EXECUTIVE SUMMARY

INTRODUCTION

The Armed Forces of the Philippines Retirement and Separation Benefits System
(AFPRSBS or the “System” for brevity) was created by virtue of Presidential Decree
(PD) No. 361 dated December 30, 1973 and started its operations in 1976. The System
was established as a funding mechanism to ensure the continuous payment of
retirement and separation benefits to the members of the AFP. To strengthen the
System, certain provisions of PD No. 361 pertaining to membership and rate of
contributions were amended by PD No. 1656 dated December 21, 1979 and PD
No. 1909 dated March 22, 1984.

The System is engaged in various business operations which include the management
of funds invested in the stock market, money market, government bonds, corporate
loans, consumer/member loans, real estate properties and equity holdings in
subsidiaries and associates. It also has interests and participation in real estate projects
involving the development and construction of commercial and subdivision projects,
memorial parks, golf courses, and, for some, in partnership with reputable real estate
developers. In the course of its lending operations, the System also acquires through
foreclosure proceedings and dacion en pago arrangements, mortgaged real estate
properties as payment for the full or partial settlement of the loan obligations of its
borrowers. The inventory of developed lots, condominium units and acquired assets are
being offered for sale to the military personnel and to the public as well to recoup its
principal investments.

The System was not able to discharge its mandate originally set out in PD No. 361
because it has not paid a single peso for retirement benefits of the retiring AFP
personnel. All payments of retirement benefits to AFP military personnel, before and
after the promulgation of its Charter, have been made from the regular annual
appropriation of AFP as set out in the General Appropriation Act (GAA). Thus,
Executive Order (EO) Nos. 590 and 590A were issued in December 15, 2006 and
January 31, 2007, respectively, mandating the deactivation of the AFPRSBS and
directing the transfer of its assets in trust to a government financial institution (GFI).

On April 8, 2016, Memorandum Order (MO) No. 90, s. 2016, was issued by the Office of
the President of the Philippines directing the abolition of the System, privatization of its
subsidiaries, and for other purposes. The System was directed under Section 3 of the
said MO to: (a) cease collecting members’ contributions and accrual of interest thereon
upon effectivity of the Order; (b) maintain such number of personnel necessary to wind-
down its corporate affairs and cease the hiring of new personnel unless approved by the
Governance Commission for Government Owned and Controlled Corporations (GCG);
(c) collect all indebtedness due to the System; (d) continue a Corporate Operating
Budget; (e) for its Board of Trustees (BOT) to act as Board of Liquidators (BOL); (f) enter
into contracts for the purpose of selling all its real estate assets, golf and country club
shares; manage, preserve and maintain its buildings, facilities and equipment in line with
the winding down activities; complete deliverables to subdivisions; turn over completed
subdivisions, and maintenance and preservation of existing projects and properties; (g)
pursue activities necessary to perfect ownership of its real estate assets; (h) continue,

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abrogate, and/or re-negotiate existing Joint Venture (JV) Agreements/Contracts, subject
to the revised National Economic and Development Authority (NEDA) JV Guidelines;
and (i) maintain full power to sue and file complaints for the protection of the rights and
interests of the corporation.

To implement the provisions of MO No. 90, the GCG shall be assisted by a Technical
Working Group (TWG) composed of representatives from the Department of National
Defense (DND), Department of Finance (DOF), Department of Budget and Management
(DBM), Privatization Management Office (PMO), the System, and the AFP.

On April 19, 2016, pursuant to the above MO, the System’s BOT already convened as
BOL. The BOL approved in that meeting the stoppage of the collection of five per cent
members’ contributions and the accrual of interest on members’ contributions effective
March 31, 2016 as per Board Resolution (BR) No. SPL-01-2016. In the same meeting,
the BOL also approved the continuance of the implementation of the Advance Refund
Program to retiring military personnel with approved Order of Retirement from the AFP
until the final closure of the System.

The registered business and office address of the System is at No. 424 Capinpin
Avenue, Camp General Emilio Aguinaldo, Quezon City, Metro Manila, Philippines. It has
no other offices within and outside the Philippines, except for a Satellite Office in Iloilo
City.

The Board of Liquidators (BOL), consisting of 9 regular and 1 alternate members, is the
policy making body of the System. All members were appointed by the AFP Chief of
Staff who also appointed the President/Chief Executive Officer (CEO) and the Executive
Vice President (EVP)/Chief Operating Officer (COO) of the System. The President/CEO,
as well as the EVP/COO, takes charge of the day to day affairs of the organization.

As at December 31, 2020, the System has 58 regular, 36 casual, 4 contractual and 14
project-hired employees or a total workforce of 112 personnel.

The System’s Corporate Operating Budget (COB) for CY 2020 and CY 2019 were
approved per Board Resolution Nos. 06-2019 and 01-2019 dated December 4, 2019 and
February 21, 2019, respectively. The COB and budget utilization are as follows (in
millions):

Approved Budget Utilization

Particulars
2020 2019 2020 2019
Personnel services 73.125 73.613 63.679 65.003
Maintenance and other operating expenses 241.024 225.574 22.347 33.909
Capital expenditures 1.593 0.613 0.668 0.098
Total 315.742 299.800 86.694 99.010

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FINANCIAL HIGHLIGHTS (In Philippine Peso)

I. Comparative Financial Position

Increase
Particulars 2020 2019
(Decrease)
Assets 15,867,056,365 18,914,957,246 (3,047,900,881)
Liabilities 6,818,639,896 10,470,904,464 (3,652,264,568)
Fund equity 9,048,416,469 8,444,052,782 604,363,687

II. Comparative Results of Operations

Increase
Particulars 2020 2019
(Decrease)
Income 592,796,695 730,506,898 (137,710,203)
Expenses 86,240,915 98,911,301 (12,670,386)
Other comprehensive income/(loss) (4,746,868) 19,899,039 (24,645,907)
Total comprehensive income 501,808,912 651,494,636 (149,685,724)

SCOPE OF AUDIT

Our audits covered the examination, on a test basis, of the accounts and transactions of
the System for the period January 1 to December 31, 2020 in accordance with
International Standards of Supreme Audit Institutions to enable us to express an opinion
on the fairness of presentation of the financial statements for the years ended December
31, 2020 and 2019. Also, we conducted our audit to assess compliance with pertinent
laws, rules and regulations, as well as adherence to prescribed policies and procedures.

AUDITOR’S REPORT

We rendered a qualified opinion on the fairness of presentation of the financial

statements of the System for the years ended December 31, 2020 and 2019 due to the
variance of P745.483 million between the balances in the general ledger and Integrated
Financial Management System (IFMS) subsidiary ledgers (SL) of the Members’
Contributions (MC) Payable and Estimated Liability on MC Earnings accounts. Likewise,
there is a net variance of 2,517,453 square meters of raw lands with equivalent cost of
P651.925 million between the total land area per physical inventory of Transfer
Certificates of Titles and those recorded in the Investments in Real Estate account. The
non-reconciliation of the said variances casts doubt on the correctness and fair
presentation of the balances of Members’ Contributions (MC) Payable and Estimated
Liability on MC Earnings accounts, stated at P4.360 billion and P1.393 billion,
respectively, in CY 2020 and P7.268 billion and P2.294 billion, respectively, in CY 2019,
and the Investments in Real Estate account stated at P1.730 billion both as at December
31, 2020 and December 31, 2019. The status of the records of AFPRSBS did not
permit us to apply alternative audit procedures. Consequently, we were unable to
determine whether any adjustments on the balances presented in the financial
statements of the above-mentioned accounts were necessary.

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For the above observations that caused the issuance of a qualified opinion, we
recommended that Management:
On the variance between the balances in the general ledger and IFMS subsidiary
ledgers of the MC Payable and Estimated Liability on MC Earnings accounts
a. Reconcile the IFMS SLs with the books of accounts/General Ledger maintained by
the Accounting Department in preparation for the transfer of MC records to the
Government Financial Institution Trustee in accordance with Executive Order Nos.
590 and 590-A, as amended by Memorandum Order No. 90; and
b. Submit a quarterly report on the status of reconciliation of the AFPRSBS’ IFMS SLs
with the books of accounts.
On the net variance on the total land area per physical inventory of Transfer Certificates
of Titles (TCTs) as against those recorded in the Investments in Real Estate account
a. Reconcile the noted variance between the total land area per physical inventory of
TCTs with those recorded under the Investment in Real Estate account to ensure
correctness of the account balance;
b. Accordingly adjust the books of accounts based on the result of reconciliation; and
c. Prioritize the submission of the updated reconciliation pertaining to Investments in
Real Estate account for the Audit Team to validate and verify the nature of the
variance in the land area totaling 2,517,453 square meters.

OTHER SIGNIFICANT AUDIT OBSERVATION AND RECOMMENDATIONS

1. Deficiencies were noted in the accounting treatment for transactions related to the
foreclosed properties consisting of a parcel of land and 329 units in Royal Plaza
Twin Tower amounting to P361 million.

1.a A parcel of land and 329 units in Royal Plaza Twin Tower which were
previously foreclosed by the AFPRSBS amounting to P361 million were recorded
as part of Loans Receivable-Accounts under Litigation instead of Investment
Property, contrary to paragraphs 5 and 16 of Philippine Accounting Standard 40
on Investment Property, understating the Investment Property and Accumulated
Depreciation accounts as of December 31, 2020, and depreciation expense
account for CY 2020.

1.b The waived penalties amounting to P248.607 million on the restructured

commercial loan account were not reinstated despite the borrower’s failure to
comply with the terms and conditions of the Amendment to Loan Agreement dated
December 21, 2001, thus, understating the Loans receivable – Past Due
Commercial Loan account and the related income account by the same amount.

We recommended that Management:

a. Enforce collection of the adjusted balance of commercial loan to the spouses

who are key officers of the Corporation in accordance with the Joint and
Several Suretyship (JSS);

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 b. Pay the deficiency capital gains tax assessments;

c. Reclassify in the books of the AFPRSBS the foreclosed properties consisting

of a parcel of land and 329 units in Royal Plaza Twin Tower amounting to
P361 million from Loans Receivable- Accounts under litigation to the
Investment Property account;

d. Provide annual depreciation;

e. Cause the consolidation of the land title in the name of the AFPRSBS;

f. Finalize the terms of the amicable settlement with the borrower in relation to
the annulment of foreclosure sale filed by the latter against AFPRSBS; and

g. Provide the Audit Team with a copy of the case filed by the borrower against
the AFPRSBS including its current status.

2. Revenue from the sale of real estate properties and real estate rentals amounting
to P47.519 million and P131.664 million, respectively, were not subjected to
Value-Added Tax, contrary to the pertinent provisions of the National Internal
Revenue Code of 1997, as amended by Republic Act No. 10963 or the Tax
Reform for Acceleration and Inclusion, and Revenue Regulation (RR) No. 16-
2005, as amended by RR No. 13-2018, thus exposing the AFPRSBS to possible
financial and legal consequences.

We reiterated our recommendation in our CY 2014 audit that Management register

under the VAT system to comply with pertinent provisions of RA No. 8424, or
request for VAT exemption from the BIR for the possible issuance of VAT
Exemption Certificate.

Other audit observations together with the recommendations are discussed in Part II of
this Report.

SUMMARY OF AUDIT SUSPENSIONS, DISALLOWANCES AND CHARGES

As at December 31, 2020, the balance of audit disallowances amounted to

P248,529,715, while there are no balances for audit suspensions and charges.

STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS

Out of the 58 audit recommendations embodied in the CY 2019 Annual Audit Report, 12
were fully implemented, 35 were partially implemented, 5 were not implemented and 6
were reconsidered. Of the partially and unimplemented recommendations, 13 were
reiterated in Part II of this Report. The details are presented in Part III of this Report.