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2005 ANNUAL REPORT33c. Profit and loss reported under Philippine GAAP for the year ended December 31, 2004 is reconciled to profit and loss under PFRS as follows:ConsolidatedParentPrevious Effects of Previous Effects ofNotes GAAP Transition PFRS GAAP Transition PFRSInterest income 2.8 P 11,171,026 (P 23,454) P 11,147,572 P 10,479,039 (P 23,203) P 10,455,836Interest expense 2.3, 2.4, 2.8 ( 6,146,797) 39,761 ( 6,186,558) ( 5,969,324) 39,761 ( 6,009,085)Net interest income beforeimpairment loss 5,024,229 ( 63,215) 4,961,014 4,509,715 ( 62,964) ( 4,446,751)Impairment loss 2.6, 2.9 ( 746,613) ( 36,942) ( 783,555) ( 743,024) ( 207,186) ( 950,210)Net interest income afterimpairment loss 4,277,616 ( 100,157) 4,177,459 3,766,691 ( 270,150) 3,496,541Other income 2.10, 2.11 2,566,079 ( 151,463) 2,414,616 2,546,906 ( 380,401) 2,166,505Other expenses 2.15, 2.16 ( 4,885,763) 227,192 4,658,571 ( 4,397,354) 158,853 ( 4,238,501)Income before tax 2.17 1,957,932 ( 24,428) 1,933,504 1,916,243 ( 491,698) 1,424,545Tax income ( 57,738) 18,608 ( 39,130) 99,427 ( 9,311) 90,116Net income for the year P 2,015,670 (P 43,036) P 1,972,634 P 2,015,670 (P 501,009) P 1,514,6612.2 Revised Structure of Statement of Condition and Statement of IncomeThe Group has modified its former statement of condition and statement of income structure on transition to PFRS. The main changes aresummarized as follows:a. Interbank loans receivable are now shown as part of loans and other receivables;b. Assets classified as trading account securities under the previous GAAP are now presented under a separate statement of conditionline item Financial Assets at Fair Value through Profit or Loss;c. Assets classified as Investments in Bonds and Other Debt Instruments under previous GAAP are presented as Held-to-maturityInvestments;d. Assets foreclosed by the Group from borrowers were reclassified from Real and Other Properties Acquired (ROPA) as presented underprevious GAAP to the separate statement of condition line items as Investment Properties, Non-current Assets Held for Sale andAvailable-for-Sale Securities;e. Accounts receivable and other receivables presented as part of Other Resources account under the previous GAAP now forms part ofthe Loans and Other Receivables account;f. Accrued interest receivables and payables previously presented as part of Other Resources and Other Liabilities, respectively, are nowpresented as part of the related principal accounts;g. In the consolidated financial statements, minority interest for the equity share of the minority stockholder of a subsidiary previouslydeducted from Other Resources is now presented as part of Capital Funds;h. Fair value measurement of derivatives shall be presented under Financial Assets at Fair Value through Profit or Loss if the fair valuesare positive and under Derivative Liabilities if the fair values are negative rather than shown net under Other Resources or OtherLiabilities accounts; andi. Preferred shares and the related additional paid-in capital previously presented as part of the capital funds under the previous GAAPare now presented as part of bills payable. Cumulative dividends declared and not declared were recognized as interest expense andunpaid portion presented as part of bills payable.2.3 Reclassification of Mandatory Redeemable Preferred Shares to Financial LiabilityUnder previous GAAP, subscription of preferred shares is recorded as part of capital funds with the excess over the par value recorded asadditional paid-in capital. Under PFRS, mandatory redeemable preferred shares should be recognized as financial liability and any dividendspaid are recognized as interest expense. Accordingly, the Bank reclassified the mandatory redeemable preferred shares issued in 2004 to SMPrime Holdings, Inc. with total par value of P250,000 and the related additional paid-in capital amounting to P2,568,050 to financial liabilityas part of Bills Payable. In addition, the related dividends amounting to P37,589 are now recognized as part of interest expense in the 2004statement of income.2.4 Separation of the Liability and Equity Components of Convertible Loan and Amortization of the Related LoanThe Bank has a US$20,000 convertible loan with the International Finance Corporation (IFC) which can be converted at the option of IFC tocommon stock starting two years after the date of the loan agreement. Under previous GAAP, the nominal value of the loan is recorded asfinancial liability while the value of the option to convert is not recognized.Under PFRS, compound financial instrument should be separated for its liability and equity components. Accordingly, the Bank separated theliability and equity components of the IFC loan and recognized stock option outstanding presented as part of capital funds amounting toP27,268 as of January 1, 2004 and December 31, 2004 and reduced the balance of the liability by the same amount. Subsequently, the liabilitycomponent is amortized using the effective interest method over the expected life of the loan assuming IFC will not opt to convert. Theamortization resulted to the increase in interest expense by P3,718 and P5,330 as of January 1, 2004 and December 31, 2004,respectively, andincreased the balance of liability to P1,103,270 and P1,108,600 as of January 1, 2004 and December 31, 2004, respectively. The adjustment alsoresulted to the decrease in the balance of surplus free by P3,718 and P9,048 as of January 1, 2004 and December 31, 2004, respectively.Moreover, the interest paid on IFC loan is segregated into interest expense for the liability component and dividends for the equitycomponent. Accordingly, the interest expense was reduced by P526 in the 2004 statement of income and recognized as dividends directlycharged to Surplus Free. This PFRS adjustment has no impact in the Surplus Free account under previous GAAP and under PFRS.