GOVERNMENT SERVICE INSURANCE SYSTEM
SOCIAL INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
(All amounts in Philippine Pesos unless otherwise stated)
1. GENERAL INFORMATION
The Government Service Insurance System (GSIS) is a government financial institution, organized and created to administer the System’s funds and implement the laws that govern the social security and insurance benefits of all government employees. The GSIS maintains its officially registered address at the Government Financial Center, Roxas Boulevard, Pasay City, which is also its Central Office. It has 40 field offices strategically located in various cities and municipalities of the country.
The GSIS was created by the Congress of the Philippines through the passing of Commonwealth Act. No.186 on November 14, 1936. Its primary objective is to promote the welfare of the employees of the government through an insurance system that will protect its members against adverse economic effects resulting from death, disability and old age.
On May 31, 1977, Presidential Decree No. 1146, otherwise known as “Revised Government Service Insurance Act of 1977,” was issued by then President Ferdinand E. Marcos. On June 24, 1997, Republic Act (RA) No. 8291 otherwise known as, “The Government Service Insurance System Act of 1997”, was enacted into law, enhancing the social security coverage of the GSIS.
Pursuant to Section 34 of RA 8291, all contributions payable under Section 5 thereof, together with the earnings and accruals thereon shall constitute the GSIS Social Insurance Fund (SIF). The said Fund shall be used to finance the benefits administered by the GSIS under RA 8291. As such, the Social Insurance Fund (SIF) serves as the core fund of the GSIS, as distinguished from the other funds that the GSIS is mandated to administer.
2. NEW COMPUTERIZED SYSTEMS
2.1 Integrated Loans, Membership, Acquired Assets and Accounts Management System (ILMAAAMS)
Steadfast in its decision to upgrade and constantly update information about its more than 1.5 million members, the GSIS decided to adopt a new, open software system called the Integrated Loans, Membership, Acquired Assets and Accounts Management System (ILMAAAMS) in 2007.
As its name suggests, the ILMAAAMS is designed to handle and process all data requirements in four major areas that form the core of GSIS operations: membership, loans origination and administration, acquired assets, and accounts management.
The upgrade allows the GSIS to migrate its current system from legacy to an open system that enables the pension fund to impeccably introduce new products or processes without being hindered by proprietary issues associated with legacy or mainframe software systems. In addition, open systems are synonymous with interoperability and portability.
Migration of all the necessary data into the new processing system as part of the ILMAAAMS integration process was started in October 2007. With the ILMAAAMS, the state pension fund has likewise implemented a fully electronic system that links complex processes, such as posting amortization records to the general ledger system by providing seamless communication to the two crucial procedures. The new software also can connect other multi-faceted processes of the GSIS, as well as new technologies that may be offered by providers in the future.
2.2 Financial Information System (FIS)
The GSIS started during the last quarter of 2007 the installation and usage of new software called the GSIS Financial Information System (FIS). It is aimed at improving operational efficiencies of accounting units in the Central Office and Field Offices, thus enabling the pension fund to render faster and more accurate service to members and client-agencies.
The implementation of the FIS enables the GSIS to significantly reduce operational steps because of an integrated accounting system, thereby reducing cycle time particularly in claims and disbursements transactions to the generation of financial reports from central and field operations.
The automated business process likewise reduces manual work for the staff, improves internal controls, and allows the employees to view real-time information business transactions, which is a key area for adherence in corporate governance.
The areas that benefits much from the new software includes general ledger, cash management, budget management, miscellaneous disbursements, and reconciliation of subsidiary and general ledger balances.
The new accounting platform also allows the automatic posting of transactions upon their entry in either Central Office or Field Offices, eliminating redundancies that previously occurs’ in duplication of records. It likewise provides more security to the GSIS data because of built-in access levels in the system.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1 Basis of preparation of financial statements
The accompanying financial statements for the Social Insurance Fund are prepared in accordance with Philippine Financial Reporting Standards (PFRS) and the generally accepted insurance accounting principles and reporting practices prescribed by the Insurance Commission.
The financial statements are prepared on historical cost basis, except for certain financial instruments and investment property which are carried at fair values.
3.2 Centralized Deposit and Funding System or “One Bank Account” policy
Under the “One Bank Account” policy, all collections are deposited to a centralized collection bank account and all disbursements are funded through the same account, which is maintained in the Central Office of the Union Bank of the Philippines and Philippine National Bank. Accordingly, collections and disbursements of the Field Offices (FOs) are debited and credited, respectively, to Due Manila Office, a reciprocal account.
This cash management policy is intended, among others, to efficiently manage the cash in bank by properly establishing the cash position of the Fund and by strengthening the monitoring and control of cash flows.
3.3 Cash and cash equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term and highly liquid investments with original maturity of less than three months and readily convertible into cash such as special savings and time deposits.
3.4 Contributions and premiums receivable
Pursuant to Section 3.1 of RA 8291, it is mandatory for all the covered members of the GSIS to pay monthly contributions of 9% of the Monthly Compensation (MC) for the member, and 12% of the MC, for the employer. The premium contributions are remitted directly to the GSIS within the first ten days of the month following the month to which the contributions apply.
Based on the monthly billing reports, premium contributions are set-up in the books as Premiums Receivable and correspondingly recognized premium income. Upon actual receipt of remittances, the receivable amount is adjusted accordingly.
Premiums Receivable with arrearages beyond one year is periodically reclassified to Other Non-current Assets.
3.5 Loans and accounts receivable
Loans and accounts receivables are stated net of deferred income or provision for estimated uncollectible accounts.
a. Provision for probable losses is established for estimated losses on the principal portion of business loans and receivable accounts based on management’s evaluation if the accounts are collectible.
b. Allowance for doubtful accounts/bad debts is established for estimated losses on the interest income portion of business loans and receivable accounts.
On business loans, the level of allowance is based on the collateral deficiency or the excess of the loan exposure (principal plus accrued interest) over the fair value of the collateral.
On receivables, allowances are expressed as percentages of the accounts, as follows:
Years / Age / Percentage of Allowance2006 – 2007 / 0 – 2 years / -
2004 – 2005 / 3 – 4 years / 25
2002 – 2003 / 5 – 7 years / 50
2001 – below / more than 7 years / 100
Loans and receivable accounts which carry government guarantee are not covered by the above provision.
3.6 Investments
Investments are classified in the following categories at initial recognition based on the purpose for which they are acquired.
a. Held for trading (HFT) – stocks and foreign currency-denominated Republic of the Philippines (ROP) notes and bond
Investments are classified as held for trading if 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 balance sheet date. Any difference between the cost and the fair value is recorded as unrealized gain or loss in the Statement of Revenue and Expenditures of the current period.
Foreign currency denominated Republic of the Philippines (ROP) notes and bonds are classified as held for trading. 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 revenue or loss.
b. 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 Peso ROP Bonds are classified as Held-to-maturity and as such, these are recorded at cost, duly adjusted periodically through the amortization of premiums or discounts.
c. Available-for-sale (AFS)
Available-for-sale 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.
d. Investments in subsidiaries
The System practices the equity method in accounting for investments in shares of stocks in which it holds at least 20% ownership or where it has the ability to exercise significant influence over the companies’ operating and financial affairs.
The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the net investors’ share of the net assets of the investee.
e. Investments in non-traded stocks
Non-traded stocks are valued at cost, net of allowance for impairment in value.
3.7 Investment property
Investment property account pertains to land or a 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 are either foreclosed or cancelled or dacioned by former owners in favor of the System.
Fair valuation model
In compliance with Philippine Accounting Standard (PAS) No, 40, the GSIS applies fair value model consistently on its investment property, 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.
Selling price
In November 2007, the GSIS Board of Trustees thru Board Resolution No. 167 approved the computation of the new selling price of acquired housing units and lots for disposition by applying the highest of 70% of the current market values (CMV) of the said acquired property; and book value plus 50% of the rental receivables of the acquired property.
3.8 Property and equipment
These assets are recognized and recorded in accordance with PAS 16.
Depreciation is computed in conformity with the provisions of COA Circular No. 2003-007 dated December 11, 2003. The COA Circular provides the revised estimated useful life in computing depreciation for government property, and equipment effective January 1, 2004. The major changes involve the following:
· Depreciation is computed on a straight-line method based on the estimated useful life of 20 to 30 years for buildings and a residual value of 10% of the acquisition cost/appraised value thereof.
· Prior to CY 2004, the salvage value for building was computed at 5% of its cost while useful life is estimated at 50 years. For land improvements, depreciation was computed at 5% residual value and useful life of 5 years.
· In October 2004, the above circular was amended by COA Circular No. 2004-003 which prescribe that the resulting adjustment from the change in the depreciation computation shall be charged to the current depreciation expense and that past depreciation expense need not be adjusted.
· Computer equipment are carried at cost less salvage value of ½ % of the cost of the equipment. Depreciation is computed on a straight-line method over estimated life of 5 years.
3.9 Revenue recognition
The major sources of operating revenues of the Fund are the social insurance premium contributions, investment income, interest income from loans, rental income from investment properties and other income.
The GSIS uses the accrual method in recognizing revenues.
a. Service loans
Revenues from loans are computed using the rate of interest for each loan. Interest receivable on service loans is recorded monthly based on 1/12 of the approved interest rate for each loan product multiplied by the loan outstanding balance as of the end of the month.
The actual collections on the service loans are distributed based on the 73% (principal) and 27% (interest) ratio except for collections on policy loan which are distributed on a 10% (principal) and 90% (interest) ratio. The use of estimates in the distribution of interest and principal upon collection shall no longer be used once the ILMAAAMS (Integrated Loans, Membership, and Acquired Assets Accounts Management System) and FIS (Financial Information System) are fully operational. These will enable the accurate and timely distribution of collection to the proper accounts.
The interests on the following loans are computed in advance for the entire term of the loan upon granting and are made part of the loan amortization. This is recorded as deferred interest income and recognized as earned upon collection.
Type of Loan / ActualDistribution of collections
Principal / Interest
eCard cash advance / P138.89/mo / P50.00/mo.
Emergency loan / P416.67 / P83.33
Emergency loan assistance / P416.67 / P83.33
Pension loan / Actual distribution
b. Housing loans
Accrual of interest on housing loans (Real Estate Loans-REL and Deeds of Conditional Sale-DCS)
Interest Receivable on REL and DCS is set-up monthly by applying 1/12 of 10 percent (average interest rate) on active loan accounts which is estimated at 80 percent of the previous month’s outstanding balance. The accrued interest is reversed during the succeeding month. The interest component of monthly loan repayments is then recorded using the actual distribution of collection as to principal and interest generated by the Information Technology Services Group (ITSG).