August 15, 2005

The Securities and Exchange Commission (SEC) issued Circular No. 19, Series of 2004 on the implementation of Philippine Accounting Standards (PAS) 39 in line with the International Accounting Standards (IAS) beginning with annual financial statements ending December 31, 2005. Consequently, the SEC required that the valuation of all mutual funds converted from an Accrual Method to a Mark-to-Market Method (MTM) starting September 30, 2005. Accordingly, the Prudentialife Fixed Income Fund, Inc. (PFIFI) will be converted from an Accrual to MTM valuation on the said date.

1. Why is the SEC changing the accounting standards in the Philippines?

The SEC committed to adopt the International Accounting Standards in the Philippines effective December 31, 2005 in order to enhance the comparability, understandability, and reliability of financial statements; enhance the country's global competitiveness; and promote greater investor protection.

2. What are International Accounting Standards (IAS)?

The International Accounting Standards or IAS is a set of globally recognized accounting standards and procedures relating to the presentation of financial statements. These are international benchmarks in accounting rules. The main objective in formulating and developing the same is to establish a worldwide standard on accounting reporting process and procedures.

3. Who formulates the IAS?

The International Accounting Standards Board (IASB), an independent, privately funded organization based in the United Kingdom, is solely responsible for setting the IAS. Its members come from nine countries with a variety of functional backgrounds. The IASB is committed "to developing, in the public interest, a single set of high quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements." (IASB Mission Statement from http://www.iasc.og.uk)

4. What accounting method has PFIFI been using?

PFIFI's assets are currently valued on an accrual basis, also known as the amortized cost method of accounting. This means that the method records the value of each asset in the Fund at its purchase price, plus coupon (or interest) payments which are accrued on a daily basis. Hence, the accrual method does not reflect the actual price at which the assets in the Fund can be traded in the market.

5. What is the effect of the new accounting standard on my investments?

The regulation is intended to ensure that all mutual funds reflect the fair value of the underlying investments as of a given reporting period. The MTM method computes the value of each asset in a Fund at the prevailing market price as of the end of a given period.

6. Do fixed income securities have prices?

Yes. Fixed income securities or bonds have prices similar to stocks. Bond prices change on a daily basis depending on the direction of interest rates. Interest rates, in turn, are affected by various factors which affect the supply and demand of money in the financial market.

7. What is the relationship between interest rates and bond prices?

In general, interest rates and prices have an inverse relationship. This means that bond prices move up when interest rates decline. On the other hand, bond prices decline when interest rates rise.

8. What is the effect of changes in bond prices on the Fund's value?

The Fund's value as reflected in the Net Asset Value or NAV will increase as bond prices rise. Conversely, the Fund's NAV will decline as bond prices drop.

9. What are the advantages of the MTM method of accounting?

The MTM method will introduce some volatility in fixed income investments. The movement of the Fund's value, in turn, would allow investors to realize a larger gain when the market is up. Similarly, investors can buy additional shares and reduce their average cost when the market is down. Moreover, the MTM method will also allow investors to know the real worth of the Fund because of the transparent fund accounting method.

10. What are the implications of the MTM method on my investment?

The MTM accounting method could result in short-term unrealized or paper losses for the investor. These become realized only when the investor sells the shares or liquidates the investment. However, a change in the direction of interest rates can reverse the unrealized losses of the investor.