ANNEX G
E. Corporate Governance
II. CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE INFORMATION 1 Background of the University
2.24 Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s strategic steering committee, its chief operating
decision-maker. The strategic steering committee is responsible for allocating resources and assessing performance of the operating segments.
In identifying its operating segments, management generally follows the Group’s
products and service lines as disclosed in Note 7, which represent the main products and services provided by the Group.
Each of these operating segments is managed separately as each of these service lines requires different technologies and other resources, as well as marketing approaches. All intersegment transfers are carried out at arm’s length prices.
- 27 -
The measurement policies the Group uses for segment reporting under PFRS 8, Operating Segments, are the same as those used in its consolidated financial statements.
In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment. There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss.
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of the Group’s consolidated financial statements in accordance with PFRS requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may ultimately differ from these estimates.
3.1 Critical Management Judgments in Applying Accounting Policies
In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the consolidated financial statements:
(a) Classification of Financial Assets as HTM Investments
In classifying non-derivative financial assets with fixed or determinable payments and fixed maturity, such as bonds, as HTM investments, the Group evaluates its intention and ability to hold such investments up to maturity. Management has confirmed its intention and determined its ability to hold the investments up to maturity. If the Group fails to keep these investments to maturity other than for specific circumstances as allowed under the standard, it will be required to reclassify the whole class as AFS financial assets. In such a case, the investments would, therefore, be measured at fair value, not at amortized cost.
(b) Impairment of AFS Financial Assets
The determination when an investment is other-than-temporarily impaired requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost, and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows.
Based on the recent evaluation of information and circumstances affecting the Group’s AFS Financial Assets, management concluded that the assets are not impaired as at May 31, 2017 and 2016 and March 31, 2016. Future changes in those information and circumstance might significantly affect the carrying amount of the assets.
- 28 -
(c) Determination of Control of Entities in which the University Holds Less than 50%
Management considers that the University has de facto control of FRC even though it holds less than 50% of the ordinary shares and voting rights in the latter.
Although the University holds less than 50% of the voting shares of stock of FRC, it has control over FRC because it is exposed or has right to variable returns from its involvement with FRC and it has the ability to affect those returns through its power over FRC. It is able to do this primarily because the University has the power to cast the majority of votes at meetings of the BOD and elect officers of FRC.
Accordingly, FRC is recognized as a subsidiary of the University (see Note 1.1).
On the other hand, JMCI is not considered a subsidiary because the Group does not make financial or operational decisions for the benefit of JMCI. It only has
significant influence over the entity.
(d) Amortization of Leasehold Improvements
The Group’s leasehold improvements, which are included as part of the building and improvements, are amortized over 20 years, which is the estimated useful life of the asset (see Notes 2.7 and 14) regardless of the term of the lease contracts which is usually shorter than the expected useful life of the improvements because it is highly probable that the lease contract will be renewed before the end of such contract. A decision by management not to renew its lease agreement will result in a significant impact on its consolidated profit or loss in the period such decision is made.
(e) Distinction between Investment Properties and Owner-managed Properties
The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generates cash flows largely independent of the other assets held by an entity. Owner-managed properties generate cash flows that are attributable not only to the property but also to other assets used in the process of providing educational services.
Some properties comprise a portion that is held to earn rental or for capital
appreciation and another portion that is held for use in the supply of services or for administrative purposes. If a portion can be sold separately (or leased out
separately under finance lease), the Group accounts for such portion separately. If the portion cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in the supply of services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property.
The Group considers each property separately in making its judgment.
(f) Distinction between Operating and Finance Lease
The Group has entered into various lease agreements as either a lessor or a lessee.
Judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the
agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. Currently, all of the Group’s lease agreements are determined to be operating leases.
- 29 -
(g) Recognition of Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and contingencies. Accounting policies on recognition and disclosure of provisions and contingencies are discussed in Note 2.12 and relevant disclosures are presented in Note 28.
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
Adequate amount of allowance for impairment is provided for specific and groups of accounts, where objective evidence of impairment exists. 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 offinancial 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, 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).
- 30 -
(c) Estimation of Useful Lives of Property and Equipment and Investment Property
The Group estimates the useful lives of property and equipment and investment property 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 property are presented in Notes 14 and 15, respectively.
Based on management’s assessment as at May 31, 2017 and 2016 and March 31, 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 property is measured using the cost model. In determining the fair value of these assets for disclosure purposes, the Group engages the services of a professional and independent appraiser applying the relevant valuation
methodologies as discussed in Note 6.
For investment property 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 property without appraisal report, the fair value disclosed in the consolidated financial statements is determined by the Group using the discounted cash flows valuation technique 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.
(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 property, property and equipment, goodwill, and certain other non-financial assets during the periods ended May 31, 2017 and 2016 and March 31, 2016.
- 31 -
(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, 2017 and 2016 and March 31, 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).
(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.
4. RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group 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 the overall responsibility for the establishment and oversight of the Group’s risk management framework. It has a risk management committee headed by an independent trustee that is responsible for developing and monitoring the Group’s policies, which address risk management areas.
Management is responsible for monitoring compliance with the Group’s risk
management policies and procedures and for reviewing the adequacy of these policies in relation to the risks faced by the Group.
- 32 -
The Group does not engage in trading of financial assets for speculative purposes nor does it write options. Following are the most significant financial risks to which the Group is exposed to.
4.1 Market Risk