PART V EXHIBITS AND SCHEDULES
Item 13. Exhibits and Reports on SEC Form 17-C (a) Exhibit
6. FAIR VALUE MEASUREMENT AND DISCLOSURES 1 Fair Value Hierarchy
In accordance with PFRS 13, Fair Value Measurement, the fair value of financial assets and financial liabilities and non-financial assets which are measured at fair value on a recurring or non-recurring basis and those assets and liabilities not measured at fair value but for which fair value is disclosed in accordance with other relevant PFRS, are categorized into three levels based on the significance of inputs used to measure the fair value. The levels of the fair value hierarchy are as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity can access at the measurable date;
• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices);
and,
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level within which the asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement.
For purposes of determining the market value at Level 1, a market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
For investments which do not have quoted market price, the fair value is determined by using generally acceptable pricing models and valuation techniques or by reference to the current market of another instrument which is substantially the same after taking into account the related credit risk of counterparties, or is calculated based on the expected cash flows of the underlying net asset base of the instrument.
When the University uses valuation technique, it maximizes the use of observable market data where it is available and relies as little as possible on entity specific estimates. If all significant inputs required to determine the fair value of an instrument are observable, the instrument is included in Level 2. Otherwise, it is included in Level 3.
6.2 Financial Instruments Measurement at Fair Value
The following tables show the fair value hierarchy of the University’s classes of financial assets and financial liabilities measured at fair value in the statements of financial position on a recurring basis as of:
Level 1 Level 2 Level 3 Total
May 31, 2018 AFS financial assets:
Debt securities:
Government P 240,339,612 P - P - P 240,339,612
Corporate 720,618,778 - - 720,618,778
Equity securities 750,072,034 408,461,253 - 1,158,533,287 P 1,711,030,424 P 408,461,253 P - P 2,119,491,677
Derivative liability –
Cross-currency swaps P - (P 38,255,313) P - (P 38,255,313 ) May 31, 2017
AFS financial assets:
Debt securities:
Government P 413,651,744 P - P - P 413,651,744
Corporate 601,943,490 - - 601,943,490
Equity securities 810,337,410 313,722,190 - 1,124,059,600 P 1,825,932,644 P 313,722,190 P - P 2,139,654,834 Derivative liability –
Cross-currency swaps P - ( P 33,365,459 ) P - (P 33,365,459 )
Level 1 Level 2 Level 3 Total May 31, 2016
AFS financial assets:
Debt securities:
Government P 411,845,035 P - P - P 411,845,035
Corporate 886,935,351 - - 886,935,351
Equity securities 743,334,780 428,061,603 - 1,171,396,383 P 2,042,115,166 P 428,061,603 P - P 2,470,176,769
Derivative liability –
Cross-currency swaps P - ( P 20,520,000 ) P - (P 20,520,000 )
There were neither transfers between levels nor changes in levels of classification of instruments in all years presented.
Following are the information about how the fair values of the University’s classes of financial assets and financial liabilities are determined:
a) Equity securities
As of May 31, 2018, 2017 and 2016, instruments included in Level 1 comprise of corporate shares which are classified as AFS financial assets. The corporate shares were valued based on their market prices quoted in the PSE at the end of each reporting period. On the other hand, certain underlying assets of the UITF are in equity securities. Thus, UITF is included in Level 2 and valued based on the Net Asset Value per unit (NAVPU) of the fund, as computed by the banks. NAVPU is computed by dividing the total fair value of the fund by the total number of units at the end of each reporting period.
b) Debt securities
The fair value of the University’s debt securities which consist of government and corporate bonds is estimated by reference to quoted bid price in active market at the end of the reporting period and is categorized within Level 1.
c) Derivatives
Derivatives classified as financial assets at FVTPL are included in Level 2 as their prices are not derived from market considered as active due to lack of trading activities among market participants at the end or close to the end of the reporting period.
6.3 Financial Instruments Measured at Amortized Cost for which Fair Value is Disclosed
As of May 31, 2018 and 2017 (nil as of May 31, 2016), the fair value of debt securities
categorized as HTM investments amounts to P301.7 million and P344.0 million, respectively, which is Level 1 in the hierarchy of fair values (see Note 5.1).
Other than the HTM investments and interest-bearing loans, management determined that due to the short-term duration of the other University’s financial assets and financial liabilities measured at amortized cost, as described in Notes 2.4 and 2.8, their fair values as at May 31, 2018, 2017 and 2016 equal or approximate their carrying amounts. Accordingly, the
University did not anymore present a comparison of their fair values with their carrying amounts and, correspondingly, their level in the hierarchy. Nevertheless, if presented in the hierarchy, only Cash and Cash Equivalents and Short-term investments (presented under Other Current Assets) would fall under Level 1 and the rest would be under Level 3.
6.4 Fair Value Measurement for Non-financial Assets (a) Determining Fair Value of Investment Properties
The table below shows the Levels within the hierarchy of non-financial assets measured at fair value on a recurring basis as of May 31, 2018, 2017 and 2016 (see Note 13).
Level 1 Level 2 Level 3 Total
May 31, 2018
Land P - P - P 2,335,840,000 P 2,335,840,000
Building and improvements - - 376,311,000 376,311,000
P - P - P 2,712,151,000 P 2,712,151,000 May 31, 2017 and 2016
Land P - P - P 1,437,440,000 P 1,437,440,000
Building and improvements - - 340,389,000 340,389,000
P - P - P 1,777,829,000 P 1,777,829,000
The fair values of the University’s investment properties are determined on the basis of the latest appraisals performed by an independent appraiser in August 2018 covering the year ended May 31, 2018, and in July 2016 covering the periods ended May 31, 2017 and 2016, with appropriate qualifications and recent experience in the valuation of similar properties in the relevant locations. To some extent, the
valuation process was conducted by the appraiser in discussion with the University’s management with respect to the determination of the inputs such as the size, age, and condition of the land and buildings, and the comparable prices in the corresponding property location with an average of 5% to 10% adjustment.
In estimating the fair value of these properties, management takes into account the market participant’s ability to generate economic benefits by using the assets in their highest and best use. Based on management assessment, the best use of the
University’s non-financial assets indicated above is their current use.
The fair values of these non-financial assets were determined based on the following approaches:
(i) Fair Value Measurement for Land
The Level 3 fair value of land was determined using the income approach which is performed with values derived using a discounted cash flow model. The income approach uses future free cash flow projections and discounts them to arrive at a present value. The discount rate is based on the level of risk of the business opportunity and costs of capital. The most significant inputs into this valuation approach are the estimated annual cash inflow and outgoing expenses.
(ii) Fair Value Measurement for Building and Improvements
The Level 3 fair value of the buildings and improvements included under the
Investment Property account was determined using the cost approach that reflects the cost to a market participant to construct an asset of comparable usage, construction standards, design and layout, adjusted for obsolescence. The more significant inputs used in the valuation include direct and indirect costs of construction such as but not limited to, labor and contractor’s profit, materials and equipment, surveying and permit costs, electricity and utility costs, architectural and engineering fees, insurance and legal fees.
These inputs were derived from various suppliers and contractor’s quotes, price catalogues, and construction price indices. Under this approach, higher estimated costs used in the valuation will result in higher fair value of the properties.
There has been no change to the valuation techniques used by the University during the year for its non-financial assets. Also, there were no transfers into or out of the different levels of the fair value hierarchy as of May 31, 2018, 2017 and 2016.
The carrying amount of investment properties included in Level 3 is presented in Note 13.