Toyota Financial Services Philippines Corporation Financial Statements March 31, 2016 and 2015 and Independent Auditors Report
SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Toyota Financial Services Philippines Corporation Report on the Financial Statements We have audited the accompanying financial statements of Toyota Financial Services Philippines Corporation, which comprise the statements of financial position as at March 31, 2016 and 2015, and the statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited
- 2 - Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Toyota Financial Services Philippines Corporation as at March 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. Report on the Supplementary Information Required Under Revenue Regulations 15-2010 Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information required under Revenue Regulations 15-2010 in Note 26 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of Toyota Financial Services Philippines Corporation. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as whole. SYCIP GORRES VELAYO & CO. Aris C. Malantic Partner CPA Certificate No. 90190 SEC Accreditation No. 0326-AR-3 (Group A), May 1, 2015, valid until April 30, 2018 Tax Identification No. 152-884-691 BIR Accreditation No. 08-001998-54-2015, February 27, 2015, valid until February 26, 2018 PTR No. 5321657, January 4, 2016, Makati City July 8, 2016 A member firm of Ernst & Young Global Limited
TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF FINANCIAL POSITION ASSETS Cash and Cash Equivalents (Notes 4 and 21) P=1,132,903,201 P=590,024,131 Due from Bangko Sentral ng Pilipinas (Note 4) 6,983,598,916 6,086,246,756 Available-for-Sale Investments (Note 5) 1,500,000 1,000,000 Loans and Receivables (Note 6) 36,706,013,615 33,501,352,616 Assets Held for Sale (Note 7) 74,944,685 36,704,929 Property and Equipment (Note 8) 40,570,727 31,279,010 Software Costs (Note 9) 32,651,335 15,239,148 Deferred Tax Assets (Note 19) 262,318,548 200,215,735 Derivative Asset (Note 14) 23,423 Other Assets (Note 9) 25,166,880 29,310,769 P=45,259,667,907 P=40,491,396,517 LIABILITIES AND EQUITY LIABILITIES Loans Payable (Note 11) P=35,727,455,244 P=30,435,687,160 Derivative Liability (Note 14) 18,582,447 Accounts Payable and Other Liabilities (Notes 13 and 21) 764,861,698 459,528,233 Income Tax Payable 19,851,724 54,166,936 Deposits on Lease Contracts (Note 15) 3,201,390,461 4,524,606,158 Subordinated Debt (Note 12) 999,919,120 998,900,214 40,732,060,694 36,472,888,701 EQUITY Capital Stock - P=100 par value Authorized, issued and outstanding - 17,000,000 shares in 2016 and 10,000,000 shares in 2015 (Note 23) 1,700,000,000 1,000,000,000 Deposit for Future Subscription (Notes 21 and 23) 700,000,000 Retained Earnings (Note 23) 2,820,934,295 2,315,610,126 Net Unrealized Gain on Available-for-Sale Investments (Note 5) 850,000 350,000 Cash Flow Hedge Reserve (Note 14) 7,467,287 Actuarial Gain (Loss) on Retirement (Note 18) (1,644,369) 2,547,690 4,527,607,213 4,018,507,816 P=45,259,667,907 P=40,491,396,517 See accompanying Notes to Financial Statements.
TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF COMPREHENSIVE INCOME Years Ended March 31 INTEREST INCOME Loans and receivables (Note 6) P=3,127,924,542 P=2,603,166,843 Cash and cash equivalents (Notes 4 and 21) 7,427,884 5,258,353 3,135,352,426 2,608,425,196 INTEREST EXPENSE (Notes 11 and 12) 1,315,489,478 1,084,707,654 NET INTEREST INCOME 1,819,862,948 1,523,717,542 SERVICE FEES AND OTHER INCOME (Note 17) 175,725,516 166,519,991 OPERATING EXPENSES Provision for credit and impairment losses (Note 10) 526,321,581 396,631,391 Taxes and licenses 193,978,186 177,418,509 Compensation and fringe benefits (Notes 18 and 21) 127,096,604 113,323,226 Sales and marketing 83,240,796 104,646,738 Occupancy (Notes 20 and 21) 81,495,464 61,355,792 Loss on sale of assets held for sale (Note 7) 76,416,446 20,931,818 Litigation 72,983,126 26,441,765 Credit investigation 29,217,980 16,245,596 Contractual services 27,416,880 18,708,480 Depreciation and amortization (Notes 8 and 9) 22,684,399 22,324,603 Management and professional fees (Note 21) 21,256,456 15,180,073 Transportation and travel 6,037,116 7,043,625 Entertainment, amusement and recreation (Note 19) 3,418,126 6,129,079 Others 28,406,325 23,304,619 1,299,969,485 1,009,685,314 INCOME BEFORE INCOME TAX 695,618,979 680,552,219 PROVISION FOR INCOME TAX (Note 19) 190,294,810 210,120,457 NET INCOME 505,324,169 470,431,762 OTHER COMPREHENSIVE INCOME Other comprehensive income to be reclassified to profit or loss in subsequent periods: Net unrealized gain on available-for-sale investments (Note 5) 500,000 210,000 Net movement on cash flow hedges 10,667,553 Income tax effect (3,200,266) 7,967,287 210,000 Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods: Actuarial loss on retirement (Note 18) (4,192,059) 776,920 Income tax effect (Note 19) (233,076) (4,192,059) 543,844 3,775,228 753,844 TOTAL COMPREHENSIVE INCOME P=509,099,397 P=471,185,606 See accompanying Notes to Financial Statements.
TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF CHANGES IN EQUITY Deposit for Future Subscription (Note 23) For the Years Ended March 31, 2016 and 2015 Net Unrealized Gains on Availablefor Retained Sale Cash Flow Earnings Investments Hedge Reserve (Note 23) (Note 5) (Note 14) Actuarial Gain (Loss) on Retirement (Note 18) Capital Stock (Note 23) Total Balances at April 1, 2015 P=1,000,000,000 P=700,000,000 P=2,315,610,126 P=350,000 P= P=2,547,690 P=4,018,507,816 Deposit for future subscription 700,000,000 (700,000,000) Net income 505,324,169 505,324,169 Other comprehensive income 500,000 7,467,287 (4,192,059) 3,775,228 Total comprehensive income 505,324,169 500,000 7,467,287 (4,192,059) 509,099,397 Balances at March 31, 2016 P=1,700,000,000 P= P=2,820,934,295 P=850,000 P=7,467,287 (P=1,644,369) P=4,527,607,213 Balances at April 1, 2014 P=1,000,000,000 P= P=1,845,178,364 P=140,000 P= P=2,003,846 P=2,847,322,210 Deposit for future subscription 700,000,000 700,000,000 Net income 470,431,762 470,431,762 Other comprehensive income 210,000 543,844 753,844 Total comprehensive income 470,431,762 210,000 543,844 471,185,606 Balances at March 31, 2015 P=1,000,000,000 P=700,000,000 P=2,315,610,126 P=350,000 P= P=2,547,690 P=4,018,507,816 See accompanying Notes to Financial Statements.
TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION STATEMENTS OF CASH FLOWS Years Ended March 31 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=695,618,979 P=680,552,219 Adjustments for: Provision for credit and impairment losses (Note 10) 526,321,581 396,631,391 Loss on sale of assets held for sale (Note 7) 76,416,446 20,931,818 Depreciation and amortization (Notes 8 and 9) 22,684,399 22,324,603 Amortization of debt issue cost on subordinated note 1,100,196 948,519 Realized gain on available-for-sale investments (440,000) Gain on sale of property and equipment (703,362) (422,430) Valuation loss (gain) on derivative instrument (Note 14) 23,423 (234,053) Changes in operating assets and liabilities: Decrease (increase) in: Loans and receivables (5,780,843,442) (8,257,664,270) Other assets (4,290,091) (3,602,076) Increase (decrease) in: Accounts payable and other liabilities 309,575,386 (35,028,964) Net cash used in operations (4,154,096,485) (7,176,003,243) Income taxes paid (289,913,100) (281,667,554) Net cash used in operating activities (4,444,009,585) (7,457,670,797) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Property and equipment (Note 8) (22,329,786) (7,519,850) Software (Note 9) (24,146,777) (2,277,120) Proceeds from sale of: Assets held for sale 608,351,181 252,163,777 Property and equipment 1,429,404 1,230,231 Available-for-sale investments 600,000 Net cash provided by investing activities 563,304,022 244,197,038 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from availment of loans payable 19,273,102,610 20,776,403,463 Settlement of loans payable (13,952,165,817) (12,109,867,029) Proceeds from subscription of additional shares (Note 23) 700,000,000 Net cash provided by financing activities 5,320,936,793 9,366,536,434 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,440,231,230 2,153,062,675 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and cash equivalents 590,024,131 628,779,104 Due from Bangko Sentral ng Pilipinas 6,086,246,756 3,894,429,108 6,676,270,887 4,523,208,212 (Forward)
- 2 - Years Ended March 31 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) Cash and cash equivalents P=1,132,903,201 P=590,024,131 Due from Bangko Sentral ng Pilipinas 6,983,598,916 6,086,246,756 P=8,116,502,117 P=6,676,270,887 OPERATIONAL CASH FLOWS FROM INTEREST Interest received P=3,135,321,336 P=2,608,423,820 Interest paid 1,220,184,549 1,049,876,699 See accompanying Notes to Financial Statements.
TOYOTA FINANCIAL SERVICES PHILIPPINES CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Corporate Information Toyota Financial Services Philippines Corporation (the Company) is a domestic corporation registered with the Securities and Exchange Commission (SEC) on August 16, 2002. The Company s registered address is 32nd Floor, GT Tower International, Ayala Avenue corner H.V. Dela Costa St., Salcedo Village, Makati City. The Company serves customers of Toyota vehicles through financing and leasing services, as well as Toyota dealers, through inventory stock financing. On May 8, 2008, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) granted the Company its quasi-banking license, which enables the Company to diversify its sources of funds, as well as offer a wider range of financing products to its growing customers and perform other quasi-banking functions effective April 1, 2009. The following table sets forth the ownership structure of the Company: Percentage of ownership Toyota Financial Services Corporation (TFSC) 60% GT Capital Holdings, Inc. (GT Capital) 40% The Company s ultimate parent company is TFSC, a financial services company based in Japan. The accompanying financial statements were approved and authorized for issue by the Board of Directors (BOD) on July 8, 2016. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements of the Company have been prepared using the historical cost basis except for available-for-sale (AFS) investments and derivative financial instruments, which have been measured at fair value. The accompanying financial statements are presented in Philippine peso (PHP), which is also the Company s functional currency. All values are rounded to the nearest peso unless otherwise stated. The accompanying financial statements provide comparative information in respect of the previous period. Statement of Compliance The financial statements of the Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Presentation of Financial Statements The Company presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non-current) is presented in Note 16.
- 2 - Changes in Accounting Policies and Disclosures The Company applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2015. The nature and impact of each new standard and amendment is described below: Amendments to Philippine Accounting Standards (PAS) 19, Defined Benefit Plans: Employee Contributions PAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognize such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after July 1, 2014. The amendments to PAS 19 shall be applied retrospectively. This amendment has no impact on the Company s financial statements. Annual Improvements to PFRSs 2010-2012 Cycle These improvements are effective from July 1, 2014 and the Company has applied these amendments for the first time in this financial statement. Unless otherwise stated, these amendments have no impact on the Company s financial statements. PFRS 2, Share-based Payment - Definition of Vesting Condition This improvement is applied and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including: A performance condition must contain a service condition; A performance target must be met while the counterparty is rendering service; A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group; A performance condition may be a market or non-market condition; If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied. PFRS 3, Business Combinations - Accounting for Contingent Consideration in a Business Combination The amendment is applied prospectively for business combinations for which the acquisition date is on or after July 1, 2014. It clarifies that a contingent consideration that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope of PAS 39, Financial Instruments: Recognition and Measurement. PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments Assets to the Entity s Assets The amendments are applied retrospectively and clarify that: An entity must disclose the judgments made by management in applying the aggregation criteria in the standard, including brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are similar. The reconciliation of segment assets of total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.
- 3 - PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Revaluation Method - Proportionate Restatement of Accumulated Depreciation and Amortization The amendment is applied retrospectively and clarifies in PAS 16 and PAS 38 that the asset may be revalued by reference to the observable date on either the gross or the net carrying amount. In addition, the accumulated depreciation or amortization is the difference between the gross and carrying amounts of the asset. The adoption of this amendment did not have any impact in the Company s financial statements as the Company s property, plant and equipment and intangible assets are not carried at revalued amounts. PAS 24, Related Party Disclosures - Key Management Personnel The amendment is applied retrospectively and clarifies that a management entity, which is an entity that provides key management personnel services, is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. Annual Improvements to PFRSs (2011-2013 Cycle) These improvements are effective from July 1, 2014 and the Company has applied these amendments for the first time in this financial statement. Unless otherwise stated, these amendments have no impact on the Company s financial statements. PFRS 3, Business Combinations - Scope Exceptions for Joint Arrangements The amendment is applied prospectively and clarifies the following regarding the scope exceptions within PFRS 3: Joint arrangements, not just joint ventures, are outside the scope of PFRS 3. This scope exception applies only to the accounting in the financial statements of the joint arrangement itself. PFRS 13, Fair Value Measurement - Portfolio Exception The amendment is applied prospectively and clarifies that portfolio exception in PFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of PAS 39. PAS 40, Investment Property The description of ancillary services in PAS 40 differentiates between the investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that PFRS 3, and not the description of ancillary services in PAS 40, is used to determine if the transaction is the purchase of an asset or business combination. The description of ancillary services in PAS 40 only differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). Significant Accounting Policies Foreign Currency Translations Transactions denominated in foreign currencies are recorded using the applicable exchange rate at the date of the transaction. Foreign currency-denominated assets and liabilities are translated to PHP using the Philippine Dealing System (PDS) closing rate prevailing at the reporting date. Foreign exchange gains or losses arising from foreign currency transactions and revaluation of foreign currency-denominated assets and liabilities are credited to or charged to profit or loss in the year in which the rates change.
- 4 - Fair Value Measurement The Company measures AFS investments and derivatives at fair value at each statement of financial position date. Also, fair values of other financial assets and liabilities are disclosed in Note 22. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and fair value hierarchy as explained above. Financial Instruments - Initial Recognition and Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date, the date that an asset is delivered to or by the Company. Deposits on finance lease, amounts due to banks and loans are recognized when cash is received by the Company or advanced to the borrowers. Initial recognition of financial instruments All financial instruments are initially recognized at fair value. Except for financial assets and financial liabilities at fair value through profit or loss (FVPL), the initial measurement of financial assets includes transaction costs. The Company classifies its financial assets in the following
- 5 - categories: financial assets at FVPL, AFS investments, held-to-maturity (HTM) investments and loans and receivables. Financial liabilities are classified as financial liabilities at FVPL and other financial liabilities carried at amortized cost. Financial assets or financial liabilities at FVPL include financial assets or liabilities held for trading purposes and financial assets or liabilities designated upon initial recognition as at FVPL. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date. As of March 31, 2016 and 2015, the Company has no HTM investments. Day 1 difference Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 difference) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the Day 1 difference amount. AFS investments AFS investments are those which are designated as such or do not qualify to be classified as financial assets held for trading, designated at FVPL, HTM investments or loans and receivables. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as Other Comprehensive Income (OCI) in the statements of comprehensive income as Net unrealized gain (loss) on available-for-sale investments, until the investment is derecognized or determined to be impaired at which time the cumulative gains or losses previously reported as OCI is included in profit or loss. The Company s AFS investments consist of golf club shares. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and as such are not classified as financial assets at FVPL and AFS investments. They also do not include those for which the Company may not recover substantially its initial investments, other than because of credit deterioration. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method less allowance for credit losses. Amortized cost is calculated by taking into account any discount or premium on acquisition cost and fees that are an integral part of the effective interest rate (EIR). The amortization is included in profit or loss under Interest income. The losses arising from impairment are recognized in profit or loss under Provision for credit and impairment losses.
- 6 - The Company s loans and receivables consist of cash in bank, due from BSP, receivables from customers and other receivables. Other financial liabilities Issued financial instruments or their components, which are not designated at FVPL, are classified as loans payable, accounts payable and other liabilities, deposits on lease contracts and subordinated debt where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial assets to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. After initial measurement, these financial liabilities not qualified as and not designated at FVPL are subsequently measured at amortized cost using the effective interest method. Derivative Financial Instrument and Hedge Accounting The Company uses derivative financial instruments such as cross currency interest rate swap to hedge its foreign currency and interest rate risks. Such derivative financial instruments are initially recognized at fair value on the date in which a derivative transaction is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from the changes in fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognized as OCI. For the purpose of hedge accounting, hedges are classified as: Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk); Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or Hedges of a net investment in a foreign operation. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument s effectiveness in offsetting the exposure to changes in the hedge item s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognized directly as OCI in the cash flow hedge reserve, while the ineffective portion is recognized directly in profit or loss. Amounts recognized as OCI are transferred to profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized as OCI are transferred to the initial carrying amount of the non-financial asset or liability.
- 7 - If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in OCI are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in OCI remains in OCI until the forecast transaction or firm commitment affects profit or loss. If the related transaction is not expected to occur, the amount is taken to profit or loss. As of March 31, 2015, the Company did not apply hedge accounting on its derivatives. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Company s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. Financial liability A financial liability is derecognized when the obligation under the liability, is discharged, cancelled or has 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 profit or loss. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash in banks, due from BSP and cash equivalents with original maturities of three months or less from date of placements and that are subject to insignificant risks of changes in value. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to set off the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Company assesses that it has a currently enforceable right of offset if the right is not contingent on a future event, and is legally enforceable in the normal course of
- 8 - business, event of default, and event of insolvency or bankruptcy of the Company and all of the counterparties Impairment of Financial Assets The Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Loans and receivables For loans and receivables, carried at amortized cost, the Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively, for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to profit or loss. Interest income continues to be recognized based on the original EIR of the asset. The financial assets, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to Other income in profit or loss. AFS investments For equity investments classified as AFS investments, impairment indicators would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized as OCI is removed and recognized in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. Increases in fair value after impairment are recognized directly in OCI.
- 9 - Residual Value of Leased Assets and Deposits on Lease Contracts The residual value of leased assets is the estimated proceeds from the disposal of the leased asset at the end of the lease term which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease. At the end of the lease term, the residual value is generally applied against the guaranty deposit of the lessee when the lessee decides to buy the leased asset. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization and impairment loss, if any. The initial cost of property and equipment consists of its purchase price, any directly attributable costs of bringing the asset to its working condition and location for its intended use and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located to the extent it had recognized an obligation for that cost. Expenditures incurred after an item of property and equipment has been put into operation, such as repairs and maintenance, are normally charged to operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. When the property and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in profit or loss. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the property and equipment as follows: Leasehold improvements Furniture, fixtures and equipment Transportation equipment 5 years or the lease term, whichever is shorter 3-5 years 3-5 years The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the assets, which is calculated as the difference between the net disposal proceeds and the carrying amount of the asset, is included in profit or loss in the year the asset is derecognized. Assets Held for Sale An asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use, available for immediate sale and its sale is highly probable. An asset classified as held for sale is measured at the lower of fair value less costs to sell and its carrying amount. Any impairment loss on write-down of the asset to fair value less costs to sell is recognized in profit or loss. Any gain on subsequent increase in fair value less costs to sell is also recognized in profit or loss, but not in excess of the cumulative impairment loss already recognized on the asset.
- 10 - Assets held for sale of the Company consists mainly of motor vehicles foreclosed from borrowers or lessees who have defaulted on their installment or lease payments. Intangible Assets This consists of software costs, stated at acquisition cost and is amortized on a straight-line basis over estimated useful life of five (5) years. An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Company. Other Assets Other assets consist of prepaid expenses, security deposits, retirement asset and withholding tax receivables. Prepaid expenses are advanced payments for occupancy costs and employee benefits. Security deposits are rental deposits for the Company s office space and residential units for officers. Prepaid expenses and security deposits are recognized in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Amortization of prepayments is recognized monthly on a straight-line basis. Withholding tax receivable pertains to Creditable Withholding Tax (CWT). CWT is recognized by virtue of Republic Act (RA) No. 8424 relative to the withholding on income subject to expanded and final withholding tax on compensation, value-added tax and other percentage taxes. CWT is recognized when the Branch withheld certain taxes payable to the taxation authority, and is reduced to the extent of that CWT will not be realized, through the use of an allowance account. Impairment of Non-financial Assets The carrying values of non-financial assets (i.e. property and equipment, assets held for sale, software cost and other assets) are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cashgenerating units are written down to their recoverable amounts. The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment loss is recognized under Provision for credit and impairment losses in statements of comprehensive income. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, depreciation and amortization expense is adjusted in future years to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining life.
- 11 - Retirement Cost The Company has a funded, noncontributory defined benefit retirement plan covering all its employees with regular employment status. The defined benefit liability (asset) is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. Defined benefit costs comprise the following: Service cost Net interest on the net defined benefit liability or asset Remeasurements of net defined benefit liability or asset Service costs which include current service costs, past service costs and gains or losses on nonroutine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss. Remeasurements comprising of actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in OCI in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods. Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not available to the creditors of the Company, nor can they be paid directly to the Company. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Company as lessor The Company recognizes assets held under a finance lease in its statement of financial position as a receivable at an amount equal to the net investment in the lease. The lease payments received from the lessee are treated as repayments of principal and finance income. Initial direct costs that are incremental and directly attributable to negotiating and arranging the lease are included in the
- 12 - measurement of the net investment in the lease at inception and reflected in the calculation of the implicit interest rate. Company as lessee Lease of assets under which the lessor effectively retains all the risks and rewards of ownership is classified as operating lease. Lease payments under an operating lease are recognized as an expense on a straight-line basis over the lease term. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the income can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Interest income Interest and financing fees on finance leases and loans and receivables (including dealers and manufacturers subsidy) are initially credited to unearned interest income and amortized over the term using effective interest method. Any direct costs to acquire finance leases and loans and receivables are capitalized and amortized using the effective interest method. Interest income on impaired receivables is recognized based on the rate used to discount future cash flows to their net present value. Interest income from cash in bank is accrued as earned. Service fees Service fees earned for the provision of transaction services such as processing fees are recognized upon completion of the underlying transaction. Recoveries of accounts written off Recoveries of accounts written off are recognized as income upon actual collection. Gain or loss on sale of non-current assets The gain or loss arising from the sale of non-current asset held for sale, property and equipment and software costs is included in profit or loss when the asset is derecognized. The gain or loss arising from the derecognition is determined as the difference between the net disposal proceeds and its carrying amount on the date of the transaction. Foreign exchange gain/loss Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalized. All other borrowing costs are recognized as expense in the year which they are incurred. Income Taxes Current taxes Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.