Part II OPERATIONAL AND FINANCIAL INFORMATION
Item 7. Financial Statements
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. These judgments, which are discussed in the succeeding page, have the most significant effect on the amounts recognized in the financial statements.
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(a) Evaluating 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 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 University’s AFS Financial Assets, management concluded that the assets are not impaired as at March 31, 2015, 2014 and 2013. Future changes in those
information and circumstance might significantly affect the carrying amount of the assets.
(b) Determining 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.
(c) Distinguishing 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.
In 2015, the lease agreement between East Asia Educational Foundation (EAEF) and the University for certain land and building had ceased.
Accordingly, the carrying value of the land and building that is being leased out to EAEF were reclassified from the Investment Property account to the Property and Equipment account in the 2015 statement of financial position (see Notes 13 and 14).
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(d) Distinguishing 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.
(e) 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, 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 statements of profit or loss [see Note 2.4(a)].
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(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 March 31, 2015, 2014 and 2013, 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) Determining Fair Value of Investment Properties
Investment property is measured using the cost model. The fair value disclosed in the financial statements is determined by the University using the discounted cash flows valuation technique when information on current or recent prices of assumptions underlying the discounted cash flow approach of investment property is not readily available. Otherwise, the disclosures on fair values of investment properties are based on appraisal reports prepared by a third party appraiser. The University 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 University and those reported by the market.
The expected future market rentals are determined on the basis of the remaining useful life of the properties being leased out.
(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. The management assessed that the full amount of investment in a joint venture previously impaired in prior years is no longer recoverable and thus appropriately written off in 2014
(see Note 12.2). On the other hand, based on management assessment, no impairment loss is required to be recognized on the investment properties, property and equipment, and investments in subsidiaries and an associate in 2015, 2014 and 2013.
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(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 asset to be utilized. Management assessed that the deferred tax assets recognized as at March 31, 2015, 2014 and 2013 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.