MODFIN PORTFOLIO

Reflection paper presented

To the Accountancy Department

In partial fulfillment

Of the course requirement

In MODFIN 1

Javier, Abigail Faith B.

MODFIN1 K31
 I. Introduction

On the year October 17, 1972 Lorenzo Shipping Corporation (LSC) was founded and
incorporated to engage in domestic inter-island cargo handling business. Pioneered by the Go
family, the business‟ primary focus then evolved from that of being a break-bulk cargo carrier to
a fully containerized cargo shipping company.

Since 2006, the Company is majority-owned by National Marine Corporation (NMC), a

domestic shipping company. A. Magsaysay, Inc. (AMI) is the ultimate parent company of NMC.
The Company‟s common shares of stock are traded in the Philippine Stock Exchange. In
addition, the Company is a holder of several Certificates of Convenience and special permits
issued by the Maritime Industry Authority to service certain domestic ports of call.

As of the year 2018, the enterprise operates a fleet of six vessels deployed to key ports in
Manila, Visayas, and Mindanao. Aside from their vessels, LSC also owns various equipment and
facilities to efficiently handle customer's cargoes including land-based equipment such as
forklifts, top lifts and trucks; and container yards and warehouses in its branches and agencies.

With a total of six branches nationwide, LSC markets its services across Cebu, Davao,
General Santos, Cotabato, Iloilo, and Cagayan, and three agencies in Zamboanga, Dumaguete,
and Bacolod. Furthermore, all inbound and outbound volume in Manila is overseen in LCS‟s
Manila operations under its corporate office.

II. Disclosures on accounting policies

Accounting policies are the specific principles and procedures implemented by a company's
management team and are used to prepare its financial statements. These include any methods,
measurement systems and procedures for presenting disclosures (Investopedia, 2019).

As a Reporting entity, the corporation disclosed the summary of their operations and a brief
history on when the corporation was incorporated. After which, the basis of presentation was
indicated and the statement of compliance indicating that the company underwent necessary
procedures and evaluations so as to comply with reporting standards were given. The accounting
policies adopted are consistent with those of the previous financial year, except that the
Company has adopted the following new accounting pronouncements starting January 1, 2018
which were considered as a change in accounting policies and disclosures because of its effect in
the financial statements:

 PFRS 9, Financial Instruments.

 PFRS 15, Revenue from Contracts with Customers
 PFRS 16, Leases
 Amendments to PAS 19, Employee Benefits, Plan Amendment, Curtailment or
Settlement

And such pronouncements that currently do not have an effect but may have a potential
effect in the future which was:

 Annual Improvements to PFRSs 2015-2017 Cycle

 Amendments to PFRS 3, Business Combinations, and PFRS 11, Joint Arrangements,
Previously Held Interest in a Joint Operation
 Amendments to PFRS 3, Definition of a Business

Also such pronouncements that do not have an effect because accounts and transactions related
to the procurements or amendments are currently not recognized were:

 Amendments to PFRS 4, Applying PFRS 9 Financial Instruments with PFRS 4

Insurance Contracts
 Amendments to PFRS 2, Share-based Payment, Classification and Measurement of
Share-based Payment Transactions
 Amendments to PAS 28, Investments in Associates and Joint Ventures, Measuring an
Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs
2014–2016 Cycle)
 Amendments to PAS 40, Investment Property, Transfers of Investment Property
 Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance
Consideration
 Furthermore, the business also assesses the impact on adopting interpretations of
Philippine Interpretation IFRIC-23, Uncertainty over Income Tax Treatments and Amendments
to PAS 23, Borrowing Costs, and Borrowing Costs Eligible for Capitalization.

After which, Note 3 which was the “Summary of Significant Accounting Policies” were
presented. The Company opted to present all items of recognized income and expenses in two
statements: a statement displaying income or loss (statements of income) and a second statement
beginning with income or loss and displaying components of OCI (statements of comprehensive
income).

The presentation of assets and liabilities in the statement of financial position were also
based on current and non-current classification. The definition of a current asset and liability
were disclosed and all other assets and liabilities were classified as non-current. Under the
summary of significant accounting policies account presented in the financial statement were
described as well as the determination of initial recognition and subsequent measurements. It
also discussed the impairment of assets, financial liabilities, Provisions, Taxes, Related Party
transactions and the like.

The Determination of Fair Value was also disclosed thereby presenting the category of
the fair value hierarchy which was described as follows , based on the lowest level input that is
significant to the fair value measurement as a whole:

 Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or
liabilities
 Level 2 - Valuation techniques for which the lowest level input that is significant to the
fair value measurement is directly or indirectly observable
 Level 3 - Valuation techniques for which the lowest level input that is significant to the
fair value measurement is unobservable

LSC re-assesses the categorization of their respective fair values at the end of each reporting
period. For the purpose of fair value disclosures, the Company has determined classes of assets
and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy. With that being said, Lorenzo Shipping Company did comply
with Philippine Accounting Standards PAS 1 Presentation of Financial Statements.
 III. Inventory

Table 1: Note 7 of LSC‟s Statement of Financial position which discloses its inventories.

Inventory is the term for the goods available for sale and raw materials used to produce
goods available for sale. Inventory represents one of the most important assets of a business
because the turnover of inventory represents one of the primary sources of revenue generation
and subsequent earnings for the company's shareholders (Investopedia, 2019).

LSC‟s inventories are valued at the lower of cost and net realizable value (NRV). Costs
incurred in bringing each product to its present location and conditions are accounted for as
follows:

 Materials and spare parts - purchase cost using first-in, first-out method
 Fuel, diesel and lubricants - purchase cost using first-in, first-out method

Net realizable value is the estimated replacement cost. An allowance for losses and
obsolescence is determined based on a regular review and management evaluation of movement
and condition of spare parts and supplies.

When it comes to the amounts of the company‟s inventories, it garnered an amount of

P=24,628,023 in the year 2018 and P=25,434,984. There was an increase from year 2017 and
2018. The cause for the increase can be located under the disclosure of its financial condition, it
which indicates that fuel inventory increased during the period due to higher fuel prices.
However, Inventory decrease as at the year 2016 due to lower fuel prices and reduction in vessel
fleet.

Expenses incurred for Fuel and supplies inventories were recorded under “Cost of services”,
“Terminal expenses”, and “General and administrative expenses” amounted to P=370.5 million,
P=47.5 million and P=1.4 million, respectively, in 2018, P=375.2 million, P=40.7 million and
P=1.3 million, respectively, in 2017 and P=329.6 million, P=32.9 million and P=4.0 million,
respectively, in 2016 (see Notes 14, 15 and 16).

Furthermore, Cash flows from inventories had the amounts of P=806,961, (P= 4,339,129),
P= 8,932,211 for the year 2018, 2017 and 2016 respectively. Negative Cash flows meant that
outflows related to inventories exceeded cash inflows from it. Meanwhile, a positive cash flow
meant that inflows of cash exceeded outflows. After examination of the inventory account,
Lorenzo Shipping Corporation did comply with Philippine Accounting Standards (PAS 2) in
accounting for inventories since it adhered to the policies that were indicated in the standards.

Table 2: Note 14 of LSC‟s Statement of Financial position which discloses its Cost of Services.

Table 3: Note 15 of LSC‟s Statement of Financial position which discloses its Terminal
Expenses.
Table 4: Note 16 of LSC‟s Statement of Financial position which discloses its General and
Administrative Expenses.

IV. Investment in Equity securities

According to Accounting Tools, 2018, “An equity security is a financial instrument that
represents an ownership share in a corporation. Equity securities also give their holders
varying levels of voting rights in regard to certain matters, such as the appointment of a
board of directors that then acts on behalf of the shareholders. A sufficiently large amount
of ownership of equity securities will give the owner voting control over a business.”

The Company recognizes a financial asset in the statement of financial position when it
becomes a party to the contractual provisions of the instrument. Purchases or sales of financial
assets, recognition and de-recognition, as applicable, that require delivery of assets within the
time frame established by regulation or convention in the market place are recognized on the
settlement date.

Financial instruments are recognized initially at fair value, which is the fair value of the
consideration given (in case of an asset) or received (in case of a liability). With the exception of
trade receivables that do not contain a significant financing component or for which the
Company has applied the practical expedient, the Company‟s initial measurement of financial
instruments, except for those classified as fair value through profit or loss (FVTPL), includes
transaction cost. Trade receivables that do not contain a significant financing component or for
which the Company has applied the practical expedient are measured at the transaction price
determined under PFRS 15.

As of December 31, 2017, the Company does not have outstanding financial assets at FVPL,
HTM investments, AFS investments, and financial liabilities at FVPL. Subsequently, The
Company has no financial assets at FVTOCI and at FVTPL as at December 31, 2018.

V. Investment in Debt securities

Debt security refers to a debt instrument, such as a government bond, corporate bond, certificate
of deposit (CD), municipal bond or preferred stock, that can be bought or sold between two
parties and has basic terms defined, such as notional amount (amount borrowed), interest rate,
and maturity and renewal date as stated in Investopedia, 2019.

Financial instruments are recognized initially at fair value, which is the fair value of the
consideration received (in case of a liability). Under PFRS 9, debt instruments are subsequently
measured at fair value through profit or loss (FVTPL), amortized cost, or fair value through OCI
(FVTOCI). The classification is based on two criteria:

a. The Company‟s business model for managing the assets; and

b. Whether the instruments‟ contractual cash flows represent „solely payment of principal
and interest‟ on the principal amount outstanding.

The assessment of the Company‟s business model was made as of the date of initial
application, January 1, 2018. The assessment of whether contractual cash flows on debt
instruments are solely comprised of principal and interest was made based on the facts and
circumstances as at the initial recognition of the assets.

On the year 2017 and 2018, Lorenzo Shipping Company only had Financial Instruments at
Amortized Cost (Debt Instruments). This was classified as such since the two conditions for
financial asset to be classified and measured at amortized cost was present which were: (1) The
financial asset is held to collect the contractual cash flows; and (2) Contractual terms of the
financial asset give rise to cash flows that are solely payments of principal and interest on the
principal amount outstanding. Indicated on the table below are the amounts categorized as Debt
Instruments. There was no Level 1 and Level 2 amount for fair value measurement since there
was no transfer into and out of level 3 since this is a Financial Asset measured at Amortized
Cost.

Table 5: of LSC‟s fair value measurement for Financial Asset at Amortized Cost.

As for the changes in accounting policies under the new procurements in PFRS 9: Financial
Instruments. The Company‟s financial assets previously classified as loans and receivables under
PAS 39 are classified as financial assets at amortized cost under PFRS 9. The adoption of PFRS
9 did not result to changes in the classification and measurement of financial liabilities. This
interpretation can be illustrated in the table below:
 Table 6: illustrates the classification and measurement of financial instruments under PFRS 9
and PAS 39 at the date of application.

After scrutinizing the financial statements, the person responsible for examining Lorenzo
Shipping Corporation concluded that their disclosures and statements in relation to debt
securities have complied with PFRS 9 Financial Instruments due to the fact that they have
adopted the principles that were indicated within the standards.

VI. Related Party Transactions

Based on Investopedia, 2019, a related-party transaction is a deal or arrangement between two

parties who are joined by a preexisting business relationship or common interest. Related parties
may be individuals or corporate entities.

Related Parties of LSC were: Magsaysay Group of Companies, Retirement Fund and Other
Shareholders. The Magsaysay Group of Corporation‟s Parent is National Marine Corporation
(NMC) wherein A. Magsaysay, Inc. (AMI) is the ultimate parent company of NMC. Related
parties under the Magsaysay Group of Companies were enumerated as follows:

 NMC Container Lines, Inc. (NMCCLI) and Marine Fuels Philippines, Inc. (MFPI) are
subsidiaries of NMC. NMCCLI has a co-loading agreement with the Company while
MFPI supplies fuel to the Company.
 Magsaysay Houlder Insurance Brokers, Inc. (MHIBI), a subsidiary of NMC‟s parent,
handles both marine cargo and fidelity guarantee insurance requirements of the
Company.
  Magsaysay Shipmanagement, Inc. (MSI) is a subsidiary of NMC‟s parent. The Company
entered into a shipmanagement agreement with MSI whereby the Company appointed
MSI as the manager of its vessels. The agreement is renewable annually.
 Asiaport Equipment and Logistics Corp. (AELC) is an associate of NMC. In 2008, the
Company entered into an equipment and logistics services contract with AELC.
 One Stop Logistics Solutions, Inc. (OSLI), a wholly-owned subsidiary of NMC, is
engaged in warehousing, project and rolling cargo handling and other cargo related
services.
 Magsaysay Marine Services, Inc. (MMSI), a subsidiary of NMC‟s parent, is primarily
engaged in ship repair including corrosion control, container van repairs and other similar
services. In 2016, MMSI‟s management approved the cessation of its commercial
operations.
 Roadlink Solution Inc. (RLSI) and One Stop Warehousing Solutions, Inc. (OWLI) are
wholly-owned subsidiaries of NMC
 All Asian Countertrade
 Oceanic Container Lines, Inc.
 NMC Ship Agency and Brokearge Inc
 Icebox Logistics Services Inc. (ILSI)

On April 20, 2011, the Company and its related party NMC Container Lines Inc. (NMCCLI)
incorporated OTSI, in the Philippines owning 50% each, primarily to engage in the business of
operating and maintaining cargo handling services including the operation, ownership,
acquisition, and/or lease of the proper and necessary transport and cargo handling equipment.

On May 8, 2018, the Company sold all its interests in OTSI for a total consideration of
P=999,997 to Global Process Manager, Inc., an affiliate. As a result of this disposal, a loss
amounting to P=775,878 was reported under “Other income (charges) - net” in the statements of
income.

On the Other hand, “Other Shareholders” such as: Dumaguete Coconut Mills, Inc. (DCM),
Tao Commodity Trader, Inc. (TAO), Pioneer Insurance and Surety Corp. (Pioneer) were also
considered as related parties. TAO and DCM are substantially owned by Mr. Julio Sy, or his
immediate family. The Company has a lease agreement with DCM, while TAO is one of the
Company‟s suppliers of fuel for its vessels. Pioneer is the Company‟s provider of protection and
indemnity and hull and machinery insurance for its vessels. Other related parties not specifically
mentioned are businesses owned by various shareholders or directors of the Company and has
transactions with the Company in the regular course of business.

Lastly, Retirement Funds also formed part in the notes to related party disclosures. The
company‟s retirement fund is managed by BPI Asset Management. It comprises of both short
term employee and post-employment benefits which amounted to P=5,012,994 P=5,568,781
P=9,022,115 of the year 2018, 2017 and 201 respectively.

In summary, Lorenzo Shipping Corporation did comply with the Philippine Accounting
Standards 24 (PAS 24) “ Related Party Disclosures” because it disclosed transactions which are
material to users of financial statements and the expenses, purchases, management fees,
reimbursable expenses, Insurance Rental, Guarantee Fee, and Other Services, Amounts Owed by
Related Parties, Amounts Owed to Related Parties and its terms and conditions.

Table 7: Significant Related Party Transactions with its corresponding balances as of and for the
years ended December 31, 2018, 2017 and 2016 not separately shown elsewhere in the financial
statements.
Table 8: Significant Related Party Transactions with its corresponding balances as of and for the
years ended December 31, 2018, 2017 and 2016 not separately shown elsewhere in the financial
statements (Continuation of Table 7).

VII. Intangible assets

As stated in Investopedia, 2019, an intangible asset is an asset that is not physical in

nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and
copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which
include land, vehicles, equipment, and inventory. Additionally, financial assets such as stocks
and bonds, which derive their value from contractual claims, are considered tangible assets.

In the statement of financial position of Lorenzo Shipping Corporation (LSC) as of

December 31, 2017, the Company does not have outstanding intangible assets. Subsequently,
The Company has no intangible assets as at December 31, 2018. Therefore International
Accounting Standards (IAS 38) cannot be applied due to the lack of intangible assets.

VIII. Conclusion

After analyzing and scrutinizing the financial statements of Lorenzo Shipping Company it
can be concluded that they have complied with the guidelines set by the accounting standards
namely: PAS 1 Presentation of Financial Statements, PAS 2 Inventories, PAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors, PAS 23 Borrowing Costs, PAS 24
Related Party Disclosures, PAS 28 Investments in Associates and Joint Ventures, PAS 36
Impairment of Assets, PAS 39 Financial Instruments: Recognition and Measurement, PFRS 9
Financial Instruments and PFRS 10 Consolidated Financial Statements. This was stated due to
the fact that the company disclosed information about certain standards that have been amended
or procured which may affect the financial statements. After disclosing a change in the standard,
they correlate it with the potential effects and the changes that can impact external users. They
also disclose whether an account is existent or non-existent within the statements. In addition, the
company provides detailed and concise information concerning the movement of its accounts
and the underlying changes therein. One of its core values is accountability in order to “provide
balanced and comprehensive assessment of the company's performance and prospects (Lorenzo
Shipping Company, 2017)” with that being said LSC claimed to have the responsibility for its
actions and business decisions. This also includes its presentation of financial statements which
have been prepared with relevance and faithful representation.
IX. Financial Statements:
 X. References:

Accounting Policies. (2019). In Investopedia. Retrieved July 3, 2019, from:

https://www.investopedia.com/terms/a/accounting-policies.asp.

Inventory. (2019). In Investopedia. Retrieved July 3, 2019, from:

https://www.investopedia.com/terms/i/inventory.asp.

Accounting Tools. (2018). Equity Security. Retrieved July 3, 2019, from:

https://www.accountingtools.com/articles/2017/5/6/equity-security.

Debt Security. (2019). In Investopedia. Retrieved July 3, 2019, from:

https://www.investopedia.com/terms/d/debtsecurity.asp.

Related- Party Transactions. (2019). In Investopedia. Retrieved July 3, 2019, from:

https://www.investopedia.com/terms/r/related-partytransaction.asp.

Intangible Assets. (2019). In Investopedia. Retrieved July 5, 2019, from:

https://www.investopedia.com/terms/i/intangibleasset.asp

Lorenzo Shipping Corporation (2017). Our Company. Retrieved July 5, 2019, from:
http://www.lorenzoshipping.com/en/index.php/our-company.