Translation Of Financial Statements Originally Issued In .

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Translation of financial statements originally issued in SpanishPanama Canal AuthorityIndependent Auditors’ ReportFinancial statementsSeptember 30, 2009Deloitte – Panama

Panama Canal AuthorityIndependent Auditors’ Report andFinancial Statements September 30, 2009ContentPagesIndependent Auditors’ Report1Balance sheet2Income statement3Statement of changes in equity4Statement of cash flows5Notes to financial statements6-38

Panama Canal AuthorityBalance sheetSeptember 30, 2009(In thousands of balboas)NotesAssetsNon-current assets:Properties, plant and equipment, netCurrent assets:Cash, cash equivalents, and bank depositsInvestment securities (held to maturity)Hedge instrumentAccounts receivableInventories, netAccrued interest receivable and other assets2,679,0672,438,71056, 55,334,7854,659,716Total assetsTotal equityCurrent liabilities:Accounts payableProvision for marine accident claimsAccrued salaries and vacation payableOther liabilities1213Total current liabilitiesTotal equity and liabilitiesThe accompanying notes are an integral part of these financial statements.-2-20084, 16Total current assetsEquity and liabilitiesEquity:Contributed capitalRetained earnings:ReservedUnappropriatedAdjustment for hedge instrument valuation2009

Panama Canal AuthorityIncome statementFor the year ended September 30, 2009(In thousands of balboas)NotesRevenues:Toll revenuesOther Canal transit servicesOther revenues:Electric power salesPotable water salesInterest incomeMiscellaneous17Total other revenuesTotal revenuesExpenses:Salaries and wagesEmployee benefitsMaterials and suppliesFuelTransportation and allowancesContracted services and feesInsuranceProvision for marine accidentsProvision for obsolete inventoryOther expenses139Capitalized labor and materials14Total expensesIncome before fees and 3,1721,426,6271,453,873Fees per net tonPanamanian Treasury (Tesoro Nacional) public service 0)(1,874)(68,503)Net income151,006,913The accompanying notes are an integral part of these financial statements.-3-1,028,462

Panama Canal AuthorityStatement of changes in equityFor the year ended September 30, 2009(In thousands of balboas)Retained EarningsNotesBalance as of September 30, 2007Transfer to Panamanian 904,9681,475,151----11Net incomeAdjustmentfor ons to the investment program10-579,032(579,032)--Increase in equity ,852-4,408,58111--(343,852)-(343,852)Net incomeCash flow hedge7--Contributions to the investment program10-507,868Increase in equity reserves10-64,9251,904,9682,732,554Balance as of September 30, 2008Transfer to Panamanian TreasuryBalance as of September 30, 2009The accompanying notes are an integral part of these financial 8)--(64,925)--6,4785,078,120434,120

Panama Canal AuthorityStatement of cash flowsFor the year ended September 30, 2009(In thousands of balboas)NotesCash flows from operating activities:Net incomeAdjustments for:DepreciationLoss on disposal of fixed assetProvision for obsolete inventoryProvision for marine accidentsSeverance payableChanges in operating assets and liabilities:Accounts receivableInventoriesAccrued interest receivable and other assetsCurrent liabilities20091,006,913491317Net cash provided by operating activities67Net cash used in investing activitiesCash flows from financing activities:Transfer to Panamanian 5)3,77247,1571,093,286Cash flows from investing activities:Net increase of fixed assetNet decrease (increase) in investmentsNet increase in time deposits, over 90 daysHedge 1)(343,852)(486,414)Net (decrease) increase in cash and cash equivalents(38,433)Cash and cash equivalents at beginning of the year250,658242,479212,225250,658(1,440)(2,323)Cash and cash equivalents at end of the year5Investing activities that did not represent cashoutflowsFixed assets - capitalized depreciation4, 14The accompanying notes are an integral part of these financial statements.-5-8,179

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)1.General InformationThe Panama Canal Authority (PCA) is an autonomous agency of the Government ofPanama, established in conformity with Article 316 of the Political Constitution of theRepublic of Panama. The PCA is responsible for the administration, operation,conservation, maintenance, modernization, and other related activities of the Panama Canal(the Canal), that are necessary to ensure the safe, uninterrupted, efficient and profitableoperation of the Canal in accordance with the constitutional and legal regulations in effect.The PCA has its own patrimony and the right to manage it. The PCA was organized onJune 11, 1997 under Law No.19 (Organic Law).The PCA, in coordination with government entities designated by law, is also responsiblefor the management, maintenance, use and conservation of the water resources of the Canalwatershed, including lakes and their tributary streams.With the expiration of the 1977 Torrijos-Carter Treaty at noon on December 31, 1999, thePanama Canal reverted to the Republic of Panama free of debts and liens, becoming aninalienable patrimony of the Republic of Panama, open to the peaceful and uninterruptedpassage of vessels of all nations and whose use will be subject to the requirements andconditions established by the Political Constitution of Panama, the Organic Law of thePCA, and its management.As of September 30, 2009, the PCA had a total of 9,671 (2008: 9,447) employees, of which8,147 (2008: 7,797) were permanent and 1,524 (2008: 1,650) were temporary.The main PCA offices are located at the Administration Building #101, Balboa, Republicof Panama.The financial statements of the Panama Canal Authority for the period ended as ofSeptember 30, 2009, were approved by the Board of Directors and authorized for theirissuance on December 17, 2009.-6-

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)2.Adoption of New and Revised International Financial Reporting StandardsAt the date of these financial statements, the following standards and interpretations wereissued but not yet in effect:Standard and InterpretationEffective DateIAS 1 (Revised) - Presentation ofFinancial StatementsJanuary 1, 2009IFRS 8 - Operating segments, replacesIAS 14, Segment reportingJanuary 1, 2009IAS 23 (Revised) - Borrowing costsJanuary 1, 2009IAS 32 (Amendment) FinancialInstrumentsJanuary 1, 2009IFRIC 14 - The limit on a defined benefitasset, minimum funding requirements andtheir interactionJanuary 1, 2009The Administration considers that the adoption of these standards and interpretationsapplicable to future periods, would not have an important effect in PCA’s financialstatements.-7-

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)3. Significant accounting policies3.1.Statement of compliancePCA’s financial statements, including the comparatives figures, have been prepared inaccordance with International Financial Reporting Standards, issued by theInternational Accounting Standard Board (“IASB”) and the interpretations issued bythe International Financial Reporting Interpretations Committee (IFRIC) of the IASB.3.2.Basis of presentationThe financial statements have been prepared under the historical cost basis, except forthe recognition of changes in foreign currency of hedge instruments. PCA appliedaccounting policies consistent with those applied in the prior year.3.3.Use of estimatesThese financial statements are prepared in conformity with IFRS which requiresmanagement to make estimates and assumptions. These assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Future actual results could differ from thoseestimates. Significant estimates for these financial statements include the provisionfor marine accident claims, provision for obsolete inventory of materials and supplies,and the determination of the useful life of fixed assets.3.4.Properties, plant, and equipmentItems of properties, plant, and equipment with a value of B/.5 or more are recorded atcost. The cost of items that are not capitalized or under B/.5 is expensed as incurred.Depreciation is calculated using the straight-line method over the following estimateduseful lives:BuildingsStructuresEquipment25 - 75 years5 - 100 years3 - 75 years-8-

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)The assets’ useful lives are reviewed periodically to ensure that the depreciation periodis consistent with the expected economic benefit of the components of properties,plant, and equipment.The gain or loss resulting from the retirement or disposal of an asset is the differencebetween the net proceeds and the net book value of the asset. The gain or loss isreflected in the statement of income when incurred, except for buildings and propertiesthat were received from the Government of Panama, which are charged against equitywhen they are demolished or returned to the Government of Panama once it isdetermined they have no operating use for the PCA.Maintenance and repairs are expensed as incurred, while major improvements arecapitalized. Dredging costs incurred for recurrent maintenance of the waterway, as aresult of landslides and erosion, are expensed. Dredging costs for substantialimprovements to the waterway are capitalized and depreciated over their estimateduseful lives.Construction in progress represents plant and properties under construction andincludes the cost construction and other direct costs. These assets are depreciatedwhen completed and placed in operation.3.5.Impairment of long term assetsAssets that are subject to amortization are reviewed annually to identify anyimpairment losses, whenever events or changes in circumstances indicate that thecarrying amounts may not be recoverable. An impairment loss is recognized for theamount by which an asset’s carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of an asset’s net selling price and its value in use.3.6.Financial instrumentsThe financial assets and liabilities are recognized in the balance sheet of the PCAwhen they become a contractual obligation of the instrument. Cash, cash equivalents and bank deposits - Consist of cash on hand, deposits incurrent and saving accounts, and time deposits, free of liens and with originalmaturity dates of less than 90 days or over 90 days not exceeding one year.-9-

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas) Accounts receivable - Accounts receivable are recorded at their face value. Classification of financial assets and liabilities into current or non-current Financial assets and liabilities are classified according to their maturity date on thebalance sheet. Current assets and liabilities are those with a maturity date that is lessthan or equal to twelve months. Non-current assets and liabilities are those with amaturity date greater than twelve months. Write-off of financial assets - Financial assets are written off only when thecontractual rights to receive cash flows have expired; or where in the transfer offinancial assets, substantially all the risks and benefits inherent in ownership of theasset were transferred to another entity. If the entity does not transfer and does notretain substantially all the risks and benefits of ownership and continues to control thetransferred asset, the entity recognizes its retained interest in the asset as well as aliability for the amount it may have to pay. If the entity retains substantially all therisks and benefits of ownership of the financial asset transferred, the entity continuesto recognize the financial asset and also recognizes a liability secured by the amountreceived. Impairment of financial assets - Financial assets are assessed at the end of eachreporting period to determine whether there is evidence of impairment. A financialasset is impaired if there is evidence that as a result of one or more events thatoccurred after the initial recognition of the asset there has been an impact on theestimated future cash flows of the financial asset. Accounts payable - Accounts payable do not earn interests explicitly and are recordedat their face value. Write-off of financial liabilities - The entity removes financial liabilities when, andonly when, the entity’s obligations are discharged, cancelled or expired.3.7.Investment securitiesPurchases of investments are recognized on the settlement date, the date on whichPCA pays and receives the asset.Investment securities are acquired with the intention to be held to maturity and arerecorded at amortized cost. Amortized cost is the initial cost of the investment,adjusted by the cumulative amortization of any discount or premium on acquisition.The amortization of the discount or premium is recognized as an increase or decreaseof interest income in the statement of income.- 10 -

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)3.8.Hedge instrumentThe entity recognizes at fair value all assets or liabilities arising from operations withderivative financial instruments on the balance sheet, independently of the purpose forholding them. Fair value is determined based on quoted market prices and, when nottraded in an active market, is determined by using valuation techniques accepted in thefinancial sector.When hedging instruments are contracted with the aim of hedging risks and complywith all hedging requirements, their designation is documented at the beginning of thehedging relationship, describing the objective, characteristics, accounting recognition,and how effectiveness will be measured, as applicable to that operation.Hedging instruments designated as hedges recognize changes in valuation according tothe type of hedging involved: (1) for fair value hedges, fluctuations in the fair value ofthe derivative, as well as fluctuations of the hedged item are valued at fair value andare recognized in profit and loss; (2) for cash flow hedges, the effective portion istemporarily recognized in equity as comprehensive income and recycled in the incomestatement when the hedge item affects profit or loss; the ineffective portion isrecognized immediately in profit and loss.The entity shall discontinue the hedge accounting when the derivative expires, is sold,terminated or exercised, when the hedging instrument does not achieve a higheffectiveness to compensate for the changes in fair value or cash flows of the hedgeditem, or when the entity decides to cancel the hedge designation.In cash flow hedges, when hedge accounting is discontinued, the amounts recorded inequity as comprehensive income shall remain in equity until the forecasted transactionor firm commitment affect profit and loss. When a forecasted transaction or firmcommitment is no longer expected to occur, the cumulative gains or losses that werereported in equity as comprehensive income are immediately transferred to the incomestatement. If the hedging of a forecasted transaction had been shown as effective andlater does not comply with the effectiveness test, the accumulated effects in thecomprehensive income equity account are carried proportionally to the incomestatement to the extent that the forecasted asset or liability affects the profit and loss.- 11 -

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)All investments, deposits and/or certificates of deposits of the PCA, are denominatedin the currency of the United States of America, or in other currencies exclusively forpayment to vendors for contracts awarded in such currencies, without the intention ofspeculating and with the sole purpose of mitigating the foreign currency exchange risk.Topics related to foreign exchange rate volatility are documented with the purpose ofmitigating the risk related to payments of the awarded contracts. Deposits are renewedfor remaining balances as periodic payments are made and interests are generated.Interests are considered part of the hedge, and are capitalized to the deposit until theentire contract is paid. To determine the prospective effectiveness, a historiccorrelation is made between the variations in the exchange rate of the deposit with thevariations experienced by the commitment of the purchase contracted. The methodused to determine the retrospective effectiveness is the dollar off-set method forcumulative changes.3.9.InventoriesInventories of materials, operating supplies, and fuel are presented at the lower of costand net realizable value. Inventories are valued based on the average cost methodaccording to the valuation of suppliers which after the allowance for obsolescence ofmaterials and supplies inventory, does not exceed the realizable value.3.10. Allowance for obsolete materials and suppliesThe inventory of supplies and materials is evaluated annually to determine theadequacy of stock levels. If determined to be excessive, these should be reduced due toobsolescence, impairment, diminishment of quality, slow turnover or as a result of notbeing useful for the operation and functioning of the Canal.If any inventory item of supplies and materials complies with the previously mentionedcharacteristics, the allowance is adjusted to its reasonable value to recognize theprobable loss.3.11. Revenue recognitionRevenues are recognized when it is probable that future economic benefits will flow tothe PCA and those benefits can be measured reliably. The following specific criteriahave to be complied before revenues are recognized:- 12 -

Panama Canal AuthorityNotes to financial statementsSeptember 30, 2009(In thousands of balboas)Toll revenueThe toll revenue is recognized once vessels complete their transits through the Canal.Electric power sales revenueThe PCA has the capacity to produce both hydropower and thermal power to generateelectricity needed for canal operations. Excess production is sold in the open marketthrough contracts with distributors of electricity and other third parties.Potable water sales revenueThe PCA has the capacity to produce and supply potable water for consumption within itsfacilities. Surplus production is sold to the National Institute of Pipelines and Sewerage(Instituto de Acueductos y Alcantarillados Nacionales).Services renderedRevenues from other services are recognized when services are rendered.InterestInterest income on bank deposits and investments are recognized as accrued.3.12. Embedded derivativesDerivatives may be embedded in other contractual agreement (a “host contract”). Theentity accounts for the embedded derivative separately when the host contract is notcarried at fair value by means of profit or loss, and if because of the char

IAS 1 (Revised) - Presentation of Financial Statements January 1, 2009 IFRS 8 - Operating segments, replaces IAS 14, Segment reporting January 1, 2009 IAS 23 (Revised) - Borrowing costs January 1, 2009 IAS 32 (Amendment) Financial Instruments January 1, 2009 IFRIC 14 - The limit on a defined benefit asset, minimum funding requirements and

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