Financial Reporting Bulletin

SRC Rule 68, as amended (2011)

Additional components of financial statements

(1) The additional components that are submitted with the company’s financial statements, forming part thereof, should necessarily be covered by the Statement of Management’s Responsibility (SMR). Thus, the first paragraph of the SMR must partly read “The management of (name of reporting company) is responsible for the preparation and fair presentation of the financial statements for the year (s) ended (date), including the additional components attached therein x x x.”

(2) The following additional components, if applicable to the company, should be covered by a legal matter paragraph in the Auditor’s Report or a separate report of auditor on each component:

i. Schedule of receipts and disbursements of non-stock and non-profit organizations (Part 1, 4A);

ii. Reconciliation of Retained Earnings Available for Dividend Declaration (Part 1, 4C);

iii. Tabular schedule of standards and interpretations as of reporting date (for large and/or publicly-accountable entities);

iv. Supplementary schedules required by Annex 68-E (for issuers of securities to the public);

v. A map of the conglomerate or group of companies within which the reporting entity belongs (Part 1, 4H) (for listed companies and investment houses);

SRC Rule 68, as amended (2011)

Emphasis of Matter paragraph for companies with capital deficiency – Part I, 3.B(iv)

Request for Additional Ground for Exemption

If, other than those specific exemptions provided under subpar. (viii) items (a) to (c) of Part I, par. 3.B(iv), the auditor believes that the audit report on a company with capital deficiency does not warrant an emphasis matter paragraph, a confirmation must be obtained from the Commission through the submission of a position paper.

A determination will be made by the Commission whether the circumstance/s described in the position paper will qualify under item (d) of the exemption list [i.e., such other cases which the Commission may consider as valid ground for considering the company as a going concern].

For those availing of the exemption based on items (a) to (c) or pursuant to an additional exemption granted by the Commission, the notes to the financial statements should include a disclosure of the basis for the exemption.

Wordings of the Emphasis of Matter paragraph

The external auditor of a company which has incurred a capital deficiency, shall provide in the audit report an emphasis paragraph indicating the following information:

(a) The fact that the company has incurred a capital deficiency that raises an issue on its going concern status;

(b) A brief discussion of a concrete plan of the company to address the capital deficiency and reference to the note to financial statements that provides a complete disclosure of the said plan;

(c) A statement that the auditor conducted sufficient audit procedures to verify the validity of the aforementioned plan.

Under PSA 570, external auditors are required to perform additional procedures when materiality uncertainty exists as to the ability of the company to continue as a going concern. Thus, in lieu of the statement under item (c) above, the following provisions consistent with PSA 570 provisions, may be indicated: that the auditor performed audit procedures to evaluate management’s plans for such future actions as to likelihood to improve the situation and as to feasibility under the circumstances.

SRC Rule 68, as amended (2011)

Disclosures of receivables/ payables with related parties eliminated during consolidation (Annex 68-D)

Information required under par. (1)(A)(ii) and (1)(F)(ii) on receivables/payables with related parties that are eliminated during consolidation, may be incorporated in the applicable schedules under Annex 68-E of Part II.

The subject information need not be comparative. It shall cover only to those transactions eliminated at the reporting entity’s level.

This disclosure requirement is applicable only to issuers of securities to the public, companies listed in an exchange and public companies as provided under Part II of the Rule.

If no operation only for one (1) year: a complete set of audited financial statements must be submitted by the company despite its non-operation

If no operation for the last two (2) years: The Income Statement need NOT be included in the audited financial statements

(1) For issuers of securities to the public, the SMR shall be attached to both the consolidated financial statements and the parent company’s financial statements for filing with the Commission.

(2) Paragraph (iv) of Part I (2)(B)(iv) of the Rule is also applicable to representative offices established in the Philippines. Thus, the SMR shall be signed by its local manager or chief representative in the Philippines.

(3) If the financial statements for filing are comparative, the SMR has to be comparative, even if the independent auditors for the comparative periods are different.

The following is an illustration on how the last paragraph of the SMR may be worded in such a case:

“(name of audit firm) and (indicate prior year auditor), the independent auditors appointed by the stockholders for the period December 31, 2011 and 2010, respectively, have examined the consolidated financial statements of the company in accordance with Philippine Standards on Auditing, and in their reports to the stockholders (or members), have expressed their opinion on the fairness of presentation upon completion of such examination.”

“(name of audit firm) and (indicate prior year auditor), the independent auditors appointed by the stockholders for the period December 31, 2011 and 2010, respectively, have examined the consolidated financial statements of the company in accordance with Philippine Standards on Auditing, and in their reports to the stockholders (or members), have expressed their opinion on the fairness of presentation upon completion of such examination.”

Small and Medium-sized Entities (SMEs)

(1) Under SEC’s Notice of Implementation Guidelines on PFRS for SMEs dated February 9, 2010, micro entities have the option to use any of these bases of accounting in the preparation of their financial statements: (a) full PFRS, (b) PFRS for SMEs, or (c) another acceptable basis of accounting.

Under Part I (2)(A)(iii) of the Rule, micro entities have the option to use as their financial reporting framework the income tax basis, accounting standards in effect as of December 31, 2004 or PFRS for SMEs.

Micro entities which have previously adopted full PFRSs in accordance with SEC’s Notice of Implementation Guidelines on PFRS for SMEs dated February 9, 2010 are allowed to continue the use of full PFRS. Nevertheless, micro entities may also choose to change their financial reporting framework to one of the options made available under the Rule. Such change should be accounted for in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

(2) Micro entities are not required to disclose in the notes to the financial statements their rationale for choosing a particular financial reporting framework available to them.

(3) Micro entities that continue to use full PFRS are not required to file the tabular schedule of all the effective standards and interpretations under the PFRS as of year-end as required under Part I (4)(J) of the Rule.

Financial statements to be filed by entities for the purpose of issuing any class of instruments (whether shares of stock or bonds) in a public market are required to comply with the provisions of Part II of the Rule, including Annexes 68-D and 68-E. Likewise, the following documents are to be filed with the financial statements, as required by Part I, Section 4 of the Rule:

(1) Issuers of securities to the public and stock corporations with unrestricted retained earnings in excess of 100% of paid-in capital stock – A Reconciliation of Retained Earnings Available for Dividend Declaration which shall present the prescribed adjustments as indicated in Annex 68-C of this Rule.

(2) Listed companies and investment houses that are part of a conglomerate or group of companies – A map showing the relationships between and among the companies and its ultimate parent company, middle parent, subsidiaries or co-subsidiaries, and associates.

(3) Large and/or publicly-accountable entities – A schedule, in table format, showing in the first column a list of all the effective standards and interpretations under the PFRS as of year-end, and an indication opposite each in the second column on whether it is “Adopted”. “Not adopted” or “Not applicable”.

The above components should be covered by an auditor’s report.

Annex 68-E – Schedule A. Financial Assets

(Issuers of Securities to the Public)

The schedule shall be applicable for Available-For-Sale (AFS), Fair Value through Profit or Loss (FVPL) and Held-to-Maturity (HTM) investments. Loans and Receivables shall be included in the schedule only if the information requirements are applicable.

For example, trade receivables of a reporting entity need not be included in this Schedule A but Long-term Commercial Papers classified under Loans and Receivables shall be included.

Philippine Accounting Standard (PAS) 24 provides that an entity should disclose information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements[1]. At a minimum, the disclosures shall include:

(a) the amount of the transactions;

(b) the amount of outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received;

(c) provisions for doubtful debts related to the amount of outstanding balances;

(d) the expense recognized during the period in respect of bad or doubtful debts due from related parties.[2]

PAS 24 also provides that the said disclosures shall be made separately for each of the following categories: (a) the parent; (b) entities with joint control or significant influence over the entity; (c) subsidiaries; (d) associates; (e) joint ventures in which the entity is a venture; (f) key management personnel of the entity or its parent; and (g) other related parties.[3]

To attain the objective of PAS 24 of providing an understanding of the potential effect of the relationship on the financial statements, the following requirements under the said standard must be observed by corporations:

1. The required disclosures on transactions and outstanding balances shall be made separately for each of the following categories: (a) the parent; (b) entities with joint control or significant influence over the entity; (c) subsidiaries; (d) associates; (e) joint ventures in which the entity is a venture; (f) key management personnel of the entity or its parent; and (g) other related parties.

2. For each of said category, the following information shall be provided:

(a) the amount of the transactions;

(b) the amount of outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received;

(c) provisions for doubtful debts related to the amount of outstanding balances;

(d) the expense recognized during the period in respect of bad or doubtful debts due from related parties.

The presentation shall be made in columnar format according to the above categories and disclosure items.

Under paragraph 4(C) of SRC Rule 68, as amended, issuers of securities to the public, and stock corporations with unrestricted retained earnings in excess of 100% of paid-in capital stock, are mandated to submit with their audited financial statements a Reconciliation of Retained Earnings Available for Dividend Declaration which should present the prescribed adjustments as indicated in Annex 68-C of the Rule.

The amount of retained earnings of a company should be based on its separate (“stand alone”) financial statements and not on its consolidated financial statements if it is a parent company. This is because the retained earnings based on the consolidated financial statements include surplus of the subsidiaries which are not yet actual earnings of the parent unless released by the subsidiaries in the form of dividends. The reconciliation of retained earnings of the parent company shall however, be submitted with the consolidated financial statements pursuant to SRC Rule 68, as amended.

To avoid inconsistencies in the balances, the Reconciliation should be presented as follows:

PAS 1 prescribes that the notes to financial statements of corporations shall disclose among others, information that is relevant to an understanding of the financial statements.

For corporations with excess retained earnings, their financial statements must contain relevant information in connection with Section 43 of the Corporation Code (the “Code”) which provides in part:

“Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:

a. when justified by definite corporate expansion projects or programs approved by the board of directors; or

b. when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent, and such consent has not yet been secured; or

c. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.” (emphasis, ours)

The above provisions indicate that the retention for expansion projects must be definite and approved by the Board of Directors.

Pursuant to PAS 1, the following disclosures are relevant to provide an understanding on the impact of the retention of earnings on the financial statements and thus, must be provided therein:

1. Details of the expansion (e.g., description of the project, timeline) to render the project definite;

2. The date of the approval by the Board of Directors of the project.

Under paragraph 4(J) of SRC Rule 68, as amended, large and/or publicly-accountable entities are required to submit with their audited financial statements a schedule, in table format, showing in the first column a list of all the effective standards and interpretations under the PFRS as of year-end, and an indication opposite each in the second column on whether it is “Adopted”, “Not adopted” or “Not applicable”.

To comply with the said requirement, the following list must be accomplished, audited by the company’s external auditor and submitted with annual financial statements:

COMPANY NAME

Under Section 141 of the Corporation Code, every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission.

A threshold for the submission of the said audited financial statements is indicated in Section 75 of the Code, as follows:

“SEC. 75. Right to financial statements. — Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.

At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant.

However, if the paid-up capital of the corporation is less than P50,000.00 the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation.”

Except for the above limitation on the coverage of entities whose financial report must be audited, the provisions of the Corporation Code do not grant any exemption from the required submission of annual financial statements (AFS). The filing requirement is applicable to all corporations and organizations registered with the Commission as of the fiscal year end including those newly incorporated during the said year.

Corporations with fiscal year of 31 December that were registered during the last preceding year, regardless of the date of incorporation, must submit their AFS in accordance with the Annual Schedule of Filing of Financial Statements indicated in the applicable Circular of the Commission (for 2012 AFS, SEC Memorandum Circular No. 7, Series of 2012 is applicable). For those with fiscal year other than 31 December, their first AFS shall be due within 120 days after the end of their fiscal year.”

Age Requirement for Financial Statements

Under Part II, Section 4 of SRC Rule 68, as amended, issuers of securities to the public are required to comply with the following provisions of the Rule:

“At the time a registration statement on SEC Form 12-1 is to become effective, the financial information therein shall be as of a date within 135 days from effective date or such longer period which the Commission may allow upon favorable consideration of a written request of the registrant. The factors that may considered in granting the request include the time constraints and the significant circumstances surrounding the given proposed issue.”

It has been noted that several corporations applying for registration of their securities have requested for exemptive relief from the adoption of the above-cited provisions, particularly on the extension of the effectivity of financial statements from 135 days to 180 days. While the proposed amendments to SRC Rule 68, as Amended, to consider the matter are still pending consideration by the Commission, and in line with its preparation for the capital market integration and for consistency with the adopted ASEAN Framework, companies are hereby informed that the following proposed amendments to Part II Section 4 of SRC Rule 68 can already be adopted:

“At the time a registration statement on SEC Form 12-1 is to become effective, the financial information therein shall be as of a date 180 days from effective date.”

The SEC shall no longer grant further request for extension of said period.