Toyota Financial Services Philippines Corporation. Financial Statements March 31, 2010 and and. Independent Auditors Report

Transcription

1 Toyota Financial Services Philippines Corporation Financial Statements March 31, 2010 and 2009 and Independent Auditors Report SyCip Gorres Velayo & Co.

2 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No FR-2 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Toyota Financial Services Philippines Corporation We have audited the accompanying financial statements of Toyota Financial Services Philippines Corporation, which comprise the statements of financial position as at March 31, 2010 and 2009, and the related statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatements. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited

3 - 2 - Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Toyota Financial Services Philippines Corporation as of March 31, 2010 and 2009, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Janet A. Paraiso Partner CPA Certificate No SEC Accreditation No A Tax Identification No PTR No , January 4, 2010, Makati City July 7, 2010

4 TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF FINANCIAL POSITION ASSETS March 31 Cash (Notes 4 and 21) P=1,231,774,289 P=358,228,968 Due from Bangko Sentral ng Pilipinas (Note 4) 1,357,704,105 1,760,000,000 Available-for-Sale Investments (Note 5) 910,000 1,115,000 Loans and Receivables (Notes 6 and 10) 12,523,489,334 10,078,158,474 Assets Held for Sale (Note 7) 41,900,106 24,743,116 Property and Equipment (Note 8) 20,377,457 31,405,520 Software Costs (Note 9) 20,338,901 23,865,201 Deferred Tax Assets (Note 19) 70,751,093 40,825,467 Other Assets (Note 9) 14,595,581 7,959,720 P=15,281,840,866 P=12,326,301,466 LIABILITIES AND EQUITY LIABILITIES Loans Payable (Notes 11, 13 and 21) P=12,435,409,522 P=10,221,496,381 Accounts Payable and Other Liabilities (Notes 12 and 21) 322,344, ,547,034 Derivative Liability (Notes 11 and 13) 27,324,286 Deposits on Lease Contracts (Note 14) 801,409, ,236,242 Income Tax Payable 16,863,022 23,583,834 13,603,351,671 10,801,863,491 EQUITY Capital Stock - P=100 par value Authorized, issued and outstanding - 10,000,000 shares (Note 23) 1,000,000,000 1,000,000,000 Retained Earnings (Notes 16 and 23) 664,892, ,597,975 Net Unrealized Loss on Available-for-Sale Investments (Note 5) (160,000) Cash Flow Hedge Reserve (Note 13) 13,596,600 1,678,489,195 1,524,437,975 P=15,281,840,866 P=12,326,301,466 See accompanying Notes to Financial Statements.

5 TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF COMPREHENSIVE INCOME Years Ended March 31 INTEREST INCOME Loans and receivables (Notes 6 and 21) P=1,301,046,260 P=1,234,441,601 Cash in bank and due from BSP (Notes 4 and 21) 71,067,764 20,653,530 1,372,114,024 1,255,095,131 INTEREST EXPENSE (Notes 11, 13 and 21) 767,608, ,198,407 NET INTEREST INCOME 604,505, ,896,724 SERVICE CHARGES AND OTHER INCOME (Note 17) 78,052,703 76,976,686 OPERATING EXPENSES Taxes and licenses 83,544,366 74,097,594 Compensation and fringe benefits (Notes 18 and 21) 72,465,187 71,718,365 Provision for credit and impairment losses (Notes 6, 7 and 10) 40,057,331 81,328,846 Sales and marketing 34,437,469 35,755,801 Occupancy (Note 20) 32,088,900 31,516,483 Litigation 27,046,713 23,686,410 Depreciation and amortization (Notes 8 and 9) 26,625,029 19,585,639 Management and professional fees 16,005,194 6,060,311 Entertainment, amusement and recreation (Note 19) 9,689,719 9,824,965 Credit investigation 8,340,800 4,203,869 Transportation and travel 3,556,437 4,778,424 Others 15,515,650 11,200, ,372, ,757,223 INCOME BEFORE INCOME TAX 313,185, ,116,187 PROVISION FOR INCOME TAX (Note 19) 65,806,692 95,946,994 NET INCOME 247,379, ,169,193 OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized gain (loss) on available-for-sale investments 160,000 (100,000) Net movement on cash flow hedges 19,423,714 Income tax effect (Note 19) (5,827,114) 13,596,600 13,756,600 (100,000) TOTAL COMPREHENSIVE INCOME FOR THE YEAR P=261,135,815 P=214,069,193 See accompanying Notes to Financial Statements.

6 TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF CHANGES IN EQUITY Capital Stock (Note 23) For the Years Ended March 31, 2010 and 2009 Net Unrealized Loss on Retained Available-for- Cash Flow Earnings Sale Hedge Reserve (Note 16) Investments (Note 13) Total Balances at April 1, 2009 P=1,000,000,000 P=524,597,975 (P=160,000) P= P=1,524,437,975 Total comprehensive income 247,379, ,000 13,596, ,135,815 Cash dividends (107,084,595) (107,084,595) Balances at March 31, 2010 P=1,000,000,000 P=664,892,595 P= P=13,596,600 P=1,678,489,195 Balances at April 1, 2008 P=1,000,000,000 P=310,428,782 (P=60,000) P= P=1,310,368,782 Total comprehensive income 214,169,193 (100,000) 214,069,193 Balances at March 31, 2009 P=1,000,000,000 P=524,597,975 (P=160,000) P= P=1,524,437,975 See accompanying Notes to Financial Statements.

7 TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF CASH FLOWS Years Ended March 31 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=313,185,907 P=310,116,187 Adjustments for: Depreciation and amortization (Notes 8 and 9) 26,625,029 19,585,639 Gain on sale of assets held for sale (Note 17) (14,324,066) (4,008,177) Gain on sale of property and equipment (Note 17) (1,269,478) (769,437) Changes in operating assets and liabilities: Increase in: Loans and receivables (2,647,439,287) (356,867,773) Other assets (6,270,860) (2,893,706) Increase (decrease) in: Deposits on lease contracts 522,173,629 78,034,432 Accounts payable and other liabilities 44,797,936 (17,822,540) Net cash generated from (used for) operations (1,762,521,190) 25,374,625 Income taxes paid (102,453,130) (130,868,743) Net cash used in operating activities (1,864,974,320) (105,494,118) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Property and equipment (Note 8) (10,321,304) (12,380,632) Software (Note 9) (4,836,869) (13,868,416) Proceeds from sale of: Assets held for sale 199,275, ,453,549 Property and equipment 4,356,984 5,399,337 Net cash provided by investing activities 188,474, ,603,838 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from availment of loans payable 7,015,018,650 5,219,388,861 Payments of loans payable (4,760,184,623) (3,275,379,834) Payments of cash dividends (Note 16) (107,084,595) Net cash provided by financing activities 2,147,749,432 1,944,009,027 NET INCREASE IN CASH AND CASH EQUIVALENTS 471,249,426 1,969,118,747 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash 358,228, ,110,221 Due from Bangko Sentral ng Pilipinas (BSP) 1,760,000,000 2,118,228, ,110,221 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash 1,231,774, ,228,968 Due from BSP 1,357,704,105 1,760,000,000 P=2,589,478,394 P=2,118,228,968

8 - 2 - Years Ended March 31 OPERATIONAL CASH FLOWS FROM INTEREST Interest received P=1,782,992,537 P=1,230,973,385 Interest paid 752,259, ,050,646 See accompanying Notes to Financial Statements.

9 TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Corporate Information Toyota Financial Services Philippines Corporation (the Company) is a domestic corporation registered with the Securities and Exchange Commission (SEC) on August 16, The Company s registered address is 32nd Floor, GT Tower International, Ayala Avenue corner H.V. Dela Costa St., Salcedo Village, Makati City. The Company serves customers of Toyota vehicles through financing and leasing services, as well as Toyota dealers, through inventory stock financing. On May 8, 2008, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) granted the Company its quasi-banking license, which enables the Company to diversify its sources of funds, as well as offer a wider range of financing products to its growing customers and perform other quasi-banking functions effective April 1, The following table sets forth the ownership structure of the Company: Percentage of ownership Toyota Financial Services Corporation (TFSC) 60% Philippine Savings Bank (PSBank) 25% Metropolitan Bank and Trust Company (MBTC) 15% The Company s parent company is TFSC, a leading financial services company based in Japan. The accompanying financial statements were approved and authorized for issue by the Board of Directors (BOD) on July 7, Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements of the Company have been prepared using the historical cost basis except for available-for-sale (AFS) investments and derivative financial instruments, which have been measured at fair value. The accompanying financial statements are presented in Philippine peso (P=), which is also the Company s functional currency. Statement of Compliance The financial statements of the Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following new and amended PFRSs and Philippine Interpretations mandatory for financial years beginning on or after January 1, 2009: New Standards and Interpretations Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements, effective January 1, 2009

10 - 2 - PAS 23, Borrowing Cost (Revised), effective January 1, 2009 PFRS 8, Operating Segments, effective January 1, 2009 Philippine Interpretation International Financial Reporting Interpretations Committee (IFRIC)13, Customer Loyalty Programmes, effective July 1, 2008 Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operations, effective October 1, 2008 Philippine Interpretation IFRIC 18, Transfer of Assets from Customers, effective July 1, 2009 Amendments to Standards Improvements to PFRSs (2008) Improvements to PFRSs (2009), with respect to the amendment to the Appendix to PAS 18, Revenue PAS 32 and PAS 1 Amendments - Puttable Financial Instruments and Obligations Arising on Liquidation, effective January 1, 2009 PFRS 1 and PAS 27 Amendments - Cost of an Investment in a Subsidiary, Joint Controlled Entity or Associate, effective January 1, 2009 PFRS 2 Amendment - Vesting Conditions and Cancellations, effective January 1, 2009 PFRS 7 Amendment - Improving Disclosures about Financial Instruments, effective January 1, 2009 Standards that have been adopted and have an impact on the financial statements disclosures of the Company are described below: PAS 1, Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in a single statement, or in two linked statements. The Company has elected to present a single statement and has changed the title of its balance sheet to statement of financial position. PFRS 7 Amendments - Improving Disclosures about Financial Instruments The amendments to PFRS 7, Financial Instruments: Disclosures, require additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognized at fair value. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and financial assets used for liquidity management. The fair value measurement disclosures and the liquidity disclosures are presented in Notes 22 and 24, respectively.

11 - 3 - Future Changes in Accounting Policies The Company will adopt the following standards, interpretations and amendments when these become effective. Except as otherwise indicated, the Company does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements: Effective in 2010 PAS 39 Amendment, Eligible Hedged Items The amendment to PAS 39, Financial Instruments: Recognition and Measurement, effective for annual periods beginning on or after July 1, 2009, clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, and PAS 39, Financial Instruments: Recognition and Measurement, Amendments - Embedded Derivatives, effective for annual periods beginning on or after June 30, 2009, requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. PAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit or loss. PFRS 3, Business Combinations (Revised) and PAS 27, Consolidated and Separate Financial Statements (Amended) The revised standards are effective for annual periods beginning on or after July 1, PFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interests, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs and future reported results. PAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by PFRS 3 (Revised) and PAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests. PFRS 3 (Revised) will be applied prospectively while PAS 27 (Amended) will be applied retrospectively with a few exceptions. Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to Owners This Interpretation is effective for annual periods beginning on or after July 1, 2009 with early application permitted. It provides guidance on how to account for noncash distributions to owners. The Interpretation clarifies when to recognize a liability, how to measure it and the associated assets, and when to derecognize the asset and liability.

12 - 4 - PFRS 2 Amendments, Group Cash-settled Share-based Payment Transactions The amendments to PFRS 2, Share-based Payments, effective for annual periods beginning on or after January 1, 2010, clarify the scope and the accounting for group cash-settled sharebased payment transactions. Effective in 2012 Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This Interpretation, effective for annual periods beginning on or after January 1, 2012, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and rewards of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. Improvements to PFRSs 2009 The omnibus amendments to PFRSs issued in 2009 were issued primarily with a view to removing inconsistencies and clarifying wording. The amendments are effective for annual periods beginning January 1, 2010 except otherwise stated. The Company has not yet adopted the following amendments and anticipates that these changes will have no material effect on the financial statements. PFRS 2, Share-based Payment: clarifies that the contribution of a business on formation of a joint venture and combinations under common control are not within the scope of PFRS 2 even though they are out of scope of PFRS 3, Business Combinations (Revised). The amendment is effective for financial years on or after July 1, Amendment to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives: clarifies that it does not apply to possible reassessment at the date of acquisition, to embedded derivatives in contracts acquired in a business combination between entities or businesses under common control or the formation of joint venture. The amendment is effective for annual periods beginning on or after July 1, Amendment to Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation: states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of PAS 39 that relate to a net investment hedge are satisfied. The amendment is effective for annual periods beginning on or after July 1, PAS 38, Intangible Assets: clarifies that if an intangible asset acquired in a business combination is identifiable only with another intangible asset, the acquirer may recognize the group of intangible assets as a single asset provided the individual assets have similar useful lives. Also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination that are not traded in active markets are only examples and are not restrictive on the methods that can be used. The amendment is effective for the annual periods beginning on or after July 1, 2009.

13 - 5 - PFRS 5, Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in PFRS 5. The disclosure requirements of other PFRSs only apply if specifically required for such non-current assets or discontinued operations. PFRS 8, Operating Segment: clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. PAS 1, Presentation of Financial Statements: clarifies that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. PAS 7, Statement of Cash Flows: explicitly states that only expenditure that results in a recognized asset can be classified as a cash flow from investing activities. PAS 17, Leases: removes the specific guidance on classifying land as a lease. Prior to the amendment, leases of land were classified as operating leases. The amendment now requires that leases of land are classified as either finance or operating in accordance with the general principles of PAS 17. The amendments will be applied retrospectively. PAS 36, Impairment of Assets: clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes. PAS 39, Financial Instruments: Recognition and Measurement: clarifies the following: that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract; that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken; and that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss. Significant Accounting Policies Foreign Currency Translations Transactions denominated in foreign currencies are recorded using the applicable exchange rate at the date of the transaction. Foreign currency-denominated assets and liabilities are translated to Philippine peso using the Philippine Dealing System (PDS) closing rate prevailing at the reporting date. 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 current operations in the year in which the rates change.

14 - 6 - Financial Instruments - Initial Recognition and Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date - the date that an asset is delivered to or by the Company. Deposits on finance lease, amounts due to banks and loans are recognized when cash is received by the Company or advanced to the borrowers. 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 assets includes transaction costs. The Company classifies its financial assets in the following categories: financial assets at FVPL, AFS investments, held-to-maturity (HTM) investments and loans and receivables. Financial liabilities are classified as financial liabilities at FVPL and other financial liabilities carried at amortized cost. Financial assets or financial liabilities at FVPL include financial assets or liabilities held for trading purposes and financial assets or liabilities designated upon initial recognition as at FVPL. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date. As of March 31, 2010 and 2009, the Company has no financial assets or liabilities at FVPL and HTM investments. Determination of fair value The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction is used since it provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, and other relevant valuation models. Day 1 difference Where the transaction price in a non-active market is different to 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 Company recognizes the difference between the transaction price and fair value (a Day 1 difference) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the Day 1 difference amount.

15 - 7 - AFS investments AFS investments are those which are designated as such or do not qualify to be classified as financial assets held for trading, designated as FVPL, HTM investments or loans and receivables. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. These include equity investments. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as other comprehensive income in the statement of comprehensive income as Net unrealized gain (loss) on AFS investments, until the investment is derecognized or determined to be impaired at which time the cumulative gains or losses previously reported as other comprehensive income is included in profit or loss. The Company s AFS investments consist of golf club shares. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not classified as financial assets at FVPL and AFS investments. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method less allowance for credit losses. Amortized cost is calculated by taking into account any discount or premium on acquisition cost and fees that are an integral part of the effective interest rate (EIR). The amortization is included in the statement of comprehensive income under Interest income. The losses arising from impairment are recognized in the statement of comprehensive income under Provision for credit and impairment losses. The Company s loans and receivables consist of cash in bank, amounts due from BSP, receivables from customers and other receivables. Other financial liabilities Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market. These liabilities are carried at cost or amortized cost. Amortization is determined using effective interest method. The Company s other financial liabilities consist primarily of loans payable, deposits on lease contracts and accounts payable and other liabilities. Derivative Financial Instrument and Hedge Accounting The Company uses derivative financial instruments such as cross currency interest rate swap to hedge its foreign currency risks and interest rate risks. Such derivative financial instruments are initially recognized at fair value on the date in which a derivative transaction is entered into or bifurcated, and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from the changes in fair value on derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognized as other comprehensive income.

16 - 8 - For the purpose of hedge accounting, hedges are classified as: Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or Hedges of a net investment in a foreign operation. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument s fair value in offsetting the exposure to changes in the hedge item s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income in the cash flow hedge reserve, while ineffective portion is recognized directly in the profit or loss. Amounts recognized as other comprehensive income are transferred to profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss. The Company designates its cross currency interest rate swaps as cash flow hedges of the foreign currency exchange risk and interest rate risk arising from floating interest rate foreign currencydenominated liabilities. 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 similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Company 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;

17 - 9 - the Company 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 substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Company s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. Financial liability A financial liability is derecognized when the obligation under the liability expires, is discharged or cancelled. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is 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. Impairment of Financial Assets The Company 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, cash in banks and amounts due from BSP For loans and receivables, cash in banks and due from BSP carried at amortized cost, the Company 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 Company 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

18 by being indicative of the debtors 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 use of an allowance account and the amount of loss is charged to profit or loss. Interest income continues to be recognized based on the original EIR of the asset. The financial assets, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, 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 future write-off is later recovered, any amounts formerly charged are credited to Other income in the statements of financial position. AFS investments carried at fair value For equity investments classified as AFS investments, impairment indicators would include a significant or prolonged decline in the fair value of the investments below its 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 as other comprehensive income is removed and recognized in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. Increases in fair value after impairment are recognized directly in other comprehensive income. Finance Lease Receivables When assets are held subject to finance leases, the present value of the lease payments is recognized as finance lease receivables. Finance lease receivables are stated at the outstanding balance, reduced by unearned lease income and allowance for credit losses. Residual Value of Leased Assets and Deposits on Lease Contracts The residual value of leased assets is the estimated proceeds from the disposal of the leased asset at the end of the lease term which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease. At the end of the lease term, the residual value is generally applied against the guaranty deposit of the lessee. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, cash in banks and due from BSP. Cash equivalents represent short-term investments 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. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization and impairment loss, if any. The initial cost of property and equipment consists of its purchase price, any directly attributable costs of bringing the asset to its working condition and location for its intended use and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located to the extent it had recognized an obligation for that cost.

19 Expenditures incurred after an item of property and equipment has been put into operation, such as repairs and maintenance, are normally charged to operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. When the property and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected as income or loss in the statement of comprehensive income. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the property and equipment as follows: Leasehold improvements Furniture, fixtures and equipment Transportation equipment 5 years or the lease term, whichever is shorter 5 years 3-5 years The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the assets, which is calculated as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the statement of comprehensive income in the year the asset is derecognized. Assets Held for Sale An asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use, available for immediate sale and its sale is highly probable. An asset classified as held for sale is measured at the lower of fair value less costs to sell and its carrying amount. Any impairment loss on write-down of the asset to fair value less costs to sell is recognized in profit or loss. Any gain on subsequent increase in fair value less costs to sell is also recognized in profit or loss, but not in excess of the cumulative impairment loss already recognized on the asset. Assets held for sale of the Company consists mainly of motor vehicles foreclosed from borrowers or lessees who have defaulted on their installment or lease payments. Intangible Assets This consists of software costs, stated at acquisition cost and is amortized on a straight-line basis over estimated useful life of five (5) years. Impairment of Nonfinancial Assets The carrying values of non-financial assets (i.e. property and equipment, assets held for sale, software cost) are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of an asset is the greater of its net

20 selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. Impairment loss is recognized in the statement of comprehensive income. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of comprehensive income. After such a reversal, depreciation and amortization expense is adjusted in future years to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining life. Retirement Cost The Company has a defined benefit pension plan (the Plan), which requires contributions to be made to a separately administered fund. The retirement cost of the Company is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The liability recognized in the statement of financial position with respect to defined benefit pension plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. In case the fair value of the plan assets exceed the present value of the defined benefit obligation, the recognition of the net plan assets should not exceed the total of (a) any cumulative unrecognized net actuarial losses and past service cost and (b) the present value of any economic benefits available in the form of refunds from the Plan or reductions in future contributions to the Plan. The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceeded 10.0% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working life of the employees participating in the Plan. Past service costs, if any, are recognized immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straightline basis over the vesting period.

21 Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Company as lessor The Company recognizes assets held under a finance lease in its statement of financial position as a receivable at an amount equal to the net investment in the lease. The lease payments received from the lessee are treated as repayments of principal and finance income. Initial direct costs that are incremental and directly attributable to negotiating and arranging the lease, are included in the measurement of the net investment in the lease at inception and reflected in the calculation of the implicit interest rate. Company as lessee Lease of assets under which the lessor effectively retains all the risks and rewards of ownership is classified as operating lease. Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the income can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Interest income Interest and financing fees on finance leases and loans and receivables (including dealers and manufacturers subsidy) are initially credited to unearned interest income and amortized over the term using effective interest method. Any direct costs to acquire finance leases and loans and receivables are capitalized and amortized using the effective interest method. Interest income on impaired receivables is recognized based on the rate used to discount future cash flows to their net present value. Interest income from cash in bank is accrued as earned. Service charges Service charges earned for the provision of transaction services such as processing fees are recognized upon completion of the underlying transaction. Recoveries of accounts written off Recoveries of accounts written off are recognized as income upon actual collection. Income Taxes Current taxes Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted at the reporting date. Deferred taxes Deferred tax is provided using the balance sheet liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.