COVER SHEET COVER SHEET COVER SHEET
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
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 end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period:
(a) Estimation of Impairment of Trade and Other 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 collectability 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. The methodology and assumptions used in estimating future cash flows are reviewed regularly by the Group to reduce any difference between loss estimates and actual loss experience. The carrying value of trade and other receivables and the analysis of allowance for impairment on such financial assets are shown in Note 9.
(b) Determination of Fair Value Measurement for Financial Instruments other than Loans and Receivables
Management applies valuation techniques to determine the fair value of
financial instruments where active market quotes are not available. This requires management to develop estimates and assumptions based on market inputs, using observable data that market participants would use in pricing the instrument.
Where such data is not observable, management uses its best estimate. Estimated fair values of financial instruments may vary from the actual prices that would be achieved in an arm’s length transaction at the end of the reporting period.
The carrying values of the Group’s AFS financial assets and HTM investments and the amounts of fair value changes recognized during the years on those assets are disclosed in Note 11. On the other hand, the carrying value of the cross-currency swap is disclosed in Note 10 while fair value gains or losses on cross-currency swap agreements are presented as part of Fair value gains or losses on financial assets at FVTPL under Finance Income or Finance Costs in the consolidated statement of profit or loss (see Note 21).
(c) Estimation of Useful Lives of Property and Equipment and Investment Properties
The Group estimates the useful lives of property and equipment and investment properties 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.
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The carrying amounts of property and equipment and investment properties are presented in Notes 14 and 15, respectively. Based on management’s assessment as at May 31, 2018, 2017 and 2016, 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.
(d) Determination of Fair Value of Investment Properties
Investment properties are measured using the cost model. The fair value disclosed in Note 15 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.
For investment properties without appraisal report, the fair value disclosed in the consolidated financial statements is determined by the Group using the discounted cash flows valuation method since information on appraisal reports is not readily available. The Group uses assumptions that are mainly based on market conditions existing at the end of each reporting period.
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, 2018, 2017 and 2016, the University determined that there were no significant circumstances that may affect the fair value determination of investment properties.
(e) 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 2.16. 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 investment in an associate, investment properties, property and equipment, goodwill, and certain other non-financial assets as of May 31, 2018, 2017 and 2016.
The Group recognized goodwill arising from the University’s acquisition of the net assets of RCI from which the University had expected future economic benefits and synergies that will result from combining the operations of the acquired school with that of the University (see Note 1.2). Goodwill is subject to annual
impairment testing and whenever there is an indication of impairment.
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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
6.00% and 6.50% (based on forecasted gross domestic product growth rate) as of May 31, 2018 and 2017, respectively, were used; and,
• in discounting the projected free cash flows, weighted average cost of capital of 5.43% and 4.15% was used in 2018 and 2017, respectively.
For the years ended May 31, 2018 and 2017, the Group has assessed that the recoverable amount of the goodwill (P1.9 billion and P2.7 billion as of
May 31, 2018 and 2017, respectively) exceeds its carrying amount. Accordingly, no impairment loss is required to be recognized in 2018 and 2017.
(f) 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, 2018, 2017 and 2016 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 23).
(g) 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 22(b).
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(h) Business Combinations
On initial recognition, the assets and liabilities of the acquired business and the consideration paid for them are included in the consolidated financial statements at their fair values. In measuring fair value, management used the expertise of an independent appraiser (for property and equipment) and estimates of future cash flows and discount rates. Any subsequent change in these estimates would affect the amount of goodwill if the change qualifies as a measurement period adjustment.
Any other change would be recognized in consolidated profit or loss in the subsequent period. Details of acquired assets and liabilities assumed are given in Note 1.2.