ACCCOB2 PORTFOLIO

Reflection Paper presented

to the Accountancy Department

In partial fulfillment
of the course requirements
in ACCCOB2 K32

Jocson, Gabriel IV, M.

K32
I. Introduction (Megawide Construction Corporation)

Oftentimes, liabilities are viewed as detrimental to a company; however, one

significant factor that people typically fail to see is its utility in financing operations and
expansion (Indeed Career Guide, 2020). This is one of the major factors in evaluating a
company’s financial performance and solvency. However, as the famous quote says “too
much of everything is bad.” Failure to settle short-term and long-term obligations leads to a
solvency crisis, thus producing more expenses and problems for the company.

The same goes with share capital. Megawide Construction Corporation is listed in the
Philippine Stock Exchange as they are open for investors in the stock market; thus, it
constantly needs equity financing for its project and business expansion. Also, a wise
investor would always evaluate the share capital, retained earnings, and financial ratios of a
company before capitalizing. Thus, it is vital for a company to maintain a positive outlook
and performance, as this will generate profit and invite more potential creditors.

Simply put, having liabilities is entirely normal in corporations. It does not necessarily
mean that having high liabilities signifies poor performance; in fact, even the biggest
corporations in the Philippines such as SM and JFC have billions of liabilities. One thing I have
learned in ACCCOB 2 is — as long as it does not exceed the assets, and the current ratio is
not below 1, it is relatively safe to assume that the company has enough liquid assets to cover
its short-term liabilities. In other words, it can settle its obligations well.
II. Liabilities

Figure 1: Liabilities
Source: Megawide Annual Report 2018

Financial Liabilities are regarded as current liabilities if payment is due to be settled

within one Companies regard current liabilities as payment due to be settled within one year
or less after the end of an accounting period, or if the top management does not have an
unconditional right to defer settlement of the liability for at least 12 months following the
end of the accounting period. On the other hand, if the liability does not meet the
aforementioned characteristics, it is considered as non-current liabilities.

Megawide Construction corporation recognizes financial liabilities when the group

signs a construct with an instrument. These include interest-bearing loans and borrowings
as they need these to support the funding of operations. Additionally, the company charged
finance charges such as direct costs, to profit or loss through an accrual basis using the
effective interest method. These are then added to the carrying amount of any instrument,
whereby they are not settled in the period in which they are acquired.

Moreover, under the trade and other payables, the company abided by the IFRS
whereby they initially recognized trade and other payables at their fair value. Subsequently,
they measured them at amortized cost with the effective interest method for maturities
beyond one year, less settlement payments. More than these, the construction company also
recognized the declaration of dividends by the board of directors as part of its financial
liabilities, thus successfully following the IFRS/PFRS.

All these said, it is important to note that Meagwide’s 2018 current liabilities
skyrocketed by 76% more than last year or by 7.15B. Specifically, one of the significant
factors that contributed to this is the current interest-bearing loans and borrowings, wherein
it increased by 150% or P3.85B. According to Megawide (2018), this is due to the availability
of short-term loans to construct the new Clark International Airport. While this is beneficial
for the company in the long-run, Megawide’s management should be aware that P3.85B is
not small, considering that they have other liabilities. Moreover, another important factor is
the vast growth of advances from customers. It grew by 561%, specifically P2.96B, and it is
due to the down payments received by the Parents for its new projects. This is extremely
alarming because of its abrupt enlargement. It basically means that the company received
cash before a service has been provided; thus, they are obliged to perform their obligation
within a period of 12 months.

On the other hand, Non-Current Liabilities also escalated by roughly around 17% or
by P4.47B. This is due to the non-current interest-bearing loans and borrowings whereby
Megawide availed several loans in 2018. More than this, deferred tax liabilities vastly
expanded by 495% or by P349.14M — also because of its ongoing projects.

With all said above, 2018 is a critical year for Megawide as its current ratio has
lowered by almost 40%, which tells that it has more liabilities than assets compared to 2017.
This also signifies that the cash generation to meet short-term obligations is very slow. More
so, the quick ratio, 0.96, is also lower than 1, which means that the company cannot pay off
completely its current liabilities; thus, the working capital is negative. In addition, its debt to
total assets ratio negatively increased from 53% to 56%; hence, Megawide has more assets
that are provided by creditors in 2018 than in 2017. Overall, while the company’s higher
debt is used to improve the overall operations of the company, these still possess a great risk
as Megawide is financing a significant amount of its potential growth through liabilities.
Therefore, the group should highly take into account the growth in its liabilities since these
cause them declining liquidity ratios.

III. Shared Capital

 Figure 2: Shareholders’ Equity
Source: Megawide Annual Report 2018
 The nominal value of common and preferred shares that have been issued are a
reflection on the Capital Stock. IFRS explains that any additional paid-in capital includes any
premium acquired on the issuance of capital stock or re-issuance of treasury shares.
Transaction costs directed with the said shares are lessened from the succeeding paid-in
capital, net of any related income tax benefits. Additionally, treasury shares are stated at the
cost of regaining shares and are subtracted from equity attributable to the Parent Company’s
equity holders, not unless the shares are canceled, reissued, or disposed of. Also, retained
earnings consist of all current and prior results of operations presented in the consolidated
income statement, deducted by the amounts of dividends declared.

On December 31, 2018, and 2018, Megawide’s parent company had 23 and 29 holders
of its common equity securities procuring at a minimum of 100 shares listed in the Philippine
Stock Exchange (PSE), respectively. On the said dates, it closed at P18.50 and P18.00 per
share, respectively. Consequently, the Parent Company had 2,399.4 million common shares
traded in the PSE, both as of December 31, 2018, and 2017. Furthermore, 40 million
preferred shares are traded on the Philippine Stock Exchange, back on December 31, 2018,
and 2017. The preferred share last traded price was at P98.0 and P109.40 per share as of
December 31, 2018, and 2017, respectively.

Moreover, in 2018 and 2017, the Board of Directors approved the declaration of cash
dividends with a value of P1.76 per share, equivalent to P70.3 million per quarter (or
P281.0M in total) to the holders of preferred shares (Megawide, 2018). The dividends on
preferred shares were cumulative, non-participating cash dividends in accordance with the
issue price, payable quarterly in arrears every dividend payment date, and had a fixed rate
of 7.025% yearly from the listing date (Megawide, 2018).

However, according to Megawide (2018), on October 1, 2018, and December 11,

2017, the Board of Directors agreed to declare cash dividends for common shares at P0.12
per share and 0.05 per share, respectively. The dividends were laid out on November 12,
2018, and December 29, 2017, respectively, to all common stockholders of record as of
October 15, 2018, and December 26, 2017 (Megawide, 2018).
 On July 20, 2016, the Board of Directors decided to reacquire 410.8 million common
shares by Sybase Equity Investment Corporation at a price equivalent to the 7-trading day
volume-weighted average price, terminating on July 28, 2016, or equal to P10.03 per share
(Megawide, 2018). With this, the total purchase price of the treasury shares amounted to
P4,138.8M. Two years after, on October 1, 2018, the BOD again approved a share buyback
program worth P2.0B over a period of two years. The total cost amounted to P827.1M
equivalent to 48.8M shares.

Most importantly, Megawide’s strategy of growing and expanding the company by

acquiring additional projects within the country continues to make substantial expenses,
whereby they use cash from operations to finance the acquisitions and expenditures. Thus,
the amount of dividend declared is limited; therefore, retained earnings are at a higher level
in comparison to the paid-up capital stock. Ultimately, this explains the analysis conducted
for the company’s treasury shares and excess cost over the carrying value of non-controlling
interest procured.
References:

Complete Guide for Liabilities: Definition and Examples. (2020). Indeed Career Guide.

https://www.indeed.com/career-advice/career-development/examples-of-

liabilities#:~:text=A%20liability%20is%20something%20owed,to%20vendors%2C

%20customers%20or%20employees.&text=Liabilities%20represent%20an%20im

portant%20aspect%20of%20supply%20and%20demand%20in%20the%20econo

my.