Corporations are supervised by the Securities and Exchange Commission (SEC), whose mandate is to protect the investing public by
promulgating rules to ensure transparency and fair reporting. To that end, all corporations are required to submit audited financial
statements annually. Moreover, the SEC prescribes the form and content of these financial statements to ensure adequate disclosure
among these corporations.

What is a Financial Reporting Framework?

SRC (Securities Regulations Code) Rule 68 defines Financial Reporting Framework as a set of accounting principles, standards, interpretations, and pronouncements that must be adopted in the preparation and submission of the annual financial statements. There are three types of frameworks that are prescribed by SRC Rule 68, and these are:

1. Philippine Financial Reporting Standards (or “PFRS”, also equivalent to “IFRS”);
2. Philippine Financial Reporting Standards for Small and Medium Sized Entities (or “PFRS for SMEs”, also equivalent to “IFRS
   for SMEs), and
3. Philippine Financial Reporting Standard for Small Entities (or “PFRS for SEs”, with no international equivalent).

While all these frameworks have similar accounting policies, there are key differences among these three frameworks that must not be missed or overlooked by the preparer of the financial statements. Careful study of these differences must be made to ensure that the financial statements are compliant with the applicable financial reporting framework.

How to determine which framework must be adopted by a corporation?

SRC Rule 68 prescribes the size criteria for corporations to be classified into large, medium, small and micro. Corporations must assess their size to determine the applicable framework to be used in preparing their financial statements:

As a general rule, a corporation must adopt the applicable financial reporting framework according to its size. A large corporation cannot simply choose to adopt PFRS for SME nor PFRS for SE. Likewise, a medium sized entity or a small entity cannot voluntarily adopt PFRS without justifiable exemptions. What is an example of a such an exemption? When a medium sized entity or a small entity is a subsidiary of a parent company that adopts PFRS, then the subsidiary may be exempted from the prescribed framework and instead apply PFRS.

There is also a special type of corporation, called a public interest entity (PIE), which SRC Rule 68 requires to adopt PFRS as its financial reporting framework, regardless of size. A PIE may refer to any the following regulated corporations:

1. Holders of secondary licenses,
2. Those covered under Part II of the SRC Rule 68 such as:
   1. Filers of registration statements (under Section 12 of the SRC),
   2. Issuers of registered securities (under Section 12 of the SRC),
   3. Issuers of publicly listed securities, and
   4. Issuers with assets of at least ₱50 million and has 200 or more shareholders holding at least 100 shares of a class as of its first day of the issuer’s fiscal year (also called Public Companies)
3. Entities in the process of filing their financial statements for the purpose of issuing any class of instruments in a public
   market; and
4. Such other corporations that are imbued with public interest regardless of having required to obtain a secondary license:
   1. Grantees of legislative franchises,
   2. Those engaged in nationalised and partly nationalised activities,
   3. Grantees or recipients of public funds, and
   4. Those regulated by other government entities other than the Bangko Sentral ng Pilipinas or the Insurance Commission.

As to the fourth item, the SEC has yet to issue specific guidelines to identify which corporations are considered as imbued with public
interest.

Feel free to contact us so we can assist you in determining the applicable financial reporting framework for your entity.

What is the role of the Board of Directors? The Code of Corporate Governance defines the Board of Directors as the governing body that exercises the corporate powers of a corporation, conducts all its business and controls its properties. Moreover, the Board of Directors may only exercise its powers when a quorum exists. What about the officers? According to Section 24 of the Revised Corporation Code,

“Immediately after their election, the directors of a corporation must formally organise and elect: (a) a president, who must be a director; (b) a treasurer, who must be a resident; (c) a secretary, who must be a citizen and resident of the Philippines; and (d) such other officers as may be provided in the bylaws. If the corporation is vested with public interest, the board shall also elect a compliance officer. The same person may hold two (2) or more positions concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in this Code.

The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as resolved by the board of directors.”

This section states that the Board of Directors must elect at least three officers, namely, the President, the Treasurer, and the Secretary. Officers implement the decisions made by the Board of Directors, oversee day-to-day operations, and manage the affairs of the corporation. Hence, officers and directors have different responsibilities.

It is common practice among closely held corporations to appoint officers from the Board of Directors. While this is completely acceptable, the more pertinent question is whether it is necessary to be an elected director to qualify as an officer.

Section 24 implies that not all officers are required to be directors. Except for the President, which the Code specifically requires to be a director, the other two officers, namely the treasurer and secretary, may or may not necessarily be a director.

Furthermore, Section 24 specifically prohibits an elected President to be appointed as Secretary or Treasurer at the same time. This must be considered by the Board when electing the officers of the corporation.

Is there a nationality requirement for officers? The Code states that the treasurer must be a resident, while the secretary must be both resident and Filipino citizen. What about the president? Can a foreign national be appointed as President? And what about the treasurer? Can a resident foreigner be appointed as Treasurer?

While the Code is silent on these matters, the SEC has stated in several of its opinions, that this depends on whether the company is engaged in nationalised or partly nationalised activities.

What are nationalized activities? Nationalized activities are business activities that are expressly reserved to Filipino citizens. On the other hand, partly nationalized activities are those business activities that the law allows foreign equity participation up to 40%. These activities can be found in Foreign Investment Negative List which is composed of:

1. List A pertains to foreign ownership that is limited by mandate of the constitution and specific laws. This includes mass media, practice of professions, retail trade enterprise with paid up capital of less than US$2,500,000, cooperatives, among others.
2. List B refers to foreign ownership which is limited for reasons of security, defense, risk to health, and morals and protection of small and medium scale enterprises. Some examples include advertising (up to 30%), ownership of private lands (up to 40%), operation of public utilities (up to 40%), ownership of condominium units (up to 40%). Partly nationalized activities under List B includes domestic market enterprises with paid up equity capital of less than US$200,000, etc.

Section 2-A of the Commonwealth Act. No. 108 as amended, provides that foreigners are prohibited from being appointed to management positions such as the president, vice president, treasurer, and secretary in business activities where there is a constitutional or statutory provision imposing a specific nationality requirement as a requisite for the exercise or enjoyment of a right, franchise, or privilege.

While foreigners are prohibited from being appointed as officers in nationalized and partially nationalized businesses, they can be elected as directors in proportion to their participation or share capital of the business (PD 715). The SEC maintained its position in several opinions, that foreigners can be elected as directors in proportion to their share capital, but are prohibited from being elected as officers of the corporation, such as President, Vice President, Treasurer and Secretary. The basis should be the actual share of the alien stockholders in the total capital of the corporation, and should not exceed the foreign equity ceiling prescribed by law. (DOJ Opinion No. 161 S. 1994).

The Philippines is an ideal business destination for foreign companies seeking to expand their overseas operations. With a stable outlook for the Philippine economy, coupled with low capital costs and high English proficiency among its labor force, the island nation is seen as the preferred choice for foreign companies setting up a manufacturing, processing or service enterprise. Through various Investment Promotion Agencies such as the Philippine Economic Zone Authority (PEZA), Board of Investments, Subic Bay Metropolitan Authority and many others, foreign companies may also qualify for some attractive tax perks, such as, income tax holidays, special corporate income taxes, and many other incentives.

Foreign companies that intend to do business in the Philippines may choose from establishing a domestic corporation, or a branch office. Let us compare these two options and explore their respective features.

Choosing the most appropriate form of business may not be easy and straightforward, as each option has its own advantages and disadvantages. These decisions require careful study to anticipate such implications. Please feel free to get in touch with us, so we can assist you in planning to set up your business in the Philippines