ANNEX G
E. Corporate Governance
4. RISK MANAGEMENT OBJECTIVES AND POLICIES
4.2 Credit Risk
Credit risk represents the loss that the University would incur if the counterparty fails to perform its contractual obligations.
The University 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 University based on installment payment schemes. The University 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 University also withholds the academic records and clearance of the students with unpaid balances, thus ensuring that collectability is reasonably assured. The University’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 University 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 University’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 2020 2019 2018
Cash and cash
equivalents 7 P 193,452,523 P 177,278,502 P 237,874,555
Receivables 8 978,205,118 649,840,987 589,848,181
Financial assets at
FVOCI* 9.2 328,345,250 330,316,652 960,958,390 Investment securities
at amortized cost** 9.3 503,611,483 762,247,744 297,284,616 Short-term investments 11 4,481,523 11,489,009 52,993,469
Refundable deposits 4,794,962 4,796,804 4,880,271
P 2,012,890,859 P 1,935,969,698 P 2,143,839,482
*Previously classified as AFS Financial Assets in 2018
**Previously classified as HTM Investments in 2018 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.
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For cash and cash equivalents and financial assets of similar nature, the University 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 University’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, 2020, 2019 and 2018, management assessed that the allowance for ECL on these financial instruments is not material.
b. Receivables
The University’s receivables include tuition fees and other school receivables, receivables from related parties and others miscellaneous receivables.
The University writes off its receivables from students who have not enrolled for two semesters and are not expected by management to re-enroll in the near future.
The University 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 University 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 semesters 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 University writes off such balances as collection becomes unlikely as the concerned students did not return for enrollment. The University 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 University analyzes 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 FLI on macroeconomic factors affecting the ability of the students to settle the receivables. The University 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, 2020, 2019 and 2018, weighted average loss rates, adjusted with FLI, used in the measurement of ECL is at 4.2%, 4.1% and 5.4%, respectively.
The University 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 macroeconomic variable used in the
measurement of ECL is consumer spending as at May 31, 2020 and 2019 and inflation rate as at June 1, 2018, based on the correlation of historical loss rates and FLI.
For the years ended May 31, 2020, 2019 and 2018, the University recognized allowance for impairment loss amounting to P42.6 million, P30.3 million and P26.5 million, respectively. A reconciliation of the allowance for ECL as at May 31, 2020 and 2019 to the opening loss allowance is presented in Note 8.
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With respect to advances to related parties, the University determines possible impairment based on the counterparties’ ability to repay the receivables upon demand at the reporting date taking into consideration the historical defaults from the
counterparties. Accordingly, the University recognized allowance amounting to P0.6 million in 2020 (see Note 8).
c. Debt Instruments Classified as Financial Assets at FVOCI and at 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 provided are as follows:
Estimated Gross
Company Internal External Carrying Amount
Credit Rating Credit Rating ECL Rate at Default Allowance 2020
Investment Securities at Amortized Cost
Performing A - AAA 0.00% - 0.06% P 286,378,955 P 52,195
Underperforming BB - BBB+ 0.10% - 0.52% 217,546,529 423,978 Financial Assets at
FVOCI
Performing AAA 0.0% 106,600,000 -
Underperforming BBB+ 0.00% - 0.11% 203,359,312 186,942
P 813,884,796 P 663,115
2019
Investment Securities at Amortized Cost
Performing A - AAA 0.00% - 0.06% P 504,281,405 P 52,195
Underperforming BB - BBB+ 0.10% - 0.52% 257,934,691 423,978 Financial Assets at
FVOCI
Performing AAA 0.0% 156,600,000 -
Underperforming BBB+ 0.00% - 0.11% 178,385,345 186,942
P 1,097,201,441 P 663,115
In 2020, the University has not recognized 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 financial statements.
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The table below show the credit quality of the University’s financial assets as of May 31, 2018 having past due components under PAS 39.
Neither
past due nor Past due
Notes impaired and impaired Total Cash and cash
equivalents 7 P 237,874,552 P - P 237,874,552 Receivables 8 536,841,848 26,503,166 563,345,014 AFS financial assets
(debt securities) 9.2 960,958,390 - 960,958,390 HTM investments 9.3 297,284,616 - 297,284,616 Short-term investments 11 52,993,469 - 52,993,469
Refundable deposits 4,880,271 - 4,880,271
P 2,090,833,146 P 26,503,166 P 2,117,336,312
The University has no past due but unimpaired financial assets as at May 31, 2018.
As of May 31, 2018, the University’s management considers that all of its financial assets are not impaired, except those specifically provided with allowance for impairment at the end of the reporting period, and of good credit quality. Cash and cash equivalents, AFS financial assets, HTM investments and other short-term investments (presented as part of
Prepayments and Other Current Assets) are coursed through reputable financial institutions duly approved by the BOT.