Notes to Financial Statements
2. Summary of Significant Accounting Policies and
Impact of the New and Revised Accounting Standards
The significant accounting policies are set forth to facilitate understanding of data
presented in the financial statements.
Basis of Preparation
The accompanying financial statements are presented and prepared in Philippine Pesos
under the historical cost convention, except for certain financial instruments which are
required to be stated at fair value.
Statement of Compliance
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the Philippines. These are the Company’s
first financial statements prepared in accordance with Philippine Financial Reporting
Standards (PFRS), where PFRS 1,First-time Adoption of Philippine Financial Reporting
Standards,was then applied.
As allowed by the Notice of Amendments to Securities Regulation Code Rules 68 and
68.1 issued by the Securities and Exchange Commission on October 25, 2005 for public
companies, which include listed companies, for the year ending December 31, 2005, the
Company is presenting a comparative format of only two (2) years for the statements of
income, changes in stockholders’ equity and cash flows for the year to give temporary
relief for the first time adoption of the more complex Philippine Financial Reporting
Standards (PFRS). The requirement for three-year comparative presentation will resume
for year-end reports beginning the year ending December 31, 2006 and onwards.
The Company prepared its financial statements until December 31, 2004 in accordance
with Statements of Financial Accounting Standards/International Accounting Standards.
Use of Estimates and Judgments
The preparation of the financial statements in conformity with PFRS requires
management to make judgments, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical experience and various
other factors that are believed to be reasonable under the circumstances, the results of
which form the basis of making the judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Although these estimates are
based on Management’s best knowledge of current events and actions, actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognized in the period in which the estimate is revised if
the revision affects only that period or in the period of the revision and future periods if
the revision affects both current and future periods.
Judgments are made by management on the development, selection and disclosure of the
Company’s critical accounting policies and estimates and the application of these policies
Financial Assets and Liabilities
The Company carries certain financial assets and liabilities at fair value, which requires
extensive use of accounting estimates and judgment. While significant components of
fair value measurement are determined using verifiable objective evidence (i.e., foreign
exchange rates) the amount of changes in fair value would differ if the Company will
utilize a different valuation methodology.
Estimating Allowances for Doubtful Accounts
Provisions are made for accounts specifically identified to be doubtful of collection. An
estimate of allowance is generally provided for the receivables when collection of full
amount is no longer probable.
Estimating Realizability of Deferred Tax Assets
The Company reviews its deferred tax assets at each balance sheet date and reduces the
carrying amount to the extent that it is no longer probable that sufficient taxable profit
will be available to allow all or part of the deferred tax asset to be utilized. Any deferred
tax asset will be re-measured if it might result in derecognition where the expected tax
law to be enacted has a possible risk on the realization.
The determination of the Company’s obligation and cost for pension and other retirement
benefits is dependent on the selection of certain assumptions used by actuaries in
calculating such amounts. The assumptions described in Note 14 include among others,
discount rates and rates of compensation increase. In accordance with PFRS, actual
results that differ from the assumptions are accumulated and amortized over future
periods and, therefore, generally affect the recognized expense and recorded obligation in
such future periods. While Management believes that the assumptions are reasonable
and appropriate, significant differences in actual experience or significant changes in
assumptions may materially affect pension and other retirement obligations.
Provisions and Contingencies
The Company, in the ordinary course of business, sets up appropriate provisions for its
present legal or constructive obligations in accordance with its policies on provisions and
Adoption of New and Revised Accounting Standards
The Accounting Standards Council approved in 2004 the issuance
of new and revised accounting standards which are based on new International Financial Reporting
Standards issued by the International Accounting Standards Board (IASB) and revised
International Accounting Standards arising from the improvements project of the IASB.
The new and revised standards are effective for annual periods beginning on or after
January 1, 2005.
Accordingly, effective January 1, 2005, the Company adopted the following PFRS and
Philippine Accounting Standards (PAS) which are relevant to its operations:
The Company also adopted the following revised standards in 2005:
Effective January 1, 2006, the Company will adopt the following new PFRS which is
relevant in its operations:
Unless otherwise indicated, adoption of the new and revised standards did not result in a
significant change and adjustment. Additional disclosures required by the new and
revised standards were included in the financial statements when applicable.
Cash and Cash Equivalents
Cash and cash equivalents are carried in the balance sheets at cost. For the purpose of the
cash flow statements, cash and cash equivalents consist of cash on hand and in banks,
and other short term highly liquid investments with original maturities of three months or
less from date of acquisition and that are subject to an insignificant risk of change in
Receivables are recognized and carried at original invoice amount less an allowance for
any uncollectible amounts. An estimate for doubtful accounts is made when collection of
the full amount is no longer probable.
Investment in Associate
Investments in share of stock of associates, where the percentage of ownership is 20% or
more, or where the Company can exercise significant influence over the investee’s
operating and financial policies, are accounted for under the equity method. Under the
equity method, the cost of investment is increased or decreased by the Company’s equity
in the net earnings or losses of the investees, adjusted of the straight-line amortization
over five (5) years of the difference between the cost of such investments and the
proportionate share in the underlying net assets of such investments, since the dates of
acquisition. Dividends received are treated as a reduction in the carrying value of the
Investments in companies over which no significant influence is exercised are stated at
cost. An allowance is set up for any substantial decline in carrying value of the
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and any
impairment in value.
Initially, an item of property and equipment is measured at its cost, which comprises its
purchase price and any directly attributable costs of bringing the asset to working
condition. Subsequent expenditures are added to the carrying amount of the asset when it
is probable that future economic benefits, in excess of the originally assessed standard of
performance, will flow to the Company. All other subsequent expenditures are
recognized as expenses in the period in which they are incurred.
Depreciation is computed based on the carrying values of the assets using the straightline
method over the following estimated useful lives:
The useful lives and depreciation method are reviewed periodically to ensure that such
useful lives and depreciation method are consistent with the expected pattern of
economic benefits from those assets.
When an asset is disposed of, or is permanently withdrawn from use and no future
economic benefits are expected from its disposal, the cost and accumulated depreciation
and impairment losses, if any, are removed from the accounts and any resulting gain or
loss arising from the retirement or disposal is credited to or charged against current
Impairment of Financial Assets
Financial instruments are reviewed for impairment at each balance sheet date. For
financial assets carried at amortized cost, whenever it is probable that the Company will
not collect all amounts due according to the contractual terms of receivables, an
allowance for doubtful accounts is recognized in the statements of income. Reversal of
allowance for doubtful accounts previously recognized is recorded when the decrease can
be objectively related to an event occurring after the write-down. Such reversal is
recorded in the statements of income. However, the increased carrying amount is only
recognized to the extent that it does not exceed what amortized cost would have been had
the impairment not been recognized.
Deferred Exploration and Other Charges
All exploration costs and related expenses incurred prior to the start of commercial
operations, reduced by incidental revenues, are carried as deferred exploration and other
The costs and expenses for exploration activities which do not result in the discovery of
petroleum or mineral deposits that are commercially productive are charged to operations
after the project is abandoned and when management expects no further recovery.
Income tax on the profit or loss for the year is composed of current and deferred income
tax. Income tax is recognized in the statements of income except to the extent that it
relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax is the expected tax payable on the taxable income for the year, using
tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect
of previous years.
Deferred tax assets are recognized for the future tax consequences attributable to
temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes and the carryforward
benefits of net operating loss carryover (NOLCO) and the minimum corporate income
tax (MCIT) over the regular corporate income tax. The amount of deferred tax provided
is based on the expected manner of realization or settlement of the carrying amount of
assets and liabilities, using tax rates enacted at the balance sheet date. A deferred tax
asset is recognized only to the extent that it is probable that future taxable profits will be
available against which the asset can be utilized.
Deferred tax assets are reduced to the extent that it is no longer probable that the related
tax benefit will be realized. The carrying amount of the deferred tax asset is reviewed at
each balance sheet date and reduced, if appropriate.
Deferred income tax assets and liabilities are measured at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled, based on tax
laws that have been enacted or substantively enacted at the balance sheet date.
Foreign Currency Transactions
Foreign currency transactions are recorded in Philippine peso based on the exchange
rates prevailing at the transaction dates. Foreign currency denominated assets and
liabilities are translated into Philippine peso at the exchange rates prevailing at the
balance sheet date. The resulting foreign exchange gains and losses are credited to or
charged against current operations.
Retirement Benefit Costs
The Company has a non-contributory defined retirement benefit plan covering
substantially all regular employees. The cost of providing benefits is valued every year
by a professionally qualified independent actuary. The obligation and costs of retirement
benefits are determined using the projected unit credit method. This method considers
each period of service as giving rise to an additional unit of benefit entitlement and
measures each unit separately to build up the final obligation. Gains or losses on the
curtailment or settlement of retirement benefits are recognized when the curtailment or
settlement occurs. Actuarial gains and losses are recognized as income or expenses when
the net cumulative unrecognized actuarial gains and losses for the retirement plan at the
end of the previous reporting exceeded 10% of the higher of the defined benefit
obligation and the fair value of plan assets at the date. These gains or losses are
recognized over the expected average remaining working lives of the employee
participating in the plan.
The defined benefit liability is the aggregate of the present value of the defined benefit
obligation and actuarial gains and losses not recognized reduced by past service cost not
yet recognized and the fair value of plan assets out of which the obligations are to be
settled directly. If such aggregate is negative, the asset is measured at the lower of such
aggregate or the aggregate of cumulative unrecognized net actuarial losses and past
service cost at the present value of any economic benefits available in form of refunds
from the plan, or reductions in the future contributions to the plan. If the asset is
measured at the aggregate of cumulative unrecognized net actuarial losses and past
service cost and the present value of any economic benefits available in the form of
refunds from the plan or reductions in the future contributions to the plan, net actuarial
losses of the current period and past service cost of the current period are recognized
immediately to the extent that they exceed any reduction in the present value of those
economic benefits. If there is no change or an increase in the present value of the
economic benefits, the entire net actuarial losses of the current period and past service
cost of the current period are recognized immediately. Similarly, net actuarial gains of
the current period after the deduction of past service cost of the current period exceeding
any increase in the present value of economic benefits stated above are recognized
immediately if the asset is measured at the aggregate of cumulative unrecognized net
actuarial losses and past service cost and the present value of any economic benefits
available in the form of refunds from the plan or reductions in the future contributions to
the plan. If there is no change or a decrease in the present value of economic benefits,
the entire net actuarial gains of the current period after the deduction of past service cost
of the current period are immediately recognized.
Any transitional liability is either recognized immediately or amortized as an expense on
a straight-line basis over 5 years from the date of adoption.
Earnings per Share
Earnings per share is determined by dividing net income for the year by the weighted
average number of common shares outstanding during the year.
Interest and Other Income
Interest income on bank deposits and temporary investments are recorded when earned
and presented net of applicable final tax. Other income is recorded when earned.
Costs and Expenses
Costs and expenses, not directly attributable to capitalizable projects, are recognized and
charged to operations as incurred.
Operating Lease Payments
Leases in which a significant portion of the risks and rewards of ownership are retained
by the lessor are classified as operating leases. Payments made under operating leases
are recognized in the statements of operations on a straight-line basis over the term of the
Parties are considered to be related if one party has the ability to control the other party
or exercise significant influence over the other party in making financial and operating
decisions. It includes companies in which one or more of the directors and/or controlling
shareholders of the Company either have a beneficial controlling interest or are in a
Provisions and Contingencies
Provisions are recognized when the Company has a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. If the effect of the time value of
money is material, provisions are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability. Where discounting is used, the
increase in the provision due to the passage of time is recognized as an interest expense.
Contingent liabilities are not recognized in the financial statements but are disclosed in
the notes to financial statements unless the possibility of an outflow of resources
embodying economic benefits is remote. Contingent assets are not recognized in the
financial statements but are disclosed in the notes to financial statements when an inflow
of economic benefits is probable.
Events After the Balance Sheet Date
Post year-end events that provide additional information about the Company’s position at
the balance sheet date (adjusting events) are reflected in the financial statements when
material. Post year-end events that are not adjusting events are disclosed in the notes