BY JENNEE GRACE U. RUBRICO, Senior Reporter and JEFFREY O. VALISNO, Reporter
Necessary complications
From the start, government regulators had been aware of the inherent difficulties in adopting new accounting rules. Hence, both the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) chose to implement the 40-plus new rules in batches, starting with the least complicated standards as early as five years ago.
“If companies had problems complying with the earlier rules, they would sure find the last batch of rules more complicated,” SEC consultant Roberto G. Manabat had said in an earlier interview.
True enough, some firms had found it more difficult than others to apply the new standards.
Asian Institute of Management professor Larry Tan cited pre-need firms as examples, saying the rules that govern either the insurance industry or the pension industry may not be applicable to pre-need.
“The pre-need industry is unique to the Philippines and the IAS provisions are not for the industry. Are they going to have to come up with a Philippine Accounting standard just for that [industry]?” he said.
And some rules turned out to be more troublesome than others. Here are samples
Accountants said that of the new accounting standards, IAS 39, which deals with recognition and measurement of financial instruments, required the most drastic changes.
“IAS 39 deals with both assets and liabilities. The change in the rules is that, at the time you acquire the financial instrument, you have to make clear already what your intention is for the instrument,” Mr. Manabat said.
For instance, if a company purchases government or corporate bonds, it is required at the outset to say if it will be holding the financial instruments to maturity, make them available for sale or and loss.”
How these bonds are categorized, Mr. Manabat said, is the basis of how they will be included in the financial statements.
Instruments that are classified as available for sale are measured at fair value — the price of an instrument which both the buyer and the seller find reasonable — and are included in the equity portion of the financial statement; the instruments would be recorded as cost if their fair value cannot be reliably measured.
Instruments that are classified as held at fair value through profit and loss, meanwhile, are measured at fair value
and are included in the profit and loss portion of the financials of a company. They are recorded as cost if the fair value cannot be reliably ascertained.
Financial instruments classified as loans and receivables are measured at amortized cost. The same measurement
is used for instruments that are classified as being held to maturity, with the difference between its face value and its cost being amortized over the remaining term of the instrument.
If bonds categorized as held to maturity are used for trading, Mr. Manabat said, companies will be penalized. “Even if not all the bonds that are categorized as held to maturity are reclassified, all the bonds under the classification will be tainted. They will also be reclassified as available for sale,” he said.
Moreover, reclassification will ban the company from using the “held to maturity” category for two years.
Mr. Manabat said financial instruments have been classified this way to prevent abuses on the part of the companies which would put the instruments in whichever category would be favorable for them.
“Measuring at fair value would keep on changing the value of the financial instruments, so many people want to classify the bonds as held to maturity. But now, once you designate, you can no longer keep on changing categories. This was done because many companies have abused this [flexibility],” he said.
Besides the classification of financial instruments, IAS 39 also touches on hedging as well as the measurement of derivative products.
IAS 32 basically requires companies to fully disclose all monetary transactions, and the risks that come with the use of such financial instruments.
Application of IAS 32 and 39 has proven to be very difficult, especially for mining and pre-need companies due to varying interpretations of these standards.
Following the decision of the Supreme Court in 2004 allowing foreign firms to have full ownership in mining firms, the Arroyo administration has been counting on mining to drive economic growth.
While the aim of reporting financial statements on current prices is to promote greater transparency, mining companies have complained that the implementation of the IAS rules might present an opposite picture of their bottom lines.
Since mining firms forge contracts at present based on what they think would be future prices of the minerals that they still have to retrieve, implementing an accounting standard that mandates the use of current prices may be impractical.
For example, if contracts were made on the assumption that prices would be high in the future, and if those prices fall short of projections, the mining company would have to take a loss.
This, despite the fact prices might have “fallen” due to higher-than-projected production.
Another accounting rule that is expected to have made a significant impact on the financials of companies is IAS 19, which governs employee benefits. Under IAS 19, companies must fully finance future benefits due to employees.
Before, companies did not need to disclose in detail how much they allot for mandatory retirement benefits, for example.
Mr. Manabat said IAS 19 requires companies to get the fair value of benefits they committed to their employees.
“The companies are required to book the present value of those promises, based on their experience. For instance, if the employees last for 20 years, this will be booked over 20 years.
“There are a lot of factors — morbidity, turnover, increases in salary. It depends on all of those. These are projected and then the present value is determined,” he said.
He said this standard will weigh heavily on companies because the “past service liability” — a company’s liability which covers the time the trust fund had not yet been formed — used to be amortized over the estimated service life of employees.
“Now, this is no longer the case. You have to include this already in the trust fund asset,” he said.
He added, however, that a five-year transition period has been given wherein companies will be allowed to amortize the past service liability over five years.
“This will mitigate the impact on the profit and loss. Still, if the amortization is from 20 to five years, you’re talking of billions,” he said.
Still another rule governs how companies report the effects of foreign currency exchange rate fluctuations. IAS 21 mandates that impact of foreign exchange changes should be reported immediately in the company’s current operations.
Previous to the rule, companies could spread this cost over a certain period.
For instance, the peso ended at P52.835 to the dollar in 2005, from the P54 levels the previous year. IAS 21 requires companies which imported equipment when the peso was weaker to immediately report the purchase as a loss in their financial statements.
IAS 40 governs investment property, or the properties like land or buildings that a company uses to earn rentals, or for capital appreciation. It does not include properties for the use of the owner, like building that the company owns and occupies. Under the old rule, properties were not segregated on their purpose for the company.
This rule became problematic when it gave companies the option to valu investment property based on either cost (when the property was acquired), or at current prices.
IAS 40 requires companies to be consistent once they decide which method they use to value their investment properties. The option to choose became a concern for pre-need firms, for instance, since variations on how they report their investment properties made it more complicated for one to be compared to its competitor.
“One of the key features of the [new accounting] standards is the overwhelming amount of disclosure requirements.
This has made financial reporting a complex process,” BSP Governor Amando M. Tetangco, Jr. acknowledged in an interview.
“However, looking at the upside of it, these disclosure requirements will empower the stakeholders in making relevant decisions.”
Following the decision of the Supreme Court in 2004 allowing foreign firms to have full ownership in mining firms, the Arroyo administration has been counting on mining to drive economic growth.
While the aim of reporting financial statements on current prices is to promote greater transparency, mining companies have complained that the implementation of the IAS rules might present an opposite picture of their bottom lines.
Since mining firms forge contracts at present based on what they think would be future prices of the minerals that they still have to retrieve, implementing an accounting standard that mandates the use of current prices may be impractical.
For example, if contracts were made on the assumption that prices would be high in the future, and if those prices fall short of projections, the mining company would have to take a loss.
This, despite the fact prices might have “fallen” due to higher-than-projected production.
Another accounting rule that is expected to have made a significant impact on the financials of companies is IAS 19, which governs employee benefits. Under IAS 19, companies must fully finance future benefits due to employees.
Before, companies did not need to disclose in detail how much they allot for mandatory retirement benefits, for example.
Mr. Manabat said IAS 19 requires companies to get the fair value of benefits they committed to their employees.
“The companies are required to book the present value of those promises, based on their experience. For instance, if the employees last for 20 years, this will be booked over 20 years.
“There are a lot of factors — morbidity, turnover, increases in salary. It depends on all of those. These are projected and then the present value is determined,” he said.
He said this standard will weigh heavily on companies because the “past service liability” — a company’s liability which covers the time the trust fund had not yet been formed — used to be amortized over the estimated service life of employees.
“Now, this is no longer the case. You have to include this already in the trust fund asset,” he said.
He added, however, that a five-year transition period has been given wherein companies will be allowed to amortize the past service liability over five years.
“This will mitigate the impact on the profit and loss. Still, if the amortization is from 20 to five years, you’re talking of billions,” he said.
Still another rule governs how companies report the effects of foreign currency exchange rate fluctuations. IAS 21 mandates that impact of foreign exchange changes should be reported immediately in the company’s current operations.
Previous to the rule, companies could spread this cost over a certain period.
For instance, the peso ended at P52.835 to the dollar in 2005, from the P54 levels the previous year. IAS 21 requires companies which imported equipment when the peso was weaker to immediately report the purchase as a loss in their financial statements.
IAS 40 governs investment property, or the properties like land or buildings that a company uses to earn rentals, or for capital appreciation. It does not include properties for the use of the owner, like building that the company owns and occupies. Under the old rule, properties were not segregated on their purpose for the company.
This rule became problematic when it gave companies the option to valu investment property based on either cost (when the property was acquired), or at current prices.
IAS 40 requires companies to be consistent once they decide which method they use to value their investment properties. The option to choose became a concern for pre-need firms, for instance, since variations on how they report their investment properties made it more complicated for one to be compared to its competitor.
“One of the key features of the [new accounting] standards is the overwhelming amount of disclosure requirements.
This has made financial reporting a complex process,” BSP Governor Amando M. Tetangco, Jr. acknowledged in an interview.
“However, looking at the upside of it, these disclosure requirements will empower the stakeholders in making relevant decisions.”
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