Cebu Holdings, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2012 and 2011 and Years ended December 31, 2012, 2011 and 2010 and Independent Auditors Report SyCip Gorres Velayo & Co.
SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Cebu Holdings, Inc. We have audited the accompanying consolidated financial statements of Cebu Holdings, Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited
- 2 - Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cebu Holdings, Inc. and its subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Jessie D. Cabaluna Partner CPA Certificate No. 36317 SEC Accreditation No. 0069-AR-3 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 102-082-365 BIR Accreditation No. 08-001998-10-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669666, January 2, 2013, Makati City March 7, 2013
CEBU HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Thousands) ASSETS December 31 2012 2011 Current Assets Cash and cash equivalents (Notes 4 and 23) P=1,864,017 P=1,214,231 Short-term investments (Notes 5 and 23) 2,956 Accounts receivable (Notes 6, 16 and 23) 541,004 390,697 Inventories (Note 7) 1,257,764 986,936 Other current assets (Note 8) 78,878 17,981 Total Current Assets 3,741,663 2,612,801 Noncurrent Assets Noncurrent accounts receivable (Notes 6, 16 and 23) 489,701 522,526 Property and equipment (Note 9) 49,265 39,432 Investments in associates (Note 10) 773,260 690,354 Investment properties (Note 11) 4,635,201 3,170,576 Deferred tax assets - net (Note 21) 8,638 9,579 Other noncurrent assets (Note 12) 51,335 86,045 Total Noncurrent Assets 6,007,400 4,518,512 P=9,749,063 P=7,131,313 LIABILITIES AND EQUITY Current Liabilities Accounts and other payables (Notes 13, 16 and 23) P=2,046,332 P=654,135 Current portion of long-term debt (Notes 14 and 23) 163,315 55,000 Income tax payable 16,259 36,609 Other current liabilities (Notes 15 and 23) 502,274 402,115 Total Current Liabilities 2,728,180 1,147,859 Noncurrent Liabilities Long-term debt - net of current portion (Notes 14 and 23) 1,681,747 895,675 Pension liabilities (Note 20) 16,239 18,044 Deferred tax liabilities - net (Note 21) 33,094 28,556 Other noncurrent liabilities (Note 23) 7,557 12,788 Total Noncurrent Liabilities 1,738,637 955,063 Total Liabilities 4,466,817 2,102,922 (Forward)
- 2 - December 31 2012 2011 Equity (Note 24) Equity attributable to equity holders of Cebu Holdings, Inc. Paid-in capital P=2,776,758 P=2,776,758 Retained earnings 2,177,596 1,928,311 4,954,354 4,705,069 Non-controlling interests 327,892 323,322 Total Equity 5,282,246 5,028,391 P=9,749,063 P=7,131,313 See accompanying Notes to Consolidated Financial Statements.
CEBU HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, except Earnings Per Share) Years Ended December 31 2012 2011 2010 REVENUE Real estate (Note 17) P=1,260,651 P=1,164,625 P=1,273,515 Equity in net earnings of associates (Note 10) 73,901 28,505 29,020 Interest income (Note 18) 83,179 59,384 52,240 Other income (Note 18) 215,303 190,187 167,095 1,633,034 1,442,701 1,521,870 COSTS AND EXPENSES Real estate (Note 19) 751,590 617,901 740,346 General and administrative expenses (Notes 16, 19 and 20) 196,682 190,180 173,541 Interest and other financing charges (Notes 16 and 19) 43,545 22,409 25,347 Other charges 1,528 4,080 1,824 993,345 834,570 941,058 INCOME BEFORE INCOME TAX 639,689 608,131 580,812 PROVISION FOR INCOME TAX (Note 21) Current 161,570 150,066 124,615 Deferred 5,463 (6,949) 10,934 167,033 143,117 135,549 NET INCOME P=472,656 P=465,014 P=445,263 Net Income Attributable to: Equity holders of Cebu Holdings, Inc. P= 441,292 P=424,333 P=406,200 Non-controlling interests 31,364 40,681 39,063 P=472,656 P=465,014 P=445,263 Basic/Diluted Earnings Per Share (Note 22) Net income attributable to equity holders of Cebu Holdings, Inc. P=0.23 P=0.22 P=0.21 See accompanying Notes to Consolidated Financial Statements.
CEBU HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Years Ended December 31 2012 2011 2010 Net income P=472,656 P=465,014 P=445,263 Other comprehensive income Total comprehensive income P=472,656 P=465,014 P=445,263 Total comprehensive income attributable to: Equity holders of Cebu Holdings, Inc. P=441,292 P=424,333 P=406,200 Non-controlling interests 31,364 40,681 39,063 P=472,656 P=465,014 P=445,263 See accompanying Notes to Consolidated Financial Statements.
CEBU HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in Thousands, except Cash Dividends Per Share) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF CEBU HOLDINGS, INC. Years Ended December 31 2012 2011 2010 Capital Stock - P=1 par value (Note 24) Balance at beginning and end of year P=1,920,073 P=1,920,073 P=1,920,073 Additional Paid-in Capital Balance at beginning and end of year 856,685 856,685 856,685 Total Paid-in Capital 2,776,758 2,776,758 2,776,758 Retained Earnings (Note 24) Appropriated for future expansion 1,300,000 Unappropriated: At beginning of year 1,928,311 1,638,384 1,366,590 Net income 441,292 424,333 406,200 Cash dividends - P=0.10 per share in 2012 and P=0.07 per share in 2011 and 2010 (192,007) (134,406) (134,406) Appropriations during the year (1,300,000) At end of year 877,596 1,928,311 1,638,384 2,177,596 1,928,311 1,638,384 NON-CONTROLLING INTERESTS At beginning of year 323,322 309,435 297,183 Net income 31,364 40,681 39,063 Dividends paid to non-controlling interests (26,794) (26,794) (26,811) At end of year 327,892 323,322 309,435 P=5,282,246 P=5,028,391 P=4,724,577 See accompanying Notes to Consolidated Financial Statements.
CEBU HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December 31 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=639,689 P=608,131 P=580,812 Adjustments for: Depreciation and amortization (Notes 9, 11 and 19) 138,362 137,054 126,355 Interest and other financing charges (Note 19) 43,545 22,409 25,347 Unrealized foreign exchange losses 1,531 4,099 1,903 Provision for doubtful accounts (Note 6) 1,000 151 Loss (gain) on disposal of property and equipment (217) 155 (129) Realized profit from downstream sale (Notes 10 and 29) (9,005) (16,920) Equity in net earnings of associates (Note 10) (73,901) (28,505) (29,020) Interest income (Note 18) (83,179) (59,384) (52,240) Operating income before working capital changes 656,825 668,039 653,179 Decrease (increase) in: Accounts receivable (98,241) (381,532) (90,034) Inventories (Note 29) 75,610 (130,755) 30,343 Other current assets (60,897) (4,608) 11,479 Increase (decrease) in: Accounts and other payables (Note 29) 213,284 (180,962) (3,926) Other liabilities 93,454 20,588 26,704 Pension liabilities (1,805) 15,332 160 Net cash generated from operations 878,230 6,102 627,905 Interest received 63,938 58,249 39,773 Interest paid (38,099) (21,387) (19,473) Income taxes paid (181,920) (140,227) (123,698) Net cash provided by (used in) operating activities 722,149 (97,263) 524,507 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Investment properties (Notes 11 and 29) (757,864) (223,071) (100,916) Property and equipment (Note 9) (22,886) (11,626) (34,874) Investments in associates (Notes 10 and 29) (90,454) Decrease (increase) in: Short-term investments 2,956 22,864 211,690 Other noncurrent assets 34,710 5,588 (7,358) Proceeds from sale of property and equipment 803 10 295 Net cash used in investing activities (742,281) (206,235) (21,617) (Forward)
- 2 - Years Ended December 31 2012 2011 2010 CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (P=55,000) (P=110,000) (P=110,000) Availments of long-term debt 945,250 895,675 Dividends paid to: Non-controlling interests (26,794) (26,794) (26,811) Equity holders of Cebu Holdings, Inc. (192,007) (134,406) (134,406) Net cash provided by (used in) financing activities 671,449 624,475 (271,217) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,531) (4,099) (1,903) NET INCREASE IN CASH AND CASH EQUIVALENTS 649,786 316,878 229,770 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 4) 1,214,231 897,353 667,583 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) P=1,864,017 P=1,214,231 P=897,353 See accompanying Notes to Consolidated Financial Statements
CEBU HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Group Information Cebu Holdings, Inc. (the Parent Company) was incorporated in the Republic of the Philippines on December 9, 1988 and is engaged in real estate development, sale of subdivided land, residential and office condominium units, sports club shares, and lease of commercial spaces. The registered office address of the Parent Company is at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. Cebu Property Ventures and Development Corporation (CPVDC), a subsidiary, is engaged in real estate development and sale of subdivision land and residential units. The registered office address of the CPVDC is at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. Asian I-Office Properties, Inc. (AiO) is 40%-owned by CPVDC starting in 2008. Its purpose is to engage in all aspects of real estate development and in leasing of corporate spaces. The registered office address of AiO is at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. AiO was incorporated on September 24, 2007 and has commenced its operations in May 2009. Cebu Leisure Company, Inc. (CLCI), a wholly owned subsidiary, is engaged in subleasing of commercial spaces, food courts and entertainment facilities. The registered office address of CLCI is at 7/F Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. CBP Theatre Management Company, Inc. (CBP Theatre), a subsidiary, was registered with the Securities and Exchange Commission to engage in all aspects of the theatrical and cinematographic entertainment business, including theatre management and other related undertakings. The registered office address of CBP Theatre is at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. CBP Theatre has not yet started its operations as of December 31, 2012. The consolidated financial statements of Cebu Holdings, Inc. and its subsidiaries (the Group) as of December 31, 2012 and 2011 and for each of the three years ended December 31, 2012 were authorized for issue by the Executive Committee of the Board of Directors (BOD) on March 7, 2013. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying consolidated financial statements of the Group have been prepared on a historical cost basis. The consolidated financial statements are presented in Philippine Peso (P=), which is the functional currency of the Parent Company. All values are rounded to the nearest thousand (P=000) except when otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).
- 2 - Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and the following wholly owned and majority owned subsidiaries (the Group) as of December 31, 2012 and 2011: Effective Percentages of Ownership CLCI 100% CBP Theatre 100 CPVDC 76 Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date such control ceases. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies. All intercompany balances and transactions, including income, expenses and dividends, are eliminated in full. Non-controlling interests represent the portion of profit or loss and net assets in CPVDC not held by the Parent Company and are presented separately in the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and within equity in the consolidated statements of financial position, separately from the equity attributable to the Parent Company. The excess of the Parent Company s cost of investment in CPVDC over its proportionate share in the underlying net assets at date of acquisition was allocated to Inventories and Investment properties accounts in the consolidated statement of financial position. The purchase premium is amortized in proportion to the area of lots (in square meters) sold by CPVDC. Adoption of New and Amended Accounting Standards and Interpretations The accounting policies adopted in the preparation of the Group s consolidated financial statements are consistent with those of the previous financial year except for the adoption of the following amended PFRS and Philippine Accounting Standard (PAS) which became effective January 1, 2012. Except as otherwise indicated, the adoption of the new and amended standards did not have any significant impact on the Group s financial statements. PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments) The amendments require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets that have not been derecognized and their associated liabilities. In addition, the amendments require disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognized assets. The amendments affect disclosures only and do not have significant impact on the Group s financial position or performance since the Group does not engage in these types of transfers of financial assets.
- 3 - PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendments) This amendment to PAS 12 clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a sale basis. The presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time ( use basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. The amendments have no impact on the Group s financial position or performance since the Group does not have property and equipment and investment properties measured at fair value. Future Changes in Accounting Policies The Group will adopt the following amended standards and Philippine Interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on the consolidated financial statements. Effective 2013 PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32, Financial Instruments: Presentation and Disclosure. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; c) The net amounts presented in the statement of financial position; d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and e) The net amount after deducting the amounts in (d) from the amounts in (c) above. The amendments to PFRS 7 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment affects disclosures only on the Group s financial position or performance since the Group does not have financial instruments that are set off in accordance with the criteria in PAS 32.
- 4 - PFRS 10, Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. PFRS 11, Joint Arrangements PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC13, Jointly controlled Entities (JCEs) - Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for JCEs using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The application of this new standard will have no impact on the financial position of the Group since the Group does not have JCEs. The Group will adopt the standard when it enters into joint arrangements. PFRS 12, Disclosure of Interests with Other Entities PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31, Interest in Joint Ventures and PAS 28, Investment in Associates. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The adoption of PFRS 12 will affect disclosures only and has no impact on the Group s financial position or performance since the Group assessed that there will be no significant changes in the disclosures required by PAS 27, 28 and 31. PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This Standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The Group does not consider that the definition of fair value that is applied in PFRS 13 differs in a material way from its current approach and consequently anticipates there will not be any impact from this standard on its financial position. However, PFRS 13 does expand the disclosure requirements in respect of fair value measurement. PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income or OCI (Amendments) The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be recycled. The amendments affect presentation only and have no impact on the Group s financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1, 2012. The amendments will be applied retrospectively and will result to the modification of the presentation of items of OCI including unrealized gains on AFS financial assets and cumulative translation adjustments.
- 5 - PAS 19, Employee Benefits (Revised) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. Once effective, the Group has to apply the amendments retroactively to the earliest period presented. The effects are detailed below: Increase (decrease) As at As at December December 31, 2012 31, 2011 As at January 1, 2011 Consolidated Statements of Financial Position Net defined benefit obligation P=8,408 P=586 P=17,997 Other comprehensive loss (15,366) (7,858) (13,517) Retained earnings (220) 8,294 (2,825) Increase (decrease) 2012 2011 (In thousands) Consolidated Statements of Income Net benefit cost P=314 (P=11,849) Income tax expense 94 (3,555) Profit (loss) for the year Attributable to the equity holders of Cebu Holdings, Inc. (220) 8,294 PAS 27, Separate Financial Statements (as revised in 2011) As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The adoption of the amended PAS 27 will not have a significant impact on the separate financial statements of the entities in the Group since the Group s accounting policy is already consistent with the revised PAS 27. PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new PFRS 11, Joint Arrangements and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. Effective 2014 PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendments) These amendments to PAS 32 clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only on the Group s financial position or performance. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014.
- 6 - Effective 2015 PFRS 9, Financial Instruments PFRS 9, as issued, reflects the first phase on the replacement of PAS 39, Financial Instruments: Recognition and Measurement and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through OCI or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Group s financial assets, but will potentially have no impact on the classification and measurement of financial liabilities. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this Interpretation until the final Revenue standard is issued by International Accounting Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. The adoption of this Philippine Interpretation may significantly affect the determination of the revenue from real estate sales and the corresponding costs, and the related trade receivables, deferred tax liabilities and retained earnings accounts. The Group is in the process of quantifying the impact of adoption of this Interpretation. Improvements to PFRSs Improvements to PFRSs, an omnibus of amendments to standards, deal primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted.
- 7 - PFRS 1, First-time Adoption of PFRS - Borrowing Costs The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Group as it is not a first-time adopter of PFRS. PAS 1, Presentation of Financial Statements - Clarification of the requirements for comparative information The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments affect disclosures only and have no impact on the Group s financial position or performance. The amendment will not have significant impact on the Group s consolidated financial statements since the comparative information disclosures are in accordance with the requirements of PAS 1. PAS 16, Property, Plant and Equipment - Classification of servicing equipment The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will not have any significant impact on the Group s financial position or performance. PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity instruments The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not have any impact on its financial position or performance. PAS 34, Interim Financial Reporting - Interim financial reporting and segment information for total assets and liabilities The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity s previous annual financial statements for that reportable segment. The amendment affects disclosures only on the Group s financial position or performance. Cash and Cash Equivalents and Short-term Investments Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amount of cash with original maturities of three (3) months or less from date of placement and that are subject to an insignificant risk of changes in value. Cash investments with original maturities beyond three months but within one year are classified as short-term investments.
- 8 - Financial Assets and Financial Liabilities Date of recognition The Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, is done using the settlement date accounting. Initial recognition Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss (FVPL). Financial assets within the scope of PAS 39 are classified as either financial assets at FVPL, loans and receivables, held-to-maturity financial assets, or available-for-sale (AFS) financial assets, as appropriate. Financial liabilities are classified as either financial liabilities at FVPL or other financial liabilities. The Group s financial assets and financial liabilities are of the nature of loans and receivables and other financial liabilities, respectively. The classification depends on the purpose for which the investments were acquired or liabilities were incurred and whether they are quoted in an active market. Management determines the classification of its financial instruments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of fair value The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 23. Day 1 profit Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where variables used are made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit amount.
- 9 - Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. This accounting policy relates to the consolidated statement of financial position captions Cash and cash equivalents, Short-term investments and Accounts receivable except advances to contractors. After initial measurement, the loans and receivables are subsequently measured at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate (EIR). The amortization is included in Interest income account in the consolidated statement of income. The losses arising from impairment of such loans and receivables are recognized under General and administrative expenses account in the consolidated statement of income. Loans and receivables are included in current assets if maturity is within twelve months from the reporting date. Otherwise, these are classified as noncurrent assets. Other financial liabilities Other financial liabilities are financial liabilities not designated as at FVPL where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash. After initial measurement, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. The amortization is included in the Interest and other financing charges account in the consolidated statement of income. This accounting policy applies primarily to the Group s Accounts and other payables, Longterm debt and other obligations that meet the above definition (other than liabilities covered by other accounting standards, such as income tax payable). Other Liabilities Other liabilities which include customers deposits are measured initially at fair value. The difference between the cash received and the fair value of customers deposits is recognized as deferred credits (included in Other liabilities in the consolidated statement of financial position) and amortized using the straight-line method under the Real estate account in the consolidated statement of income. After initial recognition, customers deposits are subsequently measured at amortized cost using effective interest method. Accretion of discount is recognized under Interest and other financing charges in the consolidated statement of income. Derecognition of Financial Assets and Financial Liabilities Financial asset A financial asset (or, where applicable, a part of a group of financial assets) is derecognized when: (a) the right to receive cash flows from the assets has expired; (b) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third-party under a pass-through arrangement; or (c) the Group has transferred its right to receive cash flows from the asset and either: (i) has transferred substantially all the risks and rewards of the asset; or (ii) has neither transferred nor retained the risks and rewards of the asset but has transferred control of the asset.
- 10 - Where the Group has transferred its right to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liability A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income. Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in economic conditions that correlate with defaults. Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the consolidated statement of income. Interest income continues to be recognized based on the original effective interest rate (EIR) of the asset. Loans and receivables, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. Any
- 11 - subsequent reversal of an impairment loss is recognized in consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as customer type, credit history, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position. Inventories Property acquired or being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation, is held as inventory and is valued at the lower of cost or net realizable value (NRV). NRV is the estimated selling price in the ordinary course of business, less estimated costs to complete and sell. Cost includes those incurred for the acquisition and development of the properties and is measured using the average cost method. Cost includes: Land cost Amount paid to contractors for construction Borrowing costs, planning and design costs, cost of site preparation, professional fees, property transfer taxes, construction overheads and other related costs The cost of inventory recognized in profit or loss in disposal is determined with reference to the specific costs incurred on the property sold and an allocation of any non-specific cost based on the relative size of the property sold. Club shares are valued at the lower of cost or NRV. Cost comprise of acquisition and actual development cost incurred plus the estimated development cost to complete the project based on the estimates as determined by in-house engineers, adjusted with the actual cost incurred as the development progresses. NRV is the estimated selling price in the ordinary course of business, less estimated costs to sell. Cost is determined using the average cost method. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization and any impairment in value. The initial cost of property and equipment comprises its purchase price and any directly attributable costs of bringing the property and equipment to its intended location and working condition, including borrowing costs.
- 12 - Major repairs are capitalized as property and equipment only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the items can be measured reliably. All other repairs and maintenance are charged against current operations as incurred. Depreciation and amortization of assets commence once the property and equipment are available for their intended use and is computed on a straight-line basis over the estimated useful lives of the property and equipment as follows: Years Buildings and improvements 40 Furniture, fixtures and equipment 3-10 Transportation equipment 3-5 The useful lives and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. When property and equipment are retired or otherwise disposed of, the cost of the related accumulated depreciation and amortization and accumulated provision for impairment losses, if any, are removed from the accounts and any resulting gain or loss is credited or charged against current operations. Fully depreciated property ad equipment are retained in the accounts while still in use although no further depreciation is credited or charged to current operations. Investments in Associates Investment in associates is accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence. Under the equity method, the investment in associates is carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group s share in the net assets of the investee companies. Cost includes all amounts provided to the associate which are intended to be the associate s capital. The consolidated statement of income includes the Group s share in the results of the operations of the associate. Profit and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The reporting date of the associate and the Group are identical and the associate s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Investment Properties Investment properties consist of properties that are held to earn rentals and for capital appreciation or both. Investment properties, except for land, are carried at cost less accumulated depreciation and amortization and any impairment in value. Land is carried at cost less any impairment in value. The initial cost of investment properties consists of any directly attributable costs of bringing the investment properties to its intended location and working condition, including borrowing costs.