M E G A W O R L D C O R P O R A T I O N

Transcription

1 M E G A W O R L D C O R P O R A T I O N (Company s Full Name) S.E.C. Registration Number 2 8 T H F L R. T H E W O R L D C E N T R E S E N. G I L J P U Y A T M A K A T I (Business Address: No. Street City/ Town/ Province) MONICA T. SALOMON to 40 Contact Person Company Telephone Number S E C F O R M Q rd Friday Month Day FORM TYPE Month Day Fiscal Year (QUARTERLY REPORT) Annual Meeting ended March 31, 2007 Secondary License Type, If Applicable Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document I.D. Cashier S T A M P S Remarks = pls. use black ink for scanning purposes Date: May 11, 2007

2 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended 31 March Commission Identification Number: BIR Tax Identification No.: MEGAWORLD CORPORATION Exact name of issuer as specified in its charter 5. Metro Manila Province, Country or other jurisdiction of incorporation or organization 6. (SEC Use Only) Industry Classification Code th Floor, The World Centre 330 Sen. Gil J. Puyat Avenue Makati City, Philippines 1227 Address of issuer s principal office 8. (632) to 40 Issuer s telephone number, including area code 9. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA Title of Class Number of Shares of Common Stock Outstanding Common 20,641,646, Are any or all of the securities listed on a Stock Exchange? Yes [X] No [ ] If yes, state the name of such Stock Exchange and the class/es of securities listed therein: The shares of common stock of the Company are listed on the Philippine Stock Exchange. 11. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines, during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports). Yes [X] No [ ]

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4 MEGAWORLD CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet EXHIBIT 1 (In Thousands) A S S E T S Unadited 31-Mar-07 Audited 31-Dec-06 CURRENT ASSETS Cash and cash equivalents P 21,424,446 P 12,292,151 Trade and other receivables - net 2,702,318 2,130,756 Marketable securities 1,079,988 1,114,189 Residential and condominium units for sale 3,094,888 2,699,186 Property development costs 2,870,217 2,663,288 Prepayments and other current assets - net 649, ,634 Total Current Assets 31,821,170 21,510,204 NON-CURRENT ASSETS Trade and other receivables - net 4,782,381 4,540,829 Advances to landowners and joint ventures 183, ,105 Land for future development 3,296,009 2,608,286 Investments in and advances to associates and other related parties - net 8,805,744 9,078,507 Investment property - net 4,441,995 4,620,629 Property and equipment - net 511, ,892 Deferred tax assets 1,423 1,423 Other non-current assets 1,579,964 1,579,010 Total Non-current Assets 23,602,356 22,998,681 TOTAL ASSETS P 55,423,526 P 44,508,885

5 -2- LIABILITIES AND EQUITY CURRENT LIABILITIES Interest-bearing loans and borrowings P 271,037 P 273,050 Trade and other payables 1,497,956 1,836,853 Customers' deposits 2,582,743 2,467,217 Reserve for property development 12, Deferred income on real estate sales 919,164 1,576,863 Income tax payable 163, ,184 Other current liabilities 681, ,459 Total Current Liabilities 6,128,452 7,212,127 NON-CURRENT LIABILITIES Interest-bearing loans and borrowings 2,006,973 2,075,977 Bonds payable 4,826,200 4,913,200 Customers' deposits 1,570,862 1,469,157 Reserve for property development 1,325, ,487 Deferred income on real estate sales 732, ,436 Advances from other related parties 191, ,806 Deferred tax liabilities - net 1,356,130 1,339,392 Other non-current liabilities 658, ,996 Total Non-current Liabilities 12,667,633 11,385,451 Total Liabilities 18,796,085 18,597,578 EQUITY Equity attributable to parent company's shareholders 35,853,554 25,133,556 Minority interest 773, ,751 Total Equity 36,627,441 25,911,307 TOTAL LIABILITIES AND EQUITY P 55,423,526 P 44,508,885

6 MEGAWORLD CORPORATION AND SUBSIDIARIES Consolidated Income Statements EXHIBIT 2 (In Thousands) Unadited 31-Mar-07 Unaudited 31-Mar-06 REVENUES Real estate sales P 1,854,759 P 1,204,552 Interest income on real estate sales 182, ,887 Realized gross profit on prior years' sales 100, ,243 Rental income 209, ,368 Hotel operations 59,795 49,101 Equity share in net earnings of associates, interest and other income 452, ,907 2,859,245 1,995,058 COSTS AND EXPENSES Real estate sales 1,240, ,586 Deferred gross profit 271, ,780 Hotel operations 47,423 37,496 Operating expenses 249, ,012 Interest and other charges 149,261 64,140 Income tax expense 116, ,138 2,074,797 1,390,152 NET INCOME P 784,448 P 604,906 Attributable to: Minority interest ( P 1,925 ) ( P 335 ) Parent company's shareholders 786, ,241 P 784,448 P 604,906 Earnings Per Share P 0.05 P 0.06

7 EXHIBIT 3 MEGAWORLD CORPORATION & SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY (In Thousands) Unaudited Unaudited CAPITAL STOCK P 21,266,647 P 10,655,559 ADDITIONAL PAID-IN CAPITAL 7,807,990 2,227,892 TREASURY SHARES (515,166) (295,566) NET UNREALIZED GAIN ON AVAILABLE-FOR-SALE-FINANCIAL ASSETS 75,795 - ACCUMULATED TRANSLATION ADJUSTMENT (70,316) (101,293) RETAINED EARNINGS 7,288,604 5,081,099 MINORITY INTEREST 773, ,871 TOTAL EQUITY P 36,627,441 P 18,284,562

8 EXHIBIT 4 MEGAWORLD CORPORATION & SUBSIDIARIES Comparative Consolidated STATEMENTS OF CASH FLOWS CASH FLOW FROM OPERATING ACTIVITIES (In Thousands) Unaudited Unaudited NET INCOME P 784,448 P 604,906 Net Changes in Operating Assets & liabilities Decrease (Increase) in: Other Current Assets (641,310) (28,533) Non-current portion of Account Receivable (813,114) (1,830,757) Other Non-Current Assets (2,213) 617,515 Increase (Decrease) in: Current Liabilities (85,931) (74,272) Non-Current Liabilities 272, ,184 Reserve for Property Development Cost 169,595 22,324 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,100,112) (1,163,539) CASH FLOW FROM INVESTING ACTIVITIES (325,709) (472,928) CASH FLOW FROM FINANCING ACTIVITIES 9,773, ,848 INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS 9,132,295 (689,713) CASH & CASH EQUIVALENTS - BEGINNING 12,292,151 2,850,313 CASH & CASH EQUIVALENTS - END 21,424,446 P 2,160,600

9 EXHIBIT 5 MEGAWORLD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts In Philippine Pesos) 1. CORPORATE INFORMATION Megaworld Corporation (the Company or parent company) holds interests in the following subsidiaries and associates: Explanatory Percentage of Ownership Subsidiaries/Associates Notes Subsidiaries: Megaworld Land, Inc. (MLI) 100% 100% 100% Prestige Hotels and Resorts, Inc. (PHRI) (a) 100% 100% 100% Mactan Oceanview Properties and Holdings, Inc. (MOPHI) 100% 100% 100% Megaworld Cayman Islands, Inc. (MCII) 100% 100% 100% Richmonde Hotel Group International (RHGI) 100% 100% 100% Eastwood Cyber One Corporation (ECOC) 100% 100% 100% Forbes Town Properties and Holdings, Inc. (FTPHI) 100% 100% 100% Megaworld Newport Property Holdings, Inc. (MNPHI) 100% 100% - Townsquare Development, Inc. (TDI) (f) 100% - - Oceantown Properties, Inc. (OPI) (b) 100% - - Travellers International Hotel Group, Inc. (TIHGI) (e) 70% - - Megaworld-Daewoo Corporation (MDC) 60% 60% 60% Megaworld Central Properties, Inc. (MCPI) 60% 60% - Philippine International Properties, Inc. (PIPI) (d) 50% - - Megaworld Globus Asia, Inc. (MGAI) 50% 50% 50% Associates: Empire East Land Holdings, Inc. (EELHI) 45.22% 45.22% 43% Suntrust Home Developers, Inc. (SHDI) (g) 42.48% 42.48% 36.32% Palm Tree Holdings and Development Corporation (PTHDC) (c) 40% 40% - (a) Wholly owned subsidiary of MLI. (b) Subsidiary incorporated in 2006, not yet in commercial operations as of December 31, (c) Subsidiary incorporated in 2005, not yet started commercial operations as of December 31, (d) Subsidiary incorporated in 2002, not yet started commercial operations as of December 31, (e) Subsidiary incorporated in 2003, not yet started commercial operation as of December 31, (f) Subsidiary incorporated in (g) Formerly Fairmont Holdings, Inc. (FHI). Except for MCII and RHGI, the subsidiaries and associates were incorporated in the Philippines and operate within the country. MCII was incorporated and operates in the Cayman Islands while RHGI was incorporated and operates in the British Virgin Islands.

10 - 2 - The Company and its subsidiaries (the Group), except for TIHGI, PIPI and OPI which are not yet in commercial operations as of December 31, 2006, are presently engaged in the real estate business, hotel operations and marketing services. The registered office of the Company, which is also its principal place of business, is located at 28th Floor, The World Centre Building, Sen. Gil Puyat Avenue, Makati City. The financial statements of the Group for the year ended December 31, 2006 (including the comparatives for the years ended December 31, 2005 and 2004) were authorized for issue by the Company s Board of Directors on March 4, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarized below. The policies have been consistently applied to all years presented, unless otherwise stated. 2.1 Basis o f Preparation (a) Statement of Compliance with Philippine Financial Reporting Standards (PFRSs) The consolidated financial statements of the Group have been prepared in accordance with PFRSs. PFRSs are adopted by the Financial Reporting Standards Council (FRSC), formerly the Accounting Standards Council, from the pronouncements issued by the International Accounting Standards Board (IASB), PFRS consist of: (i) PFRSs corresponding to International Financial Reporting Standards; (ii) Philippine Accounting Standards (PASs) corresponding to International Accounting Standards; and, (iii) Interpretations to existing standards representing interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), formerly the Standing Interpretations Committee, of the IASB which are adopted by the FRSC. These consolidated financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial assets. The measurement bases are more fully described in the accounting policies that follow.

11 (b) Transition to PFRS in In compliance with the pronouncements of the FRSC and the regulations of the Philippine Securities and Exchange Commission, the Group adopted all the relevant PFRSs for the first time in its consolidated financial statements for the year ended December 31, 2005, with January 1, 2003 as its transition date. The transition from the previous generally accepted accounting principles in the Philippines to PFRS was made in accordance with PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. The Group s transition to PFRS in 2005 resulted in the restatement of the balance of Equity as of January 1, 2005 and The total adjustment to Equity, particularly in the balance of Accumulated Translation Adjustments and Retained Earnings, arising from the transition amounted to P611,755,927 and P633,200,872 in 2005 and 2004, respectively, and is broken down as follows: January 1, 2005: Increase (Decrease) in Equity Accumulated Relevant Translation Retained Total PFRS Adjustments Earnings Adjustment Remeasurement of foreign subsidiaries financial instruments PAS 21 (P 26,540,291 ) P - ( P 26,540,291 ) Reversal of goodwill amortization PAS 27/28-25,988,101 25,988,101 Remeasurement of trade receivables at amortized cost PAS 39 - ( 237,736,238 ) ( 237,736,238 ) Remeasurement of security deposits at amortized cost PAS 39-31,485,381 31,485,381 Fair value adjustment of marketable securities PAS 39-24,404,458 24,404,458 Recognition of transitional liability and defined benefit expense PAS 19 - ( 28,396,613 ) ( 28,396,613 ) Depreciation of investment property by component PAS 16 - ( 62,008,613 ) ( 62,008,613 ) Recognition of equity share in net loss of an associate PAS 27/28 - ( 367,926,581 ) ( 367,926,581 ) Deferred tax adjustment PAS 12-28,974,469 28,974,469 (P 26,540,291 ) (P 585,215,636 ) (P 611,755,927 )

12 January 1, 2004: Increase (Decrease) in Equity Accumulated Relevant Translation Retained Total PFRS Adjustments Earnings Adjustment Remeasurement of foreign subsidiaries financial instruments PAS 21 (P 15,660 ) P - ( P 15,660 ) Remeasurement of trade receivables at amortized cost PAS 39 - ( 314,607,193 ) ( 314,607,193 ) Remeasurement of security deposits at amortized cost PAS 39-29,053,760 29,053,760 Fair value adjustment of marketable securities PAS 39 - ( 170,661,355 ) ( 170,661,355 ) Recognition of transitional liability and defined benefit expense PAS 19 - ( 22,472,830 ) ( 22,472,830 ) Depreciation of investment property by component PAS 16 - ( 42,162,539 ) ( 42,162,539 ) Recognition of equity share in net loss of an associate PAS 27/28 - ( 133,047,814 ) ( 133,047,814 ) Deferred tax adjustment PAS 12-20,712,759 20,712,759 (P 15,660 ) (P 633,185,212 ) (P 633,200,872 ) In addition to the foregoing adjustments to Equity, the structure of the consolidated balance sheet and consolidated income statement was also revised. (c) Functional and Presentation Currency These consolidated financial statements are presented in Philippine pesos, the functional currency of the Group (except for MCII and RHGI), and all values represent absolute amounts except when otherwise indicated (see also Note 2.13). 2.2 Impact of New Standards, and Amendments and Interpretations to Existing Standards that are Relevant to the Group (a) Effective in 2006 In 2006, the Group adopted the amendments and interpretations to existing accounting standards issued by the IASB and adopted by the FRSC which are mandatory for accounting periods beginning on or after January 1, These amendments and interpretations are as follows: PAS 19 (Amendment) : Employee Benefits PAS 39 and PFRS 4 (Amendment) : Financial Guarantee Contracts

13 - 5 - Discussed below are the impact on the consolidated financial statements of each of these amendments and interpretations. (i) PAS 19 (Amendment), Employee Benefits. The amendment introduces an option for an alternative recognition approach for actuarial gains and losses. It also adds new disclosure requirements and imposes additional recognition requirements for multiemployer plans where insufficient information is available to apply defined benefit accounting. Because the Group does not intend to change its current accounting policy for recognition of actuarial gains and losses and does not participate in any multi-employer plans, the adoption of this amendment did not result in a material adjustment to the consolidated financial statements. (ii) PAS 39 and PFRS 4 (Amendment), Financial Guarantee Contracts. The amendment requires the recognition of guarantee liability, at its fair value, of the parent company in relation to a third party loan to a subsidiary guaranteed by the parent company. The Group s adoption of the amendment did not result in a material adjustment to the consolidated financial statements as management opted not to record the fair value of the liability because of the low probability of the subsidiary s default in paying its borrowings guaranteed by the parent company. (b) Effective Subsequent to 2006 There are a few new standards, and amendments and interpretation to existing standards that are effective for periods subsequent to Of these new standards, and amendments and interpretations, the following are relevant to the Group but the Group has opted not to adopt them early. PAS 1 (Amendment) : Presentation of Financial Statements PFRS 7 : Financial Instruments: Disclosure Philippine Interpretation IFRIC 10 : Interim Financial Reporting and Impairment Below is a discussion of the possible impact of the foregoing standards, amendments and interpretations which the Group will apply in 2007 in accordance with their transitional provisions. (i) PFRS 7, Financial Instruments: Disclosures and complementary amendment to PAS 1 (effective for annual periods beginning on or after January 1, 2007). PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity s capital and how it manages capital.

14 - 6 - The Group has assessed the impact of PFRS 7 and the amendment to PAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of PAS 1. (ii) Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after November 1, 2006). It prohibits the impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group is currently evaluating the impact of this interpretation on its consolidated financial statements and has initially determined that such may not have significant effects on the consolidated financial statements for 2007, as well as for prior and future periods. 2.3 Consolidation, Investment in Associates and Interest in Joint Venture The Group s consolidated financial statements comprise the accounts of the Company and its subsidiaries as of March 31, 2007 and December 31, 2006 for the period ended March 31, 2007 and March 31, 2006 after elimination of material intercompany transactions. All intercompany balances and transactions with subsidiaries, including income, expenses and dividend, are eliminated in full. Unrealized profits and losses from intercompany transactions that are recognized in assets are also eliminated in full. Intercompany losses that indicate an impairment are recognized in the consolidated financial statements. The financial statements of subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The Company accounts for its investments in subsidiaries, and minority interest as follows: (a) Investments in Subsidiaries Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Company obtains and exercises control through voting rights. Subsidiaries are consolidated from the date the Company obtains control until such time that such control ceases. In addition, acquired subsidiaries are subject to the application of the purchase method for acquisitions. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their revalued amounts, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Positive goodwill represents the excess of acquisition cost over the Group s share in the fair value of the identifiable net assets of the acquired subsidiary at the date of acquisition. Negative goodwill represents the excess of the Group s share in the fair

15 - 7 - value of identifiable net assets of the subsidiary at date of acquisition over acquisition cost (see also Note 2.9). (b) Transactions with Minority Interests The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals of equity investments to minority interests result in gains and losses for the Group that are recorded in the consolidated income statement. Purchases of equity shares from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired in the carrying value of the net assets of the subsidiary. (c) Investment in Associates Associates are those entities over which the Group is able to exert significant influence but which are neither subsidiaries nor interests in a joint venture. Investments in Associates are initially recognized at cost and subsequently accounted for using the equity method. Acquired investments in associates are also subject to purchase accounting. However, any goodwill or fair value adjustment attributable to the share in the associate is included in the amount recognized as Investment in Associates. All subsequent changes to the share of interest in the equity of the associate are recognized in the Group s carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are shown as Equity in Net Earnings (Losses) in the Group s consolidated income statement and therefore affect the net results of the Group. These changes include subsequent depreciation, amortization or impairment of the fair value adjustments of assets and liabilities. Items that have been directly recognized in the associate s equity, for example, resulting from the associate s accounting for available-for-sale financial assets, are recognized in the Equity of the Group. Any nonincome related equity movements of the associate that arise, for example, from the distribution of dividend or other transactions with the associate s shareholders, are charged against the proceeds received or granted. No effect on the Group s net result or Equity is recognized in the course of these transactions. However, when the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

16 (d) Interests in Joint Ventures For interests in jointly controlled operations, the Group recognized in its consolidated financial statements the assets that it controls, the liabilities, the expenses that it incurs and its share in the income from the sale of goods or services by the joint venture. 2.4 Financial Assets Financial assets include cash and other financial instruments. Financial assets, other than hedging instruments, are classified into the following categories: marketable securities which represent financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which date a choice of classification or accounting treatment is available, subject to compliance with specific provisions of applicable accounting standards. Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. All financial assets are recognized on their trade date. All financial assets that are not classified as at fair value through profit or loss are initially recognized at fair value, plus transaction costs. The Group s financial instruments are currently lodged in the following classifications: (a) Financial Assets at Fair Value Through Profit or Loss (FVTPL)/Marketable Securities This category includes financial assets that are either classified as held for trading or are designated by the entity to be carried at fair value through profit or loss upon initial recognition. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless such are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. Subsequent to initial recognition, the financial assets included in this category are measured at fair value with changes in fair value recognized in profit or loss. Financial assets originally designated as financial assets at fair value through profit or loss may not subsequently be reclassified into another category, hence, it must remain in such category until it is disposed of or derecognized.

17 (b) Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. These are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses. Any change in their value is recognized in profit or loss. Loans and receivables are presented as Trade and Other Receivables in the consolidated balance sheets. Trade receivables, which generally have one to five-year terms, are noninterest-bearing instruments recognized initially at fair value and subsequently stated at amortized cost using the effective interest method, less accumulated impairment losses, if any. An impairment loss is provided when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognized in profit or loss. This receivable represents buyers unpaid balances arising from sale of real estate properties. The title to the real estate properties remains with the Group until such time that the Group fully collects its receivable from the buyers. (c) Available-for-sale Financial Assets These include non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. They are included in non-current assets under the Other Non-current Assets account in the balance sheets unless management intends to dispose of the investment within 12 months of the balance sheet date. All financial assets within this category are initially recognized at fair value plus transaction costs and subsequently, unless otherwise disclosed, with changes in value recognized in Equity, net of any effects arising from income taxes. Gains and losses arising from securities classified as available-for-sale are recognized in the consolidated income statement when they are sold or when the investment is impaired. In the case of impairment, the cumulative loss previously recognized directly in Equity is transferred to the consolidated income statement. If circumstances change, impairment losses on available-for-sale equity instruments are not reversed through the income statement. On the other hand, if in a subsequent period the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated income statement, the impairment loss is reversed through the consolidated income statement.

18 For investments that are actively traded in organized financial markets, fair value is determined by reference to stock exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured. Derecognition of financial assets occurs when the rights to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. 2.5 Real Estate Transactions Acquisition costs of raw land intended for future development, including other costs and expenses incurred to effect the transfer of title of the property to the Group, are charged to the Land for Future Development account. These costs are reclassified to the Property Development Costs account when the development of the property starts. Related property development costs are then accumulated in this account. Borrowing costs on certain loans incurred during the development of the real estate properties are also capitalized by the Group as part of the Property Development Costs account. When portions of the property being developed are sold prior to the completion of the development, the accumulated costs of the project are transferred to the Residential and Condominium Units for Sale account. Cost of real estate property sold before completion of the development is determined based on the actual costs incurred to date plus estimated costs to complete the development of the property. The estimated expenditures for the development of sold real estate property, as determined by the project engineers, are charged to the cost of residential and condominium units sold with a corresponding credit to the Reserve for Property Development account. Residential and Condominium Units for Sale are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and the estimated costs necessary to make the sale. Considering the Group s pricing policy for real estate units for sale, cost is considerably lower than the net realizable value. The Group recognizes the effect of revisions in the total project cost estimates in the year in which these changes become known. Any impairment loss from a real estate project is charged to operations during the period in which the loss is determined. 2.6 Investment Property Properties held for lease under operating lease agreements, which comprise mainly of land, buildings and condominium units, are classified as Investment Property and carried at cost

19 net of accumulated depreciation and any impairment in value (see Note 2.14). Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 5 to 25 years. 2.7 Property and Equipment Buildings and improvements, a hotel building, hotel improvements, office furniture, fixtures and other equipment and transportation equipment are carried at acquisition or construction cost less subsequent depreciation, amortization and any impairment losses. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to income as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation and amortization and impairment losses are removed from the accounts and any resulting gain or loss is reflected in income for the period. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. Amortization of leasehold and office improvements is recognized over the estimated useful lives of improvements or the term of the lease, whichever is shorter. The depreciation and amortization periods for property and equipment, based on the above policies, are as follows: Condominium units Land and office improvements Hotel and building improvements Office furniture, fixtures and equipment Transportation equipment years 5-20 years 5-20 years 3-5 years 5 years An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (see Note 2.14). The residual values and estimated useful lives of property and equipment are reviewed, and adjusted if appropriate, at each balance sheet date. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year the item is derecognized. 2.8 Financial Liabilities Financial liabilities include Interest-bearing Loans and Borrowings, Bonds Payable, Trade and Other Payables and Retirement Benefit Obligation. Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognized as an expense in the consolidated income statement as Finance Costs under the caption of Interest and Other Charges account.

20 Interest-bearing Loans and Bonds Payable are raised for support of long-term funding of operations. These are recognized at proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accrual basis using the effective interest method and are added to the carrying amount of the instrument to the extent that these are not settled in the period in which they arise. Trade and Other Payables are recognized initially at their nominal value and subsequently measured at amortized cost less settlement payments. Dividend distributions to shareholders are recognized as financial liabilities when the dividends are approved by the shareholders. Financial liabilities are derecognized from the consolidated balance sheet only when the obligations are extinguished either through discharge, cancellation or expiration. 2.9 Business Combination Business acquisitions are accounted for using the purchase method of accounting. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (see Note 2.14). Negative goodwill which is the excess of the Group s interest in the net fair value of acquired identifiable assets, liabilities and contingent liabilities over cost is charged directly to income. Transfers of assets between commonly controlled entities are accounted for under historical cost accounting.

21 Provisions Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, legal disputes or onerous contracts. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognized, if virtually certain as a separate asset, not exceeding the amount of the related provision. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long-term provisions are discounted to their present values, where time value of money is material. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the consolidated financial statements. Probable inflows of economic benefits that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the consolidated financial statements Revenue and Cost Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: (a) Sale of residential and condominium units - For financial reporting purposes, revenues from transactions covering sales of residential and condominium units are recognized under the percentage of completion method. Under this method, realization of gross profit is recognized by reference to the stage of development of the properties, i.e., revenue is recognized in the period in which the work is performed. Advances made to contractors and suppliers are treated as actual cost incurred in determining the stage of development of the properties. For tax reporting purposes, a modified basis of computing the taxable income for the year based on collections from sales is used by the parent company, MGAI, ECOC and EELHI, while MDC report revenues based on the percentage of completion method. (b) Sale of undeveloped land - Revenues on sales of undeveloped land are recognized using the full accrual method. Under the full accrual method, revenue is recognized when the risks and rewards of ownership of the undeveloped land has passed to the buyer and the amount of revenue can be measured reliably.

22 (c) Rental and hotel income Revenue is recognized when the performance of contractually agreed tasks has been substantially rendered. (d) Construction contracts Revenue is recognized when the performance of contractually agreed tasks have been substantially rendered using the cost recovery and percentage of completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. (e) Interest Revenue is recognized as the interest accrues (taking into account the effective yield on the asset). (f) Dividends Revenue is recorded when the stockholders right to receive the payment is established. Costs of residential and condominium units sold before completion of the projects include the acquisition cost of the land, development costs incurred to date and estimated costs to complete the project, determined based on firm construction contracts and on estimates made by the project engineers (see Note 2.5) Leases The Group accounts for its leases as follows: (a) Group as Lessee Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the consolidated income statement on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. (b) Group as Lessor Leases which do not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as income in the consolidated income statement on a straight-line basis over the lease term Functional Currency and Foreign Currency Transactions (a) Functional and Presentation Currency Except for MCII and RHGI which uses the U.S. dollars as its functional currency, the accounting records of the Group are maintained in Philippine pesos. Items included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Group s consolidated financial statements are presented in Philippine pesos.

23 (b) Transactions and Balances Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates. Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated income statement. (c) Translation of Financial Statements of Foreign Subsidiaries The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and, (iii) All resulting exchange differences are recognized as a separate component of Equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to Equity. When a foreign operation is sold, such exchange differences are recognized in the consolidated income statement as part of gain or loss on sale of the foreign operation. Goodwill arising on the acquisition of a foreign entity are treated as an asset of the foreign entity and translated at the closing rate Impairment of Non-financial Assets The Group s Investment in Associates, Goodwill, Investment Property, Land for Future Development, and Property and Equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls the related cash flows. Note 2.9 provides further details on initial recognition of goodwill. Individual assets or cash-generating units that include goodwill and other intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

24 An impairment loss is recognized for the amount by which the asset s or cash-generating unit s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognized for cashgenerating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist Employee Benefits (a) Retirement Benefit Obligations Pension benefits are provided to employees through a defined benefit plan. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of pension plan remains with the Group, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Group s defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee. The liability recognized in the consolidated balance sheet for defined benefit pension plans is the present value of the defined benefit obligation (DBO) at the consolidated balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated annually by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses are not recognized as an income or expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees expected average remaining working lives. Actuarial gains and losses within the 10% corridor are disclosed separately. Past-service costs are recognized immediately in the consolidated income statement, 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 straight-line basis over the vesting period. (b) Compensated Absences Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the balance sheet date. They are included in the Trade and Other Payables account at the undiscounted amount that the Group expects to pay as a result of the unused entitlement.

25 Borrowing Costs For financial reporting purposes, borrowing costs are recognized as expenses in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of the cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete. For income tax purposes, interest and other borrowing costs are charged to expense when incurred Income Taxes Current income tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in the consolidated income statement. Deferred tax is provided, using the balance sheet liability method on temporary differences at the balance sheet date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the balance sheet liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deferred income tax asset to be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in the consolidated income statement. Only changes in deferred tax assets or liabilities that relate to a change in value of assets or liabilities that is charged directly to Equity are charged or credited directly to Equity Equity Capital stock is determined using the nominal value of shares that have been issued. Additional paid-in capital includes any premiums received on the initial issuance of capital stock. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital, net of any related income tax benefits.