SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-C. CURRENT REPORT UNDER SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17.

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2 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-C CURRENT REPORT UNDER SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17.2 (c) THEREUNDER March 2006 Date of Report 2. SEC 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 principal office 8. (632) to 40 Issuer s telephone number, including area code 9. Securities registered pursuant to Sections 8 and 12 of the SRC or Sections 4 and 8 of the RSA Title of Each Class Number of Shares of Common Stock Outstanding Common 10,655,558, Item 9(b) Megaworld Corporation posted a net income of P1.15 billion in 2005, up 43 percent from P million the year before. This came from revenues of P5.32 billion, up 19.3 percent year on year. Ongoing residential projects such as Eastwood Parkview, Grand Eastwood Palazzo and One Orchard Road in Eastwood City, Forbeswood Heights at the Bonifacio Global City in Taguig and Greenbelt Radissons and Greenbelt Parkplace in Makati contributed to the Company s strong earnings performance.

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5 MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (Amounts in Philippine Pesos) Notes A S S E T S CURRENT ASSETS Cash and cash equivalents 6 P 2,850,312,456 P 2,688,988,568 Trade and other receivables - net 7 2,751,268,212 2,382,098,258 Marketable securities 8 3,599,631,526 4,138,353,661 Residential and condominium units for sale 3,552,320,332 4,051,490,108 Property development costs 1,606,180,565 1,193,231,724 Prepayments and other current assets - net 619,652, ,939,607 Total Current Assets 14,979,366,009-14,832,101,926 NON-CURRENT ASSETS Trade and other receivables 7 1,868,934,869 1,618,719,128 Advances to landowners and joint ventures 9 240,640, ,982,837 Land for future development 1,784,032,410 1,552,858,507 Investments in and advances to associates and other related parties - net 10 7,937,355,562 7,616,504,170 Investment property - net 11 5,043,102,197 4,419,478,853 Property and equipment - net ,050, ,753,952 Deferred tax assets 18 2,123,480 30,200,896 Other non-current assets - net ,286,182 1,834,840,999 Total Non-current Assets 17,803,525,804-17,715,339,342 TOTAL ASSETS P 32,782,891,813 - P 32,547,441,268 Forward -2- LIABILITIES AND EQUITY Notes CURRENT LIABILITIES Interest-bearing loans and borrowings 14 P 963,577,614 P 314,290,947 Trade and other payables 15 1,691,285,280 1,486,567,695 Customers' deposits 1,791,570,197 1,224,782,675 Income tax payable 2,275,330 14,651,258 Reserve for property development 641,435, ,965,140 Deferred income on real estate sales 556,779, ,652,672 Other current liabilities 748,491, ,301,205 Total Current Liabilities 6,395,414,532-4,618,211,592 NON-CURRENT LIABILITIES Interest-bearing loans and borrowings 14 2,132,386,146 4,275,221,611 Customers' deposit 2,448,761,300 2,612,953,197 Reserve for property development 1,243,213,018 1,278,483,516 Deferred income on real estate sales 287,525, ,080,617 Advances from associates and other related parties ,190, ,768,253 Deferred tax liabilities - net 18 1,290,056,253 1,302,349,361 Other non-current liabilities 941,643, ,061,940 Total Non-current Liabilities 8,512,775,644-11,158,918,495 Total Liabilities 14,908,190,176-15,777,130,087 EQUITY Equity attributable to parent company's shareholders 17,141,588,050 16,065,271,202 Minority interest 733,113, ,039,979 Total equity 17,874,701,637 16,770,311,181 TOTAL LIABILITIES AND EQUITY P 32,782,891,813 P 32,547,441,268 See Notes to Financial Statements.

6 MEGAWORLD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Amounts in Philippine Pesos) Notes REVENUES Realized gross profit from real estate sales: Real estate sales P 3,151,214,282 P 2,396,727,787 Cost of real estate sales ( 2,158,202,768) ( 1,694,917,117 ) Gross profit 993,011, ,810,670 Deferred gross profit ( 367,358,696) ( 381,934,355 ) Realized gross profit on current year's sales 625,652, ,876,315 Realized gross profit on prior years' sales 506,439, ,279,550 1,132,092, ,155,865 Rental income 5 547,822, ,653,065 Hotel income - net 101,057,099 88,720,411 Other revenues 16 1,012,147,201 1,251,061,979 2,793,118,555 2,379,591,320 OPERATING EXPENSES Commissions 252,804, ,652,378 Depreciation and amortization 190,179, ,326,852 Taxes and licenses 124,999,535 47,492,684 Salaries and employee benefits ,859, ,245,504 Advertising and promotions 32,471,639 31,870,665 Impairment losses 3,496,464 61,856,416 Foreign exchange losses 1,103,304 14,100,264 Other operating expenses ,966, ,221, ,881, ,766,761 OPERATING PROFIT 1,816,236,943 1,506,824,559 OTHER INCOME (CHARGES) Finance costs 7,14 ( 280,835,810) ( 205,271,197 ) Equity in net losses of associates 10 ( 64,638,874) ( 207,138,433 ) Fair value losses - net 8 ( 44,785,138) ( 111,857,690 ) ( 390,259,822) ( 524,267,320 ) INCOME BEFORE TAX 1,425,977, ,557,239 TAX EXPENSE ,993, ,343,471 NET INCOME P 1,166,983,958 P 802,213,768 Attributable to: Minority interest P 13,121,607 ( P 5,476,720 ) Parent company's shareholders 1,153,862, ,690,488 P 1,166,983,958 P 802,213,768 Earnings Per Share 21 P 0.11 P 0.09 See Notes to Financial Statements.

7 MEGAWORLD CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Amounts in Philippine Pesos) Notes CAPITAL STOCK 20 P 10,655,559,106 P 8,879,632,590 ADDITIONAL PAID-IN CAPITAL 2,227,892,300 2,227,892,295 TREASURY SHARES, representing parent company's common shares held by subsidiaries 20 Balance at beginning of year ( 363,575,945 ) ( 363,575,945 ) Disposals during the year 68,009,769 - Balance at end of year -250 million and 350 million shares in 2005 and 2004, respectively ( 295,566,176 ) ( 363,575,945 ) ACCUMULATED TRANSLATION ADJUSTMENTS Balance at beginning of year As previously reported 57,494,655 91,752,859 Effects of transition to PFRS, net of taxes ( 26,540,291 ) ( 15,660 ) As restated 30,954,364 91,737,199 Currency translation differences during the year, net of tax 3 ( 145,555,275 ) ( 60,782,835 ) Balance at end of year ( 114,600,911 ) 30,954,364 RETAINED EARNINGS Balance at beginning of year As previously reported 5,875,583,534 5,115,862,622 Effects of transition to PFRS, net of taxes 2 ( 585,215,636 ) ( 633,185,212 ) As restated 5,290,367,898 4,482,677,410 Net income 1,153,862, ,690,488 Stock dividends ( 1,775,926,518 ) - Balance at end of year 4,668,303,731 5,290,367,898 TOTAL EQUITY P 17,141,588,050 P 16,065,271,202 See Notes to Financial Statements.

8 MEGAWORLD CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Amounts in Philippine Pesos) CASH FLOWS FROM OPERATING ACTIVITIES Income before tax P 1,425,977,121 P 982,557,240 Adjustments for: Depreciation and amortization 190,179, ,326,852 Interest expense 280,835, ,271,197 Unrealized increase in value of marketable securities 44,785, ,857,690 Interest income ( 406,010,444 ) ( 571,123,393 ) Dividend income ( 28,791,600 ) ( 27,975,650 ) Gain on sale of investment ( 45,163,750 ) - Probable losses 3,496,464 61,856,416 Equity in net losses (earnings) of subsidiaries and an associate 64,638,874 ( 27,740,334 ) Amortization of deferred foreign exchange losses 1,103,304 13,960,410 Operating income before working capital changes 1,531,050, ,990,428 Decrease (increase) in trade and other receivables ( 538,761,225 ) 845,082,621 Decrease (increase) in residential and condominium units for sale 499,169,776 ( 358,904,954 ) Decrease (increase) in property development costs ( 489,758,441 ) 70,174,819 Increase in prepayments and other current assets ( 48,687,520 ) ( 267,443,556 ) Decrease (increase) in advances to landowners and joint ventures 5,342,196 ( 26,705,064 ) Increase in trade and other payables 61,722,929 24,053,188 Increase in customers' deposits 402,595, ,768,233 Increase (decrease) in deferred income on real estate sales ( 139,429,038 ) 73,734,053 Increase in other current liabilities ( 35,810,108 ) 406,418,141 Increase in reserve for property development 13,200, ,291,767 Increase (decrease) in other non-current liabilities 201,581,580 80,091,929 Cash generated from operations 1,462,216,727 2,609,551,604 Interest paid ( 280,835,810 ) ( 205,591,795 ) Cash paid for income taxes ( 371,094,617 ) ( 112,424,844 ) Net Cash From Operating Activities 810,286,300 2,291,534,965 Forward

9 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Investment property ( 20,316,070 ) ( 8,797,365 ) Land for future development ( 846,021,979 ) ( 383,370,555 ) Property and equipment ( 42,123,813 ) ( 115,996,375 ) Proceeds from disposals of property and equipment 1,391,857 8,631,939 Net increase in investments in and advances to associates and other related parties ( 613,020,623 ) ( 640,014,965 ) Net decrease (increase) in other non-current assets ( 661,960,174 ) ( 1,374,703,467 ) Disposals (acquisition) of investments during the year 493,936, ,396,297 Interest received 347,803, ,480,423 Dividends received 28,791,600 27,975,650 Net Cash Used in Investing Activities ( 1,311,518,569 ) ( 1,459,398,418 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term liabilities and other non-current liabilites ( 450,115,471 ) ( 164,245,614 ) Proceeds from long-term liabilities 1,112,671,628 - Net Cash From (Used in) Financing Activities 662,556,157 ( 164,245,614 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 161,323, ,890,933 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,688,988,568 2,021,097,635 CASH AND CASH EQUIVALENTS AT END OF YEAR P 2,850,312,456 P 2,688,988,568 Supplemental Information for Noncash Investing and Financing Activities: In the normal course of business, the Company enters into non-cash transactions such as exchange or purchase on account of real estate and other assets, transfers property from Land for Future Development to Property Development Cost to Real Estate for Sale or Lease as the property goes through its various stages of development. These non-cash activities are not reflected in the cash flows statements (see Notes (9, 10 and 11). See Notes to Financial Statements.

10 MEGAWORLD CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (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/Associate Notes Megaworld Land, Inc. (MLI) 100% 100% Prestige Hotels and Resorts, Inc. (PHRI) (a) 100% 100% Mactan Oceanview Properties and Holdings, Inc. (MOPHI) 100% 100% Megaworld Cayman Islands, Inc. (MCII) 100% 100% Richmonde Hotel Group International (RHGI) 100% 100% Eastwood Cyber One Corporation (ECOC) 100% 100% Forbes Town Properties and Holdings, Inc. (FTPHI) 100% 100% Megaworld Newport Property Holdings, Inc. (MNPHI) (b) 100% - Megaworld-Daewoo Corporation (MDC) 60% 60% Megaworld Central Properties, Inc. (MCPI) (c) 60% - Megaworld Globus Asia, Inc. (MGAI) 50% 50% Empire East Land Holdings, Inc. (EELHI) 45.22% 43% Fairmont Holdings, Inc % 36.32% Palm Tree Holdings and Development Corporation (PTHDC) (d) 40% - (a) Wholly owned subsidiary of MLI (b) Subsidiary acquired in 2005 (c) Subsidiary incorporated in 2005, not yet in commercial operations as of December 31, 2005 (d) Associate incorporated in 2005, not yet in commercial operations as of December 31, 2005 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. RHGI was incorporated and operates in the British Virgin Islands. The Company and its subsidiaries (the Group ), except for MCPI and PTHDC which are not yet in commercial operations as of December 31, 2005, are presently engaged in the real estate business, hotel operations and marketing services.

11 2 The registered office of the Company 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, 2005 including the comparatives for the year ended December 31, 2004 were authorized for issue by the Company s Board of Directors on February 22, TRANSITION TO PHILIPPINE FINANCIAL REPORTING STANDARDS The Accounting Standards Council (ASC), the accounting standards-setting body in the Philippines, started a program in 1997 to move fully to the International Accounting Standards (IASs) issued by the then International Accounting Standards Committee (IASC). In April 2001, IASC was succeeded by the International Accounting Standards Board (IASB) which since then has issued revised IASs and new International Financial Reporting Standards (IFRSs). To correspond better with the issuances of the IASB, the ASC re-named the Standards it issues as Philippine Financial Reporting Standards or PFRSs (previously referred to as Statements of Financial Accounting Standards or SFASs). PFRSs consist of: a. PFRSs (corresponding to IFRSs); b. PASs (corresponding to IASs); and, c. Interpretations (corresponding to IFRICs and SICs). In compliance with the pronouncements of ASC and the regulations of Securities and Exchange Commission (SEC), the Group has adopted all the relevant PFRS for the first time in its financial statements for the year ended December 31, 2005, with January 1, 2004 as its transition date. The transition from previous generally accepted accounting principles (GAAP) in the Philippines to PFRS has been made in accordance with PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. Due to the transition to PFRS, the 2004 comparatives contained in these financial statements differ from those previously presented in the financial statements for the year ended December 31, The following reconciliations and explanatory notes thereto describe the effects of the transition on the Group s opening PFRS balance sheet as of January 1, 2004 and for the year ended December 31, All explanations should be read in conjunction with the PFRS accounting policies of the Group as disclosed in Note 3.

12 3 No adjustments to capital stock, additional paid-in capital and treasury stock were necessary in the opening PFRS balance sheet as of January 1, 2004 and the comparatives prepared for the year ended December 31, Reconciliations a. The reconciliation of the Group s equity reported under previous Philippine GAAP to its equity under PFRS are summarized as follows: Dec. 31 Jan. 1 Notes Accumulated Translation Adjustments under previous GAAP P 57,494,655 P 91,752,859 Restatement of foreign subsidiaries 2.11 ( 26,540,291) ( 15,660 ) Accumulated Translation Adjustments under PFRS P 30,954,364 P 91,737,199 Retained Earnings under previous GAAP P 5,875,583,534 P 5,115,862,622 Reversal of goodwill amortization ,988,101 - Remeasurement of trade receivables at amortized cost 2.4 ( 237,736,238) ( 314,607,192 ) Remeasurement of security deposits ,485,382 29,053,760 Fair value adjustment of financial assets ,404,458 ( 170,661,355 ) Recognition of transitional liability and defined benefit expense 2.7 ( 28,396,613) ( 22,472,830 ) Depreciation of investment property by component 2.8 ( 62,008,613) ( 42,162,539 ) Prior year recognition of equity share in net loss of an associate ( 367,926,582) ( 133,047,815 ) Deferred tax adjustments ,974,469 20,712,759 Total adjustment to retained earnings ( 585,215,636) ( 633,185,212 ) Retained Earnings under PFRS 5,290,367,898 4,482,677,410 Total adjustments to Equity ( 611,755,927) ( 633,200,872 ) Equity under previous GAAP 16,677,027,129 15,951,564,421 Equity under PFRS P 16,065,271,202 P 15,318,363,549

13 4 b. The remeasurements of balance sheet items at the opening PFRS balance sheets as of January 1, 2004 and comparative financial year as of December 31, 2004 are summarized as follows: January 1, 2004 Changes in assets: Previous Effects of Notes GAAP Transition PFRS Investments in marketable securities 2.6 P 2,880,987,696 ( P 170,684,384) P 2,710,303,312 Non-current trade and other receivables 2.2,2.4 P 2,682,002,702 ( P 314,607,192) P 2,367,395,510 Investments in and advances to associates and other related parties 7,794,563,752 ( 120,097,778) 7,674,465,974 Investment property 2.8 4,343,177,352 ( 55,112,576) 4,288,064,776 Other non-current assets ,629,070 20,712,759 30,341,829 17,710,360,572 ( 639,789,171) 17,070,571,401 Changes in liabilities: Trade and other payables 2.8 1,219,001,053 22,472,830 1,241,473,883 Deferred tax liabilities net 1,327,438,905 ( 7,369) 1,327,431,536 Other non-current liabilities 689,023,771 ( 29,053,760) 659,970,011 3,235,463,729 ( 6,588,299) 3,228,875,430 P 14,474,896,843 P 13,841,695,971 Total adjustment to equity (P 633,200,872) December 31, 2004 Changes in assets: Investments in marketable securities 2.6 2,110,047,610 ( 14,625,381) 2,095,422,229 Non-current trade and other receivables 2.2, 2.3 1,809,852,101 ( 237,736,238) 1,572,115,863 Investment in and advances to associates and other related parties 7,984,430,752 ( 367,926,582) 7,616,504,170 Investment property 2.2 4,481,487,466 ( 62,008,613) 4,419,478,853 Other non-current assets 2.2, 2.6 1,808,852,898 25,988,101 1,834,840,999 Deferred tax assets 2.2 1,226,427 28,974,469 30,200,896 Balance carried forward P 18,195,897,254 ( 627,334,244) 17,568,563,010

14 5 Previous Effects of Notes GAAP Transition PFRS Balance carried forward P 18,195,897,254 ( 627,334,244) 17,568,563,010 Changes in liabilities: Trade and other payables 2.9 1,458,171,082 28,396,613 1,486,567,695 Deferred tax liabilities 2.7 1,314,838,909 ( 12,489,548) 1,302,349,361 Other non-current liabilities 724,944,057 ( 31,485,382) 693,458,675 3,497,954,048 ( 15,578,317) 3,482,375,731 P 14,697,943,206 Total adjustment to equity (P 611,755,927) P14,086,187,279 c. Profit and loss reported under previous GAAP for the year ended December 31, 2004 is reconciled to profit and loss under PFRS as follows: Previous Effects of Notes GAAP Transition PFRS Realized gross profit on real real estate sales P 759,072,979 (P 173,917,114) P 585,155,865 Other revenues 1,346,470, ,964,905 1,794,435,455 2,105,543, ,047,791 2,379,591,320 Operating expenses 2.7, ,985,005 ( 218,244) 872,766,761 Operating profit 1,232,558, ,266,035 1,506,824,559 Other income (charges): Finance cost 2.2, 2.7 ( 205,591,795 ) 320,598 ( 205,271,197 ) Equity share in net earnings ,740,334 ( 234,878,767) ( 207,138,433 ) Fair value gains (losses) 2.2, 2.4 ( 111,857,690 ) - ( 111,857,690) ( 289,709,151 ) ( 234,558,169) ( 524,267,320 ) Income before tax and minority interest 942,849,373 39,707, ,557,239 Tax expense ,605,181 ( 8,261,710) 180,343,471 Net earnings applicable to minority interest 5,476,720-5,476,720 Net Income P 759,720,912 P 47,969,576 P 807,690,488

15 6 2.2 Revised Structure of Balance Sheet and Statement of Income The Company has modified its previous balance sheet and income statement structure on transition to PFRS. The main changes are summarized as follows: a. Under the previous GAAP, trade receivables sold with recourse are derecognized from the carrying amount of trade receivables account. These trade receivables sold did not qualify for derecognition criteria under PFRS since related risks and rewards were not transferred from the Group to the buyer of the receivables. Accordingly, the amounts of trade receivables sold as of January 1, 2004 and December 31, 2004 amounting to P638,059,173 and P488,509,770, respectively, were reversed and the related liability was recognized for the proceeds received by the Group. This resulted in the increase in the Trade and Other receivable and Interest-bearing Loans accounts in the opening PFRS balance sheet as of January 1, 2004 and the comparatives as of December 31, 2004; b. Investments in bonds and other debt instruments previously presented separately in the face of the balance sheets and classified as long-term are now presented as part of marketable securities, which represent financial assets at fair value through profit and loss. c. Investments in preferred stock classified as part of the Investments in and advances to subsidiaries and other related parties net under previous GAAP are now included in Marketable securities which represent financial assets at fair value through profit and loss. d. Investments in associates measured at cost previously included in Investments in and advances to subsidiaries and other related parties net under previous are now presented as part of Other noncurrent assets classified as available for sale financial assets. e. Financing income shown as part of Other income and expenses under previous GAAP is now presented as a reduction of interest expense and other financing charges to arrive at finance costs. f. Real estate held for lease under the previous GAAP is now presented as Investment property. In addition, some balance sheet items that previously were classified non-current in accordance with previous GAAP requirements are now presented as current under PFRS. Individual notes to the balance sheet items and the accounting policies provide further details on these changes.

16 7 2.3 Cessation of Amortization of Goodwill Under PFRS, Goodwill, representing the excess of acquisition costs over the equity in underlying net assets of the subsidiaries or associates at date of acquisition, is not amortized. Instead, Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. As required by PFRS 1, First Time Adoption of PFRS, Goodwill recognized under previous GAAP has been tested for impairment at the date of transition to IFRS. Based on the test, no impairment loss was required to be recognized. Also, in accordance with PFRS 1, the unamortized amount as of January 1, 2004 has been considered as the carrying amount of Goodwill in the opening PFRS balance sheet. For the year ended December 31, 2004, Goodwill was not amortized in accordance with PFRS. As a result, the amortization amounting to P25,988,101 for 2004 recorded under the previous GAAP was reversed in the reconciliation from previous GAAP figures to PFRS figures with corresponding reduction in expenses by P25,988,101 for the year ended December 31, Measurement of Accounts Receivable Trade at Amortized Cost Accounts receivable trade are non interest-bearing receivable. These were measured under the previous GAAP at realizable value. Under PFRS, the accounts receivable trade are considered as loans and receivable financial assets measured at amortized cost using effective interest rate method. The discount rate used of 10% was determined by reference to the market interest rate at the time of the recognition of sale. This resulted in the recognition of day-one loss amounting to P607,694,564 and interest income of P295,570,880 in retained earnings as of January 1, The related day-one loss and interest income recognized in 2004 amounted to P173,251,263 and P248,931,164, respectively. The net effect resulted in a net increase in net income of P75,679,901 for that year. The net adjustment resulted in the decrease of the beginning retained earnings as of December 31, 2004 by P237,736,238.

17 8 2.5 Measurement of Security Deposits at Amortized Cost Security deposits arising from the lease of real properties were measured under the previous GAAP at the amount of consideration given by the lessees amounting to P105.8 million as of January 1, Under PFRS, refundable guarantee deposits are considered as loans and receivable financial assets measured at amortized cost using effective interest rate method. The discount rate used of 10% was determined by reference to the market interest rate of comparable financial instrument at the date of the inception of the lease. This resulted in the recognition of day-one gain amounting to P13,640,989 and interest expense of P1,960,419 in retained earnings as of January 1, In 2004, the Group recognized an additional day-one loss pertaining to lease contracts acquired during the year amounting to P4,856,244. Interest expense amounting to P3,131,511 is recognized representing the cost of money paid in advance by the Group s tenants. The net adjustment to the beginning retained earnings as of December 31, 2004 amounted to P31,485, Fair Value Measurement of Financial Assets Certain equity shares classified as Investments in and advances to subsidiaries and related parties under the previous GAAP were measured at cost. Under PFRS, these financial assets which quoted market price were classified as financial asset at fair value through profit and loss, and presented as Marketable securities in a separate line item in the balance sheets. This resulted in the recognition of gain on change in fair value amounting to P60,372,752 in The gain on change in fair value is recorded in the 2004 profit and loss statement of the Group. 2.7 Full Recognition of Defined Benefit Obligation Under PFRS, the Company s obligation under post-employment defined benefit plan should be actuarially determined using the projected unit credit method. The adoption of the related new standard resulted in the recognition of transitional liability amounting to P21,491,473 as of January 1, This transitional liability was fully recognized retrospectively in the Company s opening PFRS balance sheet. This also resulted in the recognition of additional defined benefit expense in 2004 amounting to P6,400,278. The total adjustments to retained earnings as of January 1, 2005 and 2004 amounted to P28,396,613and P22,472,830, respectively. 2.8 Depreciation of Buildings by Component Significant component parts of the buildings of the Group, such as elevators, that have useful lives significantly different from the useful life of the building are identified as separate components and are depreciated separately. Under previous GAAP, this requirement is not clearly set out. The adoption of this new standard resulted in the recognition of additional depreciation expense amounting to P42,162,539 as of January 1, 2004, adjusted as a reduction to the actual earnings of that date. The additional depreciation expense recognized in 2004 amounted to P19,846,074 which resulted to decrease in net income for that year. The resulting decrease in retained earnings as of December 31, 2004 amounted to P62,008,613.

18 9 2.9 Classification and Measurement of Investment Property Under the previous GAAP, the Group s investment property previously classified as real properties held for lease was measured using the cost model. Under PFRS, investment property should be measured using the cost model or fair value model. The Group elected to measure its investment property using the cost model. When the cost model is used, an additional disclosure shall be made on the assets fair market value as of the comparative balance sheets dates. The Group uses the discounted cash flow valuation model in determining the assets fair market value. Projected annual cash inflow less the projected annual cash outflow specifically attributed to the asset is discounted using the cost of capital of the Group Deferred Tax Adjustments The deferred tax expense recognized by the Company which relates to the temporary differences arising from PFRS adjustments amounted to P28,974,469 in December 2004 and P20,712,759 in January Accumulated Translation Adjustments This represents translation adjustments resulting from the conversion of MCII and RHGI s foreign currency denominated financial statements into the Group s presentation currency. Restatement of foreign subsidiaries under PFRS resulted to a decrease in Accumulated translation adjustment of P15,660 and P26,540,291 as of January 1, 2004 and December 31, 2004, respectively.

19 10 3. 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. 3.1 Basis of Preparation The consolidated financial statements of Megaworld Corporation and subsidiaries have been prepared in accordance with generally accepted accounting principles in the Philippines as set forth in PFRSs. The 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 below. It should be noted that accounting estimates and assumptions are used in preparing the financial statements. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates. The consolidated financial statements are presented in Philippine pesos, the Group s functional currency, and all values represent absolute amounts except when otherwise indicated. 3.2 Impact of New and Revised Accounting Standards Effective Subsequent to 2005 There are new and revised accounting standards, amendments and interpretations to existing standards that have been published by IASB and adopted by the ASC which are mandatory for accounting periods beginning on or after January 1, These standards, which the Group has not opted to adopt early, are as follows: 2006 PAS 19 (Amendment) : Employee Benefits PAS 39 (Amendment) : The Fair Value Option PAS 39 and PFRS 4 (Amendment) : Financial Guarantee Contracts PFRS 1 (Amendment) : First-time Adoption of Philippine Financial Reporting Standards IFRIC 4 : Determination whether an Arrangement Contains a Lease 2007 PAS 1 (Amendment) : Presentation of Financial Statements PFRS 7 : Financial Instruments: Disclosures

20 11 The Group will apply the relevant new accounting standards in 2006 and 2007 in accordance with their transitional provisions. It is currently evaluating the impact of those standards on its consolidated financial statements and has initially determined that the following new standards may have significant effects on the financial statements for 2006, as well as for prior and future periods: PAS 19 (Amended), Employee Benefits. This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It imposes additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the accounts. The Group will apply this amendment for annual periods beginning January 1, PAS 39 (Amended), The Fair Value Option. This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group believes that this amendment will not have a significant impact on the classification of financial instruments, as the Group would be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. The Group will apply this amendment for annual periods beginning January 1, PFRS 7, Financial Instruments: Disclosures and complementary amendment to PAS 1. 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 replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. 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. 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. The Group will apply PFRS 7 and the amendment to PAS 1 for annual periods beginning January 1, 2007.

21 12 IFRIC 4, Determining whether an Arrangement Contains a Lease. IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfillment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset. Management is currently assessing the impact of PFRIC 4 on the Group s operations. As for the other new accounting standards, the Group has initially assessed that they will not result in significant changes to the amounts or disclosures in its financial statements. 3.3 Consolidation, Investment in Associates and Investment in Joint Venture The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as December and 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 account for its investments in subsidiaries and associates, and minority interest as follows: 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. In addition, acquired subsidiaries are subject to application of the purchase method. 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. Goodwill represents the excess of acquisition cost over the fair value of the Group s share of the identifiable net assets of the acquired subsidiary at the date of acquisition. All intercompany balances and transactions with subsidiaries, including unrealized profits arising from intra-group transactions, have been eliminated in full. Unrealized losses are eliminated unless costs cannot be recovered. Transactions and Minority Interests. The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the statement of income. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

22 13 Investments 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 charged against Equity in Net Earnings (Losses) in Group s consolidated statements of income and therefore affect 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 consolidated equity of the Group. Any nonincome related equity movements of the associate that arise, for example, from the distribution of dividends 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. Interests in Joint Ventures. For interests in jointly controlled operations, the Group recognized in its financial statements the assets that it controls and the liabilities that it incurs, and the expenses that it incurs and its share in the income from the sale of goods of goods or services by the joint venture. No adjustment or other consolidation procedures are required since the assets, liabilities, income and expenses of the joint venture are recognized in the financial statements of the venturer. 3.4 Cash and Cash Equivalents Cash and cash equivalents are defined as cash on hand, demand deposits and shortterm, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

23 Financial Assets Financial assets include cash and 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, held-to-maturity investments 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. 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: Financial Assets at Fair Value Through Profit or Loss/Marketable Securities. This category include 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 or derecognized. 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 balance sheets.

24 15 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 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 the 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. Impairment loss is provided when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the impairment loss is determined as the difference between the asset s carrying amount and the present value of estimated cash flows. Available-for-sale Financial Assets. This 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 Long-term Financial 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 subsequently measured at fair value, 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 income statement when they are sold or when the investment is impaired. In the case of impairment, any loss previously recognized in equity is transferred to the income statement. Losses recognized in the income statement on equity investments are not reversed through the income statement. Losses recognized in prior period income statements resulting from the impairment of debt instruments are reversed through the income statement. 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.

25 16 Non-compounding interest and other cash flows resulting from holding financial assets are recognized in profit or loss when received, 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. 3.6 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 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 Reserve for Property Development account. Residential and condominium units 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 of completion and the estimated costs necessary to 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. 3.7 Investment Property Properties held for lease under operating lease agreements, which comprise mainly of land, a hotel building, hotel improvements and condominium units, are classified as Investment Property and carried at cost net of accumulated depreciation and any impairment in value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 5 to25 years.

26 Property and Equipment Buildings and improvements, office furniture, fixtures and other equipment and transportation equipment are carried at acquisition cost or construction less subsequent depreciation 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 life 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 Office furniture, fixtures and equipment Office and land improvements Transportation equipment years 3-5 years 5-20 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. 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 statement of income in the year the item is derecognized. 3.9 Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is presented under Other Non-current Assets. Goodwill on acquisitions of associates is included in the carrying value of investments in associates. Goodwill is tested annually for impairment. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.