Peace and Equity Foundation - News and Updates

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT (PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004

Report of Independent Auditors

To the Board of Trustees of
Peace Equity Access for Community Empowerment
(PEACE) Foundation, Inc.
(A non-stock, non-profit organization)
No. 69 Esteban Abada Street
Loyola Heights, Katipunan
Quezon City

We have audited the accompanying statements of assets, liabilities and fund balances of Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc. as of December 31, 2005 and 2004, and the related statements of revenues and expenses, changes in fund balances and cash flows for the years then ended. These financial statements are the responsibility of the Foundation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and fund balances of Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc. as of December 31, 2005 and 2004, and its revenues and expenses and its cash flows for the years then ended in conformity with Philippine Financial Reporting Standards.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information shown on Schedules I and II is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Makati City
March 27, 2006

ADOR C. MEJIA
(Signing on behalf of Isla Lipana & Co.)

CPA Cert. No. 29620
P.T.R. No. 0529317; Issued on January 19, 2006 at Makati City
SEC A.N. (Individual) as general auditors 0048-A
SEC A.N. (Firm) as general auditors 0009-F
T.I.N. 112-071-634
BIR A.N. 08-000745-13-2004; Issued on October 12, 2004; Effective until October 11, 2007
BOA/PRC Registration No. 0142; October 25, 2004

Statement Required by Section 8-A, Revenue Regulations No. V-1

None of the partners of the firm has any financial interest in the Foundation or any family relationships with its executive director or manager.

The required information regarding taxes is shown in the attached schedules of taxes paid or accrued during the year.

Makati City
March 27, 2006

ADOR C. MEJIA

(Signing on behalf of Isla Lipana & Co.)
CPA Cert. No. 29620
P.T.R. No. 0529317; Issued on January 19, 2006 at Makati City
SEC A.N. (Individual) as general auditors 0048-A
SEC A.N. (Firm) as general auditors 0009-F
T.I.N. 112-071-634
BIR A.N. 08-000745-13-2004; Issued on October 12, 2004; Effective until October 11, 2007
BOA/PRC Registration No. 0142; October 25, 2004

Statement Required by Rule 68, Section 3.c,
Securities Regulation Code (SRC),
As Amended on October 25, 2005

The supplemental written statement being required by the Securities and Exchange Commission with respect to the number of stockholders owning one hundred (100) or more shares each is not applicable because the SRC rules on the subject matter apply only to stock corporations. Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc. is a non-stock, non-profit organization, which does not issue shares of stock. A stock corporation is one which has a capital stock divided into shares and is authorized to distribute dividends or allotments of retained earnings on the basis of the shares held.

Makati City
March 27, 2006

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

STATEMENTS OF ASSETS, LIABILITIES AND FUND BALANCES
DECEMBER 31, 2005 and 2004
(All Amounts in Philippine Pesos)

	Notes	2005	2004
A S S E T S
CURRENT ASSETS
Cash and cash equivalents	2, 5, 6, 19	P 7,536,176	P 10,029,943
Loans and receivables, net	2, 9	52,684,499	116,392,029
Available-for-sale financial assets	2, 5, 7,19	1,523,428,515	-
Trading investments in trust funds	2, 5, 8, 19	-	1,653,289,314
Total current assets		1,583,649,190	1,779,711,286
NON-CURRENT ASSETS
Loans and receivables, net	2, 9, 16, 17	83,370,182	284,784
Property and equipment, net	2, 10	21,427,679	18,155,935
Investment property	2, 11	2,665,531	-
Total non-current assets		107,463,392	18,440,719
Total assets		P 1,691,112,582	P 1,798,152,005
LIABILITIES AND FUND BALANCES
CURRENT LIABILITIES
Accounts payable, accrued expenses and other liabilities	2, 12, 19	P 13,202,246	P 43,069,633
Grants payable	13	48,781,968	18,132,354
Total current liabilities		61,984,214	61,201, 987
FUND BALANCES
Unrestricted	1, 5	40,519,536	252,291,186
Restricted	1	1,588,608,832	1,484,658,832
Total fund balances		1,629,128,368	1,736,950,018
Total liabilities and fund balances		P 1,691,112,582	P 1,798,152,005

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

STATEMENTS OF REVENUES AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004
(All Amounts in Philippine Pesos)

	Notes	2005	2004
REVENUES, GAINS AND OTHER SUPPORTS	2
Investment income, net		P 147,334,974	P 148,046, 674
Interest income		15,631,143	8,957,019
Net unrealized foreign exchange gain	19	-	12,305,364
Unrealized gain in market value of investments		-	35,150,354
Others, net		2,106,676	125,895
Total revenues, gains and other supports		165,072,793	204,585,306
EXPENSES	2
Grants		100,574,361	58,726,965
Unrealized foreign exchange loss	19	59,627,664	-
Project expenses	1, 14, 17	36,383,907	23,749,970
Realized foreign exchange loss	19	30,280,934	-
General and administrative	1, 15	8,037,985	7,454,664
Provision for impairment of loans and receivables		7,663,941	2,518,689
Depreciation	10	2,778,980	2,106,638
Total expenses		245,347,772	94,556,926
EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES FOR THE YEAR		P ( 80,274,979 )	P 110,028,380

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

STATEMENTS OF CHANGES IN FUND BALANCES
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004
(All Amounts in Philippine Pesos)

	Unrestricted Fund
	Members' contribution	Cumulative excess of revenues over expenses	Reserve for fluctuations in value of available-for-sale financial assets	Total	Restricted Fund	Total
Balance at January 1, 2004	100,000	217,162,806	-	217,262,806	1,409,658,832	1,626,921,638
Excess of revenues over expenses for the year	-	110,028,380	-	110,028,380	-	110,028,380
Provision for cost of inflation (Note 1)	-	(75,000,000)	-	(75,000,000)	75,000,000	-
Balance at December 31, 2004	100,000	252,191,186	-	252,291,186	1,484,658,832	1,736,950,018
Adoption of PAS 32 and PAS 39	-	(49,276,448)	49,276,448	-	-	-
Balance at January 1, 2005	100,000	202,914,738	49,276,448	252,291,186	1,484,658,832	1,736,950,018
Fair value adjustments	-	-	(27,546,671)	(27,546,671)	-	(27,546,671)
Deficiency of revenues over expenses for the year	-	(80,274,979)	-	(80,274,979)	-	(80,274,979)
Provision for cost of inflation (Note 1)	-	(103,950,000)	-	(103,950,000)	103,950,000	-
Balance at December 31, 2005	100,000	18,689,759	21,729,777	40,519,536	1,588,608,832	1,629,128,368

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004
(All Amounts in Philippine Pesos)

	Notes	2005	2004
CASH FLOWS FROM OPERATING ACTIVITIES
Excess (deficiency) of revenues over expenses for the year		(80,274,979)	110,028,380
Adjustments for:
Depreciation	10	2,778,980	2,106,638
Net unrealized foreign exchange loss (gain)	19	59,627,664	(12,305,364)
Provision for impairment of loans and receivables		7,663,941	2,518,689
Recovery of write-off of loans and receivables		(1,941,719)	-
Loss (gain) on disposal of property and equipment		(2,966)	143,512
Provision for retirement benefits	16	190,278	153,322
Contributions to retirement fund	16	(100,858)	(311,292)
Investment and interest income		(162,966,117)	(157,003,693)
Amortization of bonds premiums		-	284,263
Net unrealized gain in market value of investment under trust accounts		-	(35,150,354)
Operating loss before changes in working capital		(175,025,776)	(89,535,899)
(Increase) decrease in:
Loans and receivables		(23,904,839)	(25,570,831)
Trading investments in trust funds		1,653,289,314	(58,551,523)
Available-for-sale financial assets		(1,610,602,850)	-
Increase (decrease) in:
Accounts payable, accrued expenses and
other liabilities		(29,867,387)	15,069,588
Grants payable		30,649,614	2,568,067
Net cash used in operating activities		(155,461,924)	(156,020,598)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment and interest income received		161,681,446	163,072,232
Proceeds from sale of property and equipment		9,400	540,000
Additions to property and equipment	10	(6,057,158)	(3,948,525)
Increase in investment property		(2,665,531)	-
Net cash provided by investing activities		152,968,157	159,663,707
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE YEAR		(2,493,767)	3,643,109
CASH AND CASH EQUIVALENTS
January 1		10,029,943	6,386,834
December 31	6	P 7,536,176	P 10,029,943

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A non-stock, non-profit organization)

NOTES OF THE FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2005 and 2004
(All Amounts in Philippine Pesos unless otherwise stated)

Note 1 - General information

Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc. (the “Foundation”) was formed by the Caucus of Development NGO Networks (CODE-NGO) and incorporated on November 27, 2001 for the purpose of providing financial, managerial, technical and policy assistance to non-governmental organizations, people’s organizations, community associations, social entrepreneurs, educational and research institutions, cooperatives and other similar groups or corporations in their effort to reduce or totally eliminate poverty, by increasing the entitlements of the poor in a sustained manner, through the distribution of resources and provision of public goods and by raising the level and quality of social services, thereby empowering them to improve their socio-economic condition and to participate in community and civic affairs. It is governed by a Board of Trustees whose members do not receive any compensation.

On February 14, 2003, CODE-NGO executed a deed of donation in favor of the Foundation, to transfer and convey, an endowment fund in trust of P1.318 billion, the principal amount, plus interest less expenses incurred by the Foundation from October 18, 2001 up to December 31, 2002. The amount advanced from the fund relative to the acquisition of a property (lot with office building currently being used as office site) was also included in the donation granted to the Foundation. The fund represents a portion of the net proceeds earned by CODE-NGO from the sale of Poverty Eradication and Alleviation Certificates (PEACe bonds) in the capital market. As agreed by the Foundation and CODE-NGO, only the earnings of the principal fund shall be utilized for poverty alleviation and development projects, general administrative expenses or acquisition of assets necessary for the furtherance of the Foundation’s objectives.

Currently, the Foundation reports the income earned and expenses incurred pertaining to the fund under unrestricted activities. Accordingly, the excess of revenues over expenses for the years ended December 31, 2002 and 2001 of P144.4 million and P18.7 million, respectively, were transferred to the unrestricted fund in accordance with the agreement with CODE-NGO. The Foundation also allocates a certain percentage from the earnings of the fund to cover for the cost of inflation.

As a non-stock, non-profit private foundation, organized and operated exclusively for providing financial, managerial, technical assistance to proponents of poverty alleviation and development projects, it is exempt from income tax pursuant to Section 30 of the Tax Reform Act of 1997 (R.A. 8424). However, income derived from its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of such income, is subject to tax.

On December 23, 2004, the Bureau of Internal Revenue (BIR) issued to the Foundation a five-year certification of registration in accordance with Revenue Regulations No. 13-98. This certification allows the Foundation certain incentives such as: (a) full or limited deduction by the donors of their donations, grants and contributions pursuant to Section 34(H) of the Tax Code; and (b) exemption from donor’s tax pursuant to Section 101 of the R.A. 8424. The certification issued by the BIR is subject to the representations and commitments set forth in the accreditation issued to the Foundation by the Philippine Council for NGO Certification (PCNC) on October 27, 2004.

The Foundation’s registered office is at No. 69 Esteban Abada Street, Loyola Heights, Quezon City. It has 19 regular employees as of December 31, 2005 and 2004. Total staff costs charged to general and administrative expenses and project expenses - project development, monitoring and evaluation for the year amounted to P4,138,683 (2004 - P3,612,816) and P6,345,304 (2004 - P5,024,599), respectively (see Notes 14 and 15).

Note 2 - Significant accounting policies

The principal accounting policies adopted in the preparation of the financial statements are set out below:

a) Basis of preparation

The financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS) and International Financial Reporting Interpretations Committee (IFRIC) Interpretations issued and effective at the time of preparation of the financial statements, and are covered by PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. The financial statements are the first financial statements of the Foundation to be prepared in accordance with PFRS. The term PFRS includes all applicable PFRS, IFRIC Interpretations, Philippine Accounting Standards (PAS) and Philippine Interpretations Committee (PIC) Interpretations which have been approved by the Accounting Standards Council (ASC) (soon to be called Financial Reporting Standards Council or FRSC) and adopted by the Securities and Exchange Commission to take effect starting annual accounting periods beginning January 1, 2005.

The policies set out below have been consistently applied to all the years presented except for those relating to designation and measurement of financial instruments. The Foundation has made use of the exemption available under PFRS 1 relative to the application of PAS 32 and PAS 39 from January 1, 2005. The policies applied to financial investments for 2004 and 2005 are disclosed separately below.

The financial statements of the Foundation were prepared in accordance with generally accepted accounting principles in the Philippines (GAAP) until December 31, 2004. GAAP differs in some areas from PFRS. In preparing the Foundation’s 2005 financial statements, management has amended certain accounting and valuation methods applied in the GAAP financial statements to comply with PFRS. The comparative figures in respect of 2004 were restated to reflect these adjustments, except as described in the accounting policies.

Reconciliations and descriptions of the effect of the transition from GAAP to PFRS on the Foundation’s fund balances and the excess of its revenues over expenses and cash flows during the year are provided in Note 5.

The financial statements have been prepared under the historical cost convention, as modified by the re-measurement of available-for-sale financial assets.

The preparation of financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Foundation’s accounting policies. The areas involving a higher degree of judgment or complexity or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

Adoption of new accounting standards effective in 2005

The ASC approved the issuance of new and revised accounting standards which are based on revised International Accounting Standards (IAS) and new International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) which are effective for annual periods beginning on or after January 1, 2005. These new Standards have been renamed Philippine Accounting Standards (PAS) to correspond to adopted IAS while the Philippine Financial Reporting Standards (PFRS) correspond to adopted IFRS.

The Foundation adopted the following applicable revised and new accounting standards effective January 1, 2005:

Philippine Accounting Standards

PAS 1, Presentation of Financial Statements
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
PAS 10, Events after the Balance Sheet Date
PAS 16, Property, Plant and Equipment
PAS 17, Leases, as revised
PAS 19, Employee Benefits
PAS 21, The Effects of Changes in Foreign Exchange Rates
PAS 24, Related Party Disclosures
PAS 32, Financial Instruments: Disclosure and Presentation
PAS 36, Impairment of Assets
PAS 38, Intangible Assets
PAS 39, Financial Instruments: Recognition and Measurement
PAS 40, Investment Property

Philippine Financial Reporting Standards

PFRS 1, First-time Adoption of Philippine Financial Reporting Standards

PFRS 1 applies when an entity adopts PFRS for the first time, by an explicit and unreserved statement of compliance with PFRS. In general, PFRS 1 requires an entity adopting PFRS for the first time (a first time adopter) to comply with each PFRS that has come into effect at the reporting date for its first PFRS financial statements. PFRS 1 requires that the Foundation prepares an opening PFRS statement of assets, liabilities and fund balances at the date of transition to PFRS (the beginning of the earliest period for which it presents full comparative information under PFRS in its first PFRS financial statements). PFRS 1 grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed benefits to users of financial statements. PFRS 1 also prohibits retrospective application of PFRS in some areas, particularly where retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known. Further, PFRS 1 requires disclosures that explain how the transition from previous GAAP to PFRS affected the Foundation’s reported statements of assets, liabilities and fund balances, revenues and expenses and cash flows.

Except for PFRS 1, PAS 19, 32 and 39, the adoption of the above revised standards did not result in substantial changes to the Foundation’s accounting policies.

New accounting standards, amendments and IFRIC interpretations effective in 2006

Certain new accounting standards and IFRIC interpretations have been published that are mandatory for accounting periods beginning on or after January 1, 2006.

IFRIC 4, Determining whether an Arrangement Contains a Lease
PAS 19 (Amendment), Employee Benefits
PAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions
PAS 39 (Amendment), The Fair Value Option
PAS 39 and PFRS 4 (Amendment), Financial Guarantee Contracts

The Foundation’s assessment of the impact of the above new standards and interpretations could not be reasonably estimated as of December 31, 2005.

b) Cash and cash equivalents

Cash and cash equivalents are carried in the statements of assets, liabilities and fund balances at face value. For the purposes of statements of cash flows, cash and cash equivalents consist of cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less from the date of acquisition.

c) Loans and receivables

Loans and receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of loans and receivables is established when there is an objective evidence that the Foundation will not be able to collect all amounts due according to the original terms of the loans and receivables. The amount of provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the statements of revenues and expenses .

Bad debts are written-off in the year they are fully determined to be uncollectible.

d) Financial assets

From January 1, 2005

Classification

The Foundation classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the Foundation’s financial assets at initial recognition and re-evaluates this designation at every reporting date.

Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. The Foundation does not hold any investments under this category during the year.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and where management has no intention of trading. These financial assets are included in current assets, except for maturities greater than 12 months after the reporting date which are classified as non-current assets. The Foundation’s advances to project proponents and other receivables are classified under this category.

Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. The Foundation does not hold any investments in this category during the year.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months from the reporting date. The Foundation has investments under this category during the year.

Recognition and derecognition

Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets are recognized on trade date (the date on which the Foundation commits to purchase or sell the asset). Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Foundation has transferred substantially all risks and rewards of ownership.

Measurement

Available-for-sale financial assets and financial assets at fair value through profit or loss are carried at fair value. Held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included in the statements of revenues and expenses in the year in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized as reserve for fluctuations in value of available-for-sale financial assets, until the financial assets are derecognized or impaired at which time the cumulative gain or loss previously recognized as reserve for fluctuations in value of available-for-sale financial assets should be recognized in the statements of revenues and expenses. However, interest calculated on these financial assets using the effective interest method is recognized in the statements of revenues and expenses. Dividends on available-for sale financial assets are recognized in the statements of revenues and expenses when the Foundation’s right to receive payment is established.

Determination of fair values

The fair values of quoted investment in active markets are based on current bid prices.

Impairment

The Foundation assesses at each reporting date whether there is an objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale financial assets, a significant or prolonged decline in the fair value of available-for-sale financial asset below cost is considered in determining whether the securities are impaired. The cumulative loss (difference between the acquisition cost and the fair value) is removed from reserve for fluctuations in value of available-for-sale financial assets and recognized in the statements of revenues and expenses when the asset is determined to be impaired.

From January 1, 2004 to December 31, 2004

The above policies apply except for:

Trading investments in trust funds are carried at fair value plus transaction costs. Fair values are based on current level prices. Gains and losses arising from the changes in the fair value of investments are included in the statements of revenues and expenses based on the financial reports of the trustee banks.

Loans and receivables, which include advances to project proponents, are carried at original amount less provision for impairment. A provision for impairment of loans and receivables is established after a study of the estimated collectibility of the loan and receivable balances and evaluation of such factors as aging of the accounts, collection experience of the Foundation in relation to the particular loan or receivable, and identified doubtful accounts.

e) Property and equipment

Property and equipment are stated at cost less accumulated depreciation and provision for impairment.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Foundation and the cost of the item can be measured reliably. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is sooner. All other repairs and maintenance are charged to the statements of revenues and expenses during the financial period in which they are incurred.

Depreciation is computed using the straight-line method over the asset’s estimated useful life, as follows:

Particulars	Number of years
Building and improvements	10 - 25
Transportation equipment	5
Office furniture, fixtures and equipment	3 - 5

The asset’s residual value and useful life are reviewed, and adjusted if appropriate, at each reporting date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount of the asset and are reflected as other revenues or expenses in the statements of revenues and expenses.

f) Investment property

Property that is held either to earn rental income or for capital appreciation or for both and that is not significantly occupied by the Foundation is classified as investment property.

Investment property is initially measured at cost (including transaction costs). Cost is the fair value of the consideration given to acquire the investment property. Under the cost model, investment property is measured at cost less any accumulated depreciation and impairment. The Foundation applies the cost model in measuring its investment property subsequent to initial recognition.

The carrying value of the investment property is periodically reviewed for impairment losses whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. Where an impairment of an investment property is identified, the carrying value should be written down to its recoverable amount. Any impairment loss is charged to the statements of revenues and expenses.

g) Non-current assets held for sale

From January 1, 2005

The Foundation classifies a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such asset and its sale must be highly probable.

The Foundation measures a foreclosed asset classified as held for sale at the lower of its carrying amount or fair value less costs to sell. When the sale is expected to occur beyond one year, the Foundation measures the cost to sell at its present value. Otherwise, the foreclosed asset is recorded using the measurement basis appropriate to the asset as follows:

i) Investment property shall be accounted for using the cost method under PAS 40 (see Note 2.f);

ii) Foundation-occupied property shall be accounted for using the cost model under PAS 16 (see Note 2.e); and

iii) Financial assets shall be initially booked and classified according to intention accounted for in accordance with provisions of PAS 39 (see Note 2.d).

From January 1, 2004 to December 31, 2004

Real and other properties owned or acquired (ROPOA) are generally stated at the total outstanding exposure or at the estimated fair market value of the collateral at the time of acquisition, whichever is lower less allowance for probable losses. Any excess of loan balance over the fair market value of the collateral not recovered from the borrower is charged against revenue.

h) Impairment of assets

Assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

i) Related party transactions and relationships

Related party relationships exist when one party has the ability to control, directly, or indirectly through one or more of the intermediaries, the other party or exercise significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprise and its key management personnel, directors, or its members. Transaction between related parties are accounted for at arm’s length prices or on terms similar to those offered to non-related entities in an economically comparable market.

In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely the legal form.

j) Accounts payable

Accounts payable are measured at amortized cost, normally equal to the nominal amount.

k) Provisions

Provisions are recognized when: the Foundation has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.

Provisions are measured at the present value of the management’s best estimate of the expenditure required to settle the present obligation at the reporting date.

l) Revenue and expense recognition

Investment income, which principally consists of gain on sale of investments, interest income and other income are recognized when earned, net of applicable final withholding taxes.

Interest income on loans and receivables is recognized in the statements of revenues and expenses for all financial assets measured at amortized cost using the effective interest method.

Grants, project development, monitoring and other expenses are recognized when incurred.

Interest income on bank deposits is recognized on a time proportion basis, net of applicable final withholding tax.

m) Employee benefits

The Foundation operates a defined benefit retirement plan which is funded through payments to trustee-administered funds, determined by periodic actuarial calculations. A defined benefit plan is a retirement plan that defines an amount of retirement benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the statements of assets, liabilities and fund balances in respect of defined benefit retirement plan is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity which approximate the terms of the related retirement liability.

Cumulative actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are spread to revenues over the employees’ expected average remaining working lives.

Past-service costs are recognized immediately, unless the changes to the retirement plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

n) Foreign currency translations

From January 1, 2005

i. Functional and presentation currency

Items included in the financial statements of the Foundation are measured using the currency of the primary economic environment in which the Foundation operates (the ‘functional currency’). The financial statements are presented in Philippine Peso, which is the Foundation’s functional and presentation currency.

Presentation currency is the currency in which the financial statements are presented.

ii. Translations and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Outstanding foreign currency denominated monetary assets and liabilities are translated at the exchange rate prevailing at reporting date. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the statements of revenues and expenses.

Translation differences on non-monetary items, such as investments held at fair value through profit or loss, are reported as part of their fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the reserve for fluctuations in value of available-for-sale financial assets in the statements of assets, liabilities and fund balances.

From January 1, 2004 to December 31, 2004

The above policies apply except for the following:

The standards then did not have discussions on the functional currency concept.

Foreign currency was then defined as the currency other than the reporting currency of an enterprise; starting 2005, this was defined as the currency other than the functional currency of the entity.

p) Comparatives

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current period.

Note 3 - Financial risk management

The Foundation’s activities expose it to varieties of financial risks: market risk (including foreign exchange risk and price risk), credit risk and liquidity risk. The Foundation has no formal risk management program that focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on its financial performance.

Market risk

Foreign currency risk
The Foundation is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Foundation’s functional currency. The Foundation has certain investments in foreign currency which are exposed to foreign currency translation risk.
Price risk
The Foundation is exposed to equity securities’ and debt instruments’ price risk because of financial assets it holds which are available for sale. The Foundation is not exposed to commodity price risks.

Credit risk

The Foundation has no significant concentrations on credit risk. It has policies and procedures to ensure that borrowers have appropriate credit history.

Liquidity risk

The Foundation is exposed to liquidity risk. It aims to maintain flexibility in funding its operations by realizing income from investments, collecting efficiently from its project proponents and maintaining sufficient and available cash.

Note 4 - Critical accounting estimates and judgments

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Foundation makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Provision for impairment of loans and receivables

The provision for impairment of loans and receivables is based on the Foundation’s assessment of the collectibility of accounts from borrowers. This assessment requires judgment regarding the outcome of disputes and the ability of each of the borrowers to pay the amount owed to the Foundation.

Note 5 - Transition to Philippine Financial Reporting Standards (PFRS)

(a) Application of PFRS 1

The Foundation’s financial statements for the year ended December 31, 2005 will be the first annual financial statements that comply with PFRS. The Foundation has applied PFRS 1 in preparing the financial statements.

The Foundation’s transition date is January 1, 2004. The Foundation prepared its opening PFRS statement of assets, liabilities and fund balances at that date. The reporting date of the financial statements is December 31, 2005. The Foundation’s PFRS adoption date is January 1, 2005.

In preparing the financial statements in accordance with PFRS, the Foundation has applied certain of the optional exemptions from full retrospective application of PFRS.

(b) Exemptions from full retrospective application elected by the Foundation

The Foundation has elected to apply the following optional exemptions from full retrospective application under PFRS 1:

• Exemption from restatement of comparatives for PAS 32 and PAS 39

The Foundation has elected to apply this exemption. It applied GAAP rules to financial assets and financial liabilities for the 2004 comparative information. The adjustments required for differences between GAAP and PAS 32 and PAS 39 are determined and recognized at January 1, 2005.

• Designation of financial assets and financial liabilities exemption

The Foundation reclassified various financial assets as available-for-sale financial assets and loans and receivables. The adjustments relating to PAS 32 and PAS 39 at the opening reporting date of January 1, 2005, the PAS 32/39 transition date, are detailed below.

The Foundation did not avail of the other optional exemptions under PFRS 1.

The exceptions from full retrospective application available to the Foundation under PFRS 1 are not applicable.

(d) Reconciliations between PFRS and GAAP

(d.1) Reconciliation of fund balances

The analysis below shows the reconciliation of fund balances as reported under GAAP to the restated fund balances under PFRS as reported in the financial statements at January 1, 2004 (date of transition to PFRS) and December 31, 2004.

	January 1, 2004	December 31, 2004
Fund balances under GAAP	P 1,626,863,684	P 1,736,734,094
Recognition of prepaid retirement benefits in accordance with the provisions of PAS 19	57,954	215,924
Fund balances under PFRS	P 1,626,921,638	P 1,736,950,018

(d.2) Reconciliation of the excess of revenues over expenses for the year ended December 31, 2004.

The analysis below shows the reconciliation of the excess of revenues over expenses reported under GAAP to the excess of revenues over expenses under PFRS as reported in the financial statements for the year ended December 31, 2004.

Excess of revenues over expenses under GAAP	P 109,870,410
Recognition of prepaid retirement benefits in accordance with the provisions of PAS 19	157,970
Excess of revenues over expenses under PFRS	P 110,028,380

d.3) Reconciliation of fund balances at January 1, 2005

The following analysis provides a quantification of transition to PFRS as required by PFRS 1. Except for the accounts included in the analysis below, all other accounts are not significantly affected by changes in accounting policies due to transition to PFRS.

	Notes	PFRS December 31, 2004	Effect of adoption of PAS 32 and 39	PFRS January 1, 2005
Cash and cash equivalents	d.3.1	P 10,029,943	P 19,681,780	P 29,711,723
Available-for-sale financial assets	d.3.2	-	1,633,607,534	1,633,607,534
Trading investments in trust funds	d.3.3	1,653,289,314	(1,653,289,314)	-

The Foundation took the exemption not to restate its comparative information for PAS 32 and PAS 39 for the year ended December 31, 2004. It therefore adopted PAS 32 and PAS 39 effective January 1, 2005.

The following notes explain the adjustments made at January 1, 2005 to the Foundation’s statement of assets, liabilities and fund balances at December 31, 2004 to reflect the adoption of PAS 32 and PAS 39.

d.3.1 Cash and cash equivalents

Reclassification from trading investments in trust funds

P 19,681,780

d.3.2 Available-for-sale financial assets

Reclassification from trading investments in trust funds

P 1,633,607,534

d.3.3 Trading investments in trust funds

Reclassification to cash and cash equivalents and available-for-sale financial assets

P (1,653,289,314)

d.4) Reconciliation of cash flows for the year ended December 31, 2004

	GAAP	Effect of transition to PFRS	PFRS
Excess of revenues over expenses for the year	P 109,870,410	P 157,970	P 110,028,380
Provision for retirement benefits	-	153,322	153,322
Increase in loans and receivables	(25,259,539)	(311,292)	(25,570,831)

The main PFRS transition effect presented by the Foundation in its statement of cash flows for the year ended December 31, 2004 represents recognition of transitional prepaid retirement benefits following the provisions of PAS 19.

Note 6 - Cash and cash equivalents

Cash and cash equivalents at December 31 consist of:

	2005	2004
Cash on hand and balances with banks	P 5,362,419	P 4,367, 843
Special savings deposits held by fund managers	2,173,757	-
Short-term placements	-	5,662,100
	P 7,536,176	P 10,029,943

Short-term placements earn annual interest of 6%. These deposits have an average maturity period of 30 days. The placements were pre-terminated in August 2005.

Note 7 - Available-for-sale financial assets

Available-for-sale financial assets held by the following fund managers at December 31, 2005 consist of:

ING Bank, N.V. (ING)
Republic of the Philippines (ROP) - Sovereign bonds	P 617,060,422
Unitized investment trust fund	231,630,554
Shares of stock listed in stock exchange	119,689,961
	968,380,937
Deutsche Bank, AG (DB)
Corporate bonds	70,122,288
ROP - Sovereign bonds	331,554,499
	401,676,787
Asia United Bank Corp. (AUB)
Treasury notes	97,008,690
ROP - Sovereign bonds	45,182,492
Unitized investment trust fund	11,179,609
	153,370,791
	P 1,523,428,515

The Foundation pays ING, DB and AUB every quarter one-fourth of the annual service fee rates of 0.25% based on the average market values of funds in trust.

Note 8 - Trading investments in trust funds

Trading investments in trust funds held by the following fund managers at December 31, 2004 consist of:

ING Bank, N.V. (ING)
Republic of the Philippines (ROP) - Sovereign bonds	P 368,723,547
Unitized investment trust fund	196,153,270
Shares of stock listed in stock exchange	136,349,024
Global mutual fund	105,068,328
Corporate loans	95,236,108
Corporate bonds	71,388,792
Quasi-government bonds	42,236,822
Savings deposit account	18,314,974
Commercial papers	8,002,072
	1,041,472,937
Deutsche Bank, AG (DB)
Corporate bonds	319,400,831
ROP - Sovereign bonds	93,169,798
Savings deposit account	1,362,898
	413,933,527
Asia United Bank Corp. (AUB)
Treasury notes	138,110,937
Common trust fund	36,306,206
Corporate bonds	23,461,799
Savings deposit account	3,908
	197,882,850
	P 1,653,289,314

With the adoption of PAS 32 and PAS 39, this account was no longer used in 2005.

Note 9 - Loans and receivables, net

Loans and receivables, net at December 31 consist of:

	Notes	2005	2004
Current
Advances to project proponents (Schedule I)		P 57,459,848	P 119,543,717
Accrued interest		2,202,223	917,553
Prepayments and other current assets		103,965	374,262
Others		2,747,123	1,086,243
		62,513,159	121,921,775
Allowance for impairment losses		(9,828,660)	(5,529,746)
Total current loans and receivables		52,684,499	116,392,029
Non-current
Advances to project proponents Schedule I)		84,605,507	-
Prepaid retirement benefits	16	126,504	215,924
Refundable deposits	17	61,479	68,860
		84,793,490	284,784
Allowance for impairment losses		(1,423,308)	-
Total non-current loans and receivables		83,370,182	284,784
		P 136,054,681	P 116,676,813

Advances to project proponents represent releases to project proponents subject to repayment for micro-finance, micro-enterprise, agricultural development, housing and proactive projects. These advances earn annual interest of 9% or 12% to cover the administrative costs of servicing the projects . A 3% rebate is given as incentive for prompt payments. Financial advances extended for micro-enterprise, housing and other projects involving acquisition of assets are secured with real and chattel mortgages and/or joint security.

The carrying amounts of advances from project proponents approximate their fair values at each reporting date.

Note 10 - Property and equipment

Property and equipment at December 31, 2005 consist of:

	Land (Note 1)	Building and improvements (Note 1)	Transportation equipment	Office furniture, fixtures and equipment	Total Cost
Balance at January 1	P 9,158,002	P 4,030,277	P 3,776,831	P 4,169,449	P 21,134,559
Additions during the year	3,211,970	889,665	267,562	1,687,961	6,057,158
Disposals during the year	-	-	-	(104,698)	(104,698)
Balance at December 31	12,369,972	4,919,942	4,044,393	5,752,712	27,087,019
Accumulated depreciation
Balance at January 1	-	653,192	583,826	1,741,606	2,978,624
Depreciation during the year	-	443,245	777,766	1,557,969	2,778,980
Disposals during the year	-	-	-	(98,264)	(98,264)
Balance at December 31	-	1,096,437	1,361,592	3,201,311	5,659,340
Net book value at December 31	P 12,369,972	P 3,823,505	P 2,682,801	P 2,551,401	P 21,427,679

Property and equipment at December 31, 2004 consist of:

	Land (Note 1)	Building and improvements (Note 1)	Transportation equipment	Office furniture, fixtures and equipment	Total Cost
Balance at January 1	P 9,158,002	P 3,994,092	P 2,228,839	P 2,679,733	P 18,060,666
Additions during the year	-	36,185	2,422,624	1,489,716	3,948,525
Disposals during the year	-	-	(874,632)	-	(874,632)
Balance at December 31	9,158,002	4,030,277	3,776,831	4,169,449	21,134,559
Accumulated depreciation
Balance at January 1	-	249,562	136,226	677,318	1,063,106
Depreciation during the year	-	403,630	638,720	1,064,288	2,106,638
Disposals during the year	-	-	(191,120)	-	(191,120)
Balance at December 31	-	653,192	583,826	1,741,606	2,978,624
Net book value at December 31	P 9,158,002	P 3,377,085	P 3,193,005	P 2,427,843	P 18,155,935

Depreciation expense during the year amounted to P2,778,980 (2004 - P2,106,638) and shown as part of expenses in the statements of revenues and expenses.

Note 11 - Investment property

The account represents parcel of land foreclosed by the Foundation when a borrower is unable to settle its loan. The fair value of the investment property amounted to P2,397,000 which was based on a valuation performed by an independent valuer.

Note 12 - Accounts payable, accrued expenses and other liabilities

Accounts payable, accrued expenses and other liabilities at December 31 consist of:

	2005	2004
Accrued expenses	P 5,654,587	P 2,248, 659
Trustee fee payable	6,720,028	40,584,745
Accounts payable	827,631	236,229
	P 13,202,246	P 43,069, 633

Trustee fee payable represents service fees of ING, DB and AUB in managing the Foundation’s investments.

Note 13 - Grants payable

This account represents unreleased and committed grants to project proponents.

Note 14 - Project expenses

Project expenses for the years ended December 31 consist of:

	Notes	2005	2004
Project development, monitoring
and evaluation	1, 17	P 15,878,357	P 11,551,202
Project support		14,872,722	9,508,973
Institutional support		4,146,279	2,689,795
Rebates to proponents		1,486,549	-
		P 36,383,907	P 23,749,970

Note 15 - General and administrative expenses

General and administrative expenses for the years ended December 31 consist of:

	Note	2005	2004
Personnel costs	1	P 4,200,687	P 3,538,714
Supplies and services		2,777,313	2,138, 486
Outside services		958,718	1,189,18 4
Transportation and travel		101,267	588,280
		P 8,037,985	P 7,454,664

Note 16 - Retirement benefits

The Foundation has a trusteed, non-contributory retirement plan covering all qualified officers and employees. Under the plan, qualified officers and employees will be entitled to receive retirement benefits when they reach the normal retirement age of 60. The projected unit credit cost method was used to determine the current service cost for the year.

The most recent actuarial valuation of the Foundation’s retirement plan was performed by an independent actuary at December 31, 2005. The principal assumptions made were:

	2005	2004
Rate of salary increases	7.00%	5.00%
Discount rate	11.90%	14.47%
Expected return on plan assets	7.73%	7.88%

The prepaid retirement benefits recognized in the statements of assets, liabilities and fund balances at December 31 is determined as follows:

	2005	2004
Present value of retirement benefit obligation	P (808,672)	P (482,730)
Fair value of plan assets	859,977	699,664
Unrecognized actuarial gains (losses)	75,199	(1,010)
Prepaid retirement benefits	P 126,504	P 215,924

The Foundation’s plan assets represent investment in trust fund with a local bank amounting to P859,977 as of December 31, 2005 (2004 - P 699,664).

The retirement benefit expense recognized in the statements of revenues and expenses for the years ended December 31 is determined as follows:

	2005	2004
Current service cost	P 175,561	P 144,369
Interest cost	69,851	36,194
Expected return on plan assets	(55,134)	(27,241)
	P 190,278	P 153,322

Changes in the fair value of plan assets for the years ended December 31 follow:

	2005	2004
Beginning of year	P 699,664	P 351,499
Expected return on plan assets	55,134	27,241
Contributions during the year	100,858	311,292
Actuarial gains	4,321	9,632
End of year	P 859,977	P 699,664

Below is the analysis of the movement in the prepaid retirement benefits during the year:

	2005	2004
Beginning of year	P 215,924	P 57,954
Retirement expense during the year	(190,278)	(153,322)
Contributions during the year	100,858	311,292
End of year	P 126,504	P 215,924

Note 17 - Leases

The Foundation has a lease agreement covering its office space in Cebu City for a period of two years commencing on January 1, 2004. The Foundation also leases an office space in Davao City which commenced on January 1, 2004 for a period of one year. This lease agreement was terminated in December 2005. The lease agreements required the Foundation to pay rental deposits which are included under Loans and Receivables - refundable deposits account in the statements of assets, liabilities and fund balances.

Rent expense on the above lease agreements during the year amounted to P 259,760 (2004 - P267, 860) and is included in project development, monitoring and evaluation account, a component of project expenses in the statements of revenues and expenses.

Note 18 - Related party transactions

Key management compensations for the years ended December 31 consist of:

	2005	2004
Salaries and wages	P 4,350,852	P 3,255,829
Employee benefits	1,114,085	764,806
	P 5,464,937	P 4,020,635

There are no other material related party transactions during year.

Note 19 - Foreign currency denominated monetary assets and liabilities

The Foundation’s foreign currency denominated monetary assets and liabilities at December 31 follow:

	2005	2004
Assets
Cash and cash equivalents	US$ 30,499	US$ 1,782
Trading investments in trust funds	-	17,974,702
Available-for-sale financial assets	18,303,530	-
Accounts payable, accrued expenses and Liabilities
other liabilities - trustee fee payable	(57,310)	(362,653)
Net foreign currency assets	US$18,276,719	US$ 17,613,831
Peso equivalent	P 970,311,012	P 991,306,409

At December 31, 2005, the exchange rate used is P53.09 per US$1.00 (2004 - P56.28 per US$1.00).

Net foreign exchange loss charged to the statements of revenues and expenses during the year amounted to P89,908,598 (2004 - P12,305,364, net foreign exchange gain).

As of March 27, 2006 the exchange rate per US$1 is P51.14.

Note 20 - Approval and authorization for issuance of financial statements

The financial statements of the Foundation were approved and authorized for issuance by the Foundation’s Finance and Investment Committee, on behalf of the Board of Trustees on March 27, 2006.