CAPITAL STRUCTURE AND CAPITAL ADEQUACY

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2 CAPITAL STRUCTURE AND CAPITAL ADEQUACY The capital-to-risk assets ratios of the Company as reported to the BSP as of 30 September 2017 and 2016 based on Basel III are shown in the table below. In PHP million A. Qualifying Capital Tier 1 Capital 5, , Common Equity Tier 1 Capital 5, , Additional Tier 1 Capital Tier 2 Capital Total Qualifying Capital 5, , B. Total Risk Weighted Assets Total Credit Risk-Weighted Assets 37, , Total Market Risk-Weighted Assets - - Total Operational Risk-Weighted Assets 3, , Total Risk-Weighted Assets 41, , C. RISK-BASED CAPITAL ADEQUACY RATIO Common Equity Tier 1 Ratio 13.05% 13.93% Capital Conservation Buffer 7.05% 2.50% Tier 1 Capital Ratio 13.05% 13.93% Total Capital Adequacy Ratio 13.86% 14.76% Ratios of common equity tier 1 (CET1) capital, tier 1 capital and total qualifying capital are computed by dividing each component over the total risk-weighted assets. The Capital Conservation Buffer is computed by deducting the statutory 6.00% CET1 ratio from the actual CET1 ratio. The components of Tier 1 and Tier 2 Capital and regulatory adjustments/deductions as of 30 September 2017 and 2016 based on Basel III, follow: In PHP million A. Tier 1 Capital Common Equity Tier 1 (CET1) Capital 6, , Paid-up common stock 3, , Retained earnings 2, , Undivided profits Other comprehensive income: (57.22) (55.68) (i) Net unrealized gains or losses on AFS securities (0.45) (0.68) (ii) Cumulative foreign currency translation - - (iii) Remeasurement of Net Defined Benefit Liability/(Asset) (56.77) (55.00) (iv) Gains(Losses) on Fair Value Adjustments of Hedging Instruments - - (a) Cash Flow Hedge - - (b) Hedge of Net Investment in Foreign Operations - - (v) Others - - Minus: Regulatory Adjustments to CET1 Capital 1, Investments in equity of unconsolidated subsidiary securities dealers/brokers and insurance companies after deducting related goodwill 1, TOTAL COMMON EQUITY TIER 1 CAPITAL 5, , TOTAL TIER 1 CAPITAL 5, , (Forward) 2

3 B. Tier 2 (T2) Capital Tier 2 (T2) Capital General loan loss provision, limited to a maximum of 1% of credit risk-weighted assets, and any amount in excess thereof shall be deducted from the credit risk-weighted assets in computing the denominator of the risk-based capital ratio TOTAL TIER 2 CAPITAL C. TOTAL QUALIFYING CAPITAL 5, , Full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements follows: Qualifying capital Reconciling items In PHP million Audited financial statements Qualifying capital Reconciling items Audited financial statements Paid-up common stock 3, , , , Retained earnings 2, (177.74) 2, , (122.7) 1, Undivided profits * (4.2) ** 1, *** 7.83 **** 1, Other comprehensive income (57.22) (22.82) (80.04) (55.68) (9.68) (65.36) Deductions (1,258.47) (102.93) (1,361.40) (988.90) (257.33) (1,246.23) Tier 1 Capital 5, (16.78) 5, , (149.16) 4, Tier 2 Capital TOTAL QUALIFYING CAPITAL 5, (15.34) 5, , (149.16) 4, * undivided profit from January to September 2017 ** includes undivided profit of Php Mn for the period October to December 2016 *** undivided profit from January to September 2016 **** includes undivided profit of Php Mn for the period October to December 2015 Details of risk-weighted assets by type of exposure as of 30 September 2017 and 2016 follow: In PHP million Nature of Item Due from Bangko Sentral ng Pilipinas (BSP) 6, , Due from Other Banks Available-for-Sale (AFS) Financial Assets Loans and Receivables 35, , Loans and Receivables Arising from Repurchase Agreements Real and Other Properties Acquired Total Exposures Excluding Other Assets 42, , Other Assets 1, , Total Exposures, Including Other Assets 43, , TOTAL RISK-WEIGHTED ON-BALANCE SHEET ASSETS 37, , External credit assessments by Standard & Poor, Fitch and Moody s are used to measure exposures under Due from Other Banks. 3

4 STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of ORIX METRO Leasing and Finance Corporation (the Company) is responsible for the preparation and fair presentation of the financial statements for the years ended September 30, 2017 and 2016, including the additional components attached therein, in accordance with Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. The Board of Directors reviews and approves the financial statements and submits the same to the stockholders. SGV & Co., the independent auditors appointed by the stockholders, has examined the financial statements of the Company in accordance with Philippine Standards on Auditing, and its reports to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination. Vicente R. Cuna, Jr. Chairman Protacio C. Bantayan, Jr. President Mary Mylene A. Caparas Treasurer 4

5 INDEPENDENT AUDITOR S REPORT The Board of Directors and Stockholders ORIX METRO Leasing and Finance Corporation 21st Floor, GT Tower International Ayala Avenue corner H.V. dela Costa Street, Makati City Report on the and Financial Statements Opinion We have audited the consolidated financial statements of ORIX METRO Leasing and Finance Corporation and its subsidiaries (the Group) and the parent company financial statements of ORIX METRO Leasing and Finance Corporation (the ), which comprise the consolidated and parent company statements of financial position as at September 30, 2017 and 2016, and the consolidated and parent company statements of income, consolidated and parent company statements of comprehensive income, consolidated and parent company statements of changes in equity and consolidated and parent company statements of cash flows for the years then ended, and notes to the consolidated and parent company financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated and parent company financial statements present fairly, in all material respects, the financial position of the Group and the as at September 30, 2017 and 2016, and their financial performance and their cash flows for the years then ended in accordance with Philippine Financial Reporting Standards (PFRSs). Basis for Opinion We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the and Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in 5

6 accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the and Financial Statements Management is responsible for the preparation and fair presentation of the consolidated and parent company financial statements in accordance with PFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated and parent company financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated and parent company financial statements, management is responsible for assessing the Group s and the s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group and the or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s and the s financial reporting process. Auditor s Responsibilities for the Audit of the and Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated and parent company financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and parent company financial statements. As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated and parent company financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s and the internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s and the s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated and parent company financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, 6

7 future events or conditions may cause the Group and the to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated and parent company financial statements, including the disclosures, and whether the consolidated and parent company financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on the Supplementary Information Required Under Revenue Regulations Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information required under Revenue Regulations in Note 31 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of ORIX METRO Leasing and Finance Corporation. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO. Janet A. Paraiso Partner CPA Certificate No SEC Accreditation No AR-2 (Group A), May 1, 2015, valid until April 30, 2018 Tax Identification No BIR Accreditation No , February 27, 2015, valid until February 26, 2018 PTR No , January 3, 2017, Makati City October 25,

8 ORIX METRO LEASING AND FINANCE CORPORATION AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION ASSETS September 30 October (As restated- Note 2) 2015 (As restated- Note 2) Cash and Cash Equivalents (Note 6) P=326,043,576 P=425,282,614 P=227,724,988 P=341,214,984 P=543,574,748 Due from Bangko Sentral ng Pilipinas (Note 7) 6,120,819,739 4,827,782,576 6,120,819,739 4,827,782,576 3,654,626,637 Securities Purchased Under Repurchase Agreements (Note 7) 232,000, ,025, ,000, ,025,249 Available-for-Sale Financial Assets (Note 8) 953, , , , ,978 Loans and Receivables (Notes 9 and 27) 32,996,049,892 25,170,732,090 32,861,634,332 25,068,471,938 20,020,497,365 Investments in Subsidiaries (Notes 2 and 10) 1,361,396,606 1,246,233, ,986,758 Property and Equipment (Note 11) 406,929, ,811, ,714, ,429,306 87,694,565 Equipment for Lease (Note 12) 2,842,828,810 2,341,847,098 Investment Properties (Note 13) 411,993,533 78,781,503 11,190,099 11,190, ,632 Prepaid Expenses (Note 14) 74,207,981 49,712,785 50,300,726 41,006,361 40,024,709 Other Assets (Note 15) 556,398, ,464, ,025,991 69,098,204 66,047,239 P=43,968,225,186 P=33,796,158,384 P=41,105,761,110 P=31,843,170,474 P=25,364,835,631 LIABILITIES AND EQUITY Liabilities Bills Payable (Notes 17 and 27) P=33,514,045,601 P=24,861,949,543 P=31,063,917,860 P=23,238,166,036 P=18,522,253,327 Deposits on Lease Contracts (Note 19) 1,392,792,543 1,298,513,037 1,304,921,444 1,225,676,475 1,137,387,571 Accounts Payable and Other Liabilities (Note 18) 1,684,557,905 1,528,788,831 1,353,774,830 1,273,511, ,346,837 Income Tax Payable (Note 26) 359,363, ,813, ,363, ,852, ,921,157 Deferred Tax Liabilities (Note 26) 272,212, ,533, ,030, ,740, ,126,123 37,222,971,964 28,264,599,032 34,354,008,515 26,310,946,919 20,866,035,015 Equity Equity Attributable to Equity Holders of the Capital stock (Note 21) 3,595,709,900 2,996,424,900 3,595,709,900 2,996,424,900 1,897,139,900 Retained earnings (Note 21) 3,232,181,310 2,600,763,189 3,236,080,934 2,601,161,710 2,665,990,654 Net unrealized losses on available-forsale financial assets (Note 8) (448,455) (684,231) (448,455) (684,231) (593,343) Remeasurement losses on retirement plan (Notes 10 and 24) (79,589,784) (64,678,824) (79,589,784) (64,678,824) (63,736,595) 6,747,852,971 5,531,825,034 6,751,752,595 5,532,223,555 4,498,800,616 Non-controlling interest (2,599,749) (265,682) 6,745,253,222 5,531,559,352 6,751,752,595 5,532,223,555 4,498,800,616 P=43,968,225,186 P=33,796,158,384 P=41,105,761,110 P=31,843,170,474 P=25,364,835,631 See accompanying Notes to Financial Statements. 8

9 ORIX METRO LEASING AND FINANCE CORPORATION AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME Years Ended September (As restated- Note 2) NET INCOME P=1,228,369,054 P=1,033,672,044 P=1,234,204,224 P=1,034,456,056 OTHER COMPREHENSIVE LOSS Other comprehensive income (loss), net of income tax, to be reclassified in profit or loss in subsequent periods: Change in net unrealized gain (loss) on available-for-sale financial assets (Note 8) 235,776 (90,888) 235,776 (90,888) Other comprehensive income (loss), net of income tax, not to be reclassified in profit or loss in subsequent periods: Remeasurement losses on retirement plan (Note 23) (14,910,960) (942,229) (12,854,304) (1,771,347) Share in remeasurement gains (losses) on retirement plan of subsidiaries (Notes 10 and 24) (2,056,656) 829,118 OTHER COMPREHENSIVE LOSS, NET OF TAX (14,675,184) (1,033,117) (14,675,184) (1,033,117) TOTAL COMPREHENSIVE INCOME P=1,213,693,870 P=1,032,638,927 P=1,219,529,040 P=1,033,422,939 Attributable to: Equity holders of the P=1,216,027,937 P=1,033,024,422 Non-controlling interest (2,334,067) (385,495) P=1,213,693,870 P=1,032,638,927 See accompanying Notes to Financial Statements. 9

10 ORIX METRO LEASING AND FINANCE CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY Attributable to Equity Holders of the Net Unrealized Losses on Capital Stock (Note 21) Retained Earnings (Note 21) Availablefor-Sale Financial Assets (Note 8) Remeasurement Losses on Retirement Plan (Note 24) Total Non-controlling Interest Total Equity Balances at October 1, 2016 P=2,996,424,900 P=2,600,763,189 (P=684,231) (P=64,678,824) P=5,531,825,034 (P=265,682) P=5,531,559,352 Net income (loss) 1,230,703,121 1,230,703,121 (2,334,067) 1,228,369,054 Other comprehensive income (loss) 235,776 (14,910,960) (14,675,184) (14,675,184) Total comprehensive income (loss) 1,230,703, ,776 (14,910,960) 1,216,027,937 (2,334,067) 1,213,693,870 Stock dividends distributed (Note 20) 599,285,000 (599,285,000) Balances at September 30, 2017 P=3,595,709,900 P=3,232,181,310 (P=448,455) (P=79,589,784) P=6,747,852,971 (P=2,599,749) P=6,745,253,222 Balances at October 1, 2015 P=1,897,139,900 P=2,665,990,650 (P=593,343) (P=63,736,595) P=4,498,800,612 P=119,813 P=4,498,920,425 Net income (loss) 1,034,057,539 1,034,057,539 (385,495) 1,033,672,044 Other comprehensive loss (90,888) (942,229) (1,033,117) (1,033,117) Total comprehensive income (loss) 1,034,057,539 (90,888) (942,229) 1,033,024,422 (385,495) 1,032,638,927 Stock dividends distributed (Note 20) 1,099,285,000 (1,099,285,000) Balances at September 30, 2016 P=2,996,424,900 P=2,600,763,189 (P=684,231) (P=64,678,824) P=5,531,825,034 (P=265,682) P=5,531,559,352 Retained Earnings (Note 21) Net Unrealized Losses on Available-for- Sale Financial Assets (Note 8) Remeasurement Losses on Retirement Plan (Note 24) Capital Stock (Note 21) Total Equity Balances at October 1, 2016, as restated P=2,996,424,900 P=2,601,161,710 (P=684,231) (P=64,678,824) P=5,532,223,555 Net income 1,234,204,224 1,234,204,224 Other comprehensive income (loss) 235,776 (14,910,960) (14,675,184) Total comprehensive income (loss) 1,234,204, ,776 (14,910,960) 1,219,529,040 Stock dividends distributed (Note 20) 599,285,000 (599,285,000) Balances at September 30, 2017 P=3,595,709,900 P=3,236,080,934 (P=448,455) (P=79,589,784) P=6,751,752,595 Balances at October 1, 2015, as previously reported P=1,897,139,900 P=2,130,330,217 (P=593,343) (P=55,000,416) P=3,971,876,358 Effect of change in accounting for investments in subsidiaries from cost to equity method (Note 2) 535,660,437 (8,736,179) 526,924,258 Balance at October 1, 2015, as restated 1,897,139,900 2,665,990,654 (593,343) (63,736,595) 4,498,800,616 Net income, as restated 1,034,456,056 1,034,456,056 Other comprehensive loss, as restated (90,888) (942,229) (1,033,117) Total comprehensive income (loss), as restated 1,034,456,056 (90,888) (942,229) 1,033,422,939 Stock dividends distributed (Note 21) 1,099,285,000 (1,099,285,000) Balances at September 30, 2016, as restated P=2,996,424,900 P=2,601,161,710 (P=684,231) (P=64,678,824) P=5,532,223,555 See accompanying Notes to Financial Statements. 10

11 ORIX METRO LEASING AND FINANCE CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS Years Ended September (As restated- Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=1,744,276,592 P=1,488,319,230 P=1,676,465,497 P=1,423,704,267 Adjustments for: Share in net income of subsidiaries (Note 10) (166,219,595) (173,917,791) Depreciation and amortization (Note 23) 1,084,003, ,542,104 94,504,996 82,104,622 Provision for credit and impairment losses (Note 23) 234,116, ,935, ,050, ,512,500 Net movement in retirement liability 10,011,397 (3,144,810) 8,697,616 (2,079,714) Amortization of debt transaction costs 31,700,525 9,851,971 22,819,266 9,851,971 Losses on initial recognition of other assets - chattels (Note 22) 4,340,402 1,528,105 4,340,402 1,528,105 Net (gain) loss on sale of: Equipment for lease (Note 22) (108,526,952) (72,525,103) Other assets - chattels (Note 22) (12,351,341) (22,659,936) (12,351,341) (22,659,936) Property and equipment (Note 22) 1,337,893 (1,662,161) 1,337,893 (1,323,119) Dividend income (7,296) (16,416) (7,296) (16,416) Changes in operating assets and liabilities: Decrease (increase) in: Loans and receivables (8,202,158,012) (5,262,893,671) (8,166,055,696) (5,249,235,843) Prepaid expenses (10,307,612) 21,345,834 (9,294,365) 322,090 Other assets (125,229,349) (5,344,857) (18,574,227) (729,536) Increase in: Bills payable deposit substitutes 1,158,484,033 5,478,211,409 1,091,498,338 5,478,211,409 Deposits on lease contracts 94,279,506 87,085,516 79,244,969 88,288,904 Accounts payable and other liabilities 154,477, ,328,857 55,316, ,599,740 Net cash generated from (used in) operations (3,941,553,394) 3,221,901,307 (5,110,226,687) 2,114,161,253 Income taxes paid (475,325,769) (370,392,535) (378,950,801) (284,247,188) Net cash provided by (used in) operating activities (4,416,879,163) 2,851,508,772 (5,489,177,488) 1,829,914,065 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Property and equipment (Notes 11 and 29) (129,178,760) (118,114,543) (95,181,204) (65,332,574) Software (Note 15) (14,519,811) Equipment for lease (Notes 12 and 29) (1,585,734,815) (1,005,068,972) Investment properties (Note 13 and 29) (319,191,195) Proceeds from sale of: Property and equipment (Note 11) 14,415,140 4,498,867 11,284,439 3,791,725 Equipment for lease (Notes 12 and 29) 190,788, ,386,851 Other assets - chattels (Note 15) 88,154,655 76,082,462 88,154,655 76,082,464 Dividends received (Note 10) 7,296 16,416 49,007,296 34,516,416 Net cash provided by (used in) investing activities (1,755,259,461) (911,198,919) 53,265,186 49,058,031 CASH FLOWS FROM FINANCING ACTIVITIES Availments of bills payable bank borrowings net of debt transaction costs 48,943,594,231 13,288,068,962 24,731,482,571 10,645,519,619 Settlements of bills payable bank borrowings (41,481,682,731) (14,102,890,290) (18,020,048,351) (11,417,670,291) Net cash provided by (used in) financing activities 7,461,911,500 (814,821,328) 6,711,434,220 (772,150,672) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,289,772,876 1,125,488,525 1,275,521,918 1,106,821,424 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and cash equivalents 425,282, ,975, ,214, ,574,748 Due from Bangko Sentral ng Pilipinas (BSP) 4,827,782,576 3,654,626,637 4,827,782,576 3,654,626,637 Securities purchased under resale agreement 136,025, ,025,249 5,389,090,439 4,263,601,914 5,305,022,809 4,198,201,385 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and cash equivalents 326,043, ,282, ,724, ,214,984 Due from BSP 6,120,819,739 4,827,782,576 6,120,819,739 4,827,782,576 Securities purchased under resale agreement 232,000, ,025, ,000, ,025,249 P=6,678,863,315 P=5,389,090,439 P=6,580,544,727 P=5,305,022,809 OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS Interest received P=3,4 P=3,459,566,770 P=2,660,341,937 P=3,076,553,270 P=2,660,137,912 Interest paid 8 837,996, ,678, ,723, ,828,484 Dividends received 7,296 16,416 49,007,296 34,516,416 See accompanying Notes to Financial Statements. 11

12 ORIX METRO LEASING AND FINANCE CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Corporate Information ORIX METRO Leasing and Finance Corporation (OMLFC or the ) was incorporated in the Philippines and was registered with the Securities and Exchange Commission (SEC) on June 28, Its primary purpose is to engage in financing by leasing all kinds of real and personal property; to extend credit facilities to consumers and enterprises by discounting commercial papers or accounts receivable, or by buying or selling evidence of indebtedness; and to underwrite securities. On August 24, 2007, the was authorized by the BSP to engage in quasi-banking functions. The engaged in quasi-banking functions effective January 1, 2008 as agreed to by the BSP subject to certain conditions. The and its subsidiaries (the Group) parent company is Metropolitan Bank and Trust Company (MBTC). As of September 30, 2017 and 2016, the is owned by Orix Corporation, MBTC and First Metro Investment Corporation (FMIC), a subsidiary of MBTC, with shareholdings of 40%, 40% and 20%, respectively. The registered office address of the is at 21st Floor, GT Tower International, Ayala Avenue corner H.V. dela Costa Street, Makati City. The accompanying financial statements of the Group and of the were approved and authorized for issue by the BOD on October 25, Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements include the consolidated financial statements of the Group and the separate financial statements of the as of and for the years ended September 30, 2017 and The financial statements have been prepared on a historical cost basis except for available-for-sale (AFS) financial assets that are measured at fair value. Each entity within the Group determines its own functional currency and items reported in their respective financial statements are measured using that functional currency. The functional currency of the and all subsidiaries is Philippine Peso (P=). The accompanying financial statements are presented in Philippine peso. All values are rounded to the nearest peso except when otherwise indicated. Statement of Compliance The financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). 12

13 - 2 - Presentation of Financial Statements The Group and the present its statement of financial position broadly in order of liquidity. An analysis regarding recovery (asset) or settlement (liability) within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in Note 20. Basis of Consolidation The consolidated financial statements include the financial statements of the following subsidiaries: Subsidiary Effective Percentage of Ownership Industry Country of Incorporation Date of Incorporation OMLF Insurance Agency, Inc Insurance Agents (OIAI) Philippines November 11, 1980 OMLF International Trading and Development Corporation (OITDC) Real Estate Lease Philippines September 25, 1986 ORIX Auto Leasing Philippines Corporation (OALPC) Car Lease and Repairs and Maintenance Philippines September 14, 1989 ORIX Rental Corporation (ORC) Car and Equipment Lease Philippines January 28, 1999 OMLF Servicer Corporation (OSC) 60.0 Collection Service Philippines December 28, 2007 Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns The Group reassesses whether or not it has control over an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of financial position and statement of income from the date the Group gains control until the date the Group ceases to control the subsidiary. The financial statements of the subsidiaries are prepared on the same reporting period as the Parent Company using consistent accounting policies. All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the and to the non-controlling interests, even if this results in the noncontrolling interest having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. Non-controlling Interests Non-controlling interest represents the portion of profit or loss and net assets not owned, directly or indirectly, by the. 13

14 Non-controlling interests are presented separately in the consolidated statement of income, consolidated statement of comprehensive income, and within equity in the consolidated statement of financial position, separately from s shareholders' equity. Any losses applicable to the non-controlling interests are allocated against the interests of the non-controlling interest even if this results in the non-controlling interest having a deficit balance. Acquisitions of non-controlling interests that do not result in a loss of control are accounted for as equity transactions, whereby any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received shall be recognized directly in equity and attributed to the owners of the. Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year, except for the following amended Philippine Accounting Standards (PAS) and Philippine Interpretations which became effective for the Group as of October 1, Except as otherwise indicated, these changes in the accounting policies did not have any impact on the financial position or performance of the Group. Amendments to PFRS 10, PFRS 12 and PAS 28, Investment Entities: Applying the Consolidation Exception Amendments to PFRS 11, Accounting for Acquisitions of Interests in Joint Operations PFRS 14, Regulatory Deferral Accounts Amendments to PAS 1, Disclosure Initiative Amendments to PAS 16 and PAS 38, Clarification of Acceptable Methods of Depreciation and Amortization Amendments to PAS 16 and PAS 41, Agriculture: Bearer Plants Amendments to PAS 27, Equity Method in Separate Financial Statements Annual Improvements to PFRSs Cycle Amendment to PFRS 5, Changes in Methods of Disposal Amendment to PFRS 7, Servicing Contracts Amendment to PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements Amendment to PAS 19, Discount Rate: Regional Market Issue Amendment to PAS 34, Disclosure of Information Elsewhere in the Interim Financial Report Amendments to PAS 27, Separate Financial Statements, Equity Method in Separate Financial Statements The amendments allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying PFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. To comply with BSP Circular Circular No. 915, Amendments on Accounting Guidelines for Prudential Reporting to the BSP, the changed its method of accounting for its investments in subsidiaries from the cost method to the equity method. The change in the accounting policy was applied retrospectively, with impact to the s statements of financial position, statements of income and statements of comprehensive income. 14

15 The effects of the adoption are presented below: Statements of Financial Position As previously reported Effect of retrospective application As restated As of September 30, 2016 Assets Investments in subsidiaries P=579,062,500 P=667,171,167 P=1,246,233,667 Equity Retained earnings 1,926,083, ,078,228 2,601,161,710 Remeasurement losses on retirement plan (56,771,763) (7,907,061) (64,678,824) As of October 1, 2015 Assets Investments in subsidiaries 424,062, ,924, ,986,758 Equity Retained earnings 2,130,330, ,660,437 2,665,990,654 Remeasurement losses on retirement plan (55,000,416) (8,736,179) (63,736,595) Statements of Income As previously reported Effect of retrospective application As restated For the year ended September 30, 2016 Dividend income* P=34,516,416 (P=34,500,000) P=16,416 Share in net income of subsidiaries 173,917, ,917,791 *Included in Other income Statements of Comprehensive Income As previously reported Effect of retrospective application As restated For the year ended September 30, 2016 Net income P=895,038,265 P=139,417,791 P=1,034,456,056 Share in remeasurement gain on retirement plan of subsidiaries (Note 10) 829, ,118 Significant Accounting Policies Foreign Currency Translation Transactions and balances Foreign currency-denominated assets and liabilities are translated to Philippine peso using the Philippine Dealing System (PDS) closing rate prevailing at the reporting date while foreign currencydenominated income and expenses are translated using the PDS exchange rates as at the date of the transaction. Foreign exchange gains or losses arising from foreign currency transactions and revaluation of foreign currency-denominated assets and liabilities are credited to or charged against profit or loss in the year in which the rates change. 15

16 Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date Level 2 - inputs other than quoted prices included within Level 1 that are observable either directly or indirectly Level 3 - inputs are unobservable inputs for the asset or liability For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. External appraisers are involved for valuation of significant assets, such as investment properties and other asserts-chattels For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash in banks, due from BSP and securities purchased under resale agreement that are convertible to known amounts of cash and with original maturities of three months or less from dates of placements and which are subject to an insignificant risk of changes in value. 16

17 Financial Instruments - Initial Recognition and Subsequent Measurement Date of recognition Purchases or sales of financial assets that require subsequent delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on settlement date - the date that an asset is delivered to or by the Group. Initial recognition of financial instruments All financial instruments are initially recognized at fair value. Except for financial assets and financial liabilities at fair value through profit or loss (FVPL), the initial measurement of financial instruments includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, AFS financial assets, held-to-maturity (HTM) investments and loans and receivables. Financial liabilities are classified into financial liabilities at FVPL and financial liabilities at amortized cost. The classification depends on the purpose for which the financial instruments were acquired and whether they are quoted in an active market. Management determines the classification of its financial instruments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. As of September 30, 2017 and 2016, the Group has no financial assets and financial liabilities at FVPL and HTM investments. Day 1 difference Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 difference) in the statement of income unless it qualifies for recognition as some other type of asset. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 difference amount. Loans and receivables This accounting policy relates to the statement of financial position captions Cash and cash equivalents, Due from BSP, Securities purchased under resale agreement, Loans and receivables and security deposits under Other assets. These are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as AFS financial assets or financial assets at FVPL. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method, less allowance for impairment losses, if any. Amortized cost is calculated by taking into account any transaction costs, discount or premium on acquisition and fees that are an integral part of the effective interest rate (EIR). The amortization is recognized in the statement of income. The losses arising from impairment are recognized in Provision for credit and impairment losses included under General and administrative expenses in the statement of income. AFS financial assets AFS financial assets are those non-derivative financial assets which are designated as such or do not qualify to be classified as financial assets at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. These include equity investments. 17

18 After initial measurement, AFS financial assets are subsequently measured at fair value. The unrealized gains and losses arising from the fair valuation of AFS financial assets are excluded, net of tax, from the reported income and are reported as part of OCI in the statement of comprehensive income. When the investment is disposed of, the cumulative gain or loss previously recognized in OCI is recognized in the statement of income. The losses arising from impairment of such investments are recognized as Provision for credit and impairment losses included under General and administrative expenses in the statement of income. Financial liabilities at amortized cost Issued financial instruments or their components, which are not designated at FVPL, are classified as financial liabilities at amortized cost which includes Bills payable, Deposits on lease contracts and Accounts payable and other liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. After initial measurement, financial liabilities at amortized cost are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: 1. the rights to receive cash flows from the asset have expired; or 2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or 3. the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risks and rewards of the asset but has transferred control over the asset. Financial liability A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master-netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. 18

19 Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Loans and receivables For loans and receivables, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparties ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original EIR of the asset. Loans and receivables, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collaterals have been realized. If subsequently, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a previously written-off account is later recovered, any amounts formerly charged are credited to Recovery on written-off receivables and charged-off assets account under Other income in the statement of income. The present value of the estimated future cash flows is discounted at the financial asset s original EIR. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, collateral type, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the 19

20 group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such changes in property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. Restructured loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original EIR. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original EIR, is recognized in Provision for credit and impairment losses included under General and administrative expenses in the statement of income. AFS financial assets In case of equity investments classified as AFS financial assets, this would include a significant or prolonged decline in the fair value of the investments below their cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income - is removed from OCI and recognized in the statement of income. Impairment losses are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in OCI. Residual Value of Leased Assets and Deposits on Lease Contracts The residual value of leased assets, which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease, is the estimated proceeds from the sale of the leased asset at the end of the lease term. At the end of the lease term, the residual value of leased assets is generally applied against the guaranty deposit of the s lessee when the lessee decides to buy the leased asset. Deposits on Operating Leases Deposits on lease contracts are initially recognized at fair value. Fair values are estimated by discounted cash flow methodology using applicable rates for similar types of instruments. The excess of the principal amount of the deposit over its fair value is accounted for as deferred lease income under Accounts payable and other liabilities in the statement of financial position. This is amortized over the lease term on a straight-line basis and recognized as Rent income in statement of income. Interest accretion on the deposits on lease contracts, is accounted for using the effective interest method. Equity Capital stock is measured at par value for all shares issued and outstanding. When the shares are sold at a premium, the difference between the proceeds and the par value is credited to Additional paid-in capital in the statement of financial position. 20