(Incorporated in the Republic of the Philippines) Primary Offer of 229,654,404 Common Shares Offer Price of ₱13.75 per Offer Share to be listed and traded on the Main Board of The Philippine Stock Exchange, Inc. Joint Issue Managers, Joint Lead Underwriters and Joint Bookrunners BDO Capital & Investment Corporation BPI Capital Corporation First Metro Investment Corporation Financial Adviser Evercore Asia Limited The date of this Prospectus is 21 April 2014 THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION.
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(Incorporated in the Republic of the Philippines)
Primary Offer of 229,654,404 Common Shares
Offer Price of ₱13.75 per Offer Share
to be listed and traded on the Main Board of The Philippine Stock Exchange, Inc.
Joint Issue Managers, Joint Lead Underwriters and Joint Bookrunners
BDO Capital & Investment
Corporation
BPI Capital Corporation
First Metro Investment
Corporation
Financial Adviser
Evercore Asia Limited
The date of this Prospectus is 21 April 2014
THE PHILIPPINES SECURITIES AND EXCHANGE COMMISSION HAS
NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
AND SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINES
SECURITIES AND EXCHANGE COMMISSION.
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Century Pacific Food, Inc.
7th Floor, Centerpoint Building
Julia Vargas corner Garnet Street
Ortigas Center
1605 Pasig City, Metro Manila
Philippines
Telephone Number: + (632) 633 85 55
Corporate Website: www.centurypacific.com.ph
This Prospectus relates to the offer and sale of 229,654,404 new common shares by way of
primary offer (the ―Offer‖), with a par value of ₱1.00 per share (the ―Offer Shares‖), of Century
Pacific Food, Inc., a corporation organized under Philippine law (the ―Company‖, ―CNPF‖, or the
―Issuer‖) to be listed and traded in the Main Board of The Philippine Stock Exchange, Inc. (the
―PSE‖). The trading symbol of the Company shall be ―CNPF‖. See ―Plan of Distribution‖.
The Offer Shares shall be offered at a price of ₱13.75 per Offer Share (the ―Offer Price‖). The
determination of the Offer Price is further discussed on page 64 of this Prospectus and was
determined through a book-building process, as well as discussions between the Company and
BDO Capital & Investment Corporation (―BDO Capital‖), BPI Capital Corporation (―BPI
Capital‖), and First Metro Investment Corporation (―First Metro‖), collectively, the ―Joint Issue
Managers, Joint Lead Underwriters, and Joint Bookrunners‖ or simply, the ―Joint Lead
Underwriters‖. A total of 2,229,654,404 Common Shares will be outstanding after the Offer. The
Offer Shares will comprise up to 10.30% of the outstanding Common Shares after the Offer.
Pursuant to its amended articles of incorporation, the Company has an authorized amount of
capital stock of ₱6,000,000,000.00 divided into 6,000,000,000 Common Shares with a par value
of ₱1.00 per share, of which 2,000,000,000 Common Shares are outstanding as of the date of this
Prospectus. The Offer Shares shall be Common Shares of the Company.
The Company will be listed on the Main Board of the PSE. As a newly incorporated company,
CNPF will be relying on the track record of its wholly owned subsidiaries, General Tuna Corp.
(―GTC‖) and Snow Mountain Dairy Corp. (―SMDC‖). In this respect, both GTC and SMDC,
satisfy the requirements of the PSE Revised Listing Rules i.e., that such subsidiary (i) must have a
cumulative consolidated earnings before interest, taxes, depreciation, and amortization
(―EBITDA‖), excluding non-recurring items, of at least ₱50 million for three full fiscal years
immediately preceding the application for listing, (ii) a minimum EBITDA of ₱10 million for
each of the three fiscal years, and (iii) must further be engaged in materially the same businesses
and must have a proven track record of management throughout the last three years prior to the
filing of the application. With SMDC‘s EBITDA of approximately ₱27 million, ₱39 million and
₱68 million for 2011, 2012 and 2013, respectively and GTC‘s EBITDA of approximately ₱269
million, ₱299 million and ₱336 million for 2011, 2012 and 2013, respectively, CNPF‘s
subsidiaries are in full compliance with the financial requirements. Moreover, GTC and SMDC
have both been in existence and operating since 1997 and 2001, respectively and have had a
proven track record of management since then. The PSE Revised Listing Rules prohibit CNPF
from divesting its shareholdings in GTC and SMDC for a period of three years from the date the
Offer Shares are listed on the PSE; provided that the prohibition shall not apply if the divestment
is approved by a majority of CNPF‘s shareholders.
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The total proceeds to be raised by the Company from the sale of the Offer Shares will be
approximately ₱3,157.8 million. The estimated net proceeds to be raised by the Company from
the sale of the Offer Shares (after deducting estimated fees and expenses payable by the Company
of approximately ₱266.5 million) will be approximately ₱2,891.3 million. The Company intends
to use the proceeds it receives from the Offer for payment of financial obligations, capital
expenditures to increase production capacity and cost efficiency, working capital and/or potential
acquisitions. For a more detailed discussion on the proceeds from the Offer and the Company‘s
proposed use of proceeds, please see ―Use of Proceeds‖ beginning on page 55 of this Prospectus.
The Joint Lead Underwriters (as defined below) will receive a transaction fee from the Company
equivalent to 1.5% of the gross proceeds from the sale of the Offer Shares. These are inclusive of
the amounts to be paid to other participating underwriters and selling agents and exclusive of the
amounts to be paid to the PSE Trading Participants, where applicable. For a more detailed
discussion on the fees to be received by the Joint Lead Underwriters, please see ―Plan of
Distribution‖ beginning on page 59 of this Prospectus.
Each holder of Common Shares will be entitled to such dividends as may be declared by the
Company‘s Board of Directors (the ―Board‖ or ―Board of Directors‖), provided that any share
dividends declaration requires the approval of shareholders holding at least two-thirds of its total
―outstanding capital stock.‖ The Corporation Code of the Philippines, Batas Pambansa Blg. 68
(the ―Philippine Corporation Code‖), has defined ―outstanding capital stock‖ as the total shares of
stock (―Shares‖) issued to subscribers or stockholders, whether paid in full or not, except for
treasury shares. Dividends may be declared only from the Company‘s unrestricted retained
earnings. The Company has approved a dividend policy of maintaining an annual cash and/or
share dividend pay-out of up to 30% of its net income from the preceding year, subject to the
requirements of applicable laws and regulations, the terms and conditions of its outstanding bonds
and loan facilities, and the absence of circumstances that may restrict the payment of such
dividends, such as where the Company undertakes major projects and developments. The
Company‘s Board may, at any time, modify the Company‘s dividend policy depending upon the
Company‘s capital expenditure plans and/or any terms of financing facilities entered into to fund
its current and future operations and projects. The Company can give no assurance that it will pay
any dividends in the future. See ―Dividends and Dividend Policy‖.
45,930,800 Offer Shares (or 20% of the Offer Shares) are being offered to all of the trading
participants of the PSE (the ―PSE Trading Participants‖) and 22,965,400 Offer Shares (or 10% of
the Offer Shares) are being offered to local small investors (the ―Local Small Investors‖ or
―LSIs‖) in the Philippines. The remaining 160,758,204 Offer Shares (or 70% of the Offer Shares)
are being offered by the Joint Lead Underwriters to the Qualified Institutional Buyers (the
―QIBs‖) and to the general public. Prior to the closing of the Offer, any Offer Shares not taken up
by the PSE Trading Participants and Local Small Investors shall be distributed by the Joint Lead
Underwriters to their clients or to the general public. The Joint Lead Underwriters firmly
underwrite any shares left unsubscribed after the Offer. For a more detailed discussion of the
underwriting commitment of the Joint Lead Underwriters, see ―Plan of Distribution‖ on page 59
of this Prospectus.
All of the Common Shares to be sold pursuant to the Offer have identical rights and privileges.
The Common Shares may be owned by any person or entity regardless of citizenship or
nationality, subject to the nationality limits under Philippine law. The Philippine Constitution and
related statutes set forth restrictions on foreign ownership for companies engaged in certain
activities. The Company currently does not own any land in the Philippines but if the Company
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acquires land in the future, its foreign shareholdings may not exceed 40% of its issued and
outstanding voting capital shares. See ―Philippine Foreign Exchange and Foreign Ownership
Controls‖.
Before making an investment decision, investors should carefully consider the risks associated
with an investment in the Common Shares. These risks include:
1. Risks relating to the Company’s business
CNPF‘s financial performance may be materially and adversely affected by fluctuations
in prices or disruption in the supply of key raw materials;
CNPF‘s sales growth depends on successful introduction of new products and new
product extensions, which is subject to consumer preference and other market factors at
the time of introduction;
Actual or alleged contamination or deterioration of, or safety concerns about, CNPF‘s
food products or similar products produced by third parties could give rise to product
liability claims and harm CNPF‘s reputation;
Competition in CNPF‘s businesses may adversely affect its financial condition and results
of operations;
CNPF relies on the strength of its brands;
Consolidation of distribution channels in the Philippines may adversely affect CNPF‘s
financial condition and results of operations;
CNPF relies on key suppliers for certain raw materials and the failure by such suppliers to
adhere to and perform contractual obligations may adversely affect CNPF‘s business and
results of operations;
CNPF has a limited history as a separate entity;
CNPF generally does not have long-term contracts with its customers, and it is subject to
uncertainties and variability in demand and product mix;
CNPF is exposed to the credit risks of its customers, and delays or defaults in payment by
its customers could have a material adverse effect on CNPF‘s financial condition, results
of operations and liquidity;
Any infringement or failure to protect CNPF‘s trademarks and proprietary rights could
materially and adversely affects its business;
CNPF‘s strategy of growth, including acquisitions, entering new product categories and
international expansion, may not always be successful or may entail significant costs,
which could adversely affect its business, financial condition and results of operations;
CNPF may be subject to labor unrest, slowdowns and increased wage costs;
CNPF is effectively controlled by the Po family and their interests may differ from the
interests of other shareholders;
CNPF‘s international operations may present operating, financial and legal challenges,
particularly in countries where CNPF has little or no experience;
CNPF‘s existing insurance policies and self-insurance measures may not be sufficient to
cover the full extent of any losses;
CNPF‘s businesses and operations are substantially dependent upon key executives; and
Problems may develop among partners of joint ventures operated by CNPF, which may
result in disruptions to these businesses.
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2. Risks relating to the Philippines
The substantial majority of CNPF‘s income is derived from sales in the Philippines and,
therefore, a slowdown in economic growth in the Philippines could materially adversely
affect CNPF‘s financial condition and results of operation;
A decline in the value of the Peso against the U.S. dollar and other currencies would
increase many of CNPF‘s costs; and
Any political instability or acts of terrorism in the Philippines may adversely affect
CNPF.
3. Risks relating to the Offer and the Offer Shares
The Offer Shares may not be suitable investments for all investors;
There can be no guarantee that the Offer Shares will be listed on the PSE;
There has been no prior market for the Common Shares, so there may be no liquidity in
the market for the Offer Shares and the price of the Offer Shares may fall;
The market price of the Common Shares may be volatile, which could cause the value of
investors‘ investments in the Company to decline;
Future sales of Common Shares in the public market could adversely affect the prevailing
market price of the Common Shares and Shareholders may experience dilution in their
holdings;
Investors may incur immediate and substantial dilution as a result of purchasing Offer
Shares; and
The Company may be unable to pay dividends on the Common Shares.
4. Risks relating to certain statistical information in this Prospectus
The Prospectus contains forward-looking statements that are, by their nature, subject to
significant risks and uncertainties.
The pro forma financial information included herein may not be indicative of actual
results;
Certain information contained herein is derived from unofficial publications; and
The section of this Prospectus entitled ―Industry‖ was not independently verified by the
Company or the Joint Lead Underwriters, and the sources therein may not be completely
independent or independent at all.
Please refer to the section entitled ―Risk Factors‖ beginning on page 35 of this Prospectus, which,
while not intended to be an exhaustive enumeration of all risks, must be considered in connection
with a purchase of the Offer Shares.
The information contained in this Prospectus relating to the Company and its operations has been
supplied by the Company, unless otherwise stated herein. To the best of its knowledge and belief,
the Company, which has taken reasonable care to ensure that such is the case, confirms that the
information contained in this Prospectus relating to it and its operations is correct, and that there
is no material misstatement or omission of fact which would make any statement in this
Prospectus misleading in any material respect and that the Company hereby accepts full and sole
responsibility for the accuracy of the information contained in this Prospectus with respect to the
same.
An application for listing of the Common Shares was approved on March 26, 2014 by the board
of directors of the PSE, subject to the fulfillment of certain listing conditions. The PSE assumes
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No representation or warranty, express or implied, is made by the Company or the Joint Lead
Underwriters, regarding the legality of an investment in the Offer Shares under any legal,
investment or similar laws or regulations. No representation or warranty, express or implied, is
made by the Joint Lead Underwriters as to the accuracy or completeness of the information herein
and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation
by the Joint Lead Underwriters. The contents of this Prospectus are not investment, legal or tax
advice. Prospective investors should consult their own counsel, accountant and other advisors as
to legal, tax, business, financial and related aspects of a purchase of the Offer Shares. In making
any investment decision regarding the Offer Shares, prospective investors must rely on their own
examination of the Company and the terms of the Offer, including the merits and risks involved.
Any reproduction or distribution of this Prospectus, in whole or in part, and any disclosure of its
contents or use of any information herein for any purpose other than considering an investment in
the Offer Shares is prohibited.
No person has been authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or the Joint Lead Underwriters.
This Prospectus does not constitute an offer to sell or the solicitation of an offer to purchase any
securities other than the Offer Shares or an offer to sell or the solicitation of an offer to purchase
such securities by any person in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale of the Offer Shares offered hereby shall, under
any circumstances, create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is correct as of any time
subsequent to the date hereof.
Certain statistical information and forecasts in this Prospectus relating to the Philippines and other
data used in this Prospectus were obtained or derived from internal surveys, industry forecasts,
market research, governmental data, publicly available information and/or industry publications.
Industry publications generally state that the information they contain has been obtained from
sources believed to be reliable. However, there is no assurance that such information is accurate
or complete. Similarly, internal surveys, industry forecasts, market research, governmental data,
publicly available information and/or industry publications have not been independently verified
by the Company or the Joint Lead Underwriters and may not be accurate, complete, up-to-date,
balanced or consistent with other information compiled within or outside the Philippines.
The Company reserves the right to withdraw the offer and sale of Offer Shares at any time, and
Joint Lead Underwriters reserve the right to reject any commitment to subscribe for the Offer
Shares in whole or in part and to allot to any prospective purchaser less than the full amount of
the Offer Shares sought by such purchaser. If the Offer is withdrawn or discontinued, the
Company shall subsequently notify the SEC and the PSE. The Joint Lead Underwriters and
certain related entities may acquire for their own account a portion of the Offer Shares.
Each offeree of the Offer Shares, by accepting delivery of this Prospectus, agrees to the foregoing.
Forward-Looking Statements
This Prospectus contains forward-looking statements that are, by their nature, subject to
significant risks and uncertainties. These forward-looking statements include, without limitation,
statements relating to:
known and unknown risks;
uncertainties and other factors that may cause the Company‘s actual results, performance
or achievements to be materially different from expected future results; and
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performance or achievements expressed or implied by forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding the Company‘s
present and future business strategies and the environment in which the Company will operate in
the future. Important factors that could cause some or all of the assumptions not to occur or cause
actual results, performance or achievements to differ materially from those in the forward-looking
statements include, among other things:
the Company‘s ability to successfully implement its current and future strategies;
the Company‘s ability to anticipate and respond to local and regional trends, including
demand for canned and processed fish, meat and dairy products or other future products
the Company may offer;
the Company‘s ability to successfully manage its future business, financial condition,
results of operations and cash flow;
the Company‘s ability to secure additional financing and manage its capital structure and
dividend policy;
the condition of, and changes in, the relationship of the Company with the Philippine
Food and Drug Administration (―Philippine FDA‖), the Philippine Bureau of Internal
Revenue (―BIR‖) or other Philippine regulatory authorities or licensors;
general political, social and economic conditions in the Philippines;
regional geopolitical dynamics involving the Philippines and/or its neighbors;
the condition of and changes in the Philippine, Asian or global economies;
changes in interest rates, inflation rates and the value of the Peso against the U.S. dollar
and other currencies;
changes to the laws, regulations and policies applicable to or affecting the Company;
competition in the Philippine food processing and food distribution industries;
legal or regulatory proceedings in which the Company is or may become involved; and
uncontrollable events, such as war, civil unrest or acts of international or domestic
terrorism, the outbreak of contagious diseases, accidents and natural disasters.
Additional factors that could cause the Company‘s actual results, performance or achievements to
differ materially from forward-looking statements include, but are not limited to, those disclosed
under ―Risk Factors‖ and elsewhere in this Prospectus. These forward-looking statements speak
only as of the date of this Prospectus. The Company and Joint Lead Underwriters expressly
disclaim any obligation or undertaking to release, publicly or otherwise, any updates or revisions
to any forward-looking statement contained herein to reflect any change in the Company‘s
expectations with regard thereto or any change in events, conditions, assumptions or
circumstances on which any statement is based.
This Prospectus includes statements regarding the Company‘s expectations and projections for
future operating performance and business prospects. The words ―believe,‖ ―plan,‖ ―expect,‖
Statement of Financial Position…………………………………….……………………………... F-399
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Statement of Changes in Equity…………………………………………………………………… F-401
Statement of Cash Flows………………………………………………………………………….. F-402
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CENTURY PACIFIC FOOD, INC. (A Wholly Owned Subsidiary of Century Canning Corporation)
Financial Statements December 31, 2013
and Independent Auditors’ Report
Suite 505, Centerpoint Building, Julia Vargas St., Ortigas Center Pasig City, Metro Manila, Philippines
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CENTURY PACIFIC FOOD, INC. (A Wholly Owned Subsidiary of Century Canning Corporation)
List of Effective Standards and Interpretations under the Philippine Financial Reporting Standards (PFRS)
PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics
PFRSs Practice Statement Management Commentary
Philippine Financial Reporting Standards
PFRS 1 (Revised)
First-time Adoption of Philippine Financial Reporting Standards
Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
Amendments to PFRS 1: Additional Exemptions for First-time Adopters
Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters
Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters
Amendments to PFRS 1: Government Loans
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PFRS 1, First-Time Adoption of PFRS
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PFRS 1, First-time Adoption of International Financial Reporting Standards (Changes to the Basis for Conclusions only)*
PFRS 2 Share-based Payment
Amendments to PFRS 2: Vesting Conditions and Cancellations
Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 2:Definition of Vesting Condition*
PFRS 3 (Revised)
Business Combinations
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 3, Business Combinations (with consequential amendments to other standards)*
Annual Improvements to PFRSs 2011-2013 Cycle -
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PFRS 3: Scope of Exception for Joint Ventures*
PFRS 4 Insurance Contracts
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
PFRS 6 Exploration for and Evaluation of Mineral Resources
PFRS 7 Financial Instruments: Disclosures
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition
Amendments to PFRS 7: Improving Disclosures about Financial Instruments
Amendments to PFRS 7: Disclosures - Transfers of Financial Assets
Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities
Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures*
PFRS 8
Operating Segments
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 8: Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments' Assets to the Entity's Assets*
PFRS 9* Financial Instruments
Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures
Amendments to PFRS 9: Hedge accounting and Removal of Mandatory effective date of IFRS 9
PFRS 10 Consolidated Financial Statements
Amendments to PFRS 10: Consolidated Financial Statement: Transition Guidance
Amendments to PFRS 10:Transition Guidance and Investment Entities*
PFRS 11 Joint Arrangements
Amendments to PFRS 1: Joint Arrangements: Transition Guidance
PFRS 12 Disclosure of Interests in Other Entities
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PFRS 12: Disclosure of Interests in Other Entities: Transition Guidance
Amendments to PFRS 12: Transition Guidance and Investment Entities*
PFRS 13
Fair Value Measurement
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 13: Fair Value Measurement (Amendments to the Basis of Conclusions Only, with Consequential Amendments to the Bases of Conclusions of Other Standards)*
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PFRS 13: Portfolio Exception*
Philippine Accounting Standards
PAS 1 (Revised)
Presentation of Financial Statements
Amendment to PAS 1: Capital Disclosures
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation
Amendments to PAS 1: Presentation of Items of Other Comprehensive Income
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 1: Presentation of Financial Statements
PAS 2 Inventories
PAS 7 Statement of Cash Flows
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
PAS 10 Events after the Reporting Period
PAS 11 Construction Contracts
PAS 12 Income Taxes
Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets
PAS 16 Property, Plant and Equipment
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 16, Property, Plant and Equipment
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 16: Revaluation Method - Proportionate Restatement of Accumulated Depreciation*
PAS 17 Leases
PAS 18 Revenue
PAS 19 Employee Benefits (2011)
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
(Amended)
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance
PAS 21 The Effects of Changes in Foreign Exchange Rates
Amendment: Net Investment in a Foreign Operation
PAS 23 (Revised)
Borrowing Costs
PAS 24 (Revised)
Related Party Disclosures
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 24: Key Management Personnel*
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 27 (Amended)
Separate Financial Statements
Amendments to PAS 27: Transition Guidance and Investment Entities*
PAS 28 (Amended)
Investments in Associates and Joint Ventures
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 31 Interests in Joint Ventures
PAS 32 Financial Instruments: Disclosure and Presentation
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation
Amendment to PAS 32: Classification of Rights Issues
Annual Improvements to PFRSs 2009-2011 Cycle -Amendments to PAS 32, Financial Instruments: Presentation
Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities*
PAS 33 Earnings per Share
PAS 34 Interim Financial Reporting
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 34, Interim Financial Reporting
PAS 36 Impairment of Assets
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PAS 38
Intangible Assets
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 38: Revaluation Method - Proportionate Restatement of Accumulated Amortization*
PAS 39 Financial Instruments: Recognition and Measurement
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities
Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions
Amendments to PAS 39: The Fair Value Option
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition
Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives
Amendment to PAS 39: Eligible Hedged Items
PAS 40
Investment Property
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PAS 40: Clarifying the Interrelationship of IFRS 3 and IAS 40 When Classifying Property as Investment Property or Owner-Occupied Property*
PAS 41 Agriculture
Philippine Interpretations
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members' Share in Co-operative Entities and Similar Instruments
IFRIC 4 Determining Whether an Arrangement Contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of PFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 PFRS 2- Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement
IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 18 Transfers of Assets from Customers
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
IFRIC 21* Levies
SIC-7 Introduction of the Euro
SIC-10 Government Assistance - No Specific Relation to Operating Activities
SIC-15 Operating Leases - Incentives
SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders
SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease
SIC-29 Service Concession Arrangements: Disclosures.
Revenue Recognition for Sales of Property Units Under Pre-Completion Contracts
PIC Q&A No. 2007-03
Valuation of Bank Real and Other Properties Acquired (ROPA)
PIC Q&A No. 2008-02
Accounting for Government Loans with Low Interest Rates under the Amendments to PAS 20
PIC Q&A No. 2010-02
Basis of Preparation of Financial Statements
PIC Q&A No. 2010-03
Current/non-current Classification of a Callable Term Loan
PIC Q&A No. 2011-02
Common Control Business Combinations
PIC Q&A No. 2011-03
Accounting for Inter-company Loans
PIC Q&A No. 2011-04
Costs of Public Offering of Shares
PIC Q&A No. 2011-05
Fair Value or Revaluation as Deemed Cost
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
PIC Q&A No. 2011-06
Acquisition of Investment Properties – Asset Acquisition or Business Combination?
PIC Q&A No. 2012-01
Application of the Pooling of Interests Method for Business Combinations of Entities under Common Control in Consolidated Financial Statements
PIC Q&A No. 2012-02
Cost of a New Building Constructed on Site of a Previous Building
*These are the new and revised accounting standards and interpretations that are effective after the reporting period ended December 31, 2013. The Company will adopt these standards and interpretations when these become effective.
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CENTURY PACIFIC FOOD, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Century Canning Corporation)
Consolidated Financial Statements December 31, 2013
and Independent Auditors’ Report
Suite 505, Centerpoint Building, Julia Vargas St., Ortigas Center Pasig City, Metro Manila, Philippines
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CENTURY PACIFIC FOOD, INC. AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Century Canning Corporation)
List of Effective Standards and Interpretations under the Philippine Financial Reporting Standards (PFRS)
PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics
PFRSs Practice Statement Management Commentary
Philippine Financial Reporting Standards
PFRS 1 (Revised)
First-time Adoption of Philippine Financial Reporting Standards
Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
Amendments to PFRS 1: Additional Exemptions for First-time Adopters
Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters
Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters
Amendments to PFRS 1: Government Loans
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PFRS 1, First-Time Adoption of PFRS
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PFRS 1, First-time Adoption of International Financial Reporting Standards (Changes to the Basis for Conclusions only)*
PFRS 2 Share-based Payment
Amendments to PFRS 2: Vesting Conditions and Cancellations
Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 2:Definition of Vesting Condition*
PFRS 3 (Revised)
Business Combinations
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 3, Business Combinations (with consequential amendments to other standards)*
Annual Improvements to PFRSs 2011-2013 Cycle -
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PFRS 3: Scope of Exception for Joint Ventures*
PFRS 4 Insurance Contracts
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
PFRS 6 Exploration for and Evaluation of Mineral Resources
PFRS 7 Financial Instruments: Disclosures
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition
Amendments to PFRS 7: Improving Disclosures about Financial Instruments
Amendments to PFRS 7: Disclosures - Transfers of Financial Assets
Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities
Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures*
PFRS 8
Operating Segments
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 8: Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments' Assets to the Entity's Assets*
PFRS 9* Financial Instruments
Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures
Amendments to PFRS 9: Hedge accounting and Removal of Mandatory effective date of IFRS 9
PFRS 10 Consolidated Financial Statements
Amendments to PFRS 10: Consolidated Financial Statement: Transition Guidance
Amendments to PFRS 10:Transition Guidance and Investment Entities*
PFRS 11 Joint Arrangements
Amendments to PFRS 1: Joint Arrangements: Transition Guidance
PFRS 12 Disclosure of Interests in Other Entities
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PFRS 12: Disclosure of Interests in Other Entities: Transition Guidance
Amendments to PFRS 12: Transition Guidance and Investment Entities*
PFRS 13
Fair Value Measurement
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PFRS 13: Fair Value Measurement (Amendments to the Basis of Conclusions Only, with Consequential Amendments to the Bases of Conclusions of Other Standards)*
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PFRS 13: Portfolio Exception*
Philippine Accounting Standards
PAS 1 (Revised)
Presentation of Financial Statements
Amendment to PAS 1: Capital Disclosures
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation
Amendments to PAS 1: Presentation of Items of Other Comprehensive Income
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 1: Presentation of Financial Statements
PAS 2 Inventories
PAS 7 Statement of Cash Flows
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
PAS 10 Events after the Reporting Period
PAS 11 Construction Contracts
PAS 12 Income Taxes
Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets
PAS 16 Property, Plant and Equipment
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 16, Property, Plant and Equipment
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 16: Revaluation Method - Proportionate Restatement of Accumulated Depreciation*
PAS 17 Leases
PAS 18 Revenue
PAS 19 Employee Benefits (2011)
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
(Amended)
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance
PAS 21 The Effects of Changes in Foreign Exchange Rates
Amendment: Net Investment in a Foreign Operation
PAS 23 (Revised)
Borrowing Costs
PAS 24 (Revised)
Related Party Disclosures
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 24: Key Management Personnel*
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 27 (Amended)
Separate Financial Statements
Amendments to PAS 27: Transition Guidance and Investment Entities*
PAS 28 (Amended)
Investments in Associates and Joint Ventures
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 31 Interests in Joint Ventures
PAS 32 Financial Instruments: Disclosure and Presentation
Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation
Amendment to PAS 32: Classification of Rights Issues
Annual Improvements to PFRSs 2009-2011 Cycle -Amendments to PAS 32, Financial Instruments: Presentation
Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities*
PAS 33 Earnings per Share
PAS 34 Interim Financial Reporting
Annual Improvements to PFRSs 2009-2011 Cycle - Amendments to PAS 34, Interim Financial Reporting
PAS 36 Impairment of Assets
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PAS 38
Intangible Assets
Annual Improvements to PFRSs 2010-2012 Cycle - Amendments to PAS 38: Revaluation Method - Proportionate Restatement of Accumulated Amortization*
PAS 39 Financial Instruments: Recognition and Measurement
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities
Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions
Amendments to PAS 39: The Fair Value Option
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition
Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives
Amendment to PAS 39: Eligible Hedged Items
PAS 40
Investment Property
Annual Improvements to PFRSs 2011-2013 Cycle - Amendments to PAS 40: Clarifying the Interrelationship of IFRS 3 and IAS 40 When Classifying Property as Investment Property or Owner-Occupied Property*
PAS 41 Agriculture
Philippine Interpretations
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members' Share in Co-operative Entities and Similar Instruments
IFRIC 4 Determining Whether an Arrangement Contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of PFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 PFRS 2- Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement
IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 18 Transfers of Assets from Customers
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
IFRIC 21* Levies
SIC-7 Introduction of the Euro
SIC-10 Government Assistance - No Specific Relation to Operating Activities
SIC-15 Operating Leases - Incentives
SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders
SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease
SIC-29 Service Concession Arrangements: Disclosures.
Revenue Recognition for Sales of Property Units Under Pre-Completion Contracts
PIC Q&A No. 2007-03
Valuation of Bank Real and Other Properties Acquired (ROPA)
PIC Q&A No. 2008-02
Accounting for Government Loans with Low Interest Rates under the Amendments to PAS 20
PIC Q&A No. 2010-02
Basis of Preparation of Financial Statements
PIC Q&A No. 2010-03
Current/non-current Classification of a Callable Term Loan
PIC Q&A No. 2011-02
Common Control Business Combinations
PIC Q&A No. 2011-03
Accounting for Inter-company Loans
PIC Q&A No. 2011-04
Costs of Public Offering of Shares
PIC Q&A No. 2011-05
Fair Value or Revaluation as Deemed Cost
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PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2013
Adopted Not Adopted
Not Applicable
PIC Q&A No. 2011-06
Acquisition of Investment Properties – Asset Acquisition or Business Combination?
PIC Q&A No. 2012-01
Application of the Pooling of Interests Method for Business Combinations of Entities under Common Control in Consolidated Financial Statements
PIC Q&A No. 2012-02
Cost of a New Building Constructed on Site of a Previous Building
*These are the new and revised accounting standards and interpretations that are effective after the reporting period ended December 31, 2013. The company will adopt these standards and interpretations when these become effective.
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Audited Consolidated Financial Statements of CNPF
Schedule of Financial Soundness Indicator
As of December 31, 2013 and for the period October 25, 2013 to Decemeber 31, 2013
Formula Value
Current Ratio Total Current Assets / Total Current Liabilities 1.14
Solvency Ratio Net Income + Depreciation / Total Liabilities 0.00
Debt Ratio Total Liabilities / Total Assets 0.66
Debt to Equity Ratio Total Liabilities / Total Equity 1.93
Gross Profit Ratio Gross Profit / Revenue 8.08%
Net Profit Ratio Net Income / Revenue -0.08%
Return on Assets Net Income / Total Assets -0.03%
Return on Equity Net Income / Total Equity -0.07%
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GENERAL TUNA CORPORATION AND SNOW MOUNTAIN DAIRY
CORPORATION (Wholly Owned Subsidiaries of Century Pacific
Food, Inc.)
Combined Financial Statements December 31, 2013, 2012 and 2011
and Practitioner’s Compilation Report
Suite 505, Centerpoint Building, Julia Vargas St. Ortigas Center Pasig City, Metro Manila, Philippines
As restated 11,333,722 3,296,386 35,773 22,241 )( 4,071,482 18,715,122
Total comprehensive income
Net profit for the year - - - - 2,180,842 2,180,842
Actuarial gain on post-employment benefit - - - 5,081 - 5,081
- - - 5,081 2,180,842 2,185,923
Balance at December 31, 2012 11,333,722 $ 3,296,386 $ 35,773 $ 17,160 )( $ 6,252,324 $ 20,901,045 $
See Notes to Financial Statements.
GENERAL TUNA CORPORATION
(A Wholly Owned Subsidiary of Century Pacific Food, Inc.)
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
Revaluation Reserves
(Amounts in United States Dollars)
DRAFT 03-08-14(FOR FINALIZATION)
$
$
$
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2012
(As Restated −
Notes 2013 see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 3,907,261 $ 3,056,798 $
Adjustments for:
Depreciation 9 2,837,514 2,729,259
Unrealized foreign currency loss (gain) 14 2,243,620 )( 371,426
Interest expense 14 1,069,892 816,041
Loss on sale and derecognition of property and equipment 9 72,921 -
Interest income 5 38,266 )( 67,561 )(
Operating profit before working capital changes 5,605,702 6,905,963
Decrease (increase) in trade and other receivables 16,907,952 )( 2,349,988
Decrease (increase) in inventories 15,634,978 6,170,772 )(
Increase in prepayments and other current assets 679,299 )( 763,979 )(
Decrease (increase) in post-employment benefit asset 10,434 232 )(
Decrease in other non-current assets 322,695 30,556
Increase (decrease) in trade and other payables 2,026,068 )( 875,219
Increase in post-employment benefit obligation 13,479 -
Cash generated from operations 1,973,969 3,226,743
Income taxes paid 335,243 )( 262,994 )(
Net Cash From Operating Activities 1,638,726 2,963,749
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisitions of property, plant and equipment 9 2,726,974 )( 1,724,761 )(
Proceeds from sale of land 9 1,827,066 -
Interest received 38,266 67,561
Net Cash Used in Investing Activities 861,642 )( 1,657,200 )(
CASH FLOWS USED IN FINANCING ACTIVITIES
Proceeds from interest-bearing loans 127,040,117 26,946,980
Repayments of interest-bearing loans 114,550,370 )( 19,711,804 )(
Advances from related parties 17 12,669,366 16,616,604
Repayments of advances from related parties 17 11,516,148 )( 22,537,906 )(
Payment of cash dividends 19 7,388,764 )( 1,732,062 )(
Interest paid 1,058,939 )( 763,925 )(
Net Cash From (Used in) Financing Activities 5,195,262 1,182,113 )(
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,972,346 124,436
Effect of Exchange Rate Changes on Cash and Cash Equivalents 31,186 18,985
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,203,548 2,060,127
CASH AND CASH EQUIVALENTS AT END OF YEAR 8,207,080 $ 2,203,548 $
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
STATEMENTS OF CASH FLOWS
(A Wholly Owned Subsidiary of Century Pacific Food, Inc.)
GENERAL TUNA CORPORATION
See Notes to Financial Statements.
(Amounts in United States Dollars)
DRAFT 03-08-14(FOR FINALIZATION)
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GENERAL TUNA CORPORATION (A Wholly Owned Subsidiary of Century Pacific Food, Inc.)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 AND 2012
(With Corresponding Figures as at January 1, 2012) (Amounts in United States Dollars)
1. CORPORATE INFORMATION 1.1 Incorporation and Operations General Tuna Corporation (the Company) was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) on March 10, 1997. It is engaged in manufacturing and exporting private label canned, pouched and frozen tuna products. The Company is a subsidiary of Century Canning Corporation (CCC) until October 31, 2013 when CCC transferred for a consideration its 100% ownership interest in the Company to Century Pacific Food, Inc. (CPFI or the new parent company). This transfer of ownership is part of the corporate reorganization undertaken by the Century Pacific Group (the Group) within which CCC is the parent company. CPFI is the newly incorporated wholly owned subsidiary of CCC, which is now the Company’s ultimate parent company. It is incorporated and domiciled in the Philippines and will soon be operating as a food manufacturing company in 2014. CCC is engaged in manufacturing and distribution of canned tuna products for the Philippine Market. The Company’s registered office is located at 32 Arturo Drive, Bagumbayan, Taguig, Metro Manila and the Company’s processing plant is located at Brgy. Tambler, General Santos City. The registered office of CPFI is located at Centerpoint Building, Julia Vargas Street, Ortigas Center, Pasig City. 1.2 Approval of Financial Statements The financial statements of the Company for the year ended December 31, 2013 (including the comparative financial statements for the year ended December 31, 2012 and the corresponding figures as at January 1, 2012) were authorized for issue by the Company’s Board of Directors (BOD) on March 7, 2014.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. The policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation of Financial Statements (a) Statement of Compliance with Philippine Financial Reporting Standards
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). The financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies in the succeeding pages.
(b) Presentation of Financial Statements
The financial statements are presented in accordance with Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements. The Company presents all items of income and expense in a single statement of comprehensive income. The Company presents a third statement of financial position as at the beginning of the preceding period when it applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that has a material effect on the information in the statement of financial position at the beginning of the preceding period. The related notes to the third statement of financial position are not required to be disclosed. The Company’s adoption of PAS 19 (Revised), Employee Benefits, resulted in retrospective restatements on certain accounts in the comparative financial statements for December 31, 2012 and in the corresponding figures as at January 1, 2012 [see Note 2.2(a)(ii)]. Accordingly, the Company presents a third statement of financial position as of January 1, 2012 without the related notes, except for the disclosures required under PAS 8, Accounting Polices, Changes in Accounting Estimates and Errors.
(c) Functional and Presentation Currency
These financial statements are presented in United States (U.S.) dollars, the Company’s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items included in the financial statements of the Company are measured using its functional currency. Functional currency is the currency of the primary economic environment in which the Company operates.
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2.2 Adoption of New and Amended PFRS
(a) Effective in 2013 that are Relevant to the Company
In 2013, the Company adopted for the first time the following new PFRS, revisions, amendments and annual improvements thereto that are relevant to the Company and effective for financial statements for the annual periods beginning on or after July 1, 2012 or January 1, 2013: PAS 1 (Amendment) : Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income PAS 19 (Revised) : Employee Benefits PFRS 7 (Amendment) : Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities PFRS 13 : Fair Value Measurement Annual Inprovements : Annual Improvements to PFRS (2009 – 2011 Cycle) Discussed below are the relevant information about these new, revised and amended standards. (i) PAS 1 (Amendment), Financial Statements Presentation - Presentation of Items of Other
Comprehensive Income (effective from July 1, 2012). The amendment requires an entity to group items presented in other comprehensive income into those that, in accordance with other PFRS: (a) will not be reclassified subsequently to profit or loss, and, (b) will be reclassified subsequently to profit or loss when specific conditions are met. Management determined that the amendment did not significantly affect the financial statements as its comprehensive income is only comprised of actuarial gains and losses on retirement benefit obligation which are not reclassified to profit or loss.
(ii) PAS 19 (Revised), Employee Benefits (effective from January 1, 2013). The
revision made a number of changes as part of the improvements throughout the standard. The main changes relate to defined benefit plans as follows: • eliminates the corridor approach under the existing guidance of PAS 19
and requires an entity to recognize all actuarial gains and losses arising in the reporting period;
• streamlines the presentation of changes in plan assets and liabilities
resulting in the disaggregation of changes into three main components of service costs, net interest on net defined benefit obligation or asset, and remeasurement; and,
• enhances disclosure requirements, including information about the characteristics of defined benefit plans and the risks that entities, through participation in those plans are exposed to.
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The Company’s adoption of PAS 19 (Revised) resulted in the retrospective adjustment of the post-employment benefit obligation to record the previously unrecognized net actuarial losses with the corresponding recognition of reserve in equity for such net actuarial losses including those previously recognized in profit or loss and accumulated in Retained Earnings. The restatement of certain line items in the statements of financial position as at December 31, 2012 and the corresponding figures as at January 1, 2012 as a result of the above adjustments are summarized below.
As Previously Prior Period Notes Reported Adjustment As Restated
December 31, 2012
Changes in assets: Post-employment benefit asset 15.2 $ 15,652 ($ 5,218 ) $ 10,434 Deferred tax assets - net 16 141,504 1,565 143,069 Net Effect on Assets ($ 3,653 ) Changes in equity: Revaluation reserves $ 35,773 ($ 17,160 ) $ 18,613 Retained earnings 6,238,817 13,507 6,252,324 Net Effect on Equity ($ 3,653 )
January 1, 2012
Changes in assets: Post-employment benefit asset $ 17,692 ($ 15,028 ) $ 2,664 Deferred tax assets - net 71,896 4,508 76,404 Net Effect on Assets ($ 10,520 ) Changes in equity: Revaluation reserves $ 35,773 ($ 22,241 ) $ 13,532 Retained earnings 4,059,761 ( 11,721 ) 4,071,482 Net Effect on Equity ($ 10,520 )
The adoption of PAS19 (Revised) did not have material impact on the Company’s statement of comprehensive income and statement of cash flows for the year ended December 31, 2012.
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(iii) PFRS 7 (Amendment), Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2013). The amendment requires qualitative and quantitative disclosures relating to gross and net amounts of recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation. The amendment also requires disclosure of information about recognized financial instruments which are subject to enforceable master netting arrangements or similar agreements, even if they are not set-off in the statement of financial position, including those which do not meet some or all of the offsetting criteria under PAS 32 and amounts related to a financial collateral. These disclosures allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with recognized financial assets and financial liabilities on the entity’s statement of financial position. The adoption of this amendment did not result in any significant changes in the Company’s disclosures on its financial statements as it has no master netting arrangements; however, potential offsetting arrangements are disclosed in Note 21.3. Other than the additional disclosures presented in Note 21.3, the application of this new standard had no significant impact on the amounts recognized in the financial statements.
(iv) PFRS 13, Fair Value Measurement (effective from January 1, 2013). This new standard clarifies the definition of fair value and provides guidance and enhanced disclosures about fair value measurements. The requirements under this standard do not extend the use of fair value accounting but provide guidance on how it should be applied to both financial instrument items and non-financial items for which other PFRS require or permit fair value measurements or disclosures about fair value measurements, except in certain circumstances. The amendment applies prospectively from annual period beginning January 1, 2013, hence, disclosure requirements need not be presented in the comparative information in the first year of application. Nevertheless, other than the additional disclosure presented in Note 21, the application of this new standards had no significant effect on the amount recognized in the financial statements.
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(v) 2009 - 2011 Annual Improvements to PFRS. Annual improvement to PFRS (2009-2011 Cycle) made minor amendments to a number of PFRS. Among those improvements, the following are relevant to the Company: (a) PAS 1 (Amendment), Presentation of Financial Statements - Clarification of the
Requirements for Comparative Information. The amendment clarifies that a statement of financial position as at the beginning of the preceding period (third statement of financial position) is required when an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that has a material effect on the information in the third statement of financial position. The amendment specifies that other than disclosure of certain specified information in accordance with PAS 8 related notes to the third statement of financial position are not required to be presented. Consequent to the Company’s adoption of PAS 19 (Revised) in the current year which resulted in retrospective restatement of the prior years’ financial statements, the Company has presented a third statement of financial position as at January 1, 2012 without the related notes, except for the disclosure requirements of PAS 8.
(b) PAS 16 (Amendment), Property, Plant and Equipment - Classification of Servicing Equipment. The amendment addresses a perceived inconsistency in the classification requirements for servicing equipment which resulted in classifying servicing equipment as part of inventory when it is used for more than one period. It clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized as property, plant and equipment when they meet the definition of property, plant and equipment, otherwise, these are classified as inventory. This amendment had no impact on the Company’s financial statements since it has been recognizing those servicing equipment in accordance with the recognition criteria under PAS 16.
(c) PAS 32 (Amendment), Financial Instruments – Presentation – Tax Effect of Distributions to Holders of Equity Instruments. The amendment clarifies that the consequences of income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction shall be accounted for in accordance with PAS 12. Accordingly, income tax relating to distributions to holders of an equity instrument is recognized in profit or loss while income tax related to the transaction costs of an equity transaction is recognized in equity. This amendment had no effect on the Company’s financial statements as it has been recognizing the effect of distributions to holders of equity instruments and transaction costs of an equity transaction in accordance with PAS 12.
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(b) Effective in 2013 that are not Relevant to the Company
The following amendments became effective for annual periods beginning on or after January 1, 2013 but are not relevant to the Company’s financial statements: PPRS 1 (Amendment) : First-time Adoption of PFRS – Government Loans
PFRS 10 : Consolidated Financial Statements
PFRS 11 : Joint Arrangements PFRS 12 : Disclosure of Interests in Other Entities PAS 27 (Revised) : Separate Financial Statements PAS 28 (Revised) : Investments in Associate and Joint Venture PFRS 10, PFRS 11 and PFRS 12 (Amendment) : Amendments to PFRS 10, 11 and 12 - Transition Guidance to PFRS 10, 11 and 12 Annual Improvements
PAS 34 (Amendment) : Interim Financial Reporting – Interim Financial Reporting and Segment Information for Total Assets and Liabilities
PPRS 1 (Amendment) : First-time Adoption of PFRS – Repeated Application of PFRS 1 and Borrowing
Cost Philippine Interpretation
International Financial Reporting Interpretation Committee 20 : Stripping Costs in the Production Phase of a Surface Mine
(c) Effective Subsequent to 2013 but not Adopted Early
There are new PFRS, amendments, annual improvements and interpretations to existing standards that are effective for periods subsequent to 2013. Management has initially determined the following pronouncements, which the Company will apply in accordance with their transitional provisions, to be relevant to its financial statements: (i) PAS 19 (Amendment), Employee Benefits - Defined Benefit Plans - Employee
Contributions (effective from January 1, 2014). The amendment clarifies that if the amount of the contributions from employees or third parties is dependent on the number of years of service, an entity shall attribute the contributions to periods of service using the same attribution method (i.e., either using the plan’s contribution formula or on a straight-line basis) for the gross benefit. Management has initially determined that this amendment will have no impact on the Company’s financial statements since there are no plans of future contribution from third parties.
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(ii) PAS 32 (Amendment), Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2014). The amendment provides guidance to address inconsistencies in applying the criteria for offsetting financial assets and financial liabilities. It clarifies that a right of set-off is required to be legally enforceable, in the normal course of business; in the event of default; and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendment also clarifies the principle behind net settlement and provided characteristics of a gross settlement system that would satisfy the criterion for net settlement. The Company does not expect this amendment to have a significant impact on its financial statements.
(iii) PAS 36 (Amendment), Impairment of Assets - Recoverable Amount Disclosures for Non-financial Assets (effective from January 1, 2014). The amendment clarifies that the requirements for the disclosure of information about the recoverable amount of assets or cash-generating units is limited only to the recoverable amount of impaired assets that is based on fair value less cost of disposal. It also introduces an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount based on fair value less cost of disposal is determined using a present value technique. Management will reflect in its subsequent years’ financial statements the changes arising from this relief on disclosure requirements.
(iv) PAS 39 (Amendment), Financial Instruments: Recognition and Measurement – Novation of Derivatives and Continuation of Hedge Accounting (effective January 1, 2014). The amendment provides some relief from the requirements on hedge accounting by allowing entities to continue the use of hedge accounting when a derivative is novated to a clearing counterparty resulting in termination or expiration of the original hedging instrument as a consequence of laws and regulations, or the introduction thereof. As the Company neither enters into transactions involving derivative instruments nor it applies hedge accounting, the amendment will not have any impact on the financial statements.
(v) PFRS 9, Financial Instruments: Classification and Measurement (effective from January 1, 2015). This is the first part of a new standard on financial instruments that will replace PAS 39, Financial Instruments: Recognition and Measurement, in its entirety. The first phase of the standard was issued on November 2009 and October 2010 and contains new requirements and guidance for the classification, measurement and recognition of financial assets and financial liabilities. It requires financial assets to be classified into two measurement categories: amortized cost or fair value. Debt instruments that are held within a business model whose objective is to collect the contractual cash flows that represent solely payments of principal and interest on the principal outstanding are generally measured at amortized cost. All other debt instruments and equity instruments are measured at fair value. In addition, PFRS 9 allows entities to make an irrevocable election to present subsequent changes in the fair value of an equity instrument that is not held for trading in other comprehensive income. The accounting for embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangement, does not require separation from the host contract.
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For liabilities, the standard retains most of the PAS 39 requirements which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in case where the fair value option is taken for financial liabilities, the part of a fair value change due to the liability’s credit risk is recognized in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch. In November 2013, the IASB has published amendments to International Financial Reporting Standard (IFRS) 9 that contain new chapter and model on hedge accounting that provides significant improvements principally by aligning hedge accounting more closely with the risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. The amendment also now requires changes in the fair value of an entity’s own debt instruments caused by changes in its own credit quality to be recognized in other comprehensive income rather in profit or loss. It also includes the removal of the January 1, 2015 mandatory effective date of IFRS 9. To date, the remaining chapter of IFRS 9 and PFRS 9 dealing with impairment methodology is still being completed. Further, the IASB is currently discussing some limited modifications to address certain application issues regarding classification of financial assets and to provide other considerations in determining business model. The Company does not expect to implement and adopt PFRS 9 until its effective date. In addition, management is currently assessing the impact of PFRS 9 on the financial statements of the Company and it plans to conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes.
(vi) Annual Improvements to PFRS. Annual improvements to PFRS (2010-2012 Cycle) and PFRS (2011-2013 Cycle) made minor amendments to a number of PFRS, which are effective for annual period beginning on or after July 1, 2014. Among those improvements, the following amendments are relevant to the Company but management does not expect a material impact on the Company’s financial statements: Annual Improvements to PFRS (2010-2012 Cycle)
(a) PAS 16 (Amendment), Property, Plant and Equipment – Classification of
Servicing Equipment. The amendment addresses a perceived inconsistency in the classification requirements for servicing equipment which resulted in classifying servicing equipment as part of inventory when it is used for more than one period. It clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized as property, plant and equipment when they meet the definition of property, plant and equipment, otherwise, these are classified as inventory. This amendment had no impact on the Company’s financial statements since it has been recognizing those servicing equipment in accordance with the recognition criteria under PAS 16.
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(b) PAS 24 (Amendment), Related Party Disclosures. The amendment clarifies the entity providing key management services to a reporting entity is deemed to be a related party of the latter. It also requires and clarifies that the amounts incurred by the reporting entity for key management personnel services that are provided by a separate management entity should be disclosed in the financial statements, and not the amounts of compensation paid or payable by the key management entity to its employees or directors.
(c) PFRS 13 (Amendment), Fair Value Measurement. The amendment, through
a revision only in the basis of conclusion of PFRS 13, clarifies that issuing PFRS 13 and amending certain provisions of PFRS 9 and PAS 39 related to discounting of financial instruments, did not remove the ability to measure short-term receivables and payables with no stated interest rate on an undiscounted basis, when the effect of not discounting is immaterial.
Annual Improvements to PFRS (2011-2013 Cycle)
PFRS 13 (Amendment), Fair Value Measurement. The amendment clarifies that the scope of the exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis (the portfolio exception) applies to all contracts within the scope of, and accounted for in accordance with PAS 39 or PFRS 9, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in PAS 32.
2.3 Financial Assets Financial assets are recognized when the Company becomes a party to the contractual terms of the financial instrument. Financial assets other than those designated and effective as hedging instruments are classified into the following categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity investments and available-for-sale (AFS) financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at FVTPL are initially recognized at fair value plus any directly attributable transaction costs. The Company’s financial assets are generally categorized as loans and receivables and are presented as Cash and Cash Equivalents and Trade and Other Receivables in the statement of financial position. Cash and cash equivalents are defined as 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. 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 12 months after the end of the reporting period which are classified as non-current assets.
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Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses, if any. 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 between the assets’ carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate or current effective interest rate determined under the contract if the loan has a variable interest rate. All income and expenses, excluding impairment losses and foreign currency exchange losses or gains and other gains or losses that relate to operating activities, relating to financial assets that are recognized in profit or loss are presented as part of Finance Costs or Finance Income in the statement of comprehensive income.
Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured. The financial assets are derecognized when the contractual rights to receive cash flows from the financial instruments expire and substantially all of the risks and rewards of ownership have been transferred to another party. 2.4 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted-average method. Finished goods and work-in-process include the cost of raw materials, direct labor and a proportion of manufacturing overheads based on normal operating capacity. The cost of raw materials include all costs directly attributable to acquisition, such as the purchase price, import duties and other taxes that are not subsequently recoverable from taxing authorities. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of raw materials is the current replacement cost. 2.5 Property, Plant and Equipment Property, plant and equipment, except land which is stated at fair value, are stated at cost less accumulated depreciation, and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred. Following initial recognition of at cost, land is carried at revalued amounts which are the fair values at the date of the revaluation, as determined by independent appraisers, less and any accumulated impairment losses. Revalued amounts are fair market values determined based on appraisals by external professional valuer once every two years or more frequently if market factors indicate a material change in fair value.
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Any revaluation surplus is recognized in other comprehensive income and credited to the Revaluation Reserves account in the statement of changes in equity. Any revaluation deficit directly offsetting a previous surplus in the same asset is charged to other comprehensive income to the extent of any revaluation surplus in equity relating to this asset and the remaining deficit, if any, is recognized in profit or loss. Upon disposal of land, amounts included in Revaluation Reserves relating to them are transferred to Retained Earnings. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets as follows: Buildings 15 years Machinery and equipment 10 years Land improvements 10 years Transportation and delivery equipment 5 years Fully depreciated assets are retained in the accounts until these are no longer in use. No further charge for depreciation is made in respect of those accounts. Construction-in-progress represents properties under construction and is stated at cost. This includes cost of construction, applicable borrowing cost (see Note 2.15) and other direct costs. The account is not depreciated until such time that the assets are completed and available for use. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.13). The residual values and estimated useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at the end of each reporting period. An item of property, plant and equipment, including the related accumulated depreciation and impairment losses, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the year the item is derecognized. 2.6 Prepayments and Other Assets Prepayments and other current assets pertain to other resources controlled by the Company as a result of past events. They are recognized in the financial statements when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Other recognized assets of similar nature, where future economic benefits are expected to flow to the Company beyond one year after the end of the reporting period or in the normal operating cycle of the business, if longer, are classified as non-current assets.
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2.7 Financial Liabilities Financial liabilities, which include interest-bearing loans, trade and other payables (except tax related payables), due to related parties and dividends payable, are recognized when the Company becomes a party to the contractual terms of the instrument. All interest-related charges incurred on financial liability that relate to financing activities and are not capitalized are recognized as an expense in profit or loss under the caption Finance Costs in the statement of comprehensive income.
Interest-bearing loans are raised for support of short-term or long-term funding of operations. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accrual basis using the effective interest method and are added to the carrying amount of the instrument to the extent that these are not settled in the period in which they arise. Trade and other payables, due to related parties and dividends payable are recognized initially at their fair values and subsequently measured at amortized cost, using effective interest method for maturities beyond one year, less settlement payments. Dividends payable to shareholders are recognized as financial liabilities upon declaration by the Company. Financial liabilities are classified as current liabilities if payment is due to be settled within one year or less after the end of the reporting period (or in the normal operating cycle of the business, if longer), or the Company does not have an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Otherwise, these are presented as non-current liabilities. Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. The difference between the carrying amount of the financial liability derecognized and the consideration paid or payable is recognized in profit or loss.
2.8 Offsetting Financial Instruments Financial assets and liabilities are offset and the resulting net amount is reported in the statement of financial position when there is a legally enforceable right to set-off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.9 Provisions and Contingencies Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events.
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Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. The increase in provision due to passage of time is recognized as interest expense. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Company that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Company can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision. 2.10 Revenue and Expense Recognition Revenue comprises revenue from the sale of goods measured by reference to the fair value of consideration received or receivable by the Company for goods supplied, excluding value-added tax (VAT) and trade discounts. Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that the economic benefits will flow to the Company; and the costs incurred or to be incurred can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized: (a) Sale of goods – Revenue is recognized when the risks and rewards of ownership of the
goods have passed to the buyer. This is generally when the customer has taken undisputed delivery of goods.
(b) Interest income – Revenue is recognized as the interest accrues taking into account the effective yield on the asset.
Costs and expenses are recognized in the statement of comprehensive income upon receipt of goods and/or utilization of service or at the date they are incurred. Finance costs are reported on an accrual basis, except capitalized borrowing costs which are included as part of the cost of the related qualifying assets (see Notes 2.5 and 2.15).
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2.11 Leases The Company accounts for its leases as follows: (a) Company as Lessee
Leases which do not transfer to the Company substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments (net of any incentive received from the lessor) are recognized as expense in profit or loss on a straight-line basis over the lease term. Associated costs, such as repairs and maintenance and insurance, are expensed as incurred.
(b) Company as Lessor
Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease income from operating leases is recognized in profit or loss on a straight-line basis over the lease term.
The Company determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
2.12 Foreign Currency Transactions and Translation The accounting records of the Company are maintained in U.S. dollars. Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies that arise from financing activities are presented as part of Finance Costs in the statement of comprehensive income.
2.13 Impairment of Non-financial Assets The Company’s property, plant and equipment and other non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amounts which is the higher of its fair value less costs to sell and its value-in-use. In determining value-in-use, management estimates the expected future cash flows from each cash-generating unit and determines the suitable interest rate in order to calculate the present value of those cash flows. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment loss is reversed if the asset’s or cash generating unit’s recoverable amount exceeds its carrying amount.
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2.14 Employee Benefits The Company provides post-employment benefits to employees through a defined benefit plan, as well as a defined contribution plan. (a) Defined Benefits Plan
A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Company, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Company’s post-employment defined benefit pension plan covers all regular full-time employees. The liability recognized in the statement of financial position for a defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using a discount rate derived from the interest rates of a zero coupon government bonds as published by Philippine Dealing and Exchange Corporation, that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related post-employment liability. Remeasurements, comprising of actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions and the return on plan assets (excluding amount included in net interest) are reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they arise. Net interest is calculated by applying the discount rate at the beginning of the period, taking account of any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest is reported as part of Finance Costs or Finance Income account in the statement of profit or loss. Past-service costs are recognized immediately in profit or loss in the period of a plan amendment.
(b) Defined Contribution Plan A defined contribution plan is a post-employment plan under which the Company pays fixed contributions into an independent entity. The Company has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short-term nature.
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(c) Termination Benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits at the earlier of when it can no longer withdraw the offer of such benefits and when it recognizes costs for a restructuring that is within the scope of PAS 37, Provision, Contingent Liabilities and Contingent Assets, and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the reporting period are discounted to their present value.
(d) Compensated Absences Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the end of the reporting period. They are included in the Trade and Other Payables account at the undiscounted amount that the Company expects to pay as a result of the unused entitlement.
2.15 Borrowing Costs Borrowing costs are recognized as expenses in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.
2.16 Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity, if any. Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the end of the reporting period. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss.
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Deferred tax is accounted for using the liability method, on temporary differences at the end of the reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For purposes of measuring deferred tax liabilities and deferred tax assets for investment properties that are measured using the fair value model, the carrying amounts of such properties are presumed to be recovered entirely through sale, unless the presumption is rebutted, that is, when the investment property is depreciable and is held within the business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The Company establishes liabilities for probable and estimable assessments by Bureau of Internal Revenue (BIR) resulting from any known tax exposures. Estimates represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes available. Deferred tax assets liabilities are offset if the Company has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes relate to the same entity and the same taxation authority.
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2.17 Related Party Relationships and Transactions Related party transactions are transfers of resources, services or obligations between the Company and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual; and, (d) the Company’s retirement plan. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form.
2.18 Equity Capital stock represents the nominal value of shares that have been issued. Additional paid-in capital includes any premium received on the issuance of capital stock. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital, net of any related income tax benefits. Revaluation reserves comprise gains and losses due to the revaluation of land and remeasurements of post-employment defined benefit obligation or asset, specifically actuarial gains and losses. Retained earnings represent all current and prior period results of operations as reported in the profit or loss section of the statements of comprehensive income, reduced by the amount of dividends declared. 2.19 Events after the End of the Reporting Period
Any post-year-end event that provides additional information about the Company’s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.
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3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The Company’s financial statements prepared in accordance with PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates 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. Actual results may ultimately vary from these estimates. 3.1 Critical Management Judgments in Applying Accounting Policies In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements: (a) Distinction between Operating and Finance Leases
The Company has entered into various lease agreements as a lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of asset and liabilities. Based on management’s judgment such leases were determined to be operating leases.
(b) Recognition of Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and contingencies are discussed in Note 2.9 and relevant disclosures in contingencies are presented in Note 20.
3.2 Key Sources of Estimation Uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: (a) Impairment of Trade and Other Receivables
Adequate amount of allowance for impairment is provided for specific and group of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Company’s relationship with the customers, the customers’ current credit status based on third party credit reports and known market forces, the average age of accounts, collection experience and historical loss experience. Based on the analysis done by management, certain receivables were identified to be impaired. The carrying value of trade and other receivables and analysis of allowance for impairment on such financial assets are shown in Note 6.
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(b) Determining Net Realizable Value of Inventories
In determining the net realizable value of inventories, management takes into account the most reliable evidence available at the dates the estimates are made. The future realization of the carrying amounts of inventories as presented in Note 7 is affected by price changes in different market segments. These are considered key sources of estimation, especially that such inventories are substantially perishable in nature and highly affective by temperature and other environmental conditions, uncertainty and may cause significant adjustments to the Company’s inventories within the next financial year.
(c) Estimating Useful Lives of Property, Plant and Equipment
The Company estimates the useful lives of property, plant and equipment, except land, based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amounts of property, plant and equipment are analyzed in Note 9. Based on management’s assessment as at December 31, 2013, there is no change in estimated useful lives of property, plant and equipment during the year. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.
(d) Determining the Fair Value of Land
The Company’s land is carried at revalued amount at the end of the reporting period. In determining the fair value of the land, the Company engages the services of professional and independent appraisers. The fair value is determined by reference to market-based evidence, which is the amount for which the asset could be exchanged between a knowledgeable willing buyer and seller in an arm’s length transaction as at the valuation date. Such amount is influenced by different factors including the location and specific characteristics of the property (e.g., size, features, and capacity), quantity of comparable properties available in the market, and economic condition and behaviour of the buying parties. A significant change in these elements may affect prices and the value of the asset. The amounts of revaluation and fair value gain recognized on land are disclosed in Note 9.
(e) Determining Recoverable Amount of Deferred Tax Assets
The Company reviews its deferred tax assets at the end of the reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The carrying value of deferred tax assets as at December 31, 2013 and 2012 which the management assessed to be probable of being fully utilized within the next two to three years is disclosed in Note 16.
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(f) Impairment of Non-financial Assets
The Company’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.13. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations. No impairment loss was recognized on the Company’s non-financial assets in 2013 and 2012.
(g) Valuation of Post-employment Benefits
The determination of the Company’s obligation and cost of post-employment defined benefit are dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates and salary increase rates. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. The amount of retirement benefit obligation (asset) and expense and an analysis of the movements in the estimated present value of post-employment benefit obligation and fair value of plan assets are presented in Note 15.2.
4. RISK MANAGEMENT OBJECTIVES AND POLICIES The Company is exposed to certain financial risks which result from both its operating and investing activities. The Company’s risk management is coordinated with its parent company, in close cooperation with the BOD, and focuses on actively securing the Company’s short-to-medium term cash flows by minimizing the exposure to financial markets. The Company does not engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed to are described below.
4.1 Market Risk
The Company is exposed to market risk through its use of financial instruments and specifically to currency risk and interest risk which result from both its operating and investing activities. (a) Foreign Currency Risk
Most of the Company’s transactions are carried out in U.S. Dollars, its functional currency. Exposures to currency exchange rates arise from the interest-bearing loans from local banks, trade and other payables and due to related parties which are primarily denominated in Philippine peso. The Company also holds Philippine peso-denominated cash.
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To mitigate the Company’s exposure to foreign currency risk, non-U.S. dollar cash flows are regularly monitored. Foreign currency denominated financial assets and liabilities (in Philippine pesos), translated into U.S. dollars at the closing rate are as follows:
The sensitivity of the net results in regards to the Company’s financial assets and financial liabilities and the U.S. dollar – Philippine peso exchange rate assumes a +/-23.7% and +/-15.9% change of the U.S. dollar/Philippine peso exchange rate in 2013 and 2012, respectively. These percentages have been determined based on the average market volatility in exchange rates, using standard deviation, in the previous 12 months, estimated at 99% level of confidence. The sensitivity analysis is based on the Company’s foreign currency financial instruments held at the end of each reporting period, with effect estimated from the beginning of the year. If the Philippine peso had strengthened against the U.S. dollar, then this would have the following impact:
If the Philippine peso had weakened against the U.S. dollar, then this would have a reverse impact by the same amounts as above.
The exchange rates used to translate Philippine peso-denominated financial assets and liabilities to U.S. dollars at December 31, 2013 and December 31, 2012 was P44.41:$1 and P41.19:$1, respectively. The Company actively monitors the volatility of the foreign currency exchange rates to manage its foreign currency exposure.
Exposures to foreign currency exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Company’s currency risk.
(b) Interest Rate Risk
The Company has limited exposure to changes in market interest rates through its interest-bearing loans and cash and cash equivalents, which are mostly short-term and are subject to variable interest rates. These financial instruments have historically shown small or measured changes in interest rates. All other financial assets and liabilities have fixed rates.
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4.2 Credit Risk Credit risk is the risk that a counter party may fail to discharge an obligation to a Company. The Company is exposed to this risk with respect to certain financial instruments arising from selling goods to customers, including related parties, and placing deposits and short term placements with banks. The Company continuously monitors defaults of customers and other counterparties, if any identified either individually or by group, and incorporate this information into its credit risk controls. Where available at a reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Company’s policy is to deal only with creditworthy counterparties. In addition, for a significant proportion of sales, advance payments are received to mitigate credit risk. Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the statements of financial position (or in the detailed analysis provided in the notes to the financial statements), as summarized below. Notes 2013 2012
Cash and cash equivalents 5 $ 8,205,166 $ 2,201,727 Trade and other Receivables - net 6 20,158,886 4,619,685 $ 28,364,052 $ 6,821,412 The Company’s management considers that all the above financial assets that are not impaired or past due for each reporting period are of good credit quality. a. Cash and Cash Equivalents As part of Company policy, bank deposits are only maintained with reputable financial institutions. Cash in banks which are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum coverage of P500,000 ( approximately $11,259) per depositor per banking institution, as provided for under Republic Act No. 9576, Charter of PDIC, are still subject to credit risk.
b. Trade and Other Receivables In respect of trade and other receivables, the Company is exposed to significant credit risk exposure to a single counterparty. As of December 31, 2013, 25% of its trade receivable is from a single counterparty. To mitigate the risk, the Company has policies in place to ensure that goods are sold to customers with an appropriate credit history. Based on historical information about customer default rates, management consider the credit quality of trade receivables that are not past due or impaired to be good. There was no significant credit risk exposure to a single counterparty as of December 31, 2012.
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Financial assets that are past due but not impaired are as follows: 2013 2012 Less than one year $ 2,485,213 $ 1,566,491 More than one year - 259
$ 2,485,213 $ 1,566,750
4.3 Liquidity Risk
The ability of the Company to finance its operations and to meet obligations as these become due is extremely crucial to its viability as a business entity. The Company adopts a prudent liquidity risk management where it maintains sufficient cash to meet trade and other short-term payables as they fall due. The Company manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash outflows due in a day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a six-month and one-year period are identified monthly. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets. As at December 31, 2013, the Company’s financial liabilities have contractual maturities which are presented below.
Within 6 to 12 6 Months Months Interest-bearing loans $ 45,155,961 $ - Trade and other payables 8,199,726 - Due to related parties 5,238,586 - $ 58,594,273 $ -
This compares to the maturity of the Company’s financial liabilities as at December 31, 2012 as follows:
Within 6 to 12 6 Months Months
Interest-bearing loans $ 33,577,830 $ 370,986 Trade and other payables 10,868,961 - Due to related parties 4,085,368 - $ 48,532,159 $ 370,986
The above contractual maturities reflect the gross cash flows, which may differ from the carrying values of the liabilities at the end of each of the reporting periods.
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5. CASH AND CASH EQUIVALENTS The breakdown of this account is as follows: 2013 2012
Cash on hand $ 1,914 $ 1,821 Cash in bank 4,259,113 2,201,727 Short term placements 3,946,053 - $ 8,207,080 $ 2,203,548
Cash in banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods between 30 to 90 days and earn effective interest ranging from 1.63% to 2.25% for both periods.
6. TRADE AND OTHER RECEIVABLES
This account (see also Note 4.2) is composed of the following: Note 2013 2012
Trade receivables are usually due within 30 to 45 days and do not bear any interest. All trade and other receivables are subject to credit risk exposure. Deposit on purchase pertains to the Company’s advance payment to suppliers. All of the Company’s trade and other receivables have been reviewed for indicators of impairment. Certain receivables were identified to be impaired, hence, adequate amounts of allowance for impairment have been recognized. The Company recognized impairment losses of $22,189 in 2013 and $75,500 in 2012 and presented them as part of Impairment loss on trade and other receivables under Administrative Expenses in the statements of comprehensive income (see Note 13).
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A reconciliation of the allowance for impairment at the beginning and end of 2013 and 2012 is shown below. Note 2013 2012
Balance at beginning
of year $ 144,283 $ 68,783 Reversal of impairment ( 144,283) - Impairment losses 13 22,189 75,500 Balance at end of year $ 22,189 $ 144,283
In 2013, the Company recognized reversal of allowance for impairment on certain accounts amounting to P144,283 (nil in 2012) and presented it as part of Other income under Other Operating Expenses (Income) in the 2013 statement of comprehensive income.
7. INVENTORIES
Details of inventories are shown below. Note 2013 2012
Finished goods:
At cost $ 13,256,275 $ 10,268,611 At net realizable value 2,570,888 176,170
13 15,827,163 10,444,781 Raw and packaging materials 12,476,580 33,344,561
Spare parts, supplies and others 906,828 1,056,207
$ 29,210,571 $ 44,845,549
The inventory write-down amounting to $623,851 in 2013 and $291,319 in 2012 are included under changes in finished goods inventories and is presented as part of Cost of Goods Sold in the statements of comprehensive income, as the Company considers the write-down to be normal in its operations.
Cost of inventories charge to operation in 2013 and 2012 is analyzed in Note 13.
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8. PREPAYMENTS AND OTHER CURRENT ASSETS The composition of this account is shown below. 2013 2012
Tax credit certificates (TCC) from the Bureau of Customs (BOC) $ 1,004,460 $ 937,542 Prepaid insurance 9,579 12,385 Prepaid rent 337 363 Others 46,202 23,350 $ 1,060,578 $ 973,640
TCC from the BOC are granted to the Bureau of Investment (BOI) registered companies and are given for taxes and duties paid on raw materials used for the manufacture of their export products. The Company can offset their TCC against tax liabilities other than withholding tax or be converted to a cash refund.
9. PROPERTY, PLANT AND EQUIPMENT The gross carrying amounts and accumulated depreciation of property, plant and equipment at the beginning and end of 2013 and 2012 are shown below.
At Fair Value At Cost Transportation Machinery Construction- Land and Delivery and in- Land Buildings Improvements Equipment Equipment Progress Total
Construction-in-progress pertains to the accumulated costs incurred on the ongoing construction of a new building and installation of machinery and equipment as part of the Company’s expansion program (see Note 20.3). In 2013 and 2012, portion of construction-in-progress amounting to $638,886 and $392,963, respectively, were completed and transferred by the Company to their proper account classification. The Company did not capitalize any borrowing cost related to their general borrowings in 2013 and 2012, since management determined that the effect is not material to the financial statements. On October 15, 2013, the Company’s land with a carrying value of $1,862,839 as at the date of sale was sold to CCC at its original cost of $1,827,066. Consequently, loss on disposal of land of $35,773 is recognized and shown as part of Loss on disposal of property and equipment under Other Expenses in the 2013 statement of comprehensive income (see Note 13). The corresponding revaluation reserve of $35,773, carried in equity is transferred directly to the Retained Earnings. The amount of depreciation (see Note 13) is allocated as follows: 2013 2012
Cost of goods sold $ 2,695,638 $ 2,550,836 Administrative expenses 141,876 178,423 $ 2,837,514 $ 2,729,259
Fully depreciated assets with total original cost of $4,635,448 and $3,887,265 as at December 31, 2013 and 2012 respectively, are still being used in operations. Certain machinery with net book value of $37,148 was no longer in use; hence, derecognized as at December 31, 2013.
10. OTHER NON-CURRENT ASSETS Other non-current assets are summarized below: Note 2013 2012
The short-term and long-term interest-bearing loans, which are collateralized by a continuing joint suretyship of certain stockholders and a corporate guarantee of CCC (see Note 20), are broken down as follows:
2013 2012 in PHP in USD in PHP in USD Short-term P1,984,600,000 $ 44,684,109 P 1,320,700,000 $ 32,062,051 Long-term 15,000,000 337,731 75,000,000 1,820,742 P1,999,600,000 $ 45,021,840 P 1,395,700,000 $ 33,882,793
These loans were originally availed in Philippine peso and are presented in the statements of financial positions as follows: 2013 2012
Short-term loans consist of several borrowings from local banks which mature within 14 to 30 days and bear annual interest rates ranging from 2.50% to 2.65% in 2013 and 2.25% to 4.75% in 2012. Only the Company’s long-term loan is subject to a condition that requires the Company to meet certain financial ratios such as debt-to-equity ratio (not to exceed 2.5:1) and current ratio (of at least 1.0:1). In the event of default or non-compliance with any of the provisions of the loan agreement, the bank-creditor may (by written notice) either declare the loan terminated or declare the entire unpaid principal amount and interest of the loan due and demandable. The loan covenant has been consistently complied with by the Company but not as of December 31, 2013 (see Note 22). However, on February 27, 2014, complying with the long-term loan’s prescribed bank-scheduled-amortization, the Company has fully paid the remaining principal amount, denominated in Philippine peso, and included in current liabilities as at December 31, 2013 amounting to P15,000,000 (or approximately $337,731) without additional burden of penalties that the local bank could have imposed had the loan covenant conditions were applied. As such, the Company had foregone obtaining a bank loan waiver effective December 31, 2013. The Company’s management assessed that obtaining such waiver is academic, in the absence of a written notice issued by the bank, as full payment and non-imposition of any bank penalties has cured any breach of the loan covenant. Interest expense charged to operations amounted to $1,069,892 in 2013 and $816,041 in 2012 and presented as part of Finance Costs in the statements of comprehensive income (see Note 14). The unpaid balance of interest amounting to $64,678 and $52,116 as at December 31, 2013 and 2012, respectively, is presented as part of Accrued Expenses under the Trade and Other Payables account in the statements of financial position (see Note 12).
Accrued expenses include the current portion of the Company’s obligations to its employees and service providers that are expected to be settled within 12 months from the end of the reporting period. These liabilities arise mainly from the accrual of various expenses such as rent, freight, interest on loans and payroll at the end of the period.
Others payable also include liabilities to various agencies and regulatory bodies. 13. COSTS AND OPERATING EXPENSES BY NATURE
The details of costs and operating expenses by nature are shown below.
Notes 2013 2012 Raw materials used $ 115,802,914 $ 62,956,137 Changes in finished goods inventories 7 ( 5,382,382) 1,531,579 Outside services 17.5 7,376,689 5,852,420 Rent 20.1 5,070,682 4,100,160 Depreciation 9 2,837,514 2,729,259 Gas, fuel and oil 2,382,700 2,156,957 Supplies 2,255,899 1,989,322 Communication, light and water 1,686,203 1,315,590 Freight 1,587,318 1,117,023 Salaries and employee benefits 15 1,145,041 1,134,103 Taxes and licenses 24.1(c) 356,812 299,395 Insurance 249,003 175,994 Repairs and maintenance 213,316 170,374 Loss on disposal of property and equipment 9 72,921 - Commissions 63,689 45,369 Impairment losses on trade and other receivables 6 22,189 75,500 Foreign currency losses – net - 989,185 Miscellaneous 296,626 248,560 $ 136,037,134 $ 86,886,927
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These expenses are classified in the statements of comprehensive income as follows: 2013 2012 Cost of goods sold $ 132,466,117 $ 83,175,582 Administrative expenses 1,844,935 2,500,647 Selling expenses 1,651,007 1,162,392 Other expenses 75,075 48,306 $ 136,037,134 $ 86,886,927
Cost of goods sold consists of the following:
Note 2013 2012 Finished goods at beginning of year 7 $ 10,444,781 $ 11,976,360
Cost of goods manufactured: Raw materials used 115,802,914 62,956,137
Direct labor 5,584,209 4,505,777 Manufacturing overhead 16,461,376 14,182,089
137,848,499 81,644,003 Total goods available for sale 148,293,280 93,620,363
Finished goods at end of year 7 ( 15,827,163 ) ( 10,444,781 ) $ 132,466,117 $ 83,175,582
14. FINANCE COSTS AND INCOME
The details of these accounts are presented below. Notes 2013 2012
The Company maintains a partially funded, tax-qualified, non-contributory post-employment benefit plan that is being administered by a trustee bank covering all regular full-time employees. The normal retirement age is 60 with a minimum of 5 years of credited service. The plan also provides for an early retirement at age 50 with a minimum of 10 years of credited service and late retirement after age 60, both subject to the approval of the Company’s BOD. Normal retirement benefit is an amount equivalent to 100% of the final monthly covered compensation (average monthly basic salary during the last 12 months of credited service) for every year of credited service.
(b) Explanation of Amounts Presented in the Financial Statements
Actuarial valuations are made annually to update the retirement benefit costs and the amount of contributions. All amounts presented below are based on the actuarial valuation report obtained from an independent actuary in 2013 including the comparative year which has been restated in line with the adoption of PAS 19 (Revised), see Note 2.2(a)(ii).
The amounts of post-employment defined benefit obligation recognized in the statements of financial position are determined as follows:
2013 2012 Present value of the obligation $ 415,197 $ 396,926 Fair value of plan assets ( 401,718 ) ( 408,017 ) Under (over) funded 13,479 ( 11,091 ) Effect of asset ceiling - 657 $ 13,479 ( $ 10,434 )
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The movements in present value of the post-employment benefit obligation are as follows:
2013 2012 Balance at beginning of year $ 396,926 $ 314,055 Current service 42,726 40,176 Interest costs 24,491 20,346 Remeasurements – actuarial loss (gain): Changes in financial assumptions 31,307 - Experience adjustments ( 30,796 ) - Benefits paid by the plan ( 28,898 ) - Effect of foreign currency exchange rate changes ( 20,559) 22,349 Balance at end of year $ 415,197 $ 396,926
The movement in the fair value of plan assets is presented below.
2013 2012 Balance at beginning of year $ 408,017 $ 316,719 Interest income 25,145 21,823 Contributions paid into the plan 29,248 35,762 Benefits paid by the plan ( 28,898 ) - Remeasurement- return on plan assets ( 11,445 ) 7,430 Effect of foreign currency exchange rate changes ( 20,349 ) 26,283 Balance at end of year $ 401,718 $ 408,017
Actual return on plan assets amounted to $9,509 in 2013 and $29,335 in 2012. The composition of the fair value of total plan assets at the end of the reporting period by category is shown below.
2013 2012 Cash and cash equivalents $ 38,967 $ 43,209 Debt instruments : Government bonds 244,566 247,340 Other bonds 87,333 80,175 Others 30,852 37,293 $ 401,718 $ 408,017
Plan assets do not comprise any of the Company’s own financial instruments or any of its assets occupied and/or used in its operations.
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The components of amounts recognized in profit or loss and in other comprehensive income in respect of the defined benefit post-employment plan are as follows:
2013 2012
Reported in profit or loss:
Current service costs $ 42,726 $ 40,176 Net interest income ( 654 ) ( 1,477 ) $ 42,072 $ 38,699
Reported in other comprehensive income:
Actuarial gains (losses) arising from changes in: Financial assumptions $ 31,307 $ - Experience adjustments ( 30,796) - Return on plan assets (excluding amounts included in net interest expense) ( 11,445) 7,430 Actuarial gain (loss) on change on the effect of the asset ceiling test 683 ( 171 ) Tax income (expense) 3,075 ( 2,178 ) ($ 7,176) $ 5,081
Current service cost is allocated and presented in the statements of profit or loss under the following accounts:
The net interest income is included in the caption Finance Income (see Note 14.2) and the amount recognized in other comprehensive income is included under item that will not be reclassified subsequently to profit or loss. In determining the amounts of the defined benefit post-employment obligation, the following significant actuarial assumptions were used:
Assumptions regarding future mortality experience are based on published statistics and mortality tables. The average remaining working lives of an individual retiring at the age of 65 is 22 for both males and females.
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These assumptions were developed by management with the assistance of an independent actuary. Discount factors are determined close to the end of each reporting period by reference to the interest rates of a zero coupon government bonds with terms to maturity approximating to the terms of the post-employment obligation. Other assumptions are based on current actuarial benchmarks and management’s historical experience.
(c) Risks Associated with the Retirement Plan
The plan exposes the Company to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.
(i) Investment and Interest Risks The present value of the defined benefit obligation is calculated using a discount rate determined by reference to market yields of government bonds. Generally, a decrease in the interest rate of a reference government bonds will increase the plan obligation. However, this will be partially offset by an increase in the return on the plan’s investments in debt securities and if the return on plan asset falls below this rate, it will create a deficit in the plan. Currently, the plan is composed of investment in cash and cash equivalents, corporate and government debt securities. (ii) Longevity and Salary Risks The present value of the defined benefit obligation is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment, and to their future salaries. Consequently, increases in the life expectancy and salary of the plan participants will result in an increase in the plan obligation.
(d) Other Information
The information on the sensitivity analysis for certain significant actuarial assumptions, the Company’s asset-liability matching strategy, and the timing and uncertainty of future cash flows related to the retirement plan are described below. (i) Sensitivity Analysis
The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is shown below.
Impact on Defined Benefit Obligation Change in Increase in Decrease in Assumption Assumption Assumption Discount rate +/-1% ( $ 29,020 ) $ 32,051 Salary increase rate +/-1% 28,153 ( 26,163 )
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The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. This analysis may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the statements of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous years.
(ii) Asset-liability Matching Strategies
The Company has no specific matching strategy between the plan assets and the plan liabilities. However, concentration on government and corporate debt instruments, are evident to align securing the principal value of plan assets from volatility or high risk in loss of value.
(iii) Funding Arrangements and Expected Contributions The plan is currently underfunded by $13,479 based on the latest actuarial valuation but the Company does not expect any contribution to the retirement benefit plan in 2014. While there are no minimum funding requirement in the country, the size of the underfunding may pose a cash flow risk in about 6 years’ time when a significant number of employees is expected to retire. The maturity profile of undiscounted expected benefit payments from the plan follows:
Between 1 to 5 years $ 7,530 Between 6 to 10 years 111,318 $ 118,848
The weighted average duration of the defined benefit obligation at the end of the reporting period is 9.5 years.
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16. TAXES
The major components of tax expense as reported in profit or loss: Note 2013 2012 Reported in profit or loss: Current tax expense: Regular corporate income tax (RCIT) at 30% 18 $ 742,366 $ 931,329 Final taxes at 20% and 7.5% 7,191 13,249 749,557 944,578 Deferred tax income relating to reversal of temporary differences ( 82,075 ) ( 68,622) $ 667,482 $ 875,956 Reported in other comprehensive income – Deferred tax expense (income) relating to reversal of temporary differences $ 3,075 ($ 2,178)
The reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in the statements of comprehensive income profit is as follows:
2013 2012 Tax on pretax profit at 30% $ 1,172,178 $ 917,039 Adjustment for income subjected to lower income tax rates ( 3,595 ) ( 7,019) Tax effects of: Income subjected to income tax holiday (ITH) ( 462,218 ) - Non-taxable income ( 44,608 ) ( 40,549 ) Non-deductible expenses 5,725 6,485 Tax expense $ 667,482 $ 875,956
The net deferred tax assets relate to the following: Statement of Comprehensive Income
Statements of Other Financial Position Profit or loss Comprehensive Income 2013 2012 2013 2012 2013 2012 Allowance for inventory write-down $ 178,875 $ 87,396 ( $ 91,479) ( $ 12,273 ) $ - $ - Unrealized foreign currency loss (gain) 23,690 ( 108 ) ( 23,797) ( 42,652 ) - - Past service cost 12,171 15,625 3,454 3,765 Allowance for impairment 6,362 43,285 36,923 ( 22,543 ) - - Post-employment benefit obligation (asset) 4,046 ( 3,130 ) ( 7,176) 5,081 3,075 ( 2,178 ) Net Deferred Tax Assets $ 225,144 $ 143,069 Deferred Tax Expense (Income) ($ 82,075 ) ( $ 68,622 ) $ 3,075 ( $ 2,178 )
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The Company is subject to the minimum corporate income tax (MCIT) which is computed at 2% of gross income, as defined under the tax regulations, or RCIT, whichever is higher. No MCIT was reported in 2013 and 2012 as the RCIT was higher than MCIT in both years. In 2013 and 2012, the Company opted to claim itemized deductions.
17. RELATED PARTY TRANSACTIONS
The Company’s related parties include its ultimate parent, parent, entities under common ownership, the Company’s key management personnel and others as described in Note 2.17. A summary of the Company’s transaction with related parties:
December 31, 2013 December 31, 2012 Related Party Amount of Receivable Amount of Receivable Category Notes Transactions (Payable) Transactions (Payable) Ultimate Parent Company Purchase of goods 17.1 $ 1,451,775 ($ 1,011,289) $ 993,893 ($ 700,010 ) Accommodation of purchases 17.2 5,535,725 - 11,702,675 - Advances 17.4 1,153,218 ( 5,238,586 ) ( 5,921,302 ) ( 4,085,368 ) Management and consultancy services 17.5 753,813 ( 210,744 ) 438,395 ( 149,555 ) Lease Services 17.3 489,057 125,035 1,092,821 - Related Parties Under
Common Ownership Accommodation of Purchases 17.2 7,856,250 4,577,777 2,242,496 - Key Management Personnel Compensation 17.7 42,447 - 45,539 -
Details of foregoing transaction are as follows:
17.1 Purchase of Goods The Company buys frozen and canned fish inventories from CCC which are then exported at cost. Purchases from CCC amounted to $1,451,775 in 2013 and $993,893 in 2012, which are presented as part of Cost of Good Sold in the statement of comprehensive income. The outstanding payable to CCC in relation to these purchases of goods amounts to $1,011,289 and $700,010 as at December 31, 2013 and 2012, respectively, and presented as part of Others under the Trade and Other Payables account in the statements of financial position (see Note 12). 17.2 Accommodation of Purchases In normal course of the Company’s operation, the Company accommodates purchases of raw material fish inventories and other raw materials for CCC and Columbus Seafoods Corporation (CSC), a related party under common ownership. The total amount of purchases made on behalf of these related parties amounted to $13,391,975 in 2013 and $13,945,171 in 2012. The outstanding balance of such transactions amounts to $4,577,777 as at December 31, 2013 (nil as at December 31, 2012), and is presented as part of Others under Trade and Other Receivables in the 2013 statement of financial position (see Note 6).
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The Company did not recognize any allowance for impairment on those receivables in both years, as these are settled in the normal course of operating cycle and none remains as long-outstanding in any given year. 17.3 Lease Services In 2012, the Company entered into a new agreement with CCC to lease a portion of plant, machinery and equipment and cold storage located in Brgy. Tambler, General Santos City. Both leases shall be from January 1, 2012 onwards and will continue to be in effect unless sooner terminated. Rentals amounted to $489,057 in 2013 and $1,092,821 in 2012. As of December 31, 2013, the outstanding liability arising from this transaction amounts to $125,035 (nil as of December 31, 2012) and is presented as part of part of Others under the Trade and Other Payable account in the 2013 statement of financial position (see Note 12). 17.4 Advances from Related Parties In the normal course of business, the Company obtains advances from CCC and Pacific Meat Company Incorporated (PMCI), a related party under common ownership, for working capital requirements and other purposes. The balance of these advances from related parties as at December 31, 2013 and 2012 is presented as Due to Related Parties in the statements of financial position. Advances from related parties are unsecured, noninterest-bearing and repayable within 12 months.
2013 2012 Balance at beginning of year $ 4,085,368 $ 10,006,670 Additions 12,669,366 16,616,604 Repayments ( 11,516,148) ( 22,537,906) Balance at end of year $ 5,238,586 $ 4,085,368
17.5 Management and Consultancy Fees
Beginning 2011, in addition to key management personnel compensation incurred, the Company entered into an agreement to allow CCC to allocate and charge common corporate expenses to its subsidiaries. The management and consultancy fees incurred by the Company amounted to $753,813 in 2013 and $438,395 in 2012. These are presented as part of Outside Services under Administrative Expenses (see Note 13). The Company’s outstanding liability arising from this agreement amounted to $210,744 and $149,555 as at December 31, 2013 and 2012, respectively, and is presented as part of Others under the Trade and Other Payables account in the statement of financial position and is expected to be settled in 2014 (see Note 12).
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17.6 Financial Guarantees The Company, jointly and severally with its related parties, entered into a cross-corporate guarantee arrangement with various local banks to secure the short-term loan availments of its related parties. The total guaranteed outstanding loan balance (denominated in Philippine peso) amounts to P2,514,700,000 (or approximately $56,619,534) and P1,447,400,000 (or approximately $35,137,891) as at December 31, 2013 and 2012, respectively. The Company did not record the allocated share in exposure measured at fair value (or gross cash outflows) of the guarantee liability because the Company’s management believes and in coordination with the BOD of the Company’s ultimate parent company that probability of default in paying the Company’s related parties respective borrowings is low. There has been no credit default by any related parties nor of the Company. 17.7 Key Management Personnel Compensation
The compensation of key management personnel including the members of Executive Committee and department heads (see Note 15.1), for employee services is shown below:
The key management personnel compensation is in line with the agreement entered into by the Company with CCC relating to management and consultancy fees (see Note 17.5).
18. REGISTRATION WITH BOI
On September 25, 2012, the BOI approved the Company’s application for registration as a new expanding export producer of frozen tuna loins on a non-pioneer status. The Company is entitled to ITH for a period of three years beginning February 1, 2013 using the project’s ability to contribute to the economy’s development pursuant to Article 7 of Executive Order 226 based on the following parameters: (1) project’s net value added; (2) job generation; (3) multiplier effect; and (4) measured capacity.
19. EQUITY 19.1 Capital Stock As at December 31, 2013, the Company has only one stockholder owning 100 or more shares of the Company’s capital stock.
19.2 Retained Earnings
On September 30, 2013, the BOD approved the declaration of cash dividend amounting to P320,000,000 (or approximately $7,388,764) for distribution to stockholders of record as of September 30, 2013. The related dividend was paid in full on November 19, 2013.
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20. COMMITMENTS AND CONTINGENCIES 20.1 Operating Leases The Company is a lessee under several short-term lease contracts with renewal options. The usual term of the lease contract extends to one year that usually ends in December. The amount of rent expense which is recognized as part of Manufacturing overhead under Cost of Goods Sold in the statements of comprehensive income amounted to $5,070,682 and $4,100,160, respectively, in 2013 and 2012 (see Note 13). As of December 31, 2013 and 2012, the future minimum lease payments under these lease agreements amounted to $4,217,330 and $3,583,273, respectively. 20.2 Financial Guarantees The Company together with its related parties has financial guarantees amounting to $56,619,534 and $35,137,891 for the loan obtained by various related parties from various local banks (see Note 17.6). 20.3 Capital Commitments As at December 31, 2013, the Company has construction in progress with an accumulated cost of $661,260. The construction relates to a new building in connection with the Company’s plant expansion. The construction is expected to be completed in 2014 and has remaining estimated costs to complete of P21,290,451 ($479,407) as at December 31, 2013. 20.4 Credit Facilities As at December 31, 2013, the Company together with its related parties has short term loan credit facilities from various local banks under corporate cross guarantee arrangement (see Note 17.6). As at December 31, 2013, the unused credit facilities amounts to $59,589,769. 20.5 Others There are other commitments, litigations and contingent liabilities that arise in the normal course of the Company’s operations which are not reflected in the accompanying financial statements. As at December 31, 2013, management is of the opinion that losses, if any, from these commitments and contingencies will not have a material effect on the Company’s financial statements.
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21. CATEGORIES, FAIR VALUE MEASUREMENTS AND OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
21.1 Carrying Amounts and Fair Values by Category
The carrying amounts and fair values of the categories of assets and liabilities presented in the statements of financial position are shown below.
Notes December 31, 2013 December 31, 2012 Carrying Fair Carrying Fair Values Values Values Values Financial Assets Loans and receivables: Cash 5 $ 8,207,080 $ 8,207,080 $ 2,203,548 $ 2,203,548 Trade and other receivables – net 6 20,158,886 20,158,886 4,619,685 4,619,685 $ 28,365,966 $ 28,365,966 $ 6,823,233 $ 6,823,233 Financial Liabilities Financial liabilities at amortized cost: Current: Interest-bearing loans 11 $ 45,021,840 $ 45,021,840 $ 33,518,645 $ 33,518,645 Trade and other payables 12 8,199,726 8,199,726 7,285,945 7,285,945 Advances from related parties 17.4 5,238,586 5,238,586 4,085,368 4,085,368 Non-current – Interest-bearing loans 11 - - 364,148 364,148 $ 58,460,152 $ 58,460,152 $ 45,254,106 $ 45,254,106
See Notes 2.3 and 2.7 for a description of the accounting policies for each category of financial instrument. A description of the Company’s risk management objectives and policies for financial instruments is provided in Note 4. Management considered the carrying amounts of these financial instruments to approximate their fair values as at December 31, 2013 and 2012.
21.2 Fair Value Hierarchy In accordance with PFRS 13, the fair value of financial assets and liabilities and non-financial assets which are measured at fair value on a recurring or non-recurring basis and those assets and liabilities not measured at fair value but for which fair value is disclosed in accordance with other relevant PFRS, are categorized into three levels based on the significance of inputs used to measure the fair value. The fair value hierarchy has the following levels:
a) Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities that an entity can access at the measurement date; b) Level 2: inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and,
c) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level within which the asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement.
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For purposes of determining the market value at Level 1, a market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company has no financial assets and financial liabilities measured at fair value or that are not carried at fair value but are required to be disclosed as at December 31, 2013 and 2012. For financial asset and financial liabilities measured at amortized cost management considers that their carrying amounts approximate their fair values (see Note 21.1).
21.3 Offsetting of Financial Assets and Financial Liabilities The Company has no financial assets and financial liabilities which are presented as net as at December 31, 2013 and 2012. Currently, certain financial assets and financial liabilities are settled on a gross basis, except for certain transactions where the customer also supplies certain raw materials to the Company and wherein such amounts can be settled on a net basis upon the approval of both parties. As such, the Company’s related outstanding receivables amounting to $5.1 million can be offset by the amount of related outstanding liabilities of $1.2 million as of December 31, 2013. There was no similar transaction source of potential offsetting in 2012.
22. CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES The Company’s capital management objectives are:
• To ensure the Company’s ability to continue as a going concern;
• To meet maturing obligation to creditors; and,
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the statements of financial position. The Company is required to meet a certain level of debt-to-equity ratio. With the declaration of cash dividend as of September 30, 2013 (see Note 19) the Company’s equity account as at December 31, 2013 significantly declined. As a result, the Company breached the level set forth in the long-term loan agreement. However, the subsequent full settlement of the loan balance as of February 27, 2014 cured bank imposed penalties, if any (see Note 11). Capital for the reporting periods under review is summarized as follows:
2013 2012 Total liabilities $ 58,503,306 $ 49,186,500 Total equity 16,744,884 20,901,045 Debt-to-equity ratio 3.49 : 1 2.35 : 1
The Company sets the amount of capital in proportion to its overall financing structure, i.e., equity and financial liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.
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23. SUPPLEMENTARY INFORMATION ON STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME The Company’s financial statements are presented in U.S. dollars, its functional currency. The following information, which shows amounts of the Company’s statements of financial position and statements of comprehensive income in Philippine pesos, is presented for purposes of providing supplementary information to certain users and is not intended to be a presentation in accordance with PFRS. Under this supplemental information, transactions denominated in Philippines pesos were presented using the amounts at the dates of the transactions, while transactions denominated in U.S. dollars were translated using appropriate exchange rates. Foreign currency gains and losses are not translated.
Statements of Financial Position
2013 2012 ASSETS Current assets P 2,651,407,165 P 2,194,606,531 Non-current assets 606,584,984 674,726,869 Total Assets P 3,257,992,149 P 2,869,333,400 LIABILITIES AND EQUITY Current liabilities P 2,598,351,018 P 2,011,090,293 Non-current liabilities - 14,355,250 Total Liabilities 2,598,351,018 2,025,445,543 Equity 659,641,131 843,887,857 Total Liabilities and Equity P 3,257,992,149 P 2,869,333,400
Statements of Comprehensive Income 2013 2012 Revenue – net P 5,923,105,471 P 3,793,036,607 Cost of goods sold ( 5,551,720,786) ( 3,575,252,766 ) Other operating expenses and other charges ( 205,169,853) ( 93,713,393 ) Tax expense ( 29,979,210) ( 37,198,563 ) Net profit P 136,235,622 P 86,871,885
The translation into Philippine pesos should not be construed as a representation that the U.S. dollar amounts could be converted into Philippine Peso amounts or at any other rates of exchange.
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24. SUPPLEMENTARY INFORMATION REQUIRED BY THE BUREAU OF INTERNAL REVENUE
Presented below is the supplementary information which is required by the Bureau of Internal Revenue (BIR) under its existing revenue regulations to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under PFRS. 24.1 Requirements under Revenue Regulations (RR) 15-2010 The information on taxes, duties and license fees paid or accrued during the taxable year required under RR 15-2010 issued on November 25, 2010 are as follows:
(a) Output VAT
In 2013, the Company declared output VAT as follows:
In Philippine Pesos In U.S. Dollars Output Output
Tax Base VAT Tax Base VAT
VATable sales P 204,527,796 P 24,543,336 $ 4,605,030 $ 552,604
Zero-rated sales 5,447,951,376 - 122,662,930 -
Exempt sales 913,078,125 - 20,558,340 -
P 6,565,557,297 P 24,543,336 $ 147,826,300 $ 552,604
The Company’s zero-rated and VAT zero-rated and exempt sales/receipt were determined pursuant to Section 106(A)(2)(a), Zero-rated VAT on Export Sale of Goods, and Section 109, VAT Exempt Transactions, of the 1997 National Internal Revenue Code, as amended. The tax bases are included as part of Sales of Goods in the 2013 statement of comprehensive income. Total output VAT paid during the year amounting to P13,138,511 ($295,842) net of allowable input VAT.
(b) Input Value-added Tax The movements in Input VAT in 2013 are summarized below.
In Philippine In U.S. Pesos Dollars Balance at beginning of year P 27,337,273 $ 663,655 Goods for resale/manufacture or further processing 581,015 13,081 Capital goods subject to amortization 897,722 20,213 Services lodged under cost of goods sold 6,048,961 136,195 Claims for tax credit/refund ( 8,725,287 ) ( 196,454 ) Applied against output VAT ( 11,403,825 ) ( 256,762 ) Foreign currency adjustment - ( 48,145 ) Balance at end of year P 14,735,859 $ 331,784
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The balance of Input VAT amounting to P14,735,859 ($331,784) as at December 31, 2013 is presented as part of Other Non-current Assets in the 2013 statement of financial position (see Note 10). (c) Taxes on Importation
In 2013, the total landed cost of the Company’s imported inventory for the use in business amounted to P4,485,108,643 ($105,658,759). This amount includes customs’ duties and tariff fees of P539,022 ($12,698).
(d) Excise Tax
The Company did not have any transactions in 2013 which are subject to excise tax.
(e) Documentary Stamp Tax (DST)
In 2013, the total DST paid and accrued by the Company on loan instruments amounted to P9,382,081 ($221,020).
(f) Taxes and Licenses
The details of taxes and licenses for the year 2013 are broken down as follows:
Philippine U.S. Pesos Dollars
DST P 9,382,081 $ 221,020 Business tax 2,638,576 62,159 Real estate tax 2,092,098 49,285 Miscellaneous 1,033,565 24,348 P 15,146,320 $ 356,812
The amounts of taxes and licenses for the year 2013 are presented as part of Taxes and licenses under Administrative Expenses in the 2013 statement of comprehensive income (see Note 13).
(g) Withholding Taxes
The details of total withholding taxes for the year ended December 31, 2013 are shown below.
Philippine U.S. Pesos Dollars
Expanded P 25,507,685 $ 574,316 Compensation and benefits 3,376,105 76,014 Final 537,104 12,093 P 29,420,894 $ 662,423
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(h) Deficiency Tax Assessment and Tax Cases
As at December 31, 2013, the Company does not have any deficiency tax assessment with the BIR or tax cases outstanding or pending in courts or bodies outside of the BIR in any of the open years. 24.2 Requirements under RR 19-2011 RR 19-2011 requires schedules of taxable revenues and other non-operating income, costs of sales and services, and itemized deductions, to be disclosed in the notes to financial statements.
The amounts of taxable revenues and income, and deductible costs and expenses presented below are based on relevant tax regulations issued by the BIR, hence, may not be the same as the amounts reflected in the 2013 statement of comprehensive income. (a) Taxable Revenues
The composition of the Company’s taxable revenues arising from sale of goods for the year ended December 31, 2013 is presented below.
U.S. Dollar Philippine Peso Exempt $ 69,650,674 P 2,972,532,223 Regular rate 68,468,547 2,922,081,741 $ 138,119,221 P 5,894,613,964
Exempt transactions were determined pursuant to the guidelines on the issuance of certification to BOI-registered Company per Revenue Memorandum Order 9-2000, Tax Treatment of treatment of Sales of Goods, Properties and Services made by VAT-registered supplier to BOI-registered Manufacturers-Exporters with 100% Export Sales.
(b) Deductible Costs of Sale
Deductible costs of sales at regular tax rate for the year ended December 31, 2013 comprises the following:
Exempt Regular Rate U.S. Dollar Philippine Peso U.S. Dollar Philippine Peso Finished goods at beginning of year $ 8,180,447 P 222,375,120 $ 7,646,716 P 207,866,300 Cost of goods
As restated 11,333,722 3,296,386 35,773 4,059,761 18,725,642
Net profit for the year - - - 2,179,056 2,179,056
Balance at December 31, 2012 11,333,722 $ 3,296,386 $ 35,773 $ 6,238,817 $ 20,904,698 $
Balance at January 1, 2011 7,286,958 $ 3,296,386 $ 35,773 $ 8,495,621 $ 19,114,738 $
Cash dividend 19 - - - 1,732,062 )( 1,732,062 )(
Stock dividend 19 4,046,764 - - 4,046,764 )( -
Net profit for the year - - - 1,342,966 1,342,966
Balance at December 31, 2011 11,333,722 $ 3,296,386 $ 35,773 $ 4,059,761 $ 18,725,642 $
GENERAL TUNA CORPORATION
(A Wholly Owned Subsidiary of Century Canning Corporation)
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Amounts in United States Dollars)
DRAFT (For Discussion Purpose Only)
See Notes to Financial Statements.
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Notes 2012 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 3,054,026 $ 2,702,678 $
Adjustments for:
Depreciation 9 2,729,259 2,461,014
Unrealized foreign currency loss 1,361,096 867,227
Interest expense 14 816,041 605,044
Finance income 5 67,561 )( 19,797 )(
Loss on retirement of property and equipment 1,508 27,358
Operating profit before working capital changes 7,894,369 6,643,524
Decrease in trade and other receivables 1,360,818 1,584,338
Increase in inventories 6,170,772 )( 7,035,751 )(
Decrease (increase) in other current assets 765,487 )( 47,701
Decrease in retirement benefit asset 2,040 9,404
Decrease in other non-current assets 30,556 136,926
Increase in trade and other payables 875,219 2,859,741
Cash generated from operations 3,226,743 4,245,883
Income taxes paid 262,994 )( 128,421 )(
Net Cash From Operating Activities 2,963,749 4,117,462
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisitions of property, plant and equipment 9 1,724,761 )( 2,494,151 )(
Interest received 67,561 19,797
Proceeds from sale of property, plant and equipment - 88,081
Net Cash Used in Investing Activities 1,657,200 )( 2,386,273 )(
CASH FLOWS USED IN FINANCING ACTIVITIES
Proceeds from short-term interest-bearing loans 8,691,770 756,164
Repayments of advances from related parties 5,921,302 )( 690,564 )(
Payment of dividends declared in prior year 19 1,732,062 )( -
Repayments of long-term interest-bearing loans 1,456,594 )( 1,385,265 )(
Interest paid 763,925 )( 229,794 )(
Net Cash Used in Financing Activities 1,182,113 )( 1,549,459 )(
NET INCREASE IN CASH AND CASH EQUIVALENTS 124,436 181,730
Effect of Exchange Rate Changes on Cash and Cash Equivalents 18,985 10,006
BEGINNING OF YEAR CASH AND CASH EQUIVALENTS 2,060,127 1,868,391
END OF YEAR CASH AND CASH EQUIVALENTS 2,203,548 $ 2,060,127 $
Supplemental Information on Non-cash Investing and Financing Activities:
1)
2)
STATEMENTS OF CASH FLOWS
(A Wholly Owned Subsidiary of Century Canning Corporation)
GENERAL TUNA CORPORATION
See Notes to Financial Statements.
DRAFT (For Discussion Purpose Only)
(Amounts in United States Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
In the same year, the Company transferred certain available-for-sale financial assets to its parent company amounting to $185,370
as payment for certain advances from the parent company (see Note 17.2)
In 2011, the Company issued common shares amounting to $4,046,764 as stocks dividends (see Note 19); declared cash dividend
amounting to $1,732,062 which remained unpaid as at December 31, 2011 (see Note 19).
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DRAFT (For Discussion Purpose Only)
GENERAL TUNA CORPORATION (A Wholly Owned Subsidiary of Century Canning Corporation)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 (Amounts in United States Dollars)
1. CORPORATE INFORMATION General Tuna Corporation (the Company) was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) on March 10, 1997. It is presently engaged in manufacturing and exporting private label canned, pouched and frozen tuna products. The Company is a wholly owned subsidiary of Century Canning Corporation (CCC or the parent company), a company incorporated and domiciled in the Philippines. CCC is presently engaged in the manufacturing and distribution of canned tuna products for the Philippine market. The registered office, which is also the principal place of business, of CCC and the Company is located at 32 Arturo Drive, Bagumbayan, Taguig, Metro Manila and the Company’s processing plant is located at Brgy. Tambler, General Santos City. The financial statements of the Company for the year ended December 31, 2012 (including the comparatives for the year ended December 31, 2011) were authorized for issue by the Company’s Vice President for Finance on April 12, 2013.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. The policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation of Financial Statements
(a) Statement of Compliance with Philippine Financial Reporting Standards
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). The financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies in the succeeding pages.
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DRAFT (For Discussion Purpose Only)
(b) Presentation of Financial Statements
The financial statements are presented in accordance with Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements. The Company presents all items of income and expense in a single statement of comprehensive income. Two comparative periods are presented for the statement of financial position when the Company applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or reclassifies items in the financial statements. In 2012, the Company restated its 2011 financial statements to reclassify the amount of cold storage rentals, which was inadvertently included as part of the Company’s inventoriable costs in 2011, should be expensed outright as the said expense is not directly related to the cost of its inventories.
(c) Functional and Presentation Currency
These financial statements are presented in United States (U.S.) Dollars, the Company’s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items included in the financial statements of the Company are measured using its functional currency. Functional currency is the currency of the primary economic environment in which the Company operates.
2.2 Adoption of New and Amended PFRS
(a) Effective in 2012 that are Relevant to the Company
In 2012, the Company adopted the following amendments to PFRS that are relevant to the Company and effective for financial statements for the annual periods beginning on or after July 1, 2011 or January 1, 2012: PFRS 7 (Amendment) : Financial Instruments: Disclosures – Transfers of Financial Assets PAS 12 (Amendment) : Income Taxes – Deferred Tax: Recovery of Underlying Assets Discussed below are the relevant information about these amended standards.
Assets. The amendment requires additional disclosures that will allow users of financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and, to evaluate the nature of, and risk associated with any continuing involvement of the reporting entity in financial assets that are derecognized in their entirety. The Company did not transfer any financial asset involving this type of arrangement; hence, the amendment did not result in any significant change in the Company’s disclosures in its financial statements.
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DRAFT (For Discussion Purpose Only)
(ii) PAS 12 (Amendment), Income Taxes – Deferred Tax: Recovery of Underlying Assets. The amendment introduces a rebuttable presumption that the measurement of a deferred tax liability or asset that arises from investment property measured at fair value under PAS 40, Investment Property, should reflect the tax consequence of recovering the carrying amount of the asset entirely through sale. The presumption is rebutted for depreciable investment property (e.g., building) that is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the asset over time, rather than through sale. Moreover, Standing Interpretation Committee 21, Income Taxes – Recovery of Revalued Non-Depreciable Assets, is accordingly withdrawn and is incorporated under PAS 12 requiring that deferred tax on non-depreciable assets that are measured using the revaluation model in PAS 16, Property, Plant and Equipment, should always be measured on a sale basis of the asset. The amendment has no significant impact on the Company’s financial statements as the Company has no investment property while the Company’s land classified as property, plant and equipment which is measured at fair value is taxable with the same rate regardless of whether these assets will be sold or used in operation.
(b) Effective in 2012 that is not Relevant to the Company
Of the amendments to PFRS that are effective in 2012 only PFRS 1, First-time Adoption of PFRS, is not relevant to the Company.
(c) Early Adoption of Philippine Accounting Standard 1 (Amendment), Presentation of Financial Statements In the preparation of the 2012 financial statements, the Company adopted early the amendment made to PAS 1, issued by the IASB and adopted by the FRSC as part of the Annual Improvements to PFRS 2009-2011 Cycle, which will be effective for the annual period beginning on or after January 1, 2013. The amendment clarifies that when an entity applies an accounting policy retrospectively or makes a retrospective restatement or reclassification of items in its financial statements that has a material effect on the information in the statement of financial position at the beginning of the preceding period (i.e., opening statement of financial position), it shall present a third statement of financial position as at the beginning of that preceding period. Other than disclosures of certain specified information as described below, related notes to the opening statement of financial position are not required to be presented.
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DRAFT (For Discussion Purpose Only)
(d) Effective Subsequent to 2012 but not Adopted Early
There are new PFRS, amendments, annual improvements and interpretations to existing standards that are effective for periods subsequent to 2012. Management has initially determined the following pronouncements, which the Company will apply in accordance with their transitional provisions, to be relevant to its financial statements:
(i) PAS 1 (Amendment), Financial Statements Presentation – Presentation of Items of Other
Comprehensive Income (effective from July 1, 2012). The amendment requires an entity to group items presented in other comprehensive income into those that, in accordance with other PFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. The Company’s management does not expect this amendment to have an impact on the Company’s financial statements as the Company does not have any transaction recognized in other comprehensive income.
(ii) PAS 19 (Revised), Employee Benefits (effective from January 1, 2013). The revision made a number of changes as part of the improvements throughout the standard. The main changes relate to defined benefit plans as follows: • eliminates the corridor approach under the existing guidance of PAS 19
and requires an entity to recognize all actuarial gains and losses arising in the reporting period;
• streamlines the presentation of changes in plan assets and liabilities
resulting in the disaggregation of changes into three main components of service costs, net interest on net defined benefit obligation or asset, and remeasurement; and,
• enhances disclosure requirements, including information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.
Currently, the Company is using the corridor approach and its unrecognized actuarial loss as at December 31, 2012 amounts to $4,450 which will be retrospectively recognized as loss in other comprehensive income in 2013 (see Note 15.2).
(iii) PFRS 7 (Amendment), Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2013). The amendment requires qualitative and quantitative disclosures relating to gross and net amounts of recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation. The amendment also requires disclosure of information about recognized financial instruments which are subject to enforceable master netting arrangements or similar agreements, even if they are not set-off in the statement of financial position, including those which do not meet some or all of the offsetting criteria under PAS 32 and amounts related to a financial collateral. These disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with recognized financial assets and financial liabilities on the entity’s financial position. The Company has initially assessed that the adoption of the amendment will not have a significant impact on its financial statements.
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DRAFT (For Discussion Purpose Only)
(iv) PFRS 13, Fair Value Measurement (effective from January 1, 2013). This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRS. 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. Management is in the process of reviewing its valuation methodologies for conformity with the new requirements and has yet to assess the impact of the new standard on the Company’s financial statements.
and Financial Liabilities (effective from January 1, 2014). The amendment provides guidance to address inconsistencies in applying the criteria for offsetting financial assets and financial liabilities. It clarifies that a right of set-off is required to be legally enforceable, in the normal course of business; in the event of default; and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendment also clarifies the principle behind net settlement and provided characteristics of a gross settlement system that would satisfy the criterion for net settlement. The Company does not expect this amendment to have a significant impact on its financial statements.
(vi) PFRS 9, Financial Instruments: Classification and Measurement (effective from January 1, 2015). This is the first part of a new standard on financial instruments that will replace PAS 39, Financial Instruments: Recognition and Measurement, in its entirety. This chapter covers the classification and measurement of financial assets and financial liabilities and it deals with two measurement categories for financial assets: amortized cost and fair value. All equity instruments will be measured at fair value while debt instruments will be measured at amortized cost only if the entity is holding it to collect contractual cash flows which represent payment of principal and interest.
The accounting for embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangement, does not require separation from the host contract.
For liabilities, the standard retains most of the PAS 39 requirements which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in case where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch. To date, other chapters of PFRS 9 dealing with impairment methodology and hedge accounting are still being completed. Further, in November 2011, the IASB tentatively decided to consider making limited modifications to International Financial Reporting Standard 9’s financial asset classification model to address certain application issues.
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DRAFT (For Discussion Purpose Only)
The Company does not expect to implement and adopt PFRS 9 until its effective date. In addition, management is currently assessing the impact of PFRS 9 on the financial statements of the Company and it plans to conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes.
(vii) 2009-2011 Annual Improvements to PFRS. Annual improvements to PFRS (2009-2011 Cycle) made minor amendments to a number of PFRS, which are effective for annual periods beginning on or after January 1, 2013. Among those improvements, the following amendments are relevant to the Company but management does not expect a material impact on the Company’s financial statements:
(a) PAS 16 (Amendment), Property, Plant and Equipment – Classification of
Servicing Equipment. The amendment addresses a perceived inconsistency in the classification requirements for servicing equipment which resulted in classifying servicing equipment as part of inventory when it is used for more than one period. It clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized as property, plant and equipment when they meet the definition of property, plant and equipment, otherwise, these are classified as inventory.
(b) PAS 32 (Amendment), Financial Instruments – Presentation – Tax Effect of Distributions to Holders of Equity Instruments. The amendment clarifies that the consequences of income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction shall be accounted for in accordance with PAS 12. Accordingly, income tax relating to distributions to holders of an equity instrument is recognized in profit or loss while income tax related to the transaction costs of an equity transaction is recognized in equity.
2.3 Financial Assets Financial assets are recognized when the Company becomes a party to the contractual terms of the financial instrument. Financial assets other than those designated and effective as hedging instruments are classified into the following categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity investments and available-for-sale (AFS) financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at FVTPL are initially recognized at fair value plus any directly attributable transaction costs. Financial assets carried at FVTPL are initially recorded at fair value and related transaction costs are recognized in profit or loss. 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 12 months after the end of the reporting period which are classified as non-current assets.
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DRAFT (For Discussion Purpose Only)
Loans and receivables are subsequently measured at amortized cost using the effective interest method for maturities extending beyond one year, 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 between the assets’ carrying amount and the present value of estimated cash flows. The Company’s financial assets categorized as loans and receivables are presented as Cash and Cash Equivalents and Trade and Other Receivables (except Deposit on purchases) in the statement of financial position. Cash and cash equivalents are defined as 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.
All income and expenses, excluding impairment losses and foreign currency exchange losses related to trade and other receivables, relating to financial assets that are recognized in profit or loss are presented as part of Finance Costs or Finance Income in the statement of comprehensive income.
Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured. Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire and substantially all of the risks and rewards of ownership have been transferred. 2.4 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted-average method. Finished goods and work-in-process include the cost of raw materials, direct labor and a proportion of manufacturing overheads based on normal operating capacity. The cost of raw materials include all costs directly attributable to acquisition, such as the purchase price, import duties and other taxes that are not subsequently recoverable from taxing authorities. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of raw materials is the current replacement cost. 2.5 Property, Plant and Equipment Property and equipment, except land which is stated at fair value, are stated at cost less accumulated depreciation, and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred.
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DRAFT (For Discussion Purpose Only)
Depreciation is computed on the straight-line basis over the estimated useful lives of the assets as follows: Buildings 15 years Machinery and equipment 10 years Land improvements 10 years Transportation and delivery equipment 5 years Fully depreciated assets are retained in the accounts until these are no longer in use. No further charge for depreciation is made in respect of those accounts. Construction-in-progress represents properties under construction and is stated at cost. This includes cost of construction, applicable borrowing cost and other direct costs (see Note 2.15). The account is not depreciated until such time that the assets are completed and available for use. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.13). The residual values and estimated useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at the end of each reporting period. An item of property, plant and equipment, including the related accumulated depreciation and any impairment losses, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the year the item is derecognized. 2.6 Other Assets Other assets pertain to other resources controlled by the Company as a result of past events. They are recognized in the financial statements when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Other recognized assets of similar nature, where future economic benefits are expected to flow to the Company beyond one year after the end of the reporting period (or in the normal operating cycle of the business, if longer), are classified as non-current assets. 2.7 Financial Liabilities Financial liabilities, which include interest-bearing loans, trade and other payables [except output value-added tax (VAT) and other taxes payable], advances from a stockholder and dividend payable are recognized when the Company becomes a party to the contractual terms of the instrument. These are recognized initially at their fair values and subsequently measured at amortized cost, using the effective interest method for maturities beyond one year, less settlement payments. All interest-related charges incurred on financial liability are recognized as an expense in profit or loss under the caption Finance Costs in the statement of comprehensive income.
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DRAFT (For Discussion Purpose Only)
Interest-bearing loans are raised for support of short-term or long-term funding of operations. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accrual basis using the effective interest method and are added to the carrying amount of the instrument to the extent that these are not settled in the period in which they arise. Dividend payable to shareholders are recognized as financial liabilities when the dividends are approved by the Company’s Board of Directors (BOD). Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration.
2.8 Offsetting Financial Instruments Financial assets and liabilities are offset and the resulting net amount is reported in the statement of financial position when there is a legally enforceable right to set-off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.9 Provisions and Contingencies Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events.
Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. The increase in provision due to passage of time is recognized as interest expense. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Company that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Company can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision.
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DRAFT (For Discussion Purpose Only)
2.10 Revenue and Expense Recognition
Revenue comprises revenue from the sale of goods measured by reference to the fair value of consideration received or receivable by the Company for goods supplied, excluding VAT and trade discounts. Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that the economic benefits will flow to the Company; and the costs incurred or to be incurred can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized: (a) Sale of goods – Revenue is recognized when the risks and rewards of ownership of the
goods have passed to the buyer. This is generally when the buyer has taken undisputed delivery of goods.
(b) Interest Income – Revenue is recognized as the interest accrues taking into account the effective yield on the asset.
Costs and expenses are recognized in the statement of comprehensive income upon receipt of goods and/or utilization of service or at the date they are incurred. Finance costs are reported on an accrual basis, except capitalized borrowing costs which are included as part of the cost of the related qualifying assets (see Note 2.15). 2.11 Leases (a) Company as Lessee
Leases which do not transfer to the Company substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments (net of any incentive received from the lessor) are recognized as expense in profit or loss on a straight-line basis over the lease term. Associated costs, such as repairs and maintenance and insurance, are expensed as incurred.
(b) Company as Lessor
Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases. Lease income from operating leases is recognized in profit or loss on a straight-line basis over the lease term. The Company determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
2.12 Foreign Currency Transactions and Translation The accounting records of the Company are maintained in U.S. Dollars. Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates.
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DRAFT (For Discussion Purpose Only)
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are presented in the statement of comprehensive income as part of Finance Costs in the statement of comprehensive income.
2.13 Impairment of Non-financial Assets The Company’s property, plant and equipment and other non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flows evaluation. Impairment loss is charged pro rata to the other assets in the cash-generating unit. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.
2.14 Employee Benefits
(a) Defined Benefits Plan Post-employment benefits are provided to employees through a defined benefit plan. A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Company, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Company’s post-employment defined benefit pension plan covers all regular full-time employees. The liability recognized in the statement of financial position for a defined benefit plan is the present value of the defined benefit obligation (DBO) at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated annually by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using a discount rate derived from the interest rates of a zero coupon government bonds as published by Philippine Dealing and Exchange Corporation, that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related post-employment liability.
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DRAFT (For Discussion Purpose Only)
Actuarial gains and losses are not recognized as an income or expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees’ expected average remaining working lives. Actuarial gains and losses within the 10% corridor are disclosed separately. Past service costs are recognized immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period.
(b) Termination Benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits.
The Company recognizes termination benefits when it is demonstrably committed to either: (a) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or (b) providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.
(c) Compensated Absences
Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the end of the reporting period. They are included in the Trade and Other Payables account at the undiscounted amount that the Company expects to pay as a result of the unused entitlement. 2.15 Borrowing Costs Borrowing costs are recognized as expenses in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete.
2.16 Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity, if any. Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the end of the reporting period. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss.
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DRAFT (For Discussion Purpose Only)
Deferred tax is accounted for using the liability method, on temporary differences at the end of the reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss. Only changes in deferred tax assets or liabilities that relate to items recognized in other comprehensive income or directly in equity are recognized in other comprehensive income or directly in equity, respectively. Deferred tax assets and deferred tax liabilities are offset if the Company has a legally enforceable right to set-off current tax assets against current tax liabilities and the deferred taxes relate to the same entity and the same taxation authority.
The Company establishes liabilities for probable and estimable assessments by Bureau of Internal Revenue (BIR) resulting from any known tax exposures. Estimates represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes available.
2.17 Related Party Relationships and Transactions Related party transactions are transfers of resources, services or obligations between the Company and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; and, (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form.
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DRAFT (For Discussion Purpose Only)
2.18 Equity Capital stock represents the nominal value of shares that have been issued. Additional paid-in capital includes any premium received on the issuance of capital stock. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital, net of any related income tax benefits. Revaluation reserves comprise gains and losses due to the revaluation of land. Retained earnings represent all current and prior period results of operations as reported in the profit or loss section of the statements of comprehensive income. 2.19 Events After the End of the Reporting Period
Any post-year-end event that provides additional information about the Company’s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The Company’s financial statements prepared in accordance with PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates 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. Actual results may ultimately vary from these estimates. 3.1 Critical Management Judgments in Applying Accounting Policies In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements: (a) Distinction between Operating and Finance Leases
The Company has entered into various lease agreements as a lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of asset and liabilities. Based on management’s judgment such leases were determined to be operating leases.
(b) Recognition of Provisions and Contingencies Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and contingencies are discussed in Note 2.9 and relevant disclosures of contingencies are presented in Notes 20.
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DRAFT (For Discussion Purpose Only)
(c) Costing of Inventories
In determining cost, management uses judgment in properly allocating the labor and overhead between the cost of inventories on hand (finished goods and work-in-process) and cost of goods sold. The Company currently allocates production overhead on the basis of units produced. However, the amount of costs charged to finished goods and work-in-process inventories would differ if the Company utilized a different allocation base. Changes in allocated cost would affect the carrying cost of inventories and could potentially affect the valuation based on lower of cost and net realizable value.
3.2 Key Sources of Estimation Uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: (a) Impairment of Trade and Other Receivables
Adequate amount of allowance for impairment is provided for specific and group of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Company’s relationship with the customers, the customers’ current credit status based on third party credit reports and known market forces, the average age of accounts, collection experience and historical loss experience. Based on the analysis done by management, certain receivables were identified to be impaired. The carrying value of trade and other receivables and analysis of allowance for impairment on such financial assets are shown in Note 6.
(b) Determining Net Realizable Value of Inventories
In determining the net realizable value of inventories, management takes into account the most reliable evidence available at the dates the estimates are made. The future realization of the carrying amounts of inventories as presented in Note 7 is affected by price changes in different market segments. These are considered key sources of estimation, especially that such inventories are substantially perishable in nature and highly affective by temperature and other environmental conditions, uncertainty and may cause significant adjustments to the Company’s inventories within the next financial year.
(c) Estimating Useful Lives of Property, Plant and Equipment
The Company estimates the useful lives of property, plant and equipment, except land, based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets.
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DRAFT (For Discussion Purpose Only)
The carrying amounts of property, plant and equipment are analyzed in Note 9. Based on management’s assessment as at December 31, 2012, there is no change in estimated useful lives of property, plant and equipment during the year. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.
(d) Determining the Fair Value of Land
The Company’s land is carried at revalued amount at the end of the reporting period. In determining the fair value of the land, the Company engages the services of professional and independent appraisers. The fair value is determined by reference to market-based evidence, which is the amount for which the asset could be exchanged between a knowledgeable willing buyer and seller in an arm’s length transaction as at the valuation date. Such amount is influenced by different factors including the location and specific characteristics of the property (e.g., size, features, and capacity), quantity of comparable properties available in the market, and economic condition and behaviour of the buying parties. A significant change in these elements may affect prices and the value of the asset. The amounts of revaluation and fair value gain recognized on land are disclosed in Note 9.
(e) Determining Recoverable Amount of Deferred Tax Assets
The Company reviews its deferred tax assets at the end of the reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The carrying value of deferred tax assets as at December 31, 2012 and 2011 which the management assessed to be probable of being utilized within the next two to three years is disclosed in Note 16.
(f) Impairment of Non-financial Assets
The Company’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.13. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations. No impairment loss was recognized on the Company’s non-financial assets in 2012 and 2011.
(g) Valuation of Post-employment Benefits The determination of the Company’s obligation and cost of post-employment defined
benefit is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates, expected return on plan assets and salary increase rate. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods.
The amount of retirement benefit obligation (asset) and expense and an analysis of the
movements in the estimated present value of retirement benefit obligation (asset) are presented in Note 15.2.
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DRAFT (For Discussion Purpose Only)
4. RISK MANAGEMENT OBJECTIVES AND POLICIES The Company is exposed to certain financial risks which result from both its operating and investing activities. The Company’s risk management is coordinated with its parent company, in close cooperation with the BOD, and focuses on actively securing the Company’s short-to-medium term cash flows by minimizing the exposure to financial markets. The Company does not engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed to are described below.
4.1 Market Risk
The Company is exposed to market risk through its use of financial instruments and specifically to currency risk and interest risk which result from both its operating and investing activities. (a) Foreign Currency Risk
Most of the Company’s transactions are carried out in U.S. Dollars, its functional currency. Exposures to currency exchange rates arise from the interest-bearing loans from local banks, trade and other payables and due to a related party which are primarily denominated in Philippine peso. The Company also holds Philippine peso-denominated cash.
To mitigate the Company’s exposure to foreign currency risk, non-U.S. dollar cash flows are regularly monitored.
Foreign currency denominated financial assets and liabilities (in Philippine pesos), translated into U.S. dollars at the closing rate are as follows:
The sensitivity of the net results in regards to the Company’s financial assets and financial liabilities and the U.S. dollar – Philippine peso exchange rate assumes a +/-15.90% and +/-16.23% change of the U.S. dollar/Philippine peso exchange rate in 2012 and 2011, respectively. These percentages have been determined based on the average market volatility in exchange rates, using standard deviation, in the previous 12 months, estimated at 99% level of confidence. The sensitivity analysis is based on the Company’s foreign currency financial instruments held at the end of each reporting period, with effect estimated from the beginning of the year.
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DRAFT (For Discussion Purpose Only)
If the Philippine peso had strengthened against the U.S. dollar, then this would have the following impact:
If the Philippine peso had weakened against the U.S. dollar, then this would have a reverse impact by the same amounts as above.
The exchange rates used to translate Philippine peso – denominated financial assets and liabilities to U.S. dollars at December 31, 2012 and 2011 was P41.19:$1 and P43.93:$1, respectively. The Company actively monitors the volatility of the foreign currency exchange rates to manage its foreign currency exposure.
Exposures to foreign currency exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Company’s currency risk.
(b) Interest Rate Risk
The Company has limited exposure to changes in market interest rates through its interest-bearing loans and cash and cash equivalents, which are subject to variable interest rates. These financial instruments have historically shown small or measured changes in interest rates. All other financial assets and liabilities have fixed rates.
4.2 Credit Risk Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the statements of financial position (or in the detailed analysis provided in the notes to the financial statements), as summarized below.
Notes 2012 2011
Cash and cash equivalents 5 $ 2,201,717 $ 2,058,243 Trade and other receivables 6 4,619,685 5,446,965 $ 6,823,233 $ 7,507,092 As part of Company policy, bank deposits are only maintained with reputable financial institutions. Cash in banks which are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum coverage of (P500,000) per depositor per banking institution, as provided for under Republic Act No. 9576, Charter of PDIC, are still subject to credit risk. Trade and other receivables, as presented above, exclude deposit on purchases of $501,407 as of December 31, 2011. There was no outstanding balance of deposit on purchases as of December 31, 2012.
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DRAFT (For Discussion Purpose Only)
The Company continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporate this information into its credit risk controls. Where available at a reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Company’s policy is to deal only with creditworthy counterparties. In addition, for a significant proportion of sales, advance payments are received to mitigate credit risk.
The Company’s management considers that all the above financial assets that are not impaired or past due for each reporting period are off good credit quality.
In respect of trade and other receivables, the Company is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Financial assets that are past due but not impaired are as follows: 2012 2011 Less than one year $ 144,024 $ 51,756 More than one year 259 16,065
$ 144,283 $ 67,821
The fair value of these short-term financial assets is not individually determined as the carrying amount is a reasonable approximation of fair value. 4.3 Liquidity Risk
The ability of the Company to finance its operations and to meet obligations as these become due is extremely crucial to its viability as a business entity. The Company adopts a prudent liquidity risk management where it maintains sufficient cash to meet trade and other short-term payables as they fall due. The Company manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash outflows due in a day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a six-month and one-year period are identified monthly. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets. As at December 31, 2012, the Company’s financial liabilities have contractual maturities which are presented below. Current Non-current
Within 6 to 12 1 to 5 6 Months Months Years Interest-bearing loans $ 33,518,645 $ 364,148 $ - Trade and other payables 10,868,961 - - Advances from related parties 4,085,368 - - $ 48,769,974 $ 364,148 $ -
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This compares to the maturity of the Company’s financial liabilities as at December 31, 2011 as follows:
Current Non-current Within 6 to 12 1 to 5 6 Months Months Years
Interest-bearing loans $ 24,062,102 $ 1,365,871 $ 341,468 Advances from related parties 10,006,670 - - Trade and other payables 9,372,685 - - Dividend payable 1,732,062 - - $ 45,173,519 $ 1,365,871 $ 341,468
The above contractual maturities reflect the gross cash flows, which may differ from the carrying values of the liabilities at the end of each of the reporting periods.
5. CASH AND CASH EQUIVALENTS
The breakdown of this account is as follows: 2012 2011
Cash on hand $ 1,821 $ 1,884
Cash in bank 2,201,727 1,990,884 Short-term placements - 67,359
$ 2,203,548 $ 2,060,127
Cash in banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods of between 15 to 30 days and earn effective interest ranging from 2.8% to 4.0% in both years. Interest income earned amounting to $67,561 and $ 19,797 in 2012 and 2011, respectively and presented as Finance Income in the statement of comprehensive income.
6. TRADE AND OTHER RECEIVABLES This account (see also Note 4.2) is composed of the following:
Trade receivables are usually due within 30 to 45 days and do not bear any interest. All trade and other receivables are subject to credit risk exposure. However, the Company does not identify specific concentrations of credit risk with regard to trade and other receivables as the amounts recognized resemble a large number of receivables from various customers and counterparties.
Deposit on purchases pertains to advances made to suppliers for goods ordered. This is applied against billings from the suppliers upon the completion of such order; accordingly, not considered as financed assets (see also Note 4.2). All of the Company’s trade and other receivables have been reviewed for indicators of impairment. Certain receivables were identified to be impaired, hence, adequate amounts of allowance for impairment have been recognized. The Company recognized impairment losses on certain trade receivables amounting $75,500 in 2012 and $68,783 in 2011 and presented them as part of Impairment Loss on Trade and Other Receivables under Administrative Expense in the statements of comprehensive income (see Note 13).
A reconciliation of the allowance for impairment at the beginning and end of 2012 and 2011 is shown below. Note 2012 2011
Balance at beginning of year $ 68,783 $ - Impairment losses 13 75,500 68,783
Balance at end of year $ 144,283 $ 68,783
7. INVENTORIES
Details of inventories are shown below. Note 2012 2011
Finished goods: At cost $ 10,268,611 $ 11,439,866 At net realizable value 176,170 536,494 13 10,444,781 11,976,360
Raw and packaging materials 33,344,561 25,674,768
Spare parts, supplies and others 1,056,207 1,023,649 $ 44,845,549 $ 38,674,777 Raw and packaging materials include inventories amounting to $1,557,305 that are in transit as at December 31, 2011 (Nil as at December 31, 2012).
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The inventory write-down amounting to $291,319 in 2012 and 249,395 in 2011, is presented as part of Cost of Goods Sold in the statements comprehensive income.
8. OTHER CURRENT ASSETS
The composition of this account is shown below.
2012 2011
Tax credit certificates from Bureau of Customs $ 937,542 $ 711,973 Prepaid insurance 12,385 14,839 Prepaid rent 363 340 Others 23,350 23,017 $ 973,640 $ 750,169
9. PROPERTY, PLANT AND EQUIPMENT The gross carrying amounts and accumulated depreciation of property, plant and equipment at the beginning and end of 2012 and 2011 are shown below.
At Fair Value At Cost Transportation Machinery Construction- Land and Delivery and in- Land Buildings Improvements Equipment Equipment Progress Total
Construction-in-progress pertains to the accumulated costs incurred on the ongoing construction of a new building and installation of machinery and equipment as part of the Company’s expansion program (see Note 20.3). In 2012 and 2011, portion of construction-in-progress amounting to $392,963 and $393,685, respectively, were completed and reclassified by the Company to their proper account classification. In 2012 and 2011, management’s assessment showed that the fair value of the land, carried at revalued amount, did not materially change. Accordingly, no fair value gain or loss was recognized. The amount of depreciation (see Note 13) is allocated as follows: 2012 2011
Cost of goods sold $ 2,550,836 $ 2,381,301 Administrative expenses 178,423 79,713 $ 2,729,259 $ 2,461,014
Fully depreciated assets with total original cost of $3,887,265 and $3,047,799 as at December 31, 2012 and 2011 are still being used in operations.
10. OTHER NON-CURRENT ASSETS Other non-current assets are summarized below:
The short-term and long-term interest-bearing loans [denominated in Philippine pesos (PHP)], which are collateralized by a continuing suretyship of certain stockholders and a corporate guarantee of CCC are broken down as follows:
2012 2011 in PHP in USD in PHP in USD Short-term P1,320,700,000 $ 32,062,051 P 997,000,000 $ 22,696,230 Long-term 75,000,000 1,820,742 135,000,000 3,073,211
P1,395,700,000 $ 33,882,793 P 1,132,000,000 $ 25,769,441
Short-term loans consist of several borrowings from local banks which mature within 14 to 30 days and bear annual interest rates ranging from 2.25% to 4.75% in 2012 and 3.25% to 3.60% in 2011. Long-term loan pertains to a five year loan with an original principal amount of $6,219,421 (P300,000,000) obtained on February 27, 2009 from a local commercial bank. The loan is payable quarterly and bears an annual interest of 7.51%. The long-term loan is subject to a condition that requires the Company to meet certain financial ratios such as debt-to-equity ratio (not to exceed 2.5:1) and current ratio (at least 1.0:1). In the event of default or non-compliance with any of the provisions of the loan agreement, the bank-creditor may (by written notice) either declare the loan terminated or declare the entire unpaid principal amount and interest of the loan due and demandable. As at December 31, 2012, the Company has complied with all the covenants set forth in the loan agreement (see Note 22). Interest-bearing loans are presented in the in statements of financial positions as follows: 2012 2011 Current $ 33,518,645 $ 24,062,102 Non-current 364,148 1,707,339 $ 33,882,793 $ 25,769,441
Interest expense charged to operations amounted to $816,041 in 2012 and $605,044 in 2011 and presented as part of Finance Costs in the statements of comprehensive income (see Note 14). The unpaid balance of interest amounting to $52,116 and $49,307 as at December 31, 2012 and 2011, respectively, is presented as part of Accrued Expenses under the Trade and Other Payables account in the statements of financial position (see Note 12).
Accrued expenses include the current portion of the Company’s obligations to its employees and service providers that are expected to be settled within 12 months from the end of the reporting period. These liabilities arise mainly from the accrual of various expenses such as rent, freight, interest on loans and payroll at the end of the period. The carrying amount of trade and other payables, which are expected to be settled within the next 12 months from the end of the reporting period, is a reasonable approximation of fair value.
Others payable include liabilities to various agencies and regulatory bodies. 13. COSTS AND OPERATING EXPENSES BY NATURE
The details of costs and operating expenses by nature are shown below.
Notes 2012 2011 Raw materials used $ 62,956,137 $ 54,166,359 Outside services 17.3 5,852,420 4,744,437 Rent 20.1 4,100,160 2,297,001 Depreciation and amortization 9 2,729,259 2,461,014 Gas, fuel and oil 2,156,957 2,195,909 Supplies 1,989,322 1,568,378 Changes in finished goods inventories 1,531,579 5,388,109 Communication, light and water 1,315,590 963,208 Salaries and employee benefits 15 1,135,913 1,097,485 Freight 1,117,023 1,282,947 Taxes and licenses 24.1 299,395 244,361 Insurance 175,994 113,946 Repairs and maintenance 170,374 140,078 Impairment loss on trade receivables 6 75,500 68,783 Commissions 45,369 84,781 Miscellaneous 248,560 270,577
$ 85,899,552 $ 77,087,373
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These expenses are classified in the statements of comprehensive income as follows: 2012 2011 Cost of goods sold $ 83,177,084 $ 74,609,681 Administrative expenses 1,511,770 1,320,698 Selling expenses 1,162,392 1,129,637 Other expenses 48,306 27,357 $ 85,899,552 $ 77,087,373
Cost of goods sold for the years ended December 31, 2012 and 2011 consist of the following:
Note 2012 2011 Finished goods at beginning of year 7 $ 11,976,360 $ 17,412,482
Cost of goods manufactured: Raw materials used 62,956,137 54,166,359
Direct labor 4,505,777 3,475,044
Manufacturing overhead 14,183,591 11,532,156
81,645,505 69,173,559 Total goods available for sale 93,621,865 86,586,041
Finished goods at end of year 7 ( 10,444,781 ) ( 11,976,360 ) $ 83,177,084 $ 74,609,681
14. FINANCE COSTS
The details of finance costs are presented below. Note 2012 2011 Foreign currency losses $ 1,361,096 $ 858,018 Interest expense 11 816,041 605,044 Bank charges 109,693 166,205 Other finance charges - 47,261 $ 2,286,830 $ 1,676,528
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15. EMPLOYEE BENEFITS 15.1 Salaries and Employee Benefits
Expenses recognized for salaries and employee benefits (see Note 13) are presented below.
The Company maintains a fully funded, tax qualified, noncontributory retirement plan that is being administered by a trustee bank covering all regular full-time employees.
The amount of retirement benefit asset recognized in the statements of financial position is determined as follows:
2012 2011 Present value of the obligation $ 396,926 $ 314,055 Fair value of plan assets ( 408,017 ) ( 317,069 ) Excess of plan assets ( 11,091 ) ( 3,014 ) Unrecognized actuarial losses ( 4,450 ) ( 14,886 ) Effect of foreign currency exchange rate changes ( 111 ) 208 ($ 15,652 ) ( $ 17,692 )
The movements in present value of the retirement benefit obligation are as follows:
2012 2011 Balance at beginning of year $ 314,055 $ 185,465 Current service and interest costs 60,499 52,953 Actuarial loss - 95,099 Benefits paid by the plan - ( 17,453) Effect of foreign currency exchange rate changes 22,372 ( 2,009 ) Balance at end of year $ 396,926 $ 314,055
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The movement in the fair value of plan assets is presented below.
2012 2011 Balance at beginning of year $ 317,069 $ 251,842 Expected return on plan assets 29,335 35,167 Contribution paid into the plan 35,762 71,778 Benefits paid by the plan - ( 17,453 ) Actuarial loss - ( 23,089 ) Effect of foreign currency exchange rate changes 25,851 ( 1,176 ) Balance at end of year $ 408,017 $ 317,069
Actual return on plan assets were $29,335 in 2012 and $12,078 in 2011. The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:
Presented below are the historical information related to the present value of the retirement benefit obligation, fair value of plan assets and excess or deficit in the plan. 2012 2011 2010 2009 2008 Present value of the obligation $ 396,926 $ 314,055 $ 185,465 $ 182,218 $ 245,560 Fair value of plan assets 408,017 317,069 251,842 169,637 89,119 Deficit (excess) in the plan ($ 11,091) ($ 3,014 ) ( $ 66,377 ) $ 12,581 $ 156,441 Experience adjustments arising on plan liabilities $ - $ 8,080 $ - $ 2,738 $ - Experience adjustments arising on plan assets $ - $ 23,089 $ - $ 3,042 $ -
The amounts of retirement benefits expense recognized in the profit or loss are as follows:
2012 2011 Current service costs $ 40,176 $ 37,657 Interest costs 20,323 15,296 Expected return on plan assets ( 29,335 ) ( 35,167 ) Net actuarial loss recognized during the year 10,821 63,502 $ 41,985 $ 81,288
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The amounts of retirement benefits expense are allocated as follows: Note 2012 2011
Cost of goods sold 13 $ 33,866 $ 67,359
Administrative expenses 8,119 13,929 $ 41,985 $ 81,288 For the determination of the retirement benefit asset, obligation and related expenses, the following actuarial assumptions were used:
2012 2011 Discount rates 6.29% 6.22% Expected rate of return on plan assets 8.81% 6.00% Expected rate of salary increases 4.00% 4.00%
Assumptions regarding future mortality are based on published statistics and mortality tables. The average life expectancy of an individual retiring at the age of 60 is 18 for males and 20 for females.
16. TAXES
The major components of tax expense as reported in profit or loss: 2012 2011 Current tax expense: Regular corporate income tax (RCIT) at 30% $ 931,329 $ 574,892 Final taxes at 20% and 7.5% 13,249 3,343 944,578 578,235 Deferred tax expense (income) relating to origination of temporary differences ( 69,608 ) 151,477 $ 874,970 $ 729,712
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The reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in the statements of comprehensive income profit is as follows:
2012 2011 Tax on pretax profit at 30% $ 916,208 $ 621,804 Adjustment for income subjected to lower income tax rates ( 7,019 ) ( 2,596) Tax effects of: Non-taxable income ( 40,704 ) ( 65,504 ) Non-deductible expenses 6,485 1,736 Reversal of deferred tax asset - 174,272 Tax expense $ 874,970 $ 729,712
The net deferred tax assets relate to the following as at December 31: Statements of Statements of
Financial Position Comprehensive Income 2012 2011 2012 2011 Allowance for inventory write-down $ 87,396 $ 75,123 ( $ 12,273) $ 109,574 Allowance for impairment 43,178 20,635 ( 22,543) ( 20,635 ) Past service cost 15,626 19,391 3,765 ( 812 ) Retirement benefit asset ( 4,696 ) 2,813 7,509 ( 2,813 ) Unrealized foreign currency loss (gain) - ( 46,066 ) ( 46,066) 66,163 Net Deferred Tax Assets $ 141,504 $ 71,896 Deferred Tax Expense (Income) ($ 69,608) $ 151,477
The Company is subject to the MCIT which is computed at 2% of gross income, as defined under the tax regulations, or RCIT, whichever is higher. No MCIT was reported in 2012 and 2011 as the RCIT was higher than MCIT in both years. In 2012 and 2011, the Company opted to claim itemized deductions.
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17. RELATED PARTY TRANSACTIONS
The Company’s related parties include its parent, entities under common ownership, the Company’s key management personnel and others as described below. The following are the transactions of the Company with related parties:
2012 2011 Outstanding Outstanding Related Party Amount of Receivable Amount of Receivable Category Notes Transactions (Payable) Transactions (Payable) Parent Sale of goods 17.1 $ 11,702,675 $ 380,231 $ 7,188,460 $ - Management and consultancy Services 17.3 438,395 149,555 351,142 - Advances 17.2 ( 5,921,302 ) ( 4,085,368 ) ( 832,648 ) ( 10,006,670 ) Lease services 17.1 1,092,821 - 415,578 - Related Parties Under Common Ownership Sale of goods 17.1 2,242,496 - 96,606 - Key Management Personnel Compensation 17.5 45,539 - 42,574 -
17.1 Sale of Goods and Services The Company sells raw material fish inventories to CCC and Columbus Seafoods Corporation (CSC), a related party under common ownership. Outstanding balance in relation to sale of goods amounts to $380,231 as at December 31, 2012 (nil in 2011). In 2012, the Company entered into a new agreement with CCC to lease a portion of plant, machinery and equipment and cold storage located in Brgy. Tambler, General Santos City. Both leases shall be from January 1, 2012 onwards and will continue to be in effect unless sooner terminated. Rentals are fully collected by the Company as at December 31, 2012.
Amount of Transactions 2012 2011 Parent company: Sale of goods $ 11,702,675 $ 7,188,460 Rental of facilities 1,092,821 415,578 12,795,496 7,604,038 Columbus Seafoods Corporation – Sale of goods 2,242,496 96,606 $ 15,037,992 $ 7,700,644
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17.2 Advances from Related Parties In the normal course of business, the Company obtains advances from CCC and Pacific Meat Company Incorporated (PMCI), a related party under common ownership, for working capital requirements and other purposes. The balance of Advances from Related Parties amounts to $4,085,368 and $10,006,670 as at December 31, 2012 and 2011, respectively. Advances from related parties are unsecured, noninterest-bearing and repayable within 12 months.
2012 2011 Balance at beginning of year $ 10,006,670 $ 10,839,318 Net repayments during the year ( 5,921,302) ( 647,278) Transfer of AFS financial assets - ( 185,370) Balance at end of year $ 4,085,368 $ 10,006,670
In 2011, the Compnay paid certain advances from CCC by transferring all of its AFS financial assets to CCC. The AFS financial assets were transferred at their carrying amounts and because there is no available fair value at the time of transfer, no gain or loss was recognized. There was no similar transaction in 2012. 17.3 Consultancy and Management Fees
Beginning 2011, in addition to key management personnel compensation incurred, the Company entered into an agreement to allow CCC to allocate and charge common corporate expenses to its subsidiaries. The consultancy and management fee incurred by the Company amounted to $438,395 and $351,142 in 2012 and 2011, respectively. This amount is presented as part of Outside Services (see Note 13). As at December 31, 2012, the Company has $149,555 outstanding liability arising from this agreement and is presented as part of Others under the Trade and Other Payables account in the 2012 statement of financial position and is expected to be settled in 2013 (see Note 12). 17.4 Financial Guarantees The Company, together with its related parties, has entered into a cross-corporate guarantee for the short-term loan obtained by CCC and PMCI from various local banks. The outstanding balance of loan amounts to P1,447,400,000 ($35,137,891) and P1,910,400,000 ( $43,489,346) as at December 31, 2012 and 2011, respectively. The Company did not record the fair value of the guarantee liability because of the low probability of CCC and PMCI’s default in paying their respective borrowings. 17.5 Key Management Personnel Compensations
The short-term employee benefits of the key management personnel amounted to $45,539 in 2012 and $42,574 in 2011 and are included as part of Employee Benefits in the statements of comprehensive income. The increase in the key management personnel compensation was in line with the agreement entered into by the Company with CCC relating to consultancy and management fees (see Note 17.3).
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18. REGISTRATION WITH THE BOARD OF INVESTMENTS (BOI)
On September 25, 2012, the BOI approved the Company’s registration as a new expanding export producer of frozen tuna loins on a non-pioneer status. The Company is entitled to ITH for a period of three years beginning February 1, 2013 using the project’s ability to contribute to the economy’s development pursuant to Article 7 of Executive Order 226 based on the following parameters in this order: (1) project’s net value added; (2) job generation; (3) multiplier effect; and (4) measured capacity.
19. EQUITY 19.1 Capital Stock
Capital stock consists of common shares with details as follows: Shares Amount
2012 2011 2012 2011
Authorized – P10 par value 50,000,000 50,000,000
Issued and outstanding:
Balance at beginning of year 50,000,000 32,477,106 P 500,000,000 P 324,771,060
Issuances during the year - 17,522,894 - 175,228,940
Balance at end of year 50,000,000 50,000,000 P 500,000,000 P 500,000,000
Balance at end of year (in U.S. dollars) $ 11,333,722 $ 11,333,722
As at December 31, 2012, the Company has six stockholders owning 100 or more shares each of the Company’s capital stock. 19.2 Dividend Declaration On December 6, 2011, the BOD approved the declaration of cash dividend of $1,732,062 (P75,000,000) for distribution to stockholders of record as at the same date. The related dividend was paid in full in 2012. On the same date, the BOD approved the declaration of stock dividend of $4,046,764 (P175,228,940) which is equivalent to 17,522,894 common shares in favor of all its existing stockholders of record as at December 31, 2011. The Company did not declare any cash or stock dividend in 2012.
19.3 Prior Period Adjustments In 2012, the Company’s management determined that the amount of cold storage rentals, which was inadvertently included as part of the Company’s inventoriable costs in 2011, should be expensed outright as the said expense is not directly related to the cost of its inventories. Accordingly, the balance of Retained Earnings as at January 1, 2012 has been restated from the amount previously reported to recognize the effects such change.
The restatement resulted in a decrease in the amount of the previously reported Retained Earnings by $857,231 as of January 1, 2012 and decrease in previously reported net profit by the same amount in 2011.
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This prior period adjustment have the following effects on certain accounts in the statements of financial position as at December 31, 2011 and statements of comprehensive income for the year then ended.
As Previously Prior Period Reported Adjustment As Restated
Changes in Net Assets - Inventories $ 39,532,008 ( $ 857,231 ) $ 38,674,777 Changes in Profit or Loss:
Cost of Goods Sold $ 73,695,228 $ 866,440 $ 74,561,668 Finance Costs – net 1,665,940 ( 9,209 ) 1,656,731 Effect on Retained Earnings ( $ 857,231 )
20. COMMITMENTS AND CONTINGENCIES
20.1 Operating Leases The Company is a lessee under several short-term lease contracts with renewal options. The usual term of the lease contract extends to one year that usually ends in December. The amount of rent expense which is recognized as part of Manufacturing overhead under Cost of Goods Sold in the statements of comprehensive income amounted to $4,100,160 and $2,297,001, respectively, in 2012 and 2011 (see Note 13). As of December 31, 2012 and 2011, the future minimum lease payments under these lease agreements amounted to $3,583,273 and $3,195,928, respectively. 20.2 Financial Guarantees As at December 31, 2012, the Company together with its related parties has financial guarantees amounting to $35,137,891 for the loan obtained by CCC and PMCI from various local banks (see Note 17.4). 20.3 Capital Commitments As at December 31, 2012, the Company has construction in progress totaling $705,335. The construction relates to a new building in connection with the Company’s plant expansion. The construction is expected to be completed in 2013 and has remaining estimated costs to complete of P55,648,048 ($1,310,294) as at December 31, 2012. 20.4 Credit Facilities As at December 31, 2012, the Company has unused credit facilities with two local banks amounting to $207,564,575. Also, the Company has continuing surety with related parties on several credit facilities with a local bank which was fully utilized as at December 31, 2012. These credit facilities will expire in 2013.
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DRAFT (For Discussion Purpose Only)
20.5 Others There are other commitments, litigations and contingent liabilities that arise in the normal course of the Company’s operations which are not reflected in the accompanying financial statements. As at December 31, 2012, management is of the opinion that losses, if any, from these commitments and contingencies will not have a material effect on the Company’s financial statements.
21. CATEGORIES AND FAIR VALUES OF FINANCIAL ASSETS AND
LIABILITIES
The carrying amounts and fair values of the categories of assets and liabilities presented in the statements of financial position are shown below.
See Notes 2.3 and 2.7 for a description of the accounting policies for each category of financial instrument. A description of the Company’s risk management objectives and policies for financial instruments is provided in Note 4. The Company has no financial instruments that are carried at fair values in the statement of financial position as of December 31, 2012 and 2011, hence no fair value hierarchy disclosure is presented.
22. CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES
The Company’s capital management objectives are:
• To ensure the Company’s ability to continue as a going concern;
• To meet maturing obligation to creditors; and,
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
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The Company monitors capital on the basis of the carrying amount of equity as presented on the face of the statements of financial position. Capital for the reporting periods under review is summarized as follows:
2012 2011 Total liabilities $ 49,186,501 $ 47,122,081 Total equity 20,904,698 18,725,642 Debt-to-equity ratio 2.35 2.52
The Company sets the amount of capital in proportion to its overall financing structure, i.e., equity and financial liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.
23. SUPPLEMENTARY INFORMATION ON STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME The Company’s financial statements are presented in U.S. dollars, its functional currency. The following information, which shows amounts of the Company’s statements of financial position and statements of comprehensive income in Philippine pesos, is presented for purposes of providing supplementary information to certain users and is not intended to be a presentation in accordance with PFRS. Under this supplemental information, transactions denominated in Philippines pesos were presented using the amounts at the dates of the transactions, while transactions denominated in U.S. dollars were translated using appropriate exchange rates. Foreign currency gains and losses are not translated.
Statements of Financial Position
2012 2011 ASSETS Current assets P 2,194,606,531 P 2,070,893,799 Non-current assets 674,726,869 755,014,918 Total Assets P 2,869,333,400 P 2,825,908,717 LIABILITIES AND EQUITY Current liabilities P 2,011,090,293 P 1,993,892,745 Non-current liabilities 14,355,250 75,000,000 Total Liabilities 2,025,445,543 2,068,892,745 Equity 843,887,857 757,015,972 Total Liabilities and Equity P 2,869,333,400 P 2,825,908,717
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Statements of Comprehensive Income 2012 2011 Revenue – net P 3,793,036,607 P 3,468,026,827 Cost of goods sold ( 3,575,252,766) ( 3,307,175,759 ) Other operating expenses and other charges ( 93,713,393) ( 118,190,628 ) Tax expense ( 37,198,563) ( 31,702,294 ) Net profit P 86,871,885 P 10,958,146
The translation into Philippine pesos should not be construed as a representation that the U.S. dollar amounts could be converted into Philippine Peso amounts or at any other rates of exchange.
24. SUPPLEMENTARY INFORMATION REQUIRED BY THE BUREAU OF
INTERNAL REVENUE
Presented below is the supplementary information which is required by the Bureau of Internal Revenue (BIR) under its existing revenue regulations to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under PFRS. 24.1 Requirements under Revenue Regulations (RR) 15-2010 The information on taxes, duties and license fees paid or accrued during the taxable year required under RR 15-2010 issued on November 25, 2010 are as follows: (a) Output VAT
In 2012, the Company declared output VAT as follows:
In Philippine Pesos In U.S. Dollars
Output Output
Tax Base VAT Tax Base VAT
VATable sales P 47,847,911 P 5,741,740 $ 1,133,250 $ 135,990
Zero-rated sales 3,539,169,480 - 83,823,193 -
Exempt sales 844,879,945 - 20,010,496 -
P 4,431,897,336 P 5,741,740 $ 104,966,939 $ 135,990
The Company’s zero-rated and VAT exempt sales/receipt were determined pursuant to Section 106A, VAT on Export Sales of Goods or Properties, and Section 109, VAT Exempt Transactions, of Revenues in the 2012 statement of comprehensive income.
The tax bases are included as part of Sale of Goods and as part of Other Charges, with respect to other operating income, in the 2012 statement of comprehensive income. The tax bases for other operating income are based on the Company’s gross receipts for the year, hence, may not be the same with the amounts accrued in the 2012 statement of comprehensive income.
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(a) Input Value-Added Tax The movements in Input VAT in 2012 are summarized below.
In Philippine In U.S. Pesos Dollars Balance at beginning of year P 30,096,474 $ 685,132 Goods for resale/manufacture or further processing 3,450,628 81,726 Capital goods subject to amortization 3,755,406 88,945 Services lodged under cost of goods sold 3,120,188 73,900 Claims for tax credit/refund ( 7,343,674 ) ( 173,931 ) Applied against output VAT ( 5,741,749 ) ( 135,990 ) Foreign currency adjustment - 43,873 Balance at end of year P 27,337,273 $ 663,655
The balance of Input VAT amounting to P27,337,273 ($663,655) as at December 31, 2012 is presented as part of Other Non-current Assets in the 2012 statement of financial position (see Note 10). (b) Taxes on Importation
In 2012, the total landed cost of the Company’s imported inventory for the use in business amounted to P3,081,938,799 ($72,993,948). This amount includes customs’ duties and tariff fees of P194,521,081 ($4,607,120). (c) Excise Tax
The Company did not have any transactions in 2012 which are subject to excise tax. (d) Documentary Stamp Tax (DST)
In 2012, the total DST paid and accrued by the Company on loan instruments amounted to P7,765,845 ($183,930).
(e) Taxes and Licenses
The details of taxes and licenses for the year 2012 are broken down as follows:
In Philippine In U.S. Pesos Dollars
DST P 7,765,845 $ 183,930 Business tax 2,422,464 57,375 Real estate tax 1,718,428 40,700 Miscellaneous 734,208 17,390 P 12,640,945 $ 299,395
The amounts of taxes and licenses for the year 2012 are presented as part of Taxes and licenses under Administrative Expenses in the 2012 statement of comprehensive income (see Note 14).
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DRAFT (For Discussion Purpose Only)
(f) Withholding Taxes
The details of total withholding taxes for the year ended December 31, 2012 are shown below.
In Philippine In U.S. Pesos Dollars
Expanded P 345,334 $ 8,179 Compensation and benefits 3,237,682 76,683 P 3,583,016 $ 84,862 The Company has no transactions in 2012 which are subject to final tax.
(g) Deficiency Tax Assessment and Tax Cases
As at December 31, 2012, the Company does not have any deficiency tax assessments with the BIR or tax cases outstanding or pending in courts or bodies outside of the BIR in any of the open years. 24.2 Requirements under RR 19-2011 RR 19-2011 requires schedules of taxable revenues and other non-operating income, costs of sales and services, and itemized deductions, to be disclosed in the notes to financial statements.
The amounts of taxable revenues and income, and deductible costs and expenses presented below are based on relevant tax regulations issued by the BIR, hence, may not be the same as the amounts reflected in the 2012 statement of comprehensive income. (a) Taxable Revenues
The Company’s sale of goods for the year ended December 31, 2012 which are subject to regular tax rate amounted to P3,793,036,607 ($90,072,393).
(b) Deductible Costs of Sales
Deductible costs of sales at regular tax rate for the year ended December 31, 2012 comprises the following:
In Philippine In U.S. Pesos Dollars
Finished goods at beginning of the year P 549,042,798 $ 11,976,360 Cost of goods manufactured 3,455,451,388 81,621,821 Total goods available for sale 4,004,494,186 93,598,181 Finished goods at end of year ( 430,241,420 ) ( 10,444,781 )
P 3,574,252,766 $ 83,153,400
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DRAFT (For Discussion Purpose Only)
(c) Taxable Non-operating and Other Income
The details of taxable non-operating and other income in 2012 which are subject to regular tax rate are shown below.
In Philippine In U.S.
Pesos Dollars
Rental income P 48,851,651 $ 1,092,821
Others 9,023,354 213,713 P 57,875,005 $ 1,306,534
(d) Itemized Deductions
The amounts of itemized deductions at regular tax rate for the year ended December 31, 2012 are as follows:
In Philippine In U.S.
Pesos Dollars
Freight and handling P 47,162,798 $ 1,117,024 Interest 33,542,104 794,425 Other outside services 20,338,231 481,699 Salaries and allowances 13,407,188 317,542 Taxes and licenses 12,640,945 299,395 Depreciation and amortization 8,171,695 178,423 Commissions 1,915,551 45,369 Communication, light and water 658,242 15,590 Office supplies 403,049 9,546 Insurance 235,953 5,588 Rental 208,000 4,926 Miscellaneous 6,900,366 163,431 P 145,584,122 $ 3,432,958
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December 31, January 1,
2012 2012
December 31, (As Restated - (As Restated -Notes 2013 see Note 2) see Note 2)
CURRENT ASSETS
Cash and cash equivalents 5 49,156,818 P 36,933,115 P 25,373,381 P
Trade and other receivables - net 6 278,899,837 280,440,109 213,991,953
Inventories 7 304,661,051 430,924,704 560,094,395
Prepayments and other current assets 8 46,609,648 65,252,136 60,432,337
Total Current Assets 679,327,354 813,550,064 859,892,066
NON-CURRENT ASSETS
Property, plant and equipment - net 9 164,345,799 22,055,547 31,704,177
Post-employment benefit asset 15 622,299 - -
Deferrex tax asset - net 16 3,412,465 - -
Other non-current assets 10 42,013,295 42,884,295 42,435,295
Total Non-current Assets 210,393,858 64,939,842 74,139,472
TOTAL ASSETS 889,721,212 P 878,489,906 P 934,031,538 P
CURRENT LIABILITIES
Trade and other payables 11 159,735,096 P 334,282,846 P 317,917,167 P
Interest-bearing loans 12 215,000,000 - -
Due to related parties 18 7,965,473 278,872,672 415,465,566
Total Current Liabilities 382,700,569 613,155,518 733,382,733
As restated 40,625,000 150,383,200 1,013,863 )( 10,001,344 199,995,681
Transaction with owner
Conversion of advances from parent
during the year 17 - 45,500,000 - - 45,500,000
- 45,500,000 - - 45,500,000
Total comprehensive income
Net profit for the period - - - 19,252,510 19,252,510
Other comprehensive income for the year −
Remeasurement of post-employment
benefits obligation 15 - - 57,064 - 57,064
- - 57,064 19,252,510 19,309,574
Balance at December 31, 2012 40,625,000 P 195,883,200 P 956,799 )( P 29,253,854 P 264,805,255 P
See Notes to Financial Statements.
SNOW MOUNTAIN DAIRY CORPORATION
(A Wholly Owned Subsidiary of Century Pacific Food, Inc.)
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(Amounts in Philippine Pesos)
P
P
P
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2012
(As Restated -Notes 2013 see Note 2.2)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 57,069,676 P 26,627,517 P
Adjustments for:
Depreciation and amortization 9 9,515,021 11,919,169
Finance costs 14 1,646,343 149,281
Finance income 14 114,489 )( 187,370 )(
Impairment losses 6 - 512,760
Operating profit before working capital changes 68,116,551 39,021,357
Decrease (increase) in trade and other receivables 1,540,271 45,243,422 )(
Decrease in inventories 126,263,653 100,110,346
Increase in prepayments and other current assets 47,754 )( 4,819,799 )(
Increase in post-employment benefit asset 201,490 )( 92,183 )(
Decrease (increase) in other non-current assets 871,000 449,000 )(
Increase (decrease) in trade and other payables 174,547,750 )( 16,365,682
Cash generated from operations 21,994,481 104,892,981
Income taxes paid 18,253 )( 33,159 )(
Net Cash From Operating Activities 21,976,228 104,859,822
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment 9 151,805,272 )( 2,270,539 )(
Interest received 114,489 187,370
Net Cash Used in Investing Activities 151,690,783 )( 2,083,169 )(
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of interest-bearing loans 12 540,000,000 -
Repayments of due to related parties 18 527,630,340 )( 91,092,894 )(
Repayment of interest-bearing loans 12 325,000,000 )( -
Proceeds from issuance of shares 17 263,491,800 -
Advances from related parties 18 256,723,141 -
Payment of cash dividend 17 64,000,000 )( -
Interest paid 1,646,343 )( 124,025 )(
Net Cash From (Used in) Financing Activities 141,938,258 91,216,919 )(
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,223,703 11,559,734
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 36,933,115 25,373,381
CASH AND CASH EQUIVALENTS
AT END OF YEAR 49,156,818 P 36,933,115 P
Supplemental Information on Non-cash Financing Activities:
1)
2)
See Notes to Financial Statements.
SNOW MOUNTAIN DAIRY CORPORATION
(A Wholly Owned Subsidiary of Century Pacific Food, Inc.)STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(Amounts in Philippine Pesos)
In 2013, the Company issued to Century Canning Corporation (CCC) 19,588,320 shares of stock, at par value,
which is equivalent to P195,883,200, upon application of the total balance of its deposits for future stock
subscription as full payment for its subscription (see Note 17).
In 2012, the Company and CCC agreed to convert portion of the Company’s advances from CCC amounting to
P45,500,000 to deposit for future stock subscription (see Note 17).
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SNOW MOUNTAIN DAIRY CORPORATION (A Wholly Owned Subsidiary of Century Pacific Food, Inc.)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 and 2012
(Amounts in Philippine Pesos) 1. CORPORATE INFORMATION
Snow Mountain Dairy Corporation (the Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on February 14, 2001. It started commercial operations in November 2002. The Company is engaged in producing, canning, freezing, preserving, refining, packing, buying and selling at wholesale and retail, food products including all kinds of milk and dairy products, fruits and vegetable juices and other milk or dairy preparations and by-products. The Company is a subsidiary of Century Canning Corporation (CCC) until October 31, 2013 when CCC transferred for a consideration its 100% ownership interest in the Company to Century Pacific Food, Inc. (CPFI or the new parent company) as part of the corporate reorganization undertaken by the Century Pacific Group (the Group) within which CCC is the parent company (see also Note 17.1). CPFI is a newly incorporated subsidiary of CCC, which is now the Company’s ultimate parent company. CCC is engaged in the manufacture and distribution of canned tuna products for the Philippine market. CPFI will soon operate as a food manufacturing company. On January 7, 2014, the Board of Directors resolved to amend the Company’s articles of incorporation due to the change in the address of its registered office, which is also its principal place of business, from No.48 Amang Rodriguez Avenue, Ignacio Complex, Manggahan, Pasig City to 32 Arturo Drive, Bagumbayan, Taguig, Metro Manila as part of the Company’s expansion activities (see Note 9). The amendment was accordingly approved by the SEC on February 26, 2014. The ultimate parent and parent company’s registered office, which is also their principal place of business, is located at Suite 505 Centerpoint Building, Julia Vargas St., Ortigas Center, Pasig City. The financial statements of the Company for the year ended December 31, 2013 (including the comparatives financial statements for December 31, 2012 and the corresponding figures as of January 1, 2012) were authorized for issue by the Company’s Board of Directors on March 7, 2014.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. The policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation of Financial Statements
(a) Statement of Compliance with Philippine Financial Reporting Standards (PFRS)
The financial statements of the Company have been prepared in accordance with PFRS. PFRS are adopted by the Financial Reporting Standards Council from the pronouncements issued by the International Accounting Standards Board (IASB). The financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies that follow.
(b) Presentation of Financial Statements
The financial statements are presented in accordance with Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements. The Company presents all items of income and expenses and other comprehensive income in a single statement of comprehensive income. The Company presents a third statement of financial position as at the beginning of the preceding period when it applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that has a material effect on the information in the statement of financial position at the beginning of the preceding period. The related notes to the third statement of financial position are not required to be disclosed. The Company’s adoption of PAS 19 (Revised), Employee Benefits, resulted in material retrospective restatements on certain accounts in the comparative financial statements for December 31, 2012 and in the corresponding figures as of January 1, 2012 [see Note 2(a)(ii)]. Accordingly, the Company presents a third statement of financial position as at January 1, 2012 without the related notes, except for the disclosures required under PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
(c) Functional and Presentation Currency
These financial statements are presented in Philippine pesos, the Company’s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items included in the financial statements are measured using its functional currency, the currency of the primary economic environment in which the Company operates.
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2.2 Adoption of New and Amended PFRS
(a) Effective in 2013 that is Relevant to the Company
In 2013, the Company adopted for the first time the following new, amendments, revision and improvements to PFRS that are relevant to the Company and effective for financial statements for the annual periods beginning on or after July 1, 2012 or January 1, 2013:
PAS 1 (Amendment) : Financial Statements Presentation – Presentation of Items of Other Comprehensive Income PAS 19 (Revised) : Employee Benefits PFRS 7 (Amendment) : Financial Instrument: Disclosures – Offsetting Financial Assets and Financial Liabilities PFRS 13 : Fair Value Measurement Annual Improvements : Annual Improvements to PFRS (2009 – 2011 Cycle) Discussed below are the relevant information about these new, amended and revised standards and the corresponding impact in the Company’s financial statements.
(i) PAS 1 (Amendment), Financial Statements Presentation – Presentation of Items of
Other Comprehensive Income (effective from July 1, 2012). The amendment requires an entity to group items presented in other comprehensive income into those that, in accordance with other PFRS: (a) will not be reclassified subsequently to profit or loss, and, (b) will be reclassified subsequently to profit or loss when specific conditions are met. The amendment has been applied retrospectively, hence, the presentation of other comprehensive income has been modified to reflect the changes. Management determined that the amendment did not significantly affect the financial statements as its other comprehensive income is only comprised of actuarial gains and losses on post-employment defined benefit obligation, an item which is not reclassified subsequently to profit or loss.
(ii) PAS 19 (Revised 2011), Employee Benefits (effective from January 1, 2013). The revision made a number of changes as part of the improvements throughout the standard. The main changes relate to defined benefit plans as follows:
• eliminates the corridor approach and requires the recognition of remeasurements (including actuarial gains and losses) arising in the reporting period in other comprehensive income;
• changes the measurement and presentation of certain components of the defined benefit cost. The net amount in profit or loss is affected by the removal of the expected return on plan assets and interest cost components and their replacement by a net interest expense or income based on the net defined benefit liability or asset; and,
• enhances disclosure requirements, including information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.
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The Company has applied PAS 19 (Revised) retrospectively in accordance with its transitional provision. Consequently, it restated the previous years presented. An analysis of the effect of the adjustments on the specific assets, liabilities, and equity components affected is presented below.
As Previously Prior PeriodReported Adjustment As Restated
December 31, 2012
Change in asset and liability:
Post-employment benefit asset 608,524 P 608,524 )( P -
Post-employment benefit
obligation - 529,133 )( 529,133 )(
Total decrease in equity 1,137,657 )( P
Changes in equity:
Retained earnings 29,434,712 P 180,858 )( P 29,253,854 P
Other reserve - 956,799 )( 956,799 )(
Total decrease in equity 1,137,657 )( P
P
P
January 1, 2012
Change in asset and liability:
Post-employment benefit asset 484,533 P 484,533 )( P -
Retained earnings 10,125,138 P 123,794 )( P 10,001,344 P Other reserve - 1,013,863 )( 1,013,863 )(
Total decrease in equity 1,137,657 )( P
P
The effect of the prior period adjustments arising from the adoption of PAS 19 (Revised) on certain line items of the statements of comprehensive income and statements of cash flows for the year ended December 31, 2012 is not material; accordingly, the analyses were no longer presented.
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(iii) PFRS 7 (Amendment), Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2013). The amendment requires qualitative and quantitative disclosures relating to gross and net amounts of recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation. The amendment also requires disclosure of information about recognized financial instruments which are subject to enforceable master netting arrangements or similar agreements, even if they are not set-off in the statement of financial position, including those which do not meet some or all of the offsetting criteria under PAS 32 and amounts related to a financial collateral. These disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with recognized financial assets and financial liabilities on the entity’s financial position. This amendment did not have a significant impact on the Company’s financial statements as the Company has no and does not expect to have offsetting arrangements (see Note 20).
(iv) PFRS 13, Fair Value Measurement (effective from January 1, 2013). This new standard clarifies the definition of fair value and provides guidance and enhanced disclosures about fair value measurements. The requirements under the this standard do not extend the use of fair value accounting but provide guidance on how it should be applied to both financial instrument items and non-financial items for which other PFRS require or permit fair value measurements or disclosures about fair value measurements, except in certain circumstances. The amendment applies prospectively from annual periods beginning January 1, 2013; hence, disclosure requirements need not be resented in the comparative information in the first year of application. Other than the additional disclosures presented in Note 21, the application of this new standard had no significant impact in the amounts recognized in the financial statements.
(v) 2009-2011 Annual Improvements to PFRS. Annual improvements to PFRS (2009-2011 Cycle) made minor amendments to a number of PFRS, which are effective for annual periods beginning on or after January 1, 2013. Among those improvements, the following amendments are relevant to the Company:
(a) PAS 1 (Amendment), Presentation of Financial Statements – Clarification of the Requirements for Comparative Information. The amendment clarifies that a statement of financial position as at the beginning of the preceding period (third statement of financial position) is required when an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that has a material effect on the information in the third statement of financial position. The amendment specifies that other than disclosure of certain specified information in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, related notes to the third statement of financial position are not required to be presented. Consequent to the Company’s adoption of PAS 19 (Revised) in the current year, which resulted in retrospective restatement of the prior years’ financial statements, the Company has presented a third statement of financial position as at January 1, 2012 without the related notes, except for the disclosure requirements of PAS 8, as allowed under this amendment to PAS 1.
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(b) PAS 16 (Amendment), Property, Plant and Equipment – Classification of Servicing Equipment. The amendment addresses a perceived inconsistency in the classification requirements for servicing equipment which resulted in classifying servicing equipment as part of inventory when it is used for more than one period. It clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized as property, plant and equipment when they meet the definition of property, plant and equipment, otherwise, these are classified as inventory. This amendment has no significant effect on the financial statements since the Company has already been applying the classification requirements of this amendment for the abovementioned spare parts and equipment in accordance with the recognition criteria under PAS 16.
(c) PAS 32 (Amendment), Financial Instruments : Presentation – Tax Effect of Distributions to Holders of Equity Instruments. The amendment clarifies that the consequences of income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction shall be accounted for in accordance with PAS 12. Accordingly, income tax relating to distributions to holders of an equity instrument is recognized in profit or loss while income tax related to the transaction costs of an equity transaction is recognized in equity. The adoption of this amendment did not have an impact on the Company’s financial statements as the Company’s accounting policy on tax effect of transactions involving equity instruments is in accordance with the amendment.
(b) Effective in 2013 that are not Relevant to the Company
The following new PFRS, amendments and annual improvements to existing standards are mandatory for accounting periods beginning on after January 1, 2013 but are not relevant to the Company’s financial statements:
PAS 27 (Amendment) : Separate Financial Statements PAS 28 (Amendment) : Investment in Associate and Joint Venture PFRS 1 (Amendment) : First-time Adoption of PFRS – Government Loans PFRS 10 : Consolidated Financial Statements PFRS 11 : Joint Arrangements PFRS 12 : Disclosure of Interests in Other Entities PFRS 10, 11 and PFRS 12 (Amendment) : Amendments to PFRS 10, 11 and 12 – Transition Guidance to PFRS 10, 11 and 12 Philippine Interpretation International Financial Reporting Interpretations Committee 20 : Stripping Costs in the Production Phase of a Surface Mine
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Annual Improvements 2009-2011 Cycle PFRS 1 (Amendment) : First-time Adoption of PFRS – Repeated Application of PFRS 1 and Borrowing Cost PAS 34 (Amendment) : Interim Financial Reporting – Interim Financial Reporting and Segment Information for Total Assets and Liabilities
(c) Effective Subsequent to 2013 but not Adopted Early There are new PFRS, amendments and annual improvements to existing standards that are effective for periods subsequent to 2013. Management has initially determined the following pronouncements, which the Company will apply in accordance with their transitional provisions, to be relevant to its financial statements:
(i) PAS 19 (Amendment), Employee Benefits – Defined Benefit Plans – Employee
Contributions (effective from January 1, 2014). The amendment clarifies that if the amount of the contributions from employees or third parties is dependent on the number of years of service, an entity shall attribute the contributions to periods of service using the same attribution method (i.e., either using the plan’s contribution formula or on a straight-line basis) for the gross benefit. Management has initially determined that this amendment will have no impact on the Company’s financial statements.
(ii) PAS 32 (Amendment), Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2014). The amendment provides guidance to address inconsistencies in applying the criteria for offsetting financial assets and financial liabilities. It clarifies that a right of set-off is required to be legally enforceable, in the normal course of business; in the event of default; and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendment also clarifies the principle behind net settlement and provided characteristics of a gross settlement system that would satisfy the criterion for net settlement. The Company does not expect this amendment to have a significant impact on its financial statements.
(iii) PAS 36 (Amendment), Impairment of Assets – Recoverable Amount Disclosures for Non-financial Assets (effective from January 1, 2014). The amendment clarifies that the requirements for the disclosure of information about the recoverable amount of assets or cash-generating units is limited only to the recoverable amount of impaired assets that is based on fair value less cost of disposal. It also introduces an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount based on fair value less cost of disposal is determined using a present value technique. Management will reflect in its subsequent year’s financial statements the changes arising from this relief on disclosure requirements.
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(iv) PAS 39 (Amendment), Financial Instruments: Recognition and Measurement – Novation of Derivatives and Continuation of Hedge Accounting (effective January 1, 2014). The amendment provides some relief from the requirements on hedge accounting by allowing entities to continue the use of hedge accounting when a derivative is novated to a clearing counterparty resulting in termination or expiration of the original hedging instrument as a consequence of laws and regulations, or the introduction thereof. As the Company neither enters into transactions involving derivative instruments nor it applies hedge accounting, the amendment will not have any impact on the financial statements.
(v) PFRS 9, Financial Instruments: Classification and Measurement. This is the first part
of a new standard on financial instruments that will replace PAS 39, Financial Instruments: Recognition and Measurement, in its entirety. The first phase of the standard was issued on November 2009 and October 2010 and contains new requirements and guidance for the classification, measurement and recognition of financial assets and financial liabilities. It requires financial assets to be classified into two measurement categories: amortized cost or fair value. Debt instruments that are held within a business model whose objective is to collect the contractual cash flows that represent solely payments of principal and interest on the principal outstanding are generally measured at amortized cost. All other debt instruments and equity instruments are measured at fair value. In addition, PFRS 9 allows entities to make an irrevocable election to present subsequent changes in the fair value of an equity instrument that is not held for trading in other comprehensive income.
The accounting for embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangement, does not require separation from the host contract. For liabilities, the standard retains most of the PAS 39 requirements which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in case where the fair value option is taken for financial liabilities, the part of a fair value change due to the liability’s credit risk is recognized in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch.
In November 2013, the IASB has published amendments to International Financial Reporting Standard (IFRS) 9 that contain new chapter and model on hedge accounting that provides significant improvements principally by aligning hedge accounting more closely with the risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. The amendment also now requires changes in the fair value of an entity’s own debt instruments caused by changes in its own credit quality to be recognized in other comprehensive income rather in profit or loss. It also includes the removal of the January 1, 2015 mandatory effective date of IFRS 9.
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To date, the remaining chapter of IFRS 9 and PFRS 9 dealing with impairment methodology is still being completed. Further, the IASB is currently discussing some limited modifications to address certain application issues regarding classification of financial assets and to provide other considerations in determining business model. The Company does not expect to implement and adopt PFRS 9 until its effective date. In addition, management is currently assessing the impact of PFRS 9 on the financial statements of the Company and it plans to conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes.
(vi) Annual Improvements to PFRS. Annual improvements to PFRS (2010-2012 Cycle) and PFRS (2011-2013 Cycle) made minor amendments to a number of PFRS, which are effective for annual periods beginning on or after July 1, 2014. Among those improvements, the following amendments are relevant to the Company but management does not expect a material impact on the Company’s financial statements: Annual Improvements to PFRS (2010-2012 Cycle) (a) PAS 16 (Amendment), Property, Plant and Equipment and PAS 38 (Amendment), Intangible Assets. The amendments clarify that when an item of property, plant and equipment, and intangible assets is revalued, the gross carrying amount is adjusted in a manner that is consistent with a revaluation of the carrying amount of the asset.
(b) PAS 24 (Amendment), Related Party Disclosures. The amendment clarifies
that entity providing key management services to a reporting entity is deemed to be a related party of the latter. It also requires and clarifies that the amounts incurred by the reporting entity for key management personnel services that are provided by a separate management entity should be disclosed in the financial statements, and not the amounts of compensation paid or payable by the key management entity to its employees or directors.
(c) PFRS 13 (Amendment), Fair Value Measurement. The amendment, through a revision only in the basis of conclusion of PFRS 13, clarifies that issuing PFRS 13 and amending certain provisions of PFRS 9 and PAS 39 related to discounting of financial instruments, did not remove the ability to measure short-term receivables and payables with no stated interest rate on an undiscounted basis, when the effect of not discounting is immaterial.
Annual Improvement to PFRS (2011-2013 Cycle) PFRS 13 (Amendment), Fair Value Measurement. The amendment clarifies that the scope of the exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis (the portfolio exception) applies to all contracts within the scope of, and accounted for in accordance with, PAS 39 or PFRS 9, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in PAS 32.
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2.3 Financial Assets Financial assets are recognized when the Company becomes a party to the contractual terms of the financial instrument. Financial assets other than those designated and effective as hedging instruments are classified into the following categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity investments and available-for-sale financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at FVTPL are initially recognized at fair value plus any directly attributable transaction costs. Financial assets carried at FVTPL are initially recorded at fair value and related transaction costs that are recognized in profit or loss. The financial assets category that is relevant to the Company is 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 12 months after the end of the reporting period which are classified as non-current assets.
Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment loss, if any. 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 between the assets’ carrying amount and the present value of estimated cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate or current effective interest rate determined under the contract if the loan has a variable interest rate. The Company’s financial assets categorized as loans and receivables are presented as Cash and Cash Equivalents, Trade and Other Receivables (except deposit on purchases) and as part of Other Non-current Assets, with respect to security deposits included therein, in the statement of financial position. Cash and cash equivalents include cash on hand, demand deposits and short-term, highly liquid investments with original maturities of three months or less, readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. All income and expenses, excluding those that relate to operating activities, relating to financial assets that are recognized in profit or loss in the statement of comprehensive income. Non-compounding interest, and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured. Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred to another party.
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2.4 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Finished goods and work-in-process include the cost of raw materials, direct labor and a proportion of manufacturing overhead based on normal operating capacity. The cost of raw materials include all costs directly attributable to acquisitions, such as the purchase price, import duties and other taxes that are not subsequently recoverable from taxing authorities. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of raw materials is the current replacement cost.
2.5 Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
Plant, machinery and equipment 2 to 10 yearsLaboratory tools and equipment 1 to 10 years
Leasehold improvements are amortized over the term of the lease or the useful lives of the assets of 1 to 10 years, whichever is shorter. Construction-in-progress represents properties undergoing construction. It is stated at cost which includes cost of construction, applicable borrowing costs (see Note 2.15) and other direct costs. This account is not depreciated until such time that the assets are completed and available for use. Fully depreciated assets are retained in the accounts until these are no longer in use. No further charge for depreciation is made in respect of those accounts. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.13). The residual values and estimated useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at the end of each reporting period. An item of property, plant and equipment, including related accumulated depreciation and amortization and impairment losses, if any, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of comprehensive income in the period the item is derecognized.
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2.6 Prepayments and Other Assets Prepayment and other assets pertain to the other resources controlled by the Company as a result of past events. They are recognized in the financial statements when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Other recognized assets of similar nature, where future economic benefits are expected to flow to the Company beyond one year after the end of the reporting period (or in the normal operating cycle of the business, if longer), are classified as non-current assets. 2.7 Trademarks The cost of trademarks is the amount of cash or cash equivalents paid or the fair value of the other considerations given up to acquire the trademark. The Company’s trademark is not amortized but tested for impairment annually [see Notes 2.13 and 3.1(a)].
2.8 Financial Liabilities
Financial liabilities of the Company include trade and other payables (except tax-related liabilities) and due to related parties which are recognized when the Company becomes a party to the contractual terms of the instrument. All interest-related charges incurred on a financial liability that relates to financing activities are recognized as an expense in profit or loss under the caption Finance Costs (Income) – net in the statement of comprehensive income. Financial liabilities are recognized initially at their fair value and subsequently measured at amortized cost, using effective interest method for maturities of more than one year, less settlement payments. Financial liabilities are classified as current liabilities if payment is due to be settled within one year or less after the end of the reporting period (or in the normal operating cycle of the business, if longer), or the Company does not have an unconditional right to defer settlement of liability for at least 12 months after the end of the reporting period. Otherwise, these are presented as non-current liabilities. Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. The difference between the carrying amount of the financial liability derecognized and the consideration paid or payable is recognized in profit or loss. 2.9 Offsetting Financial Instruments Financial assets and liabilities are offset and the resulting net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
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2.10 Provisions and Contingencies
Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events.
Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. The provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate.
In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Company that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Company can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision. 2.11 Revenue and Expense Recognition Revenue comprises of revenue from the sale of goods measured by reference to the fair value of consideration received or receivable by the Company for goods sold excluding value-added tax (VAT) and any trade discounts. Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that the economic benefits will flow to the Company; and the costs incurred or to be incurred can be measured reliably. In addition, the following specific recognition criteria must also be met before revenue is recognized: (a) Sale of goods – Revenue is recognized when the risks and rewards of ownership of the
goods have passed to the buyer, i.e. generally when the customer has acknowledged delivery of goods.
(b) Interest income – Recognized as the interest accrues taking into account the effective yield on the asset.
Costs and expenses are recognized in profit or loss upon receipt of goods, utilization of services or at the date they are incurred. All finance costs are reported in profit or loss on an accrual basis, except capitalized borrowing costs which are included as part of the cost of the related qualifying asset (see Note 2.15).
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2.12 Leases – Company as Lessee Leases which do not transfer to the Company substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the statement of comprehensive income on a straight-line basis over the lease term. Associated costs, such as repairs and maintenance and insurance, are expensed as incurred. The Company determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. 2.13 Impairment of Non-financial Assets
The Company’s trademarks, having an indefinite useful life, are tested for impairment annually. Property, plant and equipment and other non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit). As a result, assets are tested for impairment either individually or at the cash-generating unit level. Impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use, based on an internal evaluation of discounted cash flow. Impairment loss is charged pro-rata to other assets in the cash-generating unit.
All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment loss is reversed if the asset’s or cash generating unit’s recoverable amount exceeds its carrying amount.
2.14 Employee Benefits
(a) Defined Benefit Plan
The Company provides post-employment benefits to employees through a defined benefit plan.
A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Company, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Company’s defined benefit post-employment plan covers all regular full-time employees. The pension plan is tax-qualified, non-contributory and administered by a trustee.
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The liability recognized in the statement of financial position for a defined benefit plan is the present value of the defined benefit obligation (DBO) at the end of the reporting period less the fair value of plan assets. The DBO is calculated every other year by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using a discount rate derived from the interest rate of a zero coupon government bonds as published by Philippine Dealing and Exchange Corporation that are denominated in the currency in which the benefits will be paid and that have terms of maturity approximating to the terms of the related post-employment liability. Remeasurements, comprising of actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions and the return on plan assets (excluding amount included in net interest) are reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they arise. Net interest is calculated by applying the discount rate at the beginning of the period, taking account of any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest is reported as part of Finance Costs (Income) – net account in the statement of profit or loss. Past-service costs are recognized immediately in profit or loss in the period of any plan amendment.
(b) Termination Benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits at the earlier of when it can no longer withdraw the offer of such benefits and when it recognizes costs for a restructuring that is within the scope of PAS 37, Provision, Contingent Liabilities and Contingent Assets, and involves the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the reporting period are discounted to their present value.
(c) Compensated Absences
Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the end of the reporting period. They are included in the Trade and Other Payables account in the statement of financial position at the undiscounted amount that the Company expects to pay as a result of the unused entitlement.
2.15 Borrowing Costs
Borrowing costs are recognized as expense in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of the cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete.
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Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.
2.16 Foreign Currency Transactions and Translation
The accounting records of the Company are maintained in Philippine pesos. Foreign currency transactions during the period are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates.
Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive income as part of profit or loss from operations.
2.17 Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity, if any.
Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the end of the reporting period. They are calculated using the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the period. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss. Deferred tax is accounted for using the liability method, on temporary differences at the end of the reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to in the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
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Deferred tax assets and deferred tax liabilities are offset if the Company has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes related to the same entity and the same taxation authority. The Company establishes liabilities for probable and estimable assessments by the Bureau of Internal Revenue (BIR) resulting from any known tax exposures. Estimates represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes available.
2.18 Related Party Relationships and Transactions
Related party transactions are transfer of resources, services or obligations between the Company and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual; and, (d) the Company’s retirement plan. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form.
2.19 Equity
Capital stock represents the nominal value of shares that have been issued.
Deposits for future stock subscriptions represent deposits from the parent company as payment for future subscriptions. Other reserve represents actuarial gains and losses arising from the remeasurements of the Company’s net post-employment defined benefit obligation (asset) [see Note 2(a)(ii)]. Retained earnings represent all current and prior period results of operations as reported in the profit or loss section of the statement of comprehensive income reduced by the amounts of dividend declared.
2.20 Events After the End of the Reporting Period Any post-period-end event that provides additional information about the Company’s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-period-end events that are not adjusting events, if any, are disclosed when material to the financial statements.
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3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The Company’s financial statements prepared in accordance with PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates 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. Actual results may ultimately differ from these estimates.
3.1 Critical Management Judgments in Applying Accounting Policies
In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements:
(a) Determining the Useful Lives of Trademark
Under the Intellectual Property Code of the Philippines, the legal life of trademark is 10 years and may be perpetually renewed thereafter for another 10 years. However, considering that the management does not expect any circumstances or events which will cause it to decide not to renew its trademarks every 10 years, management has taken the position that the useful lives of its trademarks are indefinite; hence the related costs are not amortized but subjected to annual impairment testing (see Notes 2.7 and 2.13). Changes in assumption and circumstances in the future will substantially affect the financial statements of the Company, particularly the carrying value of such asset.
No impairment loss on trademark was recognized in both periods based on management evaluation. The carrying value of the Company’s trademark as at December 31, 2013 and 2012 is presented in Note 10.
(b) Distinction between Operating and Finance Leases
The Company has entered into various lease agreements as a lessee. Judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. Based on management’s judgment such leases were determined to be operating leases.
(c) Recognition of Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and contingencies. Accounting policies on recognition of provisions and contingencies are discussed in Notes 2.10 and disclosure on relevant provision and contingencies are presented in Note 19.
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3.2 Key Sources of Estimation Uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period:
(a) Impairment of Trade and Other Receivables
Adequate amount of allowance is made for specific and groups of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Company’s relationship with the customers, the customers’ current credit status based on known market forces, average age of accounts, collection experience and historical loss experience.
Based on the analysis done by management, certain receivables were identified to be impaired and have been provided with adequate allowance for impairment. The carrying value of trade and other receivables and the analysis of allowance for impairment on such financial assets are shown in Note 6.
(b) Determining Net Realizable Value of Inventories
In determining the net selling prices of inventories, management takes into account the most reliable evidence available at the times the estimates are made. It also takes into consideration the obsolescence of the inventory in determining net realizable value. The future realization of the carrying amounts of inventories as disclosed in Note 7 is affected by price changes in different market segments. These aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Company’s inventories within the next financial period. Impairment loss on inventory amounting to P4.5 million relating to expired inventories that were written down to net realizable value is recognized in 2013 (see Note 7). No similar writedown on inventories was made in 2012.
(c) Estimating Useful Lives of Property, Plant and Equipment
The Company estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amounts of property, plant and equipment are analyzed in Note 9. Based on management’s assessment as at December 31, 2013 and 2012, there is no change in estimated useful lives of property, plant and equipment during those periods. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.
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(d) Determining Realizable Amount of Deferred Tax Assets The Company reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Management assessed that the deferred tax assets recognized as of December 31, 2013 will be fully utilized in the coming years. The details of deferred tax assets as of December 31, 2013 are disclosed in Note 16.
(e) Impairment of Non-financial Assets
Except for trademarks with indefinite useful lives which are reviewed for impairment annually or regularly, PFRS requires that an impairment review be performed when certain impairment indicators are present. The Company’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.13. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations. No impairment loss on non-financial assets was recognized in 2013 and 2012.
(f) Valuation of Post-employment Defined Benefit
The determination of the Company’s obligation and cost of post-employment defined benefit are dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates and salary increase rates. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. The amount of post-employment benefit obligation (asset), related expense and an analysis of the movements in the estimated present value of post-employment benefit obligation and fair value of plan asset are presented in Note 15.2.
4. RISK MANAGEMENT OBJECTIVES AND POLICIES The Company is exposed to certain financial risks in relation to financial instruments. The Company’s financial assets and liabilities by category are summarized in Note 20. The main types of risks are market risk, credit risk and liquidity risk.
The Company’s risk management is coordinated with its Board of Directors (BOD), and focuses on actively securing the Company’s short to medium-term cash flows by minimizing the exposure to financial markets.
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The Company does not engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed to are described below. 4.1 Credit Risk
Credit risk is the risk that a counterparty may fail to discharge an obligation to the Company. The Company is exposed to this risk for various financial instruments arising from selling goods to customers, including related parties, providing security deposits to lessors, and placing deposits with banks. The Company continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporate this information into its credit risk controls. The Company’s policy is to deal only with creditworthy counterparties. Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the statements of financial position (or in detailed analysis provided in the notes to the financial statements), as summarized below.
Notes 2013 2012
Cash and cash equivalents 5 42,985,172 P 36,424,315 P
Trade and
other receivables – net 6 258,579,504 246,999,008
Security deposits 10 1,780,295 1,780,295
303,344,971 P 285,203,618 P
None of the Company’s financial assets are secured by collateral or other credit enhancements, except for cash and cash equivalents as described below. (a) Cash and Cash Equivalents
The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. Included in the cash and cash equivalents are cash in banks and short-term placements. As part of Company policy, bank deposits are only maintained with reputable financial institutions. Cash in banks which are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum coverage of P500,000 per depositor per banking institution, as provided for under Republic Act (R.A.) No. 9576, Charter of PDIC, are still subject to credit risk. (b) Trade and Other Receivables In respect of trade and other receivables, the Company is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Trade receivables consist of a large number of customers in various industries and geographical areas. Based on historical information about customer default rates, management consider the credit quality of trade receivables that are not past due or impaired to be good.
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Some of the financial assets, which are all trade receivables, are past due but unimpaired as at the end of the reporting periods. Trade receivables that are past due but not impaired are as follows:
2013 2012
Not more than three months 78,650,977 P 48,647,741 P
More than three months but not morethan six months 6,546,544 24,223,084
85,197,521 P 72,870,825 P
The fair value of these short-term financial assets is not individually determined as the carrying amount is a reasonable approximation of fair value. 4.2 Liquidity Risk The Company manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 6-month and one-year period are identified monthly. The Company maintains cash to meet its liquidity requirements for up to 60-day periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets. As at December 31, 2013 and 2012, the Company’s financial liabilities have contractual maturities within six months or less.
4.3 Foreign Currency Risk Most of the Company’s transactions are carried out in Philippine pesos, its functional
currency. Exposures to currency exchange rates arise from the Company’s overseas purchases, which are denominated in United States (U.S.) dollars. The Company also holds U.S. dollar-denominated cash in banks.
To mitigate the Company’s exposure to foreign currency risk, non-Philippine peso cash flows are monitored and settled within a short period, in the case of liabilities. Accordingly, the Company does not have significant exposure to foreign currency exchange rates.
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5. CASH AND CASH EQUIVALENTS
The breakdown of this account are as follows:
2013 2012
Cash in banks 42,985,172 P 35,381,811 P
Cash on hand 6,171,646 508,800 Short-term placements - 1,042,504
49,156,818 P 36,933,115 P
Cash in banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods between 30 to 90 days and earn effective interest ranging from 1.63% to 2.25% for both periods. Interest income earned amounting to P91,267 in 2013 and P165,794 in 2012 is presented as part of Finance Costs (Income) – net in the statements of comprehensive income (see Note 14).
6. TRADE AND OTHER RECEIVABLES
This account is composed of the following:
Notes 2013 2012
Trade receivables 18.1 257,171,099 P 252,608,378 P Advances to suppliers 17,509,562 29,059,344 Others 7 11,072,931 5,626,142
285,753,592 287,293,864
Allowance for impairment 6,853,755 )( 6,853,755 )(
278,899,837 P 280,440,109 P
Trade receivables are usually due within 30 to 90 days and do not bear any interest.
The Company’s trade and other receivables, which are subject to credit risk exposure (see Note 4.1), have been reviewed for indicators of impairment. Certain trade receivables were identified to be impaired; hence, adequate amount of allowance for impairment has been recognized [see Note 3.2(a)].
A reconciliation of the allowance for impairment at the beginning and end of the years ended December 31, 2013 and 2012 is shown below.
Note 2013 2012
Balance at beginning of year 6,853,755 P 6,340,995 P
Impairment loss
during the year 13 - 512,760
Balance at end of year 6,853,755 P 6,853,755 P
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7. INVENTORIES
Inventories at the end of December 31 2013 and 2012 are broken down as follows:
Note 2013 2012
At Cost:Finished goods 172,179,775 P 314,973,334 P Raw and packaging materials 127,469,371 109,877,664 Other supplies 5,011,905 6,073,706
304,661,051 430,924,704
At Net Realizable Value (NRV):Finished goods 4,143,035 - Raw and packaging materials 319,283 -
4,462,318 - Allowance to writedown
inventory to NRV 13 4,462,318 )( - - -
304,661,051 P 430,924,704 P
The cost of inventories charged to operations for the years ended December 31, 2013 and 2012 are analysed in Note 13.
In 2013, the Company’s management determined that certain raw materials and finished goods may no longer be used in production nor the carrying amounts can be recovered through sale. Accordingly, the Company recognized impairment loss on inventory amounting to P4.5 million which is presented as Loss on inventory obsolescence under Administrative Expenses in the 2013 statement of comprehensive income [see Notes 3.2(b) and 13]. There was no loss on inventory obsolescence recognized in 2012.
The Company has a warehouse located in Tacloban City, Leyte. In November 2013, the warehouse facility was destroyed by a typhoon that resulted in estimated inventory losses of P2.8 million, which is equivalent to the claims filed with the insurance company. The said claim is still outstanding as at December 31, 2013 and is presented as part of Others under the Trade and Other Receivables in the 2013 statement of financial position (see Note 6). There was no similar transaction in 2012.
The Company’s prepaid taxes represent taxes withheld by the Company’s customers amounting to P16,100,323 and P23,189,893 as at December 31, 2013 and 2012, respectively, and tax credit certificates issued by the Bureau of Customs (BOC) amounting to both P817,246 as at December 31, 2013 and 2012.
9. PROPERTY, PLANT AND EQUIPMENT
The gross carrying amounts and accumulated depreciation and amortization of property, plant and equipment at the beginning and end of the years ended December 31, 2013 and 2012, are shown below.
Plant, Laboratory
Machinery and Tools and Leasehold Construction-Equipment Equipment Improvements in-Progress Total
December 31, 2013
Cost 108,453,610 P 8,195,012 P 15,753,041 P 145,137,943 P 277,539,606 P Accumulated
Net carrying amount 27,863,385 P 638,399 P 3,202,393 P - 31,704,177 P
P
P
P
P
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A reconciliation of the carrying amounts of property, plant and equipment at the beginning and end of the years ended December 31, 2013 and 2012, is presented below.
Plant, Laboratory
Machinery and Tools and Leasehold Construction-Equipment Equipment Improvements in-Progress Total
Balance at January 1, 2013,
net of accumulated depreciation and
amortization 19,930,472 P 697,392 P 1,427,684 P - 22,055,548 P Additions 1,845,282 3,174,286 1,647,761 145,137,943 151,805,272
Depreciation and amortization charges
for the year 7,744,992 )( 495,504 )( 1,274,525 )( - 9,515,021 )(
Balance at December 31, 2013, net
of accumulated depreciation and
amortization 14,030,762 P 3,376,174 P 1,800,920 P 145,137,943 P 164,345,799 P
Balance at
January 1, 2012, net of accumulated
depreciation and amortization 27,863,385 P 638,399 P 3,202,393 P - 31,704,177 P
Additions 1,651,555 405,320 213,664 - 2,270,539 Depreciation and
amortization chargesfor the year 9,584,468 )( 346,327 )( 1,988,374 )( - 11,919,169 )(
Balance at
December 31, 2012, net of accumulated
depreciation and
amortization 19,930,472 P 697,392 P 1,427,683 P - 22,055,547 P
P
P
P
Construction-in-progress pertains to the accumulated costs incurred on the ongoing construction, which started in 2013, of the Company’s new production plant and administration building as part of the Company’s expansion activities (see Notes 1 and 19.2). As at December 31, 2013, the construction is not yet complete. The cost of fully depreciated property, plant and equipment as at December 31, 2013 and 2012 which are still being used in operations amounts to P82,828,129 and P46,505,687, respectively. The Company did not capitalize any borrowing cost related to their general borrowings in 2013, since management determined that the effect is not material to the financial statements.
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The depreciation and amortization for the years ended December 31 is allocated as follows (see Note 13):
In July 2008, the Company purchased from General Milling Corporation (GMC) certain trademarks owned and registered with the Intellectual Property Office under the name of GMC. As discussed in Note 3.1(a), the Company’s trademarks are subject to annual impairment testing. No impairment losses were recognized for the years ended December 31, 2013 and 2012 as the recoverable amounts of the trademarks were determined to be higher than their carrying values. Security deposits pertain to deposits required under the terms of the lease agreements of the Company with certain lessors. The carrying amount of these deposits is a reasonable approximation of its fair value based on management’s assessment as at December 31, 2013 and 2012.
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11. TRADE AND OTHER PAYABLES The composition of this account is shown below.
Accrued expenses include obligations relating to trucking and shipment fee, consultancy and management fee and salaries and employee benefits. Other payables consist of various payables to government agencies which includes taxes and employer’s shares in certain mandatory employee benefits. Due to the short duration of trade and other payables, management considers the carrying amounts to be a reasonable approximation of fair values.
12. INTEREST-BEARING LOANS On October 30, 2013, the Company obtained two unsecured interest-bearing loans from a local bank for its working capital and capital expenditure requirements (see Note 19.2) totalling to P540.0 million. These loans both bear fixed interest rate of 2.5% per annum and are to be repaid on November 30, 2013. In November and December 2013, the Company repaid a portion of these loans amounting to P325.0 million. The outstanding balance of these unsecured interest-bearing loans as at December 31, 2013 is presented as Interest-Bearing Loans in the 2013 statement of financial position. Interest expense arising from these loans which amounted to P1.6 million is presented as part of Finance costs under Finance Costs (Income) – Net in the 2013 statement of comprehensive income (see Note 14). There is no outstanding interest payable as of December 31, 2013.
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13. COSTS AND EXPENSES BY NATURE
The details of costs and expenses by nature are shown below.
2012Notes 2013 (As Restated)
Milk and ingredients 734,122,138 P 821,975,535 P
Packaging and other materials 261,172,270 380,053,910
Changes in inventories of
finished goods 138,650,524 101,850,269
Advertisements 111,507,292 116,893,508
Outside services 18.3 46,447,826 49,546,397
Freight 46,253,380 44,342,447
Forwarding and other
warehousing fees 44,724,843 55,231,107
Merchandisers’ salary 34,951,327 32,607,195
Communication, light and water 16,325,822 20,972,321
Salaries and employee benefits 15.1, 18.5 14,398,014 13,977,192
Rentals 18.4 9,606,064 11,031,433
Depreciation and amortization 9 9,515,021 11,919,169
Gas, fuel and oil 8,787,684 12,837,058
Taxes and licenses 23.1(f) 7,311,020 6,897,574 Supplies 4,522,876 6,213,439 Loss on inventory
obsolescence 7 4,462,318 -
Repairs and maintenance 1,156,243 1,962,046
Impairment loss
on trade receivables 6 - 512,760 Miscellaneous 3,857,370 5,086,402
1,497,772,032 P 1,693,909,762 P
These expenses are classified in the statements of comprehensive income as follows:
20122013 (As Restated)
Cost of goods sold 1,222,454,203 P 1,419,620,458 P
Total cost of goods manufactured 1,083,803,679 1,317,768,542
Finished goods at
beginning of year 314,973,334 416,825,250 Finished goods at
end of year 7 176,322,810 )( 314,973,334 )(
1,222,454,203 P 1,419,620,458 P
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14. FINANCE COSTS (INCOME)
The details of Finance Costs (Income) – net are presented below.
2012Notes 2013 (As Restated)
Finance costs 12, 15.2 1,646,343 P 149,281 P
Finance income 5 114,489 )( 187,370 )(
1,531,854 P 38,089 )( P
15. EMPLOYEE BENEFITS
15.1 Employee Benefits Expense Expenses recognized for salaries and employee benefits are presented below.
2012Notes 2013 (As Restated)
Short-term benefits 14,103,227 P 13,557,311 P Post-employment benefits 15.2 294,787 419,881
13 14,398,014 P 13,977,192 P
The amount of employee benefits expense is allocated as follows:
2012Note 2013 (As Restated)
Cost of goods sold 13 9,829,140 P 9,258,820 P Administrative expenses 4,568,874 4,718,372
13 14,398,014 P 13,977,192 P
15.2 Post-employment Defined Benefit
(a) Characteristics of the Defined Benefit Plan
The Company maintains a fully funded, tax-qualified, non-contributory post-employment benefit plan that is being administered by a trustee bank covering all regular full-time employees. The normal retirement age is 60 with a minimum of 5 years of credited service. The plan also provides for an early retirement at age 50 with a minimum of 10 years of credited service and late retirement after age 65, both subject to the approval of the Company’s BOD. Normal retirement benefit is an amount equivalent to 100% of the final monthly covered compensation (average monthly basic salary during the last 12 months of credited service) for every year of credited service.
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(b) Explanation of Amounts Presented in the Financial Statements
Actuarial valuations are made every other year to update the retirement benefit costs and the amount of contributions. All amounts presented below are based on the actuarial valuation report obtained from an independent actuary in 2013 including the comparative year which has been restated in line with the adoption of PAS 19 (Revised), see Note 2.2(a)(ii). The amounts of post-employment benefit obligation (asset) recognized in the statements of financial position are determined as follows:
20122013 (As Restated)
Present value of the obligation 2,560,525 P 3,379,996 P Fair value of plan assets 3,212,678 )( 2,850,863 )(
Under (over) funded 652,153 )( 529,133 Effect of asset ceiling 29,854 -
622,299 )( P 529,133 P
The movements in the present value of the post-employment benefit obligation recognized in the books are as follows:
2012
2013 (As Restated)
Balance at beginning of year 3,379,996 P 2,802,558 P
The movements in the fair value of plan assets are presented below [see also Note 15.2(b)].
20122013 (As Restated)
Balance at beginning of year 2,850,863 P 2,149,434 P Contributions 512,064 512,064 Interest income 142,509 132,301 Return on plan assets (excluding -
amounts included in net interest) 292,758 )( 57,064
Balance at end of year 3,212,678 P 2,850,863 P
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The composition of the fair value of plan assets as at December 31, 2013 and 2012 for each category and risk characteristics is shown below.
2013 2012
Cash and cash equivalents 311,630 P 301,906 P Debt instruments - government bonds 1,955,878 1,728,193 Debt instruments - other bonds 452,024 560,195 Others 493,146 260,569
3,212,678 P 2,850,863 P
Except for cash and cash equivalents which have insignificant risk of changes in value, the fair values of the above financial assets are determined based on quoted market prices in active markets. The plan assets do not comprise any of the Company’s own financial instruments or any of its assets occupied and/or used in its operations. It incurred a negative return of P0.2 million in 2013 and positive return of P0.2 million in 2012. The components of amounts recognized in profit or loss and in other comprehensive income in respect of the defined benefit plan are as follows:
20122013 (As Restated)
Recognized in profit or loss:
Current service cost 294,787 P 419,881 P
Net interest expense 15,787 25,256
310,574 P 445,137 P
Recognized in other comprehensive income:
Actuarial losses (gains) arising from:
−experience adjustments 1,700,522 )( P -
−changes in financial assumptions 427,968 -
Return of plan assets
(excluding amount included in
net interest expense) 292,758 57,064 )(
Effect of asset ceiling 29,854 -
949,942 )( P 57,064 )( P
P
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Current service cost is allocated and presented in the statements of comprehensive income under the following accounts:
2013 2012
Cost of goods sold 261,689 P 363,309 P Administrative expenses 33,098 56,572
294,787 P 419,881 P
Net interest expense is included in Finance Costs (Income) – net account in the statements of comprehensive income (see Note 14). The amount recognized in other comprehensive income was classified as item that will not be reclassified subsequently to profit or loss. In determining the amounts of the post-employment benefit obligation, the following significant actuarial assumptions were used:
2013 2012
Discount rates 4.63% 5.62%Expected rate of salary increases 3.00% 2.00%
Assumptions regarding future mortality experience are based on published statistics and mortality tables. The average remaining working lives of an individual retiring at the age of 60 is 22 for males and 30 for females. These assumptions were developed by management with the assistance of an independent actuary. Discount factors are determined close to the end of each reporting period by reference to the interest rates of a zero coupon bond government bonds with terms to maturity approximating to the terms of the retirement obligation. Other assumptions are based on current actuarial benchmarks and management’s historical experience.
(c) Risks Associated with the Retirement Plan
The plan exposes the Company to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.
(i) Investment and Interest Risk
The present value of the defined benefit obligation is calculated using a discount rate determined by reference to market yields of government bonds. Generally, a decrease in the interest rate of a reference government bond will increase the plan obligation. However, this will be partially offset by an increase in the return on the plan’s investments in debt securities and if the return on plan asset falls below this rate, it will create a deficit in the plan. Currently, the plan has significant investment in debt instruments.
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(ii) Longevity and Salary Risks The present value of the defined benefit obligation is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment and to their future salaries. Consequently, increases in the life expectancy and salary of the plan participants will result in an increase in the plan obligation.
(d) Other Information
The information on the sensitivity analysis for certain significant actuarial assumptions, the Company’s asset-liability matching strategy, and the timing and uncertainty of future cash flows related to the retirement plan are described as follows:
(i) Sensitivity Analysis
The following table summarizes the effects of changes in the significant actuarial assumptions used in the determination of the defined benefit obligation as of December 31, 2013:
Change in Increase in Decrease inassumption assumption assumption
Salary increase rate +9.3% to - 8.5% 238,550 P 217,830 )( P
Discount rate +10.3% to - 9.1% 234,207 )( 263,271
Impact on post-employment define benefit obligation
The sensitivity analysis in the foregoing table is based on a change in an assumption while holding all other assumptions constant. This analysis may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the previous page sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognized in the statements of financial position. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous years. (ii) Asset-liability Matching Strategies
To efficiently manage the retirement plan, the Company ensures that the investment positions are managed in accordance with its asset-liability matching strategy to achieve that long-term investments are in line with the obligations under the retirement scheme. This strategy aims to match the plan assets to the retirement obligations by investing in long-term fixed interest securities (i.e., government or corporate bonds) with maturities that match the benefit payments as they fall due and in the appropriate currency. The Company actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the retirement benefit obligations.
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In view of this, investments are made in reasonably diversified portfolio congruent to the level of credit risks identified on such investments, such that the failure of any single investment will be minimized and would not have a material impact on the overall level of assets. A large portion of the plan assets as of December 31, 2013 and 2012 consists of debt securities, although the Company also invests in cash and cash equivalents and other forms of investments. The Company believes that the debt securities which mainly represent government bond investments offer the best returns over the long term with an acceptable level of risk. There has been no change in the Company’s strategies to manage its risks from previous periods.
(iii) Funding Arrangements and Expected Contributions The plan is currently overfunded by P0.6 million based on the latest actuarial valuation. While there are no minimum funding requirement in the country, expected retirement of significant number of employees may pose a cash flow risk in about 12 years’ time. The maturity profile of undiscounted expected benefits payments from the plan is between 6 to 10 years amounting to P1.1 million. The weighted average duration of the defined benefit obligation at the end of the reporting period is 12 years.
16. CURRENT AND DEFERRED TAXES
The components of tax expense as reported in profit or loss and other comprehensive income are as follows:
2013 2012
Recognized in profit or loss:
Regular corporate income tax (RCIT) at 30% 18,690,242 P 7,341,848 P
Final tax at 20% and 7.5% 18,253 33,159
18,708,495 7,375,007 Deferred tax income relating
to origination and reversal of temporary difference 3,410,408 )( -
15,298,087 P 7,375,007 P
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2013 2012
Recognized in other comprehensive income:
Recognition of previously unrecognized DTA 287,040 )( P -
Deferred tax expense for the year 284,983 -
2,057 )( P -
P
P
A reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in the statements of comprehensive income is presented below.
2013 2012
Tax on pretax profit at 30% 17,120,903 P 7,988,255 P
temporary difference - 127,757 Application of previously
unrecognized DTA on minimum corporate income tax (MCIT) - 740,840 )(
Tax Expense 15,298,087 P 7,375,007 P
The Company did not recognize deferred tax assets (as restated) related to the following temporary differences as at December 31, 2012, since their recoverability and utilization is not yet certain during that period based on the management’s assessment.
Deferred tax assets:Allowance for impairment loss
on trade and other receivables 2,056,127 P Unamortized past service cost 267,537 Retirement benefit obligation 158,739
2,482,403 Deferred tax liabilities −
Unrealized foreign currency gain 7,282 )(
Unrecognized Net Deferred Tax Assets 2,475,121 P
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However, based on the recent historical profitability analysis made in 2013 and positive expectations on future results of the Company’s operations, the Company recognized the deferred tax assets related to the following temporary differences as at December 31, 2013:
Statement of OtherFinancial ComprehensivePosition Profit or Loss Income
Deferred tax assets:Allowance for impairment loss
on trade and other receivables 2,056,127 P 2,056,127 P - Allowance to write-down
inventory to NRV 1,338,695 1,338,695 - Unamortized past service cost 287,596 287,596 -
The Company is subject to MCIT which is computed at 2% of gross income, as defined under tax regulations, or RCIT, whichever is higher. In 2013 and 2012, RCIT was higher than MCIT. As at December 31, 2012, the Company has fully utilized its MCIT amounting to P740,840 which represents the total of MCIT incurred in 2011 (P133,950) and 2010 (P606,890). For the years ended December 31, 2013 and 2012, the Company opted to claim itemized deductions in computing its income tax due.
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17. EQUITY 17.1 Capital Stock Capital stock consists of common shares with details as follows:
Note 2013 2012 2013 2012
Authorized – P10 par value:Balance at beginning
of year 5,000,000 5,000,000 50,000,000 P 50,000,000 P
Increase during the year 17.2 45,000,000 - 450,000,000 -
Balance at end of year 50,000,000 5,000,000 500,000,000 P 50,000,000 P
Issued and outstanding:
Balance at beginning of year 4,062,500 4,062,500 40,625,000 P 40,625,000 P
Issuances during
the year:
Cash subscription 17.2 25,411,680 - 254,116,800 -
Application of deposit for future stock
subscription 17.2 19,588,320 - 195,883,200 -
Collection of subscription
receivable 937,500 - 9,375,000 -
Balance at end of year 50,000,000 4,062,500 500,000,000 40,625,000
Subscribed:
Balance at beginning of year 937,500 937,500 9,375,000 9,375,000
Additional subscription
during the year 45,000,000 - 450,000,000 -
Issued during the year 45,937,500 )( - 459,375,000 )( -
Balance at end of year - 937,500 - 9,375,000
Subscription receivable:
Balance at beginning 9,375,000 )( 9,375,000 )( of year
Collection 17.2 9,375,000 -
Balance at end of year - 9,375,000 )(
500,000,000 P 40,625,000 P
Shares Amount
In 2013, apart from CCC’s subscription to the increase in authorized capital stock paid by way of application of its deposits for future stock subscription (see Note 17.2), it also subscribed to additional shares amounting to P254.1 million, which was paid in cash by CCC. The Company also collected its P9.4 million outstanding subscription receivable in previous years. In October 2013, CCC sold 100% of its ownership interest to CPFI (see Note 1).
As at December 31, 2013 and 2012, the Company has three stockholders owning 100 or more shares each of the Company’s capital stock.
-
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17.2 Deposits for Future Stock Subscriptions
On October 18, 2012, the Company filed an application with the SEC for its proposed increase in authorized capital stock from P50.0 million divided into 5,000,000 to P500.0 million divided into 50,000,000 shares with the same par value per share of P10. This was previously approved by the Company’s BOD on December 6, 2011. In compliance with the SEC’s rules relating to the foregoing, the Company applied a portion of the parent company’s advances to the Company amounting to P45,500,000 (see Note 18.2) and the parent company’s previously recognized Deposits for Future Stock Subscriptions amounting to P150,383,200 as subscription payments. As at December 31, 2012, approval of the application is still pending with the SEC. Accordingly, the subscription payments were presented as Deposits for Future Stock Subscriptions in the 2012 statement of financial position. Subsequently, on April 15, 2013, the SEC approved the Company’s proposed increase in authorized capital stock. Accordingly, on the same date, the Company issued 19,588,320 shares to CCC by applying its deposits on future stock subscription of P195,883,200 on the subscription price which equals the par value of the shares; hence, no additional paid-in-capital arose from this equity transaction. 17.3 Dividends Declaration The BOD approved the declaration of cash dividend amounting to P64.0 million on September 30, 2013 payable to stockholders of record as of September 30, 2013. The cash dividend was fully settled in October 2013. There was no dividend declaration in 2012.
18. RELATED PARTY TRANSACTIONS
The Company’s related parties include its ultimate parent company, the Company’s key management personnel, related parties under common ownership and retirement plan assets.
The summary of the Company’s related party transactions is presented below.
Outstanding OutstandingAmount of Receivable Amount of Receivable
18.1 Sale of Goods The Company sold finished goods inventories to CCC amounting to P8.4 million in 2013 and P127.9 million in 2012 which is presented as part of Sale of Goods in the statements of comprehensive income. Outstanding balance in relation to the sale of goods as at December 31, 2012 amounts to P7.0 million and is shown as part of Trade receivables under the Trade and Other Receivables account in the 2012 statement of financial position (see Note 6). There is no outstanding balance of receivable from this transaction as at December 31, 2013. Also, no impairment loss was recognized in both years on the Company’s receivable from parent company. 18.2 Advances from Related Parties In the normal course of business, the Company obtains unsecured, noninterest-bearing advances from related parties, including its parent company and entities under common ownership, for working capital requirements and other purposes. Such advances are presented as Due to Related Parties in the statements of financial position. Presented below are the movement in the account.
Note 2013 2012
Balance at beginning of year 278,872,672 P 415,465,566 P Additional borrowings
during the year 256,723,141 - Repayments during the year 527,630,340 )( 91,092,894 )( Applied as deposits for
future stock subscription 18.2 - 45,500,000 )(
Balance at end of year 7,965,473 P 278,872,672 P
These are due on demand and normally repaid in cash.
18.3 Consultancy and Management Fees The Company incurs management and consultancy fees based on an agreement between CCC and the Company. Under the agreement, CCC can allocate and charge common corporate expenses to its subsidiaries. The consultancy and management fees incurred and paid by the Company for the years ended December 31, 2013 and 2012 amounted to P12.1 million and P7.3 million, respectively, and is presented as part of Outside Services under Administrative Expenses in the statements of comprehensive income (see Note 13). The outstanding payables arising from these transactions amount to P8.3 million and P2.6 million as at December 31, 2013 and 2012, respectively, are shown as part of Accrued expenses under the Trade and Other Payables account in the statements of financial position (see Note 11).
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18.4 Rentals For the year ended December 31, 2012, CCC leased out storage and production facilities to the Company. In 2013, both parties agreed that the Company may use the facilities at no cost to the Company. Rental expense incurred amounting to P1.5 million for the year ended December 31, 2012 is presented as part of Rentals under Cost of Goods Sold in the 2012 statement of comprehensive income (see Note 13). The outstanding payables arising from these transactions amounts to P3.5 million as at December 31, 2012 and are shown as part of Trade payables under the Trade and Other Payables account in the 2012 statement of financial position (see Note 11).
18.5 Key Management Personnel Compensations
The short-term employee benefits of the key management personnel amounted to P3.2 million and P3.0 million for the years ended December 31, 2013 and 2012, are included in Salaries and employee benefits presented as part of Administrative Expenses in the statements of comprehensive income (see Note 13). 18.6 Retirement Plan
The Company’s retirement plan for its post-employment defined benefit plan is administered and managed by a trustee bank. The fair value and the composition of the plan assets as well as details of the contributions of the Company and benefits paid out by the plan as of December 31, 2013 and 2012 are presented in Note 15.2(b).
The retirement fund neither provides any guarantee or surety for any obligation of the Company nor its investments covered by any restriction or liens.
19. COMMITMENTS AND CONTINGENCIES
The following are the significant commitments and contingencies involving the Company. 19.1 Credit Facilities
The Company has continuing surety with related parties on a P2,700,000,000 credit facility with a major local bank and a P1,345,376,000 combined sub-limits through inter corporate guarantee lines from other local banks. 19.2 Capital Commitments
As at December 31, 2013, the Company has construction-in-progress totalling P145,137,943. The construction relates to the Company’s new production plant in Taguig City (see Note 9). The construction is expected to be completed in 2014 and has remaining estimated costs to complete of P51,925,717 as at December 31, 2013 which is partly financed by the interest-bearing loans obtained from a local bank on October 30, 2013 (see Note 12).
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19.3 Others
There are other commitments, guarantees, litigations and contingent liabilities that arise in the normal course of the Company’s operations which are not reflected in the accompanying financial statements. As at December 31, 2013, management is of the opinion that losses, if any, from these commitments and contingencies will not have a material effect on the Company’s financial statements.
20. CATEGORIES AND OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
The carrying amounts and fair values of the categories of assets and liabilities presented in the statements of financial position are shown below.
Due to related parties 18 7,965,473 7,965,473 278,872,672 278,872,672
381,520,477 P 381,520,477 P 610,659,862 P 610,659,862 P
2013 2012
See Notes 2.3 and 2.8 for a description of the accounting policies for each category of financial instrument. A description of the Company’s risk management objectives and policies for financial instruments is provided in Note 4.
The Company has no financial instrument offsetting arrangements in 2013 and 2012.
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21. FAIR VALUE MEASUREMENT AND DISCLOSURE 21.1 Fair Value Hierarchy In accordance with PFRS 13, the fair value of financial assets and liabilities and non-financial assets which are measured at fair value on a recurring or non-recurring basis and those assets and liabilities not measured at fair value but for which fair value is disclosed in accordance with other relevant PFRS, are categorized into three levels based on the significance of inputs used to measure the fair value. The fair value hierarchy has the following levels: a) Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity can access at the measurement date; b) Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and, c) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. For purposes of determining the market value at Level 1, a market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company has no financial assets and financial liabilities measured at fair value or that are not carried at fair value but are required to be disclosed as at December 31, 2013 and 2012. For financial assets and financial liabilities measured at amortized cost management consider that their carrying amounts approximate their fair value (see Note 20).
22. CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES
The Company’s capital management objectives are:
• To ensure the Company’s ability to continue as a going concern; and,
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Company monitors capital on the basis of the carrying amount of equity as presented in the statements of financial position. Capital for the reporting periods under review is summarized as follows:
2013 2012
Total liabilities 382,700,569 P 613,684,651 P
Total equity 507,020,643 264,805,255
Debt-to-equity ratio 0.75 : 1 2.32 : 1
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The Company sets the amount of capital in proportion to its overall financing structure, i.e., equity and liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.
23. SUPPLEMENTARY INFORMATION REQUIRED BY THE BIR
Presented below is the supplementary information which is required by the BIR under its existing revenue regulations to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under PFRS. 23.1 Requirements under Revenue Regulations (RR) 15-2010 The information on taxes, duties and license fees paid or accrued during the taxable year required under RR 15-2010 are as follows: (a) Output VAT
The total revenue and corresponding VAT of the Company for 2013 is as follows:
OutputTax Base VAT
VATable sales 1,551,915,037 P 186,229,804 P
Zero-rated sales 4,443,844 -
1,556,358,881 P 186,229,804 P
The Company’s VAT zero-rated sales/receipt were determined pursuant to Section 106(A)(2)(a), Zero-rated VAT on Export Sale of Goods, and Section 109, VAT Exempt Transactions, of the 1997 National Internal Revenue Code.
The tax bases are presented as Sale of Goods in the 2013 statement of comprehensive income. There is no outstanding output VAT payable as of December 31, 2013.
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(b) Input VAT The movements in input VAT, which is presented as part of the Prepayments and Other Current Assets (see Note 8), in 2013 are summarized below.
Balance at beginning of year 40,180,862 P Input tax on imported goods 73,843,567 Goods for resale/manufacture
or further processing 46,589,848 Services lodged under other accounts 45,564,142 Services lodged under cost of goods sold 9,000,435 Capital goods not subject to amortization 469,424 Applied against output VAT 186,229,804 )(
Balance at end of year 29,418,474 P
(c) Taxes on Importation
In 2013, the total landed cost of the Company’s imported inventory for use in business amounted to P615,363,047. This amount includes customs duties and tariff fees of P6,320,868.
(d) Excise Tax
The Company does not have excise tax in 2013 since it does not have any transactions which are subject to excise tax.
(e) Documentary Stamp Tax (DST)
In 2013, the Company incurred DST amounting to P2,250,000 [see Note 23.1(f)] in connection with its increase in the authorized capital stock (see Note 17.2).
(f) Taxes and Licenses
The details of Taxes and licenses are broken down as follows:
Notes
Business tax 4,936,848 P
DST 23.1(e) 2,250,000
Municipal license and permit 70,764
Miscellaneous 53,408
13 7,311,020 P
The amounts of taxes and licenses are allocated as follows:
Cost of goods sold 161,729 P Operating expenses 7,149,291
7,311,020 P
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(g) Withholding Taxes
The details of total withholding taxes for the year ended December 31, 2013 are shown below.
Expanded 13,965,214 P Compensation and benefits 1,785,175
15,750,389 P
The Company has no transaction in 2013 which are subject to final tax.
(h) Deficiency Tax Assessment and Tax Cases
As of December 31, 2013, the Company does not have any final deficiency tax assessment from the BIR nor does it have tax cases outstanding or pending in courts or bodies outside of the BIR in any of the open years. 23.2 Requirements under RR 19-2011
RR 19-2011 requires schedules of taxable revenues and other non-operating income, costs of g, itemized deductions and other significant tax information, to be disclosed in the notes to financial statements. The amount of taxable revenues and income, and deductible costs and expenses presented below are based on relevant tax regulations issued by the BIR, hence, may not be the same as the amounts reflected in the 2013 statement of comprehensive income.
(a) Taxable Revenues
The Company’s taxable revenues subject to regular tax rate for the year ended December 31, 2013 amounted to P1,556,358,881. (b) Deductible Cost of Goods Sold Deductible cost of goods sold for the year ended December 31, 2013 which is subject to regular tax rate comprises the following:
Finished goods at beginning of year 314,973,334 P Cost of goods manufactured 1,084,309,547
Total goods available for sale 1,399,282,881 Finished goods at end of year 176,322,810 )(
1,222,960,071 P
(c) Taxable Non-operating and Other Income
Taxable non-operating and other income which are subject to the regular tax rate amounted to P58,240.
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(d) Itemized Deductions The amounts of itemized deductions for the year ended December 31, 2013 follow:
Advertisements 111,507,292 P Freight 45,810,049 Forwarding and other warehousing fees 44,724,843 Merchandisers’ salary 34,951,327 Outside services 19,030,867 Taxes and licenses 7,149,291 Salaries and employee benefits 4,585,762 Finance costs 1,630,556 Depreciation and amortization 197,710 Communication, light and water 81,847 Supplies 30,240 Rentals 13,417 Repairs and maintenance 3,726 Miscellaneous 1,439,317
271,156,244 P
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Notes 2012 2011
CURRENT ASSETS
Cash and cash equivalents 5 36,933,115 P 25,373,381 P
Trade and other receivables - net 6 251,380,765 213,991,953
Inventories 7 459,984,049 560,094,395
Prepayments and other current assets 8 65,252,136 60,432,337
Total Current Assets 813,550,065 859,892,066
NON-CURRENT ASSETS
Property, plant and equipment - net 9 22,055,547 31,704,177
Retirement benefit asset 15 608,524 484,533
Other non-current assets 10 42,884,295 42,435,295
Total Non-current Assets 65,548,366 74,624,005
TOTAL ASSETS 879,098,431 P 934,516,071 P
CURRENT LIABILITIES
Trade and other payables 11 334,282,849 P 317,917,167 P
Due to related parties 17 278,872,672 415,465,566
Total Liabilities 613,155,521 733,382,733
EQUITY
Capital stock 16 40,625,000 40,625,000
Deposits for future stock subscriptions 16 195,883,200 150,383,200
Retained earnings 29,434,710 10,125,138
Net Equity 265,942,910 201,133,338
TOTAL LIABILITIES AND EQUITY 879,098,431 P 934,516,071 P
SNOW MOUNTAIN DAIRY CORPORATION
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2012 AND 2011
(Amounts in Philippine Pesos)
See Notes to Financial Statements.
A S S E T S
LIABILITIES AND EQUITY
(A Subsidiary of Century Canning Corporation)
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Notes 2012 2011
SALE OF GOODS 17 1,720,370,574 P 1,279,476,627 P
COST OF GOODS SOLD 12 1,419,592,252 1,088,308,409
GROSS PROFIT 300,778,322 191,168,218
OPERATING EXPENSES (INCOME)
Selling expenses 12 131,551,269 94,115,732
Marketing expenses 12 119,270,662 64,472,398
Administrative expenses 12 23,318,349 21,348,147
Other income 128,616 )( 1,298,461 )(
274,011,664 178,637,816
OPERATING PROFIT 26,766,658 12,530,402
FINANCE COSTS - Net 13 82,077 337,244
PROFIT BEFORE TAX 26,684,581 12,193,158
TAX EXPENSE 15 7,375,007 3,884,847
NET PROFIT 19,309,574 8,308,311
OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE INCOME 19,309,574 P 8,308,311 P
SNOW MOUNTAIN DAIRY CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Amounts in Philippine Pesos)
See Notes to Financial Statements.
(A Subsidiary of Century Canning Corporation)
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Note 2012 2011
CAPITAL STOCK 16
Balance at beginning of year 40,625,000 P 3,125,000 P
Issuance of shares during the year - 37,500,000
Balance at end of year 40,625,000 40,625,000
DEPOSITS FOR FUTURE STOCK
SUBSCRIPTIONS 16
Balance at beginning of year 150,383,200 187,883,200
Additional subscription during the year 45,500,000 -
Applied to subscription during the year - 37,500,000 )(
Balance at end of year 195,883,200 150,383,200
RETAINED EARNINGS
Balance at beginning of year 10,125,136 1,816,827
Net profit 19,309,574 8,308,311
Balance at end of year 29,434,710 10,125,138
TOTAL EQUITY 265,942,910 P 201,133,338 P
SNOW MOUNTAIN DAIRY CORPORATION
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Amounts in Philippine Pesos)
See Notes to Financial Statements.
(A Subsidiary of Century Canning Corporation)
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Notes 2012 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 26,684,581 P 12,193,158 P
Adjustments for:
Depreciation and amortization 9 11,919,168 14,192,440
Impairment losses 6 512,760 )( 319,869 )(
Finance costs 13 124,025 261,567
Finance income 13 187,370 )( 158,321 )(
Operating profit before working capital changes 38,027,644 26,168,975
Increase in trade and other receivables 44,217,902 )( 6,919,250 )(
Decrease in inventories 100,110,346 261,135,452
Increase in prepayments and other current assets 4,819,799 )( 9,841,291 )(
Increase in retirement benefit asset 123,991 )( 225,788 )(
Increase in other non-current assets 449,000 )( 542,180 )(
Increase in trade and other payables 16,365,682 10,144,512
Cash generated from operations 104,892,980 279,920,430
Interest received 187,370 158,321
Income taxes paid 33,159 )( 27,844 )(
Net Cash From Operating Activities 105,047,191 280,050,907
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment 9 2,270,538 )( 57,221 )(
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of due to related parties 17 91,092,894 )( 282,232,333 )(
Interest paid 124,025 )( 261,567 )(
Net Cash Used in Financing Activities 91,216,919 )( 282,493,900 )(
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,559,734 2,500,214 )(
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 25,373,381 27,873,595
CASH AND CASH EQUIVALENTS
AT END OF YEAR 36,933,115 P 25,373,381 P
Supplemental Information on Non-cash Financing Activities:
1)
2)
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(Amounts in Philippine Pesos)
See Notes to Financial Statements.
SNOW MOUNTAIN DAIRY CORPORATION
STATEMENTS OF CASH FLOWS
(A Subsidiary of Century Canning Corporation)
In 2012, the Company and Century Canning Corporation (CCC) agreed to convert portion of
the Company's advances from CCC amounting to P45,500,000 to equity (see Note 16).
In December 2011, the Company issued 3,750,000 shares to a stockholder by applying the
stockholder's deposit for future stock subscription amounting to P37,500,000 (see Note 16).
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SNOW MOUNTAIN DAIRY CORPORATION (A Subsidiary of Century Canning Corporation)
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 (Amounts in Philippine Pesos)
1. CORPORATE INFORMATION
1.1 Incorporation and Operations Snow Mountain Dairy Corporation (the Company) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on February 14, 2001. It started commercial operations in November 2002. The Company is engaged in producing, canning, freezing, preserving, refining, packing, buying and selling at wholesale and retail, food products including all kinds of milk and dairy products, fruits and vegetable juices and other milk or dairy preparations and by-products. In December 2011, the Company became a subsidiary of Century Canning Corporation (CCC or the parent company), a company incorporated and domiciled in the Philippines. CCC is presently engaged in manufacturing and distribution of canned tuna products for the Philippine market. The registered office of the Company, which is also its principal place of business, is located at No. 48 Amang Rodriguez Avenue, Ignacio Complex, Manggahan, Pasig City. CCC’s registered office, which is also its principal place of business, is located at 32 Arturo Drive, Bagumbayan, Taguig, Metro Manila.
1.2 Approval of Financial Statements
The financial statements of the Company for the year ended December 31, 2012 (including the comparatives for the year ended December 31, 2011) were authorized for issue by the Company’s Vice President for Finance on April 12, 2013.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. The policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation of Financial Statements
(a) Statement of Compliance with Philippine Financial Reporting Standards
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 from the pronouncements issued by the International Accounting Standards Board (IASB).
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The financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expenses. The measurement bases are more fully described in the accounting policies that follow.
(b) Presentation of Financial Statements
The financial statements are presented in accordance with Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements. The Company presents all items of income and expenses in a single statement of comprehensive income. Two comparative periods are presented for the statement of financial position when the Company applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements, or reclassifies items in the financial statements.
(c) Functional and Presentation Currency
These financial statements are presented in Philippine pesos, the Company’s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items included in the financial statements of the Company are measured using its functional currency, the currency of the primary economic environment in which the entity operates.
2.2 Adoption of New and Amended PFRS (a) Effective in 2012 that is Relevant to the Company
In 2012, the Company adopted PFRS 7 (Amendment), Financial Instruments: Disclosures – Transfers of Financial Assets, effective for financial statements for the annual periods beginning on or after July 1, 2011. The amendment requires additional disclosures that will allow users of financial statements to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities; and, to evaluate the nature of, and risk associated with any continuing involvement of the reporting entity in financial assets that are derecognized in their entirety. The Company did not transfer any financial asset involving this type of arrangement; hence, the amendment did not result in any significant change in the Company’s disclosures in its financial statements.
(b) Effective in 2012 that are not Relevant to the Company
The following amendments and improvement to PFRS are mandatory for accounting periods beginning on or after July 1, 2011 or January 1, 2012 but are not relevant to the Company’s financial statements: PFRS 1 (Amendment) : First time adoption of PFRS – Severe Hyperinflation and Removal of Fixed Date for First-time Adopters PAS 12 (Amendment) : Income Taxes – Deferred Tax: Recovery of Underlying Assets
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(c) Effective Subsequent to 2012 but not Adopted Early There are new PFRS, amendments and annual improvements to existing standards that are effective for periods subsequent to 2012. Management has initially determined the following pronouncements, which the Company will apply in accordance with their transitional provisions, to be relevant to its financial statements:
(i) PAS 1 (Amendment), Financial Statements Presentation – Presentation of Items of Other Comprehensive Income (effective from July 1, 2012). The amendment requires an entity to group items presented in other comprehensive income into those that, in accordance with other PFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. The Company’s management expects that this will not change the current presentation of items in other comprehensive income.
(ii) PAS 19 (Revised), Employee Benefits (effective from January 1, 2013). The revision made a number of changes as part of the improvements throughout the standard. The main changes relate to defined benefit plans as follows:
• eliminates the corridor approach under the existing guidance of PAS 19 and requires an entity to recognize all actuarial gains and losses arising in the reporting period;
• streamlines the presentation of changes in plan assets and liabilities resulting in the disaggregation of changes into three main components of service costs, net interest on net defined benefit obligation or asset, and remeasurement; and,
• enhances disclosure requirements, including information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.
Currently, the Company is using the corridor approach and its unrecognized actuarial loss as at December 31, 2012 which amounts to P1.1 million (see Note 14.2) which will be retrospectively recognized as loss in other comprehensive income in 2013.
Assets and Financial Liabilities (effective from January 1, 2013). The amendment requires qualitative and quantitative disclosures relating to gross and net amounts of recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation. The amendment also requires disclosure of information about recognized financial instruments which are subject to enforceable master netting arrangements or similar agreements, even if they are not set-off in the statement of financial position, including those which do not meet some or all of the offsetting criteria under PAS 32 and amounts related to a financial collateral. These disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with recognized financial assets and financial liabilities on the entity’s financial position. The Company has initially assessed that the adoption of the amendment will not have a significant impact on its financial statements.
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(iv) PFRS 13, Fair Value Measurement (effective from January 1, 2013). This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRS. 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. Management is in the process of reviewing its valuation methodologies for conformity with the new requirements and has yet to assess the impact of the new standard on the Company’s financial statements.
(v) PAS 32 (Amendment), Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities (effective from January 1, 2014). The amendment provides guidance to address inconsistencies in applying the criteria for offsetting financial assets and financial liabilities. It clarifies that a right of set-off is required to be legally enforceable, in the normal course of business; in the event of default; and in the event of insolvency or bankruptcy of the entity and all of the counterparties. The amendment also clarifies the principle behind net settlement and provided characteristics of a gross settlement system that would satisfy the criterion for net settlement. The Company does not expect this amendment to have a significant impact on its financial statements.
(vi) PFRS 9, Financial Instruments: Classification and Measurement (effective from
January 1, 2015). This is the first part of a new standard on financial instruments that will replace PAS 39, Financial Instruments: Recognition and Measurement, in its entirety. This chapter covers the classification and measurement of financial assets and financial liabilities and it deals with two measurement categories for financial assets: amortized cost and fair value. All equity instruments will be measured at fair value while debt instruments will be measured at amortized cost only if the entity is holding it to collect contractual cash flows which represent payment of principal and interest. The accounting for embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangement, does not require separation from the host contract. For liabilities, the standard retains most of the PAS 39 requirements which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in case where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch. To date, other chapters of PFRS 9 dealing with impairment methodology and hedge accounting are still being completed. Further, in November 2011, the IASB tentatively decided to consider making limited modifications to International Financial Reporting Standard (IFRS) 9’s financial asset classification model to address certain application issues.
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The Company does not expect to implement and adopt PFRS 9 until its effective date. In addition, management is currently assessing the impact of PFRS 9 on the financial statements of the Company and it plans to conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes.
(vii) 2009-2011 Annual Improvements to PFRS. Annual improvements to PFRS (2009-2011 Cycle) made minor amendments to a number of PFRS, which are effective for annual periods beginning on or after January 1, 2013. Among those improvements, the following amendments are relevant to the Company but management does not expect a material impact on the Company’s financial statements:
(a) PAS 1 (Amendment), Presentation of Financial Statements – Clarification of the Requirements for Comparative Information. The amendment clarifies the requirements for presenting comparative information for the following:
• Requirements for opening statement of financial position
If an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that has a material effect on the information in the statement of financial position at the beginning of the preceding period (i.e., opening statement of financial position), it shall present such third statement of financial position. Other than disclosure of certain specified information in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, related notes to the opening statement of financial position as at the beginning of the preceding period are not required to be presented.
• Requirements for additional comparative information beyond minimum requirements If an entity presented comparative information in the financial statements beyond the minimum comparative information requirements, the additional financial statements information should be presented in accordance with PFRS including disclosure of comparative information in the related notes for that additional information. Presenting additional comparative information voluntarily would not trigger a requirement to provide a complete set of financial statements.
(b) PAS 16 (Amendment), Property, Plant and Equipment – Classification of Servicing Equipment. The amendment addresses a perceived inconsistency in the classification requirements for servicing equipment which resulted in classifying servicing equipment as part of inventory when it is used for more than one period. It clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized as property, plant and equipment when they meet the definition of property, plant and equipment, otherwise, these are classified as inventory.
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(c) PAS 32 (Amendment), Financial Instruments : Presentation – Tax Effect of Distributions to Holders of Equity Instruments. The amendment clarifies that the consequences of income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction shall be accounted for in accordance with PAS 12. Accordingly, income tax relating to distributions to holders of an equity instrument is recognized in profit or loss while income tax related to the transaction costs of an equity transaction is recognized in equity.
2.3 Financial Assets Financial assets are recognized when the Company becomes a party to the contractual terms of the financial instrument. Financial assets other than those designated and effective as hedging instruments are classified into the following categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity investments and available-for-sale financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at FVTPL are initially recognized at fair value plus any directly attributable transaction costs. Financial assets carried at FVTPL are initially recorded at fair value and related transaction costs that are recognized in profit or loss. The financial assets currently category relevant to the Company is 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 12 months after the end of the reporting period which are classified as non-current assets.
Loans and receivables are subsequently measured at amortized cost using the effective interest method for maturities extending beyond one year, less 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 between the assets’ carrying amount and the present value of estimated cash flows. The Company’s financial assets categorized as loans and receivables are presented as Cash and Cash Equivalents, Trade and Other Receivables (except deposit on purchases) and Other Non-current Assets, with respect to security deposits included therein, in the statement of financial position. Cash and cash equivalents are defined as 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. All income and expenses, except impairment loss on trade and other receivables which is considered administrative expense, relating to financial assets that are recognized in profit or loss are presented as part of Finance Costs (Income) in the statement of comprehensive income.
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Non-compounding interest, and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured.
Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. 2.4 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Finished goods and work-in-process include the cost of raw materials, direct labor and a proportion of manufacturing overhead based on normal operating capacity. The cost of raw materials include all costs directly attributable to acquisitions, such as the purchase price, import duties and other taxes that are not subsequently recoverable from taxing authorities. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Net realizable value of raw materials is the current replacement cost.
2.5 Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization and any impairment loss. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows and any impairment loss:
Plant, machinery and equipment 2 to 10 years Laboratory tools and equipment 1 to 10 years
Leasehold improvements are amortized over the term of the lease or useful lives of the assets of 1 to 10 years, whichever is shorter. Fully depreciated assets are retained in the accounts until these are no longer in use. No further charge for depreciation is made in respect of those accounts. Construction-in-progress represents properties undergoing construction. It is stated at cost which includes cost of construction, applicable borrowing cost (see Note 2.15) and other direct costs. This account is not depreciated until such time that the assets are completed and available for use. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.13). The residual values and estimated useful lives of property, plant and equipment are reviewed, and adjusted if appropriate, at the end of each reporting period.
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An item of property, plant and equipment, including related accumulated depreciation and amortization and impairment losses, if any, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of comprehensive income in the year the item is derecognized. 2.6 Prepayments and Other Assets Prepayment and other assets pertain to the other resources controlled by the Company as a result of past events. They are recognized in the financial statements when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Other recognized assets of similar nature, where future economic benefits are expected to flow to the Company beyond one year after the end of the reporting period (or in the normal operating cycle of the business, if longer), are classified as non-current assets.
2.7 Trademarks The cost of trademarks is the amount of cash or cash equivalents paid or the fair value of the other considerations given up to acquire the trademark. The Company’s trademark is not amortized but tested for impairment annually [see Notes 2.13 and 3.1(a)]. 2.8 Financial Liabilities
Financial liabilities of the Company include trade and other payables (excepts tax-related liabilities) and due to related parties which are recognized when the Company becomes a party to the contractual terms of the instrument. These are recognized initially at their fair value and subsequently measured at amortized cost, using effective interest method for maturities of more than one year less settlement payments. All interest-related charges are recognized as an expense in profit or loss under the caption Finance Costs (Income) in the statement of comprehensive income. Financial liabilities are classified as current liabilities if payment is due to be settled within one year or less after the end of the reporting period (or in the normal operating cycle of the business, if longer), or the Company does not have an unconditional right to defer settlement of liability for at least twelve months after the end of the reporting period. Otherwise, these are presented as non-current liabilities. Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. 2.9 Offsetting Financial Instruments Financial assets and liabilities are offset and the resulting net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
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2.10 Provisions and Contingencies Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events.
Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. The provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate.
In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Company that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Company can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision. 2.11 Revenue and Expense Recognition Revenue comprise of revenue from the sale of goods are measured by reference to the fair value of consideration received or receivable by the Company for goods sold excluding vlue-added tax (VAT).
Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that the economic benefits will flow to the Company; and the costs incurred or to be incurred can be measured reliably. In addition, the following specific recognition criteria must also be met before revenue is recognized:
(a) Sale of goods – Revenue is recognized when the risks and rewards of ownership of the
goods have passed to the buyer, i.e. generally when the customer has acknowledged delivery of goods.
(b) Interest income – Recognized as the interest accrues taking into account the effective yield on the asset.
Costs and expenses are recognized in profit or loss upon receipt of goods and/or utilization of services or at the date they are incurred. All finance costs are reported in profit or loss on an accrual basis.
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2.12 Leases – Company as Lessee Leases, which do not transfer to the Company substantially all the risks and benefits of ownership of the asset, are classified as operating leases. Operating lease payments are recognized as expense in the statement of comprehensive income on a straight-line basis over the lease term. Associated costs, such as repairs and maintenance and insurance, are expensed as incurred. The Company determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. 2.13 Impairment of Non-financial Assets
The Company’s trademarks, having an indefinite useful life, are tested for impairment annually. Property, plant and equipment and other nonfinancial are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit). As a result, assets are tested for impairment either individually or at the cash-generating unit level. Impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use, based on an internal evaluation of discounted cash flow. Impairment loss is charged pro-rata to other assets in the cash-generating unit.
All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.
2.14 Employee Benefits
The Company provides post-employment benefits to employees through a defined benefit plan. (a) Post-employment Benefits
A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Company, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Company’s post-employment defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee bank.
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The assets recognized in the statement of financial position for post-employment defined benefit pension plans is the present value of the defined benefit obligation (DBO) at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated regularly by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related post-employment liability.
Actuarial gains and losses are not recognized as an income or expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees’ expected average remaining working lives. Actuarial gains and losses within the 10% corridor are disclosed separately. Past service costs are recognized immediately in profit or loss, unless the changes to the post-employment plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.
(b) Termination Benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either: (a) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or (b) providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the reporting period are discounted to present value.
(c) Compensated Absences
Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the end of the reporting period. They are included in the Trade and Other Payables account in the statement of financial position at the undiscounted amount that the Company expects to pay as a result of the unused entitlement.
2.15 Borrowing Costs
Borrowing costs are recognized as expense in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of the cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete.
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2.16 Foreign Currency Transactions and Translation The accounting records of the Company are maintained in Philippine pesos. Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates. Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive income as part of profit or loss from operations.
2.17 Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity, if any.
Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the end of the reporting period. They are calculated using the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss. Deferred tax is accounted for using the liability method, on temporary differences at the end of the reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss. Only changes in deferred tax assets or liabilities that relate to items recognized in other comprehensive income or directly in equity are recognized in other comprehensive income or directly in equity. The Company establishes liabilities for probable and estimable assessments by the Bureau of Internal Revenue (BIR) resulting from any known tax exposures. Estimates represent a reasonable provision for taxes ultimately expected to be paid and may need to be adjusted over time as more information becomes available.
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2.18 Related Party Relationships and Transactions
Related party transactions are transfer of resources, services or obligations between the Company and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company and close members of the family of any such individual; and, (d) the Company’s retirement plan. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form.
2.19 Equity
Capital stock represents the nominal value of shares that have been issued.
Deposits for future stock subscriptions represent deposits from the parent company as payment for future subscriptions. Retained earnings represent all current and prior period results of operations as reported in the profit or loss section of the statements of comprehensive income.
2.20 Events After the End of the Reporting Period
Any post-year-end event that provides additional information about the Company’s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The Company’s financial statements prepared in accordance with PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates 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. Actual results may ultimately differ from these estimates.
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3.1 Critical Management Judgments in Applying Accounting Policies
In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements:
(a) Determining the Useful Lives of Trademark
Under the Intellectual Property Code of the Philippines, the legal life of trademark is 10 years and may be renewed every other 10 years. However, considering that the management does not expect any circumstances or events which will cause it to decide not to renew its trademarks every 10 years, management has taken the position that the useful lives of its trademarks is indefinite; hence its costs is not amortized but subjected to annual impairment testing (see Note 2.7 and 2.13). Changes in assumption and circumstances in the future will substantially affect the financial statements of the Company, particularly the carrying value of assets. No impairment loss on trademark was recognized in both years based on management evaluation.
(b) Distinction between Operating and Finance Leases
The Company has entered into various lease agreements as a lessee. Judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. Based on management’s judgment such leases were determined to be operating leases.
(c) Recognition of Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and contingencies. Accounting policies on provisions and contingencies are discussed in Notes 2.10 and relevant disclosures are presented in Note 18.
3.2 Key Sources of Estimation Uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:
(a) Impairment of Trade and Other Receivables
Adequate amount of allowance is made for specific and groups of accounts, where objective evidence of impairment exists. The Company evaluates these accounts based on available facts and circumstances, including, but not limited to, the length of the Company’s relationship with the customers, the customers’ current credit status based on known market forces, average age of accounts, collection experience and historical loss experience. The carrying value of trade and other receivables and the analysis of allowance for impairment on such financial assets are shown in Note 6.
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(b) Determining Net Realizable Value of Inventories
In determining the net selling prices of inventories, management takes into account the most reliable evidence available at the times the estimates are made. It also takes into consideration the obsolescence of the inventory in determining net realizable value. The future realization of the carrying amounts of inventories as disclosed in Note 7 is affected by price changes in different market segments. These aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Company’s inventories within the next financial year. No impairment loss on inventory was recognized in both years based on management’s assessment..
(c) Estimating Useful Lives of Property, Plant and Equipment
The Company estimates the useful lives of property, plant and equipment, except land, based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amounts of property, plant and equipment are analyzed in Note 9. Based on management’s assessment as at December 31, 2012 and 2011 there is no change in estimated useful lives of property, plant and equipment during those years. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.
(d) Determining Recoverable Value of Deferred Tax Assets The Company reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The Company did not recognize any deferred tax assets as at December 31, 2012 and 2011 as the management believes that it cannot realize the tax benefits from its deductible temporary differences in the foreseeable future. The details of deferred tax assets that were not recognized by the Company are disclosed in Note 15.
(e) Impairment of Non-financial Assets
Except for trademarks with indefinite useful lives which are reviewed for impairment annually or regularly, PFRS requires that an impairment review be performed when certain impairment indicators are present. The Company’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.13. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations. No impairment loss on non-financial assets was recognized both in 2012 and 2011.
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(f) Valuation of Post-employment Defined Benefit
The determination of the Company’s obligation and cost of post-employment defined benefit are dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 14.2 and include, among others, discount rates, expected return on plan assets, salary increase rate and employee turnover. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. The amount of retirement benefit asset and expense and an analysis of the movements in the estimated present value of retirement benefit asset are presented in Note 14.2.
4. RISK MANAGEMENT OBJECTIVES AND POLICIES The Company is exposed to certain financial risks in relation to financial instruments. The Company’s financial assets and liabilities by category are summarized in Note 19. The main types of risks are market risk, credit risk and liquidity risk. The Company’s risk management is coordinated with its Board of Directors, and focuses on actively securing the Company’s short to medium-term cash flows by minimizing the exposure to financial markets. The Company does not engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed to are described below. 4.1 Credit Risk
Credit risk is the risk that a counterparty may fail to discharge an obligation to the Company. The Company is exposed to this risk for various financial instruments, for example by granting loans and receivables to customers and placing deposits. The Company continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporate this information into its credit risk controls. The Company’s policy is to deal only with creditworthy counterparties. In addition, for a significant portion of sales, advance payments are received to mitigate credit risk. Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the statements of financial position (or in detailed analysis provided in the notes to the financial statements), as summarized below.
Notes 2012 2011
Cash and cash equivalents 5 P 36,933,115 P 25,373,381 Trade and other receivables – net 6 254,367,946 211,381,610 Security deposits 10 1,780,295 1,780,295
P 293,081,356 P 238,535,286
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(a) Cash and Cash Equivalents
The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. Included in the cash and cash equivalents are cash in banks and short-term placements. As part of Company policy, bank deposits are only maintained with reputable financial institutions. Cash in banks which are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum coverage of P500,000 per depositor per banking institution, as provided for under Republic Act (RA) No. 9576, Charter of PDIC, are still subject to credit risk. (b) Trade and Other Receivables In respect of trade and other receivables, the Company is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Trade receivables consist of a large number of customers in various industries and geographical areas. Based on historical information about customer default rates management consider the credit quality of trade receivables that are not past due or impaired to be good. Some of the unimpaired trade receivables are past due as at the end of the reporting period. Trade receivables that are past due but not impaired are as follows:
2012 2011
Not more than three months P 48,647,741 P 33,623,543 More than three months but not more
than six months 24,223,084 6,990,171 P 72,870,825 P 40,613,714
4.2 Liquidity Risk The Company manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 6-month and one-year period are identified monthly. The Company maintains cash to meet its liquidity requirements for up to 60-day periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets. In 2012 and 2011, the Company’s financial liabilities have contractual maturities within six months.
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5. CASH AND CASH EQUIVALENTS
The breakdown of this account as of December 31 follows:
2012 2011 Cash in banks P 35,381,811 P 24,961,420 Cash on hand 508,800 411,961 Short-term placements 1,042,504 - P 36,933,115 P 25,373,381
Cash in banks generally earn interest at rates based on daily bank deposit rates. Short-term placements are made for varying periods of between 30 to 90 days and earn effective interest ranging from 1.63% to 2.25% for both years. There was no short-term placement as at December 31, 2011. Interest income earned amounting to P165,794 and P139,218 in 2012 and 2011, respectively and presented as part of Finance Costs - net in the statements of comprehensive income (see Note 13).
6. TRADE AND OTHER RECEIVABLES
This account (see also Note 4.1) is composed of the following:
2012 2011 Trade receivables P 252,608,378 P 217,449,658 Others 5,626,142 2,883,290 258,234,520 220,332,948 Allowance for impairment ( 6,853,755 ) ( 6,340,995 ) P 251,380,765 P 213,991,953
Trade receivables are usually due within 30 to 90 days and do not bear any interest. The Company’s trade and other receivables, which are subject to credit risk exposure (see Note 4.1), have been reviewed for indicators of impairment. Certain trade receivables were identified to be impaired; hence, adequate amount of allowance for impairment has been recorded.
A reconciliation of the allowance for impairment at the beginning and end of 2012 and 2011 is shown below.
Note 2012 2011 Balance at beginning of year P 6,340,995 P 6,021,126 Impairment loss during the year 12 512,760 319,869 Balance at end of year P 6,853,755 P 6,340,995
Due to their short duration, the net carrying amounts of trade and other receivables is a reasonable approximation of fair values.
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7. INVENTORIES
All inventories at the end of 2012 and 2011 are stated at cost and are broken down as follows:
Note 2012 2011 Finished goods 12 P 314,973,334 P 416,825,250 Raw materials 12 138,937,009 135,545,967 Packaging materials and other supplies 6,073,706 7,723,178 P 459,984,049 P 560,094,395
Raw materials include items in transit amounting to P29,059,345 and P9,866,353 as at December 31, 2012 and 2011, respectively. The cost of inventories charged to operations in 2012 and 2011 are analysed in Note 12.
8. PREPAYMENTS AND OTHER CURRENT ASSETS
The composition of this account is shown below.
Note 2012 2011 Input VAT 21.1(b) P 40,180,862 P 40,794,187 Prepaid taxes 24,007,117 18,462,173 Others 1,064,157 1,175,977 P 65,252,136 P 60,432,337
The Company’s prepaid taxes represent taxes withheld by the Company’s customers amounting to P23,189,873 and P17,644,949 as at December 31, 2012 and 2011, respectively, and tax credit certificates issued by the Bureau of Customs (BOC) amounting to P817,244 as at December 31, 2012 and 2011.
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9. PROPERTY, PLANT AND EQUIPMENT
The gross carrying amounts and accumulated depreciation and amortization of property, plant and equipment at the beginning and end of 2012 and 2011, are shown below.
Plant, Laboratory Machinery and Tools and Leasehold Construction- Equipment Equipment Improvements in-Progress Total
December 31, 2012 Cost P 106,608,328 P 5,020,726 P 14,105,279 P - P 125,734,333 Accumulated depreciation and amortization ( 86,677,856 ) ( 4,323,334 ) ( 12,677,596 ) - ( 103,678,786 ) Net carrying amount P 19,930,472 P 697,392 P 1,427,683 P - P 22,055,547
December 31, 2011 Cost P 104,956,773 P 4,615,406 P 13,891,615 P - P 123,463,794 Accumulated depreciation and amortization ( 77,093,388 ) ( 3,977,007 ) ( 10,689,222 ) - ( 91,759,617 ) Net carrying amount P 27,863,385 P 638,399 P 3,202,393 P - P 31,704,177 January 1, 2011 Cost P 91,088,979 P 4,124,558 P 11,155,442 P 17,037,594 P 123,406,573 Accumulated depreciation and amortization ( 66,255,721 ) ( 3,668,861 ) ( 7,642,595 ) - ( 77,567,177 ) Net carrying amount P 24,833,258 P 455,697 P 3,512,847 P 17,037,594 P 45,839,396
A reconciliation of the carrying amounts of property, plant and equipment at the beginning and end of 2012 and 2011, is presented below.
Plant, Laboratory Machinery and Tools and Leasehold Construction- Equipment Equipment Improvements in-Progress Total
Balance at
January 1, 2012, net of accumulated depreciation and amortization P 27,863,385 P 638,399 P 3,202,393 P - P 31,704,177 Additions 1,651,554 405,321 213,664 - 2,270,539 Depreciation and amortization charges for the year ( 9,584,467 ) ( 346,328 ) ( 1,988,374 ) - ( 11,919,169 )
Balance at
December 31, 2012, net of accumulated depreciation and amortization P 19,930,472 P 697,392 P 1,427,683 P - P 22,055,547
Balance at
January 1, 2011, net of accumulated depreciation and amortization P 24,833,258 P 455,697 P 3,512,847 P 17,037,594 P 45,839,396 Additions 57,221 - - - 57,221 Reclassification 13,810,573 490,848 2,736,173 ( 17,037,594 ) - Depreciation and amortization charges for the year ( 10,837,667 ) ( 308,146 ) ( 3,046,627 ) - ( 14,192,440 )
Balance at
December 31, 2011, net of accumulated depreciation and amortization P 27,863,385 P 638,399 P 3,202,393 P - P 31,704,177
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In 2011, certain assets amounting to P17,037,594 were completed and, accordingly, reclassified to their appropriate classification within the Property, Plant and Equipment account. The cost of fully depreciated property, plant and equipment as at December 31, 2012 and 2011 which are still being used in operations amounts to P46,505,687 and P34,513,265, respectively. The depreciation and amortization for the year is allocated as follows:
Note 2012 2011 Cost of goods sold P 11,345,333 P 12,636,367 Administrative expenses 573,835 1,556,073
12 P 11,919,168 P 14,192,440 10. OTHER NON-CURRENT ASSETS
This account consists of:
Note 2012 2011 Trademarks 3.1(a) P 40,000,000 P 40,000,000 Security deposits 1,780,295 1,780,295 Returnable containers 1,104,000 655,000 P 42,884,295 P 42,435,295
In July 2008, the Company purchased from General Milling Corporation (GMC) certain trademarks owned and registered with the Intellectual Property Office under the name of GMC. As discussed in Note 3.1(a), the Company’s trademarks are subject to annual impairment testing. No impairment losses were recognized in 2012 and 2011 as the recoverable amounts of the trademarks were determined to be higher than their carrying values. Security deposits pertain to deposits required under the terms of the lease agreements of the Company with certain lessors (see Note 18.1). The carrying amount of these deposits is a reasonable approximation of its fair value based on management assessment as at December 31, 2012 and 2011.
11. TRADE AND OTHER PAYABLES The composition of this account is shown below. Note 2012 2011 Trade payables P 330,953,655 P 312,873,691 Accrued expenses 35,881 2,057,667 Others 17.1 3,293,313 2,985,809 P 334,282,849 P 317,917,167
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Due to the short duration of trade and other payables, management considers the carrying amounts to be a reasonable approximation of fair values.
12. COSTS AND EXPENSES BY NATURE
The details of costs and expenses by nature are shown below. Notes 2012 2011 Milk and ingredients P 821,975,535 P 721,790,335 Packaging and other materials 380,053,910 240,054,709 Advertisements 116,893,508 64,317,897 Changes in inventories of finished goods 7 101,851,916 47,779,399 Forwarding and other warehousing fees 55,231,107 35,247,175 Outside services 17.2 49,546,397 40,106,072 Freight 44,342,447 30,783,423 Merchandisers’ salary 32,607,195 28,526,805 Communication, light and water 20,972,321 12,742,850 Salaries and employee benefits 14 13,945,384 12,357,164 Gas, fuel and oil 12,837,058 70,133 Depreciation and amortization 9 11,919,168 14,192,440 Rentals 17.1, 18.1 11,031,433 10,914,244 Taxes and licenses 21.1(f) 6,897,574 6,124,444 Supplies 6,213,439 178,326 Repairs and maintenance 1,960,399 1,259,265 Impairment loss on trade receivables 6 512,760 319,869 Miscellaneous 4,940,981 1,480,136 P 1,693,732,532 P 1,268,244,686
These expenses are classified in the statements of comprehensive income as follows: 2012 2011 Cost of goods sold P 1,419,592,252 P 1,088,308,409 Selling expenses 131,551,269 94,115,732 Marketing expenses 119,270,662 64,472,398 Administrative expenses 23,318,349 21,348,147 P 1,693,732,532 P 1,268,244,686
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Cost of goods sold for the years ended December 31, 2012 and 2011 consist of the following:
Notes 2012 2011 Raw materials used: Raw materials at beginning of year 7 P 135,545,967 P 348,324,445 Net purchases during the year 1,205,420,487 749,066,566 Raw materials at end of year 7 ( 138,937,009) ( 135,545,967 ) 1,202,029,445 961,845,044 Direct labor 14 1,000,537 751,657
Manufacturing overhead: Outside services 39,432,092 31,954,958 Communication, light and water 20,877,595 12,599,068
Depreciation and amortization 9 11,345,333 12,636,367 Rentals 17.1, 18.1 11,024,845 10,906,609 Indirect labor 14 8,230,077 6,692,786 Repairs and maintenance 1,953,615 1,157,785 Supplies 6,171,109 135,809 Gas, fuel and oil 12,834,545 44,209
Others 2,841,143 1,804,718 114,710,354 77,932,309
Total cost of goods manufactured 1,317,740,336 1,040,529,010 Finished goods at beginning of year 7 416,825,250 464,604,649 Finished goods at end of year 7 ( 314,973,334) ( 416,825,250)
P 1,419,592,252 P 1,088,308,409
13. FINANCE COSTS (INCOME)
The details of Finance Costs (Income) are presented below.
Note 2012 2011 Finance income 5 (P 187,370) (P 158,321 ) Finance costs 124,025 261,567 Other finance charges 145,422 233,998 P 82,077 P 337,244
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14. EMPLOYEE BENEFITS
14.1 Employee Benefits Expense Expenses recognized for salaries and employee benefits are presented below (see Note 12).
2012 2011
Short-term benefits P 13,557,311 P 11,830,280 Post-employment benefits 388,073 526,884 P 13,945,384 P 12,357,164
The amount of employee benefits expense is allocated as follows:
Note 2012 2011
Cost of goods sold 12 P 9,230,614 P 7,444,443 Administrative expenses 12 4,714,770 4,912,721 P 13,945,384 P 12,357,164
14.2 Post-employment Benefits The Company maintains a partially funded, tax qualified, noncontributory post-employment benefit plan that is being administered by a trustee bank covering all regular full-time employees. The amount of retirement benefit asset recognized in the statements of financial position is determined as follows:
2012 2011 Present value of the obligation P 3,379,996 P 2,802,558 Fair value of plan assets ( 2,850,863 ) ( 2,149,434 ) Unfunded obligation 529,133 653,124 Unrecognized actuarial losses ( 1,137,657 ) ( 1,137,657 ) (P 608,524 ) (P 484,533 )
The movement in the present value of the retirement benefit obligation is as follows:
2012 2011 Balance at beginning of year P 2,802,558 P 2,260,245 Current service and interest costs 577,438 620,721 Benefits paid - ( 475,028 ) Actuarial loss - 396,620 Balance at end of year P 3,379,996 P 2,802,558
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The movement in the fair value of plan assets is presented below. 2012 2011 Balance at beginning of year P 2,149,434 P 1,872,842 Contributions paid into the plan 512,064 752,672 Benefits paid - ( 475,028 ) Actuarial loss - ( 111,694 ) Expected return on plan assets 189,365 110,642 P 2,850,863 P 2,149,434
Actual return (loss) on plan assets were P189,365 in 2012 and (P1,052) in 2011. As at December 31, 2012, the Company has no definite plan of funding its retirement benefit plan in 2013. The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:
Presented below are the historical information related to the present value of the retirement benefit obligation, fair value of plan assets and excess or deficit in the plan. 2012 2011 2010 2009 2008 Present value of the obligation P 3,379,996 P 2,802,558 P 2,260,245 P 1,907,108 P1,253,261 Fair value of plan assets 2,850,863 2,149,434 1,872,842 996,681 487,564 Deficit in the plan (P 529,133)( P 653,124 ) ( P 387,403 ) (P 910,427) ( P 765,697) Experience adjustments arising on plan liabilities P - ( P 449,976 ) P - (P 851,376) P - Experience adjustments arising on plan assets P - ( P 111,694 ) P - (P 17,673 ) P -
The amounts of post-employment benefits expense recognized in the statements of comprehensive income are as follows:
2012 2011 Current service costs P 419,881 P 411,648 Interest costs 157,557 209,073 Expected return on plan assets ( 189,365) ( 110,642) Net actuarial loss recognized in the year - 16,805 P 388,073 P 526,884
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The amounts of post-retirement benefits expense are allocated as follows: 2012 2011 Cost of goods sold P 335,103 P 405,190
Administrative expenses 52,970 121,694 P 388,073 P 526,884 For the determination of the present value of retirement benefit obligation, fair value of plan assets and related expense, the following actuarial obligation were used:
2012 2011 Expected rate of return on plan assets 8.81% 9.25% Expected rate of salary increases 2.00% 2.00% Discount rates 5.62% 5.50%
Assumptions regarding future mortality are based on published statistics and mortality tables. The average remaining working life of an individual, male and female, retiring at the age of 60 is 25 years.
15. CURRENT AND DEFERRED TAXES
The components of tax expense (all are current) as reported in profit or loss are as follows:
2012 2011 Regular corporate income tax (RCIT) at 30% P 7,341,848 P 3,723,053 Excess of minimum corporate income tax (MCIT) at 2% over RCIT - 133,950 Final tax at 20% and 7.5% 33,159 27,844 P 7,375,007 P 3,884,847
A reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in the statements of comprehensive income is presented below.
2012 2011 Tax on pretax profit at 30% P 8,005,374 P 3,657,947 Adjustment for income subjected to lower income tax rates ( 16,579 ) ( 13,922) Tax effects of: Application of previously unrecognized DTA on MCIT ( 740,840 ) - Unrecognized deductible temporary difference 110,638 82,450 Non-deductible expenses 16,414 24,422 Unrecognized DTA on MCIT - 133,950 Tax expense P 7,375,007 P 3,884,847
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The Company did not recognize net deferred tax assets totalling to P2,133,825 and P2,764,027 as at December 31, 2012 and 2011, respectively, since their recoverability and utilization is unlikely at this time based on the assessment of management. The net deferred tax assets not recognized as at December 31, 2012 and 2011 pertain to the following:
2012 2011 Amount Tax Effect Amount Tax Effect Allowance for impairment loss P 6,853,755 P 2,056,127 P 6,340,995 P 1,902,299 Unamortized past service cost 891,788 267,537 928,294 278,489 MCIT - - 740,840 740,840 Retirement benefit assets ( 608,524 ) ( 182,557 ) ( 484,533 ) ( 145,360 ) Unrealized foreign currency gain ( 24,272 ) ( 7,282 ) ( 40,803 ) ( 12,241 ) P 7,112,747 P 2,133,825 P 7,484,793 P 2,764,027
The Company is subject to MCIT which is computed at 2% of gross income, as defined under tax regulations, or RCIT, whichever is higher. In 2012, RCIT was higher than MCIT while MCIT was higher in 2011. As at December 31, 2012, the Company has fully utilized its MCIT amounting to P740,840 which represents that total of MCIT incurred in 2011 (P133,950) and 2010 (P606,890). In 2012 and 2011, the Company opted to claim itemized deductions in computing for its income tax due.
16. EQUITY
16.1 Capital Stock Capital stock consists of common shares with details as follows:
Shares Amount
2012 2011 2012 2011
Authorized – P10 par value 5,000,000 5,000,000
Issued and outstanding:
Balance at beginning of year 4,062,500 312,500 P 40,625,000 P 3,125,000
Issuances during the year - 3,750,000 - 37,500,000 Balance at end of year 4,062,500 4,062,500 40,625,000 40,625,000
Subscribed:
Balance at beginning of year 937,500 937,500 9,375,000 9,375,000
Subscription during the year 3,750,000 - 37,500,000
Issuances during the year - ( 3,750,000 ) - ( 37,500,000 ) Balance at end of year 937,500 937,500 9,375,000 9,375,000
Subscription receivable ( 9,375,000)( 9,375,000 )
P 40,625,000 P 40,625,000
As at December 31, 2012 and 2011, the Company has three stockholders owning 100 or more shares each of the Company’s capital stock.
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16.2 Deposits on Future Stock Subscriptions
On October 18, 2012, the Company filed an application with the SEC for its proposed increase in authorized capital stock from P50.0 million divided into 5,000,000 to P500.0 million divided into 50,000,000 shares with the same value per share of P10. This was previously approved by the Company’s BOD on December 6, 2011. In compliance with the SEC’s rules relating to the foregoing, the Company applied a portion of the parent company’s advances to the Company amounting to P45,500,000 and the parent company’s previously recognized Deposits for Future Stock Subscriptions amounting to P150,383,200 as subscription payments. As at December 31, 2012, approval of the application is still pending with the SEC. Accordingly, the subscription payments were presented as Deposits for Future Stock Subscriptions in the statements of financial position. In December 2011, the Company issued 3,750,000 shares to a stockholder by applying deposits on future stock subscription amounting to P37,500,000 on the subscription price which equals the par value of the shares, hence, no additional paid-in-capital was recognized.
17. RELATED PARTY TRANSACTIONS
A summary of the Company’s related party transactions is presented below.
2012 2011 Outstanding Outstanding Amount of Receivable Amount of Receivable Note Transactions (Payable) Transactions (Payable) Parent: Sale of goods 17.1 P 127,866,796 P 7,044,926 P - P - Consultancy and management fees 17.3 7,279,445 ( 2,556,101) 5,088,473 - Advances 17.2 127,929,279 ( 278,872,672) 290,895,948 ( 406,801,951) Rentals 17.4 1,547,100 ( 3,456,221) 1,986,476 ( 1,986,476) Related Parties Under Common Ownership – Advances 17.2 8,663,615 - ( 8,663,615) ( 8,663,615)
17.1 Sale of Goods In 2012, the Company sold P127,866,796 (nil in 2011) worth of finished goods inventories to CCC included in Sale of Goods in the 2012 statement of comprehensive income. Outstanding balance in relation to the sale of goods as at December 31, 2012 amounts to P7.0 million and is shown as part of Trade Receivables under Trade and Other Receivables account in the 2012 statement of financial position.
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17.2 Advances from Related Parties In the normal course of business, the Company obtains unsecured, noninterest-bearing advances from related parties, including stockholders and entities under common ownership, for working capital requirements and other purposes. Such advances are presented as Due to Related Parties in the statements of financial position and has an outstanding balance of P278,872,672 and P415,465,566 as at December 31, 2012 and 2011, respectively. Presented below are the movements in the account.
Note 2012 2011 Balance at beginning of year P 415,465,566 P 697,697,899 Repayments during the year ( 91,092,394) ( 724,743,133) Applied as deposits for future stock subscription 16 ( 45,500,000) - Additional borrowings during the year - 442,510,800 Balance at end of year P 278,872,672 P 415,465,566
17.3 Consultancy and Management Fees
The Company incurs management and consultancy fees based on an agreement between CCC and the Company. Under the agreement, CCC can allocate and charge common corporate expenses to its subsidiaries. The consultancy and management fees incurred and paid by the Company amounted to P7,279,445 in 2012 and P5,088,473 in 2011 and is presented as part of Outside Services under Administrative Expenses in the statements of comprehensive income (see Note 12). As at December 31, 2012 and 2011, the Company has no outstanding liability arising from this agreement.
17.4 Rentals In 2012 and 2011, CCC leased out storage and production facilities to the Company. Rental expense incurred amounting to P1,547,100 in 2012 and P1,986,476 in 2011 is presented as part of Rentals under Cost of Goods Sold in the statements of comprehensive income. The outstanding payables amounting to P3,456,221 and P1,986,476 as at December 31, 2012 and 2011, respectively, arising from these transactions are shown as part of Trade Payables under Trade and Other Payables (see Note 11). 17.5 Key Management Personnel Compensations
The short-term employee benefits of the key management personnel amounted to P2,958,888 in 2012 and P2,748,221 in 2011, and are included in the salaries and employee benefits presented as part of Administrative expenses in the statements of comprehensive income (see Note 12).
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18. COMMITMENTS AND CONTINGENCIES
The following are the significant commitments and contingencies involving the Company.
18.1 Operating Leases The Company is a lessee under several short-term lease contracts with renewal options. The usual term of the lease contract is one year that usually ends in December. The amount of rent expense is allocated as follows:
Note 2012 2011 Cost of goods sold 12 P 11,024,845 P 10,906,609 Administrative expenses 6,588 7,635 P 11,031,433 P 10,914,244
As of December 31, 2012, the future minimum lease payments under these lease agreements amounted to P7,052,625.
18.2 Credit Facilities The Company has continuing surety with related parties on several credit facilities with various local banks amounting to P250,000,000. These credit facilities will expire in 2013. 18.3 Others
There are other commitments, guarantees, litigations and contingent liabilities that arise in the normal course of the Company’s operations which are not reflected in the accompanying financial statements. As at December 31, 2012, management is of the opinion that losses, if any, from these commitments and contingencies will not have a material effect on the Company’s financial statements.
19. CATEGORIES AND FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The carrying amounts and fair values of the categories of assets and liabilities presented in the statements of financial position are shown below.
Cash and cash equivalents 5 P 36,933,115 P 36,933,115 P 25,373,381 P 25,373,381
Trade and other receivables – net 6 254,367,946 254,367,946 211,381,610 211,381,610
Security deposits 10 1,780,295 1,780,295 1,780,295 1,780,295 P 293,081,356 P 293,081,356 P 238,535,286 P 238,535,286
Financial Liabilities
Trade and other payables P 334,282,849 P 334,282,849 P 317,917,167 P 317,917,167
Due to related parties 17 278,872,672 278,872,672 415,465,566 415,465,566
P 613,155,521 P 613,155,521 P 733,382,733 P 733,382,733
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See Notes 2.3 and 2.8 for a description of the accounting policies for each category of financial instrument. A description of the Company’s risk management objectives and policies for financial instruments is provided in Note 4. There is no disclosure of fair value hierarchy as the Company does not have any financial instruments valued at fair value in the statements of financial position as at December 31, 2012 and 2011.
20. CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES
The Company’s capital management objectives are:
• To ensure the Company’s ability to continue as a going concern; and,
• To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Company monitors capital on the basis of the carrying amount of equity as presented in the statements of financial position. Capital for the reporting periods under review is summarized as follows:
2012 2011 Total liabilities P 613,155,521 P 733,382,733 Total equity 265,942,910 201,133,338 Debt-to-equity ratio 2.31:1 3.65:1
The Company sets the amount of capital in proportion to its overall financing structure, i.e., equity and liabilities. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.
21. SUPPLEMENTARY INFORMATION REQUIRED BY THE BUREAU OF INTERNAL REVENUE Presented in the succeeding pages is the supplementary information which is required by the BIR under its existing revenue regulations to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under PFRS.
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21.1 Requirements under Revenue Regulations (RR) 15-2010 The information on taxes, duties and license fees paid or accrued during the taxable year required under RR 15-2010 issued on November 25, 2010 follows:
(a) Output VAT
In 2012, the Company declared output VAT on the sale of goods as follows:
Output Tax Base VAT Taxable sales P 1,715,808,460 P 205,897,015 Zero-rated sales 3,907,898 - Government related sales 654,216 78,506 P1,720,370,574 P 205,975,521
The Company’s VAT zero-rated sales/receipt were determined pursuant to Section 106(A)(2)(a), Zero-rated VAT on Export Sale of Goods, and Section 109, VAT Exempt Transactions, of the 1997 National Internal Revenue Code. The tax bases are presented as Sale of Goods in the 2012 statement of comprehensive income. There is no outstanding output VAT payable as of December 31, 2012.
(b) Input VAT
The movements in input VAT, which is presented as part of the Prepayments and Other Current Assets account (see Note 8), in 2012 are summarized below.
Balance at beginning of year P 40,794,187 Goods for resale/manufacture or further processing 77,249,604 Services lodged under other accounts 29,,906,819 Services lodged under cost of goods sold 10,241,643 Goods other than for resale or manufacture 2,359,409 Capital goods not subject to amortization 197,009 Claims for tax credit/refund and other adjustments 896,987 Input tax on imported goods 84,432,219 Applied against output VAT ( 205,897,015 ) Balance at end of year P 40,180,862
(c) Taxes on Importation
In 2012, the total landed cost of the Company’s imported inventory for use in business amounted to P704,256,038. This amount includes customs duties and tariff fees of P9,770,978.
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(d) Excise Tax
The Company did not have any transactions in 2012 subject to excise tax. (e) Documentary Stamp Tax
In 2012, the Company incurred documentary stamp tax (DST) on intercompany advances amounting to P2,238,059.
(f) Taxes and Licenses
Details of taxes and licenses which are presented under the Other Operating Expenses account in the 2012 statement of comprehensive income are as follows:
Business tax P 3,616,698 DST 2,238,059 Municipal license and permits 987,154 Miscellaneous 55,663
P 6,897,574
The amounts of taxes and licenses are allocated as follows:
Cost of goods sold P 59,987 Operating expenses 6,852,957
P 6,897,574
(g) Withholding Taxes
The details of total withholding taxes in 2012 are shown below.
Expanded P 14,682,941 Compensation and benefits 1,503,978 P 16,186,919
The Company has no transaction in 2012 which are subject to final tax.
(h) Deficiency Tax Assessment and Tax Cases
As at December 31, 2012, the Company does not have any final deficiency tax assessment with the BIR or tax cases outstanding or pending in courts or bodies outside of the BIR in any of the open years.
21.2 Requirements under RR 19-2011 RR 19-2011 requires schedules of taxable revenues and other non-operating income, costs of sales and services, itemized deductions and other significant tax information, to be disclosed in the notes to financial statements.
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The amounts of taxable revenues and income, and deductible costs and expenses presented below are based on relevant tax regulations issued by the BIR, hence, may not be the same as the amounts of revenues reflected in the 2012 statement of comprehensive income. (a) Taxable Revenues
The Company’s taxable revenues subject to regular tax rate for the year ended December 31, 2012 amounted to P1,720,370,574.
(b) Deductible Cost of Goods Sold
Deductible cost of goods sold for the year ended December 31, 2012 which is subject to regular tax rate comprises the following:
Finished goods at beginning of the year P 416,825,250 Cost of goods manufactured 1,317,740,336 Total goods available for sale 1,734,565,586 Finished goods at end of year ( 314,973,334 ) P 1,419,592,252
(c) Taxable Non-operating and Other Income
Taxable non-operating and other income which are subject to the regular tax rate amounted to P150,192.
(d) Itemized Deductions
The amounts of itemized deductions for the year ended December 31, 2011 follow:
Advertising P 116,893,508 Forwarding and other warehousing fees 55,246,967 Freight 43,326,311 Merchandisers’ salary 32,607,195 Outside services 12,377,781 Taxes and licenses 6,837,587 Salaries and benefits 4,875,267 Depreciation 573,834 Communication, light and water 94,726 Interest 69,313 Supplies and materials 42,330 Repairs and maintenance 7,188 Rental 6,588 Fuel and oil 2,513 Miscellaneous 1,025,113 P 273,986,221