Notes to Financial Statements - BDO

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Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)(b)Functional and Presentation CurrencyThese financial statements are presented in Philippines pesos, the Group’s functional and presentation currency, and all values representabsolute amounts, except when otherwise indicated (see also Note 2.22).2.2 Impact of New Standards, Amendments and Interpretations to Existing Standards(a)Effective in 2008 that are Relevant to the GroupIn 2008, the Group adopted for the first time the following new interpretations and amended standards which are mandatory in 2008:Philippine Interpretation : The Limit on a Defined BenefitIFRIC 14, PAS 19Assets, Minimum FundingRequirements and theirInteractionPhilippine Accounting : PAS 39, Financial Instruments :Standard (PAS) 39 andRecognition and Measurements andPFRS 7 (Amendment) PFRS 7, Financial Instruments :DisclosuresPhilippine Interpretation : Group and Treasury Share TransactionsIFRIC 11Discussed below are the effects in the financial statements of the new accounting interpretations and amended standards.(i)On October 29, 2008, the FRSC approved the immediate adoption of amendments to IAS 39, Financial Instruments: Recognition andMeasurement, and IFRS 7, Financial Instruments: Disclosures: Reclassification of Financial Assets, issued by the IASB as amendments toPAS 39 and PFRS 7. Adoption of the amendments enables Philippine entities applying PFRSs to avail of the allowed internationalaccounting treatments. The amendments to PAS 39 permit an entity to, among others:• reclassify non-derivative financial assets, other than those designated at FVTPL upon initial recognition, out of the FVTPLcategory:a. only in rare circumstances and if there is a change in intention (i.e., the financial asset is no longer held for the purpose ofselling or repurchasing it in the near future); or,b. if the financial asset would have met the definition of loans and receivables and if the financial asset had not been requiredto be classified as held-for-trading (HFT) at initial recognition and the entity has the intention and ability to hold the financialasset for the foreseeable future or until maturity.• transfer from available-for-sale (AFS) category to the loans and receivables category a non-derivative financial asset that wouldhave met the definition of loans and receivables if the entity has the intention and ability to hold that financial asset for theforeseeable future or until maturity.Related to this, the Monetary Board of the BSP approved the prudential reporting guidelines for banks governing the reclassificationof investments in debt and equity securities between categories in accordance with the provisions of the October 2008 amendmentsto the PAS 39 and PFRS 7, and provided additional guidelines (under BSP Circular No. 628) which include; among others, thereclassification of CLNs and other similar instruments that are linked to ROP bonds:• out of the HFT into AFS/held-to-maturity (HTM)/ UDSCL; or,• from AFS to UDSCL or HTM, without bifurcating the embedded derivatives from the host instruments;Provided that these shall only apply for CLNs that are outstanding as of the effective date of reclassification, which shall not be onor later than November 15, 2008.On February 2, 2009, the SEC approved the adoption of BSP Circular 628 as being compliant with generally accepted accountingprinciples for banks.Pursuant to these amendments and guidelines, the Group reclassified certain financial assets out of FVTPL and AFS categories toHTM and loans and receivables categories (see Note 9).(ii)In 2008, the Group adopted for the first time the Philippine Interpretation, International Financial Reporting Interpretation Committee(IFRIC) 14, PAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective fromJanuary 1, 2008). This Philippine Interpretation provides general guidance on how to assess the limit in PAS 19, Employee Benefits,on the amount of the surplus that can be recognized as an asset. It also explains how the pension asset or liability may be affectedby statutory or contractual minimum funding requirement. The Group’s adoption of this interpretation does not have any impact onthe Group’s financial statements, as its retirement benefit plan is still partially unfunded.(iii) In 2008, the Group adopted for the first time the Philippine Interpretation International Financial Reporting Interpretation Committee(IFRIC) 11, Group and Treasury Shares Transactions (effective from March 1, 2007). This standard addresses the issue relating to anentity’s obligation to provide its employees, as well as other third parties, with its own equity instrument (i.e., treasury shares) or theequity instrument of its shareholder (SMIC). The Parent Bank is obligated to provide the Group’s employees with its equity shares10Thinking Ahead To Get You Ahead • Annual Report 2008
Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)and such transaction is accounted for as equity settled in the Group financial statements. Under this Philippine Interpretation, theGroup is required to measure the services received from the employees in accordance with the requirements applicable to equitysettledshare-based payment transactions, with a corresponding increase recognized in the Group’s equity as a contribution fromthe shareholders.The first-time application of these amended standards, and interpretations has not resulted in any prior period adjustments of cashflows, net income or statement of condition line items.(b)Effective in 2008 but not Relevant to the GroupPhilippine Interpretation : Service Concession ArrangementsIFRIC 12(c)Effective Subsequent to 2008 that is Relevant to the GroupThere are new and amended standards and Philippine Interpretation that are effective for periods subsequent to 2008. The followingnew standards are relevant to the Group which the Group will apply in accordance with their transitional provisions.PAS 1 (Revised 2007) : Presentation of Financial StatementsPAS 23 (Revised 2007) : Borrowing CostsPAS 32 and PAS 1 : Financial Instruments: Presentation and(Amendment)Presentation of Financial Statements- Puttable Financial Instruments andObligations Arising on LiquidationVarious Standards : 2008 Annual Improvements to PFRSBelow is a discussion of the possible impact of these accounting standards:(i)(ii)PAS 1 (Revised 2007), Presentation of Financial Statements (effective from January 1, 2009). The amendment requires an entityto present all items of income and expense recognized in the period in a single statement of comprehensive income or in twostatements: a separate income statement and a statement of comprehensive income. The income statement shall disclose incomeand expense recognized in profit and loss in the same way as the current version of PAS 1. The statement of comprehensiveincome shall disclose profit or loss for the period, plus each component of income and expense recognized outside of profit andloss classified by nature (e.g., gains or losses on available-for-sale assets or translation differences related to foreign operations).Changes in equity arising from transactions with owners are excluded from the statement of comprehensive income (e.g., dividendsand capital increase). An entity would also be required to include in its set of financial statements a statement showing its financialposition (statement of condition) at the beginning of the previous period when the entity retrospectively applies an accountingpolicy or makes a retrospective restatement. The Group will apply PAS 1 (Revised 2007) in its 2009 financial statements.PAS 23 (Revised 2007), Borrowing Costs (effective from January 1, 2009). Under the revised PAS 23, all borrowing costs that aredirectly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost ofthat asset. The option of immediately expensing borrowing costs that qualify for asset recognition has been removed. The Grouphas initially determined that adoption of this new standard will not have significant effects on the financial statements for 2009, aswell as for prior and future periods, as the Group’s current accounting policy is to capitalize all interest directly related to qualifyingassets.(iii) PAS 32 (Amendment), Financial Instruments: Presentation and PAS 1 (Amendment), Presentation of Financial Statements – PuttableFinancial Instruments and Obligations Arising on Liquidation (effective from January 1, 2009). The amendments require certainfinancial instruments that represent a residual interest in the net assets of an entity, which would otherwise be classified as financialliabilities, to be classified as equity, if both the financial instrument and the capital structure of the issuing entity meet certainconditions. The Group does not expect any impact on its financial statements when it applies the amendments in 2009.(iv) 2008 Annual Improvements to PFRS. The FRSC has adopted the Improvements to International Financial Reporting Standards2008. These amendments become effective in the Philippines in annual periods beginning on or after January 1, 2009. The Groupexpects the amendments to the following standards to be relevant to the Group’s accounting policies:• PAS 23 (Amendment), Borrowing Costs. The amendment clarifies the definition of borrowing costs to include interest expensedetermined using the effective interest method under PAS 39. This amendment will be applied by the Group in 2009; however,management expects its effect to be insignificant.• PAS 1 (Amendment), Presentation of Financial Statements. The amendment clarifies that financial instruments classified asheld for trading in accordance with PAS 39 are not necessarily required to be presented as current assets or current liabilities.Instead, normal classification principles under PAS 1 should be applied. The Group determines that this amendment willhave no impact in the Group’s 2009 financial statements.• PAS 19 (Amendment), Employee Benefits. The amendment includes the following:- Clarification that a curtailment is considered to have occurred to the extent that benefit promises are affected by futuresalary increases and a reduction in the present value of the defined benefit obligation results in negative past servicecost.Thinking Ahead To Get You Ahead • Annual Report 2008 11
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