Annual Report 2009 - LWUA

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LOCAL WATER UTILITIES ADMINISTRATIONNOTES TO FINANCIAL STATEMENTSAs of December 31, 2009(With comparative figures for 2008)1. AGENCY INFORMATIONPresidential Decree No. 198 dated May 25, 1973 (as amended by Presidential Decrees Nos. 768 and 1479), otherwise known as the ProvincialWater Utilities Act of 1973, created the Local Water Utilities Administration (LWUA) as a specialized lending institution for the promotion,development and financing of local water utilities. This law authorized LWUA to service major provincial urban areas with at least 20,000population through the water districts. Part of the mandate is to provide a composite of financial, technical and institutional development andregulatory services to water utilities. Meanwhile, Executive Order No. 124 issued in 1987, abolished the Rural Waterworks DevelopmentCorporation (RWDC) and transferred RWDC’s functions and responsibilities to LWUA. This issuance virtually placed all of the 1,500 cities/municipalities outside Metro Manila as LWUA’s target areas. Since 1987, the new beneficiaries of LWUA included relatively smaller waterdistricts than those in the 70’s or 80’s.Some of the major functions of LWUA include the following:• Prescribes minimum standards and regulations in order to assure acceptable standards of construction materials and supplies, maintenance,operation, personnel training, accounting and fiscal practices for local water utilities;• Furnishes technical assistance for personnel training program for local water utilities;• Monitors and evaluates local water standards;• Effects systems integration, joint investment and operations, district annexation and de-annexation whenever economically warranted.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe principal accounting policies adopted in preparing the financial statements of the Local Water Utilities Administration are as follows:Basis of PreparationThe financial statements of LWUA have been prepared using the historical cost basis in compliance with the accounting principles generallyaccepted in the Philippines.Functional and Presentation CurrenciesThe financial statements are stated in Philippine peso, rounded to the nearest peso.Statement of ComplianceThe Local Water Utilities Administration has adopted the following Philippine Accounting Standards (PAS) by the Accounting Standards Council(ASC) in preparation for the full adoption of PAS / Philippine Financial Reporting Standards (PFRS).• PAS 1 (Revised 2007) “Presentation of Financial Statements”, provides a framework within which an entity assesses how to present fairly theeffects of transactions and other events; provides the base criteria for classifying assets and liabilities as current and non-current; prohibitsthe presentation of items of income and expense as “extraordinary items”; and specifies the disclosures about the key sources ofestimation which management has made in the process of applying the entity’s accounting policies.• PAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” removes the concept of fundamental error to correct prior perioderrors. It defines material omission or misstatements, and describes how to apply the concept of materiality when applying accountingpolicies and correcting errors.• PAS 12, “Income Taxes”, which prescribes the accounting treatment for income taxes. It requires the recognition of deferred income taxliability for taxable temporary differences, with certain exceptions and deferred income tax asset for deductible temporary differences, withcertain exceptions, if it is probable, a tax benefit will be realized. It also deals with the presentation of income taxes in the financialstatements and the disclosure of information relating to income taxes.• PAS 16 “Property, Plant and Equipment”, provides additional guidance and clarification on recognition and measurement of items of property,plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation tothe total cost of the item shall be depreciated separately.• PAS 21 “The Effects of Changes in Foreign Exchange Rates”, provides additional guidance on the translation method and on determining thefunctional and presentation currencies.Restatement of Account Balances in CY 2008In compliance with Paragraphs 29 and 75b of PAS 1 regarding the fair presentation of financial statements, the line Item “Receivables, net”shown under the Current Asset caption, was segregated into two classes: (1) Trade Receivables and (2) Non-trade Receivables. In effect,“Receivables, net” was shown at P1,691,527,915 for CY 2008 figures in this Year’s 2009 Annual Audit Report (Note 4).Likewise, the Line item “Prepaid Expenses” shown under the Current Assets caption of the Balance Sheet for CY 2008 in the last year’spreviously published report in the amount of P361,609, was merged with Other Current Assets for the latter to aggregate P105,525,719 (Note 6).Also, to conform to Paragraphs 29 and 75b of PAS 1 regarding the fair presentation of financial statements, Long-term Liabilities net weresegregated into three (3) line items on the face of the Balance Sheet under the caption of Non-Current Liabilities, namely:30 Local Water Utilities Administration
Annual Report 20091. Loans payable, Government of the Philippines (Note 14)2. Loans payable – Foreign, net of current portion (Note 15)3. Loans Payable – Local (Note 16)And in adherence with Paragraphs 60 and 62 of PAS 1 on the distinction of a liability either as a current or a non-current liability, Loans Payable,Government of the Philippines decreased by P143,551,069 while Loans Payable, Foreign decreased by the same amount.The affected accounts were disclosed in detail under Notes 4, 6, and 13 of the Notes to Financial Statements.Revenue RecognitionThe Corporation employs the modified accrual basis of accounting where revenues are recognized to the extent that it is probable that theeconomic benefits associated with the transactions will flow to the corporation and the amount can be measured reliably.Cash EquivalentsCash Equivalents are short term highly liquid investments that are readily convertible to known amounts of cash with original maturities of threemonths or less from dates of acquisition and that are subject to insignificant risk of changes in value.InvestmentsInvestments in government bonds and treasury notes are valued at cost. The difference between the net proceeds from the sale of governmentsecurities and its cost is recorded under the “Income (Loss) on Sale of Government Securities” account. Realized gains or losses are includedin determining the net income for the period in which they occur.Bad DebtsFor performing loans, estimated uncollectible accounts are determined at 25% of interest receivable and current portion of long-term loansreceivable, and 4% of long-term portion of loans receivable. On the other hand, non-performing loans and loans to non-operational WaterDistricts are provided with a 40% allowance.Property, Plant and Equipment (PPE)Property and equipment are carried at cost, less accumulated depreciation, which is computed using the straight-line method over the estimateduseful lives of the assets ranging from five (5) to thirty (30) years. As of balance sheet date, there was no indication that an item of LWUA’sPPE is impaired , using the assessment procedure provided in IAS 36. LWUA uses the Cost Model in recognizing an item of PPE. Under thismodel, there is no need for appraisal or revaluation of PPE.Repairs and maintenance costs are charged to operations as incurred and significant renewals and betterments are capitalized. When assetsare retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain orloss is credited or charged to current operations.InventoriesInventories are stated at cost determined by the first-in, first-out method. Subsequent change in accounting policy from FIFO method to theMoving Average Method shall take place upon completion of the Computerized Supplies Inventory System.Income TaxDeferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financialreporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rates expectedto apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.The account “Deferred Tax Asset” is presented and classified under “Other Non-Current Assets”, net of the Deferred Tax Liability, as follows:2009 2008Deferred Tax Assets 485,544,555 403,124,165Deferred Tax Liability 261,681,142 261,681,142Net Deferred Tax 223,863,412 141,443,023Foreign Currency TransactionsOutstanding loans from USAID, DANIDA and other foreign currency denominated loans where the Corporation undertakes the foreign exchangefluctuation risk are stated at their current values.Engineering Services/Well DrillingTo ensure the successful implementation of the water supply system financed by the Corporation, well drilling and engineering services arerendered to the water districts for a fee. Expenses relative to these services are booked as “Deferred Charges” when incurred and eventuallytransferred to the receivable when billed or expense accounts when the implementation of the water supply system is discontinued.31
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Annual Report 2009 - LWUA

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