FAR EASTERN UNIVERSITY, INC. NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 1. Reporting Entity Far Eastern University, Inc. (the Company) is a domestic educational institution founded in June of 1928 and incorporated on January 5, 1933. The Company is a private, nonsectarian institution of learning comprising the following different institutes that offer specific courses, namely: Institute of Arts and Sciences; Institute of Accounts, Business and Finance; Institute of Education; Institute of Architecture and Fine Arts; Institute of Nursing; Institute of Engineering; Institute of Law; and Institute of Graduate Studies. The Company became a listed corporation in the Philippine Stock Exchange on July 11, 1986. The address of the Company s registered office is located at Nicanor Reyes Sr. St., Sampaloc, Manila. 2. Basis of Preparation Statement of Compliance The parent company financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The financial statements of the Company as of and for the year ended March 31, 2008 were authorized for issue by the Board of Trustees on July 14, 2008. Basis of Measurement The parent company financial statements have been prepared on a historical cost basis, except for available-for-sale investments which are stated at fair value. Functional and Presentation Currency The parent company financial statements are presented in Philippine peso, which is also the Company s functional currency. Use of Estimates and Judgments The preparation of financial statements in conformity with PFRS requires management to make judgments, estimates and assumptions that affect the application of accounting polices and amounts reported in the financial statements. The estimates and assumptions used in the financial statements are based upon management s evaluation of relevant facts and circumstances as of the balance sheet date. Actual results could differ from such estimates. Estimates and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.
The following presents the summary of these judgments and estimates, which have the most significant effect on the amounts recognized in the parent company financial statements: Functional Currency Based on the economic substance of the underlying circumstances relevant to the Company, the functional currency has been determined to be the Philippine peso. It is the currency that mainly influences the normal operations of the Company. Leases The Company has entered into various lease agreements both as lessor and lessee. a. As Lessee For the Company s lease of buildings that the Company occupies within the campus premises, the Company has determined that the lessor retains all significant risks and rewards of ownership of these properties which are leased out under an operating lease agreement (see Note 8 for the related balances). b. As Lessor The Company carries investment property held to earn rentals. The Company has determined that it retains all significant risks and rewards of ownership of these properties which are leased out under operating lease agreements (see Note 16 for the related balances). Estimating Allowance for Impairment Losses on Receivables The Company maintains an allowance for impairment losses on receivables at a level considered adequate to provide for probable uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, history of the students payment behavior, age of receivables and other external factors affecting the education industry. The Company reviews the age and status of receivables, and identifies accounts that are to be provided with an allowance on a continuous basis (see Notes 6 and 21 for the related balances). Estimating Useful Lives of Investment Property and Property and Equipment The Company reviews annually the estimated useful lives of investment property and property and equipment based on the period over which the assets are expected to be available for use and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of investment property and property and equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property and equipment and investment property would increase the recorded depreciation and amortization expenses and decrease noncurrent assets (see Notes 9 and 10 for the related balances). Determining the Realizability of Deferred Tax Assets The Company reviews its deferred tax assets at each balance sheet date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Company also reviews the expected timing and tax rates upon reversal of temporary differences and adjusts the impact of deferred tax accordingly (see Note 17 for the related balances). - 2 -
Impairment of Assets The Company assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Company considers important which could trigger an impairment review include the following: Significant underperformance relative to the expected historical or projected future operating results; Significant changes in the manner of use of the acquired assets or the strategy for overall business; and Significant negative industry or economic trends. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Company is required to make estimates and assumptions that can materially affect the parent company financial statements. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount (see Note 7). Contingencies The Company is currently involved in certain legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Company s defense in these matters and is based upon an analysis of potential results. The Company currently does not believe that these proceedings will have a material adverse effect on its financial position (see Note 22). 3. Significant Accounting Policies New Standard, Amendment to Standard and Interpretation Adopted in 2008 Effective April 1, 2007, the Company adopted the following new standard, amendment to standard and interpretation: PFRS 7, Financial Instruments: Disclosures, which requires extensive disclosures about the significance of financial instruments for an entity s financial position and performance, and quantitative and qualitative disclosures on the nature and extent of risks. It replaces disclosure requirements in PAS 32, Financial Instruments: Disclosures and Presentation. It is applicable to all entities that report under PFRS. Additional disclosures required by this standard were included in the parent company financial statements. The Company availed of the transitional relief available under Amendment to PFRS 7 with respect to the presentation of certain comparative information for the new risk disclosures about the nature and extent of risks arising from financial instruments. Accordingly, the Company did not present comparative information for these risk disclosures, unless the disclosure was previously required under PAS 32, Financial Instruments: Disclosure and Presentation. - 3 -
Amendment to Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements - Capital Disclosures, which adds requirements to disclose the entity s objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. Additional disclosures required by this amendment were included in the parent company financial statements. Philippine Interpretation - International Financial Reporting Interpretations Committee (IFRIC) 10, Interim Financial Reporting and Impairment. This interpretation prohibits the reversal of impairment losses on goodwill and availablefor-sale investments recognized in interim financial reports even if the impairment is no longer present at the balance sheet date. The adoption of this interpretation had no significant impact on the parent company financial statements. Revised Standards Not Yet Adopted The following are the revised standards which are not yet effective for the year ended March 31, 2008, and have not been applied in preparing the parent company financial statements: Effective 2009: Revised PAS 1, Presentation of Financial Statements. The revised standard will be effective for annual periods beginning on or after January 1, 2009. This revised standard introduces total comprehensive income (i.e., changes in equity during a period, other than those changes resulting form transactions with owners in their capacity as owners), which is presented either in: (a) one statement (i.e., a statement of comprehensive income); or (b) two statements (i.e., an income statement and a statement beginning with profit or loss and displaying components of other comprehensive income). Certain requirements are also required by revised PAS 1 that are not required by the original standard. The requirements of Revised PAS 1 will be included in the parent company financial statements upon its adoption on April 1, 2009. Revised PAS 23, Borrowing Costs. Revised PAS 23 will be effective for annual periods beginning on or after January 1, 2009. This revised standard removes the option to expense borrowing costs and requires that an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The adoption of the revised standard is not expected to have significant impact on the parent company financial statements. Effective 2010: Revised PFRS 3, Business Combinations. The revised standard will be effective for annual periods beginning on or after July 1, 2009. The revised standard includes in its scope business combinations involving only mutual entities, and those in which separate entities or businesses are brought together to form a reporting entity by contract alone. All business combinations are accounted for by applying the acquisition method (referred to previously as the purchase method). The adoption of this revised standard is not expected to have significant impact on the parent company financial statements. - 4 -
Amendments to PAS 27, Consolidated and Separate Financial Statements. These amendments will be effective for financial years beginning on or after July 1, 2009. These amendments mainly relate to changes in the accounting for non-controlling interest and the loss of control of a subsidiary. These amendments to standard are not expected to have significant impact on the parent company financial statements. The following are the accounting policies which have been applied consistently in the preparation of these parent company financial statements. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Tuition and Other Fees Tuition and other fees are recognized as income over the corresponding school term. Interest Interest income is recognized as the interest accrues. Rental Rental income is accounted for over the term of the lease using the straight-line method. Financial instruments Nonderivative financial instruments comprise cash and cash equivalents, receivables, due from a related party, available-for-sale (AFS) investments, held-to-maturity (HTM) investments and accounts payable and accrued expenses. Nonderivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition, nonderivative financial instruments are measured as described below. A financial instrument is recognized if the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the Company s contractual rights to the cash flows from the financial assets expire or when the Company transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Company commits itself to purchase or sell the asset. Financial liabilities are derecognized if the Company s obligations specified in the contract expire or are discharged or cancelled. Cash and Cash Equivalents Cash includes cash on hand and in banks and is stated at its face value. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from the dates of acquisition and are subject to an insignificant risk of change in value. - 5 -
Receivables Receivables, which include receivables from students and other receivables, are nonderivative financial assets with determinable payments that are not quoted in an active market and for which the Company has no intention of trading. They are stated at amortized cost and reduced by an allowance for impairment losses, if any. An allowance for impairment losses on receivables is maintained at a level considered adequate to provide for probable uncollectible receivables. The level of allowance for impairment losses on receivables is evaluated by management on the basis of factors affecting the collectibility of the receivables. AFS Investments AFS investments are non-derivative investments that are designated in this category or are not classified in any other category of financial assets. Financial assets are classified as AFS when purchased and held indefinitely, but which the Company anticipates to sell in response to liquidity requirements or in anticipation of changes in market rates or other factors. AFS investments are initially measured at fair value plus incremental direct transaction costs and subsequently carried at fair value. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Realized gains or losses on AFS investments are included in Interest Income and Other Finance Income on AFS Investments in the parent company statements of income. Unrealized gains or losses arising from marking-to-fair value of AFS investments are reported as Net Unrealized Gain or Loss on AFS Investments in the parent company statements of changes in equity, until such financial asset is derecognized or impaired at which time the cumulative gains or losses previously recognized in equity should be recognized in the parent company statements of income. HTM Investments HTM investments are debt securities which the Company has the positive intent and ability to hold to maturity. These investments are initially measured at fair value plus incremental direct transaction costs and subsequently carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective interest method and reduced by impairment losses, if any. Other Financial Instruments Other non-derivative financial instruments such as due from a related party and accounts payable and accrued expenses are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less any impairment losses. Equity Investments The Company follows the cost method of accounting for its investments in subsidiaries and associate over which the Company exercises control or significant influence. Under this method, the Company does not recognize its share in the earnings or losses of the subsidiary or associate. Dividends received from the subsidiary or associate are reported as income in the parent company statements of income. Other equity investments where the Company has no significant influence or where control is likely to be temporary are also carried at cost. The following are the Company s beneficial ownership interest over its subsidiaries and associate. Subsidiaries and Associate Ownership Interest East Asia Computer Center, Inc. (EACCI) 100.00% Juliana Management Co., Inc. (JMCI) 49.00% Fern Realty Corporation (FRC) 36.73% - 6 -
Although the Company controls less than 50% of the voting shares of stock of FRC, it has the power to govern the financial and operating policies of the said entity. Also, the Company has the power to cast the majority of votes at meetings of the board of directors and elect officers of FRC. Accordingly, investment in FRC was accounted for under cost method. Property and Equipment Property and equipment, except land, are carried at cost less accumulated depreciation, amortization and impairment losses, if any. Land is stated at cost less any impairment in value. Initially, an item of property and equipment is measured at its cost, which comprises its purchase price and any directly attributable cost of bringing the asset to the location and condition for its intended use. Subsequent costs that can be measured reliably are added to the carrying amount of the asset when it is probable that future economic benefits associated with the asset will flow to the Company. The costs of day-to-day servicing of an asset are recognized as expenses in the year in which they are incurred. Construction in progress represents a building under construction and is stated at cost. This includes costs of construction and other direct costs. Construction in progress is not depreciated until such time the relevant assets are completed and available for operational use. Depreciation is recognized in the parent company statements of income on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the estimated useful life of the improvements or the term of the lease, whichever is shorter. Land and construction in progress are not depreciated. The estimated useful lives are as follows: Number of Years Buildings and improvements 20 Leasehold improvements 20 Furniture and equipment 4-6 Miscellaneous equipment 5 The useful lives and depreciation and amortization method are reviewed at each balance sheet date to ensure that they are consistent with the expected pattern of economic benefits from those assets. When an asset is disposed of, or is permanently withdrawn from use and no future economic benefits are expected from its disposal, the cost and accumulated depreciation, amortization and impairment losses, if any, are removed from the accounts and any resulting gain or loss arising from the retirement or disposal is recognized in the parent company statements of income. Investment Property Investment property consists of the FEU East Asia Main Building and improvements thereon, which is held either to earn rental income or for capital appreciation or for both. Investment property is initially measured at cost less accumulated depreciation, amortization and impairment losses, if any. - 7 -
Investment property is derecognized when it has either been disposed of or permanently withdrawn from use and no future benefit is expected from its disposals. Any gain or loss on derecognition of investment property is recognized in the parent company statements of income in the year of derecognition. Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner-occupation, commencement of an operating lease to another party or by the end of construction or development. Depreciation and amortization of investment property, which consists of building and improvements, are computed using the straight-line method over its estimated useful life of 20 years. Impairment of Assets Financial Assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognized in the parent company statements of income. Non-financial Assets Non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any such indication exists and where the carrying amount of an asset exceeds its recoverable amount, the asset or cash-generating unit is written down to its recoverable amount. The estimated recoverable amount is the higher of an asset s fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the parent company statements of income. Recovery of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The recovery is recognized in the parent company statements of income. However, the increase in carrying amount of an asset due to a recovery of an impairment loss is recognized to the extent that it does not exceed the carrying amount that would have been determined (net of depreciation and amortization) had no impairment loss been recognized for that asset in prior years. - 8 -
Related Parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. Transactions between related parties are based on terms similar to those offered to non-related parties. Restricted Funds The Company uses the fund accounting method for funds held for specific purposes. Receipt and disbursement transactions of the funds are accounted for separately and consumption of the fund s assets is restricted. Retirement Plan The Company has a contributory and defined contribution type of retirement benefit plan. Under this plan, the amount of a member's future benefits is determined by the contributions paid by both the Company and the member and the operating efficiency and investment earnings of the fund. Operating Lease Leases in which a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are recognized in the parent company statements of income on a straight-line basis over the term of the lease. Finance Income and Expenses Finance income comprises of interest income on bank deposits, cash equivalents, AFS investments and HTM investments, dividend income, foreign currency gains and other income on AFS investments. Interest income is recognized in the parent company statements of income as it accrues, using the effective interest rate method. Dividend income is recognized on the date that the Company s right to receive payment is established. All other finance income are recognized in the parent company statements of income as they accrue. Finance expenses comprise foreign currency losses, which is recognized in the parent company statements of income as it accrue. Income Taxes Income tax expense for the year comprises of current and deferred tax. Income tax expense is recognized in the parent company statements of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current Tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the current tax are those that are enacted or substantively enacted as of the balance sheet date. Deferred Tax Deferred tax is provided using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation on purposes and carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over regular income tax and the net - 9 -
operating loss carryover (NOLCO). The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, carryforward benefits of MCIT and NOLCO, using the tax rates enacted or substantively enacted as of the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and carryforward benefits of MCIT and NOLCO can be utilized. Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Provisions and Contingent Liabilities A provision is a liability of uncertain timing or amount. It is recognized when the Company has a legal or constructive obligation as a result of a past event; it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. When it is not possible that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, those existences will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. Earnings per Share Basic earnings per share is computed by dividing net income for the year by the weighted average number of outstanding common stock during the year while diluted earnings per share is computed by dividing net income by the weighted average number of outstanding common stock after adjusting the effect to both numbers of potential dilutive common stock. Foreign Currency Transactions Transactions in foreign currencies are recorded in Philippine peso based on the exchange rates prevailing at the transaction dates. Foreign currency denominated monetary assets and liabilities are translated into Philippine peso using the rates of exchange prevailing at balance sheet date. Exchange gains or losses arising from translation of foreign currency denominated items at rates different from those at which they were previously recorded are recognized in the parent company statements of income. Events After the Balance Sheet Date Post year-end events that provide additional information about the Company s position at the balance sheet date (adjusting events) are recognized in the parent company financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the parent company financial statements when material. 4. Cash and Cash Equivalents This account at March 31 consists of: 2008 2007 Cash on hand and in banks P175,914,479 P122,345,981 Short-term deposits 1,030,862,192 753,581,713 P1,206,776,671 P875,927,694-10 -
Cash in banks earn interest at the prevailing bank deposit rates. Short-term deposits represent time deposits with local banks which are pre-terminable. These placements bear annual interest ranging from 3.75% to 5.25% in 2008 and 3.50% to 6.00% in 2007 for peso placements and 2.25% to 2.5% in 2008 and 3.62% to 4.00% in 2007 for dollar placements. Certain portions of cash and cash equivalents are restricted to fund activities for specific educational purposes (see Note 12). 5. Available-for-Sale Investments This account at March 31 consists of: 2008 2007 Government securities P466,818,731 P501,707,462 Trust fund 372,635,428 309,725,000 839,454,159 811,432,462 Add net unrealized gain on AFS investments 1,233,243 5,461,069 P840,687,402 P816,893,531 Certain AFS investments reached their maturity during the years ended March 31, 2008 and 2007 and were converted into cash and cash equivalents, which resulted to recognition of cumulative gain of P5,514,166 in 2008 and cumulative loss of P5,568,330 in 2007, previously recognized in equity, in the parent company statements of income. The Company s exposures to credit and market risks are disclosed in Note 21. 6. Receivables This account consists of: Note 2008 2007 Tuition and other fee receivables P81,923,719 P57,582,620 Accrued interest receivable 44,938,392 44,535,165 Advances to suppliers 36,121,662 21,814,381 Receivable from FEU Educational Foundation, Inc. 28,843,710 30,046,651 Receivable from East Asia Educational Foundation (EAEF) 14,116,055 4,638,949 Advances to employees 9,145,859 9,548,058 Receivable from FRC 8 2,341,650 1,336,314 Others 253,658 213,298 217,684,705 169,715,436 Less allowance for impairment losses on tuition and other fee receivables 11,872,333 11,436,501 P205,812,372 P158,278,935 No allowance for impairment losses on all other receivables were provided as of March 31, 2008 and 2007 since management believes that these are collectible. - 11 -
The Company s exposure to credit risk is disclosed in Note 21. 7. Equity Investments This account at March 31 consists of: 2008 2007 Acquisition cost of investments in shares of stock: FRC (36.73% owned subsidiary) P63,297,699 P63,297,699 EACCI (a wholly owned subsidiary) 20,104,999 20,104,999 JMCI (49.00% owned associate) 7,878,121 7,878,121 91,280,819 91,280,819 Less allowance for impairment losses 2,338,930 2,338,930 P88,941,889 P88,941,889 JMCI s summary of the financial information as of December 31, 2007 and 2006 follows: 2007 2006 Total assets P14,826,831 P14,749,245 Total liabilities 326,060 198,000 Total equity 14,500,771 14,551,245 Net loss 50,474 73,682 8. Related Party Transactions In the normal course of business, the Company has transactions with its related parties as follows: a) The Company has outstanding advances to FRC with an aggregate principal amount of P100,000,000 and P65,000,000 as of March 31, 2008 and 2007, receivable on demand. These advances, which bear interest due quarterly at 91-day Treasury Bill rate ranging from 3.95% to 4.15% annually in 2008 and 3.00% to 6.63% annually in 2007. Total interest income from these advances recognized in the parent company statements of income amounted to P3,129,468 in 2008 and P7,051,084 in 2007. b) The Company has an existing lease contract with FRC which covers certain buildings that the Company occupies within the campus premises. The said contract was renewed on July 1, 2005 and will expire on June 30, 2015. The remaining future minimum rent payments are as follows: 2008 2007 More than five years P122,576,689 P131,575,959 Between one and five years 163,161,321 175,434,612 Less than one year 31,960,455 43,858,653 P317,698,465 P350,869,224-12 -
Total rental expense recognized the parent company statements of income amounted to P50,504,658 in 2008 and P48,217,745 in 2007, in accordance with PAS 17. c) The Company leased out a building to FRC for a period of 10 years covering the period beginning on September 1, 2007 until August 31, 2017, renewable upon mutual consent of both parties. Rent income from FRC amounted to P560,000 in 2008 (see Note 16). d) The Company grants non-interest bearing advances to certain related parties for working capital purposes. Total outstanding advances to FRC, which are included in Receivables in the parent company balance sheets, as of March 31, 2008 and 2007 amounted to P2,341,650 and P1,336,314, respectively (see Note 5). e) Total remunerations of the Company s key management personnel presented under the Salaries, Allowances and Benefits account is as follows: 2008 2007 Short-term benefits P100,412,356 P103,872,843 Retirement benefits 16,321,494 13,592,380 P116,733,850 P117,465,223 The Company s exposures to credit and market risks are disclosed in Note 21. 9. Investment Property The movements in this account are as follows: 2008 2007 Gross carrying amount P200,763,421 P200,763,421 Accumulated depreciation and amortization: Balance at beginning of year 47,087,832 37,049,661 Depreciation and amortization 10,038,171 10,038,171 Balance at end of year 57,126,003 47,087,832 Carrying amount P143,637,418 P153,675,589 This property pertains to the FEU East Asia Main Building including its building improvements rented by EACCI and EAEF. The fair value of investment property amounted to P114,027,000. This was determined based on the most recent valuation performed by independent appraisers in 2003. The difference between the fair value and the carrying amount as of March 31, 2008 and 2007 pertains to additions made to investment property from the date of the last independent appraisal. - 13 -
10. Property and Equipment The movements in this account are as follows: Land and Buildings and Improvements For the Years Ended March 31, 2008 and 2007 Furniture and Equipment Leasehold Improvements Miscellaneous Equipment Construction in Progress Gross carrying amount: March 31, 2006 P538,412,933 P78,658,672 P49,301,578 P11,943,025 P - P678,316,208 Additions 6,681,129 10,736,384-147,973-17,565,486 Disposals/write-offs - (500,000) - - - (500,000) Reclassifications (15,000,000) - - - - (15,000,000) March 31, 2007 530,094,062 88,895,056 49,301,578 12,090,998-680,381,694 Additions 29,121,955 18,116,891 369,348 318,151 982,713 48,909,058 March 31, 2008 559,216,017 107,011,947 49,670,926 12,409,149 982,713 729,290,752 Accumulated depreciation and amortization: March 31, 2006 37,262,186 56,581,944 7,395,237 11,442,222-112,681,589 Depreciation and amortization 20,659,963 10,783,379 2,465,079 101,634-34,010,055 Disposals/write-offs - (427,083) - - - (427,083) March 31, 2007 57,922,149 66,938,240 9,860,316 11,543,856-146,264,561 Depreciation and amortization 20,399,171 10,142,060 2,465,079 115,395-33,121,705 March 31, 2008 78,321,320 77,080,300 12,325,395 11,659,251-179,386,266 Carrying amount: March 31, 2007 P472,171,913 P21,956,816 P39,441,262 P547,142 P - P534,117,133 March 31, 2008 P480,894,697 P29,931,647 P37,345,531 P749,898 P982,713 P549,904,486 Total 11. Accounts Payable and Other Current Liabilities This account at March 31 consists of: 2008 2007 Accounts payable and accrued expenses P141,505,198 P134,997,669 Dividends Payable 139,805,663 19,073,560 Accrued retirement 7,099,700 6,614,691 Deposits payable 1,326,485 1,326,485 Other current liabilities 134,021,574 92,201,242 P423,758,620 P254,213,647 The accounts payable and accrued expenses account is further itemized as follows: 2008 2007 Accounts payable - trade P60,050,173 P50,513,265 Accrued expenses 57,845,983 56,209,925 Accrued bonus and benefits 23,609,042 28,274,479 P141,505,198 The Company s exposure to liquidity risk is disclosed in Note 21. P134,997,669-14 -
12. Trust Funds This account at March 31 consists of: 2008 2007 Student welfare and development fund P40,693,748 P40,693,748 Visual aid development fund 26,331,899 23,686,114 FEU Central Student Organization: Student loan fund 10,502,842 8,354,034 Student scholarship fund 3,919,602 3,792,576 Student assistance fund 2,653,039 3,011,565 Others 8,232,350 25,243,247 P92,333,480 P104,781,284 These trust funds represent collections to defray expenses related to activities for specific educational purposes wherein cash equivalent to the outstanding balances of these funds are restricted from use for other purposes (see Note 4). 13. Tuition Fees This account consists of: 2008 2007 2006 Tuition and other fees P1,655,826,499 P1,636,730,534 P1,475,070,326 Less: Scholarship discounts (57,508,745) (52,764,930) (40,892,082) Cash discounts (10,038,965) (9,804,230) (9,312,478) Family discounts (7,595,756) (8,192,472) (6,652,416) P1,580,683,033 P1,565,968,902 P1,418,213,350 14. Employees Health, Welfare and Retirement Fund The Company maintains a funded and contributory retirement plan, which is a defined contribution type of retirement plan since 1967, covering regular teaching and nonteaching personnel members. Contributions to this fund are in accordance with the defined contribution established by the Retirement Board which is the sum of the employees and the Company s contributions. Employees contribution is 5.00% of basic salary while the Company s contribution is equivalent to 20.00% of the employees basic salary. Retirement expense recognized in the parent company statements of income amounted to P63,446,825 in 2008, P48,976,768 in 2007 and P48,649,476 in 2006. The retirement fund is under the administration of an organization, FEU Health, Welfare and Retirement Fund through its Retirement Board. - 15 -
The Fund s balance sheets as of December 31, 2007 and 2006 showed the following: 2007 2006 Assets Money market placements P555,853,116 P469,330,668 Receivables 40,186,159 39,495,746 Cash in banks 4,628,136 5,121,742 Others 208,505 157,398 600,875,916 514,105,554 Liabilities 49,871,692 45,330,630 P551,004,224 P468,774,924 15. Operating Expenses This account consists of: Note 2008 2007 2006 Instructional and Academic Salaries and allowances 8 P495,587,597 P468,906,339 P298,970,355 Employees benefits 14 150,395,234 135,098,784 231,109,260 Related Learning Experience 19,474,376 19,959,589 2,770,600 Affiliation 11,418,035 11,265,056 3,205,809 Others 17,370,504 14,909,660 31,172,190 694,245,746 650,139,428 567,228,214 Administrative Salaries and allowances 8 77,655,820 70,511,646 62,270,613 Rental 8 50,504,658 48,217,745 36,767,634 Employees benefits 14 36,165,361 35,175,975 58,596,699 Others 27,418,627 17,837,157 22,427,426 191,744,466 171,742,523 180,062,372 Maintenance and Company Operations Utilities 60,771,052 68,929,086 61,921,693 Salaries and allowances 8 24,196,975 23,049,555 8,734,742 Employees benefits 14 11,772,106 10,492,989 9,858,257 Janitorial services 11,707,163 13,052,135 10,506,279 Repairs and maintenance 4,330,271 29,441,175 5,076,787 Property insurance 564,594 1,487,187 649,521 113,342,161 146,452,127 96,747,279 General Depreciation and amortization 9, 10 43,159,876 44,048,226 28,071,164 Security services 18,314,315 15,323,818 14,185,307 Impairment losses on receivables 21 17,450,897 12,686,351 10,939,753 Publicity and promotions 8,033,477 4,966,479 3,886,531 Donation and charitable contributions 533,888 818,470 17,672,293 Taxes and licenses 445,275 1,041,292 282,306 Others 6,922,295 8,220,210 15,699,452 94,860,023 87,104,846 90,736,806 P1,094,192,396 P1,055,438,924 P934,774,671-16 -
16. Operating Leases The Company leases out certain buildings to several parties for a period of one (1) to ten (10) years until August 31, 2017. Total rent income recognized in the parent company statements of income amounted to P25,494,399 in 2008, P42,011,777 in 2007 and P21,705,099 in 2006. The remaining future minimum rent receivables are as follows: 2008 2007 More than five years P4,400,000 P - Between one and five years 142,477,280 137,828,526 Less than one year 38,104,829 37,239,314 P184,982,109 P175,067,840 17. Income Taxes The components of the Company s income tax expense are as follows: 2008 2007 2006 Current tax expense P59,615,310 P58,009,602 P57,408,347 Deferred tax benefit arising from origination and reversal of temporary differences (2,965,176) (1,235,659) (1,689,260) P56,650,134 P56,773,943 P55,719,087 Deferred tax assets are attributable to the following: 2008 2007 Deferred income P1,685,492 P - Non-deductible accruals 5,243,085 4,111,375 Impairment losses on receivables 1,187,233 1,143,650 Others 474,786 370,395 P8,590,596 P5,625,420-17 -
The reconciliation of the income tax expense computed at applicable statutory income tax rate of 10% to the income tax expense shown in the parent company statements of income follows: 2008 2007 2006 Income before income tax P649,556,137 P660,300,995 P624,629,443 Income tax at 10% P64,955,614 P66,030,100 P62,462,944 Additions to (reductions in) income tax resulting from the tax effects of: Income subjected to final tax (8,412,302) (9,239,732) (8,081,167) Provision for probable losses - - 1,103,417 Others 106,822 (16,425) 233,893 P56,650,134 P56,773,943 P55,719,087 The Company availed the Tax Incentives Provisions of Republic Act (R.A.) No. 8525, Adopt-a-School Act of 1998. The amount of contribution/donation that were actually, directly and exclusively incurred for the Adopt-a-School Program, with limitations, conditions and rules set forth in Section 34 (H) of the Tax Code, is subject to an additional amount equivalent to fifty percent (50%). On October 10, 2007, the BIR issued Revenue Regulation No. 12-2007, which amended the timing of the calculation and payment of minimum corporate income tax (MCIT) from an annual basis to a quarterly basis, i.e., excess MCIT from a previous quarter during the current taxable year may be applied against subsequent quarterly or current annual income tax due, whether MCIT or regular corporate income tax (RCIT). However, excess MCIT from the previous taxable year/s are not creditable against MCIT due for a subsequent quarter and are only creditable against quarterly and annual RCIT. On May 24, 2005, Republic Act No. 9337 entitled An Act Amending the National Internal Revenue Code, as Amended, with Salient Features (the Act ) was passed into a law effective November 1, 2005. Among others, the Act provides for the increase in unallowable interest rate from 38% to 42% with a reduction thereof to 33% beginning on January 1, 2009. - 18 -
18. Dividend Declarations The Board of Trustees approved the following dividend declarations in 2008, 2007 and 2006, respectively: Date of Declaration Date of Record Date of Payment Amount 2008 Cash dividend of P15.00 per share June 26, 2007 July 11, 2007 July 23, 2007 P105,095,520 Cash dividend of P15.00 per share December 18, 2007 January 7, 2008 January 17, 2008 105,095,520 Cash dividend of P15.00 per share March 25, 2008 April 10, 2008 April 24, 2008 105,095,520 P315,286,560 2007 Cash dividend of P15.00 per share June 20, 2006 July 17, 2006 July 17, 2006 P70,067,130 50% Stock dividend equivalent to 2,335,226 shares March 21, 2006 September 6, 2006 October 2, 2006 233,522,600 345 fractional shares paid out in cash at P100.00 per share March 21, 2006 September 6, 2006 October 2, 2006 34,500 Cash dividend of P15.00 per share December 19, 2006 January 5, 2007 January 15, 2007 105,095,520 P408,719,750 2006 Cash dividend of P12.00 per share June 21, 2005 July 08, 2005 July 18, 2005 P56,053,704 Cash dividend of P12.00 per share December 13, 2005 January 10, 2006 January 20, 2006 56,053,704 P112,107,408 19. Appropriated Retained Earnings This account consists of: 2008 2007 2006 Appropriations for: Expansion of facilities P1,010,000,000 P610,000,000 P610,000,000 Purchases of equipment and improvements 30,000,000 30,000,000 30,000,000 Contingencies 20,161,414 20,161,414 20,161,414 Acquisition of laboratory equipment 20,000,000 20,000,000 20,000,000 Repairs and improvements 10,000,000 10,000,000 10,000,000 General retirement 57,000,000 7,000,000 7,000,000 P1,147,161,414 P697,161,414 P697,161,414-19 -
The Board of Trustees approved the following appropriations: a. On July 19, 2005, P200 million for school facilities expansions; b. On March 21, 2006, additional P40 million and P20 million for school facilities expansions and purchase of equipment, respectively; c. On June 26, 2007, P100 million and P50 million for improvement of facilities and general retirement, respectively; and d. On March 25, 2008, additional P300 million for school expansion. 20. Earnings Per Share Basic and diluted earnings per share are computed as follows: 2008 2007 2006 Outstanding number of shares - net of treasury stock of 37,331 shares 7,005,738 7,005,738 4,671,142 Net income for the year P592,906,003 P603,527,052 P568,910,443 Divided by average outstanding shares 7,005,738 5,838,440 4,671,142 P84.63 P103.37 P121.79 21. Financial Risk Management The Company has exposure to the following risks from its use of financial instruments: 1. Credit risk 2. Liquidity risk 3. Market risk This note presents information about the Company s exposure to each of the above risks, the Company s objectives, policies and processes for measuring and managing risk, and the Company s management of capital. The main purpose of the Company s dealings in financial instruments is to fund its operational and capital expenditures. The Board of Trustees (BOT) has overall responsibility for the establishment and oversight of the Company s risk management framework. The BOT has delegated to the senior management the responsibility for developing and monitoring the Company s policies, which address risk management areas. Management is responsible for monitoring compliance with the Company s risk management policies and procedures and for reviewing the adequacy of these policies in relation to the risks faced by the Company. - 20 -
1. Credit Risk Credit risk represents the loss the Company would incur if counterparty failed to perform under its contractual obligations. The Company s exposure to credit risk on its receivables relates primarily to the inability of the debtors and students to pay and fully settle the unpaid balance of tuition fees and other charges, respectively, which are owed to the Company based on the installment payment schemes. The Company has established controls and procedures in its credit policy to determine and to monitor the credit worthiness of the students based on relevant factors. Also, students are not allowed to enroll in the following semester unless the unpaid balance in the previous semester has been paid. The Company also withholds the academic records and clearance of the students with unpaid balance, thus ensuring that collectibility is reasonably assured. The Company s exposure to credit risk on its other receivables from debtors and related parties is managed through close account monitoring and setting limits. The Company neither has any significant exposure to any individual customer or counterparty nor any other concentration of credit risk arising from counterparties is similar business activities, geographic region or economic parties. With respect to credit risk arising from cash and cash equivalents, receivables, due from a related party, AFS investments and HTM investments, the Company s exposure to credit risk arises from default of the counterparty, with maximum exposure equal to the carrying amount of these instruments. The maximum exposure to credit risk at the balance sheet date is as follows: Note 2008 Cash in bank and cash equivalents 4 P1,206,629,763 AFS investments 5 840,687,402 Receivables 6 205,812,372 Due from a related party 4, 8 100,000,000 HTM investments 32,071,040 P2,385,200,577 The analysis of the Company s receivables as of March 31, 2008 according to credit quality is as follows: (In 000s) Neither past due nor impaired Impaired Past Due Not impaired Total Tuition and other fees P43,360 P11,872 P26,692 P81,924 Related party 102,342 - - 102,342 Suppliers 36,122 - - 36,122 Employees 9,146 - - 9,146 Others 43,213 - - 43,213 The Company classifies tuition and other fee receivables from students based on the number of semesters the receivables have been outstanding. Receivables from students that are outstanding for more than one semester are analyzed to determine whether they are impaired. Those that are not outstanding for more than one semester or are currently receivable are determined to be collectible, based on historical experience. - 21 -
The movements in allowance for impairment losses in respect of receivables during the year ended March 31, 2008 are as follows: Balance at April 1, 2007 P11,436,501 Impairment loss recognized during the year 17,450,897 Receivables written-off during the year (17,015,065) Balance at March 31, 2008 P11,872,333 The allowance for impairment losses on receivables as of March 31, 2008 relates to receivables from students which have been outstanding for more than one semester and specifically identified to be impaired. No impairment loss on the rest of the Company s financial assets have been provided since none of them were identified to be impaired as of March 31, 2008. Cash and cash equivalents, AFS investments and HTM investments are coursed through reputable financial institutions duly approved by the BOT. The balance due from a related party is from a profitable related party with good payment records; collections therefrom are reasonably assured. 2. Liquidity Risk The Company manages liquidity risk by maintaining a balance between continuity of funding and flexibility. Treasury controls and procedures are in place to ensure that sufficient cash is maintained to cover daily operational and working capital requirements. Management closely monitors the Company s future and contingent obligations and ensures that future cash collections are sufficient to meet them in accordance with internal policies. The Company invests in cash placements when excess cash is obtained from operations. Financial liabilities of the Company at the balance sheet date comprise of accounts payable and accrued expenses which are all short term in nature and have contractual maturities of less than 12 months. 3. Market Risk Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes. The objective of market risk management is to manage and control risk exposures within acceptable parameters, while optimizing the return on risk. The Company is subject to various market risks, including risks from changes in interest rates and currency exchange rates. Price Risk Sensitivity Analysis The Company s exposure to price risk arises from its investments in equity and debt securities, which are classified as AFS investments in the balance sheets. Management monitors its equity and debt securities in its investment portfolio based on market indices. Material investments within the portfolio are managed on an individual basis. - 22 -