Conversion to International Financial Reporting Standards: The RP experience

(Conclusion)

When mining companies entered into these long-dated commodity contracts, they did not anticipate the extent of complexity and effects that PAS 39 would have on these contracts and on the impact on their financial position. Aggravating this is the volatility of commodity prices normally inherent in the selling prices of mining products.The more volatile the spot market prices is, which are in most instances affected by world demand and supply as well as economic and political events, the more uncertain and significant the fluctuations in the fair values of these commodity derivative instruments can be. And the longer the period covered by these derivative contracts, the more pronounced the fair value changes will be given volatile market prices.

It is in this context that a proposal was submitted to the SEC for a transitional relief to be extended to the mining industry with respect to the effects of adopting PAS 39.

Given the significant effects of PAS 39 which could potentially undermine the financial condition of certain mining companies and may therefore be inconsistent with the Philippine government’s overall thrust to help this industry, proposal for relief was worth considering.

In November 2006, the SEC approved the proposed transition relief from PAS 39 covering the hedging contracts of mining companies which were entered into prior to January 1, 2005. Under the approved transitional relief, commodity derivative contracts shall be "grandfathered" and exempted from the fair value requirements of PAS 39, if all of the following conditions are met:

(a) entered into and effective prior to January 1, 2005;

(b) with original maturity of more than one year; and

(c) qualified under PAS 39 hedge accounting rules had this been applied at inception of such contracts.

Insurance and Preneed Industries

The implementation of the reporting standards which affect the insurance industry (IAS 32, IAS 39 and IFRS 4) was postponed to January 1, 2006 giving the industry an additional year to prepare for the expected major changes.

The accounting standards affecting the preneed industry are still under discussion with the SEC. Some accountants believe that education and pension plans are investment contracts where collections from planholders are treated as liabilities and not as income under present practice. The preneed industry is however proposing the status quo on income recognition and reserving for planholder liabilities using discount rates different from what is presently prescribed.Until the issue is resolved, the industry will follow the Preneed Uniform Chart of Accounts as promulgated by the SEC.

Banking Industry

Banks provide for bad debts based on rules prescribed by the BSP including expected losses while IFRS considers the present value of projected cash flows and only incurred losses. Losses from sales of non-performing assets under the SPV law are amortized over a period of time while IFRS would recognize those losses in the year of sale. Investment properties are valued at cost while IFRS allows either cost or fair values.

The Challenge

Despite the foregoing concerns and issues, directors and management of companies should realize that this harmonization of accounting standards through the adoption of IFRS is meant to improve corporate governance and attract more investments in the Philippines.

The challenge is for the Philippine companies to keep up with the continuing changes in the IFRS and for the regulators to institute processes to ensure compliance across industries.

(Roberto G. Manabat is the Chairman and CEO of Manabat Sanagustin & Co., CPAs, a member firm of KPMG International, a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG international or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. For comments and inquiries, please email [email protected] or [email protected])