DRAFT
21. RISK MANAGEMENT OBJECTIVES AND POLICIES
The University is exposed to certain financial risks in relation to financial instruments.
Its main purpose for its dealings in financial instruments is to fund operational and capital expenditures. The BOT has overall responsibility for the establishment and oversight of the University’s risk management framework. It has a risk management committee headed by an independent trustee that is responsible for developing and monitoring the University’s policies, which address risk management areas.
Management is responsible for monitoring compliance with the University’s risk management policies and procedures and for reviewing the adequacy of these policies in relation to the risks faced by the University.
The University does not engage in trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the University is exposed to are described below.
21.1 Interest Rate Sensitivity
The University’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 liabilities have fixed rates.
Notes 2011 2010 2009
Cash and cash
equivalents 4 P 381,502,288 P 427,163,215 P 1,121,771,210 AFS investments 6 1,510,553,138 1,202,638,312 1,073,109,957
HTM investments - 20,000,000 20,000,000
Due from a
related party 17.1 100,000,000 100,000,000 100,000,000 Restricted cash and
cash equivalents 4, 11 5,394,693 43,970,750 58,490,642 P 1,997,450,119 P 1,793,772,277 P 2,373,371,809
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The following table illustrates the sensitivity of income before tax for the years with regard to the University’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 68% level of confidence. The sensitivity analysis is based on the University’s financial instruments held at March 31, 2011, 2010 and 2009.
2011 2010 2009
Reasonably Effect on Reasonably Effect on Reasonably Effect on possible income before possible income before possible income before change in rate tax change in rate tax change in rate tax
Cash and cash equivalents +/-0.79% P 3,071,364 +/-1.39% P 5,925,674 +/-2.67% P 31,423,827
AFS investments +/-0.79% 12,024,719 +/-0.94% 16,034,252 +/-2.83% 28,147,720
HTM investments - - +/-1.39% 278,000 +/-2.67% 534,000
Due from a related party +/-0.79% 937,325 +/-0.78% 780,297 +/-2.73% 2,733,463
Restricted cash and cash equivalents +/-0.79% 42,618 +/-1.39% 611,193 +/-2.67% 1,561,700
P 16,076,026 P 23,629,416 P 64,400,710
21.2 Credit Risk
Credit risk represents the loss the University would incur if the counterparty failed to perform under its contractual obligations. The University’s exposure to credit risk on its receivables related 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 University based on installment payment schemes. The University has established controls and procedures in its credit policy to determine and to monitor the credit worthiness of the students based on relevant factors. Also, students are not allowed to enroll in the following semester unless the unpaid balance in the previous semester has been paid. The University also withholds the academic records and clearance of the students with unpaid balance, thus ensuring that collectibility is reasonably
assured. The University’s exposure to credit risk on its other receivables from debtors and related parties is managed through close account monitoring and setting limits.
The University neither has 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.
It has, however, a significant amount of loans to FRC which are not considered high risk considering that FRC is a subsidiary of the University (see Notes 17.1 and 17.2).
With respect to credit risk arising from cash and cash equivalents, receivables, due from a related party, AFS investments and HTM investments, the University’s exposure to credit risk arises from default of the counterparty, with maximum
exposure equal to the carrying amount of these instruments. The maximum exposure to credit risk at the end of the reporting period is as follows:
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Notes 2011 2010 2009
Cash and cash
equivalents 4 P 381,502,288 P 427,163,215 P 1,121,771,210
Receivables 5 591,894,556 699,920,334 133,310,657
Financial assets
at FVTPL 8,456,381 - -
AFS investments
(debt securities) 6 1,318,716,186 1,180,709,313 1,053,371,205 Restricted cash and
cash equivalents 4, 11 5,394,693 43,970,750 58,490,642 Due from a
related party 17.1 394,489,204 218,774,500 100,000,000
HTM investments - 20,000,000 20,000,000
P 2,700,453,308 P 2,590,538,112 P 2,486,943,714 The table below shows the credit quality of the University’s financial assets as of March 31, 2011, 2010 and 2009 (presented in thousands Philippine pesos) having past due but not impaired components.
Neither Past due
past due nor Impaired Not
impaired (see Note 5) impaired Total 2011Cash and
cash equivalents P 381,502 P - P - P 381,502
Receivables 572,311 24,429 32,509 629,249
Financial assets
at FVTPL 8,456 - - 8,456
AFS investments 1,318,716 - - 1,318,716
Restricted cash and
cash equivalents 5,395 - - 5,395
Due from a
related party 394,489 - - 394,489
P 2,680,869 P 24,429 P 32,509 P 2,737,807
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Neither Past due
past due nor Impaired Not
impaired (see Note 5) impaired Total 2010Cash and
cash equivalents P 427,163 P - P - P 427,163
Receivables 683,522 15,728 16,398 715,649
AFS investments 1,180,709 - - 1,180,709
HTM investments 20,000 - - 20,000
Restricted cash and
cash equivalents 43,971 - - 43,971
Due from a
related party 218,774 - - 218,774
P 2,574,139 P 15,728 P 16,398 P 2,606,266 2009Cash and
cash equivalents P 1,121,771 P - P - P 1,121,771
Receivables 118,536 14,146 14,775 147,457
AFS investments 1,053,371 - - 1,053,371
HTM investments 20,000 - - 20,000
Restricted cash and
cash equivalents 58,491 - - 58,491
Due from a
related party 100,000 - - 100,000
P 2,472,169 P 14,146 P 14,775 P 2,501,090 The age of past due but not impaired receivables is about six months for each of the three years.
The University classifies tuition and other school fees 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.
The University’s management considers that all the above financial assets are not impaired, except those specifically provided with allowance for impairment, at the end of the reporting period and of good credit quality. Cash and cash equivalents, AFS investments and HTM investments are coursed through reputable financial
institutions duly approved by the BOT. The balance of Due from a Related Party account is from a profitable related party with good payment record; collections therefrom are reasonably assured.
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21.3 Liquidity Risk
The University 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 University’s future and contingent obligations and ensures that future cash collections are sufficient to meet them in accordance with internal policies. The University invests in cash placements when excess cash is obtained from operations.
Financial liabilities of the University at the end of the reporting period comprise of Accounts Payable and Other Liabilities which are all short-term in nature and have contractual maturities of less than 12 months.
21.4 Other Price Risk Sensitivity
The University’s exposure to price risk arises from its investments in equity and debt securities, which are classified as AFS Investments in the statements of financial position.
Management monitors its equity and debt securities in its investment portfolio based on market indices. Material investments within the portfolio are managed on an individual basis.
AFS investments consist of publicly listed equity securities and government securities which are carried at fair value and non-listed equity securities for which no fair value information is available and that are therefore carried at cost.
For equity securities listed in the Philippines, an average volatility of 18.98%, 26.06%
and 36.68% has been observed during 2011, 2010 and 2009, respectively. If quoted price for these securities increased or decreased by that amount income before tax would have changed by P28.3 million, P4.9 million and P7.1 million in 2011, 2010 and 2009, respectively.
The investments in listed equity securities are considered long-term strategic investments. In accordance with the University’s policies, no specific hedging activities are undertaken in relation to these investments, except as discussed in Note 6 in connection with its investment in cross currency swap. The investments are continuously monitored and voting rights arising from these equity instruments are utilized in the University’s favor.
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22. CATEGORIES AND FAIR VALUES OF FINANCIAL ASSETS AND