Problems: Balance Sheet and Financial Statements

THE PROBLEM OF THE BEE: PROBLEMS IN FINANCIAL REPORTING OF JOLLIBEE FOODS CORPORATION’S 2005 FINANCIAL STATEMENTS A Paper Submitted In Partial Fulfillment of the Requirements for the Course ACT515M (Problems in Financial Reporting) MC REYNALD SIMBAJON BANDERLIPE II Candidate for the degree of MASTER OF SCIENCE IN ACCOUNTANCY Mr. WILFREDO BALTAZAR Professor De La Salle University - Manila Term 2, SY 2006-2007 THE PROBLEM OF THE BEE: PROBLEMS IN FINANCIAL REPORTING OF JOLLIBEE FOODS CORPORATION’S 2005 FINANCIAL STATEMENTS Mc Reynald S.

Banderlipe II College of Business and Economics, De La Salle University Company Background This paper aims to perform an analysis of the 2005 financial statements of Jollibee Foods Corporation. Before such presentation, this chapter intended to present some information about the company, and how Jollibee became the leading company in the Philippine fast food industry. After graduating with a degree in Chemical Engineering, Tony Tan Caktiong decided not to compete with fellow new yuppies at his time searching for jobs after graduation.

Having gained first-hand experience in managing a family eatery in Davao during his childhood years, he decided to pursue a food business that would be simple to operate. Thus, he borrowed P200,000 from his father to commence a Magnolia ice cream franchise beside Coronet Theater in 1975. With his ingenuity and passion to satisfy the cravings of his customers, the idea of serving American foods such as hamburgers and fries that is quick, tasty and affordable (Acuna, Bernardo, Dy, Malabanan, and Young. , 2004) became his vision that he never thought would be one of the entrepreneurial successes in the Philippines.

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In 1978, the vision became a reality when Tony and his family decided to incorporate and saw the birth of Jollibee Foods Corporation. One year after, the company posted P2 Million peso sales. It also marked the establishment of a first Jollibee franchise in Sta. Cruz, Manila and its first TV advertisement. Jollibee entered the list of the Top 1000 Corporations in 1981. Since then, the company continues its unprecedented growth as it enters the Top 500 in 1984, the Top 250 in 1986, and Top 100 in 1987. Meanwhile, in 1983, JFC launched flagship motto of JFC, known as the “Langhap Sarap. The year 1986 signaled the start of branching out in the international market by putting an international outlet in Taiwan and Brunei Darussalam. In 1989, the company posted very remarkable sales of P1. 3 Billion, while expansion efforts continued when they acquired 73% share in the Hamburger segment of the fast food industry in 1991. Jollibee became a public corporation in July 14, 1993 with its initial offering of P9. 00 per share. The expansion of JFC came when they acquired Greenwich Pizza Corporation in 1994 and Delifrance, a popular French patisserie shop, in 1995. This led to the increased variety of food items served by JFC.

In 1996, the Far Eastern Economic Review cited Jollibee as one of the leading companies in Asia. At the end of the year, more and more Filipinos abroad trooped down to their Jollibee stores in Guam, the Middle East, and Hong Kong. In 1997, Jollibee opened another branch in Xiamen, China. A year after, the company marked its 300th store in Balagtas, Bulacan, together with an international branch in Daly City, California. The following years thereafter saw the P20 Billion sales and recognition of Jollibee as the Most Admired Company in the Philippines and third overall in Asia.

Jollibee opened its 400th store in Intramuros, Manila, while sales continuously shoot up to the P27 Billion mark. In the same year, Jollibee opened its 500th store in Basilan, Isabela Province. At present, Jollibee continues to expand its network of stores, after acquiring Chowking in 2000, an 85 percent share in Yonghe King in 2004, and Red Ribbon Bakeshop in 2005. Table 1 Timetable of Selected Jollibee Products from the Years 1978 – 2005 Jollibee Foods Corporation Timetable of Selected Products 1978 – 2005

YEAR 1978 1979 1980 1982 1985 1986 1988 1990 1991 1992 1994 1995 1996 1999 2000 2001 2004 2005 PRODUCTS Regular Yum, Yum with Cheese Spaghetti Special Chickenjoy, French Fries Palabok Fiesta Breakfast Meals Chunky Chicken Sandwich Jollytwirl soft sundaes Coleslaw, Jolly Hotdog, Peach Mango Pie Pancakes Fruit-flavored ice cream sundaes Greenwich Pizzas and Pastas Delifrance French Pastries, Burger Steak Amazing Aloha, Chili Wings Cheezy Bacon Mushroom Burger Chowking Products, Pepper Crazy Burger, Shanghai Rolls, Pocket Pies, and Swirly Bitz Glazed Chicken Rice, Honey Beef Rice, Chicken Sotanghon Soup, Jolly Meat Pies, Yonghe King Products Super Meals, Jolly Chicken Tocino, Red Ribbon Cakes and Pastries As of 2005, the company’s store count estimated 552 Jollibee stores, 239 for Greenwich, 344 for Chowking, and 37 for Delifrance, 101 for Yonghe King, and 156 for Red Ribbon, the newest in the Jollibee family. Continuous expansion in terms of the number of food items and outlets is still underway. Table 1 below shows the timetable of elected Jollibee Products sold in the Philippine market starting from its inception in 1978. Standards Used by the Company Prior to analyzing the 2005 financial statements of Jollibee Foods Corporation, it is noteworthy to make a comparison of the standards to be adopted by the company as indicated in the 2004 financial statements in contrast with those standards actually applied in its preparation of the 2005 financial statements. Table 2 presents the comparison of accounting standards to be used in 2005 as per 2004 financial statements and the accounting standards actually used in 2005 per examination of the company’s 2005 financial statements.

As can be seen, eight standards were not identified by the company in its 2004 financial statements that were actually adopted in 2005. Moreover, by looking at the 2004 financial statements, there has been noted a difference in the presentation of the financial information. This was noted because although the year 2004 signifies the transition year towards adopting the Philippine Financial Reporting Standards and Philippine Accounting Standards, the 2004 financial statements still has presented the information in accordance with the superseded generally accepted accounting principles (GAAP). Table 2 Comparison of Standards to be used by JFC in 2005 as indicated in its 2004 Financial Statements and Standards actually used in 2005 Standard No. / Name

PAS 1 “ Presentation of Financial Statements” PAS 2 “Inventories” PAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” PAS 10 “Events After the Balance Sheet Date” PAS 14 “Segment Reporting” PAS 16 “ Property, Plant and Equipment” PAS 17 “Leases” PAS 18 “Revenue” PAS 19 “Employee Benefits” PAS 21 “ The Effects of Changes of Foreign Exchange Rates” PAS 24 “Related Party Disclosures” PAS 27 “Consolidated and Separate Financial Statements” PAS 31 “Interests in Joint Ventures” PAS 32 “ Financial Instruments: Disclosure and Presentation” PAS 36 “ Earnings per Share” PAS 36 “ Impairment of Assets” PAS 37 “Provisions, Contingent Liabilities and Contingent Assets” PAS 39 “Financial Instruments: Recognition and Measurement” PAS 40 “Investment Property” PFRS 1 “First Time Adoption of International Financial Reporting Standards” PFRS 2 “Share-Based Payments” PFRS 3 “Business Combination” PFRS 5 “Noncurrent Assets Held for Sale and Discontinued Operations” PFRS 7 “Financial Instruments” 2004 * * * * * * * * * * * * 2005 * * * * * * * * * * * * * * * * * * * * * * * * * * * * This paper will elaborate the compliance of Jollibee Foods Corporation in their adoption of the PFRS and PAS as indicated in their 2005 financial statements. It will also include a discussion of other problems in financial reporting noted in the analysis of the company’s financial statements.

Discussion of Compliance with the Standards In analyzing the financial statements of Jollibee Foods Corporation for the year 2005, the researcher delved on the disclosure requirements of the Philippine Accounting Standards PAS and PFRS published by Philippine Institute of Certified Public Accountants (2005). These standards assess whether the company has complied with such requisites in preparing the PFRS financial statements for the year 2005, the year where PFRS formats became applicable in Philippine companies. In this case, the paper used the annual report released by the company in its corporate website in 2004 and in 2005. I. Philippine Financial Reporting Standards (PFRS) PFRS 1: First Time Adoption of Philippine Financial Reporting Standards Paragraph 36 of PFRS 1 requires the inclusion of at least one year of comparative information under the IFRSs.

JFC was able to follow such requirements since the financial statements presented 2005 data and 2004 restated data. The Note 2 of the company’s 2005 financial statements highlights such explanation. Paragraph 36A applies to entities that will choose to present comparative information that does not comply with IAS 32, IAS 39, and IFRS 4, which delves on financial instruments and insurance contracts, under certain conditions presented in the standard. In resolving the issue, Jollibee complied with the accounting policies set forth in IAS 32 and IAS 39. Nevertheless, the company applied for exemption in adopting the standards retroactively as permitted by SEC, applicable for the year ended 2004.

Hence, the standards will be applied prospectively beginning January 1, 2005. Paragraph 37 presents the standards on historical summaries of selected data for periods before the first period for which they present full comparative information under the IFRSs. This is not applicable to JFC’s financial statements for the year ended December 31, 2005. Paragraphs 38 – 46 delve on the explanations regarding the transition to previous GAAP to IFRS financial statements. Accordingly, reconciliations of the company’s equity, profit and loss, and impairment losses should have appropriated disclosures. The company’s financial statements have presented supporting schedules for equity and profits and losses.

With the adoption of PFRS 3 and PAS 36, JFC presented a disclosure under Section 2. 3. 1 (Reconciliation of Equity). Moreover, the same section also exhibited an expose on the designation of fair values on financial assets or liabilities and valuation of investment properties under paragraphs 43A – 44 of PFRS 1. Required disclosures such as the fair value of financial assets per category and the aggregate fair values and adjustment to carrying amounts under previous GAAP are also shown. The company has therefore complied with such requirements for first time adoption of Philippine Reporting Standards since it complied with its minimum requirements.

PFRS 2: Share Based Payments Major provisions regarding disclosures in compliance with PFRS 2 necessitated information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed during the period. This includes disclosures such as description of each type of share-based payment arrangements; the number and weighted average exercises prices of share options and the weighted average share price at the date of exercise for options exercised during the period. Moreover, the range of exercise prices and weighted average remaining contractual life for share options outstanding at the end of the period, more than the option pricing model used.

In addition, information should be accessible to enable users of financial statements understand the determination of fair values of goods or services received, and equity instruments granted. This includes disclosures such as weighted average fair value of share options granted and other equity instruments granted during the period and information on how the fair value was measured. Information on share-based payments that were modified during the period should also be disclosed, if any. Lastly, disclosures that enable users of financial statements to understand the effects of share-based payment transactions on the entity’s profit and loss and financial position should be provided.

This includes disclosures on the total expenses recognized for the period arising from share-based payment transactions in which goods or services received but did not qualify for recognition as assets, and carrying and intrinsic value of liabilities arising from share-based payment transactions at the end of the period. JFC was able to comply with this standard, following the compliance of PFRS 2, including the provisions set forth in paragraphs 25B to 25C of IFRS 1. Required data to understand its effects are also indicated. Such indicators were presented in Note (b) of Section 2. 3. 1 and Section 2. 24. 2 of the company’s financial statements for the year ended December 31, 2005.

A more detailed discussion about share-based payments is presented in Note 23. Here, the company disclosed basic information on each type of share-based payments such as Tandem Stock Purchase and Option Plans I and II, and Management Stock Option and Incentive Plans. It can be said that JFC has complied with the requirements on Share-Based Payments. PFRS 3: Business Combinations Required disclosures for PFRS 3 were information that enables users of financial statements to evaluate the nature and financial effect of business combinations that were effected during the period and after the balance sheet date but before the financial statements are authorized for issue.

It should also disclose, as in the case of the acquirer, information that enables users of financial statements to evaluate the financial effects of gains, losses, error corrections, and other adjustments recognized in the current period that relate to business combinations that were effected in the current year or in previous periods. In addition, data that will enable users to evaluate changes in the carrying amount of goodwill, if any, during the period should be disclosed. The company’s financial statements complied with the provisions of PFRS 3 for which the date is on or after March 31, 2004, the agreement date for all business combinations to be considered as stipulated in paragraph 78 of PFRS 3. Under Note (d) of Section 2. 3. 1 of JFC’s financial statements, the notes also depicted information about the financial effects of gains, losses, and other adjustments that were effected in current or previous periods.

Moreover, the financial statements presented the changes in reversal of goodwill amortizations and recognition of goodwill in accordance with PAS 21. It included several notes in relation to the commencing testing for impairment losses, and reflected effects of changes of these policies to goodwill account of JFC. This can be best explained in Notes 8 to 10, where information regarding their investments in subsidiaries, interests in a joint venture, and goodwill arising from such transactions were designated. PFRS 5: Non-Current Assets Held for Sale and Discontinued Operations PFRS 5 specifies the accounting for assets held for sale and presentation and disclosure of discontinued operations.

It requires assets that meet the criteria to be classified as held for sale to be measured at the lower carrying amount and fair value less costs to sell, and the depreciation on such assets to cease. Furthermore, assets that meet the criteria as held for sale should be presented separately on the face of the balance sheets and the results of discontinued operations to be presented separately in the income statement. Disclosure requirements include information that will enable users to evaluate the financial effects of discontinued operations and disposals of non-current assets (or disposal groups). Since the company believes that this will have no material effect on the company’s financial position and results of operations as indicated in the 2004 financial statements, this has never been an issue in the 2005 financial statements.

PFRS 7: Financial Instruments Revised disclosures on financial instruments provided by the standard will be included in consolidated financial statements when the standard is adopted in 2007. II. Philippine Accounting Standards (PAS) PAS 1: Presentation of Financial Statements PAS 1 provides a framework within which an entity assesses how to present fairly the effects of transactions and other events; provides the basic criteria for classifying liabilities as current or non-current; and prohibits the presentation of income from operating activities and extraordinary items as separate line items in the income statement. Disclosure requirements include the measurement basis (or bases) used in preparing the financial statements and other accounting policies used that are relevant to an understanding of the financial statements.

It also requires disclosures of judgments management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognized in the financial statements. Additionally, it also requires disclosures as to key sources of estimation uncertainty and other disclosures if not disclosed elsewhere in information published with the financial statements. In 2004, JFC’s financial statements noted the probable change in the presentation of minority interest in the balance sheet and income statement will be effected in 2005 in addition of restating prior years’ financial data to conform to the 2005 presentation.

However, in 2005, the company believes that this standard will have no effect on equity on the reporting periods presented. In other aspects of the standard, the company’s financial statements also complied with the inclusion of significant accounting judgments and estimates made by the company’s management, in addition to the disclosure of key estimation uncertainties. The Note 2 of the financial statements indicates such compliance. Corporate information was also included in Note 1 of the Notes to Financial Statements (including the description of the entity’s operations and the name of the parent company), together with the basis of preparation and consolidation of the financial statements.

Details of dividends are located in Note 15 and Note 17(b) of the financial statements. In general, the company’s financial statements complied with the requisites of PAS 1. However, the company should also include in Section 2. 3. 5 the additional disclosures regarding capital management that are not yet effected by the company until January 1, 2007. PAS 2: Inventories Disclosure requirements in PAS 2, as shown in paragraphs 36 to 39 are the accounting policies adopted in measuring inventories and cost formula used, the carrying amount of inventories carried at fair value less costs to sell, and the amount of inventories recognized as expense during the period, the amount of any write-downs.

In addition, the notes should indicate reversal of inventory write-downs, circumstances that led to the write-downs and the amount of inventories held as security or pledge. In the adoption of PAS 2, the company has no foreseen significant changes in its accounting policies; thereby PAS 2 will not be an issue for JFC. As indicated in section 2. 11 in Note 2, the company disclosed the accounting policies and cost formula used in the inventory items of Jollibee, both food and non-food items. In Note 6 of the financial statements, the presentation of the carrying amount of inventories was in accordance with the lower of cost or net realizable values as indicated in the standard. Hence, the financial statements complied with the requirements of the standard.

PAS 7: Cash Flow Statements As can be seen, the financial statements were presented classified by operating investing, and financing activities. While is it encouraged to adopt the direct method in accounting for cash flows from operating activities, JFC used indirect method, which is still acceptable in practice because of its easy application. On the other hand, almost all disclosure policies stated in PAS 7 have complied by Jollibee such as those regarding interest, income taxes, cash flows related to the acquisition of a subsidiary, and components/reconciliation of cash and cash equivalents in the financial statements and in the notes. This means that the company was able to meet the requirements of PAS 7.

PAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Under PAS 8, requisite disclosures as to changes in accounting standards or policies include the title of the standard or interpretation, the note that signifies that the change is in accordance with transitional provisions, its descriptions, the amount of adjustments, and certain conditional disclosures and how the standard addressed the disclosure, the nature of the changes in accounting policy, and reasons why this new policy will lead to a more reliable and relevant information. It should also divulge information when a voluntary change in accounting policy has an effect on the current period or any prior period that would have and effect on that period except that it is impracticable to determine the amount of the adjustment, or might affect future periods. Moreover, it should also present information as to the standards issued but not yet effective to the company. In terms of hanges in accounting estimates, the financial statements must depict the nature and amount of change in accounting estimate and its effect on current and future periods when it is practicable to estimate the effect. If not possible, the fact should be disclosed. With regards to errors, disclosures should include the nature and amount of the errors, and the circumstances that led to the error and how it will be addressed by such correction. The company does not expect any significant changes in the accounting policies when it adopts PAS 8 and accordingly, in the 2005 financial statements, it also exhibited no effect on equity at January 1 and December 31, 2006. With regards to standards issued but not yet effective, section 2. 3. 5 of Note 2 depicted such disclosure.

Still, the company should also have included the disclosures regarding capital management in compliance with PAS that will be applicable in 2007 to fully disclose all standards issued but not yet effective. PAS 10: Events after the Balance Sheet Date PAS 10 provides a limited clarification of the accounting for dividends declared after the balance sheet date. Disclosure requirements include the date when the financial statements were authorized for issue and who gave the authorization. It should also disclose the fact that the entity’s owners or others have the power to amend the financial statements after the issue. Moreover, if the entity receives information after the balance heet date about that conditions that existed at the balance sheet date, the entity should update disclosures in the light of new information. The company does expect any significant changes in the accounting policies when it adopts PAS 10 and accordingly, in the 2005 financial statements, it also exhibited no effect on equity at January 1 and December 31, 2004. Compliance with this standard is stated in Note 1 with regards to the date of authorization for issue of the financial statements and section 2. 30 of Note 2 and Note 29 regarding subsequent events. Furthermore, disclosure on dividends may not be an issue since the company annually declares and pays dividends to its stockholders, as evidenced by the cash flow statements for the years ended December 31, 2004 and 2005.

For this reason, the company was able to comply with the disclosure requirements set forth in PAS 10. PAS 14: Segment Reporting This standard establishes the principles for reporting financial information by segments about the different types of products and services an enterprise produces and the different geographical areas in which they operate. Reportable segments should present the segment’s results of operations, carrying value of total assets and liabilities, contingencies, expenditures, depreciation, share in profits or losses, and other requirements mentioned in the standard. It also provides secondary reporting format requisite disclosures for segment revenues, expenses, results, assets, liabilities, and accounting policies.

Accordingly, this standard has no effect on equity at January 1 and December 31, 2004 and as such, is not an issue for the company’s financial statements as of December 31, 2005. As can be seen, the company maintained the same format in segment reporting for the presentation of segment information in Note 3 of both 2004 and 2005 financial statements. Disclosures are generally in compliance with PAS 14. The company focused on using the primary reporting format, since the use of geographical segment reporting is not feasible due to a non-substantial portion of revenues earned by international operations, which are still few in number. In addition, the company disclosed information for inter-segment sales and transfers and the basis of pricing these transactions.

PAS 16: Property, Plant, and Equipment Disclosure requirements on property, plant and equipment are the measurement bases to determine gross carrying amounts; depreciation methods and useful lives used; gross carrying amounts and accumulated depreciation at the beginning and end of the period; reconciliations of carrying amount of PPE assets pertaining to additions, reclassifications, and other increases or decreases; the recognition of impairment and reversal of impairment losses; restrictions on title of PPE assets, PPE assets pledged as security for liabilities; expenditures related to property, plant and equipment; and changes in accounting estimate as to residual values. Furthermore, the entities should disclose contractual commitments for acquisition of PPE assets; compensation to third parties rising from impairment of PPE items included in profit and loss; information regarding the revaluation of property, plant, and equipment as to effective date of revaluation, involvement of third parties for revaluation, assumptions in estimating fair values, carrying value of assets under cost models, and revaluation surplus; and information on idle properties. The company believes that there is no significant effect on equity upon adoption of PAS 16. Similar formats were presented, with differences in the probable restatements done in the 2005 financial statements. This is evidenced in note (c) of section 2. 4. 2, which depicted the management’s estimation uncertainty assumptions regarding PPE assets. In section 2. 9, the policy on accounting for PPE assets was presented, including compliance with general disclosures in accordance with PAS 16; while in Note 11, the financial statements showed the reconciliation of carrying amounts of PPE assets pertaining to additions, retirements, reclassifications, and transfers, including the disclosure regarding a fire that damaged the company’s commissary. It also included compensation from the insurance company for the damage of the property. No disclosure is necessary on revaluation of properties, as the company had not yet hired appraisers to revalue their properties. Disclosures regarding derecognition on PPE assets and idle and fully depreciated property are not of greater importance, since all properties have found its usage in the company.

PAS 17: Leases PAS 17 prescribes appropriate accounting policies and disclosures to apply in relation to finance and operating leases. It also prohibits expensing of initial direct costs in the financial statements of the lessors. Under this standard pertaining to operating leases, which the company have adopted (as can be seen in section 2. 3. 1 reconciliation of equity in the company’s financial statements, in letter (c) in note 2. 4. 1, and section 2. 26 in Note 2 of the financial statements), disclosures should include total future minimum lease payments under non- cancellable operating leases for periods within one year, within after one year but not more than five years, and after 5 years (for both lessors and essees); future minimum sublease payments under non-cancellable subleases; lease and sublease payments recognized as expenses (for the point of view of lessees); disclosures regarding contingent rents recognized as income, general description of leasing arrangements, bargain purchase options or renewal options, and restrictions involving lease arrangements as lessors or lessees (for both lessors and lessees). JFC does not expect any significant changes in accounting policies when it adopts PAS 17. In Note 26, the future minimum rental receivables and payables were presented, including the general details of lease arrangements entered by JFC (both positions are renewal options), and legal issues normal to its operations. The company did not entered into sale and leaseback transactions. The Company complied with the accounting rules in accordance with PAS 17.

However, as a lessor, the company did not classified assets subject to operating leases according to the nature of the assets in the balance sheet. This is on the assumption that the firm’s lease transactions involve only commercial properties. Information on such classification was aggregated in the financial statements, which ensured its compliance. PAS 18: Revenue Disclosure requirements to comply with this standard includes accounting policies adopted for the recognition of revenue; methods used in accounting for stage of completion of service transactions; the amount of significant categories of revenue recognized during the period, which includes sale of goods, rendering of services, nterest, royalties, and dividends; and the amount of revenue arising from exchanges of goods and services included in each significant category of revenue. The policies adopted for revenue recognition is presented in section 2. 23 as to how they recognize revenue from various categories. Its compliance with standards related to revenue recognition from royalty and franchise fees are delineated in Note 18. Though the financial statements do not present the breakdown of revenues according to significant categories, they believe that the use of segment information is already sufficient enough to present the revenues of the company. In this case, such segment information suffices compliance with PAS 18.

PAS 19: Employee Benefits Disclosure requirements under PAS 19 include the policy for recognizing actuarial gains and losses; general description of the types of plans; reconciliation of assets and liabilities regarding defined benefit obligations; actuarial gains or losses; fair value of plan assets; reconciliation of movements in the next period of net assets or liabilities, total expenses related to employee benefits such as current service costs, interest costs, expected actuarial returns on plan assets, past service costs, effects of curtailment and settlement; actual return on plan assets and actual return on reimbursement right recognized as an asset; and principal actuarial assumptions used at balance sheet date such as discount rates, expected rates of returns, expected rates of salary increases, medical cost trend increases, and other assumptions all expressed in absolute terms. The company was able to comply with the rules set on PAS 19. As can be seen in Note (a) of Section 2. 3. 1 of the Notes to Financial Statements, the policies on actuarial gains, losses, past service costs, plus its effect on the retained earnings and net income were depicted. Moreover, such information was also presented in the reconciliation of equity. In section 2. 4, the company disclosed their policy on employee benefits, both pension and share-based payments. Accordingly, the company uses defined benefit accounting. They also used defined contribution accounting to some extent for employees of Chinese domiciled subsidiaries of the company, as seen in Note 22; only a limited disclosure regarding the use of this plan was indicated. It also provided information as to actuarial gains, actual returns on plan assets, plan liabilities, reconciliation of movements in the present value of obligations and fair value of plan assets, fair value of plan assets, the date of actuarial valuation, the actuarial assumptions such as salary increase rate, rate of return on assets, and discount rates.

Termination benefits and other long-term benefits are not considered issues to the company. Other disclosures such as medical costs, schedules of contributions by employers and employees, and the recognition of actuarial gains and losses not presented in the financial statements will not affect the company’s compliance with the standard. PAS 21: The Effects of Changes in Foreign Exchange Rates Disclosure requirements under PAS 21 referring to functional currency of the parent includes the amount of exchange differences recognized in profit or loss except for those arising on financial instruments measured at fair value through profit or loss in ccordance with PAS 39 and net exchange differences classified in a separate component of equity, in addition to the reconciliation of the amount of such exchange differences at the beginning and end of the period. Moreover, reasons for using presentation currency rather than functional currency should be indicated if such is the case; or if there is a change in the functional currency of either reporting entity or a significant foreign operation, that fact and the reason of change should be disclosed. It will only be deemed complying with the IFRS if all the requirements of each applicable accounting standard and interpretations are followed including the method of translation. The company disclosed its adoption of PAS 21, and they will be applying it prospectively.

They also noted that goodwill arising from acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are now treated as assets and liabilities of the foreign operation and are to be translated at a closing rate. However, this new policy will have no significant impact to the company. As seen in letter (d) of note 2. 4. 1, the company has determined the Philippine peso as the functional currency of the company. Additional information regarding functional currency and translation method is provided in section 2. 5. There is no issue as to the use of functional currency, since both parent and subsidiaries will use the Philippine peso.

But as can be noticed, although there is a presented amount of exchange differences resulting from translation as indicated in the Statement of Changes in Equity, there is no reconciliation of the amount of such differences at the beginning and end of the period. PAS 24: Related Party Disclosures Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. An entity shall disclose the name of the entity’s parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party produces financial statements available for public use, the name of the next senior parent that does so shall also be disclosed. Moreover, disclosure requirements include key management personnel ompensation in total and per categories presented in paragraph 16 regarding short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, and share based payments; the nature of related party relationships and information on the amount of transactions and outstanding balances, provisions for doubtful debts, and expenses recognized during the period in respect of bad and doubtful debts. The parent shall make separate disclosures, in addition to their interests in a joint control or significant influence over the entity, information regarding the parent company’s subsidiaries, associates, joint ventures, key management personnel, and other related parties.

JFC finds this standard to have no effect on its equity but they are amenable to adopt the new standard. In note 24, the company noted that the transactions with members of the Jollibee group are eliminated while intercompany advances are major transactions with joint venture. They complied with the presentation of outstanding balance of advances as indicated in the standard. The company was able to justify such presentation in Notes 8 and 9. Yet on the other hand, there is no information regarding key management personnel and their compensation schedule. Accordingly, since JFC, as a parent, runs its business independently of its subsidiaries and other related parties, there is no dependence on the company’s related parties.

PAS 27: Consolidated and Separate Financial Statements In this standard, the entity’s compliance of the standards depends on their disclosure of the nature of the relationship between the parent and the subsidiary, reasons that will not constitute control of an investee in the entity, differences in reporting dates, and a listing of information regarding significant investments in subsidiaries, jointly controlled entities or associates. In note 8, the company’s financial statements presented its required disclosures of investments in subsidiaries, although information with their compliance to paragraphs 41 and 42 of the standard is not that material for their presentation regarding separate financial statements. Hence, the company managed to comply with the disclosure requirements of PAS 27.

PAS 31: Interests in Joint Ventures PAS 31 delineated several disclosure requirements such as the aggregate amount of specified contingent liabilities, unless the probability of loss is remote; the aggregate amounts of capital commitments of the parties with respect to their interest in the joint venture; a listing and description of their interests in joint ventures; and accounting methods in recognizing interests in joint ventures. JFC was able to comply with the disclosure provisions of the standard, having presented its description of their interest in a joint venture and the accounting method for its joint venture, as seen in section 2. 18 in Note 2 and the entire Note 9 of the financial statements. The first two items are not applicable in the company at the moment. In this case, the company was able to comply with the requirements of PAS 31.

PAS 32: Financial Instruments: Disclosure and Presentation To enhance the understanding and significance of financial instruments of the entity, the firm should describe its financial risk management objectives and policies, including hedging policies for each main type of forecast transaction for which hedge accounting is used. The firm should also disclose a description of the hedge; financial instruments designated as hedging instruments including their fair values, nature of risks being hedged, and for cash flow hedges, the period in which cash flows are expected to occur. Information about the nature of financial instruments and basis for accounting recognition must also be divulged.

The firm should disclose the amount of gain or loss on a hedging instrument recognized in equity, removed from equity, and the amount removed from equity and was included in the initial measurement of acquisition cost or carrying amount of non-financial assets or liabilities. Information about their exposures to credit risk and interest rate risk are also mandated. Furthermore, the standard requires information regarding fair valuation of financial instruments, de-recognition of financial instruments, financial assets held as collateral, compound financial instruments with multiple embedded derivatives, reclassification and presentation of income, expenses, gains, and losses resulting from financial assets and financial liability transactions, and impairment and defaults/breaches. Under Note (c) of section 2. 3. of the notes, JFC has embedded information on how the company identified its financial assets, and how they valued those financial assets. These pertain to their investment in stocks, refundable deposits on leases and noninterest bearing car loans. These financial assets were explained in full detail in section 2. 6 of Note 2. In section 2. 16, information on de-recognition of financial assets and liabilities in accordance with PAS 32 were presented. Under Note 27, the company expressed its compliance with PAS 32, showing their risk management objectives and policies, and information on how JFC addresses the financial risks discussed in the standard.

In Note 29, the financial statements presented the valuation of financial assets and liabilities, in accordance with the valuation set by PAS 32, together with the information of multiple embedded derivatives. However, detailed information about the maximum degree of risk exposure must be presented. PAS 39: Financial Instruments: Recognition and Measurement PAS 39 has no disclosure requirements since they were moved to PAS 32. However, to comply with IAS 39, information about the decrease in retained earnings and carrying amounts of financial assets was disclosed. In note (c) of Section 2. 3. 1, they also disclosed unrealized loss in the company’s AFS financial assets as part of compliance with the standards. Section 2. 6 provided a description of financial instruments held by JFC.

In Section 2. 10 the company disclosed information on the impairment of financial assets in accordance with the requirements of PAS 39. Section 2. 22 presents information on the impairment of non-financial assets. Information on Notes 27 and 28 are still applicable in compliance with PAS 39 regarding measurement of financial assets and liabilities. PAS 33: Earnings per Share In presenting the financial statements in accordance with PAS 33, the standard requires the presentation of amounts used as numerators in calculating basic and diluted earnings per share and its reconciliations to profit or loss attributable to the parent entity for the period.

It should also disclose the average number of ordinary shares used to calculate basic and diluted EPS, instruments that could dilute basic EPS in the future, and a description of ordinary share transactions that occur after balance sheet date. Jollibee’s compliance with the standard was indicated in section 2. 27 of Note 2 and Note 25, which presented the Earnings per share computations. As indicted in section 2. 3. 4, comparative information and disclosures have been presented as required. However, the adoption of PAS 33 has no effect on equity of JFC. The presentation of Earnings per Share of Equity Holders of the Parent was indicated in the Income Statement of JFC.

PAS 36: Impairment of Assets Disclosure requirements in accordance with PAS 36 include the amount of impairment losses recognized in profit or loss during the period in each class of assets and revalued assets, the reversals of impairment losses in each class of assets and revalued assets. For material impairment losses, disclosures as to the events that led to the recognition or reversal of impairments losses in assets, cash generating units and information on aggregate losses should be indicated. Such compliance by JFC’s 2005 financial statements is indicated in letter (b) of section 2. 4. 2, section 2. 22 of Note 2, Note 3 regarding segment information on impairment losses, Notes 10 and 11. The company provided disclosures of their assessment of impairment losses on non-financial assets

PAS 37: Provisions, Contingent Liabilities, and Contingent Assets PAS 37 requires disclosures regarding contingent assets, liabilities, and provision. Contingencies are disclosed except when the possibility of an inflow or outflow of resources is remote. Information regarding the nature and estimated amount of such contingency, its financial effects, the uncertainties relating to the outflow and amount of reimbursements are also noted. Obligatory disclosures for provisions include carrying amounts, additions of provisions, provisions used, and unused amounts reversed during the period. Moreover, brief descriptions on each class of provisions are due for presentation in the financial statements.

The company was able to provide information regarding the company’s provisions, as stated in Note 14. While information on contingencies is not substantial, still, the assumptions are still presented in Note 2 of the financial statements. PAS 40: Investment Property PAS 40 identified the presentation requirements for investment properties. Disclosures under this standard are and extension of the requirements presented in IAS 17 (or PAS 17, “Leases”). Entities shall disclose whether they apply the fair value model or cost model in valuing investment properties. Should they apply fair value model, firms should indicate the circumstances property interests held under operating leases are classified and accounted for as investment property.

If the classification is difficult, they should distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business. In addition, entities have to identify the methods and significant assumptions in valuation of investment properties. Amounts recognized in profit or loss such as rental income, operating expenses incurred from properties that are income and non-income generating, existence of restrictions on realizable characteristic of investment properties upon disposal, and contractual obligations regarding investment properties should be disclosed. Because JFC elected to use cost model in the valuation of investment properties as shown in note (e) of Section 2. 3. of Note 2, disclosures require the depreciation methods used, useful lives or depreciation rates used, gross carrying amount and accumulated depreciation, a reconciliation of the beginning and ending balances showing additions, assets classified as held for sale, depreciation, transfers, impairment losses, and fair value of investment properties. In the same notation, JFC presented the effects of adopting the policy in the financial statements, as evidenced by the reconciliation found in the same note. Here, the changes in retained earnings and net income were presented, in addition to the expressed carrying value of the property. In Section 2. 20, the company presented their significant accounting judgments and policies regarding the adoption of the new standard. In Note 10, since they are using the cost method of valuing investment properties, reconciliation was presented showing the cost and accumulated depreciation of investment properties.

Moreover, it also showed information regarding any transfers; retirements; impairment losses; and depreciation were depicted. Yet, they did not disclose the accounting methods used and the estimated useful lives of investment properties subject to depreciation. Table 3 Financial Reporting Issues Presented in the Analysis of Jollibee’s Financial Statements for the Year 2005 Standard No Financial Reporting Issues Presented The non-inclusion under Notes 2. 3. 5 regarding disclosure standards regarding capital management that should be indicated even though the provisions are not yet effective The classification of Judgments a-c in Notes 2. 4. 1. Is that considered a judgment, or an estimation uncertainty? PAS 1 PAS 8 PAS 24 PAS 40 ADDITIONAL NOTES

Same as the problem of application in PAS 1 regarding disclosure standards on capital management Information about key management personnel was not indicated in the notes to financial statements. Information about the persons, their salaries, etc. is found in the 2005 SEC Form 17A. Only the disclosure regarding accounting methods used and estimated lives of investment properties subject to depreciation were not described. The release of the financial statements in the annual report has produced several encoding errors in the production of the financial statements. In summarizing the entire discussion, Table 3 highlights all financial reporting issues noted in the analysis of Jollibee Foods Corporation’s 2005 financial statements. As can be seen, there has been an issue regarding the adoption of ten Philippine Accounting Standards.

In addition, there was noted some encoding errors in the financial statements per examination of the annual report. Referencing regarding the reconciliation of equity upon adoption of the new standards is one example. Such errors, if noticed, may lead to some confusion in understanding the financial statement information. Other Problems in Financial Reporting This section tackles the problems that might have encountered by Jollibee in their preparation and presentation of the financial statements other than disclosure requirements. In addition, this paper will address how the company may have resolved such setbacks to achieve a fair presentation of the financial information.

Functional Currency and Translation This problem arose for the reason that Jollibee has been maintaining international operations in the United States, Hong Kong, Vietnam, Brunei, Guam, and Saipan. In addition, its Chowking stores are located in Dubai, while their Yonghe King restaurants situated in China. Red Ribbon had also expanded in the US even before it was acquired by Jollibee. Because these countries uses different currencies in their daily operations and in the preparation of financial data, it is wondered how Jollibee will address such problem in their consolidated financial statements, whose parent company is situated in the Philippines.

The problem was resolved in Note 2. 5. As can be said, the company’s management determined its functional currency to be the Philippine peso. In this case, the company measured these international transactions in Philippine peso at the transaction dates. Monetary assets and liabilities were measured using the exchange rate at balance sheet date. Non-monetary assets and liabilities wee measured at historical cost using the exchange rate at the date of initial transaction. Its foreign subsidiaries’ financial statements were translated into the presentation currency of the company. Exchange rate differences were presented in the financial statements, though in aggregate form.

Receivables Although the company’s main business is the development, operation, and franchising of Quick Service Restaurants (QSR), the company also maintains other operations in support of their QSR restaurants like franchising and leasing of facilities to other companies, it can be inferred that the company does not only depend on cash sales brought about by their restaurant operations. Receivables arose because franchising and real estate are also revenue-generating areas of the organization which also forms part of their trade receivables. Moreover, they also have dues from the joint venture and other related parties, which were aggregated as loan receivables. To prevent confusion, the company presented in its segment information the operations of such segments and as such, users can find out those transactions under franchising and real estate operations may primarily cause such receivables recognition.

Inventory Valuation Because the primary operation of Jollibee is the operation of QSRs, it is noteworthy that the major bulk of their investments are food supplies, novelties, packaging, store supplies, and processed inventories. The perishable nature of food supplies and processed inventories, and the obsolescence of other supplies due to the release of new packaging designs, the lapse of periods where Jolly Kiddy meals come with novelties, and other time-based factors are the problems that Jollibee encounter in the valuation of its inventories. As such, the company maintained the policy of the First-In, First-Out (FIFO) basis of inventory system and in their valuation of inventories as of the balance sheet date.

This is to prevent the deterioration of goods that may be harmful if not used within a certain amount of time, and to maximize the usability of these items. Though designs change, its utility value is the same for packaging all Jollibee products. Cost valuation using FIFO allows the firm to value its unsold or unused inventories at more recent dates of acquisition, which is acceptable under the new standard. Revenue Recognition Jollibee recognizes revenue from various sources such as from sale of goods, royalty fees, franchise fees, dividend income, rental income, and interest income. While the policy of revenue recognition was presented in the notes to financial statements, certain question on how they recognize revenues from franchise fees.

Accordingly, such revenues are recognized when all services or conditions relating to the transaction have been substantially performed. Substantial may not be the total performance demanded to the company in providing such services. The question lies regarding new franchisee transactions that the company’s services commence at one period and terminates on the other period. How will the company assess their substantial performance on such franchise services to its new franchisees on the first period? Segment Reporting As can be seen, Jollibee has presented its segments on the basis of the nature of operations. Specifically, the company presented the food service, franchising, and real estate segments of its business.

Knowing that Jollibee has international operations in the USA, East and Southeast Asia, and even in the Middle East, it is of question why did the company did not presented information related to geographical segments. Be it noted that of the more than 1,000 outlets of the Jollibee Group, less than 140 of them were located outside the Philippines, including the 101 Yonghe King restaurants in China. Based on the combined performance of these stores, the international operations has yet to contribute more in the total operations of Jollibee, as approximately 90% of their stores are located in the Philippines. Again, it should also boil down on the notation that Jollibee has other major operations.

That could be the reason for segment information to be reported that way. Admission of Red Ribbon into the Jollibee Group In 2005, the company bought Red Ribbon, a company that sells cake products to Philippine consumers. Red Ribbon’s financial statements prior to acquisition are prepared for the fiscal year ending June 30. Since Jollibee and Red Ribbon have time differences in financial reporting, the stockholders and the Board of Directors agreed that the reporting period of the company should follow the calendar year presentation of Jollibee. Hence, the notes presented the summative position and performance of Red Ribbon for the fiscal year ended

June 30, 2005 and for the six months ended December 31, 2005, following the calendar year. Financial Instruments Due to the applicability of PAS 32 and 39, the company classified certain investments in shares of stocks as available-for-sale financial assets and valued at fair value, though these has been measured at lower of aggregate cost or market value in the previous GAAP. Refundable deposits on leases and non-interest bearing car loans were re-measured at fair value at initial recognition and subsequently at amortized value under the effective interest method. Prior to such adoption, these are carried at cost, less impairment in value under previous GAAP.

Such adoption resulted in a decrease in retained earnings for the company, which may have brought adverse effects to the company from the point of view of layman financial statement reader. Realizations After analyzing the financial statements of Jollibee Foods Corporation’s 2005 financial statements to identify the issues and problems in their financial reporting in accordance with the PFRS and PAS, this paper presents some realizations about the state of the company struggling to ensure compliance with the Philippine accounting standards under issue in the preparation of the financial statements. In addition, an insight regarding problems in financial reporting is presented. 1. Some judgments may not be considered judgments at all.

While the company may have a point in identifying several issues to be as accounting judgments, it may be preferable if such judgments like impairment, leases, and asset retirement be presented under estimation uncertainties. This is because this transactions or events normally require estimations rather than judgments. 2. Keep abreast with the release of new standards. It can be assumed that the newest release of PAS 1 standards relating to capital management may not yet noted by the company. Jollibee must continuously upgrade its awareness of these new standards since it might have a significant bearing on how they will present the information to comply with such new standards. Such can be achieved through attendance to seminars on PAS and PFRS, and continuous training and research. 3. Redundancy can lead to fair presentation.

Standards have the say. Sometimes, the notes have to be redundant in stressing out the emergence of applications, measurement, and valuation of items that are covered by a particular accounting standard (e. g. PAS 14, “Segment Reporting” and PAS 18, “Revenue,” where both standards require the presentation of similar information related to reportable and non-reportable segments). In such case, preparers of financial information have no option but to present the information more than once, as per accord with the standards. 4. Show reconciliations, when necessary. The use of such reconciliations may lead to a better understanding of the financial statements.

Showing the movements in the beginning and ending balances may already be an important tool to understand the information related to such reconciliation. 5. Encode information with accuracy and with precision. Preparers of financial statements must exercise due care in encoding of information in the soon-to-be published financial statements. Errors resulting from such carelessness may mislead users of financial information in making economic decisions for the company. 6. Problems are immortal. New policies, new standards, new conventions. These lead to problems especially in dealing with the preparation of the company’s financial statements. Instant compliance maybe difficult. Sometimes, resolving these problems might have adverse effects.

It really depends on the company on how they are motivated to face these situations and eventually gear itself to imminent financial reporting problems in the future. References Acuna, C. , Bernaldo, R. , Dy, L. , Malabanan, R. , & Young, L. (2004). A comparative study on the performance and financial position of Jollibee and McDonald’s for the years 1999 – 2006. Unpublished undergraduate thesis. Manila, Philippines: De La Salle University. Jollibee Foods Corporation (2004). Jollibee Foods Corporation Annual Report 2004. Pasig City, Philippines. Jollibee Foods Corporation (2005). Jollibee Foods Corporation Annual Report 2005. Pasig City, Philippines Philippine Institute of Certified Public Accountants (2005). Philippine Accounting Standards Vol. 1-5. Mandaluyong City, Philippines.

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