CBP Circular Letter

September 27, 1988 CBP CIRCULAR LETTER TO : All Thrift Bank, Rural Banks, Investment Houses, Investment Companies, Securities Dealers/Brokers and Financing Companies The respective Manuals of Accounts of the above-named financial intermediaries are hereby amended by incorporating in the pertinent pages thereof as-indicated in Annex "A" the following accounts and their definition: 1. Equity investments This represents investments in shares of stock, including any unpaid subscriptions, of companies/institutions as allowed under existing laws, rules and regulations. Equity investments shall be booked at cost or book value whichever is lower on the date of acquisition. If cost is greater than book value, the excess shall be charged in full to operations or booked as deferred charges and amortized as expense over a period not exceeding five (5) years. Subsequent to acquisition, equity investments should still be carried at recorded value on date of acquisition; except for investments representing more than 50% of the voting stocks of a single investee company in which case the equity method of accounting shall be used. The use of the equity method, however, does not preclude the setting up of valuation reserves, if warranted. 2. Allowance for Probable Losses Equity Investments This represents the amount set up against current operations to provide for losses such as decline in market or book value which may arise on equity investments. 3. Subscription Payable Equity Investments This represents the entity's liability on the unpaid portion of its subscriptions to shares of stocks of an investee. 4. Dividends Equity Investments This represents dividends earned and/or actually received on equity investments. 5. Other Investments This represents the cost of investments made for public relations purposes and/or to qualify as member/subscriber of clubs/other non-profit organization/public utilities, including deposits made therein. cdlex Likewise, the guidelines on the use of the equity method of accounting for equity investments (Annex "B") shall be adopted. This amendment shall take effect immediately. (SGD.) CARLOTA P. VALENZUELA Deputy Governor ANNEX "A" Affected Pages of Table of Contents Text 1. Accounts for Inclusion a. Equity Investments (Insert after Investments in Bonds and Other Debt Instruments) for- Savings and mortgage banks II 6 private development banks I 4 stock savings and loan associations I 4 rural banks I 4 investment houses II 4 investment companies I 4 financing companies II 5 securities dealers/brokers II 4 b. Allowance for Probable Losses Equity Investments (Insert after Equity Investments) for- savings and mortgage banks II 6 private development banks I 4 stock savings and loan associations I 4 rural banks I 4 investment companies I 4 c. Subscription Payable Equity Investments (Insert after Other Liabilities Overages) for- savings and mortgage banks V 18 private development banks IV 14 stock savings and loan associations III 14 rural banks IV 13 investment companies III 13 d. Dividends Equity Investments (Insert before Other Income) for- savings and mortgage banks VII 26 private development Banks V 20 stock savings and loan association IV 20 rural banks V 19 investment houses V 19 investment companies V 19 financing companies VI 22 securities dealers/brokers V 20 e. Other Investments (amended definition) for- savings and mortgage banks III 12 private development banks II 10 stock savings and loan associations II 9 rural banks II 8 2. Accounts Deleted a. Equity Investments in Allied Undertakings/Affiliates and its definition for- savings and mortgage banks II 6 private development banks I 4 stock savings and loan associations I 4 rural banks I 4 investment houses II 4 investment companies I 4 financing companies II 5 securities dealers/brokers II 4 b. Equity Investment Others and its definition for- investment houses II 4 financing companies II 5 securities dealers/brokers II 4 c. Dividends Equity investments in Allied Undertakings/Affiliates and its definition for- savings and mortgage banks VII 26 Private development banks V 21 stock savings and loan associations IV 20 rural banks V 19 investment houses V 19 investment companies V 22 financing companies VI 22 securities dealers/brokers V 19 ANNEX "B" Guidelines on the Equity Method of Accounting for Equity Investments 1. Parent's share in the income/loss of the subsidiary should be taken up annually based on latest audited financial statements of the subsidiary. 2. The following separate subsidiary ledger accounts shall be used to record Item (1) transactions: 'Profits (Losses) Under the Equity Method' and 'Undivided Profits Equity Method' or other descriptive account titles, under the general ledger accounts 'Miscellaneous Income (Loss)' and 'Undivided Profits', respectively. Subsidiary ledger accounts should also distinguish local from foreign subsidiaries. 3. In the case of foreign subsidiaries, equity investments, being a non-monetary account, should not be revalued. The carrying value of the equity investments shall be: a) Original cost valued at the foreign currency amount converted into local currency at the exchange rate prevailing on the date of acquisition; plus/minus b) Share of the investor in the profits/losses from operations of the foreign subsidiary valued at the foreign currency amount converted into local currency at the exchange rate existing as of the statement date of the investee firm. 4. For equity investments, both in local and foreign subsidiaries, the investor shall discontinue applying the equity method when the investment is reduced to zero and should not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support to the investee.