QuestionsQuestions (CDA MEMORANDUM CIRCULAR NO. 2011-09)
MC 2011-09 is issued pursuant to RA 9520 (Philippine Cooperative Code of 2008). It specifically cites Rule III of its IRR requiring transformed/existing cooperatives to maintain separate books of accounts for each business activity, and Item V of MC No. 2009-04 prescribing the Standard Chart of Accounts (SCA), including separate financial reports per type of activity for cooperatives with multi-business activities.
Ring-fencing is the segregation of activities, assets and liabilities, and revenues and costs generated by a specific economic undertaking from the general business of the MPC. It isolates water service operations as an autonomous enterprise (without changing the MPC’s legal personality) and requires the separation of financial accounts through a subsidiary accounting system.
The guidelines provide information and rules for adopting ring-fencing to separate water utility operations from the general accounts of the MPC, introduce new accounts for uniformity, facilitate analysis and evaluation of financial management performance, and provide the basis for monitoring and supervision of water service operations.
It enables: (1) more accurate, reliable financial reports for water operations; (2) better monitoring of collection efficiency and operational costs, including costs supported by other units; (3) a transparent basis for tariff-setting through relevant financial statements (e.g., PEER, revenues, expenses); and (4) improved tracking/monitoring of financial performance and accountability, including more precise determination of investment needs.
MC 2011-09 notes that cooperative accounting uses a modified accrual method where revenues are recognized when collected, not when realized. It states that this can lead to inaccurate income reporting for the water service unit and does not automatically monitor collection performance against receivables under accrual. Ring-fencing is presented as enabling use of the accrual method for water operations so that collection efficiency can be more easily monitored.
Phase 1 involves preparatory activities and reconstruction of water utility accounts still within the MPC’s general accounting records. Phase 2 occurs once the water utility has its own budget and separate books of accounts; it becomes viable and sustainable. In Phase 2 it keeps separate financial accounting and reporting systems and may even maintain its own separate bank account, making it “automatically ring-fenced” due to autonomous reporting.
(1) Board commitment via a Board Resolution to adopt ring-fencing; (2) account reconstruction to establish beginning balances using the full cost method; (3) interim accounting procedures, including accrual-based revenue based on total bills issued and capturing all relevant costs, while maintaining a separate set of books and preparing ring-fenced financial statements; (4) establish a separate bank account for collections/disbursements and prepare a full budget using full cost accounting; (5) prepare, adopt, and implement ring-fencing financial management guidelines to institutionalize separate books and periodic ring-fenced reports and support business planning; and (6) possible shift/spin-off to a fully self-sustaining entity (subject to GA approval and applicable laws), when conditions are met.
The Circular states that beginning balances are established using the full cost method during account reconstruction, and that the ring-fenced unit should adopt full cost accounting when preparing its full budget. The purpose is to ensure all operating and running costs of the water utility are captured and reflected for accurate reporting and planning.
Implementation starts with the issuance by the Board of Directors (BOD) of a Board Resolution affirming commitment to adopt ring-fencing.
It provides that a separate bank account should be established for the water utility where collections can be deposited and disbursements can be paid from.
The MPC (with approval of the General Assembly and subject to applicable laws of incorporation) may spin off when the water operations have: (1) dedicated staff members or assigned shared staff; (2) a separate financial and accounting system; (3) a full cost budget considering all operating and running costs; and (4) fiscal autonomy to use funds for system expansion and improvement.
The ultimate goal is to form a self-sustaining unit within the MPC operating without any change in legal personality. Alternatively, it notes ring-fencing can lead to forming a subsidiary cooperative with a separate legal entity or charter.
The ring-fenced financial management system generally follows the CDA Standard Chart of Accounts for all cooperatives. For water-service-specific and exclusive accounts, some account titles and descriptions are customized to fit water supply services.
Examples include: (1) 14150 Water Utility Plant—cost of property and equipment used for water utility operation/distribution; (2) 14151 Accumulated Depreciation—total depreciation on Utility Plant set up periodically; (3) 17600 Due from Branch/Subsidiary—receivables from head office/branches/subsidiary; (4) 24830 Due to Head Office—inter-office transactions recorded in HO/branch/subsidiary and closed at end of period; (5) 40210 Water Service Income—amount collected for various services; (6) 40211 Other Service Income—other water service revenues, with subsidiary ledger per sub-account.
It states that ring-fenced financial statements provide accurate information about PEER, revenues, and expenses that will provide useful inputs in reviewing the adequacy of tariffs charged by the MPC, supported by more transparent and reliable cost and performance data.
It says that when financial reporting of the utility’s operations is already autonomous—i.e., it has separate budgeting, separate financial accounting/reporting system, and possibly separate bank account—then it is now automatically ring-fenced because financial reporting is autonomous.
It takes effect upon fifteen (15) days from approval by the Board of Administrators and submission of a copy to the Office of the National Administrative Register (ONAR).