REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc.
No. 69 Esteban Abada Street Loyola Heights, Quezon City
(A Nonstock, Nonprofit Organization)

Report on Financial Statements

We have audited the accompanying financial statements of Peace Equity Access for
Community Empowerment (PEACE) Foundation, Inc., which comprise the statement of
assets, liabilities and fund balances as at December 31,2006, and the revenues and expenses statement, statement of changes in fund balances and cash flow statement for the year then ended, and notes to linancial statements comprising of a summary of significant accounting policies and other explanatory notes. The financial statements of Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc. for the year ended December 31,2005 were audited by other auditors whose report, dated March 27,2006, expressed an unqualified opinion on those statements.

Management's Responsibilities for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial
statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, includmg the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the assets, liabilities and fund balances of Peace Equity Access for Community Empowerment (PEACE) Foundation as of December 31, 2006, and of its revenues and expenses and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements

Our audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The applicable supplementary Schedules I to II of the Foundation as at December 31,2006 and for the year then ended, required by the Securities and Exchange Commission, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The information in such supplementary schedules 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.

PUNONGBAYAN & ARAULLO

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PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT (PEACE) FOUNDATION, INC.
(A Nonstock, Nonprofit Organization)
STATEMENT OF ASSETS, LIABILITIES AND FUND BALANCES
DECEMBER 31, 2006
(With Comparative Figures for 2005)
(Amounts in Philippine Pesos)
			Notes	2006	2005
A S S E T S
CURRENT ASSETS
	Cash and cash equivalents		4	P 5,292,836	P 7,536,176
	Loans and receivables - net		5	57,575,402	52,684,499
	Available-for-sale financial assets		6	1,640,914,202	1,523,428,515
		Total Current Assets		1,703,782,440	1,583,649,190
NON-CURRENT ASSETS
	Loans and receivables - net		5	86,979,438	83,370,182
	Property and equipment - net		7	32,256,974	21,427,679
	Investment property		8	3,145,789	2,665,531
		Total Non-current Assets		122,382,201	107,463,392
TOTAL ASSETS				P 1,826,164,641	P 1,691,112,582
LIABILITIES AND FUND BALANCE
	Accounts payable, accrued expenses and other liabilities		9	P 19,316,894	P 13,202,246
	Grants payable		10	80,205,835	48,781,968
	Unused project funds		11	28,114,042	-
		Total Current Liabilities		127,636,771	61,984,214
FUND BALANCES
	Unrestricted			30,919,038	40,519,536
	Restricted			1,667,608,832	1,588,608,832
TOTAL FUND BALANCES				1,698,527,870	1,629,128,368
TOTAL LIABILITIES AND FUND BALANCE				P 1,826,164,641	P 1,691,112,582

 

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT (PEACE) FOUNDATION, INC.
(A Nonstock, Nonprofit Organization)
REVENUES AND EXPENSES STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2006
(With Comparative Figures for 2005)
(Amounts in Philippine Pesos)
		Notes	2006	2005
REVENUES , GAINS AND OTHER SUPPORTS
	Investment income - net		P 224,907,723	P 147,334,974
	Interest income		13,747,944	15,631,143
	Net unrealized foreign exchange gain		-	-
	Unrealized gain in market value of investments		-	-
	Others - net		532,687	2,106,676
			239,188,354	165,072,793
EXPENSES
	Grants		127,645,937	100,574,361
	Foreign exchange losses		56,080,700	89,908,598
	Project expenses	12	35,329,515	36,383,907
	Realized foreign exchange loss		-	-
	General and administrative	13	8,540,216	8,037,985
	Impairment losses		6,829,151	7,663,941
	Depreciation	7	2,846,930	2,778,980
			237,272,449	245,347,772
EXCESS (DEFICIENCY) OF REVENUES
	OVER EXPENSES	17	P 1,915,905	( P 80,274,979 )

 

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT (PEACE) FOUNDATION, INC.
STATEMENT OF CHANGES IN FUND BALANCES
FOR THE YEAR ENDED DECEMBER 31, 2006
(With Comparative Figures for 2005)
(Amounts in Philippine Pesos)
			Unrestricted Fund
				Cumulative	Revaluation
		Notes	Member's Contribution	Excess (Deficiency) of Revenues over Expenses	Reserve on Available-for-sale Financial Assets	Total Unrestricted	Restricted Fund	Total
Balance at January 1, 2006			P100,000	P18,689,759	P 21,729,777	P40,519,536	P1,588,608,832	P1,629,128,368
	Excess of revenues over expenses for the year		-	1,915,905	-	1,915,905	-	1,915,905
	Fair value adjustments	3	-	-	67,483,597	67,483,597	-	67,483,597
	Provision for cost of inflation	1	-	( 79,000,000 )	-	( 79,000,000 )	79,000,000	-
Balance at December 31, 2006		1	P100,000	( 58,394,336 )	P89,213,374	P30,919,038	P1,667,608,832	P1,698,527,870
Balance at January 1, 2005
	As previously reported		P100,000	P 252,191,186	-	P252,291,186	P1,484,658,832	P1,736,950,018
	Effects of transition to PFRS	2	-	( 49,276,448 )	49,276,448	-	-	-
	As restated		100,000	202,914,738	49,276,448	252,291,186	1,484,658,832	1,736,950,018
	Deficiency of revenues over expenses for the year		-	( 80,274,979 )	-	( 80,274,979 )		( 80,274,979 )
	Fair value adjustments	3	-	-	( 27,546,671 )	( 27,546,671 )		( 27,546,671 )
	Provision for cost of inflation	1	-	( 103,950,000 )	-	( 103,950,000 )	103,950,000	-
Balance at December 31, 2005		1	P100,000	P18,689,759	P21,729,777	P40,519,536	P1,588,608,832	P1,629,128,368

PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT (PEACE) FOUNDATION, INC.
(A Nonstock, Nonprofit Organization)
CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2006
(With Comparative Figures for 2005)
(Amounts in Philippine Pesos)
			2006	2005
CASH FLOWS FROM OPERATING ACTIVITIES
	Excess (deficiency) of revenues over expenses		P 1,915,905	( P 80,274,979 )
	Adjustments for:
		Investment and interest income	( 238,655,667 )	( 162,966,117 )
		Unrealized foreign exchange losses	51,279,136	59,627,664
		Impairment losses	6,829,151	7,663,941
		Depreciation	2,846,930	2,778,980
		Reversal of (provision for) retirement benefits	( 150,556 )	190,278
		Loss (gain) on disposal of property and equipment	56,347	( 2,966 )
		Contributions to retirement fund	( 318,401 )	( 100,858 )
		Recovery of write-off of loans and receivables	-	( 1,941,719 )
		Amortization of bonds premium	-	-
		Net unrealized gain in market value of investment under trust account	-	-
	Operating loss before working capital changes		( 176,197,155 )	( 175,025,776 )
		Increase in loans and receivables	( 14,860,353 )	( 23,904,839 )
		Decrease in trading investments in trust funds	-	1,653,289,314
		Increase in available-for-sale financial assets	( 101,281,226 )	( 1,610,602,850 )
		Increase (decrease) in accounts payable, accrued expenses and other liabilities	6,114,648	( 29,867,387 )
		Increase in grants payable	31,423,867	30,649,614
		Increase in unused project funds	28,114,042	-
	Net Cash Used in Operating Activities		( 226,686,177 )	( 155,461,924 )
CASH FLOWS FROM INVESTING ACTIVITIES
		Investment and interest income received	238,655,667	161,681,446
		Proceeds from sale of property and equipment	83,109	9,400
		Acquisitions of property and equipment	( 13,815,681 )	( 6,057,158 )
		Increase in investment property	( 480,258 )	( 2,665,531 )
	Net Cash from Investing Activities		224,442,837	152,968,157
NET DECREASE IN CASH AND CASH EQUIVALENTS			( 2,243,340 )	( 2,493,767 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			7,536,176	10,029,943
CASH AND CASH EQUIVALENTS AT END OF YEAR			P 5,292,836	P 7,536,176

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PEACE EQUITY ACCESS FOR COMMUNITY EMPOWERMENT
(PEACE) FOUNDATION, INC.
(A Nonstock, Nonprofit Organization)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
(With Comparative Figures for 2005)
(Amounts in Philippine Pesos)

1. CORPORATE INFORMATION

1.1 Company Information

Peace Equity Access for Community Empowerment (PEACE) Foundation, Inc.
(the Foundation or “PEACE”) 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.

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 for the earnings of the fund to cover for the cost of inflation.

The Foundation’s registered office, which is also its principal place of business, is located at No. 69 Esteban Abada Street, Loyola Heights, Quezon City.

1.2 Approval and Authorization for the Issuance of Financial Statements

The financial statements of the Foundation for the year ended December 31, 2006 (including the comparatives for the year ended December 31, 2005) were authorized for issue by the Foundation’s Finance and Investment Committee on March 19, 2007.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that have been used in the preparation of these financial statements are summarized below. The policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of Preparation

(a) Statement of Compliance with Philippine Financial Reporting Standards (PFRS)

The financial statements of the Foundation have been prepared in accordance with PFRSs. PFRSs are adopted by the Financial Reporting Standards Council (FRSC), formerly the Accounting Standards Council, from the pronouncements issued by the International Accounting Standards Board (IASB). PFRSs consist of:

a. PFRSs – corresponding to International Financial Reporting Standards;

b. Philippine Accounting Standards (PASs) – corresponding to International Accounting Standards; and,

c. Interpretations to existing standards – representing interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), formerly the Standing Interpretations Committee (SIC), of the IASB which are adopted by the FRSC.

These financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial assets. The measurement bases are more fully described in the accounting policies that follow.

(b) Transition to PFRS in 2005

In compliance with the pronouncements of the FRSC and the regulations of the Securities and Exchange Commission (SEC), the Foundation adopted all the relevant PFRSs for the first time in its financial statements for the year ended December 31, 2005, with January 1, 2004 as its transition date.

The transition from the previous generally accepted accounting principles in the Philippines to PFRS was made in accordance with PFRS 1, First-time Adoption of PFRS.

The Foundation’s transition to PFRS in 2005 resulted in the restatement of the balance of its fund balance as of January 1, 2005. The total adjustment to Fund Balances, particularly in the balance of Revaluation Reserves and Cumulative Excess of Revenues over Expenses, amounted to P49,276,448 pertaining to the remeasurement of available-for-sale financial assets as a result of the adoption of PAS 32, Financial Instruments: Disclosure and Presentation and PAS 39, Financial Instruments Recognition and Measurement.

In addition to the foregoing adjustments to Fund Balances, the structure of the statement of assets, liabilities and fund balances and revenues and expenses statement was also revised.

(c) Functional and Presentation Currency
These financial statements are presented in Philippine pesos, the Foundation’s functional currency, and all values represent absolute amounts except when otherwise indicated (see also Note 2.10).

2.2 Impact of New Standards, and Amendments and Interpretations to Existing Standards that are Relevant to the Foundation

(a) Effective in 2006

In 2006, the Foundation adopted the amendments and interpretations to existing accounting standards issued by the IASB and adopted by the FRSC which are mandatory for accounting periods beginning on or after January 1, 2006. These amendments and interpretations are as follows:

Discussed below are the impact on the financial statements of each of these amendments and interpretations.

(i) PAS 19 (Amendment), Employee Benefits. The amendment introduces an option for an alternative recognition approach for actuarial gains and losses. It also adds new disclosure requirements and imposes additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. Because the Foundation does not intend to change its current accounting policy for recognition of actuarial gains and losses and does not participate in any multi-employer plans, the adoption of this amendment did not result in a material adjustment to the financial statements.

(ii) PAS 39 (Amendment), The Fair Value Option. This amendment changes the definition of financial instruments classified as at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The adoption of this amendment did not result in a material reclassification of financial instruments because their current designation conforms with the amendments to PAS 39.

(iii) Philippine Interpretation IFRIC 4, Determining Whether an Arrangement Contains a Lease. Philippine Interpretation IFRIC 4 requires the determination of whether an arrangement is or contains a lease based on the substance of the arrangement. It requires an assessment of whether: (a) fulfillment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset. Based on the management’s current year assessment, the adoption of Philippine Interpretation IFRIC 4 has no significant impact on the Foundation’s current operations because there were no outstanding arrangements that were identified to be a lease or contains a lease.

(b) Effective Subsequent to 2006

There are a few new standards, and amendments and interpretation to existing standards that are effective for periods subsequent to 2006. Of these new standards, and amendments and interpretations, the following are relevant to the Foundation but it has opted not to adopt them early.

PAS 1 (Amendment) : Presentation of Financial Statements
PFRS 7 : Financial Instruments: Disclosures

PFRS 7, Financial Instruments: Disclosures and complementary amendment to PAS 1 (effective for annual periods beginning on or after January 1, 2007). PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Foundation has assessed the impact of PFRS 7 and the amendment to PAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of PAS 1.

2.3 Financial Assets

Financial assets include cash and other financial instruments. Financial assets, other than hedging instruments, are classified into 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. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which date a choice of classification or accounting treatment is available, subject to compliance with specific provisions of applicable accounting standards.

Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

All financial assets are recognized on their trade date. All financial assets that are not classified as at fair value through profit or loss are initially recognized at fair value, plus transaction costs.

The foregoing categories of financial instruments are more fully described below.

(a) Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Foundation provides money, goods or services directly to a debtor with no intention of trading the receivables. They are included in current assets, except for maturities greater than 12 months after the financial position date which are classified as non-current assets.

Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses. Any change in their value is recognized in profit or loss. Impairment loss is provided when there is objective evidence that the Foundation will not be able to collect all amounts due, in accordance with the original terms of the receivables. The amount of the impairment loss is determined as the difference between the assets’ carrying amount and the present value of estimated cash flows.

(b) Available-for-sale Financial Assets

This include non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. They are reported as part of current assets in the statement of assets, liabilities and fund balances.

All financial assets within this category are initially recognized at fair value plus transaction costs and subsequently measured at fair value, unless otherwise disclosed, with changes in value recognized in equity, net of any effects arising from income taxes. Gains and losses arising from securities classified as available-for-sale are recognized in the revenues and expenses statement when they are sold or when the investment is impaired.

In the case of impairment, the cumulative loss previously recognized directly in fund balances is transferred to the revenues and expenses statement. If circumstances change, impairment losses on available-for-sale equity instruments are not reversed through the revenues and expenses statement. On the other hand, if in a subsequent period the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in revenues and expenses statement, the impairment loss is reversed through the revenues and expenses statement.

For investments that are actively traded in organized financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the statement of assets, liabilities, and fund balances date. For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment.

Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured.

Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.

2.4 Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and any impairment in value.

The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation and impairment losses are removed from the accounts and any resulting gain or loss is reflected in income for the period.

Depreciation is computed using the straight-line method over the following useful lives:

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

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

The residual values and estimated useful lives of property and equipment are reviewed, and adjusted if appropriate, at each financial position date.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of income in the year the item is derecognized.

2.5 Investment Property

Investment property is measured initially at cost.

Investment property is derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the revenues and expenses statement in the year of retirement or disposal.

2.6 Financial Liabilities

Financial liabilities include accounts payable, accrued expenses and other liabilities, grants payable and unused project funds.

Financial liabilities are recognized when the Foundation becomes a party to the contractual agreements of the instrument.

Grants payable represents unreleased and committed grants to project proponents.

Grants received for specific projects are initially recognized as liabilities to the donors at the time the funds are received. These grants are recognized as revenue at the time project related expenses are incurred. Excess grants received over expenses incurred are shown as Unused Project Funds, a liability account in the statement of assets, liabilities and fund balances.

Financial liabilities are derecognized from the statement of assets, liabilities and fund balances only when the obligations are extinguished either through discharge, cancellation or expiration.

2.7 Provisions

Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events.

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the financial position date, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognized, if virtually certain as a separate asset, not exceeding the amount of the related provision. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long-term provisions are discounted to their present values, where time value of money is material.

Provisions are reviewed at each financial position date and adjusted to reflect the current best estimate.

In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements.

Probable inflows of economic benefits that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements.

2.8 Revenue and Expense Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Foundation and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

(a) Investment income – principally consist of gain on sale of investments, interest income and other income are recognized when earned.

(b) Interest income on loans and receivables – Revenue is recognized in the revenues and expenses statement for all financial assets at amortized cost using the effective interest method.

(c) Interest income on bank deposits – Revenue is recognized as the interest accrues, taking into account the effective yield on the asset.

(d) Revenue from restricted support - Revenue from restricted support, including government grants, is recognized upon fulfillment of the donor-imposed conditions attached to the support and/or to the extent that expenses are incurred. At project completion date, any excess funds are returned to the donors unless otherwise agreed by both parties that the excess be retained by the Foundation and therefore credited to unrestricted support.

Grants, project development, monitoring and other expenses are recognized in the revenues and expenses statement at date they are incurred.

2.9 Leases

Leases, which do not transfer to the Foundation substantially all the risks and benefits of ownership of the asset, are classified as operating leases. Operating lease payments are recognized as expense in the revenues and expenses statement on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

2.10 Functional Currency and Foreign Currency Transactions

(a) 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 entity operates (the functional currency). The financial statements are presented in Philippine pesos, which is the Foundation’s functional and presentation currency.

(b) Transactions and Balances

The accounting records of the Foundation are maintained in Philippine pesos. Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates.

Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the revenues and expenses statement.

2.11 Employee Benefits

(a) Retirement Benefit Obligations

Pension benefits are provided to employees through a defined benefit plan, as well as several defined contribution plans.

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of pension plan remains with the Foundation, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Foundation’s defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee.

The liability recognized in the statement of assets, liabilities and fund balances for defined benefit pension plans is the present value of the defined benefit obligation (DBO) at the financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated every two years by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses are not recognized as an income or expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees’ expected average remaining working lives. Actuarial gains and losses within the 10% corridor are disclosed separately. Past-service costs are recognized immediately in the income and expense statement, unless the changes to the pension 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.

A defined contribution plan is a pension plan under which the Foundation pays fixed contributions into an independent entity. The Foundation has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature.

(b) Compensated Absences

Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the financial position date at the undiscounted amount that the Foundation expects to pay as a result of the unused entitlement.

2.12 Impairment of Non-financial Assets

The Foundation’s property and equipment and investment property are subject to impairment testing. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.

An impairment loss is recognized for the amount by which the asset or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment loss is charged pro rata to the other assets in the cash generating unit.

All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.

3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The Foundation’s financial statements prepared in accordance with PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes.

3.1 Judgments

In the process of applying the Foundation’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements:

(a) Functional Currency

The Foundation has determined that its functional currency is the Philippine peso which is the currency of the primary environment in which the Foundation operates.

(b) Impairment of Available-for-sale Financial Assets

The Foundation follows the guidance of PAS 39 on determining when an investment is other-than-temporarily impaired. This determination requires significant judgment. In making this judgment, the Foundation evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.

(c) Distinction Between Investment Properties and Owner-occupied Properties

The Foundation determines whether a property qualifies as investment property. In making its judgment, the Foundation considers whether the property generated cash flows largely independently of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to other assets used in the production or supply process.

Some properties comprise a portion that is held to earn rental or for capital appreciation and another portion that is held for use in the production and supply of goods and services or for administrative purposes. If these portion can be sold separately (or leased out separately under finance lease), the Foundation accounts for the portions separately. If the portion cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Foundation considers each property separately in making its judgment.

(d) Operating and Finance Leases

The Foundation has entered into various lease agreements as a lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements.

Rent expense charged to operations amounted to P165 thousand in 2006 and P260 thousand in 2005 (see Note 16).

(e) Provisions and Contingencies

Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and disclosure of contingencies are discussed in Note 2.7.

3.2 Estimates

The estimates and assumptions used in the financial statements are based upon management’s evaluation of relevant facts and circumstances of the Foundation’s financial statements. Actual results could differ from those estimates. Shown below are the relevant estimates performed by management on its December 31, 2006 and 2005 financial statements:

(a) Useful Life of Property and Equipment

The Foundation estimates the useful lives of property and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of property and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property and equipment would increase recorded operating expenses and decrease non-current assets.

Property and equipment net of accumulated depreciation and any impairment losses amounted to P32.3 million and P21.4 million as of December 31, 2006 and 2005 respectively (see Note 7).

(b) Valuation of Financial Assets Other than Loans and Receivables

The Foundation carries certain financial assets at fair value, which requires the extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence such as foreign exchange rates, interest rates, volatility rates. However, the amount of changes in fair value would differ if the Foundation utilized different valuation methods and assumptions. Any change in fair value of these financial assets and liabilities would affect profit and loss and equity.

Net fair value gains and losses recognized on available-for-sale financial assets amounted to P67.5 million gain and P27.5 million loss as of December 31, 2006 and 2005, respectively.

(c) Impairment of Non-financial Assets

PFRS requires that an impairment review be performed when certain impairment indicators are present. The Foundation’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.12. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.

No impairment loss was recognized by the Foundation in 2006 and 2005.

(d) Retirement Benefits and Other Retirement Benefits

The determination of the Foundation’s obligation and cost of pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 14 and include, among others, discount rates, expected return on plan assets and salary increase rate. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods.

The defined benefit asset and net unrecognized actuarial gains amounted to P176 thousand and P75 thousand, respectively, in 2006 and P126 thousand and P75 thousand, respectively, in 2005 (see Note 14).

4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include the following components as of December 31:

Cash in banks generally earn interest at rates based on daily bank deposit rates.
Short-term placements are made for varying periods of between 15 to 30 days and earn effective interest ranging from 5.0% to 6.5% in 2006 and 2005.

5. LOANS AND RECEIVABLES

Loans and receivables at December 31 consist of:

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 administrative costs of servicing the projects. A 3% rebate is given as incentive for prompt payments. Financial advances extended to 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.

6. AVAILABLE-FOR-SALE FINANCIAL ASSETS

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

			Note	2006	2005
ING Bank, N.Y. (ING)
	PEACE:
		Republic of the Philippines (ROP)
		Shares of stock listed in stock exchange		P 540,505,099	P 119,689,961
		sovereign bonds		441,928,576	617,060,422
		Unitized investment trust fund		59,555,753	231,630,554
		Treasury notes		40,655,604	-
		Corporate bonds		2,796,140	-
				1,085,441,172	968,380,937
	Unused project funds:		11
		Unitized investment trust fund		26,536,264	-
		Shares of stock listed in stock exchange		288,670	-
				26,824,934	-
				1,112,266,106	968,380,937
	Deutsche Bank, AG (DB)
		ROP sovereign bonds		106,440,061	70,122,288
		Shares of stock listed in stock exchange		76,812,378	-
		Corporate bonds		41,434,080	331,554,499
				224,686,519	401,676,787
	Asia United Bank (AUB)
		Treasury notes		163,625,691	97,008,690
		ROP sovereign bonds		98,815,514	45,182,492
		Shares of stock listed in stock exchange		30,743,100	-
		Unitized investment trust fund		10,777,272	11,179,609
				303,961,577	153,370,791
				P 1,640,914,202	P 1,523,428,515

The Foundation pays ING, DB and AUB every quarter one-fourth of the annual service fees of 0.25% based on the average market value of the fund.

7. PROPERTY AND EQUIPMENT

A reconciliation of the carrying amounts at the beginning and end of 2006 and 2005, and the gross carrying amounts and the accumulated depreciation of property and equipment is shown below:

	Land	Building and improvements	Transportation equipment	Office furniture, fixtures and equipment	Total
Balance at January 1, 2006, net of accumulated depreciation	P12,369,972	P3,823,505	P2,682,801	P2,551,401	P21,427,679
Additions	9,745,837	2,925,826	73,679	1,070,339	13,815,681
Disposals	( - )	( - )	( 75,358 )	( 64,098 )	( 139,456 )
Depreciation charged for the year	( - )	( 498,856 )	( 824,521 )	( 1,523,553 )	(2,846,930)
Balance at December 31, 2006, net of accumulated depreciation	22,115,809	6,250,475	1,856,601	2,034,089	32,256,974
December 31, 2006
Cost or valuation	22,115,809	7,845,768	3,969,826	6,687,439	40,618,842
Accumulated depreciation	( - )	( 1,595,293 )	( 2,113,225 )	( 4,653,350 )	(8,361,868)
Net carrying amount	22,115,809	6,250,475	1,856,601	2,034,089	32,256,974
Balance at January 1, 2005, net of accumulated depreciation	9,158,002	3,377,085	3,193,005	2,427,843	18,155,935
Additions	3,211,970	889,665	267,562	1,687,961	6,057,158
Disposals	-	-	-	( 6,434 )	( 6,434 )
Depreciation charged for the year	( - )	( 443,245 )	( 777,766 )	( 1,557,969 )	(2,778,980)
Balance at December 31, 2005, net of accumulated depreciation	12,369,972	3,823,505	2,682,801	2,551,401	21,427,679
December 31, 2005
Cost or valuation	12,369,972	4,919,942	4,044,393	5,752,712	27,087,019
Accumulated depreciation	( - )	( 1,096,437 )	( 1,361,592 )	( 3,201,311 )	(5,659,340)
Net carrying amount	12,369,972	3,823,505	2,682,801	2,551,401	21,427,679

8. INVESTMENT PROPERTY

The account represents parcel of land foreclosed by the Foundation when the borrower was 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 appraiser. However, no impairment loss was taken up as the management believes that the impact is not material to the financial statements.

9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES

This account includes the following:

	2006	2005
Trustee fee payable	P 13,529,370	P 6,720,028
Accrued expenses	4,253,620	5,654,587
Accounts payable	1,533,904	827,631
	P 19,316,894	P 13,202,246

Trustee fee payable represents additional trustee fee of ING, AUB and DB in managing the Foundation’s investment based on a tiered-trust fee arrangement.

10. GRANTS PAYABLE

The account represents unreleased and committed grants to project proponents.

11. UNUSED PROJECT FUNDS

In October 2006, the Foundation was awarded a grant amounting to $535,500 (P26,746,032) by the Global Environment Facility through United Nation Development Programme and Department of Energy. Such grant shall be used to fund micro-finance intermediaries for re-lending to small-scale projects focusing on expanding renewable energy which are themed “Capacity Building to Remove Barriers to Renewable Energy Development in the Philippines” (CBRED). The proceeds have been invested as part of the Available-for-sale Financial Assets account in the statement of assets, liabilities and fund balances (see Note 6). The unused funds as of December 31, 2006 amounted to P26,570,658.

In 2006, the Foundation was awarded a grant amounting to €23,565 (P1,543,384) by the Catholic Organization for Relief and Development Agency for International Development (CORDAID), Netherlands. Such fund shall be used for an 8-year micro-finance fund program tagged as “Mindanao Partnership Project for Peace” Fund Program (MP3 FP) that will focus in providing credit assistance and institutional support to eligible borrowers. CORDAID will provide the original amount of
P80 million to the MP3 FP, and will be returned to CORDAID including any returns as follows: 25% and 35% of the original amount in 2012 and 2013, respectively, and the remaining amount in 2014. The entire amount of fund was still unused as of December 31, 2006.

12. PROJECT EXPENSES

The breakdown of this account is as follows:

	2006	2005
Project support	P 15,864,532	P 14,872,722
Project development, monitoring and evaluation	15,072,199	15,878,357
Institutional support	2,358,300	4,146,279
Rebates to proponents	1,855,759	1,486,549
CBRED related expenses	178,725	-
	P 35,329,515	P 36,383,907

13. GENERAL AND ADMINISTRATIVE EXPENSES

The details of general and administrative expenses are shown below:

	2006	2005
Employee benefits	P 4,391,950	P 4,200,687
Supplies and services	3,348,775	2,777,313
Transportation and travel	632,476	101,267
Outside services	167,015	958,718
	P 8,540,216	P 8,037,985

14. EMPLOYEE BENEFITS

The Foundation maintains a tax-qualified, noncontributory retirement plan that is being administered by a trustee covering all regular full-time employees. Actuarial valuations are made every two years to update the retirement benefit costs and the amount of contributions.

The amounts of prepaid retirement benefits recognized in the statement of assets, liabilities and fund balances which is reported as part of Loans and Receivables account are determined as follows:

	Note	2006	2005
Present value of the obligation		P 1,143,560	P 808,672
Fair value of plan assets		( 1,244,854 )	( 859,977 )
Excess of plan assets		( 101,294 )	( 51,305 )
Unrecognized actuarial gains		75,199	75,199
Prepaid retirement benefits	5	P 176,493	P 126,504

The movements in present value of the retirement benefit obligation recognized in the books are as follows:

	2006	2005
Balance at beginning of year	P 808,672	P 482,730
Current service cost and interest cost	334,888	245,412
Actuarial (gains) losses	-	80,530
Balance at end of year	P 1,143,560	P 808,672

The movement in the fair value of plan assets is presented below.

	2006	2005
Balance at beginning of year	P 859,977	P 699,664
Contributions paid into the plan	318,401	100,858
Expected return on plan assets	66,476	55,134
Actuarial gains	-	4,321
Balance at end of year	P 1,244,854	P 859,977

The plan assets consist of the following:

	2006	2005
Investment in EPCIB Merit – UITF	P 1,242,009	P 857,070
Savings deposit	2,845	5,420
Accrued trustee fee payable	( - )	( 2,513 )
	P 1,244,854	P 859,977

Actual returns on plan assets were P0.5 thousand in 2006 and P59.5 thousand in 2005.

The amounts of retirement benefits recognized in the revenues and expenses statements are as follows:

	2006	2005
Current service costs	P 238,656	P 175,561
Interest costs	96,232	69,851
Expected return on plan assets	( 66,476 )	( 55,134 )
Retirement benefits	P 268,412	P 190,278

The movements in the prepaid retirement benefits recognized in the books are as follows:

	2006	2005
Balance at beginning of year	P 126,504	P 215,924
Expense recognized	( 268,412 )	( 190,278 )
Contributions paid	318,401	100,858
Balance at end of year	P 176,493	P 126,504

Presented below are the historical information related to the present value of the retirement benefit obligation, fair value of plan assets and excess or deficit in the plan as well as experienced adjustments arising on plan assets and liabilities.

	2006	2005	2004	2003
Present value of the obligation	P 1,143,560	P 808,672	P 482,730	P 293,545
Fair value of the plan assets	1,244,854	859,977	699,664	351,499
Excess in the plan	P 101,294	P 51,305	P 216,934	P 57,954

For determination of the retirement benefit obligation, the following actuarial assumptions were used in 2006 and 2005:

Discount rates - 11.90%
Expected rate of return on plan assets - 7.73%
Expected rate of salary increases - 7.00%

Assumptions regarding future mortality are based on published statistics and mortality tables. The average life expectancy of an individual retiring at the age of 60 is 7 for males and 12 for females.

The overall expected long-term rate of return on assets is 10%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments

15. RELATED PARTY TRANSACTIONS

Key management compensation for the years ended December 31 consists of:

	2006	2005
Salaries and wages	P 4,555,190	P 4,350,852
Employee benefits	1,029,276	1,114,085
	P 5,584,466	P 5,464,937

16. COMMITMENT AND CONTINGENCIES

16.1 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 statement of assets, liabilities and fund balances.

Rent expense on the above lease agreement during the year amounted to P165,000 and is included in project development, monitoring and evaluation account, a component of Project Expenses in the revenues and expenses statement.

16.2 Others

There are commitments and contingencies that arise in the normal course of the Foundation’s operations which are not reflected in the accompanying financial statements. As of December 31, 2006, management is of the opinion that losses, if any, that may arise from these commitments and contingencies will not have a material effect on the Foundation’s financial statements.

16. FOREIGN CURRENCY DENOMINATED MONETARY ASSETS AND LIABILITIES

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

			2006	2005
In US Dollars:
	Assets
		Cash and cash equivalents	$ 1,868	$ 30,499
		Available-for-sale financial assets	14,661,534	18,305,530
	Liabilities
		Accounts payable, accrued expenses and other liabilities	( 132,309 )	( 57,310 )
			$ 14,531,093	$ 18,278,719
	Peso equivalent		P 713,941,661	P 970,311,012
In Euro:
	Cash and cash equivalents		€ 23,555	€ -
	Peso equivalent		P 1,521,112	P -

17. TAXES

The Foundation is a non-stock, non-profit private foundation, organized and operated exclusive 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 donation, grants, and contributions pursuant to Section 34(H) of the Tax Code; and (b) exemption from donor’s tax pursuant to Section 101 of R.A.8424. The certification issued by the BIR is subject to the representation and commitments set forth in the accreditation issued to the Foundation by the Philippine Council for NGO Certification (PCNC) on October 27, 2004.

As required by PAS 12, Income Taxes, the Foundation is supposed to recognize deferred tax assets or liabilities for the tax effects of temporary differences arising from net operating loss carry over and the unrealized foreign exchange gain and/or losses on the Foundation’s incidental taxable activities. However, since the Foundation does not expect to be in a taxable position in the future relative to its incidental taxable activities, recognition of the deferred tax assets in the books has not been made in the accounts for the years ended December 31, 2006 and 2005.

18. RISK MANAGEMENT OBJECTIVES AND POLICIES

The Foundation is exposed to a variety of financial risks which result from both its operating and investing activities. The Foundation’s risk management is coordinated with the Board of Trustees, and focuses on actively securing the Foundation’s short-to medium-term cash flows by minimizing the exposure to financial markets. Long-term financial investments are managed to generate lasting returns.

The Foundation does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Foundation is exposed to are described below.

18.1 Foreign Currency Risk

The Foundation is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to 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.

18.2 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.

18.3 Credit Risk

Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the statement of assets, liabilities and fund assets.

The Foundation’s trade and other receivables are actively monitored to avoid significant concentrations of credit risk.

18.4 Cash Flow and Fair Value Interest Rate Risks

Cash flow and fair value interest rate risks are managed by means of derivative financial instruments, where necessary, to ensure short- to medium-term liquidity. Currently, the Foundation has no financial liabilities with floating interest rates.