PART II - OBSERVATIONS AND RECOMMENDATIONS

A. FINANCIAL

1. The validity and accuracy of the reported carrying amounts of the Property,
Plant and Equipment (PPE) and Investment Property (IP) - Buildings accounts of
P17.546 billion and P345.186 million, respectively, as at year end cannot be
ascertained due to variances in the acquisition costs and accumulated
depreciation (AD) of the PPE and IP-Buildings accounts per lapsing schedules
and per audit amounting to P30,460 and P31.816 million, respectively, or a total
net understatement of PPE and AD accounts by P32.103 million, due to erroneous
postings, omission, and incorrect classification of the accounts, and discrepancy
in the balances per books and per Report on Physical Count of PPE (RPCPPE),
among others.

1.1 Paragraph 7 of Philippine Accounting Standard (PAS) 16 provides that [t]he cost
of an item of property, plant and equipment shall be recognized as an asset if, and
only if: (a) it is probable that future economic benefits associated with the item will
flow to the entity; and (b) the cost of the item can be measured reliably. (Emphasis
supplied)

1.2 Paragraph 55 of PAS 16 specifies that [d]epreciation of an asset begins when it

is available for use, i.e. when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management.

1.3 Section 27c, Chapter 10 of the Government Accounting Manual (GAM) for NGAs,
Volume I, on Depreciation stipulates that [d]epreciation of an asset begins when it is
available for use such as when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management. For simplicity and to
avoid proportionate computation, depreciation shall be for one month if the PPE is
available for use on or before the 15th of the month. However, if the PPE is available for
use after the 15th of the month, depreciation shall be for the succeeding month.

1.4 Appendix 73, Instructions Item A of the GAM for NGAs, Volume II, requires that,
[t]he Report on the Physical Count of Property, Plant and Equipment (RPCPPE) shall be
used to report the physical count of PPE by type such as land, land improvements,
infrastructure, building and other structures, machinery and equipment, transportation
equipment, furniture, fixtures and books, etc. which are owned by the agency. It shall be
prepared yearly by fund cluster. It shall be submitted to the Auditor concerned and
Accounting Division/Unit not later than January 31 of each year.

Variances in the acquisition costs

of PPE per books/lapsing schedules
and per audit -

1.5 Review of the PPE accounts revealed variances in the acquisition costs per
books/lapsing schedules and per audit in the net amount of P30,460, as shown in Table
1.

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 Table 1 - Variances in Acquisition Costs of PPE
Per Books/Lapsing Schedules and Per Audit

Per Books/
Lapsing Variance
Particulars Schedules Per Audit (Over)/Under
Electrical Equipment (EE) P - P 1,719,652 P 1,719,652
Information and Communication
Technology Equipment (ICTE) 7,293,327 7,333,505 40,178
Office Equipment (OE) 2,139,110 2,169,406 30,296
Power Supply System (PSS) 4,686,107 2,966,455 (1,719,652)
Other Machinery and Equipment (OME) 10,809,334 10,769,330 (40,004)
Land Improvement (LI) 98,323,798 98,323,788 (10)
Total P 123,251,676 P 123,282,136 P 30,460

1.6 Some of the causes of the above variances in the acquisition costs per lapsing
schedules and per audit were erroneous postings, non-inclusion of some costs incurred
in prior year transactions, and/or non-adjustment of the balances of the accounts, as
observed in the prior year.

1.7 The causes of discrepancies between the balances per books/lapsing schedules
and per audit in the total amount of P30,460 shown in Table 4 are as follows:

a. PSS was overstated by P1.720 million and the EE was understated by the
same amount. In Journal Entry Voucher (JEV) No. 20-12-494, pursuant to prior year
audit recommendation, the amount of P1.720 million was reclassified from OME but
was, however, incorrectly debited to PSS instead of to EE. To correct the erroneous
reclassification, the amount should be debited to EE and credited to PSS. The
corresponding AD for PSS was overstated because the cost depreciated includes the
P1.720 million cost for properties that should be part of EE.

b. The cost of ICTE was understated by P40,178, as observed in the prior

year. The beginning balance of the ICTE account during the year does not include the
amount of P40,178 for the purchase of a laptop computer in February 2016 which was
omitted in the lapsing schedule in CY 2020.

c. The cost of OE was understated by P30,296 which includes unadjusted

prior period audit observation amounting to P13,482, due to error of omission, as the
payment in CY 2019 for additional piping for the installation of the new air conditioning
unit with the cost of P32,579 at the Office of the Vice President for Business Support
was inadvertently omitted from the books of accounts. On the other hand, there was a
credit in the general ledger (GL) of P16,814 in the cost of OE for the month of November
2020 but per verification, there was no JEV supporting the same. Conversely, in JEV
No. 20-11-401 dated November 2020, there was a credit recorded in AD-OE amounting
to P16,814 but not recorded in the GL.

d. Comparison of the OME account per books and per audit showed a
discrepancy of P40,004. This amount includes the unadjusted prior year finding as a
result of the inclusion of P40,000 payment for the rental of two 10-tonner forklifts in CY
2019 which should have been recognized as Rent/Lease Expense. It should be noted
that the cost of PPE can be capitalized or recognized as an asset if and only if, it is

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probable that future economic benefit associated with the item will flow to the entity and
the cost of the item can be measured reliably.

Variances in the AD of PPE and IP-

Buildings per lapsing schedules and per
audit -

1.8 Review of the AD accounts also revealed variances per lapsing schedules and
per audit in the amount of P32.072 million as presented in Table 2.

Table 2 - Variances in the AD Accounts Per Lapsing Schedules and Per Audit

Per Lapsing Variance

Particulars Schedules Per Audit (Over)/Under
IP-
AD-Buildings P 177,385,743 P 188,847,353 P 11,461,610
PPE-
AD-LI 46,239,265 64,445,644 18,206,379
AD-PSS 1,663,576 2,591,542 927,966
AD-OME 5,024,667 5,700,537 675,870
AD-EE - 561,085 561,085
AD-OE 1,264,206 1,381,004 116,798
AD-ICTE 4,050,394 4,158,381 107,987
AD-Buildings 24,687,012 24,720,130 33,118
AD-Furniture and Fixtures (FF) 4,707,784 4,689,182 (18,602)
87,636,904 108,247,505 20,610,601
Total P 265,022,647 P 297,094,858 P 32,072,211

1.9 The variances in the AD accounts were affected by the variances in the
acquisition costs of the related PPE/IP-Buildings accounts. Other attributable causes for
the variances include improper computation of depreciation and not depreciating some
of the properties included in the lapsing schedules. Further, some properties indicated
only the year they were acquired and the corresponding depreciation were only
computed starting the following year contrary to Paragraph 55 of PAS 16 and Section
27c of the GAM for NGAs, Volume I, thus understating the AD accounts. We also
observed that for the additional purchases for CY 2020, the exact date (month/day/year)
of acquisition or the dates of availability for use of the related properties were not
indicated in the lapsing schedule.

1.10 As an example, in the AD of the IP-Building, a total cost of P378.114 million for
properties acquired in prior years (CYs 1998 to 2014) were depreciated starting the
following year they were acquired which continued until CY 2020, thus, understating the
AD as of the end of the year.

1.11 In the AD of LI, the estimated life used in the computation was 20 years but per
FTI’s policy, as disclosed in the Notes to Financial Statements, the LI’s estimated useful
life was 10 years. There was also incorrect computation of depreciation as the
depreciable amounts of improvements of some roads within the FTI Complex from
February to May during the year were lumped per lapsing schedule while in a summary
on the properties, there was a breakdown specifying the month acquired or when the
improvements were made available for use, thus, affecting the computation of
depreciation. The exact date is one of the determining factors for the correct
computation of depreciation.

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1.12 For the AD of the PSS, of the cost of P1.720 million, the P1.563 million indicated
in the lapsing schedule was not included in computing the depreciation, thus, also
understating the AD. On the other hand, the AD for properties that should have been
part of EE were included in the PSS and thus, overstating the AD.

1.13 Table 3 shows the total net understatement of P32.103 million in PPE and AD
accounts per books/lapsing schedules and per audit.

Table 3 – Total Net Understatement in PPE and AD Accounts

Per Books/Lapsing Schedules and Per Audit

Per Books/ Difference

Account Lapsing Schedules Per Audit (Over)/Under
Total PPE P 123,251,676 P 123,282,136 P 30,460
AD - IP - Buildings 177,385,743 188,847,353 11,461,610
AD - PPE 87,636,904 108,247,505 20,610,601
Total P 388,274,323 P 420,376,994 P 32,102,671

Variances of PPE account balances

per RPCPPE and per books -

1.14 Review of records also revealed that, as of December 31, 2020, there were
variances of P150.501 million among the PPE account balances per RPCPPE and per
books, as shown in Table 4.

Table 4 – Variances of PPE Account Balances per RPCPPE and Per Books

Per Per Difference

Account RPCPPE Books (Over)/Under
PPE-
OME P 11,350,533 P 10,809,334 P 541,199
Motor Vehicles 6,069,938 5,693,824 376,114
Books 109,901 50,000 59,901
Medical, Dental and Laboratory Equipment (MDLE) 38,750 - 38,750
Disaster Response and Rescue Equipment (DRRE) 321,339 299,902 21,437
LI - 98,323,797 (98,323,797)
PSS - 4,686,107 (4,686,107)
FF 2,693,226 5,375,098 (2,681,872)
ICTE 6,171,254 7,293,327 (1,122,073)
OE 1,637,750 2,139,110 (501,360)
Other Structures - 303,264 (303,264)
Other PPE 418,575 536,883 (118,308)
Sports Equipment 19,475 19,745 (270)
PPE-Revalued-
Buildings - 43,801,689* (43,801,689)
P 28,830,741 P 179,332,080 P (150,501,339)
* Inclusive of P14.916 million revaluation

1.15 Based on inquiry and observation, the variances per books and per RPCPPE are
due to, among others, the following:

a. There are properties recorded in the RPCPPE which were either recovered
from lessees or other properties that are fully depreciated with unit value of P1.
Although the properties are fully depreciated, they are still recorded in the books
at acquisition costs while in the RPCPPE, they are accounted with unit value of
P1.

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 b. Some properties included in the RPCPPE without costs pertain to old
properties without documents, however, they are recorded with costs in the
books.

c. There were no properties recorded in the RPCPPE for LI, PSS, and
Buildings and Other Structures that resulted in a variance of P147.115 million
with records in the books.

d. The MDLE included in the RPCPPE amounting to P38,750 is not recorded

in the books.

e. The additional purchase of OE in CY 2020 amounted to P173,169 in the

books while in the RPCPPE, the additional purchases during the year amounted
to P5,138.

f. For OME, the payment for the labor and materials for the repair and
replacement of closed-circuit television camera in a road in the FTI Complex
amounting to P87,188 was omitted in the RPCPPE.

g. The additional purchases during the year of ICTE and Other PPE
amounting to P2.537 million and P186,250, respectively, which are in the books,
are not included in the RPCPPE.

Items of PPE with cost below P15,000

and without costs still included in the
RPCPPE, and impairment losses on
PPE/IP not recorded -

1.16 Section 10, Chapter 8 of the GAM for NGAs, Volume 1, and COA Circular No.
2015-007 dated October 22, 2015, which took effect on January 1, 2016, provide for the
reclassification to semi-expendable property of tangible items below the capitalization
threshold of P15,000.

1.17 In addition, Paragraph 63 of PAS 16 and Annex A of the Revised Chart of

Accounts (RCA) for Government Corporations (GCs), issued pursuant to COA Circular
No. 2020-002 dated January 28, 2020, provide for impairment losses on items of PPE,
particularly on the determination/reduction of asset to recoverable amount and reversal
of impairment.

1.18 Review of the RPCPPE also disclosed that there were still 752 items of PPE
costing below P15,000 included in the RPCPPE, as shown in Table 5. These items
were identified only during the year as the RPCPPE submitted in prior year lacked
monetary values.

Table 5 – Items of PPE below P15,000 included in the RPCPPE

as of December 31, 2020

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Classification No. of Items Amount
FF 381 P 1,625,934
IT Equipment and Software 57 265,359
OE 198 146,911
Other PPE 38 109,365
Library Books 58 59,901
Medical Equipment 8 38,750
OME 2 22,102
DRRE 10 21,437
Total 752 P 2,289,759

1.19 These items were reflected in the RPCPPE despite the requirement of Section
10, Chapter 8 of the GAM for NGAs, Volume I, and COA Circular No. 2015-007, that
tangible items below the capitalization threshold of P15,000 shall be reclassified to semi-
expendable property. Also included in these items were some fully-depreciated
PPE/items recovered from lessees and other properties with unit value of P1.

1.20 Some of the 752 items were recorded in the books as PPE, others were not
recorded while the rest cannot be traced due to incomplete information on their
description and particulars in the lapsing schedules and RPCPPE.

1.21 PPE without costs and property numbers were also included in the RPCPPE.
Unserviceable properties were noted through ocular inspection and they were recorded
in the books and included but not segregated in the RPCPPE. In addition, impairment
losses were not provided on PPE.

1.22 Accounting errors may or may not have material effect on account balances.
Either way, they can have serious consequences such as incorrect income/expense
reporting and incorrect asset reporting. Adjusting entries are therefore necessary to
establish the correct balances of accounts in the Financial Statements. The goal of the
adjustments is to correctly assign the appropriate amount of the affected accounts for
the current reporting period leaving the remainder in a financial position account to be
carried over to the next reporting period/s.

1.23 We recommended that Management:

a. Require the Procurement and Disposal Unit (PDU) and the Accounting
Division to reconcile their records on PPE/IP-Buildings;

b. Require the Accounting Division to:

b.1 Conduct the monthly and annual reconciliation in the PPE/IP-

Buildings and AD accounts to check errors and effect the necessary
adjustments to present the correct balances in the Financial
Statements;

b.2 Provide for impairment losses on PPE;

b.3 Henceforth, strictly enforce the provisions of: Paragraphs 7

and 55 of PAS 16; Section 27c, Chapter 10 of the GAM for NGAs,
Volume I; Appendix 73 of the GAM for NGAs, Volume II; Section 10,

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 Chapter 8 of the GAM for NGAs, Volume I; COA Circular No. 2015-007;
Paragraph 63 of PAS 16; and Annex A of the RCA for GCs;

c. Require the PDU to:

c.1 Reclassify the items of PPE with cost below P15,000 to

respective semi-expendable accounts pursuant to Section 10,
Chapter 8 of the GAM for NGAs, Volume I, and COA Circular No.
2015-007;

c.2 Segregate the unserviceable properties in the RPCPPE to

easily identify them and cause their disposal, as necessary;

c.3 For items without costs/values, segregate them and exert

effort to retrieve records and trace their costs/values and/or appraise
and assign values on said items to provide a basis for their
recognition in the books of accounts; and

c.4 Assign property number to every item of PPE.

1.24 Management commented that:

a. The discrepancies will be investigated and necessary control shall be put in

place to avoid recurrence of the same;

b. Adjustments of the deficiencies in the RPCPPE were referred to PDU for

compliance; and

c. Thorough examination on the discrepancies/variances noted in the PPE/IP-

Buildings and AD accounts will be continued and the necessary corrections will be made
to comply with the GAM for NGAs and other applicable rules and regulations.

1.25 As a rejoinder, we appreciate Management’s commitment to investigate and

examine the discrepancies/variances. We will monitor the correction of errors on the
PPE/IP-Buildings accounts in CY 2021.

2. The boundaries and limits of nine lots outside the FTI compound with
carrying amount of P206,493 cannot be established, thus affecting the accuracy of
the presented balance of the Property, Plant, and Equipment (PPE)-Land account
recorded at total carrying amount of P17.457 billion as at year end. Unidentified
boundaries not only hampered the accounting of the properties but also resulted
in the non-monitoring and safeguarding against encroachment by informal
settlers and further forfeiture by Local Government Units (LGUs), further resulting
in forgone opportunity for the economic use of the properties and the possible
loss of the assets.
2.1 As of December 31, 2020, PPE-Land account composed of lots within the FTI
compound and acquired outside FTI has a balance of P17.457 billion, details shown in
Table 6.

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 Table 6 – Balance of the PPE-Land account
as of December 31, 2020

In In square
Fair
hectares meters Cost/Value
Value
(has.) (sq. m.)
Land inside FTI Complex:
FTI Complex lot 25.992 259,923 P 176,800 P 45,954,386,400
Usufruct with LGU-Taguig 11.800 118,000 131,700 15,540,600,000
Usufruct with MWCI 1.080 10,800 176,800 1,909,440,000
38.872* 388,723 63,404,426,400
Add: Land/Lots outside FTI Complex 59.911 599,110 489,988
63,404,916,388
Less: Land reclassified to Investment Property 45,954,386,400
Balance as of December 31, 2019 P 17,450,529,988
Add: Adjustment of values of four lots outside the FTI compound
based on appraisal values of CAL-FIL in January 2017 P6,653,240
Less: Derecognition of lot 126,735 6,526,505
Balance as of December 31, 2020 P 17,457,056,493
* Already adjusted to 38.952 has. due to adjustment of the FTI Complex lot from 259,923 sq. m. or 25.992 has. to 260,720 sq. m.
or 26.072 has. based on appraisal values of CAL-FIL in March 2019 per Journal Entry Voucher (JEV) No. 19-12-552 dated
January 30, 2020

2.2 Computation of the adjustment of P6.653 million is in Table 7.

Table 7 – Adjustment During the Year of Values of Four Lots Outside the FTI
Complex Based on Appraisal Values of CAL-FIL in January 2017

Location Area Appraised/Fair Book Value

(sq. m.) Market Value Adjustment
Barangay (Brgy.) Bagbag, Novaliches, Quezon City 2,000 P 4,400,000 P 80,000 P 4,320,000
Brgy. San Dionisio, Paranaque City 849 1,240,000 42,450 1,197,550
Brgy. Sala, Cabuyao, Laguna 301 930,000 33,110 896,890
Brgy. Nazareth, General Tinio, Nueva Ecija 12,797 240,000 1,200 238,800
Total 15,947 P 6,810,000 P 156,760 P 6,653,240

2.3 The FTI engaged the services of CAL-FIL Appraisal and Management,
Incorporated (CAL-FIL) to conduct the appraisal of the properties of FTI inside its
complex in Taguig City as of March 15, 2019. Subsequently, land inside the FTI
compound included in both the PPE and Investment Property (IP) accounts were
recorded at fair market values as shown in Table 6.

2.4 Also, included are 14 lots located outside the FTI compound which were valued
at the original cost of loans of P489,988 granted by FTI to farmers during the KADIWA
operation in the 1970s who mortgaged their land and were not able to pay the loans. Of
the 14 lots with a total area of 599,110 sq. m., only four lots with a total land area of
15,947 sq. m. were revalued. These were appraised by CAL- FIL in January 2017 and
the values of the lots were adjusted during the year, as can be gleaned in Table 7.

2.5 A lot in Malibay, Pasay City was reported by Management as forfeited by the
Pasay City government. In the FTI’s CY 2007 Report on the Recovery Program of Real
Estate Properties Mortgaged to and Acquired by FTI, no copy of the Transfer Certificate
of Title (TCT) of the Malibay, Pasay City lot was found. The property was already
foreclosed and auctioned by the Pasay City government because of unpaid taxes.

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2.6 The remaining nine lots with a total area of 582,529 sq. m. cannot be located and
therefore cannot be appraised. The FTI Property Officer informed that Management
previously made efforts to locate them but to no avail.

2.7 The derecognition of the Malibay, Pasay City lot, together with the revaluation of
four lots during the year resulted in the carrying amount of P206,493 of the nine lots
outside the FTI compound not yet revalued as at year end, as presented in Table 8.

Table 8 – Carrying Amount of Nine Lots Outside the FTI Compound

Not Yet Revalued as at Year End

Area in Carrying
Particulars sq. m. Amount
10 lots not yet revalued as of CY 2019 599,110 P 489,988
Less: Four lots revalued in CY 2020 15,947 P 156,760
Malibay, Pasay City lot derecognized in CY 2020 634 126,735 283,495
Balance as of CY 2020 582,529 P 206,493

2.8 Likewise, copy of TCT No. 119144-R of the lot in Floridablanca, Pampanga was
not presented for verification. Copies of the TCTs of the other lots outside the FTI
compound were presented to the Audit Team for verification.

2.9 In December 2019, we, together with the FTI Inspection Team, conducted an
ocular inspection of the four lots in Paranaque City; Kalayaan Avenue, Quezon City;
Cabuyao City, Laguna; and General Tinio, Nueva Ecija. The Property Officer informed
that they were the only lots located/existing and physically inspected by FTI. We
discovered during the ocular inspection that the Kalayaan Avenue, Quezon City lot is
occupied by informal settlers. In CY 2020, we did not conduct an ocular inspection of
the properties because of the pandemic. However, we were informed by the Property
Officer that the subject properties are still in the same condition.

2.10 The above conditions affect the accuracy of the presented balance of the PPE-
Land account. In addition, the lots could be encroached by informal settlers and further
forfeited by LGUs resulting in the forgone opportunity for the economic use of the
properties and the possible loss of the assets.

2.11 We reiterated our prior year’s recommendations that Management require

the PDU to:

a. Continue to locate the metes and bounds of all the FTI properties
based on the TCTs; and

b. Monitor and safeguard the lots by putting stone boundary markers

and fencing the properties to protect them from being encroached by
informal settlers.

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2.12 Management commented that:

a. The lot under usufruct with the City of Taguig and the lot under lease
agreement with MWCI with the total value of P17.451 million as at year end will
be reclassified to IP-Land account in CY 2021.

b. The property located in Pasay City with a book value of P126,735 under
Journal Entry Voucher (JEV) No. 20-12-514 dated December 29, 2020 was
derecognized and excluded from the FTI books in view of the documents
obtained from the City Assessor’s Office of Pasay/Registry of Deeds certifying
that there is no property under FTI’s name in their records and/or that the
property’s certificate of title was cancelled and a new one was issued in the
name of another company.

c. The existence of the properties listed in Table 9 is being validated, and

cannot be revalued until evident that they exist. They believe that revaluing the
unlocated properties based on unrealistic zonal valuation will not present the
FTI’s Financial Statements fairly.

Table 9 – List of PPE Land

Area Book Zonal Value Total Zonal
Location TCT No. (sg. m.) Value per sq. m. Value
A. Acquired lots with TCT’s under the name of FTI
1. Capitol District, Balara,
Quezon City T-245107 15,241 P77,800 P10,000 P152,410,000
2. Brgy. Sta. Ines, Antipolo T-174320 40,000 20,000 175 7,000,000
Total 55,241 97,800 159,410,000
Difference/Undervaluation 159,312,200
B. Acquired lots with TCT’s not yet transferred to the name of FTI
3. Floridablanca Pampanga 119517 327,007 10,000 800 P261,605,600
4. Floridablanca Pampanga 119144-R 197,930 10,000 800 158,344,000
5. San Jose del Monte,
Bulacan T-211971 500 13,693 3,500 1,750,000
6. San Jose del Monte,
Bulacan T-164132 500 50,000 3,500 1,750,000
7. Brgy. Pingkian (Pasong
Tamo), Quezon City 197880 240 5,000 7,000 1,680,000
8. Sapang Bato, Angeles City 40750to52
(3TCTs) 618 10,000 1,500 927,000
9. Sapang Bato, Angeles City 40213to15* 493 10,000 1,500 739,500
Total 527,288 108,693 426,796,100
Difference/Undervaluation 426,687,407
Grand Total 582,529 P206,493 P586,206,100
Difference/Undervaluation P585,999,607
* Originally mortgaged with 3 TCTs

d. During the Exit Conference on April 20, 2021, Management suggested to

include the nine lots in the immediately preceding table in the Notes to Financial
Statements but should not be presented at market values.

e. Further, Management emphasized that extra efforts were exerted in the

past, such that surveyors were hired to locate the lots. Some of the properties
were google searched and/or property point projected by the surveyor to be in
the mountains. Despite these efforts, the lots were not located. It was surmised
that FTI holds the land titles but the lots do not exist.

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2.13 In addition, we recommended that Management:

a. Require the PDU to:

a.1 Exercise due diligence in locating the properties as some of

the nine lots which are not yet revalued are prime properties. Even if
they are located in the province and mountains, with the present fast
development of land, they could be valued in millions, hence, the need
to locate them;

a.2 Apprise the Audit Team of the actions taken by FTI to locate
the properties and submit the documents to substantiate the actions
taken thereon; and

b. Require the Accounting Division to trace the documents, such as

journal vouchers, general ledger, etc., supporting the initial recording of
the lots in the books, and submit them to the Audit Team for evaluation.

3. Long outstanding receivables amounting to P164.350 million were not

substantiated by supporting documents resulting in the dormant accounts for
more than 20 years, thus, depriving the FTI for the use of funds for its operations.

3.1 COA Circular No. 2016-005 dated December 19, 2016 provides the guidelines
and procedures on the write-off of dormant receivable accounts, unliquidated cash
advances, and fund transfers of national government agencies (NGAs), LGUs and
government-owned and controlled corporations (GOCCs).

3.2 Item 8.2 of said Circular provides that the Head of the government entity shall file
the request for authority to write off dormant receivable accounts while Items 7.4 and 8.3
thereof enumerate the relevant documents, including schedule of dormant accounts,
which shall be submitted to support the request for write-off.

3.3 Item 1 of said Circular also emphasizes that the unreliable receivable account
balances, significant amounts of unliquidated cash advances, and fund transfers of a
number of entities due to unsupported/undocumented dormant accounts which have
long been outstanding/remained past due/dormant, deprive the government of funds for
its operations and affect the fair presentation of accounts in the Financial Statements.

3.4 Records show that the Other Assets account with a balance of P164.350 million
represents accounts receivable from former lessees of FTI and other receivables which
have been outstanding and dormant for more than 20 years, details presented in Table
10.

Table 10 - Other Assets account as of December 31, 2020

Particulars Amount
Receivables from former lessees of FTI P 160,710,267
Miscellaneous contingent assets 2,371,973
Various other receivables 1,268,128
Total P 164,350,368

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3.5 In a letter dated June 26, 2020, Management states that [m]ost of the
records/files of these accounts are no longer with, FTI as the lessees of FTI were part of
the portion of the FTI property sold to Ayala Land, Inc. (ALI) in 2012. Said records
include the original copies of the contracts and demand letters. Also, said letter states
that the actions taken against some lessees/accounts were already initiated;
coordination with some government agencies with accounts with FTI are continuously
made; and collection from other accounts that are still lessees of FTI will be pursued.

3.6 We noted the previous efforts of Management to locate and enforce collection
from former lessees. In CY 2017, they even secured certifications from the Department
of Trade and Industry (DTI) and Securities and Exchange Commission (SEC) containing
the principal offices and business addresses/locations of the former lessees of the
agency. In CY 2020, however, no courses of action were taken by Management to
enforce the collection of said receivables and/or update the accounts.

3.7 Management issued collection/demand letters during the year but pertaining to
FTI lessees’ current accounts only.

3.8 Management, however, does not have documents, such as contracts, demand
letters, and statements of accounts, which are necessary in the collection of receivables
from lessees/debtors to prove the existence of and rights to the assets/receivables.
Non-possession of the said documents by FTI could either hamper the collection or
result in non-collection of long outstanding receivables of the agency, thereby, depriving
the FTI of the funds for its operations.

3.9 We reiterated our prior year’s recommendations that Management:

a. Require the Accounting Division and the Treasury Unit to:

a.1 Regularly and continually exert utmost efforts and issue

collection/demand letters to enforce the collection of the accounts of
the former lessees, including the receivable from lessees of
properties before they were sold to ALI;

a.2 Henceforth, always maintain/keep intact the records/contracts/

demand letters relative to accounts which are still in the books for
collection by FTI;

b. Require the Office of Corporate Affairs to seek legal assistance from

the Office of the Government Corporate Counsel (OGCC) or other offices
that can provide legal services to enforce collection from FTI’s debtors;

c. Require the Accounting Division to:

c.1 Request for authority to write-off the receivable accounts aged

10 years or over, the collection/reconciliation of which is already
remote or nil pursuant to COA Circular No. 2016-005; and

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 c.2 In the succeeding periods, conduct the regular and periodic
verification, analysis, and validation of the existence of the
receivables for the strict and regular collection thereof.

3.10 Management commented that, in the past years, the collection of accounts has
not been relinquished, but like many companies, bad debts are inevitable despite utmost
collection efforts.

3.11 Management also informed that, in early CY 2000, they requested COA for
authority to write-off the receivable accounts 10 years and over. A task force was
created to focus on the collation of documents required for the write-off. The documents
were attached to the request sent to COA Central Office for evaluation. To date, the
accounts remained in the books as there was no information on the status of the
request. However, these receivables were declared fully impaired and fully provided
with allowance for impairment losses. They need COA’s full support to write off these
uncollected accounts to enable them to use the tax benefit attached to these accounts.
Likewise, the early resolution of their request will stop the recurring Audit Observation
Memoranda.

3.12 Further, Management assured that verification, analysis and validation of the
correct receivables pursuant to COA Circular No. 2016-005, including the strict and
regular collection thereof, are regularly and periodically done. This could be verified by
the improvement in FTI’s receivable turn-over.

3.13 On the receivables from former lessees of the properties sold to ALI,
Management claimed during the Exit Conference that they cannot anymore collect from
said lessees as, legally and technically speaking, they no longer have the personality to
collect from the lessees. They further expounded that the sale of the properties to ALI
carries with it all the obligations and rights over the properties, and the lease contracts.
The contracts of the former lessees of FTI were not terminated and were continued upon
sale of the properties to ALI which assumed the leases. In this connection, FTI’s hands
are tied as far as collection is concerned. They also apprised that the sale of the FTI
property/ies was negotiated by the National Government through the Privatization and
Management Office (PMO) in CY 2012.

3.14 The Purchase Agreement dated October 29, 2012 by and among FTI (Seller),
ALI (Buyer), and PMO for the sale of the approximately 74-hectare property of FTI was
submitted by Management after the Exit Conference.

3.15 As audit rejoinder, we maintain our recommendation that Management has the
right to collect receivables prior to the sale of the property to ALI, hence, they have to
continually exert utmost efforts to enforce collection of the accounts from the former
lessees of the properties and issue collection/demand letters with the contention that:

a. For former lessees of properties not sold to ALI, efforts on collection can
continually be exerted by seeking the assistance of the DTI, SEC, and other
sources for their addresses, locations and other relevant information;

b. On the receivables from the former lessees of properties sold to ALI, FTI
has the legal right to collect the receivables as these were the expected lease

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payments to be received by FTI during the lease terms when the properties were
not yet sold to ALI;

c. Provisions of the Purchase Agreement among FTI, ALI, and PMO included,
among others, the following:

c.1 Article I includes, among others, the definition/interpretation of the

following terms:

Closing Date - shall refer to October 29, 2012, the date of

the signing or execution of the Agreement,
and the payment by the Buyer of the Upfront
Payment, which shall be 60 days from the
Award Date.

Turnover Date - shall mean the date of the actual turnover of

possession of the Property to the Buyer,
which shall be the date falling 60 days from
the Closing Date, or December 31, 2012,
whichever is later.

c.2 Section 3.03 of Article III provides the following:

Section 3.03. Rights and Obligations of the Buyer upon

Delivery of Property. Upon delivery of the Property to the
BUYER in accordance with Section 3.02, the rights and
obligations pertaining to the Property shall be treated in the
following manner:

(a) From the Turnover Date, the BUYER shall directly

assume and discharge all the rights, liabilities, and
obligations pertaining to the Property, including:

(i) all rights, obligations, and liabilities of the

SELLER arising from the Lease Contracts which
remain effective on or after the Turnover Date,
including all liabilities as a result of the breach
thereof, pertaining to the Property; (Emphasis
supplied)

Xxx.

(b) On the Turnover Date, the BUYER shall assume all

the rights and obligations of the SELLER xxx.

Xxx.

(ii) The BUYER shall be entitled to the rents, or

any amount due under the Lease Contracts, which
accrue from the Turnover Date. Any amount due
from the lessees referred to in the Lease

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 Contracts which accrued prior to the Turnover
Date shall inure to the benefit of the SELLER.
(Emphasis supplied)

c.3 For emphasis, based on Items c.1 to c.2 above, all rights,
obligations, and liabilities of the Seller arising from the lease contracts shall
be assumed by the Buyer effective on or after the Turnover Date, and
amounts due from the lessees referred to in the Lease Contracts which
accrued prior to the Turnover Date shall be for the benefit of the Seller.

d. Full recovery from what are due from the former lessees must be FTI’s
priority, even as they seek proper legal assistance from the offices created to
lend legal services for GOCCs, or engage private counsel subject to prior written
concurrence of both the OGCC and COA.

3.16 On the request of Management for authority to write-off made in early CY 2000,
as recommended in prior year, we requested submission of authenticated copy of the
received request, as well as copies of the documents, submitted to COA. This shall be
used in tracing the submitted request by FTI. A new request for authority to write-off
could be submitted if the previous request can no longer be found. Also, we emphasize
that the accounts that may be authorized to be written off do not preclude the
Management to collect said outstanding accounts receivable which should be recorded
in the Registry of Accounts Written Off for monitoring purposes.

B. OTHER OBSERVATIONS

4. The payment of fixed Representation Allowance (RA) for CYs 2018 to 2020
totaling P3.681 million to FTI officers without imposing the corresponding
withholding tax is not in accordance with FTI Board Resolution dated November
13, 2003, authorizing the payment of RA on reimbursement basis supported by
official receipts (ORs). Otherwise, the payment shall be subject to withholding
taxes pursuant to the pertinent Bureau of Internal Revenue rules and regulations.

4.1 The Corporate Board Secretary’s Certificate, issued on November 13, 2003,
provides that, during the special meeting of the FTI Board of Directors held on October
28, 2003, the Board approved, effective October 1, 2003, the entitlement and adjustment
of RA being received by FTI officials, as shown in Table 11.

Table 11 - Entitlement and Adjustment of RA

Pay Class Old Rate New Rate

8 P 1,500 P 2,600
9 2,500 4,400
10 4,000 7,000
Vice President 7,000 12,100
Executive Vice President 15,000 25,900
President 25,000 43,200

4.2 Likewise, the Corporate Board Secretary’s Certificate emphasized that the
approval of such adjustment is subject to the condition that it shall be on a

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reimbursement basis covered with ORs. Should there be an instance that it shall not be
covered in its entirety with ORs, the RA shall become taxable, subject to existing internal
revenue rules and regulations on the grant of the allowance, including the usual
accounting and auditing rules and regulations.

4.3 Audit of disbursements for CYs 2018 to 2020 disclosed that the RAs in the total
amount of P3.681 million were granted to FTI officers. The RAs were paid on a monthly
basis as fixed allowances instead of on reimbursement basis, without corresponding
ORs, and without the imposition of the withholding tax as required by the Board in its
Board Resolution dated November 13, 2003. Details are in Table 12.

Table 12 - Actual RAs Received by FTI Officers

from CYs 2018 to 2020

Rate per Calendar Year

Position Month Total
2018 2019 2020
President P 43,200 P 518,400 P 518,400 P 518,400 P 1,555,200
Vice President for Business Support 12,100 145,200 145,200 145,200 435,600
Vice President for Corporate Affairs 12,100 145,200 145,200 145,200 435,600
Vice President for Operations 12,100 72,600* 145,200 145,200 363,000
Estate Leasing Officer 7,000 42,000* - - 42,000
Budget and Accounting Officer 7,000 84,000 84,000 84,000 252,000
Strategic Planning and Research Officer 7,000 84,000 84,000 84,000 252,000
state Engineering and Maintenance Officer 7,000 84,000 84,000 84,000 252,000
Internal Audit Specialist 2,600 31,200 31,200 31,200 93,600
Total P 1,206,600 P 1,237,200 P 1,237,200 P 3,681,000
* Served for six months

4.4 We reiterated our recommendation that Management strictly comply with

the FTI Board Resolution issued on November 13, 2003 on the submission of ORs
to support the claims for the reimbursement of RA. Otherwise, impose the
corresponding tax due on RA claimed without supporting ORs.

4.5 Management clarified that the concerned officers of FTI have been submitting the
required ORs for CY 2020, and copies of said ORs are available on file for perusal of the
Audit Team.

4.6 They contended that the subject FTI Board Resolution is already obsolete
considering that the organization and compensation structure of FTI was already revised
in CY 2006. In fact, there is no more Executive Vice-President under the present
structure. Moreover, several Wage Orders by the Department of Labor and Employment
and Revenue Regulations issued by the Bureau of Internal Revenue were issued on the
matter that render the subject FTI Board Resolution outdated.

4.7 Nonetheless, they assured that the issue, in compliance with previous AOMs,
has been the subject of evaluation and discussion by the FTI Management. Following
the renewal of the corporate life of FTI in CY 2018, they are re-assessing its organization
and compensation structure with the assistance of the Development Academy of the
Philippines to align the same with the standards of the Governance Commission for
GOCCs (GCG). The revised compensation structure for FTI officers and employees
would have been submitted to the GCG in CY 2020 had it not been for the limitations
imposed under the Enhanced Community Quarantine (ECQ) and General Community
Quarantine caused by COVID-19 pandemic.

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4.8 As a rejoinder, we maintain our recommendation that Management submit the
ORs for verification/evaluation and attachment to Authority to Debit Accounts/payrolls as
supporting documents, otherwise, the paid RAs without supporting ORs shall be
imposed with appropriate tax. The ORs, which have not been submitted to COA, are
necessary to support the above claims for RAs.

4.9 The FTI Board Resolution issued on November 13, 2003 still prevails until a new
or revised Board Resolution on RA, in line with the current organization and structure of
FTI, is approved and implemented.

5. The expenses amounting to P465,306 for donation for the victims of the
Taal Volcano eruption in January 2020 lack supporting documents, thereby,
affecting the propriety and validity of the transactions. Further, it could not be
determined if the donations for the Taal Volcano eruption actually reached the
intended beneficiaries since in November 2020 even if no additional purchases
were made, donations were granted to Super Typhoon Rolly victims. Both
donations were not supported with corresponding Acknowledgement
Receipt/proof of receipt of the donated goods by the beneficiaries or their
representatives (LGU, risk management office, etc.). Moreover, there were still
inventories on hand as at year end, which could result in their expiry and
deterioration if not immediately disposed.

Expenses not supported with

complete documentation -

5.1 Section 4(6) of Presidential Decree (PD) No. 1445 requires that claims against
government funds shall be supported with complete documentation.

5.2 The Donation Expense account amounted to P487,356 as of December 31,

2020, details shown in Table 13.

Table 13 – Donation Expenses

Reference Gross
Document Date Particulars Amount
Manager’s Check No. 02/28/2020 Purchase of goods from a supplier for donation in P 465,306
8557 Taal Volcano eruption
Check No. 472286/ 11/05/2020/ Full liquidation of cash advance of accountable 22,050
JEV No. 20-11-342 12/02/2020 officer for trucking service for donation to families
affected by Super Typhoon Rolly in Tabaco,
Albay
Total P 487,356

5.3 However, the vouchers for the above expenses lacked supporting documents,
such as the following:

a. Board Resolution/s approving the donation/s;

b. Canvass papers from two other bonafide suppliers for the purchased goods
for the victims of the Taal Volcano eruption; and

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 c. Acknowledgement receipt/proof of receipt by the beneficiaries or their
representatives (LGU, risk management office, etc.) of the goods donated to the
victims of the Taal Volcano eruption and/or Super Typhoon Rolly, and accounting
of the goods for said donations.

5.4 As at year end, there were still undistributed inventories on hand and no proper
accounting thereof was conducted. Details of the inventory/amount as at year end were
not submitted to the Audit Team.

Canvass of prices not conducted, hence,

price quotations on supplies not obtained
and submitted -

5.5 Section 52.3 of the 2016 Revised Implementing Rules and Regulations (IRR) of
Republic Act No. 9184 requires that for shopping method of procurement, at least three
price quotations from bonafide suppliers shall be obtained.

5.6 Examination of the documents revealed that goods in the total amount of
P465,306 for donation to the victims of Taal Volcano eruption in January 2020 were all
purchased from a single supplier. Management justified that the required canvass of
supplies was not complied with because the procurement was done at a very short
period of time due to: (a) donation and distribution of goods to the victims were very
urgent; (b) all the needed supplies were available from the supplier, other suppliers do
not carry some of the items bought; (c) the supplier is a well-known wholesaler offering
very competitive prices; and (d) prices of some items at other suppliers were higher than
those of the supplier.

Goods for donation to victims of

Taal Volcano eruption were
donated to Super Typhoon Rolly
victims with some inventories still
on hand as at year end -

5.7 Verification of the records disclosed that there was no purchase of goods for
donation to the victims of Super Typhoon Rolly. There was, however, trucking service of
P22,050 charged to Donation Expense account for the delivery of relief goods to
Tabaco, Albay in November 2020. The accountable officer informed that goods from the
purchases for the victims of the Taal Volcano eruption were donated to victims of Super
Typhoon Rolly. During ocular inspection, we observed that there were inventories still
on hand.

5.8 The expenses without complete documentation affected the propriety and validity
of the transactions, and inventories still on hand as at year end could result to waste of
funds as they are nearing expiration and deterioration.

5.9 We recommended that Management:

a. Require the Accounting Division to:

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 a.1 Submit the lacking documents. Henceforward, ensure that all
claims against public funds are supported with complete
documentation;

a.2 Reclassify the trucking service of P22,050 from Donation

Expense account to Miscellaneous Expense account;

b. Require the PDU to:

b.1 Immediately dispose (through sale, auction, etc.) the

inventories on hand especially those which will readily expire/
deteriorate; and

b.2 Henceforth, fully and immediately deliver donations to the

beneficiaries to avoid waste of resources.

5.10 Management clarified that FTI originally intended to donate goods for the victims
of the Taal Volcano eruption during the first quarter of CY 2020 as part of its corporate
social responsibility. However, after the FTI Board passed the Resolution approving the
donation in January 2020, they were prevented from going to Batangas to deliver the
goods purchased because of the limitation imposed by the lockdown in March 2020.
They exerted efforts to coordinate with the organization in-charge in Taal after the lifting
of the Modified ECQ sometime in June 2020, but to no avail.

5.11 When Super Typhoon Rolly struck the Bicol Region in late October 2020, FTI
found an opportunity to donate the purchased goods for the Taal victims, rather than let
the goods deteriorate and render unusable. In November 2020, the FTI Board approved
the re-allocation of the goods. Arrangements were made to deliver the goods to Bicol.
However, it was discovered on the scheduled date of delivery that the hired van lacked
enough space to accommodate all the boxes of goods. Such that, some of the goods
were not delivered and remained with FTI.

5.12 Management assured that the expenses for donation, originally intended for the
victims of the Taal Volcano eruption, were duly supported by required documentation,
such as: (a) Board Resolution approving the donation of goods to persons affected by
the Taal Volcano eruption; (b) Minutes of the Meeting approving the re-allocation of the
donation originally intended for persons affected by the Taal Volcano eruption to the
victims of Super Typhoon Rolly; (c) Canvass papers for the purchase of goods for
donation; (d) Acknowledgment receipt of goods donated; and (e) Inventory/accounting of
goods for donations still available.

5.13 Further, they rationalized that the current pandemic has imposed certain
limitations in personnel movement that prevented FTI from finally disposing the
remaining goods for donation. They explained that the FTI Management has no
intention of allowing these goods to go to waste. They have already reached out to
several groups as early as January 2021 to extend the goods to benefit the patients of
COVID-19. However, the targeted beneficiaries also have reservations to interact due to
social distancing rules.

5.14 During the Exit Conference, Management committed to submit the lacking
documents.

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5.13 As a rejoinder, we appreciate Management’s efforts to submit the lacking
documents for evaluation. We will monitor Management’s fulfillment of their commitment
on this matter.

COMPLIANCE WITH REGULATORY REQUIREMENTS

Gender and Development (GAD)

6. The FTI is compliant in submitting the GAD Plan and Budget to the Philippine
Commission on Women. GAD expenditures during the year totaled P11.377 million
which mainly consisted of payments for the engagement of Security Services provided
for FTI and the FTI-Special Economic Zone for CYs 2019 and 2020 and hiring of
contractor for custodial maintenance services for CYs 2018 to 2020.

Tax Laws

7. The FTI complied with the Bureau of Internal Revenue (BIR) regulations in
withholding of taxes from compensation and from goods and services purchased. The
unremitted balance as of December 31, 2020 was remitted to the BIR in January 2021.

Government Service Insurance System (GSIS) Insurance Fund Law

8. During the year, the Agency paid a total of P1.545 million in compliance with the
requirement of insuring its properties with the General Insurance Fund of the GSIS
pursuant to Republic Act No. 656, otherwise known as the Property Insurance Law.

SUMMARY OF AUDIT SUSPENSIONS, DISALLOWANCES AND CHARGES

9. The Statement of Audit Suspensions, Disallowances and Charges (SASDC)

which summarized the total audit suspensions, disallowances, and charges as of
December 31, 2020 shows a total unsettled audit disallowance of P43.053 million, which
were appealed by Management. From this amount, a total of P6.610 million were
already denied by Cluster 5, Corporate Government Sector, COA, and with filed
Petitions for Review, while the remaining appeals from Notices of Disallowance (NDs) in
the total amount of P36.443 million are still under review. There were no unsettled audit
charges and suspensions at year-end.

11. In addition, there were NDs totaling P13.475 million as of December 31, 2020
which pertained to disallowances issued before the effectivity of the 2009 Rules and
Regulations on the Settlement of Accounts, as prescribed under COA Circular No. 2009-
006 dated September 15, 2009. These disallowances have been outstanding for more
than 10 years.

12. In prior years’ audit, we recommended that Management conduct an in-

depth analysis of the composition/details and propriety of the total disallowance
of P13.475 million and exhaust all possible means to enforce its collection.

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