Republic of the Philippines COMMISSION ON AUDIT Commonwealth Avenue, Quezon City ANNUAL AUDIT REPORT on the Philippine Extractive Industries Transparency Initiative (PH-EITI) International Bank of Reconstruction and Development (IBRD) Grant No. TF0A2761 IMPLEMENTED BY DEPARTMENT OF FINANCE For the Year Ended December 31, 2017 PART I FINANCIAL STATEMENTS Republic of the Philippines COMMISSION ON AUDIT Commonwealth Avenue. Quezon City INDEPENDENT AUDITOR'S REPORT The Secretary of Finance DOF Bldg., BSP Complex, Roxas Blvd. Manila Qualified Opinion We have audited the accompanying financial statements of the Department of Finance (DOF)- IBRD - Extractive Industries Transparency Initiative (EITI) Project, World Bank - TF No. 0A2761, which comprise the Statement of Financial Position as at 31 December 2017, Statement of Financial Performance, Statement of Changes in Net Assets/Equity, Statement of Cash Flows, for the year then ended, and Notes to the Financial Statements, including a summary of significant accounting policies. In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the accompanying financial statements present fairly, in all material respects, the financial position of the DOF - IBRD - EITI Project, World Bank - TF No. 0A2761 as at 3 1 December 2017, and its financial performance, changes in net asset/equity, cash flows, for the year then ended in accordance with the Philippine Public Sector Accounting Standards (PPSASs). Basis for Qualified Opinion As discussed in Part II - Audit Observations and Recommendations of this report, the following audit affected the fair presentation of the financial statements of DOF - IBRD - EITI Project, World Bank - TF No. 0A2761: a) Inappropriate charge of seminars or training expenses to grant amounting to P928,210.40; b) Various PHI-EITI expenses amounting to P714,634.61 charged to Regular Agency Fund instead OF to PH-EITI; and c) Unsupported expenditures amounting to P1.141 million. We conducted our audit in accordance with International Standards of Supreme Audit Institutions (ISSAls). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the agency in accordance with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with PPSASs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAls will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Our audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's professional judgment, including the assessment of the risk 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 agency'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 agency's internal control. Our 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 opinion. COMMISSION ON AUDIT By 4 CONCEPCION C. REYES State Auditor IV OIC-Supervising Auditor Department of Finance January 9, 2019 2 H! h lid, Uo1c uc I -DERARTMENT OF FINANCE ~R{a Houicuard Corner e'abin OcanmoK. Sr. Sir=e Mandla 1(1W STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Fund 04104163 - IBRD Extractive Industries Transparency Initiative Project The Management of the Department of Finance is responsible for all information and representations contained in the accompanying Statement of Financial Position as of December 31, 2017 and the related Statement of Financial Performance, Statement of Cash Flows, Statement of Comparison of Budget and Actual Amounts, Statement of Changes in Net Assets/Equity and the Notes to Financial Statements for the year then ended. The financial statements have been prepared in conformity with the Philippine Public Sector Accounting Standards and the generally accepted state accounting principles, and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality. In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. MA. LOURDE V. DEDAL GI S. BELTRAN Director IV Undersecretary Central Financial Mapage ent Office Date:_ /A' // Date: DEPARTIENT OF FINANCE STATEMENT OF FINANCIAL POSITION SPECIAL ACCOUNT - FOREIGN ASSISTED/GRANTS GENERAL FUND - AUTOMATIC APPROPRAITIONS INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT PHILIPPINE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE EITI GRANT TF0A2761 PROJECT AS AT DECEMBER 31, 2017 (In Philippine Peso) Note 2017 2016 ASSETS Current Assets Cash and Cash Equivalents 3 16,181,733.67 3,385.90 Inventories 4 1,050.00 - Other Current Assets 5 1.288.192.09 1,399,500.00 Total Current Assets 17,470,975.76 1,402,885.90 Non-Current Assets Property Plant and Equipment 92,866.36 121,325.68 Total Non-Current Assets 92,866.36 121,325.68 Total Assets 17,563,842.12 1,524,211.58 LIABILITIES Current Liabilities Financial Liabilities 6 3,982,840.10 Inter-Agency Payables 6 827,052.20 - Total Current Liabilities 4,809,892.30 - Total Liabilities 4,809,892.30 - Total Assets less Total Liabilities 12,753,949.82 1,524,211.58 NET ASSETS/EQUITY Accumulated Surplus/(Deficit) 12,753,949.82 1.524,211.58 Total Net Assets/Equity 12,753,949.82 1,524,211.58 This statement should be read in conjunction with the accompanying notes. 4 DEPARTMENT OF FINANCE STATEMENT OF FINANCIAL PERFORMANCE SPECIAL ACCOUNT - FOREIGN ASSISTED/GRANTS GENERAL FUND - AUTOMATIC APPROPRIATIONS INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT PHILIPPINE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE EITI GRANT TF0A2761 PROJECT FOR THE YEAR ENDED DECEMBER 31, 2017 (In Philippine Peso) Note 2017 2016 Revenue Service and Business Income 33,901.66 19,645.03 Total Revenue 33,901.66 19,645.03 Less: Current Operating Expenses Maintenance and Other Operating Expenses 8 29015293.87 2203418 Financial Expenses 9 8,306.96 0.00 Non-Cash Expenses 10 28,459.32 28,459.32 Total Current Operating Expenses 29,052,060.15 2,231,877.32 Surplus/(Deflcit) from Current Operations (29,018,158.49) (2,212,232.29) Net Financial Assistance/Subsidy 7 41,248,175.22 (190,392.87) Surplus(Deficit) for the period 12,230,016.73 (2,402,625.16) This statement should be read in conjunction with the accompanying notes. 5 DEPARTMENT OF FINANCE STATEMENT OF CASH FLOWS SPECIAL ACCOUNT - FOREIGN ASSISTED/GRANTS GENERAL FUND - APPROPRIATIONS INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT PHILIPPINE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE EITI GRANT TF0A2761 PROJECT FOR THE YEAR ENDED DECEMBER 31. 2017 (In Philippine Peso) Note 2017 2016 Cash Flows from Operating Expenses Cash Inflows Receipt of Notice of Cash Allocation (NCA) 11 40,850,194.79 Collection of Receivables/Other Receipts 89,132.82 325,284.00 Net Interest Earned from Dollar Account 33,901.66 19,645.03 Gain on Forex 12 1,079,439.20 821,754.86 Cancellation of Dishonored Checks - 103,659.38 Total Cash Inflows 42,052,668.47 1,270,343.27 Cash Outflows 13 Remittance to National Treasury - 13,639,363.56 Payment of Expenses 24,205,401.57 26,436,961.24 Grant of Cash Advances 978,103.40 - Purchase of Inventories Held for Consumption 1,050.00 Loss on Forex 681,458.77 806,017.04 Bank Charges 8.306.96 - Total Cash Outflows 25,874,320.70 40,882,341.84 Net Cash Provided by (Used In) Operating Activities 16,178,347.77 (39,611,998.57) Casf Flows from Investing Activities Cash Flows from Financing Activities - Increase (Decrease) in Cash and Cash Equivalents 16,178,347.77 (39,611,998.57) Cash and Cash Equivalents, January 1 3,385.90 39,615,384.47 Cash and Cash Equivalents, December 31 16,181,733.67 3,385.90 This statement should be read in conjunction with the accompanying notes- 6 DEPARTMENT OF FINANCE STATEMENT OF CHANGES IN NET ASSETS/EQUITY SPECIAL ACCOUNT - FOREIGN ASSISTED/GRANTS GENERAL FUND - APPROPRIATIONS INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT PHILIPPINE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE EITI GRANT TF0A2761 PROJECT FOR THE YEAR ENDED DECEMBER 31, 2017 (In Philippine Peso) Accumulated Surplus (Deficit) 2017 2016 Beginning Balance, January 1 1,524,211.58 40,816,947.99 Add(Deduct): Prior Period Adjustments/Unrecorded Income and Expenses (23,443,402.38) Liquidation on Prior Year's Advances/Petty Cash (1,000,278.49) (13,476.00) Unutilized NCA (released 2015) (13,433,232.87) Adjustment in Funding Source Restated Balance 523,933.09 3,926,836.74 Add(Deduct): Changes in Net Assets/Equity for the Calendar Year Surplus(Deficit) for the period 12,230,016.73 (2,402,625.16) Ending Balance, December 31 12,753,949.82 1,524,211.58 7 DEPARTMENT OF FINANCE NOTES TO FINANCTAL STATEMENTS SPECIAL ACCOUNT - FOREIGN ASSISTED/GRANTS GENERAL FUND - APPROPRIATIONS INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT PHILIPPINE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE EITI GRANT TF0A2761 PROJECT For the year ended December 31, 2017 1. General Information 1.1 The Grant Fund The Grant Fund for the Extractive Industries Transparency Initiative (EITI) Project was provided by Australia, Belgium, Canada. Denmark, the European Commission, Finland, France, Germany, Japan, the Netherlands, Norway, Spain, Switzerland, the United Kingdom and the United States ("Donor") under the Multi Donor Trust Fund for the Extractive Industries Technical Advisory Facility, through the International Bank for Reconstruction and Development /International Development Association ("World Bank"), to the Republic of the Philippines (the Recipient) in an amount not exceeding US$1,080,000.00 to be used by the Recipient for the purposes and on the terms and conditions stated in the underlying Grant Agreement. The Agreement was signed August 26, 2014. The Objectives of the Project are to: (a) support the Recipient in its effort to increase the transparency of its extractives sectors, demonstrated by the completion of the two EITI reports and the successful validation of the Recipient as an EITI compliant country; and (b) increase civil society engagement through its participation on the multi-stakeholder group (MSG) through EITI outreach activities. The Project consists of the following parts: (a) Institutionalization of the EITI process by: (i) addressing legal/legislative barriers to EITI implementation, (ii) engagement of Congress to legislate the creation of EITI and adopt its principles; (iii) developing a framework for subnational implementation of EITI; and (iv) formulating recommendations regarding monitoring mechanisms for transfer of revenues, adoption of a transparent licensing process and increasing accountability of the extractive industry section. (b) Building the capacity of the MSG, TWG and the National Secretariat through training on all aspects of EM implementation. (c) Active engagement and training of relevant stakeholders by: (i) conducting training with national government agencies, local government units, and industry on how to complete the reporting template; (ii) organizing regional conferences with local government regarding EITI 8 implementation4 (iii) organizing briefings with the oil, gas and mining companies including non-chamber members, (iv)monitoring and strengthening the capacity of civil society organizations (CSO); and (v) engagement of the Senate and the Congress as part of confidence building measures. (d) Improvement of public access to extractive information and the findings of EITI process, through (i) publication of reference materials, primers, articles on extractive industries and EITI implementation, online trainings and digital presentations; (ii) conducting forums for the general public to discuss extractive industry issues; (iii) release of statements and press briefings on the EI activities including workshops conducted with the media; (iv) publication of EITI reports; (v) conducting regional conferences with local governments, CSOs, academia and host communities to explain EITI reports,; (vi) creation and maintenance of the EITI website; and (vii) improving procedures and information infrastructures in relevant agencies and creating a knowledge hub. 1.2 Terms of the Grant The second phase of the grant starts with the issuance of NCA-BMB-A-17- 0003839 dated March 10, 2017 for P40,850,194.79. The release was based on BSP Credit Advice No. 79199 dated January 16, 2017 in the amount of US$824,190.84 and credited in March 27, 2017 to the Grant's US Dollar Account No.1774-0106-50 for US$824,180.84, net of US$10.00 bank charge. The utilization of the grant is effective until December 31, 2017 but with the World Bank approval, payments for expenses incurred during the grant terms extends until April 30, 2018. 2. Summary of Significant Accounting Policies 2.1 Basis of Financial Statement Preparation The financial statements have been prepared in accordance with and comply with the Philippine Public Sector Accounting Standards (PPSAS) issued by the Commission on Audit per COA Resolution No. 2014-003 dated January 24, 2014. The accounts used conformed with the Revised Chart of Accounts (RCA) for National Government Agencies under Commission on Audit Circular No. 2013-002 dated January 30, 2013. The accompanying financial statements has been prepared on the basis of cash receipts and disbursements, except for the recognition of foreign exchange gain or losses from the translation of foreign account balances and transactions. Consequently, certain revenues, if any, are recognized when received rather than 9 when earned; and certain expenditures are recognized when paid rather than when the obligation is incurred. Also, cash receipts and expenditures in foreign currency are recognized using the prevailing foreign exchange rates at transaction dates. 2.2 Interest on Special Deposit Account Interest earned from special deposit account, net of taxes and bank charges which the project is not authorized to use, is recognized as income and will be remitted to the Bureau of the Treasury at the end of the project. 2.3 Foreign Currency-Denominated Transactions and Translation Foreign currency-denominated transactions are recognized using the prevailing foreign exchange rates at the time of the transaction. Foreign exchange gains or loss from translation is recognized as part of the Statement of Financial Performance 3. Cash and Cash Equivalents 3.1 Cash in Bank- Local Currency, Current Account Account Name LBP Account No. 2017 2016 DOF-PH-EITI-MDTF 1772-1037-90 2463,988.26 9491.39 The balance at year-end consists of fund transferred from the dollar savings account deposit to cover for various checks issued. 3.2 Cash in Bank-Foreign Currency, Savings Account Account Name LBP Account No. 2017 2016 DOF-PH-EITI-MDTF 1774-0106-50 R15,717,745.41 P2,894.51 The US dollar equivalent of the year-end balance of R15,717,745.41 is $316,328.80 at December 31, 2017 foreign exchange buying rate of P49.688. For 2016, the US dollar equivalent is $58.43 at December 31, 2016 foreign exchange buying rate of P49.538, 4. Inventories Accountable Forms, Plates and Stickers Inventory pertain to the cost of three (3) checkbooks. Adjustment to appropriate account was recognized under JEV 2018-11- 000648 dated November 29, 2018. 10 5. Other Current Assets 5.1 Advances to Special Disbursing Officer Employee name 2017 2016 Elisa Estrada P 80.000.00 P - Ma. Teresa Habitan 310,088.69 1,399,500.00 Total P390,088.69 P1.399,500.00 The advances granted to Ms. Elisa Estrada for P80,000 00 in December 11. 2017 under Office Order 104-2017 dated October 27, 2017 was for the payment of meals, transportation and communication allowance of close-in security and detailed PNP personnel in line with the Philippines hosting of the 38th EITI Board Meeting from October 23-29, 2017. The liquidation was made in January 23, 2018 under JEV 2018-01-000053. Under Office Order no. 057-2015 dated July 7, 2015, a cash advance for P1,681,500.00 was granted to Assistant Secretary Ma. Teresa S. Habitan as Special Disbursing Officer to cover for travelling expenses (transportation and in-transit expenses) of LGU Roadshow participants for the National Resource Governance at the Local Level: Making Transparency Matter from July to August 2015. In December 10, 2015, Office Order no. 120-2015 was issued to extend its covered period until December 2015. In 2016, a partial refund of P282,000.00 was deposited to the local currency account maintained by the project. In 2017, another partial refund of P89,132-82 was received and liquidation for expenses incurred for P1,000,278.49 was booked. The liquidation was finally completed in 2018 with the refund of P50,000.00 in June 26, 2018 and P260,088.69 in July 30, 2018 booked under Journal Entry Voucher Nos. 2018-06-000277 and 2018-07- 000279 respectively, 5.2 Advances to Officers and Employees A total of P898,103.40 was granted for foreign travel of two (2) Accounting employees to defray expenses to attend the Professional Certificate in International Public Sector Accounting Standard in London last November 2017. Liquidations were made in January 22, 2018 under JEV nos. 2018-01- 000051, 2018-000052, 2018-01-000086 and 2018-01-000087. 11 6. Total Liabilities 6.1 Current Liabilities Account Title 2017 2016 Accounts Payable 93,977,126.60 Y - Due to Officers and Employees 5,713.50 Total ;3,982,840.10 - Accounts Payables were fully paid in January and February 2018 while the Due to Officers and Employees in January 2018. 6.2 Inter-agency Payables Account Title 2017 2016 Due to BIR 9827,052.20 P Beginning balance was remitted in January 2018. No set-up for current liabilities was made in 2016, payments were charged to Accumulated Surplusi(Deficit) account. 7. Net Financial Assistance/Subsidy Account Title 2017 Subsidy from National Government R 40,850,194.79 Net Gain on Foreign Exchange 397,980.43 Total R 41,248,175.22 8. Maintenance and Other Operating Expenses Account Title 2017 2016 Traveling Expense-Local P2,061,012.94 P1 Traveling Expense-Foreign 2,924,918.34 Training Expenses 1,656,969.07 Office Supplies Expenses 193.75 136,180.00 Other Supplies and Materials Expenses 685,000.00 Semi-Expendable Machinery and Equip Exp 26,738.00 Telephone Expenses 16,278.00 Consultancy Expenses 5,664,292-00 1,000,000.00 Other Professional Services 2,631,841.60 Printing and Publication Expenses 130,000.00 1,036,000.00 Representation Expenses 26,121.94 Rent/Lease Expenses 211,000.00 Subscription Expenses 4,500.00 12 Other Maintenance and Operating Expenses 13,007,666.23 Total R29,015.293.87 R2,203,418.00 The increase in expenses was due to the implementation of the Second Philippines Extractive Industries Transparency Project. Maintenance and Other Operating Expenses such as traveling, training, office and other supplies and materials, printing and publication, representation, rent, other maintenance and other operating expenses which covers banquets and hotel accommodation in different parts of the country were incurred to provide transparency initiatives in different regions, regular forums and dialogues with stakeholders, conferences, outreach activities with different sectors, Local Government Units (LGU) Roadshows, conferences, workshops and trainings. Consultancy Services cover monthly payment for National Coordinator, Technical Manager and Grant and Contract Specialist, it includes fees for the engagement of Information Technology Service Provider and Senior Consultant for Scoping Study on Disclosure on Beneficial Ownership in Extractive Industries. Other Professional Services pertains to services rendered for various technical, audio and visual needs to cover LGU roadshows and the Philippine hosting of the 38th EITI Board Meeting. However, for CY 2016, the Consultancy, Printing and Publication, and Subscription Expenses pertains to obligations of CY 2015 and should have been charged to Accumulated Surplus/(Deficit) instead. The Office Supplies and Semi-Expendable Machinery and Equipment Expenses pertains to the issuance of goods. 9. Financial Expenses 9.1 Bank Charges This includes charges on NCA deposit and telegraphic transfer. 10. Non-Cash Expenses 10.1 Depreciation - Machinery and Equipment P28,459.32 11. Notice of Cash Allocation The NCA is issued in Philippine peso but received in US dollar denomination. This is credited by the bank to the grant's foreign savings account net of $10.00 bank charge. It is booked using the peso equivalent as stated in the NCA. 13 12. Gain/Loss on Foreign Exchange Net gain of P397,980.43 (P1,079,439.20 - P681,458.77) was the result of fluctuation in foreign exchange rate used for various disbursements at different dates. 13. Cash Outflows Of the total cash outflows for the year on various maintenance and other operating expenses, advances and inventory of P25,184,554.97, the amount of tax remitted to the Bureau of Internal Revenue through LBP-BSPSU-FAO-BIR is P1,101,547.86. Remittance of taxes through Tax Remittance Advice is not applied since the NCA released was the gross amount of the disbursement program. The current year disbursements were sourced from the NCA released for the year while the disbursements for CY 2016 were sourced from the remaining balance of NCA released in CY 2015 thus, all disbursements of 2016 pertains to obligations of 2015. 14