rr no. 19-86

Copyright 2015 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2015 1

(1)

November 10, 1986 January 1, 1987

REVENUE REGULATIONS NO. 19-86

SUBJECT : Taxation of Leases

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Purpose. These regulations pursuant to Section 277 ofthe National Internal Revenue Code, prescribe the rules to govern the tax treatment oflease agreements and provide guidelines for determining whether certain transactionspurporting to be leases of tangible personal property are in reality conditional salescontracts.

PART A

INCOME TAX

SECTION 2. Reporting of Income and Deductions by a Lessor or aVendor.

2.01 Lessor if contract is a lease The amount paid for the use ofproperty under an agreement which is determined under these regulations to be alease shall be considered as rental ( and therefor includible in gross income) ofthe lessor. Such lessor may deduct all ordinary and necessary expenses paid orincurred during the taxable year which are attributable to the earning of theincome. In addition, the lessor, with respect to properties subject to an"operating lease" as defined in subparagraph 2.01/1 of this Section, will beallowed 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 theseRegulations which are subject to "finance lease" (as defined in subparagraph2.01/2 of this Section) may be depreciated during the primary lease period butsuch period shall not be less than 60% of the depreciable life of the property asindicated in Annex "A". If, under the agreement, the lessee pays to the lessor a

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stipulated rental, and in addition pays certain other expenses which are properlypayable by the lessor, the lessor is deemed to have received as rental income notonly the stipulated rental but also the amount of such other expenses paid by thelessee to, or for the account of, the lessor.

2.01/1 Operating lease defined An "operatinglease" is a contract under which the asset is not whollyamortized during the primary period of the lease, and where thelessor does not rely solely on the rentals during the primaryperiod for his profits, but looks for the recovery of the balanceof his costs and for the rest of his profits from the sale orre-lease of the returned asset of the primary lease period.

2.01/2 Finance lease defined "Finance lease"or full payout lease is a contract involving payment over anobligatory period (also called primary or basic period) ofspecified rental amounts for the use of a lessor's property,sufficient in total to amortize the capital outlay of the lessor andto provide for the lessor's borrowing costs and profits. Theobligatory period refers to the primary or basic non-cancellableperiod of the lease which in no case shall be less than 730 days.The lessee, not the lessor, exercises the choice of the asset andis normally responsible for maintenance, insurance and suchother expenses pertinent to the use, preservation and operationof the asset. Finance leases may be extended, after theexpiration of the primary period, by non-cancellable secondaryor subsequent periods with the rentals significantly reduced.The residual value shall in no instance be less than five percentum (5%) of the lessor's acquisition cost of the leased asset.

2.02 "Packaged lease" not taxable as acorporation A "package lease" or "lease package" shall notbe considered as a joint venture or association taxable as acorporation as defined in Section 20(b) of the NationalInternal Revenue Code.

2.03 "Packaged Lease" or "Lease Package"defined A lease package refers to that type of finance leasewhich has two or more lessors, particularly if the size of thelease facility is substantial relative to the exposure limits of alessor. Under a lease package, the lead lessor either invites oneor more lessors to participate as a co-lessor in the funding lease.

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Consequently, two or more lessors may have co-ownership of asingle leased item, proportionate to their participation. For thepurpose of this subparagraph, the lessors in a lease packageshall be limited to finance and leasing companies registeredunder Republic Act No. 5980.

2.04 Taxation of income derived from"'package leases" The rental income derived from apackaged lease shall be taxable directly to each of theparticipating lessors in their individual capacity, the respectiveshares of which shall be determined in accordance with theirsharing agreement. Any gain or loss derived by the lessor whosells the lease contracts or lease receivables to one or morebuyers shall be taxed as ordinary gain or loss. To computeordinary gain or loss, the outstanding principal value of thelease as determined in Annex "B" shall be deducted from theselling price.

2.05 Vendor, if contract is a conditional sale If the agreement is determined to be a sale, the amountsreceived under the contract by the vendor will be considered tobe payments which are part of the sales price to the extent suchamounts 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 inthese Regulations, an agreement constitutes a lease, the lessee may deduct theamount of rent paid or accrued, including all expenses which under the terms ofthe agreement the lessee is required to pay to, or for the account of, the lessor. Ifthe payments are so arranged as to constitute advance rentals, such paymentsshall 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 reasonableexpectation that such options will be exercised.

3.02 Vendee, if contract is a conditional sale If under the provisionsof these Regulations, the agreement is to be treated as a sale, the amounts paidto the vendor will be considered as payments which are part of the purchaseprice to the extent such amounts do not represent interest or other charges. acd

SECTION 4. General criteria for characterizing an agreement as aconditional sale.


4.01 Statutory basis for distinguishing a lease from a sale A lease isa 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 periodwhich may be definite or indefinite (Article 1643, Civil Code ). In otherwords, a lease is an agreement between a lessor and a lessee giving the lesseepossession and use of a specific property upon payment of rentals over a periodof time. The lessor retains ownership of the asset so that it shall not become theproperty of the lessee or any related third party during the term of the lease. Onthe other hand, a sale is a contract whereby one of the contracting parties (selleror vendor) obligates himself to transfer ownership of and to deliver a determinatething while the other party (buyer or vendee) obligates himself to pay for saidthing a price certain in money or its equivalent. (Article 1458, Civil Code.)

4.02 Characterizing a transaction that does not readily fit statutoryconcepts In cases where the true character of the transaction cannot bedefinitely determined from the terms and conditions of the agreement, theCommissioner shall make the determination on the basis of all relevant facts andcircumstances of each transaction, among which are (but not limited) thoseindicated in the following subparagraphs.

4.03 Factors to be considered.

4.03/1 In general. Whether an agreement, which in form isa lease, is in substance a conditional sales contract depends upon the intentof the parties as evidenced by the provisions of the agreement, read in thelight of the facts and circumstances existing at the time the agreement wasexecuted. In ascertaining such intent no single test or any specialcombination of tests is absolutely determinative. No general rule, applicableto all cases can be laid down.

4.03/2 Compelling persuasive factors. A contract oragreement purported to be a lease shall be treated as conditional salescontract if one or more of the following compelling persuasive factors arepresent:

(A) The lessee is given the option to purchasethe asset at anytime during the obligatory period of thelease, notwithstanding that the option price is equivalentto or higher than the current fair market value of theasset;

(B) The lessee acquires automatic ownership


of the asset upon payment of the stated amount of"rentals" which under the contract he is required tomake;

(C) Portions of the periodic rental paymentsare credited to the purchase price of the asset; cdtai

(D) The receipts of payment indicate that thepayment made were partial or full payments of the asset.

4.03/3 Absence of compelling persuasive factors. In theabsence of the above compelling persuasive factors or contrary implication,an intent warranting treatment of a transaction for tax purposes as apurchase and sale rather than as a lease or rental agreement, may in generalbe said to exist if, for example, one or more of the following conditions arepresent:

(a) Portions of the periodic payments aremade specifically applicable to an equity to be acquiredby the lessee.

(b) The property may be acquired under apurchase option, at a price which is nominal in relationto the value of the property at the time when the optionmay be exercised, as determined at the time enteringinto the original agreement, or which is a relatively smallamount when compared with the total payments whichare 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 advanceruling recognizing the fact that an agreement actually constitutes a lease for taxpurposes. In cases where a lessor is engaged in the leasing business and frequentlyenters into a contract with various lessees under the same or essentially similar termsand conditions, the lessor may submit a model lease agreement on which to base anadvance ruling. Thereafter, any specific lease agreement entered into by the lessor anda lessee which does not substantially deviate from the terms and conditions of themodel contract on the basis which the advance ruling had been secured, need not besubmitted 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 anagreement qualifying as a finance lease as defined in Section 2.01/2 of theseRegulations shall be divided into two components, namely principal and interestto be arrived at using either the Annuity or the Sum-of-the-Years-Digits methodof accounting. The amount representing interest shall be determined inaccordance with the formulae prescribed in Annex "B".

6.02 The amount of interest, if the same is derived by a finance andleasing company registered under R.A. 5980 shall be subject to the gross receiptstax prescribed in Sections 260 and 261 (as amended by PD 1739 ) ofthe National Internal Revenue Code based on the remaining maturity of thelease. Amounts which the lessee, under the agreement, pays to the lessor (inaddition to a stipulated rental) for certain other expenses properly payable by thelessor (as described in Section 2.01) shall be excluded for purposes of the grossreceipts tax determined under this subparagraph.

6.03 If the lessor is a person other than a finance and leasing companyregistered under R.A. 5980, then the rentals resulting from the lease agreementshall be subjected too the 4% contractor's tax imposed under Section 205 ofthe 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 thereforeretains title to the equipment), the rental amount received by the buyer shall besubjected to the pertinent provisions governing corporate taxation under theNIRC without prejudice to the exemptions and benefits allowed by special laws.casia

SECTION 7. Effectivity. These regulations shall take effect on January1, 1987 and shall be applicable to all leases written on or after the said date."

(SGD.) JAIME V. ONGPINMinister 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 8 years

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 3 years

9. Main Frame Computer 5 years

10. Materials Handling Equipment 5 years

11. Auxiliary Equipment 5 years

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

1. LAND TRANSPORT EQUIPMENT

1.1 Automotive Vehicles1.2 Passenger Bus AEIHaS1.3 Tourist Bus1.4 Asian Utility Vehicles1.5 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 Locomotives1.9 Trailers (Flatbed & Skeletal)1.10 Tankers (Bulk Carriers)1.11 Motorcycles1.12 And such other similar or related equipment, as may be mutually agreed

upon from time to time.

2. WATER TRANSPORT EQUIPMENT

2.1 Tugboats2.2 Barges2.3 Tankers2.4 Purse Seiner2.5 Reefer Vessels2.6 Container Vessels2.7 Passenger Vessels2.8 And such other similar or related equipment, as may be mutually agreed


3. AIR TRANSPORT EQUIPMENT

3.1 Helicopters3.2 Prop Aircraft3.3 Turbo-Prop Aircraft3.4 Jet Aircraft3.5 And such other similar or related equipment, as may be mutually agreed


4. INDUSTRIAL EQUIPMENT

4.1 Injection Moulding Machines4.2 Extruding Machines4.3 Foundry Equipment4.3 Metal Fabrication Equipment4.5 Welding Equipment4.6 Logging Equipment4.7 Sawmill Equipment4.8 Woodworking Equipment4.9 Kiln Drying Equipment4.10 Refrigerating Equipment4.11 Mining and Quarrying Equipment4.12 Printing Equipment4.13 Textile Machines4.14 Refractory Equipment


4.15 Boilers4.16 Industrial Pumps4.17 Industrial Gas Manufacturing Equipment4.18 Distilling Equipment4.19 Laboratory Testing Equipment AaCTID4.20 Medical Equipment4.21 Drilling Equipment4.22 And such other similar or related equipment, as may be mutually agreed


5. AGRICULTURAL EQUIPMENT

5.1 Threshers5.2 Palay Driers5.3 Rice Mills5.4 Corn Mills5.5 Feed Mills5.6 4-Wheel Tractors with farm implements5.7 2-Wheel Tractors with farm implements5.8 Track type agricultural tractors with farm implement5.9 Hard Tractors with prime mover and farm implements5.10 Irrigation Pumps/Aerators5.11 Diesel Engines5.12 And such other similar or related equipment, as may be mutually agreed


6. CONSTRUCTION EQUIPMENT

6.1 Bulldozers (Track type or wheel)6.2 Loaders (Track type of Wheel)6.3 Compactors6.4 Motor Graders6.5 Tractor-Scrapers6.6 Off-Highway Trucks6.7 Excavators (Track Type or Wheel)6.8 Crushing Plant6.9 Concrete Batching Plant6.10 Asphalt Mixing Plant6.11 Pipelayers6.12 Asphalt Laying Machines6.13 Hydraulic Breakers6.14 And such other similar or related equipment, as may be mutually agreed



7. TELECOMMUNICATIONS EQUIPMENT

7.1 PABX Systems7.2 Telex Machines7.3 VFT Equipment7.4 Teleprinters7.5 Broadcasting Equipment7.6 Transmitting Equipment7.7 And such other similar or related equipment, as may be mutually agreed


8. OFFICE MACHINES

8.1 Adding Machines8.2 Copiers8.3 Calculators8.4 Typewriters8.5 Mini-Computers8.6 Micro-Computers8.7 Stencil Machines8.8 Mimeographing Machines8.9 Posting Machines8.10 Cash Registers8.11 And such other similar or related equipment, as may be mutually agreed


9. MAINFRAME COMPUTERS

10 MATERIALS HANDING EQUIPMENT

10.1 Forklifts10.2 Container Vans10.3 Conveyor Systems10.4 Box Cars AEaSTC10.5 Cranes (mounted or overhead)10.6 Loaders with tines10.7 Cement Mixers10.8 And such other similar or related equipment, as may be mutually agreed


11 AUXILIARY EQUIPMENT

11.1 Air-conditioning Systems11.2 Generators and Accessories11.3 Elevators


11.4 Escalators11.5 Water Tanks11.6 Water Heating Systems11.7 Air Compressors11.8 Cooling Tanks11.9 Anti-Pollution Equipment11.10 Audio-Visual Equipment11.11 And such other similar or related equipment, as may be mutually agreed


ANNEX B

GUIDELINES IN THE DETERMINATION OF THE PRINCIPAL AND LEASE INCOMECOMPONENT OF FINANCIAL LEASE RENTAL

Lease rentals received by financial lessor shall be broken down into a principal andlease income component, the latter being subjected to the gross receipts tax under Sections260 and 261 of NIRC, as amended by Section 15 of P.D. 1739. Recognition of leaseincome 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 thediminishing outstanding principal of the net lease facility. Explanation follows.

SECTION 1. Determination of Lease Rate

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

Where Ct = cash flow or period t, whether it be a net cash inflowof outflow

r = the lease rate for a period t


t = the periodic time involved in the lease transactionwhich may be monthly, quarterly, semi-annually or yearly.

= the summation of the series ofcash 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 leaserate factor.)

SECTION 2. Determination of Lease Income

Lease income component of lease rentals shall be determined by the followingformula:

Outstanding principal Lease Lease incomebalance of lease X rate = for a specificfacility factor period t

(Please refer to Exhibit 2A for computational examples in the determination of thelease 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 totallease income. Explanation follows:

SEC. 1. Determination of SYD

The SYD is computed by

a) using the following algebraic equation

SYD = N (N+1)

2where 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= 78

2) SYD = 1+2+3+4+5+6+7+8+9+10+11+12

= 78SEC. 2. Determination of the Total Lease Income

The total lease income is derived by deducting the net lease facility (lease facilityminus residual value) from the total lease receivables (lease rentals.)

SEC. 3. Determination of Lease Income

Lease income component of lease rentals shall be determined by the followingformula:

LeaseTotal income

No. of remaining periodic payments (NRP) X Lease = for a Income specific

SYD period

(Please refer to Exhibit 28 for computational examples in the determination of thelease 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 andcorrespondingly lease rate factor, using the formula


Where r = lease rate

are as follows:

PresentValue Discount

Period Net Net Factor at(in Lease Lease Residual Cash 3% lease Presentqtr) Facility Rental Value Inflow Rate 1 Value 2

0 1,000,000 (1,000,000) 1.00000 (1,000,000)1 93,415.88 93,415.88 .97087 90,694.682 93,415.88 93,415.88 .94260 88,053.813 93,415.88 93,415.88 .91514 85,488.614 93,415.88 93,415.88 .88849 82,999.085 93,415.88 93,415.88 .86261 80,581.476 93,415.88 93,415.88 .83748 78,233.937 93,415.88 93,415.88 .81309 75,955.528 93,415.88 93,415.88 .78941 73,743.439 93,415.88 93,415.88 .76642 71,595.8010 93,415.88 93,415.88 .74409 69,509.8211 93,415.88 93,415.88 .72242 67,485.5012 93,415.88 100,000 193,415.88 .70138 135,658.03

Total cumulative present value 0

1. Discount factor at a certain rate need not be computed since this could beacquired 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 leasetransaction 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 attimes, the process of interpolation. This however could be determined with greater ease withthe 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 leaseincome component of a lease rental, timing differences of whether a periodic lease rentalpayment is payable in advance or in arrears, is immaterial. Consequently, example 2 wouldhave the same cash flows as example 1 and thus, the lease rate factor in determining leaseincome is also .03.

Example 3 Lease Facility : P1,000,000

Guaranty Deposit : P100,000



Lease Rental : P90,415.88 payablequarterly in arrears

Given the parameters of this lease transaction, the cash flows and the resultant leaserate factor, are as follows:



0 900,000 1 (900,000) 1.00000 (900,000)1 90,415.88 90,415.88 .97087 85,782.062 90,415.88 90,415.88 .94260 85,226.013 90,415.88 90,415.88 .91514 82,743.194 90,415.88 90,415.88 .88849 80,333.615 90,415.88 90,415.88 .86261 77,993.646 90,415.88 90,415.88 .83748 75,721.497 90,415.88 90,415.88 .81309 73,516.258 90,415.88 90,415.88 .78941 71,375.209 90,415.88 90,415.88 .76642 69,296.5410 90,415.88 90,415.88 .74409 67,277.5511 90,415.88 90,415.88 .72242 65,318.2412 93,415.88 0 2 90,415.88 .70138 63,415.89


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 toreasons explained in example 2. Thus, lease rate factor is also 3% per quarter. TIHCcA






The lease rate factor for this transaction is 3% per quarter or 12% per annum asshown 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 guaranteedeposit, which is in the amount of P100,000, is given back at the end of thelease term and is netted out with the residual value, which in this example, isalso P100,000.

3 Figures not exact due to rounding off.



0 900,000 1 (900,000) 1.00000 (900,000)1 83,369.67 83,369.67 .97087 80,941.112 83,369.67 83,369.67 .94260 78,584.253 83,369.67 83,369.67 .91514 76,294.924 83,369.67 83,369.67 .88849 74,073.125 83,369.67 83,369.67 .86261 71,915.516 83,369.67 83,369.67 .83748 69,820.437 83,369.67 83,369.67 .81309 67,787.048 83,369.67 83,369.67 .78941 65,812.859 83,369.67 83,369.67 .76642 63,896.1810 83,369.67 83,369.67 .74409 62,034.54


11 83,369.67 83,369.67 .72242 60,227.9212 83,369.67 100,000 2 183,369.67 .70138 128,611.82


Example 6. Same parameters as Example 5 except that lease rental payments are inadvance.

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 thelease term from the P200,000 residual value. Thus, cashflow-wise, residualvalue is only P100,000.


Exhibit 2A

Computational Examples in the Determination of the Lease Income Component of LeaseRental under the Annuity Method


Guarantee Deposit : 0



Based on Exhibit 1, example 1, the lease rate quarterly factor is .03. Thus, using thebasic formula:

Ending Outstanding Principal Lease Rate Lease Income for theBalance of the Lease Facility X Factor = Subsequent periodof the Previous Period (t = n) (t = n+1)

we arrive at the following table:

(A) (B) (C) (D) (E)Ending Payment of (E-D-C)

Outstanding Residual Principal Lease IncomePeriod Balance 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 93,415.882 871,265.76 65,318.36 28,097.52 93,415.883 803,987.85 67,277.91 26,137.97 93,415.884 734,691.61 69,296.24 24,119.64 93,415.885 663,316.48 71,375.13 22,040.75 93,415.886 589,800.09 73,516.39 19,899.49 93,415.887 514,078.21 75,721.88 17,694.00 93,415.888 436,084.68 77,993.53 15,422.35 93,415.889 355,751.34 80,333.34 13,082.54 93,415.8810 273,088.00 82,743.34 10,672.54 93,415.8811 187,782.36 85,225.64 8,190.24 93,415.8812 100,000.00 87,782.36 5,663.52 1 93,415.88


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

Ending Payment ofOutstanding Residual Principal Lease Lease

Period Balance Value Repayment Income Rental

0 936,584.12 63,415.88 30,000.00 93,415.881 871,265.76 65,318.36 28,097.52 93,415.882 803,987.85 67,277.91 26,137.97 93,415.883 734,691.61 69,296.24 24,179.64 93,415.884 663,316.48 71,375.13 22,040.75 93,415.885 589,800.09 73,516.39 19,899.49 93,415.886 514,078.21 75,721.88 17,694.00 93,415.887 436,084.68 77,993.53 15,422.35 93,415.888 355,751.34 80,333.34 13,082.54 93,415.889 273,088.00 82,743.34 10,672.54 93,415.8810 187,782.36 85,225.64 8,190.24 93,415.8811 100,000.00 87,782.36 5,663.52 1 93,415.8812 100,000.00

Example 3. Lease Facility : P1,000.000







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



0 900,000.001 836,584.12 63,415.88 27,000.00 90,415.882 771,265.76 65,318.36 25,097.52 90,415.883 703,987.85 67,277.91 23,137.97 90,415.884 634,691.61 69,296.24 21,119.64 90,415.885 563,316.48 71,375.13 19,040.75 90,415.886 489,800.09 73,516.39 16,899.49 90,415.887 414,078.21 75,821.88 14,694.00 90,415.888 336,084.68 77,993.53 12,422.35 90,415.889 255,751.34 80,333.34 10,082.54 90,415.8810 173,008.00 82,743.34 7,672.54 90,415.8811 87,782.36 85,225.64 5,190.24 90,415.8812 - 0 1 87,782.36 2,633.52 2 90,415.88

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



0 836,584.12 63,415.88 27,000.00 90,415.881 771,265.76 65,318.36 25,097.52 90,415.882 703,987.85 67,277.91 23,137.97 90,415.883 634,691.61 69,296.24 21,119.64 90,415.884 563,316.48 71,375.13 19,040.75 90,415.885 489,800.09 73,516.39 16,899.49 90,415.886 414,078.21 75,721.88 14,694.00 90,415.887 336,084.68 77,993.53 12,422.35 90,415.888 255,751.34 80,333.34 10,082.54 90,415.889 173,008.00 82,743.34 7,672.54 90,415.8810 87,782.36 85,225.64 5,190.24 90,415.8811 - 87,782.36 2,633.52 2 90,415.88


12 - 0 1

1 Cashflow-wise, residual value is 0 since guarantee deposit, in the amount ofP100,000, is given back at the end of the lease term and is netted out with theresidual value, which in this example, is also P100,000.


Example 5. Lease Facility : P1,000.000





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



0 900,000.001 843,630.33 56,369.67 27,000.00 83,369.672 785,569.57 58,060.76 25,308.91 83,369.673 725,766.99 59,802.58 23,567.09 83,369.674 664,170.33 61,596.66 21,773.01 83,369.675 600,725.77 63,444.56 19,925.11 83,369.676 535,377.87 65,347.90 18,021.77 83,369.677 468,069.54 67,308.33 16,061.34 83,369.678 398,741.96 69,327.58 14,042.09 83,369.679 327,334.55 71,407.41 11,962.26 83,369.6710 253,784.92 73,549.63 9,820.04 83,369.6711 178,028.80 75,756.12 7,613.55 83,369.6712 - 100,000.00 1 78,028.80 5,340.87 2 83,369.67

1 Cashflow-wise, residual value is P100,000, since guarantee deposit which isalso in the amount of P100,000, is netted out at the end of lease term from theP200,000 residual value.


Example 6. Same parameters as Example 5, except that lease rental payments are in


advance; thus, lease rate quarterly factor is also .03.



0 843,630.33 56,369.67 27,000.00 83,369.671 785,569.57 58,060.76 25,308.91 83,369.672 725,766.99 59,802.58 23,567.09 83,369.673 664,170.33 61,596.66 21,773.01 83,369.674 600,725.77 63,444.56 19,925.11 83,369.675 535,377.87 65,347.90 18,021.77 83,369.676 468,069.54 67,308.33 16,061.34 83,369.677 398,741.96 69,327.58 14,042.09 83,369.678 327,334.55 71,407.41 11,962.26 83,369.679 253,784.92 73,549.63 9,820.04 83,369.6710 178,028.80 75,756.12 7,613.55 83,369.6711 100,000.00 78,028.80 5,340.87 2 83,369.6712 - 100,000.00 1

1 Cashflow-wise, residual value is P100,000, since guarantee deposit which isalso in the amount of P100,000, is netted out at the end of lease term from theP200,000 residual value.


Exhibit 2B

Computational Examples in the Determination of the Lease Income Component of LeaseRentals under the SYD Method


Guaranty Deposit : 0




Based on the above parameters, the total lease income is P220,990.56 [(93,415.88 x12) - (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 IncomePeriod NRP/STD x Income = for the period

1 12/78 P220,990.56 P33,998.552 11/78 220,990.56 31,165.343 10/78 220,990.56 28,332.124 9/78 220,990.56 25,498.915 8/78 220,990.56 22,665.706 7/78 220,990.56 19,832.497 6/78 220,990.56 16,999.278 5/78 220,990.56 14,166.069 4/78 220,990.56 11,332.85

10 3/78 220,990.56 8,499.6411 2/78 220,990.56 5,666.4212 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 Lease Lease RepaymentPeriod Balance Value Rental Income (C-D-E)

0 1,000,000.001 940,582.67 93,415.88 33,998.55 59,417.332 878,332.13 93,415.88 31,165.34 62,250.543 813,248.37 93,415.88 28,332.12 65,083.764 745,331.40 93,415.88 25,498.91 67,916.975 674,581.22 93,415.88 22,665.70 70,750.186 600,997.83 93,415.88 19,832.49 73,583.397 524,581.22 93,415.88 16,999.27 76,416.618 445,331.40 93,415.88 14,166.06 79,249.829 363,248.37 93,415.88 11,332.85 82,083.03

10 278,332.13 93,415.88 8,499.64 84,916.2411 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 inadvance, thus, the computation for the lease income is also the same. DTIACH

(A) (B) (C) (D) (E)Payment of

Outstanding Residual Lease Lease PrincipalPeriod Balance Value Rental Income Repayment

0 940,582.67 93,415.88 33,998.55 59,417.331 878,332.13 93,415.88 31,165.34 62,250.542 813,248.37 93,415.88 28,332.12 65,083.763 745,331.40 93,415.88 25,498.91 67,916.974 674,581.22 93,415.88 22,665.70 70,750.185 600,997.83 93,415.88 19,832.49 73,583.396 524,581.22 93,415.88 16,999.27 76,416.617 445,331.40 93,415.88 14,166.06 79,249.828 363,248.37 93,415.88 11,332.85 82,083.039 278,332.13 93,415.88 8,499.64 84,916.24

10 190,582.67 93,415.88 5,666.42 87,749.4611 100,000.00 93,415.88 2,833.21 90,582.6712 - 100,000.00 - - -




Period : 3 years payable in 12quarterly installments

Lease Rental : P93,415.88 payable quarterlyin arrears

Based on the given parameters, the total lease income is P184,990.56 [(P90,415.88 x12) - (P1,000,000-P100,000)], and the SYD is also 78. Thus,


1 12/78 P184,990.56 P28,460.092 11/78 184,990.56 26,088.413 10/78 184,990.56 23,716.744 9/78 184,990.56 21,345.06


5 8/78 184,990.56 18,973.396 7/78 184,990.56 16,601.727 6/78 184,990.56 14,230.048 5/78 184,990.56 11,858.379 4/78 184,990.56 9,486.70

10 3/78 184,990.56 7,115.0211 2/78 184,990.56 4,743.3512 1/78 184,990.56 2,371.67

P184,990.56

===========(A) (B) (C) (D) (E)

Payment ofOutstanding Residual Lease Lease Principal

Period Balance Value Rental Income Repayment

0 900,00.001 838,044.21 90,415.88 28,460.09 61,955.792 773,716.74 90,415.88 26,088.41 64,327.473 707,017.60 90,415.88 23,716.74 66,699.144 637,946.78 90,415.88 21,345.06 69,070.825 566,504.29 90,415.88 18,973.39 71,442.496 492,690.13 90,415.88 16,601.72 73,814.167 416,504.29 90,415.88 14,230.04 76,185.848 337,946.78 90,415.88 11,858.37 78,557.519 257,017.60 90,415.88 9,486.70 80,929.18

10 173,716.74 90,415.88 7,115.02 83,300.8611 88,044.21 90,415.88 4,743.35 85,672.5312 - 0 1 90,415.88 2,371.67 88,044.21

1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount ofP100,000, is given back at the end of the lease term and is netted out with theresidual value, which in this example, is also P100,000.

Example 4. Same parameters as Example 3 except that lease rental payments are inadvance, thus, the computation for the lease income is also the same.



0 838,044.21 90,415.88 P28,460.09 61,955.79


1 773,716.74 90,415.88 26,088.41 64,327.472 707,017.60 90,415.88 23,716.74 66,699.143 637,946.78 90,415.88 21,345.06 69,070.824 566,504.29 90,415.88 18,973.39 71,442.495 492,690.13 90,415.88 16,601.72 73,814.166 416,504.29 90,415.88 14,230.04 76,185.847 337,946.78 90,415.88 11,858.37 78,557.518 257,017.60 90,415.88 9,486.70 80,929.189 173,716.74 90,415.88 7,115.02 83,300.86

10 88,044.21 90,415.88 4,743.35 85,672.5311 - 90,415.88 2,371.67 88,044.2112 - 0 1 - - -




Period : 3 years, 12 quarterly installments


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.


1 12/78 P200,436.04 P30,836.312 11/78 200,436.04 28,266.623 10/78 200,436.04 25,696.934 9/78 200,436.04 23,127.245 8/78 200,436.04 20,557.546 7/78 200,436.04 17,987.857 6/78 200,436.04 15,418.168 5/78 200,436.04 12,848.469 4/78 200,436.04 10,278.77

10 3/78 200,436.04 7,709.0811 2/78 200,436.04 5,139.3912 1/78 200,436.04 2,569.69

1 Cashflow-wise, residual value is 0 since guaranty deposit, in the amount ofP100,000, 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.



0 900,00.001 847,466.64 83,369.67 30,836.31 52,533.362 792,363.59 83,369.67 28,266.62 55,103.053 734,690.85 83,369.67 25,696.93 57,672.744 674,448.42 83,369.67 23,127.24 50,242.435 611,636.29 83,369.67 20,557.54 62,812.136 546,254.47 83,369.67 17,987.85 65,381.827 478,302.96 83,369.67 15,418.16 67,951.518 407,781.75 83,369.67 12,848.46 70,521.219 334,690.85 83,369.67 10,278.77 73,090.90

10 259,030.26 83,369.67 7,709.08 75,660.5911 180,799.98 83,369.67 5,139.39 78,230.2812 - 100,000.00 1 83,369.67 2,569.69 80,799.98

Example 6. Same parameters as Example 5, except that lease rental payments are inadvance, thus, the computation for the lease income is also the same.



0 847,466.64 83,369.67 30,836.31 52,533.361 792,363.59 83,369.67 28,266.62 55,103.052 734,690.85 83,369.67 25,696.93 57,672.743 674,448.42 83,369.67 23,127.24 50,242.434 611,636.29 83,369.67 20,557.54 62,812.135 546,254.47 83,369.67 17,987.85 65,381.826 478,302.96 83,369.67 15,418.16 67,951.517 407,781.75 83,369.67 12,848.46 70,521.218 334,690.85 83,369.67 10,278.77 73,090.909 259,030.26 83,369.67 7,709.08 75,660.59

10 180,799.98 83,369.67 5,139.39 78,230.2811 100,000.00 83,369.67 2,569.69 70,799.9812 - 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 P200,000residual value.


Endnotes

1 (Popup - Popup)Annex AAnnex B

rr no. 19-86

Documents

payout lease

anoperating lease

primary period

lessor andto

lessor afatma

sale orrelease

gross income ofthe lessor

anobligatory period