DRAFT
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES The Group’s consolidated financial statements prepared in accordance with PFRS
require management to make judgments and estimates that affect 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 vary from these estimates.
3.1 Critical 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 Held-to-maturity Investments
In classifying non-derivative financial assets with fixed or determinable payments and fixed maturity, such as bonds, as held-to-maturity investments, the Group evaluates its intention and ability to hold such investments up to maturity.
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If the Group fails to keep these investments to maturity other than for specific circumstances as allowed under the standards, it will be required to reclassify the whole class as available-for-sale financial assets. In such a case, the investments would therefore be measured at fair value, not amortized cost.
As of March 31, 2010 and 2009, there are no held-to-maturity investments disposed off before their maturity. In fiscal year 2011, all of the Group’s held-to-maturity investments matured and were no longer reinvested in the same type of investment in 2011.
(b) 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-occupied properties generate cash flows that are attributable not only to the property but also to other assets used in the process of supplying 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 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.
(c) Classification of Leases
The Group has entered into various lease agreements as either a lessee or a lessor. Critical 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. Currently, all of the Group’s lease agreements are
determined to be operating leases.
Rental expense charged to operations amounted to P5.8 million in 2011, P7.9 million in 2010, and P17.1 million in 2009 (see Note 15) while rental income earned in 2011, 2010 and 2009 are presented as Rental account under Revenues in the consolidated statements of comprehensive income.
(d) Provisions and Contingencies
Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provisions and disclosure of contingencies are discussed in Note 2.10 and relevant disclosures are presented in Note 22.
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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 financial year:
(a) Allowance for Impairment of 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 collectibility 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. Analyses of net realizable value of receivables as of March 31, 2011, 2010 and 2009 are presented in Note 6.
Impairment losses recognized on receivables amounted to about P32.6 million in 2011, P22.0 million in 2010, and P17.6 million in 2009 (see Note 6).
(b) Valuation of Financial Assets Other than Loans and Other Receivables
The Group 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 Group utilized different valuation methods and assumptions. Any change in fair value of these financial assets would affect profit or loss and fund balance.
Fair value gains and losses recognized on AFS investments in 2011, 2010 and 2009 are presented as Accumulated Fair Value Gains (Losses) account in the consolidated statements of changes in equity (see Note 7). On the other hand, fair value gains recognized on FVTPL investments in 2011 are presented as Fair Value Gains on Financial Assets at Fair Value through Profit or Loss under Finance Income account in the 2011 consolidated statements of comprehensive income (see Note 7).
(c) Impairment of AFS Investments
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.
Analyses of the carrying value of the AFS investments as of March 31, 2011, 2010 and 2009 are presented in Note 7.
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(d) Useful Lives of Investment Property and Property and Equipment
The Group estimates the useful lives of investment property 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. Analyses of the carrying amounts of investment property and property and equipment are presented in
Notes 10 and 11, respectively. Actual results, however, may vary due to changes in factors mentioned above. Based on management assessment as of
March 31, 2011, 2010 and 2009, no change in the estimated useful lives of the assets is necessary.
(e) Impairment of Non-financial Assets
PFRS requires that an impairment review be performed when certain impairment indicators are present. The Group’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 fair values reflected in the consolidated financial statements 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.
The Group did not recognize any impairment loss on investments in an
associate and joint venture, investment property, and property and equipment in 2011, 2010 and 2009.
4. SEGMENT INFORMATION