ACYFAR 4

ACYFAR 4’s topic focused more on accounts that involve how the company’s

shareholders are affected, how they earn from the company’s profits, and how can they value

their investments in the company in case the company gets liquidated in the future. These

topics include lease payments-lessee, shareholders' equity, quasi-reorganization, share-based

payments, employee benefits, book value per share, earnings per share, and correction of

errors. These topics were harder than what was discussed for ACYFAR 3 since most of the

topics require a heavy understanding of the accounts involved and what accounts should be

added or reduced based on the transaction. This critique paper intends to utilize the knowledge

gained from the course to scrutinize and evaluate the operations of a particular company,

highlighting how the concepts covered in the course are manifested in their practices.

This critique paper concerns BDO Unibank Inc., which is a publicly traded company on

the Philippine stock market. The company provides a range of services such as lending,

investments, deposits, insurance, and foreign exchange. This company is an ideal fit for the

topics discussed in ACYFAR 4, as they are a corporation that issues shares, and all of the

course topics are utilized in their operations. The company’s headquarters is at 7899 Makati

Avenue, Makati City, Philippines.

BDO Unibank Inc. prioritizes providing excellent customer service and helping

customers in every way possible, which is conveyed by its motto "We find ways". Financial

statements serve as essential documents that allow companies to present themselves to their

investors and customers. However, if the information provided is inaccurately reported or

withheld, all of the company's efforts could be for naught. Therefore, BDO Unibank Inc. must

guarantee the accurate and transparent reporting of its financial statements, enabling investors

and customers to make informed decisions with confidence.

One of the most reliable ways to ensure the accuracy and reliability of a company's

financial records is to hire an external auditing firm to evaluate and verify the company's

financial information. BDO Unibank Inc. has been dedicated to this practice since the beginning

of its operations, and the company's ongoing use of this approach has established its reputation

as a reliable source of financial reports for its various stakeholders, including investors,
customers, and creditors.

Although it is not mandatory in the corporation’s by-laws, having a company's financial

statements audited can enhance its credibility. This is particularly crucial for BDO Unibank Inc.

as a publicly listed company whose financial performance is continuously monitored by its

stakeholders, including industry analysts and shareholders. By engaging an independent firm to

audit its financial statements, BDO Unibank Inc. has established its financial information as

trustworthy and dependable, instilling confidence in those who rely on it.

The inclusion of an external auditing firm is especially crucial in verifying the legitimacy

and precision of the data presented in BDO Unibank Inc.'s financial statements. This is because

the auditing firm can review the financial information objectively and identify any inaccuracies or

discrepancies that may have been overlooked by the company's accounting team.

"Punongbayan & Araullo" audited the financial statements of BDO Unibank Inc., which

guarantees that its financial information is impartial and provides an accurate portrayal of the

company's financial standing.

With that, starting first with BDO Unibank’s Leases wherein the perspective that will be

looked upon is the company as the lessee. First is the bank’s leases where they have the right

to use the assets that they have leased from their lessors. This represents the lessee's

entitlement to use an asset throughout the lease period in which they pay lease payments

throughout the lease term. Under the new lease accounting standard, ASC 842, most lessees

must recognize a right-of-use asset on their balance sheet in which its balances reflect the

present value of future lease payments.

Throughout the lease term, the right of use asset is amortized depending on whether the

transfer of ownership of the leased asset is transferred to the lessee. If it will be transferred to

the lessee, it will be depreciated through its useful life and if not, the lower between the lease

term and the useful life will be used. The recognition of Right of use assets on the balance sheet

aims to provide a more precise depiction of a lessee's financial standing and obligations under

lease agreements. According to BDO Unibank’s annual report (2021), they have disclosed that

their Right of Use Assets includes Lands and Buildings only in which BDO Unibank is not

allowed to sell these leased assets as security to its customers.

them directly to fulfill its operational requirements because of different benefits or reasons that

the management has identified. Leasing is often a more economical choice, particularly for

short-term needs or assets that are quickly outdated, compared to purchasing them outright.

This enables the bank to conserve its cash flow and use its resources in other areas such as its

daily operations, investing, and research and development. Moreover, leasing provides access

to assets that may have been unaffordable at the moment because of certain constraints that

the management identifies and one example of it is the pandemic. Lastly, obtaining the right-ofuse

assets through leasing allows the bank to recognize a right-of-use asset on its balance

sheet, which can enhance its financial position and provide a more precise view of its leaserelated

expenses and obligations.

Considering the benefits that leasing a property can get a bank like BDO Unibank whose

main business operations rely on business establishments, they need to consider leasing

properties to manage their risk (The Menlo Group Commercial Real Estate, LLC, 2017).

According to their annual reports, BDO Unibank Inc.’s land leases in which they have the right

to use the asset leased increased to ₱ 434 (in millions) in 2021 rather than in 2020 in which they

only had leases amounting to ₱ 416 (in millions). The same can also be said for their leases for

buildings which also increased to ₱ 9,824 (in millions) in 2021 which was ₱ 9,544 (in millions) in

2020. Considering the fact that the pandemic happened in 2020, this is a good sign that the

management of BDO Unibank Inc. has considered the economic condition which made them

lower the risk of buying properties that might incur losses just in case they will not gain any

benefit from that certain property. This is a useful information for its stockholders and potential

investors since this showed them that the management is doing a good job in assessing the

situation which will benefit the company overall.

Aside from leasing a property, there might be instances when the company sells its

property and the company who sold it would lease back that property. Companies engage in

leasebacks primarily to raise cash while retaining the use of the asset. Other than that, there are

several reasons why companies may choose to do leasebacks. One of them is, it can provide a

quick cash flow into the company which can be used to fund its investments, pay down debt, or
supply its daily business operations. Moreover, leasebacks can offer tax benefits by allowing

companies to deduct lease payments as a business expense. Leasebacks can also provide

flexibility by freeing up capital that would otherwise be tied up in an asset purchase which could

reduce the time and resources spent on asset management and maintenance such as in

depreciation and repairs. Lastly, leasebacks can help companies manage and assess the risks

associated with owning an asset, such as fluctuations in property values. Leases that were

acquired through leaseback transactions also form part of BDO Unibank Inc.’s overall Right-of-

Use Assets account already. Leaseback transactions may be one of the reasons why BDO

Unibank Inc.’s Right-of-use Assets have increased for the current year.

After conducting an analysis, it is advisable for BDO Unibank Inc. to disclose more

details about its leasing agreements in the supplementary management discussion section of its

annual report. This should include information about the different types of leases the company

has entered into and its overall leasing strategy. Such transparency will enable shareholders

and prospective investors to gain a better understanding of the company's decision-making

process regarding leasing properties. Additionally, this information can be used as a point of

reference for the company when it needs to make similar decisions in the future.

Regarding the Shareholder's Equity of the company, it consists of contributed capital,

retained earnings, treasury shares, and other comprehensive gains or losses. Contributed

capital includes common stock capital, preferred stock capital, share premium for both types of

stocks, and shares that are subscribed. Common stock is the primary unit of ownership for

shareholders who have the power to make decisions about the company's actions. Preferred

stocks have a higher priority than common stocks in terms of dividends and liquidation

preference, but they lack the power to vote or make decisions about company matters, making

them passive in terms of decision-making.

Aside from that, share premium represents the capital contributed by shareholders

beyond the par value of the stock. Retained earnings are the company's accumulated profits

that have not been paid out as dividends to its preferred and common shareholders. Finally,

accumulated other comprehensive income includes unrealized gains and losses on certain

financial instruments, foreign currency translation adjustments, and certain gains and losses
from pension and post-retirement benefit plans. Together, these components of shareholders'

equity provide insight into the long-term financial health and stability of the company.

According to BDO Unibank Inc.'s annual report, their preference stocks are noncumulative,

convertible to common stock, non-participating, and offer an annual dividend rate of

6.5%. Unlike other companies, BDO Unibank allows preference stockholders to exercise their

right to vote. This could benefit the company as it provides them with additional insights on key

decisions that could impact their preference shareholders. BDO Unibank has authorized

1,000,000,000 preference shares, of which 515,000 are issued, fully paid, and outstanding.

BDO Unibank Inc. has disclosed that each preference stock has a par value of ₱10, with that,

their total preference stock capital is ₱5,510 million, which has remained unchanged since

2020.

Regarding the company's common stock, it has been disclosed that it also has a par

value of ₱ 10, and the stock was offered at a price range of ₱ 17.80 to ₱ 23.80 per share. This

resulted in increased capital that is recognized as a share premium in which the offering of

shares generated proceeds of ₱ 2,200 (in millions), as disclosed by the company. The company

has the authorization to issue 5,500,000,000 shares, with 4,385,519,015 shares issued, fully

paid, and outstanding, compared to 4,384,227,915 outstanding in the previous year. The

company also mentioned in its disclosure that the total disclosed amount of issued shares

include the subscribed shares by companies, which can be found in Note 22.1.2 of their

disclosure.

The company distributes cash dividends rather than share dividends which are

appropriated according to the surplus free (retained earnings-unrestricted) that the company

has. This is the balance that was left after the company appropriated its retained earnings to

sustain losses incurred by the company and with regard to the appropriated requirement by the

BSP. Since the distribution of dividends for the preference shareholders is non-participating,

they only get a certain percentage of 6.50% per stock owned from the retained earnings-free

that the company has stated which was ₱ 16,795 (in millions). With that, the total dividends

distributed to the preference shareholders was ₱ 1018 (in millions) based on the prescribed

percentage for preference stockholders. For the common stockholders, BDO Unibank Inc.
decided to give each common stockholder ₱ 0.30 per stock which amounted to a total of 15,777

(in millions) worth of dividends distributed to its common stockholders.

Regularly distributing dividends is essential for a company because it rewards

shareholders for their investment and commitment to the company (Kelly, 2022). This creates a

motivation for investors to hold onto their shares and can even attract new investors looking for

a dependable return on their investment. When a company pays dividends, it also improves its

reputation and establishes trust with shareholders, demonstrating that the company is financially

stable and can generate sustainable profits. As a result, this can increase the company's appeal

to investors and help it raise capital in the future.

According to BDO Unibank's financial statements, its senior officers, ranging from vice

president and above, are entitled to an employee stock option plan. It has been specified that

these payments are non-cash settlements and are granted only upon completion of the vesting

period, which is five years, as a reward for the employee's contribution towards the performance

of BDO Unibank Inc. Additionally, the share options granted are valued at their fair market value

and can only be exercised within three years after the vesting period has been completed. The

number of share options granted to the employees will also be adjusted annually based on how

many employees are remaining in the company.

BDO Unibank Inc. has revealed that it still holds 14,950,363 unexercised share options,

each with an exercise price of ₱109.97. This represents a significant increase from the

6,498,024 share options with an exercise price of ₱104.08 held in 2020, especially given that

14,118,934 shares vested in 2021. Providing senior employees with share options to exercise

can help to make them feel valued to encourage them to remain with the company. Additionally,

employees who own shares will also naturally want for the company’s success since the value

of the shares that they own together with its dividends are all based on how the company

performs based on their management. This then motivates them more to contribute to the

company’s growth and prosperity.

BDO Unibank Inc. provides its employees with benefits and retirement plans that can

assist them after they leave the company. The bank aims to retain its skilled employees by

offering these benefits, like its share-based payments, which can benefit the company in the
long run. The employee benefits offered by BDO Unibank Inc. include short-term benefits,

termination benefits, bonus plans, post-employment defined contribution plans, and postemployment

defined benefit plans.

Short-term benefits consist of wages, salaries, bonuses, and non-monetary benefits paid

to current employees, while termination benefits are provided to employees who are laid off or

terminated before their retirement age or date. If the termination benefits are due for more than

12 months, they are discounted to their present value. Bonus plans are based on past practices

and recorded as a provision liability in the bank's financial statements to ensure conservatism.

Contributions to the post-employment defined contribution plan are deposited in an independent

entity, such as the social security system, and the bank does not bear any risk if the

investment's value decreases. The post-employment defined benefit plan covers all employees,

and the plan assets are invested in high-yield government bonds globally, which are converted

to pesos based on Bloomberg's valuation service.

BDO Unibank Inc.'s decision to invest in government bonds for their employees' postemployment

defined benefit plan is a wise choice. This is because government bonds are

generally considered to be a secure investment, particularly when the country issuing the bonds

has a good reputation in international business. Additionally, bonds typically have a fixed

interest rate, which makes them more predictable than other investments and requires minimal

actuarial work when estimating their future value. Lastly, bonds are also highly liquid, making it

easy to sell them when it comes time to pay out employee benefits.

The next important aspect to consider is the Book Value per Share of the company,

which represents the value of a shareholder's share if the company liquidates in the future,

taking into account the bank's assets and liabilities. The company's statement of changes in

equity reveals that they only disclosed the book value per share for their ordinary shares, which

was assessed at ₱ 95.26 per share, an increase of 8% from the previous year's book value per

share of ₱ 88.11 per share. This indicates that the company's assets have grown in comparison

to its liabilities, which is a positive sign for shareholders since it suggests that the company's net

worth is increasing. This could also boost the confidence and interest of potential investors in

investing in the company, as they can see that the company's worth is rising, which they can
compare to the stock's price to determine if the stock is undervalued or overvalued (Hayes,

2022). If the book value per share exceeds the stock's price, the stock is believed to be

undervalued since the stock's value in the company's books is high.

When assessing the overall value of a company's shares based on its net income, it is

important to consider not only the book value per share but also its earnings per share. The

earnings per share can be categorized into two types: basic and diluted. Basic earnings per

share is calculated by subtracting the company's preference share dividends from its net

income and dividing the result by its average outstanding shares. In contrast, diluted earnings

per share take into account the potential ordinary shares that could arise from share

options/warrants, convertible preference shares, and convertible bonds payable.

The company's annual report indicates that both the basic and diluted earnings per

share increased by 52%, which is a positive indication for the company. This suggests that the

net income has significantly increased compared to the average outstanding number of shares.

Shareholders may benefit from this increase, as there could be more retained earnings

available for distribution as dividends.

Lastly, with regards to the company’s prior period errors, they have disclosed that the

purpose of internal auditing and external auditing to Punongbayan & Araullo is so that the errors

are minimized and avoided. Moreover, before the financial statements are even distributed to its

stockholders or members, they are reviewed by the board of directors first in which they have

stated that fraud is the most likely to occur than errors since the overall check is a team effort by

the company and its auditors. With that, their annual reports didn’t contain or disclose any

information on whether there have been any corrections of errors that were done from the

previous years. With that, it can be concluded that there were not any errors or corrections to

the financial statements for its previous years.

Recognizing and correcting errors in financial statements from prior periods is crucial for

a banking company since financial statements are used by its shareholders to make decisions,

and errors can mislead and harm the reputation of the bank (Investopedia Team, 2021).

Moreover, correcting errors is essential for maintaining accurate accounting records, preventing

compounding discrepancies, and complying with regulatory requirements. Inaccurate financial

Lastly, promptly addressing and correcting errors demonstrates the bank's commitment to

transparency and integrity, builds trust among shareholders, and enhances the bank's

reputation.

It can be concluded that BDO Unibank Inc. has effectively managed risks, which is

reflected in its shareholders' equity. The financial statements are accurately prepared to

minimize errors. However, it is recommended to provide more information in the supplementary

management discussion section of the annual report to give shareholders a better

understanding of the company's leasing strategy. Overall, BDO Unibank Inc.'s financial

statements are detailed and reliable due to the internal and external audits and the board of

directors' review. This indicates that the bank's financial stability and ability to continue offering

banking services and financing options to its customers.