(d) Fair value of financial assets is derived from quoted market prices in active markets,
if available;
(e) Fair value of unquoted available-for-sale financial assets is estimated using appropriate
valuation techniques.
Fair value hierarchy
The LGU uses 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 LGU if customers or counterparties to financial
instruments fail to meet their contractual obligations, and it arises principally from the
LGU’s 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 LGU
extends credit and also those parties with whom the LGU invests. As such, the credit
quality assessed extends to the customers, investments, and banks servicing the LGU.
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 LGU follows Department Order No. 27-05 of the Department of
Finance (DOF) in the maintenance of depository accounts. It also determines the credit
quality of investments and banks using information obtained from external rating agencies.
The customer base of the LGU 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 their constituents irrespective of their financial standing. As
such, the LGUs are required, by legislation, to extend services and extended payment terms
to all customers irrespective of their financial standing. To determine the credit quality of
customers, the LGUs apply their past experience with customers in determining the risk of
default posed by customers. In line with the methodology applied, customers are classified
into the following credit quality groups:
(a) High - Those customers who have no history of defaulting on payments to the LGU
and only include customers who settle their accounts in full and within the prescribed
minimum period;
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