2004 illustrative nfs parent rev 02 05

7/28/2019 2004 Illustrative NFS Parent Rev 02 05

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ABC MANUFACTURING COMPANY(A Wholly Owned Subsidiary of XYZ Holdings Corporation)

NOTES TO FINANCIAL STATEMENTSDECEMBER 31, 2004 AND 2003

1. CORPORATE INFORMATION

The ABC Manufacturing Company (the Company1) wasincorporated in the Philippines, and is a wholly owned subsidiary ofXYZ Holdings Corporation (XYZ)2, a domestic company. TheCompany holds 100% interests in D Company and S Corporation,40% interest in TXT Co, and 50% interest in Extinguishers Limited, ajointly controlled entity3, which are all domestic entities.

The Company is presently engaged in the manufacture anddistribution of electronic components, the manufacture andinstallation of insulation products, and the manufacture and sale ofready-to-wear clothes.

The registered office4of the Company and XYZ5 is located at 123Maganda Street, Future Village, Makati City.

The Company operates within the Philippines and had 1,734 and1,543 employees and officers as of December 31, 2004 and 2003,respectively.

The financial statements of the Company for the years endedDecember 31, 2004 and 2003 were authorized for issue by the Boardof Directors on March 31, 2005.6

1 Or ABC, however, the term chosen should be used consistently within the notes tofinancial statements.

2The name of the parent company and the ultimate parent company of the group shouldbe disclosed.

3 Related party relationships where control exists should be disclosed irrespective ofwhether there have been transactions between the related parties.

4Or principal place of business, if different from the registered address.

5Disclosure of the registered office of the ultimate parent is only required if the Companydoes not present consolidated financial statements.

6Refer to AAR 04-03 for discussion on the relationship of the date of clients authorizationfor the issuance of the financial statements and the date of the auditors report thereon.


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The Company does not present consolidated financial statements asit is a wholly owned subsidiary of XYZ7.

7

Under SFAS 27/IAS 27, a parent company that does not present consolidated financialstatements should disclose the reason for such together with the manner of accountingfor investment in its subsidiaries.


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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation of Financial Statements

The financial statements have been prepared in accordance withgenerally accepted accounting principles in the Philippines.

The financial statements have been prepared on a historical costbasis, except for the measurement at market value of marketableequity securities.

The accounting policies have been consistently applied by theCompany and are consistent with those used in the previous year,except for the adoption of new accounting standards as statedbelow.

Adoption of New Accounting Standards

In 2004 and 2003, the Company adopted the following Statements ofFinancial Accounting Standards (SFAS)/International AccountingStandards (IAS) issued by the Accounting Standards Council(ASC) which became effective on January 1, 2004 and 2003,respectively, that are relevant to the Company:

2004SFAS 12/IAS 12 : Income TaxesSFAS 17/IAS 17 : Leases

2003SFAS 8A : Deferral of Foreign ExchangeDifferences

SFAS 10/IAS 10 : Events After the Balance SheetDateSFAS 37/IAS 37 : Provisions, Contingent Liabilitiesand

Contingent AssetsSFAS 38/IAS 38 : Intangible Assets

The effects of the Companys adoption in 2004 of SFAS 12/IAS 12

and SFAS 17/IAS 17 and in 2003 of SFAS 8A and SFAS 38/IAS 38 arediscussed in Note 3. Adoption of other new accounting standards didnot result in material adjustments to the financial statements of thecurrent and prior years.

Certain accounts in the 2003 financial statements have beenreclassified to conform to the 2004 presentation and classification.8

88 The nature, amount of, and reason for, any reclassification of comparative amountsshould be disclosed. When it is impracticable to reclassify comparative amounts, thereason for not reclassifying and the nature of the changes that would have been made ifamounts were reclassified.


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Impact of New and Revised Accounting Standards EffectiveSubsequent to 20049

In 2004, the ASC issued a series of new accounting standards thatare adopted from existing IAS, revised IAS and new InternationalFinancial Reporting Standards (IFRSs) issued by the InternationalAccounting Standards Board (IASB). The new ASC accountingstandards are effective in the Philippines for financial statementscovering periods beginning on or after January 1, 2005. Also, theASC re-named its accounting standards to correspond better with theIASB pronouncements. Philippine Accounting Standards (PASs)correspond to the adopted IASs, while Philippine Financial ReportingStandards (PFRSs) correspond to the adopted IFRSs. ExistingSFASs and SFASs/IASs not yet superseded will be reissued by theASC as PASs.

The new ASC pronouncements that are effective in 2005 are the

following: (Alternatively, the NFS may mention only thosethat are relevant to the Company; in this case, the sentencewill be: Of the new ASC pronouncements, the followingstandards are relevant to the Company. Then the list belowshall show only those relevant standards that will be appliedby the Company starting 2005.)

PAS 1 : Presentation of Financial StatementsPAS 2 : InventoriesPAS 8 : Accounting Policies, Changes in Accounting

Estimates and Errors

PAS 10 : Events after the Balance Sheet DatePAS 16 : Property, Plant and EquipmentPAS 17 : LeasesPAS 19 : Employee BenefitsPAS 21 : The Effects of Changes in Foreign ExchangeRatesPAS 24 : Related Party DisclosuresPAS 27 : Consolidated and Separate FinancialStatementsPAS 28 : Investments in AssociatesPAS 29 : Financial Reporting in Hyperinflationary

EconomiesPAS 30 : Disclosures in the Financial Statements of Banks and

Similar InstitutionsPAS 31 : Interests in Joint VenturesPAS 32 Financial Instruments: Disclosures andPresentation

9When any of the new accounting standards is applied early (i.e., before January 1, 2005),that fact should be disclosed, together with the other information required under thespecific standard.


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PAS 33 : Earnings per SharePAS 36 : Impairment of AssetsPAS 38 : Intangible AssetsPAS 39 Financial Instruments: Recognition andMeasurementPAS 40 : Investment PropertyPAS 41 : AgriculturePFRS 1 : First-time Adoption of PFRSPFRS 2 : Share-based PaymentPFRS 3 : Business CombinationsPFRS 4 : Insurance ContractsPFRS 5 : Non-current Assets Held for Sale andDiscontinued Operations


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The Company will apply the relevant new accounting standards in2005 in accordance with their transitional provisions. It is currentlyevaluating the impact of those standards on its financial statementsand has initially determined that the following new standards mayhave significant effects on the financial statements for 2005, as wellas for prior and future periods: (Include here brief discussionson the relevant standards that are expected to have materialeffects on the Companys FS, using the format of thesamples given below. The samples below should bereworded to consider the specific circumstances of theclient.)

PAS 19, Employee Benefits. This new accounting standard

prescribes the accounting and disclosure by employers foremployee benefits. Employee benefits are all forms ofconsideration given by an entity in exchange for service

rendered by employees. These benefits include short-termbenefits (such as short-term compensated absences and profitsharing and bonus plans), post-employment benefits (such aspension plans), other long-term benefits (such as long-serviceleave or sabbatical leave) and termination benefits. Presently,the Company provides short-term benefits to its employeesand recognizes employee benefits on its defined benefitspension plan. The Companys application of PAS 19 mayincrease the employee benefits that it will recognize asexpense starting 2005.

PAS 21, The Effects of Changes in Foreign Exchange Rates.PAS 21 requires the recognition of foreign exchangedifferences as income or expense in the period in which theyarise. Capitalization of foreign currency differences is nolonger allowed even under severe currency devaluation. As ofDecember 31, 2004, the remaining undepreciated balance(P1.0 million) of the foreign exchange losses capitalized in prioryears as part of the carrying value of certain importedmachinery will be written off in 2005. (If applicable, i.e., inthe case of a subsidiary or branch of a foreign companythat is qualified to use a functional currency other than

the peso, add the following: The standard alsoreplaced the notion of reporting currency with thenotions of functional currency and presentationcurrency. Functional currency is the currency of theprimary economic environment in which the entityoperates; presentation currency is the currency inwhich the financial statements are presented. TheCompanys functional currency is the U.S. dollar and itwill present its financial statements for future years inU.S. dollars after the necessary approval for the use of


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the functional currency is obtained from theappropriate government agencies.

PAS 32, Financial Instruments: Disclosures and Presentation.PAS 32 prescribes the requirements for the presentation offinancial instruments and identifies information that should be

disclosed about them. The presentation requirements apply tothe classification of financial instruments, from the perspectiveof the issuer, into financial assets, financial liabilities andequity instruments, as well as the classification of the relatedincome and expense items. The required disclosures includeinformation that affect the amount, timing and certainty offuture cash flows relating to the financial instruments, theaccounting policies applied to those instruments and the risksassociated with them and managements policies forcontrolling those risks. The standard also requires andprovides guidance on the separation of the liability and equity

components of a compound financial instrument.


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PAS 39, Financial Instruments: Recognition and Measurement.

This new standard prescribes the principles for recognizing,measuring and disclosing information about financialinstruments in the financial statements of companies. It

requires initial recognition of a financial asset or liability at fairvalue, which is normally the transaction price (i.e., the fairvalue of the consideration given or received). Subsequentmeasurement is at fair value, amortized cost using theeffective interest method, or cost depending on theclassification of the financial asset or liability. Recognition ofgains or losses mainly from changes in the fair values,amortization, impairment and derecognition also depends onthe classification of the financial instruments. The initialadoption by the Company of PAS 39 in 2005 may give rise torecognition of previously unrecognized assets and liabilities,

the derecognition of previously recognized assets and liabilitiesand recognition of gains or losses from fair value changes thatmay have material impact on its financial statements.

PAS 40, Investment Property. This new standard prescribes

the accounting treatment for investment property and relateddisclosure requirements. Investment property is property(generally land or a building or part of a building) held to earnrentals or for capital appreciation, rather than for use inproduction or supply of goods or services or for administrativepurposes, or sale in the ordinary course of business.

Investment property is initially recognized at cost. Formeasurement after initial recognition, an entity shall choose asits accounting policy either the fair value model or the costmodel in valuing investment property. Under the fair valuemodel, the investment property is measured at fair valuewhich changes in fair value recognized in profit or loss. Underthe cost model, the investment property is measured atdepreciated cost (less any accumulated losses). While theCompany expects to make reclassification of certain assets asinvestment property in 2005, it still has to decide on the modelto adopt for measuring those assets.

PFRS 2, Share-based Payment. PFRS 2 requires an entity to

recognize share-based payment transactions (i.e., acquisitionsof goods or services) in its financial statements, includingtransactions with employees or other parties to be settled incash, other assets or equity instruments of the entity when itobtains the goods or as the services are received. The newstandard sets out measurement principles and specificrequirements for these three types of share-based paymenttransactions: (a) equity-settled share-based payment,


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(b) cash-settled share-based payment, and (c) transactions inwhich the terms of the arrangement provide a choice ofsettlement in cash or by issuing equity instruments. The stockoptions granted by the Company to its employees areconsidered share-based payments under the standard and theCompany expects that the adoption of the standard mayrequire recognition of additional expense for employeecompensation relating to such stock options.

As for the other new accounting standards, the Company has initiallyassessed that they will not result in significant changes to theamounts or disclosures in its financial statements.


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Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand, demanddeposits andshort-term, highly liquid investments readily convertible to knownamounts of cash and which are subject to insignificant risk ofchanges in value.

Trade and Other Receivables

Trade receivables, which generally have 30-90 day terms, arerecognized and carried at original invoice amounts less allowance forany uncollectible amounts. An estimate for doubtful debts is madewhen collection of the full amount is no longer probable. Bad debtsare written off when identified.

Inventories

Inventories are valued at the lower of cost and net realizable value.

Costs incurred in bringing each product to its present location andcondition are accounted for as follows:

Raw materials purchase cost on a first-in, first-out basis; and,

Finished goods and work-in-process cost of direct materials

and labor and a proportion of manufacturing overheads basedon normal operating capacity.

Net realizable value is the estimated selling price in the ordinarycourse of business, less the estimated costs of completion and theestimated costs necessary to make the sale.

Investments

Investments are initially recorded at cost at the time of acquisition,which is generally measured by the purchase price of the security, or

the fair value of the asset given up or the security received in theexchange and other costs directly related to the acquisition.Subsequent to acquisition, the carrying values of the investmentsare determined as follows:

Marketable equity securities Investments in marketable

equity securities (classified as current) are carried at the lowerof its aggregate cost or market value at the balance sheetdate. The excess of aggregate cost over market value isaccounted for as valuation allowance. Realized gains and


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losses and changes in the valuation allowance are recognizedin income of the period in which they occur. In computingrealized gains or losses, cost is determined on the averagecost basis.


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Investments in marketable equity securities (classified as non-current) are carried at the lower of its aggregate cost ormarket value at the balance sheet date. The excess ofaggregate cost over market value is accounted for as valuationallowance. Realized gains and losses are recognized in incomeof the period in which they occur; the cost of the sold securitiesis determined on the average cost basis. The accumulatedchanges in the valuation allowance are included as a separatecomponent of equity in the balance sheet until realized.

Investments in subsidiaries and associate These areaccounted for at cost plus the Companys equity in netearnings and other changes in its share in net assets of theinvestee from date of acquisition, less any impairment invalue. Equity in net earnings is being adjusted for the straight-line amortization, over a 15-year period10, of the differencebetween the Company's cost of such investments and its

proportionate share of the underlying net assets at date ofacquisition, which represents goodwill. Dividends receivedfrom investees are not considered income but are deductedfrom the investment account.

Interest in joint venture The Companys interest in a jointly

controlled entity is accounted for using the equity method.

Other investments, consisting mainly of shares of stock andreal estate, are carried at cost.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulateddepreciation and any impairment in value. The cost of an assetcomprises its purchase price and directly attributable costs ofbringing the asset to working condition for its intended use.Expenditures for additions, major improvements and renewals arecapitalized; expenditures for repairs and maintenance are charged toexpense as incurred. When assets are sold, retired or otherwisedisposed of, their cost and related accumulated depreciation andimpairment losses are removed from the accounts and any resulting

gain or loss is reflected in income for the period.

Depreciation is computed on the straight-line basis over theestimated useful lives of the assets as follows:

Buildings and improvements 10-20 yearsMachinery and equipment 5-12 years

10 The new ceiling for the amortization of goodwill and other intangible assets is now 20years unless, it can be reasonably justified that the useful life exceeds 20 years.


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Office furniture, fixtures and other equipment5-10 yearsTransportation equipment 3-5 years

Fully depreciated assets are retained in the accounts until they areno longer in use and no further charge for depreciation is made inrespect of those assets.


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Goodwill and Intangible Assets11

The excess of the cost of acquisition over the fair value ofidentifiable net assets of a subsidiary, associate or joint venture atdate of acquisition, which represents goodwill, is stated at cost lessaccumulated amortization and any impairment in value. Suchgoodwill is included in the carrying amounts of the investments.Goodwill is amortized on a straight-line basis over its estimateduseful economic life of 15 years.

Other intangible assets are recorded at cost less accumulatedamortization and any impairment in value. The cost of the asset isthe amount of cash or cash equivalent paid or the fair value of theother considerations given to acquire an asset at the time of itsacquisition or production.

Licenses and franchises The costs relating to patents and

licenses acquired are capitalized and amortized using thestraight-line method of amortization over their lives, notexceeding 10 years.

Research and development costs Research costs are

expensed when incurred. Development costs which relate tothe design and testing of new or improved materials, productsor processes are recognized as assets when the Company candemonstrate that the assets will generate probable future

economic benefits and resources are available to complete,use and obtain the benefits from the assets. Deferreddevelopment costs are amortized on a straight-line basis overtheir useful lives, not exceeding 6 years, from the date ofcommercial production of the product or from the date theprocess is put into use.

Revenue Recognition

Revenue is recognized to the extent that it is probable that theeconomic benefits will flow to the Company and the revenue can be

reliably measured. The following specific recognition criteria mustalso be met before revenue is recognized:

Sale of goods Revenue is recognized when the risks andrewards of ownership of the goods have passed to the buyerand the amount of revenue can be measured reliably.

11 The new ceiling for the amortization of goodwill and other intangible assets is now 20years unless, it can be reasonably justified that the useful life exceeds 20 years.


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Rendering of services Revenue from the installation of

insulation products is recognized by reference to the stage ofcompletion. The stage of completion is measured by referenceto the labor hours incurred to date as a percentage of totalestimated labor hours for each contract. Where the outcomeof the contract cannot be measured reliably, revenue is

recognized only to the extent of the expenses recognized thatare recoverable.


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Interest Revenue is recognized as the interest accrues

(taking into account the effective yield on the asset).

Dividends Revenue is recognized when the stockholders

right to receive the payment is established.

Leases12

Company as lessee Leases, which transfer to the Company

substantially all risks and benefits incidental to ownership ofthe leased item, are classified as finance leases and arerecognized as assets and liabilities in the balance sheets atamounts equal at the inception of the lease to the fair value ofthe leased property or, if lower, at the present value ofminimum lease payments. Lease payments are apportionedbetween the finance charges and reduction of the lease

liability so as to achieve a constant rate of interest on theremaining balance of the liability. Finance charges are directlycharged against income. Capitalized leased assets aredepreciated over the shorter of the estimated useful life of theasset or the lease term.

Leases, which do not transfer to the Company substantially allthe risks and benefits of ownership of the asset are classifiedas operating leases. Operating lease payments are recognizedas expense in the statement of income on a straight-line basisover the lease term.

Company as lessor Leases, wherein the Company

substantially transfers to the lessee all risks and benefitsincidental to ownership of the leased item, are classified asfinance leases and are presented as receivable at an amountequal to the Companys net investment in the lease. Financeincome is recognized based on the pattern reflecting aconstant periodic rate of return on the Companys netinvestment outstanding in respect of the finance lease.

Foreign Currency Transactions

The accounting records of the Company are maintained in Philippinepesos. Foreign currency transactions during the year are translatedinto Philippine pesos at exchange rates which approximate thoseprevailing on transaction dates. Foreign currency monetary assets

12Par. 23 of SFAS 17/IAS 17, Leases, requires a general description of significant leasingarrangements including, but not limited to, (a) the basis on which contingent rentpayments are determined; (b) the existence and terms of renewal or purchase optionsand escalation clauses and (c) restrictions imposed by the lease arrangements.


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and liabilities at the balance sheet date are translated into Philippinepesos at exchange rates which approximate those prevailing on thatdate. Exchange gains and losses are recognized in income for theperiod, except for the amounts capitalized and deferred in prioryears (see Note 3).


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Provisions

Provisions are recognized when the Company has a presentobligation (whether legal or constructive) as a result of a past event,it is probable that an outflow of resources embodying economicbenefits will be required to settle the obligation and a reliableestimate can be made of the amount of the obligation. Provisionsare reviewed at each balance sheet date and adjusted to reflect thecurrent best estimate.

Impairment of Assets

The carrying values of property, plant and equipment; investments insubsidiaries and an associate; interest in joint venture; other long-term investments; goodwill; and other intangible assets are reviewed

for impairment when events or changes in circumstances indicatethat their carrying values may not be recoverable. If any suchindication exists and where the carrying values exceed theestimated recoverable amount, the assets or cash generating unitsare written down to their recoverable amount. The recoverableamount of property, plant and equipment is the greater of net sellingprice and value in use. In assessing value in use, the estimatedfuture cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of timevalue of money and the risks specific to the asset. For an asset thatdoes not generate largely independent cash inflows, the recoverable

amount is determined for the cash-generating unit to which theasset belongs. Impairment losses are recognized in the incomestatement.

If there is any indication at the balance sheet date that animpairment loss recognized for an asset in prior years may no longerexist or may have decreased, the Company estimates therecoverable amount of that asset and the carrying amount of theasset is adjusted to the recoverable amount resulting in the reversalof the impairment loss.

Employee Benefits

The Company has a defined benefit pension plan covering all regularfull-time employees. The pension plan is tax-qualified,noncontributory and administered by a trustee. The cost ofproviding benefits under the plan is determined using the projectedunit credit actuarial valuation method, which utilizes the normal cost,actuarial accrued liability and unfunded actuarial liability concepts.Past service cost is amortized and actuarial gains and losses are


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recognized over the expected remaining working lives of theemployees covered by the plan.


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Borrowing Costs

Borrowing costs are recognized as expenses in the period in whichthey are incurred, except to the extent that they are capitalized. Forfinancial reporting purposes, borrowing costs that are attributable tothe acquisition, construction or production of a qualifying asset (i.e.,an asset that takes a substantial period of time to get ready for itsintended use or sale) are capitalized as part of cost of such asset.The capitalization of borrowing costs commences when expendituresfor the asset are being incurred, borrowing costs are being incurredand activities that are necessary to prepare the asset for its intendeduse or sale are in progress; capitalization ceases when substantiallyall such activities are complete.

For income tax purposes, borrowing costs are treated as deductibleexpenses in the period in which they are incurred.

Income Taxes

13

Deferred income tax is provided, using the balance sheet liabilitymethod effective 2004(see Note 3), on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carryingamounts for financial reporting purposes.

Under the balance sheet liability method, deferred tax liabilities arerecognized for all taxable temporary differences:

except where the deferred tax liability arises from goodwillamortization or the initial recognition of an asset or liability in atransaction that is not a business combination and, at the timeof the transaction, affects neither the accounting profit nortaxable profit or loss; and,

in respect of taxable temporary differences associated with

investments in subsidiaries, associates and interests in jointventures, except where the timing of the reversal of temporarydifferences can be controlled and it is probable that thetemporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporarydifferences and the carryforward of unused tax losses and unusedtax credits to the extent that it is probable that taxable profit will beavailable against which the deferred tax assets can be utilized:

13SFAS 12/IAS 12, Income Taxes, provides the disclosure requirements for accounting forincome taxes.


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except where the deferred tax asset relating to the deductible

temporary difference arises from the initial recognition of anasset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neitherthe accounting profit nor taxable profit or loss; and,

in respect of deductible temporary difference associated withinvestments in subsidiaries, associates and interests in jointventures, deferred tax assets are only recognized to the extentthat it is probable that the temporary difference will reverse inthe foreseeable future and taxable profit will be availableagainst which the temporary difference can be utilized.


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The carrying amount of deferred tax assets is reviewed at eachbalance sheet date and reduced to the extent that it is probable thatsufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilized.

Deferred tax assets and liabilities are measured at the tax rates thatare expected to apply to the period when the asset is realized or theliability is settled, based on tax rates and tax laws that have beenenacted or substantively enacted at the balance sheet date.

3. CHANGES IN ACCOUNTING POLICIES

Income Taxes14

On January 1, 2004, the Company adopted the balance sheet liabilitymethod of accounting for income taxes under SFAS 12/IAS 12,Income Taxes, which became effective on January 1, 2004. Prior to2004, the Company used the method of accounting for income taxeswherein deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences mainly betweenthe taxable income and accounting income and tax consequences ofnet operating loss carryover.

The Companys adoption of the new accounting standard did notresult in material adjustments to the financial statements, except forthe reclassification of deferred tax assets amounting to P10,584,259as of December 31, 2003, previously shown among current assets inthe 2003 balance sheet, to non-current assets in the 2004 balancesheet and disclosures of additional information required under thenew accounting standard (see Note 19).

Leases15

In 2003, the Company became a party to non-cancellable leasescovering certain warehouses and offices with lease terms rangingfrom four to ten years. Annual rent payments amounted toP1,000,000 and P500,000, respectively, with annual escalation rates

of 10%. The Company recognized rent expense in 2003 equivalentto the annual rental rates stipulated on the lease contracts.

On January 1, 2004, the Company adopted the provisions of SFAS17/IAS 17, Leases. Under SFAS 17/IAS 17, lease payments under an

14 When the presentation or classification of items in the balance sheet is amended, anentity is required to reclassify the comparative amounts and disclose the nature of thereclassification, the amount of the reclassification and the reason for the reclassification.

15 Refer to SFAS 17/IAS 17 for details.


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operating lease should be recognized as expense in the statement ofincome on a straight-line basis over the lease term unless anothersystematic basis is representative of the time pattern of the usersbenefits. Retrospective application of SFAS 17/IAS 17 is encouragedbut not required. The Company adopted SFAS 17/IAS 17prospectively and, accordingly, recognized as expense the averagerent computed on the remaining lease terms. This resulted in anincrease in the rent expense of P394,714 in 2004.


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As of January 1, 2004, the Company is a lessee under existing leasescovering certain transportation equipment with lease terms rangingfrom three to five years which the Company classified andrecognized as finance leases in previous years. The carrying amountof transportation equipment held under finance leases amounting toP1.5 million as of December 31, 2003 (see Notes 10 and 23) isdeemed to have been properly determined, hence, the Companysapplication of SFAS 17/IAS 17 on these leases in 2004 did not resultin any adjustment to the financial statements, except for thedisclosure of additional information required under the newaccounting standard.16

On December 29, 2004, the Company entered into a lease contract,the Company being the lessor, covering certain specializedequipment. The lease has been classified and recognized as afinance lease in accordance with SFAS 17/IAS 17 (see Note 23).

Foreign Exchange Differences

In 2003, the Company adopted SFAS 8A, Deferral of ForeignExchange Differences, which became effective on January 1, 2003.SFAS 8A eliminated the deferral of foreign exchange differencespreviously allowed as an option in accounting for foreign exchangedifferences.

As of January 1, 2003, the Company had unamortized balance ofP3.4 million of deferred foreign currency losses arising from its long-

term foreign currency-denominated debt. To comply with therequirements of SFAS 8A, the Company eliminated the balance ofthe deferred foreign exchange losses against retained earnings as ofJanuary 1, 2003, as allowed under the benchmark treatment. Thisresulted in an increase in net income of P762,500 in 2003representing the scheduled amortization in 2003.

Preoperating Expenses

Prior to 2003, the Company capitalized expenses incurred prior tothe start of its operations and amortized the capitalized amount over

a period of five years. OnJanuary 1, 2003, the Company adopted SFAS 38/IAS 38. Under thisnew accounting standard, expenditures on start-up activities orstart-up costs, including preopening and preoperating costs, arerequired to be recognized as expenses when incurred instead ofbeing capitalized and amortized over a specified period.

16SFAS 17/IAS 17 requires, among others, the disclosure of the net carrying amount for

each class of asset under a finance lease as at the balance sheet date.


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The Company adopted the benchmark treatment under SFAS 38/IAS38 and eliminated the balance of preoperating expenses as ofDecember 31, 2002 of P3.9 million as an adjustment to the balanceof retained earnings as of January 1, 2003. This resulted in anincrease in net income of P1.3 million in 2003 representing thescheduled amortization in 2003.

For income tax purposes, preoperating expenses are continued to beamortized over a period of five years up to 2005.


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4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents were as follows as of December 31:

2004 2003

Cash on hand and in banks P3,445,563 P 4,883,365Short-term placements 17,566,539 17,763,883

P 21,012,102 P 22,647,248

Cash accounts with the banks generally earn interest at rates basedon daily bank deposit rates. Short-term placements are made forvarying periods of between 15 to 30 days and earn interest at therespective short-term placement rates ranging from 4.2% to 6.5% in2004 and 5.4% to 7.9% in 2003.

The balances of the Cash on Hand and in Banks as of December 31,2004 and 2003 did not include an amount of about P2.5 millionwhich is shown as part of the Other Long-term Investments accountin the balance sheets. Such amount is not available for the generaluse of the Company in accordance with a restriction under a loancovenant(see Notes 9 and 13).

5. MARKETABLE EQUITY SECURITIES

The details of this account are shown below:

2004 2003Current portfolio:

Aggregate cost P7,107,965 P 6,350,965Valuation allowance ( 763,883 ) (

763,883 )

Aggregate market value P 6,344,082 P 5,587,082

Non-current portfolio (included inOther Long-term Investments)(see Note 9):

Aggregate cost P65,026,072 P63,026,072Valuation allowance ( 3,000,000 ) (

2,757,000 )

Aggregate market value P 62,026,072 P 60,269,072

The Company recognized a net realized loss of P500,000 in 2004(shown as part of Miscellaneous Other Operating Expenses) and a


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net realized gain of P100,500 in 2003 (shown as part of Gain on Saleof Assets) from the sale of certain current marketable equitysecurities (see Note 18).

In 2004 and 2003, the Company recognized the declines in value ofnon-current marketable equity securities of P243,000 and P882,000,respectively, which were charged to a separate component of equity.


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6. TRADE AND OTHER RECEIVABLES

This account is composed of the following:

2004 2003

Current:Trade receivables P19,251,912 P26,140,079Due from related partiesDue from related parties

(see Note 20) 1,945,985 2,874,992Advances to officers and

employees (see Note 20) 1,905,0081,125,008

Others 108,00098,965

23,210,905 30,239,044Allowance for doubtful accounts (2,449,284 )(

2,449,284 )

P 20,761,621 P 27,789,760

Non-current:Loans to directors (see Note 20) P 6,297,832P

7,571,023Others 27,489

127,4896,325,321 7,698,512

Allowance for doubtful accounts (2,000,000 )(1,700,000 )

P 4,325,321 P 5,998,512

The loan to directors are payable on various dates beginning 2004with interests ranging from 6.5% to 9% per annum in both years (seeNote 20).


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7. INVENTORIES

Except for the portion of finished goods stated at net realizablevalue, inventories at the end of 2003 and 2002 were stated at cost.17

The details of inventories are shown below:

2004 2003

Finished goods:At cost P6,124,155 P 8,439,245At net realizable value 27,012,132 31,640,369

33,136,287 40,079,614Work in progress 24,456,155 27,686,672Raw materials (see Note 20) 2,100,029

4,559,225Materials in transit 457,845 1,845,457

Inventories at cost and netrealizable value P 60,150,316 P 74,170,968

Raw materials amounting to P3,215,400 and P4,125,890 in 2004 and2003, respectively, have been released under trust receiptagreements (see Note 13).

8. PREPAYMENTS

Prepayments includes the following:

2004 2003

Prepaid insurance P3,976,462 P 4,178,925Prepaid rent 2,400,125 3,929,378Others 2,038,728 2,038,728

P 8,415,315 P 10,147,031

9. LONG - TERM INVESTMENTS

In addition to its investments in marketable equity securities (seeNote 5), the Company also holds long-term investments consisting ofinvestments in subsidiaries and associate, interest in a joint ventureand other long-term investments.

17 It was assumed in this presentation that the rest of the inventory items are stated ascost. If all or more than one of the inventory items consist of items that are stated at costand at net realizable value (NRV), present separate rows of items at cost and at NRV.Disclosure should also include reversal of write-down that is recognized as income in theperiod, if any, and the circumstances or events that led to the reversal of a write-down ofinventories.


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Investments in Subsidiaries and Associate

The components of the carrying values of investments in subsidiariesand associate accounted for under the equity method are as follows:

2004 2003

Acquisition costs:D Company 100% owned P 88,299,200

P 88,299,200S Corporation 100% owned 47,993,960

47,993,960TXT Co. 40% owned 20,354,376 20,354,376

156,647,536 156,647,536Accumulated equity in net earnings:

Balance at beginning of year 21,553,85819,155,378

Equity in net earnings for the year(net of goodwill amortization-see below) 2,112,521 2,848,480

Dividends received ( 450,000 )(450,000 )

Balance at end of year 23,216,379 21,553,858

P 179,863,915 P178,201,394

A reconciliation18of goodwill, or the difference between the carryingvalue of the Companys investment in D Company and the amount ofits underlying equity in net assets of the subsidiary (included in thecarrying amount of the investment), is shown below:

2004 2003

Goodwill at beginning of year,net of amortization P6,900,000 P 8,625,000

Amortization during the year(charged against equity in netearnings of subsidiary see above)19 ( 1,725,000 )(

1,725,000 )Goodwill at end of year,net of amortization P 5,175,000 P 6,900,000

18SFAS 22/IAS 22 requires the disclosure of a reconciliation showing the gross carryingamounts and accumulated amortization (and impairment, if any) of goodwill at thebeginning and at the end of the year and the changes during the year.

19 SFAS 22/IAS 22 also requires disclosure of the line item of the income statement inwhich the amortization of goodwill is included.


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Goodwill at gross amount P25,875,000 P25,875,000Accumulated amortization ( 20,700,000 )(

18,975,000 )

Net carrying amount P 5,175,000 P 6,900,000


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Interest in Joint Venture and Other Long-Term Investments

The details of these accounts are shown below:2004 2003

Interest in joint venture:Interest in Extinguishers Limited,

a 50% owned joint venture at equity

Acquisition cost P 7,577,631 P 7,577,631Accumulated equity in net earnings:

Balance at beginning of year 808,444178,778

Equity in net earnings for the year 2,399,830629,666

Balance at end of year 3,208,274808 ,444

10,785,905 8,386,075Other long-term investments:

Non-current marketable equity securities(see Note 5) 62,026,072 60,269,072

Restricted cash in banks (see Note 4) 2,500,0002,500,000

Others - at cost 6,557 ,000 4,800,000

P 78,354,977 P 75,955,147

Included in non-marketable equity securities are preferred sharesobtained by the Company upon conversion of part of its depositsamounting to P4.8 million in a closed bank into preferred shares ofthe bank that acquired the closed bank.

The Companys share in the assets, liabilities, revenues andexpenses of the joint venture as of December 31 and for the yearsthen ended are as follows20:

2004 2003

Current assets P 15,150,158P 10,462,500

Non-current assets 37,001,589 27,433,20052,151,747 35,895,700

Current liabilities ( 20,154,125 )(

12,585,002 )Non-current liabilities ( 21,211,717 )(16,924,623 )

20SFAS 31/IAS 31 requires a venturer which reports its interests in jointly controlledentities using the line-by-line reporting format for proportionate consolidation or theequity method to disclose the aggregate amounts of each of current assets, long-termassets, current liabilities, long-term liabilities, income and expenses related to its interestsin joint ventures.


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Share in the Underlying Net Assets P 10,785,905P 8,386,075

Revenues P107,122,120 P97,332,581

Costs and operating expenses (101,823,502 ) (

95,301,400 )Income before tax 5,298,618 2,031,181Tax expense (2,898,788 ) ( 1,401,515 )

Share in Net Income P 2,399,830 P 629,666


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10. PROPERTY, PLANT AND EQUIPMENT21

A reconciliation22 of the carrying amounts at the beginning and endof 2004 and the gross carrying amounts and the accumulateddepreciation of property, plant and equipment are shown below:

Machinery Office Furniture, Buildingsand Fixtures and Other and Transportation

Construction inEquipment Equipment Improvements Equipment Land Progress Total

Balance at January 1, 2004,net of accumulateddepreciation andimpairment P 32,619,984 P 15,763,521 P 6,609,545 P 6,881,975 P 7,540,808 P10,915,320 P

80,331,153Additions 3,458,787 3,267,444 3,703,831 4,548,781 - 1,365,597

16,344,440Depreciation charge

for the year ( 3,217,080) ( 2,667,891 ) ( 3,461,233 ) ( 2,667,257) - - ( 12,013,461 )Impairment loss ( 1,200,000 ) - - - - - (

1,200,000 )

Balance at December 31, 2004,net of accumulateddepreciation andimpairment P 31,661,691 P 16,363,074 P 6,852,143 P 8,763,499 P 7,540,808 P 12,280,917 P

83,462,132

January 1, 2004Cost P 68,934,997 P 21,724,318 P 16,129,672 P 12,993,927 P 7,540,808 P10,915,320 P

138,239,042Accumulated

depreciation ( 34,315,013 ) ( 5,960,797 ) ( 9,520,127 )( 6,111,952 ) - -( 55,907,889 )

Accumulatedimpairment loss ( 2,000,000 ) - - - - - ( 2,000,000 )

Net carrying amount P 32,619,984 P 15,763,521 P 6,609,545 P 6,881,975 P 7,540,808 P 10,915,320 P80,331,153

December 31, 2004Cost P 72,393,784 P 24,991,762 P 19,833,503 P 17,542,708 P 7,540,808 P12,280,917 P

154,583,482Accumulated

depreciation ( 37,532,093 ) ( 8,628,688 ) ( 12,981,360 )( 8,779,209 ) - -( 67,921,350 )

Accumulatedimpairment loss ( 3,200,000 ) - - - - - ( 3,200,000 )

Net carrying amount P 31,661,691 P 16,363,074 P 6,852,143 P 8,763,499 P 7,540,808 P 10,915,320 P83,462,132

Land and building and improvements with a total carrying value ofabout P60 million are used as collaterals for certain interest-bearingloans and borrowings (see Note 13).

Construction in progress pertains to accumulated costs incurred onthe new building being constructed as part of the Companysexpansion program, including borrowing costs capitalized during theperiod of about P3.8 million in 2004 and P2.8 million in 2003,

representing the actual borrowing costs incurred on loans obtainedto fund the construction project.

21 Covers disclosures when property, plant and equipment are carried at cost (benchmarktreatment) subsequent to initial recognition.

22 SFAS 16/IAS 16 requires the disclosure, for each class of property, plant and equipment,of a reconciliation showing the gross carrying amounts and accumulated depreciation(and impairment, if any) of property, plant and equipment at the beginning and at the endof the year and the changes during the year.


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In 2004 and 2003, the Company recognized impairment losses ofP3.2 million and P2.0 million, respectively, to write-down torecoverable amount certain assets following a reorganization withinthe electronics segment. The recoverable amount was based onvalue in use and was determined at the cash-generating unit level.In determining the value in use for the cash-generating unit, thecash flows were discounted at a nominal rate of 12.1% in 2004 and

12.3% in 2002 on a pre-tax basis.


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As of December 31, 2004 and 2003, the carrying amount oftransportation equipment held under finance leases amounted toP1.5 million and P1.6 million, respectively(see Note 23).23

11. INTANGIBLE ASSETS

A reconciliation24of the carrying amounts at the beginning and endof 2004 and the gross carrying amounts and the accumulatedamortization of intangible assets (other than goodwill see Note 9)are shown below:

DeferredLicenses and Development

Franchises Costs TotalBalance at January 1, 2004,

net of accumulatedamortization P2,400,000 P1,500,000 P3,900,000

Amortization expense forthe year (see Note 18)25 (1,100,000 )( 750,000 )(

1,850,000 )Balance at December 31, 2004,

net of accumulatedamortization P 1,300,000 P 750,000 P 2,050,000

January 1, 2004:Cost P8,500,000 P3,750,000 P12,250,000Accumulated amortization (6,100,000 )( 2,250,000 )(

8,350,000 )

Net carrying amount P 2,400,000 P 1,500,000 P 3,900,000

December 31, 2004:Cost P8,500,000 P3,750,000 P12,250,000Accumulated amortization (7,200,000 )( 3,000,000 )(

10,200,000 )

23SFAS 17/IAS 17 requires, among others, the disclosure of the net carrying amount for

each class of asset under a finance lease as at the balance sheet date.

24SFAS 38/IAS 38 requires the disclosure, for each class of intangible assets, of areconciliation showing the gross carrying amounts and the accumulated amortization (andimpairment, if any) of intangible assets at the beginning and end of the year and thechanges during the year.

25 SFAS 38/IAS 38 also requires disclosure of the line item of the income statement inwhich the amortization of intangible assets is included.


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Net carrying amount P 1,300,000 P 750,000 P 2,050,000


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12. OTHER ASSETS

The composition of this account as of December 31 is shown below:

2004 2003

Current:

Input value-added tax P1,440,283 P 5,998,238Miscellaneous 1, 305,217 2,921,217

P 2,745,500 P 8,919,455

Non-current:Abandoned property and

equipment - at net realizable value P 28,750,062P 28,750,062

Miscellaneous 1,796,966 1,924,623

P 30,547,028 P 30,674,685

13. INTEREST-BEARING LOANS AND BORROWINGS26

At December 31, the short-term and long-term interest-bearing loansand borrowings were as follows:

2004 2003

Current:Bank loans P10,000,000 P12,000,000Acceptances payable and liabilities

under trust receipts (see Note 7) 4,000,0005,000,000Obligations under finance leases

(see Note 23) 180,000 192,700Others 2,472,700

2,146,633

P 16,652,700 P19,339,333

Non-current:Long-term debt P53,600,000 P

40,530,000Obligations under finance leases

(see Note 23) 1,400,000 1,470,000

P 55,000,000 P42,000,000

26 Separately disclose/indicate if interest-bearing loans and borrowings include itemsdenominated in foreign currency.


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The bank loans represent secured and unsecured loans from a localcommercial bank.The loans bear annual interest rates ranging from 10.75% to 16.5%in both years, subject to monthly repricing.


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The long-term debt represents the US$760,000 loan obtained by theCompany on December 2000 from a local bank. The debt is payableup to 2006 and bears interest at an annual average rate of 8% in2004 and 9% in 2003. On December 29, 2003, the Companyobtained an additional loan from the same bank. The new loan,which is payable up to 2010, bears interest at 10% per annum.

Certain Company assets and properties are used as collaterals forthe secured short-term bank loans and the long-term debt (seeNotes 4 and 10).

14. TRADE AND OTHER PAYABLES

This account consists of:2004 2003

Trade (see Note 20) P40,661,477 P44,140,079

Accrued expenses 15,542,050 10,112,534Others 1,781,125 2,670,300

P 57,984,652 P 56,922,913

15. PROVISIONS

The changes in each class of provisions during the year are asfollows27:

Provision forProduct RetirementWarranty Benefits (Note 16) Total

Balance at January 1, 2004 P11,438,511 P5,634,001 P17,072,512Additions (deductions) during the year:

Additional provisions 4,379,620 916,773 5,296,393Amounts used ( 5,456,030) - (

5,456,030 )Unused amount reversed - ( 750,654 ) ( 750,654 )

Balance at December 31, 2004 P 10,362,101 P 5,800,120 P 16,162,221

December 31, 2004Current P 8,511,981 P 5,500,120 P14,012,101Non-current 1,850,120 300,000 2,150,120

P 10,362,101 P 5,800,120 P 16,162,221

December 31, 2003Current P 9,618,899 P 5,389,113 P15,008,012Non-current 1,819,612 244,888 2,064,500

27 SFAS 37/IAS 37 requires disclosure, for each class of provisions, of the carrying amountat the beginning and end of year and the changes during the year.


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P 11,438,511 P 5,634,001 P 17,072,512


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A provision is recognized for expected warranty claims on productssold during the last three years, based on the Companys pastexperience of the level of repairs and returns. It is expected that asignificant portion of the provision will be incurred in 2005. In 2003,based on current sales level and current information about warrantyclaims experience, management reversed to income about P1.9million of the provision for product warranty. The amount reversedis shown as part of Other Revenues in the 2003 statement of income(see Note 18).

16. COST OF GOODS SOLD AND COST OF SERVICES

The details of these accounts are shown below:

2004 2003

Cost of goods sold:Finished goods at beginning of year P 40,079,614

P 35,613,236

Cost of goods manufacturedRaw materials at beginning year 4,559,225

10,503,928Work-in-process at beginning year 27,686,672

24,510,069Net purchases during the year 25,051,000

31,802,726Direct labor 20,438,854 21,323,984

Manufacturing overhead (see Note 23) 9,609,71411,289,168Raw materials at end of year ( 2,100,029 )(

4,559,225 )Work-in-process at end of year ( 24,456,155 )(

27,686,672 )60,789,281

67,183,977

Finished goods at end of year ( 33,136,287 )( 40,079,614 )

P 67,732,608 P

62,717,599

Cost of services:Direct costs and expenses

Salaries, wages and benefits P6,512,500 P 6,319,624Materials, supplies and facilities 1,447,125

1,247,922Outside services 754,125 801,079Depreciation 305,120 267,026Rental (see Notes 3 and 23) 180,120

178,019


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Others 75,725 87,210P 9,274,715 P 8,900,880


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17. EMPLOYEE BENEFITS

The Company maintains a tax-qualified, noncontributory retirementplan that is being administered by a trustee covering all regular full-time employees. Total retirement benefit expense shown as part ofSalaries and Employees Benefits in the statements of incomeamounted to about P2.2 million in 2004 and P2.0 million in 2003.

Based on the latest actuarial valuation report as of January 1, 2003,the fair value of the plan assets exceeds the actuarial present valueof retirement benefits, based on the assumed rate of return of 9%,by about P1.4 million. Actuarial valuations are made every two yearsto update the retirement benefit costs and the amount ofcontributions.

The annual contribution to the retirement plan covers the currentservice cost and the amortization of the past service cost.

18. OTHER REVENUES AND OTHER OPERATING EXPENSES

These accounts are composed of the following:

2004 2003Other revenues:

Interest P 572,150 P 462,094Dividends 450,000 450,000Reversal of provision (see Note 15) -

1,880,000

Gain on sale of assets (see Note 5) -325,000

P 1,022,150 P 3,117,094

Other operating expenses:Advertising and promotions

(see Note 20) P1,975,811 P 2,174,557Amortization of intangible assets

(see Note 11) 1,850,000 1,850,000Taxes and licenses 956,788 1,995,358Insurance 775,450 980,132Communications 489,154 900,978Security and janitorial 410,150 405,309Transportation and travel 354,018

885,221Representation and entertainment 300,160

920,145Supplies 245,021 685,302Rental (Notes 3 and 23) 206,981 319,880


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Repairs and maintenance 150,012585,315 Miscellaneous (see Note 5) 2,147,017

2,244,823

P 9,865,562 P 13,947,020


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19. INCOME TAXES

The major components of tax expense for the years endedDecember 31 are as follows:

2004 2003

Statement of income:Current tax:28/29

At 32% P12,087,409 P10,205,016At 20% 143,038 115,523

12,230,44710,320,539

Deferred tax relating toorigination and reversal of

temporary differences

30

1,953,235710,715

Tax expense reportedin statement of income P 10,277,212 P

11,449,273

Statement of changes in equity:Deferred tax arising

from adoption of newaccounting standards(see Notes 3 and 21)31 P - P 1,582,966

28Inthe ITR, only the current tax at 32% will be shown in line 22B of the ITR (or line 22A ifPEZA or BOI registered); hence, the income item subjected to 20% or 7.5% (final tax)should be shown as a reconciling item in Section E of the ITR. This is because, for taxpurposes, the final tax is reported using a different BIR form.

29 An alternative presentation is to show the total current tax as one line item (at 32% plusat 20%) and just disclose as part of the note the amount of the 20% final tax (e.g., thecurrent income tax includes final tax on interest income amounting to P143,038 andP115,523 in 2004 and 2003, respectively).

30Utilization of unused NOLCO, if any, should be presented as a separate line item under

deferred tax.

31With regard to the adoption of SFAS 8A, the tax effect of the adjustment to equity(retained earnings) arising from the unamortized deferred foreign exchange losses andthe increase in the related debt arising from restatement (which gave rise to suchdeferred foreign exchange losses) will offset each other (since in this Illustrative FS, it isassumed that the amortization period and the debt repayment period are the same).Hence, no amount of the income tax expense is allocated to such adjustment.

If this is not the case, the amount allocated should also be disclosed (refer to SFAS 23).


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The reconciliation of tax on pretax income computed at theapplicable statutory rates to tax expense attributable to continuingoperations is as follows:32/33

2004 2003

Tax on pretax income:At 32% P10,531,219 P

9,179,655At 20% 143,038 115,523

Tax effects of:Nondeductible expenses 1,190,907 2,993,083Dividend income not subject to tax ( 144,000 )(

144,000)Equity in income of subsidiaries,

associate and joint venture net

of goodwill amortization ( 1,443,952 )(1,113,007 )

Tax expense reported instatement of income P 10,277,212 P 11,031,254

32 An alternative presentation of reconciliation is as follows:

2004 2003

Tax on pretax income at 32% P 10,760,080P 9,364,492

Adjustment for income subjectedto lower tax rate * ( 85,823 )(

69,314 )Tax effects of:

Nondeductible expenses 1,190,907 2,993,083Dividend income not subject to tax ( 144,000 )(

144,000)Equity in income of subsidiaries,

associate and joint venture netof goodwill amortization ( 1,443,952 )(

1,113,007 )

Tax expense reported instatement of income P 10,277,212 P 11,031,254

* Computed based on the difference between the statutory income tax of 32%and the final tax rate(e.g., 32%-20% = 12% x gross interest income)

33 The reconciliation of the tax expense and pretax income may be presented in anumerical reconciliation between the average effective tax rate and applicable tax rate,disclosing also the basis on which the applicable tax rate is computed.


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The net deferred tax assets as of December 31 related to thefollowing:

Balance Sheets Statements of Income

2004 2003 2004 2003

Deferred tax assets:34

Provisions P5,171,911 P 5,463,204 P291,293 P

201,901

Write-down of inventories

to net realizable values 3,530,1471,282,438 (2,247,709)

1,270,808

Unamortized past service cost 1,805,162 955,612 ( 849,550)( 849,550)

Allowance for doubtful accounts 1,423,7701,327,771 ( 95,999)( 100,190)

Impairment loss on property, plant

and equipment 1,024,000 640,000 ( 384,000) -

Unamortized portion of preoperating

expenses (for tax purposes) 418,219 836,438 418,219 -

Unrealized foreign exchange losses 393,640 1,729,052 1,335,412187,746

Accrued rental 126,308 - ( 126,308) -

Deferred tax liability:

Undepreciated capitalized

borrowing costs ( 1,355,663 ) ( 1,650,256 )(294,593 )( -

)

Deferred Tax Expense (Income) (P 1,953,235 ) P

710,715

Net Deferred Tax Assets P 12,537,494 P 10,584,259

The NOLCO of the Company which arose in 2001 amounting toP21,254,493 was fully utilized in 2003 (P7,547,266) and 2002(P13,707,227) as deduction from the respective years taxableincome.35

34Under SFAS 12/IAS12, unused tax credits pertaining to income taxes recoverable infuture periods should be included as part of deferred tax assets. Accordingly, MCIT andcreditable withholding taxes should be shown under deferred tax assets.

35 If there are several layers of NOLCO and MCIT amounts (i.e., NOLCO incurred and MCITpaid in different years), disclose in a tabular form the necessary information such asamount incurred in each year, prescription period, amount utilized and amount expired.

The following is a sample presentation for NOLCO (assuming a different set figures):

Applied AppliedOriginal in in Expired Remaining Valid

Year Amount Previous Year Current Year Balance BalanceUntil

2004 P 1,200,521 P - P - P - P 1,200,5212007

2003 120,215 - - - 120,2152006


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The Company is subject to the minimum corporate income tax (MCIT)which is computed at 2% of gross income, as defined under the taxregulations. In 2002, the Company recorded MCIT amounting toP758,555 which was included in the Other Current Assets-Miscellaneous account as of December 31, 2002 (see Note 12). Thetotal MCIT was applied against the regular income tax in 2003.

No deferred tax liability has been recognized on the accumulatedequity in net earnings of subsidiaries, associates or joint ventures(see Note 9). The Company has no liability for tax should theamounts be declared as dividends since dividend income receivedfrom domestic corporations is not subject to income tax. Also, thereare no tax consequences attaching to the payment of dividends bythe Company to its parent company, which is a domestic entity.36

No deferred tax asset was also recognized on the net unrealizedlosses on non-current marketable equity securities of P243,000 andP882,000 as of December 31, 2004 and 2003 presented in thestatement of changes in equity.37

20. RELATED PARTY TRANSACTIONS38

2002 3,727,600 1,343,000 2,184,500 - 200,1002005

2001 204,736 160,353 28,045 16,338 -2004

P 5,253,072 P 1,503,353 P 2,212,545 P 16,338 P 1,520,836

36Under SFAS 12/IAS 12, disclosure should be made of the aggregate temporarydifferences associated with investments in subsidiaries, branches and associates andinterests in joint ventures for which deferred tax liabilities have not been recognized, aswell as the amount of income tax consequences of dividends to stockholders.

37SFAS 12/IAS 12 also requires disclosure of the amount (and expiry date, if any) ofdeductible temporary differences, unused tax losses and unused tax credits for which nodeferred tax asset is recognized in the balance sheet.

38Under SFAS 24/IAS 24, no disclosure of related party transactions is required (a) inconsolidated financial statements in respect of intra-group transactions; (b) in parentcompany FS when they are made available or published with the consolidated FS; (c) in FSof a wholly-owned subsidiary if its parent is incorporated in the same country andprovides consolidated FS in that country; and (d) in FS of state-controlled enterprises oftransactions with other state-controlled enterprises.

While SFAS 24/IAS 24 does not require the disclosure of related party transactions in theabove situations, we should encourage clients to provide the relevant disclosures in theFS of individual entities in the group. This is to avoid issues being raised overnondisclosure of such transactions as the SEC and other regulatory agencies may bedoing the reviews of FS on individual entity basis not on the basis of group reporting.


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The significant transactions of the Company in the normal course ofbusiness with related parties are described below:

a. The Company obtains from and grants advances to itssubsidiaries and associate for working capital requirements andother purposes. The net advances to such entities for working

capital requirements amounted to P664,144 and P2,590,000 in2004 and 2003, respectively. Outstanding receivables arisingfrom these transactions are shown as part of Due from RelatedParties (see Note 6). On the other hand, net advances from theserelated parties in 2004 and 2003 for the Companys constructionproject amounted to P2,000,000 and P5,500,000, respectively,and are shown under the Due to Related Parties account in thebalance sheets.

b. The Company buys raw materials from its subsidiaries at normalmarket prices. Purchases totaled P53,052,321 in 2004 andP63,988,012 in 2003. Outstanding liabilities amounted toP5,032,010 and P3,902,145 as of December 31, 2004 and 2003,respectively, and are shown as part of Trade and Other Payablesaccount in the balance sheets (see Note 14).

c. The Company also purchases raw materials from IntegratedIndustries Limited, of which the wife of the Companys Presidentis a director and a controlling stockholder. Purchases at normalmarket prices totaled P2,000,000 in 2004 and P500,000 in 2003.Outstanding liabilities amounted to P1,000,000 and P250,000 asof December 31, 2004 and 2003, respectively, and are includedin Trade and Other Payables account in the balance sheets (see

Note 14).

d. In 2002, the Company entered into a marketing and distributionagreement with TXT Co., an associate, for the exclusivemarketing and distribution of the Companys products. Chargesarising from this agreement amounted to P2,000,000 in 2004 andP1,200,000 in 2003 and are presented as part of Advertising andPromotions (see Note 18). There are no outstanding liabilitiesarising from these transactions.

e. At the Annual General Meeting held on May 26, 2003, the Boardof Directors approved a non-interest-bearing loan up to a

maximum of P1,000,000 to be made as necessary to theCompanys Technical Director to enable him to meet expenditureto be incurred at production seminars and tours that he willattend in the United States. During the year, P750,000 wasadvanced to him for this purpose and at December 31, 2003, thewhole amount was outstanding and is included in Advances toOfficers and Employees account (see Note 6).

An alternative format for disclosure of related party transactions is a tabular presentationwhere the relevant data and balances (e.g., sales, purchases, receivables, payables) arepresented in columnar format. Additional information is presented in narrative.


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f. The executive members of the Board of Directors receivedremuneration totaling P1,950,000 and P1,700,000 for the yearsended December 31, 2004 and 2003, respectively, while the non-executive members received fees totaling P554,000 and 476,900,respectively, for the same years. In addition, during 2003, theCompany paid P590,890 to an executive director who retired. All

charges arising from these transactions are included in theSalaries and Employees Benefits account in the statements ofincome.

g. The Company also grants interest-bearing loans to its directors.In 2004, loans made to directors amounted to P769,138 andP1,230,000 in 2003. The outstanding receivables arising fromthese transactions are shown in Loans to Directors(see Note 6).


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21. CAPITAL STOCK AND RETAINED EARNINGS

Capital Stock

Capital stock consists of: Shares Amount

2004 2003 2004 2003

Preferred 10% cumulative,

non-participating , convertible into

common shares P100 par value

Authorized, issued and

outstanding 100,000 100,000 P 10,000,000 P

10,000,000

Common shares P10 par value

Authorized 35,000,000 shares

Issued:

Balance, beginning of year 10,000,000 7,920,000 100,000,000

79,200,000

Issued during the year - 2,080,000 - 20,800,000

Balance, end of year 10,000,000 10,000,000 100,000,000

100,000,000

Subscribed:

Balance, beginning of year 1,900,000 1,200,00019,000,000

12,000,000

Additions during the year - 700,000 - 7,000,000

Balance, end of year 1,900,000 1,900,00019,000,000

19,000,000

Subscriptions receivable:

Balance, beginning of year (3,750,000) (1,200,000 )

Additions during the year - (2,550,000 )

Balance, end of year (3,750,000 ) (

3,750,000 )

P 125,250,000 P

125,250,000

Each preferred share is convertible to ten common shares at theoption of the Company.

Retained Earnings

The balance of Retained Earnings includes the Companysaccumulated equity in income of subsidiaries, associate and jointventure of P26,424,653 and P22,362,302 in 2004 and 2003,respectively, which are not currently available for dividenddeclaration (see Note 9).

On June 30, 2004 and 2003, the Board of Directors approved thedeclaration of cash dividends of P1.14 per common share (or a total


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of P13,554,600) and P1.20 per common share (or a total ofP12,342,994), respectively, payable to stockholders of record as ofJuly 15, 2004 and 2003, respectively. The dividends were paid withintheir respective year of declaration and approval.

The aggregate amount of cumulative preferred dividends in arrearsas ofDecember 31, 2004 and 2003 amounted to P4 million and P3 million,respectively, or P4 per share and P3 per share, respectively.


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A summary of the adjustments to the balances of retained earningsas of January 1, 2003, net of tax effects of P1.6 million in 2003,arising from the Companys adoption in 2003 of new accountingstandards (see Note 3) is shown below:

Elimination of unamortized deferredforeign exchange losses P 2,280,625

Elimination of unamortizedpreoperating expenses 2,666,144

P 4,946,769

22. EVENTS AFTER THE BALANCE SHEET DATE39

On January 28, 2005, the Companys distribution warehouse wasseverely damaged by fire. Loss of inventory was limited, but therewas and continues to be, a significant disruption in the flow of

distribution. It is expected that insurance proceeds will fall short ofcosts or rebuilding and loss of inventories by about P1.2 million. Theloss will be taken up in 2005.

23. COMMITMENTS AND CONTINGENCIES40

The following are the significant commitments and contingenciesinvolving the Company:

Operating Lease Commitments Company as Lessee

The Company is a lessee under non-cancellable operating leasescovering certain warehouse and offices. The leases have termsranging from four to ten years, with renewal options, and includeannual escalation rates of 10%. The future minimum rentals payableunder these non-cancellable operating leases as of December 31 areas follows:41

2004 2003

39SFAS 10/IAS 10 requires that when non-adjusting events after the balance sheet date

are of such importance that non-disclosure would affect the ability of the users of thefinancial statements to make proper evaluations and decisions, an enterprise shoulddisclose the following information for each significant category of non-adjusting eventafter the balance sheet date: (a) the nature of the event; and (b) an estimate of itsfinancial effect, or a statement that such an estimate cannot be made.

40 Under SFAS 37/IAS 37, the disclosure for each class of contingent liability should includea brief description of the nature of the contingent liability and, where applicable: (a) anestimate of its financial effect; (b) an indication of the uncertainties relating to the amountor timing of any outflow; and (c) the possibility of reimbursement.

41SFAS 17/IAS 17, Leases, requires the disclosure of information on future minimum rentalpayable for more than five years.


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Within one year P1,815,000 P 1,650,000After one year but not more than five years 6,177,171

6,220,610More than five years 6,450,254 8,221,815

P 14,442,425 P 16,092,425


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Total rentals from these operating leases amounted to P2.0 million in2004 and P1.5 million in 2003, of which the major portion wascharged to manufacturing overhead (see Notes 16 and 18).

Finance Lease Commitments Company as Lessee42

The Company has finance leases covering certain transportation

equipment with terms ranging from three to six years. The leasesprovide options to purchase the transportation equipment at the endof the lease terms. Future minimum lease payments (MLP) underthe finance leases together with the present value (PV) of the netminimum lease payments (NMLP) are as follows:

2004 2003

Future PV of Future PV

MLP NMLP MLP of NMLP

Within one year P210,000 180,000 P 215,000 P 192,700

After one year but not more than five years 1,034,000 900,000 1,110,000

820,000

More than five years 700,000 500,000 800,000 650,000

Total MLP 1,944,000 1,580,000 2,125,000

1,662,700

Amounts representing finance charges ( 364,000 ) - ( 462,300 )

-

Present value of minimum lease payments P 1,580,000 P 1,580,000 P

1,662,700 P 1,662,700

The liabilities relating to the finance leases are shown as part of

Interest-bearing Loans and Borrowings (see Note 13).

Finance Lease Company as Lessor

On December 29, 2004, the Company entered into a finance leasecovering certain specialized equipment with a lease term of sixyears. Future minimum lease payments receivable (MLPR) underthis finance lease together with the PV of minimum lease paymentsreceivable are as follows:

Future MLPR PV of MLP

Within one year P1,108,901 P 943,333After one year but not more

than five years 3,990,091 3,773,332More than five years 1,209,019 943,335Total MLPR 6,308,011 5,660,000Amounts representing

42 SFAS 17/IAS 17, Leases, requires a reconciliation between the total of minimum leasepayments at the balance sheet date, and their present value. In addition, an enterpriseshould disclose the total of the minimum lease payments at the balance sheet date, theirpresent value, for each of the periods disclosed above.


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unearned finance income ( 648,011 )-

P 5,660,000 P 5,660,000

The net investment relating to this finance lease is presented underthe Receivable from a Finance Lease accounts (current and non-

current) in the balance sheet (see Note 13).


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Legal Claims

Litigation is in process against the Company relating to a disputewith a competitor who alleges that the Company has infringedpatents and seeks damages amounting to P50.0 million. The legalcounsel has advised that it is probable that the Company will not befound liable. Hence, no provision for the claim has been made in thefinancial statements as of December 31, 2004.

Capital Commitments

As of December 31, 2004, the Company has commitments of aboutP10.5 million for the acquisition of new plant and machinery.

Others

As of December 31, 2004, the Company has unused letters of creditamounting to P35.0 million.

The Philippines continues to experience economic difficulties relatingto currency fluctuations, volatile stock markets and slowdown ingrowth. Management is of the opinion that losses, if any, fromthese events and conditions will not have material effects on theCompanys financial statements.

2004 illustrative nfs parent rev 02 05

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