Annex A

PHILIPPINE GOVERNMENT ACCOUNTING STANDARDS (PGAS)

PGAS 1 - FINANCIAL STATEMENTS 1.1 Financial statements of a government agency shall consist of: (a) Balance Sheet presents the financial position of a government agency as of a given date. It includes information on the three elements directly related to the measurement of the agencys financial position assets, liabilities and equity; Statement of Changes in Equity shows the changes in equity between two accounting periods reflecting the increase or decrease in the agencys net assets during the year; Statement of Income and Expenses shows the results of operations of a government agency for a given period; and Statement of Cash Flows summarizes the cash flows from operating, investing and financing activities of a government agency during a given period.

(b)

(c)

(d)

1.2

Notes to the financial statements shall likewise be prepared when necessary to: (a) provide information about the basis of preparation of the financial statements and the significant accounting policies; disclose the information required by applicable PGAS that is not presented elsewhere in the financial statements; and provide additional information which is not presented on the face of the financial statements but necessary for a fair presentation.

(b)

(c)

1.3

The books of accounts shall consist of: (a) National Government (NG) books for recording funds held for remittance to the National Treasury, such as those resulting from collections of taxes, fees, etc.; Regular Agency (RA) books for recording funds pertaining to agencys regular operations; and

(b)

(c)

Subsidiary ledgers, which reconcile with general ledger control accounts such as cash, receivables, inventories, property plant and equipment and payables.

PGAS 2 - CONCEPTS AND CHARACTERISTICS 2.1 The following accounting principles, concepts and qualitative characteristics of financial reporting shall be used as guides in the recording of transactions and preparation of financial statements: Principles and Concepts (a) Consistency Transactions and other events should be recognized, measured and presented in a consistent manner from one accounting period to another. Going Concern A government agency is normally viewed as a going concern, that is, as continuing in its operation and meeting its statutory obligations for a foreseeable future. Matching of Costs and Revenues The cost incurred for the generation of revenue or benefits should be recognized as expense over the same period when such revenue or benefits are realized by the agency. Modified Accrual Basis Financial transactions and events shall be recorded using a modified accrual basis of accounting. Under this method, all expenses shall be recognized when incurred and reported in the financial statements in the period to which they relate. Income shall be on accrual basis except where it is impractical or when other methods are required by law. Responsibility Accounting It is a system that relates the financial results to a responsibility center, which provides access to cost and income information under the supervision of a manager having direct responsibility for the centers performance.

(b)

(c)

(d)

(e)

Qualitative Characteristics (a) Comparability Financial information is comparable when users are able to identify and evaluate similarities in, and differences between, the nature and effects of transactions or other events, at one time or over time, either when assessing aspects of a single reporting government agency or of a number of reporting government agencies. To enable users to compare the performance of a government agency over time, financial statements should show comparable information for preceding period.

(b)

Relevance Financial information is relevant when users can use such information in making and evaluating decisions about the allocation of scarce resources, in making predictions about future situations and in forming expectations, or in confirming or correcting past evaluations. (i) Materiality The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the decisions or assessments of users made on the basis of the financial statements. Materiality depends on the nature or size of the item or error in the particular circumstances of omission or misstatement. Timeliness In order to be relevant, financial information must be timely. The usefulness of financial statements is impaired if they are not made available to users within a reasonable period after the reporting date. A government agency should be in a position to issue its financial statements on or before the set deadline.

(ii)

(c)

Reliability Financial information is reliable when the quality of information assures users that such is free from bias and error and faithfully represents what it purports to represent. (i) Completeness Information in financial statements should be complete within the bounds of materiality and cost. Faithful Representation The actual effects of the transactions should be properly accounted and reported in the financial statements. Substance Over Form Transactions and other events should be accounted for and presented in accordance with their substance and economic reality and not merely with their legal form. Neutrality Information is neutral if it is free from bias. Financial statements are not neutral if the information they contain has been selected or presented in a manner designed to influence the making of a decision or judgment in order to achieve a predetermined result or outcome. Prudence It is the inclusion of a degree of caution in the exercise of judgment necessary in making the estimates required under conditions of uncertainty, such that assets or revenues are not overstated or liabilities or expenses are not understated. Prudence does not, however, justify the creation of secret or hidden reserves or excessive provisions, the deliberate understatement of assets or revenues, or the deliberate overstatement of liabilities or expenses.

(ii)

(iii)

(iv)

(v)

(d)

Understandability Financial information is understandable when users comprehend its meaning. It is assumed that users have a reasonable knowledge of the government agencys activities and the environment in which it operates and possess the proficiency necessary to comprehend the significance of contemporary financial reporting practices.

PGAS 3 - CASH 3.1 Cash means money, which is the standard medium of exchange in business transactions. Cash includes money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. It includes checks, bank drafts and money orders. Cash shall be recognized at face value upon its actual receipt or through credit memo from the bank. Cash in foreign currency shall be converted to the Philippine peso using the exchange rate prescribed by Bangko Sentral ng Pilipinas at reporting date. Deposits in banks which are subject to restriction, if material, shall be classified separately among non-current assets and the restrictions clearly disclosed in the financial statements.

3.2

3.3

3.4

PGAS 4 - RECEIVABLES 4.1 Receivables represent amounts collectible from customers and other debtors arising from sale of merchandise or the performance of services on account and claims for money lent, including real property taxes due the Local Government Units (LGUs). Trade and non-trade receivables expected to be realized within the normal operating cycle or one fiscal year shall be recognized at face value and classified as current assets in the balance sheet. Those collectible beyond one year shall be classified as non-current assets. Allowance for doubtful accounts shall be set up for estimated total uncollectible trade receivables to allow fair presentation in the financial statements. To allow presentation of realizable value of receivables, accounts determined to be uncollectible shall be written-off subject to legal and regulatory requirements. Receivables written off shall be transferred to the appropriate registry. Real Property Tax receivable due the city or municipality and the amount due the Special Education Fund (SEF) shall be recorded at the start of the year, with corresponding deferred credits account to avoid appropriating uncollected revenues.

4.2

4.3

4.4

4.5

4.6

Negative receivable balances shall be classified as current liabilities and shall not be offset against the outstanding balance of individual customers.

PGAS 5 - INVENTORIES 5.1 Inventories are assets a) held for sale, b) held for production of goods for sale, c) for transfer, or d) for consumption in the normal course of operations, including those items repossessed, abandoned, confiscated and seized. Inventories shall be measured at cost which shall include: (a) purchase price, import duties and taxes, freight, handling and other costs directly attributable to the acquisition of finished goods, materials and services; cost directly related to the units of production and the systematic allocation of fixed and variable production overhead incurred in converting materials into finished goods; and other costs incurred in bringing the inventories to their present location and condition.

5.2

(b)

(c)

5.3

Repossessed, abandoned, confiscated and seized items shall be measured at fair value on the date of repossession, acquisition and establishment of ownership, respectively. Agricultural produce harvested from agencys biological assets shall be measured at its fair value less the estimated point-of sale cost at the point of harvest. The perpetual inventory system shall be used in accounting for inventories. When inventories are sold, the carrying amount shall be recognized as cost of goods sold in the period when the related revenue is realized. Inventories issued and on hand shall be valued using the moving average method.

5.4

5.5 5.6

5.7

PGAS 6 - INVESTMENTS 6.1 Investments are assets held by an agency for the accretion of wealth through distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing agency such as those obtained through trading relationships. These are assets not directly identified with the operating activities of a government agency.

6.2

Investments shall be recognized at date of acquisition measured by the purchase price of the security and other costs incidental to the purchase. Investments in the form of stocks and other securities, which are readily realizable and are intended to be held for not more than one year, shall be classified as current assets. Investments in foreign currency shall be revalued to the Philippine peso using the exchange rate prescribed by Bangko Sentral ng Pilipinas at reporting date.

6.3

6.4

PGAS 7 - PROPERTY, PLANT AND EQUIPMENT 7.1 Property, plant and equipment (PPE) are non-current assets held by a government agency for use in operation or for lease and are expected to be used for more than one year. PPE shall initially be recognized at cost which includes purchase price and incidental costs such as import duties, freight, installation and any other directly attributable costs. The cost of donated and leased property shall be based on its fair value or appraised value. The cost of construction shall include direct materials, direct labor, indirect cost and incremental overhead identifiable to the construction. Subsequent costs on PPE which result in increased future economic benefits or service potential shall be added to its carrying amount. Subsequent to initial recognition as an asset, PPE shall be carried at its cost less any accumulated depreciation. PPE that are still serviceable but no longer in use shall be properly classified. The straight-line method of depreciation for PPE and leased property shall be used. Depreciation shall be recorded starting the month following date of purchase. A residual value equivalent to ten percent of the purchase cost shall be set up.

7.2

7.3

7.4

7.5 7.6

PGAS 8 - PUBLIC INFRASTRUCTURES 8.1 Infrastructures are classified into two categories, namely: (a) Those for the specific use of a government agency or office, such as office buildings as well as those used for commercial and/or income generating purposes, such as public markets, toll roads, slaughterhouses, etc.

(b)

Those for the use of the general public at large, such as roads, bridges, public parks as well as those for environmental purposes such as reforestations, canals, river, embankments, etc.

8.2 .

Accounting Treatment During Construction Infrastructure projects during construction shall be recorded under the respective Construction in Progress accounts.

8.3

Accounting Treatment After Completion (a) Infrastructures pertaining to category (a) above, shall be recorded as part of the assets of the government agency that owns and uses them. Infrastructures pertaining to category (b) above, shall be transferred from the General Ledger to a separate record (e.g. Registry of Public Infrastructures). They shall be reflected in the notes to financial statements. They shall not be subject to depreciation.

(b)

PGAS 9 - OTHER ASSETS 9.1 Other assets shall include a) arts, archeological specimens, exhibits, restricted funds/cash, b) breeding stocks/work animals, and c) serviceable assets not used in operations and shall be recognized at acquisition cost, at fair value and at carrying amount respectively.. Other assets shall also include intangible assets which are identifiable nonmonetary assets without physical substance held for use in the production/supply of goods or services, for rental to others, or for administrative purposes. These shall be recognized at cost, if it is probable that future economic benefits attributable to the assets shall flow to the agency. These shall be subject to amortization based on the straight line method less ten percent residual value.

9.2

PGAS 10 - LIABILITIES 10.1 Liabilities are present obligations of an agency arising from past transactions or events, the settlement of which is expected to result in an outflow of resources embodying economic benefits from the agency. Current liabilities shall include accounts payable, short-term borrowings and accrued expenses which the agency is committed to pay for goods or services received. It shall also include amounts entrusted/withheld from outside sources/offices and personnel for which the agency is acting as a trustee or administrator.

10.2

10.3

Current liabilities shall be recognized and measured at the time goods/services are accepted/rendered and bills are received. Loans in cash or in kind contracted and guaranteed by the government shall be recognized upon receipt of the proceeds or goods and services from creditors. Loans in foreign currency shall be converted to the Philippine peso using the exchange rate prescribed by the BSP at transaction date. At each reporting date, loans in foreign currency shall be revalued using the closing rate prescribed by the BSP. Contingent liabilities, such as those arising from guarantees against debt default, shall be presented and explained in the notes to the financial statements, indicating, among other things, the name of the debtor, the creditor, the amount of debt guaranteed, the maturity date of the debt and other relevant information.

10.4

10.5

10.6

10.7

PGAS 11 - EQUITY 11.1 11.2 Equity represents the difference between the assets and liabilities. Equity for GOCCs shall include among others the authorized subscribed capital stock, additional paid in capital, treasury stock and retained earnings.

PGAS 12 - INCOME 12.1 Income are increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income includes both revenues and gains. Revenue arises in the course of the ordinary activities of an agency. Gains include those arising on the disposal of non-current assets and those resulting from revaluation of marketable securities as well as increases in the carrying amount of non-current assets. Income shall be recognized when earned or collected. It shall be measured at fair value of the consideration received or still collectible in the future. Donations in cash or in kind shall be recognized as income.

12.2

12.3

12.4

PGAS 13 - EXPENSES 13.1 Expenses are the decreases in economic benefits during an accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity. Expenses shall include financial costs in fulfilling the mandate of an agency such as personal services, maintenance and other operating expenses and financial expenses. These shall also include losses resulting from disasters such as fire and flood as well as those arising on the disposal of non-current assets and those arising from the effects of increases in the rate of exchange for a foreign currency in respect of the borrowings of an agency. Expenses shall be recognized when incurred. Bank charges, commitment fees, documentary stamp expenses, interest expenses and other financial charges shall be classified separately.

13.2

13.3

13.4 13.5