Report of Independent Auditors
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
3.2 Key Sources of Estimation Uncertainty
(d) Estimation of Useful Lives of Investment Properties and Property and Equipment
The Group estimates the useful lives of investment properties 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.
The carrying amounts of property and equipment and investment properties are presented in Notes 12 and 14, respectively. Based on management’s assessment as at May 31, 2021, 2020 and 2019, there is no change in the estimated useful lives of the assets during those years. Actual results, however, may vary due to changes in factors mentioned above.
(e) Determination of Fair Value of Investment Properties
Investment properties are measured using the cost model. The fair value disclosed in Note 14 is determined by the Group based on the appraisal report prepared by independent appraisers using the relevant valuation methodology as discussed in Note 6.4.
For investment properties with appraisal conducted prior to the end of the current reporting period, management determines whether there are significant circumstances during the intervening period that may require adjustments or changes in the
disclosure of fair value of those properties.
The principal assumptions underlying management’s estimation of fair value are those related to the receipt of contractual rentals, expected future market rentals, and appropriate discount rates. These valuations are regularly compared to actual to market yield data, and actual transactions by the Group and those reported by the market.
A significant change in these elements may affect the prices and the value of the assets. As of May 31, 2021, 2020 and 2019, the Group determined that there were no significant circumstances that may affect the fair value determination of investment properties.
(f) Estimation of Impairment of Non-financial Assets
The Group’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.14. Though management believes that the assumptions used in the estimation of recoverable amounts 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.
Based on management’s assessment, no impairment loss is required to be recognized on the Group’s investment properties, property and equipment, goodwill and certain other non-financial assets as for the years ended May 31, 2021, 2020 and 2019.
As at the acquisition date of RCI on May 12, 2017, the fair value of the University’s share in RCI’s net identifiable assets amounts to P621.8 million resulting in the recognition of goodwill amounting to P186.5 million. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the University and RCI. The goodwill recognized is subject to annual impairment testing [see Notes 2.4 and 2.14].
For purposes of assessing impairment, the Group based on the value in use of the CGU (that is, RCI) to which the carrying value of goodwill is compared. This methodology is in accordance with PAS 36, Impairment of Assets. The management considers that the benefits of acquisition accrue to the University as a whole and not to a specific business unit nor department only.
In determining the value in use, discounted cash flows method was used. Some of the key assumptions that have been considered which have significant impact on the results of the determination of the value in use are as follows:
• RCI will continue as a going concern entity and will have sufficient financial resources to finance its working capital requirements to achieve its projected forecast and to support its business needs;
• RCI’s performance forecasts for the next five years from the end of each reporting period;
• In estimating the terminal value of the CGU, long-term growth rates at 2.0%, 1.0% and 1.2% (based on forecasted gross domestic product growth rate) as of May 31, 2021, 2020 and 2019 was used, respectively; and,
• In discounting the projected free cash flows, weighted average cost of capital of 4.88%, 4.76% and 6.79% was used in 2021, 2020 and 2019, respectively.
For the years ended May 31, 2021, 2020 and 2019, the Group has assessed that the recoverable amount of the goodwill of P3.7 billion, P3.0 billion and P1.6 billion, respectively, exceeds its carrying amount. Accordingly, no impairment loss is required to be recognized in 2021, 2020 and 2019.
(g) Determination of Recoverability of Deferred Tax Assets
The Group reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.
Management assessed that the deferred tax assets as at May 31, 2021, 2020 and 2019 are fully recoverable and will be fully utilized within the prescribed periods, except for the related benefits of net operating loss carryover (NOLCO) and other temporary differences of certain subsidiaries which are not recognized, because it expects that the Group will generate sufficient taxable profits in the future against which the assets can be applied (see Note 22).
(h) Valuation of Post-employment Defined Benefit Obligation
The determination of the obligation and cost of post-employment defined benefit is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates, expected rate of return on plan assets, salary rate increase, and employee turnover rate. A significant change in any of these actuarial assumptions may generally affect the recognized expense, other comprehensive income or losses and the carrying amount of the post-employment benefit obligation in the next reporting period.
The amounts of post-employment benefit obligation and expense and an analysis of the movements in the estimated present value of post-employment defined benefit, as well as the significant assumptions used in estimating such obligation are presented in Note 21(b).