Financial Ratios and Financial Statements

Regulations on financial ratios and financial statements

The Philippines, with a growing middle class and a youthful population, is one of the world’s preferred investment destinations[1]. And with above-trend growth rates expected to persist in the coming years, opportunities abound for investors seeking to get in on the action.

However, we’ve noticed that many foreign corporations that want to set up an office in the Philippines are unaware of two key requirements set by the country’s regulators, the SEC or the Securities and Exchange Commission in Particular: adequate financial ratios, and audited or certified financial statements. This is in addition to the requirements under the Foreign Investment Act or FIA.

These requirements were put in place to ensure the viability and sustainability of foreign firms that enter the country. Knowing them beforehand will help you better prepare your application packet and lower the chances of rejection.

Adequate financial ratios

The required financial ratios vary depending on the type of corporation you want to put up. The benchmark values for a Stock Branch Office, Regional Operating Head Quarters or ROHQ, Regional Area Head Quarters or RAHQ, and Representative Office are as follows:

Ratio Formula Benchmark Value
Solvency Total Assets/Total Liabilities 1:1
Liquidity Current Assets/Current Liabilities 1:1
Debt-to-equity Total Liabilities/Equity 3:1

Meanwhile, the requirement for Stock Representative Office, Non-Stock Branch Office, and Non-Stock Representative Office is:

Ratio Formula Benchmark Value
Solvency Total Assets/Total Liabilities 1:1

If the Solvency Ratio isn’t within the benchmark value, the application is automatically rejected. If the liquidity ratio or debt-to equity ratio (or both) falls short, you are required to submit a Surety Bond worth PhP 1 million, or about USD 20,000.

Financial statements

Another oft-overlooked requirement is the need for audited financial statements (AFS). If you are based in a country that already requires AFS, submit the AFS covering the immediately preceding year at the time of your application. In case the AFS is more than a year old, you must submit the latest available AFS, along with the unaudited financial statements that are not more than a year old. Note that the Philippines’ Securities and Exchange Commission (SEC) requires both audited and unaudited financial statements to be authenticated by the Philippine Consulate or Embassy.

If you are based in a country that doesn’t require financial statements to be audited, you must submit the unaudited statements that are not more than a year old. Again, these financial statements must be authenticated by the Philippine Consulate or Embassy covering your home country. In addition, you must prepare a Certification signed under oath by your firm’s legal counsel, or by an officer of your home country’s regulatory institution, that you are not required to prepare and submit audited financial statements. This certification must clearly cite the law or regulation on which it is based. Attach a copy of the law or regulation for verification.