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MANILA INTERNATIONAL AIRPORT AUTHORITYNOTES TO FINANCIAL STATEMENTS

1. INTRODUCTION

The Manila International Airport Authority (MIAA), an attached agency of the Departmentof Transportation and Communications (DOTC), was created by virtue of ExecutiveOrder No. 778 which was approved on March 04, 1982. The Charter of the Authoritywas amended by Executive Order Nos. 903 and 909 signed on July 21, 1983 andSeptember 16, 1983, respectively. Executive Order No. 298 was issued on July 26,1987 amending Sections 7, 10, 11 and 13 of E.O. No. 778 as amended by E.O. Nos.903 and 909. The amendments were the following: (a) modifying the composition of theAuthority’s Board of Directors to afford better coordination, (b) increasing the capitalcontribution of the National Government, (c) reducing the contribution of the Authority tothe General Fund from sixty-five percent (65%) to twenty percent (20%) of its annualoperating income excluding utilities and terminal fee collections and (d) appointing theGovernment Corporate Counsel and/or the Solicitor General as legal counsel of theAuthority.

The Authority’s functions, among others, are to formulate a comprehensive andintegrated policy and program for the airport and to implement, review and update suchpolicy and program periodically; to control, supervise, construct, maintain, operate andprovide such facilities or services as shall be necessary for the efficient functioning of theairport; to promulgate rules and regulations governing the planning, development,maintenance, operation and improvement of the airport; and to control and/or superviseas may be necessary the construction of any structure or the rendition of any servicewithin the airport.

On August 4, 2004, Executive Order No. 341 was issued reorganizing the Authority,modifying its power and functions, and authorizing and directing it to exerciseadministrative supervision and control over all international airports in the Philippinesand to promulgate and implement a comprehensive and integrated program for themanagement, operation, maintenance and development of all international airports in thePhilippines to internationally accepted standards.

The following are some of the accomplishments of the Authority for CY 2009:

The ISO 9001:2000 Certificate for NAIA Terminal 1 was awarded by the AngloJapanese American (AJA) Registrars, Inc. on March 19, 2009 after passing thePhase 1 Audit of the Passenger Facilitation Processes. The ISO Certification isjust the beginning of a continuing quality policy of going beyond what is expectedand truly manifest that at the NAIA, we go the extra service, all airport workerscontinue their efforts to make the new service campaign, “NAIA, we go the extraSmile”, a consistent reality;

MIAA was given the upgraded ISO 9001:2008 Certification on May 21, 2009 afteranother successful quality audit conducted by the AJA Registrars, Inc., whichmakes the Authority and the NAIA Terminal 1 as one of the very few institutions

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in the country that have passed and been accorded this upgraded level ofcertification. These efforts were undertaken with fifteen airport agencies, eachrepresented by a Quality Management Representative (QMR), operating at theNAIA and whose functions directly involve passenger handling;

The MIAA took the next step as it signed Service Level Agreements with thirteen(13) airport agencies on November 27, 2009, following the successful ISOcertification of NAIA Terminal 1. The signing ceremony was just the beginning ofthe certification process for NAIA Terminals 2 and 3. MIAA also launched theNAIA Privilege Card Program, an airport assistance program allowing bearers toavail of NAIA’s Meet and Assist Service;

On corporate social responsibility, the Authority, in support of the call of theNational Government to GOCCs and other government instrumentalities,extended assistance and participated in the relief efforts/operations andrehabilitation of areas damaged by Typhoons Ondoy and Pepeng. The MIAAdistributed relief goods to the victims of said typhoons. Customized HygieneVans were donated for the use of evacuees in Marikina City and Sta. Cruz,Laguna.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of PreparationThe financial statements of the MIAA have been prepared in accordance with stateaccounting principles generally accepted in the Philippines.

The financial statements of the Authority have been prepared on the historical costbasis. It is presented in Philippine pesos and all amounts are rounded to the nearestthousands (P000).

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highlyliquid investments that are readily convertible to known amount of cash with originalmaturities of three months or less from date of placements.

Allowance for Doubtful AccountsAllowance for doubtful accounts is computed at ten percent (10%) of the total TradeAccounts Receivable, current and non-current and 100% on accounts determined to betotally bad debts.

InventoriesSupplies and materials are valued using the moving average method of costing.

Property and EquipmentProperty and equipment, except land, are stated at cost less accumulated depreciation.Major replacements, rehabilitation and improvements are charged to asset account.Minor repairs are charged to operating expenses. Depreciation is computed using thestraight-line method where a residual value of ten percent (10%) of the acquisition

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cost/appraised value is deducted before dividing the same by the estimated useful life.

Recognition of Income and ExpensesThe Authority adopts the accrual method of accounting for income and expenses.However, income billed but which are still under litigation/appeal are not recognized inthe financial statements. The following are the other income which are recognized at thetime these are earned:

income from use of facilities such as runways, taxiways, aerobridge and lightingfacilities;

income from lease or rental of floor spaces, building and land; concession privilege fees; service fees for utilities; advertising fees; ground handling service fees.

Foreign Exchange Currency TransactionForeign exchange differences arising from revaluation of foreign currency denominatedaccounts at rates different from those at which they were booked are recognized eitheras gain or loss during the period.

3. CASH AND CASH EQUIVALENTS

This account consists of the following:

2009 2008

Cash (Collecting/Disbursing Officers) 4,057 20,206Savings Account – Dollar and Peso 997,975 186,550Current Account – Dollar and Peso 85,725 102,131Time Deposits – Peso 150,000 150,080Time Deposits – Dollar 6,159,917 5,490,753

7,397,674 5,949,720

Foreign currency/dollar deposits are restated at P46.35 and P47.40 to US$ 1 as ofDecember 31, 2009 and 2008, respectively.

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4. RECEIVABLES

This account consists of the following:

2009 2008

Trade ReceivablesNon-Government Entities 2,382,056 2,375,918National Government Agencies 20,240 17,795Government Owned and Controlled Corporations

CAAP (formerly ATO) 538,927 483,781Others 52,338 66,344

2,993,561 2,943,838Allowance for Doubtful Accounts (633,384) (287,566)

2,360,177 2,656,272

Non-Trade ReceivablesNational Government Agencies (NGAs) 287,986 79,113Local Government Unit (LGUs) 76,831 38,436

364,817 117,549Other Receivables

COA Disallowances 54,837 54,837Interests Receivable 11,222 15,531Advances to Officers and Employees 1,418 1,535Others 185,541 187,988

253,018 259,8912,978,012 3,033,712

Trade Receivables consist of receivables from airline companies (including the currentportion of receivables from the Philippine Airlines), concessionaires/lessees and othernon-government entities for the use of facilities, services and utilities of the airport. Italso includes long-outstanding, non-moving trade receivables from concessionaires withrate disputes and collection cases. Trade receivables from non-government entities andfrom the Civil Aviation Authority of the Philippines (formerly Air Transportation Office) areprovided with 10% allowance for uncollectibility and 100% for accounts determined to betotally bad debts.

Non-Trade Receivables-NGAs consist of cash advances to Procurement Service-DBMfor the supply and installation and commissioning of various check-in baggage x-raymachines with Threat Image Projection amounting to P 212 million, to the DPWH for theimplementation of various road construction projects, to MMDA for geometric anddrainage projects, to OSG for the Terminal 3 arbitration expenses and to DOTC forexpansion of the Puerto Princesa Airport in Palawan. It also includes receivables fromthe Bureau of the Treasury (BTR) for the excess payments by the Authority to the BTRof the amount advanced by the latter for loan payment to JBIC.

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Non-Trade Receivables-LGUs represent cash advances/releases of funds to the City ofPasay in 2009 and to the City of Parañaque in 2008, both for the purchase of medicalequipment.

Other Receivables of P 185.541 million and P 187.988 million as of December 31, 2009and 2008, respectively, consist mainly of the 12% EVAT billed to concessionaires.

5. INVENTORIES

This account consists of the following:2009 2008

Spare Parts Inventory 10,102 8,488Gasoline, Oil and Lubricants 3,996 4,028Accountable Forms Inventory 0 6,127Other Supplies Inventory 8,585 1,916

22,683 20,559

6. PREPAYMENTS

This account consists of the following:

2009 2008

Prepaid Insurance 47,803 51,548Advances to Contractors 77,042 18,654Deferred Charges 7,660 23,647Other Prepaid Expenses 11,357 17,306

143,862 111,155

7. OTHER CURRENT ASSETS

This account consists of:

2009 2008

Creditable Input Taxes 115,574 65,756Guaranty Deposits 3,304 3,304

118,878 69,060

Creditable Input Taxes are value added taxes paid by the Authority on local purchasesof goods and services from VAT-registered persons/entities and which are to bededucted/offsetted against output taxes.

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8. LONG-TERM RECEIVABLES

This account pertains to the following:

2009 2008

Trade Receivables-PAL 1,794,079 2,208,097Less Current Portion 414,018 414,018

1,380,061 1,794,079Less Allowance for Doubtful Accounts 138,006 179,408

1,242,055 1,614,671

Trade Receivables-PAL represent amount collectible from PAL not due within the next12 months under a Compromise Agreement in the case entitled “MANILAINTERNATIONAL AIRPORT AUTHORITY vs. PHILIPPINE AIRLINES, INC.”, CA G.R.CV No. 79295. PAL shall pay the Authority the total amount ofP 2,933 billion through monthly installments of P 34,914 million due within the first five(5) days of each month, for a period of seven (7) years commencing on the monthimmediately following the approval by the Court of the Agreement. The CompromiseAgreement was approved on March 26, 2007.

9. INVESTMENTS

This account represents investments in:

2009 2008

Philippine Aviation Security Corp. (PASSCOR) 11,850 11,850Panglao Airport Development Project 6,757 4,635Aviation Security & Training Institute Inc. 655 655

19,262 17,140

The Authority’s investment in PASSCOR, an affiliate corporation engaged in aviationsecurity at the Ninoy Aquino International Airport (NAIA), for 137,500 shares at P 100per share, or a total amount of P 13,750 million, was acquired by the Authority in March1995 and accounted for under the cost method of accounting. A total of 118,500 shareswere paid representing 39.5% of the total PASSCOR capital.

The Authority is one of the principal funders of the Panglao International AirportDevelopment Project (PIADP) pursuant to Executive Order 341 dated August 4, 2004.As provided under Memorandum Circular 282 dated March 28, 2008, the MIAA, asprincipal funder of the PIADP, shall provide the necessary funds needed for theconstruction and operation of the Panglao International Airport and for this purpose, shallcreate a Project Management Office, hereinafter referred to as the Panglao PMO.

The Aviation Security and Training Inc. (ASTI), created in March 26, 2003, is 100%owned by the Authority.

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10. PROPERTY AND EQUIPMENT

This account consists of the following:

Land and LandImprovement

Construction inProgress

Buildings andStructures

Machinery andEquipment Total

At Dec. 31, 2008Cost 12,825,407 3,230,907 5,866,070 4,735,754 26,658,138Accum Depr. (4,283,091) 0 (3,206,439) (4,024,101) (11,513,631)Net Book Value 8,542,316 3,230,907 2,659,631 711,653 15,144,507

Year Ended Dec. 31,2009Opening Net Book Value 8,542,316 3,230,907 2,659,631 711,653 15,144,507Adjustments / Additions 78,384 63,035 0 190,636 332,055Disposals 0 0 (2,272) (16,747) (19,019)Depreciation –Current (444,485) 0 (181,864) (336,530) (962,879)

Prior 69,894 2,046 10,826 82,766Closing Net Book Value 8,246,109 3,293,942 2,477,541 559,838 14,577,430

At Dec. 31, 2009Cost 12,903,791 3,293,942 5,863,798 4,909,643 26,971,174Accum Depr. (4,657,682) 0 (3,386,257) (4,349,805) (12,393,744)Net Book Value 8,246,109 3,293,942 2,477,541 559,838 14,577,430

Land owned by the Authority was recorded in 1987 at appraised value ofP 1,000 per sq. m. It covers an area of 6,250,905 sq. m. based on a Cadastral Surveydated January 5, 1987. In 1991, the Authority sold to LRTA a total area of107,179 sq. m. at P 1,000 per sq. m.

In 2003 and 2004, purchases were made from the heirs of Eladio Santiago of 720 sq. m.valued at P 2,160 million and from the Nayong Pilipino of 86,000 sq. m. at P 500 million,respectively. To date, the total land area owned by the Authority is 6,230,446 sq. m.inclusive of 232,647.74 sq. m. of segregated lots covered under a PresidentialProclamation.

Construction In Progress account includes the P 3.002 billion payment to PIATCO inSeptember 2006 in compliance with the Court Order issued by the Pasay City RegionalTrial Court Branch 117. The amount represents the proffered value of the Terminal 3facility. The partial liquidations made by DPWH and MMDA for Terminal 2/Terminal 3access road and geometric improvement projects are also included in this account.

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11. OTHER NON-CURRENT ASSETS

This account consists of the following:

2009 2008

Advances to BCDA 353,357 416,750Advances to Contractors 58,867 619,567Work Animals 14,348 0Items in Transit/for Disposal 202 202

426,774 1,036,519

Advances to BCDA represent the rental payments to the Bases Conversion andDevelopment Authority (BCDA) from January 2003 to December 31, 2009 for the65-hectare land leased by the BCDA to MIAA as site for the NAIA Terminal 3. Under aContract of Lease, dated April 14, 1997, BCDA shall be paid annual rentals in theamount of one percent (1%) of the appraised value fixed at P 25,000 per sq. m. orP250.00 per square meter, with ten percent (10%) escalation every five (5) yearseffective from the transfer of Clean Possession of the Site up to the end of the 25th yearof the concession period reckoned from the “In-Service Date”.

Total payments to BCDA of P 498 million as of December 31, 2007 were originallytreated as rent expense, but upon advice of the Commission on Audit in 2007, saidpayments were reclassified as advances until such time that the arbitration case filedwith the Department of Justice (DOJ) in connection with the Contract of Lease isresolved.

On April 17, 2007, the DOJ resolved that the Contract of Lease should be interpretedsuch that the payment of rentals by MIAA shall commence from the In-Service Date;however, considering that MIAA has possessed/used the BCDA property since thetransfer of clean possession of the site up to the present time, reasonable compensationshould be accorded to BCDA.

The BCDA has appealed the DOJ Resolution with the Office of the President. The MIAAfiled its Reply Memorandum on March 10, 2008 and is awaiting further orders from theOffice of the President (see Note 24 C).

In view of the opening and operationalization of the NAIA Terminal 3 on July 22, 2008,the Authority started amortizing the amount advanced effective July 2008 computed atP 250 per sq. m. per annum for the 650,000 sq. m. land leased.

In 2009, the Authority made additional rental advances of P99.107 million.

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12. PAYABLES

This account consists of the following:

2009 2008

Accounts PayableDividend PayableInterest PayableDue to Officers and Employees

813,2001,206,257

119,97820,523

589,831683,005119,680

28,1982,159,958 1,420,714

Accounts Payable represent payables to suppliers/contractors for purchases ofmaterials, supplies and other obligations to non-government entities in connection withthe operation of the Authority.

Dividends Payable represent the fifty percent (50%) of annual net earnings for CY 2009and 2008 payable to the National Government, thru the Bureau of the Treasury,pursuant to R.A. No. 7656. The Authority has a pending request for exemption frompayment of the annual dividend for CY 2008 per letter addressed to the Secretary,Department of Finance dated January 20, 2009.

13. INTER-AGENCY PAYABLES

This account consists of amounts due to the following:

2009 2008

National TreasuryBIRGSISPag-IBIGPHILHEALTHOther NGAs

267,862157,641

7,822820548

59,586

490,989146,798

7,245865504

259,771494,279 906,172

Inter-Agency Payables represent the amounts due to the departments, bureaus andother government agencies which include the share of the Government on theAuthority’s income and terminal fees, income taxes, premiums and loan deductions forremittance to the GSIS, Pag-IBIG and PHILHEALTH and the share of the Office ofTransportation Security (OTS) on terminal fees.

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14. OTHER CURRENT LIABILITIES

This account consists of the following:

2009 2008Guaranty Deposits Payable 156,270 150,660Performance/Bidders Bonds Payable 33,844 32,746Tax Refund Payable 17,092 15,715Other Payables 362,984 330,112

570,190 529,233

Guaranty Deposits Payable represent the airport lessees’ and/or concessionaires’deposits equivalent to two months or as stated in the contract/temporary permit; whilePerformance/Bidders Bonds Payable represent cash received from contractors/suppliersto guarantee the performance of contracts.

Tax Refund Payable represents excess taxes withheld from employees’ compensation;while Other Payables include retention money from contractors, trust receipts due toprivate companies, and the EVAT on billed receivables.

15. LOAN PAYABLE - FOREIGN

This account consists of outstanding foreign loans secured by the Authority in theconstruction of Terminal 2.

2009 2008FRENCH LOAN to finance consultancy services for the detailedarchitectural & engineering design of NAIA Terminal II contractedwith Natixis (formerly Credit Nationale)

FF11,369,624 = Euro 1,733,287.99 = US$ 2,492,641.46 @ 46.35 115,534FF12,528,906 = Euro 1,910,019.41 = US$ 2,664,668.08 @ 47.40 126,305

Fund releases made by Overseas Economic Cooperation Fund(OECF) of Japan financing the consultancy of ADP-JAC and contractwith MTOBY12,302,332,000 = US$ 134,255,349.12 @ P 46.35 6,222,735Y13,181,070,000 = US$ 144,939,045.72 @ P 47.40 6,870,111

6,338,269 6,996,416Less current portion 456,261 469,694

5,882,008 6,526,722

French loan from Credit Nationale, now Natixis, is covered by Loan Agreements datedJanuary 25, 1991 (DAN:94-2089) for FRF 14.5 million and July 5, 1994 (DAN: 94-2232)for FRF 6.08 million. The loan dated January 25, 1991 is payable in forty-two (42) semi-annual installments commencing on June 30, 2002 and ending December 31, 2022 with

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2.5% interest per annum; while the loan dated July 5, 1994 is payable in twenty-nine(29) semi-annual installments commencing on June 30, 2001 and ending June 30, 2015with 3.3% interest per annum on the unpaid account.

Loan from OECF, now JBIC, is payable in forty-one (41) semi-annual installmentscommencing on August 10, 2003 and ending on August 10, 2023 with 5% interest perannum including 2% spread of the National Government.

16. DEFERRED CREDITS

Deferred Credits pertain to the following:

2009 2008

Contra account of Receivables-COA Disallowances (Note 4)Others

54,83747,364

54,83744,435

102,201 99,272

Deferred Credits-Others pertain to the airport lessees’ and/or concessionaires’ one-month advance rental/concessions privilege fee.

17. GOVERNMENT EQUITY

This account includes the value of assets transferred by the then Air TransportationOffice (ATO), now Civil Aviation Authority of the Philippines (CAAP), and the Departmentof Transportation and Communications (DOTC) to the Authority. This also includes theP 605 million unremitted share of the National Government on the income of theAuthority from 1983 to 1986 which was converted to National Government Equity inaccordance with Executive Order No. 298.

18. DONATED CAPITAL

This account includes properties donated by various donors.

19. NATIONAL GOVERNMENT SHARE ON MIAA’S GROSS INCOME

This represents the twenty percent (20%) share of the National Government on theAuthority’s annual operating income based on actual cash collection, excluding incomefrom utilities and terminal fee collections, to be remitted to the General Fund in theNational Treasury to be used for the maintenance and operation of other international

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and domestic airports in the country, in accordance with Section 3 of Executive OrderNo. 298 dated July 26, 1987, computed as follows:

2009 2008

Landing & Parking Fees (Aeronautical fees)RentalsOther Business Income (Concession Privilege fees)Other Service Income (Miscellaneous Revenues)

2,246,5381,080,804

674,258188,380

2,092,0761,072,075

576,387216,635

4,189,980 3,957,173Rate of Government’s Share 20% 20%National Government’s Share 837,996 791,435

20. PRIOR YEARS’ ADJUSTMENTS

This account consists mainly of adjustments pertaining to prior year’s income andexpenses:

2009 2008Adjustment of Prior Years’ Income 13,393 21,913Adjustment of Prior Years’ Expenses (22,854) (503,458)

9,461 481,545

21. INPUT TAX ON SALE TO GOVERNMENT

Pursuant to BIR Revenue Memorandum Circular No. 62-2005, Revised Guidelines in theRegistration and Invoicing Requirements Including Clarification on Common IssuesAffecting (VAT), when claiming for input tax, the allowable input tax for sales of goodsand services to the government shall not exceed five percent (5%) of the sellingprice/gross receipts. The Authority’s actual input tax is less than 5% of gross payments.The difference between the actual input and 5% Standard Input VAT was recordedunder the Income and Expense Summary account amounting to P7.432 million in 2009and P15.810 million in 2008 (See Statement of Changes in Equity).

22. COMPLIANCE WITH TAX LAWS

The Authority is withholding and remitting to the Bureau of Internal Revenue (BIR)applicable taxes imposed under the National Internal Revenue Code. Likewise, itregularly submits the quarterly lists of government purchases/contracts for services fortax purposes to the BIR in compliance with Memorandum Order No. 219 issued by thePresident of the Philippines.

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23. BUDGET UTILIZATIONS NOT YET DUE AND DEMANDABLE

Budget utilizations which are not yet recorded as liabilities but were funded based on theAuthority’s approved contracts/purchase orders amounted to P193.739 million in 2009and P325.287 million in 2008.

24. OTHER MATTERS

a. On claims for Real Estate Taxes by the City Governments of Pasay andParañaque

The claims for real estate taxes were rendered academic with the decision of theSupreme Court in the Parañaque case (SC-G.R. 155650) and Pasay (SC-G.R.No.163072). In both cases, the Supreme Court ruled that the airport lands andbuildings of the Authority are exempted from real estate taxes except for portionsthat are leased to private parties.

b. Receivables from Private Concessionaires with Pending Cases

The following receivables from private concessionaires with court cases were nottaken up in the books but billing and collection of which are continuous:

Ding Velayo (Civil Case No. 8847) – P109,519 million

A case was filed by Ding Velayo Sports Incorporated for Injunction, Consignation,Damages and Preliminary Injunction in March 1992. It was prayed in said complaintthat MIAA be ordered to renew the contract for another 25 years counted fromFebruary 15, 1992. In the alternative, it was prayed that should the renewal be notallowed, MIAA should be ordered to pay expected unrealized rental income in theamount of P1 million per year. Award of attorney’s fees was also prayed for.

The Regional Trial Court and the Court of Appeals both decided the case in favor ofDing Velayo. MIAA appealed the case before the Supreme Court. The case is stillpending with the Supreme Court even if Ding Velayo has filed a Motion for EarlyResolution with the Supreme Court, dated January 24, 2006.

Philippine Airport and Ground Services (PAGS) (Civil Case No. 000363) – P61,551 million

This is an action to enjoin MIAA from increasing the rental rates for the premises(Open Area A and Open Area B) mentioned in the Revised and Restated Contract ofLease between parties. PAGS claims that the Restated Contract does not containany escalation clause. MIAA, however, claims that the Restated Contract is null andvoid as it was not approved by the MIAA Board. Hearing on the case is still on-going.

c. Contract of Lease with Bases Conversion Development Authority (BCDA)

An arbitration case was filed before the DOJ in connection with the Contract ofLease, dated April 14, 1997, entered into by and between the MIAA and BCDA. Themain issue is the determination of the exact date when MIAA’s obligation to pay

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lease rental to BCDA shall commence. Under the contract, MIAA shall pay perannum, as rentals, the amount of one percent (1%) of the appraised value fixed attwenty five thousand pesos (P 25,000.00) per sq. m. in an area comprising ofapproximately sixty-five (65) hectares with ten percent (10%) escalation every five(5) years effective from the transfer of Clean Possession of the Site up to the end ofthe twenty-fifth (25th) year of the concession period reckoned from the “In-ServiceDate”.

In a resolution, dated December 23, 2003, the DOJ resolved that the payment ofrentals should be reckoned from the transfer of the clean possession of the site byMIAA to PIATCO (August 17, 1998). The Authority filed a Motion forReconsideration praying that the DOJ Resolution be reconsidered and set aside andthat the Contract of Lease be declared without legal effect or, in the alternative, thatthe commencement of the payment of rentals be reckoned from the In-Service Date.

On April 17, 2007, the Motion for Reconsideration was partially granted. The DOJruled that: (1) the Contract of Lease is an independent contract; thus, it is notaffected by the nullity of the Concession Agreement; and (2) based on the settledrules of contract interpretation, the Contract of Lease should be interpreted such thatthe payment of rentals by MIAA shall commence from the In-Service Date. However,considering that MIAA has possessed/used the BCDA property since transfer ofclean possession of the site up to the present time, the principles of fairness andequity as well as quantum meruit dictate that reasonable compensation should beaccorded to BCDA - the rates, terms of payment and reckoning point shall be subjectto further negotiations by the parties.

The BCDA has appealed the DOJ Resolution, dated 17 April 2007, with the Officeof the President. The MIAA filed its Reply Memorandum on March 10, 2008 and isawaiting further orders from the Office of the President. In the meantime, BCDA hasrequested for a negotiation considering that the [determination of the] “In-ServiceDate” has become impossible. The MIAA Legal Office requested BCDA to make aproposal. To date, no proposal has been received.

d. Airspan Case: Rate AdjustmentsThe Supreme Court nullified MIAA Resolution Nos. 98-30 and 99-11 effecting rateincreases because of the lack of prior notice and public hearing. In a Resolution,dated June 8, 2005, the Supreme Court also denied MIAA’s Motion for Leave to Filea Second Motion for Reconsideration and to elevate the Case to the Court En Banc.The Court also resolved to deny for lack of merit the Department of Finance’s Motionfor Leave to Intervene.

The petitioners have secured a Writ of Execution from the Regional Trial CourtBranch 58, Makati City. The MIAA filed an Urgent Motion To Defer Execution, whichmotion was denied by the Court.

The petitioners have, likewise, filed a Motion to Cite MIAA in Contempt for its failureto implement the refund despite the finality of the decisions in 2005. On December26, 2007, the Court declared MIAA in contempt of court and ordered it to pay a fineof thirty thousand (P30,000.00) pesos, without prejudice to the imprisonment of the

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General Manager and/or Assistant General Manager should MIAA fail to comply withthe Order of the Court denying the MIAA’s Manifestation and Motion for Approval ofthe Methodology for the Payment of Refund, dated October 5, 2007, until MIAA fullycomplies with the Decision, dated February 17, 2003.

On June 24, 2008, the Court denied the Motion for Reconsideration filed by MIAA onthe contempt and on the Motion for Approval of Methodology of Payment of Refund.Subsequently, the MIAA paid the fine of P30,000.00 and elevated the matter –contempt and motion for approval of methodology of payment of refund – to theCourt of Appeals on a Petition for Certiorari.

In a decision, dated March 13, 2009, the Court of Appeals annulled and set aside theorders of the Regional Trial Court declaring MIAA in contempt and denying theMIAA’s Manifestation and Motion for Approval of the Methodology for the Payment ofRefund and ordered the Regional Trial Court to defer the implementation of the Writof Execution, as the amounts to be refunded to each of the private respondents stillhave to be determined and filed with the COA, as the latter, needs to examine, auditand settle the same in accordance with law and government auditing rules andregulations.

Airspan filed a Petition with the Supreme Court assailing the CA Decision. TheSupreme Court dismissed the Petition. Airspan filed a Motion for Reconsideration,which was denied with finality per Resolution dated November 16, 2009.

The Philippine Airlines, Macroasia Airport Services Corporation, and MacroasiaCatering Services have, likewise, filed separate claims to the Authority for refund ofrentals pertaining to the increase that was invalidated for lack of publication as ruledby the Supreme Court in the Airspan case. Said claims are estimated at P 1.2 billionand are still subject to (1) the approval of the Office of the Government CorporateCounsel on the refund, (2) the examination, audit and settlement by the Commissionon Audit and (3) the procedure which shall be in accordance with accounting andauditing rules and regulations.

e. Accounts under Litigation

a. Joaquin Rodriguez vs. MIAACivil Case No. 97- 0499RTC, Branch 209, Parañaque CityJoaquin Rodriguez filed a case against MIAA for the recovery of ownership andpossession of a parcel of land situated in Parañaque City which is Lot 3412-BParañaque Cadastre and covered by Transfer Certificate of Title No. 109416having acquired the same from Buck Estate sometime in April 29, 1996. Adecision, dated August 30, 1999, was already rendered ordering MIAA to pay theamount of P 70,868,936.72 as rental for the property from 1972 to 1998,P 15,000.00 per sq. m. as purchase price of the property, exemplary damage ofP 1,000,000.00 and attorney’s fees equivalent to 5% of the amount due. MIAAappealed the decision to the Court of Appeals which affirmed the earlier decisionbut with modification. MIAA then moved for partial reconsideration, which wasdenied on January 28, 2004.

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A petition for review with the Supreme Court was filed on March 22, 2004. In adecision promulgated on February 28, 2006, the Supreme Court granted MIAA’spetition and modified as follows:

“WHEREFORE, the petition is GRANTED IN PART. The decision of theCourt of Appeals is modified as follows:

a. The MIAA is ordered to pay Joaquin Rodriguez just compensation for thesubject lot, the portion actually occupied by the runway consisting of or basedon the value thereof at the time of taking in 1972, with interest thereon at thelegal rate of six percent (6%) per annum from the time of the taking until fullpayment is made. For the purpose of determining said value, the case isremanded to the lower court. Said court is ordered to make the determinationwith deliberate dispatch;

b. The award of back rentals as damages is DELETED;c. The MIAA is ordered to PAY exemplary damages in the reduced amount of

P 200,000.00, and attorney’s fees equivalent to one percent (1%) of theamount due.

No pronouncement as to costs.

SO ORDERED.”

On January 21, 2009, a hearing was held at the Regional Trial Court Branch 360,Parañaque City for the purpose of determining the just compensation.

On August 11, 2009, the Office of the Solicitor General (OSG) issued a letterconfirming MIAA’s proposal to tender payment of just compensation in theamount of P275,004.25 and consignation with the lower court in order to stopaccrual of interest thereon.

At the RTC Parañaque, the OSG filed a Manifestation and Motion to substituteRodriguez with the RCBC as the real party in interest on March 04, 2009. TheMotion has been submitted for resolution by the Court.

b. People’s Aircargo and Warehousing Co., Inc. (PAIRCARGO) vs. MIAACivil Case No. 00-304RTC, Branch 110, Pasay City

This is a case filed by PAIRCARGO against the Authority questioning theincrease in rental rates as mandated by Administrative Orders issued by theMIAA Board. Said concessionaire alleged that MIAA has no legal right toincrease its rental rates because its lease contract with the then Civil AeronauticsAdministration, which was renewed in 1991 under the pre-emptive right of thelessee, does not provide an escalation clause. By agreement of the parties, thestatus quo will be maintained during the pendency of the case. Hearing of thecase is still on-going.

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c. Little Vin-Vin’s Food Corporation vs. MIAACivil Case No. 02-0215RTC, Branch 115, Pasay City

This is a case filed by LVVFC against MIAA for Specific Performance andDamages, praying that: (1) MIAA be liable for the rectification of the electricaldefects in the concession area at its costs; (2) LVVFC’s construction period beextended until the electrical defects have been rectified; (3) MIAA deliver theareas fully operational; (4) LVVFC’s expenses on the electrical installations beoffset against the rentals already paid; (5) LVVFC be absolved from the chargesand fees stated in the Contract of Lease and Concession until the electricaldefects are rectified; and (6) MIAA pays LVVFC damages plus costs.

The parties entered into a Compromise Agreement pursuant to Board ResolutionNo. 2005-023, dated May 4, 2005, and Board Resolution No. 2005-017, datedMarch 28, 2005. The Compromise Agreement for signature of Little Vin-Vin’s willbe submitted to the Supreme Court for approval.

d. Avia Filipinas Int’l. Inc. vs. MIAA (G.R. No. 180168, Supreme Court)

This is a case filed by Avia Filipinas against MIAA stemming from the increase inthe former’s monthly lease rentals from P 6,580.00 per month to P 15,966.50(P 9,386.50 increase per month) effective September 1, 1991 to September 30,1994, for a total of P 347,300.50. The increase was based on Section 2.04 of thelease contract and Adm. Order No. 1, Series of 1990 which embodied theincrease in rentals of the properties being leased by MIAA to its lessees andconcessionaires. However, Avia Filipinas refused to pay the increased rentals,claiming that under Sec. 8.13 of the lease contract, “any amendment, alteration,or modification thereof shall not be valid and binding, unless and until made inwriting and signed by the parties thereto”. It claimed that since it did not sign therental increase embodied in Adm. Order No. 1, Series of 1990, the said increaseis not valid and binding.

On March 21, 2003, the lower court rendered a decision in favor of Avia Filipinasordering MIAA to pay Avia Filipinas P 2 million actual damages, P 2 millionexemplary damages, to refund the monthly rental payments beginning July 1,1997 up to March 11, 1998 with 12% interest, P 100,000.00 attorney’s fees, andcosts of suit.

MIAA appealed to the Court of Appeals which rendered a decision on June 19,2007 deleting the award of actual and exemplary damages, reduction from 12%to 6% of the interest on the monthly rentals to be refunded beginning July 1,1997 up to March 11, 1998. The 6% interest is to begin from date of filing of thecomplaint until finality of the decision. A 12% interest shall be imposed on anyunpaid balance from such finality until judgment is fully satisfied. The award ofattorney’s fees still stands.

MIAA brought the case to the Supreme Court by way of a Petition for Review onDecember 07, 2007. The case is still pending with the Supreme Court.

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e. DL ADMARK vs. MIAA, et. al. (Civil Case No. 02-0047, RTC Pasay Br. 111)

DL Admark filed a case for damages against MIAA for terminating its manpowerservice contract. The case has been submitted for decision.

Republic of the PhilippinesCOMMISSION ON AUDIT

Commonwealth Ave., Quezon City, Philippines

INDEPENDENT AUDITOR’S REPORT

The Board of DirectorsManila International Airport AuthorityPasay City

We have audited the accompanying financial statements of Manila International AirportAuthority, which comprise the balance sheet as at December 31, 2009, and the statements ofincome, changes in equity and cash flows for the year then ended, and a summary of significantaccounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with state accounting principles generally accepted in the Philippines,and for such internal control as management determines is necessary to enable the preparationof financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with Philippine Standards on Auditing. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor’sjudgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity’s internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by management, as wellas evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.

Basis for Qualified Opinion

Provision was not set up for claims by lessees for refund of rental rate increases invalidated bythe Supreme Court for lack of publication estimated at P1.231 billion and for real estate taxes onportions of the Authority’s airport lands and buildings leased to private parties which theSupreme Court ruled as not exempted from taxes, thereby understating liabilities and expensesand overstating retained earnings. Also, the disbursed portion of the P78.53 million fundstransferred to certain government agencies has not yet been recognized in the books due to thenon-submission of the related liquidation papers, thereby overstating non-trade receivables and

understating the related asset or expense account. Further, earned rent amounting to not lessthan P17.9 million arising from the implementation of the new rental rates effective September2009 has not been accrued, thereby understating both trade receivables and rental income. Onthe other hand, the P633.384 million allowance for uncollectibility provided on trade receivablesof P2.994 billion is inadequate considering the status of some of the accounts, therebyoverstating trade receivables and understating expenses. Likewise, the erroneous treatment ofincome from sale of bid documents of P7.197 million as other payables understated income andoverstated liabilities.

Physical inventory of some of the Authority’s property and equipment stated at P4.661 billionhas not been completed, while the variance of P14.596 million between the balance per booksof P22.683 million and balance per physical count of P37.279 million of inventories has not beenreconciled. Likewise, out of the total land area of 6.3 million square meters valued at P6.6billion and claimed as owned by the Authority, 1.2 million square meters are not yet titled in itsname. Further, the P9.886 million variance between the general ledger balance of P2.994billion and subsidiary ledger balance of P2.984 billion of trade receivables has not beenreconciled, while the analysis and reconciliation of non-moving and long-outstanding advancesto contractors amounting to P58.867 million is still on-going. The inadequacy of records did notpermit us to apply alternative procedures to establish either the existence, ownership, validity orcorrectness of the balances of the mentioned asset accounts.

Qualified Opinion

In our opinion, except for the effects of the matters described in the 1st paragraph, and for thepossible effects of the matters discussed in the 2nd paragraph, both of the Basis for QualifiedOpinion, the financial statements present fairly, in all material respects, the financial position ofthe Manila International Airport Authority as at December 31, 2009, and of its financialperformance and its cash flows for the year then ended in accordance with state accountingprinciples generally accepted in the Philippines.

Emphasis of Matter

Without further qualifying our opinion, we draw attention to Note 24 to the financial statements.The Authority has various pending cases/petitions in various courts and administrative bodies.These cases involve various claims against the Authority and contested receivables. Theultimate outcome of some of these cases/petitions could not presently be determined and noprovision for any liability that may result have been made in the financial statements.

COMMISSION ON AUDIT

By:

JIMMY B. GIANANSupervising Auditor

April 15, 2010

(With comparative figures for December 31, 2008)(In thousand pesos)

Notes 2009 2008

ASSETS

Current AssetsCash and cash equivalents 3 7,397,674 5,949,720Receivables, net 4 2,978,012 3,033,712Inventories 5 22,683 20,559Prepayments 6 143,862 111,155Other current assets 7 118,878 69,060

Total current assets 10,661,109 9,184,206

Non-Currrent Assets

Long-term receivables, net 8 1,242,055 1,614,671Investments 9 19,262 17,140Property and equipment, net 10 14,577,430 15,144,507Other non-current assets 11 426,774 1,036,519

Total non-current assets 16,265,521 17,812,837

26,926,630 26,997,043

MANILA INTERNATIONAL AIRPORT AUTHORITYBALANCE SHEETDecember 31, 2009

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LIABILITIES AND EQUITY

Current LiabilitiesPayables 12 2,159,958 1,420,714Inter-agency payables 13 494,279 906,172Current portion of loans payable-foreign 15 456,261 469,694Other current liabilities 14 570,190 529,233

Total current liabilities 3,680,688 3,325,813

Non-Current LiabilitiesLoans payable-foreign 15 5,882,008 6,526,722Other long-term liabilities 435 435

Total non-current liabilities 5,882,443 6,527,157

Deferred Credits 16 102,201 99,272

Equity 17,261,298 17,044,801

26,926,630 26,997,043

See accompanying Notes to Financial Statements. 3

For the Year Ended December 31, 2009(With comparative figures for the year ended December 31, 2008)

Notes 2009 2008

OPERATING INCOMEToll and terminal fees 2,543,863 2,365,547Landing and parking fees 1,984,696 1,909,988Rent income 1,172,057 1,173,779Other service income 978,557 1,023,593Other business income 694,218 649,828

7,373,391 7,122,735National Government share on MIAA's gross income 19 (837,996) (791,435)MIAA'S SHARE ON OPERATING INCOME 6,535,395 6,331,300

OPERATING EXPENSESPersonal services (Schedule 1) (886,785) (835,784)Maintenance and other operating expenses (Schedule 2) (4,200,049) (3,288,166)

(5,086,834) (4,123,950)

INCOME FROM OPERATIONS 1,448,561 2,207,350

(In thousand pesos)

MANILA INTERNATIONAL AIRPORT AUTHORITYSTATEMENT OF INCOME

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OTHER INCOME (EXPENSES)Interest income 104,167 124,183Fines and penalties 2,587 9,926Dividend income 948 2,727Miscellaneous income 15,104 17,000Financial expenses (329,574) (302,300)Gain(loss) on foreign exchange, net (79,970) (1,463,312)Gain(loss) on disposal of assets (552) 1,136

(287,290) (1,610,640)

INCOME BEFORE INCOME TAX 1,161,271 596,710INCOME TAX EXPENSE (419,493) (697,569)

NET INCOME(LOSS) 741,778 (100,859)

See accompanying Notes to Financial Statements.

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MANILA INTERNATIONAL AIRPORT AUTHORITYSTATEMENT OF CHANGES IN EQUITYFor the Year Ended December 31, 2009(With comparative figures for the year December 31, 2008)(In thousand pesos)

Notes 2009 2008

GOVERNMENT EQUITYBalance at beginning of the year 17 7,191,934 7,191,934Additions/deductions - -

Balance at end of the year 7,191,934 7,191,934

DONATED CAPITALBalance at beginning of the year 18 280,064 280,064Additions/deductions - -

Balance at end of the year 280,064 280,064

RETAINED EARNINGSBalance at beginning of the year 9,572,803 10,497,185Net income(loss) 741,778 (100,859)Dividend declared (523,252) (683,005)

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Dividend declared (523,252) (683,005)Prior years' adjustments 20 (9,461) (481,545)Adjustment on prior years' declared dividends 12 - 325,217

21 7,432 15,810

Balance at end of the year 9,789,300 9,572,803

17,261,298 17,044,801

See accompanying Notes to Financial Statements.

as amended by RR 4-2007Input tax on sale to government per RR 16-2005

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MANILA INTERNATIONAL AIRPORT AUTHORITYSTATEMENT OF CASH FLOWSFor the Year Ended December 31, 2009(With comparative figures for the year ended December 31, 2008)(In thousand pesos)

2009 2008

CASH FLOWS FROM OPERATING ACTIVITIESIncome from operations 7,660,798 7,216,898Trust receipts 1,719,003 1,624,045Miscellaneous income 24,068 22,006Payment of operating expenses (3,636,745) (3,003,822)Remittance of trust receipts (1,650,472) (1,400,581)Remittance of share of National Government (1,036,913) (722,340)Payment of prior years' obligations (391,293) (267,838)Advances to other agencies (262,703) (58,007)Advances to officers and employees (32,515) (24,935)Net cash generated from operations 2,393,228 3,385,426Interest income received 108,726 131,073Corporate income tax paid (248,465) (628,250)Net cash provided by operating activities 2,253,489 2,888,249

CASH FLOWS FROM INVESTING ACTIVITIESRecoupment of advances to contractor 560,700Proceeds from sale of property and equipment 1,385 2,498Acquisition of property and equipment (287,565) (70,799)

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Acquisition of property and equipment (287,565) (70,799)Net cash used in investing activities 274,520 (68,301)

CASH FLOWS FROM FINANCING ACTIVITIESDividends paid - (683,901)Debt servicing (806,591) (649,321)Net cash used in financing activities (806,591) (1,333,222)

Effects of exchange rate changes on cash and cash equivalents (273,464) 620,270NET INCREASE IN CASH AND CASH EQUIVALENTS 1,447,954 2,106,996CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 5,949,720 3,842,724CASH AND CASH EQUIVALENTS AT END OF THE YEAR 7,397,674 5,949,720

See accompanying Notes to Financial Statements.

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Schedule 1

SCHEDULE OF PERSONAL SERVICES

(With comparative figures for the year ended December 31, 2008)(In thousand pesos)

2009 2008

Salaries and wages 258,844 241,666Other compensation

Overtime and night differential 148,927 143,789Additional compensation 25,056 25,796Year-end bonus 22,988 21,369Representation allowance 11,497 10,057Hazard pay 11,134 11,324Clothing uniform allowance 10,602 473Personnel economic relief allowance 8,353 8,718Cash gift 6,997 7,184Productivity incentive allowance 2,740 2,826Subsistence allowance 74 74Honoraria - 88Other bonuses and allowances 298,456 284,943

Personnel benefits contributionLife and retirement insurance contribution 31,567 29,218Philhealth contribution 3,195 2,941

MANILA INTERNATIONAL AIRPORT AUTHORITY

For the Year Ended December 31, 2009

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Philhealth contribution 3,195 2,941Pag-ibig contribution 1,669 1,717ECC contribution 1,662 1,700

Other personnel benefitsRetirement benefits 3,664 6,698Terminal leave 847 963Other personnel benefits 38,513 34,240

886,785 835,784

See accompanying Notes to Financial Statements.

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Schedule 2

SCHEDULE OF MAINTENANCE AND OTHER OPERATING EXPENSES

(With comparative figures for the year ended December 31, 2008)(In thousand pesos)

2009 2008

Professional services 1,416,637 984,440Depreciation 962,879 982,792Utility expenses 542,691 483,782Bad debts 304,416 30,087Repairs and maintenance 294,811 345,726Rent expenses 276,822 169,998Taxes, insurance premiums and other fees 123,068 125,150Supplies and materials 99,226 95,920Donations 59,473 847Loss of assets 32,515 -Training expenses 15,756 9,002Confidential and intelligence expenses 12,000 12,000Communication expenses 9,532 6,883Advertising expenses 6,691 5,148Representation expenses 3,797 4,415Traveling expenses 2,424 2,378

MANILA INTERNATIONAL AIRPORT AUTHORITY

For the Year Ended December 31, 2009

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Traveling expenses 2,424 2,378Membership dues and contributions to organizations 1,679 1,228Subscription expenses 965 929Awards and indemnities 102 72Scholarship 50 -Printing and Binding 31 -Extraordinary and miscellaneous expenses 34,484 27,369

4,200,049 3,288,166

See accompanying Notes to Financial Statements.

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