Notes to Financial Statements - BDO

More documents

Recommendations

Info

Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)Impairment losses is the estimated amount of losses in the Group’s loan portfolio, based on the evaluation of the estimated futurecash flows discounted at the loan’s original effective interest rate or the last repricing rate for loans issued at variable rates (seeNote 2.20). Impairment is established through an allowance account which is charged to expense. Loans and receivables are writtenoff against the allowance for impairment losses when management believes that the collectibility of the principal is unlikely, subject toBSP regulations.(c)Held-to-maturity Investments (HTM)This category includes non-derivative financial assets with fixed or determinable payments and a fixed date of maturity. Investments areclassified as HTM if the Group has the positive intention and ability to hold them until maturity. Investments intended to be held for anundefined period are not included under this category.HTM investments consist of government and private debt securities. If the Group were to sell other than an insignificant amount of HTMassets, the entire category of HTM securities would be tainted and would be reclassified as AFS securities. The tainting provision willnot apply if the sales or reclassifications of HTM investments: (i) are so close to maturity or the financial asset’s call date that changes inthe market rate of interest would not have a significant effect on the financial asset’s fair value; (ii) occur after the Group has collectedsubstantially all of the financial asset’s original principal through scheduled payments or prepayments; or, (iii) are attributable to anisolated event that is beyond the control of the Group, is nonrecurring and could not have been reasonably anticipated by the Group.HTM investments are subsequently measured at amortized cost using the effective interest method. If there is objective evidence thatthe investment has been impaired, the financial asset is measured at the present value of estimated cash flows. Any changes to thecarrying amount of the investment due to impairment are recognized in profit or loss.(d)Available-for-sale Financial Assets (AFS)This category includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any ofthe other categories of financial assets.Non-derivative financial asset classified as AFS may be reclassified to loans and receivables category that would have met the definitionof loans and receivables (effective July 1, 2008) if there is an intention and ability to hold that financial asset for the foreseeable futureor until maturity.All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed, with changes in valuerecognized in equity, net of any effects arising from income taxes. Gains and losses arising from securities classified as AFS arerecognized in the income statement when these are sold or when the investment are impaired.In the case of impairment, any loss previously recognized in equity is transferred to the income statement. Losses recognized in theincome statement on equity instruments are not reversed through the income statement. Losses recognized in prior period incomestatement resulting from the impairment of debt instruments are reversed through the income statement, when there is recovery in theamount of previously recognized impairment losses.The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active(and for unlisted securities), the Group establishes the fair value by using valuation techniques, which include the use of recent arm’slength transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by marketparticipants.Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are reportedas part of Trading Gain under Other Operating Income account in income statement in the period in which these arise. Gains andlosses arising from changes in the fair value of AFS securities are recognized directly in equity until the financial asset is derecognizedor impaired, at which time the cumulative gain or loss previously recognized in equity shall be recognized in profit or loss. However,interest calculated using the effective interest method is recognized in the income statement. Dividends on AFS equity instruments arerecognized in the income statement when the Group’s right to receive payment is established.Non-compounding interest and other cash flows resulting from holding impaired financial assets are recognized in profit or loss whenreceived, regardless of how the related carrying amount of financial assets is measured.Derecognition of financial assets occurs when the right to receive cash flows from the financial instruments expire or are transferred andsubstantially all of the risks and rewards of ownership have been transferred.2.6 Derivative Financial Instruments and Hedge AccountingThe Group is a party to various foreign-currency forward and swap contracts and cross-currency and interest rate swaps. These contracts areentered into as a service to customers and as a means of reducing or managing the Group’s foreign exchange and interest rate exposures,as well as for trading purposes.Derivatives are initially recognized at fair value on the date on which derivative contract is entered into and are subsequently measured at theirfair value (except for the embedded derivatives in CLNs linked to ROP bonds which the Group reclassified to loans). Fair values are obtainedfrom quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flowmodels and option pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fairvalue is negative.14Thinking Ahead To Get You Ahead • Annual Report 2008
Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)The best evidence of the fair value of a derivative at initial recognition is the transaction price (the fair value of the consideration given orreceived) unless the fair value of the instrument is evidenced by comparison with other observable current market transactions in the sameinstrument or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, theGroup recognizes profit or loss at initial recognition.For more complex instruments, the Group uses proprietary models, which usually are developed from recognized valuation models. Someor all of the inputs into these models may not be market observable, and are derived from market prices or rates or are estimated basedon assumptions. When entering into a transaction, the financial instrument is recognized initially at the transaction price, which is the bestindicator of fair value, although the value obtained from the valuation model may differ from the transaction price. This initial difference infair value indicated by valuation techniques is recognized as profit or loss depending upon the individual facts and circumstances of eachtransaction and not later than when the market data becomes observable.The value produced by a model or other valuation technique is adjusted to allow for a number of factors as appropriate, because valuationtechniques cannot appropriately reflect all factors market participants take into account when entering into a transaction. Valuation adjustmentsare recorded to allow for model risks, bid-ask spreads, liquidity risks as well as other factors. Management believes that these valuationadjustments are necessary and appropriate to fairly state financial instruments carried at fair value on the statement of condition.Certain derivatives embedded in other financial instruments are considered as separate derivatives when their economic characteristicsand risks are not closely-related to those of the host contract and the host contract is not carried at fair value through profit or loss. Theseembedded derivatives are bifurcated from the host contracts and are measured at fair value with changes in fair value recognized in theincome statement (except for the embedded derivatives in CLNs linked to ROP bonds which were not bifurcated from the host contracts aspermitted for prudential reporting and were reclassified to loans).Certain derivatives may be designated as either: (i) hedges of the fair value of recognized assets or liabilities or firm commitments (fair valuehedge); or, (ii) hedges of highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flowhedge). Changes in the fair value of derivatives are recognized in profit or loss. The method of recognizing the resulting fair value gain or losson derivatives that qualify as hedging instrument depends on the hedging relationship designated by the Group.2.7 Non-current Assets Held-for-SaleAssets held-for-sale include real and other properties acquired through repossession or foreclosure that the Group intends to sell within oneyear from the date of classification as held for sale.Assets classified as held for sale are measured at the lower of their carrying amounts immediately prior to their classification as held for saleand their fair value less costs to sell. Assets classified as held for sale are not subject to depreciation or amortization. The profit or loss arisingfrom the sale of held-for-sale assets is included as part of Income from Assets Acquired under Other Operating Income account in the incomestatement.2.8 Investment PropertiesInvestment properties are stated at cost. The cost of an investment property comprises its purchase price and directly attributable costincurred. This also includes land and building acquired by the Group from defaulting borrowers not held for sale in the next 12 months. Forthese assets, the cost is recognized initially at fair value. Investment properties except land are depreciated on a straight line basis over aperiod of 10 years.Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any impairment losses.The Group adopted the cost model in measuring its investment property, hence, is carried at cost less accumulated depreciation andany impairment in value. Depreciation and impairment loss are recognized in the same manner as in Premises, Furniture, Fixtures andEquipment.Investment property is derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expectedfrom its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the income statement in the yearof retirement or disposal.2.9 Equity InvestmentsIn the Group financial statements, investments in associates are accounted for under the equity method of accounting and are initiallyrecognized at cost, less any impairment losses (see Note 2.21).The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisitionmovements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of theinvestment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecuredreceivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates.Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policieshave been changed where necessary to ensure consistency with the policies adopted by the Group.Thinking Ahead To Get You Ahead • Annual Report 2008 15
Page 1 and 2: ATTUNED TO THE TIMES, WE AREALWAYS
Page 3 and 4: Financial HighlightsIn Billion Peso
Page 5 and 6: Report of Independent AuditorsTo th
Page 7 and 8: Income StatementsFor the Years Ende
Page 9 and 10: Cash Flow StatementsFOR THE YEARS E
Page 11 and 12: Notes to Financial StatementsDECEMB
Page 15: Notes to Financial StatementsDECEMB
Page 19: Notes to Financial StatementsDECEMB
Page 66 and 67:
Notes to Financial StatementsDECEMB
Page 68 and 69:
Page 70 and 71:
Page 72 and 73:
Page 74 and 75:
Page 76 and 77:
Page 78 and 79:
Page 80 and 81:
Page 82 and 83:
Page 84:
BDO Corporate Center7899 Makati Ave
show all

Notes to Financial Statements - BDO

Create successful ePaper yourself

Delete template?

Save as template?