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Fall

08
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XYZ GROUP
Financial Statements
XYZ Group Consolidated statement of comprehensive income and
retained earnings for the year ended 31 December 2016

Ta g u i g C i t y , P h i l i p p i n e s
XYZLeatherBagsFinancialReport

201420152016
201420152016
FortheyearendedDecember31,2016
XYZLeatherBagsAccountingpoliciesandexplanatorynotesto
thefinancialstatementsfortheyearended31December20X2

1.Generalinformation
XYZLeatherBagsisalcompanyincorporatedinTaguig,Philippines.Theaddressofits
registeredofficeandprincipalplaceofbusinessisArea3,Lot33,TaguigCity.XYZLeather
BagsconsistsoftheCompanyanditswhollyownedsubsidiaryABCNylonBags.Theirprincipal
activitiesarethemanufactureandsaleofbags.

2.Basisofpreparationandaccountingpolicies
TheseconsolidatedfinancialstatementshavebeenpreparedinaccordancewiththeInternational
FinancialReportingStandardforSmallandMediumsizedEntitiesissuedbytheInternational
AccountingStandardsBoard.Theyarepresentedinthecurrencyunits(CU)ofALand.

Basisofconsolidation

TheconsolidatedfinancialstatementsincorporatethefinancialstatementsoftheCompanyandits
whollyownedsubsidiary.Allintragrouptransactions,balances,incomeandexpensesare
eliminated.

Investmentsinassociates

Investmentsinassociatesareaccountedforatcostlessanyaccumulatedimpairmentlosses.

DividendincomefrominvestmentsinassociatesisrecognisedwhentheGroupsrighttoreceive
paymenthasbeenestablished.Itisincludedinotherincome.

Revenuerecognition

Revenuefromsalesofgoodsisrecognisedwhenthegoodsaredeliveredandtitlehaspassed.
Royaltyrevenuefromlicensingcandlemakingpatentsforusebyothersisrecognisedona
straightlinebasisoverthelicenceperiod.Revenueismeasuredatthefairvalueofthe
considerationreceivedorreceivable,netofdiscountsandsalesrelatedtaxescollectedonbehalf
ofthegovernmentofALand.

Borrowingcosts

Allborrowingcostsarerecognisedinprofitorlossintheperiodinwhichtheyareincurred.

Incometax

Incometaxexpenserepresentsthesumofthetaxcurrentlypayableanddeferredtax.Thetax
currentlypayableisbasedontaxableprofitfortheyear.

Deferredtaxisrecognisedondifferencesbetweenthecarryingamountsofassetsandliabilitiesin
thefinancialstatementsandtheircorrespondingtaxbases(knownastemporarydifferences).
Deferredtaxliabilitiesarerecognisedforalltemporarydifferencesthatareexpectedtoincrease
taxableprofitinthefuture.Deferredtaxassetsarerecognisedforalltemporarydifferencesthat
areexpectedtoreducetaxableprofitinthefuture,andanyunusedtaxlossesorunusedtax
credits.Deferredtaxassetsaremeasuredatthehighestamountthat,onthebasisofcurrentor
estimatedfuturetaxableprofit,ismorelikelythannottoberecovered.

Thenetcarryingamountofdeferredtaxassetsisreviewedateachreportingdateandisadjusted
toreflectthecurrentassessmentoffuturetaxableprofits.Anyadjustmentsarerecognisedin
profitorloss.

Deferredtaxiscalculatedatthetaxratesthatareexpectedtoapplytothetaxableprofit(taxloss)
oftheperiodsinwhichitexpectsthedeferredtaxassettoberealisedorthedeferredtaxliability
tobesettled,onthebasisoftaxratesthathavebeenenactedorsubstantivelyenactedbytheend
ofthereportingperiod.

Property,plantandequipment

Itemsofproperty,plantandequipmentaremeasuredatcostlessaccumulateddepreciationand
anyaccumulatedimpairmentlosses.

Depreciationischargedsoastoallocatethecostofassetslesstheirresidualvaluesovertheir
estimatedusefullives,usingthestraightlinemethod.Thefollowingannualratesareusedforthe
depreciationofproperty,plantandequipment:

Buildings2percentFixturesandequipment1030percent

Ifthereisanindicationthattherehasbeenasignificantchangeindepreciationrate,usefullifeor
residualvalueofanasset,thedepreciationofthatassetisrevisedprospectivelytoreflectthenew
expectations.

Intangibleassets

Intangibleassetsarepurchasedcomputersoftwarethatisstatedatcostlessaccumulated
depreciationandanyaccumulatedimpairmentlosses.Itisamortisedoveritsestimatedlifeoffive
yearsusingthestraightlinemethod.Ifthereisanindicationthattherehasbeenasignificant
changeinamortisationrate,usefullifeorresidualvalueofanintangibleasset,theamortisationis
revisedprospectivelytoreflectthenewexpectations.

Impairmentofassets

Ateachreportingdate,property,plantandequipment,intangibleassets,andinvestmentsin
associatesarereviewedtodeterminewhetherthereisanyindicationthatthoseassetshave
sufferedanimpairmentloss.Ifthereisanindicationofpossibleimpairment,therecoverable
amountofanyaffectedasset(orgroupofrelatedassets)isestimatedandcomparedwithits
carryingamount.Ifestimatedrecoverableamountislower,thecarryingamountisreducedtoits
estimatedrecoverableamount,andanimpairmentlossisrecognizedimmediatelyinprofitorloss.

Similarly,ateachreportingdate,inventoriesareassessedforimpairmentbycomparingthe
carryingamountofeachitemofinventory(orgroupofsimilaritems)withitssellingpriceless
coststocompleteandsell.Ifanitemofinventory(orgroupofsimilaritems)isimpaired,its
carryingamountisreducedtosellingpricelesscoststocompleteandsell,andanimpairmentloss
isrecognizedimmediatelyinprofitorloss.

Ifanimpairmentlosssubsequentlyreverses,thecarryingamountoftheasset(orgroupofrelated
assets)isincreasedtotherevisedestimateofitsrecoverableamount(sellingpricelesscoststo
completeandsell,inthecaseofinventories),butnotinexcessoftheamountthatwouldhave
beendeterminedhadnoimpairmentlossbeenrecognisedfortheasset(groupofrelatedassets)in
prioryears.Areversalofanimpairmentlossisrecognisedimmediatelyinprofitorloss.

Leases

Leasesareclassifiedasfinanceleaseswheneverthetermsoftheleasetransfersubstantiallyall
therisksandrewardsofownershipoftheleasedassettotheGroup.Allotherleasesareclassified
asoperatingleases.

RightstoassetsheldunderfinanceleasesarerecognisedasassetsoftheGroupatthefairvalueof
theleasedproperty(or,iflower,thepresentvalueofminimumleasepayments)attheinception
ofthelease.Thecorrespondingliabilitytothelessorisincludedinthestatementoffinancial
positionasafinanceleaseobligation.Leasepaymentsareapportionedbetweenfinancecharges
andreductionoftheleaseobligationsoastoachieveaconstantrateofinterestontheremaining
balanceoftheliability.Financechargesaredeductedinmeasuringprofitorloss.Assetsheld
underfinanceleasesareincludedinproperty,plantandequipment,anddepreciatedandassessed
forimpairmentlossesinthesamewayasownedassets.

Rentalspayableunderoperatingleasesarechargedtoprofitorlossonastraightlinebasisover
thetermoftherelevantlease.

Inventories

Inventoriesarestatedatthelowerofcostandsellingpricelesscoststocompleteandsell.Costis
calculatedusingthefirstin,firstout(FIFO)method.

Tradeandotherreceivables

Mostsalesaremadeonthebasisofnormalcreditterms,andthereceivablesdonotbearinterest.
Wherecreditisextendedbeyondnormalcreditterms,receivablesaremeasuredatamortisedcost
usingtheeffectiveinterestmethod.Attheendofeachreportingperiod,thecarryingamountsof
tradeandotherreceivablesarereviewedtodeterminewhetherthereisanyobjectiveevidencethat
theamountsarenotrecoverable.Ifso,animpairmentlossisrecognisedimmediatelyinprofitor
loss.

Tradepayables

Tradepayablesareobligationsonthebasisofnormalcredittermsanddonotbearinterest.Trade
payablesdenominatedinaforeigncurrencyaretranslatedintoCUusingtheexchangerateatthe
reportingdate.Foreignexchangegainsorlossesareincludedinotherincomeorotherexpenses.

Interestexpenseisrecognisedonthebasisoftheeffectiveinterestmethodandisincludedin
financecosts.

Employeebenefitslongservicepayment

Theliabilityforemployeebenefitobligationsrelatestogovernmentmandatedlongservice
payments.Allfulltimestaff,excludingdirectors,arecoveredbytheprogramme.Apaymentis
madeof5percentofsalary(asdeterminedforthetwelvemonthsbeforethepayment)attheend
ofeachoffiveyearsofemployment.ThepaymentismadeaspartoftheDecemberpayrollinthe
fifthyear.TheGroupdoesnotfundthisobligationinadvance.

TheGroupscostandobligationtomakelongservicepaymentstoemployeesarerecognised
duringtheemployeesperiodsofservice.Thecostandobligationaremeasuredusingthe
projectedunitcreditmethod,assuminga4percentaverageannualsalaryincrease,with
employeeturnoverbasedontheGroupsrecentexperience,discountedusingthecurrentmarket
yieldforhighqualitycorporatebonds.

Provisionforwarrantyobligations

AllgoodssoldbytheGrouparewarrantedtobefreeofmanufacturingdefectsforaperiodofone
year.GoodsarerepairedorreplacedattheGroupsoption.Whenrevenueisrecognised,a
provisionismadefortheestimatedcostofthewarrantyobligation.

3.Keysourcesofestimationuncertainty
Longservicepayments

Indeterminingtheliabilityforlongservicepaymentsmanagementmustmakeanestimateof
salaryincreasesoverthefollowingfiveyears,thediscountrateforthenextfiveyearstousein
thepresentvaluecalculation,andthenumberofemployeesexpectedtoleavebeforetheyreceive
thebenefits.

4.Restrictiononpaymentofdividend
Underthetermsofthebankloanandbankoverdraftagreements,dividendscannotbepaidtothe
extentthattheywouldreducethebalanceofretainedearningsbelowthesumoftheoutstanding
balanceofthebankloanandthebankoverdraft.

7.Financecosts
InterestonbankloanandoverdraftInterestonfinanceleases

8.Profitbeforetax
2014CU

(21,250)(5,116)(26,366)

2015CU
(30,135)(6,577)(36,712)

6.Otherincome
OtherincomeincludesdividendsreceivedfromanassociateofCU25,000inboth2014and2016
andgainondisposalofproperty,plantandequipmentofCU63,850in2017.

Thefollowingitemshavebeenrecognizedasexpenses(income)indeterminingprofitbeforetax:

Costofinventoriesrecognizedasexpense

Researchanddevelopmentcost(includedinotherexpenses)

Foreignexchangelossontradepayables(includedinotherexpenses)

Warrantyexpense(includedincostofsales*)

2015

5,178,530

2016

4,422,575

*Iftheentityclassifiesitsexpensesbynatureinitsincomestatement,thiswouldsayincludedin
rawmaterialsandconsumablesused.

9.Incometaxexpense
CurrenttaxDeferredtax

2015CU271,647

(1,397)270,250

2016CU190,316

(757)189,559

Incometaxiscalculatedat40percent(20X1:40percent)oftheestimatedassessableprofitfor
theyear.

Incometaxexpensefortheyear270,250in2015(CU189,559in2016)differsfromtheamount
thatwouldresultfromapplyingthetaxrateof32percent(both2015and2016)toprofitbefore
taxbecause,underthetaxlawsofPhilippinessomeemployeecompensationexpenses(CU20,670
in20X2andCU16,750in20X1)thatarerecognizedinmeasuringprofitbeforetaxarenottax
deductible.
10.Tradeandotherreceivables
2016CUTradedebtors528,788Prepayments56,760585,548

2015CU528,38445,478573,862

2014CU36,45090010,57047,920

2013CU107,500

25,000

11.Inventories
RawmaterialsWorkinprogressFinishedgoods

12.Investmentinassociate
2016CU42,6011,14013,64057,381

TheGroupowns35percentofanassociatewhosesharesarenotpubliclytraded.

Costofinvestmentinassociate

Dividendreceivedfromassociate(includedinotherincome)

2016CU107,500

25,000

13.Property,plantandequipment
Cost

1January2016AdditionsDisposals31December2016

Accumulateddepreciationandimpairment

1January2016

Annualdepreciation

Impairment

Lessaccumulateddepreciationonassetsdisposedof
31December2016

Carryingamount

31December2016

1,960,0001,960,000

390,00030,000

420,000

1,540,000

1,102,045485,000

(241,000)1,346,045

270,590240,36030,000

(204,850)336,100

1,009,945

3,062,045485,000

(241,000)3,306,045

660,590270,36030,000

(204,850)756,100

2,549,945

ILLUSTRATIVEFINANCIALSTATEMENTS

FixturesLandandand

buildingsequipmentTotalCUCUCU



During2015XYZnoticedasignificantdeclineintheefficiencyofamajorpieceofequipment
andsocarriedoutareviewofitsrecoverableamount.Thereviewledtotherecognitionofan
impairmentlossof30,000.

ThecarryingamountoftheGroupsfixturesandequipmentincludesanamountof40,000(2016:
CU60,000)inrespectofassetsheldunderfinanceleases.
On10December2016thedirectorsresolvedtodisposeofamachine.Themachinescarrying
amountofCU1,472isincludedinfixturesandequipmentat31December2016,andtrade
payablesincludestheGroupsremainingobligationofCU1,550ontheacquisitionofthis
machine.Becausetheproceedsondisposalareexpectedtoexceedthenetcarryingamountofthe
assetandrelatedliability,noimpairmentlosshasbeenrecognised.

14.Intangibleassets
Software:

Cost

1January2016AdditionsDisposals31December2016

Accumulateddepreciationandimpairment1January2016

Annualamortisation(includedinadministrativeexpenses*)31December2016

Carryingamount

31December2016

CU

8,5008,500

5,9501,7007,650

850

*Iftheentityclassifiesitsexpensesbynatureinitsincomestatement,thiswouldsayincludedin
depreciationandamortisationexpense.

15.Deferredtax
Differencesbetweenamountsrecognisedintheincomestatementandamountsreportedtotax
authoritiesinconnectionwithinvestmentsinthesubsidiaryandassociateareinsignificant.

Thedeferredtaxassetsarethetaxeffectsofexpectedfutureincometaxbenefitsrelatingto:

. (a)thelongservicebenefit(note19),whichwillnotbetaxdeductibleuntilthebenefitis
actuallypaidbuthasalreadybeenrecognisedasanexpenseinmeasuringtheGroupsprofitfor
theyear.

. (b)theforeignexchangelossontradepayables,whichwillnotbetaxdeductibleuntilthe
payablesaresettledbuthasalreadybeenrecognisedasanexpenseinmeasuringtheGroups
profitfortheyear.
TheGrouphasnotrecognisedavaluationallowanceagainstthedeferredtaxassetsbecause,on
thebasisofpastyearsandfutureexpectations,managementconsidersitprobablethattaxable
profitswillbeavailableagainstwhichthefutureincometaxdeductionscanbeutilised.