Background

Last year, we published about an exposure draft on Disclosure Guidelines on Retirement Benefit Funds.  Recently, on January 4, 2012, the Securities and exchange commission has finally posted the Memorandum Circular No. 12, Series of 2012, Guidelines on the Disclosure of Transactions with Retirement Benefit Funds, which was before just an exposure draft.

Click here to download  SEC Memo Circular No. 12, Series of 2012.

Who are Covered?

The circular was issued in order to improve the quality and transparency of financial reporting of corporations.  This circular prescribe the information on the transactions of reporting entities with a retirement fund of their employees in accordance with Rule 68, as amended, and Philippine Accounting Standards (PAS) No . 24.  This aims to provide greater understanding of the potential effect of such transactions not only on the entity’s financial statements but also on the financial position of the fund.

Clearly, only those who prepares financial statements under Philippine Financial Reporting Standards (PFRS) are required to comply with the requirements of SEC Memo Circular No. 12, Series of 2012.  Needless to say, entities whose financial statements are prepared under PFRS for SMEs are not not required to comply with these disclosure requirements.  Microentities on the other hand, if chooses their financial statements to be prepared in accordance with PFRS should also comply.

Also, needless to say, an entity who has retirement obligation but has no plan assets (retirement fund) is not covered by this circular.

What are the Required Disclosures under SEC Memo Circular No. 12, Series of 2012?

The following disclosures must be provided in the annual financial statements of a reporting entity that has transactions either directly or indirectly through its subsidiaries, with its employees’ retirement benefit fund (the “fund”) under SEC Memo Circular No. 12, Series of 2012:

1) Information whether the reporting entity’s fund is in the form of a trust being maintained by a trustee bank or trust company, or in the form of a corporation which has been created for the purpose of managing the fund;

2) The carrying amount and fair value of the fund;

3) Description of the assets and investments of the fund. The disclosure shall include a brief description of each category such as the market for equity or debt securities, information on the land or building;

4) Volume and outstanding balances of transactions of the fund with the reporting entity or its subsidiaries including the terms and conditions thereof. These transactions may include among others, loans, investment, lease, guarantee or surety;

5) If the transaction is material, a discussion of the nature of relationship of the persons who approved it with the reporting entity, its subsidiaries, or any of its directors and officers.

The company shall generally be guided by the provisions of paragraph 7 of PAS 1 which states “Material omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.”

With respect to testing the materiality on a quantitative basis, the company shall consider the threshold set under SEC Memo Circular No.8, Series of 2009. For listed or public companies and other secondary licensees of the SEC, the threshold is 5% which means any transaction involving an amount more than 5% of the total related accounts, is considered material. For all other corporations, the threshold is 10%.

6) If the fund has investments in the securities (debt or equity) of the related entity, a disclosure of the following information:
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(i) The amount of investment in each type of securities of reporting entity and/or its subsidiaries, including limitations or restrictions provided in the plan (if any);
(ii) In case of equity investment, nature of the relationship of .the person/s who exercises voting right over the shares, with the reporting entity, its subsidiaries, or any of its directors or officers;
(iii) The amount of gains or losses of the fund arising from its investment in the securities of the reporting entity and/or its subsidiaries. The gains and losses shall be presented per type of security.

When is the Effectivity?

These disclosure requirements shall be applicable to annual financial statements (AFS) for the period ended December 31, 2012 and onwards.  Except for the 2012 AFS, the presentation of the required information shall be in a two-year comparative period.

Failure to comply with the disclosure requirements shall constitute a material deficiency and shall subject the entity to penalties under the existing Scale of Fines.

Click here to download  SEC Memo Circular No. 12, Series of 2012.