GOVERNMENT SERVICE INSURANCE SYSTEM

ADMINISTERED FUNDS

NOTES TO FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

  1. GENERAL INFORMATION

The Administered Funds are the funds that the GSIS is mandated by law to administer, other than the pension fund. As enumerated in Section 34 of Republic Act (RA) 8291, otherwise known as “The Government Service Insurance System Act of 1997,” the other administered funds of the GSIS are the following:

  • General Insurance Fund;
  • Employees’ Compensation Insurance Fund;
  • Barangay and Sanggunian Officials’ Insurance Fund; and
  • Property Replacement Fund.

The General Insurance Fund is composed of the following businesses: (a) general insurance business; (b) optional life insurance business; and (c) pre-need insurance business.

A separate set of financial statements is prepared for the aforementioned funds to clearly distinguish the financial position, financial performance and cash flows of the administered funds from those of the Social Insurance Fund.

The accompanying financial statements of the GSIS were authorized for issue by the GSIS management represented by the President and General Manager and the Senior Vice President – Controller Group on June 24, 2010.

  1. UPDATE ON NEW COMPUTERIZED SYSTEM

2.1Integrated loans, membership, acquired assets and accounts management system (ILMAAAMS)

To hasten the reconciliation of subsidiary and general ledger balances of contributions and premiums and loans receivable accounts, GSIS has developed various programs to enhance the reliability of the two major modules in ILMAAAMS, the Collections and Disbursements (FS-CD) and the Consumer and Mortgage Loans (FS-CML). Although these two systems were designed to be linked because of the billing and remittance processes for premiums and loans, their integration was not really inherent in the design of SAP. This meant that a lot of customization and work-around procedures needed to be put in place in order to ensure that the system would function as designed.

The integration of the FS-CD and FS-CML, particularly the jobs executed for creation of receivables in both modules upon accrual of the regular monthly installment (RMI) was modified due to resource issues. The initial design proved to be too taxing on resources and the bulk of the transactions could not be managed. The System was enhanced to ensure that all payments on loan accounts have been posted and members’ records are updated.

At present, posting periods from January 1997 to December 2009 in the SAP are still open due to the on-going updating of members’ accounts. However, Management assures that by 2010 posting periods prior to December 2009 will be closed in order to generate the GSIS financial statements real-time using the FIS.

2.2Financial information system (FIS)

The FIS is designed to capture the recording of all the financial transactions from the source or feeder systems. These feeder systems have implementation environments different from that of the FIS subsystems. Financial data from various feeder systems are either automatically extracted and uploaded to FIS through interface program or generated in excel format known as SAP prescribed template with pre-defined accounting entries and manually uploaded to FIS through upload program.

The following are the GSIS’ feeder systems and how the data from these systems are currently fed to the FIS:

  1. General insurance information system (GIIS)

GIIS is an oracle-based system application designed for the computerized processing of non-life insurance transactions for underwriting, reinsurance and claims.

The underwriting process includes issuance of certificate of cover, policy contract and bill for various lines of business such as fire, motor car, floater, marine cargo, marine hull, engineering, aviation, personal accident, miscellaneous and bonds. The reinsurance process includes the distribution of business to reinsurers, whether facultative or treaty, and the corresponding issuance of binders. Processing of claims includes recording of reported losses and the final adjustment of claims for all lines.

All general insurance claims, underwriting and reinsurance transactions are uploaded to FIS through manually-prepared templates provided by the Housing and Insurance Group (HIG). On July 8, 2009, the connection of the GIIS interface program to FIS becomes fully operational in the Central Office and starting August 1, 2009 at the Field Offices. Accounting entries are automatically generated and recorded in the FIS on a per transaction basis.

  1. Technistock portfolio management system (TPMS)

The TPMS is a portfolio management solution which was customized to fit the back-office portfolio requirements of the Investment Management Office (IMO). The system generates a SAP-prescribed template with predefined accounting entries in excel format for batch uploading to FIS. However, TPMS was used by IMO only up to May 2009. The contract with Technistock (Phils.), Inc. for 2009 was no longer renewed.

At present, most of the investment transactions are manually uploaded to FIS based on the duly accomplished SAP-prescribed template provided by IMO personnel. These transactions include placement in foreign-denominated notes and bonds, accrual and collection of interests, treasury bills and bonds maturities, premium and discount amortization and valuation of stocks. However, placement in peso bonds and buying of stocks are directly set-up in the Accounts Payable (AP) Module while selling of stocks is directly set-up in the Accounts Receivable (AR) Module.

  1. Real and other properties owned andacquired (ROPOA) and Leasing manager

The ROPOA Manager is a system used for monitoring and recording the acquisition, administration and disposition of acquired assets covering big ticket accounts.

The Leasing Manager on the other hand, is a system that creates the records for the accrued rental receivables on occupied properties for big ticket accounts that were previously covered by cancelled deed of conditional sale (DCS) and occupied foreclosed properties after the expiration of the redemption period.

Both systems generate file with predefined accounting entries in excel format. The file is saved in a specified storage directory and extracted for batch uploading to FIS.

  1. Claims and pensions administration system (CPAS)

CPAS is a comprehensive application system that will consolidate all information and processing requirements of members’ claim, pension, retirement and dividend under the new open system platform - SAP.

The CPAS is designed to provide online facility for inquiry, processing and computation of optional, pre-need and employees’ compensation (EC) claims. At present, all optional, pre-need and EC claims are uploaded to FIS through manually-prepared templates based on the monthly abstract of disbursed claims extracted by the ITSG from the mainframe.

  1. Migration of SAP DB to ORACLE Database System Software

On November 26, 2009, Management addressed the problem on the database crash and technical problems encountered with the DB2 software through the migration of SAP DB to Oracle PROD. This is in addition to the implemented data recovery measures by the GSIS to assure its members and pensioners that the integrity of all its data has not been compromised and no data is lost.

The GSIS is still in a transition period due to the recent implementation of the new systems, thus the financial statements for CY2009 were prepared manually based on the readily available data from SAP, feeder systems and other reports furnished by operating units concerned (OUCs). However, Management is pursuing that by 2010, GSIS Financial Statements can be generated real-time using the FIS.

  1. RECORDING OF COLLECTIONS AND DISBURSEMENTS IN FIS

3.1Collections

  1. Collections thru the Financial information - Cash Desk (FI-CD) facility of ILMAAAMS

Effective October 13, 2008, all collections pertaining to loans and contributions were processed thru the FS-CD of ILMAAAMS where transactions are automatically recorded simultaneously in the general ledger and subsidiary ledger. However, this facility was stopped on April 2, 2009 when it encountered some technical problems during the database crash.

  1. Collections thru the Cash Receipts and Management System (CRMS)

All collections pertaining to general insurance accounts, investments and other miscellaneous transactions are processed thru the CRMS. Collections done thru the CRMS are uploaded to FIS through the use of templates.

  1. Collections thru the Accounts Receivable (AR) Module

Effective December 15, 2009, all collections from general insurance, investments, investment property, and administrative/miscellaneous transactions with corresponding receivable accounts are being processed directly in SAP thru the FI-AR module. For the meantime, this is being implemented at the Central Office only.

  1. Collections covered by Letter of Authority (LOAs)

All collections pertaining to investment maturities and interests and all fund transfers from other bank accounts are covered by LOAs. LOAs are generally prepared thru SAP, but currently, there are still some manually prepared LOAs. Manually prepared LOAs are posted to SAP while SAP LOAs are automatically posted to the General Ledger (GL) accounts of Cash and Receivable accounts.

During the database crash that happened in April 2009, LOAs were prepared manually. Preparation of LOAs in SAP was resumed only on October 27, 2009.

Data that were lost in March, April and May 2009 were all recovered and uploaded to SAP through manually prepared templates.

3.2Disbursements

All disbursements pertaining to investment placements and fund transfer to other bank accounts, payroll and other miscellaneous transactions are covered by LOAs which are prepared directly in SAP. However, during the database crash that happened in April 2009, LOAs were prepared manually. Preparation of LOAs in SAP was resumed only on October 27, 2009.

The miscellaneous disbursements of the GSIS are being processed thru the AP module of the FIS. Disbursement checks are being generated from this module and these transactions are automatically recorded in the FI-GL.

  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4.1Basis of preparation of financial statements

The accompanying financial statements for the Administered Funds (AF) have been prepared in accordance with the Philippine Accounting Standards (PAS)/Philippine Financial Reporting Standards (PFRS) and the generally accepted insurance accounting principles and reporting practices prescribed by the Insurance Commission.

The financial statements have been prepared on historical cost basis, except for certain financial instruments and investment properties which are carried at fair values.

4.2Cash and cash equivalents

Cash includes cash on hand and in banks. Cash equivalents are short - term and highly liquid investments with maturity of less than three months and readily convertible into cash such as high-yield short-term placements (HYSTP), special savings and time deposits.

4.3Loans and accounts receivable

Loans and accounts receivable are stated at the outstanding balance reduced by unearned income, and allowance for estimated uncollectible accounts.

Allowance/provision for probable losses is established for estimated losses on the principal portion of private loans and receivable accounts based on management’s evaluation of the probability of collection.

4.4Interest receivable

Interest income on unpaid premiums, loans and investments already earned but uncollected are recognized in the books.

An interest of two per cent per month is charged/accrued on unremitted Employees’ Compensation‘s premium contributions as of balance sheet date and classified as non-admitted assets. Income is recognized only upon collection.

4.5Revenue recognition

The major sources of operating revenues of the AF are insurance premiums, interest income on premium arrearages, dividends from investments, interest income from loans, and other miscellaneous income.

Revenues are recorded using the accrual methodwhich provides for the recognition of income in the books when earned regardless of when it is received, and expense when incurred regardless of when it is paid.

For the Employees’ Compensation Insurance Fund, income and expenses is recognized only upon collection and disbursement, respectively. Accrual on income is classified as non-admitted assets.

4.6Administrative andoperating expenses

This account pertains to the contribution made by the GSIS to the Employees’ Compensation Commission (ECC) and the Occupational Safety and Hazard Commission (OSHC), to be drawn from the Employees’ Compensation Insurance Fund, as its share in administrative expenses.

4.7Investments

Investments are classified in the following categories at initial recognition based on the purpose for which they are acquired.

  1. Held for trading (HFT) or Fair value through profit or loss (FVPL)

These are financial assets acquired principally for the purpose of generating profit from short-term fluctuations in price or dealer’s margin.

These are initially recorded at cost and are revalued at fair values every reporting date. Any difference between the cost and the fair value is recorded as appreciation or depreciation of the fair value of investments in the statement of changes in net assets.

Investments in equity securities - stocks traded are classified as HFT or FVPL and as such, these are recorded at cost and are revalued every month-end.

  1. Held-to-maturity investments (HTM)

These are financial assets with fixed or determinable payments and fixed maturities. They are carried at amortized cost using the effective interest method and are classified as non-current assets.

Investments in Foreign Currency and Peso Denominated Bonds are classified as HTM and as such, these are recorded at cost, duly adjusted periodically through the amortization of premiums or discounts.

  1. Available-for-sale (AFS)

AFS financial assets are acquired and held indefinitely for long-term capital appreciation or are not classified as (a) loans and receivables (b) held-to-maturity investments or (c) financial assets of fair value thru profit and loss. They are included in the non-current assets unless GSIS intends to dispose of the investments within 12 months of the balance sheet date.

These assets are initially recognized at cost and are subsequently valued at fair values. Unrealized gains and losses arising from changes in fair values are recognized in equity.

  1. Loans and receivables

These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as non-current assets.

They are initially recognized at cost and subsequently carried at amortized cost, net of allowance for uncollectible accounts.

e.Investments in subsidiaries
The System practices the equity method in Investments in shares of stocks in which it holds at least 20 per cent ownership or where it has the ability to exercise significant influence over the companies’ operating and financial affairs.
Equity method prescribes the initial recognition of the investment at cost but subsequently increased by the share in net earnings (or decreased by the share in the net loss) and extraordinary items and prior period adjustments of the investee/ subsidiary.
  1. Investments In non-traded stocks

Non-Traded stocks are valued at cost, net of allowance for impairment in value.

4.8Investment Property

Investment property pertains to land or building or part of a building or both, held to earn rentals or for capital appreciation or both.

These consist of real properties that were previously the subject of mortgage loan, individual real estate loan, commercial-industrial loan, lease-purchase agreement, or deed of conditional sale, which were either foreclosed or cancelled or dacioned by former owners in favor of the System.

  1. Fair valuation model

In compliance with PAS 40, the GSIS applies fair value model consistently on its investment properties, whereby the assets were initially recorded at cost (consisting of the purchase price and any directly attributable expenditures), then subsequently valued at fair values.

Gains or losses from changes in fair values are recognized during the period in which they occur.

  1. Selling price

In November 2007, the GSIS Board of Trustees in its Resolution No. 167 approved the computation of the new selling price of acquired housing units and lots for disposition by applying the higher of 70 per cent of the current market values (CMV) of the said acquired properties; and book value plus 50 per cent of the rental receivables of the acquired property.

4.9Foreign currency translations

Foreign currency - denominated income and expenses are translated into Philippine Pesos based on the Philippine Dealing System Weighted Average Rate (PDSWAR) exchange rate prevailing on transaction dates.

Foreign currency-denominated assets and liabilities are translated into Philippine Pesos based on PDSWAR prevailing at the end of the interim reporting period. At the end of the reporting year, foreign currency-denominated assets and liabilities are translated to Philippine Peso using the exchange rate provided by the Insurance Commission.

Gain or Loss from foreign exchange transactions and revaluation of foreign currency – denominated assets and liabilities are credited to or charged against current operations.

As of December 31, 2009, the exchange rate provided by the Insurance Commission, per its Circular Letter No. 5-2010 dated January 27, 2010 was P46.3560 to $1.00.

4.10Actuarial reserves

Actuarial reserve requirements for the mandated obligation of the System are computed monthly by the GSIS Actuarial Group based on certain assumptions which are in accordance with generally accepted principles of actuarial valuation.
The actuarial reserves are set up/appropriated out of the accumulated earnings of the administered funds.
4.11Non-admitted assets

Assets of the General Insurance business like prepaid expenses, supplies and materials in stock, receivables from reinsurers and from ceding companies are classified as Non-Admitted Assets. Contingent assets arising from deficit cases of the Optional Life Insurance Business are likewise classified as Non-Admitted Assets. The foregoing classifications are pursuant to Section 179 of the Insurance Code and recommendation of the Commission on Audit.

Due from Reinsurers account refers to losses recoverable from reinsurance policies. On the part of the GSIS, reinsurer’s shares on losses are recognized as income and a receivable from the reinsurers.