Report of Independent Auditors
4. RISK MANAGEMENT OBJECTIVES AND POLICIES
4.2 Credit Risk
Credit risk represents the loss that the Group would incur if the counterparty fails to perform its contractual obligations.
The Group is mainly exposed to credit risk relating to its tuition and other school fees receivables due primarily to the student’s possible inability to pay and to fully settle his or her unpaid balance of tuition fees and other charges which are owed to the Group based on installment payment schemes. The Group has established controls and procedures to minimize risks of non-collection. Students are not allowed to enroll in the following semester unless the unpaid balance in the previous semester has been paid. The Group also withholds the academic records and clearance of the students with unpaid balances, thus ensuring that collectability is reasonably assured. The Group’s exposure to credit risk on its other receivables from debtors and related parties is managed through close account monitoring and setting limits.
Other than the foregoing, the Group is not exposed to significant credit risk and has no significant exposure to any individual customer or counterparty nor it has any other concentration of credit risk arising from counterparties in similar business activities, geographic region or economic parties.
With respect to credit risk arising from debt instruments, the Group’s maximum exposure is equal to the carrying amount, before any allowances for impairment, of these
instruments.
The maximum exposure to credit risk at the end of the reporting period is as follows:
Notes 2021 2020 2019
Cash and cash
equivalents 8 P 1,191,146,185 P 1,798,366,234 P 1,520,192,490 Trade and other
receivables - net 9 782,189,376 970,146,864 608,223,874 Financial assets
at FVOCI 10 1,239,740,426 542,005,510 537,594,985 Investment securities at
amortized cost 10 584,766,708 530,618,267 787,493,150 Short-term investments 15 32,211,342 64,562,591 76,269,824 Long-term
investments - net 15 10,706,000 11,280,724 16,425,700 Refundable deposits 15 22,819,818 16,235,991 9,975,338 P 3,863,579,885 P 3,933,216,181 P 3,556,175,361 a. Cash and Cash Equivalents, and Short-term Placements
The credit risk for cash and cash equivalents, and short-term placements herein is considered negligible or the probability of default from these reputable banks is remote since there has been no history of default from these counterparties and because of their high-quality external credit ratings.
Cash in banks are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum coverage of P0.5 million per depositor per banking institution, as provided for under RA No. 9576, Amendment to Charter of PDIC.
For cash and cash equivalents, and financial assets of similar nature, the Group applies the low credit risk simplification. The probability of default and loss given defaults are publicly available and are considered to be low credit risk investments. It is the Group’s policy to measure ECL on such instruments on a 12-month basis. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL.
As of May 31, 2021, 2020 and 2019, management assessed that the allowance for ECL on these financial instruments is not material.
b. Trade and Other Receivables
The Group’s trade and other receivables include tuition fees and other school receivables, rental receivables and other miscellaneous receivables.
The Group applies the simplified approach in measuring ECL, which uses a lifetime expected loss allowance for tuition fees and other receivables. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial assets. To calculate the ECL, the Group uses its historical experience, external indicators and forward-looking information to calculate the ECL using a provision matrix. The loss rates are based on actual credit-impaired student accounts or those which are outstanding for two terms and have not enrolled for the succeeding term. In practice and considering the nature of its business, particularly with respect to its educational activities, the Group writes off such balances as collection becomes more unlikely as the concerned students did not return for enrollment. The Group also assesses impairment of tuition fees and other receivables on a collective basis as they possess shared credit risk characteristics.
The expected loss rates on these receivables are determined based on the history of credit-impaired student accounts. The Group analyses tuition and other school fees receivables based on the number of semesters the receivables have been outstanding. Student receivables that are outstanding for at least two semesters are assessed for credit impairment.
The historical loss rates, which are expressed as the relationship between the
credit-impaired accounts and the related recognized tuition fees, are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the students to settle the receivables. The Group assessed that the expected loss rates for tuition fees and other receivables are a reasonable approximation of the loss rates for these financial assets. As at May 31, 2021, 2020 and 2019, the weighted average loss rate, adjusted with FLI, used in the measurement of ECL is at 6.4%, 8.4% and 4.7%, respectively.
The Group incorporates FLI into both the assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and the measurement of ECL. The most relevant macro-economic variable used in the measurement of ECL is consumer spending as at May 31, 2021, 2020 and 2019 based on the correlation of historical loss rates and FLI.
The Group writes off its receivables from students who have not enrolled for two terms and are not expected by management to re-enroll in the near future.
For the years ended May 31, 2021, 2020 and 2019, the Group recognized total impairment losses amounting to P254.8 million, P81.7 million and P27.0 million, respectively. A reconciliation of the allowance for ECL as at May 31, 2021, 2020 and 2019 to the opening loss allowance is presented in Note 9.
On the other hand, to calculate the ECL of rental receivables, these have been grouped based on shared credit risk characteristics and the days past due
(age buckets). The rental receivables which relate to both third party and related party receivables have substantially the same risk characteristics. The Group has therefore concluded that the expected loss rates for all rental receivables, whether from third party or related party, are the same. The expected loss rates are based on the payment profiles of sales over a period of 36 months before May 31, 2021, 2020 and 2019, respectively, and the corresponding historical credit losses experienced within such period. The Group has identified the Philippine inflation rate to be the most relevant factor and has accordingly adjusted the historical loss rates based on expected changes in this factor. There are no past due rental receivables for the years ended
May 31, 2021, 2020 and 2019.
On that basis, there is no additional loss allowance recognized based on
management’s assessment as of March 31, 2021, 2020 and 2019, as the expected credit losses are assessed to be insignificant to the Group’s consolidated financial statements.
c. Debt Instruments Classified as Financial Assets at FVOCI and Amortized Cost
Debt securities measured at amortized cost and at FVOCI are considered to have low credit risk, and therefore, the loss allowance during the period is determined to be equivalent to 12 months ECL. Management considers “low credit risk” for listed bonds to be an investment grade credit rating with at least one major rating agency.
Other instruments are considered to be low credit risk when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow
obligations in the near term.
The loss allowance are as follows:
Estimated Gross
Company Internal External Carrying Amount
Credit Rating Credit Rating ECL Rate at Default Allowance 2021
Investment Securities at Amortized Cost
Performing A - AAA 0.00% - 0.05% P 516,046,376 P 146,262
Underperforming BB - BBB+ 0.23% - 0.45% 69,055,667 - Financial Assets at
FVOCI
Performing AAA 0.0% 177,230,169 -
Underperforming BBB+ 0.00% - 0.09% 975,503,462 842,339
P 1,737,835,674 P 988,601
2020
Investment Securities at Amortized Cost
Performing A - AAA 0.00% - 0.06% P 313,600,494 P 104,778
Underperforming BB - BBB+ 0.10% - 0.52% 217,546,529 423,978 Financial Assets at
FVOCI
Performing AAA 0.0% 338,646,198 -
Underperforming BBB+ 0.00% - 0.11% 203,546,254 186,942
P 1,073,339.475 P 715,698
2019
Investment Securities at Amortized Cost
Performing A - AAA 0.00% - 0.06% P 530,063,053 P 80,616
Underperforming BB - BBB+ 0.10% - 0.52% 257,934,691 423,978 Financial Assets at
FVOCI
Performing AAA 0.0% 359,209,640 -
Underperforming BBB+ 0.00% - 0.11% 178,572,287 186,942
P 1,325,779,671 P 691,536
In 2021 and 2020, the Group did not recognize additional or reversal of ECL for debt securities at amortized cost and debt securities at FVOCI.
d. Refundable Deposits
Management has assessed that these financial assets have low probability of default since these relate to continuing lease contracts and any outstanding deposit balance can be applied against future monthly rentals. Also, these are no longer discounted since management believes that the effect of discounting is not material to the consolidated financial statements.