(e) Fair value of unquoted available-for-sale financial assets is estimated using
appropriate valuation techniques
Fair value hierarchy
The LGUs use the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or
liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e., as price) or indirectly
(i.e., derived from prices);
Level 3: Techniques which use inputs that have a significant effect on the
recorded fair value that are not based on observable market data
Credit risk
Credit risk is the risk of financial loss to the LGUs if customers or counterparties
to financial instruments fail to meet their contractual obligations, and it arises
principally from the LGUs’ investments, loans, receivables, and cash and cash
equivalents. The carrying amount of financial assets represents the maximum
credit exposure.
Credit quality is assessed risk of default attached to counterparties to which the
LGUs extend credit and also those parties with whom the LGUs invests. As such,
the credit quality assessed extends to the customers, investments and banks
servicing the LGUs.
For financial statement purposes, the investments and balances with banks are
limited to the investments, loans receivable and cash and cash equivalents line
items in the statement of financial position. The LGUs follow Department Order
No. 27-05 of the Department of Finance (DOF) in the maintenance of depository
accounts. It also determines credit quality of the investments and banks using
information obtained from external rating agencies.
The customer base of the LGUs is diverse and consists of individuals, companies,
non-profit organizations and government entities. Credit ratings, from external
rating agencies, are not readily available for all customers. Also, it is not
financially viable to obtain external credit ratings for all customers due to the
nature of the customer base. Furthermore, the LGUs are mandated under
Republic Act No. 7160 or the Local Government Code to provide basic services
to all its constituents irrespective of their financial standing. As such, the LGUs
are required, by legislation, to extend services and extended payment terms to all
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