Transcription

1

2

3

4

5

6

7

8

9

10

11

12 MERALCO EMPLOYEES MUTUAL AID AND BENEFIT ASSOCIATION, INC. A Non-stock, Non-profit Organization Notes to Financial Statements As at and for the years ended December 31, 2017 and ASSOCIATION INFORMATION MERALCO Employees Mutual Aid and Benefit Association, Inc. (the Association ) is a nonstock, non-profit organization established by the employees of Manila Electric Company (MERALCO) and its affiliated companies. The Association was registered with the Philippine Securities and Exchange Commission (SEC) on September 17, 1969 to carry out the following objectives: a. To provide assistance for death, sickness or other mutual benefits and to render mutual aid and assistance to its members and their families who sustained serious physical injuries or suffered personal damages due to natural calamities; b. To foster the interest and promote the mutual concern of the members by protecting and giving financial assistance to one another; c. To encourage and foster growth and the general welfare of the members and/or their beneficiaries; and d. In general, to carry on any other lawful business whatsoever in connection with any or all of the foregoing purposes and which are calculated directly or indirectly to promote the interest of the Association and its members. The Insurance Commission (IC) granted the Association a license to transact business as a mutual benefit association on January 25, 2016, effective January 1, 2016 valid until December 31, 2018, pursuant to the provisions of Insurance Code, as amended. The Association s registered office address and principal place of business is located at G/F Employee Services Center, MERALCO Compound, Ortigas Avenue, Pasig City, Philippines. The financial statements of the Association for the year ended December 31, 2017, including its comparatives for 2016, were approved and authorized for issue by the Board of Trustees ( BOT) on April 13, 2018.

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. The policies have been consistently applied to all the years presented, unless otherwise stated. Basis of Preparation The financial statements have been prepared on a historical basis except otherwise stated. The financial statements are presented in Philippine peso ( ), the Association s functional currency. All amounts are rounded to the nearest peso except when otherwise indicated. The Association presents its statements of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date and more than 12 months after the reporting date is presented in Note 19. Statement of Compliance The financial statements of the Association have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS) and Interpretations issued by the former Standing Interpretations Committee (SIC), the Philippine Interpretations Committee (PIC) and the International Financial Reporting Interpretations Committee (IFRIC), which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by SEC. Revised Standard Chart of Accounts (SCA) On September 25, 2014, the IC issued Circular Letter no presenting a revised SCA for Mutual Benefit Associations (MBAs). The revised SCA is in line with the requirements of SRC Rule 68, section 189 of the Amended Insurance Code, and current accounting standards in the Philippines (PFRSs). The Association adopted the applicable revised SCA starting as at and for the year ended December 31, New accounting interpretations, revisions and amendments to PFRS The accounting policies adopted are consistent with those of the previous financial years except for the following amended PFRS that are mandatorily effective for annual periods beginning on or after January 1, PAS 7 (Amendment), Statement of Cash Flows Disclosure Initiative. The amendments require to provide disclosures to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. PAS 12 (Amendment), Income Taxes Recognition of Deferred Tax Assets for Unrealized Losses. These amendments clarify the accounting for deferred tax assets for unrealized losses on debt instruments measured at fair value. The amendments also clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explains in which circumstances taxable profit may include the recovery of some assets for more than their carrying amount.

14 The applications of the above improvements have no material impact on the disclosures and amounts recognized on the Association s financial statements. New accounting standards, interpretations and amendments to existing standards effective subsequent to January 1, 2017 Standards issued but not yet effective up to the date of the Association s financial statements are listed below. This listing of standards and interpretations issued are those that the Association reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Association intends to adopt these standards when they become effective. Annual Improvements to PFRSs Cycle PFRS 4 (Amendment), Insurance Contracts - Applying PFRS 9 Financial Instruments and PFRS 4 Insurance Contracts. The amendments provide two options for entities that issue insurance contracts within the scope of PFRS 4: (a) an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the "overlay approach"); and (b) an optional temporary exemption from applying PFRS 9 for entities whose predominant activity is issuing contracts within the scope of PFRS 4 (the "deferral approach"). The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied. An entity would apply the overlay approach retrospectively to designated financial assets, when it first applies PFRS 9. An entity would apply the deferral approach for annual periods beginning on or after January 1, The amendments will not have significant impact on the Association s financial statements. PFRS 9, Financial Instruments. The standard requires all recognized financial assets that are within the scope of PAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or at fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely for payments of principal and interest on the outstanding balance are generally measured at amortized cost at the end of subsequent reporting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent reporting periods. For financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or increase an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. The standard is to be effective no earlier than the annual periods beginning January 1, 2018, with earlier application permitted. The management does not anticipate that the application of PFRS 9 will have a significant impact on the financial statements as the Association s financial assets and liabilities pertains only to debt securities that will continue to be measured at amortized cost.

15 PFRS 15, Revenue from Contracts with Customers. This new standard establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize. The core principle in that framework is that an entity should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognizes revenue in accordance with that core principle by applying the following steps: (a) identify the contracts with customers; (b) identify the performance obligations in the contract; (c) determine the transaction price; (d) allocate the transaction price to the performance obligations in the contract; and (e) recognize revenue when the entity satisfies a performance obligation. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The standard will not have a significant impact in the measurement, recognition and disclosure of the Association s revenue. PFRS 15 (Amendment), Clarifications to PFRS 15 Revenue from Contracts with Customers. This addresses clarifying amendments to PFRS 15 and introduced a transitional relief for entities applying the standard for the first time. The focus of these amendments is on clarifying the application of PFRS 15 when (a) identifying performance obligations by clarifying how to apply the concept of distinct, (b) determining whether an entity is acting as principal or an agent in a transaction by clarifying how to apply the control principle, and (c) assessing whether a license transfers to a customer over time or at a point in time by clarifying when a company s activities significantly affect the intellectual property to which the customer has rights. The amendments also add two practical expedients to the transition requirements of PFRS 15 for completed contracts under the full retrospective transition approach and contract modifications at transition. The amendments are effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. The standard will not have a significant impact in the measurement, recognition and disclosure of the Association s revenue. PFRS 16, Leases. This new standard introduces a single lessee accounting model to be applied to all leases, whilst substantially carries forward the lessor accounting requirements in PAS 17 Leases. Lessees recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases with a term of more than twelve (12) months, unless the underlying asset is of low value. Whereas, lessors continue to classify leases as operating leases or finance leases, and to account for those two types of leases differently. The standard is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply PFRS 15 at or before the initial application of PFRS 16. The standard will not have an impact on the financial statement since the Association is not a party to a lease. Financial Instruments Initial Recognition, Measurement and Classification of Financial Instruments The Association recognizes financial assets and financial liabilities in the statements of financial position when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place are recognized on the settlement date.

16 Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments includes transaction costs, except for those financial assets and liabilities at fair value through profit or loss (FVPL) where the transaction costs are charged to expense in the period incurred. On initial recognition, the Association classifies its financial assets in the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments and available for sale (AFS) financial assets. The Association also classifies its financial liabilities into FVPL and other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at the end of each reporting period. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits. Financial Assets at FVPL Financial assets at FVPL are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. As at December 31, 2017 and 2016, the Association has no financial assets at FVPL. Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables are subsequently carried at amortized cost using the effective interest method less any allowance for impairment. Amortized cost is calculated, taking into account any discount or premium on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognized in statements of comprehensive income when the loans and receivables are derecognized or impaired, as well as through the amortization process. The Association s loans and receivables include cash and cash equivalents (excluding cash on hand), receivables and membership certificate loans (see Notes 4, 5 and 6). Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash depending on the immediate cash requirements of the Association and are subject to an insignificant risk of change in value. Receivables This includes members contributions due and uncollected and amortization of membership certificate loans deducted from members payroll, which were not yet remitted by their employers to the Association.

17 Membership Certificate Loans Membership certificate loans are loans granted to the members and are interest bearing and paid through pension deduction for retired members and salary deduction for members working in MERALCO and affiliated companies. (HTM) investments HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as HTM investments when the Association s management has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this category. After initial measurement, HTM investments are measured at amortized cost. This cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount and the maturity amount, less allowance for impairment. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognized in the statements of comprehensive income when the investments are derecognized or impaired, as well as through the amortization process. As at December 31, 2017 and 2016, the Association s HTM investments consist of investments in government and corporate debt securities (see Note 7). Other Financial Liabilities After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognized in the statements of comprehensive income when the liabilities are derecognized as well as through the amortization process. As at December 31, 2017 and 2016, the Association s other financial liabilities consist of accounts payable and other liabilities (excluding liabilities to government agencies) and liability on individual equity value (see Notes 9 and 11). Accounts Payable and Other Liabilities Accounts payables pertains to unclaimed benefits of the members,outstanding payable related to loan overpayments, interest rebates and refund of equity value of terminated members. It also include obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Other liabilities include non-trade payables and accrued expenses. Claims Payable on Basic Contingent Benefit This represents benefit claims on membership certificates filed or reported to the Association but not yet paid as of end of the reporting period. It included claims due and unpaid, claims in the course of settlement and those which are incurred but not reported.

18 Liability on Individual Equity Value This represents the fifty percent (50%) of the total accumulated contributions of the members in the Association presented under the liability section of the statements of financial position. Under the Association s policies and guidelines, the account entitles the member to a benefit upon his death, or withdrawal from or termination of his membership in the Association after three years of continuous membership. Determination of Fair Value and Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to the Association. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Association uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities. Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Association determines whether transfers have occurred between Levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

19 For the purpose of fair value disclosures, the Association has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Fair value measurement disclosures of financial and non-financial assets are presented in Note 18 to the financial statements. Day 1 difference When the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Association recognizes the difference between the transaction price and fair value (a Day 1 difference) in the statements of comprehensive income unless it qualifies for recognition as some other type of asset or liability. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the statements of comprehensive income when the inputs become observable or when the instrument is derecognized. For each transaction, the Association determines the appropriate method of recognizing the Day 1 difference amount. Offsetting of Financial Instruments Financial assets and liabilities are offset and the net amount is reported in the statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Derecognition of Financial Instruments Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: The rights to receive cash flows from the asset have expired; The Association retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to third party under a pass-through arrangement; or The Association has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control of the asset. Where the Association has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Association s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Association could be required to repay.

20 Financial liabilities A financial liability is derecognized when the obligation under the liability was discharged, cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statements of comprehensive income. Impairment of Financial Assets The Association assesses at each end of the reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the contracted parties or a group of contracted parties is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Loans and receivables and HTM investments The Association first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in the group of financial assets with similar credit risk and characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of loss is measured as a difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced through the use of an allowance account. The amount of loss is recognized in the statements of comprehensive income.

21 If in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, and the increase or decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance for impairment losses account. If a future write-off is later recovered, the recovery is recognized in the statements of comprehensive income under Other income account. Any subsequent reversal of an impairment loss is recognized in the statements of comprehensive income to the extent that the carrying value of the asset does not exceed its amortized cost at reversal date. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Association. Property and Equipment Property and equipment are initially measured at cost which comprises its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location necessary for it to be capable of operating in the manner intended by management. Property and equipment are subsequently carried at cost less accumulated depreciation and amortization and any impairment in value. Expenses that provide incremental future economic benefits to the Association are added to the carrying amount of an item of property and equipment. All other expenses are recognized in the statements of comprehensive income as incurred. Depreciation of property and equipment commences once the property and equipment are available for use and are calculated on a straight-line basis over the estimated useful life as follows: Number of years Office equipment 3 to 5 Furniture and fixtures 3 to 5 IT Equipment 3 to 5 The useful life and depreciation method are reviewed periodically to ensure that the period and method of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment. When property and equipment are retired or otherwise disposed of, their cost and related accumulated depreciation and accumulated provision for impairment losses, if any, are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. Fully depreciated property and equipment are retained in the accounts until they are no longer in use and no further depreciation is charged against current operations. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

22 Impairment of Non-financial Assets At each reporting date, the Association reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When the asset does not generate cash flows that are independent from other assets, the Association estimates the recoverable amount of the cashgenerating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income. Basic Contingent Benefit Reserve Basic contingent benefit reserve represents the total actuarial reserve set-up by the Association pertaining to the basic life benefit that is in force as at the end of the accounting period. It refers to the amount of liability which the Association establishes for a certificate to meet the contractual obligation as it falls due. It is computed as the net present value of benefits less present value of future contributions, calculated using actuarial methods and assumptions as approved by the IC, subject to the liability adequacy test. Liability adequacy test At each reporting date, a liability adequacy test is performed for the membership in force. In performing this test, current best estimate of future cash flows and benefits/claims handling and administration expenses, as well as investment income from the asset backing such liabilities are used. Any deficiency is immediately charged against current operations. Liabilities for future membership benefits/claims have been computed based on methods and assumptions that are in accordance with generally accepted actuarial principles. Changes in the balance of legal policy reserves at each reporting date are taken to profit or loss. Fund Balance Fund balance represents the cumulative net income from current and prior periods.

23 Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Association and the revenue can be reliably measured. In addition, the following specific recognition criteria must be met before revenue is recognized: a) Members contributions Revenue is recognized on accrual basis, when they become due from members. b) Interest on membership certificate loans Revenue is recognized using the effective interest method in accordance with the terms of the loan. c) Interest in bank deposits and investments Revenue is recognized as the interest accrues (taking into account the effective yield on the asset). d) Dividends Revenue is recognized when the Association s right to receive payment is established. Revenue is measured by reference to the fair value of consideration received. Interest income and dividends are presented net of related final taxes. Expense Recognition Cost and expenses are recognized in the statements of comprehensive income when decrease in future economic benefits related to a decrease in an asset or an increase in liability has arisen that can be measured reliably. Benefit/claims expenses Members benefits consist of funeral, fire victim aid, refund of 50% of total contributions and other non-financial benefits given to members. Benefits/claims expense are recorded when incurred. These are recorded when notices of claims have been received or when the members are entitled to the benefits. Unpaid benefits/claims expenses, including those incurred but not reported (IBNR) claims, are based on the estimated cost of all claims incurred but not settled at the reporting date. These costs pertain to estimates of the Association s obligations to the members where the Association has not yet received notification on. Delays can be experienced in the notification and settlement of benefits/claims, therefore the ultimate cost could be known with certainty at the reporting date. Provisions and Contingencies Provisions are recognized when the Association has a present obligation (legal or constructive) 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.

24 Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. When the Association expects a provision or loss to be reimbursed, the reimbursement is recognized as a separate asset only when it is virtually certain that reimbursement will be received. The expense relating to any provision is presented in the statements of comprehensive income, net of any reimbursement. Contingent liabilities are not recognized in the financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the financial statements. Related Party Transactions and Relationships Related party relationship exists when: (a) a person or a close member of that person s family has control or joint control, has significant influence or is a member of the key management personnel of the reporting entity or of a parent of the reporting entity; and (b) when any of the following conditions apply: (i) the entity and the Association are members of the same group; (ii) one entity is an associate or joint venture of the other entity; (iii) both entities are joint ventures of the same third party; (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third party; (v) the entity is a post-employment benefit plan for the benefit of employees of the Association; (vi) the entity is controlled or jointly controlled by a person who has control or joint control over the Association, a person as identified in (a) above; (vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity or of a parent of the entity; and (viii) the entity or any member of a group of which it is part, provides key management personnel services to the Association. Related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Events after the Reporting Date The Association identifies post-year events as events that occurred after the reporting date but before the date when the Association financial statements were authorized for issue. Post year-end events that provide additional information about the Association s position at the reporting date (adjusting events) are reflected in the Association financial statements. Post year-end events that are not adjusting events are disclosed in the Association financial statements when material.

25 3. SIGNIFICANT ACCOUNTING JUDGMENTS, AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of the financial statements in compliance with PFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements. The estimates and assumptions used in the financial statements are based upon management s evaluation of relevant facts and circumstances at the end of the reporting period. Actual results could differ materially from such estimates. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant Accounting Judgments in Applying the Association's Accounting Policies In the process of applying the Association s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on amounts recognized in the financial statements. Classification of Financial Instruments The Association classifies a financial instrument, or its components on initial recognition as a financial asset, financial liability or equity instrument in accordance with the substance of the contractual arrangement and the definition of a financial asset, liability or equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the statements of financial position. Financial assets are classified as HTM investments and loans and receivables, as appropriate. Financial liabilities, on the other hand, are classified as FVPL financial liabilities and other financial liabilities, as appropriate. The Association determines the classification of its financial assets and liabilities based on the above conditions. Distinction between Debt and Equity Instrument The Association s members contribution takes the legal form of equity, but the substance of these financial instruments takes the form of a liability since the Association does not have an unconditional right to avoid delivering cash or another financial asset to the Association s members upon their termination or withdrawal. Impairment of HTM investments The Association determines impairment of HTM investments based on its evaluation of the presence of objective evidence of impairment which includes observable data that comes to the attention of the Association such as, but not limited to, significant financial difficulty of the counterparty or the probability that the issuer will enter bankruptcy or other financial reorganization. As at December 31, 2017 and 2016, no impairment was recognized on HTM investments.

26 Significant Accounting Estimates and Assumptions The Association makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates, assumptions and judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment on Loans and Receivables The Association provides impairment loss on loans and receivables based on estimated collection losses, which may arise from non-collectability of accounts, and writing-off accounts deemed worthless. The estimates are based on a periodic review of the collection probability of the outstanding receivables and other available facts and circumstances that would determine that there is objective evidence of impairment. As at December 31, 2017 and 2016, loans and receivables which include receivables and membership certificate loans (net of allowance for impairment of 577,296 in 2017 and 401,054 in 2016) amounted to 238,224,070 and 167,111,595, respectively (see Notes 5 and 6). Estimation of Basic Contingent Benefit Reserve The determination of the Association s basic contingent benefit reserve is dependent on the selection of certain assumptions used by actuaries in calculating such amount. These estimates are based on standard mortality and morbidity tables as required by the Insurance Code. Actual future experience could differ from the assumptions used to make the reserve estimates. The carrying value of basic contingent benefit reserve amounted to 156,568,350 and 152,255,833 as at December 31, 2017 and 2016, respectively (see Note 10). 4. CASH AND CASH EQUIVALENTS Cash and cash equivalents as at December 31 consist of: Cash on hand 5,000 5,000 Cash in banks 22,455,236 19,873,791 Cash equivalents 26,733, ,245,107 49,194, ,123,898 Cash in banks generally earn interest at rates based on daily bank deposit rates. Cash equivalents are made for varying periods from 28 to 33 days and earn effective interest ranging from 1.2% to 2.5% in 2017 and 1.2% to 1.6% in Interest income earned in 2017 and 2016 amounted to 826,484 and 1,473,891 respectively (see Note 13). There is no restriction on the Association s cash and cash equivalents as at December 31, 2017 and 2016.

27 5. RECEIVABLES Receivables as at December 31 consist of: Members contribution due and uncollected 606, ,756 Accrued interest receivable 287, ,987 Unremitted members contributions, dues and fees 168, ,060 Other receivables 7,094,572 9,722,702 8,157,723 11,209,505 Members contribution due and uncollected pertains to the membership contributions that are already due but not yet collected or deducted from the members salaries. Other receivables pertain to monthly amortizations of membership certificate loan deducted from the members payroll which are not yet remitted by MERALCO and its affiliated companies to the Association as at December 31, 2017 and Based on Management s assessment, the outstanding receivables as at December 31, 2017 and 2016 were fully performing and highly collectible. 6. MEMBERSHIP CERTIFICATE LOANS (NET) Membership certificate loans include Educational Loan, Hospitalization Loan, Fire Loan, Funeral Loan, Supplemental Loan, Calamity Loan and Medicine Loan. Membership Certificate Loans bears 4.5% to 6% annual interest rate and have maximum term of one (1) to three (3) years depending on the type of loan. For MERALCO employees, all loans except educational loan are required to have a co-maker. The co-maker serves as borrower s collateral or security in paying the loan. The details of membership certificate loans (net) are as follow: Loans, at gross 230,918, ,421,521 Less: Unearned income 274,859 4,118,377 Carrying value 230,643, ,303,144 Less: Allowance for loan impairment 577, , ,066, ,902,090 All of the Association s membership certificate loans have been reviewed for indication of impairment. Certain membership certificate loans were found to be impaired; hence, adequate amounts of allowance for impairment have been recorded.

28 A reconciliation of the allowance for loan impairment as at December 31 is shown below Balance at beginning of year 401, ,276 Add: Provision for the year 176,242 11,020 Less: Write off - 21,242 Balance at end of year 577, ,054 The Association had written off loan accounts of withdrawn member amounting to 21,242 in 2016, as collection of these receivables is no longer certain. Interest income on Membership Certificate Loans amounted to 13,523,563 and 15,484,260 for the years ended December 31, 2017 and 2016, respectively as presented in the statements of comprehensive income. 7. HTM INVESTMENTS HTM investments consist of Philippine government securities and corporate bonds with details as follow: Government securities 50,063,105 20,002,964 Corporate bonds 5,000,000 5,000,000 55,063,105 25,002,964 HTM investments have terms of three years and two years in 2017 and 2016, respectively, and bear fixed interest rates from 2.13% to 4.38% in 2017 and 2.13% in The effective interest rates range from 1.377% to 3.497% for both 2017 and Government bonds are part of the Association s compliance to guaranty fund requirement of IC in accordance with the provision under Section 405 (formerly Section 392) of the Insurance Code of the Philippines, as amended under Republic Act No , An Act Strengthening the Insurance Industry, as security for the benefit of members and creditors of the Association. These bonds are deposited with the Bureau of Treasury under the Registry of Scripless Securities System. The movements of HTM investments are as follow: Cost Balance at beginning of year 25,087,200 24,884,000 Acquisitions 30,000,000 20,087,200 Maturities - (19,884,000) Balance at end of year 55,087,200 25,087,200 Premium (discount) Balance at beginning of year (84,236) 119,531 Acquisitions net - (234,576) Amortization net 60,141 30,809 Balance at end of year (24,095) (84,236) Carrying amount at December 31 55,063,105 25,002,964

29 Interest income for the years ended December 31, 2017 and 2016 amounted to 1,310,457 and 727,021, respectively, and is included as Other income in the statements of comprehensive income (see Note 13). 8. PROPERTY AND EQUIPMENT (NET) The reconciliation of property and equipment is as follows: December 31, 2017 Office equipment Furniture and fixtures IT equipment Total Cost Balance at beginning of year 1,346,079 70,120 1,562,181 2,978,380 Additions ,600 80,600 Balance at end of year 1,346,079 70,120 1,642,781 3,058,980 Accumulated depreciation Balance at beginning of year 1,321,521 70,120 1,394,180 2,785,821 Depreciation 9,215-44,350 53,565 Balance at end of year 1,330,736 70,120 1,438,530 2,839,386 Carrying amount at December 31, , , ,594 December 31, 2016 Office equipment Furniture and fixtures IT equipment Total Cost Balance at beginning and end of year 1,318,434 70,120 1,360,581 2,749,135 Additions 27, , ,245 Balance at end of year 1,346,079 70,120 1,562,181 2,978,380 Accumulated depreciation Balance at beginning of year 1,316,185 70,120 1,339,509 2,725,814 Depreciation 5,336-54,671 60,007 Balance at end of year 1,321,521 70,120 1,394,180 2,785,821 Carrying amount at December 31, , , ,559 As at December 31, 2017 and 2016, the total cost of fully-depreciated property and equipment that are still being used by the Association amounted to 2,749,135. The Association s property and equipment as at December 31, 2017 and 2016 are not held as collateral for its liabilities and are free from any encumbrances. The Association did not enter into any contractual commitment for the acquisition of property and equipment. Management believes that there is no indication that an impairment on its property and equipment.

30 9. ACCOUNTS PAYABLE AND OTHER LIABILITIES Accounts payable and other liabilities as at December 31 consist of: Payable to members 3,209,980 2,563,077 Claims payable on basic contingent benefit 1,286, ,456 Members contribution received in advance 298, ,875 Withholding taxes payable 249, ,993 Accrued expenses 239, ,350 SSS, Philhealth, and Pag-ibig payables 20,401 21,745 5,304,114 4,346,496 Payable to members include outstanding payable related to loan overpayments, interest rebates and refund of equity value of terminated members. Claims payable on basic contingent benefit pertains to the benefits not yet claimed by members beneficiaries including those benefits IBNR as at December 31, 2017 and Accrued expenses consist mainly of accrual for professional and technical fees. 10. BASIC CONTINGENT BENEFIT RESERVE Under the Insurance Code, a MBA doing business in the Philippines shall establish a reserve liability in accordance with actuarial procedures, and shall be approved by the IC. The Association s latest actuarial valuation is as at December 31, The table below shows the summary of valuation results based on actuarial valuation report under existing benefit guidelines: Number of members (A) 8,607 8,475 Estimated annual contributions (B) 1,440 1,440 Total estimated annual contributions (A x B) 12,394,080 12,204,000 Present value of benefits (D) 295,437, ,919,488 Present value of future contributions (E) 138,868, ,663,655 Reserves (D-E) 156,568, ,255,833 The reserves were computed as the present value of future benefits less the present value of future net annual contributions. The net annual contribution used is 80% of the gross annual contribution. The valuation method interest rate used was 4.24% per annum for 2017 and The mortality rates used were based on the 1958 Commissioners Reserve Ordinary (1958 CSO) for members and on 150% of the 1958 CSO for dependents. No withdrawals were assumed. The basic contingent benefit reserve was certified by the Association s independent actuary who is accredited by the IC and who also issued an unqualified opinion on the account.