GOVERNMENT SERVICE INSURANCE SYSTEM

SOCIAL INSURANCE FUND

NOTES TO FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The Government Service Insurance System (GSIS) is a government financial

institution, organized and created to administer the System’s funds and implement
the laws that govern the social security and insurance benefits of all government
employees. The GSIS maintains its officially registered address at the Government
Financial Center, Roxas Boulevard, Pasay City, which is also its Home Office. It
has 40 field offices strategically located in various cities and municipalities of the
country.

The GSIS was created by the Congress of the Philippines through the passing of
Commonwealth Act. No.186 on November 14, 1936. Its primary objective is to
promote the welfare of the employees of the government through an insurance
system that will protect its members against adverse economic effects resulting
from death, disability and old age.

On May 31, 1977, Presidential Decree No. 1146, otherwise known as “Revised
Government Service Insurance Act of 1977,” was enacted by then President
Ferdinand E. Marcos. On June 24, 1997, Republic Act (RA) No. 8291 otherwise
known as, “The Government Service Insurance System Act of 1997”, was enacted
into law, enhancing the social security coverage of the GSIS.

Pursuant to Section 34 of RA 8291, all contributions payable under Section 5

thereof, together with the earnings and accruals thereon shall constitute the GSIS
Social Insurance Fund (SIF). The said Fund shall be used to finance the benefits
administered by the GSIS under RA 8291. As such, the Social Insurance Fund
(SIF) serves as the core fund of the GSIS, as distinguished from the other funds
that the GSIS is mandated to administer.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparation of financial statements

The accompanying financial statements for the Social Insurance Fund have
been prepared in accordance with Philippine Financial Reporting Standards
(PFRS)/ Philippine Accounting Standards (PAS), where applicable. The
accounting policies applicable to the life insurance as well as the non-life
insurance operations are in accordance with the generally accepted
insurance accounting principles in the Philippines and reporting practices
prescribed by the Insurance Commission.

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2.2 New accounting standards

The Financial Reporting Standard Council (FRSC) approved the issuance

of new and revised accounting standards which are based on International
Accounting Standards (IAS) and new International Financial Reporting
Standards (IFRS) issued by the IAS Board. These new standards have
been renamed Philippine Accounting Standard to correspond to IAS while
the PFRS corresponds to IFRS.

Starting January 1, 2006, the GSIS has adopted the new and revised
accounting standards, where applicable, as follows:

a. Philippine Accounting Standards ( PAS )

PAS 1 – Presentation of Financial Statements

PAS 8 – Accounting Policies, Changes in Accounting Estimates

and Errors

PAS 19 – Employee Benefits

PAS 21 – The Effects of Changes in Foreign Exchange Rates

PAS 28 – Investments in Associates

PAS 32 – Financial Instruments: Disclosure and Presentation

PAS 36 – Impairment of Assets

PAS 39 – Financial Instruments: Recognition and Measurement

The GSIS had an early and partial adoption of PAS 39 on December

31, 2004 on its investment in bonds. Application of the standard on
the rest of the investments was made beginning January 1, 2006.

As of December 31, 2006, the System has not yet determined the
impact of PAS 32 and 39 to the financial statements because the
System is still in the process of enhancing and polishing policies and
procedures and information systems related to the adoption of these
Standards.

Generally, the adoption of PAS 32 and 39 will not result in the

restatement of prior years financial statements as allowed by the
Securities and Exchange Commission. Any cumulative effect of
adopting the standards, however, will be reflected in the equity.

PAS 40 – Investment Property

The GSIS uses the fair value model. Fair value model requires an
investment property to be measured at fair value with fair value

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 changes recognized directly in the statement of revenues and
expenditures.

The GSIS is in the process of determining the real and other

properties owned and acquired (ROPOA). It has not yet come up with
an analysis on the financial impact of the adoption of PAS 40 (fair
value method) because of the volume of transactions and the fact
that assessment/valuation procedures and techniques of the System
have yet to be ascertained.

b. Philippine Financial Reporting Standards ( PFRS)

PFRS 1 – First Time Adoption of Philippine Financial Reporting

Standards

PFRS 4 – Insurance Contracts

PFRS 5 – Non-Current Assets Held for Sale and Discontinued

Operations

2.3 Centralized Deposit and Funding System or “One Bank Account”

Policy

Under the “One Bank Account” policy, all collections are deposited to a
centralized collection bank account and all disbursements are funded
through the same account, which is maintained in the Central Office of the
Union Bank of the Philippines and Philippine National Bank. Accordingly,
collections and disbursements of the Field Operating Departments (FODs)
are debited and credited, respectively, to Due Manila Office, a reciprocal
account.

This cash management policy is intended, among others, to efficiently

manage the cash in bank by properly establishing the cash position of the
Fund and by strengthening the monitoring and control of cash flows.

2.4 Cash equivalents

Cash equivalents are short - term and highly liquid investments with
original maturity of less than three months, are readily convertible into cash
and are subject to an insignificant risk of change in value. These include
special savings deposits and time deposits.

2.5 Contributions and premiums receivable

Pursuant to Section 3.1 of RA 8291, it is mandatory for all the covered

members of the GSIS to pay monthly contributions of 9% of the Monthly
Compensation (MC) for the member, and 12% of the MC, for the employer.
The premium contributions are remitted directly to the GSIS within the first
ten days of the month following the month to which the contributions apply.

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 Based on the billing reports, premium contributions applicable for a month
are set-up in the books as Premiums Receivable at the end of that month,
simultaneously recognizing it as income for the period. Upon actual receipt
of remittances, the receivable amount is adjusted accordingly.

Premiums Receivable with arrearages beyond one year are periodically

reclassified to Other Non-current Assets.

2.6 Loans and accounts receivable

Loans and accounts receivable are stated at the outstanding balance

reduced by unearned income, and allowance for estimated uncollectible
accounts.

a. Allowance/Provision for probable losses is established for estimated

losses on the principal portion of business loans and receivable
accounts based on evaluation of collectibility.

b. Allowance for doubtful accounts/bad debts is established for

estimated losses on the interest portion of business loans and
receivable accounts.

On business loans, the level of allowance is based on the collateral

deficiency or the excess of the loan exposure (principal plus accrued
interest) over the fair value of the collateral.

Loans and receivable accounts which carry government guarantee

are not covered by the above provision.

For loan programs with interest rates that are computed in advance
(E-Card Cash Advance, Emergency Loan, Pension Loan, and
Emergency Loan Assistance), the interest for the full term of the
loans are capitalized and are correspondingly credited to Deferred
Income (Unearned Interest Income). This unearned income is reduced
whenever income is recognized in the books, which is during receipt
of actual collections.

2.7 Investments

Investments are classified in the following categories at initial recognition

based on the purpose for which they are acquired.

a. Held for trading – stocks (HFT)

Stock investments are classified as held for trading if acquired

principally for the purpose of generating profit from short-term
fluctuations in price or dealer’s margin.

These are initially recorded at cost and are revalued at fair values
every balance sheet date. Any difference between the cost and the

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 fair value is recorded as unrealized gain or loss in the income
statement of the current period.

b. Held-to-maturity investments (HTM)

These are financial assets with fixed or determinable payments and

fixed maturities. They are carried at amortized cost using the effective
interest method and are classified as non-current assets. Investments
in Peso ROP Bonds are classified as Held to Maturity and as such,
these are recorded at cost, duly adjusted periodically through the
amortization of premiums or discounts.

c. Available for sale (AFS)

Available–for–sale financial assets are acquired and held indefinitely

for long-term capital appreciation or are not classified as (a) loans and
receivables (b) held-to-maturity investments or (c) financial assets of
fair value thru profit and loss. They are included in the non-current
assets unless GSIS intends to dispose of the investments within 12
months of the balance sheet date.

d. Investments in subsidiaries

The GSIS practices the equity method in accounting for investments

in shares of stocks in which it holds at least 20% ownership or where
it has the ability to exercise significant influence over the companies’
operating and financial affairs.

e. Investments in non-traded stocks

Non-traded stocks are valued at cost, net of allowance for impairment

in value.

f. Investments in mutual funds

This investment comprises the GSIS Mutual Fund which is currently

classified as a financial asset available for sale, under non-current
investment. It was originally classified as Investment in Subsidiary.

The GSIS Mutual Fund is an open ended mutual fund company,

essentially established by the GSIS in October 1994 with the objective
of providing its members with a vehicle to participate in the Philippine
capital market.

As of December 31, 2006, investments on GMFI used fair valuation

based on Net Asset Value (NAV) per share.

2.8 Property and equipment

These assets are recognized and recorded in accordance with the

requirements of PAS 16 on Property, Plant, and Equipment.

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 Depreciation is computed in conformity with the provisions of COA Circular
No. 2003-007 dated December 11, 2003. The COA Circular provides the
revised estimated useful life in computing depreciation for government
property, and equipment effective January 1, 2004. The major changes
involve the following:

 Depreciation is computed on a straight-line method based on the

estimated useful life of 20 to 30 years for buildings and a residual value
of 10% of the acquisition cost/appraised value thereof.

 Prior to CY 2004, the salvage value for building was computed at 5% of

its cost while useful life is estimated at 50 years. For land
improvements, depreciation was computed at 5% residual value and
useful life of five years.

 In October 2004, the above circular was amended by COA Circular No.
2004-003 which prescribe that the resulting adjustment from the change
in the depreciation computation shall be charged to the current
depreciation expense and that past depreciation expense need not be
adjusted.

 Computer equipment is carried at cost less salvage value of ½ % of the

cost of the equipment. Depreciation is computed on a straight-line
method over estimated life of five years.

2.9 Investment property

Investment property pertains to land or a building or part of a building or

both, held to earn rentals or for capital appreciation or both.

These assets are comprised of real properties that were previously the
subject of a mortgage loan, individual real estate loan, commercial -
industrial loan, lease-purchase agreement, or a Deed of Conditional Sale
(DCS) which are either foreclosed or cancelled or dacioned by former
owners in favor of the Social Insurance Fund. These properties are
occupied and are charged rental fees.

Fair Value Model

The GSIS applies fair value model on its investment property, whereby the
assets are initially recorded at cost (consisting of the purchase price and
any directly attributable expenditures), then subsequently valued at fair
values.

Gains or losses from changes in fair values are recognized during the
period in which they arise. For the “Big Ticket “accounts, only 85% of the
gains on valuation are recognized. For Deeds of Conditional Sale (DCS)
accounts, gains on valuation are booked at 100%. Losses on valuation for
the Big Ticket accounts and the DCS accounts are recognized at 100%.

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 An investment property is derecognized on disposal and the gain or loss is
recognized as income or expense in the income statement.

2.10 Non-current assets held for sale

These are assets acquired from foreclosed real estate property and
cancelled Deeds of Conditional Sales accounts which are presently
unoccupied and are held for sale.

These assets are measured at the carrying amount. Fair values are taken
up at the point of sale, whereby any excess of fair value over carrying value
is recognized as gain on valuation.

No depreciation is computed for these assets while they are classified as

held for sale.

2.11 Revenue recognition

The major sources of operating revenues of the Fund are the social
insurance premium contributions, dividends from investments, interest
income from loans, income from investment property and other income.

The GSIS accounts for its revenue using the accrual method. Generally,
accrued revenues from loans are computed using estimates determined by
management, based on past experiences and established trends in
collection.

a. Social insurance loans (e.g., Salary Loan, Enhanced Salary Loan,

Restructured Salary Loan, Summer One Month Salary, Emergency
Loan, Emergency Loan Assistance, Policy Loan, eCard Cash
Advance) compute revenue using specific formulae based on the
interest rates of the loans. On actual collections, principal and interest
portions are determined by using estimated ratios.

Interest Rate Used Estimated Ratios for the

Type of Loan in the Computation Distribution of Collections
of Accrued Interest Principal Interest
Salary Loan 12% /yr or 1%/mo. 73 % 27 %
Enhanced Salary Loan 12% /yr or 1%/mo. 73 % 27 %
Summer One Month Salary Loan 12% /yr or 1%/mo. 73 % 27 %
Conso- Loan 12% /yr or 1%/mo. 73 % 27 %
E-Card Plus Cash Advance 12% /yr or 1%/mo. 73 % 27 %
E-Card Cash Advance* 12% /yr or 1%/mo. P138.89/mo P50.00/mo.
Policy Loan 8% /yr or .67%/mo. 10% 90 %
Emergency Loan* 8% /yr or .67%/mo. P416.67 P83.33
Pension Loan* 8% /yr or .67%/mo. Actual distribution
Emergency Loan Assistance* 10% /yr or 83%/mo. P416.67 P83.33

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 * These are loan programs whose interests for the entire term of the
loan are computed in advance at the point of granting and made
part of the loan amortization, recorded as deferred or unearned
interest income. This unearned income is reduced whenever actual
collection is received, whereby income is recognized in the books.

* E-card Cash Advance has a fixed loan amount of P5,000 and fixed
monthly amortization of P188.89.

b. On housing loans (Real Estate Loans and Deeds of Conditional

Sales), accrual of interest is computed using 10% average interest
rates applied on the estimated current portion of the principal amount.
These accruals are reversed during the following month by which time
information on actual principal and interest portions are already
available and consequently recorded in the books of accounts.

c. Change in estimates

In 2005, current principal portions of REL and DCS loan accounts

were computed using the estimates of 47.76% and 20.67%,
respectively, applied on outstanding balances. In 2006, these
percentages were changed to 80%, uniformly applied on REL and
DCS outstanding balances.

The aforementioned change in estimates has not created any impact

on the income of the current period because of the procedural
reversals of the accruals during the following month. Only the year-
end accrual of interest would cause an effect on the current income.
Since the year-end accrual in 2006 covered only the month of
December, the effect on income is material.

The change in estimates is justifiable since the rate of 80%

approximates more realistically the current principal portion of the
loans, based on the housing loan portfolio after considering the
cancelled DCS and foreclosed REL accounts.

The accrual method is not applied on the following:

1. On business loans, if the outstanding balance exceeds the

current appraised value of the collateral

2. On investments administered by the Fund Management Group,

if the arrearages already exceed six months’ amortization.
Previously, it has been the practice of the GSIS to accrue until
the arrearages shall have reached 24 months.

3. Distribution of interest portion and the principal portion of the

housing loan is based on computerized distribution reports
generated by the in-house Information Technology Services
Group of the GSIS.

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2.12 Foreign currency transactions

a. Functional and presentation currency

The financial statements are measured and presented using the

Philippine peso, which is the System’s functional and presentation
currency.

b. Transactions and balances

Foreign currency income and expenses are translated into Philippine

Pesos based on the Philippine Dealing System Weighted Average
Rate (PDSWAR) exchange rate prevailing on transaction dates.

Foreign currency-denominated assets and liabilities are translated into

Philippine Pesos based on PDSWAR prevailing at the end of the
interim reporting period. At the end of the reporting year, foreign
currency - denominated assets and liabilities are translated to
Philippine Peso using the exchange rate provided by the Insurance
Commission.

Gain or Loss from foreign exchange transactions and revaluation of

foreign currency – denominated assets and liabilities are credited to or
charged against current operations.

2.13 Administrative loading

Pursuant to Section 35, RA 8291, the Fund is allowed to disburse a

maximum of 12% of the annual revenues from all sources for administrative
and operating expenses.

2.14 Actuarial reserves

Actuarial Reserve requirements for the mandated obligations of the System

are computed monthly by the GSIS Actuarial Group based on certain
assumptions which are in accordance with generally accepted principle of
actuarial valuation.

The actuarial reserves are set up/ appropriated out of the Surplus
representing the accumulated earnings of the Social Insurance Fund.

2.15 Accrual of employee benefits

As first time adoption of PAS 19, the System has recognized in its books
liabilities for employee benefits as of December 31, 2006, specifically the
accumulating compensated absences, or the accumulated annual leaves
and sick leaves which have been unused or unavailed by the employee
during the period of entitlement.

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 2.16 Claims and benefits

Regular disbursements of the Social Insurance Fund comprise the claims of

qualified members involving the following:

 Life insurance benefits claims which consist of policy maturities, cash

surrender values, disability benefit, death benefit, accidental benefit,
accidental death benefit, and funeral benefits.
 Retirement Claims
 Monthly Survivorship Pension
 Monthly Annuity Pension

Generally, retirement claims (from all regular and eligible member-retirees,

who are aged 60 at the time of retirement) are paid under RA 8291, which
provides for the payment of a five-year lump sum benefit plus an old age
pension payable monthly for life; or cash payment equivalent to 18 months
of basic monthly pension, plus basic monthly pension for life payable
immediately without five-year guaranty.

2.17 Non-admitted assets

Pursuant to Section 179 of the Insurance Code, certain assets are not
allowed as admitted assets, hence, are presented as Non-admitted Assets.
These are furniture, fixtures and equipment; deposit and indent orders;
supplies and materials in stock; prepaid expenses; income receivable; and
such other assets proven to be of doubtful value.

Income Receivable consist of accrued interests on obligations of DBM and

other government agencies for unpaid and/or delayed remittances of social
insurance premiums and housing loan amortization/Rental Receivable
which are credited to Deferred Income, as recommended by Commission
on Audit. Since collection thereof is very low and the receivables are not
readily realizable, the same were classified from admitted to non-admitted
assets and the corresponding Deferred Income was reduced.

Only the carrying value of the furniture, fixtures and equipment are reported
as Non-admitted Assets.

3. TRANSITION TO PFRS

The transition to PFRS resulted in certain changes in the System’s previous

accounting policies, referred to in the succeeding tables as “previous Generally
Accepted Accounting Principles (GAAP)”.

The effects of the transition in figures are presented in specific balance sheet and
revenue accounts, resulting from the adoption of PAS 39 (Financial Instruments:
Recognition and Measurement), PAS 32 (Financial Instruments: Disclosure and
Presentation), PAS 19 (Employee Benefits), and PAS 16 (Property, Plant and
Equipment).

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Under previous GAAP, foreclosed housing units from REL and cancelled DCS
awards have been presented and recognized as acquired assets at carrying values
and lumped in one classification of acquired assets, whether these assets are
occupied or not.

Under PFRS, the acquired assets are no longer presented in the balance sheet as
such, but instead are recorded either as investment property or non-current asset
held for sale.

Since this kind of recognition under PFRS is a first time adoption by the System in
2006, the PFRS effects, on investment property and non-current assets held for
sale due to fair values applied on the assets, are summarized below:

Non-Current
Investment
Assets Total
Property
Held for Sale
PFRS, 12/31/06 P17,439,098,727 P 5,469,635,160 P 22,908,733,887
Balances before
16,217,797,818 3,031,695,405 19,249,493,223
Transition to PFRS
Transition Effects
P 1,221,300,909 P 2,437,939,755 P 3,659,240,664
(due to valuation)

Investment property

Acquired assets which are currently occupied and from which the System derives
rental income and acquired assets which are being held by the System for
potential appreciation in the future are recognized as investment properties; under
PFRS, these assets are recorded by the System initially at cost and subsequently
at fair values. Net gains amounting to P1.2 billion resulted from the PFRS
transition. Out of this amount, P789.6 million, increased current income and the
remaining P431.6 million increased Surplus, as prior years’ income.

Effect of
Previous GAAP Transition to PFRS
PFRS
Foreclosed REL
P 29,007,010 P 10,938,322 P 39,945,332
(Acquired assets)
Cancelled DCS
11,948,314,883 (2,110,493,749) 9,837,821,134
(Acquired assets)
Other Investments
4,240,475,925 3,320,856,336 7,561,332,261
(Big tickets accounts)
Total P 16,217,797,818 P 1,221,300,909 P17,439,098,727

Non-current assets held for sale

Adopting the PFRS, the System classified its acquired assets which are not
occupied and, therefore, not generating rental income as non-current assets held
for sale. These assets are recorded at their carrying values (less cost to sell).

2121
 Unlike the investment properties, there is no transitional valuation effect reflected
in the financial statements. The effect of PFRS is only in the presentation of the
assets in the Balance Sheet.

Employee benefits

The System’s adoption of PFRS resulted the recognition of a transitional liability on

employees’ benefits comprised of the accumulated compensated absences, or the
accumulated annual leaves and sick leaves which have been unused or unavailed
of by the employees during the period of entitlement.

The transitional liability as of December 31, 2006, for employee benefits amounted
to P522,239,817 computed as follows:

Home Office Field Office Total

Current Year – 2006 P 54,071,884 P 37,472,779 P 91,544,663

Prior Years 250,553,678 180,141,476 430,695,154
Total P 304,625,562 P 217,614,255 P 522,239,817

Under previous GAAP, the liability of the System pertaining to employees’

accumulated compensated absences was never determined and recognized.
Under the PFRS, the System’s liability was increased by P522,239,817; current
income decreased by P91,544,663 because of the recognition as expense payable
for the current portion; and, surplus account decreased by P430,695,154 in
recognizing prior year’s liabilities. These changes are illustrated in tabular form as
follows:

Effects of
Accounts Affected Previous GAAP Transition to PFRS
PFRS
Sundry Accounts
P 1,771,487,884 P 522,239,817 P 2,293,727,701
Payable
Net Operating
39,480,719,545 (91,544,663) 39,389,174,882
Revenues
Surplus 11,755,808,390 3,300,294,724 15,056,103,114

4. CASH AND CASH EQUIVALENTS

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 This account consists of the following:

Particulars 2006 2005

Cash on hand P 118,351,527 P 661,300,221

Cash in banks
(includes special savings deposits and
30,046,689,048 5,310,761,345
time deposits amounting to P28.3 billion in
2006 and P7.923 billion in 2005)
Total Cash and Cash Equivalents P 30,165,040,575 P 5,972,061,566

5. LOANS - NET

The total loans financed by the Social Insurance Fund consist of the following:

Particulars 2006 2005

Enhanced salary loans P 57,698,673,225 P 57,769,825,005

Policy loans 14,379,810,247 12,846,231,984
Real estate loans 10,999,256,475 11,150,602,073
Government loans 6,293,879,124 7,912,757,213
Summer one month 4,766,360,226 6,538,988,375
Private loans 4,360,786,061 3,547,858,384
eCard cash advance loan (net) 2,658,073,123 4,156,309,904
Deeds of conditional sale 2,309,193,280 3,737,873,833
Emergency / calamity loans (net) 1,514,276,713 1,001,644,125
Emergency loan assistance (net) 1,390,270,687 2,267,785,415
Pension loans (net) 1,036,716,129 861,667,030
Lease purchase 427,708,035 428,123,251
Government guaranteed loans 350,000,000 350,000,000
Conso – loans 265,364,544 -
Stock purchase loans 47,051,176 45,068,842
eCard plus cash advance loans 42,670,000 -
Educational assistance loans 34,104,585 34,683,925
Total Loans - Net P 108,574,193,630 P 112,649,419,359

The outstanding balances of the e-Card Cash Advance Loan, Emergency/Calamity

Loans, and Emergency Loan Assistance accounts are shown net of their
respective unearned income amounting to P1,216,943,757, P206,337,601 and
P189,458,446, respectively.

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 Conso-loan

Conso-loan is a new loan window offered by the GSIS in October, 2006. Otherwise
known as the GSIS Consolidated Salary Loan Plus, this loan program consolidates
all the existing loans of a member under one account through the full liquidation of
the outstanding balances of these loans, as follows:

 Salary loan
 Restructured salary loan
 Enhanced salary loan
 Emergency loan assistance
 Summer one-month salary loan

The salient features of the Conso-loan include the following:

 Interest rate is 12% effective, based on diminishing balance.

 Maximum loanable amount is equivalent to ten months of basic salary
 Maximum repayment period is six years
 Penalties and surcharges on current arrearages of the existing loan balances
are waived, once the loan is approved.

As of December 31, 2006, there are about 2,100 members who have availed
themselves of the Conso-loan.

E-card Plus cash advance (eCAP)

The eCard Plus Cash Advance launched in October 2006 is basically the same
features as the eCard Cash Advance of 2004, except that the loanable amount for
the eCAP is P10,000 instead of P5,000 and the interest is 12% effective, based on
a diminishing balance instead of computing in advance.

Discrepancies of subsidiary ledgers and the general ledger

Discrepancies noted between the subsidiary ledger balances of the loan accounts
and those of the general ledger as of December 31.2006 are set to be corrected by
the implementation of the Integrated Loans, Membership, Acquired Assets, and
Accounts Management System (ILMAAAMS), which is expected to run during the
second half of CY 2007.

6. INVESTMENTS

The current investments amounts to P76.49 billion, composed of treasury bills and
loans from local government units with maturities within twelve months of balance

sheet date and stocks held-for-trading, as follows:

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 Particulars 2006 2005

Current Investments
Held-for-trading –
Foreign currency –
denominated ROP
notes and bonds P 50,878,530,455 P -
ROP bills 22,803,909,431 8,831,272,168
Held-for-trading - stocks 2,808,024,936 4,301,590,930
Government loans 1,998,610 11,881,579
Total Investments P 76,492,463,432 P 13,144,744,677

The non-current investments amounts to P80.5 billion composed of the following:

Particulars 2006 2005

P P
ROP notes and bonds
44,870,675,983 94,255,095,304
Available for sale - stocks 30,408,764,787 29,193,364,819
Investment in mutual fund 1,814,130,133 973,910,869
781,275,13
Stock -subsidiaries 956,688,149
3
Investments in joint venture 977,065,177 981,795,374
934,783,38
Stocks-non-traded 918,289,043
4
Asset participation certificates 551,600,000 561,600,000
6,650,00
Corporate bonds 112,495,138
0
449,916,22
Commercial papers -
2
Total Non-Current P P
Investments 80,503,863,272 128,244,236,243

Foreign-currency denominated ROP bonds in the total amount of P50.9 billion are
reclassified from Available for Sale (AFS) to Financial Assets at Fair Value through
Profit or Loss (FVPL). The reclassification is due to the change in Management’s
intention/strategy from holding these securities for a longer period to short-term
profit taking.

Philippine debt papers are among the best performing bonds in 2006 as a result of
sustained fiscal improvement of the country and credit rating upgrade possibilities.
The bullish outlook in the emerging market, including the Philippines started in
2005. Management took advantage of the surge in bond prices to realize gains by
selling these securities. Also, the correction in the middle of 2006 caused by the
apprehension in unit investment trust funds (UITFs) this time, presented an
opportunity for Management to buy back ROP bonds.

2525
Based on this actual trading behavior, the System has deemed it appropriate to
reclassify foreign-currency denominated ROP bonds from Available for Sale (AFS)
to Financial Assets at Fair Value through Profit or Loss (FVPL).

As of December 31, 2006, the exchange rate provided by the Insurance

Commission, per its Circular Letter No. 2-2006 dated January 13, 2007 was
P49.1320 to $1.00.

6.1 Investment in subsidiaries

Investments in shares of stocks in which GSIS holds at least 20%

ownership or where it has the ability to exercise significant influence over
the companies’ operating and financial affairs are accounted for under the
equity method. Under this method, the investment is initially recorded at
cost but subsequently increased by the investor’s equity share in net
earnings or decreased by the net loss, inclusive of dividends received, and
extraordinary items and prior period adjustments of the investee/subsidiary.

Particulars 2006 2005

GSIS Family Bank P 673,470,938 P 605,602,356
GSIS Properties, Inc 74,739,593 70,518,766
National Reinsurance Corporation 207,077,618 103,754,011
Worldwide Investments Co. 1,400,000 1,400,000
Meat Packing Corporation of the
- -
Philippines*
Total Investment in Subsidiaries P 956,688,149 P 781,275,133

*Meat Packing Corporation of the Philippines

Meat Packing Corporation of the Philippines (MPCP) is a wholly owned

subsidiary of the GSIS. As of beginning of CY 2006, MPCP had a carrying
value of P56.3 million. During the year, equity share in losses amounting to
P78.9 million was taken up in the books and has reduced the carrying cost
to zero.

In December 31, 2004, MPCP reflected in its Balance Sheet an Appraisal

Surplus–Land in the amount of P810,126,865 and disclosed in its Notes to
Financial Statements the unrecorded appraised value of the land,
machinery and equipment in the amount of P4,286,370,000. These assets
were appraised by an independent firm of appraisers in August of 1997.
COA has rendered a disclaimer of opinion on the CY 2004 financial
statements due to uncertain status of operations of a significant segment
of the MPCP.

2626
7. OTHER CURRENT ASSETS

The Other Current Assets account includes the following:

Particulars 2006 2005

P P
Income receivable
20,971,698,311 17,433,795,447
Notes receivable 1,625,388,329 -
Sundry accounts receivable 583,163,568 1,013,994,602
Advances to contractors 16,634,116 16,634,116
Cash advances 4,859,779 1,893,737
Rental receivable - 20,893,491
P P
Total Other Current Assets
23,201,744,103 18,487,211,393

8. PROPERTY AND EQUIPMENT - NET

The Property and Equipment account consists of the following:

Land and Real

Building and Technology Construc-
Land Estate
Particulars Improve- (IT) tion in Total
Improve- Apprecia-
ments Resources Progress
ments tion
Cost:
January 1, 2006 P484,546,124 P3,726,759,791 P9,318,045 P1,481,704,612 P41,219,421 P5,743,547,993
Add:
20,200,000 135,484,504 - 67,613,199 - 223,297,703
Additions
Adjustments 1,941,116 - - - (4,981,616) (3,040,500)
Valuation - - 60,608,800 - - 60,608,800
Less:
Derecognition in books
(H.O. = due to
- - - (9,394,197) - (9,394,197)
donations/sale)
(F.O. = due to transfers
to HO)
December 31, 2006 506,687,240 3,862,244,295 69,926,845 1,539,923,614 36,237,805 6,015,019,799
Accumulated
Depreciation
January 1, 2006 184,316,579 864,408,197 - 888,838,478 - 1,937,563,254
Add:
Depreciation Charges 749,131 158,913,780 - 174,453,102 - 334,116,013
during the year
Less:
Derecognition in the
books – (due to - - - (176,980,180) - (176,980,180)
donations/sale of
unserviceable units)
December 31, 2006 185,065,710 1,023,321,977 - 886,311,400 - 2,094,699,087
Net Book Value –
P321,621,530 P2,838,922,318 P69,926,845 P 653,612,214 P36,237,805 P3,920,320,712
December 31, 2006

2727
Net Book Value –
P299,836,279 P2,825,542,360 P 9,318,045 P 568,147,984 P41,219,421 P3,744,064,089
December 31, 2005

9. INVESTMENT PROPERTY

The Investment Property account consists of the following:

Particulars 2006 2005

Cancelled deeds of conditional P P

sale (Mass Housing) 9,837,821,134 16,353,358,267
Other investment property 7,561,332,261 4,240,475,925
Foreclosed real estate loans 39,945,332 12,131,030
P P
Total Investment Property
17,439,098,727 20,605,965,222

10. NON-CURRENT ASSETS HELD FOR SALE

Non-current Assets Held-for-Sale account consists of the following:

Particulars 2006 2005

Cancelled deeds of conditional sale P P
(Mass Housing) 5,462,305,191 344,623,145
Foreclosed real estate loans 7,329,970 1,392,608
Total Non-Current Assets Held For P P
Sale 5,469,635,161 346,015,753

11. OTHER NON-CURRENT ASSETS

The Other Non-current Assets account is broken down as follows:

Particulars 2006 2005

Contributions/Premiums receivable P 10,231,494,561 P 6,883,806,774

Notes receivable 6,529,843,083 -
Income receivable 4,334,148,384 4,618,066,302
Other receivable-agencies w/ MOA 3,886,626,801 6,023,600,543
Accounts receivable for deficit cases 327,012,794 318,980,559
Contingent asset disallowance 97,055,231 92,540,624
Sundry accounts receivable 51,422,156 49,719,472
Other asset-land 17,907,489 337,514,931
Paintings and tapestries 16,216,867 16,216,867
Other asset-building 2,975,410 33,971,073
Total Other Non-Current Assets P 25,494,702,776 P 18,374,417,145

2828
12. NON-ADMITTED ASSETS

Pursuant to Section 197 of the Insurance Code, certain assets are not allowed as
admitted assets. Hence, these are presented as Non-admitted Assets, consisting
of the following:

Particulars 2006 2005

P
Income receivable P 37,943,888,977
38,014,370,249
Rental receivable 4,871,916,468 -
Contributions and Premium
1,192,019,430 -
receivable
Prepaid expenses 401,715,515 2,712,149
Furniture, equipment, and fixtures 382,172,139 403,941,999
Loans and investments 327,263,363 327,263,363
262,365,15
Non-admitted assets-others 287,741,615
1
Suspense account 102,447,198 102,447,198
Medicines and other medical supplies 26,323,094 -
35,255,57
Supplies and materials in stock 25,822,242
8
Deposit and indent orders 15,272,423 15,943,185
Educational assistance loan 7,257,409 7,283,764
6,824,92
Contingent asset- deficit cases 7,743,192
6
P P
Total Non-admitted Assets
45,635,769,607 39,134,221,020

13. CLAIMS AND BENEFITS PAYABLE

Retirement and Life Insurance Claims Payable account pertains to the claims on
retirement and life insurance benefits, applications for which were already filed with
the System but are still unpaid as of year-end broken down as follows:

Particulars Home Office Field Offices Total

Life insurance claims P 293,000,263 P 553,976,185 P 846,976,448

Retirement claims 60,148,932 409,131,231 469,280,163
Beginning balance, remaining 9,176,073 149,388,445 158,564,518
Survivorships 179,643 4,649,378 4,829,021
Disability, funeral, annuities - 879,353 879,353
Various checks for replacement 44,802,546 - 44,802,546
Total Claims and Benefits P 407,307,457 P1,118,024,592 P1,525,332,049

2929
 Payable

14. NON-CURRENT LIABILITIES

The account pertains to Leasehold Liabilities arising from the lease–purchase

agreement between the GSIS and Questronix Corporation which started in June
2002. Specifically, the agreement involves the upgrade of the Mainframe Disk drive
of the GSIS. Per agreement, the GSIS has the option to purchase the hardware at
the end of the term (which is 36 months) for P500.

15. DEFERRED CREDITS

Deferred Credits account consists of the following:

 Deferred income arising from accrued interests on obligations of DBM and

other government agencies for unpaid and/or delayed remittances of social
insurance premiums and housing loan amortizations. These are booked as
Accrued Income Receivable and are credited to Deferred Income, as
recommended by the Commission on Audit. Since collection thereof is very low
and the receivables are not readily realizable, the same were classified from
admitted to non-admitted assets, and the corresponding deferred income was
reduced. The income will be recognized in full in the year of collection.

 Non-current Interests Receivable from housing loan accounts covered by

Deeds of Conditional Sale which have been cancelled

 Undistributed Collections - are those collections which could not be properly

classified at the time of collection.

The Deferred Credits balance includes the following:

Particulars 2006 2005

P P
Deferred income
63,644,638 48,582,670
Unrealized profits 312,821,639 -
Undistributed collections 9,598,808 12,963,939
Unearned interest - 647,965,560
Unearned premiums - 5,693
P P
Total Deferred Credits
386,065,085 709,517,862

3030
16. RESERVES

A comparison between the actuarial reserves requirements and the actual financial
reserves is shown as follows:

Particulars 2006 2005

Old age benefits P 242,558,615,486 P 217,498,732,614

Policies in force 48,295,505,681 51,505,694,842
Survivorship benefits 47,033,575,059 33,871,170,841
Disability benefits 12,744,076,167 9,664,085,937
Burial benefits 2,858,321,880 2,510,319,994
Contingencies 1,734,107,335 1,797,855,127
Actual Financial Reserves 355,224,201,608 316,847,859,355
Actuarial Reserve Requirement P355,224,201,608 P316,847,859,355

17. SURPLUS

The Surplus account of the SIF consists of the current net revenues, the
accumulated net earnings of prior years reflected in the Unassigned Surplus, as
well as other income such as the (1) the Appraisal Surplus, which pertains to
income coming from appraisal of real properties (2) Donation Surplus, for donated
assets (3) Unrealized Gain or Loss, from the fair valuation of Financial Assets
Available for Sale, and (4) Contingent Surplus on Disallowances.

Claims paid in 2006 pertaining to 2005 and prior years which could no longer be
segregated with respect to their year of incurrence due to volume of transactions,
are treated as surplus adjustments of CY 2005.

18. FEES AND COMMISSIONS

The Social Insurance Fund, being the administrator of the General Insurance Fund
(GIF) which consists of the General Insurance business, Optional Life Insurance
(OLI) business, and Pre-Need (PN) business, charges the latter fund administration
fee and marketing commissions, as follows:

 10% Administration Fee based on the three Businesses’ respective gross

income

3131
  20% Marketing Commission based on gross premium earned of the GI and the
OLI businesses.

 10% Management fee on Employees Compensation Insurance Fund premium

collections

The above fees are reported under ‘GSIS Fees and Commission in the Statement
of Revenues and Expenditures of the SIF under Miscellaneous Revenues
(Schedule II). The fees are considered as charges to the current operation of the
Administered Funds.

19. CASH DIVIDENDS DECLARED

The GSIS Board of Trustees under Resolution No. 161, dated November 8, 2006,
declared an annual cash dividend in the total amount of P857 million for CY 2006,
chargeable against the surplus of the Social Insurance Fund.

These are distributed to Compulsory Life Insurance Policy Holders, under the
following conditions:

 All active members including the members of the Judiciary and Constitutional
Offices whose life insurance coverage have been in force for at least one year
as of December 31, 2005 and are still active as of June 30, 2006.

 The following are not entitled to the dividends:

 Terminated compulsory life insurance coverage’s in 2005;

 Active members who have defaulted in their member–loans and/or premium

payments for at least six consecutive months prior to June 30, 2006; and

 Lapsed policies or policies whose indebtedness is equal to or greater than

cash surrender value as of June 30, 2006.

20. ADMINISTRATIVE LOADING

For CY 2006, the administrative loading of the Fund is 7.08% which is well below
than the allowable limit of 12%.

21. EXEMPTION FROM TAX

Pursuant to Section 39 of RA 8291, the GSIS, its assets, revenue including all
accruals thereto, and benefits paid are exempted from all taxes, assessments,
fees, charges or duties of all kind.

22. CONTINGENT LIABILITIES

3232
There are lawsuits and claims against the GSIS that are either awaiting decisions
by the courts or are subject to settlement agreements. In the opinion of its legal
counsels, the contingent liability or loss arising there from, under the Social
Insurance Fund amounts to at least P725 million. Reserve for Contingencies has
been increased by the same amount.

Additional Reserve for Contingencies

Reserve for Cases involving the Administration Group Amount

1) Ibex International, Inc. v. GSIS P 13,941,664

2) Diego Agote, et al v. PAPI 13,500,000
3) GSIS v. LSWA, Daniel Fanila, et al 129,500
27,571,164
Reserve for Cases involving the Field Operations Group
4) C.C. Fiel Enterprise, Inc. v. GSIS, et. al 8,480,000
5) Melchor Arboleda v. GSIS 2,500,000
6) Heirs of the late Enrique and Felisa Lentija v.Enrique and Elena
Diola, GSIS, Jovita Ancog and R/D-Tagum 2,189,000
7) Daymiel v. GSIS 1,260,000
8) Rasad R. Ibrahim v. GSIS, rep by BM of CDO and Butuan 1,152,000
9) Dy Teban Hardware v. R. Tuazon and GSIS 1,000,000
10) Brenda Primo v. GSIS, et.al. 249,269
11) Hermilo P. Baranda v. GSIS Ramon Lim and Ma. Elena Loresto 197,500
12) Emelita Pacudan and Concepcion Gotiamco v. GSIS and
Sps. Manuel and Isabelita Borres 100,000
13) Delilah Gantang v. GSIS 36,500
14) Ronnie Gargolis et al v. Nelson Lee, GSIS, et al 35,280
15) Isabel N. Alabado v. GSIS 25,000
17,224,549
Reserve for Cases Involving the Housing and Real Prop. Dev. Group
16) GSIS v. Eduardo Santiago, etc. 399,828,000
17) Leonito Almeda et al v. GSIS 78,000,000
18) GSIS v. Queen’s Row Subdivision, Inc. 73,100,000
19) GSIS v. City Treasurer and City Assessor of Manila 53,000,000
20) Bengson Commercial v. GSIS 31,000,000
21) Fantasia Filipina Resort v. GSIS, et al 21,801,663
22) GSIS v. OP and Jennifer Emano Bote 10,000,000
23) Salvador Housing and Dev. Corp., et al v. Juan “Bong” Lim et al 4,500,000
24) GSIS v. Marlito Villanueva, Chanelay, et al. 2,474,097
25) Felisa L. Pena v. GSIS 2,000,000
26) Mercator Finance Corp. v. GSIS 1,700,000
27) Nandeshi Const. & Dev. Corp. v. San Lorenzo Realty and GSIS 1,180,000
28) Pearlito Campanilla v. GSIS and NSJBI 969,543
29) Group Management Corp v. Lapu-Lapu Dev. and Housing Corp. 385,639
30) LGTM Corp. v. GSIS 252,000
31) GSIS v. OP and Janim Barrozo 200,000
32) GSIS v. Hon. Fabros, etc. and Francisco dela Merced, et al 50,000
33) Jose Umali, et al v. GSIS 45,000
34) GSIS v. Gonzalo and Matilde Deang 35,000
680,520,942

3333
Total Contingent Liabilities/Additional Reserve for Contingencies P725,316,655

3434