COVER SHEET COVER SHEET COVER SHEET
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 fair value hierarchy has the following levels:
• 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).
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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 Group 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 foregoing tables show the fair value hierarchy of the Group’s classes of financial assets and financial liabilities measured at fair value in the consolidated 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 303,794,340 P - P - P 303,794,340
Corporate 817,814,044 - - 817,814,044
Equity securities 755,294,472 419,112,624 - 1,174,407,096 Other non-current asset –
Investment in golf club shares - 2,830,000 - 2,830,000
P 1,876,902,856 P 421,942,624 P - P 2,298,845,480
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 479,989,235 P - P - P 479,989,235
Corporate 652,533,358 - - 652,533,358
Equity securities 830,661,127 315,462,860 - 1,146,123,987 Other non-current asset –
Investment in golf club shares - 2,880,594 - 2,880,594
P 1,963,183,720 P 354,343,454 P - P 2,317,527,174
Derivative liability –
Cross-currency swaps P - (P 33,365,459) P - (P 33,365,459)
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Level 1 Level 2 Level 3 Total
May 31, 2016 AFS financial assets:
Debt securities:
Government P 481,871,388 P - P - P 481,871,388
Corporate 932,765,579 - - 932,765,579
Equity securities 754,334,231 446,109,388 - 1,200,443,619 Other non-current asset –
Investment in golf club shares - 5,831,330 - 5,831,330
P 2,168,971,198 P 451,940,718 P - P 2,620,911,916
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 the years presented.
Following are the information about how the fair values of the Group’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 and UITF 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.
Golf club shares, which are presented as part of Other equity investments under the Other Non-current Assets account in the consolidated statements of financial position (see Note 16), 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.
b) Debt Securities
The fair value of the Group’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 asset at FVTPL or as derivative liability 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.
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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 amounted 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 financial assets and financial liabilities measured at amortized costs of the Group, as described in Notes 2.5 and 2.10, their fair values as at May 31, 2018, 2017 and 2016 equal or approximate their carrying amounts. Accordingly, the Group did not anymore present a comparison of their fair values with their carrying amounts and correspondingly, their level in the fair value hierarchy. Nevertheless, if presented in the hierarchy, only cash and cash equivalents and short-term investments 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 following tables show the Levels within the hierarchy of non-financial assets measured at fair value (see Note 15.2).
Level 1 Level 2 Level 3 Total
May 31, 2018:
Land P - P - P 736,027,523 P 736,027,523
Building and improvements - - 138,865,461 138,865,461
P - P - P 874,892,984 P 874,892,984
May 31, 2017:
Land P - P - P 230,017,694 P 230,017,694
Building and improvements - - 493,417,067 493,417,067
P - P - P 723,434,761 P 723,434,761
May 31, 2016:
Land P - P - P 306,761,920 P 306,761,920
Building and improvements - - 635,261,677 635,261,677
P - P - P 947,391,597 P 947,391,597
The fair value of the Group’s investment properties, except for certain investment properties owned by FRC which were determined using the discounted cash flows technique since information on appraisal reports is not readily available, are determined on the basis of the appraisals performed by an independent appraiser 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 Group’s management with respect to the determination of inputs such as the size, age, and condition of the land and buildings, and the comparable prices in the corresponding property location.
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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’s assessment, the best use of the Group’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 derived using the market comparable approach that reflects the recent transaction prices for similar properties in nearby locations.
Under this approach, the observable recent prices of the reference properties were adjusted for differences in key attributes such as property size, zoning, and
accessibility. The most significant input into this valuation approach is the price per square foot, hence, the higher the price per square foot, the higher the fair value.
(ii) Fair Value Measurement for Building and Improvements
The Level 3 fair value of the buildings and improvements included under the Investment Properties 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 Group 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 15.
(b) Other Fair Value Information
There were no transfers into or out of Level 3 fair value hierarchy during the periods ended May 31, 2018, 2017 and 2016.
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7. SEGMENT INFORMATION
7.1 Business Segments
The Group is organized into different business units based on its services or line of business for purposes of management assessment of each unit. In identifying its operating segments, management generally follow the Group’s three major lines of business, namely education, real estate and investment activities. These are the basis of the Group in reporting to its strategic steering committee for its strategic
decision-making activities.
Also, the Group reports geographical segments in which FEU campuses are located.
7.2 Segment Assets and Liabilities
Segment assets include all operating assets used by a segment and consist primarily of operating cash and cash equivalents, trade and other receivables, AFS financial assets, real estate held-for-sale, investment properties, and property and equipment.
Segment assets do not include investments in an associate, deferred tax assets and other assets which are not allocated to any segment’s assets.
Segment liabilities include all operating liabilities as presented in the consolidated statements of financial position, except for deferred tax liabilities.
7.3 Intersegment Transactions
Segment revenues, expenses and performance include revenues and purchases between business segments and between geographical segments. Such services and purchases are eliminated in consolidation.
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7.4 Analysis of Segment Information
Segment information can be analyzed by business line as follows for the years ended May 31, 2018, 2017 and 2016 (in thousands):
Real Estate
Education Rental Income Sale of Properties Investments Total
2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016
REVENUES
From external customers P 2,620,181 P2,816,831 P122,196 P 42,028 P 43,430 P 10,802 P - P - P - P 193,493 P 180,126 P 31,513 P 2,855,702 P 3,040,387 P 164,511
Intersegment revenues - - - 178,252 163,615 240 - - - 395 - - 178,647 163,615 240
Total revenues 2,620,181 2,816,831 122,196 220,280 207,045 11,042 - - - 193,888 180,126 31,513 3,034,349 3,204,002 164,751
COSTS AND OTHER OPERATING EXPENSES
Cost of sales and services
excluding depreciation 1,292,720 1,292,720 200,595 34,204 - - - - - - - - 1,326,824 1,292,720 200,595
Depreciation 275,246 272,097 29,385 31,087 30,012 3,563 - - - - - - 306,333 302,109 32,948
Other expenses 523,861 461,288 87,992 - - - - - - 15,262 10,754 - 539,123 472,042 87,992
2,091,827 2,026,105 317,972 65,191 30,012 3,563 - - - 15,262 - 705 2,172,280 2,066,871 321,535
SEGMENT OPERATING
INCOME (LOSS) P 528,354 P 790,726 (P 195,776) P 155,089 P 177,033 P 7,479 P - P - P - P 178,626 P 169,372 P 31,513 P 862,069 P 1,137,131 (P 156,784)
TOTAL ASSETS AND LIABILITIES
Segment assets P 8,635,533 P 6,813,718 P 5,793,725 P 2,106,778 P 2,092,755 P 2,078,378 P 170,573 P 238,162 P124,476 P 4,334,007 P 4,131,904 P 3,557,929 P 15,246,891 P 13,276,539 P 11,554,508 Segment liabilities P 4,308,982 P 3,439,476 P 2,624,519 P 2,088 P 12,071 P 33,953 P - P - P - P 339,387 P 51,126 P 2,479 P 4,650,457 P 3,502,673 P 2,660,951
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The Group’s geographical segment for the periods ended May 31, 2018, 2017 and 2016 follows (in thousands).
Quezon City,
Marikina City
Manila Makati Cavite and Rizal Total May 31, 2018
Segment revenues
From external customers P 2,444,727 P 89,282 P 90,502 P 231,191 P 2,855,702
Intersegment revenues 178,647 - - - 178,647
Total revenues 2,623,374 89,282 90,502 231,191 3,034,349 Operating expenses ( 1,867,061 ) 22,304 ( 72,918) ( 254,605 ) ( 2,172,280 ) Segment operating profit (loss) P 756,313 P 111,586 P 17,584 (P 23,414) P 862,069 Total Segment Assets P 13,717,653 P 99,104 P 143,555 P 1,286,669 P 15,246,891 Total Segment Liabilities P 3,924,819 P 64,010 P 27,583 P 634,045 P 4,650,457 May 31, 2017
Segment revenues
From external customers P 2,664,722 P 116,616 P 92,855 P 166,194 P 3,040,387
Intersegment revenues 163,615 - - - 163,615
Total revenues 2,828,337 116,616 92,855 166,194 3,204,002
Operating expenses ( 1,974,084 ) ( 21,872) ( 70,915 ) ( 187,332 ) ( 2,066,871 ) Segment operating profit (loss) P 854,253 P 94,744 P 21,940 (P 21,138) P 1,137,131 Total Segment Assets P 11,873,823 P 98,374 P 130,063 P 1,174,279 P 13,276,539 Total Segment Liabilities P 2,911,840 P 65,664 P 21,574 P 503,595 P 3,502,673 May 31, 2016
Segment revenues
From external customers P 154,618 P 4,093 P - P 5,800 P 164,511
Intersegment revenues 240 - - - 240
Total revenues 154,858 4,093 - 5,800 164,751
Operating expenses ( 318,967 ) ( 2,568) - - ( 321,535 )
Segment operating profit ( P 164,109) P 1,525 P - P 5,800 ( P 156,784 ) Total Segment Assets P 10,282,957 P 97,125 P 102,294 P 1,072,132 P 11,554,508 Total Segment Liabilities P 2,578,024 P 67,202 P 15,725 P 382,615 P 2,660,951
7.5 Reconciliation
Presented below and in the succeeding page is a reconciliation of the Group’s segment information to the key financial information presented in its consolidated financial statements (in thousands).
2018 2017 2016
(One Year) (One Year) (Two Months)
Revenue
Total segment revenues P 3,034,349 P 3,204,002 P 164,751
Elimination of intersegment
revenues ( 178,647 ) ( 163,615 ) ( 240 )
Finance income ( 193,493 ) ( 180,126 ) ( 31,513 )
Revenues as reported in
consolidated profit or loss P 2,662,209 P 2,860,261 P 132,998
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2018 2017 2016
(One Year) (One Year) (Two Months)
Profit or loss
Segment operating profit (loss) P 862,069 P 1,137,131 ( P 156,784 )
Other income 58,205 69,264 13,123
Finance costs ( 95,374 ) ( 88,838 ) ( 6,278 )
Other charges ( 95 ) ( 71 ) -
Other unallocated expense ( 184,664 ) ( 189,751 ) ( 32,162 )
Tax income (expense) ( 92,510 ) ( 121,283 ) 15,539
Group net profit (loss) as reported
in profit or loss P 547,631 P 806,452 ( P 166,562 )
Assets
Segment assets [As Restated – Note 2.1(d)] P 15,246,891 P 13,280,234 P 11,556,708
Investment in an associate 6,491 6,586 6,657
Deferred tax assets – net 18,135 20,272 36,165
Goodwill 186,487 186,487 186,487
Elimination of intercompany accounts ( 2,270,610 ) ( 1,533,736 ) ( 950,967 )
Total Assets P 13,187,394 P 11,959,843 P 10,835,050
Liabilities
Segment liabilities [As Restated – Note 2.1(d)] P 4,650,457 P 3,506,368 P 2,663,151 Deferred tax liabilities – net 19,490 10,697 4,360
Elimination of intercompany accounts ( 523,950 ) ( 379,847 ) ( 41,041 )
Total Liabilities P 4,145,997 P 3,137,218 P 2,626,470