ABC CORP.

NOTES TO FINANCIAL STATEMENTS

December 31, 2019 and 2018

1. Corporate Information

ABC Corp. (the “Company”) is incorporated and domiciled in the Republic of the Philippines. The
Company was registered as a stock corporation with the Philippine Securities and Exchange
Commission (SEC) on May 28, 1994 primarily to distribute and sell a range of home appliances
through a network of independent retailers and Company-managed retail outlets in the Philippines.

The registered office of the Company is located at 5th Street Block E4, Mactan Economic Zone
(MEZ), Lapu-lapu City, Cebu.

The President is the authorized representative of the Company’s management to approve the
financial statements. On _____, 2020, the President approved the financial statements and
authorized them for issue.

//OR//

The financial statements of the Company were authorized for issue by the Board of
Directors/Trustees on ______, 2020.

2. Summary of Significant Accounting Policies

2.1 Basis of Preparation of Financial Statements

a. Statement of Compliance

The financial statements as at and for the year ended December 31, 2019 are the first the Company
has prepared in accordance with the PFRS for Small Entities (the “Framework”) as approved by
the Financial Reporting Standards Council, Board of Accountancy, and the SEC. They have been
prepared on a historical cost basis, except for investment property that has been measured at fair
value. In preparing these financial statements, the Company’s opening statement of financial
position was prepared as at January 1, 2018, the Company’s transition date to PFRS for Small
Entities. Note __ to the financial statements explains the adjustments made by the Company in
restating its previous financial statements prepared in accordance with PFRS for SMEs, including
the statement of financial position as at January 1, 2018, and the financial statements as at and for
the year ended December 31, 2018.

//OR//

There is no material difference between the balances using PFRS for Small Entities and the
previously used PFRS for SMEs, hence a third balance sheet is not presented.

b. Going Concern (discussed w/ emphasis of matter in auditors’ report)

The accompanying consolidated financial statements have been prepared on a going concern
basis, which the Company still considers appropriate notwithstanding the consolidated capital
deficiency of P40,739,635 and P31,668,790 as of December 31, 2012 and 2011, respectively,
resulting from the accumulated losses sustained by its subsidiary amounting to P50,336,518 in
2012 and P41,338,095 in 2011. This condition raises doubt as to the Company’s ability to continue
as a going concern. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. The Company was organized only in
2016 and acquired its subsidiary on the same year. The subsidiary started its commercial operation
only in 2016 and is projected to improve its profitability in the succeeding years when its biological
assets become fully productive.

//OR//

The accompanying financial statements have been prepared on a going concern basis, which basis
the Company still considers appropriate notwithstanding the accumulated losses sustained of
P83,763,607 in 2017 and P83,045,298 in 2016 resulting into capital deficiencies of P33,763,607 in
2017 and P33,045,298 in 2016. In 2016, the Company’s stockholders and Board of Directors
decided to cease commercial operation indefinitely starting 2017. These conditions raise doubt as
to the Company’s ability to continue as going concern. The Company plans to convert advances
from stockholder to equity in 2018 (Note11).

//OR//

The accompanying financial statements have been prepared on a going concern basis, which basis
the Company still considers appropriate notwithstanding the accumulated losses sustained of
P135,062 in 2017 and P116,298 in 2016 resulting into capital deficiency of P70,062 in 2017. This
deficiency is primarily because the Company has not yet started its commercial operations. In 2018,
the Company plans to infuse additional capital through collection of outstanding subscription and
additional stock subscription.

2.2 Investment in Associate

Associates are all entities over which the Company has significant influence and that is neither a
subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the
financial and operating policy decisions of the associate but is not in control or joint control over
those policies.

The Company has elected to account for its associate using the equity method. Under the equity
method of accounting, an equity investment is initially recognized at the transaction price (including
transaction costs) and is subsequently adjusted to reflect the investor’s share of the profit or loss
of the associate.

2.3 Financial Instruments

A financial instrument is any contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity. A financial instrument is recognized when
the entity becomes a party to its contractual provisions. The Company classifies its financial
instruments into the following categories: (a) basic financial instruments; and (b) complex financial
instruments.

The Company’s basic financial instruments consist of cash and cash equivalents, trade and other
receivables, borrowings, trade and other payables. The Company does not have complex financial
instruments.

Basic Financial Instruments

Initial Measurement

On initial recognition, a debt financial instrument is measured at transaction price (including

transaction costs), unless the arrangement is in effect a financing transaction. In this case, it is
measured at present value of the future payment discounted using a market rate of interest for a
similar debt instrument.

Subsequent Measurement

The Company’s debt financial instruments are subsequently measured at amortized cost using the
effective interest method.

Impairment of Financial Instruments Measured at Amortized Cost

At each reporting date, the Company assesses whether there is objective evidence of impairment
on any financial assets that are measured at amortized cost. Where there is any objective evidence
of impairment, an impairment loss is recognized immediately in profit or loss.

The impairment loss is the difference between the asset’s carrying amount and the present value
of estimated cash flows discounted at the asset’s original effective interest rate.

Derecognition of Financial Assets

An entity only derecognizes a financial asset when the contractual rights to the cash flows from the
assets have expired or are settled, or the entity has transferred to another party substantially all
the risks and rewards of ownership relating to the financial asset.

Derecognition of Financial Liabilities

Financial liabilities are derecognized only when these are extinguished – that is, when the obligation
is discharged cancelled, or has expired.

2.4 Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and other short-term highly
liquid investments with original maturities of three months or less.

2.5 Trade Receivables

Trade receivables are recognized initially at the transaction price. These are subsequently
measured at amortized cost using the effective interest method. A provision for impairment of trade
receivables is established when there is no objective evidence that the Company will not be able
to collect amounts due according to the original terms of the receivables.

2.6 Inventories

Inventories are stated at the lower of cost and net realizable value on a first-in, first-out basis. Net
realizable value is estimated selling price in the ordinary course of business less estimated costs
necessary to make the sale. Cost of inventories includes all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and condition.

//OR//

Merchandise inventories are stated at the lower of cost or market value (i.e. the probable selling
price to willing buyers as at the reporting date). Cost is determined using the first-in, first-out (FIFO)
method.
2.7 Property, Plant and Equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and any
accumulated impairment losses.

Land is not depreciated. Depreciation on other classes of property, plant and equipment is charged
so as to allocate cost of assets less their residual values over their estimated useful lives, using the
straight-line method. The estimated useful lives of the Company’s depreciable assets are as
follows:

Building 30 years
Furniture and fixtures 5 years

The asset’s residual values, useful lives and depreciation methods are reviewed, and adjusted
prospectively if appropriate, if there is an indication of a significant change since the last reporting
date.

2.8 Investment Property

Investment property is initially recognized at cost. Subsequently, investment property is carried at

fair value with changes in fair value recognized in profit or loss.

2.9 Intangible Assets

Intangible assets are carried at cost less accumulated amortization and any impairment losses.
Amortization is calculated using the straight-line method over the estimated useful life of five years
for computer software.

2.10 Impairment of Assets Other than Inventories

Assets such as property, plant and equipment, investment property, intangible assets and
investment in associate are assessed at each reporting date to determine whether there is any
indication that assets are impaired. When an impairment indicator is identified, the carrying value
of the asset is tested for impairment. An impairment loss is recognized for the amount by which the
asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of
an asset’s fair value less costs to sell and value in use. If the recoverable amount cannot be
estimated for an individual asset, the Company estimates the recoverable amount of the cash-
generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group
of assets that generates cash inflows that are independent of the cash flows from other assets
within the Company.

If an impairment indicator no longer exists or the recoverable amount has increased subsequently,
the Company will determine the amount of impairment loss that can be reversed to the extent that
the reversal should not result in a carrying amount of the asset that is higher had no impairment
loss was recognized in the prior years.

2.11 Borrowings and Borrowing Costs

Borrowings are recognized initially at the transaction price (that is, the present value of cash
payable to the bank, including transaction costs). Borrowings are subsequently stated at amortized
cost. Interest expense is recognized on the basis of the effective interest method and is included
in finance costs.

Borrowings are classified as current liabilities unless the Company has an unconditional right to
defer the settlement of the liability for at least 12 months after the reporting date.
All borrowing costs are expensed as incurred.

2.12 Trade and Other Payables

Trade and other payables are recognized initially at the transaction price and subsequently
measured at amortized cost using the effective interest method.

2.13 Provisions

Provisions are recognized when: the Company has an obligation as a result of a past event; it is
probable that a transfer of economic benefits will be required to settle the obligation; and the amount
can be reliably estimated. Provisions are not recognized for future operating losses.

When the effect of time value is material, provisions are measured at the present value of the
amount expected to be required to settle the obligation using a pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the obligation. Changes
in the provisions due to passage of time are recognized in profit or loss.

2.14 Retirement Benefits

The Company is yet to establish a formal retirement plan for its employees. Thus, the Company’s
retirement benefit obligation is measured using the accrual approach based on the minimum
retirement benefits required under Republic Act (RA) No. 7641, or the Philippine Retirement Pay
Law. Accrual approach is applied by calculating the expected liability as at reporting date using the
current salary of the entitled employees and the employees’ years of service, without consideration
of future changes in salary rates and service periods.

2.15 Equity

a. Share Capital

Share capital is measured at par value for all shares issued. Any amount received by the Company
in excess of par value of its shares is credited to additional paid-in capital. Incremental coss directly
attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net
of tax.

b. Retained Earnings

Retained earnings consist of accumulated profits less any amounts distributed to the shareholders.

c. Cash Dividends

Cash dividends to shareholders are recognized as a liability and deducted from equity when
approved by the Board of Directors.

2.16 Revenue Recognition

a. Revenue Recognition

Revenue is measured as the fair value of the consideration received or receivable, excluding
discounts, returns and value-added tax. The Company recognizes revenue to the extent that it is
probable that future economic benefits will flow to the entity and that the amount of revenue can be
reliably measured. The following specific recognition criterial must also be met before revenue is
recognized:
 i. Sales of goods are recognized as revenue when the Company has delivered the products
to the customer and there is no unfulfilled obligation that could affect the customer’s
acceptance of the products.
ii. Service income is recognized upon rendering of the service to the customer.
iii. Interest income is recognized using the effective interest method.
iv. Rental income is recognized in profit or loss in the period in which they are earned.
v. Income from other sources is recognized when earned.

b. Cost and Expenses

Cost and expenses are decreases in economic benefits during the accounting period in the form of
outflows or decrease of assets or incurrence of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants. Cost and expenses included under “Cost
of Sales” and “Expenses” in the statements of comprehensive income are recognized as incurred.

2.17 Income Tax Expense

The Company uses the taxes payable method to account for income taxes. Under this method, the
Company recognizes income tax expense and liability based on the taxable income for the year
using tax rates that have been enacted or substantively enacted at the reporting date.

2.18 Leases

The Company leases certain items of property, plant and equipment. Payments made under leases
(net of any incentives received from the lessor) charged to profit or loss when incurred.

2.19 Events after the Reporting Date

Post year-end events that provide additional information about the Company’s position at the
reporting date (adjusting events) are reflected in the financial statements. Post year-end events
that are not adjusting events are disclosed in the noted to financial statements when material.

3. Cash and Cash Equivalents

The account at December 31 consists of:

2019 2018
Cash on hand
Cash in banks
Cash equivalents

4. Trade and Other Receivables

The account at December 31 consists of:

2019 2018
Trade receivables
Other receivables
Gross receivables
Less: Allowance for doubtful accounts
 The above receivables are collectible in cash, unsecured and non-interest bearing. Other
receivables mainly comprise of advances to officers and employees and other non-trade
receivables.

Movements in the allowance for impairment of trade receivables during the years ended December
31 are as follows:

2019 2018
January 1
Add: Provision for impairment
Less: Write-off

On December 1, 2019, the BOD in its meeting, approved the write-off of receivables amounting to
P_________ which it deems uncollectible.

5. Inventories

The Company’s inventories as at December 31 consists of the following:

2019 2018
Appliances
Spare parts and accessories
Total inventories
Less: Allowance for impairment

Movements in the allowance for impairment of merchandise inventories are as follows:

2019 2018
January 1
Add: Provision for impairment
Less: Write-off

On December 1, 2019, the BOD in its meeting, approved the write-off of inventories amounting to
P_________ which are already obsolete.

The cost of inventories recognized as expense for the year ended December 31, 2018 and 2017
amounted to P_______ and P_______, respectively.
6. Property, Plant and Equipment

The account at December 31 consists of:

Building and Machineries Furniture Transport-

Improve- and Office and ation
ments Equipment Equipment Fixtures Equipment Total
Cost
December 31,
2017
Additions
December 31,
2018
Additions
Disposals
December 31,
2019
Accumulated Depreciation
December 31,
2017
Provisions
December 31,
2018
Provisions
Disposals
December 31,
2019
Net Book Value
December 31,
2018
December 31,
2019

During the year, the Company sold its fully depreciated transportation equipment at a total gain of
P______ (Note __).

The Company’s building with net book value of P______ and P______ as of December 31, 2018
and 2017, respectively is used as security for the Company’s loan with BPI (Note __).

7. Investment Property

The Company has land and building held for rental to a third party. The movements in the account
is as follows:

Land Building
2019 2018 2019 2018
January 1
Additions
Fair value gain

The investment property is valued annually by an independent appraiser. Fair value is derived from
market prices of comparable properties, adjusted if necessary for differences in the size, location
or condition of the properties.
8. Intangible Assets

The Company’s intangible asset pertains to computer software, with the movement as follows:

Cost
December 31, 2017
Additions (Disposals)
December 31, 2018
Additions (Disposals)
December 31, 2019

Accumulated Depreciation
December 31, 2017
Provisions
December 31, 2018
Provisions
December 31, 2019

Net Book Value

December 31, 2018
December 31, 2019

9. Investment in Associate

The Company holds 30% of the equity shares of XYZ Corp. which it purchased for P_______,
making the latter its associate. XYZ Corp. is a retail company incorporated and domiciled in the
Philippines.

(Equity Method)

The movements in the account during the years ended December 31 are as follows:

2019 2018
January 1
Share in net income (loss)
Dividends received

(Cost Method)

Dividend income received from the associate amounted to P______ in 2019 and P________ in
2018.

10. Loans Payable

The Company obtained a loan from BPI amounting to P_________ in 2017, payable in 5 annual
installments until 2022. The loan bears interest at 5% per annum and is secured by the Company’s
building (Note __).
11. Trade and Other Payables

This account consists of:

2019 2018
Trade payables
Payable to government regulatory agencies
Other payables

12. Retirement Benefits

The Company recognized the amount of retirement benefits for its qualified employees following
the minimum retirement benefit required by RA No. 7641 – Retirement Pay Law, using accrual
approach.

The movements in the account during the years ended December 31 are as follows:

2019 2018
January 1
Retirement benefit expense
Benefits paid

13. Share Capital

The movement of share capital is shown as follows:

Shares Amount
2019 2018 2019 2018
Authorized
Common - P100 par value per share
Common Stock
Subscribed and paid
Balance at beginning
Issued during the year
Less: subscription receivable

The Company has seven (7) stockholders, with two (2) stockholders owning one hundred (100) or
more shares each. Its shares are not traded in any stock exchange or over the counter market.
14. Revenues

This account consists of:

2019 2018
Sale of goods
Rendering of services

15. Other Income

This account consists of:

2019 2018
Interest income
Miscellaneous

16. Compensation and Benefits

This account consists of:

2019 2018
Salaries and wages
Retirement benefits
Short-term employee benefits

17. Leases

a. Company as Lessee

The Company leases various retail outlets, offices and warehouses under non-cancellable lease
agreements. The lease terms are between five and ten years. The majority of lease agreements
are renewable at the end of the lease period at market rate.

Total rent expense recognized for these leases, including provision for lease termination penalties
(Note 12), for the year ended December 31, 2018 and 2017 amounted to P______ and P_____,
respectively.

b. Company as Lessor

The Company leases out its land for 5 years. There are no renewal or purchase options in the
lease.
18. Related Party Transactions

The Company’s related parties include:

a. Parent Company
b. Associate
c. Affiliates
d. Key management personnel

Associate and Affiliates

In the normal course of business, the Company transacts with its associate and affiliates with the
following balances as follows:

2019 2018
Due from associate
Due from affiliates

Affiliates are those companies with similar major stockholders as the Company but are not its
parent, subsidiary or associate.

Transactions with its associate are as follows:

2019 2018
Beginning balance
Transactions during the year
Sale of goods
Additional advances
Fund transfer, other advances and sharing of
expenses
Ending balance

These advances are not collateralized, non-interest bearing, unguaranteed, have no definite
repayment arrangement and are expected to be settled in cash.

Transactions with its affiliates are as follows:

2019 2018
Beginning balance
Transactions during the year
Sale of goods
Additional advances
Fund transfer, other advances and sharing of
expenses
Ending balance

These advances are not collateralized, non-interest bearing, unguaranteed, have no definite
repayment arrangement and are expected to be settled in cash.
 Key Management Personnel

The aggregate compensation and benefits paid to the executive officers and directors are as
follows:

2019 2018
Short term benefits
Post-employment benefits
Other long-term benefits
Share-based payments

The aggregate compensation and benefits paid to the managerial staff are as follows:

2019 2018
Short term benefits
Post-employment benefits
Other long-term benefits
Share-based payments

19. Income Tax

The details of the account for the years ended December 31 are as follows:

NIT

2019 2018
Net income before income tax expense
Less: Interest income
Taxable income
Tax due at 30% thereon
Less:
Creditable withholding tax
Income tax payable

MCIT

2019 2018
Sales
Less: Cost of sales
Gross Profit
Tax due at 2% thereon
 The reconciliation between the provision for income tax computed at the statutory income tax rate
and the income tax expense as shown in the statements of comprehensive income follows:

2019 2018
Income tax computed on statutory tax rate
Tax effect of:
Final tax on interest income
Income Tax per Financial Statements:
Current
Final withholding tax

20. Transition to PFRS for Small Entities

The following differences were noted in the Company’s transition from PFRS for SMEs for PFRS
for SEs:

a. Under the previous accounting framework, deferred tax assets and liabilities were recognized
for temporary differences. Under PFRS for Small Entities, the Company has the option not to
recognize the deferred tax effect of transactions. The Company opted not to recognize
deferred taxes as of December 31, 2019.

b. Retirement benefit obligation is now recognized on an accrual basis from the projected unit
credit method previously used.

The effect of the above changes are as follows:

Equity

December 31, January 1,

2018 2018
Total equity under previous framework
Restatement on non-recognition of
deferred taxes
Restatement of provisions for employee benefits
obligation
Charged to profit or loss
Charged to other comprehensive income
Total equity under PFRS for Small Entities

Income Statement

2018
Total profit under previous framework
Restatement on non-recognition of
deferred taxes
Restatement of provisions for employee benefits
obligation
Total profit under PFRS for Small Entities
21. Supplementary Information Required Under Revenue Regulations

In addition to the disclosures mandated under PFRS for Small Entities, companies are required by
the BIR to provide in the notes to financial statements certain supplementary information for the
taxable year. The amounts relating to such supplementary information may not necessarily be the
same with those amounts disclosed in the separate financial statements which were prepared in
accordance with PFRS for Small Entities. The following are the supplementary tax information
required for the taxable years ended December 31, 2019 and 2018.

i. Based on RR 02-2014

a. Schedule of Sales/Revenues/Receipts/Fees

Regular rate
Sales

b. Schedule of Cost of Sales

Regular rate
Cost of sales

c. Itemized deductions

Regular rate
Taxes and licenses
Professional fee
Depreciation and amortization
Input VAT closed to expense
Other expenses

ii. Based on RR 15-2010

a. Net Sales/Receipts and Output VAT declared in the Company’s VAT returns for 2019 and
2018

The Company’s sales pertain to fertilizers which is VAT-exempt.

b. Input Taxes

2019 2018
Beginning balance
Add: Services lodged under other accounts
Less: Input VAT closed to expense

c. Information on the Company’s Importations

The Company did not have importations during the year 2019 and 2018.

d. Excise Taxes

The Company did not have local nor imported excisable items in 2019 and 2018.
e. Documentary Stamp Tax (DST)

The Company did not incur any DST charges on loan instruments, shares of stocks or other
transactions subject thereto in 2019 and 2018.

f. Withholding Taxes

The Company did not withhold taxes in 2019 and 2018.

g. Other Taxes and Licenses

All other taxes, including license and permit fees lodged under the taxes and licenses account
under other expenses for 2019 and 2018 are as follows:

2019 2018
Business permit and taxes
Community tax
Annual registration
Others

h. Tax Assessments and Cases

As of December 31, 2019 and 2018, the Company has not received Final Assessment Notice
and/or Formal Letter of Demand from the BIR nor does it have pending tax cases outside the
administration of the BIR.