Agricultural and Rural Development for Catanduanes, Inc. (A Non-Stock, Non Profit Organization)

Transcription

1 Agricultural and Rural Development for Catanduanes, Inc. (A NonStock, Non Profit Organization) NOTES TO FINANCIAL STATEMENTS December 31, 2009 and 2008 Note 1 Organization s Information and Approval of Financial Statements 1.1 Organization s Information Agricultural and Rural Development for Catanduanes, Inc. (the Organization/ARDCI) is a nonstock, notforprofit corporation incorporated under the laws of the Republic of the Philippines. It was registered with the Securities and Exchange Commission on September 11, 1998 with principal office located at Sta. Elena, Virac, Catanduanes. It started its operations on January 1, The Organization was created under the Catanduanes Agricultural Support Programme (CatAg) to implement the microfinance component of the Programme. CatAg has terminated its operations on April The Organization s incorporators and members are farmers and fisher folks who formed the Organization primarily to develop and strengthen the Savings and Loan System (SLS) at the barangay level, and to uplift the living condition of the members by assisting them in the establishment of livelihood facilities, services and enterprises and encouraging them to save to provide for their providential and/or emergency needs. The Organization has fifteen (15) and thirteen (13) branches as of December 31, 2009 and 2008, respectively, in Catanduanes and in the provinces of Albay, Sorsogon and Camarines Norte and has a membership of 24,342 and 14,880 in 2009 and 2008, respectively. Branch 1 was granted authority on October 3, 2002, to operate as Vision Bank, Inc., a microfinanceoriented rural bank subject to the applicable provisions of law and the Bangko Sentral ng PIlipinas rules and regulations. It started its operations on October 8,2002. The Organization subscribed to 200,000 common shares of Vision Bank, Inc. (VBI) amounting to P20,000,000, equivalent to 99% of the authorized capital of VBI and its voting stock. VBI was incorporated in the Philippines pursuant to Republic Act No and to Monetary Board Resolution No. 355 dated March 7, VBI was granted authority on October 3, 2002 to operate as microfinanceoriented rural bank subject to Bangko Sentral ng Pilipinas (BSP) rules and regulations and others applicable laws. The registered head office of the Bank is located at Poblacion Libod, Bato, Catanduanes. The Organization has 144 and 131 employees as of December 31, 2009 and 2008, respectively. 1.2 Approval of Financial Statements The financial statements of the Organization have been approved by the Board of Trustees (BOT) on April 13, 2010 and Mr. Danilo B. Tiburcio, Chief Executive Officer, has been authorized to cause the issuance of the financial statements.

2 Note 2 Summary of Significant Accounting Policies 2.1 Basis of Preparation The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Additionally, the preparation of these financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies of the Organization. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. Basis of measurement These financial statements have been prepared under the historical cost convention. Statement of compliance The financial statements of the Organization have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), Philippine Interpretations Committee (PIC)/Standing Interpretations Committee (SIC)/International Financial Reporting Interpretations Committee (IFRIC) interpretations which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by SEC. These are the Company s first annual PFRS financial statements where PFRS 1, First Time Adoption of PFRS, has been applied. Functional and presentation currency The Organization s financial statements are presented in Philippine peso, its functional and presentation currency. 2.2 Adoption of Philippine Financial Reporting Standards In relation to standards referred to above, the Company has resolved to adopt the following beginning January 1, 2009: PFRS 1, First Time Adoption of PFRS This standard sets out the procedures that an entity must follow when it adopts PFRS for the first time as the basis for preparing its general purpose financial statements. It provides guidance on the accounting policies, reporting periods, recognition, derecognition, reclassification and measurement of assets and liabilities. The standard sets out optional and mandatory exemptions from the general restatement and measurement principles of assets and liabilities. PAS 1, Presentation of Financial Statements This standard provides a framework within which an entity assesses how to present fairly the effects of transactions and other events. It provides the criteria for classifying liabilities as current or noncurrent, prohibits the presentation of items of income and expense as extraordinary items, specifies disclosures about the judgments made by management in applying accounting policies, the key sources of estimation of uncertainty at the balance sheet date that have significant risks. 2

3 Amendments to PAS 1, Presentation of Financial Statements This standard requires disclosures on an entity s objectives, policies and processes for managing capital; quantitative data on what the entity regards as capital; whether the entity has complied with any capital requirements and if it has not, the consequences of such noncompliance. PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors This standard eliminates the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. The standard defines material omissions and misstatements and describes how to apply the concept of materiality when applying accounting policies and correcting errors. PAS 19 Employee Benefits This applies to all employee benefits offered by an employer to employees and their dependents and beneficiaries. This standard applies to employee benefits under: (i) formal plans and agreements between an enterprise and its employees, (ii) national, local, industry or multiemployer plans; and informal practices giving rise to a constructive obligation. This standard also identifies the following categories of employee benefits such as shortterm employee benefits, postemployment benefits, other longterm employee benefits, termination benefits and equity compensation benefits. PFRS 7, Financial Instruments: Disclosures This standard requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. It replaces the disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. This standard resulted to the inclusion of additional disclosures in the financial statements. Amendment to PAS 1, Presentation of Financial Statements Capital Disclosures This amendment requires disclosures about the entity s objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such noncompliance. This amendment resulted to the inclusion of additional disclosures in the financial statements. New accounting standards, interpretations and amendments to existing standards a) New standards, interpretations and amendments effective on or after January 1, 2009 The following amendment, which became effective in 2009 is relevant to the Organization: PAS 1 (Revised 2007), Presentation of Financial Statements The amendment requires information in financial statements to be aggregated on the basis of shared characteristics and introduce a statement of comprehensive income. This enables readers to analyze changes in the Organization s equity resulting from transactions with owners in their capacity as owners (such as dividends and share repurchases) separately from nonowner changes (such as transactions with third parties). 3

4 As a result of the adoption of this amendment, the Organization has elected to present a single statement of comprehensive income. The Organization presented a statement of comprehensive income and comprehensive income was included in the statement of changes in fund balance. The amendment does not affect the recognition or measurement of transactions and balances in the financial statements. The following standards, interpretations and amendments, also effective for the first time from January 1, 2009, have no material impact on the financial statements: Effective on or after January 1, 2009: PAS 23 (Revised), Borrowing Costs PFRS 8, Operating Segments Effective for annual periods on or after June 30, 2009: Amendments to IFRIC 9 and PAS 39,Embedded Derivatives Effective on or after July 1, 2009: Amendments on Cost of an Investment under PFRS 1 and PAS 27 PAS 27 (Revised), Consolidated and Separate Financial Statements Effective for annual periods on or after July 1, 2009: PFRS 1 (Revised), Firsttime Adoption of Philippine Financial Reporting Standards Amendments to PAS 39, Eligible Hedged Items IFRIC 17, Distribution of Noncash Assets to Owners b) New standards, interpretations and amendments not yet effective The following new standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the Organization s future financial statements: Improvements to PFRS 2009 (effective for annual periods beginning on or after January 1, 2010). Improvements to PFRS 2009 are a collection of amendments to PFRS issued by the FRSC which comprise the latest set of annual improvements. The FRSC uses the annual improvements project to make necessary, but nonurgent, amendments to PFRS that will not be included as part of another major project. The 2009 amendments reflects issues that were included in exposure drafts of; (a) proposed amendments to PFRS in October 2007; (b) proposed amendments to PFRS in August 2008; and (c) January The Organization has not yet adopted the following amendments and anticipates that these amendments will have no significant impact on its financial statements: PFRS 8, Operating Segments PAS 1, Presentation of Financial Statements PAS 7, Statement of Cash Flows PAS 17, Leases PAS 18, Revenue PAS 36, Impairment of Assets PAS 39, Financial Instruments: Recognition and Measurement 4

5 2.3 Financial Instruments Initial Recognition Financial assets and financial liabilities are recognized in the statement of financial position when the Organization becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition is done at trade date, which is the date on which the Organization commits to purchase or sell the asset. Financial instruments are recognized initially at fair value plus transaction costs. Classification of financial instruments The Organization classifies its financial assets in the following categories: cash in banks and loans receivable. Financial liabilities are classified as other liabilities. The classification depends on the purpose for which the investments and debt are acquired and incurred, respectively, and whether they are quoted in an active market. Management determines the classification of its financial assets and liabilities at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date. Determination of fair value The fair value for financial instruments traded in active markets is based on their quoted market price or dealer price quotation. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If the financial instruments are not listed in an active market, the fair value is determined using appropriate valuation techniques, which include recent arm s length market transactions, net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Fair value measurement hierarchy The Organization categorizes its financial asset and financial liability based on the lowest level input that is significant to the fair value measurement. The fair value hierarchy has the following levels: 1. Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; 2. 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 3. Level 3 inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). 5

6 2.4 Financial Assets Cash Cash includes cash on hand and in banks and is stated at its face value. Loans and receivables Loans and receivables are nonderivative financial assets with fixed and determinable payments that are not quoted in an active market. Loans and receivables are carried at cost or amortized cost, less impairment in value, if any. Amortization is determined using the effective interest rate (EIR) method. Gains and losses are recognized in the statement of comprehensive income when the loans and receivables are derecognized or impaired, as well as through the amortization process. Unearned discount is recognized as income over the life of the loan using the EIR method. The Organization s loans receivables and other receivables are included in this category. Financial Liabilities Other financial liabilities This classification pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. Included in this category are liabilities arising from operations or borrowings. The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the EIR method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Included in this category are the Organization s deposit liabilities, accounts payable and other accrued expenses, and loans payable. Derecognition of financial assets and liabilities A financial asset or, where applicable, a part of a financial asset or part of a group of similar financial assets is derecognized when (a) the rights to receive cash flows from the asset have expired; (b) the Organization retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a passthrough arrangement; or (c) the Organization has transferred its rights to receive cash flows from the asset and has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Organization has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Organization s continuing involvement in the asset. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of comprehensive income. 6

7 Impairment of financial assets Assessment of impairment The Organization assesses at each reporting date whether a financial asset or group of financial assets is impaired. It assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The determination of impairment losses for financial assets is inherently subjective because it requires material estimates, including the amount and timing of expected recoverable future cash flows. These estimates may change significantly from time to time, depending on available information. Evidence of impairment Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Organization on terms that the Organization would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Impairment of assets carried at amortized cost If there is objective evidence that an impairment loss has been incurred on an asset carried at amortized cost such as loans and receivables, the amount of loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset s original EIR (i.e., the EIR computed at initial recognition). The carrying amount of the asset is reduced either directly or through use of an allowance account. The amount of loss is recognized in the statement of comprehensive income. Impairment of assets carried at cost If there is objective evidence that an impairment loss has been incurred on an asset carried at cost such as an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or of a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Reversal of impairment 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, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the statement of comprehensive income, to the extent that the carrying value of the asset does not exceed its cost or amortized cost at the reversal date. 7

8 Classification of financial instruments between debt and equity Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest relating to a financial instrument, or a component that is a financial liability, is reported as an expense. A financial instrument is classified as debt if it provides for a contractual obligation to: (a) deliver cash or another financial assets to another entity; or (b) exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Organization; or (c) satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. If the Organization does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the statements of condition if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. 2.5 Investments in Subsidiary The Organization carries its investments at cost less any impairment in value. The carrying values of investment are reviewed for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Such impairment loss is measured as the difference between the carrying amount of the investment and the present value of the estimated cash flows discounted at the current market rate of return for similar financial asset. The amount of the impairment loss is recognized in profit or loss. Impairment losses recognized are not reversed. Subsidiary is an entity over which the Organization has the power to govern the financial reporting policies generally accompanying a shareholding of more than one half of the voting rights. The Organization obtains and exercises control through voting rights. The existence and effect of potential voting rights that are currently exercisable and convertible are considered when assessing whether the Organization controls another entity. 2.6 Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization and any impairment losses. The initial cost of property and equipment is comprised of the purchase price and costs directly attributable to bringing the assets to their intended use. Subsequent expenditures incurred after the assets have been put into operation, such as repairs and maintenance are charged to income in the period the costs are incurred. However, expenditures that result in an increase in the future economic benefit in excess of the originally assessed standard of performance of the existing asset are capitalized as an additional cost of property and equipment. When assets are sold or retired, their cost, accumulated depreciation and amortization and accumulated impairment losses are eliminated from the accounts and any resulting gain or loss is included in the statements of activities of such period. 8

9 Depreciation is computed using the straightline method over the estimated useful lives of the properties. The estimated useful lives of the properties are as follows: Building Vehicles, equipment, and furniture 25 years 3 to 5 years The useful lives and depreciation method are reviewed periodically to ensure that they are consistent with the expected pattern of economic benefits from items of property and equipment. 2.7 Impairment of Assets At each reporting date, investment in subsidiary, property and equipment and other noncurrent assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. The excess shall be recognized as impairment loss in the statement of comprehensive income, or a revaluation decrease in case of revalued assets. The recoverable amount is the higher of an asset s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm s length transaction while value in use is the present value of estimated cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cashgenerating unit to which the assets belong. Impairment losses recognized in prior years are reversed when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded as income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 2.8 Payables and Provisions Payables are stated at their nominal value. A provision is recognized when the Organization has a present obligation (legal or constructive) as a result of past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 2.9 Deferred Income on Government Grants Government grants, including nonmonetary grants at fair value, is recognized only when there is reasonable assurance that the Organization will comply with any conditions attached to the grant and the grant will be received. Grants are recognized as income over the period necessary to match them with the related cost, for which they are intended to compensate, on a systematic basis and should not be credited directly to equity Retirement Benefits Cost The Organization accrues the retirement of its employees based on the years of service using their latest compensation rate. The accrual and settlement of retirement benefit costs are based on R.A

10 2.11 Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Organization and the revenue can be reliably measured. The additional specific recognition criteria for each type of revenue are as follows: Interest income derived from loans to Savings Loan Systems (SLS) members and the related assets are accounted for using the accrual method of accounting, where interest income is recognized when it is earned regardless of when collected. Interest expense and related liabilities are likewise recorded using the accrual basis method of accounting, where expenses and related liabilities are recorded when incurred rather than when paid Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as the lease income. Operating lease payments are recognized as an expense in the statement of comprehensive income on a straightline basis over the lease term Related Parties Parties are considered 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. Individuals, associates or companies that directly or indirectly control or are controlled by or under common control are considered related parties Offsetting Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously Events after the Financial Reporting Date Post yearend events up to the date of the auditors report that provide additional information about the Organization s position at financial reporting date (adjusting events) are reflected in the financial statements. Post yearend events that are not adjusting events are disclosed in the notes to the financial statements when material. Note 3 Critical Accounting Estimates and Judgments The Organization makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. 10

11 Judgments a) Determination of functional currency Based on the economic substance of the underlying circumstances relevant to the Organization, the functional currency is determined to be the Philippine peso. It is the currency that mainly influences the sale of services and the cost of providing these services. Estimates and assumptions a) Useful lives of intangible assets and property and equipment Property and equipment are amortized or depreciated over their useful lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the statement of comprehensive income in specific periods. More details including carrying values are included in note 12. b) Fair value of financial instruments The Organization determines the fair value of financial instruments that are not quoted, using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. c) Legal proceedings In accordance with PFRS the Organization recognizes a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Obligations arising in respect of contingent liabilities that have been disclosed, or those which are not currently recognized or disclosed in the financial statements could have a material effect on the Organization's financial position. Application of these accounting principles to legal cases requires the Organization's management to make determinations about various factual and legal matters beyond its control. The Organization reviews outstanding legal cases following developments in the legal proceedings and at each reporting date, in order to assess the need for provisions and disclosures in its financial statements. Among the factors considered in making decisions on provisions are the nature of litigation, claim or assessment, the legal process and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of legal advisers, experience on similar cases and any decision of the Organization's management as to how it will respond to the litigation, claim or assessment. 11

12 Note 4 Financial Risk Management, Objectives and Policies The Organization is exposed to a variety of financial risks arising from its operating, investing and financing activities. The BOT has overall responsibility for the Organization s financial risk management, which includes establishment and approval of risk strategies, policies and limits. The main objective of the financial risk management is to minimize the adverse impact of financial risks on the Organization s financial performance and financial position due to the unpredictability of financial markets. The Organization s principal financial instruments consist of cash in banks, loans and receivables, deposit liabilities, accounts payable and other accrued expenses and loans payable. The main purpose of these financial instruments is to generate income and raise finance for the Organization s operations. The main risks arising from the Organization s use of financial instruments are summarized as follows: a. Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. To mitigate credit risk, the Organization adopted and implemented the poverty assessment tool and the cash flow assessment tool as part of its selection process to measure the capacity of the business to cover the loan payment, the description of the client s business, purpose of loan and the sources of loan payment (primary and secondary). As such, branch and community development officers (CDOs) performance have been strengthened. Implementation of loan tracking mechanism to monitor loan status, portfolio at risk, portfolio quality, repayment performance and history are made to mitigate risk. Furthermore, strict adherence to credit discipline is observed. The Organization recognizes the need to mitigate member s risk exposure in the form of introducing insurance as a form of protection against threat or possibility of loss. The Organization adopts a strong Internal Audit Unit with clear audit plans and procedures to anticipate, detect, and correct deviations from the system and ensure proper compliance with approved policies and procedures. Assurance that cash collection and disbursements are in place to minimize the transaction cost and eliminate unnecessary cost. Regular spot audit of both branches and SLS is done by the Internal Audit Unit to eliminate irregularities that lead to fraud and losses. The Organization consistently reviews its delinquency management and loan recovery policies to support high repayment rates and operational viability. As of December 31, the Organization s maximum exposures to credit risk before collateral held or other credit enhancements are as follows: Cash in banks P17,633,792 P6,377,557 Loans receivable, net 184,181, ,891,902 P201,815,330 P122,269,459 12

13 The aging analysis of financial assets excluding cash in banks is as follows: Total Neither past due nor impaired 30 days 2009 Past due but not impaired days 61 to 90 days > 90 days Impaired Loans receivable P189,339,498 P179,669,683 P717,167 P295,137 P134,303 P3,365,248 P5,157, Loans receivable P121,094,290 P115,590,396 P461,389 P189,876 P86,404 P2,165,031 P2,601,194 b. Market Risk The credit quality of the Organization s financial assets that are neither past due nor impaired is considered to be of good quality and expected to be collectible without incurring any credit losses. Market risk is the risk of loss of future earnings or future cash flows arising from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchanges rates, equity prices and other market changes. The Organization s market risk is manageable within conservative bounds. As of December 31, 2009 and 2008, the Organization has not engaged in trading financial instruments. Interest Rate Risk Interest rate risk is the risk to earnings or capital resulting from adverse movements in the interest rates. The economic perspective of interest rate risk focuses on the value of a bank in the current interest rate environment and the sensitivity of that value to changes in interest rates. To ensure a fair margin of profitability, the Organization keeps a reasonable spread between interest rate on loans and member s savings deposit. Interest rates are reviewed from time to time to anticipate future losses and minimize interest expenses for savings deposit. The following are the maturity profile of interestbearing financial instruments at December 31, 2009 and 2008: 2009 Within 1 year Beyond 1 year Total Cash in banks P17,633,792 P P17,633,792 Loans receivable, net 184,181, ,181,538 Deposit liabilities Loans payable 66,974,344 14,855,681 81,830,025 P328,151,516 P14,855,681 P343,007, Within 1 year Beyond 1 year Total Cash in banks P6,377,557 P P6,377,557 Loans receivable, net 115,891, ,891,902 Deposit liabilities Loans payable 19,539,575 11,541,130 31,080,705 P189,054,886 P11,541,130 P200,596,016 13

14 The interest rates for the interestbearing financial instruments are as follows: Within 1 year 2009 Beyond 1 year Cash in banks % to 5% Loans receivable, net 24% to 34% Deposit liabilities 5% to 7% Loans payable 9.5% to 12% 13% 2008 Cash in banks 0.05% to 5% Loans receivable, net 22% to 32% Deposit liabilities 5% to 7% Loans payable 8% to 12% 13% c. Liquidity Risk Liquidity risk is the inability to meet obligations when they become due because of the inability to liquidate assets or obtain adequate funding. The Organization ensures that sufficient liquid assets are available to meet shortterm funding and regulatory requirements. The Organization s liquidity and cash position are monitored on a daily basis. The Organization maintains sufficient liquidity reserves in the form of highyielding deposits with other banks. The Organization has also obtained sufficient liquidity lines from other banks and nonbank lending institutions that can relieve financial pressures in the event of an extraordinary demand for liquidity. Further, the Organization actively rediscounts loans with the entities that have given the Organization more than sufficient rediscounting lines. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements as of December 31, 2009 and 2008: Nonderivative financial liabilities Total As of December 31, 2009 Less than 3 3 to 12 months months 1 to 5 years Deposit liabilities P59,361,842 P6,648,430 P P52,713,412 Accounts payable and other accrued expenses 16,843,040 6,369,021 10,474,019 Loans payable 81,830,025 4,065,739 37,269,863 40,494,423 P158,034,907 P17,083,190 P47,743,882 P93,207,835 As of December 31, 2008 Deposit liabilities P47,245,852 P4,940,532 P P42,305,320 Accounts payable and other accrued expenses 12,603,042 3,330,471 9,272,571 Loans payable 31,080,705 19,539,575 11,541,130 P90,929,599 P27,810,578 P P63,119,021 14

15 Note 5 Capital Management The primary objective of the Organization s capital management is to ensure the ability of the Organization to have sufficient capital to underpin the Organization s risktaking activities, continue as a going concern and maintain a strong credit rating. The BOT has the overall responsibility for monitoring the Organization s capital structure and making the necessary adjustments to address the risks and adopt to changes in economic conditions and regulatory requirements. The Organization regards the following items as the fund it manages as of December 31, 2009 and 2008: Revolving fund P39,900,788 P40,098,269 Members' equity 33,662,199 22,841,758 P73,562,987 P60,940,027 Note 6 Financial Instruments Classification of Financial Instruments as of December Assets Cash on hand and in banks P17,633,792 P6,377,557 Loans receivable, net 184,181, ,891,902 Total Financial Assets P201,815,330 P122,269,459 Liabilities Deposit liabilities P59,361,842 P47,245,852 Accounts payable and other accrued expenses 16,843,040 12,603,042 Loans payable 81,830,025 31,080,705 Total Financial Liabilities P158,034,907 P90,929,599 Fair Value of Financial Instruments The carrying amounts of cash in banks approximate their fair values due to the relatively shortterm maturities of the financial instruments. The fair value of the Organization s loans and receivables are estimated using the discounted cash flow methodology, using current incremental lending rates for similar types of loans. Where the instrument reprices on a quarterly basis or has relatively short maturity, the carrying amounts approximated fair values. The fair value of the Organization s liabilities are estimated using the discounted cash flow methodology using the Organization s current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued, if any. The carrying amount of deposit liabilities approximates fair value considering that these are due and demandable. 15

16 Note 7 Cash on Hand and in Banks The details of this account are as follows: Cash in banks P17,633,792 P6,377,557 Cash on hand 30,000 30,000 P17,663,792 P6,407,557 Cash in banks generally earn interest at rates based on daily bank deposit rates. Interest earned for 2009 and 2008 amounted to P881,690 and P318,878, respectively (see Note 18). Note 8 Loans Receivable, net The details of this account are as follows: Micro business loan receivable P137,215,561 P79,906,300 Multipurpose loan receivable 49,566,418 36,849,172 Staff loan receivable 2,557,519 1,737,624 Allowance for probable loss (5,157,960) (2,601,194) P184,181,538 P115,891,902 This account represents loans to members who are administered through the Savings and Loan Systems (SLS) established through each of the 15 branches. Each branch has 4050 SLS under its supervision and each SLS consists of 6 Guarantee Groups (GG) with five (5) members each. Through ARDCI s technical and financial assistance, the SLS groups identify, determine and implement financially viable microbusiness to enable the farmers and fisherfolks to save and manage their own resources efficiently, thus, growing into selfsustaining agroentrepreneurs in Catanduanes. Microbusiness loans (MBLs) are intended to increase the income generating projects of the members. They are payable in 12, 24, 37 and 50 equal weekly premiums with interest at 24% per annum on the principal loan amount for branches operating in Catanduanes, and at 34% per annum on the principal loan amount for branches operating outside the province. Multi purpose loans (MPLs) are intended for any emergency needs, house acquisition and/or both improvement, acquisition of assets, hospitalization, etc., of SLS members, payable in 12, 24, 37, and 50 equal weekly premiums with interest at 24% and 34% per annum, on the principal amount in Catanduanes and for branches operating outside the province, respectively. The maximum loanable amount for MBLs and MPLs is P100,000 provided that the member reaches the threeyear membership with consistent quality membership status and taking into consideration the household cash flow of each member. Staff loan receivable is intended for the employees of the Organization, with a maximum repayment term of 24 months and maximum loanable amount depending on the employee s salary grade and the appraised value of collateral acceptable to the Organization, with interest at 15% per annum plus 1% service charge. Interest income earned from loans receivable for the years ended December 31, 2009 and 2008 amounted to P73,069,764 and P55,265,519, respectively. 16

17 The movements in allowance for probable losses are as follows: Beginning balance P2,601,194 P5,901,909 Additional provision 3,317,149 4,571,262 Write off (356,951) (6,801,562) Recovery (403,432) (1,070,415) P5,157,960 P2,601,194 Note 9 Other Receivable, net The details of this account are as follows: Accounts receivable employees, net P4,372,964 P3,128,926 Interest receivable 1,634,202 1,748,171 Other receivable 463,767 1,224,856 P6,470,933 P6,101,953 Accounts receivable from employees represents cash advances for a specified purpose which is liquidated on a timely basis. Interest receivable pertains to accrual of interest from loans receivable. Other receivable represents motorcycle and laptop plans/loans granted to the Organization s employees particularly the Community Development Officers (CDO). This loan is executed under a loan agreement with ARDCI employees. The motorcycles are initially registered under the Organization s name but upon full payment, the Certificate of Registration is transferred to the employees. The maximum term of the loan is up to three (3) years with an interest of 13% in 2009 and Interest income earned from other receivable for the years ended December 31, 2009 and 2008 amounted to P66,141 and P60,632, respectively. (see Note 18) Note 10 Prepayments and Other Current Assets The details of this account are as follows: Prepayments and deposits P2,488,326 P1,500,847 Stationery and supplies on hand 433, ,027 P2,921,459 P1,800,874 Prepayments and deposits pertain to the unused portion of the Organization s fidelity and health insurance for the staff. 17

18 Note 11 Investment in Subsidiary The investment in subsidiary represents 99% investment in the shares of stock of VBI which is accounted for using the cost method. The cost of investment amounts to P20,000,000 as of December 31, 2009 and As of and for the years ended December 31, 2009 and 2008, VBI s key financial data are as follows: Resources P129,734,574 P93,356,332 Liabilities 94,678,327 67,023,259 Capital funds P35,056,247 P26,333,073 Interest and other income P35,487,890 P24,367,346 Expenses 27,417,624 21,957,056 Net income P8,070,266 P2,410,290 Note 12 Property and Equipment, net The details and movements of the Organization s property and equipment are as follows: Building December 31, 2009 Land and land improvements Furniture, fixtures and equipment Total Cost At January 1, 2009 P12,827,276 P700,000 P7,307,307 P20,834,583 Additions 2,279,428 2,279,428 Disposals (1,175,393) (1,175,393) At December 31, ,827, ,000 8,411,342 21,938,618 Accumulated Depreciation At January 1, ,834,975 3,807,781 6,642,756 Provisions 513,090 2,343,174 2,856,264 Disposals (1,175,393) (1,175,393) At December 31, ,348,065 4,975,562 8,323,627 Net Book Value P9,479,211 P700,000 P3,435,780 P13,614,991 18

19 December 31, 2008 Land and land improvements Furniture, fixtures and equipment Building Total Cost At January 1, 2008 P12,827,276 P700,000 P10,250,892 P23,778,168 Additions 1,453,470 1,453,470 Disposals (1,675,121) (1,675,121) Others (2,721,934) (2,721,934) At December 31, ,827, ,000 7,307,307 20,834,583 Accumulated Depreciation At January 1, ,321,885 6,380,124 8,702,009 Provisions 513,090 1,256,394 1,769,484 Disposals (1,002,050) (1,002,050) Others (2,826,687) (2,826,687) At December 31, ,834,975 3,807,781 6,642,756 Net Book Value P9,992,301 P700,000 P3,499,526 P14,191,827 The Organization believes that there is no indication of impairment such that the net carrying amount of the property and equipment is higher than their recoverable amount. Note 13 Deposit Liabilities This account pertains to members contributions in the form of personal or group savings, earning annual interest at 5% computed based on the average daily balance and is withdrawable upon termination of membership from the Organization. Total deposit liabilities amounted to P59,361,842 and P47,245,852 in 2009 and 2008, respectively. Interest expense from member s savings deposit for the years ended December 31, 2009 and 2008 amounted to P2,510,179 and P2,168,327, respectively. Note 14 Accounts Payable and Other Accrued Expenses The details of this account are as follows: Accounts payable P16,214,204 P11,768,720 Accrued and other expense payable 628, ,322 P16,843,040 P12,603,042 Accounts payable includes premiums and membership fees collected by the Organization from members, net of claims, administrative expenses, and refund given to members on behalf of Mutual Benefits Association (MBA). On March 12, 2007, the Insurance Commission (IC) conducted prelicensing onsite evaluation of ARDCI MBA, which found out that the Association had been doing business as a mutual benefit association even without license from the IC. The IC ordered the discontinuance of ARDCI MBA and had been ordered by the IC to take custody and management of MBA s assets. In order to continue the microinsurance program of the Organization, the Organization entered into a contract with Country Bankers Life Insurance Corporation (CIBLIC) on March 26,2007 as its insurer to replace MBA. 19

20 Accrued and other expense payable includes accrual of professional fee and government liabilities. Note 15 Deferred Income from Government Grants In 2003, a building was transferred by CatAg to the Organization through a Deed of Donation and was initially credited to Member s equity account. In 2004, the property amounting to P9,676,639 was reclassified to deferred income on government grants account. When CatAg terminated its operation in April 2003, An asset disposition plan was executed which transfers the asset to the Organization for the purpose of continuing the banking needs for CatAg s target group in Catanduanes. The details and movements of this account are as follows: Net book value, beginning P7,741,159 P8,128,255 Amortization (see Note 18) (387,096) (387,096) Net book value, ending 7,354,063 P7,741,159 Current portion P387,096 P387,096 Non current portion P6,966,997 P7,354,063 The carrying value of the building received as government grant is to be recognized as income for a period of 25 years. Note 16 Loans Payable The details of this account are as follows: Commercial organization P18,104,847 P11,470,310 Other financial institution 63,725,178 19,610,395 P81,830,025 P31,080,705 The following table shows the breakdown of loans payable by contractual maturity dates: Due within one year P66,974,344 P19,539,575 Due beyond 1 year to 5 years 14,855,681 11,541,130 Loans payable to commercial organization represents loans rediscounted with annual interest rates of 9.5% in 2009 and in Loans amounting to P9,694,900 and P11,689,573 as of December 31, 2009 and 2008, respectively, have been pledged as collateral for said obligations. Interest expense on loans payable for the years ended December 31, 2009 and 2008 amounted to P4,076,673 and P2,722,452, respectively. 20