Part II OPERATIONAL AND FINANCIAL INFORMATION
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
4.1 Market Risk (a) Foreign Currency Risk
Most of the Group’s transactions are carried out in Philippine pesos, its functional currency. Exposures to currency exchange rates arise from certain AFS debt securities which are denominated in U.S. dollars (USD) and Euro (EUR). The Group also holds USD-denominated cash and cash equivalents.
To mitigate the Group’s exposure to foreign currency risk related to the foreign currency-denominated AFS debt securities, management entered into a cross-currency swap agreement. As to the dollar deposit, management keeps the amount of deposits at a low level.
Foreign currency-denominated financial assets, translated into Philippine pesos at the closing rate follow:
2015 2014 2013 _
USD EUR USD EUR USD EUR
Short-term exposure –
Financial assets P 581,584 P - P 88,764 P - P 3,962,877 P -
Long-term exposure –
Financial assets P 289,725,417 P 53,893,716 P 309,044,002 P 68,785,580 P147,193,807 P 58,496,721
The table below illustrates the sensitivity of the Group’s profit before tax with respect to changes in Philippine peso against USD and EUR exchange rates. The percentage changes in rates have been determined based on the average market volatility in
exchange rates, using standard deviation, in the previous 12 months at a 68% confidence level.
2015 2014 2013
Reasonably Effect in Reasonably Effect in Reasonably Effect in
possible profit before Effect in possible profit before Effect in possible profit before Effect in change in rate tax equity change in rate tax equity change in rate tax equity PhP - USD 8.29% (P 48,213) (P 24,018,237) 20.61% (P 18,294) (P63,693,969) 14.25% (P 564,570) (P 20,969,907)
PhP - EUR 52.05% - ( 28,051,679) 33.31% - ( 22,912,477) 17.58% - ( 10,285,726)
(P 48,213) (P 52,069,916) (P 18,294) (P86,606,446) (P 564,570) (P 31,255,633)
Exposures to foreign exchange rates vary during the year depending on the volume of foreign currency denominated transactions. Nonetheless, the analysis above is considered to be representative of the Group’s foreign currency risk.
(b) Interest Rate Risk
The Group’s exposure to interest rate risk arises from the following interest-bearing financial instruments which are subject to variable interest rates. All other financial assets and financial liabilities have fixed rates.
Notes 2015 2014 2013
Cash and cash
equivalents 8 P 887,246,321 P 559,380,865 P 337,545,519 AFS financial assets
(debt securities) 11 1,446,499,583 1,495,509,753 1,645,490,432 Short-term investments 13 104,480,844 134,944,032 393,155,724 Interest-bearing loans 18 ( 676,923,077) ( 800,000,000) ( 800,000,000)
P 1,761,303,671 P 1,389,834,650 P 1,576,191,675
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The following table illustrates the sensitivity of profit before tax for the years with regard to the Group’s interest-bearing financial instruments. These percentages have been determined based on the average market volatility rates, using standard deviation, in the previous 12 months, estimated at a 68% level of confidence. The sensitivity analysis is based on the Group’s financial instruments held at March 31, 2015, 2014 and 2013.
2015 2014 2013
Reasonably Effect on Reasonably Effect on Reasonably Effect on possible profit before possible profit before possible profit before
change in rate tax change in rate tax change in rate tax
Cash and cash equivalents +/-0.18% P 1,597,043 +/-0.46% P 2,573,152 +/-0.41% P 1,383,937 AFS financial assets
(debt securities) +/-3.89% 56,268,834 +/-0.59% 8,823,508 +/-1.16% 19,087,689 Short-term investments +/-3.89% 4,064,305 +/-0.59% 796,170 +/-1.16% 4,560,606 Interest-bearing loans +/-0.61% ( 4,129,231 ) +/-0.65% ( 5,200,000 ) +/-
0.93% ( 7,440,000 )
P 57,800,951 P 6,992,830 P 17,592,232
(c) Other Price Risk
The Group’s exposure to price risk arises from its investments in equity securities, which are classified as part of the AFS Financial Assets in the consolidated statements of financial position. These consist of publicly-listed equity securities which are carried at fair value.
Management monitors its equity securities in its investment portfolio based on market indices. Material investments within the portfolio are managed on an individual basis.
For equity securities listed in the Philippines, an average volatility of 16.69%, 17.43%
and 12.27% has been observed during 2015, 2014 and 2013, respectively. If quoted prices for these securities increased or decreased by that amount, profit before tax would have changed by P124.4 million, P143.3 million and P45.9 million in 2015, 2014 and 2013, respectively.
No sensitivity analysis was provided for government and corporate bonds, and
investments in UITF classified as AFS financial assets as management deemed that the risk at the end of the year is not representative of a risk inherent in financial instruments.
The investments are considered medium to long-term strategic investments. In accordance with the Group’s policies, no specific hedging activities are undertaken in relation to these investments, except as discussed in Notes 10 and 11 in connection with its investment in certain foreign currency denominated corporate debt instruments which are also subject to a cross-currency swap agreement. The investments are continuously monitored to ensure returns of these equity instruments are timely utilized or reinvested in the Group’s favor.
4.2 Credit Risk
Credit risk represents the loss the Group would incur if the counterparty fails to perform its contractual obligations. The Group’s exposure to credit risk on its receivables relates primarily to the inability of the debtors to pay and students to fully settle the unpaid balance of tuition fees and other charges which are owed to the Group based on installment payment schemes.
The Group has established controls and procedures to minimize risks of non-collection.
Students are generally not allowed to enroll in the following semester unless the unpaid balance in the previous semester has been paid.
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The Group also withholds the academic records and clearance of the students with unpaid balances; thus, ensuring that collectability is reasonably assured. The Group’s exposure to credit risk on its other receivables from debtors and related parties is managed through setting limits and monitoring closely said accounts.
The maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown in the consolidated statements of financial position or in the detailed analysis provided in the notes to the consolidated financial statements, as summarized below.
Notes 2015 2014 2013
Cash and cash
equivalents 8 P 887,447,257 P 559,584,420 P 338,059,095 Trade and other
receivables – net 9 531,858,632 404,552,152 493,525,522 Financial asset
at FVTPL 10 340,800 - 18,629,900
AFS financial assets
(debt securities) 11 1,446,499,583 1,495,509,753 1,645,490,432 Short-term investments 13 104,480,844 134,944,032 393,155,724 Refundable deposits 13 7,176,868 3,929,796 3,929,796
P 2,977,803,984 P 2,598,520,153 P 2,892,790,469
The table below shows the credit quality of the Group’s financial assets as at March 31, 2015, 2014 and 2013 having past due but not impaired components.
Neither
past due nor Past due and
Notes impaired impaired Total 2015
Cash and cash
equivalents 8 P 887,447,257 P - P 887,447,257 Trade and other
receivables – net 9 475,881,356 55,977,276 531,858,632 Financial assets at
FVTPL 10 340,800 - 340,800
AFS financial assets
(debt securities) 11 1,446,499,583 - 1,446,499,583 Short-term investments 13 104,480,844 - 104,480,844 Refundable deposits 13 7,176,868 - 7,176,868
P 2,921,826,708 P 55,977,276 P 2,977,803,984
2014
Cash and cash
equivalents 8 P 559,584,420 P - P 559,584,420 Trade and other
receivables – net 9 357,966,474 46,585,678 404,552,152 AFS financial assets
(debt securities) 11 1,495,509,753 - 1,495,509,753 Short-term investments 13 134,944,032 - 134,944,032 Refundable deposits 13 3,929,796 - 3,929,796
P 2,551,934,475 P 46,585,678 P 2,598,520,153
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Neither
past due nor Past due and
Notes impaired impaired Total
2013
Cash and cash
equivalents 8 P 338,059,095 P - P 338,059,095 Trade and other
receivables – net 9 358,641,555 134,883,967 493,525,522 Financial asset at
FVTPL 10 18,629,900 - 18,629,900
AFS financial assets
(debt securities) 11 1,645,490,432 - 1,645,490,432 Short-term investments 13 393,155,724 - 393,155,724 Refundable deposits 13 3,929,796 - 3,929,796
P 2,757,906,502 P 134,883,967 P 2,892,790,469
The Group’s management considers that all the above financial assets are not impaired and of good credit quality, except those specifically provided with allowance for impairment at the end of the reporting period. The age of past due but not impaired receivables is about six months for each of the three years presented.
None of the Group’s financial assets are secured by collateral or other credit enhancements, except for cash and cash equivalents as described below.
(a) Cash and Cash Equivalents
The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. Included in the cash and cash equivalents are cash in banks and short-term placements.
These are insured by the Philippine Deposit Insurance Corporation up to a maximum coverage of P0.5 million for every depositor per banking institution.
(b) Trade and Other Receivables
In respect of trade and other receivables, the Group has neither any significant exposure to any individual customer or counterparty nor does it have any other concentration of credit risk arising from counterparties in similar business activities, geographic region or economic parties. The Group classifies tuition and other fee receivables from students based on the number of semesters the receivables have been outstanding. Receivables from students that are outstanding for more than one semester are analyzed to determine whether they are impaired. Those that are not outstanding for more than one semester or are currently receivable are
determined to be collectible, based on historical experience.
(c) Financial Assets at FVTPL and AFS Financial Assets
Financial assets at FVTPL and AFS financial assets are coursed through reputable financial institutions duly approved by the BOT.
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4.3 Liquidity Risk
The Group manages liquidity risk by maintaining a balance between continuity of funding and flexibility. Treasury controls and procedures are in place to ensure that sufficient cash is maintained to cover daily operational and working capital requirements.
Management closely monitors the Group’s future and contingent obligations and ensures that future cash collections are sufficient to meet them in accordance with internal policies. The Group invests in short-term placements when excess cash is obtained from operations.
As at March 31, 2015, 2014 and 2013 the Group’s financial liabilities have contractual maturities which are presented below.
Current Non-current
Within 6 to 12 1 to 5 6 Months Months Years
2015
Trade and other payables P 647,217,342 P 7,876,714 P - Interest-bearing loans 684,548,185 6,217,262 34,006,754 Refundable deposits (presented
under Other Non-current
Liabilities) - - 3,701,378
P1,331,765,527 P 14,093,976 P 37,708,132
2014
Trade and other payables P 479,556,137 P 3,866,207 P - Interest-bearing loans 7,088,079 6,338,079 954,507,227
Derivative liability - 14,433,500 -
Refundable deposits (presented under Other Non-current
Liabilities) - - 3,063,144
P 486,644,216 P 24,637,786 P 957,570,371
2013
Trade and other payables P 395,712,835 P 2,550,908 P - Interest-bearing loans 2,306,123 1,223,654 944,078,904 Refundable deposits (presented
under Other Non-current
Liabilities) - - 4,632,374
P 398,018,958 P 3,774,562 P 948,711,278 The contractual maturities presented above reflect the gross cash flows, which may differ from the carrying values of the liabilities at the end of the reporting period.
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5. CATEGORIES AND OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
5.1 Carrying Amounts and Fair Values by Category
The carrying amounts and fair values of financial assets and financial liabilities measured at fair value that are presented in the consolidated statements of financial position are shown below.
2015 2014 2013
Carrying Fair Carrying Fair Carrying Fair
Notes Values Values Values Values Values Values
Financial assets Financial asset
at FVTPL –
Cross-currency swaps 10 P 340,800 P 340,800 P - P - P 18,629,900 P 18,629,900
AFS financial assets:
Debt securities 11 1,446,499,583 1,446,499,583 1,495,509,753 1,495,509,753 1,645,490,432 1,645,490,432 Equity securities 11 1,021,360,194 1,021,360,194 822,382,913 822,382,913 373,997,445 373,997,445 Investment in golf
club shares 13 2,050,000 2,050,000 2,050,000 2,050,000 2,050,000 2,050,000
2,469,909,777 2,469,909,777 2,319,942,666 2,319,942,666 2,021,537,877 2,021,537,877
P 2,470,250,577 P 2,470,250,577 P 2,319,942,666 P 2,319,942,666 P 2,040,167,777 P 2,040,167,777
Financial liabilities Derivative liability –
Cross-currency swaps 10 P - P - P 14,433,500 P 14,433,500 P - P -
Except for the financial assets and financial liability presented above, the Group has no other financial assets and/or financial liabilities that are carried at fair value or that are not carried at fair value but are required to be disclosed at fair value (see Note 6.3).
Management determined that the carrying amounts of these other financial instruments are equal to or approximate their fair values; hence, no further comparison between the carrying amounts and fair values is presented.
See Notes 2.5 and 2.10 for a description of the accounting policies for each category of financial instruments. A description of the Group’s risk management objectives and policies for financial instruments is provided in Note 4.
5.2 Offsetting of Financial Assets and Financial Liabilities
The Group’s cash in bank, which is presented as part of the Cash and Cash Equivalents account, and portion of Short-term investments under the Other Current Assets account in the consolidated statements of financial position (see Notes 8 and 13) are subject to offsetting, enforceable master netting arrangements and similar agreements in 2015, 2014 and 2013 are as follows:
Gross amounts recognized Net amount Related amounts that can in the consolidated presented potentially be set-off in the
statements of in the consolidated statements
financial position consolidated of financial position
Financial financial Cash
Financial liabilities statement of Financial collateral Net
Assets set-off position instruments received amount
March 31, 2015 P 402,039,103 P - P 402,039,103 (P 676,923,077) P - (P 274,883,974) March 31, 2014 P 209,017,368 P - P 209,017,368 (P 800,000,000) P - (P 590,982,632) March 31, 2013 P 378,861,526 P - P 378,861,526 (P 800,000,000) P - (P 421,138,474)
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For financial assets and financial liabilities subject to enforceable master netting agreements or similar arrangements above, each agreement between the Group and counterparties (i.e., depository bank) allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis.
All other financial assets and financial liabilities are settled on a gross basis; however, each party to the financial instrument (i.e., related parties) will have the option to settle all such amounts on a net basis through the approval by both parties’ BOT or BOD. As such, the Group’s outstanding receivables from and payables to the same related parties can potentially be offset to the extent of their corresponding outstanding balances.
6. FAIR VALUE MEASUREMENT AND DISCLOSURES 6.1 Fair Value Hierarchy
In accordance with PFRS 13, 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).
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.
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6.2 Financial Instruments Measurement at Fair Value
The table below shows 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 March 31, 2015, 2014 and 2013.
Level 1 Level 2 Level 3 Total
2015
AFS financial assets:
Debt securities:
Government P 484,666,003 P - P - P 484,666,003
Corporate 961,833,580 - - 961,833,580
Equity securities 1,021,360,194 - 2,050,000 1,023,410,194 Financial asset at FVTPL –
Cross-currency swaps - 340,800 - 340,800
P 2,467,859,777 P 340,800 P 2,050,000 P 2,470,250,577
2014
AFS financial assets:
Debt securities:
Government P 451,389,849 P - P - P 451,389,849
Corporate 1,044,119,904 - - 1,044,119,904
Equity securities 822,382,913 - 2,050,000 824,432,913
P 2,317,892,666 P - P 2,050,000 P 2,319,942,666
Derivative liability –
Cross currency swaps P - (P 14,433,500) P - (P 14,433,500) 2013
AFS financial assets:
Debt securities:
Government P 882,641,861 P - P - P 882,641,861
Corporate 762,848,571 - - 762,848,571
Equity securities 373,997,445 - 2,050,000 376,047,445
Financial asset at FVTPL –
Cross currency swaps - 18,629,900 - 18,629,900
P 2,019,487,877 P 18,629,900 P 2,050,000 P 2,040,167,777
There were neither transfers between levels nor changes in levels of classification of instruments in all the years presented.
Described below and in the succeeding page 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 March 31, 2015, 2014 and 2013, 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, while the UITF is valued based on the Net Asset Value per unit (NAVPU) of the fund, as compared 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.
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Golf club shares, which are presented as part of Other Non-current Assets account in the consolidated statements of financial position, are included in Level 3 since its market value is not quoted in an active market, hence, measured by reference to the fair value of a comparable instrument adjusted for inputs internally developed by management to consider the differences in corporate profile and historical performance of the entity.
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 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