GOVERNMENT SERVICE INSURANCE SYSTEM
SOCIAL INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
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 Home 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 enacted 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 Basis of preparation of financial statements
The accompanying financial statements for the Social Insurance Fund have been 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 and revised accounting standards, where applicable, as follows:
a. Philippine Accounting Standards ( PAS )
PAS 1 – Presentation of Financial Statements
PAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
PAS 19 – Employee Benefits
PAS 21 – The Effects of Changes in Foreign Exchange Rates
PAS 28 – Investments in Associates
PAS 32 – Financial Instruments: Disclosure and Presentation
PAS 36 – Impairment of Assets
PAS 39 – Financial Instruments: Recognition and Measurement
The GSIS had an early and partial adoption of PAS 39 on December 31, 2004 on its investment in bonds. Application of the standard on the rest of the investments was made beginning 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.
The GSIS is in the process of determining the real and other properties owned and acquired (ROPOA). It has not yet come up with an analysis on the financial impact of the adoption of PAS 40 (fair value method) because of the volume of transactions and the fact that assessment/valuation procedures and techniques of the System have yet to be ascertained.
b. 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 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 Operating Departments (FODs) 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.
2.4 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.
2.5 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 billing reports, premium contributions applicable for a month are set-up in the books as Premiums Receivable at the end of that month, simultaneously recognizing it as income for the period. Upon actual receipt of remittances, the receivable amount is adjusted accordingly.
Premiums Receivable with arrearages beyond one year are periodically reclassified to Other Non-current Assets.
2.6 Loans and accounts receivable
Loans and accounts receivable are stated at the outstanding balance reduced by unearned income, and allowance for estimated uncollectible accounts.
a. Allowance/Provision for probable losses is established for estimated losses on the principal portion of business loans and receivable accounts based on evaluation of collectibility.
b. Allowance for doubtful accounts/bad debts is established for estimated losses on the interest 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.
Loans and receivable accounts which carry government guarantee are not covered by the above provision.
For loan programs with interest rates that are computed in advance (E-Card Cash Advance, Emergency Loan, Pension Loan, and Emergency Loan Assistance), the interest for the full term of the loans are capitalized and are correspondingly credited to Deferred Income (Unearned Interest Income). This unearned income is reduced whenever income is recognized in the books, which is during receipt of actual collections.
2.7 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. 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 GSIS 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.
e. Investments in non-traded stocks
Non-traded stocks are valued at cost, net of allowance for impairment in value.
f. Investments in mutual funds
This investment comprises the GSIS Mutual Fund which is currently classified as a financial asset available for sale, under non-current investment. It was originally classified as Investment in Subsidiary.
The GSIS Mutual Fund is an open ended mutual fund company, essentially established by the GSIS in October 1994 with the objective of providing its members with a vehicle to participate in the Philippine capital market.
As of December 31, 2006, investments on GMFI used fair valuation based on Net Asset Value (NAV) per share.
2.8 Property and equipment
These assets are recognized and recorded in accordance with the requirements of PAS 16 on Property, Plant, and Equipment.
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 five 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 is 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 five years.
2.9 Investment property
Investment property pertains to land or a building or part of a building or both, held to earn rentals or for capital appreciation or both.
These assets are comprised of real properties that were previously the subject of a mortgage loan, individual real estate loan, commercial - industrial loan, lease-purchase agreement, or a Deed of Conditional Sale (DCS) which are either foreclosed or cancelled or dacioned by former owners in favor of the Social Insurance Fund. These properties are occupied and are charged rental fees.
Fair Value Model
The GSIS applies fair value model on its investment property, whereby the assets are 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 arise. For the “Big Ticket “accounts, only 85% of the gains on valuation are recognized. For Deeds of Conditional Sale (DCS) accounts, gains on valuation are booked at 100%. Losses on valuation for the Big Ticket accounts and the DCS accounts are recognized at 100%.
An investment property is derecognized on disposal and the gain or loss is recognized as income or expense in the income statement.
2.10 Non-current assets held for sale
These are assets acquired from foreclosed real estate property and cancelled Deeds of Conditional Sales accounts which are presently unoccupied and are held for sale.
These assets are measured at the carrying amount. Fair values are taken up at the point of sale, whereby any excess of fair value over carrying value is recognized as gain on valuation.
No depreciation is computed for these assets while they are classified as held for sale.
2.11 Revenue recognition
The major sources of operating revenues of the Fund are the social insurance premium contributions, dividends from investments, interest income from loans, income from investment property and other income.
The GSIS accounts for its revenue using the accrual method. Generally, accrued revenues from loans are computed using estimates determined by management, based on past experiences and established trends in collection.
a. Social insurance loans (e.g., Salary Loan, Enhanced Salary Loan, Restructured Salary Loan, Summer One Month Salary, Emergency Loan, Emergency Loan Assistance, Policy Loan, eCard Cash Advance) compute revenue using specific formulae based on the interest rates of the loans. On actual collections, principal and interest portions are determined by using estimated ratios.
Type of Loan / Interest Rate Used in the Computation of Accrued Interest / Estimated Ratios for theDistribution of Collections
Principal / Interest
Salary Loan / 12% /yr or 1%/mo. / 73 % / 27 %
Enhanced Salary Loan / 12% /yr or 1%/mo. / 73 % / 27 %
Summer One Month Salary Loan / 12% /yr or 1%/mo. / 73 % / 27 %
Conso- Loan / 12% /yr or 1%/mo. / 73 % / 27 %
E-Card Plus Cash Advance / 12% /yr or 1%/mo. / 73 % / 27 %
E-Card Cash Advance* / 12% /yr or 1%/mo. / P138.89/mo / P50.00/mo.
Policy Loan / 8% /yr or .67%/mo. / 10% / 90 %
Emergency Loan* / 8% /yr or .67%/mo. / P416.67 / P83.33
Pension Loan* / 8% /yr or .67%/mo. / Actual distribution
Emergency Loan Assistance* / 10% /yr or 83%/mo. / P416.67 / P83.33
* These are loan programs whose interests for the entire term of the loan are computed in advance at the point of granting and made part of the loan amortization, recorded as deferred or unearned interest income. This unearned income is reduced whenever actual collection is received, whereby income is recognized in the books.