ANNUAL AUDITREPORT. on the. PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines)

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1 Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City ANNUAL AUDITREPORT on the PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) For the Year Ended December 31, 2016

2 EXECUTIVE SUMMARY A. Introduction Philippine National Oil Company (PNOC) 1. PNOC was created through Presidential Decree No. 334 on November 9, 1973 to provide and maintain an adequate and stable supply of oil. Focusing its efforts and resources in learning the ropes of the petroleum industry, PNOC rose to occupy market leadership in an industry thought to be the domain of multinationals. Its charter was amended in December 1992 to include energy exploration and development. It initiated the exploration of the country s indigenous oil and non-oil energy resources. Its purpose is to build an energy sector that will bring energy independence to the country. Eventually, PNOC expanded its operations to include total energy development, including indigenous energy sources like oil and gas, coal, and geothermal. 2. PNOC s vision is to be a world class organization that executes the country s energy strategy toward self-sufficiency, sustainability, stability of prices, and security of supply by Through the efforts and initiative of world class professionals, PNOC is committed to develop and implement projects and programs in a financially prudent and responsible manner aimed at increasing selfsufficiency level in oil, gas and other energy sources; ensure security of supply; contributing to energy price stability and affordability; foster sustainable and environmentally-friendly sources of energy; and promote and maintain the highest standard of service and corporate governance. 3. PNOC has two subsidiaries working together to realize PNOC s vision: PNOC Exploration Corporation and PNOC Renewables Corporation. Scope and Objectives of Audit 4. The audit was conducted to determine the (a) level of assurance that may be placed on the Management s assertions on the financial statements; (b) the propriety of transactions as well as compliance with existing rules and regulations and Management s policies; and (c) the extent of the implementation of prior years audit recommendations. 5. The audit covered the examination on a test basis of the accounts and financial transactions and operations of PNOC for the period January 1 to December 31, 2016 in accordance with Philippine Public Sector Standards on Auditing. The audit also involved performing procedures to ascertain the propriety of financial transactions and compliance of the Corporation with prescribed laws, rules and regulations. i

3 B. Financial Highlights (In Million Pesos) The operating budget of PNOC for the year 2016 was P1.213 billion. Twenty one percent of the budget, equivalent to P251 million, was utilized during the year. The financial position and results of operations of PNOC are summarized as follows: Financial Position Increase (Decrease) Assets 40,534 40, Liabilities 3,487 3,617 (130) Equity 37,047 36, Results of Operations Increase (Decrease) Revenues 1,253 2,060 (807) Operating expenses Income from Operations 969 1,796 (827) Other Income 8 23 (15) Net Profit Before Tax 977 1,819 (842) Income Tax 8 19 (11) Profit 969 1,800 (831) Other Comprehensive Income(Loss) 0 (1) 1 Comprehensive Income for the Period 969 1,799 (830) PNOC remitted a total of P272 million in dividends to the Bureau of Treasury during the year C. Auditor s Opinion The Auditor rendered an unqualified opinion on the fairness of the presentation of the financial statements of the PNOC as at December 31, 2016 and 2015 as stated in the Independent Auditor s Report in Part I. D. Significant Audit Observations and Recommendations Although the Auditor rendered an unqualified opinion, there are significant audit observations that were noted in the review of transactions. These, together with the audit recommendations, are presented below. Details are in Part II. 1. Sixteen land properties amounting to P million recorded under account Investment Property and five land properties amounting to P million ii

4 recorded under the account Property and Equipment were not presented at their recoverable amounts of P million and P million, respectively, due to the non-recognition of impairment loss amounting to P million for Investment Property and P million for Property and Equipment, contrary to Philippine Accounting Standards (PAS) 36. Recommendation: Recognize the impairment loss of P55,815,288 for the 16 land properties recorded under Investment Property and P66,567,600 for five land properties recorded under Property and Equipment in compliance with PAS The accuracy of PPE with net book value of P million as of December 31, 2016 could not be ascertained due to non-compliance with asset classification and capitalization policy pursuant to COA Circular No re: adoption of the Revised Chart of Accounts (RCA) for Government Corporations. Recommendation: Comply with COA Circular No relative to the adoption of the Revised Chart of Accounts (RCA) for Government Corporations by September 30, The collectability of the year-end balance of Receivables from Power Sector Assets and Liabilities Management (PSALM) Corporation in the amount of P million was doubtful as this was not recognized and actually inexistent as payable per confirmation with PSALM Corporation. Recommendation: File the appropriate legal action against PSALM. 4. Loans Receivable from the Natural Resources Development Corporation (NRDC) in the amount of P million had been dormant for more than eight years. Recommendations: a. Come up with an agreement with NRDC on the computation of interest to arrive at the total amount of receivables; and b. Coordinate with NRDC for the issuance of Board Resolution assigning its future dividends from PMDC to PNOC as partial settlement of its long overdue accounts with PNOC. 5. Disbursements incurred by PNOC-Renewables Corporation (RC) amounting to P million for the implementation of the Barangay Electrification Project, a project entered into by and between DOE and PNOC, were not recognized as iii

5 payables to PNOC-RC by PNOC, thus, understating the liability account by the same amount. Recommendation: Recognize the payables to PNOC-RC amounting to P million and settle the account as soon as possible. 6. The accuracy and validity of performance bond/security and bid security in the amount of P545,993 and P235,295, respectively, recorded under Other Accounts Payable account could not be ascertained because the accounts have been outstanding for one to eight years. Recommendations: a. Make an inventory of completed contracts and verify whether the corresponding Certificates of Final Acceptance were issued; b. Thereafter, inform the concerned contractors/suppliers about their outstanding performance bonds and bid securities in accordance with Section 39.5 of RA 9184; and c. For performance bond/security and bid security that remained unclaimed or dormant for over two years, cause their reversion to miscellaneous income. 7. Investment Property as of December 31, 2016 amounting to P1.689 billion consisted of 23 lots with an area of 718,056 square meters with Transfer Certificate of Titles (TCTs) but not in the name of PNOC, and of 44 lots amounting to P million with an area of 241,741 square meters without TCTs in the name of PNOC. Also, discrepancies existed between the records being maintained by Estate Management Department (EMD) and Accounting Department (AD) on: a) for land area consisting of 23 lots, per EMD records, the total area was 516,884 sq.m., while per AD records, the total area was 1,463,776, or a difference of 946,892 square meters; and b) four TCTs with an area of 9,517 square meters and a total cost of P included in the accounting records but not included in the EMD records. Further, PNOC incurred additional expenses of P9.554 million in CY 2016 for the payment of real property taxes and security services for various lots which remained idle or unutilized for years with an area of million square meters and appraised value of P1.683 billion. Recommendations: a. Cause the completion of processing the titles of 67 lots to ensure the proper transfer of ownership to PNOC; iv

6 b. Document the inventory of land to confirm and validate the TCTs establishing the required government land registrations and PNOC ownership over-all Investment Properties, to be able to check as well as the status of the land if these are not public domain and therefore, not outside the commerce of men; c. Require the reconciliation of records between the Estate Management Division and Accounting Department to determine the actual area under paragraphs 7.4 (c) and 7.4 (d) and make the necessary adjustments, where appropriate; d. Maximize the use of idle lots and exert extra efforts to clear the area of unauthorized settlers in coordination with concerned government agencies; and e. Study and submit PNOC s marketing strategy to hasten the disposal of the idle assets and to explore possibilities to generate income from their use while awaiting disposal for the purpose of optimizing their values and/or to at least recover the amount invested by PNOC. E. Summary of Total Suspensions, Disallowances and Charges There were no issued Notices of Suspension, Disallowance and Charge during the year. There were also no outstanding suspension, disallowance and charge pertaining to prior years as of December 31, F. Status of Implementation of Prior Years Recommendations Out of the 25 audit recommendations embodied in the previous years Annual Audit Reports, ten were fully implemented and 15 were partially implemented. Details are presented in Part III of this Report. v

7 TABLE OF CONTENTS Page Part I AUDITED FINANCIAL STATEMENTS Independent Auditor s Report 1 Statement of Management s Responsibility 3 Statement of Financial Position 5 Statement of Comprehensive Income 6 Statement of Changes in Equity 7 Statement of Cash Flows 8 Notes to Financial Statements 9 Part II AUDIT OBSERVATIONS AND RECOMMENDATIONS 52 Part III STATUS OF IMPLEMENTATION OF PRIOR YEARS AUDIT RECOMMENDATIONS 87

8 PART I - AUDITED FINANCIAL STATEMENTS

9 PART II AUDIT OBSERVATIONS AND RECOMMENDATIONS

10 PART III STATUS OF IMPLEMENTATION OF PRIOR YEARS AUDIT RECOMMENDATIONS

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15 PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) STATEMENT OF FINANCIAL POSITION December 31, 2016 (In Philippine Peso) ASSETS Note Cash and cash equivalents 4 1,129,028, ,766,088 Receivables 5 174,922, ,382,638 Held-to-maturity investments 6 6,488,367,713 6,991,016,206 Investments in subsidiaries and affiliates 7 5,056,206,406 5,056,206,406 Investment property 8 11,389,321,206 11,584,239,935 Property and equipment 9 376,904, ,280,679 Banked gas inventory 10 13,789,376,675 13,789,376,675 Other assets 11 1,786,697,339 1,825,674,637 Deferred tax assets ,121, ,258,983 TOTAL ASSETS 40,533,947,390 40,202,202,247 LIABILITIES AND EQUITY LIABILITIES Accounts payable and accrued expenses ,402, ,447,116 Dividends payable ,637, ,799,184 Deferred tax liabilities 20 2,788,160,906 2,788,779,231 Other credits ,493, ,412,833 TOTAL LIABILITIES 3,486,693,667 3,617,438,364 EQUITY 14 37,047,253,723 36,584,763,883 TOTAL LIABILITIES AND EQUITY 40,533,947,390 40,202,202,247 See accompanying Notes to Financial Statements. 5

16 PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) STATEMENT OF COMPREHENSIVE INCOME For the year ended December 31, 2016 (In Philippine Peso) REVENUES Note Dividend Income ,695,710 1,507,889,673 Rent Income 306,822, ,561,159 Interest Income 212,661, ,816,183 GROSS REVENUES 1,253,179,660 2,060,267,015 OPERATING EXPENSES 16 (284,360,557) (263,738,739) INCOME FROM OPERATIONS 968,819,103 1,796,528,276 FOREIGN EXCHANGE GAIN (LOSS) 17 7,448 5,554 OTHER INCOME 18 7,954,544 23,162,716 NET PROFIT BEFORE TAX 976,781,095 1,819,696,546 INCOME TAX 19 Current (20,532,311) (22,495,670) Deferred 12,486,311 3,173,154 PROFIT 968,735,095 1,800,374,030 OTHER COMPREHENSIVE INCOME (LOSS) Changes in Fair Value of Available-for-Sale Investments, net 45,000 (1,051,250) COMPREHENSIVE INCOME FOR THE PERIOD 968,780,095 1,799,322,780 See accompanying Notes to Financial Statements. 6

17 PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) STATEMENT OF CHANGES IN EQUITY For the year ended December 31, 2016 (In Philippine Peso) CAPITAL RETAINED TOTAL STOCK EARNINGS EQUITY (Note 14.1) (Note 14.2) Balances, January 1, ,114,595,519 34,693,813,216 37,808,408,735 Comprehensive income for ,799,322,780 1,799,322,780 Cash dividend for 2015 net earnings 0 (271,799,184) (271,799,184) Extraordinary cash dividend 0 (2,000,000,000) (2,000,000,000) Cash dividend directly remitted to the National Government by: PNOC Exploration Corporation 0 (750,168,448) (750,168,448) PNOC Alternative Fuels Corp. 0 (1,000,000) (1,000,000) Balances, December 31, ,114,595,519 33,470,168,364 36,584,763,883 Balances, January 1, ,114,595,519 33,470,168,364 36,584,763,883 Comprehensive income for ,780, ,780,095 Cash dividend for 2016 net earnings 0 (143,637,169) (143,637,169) Cash dividend directly remitted to the National Government by: PNOC Exploration Corporation 0 (359,601,386) (359,601,386) PNOC Alternative Fuels Corp. 0 (2,000,000) (2,000,000) Adjustment on booking of revaluation of land 0 (1,051,700) (1,051,700) Balances, December 31, ,114,595,519 33,932,658,204 37,047,253,723 See accompanying Notes to Financial Statements. 7

18 PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) STATEMENT OF CASH FLOWS For the year ended December 31, 2016 (In Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers, subsidiaries and employees 589,799, ,766,735 Cash paid to suppliers, subsidiaries and employees (300,208,128) (182,605,503) Net cash from operating activities 289,591, ,161,232 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Investment in treasury bonds - net 488,050, ,000,000 Cash dividends from subsidiaries/associates 372,094, ,721,226 Loan drawdowns to subsidiaries 0 (15,845,000) Net proceeds from disposal of assets 10,000,000 1,905,877 Capital expenditures (10,674,232) (17,806,439) Net cash used in investing activities 859,470,092 1,043,975,664 CASH FLOWS FROM FINANCING ACTIVITIES Payment of cash dividend to National Government (271,799,184) (3,073,899,265) Net cash used in financing activities (271,799,184) (3,073,899,265) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 877,262,606 (1,611,762,369) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 251,766,088 1,863,528,457 CASH AND CASH EQUIVALENTS, END 1,129,028, ,766,088 8

19 PHILIPPINE NATIONAL OIL COMPANY (A Corporation Wholly-Owned by the Government of the Republic of the Philippines) NOTES TO FINANCIAL STATEMENTS (In Philippine Peso) 1. BACKGROUND The Philippine National Oil Company (herein referred to as PNOC or the Company ) was created through Presidential Decree No. 334 on November 9, 1973, to provide and maintain an adequate supply of oil. Its charter was amended to include energy exploration and development. Forty three years after its creation, the Company serves as the key institution in the exploration, development and utilization of indigenous energy sources. Development in the country, as well as the global front, makes it imperative for the Company to get more involved in new and renewable energy activities and projects. The registered office address is PNOC Building 6, Energy Center, Rizal Drive, Bonifacio Global City, Fort Bonifacio, Taguig City. 2. BASIS OF FINANCIAL STATEMENTS PREPARATION The principal accounting policies applied in the preparation of the financial statements are stated below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are presented in Philippine peso, which is the Company s functional currency. All values are rounded to the nearest peso, except when otherwise indicated. The financial statements of the Company have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS are adopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board (IASB). These consist of the following: (a) PFRS - correspond to International Financial Reporting Standards; (b) Philippine Accounting Standards (PAS) - correspond to International Accounting Standards; and (c) Philippine Interpretations to existing standards - correspond to Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretation Committee (SIC) of the IASB; these include Interpretations developed by the Philippine Interpretation Committee (PIC). The financial statements of the Company have been prepared using the measurement specified by PFRS for each type of asset, liability, income and expense. These financial statements have been prepared on the historical cost basis except for trade and other receivables and property and equipment. The measurement bases are more fully described in the accounting policies that follow: trade and other receivables at fair value, net of allowance for doubtful account (see Note 5); property and equipment at cost, net of accumulated depreciation and amortization (see Note 9). 9

20 Standards and amendments effective before or on December 31, 2016 Amendments to PFRS 10 Consolidated Financial Statements, PFRS 12 Disclosure of Interests in Other Entities and PAS 28 Investments in Associates and Joint ventures: The amendments clarify a number of aspects of PFRS 10, PFRS 12 and PAS 28 in relation to the investment entities consolidation exception: (i) How intermediate parent entities should apply the general scope exemption from preparing consolidated financial statements provided by PFRS 10.4, when the ultimate parent is an investment entity The amendments clarify that so long as the entity s ultimate (or intermediate) parent produces financial statements that are in compliance with PFRS 10 (including an investment entity that accounts for its interests in all of its subsidiaries at fair value rather than consolidating them), the exemption is available to the intermediate parent entity from presenting its own consolidated financial statements (so long as the other criteria of PFRS 10.4(a) have been met). (ii) How an investment entity parent should account for a subsidiary that provides services related to its investment activities and is also itself an investment entity The amendments clarify that an investment entity parent consolidates a subsidiary only when: - The subsidiary is not itself an investment entity, and - The subsidiary s main purpose is to provide services that relate to the investment entity s investment activities. (iii) How PFRS 12 should be applied to an investment entity The amendments clarify that an investment entity that prepares financial statements in which all of its subsidiaries are measured at fair value through profit or loss (FVTPL) is required to present the disclosures relating to investment entities as required by PFRS 12. (iv) How a non-investment entity should account for its interests in any associates or joint ventures that are investment entities The amendments clarify that for an entity that is not itself an investment entity but has an interest in an associate or joint venture that is an investment entity, the noninvestment entity may, when applying the equity method, retain the fair value measurement applied by the investment entity associate or joint venture to account for its own interests in its subsidiaries. Amendments to PFRS 11 Joint Arrangements: The amendments require an entity to apply all of the principles of PFRS 3 Business Combinations when it acquires an interest in a joint operation that constitutes a business as defined by PFRS 3. The amendment also includes two new Illustrative Examples: - Example 7: Accounting for acquisitions of interests in joint operations in which the activity constitutes a business. - Example 8: Contributing the right to use know-how to a joint operation in which the activity constitutes a business. 10

21 A consequential amendment to PFRS 1 First-time Adoption of International Financial Reporting Standards has also been made, to clarify that the exemption from applying PFRS 3 to past business combinations upon adoption of PFRS also applies to past acquisitions of interests in joint operations in which the activity of the joint operation constitutes a business. PFRS 14 regulatory Deferral Accounts: PFRS 14 is an interim standard, pending the outcome of the PASB s more comprehensive Rate-regulated Activities project, which was re-opened in September In many countries, industry sectors (including utilities such as gas, electricity and water) are subject to rate regulation where governments regulate the supply and pricing. This can have a significant effect on the amount and timing of an entity s revenue. Some national GAAPs require entities that operate in industry sectors subject to rate regulation, to recognize associated assets and liabilities. The scope of PFRS 14 is narrow, with this extending to cover only those entities that: - Are first-time adopters of PFRS - Conduct rate regulated activities - Recognize associated assets and/or liabilities in accordance with their current national GAAP. Entities within the scope of PFRS 14 would be afforded an option to apply their previous local GAAP accounting policies for the recognition, measurement and impairment of assets and liabilities arising from rate regulation, which would be termed regulatory deferral account balances. Any regulatory deferral account balances, and their associated effect on profit or loss, would be recognized and presented separately from other items in the primary financial statements. As a result, for those entities that elect to adopt PFRS 14, all other line items and subtotals would exclude the effects of regulatory deferral accounts, meaning that they would be comparable with other entities that report in accordance with PFRS but do not apply PFRS 14. Application guidance is included in PFRS 14 in respect of other PFRSs that would need to be considered alongside the previous national GAAP accounting requirements in order for these regulatory deferral accounts to be accounted for appropriately in an entity s PFRS financial statements, including: - PAS 10 Events after the Reporting Period - PAS 12 Income Taxes - PAS 28 Investments in Associates and Joint Ventures - PAS 33 Earnings per Share - PAS 36 Impairment of Assets - PFRS 3 Business Combinations - PFRS 5 Non-current Assets Held for Sale and Discontinued Operations - PFRS 10 Consolidated Financial Statements - PFRS 12 Disclosure of Interests in Other Entities. Amendments to PAS 1 Presentation of Financial Statements: The amendments made to PAS 1 include: - Materiality: Aggregation or disaggregation should not obscure useful information. Materiality applies to each of the primary financial statements, the notes and each specific disclosure required by PFRSs. 11

22 - Line items in primary financial statements: Additional guidance for the line items required to be presented in primary statements, in particular that it may be appropriate for these to be disaggregated, and new requirements regarding the use of subtotals. - Notes to the financial statements: Determination of the order of the notes should include consideration of understandability and comparability of financial statements. It has been clarified that the order listed in PAS 1.114(c) is illustrative only. - Accounting policies: Removal of the examples in PAS in respect of income taxes and foreign exchange gains and losses. In addition, the following amendments to PAS 1 were made which arose from a submission received by the PFRS Interpretations Committee: - Equity accounted investments: An entity s share of other comprehensive income will be split between those items that will and will not be reclassified to profit or loss, and presented in aggregate as single line items within those two groups. Amendments to PAS 16 Property, Plant and Equipment and PAS 38 Intangible Assets Clarification of Acceptable Methods of Depreciation and Amortization PAS 16 has been amended to prohibit the use of revenue-based methods of depreciation for items of property, plant and equipment. This is because the revenue generated by an activity that includes the use of an item of property, plant and equipment generally reflects factors other than the consumption of the economic benefits of the item, such as: - Other inputs and processes - Selling activities and changes in sales - Volumes and prices, and - Inflation. Guidance on depreciation has been expanded to state that expected future reductions in the selling price of items produced by an item of property, plant and equipment could indicate technical or commercial obsolescence (and therefore a reduction in the economic benefits embodied in the item), rather than a change in the depreciable amount or period of the item. PAS 38 has been amended to incorporate a rebuttable presumption that Amortization based on revenue is not appropriate. The presumption can be rebutted if either: - The intangible asset is expressed as a measure of revenue; or - Revenue and the consumption of the economic benefits of the intangible asset are highly correlated. Amendments to PAS 16 Property, Plant and Equipment and PAS 41 Agriculture: The amendments extend the scope of PAS 16 to include bearer plants and define a bearer plant as a living plant that: - Is used in the production process of agricultural produce, - Is expected to bear produce for more than one period; and - Has a remote likelihood of being sold (except incidental scrap sales). The changes made result in bearer plants being accounted for in accordance with PAS 16 using either: - The cost model, or - The revaluation model. As such, bearer plants are no longer within the scope of PAS 41. However, the agricultural produce of bearer plants remains within the scope of PAS

23 The amendments include the following transitional reliefs for the purposes of first time application: - Deemed cost exemption Entities are allowed to use the fair value of the bearer plants at the beginning of the earliest period presented as deemed cost for PAS 16 purposes. - Disclosures Quantitative information describing the effect of the first time application as required by PAS 8.28(f) is not required for the current reporting period, but is required for each prior period presented. Amendments to PAS 27 Separate Financial Statements: The amendments include the introduction of an option for an entity to account for its investments in subsidiaries, joint ventures, and associates using the equity method in its separate financial statements. The accounting approach that is selected is required to be applied for each category of investment. Before the amendments, an entity accounted for its investments in subsidiaries, joint ventures or associates either at cost or in accordance with PFRS 9 Financial Instruments (or PAS 39 Financial Instruments: Recognition and Measurement for those entities that have yet to adopt PFRS 9). The option to present its investments using the equity method result in the presentation of a share of profit or loss, and other comprehensive income, of subsidiaries, joint ventures and associates with a corresponding adjustment to the carrying amount of the equity accounted investment in the statement of financial position. Any dividends received are deducted from the carrying amount of the equity accounted investment, and are not recorded as income in profit or loss. A consequential amendment was also made to PAS 28 Investments in Associates and Joint Ventures, to avoid a potential conflict with PFRS 10 Consolidated Financial Statements for partial sell downs. Amendments to PAS 34 Interim Financial Reporting - Disclosure of information elsewhere in the interim financial report: PAS 34 requires certain disclosures to be presented in the notes to the interim financial report, unless they are presented elsewhere in the interim financial report (such as a front end management report). If the disclosures are presented elsewhere in the interim financial report, such as in the management commentary or the risk report of an entity, a cross reference must be made from the notes to the interim financial statements to where the disclosures have been made. Further, if the disclosures are contained in a separate document from the interim report, that document needs to be available on the same terms and at the same time as the interim report itself. Annual Improvements to PFRSs ( Cycle) PFRS 5 Non-current Assets Held for Sale and Discontinued Operations - Changes in methods of disposal: The amendment clarifies that the reclassification of an asset or disposal group from being held for sale to being held for distribution to owners, or vice versa is considered to be a continuation of the original plan of disposal. Upon reclassification, the classification, presentation and measurement requirements of PFRS 5 are applied. If an asset ceases to be classified as held for distribution to owners, the requirements of PFRS 5 for assets that cease to be classified as held for sale apply. PFRS 7 Financial Instruments: Disclosures: The amendments to PFRS 7 dealt with two aspects: servicing of contracts and the applicability in interim financial statements of the offsetting amendments made to PFRS 7 in December (i) Servicing contracts 13

24 The PASB clarified the circumstances in which an entity has continuing involvement from the servicing of a transferred asset. Continuing involvement exists if the servicer has a future interest in the performance of the transferred financial asset. Examples of situations where continuing involvement exist are where a transferor s servicing fee is: - A variable fee which is dependent on the amount of the transferred asset that is ultimately recovered; or - A fixed fee that may not be paid in full because of non-performance of the transferred financial asset. The amendment is required to be applied retrospectively in accordance with PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, the amendment does not need to be applied for any period beginning before the annual period in which the entity first applies the amendments. A consequential amendment has been made to PFRS 1 First-time Adoption of International Financial Reporting Standards, in order that the same transitional provision applies to first time adopters. (ii) Applicability of offsetting in condensed interim financial statements A further amendment to PFRS 7 has clarified that the application of the amendment Offsetting Financial Assets and Financial Liabilities (Amendments to PFRS 7) issued in December 2011 is not explicitly required for all interim periods. However, it is noted that in some cases these disclosures may need to be included in condensed interim financial statements in order to comply with PAS 34. PAS 19 Employee benefits - Discount rate - regional market issue: The guidance in PAS 19 has been clarified and requires that high quality corporate bonds used to determine the discount rate for the accounting of employee benefits need to be denominated in the same currency as the related benefits that will be paid to the employee. Entities are required to apply the amendment from the earliest comparative period presented in the financial statements, with initial adjustments being recognized in retained earnings at the beginning of that period. Standards and amendments effective after December 31, 2016 PFRS 9 Financial Instruments (2014): In July 2014 the PASB published PFRS 9 Financial Instruments (2014) which incorporated the final requirements on all three phases of the financial instruments projects classification and measurement, impairment, and hedge accounting. The original version of PFRS 9, issued in 2009, introduced new criteria for the classification and measurement of financial assets to be measured at amortized cost. In order to qualify for amortized cost measurement, a two stage test is applied. Firstly, the entity s business model must be to collect the contractual cash flows from the asset, rather than selling it to realize its fair value. Secondly, the asset must have contractual cash flows which are comprised solely of the principal amount due plus interest on the principal amount outstanding (which is only time value plus a margin for credit risk), often referred to as SPPI. Financial assets that pass those two tests are measured at amortized cost, with all others being measured at fair value. The criteria are applied to the assets as a whole, with the previous guidance in PAS 39 Financial Instruments: Recognition and Measurement for embedded derivatives no longer applying to financial assets. PFRS 9 (2014) introduces amendments to the previously finalized classification and measurement requirements for financial assets. A third measurement category has also been added for debt instruments FVTOCI. This new measurement category applies to 14

25 debt instruments that meet the Solely Payments of Principal and Interest (SPPI) contractual cash flow characteristics test and where the entity is holding the debt instrument to both collect the contractual cash flows and to sell the financial assets. Additional application guidance was included to clarify the requirements for contractual cash flows of a financial asset to be regarded as giving rise to payments that are SPPI. The classification and measurement requirements for financial liabilities were first added to PFRS 9 in 2010 and have been carried forward from PAS 39 largely unchanged, including a continuation of the requirement to separate embedded derivatives. However a significant change is that, if a financial liability is designated (under the option available in PFRS 9) as at fair value through profit or loss, changes in the fair value of that financial liability that are attributable to changes in the entity s own credit risk will typically be recorded in Other Comprehensive Income instead of profit or loss. This change has been made in order to prevent a deterioration in an entity s financial position (and hence credit status) resulting in gains being reported in profit or loss. The existing guidance for derecognition of financial assets and liabilities has been carried forward from PAS 39 unchanged, with some improvements to disclosure requirements being added to PFRS 7 Financial Instruments: Disclosures. For the impairment of financial assets, a new expected loss model in PFRS 9 (2014) replaces the incurred loss model in PAS 39. The new impairment requirements will affect all entities with financial assets that are not measured at fair value through profit or loss and are likely to bring significant changes. Provisions for trade receivables will need to be determined using a forward looking approach and, while for some entities the provisions may be relatively straightforward to calculate, the approach is significantly different and more complex in comparison to the incurred loss model, and new systems and processes may well be needed. For financial institutions the changes are likely to be very significant and require major changes to internal systems and processes in order to capture the required information. The hedge accounting requirements of PFRS 9 are also significantly different from those set out in PAS 39, and are designed to align hedge accounting more closely with entities risk management processes. In practice, it will be significantly more straightforward to apply hedge accounting under the new model and we expect that entities that have previously decided not to hedge account may do so in future. The effective date of the fully completed version of PFRS 9 (2014) is for periods beginning on or after January 1, 2018 with retrospective application. Early application is permitted. If an entity s date of initial application (the start of the period in which PFRS 9 is adopted) is before February 1, 2015, there is a choice of which version of PFRS 9 to adopt (2009, 2010, 2013 or 2014). The 2009 version covered the classification and measurement of financial assets only, the 2010 version added the classification and measurement of financial liabilities and derecognition, and the 2013 version added hedge accounting. In addition, there is an option to early adopt the own credit provisions for financial liabilities measured at fair value through profit or loss (FVTPL) under the fair value option without any of the other requirements of PFRS 9. This option will remain available until January 1, PFRS 15 Revenue from Contracts with Customers: In May 2014, the PASB published PFRS 15 Revenue from Contracts with Customers. The new Standard, which is fully converged with equivalent new US GAAP guidance issued at the same time, contains comprehensive guidance for accounting for revenue and will replace existing requirements which are currently set out in two existing standards (PAS 18 Revenue and PAS 11 15

26 Construction Contracts) and related interpretations (IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC 31 Revenue Barter Transactions Involving Advertising Services). PFRS 15 contains significantly more prescriptive and precise requirements in comparison with existing PFRS. In future, revenue will be recognized from the application of the following five steps: 1. Identify the contract 2. Identify the performance obligation(s) 3. Determine the transaction price 4. Allocate the transaction price to each performance obligation 5. Recognize revenue when each performance obligation is satisfied. The introduction of the new requirements means that for many entities the timing and profile of revenue recognition will change. In some areas the changes will be very significant and will require careful planning, including for commercial effects (such as compliance with bank covenants, performance based remuneration and business combinations). PFRS 15 is effective for periods beginning on or after January 1, 2017, with early application permitted. In May 2015 the PASB published Exposure Draft ED/2015/2 Effective Date of PFRS 15 which proposes to defer the effective date of PFRS 15 by one year to January 1, The reason for deferring the effective date is that additional changes to PFRS 15 will be proposed in the near future that stem from the discussions at the PASB and FASB Joint Transition Resource Group for Revenue Recognition (TRG). The comment deadline ended on July 3, At its meeting on July 22, 2015, the PASB decided to defer the effective date of PFRS 15 Revenue from Contracts with Customers to periods beginning on or after January 1, In addition, the change will keep the effective date aligned with the equivalent US GAAP guidance. The FASB published Accounting Standards Update (ASU) on April 29, 2015, which proposes to defer the effective date of the new revenue standard by one year. At its meeting on July 9, 2015, the FASB affirmed its proposal to defer the effective date, the final ASU is expected to be published by the end of the third quarter of

27 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash pertains to cash in banks. Cash equivalents are short-term money market placements that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition. Included also are the short-term investments maturing one year or less from value date. Receivables Trade and other receivables are recognized initially at the transaction price. They are subsequently measured at realizable value net of allowance for doubtful accounts. Allowance for Doubtful Accounts At the close of the accounting period, the Company ascertains the adequacy of its estimated losses from doubtful trade and non-trade accounts receivable to adjust these accounts to their estimated realizable values. Allowance for doubtful accounts are provided based on aging of accounts at 60 percent for accounts over two, three and four years and 100 percent for those over five years. Financial Instruments Financial instruments are recognized in the statement of financial position when the Company becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, which is the date that the Company commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Financial instruments are recognized initially at fair value. Except for financial instruments valued at fair value through profit or loss (FVPL), the initial measurement includes transaction costs. The Company classifies its financial assets into the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, available for sale (AFS) investments, and loans and receivables. For financial liabilities, the Company classifies them into financial liabilities at FVPL and other financial liabilities. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefit. 17

28 Offsetting Financial Instruments Financial assets and financial liabilities are offset with the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross in the statement of financial position. Fair Value of Financial Instruments The fair value of financial instruments traded in active markets at reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which observable market prices exist, and other relevant valuation models. HTM Investments Quoted non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as HTM investment when the Company has the positive intention and ability to hold to maturity. If the Company were to sell more than an insignificant amount of HTM investments, the entire category would be tainted and would have to be reclassified as AFS investments. Furthermore, the Company would be prohibited to classify any financial assets as HTM investments for the following two years. After initial measurement, HTM investments are measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral parts of the effective interest rate. Gains and losses are recognized in the profit or loss when the HTM investments are derecognized or impaired, as well as through the amortization process. Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of trading the receivables. They are included in current assets, except for maturities greater than twelve months after the balance sheet date which are classified as non-current assets. Loans and receivables are subsequently measured at amortized cost using the effective interest method, less any impairment losses. Any change in their value is recognized in profit or loss. Impairment loss is provided when there is objective evidence that the Company will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the impairment loss is determined as the difference 18

29 between the assets carrying amount and the present value of estimated cash flows. The Company s loans and receivables are presented as Trade and Other Receivables in the balance sheet. Trade receivables are stated at net realizable value as reduced by appropriate allowances for doubtful accounts. The adequacy of the allowance for doubtful accounts is reviewed yearly. Financial assets categorized as loans and receivables include cash and cash equivalents, trade and other receivables, and advances to related parties. Cash and cash equivalents are cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. AFS Investments This includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. They are included in non-current assets under the Financial Assets account in the balance sheet unless Management intends to dispose of the investment within twelve months from the balance sheet date. All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed, with changes in value recognized in equity, net of any effects arising from income taxes. Gains and losses arising from securities classified as availablefor-sale are recognized in the income statement when they are sold or when the investment is impaired. In the case of impairment, the cumulative loss previously recognized directly in equity is transferred to the income statement. If circumstances change, impairment losses on available-for-sale equity instruments are not reversed through the income statement. On the other hand, if in a subsequent period the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the income statement, the impairment loss is reversed through the profit or loss. Other Financial Liabilities Other financial liabilities, which include loans payable, trade and other payables, due to related parties and long-term debt are initially recognized at fair value of the consideration received less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any related issue costs, discount or premium. Gains and losses are recognized in the profit or loss when the liabilities are derecognized, as well as through the amortization process. Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Objective evidence of impairment may 19

30 include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets Carried at Amortized Cost For assets carried at amortized cost, the Company first assesses whether an objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for 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 for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. 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 for impairment. If there is an objective evidence that an impairment loss has been incurred, the amount of loss is measured as the difference between the asset s carrying value and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial assets original effective interest rate which is the effective interest rate computed at initial recognition. The carrying value of the asset is reduced through the use of an allowance account and the amount of loss is charged to profit or loss. If in case the receivable has proven to have no realistic prospect of future recovery, any allowance provided for such receivable is written off against the carrying value of the impaired receivable. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at reversal date. AFS Investments For AFS Investments, the Company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity investments classified as AFS, impairment indicators would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the profit or loss, is removed from equity and recognized in the profit or loss. Impairment losses on equity investments are not reversed through the profit or loss. Increases in fair value after impairment are recognized directly in the profit or loss. In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to 20