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

and estimates.

 

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.

 

Retirement Benefits

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

contingencies.

 

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:

 

PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, requires

an entity adopting PFRS for the first time (a first-time adopter) to comply with each

PFRS that has come into effect at the reporting date for its first PFRS financial

statements. It also requires a first-time adopter to prepare an opening PFRS balance

sheet at the date of transition to PFRS, the beginning of the earliest adoption to which

it presents the full comparative information under PFRS. PFRS 1 grants limited

exemptions from these requirements in specified areas where the cost of complying

with them would likely to exceed the benefits to users of financial statements. It

prohibits retrospective application of PFRS in some areas, particularly where

retrospective application would require judgments by management about past

conditions after the outcome of a particular transaction is already known. Further, it

requires disclosure that explains how the transition from previous generally accepted

accounting principles (GAAP) to PFRS affected the entity’s reported financial

position, financial performance and cash flows.

 

􀂃 PAS 19, Employee Benefits, which prescribes the accounting and disclosure for

employee benefits. The standard requires an entity to recognize a liability when an

employee has provided service in exchange for employee benefits to be paid in the

future and an expense when the entity consumes the economic benefit arising from

service provided by the employee in exchange for economic benefits.

The standard also prescribes the use of the projected unit credit method in measuring

retirement benefit expense and a change in the manner of computing benefit expense

relating to past service cost and actuarial gains and losses. It requires the company to

determine the present value of defined benefit obligations and the fair value of any

plan assets with sufficient regularity that the amounts recognized in the financial

statements do not differ materially from the amounts that would be determined at the

balance sheet date.

Upon adoption of this standard, “Retained earnings” decreased by P22,130,522 as of

January 1, 2004 due to the immediate recognition of transitional liability. “Accounts

payable and accrued expenses” increased by P25,937,155 as of December 31, 2004

and “Pension expense” increased by P3,806,633 as of December 31, 2004.

 

􀂃 PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure

and presentation of all financial instruments. It requires more comprehensive

disclosures about a company’s financial instruments, whether recognized or

unrecognized in the financial statements. New disclosure requirements include terms

and conditions of financial instruments used by the company; types of risks

associated with both the recognized and unrecognized financial instruments (price

risk, credit risk, liquidity risk and cash flow risk); fair value information of both

recognized and unrecognized financial assets and financial liabilities; and the

company’s financial risk management policies and objectives. It also requires

financial instruments to be classified as liabilities or equity in accordance with its

substance and not its legal form; and

 

􀂃 PAS 39, Financial Instruments: Recognition and Measurement, establishes the

accounting and reporting standards for recognizing, measuring and disclosing

information about a company’s financial assets and financial liabilities. The standard

requires a financial asset or financial liability to be recognized initially at their fair

value. Subsequent to initial recognition, the company should continue to measure

financial assets at their fair values, except for loans and receivables and held-tomaturity

investments, which are to be measured at cost or amortized cost using the

effective interest rate method, subject to test for impairment. Financial liabilities are

subsequently measured at cost or amortized cost, except for liabilities classified as

“at fair value through profit and loss” and derivatives, which are subsequently to be

measured at fair value.

The Company also adopted the following revised standards in 2005:

 

􀂃 PAS 1, Presentation of Financial Statements, (a) provides a framework within which

an entity assesses how to present fairly the effects of transactions and other events;

(b) provides the base criteria for classifying liabilities as current or noncurrent; (c)

prohibits the presentation of items of income and expenses as extraordinary items in

the financial statements; and (d) specifies the disclosures about key sources of

estimation, uncertainty and judgments management has made in the process of

applying the entity’s accounting policies;

􀂃 PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requires

changes in accounting policies and correction of errors be accounted for

retrospectively. The allowed alternative of recognizing the cumulative effect in the

current period has been removed;

 

􀂃 PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the

accounting for dividends declared after the balance sheet date;

 

􀂃 PAS 16, Property, Plant and Equipment, provides additional guidance and

clarification on recognition and measurement of items of property, plant and

equipment. It also provides that each part of an item of property, plant and

equipment with a cost that is significant in relation to the total cost of the item shall

be depreciated separately.

 

􀂃 PAS 17, Leases, provides a limited revision to clarify the classification of a lease of

land and buildings and prohibits expensing of initial direct costs in the financial

statements of the lessors;

 

􀂃 PAS 24, Related Party Disclosures, provides additional guidance and clarity in the

scope of the standard, the definitions and disclosures for related parties;

 

􀂃 PAS 33, Earnings Per Share, prescribes principles for the determination and

presentation of earnings per share for companies with publicly traded shares,

companies in the process of issuing ordinary shares to the public, and companies that

calculate and disclose earnings per share. The standard also provides additional

guidance in computing earnings per share including the effects of mandatorily

convertible instruments and contingently issuable shares, among others.

 

􀂃 PAS 28, Investments in Associates, reduces alternatives in accounting for associates

in the separate financial statements of an investor. Investments in associates will be

accounted for either at cost or in accordance with PAS 39 in the separate financial

statements. Equity method of accounting will no longer be allowed in the separate

financial statements, and

 

􀂃 PAS 36, Impairment of Assets, prescribes additional guidance on making cash flow

projections for the purpose of a value in use calculation and on using present value

techniques.

Effective January 1, 2006, the Company will adopt the following new PFRS which is

relevant in its operations:

 

􀂃 PFRS 6, Exploration for and Evaluation of Mineral Resources, requires entities

recognizing exploration and evaluation assets to perform an impairment test on those

assets when facts and circumstances suggest that the carrying amount of the assets

may exceed their recoverable amount.

 

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

value.

 

Receivables

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.

 

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

investment.

 

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:

 

 

  Number of Years
Transportation equipment 5
Office equipment 2 – 5
Communication equipment 2

 

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

operations.

 

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

charges.

 

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 Taxes

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

lease.

 

Related Parties

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

position

 

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

when material.