Acyfar 1 Critique Paper - Basic Energy Corporation - Roaring, Geoffrey PDF

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ACYFAR PORTFOLIOReflection Paper Presentedto the Accountancy DepartmentIn Partial Fulfilment of the Course Requirement in ACYFAR 1Roaring, Geoffrey Ivan, L. VOne of the most notable and distinct characteristics of an accountant is being organized. It is mainly because of the detailed and meticulous ...

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ACYFAR PORTFOLIO

Reflection Paper Presented to the Accountancy Department

In Partial Fulfilment of the Course Requirement in ACYFAR 1

Roaring, Geoffrey Ivan, L. V25

One of the most notable and distinct characteristics of an accountant is being organized. It is mainly because of the detailed and meticulous approach and method they use to work such as journalizing, posting, creating the financial statements , and calculating appropriate values which is a very tedious task since it needs a whole lot of details in order to do it properly. Hence, if an accountant is not organized, the work will be more difficult and complicated since the details and information are scattered. It would be hard to discern what to do if there is no proper organization of ideas. It is maybe one of the reasons why the members of International Accounting Standards Board (IASB) continuously formulates a lot of accounting standards and policies to keep the flow of the work efficiently and conveniently for all accountants around the world. According to International Financial Reporting Standards (IFRS) Foundation, it is their mission to develop Standards that bring transparency, accountability, and efficiency to financial markets around the world. It is a great tool to ensure comparability and good organization of financial information so that the making of financial statements and other notes associated with it would be easier and less complicated. It is why as early as today, as students, being organized by adhering to Standards is very important so that it would just be natural, like already part of one’s lifestyle. Through various activities and worksheets, professors continuously train students to become Standard-dependent future accountants because it would be a firm and great foundation when they go outside the university and started working in different firms. It is will surely produce competitive and high-caliber accountants because the skills by the help of different accounting Standards are being honed. Now, we are going to analyze and review the 2019 Financial Statements of Basic Energy Corporation (BEC) to check and evaluate whether the accountants who created it are able to follow the different accounting Standards and policies established by IFRS Foundation. BEC is considered as a Large/Publicly Accountable Entity because they have met any of the criteria according to Financial Reporting Framework which is the criteria of having total assets of more than P350 Million. It is the reasons why their financial statements are available in the Philippine Stock Exchange (PSE) Edge website since it is classified as a publicly listed corporation. Moreover, they follow the full Philippine Financial Reporting Standards (PFRS) and are required to file the financial statements under Part II of SRC Rule

68. Upon checking BEC’s financial statements, they have followed all the Standards issued by IASB and the explanation are as follows: Basic Energy Corporation that is based in Makati City starts the reporting period every 1st of January and ends it every 31st of December of each year which means they follow the calendar year approach of reporting wherein as mentioned by Kenton (2019), “A calendar year with respect to accounting periods indicates an entity begins aggregating accounting records on the first day of January and subsequently stops the accumulation of data on the last day of December.” They consistently use the calendar year to report BEC’s financial statements. It shows a thorough consistency on their end. The primary activity of BEC is all about energy such as development, exploration, acquisition, operation, and maintenance. It means that they have a lot of transactions to record every year because they have a diverse classification of business activities. Since Basic Energy Corporation works a lot of activities, it may be the reason why they also have numerous subsidiaries (the Group). The financial statements evaluated are all consolidated and includes a consolidated summary of significant accounting policies. It is done so that the purpose of the financial statements could be fulfilled to those interested parties who would like to look on the company’s performance over the past year. It is used to gauge whether it is good to invest in the company and apparently, BEC was able to present their consolidated financial statements effectively by adhering to the Standards. Interested parties can see and assess the financial statements without any worries because it is appropriately presented as according to the Conceptual Framework for Financial Reporting. Conceptual Framework is like the Philippine constitution and the Standards formulated are like the Philippine Laws. The Conceptual Framework acts as the backbone of the Standards but it not higher compared to Standards in terms of hierarchy – Standards always prevail. It just serves as a tool to assist IASB to develop Standards accordingly and with a straight and coherent objective and purpose. Again, it does not override the Standards yet underpins IASB’s decisions in setting Standards and it could be revised from time to time, but such revisions will not automatically lead to changes to the Standards.

In terms of objective of financial reporting, Basic Energy Corporation was able to provide useful information to users by adhering to all the fundamental and enhancing characteristics of financial statements. The consolidated Statements of Financial Position (SFP), consolidated Statements of Income and Statements of Comprehensive Income , consolidated Statement of Changes in Equity, and consolidated Statements of Cash Flows including the notes associated with it and the summary of significant accounting policies are all relevant, and shows a faithful representation. BEC provides relevant and material information since all information presented in the 2019 financial statements is the latest annual financial report of the company and can create a borderline whether the decisions need to be done or not. BEC’s financial statements are also Faithfully Represented because it is complete, free from error, neutral, prudent, accurate measurement of uncertainty, and shows substance over form. Starting from the company information down to supplementary schedules, it is all complete and consistent when compared to their previous annual reports. As cited by the auditors of the financial statements, “the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31,2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December 31, 2019 in accordance with Philippine Financial Reporting Standards (PFRSs).”, wherein it certainly shows that the financial statements adhere to all the fundamental qualitative characteristics and enhancing characteristics of financial statements. The usage of previous years enhances comparability, verifiability, understandability, and timeliness of the financial statements. It helps the potential investors to compare and gauge whether it would be beneficial and advantageous for them to invest in Basic Energy Corporation. It is when the link between the Conceptual Framework arises. According to International Accounting Standards (IAS) 1, Paragraph 38A, “An entity shall present, as a minimum, two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity, and related notes.”, wherein it complement’s the Enhancing characteristics of the financial statements in terms of comparability and comparative information as argued by IAS 1.

The elements of financial position presented are complete and properly classified such as the assets and liabilities are separated into current and non-current, as cited on IAS 1, “An entity shall classify an asset as current when: (a) it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; (b) it holds the asset primarily for the purpose of trading; (c) it expects to realize the asset within twelve months after the reporting period; or (d) the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non-current.” The equity is appropriately computed as well as the income and expenses. The consolidated financial statements used historical cost basis, except for quoted financial assets at fair values through other comprehensive income (FVOCI) while investment properties are measured at fair value. Additionally, the consolidated financial statements are presented in Philippine Peso as its where the corporation is established. They have also disclosed that the amounts are rounded off to the nearest Philippine Peso unless otherwise indicated. Basic Energy Corporation, as discussed earlier, has consolidated financial statements because it has a lot of subsidiaries due to its various and diverse business activities, mainly in the energy sector. It means that the parent company and subsidiaries are considered as a single reporting entity. The Parent company is the Basic Energy Corporation while its subsidiaries is collectively referred to as the Group . Six subsidiaries on the Group are being controlled 100% by BEC which means they have power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect its returns as argued by the Standards. Furthermore, if one of the requirements are not met the Parent company only control a percentage of the business wherein as of now, they control partially two subsidiaries. Chapter Six of Conceptual Framework is about measurement and also according to paragraph 117 of IAS 1, “an entity shall disclose its significant accounting policies comprising: (a) the measurement basis (or bases) used in preparing the financial statements;”, wherein Basic Energy Corporation was able to show it completely and comprehensively on the disclosure of accounting policies section of their consolidated financial statements. The measurement used by the reporting entity is fair value measurement wherein financial assets are being measured at FVOCI while investment

properties, at fair value at each of the reporting period. BEC also follows fair value of hierarchy wherein it is divided in to three levels which are quoted, observable lowest level input and unobservable lowest level input that is significant to fair value as level 1, 2, and 3, respectively. It is significant to show how the reporting entity measure certain financial instruments because it helps to properly analyze the data presented in a timely and consistent manner which BEC was able to do so in terms of reporting their financial instruments through the disclosure they have written on the summary of significant accounting policies. In terms of recognition and derecognition, Basic Energy Corporation which is the reporting entity also complied with the appropriate and accurate way of recognizing and derecognizing items to be presented in their consolidated financial statements. According to the company’s disclosure, items of property and equipment are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. It accompanies the Chapter 5 of the Conceptual Framework that suggests the proper way of or recognizing assets and liabilities faithfully. The consolidated financial statements of Basic Energy Corporation were able to show true and correct presentation of financial information and disclosures such as notes and significant accounting policies. The entire report speaks efficiency and understandability because the data and information were not scattered. Going back to the introduction earlier, it is important to classify and organize things to be able to produce a high-quality output and it will make the work easier. The accountants of BEC were able to show it since the items are correctly classified as asset, liabilities, and equity. It is also categorized into similar items and dissimilar items. For example, in the Statement of Financial Position, Assets and Liabilities are classified into two categories: current and non-current. Through this classification, users of financial statements can clearly and easily see the current state of affairs of the assets and liabilities and gauge whether it is fine to invest at BEC. The segregation of similar items and dissimilar items may look simply but it allows a huge help already because it makes the items organized and structured in a manner that is easily understandable and straightforward. One can see the current assets that can be optimized to gain profit and cover the current liabilities and see whether the company will still have enough resources to cover the expenses and liabilities of the company for the current period. It will give them a sense of

direction and knowledge to what decision is the best for the company in terms of now. On the other hand, non-current assets and liabilities shows how the company will allocate its long-term remaining assets to the long-term debts they have incurred. It will show a portion of the future status of the company based on the financial ratios appropriate to use on that certain time and to know specific information related to one’s decision. The way BEC presents their financial statements down to the disclosures are arranged correctly, thus, the paper itself was able to communicate well with the users of the financial statements. After evaluating the distinct features of the consolidated financial statements of Basic Energy Corporation, it reveals that it adhered and complied to the Standard s as mentioned in IAS 1 and other Standards which was established through the Conceptual Framework. Now, we are going to take an in-depth evaluation of the contents of the Financial Statements in terms of Cash and Cash Equivalent, Receivables, Equity Investment, Invest in Associate, and Fund & Other Investments.

Cash and Cash Equivalent Cash is the most common financial asset known by a lot of people either in or out of the company. Whenever cash is presented the usual connotation of the people is it is what we usually refer to as money. However, upon learning and discussing cash and cash equivalent on ACYFAR1, the understanding of cash deepens and its more than just the money itself. There are certain qualifications for the asset to be considered as cash, these are: a financial asset, can be used as a medium of exchange and provide basis for accounting measurement, must be readily available on the current period and is not restricted for use in the payment of current obligations, and lastly, must be acceptable for deposit at face value by a bank or other financial institutions. Knowing all these requirements, we can now check whether Basic Energy Corporation is able to list down all the cash and cash equivalents properly on their Statement of Financial Position. According to BEC’s SFP, the Cash and Cash Equivalents (C & CE) item is listed on the current assets section and its just a one liner. BEC was able to follow through the Standards since they did not separate or listed down the components of C & CE which is not required – simply Cash and Cash Equivalents. It is because the components of C & CE are enumerated down in the notes, in terms of BEC’s SFP it is under Note 6. On the previous period of

reporting (2018), the total C & CE of BEC amounted to Php 42,093,952 while on the latest reporting period (2019), it increased to a total of Php 106,866,340 . There are only two components that make up the C & CE of BEC, Cash on hand and in banks and Cash equivalents which are Php 67,059,173 and Php 39,807,167 respectively for the year 2019. According to the notes presented, cash in banks and cash equivalents earn interest depending on the bank’s deposit rates. The listed cash equivalents are all accurate since they have disclosed that its all short-term investments of up to three months which is the usual length requirement to be considered a cash equivalent. However, they should have specified the days not the months because it is strictly 90 days, thus, should be counted in days and not months. Petty Cash Fund (PCF) is also nowhere to be found in Basic Energy Corporation’s consolidated financial statements. PCF is a small amount of cash to make up for small expenditures of the company. Maybe because the company is just too big that is why they do not have any PCF anymore. However, there is still a possibility of small expenses although BEC is already considered as large publicly listed corporation. They could allot a very tiny portion of their Cash to be a PCF so it would be more appropriate and organized. The breakdown of the Cash and Cash Equivalents still seems lacking, like it could be more elaborated. As a big corporation who performs energy-related business transactions, it is interesting why they do not have money order, bank drafts, cashier’s check, and such, its missing on the notes to SFP. In terms of cash valuation, BEC was able to properly value all the money by adhering to the valuation presented by accounting standards wherein cash should be valued at face value. However, it is hard to discern whether they have value foreign currency at closing exchange rate on the date of December 31, 2019 because it was not shown in the notes. Since BEC follows a calendar year method, they should have valued the foreign currency on the closing exchange rate of December 31, 2019. Cash in hand and in banks should also be separated to be able to classify each entity because it is important to minimize the cash on hand. Apparently, since it was combined in the notes to SFP, it is difficult to discern whether cash on hand is still fine to stay still or should it be deposited in the bank already because a part of management and control of cash suggest to minimize cash on hand due to cash is the most significant resources of a company

and is also susceptible and vulnerable to corruption, stealing, and appropriation, especially that BEC is a huge corporation that serves the people with energy. It is important to take extra caution when dealing with a huge sum of money to avoid corruption that is very rampant to the Philippine setting nowadays. Nonetheless, Cash and Cash Equivalent are properly represented however the only comment is BEC should have broke down and elaborated what makes up their cash and cash equivalents on their notes to SFP to specify the classification of each, for easier discernment of certain issues about cash control.

Receivables Receivables is considered to be the hardest topic on ACYFAR 1. Along with its measurement, classification, and valuation, it was really hard. Unlike Cash, which is measured at face value, receivables have a lot of requirements to fulfill such as present value, amortization, and financing to be able to come up with the correct value. Just like Cash, the Receivables are listed down in the consolidated SFP of BEC and are compared between the previous reporting period (2018) and the latest reporting period (2019). It is classified as either current receivables which is mostly accounts receivables and trade receivables or non-current receivables which constitutes of long-term receivables that are subjected to allowance for doubtful accounts due to the principle of matching principle and conservatism. The 2018 receivables amounted to Php 130,142,483 while the latest receivables as of 2019 amounted to Php 35,135,155. There was a sudden decrease of receivables from the previous years to the latest year. In the Note 7, which is the notes to receivables, it was explained thoroughly what happened on the receivables. The total amount of Receivables for the year has decreased which was scrupulously presented in the notes. The receivables were disclosed properl...