SEC Released Amended SRC Rule 68

Accounting Alert

SEC Released Amended SRC Rule 68

17 February 2012

This Accounting Alert aims to provide summary of the significant changes made in the Amended Securities Regulation Code (SRC) Rule 68 issued by the Philippine Securities and Exchange Commission (the SEC or the Commission) last October 20, 2011. SRC Rule 68 (the Rule) defines the specific requirements of the SEC regarding financial reporting of entities registered with the SEC. The changes in the amended Rule may pertain to newly added rules and requirements already prescribed by the existing SEC Circulars which are incorporated herein.

Overview

SRC Rule is the implementing rules and regulations (IRR) of Republic Act No. 8799 otherwise known as the Securities Regulation Code of 2000. SRC Rule 68 is the IRR that specifically deals with the financial reporting requirements of entities registered with the SEC.

The Rule is previously divided into two sections, Rule 68 governing non-publicly listed entities and
Rule 68.1 applicable for public companies in the Philippines as set forth in Section 17.2 of the SRC.

The Rule is now divided into the following parts:

•  Part I: General Financial Reporting Requirements

This deals with the general financial reporting requirements of the SEC to the following public and non-public entities:

Covered Entity / Thresholds
a.  Stock corporations / paid-up capital stock of P50,000 or more
b.  Non-stock corporations / total assets of P500,000 or more, or
gross annual receipts of P100,000 or more
c.  Branch offices
(of stock corporation) / assigned capital in the equivalent amount of P1,000,000 or more
d.  Branch offices
(of non-stock corporation) / total assets in the equivalent amount of P1,000,000 or more
e.  Regional operating headquarter of foreign corporation / total revenues in the equivalent amount of P1,000,000 or more

•  Part II: Additional Requirements for Issuers of Securities to the Public

In addition to the financial reporting requirements under the Part I of the Rule, the following issuer of securities to the public must comply with the requirements under this part of the Rule:

a.  Issuer which has sold a class of their securities pursuant to a registration under Section 12 of the SRC;

b.  Issuer with a class of securities listed for trading on an exchange; and,

c.  Issuer with asset of at least P50 million and has 200 or more holders each holding at least 100 shares of its equity.

The Rule is effective for audited financial statements covering periods ended December 31, 2011 and onwards, and for interim financial statements starting the first quarter of 2012, and thereafter.

Summary of Significant Changes and Updates

1.  Financial Reporting Framework

The term “Generally Acceptable Accounting Principles (or GAAP)” was deleted and replaced with Financial Reporting Framework which means a set of accounting principles, standards, interpretations and pronouncements that must be adopted in the preparation and submission of the annual financial statements of a particular class of entities, as defined in the Rule by the Commission.

Under the amended Rule, the following are the prescribed financial reporting framework for a particular class or group of entities:

Class of Entity/Criteria / Financial Reporting Framework /
a.  Large and/or publicly accountable entity
Falling under any of the following criteria:
•  total assets of more than P350 million or total liabilities of more than P250 million;
•  required to file financial statements under Part II of the Rule;
•  in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market; or,
•  holders of secondary licenses issued by regulatory agencies / •  Philippine Financial Reporting Standards (PFRS), or
•  Financial Reporting Framework applicable to Banks, Insurance Companies or Pre-need, as allowed by the SEC or the appropriate regulatory agency
b.  Small and medium-sized entities (SMEs)
Meeting all of the following criteria:
•  total assets of between P3M to P350M or total liabilities of between P3M to P250M
•  not required to file financial statements under Part II of the Rule;
•  not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market; and,
•  not holders of secondary licenses issued by regulatory agencies.
Note: Refer to the Rule for the list of instances where an SME may be exempted from the mandatory adoption of PFRS for SMEs. / PFRS for SMEs
Class of Entity/Criteria / Financial Reporting Framework
c.  Micro entities
Meeting all of the following criteria:
•  total assets and liabilities are below P3 million;
•  not required to file financial statements under Part II of the Rule;
•  not in the process of filing their financial
statements for the purpose of issuing any class of instruments in a public market; and,
•  not holders of secondary licenses issued by regulatory agencies. / •  Income tax basis
•  accounting standard in effect as of December 31, 2004, or
•  PFRS for SMEs

When an SME that uses the PFRS for SMEs in the current year breaches the floor or ceiling of the size criteria at the end of that current year, and the event that caused the change is considered “significant and continuing”, the assessment of “significant and continuing” shall be based on management’s judgment taking into consideration relevant qualitative and quantitative factors. As a general rule, 20% or more of total assets or total liabilities would be considered significant.

2.  Statement of Management Responsibility

The Rule prescribed the wording of the Statement of Management’s Responsibility (SMR) for Financial Statements that shall be attached to the financial statements filed with the SEC. All of the following are required to sign the SMR of the entity:

•  Chairman of the Board;

•  Chief Executive Officer; and,

•  Chief Finance Officer

If required by the entity’s by-laws, persons holding equivalent position as that of the aforementioned signatories shall sign the statement.

In the case of branch offices or regional operating headquarters of foreign corporation, the SMR shall be signed by the local manager who is in charge of its operations within the Philippines.

The SMR of the entities covered under Part II of the Rule shall be signed under oath.

3.  Reportorial Requirements on Audit Findings

The Rule also incorporated reportorial requirements for all regulated entities which was only required for public companies under the existing SEC Circular (i.e., Memorandum Circular No. 5, Series of 2002) to specify the obligation of the accredited independent auditors on providing relevant information to the Commission in connection with its enforcement actions.

A regulated entity shall now report to the Commission its action on a report of its independent auditor pertaining to the following:

a.  Any material findings involving fraud or error;

b.  Losses or potential losses the aggregate of which amounts to at least 10% of the consolidated total assets of the entity;

c.  Any finding to the effect that the consolidated assets of the entity, on a going concern basis, are no longer adequate to cover the total claims of creditors; and,

d.  Material internal control weaknesses which may lead to financial reporting problems.

The Rule prescribed the form of report on the audit findings to be submitted by the regulated entity to the Commission within five business days from the date the report is submitted by the independent auditor. In case the regulated entity fails to submit this required report, the independent auditor shall, within 30 business days from the submission of his findings to the entity, file a report (SEC Form Au-Rep) to the Commission.

The report on findings shall be submitted and discussed by the independent auditors to the entity’s audit committee or Board of Directors in order to preserve the concerns of the supervisory authority and independent auditors regarding the confidentiality of the information.

The independent auditor shall document management’s explanation and/or corrective action taken regarding his adverse findings. The same shall be included in the report of the independent auditor to be submitted to the SEC if the entity fails to submit the above required report.

4.  Report of Independent Auditor when the Company Incurred Capital Deficiency

The Rule also incorporated and clarified the content of the auditor’s report in case a company has incurred a capital deficiency, to provide an emphasis paragraph indicating the following information:

a.  The fact that the company has incurred a capital deficiency that raises an issue on its going concern status;

b.  A brief discussion of a concrete plan of the company to address the capital deficiency and reference to the note to financial statements that provides a complete disclosure of the said plan; and,

c.  A statement that the auditor conducted sufficient audit procedures to verify the validity of the aforementioned plan.

In case the company fails to present a concrete plan or the auditor determines that the plan is not supported by sufficient documents, the financial statements shall not be prepared on a going concern basis but on a liquidation basis using the applicable standards under its financial reporting framework.

The requirement above shall not apply to an entity that incurred a capital deficiency due to any of the following reasons:

a.  The entity is at pre-operating stage and has incurred capital deficiency due to higher

pre-operating expenses than its initial capitalization and projected financial statements indicate that it will generate net income once it starts commercial operations;

b.  The entity has significant losses incurred in prior years but has generated positive results (net income) from operations over the current period due to developments in the business or regularization of its operation;

c.  The entity has incurred capital deficiency during the current period only due to a significant adjustment arising from the adoption of new financial reporting framework or occurrence of

non-recurring transaction for the period; and,

d.  Such other cases which the Commission may consider as valid ground for considering the company as a going concern.

Any company covered by any of above exemptions shall provide in Note 1 to its audited financial statements a discussion on the reason for its capital deficiency and a concrete plan to address the same.

5.  Auditor’s Opinion on Financial Statements Other than Qualified

It is considered as a violation of the Rule if the audited financial statements of listed companies and other issuers of securities to the public with an auditor’s opinion other than unqualified arising from the following:

a.  Deviation(s) from the required financial reporting framework, or

b.  Scope limitation imposed by the company (added under the amended Rule).

Listed banks with qualifications on the auditor’s opinion pertaining to a deviation from the financial reporting framework adopted by the Bangko Sentral ng Pilipinas as part of the latter’s prudential reporting requirements are exempted from this Rule.

6.  Re-issuance of the Financial Statements

For financial statements that may be found by the Commission to be deficient and/or misstated, the Commission shall make a determination whether such misstatement or incompleteness is significantly material, that would necessitate the amendment and re-issuance of the financial statements.

Listed companies and other issuers of securities to the public covered under the Part II of the Rule shall not amend their audited financial statements without prior request from and approval by the Commission.

7.  Rotation of External Auditors

The independent auditors or in the case of an audit firm, the signing partner, of the regulated entities covered under the Part II of the Rule shall be rotated after every five years of engagement. A two-year cooling off period shall be observed in the re-engagement of the same signing partner or individual auditor.

8.  Other Supplemental Documents to be filed with Financial Statements

The Rule prescribed the supplementary documents listed below to be filed with the annual financial statements. Some of these supplementary documents are required under the previously issued SEC Memorandum Circulars which are now incorporated in the Rule. All of these supplementary documents should be covered by SMR. Moreover, certain supplementary documents should be covered by a legal matter paragraph of auditors’ reports or a separate report of auditor.

a.  The following supplemental documents should be covered by the auditors’ report.

Regulated Entity / Required Supplemental Documents/Information /
Non-stock and non-profit organizations / A schedule showing the nature and amount of each items comprising the total receipts and disbursements according to sources and activities (e.g., pursuant to primary purpose or commercial activity).
Issuers of securities to the public (covered under Part II of the Rule) / Supplementary schedule required by Annex 68-E.
Issuers of securities to the public (covered under Part II of the Rule), and stock corporations with unrestricted retained earnings in excess of 100% of paid-in capital stock / A Reconciliation of Retained Earnings Available for Dividend Declaration which shall present the prescribed adjustments as indicated in
Annex 68-C of the Rule.
Listed companies and investment houses that are part of a conglomerate or group of companies / A map showing the relationships between and among the company and its ultimate parent company, middle parent, subsidiaries or co-subsidiaries, and associates.
Large and/or publicly accountable entities / A schedule, in table format, showing in the first column a list of all the effective standards and interpretations under the PFRS as of year-end, and an indication opposite each in the second column on whether it is “Adopted”, “Not adopted” or “Not applicable”.

b.  The following supplemental documents are not required to be covered by the auditors’ report.

Regulated Entity / Required Supplemental Documents/Information /
Foundations / A sworn statement of the Foundation’s President and Treasurer on the following:
a.  Specific sources of funds;
b.  Application of funds with the following information on activities accomplished, on-going and planned:
•  Complete name, address and contact number of project officer-in-charge;
•  Complete address and contact number of project office;
c.  Copies of the certifications from the Office of the Mayor or the Head of either the Department of Social Welfare and Development or Department of Health, on the existence of the subject program or activity in the locality on which it exercises jurisdiction.
Issuers of securities to the public (covered under Part II of the Rule), and secondary licensees of the Commission (financing companies, broker dealer of securities and underwriters) / A schedule of financial indicators for two comparative periods, as follows:
a.  Current/liquidity ratios;
b.  Solvency ratios, debt-to-equity ratios;
c.  Asset-to-equity ratios;
d.  Interest rate coverage ratios;
e.  Profitability ratios; and,
f.  Other relevant ratios necessary.
Financing companies / Information on the following for two comparative periods:
a.  Ratio or percentage of total real estate investments to total assets;
b.  Total receivables to total assets;
c.  Total DOSRI receivables to net worth;
d.  Amount of receivables from a single corporation to total receivables. These should be file together with the annual audited financial statements, and/or interim financial statements, if applicable.
Mutual funds / Information on the following for two comparative periods:
a.  Percentage of investment in a single enterprise to net asset value;
b.  Total investment of the fund to the outstanding securities of an investee company;
c.  Total investment in liquid or semi-liquid assets to total assets;
d.  Total operating expenses to total net worth; and,
e.  Total asset tot total borrowings.
These should be file together with the annual audited financial statements, and/or interim financial statements, if applicable.
Investment houses / A schedule showing the following:
a.  Details (per issue) of underwriting activities for the year:
•  Name of the issuer-client;
•  Nature of commitment;
•  Amount of issue;
•  Underwriting and other fees generated; and,
•  Basis of computation for each
b.  Transactions with DOSRI:
•  Name of related party;
•  Description of transactions;
•  Total volume/amount of transaction;
•  Terms and conditions (e.g., maturity, security, mode of payment); and,
•  If secured, the carrying amount of the asset used as collateral
Listed companies that recently offered securities to the public (initial of additional offering) / A schedule of the following:
a.  Gross and net proceeds as disclosed in the financial prospectus
b.  Actual gross and net proceeds
c.  Each expenditure item where the proceeds was used; and,
d.  Balance of the proceeds as of end of reporting period.

9.  Additional Requirements for Entities Filing Consolidated Financial Statements