PART V EXHIBITS AND SCHEDULES
Item 13. Exhibits and Reports on SEC Form 17-C (a) Exhibit
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of the University’s financial statements in accordance with PFRS requires management to make judgments and estimates that affect amounts reported in the 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 vary from these estimates.
3.1 Critical Management Judgments in Applying Accounting Policies
In the process of applying the University’s accounting policies, management has made judgments, apart from those involving estimation. The following judgments have the most significant effect on the amounts recognized in the 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 and HTM investments, the University 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 University 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 University evaluates, among other factors, the significant and prolonged decline in the fair value of an investment below 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. The management considers more than 20% decline in fair value as significant and continuous decline in value beyond nine months to be prolonged.
Based on the recent evaluation of information and circumstances affecting the University’s AFS Financial Assets, management concluded that the assets are not impaired as at May 31, 2018, 2017 and 2016. Future changes in those information and circumstance might significantly affect the carrying amount of the assets.
(c) Amortization of Leasehold Improvements
The University’s leasehold improvements are amortized over 20 years, which is the estimated useful life of the asset (see Notes 2.6 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 profit or loss in the period such decision is made.
(d) Distinction between Investment Properties and Owner-managed Properties
The University determines whether a property qualifies as investment property. In making its judgment, the University 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 University 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
University considers each property separately in making its judgment.
(e) Distinction between Operating and Finance Lease
The University 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 University’s lease agreements are determined to be operating leases.
(f) 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 2.10 and relevant disclosures are presented in Note 27.
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) Estimating Impairment of Receivables
The University 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 payment behavior of students and related parties, age of receivables and other external factors affecting the education industry. The University constantly reviews the age and status of receivables and identifies accounts that should be provided with allowance. The carrying value of receivables and the analysis of allowance for
impairment on such financial assets are shown in Note 8.
(b) Determining Fair Value Measurement of Financial Assets other than Loans and Receivables The University carries certain financial assets at fair value, which requires the extensive use of accounting estimates and judgment. In cases where active market quotes are not available, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net base of the instrument. The amount of changes in fair value would differ if the University utilized different valuation methods and assumptions. Any change in fair value of these financial assets would affect profit or loss and equity.
The carrying values of the University’s AFS Financial Assets and the amounts of fair value changes recognized during the years on those assets are disclosed in Note 10.
On the other hand, the carrying value of the cross-currency swap is disclosed in Note 9 while fair value gains or losses on cross-currency swap agreements are
presented as Fair value gain or loss on financial asset at FVTPL under Finance Income or Finance Costs in the statement of profit or loss [see Note 2.4(a)].
(c) Estimating Useful Lives of Investment Properties and Property and Equipment
The University 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 investment properties and property and equipment are presented in Notes 13 and 14, 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 periods. Actual results, however, may vary due to changes in factors mentioned above.
(d) Determining Fair Value of Investment Properties
Investment property is measured using the cost model. The fair value disclosed in Note 13 is determined by the University 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.
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) Estimating Impairment of Non-financial Assets
The University’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 assessment, no impairment loss is required to be recognized on the University’s investment properties, property and equipment, and investments in subsidiaries and an associate as of May 31, 2018, 2017 and 2016.
(f) Determining Recoverable Amount of Deferred Tax Assets
The University 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 assets to be utilized. Management assessed that the deferred tax assets recognized as at May 31, 2018, 2017 and 2016 are fully recoverable because those will be fully utilized in the coming years. The carrying value of deferred tax assets as of those dates is disclosed in Note 22.