SEC En Banc Case No. 02-11-230 ABACUS EXPLORATION AND DEVELOPMENT CORPORATION, Appellant, versus COMPANY REGISTRATION AND MONITORING DEPARTMENT, Appellee.

Securities and Exchange Commission Republlc of the Philippines Department of Finang

ABACUS EXPLORATION AND DEVELOPMENT CORPORATION

Appellant,

versus Imposition of Penalty Under SEC SEC En Banc Case No. 02-11-230 For: Review ofCRMD's

Circular No. 8 Series 2009 Memorandum

MONITORING DEPARTMENT, COMPANY REGISTRATION AND

Appellee.

DECISION

exchange of mining rights despite the approval of the increase in authorized January 19, 2011 of the Company Registration and Monitoring Department Memorandum Circular No. 8 Series of 2009 consisting of "failing to record in its 2008 and 2009 Financial Statement the issuance of capital stock in and Development Corporation (ACEDC) assailing the Letter-Order dated (CRMD) directing Appellant to "settle the imposable fine assessed by the Office of the General Accountant (OGA)" for violation of SEC capital stock in 2008." Before the Commission is the Appeal of Abacus Coal Exploration

FACTS

authorized capital stock of P20 million of which P5 million was subscribed by ACRHI. on November 9, 2007 to engage in commercial exploration and development of coal in the Philippines. It is a wholly-owned subsidiary of Abacus Consolidated Resources and Holdings, Inc. (ACRHI). It has an ACEDC is a domestic corporation registered with the Commission

coal mining rights with appraised value of P 2.7 billion' in exchange of ACEDC's P295 million worth of new shares to gain further control of the On September 23, 2008, ACRHI executed a Deed of Assignment of

1 Round off of P2,693,403,665.00

Abacus Coal Exploration and Development Corporation v. CRMD SEC En Banc Case No. 02-11-230 Page 2 of 10 Decision

latter. The valuation of coal mining rights was made by Cuervo Appraisers, Inc., an SEC accredited appraiser.

was fully subscribed and paid by ACRHI by way of assignment of coal mining rights. 300 million which'was subsequently approved by the Commission on December 24, 2008. The issuance of P295 million worth of new shares application to increase its authorized capital stock from P 20 million to P On November 13, 2008, ACEDC filed'with the Commission an

exchange of its coal mining rights are as follows: In sum, ACRHI's total subscription2 to ACEDC's shares in

1,500,000,000 Shares Shares (P 0.01 Par) P 15,000,000.00 Value From the remaining unsubscribed Description capital

28,000,000,000 Shares P 280,000,000.00 stock of ACEDC increase in ACEDC's SEC-approved

authorized capital

29,500,000,000 Shares P 295,000,000.00 Total Subscription of P 20,000,000.00 to P 300,000,000.00 stock from

ACRHI in exchange of coal mining rights

: and its 2009 audited financial statements on May 7, 2010, respectively. ACEDC filed its 2008 audited financial statements on May 7, 2009

the increased capital stock and the acquired coal mining rights. Instead. Appellant disclosed this information in the Notes to Financial Statements. In both 2008 and 2009, Appellant did not record in its Balance Sheet

material deficiencies and material misstatements in its 2008 and 2009 Notice of Conference to show cause why it should not be penalized for audited financial statements. On November 30, 2010, Appellant received from the CRMD a

through an Order dated January 19, 2011 directed Appellant to settle the Despite Appellant's explanation in the conference, the CRMD

2 Deed of Assignment dated September 23, 2008

Decision Page 3 of 10 SEC En Banc Case No. 02-11-230 Abacus Coal Exploration and Development Corporation v. CRMD

imposable fine assessed by OGA for violation of SEC Memorandum Circular No. 8 Series of 2009, summarized below:

Total 2008 AFS 2009 AFS Report P295,000,000.00 assets are understated by P295,000,000.00 Stockholder's equity and total Stockholder's equity and total assets are understated by 1/10 of 1% of the amount of misstatement, whichever is higher Penalty imposable on P295,000.00 P295,000.00 P590,000.00 ACEDC3

raised the following grounds: Appellant timely filed its Appeal on February 28, 2011 where it

a. Appellant did not commit material misstatements in its 2008 and on 23 September 2008 is concerned. 2009 financial statements, insofar as the execution of the Deed of Assignment of Mining Rights in Exchange for Shares of Stock

b. Appellant did not make a quantitative disclosure for the avoid making misleading statements or misrepresentations. the share issuance. Appellant thereby exercised prudence and conservatism in accordance with SRC Rule 68 and should not be deemed to have committed material misstatements in its 2008 and 2009 financial statements. implicit in the SEC's 24 December 2008 approval of Appellant's Nevertheless, for the sake of transparency Appellant still made a mining rights in its 2008 and 2009 financial statements due to a SEC's approval of Appellant's recording of mining rights qualitative disclosure of both the acquisition of mining rights and acquisition of mining rights and of the share in exchange for conflict between accounting standards, on the one hand, and the application for increase in capital stock, on the other, in order to

directing the CRMD to file its Reply to Appellant's Memorandum on On March 1, 2011, the Commission En Banc' issued an Order

3 Based on SEC Memorandum Circular No. 8, Series of 2009.

Abacus Coal Exploration and Development Corporation v. CRMD SEC En Banc Case No. 02-11-230 Decision Page 4 of 10

Appeal dated February 25, 2011. Since there is no record of any Reply. Appellee is deemed to have waived its right to file the same.

resolution of this appeal. Based on the foregoing, the following are the key issues for the

ISSUES

I. its 2008 and 2009 audited financial statements; and Whether Appellant committed material deficiencies in

H. Whether Appellant committed material misstatements

in its 2008 and 2009 audited financial statements.

DISCUSSION

Material Deficiencies in the Audited Financial Statements Appellant 's 2008 and 2009

financial statements: The following shall be considered a material deficiency4 in the

() Any of the following is not submitted with the FS.

(1) Balance Sheet; ((2 3 4 (6 Income Statement of Statement of Receipts and Statement of Management's Responsibility; Statement of Changes in Equity or Fund Balance: Notes to Financial Statements; Cash Flow Statement; Disbursements;

(7) Auditor's Report.

( The following shall likewise render the financial statements

significantly not compliant;

(1) If a listed company, public company, mutual fund or qualified due to a deviation from the applicable financial issuer of securities to the public, the auditor's opinion is reporting framework. However, for listed banks, a qualified opinion of the external auditor shall not be considered a non-compliance with SRC Rule 68 if the

4 SEC MC No. 8, Series of 2009

SEC En Banc Case No. 02-11-230 Page 5 of 10 Abacus Coal Exploration and Development Corporation v. CRMD Decision

qualification pertains to a deviation adopted by the Bangko Sentral ng Pilipinas as part of its prudential reporting requirements;

(2) The auditor's report is substantially not compliant with the wording prescribed by Philippine Standards on Audities (PSA) No. 700, as revise, and other applicable

auditing standards and practices.

(iii) The Statement of Management's responsibility is not signed

of a listed or public company: by the prescribed signatories and/or not notarized in the case

(iv There is no accounting policy for a significant account;

For purposes of these Guidelines a significant account means a Balance Sheet or Income Statement Item, the amount of which is equivalent to:

For listed companies, public companies, mutual funds, other issuers of securities to the public, and pre- need companies

(1)5% or more of Total Current asset, if it is one of the

2 5% or more of Total Non-Current Liabilities, if it is current asset items:

(5) 5% or more of Total Stockholder's Equity, if it is (6) 5% or more of the Gross Income, Cost of 3 4 5% or more of Total Current Liabilities, if it is one 5% or more of Total Long-Term Liabilities, if it is if there is capital deficiency; one of the equity items or the amount of Total Assets of the current liabilities items; one of the non-current asset items; one of the long-term liabilities;

Sales/Services or the Total Operating Expenses, as may be applicable.

10% or more of the items mentioned above. For all other corporations, the threshold shall be

The required disclosures or presentations under the applicable financial reporting framework and SRC Rule 68/68.1 for a significant account are not provided in the financial statements. In case, however of disclosures on

Page 6 of 10 SEC En Banc Case No. 02-11-230 Decision Abacus Coal Exploration and Development Corporation v. CRMD

of the amount involved if the reporting company is a public related party transactions required under PAs 24, any company, listed company, issuer of securities to the public or deficiency thereof shall be considered significant regardless

secondary licensee of the Commission.

(vi) Five of more of the following minor deficiencies are noted:

(1) The financial statements are not presented in prescribed comparative format; (2) There is no distinction between the current and non-current

portion of assets of liabilities except in cases where PAS 1 allows non-classification; (3 There are no cross-references to the notes to financial

statements; 4 The number of disclosure items that are not provided for

significant account does not exceed two; (5 The Statement of Management's Responsibility is not in full conformity with the prescribed wording of SRC Rule

(6) Such other deficiencies as the Commission may consider 68 or 68.1:

minor.

from indicating the amount or value of the mining rights as well as the corresponding amount or value of the shares issued in exchange for the Appellant, in its Appeal Memorandum admitted that it refrained

mining rights in both the Balance Sheet and Notes to Financial Statements.

Notes to Financial Statements The following disclosures appear in Appellant's 2008 and 2009

Note 55:

incurred for the exploration and administration of coal mining property situated in Tago and Marihatag, Surigao del Sur. Deferred coal exploration costs pertain to exploration expenditures

the DOE on January 10, 2007 to ACRHI. On September 23, 2008, the COC was transferred by ACRHI in exchange for the company's shares. COC 148 was originally granted by the Philippine Government through

Note 76:

6 2008 notes to financial statements of ACEDC 2008 and 2009 Notes to financial statements of ACEDC

SEC En Banc Case No. 02-11-230 Abacus Coal Exploration and Development Corporation v. CRMD Decision Page 7 of 10

As of December 31. 2008 and 2007, the number of shares subscribed and issued and outstanding totaled 554,751,200 and 250,000,000 shares at par value of P0.01, for a total amount of P5,547,512, and P2,500,000, respectively

by the SEC on December 24, 2008. P20,000,000 diyided into 2,000,000,000 shares to P300,000,000 divided into 30,000,000,000 shares with a par value of P0.01. The increase was approved During the year, the Company increase its authorized share capital from

Note 77:

total amount of P5,547,512, respectively. issued and outstanding totaled 554,751,200 shares at a par value of P0.01, for a As of December 31, 2009 and 2008, the number of shares subscribed

P20,000,000 divided into 2,000,000,000 shares to P30,000,000,000 shares with stamp taxes amounting to P1,475,000. a par value of P0.01. In relation to the increase, the Company paid documentary In 2008, the Company increase its authorized share capital from

Financial Statements are incomplete/deficient not only for the missing The above-stated disclosures made by the Appellant in its Notes to

amounts or values but also for failure to make a clear connection to the Deed of Assignment of Mining Rights by ACHRI in Exchange for Appellant's Shares of stock worth P295 million.

incomplete/deficient disclosures for significant accounts in its audited financial statements which constitute a violation of the SEC Memorandum Thus, Appellant committed material deficiencies by

Circular No. 8, Series of 2009.

Material Misstatements in the Appellant's 2008 and 2009 Financial Statements

The following shall be considered a material misstatement8 in the financial statements:

) An accounting policy for a significant account is not consistent with PRS or GAAP, e.g., for non-publicly

2 An accounting policy for significant account is not accountable entities or pre-need companies; consistently applied between periods or to similar transactions and events (inconsistent application); or

8 SEC MC No. 8, Series of 2009 7 2009 notes to financial statements of ACEDC

Abacus Coal Exploration and Development Corporation v. CRMD SEC En Banc Case No. 02-11-230 Decision Page 8 of 10

(3 account is unreasonable and resulted to material The estimate or assumption used on a significant

4 misstatement of the financial statements; There is more than one (minor) misstatement and the

() aggregate amount involved for said misstatement meets the test of materiality; The financial statements of a corporation with a subsidiary or subsidiaries are not presented on a consolidated basis in violation of PAS 27; (6 Such other misstatements in the financial statement,

asset, liability, or equity, that the Commission may consider material. i.e., overstatement or understatement of income,

influence the economic decisions of users taken on the basis of the financial statements. Information is material if its omission or misstatement could

The Appellant's 2008 and 2009 audited financial statements show that the Appellant failed to record the issuance of capital stock in exchange

its authorized capital stock in 2008. This resulted in the understatement of of the mining rights despite the Commission's approval of the increase of

its Stockholder's Equity. Further, it did not capitalize the amount or value

Although the Appellant properly expensed the exploration costs of the of the mining rights acquired in exchange of the shares issued to ACRHI mineral resources, it failed to capitalize/recognize the corresponding

and 2009 audited financial statements have been misstated each by 2008 shows the following: understatement of its Total Assets. According to OGA, Appellant's 2008 intangible asset or the mining rights itself which resulted in the P295,000,000. Appellant's Balance Sheet as of December 31, 2009 and

Current Assets Total Current Assets Other Receivable Advances to related party Cash 2009 8,319,144 8,200,000 99,144 20,000 ASSETS 2008 8,200,000 8,344,843 124,843 20,000

Non-Current Assets Total Non-Current Assets Deferred coal exploration costs Other non-current asset 6,687,300 6,681,872 5,428 6,681,872 6,686,856 4,984

9 SRC Rule 68, as amended

Decision SEC En Banc Case No. 02-11-230 Page 9 of 10 Abacus Coal Exploration and Development Corporation v. CRMD

Total Assets 15,006,444 15,031,699

Current Liabilities Total Current Liabilities party payables Advances from a related Accrued expenses and other Income Tax Payable LIABILITIES and EQUITY 2,460,412 2,219,520 240,892 2,229,520 3,650,642 1,421,086 36

TOTAL LIABILITIES AND Total Equity EQUITY Equity repayable in equity shares Advances from the parent Deficit Share Capital (2,925,988) 15,006,444 12,546,032 5,547,512 9,924,508 11,381,057 15,031,699 6,728,726 (895,181) 5,547,512

the asset and equity accounts in its 2008 and 2009 audited financial statements which constitute a violation of the SEC Memorandum Circular No. 8, Series of 2009. Thus, Appellant committed material misstatements by understating

value of the mining rights as an asset and the value of the shares issued in mentioned by the Appellant is irrelevant as there was already a Commission-approved"increase of authorized capital stock before the and the shares issued to ACHRI were readily available for reporting. The 6 and PAS 3 8) covering exploration for and evaluation of mineral resources issuance of its audited financial statements. The values of the mining rights Appellant disregarded the approved increase when it did not recognize the exchange for the mining rights as an equity. Lastly, the supposed conflict between accounting standards (PFRS

the Appellant. The penalty being appealed was computed based on the total amount of par value shares issued in exchange at P295 million without considering the fair value market value (FMV) of the mining rights. The OGA used the amount of P295 million in the computation of the penalty CRMD. However, there is a need to re-compute the penalty imposable to Commission does not find any reason to overturn the assailed Order of the In view of the foregoing discussions on the issues on appeal, the

Page 10 of 10 SEC En Banc Case No. 02-11-230 Abacus Coal Exploration and Devefopment Corporation v. CRMD Decision

billion subject to the maximum penalty cap of P1 Million12 per year of equivalent to the total fair value of mining rights assigned to ACEDC misstatement. imposed by CRMD based on the representation of ACEDC that such amount is the fair market value of the mining rights. After re-evaluation1o the OGA confirmed that the penalty should be based on the misstatements of asset (mining rights) and equity (issued shares and APIC) which is amounting to P2.7 billion which was not recorded and disclosed in the fines"1, the penalty should be 1/10 of 1% of the appraised value of P 2.7 Audited Financial Statements. Following the Commission's scale of

billion. Further, the CRMD-FAAD is hereby directed to investigate the misstatements carried forward to succeeding audited financial statements and if necessary impose additional penalties until such are corrected. reflect the total misstatements of asset and equity amounting to P2.7 misstatement, or a total of P2 Million, pursuant to Section 54.1 (ii) of Republic Act No. 8799, otherwise known as the Securities Regulation 2008 and 2009 Audited Financial Statements. The Appellant is hereby DENIED for lack of merit. The Order of the CRMD dated 19 January 2011 is hereby AFFIRMED with MODIFICATION as to imposable penalty Appellant is now hereby ordered to pay the fine of P1 Million per year of Code (SRC), for the material deficiencies and material misstatements in its ordered to correct its 2008 and 2009 Audited Financial Statements to WHEREFORE, premises considered, the instant appeal is hereby

SO ORDERED.

Pasay City, Philippines; 16 July 2019

EMIL C1 $hairperson 6YB. AQUINO

ANTONIETA F. IBE Commissioner aTaLa EPHYRO LUIS B. Commissioner AMATONG

JAVEY PAUL D. FRANCISCO Commissioner KELVIN LESTER K.LEE Commissioner

10 Memorandum of OGA addressed to OGC dated 31 May 2019, Subject: Re-evaluation of Abacus Coal 11 SEC Memorandum Circular No.'8, Series of 2009 12 Section 54.1 (ii) of the Securities Regulation Code Exploration and Development Corporation Regarding Imposition of Penalty