<strong>Notes</strong> <strong>to</strong> <strong>Financial</strong> <strong>Statements</strong>DECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions, Except Per Share Data)1. CORPORATE MATTERS1.1 Incorporation and OperationsBanco De Oro Unibank, Inc. (the Bank, <strong>BDO</strong> Unibank or the Parent Bank) was incorporated in the Philippines on August 16, 1967 <strong>to</strong> engage inthe business of banking. It was authorized <strong>to</strong> engage in trust operations on September 18, 1987 and in foreign currency deposit operationson November 23, 1990. The Bangko Sentral ng Pilipinas (BSP) granted approval <strong>to</strong> the Bank <strong>to</strong> operate as an expanded commercial bank onAugust 5, 1996. The Bank commenced operations as such in September of the same year. The Bank and its subsidiaries (collectively referred<strong>to</strong> as the Group) offer a wide range of commercial, investment, private and other banking services. These services include traditional loanand deposit products, as well as treasury, asset management, realty management, leasing and finance, remittance, trade services, retail cashcards, insurance, credit card services, s<strong>to</strong>ckbrokerage, trust and others.As a banking institution, the Bank’s operations are regulated and supervised by the BSP. In this regard, the Bank is required <strong>to</strong> comply with therules and regulations of the BSP such as those relating <strong>to</strong> maintenance of reserve requirements on deposit liabilities and deposit substitutesand those relating <strong>to</strong> the adoption and use of safe and sound banking practices, among others, as promulgated by the BSP. The Bank issubject <strong>to</strong> the provisions of the General Banking Law of 2000 (Republic Act No. 8791).<strong>BDO</strong> Unibank recently completed a merger, effective May 31, 2007, with Equitable PCI Bank, Inc. (EPCIB), with <strong>BDO</strong> Unibank as the survivingentity (see Note 26.1).The Bank’s common shares are listed in the Philippine S<strong>to</strong>ck Exchange (PSE). As of December 31, 2008, the Bank has 664 branches, and749 on-site and 504 off-site au<strong>to</strong>mated teller machines, all located nationwide. The Bank’s registered address is at Benguet Center, 12 ADBAvenue, Ortigas Center, Mandaluyong City.The Group operates mainly within the Philippines with a banking branch in Hong Kong and various remittance subsidiaries operating in Asia,Europe and the United States. In 2008 and 2007, these foreign operations accounted for 0.8% and 0.7% of the Group’s <strong>to</strong>tal revenues, and0.1% and 0.2% of the Group’s <strong>to</strong>tal resources, respectively. The Bank’s subsidiaries and associates are shown in Note 13.5.1.2 Merger of <strong>BDO</strong> Unibank with EPCIBAs discussed more fully in Note 26.1, on March 29, 2007 and May 25, 2007, the BSP and the Philippine Securities and Exchange Commission(SEC), respectively, approved the merger of <strong>BDO</strong> Unibank and EPCIB which became effective on May 31, 2007. The merger was accountedfor under the pooling-of-interests method of accounting as approved by the SEC since <strong>BDO</strong> Unibank and EPCIB were both under commoncontrol by SM Investments Corporation (SMIC) at the time of the merger.Under the merger, the entire assets and liabilities of EPCIB were transferred <strong>to</strong> and absorbed by <strong>BDO</strong> Unibank. In applying the pooling-ofinterestsmethod, the financial statement items of <strong>BDO</strong> Unibank and EPCIB were combined at the beginning of the year in which the mergeroccurred, that is, January 1, 2007. The comparative financial data presented for 2006 have been restated <strong>to</strong> include the accounts of EPCIBin<strong>to</strong> <strong>BDO</strong> Unibank’s accounts from Oc<strong>to</strong>ber 2, 2006, the date the two merging entities became under common control by the same controllings<strong>to</strong>ckholder, SMIC.The <strong>to</strong>tal carrying values of the resources and liabilities of EPCIB that were absorbed by <strong>BDO</strong> Unibank on May 31, 2007 were:Total resources absorbed P 305,779Total liabilities assumed 274,557<strong>BDO</strong> Unibank issued <strong>to</strong> EPCIB shareholders 1,308,606,021 <strong>BDO</strong> Unibank common shares with par value of P10 a share in exchange for thenet assets of EPCIB based on an exchange ratio of 1.8 <strong>BDO</strong> Unibank’s shares for every EPCIB share. <strong>BDO</strong> Unibank shares were quoted atP67 a share at the PSE on May 31, 2007.1.3 Approval of <strong>Financial</strong> <strong>Statements</strong>The financial statements of the Group for the year ended December 31, 2008 (with comparatives for the years ended December 31, 2007 and2006) were authorized for issue by the Bank’s Board of Direc<strong>to</strong>rs on February 28, 2009.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe significant accounting policies that have been used in the preparation of these financial statements are summarized in the succeedingpages. The policies have been consistently applied <strong>to</strong> all the years presented, unless otherwise stated.2.1 Basis of Preparation of <strong>Financial</strong> <strong>Statements</strong>(a)Statement of Compliance with <strong>Financial</strong> Reporting Standards in the Philippines for BanksThe financial statements of the Group and the financial statements of the Parent Bank have been prepared in accordance with thefinancial reporting standards in the Philippines (FRSP) for banks. The Group prepared its financial statements in accordance withPhilippine <strong>Financial</strong> Reporting Standards (PFRS), except for the reclassification of the embedded derivatives in credit-linked notes(CLNs) that are linked <strong>to</strong> Republic of the Philippines (ROP) bonds from fair value through profit or loss (FVTPL) <strong>to</strong> unquoted debtsecurities classified as loans (UDSCL), that are outstanding as of the effective date of reclassification, which is permitted by the BSP forprudential regulation, and by the SEC for financial reporting purposes.8Thinking Ahead To Get You Ahead • Annual Report 2008
<strong>Notes</strong> <strong>to</strong> <strong>Financial</strong> <strong>Statements</strong>DECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)PFRSs are adopted by the <strong>Financial</strong> Reporting Standards Council (FRSC) from the pronouncements issued by the InternationalAccounting Standards Board (IASB).These financial statements have been prepared using the measurement bases specified by FRSP for each type of resource, liability,income and expense. These financial statements have been prepared on the his<strong>to</strong>rical basis, except for the revaluation of certainfinancial assets. The measurement bases are more fully described in the accounting policies in the succeeding pages.The following reconciliations and explana<strong>to</strong>ry notes there<strong>to</strong> describe the difference on the statement of condition under FRSP and PFRS.In 2007 and prior years, there is no difference between the FRSP and PFRS since the reclassification of embedded derivatives in CLNsand other similar instruments that are linked <strong>to</strong> ROP bonds out of FVTPL is effective only in 2008.(i)The reconciliations of the equity reported under FRSP <strong>to</strong> equity under PFRS as of December 31, 2008 follow.GroupParent BankEquity under FRSP P 57,774 P 53,260Amortization of premium/discount due <strong>to</strong> change in effective interest rates ( 7 ) 1Mark-<strong>to</strong>-market loss on embedded derivatives onCLNs reclassified <strong>to</strong> loans and other receivables ( 1,134 ) ( 909 )( 1,141 ) ( 908 )Equity under PFRS P 56,633 P 52,352(ii) Differences in the measurement of statement of condition items as of December 31, 2008 are summarized below:GroupFRSP Difference PFRSChanges in resources:Trading and investment securities P 156,151 P - P 156,151Loans and other receivables 491,986 194 492,180648,137 194 648,331Changes in other liabilities 35,922 1,336 37,258P 612,215 P 611,073Total adjustments <strong>to</strong> equity (P 1,142 )Parent BankFRSP Difference PFRSChanges in resources:Trading and investment securities P 142,092 P - P 142,092Loans and other receivables 467,590 78 467,668609,682 78 609,760Changes in other liabilities 32,011 986 32,997P 577,671 P 576,763Total adjustments <strong>to</strong> equity P 908(iii) The reconciliations of the net income reported under FRSP <strong>to</strong> net income under PFRS for the year ended December 31, 2008 follow.GroupParent BankNet income under FRSP P 2,238 P 1,479Amortization of premium/discount due <strong>to</strong> change in effective interest rates ( 7 ) 1Mark-<strong>to</strong>-market loss on embedded derivativeson CLNs reclassified <strong>to</strong> loans and other receivables ( 1,135 ) ( 909 )( 1,142 ) ( 908 )Net income under PFRS P 1,096 P 571Thinking Ahead To Get You Ahead • Annual Report 2008 9