Critical Judgments in Applying Accounting Policies

FAR EASTERN UNIVERSITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.1 Critical Judgments in Applying Accounting Policies

In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the consolidated financial statements:

(a) Classification of Held-to-maturity Investments

In classifying non-derivative financial assets with fixed or determinable

payments and fixed maturity, such as bonds, as held-to-maturity investments the Group evaluates its intention and ability to hold such investments up to

maturity.

If the Group fails to keep these investments to maturity other than for specific circumstances as allowed under the standards, it will be required to reclassify the whole class as available-for-sale financial assets. In such a case, the investments would therefore be measured at fair value, not amortized cost.

As of March 31, 2009 and 2008, there are no held-to-maturity investments disposed of before their maturity.

(b) Distinction Between Investment Properties and Owner-managed Properties

The Group determines whether a property qualifies as investment property. In

making its judgment, the Group considers whether the property generates cash

flows largely independent of the other assets held by an entity. Owner-occupied

properties generate cash flows that are attributable not only to the property but

also to other assets used in the production or supply process.

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Some properties comprise a portion that is held to earn rental or for capital appreciation and another portion that is held for use in the supply of services or for administrative purposes. If portion can be sold separately (or leased out separately under finance lease), the Group accounts for such portion separately.

If the portion cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in the supply of services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making its judgment.

(c) Classification of Leases

The Group has entered into various lease agreements as either a lessor or a lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Currently, all of the Group’s lease agreements are

determined to be operating leases.

Rental expense charged to operations amounted to P17.1 million in 2009, P11.3 million in 2008 and none in 2007 (see Note 14) while rental income earned in 2009, 2008 and 2007 are presented as Rental Income in the consolidated income statements.

(d) Provisions and Contingencies

Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and disclosure of contingencies are discussed in Note 2.9 and relevant disclosures are presented in Note 21.

3.2 Key Sources of Estimation Uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a) Allowance for Impairment of Receivables

The Group maintains an allowance for impairment loss on receivables at a level

considered adequate to cover probable uncollectible receivables. The level of

this allowance is evaluated by management on the basis of factors that affect the

collectibility of the accounts. These factors include, but are not limited to,

history of the students’ payment behavior, age of receivables and other external

factors affecting the education industry. The Group constantly reviews the age

and status of receivables, and identifies accounts that should be provided with

allowance. Analyses of net realizable value of receivables as of March 31, 2009

and 2008 are presented in Note 5.

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Impairment losses recognized on receivables amounted to about P17.6 million in 2009, P17.4 million in 2008 and P12.7 million in 2007 (see Note 5).

(b) Valuation of Financial Assets Other than Loans and Other Receivables

The Group carries certain financial assets at fair value, which requires the extensive use of accounting estimates and judgment. In cases where active market quotes are not available, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net base of the instrument. The amount of changes in fair value would differ if the Group utilized different valuation methods and assumptions. Any change in fair value of these financial assets would affect profit and loss and fund balance.

Fair value gains and losses recognized on available-for-sale financial assets in 2009, 2008 and 2007 are presented as Accumulated Fair Value Gains (Losses) in the consolidated statements of changes in equity (see Note 6).

(c) Impairment of Available-for-sale Investments

The determination when an investment is other-than-temporarily impaired requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost, and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows.

Analyses of the carrying value of the available-for-sale investments as of March 31, 2009 and 2008 are presented in Note 6.

(d) Useful Lives of Investment Property and Property and Equipment

The Group estimates the useful lives of investment property and property and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of these assets are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. Analyses of the carrying amounts of investment property and property and equipment are presented in

Notes 9 and 10, respectively. Actual results, however, may vary due to changes

in factors mentioned above. Based on management assessment as of March 31,

2009 and 2008, no change in the estimated useful lives of the assets is necessary.

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(e) Impairment of Non-financial Assets

PFRS requires that an impairment review be performed when certain impairment indicators are present. The Group’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.13. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of

recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.

The Group did not recognize any impairment loss on property and equipment, investment property and investments in an associate in 2009, 2008 and 2007.

4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include the following components as of March 31:

2009 2008

Cash on hand and in banks P 157,747,517 P 197,126,244

Short-term placements 1,073,602,486 1,086,378,367

P 1,231,350,003 P 1,283,504,611

Cash in banks generally earn interest at rates based on daily bank deposit rates.

Short-term placements are made for varying periods of up to three months depending on the immediate cash requirements of the Group and earn effective annual interest ranging from 3.75% to 7.00% in 2009 and 3.75% to 5.25% in 2008 for peso

placements and 1.75% to 4.00% in 2009 and 2.25% to 2.50% in 2008 for dollar placements. Interest income earned from cash and cash equivalents were presented as part of Finance Income in the consolidated income statements.

Certain portions of cash and cash equivalents are set aside to cover for trust funds as

disclosed in Note 12.

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5. RECEIVABLES

This account is composed of the following:

2008 (As restated – Notes 2009 see Note 19.2)

Tuition and other fees P 64,246,194 P 54,371,503

Rental receivable 8,202,478 829,938

Receivable from:

FEU Educational

Foundation, Inc. 38,040,770 28,843,710

East Asia Educational

Foundation, Inc. (EAEF) 18,165,787 14,116,055

Advances to employees 11,479,722 9,145,859

Accrued interest 4, 6, 19.2 8,472,078 14,821,789

Others 3,691,162 3,177,662

152,298,191 125,306,516