ACYFAR PORTFOLIO
Reflection paper presented to the
Accountancy Department
A Critique Paper on
Philippine National Bank
In partial fulfilment of the course
requirement in ACYFAR1
Introduction
Philippine National Bank (PNB) is one of the largest local private commercial banks in
terms of assets, net loans and receivables, capital, and deposits. Established in 1916, PNB has
grown to become a major financial institution in the country, offering a wide range of banking
and financial services to private and corporate customers. The Bank has a distribution network
of 670 domestic branches and offices and 1,731 automated teller machines (ATM) in the
Philippines as of December 31, 2021. The bank has a century of banking experience as the bank
was established as a government-owned banking institution on July 22, 1916. The bank led the
industry with the agricultural modernization program and trade finance support for the
country’s agricultural exports as well as pioneering the efforts in the Overseas Filipino Worker’s
remittance business. The bank has also pioneered in innovations such as computerized banking,
ATM banking, mobile money changing, domestic traveler’s checks, and electronic filing and
payment system for large taxpayers. Through its presence in many parts of the country, PNB
has become a trusted partner to many Filipinos and has helped them achieve their financial
goals. PNB has a long history of providing quality banking services and is known for its focus on
innovation and customer service. In this critique paper, we will be focusing on Philippine
National Bank and Subsidiaries as stated in their Annual Report for 2021. The Parent Company
which is LT Group, of PNB is also in the Financial Statements as a way to compare and further
analyze some parts of the Financial Statements. In addition to that, it is important to notes that
Subsidiaries are included in the financial assets and that it is not PNB’s alone.
IAS1 Presentation of Financial Statements
IAS or the International Accounting Standards are a set of standards made by the
International Accounting Standards Council (IASC) to standardize the Accounting procedures.
IAS1, in particular is about the Presentation of Financial Statements which allows companies to
have a set of requirements for the presentation of general purpose financial statements,
including the structure, content, and emphasis of information. IAS 1 requires the presentation
of at least two of each of the company’s Statement of Financial Position, Statement of Profit or
Loss and other comprehensive Income, Separate Statements of Profit or Loss, Statement of
Cash Flows, Statement of Changes in Equity and the related notes to those financial statements
(citation). This allows the company to present comparative information of the company’s
financial assets from the previous years and various periods. With this, IAS1 also requires the
entity to present in a measurement basis in preparing Financial Statements.
When looking at Philippine National Bank’s financial statements, they disclose the
statements of financial position, income, comprehensive income, changes in equity, cash flows
and the notes to financial statements for years 2020 and 2021. All of the values are then stated
in thousands and therefore values in this critique paper will also be in thousands. They also
compare the bank’s consolidated financial statements and the parent company’s (which is LT
Group) to avoid misstatement and potential fraud. This assures that the financial statements
are “free from material misstatement” may it be due to fraud, error, or issues to in the
auditor’s report. It is very important that there is faithful representation (which is also a
requirement of IAS1) because these outcomes affect the economic decisions of the bank and
the uses who would take basis on these financial statements. When auditing for the financial
statements the companies objective is to exercise a professional judgement with skepticism.
Before presenting the financial statements, PNB also explains the responsibilities of an auditor
with which, in a way, also explains the principles that the bank values. This level of transparency
and honest comparability is very important especially because this is a bank that handles and
uses the money of people.
This making a standardized way of making financial statements is very helpful because
you do not only create an organized way of presenting your company’s finances but you also
have a point of reference when reading another company’s financial statements. It is just like
making a language in hopes that anyone interested is able to understand the company’s
financial standing. As I continue to write this paper, I have also come to realize these terms,
being components of financial statements, are simple and self-explanatory which is useful.
Those who view the financial statements come from different parts of the world so they would
need terms that are universal and straight to the point.
Cash & Cash Equivalents
Cash and Cash Equivalents are, in simple terms, cash and assets that can be converted
to cash. Cash is money which the standard medium of exchange and “the basis of accounting
measurements” (Millan, 2022) According the the International Financial Reporting Standards,
cash includes, cash on hand and cash in bank (which are deposits in banks that have
unrestricted use). Furthermore, IFRS defines cash equivalents as “other short-term highly liquid
investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value" (IFRS 7.9) and "short-term highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an insignificant risk
of changes in value" (IAS 7.11). This can be found in the Statement of Financial Position and
further expounded in the Statement of Cash Flows.
For PNB, since it is a bank, Cash and Cash Equivalents are recorded for purposes of
reporting cash flows therefore in the statement of financial position it is stated as Cash and
other cash items while cash equivalents are stated as separate items. However in the
Statement of Cash Flows, Cash and Cash Equivalents (as stated by PNB’s annual report) includes
“amounts due from Bangko Sentral ng Pilipinas (BSP) and other banks, interbank loans
receivable and securities held under agreements to resell that are convertible to known
amounts of cash, with original maturities of three months or less from dates of placements and
that are subject to an insignificant risk of changes in fair value”. To avoid confusion, I will be
referring to what is recorded in the Statement of Cash Flows which is the item of Cash and Cash
Equivalents.
Cash and Cash Equivalents for PNB decreased from Php 301,757,225 to Php 262,026,819
(in thousands) as of the dates December 31, 2020 and December 31, 2021 respectively. This
isn’t particularly alarming however, this can be traced from the decrease in “Due from Bangko
Sentral ng Pilipinas” which is from Php 202,129,356 to Php 161,001,912 which are amounts
receivable from BSP which can be set aside as funds. This item in particular affected the
decrease in cash and cash equivalents the most that resulted into a net decrease in cash and
cash equivalents. Despite all of this, the bank’s assets is more than adequate in terms of
liquidity which can meet known funding requirements.
Receivables
Receivables according to Philippine Accounting Standards (PAS) are defined as an assets
that represents the contractual right to receive cash or other assets from other enterprises that
may be your customers. These can arise from sale of goods and services, or provision of finance
in the ordinary course of business (PAS 32, para. 15). Receivables can come in the form of
accounts receivable, notes receivable, and other financial instruments (IFRS 9, para. 5.3). They
are typically recognized on the balance sheet at the amount due, discounted for any expected
credit losses (IFRS 9, para. 5.4). When investors look at receivables from a company (especially
if it is in large amounts), it is interpreted that the company at some point will have that amount
of cash will be higher in the future.
Since PNB is a bank, they use the term “Loans and Receivables” in their balance sheet. In
2021, Philippine National Bank reported loans and receivables of Php 606,953,751, which is an
increase from the Php 599,994,748 in 2020. This means that more customers or entities have
loaned from the bank and owe the bank money. However, the increase is not that big which
can indicate that the bank did not take that much new debtors or sources of income. The
increase may be attributed to the fact that net allowance for credit losses represent 51% and
48% of PNB’s total assets in 2021 and 2020, respectively. Furthermore, the 7 billion different
can be traced from the Php 18 billion net releases of loans and receivables, offset by additional
provision for impairment, credit and other losses of Php 11 billion.
In my opinion, I believe PNB should define what Loans and Receivables are in terms of
their financial assets because upon analyzing this with my prior knowledge to financial
statements I found the item name a little misleading especially because this is a bank. I thought
that the mention of “loans” meant the liability of PNB to other entities, which is a big contrast
to the term “receivables”. I found this confusing because how can a loan also be a receivable
which is why upon reading the notes I figured out that it was the loans of the entities from PNB.
The name makes sense but I believe it should at least be defined for clarity so others who read
the annual report understand at first glance. This is not really PNB’s fault as it is the standard
name of the item in IAS 39, I personally think it needs to be more distinguishable.
Investment in Equity Securities (FVPL, FVOCI)
In accordance with Philippine Accounting Standards (PAS) 39, "Financial Instruments:
Recognition and Measurement," investments in equity securities, such as FVPL and FVOCI,
should be initially recognized at fair value and subsequently measured at fair value. The fair
value should be determined by reference to quoted market prices of similar securities, or other
reliable sources (PAS 39, para. 34). Banks such as PNB invest in equity securities by buying
shares in public companies and investing in private companies as well as in public markets.
Banks typically use their own funds to purchase equity securities, which can be stocks, mutual
funds, and other types of investments. The investments can provide income through dividends,
and banks may also benefit from stock price appreciation. (Chen, 2020)
When recognizing the change in fair value of investments in equity securities that are
“available for sale”, the method of Fair Value through Comprehensive Income is used. These
changes are then reflected under Other Comprehensive Income and reported as a separate line
item on the Statement of Comprehensive Income. With this, the cumulative amount of fair
value changes of equity investments are reported in the equity section of the balance sheet to
provide a better understanding of the financial position of the company (Financial Accounting
Standards Board. “ASC 320-10-35 Investments”).
Another method for recording the change fair value of investments in equity securities
is Fair value through Profit or Loss. This is when the entity has equity investments that are
“held for trading” and any changes in their value are immediately recognized in the Statement
of Profit or Loss (IAS 39).
When looking at PNB’s equity securities, they define the methods and assumption in
estimating fair value of its assets. It is stated that “ For quoted securities – based on market
prices from stock exchanges; For unquoted securities – estimated using either: quoted market
prices of comparable investments net asset value method and applying a discount for lack of
marketability.” The bank also uses a fair value hierarchy for determining and disclosing the fair
value of assets (and liabilities). Which can be found on Note 5 Fair Value Measurement in the
appendices as reference for this observation.
For Fair Value Through Profit or Loss, the quoted (unadjusted) price in active markets of
equity securities is Php 5,045 (in thousands) which is also the carrying value. Which means
there wasn’t a change in fair value from the valuation of the lowest level input that is directly or
indirectly observable and/or unobservable in 2021. There is a decrease between the carrying
value of the equity securities when comparing it with 2020 which is Php 1,019,626. Therefore
the having an unrealized loss recorded in the Statement of Profit or Loss.
In Fair Value Through Comprehensive Income on the other hand, have a quoted
(unadjusted) price of Php 252,902, the valuation technique that is directly or indirectly
observable (Level 2 of fair value hierarchy) is Php 500,259 and the valuation technique
unobservable is Php 23,665,057. This results to the carrying value of Php 24,418,218 as of 2021.
Which in comparison with 2020, the carrying value was Php 1,450,052 which means there is an
increase between the two years. Therefore having a gain on sale, recorded in the Statement of
Comprehensive Income.
We can observe a huge difference between the two years which can be attributed the
Covid-19 Pandemic. The securities market prices fell during this time as the economy was at a
low. Prices decreased and gains in investments decreased overall (Johnson, Lane,
McClure,2022). One can imagine that banks, whose form of income comes from investing, loans
and interests, there is so much reliance on that so in post pandemic (2021) there was a massive
increase as the economy started to pick itself up and since the market was slowly rising several
investors grabbed the opportunity to invest while it was still low. Which is only a deduction as
to how there is a big gap between the carrying value of 2020 and 2021.
Investment in Associates
Investment in associates is the ownership interest in an investee that is not a subsidiary
or a joint venture. The investment in associates is accounted for using the equity method
according to Philippine Accounting Standards (PAS) 28, Investments in Associates. PAS 28
requires that the investor's initial investment in an associate be recognized at cost, which
includes any directly attributable costs. The cost of the investment is initially recognized in the
statement of financial position and is subsequently adjusted for the investor's share of the
profits or losses of the associate and dividends received from the associate. The investor's share
in the net assets of the associate is recognized in the statement of financial position at the
equity method carrying amount. This amount is adjusted for changes in the investor's share of
the net assets of the associate, and for any impairment losses recognized in relation to the
investment. Dividends received from the associate are recognized in the profit or loss in the
period in which the investor's right to receive payment is established. PNB records their
investment in associates together with its subsidiaries because there is only one investment in
associate.
After examining PNB’s financial statements, I realized that there is only one (1)
Associate. This information can be found on Note 12 which is named “Investments in
Subsidiaries and an Associate” and the line item states “Investment in an Associate-APLII”. This
had a balance of Php 2,728,089 in 2020 and increased to Php 2,973,089 in 2021. Therefore it
increased in Php 0.2 billion.
I found this information interesting because I thought a bank should have more
associates. While PNB does not disclose why there is only one, the annual report explains who
this company is.
Investment in APLII
According to PNB’s annual report, on June 6, 2016 its Parent Company entered
into agreements with Allianz SE (a German company). They then formed a new joint
venture with PNB Life insurance, Inc. called Allianz-PNB Life Insurance Inc. with a 15 year
exclusive distribution access with the branch network of the Parent Company. A
summarized version of financial information of APLII as of December 31, 2021 and 2020
was disclosed and it states that the Share in the new assets of the associate is Php
897,742 and Php 765,207, respectively. It also states that the difference of the share in
net assets of APLII and the carrying valu of investments it would represent the premium
on acquisition or retained interest.
Furthermore, since there is only one company associate, it is a good sign that despite that
there are still increases to the investment and the net earnings from them have also increased.
This means that the company is stable when in comes to investing and is able to earn from it.
Other Investments
PNB has several subsidiaries below are the different investment in subsidiaries:
Investment in AIHI (Formerly PNB Saving Bank or PNSB)
On March 1, 2020 PNBSB was integrated into the Parent Company and and was
taken into effect through the acquisition of PNBSB’s former assets and assumption of
liabilities in exchange for cash, equivalent to the fair values of the net assets acquired.
The parent company recognized the net assets of PNBSB at their carrying values and the
excess of the carrying values of the net assets which amounted to Php 390.5 million
which was the settlement price upon acquisition.
Investment in PNB Holdings
On December 28,2020, the approval of the request for temporary exemption
from prudential limits on the parent company’s equity investments in PNB holdings was
approved by BSP. This led to a series of the Parent company approving the issuance of
shares and have control over PNB Holdings. On December 24,2021 the Parent company
assessed that it had lost control over PNB holdings due the after the SEC approved the
property dividend declaration which led to them classifying their retained interest of
49% as a financial asset of FVOCI with no recycling to profit or loss with accordance to
PFRS 9. This meant that the Group and the Parent company had to recognize gain on
loss of control over PNB Holdings amounting to Php 17 billion and 17.1 billion in the
consolidated and parent company respectively. The parent company was also able to
secure a ruling from BIR that the transfer of property was not subject to tax. These
corporate actions were taken by PNB and the Parent Company to allow PNB to focus
more on its core banking business.
Investment in PNB General Insurers Co. Inc (PNB Gen)
On October 9 and December 11, 2020, the Board of Directors of bot PNB
Holdings and Parent company approved the sale of all their respective shareholdings in
PNB Gen to Allied Bankers Insurance Corporation for the purchase price of Php 1.5
billon which was subjected to approvals. An exclusive bancassurance arrangement for
non-life insurance business was also provided by the SPA to the Group and to ABIC with
the minimum guaranteed term of 15 years. As for additional consideration, Php 50
million would be paid by ABIC to the group on PNB closing date.
Investments in PMLFC
On February 19, 2021, the Parent Company's Board of Directors (BOD) approved
the injection of up to P515.0 million in additional capital into PMLFC, which was subject
to approval from regulatory and other necessary authorities. This would increase the
Parent Company's shareholdings in PMLFC from 75.00% to 83.50%. On July 2, 2021, the
Bangko Sentral ng Pilipinas (BSP) approved this additional equity investment. As of
December 31, 2021, the additional capital infusion was still being discussed with the
foreign partner of the Group, and the Parent Company's equity investment in PMLFC
had been reduced to zero. Nevertheless, as a result of the Parent Company's
commitment to provide more funding, they recognized an additional loss of P164.5
million, which represented their share of PMLFC's net losses. Furthermore, they
recorded a provision for liability of P125.1 million in regards to PMLFC's undrawn loan
commitments, which were reported under 'Miscellaneous expenses' in the statement of
income (Notes 27 and 33).
When we look into the notes of Investment of Subsidiaries and Associates, there is no specific
amount or value that has been disclosed for the consolidated but only for the Parent Company.
As of December 31, 2021 and 2020, the amount of money spent on investments in the Parent
Company's separate financial statements was P2.1 billion. This amount consists of the
translation adjustment and accumulated equity in net earnings, after dividends received after
the quasi-reorganization date and before the restructuring date have been taken into account,
and these funds are not available to be declared as dividends.
APENDICES
Relevant Notes to the Financial Statements and Critique Paper
References:
Australian Securities Markets through the COVID-19 Pandemic | Bulletin – March 2022. (2022). Reserve
Bank of Australia. https://www.rba.gov.au/publications/bulletin/2022/mar/australiansecurities-markets-through-the-covid-19-pandemic.html
Cash and Cash Equivalents (CCE) Definition: Types and Examples. (2022, September 4).
Investopedia. https://www.investopedia.com/terms/c/cashandcashequivalents.asp
Financial Accounting Standards Board. “ASC 320-10-35 Investments
How should investors interpret accounts receivable information on a company’s balance sheet? (2022,
March 28). Investopedia. https://www.investopedia.com/ask/answers/020915/how-shouldinvestors-interpret-accounts-receivable-information-companys-balance-sheet.asp
IAS 1 — Presentation of Financial Statements. (1970, August
21). https://www.iasplus.com/en/standards/ias/ias1
International Accounting Standards. (1970, August
22). https://www.iasplus.com/en/standards/ias/default.html
IFRS 9. Financial Instruments. International Accounting Standards Board, 2014.
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/
Millan, Z. V. (2012). Intermediate Accounting (2022 Edition). Bandolin Enterprise.
Philippine Accounting Standards 32: Financial Instruments: Recognition and Measurement. (2018).
Philippine Financial Reporting Standards Council. http://www.pfrsc.org.ph/wpcontent/uploads/2018/08/PAS-32-Financial-Instruments-Recognition-and-Measurement.pdf