ANNEX G
E. Corporate Governance
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.
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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 tables presented below 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 the years ended May 31, 2020, 2019 and 2018.
Level 1 Level 2 Level 3 Total
May 31, 2020
Financial assets at FVOCI:
Debt securities:
Government P 202,462,446 P - P - P 202,462,446
Corporate 125,882,804 - - 125,882,804
Equity securities 133,843,652 - - 133,843,652
Financial assets at FVTPL –
Equity securities 417,473,189 422,100,278 - 839,573,467 Investment securities at
amortized cost 507,984,400 - - 507,984,400
P 1,387,646,491 P 422,100,278 P - P 1,809,746,769 May 31, 2019
Financial assets at FVOCI:
Debt securities:
Government P 161,338,064 P - P - P 161,338,064
Corporate 168,978,588 - - 168,978,588
Equity securities 135,009,428 - - 135,009,428
Financial assets at FVTPL –
Equity securities 432,043,160 375,308,885 - 807,352,045 Investment securities at
amortized cost 761,760,745 - - 761,760,745
P 1,659,129,985 P 375,308,885 P - P 2,034,438,870 Derivative liability –
Cross-currency swaps P - (P 36,720,866 ) P - (P 36,720,866 )
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 )
There were neither transfers between levels nor changes in levels of classification of instruments in all years presented.
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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, 2020, 2019 and 2018, instruments included in Level 1 comprise of listed common and preferred shares which are classified as and designated at financial assets at FVTPL and FVOCI, respectively. 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, the fair value of investments in UITF are classified as Level 2, since fair values are generally measured based on the net asset value of the University’s investment, computed and determined at the end of each reporting period based on the closing market and trade prices of the securities comprising the fund’s portfolio. This valuation approach takes into the account the period end performance of the funds including all trades made within the funds and the related income and expenses arising therefrom.
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.
(i) Fair values of government debt securities issued by the Philippine government, are determined based on the reference price per Bloomberg which used BVAL.
These BVAL reference rates are computed based on the weighted price derived using an approach based on a combined sequence of proprietary BVAL
algorithms of direct observations or observed comparables.
(ii) For corporate and other quoted debt securities, fair value is determined to be the current mid-price, which is computed as the average of ask and bid prices as appearing on the Corporate Securities Board Summary.
c) Derivatives
Derivatives classified as financial liability 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. The fair value of derivative financial instruments that are not quoted in an active market is determined through valuation techniques normally using the discounted cash flow.
Valuation techniques are used to determine fair values, which are validated and
periodically reviewed. To the extent practicable, models use observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions and correlations could affect reported fair value of financial instruments.
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6.3 Financial Instruments Measured at Amortized Cost for which Fair Value is Disclosed
As of May 31, 2020, 2019 and 2018 the fair value of debt securities categorized as investment securities at amortized cost amounts to P508.0 million, P761.8 million and P301.7 million, respectively, which is Level 1 in the hierarchy of fair values (see Note 5.1).
Other than the HTM investments (2018) 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, 2020, 2019 and 2018 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, Short-term investments (presented under Prepayments and Other Current Assets) and Refundable deposits would fall under Level 1 and the rest would be under Level 3.
6.4 Fair Value Measurement for Non-financial Assets
The table below shows the fair value of non-financial assets (i.e., investment properties) measured at cost but fair value is determined on a recurring basis (which is at Level 3) as of May 31, 2020, 2019 and 2018 (see Note 13).
2020 2019 2018
Land P 3,054,560,000 P 2,712,151,000 P 2,335,840,000 Building and
improvements 355,970,000 382,545,000 376,311,000 P 3,410,530,000 P 3,094,696,000 P 2,712,151,000
The fair values of the University’s investment properties are determined on the basis of the latest appraisals performed by an independent appraiser in July 2020 covering the years ended May 31, 2020 and 2019, and in 2018, 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.