Report of Independent Auditors
The Board of Directors
Sun Pharma Philippines, Inc.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
Unit 604, Liberty Center Building
104 H.V. Dela Costa Street
Salcedo Village, Makati City
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of Sun Pharma Philippines, Inc. (the Company), which
comprise the statement of financial position as at March 31, 2018, and the statement of
comprehensive income, statement of changes in capital deficiency and statement of cash flows
for the year then ended, and notes to the financial statements, including a summary of significant
accounting policies.
In our opinion, except for the possible effects of the matters discussed in the Basis for
Qualified Opinion section of this report, the accompanying financial statements present fairly,
in all material respects, the financial position of the Company as at March 31, 2018, and its
financial performance and its cash flows for the year then ended in accordance with Philippine
Financial Reporting Standards (PFRS).
Basis for Qualified Opinion
Due to the significance of the amounts involved, our opinion on the 2018 financial statements
of the Company is qualified with respect to the matter pertaining to balance of inventories as
of March 31, 2017. We were unable to obtain sufficient and appropriate audit evidence to
ascertain as to whether the balance of the inventories as of March 31, 2017 were properly
stated as we were not present to observe the physical count of inventories as of that period
because that date was prior to the date we were engaged as independent auditors of the
Company.
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We conducted our audit in accordance with Philippine Standards on Auditing (PSA). Our
responsibilities under those standards are further described in the Auditors’ Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the
Company in accordance with the Code of Ethics for Professional Accountants in the
Philippines (Code of Ethics) together with the ethical requirements that are relevant to our
audit of the financial statements in the Philippines, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the Code of Ethics. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Material Uncertainty Related to Going Concern
We draw attention to Note 1 to the financial statements, which indicates that the Company’s
capital deficiency further increased as at March 31, 2018 because of its continuing net losses
from operations. As stated in Note 1, this condition indicates the existence of a material
uncertainty that may cast significant doubt on the Company’s ability to continue as a going
concern. In response to this matter, management continues to strengthen its strategy to
expand its market in order for the Company to increase its sales and eventually generate
profit. Operating losses of the Company manifested a significant decrease from P60.1 million
in 2017 to P7.6 million in 2018. Management believes that the Company will be able to
recover from losses in the next succeeding years. Accordingly, the accompanying
Company’s financial statements have been prepared assuming that the Company will
continue as a going concern which contemplates the realization of assets and the settlement
of liabilities in the normal course of business. In connection with our audit, we have
performed audit procedures to evaluate management’s assumptions as to the Company’s
ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Emphasis of
Matter
We draw attention to Note 2 to the financial statements which describes the effect of
the restatements made on the Company’s March 31, 2017 account balances. As part of our
audit of March 31, 2018 financial statements, we also audited the adjustments described in
Note 2 that were applied to the 2017 financial statements. The 2017 financial statements
were restated to properly present the correct balances presented herein as corresponding
figures. In our opinion, such adjustments are appropriate and have been properly applied.
We were not engaged to audit, review, or apply any procedures to the 2017 financial
statements of the Company other than with respect to the adjustments described in Note 2 to
the financial statements, and accordingly, we do not express an opinion or any other form of
assurance on the 2017 financial statements taken as whole. Our opinion is not modified in
respect of this matter.
Other Matter
The financial statements of Sun Pharma Philippines, Inc. for the year ended March 31, 2017
were audited by another auditor who expressed an unqualified opinion on those financial
statements on May 25, 2017 prior to restatements.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with PFRS, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
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In preparing the financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or has no realistic alternative but to
do so.
Those charged with governance are responsible for overseeing the Company’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with PSA will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with PSA, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion. The risk of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Company to cease to
continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
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Report on Other Legal and Regulatory Requirements
Our audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. As discussed in Note 21 to the financial statements, the
Company presented the supplementary information required by the Bureau of Internal
Revenue in supplemental schedules filed separately from the basic financial statements.
Such supplementary information is the responsibility of the management. The supplementary
information, however, is not a required part of the basic financial statements prepared in
accordance with PFRS and it is also not a required disclosure under the Securities Regulation
Code Rule 68, as amended, of the Philippine Securities and Exchange Commission.
PUNONGBAYAN & ARAULLO
By: Mailene Sigue-Bisnar
Partner
CPA Reg. No. 0090230
TIN 120-319-128
PTR No. 6616003 January 3, 2018, Makati City
SEC Group A Accreditation
Partner - No. 0396-AR-3 (until Oct. 15, 2018)
Firm - No. 0002-FR-5 (until Mar. 26, 2021)
BIR AN 08-002511-20-2018 (until Jan. 25, 2021)
Firm’s BOA/PRC Cert. of Reg. No. 0002 (until Dec. 31, 2018)
June 18, 2018
March 31, April 1,
2017
2016
(As Restated – (As Restated –
Notes
2018 see Note 2) see Note 2)
CURRENT ASSETS
Cash
4
10,878,827 P 15,917,778 P 17,340,201 P
Trade and other receivables - net
5
83,150,762 42,520,393 33,946,375
Inventories - net
6
81,446,365 49,071,381 57,189,150
Other current assets
7
4,315,356 63,678,895 48,384,436
Total Current Assets
179,791,310
171,188,447 156,860,162
NON-CURRENT ASSETS
Property and equipment - net
8
6,766,831 9,800,273 14,210,647
Deferred tax assets
13
- 20,834,951 715,990
Other non-current assets
16
1,025,228 585,728 -
Total Non-current Assets
7,792,059
31,220,952 14,926,637
TOTAL ASSETS
187,583,369 P
202,409,399 P 171,786,799 P
CURRENT LIABILITIES
Trade and other payables
9
184,175,487 P 163,503,464 P 85,036,307 P
NON-CURRENT LIABILITIES
Advances from parent company
14
358,818,334
345,167,970 301,725,870
Retirement benefit obligation
12
855,570 - -
Total Non-current Liabilities 359,673,904 345,167,970 301,725,870
Total Liabilities
543,849,391
508,671,434 386,762,177
CAPITAL DEFICIENCY
Capital stock
15
8,653,400 8,653,400 8,653,400
Deficit
2
364,919,422 )( 314,915,435 )( 223,628,778 )(
Total Capital Deficiency
356,266,022 )( 306,262,035 )( 214,975,378 )(
TOTAL LIABILITIES AND CAPITAL DEFICIENCY
187,583,369 P
202,409,399 P 171,786,799 P
See Notes to Financial Statements.
A S S E T S
LIABILITIES AND CAPITAL DEFICIENCY
SUN PHARMA PHILIPPINES, INC.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2018
(With Comparative Figures as of March 31, 2017 and Corresponding Figures as of April 1, 2016)
(Amounts in Philippine Pesos)
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
2017
(As Restated −
Notes
2018 see Note 2)
REVENUES - Net
2
239,377,159 P 182,801,766 P
COST OF GOODS SOLD
10
109,394,736 124,814,816
GROSS PROFIT
129,982,423 57,986,950
SELLING AND ADMINISTRATIVE
SELLING AND ADMINISTRATIVE
EXPENSES
10
137,613,655 118,059,419
OPERATING LOSS
7,631,232 )( 60,072,469 )(
OTHER CHARGES
- Net
11
18,921,067 )( 50,172,988 )(
LOSS BEFORE TAX
26,552,299 )( 110,245,457 )(
TAX INCOME (LOSS)
13
23,451,688 )( 18,958,800
NET LOSS 50,003,987 )( 91,286,657 )(
OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE LOSS
50,003,987 )( P 91,286,657 )( P
See Notes to Financial Statements.
SUN PHARMA PHILIPPINES, INC.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED MARCH 31, 2018
(With Comparative Figures for the Year Ended March 31, 2017)
(Amounts in Philippine Pesos)
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Reserves Deficit
Capital Stock (As Restated − (As Restated −
( See Note 15)
see Note 2) see Note 2) Total
Balance at April 1, 2017
As previously reported 8,653,400 P
52,072,495 )(
263,786,329 )( P 307,205,424 )( P
Effect of restatements
- 52,072,495 51,129,106 )( 943,389
As restated
8,653,400
- 314,915,435 )( 306,262,035 )(
Net loss for the year
- - 50,003,987 )( 50,003,987 )(
Balance as at March 31, 2018
8,653,400 P
- 364,919,422 )( P 356,266,022 )( P
Balance at April 1, 2016
As previously reported
8,653,400 P
1,840,374 )( P 221,788,404 )( P 214,975,378 )( P
Effect of restatements
- 1,840,374 1,840,374 )( -
As restated
8,653,400
- 223,628,778 )( 214,975,378 )(
Net loss for the year
As previously reported
- - 41,997,925 )( 41,997,925 )(
Effect of restatements
-
-
49,288,732 )
(
49,288,732 )
(
As restated
-
-
91,286,657 )
(
91,286,657 )
(
Other comprehensive income
As previously reported
- 50,232,121 - 50,232,121
Effect of restatements
- 50,232,121 )( - 50,232,121 )(
As restated
- - - -
Balance as at March 31, 2017
8,653,400 P
- 314,915,435 )( P 306,262,035 )( P
SUN PHARMA PHILIPPINES, INC.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
STATEMENT OF CHANGES IN CAPITAL DEFICIENCY
FOR THE YEAR ENDED MARCH 31, 2018
(With Comparative Figures for the Year Ended March 31, 2017)
(Amounts in Philippine Pesos)
See Notes to Financial Statements.
P
P
P
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
2017
(As Restated −
Notes
2018 see Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before tax
26,552,299 )( P 110,245,457 )( P
Adjustments for:
Unrealized loss on foreign exchange transaction
11, 14
15,476,465 50,232,121
Depreciation and amortization
7, 8, 10
4,807,421 5,199,743
Gain on disposal of assets
8, 11
345,946 )( -
Interest income
11
43,137 )( 38,035 )(
Operating loss before working capital changes 6,657,496 )( 54,851,628 )(
Increase in trade and other receivables 40,630,369 )( 8,574,018 )(
Decrease (increase) in inventories 32,374,984 )( 8,117,769
Decrease (increase) in other current assets 56,739,954
15,294,459 )(
Increase in other non-current assets 439,500 )( 1,745,889 )(
Increase in trade and other payables 18,845,921 71,677,136
Increase in retirement benefit obligation
855,570
-
Cash used in operations 3,660,904 )( 671,089 )(
Interest received
11
43,137 38,035
Cash paid for income taxes
8,627 )( -
Net Cash Used in Operating Activities
3,626,394 )( 633,054 )(
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment
8
1,758,503 )( 789,369 )(
Proceeds from sale of property and equipment
8
345,946 -
Net Cash Used in Investing Activities
1,412,557 )( 789,369 )(
NET DECREASE IN CASH 5,038,951 )( 1,422,423 )(
CASH AT BEGINNING OF YEAR
15,917,778 17,340,201
CASH AT END OF YEAR
10,878,827 P
15,917,778 P
Supplementary Information on Non-cash Financing Activities ‒
See Notes to Financial Statements.
SUN PHARMA PHILIPPINES, INC.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 2018
(With Comparative Figures for the Year Ended March 31, 2017)
(Amounts in Philippine Pesos)
In 2018 and 2017, the Company recognized unrealized foreign exchange loss on its advances from parent company amounting
to P13.7 million and P43.4 million, respectively, and is presented as part of Other Charges - Net account in the statements of
comprehensive income (see Notes 11 and 14).
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
SUN PHARMA PHILIPPINES, INC.
(A Wholly Owned Subsidiary of Sun Pharma Global FZE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2018
(With Comparative Figures as of March 31, 2017)
(Amounts in Philippine Pesos)
1. GENERAL INFORMATION
1.1
Corporate Information
Sun Pharma Philippines, Inc. (the Company) was incorporated and registered with the
Philippine Securities and Exchange Commission on December 8, 2011 primarily to
engage in the business of marketing and distribution on wholesale of pharmaceutical,
cosmetics and chemical products.
The Company is a wholly owned subsidiary of Sun Pharma Global FZE (the Parent
Company), a free zone limited liability establishment incorporated in Sharjah Airport
International Free Zone, Sharjah, United Arab Emirates (U.A.E.) pursuant to Emiri
Decree no. 2 of 1995 and in accordance with the implementation procedures of the free
zone establishment that is engaged in sourcing pharmaceutical formulations and active
pharmaceutical ingredients mainly manufactured by Sun Pharmaceutical Industries
Limited – India, the Ultimate Parent Company, and supplying to the overseas related
parties. The Ultimate Parent Company is involved with manufacturing operations that are
focused on producing generics, branded generics, speciality, over-the-counter products,
anti-retrovirals, Active Pharmaceutical Ingredients and intermediates in the full range of
dosage forms, including tablets, capsules, injectables, ointments, creams and liquids.
The registered office of the Company, which is also its principal place of business, is
located at Unit 604, Liberty Center Building, 104 H.V. Dela Costa Street, Salcedo Village,
Makati City. The registered office of the Parent Company is located at Executive Suite
Y-43, P.O. Box 122304, Sharjah, U.A.E., while the Ultimate Parent Company is located at
Sun House CTS No. 201 B/1, Western Express Highway, Goregaon, Mumbai 400063.
1.2
Status of Operations
The Company generated net losses from its operations amounting to P50.0 million and
P91.3 million in 2018 and 2017, respectively. As a result, the Company continues to
report substantial deficit of P364.9 million and P314.9 million as at March 31, 2018 and
2017, respectively. This condition indicates the existence of an uncertainty that may cast
significant doubt on the Company’s ability to continue as a going concern. In response to
this matter, the Company’s management continues to strengthen the strategy to expand its
market in order for the Company to increase its sales and eventually generate profit
through continuous intensive marketing of its products. Operating losses of the
Company manifested a significant decrease from P60.1 million in 2017 to P7.6 million in
2018. Management believes that the Company will be able to recover from losses in the
next succeeding years and that the Company remains to have a strong financial condition
since it is part of a group of companies. Accordingly, the financial statements have been
prepared assuming that the Company will continue as a going concern. The financial
statements do not include any adjustments to reflect possible future effects on the
recoverability and classification of assets or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
1.3
Approval of Financial Statements
The financial statements of the Company as at and for the fiscal year March 31, 2018
(including the comparative financial statements as at and for the year ended
March 31, 2017) were authorized for issue by the Company’s Board of Directors (BOD)
on June 18, 2018.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies that have been used in the preparation of these
financial statements are summarized below and in the succeeding pages. These policies
have been consistently applied to all the years presented, unless otherwise stated.
2.1
Basis of Preparation of Financial Statements
(a) Statement of Compliance with Philippine Financial Reporting Standards
The financial statements of the Company have been prepared in accordance with
Philippine Financial Reporting Standards (PFRS). PFRS are adopted by the
Financial Reporting Standards Council (FRSC) from the pronouncements issued
by the International Accounting Standards Board, and approved by the Philippine
Board of Accountancy.
The financial statements have been prepared using the measurement bases specified
by PFRS for each type of asset, liability, income and expense. The measurement
bases are more fully described in the accounting policies that follow.
(b) Restatements of Previously Issued 2017 Financial Statements
In 2018, the Company’s management performed a review of its prior year financial
statements to verify that the recognition and measurement of the Company’s assets,
liabilities, revenues and expenses are in accordance with the relevant accounting and
financial reporting standards. Accordingly, the Company’s management has made
certain prior period adjustments to correct the 2017 balances. The Company’s
management also made reclassifications on certain asset, equity, revenue and
expense accounts to conform with the current year presentation. The balances in
the statement of financial position, statement of comprehensive income, statement
of changes in capital deficiency and statement of cash flow of the Company have
been restated from the amounts previously reported as of and for the fiscal year
ended March 31, 2017.
The effect of the restatements in the statement of financial position as at
March 31, 2017 are summarized as follows:
Adjustments Due To
As Previously
Reported Error Reclassification As Restated
Changes in assets:
Trade and other receivables P 37,131,385 - P 5,389,008 P 42,520,393
Other current assets 69,653,631 - ( 5,974,736) 63,678,895
Deferred tax assets 19,891,562 943,389 - 20,834,951
Other non-current assets - - 585,728 585,728
P 943,389 P -
Changes in capital deficiency
‒
Deficit (P 315,858,824) P 943,389 P - (P 314,915,435)
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The effect of the restatements in the statement of income for the year ended
March 31, 2017 are summarized as follows:
Adjustments Due To
As Previously
Reported Error Reclassification As Restated
Changes in income (expenses):
Other charges – net P 59,133 - (P 50,232,121) (P 50,172,988)
Other comprehensive income (loss) ( 50,232,121) - 50,232,121 -
Tax income 18,015,411 943,389 - 18,958,800
Effect on total comprehensive loss P 943,389 P -
The effect of the restatements in the statement of cash flow for the year ended
March 31, 2017 pertains only to the reclassification of the foreign exchange gain or
loss amounting to P50.2 million from the other comprehensive income section to
profit or loss section of the statement of comprehensive income.
(c) Presentation of Financial Statements
The financial statements are presented in accordance with Philippine Accounting
Standard (PAS) 1, Presentation of Financial Statements. The Company presents all items
of income and expense and other comprehensive income or loss in a single
statement of comprehensive income.
The Company presents a third statement of financial position as at the beginning of
the preceding period when it applies an accounting policy retrospectively, or makes
a retrospective restatement or reclassification of items that has a material effect on
the information in the statement of financial position at the beginning of the
preceding period. The related notes to the third statement of financial position are
not required to be disclosed.
(d) Functional and Presentation Currency
These financial statements are presented in Philippine pesos, the Company’s
functional and presentation currency, and all values represent absolute amounts
except when otherwise indicated.
Items included in the financial statements of the Company are measured using its
functional currency, the currency of the primary economic environment in which
the Company operates.
2.2
Adoption of New and Amended PFRS
(a) Effective in Fiscal Year 2018 that are Relevant to the Company
The Company adopted for the first time the following amendments to PFRS,
which are mandatorily effective for annual periods beginning on or after
April 1, 2017:
PAS 7 (Amendments) : Statement of Cash Flows –
Disclosure Initiative
PAS 12 (Amendments) : Income Taxes – Recognition of Deferred
Tax Assets for Unrealized Losses
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Discussed below are the relevant information about the amendments.
(i) PAS 7 (Amendments), Statement of Cash Flows – Disclosure Initiative.
The amendments are designed to improve the quality of information
provided to users of financial statements about changes in an entity’s debt
and related cash flows (and non-cash changes). They require an entity to
provide disclosures that enable users to evaluate changes in liabilities arising
from financing activities. An entity applies its judgment when determining
the exact form and content of the disclosures needed to satisfy this
requirement. Moreover, they suggest a number of specific disclosures that
may be necessary in order to satisfy the above requirement, including:
(a) changes in liabilities arising from financing activities caused by changes in
financing cash flows, foreign exchange rates or fair values, or obtaining or
losing control of subsidiaries or other businesses; and, (b) a reconciliation of
the opening and closing balances of liabilities arising from financing activities
in the statement of financial position including those changes identified
immediately above.
Management has applied these amendments in the current year and has not
disclosed comparative figures as allowed by the transitional provisions.
A reconciliation between the opening and closing balances of liabilities
arising from financing activities, which includes both cash and non-cash
changes are presented in Note 14.2.
(ii) PAS 12 (Amendments), Income Taxes – Recognition of Deferred Tax Assets for
Unrealized Losses. The focus of the amendments is to clarify how to account
for deferred tax assets related to debt instruments measured at fair value,
particularly where changes in the market interest rate decrease the fair value
of a debt instrument below cost. The amendments provide guidance in the
following areas where diversity in practice previously existed: (a) existence of
a deductible temporary difference; (b) recovering an asset for more than its
carrying amount; (c) probable future taxable profit against which deductible
temporary differences are assessed for utilization; and, (d) combined versus
separate assessment of deferred tax asset recognition for each deductible
temporary difference. The application of this amendment has no impact on
the Company’s financial statements.
(b) Effective in Fiscal Year 2018 that is not Relevant to the Company
Annual improvements to PFRS (2014-2016 Cycle) – PFRS 12, Disclosure of Interest in
Other Entities, is effective for periods beginning on or after April 1, 2017 but is not
relevant to the Company.
- 5 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(c) Effective Subsequent to Fiscal Year 2018 but not Adopted Early
There are new PFRS, amendments, interpretations, and annual improvements to
existing standards effective for annual periods subsequent to fiscal year 2018, which
are adopted by the FRSC. Management will adopt the following relevant
pronouncements in accordance with their transitional provisions; and, unless
otherwise stated, none of these are expected to have significant impact on the
Company’s financial statements:
(i) PFRS 9 (2014), Financial Instruments (effective from January 1, 2018). This new
standard on financial instruments will replace PAS 39, Financial Instruments:
Recognition and Measurement and PFRS 9 (2009, 2010 and 2013 versions). This
standard contains, among others, the following:
• three principal classification categories for financial assets based on the
business model on how an entity is managing its financial instruments;
• an expected credit loss model (ECL) in determining impairment of all
financial assets that are not measured at fair value through profit or loss
(FVTPL), which generally depends on whether there has been a
significant increase in credit risk since initial recognition of a financial
asset; and,
• a new model on hedge accounting that provides significant
improvements principally by aligning hedge accounting more closely
with the risk management activities undertaken by entities when
hedging their financial and non-financial risk exposures.
In accordance with the financial asset classification principle of PFRS 9 (2014),
a financial asset is classified and measured at amortized cost if the asset is held
within a business model whose objective is to hold financial assets in order to
collect the contractual cash flows that represent solely payments of principal
and interest (SPPI) on the principal outstanding. Moreover, a financial asset is
classified and subsequently measured at fair value through other
comprehensive income if it meets the SPPI criterion and is held in a business
model whose objective is achieved by both collecting contractual cash flows
and selling the financial assets. All other financial assets are measured at
FVTPL.
In addition, PFRS 9 (2014) allows entities to make an irrevocable election to
present subsequent changes in the fair value of an equity instrument that is not
held for trading in other comprehensive income.
The accounting for embedded derivatives in host contracts that are financial
assets is simplified by removing the requirement to consider whether or not
they are closely related, and, in most arrangements, does not require separation
from the host contract.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
For liabilities, the standard retains most of the PAS 39 requirements which
include amortized cost accounting for most financial liabilities, with
bifurcation of embedded derivatives. The amendment also requires changes in
the fair value of an entity’s own debt instruments caused by changes in its own
credit quality to be recognized in other comprehensive income rather than in
profit or loss.
Based on an assessment of the Company’s financial assets and liabilities as at
March 31, 2018, which has been limited to the facts and circumstances
existing at that date, management has identified the following areas that are
expected to be most impacted by the application of PFRS (2014):
•
On classification and measurement of the Company’s financial assets,
management holds most financial assets to collect the associated cash
flows; hence, management anticipates that the Company’s trade and
other receivables and other financial assets will continue to be
accounted for at amortized cost.
•
The Company will apply a simplified model of recognizing lifetime
ECL as its financial assets do not have a significant financing
component.
•
The Company’s financial liabilities are measured at amortized
cost. Upon application of PFRS 9 (2014), management has assessed
that the amortized cost classification for most of the financial liabilities
will be retained.
(ii) PFRS 15, Revenue from Contract with Customers (effective from January 1, 2018).
This standard will replace PAS 18, Revenue, and PAS 11, Construction Contracts,
the related Interpretations on revenue recognition: International Financial
Reporting Interpretations Committee (IFRIC) 13, Customer Loyalty Programmes,
IFRIC 15, Agreement for the Construction of Real Estate, IFRIC 18, Transfers of
Assets from Customers and Standing Interpretations Committee 31, Revenue –
Barter Transactions Involving Advertising Services. This new standard establishes a
comprehensive framework for determining when to recognize revenue and
how much revenue to recognize. The core principle in the said framework is
for an entity to recognize revenue to depict the transfer of promised goods or
services to the customer in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services.
Based on an assessment and comprehensive study of the Company’s revenue
stream as of March 31, 2018, which has been limited to the facts and
circumstances existing at that date, management determined that its significant
source of revenues pertains to sales of pharmaceutical products which shall be
recognized when the risks and rewards of ownership of the goods have passed
to the buyer; or when the customer has acknowledged receipt of
pharmaceutical products which shall be recognized when the risks and
rewards of ownership of the goods have been passed to the buyer or when the
customer has acknowledged the receipt of goods. The management has
initially assessed that PFRS 15 has no material impact on its financial
statements.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(iii) IFRIC 22, Foreign Currency Transactions and Advance Consideration - Interpretation on
Foreign Currency Transactions and Advance Consideration (effective from January 1,
2018). The interpretation provides more detailed guidance on how to account
for transactions that include the receipt or payment of advance consideration
in a foreign currency. The Interpretation states that the date of the
transaction, for the purpose of determining the exchange rate, is the date of
initial recognition of the non-monetary asset (arising from advance payment)
or liability (arising from advance receipt). If there are multiple payments or
receipts in advance, a date of transaction is established for each payment or
receipt. Management has initially assessed that this amendment has no
material impact on the Company’s financial statements.
(iv) PFRS 9 (Amendment), Financial Instruments – Prepayment Features with Negative
Compensation (effective from January 1, 2019). The amendment clarifies that
prepayment features with negative compensation attached to financial
instruments may still qualify under the SPPI test. As such, the financial assets
containing prepayment features with negative compensation may still be
classified at amortized cost or at fair value through other comprehensive
income. Management has initially assessed that this amendment has no
material impact on the Company’s financial statements.
(v) PFRS 16, Leases (effective from January 1, 2019). The new standard will
eventually replace PAS 17, Leases.
For lessees, it requires to account for leases “on-balance sheet” by
recognizing a “right-of-use” asset and a lease liability. The lease liability is
initially measured as the present value of future lease payments. For this
purpose, lease payments include fixed, non-cancellable payments for lease
elements, amounts due under residual value guarantees, certain types of
contingent payments and amounts due during optional periods to the extent
that extension is reasonably certain. In subsequent periods, the
“right-of-use” asset is accounted for similar to a purchased asset subject to
depreciation or amortization. The lease liability is accounted for similar to a
financial liability which is amortized using the effective interest method.
However, the new standard provides important reliefs or exemptions for
short-term leases and leases of low value assets. If these exemptions are
used, the accounting is similar to operating lease accounting under PAS 17
where lease payments are recognized as expenses on a straight-line basis
over the lease term or another systematic basis (if more representative of the
pattern of the lessee’s benefit).
For lessors, lease accounting is similar to PAS 17’s. In particular, the
distinction between finance and operating leases is retained. The definitions
of each type of lease, and the supporting indicators of a finance lease, are
substantially the same as PAS 17’s. The basic accounting mechanics are also
similar, but with some different or more explicit guidance in few areas. These
include variable payments, sub-leases, lease modifications, the treatment of
initial direct costs and lessor disclosures.
Management has initially assessed that the Company’s adoption of PFRS 16
would likely to result in recognition of asset and corresponding lease liability
in its statement of financial position to account for its long-term lease in
accordance with this new standard.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(vi) IFRIC 23, Uncertainty over Income Tax Treatments (effective from January 1,
2019). The interpretation provides clarification on the determination of
taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates
when there is uncertainty over income tax treatments. The core principle of
the interpretation requires the Company to consider the probability of the tax
treatment being accepted by the taxation authority. When it is probable that
the tax treatment will be accepted, the determination of the taxable profit, tax
bases, unused tax losses, unused tax credits, and tax rates shall be on the basis
of the accepted tax treatment. Otherwise, the Company has to use the most
likely amount or the expected value, depending on the surrounding
circumstances, in determining the tax accounts identified immediately above.
Management has initially assessed that this amendment has no material impact
on the Company’s financial statements.
(vii) Annual Improvements to PFRS 2015-2017 Cycle. Among the improvements,
PAS 12 (Amendments), Income taxes – Tax Consequences of Dividends, is
considered relevant to the Company but has no material impact on the
Company’s financial statements as this amendment merely clarifies existing
requirements. It clarifies that all income tax consequence of dividend
payments should be recognized in profit or loss.
2.3
Financial Assets
Financial assets are recognized when the Company becomes a party to the contractual
terms of the financial instrument. For purposes of classifying financial assets, an
instrument is considered as an equity instrument if it is non-derivative and meets the
definition of equity for the issuer in accordance with the criteria of PAS 32, Financial
Instruments: Disclosure and Presentation. All other non-derivative financial instruments are
treated as debt instruments.
Financial assets other than those designated and effective as hedging instruments are
classified into the following categories: financial assets at FVTPL, loans and receivables,
held-to-maturity investments and available-for-sale financial assets. Financial assets are
assigned to the different categories by management on initial recognition, depending on
the purpose for which the investments were acquired.
Regular purchases and sales of financial assets are recognized on their trade date. All
financial assets that are not classified as at FVTPL are initially recognized at fair value plus
any directly attributable transaction costs. Financial assets carried at FVTPL are initially
recorded at fair value and transaction costs related to it are recognized at profit or loss.
All of the Company’s financial assets are currently categorized as loans and receivables.
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They arise when the Company provides
money, goods or services directly to a debtor with no intention of trading the receivables.
They are included in current assets, except for maturities greater than 12 months after the
end of reporting period which are classified as non-current assets.
The Company’s financial assets categorized as loans and receivables are presented as
Cash, Trade and Other Receivables - Net and Refundable deposits (presented as part of
Other Non-current Assets) in the statement of financial position. Cash is defined as cash
on hand and demand deposits which are subject to insignificant risk of changes in value.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Loans and receivables are subsequently measured at amortized cost using the effective
interest method, less impairment loss, if any.
Impairment loss is provided when there is objective evidence that the Company will not
be able to collect all amounts due to it in accordance with the original terms of the
receivables. The amount of the impairment loss is determined as the difference between
the assets’ carrying amount and the present value of estimated future cash flows
(excluding future credit losses that have not been incurred), discounted at the financial
asset’s original effective interest rate or current interest rate determined under the contract
if the loan has a variable interest rate.
The carrying amount of the asset shall be reduced either directly or through the use of an
allowance account. The amount of the loss shall be recognized in profit or loss.
If in a subsequent period, the amount of the impairment loss decreases and the decrease
can be related objectively to an event occurring after the impairment was recognized (such
as an improvement in the debtor’s credit rating), the previously recognized impairment
loss is reversed by adjusting the allowance account. The reversal shall not result in a
carrying amount of the financial asset that exceeds what the amortized cost would have
been had the impairment not been recognized at the date of the impairment is reversed.
The amount of the reversal is recognized in the profit or loss.
All income and expenses, including impairment losses, relating to financial assets that are
recognized in profit or loss, are presented in the statement of comprehensive income as
part of Other Charges – net account.
Non-compounding interest and other cash flows resulting from holding financial assets
are recognized in profit or loss when earned, regardless of how the related carrying
amount of financial assets is measured.
The financial assets (or where applicable, a part of a financial asset or part of a group of
financial assets) are derecognized when the contractual rights to receive cash flows from
the financial instruments expire, or when the financial assets and all substantial risks and
rewards of ownership have been transferred to another party. If the Company neither
transfers nor retains substantially all the risks and rewards of ownership and continues to
control the transferred asset, the Company recognizes its retained interest in the asset and
an associated liability for amounts it may have to pay. If the Company retains
substantially all the risks and rewards of ownership of a transferred financial asset, the
Company continues to recognize the financial asset and also recognizes a collateralized
borrowing for the proceeds received.
2.4
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined
using the first-in, first-out method. The costs of inventories include all costs directly
attributable to acquisitions, such as the purchase price, import duties and other taxes that
are not subsequently recoverable from taxing authorities. Net realizable value is the
estimated selling price in the ordinary course of business, less the estimated costs of
completion and the estimated costs necessary to make the sale. Net realizable value of
raw materials is the current replacement cost.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
2.5
Intangible Assets
Intangible assets pertain to computer software, which are presented as part of Other
Non-current Assets account in the statement of financial position. Acquired computer
software are capitalized on the basis of the costs incurred to acquire and install the
specific software. These costs are amortized on a straight-line basis over the expected
useful life of three to seven years. Costs associated with maintaining computer software
are expensed as incurred.
When an intangible asset is disposed of, the gain or loss on disposal is determined as the
difference between the proceeds and the carrying amount of the asset and is recognized in
profit or loss.
2.6
Other Assets
Other assets pertain to other resources controlled by the Company as a result of past
events. They are recognized in the financial statements when it is probable that the future
economic benefits will flow to the Company and the asset has a cost or value that can be
measured reliably.
Other recognized assets of similar nature, where future economic benefits are expected to
flow to the Company beyond one year after the end of the reporting period or in the
normal operating cycle of the business, if longer, are classified as non-current assets.
2.7
Property and Equipment
All property and equipment are stated at cost less accumulated depreciation, and
impairment in value, if any.
The cost of an asset comprises its purchase price and directly attributable costs of
bringing the asset to working condition for its intended use. Expenditures for additions,
major improvements and renewals are capitalized while expenditures for repairs and
maintenance are charged to expense as incurred.
Depreciation is computed on the straight-line basis over the estimated useful lives of the
assets as follows:
Vehicles 3 - 15 years
Furniture and fixtures 2 - 17 years
Office equipment 2 - 21 years
The residual values, estimated useful lives and method of depreciation of property and
equipment are reviewed, and adjusted if appropriate, at the end of each reporting period.
Fully depreciated and amortized assets are retained in the accounts until these are no
longer in use and no further charge for depreciation and amortization is made in respect
of those assets.
An asset’s carrying amount is written down immediately to its recoverable amount if the
asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.13).
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
An item of property and equipment, including the related accumulated depreciation,
accumulated amortization and any impairment losses, is derecognized upon disposal or
when no future economic benefits are expected to arise from the continued use of the
asset. Any gain or loss arising on derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the item) is included in
profit or loss in the year the item is derecognized.
2.8
Financial Liabilities
Financial liabilities, which include Trade and Other Payables (except tax-related liabilities),
and Advances from Parent Company are recognized when the Company becomes a party
to the contractual terms of the instrument.
Advances from Parent Company are availed to finance working capital requirements of
the Company during the start of Company’s operations.
Trade and other payables are recognized initially at their fair value and subsequently
measured at amortized cost, using effective interest method for maturities beyond one
year, less settlement payments.
Financial liabilities are classified as current liabilities if payment is due to be settled within
one year or less after the end of the reporting period (or in the normal operating cycle of
the business, if longer), or the Company does not have an unconditional right to defer
settlement of the liability for at least 12 months after the end of the reporting period.
Otherwise, these are presented as non-current liabilities.
Financial liabilities are derecognized from the statement of financial position only when
the obligations are extinguished either through discharge, cancellation or expiration. The
difference between the carrying amount of the financial liability derecognized and the
consideration paid or payable is recognized in profit or loss.
2.9
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the resulting net amount, considered
as a single financial asset or financial liability, is reported in the statement of financial
position when the Company currently has legally enforceable right to set-off the
recognized amounts and there is an intention to settle on a net basis, or realize the asset
and settle the liability simultaneously. The right of set-off must be available at the end of
the reporting period, that is, it is not contingent on future event. It must also be
enforceable in the normal course of business, in the event of default, and in the event of
insolvency or bankruptcy; and, must be legally enforceable for both entity and all
counterparties to the financial instruments.
2.10
Provisions and Contingencies
Provisions are recognized when present obligations will probably lead to an outflow of
economic resources and they can be estimated reliably even if the timing or amount of the
outflow may still be uncertain. A present obligation arises from the presence of a legal or
constructive commitment that has resulted from past events.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Provisions are measured at the estimated expenditure required to settle the present
obligation, based on the most reliable evidence available at the end of the reporting period,
including the risks and uncertainties associated with the present obligation. Where there
are a number of similar obligations, the likelihood that an outflow will be required in
settlement is determined by considering the class of obligations as a whole. When time
value of money is material, long-term provisions are discounted to their present values
using a pretax rate that reflects market assessments and the risks specific to the obligation.
Provisions are reviewed at the end of each reporting period and adjusted to reflect the
current best estimate.
In those cases where the possible outflow of economic resource as a result of present
obligations is considered improbable or remote, or the amount to be provided for cannot
be measured reliably, no liability is recognized in the financial statements. Similarly,
possible inflows of economic benefits to the Company that do not yet meet the recognition
criteria of an asset are considered contingent assets, hence, are not recognized in the
financial statements. On the other hand, any reimbursement that the Company can be
virtually certain to collect from a third party with respect to the obligation is recognized as
a separate asset not exceeding the amount of the related provision.
2.11
Revenue and Expense Recognition
Revenue comprises revenue from sale of goods and rendering of services measured by
reference to the fair value of consideration received or receivable by the Company for
goods sold and services rendered, excluding value-added tax (VAT) and trade discounts.
Revenue is recognized to the extent that the revenue can be reliably measured; it is
probable that the economic benefits will flow to the Company; and, the costs incurred or
to be incurred can be measured reliably.
In addition, the following specific recognition criteria presented below must also be met
before revenue is recognized:
(a)
Sale of Goods – Revenue is recognized when the risks and rewards of ownership of
the goods have passed to the buyer which is generally when the customer has
acknowledged delivery of goods.
(b)
Interest Income − Revenue is recognized as the interest accrues, taking into account
the effective yield of the asset.
Costs and expenses are recognized in profit or loss upon utilization of goods or services
or at the date they are incurred. All finance costs are reported in profit or loss on an
accrual basis.
2.12 Leases – Company as Lessee
Leases which do not transfer to the Company substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Operating lease payments (net of
any incentive received from the lessor) are recognized as expense in profit or loss on a
straight-line basis over the lease term. Associated costs, such as repairs and maintenance
and insurance, are expensed as incurred.
The Company determines whether an arrangement is, or contains, a lease based on the
substance of the arrangement. It makes an assessment of whether the fulfilment of the
arrangement is dependent on the use of a specific asset or assets and the arrangement
conveys a right to use the asset.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
2.12
Foreign Currency Transactions and Translation
The accounting records of the Company are maintained in Philippine pesos. Foreign
currency transactions during the year are translated into the functional currency at
exchange rates which approximate those prevailing on transaction dates.
Foreign currency gains and losses resulting from the settlement of such transactions and
from the translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognized in profit or loss.
2.13
Impairment of Non-financial Assets
The Company’s property and equipment and other non-financial assets are subject to
impairment testing. All individual assets are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable.
For purposes of assessing impairment, assets are grouped at the lowest levels for which
there are separately identifiable cash flows (cash-generating units). As a result, some
assets are tested for impairment either individually or at the cash-generating unit level.
Impairment loss is recognized for the amount by which the asset’s or cash-generating
unit’s carrying amount exceeds its recoverable amounts which is the higher of its fair
value less costs to sell and its value in use. In determining value in use, management
estimates the expected future cash flows from each cash-generating unit and determines
the suitable interest rate in order to calculate the present value of those cash flows. The
data used for impairment testing procedures are directly linked to the Company’s latest
approved budget, adjusted as necessary to exclude the effects of asset enhancements.
Discount factors are determined individually for each cash-generating unit and reflect
management’s assessment of respective risk profiles, such as market and asset-specific risk
factors.
All assets are subsequently reassessed for indications that an impairment loss previously
recognized may no longer exist. An impairment loss is reversed if the asset’s or cash
generating unit’s recoverable amount exceeds its carrying amount.
2.14
Employee Benefits
The Company provides post-employment benefits to employees through a defined
benefit plan and other employee benefits which are recognized as follows:
(a) Post-employment Defined Benefit Plan
A defined benefit plan is a post-employment plan that defines an amount of
Post-employment benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and salary. The
legal obligation for any benefits from this kind of post-employment plan remains
with the Company, even if plan assets for funding the defined benefit plan have
been acquired. Plan assets may include assets specifically designated to a
long-term benefit fund, as well as qualifying insurance policies. The Company has
not yet established a formal retirement plan.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The liability recognized in the statement of financial position for the defined benefit
post-employment plan is the present value of the defined benefit obligation. As of
March 31, 2018, the Company has not yet engaged the services of an independent
actuary, however, the Company computed retirement benefit obligation based on
the provisions of Republic Act (RA) No. 7641, The Retirement Pay Law, which covers
all regular full-time employees for the fiscal year ended 2018.
(b) Post-employment Defined Contribution Plan
A defined contribution plan is a post-employment plan under which the Company
pays fixed contributions into an independent entity. The Company has no legal or
constructive obligations to pay further contributions after payment of the fixed
contribution. The contributions recognized in respect of defined contribution
plans are expensed as they fall due. Liabilities and assets may be recognized if
underpayment or prepayment has occurred and are included in current liabilities
or current assets as they are normally of a short-term nature.
(c) Bonuses
The Company recognizes a liability and an expense for accrual of bonuses. The
Company recognizes a provision where it is contractually obliged to pay the
benefits.
(d) Termination Benefits
Termination benefits are payable when employment is terminated by the Company
before the normal retirement date, or whenever an employee accepts voluntary
redundancy in exchange for these benefits. The Company recognizes termination
benefits at the earlier of when it can no longer withdraw the offer of such benefits
and when it recognizes costs for a restructuring that is within the scope of PAS 37,
Provisions, Contingent Liabilities and Contingent Assets, and involves the payment of
termination benefits. In the case of an offer made to encourage voluntary
redundancy, the termination benefits are measured based on the number of
employees expected to accept the offer. Benefits falling due more than 12 months
after the reporting period are discounted to their present value.
2.15
Income Taxes
Tax expense recognized in profit or loss comprises the sum of deferred tax and current
tax not recognized in other comprehensive income or directly in equity, if any.
Current tax assets or liabilities comprise those claims from, or obligations to, fiscal
authorities relating to the current or prior reporting period, that are uncollected or
unpaid at the end of the reporting period. They are calculated according to the tax rates
and tax laws applicable to the fiscal periods to which they relate, based on the taxable
profit for the year. All changes to current tax assets or liabilities are recognized as a
component of tax expense in profit or loss.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Deferred tax is accounted for using the liability method on temporary differences at the
end of the reporting period between the tax base of assets and liabilities and their carrying
amounts for financial reporting purposes. Under the liability method, with certain
exceptions, deferred tax liabilities are recognized for all taxable temporary differences and
deferred tax assets are recognized for all deductible temporary differences and the
carryforward of unused tax losses and unused tax credits to the extent that it is probable
that taxable profit will be available against which the deductible temporary differences can
be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting
period and are recognized to the extent that it has become probable that future taxable
profit will be available to allow such deferred tax assets to be recovered.
Deferred tax assets and deferred tax liabilities are measured at the tax rates that are
expected to apply to the period when the asset is realized or the liability is settled
provided such tax rates have been enacted or substantively enacted at the end of the
reporting period.
The carrying amount of deferred tax assets is reviewed at the end of each reporting
period and reduced to the extent that it is probable that sufficient taxable profit will be
available to allow all or part of the deferred tax asset to be utilized.
The measurement of deferred tax assets and deferred tax liabilities reflects the tax
consequences that would follow from the manner in which the Company expects, at the
end of the reporting period, to recover or settle the carrying amount of its assets and
liabilities.
Most changes in deferred tax assets or liabilities are recognized as a component of tax
expense in profit or loss, except to the extent that it relates to items recognized in other
comprehensive income or directly in equity. In this case, the tax is also recognized in
other comprehensive income or directly in equity, respectively.
Deferred tax assets and deferred tax liabilities are offset if the Company has a legally
enforceable right to set-off current tax assets against current tax liabilities and the
deferred taxes relate to the same entity and the same taxation authority.
2.16
Related Party Transactions and Relationships
Related party transactions are transfer of resources, services or obligations between the
Company and its related parties, regardless whether a price is charged.
Parties are considered to be related if one party has the ability to control the other party
or exercise significant influence over the other party in making financial and operating
decisions. These parties include: (a) individuals owning, directly or indirectly through one
or more intermediaries, control or are controlled by, or under common control with the
Company; (b) associates; and, (c) individuals owning, directly or indirectly, an interest in
the voting power of the Company that gives them significant influence over the Company
and close members of the family of any such individual.
In considering each possible related party relationship, attention is directed to the
substance of the relationship and not merely on the legal form.
- 16 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
2.17
Capital Deficiency
Capital stock represents the nominal value of shares that have been issued.
Deficit represent all current and prior period results of operations as reported in the profit
or loss section of statement of comprehensive income.
2.18
Events After the End of the Reporting Period
Any post-year-end event that provides additional information about the Company’s
financial position at the end of the reporting period (adjusting event) is reflected in the
financial statements. Post-year-end events that are not adjusting events, if any, are
disclosed when material to the financial statements.
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The Company’s financial statements prepared in accordance with PFRS require
management to make judgments and estimates that affect amounts reported in the
financial statements and related notes. Judgments and estimates are continually evaluated
and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under circumstances. Actual results may
ultimately differ from these estimates.
3.1 Critical Management Judgments in Applying Accounting Policies
In the process of applying the Company’s accounting policies, management has made the
following judgments, apart from those involving estimation, which have the most
significant effect on the amounts recognized in the financial statements:
(a) Distinction Between Operating and Finance Leases
The Company has entered into various lease agreements. Critical judgment was
exercised by management to distinguish each lease agreement as either an operating
or finance lease by looking at the transfer or retention of significant risk and rewards
of ownership of the properties covered by the agreements. Failure to make the
right judgment will result in either overstatement or understatement of assets and
liabilities. Based on management’s judgment, such leases were determined to be
operating leases.
(b) Recognition of Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and
contingencies. Policies on recognition of provisions and contingencies are
discussed in Note 2.10 and disclosures on relevant provisions and contingencies
are presented in Note 16.
3.2 Key Sources of Estimation Uncertainty
Discussed in the succeeding pages are the key assumptions concerning the future and
other key sources of estimation uncertainty at the end of the reporting period that have a
significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next reporting period.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(a) Impairment of Trade and Other Receivables and Refundable Deposit
Adequate amount of allowance is made for specific and groups of accounts,
where objective evidence of impairment exists. The Company evaluates these
accounts based on available facts and circumstances, including, but not limited to,
the length of the Company’s relationship with its counterparties, their current
credit status based on known market forces, average age of accounts, collection
experience and historical loss experience. The methodology and assumptions
used in estimating future cash flows are reviewed regularly by the Company to
reduce any differences between loss estimates and actual loss experience.
The carrying value of trade and other receivables and the analysis of allowance for
impairment on such financial assets are shown in Note 5.
(b) Determination of Net Realizable Value of Inventories
In determining the net realizable value of inventories, management takes into account
past experience and other factors affecting the net realizable value of inventory items.
Future realization of the carrying amounts of inventories as presented in Note 6 is
evaluated on a continuous basis throughout the year. Both aspects are considered key
sources of estimation uncertainty and may cause significant adjustments to the
Company’s inventories within the next reporting period.
(c) Determination of Realizable Amount of Deferred Tax Assets
The Company reviews its deferred tax assets at the end of each reporting period and
reduces the carrying amount to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred tax asset to be
utilized. Management assessed that the deferred tax assets recognized as at
March 31, 2018 will not be fully utilized in the subsequent reporting periods.
Accordingly, prior and current deferred tax assets were derecognized and not
recognized, respectively. The carrying value of deferred tax assets derecognized as at
the said date is disclosed in Note 13.
(d) Impairment of Non-financial Assets
In assessing impairment, management estimates the recoverable amount of each asset
or a cash-generating unit based on expected future cash flows and uses an interest rate
to calculate the present value of those cash flows. Estimation uncertainty relates to
assumptions about future operating results and the determination of a suitable discount
rate (see Note 2.13). Though management believes that the assumptions used in the
estimation of fair values reflected in the financial statements are appropriate and
reasonable, significant changes in these assumptions may materially affect the
assessment of recoverable values and any resulting impairment loss could have a
material adverse effect on the results of operations.
No impairment losses are necessary to be recognized in 2018 and 2017 on the
Company’s property and equipment, and other non-financial assets based on the
management’s assessment.
- 18 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(e) Estimation of Useful Lives of Property and Equipment
The Company estimates the useful lives of property and equipment based on the
period over which the assets are expected to be available for use. The estimated
useful lives of property and equipment are reviewed periodically and are updated if
expectations differ from previous estimates due to physical wear and tear,
technical or commercial obsolescence and legal or other limits on the use of the
assets.
The carrying amounts of property and equipment are analyzed in Note 8. Based
on management’s assessment as at March 31, 2018 and 2017, there is no change in
estimated useful lives of those assets during those years. Actual results, however,
may vary due to changes in estimates brought about by changes in factors
mentioned above.
(f) Valuation of Post-employment Benefit
A defined benefit plan is a post-employment plan that defines an amount of
post-employment benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and salary.
In determining the post-employment obligation, management makes an estimate
of salary increases, determine the appropriate discount rate to use in the present
value calculation, and the number of employees expected to leave before they
receive the benefits.
As at March 31, 2018, the Company does not have a formal post-employment
benefit plan; however, it computes post-employment benefit obligation based on the
provisions of R.A. No. 7641 which covers all regular full-time employees.
Management believes that the obligation computed under R.A. No. 7641 will not
materially differ had it been actuarially determined.
4. CASH
The breakdown of this account as of March 31 follows:
2018 2017
Cash in bank P 10,390,877 P 15,900,568
Cash on hand 487,950 17,210
P 10,878,827 P 15,917,778
Cash in bank generally earn interest based on daily bank deposit rates. Interest earned
from cash in banks is reported as Interest income under Other Charges – Net in the
statement of comprehensive income (see Note 11).
- 19 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
5. TRADE AND OTHER RECEIVABLES
This account is composed of the following:
2017
[As restated
2018 see Note 2.1(b)]
Trade receivables P 82,093,008 P 38,070,244
Advances to suppliers 1,247,555 1,812,418
Advances to employees 1,099,568 3,576,590
84,440,131 43,459,252
Allowance for impairment ( 1,289,369 ) ( 938,859 )
P 83,150,762 P 42,520,393
All of the Company’s trade and other receivables have been reviewed for indicators of
impairment. The net carrying value of trade and other receivables is considered a
reasonable approximation of fair value. Trade receivables have contractual terms of
30 days and do not bear any interest.
A reconciliation of the allowance for impairment at the beginning and end of 2018 and
2017 is shown below.
Note 2018 2017
Balance at beginning of year P 938,859 P -
Impairment losses 10 355,010 938,859
Receivable write-off ( 4,500 ) -
Balance at end of year P 1,289,369 P 938,859
6. INVENTORIES
The details of inventories as at March 31 are as follows:
2018 2017
Finished goods:
At cost P 81,221,865 P 47,708,628
At net realizable value
Cost 2,758,454 2,699,931
Allowance for impairment ( 2,533,954 ) ( 1,337,178 )
224,500 1,362,753
P 81,446,365 P 49,071,381
- 20 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Movements in allowance for inventory obsolescence consist of:
Note 2018 2017
Balance at beginning of year P 1,337,178 P -
Losses on
inventory obsolescence 10 6,670,062 8,829,967
Inventory write-off ( 5,473,286 ) ( 7,492,789 )
Balance at end of year P 2,533,954 P 1,337,178
Losses on inventory obsolescence are included as part of Operating Expenses in the
statement of comprehensive income (see Note 10).
7. OTHER CURRENT ASSETS
This account is composed of the following:
2017
[As restated
Note 2018 see Note 2.1 (b)]
Input VAT 21.1(b) P 2,096,854 P 61,935,488
Creditable withholding tax 1,073,470 1,743,407
Prepaid expenses 928,365 -
Computer software – net 216,667 -
P 4,315,356 P 63,678,895
Prepaid expenses include prepayments for advertising, insurance, and supplies availed of
by the Company.
Movements of computer software as of March 31, 2018 (nil 2017) are shown below.
Note
Balance at beginning of year P -
Additions 232,143
Amortization during the year 10 ( 15,476 )
Balance at end of year P 216,667
- 21 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
8. PROPERTY AND EQUIPMENT
The gross carrying amounts and the accumulated depreciation of property and equipment
at the beginning and end of 2018 and 2017 are shown below.
Furniture and Office
Vehicles Fixtures Equipment Total
March 31, 2018
Cost P 20,528,372 P 2,337,912 P 2,627,997 P 25,494,281
Accumulated
depreciation ( 15,601,160 ) ( 1,678,597 ) ( 1,447,693 ) ( 18,727,450 )
Net carrying amount P 4,927,212 P 659,315 P 1,180,304 P 6,766,831
March 31, 2017
Cost P 22,576,230 P 2,289,340 P 2,470,765 P 27,336,335
Accumulated
depreciation ( 15,113,335 ) ( 1,291,333 ) ( 1,131,394) ( 17,536,062 )
Net carrying amount P 7,462,895 P 998,007 P 1,339,371 P 9,800,273
April 1, 2017
Cost P 22,095,334 P 2,289,340 P 2,162,292 P 26,546,966
Accumulated
depreciation ( 10,630,149 ) ( 893,132 ) ( 813,038 ) ( 12,336,319 )
Net carrying amount P 11,465,185 P 1,396,208 P 1,349,254 P 14,210,647
A reconciliation of the carrying amounts of property and equipment at the beginning and end
of 2018 and 2017 is shown below.
Furniture and Office
Vehicles Fixtures Equipment Total
Balance at
April 1, 2017
net of accumulated
depreciation P 7,462,895 P 998,007 P 1,339,371 P 9,800,273
Additions 1,552,699 48,572 157,232 1,758,503
Depreciation
charges for the year ( 4,088,382 ) ( 387,264 ) ( 316,299 ) ( 4,791,945 )
Balance at
March 31, 2018
net of accumulated
depreciation P 4,927,212 P 659,315 P 1,180,304 P 6,766,831
Balance at
April 1, 2016
net of accumulated
depreciation P 11,465,185 P 1,396,208 P 1,349,254 P 14,210,647
Additions 480,896 - 308,473 789,369
Depreciation
charges for the year ( 4,483,186 ) ( 398,201 ) ( 318,356 ) ( 5,199,743 )
Balance at
March 31, 2017
net of accumulated
depreciation P 7,462,895 P 998,007 P 1,339,371 P 9,800,273
- 22 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The amount of depreciation charges in 2018 and 2017 is presented as part of
Depreciation under Selling and Administrative Expenses in the statement of
comprehensive income (see Note 10).
The Company recognized a gain on disposal of various capital assets totaling P0.3 million
in 2018 which is presented as Gain on disposal of assets under Other Charges – Net in
the 2018 statement of comprehensive income (see Note 11). No similar transaction
occurred in 2017.
As at March 31, 2018 and 2017, the gross carrying amount of the Company’s fully
depreciated property and equipment that are still used in operation is P0.4 million and
P0.2 million, respectively.
9. TRADE AND OTHER PAYABLES
This account consists of:
Notes 2018 2017
Trade payables:
Related party 14.1 P 169,157,890 P 99,276,563
Third parties - 10,081,824
Salaries & wages payable 689,179 563,843
Withholding tax 682,253 782,004
Output VAT - net - 52,799,230
Others 21.1(h) 13,646,165 -
P 184,175,487 P 163,503,464
Others include obligations arising from various expenses incurred by the Company and
accrual for the penalties [see Note 21.1(h)].
10. OPERATING EXPENSES BY NATURE
The Company’s operating expenses are as follows:
Notes 2018 2017
Purchases used P 141,769,719 P 116,697,048
Selling and distribution 62,544,969 47,927,413
Salaries and employee benefits 12, 14 35,574,628 34,036,530
Change in inventories ( 32,374,983 ) 8,117,768
Loss on inventory
obsolescence 6 6,670,062 8,829,967
Transportation and travel 6,612,741 7,832,853
Depreciation and amortization 7, 8 4,807,421 5,199,743
Penalties 21.1(h) 3,590,037 -
Professional fees 3,313,907 1,780,392
Taxes and licenses 21.1(f) 3,143,423 1,302,980
Insurance 2,135,228 1,295,416
Rentals 16 2,125,887 2,105,284
Repairs and maintenance 1,705,014 1,614,434
Communications 1,547,606 1,892,352
Utilities 583,967 385,927
Office supplies 440,108 406,861
Impairment loss
accounts receivable 5 355,010 938,859
Others 2,463,647 2,510,408
P 247,008,391 P 242,874,235
- 23 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Others include bank charges, registration fees, and other miscellaneous expenses.
These expenses are classified in the statement of comprehensive income as follows:
2018 2017
Cost of goods sold P 109,394,736 P 124,814,816
Selling and administrative expenses 137,613,655 118,059,419
P 247,008,391 P 242,874,235
11. OTHER CHARGES – Net
This account consists of:
2017
[As restated
Notes 2018 see Note 2.1 (b)]
Other income:
Gain on disposal of assets 8 P 345,946 P -
Interest income 4 43,137 38,035
Others 77,107 21,098
466,190 59,133
Other charges –
Foreign exchange loss ( 19,387,257) ( 50,232,121)
( P 18,921,067) ( P 50,172,988)
12. EMPLOYEE BENEFITS
12.1
Salaries and Employee Benefits Expense
Expenses recognized for salaries and employee benefits are presented below.
Notes 2018 2017
Short-term employee benefits P 34,719,058 P 34,036,530
Post-employment defined
benefit 12.2 855,570 -
10 P 35,574,628 P 34,036,530
12.2
Post-employment Defined Benefit
The Company has no formal post-employment benefit plan and has not engaged any
actuary to determine the post-employment benefit obligation. RA No. 7641 has been
applied by the Company in computing the post-employment obligation for qualified
employees.
- 24 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
In 2018, the Company recorded post-employment benefit expense that is presented as
part of Salaries and employee benefits under Selling and Administrative Expenses in the
2018 statement of comprehensive income. As of March 31, 2018, retirement liability
amounting to P0.9 million is presented as Retirement Benefit Obligation in the 2018
statement of financial position. No similar transaction has transpired in 2017.
13. TAXES
13.1
Current and Deferred Taxes
The components of tax expense (income) as reported in profit or loss follow:
2017
[As restated
2018 see Note 2.1(b)]
Current tax expense:
Minimum corporate income
tax (MCIT) at 2% P 2,608,110 P 1,160,161
Final tax at 20% 8,627 -
2,616,737 1,160,161
Deferred tax expense (income)
relating to origination
and reversal of temporary
differences 20,834,951 ( 20,118,961 )
P 23,451,688 ( P 18,958,800 )
A reconciliation of tax on pretax loss computed at the applicable statutory tax rates to
tax expense reported in profit or loss follows:
2017
[As restated
2018 see Note 2.1(b)]
Tax on pretax loss at 30% (P 7,965,690) ( P 33,073,637 )
Adjustment for income
subjected to final tax ( 4,314 ) ( 11,410 )
Tax effects of:
Derecognized 2017 deferred tax assets 20,834,951 -
Non-deductible expenses 5,719,951 14,126,247
Unrecognized deferred tax assets on:
MCIT 2,608,110 -
Temporary differences 2,258,680 -
P 23,451,688 ( P 18,958,800 )
- 25 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The deferred tax asset relates to the following as of March 31:
Statements of Statements of
Financial Position Comprehensive Income
2018 2017 2018 2017
Net operating loss
carryover (NOLCO) P - P 18,275,989 P 18,275,989 ( P 18,275,989 )
MCIT 1,876,151 1,876,151 ( 1,160,161 )
Allowance for inventory
obsolescence - 401,153 401,153 ( 401,153 )
Allowance for doubtful
accounts - 281,658 281,658 ( 281,658 )
Deferred tax asset P - P 20,834,951
Deferred tax expense (income) P 20,834,951 ( P 20,118,961 )
As of March 31, 2018, the Company derecognized previously recognized deferred tax
asset totaling to P20.8 million arising from temporary differences incurred in previous
years and no longer recognized deferred tax assets for the current year, as management
assessed that the Company may not be able to utilize the deferred tax assets within the
prescribed period of availment of its tax benefit.
Presented below are the total unrecognized deferred tax assets as of March 31, 2018.
Amount Tax Effect
NOLCO P 157,002,877 P 47,100,863
MCIT 4,484,261 4,484,261
Allowance for inventory
obsolescence 2,533,954 760,186
Allowance for doubtful
accounts 1,289,369 386,811
Retirement benefit obligation 855,570 256,671
P 166,166,031 P 52,988,792
The Company is subject to the MCIT which is computed at 2% of gross income, as
defined under the tax regulations or regular corporate income tax (RCIT), whichever is
higher. The MCIT may be claimed as tax credit against the Company’s future income tax
payable within three years from the year it was incurred. The Company reported MCIT as
it is higher than the RCIT both in 2018 and 2017. Details of the Company’s MCIT which
can be applied as a deduction against future taxable income are as follows:
Year Valid
Incurred Amount Until
2018 P 2,608,110 2021
2017 1,160,161 2020
2016 715,990 2019
P 4,484,261
- 26 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The Company is in a tax loss position both in 2018 and 2017. Details of the NOLCO of
the Company, which can be claimed as deductions from future taxable income within
three years from the year NOLCO was incurred, are as follows:
Year Valid
Incurred Amount Until
2018 P 5,126,078 2021
2017 60,919,964 2020
2016 90,956,835 2019
P 157,002,877
In 2018 and 2017, the Company opted to continue claiming itemized deductions.
14. RELATED PARTY TRANSACTIONS
The Company’s related parties include the Parent Company, Ultimate Parent Company,
entities under common ownership, stockholders and the Company’s key management
personnel.
The summary of the Company’s transactions and outstanding balances with its related
parties are as follows:
2018 2017
Amount of Outstanding Amount of Outstanding
Related Party Notes Transaction Balance Transaction Balance
Ultimate parent company –
Purchase of inventories 9, 14.1 (P 69,881,327) (P 169,157,890) (P 82,103,778 ) (P 99,276,563)
Parent company–
Advances from parent 14.2 ( 13,650,364) ( 358,818,334) ( 43,442,100 ) ( 345,167,970)
Key Management Personnel –
Compensation 12.1, 14.3 11,676,843 ( 822,557) 9,480,682 -
None of the Company’s outstanding receivables from related parties has indications of
impairment; hence, no impairment loss was recognized in 2018 and 2017.
14.1
Purchase of Inventories
The Company purchases from its Ultimate Parent Company inventories sold to its
distributors and product samples distributed to sales representatives as part of the
Company’s marketing and promotional activities. The related outstanding payables are
presented as Trade payables under Trade and Other Payables account in the statement of
financial position (see Note 9). The payables are generally unsecured, noninterest-bearing,
and payable in cash within three months.
14.2
Advances from Parent Company
The Company obtains advances from parent company that are unsecured,
noninterest-bearing and payable on demand or through offsetting arrangements. The
advances were used as working capital requirements of the Company.
- 27 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The analysis of advances from stockholders, shown as Advances from Parent Company in
the statement of financial position, is shown below.
2018 2017
Balance at beginning of year P 345,167,970 P 301,725,870
Cash flows from a non-financing activity –
Unrealized foreign exchange loss 13,650,364 43,442,100
Balance at end of year P 358,818,334 P 345,167,970
The advances are presented as Advances from Parent Company under Non-current assets
in the statement of financial position.
14.3
Key Management Personnel Compensation
The details of the compensation of key management personnel are summarized below.
2018 2017
Short-term employee benefits P 10,854,286 P 9,480,682
Post-employment defined
benefit 822,557 -
P 11,676,843 P 9,480,682
Key management compensation are included in Salaries and employee benefits under
Selling and Administrative Expenses in the statements of comprehensive income
(see Notes 10 and 12.1). Post-employment defined benefit obligation remained
outstanding as of March 31, 2018 (nil as of March 31, 2017) and is presented as part of
Retirement Benefit Obligation in the 2018 statement of financial position.
15. CAPITAL STOCK
The Company’s authorized capital stock is P10.0 million divided by 100,000 shares at
P100 par value per share. Its subscribed and outstanding capital stock as of
March 31, 2018 and 2017 amounted to P8.7 million divided into 86,534 shares at P100
par value per share.
As at March 31, 2018 and 2017, the Company has only one stockholder owning
100 or more shares of the Company’s capital stock.
- 28 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
16. COMMITMENTS AND CONTINGENCIES
16.1
Operating Lease Commitment – Company as Lessee
The Company is a lessee under non-cancellable operating lease agreements covering the
offices of the Company. The leases have terms two years, with renewal options, and
include average annual escalation rate of 5%. The future minimum lease payments under
these non-cancellable operating leases are as follows as at March 31:
2018 2017
Within one year P 2,195,104 P 2,090,584
More than one year 2,345,987 2,275,401
P 4,541,091 P 4,365,985
The total rentals from these operating leases amounted to P2.1 million both in 2018 and
2017 and are presented as part of Rentals under Selling and Administrative Expenses account
in the statement of comprehensive income (see Note 10).
Refundable deposit related to these lease commitments amounted to P1.0 million and
P0.6 million as at March 31, 2018 and 2017, respectively, and is presented as Other
Non-current Assets account in the statement of financial position.
16.2
Others
There are other commitments and contingent liabilities that arise in the normal course of
the Company’s operations which are not reflected in the financial statements.
Management believes that losses, if any, that may arise from these contingencies will not
have any material effect on the financial statements.
17. RISK MANAGEMENT OBJECTIVES AND POLICIES
The Company is exposed to a variety of financial risks in relation to financial instruments.
The main types of risks are interest rate risk, credit risk and liquidity risk.
The Company’s risk management is coordinated with its Parent Company, in close
cooperation with the Company’s BOD, and focuses on securing the Company’s short to
medium-term cash flows by minimizing the exposure to financial markets.
The Company does not engage in the trading of financial assets for speculative purposes
nor does it write options. The relevant financial risks to which the Company is exposed
to are described below and in the succeeding pages.
17.1
Interest Rate Risk
As at March 31, 2018 and 2017, the Company has limited exposure to changes in
market interest rates through its cash. This financial instrument has shown small or
measured changes in interest rates. All other financial assets have fixed rates.
17.2
Foreign Currency Risk
Most of the Company’s transactions are carried out in Philippine pesos, its functional
currency. Exposures to currency exchange rates arise from the Company’s overseas
advances and purchases, which are primarily denominated in U.S. dollars.
- 29 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
To mitigate the Company’s exposure to foreign currency risk, non-Philippine peso
cash flows are monitored.
Foreign currency-denominated financial liabilities, translated from U.S. Dollars into
Philippine pesos at the closing rate follow:
2018 2017
Short-term exposure –
Trade and other payables P 169,157,890 P 99,276,563
Long-term exposure –
Advances from parent company 358,818,334 345,167,970
P 527,976,224 P 444,444,533
The following table illustrates the sensitivity of the Company’s loss before tax with
respect to changes in Philippine peso against U.S. exchange rate. The percentage
changes in rates have been determined based on the average market volatility in
exchange rates, using standard deviation, in the previous 12 months at a 99%
confidence level.
2018 2017
Effect in Effect in
Reasonably Effect in capital Reasonably Effect in capital
possible change loss before deficiency possible change loss before deficiency
in rate tax before tax in rate tax before tax
PhP - USD 11.86% (P 62,617,980) ( P 43,832,586) 11.74% (P 52,177,788) (P 36,524,452)
Exposures to foreign exchange rates vary during the year depending on the volume of
foreign currency denominated transactions. Nonetheless, the analysis above is
considered to be representative of the Company’s currency risk.
17.3
Credit Risk
Credit risk is the risk that a counterparty may fail to discharge an obligation to the
Company. The Company is exposed to this risk for various financial instruments arising
from selling goods and services to customers including related parties and placing deposits
with banks.
The maximum credit risk exposure of financial assets is the carrying amount of the
financial assets as shown on the face of the statement of financial position (or in the
detailed analysis provided in the notes to the financial statements), as summarized below:
Notes 2018 2017
Cash 4 P 10,878,827 P 15,917,778
Trade and other receivables 5 83,150,762 42,520,393
Refundable deposits 16.1 1,025,228 585,728
P 95,054,817 P 59,023,899
The above also represents the carrying values of the Company’s financial assets
categorized as loans and receivables.
- 30 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The Company continuously monitors defaults of customers identified individually and
incorporate this information into its credit risk controls. The Company’s policy is to deal
only with creditworthy counterparties.
(a) Cash
The credit risk for cash is considered negligible, since the counterparties are
reputable Companys with high quality external credit ratings. Included in the
cash are cash in Companys which are insured by the Philippine Deposit
Insurance Corporation up to a maximum coverage of P500,000 for every
depositor per Companying institution.
(b) Trade and Other Receivables
In 2018 and 2017, the Company sold goods to a relatively concentrated number of
customers. As at March 31, 2018, 67% of trade receivables is collectible from
RBC-MDC Corporation and 18% is from Southern Philippines Medical Center,
while the rest of the receivables were divided to the remaining customers. As at
March 31, 2017, 56% of trade receivables is collectible from RBC-MDC
Corporation and 18% is from Southern Philippines Medical Center.
Some of the unimpaired trade receivables are past due as at March 31, 2018 and
2017. The trade receivables that are past due but not impaired as at March 31 are as
follows:
2018 2017
More than 30 days but
not more than 60 days P 6,244,368 P 2,407,665
More than 60 days but
not more than 90 days 2,846,217 189,220
More than 90 days but
not more than 120 days 2,712,720 695,397
More than 120 days 7,329,015 1,795,011
P 19,132,320 P 5,087,293
(c) Refundable Deposits
In respect of refundable deposits, the Company is not exposed to any significant
credit risk exposure to any single counterparty or any group of counterparties
having similar characteristics. Based on historical information, management
consider the credit quality of refundable deposits to be good.
None of the financial assets are secured by collateral or other credit enhancements.
17.4
Liquidity Risk
The Company manages its liquidity needs by carefully monitoring cash outflows due in a
day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day
and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term
liquidity needs for a six-month and one-year period are identified monthly.
The Company maintains cash to meet its liquidity requirements for up to 45-day period.
- 31 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
Presented below are the financial liabilities of the Company as of March 31, which have
contractual maturities ranging from within one year to more than one year from the end of the
reporting period. These contractual maturities reflect the gross cash flows, which
approximates the carrying values, of the financial liabilities as at March 31, 2018 and 2017.
2018 2017
Within one year P 183,493,235 P 109,922,229
More than one year 358,818,334 345,167,970
P 542,311,569 P 455,090,199
18. CATEGORIES AND FAIR VALUES OF FINANCIAL ASSETS AND
FINANCIAL LIABILITIES
18.1
Carrying Amounts and Fair Values by Category
The carrying amounts and fair values of the categories of financial assets and financial
liabilities presented in the statements of financial position are shown below.
2018 2017
Notes Carrying Values Fair Values Carrying Values Fair Values
Financial Assets
Loans and receivables:
Cash 4 P 10,878,827 P 10,878,827 P 15,917,778 P 15,917,778
Trade and other receivables 5 83,150,762 83,150,762 42,520,393 42,520,393
Refundable deposits 16.1 1,025,228 1,025,228 585,728 585,728
P 95,054,817 P 95,054,817 P 59,023,899 P 59,023,899
Financial Liabilities
At amortized cost:
Trade and other payables 9 P 183,493,235 P 183,493,235 P 109,922,229 P 109,922,229
Advances from parent company 14 358,818,334 358,818,334 345,167,970 345,167,970
P 542,311,569 P 542,311,569 P 455,090,199 P 455,090,199
See Note 2.3 and 2.8 for a description of the accounting policies for each category of
financial instruments including the determination of fair values. A description of the
Company’s risk management objectives and policies for financial instruments is provided
in Note 17.
18.2
Offsetting of Financial Assets and Financial Liabilities
The Company has not set-off financial instruments in 2018 and 2017 and does not have
relevant offsetting arrangements. Currently, financial assets and financial liabilities are
settled on a gross basis.
19. FAIR VALUE MEASUREMENT AND DISCLOSURES
19.1
Fair Value Hierarchy
In accordance with PFRS 13, Fair Value Measurement, the fair value of financial assets and
financial liabilities and non-financial assets which are measured at fair value on a recurring
or non-recurring basis and those assets and liabilities not measured at fair value but for
which fair value is disclosed in accordance with other relevant PFRS, are categorized into
three levels based on the significance of inputs used to measure the fair value.
- 32 -
FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The fair value hierarchy has the following levels:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities that an entity can access at the measurement date;
• Level 2: inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e., as prices) or indirectly
(i.e., derived from prices); and,
• Level 3: inputs for the asset or liability that are not based on observable market
data (unobservable inputs).
The level within which the asset or liability is classified is determined based on the lowest
level of significant input to the fair value measurement.
For purposes of determining the market value at Level 1, a market is regarded as active if
quoted prices are readily and regularly available from an exchange, dealer, broker, industry
group, pricing service, or regulatory agency, and those prices represent actual and regularly
occurring market transactions on an arm’s length basis.
For investments which do not have quoted market price, the fair value is determined by
using generally acceptable pricing models and valuation techniques or by reference to the
current market of another instrument which is substantially the same after taking into
account the related credit risk of counterparties, or is calculated based on the expected
cash flows of the underlying net asset base of the instrument.
When the Company uses valuation technique, it maximizes the use of observable market
data where it is available and relies as little as possible on entity specific estimates. If all
significant inputs required to determine the fair value of an instrument are observable, the
instrument is included in Level 2. Otherwise, it is included in Level 3.
19.2
Financial Instruments Measurement at Amortized Cost for which Fair
Value is Disclosed
Due to the short-term duration, the carrying values of the Company’s Cash classified as
Level 1, and Trade and Other Receivables, Refundable deposits, Trade and Other Payables,
and Advances from Parent as Level 3, approximate their fair values as at the end of the
reporting period.
20. CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES
The Company’s capital management objectives are to ensure the Company’s ability to
continue as a going concern and to provide an adequate return to shareholders by
pricing products and services commensurate with the level of risk.
The Company monitors capital on the basis of the carrying amount of equity as presented
on the face of the statement of financial position.
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
The Company sets the amount of capital in proportion to its overall financing structure,
i.e., equity and liabilities. The Company manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust the capital
structure, the Company may adjust the amount of dividends paid to shareholders, issue
new shares or sell assets to reduce debt.
The Company’s total capital deficiency as at March 31, 2018 and 2017 amounted to
P356.3 million and P306.3 million, respectively.
21. SUPPLEMENTARY INFORMATION REQUIRED BY THE BUREAU OF
INTERNAL REVENUE (BIR)
21.1
Requirements Under Revenue Regulations (RR) No. 15-2010
The information on taxes, duties and license fees paid or accrued during the taxable year
required under RR No. 15-2010 are presented below and in the succeeding page.
(a) Output VAT
In 2018, the Company declared output VAT as follows:
Output
Tax Base VAT
Sale of goods P 239,377,159 P 28,725,259
Other income 352,006 42,241
Total P 239,729,165 P 28,767,500
Pursuant to Section 108(B), Zero-rated VAT on Sale of Service, and Section 109,
VAT Exempt Transactions, of the National Internal Revenue Code of 1997, the
Company had no zero-rated and VAT exempt sales/receipt for 2018.
(b) Input VAT
The movements in input VAT for the year ended March 31, 2018 are summarized
below.
Balance at beginning of year P 61,935,488
Importation of goods 18,946,597
Purchase of services 2,286,990
Deferred input VAT 554,809
Applied against output VAT ( 81,627,030 )
Balance at end of year P 2,096,854
The net input VAT, amounting to P2.1 million, is presented as Input VAT under
Other Current Assets in the 2018 statement of financial position (see Note 7).
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FOR CLIENT'S APPROVAL:
Signature:_________________
Position:__________________
Date:_____________________
(c) Customs Duties
The Company paid for customs duties amounting to P2.2 million for the importation
of goods for the fiscal year March 31, 2018.
(d) Excise Tax
The Company does not have any transaction which is subject to excise tax.
(e) Documentary Stamp Tax (DST)
The Company did not pay any DST in 2018. However, the Company recorded an
accrual for the DST to be paid amounting to P1.8 million that is presented as part of
Taxes and licenses under Selling and Administrative Expense in the 2018 statement of
comprehensive income [see Note 21.1 (f)].
(f) Taxes and Licenses
The summary of Taxes and licenses, reported under Selling and Administrative
Expenses in the 2018 statement of comprehensive income (see Note 10), is broken
down as follows:
DST P 1,783,593
Municipal licenses and permits 1,349,330
Community tax certificate 10,500
P 3,143,423
(g) Withholding Taxes
The details of total withholding taxes for the year ended March 31, 2017 follow:
Compensation and benefits P 8,354,437
Expanded 779,658
P 9,134,095
(h) Deficiency Tax Assessment and Tax Cases
On August 11, 2017, the Company received a Letter of Assessment from the BIR
but has not been assessed yet during the taxable year 2018. However, the Company
received deficiency tax assessment from the BIR upon application for tax clearance
amounting to P3.6 million which is presented as Penalties under Selling and
Administrative Expenses in the 2018 statement of comprehensive income
(see Note 10). The provision for the penalty is presented as Others under Trade and
Other Payables in the 2018 statement of financial position.
As at March 31, 2018, the Company does not have any final deficiency tax
assessment from the BIR nor does it have cases outstanding or pending in courts or
bodies outside of the BIR in any of the open taxable year.
