alaska trading company, inc.

Approved for printing: ______________________

Liberty Flour Mills, Inc.

Parent Company Financial Statements December 31, 2012 and 2011 and Independent Auditors’ Report SyCip Gorres Velayo & Co.


1 4 7 8 2

SEC Registration Number

L I B E R T Y F L O U R M I L L S , I N C .

(Company’s Full Name)

L i b e r t y B u i l d i n g , 8 3 5 A r n a i z

A v e n u e , M a k a t i C i t y

(Business Address: No. Street City/Town/Province)

Liezle L. Lasan 813-4412 (Contact Person) (Company Telephone Number)

1 2 3 1 A A F S

Month Day (Form Type) Month Day (Calendar Year) (Annual Meeting)

Not Applicable

(Secondary License Type, If Applicable)

Not Applicable Not Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

487 Not Applicable Not Applicable

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S

Remarks: Please use BLACK ink for scanning purposes.

COVER SHEET


LIBERTY FLOUR MILLS, INC.

PARENT COMPANY BALANCE SHEETS December 31

2012 2011

ASSETS

Current Assets

Cash and cash equivalents (Note 4) P=408,354,768 P=225,450,252 Receivables (Note 5) 879,007,116 1,013,268,437

Financial assets at fair value through profit or loss (Note 6) 13,767,239 10,467,205

Inventories (Note 7) 480,265,620 418,689,242 Prepaid expenses and other current assets (Note 8) 46,417,378 45,269,549

Total Current Assets 1,827,812,121 1,713,144,685

Noncurrent Assets

Investment in a subsidiary (Note 9) 212,563,900 212,563,900

Available-for-sale (AFS) financial assets (Note 10) 449,901,245 245,814,346 Investment properties (Note 11) 24,911,295 25,978,590

Property, plant and equipment (Note 12) 96,950,119 102,466,275

Utility deposits 2,460,303 2,570,270

Total Noncurrent Assets 786,786,862 589,393,381

TOTAL ASSETS P=2,614,598,983 P=2,302,538,066

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Liabilities under trust receipts (Note 7) P=172,405,480 P=85,144,050 Trade payables 30,125,744 25,058,758

Accrued expenses and other current liabilities (Note 13) 64,465,208 78,960,236

Income tax payable 20,951,978 8,129,184

Notes payable (Note 7) – 75,000,000

Total Current Liabilities 287,948,410 272,292,228

Noncurrent Liabilities

Accrued retirement benefits costs (Note 19) 101,450,962 92,172,957

Deferred income tax liability (Note 20) 807,019 807,019

Total Noncurrent Liabilities 102,257,981 92,979,976

Total Liabilities 390,206,391 365,272,204

Stockholders’ Equity

Capital stock - P=10 par value (Note 14)

Authorized - 50 million shares Issued - 50 million shares in 2012 and

40 million shares in 2011

Stock dividends distributable - 10 million shares in 2011 500,000,000

–

400,000,000

100,000,000 Fair value changes on AFS financial assets (Note 10) 39,257,783 30,460,168

Retained earnings (Note 14)

Appropriated for plant expansion 1,350,000,000 1,350,000,000 Unappropriated 335,137,489 56,808,374

2,224,395,272 1,937,268,542

Treasury stock - at cost (268 shares) (2,680) (2,680)

Total Stockholders’ Equity 2,224,392,592 1,937,265,862

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY P=2,614,598,983 P=2,302,538,066

See accompanying Notes to Parent Company Financial Statements.



PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

2012 2011

NET SALES (Note 21) P=1,969,035,756 P=2,083,038,273

COST OF SALES (Note 15) 1,451,534,574 1,699,431,939

GROSS PROFIT 517,501,182 383,606,334

RENTAL INCOME - Net (Notes 11, 21 and 22) 15,248,249 16,443,954

OPERATING EXPENSES (Note 16) Administrative expenses (123,892,021) (101,837,564)

Selling expenses (30,482,770) (32,192,734)

OTHER INCOME (CHARGES) Interest income (Notes 4 and 10) 23,679,064 18,240,588 Dividend income (Notes 9, 10 and 21) 23,486,844 3,265,009

Interest expense (Note 7) (3,137,642) (6,241,090)

Other income (charges) - net (Note 18) 2,831,498 (1,265,685)

INCOME BEFORE INCOME TAX 425,234,404 280,018,812

PROVISION FOR INCOME TAX (Note 20) Current 96,905,797 72,146,651 Deferred – 32,582,639

96,905,797 104,729,290

NET INCOME 328,328,607 175,289,522

OTHER COMPREHENSIVE INCOME

Fair value changes on available-for-sale financial assets (Note 10) 8,797,615 11,905,279

TOTAL COMPREHENSIVE INCOME P=337,126,222 P=187,194,801




PARENT COMPANY STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

Capital Stock Fair Value

Stock Dividends Changes on AFS

Distributable Financial Assets Retained Earnings (Note 14) Treasury

Issued (Note 14) (Note 10) Appropriated Unappropriated Stock Total

BALANCES AT

DECEMBER 31, 2010 P=400,000,000 P=– P=18,554,889 P=1,350,000,000 P=26,518,464

(P=2,680) P=1,795,070,673

Dividends declared during the year – – – – (44,999,612) – (44,999,612)

Stock dividends declared during the year – 100,000,000 – – (100,000,000) – –

Total comprehensive income for the year – – 11,905,279 – 175,289,522 – 187,194,801

BALANCES AT

DECEMBER 31, 2011 400,000,000 100,000,000 30,460,168 1,350,000,000 56,808,374 (2,680) 1,937,265,862

Dividends declared during the year – – – – (49,999,492) – (49,999,492)

Issuance of capital stock 100,000,000 (100,000,000) – – – – –

Total comprehensive income for the year – – 8,797,615 – 328,328,607 – 337,126,222

BALANCES AT

DECEMBER 31, 2012 P=500,000,000 P=– P=39,257,783 P=1,350,000,000 P=335,137,489 (P=2,680) P=2,224,395,272




PARENT COMPANY STATEMENTS OF CASH FLOWS

Years Ended December 31

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P=425,558,930 P=280,018,812

Adjustments for:

Interest income (Notes 4 and 10) (23,679,064) (18,240,588)

Dividend income (Notes 9 and 10) (23,486,844) (3,265,009)

Depreciation and amortization (Notes 11 and 12) 13,338,084 13,050,595 Retirement benefits costs (Note 19) 12,307,992 11,604,157

Gain from insurance claim (Note 18) (3,370,717) –

Fair value changes of financial assets at fair

value through profit or loss (Notes 6 and 18) (3,300,034) 588,135

Interest expense 3,137,642 6,241,090

Gain on exchange/sale of AFS debt/equity securities – (4,483,442) Unrealized foreign exchange loss (gain) – 14,630

Operating income before working capital changes 400,505,989 285,528,380

Decrease (increase) in:

Receivables 135,563,582 (134,675,776) Inventories (61,576,378) (24,608,825)

Prepaid expenses and other current assets (1,147,829) (4,470,925)

Increase (decrease) in:

Liabilities under trust receipts 87,261,430 (56,125,149)

Notes payable (75,000,000) 75,000,000

Trade payables 5,066,986 (36,546,489)

Accrued expenses and other current liabilities 5,133,851 (25,161,857)

Cash generated from operations 495,807,631 78,939,359

Income taxes paid, including creditable withholding taxes (84,083,003) (88,333,314)

Interest received 22,376,803 18,240,588

Interest paid (3,137,642) (6,241,090)

Contribution to the retirement fund (Note 19) (3,029,987) (3,334,935)

Net cash from (used in) operating activities 427,933,802 (729,392)

CASH FLOWS FROM INVESTING ACTIVITIES

Dividend received (Notes 9 and 10) 23,486,844 3,265,009

Additions to property, plant and equipment (Note 12) (7,569,324) (9,512,445)

Purchase of available-for-sale financial assets (Note 10) (191,103,876) –

Deductions to utility deposits 109,967 –

Additions to investment properties (Note 11) – (1,293,742)

Net cash used in investing activities (175,076,389) (7,541,178)

CASH FLOWS FROM FINANCING ACTIVITY

Dividends paid (Note 14) (69,952,897) (20,766,111)

EFFECT OF EXCHANGE RATE CHANGES ON

CASH AND CASH EQUIVALENTS – (14,630)

NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENTS 182,904,516 (29,051,311)

CASH AND CASH EQUIVALENTS AT

BEGINNING OF YEAR 225,450,252 254,501,563

CASH AND CASH EQUIVALENTS AT

END OF YEAR (Note 4) P=408,354,768 P=225,450,252




NOTES TO PARENT COMPANY FINANCIAL STATEMENTS

1. Corporate Information and Authorization for Issue of the Financial Statements

Corporate Information Liberty Flour Mills, Inc. (the Company) was incorporated and registered with the Philippine

Securities and Exchange Commission (SEC) on December 26, 1958. On December 28, 2008, the

Company extended its corporate life for another 50 years. The Company is engaged primarily in the manufacture of flour, utilization of its by-products and the distribution and sales of its produce.

The Company’s registered office is at Liberty Building, 835 Arnaiz Avenue, Makati City.

Authorization for Issue of the Financial Statements The parent company financial statements as of December 31, 2012 were authorized and approved

for issue by the Board of Directors (BOD) on March 22, 2013.

2. Significant Accounting and Financial Reporting Policies

Basis of Preparation The separate financial statements of the Company are prepared on a historical cost basis, except

for financial assets at fair value through profit or loss (FVPL) and available-for-sale (AFS)

financial assets that are measured at fair value. The separate financial statements were presented

in Philippine peso (Peso), which is the Company’s functional and presentation currency, and rounded to the nearest Peso, except when otherwise indicated.

Statement of Compliance The separate financial statements, that are prepared for submission to the Philippine SEC and the

Bureau of Internal Revenue (BIR), have been prepared in accordance with Philippine Financial

Reporting Standards (PFRS).

The Company also prepares and issues consolidated financial statements for the same period as the

separate financial statements and in accordance with PFRS.

Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for

the following new and amended Philippine Financial Reporting Standards (PFRS) and Philippine Interpretations which were adopted as of January 1, 2012.

Standards that have been adopted and that are deemed to have an impact on the financial

statements of the Company are described below:

PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments)

The amendments require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets that

have not been derecognized and their associated liabilities. In addition, the amendments require

disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entity’s continuing involvement

in those derecognized assets. The amendments affect disclosures only and have no impact on the

Company’s financial position or performance.

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PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendments)

This amendment to PAS 12 clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying

amount of investment property measured using the fair value model in PAS 40, Investment

Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a ‘sale’ basis. The presumption is rebutted if the investment property is

depreciable and it is held within a business model whose objective is to consume substantially all

of the economic benefits in the investment property over time (‘use’ basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable

assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always

be measured on a sale basis of the asset. The amendments have no impact on the Company’s

financial statements since the Company has no investment properties and property and equipment carried at revalued amounts.

Standards Issued but not yet Effective Standards issued but not yet effective up to the date of issuance of the Company’s financial

statements are listed below. This listing of standards and interpretations issued are those that the

Company reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Company intends to adopt these standards when they become

effective.

Effective in 2013

PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial

Liabilities (Amendments)

These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all

recognized financial instruments that are set off in accordance with PAS 32. These disclosures

also apply to recognized financial instruments that are subject to an enforceable master netting

arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another

format is more appropriate, the following minimum quantitative information. This is presented

separately for financial assets and financial liabilities recognized at the end of the reporting period:

a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining

the net amounts presented in the statement of financial position;

c) The net amounts presented in the statement of financial position;

d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including:

i. Amounts related to recognized financial instruments that do not meet some or all of

the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and

e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments affect disclosures only and have no impact on the Company’s financial

position or performance.

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PFRS 10, Consolidated Financial Statements

PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements,

that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single

control model that applies to all entities including special purpose entities. The changes

introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent,

compared with the requirements that were in PAS 27.

A reassessment of control was performed by the Company on its wholly-owned subsidiary in

accordance with the provisions of PFRS 10. Following the reassessment, the Company

determined that it still controls the subsidiary.

PFRS 11, Joint Arrangements

PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities

- Non-Monetary Contributions by Venturers. PFRS 11 removes the option to account for

jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method. This

standard will have no impact on the Company’s financial position or performance.

PFRS 12, Disclosure of Interests in Other Entities

PFRS 12 includes all of the disclosures related to consolidated financial statements that were

previously in PAS 27, as well as all the disclosures that were previously included in PAS 31

and PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in

subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The adoption of PFRS 12 will affect disclosures only and have

no impact on the Company’s financial position or performance.

The Company does not anticipate that the adoption of this standard will have a significant

impact on its financial position and performance.

PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRSs for all fair value measurements.

PFRS 13 does not change when an entity is required to use fair value, but rather provides

guidance on how to measure fair value under PFRS when fair value is required or permitted.

This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative

information provided for periods before initial application of PFRS 13.

The Company does not anticipate that the adoption of this standard will have a significant

impact on its financial position and performance.

PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive

Income or OCI (Amendments) The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be

reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon

derecognition or settlement) will be presented separately from items that will never be recycled. The amendments affect presentation only and have no impact on the Company’s

financial position or performance. The amendment becomes effective for annual periods

beginning on or after July 1, 2012. The amendments will be applied retrospectively and will result in the modification of the presentation of items of OCI.

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PAS 19, Employee Benefits (Revised)

Amendments to PAS 19 range from fundamental changes such as removing the corridor

mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a

sensitivity analysis for each significant actuarial assumption, information on asset-liability

matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. Once effective, the Company has to apply the amendments

retroactively to the earliest period presented.

The Company reviewed its existing employee benefits and determined that the amended

standard has significant impact on its accounting for retirement benefits. The Company

obtained the services of an external actuary to compute the impact to the financial statements

upon adoption of the standard. The effects are detailed below:

Increase (decrease) in:

As at

December 31, 2012

As at

January 1, 2012

Balance sheet

Accrued retirement benefits costs 18,099,678 15,821,482

Retained earnings (17,556,249) (9,228,619)

Other comprehensive income 2,584,576 –

2012

Statement of Comprehensive Income

Net retirement benefits cost P=8,327,630 Profit for the year (8,327,630)

Other comprehensive income 2,584,576

PAS 27, Separate Financial Statements (as revised in 2011)

As a consequence of the new PFRS 10, Consolidated Financial Statement and PFRS 12,

Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for

subsidiaries, jointly controlled entities, and associates in separate financial statements. The Company presents separate financial statements. The amendment becomes effective for

annual periods beginning on or after January 1, 2013.

PAS 28, Investments in Associates and Joint Ventures (as revised in 2011)

As a consequence of the new PFRS 11, Joint Arrangements and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application

of the equity method to investments in joint ventures in addition to associates. The

amendment becomes effective for annual periods beginning on or after January 1, 2013. The Company expects that this amendment will not have any impact on the Company’s financial

position and performance.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

This interpretation applies to waste removal (stripping) costs incurred in surface mining

activity, during the production phase of the mine. The interpretation addresses the accounting

for the benefit from the stripping activity. This interpretation becomes effective for annual

periods beginning on or after January 1, 2013. This new interpretation is not relevant to the Company.

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Effective in 2014

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial

Liabilities (Amendments)

The amendments clarify the meaning of “currently has a legally enforceable right to set-off”

and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not

simultaneous. The amendments affect presentation only and have no impact on the

Company’s financial position or performance. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014.

Effective in 2015

PFRS 9, Financial Instruments

PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the

classification and measurement of financial assets and liabilities as defined in PAS 39,

Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its

entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition.

A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold

the assets to collect the contractual cash flows and its contractual terms give rise, on specified

dates, to cash flows that are solely payments of principal and interest on the principal

outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other

comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be

measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI.

The remainder of the change in fair value is presented in profit or loss, unless presentation of

the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an

accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the

embedded derivative separation rules and the criteria for using the FVO. The adoption of the

first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets, but will potentially have no impact on the classification and

measurement of financial liabilities.

Annual Improvements to PFRSs (2009-2011 cycle)

The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary

amendments to PFRSs. The amendments are effective for annual periods beginning on or after

January 1, 2013 and are applied retrospectively. Earlier application is permitted.

PFRS 1, First-time Adoption of PFRS – Borrowing Costs

The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing

costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of

financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing

costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Company as it is not a first-time adopter of PFRS.

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PAS 1, Presentation of Financial Statements - Clarification of the Requirements for

Comparative Information

The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting

policy, or retrospective restatement or reclassification of items in the financial statements. An

entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required

comparative period. The additional comparative period does not need to contain a complete

set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective

restatement or reclassification of items in the financial statements) are not required. The

amendments affect disclosures only and have no impact on the Company’s financial position

or performance.

PAS 16, Property, Plant and Equipment - Classification of Servicing Equipment

The amendment clarifies that spare parts, stand-by equipment and servicing equipment should

be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will

not have any significant impact on the Company’s financial position or performance.

PAS 32, Financial Instruments: Presentation - Tax Effect of Distribution to Holders of Equity

Instruments

The amendment clarifies that income taxes relating to distributions to equity holders and to

transaction costs of an equity transaction are accounted for in accordance with PAS 12,

Income Taxes. The Company expects that this amendment will not have any impact on its financial position or performance.

PAS 34, Interim Financial Reporting - Interim Financial Reporting and Segment Information

for Total Assets and Liabilities The amendment clarifies that the total assets and liabilities for a particular reportable segment

need to be disclosed only when the amounts are regularly provided to the chief operating

decision maker and there has been a material change from the amount disclosed in the entity’s previous annual financial statements for that reportable segment. The amendment affects

disclosures only and has no impact on the Company’s financial position or performance.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid

investments that are readily convertible to known amounts of cash with original maturities of three

months or less and are subject to an insignificant risk of change in value.

Financial Instruments

The Company recognizes a financial asset or a financial liability in the balance sheet when it

becomes a party to the contractual provisions of the instrument.

All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the

date the Company commits to purchase or sell the financial asset. Regular way purchases or sales of financial assets require delivery of financial assets within the time frame generally established

by regulation or convention in the market place.

Financial assets and financial liabilities are recognized initially at fair value. Directly attributable

transaction costs, if any, are included in the initial measurement of all financial assets and

financial liabilities, except for financial instruments measured at FVPL. The fair value of financial

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instruments that are actively traded in organized financial markets is determined by reference to

quoted market bid prices for assets and offer prices for liabilities, at the close of business on the

balance sheet date. When current bid and offer prices are not available, the price of the most recent transaction is used since it provides evidence of the current fair value as long as there has

not been a significant change in economic circumstances since the time of the transaction.

The Company classifies its financial assets as investments at FVPL, held-to-maturity (HTM)

investments, loans and receivables or AFS financial assets, as appropriate. Financial liabilities, on

the other hand, are classified as either financial liabilities at FVPL or other financial liabilities, as appropriate. The classification depends on the purpose for which the financial instruments were

acquired or originated. Management determines the classification of its financial instruments at

initial recognition and, where allowed and appropriate, re-evaluates this designation at every

reporting date.

Directly attributable transaction costs, if any, are included in the initial measurement of all

financial assets and financial liabilities, except for financial instruments measured at FVPL.

Financial assets

The Company’s financial assets consist of: (a) financial assets at FVPL; (b) loans and receivables; and (c) AFS financial assets. The Company does not have financial assets classified as HTM.

a. Financial assets at FVPL

Financial assets at FVPL are financial assets that are purchased and held principally with the

intention of selling or repurchasing them in the near term or are designated as financial assets

at FVPL at initial recognition.

Financial assets are designated as at FVPL by management on initial recognition when any of

the following criteria are met:

The designation eliminates or significantly reduces the inconsistent treatment that would

otherwise arise from measuring the financial assets or recognizing gains or losses on them

on a different basis; or

The financial assets are part of a group of financial assets which are managed and their

performance are evaluated on a fair value basis in accordance with a documented risk management or investment strategy; or

The financial instrument contains an embedded derivative, unless the embedded

derivative does not significantly modify the cash flows or it is clear, with little or no

analysis, that it would not be separately recorded.

These financial assets are subsequently measured at fair market value, based primarily on

quoted market prices. Realized and unrealized gains and losses arising from changes in fair

market value of financial assets at FVPL are recognized in profit or loss. Interest earned on debt securities is recognized as the interest accrues taking into account the effective interest

rate. Dividend income on equity securities is recognized according to the terms of the

contract, or when the right of payment has been established.

As of December 31, 2012 and 2011, the Company’s financial assets at FVPL consist of equity

securities that are held-for-trading (see Note 6).

b. Loans and Receivables

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Loans and receivables are nonderivative financial assets with fixed or determinable payments

that are not quoted in an active market. Loans and receivables are subsequently measured at

amortized cost. The amortized cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization, using the effective interest

rate method, of any difference between the initially recognized amount and the maturity

amount. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and

discounts. Gains and losses are recognized in profit or loss when the financial assets are

derecognized or impaired or amortized. Loan and receivables are classified as current assets when it is expected to be realized within 12 months after the balance sheet date or within the

normal operating cycle, whichever is longer.

As of December 31, 2012 and 2011, the Company’s loans and receivables consist of cash in banks and cash equivalents and receivables (see Note 23).

c. AFS Financial Assets

AFS financial assets are nonderivative financial assets that are either designated in this

category or not classified in any of the other categories. Financial assets may be designated at initial recognition as AFS if they are purchased and held indefinitely, and may be sold in

response to liquidity requirements or changes in market conditions. AFS financial assets are

subsequently measured at fair market value. Unrealized gains and losses arising from changes

in fair market value of AFS financial assets are reported as other comprehensive income under “Fair value changes on AFS financial assets” until the financial asset is derecognized or as the

financial asset is determined to be impaired.

As of December 31, 2012 and 2011, the Company’s AFS financial assets consist of quoted

and unquoted equity and debt securities (see Note 10).

Financial liabilities The Company’s financial liabilities consist only of other financial liabilities. It does not have

financial liabilities at FVPL. Other financial liabilities pertain to financial liabilities that are neither held-for-trading nor

designated at FVPL upon the inception of the financial liability. Other financial liabilities are

subsequently measured at amortized cost using the effective interest rate method.

The amortized cost is computed as the amount initially recognized minus principal repayments,

plus or minus the cumulative amortization using the effective interest rate method of any

difference between the initially recognized amount and the maturity amount. This calculation includes all fees paid or received between parties to the contract that are an integral part of the

effective interest rate, transaction costs and all other premiums and discounts. Gains and losses

are recognized in profit or loss when the financial liabilities are derecognized, impaired or amortized. Other financial liabilities are classified as current liabilities when it is expected to be

settled within 12 months from the end of the reporting period or the Company does not have an

unconditional right to defer settlement for at least 12 months from the end of the reporting period.

As of December 31, 2012 and 2011, the Company’s other financial liabilities consist of liabilities

under trust receipts, notes payable, trade payables, accrued expenses and other current liabilities

(see Note 23).

- 9 -


Embedded derivatives

The Company assesses whether embedded derivatives are required to be separated from the host contracts when the Company first becomes a party to the contract. Reassessment only occurs if

there is a change in the terms of the contract that significantly modifies the cash flows that would

otherwise be required. An embedded derivative is separated from the host financial or nonfinancial asset contract and

accounted for as a derivative if all of the following conditions are met: The economic characteristics and risks of the embedded derivative are not closely related to

the economic characteristics and risks of the host contract;

A separate instrument with the same terms as the embedded derivative would meet the

definition of a derivative; and

The hybrid or combined instrument is not recognized at FVPL.

Embedded derivatives that are bifurcated from the host contracts are accounted for as investments

at FVPL. Changes in fair values are included in profit or loss. The Company has no freestanding or embedded derivatives as of December 31, 2012 and 2011.

Determination of fair values

The fair value of financial instruments that are actively traded in organized financial markets is

determined by reference to quoted market bid prices for financial assets and offer prices for financial liabilities at the close of business on the balance sheet date. For those where there is no

active market, fair value is determined by using appropriate valuation techniques. Valuation

techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the parent

company balance sheet only when there is a legally enforceable right to offset the recognized

amounts and there is an intention to settle on a net basis, or to realize the financial assets and settle the financial liabilities simultaneously.

Impairment of Financial Assets

The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. The Company first assesses whether objective evidence of impairment exists individually for

financial assets that are individually significant, and individually and collectively for financial

assets that are not individually significant. Objective evidence includes observable data that

comes to the attention of the Company about loss events such as but not limited to significant financial difficulty of the counterparty, a breach of contract, such as a default or delinquency in

interest or principal payments, probability that the borrower will enter bankruptcy or other

financial re-organization. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of

financial assets with similar credit risk characteristics, such as customer type, payment history,

past-due status and term, and that group of financial assets is collectively assessed for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is

or continues to be recognized are not included in a collective assessment of impairment.

- 10 -


Financial assets carried at amortized cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of impairment loss is measured as the difference between the

asset’s carrying amount and the present value of estimated future cash flows discounted at the

financial asset’s original effective interest rate, i.e., the effective interest rate computed at initial recognition. The carrying amount of the asset shall be reduced either directly or through the use of

an allowance account. Loans and receivables, together with the associated allowance accounts,

are written off when there is no realistic prospect of future recovery. The amount of the loss shall be recognized in profit or loss.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be

related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is

recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its

amortized cost at the reversal date.

AFS financial assets

For AFS financial assets, the Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity investments classified as AFS, impairment indicators would include a

significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition

cost and the current fair value, less any impairment loss on that financial asset previously

recognized in profit or loss, is removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity investments are not reversed through profit or loss. Increases

in fair value after impairment are recognized directly in other comprehensive income.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the

reduced carrying amount and is accrued based on the rate of interest used to discount future cash

flows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest income” in profit or loss. If in a subsequent year, the fair value of a debt instrument increases and

that increase can be objectively related to an event occurring after the impairment loss was

recognized in profit or loss, the impairment loss is reversed through profit or loss.

Financial assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not

carried at fair value because its fair value cannot be measured reliably, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been

incurred, the amount of the loss is measured as the difference between the asset’s carrying amount

and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Reclassification of financial assets A financial asset is reclassified out of the FVPL category when the following conditions are met:

the financial asset is no longer held for the purpose of selling or repurchasing it in the near

term; and

there is rare circumstance.

- 11 -


A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the

date of reclassification. Any gain or loss already recognized in profit or loss is not reversed. The

fair value of the financial asset on the date of reclassification becomes it new cost or amortized cost, as applicable.

For financial asset reclassified out of the AFS category to loans and receivables or HTM investments, any previous gain or loss on that asset that has been recognized in the statement of

comprehensive income is amortized to profit or loss over the remaining life of the investment

using the effective interest rate method. Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of asset using effective interest rate

method. If the asset is subsequently determined to be impaired then the amount recorded in the

statement of comprehensive income is recycled to the statement of income.

Reclassification is at the election of management, and is determined on an instrument by

instrument basis. The Company did not reclassify any of its financial assets in 2012 and 2011.

Derecognition of Financial Instruments

Financial asset

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

the right to receive cash flows from the financial asset has expired; or

the Company retains the right to receive cash flows from the financial asset, but has assumed

an obligation to pay them in full without material delay to a third party under a ‘pass-through’

arrangement; or

the Company has transferred its right to receive cash flows from the financial asset and either

(a) has transferred substantially all the risks and rewards of the financial asset, or (b) has

neither transferred nor retained substantially all the risks and rewards of the financial asset, but

has transferred control of the financial asset.

When the Company has transferred its right to receive cash flows from a financial asset or has

entered into a “pass-through” arrangement and has neither transferred nor retained substantially all

the risk and rewards of the financial asset nor transferred control of the financial asset, the financial asset is recognized to the extent of the Company’s continuing involvement in the

financial asset. Continuing involvement that takes the form of a guarantee over the transferred

financial asset is measured at the lower of the original carrying amount of the financial asset and the maximum amount of consideration that the Company could be required to repay.

On derecognition of a financial asset in its entirety, the difference between the carrying amount (measured at the date of derecognition) and the consideration received (including any new asset

obtained less any new liability assumed) shall be recognized in profit or loss.

Financial liabilities A financial liability is derecognized when the obligation under the liability is extinguished,

i.e., when discharged or cancelled or has expired.

When an existing financial liability is replaced by another from the same lender on substantially

different terms, or the terms of an existing liability are substantially modified, such an exchange or

modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.

- 12 -


Inventories

Cost of finished goods such as flour and mill feeds and work in process represents the costs of direct materials, direct labor and a proportion of production overhead. Inventories are valued at

the lower of cost (computed using the first-in, first-out method for raw materials and

moving-average for finished goods) and net realizable value (NRV). NRV is the selling price in the ordinary course of business less the costs of completion and the estimated costs necessary to

make the sale.

Prepayments

Prepayments are expenses paid in advance and recorded as asset before they are utilized. This

account comprises insurance premiums, creditable withholding taxes and other prepaid items. The

insurance premiums and other prepaid items are apportioned over the period covered by the payment and charged to the appropriate accounts in profit or loss when incurred. Creditable

withholding taxes are deducted from income tax payable on the same year the revenue was

recognized. Prepayments that are expected to be realized within 12 months from the parent company balance sheet date are classified as current assets, otherwise, these are classified as other

noncurrent assets.

Value-added Tax Revenue, expenses, assets and liabilities are recognized net of the amount of value-added tax,

except where the value-added tax incurred on a purchase of assets or services is not recoverable

from the taxation authority, in which case the value-added tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable.

The net amount of value-added tax recoverable from or payable to, the taxation authority is included as part of “Prepaid expenses and other current assets” or “Accrued expenses and other

current liabilities” in the parent company balance sheet.

Investment in a Subsidiary Investment in subsidiary is carried in the Parent Company balance sheet at cost, less any

impairment in value. The Company recognizes income from the investment only to the extent that

it receives distributions from accumulated income of the subsidiary arising after the date of acquisition. Distributions received in excess of the accumulated income of the subsidiary are

regarded as a recovery of investment and are recognized as a reduction of the cost of the

investment.

A subsidiary is an entity controlled by the Company. Control exists when there is power to govern

the financial and operating policies of an entity so as to obtain benefits from its activities.

Investment Properties

Investment properties are measured at cost, including transaction costs less accumulated

depreciation (for depreciable items) and any impairment in value. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the

recognition criteria are met; and excludes the costs of day-to-day servicing of an investment

property.

Depreciation is computed on a straight line basis over the estimated lives of the properties ranging

from 10 to 20 years.

Investment properties are derecognized when either they have been disposed of or when they are

permanently withdrawn from use and no future economic benefit is expected from their disposal.

- 13 -


Any gains or losses on the retirement or disposal of an investment property are recognized in

profit or loss in the year of retirement or disposal.

Transfers are made to investment property when, and only when, there is a change in use,

evidenced by ending of owner-occupation, commencement of an operating lease to another party

or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or

commencement of development with a view to sell.

Property, Plant and Equipment

Property, plant and equipment, except land, are carried at cost less accumulated depreciation and

any impairment in value. Land is carried at cost less any impairment in value.

The initial cost of property, plant and equipment consists of its purchase price and any directly

attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged in profit or loss in the period

the costs are incurred. In situations where it can be clearly demonstrated that the expenditures

have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of

performance, the expenditures are capitalized as an additional cost of the property, plant and

equipment.

Depreciation commences once the assets are available for use. Depreciation is computed using the

straight-line method over the estimated useful lives of the assets:

Number of Years

Mill machinery and equipment 10

Building and building equipment 10 - 20

Transportation equipment 5 Land improvements 20

Other equipment 5

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The estimated useful lives and depreciation

method are reviewed periodically to ensure that these are consistent with the expected pattern of

economic benefits from the items of property, plant and equipment.

An item of property, plant and equipment is derecognized upon disposal or when no further future

economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition

of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognized.

Construction-in-progress represents fabrication and installation of supplies and equipment related to mill machinery and other manufacturing equipment and is stated at cost. Construction in-

progress is not depreciated until such time as the relevant assets are completed and are ready for

use.

Impairment of Nonfinancial Assets

The carrying values of nonfinancial assets (investment properties, property, plant and equipment

and others nonfinancial assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any such

indication exists and where the carrying amount of an asset exceeds the estimated recoverable

- 14 -


amount, the assets or cash-generating units are written down to their recoverable amount. The

estimated recoverable amount of an asset is the higher of an asset’s fair value less costs to sell and

value-in-use. The fair value is the amount obtainable from the sale of an asset in an arm’s length transaction less costs of disposal while value-in-use is the present value of estimated future cash

flows expected to arise from the continuing use of an asset and from its disposal at the end of its

useful life. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses

are recognized in profit or loss.

In assessing value-in-use, the estimated future cash flows are discounted to their present value

using a pre-tax discount rate that reflects current market assessments of the time value of money

and the risks specific to the asset.

As of December 31, 2012 and 2011, no impairment loss was recognized for the Company’s

nonfinancial assets.

Capital Stock

Capital stock is measured at par value for all shares issued and outstanding. When the Company

issues more than one class of stock, a separate account is maintained for each class of stock and number of shares issued and outstanding.

When the shares are sold at premium, the difference between the proceeds and the par value is

credited to the “Additional paid-in capital” account.

Shares Held in Treasury

Own equity instruments reacquired are carried at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of the Company’s

own equity instruments.

Retained Earnings Retained earnings represent the cumulative balance of profit or loss, dividend distributions, prior

period adjustments, effects of the changes in accounting policy and other capital adjustments.

Unappropriated retained earnings represent the portion which is free and can be declared as

dividends to stockholders.

Appropriated retained earnings represent the portion which has been restricted and therefore is

not available for any dividend declaration.

Dividend Distribution Dividends on common shares are recognized as a liability and deducted from stockholders’ equity

when approved by the shareholders of the Company. Dividends for the year that are approved

after the balance sheet date are dealt with as an event after the balance sheet date.

Revenue

Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured.

Revenue is measured at the fair value of the consideration received, excluding discounts, returns

and output VAT. The Company assesses its revenue arrangements against specific criteria in

order to determine if it is acting as principal or agent and concluded that it is acting as a principal in all arrangements. The following specific recognition criteria must also be met before revenue is

recognized:

- 15 -


Sale of goods

Revenue from the sale of goods shown as “Net Sales” in profit or loss is recognized upon invoicing and delivery when the significant risks and rewards of ownership of the goods have

passed to the customer.

Rental income

Rental income from operating leases is recognized on a straight-line basis over the lease term.

Initial direct costs incurred specifically to earn revenue from an operating lease are recognized as an expense in profit or loss in the period in which they are incurred.

Interest income

Interest income is recognized as the interest accrues.

Dividend income

Dividend income is recognized when the Company’s right to receive the payment is established.

Costs and Expenses

Cost and expenses are recognized when decrease in future economic benefits related to a decrease in an asset or an increase of a liability, other than equity transactions with equity holders, has

arisen that can be measured reliably.

Cost of sales Cost of sales is recognized as expense when the related goods are sold.

Administrative and selling expenses Administrative expenses constitute costs of administering the business. Selling expenses are costs

incurred to sell or distribute the merchandise. Administrative and selling expenses are expensed

as incurred.

Borrowing Costs

Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of

a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs

are capitalized until the assets are substantially ready for their intended use. If the carrying

amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Borrowing costs include interest charges, foreign exchange differentials that qualify for capitalization and

other costs incurred in connection with the borrowing of funds. All other borrowing costs are

expensed as incurred.

Retirement Benefits Cost

Retirement benefits cost is actuarially determined using the projected unit credit method.

Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for the retirement plan at the end of the previous reporting

year exceed 10% of the higher of the present value of defined benefit obligation and the fair value

of plan assets at that date. Actuarial gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. Gain or loss on curtailment or

settlement of retirement benefits cost are recognized when the curtailment or settlement occurs.

Past service cost is recognized as an expense on a straight-line basis over the average period that the benefits become vested. If the benefits are vested immediately following the introduction of,

or changes to, the retirement plan, past service cost is recognized immediately.

- 16 -


The defined benefit liability is the aggregate of the present value of the defined benefit obligation

and actuarial gains and losses not recognized, reduced by past service cost not yet recognized, and

the fair value of plan assets from which the obligations are to be settled.

Foreign Currency-denominated Transactions Transactions denominated in foreign currencies are recorded using the exchange rate prevailing at

the date of the transaction. Outstanding foreign currency-denominated monetary assets and

liabilities at year end are remeasured using the closing rate at balance sheet date. Exchange gains

or losses resulting from exchange rate fluctuation upon actual settlement and from restatement at year end are credited to or charged in profit or loss.

Income Taxes Current income tax

Current tax assets and liabilities for the current and prior periods are measured at the amount

expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that have been enacted or substantively enacted at the balance

sheet date.

Deferred income tax Deferred income tax is recognized on all temporary differences at the balance sheet date between

the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax assets are recognized for all deductible temporary differences, carryforward

benefits of unused tax credits from excess of minimum corporate income tax (MCIT) over regular

corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that

it is probable that future taxable profits will be available against which the deductible temporary differences, carryforward benefits of unused tax credits from excess of MCIT over RCIT and

unused NOLCO can be utilized. Deferred income tax liabilities are recognized for all taxable

temporary differences.

Deferred income tax, however, is not recognized when it arises from the initial recognition of an

asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit or loss nor taxable profit or loss.

Deferred income tax liabilities are not provided on non-taxable temporary differences associated

with investments in domestic subsidiaries, associates and interest in joint ventures. With respect to investments in other subsidiaries, associates and interests in joint ventures, deferred income tax

liabilities are recognized except when the timing of the reversal of the temporary difference can be

controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profits will be

available to allow all or part of the deferred income tax assets to be utilized. Unrecognized

deferred income tax assets are reassessed at each balance sheet date and are recognized to the

extent that it has become probable that future taxable profits will allow the deferred income tax asset to be recorded.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws in

effect at the balance sheet date.

- 17 -


Provisions

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will

be required to settle the obligation and a reliable estimate can be made of the amount of the

obligation.

If the effect of the time value of money is material, provisions are determined by discounting the

expected future cash flows at a pre-tax rate that reflects current market assessments of the time value money and, where appropriate, the risks specific to the liability where discounting is used,

the increase in the provision due to the passage of time is recognized as interest expense. When

the Company expects a provision or loss to be reimbursed, the reimbursement is recognized as a

separate asset only when the reimbursement is virtually certain and its amount is estimable. The expense relating to any provision is presented in profit or loss, net of reimbursement.

Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed in the

notes to financial statements unless the possibility of an outflow of resources embodying

economic benefits is remote. Contingent assets are not recognized in the financial statements but disclosed in the notes to financial statements when an inflow of economic benefit is probable.

Events after Balance Sheet Date

Post year-end events that provide additional information about the Company’s position at the balance sheet date (adjusting events) are reflected in the parent company financial statements.

Post year-end events that are not adjusting events are disclosed in the notes to parent company

financial statements when material.

3. Significant Accounting Judgments and Estimates The preparation of the parent company financial statements in compliance with PFRS requires

management to make judgments, estimates and assumptions that affect the application of policies

and amounts reported in the parent company financial statements.

In the opinion of management, the parent company financial statements reflect all adjustments

necessary to present fairly the results for the periods presented. Actual results could differ from these estimates, and such estimates will be adjusted accordingly when the effects become

determinable.

Judgments Classification of financial instruments The Company classifies a financial instrument, or its component parts, on initial recognition as a

financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual agreement and the definitions of a financial asset, a financial liability or an equity

instrument. The substance of a financial instrument, rather than its legal form, governs its

classification in the parent company balance sheet.

Classification of building

An insignificant portion of the Company’s building classified as investment property is occupied

by the Company for administrative purposes. Based on the Company’s judgment, such owner-occupied portion is insignificant to the whole property and therefore classified the building as

investment property.

- 18 -


Classification of leases - Company as lessor

The Company has entered into the property leases where it has determined that the risk and rewards related to those properties are retained by the Company. As such, these lease agreements

are accounted for as operating leases.

Estimates

Estimation of allowance for doubtful accounts

Provisions are made for specific and groups of accounts where objective evidence of impairment exists. The level of this allowance is evaluated by management on the basis of factors that affect

the collectibility of the accounts, such as but are not limited to, the length of the Company’s

relationship with the customer, the customer’s payment behavior, known market factors and

historical loss experiences.

The Company makes an individual assessment of financial assets that are individually significant.

Since the Company has only three customers, the Company does not anymore perform collective impairment assessment on trade receivables. Collective impairment assessment of other

receivables is performed by comparing the carrying amount against the present value of expected

collection from other receivables.

The allowance for doubtful accounts amounted to P=1.60 million as of December 31, 2012 and

2011. The carrying value of receivables amounted to P=879.01 million and P=1,013.27 million as of

December 31, 2012 and 2011, respectively (see Note 5).

Determination of NRV of inventories

The Company’s estimates of the NRV of inventories are based on the most reliable evidence available at the time the estimates are made on the amount that the inventories are expected to be

realized. These estimates consider the fluctuations of price or cost directly relating to events

occurring after the end of the period to the extent that such events confirm conditions existing at

the end of the period. A new assessment is made of NRV in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or

when there is a clear evidence of an increase in net realizable value because of change in

economic circumstances, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised NRV. Inventories amounted to P=480.27 million

and P=418.69 million as of December 31, 2012 and 2011, respectively (see Note 7).

Estimation of useful lives of depreciable investment properties and property, plant and equipment

The Company reviews at each balance sheet date the estimated useful lives of investment

properties and property, plant and equipment based on the period over which the assets are

expected to be available for use and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence. It is possible that future results

of operations could be materially affected by changes in these estimates brought about by changes

in the factors mentioned. A reduction in the estimated useful lives of depreciable investment properties and property, plant and equipment would increase the recorded depreciation and

amortization expenses and decrease noncurrent assets.

There is no change in the estimated useful lives of depreciable investment properties and property,

plant and equipment in 2012 and 2011.

The carrying value depreciable of investment properties amounted to P=9.82 million and P=10.89 million as of December 31, 2012 and 2011, respectively (see Note 11).

- 19 -


The carrying value of property, plant and equipment, net of accumulated depreciation and

amortization amounting to P=294.87 million and P=282.60 million as of December 31, 2012 and 2011, respectively, amounted to P=96.95 million and P=102.47 million as of December 31, 2012 and

2011, respectively (see Note 12).

Impairment of AFS financial assets at fair value

In determining the impairment of AFS financial assets, management evaluates the presence of

significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment.

The Company treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than six

months. In addition, the Company evaluates other factors, including normal volatility in share

price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Any indication of deterioration in these factors can have a negative impact on their fair value. As

of December 31, 2012 and 2011, there was no impairment on the Company’s AFS financial assets. The carrying value of AFS financial assets amounted to P=449.90 million and P=245.81 million as of

December 31, 2012 and 2011, respectively (see Note 10).

Impairment of nonfinancial assets

The Company determines whether there are indications of impairment of the Company’s

nonfinancial assets. Indications of impairment include significant change in usage, decline in the

asset’s fair value or underperformance relative to expected historical or projected future results. Determining the fair value of these nonfinancial assets, which includes investment in a subsidiary,

investment properties and property, plant and equipment, requires the determination of future cash

flows expected to be generated from the continued use and ultimate disposition of such assets. It requires the Company to make estimates and assumptions that can materially affect the financial

statements. Future events could cause management to conclude that these assets are impaired.

Any resulting impairment loss could have a material adverse impact on the Company’s financial

condition and financial performance. The preparation of the estimated future cash flows involves significant judgment and estimation. While management assumptions may be appropriate and

reasonable, significant changes in management assumptions may materially affect the assessment

of recoverable values and may lead to future additional impairment charges. Management assessed that there are no impairment indicators as of December 31, 2012 and 2011. The total

carrying values of these assets amounted to P=334.42 million and P=341.01 million as of

December 31, 2012 and 2011, respectively (Notes 9, 11 and 12).

Recognition of deferred income tax assets

The Company reviews the carrying amounts at each balance sheet date and reduces deferred

income tax assets to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred income tax assets to be utilized. In 2012 and

2011, the Company availed of the optional standard deduction (OSD) in computing the taxable

income and projects that it will still avail of OSD in the future (see Note 20). As such, the Company reversed deferred income tax assets amounting to P=33.27 million in 2011 since reversal

of the temporary differences will no longer impact the Company’s computation of taxable income.

Also, the Company used the effective tax rate of 18% in computing the deferred income tax liability as of December 31, 2011(see Note 20).

Estimation of retirement benefits obligation and cost

The determination of the obligation and cost of retirement benefits is dependent on the selection of certain assumptions used by the actuary in calculating such amounts. Those assumptions include

among others, discount rates, expected return on plan assets and salary increase rates.

- 20 -


The Company determines the appropriate discount rate at the end of each year. This is the interest

rate that should be used to determine the present value of estimated future cash outflows expected

to be required to settle the retirement liabilities. In determining the appropriate discount rate, the Company considers the interest rates in government bonds that are denominated in the currency in

which the benefits will be paid, and that have terms to maturity approximating the terms of the

related defined benefit obligation.

Actual results that differ from the Company’s assumptions are accumulated and amortized over

future periods and therefore, generally affect the recognized expense and recorded obligation in

such future period.

While the Company believes that the assumptions are reasonable and appropriate, significant

differences between actual experience and assumptions may materially affect the cost of employee

benefits and related obligation. The carrying value of accrued retirement benefits costs amounted to P=101.45 million and P=92.17 million as of December 31, 2012 and 2011, respectively

(see Note 19).

Determination of fair value of financial instruments

Financial assets and financial liabilities, on initial recognition, are accounted for at fair value. The

fair values of financial assets and financial liabilities, on initial recognition, are normally the

transaction price (see Note 23).

4. Cash and Cash Equivalents

2012 2011

Cash on hand and in banks P=38,812,540 P=16,728,396

Cash equivalents 369,542,228 208,721,856

P=408,354,768 P=225,450,252

Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are short-term

cash investments that are made for varying periods of up to three months depending on the immediate cash requirements of the Company and earn interest at the respective short-term

investment rates.

Interest income earned on cash in banks and cash equivalents amounted to P=11.7 million and P=8.32 million in 2012 and 2011, respectively.

5. Receivables

2012 2011

Trade receivables from related parties (Note 21) P=863,491,337 P=998,700,400 Rent receivables:

Related parties (Note 21) 547,538 556,780

Third parties 2,176,576 2,454,519 Officers and employees 844,539 846,653

Others (Note 21) 13,547,126 12,310,085

880,607,116 1,014,868,437

Less allowance for doubtful accounts 1,600,000 1,600,000

P=879,007,116 P=1,013,268,437

- 21 -


Trade receivables arise from sale of flour and mill feeds. These are noninterest-bearing with

average credit terms of 90 to 120 days.

Other receivables of P=1.60 million are impaired and fully provided for as of December 31, 2012

and 2011. There is no movement in the allowance for doubtful accounts in 2012 and 2011.

6. Financial Assets at Fair Value through Profit or Loss

The Company’s financial assets at FVPL as of December 31, 2012 and 2011 consist of quoted equity securities with fair value of P=13,767,239 and P=10,467,205, respectively. The cost of these

investments amounted to P=5,762,900 as of December 31, 2012 and 2011.

Fair value changes on financial assets at FVPL amounts to a gain of P=3,300,034 in 2012 and a loss of P=588,135 in 2011 and are included in “Other charges - net” in profit or loss (see Note 18).

7. Inventories - at cost

2012 2011

Wheat grains P=210,169,926 P=202,820,285

Flour and mill feeds 60,346,540 14,875,139 Supplies 17,459,108 15,654,960

287,975,574 233,350,384

Inventories in-transit 192,290,046 185,338,858

P=480,265,620 P=418,689,242

Under the terms of agreements covering trust receipts, certain inventories have been released to

the Company in trust for the banks. Outstanding liabilities under such trust receipts, which bear

annual interest rates ranging from 3.0% to 3.5% in 2012 and 3.75% to 5.00% in 2011, amounted to

P=172.40 million and P=85.14 million as of December 31, 2012 and 2011, respectively.

The Company’s notes payable as of December 31, 2011 pertains to a 90-day unsecured loan

payable to a local bank amounting to P=75.00 million with 3.75% interest paid on March 22, 2012. The notes payable was used by the Company to pay off the maturing liabilities under trust

receipts.

Interest expense recognized on liabilities under trust receipts and notes payable amounted to P=3.14

million and P=6.24 million in 2012 and 2011, respectively.

Inventories in-transit include wheat grains and supplies owned but not yet received by the Company as of balance sheet date.

- 22 -


8. Prepaid Expenses and Other Current Assets

2012 2011

Store supplies P=26,201,309 P=27,397,150

Prepaid VAT on importation 16,370,589 14,338,445

Advances to suppliers 1,591,573 626,797 Prepaid import costs 1,354,829 348,082

Insurance 161,672 993,887

Others 737,406 1,565,188

P=46,417,378 P=45,269,549

9. Investment in a Subsidiary

This account represents the acquisition cost of the Company’s wholly owned subsidiary, LFM

Properties Corporation (LPC) amounting to P=212,563,900.

The summarized financial information of LPC follows:

2012 2011

Total assets P=536,410,030 P=338,307,508

Total liabilities 222,726,735 20,812,575

Equity 313,683,295 317,494,933 Rental income 77,764,155 72,455,145

Net income 16,188,361 20,456,044

On November 26, 2012, the BOD of LPC declared cash dividend amounting to P=20,000,000. No

cash dividend were declared in 2011.

10. Available-for-sale Financial Assets

2012 2011

Debt securities - quoted, at fair value P=326,213,713 P=185,537,858

Equity securities: Quoted - at fair value 94,464,898 35,239,262

Unquoted - at cost 29,222,634 25,037,226

123,687,532 60,276,488

P=449,901,245 P=245,814,346

Debt securities

The costs of debt securities which are stated at fair value amounted to P=291.86 million and

P=157.86 million as of December 31, 2012 and 2011.

In 2011, the Company exchanged one of its treasury notes and its treasury bond with carrying

values of P=30.00 million each, maturing on January 12, 2016 and August 1, 2012, respectively, for

P=64.48 million new treasury note, maturing on January 27, 2016, resulting in a gain on exchange of P=4.48 million (see Note 18).

Interest income earned on debt instruments amounted to P=11.98 million in 2012 and P=9.92 million in 2011.

- 23 -


Equity securities

The cost of quoted equity instruments which are stated at fair value amounted to P=89.55 million and P=32.45 million as of December 31, 2012 and 2011, respectively.

Dividend income earned on AFS financial assets amounted to P=3.49 million in 2012 and

P=3.26 million in 2011.

Unquoted equity securities are stated at cost as there is no reliable basis upon which to base its fair value.

The Company intends to dispose the unquoted shares through sale in the future. The Company’s

investment in unquoted equity shares are mostly investments coursed through a local investment

house. It is the investment house who advises the Company when to sell the shares of stock when the price is favorable to the Company.

Fair value changes in stockholders’ equity

The movement of fair value changes of AFS financial assets follows:

2012 2011

Beginning balance P=30,460,168 P=18,554,889

Fair value gains taken to other comprehensive

income 8,797,615 11,905,279

Ending balance P=39,257,783 P=30,460,168

11. Investment Properties

As of December 31, 2012:

Land

Building and

Building

Equipment Total

Cost P=15,086,983 P=35,535,697 P=50,622,680

Accumulated Depreciation

Beginning balances – 24,644,090 24,644,090 Depreciation – 1,067,295 1,067,295

Ending balances – 25,711,385 25,711,385

Net Book Values P=15,086,983 P=9,824,312 P=24,911,295


Land

Building and

Building

Equipment Total

Cost

Beginning balances P=15,086,983 P=34,241,955 P=49,328,938

Additions – 1,293,742 1,293,742

Ending balances 15,086,983 35,535,697 50,622,680

Accumulated Depreciation

Beginning balances – 23,602,131 23,602,131

Depreciation – 1,041,959 1,041,959

Ending balances – 24,644,090 24,644,090

Net Book Values P=15,086,983 P=10,891,607 P=25,978,590

- 24 -


Rental income and the related expenses recognized in profit or loss from various operating leases

on the office spaces of its building are as follows:

2012 2011

Rental income (Notes 21 and 22) P=21,549,231 P=21,478,080 Expenses (4,639,309) (5,034,126)

P=16,909,922 P=16,443,954

The fair market value of the land with book value of P=15.09 million as of December 31, 2012 and

2011 amounted to P=672.32 million based on management estimate with reference to current selling prices of the same properties in the nearby area. The Company cannot reliably determine

the fair value of its building and building equipment since comparable market transactions are

infrequent and alternative reliable estimates of fair value are not available. Management believes

that the fair value of its building and building equipment is higher than the carrying amounts as at December 31, 2012 and 2011.

As of December 31, 2012 and 2011, the Company has provided full impairment allowance for the acquisition cost of a parcel of land amounting to P=0.08 million. The said land located in Angeles

City, Pampanga is subject to a pending court case.

12. Property, Plant and Equipment


Mill

Machinery

and

Equipment

Building and

Building

Equipment

Transportation

Equipment

Land and

Land

Improvements

Other

Equipment

Construction

in Progress Total

Cost

Beginning balances P=196,530,282 P=111,986,369 P=31,863,895 P=25,019,723 P=19,668,078 P=– P=385,068,347

Additions 2,146,581 2,395,826 1,294,643 – 307,105 1,425,169 7,569,324

Disposal (814,691) – – – – – (814,691)

Ending balances 197,862,172 114,382,195 33,158,538 25,019,723 19,975,183 1,425,169 391,822,980

Accumulated

Depreciation and

Amortization

Beginning balances 169,301,947 61,746,283 26,512,458 6,552,617 18,488,767 – 282,602,072

Depreciation and

amortization 5,043,121 4,232,273 1,400,969 1,240,376 354,050 – 12,270,789

Ending balances 174,345,068 65,978,556 27,913,427 7,792,993 18,842,817 – 294,872,861

Net Book Values P=23,517,104 P=48,403,639 P=5,245,111 P=17,226,730 P=1,132,366 P=1,425,169 P=96,950,119


Mill

Machinery

and

Equipment

Building and

Building

Equipment

Transportation

Equipment

Land and

Land

Improvements

Other

Equipment

Construction

in Progress Total

Cost Beginning balances P=192,772,107 P=109,762,607 P=30,902,231 P=22,162,580 P=19,482,547 P=473,830 P=375,555,902

Additions 3,758,175 1,749,932 961,664 2,857,143 185,531 – 9,512,445

Reclassification – 473,830 – – – (473,830) –

Ending balances 196,530,282 111,986,369 31,863,895 25,019,723 19,668,078 – 385,068,347

Accumulated

Depreciation and

Amortization

Beginning balances 164,270,933 57,578,705 25,176,194 5,485,932 18,081,672 – 270,593,436

Depreciation and

amortization 5,031,014 4,167,578 1,336,264 1,066,685 407,095 – 12,008,636

Ending balances 169,301,947 61,746,283 26,512,458 6,552,617 18,488,767 – 282,602,072

Net Book Values P=27,228,335 P=50,240,086 P=5,351,437 P=18,467,106 P=1,179,311 P=– P=102,466,275

- 25 -


The aggregate cost of fully depreciated property and equipment that are still being used in

operations amounted to P=7.64 million and P=3.80 million as of December 31, 2012 and 2011, respectively.

13. Accrued Expenses and Other Current Liabilities

2012 2011

Management bonus (Note 21) P=39,003,429 P=21,034,743

Dividends payable (Note 14) 7,559,567 27,512,972 Output VAT 5,133,119 12,259,572

Customers and tenants deposits 4,677,684 8,785,444

Withholding tax, HDMF, and SSS payable 4,503,226 2,021,541 Freight and customs duties 745,398 994,939

Utilities 209,853 1,294,970

Others (Note 21) 2,632,932 5,056,055

P=64,465,208 P=78,960,236

14. Stockholders’ Equity

a. On November 26, 2012, the BOD declared cash dividends of 10% or P=1.00 per share to

shareholders of record as of December 11, 2012 totaling P=50.00 million.

b. On April 27, 2011, the BOD declared cash dividends of 5% or P=0.50 per share to shareholders

of record as of May 13, 2011 totaling P=20.00 million. These cash dividends were paid on June 2, 2011.

On December 29, 2011, the BOD declared cash dividends of 5% or P=0.50 per share

(giving effect to stock dividends declared on July 27, 2011) to shareholders of record as of January 20, 2012 totaling P=25.00 million payable on January 30, 2012.

c. On July 27, 2011, the BOD declared a 25% stock dividend equivalent to 10 million shares amounting to P=100.00 million with P=10.00 par value to stockholders of record as of

September 15, 2011.

As of December 31, 2011, the stock dividends were not yet issued. The Company presented

the P=100.00 million as stock dividend distributable in the equity section of the 2011 balance

sheet. Stock certificates were issued and distributed on February 20, 2012.

d. The retained earnings account is restricted for dividend declaration to the extent of the cost of

treasury shares of P=2,680 as of December 31, 2012 and 2011.

e. On December 22, 2010, the BOD approved the appropriation of additional P=350.00 million

out of the unappropriated retained earnings for additional plan for expansion.

The Parent Company has outstanding retained earnings appropriation amounting to P=1.35 billion as of December 31, 2012 and 2011. The expansion project is expected to be

completed in 2016.

- 26 -


15. Cost of Sales

2012 2011

Materials used P=1,319,601,495 P=1,569,232,264

Direct labor (Note 17) 52,020,698 50,755,136

Overhead: Utilities 54,038,730 55,098,119

Repairs and maintenance 11,494,287 10,965,685

Depreciation and amortization 7,706,610 7,768,579

Other factory overhead 6,672,754 5,612,156

P=1,451,534,574 P=1,699,431,939

16. Operating Expenses

Administrative:

2012 2011

Employee benefits (Notes 17 and 19) P=35,801,333 P=30,885,084 Directors’ and officers’ bonus 39,003,429 21,034,743

Salaries and wages (Note 17) 21,058,957 20,172,012

Taxes and licenses 7,389,292 5,619,507 Outside services 3,841,289 3,802,928


Travel and representation 1,618,723 1,596,474

Office supplies 1,441,995 1,057,697 Insurance 1,400,034 1,732,367

Donations and contribution 1,321,395 1,057,697

Communication, light and water 1,072,612 1,009,328 Membership and subscription 621,901 708,766

Per diem 735,000 687,750

Repairs and maintenance 817,556 629,269 Others 5,092,118 8,394,040

P=123,892,021 P=101,837,564

Selling:

2012 2011

Promotional marketing expenses (Note 21) P=26,972,924 P=28,509,913

Freight 1,785,341 2,095,870


P=30,482,770 P=32,192,734

17. Personnel Costs

2012 2011

Direct labor P=52,020,698 P=50,755,136

Salaries and wages 21,696,019 20,172,012 Retirement benefits costs (Note 19) 12,307,992 11,604,157

Others 23,493,341 19,280,927

- 27 -


P=109,518,050 P=101,812,232

- 28 -


18. Other Income (Charges) - Net

2012 2011

Fair value changes on financial assets at FVPL (Note 6) 3,300,034 (588,135)

Recoveries from insurance - net 3,370,717 –

Gain on exchange of AFS debt securities (Note 10) – 4,483,442

Foreign exchange losses - net – (14,630) Other expenses - net (P=3,839,253) (P=5,146,362)

P=2,831,498 (P=1,265,685)

19. Retirement Benefits Costs

The Company has a formal tax-qualified, non-contributory defined benefit retirement plan

covering its regular employees. Retirement costs recognized in profit or loss amounted to

P=12.31 million in 2012 and P=11.60 million in 2011.

Under the terms of the Collective Bargaining Agreement (CBA), the Company is required to pay

its regular employees retirement benefits equivalent to 30 days for every year of credited service upon reaching the compulsory retirement age of 65. Optional retirement is allowed for an

employee who reaches the age of 50 and has completed 20 years of credited service to the

Company.

Below are the details of the accrued retirement benefits and costs recognized in the parent

company financial statements:

Retirement benefits costs recognized in profit or loss:

2012 2011

Current service cost P=6,191,511 P=5,136,658 Interest cost 6,343,514 6,728,164

Expected return on plan assets (495,737) (363,927)

Net actuarial loss recognized in the plan year 268,704 103,262

Retirement benefits costs P=12,307,992 P=11,604,157

Actual return on plan assets P=3,673,982 P=2,636,203

Reconciliation of the assets and liabilities recognized in the parent company balance sheets:

2012 2011

Present value of defined benefit obligations P=132,992,247 P=117,909,186 Fair value of plan assets 13,441,607 9,914,747

Unfunded obligation 119,550,640 107,994,439

Unrecognized actuarial net loss (18,099,678) (15,821,482)

Accrued retirement benefits costs P=101,450,962 P=92,172,957

- 29 -


Movements of accrued retirement benefits costs recognized in the parent company balance sheets:

2012 2011


Retirement benefits costs for the year 12,307,992 11,604,157 Contributions during the year (3,029,987) (3,334,935)


Changes in the present value of defined benefit obligation:

2012 2011

Beginning balance P=117,909,186 P=103,034,678 Interest cost 6,343,514 6,728,164

Current service cost 6,191,511 5,136,658

Benefits paid (3,177,109) (3,334,935) Actuarial loss 5,725,145 6,344,621


Changes in the fair value of plan assets:

2012 2011


Contributions during the year 3,029,987 3,334,935

Expected return on plan assets 495,737 363,927 Actuarial gain 3,178,245 2,272,276

Benefits paid (3,177,109) (3,334,935)


The fund is managed by a trustee under LFM Employees Retirement Plan. The carrying value and

fair value of the retirement fund of the Company amounts to P=13.44 million and P=9.99 million as of December 31, 2012 and 2011, respectively.

Major categories of plan assets as a percentage of the fair value of the total plan assets are as follows:

2012 2011

Cash in banks 8.22% 11.95% Receivables 12.50% 14.09%

Investments in equity securities 121.64% 132.10%

Liabilities (Note 21) (42.35%) (58.14%)

100.00% 100.00%

Investments in equity securities can be transacted through the Philippine Stock Exchange. The

plan assets include shares of stocks of the Company with fair value of P=3.57 million and

P=4.76 million as of December 31, 2012, respectively. There are no restrictions or limitations on the shares and there was no material gain or loss over the shares for the years ended December 31,

2012 and 2011. The voting rights over the share are exercised through the trustee by the

retirement committee, the members of which are directors or officers of the Company.

- 30 -


The principal actuarial assumptions used to determine retirement benefits costs as of January 1 are

as follows:

2012 2011

Annual rates: Discount rate 5.38% 6.53%

Expected rate of return on plan assets 5.00% 5.00%

Future salary increases 3.50% 3.50%

The latest actuarial valuation of the plan is as of December 31, 2012. Discount rate used to

determine the present value of defined benefit obligation as of December 31, 2012 was 4.58%.

The amounts for the current and previous annual periods of the present value of defined benefit

obligation, fair value of plan assets, deficit in the plan and any experience adjustments are as follows:

2012 2011 2010 2009 2008

Present value of funded defined benefit obligation P=132,992,247 P=117,909,186 P=103,034,678 P=93,148,658 P=73,209,915 Fair value of plan assets 13,441,607 9,914,747 7,278,544 5,926,540 3,275,122 Experience adjustments on defined benefit obligation - loss (gain) (177,315) 2,132,674 5,864,103 (7,074,672) 14,555,566 Experience adjustments on plan assets - gain (loss) 3,178,245 2,272,276 2,150,278 2,505,910 (2,966,488)

20. Income Taxes

a. In computing the taxable income in 2012 and 2011, the Company availed of the Optional

Standard Deduction (OSD) as provided for under Revenue Regulation 16-2008, Implementing

the Provisions of Section 34 (L) of the Tax Code of 1997, as Amended by Section 3 of Republic Act No. 9504, Dealing on the OSD Allowed to Individuals and Corporations in

Computing Their Taxable Income.

As a result, the Company used the 18% effective tax rate in computing the deferred income

tax liability as of December 31, 2012 and 2011.

b. The reconciliation of the provision for income tax computed at the statutory income tax rate

with the provision for income tax as shown in the parent company statements of

comprehensive income is as follows:

2012 2011

Income tax at 30% P=127,667,679 P=84,005,644 Additions to (reductions in) income

tax resulting from:

Excess of OSD over itemized deductions (18,010,736) (7,603,733)

Income subjected to final tax (7,103,719) (5,472,176) Dividend income (7,046,053) (979,503)

Nondeductible expenses 2,687,736 1,872,327

Fair value changes of financial assets at FVPL (990,010) 176,441 Effect of change in tax rate – (538,013)

Derecognition of deferred income tax assets – 33,268,303

P=97,204,898 P=104,729,290

- 31 -


c. As of December 31, 2012 and 2011, the Company did not recognize deferred income tax

assets on the following temporary differences since management projects that the Company

will avail of the OSD in the future.

2012 2011

Accrued retirement benefits costs P=101,450,962 P=92,172,957 Unamortized past service costs 17,251,437 17,106,755

Allowance for doubtful accounts 1,600,000 1,600,000

Unrealized foreign exchange loss – 14,630

P=120,302,399 P=110,894,342

d. The deferred income tax liability as of December 31, 2011 relates to the gain on exchange of

AFS debt securities (see Note 10).

21. Related Party Transactions

Related party relationship exists when the party has the ability to control directly or indirectly, through one or more intermediaries or exercise significant influence over the other party in

making financial and operating decisions. Such relationships also exist between and/or among

entities which are under common control with the reporting entity and its key management personnel, directors or stockholders. In considering each possible related party relationship,

attention is directed to the substance of the relationships, and not merely to the legal form.

a. Transactions with its related parties for each of the years and their account balance as of December 31 follow:

Amount/Volume Outstanding Balance

Income (Expense) Receivable (Payable)

2012 2011 2012 2011 Terms Conditions

Stockholder

Parity Values, Inc.

Sale P=1,429,213,178 P=1,489,748,953 P=626,196,365 P=707,094,955 120 days Unsecured

Rent Income 1,193,671 1,466,334 32,100 40,605 -do- -do-

Promotional and

marketing expenses (22,767,857) (22,767,857) – – On demand –

Under common control

Liberty Commodities Corp.

Sales 306,620,094 308,503,219 116,340,530 133,077,820 120 days -do-

Rent Income 2,109,912 2,124,444 458,042 462,721 -do- -do-

Promotional and

marketing expenses (4,017,857) (4,017,857) – – On demand –

Trade Demands Corporation

Sale s 233,202,484 284,786,101 120,954,442 158,527,625 120 days -do-

Subsidiary

Liberty Properties Corporation

Rental income 393,390 388,800 57,396 53,453 30 days -do-

Advances – – 68,099 68,099 On demand -do-

Cash dividends 20,000,000 – – – On demand -do-

Promotional and marketing expenses are subsidies paid outright in cash to related parties for

the Company’s support in their advertising and promotional activities.

b. The Company also has a receivable from its retirement plan amounting to P=5,693,105 and

P=5,764,926 as of December 31, 2012 and 2011, respectively, which is recorded as other

- 32 -


receivables under “Receivables” account. The retirement plan’s committee includes the

Company’s key management personnel.

Outstanding balances of the intercompany receivables at year-end are unsecured, interest-free

and settlement occurs in cash. There have been no guarantees received for any related party

receivables. There is no impairment on receivables relating to amounts owed by related parties for both years.

c. The key management personnel compensation are as follows:

2012 2011

Short-term employee benefits P=51,580,356 P=39,914,575

Post-employment benefits 11,839,927 7,153,344

P=63,420,283 P=47,067,919

Short-term employee benefits include management bonus given to the Company’s directors

and officers.

22. Operating Leases

The Company leases out office spaces principally to third parties covering its investment

properties under various operating lease arrangements. The future minimum lease receivables

under noncancellable leases are as follows:

2012 2011

Within one year P=16,154,201 P=19,011,273

Between one and five years 23,386,945 36,140,287 Over five years 8,306,100 9,035,100

P=47,847,246 P=64,186,660

23. Financial Instruments and Financial Risk Management Objectives and Policies

The Company’s financial instruments consist of cash and cash equivalents, financial assets at

FVPL and AFS financial assets. The main purpose of these financial instruments is to fund the Company’s operations. The other financial assets and liabilities arising directly from its

operations are trade receivables and payables.

The main risks arising from the Company’s financial instruments are credit risk, liquidity risk, and

interest rate risk. The Company’s exposure to foreign currency risk is minimal as this only relates

to the Company’s foreign currency-denominated cash in banks. The BOD reviews and approves

policies for managing each of these risks.

Credit risk

Credit risk represents the loss that the Company would incur if counterparty failed to perform under its contractual obligations. The Company has established controls and procedures in its

credit policy to determine and monitor the credit worthiness of customers and counterparties. The

Company is operating under a sound credit-granting process over its distributors. Credit monitoring process involves a weekly check over collections based on a benchmark.

The Company’s trade receivables are concentrated with its three distributors which account for

98% of the total trade receivables both as of December 31, 2012 and 2011. The Company has

- 33 -


been transacting business with these distributors for a long time and has not encountered any

credit issue with them. While there is delay in collection of some trade receivables, those

classified under “Past due but not impaired”, the Company is in close coordination with the distributor to bring their accounts to current. With respect to credit risk arising from the other

financial assets of the Company, which comprise cash and cash equivalents, financial assets at

FVPL and AFS financial asset, the Company’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. There

are no collaterals or other credit enhancements held over these assets

The maximum exposure to credit risk as of December 31, 2012 and 2011 is as follows:

2012 2011

Loans and receivables: Cash and cash equivalents:

Cash in banks P=36,793,840 P=16,551,440

Cash equivalents 369,542,228 208,721,856

406,336,068 225,273,296 Trade receivables from related parties 863,491,337 998,700,400

Rent receivables:

Related parties 547,538 556,780 Third parties 2,176,576 2,454,519

Officers and employees 844,539 846,653

Others 13,547,126 12,310,085

880,607,116 1,014,868,437

1,286,943,184 1,240,141,733 Financial assets at FVPL 13,767,239 10,467,205

AFS financial assets - debt instruments 326,213,713 185,537,858

P=1,626,924,136 P=1,436,146,796

The following tables summarize the credit quality of the Company’s financial assets per category as of December 31, 2012 and 2011:


Neither past due nor impaired

High

Grade

Standard

Grade

Substandard

Grade

Past due but

not impaired

Past due and

impaired

Total

Loans and receivables:

Cash and cash equivalents

Cash in banks P=36,793,840 P=– P=– P=– P=– P=36,793,840

Cash equivalents 369,542,228 – – – – 369,542,228

Receivables

Trade receivables from

related parties 657,798,643 78,011,497 – 127,681,197 – 863,491,337

Rent receivables

Related parties 546,279 – – 1,259 – 547,538

Third parties 2,137,619 – – 38,957 – 2,176,576

Advances to officers and

employees – 844,539 – – – 844,539

Other receivables – 11,947,126 – – 1,600,000 13,547,126

Financial assets at FVPL – 13,767,239 – – – 13,767,239


instruments – 449,901,245 – – – 449,901,245

Total P=1,066,818,609 P=554,471,646 P=– P=127,721,413 P=1,600,000 P=1,750,611,668

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Neither past due nor impaired

High

Grade

Standard

Grade

Substandard

Grade

Past due but

not impaired

Past due and

impaired

Total

Loans and receivables:

Cash and cash equivalents

Cash in banks P=16,551,440 P=– P=– P=– P=– P=16,551,440

Cash equivalents 208,721,856 – – – – 208,721,856

Receivables


related parties 788,888,102 104,010,108 – 105,802,190 – 998,700,400

Rent receivables

Related parties 555,521 – – 1,259 – 556,780

Third parties 1,990,012 – – 464,507 – 2,454,519

Advances to officers and

employees – 846,653 – – –

846,653

Other receivables – 10,710,085 – – 1,600,000 12,310,085

Financial assets at FVPL – 10,467,205 – – – 10,467,205


instruments – 185,537,858 – – – 185,537,858

Total P=1,016,706,931 P=311,571,909 P=– P=106,267,956 P=1,600,000 P=1,436,146,796

The credit quality of the financial assets was determined as follows:

“High Grade” This includes cash and cash equivalents to counterparties with good credit or bank standing, thus

credit risk is minimal. This normally includes large prime financial institutions, companies and

government agencies. For receivables, this consists of counterparties with no history of default on the agreed contract terms.

“Standard Grade”

This includes FVPL and AFS financial assets that are not classified as “High Grade”. For receivables, this consists of counterparties with little history of default on the agreed contract

terms.

“Substandard Grade”

This includes receivables that consist of counterparties with history of default on the agreed

contract terms. The table below summarizes the aging analysis of past due but not impaired per class of the

Company’s financial assets: As of December 31, 2012: <30

Days

31-60

Days

61-90

Days

91-120

Days

Over

120 Days

Total

Loans and receivables

Trade receivables - related

parties

P=82,031,225

P=23,231,570

P=22,418,402

P=–

P=–

P=127,681,197

Rent receivables - related

parties

–

–

–

–

1,259

1,259

Rent receivables - third

parties

7,450

16,213

3,310

–

11,984

38,957

P=82,038,675 P=23,247,783 P=22,421,712 P=– P=13,243 P=127,721,413

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As of December 31, 2011: <30

Days

31-60

Days

61-90

Days

91-120

Days

Over

120 Days

Total

Loans and receivables

Trade receivables - related

parties

P=76,176,267

P=19,446,195

P=10,179,728

P=–

P=–

P=105,802,190

Rent receivables - related

parties

–

–

–

–

1,259

1,259

Rent receivables - third

parties

67,350

63,358

18,551

–

315,248

464,507

P=76,243,617 P=19,509,553 P=10,198,279 P=– P=316,507 P=106,267,956

Market risk

Market risk is the risk that the fair values of equities and debt instruments decrease as a result of changes in the levels of equity indices, the value of individual stock and the interest rates.

The effect on equity as a result of an increase (decrease) in fair value of AFS equity securities as of December 31, 2012 and 2011 due to a reasonably possible change in equity indices, with all

other variables held constant, is P=1.25 million and P=0.17 million, as of December 31, 2012 and

2011.

The effect on equity as a result of an increase (decrease) in fair value of AFS equity securities as

of December 31, 2012 and 2011 due to a reasonably possible change in equity indices, with all

other variables held constant, is P=5.26 million and P=0.17 million as of December 31, 2012 and 2011. The impact on the Company’s equity excludes the impact on transactions affecting the

parent company’s profit or loss, if any.

Liquidity risk Liquidity risk is the risk that the Company will be unable to pay its obligations when they fall due

under normal and stress circumstances. The Company manages liquidity risk by maintaining a

balance between continuity of funding and flexibility. Treasury controls and procedures are in

place to ensure that sufficient cash is maintained to cover daily operational and working capital requirements. Management closely monitors the Company’s future and contingent obligations and

sets up required cash reserves as necessary in accordance with internal policies.

The tables below summarize the maturity profile of the Company’s financial liabilities and the

maturity profile of financial assets that can be used by the Company to manage its liquidity risk as of December 31, 2012 and 2011.


On demand

Less than

3 months

3 to 12

months

Total

Financial assets:

Cash and cash equivalents:

Cash in banks P=36,793,840 P=– P=– P=36,793,840 Cash equivalents 369,542,228 – – 369,542,228


related parties 130,373,521 735,810,140 – 863,491,337

Rent receivables:

Related parties 1,259 546,279 – 547,538

Third party 38,957 2,137,619 – 2,176,576

Officers and employees 844,539 – – 844,539

Other receivables 13,547,126 – – 13,547,126

P=548,449,146 P=738,494,038 P=– P=1,286,943,184

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(Forward)

On demand

Less than

3 months

3 to 12

months

Total

Financial liabilities

Liabilities under trust receipts P=157,894 P=– P=172,247,586 P=172,405,480

Trade payables 30,125,744 – – 30,125,744

Management bonus 38,678,903 – – 38,678,903

Dividends payable 7,559,567 – – 7,559,567

Customers and tenants deposits – – 4,677,684 4,677,684

Freight and customs duties 745,398 – – 745,398

Utilities 209,853 – – 209,853

P=77,477,359 P=– P=176,925,270 P=254,402,629


On demand

Less than

3 months

3 to 12

months

Total

Financial assets:

Cash and cash equivalents:

Cash in banks P=16,551,440 P=– P=– P=16,551,440 Cash equivalents 208,721,856 – – 208,721,856


related parties 105,802,190 892,898,210 – 998,700,400

Rent receivables:

Related parties 1,259 555,521 – 556,780

Third party 464,507 1,990,012 – 2,454,519

Officers and employees 846,653 – – 846,653

Other receivables 12,310,085 – – 12,310,085

P=344,697,990 P=895,443,743 P=– P=1,240,141,733

Financial liabilities

Liabilities under trust receipts P=89,080 P=– P=85,054,970 P=85,144,050

Notes payable – 75,000,000 – 75,000,000

Trade payables 25,058,758 – – 25,058,758

Management bonus 21,034,743 – – 21,034,743

Customers and tenants deposits – – 8,785,444 8,785,444

Utilities 1,294,970 – – 1,294,970

Freight and customs duties 994,939 – – 994,939

Dividends payable 27,512,972 – – 27,512,972

P=75,985,462 P=75,000,000 P=93,840,414 P=244,825,876

Fair value Comparisons of carrying and fair values of the Company’s financial assets at FVPL and AFS

financial assets are as follows: Carrying Value Fair Value

December 31,

2012

December 31,

2011 December 31,

2012

December 31,

2011

Financial assets at FVPL P=13,767,239 P=10,467,205 P=13,767,239 P=10,467,205


Debt instruments 326,213,713 185,537,858 326,213,713 185,537,858 Equity instruments

Quoted 94,464,898 35,239,262 94,464,898 35,239,262

Unquoted 25,037,226 25,037,226 25,037,226 25,037,226

445,715,837 245,814,346 445,715,837 245,814,346

P=1,747,425,051 P=256,281,551 P=1,747,425,051 P=256,281,551

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The carrying amounts of cash in banks and cash equivalents, receivables, accounts payable and

accrued expenses and other current liabilities approximate their fair values due to their short-term nature. Investments in unquoted shares of stock are carried and presented at cost less accumulated

impairment since the fair values of such investments are not reliably determined.

The fair value of financial assets at FVPL and investments in quoted debt and equity instruments

is the quoted market bid price at the close of business (under Level 1).

The Company uses the following hierarchy for determining and disclosing the fair values of

financial instruments by valuation technique:

Quoted prices in active markets for identical assets or liabilities (Level 1);

Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2);

Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

There was no reclassification of financial instruments from and into levels 1, 2 and 3.

24. Capital Management Policies

The primary objective of the Company’s capital management is to ensure that it maintains a strong

credit rating and healthy capital ratios in order to support its business and maximize shareholder value.

The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the

dividend payment to shareholders, return capital to shareholders or issue new shares. No changes

were made in the objectives, policies or processes during the years ended December 31, 2012 and

2011.

The Company monitors capital by having a daily monitoring of receipts and collections, regular

release of disbursements to suppliers, monthly cash flow report preparation and monthly review of capital expenditure requirements. The Company at this point, with its healthy cash flow, is not

looking for any bank loans to finance its operations and renovations. The Company strives to earn

a minimum return double the annual inflation rate.

The following table summarizes the total capital considered by the Company as of

December 31, 2012 and 2011:

2012 2011

Outstanding capital stock P=499,997,320 P=399,997,320

Stock dividends distributable – 100,000,000

Retained earnings 1,684,897,060 1,406,808,374

P=2,185,160,234 P=1,906,805,694

The Company is not subject to any externally imposed capital requirements.

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25. Supplementary Information Required Under Revenue Regulations 19-2011

The Company reported the following schedules and information on taxable income and deductions to be taken in 2012:

Sale of goods and services The Company’s taxable sales and rental income amounted to P=1,969,035,756 and P=21,549,231

respectively, for the year ended December 31, 2012.

Cost of sales and services

The Company’s deductible cost of sales and services amounted to P=1,451,534,574 and

P=4,639,309, respectively, for the year ended December 31, 2012. Details are as follows:

Cost of sales:

Materials used P=1,319,601,495

Direct labor 52,020,698 Overhead:

Utilities 54,038,730

Repairs and maintenance 11,494,287 Depreciation and amortization 7,706,610

Other factory overhead 6,672,754

1,451,534,574

Cost of services:

Outside services 3,256,512 Communication, light and water 1,018,723

Depreciation 205,971

Repairs and maintenance 114,618 Insurance and others 43,485

4,639,309

P=1,456,173,883

Non-operating and taxable income

The Company’s non-operating and taxable income amounted to P=5,616,107 for the year ended December 31, 2012.

Optional standard deduction (OSD) The Company availed of the OSD in 2012. OSD amounted to P=214,662,598 which is equivalent

to 40% of gross income.

26. Supplementary Information Required Under Revenue Regulations 15-2010

On November 25, 2010, the BIR issued Revenue Regulation (RR) No. 15-2010 amending certain

provisions of RR No. 21-2002, as amended and implementing section 6 (H) of the Tax Code of 1997 which authorize the Commissioner of Internal Revenue to prescribe additional procedural

and/or documentary requirements in connection with the preparation and submission of financial

statements accompanying the tax returns. These regulations require that additional disclosures in the Notes to Financial Statements shall be made to include information on taxes, duties and

licenses paid or accrued during the taxable year.

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The Company reported and/or paid the following types of taxes in 2012:

Value-added tax (VAT)

The Company’s sales are subject to output value added tax (VAT) while its importations and

purchases from other VAT-registered individuals or corporations are subject to input VAT. The

VAT rate is 12%.

a. Net Sales/Receipts and Output VAT declared in the Company’s VAT returns for 2012

Net Sales/ Receipt

Output VAT

Taxable sales:

Sale of goods P=1,771,192,668 P=212,543,119 Leasing income 21,549,231 2,585,908

Common utilities service area income 10,843,888 1,301,267

Others-scrap sales 2,189,507 262,741.00

1,805,775,294 216,693,035 Exempt sales 197,843,088 –

P=2,003,618,382 P=216,693,035

Exempt sales consist of sales of mill feeds, the by-product of the manufactured flour.

b. Input VAT for 2012

Balance at January 1 P=–

Current year’s domestic purchases/payments of importations for:

Goods for resale/manufacture or further

processing 4,773,386 Goods other than for resale or manufacture 6,203,426

Services lodged under other accounts 13,335,532

24,312,345

Application against output VAT

Balance at December 31, 2012 P=–

Information on the Company’s importations for 2012:

Total landed cost of imports P=1,195,039,453 Customs duties 2,931,923

P=1,197,971,376

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Other taxes and licenses for 2012

Taxes and licenses, local and national, include real estate taxes, licenses and permit fees for 2012:

Included in Cost of Sales

Real estate taxes P=1,966,432

Included in Operating Expenses License and permits fees 4,777,620

Real estate taxes 2,518,532

Others 93,140

7,389,292

P=9,355,724

Withholding taxes

Withholding taxes on compensation and benefits P=14,799,199

Expanded withholding taxes 5,669,404

Final withholding taxes on royalties and dividends 1,009,559

P=21,478,162

alaska trading company, inc.

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