipment

4.19

Laboratory Testing Equipment

4.20

Medical Equipment

4.21

Drilling Equipment

AaCTID

4.22 And such other similar or related equipment, as may be mutually agreed upon from time to time.

5.

AGRICULTURAL EQUIPMENT

5.1

Threshers

5.2

Palay Drilers

5.3

Rice Mills

5.4

Corn Mills

5.5

Feed Mills

5.6

4-Wheel Tractors with farm implements

5.7

2-Wheel Tractors with farm implements

5.8

Track type agricultural tractors with farm implement

5.9

Hard Tractors with prime mover and farm implements

5.10

Irrigation Pumps/Aerators

5.11

Diesel Engines

5.12 And such other similar or related equipment, as may be mutually agreed upon from time to time. 6.

CONSTRUCTION EQUIPMENT

6.1

Bulldozers (Track type or wheel)

6.2

Loaders (Track type of Wheel)

6.3

Compactors

6.4

Motor Graders

6.5

Tractor-Scrapers

6.6

Off-Highway Trucks

6.7

Excavators (Track Type or Wheel)

6.8

Crushing Plant

6.9

Concrete Batching Plant

6.10

Asphalt Mixing Plant

6.11

Pipelayers

6.12

Asphalt Laying Machines

6.13

Hydraulic Breakers

6.14 And such other similar or related equipment, as may be mutually agreed upon from time to time. 7.

TELECOMMUNICATIONS EQUIPMENT

7.1

PABX Systems

7.2

Telex Machines

7.3

VFT Equipment

7.4

Teleprinters

7.5

Broadcasting Equipment

7.6

Transmitting Equipment

HaTDAE

7.7 And such other similar or related equipment, as may be mutually agreed upon from time to time. 8.

OFFICE MACHINES

8.1

Adding Machines

8.2

Copiers

8.3

Calculators

8.4

Typewriters

8.5

Mini-Computers

8.6

Micro-Computers

8.7

Stencil Machines

8.8

Mimeographing Machines

8.9

Posting Machines

8.10

Cash Registers

8.11 And such other similar or related equipment, as may be mutually agreed upon from time to time. 9.

MAINFRAME COMPUTERS

10

MATERIALS HANDING EQUIPMENT

10.1

Forklifts

10.2

Container Vans

10.3

Conveyor Systems

10.4

Box Cars

AEaSTC

10.5

Cranes (mounted or overhead)

10.6

Loaders with tines

10.7

Cement Mixers

10.8 And such other similar or related equipment, as may be mutually agreed upon from time to time. 11

AUXILIARY EQUIPMENT

11.1

Air-conditioning Systems

11.2

Generators and Accessories

11.3

Elevators

11.4

Escalators

11.5

Water Tanks

11.6

Water Heating Systems

11.7

Air Compressors

11.8

Cooling Tanks

11.9

Anti-Pollution Equipment

11.10 Audio-Visual Equipment 11.11 And such other similar or related equipment, as may be mutually agreed upon from time to time. aTcIAS ANNEX "B" GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOME COMPONENT OF FINANCIAL LEASE RENTAL Lease rentals received by financial lessor shall be broken down into a principal and lease income component, the latter being subjected to the gross receipts tax under Sections 260 and 261 of NIRC, as amended by Section 15 of P.D. 1739. Recognition of lease income shall be based either on the annuity methods or the sum-of-the years'-digits (SYD) method. PART A: ANNUITY METHOD Lease income under the annuity method is derived by computing the lease rate on the diminishing outstanding principal of the net lease facility. Explanation follows. SEC. 1.

Determination of Lease Rate

The lease rate is a function of the basic parameters that normally comprise a lease transactions, namely: the lease amount, guarantee deposit, lease rental, periodic payment, the term of the lease and the residual value. The lease rate is defined as the internal rate of return of a specific lease transaction such that:

Where Ct

=

cash flow or period t, whether it be a net cash inflow

of outflow r

=

the lease rate for a period t

t

=

the periodic time involved in the lease transaction

which may be monthly, quarterly, semi-annually or yearly. å

=

the summation of the series of

cash flow over a period of time n

=

the last period in which a cash flow is expected

For purposes of computing the lease rate factor, the cash flows accruing for a period, whether paid in advance is immaterial and shall be treated as any other in arrears payments. DTIcSH (Please refer to Exhibit I for computational examples in the determination of the lease rate factor.) SEC. 2.

Determination of Lease Income

Lease income component of lease rentals shall be determined by the following formula: Outstanding principal

Lease Lease income

balance of lease

rate

facility

X

=

for a specific

factor period t

(Please refer to Exhibit 2A for computational examples in the determination of the lease income component.) PART B: SUM-OF-THE-YEARS'-DIGITS (SYD) METHOD Lease income under the SYD method is derived by computing the SYD factor (number of remaining periodic payments divided by the sum-of-the-years'-digits) on the total lease income. Explanation follows: SEC. 1.

Determination of SYD

The SYD is computed by

a)

using the following algebraic equation

SYD

=

N

(N+1)

——— 2 where N represents the number of periodic payments; b) or, simply adding all the digits representing the periodic payments. Thus, for a transaction involving twelve (12) periodic payments, SYD may be computed as follows: 1)

SYD

=

12

(12+1)

——— 2

2)

=

78

SYD

=

1+2+3+4+5+6+

7+8+9+10+11+12 = SEC. 2.

78 Determination of the Total Lease Income

The total lease income is derived by deducting the net lease facility (lease facility minus residual value) from the total lease receivables (lease rentals.) HcaDIA SEC. 3.

Determination of Lease Income

Lease income component of lease rentals shall be determined by the following formula: Lease Total income No. of remaining periodic payments (NRP) —————————————————— SYD

X

Income

Lease =

for a

specific

period

(Please refer to Exhibit 28 for computational examples in the determination of the lease income component.) Exhibit 1 Computational Examples in the Determination of the Lease Factor

Example 1. Lease Facility

:

P1,000,000

Guarantee Deposit :

0

Residual Value

P100,000

Period :

:

3 years in 12 quarterly installments

Lease Rentals

:

P93,415.88 payable quarterly in arrears

Based on the above parameters, the resulting cash flows for the lessor and correspondingly lease rate factor, using the formula

Where r = lease rate are as follows: Present Value Discount Period Net

Net

Factor at

(in

Lease Lease Residual

qtr)

Facility

RentalValue Inflow Rate 1Value 2

0

1,000,000

(1,000,000) 1.00000

(1,000,000)

1

93,415.88

93,415.88

.97087

90,694.68

2

93,415.88

93,415.88

.94260

88,053.81

3

93,415.88

93,415.88

.91514

85,488.61

4

93,415.88

93,415.88

.88849

82,999.08

5

93,415.88

93,415.88

.86261

80,581.47

6

93,415.88

93,415.88

.83748

78,233.93

7

93,415.88

93,415.88

.81309

75,955.52

8

93,415.88

93,415.88

.78941

73,743.43

9

93,415.88

93,415.88

.76642

71,595.80

10

93,415.88

93,415.88

.74409

69,509.82

11

93,415.88

93,415.88

.72242

67,485.50

12

93,415.88

100,000

193,415.88 .70138

—————

Cash 3% lease

Present

135,658.03

Total cumulative present value 0 1. Discount factor at a certain rate need not be computed since this could be acquired from present value tables. 2.

Figures not exact due to rounding off.

The above example has shown that the lease rate factor for this specific lease transaction with the given parameters above is 3% per quarter or 12% per annum. Normally, finding the lease rate factor is a tedious process of trial and error, which would necessitate at times, the process of interpolation. This however could be determined with greater ease with the use of a financial calculator with the capability of imputing the internal rate of return. TDcCIS Example 2. Same parameters as Example 1 except that lease rental payments are in advance. For purposes of determining the lease rate factor to be used for computing the lease income component of a lease rental, timing differences of whether a periodic lease rental payment is payable in advance or in arrears, is immaterial. Consequently, example 2 would have the same cash flows as example 1 and thus, the lease rate factor in determining lease income is also .03. Example 3

Lease Facility

:

P1,000,000

Guaranty Deposit

:

P100,000

Residual Value

:

P100,000

Period :

3 years in 12 quarterly installments

Lease Rental:

P90,415.88 payable

quarterly in arrears Given the parameters of this lease transaction, the cash flows and the resultant lease rate factor, are as follows: Present Value Discount Period Net

Net

Factor at

(in

Lease Lease Residual

Cash 3% lease

Present

qtr)

Facility

RentalValue Inflow Rate 1Value 3

0

900,000 1

(900,000)

1.00000

(900,000)

1

90,415.88

90,415.88

.97087

85,782.06

2

90,415.88

90,415.88

.94260

85,226.01

3

90,415.88

90,415.88

.91514

82,743.19

4

90,415.88

90,415.88

.88849

80,333.61

5

90,415.88

90,415.88

.86261

77,993.64

6

90,415.88

90,415.88

.83748

75,721.49

7

90,415.88

90,415.88

.81309

73,516.25

8

90,415.88

90,415.88

.78941

71,375.20

9

90,415.88

90,415.88

.76642

69,296.54

10

90,415.88

90,415.88

.74409

67,277.55

11

90,415.88

90,415.88

.72242

65,318.24

12

93,415.88

02

90,415.88

.70138

63,415.89

————— Total cumulative present value 0 Example 4. Same parameters as Example 3 except that lease rental payments are in advance. The resulting cash flows for this transaction are the same as in Example 3 due to reasons explained in example 2. Thus, lease rate factor is also 3% per quarter. TIHCcA Example 5. Lease Facility

:

P1,000,000

Guaranty Deposit

:

P100,000

Residual Value

:

P200,000

Period :

3 years in 12 quarterly installments

Lease Rental:

P83,369.67 payable

quarterly in arrears The lease rate factor for this transaction is 3% per quarter or 12% per annum as shown by the following table: 1 Lease facility minus guarantee deposit is the net cash outflow of the lessor. 2 The residual value for this transaction, cashflow wise, is 0, since the guarantee deposit, which is in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000.

3

Figures not exact due to rounding off. Present Value Discount

Period Net

Net

Factor at

(in

Lease Lease Residual

Cash 3% lease

Present

qtr)

Facility

RentalValue Inflow Rate 1Value 3

0

900,000 1

(900,000)

1.00000

(900,000)

1

83,369.67

83,369.67

.97087

80,941.11

2

83,369.67

83,369.67

.94260

78,584.25

3

83,369.67

83,369.67

.91514

76,294.92

4

83,369.67

83,369.67

.88849

74,073.12

5

83,369.67

83,369.67

.86261

71,915.51

6

83,369.67

83,369.67

.83748

69,820.43

7

83,369.67

83,369.67

.81309

67,787.04

8

83,369.67

83,369.67

.78941

65,812.85

9

83,369.67

83,369.67

.76642

63,896.18

10

83,369.67

83,369.67

.74409

62,034.54

11

83,369.67

83,369.67

.72242

60,227.92

12

83,369.67

100,000 2

183,369.67 .70138

128,611.82

————— Total cumulative present value 0 Example 6. Same parameters as Example 5 except that lease rental payments are in advance. STaCIA Lease rate factor is also 3% per quarter or 12% per annum as Example 5. 1

Net cash outflow is lease facility minus guarantee deposit.

2 Guarantee deposit in the amount of P100,000 is netted out at the end of the lease term from the P200,000 residual value. Thus, cashflow-wise, residual value is only P100,000.

3

Figures not exact due to rounding off.

Exhibit 2A Computational Examples in the Determination of the Lease Income Component of Lease Rental under the Annuity Method Example 1. Lease Facility Guarantee Deposit : Period :

:

P1,000,000

0

3 years in 12 quarterly installments

Lease Rental:

P93,415.88 payable

quarterly in arrears Based on Exhibit 1, example 1, the lease rate quarterly factor is .03. Thus, using the basic formula: Ending Outstanding Principal

Lease Rate Lease Income for the

Balance of the Lease Facility

X

of the Previous Period (t = n)

(t = n+1)

Factor =

Subsequent period

we arrive at the following table: (A)

(B)

Ending

(C)

(D)

Payment of (E-D-C)

Outstanding Residual Period Balance

(E)

Principal

Lease Income

Value Repayment (A) x .03)

Lease Rental

0

1,000,000.00

93,415.88

1

936,584.12 63,415.88

30,000.00

93,415.88

2

871,265.76 65,318.36

28,097.52

93,415.88

3

803,987.85 67,277.91

26,137.97

93,415.88

4

734,691.61 69,296.24

24,119.64

93,415.88

5

663,316.48 71,375.13

22,040.75

93,415.88

6

589,800.09 73,516.39

19,899.49

93,415.88

7

514,078.21 75,721.88

17,694.00

93,415.88

8

436,084.68 77,993.53

15,422.35

93,415.88

9

355,751.34 80,333.34

13,082.54

93,415.88

10

273,088.00 82,743.34

10,672.54

93,415.88

11

187,782.36 85,225.64

8,190.24

93,415.88

12

100,000.00 87,782.36

5,663.52 1

93,415.88

1

Figures not exact due to rounding off.

Example 2. Same parameters as Example 1 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. caTESD Ending

Payment of

Outstanding Residual Period Balance

Principal

Lease Lease

Value Repayment Income

Rental

0

936,584.12 63,415.88

30,000.00

93,415.88

1

871,265.76 65,318.36

28,097.52

93,415.88

2

803,987.85 67,277.91

26,137.97

93,415.88

3

734,691.61 69,296.24

24,179.64

93,415.88

4

663,316.48 71,375.13

22,040.75

93,415.88

5

589,800.09 73,516.39

19,899.49

93,415.88

6

514,078.21 75,721.88

17,694.00

93,415.88

7

436,084.68 77,993.53

15,422.35

93,415.88

8

355,751.34 80,333.34

13,082.54

93,415.88

9

273,088.00 82,743.34

10,672.54

93,415.88

10

187,782.36 85,225.64

8,190.24

93,415.88

11

100,000.00 87,782.36

5,663.52 1

93,415.88

12

100,000.00

Example 3. Lease Facility

:

P1,000.000

Guaranty Deposit

:

P100,000

Residual Value

:

P100,000

Period :

3 years in 12 quarterly installments

Lease Rental:

P90,415.88 payable

quarterly in arrears 1

Figures not exact due to rounding off.

Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending

Payment of

Outstanding Residual Period Balance

Principal

Lease Lease

Value Repayment Income

Rental

0

900,000.00

1

836,584.12 63,415.88

27,000.00

90,415.88

2

771,265.76 65,318.36

25,097.52

90,415.88

3

703,987.85 67,277.91

23,137.97

90,415.88

4

634,691.61 69,296.24

21,119.64

90,415.88

5

563,316.48 71,375.13

19,040.75

90,415.88

6

489,800.09 73,516.39

16,899.49

90,415.88

7

414,078.21 75,821.88

14,694.00

90,415.88

8

336,084.68 77,993.53

12,422.35

90,415.88

9

255,751.34 80,333.34

10,082.54

90,415.88

10

173,008.00 82,743.34

7,672.54

90,415.88

11

87,782.36

85,225.64

5,190.24

90,415.88

12

-

87,782.36

2,633.52 2

90,415.88

01

Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, lease rate quarterly factor is also .03. ETIDaH Ending

Payment of

Outstanding Residual Period Balance

Principal

Lease Lease

Value Repayment Income

Rental

0

836,584.12 63,415.88

27,000.00

90,415.88

1

771,265.76 65,318.36

25,097.52

90,415.88

2

703,987.85 67,277.91

23,137.97

90,415.88

3

634,691.61 69,296.24

21,119.64

90,415.88

4

563,316.48 71,375.13

19,040.75

90,415.88

5

489,800.09 73,516.39

16,899.49

90,415.88

6

414,078.21 75,721.88

14,694.00

90,415.88

7

336,084.68 77,993.53

12,422.35

90,415.88

8

255,751.34 80,333.34

10,082.54

90,415.88

9

173,008.00 82,743.34

7,672.54

90,415.88

10

87,782.36

5,190.24

90,415.88

11

-

87,782.36

12

-

01

85,225.64

2,633.52 2

90,415.88

1 Cashflow-wise, residual value is 0 since guarantee deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. 2

Figures not exact due to rounding off.

Example 5. Lease Facility

:

P1,000.000

Guaranty Deposit

:

P100,000

Residual Value

:

P200,000

Period :

3 years in 12 quarterly installments

Lease Rental:

P83,369.67 payable

quarterly in arrears Based on Exhibit A, example 3, lease rate quarterly factor is .03. Thus, Ending

Payment of

Outstanding Residual Period Balance

Principal

Lease Lease

Value Repayment Income

Rental

0

900,000.00

1

843,630.33 56,369.67

27,000.00

83,369.67

2

785,569.57 58,060.76

25,308.91

83,369.67

3

725,766.99 59,802.58

23,567.09

83,369.67

4

664,170.33 61,596.66

21,773.01

83,369.67

5

600,725.77 63,444.56

19,925.11

83,369.67

6

535,377.87 65,347.90

18,021.77

83,369.67

7

468,069.54 67,308.33

16,061.34

83,369.67

8

398,741.96 69,327.58

14,042.09

83,369.67

9

327,334.55 71,407.41

11,962.26

83,369.67

10

253,784.92 73,549.63

9,820.04

83,369.67

11

178,028.80 75,756.12

7,613.55

83,369.67

12

-

78,028.80

5,340.87 2

100,000.00 1

83,369.67

1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is also in the amount of P100,000, is netted out at the end of lease term from the P200,000 residual value. 2

Figures not exact due to rounding off.

Example 6. Same parameters as Example 5, except that lease rental payments are in advance; thus, lease rate quarterly factor is also .03. AcHCED Ending

Payment of

Outstanding Residual Period Balance

Principal

Lease Lease

Value Repayment Income

Rental

0

843,630.33 56,369.67

27,000.00

83,369.67

1

785,569.57 58,060.76

25,308.91

83,369.67

2

725,766.99 59,802.58

23,567.09

83,369.67

3

664,170.33 61,596.66

21,773.01

83,369.67

4

600,725.77 63,444.56

19,925.11

83,369.67

5

535,377.87 65,347.90

18,021.77

83,369.67

6

468,069.54 67,308.33

16,061.34

83,369.67

7

398,741.96 69,327.58

14,042.09

83,369.67

8

327,334.55 71,407.41

11,962.26

83,369.67

9

253,784.92 73,549.63

9,820.04

83,369.67

10

178,028.80 75,756.12

7,613.55

83,369.67

11

100,000.00 78,028.80

5,340.87 2

83,369.67

12

-

100,000.00 1

1 Cashflow-wise, residual value is P100,000, since guarantee deposit which is also in the amount of P100,000, is netted out at the end of lease term from the P200,000 residual value. 2

Figures not exact due to rounding off.

Exhibit 2B Computational Examples in the Determination of the Lease Income Component of Lease Rentals under the SYD Method Example 1. Lease Facility

:

P1,000,000

Guaranty Deposit

:

0

Residual Value

:

P100,000

Period :

3 years in 12 quarterly installments

Lease Rental:

P93,415.88 payable

quarterly in arrears Based on the above parameters, the total lease income is P220,990.56 [(93,415.88 x 12) - (P1,000,000-P100,000)], while the SYD is equal to 78. Thus, using the formula: No. of remaining periodic Total Lease Lease income for a payments (NRP)

X

Income

=

specific period

———————— SYD the lease income for periods 1 to 12 are computed as follows: Total Lease Lease Income Period NRP/STD

x

Income

1

12/78 P220,990.56 P33,998.55

2

11/78 220,990.56 31,165.34

3

10/78 220,990.56 28,332.12

4

9/78

220,990.56 25,498.91

5

8/78

220,990.56 22,665.70

6

7/78

220,990.56 19,832.49

7

6/78

220,990.56 16,999.27

8

5/78

220,990.56 14,166.06

9

4/78

220,990.56 11,332.85

10

3/78

220,990.56 8,499.64

=

for the period

11

2/78

220,990.56 5,666.42

12

1/78

220,990.56 2,833.21

—————— P220,990.56 =========== Using the figures above, we arrive at the following table: (A)

(B)

(C)

(D)

(E)

Payment of Principal Outstanding Residual Period Balance

Lease Lease Repayment

Value RentalIncome

(C-D-E)

0

1,000,000.00

1

940,582.67 93,415.88

33,998.55

59,417.33

2

878,332.13 93,415.88

31,165.34

62,250.54

3

813,248.37 93,415.88

28,332.12

65,083.76

4

745,331.40 93,415.88

25,498.91

67,916.97

5

674,581.22 93,415.88

22,665.70

70,750.18

6

600,997.83 93,415.88

19,832.49

73,583.39

7

524,581.22 93,415.88

16,999.27

76,416.61

8

445,331.40 93,415.88

14,166.06

79,249.82

9

363,248.37 93,415.88

11,332.85

82,083.03

10

278,332.13 93,415.88

8,499.64

84,916.24

11

190,582.67 93,415.88

5,666.42

87,749.46

12

-

100,000.00 93,415.88

2,833.21

90,582.67

Example 2. Same parameters as Example 1 except that lease rental payments are in advance, thus, the computation for the lease income is also the same. DTIACH (A)

(B)

(C)

(D)

(E)

Payment of Outstanding Residual

Lease Lease Principal

Period Balance

Value RentalIncome

Repayment

0

940,582.67 93,415.88

33,998.55

59,417.33

1

878,332.13 93,415.88

31,165.34

62,250.54

2

813,248.37 93,415.88

28,332.12

65,083.76

3

745,331.40 93,415.88

25,498.91

67,916.97

4

674,581.22 93,415.88

22,665.70

70,750.18

5

600,997.83 93,415.88

19,832.49

73,583.39

6

524,581.22 93,415.88

16,999.27

76,416.61

7

445,331.40 93,415.88

14,166.06

79,249.82

8

363,248.37 93,415.88

11,332.85

82,083.03

9

278,332.13 93,415.88

8,499.64

84,916.24

10

190,582.67 93,415.88

5,666.42

87,749.46

11

100,000.00 93,415.88

2,833.21

90,582.67

12

-

-

100,000.00 -

Example 3. Lease Facility

:

P1,000,000

Guaranty Deposit

:

P100,000

Residual Value

:

P100,000

Period :

-

3 years payable in 12

quarterly installments Lease Rental:

P93,415.88 payable quarterly

in arrears Based on the given parameters, the total lease income is P184,990.56 [(P90,415.88 x 12) - (P1,000,000-P100,000)], and the SYD is also 78. Thus, Total Lease Lease Income Period NRP/STD

x

Income

1

12/78 P184,990.56 P28,460.09

2

11/78 184,990.56 26,088.41

3

10/78 184,990.56 23,716.74

4

9/78

184,990.56 21,345.06

=

for the period

5

8/78

184,990.56 18,973.39

6

7/78

184,990.56 16,601.72

7

6/78

184,990.56 14,230.04

8

5/78

184,990.56 11,858.37

9

4/78

184,990.56 9,486.70

10

3/78

184,990.56 7,115.02

11

2/78

184,990.56 4,743.35

12

1/78

184,990.56 2,371.67

—————— P184,990.56 =========== (A)

(B)

(C)

(D)

(E)

Payment of Outstanding Residual Period Balance

Lease Lease Principal

Value RentalIncome

Repayment

0

900,00.00

1

838,044.21 90,415.88

28,460.09

61,955.79

2

773,716.74 90,415.88

26,088.41

64,327.47

3

707,017.60 90,415.88

23,716.74

66,699.14

4

637,946.78 90,415.88

21,345.06

69,070.82

5

566,504.29 90,415.88

18,973.39

71,442.49

6

492,690.13 90,415.88

16,601.72

73,814.16

7

416,504.29 90,415.88

14,230.04

76,185.84

8

337,946.78 90,415.88

11,858.37

78,557.51

9

257,017.60 90,415.88

9,486.70

80,929.18

10

173,716.74 90,415.88

7,115.02

83,300.86

11

88,044.21

90,415.88

4,743.35

85,672.53

12

-

90,415.88

2,371.67

88,044.21

01

1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. Example 4. Same parameters as Example 3 except that lease rental payments are in advance, thus, the computation for the lease income is also the same. SDHAEC (A)

(B)

(C)

(D)

(E)

Payment of Outstanding Residual Period Balance

Lease Lease Principal

Value RentalIncome

Repayment

0

838,044.21 90,415.88

P28,460.09 61,955.79

1

773,716.74 90,415.88

26,088.41

64,327.47

2

707,017.60 90,415.88

23,716.74

66,699.14

3

637,946.78 90,415.88

21,345.06

69,070.82

4

566,504.29 90,415.88

18,973.39

71,442.49

5

492,690.13 90,415.88

16,601.72

73,814.16

6

416,504.29 90,415.88

14,230.04

76,185.84

7

337,946.78 90,415.88

11,858.37

78,557.51

8

257,017.60 90,415.88

9,486.70

80,929.18

9

173,716.74 90,415.88

7,115.02

83,300.86

10

88,044.21

4,743.35

85,672.53

11

-

90,415.88

2,371.67

12

-

01

-

-

-

Example 5. Lease Facility

:

P1,000,000

90,415.88

Guaranty Deposit

:

P100,000

Residual Value

:

P200,000

Period :

88,044.21

3 years, 12 quarterly installments

Lease Rental: quarterly in arrears

P83,369.67 payable

The total lease income in this example is P200,436.04 [(P83,369.67 x 12) (P1,000,000.00-P200,000)], while the SYD is also 78. Total Lease Lease Income Period NRP/STD

x

Income

1

12/78 P200,436.04 P30,836.31

2

11/78 200,436.04 28,266.62

3

10/78 200,436.04 25,696.93

4

9/78

200,436.04 23,127.24

5

8/78

200,436.04 20,557.54

6

7/78

200,436.04 17,987.85

7

6/78

200,436.04 15,418.16

8

5/78

200,436.04 12,848.46

9

4/78

200,436.04 10,278.77

10

3/78

200,436.04 7,709.08

11

2/78

200,436.04 5,139.39

12

1/78

200,436.04 2,569.69

=

for the period

1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term and is netted out with the residual value, which in this example, is also P100,000. (A)

(B)

(C)

(D)

(E)

Payment of Outstanding Residual Period Balance

Lease Lease Principal

Value RentalIncome

Repayment

0

900,00.00

1

847,466.64 83,369.67

30,836.31

52,533.36

2

792,363.59 83,369.67

28,266.62

55,103.05

3

734,690.85 83,369.67

25,696.93

57,672.74

4

674,448.42 83,369.67

23,127.24

50,242.43

5

611,636.29 83,369.67

20,557.54

62,812.13

6

546,254.47 83,369.67

17,987.85

65,381.82

7

478,302.96 83,369.67

15,418.16

67,951.51

8

407,781.75 83,369.67

12,848.46

70,521.21

9

334,690.85 83,369.67

10,278.77

73,090.90

10

259,030.26 83,369.67

7,709.08

75,660.59

11

180,799.98 83,369.67

5,139.39

78,230.28

12

-

83,369.67

2,569.69

100,000.00 1

80,799.98

Example 6. Same parameters as Example 5, except that lease rental payments are in advance, thus, the computation for the lease income is also the same. CDESIA (A)

(B)

(C)

(D)

(E)

Payment of Outstanding Residual Period Balance

Lease Lease Principal

Value RentalIncome

Repayment

0

847,466.64 83,369.67

30,836.31

52,533.36

1

792,363.59 83,369.67

28,266.62

55,103.05

2

734,690.85 83,369.67

25,696.93

57,672.74

3

674,448.42 83,369.67

23,127.24

50,242.43

4

611,636.29 83,369.67

20,557.54

62,812.13

5

546,254.47 83,369.67

17,987.85

65,381.82

6

478,302.96 83,369.67

15,418.16

67,951.51

7

407,781.75 83,369.67

12,848.46

70,521.21

8

334,690.85 83,369.67

10,278.77

73,090.90

9

259,030.26 83,369.67

7,709.08

75,660.59

10

180,799.98 83,369.67

5,139.39

78,230.28

11

100,000.00 83,369.67

2,569.69

70,799.98

12

-

-

100,000.00 -

-

1 Cashflow-wise, residual value is 100,000 since guaranty deposit, in the amount of P100,000, is given back at the end of the lease term from the P200,000 residual value.

C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.