Message to Shareholders. ALFM Mutual Funds

Transcription

1 Annual Report

2 CONTENTS 2 Message to Shareholders 4 ALFM Mutual Funds Fund Performance Review ALFM Peso Bond Fund ALFM Dollar Bond Fund ALFM Euro Bond Fund Philippine Stock Index Fund ALFM Growth Fund ALFM Money Market Fund Audited Financial Statements ALFM Peso Bond Fund ALFM Dollar Bond Fund ALFM Euro Bond Fund Philippine Stock Index Fund ALFM Growth Fund ALFM Money Market Fund 73 Board of Directors 74 Officers 73 Investment Advisor & Distributors annual Report 1

3 The six funds comprising the ALFM Mutual Funds grew by 49.7% in combined net asset value, to PhP billion at end from PhP billion as of end. Message to Shareholders The Philippines strong economic fundamentals continued to shine in, as the country s GDP expanded by an average of 7.2% yearonyear despite the damage caused by Typhoon Yolanda in the latter part of the year. Inflation averaged 3.0%, which was at the low end of the government s target of 3.0% to 5.0%. The benign inflationary environment allowed monetary policy to remain accommodative. In, policy actions from the Bangko Sentral ng Pilipinas (BSP) increased liquidity in the system, beginning with three Special Deposit Account (SDA) rate cuts during the first four months of the year 50 basis points each in January, March, and April ultimately limiting access to SDAs in May, and a total phaseout by November. Fiscal prudence was likewise evident as the fullyear revenue shortfall amounted to Php164 billion, safely below the ceiling of Php238 billion. The three major credit rating agencies (Standard & Poor s, Moody s, and Fitch) acknowledged these strengths, awarding the Philippines with the muchcoveted investment grade credit rating. Philippine assets showed lower returns in amid the volatility in global financial markets. The local stock market started the year on a strong note, as investors adopted a riskon sentiment that generally boosted emerging market assets. The Philippine Stock Exchange Index (PSEi) soared 27.2% to a high of 7, before former US Federal Reserve Chairman Ben S. Bernanke announced in May that the US central bank would begin to cut back on its stimulus program. Following the announcement, the market fell and tested the 5,700 support level. This decline was attributed to the substantial outflows of foreign funds.compared to an overall robust performance in, the PSEi managed to end with a modest gain of 1.3% in, closing at the 5,889 level. Consequently, the Philippine peso depreciated 7.2% against the US dollar, wiping out the gains made in to close at Philippine local currency bonds, as represented by the HSBC local currency bond index, pared gains by as much as 15.0% in May, to end the year just 5.2% higher than the previous year. However, the local fixed income space continued to be supported by the country s strong fundamentals, prudent fiscal management, abundant money supply, and sustained investor interest. Moving forward, we expect the country s fundamentals to remain solid, with GDP growth, supported by increased infrastructure outlays and continued healthy consumer spending, seen to remain above 6% for Inflation should remain manageable at below 4%, as global commodity prices remain anemic, and barring any weatherrelated supply disruptions. Moreover, the high level of gross international reserves affirms the strong external position of the country. We continue to position each of the ALFM Mutual Funds to take advantage of positive trends in the Philippine and global financial markets. The ALFM Peso Bond Fund continues to be the country s largest mutual fund with a net asset value increasing by 38.6% from Php46.5 billion at the end of to Php66.6 billion at the end of. The ALFM Peso Bond Fund registered a 4.65% net return on investment in, higher by 176 basis points than its benchmark, 50% 91day Treasury bills and 50% HSBC Local Bond Index. The ALFM Money Market Fund, now the country s largest money market mutual fund, dominates the money market segment with an 83% market share. Its net asset value more than doubled, from Php1.05 billion to Php2.21 billion at the end of. The ALFM Money Market Fund achieved a net return on investment of 1.98%, the highest yield in its segment, exceeding the 91day Tbill benchmark by 134 basis points. The ALFM Dollar Bond Fund, the country s largest USDdenominated mutual fund, posted a negative 3.23% net return in, underperforming its benchmark by 70 basis points. The fund s benchmark, comprising of 50% 3month U.S. Tbills and 50% JACI Philippines Index, was likewise negative. ALFM Dollar s net asset value decreased by 3.5% from USD226.6 million in to USD million at the end of. The ALFM Euro Bond Fund continued to dominate the Euro bond fund segment with its 98% market share. Its net asset value increased by 5.3% from 8.63 million to 9.10 million at end. The Fund achieved a net return of 0.73%, surpassing its benchmark, the 3month German Tbills, by 72 basis points. The ALFM Growth Fund, a mutual fund invested primarily in equities listed on the Philippine Stock Exchange, registered a net return of negative 1.71% in, 285 basis points lower than its benchmark, 75% PSEi and 25% 91day Tbills. Its net asset value grew by 25% from Php4.80 billion to Php6.01 billion at the end of. The Philippine Stock Index Fund, an index tracker fund which invests in the same issues comprising the PSEi, registered a 2.05% net return on investment in. The Philippine Stock Index Fund s net asset value grew to Php8.07 billion at the end of from Php7.43 billion. On the aggregate, the six funds comprising the ALFM Mutual Funds grew by 41.5% in total net asset value, to Php96.96 billion at the end of from Php68.50 billion, previously. The growth can be attributed to the superior investment returns achieved by ALFM fund managers, coupled with new accounts, and additional subscriptions from you, our dear shareholders. We acknowledge as well the distributors, sales agents, investment counselors, and receiving banks which worked handinhand in servicing your investment requirements. As the Philippine economy continues to attract more investment capital from both domestic and foreign investors in 2014, we shall be constantly be vigilant for investment opportunities, striving to generate maximum returns while keeping investment risks to the minimum for your ALFM Mutual Funds. Rest assured that your Board of Directors shall be looking after the funds with professionalism, dedication, and prudence. The Board of Directors of ALFM Mutual Funds Romeo L. Bernardo Chairman Sherisa P. Nuesa President Maria Theresa MarcialJavier Director John Philip S. Orbeta Director Mario T. Miranda Director 2 3 ALFM MUTUAL FUNDS annual Report

4 About ALFM Mutual Funds Investors No. 1 Choice Thousands of investors have discovered the convenience and simplicity of investing in the ALFM Mutual Funds. In, investing became even more affordable with the lowering of the minimum investment amounts. PESO FUND CURRENCYDENOMINATED NAME FUNDS FUND TYPE MINIMUM INVESTMENT AMOUNT ALFM Peso Bond Fund Bond Fund Php10,000 PESODENOMINATED FUNDS Philippine Stock Index Fund Equity Fund Php10,000 ALFM Growth Fund Equity Fund Php10,000 ALFM Money Market Fund Money Market Php10,000 FOREIGN CURRENCYDENOMINATED FUNDS ALFM Dollar Bond Fund Bond Fund USD500 ALFM Euro Bond Fund Bond Fund 500 ALFM Peso Bond Fund The largest mutual fund in the Philippines The ALFM Peso Bond Fund continued in its position as the most dominant mutual fund in the Philippines. The Fund further increased its market share of the Peso bond mutual fund segment to 77.6% from 75.2% as of December 31,. It is the only mutual fund in the country that provides free life insurance coverage to its eligible primary investors. The coverage is a fixed amount of Php200,000 for each eligible primary investor maintaining at least a Php100,000 investment in the Fund. The Fund was launched to the investing public in January 1999 and has grown to become the market leader and the most popular mutual fund in the country. The investment objective of the Fund is to generate a steady stream of income through investments in a diversified portfolio of highgrade fixed income securities issued by the Philippine government and by prime Philippine corporations. History The ALFM Peso Bond Fund, Inc. was originally incorporated as Ayala Life Filipino Income Fund, Inc. on July 18, It started with an initial authorized capital stock of Php200 million, consisting of 200,000,000 common shares with a par value of Php1.00 per share. On August 21, 1998, the Fund was renamed Ayala Life Fixed Income Fund, Inc. (ALFM) and its authorized capital stock was increased to Php1.0 billion, consisting of 10,000,000 shares and the new par value of Php per share. Due to the continuous strong demand for the Fund s shares, the Fund has had ten increases in its authorized capital stock. THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Minimum Holding Period Early Redemption Fee Custodian Bank Philippine Peso PhP 10, PhP 1, % p.a. 180 days 1.0% flat HSBC Investors can create their own diversified investment portfolio by investing in several funds with varying amounts depending on their tolerance for investment risk. For the appropriate mix that is suitable to you, you may contact your mutual fund sales agent who is prepared to advise you on the benefits, risks, and features of mutual funds investing *. Come closer to achieving your financial goals! Invest in the ALFM Mutual Funds. ALFM Mutual Funds your wealth management products. *Mutual funds are registered with the Securities and Exchange Commission as openend investment companies and thus, are not bank deposit products. They are not guaranteed by the Fund Manager nor by the Philippine Deposit Insurance Corporation. Past investment performance is not indicative of future results. INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval 1 10,000,000 shares August 21, ,000,000 shares December 15, ,000,000 shares June 13, ,000,000 shares January 16, ,000,000 shares June 20, ,000,000 shares November 15, ,000,000 shares October 17, ,000,000 shares April 18, ,000,000 shares September 2, ,000,000 shares October 17, 2005 On November 16, 2006, shareholders approved the change in the Fund s name to ALFM Peso Bond Fund, Inc. The SEC approved the new name on February 26, The Fund s authorized capital stock currently stands at Php34.0 billion, consisting of 340,000,000 shares with a par value of Php per share. 77.6% Market share of ALFM Peso Bond Fund in the peso mutual fund bond segment 4 5 ALFM MUTUAL FUNDS annual Report

5 The Fund Manager BPI Investment Management, Inc. (BPI Investment) is the Fund Manager and is responsible for formulating and executing the Fund s investment strategy. BPI Investment, a wholly owned subsidiary of the Bank of the Philippine Islands, was incorporated on July 30, 1974 as Ayala Investment Management, Inc. to principally engage in the business of managing an investment company. On March 5, 1991, the Securities and Exchange Commission (SEC) approved the change in the company s name to BPI Investment Management, Inc. Backed by stateoftheart technology and financial experience, BPI Investment carefully balances the Fund s investment risks and returns to guard against potential losses. The Fund s Investment Advisor is the Bank of the Philippine Islands Asset Management and Trust Group (BPI Asset Management). Financial Environment Most will remember as the year when US Federal Reserve Chairman Ben Bernanke announced that the central bank was considering to scale back its US$85 billionamonth bondbuying program, known as Quantitative Easing. This idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms. Concerns over the growth trajectory of Emerging Markets in view of their persistent structural issues further exacerbated the selloff. Though not without volatility, was still a relatively good year for Philippine local currency bonds as yields declined by an average of 42 basis points across the curve. More importantly, it would be remembered as the year of credit rating upgrades, as all three major rating agencies Standard & Poor s, Moody s, and Fitch upgraded the country s sovereign credit rating to investment grade. These upgrades were given on the back of the government s prudent fiscal management and political stability amid a backdrop of slow global economic growth and record low interest rates. The Investors No. 1 Choice The high domestic liquidity helped boost growth in the mutual fund industry, which grew by Php60.7 billion or 41.5% in. For its part, the peso bond fund segment grew by Php29 billion or by 48% over the previous year s level, with the aggregate fund value reaching Php90.4 billion by yearend. Your ALFM Peso Bond Fund grew by Php24.4 billion, or 53.4%, higher than the industry growth rate. Profitable operations The Fund s total income for the year was significantly higher at Php4.04 billion compared to just Php3.30 billion in. The Fund registered gains on financial assets at fair value through profit or loss of Php1.52 billion in. The large improvement came primarily from the increase in fair value gains on current holdings due to the sharp decline in interest rates in. Total expenses stood at Php1.18 billion, accounted for by higher management fees due to the Fund s net asset value growth, as well as documentary stamp taxes on new subscriptions, compared to Php689.7 million in. Solid fund performance In terms of investment performance, your Fund gave a return on investment (ROI) for fullyear of 4.65%, net of fees and taxes, 176 basis points higher than its benchmark return of 2.89%. The Fund s NAVPS appreciated by Php13.96, increasing from Php per share at the end of to Php by yearend. The Fund s NAVPS experienced volatility of less than 1.3%, significantly lower than the peso bond index volatility of 4.07%. Portfolio mix The Fund continued to remain well diversified in with 69.0% of the Fund s portfolio invested in government securities, 20.2% in corporate loans and receivables, 1.7% in preferred shares, 0.7% in an index bond fund, and 8.3% in cash and money market instruments. Corporate loans and receivables will continue to be a major investment of the Fund as we look to participate in corporate issuances given the prospect of yield enhancement and diversification. Outlook for 2014 The local market may come under pressure as global interest rates are seen to rise in the next year given the winding down of the FED s Quantitative Easing (QE) Program and ultimately rising policy rates in the US and in the Philippines. Inflation may experience a spike in 2014, though it will likely remain within the target of the BSP, given proactive moves of the Monetary Board. Nonetheless, the Fund will continue to use its active management of duration, yield curve positions and credit exposure to capitalize on the possible volatility within the year. Portfolio Composition As of 31 December 40.29% Government Securities Longterm 28.75% Government Securities 8.23% Mediumterm Corporate Notes 0.75% Index Bond Fund 1.74% Preferred Shares 8.28% Cash and Receivables 11.97% Corporate Bonds Net Asset Value In billions PhP MATURITY PROFILE As of 31 December 28% More than 5 years 52% 15 years ALFM Peso Bond Fund versus Benchmark Net Asset Value Per Share 39.6 Dec08 Mar10 Jun11 Sep12 Dec % Less than 1 year Fund Benchmark: 50% 91day Treasury Bill and 50% HSBC Philippines Total Currency Bond Index, net of tax Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec ALFM MUTUAL FUNDS annual Report

6 ALFM Dollar Bond Fund The Leader in US$Denominated Bond Mutual Funds The ALFM Dollar Bond Fund is an openend investment company (mutual fund) denominated in U.S. dollars. As of December 31,, its share of the US$denominated bond fund segment grew further to 66.6%, from 60.9% the previous year. It is the largest fund in its segment. Its fund value declined slightly from the previous year s figure of USD million, settling at US$ million as of December 31,. The primary investment objective of the Fund is capital preservation with returns and inflows derived out of investments in primarily foreign currency denominated investment instruments which can provide the Fund with a steady stream of fixed income. In line with this objective, the Fund invests in a diversified portfolio of U.S. dollardenominated fixed income securities issued by the Philippine government and major foreign governments, as well as by prime Philippine and foreign corporations and financial institutions. History ALFM Dollar Bond Fund, Inc. was originally incorporated as Far East Fund, Inc. on October 23, 1993 to engage primarily in the business of investing, reinvesting and trading of securities and to operate as an openend investment company (mutual fund). The Fund started its operations on May 10, On November 16, 2000, the SEC approved the conversion of the Fund s authorized capital stock of Php200.0 million, from 200,000,000 common shares of Php1.00 par value into an equivalent 2,000,000 common shares of Php par value. On December 12, 2001, the SEC approved the change in the Fund s name from Far East Fund, Inc. to Far East Dollar Bond Fund, Inc. Currently, the Fund has an authorized capital stock of Php6.79 billion, consisting of 679,000 common shares of Php10, par value. Fund Manager BPI Investment Management, Inc. (BPI Investment) is the Fund Manager and is responsible for formulating and executing the Fund s investment strategy. THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Minimum Holding Period Early Redemption Fee Custodian Bank US Dollar USD USD % p.a. 180 days 1.0% flat HSBC Volatile year ALFM Dollar Bond Fund underperformed versus its benchmark. The Fund gave a fullyear return of negative 3.23%, 70 basis points lower than its blended benchmark of 50% 3month U.S. Treasury Bills and 50% JACI Philippines Index return of negative 2.53%. The underperformance was brought about by the shift in portfolio flows from emerging markets to the developed markets. However, active management of the duration of the Fund made it less vulnerable to price volatilities and market uncertainties caused by this general riskoff sentiment in the financial markets. Yields of U.S. dollardenominated sovereign (Republic of the Philippines) bonds increased by 94 basis points for the year, which was reflective of investors move from emerging markets to developed markets. This riskoff sentiment was sparked by comments of then U.S. Federal Reserve Chairman Ben Bernanke that hinted at tapering their Quantitative Easing (QE) stimulus. This QE stimulus called for the Federal Reserve to purchase US Treasuries and MortgagedBacked Securities at the pace of USD85 billion a month. The idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms. On the local front, positive Philippine economic fundamentals remain to be supportive of ROP bond prices despite the uncertainties in other global markets. Portfolio Composition As of 31 December 2% Bond Funds 36% Philippine Sovereign Bonds 1% Supranational Bonds 15% Deposits and other receivables 2% US Corporate Bonds 1% US Sovereign Bonds 28% Philippine Corporate Bonds 8% AsiaPacific Corporate Bonds 1% Offshore Mutual Funds 6% AsiaPacific Sovereign Bonds 66.6% Market share of ALFM Dollar Bond Fund in the US dollardenominated bond fund segment NAV marks new high ALFM Dollar Bond Fund s net asset value (NAV) declined by 3.22% to USD million as of December 31,, a marked difference from the growth rate of 32.7% recorded in. In spite of this, the Fund solidified its No. 1 ranking in the USDdenominated bond fund segment with its 66.6% market share. 250 Net Asset Value In millions USD INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval 1 540,000 shares January 21, ,000 shares February 27, ,000 shares June 05, Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun12 Dec ALFM MUTUAL FUNDS annual Report

7 Operating performance Subscriptions to ALFM Dollar Bond Fund, along with the Fund s interest income, were invested primarily in U.S. dollardenominated securities issued by the Philippine government, Philippine corporates and shortterm money market placements, amidst market cautiousness brought about by the Federal Reserve s comments on QE tapering. By the end of, the ROP portion comprised 36% of the Fund. This was followed by Philippine corporate bonds which comprised 28% of the Fund. The rest of the Fund s portfolio was invested in securities issued by the United States, supranational institutions, Asian sovereigns and quasisovereign bonds. The Fund decreased its duration in order to reduce the volatility of the portfolio. Duration stood at 4.31 by the end of, as compared to 5.83 at the end of the previous year. This strategy enabled the Fund to outperform its competitors. The NAVPS still decreased though by 3.23%, from USD at the end of to USD at the end of. ALFM DOLLAR Bond Fund versus Benchmark Net Asset Value Per Share Dec08 Market outlook In 2014, we remain to be bullish on the Philippine economy and will cautiously add duration to the Fund by purchasing longerdated ROP bonds whenever we deem appropriate. This bullish view was validated by the investment grade status bestowed upon the Philippines by all three major credit ratings agencies last year. We expect volatility in the bond markets although we remain to be optimistic on global bond prices. Investors of the Fund should be ready to withstand volatility and pursue a mediumtolongterm investment perspective. Cash and less than 1 year Between 13 years Between 35 years Between 57 years Between 710 years More than 10 years MATURITY PROFILE As of 31 December 9.75% 10.81% 15.38% 17.83% % 22.61% Mar10 Fund 1% Supranational Bonds 8% AsiaPacific Corporate Bonds 2% US Corporate Bonds PORTFOLIO COMPOSITION As of 31 December 6% AsiaPacific Sovereign Bonds Jun11 Sep12 Dec13 Benchmark: 50% 3month U.S. Treasury Bill and 50% JP Morgan Asia Credit Phils. Total Return Index 1% US Sovereign Bonds 1% Offshore Mutual Funds 2% Bond Funds 36% Philippine Sovereign Bonds 28% Philippine Corporate Bonds 15% Deposits and Other Receivables ALFM Euro Bond Fund The Dominant EuroDenominated Bond Fund The ALFM Euro Bond Fund is an openend investment company (mutual fund) denominated in the Euro currency. As of December 31,, its market share of the Eurodenominated bond fund segment increased to 98.3%, from 97.8% the previous year. The investment objective of the Fund is capital preservation with returns and inflows derived out of investments in primarily foreign currency denominated investment securities which can provide the Fund a steady stream of fixed income. History The ALFM Euro Bond Fund, Inc. was originally incorporated as ALFM Euro Fund, Inc. on August 5, 2005 to operate as an openend investment company under the Investment Company Act of 1960 (Republic Act No. 2629). The Fund s initial authorized capital stock was Php200.0 million, consisting of 20,000 common shares with a par value of Php10,000 per share. It is the first fund in the Philippines incorporated with the Euro as the operating currency at inception. On September 6, 2005, the SEC approved the change in the Fund s name from ALFM Euro Fund, Inc. to ALFM Euro Bond Fund, Inc. The Fund s authorized capital stock currently stands at Php800.0 million, consisting of 80,000 common shares at Php10, par value. INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval 1 50,000 shares October 13, ,000 shares May 30, 2007 THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Minimum Holding Period Early Redemption Fee Custodian Bank Euro % p.a. 180 days 1.0% flat HSBC 98.3% Market share of ALFM Euro Bond Fund in the Eurodenominated bond fund segment ALFM MUTUAL FUNDS annual Report

8 The Fund Manager BPI Investment is the Fund Manager and is responsible for formulating and executing the Fund s investment strategy. Recovering Euro Bond Fund Segment The Net Asset Value (NAV) of ALFM Euro Bond Fund grew by 5.9% in, coming from a contraction of 20% in. As of December 31,, its NAV stood at 9.09 million, cornering 98.3% of the Eurodenominated bond fund segment while its lone competitor took up the remaining 1.7%. By the end of, Philippine Euro denominated bonds comprised 48% of the Fund s investments while 12% of the Fund was invested in supranational bonds. The remaining 40% was invested in Asia Pacific, European and US corporate bonds, and European sovereign bonds and shortterm money market placements, given our defensive strategy. The Fund maintained its low duration in order to reduce the volatility of the portfolio. Duration stood at 3.12 by the end of compared to 3.08 at the end of. Portfolio Composition As of 31 December 48% Philippine Sovereign Bonds 11% AsiaPacific Corporate Bonds Fund Performance The Fund continues to have the ROPEuro bond due in 2016 as its major holding comprising 48% of its portfolio. The Fund returned 0.73% in, higher than the 0.01% yield of the benchmark 3month German Treasury Bill as of yearend. Asset Allocation Subscriptions to ALFM Euro Bond Fund, along with the Fund s interest income and trading gains, were invested primarily in Eurodenominated securities issued by the Republic of the Philippines (ROP) and bonds issued by the Federal Republic of Germany and by France. Market Outlook In 2014, we remain to be quite bullish on the Philippine economy and will cautiously add duration to the Fund by purchasing longerdated bonds whenever we deem appropriate. This bullish view was validated by the investment grade status bestowed upon the Philippines by all three major credit ratings agencies last year. We expect volatility in the ROP bond markets though we remain to be optimistic on global bond prices. Investors of the Fund should be ready to withstand volatility and pursue a medium to longterm investment perspective. Cash and less than 1 year Between 13 years Between 57 years MATURITY PROFILE As of 31 December 7.90% 8.47% 64.66% 64.66% 12% Supranational Bonds 8% European Sovereign Bonds 7% European Corporate Bonds 6% US Corporate Bonds 8% Deposits and Other Receivables Between 710 years 18.97% Net Asset Value In millions EUR ALFM EURo Bond Fund versus Benchmark Net Asset Value Per Share % Increase in Net Asset Value (NAV) in Dec08 Mar10 Jun11 Sep12 Dec Fund Benchmark: 3month German Treasury Bill Dec05 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec ALFM MUTUAL FUNDS annual Report

9 Philippine Stock Index Fund A Mirror of the Philippine Stock Exchange Index The Philippine Stock Index Fund (PSIF) is an openend investment company or (mutual fund) denominated in Philippine pesos which invests in exactly the same securities comprising the Philippine Stock Exchange Composite Index (PSEi) and in the same weights as in the Index. Its investment objective is to mimic the performance of the PSEi. It is an index tracker fund that fully replicates the PSEi. As of December 31,, its Net Asset Value reached a new high of Php8.08 billion, representing a growth of 10.68% over the previous yearend s Php7.30 billion. The Fund was launched to the investing public in February History The Philippine Stock Index Fund Corp. was originally incorporated as Philippine Index Fund Corp. on December 11, 2002 with an authorized capital stock of Php200.0 million, consisting of 2,000,000 common shares with a par value of Php each. As an openend investment company established under the Investment Company Act of 1960 (R.A. No. 2629), the Fund is engaged in the sale of its shares and in the investment of the proceeds of this sale into the component securities comprising the PSEi. THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Philippine Peso PhP 10, PhP 1, % p.a. PSIF s net asset value (NAV) amounted to Php8.08 billion as of end. The NAV increased dramatically by 10.68% from Php7.30 billion as of end. The upbeat investor sentiment and changing investor risk profiles from conservative to aggressive contributed to the Fund s growth in terms of new subscriptions. The PSEi grew by 0.98% in. PSEi A Top Performer in the Region PSIF s NAV rose in tandem with the PSEi, sustaining its parallel performance with the Philippine stock market benchmark since inception. Major indices of the Holding (+5.41%) and Services (+8.20%) sectors outperformed the PSEi in while Property (4.30%), Financial (6.42%), Industrial (2.11%), and Mining and Oil (38.59%) underperformed on the back of the possible tapering (quantitative easing) of the monthly bond purchases of the Federal Reserve, which posed the risk of higher rates and an economic slowdown. Operating performance As of end December, PSIF s NAV per share stood at Php655.06, up 2.05% increase from s Php Total assets of the Fund amounted to Php8.172 billion, an increase of 7.29% from Php7.617 billion in assets reported in. Subtracting liabilities of Php million, net assets amounted to Php8.076 billion, showing a 8.71% increase from the Php7.429 billion in. The growth in net assets was primarily a result of new subscriptions to the fund in. Revenues totaled Php115.7 million in or a 90.44% decrease from the Php1.211 billion in, due to losses on financial assets at fair value. Net loss on financial assets at fair value through profit or loss amounted to Php131 million from a net gain of Php1.12 billion in. In, management fees rose to Php million from P million in. Total expenses for is at Php million, % higher than the Php million registered the previous year. In, the Fund registered a net loss of Php million compared to s net gain of Php1.134 billion. Currently, the Fund s authorized capital stock stands at Php2 billion, consisting of 20,000,000 common shares with a par value of Php each. Fund Manager BPI Investment is the Fund Manager and is responsible for executing the Fund s investment strategy. Consistent Performance Minimum Holding Period Early Redemption Fee Custodian Bank 180 days 1.0% flat HSBC Net Asset Value In millions PhP 7,298 10,216 8, % Increase in Net Asset Value (NAV) in INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval 1 5,000,000 shares February 15, ,800,000 shares September 5, ,680,000 shares September 13, ,000,000 shares July 12, 3,738 3,224 2,334 2,455 2,518 2,531 2,3102,759 2,933 2,458 1,935 1,426 Php2.0B Current authorized capital stock of the Philippine Stock Index Fund Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec12 Jun13 Dec ALFM MUTUAL FUNDS annual Report

10 Market Outlook 2014 is likely to be driven by continued flows from emerging markets to developed markets, particularly to North Asia (South Korea, Taiwan). These countries are particularly leveraged to the recovery in the US market. Market players will still be watching out for upcoming data releases in the US, particularly GDP numbers, nonfarm payroll, and the unemployment rate. The decision of gradual tapering will still be very much data dependent. The announcement of Janet Yellen as the new Fed Chairman is viewed positively as this would mean a more dovish stance. QE tapering should not affect markets as much as it did in, especially with strengthening of forward guidance. Some possible risks in 2014 would include China s hard landing, disappointing developments on the pace of US economic recovery, Philippine inflation surprises on the upside, geopolitical risks in Thailand, and the escalation of territorial disputes in Asia. Continued issues in peer markets will continue to drag down the Philippines along with it. Indonesia still has its current account deficit issue while Thailand has political concerns. 14% Communications 33% Holding Firms Portfolio Composition As of 31 December 14% Banks 1% Gaming 15% Property 4% Transportation 2% Mining and Oil 7% Utilities Philippine Stock Index Fund versus Benchmark Net Asset Value Per Share 10% Consumer ALFM Growth Fund A Mutual Fund Primed for Growth ALFM Growth Fund is an openend investment company or (mutual fund) denominated in Philippine pesos. It was launched to the investing public in January The Fund s investment objective is to provide longterm capital appreciation through investment in a diversified portfolio of equity and fixed income securities. Under normal market conditions, the Fund invests at least 75% of its net asset value in equity securities and the remainder in fixed income securities. Due to the aggressive nature of the Fund, ALFM Growth Fund best caters to investors who are aware of the risks in investing in stocks and who can tolerate interim price volatilities in exchange for longterm capital growth. The Fund s Net Asset Value (NAV) was recorded at PhP6.02 billion as of December 31,, growing by 25.2% from PhP4.81 billion as of December 31,. History ALFM Growth Fund, Inc. was incorporated on November 26, 2007 with an authorized capital stock of PhP400.0 million, consisting of 4,000,000 common shares with a par value of PhP As an investment company established under the Investment Company Act of 1960 (R.A. No. 2629), the Fund is engaged in the sale of its shares and in the investment of the proceeds of this sale into equity and fixed income securities. The Fund s authorized capital stock currently stands at PhP3.6 billion, consisting of 36,000,000 common shares with a par value of PhP per share. INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Minimum Holding Period Early Redemption Fee Custodian Bank Philippine Peso PhP 10, PhP 1, % p.a. 180 days 1.0% flat HSBC PhP3.6B Current authorized capital stock of ALFM Growth Fund Dec08 Mar10 Jun11 Sep12 Dec ,000,000 shares February 15, ,000,000 shares January 19, 3 30,000,000 shares December 21, 4 36,000,000 shares February 25, Fund Manager BPI Investment is the Fund Manager and is responsible for formulating and executing the Fund s investment strategy. 25.2% Increase in Net Asset Value (NAV) in Fund PSEi Sophisticated Market Segment ALFM Growth Fund s NAV has grown steadily from Php110 million as of Dec. 31, 2007 to Php6.02 billion as of December 31,. The Fund is a suitable investment product for investors who seek an actively managed fund focusing on equity securities ALFM MUTUAL FUNDS annual Report

11 Surpassing the benchmark ALFM Growth Fund s net asset value per share (NAVPS) has consistently outperformed the Fund s benchmark which is a composite of 75% PSEi and 25% 91day TBills. Operating performance As of end December, ALFM Growth s trading net asset value (NAV) per share stood at Php217.56, down 1.71% compared to the enddecember level of Php The decrease in NAV per share can be attributed to the Fund s overweight position in some equities that underperformed for the year. Total assets of the Fund amounted to Php6.080 billion as of end, an increase of 25.91% compared to the Php4.828 billion as of end. Net assets amounted to Php6.016 billion, up from Php4.805 billion in. Revenues registered at negative Php million in, down by Php million from Php million in. Net loss on financial assets at fair value through profit or loss was at Php million in from a net gain of Php million in due to increase in unrealized losses from equity investments during the year. Total expenses amounted to Php million in, compared to Php84.04 million the previous year % Property Portfolio Composition As of 31 December 20.68% Holding firms 4.55% Transportation 5.14% Mining 13.94% Financials 11.66% Food 7.71% Industrials Market Outlook 2014 is likely to be driven by continued flows from emerging markets to developed markets, particularly to North Asia (South Korea, Taiwan). These countries are particularly leveraged to the recovery in the US market. Market players will still be watching out for upcoming data releases in the US, particularly GDP numbers, nonfarm payroll, and the unemployment rate. The decision of gradual tapering will still be very much data dependent. The announcement of Janet Yellen as the new Fed Chairman is viewed positively as this would mean a more dovish stance. QE tapering should not affect markets as much as it did in, especially with strengthening of forward guidance. Some possible risks in 2014 would include China s hard landing, disappointing US recovery, a higherthantargeted Philippine inflation, geopolitical risks in Thailand, and escalation of territorial disputes in Asia. Continued issues in peer markets will continue to drag down the Philippines. Indonesia still has its current account deficit issue while Thailand has political concerns. We are still employing a bottomup approach to stock selection given current market swings. Favored sectors include consumer (due to resilient remittances and rising per capita income) and real estate (driven by improved affordability, financial system liquidity, and the current negative real interest rate environment which supports the property sector). We are also looking at companies that will benefit from the expected USD appreciation. Some mergers and acquisitions may possibly happen in the banking sector heading towards 2015 in preparation for the ASEAN integration. of Php million, and other expenses of Php million representing payment for documentary stamps and audit fees made up the bulk of the expenses in. These resulted to a net loss of Php million in compared to a net income of Php million in. Net Asset Value In millions PhP ALFM GROWTH Fund versus Benchmark Net Asset Value Per Share 6,901 6,017 5,000 4,806 3,616 3,000 1, ,246 2,614 2, Jun13 Dec13 Dec08 Mar10 Jun11 Sep12 Dec13 Fund Benchmark: 75% PSEi and 25% 91day Philippine Treasury Bill Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec ALFM MUTUAL FUNDS annual Report

12 ALFM Money Market Fund The Largest Money Market Mutual Fund The ALFM Money Market Fund was launched to the investing public in December 2009 as an alternative investment product for investors seeking shortterm investment outlets. The Fund is now the largest among the four funds comprising the money market fund segment, with a commanding market share of 83.1% as of December 31,, growing from 66.1% market share as of the previous yearend. The investment objective of the Fund is to seek capital preservation and stable income from a diversified portfolio of money market instruments and bonds with a portfolio duration of less than one. History The ALFM Money Market Fund, Inc. is a domestic corporation duly authorized to operate as an openend investment company (mutual fund). The Fund was incorporated on October 19, 2009 with an authorized capital stock of Php20.0 million consisting of 2,000,000 common shares with a par value Php10.00 per share. The Fund was organized to engage in the sale of its shares and in the investment of the proceeds of this sale into a diversified portfolio of bonds and money market instruments. The Fund s authorized capital stock currently stands at Php200.0 million consisting of 20,000,000 shares with a par value of Php10.00 per share. INCREASES IN AUTHORIZED CAPITAL STOCK Increase # Authorized Capital Stock Date of SEC Approval 1 5,000,000 shares November 18, ,000,000 shares November 17, 3 20,000,000 shares November 12, THE FUND AT A GLANCE Base Currency Minimum Initial Investment and Maintaining Balance Minimum Additional Contribution and Partial Redemption Management and Advisory Fee Minimum Holding Period Early Redemption Fee Custodian Bank Philippine Peso PhP 10, PhP 1, % p.a. 30 days 1.0% flat HSBC Php200M Current authorized capital stock of the ALFM Money Market Fund Fund Manager BPI Investment is the Fund Manager and is responsible for formulating and executing the Fund s investment strategy. Attracting New Investors The ALFM Money Market Fund s Net Asset Value (NAV) as of December 31, breached the Php2.0billion mark for the first time as it settled at Php2.5 billion. This represents a spectacular growth rate of 145% from the Php1.05 billion level as of the previous yearend. It is now the largest fund in the money market fund segment. Investors who prefer 30day tenors and those who want to avoid the hassle of monthly rollover documentation have been shifting their investments to the Fund. Market Review Most will remember as the year when US Federal Reserve Chairman Ben Bernanke announced that the central bank was considering to scale back its US$85 billionamonth bondbuying program, known as quantitative easing. This idea caused widespread panic in financial markets as investors anticipated tightening global liquidity levels, which would in turn push yields back to their historical norms. Concerns over the growth trajectory of Emerging Markets in view of their persistent structural issues further exacerbated the selloff. Though not without volatility, was still a relatively good year for Philippine local currency bonds as yields declined by an average of 42 basis points across the curve. More importantly, it would be remembered as the year of credit rating upgrades, as all three major rating agencies Standard & Poor s, Moody s, and Fitch upgraded the country s sovereign credit rating to investment grade. These upgrades were given on the back of the government s prudent fiscal management and political stability amid a backdrop of slow global economic growth and record low interest rates. 2,500 2,000 1,500 1, Fund Performance The fund s total assets grew to Php2.56 billion from s Php1.05 billion. Correspondingly, total income increased to Php38.87 million from s Php28.11 million. The main driver was higher interest income Php28.24 million from Php13.15 million. The fund incurred expenses of Php14.62 million, higher than the prior year s Php7.58 million. In terms of return on investment, the Fund had a full year return of 1.98%, outperforming its benchmark by 134 bps. The Fund s benchmark is the HSBC Philippines Money Market Index. Net Asset Value In millions PhP ,050.2 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Dec Jun13 145% Increase in Net Asset Value (NAV) in 2,568 Dec ALFM MUTUAL FUNDS annual Report

13 Asset Allocation The fund was invested mostly in cash and deposit instruments (76%) and corporate notes and bonds (24%). The fund s duration was actively managed ending the year at Market Outlook The local market may come under pressure as global interest rates are seen to rise in the next year given the winding down of the FED s quantitative easing program and ultimately rising policy rates in the US and in the Philippines. Inflation may experience a spike in 2014, though it will likely remain within the target of the BSP, given proactive moves of the Monetary Board. Nonetheless, the Fund will continue to use its active management of duration, yield curve positions and credit exposure to capitalize on the possible volatility within the year. Portfolio Composition As of 31 December 24% Corporates 76% Cash Audited Financial Statements 0.19 Duration of the ALFM Money Market Fund by end of ALFM MONEY MARKET Fund versus Benchmark Net Asset Value Per Share Dec10 Sep11 Jun12 Mar13 Dec13 Fund Benchmark: HSBC Philippines Money Market Index ALFM MUTUAL FUNDS annual Report

14 Independent Auditor s Report To the Board of Directors and Shareholders of ALFM Peso Bond Fund, Inc. 17 th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of ALFM Peso Bond Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Peso Bond Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 14 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 Statements Required by Rule 68, Securities Regulation Code (SRC), as Amended on October 20, To the Board of Directors and Shareholders of ALFM Peso Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of ALFM Peso Bond Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of ALFM Peso Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 14 to the financial statements. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 24 annual Report 25

15 ALFM Peso Bond Fund, Inc. ALFM Peso Bond Fund, Inc. Statements of Financial Position December 31, and (All amounts in thousands of Philippine Peso) Statements of Changes in Equity For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso) ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables Total assets LIABILITIES Management fee payable Deposits for future subscriptions Other liabilities Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity ASSETS LIABILITIES AND EQUITY (The notes on pages 1 to 23 are an integral part of these financial statements) ALFM Peso Bond Fund, Inc. Notes ,879,242 51,523,658 15,305,154 71,708,054 77,949 4,770, ,773 5,040,907 20,864,540 26,696,201 19,106,406 66,667,147 71,708,054 3,755,317 29,645,308 13,133,285 46,533,910 49,390 16,203 65,593 15,257,695 11,643,428 19,567,194 46,468,317 46,533,910 Balance at January 1, 2010 Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Redeemable shares (Note 10) 11,373,684 9,161,141 (8,882,105) 279,036 11,652,720 13,257,890 (9,652,915) 3,604,975 15,257,695 19,766,943 (14,160,098) 5,606,845 20,864,540 Share premium 3,445,036 15,481,908 (15,034,870) 447,038 3,892,074 25,118,634 (17,367,280) 7,751,354 11,643,428 42,567,385 (27,514,612) 15,052,773 26,696,201 Retained earnings 15,716,633 2,366,483 2,366,483 18,083,116 2,377,113 2,377,113 (893,035) (893,035) 19,567,194 2,503,540 2,503,540 (2,964,328) (2,964,328) 19,106,406 Total equity 30,535,353 2,366,483 2,366,483 24,643,049 (23,916,975) 726,074 33,627,910 2,377,113 2,377,113 38,376,524 (27,913,230) 10,463,294 46,468,317 2,503,540 2,503,540 62,334,328 (44,639,038) 17,695,290 66,667,147 Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso except per share amounts) (The notes on pages 1 to 23 are an integral part of these financial statements) INCOME Interest income Net gains on financial assets at fair value through profit or loss Other income EXPENSES Management and other professional fees Taxes and licenses Others PROFIT BEFORE INCOME TAX PROVISION FOR INCOME TAX PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE INCOME FOR THE YEAR BASIC AND DILUTED EARNINGS PER SHARE Notes 5, 6, , ,452,854 1,517, ,766 4,120,476 1,012, ,102 9,011 1,127,380 2,993, ,556 2,503,540 2,503, ,963,198 1,343,783 3,306, ,025 73,213 13, ,720 2,617, ,148 2,377,113 2,377, (The notes on pages 1 to 23 are an integral part of these financial statements) 1,595,938 1,481,660 3,077, ,574 49,182 17, ,446 2,529, ,669 2,366,483 2,366, ALFM Peso Bond Fund, Inc. Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Operating income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Loans and receivables Increase (decrease) in: Other liabilities Management fee payable Notes 6 2,993, ,825 (2,452,854) 1,050,067 (21,878,350) (2,171,869) 28, ,570 2,617,261 (12,643) (1,963,198) 641,420 (14,373,675) (2,378,756) 4,577 13,133 2,529, ,074 (1,595,938) 1,473,288 (2,687,469) 619,123 (70,135) 4,320 (Forward) 26 ALFM MUTUAL FUNDS annual Report 27

16 Cash used in operations Interest received Income taxes paid Net cash (used in) from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Deposits for future subscriptions Proceeds from issuance of shares Net cash from financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 ALFM Peso Bond Fund, Inc. Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso) Notes (22,795,023) 1,943,029 (489,556) (21,341,550) 4,770,185 62,334,328 (44,639,038) 22,465,475 1,123,925 3,755,317 4,879,242 (16,093,301) 1,752,480 (240,148) (14,580,969) 38,376,524 (27,913,230) 10,463,294 (4,117,675) 7,872,992 3,755,317 (The notes on pages 1 to 23 are an integral part of these financial statements) Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are in thousands of Philippine Peso, unless otherwise stated) Note 1 General information ALFM Peso Bond Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment company. It was registered on July 18, 1997 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799). The Fund aims to generate a steady stream of income through investments in a diversified portfolio of highgrade fixed income instruments. As an openend investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund s prospectus (Note 10). The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on October 17, 2005 (Note 10). The Fund s registered office address, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas,, Philippines. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 13). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss. The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements. The area involving a higher degree of judgment or complexity is disclosed in Note 4. New standards, interpretations and amendments to published standards 5 New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, that have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: (660,873) 1,482,950 (162,669) 659,408 24,643,049 (23,916,975) 726,074 1,385,482 6,487,510 7,872,992 PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents include deposits held at call with a bank and shortterm highly liquid investments with original maturities of three months or less from the date of acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents and due from brokers and other receivables. As at reporting date, the Fund has no financial assets under availableforsale and heldtomaturity categories. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on tradedate, the date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets at fair value through profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in the statement of total income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date 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 impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial 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. A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that the financial asset is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of the loss has been determined. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment losses for the year. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement 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 of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Redeemable shares The shares issued by the Fund are redeemable at the holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 11) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.8 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value. 2.9 Revenue and expense recognition Interest income is recognized on a timeproportion basis using the effective interest method. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Expenses are recognized when incurred Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in Philippine Peso ( Peso ). The primary activity of the Fund is to invest in Pesodenominated highgrade fixed income instruments. The Board of Directors considers the Peso as the currency that 28 ALFM MUTUAL FUNDS annual Report 29

17 most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the Fund s functional and presentation currency Earnings per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund s assets and liabilities are denominated in Philippine Peso and is not therefore exposed to foreign exchange risk. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to outperform its composite benchmark, 50% of 91day Philippine Treasury Bills and 50% HSBC Philippine local currency bond index, by investing in a diversified portfolio of Philippine Peso denominated highgrade fixed income investments. 3.2 Interest rate risk The Fund trades in financial instruments, taking positions in traded and overthecounter instruments, to take advantage of shortterm market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which include primarily exposures to changes in interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk. The Fund s financial assets at fair value through profit are mostly nonrepricing and hence exposed to fair value interest rate risk. The Fund s fair value interest rate risk exposure principally relates to debt securities issued by the Republic of the Philippines (ROP) classified as financial assets at fair value through profit or loss whose market values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund s interestbearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD. The Fund s fair value interest rate risk is managed through diversification of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management. The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund s net asset value to protect the Fund from market price fluctuations (see Note 11). To estimate its exposure to market risk, the Fund Manager computes the statistical value at risk (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolios actual loss could be greater than the VAR estimate. As at December 31,, the Fund s VAR with respect to market interest rate volatilities amounts to P1,828,588 ( P594,308). 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables 4,879,242 51,523,658 15,305,154 71,708,054 3,755,317 29,645,308 13,133,285 46,533,910 As at December 31, and, the Fund s financial assets as shown above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, and. The Fund invests primarily in highgrade investment instruments and securities. Details of ratings of the Fund s investments at December 31, and based on external credit rating agencies: At December 31, Moody s Baa3 Fitch BBB Unrated At December 31, Standard and Poor s BBB BB+ Philippine Rating Services Corp. Aaa Unrated through profit or loss 495,884 28,973,121 22,054,653 51,523,658 through profit or loss 27,925,763 1,719,545 29,645,308 Loans and receivables 14,440,299 14,440,299 Loans and receivables 595,000 4,335,610 7,611,916 12,542,526 Unrated investments and loans and receivables are from counterparties with no history of default with the Fund. The Fund s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of shortterm time deposits with various universal and thrift banks with no history of default with the Fund (Note 5). Collaterals held as security for loans and receivables consist of mortgage trust indentures, chattel and real estate mortgages. Aggregate fair value of these collaterals, pertaining to the full amount of the debt issuance in which the Fund is participating, is P1,438,984 ( P813,157). In accordance with the Fund s policy, the Fund Manager monitors the Fund s credit position on a daily basis, and the BOD reviews it on a monthly basis. Further, the Fund s investment advisor regularly reviews the credit quality of the Fund s investments and loans and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in fixedincome securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date. 3.5 Capital risk management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; ii) iii) Maintain a strong capital base to support the development of the investment activities of the Fund; and Comply with the minimum subscribed and paidin capital of P50 million required for investment companies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 3 Level 2 Level 1 Financial assets at fair value through profit or loss Government securities Unit investment trust funds Mutual funds Preferred shares 49,362, , ,300 1,244,856 51,523,658 Level 3 Level 2 Level 1 Financial assets at fair value through profit or loss Government securities Unit investment trust funds Mutual funds Preferred shares 27,925, ,609 70, ,037 29,645,308 Assets and liabilities not carried at fair value but for which fair value is disclosed amount Level 1 Level 2 Level 3 15,305,154 Financial assets Cash and cash equivalents Loans and receivables Financial liabilities Management fee payable Carrying 4,879,242 15,305,154 77,949 4,879,242 77,949 Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents 3,755,317 3,755,317 Loans and receivables Financial liabilities 13,133,285 13,133,285 Management fee payable 49,390 49,390 The fair value of loans and receivables is based on expected cash flows discounted at current market rates. The carrying amount of the Fund s other financial assets and liabilities at reporting period approximate their fair values considering that they have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Critical accounting judgment Estimates, assumptions and judgments used in preparing the financial statements 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. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below. Impairment of loans and receivables The Fund reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the statement of total comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to age of balances, financial status of counterparties, payment behaviour and known market factors. The Fund reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a regular basis. Term loans, which are classified under Loans and receivables, amounted to P5,880,807 and P11,882,526 as at December 31, and, respectively. No impairment loss recognized for the years ended December 31,, and. Note 5 Cash and cash equivalents The account at December 31 consists of: Shortterm time deposits Regular savings deposits Special savings deposits (BSP SDA) 4,800,000 79,242 4,879,242 2,420,000 63,845 1,271,472 3,755,317 Special savings deposits consist of Bangko Sentral ng Pilipinas ( BSP ) Special Deposit Accounts ( SDA ) bearing an interest rate of 4.0% in. In, the BSP limited access to its SDA facility to trust accounts and unit investment trust funds. Shortterm time deposits bear interest rates ranging from 0.38% to 1.75% ( 2.00% to 4.00%). Interest income earned from cash and cash equivalents amounts to P58,850 ( P69,757; 234,711). Note 6 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments: Government securities Unit investment trust funds Mutual funds Preferred shares Interest rate (%) Amount 49,362, , ,300 1,244,856 51,523,658 Interest rate (%) The maturity pattern of government securities follows: Due in one year or less Due after one year 561,170 48,800,834 49,362,004 Amount 27,925, ,609 70, ,037 29,645, ,015 27,769,748 27,925,763 Details of net unrealized and realized gains on financial assets at fair value through profit or loss follow: Net realized gains Net unrealized (losses) gains 2,027,681 (509,825) 1,517,856 1,331,140 12,643 1,343,783 2,021,734 (540,074) 1,481,660 Interest income earned from financial assets at fair value through profit or loss amounts to P1,668,310 ( P1,130,367; P679,845). Note 7 Loans and receivables The account at December 31 consists of: Term loans Redeemable preferred shares Other receivables 14,440, ,855 15,305,154 11,882, , ,759 13,133,285 The maturity patterns of loans and receivables follow: Due in one year or less Due after one year through five years 1,150,000 14,155,154 15,305,154 2,981,762 10,151,523 13,133,285 Term loans represent debts issued by certain Philippine corporations. The term loans carry interest rates ranging from 1.75% to 9.62% ( 3.70% to 7.10%). The preferred shares bear annual cash dividend at rates ranging from 7.00% to 8.88% in. Preferred dividends received included in interest income amount to P101,176 in. The preferred shares are nonvoting, nonparticipating, nonconvertible, cumulative and subject to mandatory redemption by the issuers at par value on various dates up to Other receivables mainly pertain to accrued interest and lease receivables assigned to the Fund by a branch of a foreign bank. The classification of Loans and receivables as to security follows: Unsecured Secured 13,866,170 1,438,984 15,305,154 Secured term loans are primarily collateralized by real estate and chattel mortgage. 12,620, ,488 13,133,285 Interest income earned on loans and receivables amounts to P725,694 ( P763,074; P681,382). Note 8 Income taxes Provision for income tax substantially represents tax withheld on income subject to final tax. The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund s income is subject to final tax. The details of the Fund s unused NOLCO at December 31 are as follows: Year of Incurrence Year of Expiration Income tax rate Unrecognized deferred income tax assets Note 9 Other liabilities 1,098, ,544 1,321,786 30% 396,536 The account at December 31, consists primarily of securities purchased payable and withholding taxes payable related to management fees. Details as at December 31 follow: Securities purchased payable Withholding taxes payable Note 10 Redeemable shares 162,652 30, , , ,544 30% 67,063 16,203 16,203 The details of the Fund s authorized shares as at December 31 follow: Number of shares Par value per share Amount The movement in the Fund s redeemable shares in thousands for the years ended December 31 follows: Issued and outstanding, January million P100 P34 billion 152, ,668 (126,600) 208, , ,579 (96,529) 152, ,737 91,611 (88,821) 116,527 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 62,334,328 38,376,524 24,643,049 44,639,038 27,913,230 23,916,975 As at December 31,, the Fund has 38,939 shareholders ( 21,351). Deposits for future subscriptions On November 16, 2006, the Board of Directors approved an increase in the Fund s authorized shares from 340 million to 1 billion with par value of P100 per share and to be implemented in tranches. Subject to the approval of the 30 ALFM MUTUAL FUNDS annual Report 31

18 SEC, the Fund applied for an increase in authorized shares from 340 million to 400 million with par value of P100 per share in. The Fund received cash from various investors as deposits for future subscriptions amounting to P4,770,185. The deposit is presented as liability as the Fund has sufficient unissued redeemable shares to cover the amount of subscription. The Fund has yet to receive the approval from the SEC. Earnings per share Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares as at yearend. The information used in the computation of basic and diluted earnings for the years ended December 31 follow: Profit for the year Weighted average number of shares outstanding during the year Basic and diluted earnings per share 2,503, , ,377, , ,366,483 Note 11 Net Asset Value (NAV) for share subscriptions and redemptions 115, The consideration received or paid for redeemable shares issued or repurchased, respectively is based on the value of the Fund s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund s NAV for purposes of share subscriptions and redemptions ( trading NAV ). The policy which has been adopted for the best interest of the Fund s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of highgrade fixedincome instruments. The allowance for market risk shall be subject to the BOD s periodic review. The movement in allowance for market risk follows: At January 1 Provisions for market risk during the year 895, ,438 1,244, , , ,316 The Fund has adopted PFRS 13 in and has changed its valuation inputs for listed financial assets to last traded market prices or weighted average of done deals in the trading market. In the prior year, the Fund used bid prices consistent with the requirements of PAS 39. The adoption eliminated the difference between the Fund s valuation methodology and PFRS. Reconciliation of the Fund s PFRS NAV to its trading NAV at December 31 is provided below: PFRS NAV Adjustments on market valuation Allowance for market risk Deposits for future stock subscriptions Trading NAV 66,667,147 (1,244,754) 4,770,185 70,192,578 46,468, ,988 (895,316) 45,755,989 The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Note Trading NAV (In thousands) Total number of shares issued and outstanding 10 Total number of shares covered by deposits for future subscriptions 10 Total number of shares Trading NAV per share 70,192, ,645 15, , ,755, , , As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s trading NAV. The Fund s retained earnings may exceed 100% of its paidup capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund. Note 12 Related party transactions BPI Investment and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 0.75% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPIAMTG a fee of not more than 0.75% p.a. of the Fund s average trading NAV. The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund for a fee of 0.75% p.a. of the Fund s average trading NAV. Such agreements are effective year after year unless terminated by each parties. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties (amounts in thousands): December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 503, ,896 1,007,793 Transactions 300, , ,246 Transactions 237, , ,542 Outstanding balances 38,975 38,974 77,949 Outstanding balances 24,695 24,695 49,390 Outstanding balances 18,263 18,264 36,527 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P30,000 (in absolute amount) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to 1,650 ( P1,109; P946). As at reporting dates, there were no outstanding balances related to these fees. Note 13 Custodian agreement The Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. ( HSBC ) for custodial services of the Fund s proprietary assets and/ or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 0.015% of the average daily market value of the assets. As at December 31,, the market value of securities in custody of HSBC aggregates to P5,880,807 ( P7,368,534). Note 14 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. I. Supplementary information required by Revenue Regulations No Below is the additional information required by RR No that is relevant to the Fund. Documentary stamp tax The documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to P99,070. There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to P145,783, P30,121 of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the years ended December 31, consist of: Business permits and other related taxes Filing fees Community tax Others Amount 6, ,032 The above local and national taxes are lodged under the taxes and licenses account. There are no other local and national taxes accrued as at December 31,. Tax cases and assessments As at December 31,, open taxable years are, and The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income Fund s main income primarily pertains to interest income, dividend income and realized gain/loss on sale of marketable securities. Interest income Subject to 30% Subject to 20% Subject to 0% Net realized fair value gains or losses Subject to 0% Cost of services Taxes and licenses Taxable amount 29,139 2,447, ,377 2,602,620 2,027,681 4,630,301 Deductible amount 1,007, ,102 1,113,896 The above direct charges are subject to the regular tax rate of 30%. Itemized deductions Other professional fees Miscellaneous Deductible amount 4,474 9,011 13,485 The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses Details of the Fund s taxes and licenses are presented in Section I of this note. Other information All other information prescribed to be disclosed by the BIR has been included in this note. Independent Auditor s Report To the Board of Directors and Shareholders of ALFM Dollar Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of ALFM Dollar Bond Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Dollar Bond Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 15 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, ALFM MUTUAL FUNDS annual Report 33

19 ALFM Dollar Bond Fund, Inc. Statements of Financial Position December 31, and (All amounts in US Dollar) Notes Statements Required by Rule 68, Part I, Section 4 Securities Regulation Code (SRC), as Amended on October 20, To the Board of Directors and Shareholders of ALFM Dollar Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of ALFM Dollar Bond Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of ALFM Dollar Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 15 to the financial statements Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Heldtomaturity securities Loans and receivables Other receivables Total assets LIABILITIES Management fee payable Withholding taxes payable Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity Balance at January 1, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Loss for the year Other comprehensive income for the year Total comprehensive loss for the year Transactions with owners Total transactions with owners Balance at December 31, ASSETS LIABILITIES AND EQUITY (The notes on pages 1 to 25 are an integral part of these financial statements) ALFM Dollar Bond Fund, Inc ,312, ,090,573 37,202,864 5,754,746 3,577, ,938, ,050 68, , ,153,322 61,292,974 48,228, ,675, ,938,142 Statements of Changes in Equity For each of the three years in the period ended December 31, (All amounts in US dollar) Redeemable shares (Note 11) 86,416,996 23,174,871 (19,283,664) 3,891,207 90,308,203 32,770,093 (13,938,849) 18,831, ,139,447 24,701,179 (24,687,304) 13, ,153,322 Share premium 36,403,697 18,824,699 (15,697,506) 3,127,193 39,530,890 31,293,101 (12,306,985) 18,986,116 58,517,006 25,196,760 (22,420,792) 2,775,968 61,292,974 Retained earnings 35,185,393 6,653,885 6,653,885 41,839,278 17,995,290 17,995,290 (877,742) (877,742) 58,956,826 (8,844,095) (8,844,095) (1,883,937) (1,883,937) 48,228,794 9,355, ,453,489 44,330, ,979 5,861, ,878, ,561 67, , ,139,447 58,517,006 58,956, ,613, ,878,473 Total equity 158,006,086 6,653,885 6,653,885 41,999,570 (34,981,170) 7,018, ,678,371 17,995,290 17,995,290 64,063,194 (27,123,576) 36,939, ,613,279 (8,844,095) (8,844,095) 49,897,939 (48,992,033) 905, ,675,090 (The notes on pages 1 to 25 are an integral part of these financial statements) 34 ALFM MUTUAL FUNDS annual Report 35

20 CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Unrealized foreign exchange losses (gains) Operating loss before changes in operating assets and liabilities Changes in operating assets and liabilities Decrease (increase) in: Financial assets at fair value through profit or loss Heldtomaturity securities Loans and receivables Other receivables (Decrease) increase in: Management fee payable Accrued expenses Cash generated from (used in) operations Interest received Income taxes paid Net cash generated from (used in) operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Net cash generated from financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 Effects of exchange rate changes on cash and cash equivalents December 31 ALFM Dollar Bond Fund, Inc. Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in US Dollar) INCOME Interest income Net (losses) gains on financial assets at fair value through profit or loss Foreign exchange gains, net Other income EXPENSES Management and other professional fees Taxes and licenses Others (LOSS) PROFIT BEFORE INCOME TAX PROVISION FOR INCOME TAX (LOSS) PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEAR BASIC AND DILUTED (LOSS) EARNINGS PER SHARE Notes (The notes on pages 1 to 25 are an integral part of these financial statements) 36 ALFM MUTUAL FUNDS Notes (The notes on pages 1 to 25 are an integral part of these financial statements) ALFM Dollar Bond Fund, Inc. Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in US dollar) (7,603,166) 12,427,534 (10,972,449) 1,563,984 (4,584,097) 8,935,382 7,127,907 (4,877,767) (2,511) 369 6,599,283 13,257,056 (1,240,929) 18,615,410 49,897,939 (48,992,033) 905,906 19,521,316 9,355,463 (1,563,984) 27,312,795 10,972,449 (15,446,845) 51,295 (4,423,101) 2,880, ,918 63,679 3,180,065 (7,603,166) 1,240,929 (8,844,095) (8,844,095) ( ) 10,219,048 9,887,148 1,676,147 20,165 21,802,508 2,444, ,524 54,191 2,713,534 19,088,974 1,093,684 17,995,290 17,995, ,088,974 (9,248,864) (10,219,048) (1,034,685) (1,413,623) (42,511,925) 124,600 (55,811) (1,989,516) 45,524 16,163 (45,784,588) 9,568,919 (1,093,684) (37,309,353) 64,063,194 (27,123,576) 36,939,618 (369,735) 8,690,513 1,034,685 9,355,463 7,942, , ,684 43,606 9,172,862 2,116, ,297 23,564 2,291,319 6,881, ,658 6,653,885 6,653, ,881,543 (255,380) (7,942,510) 36,839 (1,279,508) (19,049,266) 4,617,977 (499,023) 14,017 (4,548) (16,200,351) 7,942,510 (227,658) (8,485,499) 41,999,570 (34,981,170) 7,018,400 (1,467,099) 10,194,451 (36,839) 8,690,513 Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are in US Dollar, unless otherwise stated) Note 1 General information ALFM Dollar Bond Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment fund. It was registered on October 23, 1993 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799). The Fund aims to achieve capital preservation by investing in a diversified portfolio of foreign currencydenominated fixedincome instruments. As an openend investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund s prospectus (Note 12). The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on June 5, (Note 11). The Fund s registered office, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 13). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements. The area involving a higher degree of judgment or complexity is disclosed in Note 4. New standards, interpretations and amendments to published standards New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded annual Report prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued. There are no other PFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Fund s financial statements. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents include deposits held at call with banks and shortterm highly liquid investments with maturities of three months or less from the date of acquisition. acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Heldtomaturity securities are nonderivative financial assets with fixed or determinable payments and fixed maturities that the Fund s management has the positive intention and ability to hold to maturity. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents, loans and receivables and other receivables. As at reporting date, the Fund has no financial assets under availableforsale category. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on the trade date, the date on which the Fund commits to purchase or sell the asset. Financial assets at fair value through profit or loss are initially recognized at fair value. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets not carried at fair value through profit or loss, which include loans and receivables and heldtomaturity securities are initially recognized at fair value plus transaction costs. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets in profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in profit or loss in the year in which they arise. Loans and receivables and heldtomaturity securities are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date 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 impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial 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. A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that the financial asset is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of the loss has been determined. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment losses for the year. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. 37

21 Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement 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 of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Redeemable shares The shares issued by the Fund are redeemable at the holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 12) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.8 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value. 2.9 Revenue and expense recognition Interest income is recognized on a timeproportion basis using the effective interest method. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Expenses are recognized when incurred Foreign currency transactions and translation Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in US Dollar. The primary activity of the Fund is to invest in local and foreign US dollardenominated government securities, corporate notes, corporate notes & bonds and fixedincome funds. The performance of the Funds is measured and reported to the investors in Euro. The Board of Directors considers the Euro as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Euro, which is the Fund s functional and presentation currency. The financial statements are presented in US Dollar, which is the Fund s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the statement of total comprehensive income within net gains (losses) on financial assets at fair value through profit or loss Earnings (loss) per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund s exposure to foreign exchange risk is very limited. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to outperform its composite benchmark, 50% of 3month US Treasury Bills and 50% of JP Morgan Asia Credit Philippines Total Return Index, by investing in diversified portfolio of US dollardenominated fixed income instruments issued by foreign and local entities. 3.2 Interest rate risk The Fund trades in financial instruments, taking positions in traded and overthecounter instruments, to take advantage of shortterm market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which include primarily exposures to changes in interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk. The Fund s financial assets at fair value through profit are mostly nonrepricing and hence exposed to fair value interest rate risk. The Fund s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund s interestbearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD. The Fund s fair value interest rate risk is managed through diversification of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management. The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund s net asset value to protect the Fund from market price fluctuations (Note 12). To estimate its exposure to market risk, the Fund Manager computes the statistical value at risk (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolio s actual loss could be greater than the VAR estimate. As at December 31,, the Fund s VAR with respect to market interest rate volatilities amounts to US$5,879,670 ( US$5,791,666). 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents Financial assets at fair value through profit or loss Heldtomaturity securities Loans and receivables Other receivables 27,312,795 9,355, ,090,573 37,202,864 5,754,746 3,577, ,938, ,453,489 44,330, ,979 5,861, ,878,473 As at December 31, and, the Fund s financial assets as shown in the table above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, and. Pursuant to the guidelines issued by the SEC, the Fund is allowed to invest in debt instruments registered and traded in an organized market in another country which are rated at least BBB by a reputable credit rating agency. For unrated securities, a rating is assigned using an approach that is consistent with that used by rating agencies. Details of ratings of the Fund s investments based on various external credit rating agencies: At December 31, Standard and Poor s BB to BB + Unrated Moody s / Philippine Ratings Aaa Aa3 to Aa1 A3 to A1 Baa3 to Baa1 Ba3 to Ba1 Unrated At December 31, Standard and Poor s AA BB to BB + Moody s / Philippine Ratings Aaa Aa3 to Aa1 A3 to A1 Baa3 to Baa1 Ba3 to Ba1 B2 Unrated through profit or loss 4,826,375 38,670,457 5,257,956 14,207,032 7,677,285 62,841,001 6,191,125 5,419, ,090,573 through profit or loss 159,560 93,223,465 12,302,943 14,727,764 5,421,493 7,612,035 4,842,893 1,093,370 27,069, ,453,489 Heldtomaturity 2,390, , ,680 30,813,736 2,000,000 37,202,864 Heldtomaturity 41,334, , , ,890 44,330,771 Loans and receivables 5,754,746 5,754,746 Loans and receivables Unrated investments and loans and receivables are from counterparties with no history of default with the Fund. The total amount of loans and receivables and other receivables (mainly interest receivables) outstanding is unsecured. 876, ,979 The Fund s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of shortterm time deposits with various universal banks with no history of default with the Fund (Note 5). 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in fixedincome securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date. 3.5 Capital management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and iii) Comply with the minimum subscribed and paidin capital of P50 million required for investment companies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Debt securities Philippine government bonds Philippine corporate bonds Asian corporate and government bonds Supranational bonds US government bonds US corporate bonds European corporate bonds Others Investment funds Unit investment trust funds Mutual funds 48,976,110 54,131,456 26,698,659 2,386,081 2,871,875 3,385, ,250 1,055,800 2,921,728 2,497, ,090, ALFM MUTUAL FUNDS annual Report 39

22 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Debt securities Philippine government bonds Philippine corporate bonds Asian corporate and government bonds Supranational bonds US government bonds US corporate bonds European corporate bonds Others Investment funds Unit investment trust funds Mutual funds Assets and liabilities not carried at fair value but for which fair value is disclosed Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents Heldtomaturity securities Longterm negotiable certificate of deposits Philippine government bonds Philippine corporate bonds Asian government and corporate bonds Loans and receivables Other receivables Financial liabilities Management fee payable Financial assets Cash and cash equivalents Heldtomaturity securities Longterm negotiable certificate of deposits Philippine government bonds Asian government and corporate bonds Loans and receivables Other receivables Financial liabilities Management fee payable 27,312,795 2,000,000 30,813,736 2,390,902 1,998,226 5,754,746 3,577, ,050 9,355,463 3,378,769 38,956,072 1,995, ,979 5,861, ,561 27,312,795 2,000,000 30,788,710 2,390,164 1,998,282 5,743,190 3,577, ,050 3,378,769 1,995,890 1,235,589 5,861, ,561 Carrying amount Level 1 Level 2 Level 3 27,312,795 38,931,159 The fair value of heldtomaturity securities is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. The carrying amount of the Fund s other financial assets and liabilities at reporting period approximate their fair values considering that they have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Critical accounting estimate and judgment Estimates, assumptions and judgments used in preparing the financial statements 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. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below. Heldtomaturity classification 87,924,596 34,165,618 25,033,519 8,522,238 1,521, ,008 7,701, , , ,453,489 Notwithstanding the openended nature of the Fund, a significant portion of the Fund s investments are classified as heldtomaturity. The Fund follows the guidance of PAS 39 in classifying these investments as heldtomaturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders. If the Fund fails to keep these investments to maturity other than for the specific circumstances (e.g. selling an insignificant amount close to maturity), it will be required to measure the investments at fair value and not at amortized cost. Heldtomaturity securities as at December 31, is valued at P37,202,864 ( 44,330,771). Note 5 Cash and cash equivalents The account at December 31 consists of: Shortterm time deposits Regular savings deposits Special savings deposits (BSP SDA) 7,145, ,463 2,000,000 9,355,463 26,375, ,795 27,312,795 Special savings deposits consist of Bangko Sentral ng Pilipinas ( BSP ) Special Deposit Accounts ( SDA ) bearing an interest rate of 4.0% in. In, the BSP limited access to its SDA facility to trust accounts and unit investment trust funds. Shortterm time deposits bear interest rates ranging from 1.00% to 2.00% ( 1.50% to 2.00%) and have average maturities of 76 days in ( 35 days). Interest income earned from cash and cash equivalents amounts to P66,827 ( P88,386; P41,452). Note 6 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments in: Debt securities Philippine corporate bonds Philippine government bonds Asian corporate and government bonds US corporate bonds US government bonds Supranational bonds European corporate bonds Others Investment funds Unit investment trust funds Mutual fund Interest rates (%) Amount ,131,456 48,976,110 26,698,659 3,385,000 2,871,875 2,386, ,250 1,055,800 2,921,728 2,497, ,090,573 The maturity pattern of debt securities follows: Due in one year or less Due after one year Interest rates (%) Amount ,165,618 87,924,596 25,033,519 1,521,075 8,522, ,008 7,701, , , ,453, ,721,811 11,645,818 11,949, ,383, ,671, ,029,561 Investments in unit investment trust funds and mutual funds are classified as current. Details of net unrealized and realized gains on financial assets at fair value through profit or loss follow: Net unrealized fair value (losses) gains Net realized fair value (losses) gains (12,269,313) (3,177,532) (15,446,845) 9,248, ,284 9,887,148 11,645, ,383, ,029,561 Interest income earned from financial assets at fair value through profit or loss amounts to P7,086,132 ( P5,855,438; P4,089,571). Note 7 Heldtomaturity securities The account at December 31 consists of investments in: Philippine government bonds Philippine corporate bonds Longterm negotiable certificate of deposits Asian government bonds Asian corporate bonds Interest rates (%) Amount 30,813,736 2,390,902 2,000, , ,680 37,202,864 Interest rates (%) Amount ,956,072 3,378, , ,056 44,330,771 The maturity pattern of heldtomaturity securities follows: Shortterm (less than 1 year) Mediumterm (more than 1 year but less than 5 years) Longterm (more than 5 years) 3,557,891 9,036,604 9,916,002 23,728,971 37,202,864 11,464,359 23,829,808 44,330,771 The movement in heldtomaturity securities is summarized as follows: At January 1 Additions Maturities Amortization of premium At December 31 44,330,771 44,455,371 2,000,000 (9,030,000) (97,907) (124,600) 37,202,864 44,330,771 Interest income earned from heldtomaturity securities amounts to P3,366,761 ( P3,793,629; P3,338,254). Note 8 Loans and receivables The account as at December 31, consists of a term loan amounting to P5,754,746 ( P876,979). The total amount of loans and receivables outstanding is unsecured. The term loan carry an interest rate of 7% ( 6.86%). Interest income earned on loans and receivables amounts to P452,729 ( P481,595; P473,233). Note 9 Other receivables Other receivables consist of accrued interest mainly from loans and receivables, financial assets at fair value through profit or loss, and heldtomaturity securities. Other receivables are considered current as at December 31, and. Note 10 Income taxes Provision for income tax represents tax withheld for income subject to final tax. The Fund did not recognize deferred income tax asset on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund s income is subject to final tax. The details of the Fund s unused NOLCO at December 31 are as follows: Year of Incurrence Expired NOLCO Income tax rate Unrecognized deferred income tax asset Year of Expiration USD PHP USD PHP ,667 1,570,292 2,333,472 2,048,251 6,559,682 (2,048,251) 4,511,431 30% 1,353,429 Note 11 Redeemable shares 26,988,982 66,311,557 98,539,738 86,495, ,335,443 (86,495,166) 191,840,277 30% 57,552,083 1,570,292 2,333,472 2,048,251 1,671,020 7,623,035 (1,671,020) 5,952,015 30% 1,785,605 66,311,557 98,539,738 86,495,166 70,565, ,911,625 (70,565,164) 251,346,461 30% 75,403,938 The details of the Fund s authorized shares at December 31 follow: Number of shares Par value per share Amount 679, ,000 P10,000 P10,000 6,790,000,000 6,000,000,000 The movement in the number of redeemable shares for the years ended December 31 follow: Issued and outstanding, January 1 Redemptions of shares 558, , , ,682 (126,323) (71,324) 558, ,458 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 49,897,939 64,063,194 48,992,033 27,123, , ,682 (71,324) 558,458 41,999,570 34,981,170 As at December 31,, the Fund has 9,103 shareholders ( 8,037). Earnings per share Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year. The information used in the computation of basic and diluted earnings for the years ended December 31 follow: Loss (profit) for the year (8,844,095) 17,995,290 Weighted average number of shares outstanding during the year Basic and diluted (loss) earnings per share 582,757 ( ) 510, ,653, , Note 12 Net Asset Value (NAV) for share subscriptions and redemptions The consideration received or paid for redeemable shares issued or repurchased respectively is based on the value of the Fund s NAV per share at the date of the transaction. The total equity as shown in the statements of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund s NAV for purposes of share subscriptions and redemptions ( trading NAV ). The policy which has been adopted for the best interest of the Fund s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of highgrade foreign currencydenominated fixedincome instruments. The allowance for market risk shall be subject to the BOD s periodic review. The movement in allowance for market risk follows: At January 1 Adjustment for market risk during the year At December 31 4,210,543 4,237,487 (805,419) 3,405,124 (26,944) 4,210,543 Reconciliations of the Fund s PFRS NAV to its trading NAV at December 31 are provided below: PFRS NAV Allowance for market risk Trading NAV 218,675, ,613,279 (3,405,125) (4,210,543) 215,269, ,402,736 The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Trading NAV Total issued and outstanding shares Trading NAV per share 215,269, ,402, , , As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s NAV. The Fund s retained earnings may exceed 100% of its paidup capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund. Note 13 Related party transactions BPI Investment and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 0.625% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPIAMTG a fee of not more than 0.625% p.a. of the Fund s average trading NAV. The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties: December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 1,419,785 1,419,785 2,839,570 Transactions 1,206,425 1,206,425 2,412,850 Transactions 1,014,567 1,014,566 2,029,133 Outstanding balances 97,525 97, ,050 Outstanding balances 98,781 98, ,561 Outstanding balances 76,019 76, ,037 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of US$237 (P10,000) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to US$11,891 ( US$10,325; US$12,221). As at reporting dates, there were no outstanding balances related to these fees. Note 14 Custodianship agreement The Fund has custodian agreements with Hongkong & Shanghai Banking Corporation Ltd. ( HSBC ) and Bank of New York for custodial services of the Fund s proprietary assets and/or the assets owned in the Philippines. Under this agreement, the Fund pays HSBC a fixed monthly custodian fee of P4,900 or its US Dollar equivalent. As at December 31,, the market value of securities held by the custodian aggregates to US$176,915,611 ( US$827,181,409). Note 15 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. Amounts are presented in US Dollar and in Philippine Peso. I. Supplementary information required by Revenue Regulation No Below is the additional information required by RR No that is relevant to the Fund. Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to $149,415 (P6,224,008). There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to $383,823 (P16,055,684), $68,002 (P2,767,674) of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the year ended December 31, consist of: US Dollar Municipal and other related taxes Community tax Others In Philippine Peso Municipal and other related taxes Community tax Others Tax cases and assessments Amount 25, ,009 86,503 Amount 1,120,792 11,495 2,709,654 3,841,941 As at December 31,, open taxable years are, and The Fund has not received any Final Assessment Notice (FAN) from the BIR. The Fund is also not a party to any outstanding tax case with the BIR. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income The Fund s main income primarily pertains to dividend income, interest income and realized gain/loss. Interest income Subject to 30% Subject to 20% Subject to 7.5% Net realized foreign exchange gains Subject to 30% Cost of services Taxes and licenses Taxable amount USD PHP 2,521,103 4,856,615 3,594,731 10,972,449 51,295 11,023, ,343, ,701, ,656, ,701,785 1,906, ,608,532 Deductible amount USD PHP 2,839, ,918 3,075, ,116,655 10,065, ,182,604 The above direct charges are subject to the regular tax rate of 30%. 40 ALFM MUTUAL FUNDS annual Report 41

23 Independent Auditor s Report Statements Required by Rule 68, Securities Regulation Code (SRC), as Amended on October 20, Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of ALFM Euro Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of ALFM Euro Bond Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Euro Bond Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 14 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 To the Board of Directors and Shareholders of ALFM Euro Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of ALFM Euro Bond Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 To the Board of Directors and Shareholders of ALFM Euro Bond Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 14 to the financial statements. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 42 ALFM MUTUAL FUNDS annual Report 43

24 ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Heldtomaturity securities Other receivables Total assets LIABILITIES Management fee payable Withholding taxes payable Total current liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity ALFM Euro Bond Fund, Inc. Statements of Financial Position December 31, and (All amounts in Euro) ASSETS LIABILITIES AND EQUITY Notes ,338 7,628, , ,637 9,105,830 4,889 1,695 6,584 6,621, ,012 1,649,874 9,099,246 9,105, ,522 7,070, , ,047 8,644,068 4,553 1,561 6,114 6,296, ,393 1,698,444 8,637,954 8,644,068 INCOME Interest income Net (losses) gains on financial assets at fair value through profit or loss Other income EXPENSES Taxes and licenses Professional fees Directors fees Others ALFM Euro Bond Fund, Inc. Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in Euro) PROFIT BEFORE INCOME TAX PROVISION FOR INCOME TAX PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE INCOME FOR THE YEAR BASIC AND DILUTED EARNINGS PER SHARE Notes ,201 (171,120) ,863 67,335 11,286 10,544 1,842 3,507 94,514 79,349 58,381 20,968 20, , , ,693 57,284 10,225 8,598 2,263 2,329 80, ,994 12, , , ,287 (91,529) ,967 59,472 4,646 8,026 4,289 3,444 79, ,090 3, , , (The notes on pages 1 to 23 are an integral part of these financial statements) (The notes on pages 45 to 48 are an integral part of these financial statements.) ALFM Euro Bond Fund, Inc. Statements of Changes in Equity For each of the three years in the period ended December 31, (All amounts in Euro) Balance at January 1, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Redeemable shares (Note 9) 6,959,018 (The notes on pages 1 to 23 are an integral part of these financial statements) 670,119 (1,991,735) (1,321,616) 5,637,402 1,431,618 (772,903) 658,715 6,296,117 1,589,837 (1,264,594) 325,243 6,621,360 Share premium 732, ,196 (462,070) (308,874) 423, ,413 (210,814) 219, , ,738 (384,119) 184, ,012 Total equity 1,021, , ,976 1,132, , ,099 (12,104) (12,104) 1,698,444 20,968 20,968 (69,538) (69,538) 1,649,874 Retained earnings 8,713, , , ,315 (2,453,805) (1,630,490) 7,193, , ,099 1,862,031 (995,821) 866,210 8,637,954 20,968 20,968 2,158,575 (1,718,251) 440,324 9,099,246 ALFM Euro Bond Fund, Inc. Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in Euro) CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Operating loss before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Other receivable Heldtomaturity securities Increase (decrease) in: Management fee payable Accrued expenses Cash (used in) generated from operations Interest received Income taxes paid Net cash (used in) generated from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Net cash generated from (used in) financing activities NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 Notes (The notes on pages 1 to 23 are an integral part of these financial statements) , ,120 (344,201) (93,732) (729,005) (76) 1, (820,814) 319,687 (58,381) (559,508) 2,158,575 (1,718,251) 440,324 (119,184) 585, , ,994 (392,160) (278,968) (80,134) (868,220) (31) (1,444) (948,986) 241,129 (12,895) (720,752) 1,862,031 (995,821) 866, , , , , ,571 (285,287) (59,626) 987, ,361 (813) (969) 927, ,504 (3,114) 1,297, ,315 (2,453,805) (1,630,490) (333,231) 773, , ALFM MUTUAL FUNDS annual Report 45

25 Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are in thousands of Philippine Peso, unless otherwise stated) Note 1 General information ALFM Euro Bond Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment company. It was registered on August 5, 2005 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act 8799). The Fund aims to provide its shareholders a steady stream of income by investing in foreign currencydenominated fixed income instruments. As an openend investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund s prospectus (Note 10). The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on May 30, 2007 (Note 9). The Fund s registered office, which is also its principal place of business is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas,. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 11). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss. The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements. The area involving a higher degree of judgment or complexity is disclosed in Note 4. New standards, interpretations and amendments to published standards New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the = classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents include deposits held at call with a bank and shortterm highly liquid investments with original maturities of three months or less from the date of acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Heldtomaturity securities are nonderivative financial assets with fixed or determinable payments and fixed maturities that the Fund s management has the positive intention and ability to hold to maturity. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents and other receivables. As at reporting date, the Fund has no financial assets under availableforsale category. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on tradedate, the date on which the Fund commits to purchase or sell the asset. Financial assets at fair value are initially recognized at fair value plus transaction costs. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets at fair value through profit or loss in profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in profit or loss in the year in which they arise. Loans and receivables and heldtomaturity securities are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date 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 impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial 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. A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that the financial asset is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of the loss has been determined. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment losses for the year. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement 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 of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Redeemable shares The shares issued by the Fund are redeemable at the holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 9) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.8 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value. 2.9 Revenue and expense recognition Interest income is recognized on a timeproportion basis using the effective interest method. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Expenses are recognized when incurred Foreign currency transactions and translations Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in Euro. The primary activity of the Fund is to invest in Eurodenominated fixedincome instruments. The performance of the Funds is measured and reported to the investors in Euro. The Board of Directors considers the Euro as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Euro, which is the Fund s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the statement of total comprehensive income within net gains (losses) on financial assets at fair value through profit or loss Earnings per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are 46 ALFM MUTUAL FUNDS annual Report 47

26 disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund s assets exposure to foreign exchange risk is very limited. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to exceed the performance of 3month German Treasury Bills by investing in a diversified portfolio of Euro denominated fixed income instruments issued by foreign and local entities. 3.2 Interest rate risk The Fund trades in financial instruments, taking positions in traded and overthecounter instruments, to take advantage of shortterm market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to various risk factors, which include primarily exposures to changes in interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk. The Fund s financial assets at fair value through profit are mostly nonrepricing and hence exposed to fair value interest rate risk. The Fund s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund s interestbearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD. The Fund s fair value interest rate risk is managed through diversification of the investment portfolio by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management. The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund s net asset value to protect the Fund from market price fluctuations (see Note 10). To estimate its exposure to market risk, the Fund Manager computes the statistical value at risk (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolios actual loss could be greater than the VAR estimate. As at December 31,, the Fund s VAR with respect to market interest rate volatilities amounts to 109,970 ( 59,647). 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is minimized through diversification or by investing in a variety of investments belonging to different sectors or industries. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents Financial assets at fair value through profit or loss Heldtomaturity securities Other receivables 466, ,522 7,628, , ,637 9,105,830 7,070, , ,047 8,644,068 As at December 31, and, the Fund s financial assets as shown in the table above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, and. Pursuant to the guidelines issued by the SEC, the Fund is allowed to invest in debt instruments registered and traded in an organized market in another country which are rated at least BBB by a reputable credit rating agency. For unrated securities, a rating is assigned using an approach that is consistent with that used by rating agencies. Details of ratings of the Fund s investments based on various rating agencies follow: At December 31, Moody s/prsc A1 A2 A3 Aa1 Aa3 Aaa Baa2 Baa3 Unrated At December 31, Moody s/prsc Aaa Aa1 Aa2 A2 A3 Baa2 Ba1 Unrated through profit or loss Heldtomaturity 200, , , , ,031 1,649, ,216 3,763, ,000 7,628, , ,472 through profit or loss Heldtomaturity 1,238, , , , , ,205 3,482, ,000 7,070, , ,001 Unrated investments are from counterparties with no history of default with the Fund. The Fund s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of shortterm time deposits with Bank of the Philippine Islands as well (Note 5). The Fund s other receivables are primarily composed of accrued interest receivable which has the same credit quality of the related debt securities. In accordance with the Fund s policy, the Fund Manager monitors the Fund s credit position on a daily basis, and the BOD reviews it on a monthly basis. Further, the Fund s investment advisor regularly reviews the credit quality of the Fund s investments and loans and receivables by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in fixedincome securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date. 3.5 Capital management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and iii) Comply with the minimum subscribed and paidin capital of P50 million required for investment companies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Debt securities Philippine government bonds European government bonds Supranational debt European corporate bonds Asia pacific corporate bonds US corporate bonds 3,656, ,563 1,121, ,838 1,025, ,285 7,628,383 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Debt securities Philippine government bonds European government bonds Supranational debt European corporate bonds Asia pacific corporate bonds US corporate bonds 3,785,084 1,063, , , , ,143 7,070,498 Assets and liabilities not carried at fair value but for which fair value is disclosed Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents Heldtomaturity securities Philippine government bonds Other receivables Financial liabilities Management fee payable 466, , ,637 4, , , ,637 4,889 Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents Heldtomaturity securities 585, ,522 Philippine government bonds 755,001 1,057,248 Other receivables Financial liabilities Management fee payable 233,047 4, ,047 4,553 The fair value of heldtomaturity securities is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. The carrying amount of the Fund s other financial assets and liabilities at reporting period approximate their fair values considering that they have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Critical accounting judgment Estimates, assumptions and judgments used in preparing the financial statements 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. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below. Heldtomaturity classification Notwithstanding the openended nature of the Fund, a significant portion of the Fund s investments are classified as heldtomaturity. The Fund follows the guidance of PAS 39 in classifying these investments as heldtomaturity. This classification requires significant judgment. In making this judgment, the Fund evaluates its intention and ability to hold such investments to maturity and such evaluation takes into consideration the Fund s historical experience on the characteristics and profile of its shareholders, the level of contributions and redemptions at any given period and average holding period of its shareholders. If the Fund fails to keep these investments to maturity other than for the specific circumstances (e.g. selling an insignificant amount close to maturity), it will be required to measure the investments at fair value and not at amortized cost. As at December 31,, the Fund s heldtomaturity securities amounted to 753,472 ( 755,001). Note 5 Cash and cash equivalents The account at December 31 consists of: Regular savings deposits Shortterm time deposits 16,338 5, , , , ,522 Shortterm time deposits bear interest rates ranging from 0.25% to 0.625% ( 0.625% to 1.00%) and have average maturities of 35 days for and. Interest income earned from cash and cash equivalents amounts to P108 ( P160; P164). Note 6 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments in: Philippine government bonds European government bonds Supranational debt European corporate bonds Asia pacific corporate bonds US corporate bonds Interest rates (%) Interest Amount rates (%) Amount 3,656, , ,121, , ,025, ,785,084 1,063, , , , ,285 7,628, ,143 7,070,498 The maturity pattern of the debt securities follows: Due in one year or less Due after one year 718,950 7,628,383 6,351,548 7,628,383 7,070,498 Details of net unrealized and realized gains on financial assets at fair value through profit or loss follow: Net realized gains Net unrealized (losses) gains 417 (171,120) 392,160 (171,120) 392,577 20,042 (111,571) (91,529) Interest income earned from financial assets at fair value through profit or loss to P298,747 ( P233,377; P239,609). Note 7 Heldtomaturity securities The account consists of investments in Philippine government bonds which carry interest rate of 6.25% as at December 31,. The heldtomaturities investments are classified as longterm in which maturity is more than one year from reporting date. The movement in heldtomaturity securities is summarized as follows: At January 1 Amortization of premium At December , ,445 (1,529) (1,444) 753, ,001 Interest income earned from heldtomaturity securities to P45,346 ( P45,431; P45,514). Note 8 Income taxes Provision for income tax substantially represents tax withheld for income subject to final tax. The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund s income is subject to final tax. The details of the Fund s unused NOLCO at December 31 are as follows: Year of Incurrence Expired NOLCO Year of Expiration EUR PHP EUR PHP Income tax rate Unrecognized deferred income tax asset 79,721 80,551 83,129 84, ,264 (84,863) 243,401 30% 73,020 Note 9 Redeemable shares 4,525,742 4,374,549 4,514,578 4,608,714 18,023,583 (4,608,714) 13,414,869 30% 4,024,461 80,551 83,129 84,863 62, ,463 (62,920) 248,543 30% 74,563 4,374,549 4,514,578 4,608,714 3,417,031 16,914,872 (3,417,031) 13,497,841 30% 4,049,352 The details of the Fund s authorized shares at December 31 follow: Number of shares Par value per share Amount 80,000 P10,000 ( ) 11.5 million The movement in the number of redeemable shares for the years ended December 31 follows: Issued and outstanding, January 1 43,614 11,013 (8,760) 45,867 39,051 9,917 (5,354) 43,614 48,206 4,642 (13,797) 39,051 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 2,158,575 1,862,031 1,718, , ,315 2,453,805 As at December 31,, the Fund has 495 shareholders ( 426). Earnings per share Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year. The information used in the computation of basic and diluted earnings for the years ended December 31 follow: Profit for the year Weighted average number of shares outstanding during the year Basic and diluted earnings per share 20, , ,976 45, , Note 10 Net Asset Value (NAV) for share subscriptions and redemptions 43, The consideration received or paid for redeemable shares issued or repurchased respectively is based on the value of the Fund s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund s NAV for purposes of share subscriptions and redemptions ( trading NAV ). The policy which has been adopted for the best interest of the Fund s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of highgrade fixedincome instruments. The allowance for market risk shall be subject to the BOD s periodic review. The movement in allowance for market risk follows: At January 1 Provisions for market risk during the year At December , ,465 (44,405) (2,375) 80, ,090 Reconciliation of the Fund s PFRS NAV to its trading NAV at December 31 is provided below: PFRS NAV Allowance for market risk Trading NAV 9,099,246 8,637,954 (80,685) (125,090) 9,018,561 8,512,864 The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Trading NAV Total issued and outstanding shares Trading NAV per share Note 9,018, , ,512,864 43, As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s NAV. The Fund s retained earnings may exceed 100% of its paidup capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund. Note 11 Related party transactions BPI Investment and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 0.375% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPIAMTG a fee of not more than 0.375% p.a. of the Fund s average trading NAV. The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital), and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Bank, Inc. act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties: December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 33,668 33,667 67,335 Transactions 28,642 28,642 57,284 Outstanding balances 2,445 2,444 4,889 Outstanding balances 2,277 2,276 4,553 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. 48 ALFM MUTUAL FUNDS annual Report 49

27 December 31, BPI Investment BPI AMTG Transactions 29,736 29,736 59,472 Outstanding balances 1,930 1,929 3,859 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of 92 (P5,000) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to 1,842 ( 2,263; 4,289). As at reporting dates, there were no outstanding balances related to these fees. Note 12 Others Other expenses in consist mainly of administrative expenses amounting to 3,507 ( 2,329). Note 13 Custodian agreement The Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. ( HSBC ) and Bank of New York for custodial services of the Fund s proprietary assets and/or the assets owned in the Philippines. Under this agreement, the Fund pays HSBC a fixed monthly custodian fee of P4,900 or its Euro equivalent. As at December 31,, the market value of securities held by the custodian aggregates to 8,381,854 ( 7,573,954). Note 14 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. Amounts are presented in Euro and in Philippine Peso. I. Supplemental information required by Revenue Regulations Below is the additional information required by RR No that is relevant to the Fund. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income Interest income Subject to 30% Subject to 20% Subject to 7.5% Other income Subject to 30% Cost of services Taxes and licenses Taxable amount EUR PHP 14, ,934 61, , , ,440 15,267,385 3,477,453 19,540,278 44,394 19,584,672 Deductible amount EUR PHP 67,335 3,822,599 11, ,681 78,621 4,463,280 The above direct charges are subject to the regular tax rate of 30%. Itemized deductions Other professional fees Miscellaneous Deductible amount EUR PHP 10, ,566 5, ,730 15, ,296 The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses Details of the Fund s taxes & licenses are presented in Section I of this note. Other information All other information prescribed to be disclosed by the BIR has been included in this note. Independent Auditor s Report To the Board of Directors and Shareholders of Philippine Stock Index Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of Philippine Stock Index Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Philippine Stock Index Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 13 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to 10,063 (P571,253). There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to 10,273 (P583,174), 1,695 (P96,221) of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the year ended December 31, consist of: In Euro Municipal and other related taxes Community tax Others In Philippine Peso Municipal and other related taxes Community tax Others Amount ,223 Amount 44,506 6,642 18,279 69,427 There are no other local and national taxes accrued as at December 31,. Tax cases and assessments As at December 31,, open taxable years are, and The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Imelda Dela Vega Mangundaya Partner CPA Cert. No PTR No , issued on January 3, 2014, SEC A.N. (individual) as general auditors 0668AR2, Category A; effective until March 3, 2017 SEC A.N. (Firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 142, effective until December 31, 2016 March 22, ALFM MUTUAL FUNDS annual Report 51

28 Philippine Stock Index Fund, Inc. Statements of Financial Position December 31, and (All amounts in thousands of Philippine Peso) Notes Statements Required by Rule 68, Securities Regulation Code (SRC), as Amended on October 20, To the Board of Directors and Shareholders of Philippine Stock Index Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of Philippine Stock Index Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Imelda Dela Vega Mangundaya Partner CPA Cert. No PTR No , issued on January 3, 2014, SEC A.N. (individual) as general auditors 0668AR2, Category A; effective until March 3, 2017 SEC A.N. (Firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 142, effective until December 31, 2016 March 22, 2014 Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of Philippine Stock Index Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 13 to the financial statements. Isla Lipana & Co. Imelda Dela Vega Mangundaya Partner CPA Cert. No PTR No , issued on January 3, 2014, SEC A.N. (individual) as general auditors 0668AR2, Category A; effective until March 3, 2017 SEC A.N. (Firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 142, effective until December 31, 2016 March 22, 2014 ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Due from brokers and other receivables Total assets LIABILITIES Management fee payable Other liabilities Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity ASSETS LIABILITIES AND EQUITY (The notes on pages 1 to 20 are an integral part of these financial statements) Balance at January 1, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Loss for the year Other comprehensive income for the year Total comprehensive loss for the year Transactions with owners Total transactions with owners Balance at December 31, Philippine Stock Index Fund, Inc. Statements of Changes in Equity December 31, and (All amounts in thousands of Philippine Peso) Redeemable shares (Note 9) 601, ,717 (324,466) (85,749) 516, ,814 (293,981) 620,833 1,136, ,327 (734,124) 96,203 1,233,071 Share premium 349, ,224 (1,177,298) (333,074) 16,084 4,406,971 (1,232,562) 3,174,409 3,190,493 5,141,639 (3,443,065) 1,698,574 4,889,067 12,035 8,085,394 74,408 8,171,837 9,492 86,290 95,782 1,233,071 4,889,067 1,953,917 8,076,055 8,171,837 Retained earnings 1,964, , ,143 2,106,800 1,134,252 1,134,252 (138,936) (138,936) 3,102,116 (47,119) (47,119) (1,101,080) (1,101,080) 1,953,917 15,094 7,480, ,109 7,617,200 7, , ,723 1,136,868 3,190,493 3,102,116 7,429,477 7,617,200 Total equity 2,915, , ,143 1,082,941 (1,501,764) (418,823) 2,638,919 1,134,252 1,134,252 5,321,785 (1,665,479) 3,656,306 7,429,477 (47,119) (47,119) 5,971,966 (5,278,269) 693,697 8,076,055 (The notes on pages 1 to 20 are an integral part of these financial statements) 52 ALFM MUTUAL FUNDS annual Report 53

29 Philippine Stock Index Fund, Inc. Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso except per share amounts) INCOME Dividend income Interest income Net (losses) gains on financial assets at fair value through profit or loss Other income EXPENSES Taxes and licenses Professional fees Other (LOSS) PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR BASIC AND DILUTED (LOSS) EARNINGS PER SHARE Notes (The notes on pages 1 to 20 are an integral part of these financial statements) Philippine Stock Index Fund, Inc. 242, (130,999) 3, , ,815 8,405 1,878 1, ,819 (47,119) (47,119) (3.9763) Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit for the year Adjustments for: Unrealized fair value (gains) losses, net Interest income Operating income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Loans and receivables Increase (decrease) in: Management fee payable Due to brokers Other liabilities Cash (used in) generated from operations Interest received Net cash (used in) generated from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Net cash generated from (used in) financing activities NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 9 Notes 89, ,120, ,211,003 61,944 5,833 1,796 7,178 76,751 1,134,252 1,134, (The notes on pages 1 to 20 are an integral part of these financial statements) (47,119) 751,293 (135) 704,039 (1,355,690) 46,701 1,706 (93,647) (696,891) 135 (696,756) 5,971,966 (5,278,269) 693,697 (3,059) 15,094 12,035 1,134,252 (799,851) (83) 334,318 (4,033,978) (75,392) 5,124 (50,721) 176,773 (3,643,876) 83 (3,643,793) 5,321,784 (1,665,478) 3,656,306 12,513 2,581 15,094 93, , ,939 42,599 1, ,493 46, , , , ,897 (45) 549,995 (133,715) (34,298) (300) 40,849 (1,796) 420, ,780 1,082,942 (1,501,765) (418,823) 1, ,581 Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are in thousands of Philippine Peso, unless otherwise stated) Note 1 General information Philippine Stock Index Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment company. It was registered on December 11, 2002 with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799). The Fund aims to provide the Fund s investors with a return that tracks the performance of Philippine Stock Exchange (PSE) index (PSEi), the main stock index of the PSE, through investments in the component stocks of PSEi. As an openend investment company, the Fund stands ready at any time to redeem its outstanding shares at a value determined under the Fund s prospectus (Note 10). The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on July 12, (Note 9). The Fund s registered office, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas,, Philippines. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 11). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss. There are currently no areas involving higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Fund s financial statements. New standards, interpretations and amendments to published standards New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents includes deposits held at call with a bank and other shortterm highly liquid investments with original maturities of three months or less from the date of acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents and due from brokers and other receivables. As at reporting date, the Fund has no financial assets under availableforsale and heldtomaturity categories. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on tradedate, the date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets at fair value through profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in the statement of total income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the financial assets at amortised cost such financial assets are tested for impairment both on an individual and collective basis. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the financial assets carried at amortised cost is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction 54 ALFM MUTUAL FUNDS annual Report 55

30 between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, Fair value measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Due from and due to brokers Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the reporting date, respectively. 2.8 Redeemable shares The shares issued by the Fund are redeemable at the holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 10) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.9 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon application, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value Revenue and expense recognition Dividend income is recognized when the Fund s right to receive payment is established. Interest income is recognized on a timeproportion basis using the effective interest method. Expenses are recognized when incurred Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in Philippine Peso ( Peso ). The primary activity of the Fund is to invest in equity securities comprising the PSEi to track the performance of the PSEi. Such securities are denominated in Peso. The performance of the Fund is measured and reported to the investors in Peso. The Board of Directors considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the Fund s functional and presentation currency Earnings per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to financial risks, mainly market price risk, credit risk and liquidity risk. The Fund has minimal exposures on interest rate risk and foreign exchange risk. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to provide investment returns that track the performance of the PSEi through investing in equity securities comprising the PSEi. 3.2 Price risk The net asset value per share of the Fund will behave depending on the movement of the shares included in the PSEi. There is a possibility that when stock prices go down, the market value of the stock will be less than its purchase price. As a result, an investor might incur losses when stock prices fall. The Fund s price risk exposure principally relates to financial assets at fair value through profit or loss whose values fluctuate as a result of changes in market prices. The table below is a summary of the significant sector concentrations within the portfolio at December 31: Holdings Banks Property Communications Power and energy Food Mining Others 39% 15% 14% 10% 8% 7% 2% 5% 100% 33% 16% 15% 13% 11% 5% 2% 5% 100% The primary responsibility of the Fund Manager is to reflect changes in the allocation and composition of the shares comprising the PSEi in the Fund s net asset value by adjusting and rebalancing the shares that make up the portfolio. The Fund s risk policy requires daily tracking of the movement of the PSEi with the intention of limiting the deviation from the movement of the index. Tracking errors are monitored and reported by the risk manager on a daily basis to ensure that the Fund closely mimics the movement of the PSEi. The tracking error percentage of the Fund is 1.03% and 1.5% as at December 31, and, respectively. If the PSEi has strengthened/weakened by 24.35% ( 14.65%) based on the volatility of PSEi for the past one year with all other variables held constant, net income and equity would have been approximately P3,077 million ( P1,088 million) higher/lower mainly due to markedtomarket fluctuations of financial assets at fair value through profit or loss. 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents Due from brokers and other receivables 12,035 15,094 74, ,109 86, ,203 As at December 31, and, the Fund s financial assets as shown in the table above are neither past due nor impaired. The Fund s cash and cash equivalents as at December 31, and are placed with a reputable local universal bank with solid financial standing. All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in equity securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market. The Fund s investments in listed equity securities classified as financial assets at fair value through profit or loss are considered readily realizable as they are listed in the PSE and are heavily traded being component stocks of PSE s main index. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liabilities pertain to management fee payable, due to brokers and other liabilities which are contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their contractual maturity date. 3.5 Capital management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: (i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; (ii) Maintain a strong capital base to support the develop ment of the investment activities of the Fund; and (iii) Comply with the minimum subscribed and paidin capital of P50 million required for investment compa nies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: (i) Monitor the level of daily subscriptions and redemp tions relative to the assets it expects to be able to liquidate within 7 days; and (ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Equity securities Unit investment trust fund 8,038,939 46,455 8,085,394 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Equity securities Unit investment trust fund 7,306, ,065 7,480,997 Assets and liabilities not carried at fair value but for which fair value is disclosed Carrying amount Level 1 Level 2 Level 3 Financial assets Cash in bank Due from brokers Financial liabilities Management fee payable Capital shares redeemed payable 12,035 65,856 9,492 83,360 12,035 65,856 9,492 83,360 Carrying amount Level 1 Level 2 Level 3 Financial assets Cash in bank Due from brokers Financial liabilities Management fee payable Capital shares redeemed payable 15, ,964 7, ,651 15, ,964 7, ,651 The carrying amounts of the Fund s financial assets and financial liabilities at reporting period approximate their fair values considering that these have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Cash and cash equivalents Cash in bank at December 31, amounts to P12,035 ( P15,094) and earns interest at the prevailing bank deposit rates. Interest income earned from bank deposits during the year amounted to P135 ( P83; P45). Note 5 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments in: Listed equity securities Unit investment trust fund 799, ,516 1,120,367 (751,293) 620,294 (130,999) Note 6 Due from brokers/due to brokers (407,897) 502,559 94,662 Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on reporting date, respectively. These accounts are required to be settled within three days from transaction date. Note 7 Other liabilities The account at December 31 consists of: Capital shares redeemed payable Withholding tax on management fees 83, ,651 2,930 2,286 86, ,937 Capital shares redeemed payable represents outstanding redemptions as at reporting date which have not been settled. The amounts have been paid in the subsequent month after the reporting date. Note 8 Income taxes The Fund did not recognize the related deferred income tax assets on NOLCO in view of the Fund s limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The details of the Fund s unused NOLCO at December 31 are as follows: Year of Incurrence 2000 Expired NOLCO Year of Expiration Income tax rate Unrecognized deferred income tax assets Note 9 Redeemable shares 158,984 76,135 46, ,915 (46,796) 235,119 30% 70,536 76,135 46,796 41, ,829 (41,898) 122,931 30% 36,879 The details of the Fund s authorized number of shares at December 31 follow: Number of shares Par value per share Amount 20 million P100 P2 billion million P100 P1.468 billion The movement in the number of redeemable shares for the years ended December 31 follow: Issued and outstanding, January 1 Redemptions of shares 11,368,683 8,303,273 (7,341,244) 12,330,712 5,160,354 6,017,847 9,148,140 2,387,175 (2,939,811) (3,244,668) 11,368,683 5,160,354 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 5,971,966 5,321,784 5,278,269 1,665,478 1,082,942 1,501,765 As at December 31,, the Fund has 10,655 shareholders ( 8,296). On February 27,, the Fund s Board of Directors approved an increase in Fund s authorized shares from million to 20 million shares with par value of P100 per share. The SEC approved the application for increase in authorized capital stock on July 12,. Earnings per share is calculated by dividing the net income by weighted average number of outstanding redeemable shares during the year. The information used in the computation of basic and diluted earnings per share for the years ended December 31 follow: (Loss) profit for the year Weighted average number of shares outstanding during the year Basic and diluted earnings per share (47,119) 11,850 (3.9763) 1,134,251 8, ,143 5, Note 10 Net Asset Value (NAV) for share subscriptions and redemptions The consideration received or paid for ordinary shares issued or repurchased, respectively, is based on the value of the Fund s NAV per redeemable share at the date of the 56 ALFM MUTUAL FUNDS annual Report 57

31 transaction. The total equity as shown in the statement of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus, a portion of dividend income is appropriated for the Fund s provision for market risk and is not included in the computation of the NAV for purposes of share issuances and redemptions ( trading NAV ) to ensure that the Fund exactly replicates the performance of PSEi. The accumulated adjustment for market risk shall be subject to the BOD s periodic review. On July 25,, the Company s BOD approved the distribution of the provision for market risks of the Fund for a fixed amount per share over a period of three (3) years or until the amount is fully distributed which was implemented on September 11, to coincide with the rebalancing of the PSE indices. Effective on the date of the distribution of the market reserves, (i) the Fund will cease booking or releasing market reserves other than the purpose of distribution, (ii) dividend payments received by the Fund will be reinvested, and (iii) the reporting of the performance of the Fund will include: Fund Return Net of Fees and Expenses, Fund Return Gross of Fees and Expenses, PSEI Price Return and PSEI Total Return. The movement in the allowance for market risk follow: At January 1 Distribution of provisions for market risk At December , ,137 (132,818) (61,319) 132,818 Reconciliation of the Fund s PFRS NAV to its trading NAV at December 31 is provided below: PFRS NAV Allowance for market risk Trading NAV 8,076,055 8,076,055 7,429,477 (132,818) 7,296,659 The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Note Trading NAV Total issued and outstanding shares (in thousands) Trading NAV per share 8,076,055 12, ,296,659 11, As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s NAV. The Fund s retained earnings generally exceed 100% of its paidup capital. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings will effectively be converted into realized profits by the shareholders upon redemption from the Fund. Note 11 Related party transactions BPI Investment and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 0.75% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPIAMTG a fee of not more than 0.75% p.a. of the Fund s average trading NAV. The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties. 9 December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 75,408 75, ,815 Transactions 30,972 30,972 61,944 Transactions 21,300 21,299 42,599 Outstanding balances 4,746 4,746 9,492 Outstanding balances 3,893 3,893 7,786 Outstanding balances 1,331 1,331 2,662 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 (in absolute amount) for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to P240 ( P154; P258). As at reporting dates, there were no outstanding balances related to these fees. Note 12 Custodian agreement The Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. ( HSBC ) for custodial services of the Fund s proprietary assets and/ or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 2% of the average daily market value of the assets. As at December 31,, the market value of securities in custody of HSBC aggregates to P8,038,939 ( P7,426,859). Note 13 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. I. Supplementary information required by Revenue Regulations No Below is the additional information required by RR No that is relevant to the Fund. Documentary stamp tax The documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to P4,062. There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to P19,880, P2,930 of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the year ended December 31, consist of: Municipal and other related taxes Community tax Others Amount 4, ,343 There are no other local and national taxes accrued as at December 31,. Tax cases and assessments As at December 31,, open taxable years are, and 201o. The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income Fund s main income primarily pertains to dividend income, interest income and realized gain/loss on sale of listed securities. Dividend income Total realized gain Interest income Other income Cost of services Trust fee Taxes & licenses Exempt 242, , ,049 Final Tax Regular Rate 3,809 3,809 Deductible amount 150,815 8, ,220 The above direct charges are subject to the regular tax rate of 30%. Itemized deductions Other professional fees Miscellaneous Deductible amount 1,878 1,695 3,573 The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses Details of the Fund s taxes and licenses are presented in Section I of this note. Other information All other information prescribed to be disclosed by the BIR has been included in this note. Independent Auditor s Report To the Board of Directors and Shareholders of ALFM Growth Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of ALFM Growth Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Growth Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 13 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, ALFM MUTUAL FUNDS annual Report 59

32 ALFM Growth Fund, Inc. Statements of Financial Position December 31, and (All amounts in Philippine Peso) Notes Statements Required by Rule 68, Securities Regulation Code (SRC), as Amended on October 20, To the Board of Directors and Shareholders of ALFM Growth Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of ALFM Growth Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of ALFM Growth Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 13 to the financial statements. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Due from brokers and other receivables Total current assets LIABILITIES Accrued expenses EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity ASSETS LIABILITIES AND EQUITY (The notes on pages 1 to 19 are an integral part of these financial statements) Balance at January 1, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Loss for the year Other comprehensive income for the year Total comprehensive loss for the year Transactions with owners Total transactions with owners Balance at December 31, ALFM Growth Fund, Inc ,985,372 6,034,176,907 36,339,747 6,079,502,026 63,560,550 2,765,195,600 2,882,723, ,022,399 6,015,941,476 6,079,502,026 Statements of Changes in Equity For each of the three years in the period ended December 31, (All amounts in Philippine Peso) Redeemable shares (Note 9) 1,196,564,500 (The notes on pages 1 to 19 are an integral part of these financial statements) 1,102,731,900 (1,105,230,300) (2,498,400) 1,194,066,100 1,851,116,200 (874,329,700) 976,786,500 2,170,852,600 1,489,022,400 (894,679,400) 594,343,000 2,765,195,600 Share premium 486,969, ,714,111 (887,827,718) (29,113,607) 457,855,420 2,166,301,824 (892,937,742) 1,273,364,082 1,731,219,502 2,157,884,918 (1,006,380,943) 1,151,503,975 2,882,723,477 Retained earnings 546,528,791 10,677,838 10,677, ,206, ,653, ,653,269 (77,691,879) (77,691,879) 903,168,019 (249,996,154) (249,996,154) (285,149,466) (285,149,466) 368,022,399 12,033,575 4,785,599,722 30,810,067 4,828,443,364 23,203,243 2,170,852,600 1,731,219, ,168,019 4,805,240,121 4,828,443,364 Total equity 2,230,062,318 10,677,838 10,677,838 1,961,446,011 (1,993,058,018) (31,612,007) 2,209,128, ,653, ,653,269 4,017,418,024 (1,844,959,321) 2,172,458,703 4,805,240,121 (249,996,154) (249,996,154) 3,646,907,318 (2,186,209,809) 1,460,697,509 6,015,941, ALFM MUTUAL FUNDS annual Report 61

33 ALFM Growth Fund, Inc. Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are in thousands of Philippine Peso, unless otherwise stated) INCOME Dividend income Interest income Net (losses) gains on financial assets at fair value through profit or loss Other income EXPENSES Taxes and licenses Others Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in Philippine Peso) (LOSS) PROFIT BEFORE INCOME TAX PROVISION FOR INCOME TAX (LOSS) PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE (LOSS) INCOME FOR THE YEAR BASIC AND DILUTED (LOSS) EARNINGS PER SHARE 5 4, 5 (The notes on pages 1 to 20 are an integral part of these financial statements) 5 11 Philippine Stock Index Fund, Inc. Notes 9 110,433,232 6,064,153 (223,629,995) 2,882,463 (104,250,147) 131,564,677 10,238,409 2,730, ,533,176 (248,783,323) 1,212,831 (249,996,154) (249,996,154) (9.0768) Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in thousands of Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES (Loss) profit for the year Adjustment for: Unrealized fair value losses (gains), net Operating income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Due from brokers and other receivables Increase (decrease) in: Accrued expenses Net cash (used in) generated from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of shares Net cash generated from (used in) financing activities NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 Notes 50,316,405 4,236, ,220,294 1,767, ,540,616 71,364,255 10,565,047 2,110,687 84,039, ,500, , ,653, ,653,269 (The notes on pages 1 to 19 are an integral part of these financial statements) (249,996,154) 298,769,236 48,773,082 (1,547,346,421) (5,529,680) 40,357,307 (1,463,745,712) 3,646,907,318 (2,186,209,809) 1,460,697,509 (3,048,203) 12,033,575 8,985, ,653,269 (193,067,015) 230,586,254 (2,579,707,501) 27,280,497 (55,998,254) (2,377,839,004) 4,017,418,024 (1,844,959,320) 2,172,458,704 (205,380,300) 217,413,875 12,033,575 60,178,309 1,059,863 5,739,162 3,472,674 70,450,008 49,138,821 9,501, ,993 59,560,197 10,889, ,973 10,677,838 10,677, ,677,837 47,016,322 57,694, ,354,474 35,260,745 (21,077,015) 248,232,363 1,961,446,011 (1,993,058,018) (31,612,007) 216,620, , ,413,875 Note 1 General information ALFM Growth Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment company. It was registered on November 26, 2007 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799). The Fund aims to provide longterm capital appreciation through investments in a diversified portfolio of equity and fixedincome securities. As an openend investment company, the Fund stands ready at any time to redeem its outstanding shares at a value defined under the Fund s prospectus (Note 10). The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on February 25, (Note 9). The Fund s registered office address, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas,, Philippines. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 11). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss. There are currently no areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Fund s financial statements. New standards, interpretations and amendments to published standards New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phase of PFRS 9 when issued. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents include deposits held at call with a bank and shortterm highly liquid investments with original maturities of three months or less from the date of acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents and due from brokers and other receivables. As at reporting date, the Fund has no financial assets under availableforsale and heldtomaturity categories. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on tradedate, the date on which the Fund commits to purchase or sell the asset. Financial assets at fair value through profit or loss are initially recognized at fair value plus transaction costs. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets at fair value through profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in the statement of total comprehensive income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that the Fund will not be able to collect all amounts due according to the original terms of the financial assets at amortised cost such financial assets are tested for impairment both on an individual and collective basis. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the financial assets carried at amortised cost is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses in profit or loss. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is 62 ALFM MUTUAL FUNDS annual Report 63

34 a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement 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 of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, Fair value measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Due from and due to brokers Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the reporting date, respectively. 2.8 Redeemable shares The shares issued by the Fund are redeemable at the holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 9) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the par value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.9 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value Revenue and expense recognition Dividend income is recognized when the Fund s right to receive payment is established. Interest income is recognized on a timeproportion basis using the effective interest method. Expenses are recognized when incurred Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in Philippine Peso ( Peso ). The primary activity of the Fund is to invest in portfolio of equity securities traded in the Philippine Stock Exchange ( PSE ) and other fixed income securities or instruments. The Board of Directors considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the Fund s functional and presentation currency Earnings per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to a variety of financial risks: market risk (primarily price risk and interest rate risk), credit risk and liquidity risk. All of the Fund s assets and liabilities are denominated in Philippine Peso and is not therefore exposed to foreign exchange risk. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to outperform its composite benchmark, 75% of the Philippine Stock Exchange Index and 25% of 91day Philippine Treasury Bills, by investing in a diversified portfolio of equity instruments. 3.2 Price risk The Fund trades in financial instruments, taking positions in traded equity and overthecounter instruments to take advantage of shortterm market movements in the equity markets. Trading positions are reported at estimated market value with changes reflected in profit or loss. Trading positions are subject to the risk of arising from adverse movement in equity prices. All securities investments present a risk of loss of capital. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a quarterly basis by the BOD. The Fund s policy is to concentrate the equity investment portfolio in sectors where management believes the Fund can maximize the returns derived for level of risk which the Fund is exposed. The table below is a summary of the significant sector concentrations within the portfolio. Property Holdings Banks Food, beverage and tobacco Electricity, energy, power and water Telecommunications Transportation services Retail Total 25% 17% 20% 26% 16% 13% 14% 11% 9% 5% 6% 17% 5% 7% 5% 4% 100% 100% The Fund s equity securities are susceptible to market price risk arising from uncertainties about future prices of the instruments. The Fund s market price risk is managed through diversification of the investment portfolio ratios by exposures. If the investments of the Fund have strengthened/ weakened by 21.92% ( 14.65%) based on the volatility of the Fund for the past one year with all other variables held constant, net income and equity would have been approximately P2,275 million ( P1,088 million) higher/lower mainly due to markedtomarket fluctuations of financial assets at fair value through profit or loss. 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. External ratings are also used by the Fund for managing credit risk exposures. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents through profit or loss government securities Due from brokers and other receivables 8,985,372 36,339,747 45,325,119 12,033, ,316,025 30,810, ,159,667 As at December 31, and, the Fund s financial assets as shown in the table above are neither past due nor impaired. The Fund s cash and cash equivalents consist of regular savings deposit with a local universal bank (Note 4). Investments in government securities classified as fair value through profit or loss pertain to investments in treasury notes that are guaranteed by the Philippine government. All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in the desired mix of equity and fixedincome securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liabilities pertain to accrued expenses which are contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date. 3.5 Capital management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and iii) Comply with the minimum subscribed and paidin capital of P50 million required for investment companies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Equity securities Unit investment trust fund 5,161,767, ,409,268 6,034,176,907 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Equity securities Unit investment trust funds Mutual funds Government securities 4,226,031, ,867, ,384, ,316,025 4,785,599,722 Assets and liabilities not carried at fair value but for which fair value is disclosed Carrying amount Level 1 Level 2 Level 3 Financial assets Cash in bank Due from brokers Financial liabilities Due to brokers Management fee payable Capital shares redeemed payable 8,985,372 36,339,747 47,293,099 8,970,671 4,572,236 8,985,372 36,339,747 47,293,099 8,970,671 4,572,236 Carrying amount Level 1 Level 2 Level 3 Financial assets Cash in bank 12,033,575 12,033,575 Due from brokers Financial liabilities 30,810,067 30,810,067 Due to brokers Management fee payable Capital shares redeemed 1,300,789 7,100,288 1,300,789 7,100,288 payable 12,815,934 12,815,934 The carrying amounts of the Fund s financial assets and financial liabilities at reporting period approximate their fair values considering that these have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Cash and cash equivalents Cash in bank at December 31, amounts to P8,985,372 ( P12,033,575) and earns interest at the prevailing bank deposit rates. Interest income earned from bank deposits during the year amounted to P606,144 ( P952,290; P1,059,862). Note 5 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments in: Listed equity securities Unit investment trust funds Mutual funds Government securities 5,161,767, ,409,268 6,034,176,907 4,226,031, ,867, ,384, ,316,025 4,785,599,722 Investments in equity securities are listed at the PSE. Investment in unit investment trust fund consists of placements in a fund with investments in shortterm fixed income instruments. Investments in government securities pertain to treasury notes with maturity of more than one year as at December 31,. Interest income earned from financial assets at fair value through profit or loss during the year amounted to P5,458,009 ( P3,284,505; nil). Dividend income arising from investments in listed equity securities recognized in profit or loss amounted to P110,433,232 ( P50,316,405; P60,178,309). Net change in fair value of financial assets at fair value through profit or loss is summarized as follows: Unrealized fair value (loss) gain, net Realized gain on sale Note 6 Due from brokers/due to brokers (298,769,236) 193,067,015 75,139, ,153,279 (223,629,995) 452,220,294 Amounts due from and to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the statement of financial position date, respectively. These accounts are required to be settled within three days from transaction date. Note 7 Accrued expenses The account at December 31 consists of: Due to brokers Management fee payable Capital shares redeemed payable Withholding tax payable Notes ,293,099 8,970,671 4,572,236 2,724,544 63,560,550 7,100,288 1,300,789 1,986,232 12,815,934 23,203,243 Capital shares redeemed payable represents outstanding redemptions as at reporting date which have not been settled. The amounts have been paid in the subsequent month after the reporting date. Note 8 Income taxes The Fund did not recognize the related deferred income tax assets on NOLCO in view of the Fund s limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund s income is taxexempt and subject to final tax. Details of unrecognized deferred income tax assets are as follows: Year of Incurrence Expired NOLCO Year of Expiration Income tax rate Unrecognized deferred income tax asset Note 9 Redeemable shares 141,650,714 82,272,866 82,272,866 55,933,946 55,933,946 28,105,639 28,105,639 8,176, ,963,165 (28,105,639) 279,857,526 30% 83,957, ,489,097 (8,176,646) 166,312,451 30% 49,893,735 The details of the Fund s authorized shares at December 31 follow: Number of authorized shares Par value per share Amount 36 million 30 million P100 P100 P3.6 billion P3 billion 64 ALFM MUTUAL FUNDS annual Report 65

35 The movement in the number of redeemable shares for the years ended December 31 follow: Issued and outstanding, January 1 Redemptions of shares 11,940,661 18,511,162 (8,743,297) 21,708,526 21,708,526 14,890,224 (8,946,794) 27,651,956 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 3,646,907,318 2,186,209,809 4,017,418,024 1,844,959,320 11,965,645 11,027,319 (11,052,303) 11,940,661 1,961,446,011 1,993,058,018 As at December 31,, the Fund has 8,732 shareholders ( 5,701). On July 19,, the Fund s Board of Directors approved an increase in Fund s authorized shares from 30 million to 36 million shares with par value of P100 per share. The SEC approved the application for increase in authorized capital stock on February 25,. Earnings per share Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year. The information used in the computation of basic and diluted earnings for the years ended December 31 follow: (Loss) profit for the year (248,783,323) 423,653,269 10,677,838 Weighted average number of shares outstanding during the year Basic and diluted (loss) earnings 27,408,665 16,824,594 11,953,153 per share (9.0768) Note 10 Net Asset Value (NAV) for share subscriptions and redemptions The consideration received or paid for redeemable shares issued or repurchased respectively is based on the value of the Fund s NAV per share at the date of the transaction. The total equity as shown in the statement of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus, financial assets at fair value through profit or loss are valued based on the last traded market prices in the computation of the NAV for purposes of share issuances and redemptions ( trading NAV ). There is no difference between PFRS NAV and trading NAV as at December 31, and. The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Trading NAV Total issued and outstanding shares (Note 9) Trading NAV per share 6,015,941,476 27,651, ,805,240,121 21,708, As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s NAV. The Fund s retained earnings may exceed 100% of its paidup capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund. Note 11 Related party transactions BPI Investment and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 1% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital) and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund for a fee of 0.75% p.a. of the Fund s average trading NAV. Such agreements are effective year after year unless terminated by each parties. BPI and its thrift bank subsidiary, BPI Family Savings Bank, Inc., act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties: December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 65,782,339 65,782, ,564,677 Transactions 35,682,128 35,682,127 71,364,255 Transactions 24,569,411 24,569,410 49,138,821 Outstanding balances 4,485,336 4,485,335 8,970,671 Outstanding balances 650, ,394 1,300,789 Outstanding balances 1,735,839 1,735,838 3,471,677 Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. Terms and conditions The outstanding balance is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to P535,000 ( P341,000; P236,500). As at reporting dates, there were no outstanding balances related to these fees. Note 12 Custodian agreement The Fund has an existing custodian agreement with Hongkong & Shanghai Banking Corporation Ltd. ( HSBC ) for custodial services of the Fund s proprietary assets and/or assets owned in the Philippines. Relative to this, the Fund pays monthly custodian fees of not more than 0.015% of the average daily market value of the assets. As at December 31,, the market value of securities in custody of HSBC aggregates P5,161,767 ( P4,246,454). Note 13 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. I. Supplementary information required by Revenue Regulations No Below is the additional information required by RR No that is relevant to the Fund. Documentary stamp tax Total documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to P7,434,115. There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to P18,367,353, P2,724,544 of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the year ended December 31, consist of: Filing fees Municipal and other related taxes Community tax Others Total Amount 2,149, ,992 10,500 1,902 2,804,294 There are no other local and national taxes accrued as at December 31,. Tax cases and assessments As at December 31,, open taxable years are, and The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case with the BIR. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income Fund s main income primarily pertains to dividend income, interest income and realized gain on sale of listed securities. Dividend income Total realized gain Interest income Other income Cost of services Taxes and licenses Exempt 110,433,232 75,139, ,572,474 Final Tax 6,064,154 6,064,154 Regular Rate 2,882,464 2,882,464 Deductible amount 131,564,677 10,238, ,803,086 The above direct charges are subject to the regular tax rate of 30%. Itemized deductions Other professional fees Miscellaneous Deductible amount 1,606,256 1,123,836 2,730,092 The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses Details of the Fund s taxes and licenses are presented in Section I of this note. Other information All other information prescribed to be disclosed by the BIR has been included in this note. Independent Auditor s Report To the Board of Directors and Shareholders of ALFM Money Market Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas Report on the Financial Statements We have audited the accompanying financial statements of ALFM Money Market Fund, Inc., which comprise the statements of financial position as at December 31, and, and the statements of total comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31,, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ALFM Money Market Fund, Inc. as at December 31, and, and its financial performance and its cash flows for each of the three years in the period ended December 31, in accordance with Philippine Financial Reporting Standards. Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information in Note 13 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, ALFM MUTUAL FUNDS annual Report 67

36 ALFM Money Market Fund, Inc. Statements of Financial Position December 31, and (All amounts in Philippine Peso) Notes Statements Required by Rule 68, Securities Regulation Code (SRC), as Amended on October 20, To the Board of Directors and Shareholders of ALFM Money Market Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas We have audited the financial statements of ALFM Money Market Fund, Inc. as at and for the year ended December 31,, on which we have rendered the attached report dated March 22, The supplementary information shown in the Reconciliation of Retained Earnings Available for Dividend Declaration and Schedule of Philippine Financial Reporting Standards effective as at December 31, as additional components required by Part I, Section 4 of Rule 68 of the Securities Regulation Code and the Supplementary Schedules A to H as additional components required by Part II, Section 6 of Rule 68 of the Securities Regulation Code, is presented for purposes of filing with the Securities and Exchange Commission and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in the audit of the basic financial statements. In our opinion, the supplementary information has been prepared in accordance with Rule 68 of the Securities Regulation Code. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 Statement Required by Section 8A, Revenue Regulations No. V1 To the Board of Directors and Shareholders of ALFM Money Market Fund, Inc. 17th Floor, BPI Building Ayala Avenue corner Paseo de Roxas None of the partners of the firm has any financial interest in the Fund or any family relationship with its directors or principal shareholder. The supplementary information on taxes and licenses is presented in Note 13 to the financial statements. Isla Lipana & Co. Blesilda A. Pestaño Partner CPA Cert. No P.T.R. No , January 3, 2014, SEC A.N. (individual) as general auditors 0049AR3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009FR3; effective until August 15, 2015 TIN BIR A.N , issued on April 4, ; effective until April 3, 2016 BOA/PRC Reg. No. 0142, effective until December 31, 2016 March 22, 2014 ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables Other receivables Total assets LIABILITIES Accrued expenses Deposits for future subscriptions Total liabilities EQUITY Redeemable shares Share premium Retained earnings Total equity Total liabilities and equity Balance at January 1, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, Comprehensive income Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Total transactions with owners Balance at December 31, ASSETS LIABILITIES AND EQUITY (The notes on pages 1 to 22 are an integral part of these financial statements) ALFM Money Market Fund, Inc. Statements of Changes in Equity For each of the three years in the period ended December 31, (All amounts in Philippine Peso) Redeemable shares (Note 10) 27,166,490 (The notes on pages 1 to 22 are an integral part of these financial statements) 23,028,030 (19,850,750) 3,177,280 30,343, ,774,730 (78,319,020) 65,455,710 95,799, ,803,380 (205,227,640) 102,575, ,375, Share premium 247,067, ,099,893 (187,468,695) 32,631, ,698,925 1,406,270,830 (750,465,928) 655,804, ,503,827 3,117,518,092 (2,073,776,110) 1,043,741,982 1,979,245,809 1,939,020, ,638,187 59,077,491 12,037,561 2,570,773,797 1,799, ,999, ,798, ,375,220 1,979,245,809 41,353,934 2,218,974,963 2,570,773,797 Retained earnings 5,639,069 7,031,956 7,031,956 12,671,025 19,399,815 19,399,815 (11,841,086) (11,841,086) 20,229,754 21,124,180 21,124,180 41,353, ,730,887 88,792, ,680,490 3,975,134 1,052,178, , ,668 95,799, ,503,827 20,229,754 1,051,533,061 1,052,178,729 Total equity 279,873,286 7,031,956 7,031, ,127,923 (207,319,445) 35,808, ,713,720 19,399,815 19,399,815 1,550,045,560 (840,626,034) 709,419,526 1,051,533,061 21,124,180 21,124,180 3,425,321,472 (2,279,003,750) 1,146,317,722 2,218,974, ALFM MUTUAL FUNDS annual Report 69

37 ALFM Money Market Fund, Inc. Notes to Financial Statements As at December 31, and and for each of the three years in the period ended December 31, (All amounts are shown in Philippine Peso, unless otherwise stated) INCOME Interest income Net gains on financial assets at fair value through profit or loss Other income EXPENSES Professional fees Taxes and licenses Others PROFIT BEFORE INCOME TAX PROVISION FOR INCOME TAX PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME FOR THE YEAR TOTAL COMPREHENSIVE INCOME FOR THE YEAR BASIC AND DILUTED EARNINGS PER SHARE Statements of Total Comprehensive Income For each of the three years in the period ended December 31, (All amounts in Philippine Peso) (The notes on pages 1 to 20 are an integral part of these financial statements) 5, ALFM Money Market Fund, Inc. Notes 29,594,331 10,558,989 67,611 40,220,931 10,339, ,345 1,682, ,645 12,997,054 27,223,877 6,099,697 21,124,180 21,124, Statements of Cash Flows For each of the three years in the period ended December 31, (All amounts in Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Unrealized fair value losses (gains), net Interest income Operating (loss) income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Financial assets at fair value through profit or loss Loans and receivables Other receivables Increase in: Accrued expenses Cash (used in) generated from operations Interest received Income taxes paid Net cash (used in) generated from operating activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from deposits for future stock subscriptions Proceeds from issuance of shares Net cash from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 Notes 13,157,938 14,914,770 42,315 28,115,023 4,369,502 1,638,921 1,465, ,550 7,584,585 20,530,438 1,130,623 19,399,815 19,399, (The notes on pages 1 to 19 are an integral part of these financial statements) ,223,877 1,664,043 (29,594,331) (706,411) (473,510,012) 50,602,999 (8,062,427) 1,153,353 (430,522,498) 29,594,331 (6,099,697) (407,027,864) 349,999,813 3,425,321,472 (2,279,003,750) 1,496,317,535 1,089,289, ,730,887 1,939,020,558 20,530,438 (1,248,762) (13,157,938) 6,123,738 (36,228,674) (69,847,951) (51,051) 446,768 (99,557,170) 10,686,452 (1,130,623) (90,001,341) 1,550,045,560 (840,626,034) 709,419, ,418, ,312, ,730,887 7,884,736 2,949,550 3,462 10,837,748 1,891, , , ,635 3,142,843 7,694, ,949 7,031,956 7,031, ,694, ,465 (7,884,736) 459,634 54,231,663 20,753,111 (8,050) 6,572 75,442,930 9,682,246 (662,949) 84,462, ,127,923 (207,319,445) 35,808, ,270, ,041, ,312,702 Note 1 General information ALFM Money Market Fund, Inc. (the Fund ) was incorporated in the Philippines primarily to establish and carry on the business of an openend investment company. It was registered on October 19, 2009 with the Philippine Securities and Exchange Commission (SEC) under the Investment Company Act of 1960 (Republic Act No. 2629) and the Securities Regulation Code (Republic Act No. 8799). The Fund seeks capital preservation and stable income. It aims to achieve this objective by investing in a diversified portfolio of shortterm bonds and money market instruments. The Fund is registered as an issuer of securities with the SEC under Section 12 of the Securities Regulation Code (SRC). In compliance with the SRC, the Fund is required to file registration statements for each instance of increase in authorized shares. The last registration statement filed by the Fund for an increase in authorized shares was approved by the SEC on November 12, (Note 10). The Fund s registered office address, which is also its principal place of business, is located at the 17th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas,, Philippines. The Fund has no employees. The principal management and administration functions are outsourced from BPI Investment Management, Inc. (BPI Investment) (the Fund Manager ) (Note 12). These financial statements have been approved and authorized for issuance by the Fund s Board of Directors (BOD) on March 20, There are no material events that occurred subsequent to March 20, 2014 until March 22, Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Fund 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 of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss. The preparation of these financial statements in conformity with PFRS requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Fund s accounting policies. There are no areas where assumptions and estimates are significant to the financial statements. The area involving a higher degree of judgment or complexity is disclosed in Note 4. New standards, interpretations and amendments to published standards New standard adopted by the Fund The following PFRS or IFRIC interpretations effective for the first time for the financial year beginning January 1, have been adopted by the Fund: PFRS 13, Fair Value Measurement (effective January 1, ). The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bidask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bidask spread. On adoption of the standard, the Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Fund s prospectus for the calculation of its per share trading value for subscriptions and redemptions. The use of last traded prices is recognized as a standard pricing convention within the industry. In the prior year, the Fund utilized bid prices for its listed financial assets in accordance with PAS 39, Financial Instruments: Recognition and Measurement. The change in valuation inputs is considered to be a change in estimate in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. There is no material impact of the adoption of this standard to the Fund. New standard not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1,, and have not been early adopted by the fund and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Fund, except as set out below: PFRS 9, Financial Instruments. This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39, Financial Instruments: Recognition and Measurement, that relate to the classification and measurement of financial instruments, and hedge accounting. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. PFRS also details the changes in requirements to hedge accounting that will allow entities to better reflect their risk management activities in the financial statements. The mandatory effective date of PFRS 9 which is for annual periods beginning January 1, 2015 has been deferred and left open pending the finalization of the impairment classification and measurement requirements. The Fund has yet to assess the full impact of PFRS 9 and intends to adopt PFRS 9 upon completion of the IASB project. The Fund will also consider the impact of the remaining phases of PFRS 9 when issued. There are no other standards, amendments to standards and interpretations that are effective beginning January 1, and onwards that are expected to have a material impact on the Fund s financial statements. 2.2 Cash and cash equivalents Cash includes deposit held at call with a bank and shortterm highly liquid investments with original maturities of three months or less from the date of acquisition. 2.3 Financial assets Classification The Fund classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, heldtomaturity securities and availableforsale securities. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss are classified as held for trading as they are acquired principally for the purpose of selling in the near term or they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. The Fund s loans and receivables include cash and cash equivalents and due from brokers and other receivables. As at reporting date, the Fund has no financial assets under availableforsale and heldtomaturity categories. Recognition and derecognition Regularway purchases and sales of financial assets are recognized on tradedate, the date on which the Fund commits to purchase or sell the asset. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Transaction costs that are directly attributable to the acquisition of financial assets at fair value through profit or loss are expensed immediately at initial recognition. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Fund has transferred substantially all risks and rewards of ownership. Related gains and losses realized at the time of derecognition are recognized within net gains (losses) on financial assets at fair value through profit or loss. Subsequent measurement Financial assets at fair value through profit or loss are subsequently carried at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included within net gains (losses) on financial assets at fair value through profit or loss in the statement of total income in the year in which they arise. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Impairment The Fund assesses at each reporting date 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 impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial 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. A provision for impairment is established when there is objective evidence that the Fund will not be able to collect all amounts due according to the original credit terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments are considered indicators that the financial asset is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. When a financial asset is uncollectible, it is written off against the allowance account after all the necessary procedures have been completed and the amount of the loss has been determined. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit or loss as a reduction of impairment losses for the year. 2.4 Financial liabilities Classification and measurement The Fund classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss, and financial liabilities at amortized cost. Financial liabilities at fair value through profit or loss comprises two subcategories: financial liabilities classified as held for trading, and financial liabilities designated by the Fund as at fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profittaking. Financial liabilities designated at fair value through profit or loss are those that are not classified as heldfortrading but are managed and their performance is evaluated on a fair value basis. Gains and losses arising from changes in fair value are included in profit or loss. The Fund has no financial liabilities that are classified at fair value through profit loss. Financial liabilities at amortized cost are those not classified as at fair value through profit or loss and are measured at amortized cost. Financial liabilities measured at amortized cost include due to brokers, management fee payable and other liabilities. Derecognition of financial liabilities Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. When 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 profit or loss. 70 ALFM MUTUAL FUNDS annual Report 71

38 2.5 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.6 measurement 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 of financial assets and liabilities traded in active markets (such as publicly traded equity and debt securities) are based on quoted market prices at the close of trading on the reporting date. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Prior to January 1,, the quoted market price used for financial assets held by the Fund was the current bid price. If the current bid is not available, the Fund uses the closing price. In the absence of done deals, benchmark or reference prices based on the weighted average of done or executed deals in the trading market are used for valuation. From January 1,, the Fund adopted PFRS 13, measurement; and changed its fair valuation input to utilize the last traded market price for financial assets where the last traded price falls within the bidask spread. In circumstances where the last traded price is not within the bidask spread, management will determine the point within the bidask spread that is most representative of fair value. The Fund classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy value hierarchy has the following levels: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Fund considers relevant and observable market prices in its valuations where possible. 2.7 Redeemable shares The shares issued by the Fund are redeemable at the holder s holder s option and are classified as equity and are recognized at par value. Share premium includes any premiums or consideration received in excess of par value on the issuance of redeemable shares. The Fund classifies puttable financial instruments that meet the definition of a financial liability as equity where certain strict criteria are met. Those criteria include: the puttable instruments must entitle the holder to a prorata share of net assets; the puttable instruments must be the most subordinated class and the features of that class must be identical; there must be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; and the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer. Should the redeemable shares terms or conditions change such that they do not comply with those criteria, the redeemable shares would be reclassified to a financial liability from the date the instrument ceases to meet the criteria. The financial liability would be measured at the instrument s fair value at the date of reclassification. Any difference between the carrying value of the equity instrument and fair value of the liability on the date of reclassification would be recognized in equity. Redeemable shares can be put back to the Fund at any time for cash equal to a proportionate share of the Fund s trading net asset value (Note 10) calculated in accordance with the Fund s prospectus. Any excess of subscriptions over the value of shares issued is shown as share premium. The excess of redemption amount over the par value of shares redeemed are first applied against the related share premium and then to the related retained earnings. 2.8 Deposits for future subscriptions Deposits for future subscriptions represent funds received by the Fund with a view to applying the same as payment for a future additional issuance of shares either from its authorized but unissued shares, from a proposed increase in authorized share capital, or as share premium. Under the Corporation Code, a stock corporation is empowered to issue or sell stocks to subscribers. Such issuance should only be to the extent of the capital stock approved or authorized by the SEC. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the entity subject to the approval by its Board of Directors, stockholders and the SEC. The Fund classifies a deposit for future subscription as an equity instrument, if all of the following are present: The unissued authorized capital stock of the Fund is insufficient to cover the amount of shares indicated in the contract; There is Board of Directors approval on the proposed increase in authorized capital stock (for which a deposit was received by the Fund); There is stockholders approval of said proposed increase; and The application for the approval of the proposed increase has been filed with the SEC. If any or all of the foregoing elements are not present, the Fund recognizes the deposit as a liability. Deposits for future subscriptions are initially recognized at fair value of consideration received or receivable. Deposits for future subscriptions can be redeemed for cash equal to a proportionate share of the Fund s trading net asset value. Upon approval, the amount will be credited to share capital for the par value of the shares and share premium for the amount in excess of the par value. 2.9 Revenue and expense recognition Interest income is recognized on a timeproportion basis using the effective interest method. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Expenses are recognized when incurred Functional and presentation currency Subscriptions and redemptions of the Fund s redeemable shares are denominated in Philippine Peso ( Peso ). The primary activity of the Fund is to invest in diversified portfolio of Peso denominated shortterm fixed income and money market instruments. The Board of Directors considers the Peso as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in Peso, which is the Fund s functional and presentation currency Earnings per share Basic earnings per share is calculated by dividing net income attributable to shareholders over weighted average number of outstanding redeemable shares during the year. Diluted earnings per share is computed in the same manner as basic earnings per share, however, profit attributable to shareholders and the number of outstanding redeemable shares are adjusted for the effects of all dilutive potential redeemable shares. There are no dilutive potential redeemable shares as at December 31, and Income tax Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Fund primarily earns dividend income from its investments in equity securities which is taxexempt. Sale of financial assets at fair value through profit or loss is subject to other percentage tax while interest income from bank deposits is subject to final withholding tax. Such income is presented net of taxes paid or withheld. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible deductible temporary differences and carryforward of unused tax losses (net operating loss carryover or NOLCO) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Fund reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax liabilities are provided on taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the timing of the reversal of the temporary differences is controlled by the Fund and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and where there is an intention to settle the balances on a net basis Related party relationships and transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprises and their key management personnel, directors, or shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form Subsequent events (or Events after reporting date) Post yearend events that provide additional information about the Fund s financial position at reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 Financial risk and capital management 3.1 Strategy in using financial instruments The Fund s activities expose it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Fund s assets and liabilities are denominated in Philippine Peso and is not therefore exposed to foreign exchange risk. The Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund s financial performance. The management of these risks is carried out by the Fund Manager under policies approved by the Board of Directors (BOD). The BOD approves written principles for overall risk management as well as, written policies covering specific areas. Any prospective investment is limited to the type of investments described in the prospectus of the Fund thereby limiting the risk exposure of the Fund to the risk inherent on investments approved by the investors. The Fund also monitors and adheres to regulatory limits and restrictions to mitigate risks. The Fund has established risk management functions with clear terms of reference and with the responsibility for developing policies on financial risks. It also supports the effective implementation of policies. The policies define the Fund s identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets to the corporate goals and specify reporting requirements. The Fund s objective is to exceed the performance of the HSBC Philippines Money Market Index by investing in a diversified portfolio of the Peso denominated shortterm fixed income and money market instruments. 3.2 Interest rate risk The Fund trades in financial instruments, taking positions in traded and overthecounter instruments, to take advantage of shortterm market movements primarily in the bond markets. Trading positions are reported at estimated market value with changes reflected in the statement of total comprehensive income. Trading positions are subject to various risk factors, which include exposures to interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Fund takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates primarily on its fair value risk. The Fund s financial assets at fair value through profit are mostly nonrepricing and hence exposed to fair value interest rate risk. The Fund s fair value interest rate risk exposure principally relates to debt securities classified as financial assets at fair value through profit or loss whose market values fluctuate as a result of changes in interest rates or factors specific to their issuers. The Fund s interestbearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its finan cial position and cash flows. The Fund Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Fund s overall market positions are monitored on a daily basis by the Fund Manager and are reviewed on a monthly basis by the BOD. The Fund s fair value interest rate risk is managed through diversification of the investment portfolio ratios by exposures. The Fund is also actively managed via portfolio duration management, yield curve positioning, credit diversification, portfolio quality and liquidity management. The Fund also sets up a provision for market risk on its investment portfolio which is deducted from the Fund s net asset value to protect the Fund from market price fluctuations (see Note 11). To estimate its exposure to market risk, the Fund Manager computes the statistical value at risk (VAR) of its investments. The VAR measurement estimates the maximum loss due to adverse market movements that could be incurred by a portfolio during a given holding period with a given level of confidence. The Fund Manager uses a one month holding period, estimated as the number of days required to liquidate the investment portfolio, and a 99% degree of confidence in the computation of VAR. As such, there remains 1% statistical probability that the portfolios actual loss could be greater than the VAR estimate. As at December 31,, the Fund s VAR with respect to market interest rate volatilities amounts to P812,252 ( P60,921). 3.3 Credit risk The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Fund manages the level of credit risk it accepts through setting up of exposure limits by each counterparty or group of counterparties. The maximum investment of the Fund in any single enterprise shall not exceed an amount equivalent to ten percent (10%) of the Fund s net asset value except obligations of the Philippine government or its instrumentalities, provided that in no case shall the total investment of the Fund exceeds ten percent (10%) of the outstanding securities of any one investee company. Credit risk is also minimized through diversification or by investing in a variety of investments belonging to different sectors or industries. The maximum exposure to credit risk before any credit enhancements at December 31 is the carrying amount of the financial assets as set out below: Cash and cash equivalents Financial assets at fair value through profit or loss Loans and receivables Other receivables 1,939,020, ,638,187 59,077,491 12,037,561 2,570,773, ,730,887 88,792, ,680,490 3,975,134 1,052,178,729 As at December 31, and, the Fund s financial assets as shown above are neither past due nor impaired. There were no renegotiated financial assets as at December 31, and. The Fund invests primarily in highgrade investment instruments and securities. Details of ratings of the Fund s investments at December 31, and based on external credit rating agencies follow: At December 31, Standard and Poor s BB+ Philippine Rating Services Corp. Aaa Unrated At December 31, Standard and Poor s BB+ Philippine Rating Services Corp. Aaa Unrated through profit or loss 560,638, ,638,187 through profit or loss Loans and receivables Unrated investments and loans and receivables are from counterparties with no history of default with the Fund. The Fund s cash in bank was deposited with Bank of the Philippine Islands, a local universal bank while its cash equivalents are composed of shortterm time deposits with various universal and thrift banks with no history of default with the Fund (Note 5). The total amount of loans and receivables outstanding is unsecured. In accordance with the Fund s policy, the Fund Manager monitors the Fund s credit position on a daily basis, and the BOD reviews it on a monthly basis. Further, the Fund s investment advisor regularly reviews the credit quality of the Fund s investments and loans and receivables 69,458,090 19,334,128 88,792,218 59,077,491 59,077,491 Loans and receivables 109,680, ,680,490 by assessing the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. 3.4 Liquidity risk Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Fund is exposed to daily cash redemptions of redeemable shares. In accordance with the Fund s policy, the Fund Manager monitors the Fund s liquidity position on a daily basis to ensure that excess cash positions are invested in fixedincome securities and redemptions are funded within the prescribed period indicated in the Fund s prospectus. The Fund also manages its liquidity by investing predominantly in securities that it expects to be able to liquidate within 7 days or less. It therefore invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. The Fund s financial assets at fair value through profit or loss and cash and cash equivalents can be liquidated within 7 days from transaction date. Furthermore, the Fund has the ability to borrow in the short term to settle its obligations when necessary. No such borrowings have arisen in and. The Fund s financial liability pertains to management fee payable which is contractually due in less than 1 month. The Fund expects to settle its obligations in accordance with their maturity date. 3.5 Capital management The capital of the Fund is represented by total equity as shown in the statement of financial position. The Board of Directors and Fund Manager monitor capital on the basis of the value of total equity. The Fund s total equity can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of shareholders. The Fund s objective when managing capital is as follows: i) Safeguard the Fund s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; ii) Maintain a strong capital base to support the development of the investment activities of the Fund; and iii) Comply with the minimum subscribed and paidin capital of P50 million required for investment companies under Investment Company Act of As at December 31, and, the Fund is in compliance with the minimum required capital. In order to maintain or adjust the capital structure, the Fund s policy is to perform the following: i) Monitor the level of daily subscriptions and redemptions relative to the assets it expects to be able to liquidate within 7 days; and ii) Redeem and issue new shares in accordance with the Fund s prospectus, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. 3.6 estimation The following table presents the fair value hierarchy of the Fund s assets and liabilities measured at December 31: Recurring fair value measurements Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Corporate bonds 560,638, ,638,187 Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Government securities Corporate bonds 69,458,090 19,334,128 88,792,218 Assets and liabilities not carried at fair value but for which fair value is disclosed Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents Loans and receivables Financial liabilities Management fee payable 1,939,020,558 59,077,491 1,340,014 1,939,020,558 59,077,491 1,340,014 Carrying amount Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents 849,730, ,730,887 Loans and receivables Financial liabilities 109,680, ,680,490 Management fee payable 486, ,163 The fair value of loans and receivables is reported based on expected cash flows discounted at current market rates. The carrying amount of the Fund s other financial assets and liabilities at reporting period approximate their fair values considering that they have shortterm maturities. There were no transfers between the fair value hierarchy above. Note 4 Critical accounting judgment Estimates, assumptions and judgments used in preparing the financial statements 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. The judgment that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year is discussed below. Impairment of loans and receivables The Fund reviews its loans and receivables at each reporting date to assess whether an allowance for impairment should be recorded in the statement of total comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to age of balances, financial status of counterparties, payment behaviour and known market factors. The Fund reviews the age and status of receivables, and identifies accounts that are to be provided with allowance on a regular basis. Term loans, which are classified under Loans and receivables, amounted to P59,007,491 and P109,680,490 as at December 31, and, respectively. No impairment loss recognized for the years ended December 31,, and. Note 5 Cash and cash equivalents The account at December 31 consists of: Shortterm time deposits Special savings deposits (BSP SDA) Regular savings deposits 1,930,004,120 9,016,438 1,939,020, ,000, ,000,000 17,730, ,730,887 Special savings deposits consist of Bangko Sentral ng Pilipinas ( BSP ) Special Deposit Accounts ( SDA ) bearing an interest rate of 4.0% in. In, the BSP limited access to its SDA facility to trust accounts and unit investment trust funds. Shortterm time deposits bear interest rates ranging from 0.38% to 1.50% ( 3.70% to 4.13%). Interest income earned from cash and cash equivalents amounts to P11,529,321 ( P2,067,435; P1,418,373). Note 6 Financial assets at fair value through profit or loss The account at December 31 consists of held for trading investments in: Government securities Corporate bonds Interest rates (%) Amount ,638, ,638,187 Interest rates (%) Amount 69,458,090 19,334,128 88,792,218 The Fund generated interest income mainly from its investments in government securities and loan instruments and gains resulting from disposals and movements in the market value of its financial assets at fair value through profit or loss. The maturity pattern of government securities follows: Due in one year or less Due after one year 560,638,187 19,334,128 69,458, ,638,187 88,792,218 Details of net unrealized and realized gains on financial assets at fair value through profit or loss follow: Net realized gains Net unrealized (losses) gains 12,223,032 (1,664,043) 10,558,989 13,666,008 1,248,762 14,914,770 3,599,015 (649,465) 2,949,550 Interest income earned from financial assets at fair value through profit or loss amounts to P10,837,909 ( 5,056,535; 2,518,154). Note 7 Loans and receivables The account as at December 31, consists of unsecured term loans amounting to P59,007,491( P109,680,490). Term loans represent debts issued by certain Philippine counterparty. The term loans carry interest rates ranging from 8.66% to 11.76% ( 4.38% to 8.67%). The maturity pattern of loans and receivables follows: 72 ALFM MUTUAL FUNDS annual Report 73

39 Due in one year or less Due after one year through five years 50,000,000 59,077,491 59,680,490 59,077, ,680,490 Interest income earned from loans and receivables amounts to P7,227,100 ( P6,033,968; P3,948,209). Note 8 Accrued expenses The account at December 31 consists of the following: Note Management fee payable 12 Withholding tax on management fees Note 9 Income taxes 1,340, ,007 1,799, , , ,668 Provision for income tax substantially represents tax withheld for income subject to final tax. The Fund did not recognize deferred income tax assets on NOLCO in view of its limited capacity to generate sufficient taxable income to allow the utilization of NOLCO. The bulk of the Fund s income is subject to final tax. The details of the Fund s unused NOLCO at December 31 are as follows: Year of Incurrence 2009 Year of Expiration Income tax rate Unrecognized deferred income tax assets Note 10 Redeemable shares Number of shares Par value per share Amount Profit for the year Weighted average number of shares outstanding during the year Basic and diluted earnings per share 12,929,442 1,305,667 14,235,109 30% 4,270,533 1,305, ,576 1,415,243 30% 424,573 The details of the Fund s authorized shares at December 31 follow: 20 million P10 P200 million The movement in the number of redeemable shares for the years ended December 31 follow: Issued and outstanding, January 1 Redemptions of shares 9,579,948 27,645,301 (17,387,727) 19,837,522 3,034,377 14,377,473 (7,831,902) 9,579,948 2,716,649 2,302,803 (1,985,075) 3,034,377 Details of issuances and redemptions of the Fund s redeemable shares for the years ended December 31 follow: Issuances of shares Redemptions of shares 3,425,321,472 2,279,003,750 1,550,045, ,626, ,127, ,319,445 As at December 31,, the Fund has 2,232 shareholders ( 958). The Fund s Board of Directors approved another increase in Fund s authorized shares from 10 million to 20 million shares with par value of P10 per share on April 20, which was approved by SEC on November 12,. Deposits for future subscriptions Subject to the approval of the SEC, the Fund s Board of Directors approved an increase in the Fund s authorized shares from 20 million to 50 million with par value of P100 per share. The Fund received cash from various investors as deposits for future subscriptions amounting to P349,999,813. The deposit is presented as liability as the Fund has sufficient unissued redeemable shares to cover the amount of subscription. The Fund has yet to receive the approval from the SEC. Earnings per share Earnings per share is calculated by dividing net income by the weighted average number of outstanding redeemable shares during the year. The information used in the computation of basic and diluted earnings for the years ended December 31 follow: 21,124,180 19,399,815 7,031,956 12,416,025 6,307,163 2,875, Note 11 Net Asset Value (NAV) for share subscriptions and redemptions The consideration received or paid for redeemable shares issued or repurchased respectively is based on the value of the Fund s NAV per share at the date of the transaction. The total equity as shown in the statements of financial position represents the Fund s NAV based on PFRS ( PFRS NAV ). In accordance with the provisions of the Fund s prospectus and risk management policy, the Fund sets up provision for market risk on its investment portfolio which is deducted from the PFRS NAV to arrive at the Fund s NAV for purposes of share subscriptions and redemptions ( trading NAV ). The policy which has been adopted for the best interest of the Fund s investors is designed to protect the Fund against sharp fluctuations, thereby allowing the Fund to meet its investment objective, which is to generate a steady stream of income through investments in a diversified portfolio of highgrade fixedincome instruments. The allowance for market risk shall be subject to the BOD s periodic review. The movement in allowance for market risk follows: At January 1 Provisions for market risk during the year At December 31 1,096, ,229 (506,090) 696, ,686 1,096,776 Reconciliation of the Fund s PFRS NAV to its trading NAV at December 31 is provided below: PFRS NAV Allowance for market risk Deposits for future stock subscriptions Trading NAV 2,218,974,963 (590,686) 349,999,813 2,568,384,090 1,051,533,061 (1,096,776) 1,050,436,285 The Fund computes its NAV per share by dividing the trading net asset value as at reporting date by the number of issued and outstanding shares during the year including shares for issuances covered by deposits for future subscriptions. The trading NAV per share at December 31 is calculated as follows: Note Trading NAV Total number of shares issued and outstanding Total number of shares covered by deposits for future subscriptions Total number of shares Trading NAV per share ,568,384,090 1,050,436,285 19,837,522 9,579,948 3,135,037 22,972, ,579, As disclosed in Note 1, the Fund is an openend investment company which stands ready at any time to redeem its outstanding shares at a value defined under its prospectus (trading NAV). Any changes in the value of the shareholders investment are reflected in the increase or decrease in the Fund s NAV. The Fund s retained earnings may exceed 100% of its paidup capital from time to time. This, however, is not construed as a compelling factor for the Fund to declare dividends. Such retained earnings may be used for reinvestment and will be converted into realized profits by the shareholders upon redemption of their shareholdings in the Fund. Note 12 Related party transactions BPI Investment Management, Inc. (BPI Investment) and BPI Asset Management Trust Group (BPI AMTG) were designated as fund manager and investment advisor of the Fund, respectively. As fund manager, BPI Investment shall formulate and implement the investment strategy, provide and render management, technical, and administrative services, whereby authorizing BPI Investment to purchase and sell investment securities for the account of the Fund. In consideration for the above management, distribution and administration services, the Fund pays BPI Investment a fee of not more than 0.375% p.a. of the Fund s average trading NAV. The Fund s investment advisor is tasked to render services which include investment research and advise; the preparation of economic, industry, market, corporate, and security analyses; and assistance and recommendations in the formulation of investment guidelines. In consideration for the above advisory services, the Fund pays BPIAMTG a fee of not more than 0.375% p.a. of the Fund s average trading NAV. The Fund has distribution agreements with subsidiaries of BPI, namely, BPI Investment, BPI Capital Corporation (BPI Capital), and BPI Securities Corporation (BPI Securities). Under the terms of the agreement, BPI Investment, BPI Capital and BPI Securities are appointed as codistributors to perform principally all related daily functions in connection with the marketing and the growth of the level of assets of the Fund. BPI and its thrift bank subsidiary, BPI Family Bank, Inc. act as the receiving banks for the contributions and withdrawals related to the Fund as transacted by the distributors and shareholders. The table below summarizes the Company s transactions and balances with its related parties: December 31, BPI Investment BPI AMTG December 31, BPI Investment BPI AMTG Transactions 5,169,756 5,169,755 10,339,511 Transactions 2,184,751 2,184,751 4,369,502 Outstanding balances Terms and conditions 670,007 The outstanding balance 670,007 is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. 1,340,014 Outstanding balances Terms and conditions 243,082 The outstanding balance 243,081 is unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. 486,163 December 31, BPI Investment BPI AMTG Transactions 945, ,524 1,891,049 Outstanding balances Terms and conditions 75,900 The outstanding balance is 75,899 unsecured, unguaranteed, noninterest bearing and payable in cash a month after the management fee is incurred. 151,799 The directors and officers of the Fund are entitled to receive a per diem allowance in the amount of P10,000 for every Board meeting attended. Excluded in the payment of per diem allowances are directors and officers of the Fund who are also officers of the Fund Manager or the Investment Advisor. For the year ended December 31,, total remunerations paid to directors and officers charged in profit or loss amounted to P120,000 ( P141,250; P236,500). As at reporting dates, there were no outstanding balances related to these fees. Note 13 Supplementary information required by Bureau of Internal Revenue The following information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. I. Supplementary information required by Revenue Regulations No Below is the additional information required by RR No that is relevant to the Fund. Documentary stamp taxes Total documentary stamp taxes paid on share subscriptions for the year ended December 31, amounted to P1,551,645. There are no documentary stamp taxes accrued as at December 31,. Withholding taxes Withholding taxes for the year ended December 31, amounted to P1,413,709, P459,007 of which is outstanding at December 31,. All other local and national taxes All other local and national taxes paid for the year ended December 31, consist of: Municipal and other related taxes Community tax Others Total Amount 64,311 10,500 56, ,908 There are no other local and national taxes accrued as at December 31,. Tax assessments and cases As at December 31,, open taxable years are, and The Fund has not received any Final Assessment Notice from the BIR. The Fund is also not a party to any outstanding tax case. II. Supplementary information required by Revenue Regulations No. 19 The Fund s schedules for the year ended December 31, follow: Income Fund s main income primarily pertains to interest income, dividend income and realized gain/loss on sale of marketable securities. Interest income Subject to 20% Net realized fair value gains/(losses) Subject to 0% Other income Subject to 30% Cost of services Taxes and licenses Taxable amount 29,594,331 10,558,989 67,611 40,220,931 Deductible amount 10,339,511 1,682,553 12,022,064 The above direct charges are subject to the regular tax rate of 30%. Itemized deductions Other professional fees Miscellaneous Deductible amount 808, , ,990 The above itemized deductions are subject to the regular tax rate of 30%. Taxes and licenses Details of the Fund s taxes and licenses are presented in Section I of this note. Other information All other information prescribed to be disclosed by the BIR has been included in this note. 74 ALFM MUTUAL FUNDS Board of Directors Romeo L. Bernardo CHAIRMAN annual Report Sherisa P. Nuesa PRESIDENT Mario T. Miranda DIRECTOR Maria Theresa MarcialJavier DIRECTOR John Philip S. Orbeta director 75

40 Investment Advisor Officers (02) Best Fund House in the Philippines (awarded for the third year) Asia Asset Management Best of the Best Awards Best Asset Management Company in the Philippines (awarded for the third year) The Asset Triple A Investment Awards Trusted Brand for Investment Fund Category (awarded for the seventh year) Reader s Digest Distributors BPI Capital Corporation (LR) Mario T. Miranda, Director; Maria Theresa MarcialJavier, Vice Chairman; Fernando J. Sison III, Treasurer; Romeo L. Bernardo, Chairman; Elvie Y. Reyes, Compliance Officer; Sherisa P. Nuesa, Director; Atty. Sabino B. Padilla IV, Corporate Secretary; and John Philip S. Orbeta, Director (02) to 35 and (02) and BPI Securities Corporation (02) or 9192 Citicorp Financial Services & Insurance Brokerage Philippines, Inc. * (02) and *For ALFM Growth Fund and Philippine Stock Index Fund annual Report 77

41 17 th Floor BPI Building Ayala Avenue corner Paseo de Roxas, 1226 Philippines Tel.: (63 2) Web: or twitter.com/alfmmutualfunds youtube.com/alfmmutualfunds