GOVERNMENT SERVICE INSURANCE SYSTEM

SOCIAL INSURANCE FUND

NOTES TO FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

  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 official address of its Home Office is at the GovernmentFinancialCenter, Roxas Boulevard, Pasay City. GSIS has 15 Regional Offices, 26 Branch Offices, and 19 Satellite 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 issued 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.

The accompanying consolidated financial statements of the GSIS were authorized for issue by the GSIS management represented by the President and General Manager and the Senior Vice President – Controller Group on June 24, 2010.

In compliance with the Philippine Accounting Standard (PAS) 27 which requires the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent, and the applicable rules and regulations issued by the Commission on Audit (COA), the Consolidated Financial Statements for Social Insurance Fund include the accounts of the GSIS and its majority owned subsidiaries for the year ending December 31, 2009 and 2008 which consist of the following:

  • Statement of Net Assets
  • Statement of Changes in Net Assets
  • Statement of Changes in Net Worth
  • Cash Flow Statement
  • Notes to Financial Statements

Basis of Consolidation

The consolidated financial statements include the financial statements of the GSIS and its subsidiaries as at December 31, 2009.Subsidiaries are consolidated from the date on which control is transferred to the Group and ceased to be consolidated from the date on which control is transferred out of the Group. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

The following steps as specified in PAS 27 were applied in the consolidation process:

  • The carrying amount of GSIS’ investment in each subsidiary and the GSIS portion of equity of each subsidiary are eliminated;
  • Intra-group balances, transactions, income and expenses are eliminated in full;
  • The accounts for both GSIS and those of the subsidiaries were combined line by line by adding together like items of assets; liabilities, equity, income and expenses;
  • Minority interests in the profit or loss of consolidated subsidiaries for the reporting period are identified; and
  • Minority interests in the net assets of consolidated subsidiaries are identified separately from the GSIS’ net assets.

The GSIS Subsidiaries and its percentage of ownership as of December 31, 2009 are as follows:

Subsidiaries / Percentage of Ownership
GSIS Properties, Inc. (GPI) / 100.00%
GSIS Family Bank (GFB) / 99.55%
GSIS Mutual Fund, Inc. (GMFI) / 59.58%
Meat Packing Corp. of the Philippines (MPCP) / 100.00%

Meat Packing Corporation of the Philippines,however, is not included in the consolidation. It is now in the process of liquidation, thus, equity method is used in recording GSIS’ investments in the subsidiary.

  1. UPDATE ON GSIS NEW COMPUTERIZED SYSTEM

2.1Integrated loans, membership, acquired assets and accounts management system (ILMAAAMS)

To hasten the reconciliation of subsidiary and general ledger balances of contributions/premiums and loans receivable accounts, GSIS has developed various programs to enhance the reliability of the two major modules in ILMAAAMS, the Collections and Disbursements (FS-CD) and the Consumer and Mortgage Loans (FS-CML). Although these two systems were designed to be linked because of the billing and remittance processes for premiums and loans, their integration was not really inherent in the design of SAP. This meant that a lot of customization and work-around procedures needed to be put in place in order to ensure that the system would function as designed.

The integration of the FS-CD and FS-CML, particularly the jobs executed for creation of receivables in both modules upon accrual of the regular monthly installment (RMI) was modified due to resource issues. The initial design proved to be too taxing on resources and the bulk of the transactions could not be managed. The system was enhanced to ensure that all payments on loan accounts have been posted and members’ records are updated.

2.2Financial information system (FIS)

The FIS is designed to capture the recording of all the financial transactions from the source or feeder systems. These feeder systems have implementation environments different from that of the FIS subsystems. Financial data from various feeder systems are either automatically extracted and uploaded to FIS through interface program or generated in excel format following a SAP-prescribed template with pre-defined accounting entries and manually uploaded to FIS through an upload program.

The following are the different feeder systems and a brief description on how accounting data are captured and fed to the FIS:

  1. Technistock portfolio management system (TPMS)

The TPMS is a portfolio management solution which was customized to fit the back-office portfolio requirements of the Investment Management Office (IMO). The system generates a SAP-prescribed template with predefined accounting entries in excel format for batch uploading to FIS. However, TPMS was used only up to May 2009. The contract with Technistock (Phils.), Inc. for 2009 was no longer renewed.

At present, most of the investment transactions are uploaded to FIS based on the manually-prepared SAP-prescribed template. These transactions include placement in foreign-denominated notes and bonds, accrual and collection of interests, treasury bills and bonds maturities, premium and discount amortization and valuation of stocks. However, placement in peso bonds and buying of stocks are directly set-up in the Accounts Payable (AP) Module while selling of stocks is directly set-up in the Accounts Receivable (AR) Module.

  1. Human resources information system (HRIS)

The payroll system of the GSIS is processed through HRIS. The system generates the payroll file with predefined accounting entries in excel format. The file is saved in a specified storage directory, and extracted for batch uploading to FIS.

  1. Real and other properties owned and acquired (ROPOA) and Leasing manager

The ROPOA Manager is a system used for monitoring and recording the acquisition, administration and disposition of acquired assets. For financial recording purposes, the system is capable to do the following:

  • Creation of records for new acquired assets upon tagging of loans in default in the Customer Mortgage Loan (CML) module of ILMAAAMS;
  • Seamless interface with Leasing Manager for the creation of rental record and accrual of rental receivables;
  • Generation of report on gain or loss on valuation;
  • Tagging of acquired assets as disposed upon cash or installment sale; and
  • Automatic creation of interface file for FIS to book newly acquired assets, gain or loss on valuation, disposal and closing of corresponding rental receivables upon cash or installment sale.

The Leasing Manager, on the other hand, is a system that creates the records for the accrued rental receivables on occupied properties that were previously covered by cancelled deed of conditional sale (DCS) and occupied foreclosed properties after the expiration of the redemption period. For financial recording purposes, the system is capable to do the following:

  • Creation of property record, lease contract and tenant record;
  • Monthly accrual of rental receivables;
  • Generation of statement of account on rental receivables;
  • Posting of rental payments from cash desk (CD) module as well as those collected through Claims and Loans Interdependency Program (CLIP);
  • Stoppage of rental receivable upon conclusion of sale; and
  • Automatic creation of interface file for FIS to book accrued rental receivable, rental payments collected or “CLIPped,” and closing of rental receivables upon disposition of acquired assets.

Both systems generate file with predefined accounting entries in excel format. The file is saved in a specified storage directory and extracted for batch uploading to FIS.

  1. Claims and pensions administration system (CPAS)

CPAS is a comprehensive application system that will consolidate all information and processing requirements of members’ claim, pension, retirement and dividend under the new open system platform - SAP.

The CPAS is designed to provide online facility for inquiry, processing and computation of life, retirement and survivorship claims.It can integrate with the general ledger system of the FIS. Completed transactions of claims and pensions will be automatically reflected in the general ledger.

Phase I of the CPAS Project was implemented in September 2009 for life, retirement and survivorship claims and pensions.

  1. Migration of SAP DB2 to ORACLE database system software

On November 26, 2009, Management addressed the problem on the database crash and technical problems encountered with the DB2 software through the migration of SAP DB2 to Oracle PROD. This is in addition to the implemented data recovery measures by the GSIS to assure its members and pensioners that the integrity of all its data has not been compromised and no data is lost.

The GSIS is still in a transition period due to the recent implementation of the new systems, thus the financial statements for CY2009 were prepared manually based on the readily available data from SAP, feeder systems and other reports furnished by operating units concerned (OUCs). However, Management is pursuing that by 2010, GSIS Financial Statements can be generated real-time using the FIS.

  1. RECORDING OF COLLECTIONS AND DISBURSEMENTS IN FIS

3.1Collections

  1. Collections thru the Financial information - Cash desk (FI-CD) facility of ILMAAAMS

All collections pertaining to loans and contributions are processed thru the FI-CD of ILMAAAMS where transactions are automatically recorded simultaneously in the general ledger and subsidiary ledger. However, this facility was stopped on April 2, 2009 when it encountered some technical problems during the database crash.

  1. Collections thru the Cash receipts andmanagement system (CRMS)

All collections pertaining to Social Insurance (SI) accounts not covered by the FI-CD, investments and other miscellaneous transactions are being processed thru the CRMS. Collections done thru the CRMS are uploaded to FIS through the use of templates.

  1. Collections thru the Accounts receivable (A/R) Module

Effective December 15, 2009, all collections from investments, investment property, and administrative/miscellaneous transactions with corresponding receivable accounts are being processed directly in SAP thru the FI-AR module. For the meantime, this is being implemented at the Central Office only.

  1. Collections covered by Letter of authority (LOAs)

All collections pertaining to investment maturities and interests and all fund transfers from other bank accounts are covered by LOAs. LOAs are generally prepared thru SAP, but currently, there are still some manually prepared LOAs. Manually prepared LOAs are posted to SAP while SAP LOAs are automatically posted to the General Ledger (GL) accounts of Cash and Receivable accounts.

During the database crash that happened in April 2009, LOAs are prepared manually. Preparation of LOAs in SAP was resumed only on October 27, 2009.

Data that were lost in March, April and May 2009 were all recovered and uploaded to SAP through manually prepared templates.

3.2Disbursements

All disbursements pertaining to investment placements and fund transfer to other bank accounts, payroll and other miscellaneous transactions are covered by LOAs which are prepared directly in SAP. However, during the database crash that happened in April 2009, LOAs were prepared manually. Preparation of LOAs in SAP was resumed only on October 27, 2009.

The miscellaneous disbursements of the GSIS are being processed thru the AP module of the FIS. Disbursement checks are being generated from this module and these transactions are automatically recorded in the FI-GL.

4.1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4.1Basis of preparation and presentation of financial statements

The accompanying financial statements for the Social Insurance Fund (SIF) have been prepared in accordance with the Philippine Accounting Standards (PAS)/ Philippine Financial Reporting Standards (PFRS) and the generally accepted insurance accounting principles and reporting practices prescribed by the Insurance Commission.

The financial statements have been prepared on historical cost basis, except for certain financial instruments and investment property which are carried at fair values.

The GSIS has adopted for the financial statements presentation of the Social Insurance the format prescribed under PAS 26 and PFRS for pension funds under Board Resolution No. 180 dated November 05, 2008.

PAS 26 prescribes measurement and disclosure principles for the reports of retirement benefit plans, under either defined contribution plan or defined benefit plan. The standard requires that for defined benefit plans, the financial statements shall contain a statement of net assets available for benefits and a statement of changes in net assets available for benefits. The format in the disclosure and presentation of actuarial information, however, may vary (i.e. can be included as a statement of changes in the actuarial present value of promised retirement benefits; or in a disclosure in the notes to financial statements; or contained in a separate actuarial report).

4.2Centralized deposit and funding system or “One-bank account” policy

Under the centralized deposit and funding system, all collections are deposited to a centralized collection account and all disbursements are funded through the same account, which is maintained in the Home Office.

This cash management policy is adopted to manage efficiently the cash in bank and to strengthen the monitoring and control of cash flows.

4.3Cash and cash equivalents

Cash includes cash on hand and in banks. Cash equivalents are short - term and highly liquid investments with maturity of less than three months and readily convertible into cash such as high-yield short-term placements (HYSTP), special savings and time deposits.

4.4Contributions and premiums receivable

Pursuant to Section 5 of RA 8291, it shall be mandatory for all the covered members of the GSIS to pay monthly contributions based on the members’ Monthly Compensation (MC), as follows: 9% thereof payable by the member and 12% payable by 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 member’s monthly compensation/salary, premium contributions are set-up in the books as Premiums Receivable and correspondingly presented as additions to net assets. Upon actual receipt of remittances, the receivable account is adjusted accordingly.

4.5Loans and accounts receivable

Loans and accounts receivables are stated net of deferred income or provision for estimated uncollectible accounts.

  1. Provision for probable losses is established for estimated losses on the principal portion of business loans and receivable accounts based on management’s evaluation if the accounts are collectible.
  1. Allowance for doubtful accounts/bad debts is established for estimated losses on the interest income portion of business loans and receivable accounts.

4.6Investments

Investments are classified according to the following categories at initial recognition based on the purpose for which they are acquired.

  1. Held for trading (HFT) or Fair value through profit or loss (FVPL)

These are financial assets 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 reporting date. Any difference between the cost and the fair value is recorded as appreciation or depreciation of the fair value of investments in the statement of changes in net assets.

Investments in equity securities - stocks traded are classified as HFT or FVPL and as such, these are recorded at cost and are revalued every month-end.

  1. 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 Foreign Currency and Peso Denominated 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.

  1. 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.

These assets are initially recognized at cost and are subsequently valued at fair values. Any difference between the cost and the fair value is recorded as appreciation or depreciation of the fair value of investments in the statement of changes in net assets.

  1. Investments in subsidiaries

The System practices the equity method in accounting for investments in shares of stocks in which it holds at least 20 per cent ownership or where it has the ability to exercise significant influence over the companies’ operating and financial affairs.