GOVERNMENT SERVICE INSURANCE SYSTEM
ADMINISTERED FUNDS
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Section 34 of Republic Act (RA) 8291, otherwise known as “The Government Service Insurance System Act of 1997”, mandates the GSIS to administer the following funds:
1) General Insurance Fund
2) Employees’ Compensation Insurance Fund
3) Barangay and Sanggunian Officials’ Insurance Fund, and
4) Property Replacement Fund.
The General Insurance Fund is composed of the following businesses: (a) general insurance business (b) optional 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation of financial statements
The accompanying financial statements for the Administered Funds are prepared in accordance with Philippine Financial Reporting Standards (PFRS)/ Philippine Accounting Standards (PAS), where applicable. The accounting policies applicable to the life insurance as well as the non-life insurance operations are in accordance with the generally accepted insurance accounting principles in the Philippines and reporting practices prescribed by the Insurance Commission.
2.2 New accounting standards
The Financial Reporting Standard Council (FRSC) approved the issuance of new and revised accounting standards which are based on International Accounting Standards (IAS) and new International Financial Reporting Standards (IFRS) issued by the IAS Board. These new standards have been renamed Philippine Accounting Standard to correspond to IAS while the PFRS corresponds to IFRS.
Starting January 1, 2006, the GSIS has adopted the new Philippine Accounting Standards (PAS), where applicable, as enumerated below. The System has been guided by PFRS 1, First time adoption of Philippine Financial Reporting Standards:
PAS 1 – Presentation of Financial Statements
PAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
PAS 21 – The Effects of Changes in Foreign Exchange Rates
PAS 28 – Investments in Associates
PAS 32 – Financial Instruments: Disclosure and Presentation
PAS 39 – Financial Instruments: Recognition and Measurement
The GSIS had an early and partial adoption of PAS 39 in December 2004 on its investment in bonds. Application of the standard on the rest of the investment in securities and debt instruments started in January 1, 2006.
As of December 31, 2006, the System has not yet determined the impact of PAS 32 and 39 to the financial statements because the System is still in the process of enhancing and polishing policies and procedures and information systems related to the adoption of these Standards.
Generally, the adoption of PAS 32 and 39 will not result in the restatement of prior years’ financial statements as allowed by the Securities and Exchange Commission. Any cumulative effect of adopting the standards, however, will be reflected in the equity.
PAS 40 – Investment Property
The GSIS uses the fair value model. Fair value model requires an investment property to be measured at fair value with fair value changes recognized directly in the statement of revenues and expenditures.
Philippine Financial Reporting Standards ( PFRS)
PFRS 1 – First Time Adoption of Philippine Financial Reporting Standards
PFRS 4 – Insurance Contracts
PFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations
2.3 Cash equivalents
Cash equivalents are short - term and highly liquid investments with original maturity of less than three months, are readily convertible into cash and are subject to an insignificant risk of change in value. These include special savings deposits and time deposits.
2.4 Loans and accounts receivables
Loans and accounts receivables 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. They are expressed as percentages of the outstanding accounts, as follows:
Years / Age / Percentage of Allowance2005 – 2006 / 0 – 2 years / 0
2003 – 2004 / 3 – 4 years / 25
2001 – 2002 / 5 – 7 years / 50
2000 – below / more than 7 years / 100
On private 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.
Loans and receivable accounts which carry government guarantee are not covered by the above provision.
2.5 Interest receivable
Interest income on unpaid premiums, loans and investments already earned but uncollected are recognized in the books.
An interest of 2% per month is charged / accrued on unremitted Employees’ Compensation‘s premium contributions as of balance sheet date and classified as non-admitted assets. Income will recognize only upon collection.
2.6 Revenue recognition
The major sources of operating revenues of the Administered Funds are insurance premium contributions, interest income on premium arrearages, dividends from investments, interest income from loans, and other miscellaneous income.
Revenues are recorded using the accrual method which 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.
Beginning 2006, however, for the Employees’ Compensation Insurance Fund, income and expenses have been recognized only upon collection and disbursement, respectively. Accrual on income is classified as non-admitted assets.
2.7 Administrative and operating expenses
This account pertains to the contribution 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.
2.8 Investments
Investments are classified in the following categories at initial recognition based on the purpose for which they are acquired.
a. Held for trading – stocks (HFT)
Stock 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 income statement of the current period.
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.
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. 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% 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.
f. Investments in non-traded stocks
Non-traded stocks are valued at cost, net of allowance for impairment in value. 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.
2.9 Foreign currency transactions
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.
2.10 Actuarial reserves
Actuarial reserve requirement for the mandated obligation of the System is computed monthly by the GSIS Actuarial Group based on certain assumptions which are in accordance with generally accepted principle of actuarial valuation.
Actuarial reserves are set up / appropriated out of the Surplus representing the accumulated earnings of the administered funds.
2.11 Non-admitted assets
Assets of the General Insurance business like prepaid expenses, 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 the 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.
Reinsurance premiums for all policies exceeding one year cover are recorded as prepaid reinsurance premium and are recorded as expense on the following year until expiry of the policy.
Starting CY 2006, all accrual on EC Fund (premium and interest) are classified as non-admitted assets.
2.12 Funds held-in-trust (FHIT)
Funds held-in-trust account of the Administered Funds consists of the following:
1. Cash Collateral for performance bonds, surety bonds, judicial bonds
2. Premium Reserve for inward reinsurance under treaty agreements.
3. ACCOUNTING FOR NON-LIFE INSURANCE BUSINESS
Unearned Premiums
Pursuant to the provisions of Section 213 of the Insurance Code and the Regulatory Accounting Principles and Practices (RAPP) prescribed by the Insurance Commission, the GSIS maintains a reserve for unearned premiums on its policies in force which is charged to liability. Except for marine cargo risks, such reserve is equal to 40% of the gross premiums, less returns and cancellations, of all policies or risks in force. For marine cargo risks, reserve is equal to 40% of the premiums written during the last two months of the calendar year.
4. TRANSITION TO PFRS
The transition to PFRS resulted in certain changes in the System’s previous accounting policies referred to in the succeeding tables as “previous Generally Accepted Accounting Principles (GAAP)”.
These transition effects resulted from the adoption in CY 2006 of PAS 39 (Financial Instruments: Recognition and measurement), PAS 32 (Financial Instruments, Disclosure and Presentation), and PAS 40 (Investment Property), and are translated in figures for the affected balance sheet and income accounts.
Investment property
Under previous GAAP, foreclosed housing units, cancelled DCS awards and big tickets accounts are presented and recognized as acquired assets at carrying values and classified as “Acquired Assets” regardless if these assets are occupied or not.
Under PFRS ( specifically PAS 40 ) acquired assets which are currently occupied and from which the System derives rental income and acquired assets which are being held by the System for potential appreciation in the future are recognized as investment property ; under PFRS, these assets are recorded by the System initially at cost and subsequently at fair values.
The investment properties for the Administered Funds are comprised of the Manila Hotel and the Manila International Airport Terminal (MIPTI). These assets were acquired in 2003 thru dacion en pago, by the Social Insurance Fund to the General Insurance Business and the Optional Life Insurance Business.
Compliant with PAS 40, the acquired assets were appraised and revalued to their fair values at year end of 2006. As a result of the appraisal, the Manila Hotel gained P 1.14 Billion from the fair valuation; MIPTI’s appraisal did not yield any appreciation or gain in value.
Although PAS 40 was applied by the System for the first time in 2006, appraisal of the aforementioned assets has already been reported in 2003, the year of the appraisal. That being the case and as recommended by COA, the gains on valuation of the Manila Hotel were all recognized as Surplus adjustments in 2006; the transitional valuation had no effect on the net results of operation of the current year; investment property as of balance sheet date was increased by P1.4 Billion from its net book value of P 7.7 Billion.
The effects of the PFRS in 2006 are summarized as follows:
Previous GAAP / Effects of Transition to PFRS / PFRSA s s e t s
/ /Investment Property /
P 7,773,081,126
/P 1,141,683,343
/P 8,914,764,469
Liabilities and NetworthSurplus / P 4,956,356,730 / P 1,141,683,343 / P 6,098,040,273
The details of the transaction effects on the above accounts are shown below:
Investment Properties / Previous GAAP / Gain on Valuation / PFRSManila Hotel
/ /GIF /
P 1,392,613,662
/P 926,284,388
/P 2,318,898,050
OLIF /326,662,464
/215,398,955
/542,061,419
Sub-Total /1,719,276,126
/1,141,683,343
/2,860,959,469
Manila International Airport Terminal (MIPTI) / / /GIF /
4,911,646,560
/-
/4,911,646,560
OLIF /1,142,158,440
/ - /1,142,158,440
Sub-Total / 6,053,805,000 / - / 6,053,805,000Total / P 7,773,081,126 / P 1,141,683,343 / P 8,914,764,469
5. CASH AND CASH EQUIVALENTS
The Cash on Hand and in Banks account of the Administered Funds consists of the following:
Particulars / 2006 / 2005Cash on hand and in banks
/P 396,884,772
/ P 4,960,711,738Cash equivalents / /
Special savings deposits / 774,959,208 / 1,321,314,876
Time deposits / 14,963,994 / -
Total Cash and Cash Equivalents / P 1,186,807,974 / P 6,282,026,614
6. CONTRIBUTIONS/PREMIUMS RECEIVABLE
The account represents all premiums and contributions earned but not yet received as follows:
Particulars / 2006 / 2005Premiums receivable from:
/General insurance business
/P 2,030,445,935