1. business and industrial

COVER SHEET
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(Company's Full Name)
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(Business Address: No. Street City / Town / Province)
848-5643
Contact Person
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Company Telephone Number
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7
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A
Month
Day
Fiscal Year
Month
Day
Annual Meeting
Secondary License Type, if Applicable
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Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
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Domestic
Total No. Of Stockholders
To be accomplished by SEC Personnel concerned
File Number
LCU
Document I.D.
Cashier
STAMPS
Remarks = pls. Use black ink for scanning purposes
Foreign
SEC No.
File No. _____
AYALA CORPORATION
(Company’s Full Name)
Tower One, Ayala Triangle
Ayala Avenue, Makati City
(Company’s Address)
848-56-43
(Telephone Number)
December 31, 2009
(Fiscal Year Ending)
(Month & Day)
SEC Form 17- A
(Form Type)
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE
AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES
1.
For the fiscal year ended: December 31, 2009
2.
SEC Identification No.: 34218
3.
BIR Tax Identification No. 000-153-610-000
4.
Exact name of the registrant as specified in its charter: AYALA CORPORATION
5.
Province, country or other jurisdiction of incorporation or organization: Philippines
6.
Industry Classification Code: _______ (SEC Use Only)
7.
th
Address of principal office: 34 Floor, Tower One, Ayala Triangle, Ayala Avenue,
Makati City
Postal Code: 1226
8.
Registrant’s telephone number: (632) 848-5643
9.
Former name, former address, former fiscal year: Not applicable
10.
Securities registered pursuant to Sections 8 and 12 of the SRC, or Sections 4 and 8 of
the RSA:
Title of each class
Preferred A
Preferred B
Common*
Number of shares issued &outstanding
12,000,000
58,000,000
498,331,428
* Net of 1,844,404 treasury shares
Amount of debt outstanding as of December 31, 2009: P56.5 billion
11.
Are any or all of these securities listed in the Philippine Stock Exchange? Yes [x] No [ ]
A total of 495,179,690 Common shares, 12,000,000 Preferred “A” shares and 58,000,000
Preferred “B” shares are listed with the Philippine Stock Exchange as of December 31,
2009.
12.
Check whether the registrant:
(a)
has filed all reports required to be filed by Section 17 of the SRC and SRC Rule
17.1 thereunder or Section 11 of the RSA and RSA Rule 11 (a)-1 thereunder and
Sections 26 and 141 of the Corporation Code of the Philippines during the
preceding 12 months (or for such shorter period that the registrant was required to
file such reports): Yes [x] No[ ]
(b)
has been subject to such filing requirements for the past 90 days: Yes [x] No [ ]
13.
Aggregate market value of the voting stock held by non-affiliates: About P85 billion
(based on closing stock prices of Ayala Corporation common shares as of April 13, 2009)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS
DURING THE PRECEEDING FIVE YEARS
14. Check whether the issuer has filed all documents and reports required to be filed by Section
17 of the Code subsequent to the distribution of securities under a plan confirmed by a court
or the Commission. Not applicable
Yes [ ]
No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
15. Briefly describe documents incorporated by reference and identify the part of the SEC Form
17-A into which the document is incorporated:
2009 Audited Consolidated Financial Statements of Ayala Corporation and Subsidiaries
(incorporated as reference for item 1,6,7, and 8 of SEC Form 17-A)
2009 Audited Consolidated Financial Statements of Bank of the Philippine Islands
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2009 Audited Consolidated Financial Statements of Globe Telecom, Inc. and Subsidiaries
(incorporated as reference for item 1 and 6 of SEC Form 17-A)
2009 Audited Financial Statements of Manila Water Company, Inc. (incorporated as
reference for item 1 and 6 of SEC Form 17-A)
TABLE OF CONTENTS
PART I
BUSINESS AND GENERAL INFORMATION
Item
Item
Item
Item
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
1
2
3
4
PART II
OPERATIONAL AND FINANCIAL INFORMATION
Item 5
Market for Issuer’s Common Equity and Related
Stockholder Matters
Management’s Discussion and Analysis or Plan of Operations
Financial Statements and Supplementary Schedules
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Item 6
Item 7
Item 8
PART III
CONTROL AND COMPENSATION INFORMATION
Item 9
Item 10
Item 11
Item 12
Directors and Executive Officers of the Issuer
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management
Certain Relationships and Related Transactions
PART IV
COPORATE GOVERNANCE
Item 13
Corporate Governance
PART V
EXHIBITS AND SCHEDULES
Item
Exhibits
Reports on SEC Form 17-C (Current Report)
14
SIGNATURES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
INDEX TO EXHIBITS
0
1
70
72
76
76
78
93
93
95
102
103
105
106
113
PART I - BUSINESS AND GENERAL INFORMATION
Item 1. Description of Business
Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The Company’s
registered office address and principal place of business is Tower One, Ayala Triangle, Ayala Avenue,
Makati City. The Company is a publicly listed company which is 50.78% owned by Mermac, Inc., 10.55%
owned by Mitsubishi Corporation and the rest by the public.
The Company is the holding company of the Ayala Group of Companies (the group) with principal business
interests in real estate and hotels, financial services and bancassurance, telecommunications, electronics,
information technology and business process outsourcing services, utilities, automotives, international and
others.
The company was founded in 1834, incorporated in 1968, and was listed on the Philippine Stock Exchange
(then Makati Stock Exchange) in 1976.
For management purposes, the Group is organized into the following business units:
a.
b.
c.
d.
Real estate and hotels
Financial services and bancassurance
Telecommunications
AC Capital
•
Real estate and hotels - planning and development of large-scale fully integrated residential and
commercial communities; development and sale of residential, leisure and commercial lots and the
development and leasing of retail and office space and land in these communities; construction and
sale of residential condominiums and office buildings; development of industrial and business parks;
development and sale of upper middle-income and affordable housing; strategic land bank
management; hotel, cinema and theater operations; and construction and property management.
•
Financial services and bancassurance - universal banking operations, including savings and time
deposits in local and foreign currencies; commercial, consumer, mortgage and agribusiness loans;
leasing; payment services, including card products, fund transfers, international trade settlement and
remittances from overseas workers; trust and investment services including portfolio management,
unit funds, trust administration and estate planning; fully integrated bancassurance operations,
including life, non-life, pre-need and reinsurance services; internet banking; on-line stock trading;
corporate finance and consulting services; foreign exchange and securities dealing; and safety
deposit facilities.
•
Telecommunications - provider of digital wireless communications services, wireline voice
communication services, consumer broadband services, other wireline communication services,
domestic and international long distance communication or carrier services and mobile commence
services.
•
AC Capital - the business unit that oversees the financial performance of subsidiaries other than the
three major businesses of the Group. AC Capital also provides support to subsidiaries’ growth
initiatives and seeks new investment opportunities for the Group that will complement existing
business and further enhance the Group’s value. AC Capital has the following operating segments:
•
Electronics - electronics manufacturing services provider for original equipment manufacturers in
the computing, communications, consumer, automotive, industrial and medical electronics
markets, service provider for test development and systems integration and distribution of
related products and services.
•
Information technology and BPO services - venture capital for technology businesses and
emerging markets; provision of value-added content for wireless services, on-line business-tobusiness and business-to-consumer services; electronic commerce; technology infrastructure
hardware and software sales and technology services; and onshore and offshore outsourcing
1
services in the research, analytics, legal, electronic discovery, document management, finance
and accounting, IT support, graphics, advertising production, marketing and communications,
human resources, sales, retention, technical support and customer care areas.
•
Water utilities - contractor to manage, operate, repair, decommission, and refurbish all fixed and
movable assets (except certain retained assets) required to provide water delivery services and
sewerage services in the East Zone Service Area.
•
Automotive - manufacture and sale of passenger cars and commercial vehicles.
•
International - investments in overseas property companies and projects.
•
Others - air-charter services, agri-business and others.
Based on SEC’s parameters, the significant subsidiaries of Ayala Corporation as of December 31, 2009
are AC International Finance, Ltd. (ACIFL - organized in 1995), Ayala Land, Inc. (ALI - organized in 1988),
and Integrated Micro Electronics, Inc. (IMI - organized in 1980). Except as stated in the succeeding
paragraphs and in the discussion for each of the Company’s significant subsidiaries, there has been no other
business development such as bankruptcy, receivership or similar proceeding not in the ordinary course of
business that affected the registrant for the past three years.
As to the material reclassification, merger, consolidation or purchase or sale of a significant amount
of assets:
In January and October 2009, ALI Group acquired additional 2,295,207 shares of Bonifacio Land
Corporation (BLC) from the Development Bank of the Philippines and Metro Pacific Corporation (MPC)
amounting to P
= 362.6 million.This resulted in an increase in the ALI Group’s effective interest in BLC from
41.10% as of December 31, 2008 to 45.05% as of December 31, 2009.
On August 27, 2009, ALI and the National Housing Authority (NHA) signed a Joint Venture Agreement to
develop a 29.1-hectare North Triangle Property in Quezon City as a priming project of the government and
the private sector. The joint venture represents the conclusion of a public bidding process conducted by the
NHA which began last October 3, 2008.
In various dates in 2009, the Company acquired 40.8 million common shares of Manila Water Company,
Inc. (MWCI) for a total consideration of P
= 572.4 million. This increased the Company’s ownership interest in
MWCI from 29.9% to 31.5%.
On August 14, 2009, a Share Exchange Agreement (the Agreement) was entered into by Stream Global
Services Corp., EGS (a subsidiary of Newbridge), EGS Dutchco B.V. (EGS Dutchco), and NewBridge
International Investment ( a subsidiary of the Company through LiveIT Investments) to combine in a stockfor-stock exchange. Under the Agreement:
•
•
•
NewBridge shall contribute all its rights with respect to the US$35.8 million advances from EGS.
These advances were originally borrowed by EGS from AYC Holdings( a subsidiary of the Company
through ACIFL). AYC Holdings assigned the advances to NewBridge.
NewBridge shall transfer to Stream all the shares of EGS that it owns including shares that would
result from the conversion of the US$35.8 million advances; and,
Stream shall issue and deliver to NewBridge an aggregate of 20,192,068 common shares with
$0.001 par value per share provided that at the election of Stream, Stream may pay an aggregate of
$5,994 in cash for an aggregate of 1,131 shares (at $5.30 per share) of Stream Common Stock
otherwise issuable to NewBridge.
On October 1, 2009 (the Closing Date), NewBridge received a total of 20,190,937 shares of Stream’s capital
stock representing 25.5% interest in Stream and cash amounting to $5,994 in lieu of 1,131 shares. As a
result of the transaction, NewBridge:
2
•
•
•
derecognized its Investment in and Loan Receivable from
$61.5 million and $35.8 million, respectively;
recognized an Investment in Stream amounting to $107.0 million; and,
recognized a gain from the transaction amounting to $8.8 million.
EGS
amounting
to
After the Closing Date, Newbridge acquired additional 320,146 common shares Stream at a total cost of
US$1.9 million. As of December 31, 2009, Newbridge’s effective ownership in Stream is 25.76%
On April 30, 2009, Integreon Managed Solutions Inc. (Integreon), a subsidiary of the Company through
AIVPL, acquired On-Site Sourcing, Inc. (Onsite) for a total consideration of US$6.8 million. On October 30,
2009, Integreon acquired the assets of Grail Research Inc. (Grail), along with the share capital of its
subsidiaries, from the Monitor Group for a total consideration of US$11.8 million.
In May 2009, IMI lost inventories amounting to US$0.6 million (P
= 27.7 million), due to a fire incident in its
plant in Cebu, Philippines. The loss is included under “General and administrative expenses” in the
consolidated statement of income
As of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of Datum Legal,
Inc. (Datum) has been prepared on a preliminary basis. In 2009, purchased price allocation of Datum was
finalized and there were no significant changes to the fair values of the assets acquired and liabilities
assumed.
As of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of ALI Property
Partners Holdings Company (APPHC) and ALI Property Partners Corporation (APPCo.) has been prepared
on a preliminary basis. In 2009, the Group finalized its purchased price allocation and the 2008 comparative
information has been restated to reflect adjustments to the fair values of investment properties and property,
plant and equipment.
On July 31, 2008, the ALI Group acquired additional 4,360,178 shares of BLC from Fort Bonifacio
Development Corporation amounting to P
= 689.0 million, equivalent to 7.66% ownership in BLC. This resulted
in an increase in ALI Group’s effective interest in BLC from 37.23% to 41.10%.
In June 2008, the Company sold 3.8 million shares to Singapore Telecom, Inc. (SingTel) decreasing its
ownership interest in Globe’s common shares from 33.3% to 30.5%. The Company’s gain arising from the
sale of investments in Globe shares amounted to P
= 2.7 billion (see Note 21). The Company also holds 60%
of Asiacom Philippines, Inc., which owns 158.5 million Globe preferred shares. The Company does not
exercise control over Asiacom since it is a joint venture with SingTel.
On September 19, 2008, NewBridge, together with Providence Equity Partners (Providence), entered into a
Definitive Agreement to acquire up to all of the outstanding shares of eTelecare common shares and
American Depository Shares (ADS) for US$9.00 per share. New Bridge and Providence formed a 50-50
joint venture company, EGS Corp. to own 100% of EGS Acquisition Corp. (EGS Acquisition).
On December 12, 2008, EGS Acquisition acquired through a tender offer, 98.7% of the outstanding
eTelecare common shares and ADS for a total consideration of US$285.3 million plus US$9.4 million in
transactions costs. The 22.2% eTelecare shares owned by Newbridge were tendered and included in the
purchase.
On various dates in 2008, the Company converted US$171.88 million of its deposits on future subscriptions
in Azalea International Ventures Partners Ltd. (AIVPL) into equity, increasing the Company’s ownership from
68.71% to 97.78%. Consequently, Azalea Technology’s ownership in AIVPL was diluted from 31.29% to
2.22%.
On May 1, 2008, AIVPL converted its US$124 million deposits on future stock subscription giving it 99.99%
ownership interest in LIL. LSI, which previously held 100% of LIL, now holds 0.01% stake in LIL. LIL carries
the Group’s investments in Integreon Managed Solutions Inc. (Integreon), Affinity Express Inc. and
Newbridge International Investments.
On March 1, 2008, the Company entered into a Deed of Assignment with AIVPL to transfer the Company’s
shares of Bayantrade in exchange for AIVPL’s shares of stocks.
3
In February 2008, PFC Properties, Inc. (PPI), which is 99.85% owned by the Company and 0.15% owned by
other shareholders, was merged into the Company. This was executed via a share swap. The PPI shares
held by the other shareholders, which were valued at P
= 2.62 per share, were exchanged for the appropriate
number of newly issued Company shares valued at P
= 560.00 per share.
On December 19, 2007, the Company entered into a Subscription Agreement with Deed of Conversion of
deposits for future subscriptions with AIVPL whereby the Company converted its deposits into equity by way
of subscription to common shares of stock of AIVPL at an agreed Philippine Peso equivalent amounting to P
=
407.8 million. This resulted in the Company having a direct ownership of 68.71% in AIVPL with Azalea
Technology’s ownership interest in AIVPL reduced to 31.29 % as of December 31, 2007.
On November 29, 2007, the Company entered into a Deed of Assignment with AIVPL where the Company
assigned its 250,000 shares in HRMall, Inc. (with original acquisition cost of P
= 25.0 million representing 100%
of HRMall’s total outstanding stock) in exchange for 583,458 shares of AIVPL (with par value of US$1.00 per
share).
On June 20, 2007, Ayala International Pte. Ltd. (AIPL) and its subsidiaries (AIPL Group) have undergone
restructuring wherein intermediate Hong Kong holding companies, including AG Holdings, were formed such
that BHL became the Company’s holding company for the BHL Group which now includes the AIPL Group.
BHL is a private limited company incorporated under Hong Kong laws.
In 2007, a series of capital calls were made by NTDCC amounting to P
= 484.8 million, increasing ALI’s overall
invested capital to P
= 1,450.0 million or a 49.29% stake.
The contribution of each segment of the business, (in million pesos) to the consolidated revenues of
the Company as well as the business segments present assets and liabilities as of December 31,
2009 and 2008 and revenue and profit information for each of the three years in the period ended
December 31, 2009 are presented in the following tables.
4
2009
AC Capital
Parent
Company
Financial
Real Estate
Services and
and Hotels Bancassurance Telecommunications
Water Utilities
Electronics
Information
Technology and
BPO Services
P
= 4,041
International
Automotive
and Others
P
=–
P
= 11,256
Intersegment
Eliminations
Consolidated
P
=–
P
= 62,627
Revenue
Sales to external customers
Intersegment
P
=–
P
= 28,393
P
=–
P
=–
P
=–
P
= 18,937
–
318
–
–
–
–
(22)
(809)
–
(32)
(264)
–
Equity in net earnings of associates and
4
968
2,707
3,862
1,029
–
Interest income
jointly controlled entities*
1,617
822
–
–
–
35
Other income
1,987
591
–
–
–
323
701
Total revenue
3,608
31,092
2,707
3,862
1,029
19,295
3,916
Operating expenses
1,795
21,857
18,536
4,575
Operating profit
1,813
9,235
2,707
3,862
2,381
1,345
–
13
1,407
–
236
1,165
–
–
5
(394)
(6)
–
7,361
111
3
(96)
2,497
284
(205)
3,809
(155)
128
11,505
(565)
76,294
284
11,452
34
58,533
1,029
759
(659)
(439)
53
(599)
17,761
–
–
82
69
22
19
(96)
3,822
–
–
4
–
2
9
–
1,435
–
–
240
1
(18)
50
25
1,699
Interest expense and other financing
charges
Other charges
Provision for income tax
Income before income associated with
noncurrent assets held for sale
Net income
(817)
5,318
2,707
3,862
1,029
433
(729)
(445)
(25)
(528)
10,805
(P
= 817)
P
= 5,318
P
= 2,707
P
= 3,862
P
= 1,029
P
= 433
(P
= 729)
(P
= 445)
(P
= 25)
(P
= 528)
P
= 10,805
P
= 102,302
P
= 98,700
P
=–
P
=–
P
=–
P
= 14,019
P
= 6,248
P
= 4,276
P
= 2,862
52,517
10,798
–
–
–
2,531
370
Other information
Segment assets
–
(P
= 68,881)
P
= 159,526
Investments in associates and jointly
controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
1,523
–
5,341
10
40
–
71,557
45
(222)
1,396
P
= 154,819
P
= 111,021
P
=–
P
=–
P
=–
P
= 14,029
P
= 11,629
P
= 6,807
P
= 3,277
(P
= 69,103)
P
= 232,479
P
= 45,248
P
= 48,726
P
=–
P
=–
P
=–
P
= 6,241
P
= 3,097
P
= 893
P
= 1,627
(P
= 8,979)
P
= 96,853
–
151
–
–
–
5
42
5
5
P
= 45,248
P
= 48,877
P
=–
P
=–
P
=–
P
= 6,246
P
= 3,139
P
= 898
P
= 1,632
P
= 77
P
= 4,895
P
=–
P
=–
P
=–
P
= 387
P
= 407
P
= 23
P
= 414
P
=–
P
= 6,203
P
=–
P
= 1,794
P
=–
P
=–
P
=–
P
= 997
P
= 339
P
=4
P
= 109
P
=–
P
= 3,243
P
= 116
P
= 1,287
P
=–
P
=–
P
=–
P
= 67
P
= 75
P
=–
P
=3
P
=–
P
= 1,548
–
(P
= 8,979)
208
P
= 97,061
Segment additions to property, plant and
equipment and investment properties
Depreciation and amortization
Non-cash expenses other than depreciation
and amortization
2008
AC Capital
Parent Company
Real Estate
and Hotels
Financial
Services and
Bancassurance
Information
Technology and
BPO Services
Telecommunications
Water Utilities
Electronics
P
=–
P
= 30,679
P
=–
P
=–
P
=–
P
= 20,306
–
63
–
–
–
–
(15)
(122)
International
Automotive
and Others
P
=–
P
= 10,457
–
–
Intersegment
Eliminations
Consolidated
P
=–
P
= 64,053
Revenue
Sales to external customers
Intersegment
P
= 2,611
(48)
–
Equity in net earnings of associates and
jointly controlled entities
7
885
2,145
3,643
907
–
Interest income
1,234
925
–
–
–
53
Other income
3,591
1,331
–
–
–
261
4
178
207
(155)
5,417
Total revenue
4,832
33,883
2,145
3,643
907
20,620
2,486
126
10,740
(273)
79,109
Operating expenses
1,429
24,591
–
–
–
19,387
3,391
271
10,566
(137)
59,498
Operating profit
3,403
9,292
2,145
3,643
907
1,233
174
(136)
19,611
8
(905)
(144)
75
–
7,396
92
1
(70)
2,243
(145)
Interest expense and other financing
2,298
1,050
–
–
–
1,607
12
8
34
(72)
4,937
Other charges
999
376
–
–
–
79
16
117
9
–
1,596
Provision for income tax
197
2,065
–
–
–
109
7
(2)
32
11
2,419
(91)
5,801
2,145
3,643
907
(268)
99
(75)
10,659
charges
Income before income associated with
noncurrent assets held for sale
(562)
( 940)
Income associated with noncurrent
assets held for sale, net of tax
Net income
–
–
–
–
–
P
= 5,801
P
= 2,145
P
= 3,643
P
= 907
P
= 102,725
P
= 92,462
P
=–
P
=–
P
=–
50,857
9,916
–
–
–
795
–
–
–
P
= 153,582
P
= 103,173
P
=–
P
=–
P
= 47,720
P
= 45,248
P
=–
–
162
–
P
= 47,720
P
= 45,410
P
= 84
92
P
= 1,024
(P
= 91)
–
(P
= 562)
–
(P
= 940)
–
(P
= 268)
–
–
–
P
= 99
(P
= 75)
10,659
(P
= 69,121)
P
= 150,914
Other information
Segment assets
P
= 14,603
P
= 4,442
P
= 3,577
P
= 2,226
–
3,906
2,952
510
–
1
53
–
36
248
P
=–
P
= 14,604
P
= 8,401
P
= 6,529
P
= 2,772
(P
= 68,873)
P
= 220,188
P
=–
P
=–
P
= 6,882
P
= 928
P
= 537
P
= 1,140
(P
= 10,640)
P
= 91,815
–
–
–
12
6
6
P
=–
P
=–
P
=–
P
= 6,882
P
= 940
P
= 543
P
= 1,146
P
= 4,918
P
=–
P
=–
P
=–
P
= 731
P
= 646
P
=5
P
= 355
P
=–
P
= 6,739
1,259
–
–
–
936
558
4
91
–
2,940
P
= 462
P
=–
P
=–
P
=–
P
= 166
P
=9
P
= 221
P
=–
P
=–
P
= 1,882
Investment in associates and jointly
controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
–
(P
= 10,640)
68,141
1,133
186
92,001
Segment additions to property, plant and
equipment and investment properties
Depreciation and amortization
Non-cash expenses other than
depreciation and amortization
2007
AC Capital
Parent Company
Real Estate
and Hotels
Financial
Services and
Bancassurance
Electronics
Information
Technology and
BPO Services
Telecommunications
Water Utilities
International
Automotive
and Others
P
=–
P
= 22,962
P
=–
P
=–
–
74
–
–
P
=–
P
= 19,526
P
= 2,129
P
=–
P
= 11,961
–
–
–
–
–
61
804
3,291
4,545
1,233
597
–
–
800
–
(28)
226
68
–
66
11
114
2
(330)
1,693
Intersegment
Eliminations
Consolidated
P
=–
P
= 56,578
Revenue
Sales to external customers
Intersegment
(74)
–
Equity in net earnings of associates and
jointly controlled entities
Interest income
–
9,767
Other income
8,854
1,459
–
–
–
165
22
157
264
(193)
10,728
Total revenue
10,148
25,896
3,291
4,545
800
19,757
2,134
497
12,295
(597)
78,766
Operating expenses
1,819
17,928
–
–
–
17,761
3,036
242
12,024
(143)
52,667
Operating profit
8,329
7,968
3,291
4,545
800
1,996
255
271
(454)
26,099
(330)
(902)
Interest expense and other financing
charges
Other charges
Provision for income tax
3,316
868
–
–
–
215
20
9
22
2
874
–
–
–
21
663
–
10
–
1,570
4,120
140
1,567
–
–
–
150
17
23
63
12
1,972
4,871
4,659
3,291
4,545
800
1,610
223
176
(136)
18,437
Income before income associated with
noncurrent assets held for sale
(1602)
Income associated with noncurrent
assets held for sale, net of tax
Net income
–
599
–
–
–
–
P
= 4,871
P
= 5,258
P
= 3,291
P
= 4,545
P
= 800
P
= 1,610
–
(P
= 1,602)
26
–
P
= 249
P
= 176
–
(P
= 136)
625
P
= 19,062
Please refer also to Note 27 (“Segment Information”) of the Notes to Consolidated Financial Statements of
the 2009 Audited Financial Statements which is incorporated herein in the accompanying Index to Exhibits.
Distribution methods of the company’s products and services – Not applicable as the Company is a
holding company.
Competition
The Company is subject to significant competition in each of the industry segments where it operates.
Please refer to pages 9 – 76 for a discussion on Ayala Land, Inc. (ALI), and Integrated Micro Electronic,
Inc. (IMI), significant subsidiaries, and Globe Telecom (Globe), Bank of the Philippine Islands (BPI), and
Manila Water Company, Inc.(MWCI), significant associates.
Transactions with related parties
The Company and its subsidiaries, in their regular conduct of business, have entered into transactions with
associates and other related parties principally consisting of advances and reimbursement of expenses,
various guarantees, construction contract, and management, marketing, and administrative service
agreements. Sales and purchases of goods and services to and from related parties are made at normal
market prices.
Being a holding company, the Company has no material patent, trademark, or intellectual property right to its
products. The Company’s operating companies, however, may have these material intellectual property
rights, but the dates and terms of their expiration or renewal is not perceived to have a material adverse
effect on the Company. The Company complies with all existing government regulations and environmental
laws, the costs of which are not material. As a holding company, it has no material development activities.
Employees
Ayala Corp. has a total workforce of 120 employees as of December 31, 2009, classified as follows:
Management
Staff
72
48
The Company expects to more or less maintain its number of employees in the next 12 months.
AC Employee's Union successfully renewed its Collective Bargaining Agreement (CBA) for a period of 2
years up to end-2011. AC management had not encountered difficulties with its labor force, and no strikes
had been staged in the past.
In addition to the basic salary and 13th month pay, other supplemental benefits provided by AC to its
employees include: mid-year bonus, performance bonus, monthly rice subsidy, medical expense allocation,
dental benefits, various loan facilities and stock ownership plan among others.
Risks
The Group’s risk management policies are summarized below:
Interest Rate Risk
The Group’s exposure to market risk for changes in interest rates relates primarily to the Company’s and its
subsidiaries’ long-term debt obligations. The Group’s policy is to manage its interest cost using a mix of
fixed and variable rate debt.
Foreign Exchange Risk
The Group’s foreign exchange risk results primarily from movements of the Philippine Peso (PHP) against
the United States Dollar (USD). The Company may enter into foreign currency forwards and foreign
currency swap contracts in order to hedge its USD obligations.
Liquidity Risk
The Group seeks to manage its liquidity profile to be able to service its maturing debts and to finance capital
requirements. The Group maintains a level of cash and cash equivalents deemed sufficient to finance
operations. As part of its liquidity risk management, the Company regularly evaluates its projected and
actual cash flows. It also continuously assesses conditions in the financial markets for opportunities to
8
pursue fund-raising activities. Fund-raising activities may include bank loans and capital market issues both
on-shore and off-shore.
Credit Risk
The Group’s holding of cash and short-term investments exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing only with institutions for which credit limits have been
established. The treasury policy sets credit limits for each counter party. Given the Group’s diverse base of
counterparties, it is not exposed to large contractions of credit risk.
From an organizational standpoint, the respective lead directors/company presidents/chief risk officers have
ultimate accountability and responsibility for ensuring that risk management initiatives at the subsidiary level
are aligned with those of Ayala Corporation. They are responsible for the preparation/submission of risk
reports which reflect that key risks are well-understood, assessed/measured and managed. Internal audit
units provide risk management support by performing regular process audits.
The Audit Committee of the Board meets regularly and exercises an oversight role in managing the risks
involved in the operations of the company.
For further details on the company’s financial condition and operations, please refer to the 2009 Audited
Financial Statements which is incorporated herein in the accompanying index to exhibits.
AC INTERNATIONAL FINANCE LTD. (ACIFL)
This company (registered in the Cayman Islands) organized in 1995, was established, inter alia, to raise
financing for the registrant and its Group. It has not engaged, since incorporation, in any material activities
other than those related to financing and has no regular employees. As such, information required by Part 1,
Paragraph A of Annex C, SRC Rule 12 may not be applicable. ACIFL currently wholly owns AYC Holdings
ltd. which in turn owns 67.7% of IMI.
AYALA LAND, INC. (ALI or Ayala Land)
Organized in 1988 when Ayala Corporation decided to spin off its real estate division into an independent
subsidiary to enhance management focus on its real estate business. ALI went public in July 1991 when its
Class “B” Common shares were listed both in the Manila and Makati Stock Exchanges (the predecessors of
the Philippine Stock Exchange - PSE). On September 12, 1997, the Securities and Exchange Commission
(SEC) approved the declassification of the Company’s common class “A” and common class “B” shares into
common shares.
Products / Business Lines
Ayala Land is the largest and most diversified real estate company in the Philippines. It has organized its
operations into several core businesses and support businesses.
Core Businesses
· Strategic Landbank Management - acquisition, development and sale of large, mixed-use,
masterplanned communities; sale of override units or Ayala Land's share in properties made available to
subsidiaries for development; lease of gas station sites and carparks outside Ayala Center;
·
Residential Business - sale of high-end residential lots and units (including leisure community
developments), middle-income residential lots and units, and affordable housing units and lots; lease of
residential units; marketing of residential developments;
·
Shopping Centers - development of commercial centers and lease to third parties of retail space and
land therein; operation of movie theaters, food courts, entertainment facilities and carparks in these
commercial centers; management and operations of malls which are co-owned with partners;
·
Corporate Business - development and lease or sale of office buildings; sale of industrial lots and lease
of factory buildings; fee-based management and operations of office buildings;
·
Geographic Businesses:
9
Visayas-Mindanao – development, sale and lease of the Company and subsidiaries' product offerings in
key cities in the Visayas and Mindanao regions
International – investment in an Asian real estate private equity fund and a fund management company
Support Businesses
·
Construction – land development and construction of ALI and third-party projects
·
Hotels – development and management of hotels; lease of land to hotel tenants
·
Property management – facilities management of ALI and third-party projects
· Waterworks operations – operation of water and sewage treatment facilities in some ALI projects
In addition to above business lines, Ayala land also derives other income from its investment activities and
sale of non-core assets.
Products / Business Lines (with 10% or more contribution to 2009 consolidated revenues):
Residential development
47%
(high-end lots and units, leisure, upper mid-income
housing, affordable housing)
Shopping centers
15%
Construction
9%
Distribution Methods of Products
The Company’s residential products are distributed to a wide range of clients through various sales groups.
Ayala Land (parent company) has its own in-house sales team. In addition, it has a wholly-owned
subsidiary, Ayala Land Sales, Inc., which employs commission-based sales people. ALI also formed Ayala
Land International Sales, Inc. (ALISI) to tap the overseas Filipino market. ALISI has established
representative offices abroad, particularly in key cities with high concentration of overseas Filipino workers.
In addition, it also developed broker-tie-ups in other countries.
Separate sales groups have also been formed for certain subsidiaries which cater to different market
segments such as Avida Land Corp. (affordable housing) and Alveo Land Corp. (formerly Community
Innovations, Inc.; upper middle-income housing). To complement these sales groups, Ayala Land and its
subsidiaries also tap external brokers.
Development of the business of ALI and its key operating subsidiaries/affiliates during the past three years
Ayala Land, Inc. - parent company (incorporated in 1988), pursued major high-end land development
projects, residential and office condominium development, leisure community project and shopping center
operations. Its ongoing land development projects include Abrio at NUVALI, Ayala Westgrove Heights,
Sonera, Alegria Hills and Ayala Northpoint. Residential condominium projects undertaken in the past three
years included The Residences at Greenbelt (Laguna Tower, San Lorenzo Tower, and Manila Tower).
Shopping center operations at Ayala Center continued while the further redevelopment of both Glorietta and
Greenbelt were pursued. Operation of traditional headquarter-type and BPO buildings likewise continued.
The company also introduced in 2005 its first leisure community project, Anvaya Cove.
Strategic landbank management
Aurora Properties, Inc. (incorporated in 1992) and Vesta Property Holdings, Inc. (incorporated in 1993) are
70% owned by Ayala Land while Ceci Realty, Inc. (incorporated in 1974) is 60% owned. These companies,
joint ventures with the Yulo Family, launched a 1,700-hectare development in Canlubang, Laguna called
NUVALI.
Emerging City Holdings, Inc. and Berkshires Holdings, Inc. (incorporated in 2003), both 50% owned, serve
as ALI’s corporate vehicles in the acquisition of a controlling stake in Bonifacio Land Corp. / Fort Bonifacio
Development Corp. through Columbus Holdings, Inc. in 2003. FBDC continued to sell commercial lots and
condominium units at the Bonifacio Global City while it leased out retail spaces.
Regent Time International Limited (incorporated in 2003), 100% owned by ALI, also owns a stake at Bonifacio
Land Corp. / Fort Bonifacio Development Corp.
Residential development
Alveo Land Corp. (formerly Community Innovations, Inc. incorporated in 2002), 100% owned by ALI,
offers various residential products to the upper middle-income market. Alveo’s projects over the past
10
three years include Verdana Homes Mamplasan, The Columns at Ayala Avenue, The Columns at
Legazpi Village, Celadon Residences and Celadon Park, Two Serendra, Treveia, Marquee, Senta and
Ametta Place.
Avida Land Corp. (incorporated in 1990), a wholly-owned subsidiary, continued to develop affordable
housing projects which offer house-and lot packages and residential lots. Avida also ventured into the
development and sale of farm/hacienda/commercial lots. Project launches in the past three years included
Avida Towers Sucat, Avida Towers New Manila, Avida Towers San Lazaro, Avida Towers Makati West,
Avida Towers San Lorenzo, Avida Settings NUVALI, Avida Settings Cavite and Avida Residences San
Fernando.
Serendra, Inc. (incorporated in 1994), 28%-owned by ALI and 39%-owned by Alveo Land Corp., is engaged
in residential development. In 2004, it launched Serendra, a residential complex at the Bonifacio Global City
in Taguig.
Ayala Greenfield Development Corporation (incorporated in 1997), 50-50% owned by ALI and Greenfield
Development Corporation, started development of Ayala Greenfield Estates in Calamba, Laguna in 1999.
Over the past three years, AGDC continued to develop and sell lots in this high-end residential subdivision.
Roxas Land Corp. (incorporated in 1996), 50% owned, sold-out One Roxas Triangle in 2007. The project
was started in 1996 and was completed in September 2001.
Ayala Land Sales, Inc. (incorporated in 2002), wholly-owned, continued to sell ALI’s residential projects.
ALSI employs commission-based brokers.
Ayala Land International Sales, Inc. (incorporated in 2005), wholly-owned, was formed to tap the overseas
Filipino market. It also sells ALI’s various residential projects.
Shopping centers
Northbeacon Commercial Corporation – formerly Alabang Theatres Management Corporation (incorporated
in 1970), is ALI’s wholly-owned vehicle for its MarQuee Mall in Pampanga which commenced development
in March 2007 and opened in 2009.
Station Square East Commercial Corporation (incorporated in 1989), 69% owned subsidiary of ALI, broke
ground in 2002 for Market! Market!, a 150,000-sqm mall along C-5 Road in Taguig. It opened Phase 1A of
the mall in 2004 and Phase 1B in 2005.
Alabang Commercial Corp. (incorporated in 1978), 50% owned by ALI, continued to manage and operate
the Alabang Town Center.
North Triangle Depot Commercial Corp. (incorporated in 2001), 49% owned by ALI, commenced
development of TriNoma (formerly referred to as North Triangle Commercial Center), a 189,100-sqm mall
constructed at the main depot of MRT-3 in Quezon City. TriNoma broke ground in June 2005 and partially
open in May 2007.
ALI-CII Development Corporation (incorporated in 1997), a 50-50% joint venture with Concepcion Industries,
continued to operate Metro Point, a mid-market mall at the corner of EDSA and Taft Avenue which was
completed in the fourth quarter of 2001.
Accendo Commercial Corp. (incorporated in 2008), 46% owned by ALI, is a joint venture company with the
Floirendo family for the development of Abreeza Mall in Davao City.
Lagoon Development Corporation (incorporated in 1996), 30% owned by ALI, is a joint venture company
with Extraordinary Development Corporation. It continued to operate Pavilion Mall which is located in Biñan,
Laguna.
Ayala Theaters Management, Inc. (incorporated in 1984), 100% owned, continued to manage and operate
theaters at the Ayala Center in Makati.
11
Five Star Cinema, Inc. (incorporated in 2000), also wholly-owned, continued to manage and operate theaters
at the Alabang Town Center.
Food Court Company, Inc. (incorporated in 1997), a 100% owned subsidiary of ALI, continued to manage
and operate a high-end, trend-setting foodcourt known as Food Choices at the Glorietta 4. Similar projects
were also established at the Alabang Town Center expansion area and Ayala Center Cebu.
Leisure and Allied Industries Phils., Inc. (incorporated in 1997), a 50-50% joint venture of ALI with Australian
company, LAI Asia Pte. Ltd., continued to operate family entertainment centers called TimeZone in various
Ayala malls, as well as other malls.
Corporate business
Laguna Technopark, Inc. (incorporated in 1990), 75% owned, continued to sell industrial lots to local and
foreign company locators. It also leases a ready-built factory units within the Laguna Technopark.
ALI Property Partners Holdings Corp. (incorporated in 2006), is the Company’s 60%-owned vehicle for its
partnership with MLT Investments (Goldman Sachs). ALI has an effective stake of 68% in the joint
venture company, ALI Property Partners Corp., which handles various BPO projects and investments.
Asian I-Office Properties, Inc. (incorporated in 2008), is the Company’s 60%-owned vehicle that undertook
the construction of Cebu E Bloc, a BPO building within Asiatown IT Park.
Visayas-Mindanao
Cebu Holdings, Inc. (incorporated in 1988), 47% owned by ALI, continued to manage and operate the Ayala
Center Cebu and sell condominium units and lots within the Cebu Business Park. The company also
launched Amara, a high-end seaside residential subdivision, and continued to sell club shares at City Sports
Club Cebu. Through Cebu Property Ventures Development Corporation, CHI also continued to sell lots at
the Asiatown IT Park.
International
First Longfield Investments Limited (incorporated in 2006) is wholly owned by ALI. Through Green Horizons
Holdings Limited, it has a 17% stake in Arch Capital Management Co. Ltd, the fund management company
established to handle the US$330 million Asian private real estate equity fund which is co-sponsored by ALI
with Ayala Corporation.
Construction
Makati Development Corporation (incorporated in 1974), 100% owned by ALI, continued to engage in
engineering, design and construction of horizontal and low-rise vertical developments. It continued to
service site development requirements of Ayala-related projects while it provided services to third-parties in
both private and public sectors.
Property management
Ayala Property Management Corp. (incorporated in 1957), wholly-owned by ALI, continued to manage
properties of ALI and its subsidiaries. It also provided its services to third-party clients.
Hotels
Ayala Hotels, Inc. (incorporated in 1991), 50% owned, continued to operate Hotel InterContinental Manila
and Cebu City Marriott Hotel. In November 2006, AHI sold its 60% stake in Oakwood Premier Ayala Center
to Ascott Residences.
Bankruptcy, Receivership or Similar Proceedings
None for any of the subsidiaries and affiliates above.
Material Reclassification, Merger, Consolidation or Purchase or Sale of a Significant Amount of
Assets (not ordinary) over the past three years
Other than items listed in Ayala Corporation’s Material Reclassification, Merger, Consolidation, or purchase
or sale, following also form part of ALI’s Material related transactions:
12
Since 2003, Ayala Land has implemented an asset rationalization program involving, among others, the sale
of installment receivables and divestment of some non-core assets.
Asset sales in 2007 included the sale of preferred shares in KHI-ALI Manila, Inc. (KAMI) to Kingdom
Manila, B.V., in connection with the development of a luxury hotel complex within Ayala Center. In 2008,
the Company sold its shares in three subsidiaries (namely Piedmont Property Ventures, Inc., Stonehaven
Land, Inc. and Streamwood Property, Inc.) to Megaworld as well as P1.4 billion of accounts receivable.
There were no large sale transactions in 2009.
Various diversification/ new product lines introduced by the company during the last three years
BPO office buildings and campuses
ALI ventured into the development of office buildings catering to business process outsourcing firms and call
centers in 2004 with the construction of PeopleSupport Center and Convergys. InfoNXX Building was
constructed and completed the following year. In October 2006, ALI signed a Contract of Lease with the
University of the Philippines for a 38-hectare BPO campus project which broke ground in March 2007. As of
end-2008, 10 new BPO buildings were completed and added to ALI’s portfolio, including the first six
buildings of the U.P.-AyalaLand TechnoHub, Solaris along dela Rosa Street in Makati, Vertex San Lazaro,
NUVALI Technopod and Cebu E Bloc.
Competition
ALI is the only full-line real estate developer in the Philippines with a major presence in almost all sectors of
the industry. ALI believes that, at present, there is no other single property company that has a significant
presence in all sectors of the property market. ALI has different competitors in each of its principal business
lines.
With respect to its mall business, ALI’s main competitor is SM Prime whose focus on mall operations gives
SM Prime some edge over ALI in this line of business. Nevertheless, ALI is able to effectively compete for
tenants primarily based on its ability to attract customers -- which generally depends on the quality and
location of its shopping centers, mix of tenants, reputation as a developer, rental rates and other charges.
For office rental properties, Ayala Land sees competition in smaller developers such as Kuok Properties
(developer of Enterprise Building), Robinsons Land (developer of Robinsons Summit Center) and nontraditional developers such as the AIG Group (developer of Philam Towers) and RCBC (developer of
RCBC towers). For BPO office buildings, Ayala Land competes with the likes of Megaworld and
Robinsons Land. Ayala Land is able to effectively compete for tenants primarily based upon the quality
and location of its buildings, reputation as a building owner, quality of support services provided by its
property manager, rental and other charges.
With respect to residential lot and condominium sales, Ayala Land competes with developers such as
Megaworld and Fil-Estate Land. Ayala Land is able to effectively compete for purchasers primarily on the
basis of reputation, price, reliability, and the quality and location of the community in which the relevant
site is located.
For the middle-income/affordable housing business, Ayala Land sees the likes of SM Development,
Megaworld, Filinvest Land and DMCI Homes as key competitors. Alveo and Avida are able to effectively
compete for buyers based on quality and location of the project and availability of attractive in-house
financing terms.
Suppliers
The Company has a broad base of suppliers, both local and foreign.
Customers
Ayala Land has a broad market base including local and foreign individual and institutional clients.
Licenses
Phenix Building System
13
A joint venture agreement between Maison Individuelles, S.A. (MISA) of France and Avida Land was
organized in June 1998 and subsequently registered with the SEC as Laguna Phenix Structures Corporation
(LPSC) in July 1999.
LPSC, a 50%-50% joint venture, is primarily engaged in the business of manufacturing, installation, erection
and construction, marketing and promotion, and wholesaling of buildings, houses and other structures and
accessories using the “Phenix” technology (for which a patent has been registered and issued in the
Philippines under RP Patent No. 29862). Both MISA and Avida Land assigned their respective license rights
to LPSC since the latter’s incorporation.
Tex Building System
By virtue of the license rights granted in 1996, Avida Land operates the manufacturing of pre-cast concrete
panels and columns/other components using the TEX Building System with RP Patent No. 30327.
The on-site battery casting system and the plant facilities were procured from TEX Holdings PLC, a limited
company organized and existing under the laws of England.
Government approvals/regulations
The Company secures various government approvals such as the ECC, development permits, license to
sell, etc. as part of the normal course of its business.
Employees
Ayala Land - parent company has a total workforce of 533 employees (2,234 including operating
subsidiaries’ manpower – both consolidated and equitized companies) as of December 31, 2009. The
Company expects to more or less maintain its number of employees in the next 12 months.
The breakdown of the 533 ALI - parent company employees according to type is as follows:
Business Units
248
Project Development Group
134
Support Group
151
Total
533
In 2007, ALI successfully renewed its Collective Bargaining Agreement (CBA) for a period of 3 years up to
end-2009. In the same year, ALI also rolled out the Employee Housing program for employees of ALI and its
subsidiaries as well as employees of companies in the Ayala Group. The prime objective of the program is
to provide employees who have rendered at least one (1) year of service the privilege of owning an ALI
property at a special price.
Risks
Ayala Land is subject to significant competition in each of its principal businesses. Ayala Land competes with
other developers and developments to attract purchasers of land and condominiums, retail and office
tenants, and customers for the retail outlets, restaurants and hotels in its commercial centers.
However, Ayala Land believes that, at present, there is no single property company that has a significant
presence in all sectors of the property market.
High-End, Middle-Income and Affordable Residential Developments. With respect to high-end land and
condominium sales, Ayala Land competes for purchasers primarily on the basis of reputation, reliability,
price and the quality and location of the community in which the relevant site is located. For the middleincome and affordable housing markets, Ayala Land competes for buyers based on quality of projects,
affordability of units, and availability of in-house financing. Ayala Land is also actively tapping the OFW
market.
Office Space, Retail and Land Rental. For its office rental properties, Ayala Land competes for tenants
primarily based upon the quality and location of the relevant building, the reputation of the building's owner,
the quality of support services provided by the property manager, and rental and other charges. The
Company is addressing the demand from BPOs and call centers through its build-to-suit office buildings and
campus-type developments.
With respect to its retail properties, Ayala Land competes for tenants primarily based upon the ability of the
relevant retail center to attract customers - which generally depends on the quality and location of, and mix
14
of tenants in, the relevant retail center and the reputation of the owner of the retail center- and rental and
other charges. The market for shopping centers has become especially competitive and the number of
competing properties is growing. Some competing shopping centers are located within relatively close
proximity of each of Ayala Land's commercial centers.
Industrial Property Business. The industrial property business is affected by an oversupply which limits
industrial expansion. The entry of China into the World Trade Organization in 2003 poses strong competition
for foreign direct investment. Overall, the industrial property segment is not likely to show significant demand
improvement in the near term.
Hotel Operations. ALI’s hotels, located in key landbank developments and known for their premium
value and service, are generally subject to global business activities, local political stability and security
concerns.
Construction. Ayala Land's construction business benefitted from the strong performance of the construction
industry in recent years, particularly from an uptick in development activities mostly from the residential and
retail sectors. Any sector-wide slowdown in the construction activities could cap growth of ALI’s construction
arm.
Other risks that the company may be exposed to are the following:
-
Changes in Philippine and international interest rates
Changes in the value of the Peso
Changes in construction material and labor costs, power rates and other costs
Changes in laws and regulations that apply to the Philippine real estate industry
Changes in the country's political and economic conditions
To mitigate the above mentioned risks, Ayala Land shall continue to adopt appropriate risk management
tools as well as conservative financial and operational controls and policies to manage the various business
risks it faces.
Working Capital
Ayala Land finances its working capital requirements through a combination of internally-generated cash,
pre-selling, joint ventures and joint development agreements, borrowings and proceeds from the sale of noncore assets and installment receivables.
Domestic and Export Sales
Amounts of revenue, profitability, and identifiable assets attributable to domestic and foreign operations for
2009, 2008 and 2007 follow: (in P 000)
2009
2008
2007
Consolidated revenues
Domestic
30,455,244
33,748,983
25,707,229
Foreign
Net operating income
Domestic
9,034,205
9,330,607
Foreign
Net income (Attributable to equity holders of ALI)
Domestic
4,039,256
4,812,348
Foreign
Total assets
Domestic
Foreign
108,071,463
-
100,452,961
-
7,704,392
4,386,362
-
82,981,245
-
Compliance with leading practice on Corporate Governance
The evaluation system which was established to measure or determine the level of compliance of the
Board of Directors and top level management with its Manual of Corporate Governance consists of a
Customer Satisfaction Survey which is filled up by the various functional groups indicating the compliance
rating of certain institutional units and their activities. The evaluation process also includes a Board
Performance Assessment which is accomplished by the Board of Directors indicating the compliance
15
ratings. The above are submitted to the Compliance Officer who issues the required certificate of
compliance with the Company’s Corporate Governance Manual to the Securities and Exchange
Commission.
To ensure good governance, the Board establishes the vision, strategic objectives, key policies, and
procedures for the management of the company, as well as the mechanism for monitoring and evaluating
Management’s performance. The Board also ensures the presence and adequacy of internal control
mechanisms for good governance.
There were no deviations from the Company’s Manual of Corporate Governance. ALI has adopted in the
Manual of Corporate Governance the leading practices and principles of good corporate governance, and
full compliance therewith has been made since the adoption of the Manual.
ALI is taking further steps to enhance adherence to principles and practices of good corporate
governance.
INTEGRATED MICROELECTRONICS, INC. (IMI)
Background and Business
Integrated Micro-Electronics, Inc. (“IMI or the Company”) is a stock corporation organized under the laws of
the Republic of the Philippines, registered with the Securities and Exchange Commission on August 8, 1980
and listed under the First Board of the Philippine Stock Exchange (PSE) on January 21, 2010. The
Company’s registered office and principal place of business are 33/F Tower One, Ayala Triangle, Ayala
Avenue, Makati City and North Science Avenue, Laguna Technopark, Special Export Processing Zone,
Biñan, Laguna, respectively. The Company is a publicly listed company which is 32.90% owned by AYC
Holdings, Inc.; 23.56% owned by Ayala Corporation; 18.18% owned by Asiacom Philippines, Inc.; 16.92%
owned by Resins, Inc. and the rest by the public. IMI proved that a Filipino-owned company can go global,
transforming its local operations into a global network. IMI has three (3) wholly-owned subsidiaries, namely:
IMI International (Singapore) Pte. Ltd. (“IMI Singapore”), IMI USA, Inc. (“IMI USA”) and IMI Japan, Inc. (“IMI
Japan”).
IMI is registered with the Philippine Economic Zone Authority (PEZA) as an exporter of Printed Circuit Board
Assembly (PCBA), Flip chip assembly, Box build, Sub-assembly, Enclosure system and provider of
electronics product design, research and development, product development outsourcing and other
electronic parts. The Company is also engaged in the business of providing test development and systems
integration services and distributing related products and equipment. These PEZA registrations entitle the
Company to a four-year income tax holiday (ITH) and an option to apply for ITH extension for a maximum of
three (3) years subject to various PEZA requirements wherein projects and activities are qualified.
IMI Singapore was incorporated and domiciled in Singapore. Its wholly-owned subsidiary, Speedy-Tech
Electronics Ltd. (STEL), was incorporated and is domiciled also in Singapore. STEL on its own has
subsidiaries located in Hongkong, China, Singapore and the Philippines. IMI Singapore is engaged in the
procurement of raw materials, supplies and provision of customer services. STEL and its subsidiaries are
principally engaged in the provision of Electronic Manufacturing Services (EMS) and Power Electronics
solutions to original equipment manufacturing customers in the consumer electronics, computer
peripherals/IT, industrial equipment, telecommunications and medical device sectors.
IMI USA is at the forefront of technology with regard to precision assembly capabilities including Surface
Mount Technology (SMT), Chip on Flex (COF), Chip on Board (COB) and Flip Chip on Flex. It specializes in
prototyping low to medium PCBA and sub-assembly. It is also engaged in engineering, design for
manufacturing (DFM) technology, advanced manufacturing process development, new product innovations
(NPI), direct chip attach and small precision assemblies.
IMI Japan was registered and is domiciled in Japan. IMI Japan’s primary purposes is to transact business
with Japanese customers in the following areas: (a) turnkey EMS; (b) engineering and design services; and
(c) original design manufacturing (ODM) solutions. IMI Japan also functions as central program management
for new business in coordination with the Company (wireless), STEL and Subsidiaries (power management)
and IMI USA (film chip). IMI Japan will secure programs/projects from Japanese customers and then
endorse these to the Company or IMI Singapore.
16
As to the material reclassification, merger, consolidation or purchase or sale of a significant amount
of assets – Other than the item cited in Ayala Corporation’s material transaction portion regarding IMI’s
inventory, there are no other material reclassification, merger, consolidation, purchase or sale in 2009.
Operations
Design and Engineering Services
Partnering with IMI allows a complete and successful product development. This is made possible by the
IMI’s capability to design and develop complete products and subsystems, analyze product design and
materials for costs reduction through value and profit engineering, and develop solutions for cost-effective
production and fast time-to-market while safeguarding intellectual property. IMI’s product development and
engineering service offerings include Custom Design Manufacturing (CDM), Advanced Manufacturing
Engineering (AME), Test and Systems Development, New Product Introduction (NPI), Design for
Manufacturability (DFM), Process Engineering, and Quality and Reliability/Failure Analysis.
Manufacturing Solutions
IMI’s comprehensive manufacturing experience allows a prospective client to leverage its strength in RoHScompliant and cleanroom manufacturing process, complex manufacturing using consigned equipment and
materials, complete turnkey manufacturing with multiple materials sourcing sites, ERP-based planning,
purchasing, and manufacturing process, and strategic partnerships with leading materials distributors and
manufacturers. IMI has the essential infrastructure equipment, manpower and quality systems to assure
quick start of operations and turnaround time.
Business Models
IMI recognizes the uniqueness of each customer’s requirements. To satisfy specific requests, IMI offers
flexible business models that allow it to build the perfect assembly for its client’s manufacturing
requirements.
The “Standard” and “Semi-custom” business models pertain to IMI’s Printed Circuit Board Assembly (PCBA)
processes. IMI invests in Surface Mount Technology (SMT) lines which support multiple customer
requirements.
The “Custom” Business Model gives the client a free hand in designing the systems by offering a dedicated
facility manned by an independent and exclusive organization that will build the system from ground up.
Capabilities and Solutions
IMI’s capabilities allow it to take on the specific outsourcing needs of its customers, providing them with
flexible solutions that encompass design, manufacturing, and order fulfilment.
It develops platforms to customize solutions in response to its customers’ unique requirements. Its platforms
in areas like short-range wireless systems, embedded systems, and sensors and imaging technology
represent capabilities to manufacture products.
New manufacturing capabilities are developed by IMI’s Advanced Manufacturing Engineering (AME) group.
Its expertise includes immersion silver process, pre-flow underfill process, thermally enhanced flip chip
technology, traceless flip chip technology, and flip chip on flex assembly, among others.
IMI has a complete range of manufacturing solutions – from printed circuit board assembly to complete box
build.
Logistics
IMI’s mission is to offer strategic and competitive Supply Chain Management for complete order fulfillment of
its Customers. IMI’s turnkey capabilities involve major commodities for direct/indirect materials:
passive/active components, existing vendor base for over 10,000 line items, and Global sourcing in Asia, US
and Europe of over 270 supply base. IMI is not or is not expected to be dependent upon one supplier for raw
materials or other items.
17
IMI’s warehousing capabilities include housing all direct and indirect materials, outsourcing to a third party
logistics provider, satellite warehouses in other IMI plants and under the mySAPTM ERP System.
IMI also has Vendor Partnership Programs on vendor qualification, certification and development.
Product Capabilities
IMI has experience in working with some of the world’s leading companies in the following products:
• Magnetic Disk Drive (HDD, HGA, HSA)
• Suspension for HDD slider
• Voice Coil Motor
• Optical Disk Drive Assembly (CD-ROM/R/ RW, DVD-ROM
COMBO Drive)
• Optical Pick Up Assembly
Storage Devices
Computer Peripherals
•
•
•
•
Computer Keyboard Connector and FPCBA
Computer Printer FPCBA
Computer Telephony Interface/Network Telephony
Software Security Device COB-PCBA
Telecommunications
•
•
•
•
GPS Applications
Bluetooth modules and adaptors
Optical transceiver
Cellular Phone PCBA and COB
Automotive Electronics
•
•
•
•
Bobbin Transformer
Car Antenna
Power Isolation Unit SIP & DIP
Signal Conditioning Devices
Semiconductors
•
•
•
•
•
•
•
•
•
Ethernet Connector
Saw Filter
TCXO
Hybrid IC
Coils
Hail Element
LED/LED Display
Inspection of Advanced IC Packages
Small signal transistors and 3-pin IC
Consumer Electronics
•
•
•
•
•
•
•
•
•
Aircon Damper PCBA
Digital Still Camera
Camera FPCBA
Handy Video Camera FPCBA
CCD Module/PCBA, Hands-Free Car Kit
Electronic Whiteboard Pen
Electronic Ballast
Battery charger
Massager
Industrial Electronics
•
•
•
•
•
•
•
Proximity Cards/ COB Readers
Power Module PCBA
Uninterrupted Power Supply PCBA
Construction/Agricultural Instrument PCBA
Counter PCBA
Ignition Circuit PCBA and Final Assembly
Ignition Coil
18
•
Input/Output Board PCBA
With regard to emerging product capabilities, IMI is pursuing OEMs in the Photovoltaic (PV) or Solar Energy
and Sensor and Imaging fields.
Human Resources
The Company has a total workforce of 13,210 employees as of December 31, 2009, shown in the following
table:
Job Groups
Managers
Supervisors
Rank-and-File
Technicians
Operators
TOTAL
Total
268
1,013
2,009
442
9,478
13,210
Philippines
125
448
747
381
5,587
7,288
China/
Singapore
133
556
1,260
61
3,891
5,901
USA
Japan
Europe
4
6
2
12
3
1
4
3
2
5
The relationship between IMI and employees has always been of solidarity and collaboration from the
beginning of its operations up to the present. The rank and file employees and the supervisory employees of
the Company are not unionized. Hence, there is no existing Collective Bargaining Agreement (CBA)
between the Company and its employees.
At present, IMI does not intend or anticipate hiring any number of employees within the ensuing twelve (12)
months because the current workforce can still cope up with the volume of expected customer orders within
that period.
IMI has existing supplemental benefits for its employees such as transportation and meal subsidy, Group
Hospitalization insurance coverage and non-contributory retirement plan.
IMI has or will have no supplemental benefits or incentive arrangements with its employees other than those
mentioned above.
Strategic Partnerships
IMI has established strategic alliances or partnerships with other world-class companies that complement its
competencies in order to enhance its competitiveness. IMI has forged alliances with manufacturing
companies in the Philippines, United States, and Europe to explore subcontracting opportunities and to
serve as IMI’s virtual fast prototyping facilities for these markets.
IMI forged a strategic alliance with Bus Elektronik, an EMS company based in Riesa, Germany to seek
jointly subcontracting projects from European OEMs and to utilize BuS Elektronik’s facility as fast prototyping
and NPI center of IMI in Europe. On the other hand, IMI’s alliance with PSi Technologies Holdings, Inc., a
power semiconductor assembly and test service provider based in the Philippines, will promote PSi
Technologies’ power semiconductor assembly and test services to its foreign clients while PSi Technologies
markets IMI’s EMS and power electronics ODM capabilities to its own customers.
With a keen eye on the future, IMI has begun to seek opportunities in the renewable energy market, a
growth industry in the worldwide shift toward clean energy sources. Recently it forged a strategic partnership
with Renewable Energy Test Center (RETC), an engineering services, test and certification provider for
photovoltaic (PV) and renewable energy products.
Competition
Industry in which IMI is selling or expects to sell its products or services, and where applicable, any
recognized trends within the industry
19
IMI is an electronics manufacturing services (EMS) provider to original equipment manufacturers (OEMs) in
the computing, communications, consumer, automotive, industrial, and medical electronics segments. The
global financial crisis badly hit the electronics industry across the globe. The electronics end-markets
generally experienced weak demand as corporate and individual consumers reined in spending. This weak
end-market demand coupled with a tight credit situation strained the production of OEMs. Consequently, the
EMS industry experienced lower volume requirements from the OEMs. The EMS revenue is expected to
increase by 4 percent in 2010. First of all, the end-market electronics demand has generally bottomed out by
the end of the second quarter of 2009. Second, there is no question that the economy of the future will be
driven by electronics. Third, OEMs still do in-house more than 60 percent of electronics assembly
operations.
Part of the industry and the geographic area in which the business competes or will compete
IMI competes worldwide, with focus on Asia (including Japan and China), North America, and Europe.
Principal methods of competition (price, service, warranty or product performance)
There are two methods of competition: a) price competitiveness, b) robustness of total solution (service,
price, quality, special capabilities or technology).
Principal competitors that IMI has or expects to have in its area of competition
IMI competes with EMS companies and original design manufacturers (ODMs) all over the world. Some of
its fierce EMS provider competitors include Hon Hai, Flextronics, Kimball, and Hana.
Relative size and financial and market strengths of the registrant’s competitors
Hon Hai is a Taiwanese company with annual revenues of US$62 billion; its cost structure is very
competitive because it is vertically integrated.
Flextronics is a Singapore-headquartered company with annual revenues of US$33 billion; its cost structure
is very competitive as it is vertically integrated.
Kimball is a US company with annual revenues of US$722 million; it is a leading EMS player in the
automotive field.
Hana is a Thai company with annual revenues of US$303 million; it has a semiconductor manufacturing arm.
IMI is the world’s 24th largest EMS provider based on 2009 revenues according to Manufacturing Market
Insider, an EMS trade publication.
Reason why IMI believes that it can effectively compete with the other companies in its area of competition
IMI is focused on delivering customized solutions of highest quality at reasonable prices. It collaborates with
the customers in finding the right solutions to their problems. This expertise has propelled IMI onto the
current list of the top 50 EMS providers in the world and earned for IMI several accolades from its
customers.
Risk Factors
IMI’s business, financial condition and results of operation could be materially and adversely affected by
risks relating to IMI and the Philippines.
IMI’s operating results may significantly fluctuate from period to period
There is a risk that IMI’s operating results may fluctuate significantly. Some of the principal factors affecting
its operating results include:
(1)
changes in demand for its products and services;
(2)
customers’ sales outlook, purchasing patterns, and inventory adjustments;
20
(3)
the mix of the types of services provided to its customers such as: volume of products, complexity of
services, and product maturity;
(4)
the extent to which it can provide vertically integrated services for a product;
(5)
its effectiveness in managing its manufacturing processes, controlling costs, and integrating any
potential future acquisitions;
(6)
its ability to make optimal use of its available manufacturing capacity;
(7)
changes in the cost and availability of labor, raw materials and components, which affect its margins
and its ability to meet delivery schedules;
(8)
its ability to manage the timing of its component purchases so that components are available when
needed for production while avoiding the risks of accumulating inventory in excess of immediate production
needs;
(9)
timing of new technology development and the qualification of its technology by its customers; and
(10)
local conditions and events that may affect its production volumes, such as labor conditions, political
instability, and local holidays.
Due to the factors enumerated above and other risks discussed in this Section, many of which are beyond
IMI’s control, its operating results may vary from time to time.
Furthermore, IMI may not be able to effectively sustain its growth due to restraining factors concerning
corporate competencies, competition, global economies, and market and customer requirements. To meet
the needs of its customers, IMI has expanded its operations in recent years and, in conjunction with the
execution of its strategic plans, IMI expects to continue expanding in terms of geographical reach, customers
served, products, and services. To manage its growth, IMI must continue to enhance its managerial,
technical, operational, and other resources.
IMI’s ongoing operations and future growth may also require funding either through internal or external
sources. There can also be no assurance that any future expansion plans will not adversely affect IMI’s
existing operations since execution of said plans often involves challenges. For instance, IMI may be
required to manage relationships with new or a greater number of suppliers, customers, equipment vendors,
and other third parties. IMI may further be confronted with such issues as shortages of production equipment
and raw materials or components, capacity constraints, construction delays, difficulties in ramping up
production at new facilities or upgrading or expanding existing facilities, and training an increasing number of
personnel to manage and operate those facilities. Compounding these issues are other restraining factors
such as competitors’ more aggressive efforts in expanding business and volatility in global economies and
market and customer requirements. All these challenges could make it difficult for IMI to implement any
expansion plans successfully and in a timely manner.
In response to a very dynamic operating environment and intense industry competition, IMI focuses on highgrowth/high-margin specialized product niches, diversifies its markets and products, engages in higher value
add services, improves its cost structure, and pursues strategies to grow existing accounts.
Moreover, IMI has established a structure that promotes a transparent corporate governance system. It has
an Audit Committee that reviews quarterly and audited annual results of operations. It also has a Finance
Committee that reviews and approves significant financial policies and performs oversight function over the
risk management process of the organization. IMI’s financial statements are certified by a reputable
accounting firm.
IMI is highly dependent on an industry that is characterized by rapid technological changes
The demand for IMI’s solutions is derived from the demand of end customers for electronic products. IMI’s
solutions have end-use applications in the computing, communications, consumer automotive, industrial and
medical electronics industries.
These industries have historically been characterized by rapid technological change, evolving industry
standards, and changing customer needs. If IMI does not promptly make measures to respond to
technological developments and industry standard changes, the eventual integration of new technology or
industry standards or the eventual upgrading of its facilities and production capabilities may require
substantial time, effort, and capital investment.
21
IMI is keeping abreast of current trends and technology in the electronics industry and is continuously
conducting studies to enhance its capabilities and value proposition to its customers. It defines and executes
technology road maps that are aligned with market and customer requirements.
IMI may not be able to mitigate the effects of price declines over the life cycles of its products or as a result
of changes in its mix of new and mature products, mix of turnkey and consignment business arrangements,
and lower competitors’ prices
The price of IMI’s products tends to decline over the product life cycle, reflecting obsolescence, decreased
costs of input components, decreased demand, and increased competition as more manufacturers are able
to produce similar products in large numbers as such products become standardized. Furthermore, the
gross margin for manufacturing services is highest when a product is first developed. IMI’s gross margin may
further decline if competitors lower their prices as a result of decreased costs or to absorb excess capacity,
liquidate excess inventories, or restructure or attempt to gain market share.
IMI is also moving to a higher proportion of its products on turnkey production (with IMI providing labor,
materials and overhead support), as compared to those under the consignment model. The margins on
these turnkey businesses are generally lower than those done on consignment basis.
To mitigate the effects of price declines in IMI’s existing products and to sustain margins, IMI continues to
improve its production efficiency by reducing its input component costs, reducing inventory costs, and
lowering operating costs. IMI must continually drive its costs down. More importantly, IMI is intensifying its
effort in capturing customers with products in high-margin product niches most of which involve emerging
technologies or complex manufacturing processes.
IMI is highly dependent on a relatively small group of key OEM customers for its revenues
IMI depends on a small group of OEM customers for a substantial portion of its net revenues. There is no
guarantee that IMI will retain the business of its existing key customers or the desired level of business with
them. The loss of any key customer’s business would seriously affect its revenues, and it may have difficulty
securing comparable levels of business from other customers to offset any loss of revenue from the loss of
any of its key customers. In addition, IMI may not be able to easily re-allocate its considerable customerspecific resources and assets in a timely manner.
IMI’s periodic credit studies and analysis to assess the financial standing of its existing and new customers
maintaining close relationships with its key customers is essential to its strategy and to the ongoing growth of
its business. Because of this, several customers have been with IMI for several years, the longest has been
doing business with IMI for over 20 years. In addition, IMI may expand its customer base by leveraging its
existing customer relations. Most of IMI’s OEM customers have affiliates in IMI’s target markets. IMI’s ability
to capture outsourcing opportunities from these affiliates depends primarily on its technical and selling skills.
IMI generally does not obtain firm volume purchase commitments from its customers
Customers may place lower-than-expected orders, cancel existing or future orders or change production
quantities. Although IMI’s customers may be contractually obligated to purchase products, IMI may be
unable to or, for other business reasons, choose not to enforce its contractual rights. Cancellations,
reductions, or instructions to delay production by a significant customer could also harm IMI’s operating
results.
In addition, IMI makes significant decisions, including determining the levels of business that it will seek and
accept, production schedules, component procurement commitments, personnel needs, and other resource
requirements.
To the extent possible, IMI negotiates for guaranteed volume and/or volume break pricing, and materials
buy-back to taper the impact of sudden cancellations, reductions, delays in customer requirements.
IMI’s success depends on attracting, engaging and retaining key talents, including skilled research and
development engineers
IMI believes that its people are its most valuable asset and an engaged workforce is an essential element to
the continued success of its organization. IMI is committed to build a workforce with purpose, excitement,
and mutual alignment in order to retain its highly-skilled workers, support and technical staff and
22
management team. It is an organization that keeps abreast of latest trends and developments to fulfill
customer needs to remain in business.
IMI recognizes that its competitiveness is dependent on its key talent pipeline, including leadership, talent
and skill pool, and succession plan. Thus, it has implemented proactive measures to retain employees
through sound retention programs, encouraging work-life balance among its employees, and providing
structured career development paths to promote career growth within the organization and loyalty to IMI. The
Company also believes that in order to sustain IMI’s growth, it will have to continuously attract, develop,
engage and retain skilled workforce highly capable to achieve business goals.
IMI may encounter difficulties with acquisitions it may make in the future
IMI’s globalization strategy has transformed IMI from a Philippines-centric company into a global network
with manufacturing and engineering facilities in the Philippines, China, Singapore and the United States; and
sales offices in Asia, Europe and North America.
IMI’s further growth may depend in part on future acquisitions, which may expose IMI to potential difficulties
that include:
(1)
Diversion of management’s attention from the normal operations of IMI’s business;
(2)
Potential loss of key employees and customers of the acquired companies;
(3)
Difficulties in managing and integrating operations in geographically dispersed locations;
(4)
Lack of experience operating in the geographic market of the acquired business;
(5)
Reduction in cash balance and increases in expenses and working capital requirements, which may
reduce return on invested capital;
(6)
Potential increases in debt, which may increase operating costs as a result of higher interest
payments;
(7)
Difficulties in integrating acquired businesses into existing operations, which may prevent it from
achieving, or may reduce the anticipated synergy.
Mergers and acquisitions (M&As) may have an immediate financial impact to IMI due to:
(1)
Dilution of the percentage of ownership of current stockholders;
(2)
Periodic impairment of goodwill and other intangible assets; and,
(3)
Liabilities, litigations, and/or unanticipated contingent liabilities assumed from the acquired
companies.
If IMI is not able to successfully manage these potential difficulties, any such acquisitions may not result in
any material revenues or other anticipated benefits.
To limit its exposure to these potential difficulties, IMI performs a thorough assessment of the upside and
downside of any M&As. IMI creates a team from Business Development, Business Units, Finance, Legal,
Engineering, and Advisers who examines the vision, long-term strategy, compatibility with IMI’s culture,
customer relationship, technology, and financial stability of IMI to be acquired. All M&As have to be
reviewed by the Executive Committee, Finance Committee, and approved by the Board.
IMI’s production capacity may not correspond precisely to its production demand
IMI’s customers may require it to have a certain percentage of excess capacity that would allow it to meet
unexpected increases in purchase orders. On occasion, however, customers may require rapid increases in
production beyond IMI’s production capacity, and IMI may not have sufficient capacity at any given time to
meet sharp increases in these requirements. To soften the impact of this, IMI closely coordinates with
23
customers which provides them regular capacity reports and action plan/s for common reference and future
capacity utilizations.
IMI may be subject to reputation and financial risks due to product quality and liability issues, respectively;
and may be involved in intellectual property disputes
The contracts IMI entered into with its customers, especially customers from the automotive and medical
industry, typically include warranties that its products will be free from defects and will perform in accordance
with agreed specifications. To the extent that products delivered by IMI to its customers do not, or are not
deemed to, satisfy such warranties, IMI could be responsible for repairing or replacing any defective
products, or, in certain circumstances, for the cost of effecting a recall of all products which might contain a
similar defect, as well as for consequential damages.
In the event IMI is subjected to any infringement claims, IMI may be required to spend a significant amount
of money to develop non-infringing alternatives or obtain licenses. IMI may not be successful in developing
such alternatives or in obtaining such licenses on reasonable terms or at all, which could disrupt
manufacturing processes, damage IMI’s reputation, and affect its profitability.
IMI is not positioned as an original design manufacturer (ODM) so the risk of infringing upon product-related
intellectual property is significantly reduced. IMI’s designs and intellectual properties are used to attract
customers but ultimately, the designs that IMI produces will be owned by the customer. When IMI helps its
customers design their products, IMI exercises proper caution in ensuring that no intellectual property
infringements are committed. It is highly unlikely IMI will enter into any such disputes.
IMI provides appropriate controls to ensure that quality is maintained and continuously improved; and would
not result to losses for the customers and IMI. In addition, IMI and some of its customers maintain projects
that are covered by product recall insurance.
Among others, IMI is certified on ISO 9001:2000 quality management systems and TS 16949:2002, a quality
management system for automotive products. It also received several recognitions from its customers for its
commitment to quality.
Possible failure to comply with environmental regulations could harm IMI’s business
IMI is subject to various national and local environmental laws and regulations in the areas where it
operates, including those governing the use, storage, discharge, and disposal of hazardous substances in
the ordinary course of its manufacturing processes. If more stringent compliance or cleanup standards under
environmental laws or regulations are imposed, or the results of future testing and analyses at IMI’s
manufacturing plants indicate that it is responsible for the release of hazardous substances, IMI may be
exposed to liability. Further, additional environmental matters may arise in the future at sites where no
problem is currently known or at sites that IMI may acquire in the future.
IMI closely coordinates with various government agencies and customers to comply with existing regulations
and continuously looks for ways to improve its environmental and safety standards.
IMI operates in a highly competitive industry
Some of IMI’s competitors in the industry may have greater design, engineering, manufacturing, financial, or
other resources than IMI. Customers evaluate EMS and ODMs based on, among other things, global
manufacturing capabilities, speed, quality, engineering services, flexibility, and costs. In outsourcing, OEMs
seek, among other things, to reduce cost. In addition, major OEMs typically outsource the same type of
products to at least two or three outsourcing partners in order to diversify their supply risks. The competitive
nature of the industry has resulted in substantial price competition. IMI faces increasing challenges from
competitors who are able to put in place a competitive cost structure by consolidating with or acquiring other
competitors, relocating to lower cost areas, strengthening supply chain partnerships, or enhancing solutions
through vertical integration, among others. IMI may lose its customers to its competitors if it fails to keep its
total costs at competitive levels for comparable products.
24
IMI regularly assesses the appropriate pricing model (strategic/value based, demand based, etc.) to be
applied on its quotation to existing or prospective customers. IMI is also strengthening its risk management
capabilities to be able to turn some of the risks (e.g., credit risks) into opportunities to gain or maintain new
or existing customers, respectively.
IMI’s industry is dependent on the continuous growth of outsourcing by the original equipment manufacturers
IMI belongs to an industry that is dependent on the strong and continuous growth of outsourcing in the
computing, communications, consumer automotive, industrial, and medical electronics industries. IMI’s
industry exists because customers choose to outsource certain functions in the production process of certain
machines and equipments in these industries. A customer’s decision to outsource is affected by its ability
and capacity for internal manufacturing and the competitive advantages of outsourcing.
IMI believes that its manufacturing operations in Singapore, Philippines, and several parts of China and its
enhanced supply chain systems and capabilities will continue to provide strategic advantages for customers
to outsource certain functions of their manufacturing processes to IMI.
Demand for services in the EMS industry depends on the performance and business of the industry’s
customers as well as the demand from end consumers of electronic products
The profitability of companies in the same industry as IMI depends on the performance and business of the
industry’s customers, driven by the demand for electronic products by end consumers. If the end-user
demand is low for the industry’s customers’ products, companies in IMI’s industry may see significant
changes in orders from customers and may experience greater pricing pressures. Therefore, risks that could
seriously harm the customers of IMI’s industry could, as a result, adversely affect IMI as well. These risks
include:
(1)
(2)
(3)
(4)
Their inability to manage their operations efficiently and effectively;
Reduced consumer spending in key customers’ markets;
Seasonal demand for their products; and,
Failure of their products to gain widespread commercial acceptance.
IMI mitigates the impact of industry downturns on demand by rationalizing excess labor and capacity to
geographical areas most optimal, and by initiating cost containment programs. There have been recent
indications that the crisis has bottomed out and IMI was able to re-hire some of its employees. However, IMI
remains cautious and is continuously monitoring improvements resulting from its cost containment programs.
IMI’s industry may experience shortages in, or rises in the prices of components, which may adversely affect
business
There is a risk that IMI will be unable to acquire necessary components for its business as a result of strong
demand in the industry for those components or if suppliers experience any problems with production or
delivery.
To the extent possible, IMI works closely with customers to ensure that there is at least one back up supplier
or manufacturer for customer-supplied components or components supplied by customer-nominated
suppliers. In addition, IMI has established supplier certification and development programs designed to
assess and improve suppliers’ capability in ensuring uninterrupted supply of components to IMI.
IMI may be exposed to risk of inventory obsolescence and working capital tied up in inventories
Like other EMS and ODMs, IMI may be exposed to a risk of inventory obsolescence because of rapidly
changing technology and customer requirements. Inventory obsolescence may require IMI to make
adjustments to write down inventory to the lower of cost or net realizable value, and its operating results
could be adversely affected. IMI realizes these risks and as a result, IMI exercises due diligence in materials
planning and provides provision in its inventory systems and planning. IMI is working with key suppliers to
establish supplier-managed inventory arrangements that will make the supplier responsible for carrying
inventory.
IMI’s international operations expose it to various business, economic, political, regulatory, and legal risks
25
IMI has operations in Singapore, Hong Kong, China, and United States of America. These international
operations expose IMI to numerous risks and challenges, including:
(1)
managing operations that require coordination of communications, directions for the manufacture
and delivery of products, coordination regarding procurement and delivery of components and raw materials,
and other activities and decisions of different management teams;
(2)
coordinating the activities of senior management who are spread out internationally;
(3)
reversal of currently favorable policies encouraging foreign investment or foreign trade by host
countries could lead to the imposition of government controls, changes in tariffs or trade restrictions on
component or assembled products;
(4)
the burden of complying with a variety of foreign laws, including delays or difficulties in obtaining
import and export licenses, and regulations and unexpected changes in legal and regulatory environments,
including changes to import and export regulations and duties;
(5)
lower levels of protection for intellectual property rights in some countries;
(6)
potentially adverse tax consequences, including tax consequences which may arise in connection
with inter-company pricing for transactions between separate legal entities within a group operating in
different tax jurisdictions, and overall increases in duties and taxation;
(7)
potential foreign exchange and repatriation controls on foreign earnings, exchange rate fluctuations,
and currency conversion restrictions;
(8)
lack of developed local infrastructure, transportation and water supply, and difficult and costly local
staffing and sourcing of raw materials or components in some countries;
(9)
actions which may be taken by foreign governments pursuant to any trade restrictions; and
(10)
possible labor unrest and political economic instability.
A substantial portion of IMI’s manufacturing operations is located in China, which has regulated financial and
foreign exchange environment. IMI continuously evaluates the options available to the organization to
ensure maximum usage of excess liquidity. Among others, excess liquidity may be repatriated out of China
through dividend payments, payment of management service or royalty fees, use of leading and lagging
payment, and transfer pricing.
IMI applies conservative financial and operational controls in the management of its business risks.
Organizationally, it is the lead director/company president/chief risk officer who has ultimate accountability
and responsibility to ensure risk management initiatives at subsidiaries operating in various countries all over
the world are aligned with IMI and are responsible for submission of risk reports to ensure key risks are well
understood, assessed/measured and reported. Providing support is the internal audit unit who regularly
process audits and process improvements.
The Audit Committee of the Board meets regularly and performs its oversight role in managing the risks
involved in the operations of IMI. The Board appointed a Chief Risk Officer who oversees the entire risk
management function and is responsible for overall continuity. Moreover, Sycip Gorres velayo & Co. (SGV)
has been engaged as a risk management consultant which is overseen by the Finance Committee of the
Board. In terms of internal control risks, control mechanisms, systems and policies had been put in place in
order to address any control lapses.
IMI has adopted various Risk Management Policies like hedging policy that will protect company’s position
on different currencies against movements of the US dollars. Limits on business transactions have been set
with different sites following IMI guidelines on limit of authorities granted to IMI officers and executives. IMI
has also introduced and adopted Enterprise Wide Risk Management program that will identify all risks
related to the business and also identify risk mitigating factors to manage the risk.
While IMI tries to keep its local expertise, it also established global functions to ensure that there is adequate
coordination of activities Moreover, on a need be basis, IMI seeks the help of consultants and subject matter
experts for changes in laws and regulations that may have a significant impact in IMI’s business operations.
It also maintains good relationship with local government, customs, and tax authorities through business
transparency and compliance and/or payment of all government related dues on time.
26
IMI’s subsidiary in China has created a full-time tax management function to ensure compliance with tax
rules and regulations. It also aggressively pursued hiring of experienced logistics managers and staff from
global electronics companies operating in China.
IMI signs unilateral and bilateral agreements with customers, vendors, and partners to restrict or limit the
use of the recipient of confidential information.
With respect to legal proceedings involving IMI, AG Counsellors Corporation (AGCC) group analyzes its
transactions and activities to ensure compliance with law, regulation, and contractual obligations. In the
event that material litigation against it does arise, IMI assesses the merits of the case and its impact on
company operations. IMI refers the case to AGCC and if needed, the Company retains external counsel to
help in the analysis or handle the actual litigation of the case.
IMI has a Business Continuity Plan composed of, among other components, the ICT Systems Continuity
Plan and the Disaster Recovery Plan.
IMI’s HR ensures that IMI is able to inspire all its employees from different sites through a common vision,
that employees find greater meaning in the work they do, and more importantly, employees are convinced
that rewards and recognition are linked to contribution and performance.
IMI has been able to overcome major crises brought about by economic and political factors affecting the
country where it operates. The strong corporate governance structure of IMI and its prudent management
team are the foundations for its continued success. IMI also constantly monitors its macroeconomic risk
exposure, identifies unwanted risk concentration, and modifies its business policies and activities to navigate
such risks. Severe macroeconomic contractions may conceivably lead IMI to tweak or modify its investment
decisions to meet the downturn. As a holding company, IMI will affirm the principles of fiscal prudence and
efficiency in operations to its subsidiaries operating in various countries.
IMI faces risks related to foreign currency exchange rates
Because IMI does business in various countries, IMI is exposed to foreign currency fluctuations, which IMI
may not be able to control by matching currencies for its assets and liabilities, and forward foreign currency
exchange rate arrangements. IMI also faces the risk that foreign exchange policies in countries where it
operates may change in ways that could adversely affect its business. IMI regularly performs cash flow
analysis from each site to determine amount of foreign currency exposure to be hedged. IMI’s Finance
Committee of the Board regularly reviews IMI’s foreign currency strategies for guidance and proper
execution.
IMI may suffer business interruptions resulting from “Acts of God” and global events
“Acts of God” and global events like health pandemics and external factors like terrorism, acts of war,
political and social turmoil may disrupt production activities, transportation, and distribution. These
uncertainties could limit the capabilities of IMI to accurately plan future business activities.
IMI continues to look for opportunities to expand its operations to other location or countries that will provide
competitive advantages through its location, products, labor skills, and costs. While these expansions may
bring in new risks, it also reduces the risk that IMI may be adversely affected by political and regulatory risks
specific to each location or country.
In addition, IMI has well established business contingency plans to reduce the impact of these events to our
operations. IMI is also adequately covered with insurance against possible losses resulting from these
disasters.
Risks relating to the Philippines or other country where IMI operates
The financial performance of IMI and its subsidiaries, as well as their business prospects, may be influenced
by the general political and peace and order situation in the Philippines or the country in which it operates
and the state of the country’s economy, all of which are beyond IMI’s control. Any actual or perceived
political and economic instability may adversely affect, directly or indirectly, IMI’s business and ultimately, its
financial performance. Any potential investor in, and buyer of, the Subject Shares should pay particular
27
attention to the fact that IMI and its subsidiaries are governed in the Philippines or in the country in which
they respectively operate by a legal and regulatory system which, in some respects, may differ from that
obtaining in other countries.
Corporate Governance
Good Governance at IMI. IMI is committed to the highest level of good governance throughout the
organization, as well as to fostering a corporate culture of integrity and empowering leadership.
This governance is anchored on the belief in a strong link between quality governance and the creation of
shareholder value and long-term growth.
IMI is revising its Manual of Corporate Governance in compliance with SEC Memorandum Circular No.6,
Series of 2009 – Revised Code of Corporate Governance.
Board Structure and Process. IMI’s eleven-person Board of Directors primarily represents the shareholders
to whom it is accountable for creating and delivering value through the effective governance of the business.
Stockholders elect the directors annually.
The Board represents a mix of competencies, with each director capable of adding value and exercising
independent judgment. Meetings are held at least quarterly, or as often as necessary for the Board to fulfill
its role. The Board has established committees to assist in exercising its authority, including monitoring the
performance of the business. Five committees support the Board in the performance of specific functions
and to aid in good governance: Executive Committee, Compensation Committee, Audit Committee, Finance
Committee, and Nomination Committee.
The Executive Committee acts on such specific matters within the competence of the Board as may
occasionally be delegated to the Executive Committee by the Board, except with respect to any action for
which shareholders’ approval is also required.
The Compensation Committee establishes a formal and transparent procedure for developing a policy on
executive remuneration and for fixing the remuneration packages of corporate officers and directors.
The Audit Committee oversees IMI’s internal control and financial reporting on behalf of the Board of
Directors.
The Finance Committee supervises the implementation of an enterprise-wide risk management program and
oversees major financial policies.
The Nomination Committee ensures that all nominees for directors for election at the annual stockholders
meeting have all the qualifications and none of the disqualifications of directors.
Management. Management is primarily accountable to the Board of Directors for the operations of IMI. It
concretizes IMI’s targets and formulates the strategies to achieve these.
To further enhance its corporate governance infrastructure, IMI launched a group-wide enterprise risk
management program to ensure that risk management activities are consistently applied, integrated, aligned
and well coordinated across the organization. A Chief Risk Officer (CRO) is the ultimate champion of
enterprise risk management at IMI and oversees the entire risk management function.
Code of Conduct. IMI and its employees commit to live the following values: Integrity, Customer Focus,
Concern for Others, and Excellence.
IMI has adopted a Code of Conduct in line with the Electronics Industry’s Code of Conduct. All employees of
IMI are expected to comply with this policy, which outlines the standards to ensure that working conditions in
IMI are safe, that workers are treated with respect and dignity and that the manufacturing processes are
environmentally responsible.
28
IMI operates in full compliance with the laws, rules and regulations of the countries in which it operates and
recognizes international standards in order to advance social and environmental responsibility.
Investments in Bank of the Phil. Islands (BPI or the Bank), Globe Telecom (Globe) and Manila Water
Co., Inc. (MWC) are significant associates. Their summarized financial information are therefore
presented separately.
BANK OF THE PHILIPPINE ISLANDS
Bank of the Philippine Islands (BPI or the Bank) - balance sheets and income statements are shown
below:
Balance Sheets
(In Million Pesos)
DECEMBER 31
2009
2008
Total Resources
724,420
666,612
Total Liabilities
Capital Funds for Equity Holders
Minority Interest
656,655
66,798
967
602,740
62,934
938
Total Liabilities and Capital Funds
724,420
666,612
Statements of Income
(In Million pesos)
DECEMBER 31
2009
2008
Interest Income
Other Income
Total Revenues
33,887
12,993
46,880
33,297
10,321
43,618
Operating expenses
Interest expense
Impairment losses
Provision for Income Tax
Total Expenses
19,676
12,485
2,535
3,519
38,215
18,312
13,834
1,930
2,985
37,061
Net Income for the period
8,665
6,557
8,516
149
8,665
6,423
134
6,557
2.62
1.98
Attributable to:
Equity holders of BPI
Minority Interest
EPS:
Based on 3,246,597K common shares as of
December 31, 2009 and 3,245,710K common shares
as of December 31, 2008
(1)
Business Development
BPI is the third largest commercial bank in the country in terms of total assets. It has a significant
market share in deposits, lending, asset management and trust business and OF remittances. It
29
enjoys a significant presence in the finance and operating lease business, government securities
dealership, securities distribution and foreign exchange business. BPI is a recognized leader in
electronic banking, having introduced most of the firsts in the industry, such as automated teller
machines (ATMs), a point-of-sale debit system, kiosk banking, phone banking, internet banking and
mobile banking.
Historical Background. Founded in 1851, BPI is the country’s oldest bank and was the issuer of the
country’s first currency notes in 1855. It opened its first branch in Iloilo in 1897 and pioneered in
sugar crop loans thus paving the way for Iloilo and Negros to emerge as prime sugar exporters. It
also financed the first tram service, telephone system, and electric power utility in Manila and the
first steamship in the country.
Business Evolution. In the post World War II era, BPI evolved from a purely commercial bank to a
fully diversified universal bank with activities encompassing traditional commercial banking as well
as investment and consumer banking. This transformation into a universal bank was accomplished
mainly through mergers and acquisitions in the eighties when it absorbed an investment house, a
stockbrokerage company, a leasing company, a savings bank, and a retail finance company.
BPI consummated three bank mergers since the late 1990s. In 1996, it merged with City Trust
Banking Corporation, a medium sized bank, which further solidified its stronghold in consumer
banking, and in 2000, it consummated the biggest merger then in the banking industry when it
merged with the former Far East Bank & Trust Company (FEBTC). This merger established its
dominance in the asset management & trust services and branch banking as well as enhanced its
penetration of the middle market. In 2000, it also formalized its acquisition of three major insurance
companies in the life, non-life and reinsurance fields, a move that further broadened its basket of
financial products. In 2005, BPI acquired and merged with Prudential Bank, a medium sized bank
with a clientele of middle market entrepreneurs.
BPI evolved to its present position of eminence via a continuing process of enhancing its array of
products and services while attaining a balanced and diversified risk structure that guaranteed the
stability of its earning streams.
Business Milestones (2007-2009).
In April 2007, BPI obtained a UK Banking licence from the Financial Services Authority to operate
the Bank of the Philippine Islands (Europe) Plc, a wholly owned subsidiary. This was officially
opened to the public in October 2007. This will serve as the bank’s gateway to all countries in the
European Union and the rest of Europe.
In October 2008, BPI, Ayala Corporation and Globe Telecom signed a Memorandum of Agreement
to form the country’s first mobile microfinance bank. In October 2009, the Bangko Sentral ng
Pilipinas approved the sale/transfer of equity shares of BPI in Pilipinas Savings Bank, Inc. (PSBI)
consistent with agreed ownership structure at 40% each for BPI and Globe Telecom, Inc and 20%
for Ayala Corporation. The new venture will be known as BPI-Globe BanKO.
BPI-Globe BanKO is the first mobile savings bank in the Philippines with microfinance as its main
thrust. It will extend wholesale microfinance loans as well as provide other microfinance products
such as micro loans, microsavings and microinsurance to microentrepreneurs thru partnership
arrangement with microfinance institutions. BPI-Globe BanKO will use mobile technology to deliver
financial services and expand its retail client base.
In 2009, BPI entered into a strategic bancassurance partnership with The Philippine American Life
Insurance Company (Philamlife) to form BPI-Philam Life Assurance Corp. The joint venture aims to
benefit from the combined synergies, first-class resources and strength of two of the leading
financial companies in the Philippines. Philamlife will bring insurance distribution, product
development, and innovation to the joint venture, while gaining exclusive access to BPI’s customer
base via its extensive branch network. BPI will have reciprocal access to Philamlife’s customers for
cross selling bank products.
Principal Subsidiaries. The bank’s principal subsidiaries are:
30
(2)
(1)
BPI Family Savings Bank, Inc. (BFSB) serves as BPI’s primary vehicle for retail deposits,
housing loans and auto finance. It has been in the business since 1985.
(2)
BPI Capital Corporation is an investment house focused on corporate finance and the
securities distribution business. It began operations as an investment house in December
1994. It merged with FEB Investments Inc. on December 27, 2002. It wholly owns BPI
Securities Corporation, a stock brokerage company.
(3)
BPI Leasing Corporation is a quasi-bank concentrating on lease finance. Its quasi-banking
license was inherited from the merger with Citytrust Investment Phils. Inc. in May 1998. It
was originally established as Makati Leasing and Finance Corporation in 1970. It merged
with FEB Leasing & Finance Corporation on February 20, 2001. It wholly owns BPI Rental
Corporation which offers operating leases.
(4)
BPI Direct Savings Bank is a savings bank that provides internet and mobile banking
services to its customers. It started operating as such on February 17, 2000 upon approval
by the Bangko Sentral ng Pilipinas.
(5)
BPI International Finance Limited, Hong Kong is a deposit taking company in Hong Kong. It
was originally established in August 1974.
(6)
BPI Express Remittance Corp. (U.S.A) is a remittance center for overseas Filipino workers
and was incorporated on September 24, 1990.
(7)
Bank of the Philippine Island (Europe) Plc was granted a UK banking license by the
Financial Services Authority (FSA) on April 26, 2007. It was officially opened to the public
on October 1, 2007. In July 2008, BPI Europe was permitted by the FSA to carry out crossborder services in other EEA Member States.
(8)
Ayala Plans, Inc. is BPI’s wholly owned pre-need insurance company acquired through the
merger with Ayala Insurance Holdings Corp (AIHC) in April 2000.
(9)
BPI/MS Insurance Corporation is a non-life insurance company formed through a merger of
FGU Insurance Corporation and FEB Mitsui Marine Insurance Company on January 7,
2002. FGU and FEB Mitsui were acquired by BPI through its merger with AIHC and FEBTC
in April 2000.
Business of Issuer
Principal Products & Services
The bank has two major categories for products & services. The first category covers its deposit
taking and lending / investment activities. Revenue from this category is collectively termed as net
interest income and accounts for about 62% of revenues. The second category covers services
other than and auxiliary to the core deposit taking, lending, and investing business and from which
is derived commissions, service charges & fees from turnover volume. These include investment
banking & corporate finance fees, asset management & trust fees, foreign exchange, securities
distribution fees, securities trading gains, credit card membership fees, rental of bank assets,
income from insurance subsidiaries and service charges/ commissions earned on international
trade transactions, drafts, fund transfers, various deposit related services, etc. Non-recurring
gains are derived from the disposal of foreclosed/acquired properties.
Foreign Offices Contribution
Share in Total Revenue (%)
Hongkong
USA
Europe
2007
2008
2009
1.82
2.12
1.63
0.72
0.35
0.75
0.39
0.42
1.30
0.28
0.38
0.98
31
Share in Total Net Income (%)
Hongkong
USA
Europe
1.78
0.98
-0.04
1.51
0.11
0.16
0.42
(0.25)
0.82
0.14
0.09
(0.26)
Distribution Network
BPI has 809 branches across the country, including 115 Express Banking Centers (EBCs) by the
end of 2009. EBCs are kiosk branches much smaller than the traditional branch but fully equipped
with terminals allowing direct electronic access to product information and customers’ accounts as
well as processing of self service transactions. They serve as sales outlets in high foot traffic areas
such as supermarkets, shopping malls, transit stations, and large commercial establishments.
Outside the country, BPI operates three (3) branches – BPI International Finance Limited in Hong
Kong and Bank of the Philippine Islands (Europe) Plc’s two (2) branches in London.
BPI’s ATM network, known as the ExpressNet, complements the branch network by providing
banking services to its customers at any place and time of the day. As of December 2009, the
ExpressNet consortium had a total of 3,767 ATMs servicing its customers nationwide. And with the
interconnection with Megalink and Bancnet since 1997 and 2006, respectively, BPI ATM cardholders
have access to almost 9,000 ATMs. BPI’s ATM network is likewise interconnected with the Cirrus
International ATM network and Visa International. In addition, BPI operates an Express Payment
System (point-of-sale/debit card system) involving 24,790 terminals in major department stores,
supermarkets, and merchant establishments. This facility, interconnected with the Maestro
international POS network, allows customers to pay for purchases electronically through their ATM
cards.
The BPI Express Phone Facility enables BPI depositors to inquire account balances and latest
transactions, request for bank statements, transfer funds to other BPI accounts real time, pay for
their various bills (e.g., PLDT, Meralco, club dues, insurance premiums) and reload prepaid cell
phones electronically. To further enhance the Express Phone facility, a Call Center was established
in 1998 to provide phone banker assisted services to its customers.
In 2000, BPI launched its B2C web-based platform, Express Online (EOL), which provides all the
transactional services available through the Express Phone plus the real-time convenience of
viewing transactional history and balances on screen. EOL now also allows investment transactions
through its BPI Trade platform where customers can invest in equities without the need of any dealer
or broker.
The bank also has the BPI Express Mobile, a mobile banking platform. Upgraded with the telcoagnostic Mobile Banking Applet, an internet based application, BPI Express Mobile provides
customers with an Express Online-like platform in their mobile phones. BPI Express Mobile is also
equipped with a Mobile Mall facility that enables clients to order and pay purchases at partner
establishments. In addition, it also has Mobile Commerce application, which aims to assist
entrepreneurs as it functions as an inventory manager. With this facility, client can order their goods,
pay for them via debit from their deposit accounts, and have the good delivered to their offices.
BPI also maintains a specialized network of remittance centers for servicing overseas remittances
from Filipinos working abroad. To date, BPI has 21 Remittance Centers and Desks located in Hong
Kong, USA and Europe. BPI also maintains tie-ups with various foreign entities in locations where
this mode of operation is more effective and cost-efficient.
On the lending side, BPI maintains 8 Business Centers across the country to process loan
applications, loan releases, and international trade transactions, and provide after-sales servicing to
both corporate and retail loan accounts.
Competition
32
Mergers, acquisitions and closures trimmed down the number of players in the industry from a high
of 50 upon the liberalization of rules on the entry of foreign banks to 38 universal and commercial
banks in 2009.
In 2009, industry lending posted a substantial 10.0% growth. Loans growth was broad based.
Corporate lending though remained to be very competitive. Lending to multinational and top tier
companies waned on higher liquidity and access to the capital market. Loans to the middle and SME
markets were however healthy due to financing requirements of certain industries. Net interest
spreads however improved as the banks slowly moved towards a risk based pricing approach to
lending in view of the global financial crisis.
The anemic demand for corporate loans in the previous years prodded banks to venture more
extensively into consumer lending. BPI, being a well-entrenched, long-term player enjoys the
advantage of having an undisputed depth of experience in this demanding business that spans
origination/credit selection, collection, and asset recovery activities.
The overseas Filipinos (OFs) remained to be the focus market among banks as it continued to
contribute significantly to the economy. In view of this, BPI continued to strengthen its stake in this
segment by actively cross selling products other than the remittance service and exhibited growth in
OF deposits and housing loans. Over the years, redeployment and migration is seen to be a
preferred option for Filipino workers and professionals as long as the domestic economy can not
provide meaningful employment.
Based on required published statements by the Bangko Sentral ng Pilipinas (BSP) as of December
2009, BPI is the third largest bank operating in the country in terms of assets, loans, deposits, and
capital and second in terms of asset management and trust business. Total assets of BPI based on
PFRS compliant audited financial statement are higher though than the published statements
prepared along BSP standards.
Patents, Trademarks, Licenses, Franchises, etc.
BPI sells its products and services through the BPI trademark and/or trade name. All its major
financial subsidiaries carry the BPI name e.g. BPI Family Savings Bank, BPI Capital, BPI Securities,
BPI Leasing, BPI Direct Savings, and so do its major product & service lines.
In addition to the BPI trademark, it markets its products through the “Express” brand name e.g.,
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
BPI Express, for its mini branches
Express Banking Center, for its banking kiosks
Express Loan Center, for the banking kiosks of BPI Family Savings Bank
Express Teller, for its ATM
Express Deposit Service, for its cash acceptance machine
Express Payment System or EPS, for its debit card system
ExpressNet, for its shared ATM network
Express Credit, for its credit cards
Express Cash, for its electronic cash card
Express Phone, for its call center facility
Express Online, for its internet based transaction platform for retail customers
Express Mobile, for its mobile banking facility
ExpressLink, for its internet based transaction platform for corporate customers
Express Collect, for its corporate deposit related services
At BPI Family Savings Bank, the product trademarks include the Build your Dream Housing Loan,
the Drive your Dream Auto Loan, the Grow your SME Business Loan, the Live your Dream Credit
Line and Ride your Dream Motorcycle Loan . Other product brands of BPI and BFSB are Maxi-One,
Platinum Savings, Multi-Earner Savings, Jumpstart Savings, Save-up, Maxi-Saver, Get Started
Savings Account and Plan Ahead Time Deposit. BPI Direct Savings bank products are BPInoy
Savings, BPInoy Housing Loan, BPInoy Auto Loan and BPI Direct Save-Up.
In terms of corporate business licenses, BPI has an expanded commercial banking license while BPI
Family Savings Bank and BPI Direct Savings have savings bank licenses. Both BPI and BPI Direct
33
Savings have e-banking licenses. BPI Capital Corporation has an investment house license. BPI
Leasing has a finance company as well as quasi-banking license.
Related Parties
BPI extends loans to its Directors, Officers, Stockholders and their Related Interests or DOSRI in the
normal course of business and on equal terms with those offered to unrelated third parties. The
BSP imposes an aggregate ceiling of 15% of the bank’s loan portfolio for these types of loans with
the unsecured portion limited to thirty percent (30%) of the outstanding loans, other credit
accommodations and guarantees. As of December 31, 2009, DOSRI loans amounted to 2.2% of
loans and advances as per Note 32 of the 2008 Audited Financial Statements.
Government Regulations
Under the General Banking Act, the Monetary Board of the BSP is responsible for regulating and
supervising financial intermediaries like BPI. The implementation and enforcement of the BSP
regulations is primarily the responsibility of the supervision and examination sector of the BSP.
The General Banking Act was revised in 2000. The revisions allow (1) the issuance of tier 2 capital
and its inclusion in the capital ratio computation, and (2) the 100% acquisition of a local bank by a
foreign bank. The second item removes the advantage of a local bank over a foreign bank in the
area of branching. In 2005, the BSP issued Circular no. 494 covering the guidelines in adopting the
provision of Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards
(PAS) effective the annual financial reporting period beginning 1 January 2005. These new
accounting standards aim to promote fairness, transparency and accuracy in financial reporting.
The Special Purpose Vehicle Law was passed in 2002 and allows the creation of special purpose
vehicles (SPV) to invest in and acquire non-performing assets of financial institutions. Transactions
eligible under the law are exempt from capital gains tax. In April 2006, the law was amended to
allow further registration of SPVs for a period of 18 months. Sellers who may incur losses in their
transactions which may result in negative tax positions may utilize their NOLCO for a maximum
period of 5 years.
Research and Development Activities
BPI spent the following for the last three years (in millions):
2007
2008
2009
209.3
200.8
215.5
% of Revenues
0.6
0.7
0.6
Employees
Below is a breakdown of the manpower complement of BPI in 2009 as well as the approved
headcount for 2010.
December 31, 2009
2010
Officers
Staff
Total
Plan
Unibank
3,417
8,132
11,549
11,861
Insurance Companies
118
488
606
339
TOTAL
3,535
8,620
12,155
12,200
Majority of the rank and file employees are members of various unions. New Collective Bargaining
Agreements (CBAs) of the parent company with the employees union in different areas were
concluded/signed from July 28, 2009 to September 18, 2009. The new CBA covers the period April
2009 – March 2011.
Risk Management
34
The Bank employs a disciplined approach to managing all the risks pertaining to its business to
protect and optimize shareholder value. The risk management infrastructure covers all identified risk
areas. Risk management is an integral part of day-to-day business management and each
operating unit measures, manages and controls the risks pertaining to its business. Functional
support on policy making and compliance at the corporate level is likewise provided for the major
risk categories: credit risks, market risks and operating risks. Finally, independent reviews are
regularly conducted by the Internal Audit group, regulatory examiners and external auditors to
ensure that risk controls are in place and functioning effectively.
Credit risk continues to be the largest single risk that the bank faces. Credit risk management
involves the thorough evaluation, appropriate approval, management and continuous monitoring of
counterparty risk, product risk, and industry risk relating to each loan account and/or portfolio. The
credit risk management process of the Unibank is anchored on the strict implementation of credit risk
management policies, practices and procedures, control of delegated credit approval authorities and
limits, evaluation of portfolio risk profile and the approval of new loan products taking into
consideration the potential risk. For consumer loans, credit risk management is additionally
supported by established portfolio and credit scoring models.
Market risk management involves liquidity risk and price risk. Both risks are managed thru a
common structure and process but use separate conceptual and measurement frameworks that are
compatible with each other. Liquidity risk management involves the matching of asset and liability
tenors to limit the bank’s vulnerability to abnormal outflows of funds.
Price risk management
involves measuring the probable losses arising from changes in the values of financial instruments
and major asset and liability components as a result of changes in market rates, prices and volatility.
Operational risk management involves creating and maintaining an operating environment that
ensures and protects the integrity of the institution’s assets, transactions, records and data, the
enforceability of its claims, and compliance with all pertinent legal and regulatory parameters.
Corporate Governance
The Corporate Governance of the bank is a system of checks and balances among the Board of
Directors, management, and stockholders that is intended to efficiently increase long-term
stockholder value through ethical conduct, reportorial accuracy and transparency, and compliance to
all laws and regulations. The governance policies and guidelines are specified in the bank’s
Corporate Governance Manual that supplements and complements the Articles of Incorporation and
By-Laws.
The Bank considers the Bangko Sentral ng Pilipinas (BSP) Capital Adequacy, Asset Quality,
Management Quality, Earnings, Liquidity, and Sensitivity to Market Risk (CAMELS, 0 to 5) rating as
a measure of its governance quality. BPI had a CAMELS 4 rating for 2007 (latest BSP examination),
the highest among local banks.
Board of Directors
The Board of Directors consists of fifteen members, including four independent directors. The
directors hold office for one year and until their successors are elected and qualified in accordance
with the By-Laws of the Bank. Independent directors hold no interests affiliated with BPI,
management or controlling shareholder at the time of his election or appointment and/or re-election.
The Board bears the primary responsibility of creating and enhancing long-term shareholder value of
BPI. Its mandate includes the setting of strategic business directions, appointment of senior
executive officers, the setup of appropriate organizational structures, oversight of major risk-taking
activities, and the monitoring of business and management performance
In 2009, the Board had thirteen meetings. The director’s record of attendance on all board meetings
held during the year met the requirement of the Securities and Exchange Commission’s more than
50% attendance.
35
An annual self-assessment of the Board of Directors is conducted to determine compliance not only
with the bank’s Manual of Corporate Governance but also with all other regulations and rules that
prescribe good corporate governance.
Board Committees
The Board delegated specific responsibilities to its seven sub-committees.
1.
The Executive Committee is composed of seven members of the Board, including one
independent director, with two alternate members. This committee takes on the primary
responsibilities of the Board and serves as the Board’s operating arm on all corporate governance
matters and for approving all major credit risks. In 2009, the committee held 38 meetings.
2.
The Nominations Committee is composed of four members of the Board including two
independent directors. This committee ensures, among others, that all directors of the Board have
the qualifications and none of the disqualifications indicated in the Bank’s Corporate Governance
Manual, and vets on the qualifications of all Board appointees. In 2009, the committee held 1
meeting.
3.
The Personnel and Compensation Committee is composed of four members of the Board
including one independent director. This committee implements the Bank’s human resources
objectives, particularly those relating to talent development and hiring, promotions and succession
planning, compensation and benefits, and performance evaluation.
In 2009, the committee had seven meetings. Some of the matters deliberated upon and endorsed to
the board for approval relates to - (i) hiring, promotions and appointments of senior officers, (ii)
Collective Bargaining Agreements (CBAs), and (iii) specific benefits.
4.
The Audit Committee is composed of four members of the Board including two independent
directors. This committee oversees the overall management of operating risks, financial reporting
and control, internal auditors and external auditors, and compliance with the Corporate Governance
Manual and the BSP audit recommendations. The committee is governed by the Audit Committee
Charter.
In 2009, the committee held one special and twelve regular meetings where the following actions
were taken-up:
i.
Discussion of approximately 603 reports from Internal Audit, Credit Policy Group, Office
of Risk Management and Isla Lipana and Co.. The 2008 Audited Financial Statement, with
unqualified opinion submitted by Isla Lipana and Co. and quarterly financial reports of
Management were among those reports reviewed to ensure compliance with the applicable
Philippine Financial Reporting Standards (PFRS).
ii.
Recommendation to the stockholders of the re-engagement of Isla Lipana and Company
as the Bank’s external auditor for 2009.
iii.
Review and approval of the 2010 Internal Audit Work Plan and the changes in the
Internal Audit Risk Assessment Model as well as the Audit Committee Charter, Internal Audit
Charter, and the Audit Rating Framework and Guidelines.
iv.
Review of the Minutes of Meetings conducted by the respective Audit Committees of
various subsidiaries of the Bank.
v.
Review of the results of the credit reviews by Credit Policy Group, the quarterly report of
compliance office, and the status of unresolved issues from the Operating Risk Management
Unit.
5.
The Corporate Governance Committee is composed of four members of the Board including
two independent directors. This committee assists the Board in ensuring observance of sound
corporate governance principles and guidelines.
36
In 2009, the committee held one meeting where it deliberated and endorsed to the Board the
following:
i. Review of the 2008 Corporate Governance Scorecard of BPI and Survey For Publicly
Listed Companies
ii. Review of Bank’s compliance with BPI Corporate Governance Manual particularly on
the attendance of the Board of Directors and the qualification and disqualification of board
members pursuant to existing BSP Circulars, BPI By-Laws , SEC rules.
iii. Amendments to BPI Corporate Governance Manual and the BPI Corporate Governance
Committee Charter both to include the duty to conduct an annual performance evaluation of
the Board of Directors and Senior Management.
iv. Review of Bank’s Board Committees, their organization and their function.
v. Setting up of a Corporate Governance Seminar for Senior Officers including the most
recent member of the BPI Board of Directors, Mr. Wong Ann Chai of DBS Bank, Ltd.
6.
The Trust Committee is composed of eight members of the Board, including one independent
director. This committee oversees the management of the trust and fiduciary functions of the Bank.
The committee had twelve meetings in 2009 where it discussed and endorsed to the Board various
performance reports, and a number of credit and investment matters.
7.
The Risk Management Committee is composed of five members of the Board including two
independent directors. This committee sets risk management policies and procedures and manages
-- identifies, measures, monitors and controls -- all risks that the Bank is and may be subjected to,
and fosters risk awareness, control, and management throughout the Bank’s organization.
The committee had twelve regular meetings in 2009 where various risk strategies, policies,
compliance and reports were approved and/or noted.
For further details on the BPI’s financial condition and operations, please refer to the 2009 Audited Financial
Statements which is incorporated herein in the accompanying index to exhibits
GLOBE TELECOM, INC. (Globe or Globe Telecom)
Globe Telecom’s balance sheets and income statements are shown below :
Balance Sheets
(In Million Pesos)
DECEMBER 31
2009
2008
(As restated)
Total Current Assets
Non-current Assets
18,415
109,228
19,655
100,096
Total Assets
127,643
119,751
33,576
46,359
47,709
33,728
35,931
50,091
127,643
119,751
Current Liabilities
Non-current Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity
37
Globe Telecom
Statements of Income
(In Million Pesos)
DECEMBER 31
2009
2008
Net Operating Revenues
Other Income
Total Revenues
63,862
1,945
65,807
64,808
1,146
65,954
Costs and Expenses
Provision for Income Tax
Total Expenses
47,834
5,404
53,238
48,108
6,570
54,678
Net Income
EPS:
Basic
Diluted
12,569
11,276
94.59
94.31
84.75
84.61
As of December 31, 2009
Basic based on 132,342K common shares
Diluted based on 133,275K common shares
As of December 31, 2008
Basic based on 132,337K common shares
Diluted based on 133,273K common shares
Form and date of organization
Globe Telecom, Inc. is a major provider of telecommunications services in the Philippines, supported by over
5,000 employees and over 700,000 retailers, distributors, suppliers, and business partners nationwide. The
Company operates one of the largest and most technologically-advanced mobile, fixed line and broadband
networks in the country, providing reliable, superior communications services to individual customers, small
and medium-sized businesses, and corporate and enterprise clients. Globe currently has over 23 million
mobile subscribers, over 700,000 broadband customers, and almost 600,000 landline subscribers.
Globe is also one of the largest and most profitable companies in the country, and has been consistently
recognized both locally and internationally for its corporate governance practices. It is listed on the
Philippine Stock Exchange under the ticker symbol GLO and had a market capitalization of US$2.6 billion as
of the end of 2009.
Globe’s principal shareholders are Ayala Corporation and Singapore Telecom, both industry leaders in the
country and in the region. Aside from providing financial support, this partnership has created various
synergies and has enabled the sharing of best practices in the areas of purchasing, technical operations,
and marketing, among others.
The Globe Group is composed of the following companies:
•
Globe Telecom, Inc. (Globe) provides mobile telecommunications services;
•
Innove Communications Inc. (Innove), a wholly-owned subsidiary, provides fixed line
telecommunications and consumer broadband services, high-speed internet and private data
networks for enterprise clients, services for internal applications, internet protocol-based
solutions and multimedia content delivery;
•
G-Xchange, Inc. (GXI), a wholly-owned subsidiary, provides mobile commerce services under
the GCash brand;
38
•
Entertainment Gateway Group Corp. and EGGstreme (Hong Kong) Limited (EHL) (collectively
referred here as EGG Group), provide digital media content and applications; and
•
GTI Business Holdings, Inc. (GTI), a wholly-owned subsidiary, is an investment company.
Globe is a grantee of various authorizations and licenses from the National Telecommunications
Commission (NTC) as follows: (1) license to offer and operate facsimile, other traditional voice and data
services and domestic line service using Very Small Aperture Terminal (VSAT) technology; (2) license for
inter-exchange services; and (3) Certificate of Public Convenience and Necessity (CPCN) for: (a)
international digital gateway facility (IGF) in Metro Manila, (b) nationwide digital cellular mobile telephone
system under the GSM standard (CMTS-GSM), and (c) nationwide local exchange carrier (LEC) services
after being granted a provisional authority in June 2005.
In 1928, Congress passed Act No. 3495 granting the Robert Dollar Company, a corporation organized and
existing under the laws of the State of California, a franchise to operate wireless long distance message
services in the Philippines. The Robert Dollar Company was subsequently incorporated in the Philippines as
Globe Wireless Limited.
In 1934, Congress passed Act No. 4150 transferring the franchise and privileges of the Robert Dollar
Company to Globe Wireless Limited which was incorporated on 15 January 1935. Globe Wireless Limited
was subsequently renamed Globe-Mackay Cable and Radio Corporation (“Globe-Mackay”). Its franchise
was further expanded by Congress, through Republic Act (“RA”) 4630 enacted in 1965, to allow it to operate
international communications systems. Shortly before the expiration of this franchise, the Batasan
Pambansa enacted Batas Pambansa 95 granting Globe-Mackay a new franchise in 1980.
In 1974, Globe-Mackay sold 60% of its stock to Ayala Corporation, local investors and its employees. It
offered its shares to the public on 11 August 1975.
In 1992, the Philippine Congress passed RA 7229 approving the merger of Globe-Mackay and Clavecilla
Radio Corporation, a domestic telecommunications pioneer to form GMCR, Inc. (“GMCR”). The merger gave
GMCR the capability to provide all forms of telecommunications to address the international and domestic
requirements of its customers. Subsequently, GMCR was renamed Globe Telecom, Inc. (“Globe Telecom”)
In 1993, Globe Telecom welcomed a new foreign partner, Singapore Telecom, Inc. (STI), a wholly-owned
subsidiary of Singapore Telecommunications Limited (“SingTel”) after Ayala and STI signed a Memorandum
of Understanding.
In 2001, Globe Telecom acquired Isla Communications Company, Inc. (“Islacom”) which became a whollyowned consolidated subsidiary of Globe Telecom effective 27 June 2001.
In 2003, the National Telecommunications Commission (“NTC”) granted Globe Telecom’s application to
transfer its wireline business assets and subscribers to Islacom pursuant to its strategy to integrate all of its
wirelines services under Islacom. The Philippine SEC also approved the change in name of Islacom to
Innove Communications, Inc. (“Innove”) on 21 August 2003.
In 2004, Globe Telecom invested in G-Xchange, Inc. (“GXI”), a wholly-owned subsidiary, which handles the
mobile payment and remittance service marketed under the GCash brand using Globe Telecom’s network
as transport channel.. GXI started commercial operations on 16 October 2004.
In November 2004, Globe Telecom and seven other leading Asia Pacific mobile operators (‘JV partners’)
signed an agreement (‘JV agreement’) to form Bridge Alliance. The joint venture company operates through
a Singapore-incorporated company, Bridge Mobile Pte. Limited (BMPL) which serves as a commercial
vehicle for the JV partners to build and establish a regional mobile infrastructure and common service
platform to deliver different regional mobile services to their subscribers. In 2008, the Bridge Alliance had a
combined customer base of over 225 million subscribers among its partners in India, Thailand, Hong Kong,
South Korea, Macau, Philippines, Malaysia, Singapore, Australia, Taiwan and Indonesia.
In 2005, Innove was awarded by the NTC with a nationwide franchise for its wireline business, allowing it to
operate a Local Exchange Carrier service nationwide and expand its network coverage. In December 2005,
the NTC approved Globe Telecom’s application for third generation (3G) radio frequency spectra to support
39
the upgrade of its cellular mobile telephone system (“CMTS”) network to be able to provide 3G services.
The Company was assigned with 10-Megahertz (MHz) of the 3G radio frequency spectrum.
On 19 May 2008, following the approval of the NTC, the subscriber contracts of our Touch Mobile or TM
prepaid service were transferred from Innove to Globe which now operates all wireless prepaid services in
its integrated cellular networks.
On 30 June 2008, Globe announced that it had acquired 100% ownership of Entertainment Gateway Group
(“EGG”) and its affiliated companies. The business combination was fully consummated on 1 August 2008
upon release of the purchase consideration held in escrow pending fulfillment of certain conditions. EGG is
one of the leading mobile content providers in the Philippines, offering a wide array of value-added services
covering music, news and information, games, chat and web-to-mobile messaging.
On 25 November 2008, Globe formed GTI Business Holdings, Inc. (GTI) primarily as an investment
company.
In 2008, Globe Telecom, the Bank of the Philippine Islands (BPI) and Ayala Corporation (AC) signed a
memorandum of agreement to form a joint venture that would lead to the creation of the country’s first mobile
microfinance bank. Last October 2009, the Bangko Sentral ng Pilipinas (BSP) approved the sale and
transfer by BPI of its shares of stock in Pilipinas Savings Bank, Inc. (PSBI), formalizing the creation of the
venture. Globe’s and BPI’s ownership stakes in PSBI is at 40% each, while AC’s shareholding is at 20%.
The partners intend to use PSBI (now called BPI GLOBE BANKO, INC.) as a vehicle to offer financial
products and services such as deposits and withdrawals, salary and fund disbursements, donations, online
purchases, bills payment and remittances to rural and low-income customers.
Description of Business
1. Nature of Business
(a) Mobile Business
Globe provides digital mobile communication services nationwide using a fully digital network based
on the Global System for Mobile Communication (GSM) technology. It provides voice, data and
value-added services to its mobile subscribers through three major brands: Globe Postpaid, Globe
Prepaid and TM.
Globe Postpaid includes all postpaid plans such as regular G-Plans, consumable G-Flex Plans, Load
Allowance Plans, Time Plans, Apple TM iPhone 3G plans and high-end Platinum Plans. To serve the
needs of specific market segments and promote loyalty, the Company introduced various innovative
postpaid plans including the Load Tipid Plans which allow subscribers to control their spend and set
their plan limits based on their usage profiles. The subscriber can reload their account just like any
prepaid subscriber if their actual consumption exceeds their fixed credits. Meanwhile, for those
subscribers who want to upgrade their mobile internet browsing experience, Globe introduced
Personal Blackberry and Mobile Surfing add-on plans which entails additional monthly fees on top of
their regular monthly postpaid subscription fees.
Globe Prepaid, Globe Tattoo, and TM are the prepaid brands of Globe. The Globe Tattoo brand was
formally launched in February 2009 and is targeted towards the youth segment with its convergent
mobile and broadband offerings, while the TM brand caters to the value-conscious segment of the
market. Globe Prepaid is targeted towards the adult, mainstream market. Its unique brand
proposition revolves around its innovative product and service offerings, superior customer service,
and Globe’s “worldwidest” services and global network reach.
Globe offers various top-up or reloading options and facilities for prepaid subscribers including prepaid call
and text cards, bank channels such as ATMs, credit cards and through internet banking. Subscribers can
also top-up at over 740,000 AutoLoad Max retailers nationwide, all at affordable denominations and
increments. A consumer-to-consumer top-up facility, Share-A-Load, is also available to enable subscribers
to share prepaid load credits via SMS. Globe’s AutoLoad Max and Share-A-Load services are also available
in selected OFW hubs all over the world.
40
Globe’s mobile business accounted for 85% of total service revenues, contributing P53.3 billion in 2009.
Cumulative mobile subscribers reached 23.2 million by the end of the year with prepaid subscribers
accounting for 96% of the total.
(b) Fixed Line and Broadband Business
Globe offers a full range of fixed line communications services, wired and wireless broadband access, and
end-to-end connectivity solutions customized for consumers, SMEs (Small & Medium Enterprises) and large
enterprises and businesses. For consumers, Globe offers basic and value-added fixed line voice services
including local, national and international long distance calling services while corporate and enterprise clients
can avail of a full suite of telephony services from basic direct lines to ISDN services, 1-800 numbers, IDD
and NDD access as well as managed voice solutions. To better serve the various needs of its customers,
Globe organized dedicated customer facing units (CFUs) within the Company to focus on the integrated
mobile and fixed line needs of specific market segments. There are consumer marketing and sales groups to
address the needs of retail customers, and a business CFU focused on the needs of big and small
businesses. Globe Business was created and organized along two main segments – Corporate and SME
(CSME) and Enterprise Businesses.
Globe’s fixed line and broadband business accounted for 15% of total service revenues, contributing P9.1
billion in 2009. Cumulative fixed line voice subscribers reached 589 thousand while broadband subscribers
totaled 715 thousand by the end of the year.
2. Products and Services
(a) Mobile Business
Mobile Voice
Globe’s voice services include local, national and international long distance call services. It has one of
the most extensive local calling options designed for multiple calling profiles. In addition to its standard,
pay-per-use rates, subscribers can choose from bulk and unlimited voice offerings for all-day or off-peak
use, and in several denominations to suit different budgets.
Globe pioneered international roaming in 1995 and now has one of the widest networks with over 500
roaming partners in more than 200 calling destinations worldwide. Globe was the first to offer
international roaming service for its prepaid users in 2002 and now provides international roaming
coverage on-board selected shipping lines, airlines and via satellite.
Globe’s mobile voice service revenues accounted for 50% of total mobile service revenues in 2009
compared to 49% in 2008. Mobile voice revenues of P26.5 billion were 2% lower compared to 2008 as
the growth in bulk and unlimited voice subscriptions were unable to fully offset the lower regular and IDD
voice usage.
Globe and TM continued their popular, bulk and unlimited voice offerings such as Tawag236 for a 20minute call for P20, Globe’s P10 for a 3-minute call, and TM’s TodoTawag P15 for a 15-minute call.
Globe also sustained its per-second charging promo which allows subscribers to make on-net voice calls
for only P0.10 per second.
To serve growing market preference for unlimited offers and drive voice usage, Globe launched its
pioneering DUO and SUPERDUO service, a two-in-one mobile and landline voice service, which
enables subscribers to make unlimited landline-to-landline and mobile-to-mobile calls to any Globe and
TM subscriber for a specific amount. Globe further expanded its unlimited voice offerings with SUPERUNLI and Immortal Call promos.
Mobile Data
Globe’s data services include local and international SMS offerings, mobile browsing and content
downloads. Globe has introduced various bucket and unlimited SMS packages to cater to the different
needs and lifestyles of its postpaid and prepaid subscribers. Additionally, Globe subscribers can send
and receive Multimedia Messaging Service (MMS) pictures and video, or do local and international 3G
video calling.
41
Globe’s mobile browsing services allow subscribers to access the internet using their internet-capable
handsets or laptops with USB modems. Data access can be made using various technologies including
3G with HSDPA, EDGE and GPRS. Browsing subscribers now have multiple charging options with
Globe’s Flexible Mobile Internet Browsing rates which allow subscribers to choose between time or
usage-based rates. They can also choose between daily, per site or monthly browsing plans.
Globe also offers a full range of downloadable content covering multiple topics including news,
information, and entertainment through its web portal. Subscribers can purchase or download free
music, movie pictures and wallpapers, games, receive mobile advertising from partner brands, download
applications or watch clips of popular TV shows, movies and documentaries as well as participate in
interactive TV, mobile chat and play games, among others.
Through Globe’s partnership with major banks and remittance companies, and using Globe’s pioneering
GCash platform, subscribers can perform mobile banking and mobile commerce transactions. Globe
subscribers can complete international and domestic remittance transactions, pay fees, utility bills and
income taxes, avail of micro-finance transactions, donate to charitable institutions, and buy Globe
prepaid load credits using its GCash-activated SIM.
Globe’s mobile data business contributed 50% to total mobile net service revenues. Service revenues
totaled P26.8 billion in 2009 compared to P28.5 billion in 2008. While revenues from bucket, unlimited
SMS subscriptions, and mobile browsing improved year on year, usage of regular SMS and core valueadded services declined resulting in mobile data revenues that were 6% lower compared to 2008.
(i) SMS
SMS (or short messaging system) remains a popular form of communication in the Philippines as it is a
convenient and cost-efficient alternative to voice and e-mail based communications.
Globe has introduced various SMS packages customized to the different needs and lifestyles of its
postpaid and prepaid subscribers. These include bucket and unlimited SMS offers with all-day, daytime,
and night time unlimited SMS offers, as well as packages which provide both unlimited intra-network
SMS and discounted inter-network SMS. Both types of service offers are available to Globe and TM
subscribers.
In 2008, Globe made it possible for its prepaid subscribers to purchase selected SMS offers directly from
its Autoload Max retailers nationwide foregoing the usual subscriber-driven registration process.
Additionally the Company also introduced a single, easy-to-recall access code “8888” to enable quick
and convenient registration to its promos.
During the year Globe continued to offer its existing bulk (SuliTxt, EverybodyTxt and TxtOthers) and
unlimited (UnliTxt Dayshift and Nightshift and TodoTxt) Immortal Text and Immortal Load SMS
promotions.
(ii) Value Added Services
Globe offer a full range of value-added services covering the areas of information and entertainment
(‘infotainment’), mobile browsing and downloading. These value-added services allow subscribers to
download icons and ring tones, do Wireless Application Protocol (‘WAP’) browsing, send and receive
Multimedia Messaging Service (‘MMS’) pictures and video, as well as participate in interactive TV,
mobile chat, and play games, among others.
Globe’s Tattoo Broadband service provides connections via various access points including 3G with
High Speed Downlink Packet Access (HSDPA), EDGE and GPRS.
To further stimulate mobile browsing among its subscribers, Globe introduced entry-level iPhones and
launched Mobile Surfing and Personal Blackberry add-on plans.
(iii) M-Commerce Service
Globe was first in introducing a cashless and cardless integrated payments service with the launch of
GCash in 2004. GCash was born from a simple goal of transforming a mobile phone into a wallet,
enabling Globe and TM subscribers to transfer money via text message.
42
With GCash, Globe and TM subscribers can send remittances, buy prepaid credits (load), make
donations, settle loans, receive salaries, pay bills and buy products and services all through SMS or
using the convenient mobile wallet menu found in their SIM cards.
In addition to the above transactions, GCash is also used as a wholesale payment facility. Net registered
GCash user base at the end of 2009 totaled 1.04 million.
In 2008, Globe, the Bank of the Philippine Islands (BPI) and Ayala Corporation (AC) signed a
memorandum of agreement in 2008 to form a joint venture that would allow rural and low-income
customers’ access to financial products and services beyond remittances. Opportunities include access
to deposits and withdrawals, salary and fund disbursements, donations, online purchases and bills
payment facilitated by texting. Last October 2009, the Bangko Sentral ng Pilipinas (BSP) approved the
sale and transfer by BPI of its shares of stock in Pilipinas Savings Bank, Inc. (PSBI), formalizing the
creation of the venture. Globe’s and BPI’s ownership stakes in the company is at 40% each, while AC’s
shareholding is at 20%. The partners plan to transform PSBI (now called BPI GLOBE BANKO INC.) into
the country’s first mobile microfinance bank.
On January 2010, the Bangko Sentral ng Pilipinas (BSP), through the Monetary Board approved GXI’s
request to utilize Globe’s distribution network as GCash-enabled outlets. The approval by the BSP
increases total GCash outlets to 18,000 making it the largest remittance network in the Philippines.
Traditionally, GCash is offered at Globe Business Centers, rural banks, pawnshops and remittance
partners. With the BSP approval, GCash will be available in more loading stations including sari-sari
stores, pharmacies, internet cafes, food establishments, rice dealers, farm and poultry stores, gas
stations, multi-purpose cooperatives nationwide. With the expanded distribution network, GXI hopes to
improve its capability to provide access for people to avail of microfinance services, especially in the
rural areas.
(b) Fixed Line Business
Fixed Line Voice
Globe’s fixed line voice services include local, national and international long distance calling services in
postpaid and prepaid packages through its Globelines brand. Subscribers get to enjoy toll-free rates for
national long distance calls with other Globelines subscribers nationwide. For corporate and enterprise
customers, Globe offers voice solutions that include regular and premium conferencing, enhanced voice
mail, IP-PBX solutions and domestic or international toll free services.
Fixed Line Data
Fixed line data services include end-to-end data solutions customized according to the needs of
businesses. Globe’s product offering includes international and domestic data services, wholesale and
corporate internet access, data center services and segment-specific solutions customized to the needs
of targeted industries.
Globe’s international data services provide its corporate and enterprise customers with the most diverse
international connectivity solutions through a variety of dedicated communications services that allow
customers to manage their own virtual private networks (VPN), subscribe to wholesale internet access
via managed international private leased lines (IPL), run various applications and access networks with
integrated voice services over high-speed, redundant and reliable connections. In addition to bandwidth
access from multiple international submarine cable operators, Globe also has two international cable
landing stations situated in different locales to ensure redundancy and network resiliency.
Its domestic data services include data center solutions such as business continuity and data recovery
services, 24x7 monitoring and management, dedicated server hosting, maintenance for applicationhosting, managed space and carrier-class facilities for co-location requirements and dedicated hardware
from leading partner vendors for off-site deployment.
Other fixed line data services include access services that deliver premium-grade access solutions
combining voice, broadband and video offerings designed to address specific connectivity requirements.
These include Broadband Internet Zones (BIZ) for broadband-to-room internet access for hotels or
Internet Exchange (GiX) services for bandwidth-on-demand access packages based on average usage.
43
Broadband
Globe offers wired, fixed wireless, and fully mobile internet-on-the-go services across various
technologies and connectivity speeds for its residential and corporate customers.
3. Sales and Distribution
(a) Wireless Business
Globe have various sales and distribution channels to address the diverse needs of our subscribers.
Independent Dealers
Globe utilize a number of independent dealers throughout the Philippines to sell our prepaid wireless
services to customers. These dealers include major distributors of wireless phone handsets who usually
have their own retail networks, direct sales force, and sub-dealers in the Philippines. We compensate
our dealers based on the type, volume and value of reload denominations made for a given period. This
takes the form of fixed discounts for prepaid airtime cards and SIM packs, and discounted selling price
for phonekits.
Additionally, Globe also have a distribution network of dealers and institutions who offer prepaid
reloading services to Globe and TM subscribers nationwide. In 2003, we launched our over-the-air
reload system, Globe AutoloadMax which allows subscribers to purchase prepaid credits from over
740,000 retailers nationwide.
Business Centers
In addition to independent dealers, Globe have 102 business centers, Hub shops and micro-stores in
major cities across the country. Through the business centers, customers are able to subscribe to
wireless services, reload prepaid credits, make GCash transactions, purchase handsets, accessories,
request handset repairs, try out communications devices, ask questions about Globe’s services and pay
bills. Globe’s business centers are also registered with the Bangko Sentral ng Pilipinas (BSP) as
remittance outlets.
The 2 Hub shops, located in San Juan, and Mandaluyong City, sell the latest communications devices
and handsets as well as prepaid phonekits.
Others
Globe also distribute prepaid products (phonekits, SIM packs and prepaid call cards and credits) through
consumer distribution channels such as convenience stores, gas stations, drugstores and bookstores.
Globe also have a dedicated direct sales force to manage our corporate accounts and high-end
customers. The retail business centers and corporate sales staff also act as direct sales channels.
(b) Fixed Line Business
Globelines Payments and Services (‘GPS’) Centers
To better serve the fixed line subscribers from various service areas, Globe have set up GPS centers in
strategic locations which allow subscribers to sign up for consumer fixed line services, make GCash
transactions, inquire about services, and make bill payments. As of 31 December 2009, we had 40 GPS
centers in strategic locations nationwide.
Corporate Sales Team
Globe also sells its fixed line data services through its corporate sales team composed of account
managers based in key cities nationwide. Sales to large businesses are managed by specialized
account managers who are each dedicated to managing large business customers based on identified
target segments. They are the SPOCs (single point of contact) for any service or concern the corporate
customer may have, backed up by a strong team of pre-sales engineers, segment marketing managers
and project managers. Sales to small and medium-sized enterprises are handled by CSME while the
Enterprise Business Group serves markets for integrated wireless and fixed line communications
solutions. The Customer Support Group and Fault Management Control Center handle all after-sales
support for non-technical and technical concerns, respectively.
44
Reseller Network
Globe has its Channels program to manage its network of resellers. A Premium Business Partner
program was also developed to oversee a network of system integrators to support its sales team and its
overall value proposition.
4. Operating Revenues
Net Operating Revenues by Line of Business
(in Php Mn)
Year Ended 31 December
2009
Net Service Revenues
Mobile ……………………………………….
2008
%
2007
%
53,321
85%
55,436
88%
56,410
89%
Voice ……………………………………..
Data 2………………………………………
Fixed Line and Broadband……………….
26,497
26,824
9,122
42%
43%
15%
26,971
28,465
7,458
43%
45%
12%
29,870
26,540
6,799
47%
42%
11%
Fixed Line Voice 3………………………
Fixed Line Data 4…………………………
Broadband 5………………………………
Net Service Revenues………………………...
2,795
3,038
3,289
62,443
4%
5%
5%
98%
3,088
2,478
1,892
62,894
5%
4%
3%
97%
3,504
2073
1,222
63,209
6%
3%
2%
96%
Non Service Revenues ……………………....
1,418
2%
1,924
3%
2,300
4%
63,861
100%
64,818
100%
65,509
100%
1
Net Operating Revenues………………………
1
%
Mobile voice service revenues include the following:
a) Monthly service fees on postpaid plans;
b) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans,
including currency exchange rate adjustments, or CERA, net of loyalty discounts credited to subscriber billings; and
c) Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or expiration
of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs between 3 and 120 days
after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload
discounts; and revenues generated from inbound international and national long distance calls and international roaming
calls.
Revenues from (a) and (c) are reduced by any interconnection or settlement payouts to international and local carriers and content
providers.
2
Mobile data service revenues consist of revenues from value-added services such as inbound and outbound SMS and MMS, content
downloading and infotext, subscription fees on unlimited and bucket prepaid SMS services net of any interconnection or settlement
payouts to international and local carriers and content providers.
3
Fixed Line voice net service revenues consist of the following:
a) Monthly service fees including CERA of voice-only subscriptions;
b) Revenues from local, international and national long distance calls made by postpaid, prepaid fixed line subscribers and
payphone customers, as well as broadband customers who have subscribed to data packages bundled with a voice service.
Revenues are net of prepaid and payphone call card discounts;
c) Revenues from inbound local, international and national long distance calls from other carriers terminating on Globe’s
network;
d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice mail, duplex and
hotline numbers and other value-added features;
e) Installation charges and other one-time fees associated with the establishment of the service; and
f)
Revenues from DUO and SUPERDUO services consisting of monthly service fees for postpaid and subscription fees for
prepaid subscribers.
Revenues from (a) and (c) are reduced by any interconnection or settlement payments to domestic & international carriers.
4
Fixed Line data net service revenues consist of the following:
a) Monthly service fees from international and domestic leased lines;
b) Other wholesale transport services;
c) Revenues from value-added services; and
d) One-time connection charges associated with the establishment of service.
Revenues from (a) to (c) are net of any interconnection or settlement payments to other carriers.
5
Broadband net service revenues consist of the following:
a) Monthly service fees of wired, fixed mobile, and fully mobile broadband data only and bundled voice and data subscriptions;
b) Browsing revenues from all postpaid and prepaid wired, fixed mobile and fully mobile broadband packages in excess of
allocated free browsing minutes and expiration of unused value of prepaid load credits;
c) Value-added services such as games; and
d) Installation charges and other one-time fees associated with the service.
e)
45
5. Competition
(a) Industry, Competitors and Methods of Competition
(i) Mobile Market
The Philippine mobile market has been marked by rapid growth and intense competition in recent years. The
Philippine government liberalized the communications industry in 1993 after a framework was developed to
promote competition within the telecommunications industry and accelerate market development. Ten
operators have been granted licenses to provide CMTS services and deploy the network technology of their
choice – Globe, Innove (then known as Islacom), Bayantel, CURE, Digitel, Extelcom, MultiMedia Telephony,
Next Mobile or NEXTEL, Piltel and SMART. Of the ten operators, only eight continue to operate
commercially while Bayantel and MultiMedia have yet to operate their CMTS services commercially. Globe
acquired Islacom (now known as Innove Communications, Inc.) in 2001 as Digitel launched its mobile
service while CURE and Piltel were consolidated with SMART in 2008 and 2009, respectively.
Mobile Operators
Globe*
Digitel
Smart**
Total
Year of
Commercial
Launch
Subscribers (in
% of Total
Mn)
Wireless
System
Wireless
Technology
1994
23.245 (1)
31%
Digital
GSM
2003
10.200
(2)
14%
Digital
GSM
41.329
(3)
55%
Digital
GSM
1994
74.774
100%
* Includes TM subscribers, previously under Innove, whose contracts were transferred to Globe in 2008.
** Includes subscribers of Piltel and CURE, subsidiaries and affiliates of PLDT.
________________________________________________
Sources:
1) Globe disclosures for the year ended December 31, 2009.
2) Based on publicly available information and Company estimates
3) PLDT/ Smart/ TNT/CURE disclosures as of December 31, 2009.
As of December 31, 2009, the three active operators - Globe, Digitel and SMART account for approximately
14%, 31% and 55% of the 74.77 million mobile subscribers in the market, respectively.
Competition
The following table shows estimates for wireless subscriber growth beginning 1995:
Cellular Subscribers
Penetration Rates (%)
Growth Rate
(in Mn)
1995
0.49
0.7
n.a.
1996
0.78
1.4
58%
1997
1.13
1.9
45%
1998
1.62
2.5
43%
1999
2.68
3.8
65%
2000
6.36
8.6
138%
2001
10.96
14.2
72%
2002
15.17
19.4
38%
2003
22.31
27.8
47%
2004
32.87
39.9
47%
2005
34.61
41.3
5%
2006
41.94
48.3
21%
2007
53.96
60.8
29%
2008
68.08
74.7
26%
2009
74.77*
80.4
10%
* Estimated as of December 31, 2009.
Source: National Telecommunications Commission (Statistical Data 2007), publicly available information and Company estimates
46
Competition in the mobile industry continues to evolve and has changed the type of products and services
currently being offered in the market. Increased competition has also made mobile services more affordable
and accessible to a wider base of the population, with cumulative industry SIMs or subscribers now at 74.77
million at the end of 2009. Subscriber growth rates have also slowed down in recent years and registered at
10% in 2009 as nominal penetration rates reached the 80% level. However, market research suggests that
current SIM penetration levels have been impacted by holders of multiple-SIMs (multi-SIM) who are taking
advantage of attractive intra-network offers of the various operators.
Since 2000, the mobile communications industry experienced a number of consolidations while new players
continued to enter the market. PLDT acquired and consolidated SMART and Piltel in 2000 while Globe
Telecom acquired Islacom. In 2003, Digitel formally launched its mobile service under the brand name, Sun
Cellular. In 2008, SMART purchased CURE and subsequently launched another wireless brand, Red
Mobile. During the same year, San Miguel Corporation partnered with Qatar Telecom, bought interests in
Liberty Broadcasting Network and announced plans to enter the mobile and broadband businesses.
Competition in the mobile industry continues to evolve and has changed the type of products and services
currently being offered in the market. Increased competition has also made the service more affordable and
accessible to a wider base of the population, with industry SIMs now at 75 million by the end of 2009, and
nominal penetration rates now in excess of 80%.
Sun Cellular entered the market in 2003 with an aggressive unlimited call and text service that has allowed it
to increase its subscriber base in the past 6 years. In response to Sun’s unlimited call and text offers, the two
other operators responded by creating a new set of value propositions for its subscribers. Both Globe and
Smart have introduced bucket SMS and unlimited call and text plans to sustain overall competitiveness in
the market.
To acquire new subscribers and stimulate usage, and given the differing needs of a large and diverse
consumer market, the key operators have introduced various promos targeted towards specific market
segments including the OFWs and their families, the youth, the mass DE markets, as well as the high-end
consumers. The operators have likewise segmented the business markets, with differing offers targeted
towards the SMEs, the corporates, as well as the large enterprise clients.
On February 2010, Schutzengel Telecom, Inc. filed an application with the NTC for a provisional authority
(PA) to construct, install, operate and maintain a nationwide 3G mobile telecommunications system.
Schutzengel was granted a congressional CMTS franchise in 2009.
2009 was an eventful year in the Philippines, with all three core markets – fixed-line telephony, mobile
communications and broadband internet access – all seeing notable developments that will have a marked
impact in 2010. New data for 2008 and earlier from the regulator and the ITU have been incorporated into
our forecasts, and these have prompted BMI to rein in some of our expectations for the next five years.
Although the country’s third largest mobile network operator, Sun Cellular (owned by Digitel), has again
declined to supply detailed operating data for 9M09, it is clear that the number of mobile subscribers
decreased during Q309 on the back of slower customer growth at market leader Smart Communications,
which came as Globe Telecom disconnected approximately 1.8mn inactive customers. Further
disconnections seemed likely in Q409, although the operator could not report any new figures at the time of
writing. We therefore believe the mobile market grew less strongly than predicted in 2009, ending the year
with 74.43mn subscribers. Growth ought to be stronger in 2010 as Globe Telecom completes its programme
of eliminating inactive customers and operators intensify their price war.
A fifth 3G operator could be licensed in 2010/2011, with the regulator saying it is keen to make progress with
offering a new concession. Fixed-line operator BayanTel would be a strong candidate, having missed out in
the original tender to newcomer CURE. Philippine Long Distance Telephone (PLDT) has now acquired
CURE, and BMI has reason to consider that it may have to return CURE’s 3G spectrum, which could then be
reassigned to existing operators or a new entrant. 2G licensee Extelcom has received a fresh injection of
capital and suggests it may re-enter the mobile market within the next two years. Wireless spectrum is an
increasingly sought-after commodity in the Philippines as operators such as PLDT, Globe, BayanTel and
others demonstrate considerable success in signing customers up to their new fixed and mobile wireless
broadband services. Consequently, former paging and value-added services providers such as EasyCall
Philippines and Liberty Telecoms are looking to offer wireless broadband services themselves; Liberty
Telecoms plans to offer WiMAX services in 2010.
(i)Fixed Line Voice Market
47
There are at least eight major local exchange carriers (LEC) in the Philippines with licenses to provide local
and domestic long distance services. Each LEC operator (other than PLDT and Innove, both of whom are
authorized to provide nationwide fixed line services) is assigned service areas in which it must install the
required number of fixed lines and provide service. The NTC has created 15 such service areas in the
Philippines and in order to promote network construction, it has been the government policy to allow only
one or two major operators (in addition to PLDT) in each service area. Rates for local exchange and
domestic long distance services have been deregulated and operators are allowed to have metered as well
as flat monthly fee tariff plans for the services provided.
Fixed Line Market (in '000s of subscribers)
2009
% of Total
2008
% of
Total
Globe
482
16%
420
14%
Bayantel*
410
13%
395
13%
Digitel*
400
13%
400
13%
1,817
58%
1,782
59%
3,109
100%
2,997
100%
LEC Operator
PLDT
Total
* Based on available public disclosures and Company estimates.
The Philippine fixed line voice market registered slow growth in recent years due to the continued preference
for mobile services. Total fixed line subscribers grew 4% in 2009 to 3.1 million from 3.0 million the previous
year with PLDT, Globe accounting for 58%, 16%, respectively while Bayantel and Digitel each contributed
13% to the industry base. Relative to the mobile market, household penetration for fixed lines continues to
remain at the 17% level at the end of 2009.
Competition in the fixed line voice market intensified over the past 4 years as the major players, Globe
Bayantel, Digitel and PLDT, introduced fixed wireless voice services with limited mobile phone capabilities to
take advantage of the increasing preference for mobile services. Fixed wireless services were initially in
postpaid versions in selected areas where there were no available fixed line facilities but prepaid kits were
eventually offered while coverage was expanded.
San Miguel Corporation is reportedly pursuing its acquisition of Extelcom and Bell Telecommunications
(BellTell) If successful, San Miguel could gain entry to both mobile and fixed line markets.
(ii) Fixed Line Data Market
The fixed line data business is a growing segment of the fixed line industry. As the Philippine economy
grows, businesses are increasingly utilizing new networking technologies and the internet for critical
business needs such as sales and marketing, intercompany communications, database management and
data storage. The expansion of the local IT Enabled Service (ITES) industry which includes call centers and
Business Process Outsourcing (BPO) companies has also helped drive the growth of the corporate data
business.
Dedicated business units have been created and organized within Globe to focus on the wireless and fixed
line needs of specific market segments and customers – be they residential subscribers, wholesalers and
other large corporate clients or smaller scale industries. This reorganization has also been driven by Globe’s
corporate clients’ preferences for integrated mobile and fixed line communications solutions.
(iii) Broadband Market
The broadband market sustained its growth trajectory during the year as cumulative subscribers expanded
by 77% to 2.5 million in 2009 from 1.4 million the previous year. The addressable market for broadband
services continues to expand rapidly underpinned by rising PC penetration and the availability of affordable
prepaid broadband packages. It is estimated that broadband penetration in the Philippines is less than 20%
48
of all households and heightened competition is expected to bring about more subscribers in the short to
medium term.
Broadband Market (in '000s of subscribers)
Operator
Globe
Bayantel *
Digitel *
PLDT
Total
2009
715
105
100
1,614
2,534
% of Total
28%
4%
4%
64%
100%
2008
231
105
100
996
1,432
% of Total
16%
7%
7%
70%
100%
* Based on available public disclosures and Company estimates.
As of 2009, Globe and PLDT account for almost 92% of cumulative subscribers of 2.5 million with much of
the growth in subscribers coming from the prepaid segment.
In January of 2010, Liberty Broadcasting Network Inc. (Liberty), a partnership between San Miguel
Corporation and Qtel Group of Qatar Telecom launched its WiMAX broadband service under the brand
name Wi-Tribe. Liberty intends to focus on providing fixed broadband internet and voice service to premium
households and small-and-medium enterprises and complement it with a mobile broadband offering. Liberty
also disclosed that it hopes to launch VOIP services in 2010.
(iv) International Long Distance Market
International long distance (ILD) traffic in the Philippines has significantly increased over the years with the
increasing affordability of the service and the continued deployment of Filipinos workers overseas.
International long distance providers in the Philippines generate revenues from both inbound and outbound
international call traffic whereby the pricing of calls is based on agreed international settlement rates.
To date, there are eleven licensed international long distance operators, nine of which directly compete with
Globe for customers. Both Globe and Innove offer ILD services which cover international calls between the
Philippines and over 200 countries. Positive results from successful launches of various ILD tariff promotions
have brought about increased ILD revenues which accounted for 24% and 23% of Globe’s total net service
revenues for 2008 and 2007, respectively.
Settlement rates for international long distance traffic are based on bilateral negotiations. Commercial
negotiations for these settlement rates are settled using a termination rate system where the termination rate
is determined by the terminating carrier (e.g. Philippines) in negotiation with the originating foreign
correspondent.
(b) Principal Competitive Strengths of the Company
(i) Market Leadership Position
As a leading provider of digital wireless communications services in the Philippines, Globe is well positioned
to participate in the continued development of the telecomunications industry. Globe is also a strong second
player in the corporate fixed line industry, supporting the communications and information requirements of
companies in the manufacturing, retail, financial services, IT, outsourcing and off-shoring industries, among
others. Globe’s distinct competitive strengths include its technologically advanced nationwide wireless
network, a substantial subscriber base, good customer service, a well-established brand identity and a solid
track record in the industry.
(ii) Strong Brand Identity
Globe has some of the best-recognized brands in the Philippines. This strong brand recognition is a critical
advantage in securing and growing market share, and significantly enhances Globe’s ability to cross-sell and
push other product and service offerings.
(iii) Financial Strength and Prudent Leverage Policies
49
Globe’s financial position remains strong with ample liquidity and debt at conservative levels. At the end of
2009, Globe had total interest bearing debt of P47.5 billion representing 50% of total book capitalization.
Consolidated gross debt to equity ratio stood at 1:1 and is well within the 2:1 debt to equity limit prescribed
by its debt covenants. Additionally, our debt is predominantly in pesos at the 86% level with the balance of
14% denominated in US dollars. Expected US dollar inflows from the business offset any unhedged US
dollar liabilities, helping insulate Globe’s balance sheet from any volatilities in the foreign exchange markets.
Globe intends to maintain its strong financial position through prudent fiscal practices including close
monitoring of its operating expenses and capital expenditures, debt position, investments, and currency
exposures. Globe believes that it has sufficient financial flexibility to weather the current economic downturn
and pursue its strategies.
(iv) Proven Management Team
Globe has a strong management team with the proven ability to execute on its business plan and achieve
positive results. With its continued expansion, it has been able to attract and retain senior managers from the
telecommunications, consumer products and finance industries with experience in managing large scale and
complex operations.
(v) Strong Shareholder Support
Globe’s principal shareholders, Ayala Corporation (AC) and Singapore Telecom (STI), provide Globe with a
combination of strong financial support, local and international perspectives, and technical and operational
expertise. Since 1993, they have invested approximately P23.0 billion in the Company.
6. Suppliers
Globe Telecom works with both local and foreign suppliers and contractors. Equipment and technology
required to render telecommunications services are mainly sourced from foreign countries. Our principal
suppliers, among others, are as follows:
For wireless – Nokia/Siemens (Finland); Ericsson Radio Systems AB (Sweden), Ericsson (Sweden), Alcatel
(France) and Microwave Networks Inc. (US).
For fixed line – Fujitsu Ltd. (Japan), Lucent Technologies (USA), NEC (Japan), Alcatel (Italy), Motorola
(USA), AT&T Global (US), British Telecom (UK), and Singapore Telecom (Singapore) and Tellabs
(USA/Singapore).
Globe’s capital expenditures program includes various phases, with each phase supplied and serviced by
local and international companies who provide equipment and services including planning, design,
construction, and commissioning of various equipment and systems for Globe.
7. Customers
Globe Telecom has a large subscriber base dispersed throughout the country. On the wireless front, our
wireless subscribers stood at 23.2 million by the end of 2009. There were 851 thousand postpaid and
approximately 22.4 million prepaid subscribers. Meanwhile, our fixed line voice business ended the year
with 589 thousand subscribers driven by higher subscriptions to our unlimited mobile to landline calling
service. With our intensified push to build capacity and market our business services, our broadband
subscribers reached 715 thousand by the end of the year.
No single customer and contract accounted for more than 20% of Globe’s total sales in 2009.
8. Transactions with Related Parties
Globe Telecom and Innove, in their regular conduct of business, enter into transactions with their major
stockholders, AC and STI, and certain related parties. These transactions, which are accounted for at
market prices normally charged to unaffiliated customers for similar goods and services, are detailed in
Note 16 Related party Transaction of Globe Telecom 2009 audited financial statement forming part of
exhibits herein attached.
50
9. Licenses, Patents, and Trademarks
Globe Telecom currently holds the following major licenses:
Service
Type of
License
Globe
Wireless
CPCN (1)
Local Exchange Carrier
CPCN (1)
International Long Distance CPCN (1)
Interexchange Carrier
CPCN (1)
VSAT
CPCN (1)
International Cable Landin CPCN (1)
Station & Submarine Cab
System
(Nasugb
Batangas)
International Cable Landin Provisional
Station & Submarine Cab Authority
System
(Ballestero
Cagayan)
Date Issued or Last
Extended
Expiration Date
Action Being Taken
July 22, 2002
July 22, 2002
July 22, 2002
February 14, 2003
February 6, 1996
October 19, 2007
December 24, 2030
December 24, 2030
December 24, 2030
December 24, 2030
February 6, 2021
December 24, 2030
No action required
No action required
No action required
No action required
No action required
No action required
September 11, 2008
March 10, 2010
Motion for issuance of
CPCN and extension of
P.A. filed last Feb.15,
2010.
Innove
Type of License Date Issued or
Last Extended
Wireless
CPCN (1)
July 22, 2002
Local Fixed line
CPCN (1)
July 22, 2002
International Lon CPCN (1)
July 22, 2002
Distance
Interexchange
CPCN (1)
April 30, 2004
Carrier
Expiration Date
Action Being Taken
April 10, 2017
April 10, 2017
April 10, 2017
No action required
No action required
No action required
April 10, 2017
No action required
1
Certificate of Public Convenience and Necessity. The term of a CPCN is co-terminus with the franchise term.
In July 2002, the NTC issued CPCNs to Globe and Innove which allow us to operate our respective
services for a term that will be predicated upon and co-terminus with our congressional franchise under
RA 7229 (Globe) and RA 7372 (Innove). We were granted our permanent licenses after having
demonstrated our legal, financial and technical capabilities in operating and maintaining wireless
telecommunications systems, local exchange carrier services and international gateway facilities.
Additionally, Globe and Innove have exceeded the 80% minimum roll-out compliance requirement for
coverage of all provincial capitals, including all chartered cities within a period of seven years.
Globe has registered the following brand names with the Intellectual Property Office, the independent
regulatory agency responsible for registration of patents, trademarks and technology transfers in the
Philippines: Globe Telecom, Touch Mobile, Globelines, Globe Handyphone, Innove Communications,
Globe Link, GlobeQuest, Globe Xchange, Globelines Broadband, Globe G-Cash, Globe AutoLoad,
GlobeQuestDSL Broadband Internet, Broadband Mobility and “Hub and Circular Device” among others
for the wireless and fixed line services we offer. We have also secured certificates of registration for
Globe Telecom, Globe Handyphone, Globe AutoLoad, GlobeQuest DSL Broadband Internet, Broadband
Mobility, “Hub and Other Circular Device” and Innove Communications.
10. Government approvals/regulations
The Globe Group is regulated by the NTC under the provisions of the Public Service Act (CA 146),
Executive Order (EO) 59, EO 109, and RA 7925. Under these laws, Globe is required to do the following:
(a) To secure a CPCN/PA (Provisional Authority) from the NTC for those services it offers which are
deemed regulated services, as well as for those rates which are still deemed regulated, under RA
7925.
(b) To observe the regulations of the NTC on interconnection of public telecommunications networks.
(c) To observe (and has complied with) the provisions of EO 109 and RA 7925 which impose an
obligation to rollout 700,000 fixed lines as a condition to the grant of its provisional authorities for the
cellular and international gateway services.
51
(d) Globe remains under the supervision of the NTC for other matters stated in CA 146 and RA 7925 and
pays annual supervision fees and permit fees to the NTC.
On October 19, 2007, the NTC granted Globe a CPCN to operate and maintain an International Cable
Landing Station and submarine cable system in Nasugbu, Batangas.
On May 19, 2008, Globe Telecom, Inc. announced that the NTC has approved the assignment by its
wholly-owned subsidiary Innove Communications (Innove) of its Touch Mobile (TM) consumer prepaid
subscriber contracts in favor of Globe. Globe would be managing all migrated consumer mobile
subscribers of TM, in addition to existing Globe subscribers in its integrated cellular network.
On September 11, 2008, the NTC granted Globe a PA to establish, install, operate and maintain an
International Cable Landing Station in Ballesteros, Cagayan Province. The PA expires on March 10,
2010. However, Globe has applied for the issuance of a CPCN or an extension of the PA last Feb. 15,
2010.
11. Research and Development
Globe did not incur any research and development costs from 2007 to 2009.
12. Compliance with Environmental Laws
The Globe Group complies with the Environmental Impact Statement (EIS) system of the Department of
Environment and Natural Resources (DENR) and pays nominal filing fees required for the submission of
applications for Environmental Clearance Certificates (ECC) or Certificates of Non-Coverage (CNC) for
its cellsites and certain other facilities, as well as miscellaneous expenses incurred in the preparation of
applications and the related environmental impact studies. The Globe Group does not consider these
amounts material.
13. Employees
The Globe Group has 5,451 active regular employees as of December 31, 2009, of which about 10% are
covered by a Collective Bargaining Agreement (CBA) through the Globe Telecom Workers Union
(GTWU). Globe has a long-standing, cordial, and constructive relationship with the GTWU characterized
by industrial peace. It is a partnership that mutually agrees to focus on shared goals – one that has in
fact allowed the attainment of higher levels of productivity and consistent quality of service to customers
across different segments.
In March 2009, we have seen the strong partnership come to play with the conclusion of the CBA
Negotiations for 2009-2010. The partnership, centered on industrial peace and harmony, is focused on
shared goals and commitment to quality service, growth and productivity.
Between 2007 and 2009, there was no major dispute which warranted GTWU to file a notice of strike
against Globe. On November 2005, the GTWU began its negotiations for another five-year agreement
with Globe Telecom. An agreement was promptly reached over the economic and non-economic
provisions of the CBA last December 2005. The CBA is valid until December 31, 2010 with a
renegotiation on the economic aspects in 2008. On 27 November 2008 Globe Telecom, Inc. started the
re-negotiation of the economic provisions of its CBA with the GTWU. The parties have already come to
an agreement on the terms of the new CBA and the same has been ratified and signed by the GTWU
last 16 March 2009.
Breakdown of employees by main category of activity from 2007to 2009 are as follows:
Employee Type
Rank & File, CBU
Supervisory
Managerial
Executives
2009
2,750
1,600
800
301
2008
3,125
1,656
773
296
2007
3,132
1,450
660
269
Total *
5,451
5,850
5,511
*Includes Globe, Innove, & GXI (excluding Secondees)
52
Globe Telecom continues to explore new ways to enhance employee productivity and realize operating
efficiencies. The Company believes that these initiatives will improve corporate agility, enhance Globe’s
overall competitiveness and strengthen its position as a service leader in the telecom industry, thereby
enhancing shareholder value.
14. Risk Factors
(a) Foreign Exchange Risk
The Globe Group’s foreign exchange risk results primarily from movements of the PHP against the USD
with respect to USD-denominated financial assets, USD-denominated financial liabilities and certain
USD-denominated revenues. Majority of Globe Group’s revenues are generated in PHP, while
substantially all of capital expenditures are in USD. In addition, 14%, 12% and 20% of debt as of
December 31, 2009, 2008 and 2007, respectively, are denominated in USD before taking into account
any swap and hedges.
The Globe Group’s foreign exchange risk management policy is to maintain a hedged financial position,
after taking into account expected USD flows from operations and financing transactions. Globe
Telecom enters into short-term foreign currency forwards and long-term foreign currency swap contracts
in order to achieve this target.
(b) Industry and Operational Risks
(i.) Competitive Industry
The Philippine telecommunications industry is dominated by the wireless sector which contributed 69%
of total industry revenues in 2008. With SIM penetration over 70% and the market largely prepaid,
competition in the cellular business continues to be intense as operators compete for share of spend in a
maturing market.
Multi-SIM usage is prevalent in the country as subscribers take advantage of the intra-network offers of
the various operators. Intense competition, increasing take-up of bucket and unlimited SMS offers, and
the operators’ expansion into the lower-income segments, have all put increasing pressure on prices and
ARPUs (average revenues earned per subscriber).
The principal players in the industry are Globe Telecom, Philippine Long Distance Telephone Company
(“PLDT”) and its wireless subsidiary Smart Communications, Inc. (“Smart”), and Digital
Telecommunications Philippines, Inc. (“Digitel”) which launched its wireless “Sun Cellular” mobile service
in 2003. Other players include Bayan Telecommunications, Inc. (“Bayantel”) and Express
Telecommunications Co., Inc. (“Extelcom”), which are both licensed to provide wireless mobile services.
In 2008, PLDT purchased Connectivity Unlimited Resources Enterprises or CURE, one of the four
recipients of 3G licenses awarded by the NTC in 2005. CURE subsequently launched its own 3G mobile
service under the brand, Red Mobile. PLDT also recently announced its purchase of a stake in
MERALCO with which Globe and other telcos have joint pole agreements.
Additionally, during the year, San Miguel Corporation (SMC), Southeast Asia’s largest food and
beverage conglomerate announced that it has partnered with Qatar Telecom (QTel) and purchased
interests in Liberty Telecom, Inc. (Liberty). SMC reportedly plans to offer mobile and broadband services
through Liberty.
While wireless subscriber growth is expected to continue, it may not continue to grow at the same rate
as in the past. Further reductions in tariffs, deeper penetration into lower-usage subscriber segments,
and the increasing incidence of multi-SIM usage will continue to put pressure on average revenues per
subscriber.
Other industry considerations include the capital-intensive nature of the business, the rapid pace of
change in telecommunications technology, and the regulated nature of the industry.
(ii.) Highly Regulated Environment
53
Globe is regulated by the NTC for its telecommunications business and by the SEC and the BSP for
other aspects of its business. The introduction of, changes in, or the inconsistent or unpredictable
application of laws or regulations from time to time, may materially affect the operations of Globe, and
ultimately the earnings of the Company which could impair its ability to service debt. There is no
assurance that the regulatory environment will support any increase in business and financial activity for
Globe.
The exercise of regulatory power by regulators, including monetary regulators, may be subject to review
by the courts on the complaint of affected parties.
No assurance can be given that the regulatory environment in the Philippines will remain consistent or
open and that the current or future policies may affect the business and operations of Globe.
(c) Philippine Political and Economic Factors
The growth and profitability of Globe may be influenced by the overall political and economic situation of
the Philippines in that any political or economic instability in the future may have a negative impact on
the Company’s financial results.
15. Management of Risks
The Globe Group has adopted an expanded corporate governance approach in managing its business
risks. An Enterprise Risk Management Policy was developed to provide a better understanding of the
different risks that could threaten the achievement of the Globe Group’s mission, vision, strategies, and
goals. The policy also highlights the role that each individual in the organization plays in managing risks
and in ensuring that the Globe Group’s business objectives are attained. Globe has also developed an
Enterprise Risk Management Framework that defines the basic structure by which to integrate and align
strategies, management systems, culture, and processes, as well as build competencies towards
identifying threats and managing risks. The policies are not intended to eliminate risk but to manage it in
such a way as to enhance value creation for all stakeholders.
The Board of Directors (BOD) has an oversight role over Globe’s risk management activities. In 2008,
the BOD assigned to the Board’s Executive Committee oversight responsibility for specific non-financial
risks (i.e. strategic and regulatory). The Audit Committee of the BOD provides oversight of financial
reporting and operational risks.
The President and CEO, as the over-all risk executive, oversees the risk management activities of the
Company. The CEO is supported by the Chief Financial Officer and concurrent Chief Risk Officer, and a
risk management unit under the Office of Strategy Management (OSM). This structure ensures better
alignment of Globe’s risk management activities with its strategic planning and execution capabilities,
and more tightly links risk mitigation efforts with Globe’s day-to-day operations.
Risk owners have been identified for each risk and they are responsible for coordinating and
continuously improving risk strategies, processes and measures on an enterprise-wide basis in
accordance with established business objectives.
The risks are managed through the delegation of management and financial authority and individual
accountability as documented in employment contracts, consultancy contracts, letters of authority, letters
of appointment, performance planning and evaluation forms, key result areas, terms of reference and
other policies that provide guidelines for managing specific risks arising from the Globe Group’s
business operations and environment.
Percentage of sales or revenues and net income contributed by foreign sales
Globe operates its telecommunications services in the Philippines although it earns minimal revenue from
the roaming usage of its subscribers abroad
Bankruptcy, receivership or similar proceeding: None
Material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets
not in the ordinary course of business.
54
No material consolidation or purchase or sale of a significant amount of assets (not in the ordinary course of
business) from 2007 to 2009.
CORPORATE GOVERNANCE
Globe strive to adhere to the highest standards of ethics and governance in all that we do. Globe recognizes
the importance of good governance in realizing its vision, carrying out its mission, and living out its values to
create and sustain increased value for all its stakeholders. The impact of global conditions and challenges
further underscores the need to uphold Globe’s high standards of corporate governance to strengthen its
structures and processes.
As strong advocates of accountability, transparency and integrity in all aspects of the business, the Board of
Directors (“Board”), management, officers, and employees of Globe commit themselves to the principles and
best practices of governance in the attainment of its corporate goals.
The basic mechanisms for corporate governance are principally contained in Globe’s Articles of
Incorporation and By-Laws. These documents lay down, among others, the basic structure of governance,
minimum qualifications of directors, and the principal duties of the Board and officers of the Company.
Globe’s Manual of Corporate Governance supplements and complements the Articles of Incorporation and
By-Laws by setting forth the principles of good and transparent governance. In 2009, the Company
commissioned a review of the manual to update and improve it. This review was completed in February
2010 and new provisions have been incorporated in the manual.
Globe has likewise adopted a Code of Conduct, Conflict of Interest, and a Whistleblower Policy for its
employees, and has existing formal policies concerning Unethical, Corrupt and Other Prohibited Practices
covering both its employees and the members of the Board. These policies serve as guide to matters
involving work performance, dealings with employees, customers and suppliers, handling of assets, records
and information, avoidance of conflict of interest situations and corrupt practices, as well as the reporting and
handling of complaints from whistleblowers, including reports of fraudulent reporting practices.
Moreover, Globe adopted an expanded corporate governance approach in managing business risks. An
Enterprise Risk Management Policy was developed to provide a better understanding of the different risks
that could threaten the achievement of the Company’s vision, mission, strategies and goals. The policy also
highlights the vital role that each individual plays in the organization – from the Senior Executive Group
(SEG) to the staff –in managing risks and in ensuring that the Company’s business objectives are attained.
New initiatives are regularly pursued to develop and adopt corporate governance best practices, and to build
the right corporate culture across the organization. In 2009, Globe participated in various activities of the
Institute of Corporate Directors (ICD) and the Philippine Securities and Exchange Commission (SEC) to
improve corporate governance practices and refine the corporate governance self-rating system and
scorecard used by publicly listed companies to assure good corporate governance.
The following sections summarize the key corporate governance structures, processes and practices
adopted by Globe.
Board of Directors
Key Roles
The Board of Directors is the supreme authority in matters of governance. The Board establishes the vision,
mission, and strategic direction of Globe, monitors over-all corporate performance, and protects the longterm interests of the various stakeholders by ensuring transparency, accountability, and fairness. The Board
exercises an oversight role over the risk management function while ensuring the adequacy of internal
control mechanisms, reliability of financial reporting, and compliance with applicable laws and regulations.
In addition, certain matters are reserved specifically for the Board’s disposition, including the approval of
corporate operating and capital budgets, major acquisitions and disposals of assets, major investments, and
changes in authority and approval limits.
Board Composition
55
The Board is composed of eleven (11) members, elected by stockholders entitled to vote during the Annual
Stockholders Meeting (ASM). The Board members hold office for one year and until their successors are
elected and qualified in accordance with the By-laws of Globe.
The roles of the Chairman of the Board and the Chief Executive Officer (CEO) are clearly delineated and are
held by two individuals to ensure balance of power and authority and to promote independent decisionmaking. Of the eleven members of the Board, only the President & CEO is an executive director; the rest are
non-executive directors who are not involved in the day-to-day management of the business.
The Board includes two independent directors of the caliber necessary to effectively weigh in on Board
discussions and decisions. Globe defines an independent director as a person who is independent from
management and free from any business or other relationship which could materially interfere with his
exercise of independent judgment in carrying out his responsibilities as a director.
All board members have the expertise, professional experience, and background that allow for a thorough
examination and deliberation of the various issues and matters affecting Globe. The members of the Board
have likewise attended trainings on corporate governance prior to assuming office.
For further details on the Globe’s financial condition and operations, please refer to the 2009 Audited
Financial Statements which is incorporated herein in the accompanying index to exhibits.
MANILA WATER COMPANY, INC.
Manila Water Company, Inc. (MWCI or Manila Water) - balance sheets and income statements are
shown below:
Balance Sheets
(In Million Pesos)
DECEMBER 31
2009
2008
Total Current Assets
Total Non-current Assets
9,178
34,580
8,605
27,763
Total Assets
43,758
36,368
Current Liabilities
Non-current Liabilities
Equity Holders
Minority Interest
5,427
21,361
16,817
154
4,231
17,680
14,450
8
Total Liabilities & Stockholders' Equity
43,758
36,368
56
Manila Water Company, Inc.
Statements of Income
(In Million Pesos)
DECEMBER 31
2009
2008
Operating Revenues
Other Income (Expense)
Total Revenues
9,533
(611)
8,922
8,914
(261)
8,652
Costs and expenses
Provision for income tax
4,686
1,005
5,691
4,396
1,469
5,864
Net Income
3,231
2,788
3,277
(1)
3,276
2,790
2,790
1.31
1.31
1.13
1.13
Attributable to:
Equity holders of MWCI
Minority Interest
EPS:
Basic
Diluted
As of December 31, 2009
Basic based on 2,028,078K common shares
Diluted based on 2,030,533K common shares
As of December 31, 2008
Basic based on 2,019,834K common shares
Diluted based on 2,022,719K common shares
Manila Water Company, a Philippine company established in 1997 with the primary purpose of providing
water, sewerage and sanitation services. MWCI is a concessionaire of the Metropolitan Waterworks and
Sewerage System (MWSS). It currently serves a total estimated population of over six million people in the
East Zone, comprising a broad range of residential, commercial and industrial customers. For the year
ended December 31, 2009, the Company registered P9.5 billion of revenues and P3.2 billion of net income.
Of MWCI’s revenues during this period, 84% or P8.0 billion were generated from water delivery services in
the East Zone. The Company’s total assets as of December 31, 2009 stood at P43.8 billion and
shareholders’ equity at P17.0 billion.
Under the terms of the Concession Agreement entered into on February 21, 1997 (the “Concession
Agreement”) with the MWSS, a government-owned and controlled corporation, MWCI was granted exclusive
rights to service the East Zone as an agent and contractor of MWSS. Under the Concession Agreement,
MWSS granted MWCI the use of MWSS’s land and operational fixed assets and the exclusive right, as
agent of MWSS, to produce and treat raw water, distribute and market water, and collect, transport, treat,
dispose and eventually re-utilize wastewater, including reusable industrial effluent discharged by the
sewerage system for the East Zone. MWCI is entitled to recover over the 25-year concession period its
operating, capital maintenance and investment expenditures, business taxes, and Concession Fee
payments, and to earn a rate of return on these expenditures for the remaining term of the Concession. As
the Company has the exclusive rights to service the East Zone, no other entity can provide water services
within this area. Hence, MWCI has no competitors within its service area.
57
On October 22, 2009, MWCI’s application for the 15-year renewal of the CA was acknowledged and
approved by the Department of Finance following the special authority granted by the Office of the President.
With the CA renewal, the term of the concession was extended for 15 years or from the original 2008-2022
to 2008-2037. Under the said agreement, MWCI is entitled to recover the operating and capital
expenditures, business taxes, concession fee payments and other eligible costs, and to earn a reasonable
rate of return on these expenditures for the remaining term of the concession or until 2037.
The East Zone encompasses parts of Manila, San Juan, Taguig, Pateros, Antipolo, Taytay, Jala-Jala, Baras,
Angono, San Mateo, Rodriquez, Marikina, Pasig, Mandaluyong, Makati and most of Quezon City. Despite a
challenging business environment, MWCI sustained its volume of water sales for 2009. The volume of water
delivered to customers in 2009 totaled 396.0 million cubic meters (“MCM”), reflecting a 2.2% growth year-onyear. The increase was brought about by additional new service connections that reached 52,411 for 2009,
coming largely from the expansion areas in Rizal and Taguig. MWCI served a total of 1,086,296 households
through 736,305 water service connections as of December 31, 2009, as compared to last year’s level of
1,031,895 households and 683,894 water service connections.
From August 1, 1997, at the commencement of the Concession Agreement, to December 31, 2009, MWCI
has increased the number of customers it serves by more than two million, most of whom belong to lower
income communities in the East Zone. At the start of the Concession, only 26.0% of customers enjoyed
water supply 24 hours a day, compared to 99.0% who enjoyed 24-hour availability as of December 31, 2009.
MWCI’s non-revenue water (“NRW”) levels were significantly reduced from 63.0% at the date of
commencement of operations to an average of 15.8% for the month ended December 31, 2009.
Since August 1, 1997 up to December 31, 2008, MWCI spent over P32.4 billion on capital expenditures and
on projects funded by MWSS loans paid through Concession Fees (the “Concession Fee Projects”) by
MWCI. These capital expenditures were used for projects geared towards the improvement of water
service, reduction of water losses, maintenance of water quality, implementation of sustainable development
programs and expansion initiatives in Rizal and Taguig. From 2010 to 2014, MWCI expects to spend P47.6
billion on capital expenditures and Concession Fee payments. MWCI plans to continue to develop new
water sources, expand its water distribution network, rehabilitate its facilities to improve operational
efficiency reliability, expand sanitation and sewerage services and intensify implementation sustainable
development and environmental programs.
Manila Water has also expanded its services outside of the East Zone of Metro Manila. In July 2008, the
Company won a contract for leakage reduction in Ho Chi Minh City, Vietnam. Prior to this, Manila Water
already has an existing management contract in Tirupur, India. Through new joint venture companies,
Manila Water acquired two (2) new concessions outside of the East Zone, namely, Laguna and Boracay.
MWCI’s principal shareholders include the Ayala Corporation (“Ayala”), United Utilities Pacific Holdings BV
(“United Utilities”), Mitsubishi Corporation and the International Finance Corporation (“IFC”).
The Concession
The following are some of the key terms of the Concession Agreement:
•
Term and Service Area of Concession. The Concession took effect on August 1, 1997
(“Commencement Date”) and will expire on May 6, 2022 or on an early termination date as provided
by the Concession Agreement. By virtue of the Concession Agreement, MWSS transferred its
service obligations (i.e., water supply, sewerage and sanitation, and customer service) in the East
Zone to the Company.
•
Ownership of Assets. While the Company has the right to manage, operate, repair, decommission
and refurbish specified MWSS facilities in the East Zone, legal title to these assets remains with
MWSS. The legal title to all fixed assets contributed to MWSS by the Company during the
Concession remains with MWCI until the expiration date (or an early termination date), at which time
all rights, titles and interests in such assets will automatically vest in MWSS.
•
Ownership of the Company. Under the Concession Agreement, MWSS granted concessions for
water distribution to private-sector corporations at least 60.0% of the outstanding capital stock of
which is owned and controlled by Philippine nationals. In addition, MWCI represents and warrants to
MWSS that its outstanding voting capital is at least 60.0% owned by citizens of the Philippines or by
corporations that are themselves at least 60.0% owned by citizens of the Philippines.
58
•
Sponsor Commitment. Ayala, as local sponsor, and United Utilities PLC, as international operator,
are each required to own, directly or through a subsidiary that is at least 51.0% owned or controlled,
at least 20.0% of the outstanding capital stock of MWCI for the first five years (through December
31, 2002), and thereafter at least 10.0% each.
•
Operations and Performance. MWCI has the right, as an agent of MWSS, to bill and collect for
water and sewerage services supplied in the East Zone. In return, MWCI is responsible for the
management, operation, repair and refurbishment of MWSS facilities in the East Zone and must
provide service in accordance with specific operating and performance targets described in the
Concession Agreement.
•
Concession Fees. The Company is required to pay MWSS the following:
•
Concession Fees consisting of the Peso equivalent of (i) 10.0% of the payments due
under any MWSS loan that was disbursed prior to the Commencement Date; (ii) 10.0%
of payments due under any MWSS loan designated for the Umiray-Angat Transbasin
Project (“UATP”) that was not disbursed prior to the Commencement Date; (iii) 10.0% of
the local component costs and cost overruns related to the UATP; (iv) 100.0% of the
payments due under any MWSS designated loans for existing projects in the East Zone
that were not disbursed prior to the Commencement Date and were awarded to third
party bidders or elected by the Company for continuation; and (v) 100.0% of the local
component costs and cost overruns related to existing projects in the East Zone; and
•
an amount equal to one-half the annual budget for MWSS each year, provided that the
annual budget does not exceed P200 million (subject to annual inflation adjustments).
MWSS is required to provide MWCI with a schedule of Concession Fees payable during any year by
January 15 of that year and a written notice of amounts due no later than 14 days prior to the
scheduled payment date of principal, interest, fees and other amounts due. Currently, MWSS
invoices MWCI monthly for these fees.
•
Appropriate Discount Rate. MWCI is entitled to earn a rate of return equal to the Appropriate
Discount Rate (“ADR”) on its expenditures prudently and efficiently incurred for the remaining term of
the Concession. The ADR is the real (net of inflation) weighted average cost of capital after taxes as
determined by the Regulatory Office based on conventionally and internationally accepted methods,
using estimates of the cost of debt in domestic and international markets, the cost of equity for utility
business in the Philippines and abroad with adjustments to reflect country risk, exchange rate risk
and any other project risk. MWCI’s ADR from 2003 to 2007 is 10.4%. Pursuant to MWSS Resolution
No. 2007-278 dated December 14, 2007, the new ADR applicable for 2008 to 2012 is 9.3%.
•
Tariff Adjustments and Rate Regulation. Water tariff rates are adjusted according to mechanisms
that relate to inflation, extraordinary events, foreign currency differentials and Rate Rebasing
exercises.
•
Early Termination. MWSS has a right to terminate the Concession under certain circumstances
which include insolvency of the Company or failure to perform an obligation under the Concession
Agreement, which, in the reasonable opinion of the Regulatory Office, jeopardizes the provision of
essential water and sewerage supply services to all or any significant part of the East Zone. The
Company also has the right to terminate the Concession for the failure of MWSS to perform an
obligation under the Concession Agreement, which prevents MWCI from carrying out its
responsibilities or upon occurrence of certain events that would impair the rights of the Company.
•
Reversion. On the expiration of the Concession Agreement, all the rights, duties and powers of the
Company automatically revert to MWSS or its successors or assigns. MWSS has the option to
rebid the Concession or renew the agreement with the express written consent of the Government.
Under the Concession Agreement, MWCI and the concessionaire of the West Zone of Metro Manila,
Maynilad Water Services, Inc. (“Maynilad”), as Concessionaires, were required to enter into a joint venture or
other arrangement that identifies the responsibilities and liabilities of each with regard to the operation,
maintenance, renewal and decommissioning of certain common purpose facilities, as well as an
59
interconnection agreement which governs such matters as water supply transfers between the East and
West Zones and boundary definitions and identifies the responsibilities and liabilities of parties with regard to
the management, operation and maintenance of certain interconnection facilities. Pursuant to this, the
Concessionaires entered into the Common Purpose Facilities Agreement and the Interconnection
Agreement in July 1997.
The Regulatory Office of MWSS
The Concession Agreement also provided for the establishment of the Regulatory Office of MWSS under the
jurisdiction of the MWSS Board of Trustees, to oversee and monitor the operations of the Concessionaires.
The Regulatory Office is composed of five members with five-year terms, and no member of the Regulatory
Office may have any present or prior affiliation with MWSS, MWCI or Maynilad. The Regulatory Office is
funded by MWSS through the Concession Fee payments of the Concessionaires. The Concession
Agreement provides that major disputes between the Company and the Regulatory Office be referred to an
appeals panel consisting of two members appointed by each of the Regulatory Office and MWCI and a third
member appointed by the Chairman of the International Chamber of Commerce. Under the Concession
Agreement, both parties waive their right to contest decisions of the appeals panel through the courts.
Key Performance Indicators and Business Efficiency Measures
The Concession Agreement initially set service targets relating to the delivery of services by MWCI. As part
of the Company and Regulatory Office’s Rate Rebasing exercise that ended on December 31, 2002, MWCI
and MWSS mutually agreed to amend these targets based on MWCI’s business and capital investment plan
accepted by the Regulatory Office. In addition, MWCI and MWSS adopted a new performance-based
framework. This performance-based framework, designed to mimic the characteristics of a competitive
market and help the Regulatory Office determine prudent and efficient expenditures, utilizes Key
Performance Indicators (“KPI”) and Business Efficiency Measures (“BEM”) to monitor the implementation of
MWCI’s business plan and will be the basis for certain rewards and penalties on the 2008 Rate Rebasing
exercise.
Fourteen KPIs, representing critical performance levels for the range of activities MWCI is responsible for,
relate to water service, sewerage and sanitation service and customer service. The BEMs are intended to
enable the Regulatory Office to evaluate the efficiency of the management and operation of the concessions
and gauge progress toward the efficient fulfillment of the Concessionaires’ business plans. There are nine
BEMs relating to income, operating expenses, capital expenditures and NRW. The BEMs are evaluated for
trends and annual forecasts. For the past years, the Company has been consistently receiving
commendation from the MWSS Board of Trustees for outperforming the target set by the Regulators in terms
of KPI and other service obligations.
Since 2003, Manila Water has consistently complied with its KPI and BEM targets, and in fact, exceeded
some performance indicators.
Amendment to the Concession Agreement
The Concession Agreement was amended under Amendment No. 1 to the Concession Agreement executed
on October 26, 2001. Amendment No. 1 adjusted water tariffs to permit adjustment for foreign exchange
losses and reversal of such losses, which under the original Concession Agreement were recovered only
when the Concessionaire petitioned for an Extraordinary Price Adjustment.
Organization
MWCI is organized into six functional groups: (i) Project Delivery (formerly called Capital Works); (ii)
Operations; (iii) East Zone Business Operations; (iv) Regulation and Corporate Development; (v) Corporate
Resources; and (vi) Corporate Finance and Governance.
•
The Project Delivery Group, the Operations Group and the Business Group work together and form
the backbone for the delivery of MWCI’s services stipulated under the Concession Agreement. The
Project Delivery Group is responsible for developing the infrastructure for the supply and distribution
of water as well as the treatment and conveyance of wastewater.
60
•
The Operations Group, in turn, uses MWCI’s existing facilities as well as any new facilities
developed by the Project Delivery Group to handle day-to-day delivery of water and sewerage
services to customers and monitor water demand and NRW levels against available water supply
and other service targets set for the Company by the Regulatory Office. The Operations Group and
the Business Group also advise the Project Delivery Group on the infrastructure required to meet
service targets.
•
The East Zone Business Operations Group deals directly with MWCI’s customers, handling
customer requests for water and sewerage connections, billing and collection, and the Company’s
customer care center.
•
The Regulation and Corporate Development Group interfaces with the Regulatory Office on all
matters relating to the Concession Agreement, including submitting reports and disclosures to the
Regulatory Office relating to compliance as well as handling negotiations with the Regulatory Office
relating to the Company’s service targets. This Group also distills information from the Company’s
other groups to produce and periodically update financial projections, which serve as the bases for
petitions submitted to the Regulatory Office for quarterly, annual, and five-year tariff adjustments. In
addition, the Group is responsible for the Company’s new business development initiatives as well
as the Company’s international prospects. The Corporate Communication Department is responsible
for executing MWCI’s communication plan, and supporting MWCI’s various projects and programs
that address issues of public importance. The Sustainable Development Department develops and
implements social and environmental programs that are consistent with corporate goals.
•
The Corporate Resources Group is responsible for the Human Resources Operations Center
(“HROC”), the Human Resources Development Center (“HRDC”), and General Administration and
Security. The HROC is responsible for the research and administration of compensation and
benefits, talent and various change management programs.
•
The Corporate Finance and Governance Group, which is headed by the Chief Finance Officer,
performs basic financial services for MWCI. The Group is composed of eight departments: Treasury
and Investor Relations, Contracts and Vendor Management, Accounting, Tax Management,
Financial Planning, Systems and Control (“FPSCD”), Internal .Audit, Legal and Corporate
Governance and Enterprise Risk Management (“ERM).
To better address customer concerns, MWCI follows a decentralized approach in the provision of water and
sewerage services. Under this approach, the East Concession Area was divided into eight Business Areas,
each composed of several District Metering Zones (“DMZs”). Each DMZ is comprised of 1,500-3,000
accounts and is managed by a Territory Manager. In empowering the Territory Manager to oversee the
technical, business and customer service aspects of the DMZ, Manila Water is able to ensure that the needs
of customers are given the utmost attention and the highest quality of service.
Water Operations
The supply of water by MWCI to its customers generally involves abstraction from water sources,
subsequent treatment and distribution to customers’ premises. In 2009, MWCI supplied approximately 1,341
MLD and billed 396 million cubic meters (MCM) of water compared to 1,379 MLD of water supplied and 387
MCM billed in 2008. MWCI serves a total of 1,086,296 households through 736,305 water service
connections as of December 31, 2009, as compared to December 31, 2008 where a total of 1,031,895
households were served through 683,894 water service connections.
Water Resources
Under the Concession Agreement, MWSS is responsible for the supply of raw water, free of charge, to
MWCI’s distribution system and is required to supply a minimum quantity of water, currently 1,600 MLD.
Should MWSS fail to supply the minimum quantity, MWCI is required to distribute available water equitably.
MWCI substantially receives all of its water from MWSS, which holds permits to the raw surface waters of
the Angat and Umiray Rivers. The raw surface water which MWSS supplies to MWCI comes from the Angat
and Umiray Rivers, abstracted from the Angat Dam, and conveyed to the Ipo Dam through the Ipo River.
The remainder of MWCI’s water supply is ground-sourced through deep wells in various locations within the
61
East Zone. As of December 31, 2009, MWCI has 12 operational deep wells with an average production of
16 MLD.
Water Treatment
Raw water is stored at the La Mesa reservoir located immediately downstream of the Novaliches portal
interconnection prior to treatment in two filter plants in Balara located seven kilometers away. Aqueducts
enable either intake from three towers at La Mesa reservoir or by-pass flow direct from the portal
interconnection to Balara.
The Balara treatment plants have a total design capacity of 1,600 MLD and consist of two separate
treatment systems: Balara 1, which was commissioned in 1935 and Balara 2 which was commissioned
1958, with common use of chemical preparation and dosing facilities. The treatment process involves
coagulation, flocculation, sedimentation, filtration and chlorination. The facilities consume higher quantities
of chemicals during the rainy season when the turbidity of water increases, which leads to increased costs of
operations.
The plants nonetheless are continuously being improved and upgraded. To date, both have been installed
with an on-line monitoring system. This enables real-time monitoring of water quality data which in turn
provide an enhancement in chemical dosing efficiency. The backwashing system of Filter 1, on the other
hand, was upgraded to semi-automatic.
To further increase the efficiency of the plants, a pilot study to upgrade the process is currently being
conducted.
The upgrading is expected to increase the total capacity of the plants by about 250 mld.
Water Distribution
After treatment, water is distributed through MWCI’s network of pipelines, pumping stations and miniboosters. As of December 31, 2009, MWCI’s network consisted of around 4,000 kms of total pipeline,
comprising of primary, secondary and tertiary pipelines ranging in diameter from 50 to 2,200 mm. The pipes
are made of steel, cast iron, asbestos cement pipe, polyvinyl chloride and other materials. Due to pipes’
excessive tendency to leak, MWCI is replacing all of its asbestos cement pipes (ACP), which at the start
were estimated to comprise approximately 25.0% of the total pipeline length. MWCI has replaced a total of
78km of ACP as of December 31, 2009. From the start of the concession in 1997 until the end of 2009,
MWCI has laid approximately 3,000 km of pipeline through expansion or replacement.
Pumping stations also play a critical part in water distribution. Approximately 60.0% of the surface water
supplied by MWCI is pumped to ensure supply in high elevation areas. From the previous eight major
pumping stations, MWCI now operates an additional four major pumping stations. Three of those provide
the supply for Antipolo area and the other one for Cainta, Taytay and Angono areas. The pumping stations’
combined maximum pumping capacity is now at 2686 MLD and an average plant output of 970 MLD. The
Balara, San Juan, Pasig, Makati, and Fort Bonifacio pumping stations also have reservoirs with a combined
capacity of 204 ML. The two new pumping stations at Antipolo namely Siruna and Lucban are also provided
with reservoirs whose total volume is equal to 35 ML.
MWCI operates 14 line boosters in order to reach the fringe areas, which are quite distant from the Central
Distribution System. Line boosters typically are small facilities aimed to augment water supply for areas that
are not sufficiently supplied during the regular pumping operations of the main boosters.
Non-Revenue Water
Non-revenue water refers to the volume of water lost in MWCI’s distribution system due to leakage,
pilferage, illegal connections and metering errors. As determined by the Regulatory Office, NRW is
calculated as a percentage of the net volume of water supplied by MWCI. The net volume of water
supplied by MWCI comprises the total volume of water supplied by the Company net of Cross Border
Volume. Cross Border Volume is the volume of water transferred to the West Zone Concessionaire less
transfers received by the East Zone from the West Zone Concessionaire in the past. As of date, the cross
border flows have completely stopped.
62
MWCI’s NRW levels have been significantly reduced from an average of 63.0% at the date of
commencement of operations under the Concession Agreement to an average of 15.8% for the year ended
December 31, 2009. The significant improvement in MWCI’s system losses was accomplished through
effective management of water supply coupled with massive pipe replacement projects.
Water Quality
Since 1998, MWCI’s water quality has consistently surpassed the Philippine National Standards for Drinking
Water (“PNSDW”) set by the Department of Health (“DOH”) and based on World Health Organization water
quality guidelines. MWCI’s rating was based on a series of tests conducted regularly at 922 (EO 2009)
sampling points within the East Zone. The Company’s water samples scored an average bacteriological
compliance of 100%, surpassing the threshold of 95.0% set in the PNSDW. In 1997, when the Concession
began, only 88% of water samples complied with these quality standards. MWCI collects regular samples
on a monthly basis for bacteriological examination of treated surface water and ground water sources as well
as water sources (Angat, Ipo, Bicti and La Mesa Reservoirs).
Water quality at MWCI’s treatment plants undergoes daily bacteriological and physical-chemical analysis.
Across the distribution system within the coverage area, sampling is conducted jointly with the Regulatory
Office and DOH and each sample collected undergo monthly bacteriological and physical/chemical
analyses.
The Department of Health, together with the MWSS Regulatory Office, confirmed that MWCI’s water quality
consistently exceeded the Philippine National Standards for Drinking Water. This record is further affirmed
by an ISO 17025:2005 accreditation (meeting the principles of ISO 9001:2008) obtained by MWCI’s
laboratory for water/wastewater quality and testing in October 2006.
Sewerage Operations
MWCI is responsible for the provision of sewerage and sanitation services through the operation of new and
existing sewerage systems and a program of regular maintenance of household septic tanks in the East
Zone.
Sewerage and Sanitation System
Since 1997, MWCI has significantly improved and expanded the limited wastewater infrastructure originally
operated and maintained by the MWSS. Sewerage services are provided in areas where treatment facility is
feasible, politically, socially, and economically. With such limitations, sewered areas are mostly located in
Quezon City and Makati, but parts of Manila, Taguig, Cainta, Pasig and Mandaluyong are also connected to
sewer networks.
MWCI has few facilities for sewerage services in 1997. The Sewage Treatment Plant (“STP”) in Magallanes
Village is the largest treatment facility in the country with a 40 MLD capacity. The Karangalan Bio-module in
Karangalan Village serves approximately 100 households but also produced substandard effluent quality
before 1997. An imhoff tank in Phil-Am Village and thirty-one communal septic tanks (“CSTs”) in Quezon
City were also turned-over in 1997. These facilities serve approximately 19,000 households. These facilities
have been upgraded to secondary treatment and now meet effluent standards set by the DENR.
In 2001, MWCI constructed two pilot package Sewage Treatment Plants (“STPs”) to determine if they are
feasible in terms of social, financial, and environmental aspects. These are located in Valle Verde Homes,
Pasig that serves approximately 100 households and another serves some 400 households of the housing
project in Makati together with approximately 4,000 students and employees in Rizal Elementary School.
With the success of the two pilot STPs, the Company implemented the Manila Second Sewerage Project
(“MSSP”) funded by World Bank. Under the MSSP, twenty-six STPs were constructed. Sixteen of these
STPs were formerly CSTs and the rest are on-site STPs for medium and high rise housing establishments
and for UP campus. Takeover and upgrade of the STP in Diego Silang, Taguig was also part of the MSSP.
In 2007, MWCI successfully took over the operations and maintenance of the Bonifacio Water Sewage
Treatment Plant in Fort Bonifacio Taguig City. This facility brought an additional 5MLD treatment capacity.
63
Sewer coverage by the end of 2009 increased to 16% from just 3% coverage in 1997, totaling more than
72,000 households benefiting from this service. As of year-end 2009, MWCI operates 31 STPs with a total
capacity of 87 MLD, compared to 40 MLD in 1997.
Customers who are not connected to the sewer network are provided with septic tank maintenance services
through the ‘Sanitasyon Para Sa Barangay’ (“SPSB”) program. Through cooperation with the barangays the
program aims to desludge all septic tanks in a barangay without charge over a specified, set schedule.
As part of its commitment to expand this service, MWCI constructed and subsequently operated in 2008
under the Manila Third Sewerage Project (“MTSP”) two Septage Treatment Plants aimed at managing septic
tank materials siphoned form the East Concession customers. More than 40 trucks from its current fleet of
92 desludging trucks operate daily to ensure the desludging service is rendered to the entire East
Concession population over the next five years. Since 1997, Manila Water has already provided such
service to more than 455,000 households.
Manila Water will further implement the World Bank-funded MTSP until 2010. The MTSP is a follow-up to the
MSSP and has the ultimate objective of improving sewerage and sanitation conditions in the East Zone
concession area.
Manila Water in 2009 pursued the implementation of the 3-River Master Plan that will provide 100%
treatment to wastewater discharging to the Pasig River-, San Juan River- and Marikina River catchments
within the East Zone. The 3-River Master Plan is envisioned to be a cornerstone of the regional effort to
clean-up Manila Bay.
This P50 billion-mega project is a massive expansion of the “catchment approach” piloted in Manila Water’s
earlier projects. Comprehensive interceptor systems will capture hazardous wastewaters before they pollute
waterways. More than twenty mega-STPs will be constructed to treat these pollutants before safely
discharging them to rivers.
In December 2009, Manila Water began pre-qualification for the bidding of a 100 MLD STP in Bgy.
Concepcion I, Marikina City. Preparation for the bidding of a 40 MLD STP in Bgy. Hagonoy, Taguig City was
also completed. And with the completion of major Feasibility Studies for the 3-River Master Plan in 2009, the
company is in top gear to complete the 3-River Master Plan by 2018.
Related Party Transactions
In the normal course of business, the Company has transactions with related parties. The sales and
investments made to related parties are made at normal market prices. Service agreements are based on
rates agreed upon by the parties. Outstanding balances at year-end are unsecured and interest-free. There
have been no guarantees provided or received for any related party receivables or payable. As of
December 31, 2009, the Company has not made any provision for probable losses relating to amounts owed
by related parties. This assessment is undertaken each financial year by examining the financial position of
the related party and the market in which the related party operates.
MWCI entered into a technical services agreement with United Utilities B.V., an affiliate of United Utilities
Pacific Holdings B.V., for technical services necessary for the operation of MWCI. MWCI also contracted
with Ayala Corporation for administrative, technical and support services in relation to human resources,
treasury, accounting, capital works, corporate services and regulatory affairs and administrative
management of MWCI. MWCI further entered into a Capital Works Program Agreement with Water Capital
Works Inc. (“WCWI”), a company owned by Ayala Corporation, United Utilities Pacific Holdings B.V., and BPI
Capital Corporation, for services relating to the capital works program of MWCI. The agreements are for a
period of ten years and are renewable for successive periods of five years.
In August 2007, the board of directors approved and ratified the renewal of the Technical Services
Agreement with United Utilities, Administrative and Support Services Agreement with Ayala Corporation and
Capital Works Agreement with WCWI for another five years up to 2012.
No other transaction was undertaken by MWCI in which any director or executive officer was involved or had
a direct or indirect material interest.
64
Environmental Compliance
MWCI’s wastewater facilities must comply with Philippine environmental standards set by the Department of
Environment and Natural Resources (“DENR”) on water, wastewater, hazardous and solid wastes. In
keeping with the Company’s commitment to sustainable development, all projects are assessed for their
environmental impact, and where applicable, must obtain an Environmental Compliance Certificate from the
DENR prior to construction or expansion. Subsequent to construction, effluents from facilities, such as
sewage and septage treatment plants, are routinely sampled and tested against DENR standards using
international quality sampling and testing procedures.
MWCI has made efforts to meet and exceed all statutory and regulatory standards. MWCI employs what it
believes to be appropriate treatment, disposal and monitoring procedures and communicates the need for
conservation to its customers and employees. With technical assistance from United Utilities, the Company
uses controlled work practices and preventive measures to minimize risk to the water supply, public health
and the environment. MWCI’s regular maintenance procedures involve regular disinfection of service
reservoirs and mains and replacement of corroded pipes. MWCI believes that all water and wastewater
treatment processes meet the current standards of the Department of Health and DENR.
MWCI has contingency plans in the event of unforeseen failures in the water and wastewater treatment or
chemical leakage and accidental discharge of septage and sewage. MWCI’s Customer Care Center is used
to ensure that discharge problems are tracked, monitored and resolved.
MWCI continues to undertake improvements in the way it recycles both treated wastewater and sewage
sludge. The Company tests sludge for physio-chemical quality standards. Under the monitoring of the
Fertilizer and Pesticide Authority (“FPA”) and the Sugar Regulatory Administration, trials are being conducted
by MWCI on the use of sludge as soil conditioner to reclaim fields damaged by volcanic debris in Pampanga.
The FPA has awarded MWCI a license to manufacture and distribute biosolids as soil conditioner.
To address the concern on climate change, a policy on climate change was formulated to define MWCI’s
commitment to develop and implement a Carbon Management Plan, improve efficiency in energy
consumption, and consider the impact of climate change in the Company’s operations while putting in place
mitigating measures.
Employees
As of December 31, 2009, MWCI had 1,595 employees. Approximately 45% were non-management
employees and 55% held management positions. Five employees were seconded from Ayala.
The following table presents the number of employees as of the end of the periods indicated:
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Former
MWSS
1525
1476
1427
1407
1383
1351
1338
1320
1284
1254
Direct
Hires
13
56
109
109
149
219
241
243
258
329
Seconded
from Ayala
6
7
5
5
4
4
3
4
5
5
Seconded from
Bechtel and
United Utilities Consultants
10
3
8
3
4
2
4
2
2
3
2
3
2
1
2
2
2
2
2
5
Total
1557
1550
1547
1527
1541
1579
1585
1571
1551
1595
The following table presents the number of employees by function as of the December 31, 2009:
65
Group
Office of the President
Corporate Finance & Governance
Regulation and Corporate
Development
Corporate Resources
Eastzone Business Operations
Operations
Project Delivery
Management
2
73
NonManagement
1
13
Total
3
86
46
75
391
205
76
2
33
464
166
36
48
108
855
371
112
Before the privatization, MWSS had 8.4 employees per 1,000 service connections. MWCI has improved this
ratio to 1.5 employees per 1,000 service connections as of December 31, 2009, largely due to improvements
in productivity achieved through, among other things: value enhancement programs; improvements on work
processes; employee coaching and mentoring; transformation to knowledge workers; and various training
programs. MWCI’s organizational structure has been streamlined, reducing the number of non-management
rank levels from sixteen to six, and empowering the employees through decentralized teams with
responsibility for managing territories. In addition, the Company formed multi-functional working teams,
called clusters, composed of members of management tasked with addressing corporate issues such as
quality, risk and crisis management.
As of December 31, 2009, 635 or 40.11% of the employees of the Company belonged to the Manila Water
Employees Union (“MWEU”). MWCI and MWEU concluded negotiations on a new Collective Bargaining
Agreement covering a 3-year period from 2008 to 2011. The agreement provides for a grant of P127.7
million compensation and benefits package to employees categorized as non-management Collective
Bargaining Unit employees over three years. MWCI believes that its management maintains a strong
relationship with union officials and members. The Company has not had any strikes since its inception.
Grievances are handled in management-led labor councils. The Collective Bargaining Agreement also
provides for a mechanism for the settlement of grievances.
MWCI provides training and development programs to its employees. MWCI established its Customer
Service Institute in August 2002 to ensure the development of customer service personnel, providing
employees, particularly those with direct customer contact, with modules on delivering quality service. Other
programs provide training opportunities for the employees.
MWCI also recognizes customer service excellence of its employees through various programs. Corporate
social responsibility programs are also emphasized.
Pursuant to the Concession Agreement the Company adopted an Employee Stock Option Plan (“ESOP”).
The ESOP was instituted to allow employees of MWCI to participate directly in the growth of the Company
and enhance the employee’s commitment toward its long-term profitability.
In 2005, MWCI adopted an Employee Stock Ownership Plan (ESOWN) as part of the incentives and
rewards system of MWCI.
The Concession Agreement also mandates that MWCI institute a welfare fund to which it must contribute no
less than 5.0% of the monthly basic salary of a member of the fund who has authorized MWCI to contribute
to the fund. In 2005, MWCI’s board of directors approved the establishment of an enhanced retirement and
welfare plan. The plan is being administered by a retirement and welfare plan committee, which also has
the authority to make decisions on the investment parameters to be used by the trustee bank.
Risk Factors
Manila Water, being a water utility under concession from the Metropolitan Waterworks and Sewerage
System (MWSS), operates on a highly-regulated business environment. MWCI has to obtain all necessary
regulatory approvals in order to implement projects. Possible challenges by other government entities on
new business initiatives have to be properly managed. MWCI must anticipate, understand and respond to
the communication needs of regulatory bodies to be able to establish and maintain good relationships.
Failure of MWCI to address regulatory uncertainty and recognize adverse conditions brought about by
66
political and social forces within the areas it operates in may restrict market opportunities, hamper and
devalue investments and negatively affect returns on existing assets.
MWCI has to address increased regulatory scrutiny of wastewater discharges as it becomes more
aggressive in expanding its wastewater services. Failure to manage the disposal of wastewater properly in
accordance with public health and safety standards would lead to unfavorable public perception and
cancellation of permits and licenses.
MWCI is bound under the Concession Agreement to comply with certain service obligations and is required
to meet numerous performance and business efficiency targets. Achieving these performance targets will
require substantial capital expenditures, which could become difficult should MWCI fail to raise the funding
required for its capital works. Failure to obtain the requisite funds could delay or prevent the completion of
capital expenditure programs.
Natural and environmental disasters such as earthquakes, floods and typhoons could result to significant
losses as water, wastewater, office and other facilities may be severely damaged which would ultimately
lead to extended water service interruptions.Natural and environmental disasters such as, but not limited to,
earthquakes, floods and typhoons could result in significant losses due to damage of water and wastewater
facilities and service interruptions. Prolonged droughts could result in water supply shortage, which would
limit the ability of MWCI to meet customer demand for potable water.
MWCI continues to expand to other provinces in the Philippines and to neighboring Asian countries as well.
It now operates in new territories which have business environments totally different from that of the East
Zone concession area. Opportunities for providing services other than its core competencies are now being
explored more extensively. MWCI must be able to establish appropriate structure that would allow for an
effective integration of its new businesses. Failure to form synergistic alliances and to effectively manage
relationship with partners may result in service failures and damage in MWCI’s reputation.The expansion
initiatives of MWCI also translate to an increased demand for a competent workforce readily available for
deployment to our prospective new businesses. Failure to create and implement a strategic and integrated
talent management program that attracts, identifies, assesses, develops and retains key talents would
adversely affect MWCI’s ability to meet current and future business needs and expansion objectives.
In order to support and implement initiatives of various units and subsidiaries, MWCI must prioritize
technology programs and effectively allocate IT resources in a timely manner. Failure to adequately plan and
assess significant investments and changes in infrastructure assets as a necessary to support company
programs and projects may lead to failure in developing and monitoring operations.
Management of Risks
Managing Enterprise-wide Risks
Manila Water embarks on an Enterprise Risk Management (ERM) Program to effectively manage risks
through a standard and informed decision-making mechanism and by employing a common risk culture and
language understood by every individual within the Organization. Since its launch in 2001, ERM has steadily
gained firmer footing into MWCI’s risk culture with the establishment of an independent and dedicated Risk
Management Department (RMD). The RMD, headed by the Chief Risk Officer (CRO), acts as specialists
and consultants on matters relating to ERM and is responsible for coordinating the several ERM initiatives
across the organization.
Managing Planning Risks
MWCI uses a risk-based approach to planning and has institutionalized a holistic and unified planning
process. First, top management defines the overall business strategy and direction for the organization.
Then the strategic plan is broken down into specific, short term action and plans at the functional unit level.
Detailed execution plans are then formulated and individual employee targets are set.
Managing Corporate Resources Risks
The Cadetship Training Program which started in 1999 continues to infuse “fresh blood” into MWCI’s
workforce through the hiring of highly-competent talents from the country’s most respected colleges and
67
universities. These cadets, numbering at almost 200, are constantly honed and trained to become capable
Water System Managers who shall take the reins of managing MWCI in the near future.
MWCI also implements a talent management program that will address human resource requirements of
current operations as well as new business initiatives.
As part of its succession planning initiatives, MWCI has instituted various employee development programs
including inter- and intra-department cross-postings, foreign immersions through its foreign partner United
Utilities, Plc. and several leadership development trainings.
Managing Operational and Environmental Risks
To ensure the timely and quality execution of projects, MWCI strengthened its project management team
with the hiring of additional Project Managers and the engagement of Project Management Consultants.
Management of big-ticket water and wastewater projects will be further enhanced with the designation of
Quality Surveyors as site officers. These specialists are oriented and trained accordingly to enhance their
roles as project owners and are made fully-accountable for the success of the projects assigned to them.
Operational risks are still being effectively addressed by MWCI’s Business Continuity and Incident
Management and Response Teams. Recent calamities Ondoy and Pepeng saw these teams being quickly
mobilized to provide aid and potable water to affected residents within the concession area and even
beyond.
In addition to its strong Business Continuity Plan, Manila Water recognizes the impact of climate change in
its current and future operations and has drawn-up a Climate Change Adaptation Plan. This enhances
MWCI’s readiness to respond to possible effects of climate change and take advantage of the resulting
opportunities.
MWCI has prepared for the El Niño phenomenon in 2010 with its Drought Management Plan to ensure
continuous water service. Non-revenue water projects are being fast-tracked to curb physical and
commercial losses and recover water which can be re-allocated to areas with higher demand. Supply and
pressure management measures are also being undertaken in order to maintain the 24/7 water delivery to its
more than five million customers amidst the drought condition. To augment water supply, standby deep
wells are being activated, supplementary water sources such as those in reservoirs are being identified and
La Mesa Dam operations are being optimized.
Managing New Business Risks
Manila Water is enhancing its business development capability with the formulation of a more
comprehensive risk-based project viability screening criteria and scorecard. This becomes critical as Manila
Water accelerates its business development efforts locally and internationally. To ensure the success of new
projects, Manila Water has appointed an Integration Manager to oversee the start-up of new projects and
ensure the transfer of Manila Water best practices and processes to its projects.
Managing Regulatory Risks
To maintain the excellent relationship with its Regulators, Manila Water conducts regular huddles to update
them on various Company matters. The Company ensures that the Regulators are on a “first-to-know” basis
with regard to significant corporate developments and supports the various advocacies which are consistent
with Manila Water’s goals and objectives. MWCI also ensures that they are educated on Company
operations through regular site visits, lakbayan trips and invitations to events, workshops and capacityenhancing local and international fora.
Apart from relationship management activities, MWCI ensures that all requirements of regulatory bodies are
complied with. Internal compliance targets like the water and wastewater effluent quality are set higher than
regulatory standards.
Managing Financial Risks
MWCI strives to maintain the highest local credit rating given by Philratings through the timely payment of
interests and principal amortization of loans and strict compliance with all lender covenants and reports.
68
Through regular and targeted communication with investors, analysts and creditors, MWCI is able to sustain
good relationships with these stakeholders. Sufficient funding is made available for corporate requirements
at better than market rates.
Government Regulations
MWCI has to comply with environmental laws primarily for its wastewater operations.
regulations are the following:
Among these
•
DENR Administrative Order No. 35-91, Series of 1993 (Revised effluent regulations);
•
Resolution No. 25, Series of 1996 (Implementation of the Environmental User Fee System in the
Laguna de Bay Region);
•
•
•
Resolution No. 33, Series of 1996 (Approving the Rules and Regulations implementing the
Environmental User Fee System in the Laguna de Bay Region); and
DENR Administrative Order No. 26-92, Series of 1992 (Appointment/Designation of Pollution Control
Officers).
Clean Water Act
Other Matters
MWCI has not been involved in any bankruptcy, receivership or similar proceeding as of December 31,
2008. Further, except as discussed above, MWCI has not been involved in any material reclassification,
consolidation or purchase or sale of a significant amount of assets not in the ordinary course of business.1
MWCI is not engaged in sales to foreign markets. MWCI also has no publicly-announced new product or
service nor own any patents, trademarks, copyrights, licenses, franchises, concessions and royalty
agreements.
MWCI is not dependent on a single customer or a few customers, the loss of any or more of which would
have a material adverse effect on MWCI. Except as discussed above, government approval is not
necessary for the Company’s principal products or services. MWCI has not engaged in any research and
development activities for the last three years.
Manual of Corporate Governance
Compliance with Leading Practices on Corporate Governance
Manila Water’s corporate governance practices are anchored on its Corporate Governance Manual (the
“Manual”), which supplements the Articles of Incorporation and By-Laws of MWCI. The Manual was first
adopted on May 3, 2004 pursuant to SEC Memorandum Circular No. 2, Series of 2002. It was amended in
November 2007, as endorsed by the Audit Committee and approved by the Board.
There has been no deviation from the Manual since its adoption. In a certification submitted to the SEC on
January 12, 2010, MWCI’s Compliance Officer, Luis Juan B. Oreta, stated that Manila Water adopted in the
Manual the leading practices and principles on good corporate governance and MWCI has fully complied
with all the requirements of the Manual for the year 2009, including the requirements in relation to the board
of directors, board committees, officers and stockholders’ rights and interests.
The revised Manual formalized the role of the Audit and Governance Committee in corporate governance,
pursuant to the Audit Charter and existing practice in MWCI. The Audit and Governance Committee was
given additional functions, including the conduct of an annual evaluation of the Board and executive officers.
Furthermore, the revised Manual also enhanced the role of the Corporate Secretary in corporate
governance. In fact, the Corporate Secretary is tasked to ensure that the Board follows internal rules and
external regulations, to facilitate clear communication between the Board and management, and to inform
1
An initial public offering of shares by the Company and certain selling shareholders took place in February
and March 2005 and culminated in the listing of the Company with the Philippine Stock Exchange on 18 March
2005.
69
key officers of latest corporate governance developments. Finally, the revised Manual further strengthens
MWCI’s policy on disclosures and disclosures on related-party transactions.
To better focus on improving corporate governance across the organization, Manila Water has re-organized
its Compliance and Governance Section and formed a Corporate Governance Office (the “Office”). The
Office formulates and implements initiatives and policies on corporate governance. It reports to the Audit
and Governance Committee which performs oversight functions over Manila Water’s corporate governance
system.
Manila Water continues to implement its established corporate governance practices. Among these is the
Insider Trading Policy, which prohibits directors, officers and confidential employees from trading in Manila
Water shares within a certain period before and after the release of material information to the public. In
addition, another policy that has been in continuous effect is the policy on acceptance of corporate
entertainment/gifts.
This policy prohibits all officers and employees from accepting corporate
entertainment/gifts from suppliers, contractors and other business partners, which can be viewed as
influencing the manner on which an officer or employee may discharge his duties.
MWCI’s guidelines specifying conflict of interest situations involving all employees and their relatives up to
the fourth degree of consanguinity and/or affinity, including common law relationships, have been
strengthened. All such existing contracts/arrangements by employees and their relatives were required to
be terminated immediately and correspondingly reported to the line manager and the Office of the
Compliance Officer, as required under the Code. Any exception to the guidelines must be approved by the
President and the Audit Committee.
Other policies of the Company that has been in continuous and effective implementation are the: (i) policy on
reporting of fraudulent or dishonest acts and (ii) internal control systems which includes the Company’s
Capital Expenditures and Investments Committee that oversees bidding systems and grants approvals for
capital expenditures.
For further details on the MWCI’s financial condition and operations, please refer to the 2009 Audited
Financial Statements which is incorporated herein in the accompanying index to exhibits.
Item 2. Description of Properties
Ayala Corporation owns 4 floors of the Tower One Building located in Ayala Triangle, Ayala Avenue, Makati.
These units were purchased in 1995 and are used as corporate headquarters of the Company. Other
properties of the Company include various provincial lots relating to its business operations totaling about
860 hectares and Metro Manila lots totaling 2.6 hectares. The Honda Cars Makati, Honda Cars Pasig,
Honda Cars Alabang, Isuzu Alabang and Honda Cars Global City dealership buildings are located on its
Metro Manila lots which are leased to these dealerships.These properties do not have any mortgage, lien or
encumbrance.
The following table provides summary information on ALI’s landbank as of December 31, 2009. Properties
are wholly-owned and free of lien unless noted.
Location
Makati 1
Taguig 2
Makati (outside CBD)
Alabang 3
Las Piñas
Quezon City 4
Manila / Pasay 5
Pasig 6
Metro Manila
Canlubang 7
Laguna (ex-Canlubang) 8
Hectares
50
43
5
18
130
56
3
4
309
1,434
642
Primary land use
Commercial/ Residential
Commercial/ Residential
Residential
Commercial
Residential
Commercial/ Residential
Commercial/ Residential
Residential
Residential/ Industrial/ Commercial
Residential/ Industrial
70
Cavite 9
Batangas/Rizal/Quezon 10
Calabarzon
289
123
2,488
Pampanga 11
Naga
Cabanatuan/ Baguio
Bataan 12
Other Luzon Area
22
3
71
289
385
Residential
Residential
Residential
Leisure/ Residential
Bacolod/Iloilo 13
Cebu 14
Davao
Cagayan De Oro
Visayas/Mindanao
290
234
70
153
747
Residential
Commercial/ Residential
Residential
Residential
TOTAL
Residential
Residential
3,930
1
Makati includes sites of Mandarin Hotel (1.6 has.) and Peninsula Hotel (2.0 has.) which are 50% owned
through Ayala Hotels, Inc., and remaining area at Roxas Triangle (0.5 ha.) which is 50% owned..
2
Taguig includes 9.8-ha. site of Market! Market! under lease arrangement with BCDA; 2-ha. in Serendra
which is under joint development agreement with BCDA; 33 has. in Taguig is owned through Fort
Bonifacio Development Corporation.
For Market! Market!, the lease agreement with the BCDA covers a period of 25 years (renewable for another
25 years) and involves an upfront cash payment of P700 million and annual lease payments with fixed
and variable components.
For Serendra, the joint development agreement with BCDA involves an upfront cash payment of P700 million
plus a guaranteed revenue stream totaling P1.1 billion over an 8-year period.
3
Alabang pertains to the 17.6-ha. Alabang Town Center which is 50% owned through Alabang Commercial
Corp. (ACC), 3.7 has. of which is subject of a Mortgage Trust Indenture as security for ACC’s short-term
loans with Bank of the Philippine Islands.
4
Quezon City mainly includes 38 has. under lease arrangement with University of the Philippines and the
13-ha. site of TriNoma which is under lease arrangement with the Department of Transportation and
Communication. TriNoma is 49% owned by ALI through North Triangle Depot Commercial Corp.
5
Manila/Pasay includes 2.1 has. (under development) which are under joint venture with Manila Jockey
Club, Inc. and 0.3-ha. site of Metro Point which is 50% owned through ALI-CII Development Corp.
6
Pasig pertains to Alveo’s new project – Ametta Place.
Canlubang includes 1,216 has. which are 70% owned through Aurora Properties, Inc. and Vesta Holdings,
Inc.; also includes 304 has. which are 65% owned through Ceci Realty, Inc.
Laguna (excluding Canlubang) includes 100 has. which are under a 50-50% joint venture with Greenfield
Development Corp.; 19 has. in Laguna Technopark, Inc. which is 61% owned by Ayala Land; and 3-ha.
site of Pavilion Mall which is under 27-year lease arrangement with Extra Ordinary Group, with an option
to renew every 5 years thereafter (lease payment is based on a certain percentage of gross income).
7
8
9
Cavite includes 20 has. in Riego de Dios Village which is under joint venture with the Armed Forces of the
Philippines.
10
Batangas includes 17 has. in Sto. Tomas project which is under an override arrangement, while Quezon
includes a 39-ha. property.
11
Pampanga pertains to the site of Avida and Alveo projects, and the newly-opened Marquee Mall.
71
12
13
14
Bataan pertains to the site of Anvaya Cove which is under joint development agreement with SUDECO.
Bacolod includes 69 has. in Ayala Northpoint which is under override arrangement. Iloilo includes a 21-ha.
property.
Cebu includes about 10 has. in Cebu Business Park (including Ayala Center Cebu) which is 47% owned
through Cebu Holdings, Inc. (CHI); 0.62-ha. hotel site owned by Ayala Hotels, Inc. and Cebu Holdings,
Inc.; 8 has. in Asiatown IT Park which is owned by Cebu Property Ventures and Development
Corporation which in turn is 76% owned by CHI; and 22 has. in Amara project, (66% owned by CHI)
which is under joint venture with Coastal Highpoint Ventures, Inc. A 9.46-ha. Property (within the Cebu
Business Park) which houses the Ayala Center Cebu is subject of a mortgage trust indenture securing
term loan with Bank of the Philippine Islands; 0.62 has. is subject of a mortgage trust indenture securing
Cebu Insular Hotel Company Inc.’s term loan with Bank of the Philippine Islands.
IMI has production facilities in the Philippines (Laguna and Cavite), China (Shenzhen, Jiaxing, and
Chongqing), and Singapore. It also has a prototyping and NPI facility located in Tustin, California.
Engineering and design centers, on the other hand, are located in the Philippines, Singapore, China,
United States, and Japan. IMI’s logistics bases are located in Asia, including China, Singapore, Hong
Kong, and Philippines. Also, IMI’s global network of sales agents and representatives are managed by its
sales offices in Germany, United States, Japan, Philippines, Singapore and China.
The head office and main plant of the Company are located at North Science Avenue, Laguna
Technopark, Biñan, Laguna, 4024 Philippines. The premises are leased from Technopark Land, Inc. On
December 23, 2008, IMI renewed the lease for 3 years, to expire on December 31, 2011 and renewable
at the option of the parties for such number of years agreed upon by them. The Company is liable to pay
a monthly rent specified in the lease contract, exclusive of value added tax, which increases over the
years. In the event of sale, transfer or disposition of the leased premises, the lessor shall ensure that the
lease will be honored by the buyer.
Rental Properties
ALI’s properties for lease are largely shopping centers and office buildings. It also leases land, carparks and
some residential units. In the year 2009, rental revenues from these properties accounted for P6.4billion or
21% of Ayala Land’s consolidated revenues. Lease terms vary depending on the type of property and
tenant.
Property Acquisitions
With 3,930 hectares in its landbank as of end-2009, Ayala Land believes that it has sufficient properties for
development in next twenty-five (25) years.
Nevertheless, the Company continuous to seek new areas of opportunities for additional, large-scale,
masterplanned developments in order to replenish the inventory and provide investors with an entry point
into attractive long-term value propositions. The focus is on acquiring key sites in the Mega Manila area and
other geographies with progressive economies that offer attractive potentials and where projected value
appreciation will be fastest.
Item 3. Legal Proceedings
Except as disclosed herein, there are no material pending legal proceedings, bankruptcy petition,
conviction by final judgment, order, judgment or decree or any violation of a Securities or Commodities
Law for the past five years and the preceding years until February 28, 2010 to which Ayala or any of its
subsidiaries or affiliates or its Directors or executive officers is a party or of which any of its material
properties are subject in any court or administrative government agency.
As of end-2009, ALI is not involved in any litigation it considers material. However, certain individuals and
entities have claimed an interest in ALI’s properties located in Las Piñas, Metro Manila, which are
adjacent to its development in Ayala Southvale.
Prior to purchasing the aforesaid properties, ALI conducted an investigation of titles to the properties and
had no notice of any title or claim that was superior to the titles purchased by ALI. ALI traced its titles to
their original certificates of title and ALI believes that it has established its superior ownership position
72
over said parcels of land. ALI has assessed these adverse claims and believes that its titles are in
general superior to the purported titles or other evidence of alleged ownership of these claimants. On this
basis, beginning in October 1993, ALI filed petitions in the Regional Trial Courts (RTC) in Makati and
Las Piñas for quieting of title to nullify the purported titles or claims of these claimants. These cases are
at various stages of trial and appeal. Some of these cases have been finally decided by the Supreme
Court (“SC”) in ALI’s favor. These include decisions affirming the title of ALI to some of these properties,
which have been developed and offered for sale to the public as Sonera, Ayala Southvale. The
controversy involves the remaining area of approximately 121 hectares.
ALI does not intend to develop and sell the rest of the Las Piñas properties until the litigation is resolved.
It has made no provision in respect of such actual or threatened litigations.
For the significant affiliates:
Globe Telecom, Inc.
On 23 July 2009, the NTC issued NTC Memorandum Circular (MC) No. 05-07-2009 (Guidelines On Unit Of
Billing Of Mobile Voice Service). The MC provides that the maximum unit of billing for the cellular mobile
telephone service (CMTS) whether postpaid or prepaid shall be six (6) seconds per pulse. The rate for the
first two (2) pulses, or equivalent if lower period per pulse is used, may be higher than the succeeding pulses
to recover the cost of the call set-up. Subscribers may still opt to be billed on a one (1) minute per pulse
basis or to subscribe to unlimited service offerings or any service offerings if they actively and knowingly
enroll in the scheme
In compliance with NTC MC 05-07-2009, Globe refreshed and offered to the general public its existing persecond rates that, it bears emphasizing, comply with the NTC Memorandum Circular. Globe made per
second charging for Globe-Globe/TM-TM/Globe available for Globe Subscribers dialing prefix 232 (GLOBE)
OR 803 plus 10-digit TM or Globe number for TM subscribers. The NTC, however, contends that Globe’s
offering does not comply with the circular and with the NTC’s Order of December 7 which imposed a threetiered rate structure with a mandated flag-down of Php 3.00, a rate of Php 0.4375 for the 13th to the 60th
second of the first minute and Php 0.65 for every 6-second pulse thereafter. On December 9 the NTC
issued a Cease and Desist Order requiring the carriers to refrain from charging under the previous billing
system or regime and refund consumers. Globe maintains that the Order of the NTC of December 7, 2009
and the Cease and Desist Order are void as being without basis in fact and law and in violation of Globe’s
rights to due process. Globe, Smart and Sun all filed petitions before the Court of Appeals seeking the
nullification of the questioned orders of the NTC. On 18 February 2010, the Court of Appeals issued a
Temporary Restraining Order preventing the NTC from enforcing the disputed Order.
Globe believes that its legal position is strong and that its offering is compliant with the NTC’s Memorandum
Circular 05-07-2009, and therefore believes that it would not be obligated to make a refund to its
subscribers. If however, Globe would be held as not being in compliance with the circular, Globe may be
contingently liable to refund to any complaining subscribers any charges it may have collected in excess of
what it could have charged under the NTC’s disputed Order of December 7, if indeed it is proven by any
complaining party that Globe charged more with its per second scheme than it could have under the NTC’s
6-second pulse billing scheme stated in the disputed December 7 Order. Management has no estimate of
what amount this could be at this time.
On 22 May 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”), Inc., a
subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority and Innove from
taking any actions to implement the Certificate of Public Convenience and Necessity granted by SBMA to
Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer certain telecommunications
services within the Subic Bay Freeport Zone would violate the Joint Venture Agreement (“JVA”) between
PLDT and SBMA. The Court of Appeals ordered the reinstatement of the case and has forwarded it to the
NTC-Olongapo for trial.
PLDT and its affiliate, Bonifacio Communications Corporation (BCC) and Innove and Globe are in litigation
over the right of Innove to render services and build telecommunications infrastructure in the Bonifacio
Global City. In the case filed by Innove before the NTC against BCC, PLDT and the Fort Bonifacio
Development Corporation (FBDC), the NTC has issued a Cease and Desist Order preventing BCC from
performing further acts to interfere with Innove’s installations in the Bonifacio Global City.
In the case filed by PLDT against the NTC in Branch 96 of the Regional Trial Court (RTC) of Quezon City,
where PLDT sought to obtain an injunction to prevent the NTC from hearing the case filed by Innove, the
73
RTC denied the prayer for a preliminary injunction and the case has been set for further hearings. PLDT has
filed a Motion for Reconsideration and Globe has intervened in this case.
In the case filed by BCC against FBDC, Globe Telecom and Innove, Bonifacio Communications Corp. before
the Regional Trial Court of Pasig, which case sought to enjoin Innove from making any further installations in
the BGC and claimed damages from all the parties for the breach of the exclusivity of BCC in the area, the
court did not issue a Temporary Restraining Order and has instead scheduled several hearings on the case.
On 11 November 2008, Bonifacio Communications Corp. (BCC) filed a criminal complaint against the
officers of Innove Communications Inc., the Fort Bonifacio Development Corporation (FBDC) and Innove
contractor Avecs Corporation for malicious mischief and theft arising out of Innove’s disconnection of BCC’s
duct at the Net Square buildings. The accused officers filed their counter-affidavits and are currently pending
before the Prosecutor’s Office of Pasig.
Manila Water Co., Inc.
Except as disclosed herein, there are no material legal proceedings in the past five years to which the
Company is a party or of which any of its material properties are subject in any court or administrative agency
of the Government.
Antonio Baltazar vs. Hon. Oscar Garcia, et al., OMB Case No. C-A-05-0205-E and OMB Case No. C-A-050208-E, Ombudsman
Criminal complaints were filed with the Office of the Ombudsman against members of the Board of Trustees
of the Metropolitan Waterworks and Sewerage System (MWSS) and the MWSS Regulatory Office and the
presidents of the Company and Maynilad Water Services, Inc. (“Maynilad”), for violation of Republic Act No.
3019 and for “conduct prejudicial to the best interests of the service.” The complaint arose from the water
rate increases which became effective on January 1, 2005. The Company filed the Counter-Affidavit of its
President in 2005.
In a Decision dated April 30, 2009, the Ombudsman dismissed OMB Case No. C-A-05-0208-E. In a
resolution of even date, the Ombudsman also dismissed OMB Case No. C-A-05-0205-E. The complainant
moved for the reconsideration of the Decision and Resolution, which were timely opposed in behalf of the
President of the Company.
Freedom from Debt Coalition, et al. vs. MWSS and the MWSS-RO, G.R. No.173044, Supreme Court
In June 2006, the Freedom from Debt Coalition petitioned the Supreme Court to annul resolutions of the
MWSS Board of Trustees ruling that the Company and Maynilad are not public utilities but agents and
contractors of MWSS. While the Company is not impleaded as a respondent, certain contingent, adverse,
financial and regulatory consequences might result from a decision granting the petition. The Company
believes that it is not a public utility but an agent and contractor of the MWSS, which remains as the public
utility, a position supported by Section 2.1 of the Concession Agreement, MWSS Board Resolution dated July
30, 2004, National Water Resources Board (NWRB) Resolution dated June 17, 2005, and a Memorandum
from the Office of the Government Corporate Counsel dated June 1, 2005. On December 10, 2007, the
Supreme Court dismissed the petition on the following grounds: (a) petitioners should have appealed the
MWSS resolutions to the NWRB instead of filing a certiorari petition with the Supreme Court; (b) the petition
did not name as respondents Maynilad and the Company, the two MWSS concessionaires, who are
indispensable parties; (c) petitioners disregarded the hierarchy of courts principle by filing the petition directly
with the Supreme Court instead of a lower court; and (d) the case involves factual issues, which the Supreme
Court cannot resolve.
The Freedom from Debt Coalition has filed a motion for reconsideration dated January 25, 2008 with the
Supreme Court which was denied with finality in a Resolution dated February 12, 2008. The Supreme Court
issued an Entry of Judgment on March 26, 2008.
Manila Water Company, Inc. and Maynilad Water Services, Inc. vs. Hon. Borbe, et al., CBAA Case No. L-69
Central Board of Assessment Appeals
This is an appeal from the denial, by the Local Board of Assessment Appeals of Bulacan Province, of the
Company’s (and Maynilad’s) appeal to it from the Notice of Assessment and Notice of Demand for Payment
of Real Property Tax in the amount of P357,110,945 made by the Municipal Assessor of Norzagaray,
Bulacan. The Company is being assessed for half of the amount. In a letter dated April 3, 2008, the Municipal
Treasurer of Norzagaray and the Provincial Treasurer of the Province of Bulacan, informed both
74
concessionaires (Company and Maynilad) that their total real property tax accountabilities have reached
P648,777,944.60 as of December 31, 2007. This amount, if paid by the concessionaires, will ultimately be
charged to the customers as part of the water tariff rate. The concessionaires (and the MWSS, which
intervened as a party in the case) are thus contesting the legality of the tax on a number of grounds, including
the fact that the properties subject of the assessment are owned by the MWSS. MWSS is both a
government-owned and controlled corporation and an instrumentality of the National Government that is
exempt from taxation under the Local Government Code.
The CBAA ordered the case to be heard on the merits before it on June 25, 2009. At that hearing, parties
were given the opportunity and time to exchange pleadings on a motion for reconsideration filed aforehand
by the Municipality to have the case remanded to and heard by the LBAA, rather than by the CBAA.
The Company is awaiting from the CBAA for its resolution of the motion for reconsideration and whether the
hearing on the merits before it will ensue.
Herminio dela Peña, et al. vs. Manila Water Company, Inc., NLRC NCR (South) Case No. 30-02-007230/NLRC CA No. 025614-2000/ CA G.R. SP No.67134/ SC-G.R. No. 158255, Supreme Court
This case stemmed from a complaint for illegal dismissal filed before the National Labor Relations
Commission (NLRC) by a group of contractual collectors belonging to the Associated Collectors Group, Inc.
(ACGI). ACGI’s collection service was engaged by the Company in November 1997 up to February 1999.
Complainants claim that they are regular employees of the Company and were illegally dismissed when the
Company terminated its service contract with ACGI. The Labor Arbiter ruled in favor of the complainants and
awarded separation pay amounting to P222,500.00. Upon appeal by the Company, the decision of the Labor
Arbiter was reversed by the NLRC.
Subsequently, the complainants appealed before the Court of Appeals who ruled in their favor. The decision
of the Court of Appeals was subsequently sustained by the Supreme Court. However, the Supreme Court
deleted the award of moral and exemplary damages amounting to P10,000.00 per complainant.
Upon the finality of the decision of the Supreme Court and the subsequent remanding of the case to the
Labor Arbiter, the latter granted complainants’ Motion to Approve Computation of Complainants’ Backwages
and to Issue Writ of Execution. The Labor Arbiter directed the Company to reinstate complainants and to pay
them their backwages in the amount of P19,576,500.00. The Company appealed the order of the Labor
Arbiter. Subsequently, the NLRC granted the appeal of the Company. The complainants elevated the case to
the Court of Appeals via a Petition for Certiorari but their petition was denied. Consequently, on August 11,
2008, the complainants filed a Petition for Review with the Supreme Court which was timely opposed by the
Company. The petition was denied by the Supreme Court in a Decision dated July 20, 2009. Complainants
sought a reconsideration of the said Decision which was also denied in a Resolution dated December 15,
2009. Complainants thereafter filed a second motion for reconsideration.
Manila Water Company, Inc. vs. The Regional Director, Environmental Management Bureau-National Capital
Region, et al., CA-G.R. No. 112023(DENR-PAB Case No. NCR-00794-09)
This case arose from a complaint filed by OIC Regional Director Roberto D. Sheen of the Environmental
Management Bureau-National Capital Region (EMB-NCR) before the Pollution Adjudication Board (PAB)
against the Company, Maynilad and the MWSS for alleged violation of R.A. No. 9275, particularly the fiveyear deadline imposed in Section 8 thereof for connecting the existing sewage line found in all subdivisions,
condominiums, commercial centers, hotels, sports and recreational facilities, hospitals, market places, public
buildings, industrial complex and other similar establishments including households, to an available sewerage
system. Two (2) similar complaints against Maynilad and MWSS were consolidated with this case.
On April 22, 2009, the PAB through DENR Secretary and Chair Jose L. Atienza, Jr., issued a Notice of
Violation finding that the Company, Maynilad and MWSS have committed the aforesaid violation of R.A.
9275. Subsequently, a Technical Conference was scheduled on May 5, 2009. In the said Technical
Conference, the Company, MWSS and Maynilad explained to the PAB their respective positions with regard
to the Notice of Violation and the complaints of the Regional Directors of EMB. In fact, in the said
conference, it was considered that DENR has a great role to play in order to compel people to connect to
existing sewer lines and those that are yet to be established by the Company and Maynilad.
75
In addition to the explanations made by the Company during the Technical Conference, the Company
together with MWSS and Maynilad, wrote a letter dated May 25, 2009 and addressed to the respondent
Secretary where they outlined their position on the matter.
In response to the May 25, 2009 letter, the OIC, Regional Director for NCR, the Regional Director of Region
IV-A and the Regional Director of EMB Region III submitted their respective Comments. The Company
thereafter submitted its letter dated July 13, 2009 to the public respondent PAB where it detailed its
compliance with the provisions of the Clean Water Act and reiterated its position that the continuing
compliance should be within the context of the Company’s Concession Agreement with MWSS. Despite the
valid explanations made by the Company, the PAB issued the challenged Order dated October 7, 2009 which
found the Company, Maynilad and MWSS to have violated R.A. 9275. The Company filed its Motion for
Reconsideration dated October 22, 2009 which the PAB denied in an Order dated December 2, 2009. Hence,
Company filed its Petition for Review dated December 21, 2009 with the Court of Appeals. The Company
thereafter filed an amended Petition for Review dated January 25, 2010. The Petition remains pending.
IMI and BPI are not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Except for matters taken up during the annual meeting of stockholders, there was no other matter submitted
to a vote of security holders during the period covered by this report.
PART II - OPERATIONAL AND FINANCIAL INFORMATION
Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters
Market Information
The company’s common equity is traded at the Philippine Stock Exchange.
The following table shows the high and low prices (in PHP) of Ayala Corporation’s shares in the Philippine
Stock Exchange for the year 2008 and 2009:
2009
High
Low
1st qtr
233.00 186.00
2nd qtr
312.50 202.00
3rd qtr
320.00 265.00
4th qtr
317.50 285.00
Source: Bloomberg
2008
High
Low
454.17 322.92
352.50 257.50
320.00 250.00
295.00 174.00
The market capitalization of the Company’s common shares as of end-2009, based on the closing price of
P302.50/share, was approximately P150.75billion.
The price information of Ayala Common, Preferred “A” and Preferred “B” Shares as of the close of the latest
practicable trading date, March 4, 2010, is P292.50, P520.00 and P107.00, respectively.
Holders
There are approximately 7,789 registered holders of common shares as of February 28, 2010. The following
are the top 20 registered holders of the common shares of the Company:
No. of common
Percentage
Stockholder name
shares
(of common
shares)
1.
Mermac, Inc.
253,074,330
50.92%
2.
PCD Nominee Corporation (Non-Filipino)
121,335,907
24.35%
3.
Mitsubishi Corporation
52,564,617
10.55%
4.
PCD Nominee Corporation (Filipino)
36,394,098
7.30%
5.
Shoemart, Inc.
16,282,542
3.27%
6.
ESOWN Administrator 2009
1,813,994
0.36%
76
7.
Henry Sy, Sr.
1,296,636
0.26%
8.
SM Investment Corporation
1,067,175
0.21%
9.
ESOWN Administrator 2008
893,795
0.18%
10. ESOWN Administrator 2007
694,289
0.14%
11. Philippine Remnants Co., Inc.
685,872
0.14%
12. ESOWN Administrator 2006
633,157
0.13%
13. Sysmart Corporation
515,760
0.10%
14. ESOWN Administrator 2005
463,297
0.09%
15. BPI TA 14105123
379,657
0.08%
16. Mitsubishi Logistics Corporation
300,427
0.06%
17. Aristón Estrada, Jr.
209,472
0.04%
18. Eduardo O. Olbes
163,328
0.03%
19. Insular Life Assurance Co. Ltd.
142,549
0.03%
20. AC ESOP/ESOWN Account
129,692
0.03%
As of February 28, 2010, 54.52% of the total outstanding shares of the Company or 240,041,414 common
shares, 11,915,770 preferred “A” Shares and 57,890,950 preferred “B” shares are owned by the public.
Dividends
Stock Dividends
PERCENT
20%
20%
Cash dividends – 2008
CLASS
On common shares
Cash dividends – 2009
CLASS
On common shares
RECORD DATE
PAYMENT DATE
May 22, 2007
April 24, 2008
June 18, 2007
May 21, 2008
PAYMENT DATE
July 21, 2008
February 3, 2009
TERM / RECORD DATE
RATE
2.00/share
July 2, 2008
2.00/share
January 9, 2009
PAYMENT DATE
July 10, 2009
February 2, 2010
TERM / RECORD DATE
RATE
2.00/share
June 23, 2009
2.00/share
January 8, 2010
Dividend policy
Dividends declared by the Company on its shares of stocks are payable in cash or in additional shares of
stock. The payment of dividends in the future will depend upon the earnings, cash flow and financial
condition of the Company and other factors.
Recent Sales of Unregistered Securities or Exempt Securities
The following shares were issued to/subscribed by the Company’s executives as a result of the exercise of
stock options (ESOP) and the subscription to the stock ownership (ESOWN) plans:
Year
2008
2009
No. of shares
ESOP
ESOWN*
43,885
893,860
6,365
1,813,994
* Net of cancelled subscriptions
The above shares formed part of the 8,864,000 ESOP and ESOWN shares subject of the Commission’s
resolution dated January 12, 2006 confirming the issuance of such shares as exempt transactions pursuant
to Section 10.2 of the Securities Regulation Code.
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Item 6. Management’s Discussion and Analysis of Operations
2009
Ayala Corporation generated consolidated revenues of P76.3 billion in 2009, P2.8 billion or 4% lower than
prior year’s P79.1 billion. The decline was attributed to the slight drop in consolidated sales and services and
a P1.6 billion decline in other income as 2008 included gains from the sale of certain assets at the holding
company level as well as from Ayala Land’s land sales. Consolidated sales and services, which comprised
82% of consolidated revenues, dropped by 2% as a result of lower sales from the real estate (Ayala Land,
Inc.) and electronics manufacturing units (Integrated Micro-Electronics, Inc. - IMI).
Ayala Land recorded lower revenues in 2009 mainly due to a decline in its construction and support
businesses as it wound down external projects. Residential revenues dipped by 6% to P14.2 billion versus
prior year due to lower bookings. With GDP growth slowing in 2009, residential launches were deliberately
held back during the year. This was, however, partly offset by construction accomplishment in its existing
projects as well as a significant improvement in its leasing business in both commercial centers and office
spaces. In all, Ayala Land’s revenues declined by 10% to P30.5 billion in 2009 from P33.7 billion in 2008.
Impacted by the slowdown in the global electronics industry as a result of the financial crisis, IMI’s revenues
dipped by 7% to P18.9 billion due to the slowdown in operations of major customers of IMI Philippines and
IMI Singapore. Revenues from several other customers dropped due to reduced customer demand and
material shortages. In particular, revenues from a key Japanese original equipment manufacturer (OEM) in
the optical disc drive (ODD) industry decreased significantly as market demand softened. Also, IMI’s
decision to set aside its planned volume expansion for a key European automotive electronics OEM also
impacted revenues in the short-term.
The decline in consolidated revenues was partly mitigated by higher sales of the automotive unit (Ayala
Automotive) and the business process outsourcing (BPO) units (Integreon and Affinity Express) which
scaled up operations with several add on acquisitions.
Ayala Automotive recorded higher car sales in 2009 (11,394 units in 2009 vs 10,324 units in 2008) due to
the strong sales of the new Honda City. Honda Cars sold 4,516 Honda City units which is 53% of the total
dealership sales. This was, however, partly offset by the decrease in sales of Isuzu Automotive Dealerships.
Revenues from BPO units also increased mainly due to Integreon’s acquisition of Onsite, although this was
partly offset by the decrease in graphics revenue of Affinity Express given the generally weak US economic
conditions.
The decline in consolidated sales and services was partly compensated for by the stable equity earnings
from associates and jointly controlled entities, which reached P7.4 billion, the same level as the prior year.
Higher net income from the telecom (Globe Telecom), banking (Bank of the Philippine Islands), and water
distribution units (Manila Water Co., Inc.) despite the economic slowdown resulted in strong equity earnings.
Globe Telecom posted 11% increase in net income to P12.6 billion in 2009 with core net income of P12.0
billion slightly higher than the P11.8 billion posted in 2008. Revenues were flat at P62.4 billion. The 4%
decline in the consumer wireless business was offset by gains in the broadband business, which rose by
74% to P3.3 billion and fixed line data business, which increased by 23% to P3.0 billion. As competition in
the wireless industry intensified, Globe stepped up efforts to maintain its proportional share of revenues by
focusing on continued expansion of its broadband business. Actual EBITDA was 3% lower than 2008 due to
the overall decline in service revenues and higher subsidies as it ramped up its broadband business.
EBITDA margin, however, remains high at 58% while return on equity improved to 25.7% from 21.4% in
2008. In 2009, Globe increased its target dividend yield from 70% to between 75% and 90% of prior year’s
net income as it remains committed to achieving its optimal capital structure.
Bank of the Philippine Islands (BPI) posted significantly higher net income for the year, up 33% to P8.5
billion on the back of good revenue and business volume growth. Higher securities trading gains of P1.4
billion versus a P478 million loss in 2008 also contributed to earnings growth. Net interest income increased
by P1.94 billion. While overall net loans grew by only 2% as multinationals and top tier corporates paid down
loans and took advantage of the liquidity and availability of funding in the capital markets, consumer and
middle market loan growth was robust. Credit card receivables increased by 16%, SME loans by 11%,
consumer loans by 10%, and local middle market names by 9%. While loans grew, BPI managed to improve
its asset quality to a year-low non-performing loan ratio of 2.8%. BPI also retained its strength in the
78
remittance business which increased by 15%, outpacing the industry’s 5% growth. This allowed BPI to
capture 20% of the overseas Filipino remittance market. With improved earnings, BPI’s return on equity
likewise increased to 13%.
Manila Water continued its strong performance by posting 16% growth in net income to P3.2 billion on the
back of higher revenue and continued improvement in operating efficiency. Revenues increased by 7% to
P9.5 billion due to higher tariff and water volume sales. The water utility reduced non-revenue water to
15.8%, a remarkable accomplishment from over 25% system losses in 2007, and posted collection efficiency
of 100%. It also ramped up its wastewater initiatives, increasing sewer connections from 68,000 to 177,000
households, stepping up desludging services from 188,000 households to 291,000, and completing one
sewage treatment plant while beginning construction of two more. Total cost and expenses were well
managed, growing only by 8% despite water and wastewater expansion activities. Return on equity
remained stable at 18%. The year 2009 was marked by Typhoon Ondoy and the damage it inflicted. Manila
Water played a vital role in effective disaster management with 100% water supply restoration after a week
of round-the clock operations following the calamity. Ondoy created additional expenses but had no major
impact on the water utility’s bottomline. Collection was staggered in affected areas but comprised only 10%
of the revenue base.
Consolidated costs and expenses declined in line with the contraction in consolidated revenues.
Consolidated cost and expenses fell by 3% to P63.8 billion from P66.0 billion the prior year. Costs of sales
and services, which accounted for 77% of consolidated costs and expenses dipped by 1% to P49.3 billion
from P50.0 billion the prior year. This was mainly a result of the decline in cost of sales and services at Ayala
Land, which was in line with the fall in revenues, and IMI’s lower manpower costs due to the redundancy
program implemented in 2009 as well as lower sub-contracting and inventory costs. General and
administrative (G&A) expenses on a consolidated basis also declined by 3% to P9.2 billion with lower
expenses from Ayala Land and IMI.
Consolidated interest expense and other financing charges declined by 23% to P3.8 billion from nearly P5
billion the prior year. This was mainly due to the currency-hedging related losses at IMI booked in 2008,
which negated the impact of higher loan levels at Ayala Land and the parent company level.
At the holding company level, interest and financing charges were flat despite the increase in loan levels as
the company actively reduced lowered financing cost over the last few years. Average cost of debt at the
parent level in 2009 has decreased to 5.9% compared to 9.5% three years ago. In 2009 the company
continued to prepay P7.2 billion in debt, replacing these with newly raised funds at lower cost. The parent
company’s net debt has declined substantially to P4.3 billion from P 8.7 billion in 2008 and a high of P36.2
billion in 2004, allowing it to maintain a very comfortable net debt to equity ratio of 0.04 to 1. Likewise, on a
consolidated basis, the company is in a very comfortable financial position with consolidated net debt to
equity at 0.06 to 1.
Consolidated net income for the full year 2009 reached P8.2 billion at par with prior year’s level despite a
much more challenging economic environment.
Ayala Land recorded 16% lower net income of P4.0 billion from P4.8 billion last year, which includes gains
from the sale of an asset in 2008. Excluding the one-off gain, however, net income contracted only 2% yearon-year. IMI managed to post 160% growth in net income to US$10.1 million. The jump in income can be
primarily attributed to non-recurring items--fire insurance gain of US$4.5 million in 2009 coupled with
hedging losses of US$33.4 million in 2008. Net income without non-recurring items in 2009 was US$5.5
million.
Significant improvement in Ayala’s BPO units also underpinned the stability in consolidated earnings this
year. While LiveIt recorded net loss of P565 million for 2009, this was better than the P948 million loss in
2008. Income from an US$8.8 million gain on the eTelecare share exchange and a US$4.9 million gain from
the Integreon-Onsite bargain purchase more than offset the unbudgeted acquisition expenses for Stream
and Integreon. Affinity’s significant improvement in financial results also contributed to LiveIt’s improved
bottomline.
International real estate arm, AG Holdings, recorded a net loss of P433 million, as the U.S. economic
meltdown continued to impose provisions for assets in North America. Asian operations remained solid with
ARCH Capital Management posting profit in 2009. Projects in Thailand, China and Macau did better than or
as expected. Take-up for three Thai projects ranged between 61% and 86%. In China, Phase I take-up was
44% for apartments and 58% for villas. The Macau project’s master layout secured government approval.
79
In summary, while net earnings were flat in 2009, impacted by various factors both external and internal, the
company maintains a healthy financial and liquidity position across the group. Debt and debt to equity ratios
are at very comfortable levels, cash resources are sufficient to pursue the respective growth agenda of each
of the operating units, and solvency and liquidity ratios are well within comfortable limits.
As recovery presumably commenced in the second half of 2009, a gradual recovery is expected in 2010.
While there remain uncertainties in the economic environment, it is expected that each of the operating units
will bounce back in strong fashion given their strong financial and market positions and growth initiatives set
in place.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(December 30, 2009 Vs December 31, 2008)
Cash and cash equivalents – 6% increase from P42,886mln to P45,657mln
Dividends received net of dividends paid, proceeds from new loans availed and disbursements to fund
various investments by the parent company partly offset by the placements by the real estate group in shortterm investments. As a percentage to total assets, cash and cash equivalents slightly increased from 19% to
20% as of December 31, 2008 and December 31, 2009, respectively.
Short-term investments – 352% increase from P1,009mln to P4,561mln
Higher money market placements with maturity of more than 3 months up to 6 months by the real estate
group. As a percentage to total assets, short-term investments is at 2% as of December 31, 2009 and 0.5%
as of December 31, 2008.
Current accounts and notes receivable – 8% increase from P23,284mln to P25,233mln
Higher trade receivables by the real estate, automotive, international and electronics, information technology
and business process outsourcing services groups. As of December 31, 2009 and December 31, 2008,
current accounts and notes receivable remained at 11% of the total assets.
Inventories – 8% increase from P10,011mln to P10,797mln
Increase due to new developments and projects of the real estate group and higher vehicles inventory of the
automotive group partly offset by lower inventory of the electronics, information technology and business
process outsourcing services groups. This account remained at 5% of the total assets as of December 31,
2009 and December 31, 2008, respectively.
Other current assets – 15% decrease from P7,090mln to P6,061mln
Largely due to matured government securities and lower prepaid expenses partly offset by investment in
fixed income securities of the real estate group. This account remained at 3% of the total assets as of
December 31, 2009 and December 31, 2008.
Noncurrent accounts and notes receivable – 60% decrease from P6,694mln to P2,658mln
Payment of advances by an associate of the the electronics, information technology and business process
outsourcing services group partly offset by higher receivables of the real estate group. Noncurrent accounts
and notes receivable is at 1% and 3% of the total assets as of December 31, 2009 and December 31, 2008.
Land and improvements – 12% increase from P15,757mln to P17,583mln
Attributable to land acquisitions and incidental costs related to site preparation and clearing of various
properties of the real estate group. This account is at 8% of the total assets as of December 31, 2009 and
7% as of December 31, 2008.
Investments in associates and jointly controlled entities – 5% increase from P68,140mln to P71,557mln
Investments in associates and jointly controlled entities account includes the Company’s and its subsidiaries’
investments in various associates which are being accounted for under the equity method. These
associates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among others.
The increase is due to the equity share in net earnings of the associates and joint ventures and additional
investments in 2009. This account is at 31% of the total assets as of December 31, 2009 and December 31,
2008.
Investment in bonds and other securities – 31% increase from P3,065mln to P4,030mln
80
Primarily due to improved market prices of securities held by the group, new investments in fixed income
securities of the real estate group and new investments of the international group. This account is at 2% of
the total assets as of December 31, 2009 and 1% as of December 31, 2008.
Investment in real properties – 36% increase from P21,345mln to P29,090mln
Primarily due to the completion of malls and buildings owned by the real estate group. As a percentage to
total assets, investment in real properties is at 13% and 10% as of December 31, 2009 and December 31,
2008, respectively.
Property, plant and equipment – 44% decrease from P13,885mln to P7,772mln
Reclassification of the real estate group’s operational and completed buildings to investment in real
properties account and 2009 depreciation expense of the electronics, information technology and business
process outsourcing services group. As of December 31, 2009 and December 31, 2008, the group’s
property, plant and equipment account is at 3% and 6% of the total assets, respectively.
Deferred tax assets – 23% increase from P 1,133mln to P1,396mln
Due to higher unrealized sales collection by the real estate group. As of December 31, 2009 and December
31, 2008, this account remained at 1% of the total assets.
Pension assets – 13% increase from P 117mln to P132mln
Increase in pension assets of the electronics, information technology, business process outsourcing services
group. This account is at 0.06% and 0.05% of the total assets as of December 31, 2009 and December 31,
2008, respectively.
Intangible assets – 19% increase from P 3,865mln to P4,612mln
Excess of the acquisition cost over the fair value of the identifiable assets and liabilities of companies
acquired by the electronics, information technology and business process outsourcing services group in
2009. As of December 31, 2009 and December 31, 2008, this account remained at 2% of the total assets.
Other noncurrent assets – 30% decrease from P 1,906mln to P1,342mln
Partly caused by amortization of project development cost of the electronics information technology and
business process outsourcing services group. Other noncurrent assets remained at 1% of the total assets
as of December 31, 2009 and December 31, 2008.
Income tax payable – 136% increase from P215mln to P506mln
Higher taxable income of the real estate and electronics, information technology and business process
outsourcing services groups. As a percentage to total liabilities, this account is at 1% and 0.2% as of
December 31, 2009 and December 31, 2008, respectively.
Current portion of long-term debt – 66% increase from P1,479mln to P2,453mln
Largely due to the reclassification of the parent company’s and real estate group’s current maturing loans
from long-term debt. As of December 31, 2009 and December 31, 2008, current portion of long-term debt is
at 3% and 2% of the total liabilities, respectively.
Other current liabilities – 82% increase from P1,554mln to P2,822mln
Increase in customers’ deposits by the real estate group. Other current liabilities account is at 3% and 2% of
the total liabilities as of December 31, 2009 and December 31, 2008, respectively.
Deferred tax liabilities – 12% increase from P186mln to P207mln
Decrease in corporate tax rate from 35% to 30% beginning January 1, 2009. As a percentage to total
liabilities, this account is at 0.2% as of December 31, 2009 and December 31, 2008.
Pension liabilities – 53% decrease from P491mln to P228mln
Largely due to the adjustment made to reflect the latest actuarial valuation of the parent company and real
estate group. This account is at 0.2% and 0.5% of the total liabilities as of December 30, 2009 and
December 31, 2008, respectively.
Other noncurrent liabilities – 20% increase from P7,588mln to P9,109mln
Largely due to increase in construction and security deposits of the real estate group. As a percentage to
total liabilities, this account slightly increased from 8% to 9% as of December 31, 2008 and December 31,
2009, respectively.
81
Share-based payments – 50% increase from P705mln to P1,060mln
Increase in share-based payments of the electronics, information technology and business process
outsourcing services group.
Retained earnings – 7% increase from P61,604mln to P65,739mln
2009 net income net of dividends declared.
Cumulative translation adjustment – 39% decrease from (P969mln) to (P1,351mln)
Mainly due to forex rate changes.
Net unrealized gain on available-for-sale financial assets – 120% increase from (P613mln) to P124mln
Mainly due to improvement in the market prices of securities held by the group.
Noncontrolling interest – 7% increase from P30,876mln to P33,158mln
Noncontrolling interests’ share in 2009 net income.
Income Statement items
(YTD December 31, 2009 Vs YTD December 31, 2008)
Interest income – 11% increase from P2,243mln to P2,497mln
Due to higher investible funds in 2009 by the parent company. This account remained at 3% of the total
revenue in 2009 and 2008.
Other income – 30% decrease from P5,417mln to P3,809mln
Substantially lower capital gains from share sales in 2009 as compared to 2008. Last year also includes the
real estate group’s capital gain on sale of 3 subsidiaries namely, Piedmont Property Ventures, Inc.,
Stonehaven Land, Inc. and Streamwood Property, Inc. Decrease is partly offset by the gain on exchange of
shares by the electronics, information technology, business process outsourcing services group. This
account is 5% and 7% of the total revenue in 2009 and in 2008, respectively.
Interest and other financing charges – 23% decrease from P4,937mln to P3,822mln
Largely due to cost of unwinding the hedge contract of the electronics, information technology, business
process outsourcing services group in 2008 offset partially by higher debt level of the real estate group in
2009. This account is 6% of the costs and expenses in 2009 and 7% in 2008.
Other charges – 10% decrease from P1,595mln- to P1,435mln
Mainly due to the provisions for various assets of the real estate group. This account is 2% of the costs and
expenses in both 2009 and 2008.
Provision for income tax – 30% decrease from P2,418mln to P1,699mln
Primarily due to lower taxable income of the real estate group and reduction of income tax rate from 35% to
30% beginning January 1, 2009.
2008
Ayala Corporation generated consolidated revenues of P79.1 billion in 2008, P341.8 million higher compared
to prior year’s consolidated revenues of P78.8 billion. While consolidated sales and services posted healthy
growth and rose by 13% to P64.0 billion, this was partly offset by lower equity earnings from associates and
jointly controlled entities as well as lower capital gains realized during the year.
Consolidated sales and services mainly contributed 81% of Ayala’s consolidated revenues. Revenues of the
real estate, electronics, and business process outsourcing (BPO) businesses continued to post healthy
growth during the year.
Despite the global economic crisis that continue to threaten appetite for real estate products, Ayala Land,
Inc. posted good top-line growth across its major business segments, with residential revenues up 18%,
revenues from its commercial centers up 3%, and corporate business revenues up by 10%. Its support
business in construction also posted very strong growth with the completion of several new projects. Ayala
Land posted record earnings of P4.8 billion in 2008, 10% higher than the prior year.
82
The electronics business under Integrated Microelectronics, Inc. (IMI) posted a 5% growth in revenues in US
dollar terms with half of the revenues contributed by its operations in Singapore and China which rose by
13% versus last year. This offset the 3% decline in Philippine and US operations. IMI’s expansion of
business with a leading Chinese telecommunications company and the generation of ten new customer
programs helped cushion the slowdown in the global electronics sector. IMI’s operating income remained
positive at US$18 million, however, a non-recurring loss from currency hedging contracts as well as a onetime provision for manpower expenses and inventory obsolescence expenses resulted to a US$17 million
loss in 2008. Excluding these non-recurring items, IMI’s net income would have reached US$32 million.
On a combined basis, the investee companies of LiveIt, Ayala’s BPO investment arm, recorded revenue
growth in US dollar terms of 15%, and achieved revenues of US$344.1 million and EBITDA of US$30.2
million in 2008, LiveIt’s second full year of operations. The BPO units further diversified their client base in
2008 with eTelecare winning 11 new clients and 31 new programs, Integreon adding 14 new customers
across the corporate, legal and financial services sectors, and Affinity Express now serving over 140
publications of seven of the top 25 newspaper companies in the US. However, they posted a combined net
loss, of which LiveIt’s share was P874 million, due primarily to factors such as one-time non-recurring
expenses related to the eTelecare tender offer, non-cash accounting charges, such as stock compensation
expenses and the amortization of intangibles related to the investments in investee companies, and
unfavorable foreign exchange forward contracts that eTelecare entered into. LiveIt, together with Providence
Equity Partners, completed the tender offer for eTelecare’s common shares and American Depositary
Shares last December resulting in the acquisition of 98.7% of eTelecare’s shares. Overall, the company
remains positive about the growth trajectory of the BPO sector. Ayala expects that, as in past recessions,
outsourcing will continue to grow in the short term but at a slower pace, and then will experience
accelerating growth in the medium to long term, as companies intensify their cost-cutting.
Lower equity earnings from associates and jointly controlled entities as well as lower capital gains during the
year altogether capped growth of consolidated revenues. Equity earnings from associates declined by 24%
to P7.4 billion from P9.8 billion due to lower net income of its telecom and banking units as well as a net loss
recorded by its international real estate operations under AG Holdings.
Telecom unit under Globe Telecom posted a 15% decline in net income in 2008 to P11.3 billion. While it
continued to experience strong wireless subscriber growth as well as ramping up of broadband subscribers,
capital investments to support the broadband technology platform and a more intensely competitive market
environment impeded margin expansion. Globe Telecom’s revenues, however, remained steady even
amidst slowing domestic consumption. Consolidated revenues reached P62.9 billion from P63.2 billion the
prior year. Wireless revenues were flat amidst a 22% growth in its subscriber base while revenues from its
wireline business increased by 7%, driven by its corporate data and broadband businesses. Globe’s
broadband subscriber base grew by 84% in 2008 with the highest net adds noted in the fourth quarter.
Higher operating expenses capped EBITDA but EBITDA margin remained high at 59% as costs arising
from broadband investments lowered margins. Wireless EBITDA margin continues to be robust at 65% while
wireline EBITDA margins have been under pressure given the dynamics of the start-up broadband business.
Despite lower earnings this year, Globe’s free cash flow remains strong. It recently declared its first semiannual cash dividend of P32 per share, which puts Globe among the highest in dividend yields in the
Philippine Stock Exchange.
Banking unit under Bank of the Philippine Islands, also posted lower net income which fell by 36% to P6.4
billion as revenues fell due to a decline in securities trading income and a decline in the contribution of the
insurance company due largely to non-recurring investment income. BPI, achieved good business volume
growth. Loans expanded by an unprecedented 17%, driven by strong demand from corporate and retail
consumers. This was the second straight year BPI posted double-digit loan growth. Despite the growth in
loans, asset quality continued to improve with net 30-day non-performing loans ratio down to 2.9%. BPI’s
deposit base expanded by 5% to hit P540 billion by year-end, with total customer funds and assets held in
trust up by 8.9%. The bank’s remittance business also saw strong growth, up 35%, with volume reaching
US$4.4 billion, significantly outpacing the industry’s 15%. BPI’s capital adequacy ratio of 14.1% remains well
above the 10% regulatory minimum. Last December, the bank successfully issued P5 billion in 10-year
subordinated debt eligible as Lower Tier 2 capital in anticipation of possible acquisition opportunities.
International real estate arm, AG Holdings, recorded a net loss of US$7.1 million mainly due to an
extraordinary loss for provisions arising from a deemed impairment on a trading security. In addition, last
year’s earnings also included a gain from the sale of The Forum in Singapore.
83
Altogether, these offset the higher equity earnings from its water distribution business, Manila Water, which
posted a 7% growth in net income to P2.8 billion on the back of higher water sales volume complemented by
further improvements in the company’s operating efficiency. Manila Water pursued an intensive capex
program, spending a total of P4.2 billion in 2008 as it accelerated the implementation of expansion projects
and invested in new systems and processes. Billed volume went up by 4% to 387 million cubic meters as
Manila Water expanded its customer base by 46,765 new household connections. In addition, the company
managed to further reduce system losses by 6 percentage points to 19.6% from over 25% last year and from
a high of 63% in 1997. This is the first time that Manila Water has brought its level of water losses to below
20%, which is significantly better than most of the company’s regional counterparts. The company also
began construction on a number of sewerage treatment plants in 2008, with the aim of bringing sewerage
coverage to 30% by 2012 from the present level of 16% for the East Zone.
Lower capital gains realized during the period pushed Other Income on a consolidated basis 50% lower to
P5.4 billion from P10.7 billion in 2007. Significantly higher capital gains were realized in 2007 as the
company took advantage of the much higher market prices prevailing at that time to realize values from
some of its investments.
Consolidated costs and expenses outpaced revenue growth and rose by 13% to P66.0 billion. Costs of sales
and services, which accounted for 76% of consolidated costs and expenses, rose by 16% to P50.0 billion
from P43.2 billion the prior year. This was broadly in step with the increase in consolidated sales and
services and also a result of higher cost of sales, particularly at the electronics unit with higher cost of
inventories.
General and administrative (G&A) expenses on a consolidated basis was flat relative to last year at P9.5
billion. Higher G&A expenses in Ayala Land was offset by lower G&A expenses at the parent company level
and in the electronics unit.
Consolidated interest expense and other financing charges increased by 20% to P4.9 billion in 2008 from
P4.1 billion in 2007. This was mainly due to currency-hedging related losses at IMI. Excluding this,
consolidated interest and financing charges decreased by 16% to P3.5B.
At the holding company level, however, interest and financing charges continued to decline and has
consistently declined over the past few years as the company actively reduced debt levels and lowered
financing cost. Average cost of debt at the parent level in 2008 has decreased by over 200 basis points to
7.4% compared to 9.5% two years ago. In 2008 the company also prepaid debt and replaced these with
newly raised funds at lower cost. The parent company’s net debt has declined substantially to P8.7 billion
from a high of P36 billion in 2004, allowing it to maintain a very comfortable net debt to equity ratio of 0.09 to
1. Likewise, on a consolidated basis, the company is in a very comfortable financial position with
consolidated net debt to equity at 0.11 to 1.
While net earnings were impacted this year by various factors both external and internal, the company
maintains a healthy financial and liquidity position across the group. Debt and debt to equity ratios are at
very comfortable levels, cash resources are sufficient to pursue the respective growth agenda of each of the
operating units, and solvency and liquidity ratios are well within comfortable limits.
Amidst the height of the credit crisis last year, all of Ayala’s business units combined were able to raise P23
billion in funds in the second half of last year, from August to December, effectively securing funding
requirements for 2009. This began with Ayala Land’s P4 billion five-year fixed rate bond in August, IMI’s
P1.3 billion preferred share offering to its shareholders, Manila Water’s P4 billion five-year fixed rate bond in
October, Ayala Corp.’s issuance of perpetual preferred shares in November and BPI’s tier-2 capital raising in
December. Globe also recently announced that it will also be issuing P3 billion retail bonds in the first quarter
of 2009.
No doubt 2009 will be more challenging across all fronts as the full extent of the global financial crisis
unfolds. While the company maintains a generally cautious stance given the current environment, it is
expected that each of the operating units will remain resilient, achieve steady top-line performance and
continue to contribute positive earnings in the coming year.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
84
Balance Sheet items
(December 31, 2008 Vs December 31, 2007)
Cash and cash equivalents – 16% increase from P36,836mln to P42,886mln
Dividends received net of dividends paid, proceeds from sale of shares and issuance of preferred shares
partly offset by loan repayments and disbursements to fund various investments by the parent company,
issuance of bond and proceeds from sale of shares in Piedmont Property Ventures, Inc., Stonehaven Land,
Inc. and Streamwood Property, Inc. by the real estate group and proceeds from the issuance of preferred
shares by the electronics, information technology and business process outsourcing services group. As a
percentage to total assets, cash and cash equivalents slightly increased from 19% to 20% as of December
31, 2007 and December 31, 2008, respectively.
Short-term investments – 73% decrease from P3,688mln to P1,009mln
Parent company’s money market placements were converted to cash and cash equivalents and lower
investment management account by the real estate group. As a percentage to total assets, short-term
investments are at 2% of the total assets as of December 31, 2007 and 0.5% as of December 31, 2008.
Accounts and notes receivable-current – 38% increase from P16,823mln to P23,284mln
Increase in advances to contractors and suppliers and reclassification of a subsidiary’s receivables from
non-current receivables by the real estate group, advances to fund new investments by the international
group and parent company, higher receivables by the electronics, information technology and business
process outsourcing services group. As of December 31, 2008 and December 31, 2007, accounts and note
receivable is at 11% and 9% of the total assets, respectively.
Inventories – 13% increase from P8,843mln to P10,011mln
Development costs for new and existing real estate projects by the real estate group. The automotive group
however, has a lower inventory level in 2008 due to lower demand. As a percentage to total assets,
inventories remained at 5% as of December 31, 2007 and December 31, 2008.
Other current assets – 99% increase from P3,571mln to P7,090mln
Largely due to increase in FVPL financial assets, higher prepaid expenses, inventory of supplies and
creditable withholding tax by the real estate group. This account is at 2% and 3% of the total assets as
December 31, 2007 and December 31, 2008, respectively.
Noncurrent accounts and notes receivable – 67% increase from P4,010mln to P6,694mln
Largely due to advances for investments by the parent company. Noncurrent accounts and notes receivable
slightly increased from 2% of the total assets as of December 31, 2007 to 3% as of December 31, 2008.
Investments in associates and joint ventures – 4% decrease from P71,272,mln to P68,140mln
Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These associates
are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among others.
The decrease is attributable to the sale of shares, cash dividends received net of 2008 share in equity by the
parent company, partly offset by new investments by the international and electronics, information
technology and business process outsourcing services groups, and new investments and 2008 equity share
from associates of the real estate group. This account is at 36% of the total assets as of December 31,
2007 to 31% as of December 31, 2008.
Investment in bonds and other securities – 23% increase from P2,493mln to P3,065mln
New investments by the parent company and increase in value of investments owned by the international
group partly offset by the sale of investments and decrease in marked to market valuation of investments by
the electronics, information technology and business process outsourcing services group. This account is
1% of the total assets as of December 31, 2007 and December 31, 2008.
Investment in real properties – 21% increase from P17,416mln to P21,059mln
Primarily due to disbursements related to construction of buildings owned by the real estate group. As a
percentage to total assets, investment in real properties is at 9% and 10% as of December 31, 2007 and
December 31, 2008, respectively.
Property, plant and equipment – 64% increase from P8,493mln to P13,887mln
85
Real estate group’s disbursements for on-going projects and acquisition of an aircraft by a subsidiary. As of
December 31, 2007 and December 31, 2008, the group’s property, plant and equipment account is at 4%
and 6% of the total assets, respectively.
Deferred tax assets – 15% increase from P984mln to P1,133mln
Due to higher recognized sales by the real estate group. As of December 31, 2008 and December 31, 2007,
the group’s deferred tax asset remained at 0.5% of the total assets.
Pension assets – 16% decrease from P141mln to P117mln
Decrease in pension assets of the electronics, information technology, business process outsourcing
services group. This account remained at 0.1% of the total assets as of December 31, 2007 and December
31, 2008.
Intangible assets – 23% increase from P3,276mln to P4,014mln
Additional intangible assets, higher peso exchange rate partly offset by amortization of intangible assets in
2008 by the electronics, information technology and business process outsourcing services group and
goodwill arising from the acquisition of new subsidiaries by the real estate group. As a percentage to total
assets, this account remained 2% as of December 31, 2007 and December 31, 2008.
Other noncurrent assets – 9% decrease from P2,087mln to P1,906mln
Mainly due to prepaid items charged to various projects by the real estate group. As a percentage to total
assets, this account remained at 1% as of December 31, 2007 and December 31, 2008.
Accounts payable and accrued expenses – 23% increase from P22,261mln to P27,484mln
Increase in accrual of salaries, equipment rental and cost of materials by the real estate group and trade
payables and accrual of personnel related expenses by the electronics, information technology, business
process outsourcing services group partly offset by lower inventory pull-outs by the automotive group. As of
December 31, 2007 and December 31, 2008, this account is at 27% and 30% of the total liabilities,
respectively.
Short-term debt –5% increase from P2,634mln to P 2,755mln
Loans availed by the international and electronics, information technology, business process outsourcing
services groups partly offset by partial payments of loans by the real estate and automotive groups. As of
December 31, 2007 and December 31, 2008, this account remained at 3% of the total liabilities.
Income tax payable – 25% decrease from P286mln to P215mln
Higher creditable withholding tax recognized by the real estate group. As a percentage to total liabilities, this
account is at 0.35% and 0.23% as of December 31, 2007 and December 31, 2008, respectively.
Current portion of long-term debt – 84% decrease from P9,513mln to P 1,479mln
Decrease is due to the partial payment of loans by the parent company and the real estate group. As of
December 31, 2007 and December 31, 2008, this account is at 12% and 2% of the total liabilities,
respectively.
Long-term debt – 33% increase from P37,885mln to P50,250mln
Issuance of fixed rate bonds by the real estate group and new loans availed by the parent company net of
repayments. As a percentage to total liabilities, this account is at 46% as of December 31, 2007 and 55% as
of December 31, 2008.
Deferred tax liabilities – 19% increase from P156mln to P186mln
Mainly from operations of the real estate group. As a percentage to total liabilities, this account remained at
0.2% as of December 31, 2007 and December 31, 2008.
Pension liabilities – 8% decrease from P532mln to P491mln
Largely due to adjustment made to reflect latest actuarial valuation of the real estate group. This account
remained at 1% of the total liabilities as of December 31, 2007 and December 31, 2008.
Other noncurrent liabilities – 11% increase from P6,818mln to P7,588mln
Mainly due to increase in customer and security deposits, deferred interest income on advances and
unearned management fees of the real estate group. This account remained constant at 8% of the total
liabilities as of December 31, 2007 and December 31, 2008.
86
Paid-up capital – 39% increase from P26,855mln to P37,252mln
Largely due to the 20% stock dividend and issuance of preferred shares in 2008.
Share-based payments – 17% increase from P604mln to P705mln
Increase in stock options granted.
Cumulative translation adjustment – 58% decrease from (P2,297mln) to (P969mln)
Mainly due to forex rate changes.
Retained earnings – 2% increase from P60,173mln to P61,604mln
Attributable to 2008 net income net of cash and stock dividends declared.
Net unrealized gain on available-for-sale financial assets – 137% decrease from P1,712mln to (P631mln)
Due to lower revaluation of investments in securities.
Parent company preferred shares held by a subsidiary – 100% increase from -0- to P100mln
Parent company preferred shares held by the real estate group
Treasury shares – 245% increase from P160mln to P551mln
Due to buy-back of shares.
Minority interest – 11% increase from P27,609mln to P30,740mln
Largely due to share of minority holders in 2008 net income.
Income Statement items
(YTD December 31, 2008 Vs YTD December 31, 2007)
Sales and services – 13% increase from P56,578mln to P64,053mln
Primarily due to higher revenues from residential, strategic landbank, construction, shopping centers and
corporate businesses of the real estate group, higher sales by the electronics, information technology and
business process outsourcing services group partly offset by lower revenue from the automotive group.
Sales and services contributed 72% of the total revenue in 2007 and 81% in 2008.
Equity in net earnings of associates and joint ventures – 24% decrease from P9,767mln to P7,396mln
Largely due to lower equity earnings generated from the associates of the parent company and
international group.
the
This account is 12% and 9% of the total revenue in 2007 and in 2008, respectively.
Interest income – 32% increase from P1,693mln to P2,243mln
Due to higher investible funds in 2008.
This account is 2% of the total revenue in 2007 and 3% in 2008.
Other income – 50% decrease from P10,728mln to P5,417mln
Largely due to lower capital gains and forex gain in 2008 by the parent company. This account is 7% and
14% of the total revenue in 2008 and in 2007, respectively.
Cost of sales and services – 16% increase from P43,169mln to P50,014mln
Relative to higher sales.
Cost of sales and services is 76% and 74% of the total costs and expenses for the period ending December
31, 2008 and 2007, respectively.
Interest expense and other financing charges – 20% increase from P4,120mln to P4,937mln Charges on
unwinding of hedge contracts by the electronics, information technology and business process and
outsourcing group, increase in loan level by the real estate group, partly offset by lower interest expense due
to lower loan levels and prudent debt management by the parent company. This account is 8% and 7% of
the total costs and expenses for the periods December 31, 2008 and 2007, respectively.
Provision for income tax – 23% increase from P1,972mln to P2,418mln
Due mainly to higher taxes paid by the real estate group and the parent company.
87
2007
Ayala Corporation posted record consolidated revenues and net income in 2007. Despite the uncertainties
looming in global financial markets in the latter part of the year, the domestic operating environment
remained generally positive with economic fundamentals largely remaining intact. The main drivers of
domestic consumption, particularly the robust overseas workers’ remittances, low domestic interest rate,
revival of sectors like power and infrastructure as well as greater activity across several industries continued
to underpin the growth of the Ayala group’s major businesses, particularly in property, telecom, banking,
water, and automotive. However, the peso’s continued strength has also impacted the export-oriented
businesses in the portfolio, particularly in the electronics and business process outsourcing services. But
overall, the company’s growth momentum remained solid this year as the company also realized values from
its portfolio and as operating units achieved generally higher earnings.
Consolidated revenues reached P78.8 billion, up 12% versus the prior year driven by a healthy growth in
consolidated sales and services, higher equity in net earnings, interest income, and gains from the sale of
shares particularly at the parent level.
Consolidated sales and services increased by 6% to P56.6 billion due mainly to higher unit sales of Ayala
Automotive, higher contribution from the newly acquired companies of the electronics business as well as
the new investments in business process outsourcing (BPO) under LiveIt. Growth, however, was partly
weighed by the marginal revenue growth of the real estate group. While underlying demand across all of the
company’s real estate products remained strong as reflected in strong residential unit sales and high
occupancy rates of its commercial centers and business office portfolio, Ayala Land, Inc. (ALI) recorded only
a slight revenue expansion as a result of the standardization of revenue recognition policy, which had the
effect of accelerating its revenues in 2006. Sales and services accounted for 72% of total consolidated
revenues in 2007.
Equity in net earnings of associates and joint ventures reflected an 18% increase to P9.8 billion from P8.2
billion in 2006. The strong earnings growth of the parent company’s key affiliates, particularly Globe
Telecom, which posted a 13% growth in net income, banking unit, Bank of the Philippine Islands (BPI),
which posted an 11% increase in net income, as well as the higher earnings of the associates of Ayala Land
altogether resulted in higher equity earnings for the group. Equity earnings accounted for 12% of the
company’s total revenues in 2007.
Consolidated revenues were further boosted by capital gains which pushed the Other Income account up by
53% to P10.7 billion. A substantial part of this was generated through value realization initiatives at the
parent level as it recognized P7.3 billion in gains from the sale of shares in Ayala Land, BPI, and Globe as
market values during the year reached attractive levels for value realization.
On the cost side, consolidated cost and expenses increased by 8% to P58.4 billion. A substantial part of this
was due to a 6% increase of consolidated cost of sales and services to P43.2 billion, which was very much
in line with the growth of consolidated sales and services.
General and administrative expenses (GAE), on the other hand, rose by 23% to P9.5 billion stemming from
expenses related to capacity expansion initiatives and amortization expense of the new BPO businesses,
higher manpower and technology integration-related expenses of the electronics group.
Other charges increased by 306% to P1.6 billion as a result of non-cash, non-operating charges from the
impairment loss on goodwill of the electronics, information technology and business process outsourcing
services group, particularly Affinity Express and partly Integreon.
Consolidated interest expense and other financing charges declined by 18% to P4.1 billion from P5 billion
the prior year. This was due to a substantial reduction in average funding costs. At the holding company
level in particular, the continued decline in domestic interest rates has helped reduce financing expense
significantly. Financing expense at the holding company level reached P3 billion in 2007, 26% lower than the
prior year. In 2007 the parent company pre-paid a total of P14 billion worth of debt that had an average cost
of 11.8%. Refinancing with lower cost debt has brought down the average cost of parent company’s
outstanding debt in 2007 to 7.4% from 9.5% the prior year. Net debt at the parent level has also been
substantially reduced and is now down to P13.3 billion, putting parent level net debt-to-equity ratio even
lower at 0.15 to 1 from 0.26 to 1 at the beginning of the year. Even on a consolidated basis, consolidated
debt by year-end 2007 was lower at P50 billion. With cash, cash equivalents and short-term investments of
88
P40.5 billion, consolidated net debt declined to P9.5 billion from P29.6 billion and consolidated net debt to
equity ratio at 0.11 to 1 from 0.38 to 1. Total stockholders’ equity by year-end reached P87.2 billion, up 13%
from the prior year.
Altogether, these put consolidated net income in 2007 at P16.3 billion, which was a 33% increase from the
P12.2 billion net income recorded in 2006 and the highest ever recorded by the company.
The healthy earnings growth and strong cash position of the parent company enabled it to further increase
its dividend payout in 2007 with a total of P7.3 billion paid out to shareholders, more than double the amount
the prior year. This is equivalent to 60% of prior year’s net income, inclusive of the 20% stock dividend, and
a dividend yield of 1.4% based on an average price of P558.50 per share. This combined with the 15.5%
gain in the company’ stock price during the year put total return to shareholders at 17% in 2007.
The company’s total market capitalization by year end reached P234 billion and was ranked the second
largest among companies listed in the Philippine Stock Exchange. However, collectively, the market
capitalization of the five listed companies of the group accounted for about 27% of the Philippine Stock
Exchange’s composite index’s total market capitalization.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(31 December 2007 Vs 31 December 2006)
Cash and cash equivalents – 81% increase from P20,391mln to P36,836mln
Attributable to proceeds from sale of shares of stocks, increased collections and proceeds from the issuance
of preferred shares by the real estate group. As a percentage to total assets, cash and cash equivalents
increased from 11% to 19% as of 31 December 2006 and 31 December 2007, respectively.
Short-term investments – 26% increase from P2,928mln to P3,688mln
Mainly due to money market placements of the parent company and the real estate group’s investment
management account in 2007 partly offset by the lower money market placements of the real estate group.
As a percentage to total assets, short-term investments remained at 2% of the total assets as of 31
December 2006 and 31 December 2007.
Inventories – 6% decrease from P9,392mln to P8,843mln
Largely due to sale of units at residential building and subdivision projects by the real estate group partly
offset by higher vehicles inventory by the automotive group. As a percentage to total assets, inventories
remained at 5% as of 31 December 2006 and 31 December 2007, respectively.
Other current assets – 10% decrease from P3,961mln to P3,571mln
Sale of marketable securities partly offset by higher prepaid expenses of the real estate group. As a
percentage to total assets, other current assets remained at 2% as of 31 December 2006 and 31 December
2007, respectively.
Noncurrent assets held for sale – 100% decrease from P3, 658mln to P-0Due to sale of Oakwood by the real estate group and sale of investment in Hermill by the international group
in 2007. This account is 2% of the total assets as of 31 December 2006.
Noncurrent accounts and notes receivable – 59% increase from P2,520mln to P4,010mln
Due to availment of longer payment terms and additional sales at new and existing projects by the real
estate group. Noncurrent accounts and notes receivable slightly increased from 1% of the total assets as of
31 December 2006 to 2% as of 31 December 2007.
Investments in associates and joint ventures – 4% increase from P68,221,mln to P71,272mln
Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These associates
are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among others.
The increase is largely due to the investment in a BPO company partly booked in 2006 under Investment in
bonds and other securities account by the electronics, information technology and business process
outsourcing services group and 2007 equity share in earnings of associates partly offset by the sale of
shares and dividends received by the parent company, lower forex rate and return of investment by the
89
international group. This account is at 37% of the total assets as of 31 December 2006 and 31 December
2007.
Investment in bonds and other securities – 28% decrease from P3,462mln to P2,493mln
Sale of marketable securities and reclassification of investments in a BPO company to Investments in
Associates & Joint Ventures account partially offset by new investments and marked to market investments
of the electronics, information technology, business process outsourcing services group. This account is
2% of the total assets as of 31 December 2006 and 1% as of 31 December 2007.
Property, plant and equipment – 6% decrease from P9,057mln to P8,493mln
Decrease due to lower forex rate, depreciation expense and business development costs charged to
expense by electronics, information technology, business process outsourcing services group partly offset by
the ongoing projects of the real estate group. As of 31 December 2006 and 31 December 2007, the group’s
property, plant and equipment account is at 5% and 4% of the total assets, respectively.
Deferred tax assets – 12% decrease from P1,124mln to P984mln
Due mainly to realization of unrealized financial gross profit of the real estate group. As of 31 December
2006 and 31 December 2007, the group’s deferred tax asset is at 0.6% and 0.5% of the total assets,
respectively.
Pension assets – 31% decrease from P203mln to P141mln
Decrease in pension assets of the electronics, information technology, business process outsourcing
services group. This account remained at 0.1% of the total assets as of 31 December 2006 and 31
December 2007.
Intangible assets – 26% decrease from P4,430mln to P3,276mln
Due to lower peso exchange rate, amortization in 2007 and impairment of goodwill. As a percentage to total
assets, this account remained at 2% as of 31 December 2006 and 31 December 2007.
Other noncurrent assets –17% increase from P1,785mln to P2,087mln
Cost of various facilities advanced by the electronics, information technology, business process outsourcing
services group which will be billed to its customers. As a percentage to total assets, this account remained
at 1% as of 31 December 2006 and 31 December 2007.
Accounts payable and accrued expenses – 21% increase from P18,326mln to P22,261mln
Higher trade payables by the real estate group and higher inventory pull-outs by the automotive group. As of
31 December 2006 and 31 December 2007, this account is at 23% and 27% of the total liabilities,
respectively.
Short-term debt –5% increase from P2,504mln to P2,634mln
New loan availed by the automotive group partly offset by the payment of debt by the international and
electronics, information technology and business process outsourcing services groups. As of 31 December
2006 and 31 December 2007, this account remained at 3% of the total liabilities.
Other current liabilities – 7% increase from P1,453mln to P1,550mln
Increase in customers’ deposits by the real estate group. As a percentage to total liabilities, this account is at
2% as of 31 December 2006 and 31 December 2007.
Liabilities directly associated with noncurrent assets held for sale – 100% decrease from P469mln to P-0Due to sale of assets previously booked as held for sale. As a percentage to total liabilities, this account is at
0.6% as of 31 December 2006.
Cumulative redeemable preferred shares – 100% decrease from P2,500mln to P-0-mln
Redemption of preferred shares by the parent company. Cumulative redeemable preferred shares is 3% of
the total liabilities as of 31 December 2006.
Deferred tax liabilities – 65% decrease from P444mln to P156mln
Primarily due to reduction in deferred tax liabilities of the real estate group. As a percentage to total liabilities,
deferred tax liabilities is at 0.6% and 0.2% as of 31 December 2006 and 31 December 2007, respectively.
Pension liabilities – 9% increase from P488mln to P532mln
90
Increase in pension liabilities of the real estate group. This account remained at 1% of the total liabilities as
of 31 December 2006 and 31 December 2007.
Other noncurrent liabilities – 11% increase from P6,141mln to P6,818mln
Mainly due to increase in buyers’ and tenants’ deposits of the real estate group. This account remained
constant at 8% of the total liabilities as of 31 December 2006 and 31 December 2007.
Paid-up capital – 16% increase from P23,138mln to P26,855mln
Largely due to the 20% stock dividend.
Share-based payments – 8% increase from P558mln to P604mln
Increase in stock options granted.
Cumulative translation adjustment – 671% decrease from (P298mln) to (P2,297mln)
Mainly due to forex rate changes.
Retained earnings – 17% increase from P51,311mln to P60,173mln
Attributable to 2007 net income net of cash and stock dividends declared.
Net unrealized gain on available-for-sale financial assets – 18% decrease from P2,079mln to P1,712mln
Due to lower revaluation of investments in securities.
Treasury shares – 51,414% increase from P0.310mln to P160mln
Due to buy-back of shares.
Minority interest – 12% increase from P24,699mln to P27,609mln
Largely due to share of minority holders in 2007 net income and increased share due to reduced
shareholdings by the equity holders of the parent.
Income Statement items
(YTD 31 December 2007 Vs YTD 31 December 2006)
Sales and services – 6% increase from P53,394mln to P56,578mln
Higher unit sales by the automotive group, higher sales volume of existing businesses and contributions
from the operations of newly acquired companies by the electronics, information technology and business
process outsourcing services group partly offset by lower revenue from the real estate group.
Sales and services contributed 72% of the total revenue in 2007 and 76% in 2006.
Equity in net earnings of associates and joint ventures – 18% increase from P8,249mln to P9,767mln
Largely due to higher equity earnings generated from the associates of the real estate and international
groups and the parent company.This account is 12% of the total revenue in 2006 and in 2007.
Interest income – 11% increase from P1,521mln to P1,693mln
Due to higher investible funds in 2007. This account is 2% of the total revenue in 2007 and in 2006.
Other income – 53% increase from P6,998mln to P10,728mln
Largely due to capital gains from sale of shares and higher forex gains.
This account is 14% and 10% of the total revenue in 2007 and in 2006, respectively.
Cost of sales and services – 6% increase from P40,857mln to P43,169mln
Relative to higher sales. Cost of sales and services is 74% and 76% of the total costs and expenses for the
period ending 31 December 2007 and 2006, respectively.
General and administrative expenses – 23% increase from P7,708mln to P9,498mln
Largely due to the GAE of the new subsidiary, higher manpower costs, depreciation and amortization
expenses of the electronics, information technology and business process outsourcing services group.
This account is 16% and 14% of the total costs and expenses for the period ending 31 December 2007 and
2006, respectively.
Interest expense and other financing charges – 18% decrease from P5,024mln to P4,120mln
Due to reduced average funding costs. As of 31 December 2007 this account is 7% of the total costs and
expenses vs 9% in 31 December 2006.
Other charges – 306% increase from P387mln to P1,570mln
91
Due to impairment loss on goodwill of the electronics, information technology and business process
outsourcing services group and extraordinary charges of the real estate group. As of 31 December 2007 this
account is 3% of the total costs and expenses vs 1% in December 2006.
Provision for income tax – 5% increase from P1,877mln to P1,972mln
Due mainly to higher taxes paid by the parent company and the electronics, information technology and
business process outsourcing services group.
Key performance indicators of AC and its significant subsidiaries:
The table sets forth the comparative key performance indicators of the Company and its material
subsidiaries.
Ayala Corporation (Consolidated)
(In million pesos, except ratios)
Revenue
Net Income Attributable to Equity
Holders
Total Assets
Total Debt
Stockholders’ Equity
1
Current Ratio
2
Debt to Equity Ratio
Ayala Land, Inc.
(In million pesos, except ratios)
Revenue
Net Income Attributable to Equity
Holders
Total Assets
Total Debt
Stockholders’ Equity
1
Current Ratio
2
Debt to Equity Ratio
Integrated Micro-Electronics, Inc.
(In thousand US dollars, except ratios)
Revenue
Net Income Attributable to Equity
Holders
Total Assets
Total Debt
Stockholders’ Equity
Current Ratio1
2
Debt to Equity Ratio
1
2
2009
76,293
8,154
2008
79,108
8,109
2007
78,767
16,257
232,479
56,523
102,260
2.57
0.55
220,188
54,484
97,311
2.52
0.56
196,131
50,032
86,887
1.92
0.58
2009
30,455
4,039
2008
33,749
4,812
2007
25,707
4,386
108,071
18,812
52,392
1.95
0.36
100,589
16,752
49,028
1.88
0.34
82,981
10,139
45,705
1.65
0.22
2009
395,502
10,066
2008
441,145
(16,830)
2007
422,107
35,693
302,082
48,302
166,690
1.89
0.29
306,958
71,110
159,631
1.71
0.44
305,772
71,008
158,152
1.69
0.45
Current Assets / Current Liabilities
Total Debt/ Stockholders’ Equity (Total Debt includes short-term debt, long-term debt and current portion of long-term debt)
In general, the Company posted strong results with the improvements in most of the performance indicators.
Despite the overall economic slowdown, the above key indicators were within targeted levels.
Net income to equity holders remained stable even with the expected declines in revenues.
The marked improvements in balance sheet items (total assets, stockholders’ equity and current and debt to
equity ratios) were all result of focused financial management. The Company will continue to adopt the
following benchmarks: a) current ratio of not lower than 0.5:1.0; and b) debt to equity ratio not to exceed
3.0:1.0, both supported by prudent debt management policies.
92
There are no known trends, events or uncertainties that will result in the Company’s liquidity increasing or
decreasing in a material way.
There were no events that will trigger direct or contingent financial obligation that is material to the Company,
including any default or acceleration of an obligation.
Likewise, there were no material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships of the Company with unconsolidated entities or other persons
created during the reporting period.
In 2008, AYC Holdings, Inc. issued promissory notes and advances to EGS Corp. and EGS Acquisition
Corp. amounting to P4,986.1 million. The advances amounting to P665.3 million is payable in one year and
bear interest at the rate of 12% per annum. The promissory notes amounting to P4,320.8 million is payable
over a period of five years and bear interest at the rate of 12% to 18% per annum. The notes and advances
were partially collected on October 1, 2009. The balance amounting to P1,655.8 million owed by EGS Corp.
was assigned to NewBridge in 2009. As discussed in Note 10 to the consolidated financial statements, in a
stock-for-stock exchange between NewBridge and Stream in 2009, the advances assigned to NewBridge
were effectively converted to Stream shares. The advances of AYC Holdings to New Bridge are non-interest
bearing with a term of one-year.
As of December 31, 2009, the receivables from related parties are generally short-term in nature. The
guarantees provided by Ayala Corp to AYC Finance and Ayala International North America (AINA) to its
subsidiary have been disclosed in Note 34 to consolidated financial statements.
As of December 31, 2009, the payables to related parties are non-interest bearing. P105M of the payables to
related parties are current and classified under Accounts Payable and Accrued Expenses. The majority of
the non-current payables to related parties are payable within 1 – 2 years. The maturity profile of the Group’s
financial liabilities are presented in Note 30 to the consolidated financial statements.
At the holding company level, Ayala Corp. has allocated P7 billion for identified capital expenditure projects
in 2010. The Company is prepared to increase this should there be strategic opportunities to expand. The
Company has sufficient internal cash, which amounted to P26 billion as of year-end 2009.
There are no seasonal aspects that may have a material effect on the financial condition of the Company.
Item 7. Financial Statements and Supplementary Schedules
The consolidated financial statements and schedules as listed in the accompanying Index to Financial
Statements and Supplementary Schedules are filed as part of this Form 17 A.
As regards the significant accruals for payroll, taxes other than income taxes, interest and any other material
items, details are not reasonably available because the Company’s present consolidation process/system
covers only major and/or condensed expense classifications which are not segregated into accrued and
cash portions.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
The Company has engaged the services of SGV & Co. during the two most recent fiscal years. There are
no disagreements with SGV & Co. on accounting and financial disclosure.
The accounting policies adopted are consistent with those of the previous financial year except for the
adoption of the new and amended Philippine Financial Reporting Standards (PFRS) and the Philippine
Interpretations of International Financial Reporting Interpretation Committee (IFRIC) which became
effective beginning January 1, 2009. The Group will also adopt several amended and revised standards
and interpretations in 2010 and 2012.
Please refer to Note 2 of the attached Company’s audited financial statements on the Summary of
Significant Accounting Policies for the accounting of the new PFRS and IFRIC which became effective in
2009 and new PFRS and IFRIC that will be effective in 2010 and 2012.
93
Information on Independent Public Accountant
a.
The external auditor of the Company is the accounting firm of SyCip, Gorres, Velayo & Company
(SGV & Co.). The same accounting firm is being recommended for appointment as external
auditor at the annual meeting.
b.
Representatives of SGV & Co. for the current year and for the most recently completed fiscal year
are expected to be present at the annual stockholders’ meeting. They will have the opportunity to
make a statement if they desire to do so and are expected to be available to respond to
appropriate questions.
Pursuant to the General Requirements of SRC Rule 68, Par. 3 (Qualifications and Reports of
Independent Auditors), the Company has engaged SGV & Co. as external auditor, and Ms. Lucy
L. Chan has been the Partner In-Charge effective audit year 2007.
External Audit Fees and Services
Ayala Corporation paid or accrued the following fees, including VAT, to its external auditors in the past two
years:
2009
2008
Audit & Audit-related Fees
P 3.02
P 3.02
Tax Fees
-
Other Fees
P 1.95
P 5.29
SGV & Co. was engaged by the Company to audit its annual financial statements.
No tax consultancy services were secured from SGV & Co.
In 2009, SGV & Co. billed the Company for an aggregate fee of P1.95 M for the following services:
(i) Completion of the Enterprise-Wide Risk Management study
(ii) Performance of due diligence work related to possible investment
(iii) Conduct of seminar on major differences between International Financial Reporting Standards
and US Generally Accepted Accounting Principles
In 2008, SGV & Co. billed the Company for an aggregate fee of P5.29 M for the following services:
(i) Review of the Company’s consolidated financial statements for the period ended June 30, 2008
and issuance of a comfort letter in connection with the Company’s issuance of preferred shares.
(ii) Conduct of an Enterprise-Wide Risk Management study.
(iii) Conduct of a seminar on new accounting standards.
The Company’s Audit Committee (composed of Xavier P. Loinaz, Chairman, Meneleo J. Carlos, Jr. and
Nobuya Ichiki) recommended to the Board of Directors the appointment of SGV & Co. as its external auditor
and the fixing of the audit fees. Likewise, the other services rendered by SGV & Co. were approved by the
Board of Directors upon the recommendation of the Audit Committee. The stockholders further ratified the
resolution of the Board of Directors.
The Audit Committee has an existing policy which prohibits the Company from engaging the independent
auditors to provide services that may adversely impact their independence, including those expressly
prohibited by SEC regulations. In addition, the Audit Committee pre-approves all audit and permitted nonaudit services provided by the external auditors. It is expected that the external auditors will continue to
provide certain non-audit services including tax-related services to the Company and its subsidiaries.
94
PART III - CONTROL AND COMPENSATION INFORMATION
Item 9. Directors and Executive Officers of the Registrant
The following persons have been nominated to the Board for election at the annual stockholders’ meeting
and have accepted their nomination:
JAIME AUGUSTO ZOBEL DE AYALA
RAMON R. DEL ROSARIO, JR.
DELFIN L. LAZARO
MERCEDITA S. NOLLEDO
FERNANDO ZOBEL DE AYALA
NOBUYA ICHIKI
XAVIER P. LOINAZ
The nominees were formally nominated to the Nominations Committee of the Board (composed of Meneleo
J. Carlos, Jr., Chairman, Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala) by a shareholder of
the Company, Ms. Asuncion Lourdes de Jesus. Messrs. Ramon R. del Rosario, Jr. and Xavier P. Loinaz, an
incumbent director, are being nominated as independent directors. Ms. de Jesus is not related to any of the
nominees including Messrs. del Rosario and Loinaz. Please refer to Annex “A” for the summary of the
qualifications of the nominees.
The nominees have served as directors of the Company for more than five years except for Messrs. Xavier
P. Loinaz, Delfin L. Lazaro and Nobuya Ichiki who were elected to the Board in April 2006, January 2007
and June 2009, respectively.
The nominees are expected to attend the scheduled annual stockholders’ meeting.
On May 18, 2009, the Securities and Exchange Commission (SEC) approved the amendment of the by-laws
of the Company on the adoption of the SRC Rule 38 (Requirements on Nomination and Election of
Independent Directors). The Company always undertakes to abide by SRC Rule 38 on the required number
of independent directors subject to any revision that may be prescribed by the SEC.
The write-ups below include positions currently held by the directors and executive officers, as well as
positions held during the past five years.
Board of Directors
Jaime Augusto Zobel de Ayala
Fernando Zobel de Ayala
Meneleo J. Carlos, Jr.
Nobuya Ichiki
Delfin L. Lazaro
Xavier P. Loinaz
Mercedita S. Nolledo
Chairman and Chief Executive Officer
President and Chief Operating Officer
Independent Director
Director
Director
Director
Director
Jaime Augusto Zobel de Ayala, Filipino, 51, has served as Director of Ayala Corporation since 1987. He
also holds the following positions: Chairman and CEO and Chairman of the Nomination Committee of Ayala
Corporation; Chairman of the Board of Directors of Globe Telecom, Inc., Bank of the Philippine Islands and
Integrated Micro-Electronics, Inc., Azalea Technology Investment, Inc., World Wildlife Fund Philippine
Advisory Council, and AI North America; Vice Chairman of Ayala Land, Inc., Manila Water Co., Inc. and Asia
Society Philippines Foundation, Inc.; Co-Vice Chairman of Mermac, Inc., Ayala Foundation, Inc. and Makati
Business Club; Director of BPI PHILAM Life Assurance Corporation, Alabang Commercial Corporation,
Ayala Hotels, Inc. He is a member of various international and local business and socio-civic organizations
including the Children’s Hour Philippines, Inc., Asian Institute of Management, Asia Business Council, JP
Morgan International Council, Mitsubishi Corporation International Advisory Committee, Toshiba
International Advisory Group, Harvard Business School Asia-Pacific Advisory Board, Harvard University Asia
Center Advisory Committee, The Asia Society, The Singapore Management University, the Conference
Board, Pacific Basin Economic Council and Philippine Economic Society; Trustee of the Ramon Magsaysay
Awards Foundation and the International Business Council of the World Economic Forum. He was a TOYM
(Ten Outstanding Young Men) Awardee in 1999 and was named Management Man of the Year in 2006 by
the Management Association of the Philippines for his important role in the transformation of Ayala
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Corporation into a highly diversified forward-looking conglomorate. He was also awarded the prestigious
Harvard Business School Alumni Achievement Award in 2007. He graduated with B.A. in Economics (Cum
Laude) at Harvard College in 1981 and took his MBA at the Harvard Graduate School of Business
Administration in 1987.
Fernando Zobel de Ayala, Filipino, 50, has served as Director of Ayala Corporation since 1994. He also
holds the following positions: President and Chief Operating Officer of Ayala Corporation; Chairman of Ayala
Land, Inc., Manila Water Company, Inc., Ayala Automotive Holdings Corp., Ayala DBS Holdings, Inc.,
Alabang Commercial Corp.; Vice Chairman of Aurora Properties, Inc., Azalea Technology Investments, Inc.,
Ceci Realty, Inc. and Vesta Property Holdings, Inc.; Co-Vice Chairman of Ayala Foundation, Inc. and
Mermac, Inc.; Director of the Bank of the Philippine Islands, Globe Telecom, Inc., Integrated MicroElectronics Inc., Asiacom Philippines, Inc., Ayala Hotels, Inc., AC International Finance Limited, Ayala
International Pte. Ltd., and Caritas Manila; and Member of INSEAD, East Asia Council World Economic
Forum, Habitat for Humanity International Asia-Pacific Steering Committee and Trustee of International
Council of Shopping Centers. He graduated with B.A. Liberal Arts at Harvard College in 1982.
Meneleo J. Carlos, Jr., Filipino, 80, served as the Independent Director of Ayala Corporation since
September 2002. He is the Chairman of Ayala Corporation’s Audit and Compensation Committees and a
member of the Nomination Committee. He is the Chairman and President of Riverbanks Development
Corporation; Chairman of Chem Insurance Brokers, Inc, AVC Chemicals, Inc., Philippine Iron Construction &
Marine Works ,Inc., and Vacphil Rubber Philppines, Inc.; President of Resins, Inc., RI Chemical Corporation,
and Maja Development Corporation; and Director of Polymer Product, Inc., Philippine Iron Construction and
Marine Works, Cagayan Electric Power and Light Co. and Philippine Technology Development Ventures,
Inc. He graduated with a B.S. Chemical Engineering degree and a Certificate of Advanced Studies at
Cornell University in 1952.
Nobuya Ichiki, Japanese, 53, has served as Director of Ayala Corporation since June 2009. His other
positions include: General Manager of Mitsubishi Corporation - Manila Branch; Chairman of International
Elevator & Equipment Inc.; Chairman and President of MCPL (Philippines) Inc.; Director of Japanese
Chamber of Commerce & Industry of the Philippines, The Japanese Association Manila, Inc., Isuzu
Philippines Corporation, Imasen Philippines Manufacturing Corp., Kepco Ilijan Corporation, Team Diamond
Holdings, UniCharm Philippines Inc., Robinsons Convenience Stores, Inc., Trans World Agro-Products
Corp., Laguna Technopark Inc., West of Laguna Development Corporation and Seneca Holdings, Inc. He
graduated with a B.S. Engineering degree in Urban Design at The University of Tokyo in 1979.
Delfin L. Lazaro, Filipino, 64, has served as Director of Ayala Corporation since January 2007. He has
served as a member of the Management Committee of Ayala Corporation (Ayala Group) since 1996. He
also holds the following positions: Chairman of Philwater Holdings Co., Inc. and Atlas Fertilizer & Chemicals,
Inc.; Chairman and President of Michigan Power, Inc., Purefoods International, Ltd., and A.C.S. T. Business
Holdings, Inc.; Vice Chairman and President of Asiacom Philippines, Inc.; President of Azalea Technology
Investments, Inc.; Director of Ayala Land, Inc., Globe Telecom, Inc., Integrated Micro-Electronics, Inc.,
Manila Water Co., Inc., AYC Holdings, Ltd., AI North America, Inc., AC International Holdings, Ltd., Ayala
DBS Holdings, Inc., Ayala Automotive Holdings Corp., Probe Productions, Inc. and Empire Insurance
Company. Formerly, Mr. Lazaro was the President and CEO of Benguet Corporation and Secretary of the
Department of Energy of the Philippine government. He was named Management Man of the Year 1999 by
the Management Association of the Philippines for his contribution to the conceptualization and
implementation of the Philippine Energy Development Plan and to the passage of the law creating the
Department of Energy. He was also cited for stabilizing the power situation that helped the country achieve
successively high growth levels up to the Asian crisis in 1997. He graduated with BS Metallurgical
Engineering at the University of the Philippines in 1967 and took his MBA (with Distinction) at Harvard
Graduate School of Business in 1971.
Xavier P. Loinaz, Filipino, 66, has served as the Independent Director of Ayala Corporation since April
2009. He was a member of the Management Committee of Ayala Corporation (Ayala Group) from 1989 to
2004. He was formerly the President of Bank of the Philippine Islands (BPI) from 1982 to 2004. His other
significant positions include: Chairman of the Alay Kapwa Kilusan Pangkalusugan; Vice-Chairman of FGU
Insurance Corporation; Independent Director of Bank of the Philippine Islands, BPI Capital Corporation, BPI
Direct Savings Bank, Inc., BPI/MS Insurance Corporation, BPI Family Savings Bank, Inc. and Globe
Telecom, Inc.; and Member of the Board of Trustees of BPI Foundation, Inc. and E. Zobel Foundation. He
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graduated with an AB Economics degree at Ateneo de Manila University in 1963 and took his MBA-Finance
at Wharton School, University of Pennsylvania in 1965.
Mercedita S. Nolledo, Filipino, 68, has served as Director of Ayala Corporation since 2004 and is also a
Senior Managing Director and Corporate Secretary of Ayala Corporation, and a Senior Counsel of the Ayala
Group of Companies. Her other significant positions include: Chairman of BPI Investment Management, Inc.
and FEB Management, Inc., Director and Corporate Secretary of Ayala Land, Inc.; Director of Honda Cars
Cebu, Inc., Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu Cebu, Inc., Ayala Automotive
Holdings Corp., HCMI Insurance Agency, Inc.; Bank of the Philippine Islands, BPI Family Savings Bank, BPI
Capital Corp., and Anvaya Cove Beach and Nature Club, Inc.; Member of the Board of Trustees of Ayala
Foundation, Inc. and BPI Foundation, Inc.; Treasurer of Phil. Tuberculosis Society, Inc., Sonoma Properties,
Inc. and JMY Realty Development Corp. She had her education at the University of the Philippines and
graduated Magna Cum Laude and Class Valedictorian in Bachelor of Science in Business Administration
and Cum Laude and Class Valedictorian in Bachelor of Laws.
Nominees to the Board of Directors for election at the stockholders’ meeting:
All the above incumbent directors, except Mr. Meneleo J. Carlos, Jr.
Ramon R. del Rosario, Jr., Filipino, 65, is the President and Chief Executive Officer of Philippine
Investment Management (PHINMA), Inc. He served as an Independent Director of Ayala Land, Inc. from
1994 to April 2009. His other significant positions are: President of Bacnotan Consolidated Industries, Inc.
and Microtel Development Corp.; Chairman and CEO of AB Capital and Investment Corporation; Chairman
of Paramount Building Management, United Pulp and Paper Co., Inc., Microtel Inns and Suites (Pilipinas),
Inc., CIP II Power Corp., Trans-Asia Gold and Minerals Development Corp., Stock Transfer Services, Inc.,
Araullo University and Cagayan de Oro College; and Director of Trans-Asia Oil & Energy Development
Corporation, Trans-Asia Power Generation Corp., PHINMA Property Holdings Corp., Roxas Holdings, Inc.,
Holcim (Phils.), Inc., Bacnotan Industrial Park Corp., PHINMA Foundation, Inc. and Union Galvasteel Corp.
He served as the Philippines’ Secretary of Finance in 1992-1993. He is the current chairman of the Makati
Business Club. He graduated with degrees in BSC-Accounting and AB-Social Sciences (Magna cum Laude)
at De La Salle University, Manila in 1967 and earned his Masters in Business Administration at Harvard
Business School in 1969.
Ayala Group Management Committee Members / Senior Leadership Team
Jaime Augusto Zobel de Ayala Chairman & Chief Executive Officer
Fernando Zobel de Ayala
President & Chief Operating Officer
Delfin L. Lazaro
Senior Managing Director, Chief Executive Officer of AC Capital until
December 31, 2009
Mercedita S. Nolledo
Senior Corporate Counsel & Corporate Secretary
Gerardo C. Ablaza, Jr.
Senior Managing Director, Chief Executive Officer of AC Capit
effective January 1, 2010
Antonino T. Aquino
Senior Managing Director, President of Ayala Land, Inc.
* Jaime I. Ayala
Senior Managing Director
Charles H. Cosgrove
President of AG Holdings, Ltd.
Rufino Luis T. Manotok
Senior Managing Director, Corporate Information Officer, Chief
Finance Officer & President of Ayala Automotive Holdings, Inc.
Arthur R. Tan
Senior Managing Director, President of Integrated Micro-Electronics,
Inc.
Jose Rene D. Almendras
Managing Director, President of Manila Water Company, Inc.
Alfredo I. Ayala
Managing Director, Chief Executive Officer of LiveIt Investments, Ltd.
Ernest Lawrence L. Cu
President, Globe Telecom, Inc.
John Eric T. Francia
Managing Director, Group Head of Corporate Strategy
Victoria P. Garchitorena
Managing Director, President of Ayala Foundation, Inc.
Solomon M. Hermosura
Managing Director, General Counsel, Assistant Corporate Secretary &
Compliance Officer
Ricardo N. Jacinto
Managing Director
Rufino F. Melo III
Managing Director
Aurelio R. Montinola III
President, Bank of the Philippine Islands
Ramon G. Opulencia
Managing Director & Treasurer
John Philip S. Orbeta
Managing Director, Group Head of Corporate Resources
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* Members of the Board of Directors
** Management Committee members
*** Retired effective December 31, 2009
Gerardo C. Ablaza, Jr., Filipino, 56 has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 1998. He also holds the following positions: Senior Managing Director of
Ayala Corporation; Co-Vice Chairman of Globe Telecom, Inc.; Director of Bank of the Philippine Islands, BPI
Family Savings Bank, Inc., BPI Card Finance Corporation, Azalea Technology Investment, Inc., Asiacom
Philippines, Inc., Manila Water Company, Inc., and Integrated Micro-Electronics, Inc. He is also the Chief
Executive Officer of AC Capital with directorship position in HRMall Holdings Limited, LiveIT Investments
Limited, Integreon, Inc., Affinity Express Holdings Limited, NewBridge International Investments Ltd., Stream
Global Services., RETC (Renewable Energy Test Center). He was the President and Chief Executive Officer
of Globe Telecom, Inc. from 1998 to April 2009. He was previously Vice President and Country Business
Manager for the Philippines and Guam of Citibank, N.A. for its Global Consumer Banking business. Prior to
this position, he was Vice President of Citibank, N.A. Singapore for Consumer Banking. Attendant to his last
position in Citibank, N.A., he was the bank’s representative to the Board of Directors of CityTrust Banking
Corporation and its various subsidiaries. He graduated Summa Cum Laude at De La Salle University in
1974 with a degree in AB Major in Mathematics (Honors Program). In 2004, he was recognized by CNBC as
the Asia Business Leader of the Year, making him first Filipino CEO to win the award. In the same year, he
was awarded by Telecom Asia as the Best Asian Telecom CEO.
Antonino T. Aquino, Filipino, 62, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since August 1998. He also holds the following positions: Senior Managing
Director of Ayala Corporation and President of Ayala Land, Inc. He also previously served as President of
Manila Water Company, Inc., and Ayala Property Management Corporation, Senior Vice President of Ayala
Land, Inc., and a Business Unit Manager in IBM Philippines, Inc. Currently, he is the Chairman of the Board
of Trustees of the Hero Foundation; Member of the board of Manila Water Co., Inc. and of various corporate
social responsibility foundations such as Ayala Foundation, Manila Water Foundation, Habitat for Humanities
Philippines, La Mesa Watershed Foundation and Makati Environment Foundation. He also served as
President of Manila Water Company, Inc, and Ayala Property Management Corporation; Senior Vice
President of Ayala Land, Inc., and a Business Unit Manager of IBM Philippines, Inc. He was named “CoManagement Man of the Year 2009” by the Management Association of the Philippines for his leadership
role in a very successful waterworks privatization and public-private sector partnership. He graduated with
Bachelor of Science Major in Management at the Ateneo de Manila University in 1968 and has completed
academic units for the Masteral Degree in Business Management at the Ateneo Graduate School of
Business in 1975.
Jaime I. Ayala, Filipino, 46, has served as a member of the Management Committee of Ayala Corporation
(Ayala Group) from 2004 to December 2009. He was a Senior Managing Director of Ayala Corporation and
President and CEO of Ayala Land, Inc from 2004 to March 2009. His other significant positions were:
Chairman and President of Makati Property Ventures, Inc.; Chairman of Ayala Property Management Corp.,
Cebu Holdings, Inc., Cebu Insular Hotel Co., Inc., Cebu Property Ventures & Dev't. Corp., Alveo Land Corp.,
Avida Land Corp., Laguna Technopark, Inc., Makati Development Corp., and Station Square East
Commercial Corp; Director and President of Aurora Properties, Inc, Ayala Hotels, Inc., Enjay Hotels, Inc.,
Roxas Land Corp. and Vesta Property Holdings, Inc.; Director of Alabang Commercial Corp., Ayala
Greenfield Development Corp., Ayala Infrastructure Ventures, Inc., Ayala Land Sales, Inc., Berkshire
Holdings, Inc., Bonifacio Arts Foundation, Inc., Bonifacio Land Corp., Emerging City Holdings, Inc. and Fort
Bonifacio Development Corp. He earned his M.B.A. from Harvard School, graduating with honors in 1988.
He completed his undergraduate work in 1984 at Princeton University, where he graduated Magna Cum
Laude in Economics, with a minor in Engineering.
Charles H. Cosgrove, American, 54, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 1998. He is the CEO of AG Holdings Ltd. Prior to joining Ayala
Corporation, he was a Managing Director of Singapore Telecom International Pte. Ltd. He graduated from
Stanford University with an AB in 1977. He obtained a JD from Georgetown University School of Law in
1980.
Rufino Luis T. Manotok, Filipino, 59, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 1999. He also holds the following positions: Senior Managing Director,
Corporate Information Officer and Chief Finance Officer of Ayala Corporation; President and Chairman of
Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu Iloilo Corp., Prime Initiatives, Inc. and
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Water Capital Works, Inc.; Chairman of Honda Cars Cebu, Inc., Isuzu Cebu, Inc., Ayala Aviation
Corporation, Darong Agricultural Development Corporation, and AYC Finance Ltd.; Vice Chairman of
Michigan Power, Inc.; President and Director of Ayala Automotive Holdings Corp. and Philwater Holdings
Company; and Director of AC International Finance Ltd., AG Holdings Limited, AI North America, Inc.,
Asiacom Philippines, Inc., AYC Holdings Ltd., Azalea International Venture Partners Ltd., Ayala Systems
Technology, Inc., BPI Family Savings Bank, Inc., Bestfull Holdings Limited, Fine State Group Limited, IMA
Landholdings, Inc. and Michigan Holdings, Inc. He graduated with Bachelor of Arts in Economics at the
Ateneo de Manila University in 1971 and had his Masters Degree in Business Management at the Asian
Institute of Management in 1973. He also took the Advance Management Program at Harvard Business
School in 1994.
Arthur R. Tan, Filipino, 50, has served as a member of the Management Committee of Ayala Corporation
(Ayala Group) for more than 5 years. He holds the position of Senior Managing Director of Ayala
Corporation. He is also the President and CEO of Integrated Micro-Electronics, Inc. and Speedy-Tech
Electronics, Ltd.; Chairman of Speedy-Tech Philippines, Inc. and Advanced Research and Competency
Development Institute (ARCDI); and Vice Chairman of Semiconductor and Electronics Industries in the
Philippines, Inc. (SEIPI). He is also the President of IMI USA, Inc. and IMI International Singapore Pte. Ltd.
Prior to joining Ayala Corporation, he was a Managing Director of American Microsystems, Inc. (Asia Pacific
Region/Japan). He graduated with a degree of BS in Electronics and Communication Engineering at the
Mapua Institute of Technology in 1982. He has taken post graduate classes in MSEE from the University of
Idaho and business courses from Harvard University.
Jose Rene D. Almendras, Filipino, 49, is a Managing Director of Ayala Corporation since January 2007.
He is the Chief Executive Officer of Manila Water Co., Inc. He was previously connected with Ayala Land,
Inc. as a member of the Management Committee and concurrently Head of the Visayas Mindanao Business
and Operations Transformation Group. He was President and CEO of Cebu Holdings, Inc. and Cebu
Property Ventures and Development Corp., both publicly listed companies managed by the Ayala Land
Group. He served as Chairman of the Ayala Land Group Bidding Committee and head of its Strategic
Procurement Division. Prior to joining the Ayala Group, Mr. Almendras served as Treasurer for both Aboitiz
& Company, and the publicly listed Aboitiz Equity Ventures. While at the Aboitiz Group, he was appointed
President and CEO of City Savings Bank, also owned by the Aboitiz Group. He also worked in various
capacities with Citytrust Banking Corporation, Citibank, and the Bank of the Philippine Islands. He obtained
his Business Management degree from the Ateneo de Manila University and completed the Strategic
Business Economics Program at the University of Asia and the Pacific.
Alfredo I. Ayala, Filipino, 48, is a Managing Director of Ayala Corporation since June 2006. He is the Chief
Executive Officer of LiveIt Investments, Ltd., the holding company of Ayala Corporation for its investments in
the BPO sector. Currently, he holds the following positions: Chairman of the Business Processing
Association of the Philippines (BPA/P) and Stream Global Solutions, Inc. Director of NewBridge International
Investment Limited, Affinity Express Holdings Limited and HRMall Holdings Limited. Previously, he was a
Chairman of SPi, one of the leading non-voice BPO companies in Asia and Partner at Crimson Investment,
an international private equity firm. Prior to that, he was a Managing Director and co-Founder of MBO
Partners. He has an MBA from the Harvard Graduate School of Business Administration and BA in
Development Studies and Economics, graduated with Honors, from Brown University.
Ernest Lawrence L. Cu, Filipino, 49, is a member of the Management Committee of Ayala Corporation
(Ayala Group) since January 2009. He is the President and Chief Executive Officer of Globe Telecom, Inc.
He is also a Director of Systems Technology Institute, Inc., Prople BPO, Inc., ATR KimEng Capital Partners,
Inc., ATR KimEng Financial Corporation, Game Services Group. He is a Trustee of Ayala Foundation, Inc.
and De La Salle College of St. Benilde. He brings with him over two decades of general management and
business development experience spanning multi country operations. Prior to joining Globe, he was the
President and CEO of SPI Technologies, Inc. He also served as Director of Digital Media Exchange, Inc. and
a Trustee of the International School Manila. He has a Bachelor of Science degree in Industrial
Management Engineering from De La Salle University in Manila and an M.B.A. from the J.L. Kellogg
Graduate School of Management, Northwestern University.
John Eric T. Francia, Filipino, 38, is a Managing Director and a member of the Management Committee of
Ayala Corporation since January 2009. Mr. Francia is the Head of Ayala’s Corporate Strategy Group, which
is responsible for overseeing Ayala’s portfolio strategy, providing analytic support for resource allocation
decisions, and aligning and monitoring key performance metrics within the group. He is also a director of
Integreon, and Michigan Power, Inc. Prior to joining Ayala, he was the Head of the Global Business Planning
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and Operations of the Monitor Group, a strategy consulting firm based in Cambridge, MA. He spent 12
years in the management consulting sector both as a senior consultant and member of the management
team. Prior to consulting, he spent a few years in the field of academe and media. He received his
undergraduate degree in Humanities and Political Economy from the University of Asia & the Pacific,
graduating Magna Cum Laude. He then completed his Masters Degree in Management Studies at the
University of Cambridge in the UK, graduating with First Class Honors.
Victoria P. Garchitorena, Filipino, 65, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 2006. She is currently a Managing Director of Ayala Corporation since
1996, President and Board member of Ayala Foundation, Inc. and Ayala Foundation USA. Her other
significant positions include: Trustee of the International Center on Innovation, Transformation and
Excellence in Governance and Pinoy Me Foundation; member of the Asia Pacific Advisory Council Against
Corruption-World Bank, League of Corporate Foundations and Makati Business Club; and member of the
National Committee of Bishops-Businessmen’s Council for Human Development. Previously, she was a
Senior Consultant on Poverty Alleviation and Good Governance and the Head of the Presidential
Management Staff and Secretary to the Cabinet under the Office of the President of the Republic of the
Philippines; a Director of Philippine Charity Sweepstakes Office; Executive Assistant to the Chairman and
President of the Meralco Foundation, Inc.; a Trustee of the Ramon Magsaysay Awards Foundation; and CoChairperson of EDSA People Power Commission; a Board member of the US based Council of Foundations;
Member of the Global Foundation Leaders Advisory Group of World Economic Forum and Governor of
Management Association of the Philippines. She graduated with a B.S. Physics degree (Summa Cum
Laude) at the College of the Holy Spirit in 1964 and was an SGV scholar at the Asian Institute of
Management.
Solomon M. Hermosura, Filipino, 47, has served as Managing Director of Ayala Corporation since January
1999 and a member of the Management Committee of Ayala Corporation (Holding Company) since January
2009. He is also the General Counsel, Compliance Officer, and Assistant Corporate Secretary of Ayala
Corporation. He serves as Corporate Secretary or Assistant Corporate Secretary of various companies in
the Ayala Group, including the following: Corporate Secretary: Manila Water Company, Inc.; Integrated
Micro-Electronics, Inc.; Ayala Foundation, Inc.; Ayala DBS Holdings, Inc.; Asiacom Phils., Inc.; Philwater
Holdings Company, Inc.; AC International Finance Ltd.; AYC Finance Ltd.; Affinity Express Holdings, Inc.;
and Integreon, Inc.; Assistant Corporate Secretary: Ayala Land Inc. He also serves as a member of the
Board of Directors of a number of companies in the Ayala Group. He earned his Bachelor of Laws degree
from San Beda College in 1986 and placed 3rd in the 1986 Bar Examination.
Ricardo N. Jacinto, Filipino, 49, has served as a Managing Director of Ayala Corporation since May 2000.
He is the Head of AC Capital Portfolio B. His other significant positions are: President of Nicanor P. Jacinto,
Jr. Foundation and a Director of UP School of Economics Alumni Association, Ayala Automotive Holdings
Corporation, Ayala Hotels, Inc., Technopark Land, Inc., PFC Properties, Inc., PFN Holdings Corporation,
Ayala Aviation Corp., and Michigan Holdings, Inc. He was a Director of Integreon, Inc., Integreon Managed
Solutions (Philppines), Inc., Integreon Managed Solutions (India) Private Limited and LiveIt Solutions, Inc.
He completed his Masters in Business Administration at the Harvard University in 1986.
Rufino F. Melo III, Filipino, 56, has served as a Managing Director of Ayala Corporation since 2006. He is
the Head of the Strategic Management Control of Ayala. He is a Director of Darong Agricultural Corporation
and Pameka Holdings, Inc. Prior to joining Ayala, he was the Group Financial Comptroller of Jardine Davies,
Inc. He graduated with a BS Accountancy degree at the University of the East in 1975.
Aurelio R. Montinola III, Filipino, 58, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 2005. He also holds the following positions: President and Chief Executive
Officer of the Bank of the Philippine Islands; Chairman of Board of Directors of BPI Direct Savings Bank,
Inc., BPI Computer Systems Corporation, BPI/MS Insurance Corporation, BPI Europe Plc., East Asia
Computer Center, Inc., LGU Guarantee Corp., Monti-Rey, Inc., Desrey, Inc., Seyrel Investment & Realty
Corp., Armon Realty, Dercc, Inc., and Amon Trading Corp.; Co-Chairman of the Philippine-France Business
Council; Vice-Chairman and President of BPI Foundation, Inc.; Vice Chairman of the Board of Directors of
Republic Cement Corporation; Vice Chairman of the Board of Trustees of Far Eastern University and
Philippine Business for Education, Inc.; Regional Vice Chairman of MasterCard Incorporated; Director of
BPI-Philam Life Assurance Corporation, BPI Bancasurance, Inc., BPI Capital Corporation, BPI Family
Savings Bank, Mere, Inc., and Western Resources Corp. He is the Chairman of the Board of Trustee of East
Asia Computer Educational Foundation; Trustee of the Ayala Foundation, Inc., International School Manila
and Pres. Manuel A. Roxas Foundation. He is the President of the Bankers Association of the Philippines
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and Member of the Makati Business Club and Management Association of the Philippines. He graduated
with a degree in BS Management Engineering at the Ateneo de Manila University in 1973 and received his
MBA at Harvard Business School in 1977.
Ramon G. Opulencia, Filipino, 53, has served as Treasurer of Ayala Corporation since September 2005
and has previously served as the Senior Assistant Treasurer from November 1992 to September 2005. He
is also a Managing Director of Ayala Corporation. He is currently a member of the Board of Directors of BPI
Family Savings Bank, Inc., AYC Holdings Limited and AYC Finance Limited. Prior to joining Ayala
Corporation, he was a Senior Manager of the Bank of the Philippine Islands’ Treasury Group. He graduated
with a BS in Mechanical Engineering degree at the De La Salle University in 1978 and took his Masteral in
Business Management at the Asian Institute of Management graduating with Distinction in 1983. He
completed the Advanced Management Program at the Harvard Business School in May 2005.
John Philip S. Orbeta, Filipino, 48, has served as a member of the Ayala Corporation Management
Committee since 2005 and the Group Management Committee since 2009. He is currently the Managing
Director and Group Head for Corporate Resources, covering Strategic Human Resources, Corporate
Communications and Information & Communications Technology at Ayala Corporation. He is the President
of HRMall, Inc., the Ayala group’s HR Business Process Outsourcing company. He is concurrently the
Chairman of the following councils at the Ayala Group: Human Resources Council, Corporate Security
Council, the Ayala Business Clubs and is the Program Director of the Ayala Young Leaders Congress. Prior
to joining Ayala Corporation, he spent 19 years at Watson Wyatt Worldwide (NYSE:WW), the global
management consulting firm where he was the Vice President and Global Practice Director for the firm's
Human Capital Consulting Group, overseeing the firm's practices in executive compensation, strategic
rewards, data services and organization effectiveness around the world. He was also a member of Watson
Wyatt's Board of Directors. He received his undergraduate degree in Economics from the Ateneo de Manila
University where he also attended graduate studies in Industrial Psychology. He completed a Leadership
Development Program at the Harvard Business School.
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Pursuant to the Company’s By-Laws, each Director has a term of office of one year from date of election or
until his successor shall have been named, qualified and elected. Each Executive Officer are covered by
Letters of Appointment with the Company stating therein their respective job functionalities, among others,
the terms and conditions of which are in accordance with existing laws.
The Executive Officers are entitled to receive retirement benefits in accordance with the terms and
conditions of the Company’s BIR-registered employees’ retirement plan. There is no plan or arrangement by
which the Executive Officers will receive from the Company any form of compensation in case of a changein-control of the Company or a change in the Officers’ responsibilities following such change-in-control.
Significant Employees
The Company considers all its employees together as one work force as significant. Everyone is expected
to work as part of one team to achieve the Company’s goals and objectives.
Family Relationship
Jaime Augusto Zobel de Ayala, Chairman/Chief Executive Officer, and Fernando Zobel de Ayala,
President/Chief Operating Officer, are brothers.
Jaime I. Ayala, Senior Managing Director until his resignation effective December 31, 2009, and Alfredo I.
Ayala, Managing Director, are also brothers.
There are no known family relationships between the current members of the Board and key officers other
than the above.
Parent Company
Mermac, Inc. holds or owns 50.92% of the total issued and outstanding common stock of the Company as
of 31 December 2009. As of December 31, 2009, the Company has no material and unusual
receivable/payable from/to Mermac, Inc.
101
Involvement in Certain Legal Proceedings
Except as disclosed herein or in the Information Statements of the Company’s subsidiaries or affiliates
which are themselves public companies or as has been otherwise publicly disclosed, there are no material
pending legal proceedings, bankruptcy petition, conviction by final judgment, order, judgment or decree or
any violation of a Securities or Commodities Law for the past five years and the preceding years until
February 28, 2010 to which the Company or any of its subsidiaries or affiliates or its Directors or executive
officers is a party or of which any of its material properties are subject in any court or administrative
government agency.
Resignation of Directors/Management Committee members/Key Officers
To date, no director has resigned from, or declined to stand for re-election to the Board of Directors since the
date of the 2009 annual meeting of stockholders due to any disagreement with the Company relative to the
Company’s operations, policies and practices.
Item 10. Executive Compensation
Name and principal position
Jaime Augusto Zobel de Ayala
Chairman and CEO
Fernando Zobel de Ayala
President and COO
Gerardo C. Ablaza, Jr.
Senior Managing Director
Jaime I. Ayala
Senior Managing Director
Delfin L. Lazaro
Senior Managing Director
Rufino Luis T. Manotok
Senior Managing Director,
Corporate Information Officer & Chief
Finance Officer
Ramon G. Opulencia
Managing Director & Treasurer
Alfredo I. Ayala
Managing Director
John Eric T. Francia
Managing Director
Solomon M. Hermosura
Managing Director
Ricardo N. Jacinto
Managing Director
Rufino F. Melo III
Managing Director
John Philip S. Orbeta
Managing Director
CEO & 12 most highly compensated
executive officers
All other officers** as a group unnamed
Year
Actual 2008
(restated)
Actual 2009
Projected 2010
Actual 2008
(restated)
Actual 2009
Projected 2010
Salary
Other income*
P197.8 M
P72.6 M
P202.9 M
P226.8 M
P80.4 M
P99.0 M
P285.6 M
P109.3 M
P305.3 M
P330.8 M
P133.8 M
P145.3 M
* Composed of guaranteed and performance bonus provision
** Managers and up (including all above-named officers)
The total annual compensation includes basic pay and other taxable income (guaranteed bonus,
performance-based incentive and exercise of stock options).
102
The Company has no other arrangement with regard to the remuneration of its existing directors and officers
aside from the compensation received as herein stated.
Options Outstanding
The Company offered the Executive Stock Option Plan (ESOP) to the Company’s officers since 1995. The
following are the outstanding options held by the above named officers:
Name
All abovenamed
officers
Options
granted
640,965
588,561
937,164
767,016
45,403
Outstanding
options
103,466
197,654
423,520
529,629
45,403
Grant date
May 8, 2001
June 18, 2002
June 6, 2003
June 10, 2004
May 1, 2005
Exercise
price
171.88
140.97
107.29
152.78
204.86
Market price on
date of grant*
190.98
156.63
119.21
169.76
227.62
* Grossed up exercise price for the 10% discount
The options expire ten years from grant date. Of the above named officers, no one exercised any option in
2009.
The Company has adjusted the exercise price and market price of the options awarded to the above named
officers due to the stock dividend declared by the Company in May 2004, June 2007 and May 2008 and to
the reverse stock split in May 2005.
Compensation of Directors
The members of the Board of Directors of the Corporation who are neither officers nor consultants of the
Corporation shall be entitled to a director’s fee in an amount to be fixed by the stockholders at a regular or
special meeting duly called for the purpose.
During the 2003 Annual Stockholders’ Meeting, the stockholders ratified the resolution fixing the
remuneration of non-executive directors at P1,000,000.00 consisting of the following components:
Retainer Fee:
Per diem per Board meeting attended:
P500,000.00
P100,000.00
In addition, a non-executive director is entitled to a per diem of P20,000.00 per board committee meeting
actually attended. The executives who are members of the Board of Directors do not receive per diem. Their
compensation, as executives of the company is included in the compensation table.
None of the directors, in their personal capacity, has been contracted and compensated by the Company for
services other than those provided as a director.
The Company has no other arrangement with regard to the remuneration of its existing directors and officers
aside from the compensation received as herein stated.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain record and beneficial owners (of more than 5%) as of February 28, 2010.
Title of
class
Name and address of record owner
and relationship with Issuer
Name of beneficial
owner and
relationship with
record owner
Citizenship
No. of
shares held
Common
Mermac, Inc.2
Mermac, Inc.3
Filipino
253,074,330
Percent
(of the
outstanding
common
shares)
50.92%
2
The Co-Vice Chairmen of Mermac, Inc. (“Mermac”), Jaime Augusto Zobel de Ayala and Fernando Zobel de
Ayala, are the Chairman/CEO and President/COO of the Company, respectively.
3
The Board of Directors of Mermac has the power to decide how Mermac shares in Ayala are to be voted.
103
Common
Common
Common
35/F Tower One, Ayala Triangle,
Ayala Ave., Makati City
Stockholder
PCD Nominee Corporation
(Non-Filipino)4
G/F MSE Bldg.
Ayala Ave., Makati City
Mitsubishi Corporation6
52/F PBCom Tower, 6794 Ayala Ave.
cor. VA Rufino St., Makati City
Stockholder
PCD Nominee Corporation
3
(Filipino)
G/F MSE Bldg.
Ayala Ave., Makati City
Hongkong and
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)5
Mitsubishi
Corporation7
Various
116,887,599
23.52%
Japanese
52,564,617
10.58%
Hongkong and
Shanghai Banking
Corporation (HSBC)
and Standard
Chartered Bank
(SCB)4
Filipino
39,717,926
7.99%
Security ownership of directors and management as of February 28, 2010.
Title of class
Name of beneficial owner
Amount and nature of beneficial
ownership
Directors
Common
Jaime Augusto Zobel de Ayala
858,933
Common
Fernando Zobel de Ayala
872,804
Common
Meneleo J. Carlos, Jr.
1
Common
Nobuya Ichiki
1
Common
Delfin L. Lazaro
427,308
Common
Xavier P. Loinaz
105,513
Common
136,907
Mercedita S. Nolledo
Preferred “A”
20,000
Nominee to the Board of Directors
Common
Ramon R. del Rosario, Jr.
1
CEO and most highly compensated officers
Common
Jaime Augusto Zobel de Ayala
858,933
Common
Fernando Zobel de Ayala
872,804
Common
234,906
Gerardo C. Ablaza, Jr.
Preferred “A”
4,000
Common
Jaime I. Ayala
20,512
Common
Delfin L. Lazaro
427,308
Common
224,533
Preferred “A”
8,030
Rufino Luis T. Manotok
Preferred “B”
50,000
Common
203,166
Ramon G. Opulencia
Preferred “A”
16,000
Common
Alfredo I. Ayala
91,300
Common
John Eric T. Francia
30,534
Common
Solomon M. Hermosura
145,807
Common
28,629
Ricardo N. Jacinto
Preferred “B”
59,050
Common
90,730
Rufino F. Melo III
Preferred “A”
12,000
Common
John Philip S. Orbeta
254,067
Other executive officers (Ayala group ManCom members)
4
Citizenship
Percent of
all class
(direct & indirect)
(direct & indirect)
(direct)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
Filipino
Filipino
Filipino
Japanese
Filipino
Filipino
(direct)
Filipino
0.00000%
(direct & indirect)
(direct & indirect)
(direct & indirect)
(direct)
(indirect)
(direct & indirect)
(direct & indirect)
(indirect)
(indirect)
(direct & indirect)
(direct)
(direct & indirect)
(indirect)
(direct & indirect)
(direct & indirect)
(direct)
(direct & indirect)
(direct)
(direct & indirect)
Filipino
Filipino
0.15113%
0.15357%
0.04133%
0.00070%
0.00361%
0.07519%
0.03951%
0.00141%
0.00880%
0.03575%
0.00282%
0.01606%
0.00537%
0.02566%
0.00504%
0.01039%
0.01596%
0.00211%
0.04470%
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
0.15113%
0.15357%
0.00000%
0.00000%
0.07519%
0.01853%
0.02409%
0.00352%
The PCD is not related to the Company.
HSBC and SCB are participants of PCD. The 46,282,607 and 42,223,627 shares owned by HSBC and SCB,
respectively, form part of the 156,605,525 shares registered in the name of PCD Non-Filipino and Filipino. The
clients of HSBC and SCB have the power to decide how their shares are to be voted. There are no holders of more
than 5% of the Company’s shares under HSBC and SCB.
6
Mitsubishi Corporation (“Mitsubishi”) is not related to the Company.
7
The Board of Directors of Mitsubishi has the power to decide how Mitsubishi’s shares in Ayala are to be voted.
104
5
Common
Jose Rene D. Almendras
Common
Antonino T. Aquino
Preferred “A”
Common
Charles H. Cosgrove
Common
Ernest Lawrence L. Cu
Common
Victoria P. Garchitorena
Preferred “A”
Aurelio R. Montinola III
Common
Arthur R. Tan
All Directors and Officers as a group
9,000
113,908
24,200
0
0
112,652
2,000
217,802
4,374,294
(indirect)
(direct & indirect)
(direct)
(direct & indirect)
(indirect)
(direct & indirect)
Filipino
Filipino
American
Filipino
Filipino
Filipino
Filipino
0.00159%
0.02004%
0.00426%
0.00000%
0.00000%
0.01982%
0.00035%
0.03832%
0.77149%
None of the Company’s directors and officers owns 2.0% or more of the outstanding capital stock of the
Company.
The Company knows of no person holding more than 5% of common shares under a voting trust or similar
agreement.
No change of control in the Company has occurred since the beginning of its last fiscal year.
Item 12. Certain Relationships and Related Transactions
The Ayala Group of Companies, in their regular conduct of business, have entered into transactions with
associates, joint ventures and other related parties principally consisting of advances and reimbursement of
expenses, purchase and sale of real estate properties, various guarantees, construction contracts, and
development, management, underwriting, marketing and administrative service agreements. Sales and
purchases of goods and services to and from related parties are made at normal market prices.
No other transaction was undertaken by the Company in which any Director or Executive Officer was
involved or had a direct or indirect material interest.
To date, there are no complaints received by the Company regarding related-party transactions.
Transactions with Promoters
There are no transactions with promoters within the past five (5) years.
105
PART IV – CORPORATE GOVERNANCE
Item 13. Corporate Governance
Good corporate governance is the cornerstone of Ayala’s sustained success over the past 174 years. Ayala
is committed to the highest level of good governance throughout the organization as well as to fostering a
culture of integrity and empowering leadership.
Ayala’s governance is anchored on the belief that there is a strong link between high quality governance and
the creation of shareholder value and long-term growth.
a. The evaluation system which was established to measure or determine the level of compliance
of the Board of Directors and top level management with its Manual of Corporate Governance
consists of a Board Performance Assessment which is accomplished by the Board of Directors
indicating the compliance ratings. The above is submitted to the Compliance Officer who issues
the required certificate of compliance with the Company’s Corporate Governance Manual to the
Securities and Exchange Commission.
b. To ensure good governance, the Board establishes the vision, strategic objectives, key policies,
and procedures for the management of the company, as well as the mechanism for monitoring
and evaluating Management’s performance. The Board also ensures the presence and
adequacy of internal control mechanisms for good governance.
c.
There were no deviations from the Company’s Manual of Corporate Governance. The Company
has adopted in the Manual of Corporate Governance the leading practices and principles of
good corporate governance, and full compliance therewith has been made since the adoption of
the Manual.
d. The Company is taking further steps to enhance adherence to principles and practices of good
corporate governance.
BOARD STRUCTURE AND PROCESS
Key Role and Responsibilities
Ayala Corporation is led by its Board of Directors consisting of seven directors. The Board represents the
Company and the shareholders and is accountable to them for creating and delivering value through
effective and good governance. The Board establishes the vision, strategic objectives, key policies, and
procedures for the management of the Company, as well as the mechanism for monitoring and evaluating
Management’s performance. The Board also ensures the adequacy of internal control mechanisms for good
governance.
Composition
The directors are elected annually by the stockholders. The Board represents a mix of business, finance and
legal competencies, with each director capable of adding value and exercising independent judgment.
Decision-making at the board level adheres to a process that fosters the independence and integrity of
judgment of each director. All the directors have participated in training on corporate governance. The name
and profile of each director are found in the Board of Directors section of this Annual Report. None of the
members of the Board and management owns 2.0% or more of the outstanding capital stock of the
Company. The board structure provides a clear division of responsibilities between the Board and
management.
Independent Directors
In carrying out their fiduciary duties, the directors must act judiciously and exercise independent judgment.
Ayala Corporation also conforms to the requirement to have independent directors, as defined by law,
constituting at least twenty percent (20%) of the Board. Of the seven directors, Mr. Meneleo J. Carlos, Jr.,
sits as the independent director. Moreover, Messrs. Toshifumi Inami and Xavier P. Loinaz are non-executive
directors.
106
The Company complies with the rules of the Securities & Exchange Commission (SEC) on the qualifications,
nomination and election of independent directors. For this purpose, the Company defines an independent
director as one having no interest or relationship with the Company that may hinder his independence from
the Company or Management or interfere with his exercise of independent judgment in carrying out his
responsibilities as a director.
Chairman and Chief Executive Officer
The Chairman of the Board and Chief Executive Officer (CEO) is Jaime Augusto Zobel de Ayala who
assumed the position in 2006. Fernando Zobel de Ayala holds the position of President and Chief Operating
Officer (COO). The respective roles of the Chairman/CEO and the President/ COO are complimentary and
ensure an appropriate balance of power and increased accountability and further provide a greater capacity
of the Board for independent decision making. The Chairman/CEO and the President/COO attend the
annual meetings of the shareholders.
Board Performance
Board meetings are held at least once a quarter or as often as necessary. The Board has separate and
independent access to the Corporate Secretary who oversees the adequate flow of information to the Board
prior to meetings and serves as an adviser to the directors on their responsibilities and obligations.
Discussions during board meetings are open and independent views are given due consideration. There was
more than 80% average attendance in the five board meetings held in 2008. Of the seven directors, six
directors, namely, Messrs. Jaime Augusto Zobel de Ayala, Fernando Zobel de Ayala, Meneleo J. Carlos, Jr.
Xavier P. Loinaz and Toshifumi Inami and Mercedita S. Nolledo had perfect or 100% attendance. Mr. Delfin
L. Lazaro attended four or 80% of the five meetings. The directors had greater than 80% average
attendance in board meetings.
Board Committees
The Board has established committees to assist in exercising its authority including monitoring the
performance of the business. Four committees support the Board in the performance of specific functions
and to aid in good governance. The committees are the Executive Committee, the Compensation
Committee, the Nomination Committee and the Audit and Risk Committee.
Executive Committee (ExCom). The ExCom, during the periods between board meetings, exercises the
Board’s powers and attributes except with respect to any action for which shareholders’ approval is required,
distribution of cash dividends, filling of vacancies in the Board or in the ExCom, amendment or repeal of ByLaws or the adoption of new By-Laws, amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable, and the exercise of powers delegated by the
Compensation Committee. The Compensation Committee establishes a formal and transparent procedure
for developing a policy on executive remuneration and for fixing the remuneration of officers and directors. It
provides oversight over remuneration of senior management and other key personnel.
At three meetings in 2008, the Commitee approved:
1) the performance bonus for year 2007;
2) the salary adjustments for managers and officers for 2008;
3) the 2008 Executive Stock Ownership Plan (ESOWN) allocation; and
4) the changes to the Employee Welfare and Retirement Plan of Ayala Corporation.
Nomination Committee. The Nomination Committee’s main function is to maintain a process to ensure that
all nominees to the Board have all the qualifications and none of the disqualifications for directors stated in
the By-Laws, the Manual of Corporate Governance of the Company and the pertinent rules of the SEC. Also,
the Committee reviews the qualifications of all persons nominated to positions requiring appointment by the
Board.
At two meetings in 2008, the Nomination Committee approved:
1) the final list of nominees for directors for the year 2008-2009; and
2) the appointment of Mr. John Eric T. Francia as Managing Director, effective 02 January 2009.
107
Audit and Risk Committee. The Audit and Risk Committee oversees Ayala Corporation’s internal control,
financial reporting and risk management processes on behalf of the Board of Directors. The Committee held
five meetings in 2008. During these meetings, the Committee reviewed and approved the 2007 Consolidated
Audited Financial Statements of the Company as audited by the external auditors Sycip Gorres Velayo & Co.
(SGV & Co.), as well as the unaudited financial statements of the Company for the 1st to the 3rd quarters of
2008. The Committee likewise approved the revised Audit and Risk Committee Charter, revised Enterprise
Risk Management Policy and 2008 Internal Audit Plan. In addition, the Committee recommended the
appointment of SGV & Co. as the Company’s external auditors for 2008 and the proposed remuneration.
The activities of the Audit and Risk Committee are further discussed in the section on Accountability and
Audit.
Director and Senior Executive Compensation
Non-executive directors are members of the Board of Directors who are not officers or consultants of the
Company, and who receive remuneration consisting of a retainer fee of P500,000.00 and per diem of
P100,000.00 for each board meeting attended and P20,000.00 per board committee meeting attended. The
remuneration of nonexecutive directors was ratified during the 2003 annual stockholders’ meeting.
None of the directors has been contracted and compensated by the Company for services other than
services provided as a director.
The Company adopts a performance-based compensation scheme for its senior executives as incentive. As
additional incentive to top management, the Board approved stock option plans for key officers covering 3%
of the Company’s authorized capital stock. The grantee is selected based on certain criteria like outstanding
performance over a three year period.
The total compensation paid to non-executive directors and officers is disclosed annually in the Definitive
Information Statement sent to shareholders 15 business days prior to the annual stockholders’ meeting. The
total annual compensation includes the basic salary and other variable pay (i.e. guaranteed bonus,
performance-based incentive and exercise of Stock Option Plan).
MANAGEMENT
Management is accountable to the Board of Directors for the operations of the Company. It puts the
Company’s targets in concrete terms and formulates the basic strategies for achieving the targets.
Governance is not just a matter for the Board. A culture of good governance must be fostered throughout the
organization. Management is equally responsible for ensuring that the mechanisms and structure are in
place.
Enterprise Risk Management
In line with its corporate governance infrastructure, the Company has adopted a group-wide enterprise risk
management framework in 2002. An Enterprise Risk Management Policy was approved by the Audit
Committee in 2003, and was subsequently revised and approved on February 14, 2008. The policy was
designed to enhance the risk management process and institutionalize a focused and disciplined approach
to managing the Company’s business risks.
The risk management framework encompasses the following:
1) identification and assessment of business risks,
2) development of risk management strategies,
3) assessment/design/implementation of risk management capabilities,
4) monitoring and evaluating the effectiveness of risk mitigation strategies and management
and
5) identification of areas and opportunities for improvement in the risk management process.
performance,
A Chief Risk Officer (CRO) is the champion of enterprise risk management at Ayala and oversees the
entire risk management function. On the other hand, the Risk Management Unit provides support to the
CRO and is responsible for overall continuity. Beginning 2008, under an expanded charter, the Audit and
Risk Committee will provide a more focused oversight of the risk management function. A quarterly report on
the risk portfolio of the Ayala group of companies and the related risk mitigation efforts and initiatives are
provided to the Committee. The Company’s internal auditors monitor the compliance with risk management
policies to ensure that an effective control environment exists within the entire Ayala Group.
108
For 2008, the Company engaged the services of an outside consultant to assist the Company in the rollout
of a more focused enterprise risk management framework. The rollout included a formal risk awareness
session and self-assessment workshops with all the functional units of the Company. The Audit and Risk
Committee has initiated the institutionalization of an enterprise risk management function across all the
subsidiaries and affiliates.
ACCOUNTABILITY AND AUDIT
The Audit and Risk Committee exercises oversight of the performance of external and internal auditors. The
role and responsibilities of the Committee are defined in the expanded Audit and Risk Committee Charter.
The internal audit function is governed by a separate Internal Audit Charter.
Audit Charter.
Independent Public Accountants
The external auditors of the Company is the accounting firm of Sycip, Gorres, Velayo & Company (SGV &
Co.). Ms. Lucy L. Chan is the Partner in-charge beginning 2007. The Audit and Risk Committee reviews the
Company’s financial reporting to ensure its integrity and oversees the work of the external auditor. It also
recommends to the Board and stockholders the appointment of the external auditors and appropriate audit
fees.
Internal Audit
The Internal Audit Unit independent ly reviews the Company’s organizational and operational controls and
risk management policies, and compliance. The Audit Team, consisting of Certified Public Accountants and
a Certified Internal Auditor, reports to the Audit and Risk Committee. Business and support units are
regularly audited according to an annual audit program approved by the Audit and Risk Committee. Special
audits are also undertaken when necessary.
In 2009, the Audit and Risk Committee received, reviewed, noted and/or approved audit reports from Internal
Audit and Management according to the approved internal audit plan. The Internal Audit function was rated
“Generally Conforms” after a thorough third-party assessment review (QAR) by the Institute of Internal
Auditors, Inc. (USA) in May 2007. The rating, considered the highest possible score in connection with the
QAR, confirmed that internal audit’s activities conformed with the International Standards for the
Professional Practice of Internal Auditing. We continue to improve the Internal Audit function by using a riskbased audit approach and by benchmarking against best practices.
Compliance Officer
The Compliance Officer ensures that Ayala adheres to sound corporate governance and best practices. Mr.
Solomon M. Hermosura, a Managing Director and the general counsel, is the Compliance Officer. The
Compliance Officer identifies and manages compliance risks, implements, and monitors compliance with the
Manual of Corporate Governance; and certifies yearly the extent of Ayala’s compliance with the Manual.
In 2009, the Compliance Officer led the Ayala group’s regulatory council in a voter’s registration campaign
among employees across the companies. This is part of the council’s efforts to promote responsible
citizenship and conscientiousness in the performance of legal duties.
DISCLOSURE AND TRANSPARENCY
Ayala Corporation is committed to high standards of disclosure and transparency to give the investing
community a true picture of the company”s financial condition and the quality of its corporate governance.
Ownership Structure
Ayala has a transparent ownership structure. It discloses quarterly the top 100 shareholders of the
Company. The Definitive Information Statement sent to shareholders discloses the stock ownership of
directors and management, as well as of record and beneficial owners of more than 5%.
As of December 31, 2009, Mermac, Inc. held 253.1 million common shares representing 50.78% of the
Company’s total outstanding common shares. PCD Nominee Corporation held 157.7 million common shares
or 31.65% and Mitsubishi Corporation held 52.6 million common shares or 10.55%. Out of the total 498
million outstanding common shares, 175.46 million common shares or 35.21% are beneficially owned by
109
non-Filipinos. There were 12 million outstanding listed Preferred A shares, 95.98% of which were owned by
various holders registered under the PCD Nominee Corporation. of the outstanding Preferred A shares were
beneficially owned by non-Filipinos. Out of the 58 million outstanding listed Preferred B shares, 29.7 million
shares or 51.14% were owned by various owners registered under the PCD Nominee Corporation and about
0.14% were owned by foreigners. Of the 568 million total issued and outstanding common and preferred
shares of the Company, 175.6 million common and preferred shares or 30.89% were owned by foreigners.
There were no cross or pyramid shareholdings
Content and Timing of Disclosures
Ayala updates the investing public with strategic, operating and financial information through adequate and
timely disclosures filed with the SEC and PSE which are readily available on the company’s website. Aside
from compliance with periodic reportorial requirements, Ayala punctually discloses major and marketsensitive information such as dividend declarations, joint ventures and acquisitions, sale and disposition of
significant assets, as well as other material information that may affect the decision of the investing public.
In 2009, the company filed unstructured disclosures involving the amendment of company By-Laws in
nominating and electing independent directors, and the Bangko Sentral’s approval of Bank of Philippine
Island’s sale of shares in Pilipinas Savings Bank Inc., a fifth of which the company will now own.
Ayala also disclosed the increase in its Manila Water Company Inc. stake; sale of Ayala Systems
Technology Inc. shares owned by Azalea technology Investments Inc.; the acquisition of grail research by
Integreon Inc.; the stock-for-stock exchange with Stream global Services Inc. by EGS Corp.,; the share buyback program; and the senior executive movements.
Consolidated audited financial statements for the latest financial year were submitted to the SEC by April 15
deadline, while the audited annual report is submitted at least 15 working days before the annual
stockholders’ meeting. In 2009, the audited financial statements as contained in the Definitive Information
Statement was submitted to the SEC on March 6, 2009 and to the PSE three days later, more than three
weeks before the April 03, 2009 annual stockholders’ meeting. Interim or quarterly financial statements were
released between 30 to 45 days from the end of the financial period. The results are disclosed to the
regulators within 24 hours from the time the Board meets to accept the results.The results were also sent to
financial and stock market analysts via a live analysts’ briefing where members of senior management
presented the results personally as well as through the company Website as soon as the SEC received the
statements.
Financial Reporting
Ayala’s financial statements comply with Philippine Financial Reporting Standards. The annual consolidated
financial statements break down total assets, total liabilities and equity, revenues, costs and expenses,
income before income tax, net income attributable to equity holders of Ayala Corporation and noncontrolling
interests and earnings per share. A more comprehensive disclosure of segment results is provided to help
shareholders appreciate the various businesses and their impact on overall value enhancement. The
following are disclosed in the note on Business Segments:a. total revenue b. operating profit c. net income
d. segment assets e. investments in associates and jointly controlled entities f. segment liabilities, and
g. depreciation and amortization
A section on Geographical Segments includes the following: a. Revenue b. Segment Assets, and
c. Investment Properties
Transactions entered into with associates and other related parties are on an arm’s length basis. Sales and
purchases of goods and services to and from related parties are in accordance with normal market prices.
Related party transactions are discussed and quantified in the Notes to the Consolidated Financial
Statements.
Information on Ayala’s financial instruments is guided by the Company’s risk management objectives and
policies to allow for a better assessment of financial performance and cash flows. Significant accounting
judgments and estimates are also disclosed.
110
DEALINGS IN SECURITIES
Ayala has adopted a policy on stock transactions to ensure compliance with the government regulations
against insider trading.
Reporting of Transactions
Ayala complies with the requirement for directors and principal officers to report to the SEC and the PSE,
within five trading days any acquisition, disposal or change in their shareholdings in the Company. The
Company has expanded coverage of this requirement to include members of the Management Committee
and all the Managing Directors. All other officers must submit a quarterly report on their trades of
Company’s shares to the Compliance Officer.
Trading Blackouts
The Company has adopted a policy on insider trading, which covers directors, officers and employees,
consultants, members of key officers’ immediate families and all other employees who are made aware of
the undisclosed material information. Covered persons are prohibited from buying or selling the company’s
securities during trading blackouts. These employees may include those who have knowledge of material
facts or changes in the affairs of Ayala which have not been disclosed to the public, including any
information likely to affect the market price of Ayala’s stocks. The policy covers the company’s shares of
stocks, options to purchase stocks, bonds, and other evidence of indebtedness.
During the year, notices of trading blackouts for structured disclosures were issued for a period covering ten
(10) trading days before and three (3) trading days after the disclosure of quarterly and annual financial
results. The company strictly enforces compliance with these trading blackout periods and there have been
no violations of the Company’s Policy on Insider Trading.
STAKEHOLDER RELATIONS
Ayala adheres to a high level of moral standards and fairness in dealing with all its shareholders, customers,
employees and business partners to lay down the foundation for long-term, beneficial relationships.
Shareholder Meeting & Voting Procedures
Stockholders are informed at least fifteen (15) business days in advance of the scheduled date of their
meetings. The regular or special meetings contains the agenda and sets the date, time and place for
validating proxies, which must be done at least five business days prior to the annual stockholders’
meeting. Each outstanding common share of stock entitles the registered holder to one vote.
Shareholder and Investor Relations
Ayala believes that open and transparent communications are needed to sustain growth and build investor
confidence. Our investor communications program promotes greater understanding of the Company’s longterm proposition to create value. The Company, through its Investor Relations Unit under Strategic
Planning, addresses the various information requirements of the investing public and minority shareholders
by fully disclosing these, in a timely manner, to the local bourse, as well as via quarterly briefings, annual
shareholders’ meetings, one-on-one meetings, conference calls, road shows and investor conferences, Web
site and emails or telephone calls.
The Company holds regular briefings and meetings with analysts , including financial analysts from the
banking community. In 2009, four briefings were held, coinciding with the announcement of the 2008 yearend results, 2009 1st quarter, 1st Semester and 3rd quarter results. Analysts were also given access to
senior management.
The Company has updated the Investor Relations section of its Web site to include the organizational
structure, performance, ownership and governance of the Company. The section is updated promptly as
disclosures to the regulators are made, while presentations are immediately made available on the web.
111
Employee Relations
Ayala is committed to promoting the safety and welfare of its employees. It believes in inspiring its
employees, developing their talents, and recognizing their needs as business partners. Strong and open
lines of communication are maintained to relay the Company’s concern for their welfare and safety, and
deepen their understanding of the Company’s business directions.
CODE OF ETHICAL BEHAVIOR
Ayala strongly believes in, and adopts as part of its basic operating principles, the primacy of the person,
shared values and the empowerment of people. The Company and its employees commit to live out the
following values: Integrity, Long-term Vision, Empowering Leadership, and Commitment to National
Development. These values are captured in the new Code of Ethical Behavior , which outlines the general
expectations of, and sets standards for, employee behavior, and ethical conduct. It is in conjunction with
the Company’s Human Resources Policies, which includes the Code of Conduct governing acceptable
behavior to ensure orderly company operations and protect the rights, safety, and work for the benefit of the
employee force. Company employees are required to disclose any business- and family-related transactions
yearly to ensure that potential conflicts of interest are brought to management attention.
Recognitions
In 2009, various international and independent institutions recognized Ayala’s governance principles and
practices as among the best in the Philippines. Leading financial magazine Finance Asia ranked Ayala as 1st
in the category for “Best Corporate Governance” in its poll of the country’s Best Managed Companies.
Asiamoney’s 2009 corporate governance poll likewise ranked Ayala as “Overall Best Company in the
Philippines for Corporate governance”,” Best for Responsibilities for Management and Board of Directors”,
and “Best for shareholders’ Rights and equitable Treatment”.
Ayala and its subsidiaries Ayala land, Globe Telecom, and manila Water were cited among “the Best of Asia”
in the 5th Corporate Governance Asia Awards given in June 2009.
Finally, in the 4th Corporate Governance Scorecard Project, seven of the top 15 companies were members of
the Ayala group: Ayala, Ayala land, bank of the Philippine Islands, Globe Telecom, Manila Water Company,
Cebu Holdings Inc., and Cebu Property Ventures and Development Corporation. The citations, given by the
Institute of Corporate Directors in cooperation with PSE and the SEC, cover criteria and attributes that
include the rights of shareholders, equitable treatment of shareholders, role of stakeholders in corporate
governance, disclosure and transparency, and board responsibility.
OTHERS
Anti-Money Laundering. As a holding company, Ayala does not face issues on anti-money laundering. The
Company strictly complies with the provisions of the Anti-Money Laundering law.
WEB SITE
Additional information on the Company’s corporate governance initiatives may be viewed at
www.ayala.com.ph.
112
PART V - EXHIBITS AND SCHEDULES
Item 14. Exhibits and Reports on SEC Form 17-C
(a)
Exhibits - See accompanying Index to Exhibits
(b)
Reports on SEC Form 17-C
Reports on SEC Form 17-C were filed during the last six month period covered by this report and are
listed below:
Date
8-2009
Particulars
Ayala Corporation’s net income in the first half of the year reached P4 billion,
35% lower than the same period last year.
8-20-2009
The Ayala group has secured Monetary Board approval to put up a mobile
microfinance bank. Bank of the Phil. Islands (BPI) and Globe Telecom Inc. will
each own 40% of the new lending entity, while Ayala Corporation has a 20%
stake. Bangko Sentral ng Pilipinas approved the said sale and transfer on 08
October 2009.
10-28-2009
SCS Computer Systems Pte Ltd has purchased 21% of the outstanding
common shares of Ayala Systems technology Inc. from Azalea Technology
Investments inc., BPI Computer Systems Corp and Mitsubishi Corp for the
total price of P7,204,940.
11-26-2009
Ayala Corporation made several purchases regarding the share buyback
program of the Company’s common shares further to the Company’s
disclosure on 10 September 2007.
11-12-2009
Ayala Corporation, United Utilities and Philwater Holdings Company, Inc.
signed agreements for Ayala’s acquisition of UU’s 81.9 million common shares
and economic interest in 2 billion preferred shares in Manila Water Co. for a
total consideration of P3.5 billion.
11-13-2009
Ayala Corporation’s consolidated net income in the first nine months of 2009
reached 5.8 billion, 26% lower year-on-year, but 14% higher excluding gains
from share sales realized last year.
12-10-2009
Set the holding of the Regular Annual Stockholders’ Meeting on 16 April 2010.
113
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
2009 Audited Consolidated Financial Statements – Ayala Corporation and Subsidiaries
Statement of Management’s Responsibility for Financial Statements
Report of Independent Public Accountants
Consolidated Statement of Financial Position as of December 31, 2009 and 2008
Consolidated Statements of Income for the Years Ended December 31, 2009 and 2008
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009
and 2008
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31,
2009 and 2008
Consolidated Statements of Cash Flow for the Years Ended December 31, 2009 and 2008
Notes to Consolidated Financial Statements
Form and Content Schedules
Report of Independent Public Accountants on Supplementary Schedules
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Marketable Securities (Current Marketable Equity Securities and Other
Short-term Cash Investments)
Amounts Receivable from Directors, Officers, Employees, Related
Parties and Principal Stockholders (Other than Affiliates)
Non-current Marketable Equity Securities, Other Long-term
Investments in Stocks and Other Investments
Indebtedness of Unconsolidated Subsidiaries and Related Parties
Intangible Assets
Long-term Debt
Indebtedness to Affiliates and Related Parties (Long-term Loans
From Related Companies)
Guarantees of Securities of Other Issuers
Capital Stock
Retained Earnings Available for Dividend Distribution
2009 Audited Financial Statements
Bank of the Philippine Islands
Globe Telecom, Inc. and Subsidiaries
Manila Water Company, Inc.
115
COVER SHEET
3 4 2 1 8
SEC Registration Number
A Y A L A
C O R P O R A T I O N
A N D
S U B S I D I A R I E
S
(Company’s Full Name)
T o w e r
O n e ,
A v e n u e ,
A y a l a
M a k a t i
T r i a n g l e ,
A y a l a
C i t y
(Business Address: No. Street City/Town/Province)
Rufino Luis T. Manotok
848-5441
(Contact Person)
(Company Telephone Number)
1 2
3 1
Month
Day
A A F S
(Form Type)
Month
(Fiscal Year)
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
*SGVMC113416*
SyCip Go rres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-2
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Ayala Corporation
Tower One, Ayala Triangle
Ayala Avenue, Makati City
We have audited the accompanying consolidated financial statements of Ayala Corporation and
Subsidiaries, which comprise the consolidated statements of financial position as at December 31,
2009 and 2008, and the consolidated statements of income, the consolidated statements of
comprehensive income, consolidated statements of changes in equity and consolidated statements of
cash flows for each of the three years in the period ended December 31, 2009, and a summary of
significant accounting policies and other explanatory notes. In the consolidated financial statements,
the Group’s investment in the Bank of the Philippine Islands and Subsidiaries is stated at
=29,406 million and P
P
=28,533 million as of December 31, 2009 and 2008, respectively, and the
Group’s equity in the net income of the Bank of the Philippine Islands and Subsidiaries is stated at
=2,707 million in 2009, P
P
=2,145 million in 2008 and P
=3,291 million in 2007. The financial statements
of the Bank of the Philippine Islands and Subsidiaries, in which the Group has a 33.5% interest in 2009
and 2008, were audited by other auditors whose report has been furnished to us, and our opinion on the
consolidated financial statements, insofar as it relates to the amounts included for the Bank of the
Philippine Islands and Subsidiaries, is based solely on the report of the other auditors.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due
to fraud or error; selecting and applying appropriate accounting policies; and making accounting
estimates that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
*SGVMC113416*
A member firm of Ernst & Young Global Limited
-2An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditors’ 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 auditors consider 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 and the report of other auditors are sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, based on our audits and the report of the other auditors, the consolidated financial
statements present fairly, in all material respects, the financial position of Ayala Corporation and
Subsidiaries as of December 31, 2009 and 2008, and its financial performance and its cash flows for
each of the three years in the period ended December 31, 2009 in accordance with Philippine Financial
Reporting Standards.
SYCIP GORRES VELAYO & CO.
Lucy L. Chan
Partner
CPA Certificate No. 88118
SEC Accreditation No. 0114-AR-2
Tax Identification No. 152-884-511
PTR No. 2087400, January 4, 2010, Makati City
March 10, 2010
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)
December 31
2008
2009
ASSETS
Current Assets
Cash and cash equivalents (Notes 4 and 30)
Short-term investments (Notes 5 and 30)
Accounts and notes receivable - net (Notes 6, 29 and 30)
Inventories (Note 7)
Other current assets (Notes 8 and 30)
Total Current Assets
Noncurrent Assets
Noncurrent accounts and notes receivable (Notes 6 and 30)
Land and improvements (Note 9)
Investments in associates and jointly controlled entities - net
(Note 10)
Investments in bonds and other securities (Notes 11 and 30)
Investment properties - net (Note 12)
Property, plant and equipment - net (Note 13)
Deferred tax assets - net (Note 23)
Pension assets (Note 25)
Intangible assets - net (Note 14)
Other noncurrent assets
Total Noncurrent Assets
Total Assets
P
=45,656,889
4,560,976
25,232,799
10,797,048
6,547,004
92,794,716
=42,885,792
P
1,008,924
23,284,010
10,011,355
7,090,394
84,280,475
2,657,623
17,582,562
6,694,021
15,756,894
71,556,952
3,543,458
29,089,730
7,771,863
1,395,992
132,419
4,611,884
1,341,836
139,684,319
P
=232,479,035
68,140,394
3,064,502
21,344,980
13,884,817
1,132,847
117,388
3,865,397
1,906,172
135,907,412
=220,187,887
P
P
=27,664,537
2,638,658
506,114
2,453,144
2,821,932
36,084,385
=27,483,536
P
2,755,447
214,697
1,478,871
1,553,530
33,486,081
51,431,583
207,425
228,312
9,109,180
60,976,500
97,060,885
50,250,151
185,536
490,744
7,588,080
58,514,511
92,000,592
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Notes 16, 28 and 29)
Short-term debt (Notes 18 and 30)
Income tax payable
Current portion of long-term debt (Notes 18 and 30)
Other current liabilities (Note 17)
Total Current Liabilities
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 18 and 30)
Deferred tax liabilities - net (Note 23)
Pension liabilities (Note 25)
Other noncurrent liabilities (Note 19)
Total Noncurrent Liabilities
Total Liabilities
(Forward)
*SGVMC113416*
-2December 31
2008
2009
Equity
Equity attributable to equity holders of Ayala Corporation
Paid-up capital (Note 20)
Share-based payments (Note 26)
Retained earnings (Note 20)
Cumulative translation adjustments
Net unrealized gain (loss) on available-for-sale financial
assets (Note 11)
Parent Company preferred shares held by a
subsidiary (Note 20)
Treasury stock (Note 20)
Noncontrolling interests
Total Equity
Total Liabilities and Equity
P
=37,477,875
1,059,588
65,739,096
(1,351,334)
123,916
(100,000)
(688,714)
102,260,427
33,157,723
135,418,150
P
=232,479,035
=37,251,714
P
705,457
61,604,466
(968,778)
(631,127)
(100,000)
(550,540)
97,311,192
30,876,103
128,187,295
=220,187,887
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings Per Share Figures)
Years Ended December 31
2008
2009
REVENUE
Sales and services (Notes 12 and 29)
Equity in net income of associates and jointly controlled
entities
Interest income
Other income (Note 21)
COSTS AND EXPENSES
Costs of sales and services (Notes 7, 12, 21 and 29)
General and administrative (Notes 21, 25 and 29)
Interest expense and other financing charges
(Notes 18 and 21)
Other charges (Note 21)
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 23)
Current
Deferred
INCOME BEFORE INCOME ASSOCIATED WITH
NONCURRENT ASSETS HELD FOR SALE
INCOME ASSOCIATED WITH NONCURRENT
ASSETS HELD FOR SALE - net of tax (Note 15)
NET INCOME
Net Income Attributable to:
Equity holders of Ayala Corporation
Noncontrolling interests
EARNINGS PER SHARE (Note 24)
Basic
Income before income associated with noncurrent
assets held for sale attributable to equity holders
of Ayala Corporation
Net income attributable to equity holders of
Ayala Corporation
Diluted
Income before income associated with noncurrent
assets held for sale attributable to equity holders
of Ayala Corporation
Net income attributable to equity holders of
Ayala Corporation
2007
P
=62,627,206
=64,052,828
P
=56,578,214
P
7,361,015
2,497,077
3,808,517
76,293,815
7,396,180
2,242,895
5,416,750
79,108,653
9,767,222
1,693,045
10,728,375
78,766,856
49,318,294
9,214,570
50,014,366
9,485,514
43,169,110
9,498,306
3,822,342
1,435,038
63,790,244
12,503,571
4,937,108
1,595,422
66,032,410
13,076,243
4,120,160
1,569,944
58,357,520
20,409,336
2,010,214
(311,530)
1,698,684
2,442,789
(25,234)
2,417,555
1,979,820
(7,825)
1,971,995
10,804,887
10,658,688
18,437,341
–
P
=10,804,887
–
=10,658,688
P
624,788
=19,062,129
P
P
=8,154,345
2,650,542
P
=10,804,887
=8,108,597
P
2,550,091
=10,658,688
P
=16,256,601
P
2,805,528
=19,062,129
P
P
=14.23
=15.22
P
=30.64
P
14.23
15.22
31.62
P
=14.19
=15.17
P
=30.50
P
14.19
15.17
31.47
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Years Ended December 31
2008
2009
NET INCOME
OTHER COMPREHENSIVE INCOME
Exchange differences arising from translations of foreign
investments
Change in fair value of available-for-sale financial assets
SHARE OF OTHER COMPREHENSIVE INCOME
OF ASSOCIATES AND JOINTLY
CONTROLLED ENTITIES
Exchange differences arising from translations of foreign
investments
Change in fair value of available-for-sale financial assets
TOTAL COMPREHENSIVE INCOME
Total Comprehensive Income Attributable To:
Equity holders of Ayala Corporation
Noncontrolling interests
P
=10,804,887
=10,658,688
P
2007
=19,062,129
P
(260,419)
431,329
170,910
1,805,405
(751,054)
1,054,351
(2,274,022)
97,688
(2,176,334)
(226,115)
322,448
96,333
(203,276)
(1,586,875)
(1,790,151)
(83,389)
(435,029)
(518,418)
P
=11,072,130
=9,922,888
P
=16,367,377
P
P
=8,526,832
2,545,298
P
=11,072,130
=7,093,753
P
2,829,135
=9,922,888
P
=13,891,328
P
2,476,049
=16,367,377
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)
Paid-up Capital
(Note 20)
At January 1, 2009
Net income
Other comprehensive income
Total comprehensive income
Issuance/subscription of shares
Cost of share-based payments of Ayala Corporation
Cost of share-based payments of investees
Acquisition of treasury stock
Cash dividends
Increase in noncontrolling interests
At December 31, 2009
=37,251,714
P
–
–
–
226,161
–
–
–
–
–
P
=37,477,875
Net Unrealized
Gain (Loss) on
Available-forShare-based
Retained Sale Financial
Cumulative
Payments
Earnings
Assets
Translation
(Note 26) Adjustments
(Note 20)
(Note 11)
For the year ended December 31, 2009
=705,457
P
(P
=968,778) P
=61,604,466
(P
=631,127)
–
–
8,154,345
–
–
(382,556)
–
755,043
–
(382,556)
8,154,345
755,043
(1,708)
–
–
–
4,429
–
–
–
351,410
–
–
–
–
–
–
–
–
–
(4,019,715)
–
–
–
–
–
P
=1,059,588
(P
=1,351,334) P
=65,739,096
P
=123,916
Parent Company
Preferred Shares
Held by a
Subsidiary Treasury Stock Noncontrolling
(Note 20)
(Note 20)
Interests
(P
=100,000)
–
–
–
–
–
–
–
–
–
(P
=100,000)
(P
=550,540)
–
–
–
–
–
–
(138,174)
–
–
(P
=688,714)
Total
Equity
=30,876,103 =
P
P128,187,295
2,650,542
10,804,887
(105,244)
267,243
2,545,298
11,072,130
–
224,453
–
4,429
63,398
414,808
–
(138,174)
(537,017)
(4,556,732)
209,941
209,941
P
=33,157,723 P
=135,418,150
*SGVMC113416*
-2-
Paid-up Capital
(Note 20)
At January 1, 2008
Net income
Other comprehensive income
Total comprehensive income
Issuance/subscription of shares
Additions to subscriptions receivable
Cost of share-based payments of Ayala Corporation
Cost of share-based payments of investees
Parent Company preferred shares held by a
subsidiary
Acquisition of treasury stock
Cash dividends
Stock dividends
Increase in noncontrolling interests
At December 31, 2008
=26,855,394
P
–
–
–
6,322,349
(64,745)
–
–
–
–
–
4,138,716
–
=37,251,714
P
Net Unrealized
Gain (Loss) on
Available-forRetained Sale Financial
Cumulative
Share-based
Earnings
Assets
Translation
Payments
(Note 20)
(Note 11)
(Note 26) Adjustments
For the year ended December 31, 2008
=603,949
P
(P
=2,297,077) P
=60,172,621
=1,712,016
P
–
–
8,108,597
–
–
1,328,299
–
(2,343,143)
–
1,328,299
8,108,597
(2,343,143)
(20,801)
–
–
–
–
–
–
–
4,018
–
–
–
118,291
–
–
–
–
–
–
–
–
=705,457
P
–
–
–
–
–
(P
=968,778)
–
–
(2,538,036)
(4,138,716)
–
=61,604,466
P
–
–
–
–
–
(P
=631,127)
Parent Company
Preferred Shares
Held by a
Subsidiary Treasury Stock Noncontrolling
(Note 20)
(Note 20)
Interests
=–
P
–
–
–
–
–
–
–
(100,000)
–
–
–
–
(P
=100,000)
Total
Equity
(P
=159,693)
–
–
–
–
–
–
–
=27,609,387
P
2,550,091
279,044
2,829,135
–
–
–
27,446
=114,496,597
P
10,658,688
(735,800)
9,922,888
6,301,548
(64,745)
4,018
145,737
–
(390,847)
–
–
–
(P
=550,540)
–
(100,000)
–
(390,847)
(552,592)
(3,090,628)
–
–
962,727
962,727
=30,876,103 P
P
=128,187,295
*SGVMC113416*
-3-
Paid-up Capital
(Note 20)
At January 1, 2007
Net income
Other comprehensive income
Total comprehensive income
Issuance/subscription of shares
Additions to subscriptions receivable
Cost of share-based payments of Ayala Corporation
Cost of share-based payments of investees
Acquisition of treasury stock
Cash dividends
Stock dividends
Increase in noncontrolling interests
At December 31, 2007
=23,137,948
P
–
–
–
364,129
(96,267)
–
–
–
–
3,449,584
–
=26,855,394
P
Cumulative
Retained
Share-based
Translation
Earnings
Payments
(Note 20)
(Note 26)
Adjustments
For the year ended December 31, 2007
=558,416
P
(P
=298,310)
=51,226,582
P
–
16,256,601
–
(1,998,767)
–
(1,998,767)
16,256,601
–
–
–
–
–
–
10,718
–
–
34,815
–
–
–
–
–
–
–
(3,860,978)
–
–
(3,449,584)
–
–
–
=603,949
P
(P
=2,297,077)
=60,172,621
P
Net Unrealized
Gain (Loss) on
Available-forSale Financial
Assets Treasury Stock
(Note 11)
(Note 20)
=2,078,522
P
(366,506)
(366,506)
–
–
–
–
–
–
–
–
=1,712,016
P
(P
=310)
–
–
–
–
–
(159,383)
–
–
–
(P
=159,693)
Noncontrolling
Interests
=24,698,735
P
2,805,528
(329,479)
2,476,049
–
–
–
201
–
(533,625)
–
968,027
=27,609,387
P
Total
Equity
=101,401,583
P
19,062,129
(2,694,752)
16,367,377
364,129
(96,267)
10,718
35,016
(159,383)
(4,394,603)
–
968,027
=114,496,597
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended December 31
2008
2007
2009
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest and other financing charges - net of amount
capitalized (Note 21)
Depreciation and amortization (Note 21)
Provision for impairment loss (Note 21)
Cost of share-based payments (Note 26)
Equity in net income of associates and jointly
controlled entities
Interest income
Gain on sale of investments (Note 21)
Bargain purchase gain (Note 21)
Other investment income (Note 21)
Gain on sale of other assets (Note 21)
Impairment loss on goodwill (Note 21)
Operating income before changes in working capital
Decrease (increase) in:
Accounts and notes receivable (Note 32)
Inventories
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Other current liabilities
Net pension liabilities
Cash generated from operations
Interest received
Interest paid
Income tax paid
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of investments
Sale of available-for-sale financial assets
Disposals of property, plant and equipment
Maturities of (additions to) short-term investments
Additions to:
Investments
Available-for-sale financial assets
Land and improvements (Note 9)
Investment properties (Note 12)
Property, plant and equipment (Note 13)
Dividends received from associates and jointly controlled
entities
P
=12,503,571
=13,076,243
P
=20,409,336
P
3,822,342
3,345,985
1,435,038
471,572
3,481,156
2,940,216
1,259,085
342,919
4,120,160
2,988,879
–
288,050
(7,361,015)
(2,497,077)
(1,698,820)
(235,851)
(227,015)
(168,063)
–
9,390,667
(7,396,180)
(2,242,895)
(3,554,679)
–
(264,495)
(45,409)
–
7,595,961
(9,767,222)
(1,693,045)
(8,844,822)
–
(73,500)
(54,064)
662,591
8,036,363
559,913
(863,784)
394,741
(8,896,301)
(1,248,050)
(1,197,782)
(2,254,055)
1,981,833
863,696
(538,698)
977,356
(277,463)
9,642,732
2,363,205
(3,921,315)
(1,407,267)
6,677,355
4,169,567
(38,164)
(17,620)
367,611
2,183,379
(3,655,908)
(2,514,143)
(3,619,061)
4,239,429
97,469
105,848
13,070,583
1,469,236
(3,837,504)
(1,989,616)
8,712,699
3,280,322
775,353
853,945
(3,552,052)
9,777,713
139,095
176,166
2,678,683
7,930,635
7,221,574
1,060,647
(759,678)
(1,872,563)
(926,982)
(3,396,777)
(3,512,819)
(2,488,770)
(6,117,884)
(2,220,736)
(145,544)
(773,616)
(5,965,432)
(2,851,887)
(2,993,868)
(548,392)
(929,835)
(3,302,179)
7,679,137
8,326,390
8,050,049
(Forward)
*SGVMC113416*
-2-
2009
Acquisitions through business combinations by
subsidiaries - net of cash acquired (Note 22)
Decrease (increase) in other noncurrent assets
Net cash provided by (used in) investing activities
before cash items associated with noncurrent assets
held for sale
Net cash provided by investing activities associated with
noncurrent assets held for sale, including cash balance
Net cash provided by (used in) investing activities
Years Ended December 31
2008
2007
(P
=800,312)
583,436
(P
=891,935)
292,557
(3,378,082)
5,275,457
11,919,608
–
(3,378,082)
–
5,275,457
624,788
12,544,396
13,303,049
–
–
31,198
(11,826,486)
(3,626,165)
(138,173)
–
13,045,651
5,958,307
–
(64,745)
(12,025,905)
(2,925,409)
(390,848)
–
21,742,528
–
209,687
(96,267)
(21,392,701)
(4,255,580)
(159,383)
(2,500,000)
1,518,460
209,941
(528,176)
396,915
399,881
4,393,847
676,578
962,291
(4,812,847)
2,771,097
6,050,243
16,444,248
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
42,885,792
36,835,549
20,391,301
CASH AND CASH EQUIVALENTS AT
END OF YEAR (Note 4)
P
=45,656,889
=42,885,792
P
=36,835,549
P
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Short-term and long-term debt
Issuance of preferred shares
Issuance of common shares
Collections of (additions to) subscriptions receivable
Payments of short-term and long-term debt
Dividends paid
Acquisition of treasury shares (Note 20)
Redemption of preferred shares
Increase in:
Other noncurrent liabilities
Noncontrolling interests in consolidated subsidiaries
Net cash provided by (used in) financing activities
NET INCREASE IN CASH AND
CASH EQUIVALENTS
(P
=326,030)
(631,428)
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113416*
AYALA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The
Company’s registered office address and principal place of business is Tower One, Ayala
Triangle, Ayala Avenue, Makati City. The Company is a publicly listed company which is
50.78% owned by Mermac, Inc., 10.55% owned by Mitsubishi Corporation and the rest by the
public.
The Company is the holding company of the Ayala Group of Companies, with principal business
interests in real estate and hotels, financial services and bancassurance, telecommunications,
electronics, information technology and business process outsourcing services, utilities,
automotives, international and others.
The consolidated financial statements of Ayala Corporation and Subsidiaries (the Group) as of
December 31, 2009 and 2008 and for each of the three years in the period ended December 31,
2009 were endorsed for approval by the Audit Committee on March 5, 2010 and authorized for
issue by the Executive Committee of the Board of Directors (BOD) on March 10, 2010.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements of the Group have been prepared on a
historical cost basis, except for financial assets at fair value through profit or loss (FVPL),
available-for-sale (AFS) financial assets and derivative financial instruments that have been
measured at fair value. The consolidated financial statements are presented in Philippine Peso (P
=)
and all values are rounded to the nearest thousand pesos (P
=000) unless otherwise indicated.
Statement of Compliance
The consolidated financial statements of the Group have been prepared in compliance with
Philippine Financial Reporting Standards (PFRS).
Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Group as of
December 31, 2009 and 2008 and for each of the three years in the period ended December 31,
2009. The financial statements of the subsidiaries are prepared for the same reporting year as the
Company.
The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. All significant intercompany transactions
and balances, including intercompany profits and unrealized profits and losses, are eliminated in
consolidation.
Subsidiaries are consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date that such control ceases.
*SGVMC113416*
-2The consolidated financial statements comprise the financial statements of the Company and the
following wholly and majority-owned domestic and foreign subsidiaries:
Effective Percentages
of Ownership
2008
2009
Real Estate and Hotels:
Ayala Land, Inc. (ALI) and subsidiaries
(ALI Group)
Ayala Hotels, Inc. (AHI) and subsidiaries
Electronics, Information Technology and Business
Process Outsourcing Services:
Azalea Technology Investments, Inc. and
subsidiaries (Azalea Technology)
Azalea International Venture Partners, Limited
(AIVPL) (British Virgin Islands Company)
and subsidiaries
LiveIt Solutions, Inc. (LSI) and subsidiaries
Technopark Land, Inc.
Integrated Microelectronics, Inc. (IMI) and
subsidiaries**
Automotive:
Ayala Automotive Holdings Corporation
(AAHC) and subsidiaries
International and Others:
Bestfull Holdings Limited (incorporated in
Hong Kong) and subsidiaries (BHL Group)
AC International Finance Limited (ACIFL)
(Cayman Island Company) and subsidiary
AYC Finance Ltd. (Cayman Island Company)
Michigan Holdings, Inc. (MHI) and subsidiary
Ayala Aviation Corporation
Darong Agricultural and Development
Corporation
53.3*
76.7
53.5*
76.8
100.0
100.0
100.0
100.0
78.8
100.0
100.0
78.8
67.8
67.8
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
*The Company owns 75.33% and 75.46% of the total common and preferred shares of ALI as of December 31,
2009 and 2008, respectively.
** A subsidiary of AYC Holdings, Ltd. which is a subsidiary of ACIFL.
On various dates in 2008, the Company converted US$171.88 million of its deposits for future
stock subscription in AIVPL into equity, increasing the Company’s ownership from 68.71% to
97.78%. Consequently, Azalea Technology’s ownership in AIVPL was diluted from 31.29% to
2.22%.
On May 1, 2008, AIVPL converted its US$124 million deposits for future stock subscription in
LiveIt Investments Ltd. (LIL) giving it 99.99% ownership interest in LIL. LSI, which previously
held 100% of LIL, now holds 0.01% stake in LIL. LIL carries the Group’s investments in
Integreon Managed Solutions Inc. (Integreon), Affinity Express Inc. and Newbridge International
Investments.
On March 1, 2008, the Company entered into a Deed of Assignment with AIVPL to transfer the
Company’s shares of Bayantrade in exchange for AIVPL’s shares of stocks.
*SGVMC113416*
-3Noncontrolling interests represent the portion of profit or loss and net assets in subsidiaries not
wholly owned and are presented separately in the consolidated statements of income and changes
in equity and within the equity section in the consolidated statements of financial position,
separately from the Company’s equity. Acquisitions of noncontrolling interests are accounted for
using the parent entity extension method, whereby, the difference between the consideration and
the book value of the share of the nets assets acquired is recognized as goodwill.
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial years except
for the adoption of the following new and amended PFRS and Philippine Interpretations of
International Financial Reporting Interpretation Committee (IFRIC) which became effective
beginning January 1, 2009.
PAS 1, Presentation of Financial Statements
The revised standard introduces a new statement of comprehensive income that combines all items
of income and expenses recognized in the profit or loss together with ‘other comprehensive
income’. Entities may choose to present all items in one statement, or to present two linked
statements, a separate statement of income and a statement of comprehensive income. This
Standard also requires additional requirements in the presentation of the statements of financial
position and owner’s equity as well as additional disclosures to be included in the financial
statements. The Group elected to present two statements, a consolidated statement of income and
a consolidated statement of comprehensive income. The consolidated financial statements have
been prepared following the revised disclosure requirements.
PAS 23, Borrowing Costs
The Standard has been revised to require capitalization of borrowing costs when such costs relate
to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale. It has been the Group’s policy to capitalize
borrowing costs, and as such, adoption of this revised standard did not have any impact on the
consolidated financial statements.
PFRS 8, Operating Segments
PFRS 8 replaced PAS 14, Segment Reporting, and adopts a full management approach to
identifying, measuring and disclosing the results of an entity’s operating segments. The
information reported would be that which management uses internally for evaluating the
performance of operating segments and allocating resources to those segments. Such information
may be different from that reported in the consolidated statements of financial position and
consolidated statement of income and the Group will provide explanations and reconciliations of
the differences. This Standard is only applicable to an entity that has debt or equity instruments
that are traded in a public market or that files (or is in the process of filing) its financial statements
with a securities commission or similar party. The Group has enhanced its current manner of
reporting segment information to include additional information used by management internally.
Segment information from prior years was restated to include additional information (see
Note 27).
*SGVMC113416*
-4Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
This Interpretation requires customer loyalty award credits to be accounted for as a separate
component of the sales transaction in which they are granted and therefore part of the fair value of
the consideration received is allocated to the award credits and realized in income over the period
that the award credits are redeemed or expire. The Group does not grant loyalty award credits to
customers. As such, adoption of this Interpretation did not have any impact on the consolidated
financial statements.
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This Interpretation provides guidance on identifying foreign currency risks that qualify for hedge
accounting in the hedge of a net investment; where within the group the hedging instrument can be
held in the hedge of a net investment; and how an entity should determine the amount of foreign
currency gains or losses, relating to both the net investment and the hedging instrument, to be
recycled on disposal of the net investment. Adoption of this Interpretation did not have any
impact on the consolidated financial statements.
Amendment to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation
These amendments specify, among others, that puttable financial instruments will be classified as
equity if they have all of the following specified features: (a) Instrument entitles the holder to
require the entity to repurchase or redeem the instrument (either on an ongoing basis or on
liquidation) for a pro rata share of the entity’s net assets, (b) Instrument is in the most subordinate
class of instruments, with no priority over other claims to the assets of the entity on liquidation,
(c) Instruments in the subordinate class have identical features; (d) The instrument does not
include any contractual obligation to pay cash or financial assets other than the holder’s right to a
pro rata share of the entity’s net assets; and (e) Total expected cash flows attributable to the
instrument over its life are based substantially on the profit or loss, a change in recognized net
assets, or a change in the fair value of the recognized and unrecognized net assets of the entity
over the life of the instrument. Adoption of these amendments did not have any impact on the
consolidated financial statements.
Amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards and
PAS 27, Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary,
Jointly Controlled Entity or Associate
The amended PFRS 1 allows an entity, in its separate financial statements, to determine the cost of
investments in subsidiaries, jointly controlled entities or associates (in its opening PFRS financial
statements) as one of the following amounts: a) cost determined in accordance with PAS 27; b) at
the fair value of the investment at the date of transition to PFRS, determined in accordance with
PAS 39; or c) previous carrying amount (as determined under generally accepted accounting
principles) of the investment at the date of transition to PFRS. The Amendments to PAS 27 has
changes in respect of the holding companies’ separate financial statements including (a) the
deletion of ‘cost method’, making the distinction between pre- and post-acquisition profits no
longer required; and (b) in cases of reorganizations where a new parent is inserted above an
existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is
the previous carrying amount of its share of equity items in the subsidiary rather than its fair value.
All dividends will be recognized in profit or loss. However, the payment of such dividends
requires the entity to consider whether there is any indicator of impairment. The new requirement
does not have an impact on the consolidated financial statements.
*SGVMC113416*
-5Amendments to PFRS 2, Share-based Payment - Vesting Condition and Cancellations
This Standard has been revised to clarify the definition of a vesting condition and prescribes the
treatment for an award that is effectively cancelled. It defines a vesting condition as a condition
that includes an explicit or implicit requirement to provide services. It further requires nonvesting
conditions to be treated in a similar fashion to market conditions. Failure to satisfy a nonvesting
condition that is within the control of either the entity or the counterparty is accounted for as a
cancellation. However, failure to satisfy a nonvesting condition that is beyond the control of
either party does not give rise to a cancellation. Adoption of this revised standard did not have
any impact on the consolidated financial statements.
Amendment to PFRS 7, Financial Instruments: Disclosures
The amended PFRS 7 requires additional disclosure about fair value measurement and liquidity
risk. Fair value measurements related to items recorded at fair value are to be disclosed by source
of inputs using a three level hierarchy for each class of financial instrument. In addition, a
reconciliation between the beginning and ending balance for Level 3 fair value measurements is
now required, as well as significant transfers between Level 1 and Level 2 fair value
measurements. The amendments also clarify the requirements for liquidity risk disclosures as
follows: (a) exclusion of derivative liabilities from maturity analysis unless the contractual
maturities are essential for an understanding of the timing of the cash flows; and (b) inclusion of
financial guarantee contracts in the contractual maturity analysis based on the maximum amount
guaranteed. The fair value measurement disclosures are presented in Note 30 to the consolidated
financial statements while the current liquidity risk disclosures are not significantly impacted by
the amendments.
Amendment to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives and
PAS 39, Financial Instruments: Recognition and Measurement
These amendments require an entity to assess whether an embedded derivative must be separated
from a host contract when the entity reclassifies a hybrid financial asset out of the fair value
through profit or loss category. This assessment is to be made based on circumstances that existed
on the later of the date the entity first became a party to the contract and the date of any contract
amendments that significantly change the cash flows of the contract. PAS 39 now states that if an
embedded derivative cannot be reliably measured, the entire hybrid instrument must remain
classified as fair value through profit or loss. Adoption of these amendments did not have any
impact on the consolidated financial statements.
Improvements to PFRS
In May 2008 and April 2009, the International Accounting Standards Board issued its first
omnibus of amendments to certain standards, primarily with a view to removing inconsistencies
and clarifying wordings. There are separate transitional provisions for each Standard. These
amendments are effective beginning January 1, 2009. The adoption of the following amendments
resulted in changes to accounting policies but did not have any impact on the consolidated
financial statements.
·
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
When a subsidiary is held for sale, all of its assets and liabilities will be classified as held for
sale under PFRS 5, even when the entity retains a noncontrolling interests in the subsidiary
after the sale.
·
PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified as current in
the consolidated statement of financial position.
*SGVMC113416*
-6·
PAS 16, Property, Plant and Equipment
This amendment replaces the term ‘net selling price’ with ‘fair value less costs to sell’, to be
consistent with PFRS 5 and PAS 36, Impairment of Assets.
Items of property, plant and equipment held for rental that are routinely sold in the ordinary
course of business after rental, are transferred to inventory when rental ceases and they are
held for sale. Proceeds of such sales are subsequently shown as revenue. Cash payments on
initial recognition of such items, the cash receipts from rents and subsequent sales are all
shown as cash flows from operating activities.
·
PAS 18, Revenue
The amendment adds guidance (which accompanies the Standard) to determine whether an
entity is acting as a principal or as an agent. The features to consider are whether the entity:
a.
b.
c.
d.
has primary responsibility for providing the goods or service;
has inventory risk;
has discretion in establishing prices; and,
bears the credit risk
The Group assessed its revenue arrangements against these criteria and concluded that it is
acting as principal in all arrangements.
·
PAS 19, Employee Benefits
Revises the definition of ‘past service cost’ to include reduction in benefits related to past
services (‘negative past service cost’) and to exclude reduction in benefits related to future
services that arise from plan amendments. Amendments to plans that result in a reduction in
benefits related to future services are accounted for as a curtailment.
It revises the definition of ‘return on plan assets’ to exclude plan administration costs if they
have already been included in the actuarial assumptions used to measure the defined benefit
obligation.
Revises the definition of ‘short-term’ and ‘other long-term’ employee benefits to focus on the
point in time at which the liability is due to be settled and it deletes the reference to the
recognition of contingent liabilities to ensure consistency with PAS 37, Provisions,
Contingent Liabilities and Contingent Assets.
·
PAS 23, Borrowing Costs
Revises the definition of borrowing costs to consolidate the types of items that are considered
components of ‘borrowing costs’, i.e., components of the interest expense calculated using the
effective interest rate method.
·
PAS 28, Investments in Associates
If an associate is accounted for at fair value in accordance with PAS 39, only the requirement
of PAS 28 to disclose the nature and extent of any significant restrictions on the ability of the
associate to transfer funds to the entity in the form of cash or repayment of loans applies.
An investment in an associate is a single asset for the purpose of conducting the impairment
test. Therefore, any impairment test is not separately allocated to the goodwill included in the
investment balance.
*SGVMC113416*
-7·
PAS 29, Financial Reporting in Hyperinflationary Economies
Revises the reference to the exception that assets and liabilities should be measured at
historical cost, such that it notes property, plant and equipment as being an example, rather
than implying that it is a definitive list.
·
PAS 31, Interests in Joint Ventures
If a joint venture is accounted for at fair value in accordance with PAS 39, only the
requirements of PAS 31 to disclose the commitments of the venturer and the joint venture, as
well as summary financial information about the assets, liabilities, income and expense will
apply.
·
PAS 36, Impairment of Assets
When discounted cash flows are used to estimate ‘fair value less costs to sell’, additional
disclosure is required about the discount rate, consistent with disclosures required when the
discounted cash flows are used to estimate ‘value in use’.
·
PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an expense when the
Group either has the right to access the goods or has received the services. Advertising and
promotional activities now specifically include mail order catalogues.
It deletes references to there being rarely, if ever, persuasive evidence to support an
amortization method for finite life intangible assets that results in a lower amount of
accumulated amortization than under the straight-line method, thereby effectively allowing the
use of the unit-of-production method.
·
PAS 39, Financial Instruments: Recognition and Measurement
Changes in circumstances relating to derivatives, specifically derivatives designated or
de-designated as hedging instruments after initial recognition are not reclassifications.
When financial assets are reclassified as a result of an insurance company changing its
accounting policy in accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a
change in circumstance, not a reclassification.
It removes the reference to a ‘segment’ when determining whether an instrument qualifies as a
hedge.
It requires use of the revised effective interest rate (rather than the original effective interest
rate) when re-measuring a debt instrument on the cessation of fair value hedge accounting.
·
PAS 40, Investment Property
It revises the scope (and the scope of PAS 16) to include property that is being constructed or
developed for future use as an investment property. Where an entity is unable to determine the
fair value of an investment property under construction, but expects to be able to determine its
fair value on completion, the investment under construction will be measured at cost until such
time as fair value can be determined or construction is complete.
·
PAS 41, Agriculture
It removes the reference to the use of a pre-tax discount rate to determine fair value, thereby
allowing use of either a pre-tax or post-tax discount rate depending on the valuation
methodology used.
*SGVMC113416*
-8It removes the prohibition to take into account cash flows resulting from any additional
transformations when estimating fair value. Instead, cash flows that are expected to be
generated in the ‘most relevant market’ are taken into account.
Future Changes in Accounting Policies
The Group will adopt the following standards and interpretations enumerated below when these
become effective. Except as otherwise indicated, the Group does not expect the adoption of these
new and amended PFRS and Philippine Interpretations to have significant impact on the
consolidated financial statements.
Effective in 2010
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate Financial
Statements
The revised PFRS 3 and revised PAS 27 will be effective for annual periods beginning on or after
July 1, 2009. Revised PFRS 3 introduces a number of changes in the accounting for business
combinations that will impact the amount of goodwill recognized, the reported results in the
period that an acquisition occurs, and future reported results. Revised PAS 27 requires, among
others, that (a) change in ownership interests of a subsidiary (that do not result in loss of control)
will be accounted for as an equity transaction and will have no impact on goodwill nor will it give
rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated between the controlling
and noncontrolling interests (previously referred to as ‘minority interests’); even if the losses
exceed the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a
subsidiary, any retained interest will be remeasured to fair value and this will impact the gain or
loss recognized on disposal. The changes introduced by the revised PFRS 3 must be applied
prospectively, while changes introduced by revised PAS 27 must be applied retrospectively with a
few exceptions. The changes will affect future acquisitions and transactions with noncontrolling
interest.
Amendment to PAS 39, Financial Instruments: Recognition and Measurement - Eligible
hedged items
The Amendment to PAS 39 will be effective for annual periods beginning on or after July 1, 2009.
This Amendment addresses only the designation of a one-sided risk in a hedged item, and the
designation of inflation as a hedged risk or portion in particular situations. This amendment
clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow
variability of a financial instrument as a hedged item.
Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to Owners
IFRIC 17 will be effective for annual periods beginning on or after July 1, 2009. This
Interpretation provides guidance on the following types of non-reciprocal distributions of assets by
an entity to its owners acting in their capacity as owners: (a) distributions of non-cash assets (e.g.
items of property, plant and equipment, businesses as defined in PFRS 3, ownership interests in
another entity or disposal groups as defined in PFRS 5; and (b) distributions that give owners a
choice of receiving either non-cash assets or a cash alternative. The Group does not expect the
Interpretation to have an impact on the consolidated financial statements.
*SGVMC113416*
-9Philippine Interpretation IFRIC 18, Transfers of Assets from Customers
This Interpretation will be effective for annual periods beginning on or after July 1, 2009. This
Interpretation is to be applied prospectively to transfers of assets from customers received on or
after July 1, 2009. The Interpretation provides guidance on how to account for items of property,
plant and equipment received from customers or cash that is received and used to acquire or
construct assets that are used to connect the customer to a network or to provide ongoing access to
a supply of goods or services or both. When the transferred item meets the definition of an asset,
the asset is measured at fair value on initial recognition as part of an exchange transaction. The
service(s) delivered are identified and the consideration received (the fair value of the asset)
allocated to each identifiable service. Revenue is recognized as each service is delivered by the
entity.
Amendments to PFRS 2, Group Cash-settled Share-based Payment Transactions
The amendments to PFRS 2, Share-based Payments is effective for annual periods beginning on
or after January 1, 2010, clarify the scope and the accounting for group cash-settled share-based
payment transactions. The Group has concluded that the amendment will have no impact on the
financial position or performance of the Group as the Group has not entered into any such sharebased payment transactions.
Improvements to PFRS
The omnibus amendments to PFRSs issued in 2009 were issued primarily with a view to removing
inconsistencies and clarifying wording. The amendments are effective for annual periods
beginning January 1, 2010 except as otherwise stated. The Group has not yet adopted the
following amendments and anticipates that these changes will have no material effect on the
consolidated financial statements.
·
PFRS 2, Share-based Payment
The Amendment clarifies that the contribution of a business on formation of a joint venture
and combinations under common control are not within the scope of PFRS 2 even though they
are out of scope of PFRS 3. The amendment is effective for financial years on or after July 1,
2009.
·
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations
The Amendment clarifies that the disclosures required in respect of noncurrent assets and
disposal groups classified as held for sale or discontinued operations are only those set out in
PFRS 5. The disclosure requirements of other PFRSs only apply if specifically required for
such non-current assets or discontinued operations.
·
PFRS 8, Operating Segment Information
The Amendment clarifies that segment assets and liabilities need only be reported when those
assets and liabilities are included in measures that are used by the chief operating decision
maker.
·
PAS 1, Presentation of Financial Statements
The Amendment clarifies that the terms of a liability that could result, at anytime, in its
settlement by the issuance of equity instruments at the option of the counterparty do not affect
its classification.
·
PAS 7, Statement of Cash Flows
The Amendment explicitly states that only expenditure that results in a recognized asset can
be classified as a cash flow from investing activities.
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- 10 ·
PAS 17, Leases
The Amendment removes the specific guidance on classifying land as a lease. Prior to the
amendment, leases of land were classified as operating leases. The amendment now requires
that leases of land are classified as either ‘finance’ or ‘operating’ in accordance with the
general principles of PAS 17. The amendments will be applied retrospectively.
·
PAS 36, Impairment of Assets
The Amendment clarifies that the largest unit permitted for allocating goodwill, acquired in a
business combination, is the operating segment as defined in PFRS 8 before aggregation for
reporting purposes.
·
PAS 38, Intangible Assets
The Amendment clarifies that if an intangible asset acquired in a business combination is
identifiable only with another intangible asset, the acquirer may recognize the group of
intangible assets as a single asset provided the individual assets have similar useful lives. Also
clarifies that the valuation techniques presented for determining the fair value of intangible
assets acquired in a business combination that are not traded in active markets are only
examples and are not restrictive on the methods that can be used.
·
PAS 39, Financial Instruments: Recognition and Measurement
The Amendment clarifies the following:
i.
that a prepayment option is considered closely related to the host contract when the
exercise price of a prepayment option reimburses the lender up to the approximate
present value of lost interest for the remaining term of the host contract.
ii.
that the scope exemption for contracts between an acquirer and a vendor in a business
combination to buy or sell an acquiree at a future date applies only to binding forward
contracts, and not derivative contracts where further actions by either party are still to
be taken.
iii.
that gains or losses on cash flow hedges of a forecast transaction that subsequently
results in the recognition of a financial instrument or on cash flow hedges of
recognized financial instruments should be reclassified in the period that the hedged
forecast cash flows affect profit or loss.
·
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
The Amendment clarifies that it does not apply to possible reassessment at the date of
acquisition, to embedded derivatives in contracts acquired in a business combination between
entities or businesses under common control or the formation of joint venture.
·
Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation
The Amendment states that, in a hedge of a net investment in a foreign operation, qualifying
hedging instruments may be held by any entity or entities within the group, including the
foreign operation itself, as long as the designation, documentation and effectiveness
requirements of PAS 39 that relate to a net investment hedge are satisfied.
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- 11 Effective in 2012
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This Interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. This Interpretation
requires that revenue on construction of real estate be recognized only upon completion, except
when such contract qualifies as a construction contract to be accounted for under PAS 11,
Construction Contracts, or involves rendering of services, in which case revenue is recognized
based on stage of completion. Contracts involving provision of services with the construction
materials and where the risks and reward of ownership are transferred to the buyer on a continuous
basis will also be accounted for based on stage of completion. The adoption of this Interpretation
will be accounted for retrospectively, and will result to restatement of prior period financial
statements. The adoption of this Interpretation may significantly affect the determination of
revenue for real estate sales and the corresponding cost, and the related trade receivables, deferred
tax liabilities and retained earnings accounts. The Group is in the process of quantifying the
impact of adoption of this Interpretation when it becomes effective in 2012.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. 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 dates of acquisition and which are subject to an insignificant risk of change in
value.
Financial Instruments
Date of recognition
The Group recognizes a financial asset or a financial liability in the consolidated statement of
financial position when it becomes a party to the contractual provisions of the instrument.
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.
Initial recognition of financial instruments
All financial assets and financial liabilities are recognized initially at fair value. Except for
securities at FVPL, the initial measurement of financial assets includes transaction costs. The
Group classifies its financial assets in the following categories: financial assets at FVPL, loans and
receivables, held-to-maturity (HTM) investments, and AFS financial assets. The Group also
classifies its financial liabilities into financial liabilities at FVPL and other financial liabilities.
The classification depends on the purpose for which the investments were acquired and whether
they are quoted in an active market.
The Group determines the classification of its financial assets and financial liabilities at initial
recognition and, where allowed and appropriate, re-evaluates such designation at every reporting
date.
Financial instruments are classified as liability or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity net of any
related income tax benefits.
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- 12 Determination of fair value
The fair value for financial instruments traded in active markets at the reporting date is based on
their quoted market price or dealer price quotations (bid price for long positions and ask price for
short positions), without any deduction for transaction costs. When current bid and ask prices are
not available, the price of the most recent transaction provides evidence of the current fair value as
long as there has not been a significant change in economic circumstances since the time of the
transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation methodologies. Valuation methodologies include net present value
techniques, comparison to similar instruments for which market observable prices exist, option
pricing models, and other relevant valuation models.
Day 1 profit
Where the transaction price in a non-active market is different from the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and fair value (a ‘Day 1’ profit) in the consolidated statement of
income under “Interest income” or “Interest expense and other financing charges” unless it
qualifies for recognition as some other type of asset or liability. 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 the consolidated statement of income when the inputs become observable or when
the instrument is derecognized. For each transaction, the Group determines the appropriate
method of recognizing the ‘Day 1’ profit amount.
Financial assets at FVPL
Financial assets at FVPL include financial assets held for trading and financial assets designated
upon initial recognition as at FVPL.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in
the near term. Derivatives, including separated embedded derivatives, are also classified as held
for trading unless they are designated as effective hedging instruments or a financial guarantee
contract. Fair value gains or losses on investments held for trading, net of interest income accrued
on these assets, are recognized in the consolidated statement of income under “Other income” or
“Other charges”. Interest earned or incurred is recorded in “Interest income” or “Interest expense
and other financing charges” while dividend income is recorded when the right of payments has
been established.
Where a contract contains one or more embedded derivatives, the hybrid contract may be
designated as financial asset at FVPL, except where the embedded derivative does not
significantly modify the cash flows or it is clear that separation of the embedded derivative is
prohibited.
Financial assets may be designated at initial recognition as at FVPL if any of the following criteria
are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that
would otherwise arise from measuring the assets or recognizing gains or losses on them on a
different basis; or (ii) the assets are part of a group of financial assets which are managed and their
performance evaluated on a fair value basis, in accordance with a documented risk management or
investment strategy; or (iii) the financial instrument contains an embedded derivative that would
need to be separately recorded.
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- 13 The Group’s financial assets at FVPL pertain to government securities and other investment
securities and derivatives not designated as hedges.
Derivative financial instruments
Derivative instruments (including bifurcated embedded derivatives) are initially recognized at fair
value on the date in which a derivative transaction is entered into or bifurcated, and are
subsequently remeasured at fair value. Any gains or losses arising from changes in fair value of
derivatives that do not qualify for hedge accounting are taken directly to the consolidated
statement of income. Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative.
Derivative financial instruments also include bifurcated embedded derivatives. An embedded
derivative is separated from the host contract and accounted for as a derivative if all of the
following conditions are met: a) the economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of the host contract; b) a separate
instrument with the same terms as the embedded derivative would meet the definition of a
derivative; and c) the hybrid or combined instrument is not recognized at FVPL.
The Group assesses whether embedded derivatives are required to be separated from the host
contracts when the Group first becomes a party to the contract. Reassessment of embedded
derivatives is only done when there are changes in the contract that significantly modifies the
contractual cash flows.
For bifurcated embedded derivatives in financial contracts that are not designated or do not qualify
as hedges, changes in the fair values of such transactions are recognized in the consolidated
statement of income.
Contracts that are entered into and continue to be held for the purpose of the receipt of the raw
materials in accordance with the Group’s expected usage requirements are considered normal
purchase agreements.
HTM investments
HTM investments are quoted nonderivative financial assets with fixed or determinable payments
and fixed maturities that the Group has the positive intention and ability to hold to maturity.
Where the Group sell other than an insignificant amount of HTM investments, the entire category
would be tainted and reclassified as AFS financial assets. After initial measurement, these
investments are measured at amortized cost using the effective interest rate method, less
impairment in value. Amortized cost is calculated by taking into account any discount or
premium on acquisition and fees that are an integral part of the effective interest rate. The
amortization is included in “Interest income” in the consolidated statement of income. Gains and
losses are recognized in the consolidated statement of income when the HTM investments are
derecognized or impaired, as well as through the amortization process. The losses arising from
impairment of such investments are recognized in the consolidated statement of income under
“Other charges” account. HTM investments are included in current assets if expected to be
realized within 12 months from reporting date. HTM investments that are not due in the next 12
months are presented under “Investments in bonds and other securities” account in the
consolidated statement of financial position.
The Group’s HTM investments pertain to bonds included under “Other current assets” account in
2008.
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- 14 Loans and receivables
Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are not entered into with the intention of immediate or
short-term resale and are not designated as AFS financial assets or financial asset at FVPL. This
accounting policy relates both to the statements of financial position captions “Short-term
investments” and “Accounts and notes receivable” (except for Advances to contractors).
After initial measurement, loans and receivables are subsequently measured at amortized cost
using the effective interest rate method, less any allowance for impairment losses. Amortized cost
is calculated by taking into account any discount or premium on acquisition and fees that are an
integral part of the effective interest rate. The amortization is included in the “Interest income”
account in the consolidated statement of income. The losses arising from impairment of such
loans and receivables are recognized under “Provision for doubtful accounts” in the consolidated
statement of income.
Loans and receivables are included in current assets if maturity is within 12 months from the
reporting date.
AFS financial assets
AFS financial assets are those which are designated as such or do not qualify to be classified as
designated at FVPL, HTM, or loans and receivables.
Financial assets may be designated at initial recognition as AFS if they are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions.
After initial measurement, AFS financial assets are measured at fair value. The unrealized gains
or losses arising from the fair valuation of AFS financial assets are recognized in the consolidated
statement of comprehensive income and are reported as “Net unrealized gain (loss) on availablefor-sale financial assets” (net of tax where applicable) in equity. The Group’s share in its
associates’ net unrealized gain (loss) on AFS is likewise included in this account.
When the security is disposed of, the cumulative gain or loss previously recognized in equity is
recognized in the consolidated statement of income under “Other income” or “Other charges”.
Where the Group holds more than one investment in the same security, the cost is determined
using the weighted average method. Interest earned on AFS financial assets is reported as interest
income using the effective interest rate. Dividends earned are recognized under “Other income” in
the consolidated statement of income when the right to receive payment is established. The losses
arising from impairment of such investments are recognized under “Provision for impairment
losses” in the consolidated statement of income (see Note 21).
When the fair value of AFS financial assets cannot be measured reliably because of lack of
reliable estimates of future cash flows and discount rates necessary to calculate the fair value of
unquoted equity instruments, these investments are carried at cost, less any allowance for
impairment losses.
The Group’s AFS financial assets pertain to investments in quoted and unquoted equity securities
included under “Investments in bonds and other securities” in the consolidated statement of
financial position. AFS financial assets are included in current assets if expected to be realized
within 12 months from reporting date.
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- 15 Other financial liabilities
Issued financial instruments or their components, which are not designated at FVPL are classified
as other financial liabilities where the substance of the contractual arrangement results in the
Group having an obligation either to deliver cash or another financial asset to the holder, or to
satisfy the obligation other than by the exchange of a fixed amount of cash or another financial
asset for a fixed number of its own equity shares. The components of issued financial instruments
that contain both liability and equity elements are accounted for separately, with the equity
component being assigned the residual amount, after deducting from the instrument as a whole the
amount separately determined as the fair value of the liability component on the date of issue.
After initial measurement, other financial liabilities are subsequently measured at amortized cost
using the effective interest rate method. Amortized cost is calculated by taking into account any
discount or premium on the issue and fees that are an integral part of the effective interest rate.
Any effects of restatement of foreign currency-denominated liabilities are recognized in the
consolidated statement of income.
This accounting policy applies primarily to the Group’s short-term and long-term debt, accounts
payable and accrued expenses, and other obligations that meet the above definition (other than
liabilities covered by other accounting standards, such as income tax payable).
Deposits and Retentions Payable
Deposits and retentions payable are initially measured at fair value. After initial recognition,
deposits and retentions payable are subsequently measured at amortized cost using effective
interest rate method.
For deposits, the difference between the cash received and its fair value is deferred (included in
the “Deferred credits” account in the consolidated statement of financial position) and amortized
using the straight-line method with the amortization included under the “Sales and services”
account in the consolidated statement of income.
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 financial
assets) is derecognized where:
· the rights to receive cash flows from the assets have expired;
· the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third-party under a “pass-through” arrangement;
or
· the Group has transferred its right 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 the risks and rewards of the asset but has transferred control of the asset.
Where the Group 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 of the asset, the asset is recognized to the extent of the
Group’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 the original carrying amount of the
asset and the maximum amount of consideration that the Group could be required to repay.
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- 16 Financial liability
A financial liability is derecognized when the obligation under the liability is discharged or
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 the consolidated statement of income.
Impairment of Financial Assets
The Group assesses at each reporting date whether there is objective evidence that a financial asset
or group of financial assets is impaired. A financial asset or a group of financial assets is deemed
to be impaired if, and only if, there is objective evidence of impairment as a result of one or more
events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that
loss event (or events) has an impact on the estimated future cash flows of the financial asset or the
group of financial assets that can be reliably estimated. Evidence of impairment may include
indications that the borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganization and where observable data indicate that there is
measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Loans and receivables and HTM investments
For loans and receivables and HTM investments carried at amortized cost, the Group first assesses
whether objective evidence of impairment exists individually for financial assets that are
individually significant, or collectively for financial assets that are not individually significant. If
the Group determines that no objective evidence of impairment exists for an 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 estimated
future cash flows (excluding future credit losses that have not been incurred) discounted at the
financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). The carrying amount of the asset is reduced through the use of an allowance account
and the amount of the loss is charged to the consolidated statement of income under “Provision for
doubtful accounts” (see Note 21). Interest income continues to be recognized based on the
original effective interest rate of the asset. Loans and receivables, 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 period, the amount of the estimated impairment
loss decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its
amortized cost at the reversal date.
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- 17 For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics such as customer type, payment history, past-due status and
term.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics similar
to those in the group. Historical loss experience is adjusted on the basis of current observable data
to reflect the effects of current conditions that did not affect the period on which the historical loss
experience is based and to remove the effects of conditions in the historical period that do not exist
currently. The methodology and assumptions used for estimating future cash flows are reviewed
regularly by the Group to reduce any differences between loss estimates and actual loss
experience.
Financial assets carried at cost
If there is an objective evidence that an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value cannot be reliably measured, or on
derivative asset that is linked to and must be settled by delivery of such an unquoted equity
instrument, the amount of the loss is measured as the difference between the carrying amount and
the present value of estimated future cash flows discounted at the current market rate of return for
a similar financial asset.
AFS financial assets
In the case of equity investments classified as AFS financial assets, impairment would include a
significant or prolonged decline in the fair value of the investments below its cost. “Significant” is
to be evaluated against the original cost of the investment and “prolonged” against the period in
which the fair value has been below its original cost. Where there is evidence of impairment loss,
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 in the consolidated
statement of income - is removed from other comprehensive income and recognized in the
consolidated statement of income under “Other charges”. Impairment losses on equity
investments are not reversed through the consolidated statement of income. Increases in fair value
after impairment are recognized directly in the consolidated statement of comprehensive income.
In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount and is accrued using the rate of interest used to discount future cash
flows for the purpose of measuring impairment loss and is recorded as part of “Interest income”
account in the consolidated statement of income. If, in a subsequent year, the fair value of a debt
instrument increased and the increase can be objectively related to an event occurring after the
impairment loss was recognized in the consolidated statement of income, the impairment loss is
reversed through the consolidated statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
statement of financial position if, and only if, there is a currently enforceable legal right to offset
the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
settle the liability simultaneously.
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- 18 Inventories
Inventories are carried at the lower of cost and net realizable value (NRV). Costs incurred in
bringing each product to its present location and conditions are generally accounted for as follows:
Real estate inventories - cost includes those costs incurred for the development and
improvement of properties, including capitalized borrowing costs.
Vehicles - purchase cost on specific identification basis.
Finished goods and work-in-process - determined on a moving average basis; cost includes
direct materials and labor and a proportion of manufacturing overhead costs based on normal
operating capacity.
Parts and accessories, materials, supplies and others - purchase cost on a moving average
basis.
NRV for real estate inventories, vehicles, finished goods and work-in-process and parts and
accessories is the estimated selling price in the ordinary course of business, less estimated costs of
completion and estimated costs necessary to make the sale, while NRV for materials, supplies and
others represents the related replacement costs.
Noncurrent Assets Held for Sale
Noncurrent assets held for sale are carried at the lower of its carrying amount and fair value less
costs to sell. At each reporting date, the Group classifies assets as held for sale (disposal group)
when their carrying amount will be recovered principally through a sale transaction rather than
through continuing use. For this to be the case, the asset must be available for immediate sale in
its present condition subject only to terms that are usual and customary for sales of such assets and
its sale must be highly probable. For the sale to be highly probable the appropriate level of
management must be committed to a plan to sell the asset and an active program to locate a buyer
and complete the plan must have been initiated. Further, the asset must be actively marketed for
sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of
classification.
The related results of operations and cash flows of the disposal group that qualified as
discontinued operation are separated from the results of those that would be recovered principally
through continuing use, and prior years’ consolidated statement of income and cash flows are represented. Results of operations and cash flows of the disposal group that qualified as
discontinued operation are presented in the consolidated statement of income and consolidated
statement of cash flows as items associated with noncurrent assets held for sale.
Land and Improvements
Land and improvements consist of properties for future development and are carried at the lower
of cost or NRV. NRV is the estimated selling price in the ordinary course of business, less
estimated cost of completion and estimated costs necessary to make the sale. Cost includes cost of
purchase and those costs incurred for improvement of the properties.
*SGVMC113416*
- 19 Investments in Associates and Jointly Controlled Entities
Investments in associates and jointly controlled entities (investee companies) are accounted for
under the equity method, except for an interest in a joint venture, which is accounted for using
proportionate consolidation. An associate is an entity in which the Group has significant influence
and which is neither a subsidiary nor a joint venture. A joint venture is a contractual arrangement
whereby two or more parties undertake an economic activity that is subject to joint control, and a
jointly controlled entity is a joint venture that involves the establishment of a separate entity in
which each venturer has an interest.
An investment in a associate or joint venture is accounted for using the equity method from the
day it becomes an associate or joint venture. On acquisition of investment, the excess of the cost
of investment over the investor’s share in the net fair value of the investee’s identifiable assets,
liabilities and contingent liabilities is accounted for as goodwill and included in the carrying
amount of the investment and neither amortized nor individually tested for impairment. Any
excess of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities
and contingent liabilities over the cost of the investment is excluded from the carrying amount of
the investment, and is instead included as income in the determination of the share in the earnings
of the investees.
Under the equity method, investments in associates and jointly controlled entities are carried in the
consolidated statement of financial position at cost plus post-acquisition changes in the Group’s
share in the net assets of the investees, less any impairment in value. The Group’s share in the
investee’s post-acquisition profits or losses is recognized in the consolidated statement of income,
and its share of post-acquisition movements in the investee’s equity reserves is recognized directly
in equity. Profits and losses resulting from transactions between the Group and the investee
companies are eliminated to the extent of the interest in the investee companies and to the extent
that for unrealized losses, there is no evidence of impairment of the asset transferred. Dividends
received are treated as a reduction of the carrying value of the investment. Under the
proportionate consolidation method for the Group’s interest in a joint venture through Makati
Development Corporation (MDC), an ALI subsidiary, the Group combines its share of each of the
assets, liabilities, income and expenses of the joint venture with similar items, line by line, in its
financial statements. The financial statements of the joint venture are prepared for the same
reporting period as the Group. Adjustments are made where necessary to bring the accounting
policies into line with those of MDC.
Adjustments are made in the consolidated financial statements to eliminate the Group’s share of
unrealized gains and losses on transactions between the Group and the joint venture. Losses on
transactions are recognized immediately if the loss provides evidence of a reduction in the NRV of
current assets or an impairment loss. The joint venture is proportionately consolidated until the
date on which the Group ceases to have joint control over the joint venture.
The Group discontinues applying the equity method when its investment in an investee company
is reduced to zero. Accordingly, additional losses are not recognized unless the Group has
guaranteed certain obligations of the investee company. When the investee company subsequently
reports profits, the Group resumes recognizing its share of the profits only after its share of the
profits equals the share of net losses not recognized during the period the equity method was
suspended. The reporting dates of the investee companies and the Group are identical and the
investee companies’ accounting policies conform to those used by the Group for like transactions
and events in similar circumstances.
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- 20 Investment Properties
Investment properties consist of properties that are held to earn rentals, and are not occupied by
the companies in the Group. Investment properties, except for land, are carried at cost less
accumulated depreciation and amortization and any impairment in value. Land is carried at cost
less any impairment in value.
Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the assets, regardless of utilization. The estimated useful lives of investment
properties follow:
Land improvements
Buildings
5 years
20-40 years
Investment properties are derecognized when either they have been disposed of or when the
investment property is permanently withdrawn from use and no future economic benefit is
expected from its disposal. Any gain or loss on the retirement or disposal of an investment
property is recognized in the consolidated statement of income in the year of retirement or
disposal.
Transfers are made to investment property when there is a change in use, evidenced by ending of
owner-occupation, commencement of an operating lease to another party or ending of construction
or development. Transfers are made from investment property when, and only when, there is a
change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or for disclosure purposes.
Property, Plant and Equipment
Property, plant and equipment, except for land, are carried at cost less accumulated depreciation
and amortization and any impairment in value. Land is carried at cost less any impairment in
value. The initial cost of property, plant and equipment consists of its construction cost or
purchase price and any directly attributable costs of bringing the property, plant and equipment to
its working condition and location for its intended use.
Construction-in-progress is stated at cost. This includes cost of construction and other direct
costs. Construction-in-progress is not depreciated until such time that the relevant assets are
completed and put into operational use.
Major repairs are capitalized as part of property, plant and equipment only when it is probable that
future economic benefits associated with the item will flow to the Group and the cost of the items
can be measured reliably. All other repairs and maintenance are charged against current
operations as incurred.
*SGVMC113416*
- 21 Depreciation and amortization of property, plant and equipment commences once the property,
plant and equipment are available for use and computed on a straight-line basis over the estimated
useful lives of the property, plant and equipment as follows:
Buildings and improvements
Machinery and equipment
Furniture, fixtures and equipment
Transportation equipment
3-40 years
3-10 years
2-10 years
3-5 years
Hotel property and equipment includes the following types of assets and their corresponding
estimated useful lives:
Hotel buildings and improvements
Land improvements
Leasehold improvements
Furniture, furnishing and equipment
Machinery and equipment
Transportation equipment
30-50 years
30 years
5-20 years
5 years
5 years
5 years
The assets residual values, useful lives and depreciation and amortization method are reviewed
periodically to ensure that the amounts, periods and method of depreciation and amortization are
consistent with the expected pattern of economic benefits from items of property, plant and
equipment.
When property, plant and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization and accumulated provision for impairment losses, if
any, are removed from the accounts and any resulting gain or loss is credited or charged against
current operations.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is the fair value as at the date of acquisition.
Subsequently, intangible assets are measured at cost less accumulated amortization and provision
for impairment loss, if any. The useful lives of intangible assets with finite lives are assessed at
the individual asset level. Intangible assets with finite lives are amortized over their useful lives
on a straight line basis. Periods and method of amortization for intangible assets with finite useful
lives are reviewed annually or earlier when an indicator of impairment exists.
The estimated useful lives of intangible assets follow:
Customer relationships
Order backlog
Unpatented technology
Developed software
Licenses
2-5 years
6 months
5 years
2 years
3 years
A gain or loss arising from derecognition of an intangible asset is measured as the difference
between the net disposal proceeds and the carrying amount of the intangible assets and is
recognized in the consolidated statement of income when the intangible asset is derecognized.
*SGVMC113416*
- 22 Business Combinations and Goodwill
Business combinations are accounted for using the purchase method. The cost of an acquisition is
measured as the fair value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable
assets (including previously unrecognized intangible assets) acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values at the date
of acquisition, irrespective of the extent of any noncontrolling interest.
Goodwill is initially measured at cost being the excess of the cost of the business combination
over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and
contingent liabilities. If the cost of the acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognized directly in the consolidated statement of income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For
the purpose of the impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Group’s cash-generating units (CGU) that are expected to
benefit from the synergies of the combination, irrespective of whether other assets or liabilities of
the acquiree are assigned to those units.
Goodwill allocated to a CGU is included in the carrying amount of the CGU being disposed when
determining the gain or loss on disposal. For partial disposal of operation within the CGU, the
goodwill associated with the disposed operation is included in the carrying amount of the
operation when determining gain or loss on disposal and measured on the basis of the relative
values of the operation disposed of and the portion of the CGU retained, unless another method
better reflects the goodwill associated with the operation disposed of.
Impairment of Nonfinancial Assets
The Group assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is required,
the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is
calculated as the higher of the asset’s or CGU’s fair value less costs to sell and its value in use and
is determined for an individual asset, unless the asset does not generate cash inflows that are
largely independent of those from other assets or groups of assets. Where the carrying amount of
an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its
recoverable amount. 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. In determining fair value less cost to sell, an
appropriate valuation model is used. These calculations are corroborated by valuation multiples or
other fair value indicators. Impairment losses of continuing operations are recognized in the
consolidated statement of income in those expense categories consistent with the function of the
impaired asset.
For assets excluding goodwill, 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
*SGVMC113416*
- 23 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 the consolidated statement of income unless the asset is carried at
revalued amount, in which case the reversal is treated as revaluation increase. After such a
reversal, the depreciation and amortization charge is adjusted in future periods to allocate the
asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining
useful life.
Investments in associates and jointly controlled entities
After application of the equity method, the Group determines whether it is necessary to recognize
any additional impairment loss with respect to the Group’s net investment in the investee
company. The Group determines at each reporting date whether there is any objective evidence
that the investment in the investee company is impaired. If this is the case, the Group calculates
the amount of impairment as being the difference between the recoverable amount of the investee
company and the carrying cost and recognizes the amount in the consolidated statement of
income.
Impairment of goodwill
For assessing impairment of goodwill, a test for impairment is performed annually and when
circumstances indicate that the carrying value may be impaired. Impairment is determined for
goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the
goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an
impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future
periods.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligations and a reliable estimate can be made of the amount of the
obligation.
Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a
separate asset but only when the reimbursement is virtually certain. If the effect of the time value
of money is material, provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used, the increase in the
provision due to the passage of time is recognized as interest expense. Provisions are reviewed at
each reporting date and adjusted to reflect the current best estimate.
Treasury Stock
Own equity instruments which are reacquired and held by the Company or by other companies of
the consolidated group are carried at cost and are deducted from equity. No gain or loss is
recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity
instruments. When the shares are retired, the capital stock account is reduced by its par value and
the excess of cost over par value upon retirement is debited to additional paid-in capital to the
extent of the specific or average additional paid-in capital when the shares were issued and to
retained earnings for the remaining balance.
*SGVMC113416*
- 24 Revenue and Cost Recognition
Revenue and cost from sales of completed projects by real estate subsidiaries are accounted for
using the full accrual method. The percentage of completion method is used to recognize income
from sales of projects where the subsidiaries have material obligations under the sales contracts to
complete the project after the property is sold. Under this method, gain is recognized as the
related obligations are fulfilled, measured principally on the basis of the estimated completion of a
physical proportion of the contract work. Any excess of collections over the recognized
receivables are included under “Other current liabilities” in the liabilities section of the
consolidated statement of financial position.
Revenue from construction contracts are recognized using the percentage of completion method,
measured principally on the basis of the estimated physical completion of the contract work.
Contract costs include all direct materials and labor costs and those indirect costs related to
contract performance. Expected losses on contracts are recognized immediately when it is
probable that the total contract costs will exceed total contract revenue. Changes in contract
performance, contract conditions and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements which may result in revisions to estimated costs
and gross margins are recognized in the year in which the changes are determined.
Rental income under noncancellable and cancellable leases on Investment properties is recognized
in the consolidated statement of income on a straight-line basis over the lease term and the terms
of the lease, respectively, or based on a certain percentage of the gross revenue of the tenants, as
provided under the terms of the lease contract.
Marketing fees, management fees from administrative and property management are recognized
when services are rendered.
Revenue from hotel operations are recognized when services are rendered. Revenue from
banquets and other special events are recognized when the events take place.
Revenue from sales of electronic products and vehicles are recognized when the significant risks
and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be
measured reliably. Revenue is measured at the fair value of the consideration received excluding
discounts, returns, rebates and sales taxes.
Revenue from business process outsourcing services is recognized based on per employee, per
transaction or per hour basis and when services are rendered.
Interest income is recognized as it accrues using the effective interest method.
Dividend income is recognized when the Group’s right to receive payment is established.
Gain or loss is recognized in the consolidated statement of income if the Company disposes some
of its investment in a subsidiary or associate. Gain or loss is computed as the difference between
the proceeds of the disposal and its carrying amount, including the carrying amount of goodwill, if
any.
*SGVMC113416*
- 25 Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of 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. A
reassessment is made after inception of the lease only if one of the following applies: (a) there is a
change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal
option is exercised or extension granted, unless the term of the renewal or extension was initially
included in the lease term; (c) there is a change in the determination of whether fulfillment is
dependent on a specified asset; or (d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date of
renewal or extension period for scenario (b).
Group as lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the
consolidated asset are classified as operating leases. Fixed lease payments are recognized as an
expense in the consolidated statement of income on a straight-line basis while the variable rent is
recognized as an expense based on terms of the lease contract.
Finance leases, which transfer substantially all the risks and benefits incidental to ownership of the
leased item, are capitalized at the inception of the lease at the fair value of the leased property or,
if lower, at the present value of the minimum lease payments. Lease payments are apportioned
between the finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are charged directly against
income.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets
or the respective lease terms.
Group as lessor
Leases where the Group does not transfer substantially all the risk and benefits of ownership of the
assets are classified as operating leases. Lease payments received are recognized as income in the
consolidated statement of income on a straight-line basis over the lease term. Initial direct costs
incurred in negotiating operating leases are added to the carrying amount of the leased asset and
recognized over the lease term on the same basis as the rental income. Contingent rent is
recognized as revenue in the period in which it is earned.
Commission Expense
Commissions paid to sales or marketing agents on the sale of pre-completed real estate units are
deferred when recovery is reasonably expected and are charged to expense in the period in which
the related revenue is recognized as earned. Accordingly, when the percentage of completion
method is used, commissions are likewise charged to expense in the period the related revenue is
recognized. Commission expense is included under “Cost of sales and services” in the
consolidated statement of income.
*SGVMC113416*
- 26 Borrowing Costs
Interest and other financing costs incurred during the construction period on borrowings used to
finance property development are capitalized as part of development cost (included in real estate
inventories, investment properties and property, plant and equipment). Capitalization of
borrowing costs commences when the activities to prepare the asset are in progress and
expenditures and borrowing costs are being incurred. The capitalization of these borrowing costs
ceases when substantially all the activities necessary to prepare the asset for its intended use or
sale are complete. If the carrying amount of the asset exceeds its recoverable amount, an
impairment loss is recorded. Capitalized borrowing cost is based on the applicable weighted
average borrowing rate from general borrowings and the actual borrowing costs eligible for
capitalization for funds borrowed specifically. All other borrowing costs are expensed in the
period they occur.
Pension Cost
Pension cost is actuarially determined using the projected unit credit method. This method reflects
services rendered by employees up to the date of valuation and incorporates assumptions
concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient
regularity, with option to accelerate when significant changes to underlying assumptions occur.
Pension cost includes current service cost, interest cost, expected return on any plan assets,
actuarial gains and losses and the effect of any curtailments or settlements.
The net pension liability recognized in the consolidated statement of financial position in respect
of the defined benefit pension plans is the present value of the defined benefit obligation at the
reporting date less the fair value of the plan assets. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method. The present value of the
defined benefit obligation is determined by using risk-free interest rates of government bonds that
have terms to maturity approximating the terms of the related pension liabilities or applying a
single weighted average discount rate that reflects the estimated timing and amount of benefit
payments.
The net pension asset is the lower of the fair value of the plan assets less the present value of the
defined benefit obligation at the reporting date, together with adjustments for unrecognized
actuarial gains or losses and past service costs that shall be recognized in future periods, or the
total of any cumulative unrecognized net actuarial losses and past service cost and the present
value of any economic benefits available in the form of refunds from the plan or reductions in the
future contributions to the plan.
Actuarial gains and losses are recognized as income or expense if the cumulative unrecognized
actuarial gains and losses at the end of the previous reporting period exceeded the greater of 10%
of the present value of defined benefit obligation or 10% of the fair value of plan assets. These
gains or losses are recognized over the expected average remaining working lives of the
employees participating in the plans.
Income Tax
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 taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively enacted by the statement of
financial position date.
*SGVMC113416*
- 27 Deferred tax
Deferred income tax is provided, using the liability method, on all temporary differences, with
certain exceptions, at the reporting date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, with certain
exceptions. Deferred tax assets are recognized for all deductible temporary differences,
carryforward benefit of unused tax credits from excess of minimum corporate income tax (MCIT)
over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the
extent that it is probable that taxable income will be available against which the deductible
temporary differences and carryforward benefits of MCIT and NOLCO can be utilized.
Deferred tax liabilities are not provided on nontaxable temporary differences associated with
investments in domestic subsidiaries, associates and interests in jointly controlled entities. With
respect to investments in foreign subsidiaries, associates and interests in jointly controlled entities,
deferred tax liabilities are recognized except where the timing of the reversal of the temporary
difference can be controlled and it is probable that the temporary difference will not reverse in the
foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the
extent that it is no longer probable that sufficient taxable income will be available to allow all as
part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at
each reporting date and are recognized to the extent that it has become probable that future taxable
income will allow all as part of the deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rate that is expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates and tax laws that have
been enacted or substantively enacted reporting date. Movements in the deferred income tax
assets and liabilities arising from changes in tax rates are charged or credited to income for the
period.
Income tax relating to items recognized directly in equity is recognized in equity.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable
entity and the same taxation authority.
Foreign Currency Transactions
The functional and presentation currency of Ayala Corporation and its Philippine subsidiaries
(except for BHL, AIVPL and IMI), is the Philippine Peso (P
=). Each entity in the Group
determines its own functional currency and items included in the financial statements of each
entity are measured using that functional currency. Transactions in foreign currencies are initially
recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional currency rate of
exchange ruling at the reporting date. All differences are taken to the consolidated statement of
income with the exception of differences on foreign currency borrowings that provide a hedge
against a net investment in a foreign entity. These are recognized in the consolidated statement of
comprehensive income until the disposal of the net investment, at which time they are recognized
in the consolidated statement of income. Tax charges and credits attributable to exchange
differences on those borrowings are also dealt with in equity. Nonmonetary items that are
*SGVMC113416*
- 28 measured in terms of historical cost in a foreign currency are translated using the exchange rate as
at the date of initial transaction. Nonmonetary items measured at fair value in a foreign currency
are translated using the exchange rate at the date when the fair value was determined.
The functional currency of BHL, AIVPL and IMI is the US Dollar ($). As at the reporting date,
the assets and liabilities of these subsidiaries are translated into the presentation currency of the
Group at the rate of exchange ruling at the reporting date and their statement of income accounts
are translated at the weighted average exchange rates for the year. The exchange differences
arising on the translation are recognized in the consolidated statement of comprehensive income
and reported as a separate component of equity. On disposal of a foreign entity, the deferred
cumulative amount recognized in the consolidated statement of comprehensive income relating to
that particular foreign operation shall be recognized in the consolidated statement of income.
The Group’s share in the associates’ translation adjustments are likewise included under the
Cumulative translation adjustments account in the consolidated statement of comprehensive
income.
Share-based Payments
The Group have equity-settled, share-based compensation plans with its employees.
PFRS 2 Options
For options granted after November 7, 2002 that have not vested on or before January 1, 2005, the
cost of equity-settled transactions with employees is measured by reference to the fair value at the
date on which they are granted. In valuing equity-settled transactions, vesting conditions,
including performance conditions, other than market conditions (conditions linked to share prices),
shall not be taken into account when estimating the fair value of the shares or share options at the
measurement date. Instead, vesting conditions are taken into account in estimating the number of
equity instruments that will ultimately vest. Fair value is determined by using the Black-Scholes
model, further details of which are provided in Note 26 to the consolidated financial statements.
The cost of equity-settled transactions is recognized, together with a corresponding increase in
equity, over the period in which the performance conditions are fulfilled, ending on the date on
which the relevant employees become fully entitled to the awards (‘vesting date’). The
cumulative expense recognized for equity-settled transactions at each reporting date until the
vesting date reflects the extent to which the vesting period has expired and the Group’s best
estimate of the number of equity instruments that will ultimately vest. The income or expense for
a period represents the movement in cumulative expense recognized as at the beginning and end of
that period.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized
as if the terms had not been modified. In addition, an expense is recognized for any increase in the
value of the transaction as a result of the modification, as measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized immediately.
*SGVMC113416*
- 29 However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a
modification of the original award, as described in the previous paragraph.
Pre-PFRS 2 Options
For options granted before November 7, 2002 that have vested before January 1, 2005, the
intrinsic value of stock options determined as of grant date is recognized as expense over the
vesting period.
The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of diluted earnings per share (see Note 24).
Employee share purchase plans
The Company and some of its subsidiaries have employee share purchase plans (ESOWN) which
allow the grantees to purchase the Company’s and its respective subsidiaries’ shares at a
discounted price. The Group recognizes the difference between the market price at the time of
subscription and the subscription price as stock compensation expense over the holding period.
Where the subscription receivable is payable over more than one year, the subscription price is
adjusted for the time value and treated as additional stock compensation expense. For the
unsubscribed shares where the employees still have the option to subscribe in the future, these are
accounted for as options.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income attributable to common equity
holders by the weighted average number of common shares issued and outstanding during the year
and adjusted to give retroactive effect to any stock dividends declared during the period. Diluted
EPS is computed by dividing net income attributable to common equity holders by the weighted
average number of common shares issued and outstanding during the year plus the weighted
average number of common shares that would be issued on conversion of all the dilutive potential
common shares. The calculation of diluted earnings per share does not assume conversion,
exercise or other issue of potential common shares that would have an antidilutive effect on
earnings per share.
Operating Segments
The Group’s operating businesses are organized and managed separately according to the nature
of the products and services provided, with each segment representing a strategic business unit
that offers different products and serves different markets. Financial information on operating
segments is presented in Note 27 to the consolidated financial statements.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets are not recognized in the consolidated financial statements but disclosed when
an inflow of economic benefits is probable.
Events after the Reporting Period
Post year-end events that provide additional information about the Group’s position at the
reporting date (adjusting events) are reflected in the consolidated financial statements. Post yearend events that are not adjusting events are disclosed in the consolidated financial statements when
material.
*SGVMC113416*
- 30 3. Significant Accounting Judgments and Estimates
The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The estimates and assumptions used
in the accompanying consolidated financial statements are based upon management’s evaluation
of relevant facts and circumstances as of the date of the consolidated financial statements. Actual
results could differ from such estimates.
Judgments
In the process of applying the Group’s accounting policies, management has made the following
judgments, apart from those involving estimations, which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Operating lease commitments - Group as lessor
The Group has entered into commercial property leases on its investment property portfolio. The
Group has determined that it retains all significant risks and rewards of ownership of these
properties as the Group considered among others the length of the lease term is compared with the
estimated useful life of the assets.
A number of the Group’s operating lease contracts are accounted for as noncancellable operating
leases and the rest are cancellable. In determining whether a lease contract is cancellable or not,
the Company considers among others, the significance of the penalty, including the economic
consequence to the lessee.
Operating lease commitments - Group as lessee
The Group has entered into a contract with Bases Conversion Development Authority (BCDA) to
develop, under a lease agreement, a mall on a 9.8-hectare lot inside Fort Bonifacio. The Group
has determined that all significant risks and rewards of ownership of these properties are retained
by the lessor.
Distinction between investment properties and owner-occupied properties
The Group determines whether a property qualifies as investment property. In making its
judgment, the Group considers whether the property generates cash flows largely independent of
the other assets held by an entity. Owner-occupied properties generate cash flows that are
attributable not only to property but also to the other assets used in the production or supply
process.
Some properties comprise a portion that is held to earn rentals or for capital appreciations and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes. If these portions cannot be sold separately as of reporting date, the
property is accounted for as investment property only if an insignificant portion is held for use in
the production or supply of goods or services or for administrative purposes. Judgment is applied
in determining whether ancillary services are so significant that a property does not qualify as
investment property. The Group considers each property separately in making its judgment.
*SGVMC113416*
- 31 Distinction between real estate inventories and land and improvements
The Group determines whether a property will be classified as real estate inventories or land and
improvements. In making this judgment, the Group considers whether the property will be sold in
the normal operating cycle (Real estate inventories) or whether it will be retained as part of the
Group’s strategic landbanking activities for development or sale in the medium or long-term
(Land and improvements).
HTM investments
The classification of HTM investments requires significant judgment. In making this judgment,
the Group evaluates its intention and ability to hold such investments to maturity. If the Group
fails to keep these investments to maturity other than in certain specific circumstances, it will be
required to reclassify the entire portfolio as AFS financial asset. The investments would therefore
be measured at fair value and not at amortized cost.
Impairment of AFS equity investments
The Group treats AFS equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of impairment
exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group
treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted
equity securities. In addition, the Group evaluates other factors, including normal volatility in
share price for quoted equities and the future cash flows and the discount factors for unquoted
equities.
Financial assets not quoted in an active market
The Group classifies financial assets by evaluating, among others, whether the asset is quoted or
not in an active market. Included in the evaluation on whether a financial asset is quoted in an
active market is the determination on whether quoted prices are readily and regularly available,
and whether those prices represent actual and regularly occurring market transactions on an arm’s
length basis.
Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with outside counsel
handling the defense in these matters and is based upon an analysis of potential results. The
Group currently does not believe that these proceedings will have a material effect on the Group’s
financial position (see Note 34).
Management’s Use of Estimates
The key assumptions concerning the future and other sources of estimation uncertainty at the
reporting date that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below.
Revenue and cost recognition
ALI Group’s revenue recognition policies require management to make use of estimates and
assumptions that may affect the reported amounts of revenue and costs. ALI Group’s revenue
from real estate and construction contracts are recognized based on the percentage of completion
measured principally on the basis of the estimated completion of a physical proportion of the
contract work, and by reference to the actual costs incurred to date over the estimated total costs of
the project.
*SGVMC113416*
- 32 Estimating allowance for impairment losses
The Group maintains allowance for doubtful accounts based on the result of the individual and
collective assessment under PAS 39. Under the individual assessment, the Group is required to
obtain the present value of estimated cash flows using the receivable’s original effective interest
rate. Impairment loss is determined as the difference between the receivable’s carrying balance
and the computed present value. Factors considered in individual assessment are payment history,
past due status and term. The collective assessment would require the Group to group its
receivables based on the credit risk characteristics (customer type, payment history, past-due status
and term) of the customers. Impairment loss is then determined based on historical loss
experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted
on the basis of current observable data to reflect the effects of current conditions that did not affect
the period on which the historical loss experience is based and to remove the effects of conditions
in the historical period that do not exist currently. The methodology and assumptions used for the
individual and collective assessments are based on management's judgment and estimate.
Therefore, the amount and timing of recorded expense for any period would differ depending on
the judgments and estimates made for the year.
As of December 31, 2009 and 2008, allowance for impairment losses amounted to P
=373.0 million
and P
=357.8 million, respectively. Accounts and notes receivable, net of allowance for doubtful
accounts, amounted to P
=27.9 billion and P
=30.0 billion as of December 31, 2009 and 2008,
respectively (see Note 6).
Evaluation of net realizable value of inventories
Inventories are valued at the lower of cost or NRV. This requires the Group to make an estimate
of the inventories’ estimated selling price in the ordinary course of business, cost of completion
and costs necessary to make a sale to determine the NRV. For real estate inventories, the Group
adjusts the cost of its real estate inventories to net realizable value based on its assessment of the
recoverability of the inventories. In determining the recoverability of the inventories, management
considers whether those inventories are damaged or if their selling prices have declined.
Likewise, management also considers whether the estimated costs of completion or the estimated
costs to be incurred to make the sale have increased. In the event that NRV is lower than the cost,
the decline is recognized as an expense. The amount and timing of recorded expenses for any
period would differ if different judgments were made or different estimates were utilized.
Inventories carried at cost amounted to P
=9.0 billion and P
=8.2 billion as of December 31, 2009 and
2008, respectively. Inventories carried at NRV amounted to P
=1.8 billion as of December 31, 2009
and 2008 (see Note 7).
Evaluation of impairment of nonfinancial assets
The Group reviews investments in associates and jointly controlled entities, investment properties,
property, plant and equipment and intangible assets for impairment of value. Impairment for
goodwill is assessed at least annually. This includes considering certain indications of impairment
such as significant changes in asset usage, significant decline in assets’ market value,
obsolescence or physical damage of an asset, plans in the real estate projects, significant
underperformance relative to expected historical or projected future operating results and
significant negative industry or economic trends.
*SGVMC113416*
- 33 The Group estimates the recoverable amount as the higher of the net selling price and value in use.
In determining the present value of estimated future cash flows expected to be generated from the
continued use of the assets, the Group is required to make estimates and assumptions that may
affect investments in associates and jointly controlled entities, investment properties, property,
plant and equipment and intangible assets.
For goodwill, this requires an estimation of the recoverable amount which is the net selling price
or value in use of the cash-generating units to which the goodwill is allocated. Estimating a value
in use amount requires management to make an estimate of the expected future cash flows for the
cash generating unit and also to choose a suitable discount rate in order to calculate the present
value of cash flows.
The Group’s impairment tests for goodwill are based on value in use and fair value less cost to sell
calculations. The value in use calculations in 2009 and 2008 used a discounted cash flow model.
The cash flows are derived from the budget for the next five years and assume a steady growth
rate. The recoverable amount is most sensitive to discount rate used for the discounted cash flow
model as well as the expected future cash inflows and the growth rate used for extrapolation
purposes. The fair value less cost to sell calculation in 2009 considered the enterprise value of the
CGU based on a recent tender offer to which the goodwill is allocated.
In determining the amount of impaired goodwill in 2007, the Group determined the recoverable
amount of the investment in a subsidiary based on the estimated net selling price of the cash
generating unit to which the goodwill is allocated. The excess of the carrying amount of the
investment over the estimated net selling price is allocated first to the goodwill, resulting in an
impairment loss of P
=662.6 million (see Note 14).
Investments in associates and jointly controlled entities, investment properties, property, plant and
equipment and intangible assets amounted to P
=113.0 billion and P
=107.2 billion as of December 31,
2009 and 2008, respectively (see Notes 10, 12, 13 and 14).
Estimating useful lives of investment properties, property, plant and equipment, and intangible
assets
The Group estimated the useful lives of its investment properties, property, plant and equipment
and intangible assets with finite useful lives based on the period over which the assets are expected
to be available for use. The estimated useful lives of investment properties, property, plant and
equipment and intangible assets are reviewed at least annually and are updated if expectations
differ from previous estimates due to physical wear and tear and technical or commercial
obsolescence on the use of these assets. It is possible that future results of operations could be
materially affected by changes in these estimates brought about by changes in factors mentioned
above. A reduction in the estimated useful lives would increase depreciation and amortization
expense and decrease noncurrent assets.
Investment properties, property, plant and equipment and intangible assets with finite useful lives
amounted to P
=37.5 billion and P
=35.8 billion as of December 31, 2009 and 2008, respectively
(see Notes 12, 13 and 14).
*SGVMC113416*
- 34 Deferred tax assets
The Group reviews the carrying amounts of deferred income taxes at each reporting date and
reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable income
will be available to allow all or part of the deferred tax assets to be utilized. However, there is no
assurance that the Group will generate sufficient taxable income to allow all or part of deferred tax
assets to be utilized. The Group looks at its projected performance in assessing the sufficiency of
future taxable income.
As of December 31, 2009 and 2008, the Group has net deferred tax assets amounting to
=1,396.0 million and P
P
=1,132.8 million, respectively and net deferred tax liabilities amounting to
=207.4 million and P
P
=185.5 million, respectively (see Note 23).
Share-based payments
The expected life of the options is based on the expected exercise behavior of the stock option
holders and is not necessarily indicative of the exercise patterns that may occur. The volatility is
based on the average historical price volatility which may be different from the expected volatility
of the shares of stock of the Group.
Total expense arising from share-based payments recognized by the Group amounted to
=471.6 million in 2009, P
P
=342.9 million in 2008 and P
=288.0 million in 2007.
Estimating pension obligation and other retirement benefits
The determination of the Group’s obligation and cost of pension and other retirement benefits is
dependent on the selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 25 to the consolidated financial statements and include
among others, discount rates, expected returns on plan assets and rates of salary increase. While
the Group believes that the assumptions are reasonable and appropriate, significant differences in
the actual experience or significant changes in the assumptions materially affect retirement
obligations. See Note 25 to the consolidated financial statements for the related balances.
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated
statement of financial position or disclosed in the notes to the consolidated financial statements
cannot be derived from active markets, they are determined using internal valuation techniques
using generally accepted market valuation models. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, estimates are used in
establishing fair values. These estimates may include considerations of liquidity, volatility, and
correlation. Certain financial assets and liabilities were initially recorded at fair values by using
the discounted cash flow method. See Notes 6, 8, 11, 19 and 30 for the related balances.
Purchase price allocation
2009 Acquisition
As of December 31, 2009, the purchase price allocation relating to the Group’s acquisition of
Grail Research has been prepared on a preliminary basis. The provisional fair values of the assets
acquired and liabilities assumed as of date of acquisition were based on the net book values of the
identifiable assets and liabilities since these approximate the fair values. The difference between
the total consideration and the net assets amounting to P
=550.5 million was initially allocated to
goodwill as of December 31, 2009.
*SGVMC113416*
- 35 2008 Acquisition
As of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of
Datum Legal, Inc. (Datum) has been prepared on a preliminary basis. In 2009, purchased price
allocation of Datum was finalized and there were no significant changes to the fair values of the
assets acquired and liabilities assumed.
As of December 31, 2008, the purchase price allocation relating to the Group’s acquisition of ALI
Property Partners Holdings Company (APPHC) and ALI Property Partners Corporation (APPCo.)
has been prepared on a preliminary basis. In 2009, the Group finalized its purchased price
allocation and the 2008 comparative information has been restated to reflect adjustments to the fair
values of investment properties and property, plant and equipment.
4. Cash and Cash Equivalents
This account consists of the following:
2008
(In Thousands)
=3,772,560
P
P
=3,960,792
39,113,232
41,696,097
=42,885,792
P
P
=45,656,889
2009
Cash on hand and in banks
Cash equivalents
Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-term,
highly liquid investments that are made for varying periods of up to three months depending on
the immediate cash requirements of the Group and earn interest at the prevailing short-term rates.
5. Short-term Investments
Short-term investments pertain to money market placements made for varying periods of more
than three months and up to six months and earn interest at the respective short-term investment
rates.
The ranges of interest rates of the short-term investments follow:
PHP
USD
2009
4.0% to 4.8%
1.9% to 4.8%
2008
5.3% to 7.1%
3.5% to 4.8%
*SGVMC113416*
- 36 6. Accounts and Notes Receivable
This account consists of the following:
2008
2009
(In Thousands)
Trade:
Real estate
Electronics manufacturing
Information technology and business process
outsourcing (BPO)
Automotive
International and others
Related parties (Note 29)
Advances to other companies
Advances to contractors and suppliers
Investment in bonds classified as loans and
receivables
Others
Less allowance for doubtful accounts
Less noncurrent portion
P
=13,011,442
3,881,439
=10,565,254
P
3,152,168
877,188
849,301
3,803
3,390,161
2,888,665
2,604,816
352,084
665,670
64,074
7,869,143
3,643,843
2,496,665
200,000
556,589
28,263,404
372,982
27,890,422
2,657,623
P
=25,232,799
–
1,526,961
30,335,862
357,831
29,978,031
6,694,021
=23,284,010
P
The classes of trade receivables of the Group follow:
Real estate
Real estate receivables are receivables relating to residential development which pertain to
receivables from the sale of high-end; upper middle-income and affordable residential lots and
units and leisure community developments; construction contracts which pertain to receivables
from third party construction projects; shopping centers which pertain to lease receivables of retail
space; corporate business which pertain to lease receivables of office and factory buildings and
receivables from the sale of office buildings and industrial lots; and management fees which
pertain to facility management fees receivable.
The sales contracts receivable, included in real estate receivables, are collectible in monthly
installments over a period of one to ten years and bear annual interest rates ranging from 2.5% to
18.0% computed on the diminishing balance of the principal. Titles to real estate properties are
not transferred to the buyers until full payment has been made.
Electronics manufacturing
Electronics manufacturing receivables pertain to receivables arising from manufacturing and other
related services for electronic products and components and collectible within 30 to 60 days from
invoice date.
*SGVMC113416*
- 37 Information technology and BPO
Information technology and BPO receivables arose from venture capital for technology
businesses; provision of value-added content for wireless services, online business-to-business and
business-to-consumer services; electronic commerce; technology infrastructure sales and
technology services; and onshore- and offshore-BPO services and are normally collected within 30
to 60 days of invoice date.
Automotive
Automotive receivables are receivables relating to manufacture and sale of passenger cars and
commercial vehicles and are collectible within 30- to 90- days from date of sale.
International and others
International and other receivables arose from investments in overseas property companies and
projects, charter services, agri-business and others and are generally on 30 to 60 day terms.
The nature of the Group’s other receivables follows:
Receivables from related parties and advances to other companies
Receivables from related parties include notes receivable issued to related parties which are
interest- bearing and payable based on the terms of the notes. Advances to other companies are
due and demandable.
Advances to contractors and suppliers
Advances to contractors and suppliers are recouped every progress billing payment date depending
on the percentage of accomplishment.
Investment in bonds classified as loans and receivables
Investment in bonds classified as loans and receivables pertain to ALI’s investment in Land Bank
of the Philippines’s (LBP’s) 7.25% unsecured subordinated notes due 2019, callable with step-up
interest in 2014. Fitch Ratings assigned a National Long-term rating of AA (phl) to LBP.
Others
Other receivables include accrued interest receivable, receivable from employees and other
nontrade receivables.
*SGVMC113416*
- 38 Movements in the allowance for doubtful accounts follow (in thousands):
At January 1
Provisions during the year
(Note 21)
Write-offs
Reversals
At December 31
Individually impaired
Collectively impaired
Total
Gross amount of loans and
receivables individually
determined to be impaired
At January 1
Provisions during the year
(Note 21)
Write-offs
Reversals
At December 31
Individually impaired
Collectively impaired
Total
Gross amount of loans and
receivables individually
determined to be impaired
Real Estate
P
=136,729
Electronics
Manufacturing
P
=36,277
Automotive
P
=26,324
2009
Information
Technology
and BPO
P
=19,120
International
and Others
P
=61,160
Total
P
=357,831
36,587
(9,778)
(57,253)
P
=47,777
P
=36,033
11,744
P
=47,777
217,208
(92,386)
(109,671)
P
=372,982
P
=337,046
35,936
P
=372,982
84,492
(5,878)
(12,533)
P
=202,810
P
=178,618
24,192
P
=202,810
7,625
(18,323)
(11,143)
P
=14,436
P
=14,436
–
P
=14,436
4,127
–
–
P
=30,451
P
=30,451
–
P
=30,451
58,886
(85)
(516)
P
=77,405
P
=77,405
–
P
=77,405
P
=178,618
P
=14,436
P
=30,451
P
=77,405
P
=103
P
=36,033
P
=337,046
Automotive
=26,107
P
2008
Information
Technology
and BPO
=18,261
P
International
and Others
=61,160
P
Others
=83,130
P
Total
=339,346
P
14,006
–
(18,915)
=78,221
P
=75,160
P
3,061
=78,221
P
88,871
(44,305)
(26,081)
=357,831
P
=273,536
P
84,295
=357,831
P
Real Estate
=119,508
P
Electronics
Manufacturing
=31,180
P
61,526
(44,305)
–
=136,729
P
=82,628
P
54,101
=136,729
P
7,256
–
(2,159)
=36,277
P
=36,277
P
–
=36,277
P
=83,124
P
=36,277
P
217
–
–
=26,324
P
=217
P
26,107
=26,324
P
=217
P
25,491
(58,322)
(28,226)
P
=103
P
=103
–
P
=103
Others
P
=78,221
5,866
–
(5,007)
=19,120
P
=19,120
P
–
=19,120
P
–
–
–
=61,160
P
=60,134
P
1,026
=61,160
P
=19,120
P
=60,134
P
=122,221
P
=321,093
P
*SGVMC113416*
- 39 As of December 31, 2009 and 2008, certain receivables with a nominal amount of
=12,502.9 million and P
P
=14,720.2 million, respectively, were recorded initially at fair value. The
fair value of the receivables was obtained by discounting future cash flows using the applicable
rates of similar types of instruments. The unamortized discount amounted to P
=1,766.0 million and
=843.4 million as of December 31, 2009 and 2008, respectively.
P
In April 2009 and November 2008, ALI Group entered into agreements with certain financial
institutions for the sale of real estate receivables without recourse amounting to P
=1,193.9 million
and P
=1,537.0 million at average discount rates ranging from 8.3% to 9.8% and 6.4%, respectively.
The discount on these receivables amounting to P
=40.6 million and P
=103.8 million as of
December 31, 2009 and 2008, respectively, has been included under “Other charges” in the
consolidated statement of income.
Other receivables include IMI’s insurance claim amounting to US$5.6 million (P
=258.7 million) for
damages to equipment and inventories caused by a fire incident in IMI’s plant in Cebu, Philippines
in May 2009. The gain from the insurance claim is included under “Other income” in the
consolidated statement of income (see Note 21).
7. Inventories
This account consists of the following:
2008
2009
(In Thousands)
Real estate inventories:
Subdivision land for sale
At cost
At NRV
Condominium, residential and commercial
units for sale - at cost
Club shares - at cost
Materials, supplies and others - at NRV (cost of
=1,473,369 in 2009 and P
P
=1,650,194 in 2008)
Work-in-process - at cost
Vehicles - at cost
Finished goods - at cost
Parts and accessories - at NRV (cost of
=124,925 in 2009 and P
P
=135,296 in 2008)
Construction materials - at cost
P
=4,230,063
524,158
=3,156,622
P
608,955
3,521,952
242,320
3,681,273
281,022
1,215,129
253,622
398,849
222,446
1,122,616
344,240
265,478
268,958
96,691
91,818
P
=10,797,048
108,576
173,615
=10,011,355
P
Inventories recognized as cost of sales amounted to P
=34.3 billion, P
=34.4 billion and P
=30.2 billion
in 2009, 2008 and 2007, respectively, and were included under costs of sales and services in the
consolidated statement of income (see Note 21).
*SGVMC113416*
- 40 The Group recorded a provision for impairment amounting to P
=78.1 million and P
=136.6 million in
2009 and 2008. The provision is included under “Other charges” in the consolidated statement of
income (see Note 21).
In May 2009, IMI lost inventories amounting to US$0.6 million (P
=27.7 million), due to a fire
incident in its plant in Cebu, Philippines. The loss is included under “General and administrative
expenses” in the consolidated statement of income (see Note 21).
8. Other Current Assets
This account consists of the following:
2008
(In Thousands)
=1,845,997
P
P
=1,808,813
1,102,560
1,426,839
2,233,201
926,860
–
925,694
1,209,148
914,243
65,405
–
634,083
544,555
=7,090,394
P
P
=6,547,004
2009
Prepaid expenses
Value-added input tax
Financial assets at FVPL
Treasury bills (Note 11)
Creditable withholding tax
HTM investments
Others
Financial assets at FVPL consist of:
Held for trading:
Government securities
Designated as at FVPL:
Investment securities
2009
2008
(In Thousands)
P
=433,821
=1,778,720
P
493,039
P
=926,860
454,481
=2,233,201
P
Government securities pertain to treasury bonds that have yields to maturity of 4.2% to 4.8% in
2009 and 5.5% to 6.4% in 2008. The Group recognized unrealized loss on these government
securities amounting to P
=0.7 million in 2009, P
=3.9 million in 2008 and unrealized gain of
=18.0 million in 2007 (see Note 21). The Group recognized realized gains on disposal amounting
P
to P
=25.2 million and P
=1.1 million in 2009 and 2008, respectively (see Note 21).
Investment securities pertain mostly to the Group’s investment in The Rohatyn Group (TRG)
Allocation LLC, which has a fair value of US$9.4 million (P
=448.2 million) as of December 31,
2008. Unrealized gains on this investment amounted to US$0.3 million (P
=14.7 million) and
US$2.9 million (P
=119.5 million) in 2009 and 2008, respectively (see Note 21). In 2009,
management evaluated the continued application of prior year’s valuation technique on the TRG
investment. It was concluded that there is no reliable measure of fair value for the TRG
investments as of December 31, 2009 and it should be stated at cost with its last obtainable fair
value as the new cost basis.
*SGVMC113416*
- 41 Prepaid expenses mainly include prepayments for commissions, marketing fees, advertising and
promotion, taxes and licenses, rentals and insurance.
The value-added input tax is applied against value-added output tax. The remaining balance is
recoverable in future periods.
HTM investments in 2008 pertain to fixed rate treasury notes that bear an effective interest rate of
11.4% which matured on February 25, 2009.
Freestanding derivatives
In 2009, IMI entered into various short-term currency forwards with aggregate nominal amount of
$27.64 million. In 2008, IMI entered into structured currency options for economic hedges which
it unwound in the second quarter of 2008 (see Note 21). The remaining outstanding structured
currency options after the unwinding program have maturity dates of up to November 2008.
As of December 31, 2009 and 2008, IMI has no outstanding derivative transactions.
Fair Value Changes on Derivatives
The net movements in fair values of the Group’s freestanding derivative instruments as of
December 31 follow (amounts in thousands):
Balance at beginning of year
Net changes in fair value of derivatives
not designated as accounting hedges
Fair value of settled instruments
Balance at end of year
2009
P
=–
2008
=143,322
P
7,665
7,665
(7,665)
P
=–
(1,448,978)
(1,305,656)
1,305,656
=–
P
The net changes in fair value of derivatives not designated as accounting hedges include hedging
losses amounting to P
=1,456 million in 2008 included under “Interest expense and other financing
charges” and fair value gain amounting to P
=7.7 million and P
=7.0 million in 2009 and 2008,
respectively, included as part of “Marked-to-market gain” under “Other income” account in the
consolidated statement of income (see Note 21).
9. Land and Improvements
This account consists of:
2008
2009
(In Thousands)
Cost
Balance at beginning of the year
Additions
Transfers*
Write-offs (Note 21)
Disposals
Balance at end of the year
P
=15,974,474
3,396,777
(804,954)
(202,983)
–
18,363,314
=16,418,181
P
145,544
(588,841)
–
(410)
15,974,474
(Forward)
*SGVMC113416*
- 42 2008
2009
(In Thousands)
Allowance for decline in value
Balance at beginning of the year
Additions
Transfers*
Balance at end of the year
P
=217,580
568,672
(5,500)
780,752
P
=17,582,562
=217,580
P
–
–
217,580
=15,756,894
P
*Transfers pertain to developed land for sale and included under “Real estate inventories” account.
On August 27, 2009, ALI and the National Housing Authority (NHA) signed a Joint Venture
Agreement to develop a 29.1-hectare North Triangle Property in Quezon City as a priming project
of the government and the private sector. The joint venture represents the conclusion of a public
bidding process conducted by the NHA which began last October 3, 2008.
ALI’s proposal, which has been approved and declared by the NHA as compliant with the Terms
of Reference of the public bidding and the National Economic Development Authority (NEDA)
Joint Venture Guidelines, features the development of a new Central Business District (CBD) in
Quezon City. The CBD will be developed as the Philippines’ first transit-oriented mixed-use
central business district that will be a new nexus of commercial activity. The proposal also aims
to benefit the NHA in achieving its mandate of providing housing for informal settlers and
transforming a non-performing asset in a model for urban renewal. The development will also
generate jobs and revenues both for the local and national governments.
ALI's vision for the property is consistent with the mandate of the Urban Triangle Development
(TriDev) Commission to rationalize and speed up the development of the East and North Triangles
of Quezon City into well-planned, integrated and environmentally balanced, mixed-use
communities. The joint venture also conforms to NHA's vision of a private sector-led and
managed model for the development of the property, similar to the development experience in Fort
Bonifacio.
The total project cost is estimated at P
=22 billion, inclusive of future development costs and the
current value of the property, which ALI and the NHA will contribute as their respective equity
share in the joint venture. ALI expects to start the development within the next two years.
In 2009, the Group recorded provision for impairment amounting P
=568.7 million. The amount of
impairment has been included under “Other charges” in the consolidated statement of income (see
Note 21).
10. Investments in Associates and Jointly Controlled Entities
This account consists of the following:
Acquisition cost
Accumulated equity in earnings
Cumulative translation adjustments and equity
reserves
2008
2009
(In Thousands)
=52,426,662
P
P
=54,906,614
15,488,891
15,991,568
658,770
P
=71,556,952
224,841
=68,140,394
P
*SGVMC113416*
- 43 The Group’s equity in the net assets of its associates and jointly controlled entities and the related
percentages of ownership are shown below:
Percentage of Ownership
2008
2009
Domestic:
Bank of the Philippine Islands and subsidiaries (BPI)
Globe Telecom, Inc. and subsidiaries (Globe)*
Stream Global Services, Inc. (Stream)
Manila Water Company, Inc. and subsidiaries*
(MWCI)
Emerging City Holdings, Inc. (ECHI)*
Cebu Holdings, Inc. and subsidiaries (CHI)
Bonifacio Land Corporation (BLC)
Berkshires Holdings, Inc. (BHI)*
Philwater Holdings Company, Inc. (Philwater)*
North Triangle Depot Commercial Corporation
(NTDCC)
Asiacom Philippines, Inc. (Asiacom)*
Alabang Commercial Corporation (ACC)*
EGS Corporation (EGS)*
Foreign:
ARCH Asian Partners L.P.
Others
Carrying Amounts
2008
2009
(In Millions)
=28,533
P
P
=29,406
18,000
17,313
4,879
–
33.5**
30.5
25.7
33.5**
30.5
–
31.5**
50.0
47.2
5.0
50.0
60.0
29.9**
50.0
47.2
5.0
50.0
60.0
4,308
3,371
1,972
1,465
1,445
1,430
3,188
2,823
1,940
1,118
1,210
1,193
49.0
60.0
50.0
–
49.0
60.0
50.0
50.0
1,417
887
609
–
1,555
843
595
3,346
1,437
1,618
P
=71,557
959
2,837
=68,140
P
19.2**
Various
19.2**
Various
* Jointly controlled entities.
** Effective ownership interest of the Company.
The fair value of investments in listed associates and jointly controlled entities for which there are
published price quotations amounted to P
=104,803.2 million and P
=79,767.2 million as of
December 31, 2009 and 2008, respectively.
Financial information on significant associates and jointly controlled entities (amounts in millions,
except earnings per share figures) follows:
BPI
Total resources
Total liabilities
Noncontrolling interest
Net interest income
Other income
Other expenses
Net income attributable to:
Equity holders of the bank
Noncontrolling interests
Earnings per share
Basic
Diluted
2009
P
=724,420
656,655
967
21,402
12,993
19,676
2008
=666,612
P
602,740
938
19,463
10,321
18,312
8,516
149
6,423
134
2.62
2.62
1.98
1.98
*SGVMC113416*
- 44 Globe
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Net operating revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2009
P
=18,415
109,228
127,643
33,576
46,359
79,935
65,807
47,834
12,569
2008
=17,541
P
102,202
119,743
33,728
35,923
69,651
65,964
48,118
11,276
94.59
94.31
84.75
84.61
MWCI
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2009
P
=9,178
34,580
43,758
5,427
21,361
26,788
9,533
4,686
3,231
2008
P8,595
=
27,774
36,369
4,231
17,680
21,911
8,914
4,396
2,788
1.31
1.31
1.13
1.13
Stream
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Revenue
Costs and expenses
Net income
Loss per share:
Basic
Diluted
2009
In US$
US$227
453
680
115
262
377
585
590
(28)
In Php*
P10,505
=
20,949
31,454
5,329
12,108
17,437
27,016
27,273
(1,320)
(3.46)
(3.46)
(159.85)
(159.85)
*Translated using the closing exchange rate at the reporting date (US$1:P
=46.20)
The financial information of Stream is based on US Generally Accepted Accounting Principles
which is different in some aspects from PFRS. Stream’s long-lived assets, goodwill and intangible
assets (included as part of noncurrent assets) have been reviewed for impairment in accordance
with these standards.
*SGVMC113416*
- 45 The following significant transactions affected the Group’s investments in its associates and
jointly controlled entities:
Investment in Globe
In June 2008, the Company sold 3.8 million shares to Singapore Telecom, Inc. (SingTel)
decreasing its ownership interest in Globe’s common shares from 33.3% to 30.5%. The
Company’s gain arising from the sale of investments in Globe shares amounted to P
=2.7 billion
(see Note 21). The Company also holds 60% of Asiacom Philippines, Inc., which owns 158.5
million Globe preferred shares. The Company does not exercise control over Asiacom since it is a
joint venture with SingTel.
Investment in eTelecare and Stream
On September 19, 2008, NewBridge International Investments, Ltd. (NewBridge), a subsidiary of
the Company through LIL, together with Providence Equity Partners (Providence), entered into a
Definitive Agreement to acquire up to all of the outstanding shares of eTelecare common shares
and American Depository Shares (ADS) for US$9.00 per share. New Bridge and Providence
formed a 50-50 joint venture company, EGS Corporation to own 100% of EGS Acquisition Corp.
On December 12, 2008, EGS Acquisition Corp. acquired through a tender offer, 98.7% of the
outstanding eTelecare common shares and ADS for a total consideration of US$285.3 million plus
US$9.4 million in transactions costs. The 22.2% eTelecare shares owned by Newbridge were
tendered and included in the purchase.
On August 14, 2009, a Share Exchange Agreement (the Agreement) was entered into by Stream,
EGS, EGS Dutchco B.V. (EGS Dutchco), and NewBridge to combine in a stock-for-stock
exchange. Under the Agreement:
·
·
·
NewBridge shall contribute all its rights with respect to the US$35.8 million advances from
EGS (see Note 29). These advances were originally borrowed by EGS from AYC Holdings.
AYC Holdings assigned the advances to NewBridge.
NewBridge shall transfer to Stream all the shares of EGS that it owns including shares that
would result from the conversion of the US$35.8 million advances; and,
Stream shall issue and deliver to NewBridge an aggregate of 20,192,068 common shares with
$0.001 par value per share provided that at the election of Stream, Stream may pay an
aggregate of $5,994 in cash for an aggregate of 1,131 shares (at $5.30 per share) of Stream
Common Stock otherwise issuable to NewBridge.
On October 1, 2009 (the Closing Date), NewBridge received a total of 20,190,937 shares of
Stream’s capital stock representing 25.5% interest in Stream and cash amounting to $5,994 in lieu
of 1,131 shares. As a result of the transaction, NewBridge:
·
·
·
derecognized its Investment in and Loan Receivable from EGS amounting to
$61.5 million and $35.8 million, respectively;
recognized an Investment in Stream amounting to $107.0 million; and,
recognized a gain from the transaction amounting to $8.8 million.
After the Closing Date, Newbridge acquired additional 320,146 common shares Stream at a total
cost of US$1.9 million.
As of December 31, 2009, Newbridge’s effective ownership in Stream is 25.76%.
*SGVMC113416*
- 46 Investment in MWCI
In various dates in 2009, the Company acquired 40.8 million common shares of MWCI for a total
consideration of P
=572.4 million. This increased the Company’s ownership interest in MWCI from
29.9% to 31.5%.
Investment in NTDCC
In 2007, a series of capital calls were made by NTDCC amounting to P
=484.8 million, increasing
ALI’s overall invested capital to P
=1,450.0 million or a 49.29% stake.
NTDCC was assigned development rights over certain areas of the MRT Depot in Quezon City by
MRT Development Co. to construct and operate a commercial center under certain terms and
conditions until the end of a 50-year development period renewable for another 25 years. NTDCC
was primarily organized to own and operate the commercial center atop the MRT Depot. NTDCC
officially started the construction of the shopping center, now known as TriNoma, in 2005 and
became operational on May 16, 2007.
Investment in ECHI, BHI and BLC
ALI Group’s investment in BLC is accounted for using the equity method because the ALI Group
has significant influence over BLC. ECHI and BHI are joint venture companies established by
ALI to indirectly hold its equity interest in BLC.
On July 31, 2008, the ALI Group acquired additional 4,360,178 shares of BLC from Fort
Bonifacio Development Corporation amounting to P
=689.0 million, equivalent to 7.66% ownership
in BLC. This resulted in an increase in ALI Group’s effective interest in BLC from 37.23% to
41.10%.
In January and October 2009, ALI Group acquired additional 2,295,207 shares of BLC from the
Development Bank of the Philippines and Metro Pacific Corporation (MPC) amounting to
=362.6 million. This resulted in an increase in the ALI Group’s effective interest in BLC from
P
41.10% as of December 31, 2008 to 45.05% as of December 31, 2009.
Investment in Philwater
The Company does not exercise control over Philwater since it is a joint venture with United
Utilities Pacific Holdings BV.
Investment in ARCH Fund
In 2006, the Company and ALI entered into a Shareholders’ Agreement with ARCH Capital
Management Co. Ltd. (ARCH Capital) and Great ARCH Co. Limited, wherein the Company and
ALI committed to invest a total of US$75.0 million in a private equity fund that will explore
property markets in Asia, excluding Japan and the Philippines. In the same year, an Amendment
and Adherence Agreement was entered into by the same parties, together with Fine State Group
Limited (Fine State) and Green Horizons Holdings Limited (Green Horizons), transferring the
interests of the Company and ALI in ARCH Capital into Fine State and Green Horizons,
respectively. Fine State and Green Horizons are effectively 100% owned Hong Kong based
subsidiaries of the Company and ALI, respectively.
The Company (through Fine State) and ALI (through Green Horizons) both have interests in the
fund management company, ARCH Capital, which is tasked to raise third party capital and pursue
investments for the Fund. As of December 31, 2009 and 2008, the Company (through Fine State)
and ALI (through Green Horizon) owned a combined interest in ARCH Capital of 50%.
*SGVMC113416*
- 47 In 2007, the private equity fund, called ARCH Asian Partners, L.P. (Fund) was established. As of
December 31, 2007, the Fund achieved its final closing, resulting in a total investor commitment
of US$330.0 million. As a result, a portion of the funds disbursed by the Company and ALI
which were invested into the Fund has been returned in 2007, reducing the Company and ALI’s
overall invested capital to P
=580.3 million as of December 31, 2007. In 2008, the Fund issued a
capital call where the Company and ALI’s share amounted to US$3.9 million. In 2009, the Fund
issued another capital call where the Company and ALI’s share amounted US$6.4 million.
As of December 31, 2009, the Company and ALI’s remaining capital commitment with the Fund
amounted to US$31.8 million.
The Company and ALI exercise significant influence over the Fund by virtue of their interest in
the general partner and in ARCH Capital. Accordingly, the Company and ALI account for their
investments in the Fund using the equity method of accounting.
Interest in Limited Partnerships of Ayala International North America (AINA)
Other investments include AINA’s interest in various Limited Partnerships with a carrying value
of P
=1,164.4 million and P
=1,950.7 million as of December 31, 2009 and 2008, respectively. These
investments are all incorporated in the United States of America (USA) and are mainly involved in
developing properties in different states in the USA. Although the interest of AINA in certain
limited partnerships exceeds 50%, these limited partnerships are accounted for under the equity
method of accounting because AINA does not have control over the financial and operating
policies of these partnerships.
In 2009, impairment loss amounting to P
=574.0 million were provided for property development
projects of certain limited partnerships with projected negligible residual values after deducting
amount of repayment on loans drawn for the support and costs incurred for the projects and those
that have been served with notices of default by banks. The impairment loss is netted against the
equity in net income of associates and jointly controlled entities in the consolidated statements of
income.
The excess of cost of investments over the Group’s equity in the net assets of its associates and
jointly controlled entities accounted for under the equity method amounted to P
=12.2 billion and
=10.5 billion and as of December 31, 2009 and 2008, respectively.
P
As of December 31, 2009 and 2008, the Group has no capital commitments with its jointly
controlled entities.
11. Investments in Bonds and Other Securities
This account consists of investments in:
AFS financial assets
Quoted equity investments
Unquoted equity investments
Quoted debt investments
Less current portion (Note 8)
2009
2008
(In Thousands)
P
=877,509
2,392,489
3,269,998
1,199,154
4,469,152
925,694
P
=3,543,458
=1,449,982
P
1,614,520
3,064,502
–
3,064,502
–
=3,064,502
P
*SGVMC113416*
- 48 The unquoted equity investments include investments in TRG Global Opportunity Fund (GOF)
and TRG Special Opportunity Fund (SOF). The GOF is a multi-strategy hedge fund which invests
primarily in emerging markets securities. The SOF focuses on less liquid assets in emerging
markets (Latin America, Asia, Emerging Europe, Middle East and Africa) such as distressed debt,
NPLs, corporate high yield, mid and small cap stocks, real estate (debt and equity) and private
equity. It also includes the Group’s investment in Red River Holding in 2008. The Red River
Holding is a fund that seeks to achieve a balanced and diversified portfolio of Vietnamese
companies. In 2009, capital calls amounting to US$4.6 million were made, bringing the total
investment in Red River Holdings to US$8.1 million as of December 31, 2009. As of
December 31, 2009, the remaining capital commitment of the Group relating to its investment in
Red River Holding amounted to US$2.0 million.
Unquoted equity investments also include unlisted preferred shares in a public utility company
which the Group will continue to carry as part of the infrastructure that it provides for its real
estate development projects. These are carried at cost less impairment, if any.
As of December 31, 2009 and 2008, the Net Unrealized Gain (Loss) on AFS financial assets as
reflected in the equity section is broken down as follows:
2009
(In Thousands)
Net unrealized gain on AFS financial assets of
the Company and its consolidated subsidiaries
Share in the net unrealized loss on AFS financial
assets of associates
2008
P
=463,852
=78,320
P
(339,936)
P
=123,916
(709,447)
(P
=631,127)
The rollforward of unrealized gain (loss) on AFS financial assets of the Company and its
consolidated subsidiaries is as follows:
Balance at beginning of year
Changes in fair value recognized in equity
Recognized in profit and loss
Balance at end of year
2008
2009
(In Thousands)
=834,589
P
P
=78,320
(1,862,720)
409,245
1,106,451
(23,713)
=78,320
P
P
=463,852
*SGVMC113416*
- 49 -
12. Investment Properties
The movements in investment properties follow:
2009
Land
Cost
Balance at beginning of the year
P
=5,772,835
Additions
273,744
Transfers
–
Retirements
(247)
Balance at end of the year
6,046,332
Accumulated Depreciation and Amortization
Balance at beginning of the year
152,589
Depreciation and amortization (Note 21)
–
Reversals of impairment loss
(125,973)
Transfers
–
Retirements
–
Balance at end of the year
26,616
Net Book Value
P
=6,019,716
Building
(In Thousands)
Total
P
=21,406,904
3,239,075
5,944,985
(686,555)
29,904,409
P
=27,179,739
3,512,819
5,944,985
(686,802)
35,950,741
5,682,170
982,125
–
191,426
(21,326)
6,834,395
P
=23,070,014
5,834,759
982,125
(125,973)
191,426
(21,326)
6,861,011
P
=29,089,730
2008
Land
Cost
Balance at beginning of the year
=5,798,283
P
Additions
3,932
Additions through business
combination (Note 22)
–
Retirements
(29,380)
Balance at end of the year
5,772,835
Accumulated Depreciation and Amortization
Balance at beginning of the year
152,589
Depreciation and amortization (Note 21)
–
Additions through business
combination (Note 22)
–
Retirements
–
Balance at end of the year
152,589
=5,620,246
P
Net Book Value
Building
(In Thousands)
=16,898,156
P
769,684
Total
=22,696,439
P
773,616
4,017,955
(278,891)
21,406,904
4,017,955
(308,271)
27,179,739
5,127,677
730,845
5,280,266
730,845
73,828
(250,180)
5,682,170
=15,724,734
P
73,828
(250,180)
5,834,759
=21,344,980
P
Certain parcels of land are leased to several individuals and corporations. Some of the lease
contracts provide, among others, that within a certain period from the expiration of the contracts,
the lessee will have to demolish and remove all improvements (such as buildings) introduced or
built within the leased properties. Otherwise, the lessor will cause the demolition and removal
thereof and charge the cost to the lessee unless the lessor occupies and appropriates the same for
its own use and benefit.
*SGVMC113416*
- 50 The aggregate fair value of the Group’s investment properties amounted to P
=168.9 billion in 2009
and P
=131.91 billion in 2008. The fair values of the investment properties were determined based
on valuations performed by independent professional qualified appraisers.
Consolidated rental income from investment properties amounted to P
=7.4 billion in 2009,
=5.9 billion in 2008 and P
P
=5.5 billion in 2007. Consolidated direct operating expenses arising from
the investment properties amounted to P
=2.5 billion in 2009, P
=3.1 billion in 2008 and
=2.4 billion in 2007.
P
13. Property, Plant and Equipment
The movements in property, plant and equipment follow:
2009
Land,
Buildings and
Improvements
(Note 18)
Cost
At January 1
Additions
Additions through business
combination (Note 22)
Disposals
Transfers
Exchange differences
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year (Note 21)
Disposals
Transfers
Exchange differences
At December 31
Net book value
P
= 3,817,895
715,796
Machinery
and
Equipment
(Note 28)
P
= 7,641,215
473,065
Hotel
Property and
Equipment
(Note 18)
P
= 2,927,132
90,058
Furniture,
Fixtures and Transportation ConstructionEquipment
Equipment
in-Progress
(In Thousands)
P
= 1,999,690
587,372
P
= 1,409,698
545,770
65,576
(31,375)
140,500
(69,903)
4,638,489
136,376
(688,579)
–
(106,771)
7,455,306
–
(94,750)
–
–
2,922,440
–
(41,855)
–
(26,953)
2,518,254
–
(431,027)
–
(1,769)
1,522,672
1,980,551
4,065,995
1,499,952
1,594,811
735,350
347,132
(1,622)
101,567
(44,189)
2,383,439
P
= 2,255,050
1,205,873
(333,996)
–
(57,188)
4,880,684
P
= 2,574,622
125,105
(86,792)
–
–
1,538,265
P
= 1,384,175
306,969
(33,975)
–
(21,538)
1,846,267
P
= 671,987
142,894
(147,907)
–
(978)
729,359
P
= 793,313
Land,
Buildings and
Improvements
(Note 18)
Machinery
and
Equipment
(Note 28)
Hotel
Property and
Equipment
(Note 18)
=6,675,439
P
1,269,742
=2,693,069
P
236,064
P
= 5,965,846
76,709
–
(2,588)
(5,963,123)
15,872
92,716
–
–
–
–
–
–
P
= 92,716
Total
P
= 23,761,476
2,488,770
201,952
(1,290,174)
(5,822,623)
(189,524)
19,149,877
9,876,659
2,127,973
(604,292)
101,567
(123,893)
11,378,014
P
= 7,771,863
2008
Cost
At January 1
Additions
Additions through business
combination (Note 22)
Disposals
Transfers
Exchange differences
At December 31
=3,407,607
P
376,720
227
(317,916)
29,829
321,428
3,817,895
70,046
(235,628)
(705,809)
567,425
7,641,215
–
(2,001)
–
–
2,927,132
Furniture,
Fixtures and
Equipment
(In Thousands)
Transportation
Equipment
Constructionin-Progress
Total
=1,985,808
P
276,505
=1,040,022
P
477,798
=1,354,449
P
3,328,603
=17,156,394
P
5,965,432
23,698
(59,994)
(300,200)
73,873
1,999,690
1,640
(118,428)
–
8,666
1,409,698
1,287,009
(4,215)
–
–
5,965,846
1,382,620
(738,182)
(976,180)
971,392
23,761,476
(Forward)
*SGVMC113416*
- 51 2008
Machinery
and
Equipment
(Note 28)
Hotel
Property and
Equipment
(Note 18)
=1,760,130
P
=3,372,359
P
325,341
36,003
Land,
Buildings and
Improvements
(Note 18)
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year (Note 21)
Impairment loss for the year
(Note 21)
Additions through business
combination (Note 22)
Disposals
Transfers
Exchange differences
At December 31
Net book value
26
(283,376)
–
142,427
1,980,551
=1,837,344
P
Furniture,
Fixtures and
Equipment
(In Thousands)
Transportation
Equipment
Constructionin-Progress
Total
=1,399,430
P
=1,515,742
P
=615,888
P
=–
P
=8,663,549
P
938,985
102,523
260,529
205,204
–
1,832,582
–
–
37,400
–
–
73,403
65,557
(187,297)
(395,901)
272,292
4,065,995
=3,575,220
P
–
(2,001)
–
–
1,499,952
=1,427,180
P
8,632
(44,063)
(206,512)
23,083
1,594,811
=404,879
P
1,439
(90,688)
–
3,507
735,350
=674,348
P
–
–
–
–
–
=5,965,846
P
75,654
(607,425)
(602,413)
441,309
9,876,659
=13,884,817
P
Consolidated depreciation and amortization expense on property, plant and equipment amounted
to P
=2,128.0 million in 2009, P
=1,832.6 million in 2008 and P
=1,819.2 million in 2007 (see Note 21).
In 2008, IMI recognized an impairment loss amounting to P
=73.4 million representing the carrying
amount of the production assets dedicated to EPSON Imaging Devices, Panasonic Communication
of the Philippines and Panac Co. Ltd., net of reimbursements received, following the pretermination of the existing manufacturing agreements with said companies (see Note 21).
Part of the property, plant and equipment derecognized by IMI pertains to facilities damaged by
fire with book value amounting to US$0.1 million (P
=4.6 million). The loss from the damaged
facilities is included under “General and administrative” in the consolidated statement of income.
Starting January 2009, IMI extended the estimated useful life of Surface Mount Technology and
other production equipment from five to seven years due to factors which demonstrated that the
equipment can be used for more than five years. The change in estimated useful life reduced
depreciation expense for the year by US$2.07 million (P
=95.6 million).
14. Intangible Assets
The movements in intangible assets follow:
Cost
At January 1
Additions through business
combination (Note 22)
Additions during the year
Exchange differences
At December 31
Accumulated amortization and
impairment loss
At January 1
Amortization (Note 21)
Exchange differences
At December 31
Net book value
Goodwill
Customer
Relationships
Order
Backlog
2009
Unpatented
Technology
(In Thousands)
Developed
Software
Licenses
Total
P
=3,982,256
P
=1,226,469
P
=4,128
P
=4,752
P
=20,312
P
=161,582
P
=5,399,499
550,506
221,931
(86,999)
4,667,694
280,430
–
(44,856)
1,462,043
662,591
–
795,908
191,711
(28,305)
959,314
P
=502,729
662,591
P
=4,005,103
–
–
4,128
4,128
–
4,128
P
=–
–
–
(132)
4,620
14,505
–
(645)
34,172
–
19,722
(959)
180,345
845,441
241,653
(133,591)
6,353,002
2,727
957
(114)
3,570
P
=1,050
20,312
7,938
(238)
28,012
P
=6,160
48,436
35,281
(214)
83,503
P
=96,842
1,534,102
235,887
(28,871)
1,741,118
P
=4,611,884
*SGVMC113416*
- 52 -
Cost
At January 1
Additions through business
combination (Note 22)
Exchange differences
At December 31
Accumulated amortization and
impairment loss
At January 1
Amortization (Note 21)
Exchange differences
At December 31
Net book value
Goodwill
Customer
Relationships
Order
Backlog
2008
Unpatented
Technology
(In Thousands)
Developed
Software
Licenses
Total
=3,264,238
P
=936,354
P
=4,128
P
=4,128
P
=20,312
P
=140,946
P
=4,370,106
P
343,743
374,275
3,982,256
153,680
136,435
1,226,469
–
–
4,128
–
624
4,752
–
–
20,312
–
20,636
161,582
497,423
531,970
5,399,499
662,591
–
–
662,591
=3,319,665
P
414,487
318,766
62,655
795,908
=430,561
P
4,128
–
–
4,128
=–
P
1,652
826
249
2,727
=2,025
P
11,551
8,761
–
20,312
=–
P
–
48,436
–
48,436
=113,146
P
1,094,409
376,789
62,904
1,534,102
=3,865,397
P
Goodwill mainly comprises the excess of the acquisition cost over the fair value of the identifiable
assets and liabilities of companies acquired by IMI and Integreon, Inc (Integreon).
Impairment testing of goodwill for IMI
Goodwill acquired through business combinations have been allocated to three individual CGUs
of IMI for impairment testing as follows:
2009
In US$
Speedy Tech Electronics, Ltd.
Saturn
M. Hansson Consulting, Inc.
US$45,128
657
441
US$46,226
2008
In US$
In Php**
In Php*
(In Thousands)
US$45,128
P2,144,483
=
P
=2,084,916
657
31,221
30,353
441
20,956
20,374
US$46,226
=2,196,660
P
P
=2,135,643
*Translated using the closing exchange rate at the statements of financial position date (US$1:P
=46.20)
**Translated using the closing exchange rate at the statements of financial position date (US$1:P
=47.52)
The recoverable amounts of the CGUs have been determined based on value-in-use calculations
using cash flow projections from financial budgets approved by management covering a five-year
period. The pre-tax discount rate applied to cash flow projections is 12% and 10% in 2009 and
2008, respectively, and cash flows beyond the five-year period are extrapolated using a steady
growth rate of 1% which does not exceed the compounded annual growth rate for the global EMS
industry.
Key assumptions used in value-in-use calculations
The calculations of value-in-use for the CGUs are most sensitive to assumptions on budgeted
gross margins, growth rates and pre-tax discount rates.
Gross margins are based on the mix of business model arrangements with the customers whether
consigned or turnkey. The forecasted growth rate is based on a steady growth rate which does not
exceed the compounded annual growth rate for the global EMS industry. Discount rates reflect
management’s estimate of the risks specific to each CGU. This is the benchmark used by
management to assess operating performance.
Based on the value-in-use calculations, the carrying values of the CGUs did not exceed their
recoverable amounts. Therefore, IMI did not recognize any impairment loss in 2009 and 2008.
*SGVMC113416*
- 53 With regard to the assessment of value-in-use of the three CGUs, IMI management believes that a
reasonably possible change in any of the above key assumptions will not cause the carrying value
of the CGU to materially exceed its recoverable amount.
Impairment testing of goodwill for Integreon
The Goodwill of Integreon arose from the acquisition of the following companies:
2009
In US$
Grail
CBF Group, Inc.
Integreon Managed Solutions, Inc.
Datum Legal, Inc.
Contentscape
US$11,557
10,153
8,770
5,374
370
US$36,224
2008
In US$
In Php**
In Php*
(In Thousands)
=–
P
US$–
P
=533,933
482,471
10,153
469,069
8,770
416,750
405,174
3,678
174,779
248,279
370
17,582
17,094
US$22,971
=1,091,582
P
P
=1,673,549
*Translated using the closing exchange rate at the reporting date (US$1:P
=46.20)
**Translated using the closing exchange rate at the reporting date (US$1:P
=47.52)
Goodwill has been allocated to the Integreon CGU for purposes of impairment testing.
In 2009, the recoverable amount of the CGU has been determined based on fair value less cost to
sell. The fair value less cost to sell calculation considered the enterprise value of the CGU based
on a recent tender offer to which the goodwill is allocated.
In 2008, the recoverable amount of the CGU has been determined based on value-in-use
calculation using cash flow projections from financial budgets approved by management covering
a five-year period. The pre-tax discount rate applied to cash flow projections is 22% and cash
flows beyond the five-year period are extrapolated using a steady growth rate of 5%.
Key assumptions used in value-in-use calculation
The calculations of value-in-use for the CGU are most sensitive to the following assumptions:
revenue growth for the five-year projection period, growth rate beyond the five-year period and
the pre-tax discount rate. The assumptions are based on management’s estimate after considering
industry outlook.
Based on the value-in-use calculation, the carrying value of the CGU did not exceed its
recoverable amount. Therefore, Integreon did not recognize any impairment loss in 2008.
With regard to the assessment of value-in-use of the CGU, Integreon management believes that a
reasonably possible change in any of the above key assumptions will not cause the carrying value
of the CGU to materially exceed its recoverable amount.
15. Noncurrent Assets Held for Sale
In 2006, the Group had negotiations to sell its equity interests in Makati Property Ventures, Inc.
(MVPI) and Hermill Investments Pte. Ltd. (Hermill).
*SGVMC113416*
- 54 In 2007, the Group recognized a gain amounting to P
=598.8 million as a result of the
consummation of the sale of MPVI and P
=26.0 million as a result of the Hermill sale (included in
“Income associated with noncurrent assets held for sale” in the consolidated statement of income).
EPS on income associated with noncurrent assets held for sale attributable to equity holders of the
Company follows (amounts in thousands, except for EPS figures):
2007
=624,788
P
Income associated with noncurrent assets held for sale
Less: Income associated with noncurrent assets held for sale
attributable to noncontrolling interests
Weighted average number of common shares for basic EPS
Dilutive shares arising from stock options
Adjusted weighted average number of common shares for diluted EPS
Basic EPS
Diluted EPS
139,982
484,806
496,787
2,374
499,161
=0.98
P
=0.97
P
16. Accounts Payable and Accrued Expenses
This account consists of the following:
Accounts payable
Accrued expenses
Dividends payable
Accrued project costs
Taxes payable
Accrued personnel costs
Interest payable
Retentions payable
Related parties (Note 29)
2008
2009
(In Thousands)
=13,922,547
P
P
=14,584,321
6,821,712
6,152,842
1,333,740
2,264,306
2,022,903
2,136,700
1,659,597
1,470,295
823,717
427,502
501,251
402,278
262,330
120,938
135,739
105,355
=27,483,536
P
P
=27,664,537
Accounts payable and accrued expenses are noninterest-bearing and are normally settled on 15- to
60-day terms. Other payables are noninterest-bearing and are normally settled within one year.
Accrued expenses consist mainly of accruals for light and power, marketing costs, film share,
professional fees, postal and communication, supplies, repairs and maintenance, transportation and
travel, security, insurance, and representation.
*SGVMC113416*
- 55 17. Other Current Liabilities
This account consists of:
Customers’ deposits
Other liabilities
2008
2009
(In Thousands)
=1,246,593
P
P
=2,374,457
306,937
447,475
=1,553,530
P
P
=2,821,932
18. Short-term and Long-term Debt
Short-term debt consists of:
Philippine peso debt - with interest rates ranging
from 5.0% to 9.5% per annum in 2009 and 7.0%
to 9.6% per annum in 2008
Foreign currency debt - with interest rates ranging
from 1.9% to 3.9% per annum in 2009 and 2.5%
to 6.4% per annum in 2008
2009
2008
(In Thousands)
P
=1,669,875
=1,501,000
P
968,783
P
=2,638,658
1,254,447
=2,755,447
P
The Philippine peso debt consists mainly of ALI’s and its subsidiaries’ bank loans of
=1,423.0 million and P
P
=1,279.5 million as of December 31, 2009 and 2008, respectively. These are
unsecured peso-denominated short-term borrowings with interest rates of 5.0%per annum in 2009
and 7.0% to 8.5% per annum in 2008.
The foreign currency debt consists mainly of BHL’s and IMI’s loans from various banks.
Long-term debt consists of:
2008
2009
(In Thousands)
The Company:
Bank loans - with interest rates ranging from
4.7% to 4.8% per annum in 2009 and 6.3% to
6.6% per annum in 2008 and varying maturity
dates up to 2013
Fixed Rate Corporate Notes (FXCNs) with
interest rates ranging from 6.7% to 8.4% per
annum and varying maturity dates up to 2016
Bonds due 2012
Syndicated term loan
P
=6,985,000
=6,990,000
P
11,485,000
6,000,000
1,498,333
25,968,333
10,662,500
6,000,000
1,584,907
25,237,407
(Forward)
*SGVMC113416*
- 56 2008
2009
(In Thousands)
Subsidiaries:
Loans from banks and other institutions:
Foreign currency - with interest rates ranging
from 3.3% to 15.0% per annum in 2009
and 2.7% to 15.0% per annum in 2008
Philippine peso - with interest rates ranging
from 7.0% to 9.7% per annum in 2009 and
9.5% to 20.0% per annum in 2008
Bonds:
Due 2009
Due 2012
Due 2013
Due 2016
FXCNs
Less current portion
P
=10,724,816
=10,985,557
P
7,759,743
7,819,128
–
41,835
4,000,000
10,000
5,380,000
27,916,394
53,884,727
2,453,144
P
=51,431,583
106,930
–
4,000,000
–
3,580,000
26,491,615
51,729,022
1,478,871
=50,250,151
P
The Company
Generally, the Company’s long-term loans are unsecured. Due to certain regulatory constraints in
the local banking system regarding loans to directors, officers, stockholders and related interest,
some of the Company’s credit facilities with a local bank are secured by shares of stock of a
consolidated subsidiary with fair value of P
=6,712.9 million as of December 31, 2009 and
=2,844.0 million as of December 31, 2008 in accordance with BSP regulations.
P
All credit facilities of the Company outside of this local bank are unsecured, and their respective
credit agreements provide for this exception. The Company positions its deals across various
currencies, maturities and product types to provide utmost flexibility in its financing transactions.
In 2007, the Company issued P
=3.5 billion FXCNs consisting of 5- and 7-year notes to a local bank
with fixed interest rates of 6.73% and 6.70% per annum, respectively.
In 2005, the Company issued P
=7.2 billion FXCNs consisting of 5- and 7-year notes to various
institutions with fixed interest rates of 10.00% and 10.38% per annum, respectively.
In 2007, the Company issued 6.83% Fixed Rate Bonds with an aggregate principal amount of
=6.0 billion to mature in 2012. Prior to maturity, the Company may redeem in whole the
P
outstanding bonds on the twelfth and sixteenth coupon payment date. The bonds have been rated
“PRS Aaa” by the Philippine Ratings Services Corporation (PhilRatings).
In the first quarter of 2008, the Company availed of a syndicated term loan amounting to
=1.5 billion which bears fixed interest rate of 6.75% per annum and will mature in 2018.
P
In February 2009, the Company issued P
=4.0 billion FXCNs consisting of two 5-year notes and a 6year note to various financial institutions with fixed interest rates of 7.75% and 7.95% per annum
for the 5-year notes and 8.15% per annum for the 6-year note.
*SGVMC113416*
- 57 In March 2009, the Company issued P
=1.0 billion FXCNs consisting of 7-year note to a local
financial institution with fixed interest rate of 8.40% per annum.
In August 2009, the Company issued P
=3.0 billion FXCNs consisting of a 5-year note to various
institutions with fixed interest rate of 7.45% per annum.
Subsidiaries
Foreign Currency Debt
In 2008, the Company, through a wholly owned subsidiary, entered into a 5-year syndicated term
loan with a foreign bank, with the Company as guarantor, for US$50.0 million at a rate of 52
points over the 1-, 3- or 6- month LIBOR at the Company’s option.
In 2007, the Company, through a wholly owned subsidiary, entered into a 5-year syndicated loan
for US$150.0 million at a rate of 71.4 basis points over the 1-month, 3-month or 6-month LIBOR
at the Company’s option.
In 2006, IMI obtained a US$40.0 million 5-year term clean loan from a local bank payable in a
single balloon payment at the end of the loan term. IMI may, at its option, prepay the loan in part
or in full, together with the accrued interest without penalty. The interest is repriced quarterly at
the rate of 3-months LIBOR plus margin of 0.80% and is payable quarterly. In 2007, IMI prepaid
a portion of the loan amounting to US$10.0 million.
In 2006, IMI Singapore, a wholly owned subsidiary of IMI, obtained a US$40.0 million variable
rate 5-year loan, repayable in 10 equal semi-annual installments of US$4.0 million commencing
on May 29, 2007 and maturing on November 29, 2011. The interest is repriced semi-annually at
the LIBOR rate plus 0.75% quoted by the bank and is payable semi-annually. As of
December 31, 2009 and 2008, the outstanding balance of the loan amounted to US$16.0 million
and US$24.0 million, respectively.
Philippine Peso Debt
The Philippine Peso loans pertain to ALI subsidiaries’ loans that will mature on various dates up
to 2015 with floating interest rates at 100 basis points to 200 basis points spread over benchmark
91-day PDST-R1/R2 and fixed interest rates of 6.97% to 9.72% per annum. The term loan facility
of a subsidiary is secured by a Mortgage Trust Indenture over land and building with a total
carrying value of P
=811.2 million and P
=612.4 million as of December 31, 2009 and 2008,
respectively.
Home Starter Bonds due 2009
ALI launched in March 2006 its Homestarter Bonds of up to P
=169.2 million with fixed interest
rate of 5% per annum. The Homestarter Bonds are being issued monthly in a series for a period of
thirty six (36) months with final maturity in March 2009. On maturity date, the principal amount
of the bond is redeemable with the accrued interest. Should the bondholder decide to purchase an
Ayala Land property, he is entitled to an additional 10% of the aggregate face value of the bond as
bonus credit which together with the principal and accrued interest can be applied as
downpayment towards the purchase of an Ayala Land Premier, Alveo or Avida property. As of
December 31, 2008, the outstanding Homestarter Bonds amounted to P
=106.9 million. Bonds that
were not applied as downpayment for property and remained outstanding were fully redeemed on
March 16, 2009, the final maturity date.
*SGVMC113416*
- 58 Homestarter Bond due 2012
ALI launched a new issue of the Homestarter Bond in October 2009. The bond is to be issued
over a series of 36 issues, once every month which commenced on October 16, 2009, up to
=14.0 million per series or up to an aggregate issue amount of P
P
=504.0 million over a 3-year period.
The bond carries an interest rate of 5% per annum, payable on the final maturity date or upon the
bondholder’s exercise of the option to apply the bond to partial or full payment for a residential
property offered for sale by ALI or its affiliates. In the event of application of the bond to partial
or full payment for property, the bondholder shall be entitled to, in addition to interest, a notional
credit equivalent to 10% of the aggregate face value of the bond (the “bonus credit”). The bonus
credit is subject to a maximum of 5% of the net selling price of the property selected. The bond is
alternatively redeemable at par plus accrued interest on the third anniversary of the initial issue
date.
5-Year Bonds due 2013
In 2008, ALI issued P
=4.0 billion bonds due 2013 with fixed rate equivalent to 8.75% per annum.
The PhilRatings assigned a PRS Aaa rating on the bonds indicating that it has the smallest degree
of investment risk. Interest payments are protected by a large or by an exceptionally stable margin
and principal is assured. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
PRS Aaa is the highest credit rating possible on PhilRatings’ rating scales for long-term issuances.
5-,7- and 10-year FXCNs due in 2011, 2013 and 2016
In 2006, ALI issued P
=3.0 billion FXCNs consisting of 5-, 7- and 10-year notes issued to various
financial institutions and will mature on various dates up to 2016. The FXCNs bear fixed interest
rates ranging from 7.3% to 7.8% per annum depending on the term of the notes.
10-year FXCNs due 2012
ALI also has outstanding P
=580.0 million 10-year FXCNs with fixed interest rate of 14.9% per
annum issued in 2002 and due 2012. In February 2009, ALI prepaid in full such FXCNs.
5-, 7- and 10-year FXCN due 2014, 2016 and 2019
In 2009, ALI issued an aggregate P
=2.38 billion in 5-, 7- and 10-year notes to various financial
institutions and retail investors. The notes will mature on various dates up to 2019. The FXCNs
bear fixed interest rates ranging from 7.76% to 8.90%.
7-year FXCN due 2016
In 2009, ALI executed a P
=1.0 billion committed FXCN facility with a local bank, of which an
initial P
=10 million was drawn on October 12, 2009. The FXCN bears a floating interest rate based
on the 3-month PDST-R1 plus a spread of 0.96%, repriceable quarterly. The initial note drawn,
together with any future drawings, will mature on the seventh anniversary of the initial drawdown
date.
The loan agreements on long-term debt of the Company and certain subsidiaries provide for
certain restrictions and requirements with respect to, among others, payment of dividends,
incurrence of additional liabilities, investments and guaranties, mergers or consolidations or other
material changes in their ownership, corporate set-up or management, acquisition of treasury
stock, disposition and mortgage of assets and maintenance of financial ratios at certain levels.
These restrictions and requirements were complied with by the Group as of December 31, 2009
and 2008.
*SGVMC113416*
- 59 Total interest paid amounted to P
=3.9 billion in 2009, P
=3.7 billion in 2008 and P
=3.8 billion in 2007.
Interest capitalized by subsidiaries amounted to P
=76.3 million in 2009 and P
=151.0 million in 2008.
The average capitalization rate is 7.15% and 6.27% in 2009 and 2008, respectively.
19. Other Noncurrent Liabilities
This account consists of the following:
2008
2009
(In Thousands)
=4,880,443
P
P
=5,479,797
1,766,831
1,967,042
940,806
1,662,341
=7,588,080
P
P
=9,109,180
Deposits and deferred credits
Retentions payable
Other liabilities
Deposits are initially recorded at fair value, which was obtained by discounting future cash flows
using the applicable rates of similar types of instruments. The difference between the cash
received and its fair value is recorded as deferred credits.
Other liabilities mainly include amounts due to related parties, nontrade payables, subscription
payable and others (see Note 29).
20. Equity
The details of the Company’s common and equity preferred shares follow:
Common shares
2008
2009
Authorized shares
Par value per share
Issued and subscribed shares
Treasury shares
600,000
P
= 50
500,176
1,844
600,000
=50
P
498,362
1,378
Preferred A shares
Preferred B shares
2007
2008
2008
2007
2009
2009
(In Thousands, except par value figures)
600,000
12,000
58,000
58,000
12,000
58,000
=50
P
=100
P
=100
P
=100
P
P
=100
P
=100
414,687
12,000
58,000
58,000
12,000
58,000
324
–
–
–
–
–
Preferred shares
In February 2006, the BOD approved the reclassification of the unissued preferred shares and
redeemed preferred shares of the Company into 58 million new class of Preferred B shares with a
par value of P
=100 per share or an aggregate par value of P
=5,800 million. The Preferred B shares
have the following features: (a) optional redemption by the Company; (b) issue value, dividend
rate and declaration thereof to be determined by the BOD; (c) cumulative in payment of current
dividends as well as any unpaid back dividends and non-participating in any other further
dividends; (d) nonconvertible into common shares; (e) preference over holders of common stock
in the distribution of corporate assets in the event of dissolution and liquidation of the Company
and in the payment of the dividend at the rate specified at the time of issuance; (f) nonvoting
except in those cases specifically provided by law; (g) no pre-emptive rights to any issue of shares,
common or preferred; and; (h) reissuable when fully redeemed.
*SGVMC113416*
- 60 In July 2006, the Company filed a primary offer in the Philippines of its Preferred B shares at an
offer price of P
=100 per share to be listed and traded on the Philippine Stock Exchange (PSE). The
Preferred B shares are cumulative, nonvoting and redeemable at the option of the Company under
such terms that the BOD may approve at the time of the issuance of shares and with a dividend
rate of 9.4578% per annum. The Preferred B shares may be redeemed at the option of the
Company starting in the fifth year.
On January 31, 2008, the BOD approved the re-issuance and reclassification of 1.2 billion
redeemed Preferred A and AA shares with a par value of P
=1.00 per share into 12.0 million new
Preferred A shares with a par value of P
=100 per share with the same features as the existing
Preferred B shares, except on the issue price and dividend rate and the amendment of the
Company’s amended Articles of Incorporation to reflect the reclassification of the redeemed
Preferred shares into new Preferred A shares. On April 4, 2008, the Company’s stockholders
ratified the reissuance and reclassification.
On July 9, 2008, the SEC approved the amendments to the Company’s Articles of Incorporation
embodying the reclassification of the redeemed Preferred shares.
In November 2008, the Company filed a primary offer in the Philippines of its Preferred A shares
at an offer price of P
=500 per share to be listed and traded on the PSE. The Preferred A shares are
cumulative, nonvoting and redeemable at the option of the Company under such terms that the
BOD may approve at the time of the issuance of shares and with a dividend rate of 8.88% per
annum. The Preferred A shares may be redeemed at the option of the Company starting in the
fifth year.
Common shares
On December 7, 2006, the BOD approved the increase of the authorized common stock from
=19.0 billion divided into 380,000,000 shares to P
P
=30.0 billion divided into 600,000,000 shares
with a par value of P
=50 per share. The BOD likewise approved the declaration of a 20% stock
dividend to all common stockholders to be issued from the increased authorized capital stock.
On April 30, 2007, the Company’s application for increase in authorized common stock and stock
dividends were approved by the SEC.
The common shares may be owned or subscribed by or transferred to any person, partnership,
association or corporation regardless of nationality, provided that at anytime at least 60% of the
outstanding capital stock shall be owned by citizens of the Philippines or by partnerships,
associations or corporations 60% of the voting stock or voting power of which is owned and
controlled by citizens of the Philippines.
The details of the Company’s paid-up capital follow:
2009
As of January 1, 2009
Exercise of
ESOP/ESOWN
As of December 31, 2009
Preferred
Stock - A
Preferred
Stock - B
P
=1,200,000
P
=5,800,000
Additional
Common
Paid-in
Stock Subscribed
Capital
(In Thousands)
P
=24,772,493
P
=145,598 P
=5,734,748
–
P
=1,200,000
–
P
=5,800,000
1,047
P
=24,773,540
89,653
346,007
P
=235,251 P
=6,080,755
Subscriptions
Receivable
Total
Paid-up
Capital
(P
=401,125) P
=37,251,714
(210,546)
226,161
(P
=611,671) P
=37,477,875
*SGVMC113416*
- 61 2008
As of January 1, 2008
Exercise of
ESOP/ESOWN
Issuance of shares
Stock dividends
As of December 31, 2008
Additional
Paid-in
Capital
Preferred
Stock - A
Preferred
Stock - B
Common
Stock
=–
P
=5,800,000
P
Subscribed
(In Thousands)
P
=20,633,667
=100,685
P
P657,422
=
–
1,200,000
–
=1,200,000
P
–
–
–
=
P5,800,000
–
110
4,138,716
P
=24,772,493
44,913
–
–
=145,598
P
Total
Paid-up
Capital
Subscriptions
Receivable
319,151
4,758,175
–
P
=5,734,748
(P
=336,380) P
=26,855,394
(64,745)
299,319
–
5,958,285
–
4,138,716
(P
=401,125) P
=37,251,714
2007
As of January 1, 2007
Exercise of ESOP/ESOWN
Stock dividends
As of December 31, 2007
Preferred
Stock – B
Common
Stock
=5,800,000
P
–
–
=5,800,000
P
P
=17,166,964
17,119
3,449,584
P
=20,633,667
Additional
Total
Paid-in Subscriptions
Paid-up
Subscribed
Capital
Receivable
Capital
(In Thousands)
=75,754
P
=335,343
P
(P
=240,113) =
P23,137,948
24,931
322,079
(96,267)
267,862
–
–
–
3,449,584
=26,855,394
=100,685
P
=657,422
P
(P
=336,380) P
The movements in the Company’s outstanding number of common shares follow:
2009
At January 1
Stock dividends
Exercise of options ESOP/ESOWN
Issuance of shares
Treasury stock
At December 31
496,984
–
1,814
–
(466)
498,332
2008
(In Thousands)
414,363
82,774
898
3
(1,054)
496,984
2007
344,850
68,991
841
–
(319)
414,363
On September 10, 2007, the BOD approved the creation of a share buyback program involving
=2.5 billion worth of common capital stock. In 2009 and 2008, the Company acquired 466,360
P
and 1,054,422 common shares, respectively, at a total cost of P
=138.2 million and P
=390.8 million,
respectively. As of December 31, 2009 and 2008, treasury stock amounted to P
=688.7 million and
=550.5 million, respectively.
P
In addition, P
=100.0 million Preferred A shares of the Company have been acquired by ALI. This
has been accounted for as “Parent Company Preferred shares held by a subsidiary” and presented
as a reduction in equity.
Retained Earnings
Retained earnings include the accumulated equity in undistributed net earnings of consolidated
subsidiaries, associates and jointly controlled entities accounted for under the equity method
amounting to P
=33,990.7 million, P
=30,308.0 million and P
=29,824.0 million as of December 31,
2009, 2008 and 2007, respectively.
Retained earnings are further restricted for the payment of dividends to the extent of the cost of the
common shares held in treasury.
In accordance with SEC Memorandum Circular No. 11 issued in December 2008, the Company’s
retained earnings available for dividend declaration as of December 31, 2009 and 2008 amounted
to P
=31,060.0 million and P
=30,745.9 million, respectively.
*SGVMC113416*
- 62 Dividends consist of the following:
2008
2007
2009
(In Thousands, except dividends per share)
Dividends to common shares
Cash dividends declared during the year
Cash dividends per share
Stock dividends
Dividends to equity preferred shares
declared during the year
P
=1,994,148
P
=4.00
P
=–
=1,989,484
P
=4.00
P
=4,138,716
P
=3,312,426
P
=8.00
P
=3,449,584
P
P
=2,025,567
=548,552
P
=548,552
P
On December 10, 2009, the BOD approved the declaration and payment of cash dividends out of
the unappropriated retained earnings of the Company amounting to P
=498.3 million or P
=2 per
share, payable to all common shares shareholders of record as of January 8, 2010. The said
dividends are payable on February 2, 2010. Also on the same date, the BOD approved the
declaration and payment of the quarterly dividends to all shareholders of the Company’s
Preferred A and Preferred B shares for calendar year 2010.
On January 31, 2008, the BOD approved the declaration of a 20% stock dividend to all common
share holders of the Company as of April 24, 2008. On April 4, 2008, the Company’s
stockholders ratified the declaration of the 20% stock dividends to all stockholders.
Capital Management
The primary objective of the Company’s capital management policy is to ensure that it maintains a
strong credit rating and healthy capital ratios in order to support its business and maximize
shareholder value.
The Company manages its capital structure and makes adjustments to it, in light of changes in
economic conditions. To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders or issue new shares. No changes were made in the objectives,
policies or processes for the years ended December 31, 2009 and 2008.
The Company is not subject to externally imposed capital requirements.
The Company monitors capital using a gearing ratio of debt to equity and net debt to equity. Debt
consists of short-term and long-term debt. Net debt includes short-term and long-term debt less
cash and cash equivalents and short-term investments. The Company considers as capital the
equity attributable to equity holders of the Company.
Short-term debt
Long-term debt
Total debt
Less:
Cash and cash equivalents
Short-term investments
Net debt
Equity attributable to equity holders of the
Company
Debt to equity
Net debt to equity
2008
2009
(In Thousands)
=2,755,447
P
P
=2,638,658
51,729,022
53,884,727
54,484,469
56,523,385
45,656,889
4,560,976
P
=6,305,520
42,885,792
1,008,924
=10,589,753
P
P
=102,260,427
55%
6%
=97,311,192
P
56%
11%
*SGVMC113416*
- 63 21. Other Income and Costs and Expenses
Other income consists of:
2009
Gain on sale of investments
Management and marketing fees
Insurance claim (Note 6)
Bargain purchase gain (Note 22)
Dividend income
Gain on sale of other assets
Rental income
Marked-to-market gain (Note 8)
Foreign exchange gain (loss)
Others
P
=1,698,820
680,244
280,100
235,851
204,691
168,063
66,795
22,324
(64,974)
516,603
P
=3,808,517
2008
2007
(In Thousands)
=3,554,679
P
=8,844,822
P
626,350
485,802
–
–
–
–
148,914
73,500
45,409
54,064
40,442
39,351
119,229
320,610
181,858
626,766
699,869
283,460
=5,416,750 P
P
=10,728,375
Gain on sale of investments consists mostly of gain arising from the sale of the Company’s
investments in a listed subsidiary, an associate and jointly controlled entities. Marked-to-market
gain pertains to fair value gains on financial assets at FVPL and freestanding derivatives.
In March 2008, ALI sold its shares of stock in Streamwood Property, Inc., Piedmont Property
Ventures, Inc. and Stonehaven Land, Inc. Total consideration received from the sale amounted to
=902.0 million. Gain on sale amounted to P
P
=762.0 million included under “Gain on sale of
investments”.
In December 2007, ALI entered into a joint venture with Kingdom Hotel Investments, Inc. to
develop a 7,377-square meter property along Makati Avenue corner Arnaiz Avenue (formerly
Pasay Road) into a luxury hotel complex comprising a 300-room Fairmont Hotel, a 30-suite
Raffles Hotel and 189 Raffles branded private residences. The total project cost is approximately
US$153.0 million.
The 7,377-square meter property to be developed was conveyed by ALI to KHI-ALI Manila, Inc.
(KAMI) in exchange for 37,250 common shares, 38,250 redeemable preferred shares A and
16,758 preferred shares of KAMI. On December 13, 2007, ALI sold 16,758 of its preferred shares
in KAMI to Kingdom Manila B.V., which resulted in a gain of P
=1,004.0 million, reported under
“Gain on sale of investments”.
Other income includes income derived from ancillary services of consolidated subsidiaries.
*SGVMC113416*
- 64 Cost of sales and services included in the consolidated statement of income are as follows:
2009
Inventory
Personnel costs (Notes 25, 26 and 29)
Depreciation and amortization
Rental and utilities
Professional and management fees
Taxes and licenses
Repairs and maintenance
Transportation and travel
Insurance
Contract labor
Others
P
=34,281,857
5,279,394
2,474,988
2,339,382
1,037,461
770,138
614,205
531,087
163,801
101,587
1,724,394
P
=49,318,294
2008
2007
(In Thousands)
=34,440,421 P
P
=30,196,530
6,782,659
5,215,984
1,821,069
1,971,932
2,725,843
2,127,910
961,649
826,035
588,714
569,666
555,272
383,451
118,911
67,161
172,498
61,909
423,156
412,743
1,424,174
1,335,789
=50,014,366 P
P
=43,169,110
General and administrative expenses included in the consolidated statement of income are as
follows:
2009
Personnel costs (Notes 25, 26 and 29)
Depreciation and amortization
Professional fees
Taxes and licenses
Rental and utilities
Transportation and travel
Provision for doubtful accounts (Note 6)
Advertising and promotions
Postal and communication
Repairs and maintenance
Contract labor
Entertainment, amusement and recreation
Insurance
Supplies
Donations and contributions
Dues and fees
Research and development
Others
P
=4,661,710
870,997
817,167
428,525
384,790
264,030
217,208
182,492
179,638
128,511
125,750
124,712
106,841
89,420
67,129
55,041
29,339
481,270
P
=9,214,570
2008
2007
(In Thousands)
=4,753,473
P
P4,168,554
=
1,119,147
1,016,947
616,969
796,979
454,387
530,583
298,472
357,666
338,855
376,087
88,871
127,701
420,620
234,330
157,226
153,649
116,317
132,257
39,677
36,952
129,273
141,782
73,342
59,703
137,599
161,459
123,312
126,541
66,365
61,033
48,685
189,693
502,924
826,390
=9,485,514
P
=9,498,306
P
Depreciation and amortization expense included in the consolidated statement of income follows:
2009
Included in:
Cost of sales and services
General and administrative expenses
P
=2,474,988
870,997
P
=3,345,985
2008
(In Thousands)
=1,821,069
P
1,119,147
=2,940,216
P
2007
=1,971,932
P
1,016,947
=2,988,879
P
*SGVMC113416*
- 65 Personnel costs included in the consolidated statements of income follow:
2009
Included in:
Cost of sales and services
General and administrative expenses
P
=5,279,394
4,661,710
P
=9,941,104
2008
(In Thousands)
=6,782,659
P
4,753,473
=11,536,132
P
2007
=5,215,984
P
4,168,554
=9,384,538
P
Interest expense and other financing charges consist of:
2009
Interest expense on:
Short-term debt
Long-term debt
Hedging losses (Note 8)
Dividends on preferred shares
Others
P
=271,057
3,475,297
–
–
75,988
P
=3,822,342
2008
(In Thousands)
=244,466
P
3,216,017
1,455,952
–
20,673
=4,937,108
P
2007
=321,891
P
3,544,488
–
154,335
99,446
=4,120,160
P
During the first half of 2008, IMI entered into additional structured currency options for economic
hedges. The economic turn-around during the second quarter of 2008 led to a weaker peso which
resulted in an unfavorable position on IMI’s derivative transactions. In May 2008, the BOD of
IMI approved the unwinding of four major derivative contracts and IMI incurred unwinding costs
amounting to $33.36 million or P
=1.46 billion. The net changes in fair value of settled derivative
instruments not designated as accounting hedges are included as part of “Interest expense and
other financing charges”. The fair value of settled instruments includes the unwinding costs of
US$33.36 million for the year ended December 31, 2008.
Other charges consist of:
2009
Provision for impairment losses
Land and improvements (Note 9)
Inventories (Note 7)
AFS financial assets (Note 11)
Property, plant and equipment
(Note 13)
Write-offs and other charges
Impairment loss on goodwill
Others
2008
(In Thousands)
2007
P
=568,672
78,091
–
=–
P
136,630
1,106,451
=–
P
–
–
–
350,265
–
438,010
P
=1,435,038
73,403
–
–
278,938
=1,595,422
P
–
669,949
662,591
237,404
=1,569,944
P
In 2009, write-offs and other charges include the write-down of ALI’s inventory from purchase of
steel bars which amounted to P
=350.3 million. In 2007, write-offs and other charges include the
write-down of investment properties damaged by the Glorietta 2 explosion and related expenses
incurred, and demolition and relocation costs as part of the ALI’s Ayala Center redevelopment
program amounting to a total of P
=213.7 million in 2007 (see Note 12).
*SGVMC113416*
- 66 -
22. Business Combinations
PFRS 3 provides that if the initial accounting for a business combination can be determined only
provisionally by the end of the period in which the combination is effected because either the fair
values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the
cost of the combination can be determined only provisionally, the acquirer shall account for the
combination using those provisional values. The acquirer shall recognize any adjustments to those
provisional values as a result of completing the initial accounting within twelve months of the
acquisition date as follows: (i) the carrying amount of the identifiable asset, liability or contingent
liability that is recognized or adjusted as a result of completing the initial accounting shall be
calculated as if its fair value at the acquisition date had been recognized from that date;
(ii) goodwill or any gain recognized shall be adjusted by an amount equal to the adjustment to the
fair value at the acquisition date of the identifiable asset, liability or contingent liability being
recognized or adjusted; and (iii) comparative information presented for the periods before the
initial accounting for the combination is complete shall be presented as if the initial accounting has
been completed from the acquisition date.
2009 Acquisitions
On-Site Sourcing, Inc.
On April 30, 2009, Integreon acquired On-Site Sourcing, Inc. (Onsite) for a total consideration of
US$6.8 million.
Following is a summary of the fair values of the assets acquired and liabilities assumed of Onsite
as of the date of the acquisition:
Cash and cash equivalents
Current assets
Property and equipment - net
Current liabilities
Deferred tax liability
Net assets
Intangible assets arising on acquisition:
Customer relationships
Software
Bargain purchase gain (Note 21)
Total consideration paid in cash
Fair Value
Recognized on Acquisition
In Php*
In US$
(In Thousands)
US$282
=13,635
P
284,395
5,882
3,640
175,994
9,804
474,024
1,875
90,656
2,396
115,847
4,271
206,503
5,533
267,521
5,800
300
(4,878)
US$6,755
280,340
14,505
(235,851)
=326,515
P
*Translated using the exchange rate at the transaction date (US$1:P
=48.35)
*SGVMC113416*
- 67 Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
In Php*
In US$
(In Thousands)
US$282
=13,635
P
6,755
326,515
US$6,473
=312,880
P
*Translated using the exchange rate at the transaction date (US$1:P
=48.35)
From the date of acquisition, Onsite has contributed US$6.29 million (P
=299.58 million) to the net
income of the Group. If the contribution had taken place at the beginning of the year, the net
income of the Group would have increased by US$0.67 million (P
=31.91 million) and revenue
would have increased by US$7.84 million (P
=373.40 million) in 2009.
In accordance with PFRS 3, the bargain purchase gain is recognized in the consolidated statement
of income (see Note 21).
Grail Research, Inc.
On October 30, 2009, Integreon acquired the assets of Grail Research Inc. (Grail), along with the
share capital of its subsidiaries, from the Monitor Group for a total consideration of
US$11.8 million.
The following is a summary of the provisional fair values of the assets acquired and liabilities
assumed as of the date of the acquisition. The purchase price allocation has been prepared on a
preliminary basis and reasonable changes are expected as additional information becomes
available.
Cash and cash equivalents
Trade and other receivables
Other current assets
Property and equipment - net
Other noncurrent assets
Accounts payable and accrued expenses
Other current liabilities
Other noncurrent liabilities
Net assets
Goodwill arising on acquisition
Total consideration
Fair Value
Recognized on Acquisition
In US$
In Php*
(In Thousands)
US$155
=7,396
P
798
38,012
273
13,008
545
25,958
401
19,100
2,172
103,474
1,850
88,106
8
390
55
2,640
1,913
91,136
259
12,338
11,558
550,506
US$11,817
=562,844
P
*Translated using the exchange rate at the transaction date (US$1:P
=47.63)
*SGVMC113416*
- 68 Cost of the acquisition follows:
Cash paid
Shares issued
Transaction costs
In Php*
In US$
(In Thousands)
US$10,389
=494,828
P
1,022
48,678
406
19,338
US$11,817
=562,844
P
*Translated using the exchange rate at the transaction date (US$1:P
=47.63)
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
In US$
In Php*
(In Thousands)
US$155
=7,396
P
10,389
494,828
US$10,234
=487,432
P
*Translated using the exchange rate at the transaction date (US$1:P
=47.63)
From the date of acquisition, Grail has contributed US$0.42 million (P
=20.00 million) to the net
income of the Group. If the contribution had taken place at the beginning of the year, the net
income of the Group would have increased by US$0.46 million (P
=21.91 million) and revenue
would have increased by US$7.03 million (P
=334.82 million) in 2009.
2008 Acquisitions
Datum Legal, Inc.
On May 30, 2008, Integreon Managed Solutions, Inc., a wholly owned subsidiary of Integreon
which in turn is a subsidiary of LIL, acquired 100% of Datum Legal, Inc. (Datum).
The purchase price allocation has been prepared on a preliminary basis as of December 31, 2008.
The following is a summary of the provisional fair values of the assets acquired and liabilities
assumed as of the date of the acquisition:
Cash and cash equivalents
Trade and other receivables
Other current assets
Property and equipment - net
Other noncurrent assets
Accounts payable and accrued expenses
Other current liabilities
Other noncurrent liabilities
Net assets
Intangible assets arising on acquisition
Goodwill arising on acquisition
Total consideration
Fair Value
Recognized on Acquisition
In Php*
In US$
(In Thousands)
US$530
=23,261
P
2,156
94,667
68
2,998
364
15,987
12
506
3,130
137,419
1,324
58,149
450
19,780
128
5,575
1,902
83,504
1,228
53,915
3,500
153,680
3,678
161,511
US$8,406
=369,106
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
*SGVMC113416*
- 69 Cost of the acquisition follows:
Cash paid
Shares issued
Transaction costs
In Php*
In US$
(In Thousands)
US$7,289
=320,066
P
631
27,701
486
21,339
US$8,406
=369,106
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
In US$
In Php*
(In Thousands)
US$530
=23,261
P
7,775
341,405
US$7,245
=318,144
P
*Translated using the exchange rate at the transaction date (US$1:P
=43.91)
From the date of acquisition, Datum has contributed P
=38.9 million to the net income of the Group.
If the contribution had taken place at the beginning of the year, the net income of the Group would
have increased by P
=111.2 million and revenue would have increased by P
=417.2 million in 2008.
In 2009, IMSI finalized its purchased price allocation and there were no significant changes to the
fair values of the assets acquired and liabilities assumed of Datum. In 2009, IMSI paid an earnout as consideration for the acquisition of Datum. This was reflected as additional goodwill.
APPHC
In 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a business process outsourcing office building in Dela Rosa Street
and to purchase the existing PeopleSupport Building.
As of December 31, 2007, APPHC, the joint-venture company, is 60% owned by ALI. APPHC
owns 60% interest in its subsidiary, APPCo. The remaining 40% interest in both APPHC and
APPCo. are split evenly between MIL and FIL. APPHC and APPCo. are jointly controlled by
ALI, MIL, and FIL.
On December 8, 2008, ALI acquired from FIL its 20% ownership in APPHC and APPCo. This
resulted in an increase in ALI’s effective ownership interest in APPHC from 60% to 80% and
APPCo. from 36% to 68%, thereby providing ALI with the ability to control the operations of
APPHC and APPCo. following the acquisition. Accordingly, APPHC and APPCo.’s financial
statements are consolidated on a line-by-line basis with that of the Group as of
December 31, 2008.
*SGVMC113416*
- 70 Following is a summary of the fair values of the identifiable assets acquired and liabilities
assumed of APPHC and APPCo. as of the date of acquisition (in thousands):
Assets
Cash and cash equivalents
Trade and other receivables
Other current assets
Investment property - net (Note 12)
Property and equipment - net (Note 13)
Other assets
Liabilities
Accounts and other payables
Deposits and other current liabilities
Loans payable
Deposits and other noncurrent liabilities
Net assets
Noncontrolling interests in APPHC
Net assets of APPHC acquired
Noncontrolling interests in APPCo. acquired
Total net assets acquired
Acquisition cost
Cash and cash equivalents acquired with the subsidiary
Acquisition cost, net of cash acquired
=227,266
P
188,974
649,154
3,944,127
1,290,979
21,304
6,321,804
716,815
41,171
3,282,150
288,287
4,328,423
1,993,381
(800,392)
1,192,989
238,678
400,196
638,874
638,874
227,266
=411,608
P
From the date of acquisition, APPHC and APPCo’s additional contribution to the Group’s net
income is immaterial. Had the combination taken place at the beginning of the year, the net
income of the Group would have increased by P
=14.1 million and revenue from continuing
operations would have increased by P
=323.9 million in 2008.
Total costs directly attributable to the business combination amounted to P
=15.6 million.
In 2009, ALI finalized its purchase price allocation which resulted in adjustments to the fair value
of investment properties and property, plant and equipment. The related 2008 comparative
information has been restated to reflect these adjustments. The value of investment properties and
property, plant and equipment increased (decreased) by P
=286.5 million and (P
=1.7 million),
respectively. There was also a corresponding deduction in goodwill amounting to P
=148.7 million
and an increase in noncontrolling interest amounting to P
=136.1 million. The increase in
depreciation and amortization charge on investment properties and property, plant and equipment
was not material.
*SGVMC113416*
- 71 -
23. Income Taxes
The components of the Group’s deferred taxes as of December 31, 2009 and 2008 are as follows:
Net deferred tax assets
2008
2009
(In Thousands)
Deferred tax assets on:
Allowance for probable losses
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
Retirement benefits
Share-based payments
NOLCO
MCIT
Others
Deferred tax liabilities on:
Capitalized interest and other expenses
Others
Net deferred tax assets
P
=832,834
=796,299
P
321,177
100,466
82,784
19,052
27,323
484,134
1,867,770
446,236
144,850
62,265
28,854
5,214
233,895
1,717,613
(471,778)
–
(471,778)
P
=1,395,992
(553,912)
(30,854)
(584,766)
=1,132,847
P
Net deferred tax liabilities
2008
2009
(In Thousands)
Deferred tax assets on:
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
NOLCO
Others
Deferred tax liabilities on:
Excess of financial realized gross profit over
taxable realized gross profit
Capitalized interest and other expenses
Others
Net deferred tax liabilities
P
=17
–
809
826
(147,368)
(37,151)
(23,732)
(208,251)
(P
=207,425)
=63,593
P
36,984
13,347
113,924
(137,854)
(117,271)
(44,335)
(299,460)
(P
=185,536)
The Group has NOLCO amounting to P
=5.6 billion and P
=7.2 billion in 2009 and 2008, respectively,
which were not recognized. Further, deferred tax assets from the excess MCIT over regular
corporate income tax amounting to P
=38.6 million in 2009 and P
=41.2 million in 2008 and from
unrealized gain on real estate sales amounting to P
=4.8 million as of December 31, 2007,
respectively, were also not recognized, since management believes that there would not be
sufficient taxable income against which the benefits of the deferred tax assets may be utilized.
*SGVMC113416*
- 72 As of December 31, 2009, NOLCO and MCIT that can be claimed as deduction from future
taxable income or used as deductions against income tax liabilities are as follows:
Year incurred
Expiry Date
2007
2008
2009
2010
2011
2012
MCIT
NOLCO
(In Thousands)
=2,095,519
P
=20,248
P
2,282,936
17,482
1,336,734
28,197
=5,715,189
P
=65,927
P
At December 31, 2009 and 2008, deferred tax liabilities have not been recognized on the
undistributed earnings and cumulative translation adjustment of foreign subsidiaries, associates
and jointly controlled entities since the timing of the reversal of the temporary difference can be
controlled by the Group and management does not expect the reversal of the temporary differences
in the foreseeable future. The undistributed earnings and cumulative translation adjustment
amounted to P
=1,626.7 million and P
=2,051.0 million as of December 31, 2009 and 2008,
respectively.
The reconciliation between the statutory and the effective income tax rates follows:
Statutory income tax rate
Tax effects of:
Gain on sale of shares and capital
gains tax
Nontaxable equity in net earnings of
associates and jointly controlled
entities
Interest income subjected to final tax
at lower rates
Income under income tax holiday
Effect of change in tax rate
Others
Effective income tax rate
2009
30.00%
2008
35.00%
(3.20)
(7.43)
(17.56)
(17.67)
(19.80)
(16.70)
(0.97)
(0.16)
–
5.59
13.59%
(2.45)
(0.22)
0.90
12.49
18.49%
2007
35.00%
(1.82)
(0.04)
–
10.81
9.69%
As of December 31, 2008, the deferred tax assets and liabilities are set-up based on the 30%
corporate tax rate which became effective beginning January 1, 2009 as provided under Republic
Act No. 9337.
*SGVMC113416*
- 73 -
24. Earnings Per Share
The following table presents information necessary to calculate EPS on net income attributable to
equity holders of the Company:
Net income
Less dividends on preferred stock
Weighted average number of common
shares
Dilutive shares arising from stock
options
Adjusted weighted average number of
common shares for diluted EPS
Basic EPS
Diluted EPS
2008
2007
2009
(In Thousands, except EPS figures)
=8,108,597 P
P
=16,256,601
P
=8,154,345
548,552
548,552
1,081,352
=7,560,045 P
P
=15,708,049
P
=7,072,993
496,984
496,756
496,787
1,541
1,719
2,374
498,525
P
=14.23
P
=14.19
498,475
=15.22
P
=15.17
P
499,161
=31.62
P
=31.47
P
EPS on income before income associated with noncurrent assets held for sale attributable to equity
holders of the Company follows:
2008
2007
2009
(In Thousands, except EPS figures)
Income before income associated with
noncurrent assets held for sale
Less: Income before income associated
with noncurrent assets held for sale
associated to minority interests
Less: Dividends on preferred stock
Weighted average number of common
shares for basic EPS
Dilutive shares arising from stock
options
Adjusted weighted average number of
common shares for diluted EPS
Basic EPS
Diluted EPS
P
=10,804,887
=10,658,688
P
=18,437,341
P
2,650,542
1,081,352
P
=7,072,993
2,550,091
548,552
=7,560,045
P
2,665,546
548,552
=15,223,243
P
496,984
496,756
496,787
1,541
1,719
2,374
498,525
P
=14.23
P
=14.19
498,475
=15.22
P
=15.17
P
499,161
=30.64
P
=30.50
P
*SGVMC113416*
- 74 25. Retirement Plan
The Company and certain subsidiaries have their respective funded, noncontributory tax-qualified
defined benefit type of retirement plans covering substantially all of their employees. The benefits
are based on defined formula with minimum lump-sum guarantee of 1.5 months effective salary
per year of service. The consolidated retirement costs charged to operations amounted to
=344.4 million in 2009, P
P
=195.6 million in 2008 and P
=331.5 million in 2007.
The principal actuarial assumptions used to determine the pension benefits with respect to the
discount rate, salary increases and return on plan assets were based on historical and projected
normal rates. The Company’s and certain subsidiaries’ annual contributions to their respective
plans consist of payments covering the current service cost for the year and the required funding
relative to the guaranteed minimum benefits as applicable.
The components of retirement expense in the consolidated statement of income are as follows:
2009
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial gain
Past service cost
Curtailment loss (gain)
Settlement gain
Effect of ceiling limit
Total retirement expense
Actual return (loss) on plan assets
P
=261,116
307,200
(255,016)
30,401
2,532
382,296
(384,170)
–
P
=344,359
P
=453,834
2008
(In Thousands)
=263,055
P
215,771
(247,462)
(29,573)
2,796
(11,447)
–
2,504
=195,644
P
(P
=410,372)
2007
=260,685
P
158,528
(167,940)
(18,715)
98,539
–
–
357
=331,454
P
=244,109
P
The funded status and amounts recognized in the consolidated statement of financial position for
the pension plan assets of subsidiaries in a net pension asset position as of December 31, 2009 and
2008 are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial gains
Assets recognized in the consolidated statements of
financial position
2008
2009
(In Thousands)
(P
=306,808)
(P
=244,605)
730,490
508,082
423,682
263,477
(306,294)
(131,058)
P
=132,419
=117,388
P
*SGVMC113416*
- 75 The funded status and amounts recognized in the consolidated statement of financial position for
the pension plan liabilities of the Company and subsidiaries in a net pension liability position as of
December 31, 2009 and 2008 are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses
Unrecognized past service cost
Liabilities recognized in the consolidated statements
of financial position
2008
2009
(In Thousands)
(P
=3,136,033)
(P
=3,529,634)
2,283,634
3,147,837
(852,399)
(381,797)
331,431
125,793
30,224
27,692
(P
=490,744)
(P
=228,312)
Changes in the present value of the combined defined benefit obligation are as follows:
Balance at January 1
Interest cost on benefit obligation
Current service cost
Benefits paid
Actuarial loss (gains) on obligations
Benefits obligation from acquired subsidiary
Curtailments
Settlements
Past service cost
Balance at December 31
2008
2009
(In Thousands)
=3,708,898
P
P
=3,442,841
215,771
307,200
263,055
261,116
(342,328)
(282,615)
(214,791)
180,934
–
125
(34,104)
281,525
(153,679)
(416,887)
19
–
=3,442,841
P
P
=3,774,239
Changes in the fair value of the combined plan assets are as follows:
Balance at January 1
Expected return
Contributions by employer
Benefits paid
Settlements
Actuarial gains (losses) on plan assets
Balance at December 31
2008
2009
(In Thousands)
=3,734,339
P
P
=3,014,124
247,462
255,016
186,164
652,516
(342,328)
(282,615)
(153,679)
(181,940)
(657,834)
198,818
=3,014,124
P
P
=3,655,919
The assumptions used to determine pension benefits for the Group are as follows:
Discount rates
Salary increase rates
Expected rates of return on plan assets
2009
9.5% to 15.0%
6.0% to 10.0%
4.0% to 11.0%
2008
7.0 to 13.4%
4.5 to 8.0%
3.0 to 8.0%
*SGVMC113416*
- 76 The allocation of the fair value of plan assets of the Group follows:
2008
51.4%
25.0%
23.6%
2009
69.0%
23.5%
7.5%
Investments in debt securities
Investments in equity securities
Others
Amounts for the current and previous annual periods are as follows:
2007
2006
(In Thousands)
=3,442,841) (P
=3,708,898) (P
=4,012,650)
(P
=3,774,239) (P
3,014,124 3,734,339
3,508,563
3,655,919
(P
=428,717)
=25,441
P
(P
=504,087)
(P
=118,320)
2009
Defined benefit obligation
Plan assets
Excess (deficit)
2008
2005
(P
=3,026,065)
2,910,036
(P
=116,029)
Gains (losses) on experience adjustments are as follows:
2008
(In Thousands)
(P
=566,144)
P
=19,482
(657,834)
198,818
2009
Defined benefit obligation
Plan assets
2007
=136,564
P
30,727
The Company expects to contribute P
=113.4 million to its defined benefit pension plan in 2010.
As of December 31, 2009 and 2008, the plan assets include shares of stock of the Company with
total fair value of P
=196.5 million and P
=357.8 million, respectively.
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date.
26. Stock Option Purchase Plans
The Company has stock option plans for key officers (Executive Stock Option Plan - ESOP) and
employees (Employee Stock Ownership Plan - ESOWN) covering 3.0% of the Company’s
authorized capital stock. The grantees are selected based on certain criteria like outstanding
performance over a defined period of time.
The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the
vesting percentage and vesting schedule stated in the ESOP. Also, the grantee must be an
employee of the Company or any of its subsidiaries during the 10-year option period. In case the
grantee retires, he is given 3 years to exercise his vested and unvested options. In case the grantee
resigns, he is given 90 days to exercise his vested options.
*SGVMC113416*
- 77 ESOP
A summary of the Company’s stock option activity and related information for the years ended
December 31, 2009, 2008 and 2007 follows:
2008
2009
Outstanding, at beginning of year
Exercised
Adjustment due to 20% stock
dividends (see Note 20)
Outstanding, at end of year
2007
Number
of Shares
3,352,018
(11,900)
Weighted
Average
Exercise Price
P
=141.18
(143.51)
Number
of Shares
2,837,102
(52,499)
Weighted
Average
Exercise Price
=170.30
P
(150.99)
–
3,340,118
–
P
=141.17
567,415
3,352,018
–
=141.18
P
Weighted
Number
Average
of Shares Exercise Price
2,533,908
=205.13
P
(169,656)
(203.37)
472,850
2,837,102
–
=170.30
P
The options have a contractual term of 10 years. As of December 31, 2009 and 2008, the
weighted average remaining contractual life of options outstanding is 3.16 years and 4.3 years,
respectively, and the range of exercise prices amounted from P
=107.29 to P
=204.86.
The fair value of each option is estimated on the date of grant using the Black-Scholes optionpricing model. The fair values of stock options granted under ESOP at each grant date and the
assumptions used to determine the fair value of the stock options are as follows:
Weighted average share price
Exercise price
Expected volatility
Option life
Expected dividends
Risk-free interest rate
June 30, 2005
=327.50
P
=295.00
P
46.78%
10 years
1.27%
12.03%
June 10, 2004
=244.00
P
=220.00
P
46.71%
10 years
1.43%
12.75%
The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also necessarily be the actual outcome.
ESOWN
The Company also has ESOWN granted to qualified officers and employees wherein grantees may
subscribe in whole or in part to the shares awarded to them based on the 10% discounted market
price as offer price set at grant date. To subscribe, the grantee must be an employee of the Group
during the 10-year payment period. In case the grantee resigns, unsubscribed shares are cancelled,
while the subscription may be paid up to the percent of holding period completed and payments
may be converted into the equivalent number of shares. In case the grantee is separated, not for
cause, but through retrenchment and redundancy, subscribed shares may be paid in full,
unsubscribed shares may be subscribed, or payments may be converted into the equivalent number
of shares. In case the grantee retires, the grantee may subscribe to the unsubscribed shares
anytime within the 10-year period. The plan does not allow sale or assignment of the shares. All
shares acquired through the plan are subject to the Company’s Right to Repurchase.
*SGVMC113416*
- 78 Shares granted and subscribed under the ESOWN follows:
2008
1,015,200
898,260
=284.96
P
2009
1,831,782
1,813,994
P
=180.13
Granted
Subscribed
Exercise price
Subscriptions receivable from the stock option plans covering the Company’s shares are presented
under equity.
For the unsubscribed shares, the employee still has the option to subscribe from the start of the
fifth year but not later than on the start of the seventh year from date of grant. Movements in the
number of options outstanding under ESOWN as of December 31, 2009 and 2008 follow:
2008
2009
At January 1
Granted
Exercised/cancelled
Adjustment due to 20% stock
dividends (see Note 20)
At December 31
Weighted
Number of
average
options exercise price
190,795
P
=251.39
17,788
180.13
(48,433)
(222.07)
–
160,150
–
P
=252.34
Weighted
average
Number of
options exercise price
61,546
=237.88
P
116,940
284.96
–
–
12,309
190,795
–
=251.39
P
The fair value of stock options granted is estimated on the date of grant using the Black-Scholes
Merton Formula, taking into account the terms and conditions upon which the options were
granted. The expected volatility was determined based on an independent valuation. The fair
value of stock options granted under ESOWN at grant date and the assumptions used to determine
the fair value of the stock options follow:
Number of unsubscribed shares
Fair value of each option
Weighted average share price
Exercise price
Expected volatility
Dividend yield
Interest rate
April 30, 2009
17,788
P
=112.87
P
=263.38
P
=180.13
49.88%
1.59%
7.49%
May 15, 2008
116,940
=137.45
P
=316.50
P
=284.96
P
30.63%
1.56%
8.23%
Total expense arising from share-based payments recognized by the Group in the consolidated
statement of income amounted to P
=471.6 million in 2009, P
=342.9 million in 2008 and
=288.0 million in 2007.
P
*SGVMC113416*
- 79 -
27. Operating Segment Information
For management purposes, the Group is organized into the following business units:
a.
b.
c.
d.
Real estate and hotels
Financial services and bancassurance
Telecommunications
AC Capital
·
Real estate and hotels - planning and development of large-scale fully integrated residential
and commercial communities; development and sale of residential, leisure and commercial
lots and the development and leasing of retail and office space and land in these communities;
construction and sale of residential condominiums and office buildings; development of
industrial and business parks; development and sale of upper middle-income and affordable
housing; strategic land bank management; hotel, cinema and theater operations; and
construction and property management.
·
Financial services and bancassurance - universal banking operations, including savings and
time deposits in local and foreign currencies; commercial, consumer, mortgage and
agribusiness loans; leasing; payment services, including card products, fund transfers,
international trade settlement and remittances from overseas workers; trust and investment
services including portfolio management, unit funds, trust administration and estate planning;
fully integrated bancassurance operations, including life, non-life, pre-need and reinsurance
services; internet banking; on-line stock trading; corporate finance and consulting services;
foreign exchange and securities dealing; and safety deposit facilities.
·
Telecommunications - provider of digital wireless communications services, wireline voice
communication services, consumer broadband services, other wireline communication
services, domestic and international long distance communication or carrier services and
mobile commerce services.
·
AC Capital - the business unit that oversees the financial performance of subsidiaries other
than the three major businesses of the Group. AC Capital also provides support to
subsidiaries’ growth initiatives and seeks new investment opportunities for the Group that will
complement existing business and further enhance the Group’s value. AC Capital has the
following operating segments:
·
Electronics - electronics manufacturing services provider for original equipment
manufacturers in the computing, communications, consumer, automotive, industrial and
medical electronics markets, service provider for test development and systems integration
and distribution of related products and services.
·
Information technology and BPO services - venture capital for technology businesses and
emerging markets; provision of value-added content for wireless services, on-line
business-to-business and business-to-consumer services; electronic commerce; technology
infrastructure hardware and software sales and technology services; and onshore and
offshore outsourcing services in the research, analytics, legal, electronic discovery,
document management, finance and accounting, IT support, graphics, advertising
production, marketing and communications, human resources, sales, retention, technical
support and customer care areas.
*SGVMC113416*
- 80 ·
Water utilities - contractor to manage, operate, repair, decommission, and refurbish all
fixed and movable assets (except certain retained assets) required to provide water
delivery services and sewerage services in the East Zone Service Area.
·
Automotive - manufacture and sale of passenger cars and commercial vehicles.
·
International - investments in overseas property companies and projects.
·
Others - air-charter services, agri-business and others.
Management monitors the operating results of its business units separately for the purpose of
making decisions about resource allocation and performance assessment. Segment performance is
evaluated based on operating profit or loss and is measured consistently with operating profit or
loss in the consolidated financial statements.
Intersegment transfers or transactions are entered into under the normal commercial terms and
conditions that would also be available to unrelated third parties. Segment revenue, segment
expense and segment results include transfers between operating segments. Those transfers are
eliminated in consolidation.
*SGVMC113416*
- 81 The following tables regarding operating segments present assets and liabilities as of December 31, 2009 and 2008 and revenue and profit information for
each of the three years in the period ended December 31, 2009 (amounts in millions).
2009
Revenue
Sales to external customers
Intersegment
Equity in net earnings of associates and
jointly controlled entities*
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other financing
charges
Other charges
Provision for income tax
Income before income associated with
noncurrent assets held for sale
Net income
Other information
Segment assets
Investments in associates and jointly
controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to property, plant and
equipment and investment properties
Depreciation and amortization
Non-cash expenses other than
depreciation and amortization
AC Capital
Information
Technology and
Electronics
BPO Services
Parent
Company
Real Estate
and Hotels
Financial
Services and
Bancassurance
P
=–
–
P
= 28,393
318
P
=–
–
P
=–
–
P
=–
–
P
= 18,937
–
P
= 4,041
(22)
4
1,617
1,987
3,608
1,795
1,813
968
822
591
31,092
21,857
9,235
2,707
–
–
2,707
1,029
–
–
1,029
2,707
3,862
–
–
3,862
–
3,862
1,029
–
35
323
19,295
18,536
759
(809)
5
701
3,916
4,575
(659)
2,381
13
236
1,345
1,407
1,165
–
–
–
–
–
–
–
–
–
82
4
240
5,318
P
= 5,318
2,707
P
= 2,707
3,862
P
= 3,862
1,029
P
= 1,029
433
P
= 433
P
= 102,302
P
= 98,700
P
=–
P
=–
P
=–
P
= 14,019
P
= 6,248
P
= 4,276
52,517
–
–
–
P
=–
P
=–
–
P
=–
P
=–
P
=–
–
P
=–
P
=–
P
=–
–
P
=–
–
10
P
= 14,029
P
= 6,241
5
P
= 6,246
5,341
40
P
= 11,629
P
= 3,097
42
P
= 3,139
2,531
P
= 154,819
P
= 45,248
–
P
= 45,248
10,798
1,523
P
= 111,021
P
= 48,726
151
P
= 48,877
P
= 77
P
=–
P
= 4,895
P
= 1,794
P
=–
P
=–
P
=–
P
=–
P
=–
P
=–
P
= 387
P
= 997
P
= 116
P
= 1,287
P
=–
P
=–
P
=–
P
= 67
(817)
(P
= 817)
Telecommunications Water Utilities
International
Intersegment
Eliminations
Consolidated
P
= 11,256
(32)
P
=–
(264)
P
= 62,627
–
(6)
3
284
11,505
11,452
53
–
(96)
(205)
(565)
34
(599)
7,361
2,497
3,809
76,294
58,533
17,761
(96)
–
25
3,822
1,435
1,699
10,805
P
= 10,805
P
= 2,862
(528)
(P
= 528)
–
(P
= 68,881)
P
= 159,526
P
= 6,807
P
= 893
5
P
= 898
370
45
P
= 3,277
P
= 1,627
5
P
= 1,632
–
(222)
(P
= 69,103)
(P
= 8,979)
–
(P
= 8,979)
71,557
1,396
P
= 232,479
P
= 96,853
208
P
= 97,061
P
= 407
P
= 339
P
= 23
P
=4
P
= 414
P
= 109
P
=–
P
=–
P
= 6,203
P
= 3,243
P
= 75
P
=–
P
=3
P
=–
P
= 1,548
69
–
1
(729)
(P
= 729)
P
=–
–
Automotive
and Others
(394)
111
128
(155)
284
(439)
22
2
(18)
(445)
(P
= 445)
19
9
50
(25)
(P
= 25)
*SGVMC113416*
- 82 2008
Revenue
Sales to external customers
Intersegment
Equity in net earnings of associates and
jointly controlled entities
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other financing
charges
Other charges
Provision for income tax
Income before income associated with
noncurrent assets held for sale
Income associated with noncurrent
assets held for sale, net of tax
Net income
Other information
Segment assets
Investment in associates and jointly
controlled entities
Deferred tax assets
Total assets
Segment liabilities
Deferred tax liabilities
Total liabilities
Segment additions to property, plant and
equipment and investment properties
Depreciation and amortization
Non-cash expenses other than
depreciation and amortization
Financial
Services and
Bancassurance Telecommunications
Parent Company
Real Estate
and Hotels
=–
P
–
=30,679
P
63
=–
P
–
7
1,234
3,591
4,832
1,429
3,403
885
925
1,331
33,883
24,591
9,292
2,298
999
197
AC Capital
Information
Technology and
BPO Services
International
Automotive
and Others
Intersegment
Eliminations
Water Utilities
Electronics
=–
P
–
=–
P
–
=20,306
P
–
=2,611
P
(15)
=–
P
–
=10,457
P
–
=–
P
(48)
=64,053
P
–
2,145
–
–
2,145
–
2,145
3,643
–
–
3,643
–
3,643
907
–
–
907
–
907
–
53
261
20,620
19,387
1,233
(122)
8
4
2,486
3,391
(905)
(144)
92
178
126
271
(145)
75
1
207
10,740
10,566
174
–
(70)
(155)
(273)
(137)
(136)
7,396
2,243
5,417
79,109
59,498
19,611
1,050
376
2,065
–
–
–
–
–
–
–
–
–
1,607
79
109
8
117
(2)
34
9
32
(72)
–
11
4,937
1,596
2,419
(91)
5,801
2,145
3,643
907
(562)
( 940)
(268)
99
(75)
10,659
–
(P
=91)
–
=5,801
P
–
=2,145
P
–
=3,643
P
–
=907
P
–
(P
=562)
–
(P
=940)
–
(P
=268)
–
=99
P
–
(P
=75)
–
10,659
=102,725
P
=92,462
P
=–
P
=–
P
=–
P
=14,603
P
=4,442
P
=3,577
P
=2,226
P
(P
=69,121)
=150,914
P
50,857
–
=153,582
P
=47,720
P
–
=47,720
P
9,916
795
=103,173
P
=45,248
P
162
=45,410
P
–
–
=–
P
=–
P
–
=–
P
–
–
=–
P
=–
P
–
=–
P
–
=–
P
=–
P
–
=–
P
–
1
=14,604
P
=6,882
P
–
=6,882
P
3,906
53
=8,401
P
=928
P
12
=940
P
2,952
–
=6,529
P
=537
P
6
=543
P
510
36
=2,772
P
=1,140
P
6
=1,146
P
–
248
(P
=68,873)
(P
=10,640)
–
(P
=10,640)
68,141
1,133
=220,188
P
=91,815
P
186
92,001
=84
P
92
=4,918
P
1,259
=–
P
–
=–
P
–
=–
P
–
=731
P
936
=646
P
558
=5
P
4
=355
P
91
=–
P
–
=6,739
P
2,940
=1,024
P
=462
P
=–
P
=–
P
=–
P
=166
P
=9
P
=221
P
=–
P
=–
P
=1,882
P
12
16
7
Consolidated
*SGVMC113416*
- 83 2007
Revenue
Sales to external customers
Intersegment
Equity in net earnings of associates and
jointly controlled entities
Interest income
Other income
Total revenue
Operating expenses
Operating profit
Interest expense and other financing
charges
Other charges
Provision for income tax
Income before income associated with
noncurrent assets held for sale
Income associated with noncurrent
assets held for sale, net of tax
Net income
Electronics
AC Capital
Information
Technology and
BPO Services
International
Automotive
and Others
= 2,129
P
–
=–
P
–
=11,961
P
–
=–
P
(74)
=56,578
P
–
(28)
11
22
2,134
3,036
(902)
226
114
157
497
242
255
68
2
264
12,295
12,024
271
–
(330)
(193)
(597)
(143)
(454)
9,767
1,693
10,728
78,766
52,667
26,099
20
663
17
9
–
23
22
10
63
(330)
–
12
4,120
1,570
1,972
Parent Company
Real Estate
and Hotels
Financial
Services and
Bancassurance
=–
P
–
=22,962
P
74
=–
P
–
=–
P
–
=–
P
–
= 19,526
P
–
61
1,233
8,854
10,148
1,819
8,329
804
597
1,459
25,896
17,928
7,968
3,291
–
–
3,291
–
3,291
4,545
–
–
4,545
–
4,545
800
–
–
800
–
800
–
66
165
19,757
17,761
1,996
3,316
2
140
868
874
1,567
–
–
–
–
–
–
–
–
–
215
21
150
4,871
4,659
3,291
4,545
800
1,610
(1602)
223
176
(136)
18,437
–
=4,871
P
599
=5,258
P
–
=3,291
P
–
=4,545
P
–
=800
P
–
=1,610
P
–
(P
=1,602)
26
=249
P
–
=176
P
–
(P
=136)
625
=19,062
P
Telecommunications Water Utilities
Intersegment
Eliminations
Consolidated
*SGVMC113416*
- 84 Geographical Segments
Philippines
Japan
USA
Europe
Others (mostly Asia)
Revenue
2008
2009
P 63,077,576
P
=60,284,336 =
1,083,135
1,023,625
6,736,608
6,253,443
4,471,487
5,594,446
3,739,847
3,137,965
=79,108,653
P
=76,293,815 P
2007
P
=56,931,668
9,400,556
6,081,976
3,525,576
2,827,080
=78,766,856
P
Segment Assets
2008
2009
=205,816,750
P
P
=212,727,696
13,020
12,532
6,048,504
10,667,684
–
111,678
8,309,613
8,959,445
=232,479,035
P
=220,187,887
P
Investment Properties and
Property, Plant and
Equipment Additions
2008
2009
=5,340,557
P
P
=5,850,799
199
254
919,310
181,336
–
–
478,982
171,152
=6,739,048
P
P
=6,203,541
Summarized financial information of BPI, Globe and MWCI are presented in Note 10 to the
consolidated financial statements.
28. Leases
Finance leases - as lessee
Foreign subsidiaries conduct a portion of their operations from leased facilities, which include
office equipment. These leases are classified as finance leases and expire over the next 5 years.
The average discount rate implicit in the lease is 8.5% per annum in 2009 and 2008. Future
minimum lease payments under the finance leases together with the present value of the net
minimum lease payments follow:
Within one year
After one year but not more than five years
Total minimum lease payments
Less amounts representing finance charges
Present value of minimum lease payments
2008
2009
Minimum Present values
Minimum Present values
payments
of payments
payments
of payments
(In Thousands)
=1,036
P
=980
P
P
=13,448
P
=11,866
14
13
23,987
21,982
1,050
993
37,435
33,848
57
–
1,470
–
=993
P
=993
P
P
=35,965
P
=33,848
Operating lease commitments - as lessee
The Group entered into lease agreements with third parties covering real estate properties. These
leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain
percentage of gross revenue, whichever is higher.
Future minimum rentals payable under non-cancellable operating leases of lessee subsidiaries are
as follows:
Within one year
After one year but not more than five years
More than five years
2008
2009
(In Thousands)
=154,923
P
P
=300,933
513,202
755,185
1,478,113
1,536,304
=2,146,238
P
P
=2,592,422
*SGVMC113416*
- 85 Operating leases - as lessor
Certain subsidiaries have lease agreements with third parties covering its investment property
portfolio. These leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or
a certain percentage of gross revenue, whichever is higher.
Future minimum rentals receivable under non-cancellable operating leases of the Group are as
follows:
Within one year
After one year but not more than five years
More than five years
2008
2009
(In Thousands)
=1,361,126
P
P
=1,618,130
3,783,681
4,789,404
1,405,812
3,349,840
=6,550,619
P
P
=9,757,374
29. Related Party Transactions
The Group, in its regular conduct of business, has entered into transactions with associates, jointly
controlled entities and other related parties principally consisting of advances and reimbursement
of expenses, purchase and sale of real estate properties, various guarantees, construction contracts,
and development, management, underwriting, marketing and administrative service agreements.
Sales and purchases of goods and services to and from related parties are made at normal market
prices.
The effects of the foregoing are shown under the appropriate accounts in the consolidated financial
statements as follows (in thousands):
Receivable from related parties
Associates:
Interest in limited partnerships of AINA
CHI
NTDCC
Naraya Development Co. Ltd.
Lagoon Development Corporation
Arch Capital
MD Express
Accendo Commercial Corp.
Jointly controlled entities:
MWCI
Globe
ACC
EGS Acquisition Corp.
EGS Corp.
2009
2008
P
=1,559,312
120,791
25,383
17,863
15,337
908
144
–
1,739,738
=948,629
P
85,587
19
16,628
25,626
611
19
63,510
1,140,629
48,113
38,827
15,929
–
–
102,869
3,840
92,640
7,457
2,130,844
2,855,215
5,089,996
(Forward)
*SGVMC113416*
- 86 Other related parties:
Glory High
Columbus Holdings, Inc. (Columbus)
Key management personnel
Fort Bonifacio Development Corporation
(FBDC)
Ayala Systems Technology, Inc. (ASTI)
PPI Prime Ventures, Inc.
Innove Communications, Inc. (Innove)
Honda Cars Philippines, Inc. (HCP)
MyAyala
2009
2008
P
=571,467
520,066
280,488
=642,308
P
520,061
220,877
87,296
76,747
5,946
4,890
603
51
1,547,554
P
=3,390,161
247,428
–
–
4,806
–
3,038
1,638,518
=7,869,143
P
2009
2008
P
=78,829
509
427
79,765
=–
P
1,341
–
1,341
94
13
107
–
116
116
484,888
–
149,204
69,665
13,455
110
33,225
750,547
P
=830,419
4,937
121,447
6,371
1,196
331
134,282
=135,739
P
Payable to related parties
Associates:
BLC
CHI
Arch Capital
Jointly controlled entities:
Asiacom
Globe
Other related parties:
Columbus
Cebu Property Ventures and Development
Corporation
HCP
Green Horizons
Innove
Others
Income
2009
Associates
Jointly controlled entities
Other related parties
P
=956,704
140,652
15,062
P
=1,112,418
2008
2007
(In Thousands)
=109,277
P
=164,666
P
229,954
71,895
669,162
918,140
=1,008,393
P
P1,154,701
=
*SGVMC113416*
- 87 Cost and expenses
2009
Jointly controlled entities
Other related parties
P
=47,732
7,294
P
=55,026
2008
(In Thousands)
=54,339
P
12,983
=67,322
P
2007
=46,201
P
1,938
=48,139
P
Receivable from related parties include the following:
a. Receivables from AINA’s interest in limited partnerships are nontrade in nature and bear
interests ranging from 12% to 15%.
b. In 2008, AYC Holdings, Inc. issued promissory notes and advances to EGS Corp. and EGS
Acquisition Corp. amounting to P
=4,986.1 million. The advances amounting to P
=665.3 million
is payable in one year and bear interest at the rate of 12% per annum. The promissory notes
amounting to P
=4,320.8 million is payable over a period of five years and bear interest at the
rate of 12% to 18% per annum. The notes and advances were partially collected in October 1,
2009. The balance amounting to P
=1,655.8 million owed by EGS Corp. was assigned to
NewBridge in 2009.
c. Promissory notes issued by BLC, which were assigned by MPC to ALI and Evergreen
Holdings Inc. (EHI) and the advances subsequently made by ALI to FBDC to fund the
completion of the Bonifacio Ridge project and to BLC to finance the costs to be incurred in
relation to its restructuring program are due and demandable and bear interest at the rates of
12% to 14% per annum.
d. Any other outstanding balances at the year-end are unsecured, interest free and will be settled
in cash.
Allowance for doubtful accounts on amounts due from related parties amounted to P
=5.2 million
and P
=8.0 million as of December 31, 2009 and 2008, respectively. Reversal of provision for
doubtful accounts in 2009 amounted to P
=2.8 million and provision for doubtful accounts amounted
to P
=6.0 million in 2008, P
=1.7 million in 2007.
Compensation of key management personnel by benefit type follows:
2009
Short-term employee benefits
Share-based payments (Note 26)
Post-employment benefits (Note 25)
P
=864,014
167,886
103,979
P
=1,135,879
2008
(In Thousands)
=675,164
P
184,521
48,256
=907,941
P
2007
=503,101
P
144,767
78,110
=725,978
P
*SGVMC113416*
- 88 -
30. Financial Instruments
Fair Value of Financial Instruments
The table below presents a comparison by category of carrying amounts and estimated fair values
of all of the Group’s financial instruments (in thousands):
2008
2009
FVPL FINANCIAL ASSETS
Financial assets at FVPL
LOANS AND RECEIVABLES
Cash and cash equivalents
Short-term investments
Accounts and notes receivables
Trade receivables
Real estate
Electronics manufacturing
Automotive
Information technology and BPO
International and others
Total trade receivables
Nontrade receivables
Advances to other companies
Related parties
Investments in bonds classified
as loans and receivables
Other receivables
Total nontrade receivables
Total loans and receivables
AFS FINANCIAL ASSETS
Quoted equity investments
Unquoted equity investments
Quoted debt investments
Total AFS financial assets
HTM INVESTMENTS
Quoted debt investments
Total financial assets
OTHER FINANCIAL LIABILITIES
Current other financial liabilities
Accounts payable and accrued
expenses
Accounts payable
Accrued expenses
Dividends payable
Accrued project cost
Accrued personnel costs
Interest payable
Retentions payable
Related Parties
Customers’ deposits
Short-term debt
Current portion of long-term debt
Noncurrent other financial liabilities
Other noncurrent liabilities
Long-term debt
Total other financial liabilities
Carrying Value
Fair Value
Carrying Value
Fair Value
P
=926,860
P
=926,860
=2,233,201
P
=2,233,201
P
45,656,889
4,560,976
45,656,889
4,560,976
42,885,792
1,008,924
42,885,792
1,008,924
12,808,632
3,867,003
818,850
799,783
3,700
18,297,968
12,904,112
3,867,003
818,850
799,783
3,700
18,393,448
10,428,525
3,115,891
639,346
332,964
3,940
14,520,666
11,118,638
3,115,891
639,346
332,964
3,940
15,210,779
2,888,665
3,384,955
2,860,678
3,384,955
3,643,843
7,861,125
3,643,843
8,168,757
200,000
514,018
6,987,638
75,503,471
200,000
514,018
6,959,651
75,570,964
–
1,455,732
12,960,700
71,376,082
–
1,435,553
13,248,153
72,353,648
877,509
2,392,489
1,199,154
4,469,152
877,509
2,392,489
1,199,154
4,469,152
1,449,982
1,614,520
1,449,982
1,614,520
–
–
3,064,502
3,064,502
–
–
P
=80,899,483
P
=80,966,976
65,405
=76,739,190
P
68,695
=77,720,046
P
P
=14,584,321
6,152,842
2,264,306
2,136,700
427,502
402,278
120,938
105,355
2,374,457
2,638,658
2,453,144
P
=14,584,321
6,152,842
2,264,306
2,136,700
427,502
402,278
120,938
105,355
2,374,457
2,638,658
2,453,144
=13,922,547
P
6,821,712
1,333,740
2,022,903
823,717
501,251
262,330
135,739
1,246,593
2,755,447
1,478,871
=13,922,547
P
6,821,712
1,333,740
2,022,903
823,717
501,251
262,330
135,739
1,246,593
2,755,447
1,478,871
8,083,130
51,431,583
P
=93,175,214
8,042,012
53,331,913
P
=95,034,426
7,016,372
50,250,151
=88,571,373
P
7,022,465
51,849,121
=90,176,436
P
*SGVMC113416*
- 89 The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such value:
Cash and cash equivalents, short-term investments and current receivables - Carrying amounts
approximate fair values due to the relative short-term maturities of these investments.
Financial assets at FVPL - Fair values of investments in government securities are based on
quoted prices as of the reporting date.
Noncurrent trade and nontrade receivables - The fair values are based on the discounted value of
future cash flows using the applicable rates for similar types of instruments. The discount rates
used ranged from 4.28% to 9.59% in 2009 and 6.40% to 7.70% in 2008.
AFS quoted investments - Fair values are based on quoted prices published in markets.
AFS unquoted shares - Fair value of equity funds are based on the net asset value per share. For
other unquoted equity shares where the fair value is not reasonably determinable due the
unpredictable nature of future cash flows and the lack of suitable method of arriving at a reliable
fair value, these are carried at cost.
HTM investments - The fair value of bonds is based on quoted market prices.
Liabilities - The fair values of accounts payable and accrued expenses and short-term debt
approximate the carrying amounts due to the short-term nature of these transactions.
The fair value of noncurrent other financial liabilities (fixed rate and variable rate loans repriced
on a semi-annual/annual basis and deposits) are estimated using the discounted cash flow
methodology using the current incremental borrowing rates for similar borrowings with maturities
consistent with those remaining for the liability being valued. The discount rates used ranged
from 4.28% to 9.59% in 2009 and 6.60% to 7.70% in 2008.
For variable rate loans that reprice every three months, the carrying value approximates the fair
value because of recent and regular repricing based on current market rates.
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial
instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair
value are observable, either directly or indirectly
Level 3: techniques which use inputs that have a significant effect on the recorded fair value that
are not based on observable market data.
Financial assets at FVPL and quoted AFS financial assets amounting to P
=440.6 million and
=2,076.7 million, respectively, were classified under the Level 1 category. There are no financial
P
assets at FVPL and quoted AFS financial assets that have been classified under the Level 2 and 3
category.
During the reporting period ended December 31, 2009, there were no transfers between Level 1
and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value
measurements.
*SGVMC113416*
- 90 Risk Management and Financial Instruments
General
In line with the corporate governance structure of the Company, the Company has adopted a
group-wide enterprise risk management framework in 2002. An Enterprise Risk Management
Policy was approved by the Audit Committee in 2003, and was subsequently revised and approved
on February 14, 2008. The policy was designed primarily to enhance the risk management
process and institutionalize a focused and disciplined approach to managing the Company’s
business risks. By understanding and managing risk, the Company provides greater certainty and
confidence to the stockholders, employees, and the public in general.
The risk management framework encompasses the identification and assessment of business risks,
development of risk management strategies, assessment/design/implementation of risk
management capabilities, monitoring and evaluating the effectiveness of risk mitigation strategies
and management performance, and identification of areas and opportunities for improvement in
the risk management process.
A Chief Risk Officer (CRO) is the ultimate champion of enterprise risk management of the Group
and oversees the entire risk management function. On the other hand, the Risk Management Unit
provides support to the CRO and is responsible for overall continuity. Beginning 2008, under an
expanded charter, the Audit and Risk Committee will provide a more focused oversight role over
the risk management function. A quarterly report on the risk portfolio of the Group and the related
risk mitigation efforts and initiatives are provided to the Audit and Risk Committee. The
Company’s internal auditors monitor the compliance with Group’s risk management policies to
ensure that an effective control environment exists within the Group.
The Company engaged the services of an outside consultant to assist the Company in the roll-out
of a more focused enterprise risk management framework which included a formal risk awareness
session and self-assessment workshops with all the functional units of the Company. The
Company continues to monitor the major risk exposures and the related risk mitigation efforts and
initiatives.
The Audit and Risk Committee has initiated the institutionalization of an enterprise risk
management function across all the subsidiaries and affiliates.
Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise financial assets at FVPL, AFS financial
assets, HTM investments, bank loans, corporate notes and bonds. The financial debt instruments
were issued primarily to raise financing for the Group’s operations. The Group has various
financial assets such as cash and cash equivalents, accounts and notes receivables and accounts
payable and accrued expenses which arise directly from its operations.
The main purpose of the Group’s financial instruments is to fund its operational and capital
expenditures. The main risks arising from the use of financial instruments are interest rate risk,
foreign exchange risk, liquidity risk and credit risk. The Group also enters into derivative
transactions, the purpose of which is to manage the currency and interest rate risks arising from its
financial instruments.
*SGVMC113416*
- 91 The Group’s risk management policies are summarized below:
Interest rate risk
The Group’s exposure to market risk for changes in interest rates relates primarily to the
Company’s and its subsidiaries’ long-term debt obligations. The Group’s policy is to manage its
interest cost using a mix of fixed and variable rate debt.
The following table demonstrates the sensitivity of the Group’s profit before tax and equity to a
reasonably possible change in interest rates as of December 31, 2009 and 2008, with all variables
held constant, (through the impact on floating rate borrowings and changes in fair value of
financial assets at FVPL).
December 31, 2009
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
AFS financial assets
Effect on profit before tax
Change in basis points
+100 basis points
-100 basis points
(In Thousands)
(P
=3,796)
P
=3,846
(52,388)
52,388
(49,700)
49,700
(P
=105,884)
P
=105,934
Change in basis points
Effect on equity
+100 basis points
-100 basis points
(In Thousands)
(P
=12,106)
P
=12,438
December 31, 2008
FVPL financial assets
Parent Company - floating rate borrowings
Subsidiaries - floating rate borrowings
Effect on profit before tax
Change in basis points
+100 basis points
-100 basis points
(In Thousands)
(P
=10,295)
=10,475
P
(52,425)
52,425
(130,990)
130,990
(P
=193,710)
=193,890
P
There is no other impact on the Group’s equity other than those already affecting the net income.
*SGVMC113416*
- 92 The terms and maturity profile of the interest-bearing financial assets and liabilities, together with its corresponding nominal amounts and carrying values
(in thousands), are shown in the following table:
2009
Interest terms (p.a.)
Group
Cash and cash equivalents Fixed at the date of investment
Short-term investments Fixed at the date of investment or
revaluation cut-off
Financial assets at FVPL Fixed at the date of investment or
revaluation cut-off
Accounts and notes
Fixed at the date of sale
receivable
Quoted debt investments Fixed at the date of investment or
revaluation cut-off
Company
Long-term debt
Fixed
Fixed at 6.725% to 7.95%
Fixed at 8.15%
Fixed at 6.70% to 8.40%%
Fixed at 6.75%
Floating
Variable at 0.50% to 0.67% over 91day T-bills PDST-R1 (formerly Mart1)
Subsidiaries
Short-term debt
Variable ranging from 1.9% to 3.9%
Variable ranging from 5.0% to 9.5%
Long-term debt
Fixed
Fixed at 5.0% to 14.88%
Rate Fixing
Period
Nominal
Amount
< 1 year
1 to 5 years
> 5 years
Carrying Value
Various
Balance date
=
P45,656,889
4,560,976
=
P45,656,889
4,560,976
=–
P
–
=–
P
–
=
P45,656,889
4,560,976
Balance date
433,821
433,821
–
–
433,821
Date of sale
12,502,881
9,328,493
1,282,872
125,549
10,736,914
Various
925,694
925,694
222,490
50,970
1,199,154
5 years
6 years
7 years
10 years
14,000,000
1,000,000
2,485,000
1,498,333
45,000
–
7,500
1,667
13,955,000
1,000,000
1,477,500
6,666
–
–
1,000,000
1,490,000
14,000,000
1,000,000
2,485,000
1,498,333
3 months
6,985,000
255,000
6,730,000
–
6,985,000
Monthly
Monthly
968,783
1,669,875
968,783
1,669,875
–
–
–
–
968,783
1,669,875
3,5,7 and 10
years
15,891,724
322,320
11,388,838
4,177,019
15,888,177
3 month,
semi-annual
12,031,450
1,821,657
9,382,894
823,666
12,028,217
Floating
Variable
*SGVMC113416*
- 93 2008
Interest terms (p.a.)
Group
Cash and cash equivalents Fixed at the date of investment
Short-term investments
Fixed at the date of investment or
revaluation cut-off
Fixed at the date of investment or
Financial assets at FVPL
revaluation cut-off
Accounts and notes
Fixed at the date of sale
receivable
HTM
Fixed at 16.50%
Company
Long-term debt
Fixed
Fixed at 6.70%
Fixed at 6.75%
Fixed at 6.825%
Fixed at 10.00%
Fixed at 10.375%
Fixed at 6.725%
Floating
Variable at 0.50% to 0.67% over 91-day
T-bills PDST-R1 (formerly Mart1)
Subsidiaries
Short-term debt
Variable ranging from 7.0% to 9.64%
Variable ranging from 2.5% to 6.4%
Long-term debt
Fixed
Fixed at 9.5%
Fixed at 5.0% to 14.88%
Rate Fixing
Period
Nominal
Amount
< 1 year
1 to 5 years
> 5 years
Carrying Value
Various
Balance date
=
P42,885,792
1,008,924
=
P42,885,792
1,008,924
=–
P
–
=–
P
–
=
P42,885,792
1,008,924
Balance date
1,778,720
1,778,720
–
1,778,720
Date of sale
14,720,214
8,017,173
5,651,461
208,166
13,876,800
6 months
65,000
65,405
–
–
65,405
7 years
10 years
5 years
5 years
7 years
5 years
1,492,500
1,500,000
6,000,000
3,000,000
4,170,000
2,000,000
7,500
1,667
–
–
10,000
–
30,000
6,667
6,000,000
3,000,000
4,160,000
2,000,000
1,455,000
1,491,666
–
–
–
–
1,492,500
1,500,000
6,000,000
3,000,000
4,170,000
2,000,000
3 months
6,990,000
5,000
6,985,000
–
6,990,000
Monthly
Monthly
1,501,000
1,254,447
1,501,000
1,254,447
–
–
–
–
1,501,000
1,254,447
1 and 2 years
3,5,7 and 10
years
33,500
13,855,658
33,500
204,892
–
9,884,047
–
3,762,625
33,500
13,851,564
3 months
1,625,000
39,250
435,350
1,146,394
1,620,994
3 months
10,985,557
1,177,062
9,799,115
9,380
10,985,557
Floating
Variable at 1.00% to 1.5% over 91-day
PDST-F or PDST-R1
Variable from 4.0% to 15.0%
*SGVMC113416*
- 94 Foreign exchange risk
The Group’s foreign exchange risk results primarily from movements of the Philippine Peso
(PHP) against the United States Dollar (US$). The Company may enter into foreign currency
forwards and foreign currency swap contracts in order to hedge its US$ obligations.
The table below summarizes the Group’s exposure to foreign exchange risk as of
December 31, 2009 and 2008. Included in the table are the Group’s monetary assets and liabilities
at carrying amounts, categorized by currency.
2008
US$ Php Equivalent*
2009
US$ Php Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Short term investments
Accounts and notes receivables
Total assets
Liabilities
Accounts payable and accrued
expenses
Short-term debt
Long-term debt
Total liabilities
Net foreign currency denominated
assets (liabilities)
US$171,687
6,576
1,968
180,231
P
=7,931,962
303,811
90,932
8,326,705
US$88,107
6,120
107,245
201,472
=4,186,845
P
290,822
5,096,282
9,573,949
70,911
34,500
155,000
260,411
3,276,098
1,593,900
7,161,000
12,030,998
2,119
–
175,000
177,119
100,695
–
8,316,000
8,416,695
(US$80,180)
(P
=3,704,293)
US$24,353
=1,157,254
P
*Translated using the exchange rate at the reporting date (US$1:P
=46.200 in 2009, US$1:47.520)
The table below summarizes the exposure to foreign exchange risk of the subsidiaries with a
functional currency of US$.
2009
PHP US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Other non-current assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Short-term debt
Other noncurrent liabilities
Total liabilities
Net foreign currency denominated
assets (liabilities)
2008
PHP US$ Equivalent*
P
=446,323
194,834
29,604
38,413
709,174
US$9,661
4,217
641
831
15,350
P
=783,272
236,652
43,935
–
1,063,859
US$16,483
4,980
925
–
22,388
551,037
68,216
71,000
27,343
717,596
11,927
1,477
1,537
592
15,533
534,193
–
–
–
534,193
11,241
–
–
–
11,241
(US$183)
P
=529,666
US$11,147
(P
=8,422)
*Translated using the exchange rate at the reporting date (P
=1:US$0.022 in 2009, =
P1:US$0.021 in 2008)
*SGVMC113416*
- 95 2009
SGD US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Short-term debt
Long-term debt
Other noncurrent liabilities
Total liabilities
Net foreign currency denominated
assets
2008
SGD US$ Equivalent*
SGD5,434
717
–
5,611
11,762
US$3,911
515
–
4,037
8,463
SGD12,976
142
1,275
8,074
22,467
US$8,944
98
879
5,565
15,486
2,205
2,085
3,172
–
143
7,605
1,590
1,349
2,291
–
103
5,333
2,117
–
–
6,949
171
9,237
1,459
–
–
4,790
118
6,367
SGD4,157
US$3,130
SGD13,230
US$9,119
*Translated using the exchange rate at the reporting date (SGD1:US$0.719 in 2009, SGD1:US$0.689 in 2008)
2009
JPY US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Net foreign currency denominated
assets (liabilities)
2008
JPY US$ Equivalent*
JPY19,854
151,583
320
171,757
US$217
1,696
3
1,916
JPY44,824
92,418
–
137,242
US$493
1,016
–
1,509
323,334
3,630
80,176
882
JPY57,066
US$627
(JPY151,577)
(US$1,714)
*Translated using the exchange rate at the reporting date (JPY1:US$0.011 in 2009 and 2008)
2009
HKD US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Net foreign currency denominated
assets
2008
HKD US$ Equivalent*
HKD1,053
97,199
320
16,541
115,113
US$136
12,542
41
2,134
14,853
HKD106,845
106,559
320
16,541
230,265
US$13,787
13,750
41
2,134
29,712
4,765
615
12,076
1,558
HKD110,348
US$14,238
HKD218,189
US$28,154
*Translated using the exchange rate at the reporting date (HKD1:US$0.129 in 2009 and 2008)
*SGVMC113416*
- 96 2009
RMB US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Total liabilities
Net foreign currency denominated
assets (liabilities)
2008
RMB US$ Equivalent*
RMB43,235
160,552
203,787
US$6,333
23,518
29,851
RMB16,508
132,881
149,389
US$ 2,410
19,403
21,813
234,361
9
234,370
34,081
–
34,081
103,097
–
103,097
15,054
–
15,054
RMB46,292
US$6,759
(RMB30,583)
(US$4,230)
*Translated using the exchange rate at the reporting date (RMB1:US$0.146 in 2009 and 2008)
2009
GBP US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Total liabilities
Net foreign currency denominated
liabilities
2008
GBP US$ Equivalent
GBP77
642
775
1,494
US$124
1,035
1,250
2,409
–
–
–
–
–
–
–
–
2,354
247
2,601
3,797
399
4,196
–
–
–
–
–
–
–
–
(GBP1,107)
(US$1,787)
*Translated using the exchange rate at the reporting date (GBP1:US$0.914)
2009
INR US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other current liabilities
Long-term debt
Total liabilities
Net foreign currency denominated
liabilities
2008
INR US$ Equivalent
INR20,467
4,001
34,142
58,610
US$441
86
735
1,262
–
–
–
–
–
–
–
–
67,627
25,361
21,799
114,787
1,456
546
469
2,471
–
–
–
–
–
–
–
–
–
–
(INR56,177)
(US$1,209)
*Translated using the exchange rate at the reporting date (INR1:US$0.022)
*SGVMC113416*
- 97 2009
THB US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Net foreign currency denominated
assets
2008
THB US$ Equivalent*
THB4,846
1,591
–
153,386
159,823
US$146
48
–
4,619
4,813
THB4,846
–
92
210,205
215,143
US$137
–
3
5,524
5,664
182
5
144
4
THB159,641
US$4,808
THB214,999
US$5,660
*Translated using the exchange rate at the reporting date (THB1:US$0.030 in 2009, THB1:US$0.028 in 2008 )
2009
MYR US$ Equivalent*
(In Thousands)
Assets
Cash and cash equivalents
Accounts and notes receivables
Other current assets
Other noncurrent assets
Total assets
Liabilities
Accounts payable and accrued
expenses
Other noncurrent liabilities
Total liabilities
Net foreign currency denominated
assets
2008
MYR US$ Equivalent*
MYR3,567
30
–
4,082
7,679
US$1,052
9
–
1,204
2,265
MYR5,233
9
68
5,410
10,720
US$1,445
2
19
1,494
2,960
78
26
104
23
8
31
78
26
104
22
7
29
MYR7,575
US$2,234
MYR10,616
US$2,931
*Translated using the exchange rate at the reporting date (MYR1:US$0.0.295 in 2009, MYR1:US$0.0.276 in 2008)
The following table demonstrates the sensitivity to a reasonably possible change in the exchange
rate, with all variables held constant, of the Group’s profit before tax (due to changes in the fair
value of monetary assets and liabilities) and the Group’s equity (in thousands).
2009
Currency
US$
Increase (decrease) in
Peso per foreign currency
depreciation (appreciation)
P
=1.00
(1.00)
Effect
on profit
before tax
(P
=80,180)
80,180
*SGVMC113416*
- 98 -
Currency
PHP
SGD
JPY
HKD
RMB
GBP
INR
THB
MYR
Increase (decrease) in
USD per foreign currency
depreciation (appreciation)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
Effect
on profit
before tax
(US$8,422)
8,422
4,157
(4,157)
(151,577)
151,577
110,348
(110,348)
(30,583)
30,583
(1,107)
1,107
(56,177)
56,177
159,641
(159,641)
7,575
(7,575)
Increase (decrease) in
Peso per foreign currency
depreciation (appreciation)
Effect
on profit
before tax
2008
Currency
US$
Currency
PHP
SGD
HKD
RMB
JPY
THB
MYR
P1.00
=
(1.00)
Increase (decrease) in
USD per foreign currency
depreciation (appreciation)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
US$1.00
(US$1.00)
P24,353
=
(24,353)
Effect
on profit
before tax
US$529,666
(529,666)
13,230
(13,230)
218,189
(218,189)
46,292
(46,292)
57,066
(57,066)
215,143
(215,143)
10,616
(10,616)
There is no other impact on the Group’s equity other than those already affecting net income.
*SGVMC113416*
- 99 Price risk
AFS financial assets are acquired at certain prices in the market. Such investment securities are
subject to price risk due to changes in market values of instruments arising either from factors
specific to individual instruments or their issuers or factors affecting all instruments traded in the
market. Depending on the several factors such as interest rate movements, the country’s economic
performance, political stability, domestic inflation rates, these prices change, reflecting how
market participants view the developments.
The analysis below demonstrates the sensitivity to a reasonably possible change of market index
with all other variables held constant, of the Group’s equity (in thousands).
2009
Market Index
PSEi
Change in Variables
+5%
-5%
Effect on Equity
=168,206
P
(168,206)
Change in Variables
+5%
-5%
Effect on Equity
=38,096
P
(38,096)
2008
Market Index
PSEi
Liquidity risk
The Group seeks to manage its liquidity profile to be able to service its maturing debts and to
finance capital requirements. The Group maintains a level of cash and cash equivalents deemed
sufficient to finance operations. As part of its liquidity risk management, the Company regularly
evaluates its projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund-raising activities. Fund-raising activities may
include bank loans and capital market issues both on-shore and off-shore.
The table summarizes the maturity profile of the Group’s financial liabilities as of
December 31, 2009 and 2008 based on contractual undiscounted payments.
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Accrued project costs
Dividends payable
Accrued personnel
costs
Related parties
Retentions payable
Customers’ deposit
Short-term debt
Long-term debt
Other noncurrent
liabilities
< 1 year
1 to < 2 years
2009
2 to < 3 years
(In Thousands)
> 3 years
Total
P
= 14,584,321
6,152,842
2,136,700
2,264,306
P
=–
–
–
–
P
=–
–
–
–
P
=–
–
–
–
P
=14,584,321
6,152,842
2,136,700
2,264,306
427,502
105,355
120,938
2,374,457
2,638,658
2,453,144
–
–
–
–
–
8,256,906
–
–
–
–
–
11,289,842
–
–
–
–
–
31,884,835
427,502
105,355
120,938
2,374,457
2,638,658
53,884,727
–
P
= 33,258,223
6,865,272
P
=15,122,178
902,293
P
=12,192,135
315,565
P
=32,200,400
8,083,130
P
=92,772,936
*SGVMC113416*
- 100 -
Interest payable
Accounts payable and
accrued expenses
Accounts payable
Accrued expenses
Accrued project costs
Dividends payable
Accrued personnel
costs
Retentions payable
Related parties
Customers’ deposit
Short-term debt
Long-term debt
Other noncurrent
liabilities
Interest payable
< 1 year
P
= 3,119,138
1 to < 2 years
P
=1,795,261
2 to < 3 years
P
=1,675,878
> 3 years
P
=2,948,760
Total
P
=9,539,037
< 1 year
1 to < 2 years
2008
2 to < 3 years
(In Thousands)
> 3 years
Total
=13,922,547
P
6,821,712
2,022,903
1,333,740
=–
P
–
–
–
=–
P
–
–
–
=–
P
–
–
–
=13,922,547
P
6,821,712
2,022,903
1,333,740
823,717
262,330
135,739
1,246,593
2,755,447
1,478,871
–
–
–
–
–
5,669,616
–
–
–
–
–
8,801,387
–
–
–
–
–
35,694,241
823,717
262,330
135,739
1,246,593
2,755,447
51,644,115
–
=30,803,599
P
2,260,063
=7,929,679
P
745,981
=9,547,368
P
4,010,328
=39,704,569
P
7,016,372
=87,985,215
P
< 1 year
=3,625,656
P
1 to < 2 years
=3,360,187
P
2 to < 3 years
=3,212,604
P
> 3 years
=4,162,923
P
Total
=14,361,370
P
Cash and cash equivalents, short-term investments, financial assets at FVPL and AFS debt
investments are used for the Group’s liquidity requirements. Please refer to the terms and
maturity profile of these financial assets under the maturity profile of the interest-bearing financial
assets and liabilities disclosed in the interest rate risk section. AFS unquoted debt investments
with maturity of more than a year from December 31 are marketable securities and could be sold
as and when needed prior to its maturity in order to meet the Group’s short-term liquidity needs.
Credit risk
The Group’s holding of cash and short-term investments exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing only with institutions for which credit
limits have been established. The Group’s treasury policy sets credit limits for each counterparty.
Given the Group’s diverse base of counterparties, it is not exposed to large concentrations of credit
risk.
*SGVMC113416*
- 101 The table below shows the maximum exposure to credit risk for the components of the
consolidated statement of financial position. The maximum exposure is shown at gross, before the
effect of mitigation through the use of master netting arrangements or collateral agreements.
Cash and cash equivalents
Short-term investments
Financial assets at FVPL
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Automotive
Information technology and business
process outsourcing
International and others
Advances to other companies
Related parties
Investment in bonds classified as loans and
receivables
Others
AFS financial assets
Quoted equity investments
Unquoted equity investments
Quoted debt investments
HTM investments
Bonds
Total credit risk exposure
2008
2009
(In Thousands)
=39,113,232
P
P
=41,696,097
1,008,924
4,560,976
2,233,201
926,860
12,808,632
3,867,003
818,850
10,428,525
3,115,891
639,346
799,783
3,700
2,888,665
3,384,955
332,964
3,940
3,643,843
7,861,125
200,000
514,018
–
1,455,732
877,509
2,392,489
1,199,154
1,449,982
1,614,520
–
–
P
=76,938,691
65,405
=72,966,630
P
*SGVMC113416*
- 102 The analysis of accounts and notes receivables that are past due but not impaired follows:
December 31, 2009
Neither Past
Due nor
Impaired
Past Due but not Impaired
60-90 days 90-120 days
(In Thousands)
<30 days
30-60 days
P
=706,133
88,862
677
152,945
3
106,132
73,816
P
=309,749
69,953
406,287
48,798
635
13,169
177,172
P
=296,463
14,462
–
15,412
–
3,074
50,595
–
134
P
=1,128,702
–
419
P
=1,026,182
–
1,109
P
=381,115
Neither Past
Due nor
Impaired
<30 days
30-60 days
Trade:
Real estate
=8,132,446
P
Electronics manufacturing
2,942,598
Automotive
245,499
Information technology and BPO
200,326
International and others
–
Advances to other companies
2,429,488
Related parties
7,634,485
Others
1,067,694
P22,652,536
=
Total
=907,944
P
138,169
274,359
64,596
1,542
249,737
56,138
38,823
=1,731,308
P
=267,659
P
16,415
89,929
20,296
1,681
27,017
47,536
69,285
=539,818
P
Trade:
Real estate
P
= 10,616,823
Electronics manufacturing
3,634,407
Information technology and BPO
272,769
Automotive
562,613
International and others
2,263
Related parties
3,216,798
Advances to other companies
1,689,117
Investment in bonds classified as
loans and receivables
200,000
Others
522,926
Total
P
= 20,717,716
>120 days
Total
Impaired
Total
P
=263,399
15,810
99,157
9,772
–
28,319
38,763
P
= 640,257
43,509
20,893
29,310
799
17,463
859,202
P
=2,216,001
232,596
527,014
256,237
1,437
168,157
1,199,548
P
=178,618 P
=13,011,442
14,436
3,881,439
77,405
877,188
30,451
849,301
103
3,803
5,206
3,390,161
–
2,888,665
–
908
P
=456,128
–
266
P
=1,611,699
–
2,836
P
=4,603,826
–
200,000
30,827
556,589
P
=337,046 P
=25,658,588
Past Due but not Impaired
60-90 days 90-120 days
(In Thousands)
>120 days
Total
=671,869
P
18,465
18,956
–
270
546,018
36,863
76,826
=1,369,267
P
=2,349,684
P
173,293
419,954
132,638
3,940
1,214,355
226,640
345,064
=4,865,568
P
December 31, 2008
=369,772
P
244
28,933
31,365
258
383,020
44,731
72,592
=930,915
P
=132,440
P
–
7,777
16,381
189
8,563
41,372
87,538
=294,260
P
Impaired
Total
= 83,124 =
P
P10,565,254
36,277
3,152,168
217
665,670
19,120
352,084
60,134
64,074
–
3,643,843
8,018
7,869,143
114,203
1,526,961
=321,093 P
P
=27,839,197
*SGVMC113416*
- 103 The table below shows the credit quality of the Group’s financial assets as of December 31, 2009 and 2008 (in thousands):
December 31, 2009
Cash and cash equivalents
Short-term investments
FVPL financial assets
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Information technology and BPO
Automotive
International and others
Related parties
Advances to other companies
Investments in bonds classified as
loans and receivables
Others
AFS Investments
Quoted shares of stocks
Unquoted shares of stocks
Quoted debt investments
Neither past due nor impaired
High Grade Medium Grade
Low Grade
P
=45,656,889
P
=–
P
=–
4,560,976
–
–
926,860
–
–
Total
P
=45,656,889
4,560,976
926,860
Past due but
not impaired
P
=–
–
–
Impaired
P
=–
–
–
Total
P
=45,656,889
4,560,976
926,860
9,151,761
3,269,152
272,769
381,983
–
3,102,245
1,668,211
854,788
334,198
–
180,630
2,263
31,457
4,317
610,274
31,057
–
–
–
83,096
16,589
10,616,823
3,634,407
272,769
562,613
2,263
3,216,798
1,689,117
2,216,001
232,596
527,014
256,237
1,437
168,157
1,199,548
178,618
14,436
77,405
30,451
103
5,206
–
13,011,442
3,881,439
877,188
849,301
3,803
3,390,161
2,888,665
200,000
522,792
–
134
–
–
200,000
522,926
–
2,836
–
30,827
200,000
556,589
877,509
–
1,199,154
P
=71,790,301
–
2,392,489
–
P
=3,800,276
–
–
–
P
=741,016
877,509
2,392,489
1,199,154
P
=76,331,593
–
–
–
P
=4,603,826
–
–
–
P
=337,046
877,509
2,392,489
1,199,154
P
=81,272,465
*SGVMC113416*
- 104 December 31, 2008
Cash and cash equivalents
Short-term investments
FVPL financial assets
Accounts and notes receivables
Trade
Real estate
Electronics manufacturing
Automotive
Information technology and BPO
International and others
Advances to other companies
Related parties
Others
AFS Investments
Quoted shares of stocks
Unquoted shares of stocks
HTM Investments
Quoted debt investments
Neither past due nor impaired
High Grade Medium Grade Low Grade
=42,885,792
P
=–
P
=–
P
1,008,924
–
–
2,233,201
–
–
Total
=42,885,792
P
1,008,924
2,233,201
Past due but
not impaired
=–
P
–
–
Impaired
=–
P
–
–
Total
=42,885,792
P
1,008,924
2,233,201
6,042,439
867,658
192,080
200,326
–
2,407,629
6,967,055
928,795
1,600,010
1,682,919
53,419
–
–
7,942
667,430
138,899
489,997
392,021
–
–
–
13,917
–
–
8,132,446
2,942,598
245,499
200,326
–
2,429,488
7,634,485
1,067,694
2,349,684
173,293
419,954
132,638
3,940
1,214,355
226,640
345,064
83,124
36,277
217
19,120
60,134
–
8,018
114,203
10,565,254
3,152,168
665,670
352,084
64,074
3,643,843
7,869,143
1,526,961
1,449,982
–
–
1,614,520
–
–
1,449,982
1,614,520
–
–
–
–
1,449,982
1,614,520
65,405
=65,249,286
P
–
=5,765,139
P
–
=
P895,935
65,405
=71,910,360
P
–
=4,865,568
P
–
=321,093
P
65,405
=77,097,021
P
*SGVMC113416*
- 105 The credit quality of the financial assets was determined as follows:
Cash and cash equivalents, short-term investments, FVPL financial assets, quoted AFS financial
assets, HTM investments, advances to other companies and related party receivables
High grade pertains to cash and cash equivalents and short-term investments, quoted financial
assets, related party transactions and receivables with high probability of collection.
Medium grade pertains to unquoted financial assets other than cash and cash equivalents and
short-term investments with nonrelated counterparties and receivables from counterparties with
average capacity to meet its obligation.
Low grade pertains to financial assets with the probability to be impaired based on the nature of
the counterparty.
Trade receivables
Real estate - high grade pertains to receivables with no default in payment; medium grade pertains
to receivables with up to 3 defaults in payment; and low grade pertains to receivables with more
than 3 defaults in payment.
Electronics manufacturing - high grade pertains to receivable with favorable credit terms and can
be offered with a credit term of 15 to 45 days; medium grade pertains to receivable with normal
credit terms and can be offered with a credit term of 15 to 30 days; and low grade pertains to
receivables under advance payment or confirmed irrevocable Stand-by Letter of Credit and
subjected to semi-annual or quarterly review for possible upgrade.
Automotive - high grade pertains to receivables from corporate accounts and medium grade for
receivables from noncorporate accounts.
AFS financial assets - the unquoted investments are unrated.
31. Registration with the Philippine Export Zone Authority (PEZA)
Some activities of certain subsidiaries are registered with the PEZA. Under the registration, these
subsidiaries are entitled to certain tax and nontax incentives, which include, but are not limited to,
income tax holiday (ITH) and duty-free importation of inventories and capital equipment. Upon
the expiration of the ITH, the subsidiaries will be liable for payment of a five percent (5%) tax on
gross income earned from sources within the PEZA economic zone in lieu of payment of national
and local taxes.
32. Note to Consolidated Statements of Cash Flows
The Group’s noncash investing activity in 2009 pertains to the loans receivable from EGS Corp.
that were transferred to Stream as part of the Agreement amounting to P
=1,699.6 million
($35.8 million).
*SGVMC113416*
- 106 -
33. Interest in a Joint Venture
MDC has a 51% interest in Makati Development Corporation - First Balfour, Inc. Joint Venture
(the Joint Venture), a jointly controlled operation whose purpose is to design and build St. Luke’s
Medical Center (the Project) in Fort Bonifacio Global City, Taguig.
The Project was started on January 31, 2007. The Project is a world-class medical facility
comprising, more or less, of a 611-bed hospital and a 378-unit medical office building, with an
approximate gross floor area of 154,000 square meters, which meets international standards, and
all standards and guidelines of applicable regulatory codes of the Philippines and complies with
the criteria of the Environment of Care of the Joint Commission International Accreditation.
The Group’s share in the assets, liabilities, income and expenses of the Joint Venture at
December 31, 2009 and 2008 and for the years then ended, which are included in MDC’s financial
statements, are as follows:
2009
(In Thousands)
Current assets
Cash and cash equivalents
Receivables
Due from customers for contract work
Inventory
Other current assets
Property and equipment
Total assets
Current liabilities
Revenue
Contract costs
Interest and other income
Income before income tax
Income tax
Net income
P
=150,805
191,809
61,379
–
46,326
22
450,341
226,545
835,615
(730,779)
(583)
104,253
(831)
P
=103,422
2008
=181,953
P
440,569
229,596
18,349
135,674
16,978
1,023,119
802,821
1,422,023
(1,218,026)
16,516
220,513
(2,250)
=218,263
P
Provision for income tax pertains to final tax on interest income.
34. Commitments and Contingencies
Commitments
ALI has an existing contract with the Bases Conversion Development Authority (BCDA) to
develop, under a lease agreement, a mall with an estimated gross leasable area of 152,000 square
meters on a 9.8-hectare lot inside Fort Bonifacio. The lease agreement covers 25 years, renewable
for another 25 years subject to reappraisal of the lot at market value. The annual fixed lease rental
amounts to P
=106.5 million while the variable rent ranges from 5% to 20% of gross revenue.
Subsequently, ALI transferred its rights and obligations granted to or imposed under the lease
agreement to SSECC, its subsidiary, in exchange for equity.
*SGVMC113416*
- 107 As part of the bid requirement, ALI procured a performance bond in 2003 from the Government
Service Insurance System in favor of BCDA amounting to P
=3.9 billion to guarantee the committed
capital to BCDA. Moreover, SSECC obtained standby letters of credit to guarantee the payment
of the fixed and variable rent as prescribed in the lease agreement.
On April 15, 2003, ALI entered into a Joint Development Agreement (JDA) with BCDA for
development of another lot inside Fort Bonifacio with a gross area of 11.6 hectares for residential
purposes. Pursuant to the agreement, BCDA shall contribute its title and interest to the lot and
ALI in turn shall provide the necessary cash and expertise to undertake and complete the
implementation of the residential development. ALI commits to invest sufficient capital to
complete the residential development.
ALI procured a surety bond with a face value of P
=122.9 million issued by an insurance company
in favor and for the benefit of BCDA as beneficiary. The surety bond shall be continuing in nature
and shall secure the obligation of ALI to pay BCDA annual minimum revenue share for each of
the first 8 selling periods of the residential project.
In 2002, ALI agreed to underwrite the subscription to NTDCC additional shares amounting to
=1.4 billion over a 4-year equity schedule up to 2007 in exchange for a 5% underwriting fee (net
P
of a 1.5% rebate to existing shareholders who subscribed).
MDC, in the normal course of business, furnishes performance bonds in connection with its
construction projects. These bonds shall guarantee MDC’s execution and completion of the work
indicated in the respective construction contracts.
On April 15, 2008, the Company acted as guarantor to a US$50 million transferable term loan
facility between AYC, a subsidiary, as borrower and several lenders who are also the lead
arrangers of the Agreement.
Repayment dates for advances made to AYC are in six-month intervals from 2011 to 2013. The
Company unconditionally guaranteed the due and punctual payment of advances if for any reason
AYC does not make timely payment. The Company waived all rights of subrogation,
contribution, and claims of prior exhaustion of remedies. The Company’s obligation as guarantor
will remain in full force until no sum remains to be lent by the lenders, and the lenders recover the
advances.
AINA obtained a US$3.0 million letter of credit as security for the release of a loan to one of its
subsidiaries. As security for the letter or credit, AINA is required to maintain a US$3.0 million
certificate of deposit with the bank. AINA, together with another individual, jointly and severally
guarantees the obligation of its subsidiary.
Share sale and purchase agreement with United Utilities (UU)
On November 11, 2009, the Company, UU and Philwater Holdings, Inc. signed agreements for the
Company’s acquisition of UU’s 81.9 million common shares and economic interest in 2 billion
preferred shares in MWCI for a total consideration of 3.5 billion.
As of December 31, 2009, the MWCI shares held by UU was not transferred to the Company
pending compliance of certain conditions precedents under the Share Sale and Purchase
Agreement (see Note 35).
*SGVMC113416*
- 108 Contingencies
The Group has various contingent liabilities arising in the ordinary conduct of business which are
either pending decision by the courts or being contested, the outcome of which are not presently
determinable.
In the opinion of management and its legal counsel, the eventual liability under these lawsuits or
claims, if any, will not have a material or adverse effect on the Group’s financial position and
results of operations.
As a result of the explosion which occurred on October 19, 2007 at the basement of the Makati
Supermarket Building, the Philippine National Police - Multi-Agency Investigation Task Force
and the Department of Interior and Local Government - Inter-Agency task Force (DILG-IATF)
filed complaints with and recommended to the Department of Justice (“DOJ”) the prosecution of
certain officers/employees of Makati Supermarket Corporation, the owner of the building, as well
as some officers/employees of Ayala Property Management Corp. (APMC), among other
individuals, for criminal negligence. In a Joint Resolution dated April 23, 2008, the DOJ special
panel of prosecutors ruled that there was no probable cause to prosecute the APMC
officers/employees for criminal negligence. This was affirmed by the DOJ Secretary in a
Resolution dated November 17, 2008. A Motion for Reconsideration was filed by the DILGIATF to question the DOJ Secretary’s Resolution which remains unresolved to date. No civil case
has been filed by any of the victims of the incident.
35. Events after the Reporting Period
The Company
On March 4, 2010, the Company completed the acquisition of UU’s 81.9 million common shares
and economic interest in 2 billion preferred shares in MWCI. The acquisition increased the
Company’s interest in MWCI from 31.7% to 43.3%.
In various dates from January 1 to March 10, 2010, the Company bought a total of 1.34 million
common shares amounting to P
=395.4 million as part of the Company’s share buyback program.
IMI
Listing by Way of Introduction
On December 9, 2009, the BOD of PSE approved the application of IMI for the initial listing by
way of introduction of 1,137,708,197 common shares, with a par value of P
=1.00 per share, under
the First Board of the Exchange, at an indicative opening price of P
=6.24 per share. On the same
day, the PSE approved the application of IMI to list additional 146,681,420 common shares to
cover IMI’s ESOWN. The listing ceremony was held on January 21, 2010. On this date, IMI’s
stock symbol, IMI, officially entered into the electronic board of the PSE marking the start of
public trading of its common shares through the stock market.
Restructuring plan
On January 21, 2010, the IMI’s BOD approved another restructuring plan. IMI estimated to incur
about $0.64 million (P
=30.0 million) as a result of this restructuring. The employees that will be
laid off will come from two projects of IMI that will end its manufacturing agreements in
February 2010. Most of the employees included in the restructuring plan are in the operator level.
It is expected that the restructuring will be carried out and completed by March 2010.
Integreon
On February 16, 2010, Actis LLP, an emerging market private equity specialist, invested
US$50.0 million for a 37.7% interest in Integreon.
*SGVMC113416*
AYALA CORPORATION
RETAINED EARNINGS AVAILABLE FOR DIVIDEND DISTRIBUTION
As of December 31, 2009
(In thousand pesos)
Unappropriated retained earnings, as adjusted to available for
dividend distribution, beginning *
30,745,906
Add: Net income actually earned/realized during the period
Net income during the period closed to Retained Earnings (Parent)
(Less): Non-actual/unrealized income net of tax
Equity in net income of subsidiaries, associate/joint venture
Unrealized foreign exchange gain - net (except those attributable
to Cash and Cash Equivalents)
Unrealized actuarial gain
Fair value adjustment (M2M gains)
Fair value adjustment in Investment Property resulting to gain
Adjustment due to deviation from PFRS/GAAP-gain
Other unrealized gains or adjustments to the retained earnings as
a result of certain transactions accounted for under the PFRS
Sub-total
Add:
Non-actual losses
Depreciation on revaluation increment (after tax)
Adjustment due to deviation from PFRS/GAAP - loss
Loss on fair value adjustment of investment property (after tax)
4,471,664
4,471,664
-
Net income actually earned during the period
Add (Less):
Dividend declarations during the period
Appropriations of Retained Earnings during the period
Reversals of appropriations
Effects of prior period adjustments
Treasury shares
4,471,664
(4,019,714)
(138,173)
(4,157,887)
TOTAL RETAINED EARNINGS, END AVAILABLE FOR DIVIDEND*
31,059,682
*Reconciliation of consolidated retained earnings to retained earnings
available for dividend follows:
Consolidated ratained earnings balance
Accumulated equity in net earnings of subsidiaries, associates
and joint ventures
Effect of prior period adjustments - IFRIC 12 adoption
Treasury shares
Retained Earnings available for dividends
January 1, 2009
61,604,466
(30,308,020)
(550,540)
30,745,906
December 31, 2009
65,739,096
(33,990,701)
(688,714)
31,059,682
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE A - MARKETABLE SECURITIES (CURRENT MARKETABLE EQUITY SECURITIES AND
OTHER SHORT-TERM CASH INVESTMENTS)
As of December 31, 2009
(in thousand Pesos)
Name of Issuing entity &
association of each issue
Number of shares or principal amount of Amount shown in the
bonds & interest
balance sheet
Valued based on market quotation
at balance sheet date
Income received &
accrued
A. OTHER SHORT-TERM CASH INVESTMENTS 1/
Special Savings Account
BPI
Other Banks
Sub-Total
2,826,101
2,977,403
5,803,504
293,694
111,517
405,211
Time Deposits (FX)
RCBC
Metrobank
Banco de Oro
Unionbank
Security Bank
Deutsche Bank
HSBC
Others
Sub-Total
249,480
226,380
106,260
92,400
92,400
435,374
85,272
17,504
1,305,070
230
330
68
387
115
729
13,486
374
15,719
Time Deposits (Peso)
BPI
Unionbank
Standard Chartered Bank
Mizuho Bank
Metrobank
Bank of Tokyo
Banco de Oro
Others
Sub-Total
20,000
6,000
14,471
50,000
93,000
140,925
71,000
949,405
1,344,801
3
6
4
186
386
233
266
11,291
12,375
Money Market Placements (FX)
Banco de Oro
BPI
Citibank
Union Bancaire Privee
Metro Bank
RCBC
Sub-Total
361,752
5,687,437
1,974
11,557
1,058,296
7,121,016
4,062
38,475
4
2
12,711
2,988
58,242
17,764,279
3,456,576
800,000
1,102,000
22,128
683,000
23,827,983
534,323
354,089
91,780
62,109
87,449
1,129,750
1,661,068
632,655
2,293,723
41,696,097
131,247
21,857
153,104
1,774,401
Money Market Placements (Peso)
BPI
BPI-Family
Banco de Oro
Metrobank
Security Bank
Standard Chartered Bank
Sub-Total
Others
BPI
Others
Sub-Total
Total
B. SHORT-TERM INVESMENTS 2/
C. CURRENT MARKETABLE SECURITIES 3/
NOT APPLICABLE
NOT APPLICABLE
1/ Short-term highly liquid investments with varying periods up to three months shown as part of the Cash and Cash Equivalents account in the Balance Sheet. Cash equivalents is 18% of the
P232,479,035k total assets as of December 31, 2009.
2/ Money market placements with varying maturity periods of more than three months and up to six months amounting to P4,560,976 are booked under the Short-term investment account
which is 2% of the P232,479,035k total asets as of December 31, 2009.
3/ Current marketable securities are composed of financial assets at FVPL and treasury bills amounting to P926,860k and P925,694K, respectively. These are shown under the other current
assets account and is 3% of the P232,479,035k total assets as of December 31, 2009.
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE B - AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES
AND PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES)
As of December 31, 2009
(in thousand Pesos)
BEGINNING BALANCE
ADDITIONS
NOTES
ACCOUNTS
NOTES
ACCOUNTS
RECEIVABLE * RECEIVABLE RECEIVABLE* RECEIVABLE
Ayala Corporation
Ayala Automotive Holdings Corp. and subsidiaries
Ayala Aviation Corporation
386,110
-
2,497
13,646
2,638
407
Azalea International Venture Partners, Ltd.
219
880
Azalea Technology Investments, Inc.
and subisidiaries
557
1,129
Integrated Microelectronics, Inc.
and subsidiaries
Ayala Land, Inc. and subsidiaries
296,854
686,378
77,593
488
DEDUCTIONS
ENDING BALANCE
NOTES
ACCOUNTS ACCOUNTS RECEIVABLE
RECEIVABLE* RECEIVABLE
CURRENT
NON-CURRENT
57,988
1,032
1,625
1,467
1,518
-
14,678
900
692
874
433
1,733
219
679
1,934
482
20
752
1,136
13
,
95,253
-
618,314
,
696,446
,
17,121
,
184,875
298,687
269,661
349,361
336,512
958,999
238,666
939,268
19,951
55,648
303,444
363,095
* Notes receivables includes interest bearing notes with various maturity dates and interest rates.
-
ENDING BALANCE
NOTES RECEIVABLE *
CURRENT
NON-CURRENT
51,497
354,218
TOTALS
407,233
14,678
-
279
3,292
4,004
-
1,934
287
262,770
262,770
97,048
149,111
-
166,023
523,533
300
17,121
,
545,792
991,062
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE C - NON-CURRENT MARKETABLE EQUITY SECURITIES,
OTHER LONG-TERM INVESTMENT IN STOCKS AND OTHER INVESTMENTS
As of December 31, 2009
(in thousand Pesos except number of shares)
BEGINNING BALANCE
NAME OF COMPANY
Number of Shares
INVESTMENTS IN ASSOCIATES & JOINT VENTURES
Domestic:
Bank of the Philippine Islands and subsidiaries
Globe Telecom, Inc. and subsidiaries
Stream Global Services, Inc.
Manila Water Company, Inc. and subsidiaries
Emerging City Holdings, Inc.
Cebu Holdings, Inc.and subsidiaries
Bonifacio Land Corporation
North Triangle Depot Commercial Corp.
Philwater Holdings Company, Inc.
ADDITIONS
Equity in
Earnings
(Losses) of
Investees for
the period
Amount in
Pesos
DEDUCTIONS
Distribution of
Others-Cost
Others (Cost
Earnings by
(& equity adj)
& Equity Adj )
Investees
1,088,087,904
28,533,330
2,707,307
431,853
(1,958,556)
40,312,267
17,999,870
3,816,772
164,105
(4,595,724)
-
-
524,975,503
3,188,482
726,225
613,770
72,150,000
2,822,866
438,134
109,936
907,350,948
1,939,525
103,221
-
(256,637)
17,313,137
20,511,083
25.7%
4,878,910
4,308,120
565,778,084
31.5%
-
72,150,000
50.0%
3,370,936
-
907,350,948
47.2%
1,971,897
59,016
288,493
4,229,323
5.0%
1,465,167
40,507
42,450
(23,807)
(197,150)
15,138,634
49.0%
1,417,470
(60,000)
(368)
200,030,000
60.0%
1,430,475
31,000,000
50.0%
1,444,663
10,269,000
60.0%
887,296
408,504
50.0%
609,499
293,879
3,774
187,772
47,115
Asiacom Philippines, Inc.
10,269,000
842,970
44,926
-
408,504
594,329
135,606
927
5,820,399
3,346,309
-
958,627
Others
2,837,992
(436,209)
97,932
(597,436)
-
(121,363)
-
(600)
(2,910,100)
5,820,399
380,892
-
19.2%
-
1,437,451
287,659
(425,996)
(486,754)
1,615,465
68,140,394
7,361,015
7,506,521
(7,474,446)
(3,976,532)
71,556,952
-
631,767
818,215
1,449,982
-
59,294
-
1,185,345
164,611
50,877
27,500
598
14,526
171,063
1,614,520
-
TOTAL-INVESTMENTS IN ASSOCIATES & JOINT VENTURES
Quoted debt investments:
Treasury bonds
TOTAL-INVESTMENTS IN BONDS & OTHER SECURITIES
29,406,466
30.5%
1,117,658
1,209,776
Unquoted:
Rohatyn Group (SOF & GOF)
City Sports Club Cebu, Inc.
Tech Ventures
Batangas Assets Corporation
Anvaya shares
Alphion Corporation
Renewable Energy Training Corp.
Medicali USA
Red River Holdings
Glory High
Others
(70,849)
(2,206)
33.5%
40,312,268
1,555,470
1,193,190
INVESTMENTS IN BONDS & OTHER SECURITIES
AFS financial assets:
Quoted:
PNOC Energy Development Corporation
Others
(71,886)
Amount in
Pesos
4,229,323
31,000,000
Foreign:
Arch Asian Partners L.P.
-
Number of
Shares
Dividends
received/accrued fr
investments not
accounted for by the
equity method
17,110,234
200,030,000
EGS Corporation
(218,151)
Effective %
of
Ownership
(307,468) 1,088,087,904
5,135,547
Berkshires Holdings, Inc.
Alabang Commercial Corporation
ENDING BALANCE
130,766
274,604
23,100
405,575
27,368
861,413
-
(631,767)
-
-
-
877,509
877,509
(13,539)
(598)
(14,526)
(54,781)
(83,444)
-
-
1,316,111
164,611
37,338
27,500
274,604
23,100
405,575
27,368
116,282
2,392,489
273,460
3,064,502
-
1,134,873
273,460
-
(83,444)
-
-
3,543,458
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE D - INDEBTEDNESS OF UNCONSOLIDATED SUBSIDIARIES & RELATED PARTIES
As of December 31, 2009
Name of Related Parties
Balance at Beginning of Period
N O T
Balance at End of Period
A P P L I C A B L E
Receivables from related parties amounting to P3,390,161 (page ___ of the 2009 audited financial statements) is only 1% of the total
assets of P232,479,035k.
AYALA CORPORATION AND SUBSIDIARIES
Schedule E - INTANGIBLE ASSETS AND OTHER ASSETS (DEFERRED CHARGES)
As of December 31, 2009
(In Thousand Pesos)
DESCRIPTION
INTANGIBLE ASSETS:
Goodwill
Customer relationship
Unpatented technology
Developed software
Licenses
OTHER ASSETS-DEFERRED CHARGES
BEGINNING
BALANCE
3,319,665
430,561
2,025
113 146
113,146
3,865,397
83,106
ADDITIONS AT
COST
772,437
280,430
14,505
19 722
19,722
1,087,094
-
CHARGED TO
COSTS AND
EXPENSES
(191,711)
(957)
(7,938)
(35 281)
(35,281)
(235,887)
CHARGED TO
OTHER
ACCOUNTS
-
OTHER
CHANGES
ADD/(DED)
ENDING
BALANCE
(86,999)
(16,551)
(18)
(407)
(745)
(104,720)
4,005,103
502,729
1,050
6,160
96 842
96,842
4,611,884
(34,272)
48,834
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE F - LONG-TERM DEBT
As of December 31, 2009
(in thousand pesos)
TITLE OF ISSUE & TYPE OF OBLIGATION
PARENT COMPANY:
Bank loans - with interest rates ranging from 4.75% to 6.3%
per annum in 2009 and 6.3% to 6.6% per annum in 2008
and varying maturity dates up to 2013
Fixed Rate Corporate Notes (FXCNs) with interest rates
ranging from 6
6.7%
7% to 8
8.4%
4% per annum and varying maturiy
dates up to 2014
Bonds, due 2012
Syndicated term loan
SUBSIDIARIES:
Loans from banks and other institutions:
Foreign Currency - with interest rates ranging from 3.32% to 15%
per annum due in 2009 and 2.7% to 15.0% per annum in 2008
Philippine peso - with interest rates ranging from 6.97% to 20.0%
per annum in 2008 and 5.0% to 20.0% per annum in 2007
Bonds:
Due 2012
Due 2013
Due 2016
Fixed Rate Corporate Notes (FXCNs)
TOTAL
CURRENT PORTION
OF LONG-TERM
DEBT
LONG-TERM DEBT
255,000
6,730,000
6,985,000
52,500
1,667
11,432,500
6,000,000
1,496,666
11,485,000
6,000,000
1,498,333
1,762,867
8,961,949
10,724,816
381,110
2,143,977
7,378,633
16,340,582
7,759,743
18,484,559
-
41,835
4,000,000
10,000
4,051,835
41,835
4,000,000
10,000
4,051,835
-
5,380,000
5,380,000
2,453,144
51,431,583
53,884,727
TOTAL
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE G - INDEBTEDNESS TO RELATED PARTIES
(LONG-TERM LOANS FROM RELATED COMPANIES)
As of December 31, 2009
(in thousand Pesos)
Name of Related Parties
Balance at Beginning of Period
N O T
Balance at End of Period
A P P L I C A B L E
Indebtedness to related parties (long-term loans from related parties) amounting to P5,700,000k is only 2% of the total assets of P232,479,035k.
AYALA CORPORATION AND SUBSIDIARIES
SCHEDULE H - GUARANTEES OF SECURITIES OF OTHER ISSUERS
As of December 31, 2009
Name of issuing entity of securities guaranteed
by the company for which this statement is filed
AYC Finance Limited
Title of issue of each class of securities
guaranteed
Total amount guaranteed and
outstanding
Amount owned by person for
which statement is filed
Nature of guaranty
US$20M Revolving Credit Facility
Undrawn facility as of 12/31/09
Unconditional and irrevocable
guartantee for the proper and punctual
payment of indebtedness. The
Guarantor shall be liable as if it were
the sole principal debtor.
US$150M Transferable Term Loan Facility
Agreement
US$135M (Guaranteed and
Outstanding as of 12/31/09
Unconditional & irrevocable guarantee
for the punctual payment of the
guaranteed indebtedness. The
guarantor shall be liable as if it is the
sole princiapl debtor and note merely a
surety. The guaranty likewise includes
compliance with financial ratios, semiannual submission of financial
statements, 100% ownership of AYC
Finance's issued voting share capital,
among others.
US$50M Transferable Term Loan Facility
Agreement
US$50M (Guaranteed and
Outstanding as of 12/31/09)
Unconditional & irrevocable guarantee
for the punctual payment of the
guaranteed indebtedness. The
guarantor shall be liable as if it is the
sole princiapl debtor and note merely a
surety. The guaranty likewise includes
compliance with financial ratios, semiannual submission of financial
statements, 100% ownership of AYC
Finance's issued voting share capital,
among others.
AYALA CORPORATION
SCHEDULE I - CAPITAL STOCK
As of December 31, 2009
TITLE OF ISSUE
Common Stock issued & subscribed 1/
Less: Treasury Shares
Common shares outstanding
NUMBER OF
SHARES
AUTHORIZED
# OF SHARES
ISSUED/
SUBSCRIBED
600,000,000
600,000,000
500,175,832
(1,844,404)
498,331,428
Preferred A shares 2/
12,000,000
12,000,000
Preferred B shares
58,000,000
58,000,000
1/ Ayala Corporation has stock option plans for the
key officers (Executive Stock Option Plan-ESOP)
and employees (Employee Stock Ownership Plan ESOWN) covering 3% of the Company's capital
stock.
2/ Cumulative, nonvoting and redeemable with a par
value of P100 per share. It may be redeemed at the
option of Ayala Corporation starting in the fifth year.
The offering price is P500 per share with a dividend
rate of 8.88% per annum and is listed and traded at
the Philippine Stock Exchange.
3/ Preferred A shares held by Ayala Land, Inc.
(200,000 shares) and Manila Water Company, Inc.
(300,000 shares)
# OF SHARES RESERVED
FOR OPTIONS, WARRANTS,
CONVERSION & RIGHTS
# OF SHARES
HELD BY
AFFILIATES
DIRECTORS,
OFFICERS &
EMPLOYEES
5,220,684
500,000 3/
84,230
109,050
OTHERS
BANK OF THE PHILIPPINE ISLANDS
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND 2008
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2009
A member firm of
Isla Lipana & Co.
Independent Auditor’s Report
Isla Lipana & Co.
29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City, Philippines
Telephone + 63 (2) 845 2728
Facsimile + 63 (2) 845 2806
www.pwc.com
To the Board of Directors and Stockholders of
Bank of the Philippine Islands
BPI Building, Ayala Avenue
Makati City
We have audited the accompanying consolidated financial statements of Bank of the Philippine
Islands and Subsidiaries (the BPI Group) and the parent financial statements of Bank of the
Philippine Islands (the Parent Bank), which comprise the consolidated and parent statements of
condition as of December 31, 2009 and 2008, and the consolidated and parent statements of
income, total comprehensive income, changes in capital funds and cash flows for each of the
three years in the period ended December 31, 2009, and a summary of significant accounting
policies and other explanatory notes.
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. This responsibility
includes: designing, implementing and maintaining internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether
due to fraud or error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances.
Auditor’s 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 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.
Isla Lipana & Co.
Independent Auditor’s Report
To the Board of Directors and Stockholders of
Bank of the Philippine Islands
Page 2
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the accompanying consolidated and parent financial statements present fairly,
in all material respects, the financial position of the BPI Group and of the Parent Bank as of
December 31, 2009 and 2008, and their financial performance and their cash flows for each
of the three years in the period ended December 31, 2009 in accordance with Philippine
Financial Reporting Standards.
Isla Lipana & Co.
Blesilda A. Pestaño
Partner
CPA Cert. No. 40446
P.T.R. No. 0007713, January 13, 2010, Makati City
SEC A.N. (Individual) as general auditors 0049-AR-2
SEC A.N. (Firm) as general auditors 0009-FR-2
TIN 112-071-927
BIR A.N. 08-000745-7-2007, issued on August 24, 2007; effective until August 24, 2010
BOA/PRC Reg. No. 0142, effective until December 31, 2010
Makati City
February 22, 2010
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CONDITION
DECEMBER 31, 2009 AND 2008
(In Millions of Pesos)
Notes
Consolidated
2009
2008
Parent
2009
2008
RESOURCES
7
18,780
22,366
17,987
21,781
DUE FROM BANGKO SENTRAL NG PILIPINAS
CASH AND OTHER CASH ITEMS
7
62,744
48,422
54,465
41,428
DUE FROM OTHER BANKS
7
7,147
14,278
3,363
8,114
52,546
22,584
46,160
21,107
INTERBANK LOANS RECEIVABLE AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL
FINANCIAL ASSETS AT FAIR VALUE THROUGH
PROFIT OR LOSS
- DERIVATIVE FINANCIAL ASSETS
- TRADING SECURITIES
7, 8
9
2,146
2,182
2,146
2,182
10
53,256
34,399
52,159
32,999
AVAILABLE-FOR-SALE SECURITIES, net
11
71,706
63,829
60,433
50,766
HELD-TO-MATURITY SECURITIES, net
12
75,031
72,884
64,787
63,196
LOANS AND ADVANCES, net
BANK PREMISES, FURNITURE, FIXTURES AND
EQUIPMENT, net
13
327,474
320,216
240,328
240,681
14
11,410
11,176
7,833
7,654
INVESTMENT PROPERTIES, net
15
2,762
2,828
2,751
2,817
ASSETS HELD FOR SALE, net
4
14,241
14,837
11,035
12,168
6,952
6,712
EQUITY INVESTMENTS, net
16
1,639
730
ASSETS ATTRIBUTABLE TO INSURANCE OPERATIONS
5, 7
10,950
22,068
-
-
DEFERRED INCOME TAX ASSETS, net
17
4,872
5,676
4,138
4,981
OTHER RESOURCES, net
18
Total resources
(forward)
7,716
8,137
5,470
6,800
724,420
666,612
580,007
523,386
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CONDITION
DECEMBER 31, 2009 AND 2008
(In Millions of Pesos)
Notes
Consolidated
2009
2008
Parent
2009
2008
LIABILITIES AND CAPITAL FUNDS
DEPOSIT LIABILITIES
19
579,471
540,352
472,031
440,889
DERIVATIVE FINANCIAL LIABILITIES
9
1,593
2,547
1,593
2,547
BILLS PAYABLE
20
32,009
9,934
24,616
5,373
DUE TO BANGKO SENTRAL NG PILIPINAS AND
OTHER BANKS
1,933
1,496
1,935
1,462
MANAGER’S CHECKS AND DEMAND DRAFTS
OUTSTANDING
3,059
2,723
2,506
2,164
ACCRUED TAXES, INTEREST AND OTHER EXPENSES
4,448
4,150
3,299
3,020
UNSECURED SUBORDINATED DEBT
21
5,000
5,000
5,000
5,000
LIABILITIES ATTRIBUTABLE TO INSURANCE
OPERATIONS
5
8,762
18,813
22
20,380
656,655
17,725
602,740
DEFERRED CREDITS AND OTHER LIABILITIES
Total liabilities
CAPITAL FUNDS ATTRIBUTABLE TO THE EQUITY
HOLDERS OF BPI
Capital stock
Paid-in surplus
Reserves
Surplus
Accumulated other comprehensive loss
NON-CONTROLLING INTEREST
Total capital funds
Total liabilities and capital funds
17,731
528,711
14,927
475,382
23
32,467
1,412
1,394
33,160
(1,635)
66,798
967
67,765
724,420
32,456
1,374
1,296
30,659
(2,851)
62,934
938
63,872
666,612
(The notes on pages 1 to 94 are an integral part of these financial statements.)
32,467
1,412
1,351
17,390
(1,324)
51,296
51,296
580,007
32,456
1,374
1,241
14,652
(1,719)
48,004
48,004
523,386
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos, Except Per Share Amounts)
Notes
INTEREST INCOME
On loans and advances
On held-to-maturity securities
On available-for-sale securities
On deposits with BSP and other banks
On trading securities
Gross receipts tax
INTEREST EXPENSE
On deposits
On bills payable and other borrowings
NET INTEREST INCOME
IMPAIRMENT LOSSES
NET INTEREST INCOME AFTER
IMPAIRMENT LOSSES
OTHER INCOME
Fees and commissions
Income from foreign exchange trading
Trading gain (loss) on securities
Income attributable to insurance
operations
Other operating income
Gross receipts tax
OTHER EXPENSES
Compensation and fringe benefits
Occupancy and equipment-related
expenses
Other operating expenses
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX
Current
Deferred
19
4, 11, 13, 18
2007
Parent
2008
2007
24,440
5,285
2,127
3,018
361
(1,344)
33,887
24,100
4,058
3,668
2,428
372
(1,329)
33,297
21,658
4,344
4,826
2,325
515
(1,253)
32,415
16,059
4,542
2,006
2,602
330
(1,040)
24,499
16,565
3,339
3,145
1,919
325
(1,027)
24,266
15,159
3,691
3,781
1,655
466
(938)
23,814
11,229
1,256
12,485
21,402
2,535
13,352
482
13,834
19,463
1,930
13,002
463
13,465
18,950
1,250
7,299
983
8,282
16,217
1,983
8,958
282
9,240
15,026
1,484
9,339
296
9,635
14,179
846
18,867
17,533
17,700
14,234
13,542
13,333
2009
3,430
1,693
1,527
3,056
1,712
(516)
2,747
1,000
2,502
2,254
1,564
1,354
2,137
1,450
(547)
2,038
807
2,086
5
25
798
6,417
(872)
12,993
588
6,098
(617)
10,321
1,855
6,398
(898)
13,604
7,905
(740)
12,337
8,301
(497)
10,844
6,599
(704)
10,826
30
9,155
8,098
8,193
6,631
5,823
5,894
5,645
4,876
19,676
12,184
5,303
4,911
18,312
9,542
4,853
5,265
18,311
12,993
4,370
3,882
14,883
11,688
4,066
3,958
13,847
10,539
3,829
4,579
14,302
9,857
2,597
922
3,519
8,665
2,123
862
2,985
6,557
2,408
359
2,767
10,226
1,880
1,055
2,935
8,753
1,370
864
2,234
8,305
1,424
449
1,873
7,984
8,516
149
8,665
6,423
134
6,557
10,012
214
10,226
8,753
8,753
8,305
8,305
7,984
7,984
14, 15, 26
27
28
17
NET INCOME FOR THE YEAR
Attributable to:
Equity holders of BPI
Non-controlling interest
Earnings per share for net income
attributable to the equity holders of BPI
during the year:
Basic and diluted
Consolidated
2008
2009
23
2.62
1.98
3.09
2.69
(The notes on pages 1 to 94 are an integral part of these financial statements.)
2.56
2.46
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF TOTAL COMPREHENSIVE INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos)
Notes
NET INCOME FOR THE YEAR
OTHER COMPREHENSIVE INCOME
Net change in fair value reserve on
available-for-sale securities, net of
tax effect
Fair value reserve on investments of
insurance subsidiaries, net of tax
effect
Share in other comprehensive income
of associates
Currency translation differences
Total other comprehensive income (loss),
net of tax effect
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
Attributable to:
Equity holders of BPI
Non-controlling interest
2009
8,665
Consolidated
2008
2007
6,557
10,226
2009
8,753
Parent
2008
8,305
2007
7,984
23
390
(4,255)
(1,164)
929
(1,211)
(286)
-
-
-
(112)
(485)
-
-
-
(5,578)
(1,935)
(134)
79
1,264
395
395
(2,696)
(2,696)
(995)
(995)
9,929
979
8,291
9,148
5,609
6,989
9,732
197
9,929
943
36
979
8,114
177
8,291
9,148
9,148
5,609
5,609
6,989
6,989
(The notes on pages 1 to 94 are an integral part of these financial statements.)
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CHANGES IN CAPITAL FUNDS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos)
Balance, January 1, 2007
Total comprehensive income (loss)
for the year
Employee stock option plan:
Value of employee services
Exercise of options
Cash dividends
Transfer from surplus to reserves
Other changes in non-controlling interest
Balance, December 31, 2007
Total comprehensive income (loss)
for the year
Employee stock option plan:
Value of employee services
Exercise of options
Cash dividends
Stock dividends
Transfer from surplus to reserves
Other changes in non-controlling interest
Balance, December 31, 2008
Total comprehensive income for the year
Employee stock option plan:
Exercise of options
Cash dividends
Transfer from surplus to reserves
Other changes in non-controlling interest
Balance, December 31, 2009
Consolidated
Attributable to equity holders of BPI (Note 23)
Accumulated
other
comprehensive
Capital
Paid-in
income (loss)
stock
surplus
Reserves Surplus
27,043
1,356
922
30,337
4,527
-
-
-
-
Noncontrolling
interest
1,048
Total
65,233
-
10,012
(1,898)
177
8,291
(2,434)
(130)
37,785
2,629
(105)
1,120
146
(2,434)
(105)
71,131
1
4
27,044
1,360
146
(5)
130
1,193
-
-
-
6,423
(5,480)
36
(8,060)
(5,409)
(80)
30,659
8,516
(2,851)
1,216
(218)
938
197
44
(4)
(8,060)
(218)
63,872
9,929
(5,843)
(172)
33,160
(1,635)
(168)
967
(25)
(5,843)
(168)
67,765
3
14
5,409
32,456
-
1,374
-
44
(21)
80
1,296
-
11
32,467
38
1,412
(74)
172
1,394
(The notes on pages 1 to 94 are an integral part of these financial statements.)
979
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CHANGES IN CAPITAL FUNDS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos)
Parent (Note 23)
Balance, January 1, 2007
Total comprehensive income (loss)
for the year
Employee stock option plan:
Value of employee services
Exercise of options
Cash dividends
Transfer from surplus to reserves
Balance, December 31, 2007
Total comprehensive income (loss)
for the year
Employee stock option plan:
Value of employee services
Exercise of options
Cash dividends
Stock dividends
Transfer from surplus to reserves
Balance, December 31, 2008
Total comprehensive income for the year
Employee stock option plan:
Exercise of options
Cash dividends
Transfer from surplus to reserves
Balance, December 31, 2009
Capital
stock
27,043
-
Paid-in
surplus
1,356
-
-
-
Reserves
903
Surplus
14,476
Accumulated
other
comprehensive
income (loss)
1,972
Total
45,750
-
7,984
(995)
6,989
(2,434)
(130)
19,896
977
117
(2,434)
50,422
1
4
27,044
1,360
117
(5)
130
1,145
-
-
8,305
(2,696)
5,609
5,409
32,456
-
14
1,374
-
37
(21)
80
1,241
-
(8,060)
(5,409)
(80)
14,652
8,753
(1,719)
395
37
(4)
(8,060)
48,004
9,148
11
32,467
38
1,412
(62)
172
1,351
(5,843)
(172)
17,390
(1,324)
(13)
(5,843)
51,296
3
(The notes on pages 1 to 94 are an integral part of these financial statements.)
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos)
Notes
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Impairment losses
4, 11, 13, 18
Depreciation and amortization
14, 15
Share in net loss of associates
Share-based compensation
24
Dividend income
25
Interest income
Interest received
Interest expense
Interest paid
Operating income before changes in operating
assets and liabilities
Changes in operating assets and liabilities
(Increase) decrease in:
Due from Bangko Sentral ng Pilipinas
Interbank loans receivable and securities
purchased under agreements to resell
Trading securities, net
10
Loans and advances, net
Assets held for sale
Assets attributable to insurance
operations
Other resources
Increase (decrease) in:
Deposit liabilities
Due to Bangko Sentral ng Pilipinas and
other banks
Manager’s checks and demand drafts
outstanding
Accrued taxes, interest and other
expenses
Liabilities attributable to insurance
operations
Derivative financial instruments
Deferred credits and other liabilities
Net cash generated from (used in) operating
activities before income tax
Income taxes paid
Net cash (used in) generated from operating
activities
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in:
Available-for-sale securities, net
11
Held-to-maturity securities, net
12
Bank premises, furniture, fixtures and
equipment, net
14
Investment properties, net
Equity investments
Assets attributable to insurance operations
Dividends received
Net cash generated from (used in) investing
activities
(forward)
2009
Consolidated
2008
2007
2009
Parent
2008
2007
12,184
9,542
12,993
11,688
10,539
9,857
2,535
2,421
21
(124)
(35,231)
35,808
12,485
(12,574)
1,930
2,188
28
44
(67)
(34,626)
34,535
13,834
(14,086)
1,250
1,836
9
146
(53)
(33,668)
33,626
13,465
(13,114)
1,983
1,416
(2,906)
(25,539)
24,678
8,282
(8,386)
1,484
1,358
37
(4,061)
(25,293)
24,873
9,240
(9,519)
846
1,192
117
(2,631)
(24,752)
25,499
9,635
(9,372)
17,525
13,322
16,490
11,216
8,658
10,391
(5,074)
(772)
(16,296)
(4,895)
(965)
(13,640)
(15,839)
(18,776)
(10,064)
466
(1,509)
(25,206)
(47,280)
1,338
5,737
4,815
(31,851)
706
(16,393)
(19,071)
(1,907)
1,043
(1,509)
(25,423)
(33,565)
1,252
5,737
4,899
(21,506)
541
15,154
171
887
2,157
(846)
(3,615)
1,862
2,239
(4,063)
39,119
26,908
46,368
31,143
22,246
33,842
438
193
297
473
191
290
336
10
464
342
83
183
388
(268)
356
382
(157)
463
(10,051)
(918)
2,632
2,329
128
(1,088)
1,287
148
2,667
(918)
2,791
128
(1,847)
148
3,226
15,507
(2,735)
(28,851)
(2,510)
26,727
(2,560)
6,068
(2,036)
(28,669)
(1,671)
20,511
(1,734)
12,772
(31,361)
24,167
4,032
(30,340)
18,777
(7,743)
(2,056)
34,979
(19,948)
(13,888)
16,340
(9,550)
(1,556)
28,232
(17,164)
(10,735)
15,815
(2,476)
66
(247)
(4,032)
124
(2,406)
(12)
(1,364)
(963)
67
(721)
(451)
(886)
(1,574)
53
(1,478)
66
(240)
3,584
(32)
(1,171)
1,052
3,283
212
(431)
(1,900)
2,580
(16,364)
10,353
(1,127)
(9,174)
14,200
5,541
BANK OF THE PHILIPPINE ISLANDS
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
(In Millions of Pesos)
Notes
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid
Proceeds from (repayments of) bills
payable, net
Proceeds from issuance of unsecured
subordinated debt
Net cash generated from (used in) financing
activities
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
January 1
December 31
21
7
2009
Consolidated
2008
Parent
2008
2007
2009
2007
(7,572)
(5,843)
(8,060)
(7,572)
19,242
3,283
(1,167)
5,000
-
(5,843)
(8,060)
22,074
4,559
-
5,000
-
-
16,231
1,499
(7,913)
13,399
12,639
(19,509)
15,127
8,257
(15,917)
15,579
62,790
75,429
82,299
62,790
67,172
82,299
49,190
57,447
65,107
49,190
49,528
65,107
(341)
(The notes on pages 1 to 94 are an integral part of these financial statements.)
223
(8,739)
BANK OF THE PHILIPPINE ISLANDS
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND 2008
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2009
Note 1 - General Information
Bank of the Philippine Islands (BPI or the “Parent Bank”) is a domestic commercial bank with an expanded
banking license and with principal office at BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City.
BPI and its subsidiaries (collectively referred to as the “BPI Group”) offer a whole breadth of financial services that
include corporate banking, consumer banking, investment banking, asset management, corporate finance,
securities distribution, and insurance services. At December 31, 2009, the BPI Group has 12,155 employees
(2008 - 12,089 employees) and operated 812 branches, 1,556 ATMs and 24,790 point-of-sale terminals to support its
delivery of services. The BPI Group also serves its customers through alternative electronic banking channels such
as telephone, mobile phone and the internet. The BPI shares have been traded in the Philippine Stock Exchange
since October 12, 1971. The Parent Bank was registered with the Securities and Exchange Commission (SEC) on
January 4, 1943. This license was extended for another 50 years on January 4, 1993.
These financial statements have been approved and authorized for issuance by the Board of Directors of the Parent
Bank on February 17, 2010. There are no material events that occurred subsequent to February 17, 2010 until
February 22, 2010.
Note 2 - Summary of Significant Accounting Policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These
policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
The financial statements of the BPI Group have been prepared in accordance with Philippine Financial Reporting
Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards
(PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee
(SIC), and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the
Financial Reporting Standards Council (FRSC) and adopted by the SEC.
As allowed by the SEC, the pre-need subsidiary of the Parent Bank continues to follow the provisions of the
Pre-Need Uniform Chart of Accounts (PNUCA) prescribed by the SEC.
The financial statements comprise the statement of condition, statement of income and statement of total
comprehensive income shown as two statements, statement of changes in capital funds, the statement of cash flows
and the notes.
These financial statements have been prepared under the historical cost convention, as modified by the
revaluation of trading securities, available-for-sale financial assets, and all derivative contracts.
The preparation of financial statements in conformity with PFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the BPI Group’s
accounting policies. Changes in assumptions may have a significant impact on the financial statements in the
period the assumptions changed. Management believes that the underlying assumptions are appropriate and that
the BPI Group’s financial statements therefore present the financial position and results fairly. The areas involving
a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the
financial statements are disclosed in Note 4.
New standards, interpretations and amendments to published standards
The BPI Group adopted the following accounting standards and interpretations approved by the FRSC which are
effective for the BPI Group beginning January 1, 2009:
Philippine Interpretation IFRIC 13, Customer Loyalty Program, (effective for annual periods beginning on or
after July 1, 2008). This clarifies that where goods or services are sold together with a customer loyalty
incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement
and the consideration receivable from the customer is allocated between the components of the arrangement
using fair values. This interpretation did not have a significant impact on the BPI Group’s financial statements.
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual
periods beginning on or after October 1, 2008). This interpretation provides guidance on the following: (a)
identifying the foreign currency risks that can qualify as a "hedged risk" in the hedge of a net investment in a
foreign operation; (b) identifying situations where hedging instruments that are hedges of a net investment in a
foreign operation can qualify for hedge accounting under PAS39; and (c) determining the amounts to be
reclassified from equity to profit and loss for both the hedging instrument and the hedged item when using
hedge accounting under PAS 39. This interpretation has no impact to the BPI Group’s operations as there are
currently no hedges on net investment in foreign operations.
PAS 1 (Revised), Presentation of Financial Statements (effective from January 1, 2009). The revised standard
requires the presentation of all non-owner changes in equity (i.e., comprehensive income) in a statement of
comprehensive income or in a statement of profit or loss together with a statement of comprehensive income,
separately from owner changes in equity. PAS 1 (Revised) also requires, as a minimum, the presentation of
three statements of financial position (balance sheet) in a complete set of financial statements whenever there
is a prior period adjustment or a reclassification of items in the financial
statements - as at the end of the current period, the end of the comparative period and the beginning of the
comparative period. In other cases, only two statements of financial position are required. Dividends
recognized as distributions to owners and related per-share amounts should be presented on the face of the
statement of changes in equity or in the notes and not on the face of the statement of comprehensive income
or the face of the income statement. As a result, the BPI Group presents in the statement of changes in
capital funds all owner changes in equity, whereas all non-owner changes in equity are presented in the
statement of comprehensive income. Further, the adoption of revised PAS 1 did not have an impact on
surplus.
PAS 23 (Amended), Borrowing Costs (effective from January 1, 2009). The amendment requires an entity to
capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying
asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset.
The option of immediately expensing those borrowing costs has been removed. The adoption of amended
PAS 23 did not have an impact on the financial statements of the BPI Group as there are no qualifying assets.
PAS 32 (Amendment), Financial Instruments: Presentation, and PAS 1 (Amendment), Presentation of
Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation (effective from
January 1, 2009). The amended standards require entities to classify puttable financial instruments, or
components of instruments that impose on the entity an obligation to deliver to another party a pro rata share
of the net assets of the entity only on liquidation as equity, provided the financial instruments have particular
features and meet specific conditions. The adoption of the amended standards did not have a significant
impact on the financial statements of the BPI Group.
(2)
PFRS 2 (Amendment), Share-based Payment (effective from January 1, 2009). The amended standard deals
with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and
performance conditions only. Other features of a share-based payment are not vesting conditions. As such
these features would need to be included in the grant date fair value for transactions with employees and
others providing similar services, that is, these features would not impact the number of awards expected to
vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties,
should receive the same accounting treatment. The adoption of the amended standard did not have a
significant impact on the financial statements of the BPI Group.
PFRS 7 (Amendment), Financial Instruments: Disclosures – Improving Disclosures about Financial
Instruments (effective from January 1, 2009). The amendment requires enhanced disclosures about fair value
measurements and liquidity risk. In particular, the amendment requires disclosure of fair value measurement
by level of fair value measurement hierarchy. The adoption of the amendment resulted in additional
disclosures (see Note 3.5) but did not have an impact on the financial position or the comprehensive income
of the BPI Group.
PFRS 8, Operating Segments (effective from January 1, 2009). PFRS 8 replaces PAS 14 and requires a
“management approach”, under which segment information is presented on the same basis as that used for
internal reporting purposes. Under the requirements of PFRS 8, the BPI Group’s external segment reporting
will be based on the internal reporting to the management provided to the chief executive officer, who makes
decisions on the allocation of resources and assesses the performance of the reportable segments. The
adoption of PFRS 8 however, did not have a significant impact on the financial position of the BPI Group but
has an effect on segment disclosures as shown in Note 6.
Likewise, the following standards, amendments and interpretations to existing standards have been published and
are applicable for the BPI Group beginning on or after January 1, 2010 but the BPI Group has not early adopted.
Amendment to IFRIC 9 and IAS 39, Embedded Derivatives (effective for annual periods beginning on or after
June 30, 2009). The amendment clarifies that subsequent reassessment of embedded derivatives is
prohibited unless there is either (a) a change in the terms of the contract that significantly modifies the cash
flows that otherwise would be required under the contract or (b) a reclassification of a financial asset out of the
fair value through profit or loss category, in which cases an reassessment is required. An entity determines
whether a modification to cash flows is significant by considering the extent to which the expected future cash
flows associated with the embedded derivative, the host contract or both have changed and whether the
change is significant relative to the previously expected cash flows on the contract. The amendment is not
expected to have a significant impact on the financial statements of the BPI Group.
Amendment to PAS 39, Eligible Hedged Items (effective for annual periods beginning on or after July 1,
2009). The amendment provides that an entity can designate all changes in the cash flows or fair value of a
hedged item in a hedging relationship. An entity can also designate only changes in the cash flows or fair
value of a hedged item above or below a specified price or other variable (a one-sided risk). The intrinsic
value of a purchased option hedging instrument (assuming that it has the same principal terms as the
designated risk), but not its time value, reflects a one-sided risk in a hedged item. For example, an entity can
designate the variability of future cash flow outcomes resulting from a price increase of a forecast commodity
purchase. In such a situation, only cash flow losses that result from an increase in the price above the
specified level are designated. The hedged risk does not include the time value of a purchased option
because the time value is not a component of the forecast transaction that affects profit or loss. The
amendment is not expected to have a significant impact on the financial statements of the BPI Group as there
are currently no accounting hedges.
(3)
PAS 27 (Revised), Consolidated and Separate Financial Statements (effective for annual periods beginning
on or after July 1, 2009). The revised standard requires the effects of all transactions with non-controlling
interests to be recorded in equity if there is no change in control and these transactions will no longer result in
goodwill or gains and losses. The standard also specifies the accounting when control is lost; any remaining
interest in the entity is re-measured to fair value, and a gain or loss is recognized in profit or loss. The BPI
Group will apply this revised standard prospectively to transactions with non-controlling interests from January
1, 2010. The potential impact of this revised standard is not yet reasonably estimable.
PFRS 3 (Revised), Business Combinations (effective for annual periods beginning on or after July 1, 2009).
The revised standard continues to apply the acquisition method to business combinations, with some
significant changes. For example, all payments to purchase a business are to be recorded at fair value at the
acquisition date, with contingent payments classified as debt subsequently re-measured through the income
statement. There is a choice, on an acquisition-by-acquisition basis, to measure the non-controlling interest in
the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net
assets. All acquisition-related costs should be expensed. The BPI Group will apply this revised standard
prospectively to all business combinations from January 1, 2010.
Philippine Interpretation IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods
beginning on or after July 1, 2009). This interpretation addresses accounting by an entity that makes a noncash asset distribution to owners. An entity shall measure a liability to distribute non-cash assets as a
dividend to its owners at the fair value of the assets to be distributed. If an entity gives its owners a choice of
receiving either a non-cash asset or a cash alternative, the entity shall estimate the dividend payable by
considering both the fair value of each alternative and the associated probability of owners selecting each
alternative. At the end of each reporting period and at the date of settlement, the entity shall review and
adjust the carrying amount of the dividend payable, with any changes in the carrying amount of the dividend
payable recognized in equity as adjustments to the amount of the distribution. This interpretation will be
adopted by the BPI Group on its financial statements beginning January 1, 2010.
Amendment to PFRS 2, Group Cash-settled Share-based Payment Transactions (effective on January 1,
2010. The amendment clarifies that in particular, if the identifiable consideration received (if any) by the entity
appears to be less than the fair value of the equity instruments granted or liability incurred, typically this
situation indicates that other consideration (ie unidentifiable goods or services) has been (or will be) received
by the entity. The entity shall measure the identifiable goods or services received in accordance with PFRS 2.
The entity shall measure the unidentifiable goods or services received (or to be received) as the difference
between the fair value of the share-based payment and the fair value of any identifiable goods or services
received (or to be received). The entity shall measure the unidentifiable goods or services received at the
grant date. However, for cash-settled transactions, the liability shall be remeasured at the end of each
reporting period until it is settled. The BPI Group does not expect any significant impact on its financial
statements upon adoption of this amendment on January 1, 2010.
Improvements to PFRS. Improvements to PFRS comprise amendments that result in accounting changes for
presentation, recognition or measurement purposes, as well as terminology or editorial amendments related
to a variety of individual PFRS standards. Most of the amendments are effective for annual periods beginning
on or after January 1, 2009 and January 1, 2010, with earlier application permitted. No material changes to
accounting policies are expected as a result of these amendments.
(4)
IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 was issued in November 2009
and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key
features are as follows:
(i)
Financial assets are required to be classified into two measurement categories: those to be measured
subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to
be made at initial recognition. The classification depends on the entity’s business model for managing its
financial instruments and the contractual cash flow characteristics of the instrument.
(ii) An instrument is subsequently measured at amortized cost only if it is a debt instrument and both the
objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and the
asset’s contractual cash flows represent only payments of principal and interest. All other debt
instruments are to be measured at fair value through profit or loss.
(iii) All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for
trading will be measured at fair value through profit or loss. For all other equity investments, an
irrevocable election can be made at initial recognition, to recognize unrealized and realized fair value
gains and losses through other comprehensive income rather than profit or loss. There shall be no
recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-byinstrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on
investment.
While adoption of IFRS 9 is mandatory from January 1, 2013, earlier adoption is permitted. The BPI Group is
currently assessing the implications and impact of IFRS 9.
(5)
2.2 Consolidation
The consolidated financial statements comprise the financial statements of the Parent Bank and all its
consolidated subsidiaries. The subsidiaries’ financial statements are prepared for the same reporting periods as
the Parent Bank. The percentages of effective ownership of BPI in consolidated subsidiaries at December 31, 2009
and 2008 are as follows:
Name
BPI Family Savings Bank, Inc.
BPI Capital Corporation
BPI Leasing Corporation
BPI Direct Savings Bank, Inc.
BPI International Finance Limited
BPI Europe Plc.
BPI Securities Corp.
BPI Card Finance Corp.
Filinvest Algo Financial Corp.
BPI Rental Corporation.
BPI Investment Management Inc.
Santiago Land Dev. Corp.
BPI Operations Management Corp.
BPI Computer Systems Corp.
BPI Foreign Exchange Corp.
BPI Express Remittance Corp.
BPI Express Remittance Center HK (Ltd.)
BPI-Rome Remittance Ctr.
FEB Insurance Brokers, Inc
Prudential Investments, Inc.
First Far - East Development Corporation
Prudential Venture Capital Corporation
FEB Stock Brokers
Citysec Securities Corporation
BPI Asset Management, Inc.
BPI Express Remittance Spain S.A
Speed International
BPI Bancassurance
Ayala Plans, Inc.
FGU Insurance Corporation
BPI/MS Insurance Corporation
Ayala Life Assurance, Inc.*
Pilipinas Savings Bank**
Country of
incorporation
Philippines
Philippines
Philippines
Philippines
Hong Kong
England and Wales
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Hong Kong
Italy
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Spain
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Philippines
Principal activities
Banking
Investment house
Leasing
Banking
Financing
Banking (deposit)
Securities dealer
Financing
Financing
Rental
Investment management
Land holding
Operations management
Business systems service
Foreign exchange
Remittance
Remittance
Remittance
Insurance brokers
Investment house
Real estate
Venture capital
Securities dealer
Securities dealer
Investment management
Remittance
Remittance
Bancassurance
Pre-need
Non-life insurance
Non-life insurance
Life insurance
Banking
% of ownership
2009
2008
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
98.67
94.62
94.62
50.85
50.85
47.67
98.67
40
100
*De-consolidated effective November 2009 due to loss of control (see Note 16)
**De-consolidated effective July 2009 due to loss of control (see Note 16)
(6)
(a) Subsidiaries
Subsidiaries are all entities over which the BPI Group has the power to govern the financial and operating policies
generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of
potential voting rights that are currently exercisable or convertible are considered when assessing whether the BPI
Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to
the BPI Group. They are de-consolidated from the date on which control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the BPI Group. The
cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities
incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost
of acquisition over the fair value of the BPI Group’s share of the identifiable net assets acquired is recorded as
goodwill. If the cost of acquisition is less than the fair value of the BPI Group’s share in the net assets acquired,
the difference is recognized directly in the statement of income.
Intercompany transactions, balances and intragroup gains on transactions between the BPI Group of companies
are eliminated. Intragroup losses are also eliminated unless the transaction provides evidence of an impairment of
the asset transferred. The accounting policies of subsidiaries have been changed where necessary to ensure
consistency with the policies adopted by the BPI Group.
The results of the subsidiaries acquired or disposed of during the year are included in the statement of income
from the effective acquisition date or up to the effective date on which control ceases, as appropriate.
(b) Transactions with non-controlling interests
Interests in the equity of subsidiaries not attributable to the Parent Bank are reported in the statement of condition
as non-controlling interests. Profits or losses attributable to non-controlling interests are reported in the statement
of comprehensive income.
The BPI Group applies a policy of treating transactions with non-controlling interests as transactions with equity
owners of the BPI Group. For purchases from non-controlling interests, the difference between any consideration
paid and the relevant share acquired of the carrying value of the net assets of the subsidiary is recorded in capital
funds. Gains or losses on disposals to non-controlling interests are also recorded in capital funds.
(c) Associates
Associates are all entities over which the BPI Group has significant influence but not control, generally
accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates in the
consolidated financial statements are accounted for by the equity method of accounting and are initially recognized
at cost. The BPI Group’s investment in associates includes goodwill identified on acquisition (net of any
accumulated impairment loss).
The BPI Group’s share of its associates’ post-acquisition profits or losses is recognized in the statement of
income, and its share of post-acquisition movements in reserves is recognized in the statement of capital funds.
The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When
the BPI Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other
unsecured receivables, it does not recognize further losses, unless it has incurred obligations or made payments
on behalf of the associate.
(7)
Intragroup gains on transactions between the BPI Group and its associates are eliminated to the extent of its
interest in the associates. Intragroup losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of associates have been changed where necessary to
ensure consistency with the policies adopted by the BPI Group.
2.3 Equity investments
The financial statements include the consolidated financial statements of the BPI Group and the separate financial
statements of the Parent Bank.
Equity investments in the Parent Bank’s separate financial statements which represent investments in subsidiaries
and associates are accounted for at cost method in accordance with PAS 27. Under the cost method, income
from investment is recognized in the statement of income only to the extent that the investor receives distributions
from accumulated net income of the investee arising subsequent to the date of acquisition.
2.4 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief executive
officer who allocates resources to and assesses the performance of the operating segments of the BPI Group.
All transactions between business segments are conducted on an arm´s length basis, with intra-segment revenue
and costs being eliminated upon consolidation. Income and expenses directly associated with each segment are
included in determining business segment performance.
In accordance with PFRS 8, the BPI Group has the following main business segments: consumer banking,
corporate banking and investment banking.
2.5 Cash and cash equivalents
Cash and cash equivalents consist of Cash and other cash items, Due from Bangko Sentral ng Pilipinas (BSP) clearing account, Due from other banks, and Interbank loans receivable and securities purchased under
agreements to resell with maturities of less than three months from the date of acquisition and that are subject to
insignificant risk of changes in value.
2.6 Sale and repurchase agreements
Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged
assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty
liability is included in deposits from banks or deposits from customers, as appropriate. Securities purchased under
agreements to resell (‘reverse repos’) are treated as loans and advances and included in the statement condition
under “Interbank loans receivable and securities purchased under agreements to resell” account. The difference
between sale and repurchase price is treated as interest and accrued over the life of the agreements using the
effective interest method. Securities lent to counterparties are also retained in the financial statements.
(8)
2.7 Financial assets
2.7.1 Classification
The BPI Group classifies its financial assets in the following categories: financial assets at fair value through profit
or loss, loans and receivables, held-to-maturity securities, and available-for-sale securities. Management
determines the classification of its financial assets at initial recognition.
(a) Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets held for trading, and those designated at fair value through
profit or loss at inception.
A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or
repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial assets held
for trading (other than derivatives) are shown as “Trading securities” in the statement of condition.
Financial assets designated at fair value through profit or loss at inception are those that are managed and their
performance is evaluated on a fair value basis, in accordance with a documented investment strategy. Information
about these financial assets is provided internally on a fair value basis to the BPI Group entity’s key management
personnel. The BPI Group has no financial assets that are specifically designated at fair value through profit or
loss.
Derivatives are also categorized as held for trading unless they are designated as hedging instruments.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments (i) that are not
quoted in an active market, (ii) with no intention of trading, and (iii) that are not designated as available-for-sale.
Significant accounts falling under this category are Loans and advances, Due from BSP (liquidity and statutory
reserve account) and other banks, Interbank loans receivable and securities purchased under agreements to resell
and other receivables.
(c) Held-to-maturity securities
Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed
maturities that the BPI Group’s management has the positive intention and ability to hold to maturity. If the BPI
Group were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be
tainted and reclassified as available-for-sale.
(d)
Available-for-sale securities
Available-for-sale securities are non-derivatives that are either designated in this category or not classified in any
of the other categories.
2.7.2
Recognition and measurement
Regular-way purchases and sales of financial assets at fair value through profit or loss, held-to-maturity securities
and available-for-sale securities are recognized on trade-date, the date on which the BPI Group commits to
purchase or sell the asset. Loans and receivables recognized upon origination when cash is advanced to the
borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not
carried at fair value through profit or loss.
(9)
Available-for-sale securities and financial assets at fair value through profit or loss are subsequently carried at fair
value. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the
effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair
value through profit or loss are included in the statement of income (as “Trading gain/loss on securities”) in the
year in which they arise. Gains and losses arising from changes in the fair value of available-for-sale securities
are recognized directly in the statement of comprehensive income, until the financial asset is derecognized or
impaired at which time the cumulative gain or loss previously recognized in the statement of comprehensive
income should be recognized in the statement of income. However, interest calculated on these securities using
the effective interest method and foreign currency gains and losses on monetary assets classified as available-forsale are recognized in the statement of income. Dividends on equity instruments are recognized in the statement
of income when the BPI Group’s right to receive payment is established.
2.7.3
Financial asset reclassification
The BPI Group may choose to reclassify a non-derivative trading financial asset out of the held for trading
category if the financial asset is no longer held for the purpose of selling it in the near term. Financial assets other
than loans and receivables are permitted to be reclassified out of the held for trading category only in rare
circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In addition,
the BPI Group may choose to reclassify financial assets that would meet the definition of loans and receivables out
of the held-for-trading or available-for-sale categories if the BPI Group has the intention and ability to hold these
financial assets for the foreseeable future or until maturity at the date of reclassification.
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or
amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date
are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and heldto-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows
adjust effective interest rates prospectively.
2.7.4
Derecognition of financial assets
Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have
ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the
assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the BPI
Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not
prevent de-recognition).
2.8 Impairment of financial assets
(a) Assets carried at amortized cost
The BPI Group assesses at each balance sheet date whether there is objective evidence that a financial asset or
group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment
losses are incurred only if there is objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on
the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The criteria that the BPI Group uses to determine that there is objective evidence of an impairment loss include:
Delinquency in contractual payments of principal or interest;
Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of
sales);
Breach of loan covenants or conditions;
Initiation of bankruptcy proceedings;
Deterioration of the borrower’s competitive position; and
Deterioration in the value of collateral
(10)
The BPI Group first assesses whether objective evidence of impairment exists individually for financial assets that
are individually significant, and collectively for financial assets that are not individually significant. If the BPI Group
determines that no objective evidence of impairment exists for an 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 them for impairment. Financial 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 of
impairment.
The amount of impairment loss is measured as the difference between the financial asset’s carrying amount and
the present value of estimated future cash flows (excluding future credit losses that have not been incurred)
discounted at the asset’s original effective interest rate (recoverable amount). The calculation of recoverable
amount of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs of
obtaining and selling the collateral, whether or not foreclosure is probable. If a loan or held-to-maturity investment
has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest
rate determined under the contract. Impairment loss is recognized in the statement of income and the carrying
amount of the asset is reduced through the use of an allowance account.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar
credit risk characteristics (i.e., on the basis of the BPI Group’s grading process that considers asset type, industry,
geographical location, collateral type, past-due status and other relevant factors). 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.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the
basis of the contractual cash flows of the assets in the BPI Group and historical loss experience for assets with
credit risk characteristics similar to those in the BPI Group. Historical loss experience is adjusted on the basis of
current observable data to reflect the effects of current conditions that did not affect the period on which the
historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to
reduce any differences between loss estimates and actual loss experience.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are
written off after all the necessary procedures have been completed and the amount of the loss has been
determined.
If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s
credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The
amount of the reversal is recognized in the statement of income as a reduction of impairment losses for the year.
(b) Assets classified as available-for-sale
The BPI Group assesses at each balance sheet date whether there is evidence that a debt security classified as
available-for-sale is impaired. For an equity security classified as available-for-sale, a significant or prolonged
decline in the fair value below cost is considered in determining whether the securities are impaired. The
cumulative loss (difference between the acquisition cost and the current fair value) is removed from capital funds
and recognized in the statement of income when the asset is determined to be impaired. If in a subsequent
period, the fair value of a debt instrument previously impaired increases and the increase can be objectively
related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through
the statement of income. Reversal of impairment losses recognized previously on equity instruments is made
directly to capital funds.
(11)
(c) Renegotiated loans
Loans that are either subject to collective impairment assessment or individually significant and whose terms have
been renegotiated are no longer considered to be past due but are treated as new loans.
2.9
Financial liabilities
The BPI Group classifies its financial liabilities in the following categories: financial liabilities at fair value through
profit or loss, and financial liabilities at amortized cost.
2.9.1
Classification and measurement of financial liabilities
(a) Financial liabilities at fair value through profit or loss
This category comprises two sub-categories: financial liabilities classified as held for trading, and financial liabilities
designated by the BPI Group as at fair value through profit or loss upon initial recognition.
A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or
repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also
categorized as held for trading unless they are designated and effective as hedging instruments. Gains and
losses arising from changes in fair value of financial liabilities classified held for trading are included in the
statement of income. The BPI Group has no financial liabilities that are designated at fair value through profit loss.
(b) Other liabilities measured at amortized cost
Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are
measured at amortized cost. Financial liabilities measured at amortized cost include deposits from customers and
banks, amounts due to BSP, subordinated notes and other debt securities in issue.
2.9.2
Derecognition of financial liabilities
Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. Collateral
(shares and bonds) furnished by the BPI Group under standard repurchase agreements and securities lending and
borrowing transactions is not de-recognized because the BPI Group retains substantially all the risks and rewards
on the basis of the predetermined repurchase price, and the criteria for de-recognition are therefore not met.
2.10
Determination of fair value of financial instruments
For financial instruments traded in active markets, the determination of fair values of financial assets and financial
liabilities is based on quoted market prices or dealer price quotations. This includes listed equity securities and
quoted debt instruments on major exchanges and broker quotes mainly from Bloomberg.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available
from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent
actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the
market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer
spread or significant increase in the bid-offer spread or there are few recent transactions.
(12)
For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair
values are estimated from observable data in respect of similar financial instruments, using models to estimate the
present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR yield
curve, FX rates, volatilities and counterparty spreads) existing at reporting dates. The BPI Group uses widely
recognized valuation models for determining fair values of non-standardized financial instruments of lower
complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into
models are generally market observable.
For more complex instruments, the BPI Group uses internally developed models, which are usually based on
valuation methods and techniques generally recognized as standard within the industry. Valuation models are
used primarily to value derivatives transacted in the over-the-counter market, unlisted debt securities (including
those with embedded derivatives) and other debt instruments for which markets were or have become illiquid.
Some of the inputs to these models may not be market observable and are therefore estimated based on
assumptions.
The BPI Group uses its own credit risk spreads in determining the current value for its derivative liabilities. When
the BPI Group’s credit spreads widen, the BPI Group recognizes a gain on these liabilities because the value of
the liabilities has decreased. When the BPI Group’s credit spreads narrow, the BPI Group recognizes a loss on
these liabilities because the value of the liabilities has increased.
The output of a model is always an estimate or approximation of a value that cannot be determined with certainty,
and valuation techniques employed may not fully reflect all factors relevant to the positions the BPI Group holds.
Valuations are therefore adjusted, where appropriate, to allow for additional factors including model risks, liquidity
risk and counterparty credit risk. Based on the established fair value model governance policies, and related
controls and procedures applied, management believes that these valuation adjustments are necessary and
appropriate to fairly state the values of financial instruments carried at fair value in the statement of condition.
Price data and parameters used in the measurement procedures applied are generally reviewed carefully and
adjusted, if necessary - particularly in view of the current market developments.
The fair value of over-the-counter (OTC) derivatives is determined using valuation methods that are commonly
accepted in the financial markets, such as present value techniques and option pricing models. The fair value of
foreign exchange forwards is generally based on current forward exchange rates. Structured interest rate
derivatives are measured using appropriate option pricing models (for example, the Black-Scholes model) or other
procedures such as Monte Carlo simulation.
In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are
carried at cost less impairment. The fair value for loans and advances as well as liabilities to banks and customers
are determined using a present value model on the basis of contractually agreed cash flows, taking into account
credit quality, liquidity and costs. The fair values of contingent liabilities and irrevocable loan commitments
correspond to their carrying amounts.
(13)
2.11
Classes of financial instruments
The BPI Group classifies the financial instruments into classes that reflect the nature of information and take into
account the characteristics of those financial instruments. The classification made can be seen in the table below:
Classes (as determined by the BPI Group)
Categories
(as defined by PAS 39)
Financial
assets
Financial assets at fair
value through profit or loss
Loans and receivables
Held-to-maturity
investments
Available-for-sale financial
assets
Financial
Liabilities
Financial liabilities at fair
value through profit or
loss
Main classes
Sub-classes
- Debt securities
- Trading securities
- Equity securities
- Derivative financial assets
- Loans and advances to banks
- Real estate
mortgages
- Loans to
individuals
- Auto loans
(retail)
- Credit cards
- Loans and advances
- Others
to customers
- Large corporate
- Loans to
customers
corporate
- Small and
entities
medium
enteprises
- Investment securities
- Government
(debt securities)
- Others
- Investment securities
- Government
(debt securities)
- Others
- Investment securities
- Listed
(equity securities)
- Unlisted
Derivative financial liabilities
- Deposits from
customers
Financial liabilities at
amortized cost
Off-balance
sheet
financial
instruments
- Demand
- Savings
- Time
- Deposits from banks
- Unsecured subordinated debts
- Bills payable
- Other liabilities
Loan commitments
Guarantees, acceptances and other financial facilities
2.12 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of condition when there is a
legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or
realize the asset and settle the liability simultaneously.
(14)
2.13 Derivative financial instruments
Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active
markets, including recent market transactions, and valuation techniques, including discounted cash flow models
and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as
liabilities when fair value is negative.
Certain derivatives embedded in other financial instruments are treated as separate derivatives when their
economic characteristics and risks are not closely related to those of the host contract and the host contract is not
carried at fair value through profit or loss. The assessment of whether an embedded derivative is required to be
separated from the host contract is done when the BPI Group first becomes a party to the contract.
Reassessment of embedded derivative is only done when there are changes in the contract that significantly
modify the contractual cash flows. The embedded derivatives are measured at fair value with changes in fair
value recognized in the statement of income.
The BPI Group’s derivative instruments do not qualify for hedge accounting. Changes in the fair value of any
derivative instrument that does not qualify for hedge accounting are recognized immediately in the statement of
income under “Trading gain/loss on securities”.
2.14
Bank premises, furniture, fixtures and equipment
Land and buildings comprise mainly of branches and offices. All bank premises, furniture, fixtures and equipment
are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to the BPI
Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the
statement of income during the year in which they are incurred.
Depreciation for buildings and furniture and equipment is calculated using the straight-line method to allocate cost
or residual values over the estimated useful lives of the assets, as follows:
Building
Furniture and equipment
Equipment for lease
25-50 years
3-5 years
2-8 years
Leasehold improvements are depreciated over the shorter of the lease term (normally ranging from 5 - 10 years)
and the useful life of the related improvement. Major renovations are depreciated over the remaining useful life of
the related asset.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is
greater than its estimated recoverable amount. The recoverable amount is the higher of an asset’s fair value less
costs to sell and value in use.
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognized in
the statement of income.
(15)
2.15 Investment properties
Properties that are held either to earn rental income or for capital appreciation or for both and that are not
significantly occupied by the BPI Group are classified as investment properties.
Investment properties comprise land and building. Investment properties are measured initially at cost, including
transaction costs. Subsequent to initial recognition, investment properties are stated at cost less accumulated
depreciation. Depreciation on investment property is determined using the same policy as applied to Bank
premises, furniture, fixtures, and equipment. Impairment test is conducted when there is an indication that the
carrying amount of the asset may not be recovered. An impairment loss is recognized for the amount by which the
property’s carrying amount exceeds its recoverable amount, which is the higher of the property’s fair value less
costs to sell and value in use.
2.16 Foreclosed assets
Assets foreclosed shown as Assets held for sale in the statement of condition are accounted for at the lower of
cost and fair value less cost to sell similar to the principles of PFRS 5. The cost of assets foreclosed includes the
carrying amount of the related loan less allowance for impairment at the time of foreclosure. Impairment loss is
recognized for any subsequent write-down of the asset to fair value less cost to sell.
Foreclosed assets not classified as Assets held for sale are accounted for in any of the following classification
using the measurement basis appropriate to the asset as follows:
(a) Investment property is accounted for using the cost model under PAS 40;
(b) Bank-occupied property is accounted for using the cost model under PAS 16; and
(c) Financial assets are classified as available-for-sale
2.17 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the BPI Group’s share in the net
identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of
subsidiaries is included in “Miscellaneous assets” under Other resources. Goodwill on acquisitions of associates
is included in Equity investments. Separately recognized goodwill is tested annually for impairment and carried at
cost less accumulated impairment losses. Gains and losses on the disposal of a subsidiary/associate include
carrying amount of goodwill relating to the subsidiary/associate sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each cash-generating unit is
represented by each primary reporting segment.
(b) Computer software
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortized on the basis of the expected useful lives (three to five years).
Computer software is included in “Miscellaneous assets” under Other resources.
Costs associated with developing or maintaining computer software programs are recognized as an expense as
incurred.
(16)
2.18
Borrowings
The BPI Group’s borrowings consist mainly of bills payable and unsecured subordinated debt. Borrowings are
recognized initially at fair value, being their issue proceeds, net of transaction costs incurred. Borrowings are
subsequently stated at amortized cost; any difference between the proceeds, net of transaction costs and the
redemption value is recognized in the statement of income over the period of the borrowings using the effective
interest method.
Effective January 1, 2009, borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are capitalized as part of the cost of the asset. All other borrowing costs are
expensed as incurred.
2.19 Interest income and expense
Interest income and expense are recognized in the statement of income for all interest-bearing financial
instruments using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability
and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the
rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial
instrument or when appropriate, a shorter period to the net carrying amount of the financial asset or financial
liability.
When calculating the effective interest rate, the BPI Group estimates cash flows considering all contractual terms
of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or
received between parties to the contract that are an integral part of the effective interest rate, transaction costs and
all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment
loss, interest income is recognized using the rate of interest used to discount future cash flows for the purpose of
measuring impairment loss.
2.20 Fee and commission income
Fees and commissions are generally recognized on an accrual basis when the service has been provided.
Commission and fees arising from negotiating or participating in the negotiation of a transaction for a third party
(i.e. the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses) are
recognized on completion of underlying transactions. Portfolio and other management advisory and service fees
are recognized based on the applicable service contracts, usually on a time-proportionate basis. Asset
management fees related to investment funds are recognized ratably over the period in which the service is
provided.
2.21 Dividend income
Dividend income is recognized in the statement of income when the BPI Group’s right to receive payment is
established.
(17)
2.22 Foreign currency translation
(a) Functional and presentation currency
Items in the financial statements of each entity in the BPI Group are measured using the currency of the primary
economic environment in which the entity operates (“the functional currency”). The financial statements are
presented in Philippine Peso, which is the Parent Bank’s functional and presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign
currencies are recognized in the statement of income. Non-monetary items measured at historical cost
denominated in a foreign currency are translated at exchange rate as at the date of initial recognition. Nonmonetary items in a foreign currency that are measured at fair value are translated using the exchange rate at the
date when the fair value is determined.
Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale
are analyzed between translation differences resulting from changes in the amortized cost of the security, and
other changes in the carrying amount of the security. Translation differences are recognized in profit or loss, and
other changes in carrying amount are recognized in capital funds.
Translation differences on non-monetary financial instruments, such as equities held at fair value through profit or
loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary financial
instruments, such as equities classified as available-for-sale, are included in Accumulated other comprehensive
income (loss) in the capital funds.
(c) Foreign subsidiaries
The results and financial position of BPI’s foreign subsidiaries (none of which has the currency of a
hyperinflationary economy) that have a functional currency different from the presentation currency are translated
into the presentation currency as follows:
(i)
assets and liabilities are translated at the closing rate at reporting date;
(ii)
income and expenses are translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case
income and expenses are translated at the dates of the transactions); and
(iii)
all resulting exchange differences are recognized as a separate component (Translation adjustments) of
Accumulated other comprehensive income (loss) in the capital funds. When a foreign operation is sold,
such exchange differences are recognized in the statement of income as part of the gain or loss on sale.
2.23
Accrued expenses and other liabilities
Accrued expenses and other liabilities are recognized in the period in which the related money, goods or services are
received or when a legally enforceable claim against the BPI Group is established.
(18)
2.24
Provisions
Provisions are recognized when the BPI Group has a present legal or constructive obligation as a result of past
events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount
has been reliably estimated. Provisions are not recognized for future operating losses.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation
using a pre-tax rate that reflects the current market assessment of the time value of money and the risk specific to the
obligation. The increase in the provision due to the passage of time is recognized as interest expense.
2.25
Income taxes
(a) Current income tax
Income tax payable is calculated on the basis of the applicable tax law in the respective jurisdiction and is recognized
as an expense for the year except to the extent that current tax related to items (for example, current tax on availablefor-sale investments) that are charged or credited in other comprehensive income or directly to capital funds.
The BPI Group has substantial income from its investment in government securities subject to final withholding tax.
Such income is presented at its gross amount and the tax paid or withheld is included in Current provision for income
tax.
(b) Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is
not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business
combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred
income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the
reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred
income tax liability is settled.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax
losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or
MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary
differences can be utilized.
The BPI Group reassesses at each balance sheet date the need to recognize a previously unrecognized deferred
income tax asset.
(c) Recent tax laws
Republic Act 9337 (the Act), which was passed into law in May 2005, amended certain provisions of the National
Internal Revenue Code of 1997. The more salient provisions of the Act included: 1) change in normal corporate
income tax from 32% to 35% effective November 1, 2005 and 30% effective January 1, 2009; 2) change in
allowable deduction for interest expense from 38% to 42% effective November 1, 2005 and 33% beginning
January 1, 2009; and 3) revised rates for gross receipts tax (GRT).
On December 20, 2008, Revenue Regulations No. 16-2008 on the Optional Standard Deduction (OSD) was
published. The regulation prescribed the rules for the OSD application by corporations in the computation of their
final taxable income. The BPI Group did not avail of the OSD for purposes of income tax calculation in 2009 and
2008.
(19)
2.26 Employee benefits
(a) Pension obligations
The BPI Group operates various pension schemes. The schemes are funded through payments to trusteeadministered funds, determined by periodic actuarial calculations. The BPI Group has a defined benefit plan that
shares risks among entities within the group. A defined benefit plan is a pension plan that defines an amount of
pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as
age, years of service and compensation.
The liability recognized in the statement of condition in respect of defined benefit pension plan is the present value
of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments
for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method. The present value of the defined benefit
obligation is determined by discounting the estimated future cash outflows using interest rates of government
bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity
approximating the terms of the related pension liability.
Cumulative actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions
in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are spread to
income over the employees’ expected average remaining working lives.
Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional
on the employees remaining in service for a specified period of time (the vesting period). In this case, the pastservice costs are amortized on a straight-line basis over the vesting period.
Where the calculation results in a benefit to the BPI Group, the recognized asset is limited to the net total of any
unrecognized actuarial losses and past service costs, and the present value of any reductions in future
contributions to the plan.
For individual financial reporting purposes, the unified plan assets are allocated among the BPI Group entities
based on the level of the defined benefit obligation attributable to each entity to arrive at the net liability or asset
that should be recognized in the individual financial statements.
(b) Share-based compensation
The BPI Group engages in equity settled share-based payment transaction in respect of services received from
certain of its employees.
The fair value of the services received is measured by reference to the fair value of the shares or share options
granted on the date of the grant. The cost employee services received in respect of the shares or share options
granted is recognized in the statement of income (with a corresponding increase in reserve in capital funds) over
the period that the services are received, which is the vesting period.
The fair value of the options granted is determined using option pricing models which take into account the
exercise price of the option, the current share price, the risk-free interest rate, the expected volatility of the share
price over the life of the option and other relevant factors.
When the stock options are exercised, the proceeds received, net of any directly attributable transaction costs, are
credited to capital stock (par value) and paid-in surplus for the excess of exercise price over par value.
(20)
2.27 Capital stock
Common shares are classified as capital stock.
Incremental costs directly attributable to the issue of new shares or options are shown in capital funds as a
deduction from the proceeds, net of tax.
2.28 Earnings per share (EPS)
Basic EPS is calculated by dividing income applicable to common shares by the weighted average number of
common shares outstanding during the year with retroactive adjustments for stock dividends. Diluted EPS is
computed in the same manner as basic EPS, however, net income attributable to common shares and the
weighted average number of shares outstanding are adjusted for the effects of all dilutive potential common
shares.
2.29 Dividends on common shares
Dividends on common shares are recognized as a liability in the BPI Group’s financial statements in the year in which
they are approved by the Board of Directors and the BSP.
2.30 Fiduciary activities
The BPI Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of
assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income
arising thereon are excluded from these financial statements, as they are not assets of the BPI Group (Note 31).
2.31 Leases
(a) BPI Group is the lessee
(i)
Operating lease - leases in which substantially all risks and rewards of ownership are retained by another
party, the lessor, are classified as operating leases. Payments, including prepayments, made under
operating leases (net of any incentives received from the lessor) are charged to the statement of income
on a straight-line basis over the period of the lease.
(ii) Finance lease - leases of assets where the BPI Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalized at the commencement of the
lease at the lower of the fair value of the leased property and the present value of the minimum lease
payments. Each lease payment is allocated between the liability and finance charges so as to achieve a
constant rate on the finance balance outstanding. The interest element of the finance cost is charged to
the statement of income over the lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
(b) BPI Group is the lessor
(i)
Operating lease - properties (land and building) leased out under operating leases are included in
“Investment properties” in the statement of condition. Rental income under operating leases is
recognized in the statement of income on a straight-line basis over the period of the lease.
(ii) Finance lease - when assets are leased out under a finance lease, the present value of the lease
payments is recognized as a receivable. The difference between the gross receivable and the present
value of the receivable is recognized as unearned finance income.
(21)
Lease income under finance lease is recognized over the term of the lease using the net investment method
before tax, which reflects a constant periodic rate of return.
2.32
Insurance operations
(a) Life insurance
The BPI’s life insurance subsidiary issues contracts that transfer insurance risk or financial risk or both. Insurance
contracts are those contracts that transfer significant insurance risk. Such risks include the possibility of having to
pay benefits on the occurrence of an insured event such as death, accident, or disability. The subsidiary may also
transfer insurance risk in insurance contracts through its reinsurance arrangements; to hedge against a greater
possibility of claims occurring than expected. As a general guideline, the subsidiary defines as significant
insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10%
more than the benefits payable if the insured event did not occur.
Investment contracts are those contracts that transfer financial risk with no significant insurance risk.
The more significant of the accounting principles of the life insurance subsidiary follow: (a) premiums arising from
insurance contracts are recognized as revenue when received and on the issue date of the insurance policies for the
first year premiums; (b) commissions and other acquisition costs are expensed as incurred; (c) financial assets and
liabilities are measured following the classification and valuation provisions of PAS 39; and (d) a liability adequacy
test is performed at each balance sheet date which compares the subsidiary’s reported insurance contract
liabilities against current best estimates of future cash flows and claims handling, and policy administration
expenses as well as investment income from assets backing such liabilities, with any deficiency immediately
charged to income by establishing a provision for losses arising from liability adequacy tests.
(b) Non-life insurance
The more significant accounting policies observed by the non-life insurance subsidiary follow: (a) gross premiums
written from short term insurance contracts are recognized at the inception date of the risks underwritten and are
earned over the period of cover in accordance with the incidence of risk using the 24th method; (b) acquisition costs
are deferred and charged to expense in proportion to the premium revenue recognized; reinsurance commissions are
deferred and deducted from the applicable deferred acquisition costs, subject to the same amortization method as the
related acquisition costs; (c) a liability adequacy test is performed which compares the subsidiary’s reported
insurance contract liabilities against current best estimates of all contractual future cash flows and claims handling,
and policy administration expenses as well as investment income backing up such liabilities, with any deficiency
immediately charged to income; (d) amounts recoverable from reinsurers and loss adjustment expenses are
classified as assets, with an allowance for estimated uncollectible amounts; and (e) financial assets and liabilities are
measured following the classification and valuation provisions of PAS 39.
(c) Pre-need
The more significant provisions of the PNUCA as applied by the pre-need subsidiary follow: (a) premium income
from sale of pre-need plans is recognized as earned when collected; (b) costs of contracts issued and other direct
costs and expenses are recognized as expense when incurred; (c) pre-need reserves which represent the accrued
net liabilities of the subsidiary to its planholders are actuarially computed based on standards and guidelines set
forth by the SEC; the increase or decrease in the account is charged or credited to other costs of contracts issued
in the statement of income; and (d) insurance premium reserves which represent the amount that must be set
aside by the subsidiary to pay for premiums for insurance coverage of fully paid planholders, are actuarially
computed based on standards and guidelines set forth by the SEC.
(22)
2.33
Comparatives
Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with
comparative information.
Where PAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the current
year.
2.34
Subsequent events (or Events after balance sheet date)
Post year-end events that provide additional information about the BPI Group’s financial position at balance sheet
date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events
are disclosed in the notes to financial statements when material.
Note 3 - Financial Risk and Capital Management
Risk management in the BPI Group covers all perceived areas of risk exposure, even as it continuously endeavors to
uncover hidden risks. Capital management is understood to be a facet of risk management. The Board of Directors
is the BPI Group’s principal risk and capital manager, and the BPI Group’s only strategic risk taker. The Board of
Directors provides written policies for overall risk management, as well as written procedures for the management of
foreign exchange risk, interest rate risk, credit risk, equity risk, and contingency risk, among others.
The primary objective of the BPI Group is the generation of recurring acceptable returns to shareholders’ capital. To
this end, the BPI Group’s policies, business strategies, and business activities are directed towards the generation of
cash flows that are in excess of its fiduciary and contractual obligations to its depositors, and to its various other
funders and stakeholders.
To generate acceptable returns to its shareholders’ capital, the BPI Group understands that it has to bear risk, that
risk-taking is inherent in its business. Risk is understood by the BPI Group as the uncertainty in its future incomes an uncertainty that emanates from the possibility of incurring losses that are due to unplanned and unexpected drops
in revenues, increases in expenses, impairment of asset values, or increases in liabilities.
The possibility of incurring losses is, however, compensated by the possibility of earning more than expected
incomes. Risk-taking is, therefore, not entirely bad to be avoided. Risk-taking presents opportunities if risks are
accounted, deliberately taken, and are kept within rationalized limits.
The Risk Management Office (RMO) and the Finance and Risk Management Committee (FRMC) are responsible for
the management of market and liquidity risks. Their objective is to minimize adverse impacts on the BPI Group’s
financial performance due to the unpredictability of financial markets. Market and credit risks management is carried
out through policies approved by the Risk Management Committee (RMC)/Executive Committee/Board of Directors.
In addition, Internal Audit is responsible for the independent review of risk assessment measures and procedures and
the control environment. For risk management purposes, risks emanating from Treasury activities are managed
independently.
The most important risks that the BPI Group manages are credit risk, liquidity risk, market risk and other operational
risk. Market risk includes currency exchange risk, interest rate and other price risks.
(23)
3.1 Credit risk
The BPI Group takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the
BPI Group by failing to discharge an obligation. Significant changes in the economy, or in the prospects of a
particular industry segment that may represent a concentration in the BPI Group’s portfolio, could result in losses that
are different from those provided for at the reporting date. Management therefore carefully manages its exposure to
credit risk. Credit exposures arise principally in loans and advances, debt securities and other bills. There is also
credit risk in off-balance sheet financial arrangements. The Credit Policy Group works with the Credit Committee in
managing credit risk, and reports are regularly provided to the Board of Directors.
3.1.1 Credit risk management
(a)
Loans and advances
In measuring credit risk of loans and advances at a counterparty level, the BPI Group considers three
components: (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current
exposures to the counterparty and its likely future development; and (iii) the likely recovery ratio on the defaulted
obligations. In the evaluation process, the BPI Group also considers the conditions of the industry/sector to which
the counterparty is exposed, other existing exposures to the group where the counterparty may be related, as well
as the client and the BPI Group’s fallback position assuming the worst-case scenario. Outstanding and potential
credit exposures are reviewed to likewise ensure that they conform to existing internal credit policies.
The BPI Group assesses the probability of default of individual counterparties using internal rating tools tailored to
the various categories of counterparty. The BPI Group has internal credit risk rating systems designed for
corporate, small and medium-sized enterprises (SMEs), and retail accounts. For corporate and SMEs, the rating
system is a 10-point scale that measures the borrower's credit risk based on quantitative and qualitative factors.
The ratings of individual exposures may subsequently migrate between classes as the assessment of their
probabilities of default changes. For retail, the consumer credit scoring system is a formula-based model for
evaluating each credit application against a set of characteristics that experience has shown to be relevant in
predicting repayment. The BPI Group regularly validates the performance of the rating systems and their predictive
power with regard to default events, and enhances them if necessary. The BPI Group's internal ratings are
mapped to the following standard BSP classifications:
Unclassified - these are loans that do not have a greater-than-normal risk and do not possess the
characteristics of loans classified below. The counterparty has the ability to satisfy the obligation in full and
therefore minimal loss, if any, is anticipated.
Loans especially mentioned - these are loans that have potential weaknesses that deserve management’s
close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the loan and
thus increase the credit risk of the BPI Group.
Substandard - these are loans which appear to involve a substantial degree of risk to the BPI Group because
of unfavorable record or unsatisfactory characteristics. Further, these are loans with well-defined weaknesses
which may include adverse trends or development of a financial, managerial, economic or political nature, or a
significant deterioration in collateral.
Doubtful - these are loans which have the weaknesses similar to those of the substandard classification with
added characteristics that existing facts, conditions, and values make collection or liquidation in full highly
improbable and substantial loss is probable.
Loss - these are loans which are considered uncollectible and of such little value that their continuance as
bankable assets is not warranted although the loans may have some recovery or salvage value.
(24)
(b) Debt securities and other bills
For debt securities and other bills, external ratings such as Standard & Poor’s, Moody’s and Fitch’s ratings or their
equivalents are used by the BPI Group for managing credit risk exposures. Investments in these securities and
bills are viewed as a way to gain better credit quality mix and at the same time, maintain a readily available source
to meet funding requirements.
3.1.2 Risk limit control and mitigation policies
The BPI Group manages, limits and controls concentrations of credit risk wherever they are identified - in
particular, to individual counterparties and groups, to industries and sovereigns.
The BPI Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in
relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are
monitored on a regular basis and subject to an annual or more frequent review, when considered necessary.
Limits on large exposures and credit concentration are approved by the Board of Directors.
The exposure to any one borrower is further restricted by sub-limits covering on- and off-balance sheet exposures.
Actual exposures against limits are monitored regularly.
Exposure to credit risk is also managed through regular analysis of the ability of existing and potential borrowers to
meet interest and capital repayment obligations and by changing these lending limits where appropriate.
The BPI Group employs a range of policies and practices to mitigate credit risk. Some of these specific control
and mitigation measures are outlined below.
(a) Collateral
One of the most traditional and common practice in mitigating credit risk is requiring security particularly for loans
and advances. The BPI Group implements guidelines on the acceptability of specific classes of collateral for
credit risk mitigation. The principal collateral types for loans and advances are:
Mortgages over real estate properties and chattels; and
Hold-out on financial instruments such as debt securities deposits, and equities
In order to minimize credit loss, the BPI Group seeks additional collateral from the counterparty when impairment
indicators are observed for the relevant individual loans and advances.
(b) Derivatives
The BPI Group maintains strict control limits on net open derivative positions (i.e., the difference between purchase
and sale contracts), by both amount and term. At any one time, the amount subject to credit risk is limited to the net
current fair value of instruments resulting in a net receivable amount for the BPI Group, which in relation to derivatives
is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding.
This credit risk exposure is managed as part of the overall lending limits with customers, together with potential
exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on
these instruments (except where the BPI Group requires margin deposits from counterparties).
Settlement risk arises in any situation where a payment in cash, securities, foreign exchange currencies, or equities is
made in the expectation of a corresponding receipt in cash, securities, foreign exchange currencies, or equities. Daily
settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the
BPI Group’s market transactions on any single day. The introduction of the delivery versus payment facility in the
local market has brought down settlement risk significantly.
(25)
(c) Master netting arrangements
The BPI Group further restricts its exposure to credit losses by entering into master netting arrangements with
counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not
generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross
basis. However, the credit risk associated with favorable contracts (asset position) is reduced by a master netting
arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a
net basis. The BPI Group’s overall exposure to credit risk on derivative instruments subject to master netting
arrangements can change substantially within a short period, as it is affected by each transaction subject to the
arrangement.
(d) Credit-related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Standby
letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit - which are written
undertakings by the BPI Group on behalf of a customer authorizing a third party to draw drafts on the BPI Group up to
a stipulated amount under specific terms and conditions - are collateralized by the underlying shipments of goods to
which they relate and therefore carry less risk than a direct loan.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, or
letters of credit. With respect to credit risk on commitments to extend credit, the BPI Group is potentially exposed to
loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total
unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific
credit standards. The BPI Group monitors the term to maturity of credit commitments because longer-term
commitments generally have a greater degree of credit risk than shorter-term commitments.
3.1.3 Impairment and provisioning policies
As described in Note 3.1.1, the BPI Group’s credit-quality mapping on loans and advances is based on the standard
BSP loan classifications. Impairment provisions, however, are recognized for financial reporting purposes only for
losses that have been incurred at the reporting date based on objective evidence of impairment (Note 2.8).
The table below shows the percentage of the BPI Group’s loans and advances and the related allowance for
impairment.
Unclassified
Loans especially mentioned
Substandard
Doubtful
Loss
Consolidated
2009
2008
Loans and
Allowance for
Loans and
Allowance for
advances (%)
impairment (%) advances (%)
impairment (%)
95.46
0.42
95.35
0.09
0.70
5.57
0.59
5.41
1.45
17.34
1.80
15.27
1.07
61.42
0.93
61.20
1.32
100.00
1.33
100.00
100.00
100.00
(26)
Parent
Unclassified
Loans especially mentioned
Substandard
Doubtful
Loss
2009
Loans and
Allowance for
advances (%)
impairment (%)
95.41
0.41
0.64
5.02
1.52
16.54
0.95
62.56
1.48
100.00
100.00
2008
Loans and
advances (%)
94.99
0.62
2.13
0.76
1.50
100.00
Allowance for
impairment (%)
0.09
4.97
13.25
62.83
100.00
3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements
Credit risk exposures relating to significant on-balance sheet financial assets are as follows:
Due from BSP
Due from other banks
Interbank loans receivable and securities
purchased under agreements to resell (SPAR)
Financial assets at fair value through profit or loss
Derivative financial assets
Trading securities - debt securities
Available-for-sale - debt securities
Held-to-maturity securities, net
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees receivable
Others, net
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
62,744
48,422
54,465
41,428
7,147
14,278
3,363
8,114
52,546
22,584
46,160
21,107
2,146
53,018
70,429
75,031
327,474
2,182
34,318
62,194
72,884
320,216
2,146
52,159
60,290
64,787
240,328
2,182
32,999
50,532
63,196
240,681
299
2,212
416
1,316
288
1,956
486
1,651
271
2,062
366
54
254
2,607
426
144
Credit risk exposures relating to off-balance sheet items are as follows:
Undrawn loan commitments
Bills for collection
Unused letters of credit
Others
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
185,065
230,622
181,777
223,091
15,582
12,143
15,556
12,121
9,759
7,737
9,607
7,694
1,915
1,077
1,807
979
(27)
The preceding table represents the maximum credit risk exposure at December 31, 2009 and 2008, without taking
into account any collateral held or other credit enhancements. For on-balance-sheet assets, the exposures set out
above are based on net carrying amounts as reported in the statements of condition.
Management is confident in its ability to continue to control and sustain minimal exposure to credit risk of the BPI
Group resulting from its loan and advances portfolio based on the following:
96% of the loans and advances portfolio is categorized in the top two classifications of the internal rating
system in 2009 (2008 - 96%);
Mortgage loans are backed by collateral;
94% of the loans and advances portfolio is considered to be neither past due nor impaired (2008 - 95%); and
The BPI Group continued its stringent selection process of granting loans and advances.
3.1.5 Credit quality of loans and advances
Loans and advances are summarized as follows:
Neither past due nor impaired
Past due but not impaired
Impaired
Allowance for impairment
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
316,725
310,101
234,177
4,519
2,388
1,663
15,186
15,244
11,282
336,430
327,733
247,122
(8,956)
(7,517)
(6,794)
327,474
320,216
240,328
2008
233,352
841
12,354
246,547
(5,866)
240,681
Impaired category as shown in the table above includes loan accounts which are individually (Note 3.1.5c) and
collectively assessed for impairment.
The total consolidated impairment provision for loans and advances is P2,400 million (2008 - P1,245 million), of which
P450 million (2008 - P582 million) represents provision for individually impaired loans and the remaining amount of
P1,950 million (2008 - P663 million) represents the portfolio provision. Further information of the impairment
allowance for loans and advances is provided in Note 13.
When entering into new markets or new industries, the BPI Group focuses on corporate accounts and retail
customers with good credit rating and customers providing sufficient collateral, where appropriate or necessary.
(28)
(a) Loans and advances neither past due nor impaired
Loans and advances that were neither past due nor impaired consist mainly of accounts with Unclassified rating and
those loans accounts in a portfolio to which an impairment has been allocated on a collective basis. Details of these
accounts follow:
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
Corporate entities:
Large corporate customers
Small and medium enterprises
Retail customers:
Mortgages
Credit cards
Others
184,209
56,374
200,670
43,826
176,497
41,812
193,898
25,148
56,661
14,066
5,415
316,725
48,746
12,580
4,279
310,101
429
14,066
1,373
234,177
751
12,580
975
233,352
(b) Loans and advances past due but not impaired
The table below presents the gross amount of loans and advances that were past due but not impaired and classified
by type of borrowers. Collateralized past due loans are not considered impaired when the cash flows that may result
from foreclosure of the related collateral are higher than the carrying amount of the loans.
Consolidated
2009
Large
2008
Small and
Large
corporate
medium
Retail
customers
enterprises
customers
Total
Small and
corporate
medium
Retail
customers
enterprises
customers
Total
(In Millions of Pesos)
Past due up to 30 days
247
136
597
980
56
410
617
Past due 31 - 90 days
12
147
607
766
96
299
296
691
Past due 91 - 180 days
13
114
1,410
1,537
15
70
30
115
Over 180 days
Fair value of collateral
1,083
51
75
1,110
1,236
127
228
144
499
323
472
3,724
4,519
294
1,007
1,087
2,388
3,809
3,084
(29)
Parent
2009
Large
2008
Small and
Large
corporate
medium
Retail
customers
enterprises
customers
Total
Small and
corporate
medium
Retail
customers
enterprises
customers
Total
(In Millions of Pesos)
239
22
504
765
55
6
338
399
Past due 31 - 90 days
Past due up to 30 days
-
50
455
505
96
-
189
285
Past due 91 - 180 days
-
24
293
317
15
-
3
18
31
26
19
76
103
24
12
139
270
122
1,271
1,663
269
30
542
841
Over 180 days
Fair value of collateral
200
1,026
(c) Loans and advances individually impaired
The breakdown of the gross amount of individually impaired loans and advances (included in Impaired category) by
class, along with the fair value of related collateral held by the BPI Group as security, are as follows:
Corporate entities:
Large corporate customers
Small and medium enterprises
Retail customers:
Mortgages
Credit cards
Fair value of collateral
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2008
4,726
6,343
7,044
4,624
4,554
5,202
7,043
3,710
551
1,098
12,718
11,998
460
1,030
13,158
11,221
23
1,098
10,877
10,512
14
1,030
11,797
10,422
(d) Loans and advances renegotiated/restructured
There were no renegotiated loans in 2009 (2008 - P69 million).
3.1.6 Credit quality of other financial assets
a.
Due from Bangko Sentral ng Pilipinas
Due from BSP amounting to P62,744 million and P48,422 million as of December 31, 2009 and 2008, respectively
are made with a sovereign counterparty and are considered fully performing.
(30)
b.
Due from other banks and interbank loans receivable
Due from other banks and interbank loans receivable are considered fully performing at December 31, 2009 and
2008. The table below presents the credit ratings of counterparty banks based on Standard and Poor’s.
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
31
241
31
241
23,521
17,212
22,201
12,073
11,331
8,795
11,150
8,464
21,743
9,457
14,804
7,800
3,067
1,157
1,337
643
59,693
49,523
36,862
29,221
AAA
AA- to AA+
A- to A+
Lower than AUnrated
c.
Derivative financial assets
The table below presents the Standard and Poor’s credit ratings of counterparties for derivative financial assets
presented in the consolidated and parent financial statements.
2009
2008
(In Millions of Pesos)
546
361
1,415
789
782
67
214
154
2,146
2,182
AAA
AA- to AA+
A- to A+
Lower than AUnrated
d.
Debt securities, treasury bills and other government securities
The table below presents the ratings of debt securities, treasury bills and other government securities at December
31, 2009 and 2008 based on Standard & Poor’s:
At December 31, 2009
Consolidated
Trading
Held-to-
Available-
securities
maturity
for-sale
Parent
Total
Trading
Held-to-
Available-
securities
maturity
for-sale
Total
(In Millions of Pesos)
AAA
AA- to AA+
A- to A+
Lower than AUnrated
27,637
466
15,415
43,518
27,637
466
8,755
49
1,028
2,286
3,363
49
467
2,286
2,802
1,566
180
4,100
5,846
1,443
3,831
5,274
23,110
73,288
44,437
140,835
22,503
63,830
41,625
127,958
656
69
4,191
4,916
527
24
3,793
4,344
53,018
75,031
70,429
198,478
52,159
64,787
60,290
177,236
-
36,858
(31)
At December 31, 2008
Consolidated
Parent
Trading
Held-to-
Available-
securities
maturity
for-sale
Total
Trading
Held-to-
Available-
securities
maturity
for-sale
Total
(In Millions of Pesos)
AAA
AA- to AA+
A- to A+
Lower than AUnrated
e.
21,118
1,712
18,308
41,138
21,118
1,712
11,026
33,856
475
478
4,030
4,983
475
478
4,030
4,983
476
561
37,245
120,489
85
12,571
70,673
11,262
60,985
476
476
32,868
105,115
69
21
2,135
2,225
144
21
2,132
2,297
34,318
72,884
62,194
169,396
32,999
63,196
50,532
146,727
Other financial assets
The BPI Group’s other financial assets (shown under Other resources) as of December 31, 2009 and 2008 consist
mainly of sales contracts receivable, accounts receivable, accrued interest and fees receivable from various unrated
counterparties.
3.1.7 Repossessed or foreclosed collaterals
In 2009, the BPI Group acquired assets by taking possession of collaterals held as security for loans and advances
with carrying amount of P1,912 million (2008 - P1,311 million). The related foreclosed collaterals have aggregate fair
value of P2,615 million (2008 - P1,771 million). Foreclosed collaterals include real estate (land, building, and
improvements), auto or chattel, bond and stocks.
Repossessed properties are sold as soon as practicable and are classified as “Assets held for sale” in the statement
of condition.
(32)
3.1.8 Concentrations of risks of financial assets with credit risk exposure
The BPI Group’s main credit exposure at their carrying amounts, as categorized by industry sectors follow:
Consolidated
Financial
institutions
Less –
Consumer
Manufacturing
Real estate
Others
allowance
Total
(In Millions of Pesos)
Due from BSP
Due from other banks
62,744
-
-
-
-
-
62,744
7,147
-
-
-
-
-
7,147
52,546
-
-
-
-
-
52,546
2,127
-
6
13
-
2,146
1,060
-
638
54
51,266
-
53,018
Interbank loans receivable
and SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
-
Trading securities - debt
securities
Available-for-sale - debt
12,431
-
665
466
56,867
-
70,429
Held-to-maturity securities
securities
1,461
-
-
-
73,570
-
75,031
Loans and advances, net
15,827
37,155
70,289
83,385
129,774
(8,956)
327,474
Other financial assets
Sales contracts
receivable, net
Accounts receivable, net
-
-
-
-
301
(2)
299
-
-
-
-
2,825
(613)
2,212
Other accrued interest
and fees receivable
Others, net
At December 31, 2009
-
-
-
-
416
-
-
-
-
1,721
(405)
-
1,316
416
155,343
37,155
71,598
83,905
316,753
(9,976)
654,778
(33)
Financial
institutions
Less –
Consumer
Manufacturing
Real estate
Others
allowance
Total
(In Millions of Pesos)
Due from BSP
48,422
-
-
-
-
-
48,422
Due from other banks
14,278
-
-
-
-
-
14,278
22,584
-
-
-
-
-
22,584
2,106
-
45
-
2,182
1,335
-
-
32,982
-
34,318
6,769
-
697
-
54,728
-
62,194
498
-
-
-
72,386
-
72,884
29,592
80,418
72,893
123,793
(7,517)
320,216
Interbank loans receivable
and SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
31
-
Trading securities - debt
securities
1
Available-for-sale - debt
securities
Held-to-maturity securities
Loans and advances, net
21,037
Other financial assets
Sales contracts
-
receivable, net
Accounts receivable, net
-
-
-
-
290
(2)
288
-
-
-
2,572
(616)
1,956
Other accrued interest
and fees receivable
Others, net
At December 31, 2008
-
-
-
-
486
-
-
-
-
2,059
(408)
1,651
29,592
81,146
72,894
289,341
(8,543)
581,459
117,029
-
486
(34)
Parent
Financial
institutions
Less Consumer
Manufacturing
Real estate
Others
allowance
Total
(In Millions of Pesos)
Due from BSP
Due from other banks
54,465
-
-
-
-
-
54,465
3,363
-
-
-
-
-
3,363
46,160
-
-
-
-
-
46,160
2,127
-
6
13
-
2,146
1,060
-
514
49
50,536
-
52,159
11,707
-
665
466
47,452
-
60,290
491
-
-
-
64,296
-
64,787
14,743
30,549
64,627
30,782
106,421
(6,794)
240,328
-
-
-
-
273
(2)
271
-
-
-
-
2,648
(586)
2,062
Interbank loans receivable
and SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
-
Trading securities - debt
securities
Available-for-sale - debt
securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts
receivable, net
Accounts receivable, net
Other accrued interest
and fees receivable
Others, net
At December 31, 2009
-
-
-
-
366
-
-
-
-
442
(388)
54
30,549
65,812
31,297
272,447
(7,770)
526,451
134,116
-
366
(35)
Financial
institutions
Less Consumer
Manufacturing
Real estate
Others
allowance
Total
(In Millions of Pesos)
Due from BSP
Due from other banks
41,428
-
-
-
-
-
41,428
8,114
-
-
-
-
-
8,114
21,107
-
-
-
-
-
21,107
2,106
-
1,335
-
6,769
498
20,216
Interbank loans receivable
and SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
31
-
45
-
2,182
-
-
31,664
-
32,999
-
697
-
43,066
-
50,532
-
-
-
62,698
-
63,196
15,049
78,391
27,504
105,387
(5,866)
240,681
-
-
-
-
256
(2)
254
-
-
-
-
3,201
(594)
2,607
Trading securities - debt
securities
Available-for-sale - debt
securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts
receivable, net
Accounts receivable, net
Other accrued interest
and fees receivable
Others, net
At December 31, 2008
-
-
-
-
426
-
-
-
-
537
(393)
144
15,049
79,119
27,504
247,280
(6,855)
463,670
101,573
-
426
Trading, available-for-sale and held-to-maturity securities under “Others” category include local and US treasury
bills. Likewise, Loans and advances under the same category pertain to loans granted to individual and retail
borrowers belonging to various industry sectors.
3.2 Market risk management
The BPI Group is exposed to market risk - the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. Market risk is managed by the FRMC guided by policies and
procedures approved by the RMC and confirmed by the Executive Committee/Board of Directors.
The BPI Group reviews and controls market risk exposures of both its trading and non-trading portfolios. Trading
portfolios include those positions arising from the BPI Group’s market-making transactions. Non-trading portfolios
primarily arise from the interest rate management of the BPI Group’s retail and commercial banking assets and
liabilities.
As part of the management of market risk, the BPI Group undertakes various hedging strategies. The BPI Group
also enters into interest rate swaps to match the interest rate risk associated with fixed-rate long-term debt
securities.
The BPI Group uses the 1-day, 99% confidence, Value-at-Risk (VaR) as metric of its exposure to market risk.
This metric estimates, at 99% confidence level, the maximum loss that a trading portfolio may incur over a trading
day. This metric indicates as well that there is 1% statistical probability that the trading portfolios’ actual loss
would be greater than the computed VaR.
(36)
VaR measurement is an integral part of the BPI Group’s market risk control system. Actual market risk exposures
vis-à-vis market risk limits are reported daily to the FRMC. VaR limits for all trading portfolios are set by the RMC.
The RMC has set a 1-day VaR limit for the BPI Group aggregate trading portfolio. The BPI Group also has a yearto-date mark-to-market plus trading loss limit at which management action would be triggered.
Stress tests indicate the potential losses that could arise in extreme conditions. Price risk and liquidity risk stress
tests are conducted quarterly aside from the historical tests of the VaR models. Concluded tests indicate that BPI will
be able to hurdle both stress scenarios. Results of stress tests are reviewed by senior management and by the
RMC.
The average daily VaR for the trading portfolios follows:
Local fixed-income
Foreign fixed-income
Equity securities
Derivatives
Foreign exchange
Mutual fund
Consolidated
2009
2008
2009
(In Millions of Pesos)
152
969
146
84
210
79
13
124
13
29
13
52
14
11
8
322
1,346
249
Parent
2008
830
196
29
12
1,067
The BPI Group uses a simple version of the Balance Sheet VaR (BSVaR) whereby only the principal and interest
payments due and relating to the banking book as at particular valuation dates are considered. The BSVaR assumes
a static balance sheet, i.e., it is assumed that there will be no new transactions moving forward, and no portfolio
rebalancing will be undertaken in response to future changes in market rates.
The BSVaR is founded on re-pricing gaps, or the difference between the amounts of rate sensitive assets and the
amounts of rate sensitive liabilities. An asset or liability is considered to be rate-sensitive if the interest rate applied to
the outstanding principal balance changes (either contractually or because of a change in a reference rate) during the
interval.
The BSVaR estimates the “riskiness of the balance sheet” and compares the degree of risk taking activity in the
banking books from one period to the next. In consideration of the static framework, and the fact that income from
the positions is accrued rather than generated from marking-to-market, the probable loss (that may be exceeded 1%
of the time) that is indicated by the BSVaR is not realized in accounting income.
The cumulative BSVaR for the banking or non-trading book, follows:
BSVaR
Consolidated
2009
2008
2009
(In Millions of Pesos)
467
907
409
Parent
2008
722
(37)
3.2.1 Foreign exchange risk
The BPI Group takes on exposure to the effects of fluctuations in the prevailing exchange rates on its foreign
currency financial position and cash flows. The Board of Director sets limits on the level of exposure by currency and
in aggregate for both overnight and intra-day positions, which are monitored daily. The table below summarizes the
BPI Group’s exposure to foreign currency exchange rate risk at December 31, 2009 and 2008. Included in the table
are the BPI Group’s financial instruments at carrying amounts, categorized by currency.
Consolidated
USD
As at December 31, 2009
Financial Assets
Cash and other cash items
Due from other banks
Interbank loans receivable and
SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
Trading securities - debt
securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Others financial assets, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Due to BSP and other banks
Manager’s checks and demand
drafts outstanding
Other financial liabilities
Total financial liabilities
Net on-balance sheet financial
position (in Philippine Peso)
JPY
EUR
GBP
(In Millions of Pesos)
2,079
2,449
52
142
67
463
30,609
-
399
Less allowance
Total
9
1,557
-
2,207
4,611
-
37
-
30,646
-
-
-
-
399
30,480
28,628
17,710
23,048
405
135,807
1,681
1
1,876
14
1,514
825
70
177
3,130
232
18
27
1,880
(355)
(1)
(356)
30,494
30,374
18,535
24,462
609
142,337
104,969
305
189
1,259
-
2,535
-
435
-
-
109,198
305
189
52
1,240
106,755
26
1,285
10
145
2,690
6
441
-
62
1,417
111,171
29,052
591
440
1,439
(356)
31,166
(38)
USD
As at December 31, 2008
Financial Assets
Cash and other cash items
Due from other banks
Interbank loans receivable and
SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
Trading securities - debt
securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand
drafts outstanding
Other financial liabilities
Total financial liabilities
Net on-balance sheet financial
position (in Philippine Peso)
JPY
EUR
GBP
(In Millions of Pesos)
9
1,488
Less allowance
1,606
7,603
75
211
60
906
11,470
1,057
409
1,796
10
4
3
21,748
28,421
13,069
25,777
193
111,683
1,735
1
3,089
1,393
399
63
11
3,245
376
29
28
1,933
102,657
1,657
3,097
265
2,647
2
-
2,117
51
-
271
-
-
107,692
1,710
3,097
265
277
781
108,734
1
189
2,839
38
145
2,351
12
18
301
-
328
1,133
114,225
2,949
250
894
1,632
-
-
Total
1,750
10,208
-
12,936
-
1,813
(275)
(1)
(276)
(276)
21,748
30,190
13,468
27,329
232
119,674
5,449
(39)
Parent
USD
As at December 31, 2009
Financial Assets
Cash and other cash items
Due from other banks
Interbank loans receivable and
SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
Trading securities - debt
securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Due to BSP and other banks
Manager’s checks and demand
drafts outstanding
Other financial liabilities
Total financial liabilities
Net on-balance sheet financial
position (in Philippine Peso)
1,715
2,015
JPY
EUR
GBP
(In Millions of Pesos)
Less allowance
Total
52
140
63
264
9
59
-
1,839
2,478
30,609
-
-
37
-
30,646
393
-
-
-
-
393
30,480
20,841
16,126
23,048
738
125,965
1,681
156
2,029
14
1,514
792
69
459
3,175
232
18
355
(355)
(1)
(356)
30,494
22,587
16,918
24,443
1,370
131,168
95,549
305
189
1,259
-
2,530
-
339
-
-
99,677
305
189
41
1,217
97,301
-
-
26
1,285
41
2,571
339
-
41
1,284
101,496
28,664
744
604
16
(356)
29,672
(40)
USD
As at December 31, 2008
Financial Assets
Cash and other cash items
Due from other banks
Interbank loans receivable and
SPAR
Financial assets at fair value
through profit or loss
Derivative financial assets
Trading securities - debt
securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand
drafts outstanding
Other financial liabilities
Total financial liabilities
Net on-balance sheet financial
position (in Philippine Peso)
3.2.2
JPY
EUR
GBP
(In Millions of Pesos)
Less allowance
Total
1,443
6,762
75
210
51
690
8
45
-
1,577
7,707
11,470
1,057
409
-
-
12,936
1,789
10
4
3
-
1,806
21,748
20,774
11,708
25,777
193
101,664
1,735
1
3,088
1,393
399
63
16
3,025
376
432
(275)
(1)
(276)
21,748
22,543
12,107
27,300
209
107,933
93,534
1,657
3,097
265
2,647
2
-
2,101
51
-
205
-
-
98,487
1,710
3,097
265
257
765
99,575
1
189
2,839
38
40
2,230
12
217
-
308
994
104,861
2,089
249
795
215
(276)
3,072
Interest rate risk
There are two types of interest rate risk - (i) fair value interest risk and (ii) cash flow interest risk. Fair value interest
rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest
rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. The BPI Group takes on exposure to the effects of fluctuations in the prevailing
levels of market interest rates on both its fair value which affects mainly the BPI Group’s trading securities portfolio
and cash flow risks on available for sale securities portfolio which is carried at market. Interest margins may increase
as a result of such changes but may also result in losses in the event that unexpected movements arise. The Board
of Directors sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored
daily by the FRMC.
Interest rate risk in the banking book arises from the BPI Group’s core banking activities. The main source of this
type of interest rate risk is repricing risk, which reflects the fact that the BPI Group’s assets and liabilities are of
different maturities and are priced at different interest rates.
(41)
The table below summarizes the BPI Group’s exposure to interest rate risk, categorized by the earlier of contractual
repricing or maturity dates.
Consolidated
Up to 1 year
As at December 31, 2009
Financial Assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Financial assets at fair value through
profit or loss
Derivative financial assets
Trading securities - debt securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees
receivable
Others, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total financial liabilities
Total interest gap
Repricing
Over 1 up to
Non3 years
Over 3 years
repricing
(In Millions of Pesos)
-
2,146
224,509
-
20,608
-
-
-
43,990
-
Total
62,744
7,147
52,546
62,744
7,147
52,546
53,018
70,429
75,031
38,367
2,146
53,018
70,429
75,031
327,474
299
2,212
299
2,212
226,655
20,608
43,990
416
1,316
363,525
416
1,316
654,778
245,189
1,593
74
-
15,033
-
209,943
-
109,306
31,935
1,933
579,471
1,593
32,009
1,933
3,059
5,000
3,059
5,000
2,486
4,055
157,774
205,751
2,486
4,055
629,606
25,172
246,856
(20,201)
15,033
5,575
209,943
(165,953)
(42)
Up to 1 year
As at December 31, 2008
Financial Assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Financial assets at fair value through
profit or loss
Derivative financial assets
Trading securities - debt securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees
receivable
Others, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total financial liabilities
Total interest gap
Repricing
Over 1 up to
Non3 years
Over 3 years
repricing
(In Millions of Pesos)
Total
-
-
-
48,422
14,278
22,584
48,422
14,278
22,584
2,182
2,964
196,707
21,727
30,531
34,318
59,230
72,884
71,251
2,182
34,318
62,194
72,884
320,216
-
-
-
288
1,956
288
1,956
201,853
21,727
30,531
486
1,651
327,348
486
1,651
581,459
261,067
2,547
988
-
176,191
-
10,598
-
92,496
8,946
1,496
540,352
2,547
9,934
1,496
-
-
-
2,723
5,000
2,723
5,000
264,602
(62,749)
176,191
(154,464)
10,598
19,933
2,444
5,042
118,147
209,201
2,444
5,042
569,538
11,921
(43)
Parent
Up to 1 year
As at December 31, 2009
Financial Assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Financial assets at fair value through
profit or loss
Derivative financial assets
Trading securities - debt securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees
receivable
Others, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total financial liabilities
Total interest gap
-
2,146
193,691
-
Repricing
Over 1 up to
Non3 years
Over 3 years
repricing
(In Millions of Pesos)
-
3,632
-
Total
-
54,465
3,363
46,160
54,465
3,363
46,160
13,377
52,159
60,290
64,787
29,628
2,146
52,159
60,290
64,787
240,328
-
271
2,062
271
2,062
195,837
3,632
13,377
366
54
313,605
366
54
526,451
190,536
1,593
74
-
5,298
-
174,849
-
101,348
24,542
1,935
472,031
1,593
24,616
1,935
2,506
5,000
2,506
5,000
1,803
3,714
140,848
172,757
1,803
3,714
513,198
13,253
192,203
3,634
5,298
(1,666)
174,849
(161,472)
(44)
Up to 1 year
As at December 31, 2008
Financial Assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Financial assets at fair value through
profit or loss
Derivative financial assets
Trading securities - debt securities
Available-for-sale - debt securities
Held-to-maturity securities
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees
receivable
Others, net
Total financial assets
Financial Liabilities
Deposit liabilities
Derivative financial liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total financial liabilities
Total interest gap
-
2,182
2,964
186,132
-
Repricing
Over 1 up to
Non3 years
Over 3 years
repricing
(In Millions of Pesos)
-
6,574
-
Total
-
41,428
8,114
21,107
41,428
8,114
21,107
10,651
32,999
47,568
63,196
37,324
2,182
32,999
50,532
63,196
240,681
-
254
2,607
254
2,607
191,278
6,574
10,651
426
144
255,167
426
144
463,670
207,151
2,547
988
-
142,619
-
5,003
-
86,116
4,385
1,462
440,889
2,547
5,373
1,462
-
-
2,164
5,000
2,164
5,000
210,686
(19,408)
142,619
(136,045)
1,762
3,465
104,354
150,813
1,762
3,465
462,662
1,008
5,003
5,648
3.3 Liquidity risk
Liquidity risk is the risk that the BPI Group will be unable to meet its payment obligations associated with its
financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the
failure to meet obligations to repay depositors and fulfill commitments to lend.
(45)
3.3.1
Liquidity risk management process
The BPI Group’s liquidity management process, as carried out within the BPI Group and monitored by the RMC
and the FRMC includes:
Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This
includes replenishment of funds as they mature or are borrowed by customers;
Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any
unforeseen interruption to cash flow;
Monitoring liquidity ratios against internal and regulatory requirements;
Managing the concentration and profile of debt maturities; and
Performing periodic liquidity stress testing on the BPI Group’s liquidity position by assuming a faster rate of
withdrawals in its deposit base.
Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and
month as these are key periods for liquidity management. The starting point for these projections is an analysis of
the contractual maturity of the financial liabilities (Notes 3.3.3 and 3.3.4) and the expected collection date of the
financial assets.
The BPI Group also monitors unmatched medium-term assets, the level and type of undrawn lending
commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of
credit.
3.3.2
Funding approach
Sources of liquidity are regularly reviewed by the BPI Group to maintain a wide diversification by currency,
geography, counterparty, product and term.
3.3.3
Non-derivative cash flows
The table below presents the significant cash flows payable by the BPI Group under non-derivative financial
liabilities by contractual maturities at the reporting date. The amounts disclosed in the table are the expected
undiscounted cash flows, which the BPI Group uses to manage the inherent liquidity risk.
(46)
Consolidated
Up to 1 year
As at December 31, 2009
Financial Liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total
266,495
20,296
1,933
219,803
8,298
-
121,310
5,037
-
607,608
33,631
1,933
3,059
423
845
7,535
3,059
8,803
2,486
4,055
298,747
228,946
133,882
2,486
4,055
661,575
Up to 1 year
As at December 31, 2008
Financial Liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Over 1 up to
3 years
Over 3 years
(In Millions of Pesos)
Over 1 up to
3 years
Over 3 years
(In Millions of Pesos)
Total
259,770
8,674
1,496
180,733
877
-
106,571
570
-
547,074
10,121
1,496
2,723
423
845
7,996
2,723
9,264
2,444
5,042
280,572
182,455
115,137
2,444
5,042
578,164
(47)
Parent
Up to 1 year
As at December 31, 2009
Financial Liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Total
191,029
14,083
1,935
181,948
7,902
-
101,345
3,955
-
474,322
25,940
1,935
2,506
423
845
7,535
2,506
8,803
1,803
3,714
215,493
190,695
112,835
1,803
3,714
519,023
Up to 1 year
As at December 31, 2008
Financial Liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
Over 1 up to
3 years
Over 3 years
(In Millions of Pesos)
Over 1 up to
3 years
Over 3 years
(In Millions of Pesos)
Total
208,369
4,237
1,462
144,381
863
-
92,273
550
-
445,023
5,650
1,462
2,164
423
845
7,996
2,164
9,264
1,762
3,465
221,882
146,089
100,819
1,762
3,465
468,790
Assets available to meet all of the liabilities include cash and other cash items, due from BSP and other banks,
trading securities, available-for-sale securities and loans and advances to customers. In the normal course of
business, a proportion of customer loans contractually repayable within one year will be extended. The BPI Group
would also be able to meet unexpected net cash outflows by accessing additional funding sources.
(48)
3.3.4
Derivative cash flows
(a) Derivatives settled on a net basis
The BPI Group’s derivatives that are settled on a net basis consist only of interest rate swaps. The table below
presents the contractual undiscounted cash outflows of interest rate swaps based on the remaining period from
December 31 to the contractual maturity dates.
Consolidated and Parent
Up to 1 year
Interest rate swap contracts - held for trading
2009
2008
Over 1 up
Over 3
to 3 years
years
(In Millions of Pesos)
(25)
(39)
(158)
(210)
(93)
Total
(249)
(276)
(b) Derivatives settled on a gross basis
The BPI Group’s derivatives that are settled on a gross basis include foreign exchange derivatives mainly,
currency forwards, currency swaps and spot contracts. The table below presents the contractual undiscounted
cash flows of foreign exchange derivatives based on the remaining period from reporting date to the contractual
maturity dates.
Consolidated and Parent
Up to 1 year
Foreign exchange derivatives - held for trading
2009
- Outflow
- Inflow
2008
- Outflow
- Inflow
Over 1 up to 3
years
(In Millions of Pesos)
Total
(133,261)
132,052
-
(133,261)
132,052
(84,865)
84,992
-
(84,865)
84,992
(49)
3.4 Fair value of financial assets and liabilities
The table below summarizes the carrying amount and fair value of those significant financial assets and liabilities
not presented on the statement of condition at fair value at December 31.
Consolidated
Carrying amount
Fair value
2009
2008
2009
2008
(In Millions of Pesos)
Financial assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Held-to-maturity, net
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees receivable
Others, net
Financial liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
62,744
7,147
52,546
75,031
327,474
48,422
14,278
22,584
72,884
320,216
62,744
7,147
52,546
78,044
335,189
48,422
14,278
22,584
74,299
323,830
299
2,212
416
1,316
288
1,956
486
1,651
299
2,212
416
1,316
288
1,956
486
1,651
579,471
32,009
1,933
540,352
9,934
1,496
579,471
32,009
1,933
540,352
9,934
1,496
3,059
5,000
2,723
5,000
3,059
5,166
2,723
5,000
2,486
4,055
2,444
5,042
2,486
4,055
2,444
5,042
(50)
Parent
Carrying amount
Fair value
2009
2008
2009
2008
(In Millions of Pesos)
Financial assets
Due from BSP
Due from other banks
Interbank loans receivable and SPAR
Held-to-maturity, net
Loans and advances, net
Other financial assets
Sales contracts receivable, net
Accounts receivable, net
Other accrued interest and fees receivable
Others, net
Financial liabilities
Deposit liabilities
Bills payable
Due to BSP and other banks
Manager’s checks and demand drafts
outstanding
Unsecured subordinated debt
Other financial liabilities
Accounts payable
Others
(i)
54,465
3,363
46,160
64,787
240,328
41,428
8,114
21,107
63,196
240,681
54,465
3,363
46,160
67,606
244,484
41,428
8,114
21,107
64,364
241,637
271
2,062
366
54
254
2,607
426
144
271
2,062
366
54
254
2,607
426
144
472,031
24,616
1,935
440,889
5,373
1,462
472,031
24,616
1,935
440,889
5,373
1,462
2,506
5,000
2,164
5,000
2,506
5,166
2,164
5,000
1,803
3,714
1,762
3,465
1,803
3,714
1,762
3,465
Due from BSP and other banks and Interbank loans receivable and SPAR
The fair value of floating rate placements and overnight deposits approximates their carrying amount. The
estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing moneymarket interest rates for debts with similar credit risk and remaining maturity.
(ii) Investment securities
Fair value of held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this
information is not available, fair value is estimated using quoted market prices for securities with similar credit,
maturity and yield characteristics.
(iii) Loans and advances
The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows
expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
(51)
(iv) Financial liabilities
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the
amount repayable on demand.
The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is
based on discounted cash flows using interest rates for new debts with similar remaining maturity.
(v) Other financial assets / liabilities
Carrying amounts of other financial assets / liabilities which have no definite repayment dates are assumed to be
their fair values.
3.5 Fair value hierarchy
PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs reflect market data obtained from independent sources;
unobservable inputs reflect the BPI Group’s market assumptions. These two types of inputs have created the
following fair value hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes
listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc.,
Philippine Dealing and Exchange Corp., etc.).
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of
the OTC derivative contracts. The primary source of input parameters like LIBOR yield curve or counterparty
credit risk is Bloomberg.
Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
This level includes equity investments and debt instruments with significant unobservable components. This
hierarchy requires the use of observable market data when available. The BPI Group considers relevant and
observable market prices in its valuations where possible.
The following table presents the BPI Group’s assets and liabilities that are measured at fair value at
December 31, 2009.
Consolidated
Level 1
Financial assets
Financial assets at fair value through profit or loss
Derivative financial assets
Trading securities
- Debt securities
- Equity securities
Available-for-sale financial assets
- Debt securities
- Equity securities
Financial liabilities
Derivative financial liabilities
Level 2
(In Millions of Pesos)
-
Total
2,146
2,146
52,766
238
252
-
53,018
238
60,918
1,051
114,973
9,511
11,909
70,429
1,051
126,882
-
1,593
1,593
(52)
Parent
Level 1
Financial assets
Financial assets at fair value through profit or loss
- Derivative financial assets
- Trading securities - debt securities
Available-for-sale financial assets
- Debt securities
- Equity securities
Financial liabilities
Derivative financial liabilities
Level 2
(In Millions of Pesos)
Total
52,159
2,146
-
2,146
52,159
51,472
15
103,646
8,818
10,964
60,290
15
114,610
-
1,593
1,593
The BPI Group has no financial instruments that fall under the Level 3 category as of December 31, 2009.
3.6 Insurance risk management
The life and non-life insurance entities decide on the retention, or the absolute amount that they are ready to
assume insurance risk from one event. The retention amount is a function of capital, experience, actuarial study
and risk appetite or aversion.
In excess of the retention, these entities arrange reinsurances either thru treaties or facultative placements. They
also accredit reinsurers based on certain criteria and set limits as to what can be reinsured. The reinsurance
treaties and the accreditation of reinsurers require Board of Directors’ approval.
3.7 Capital management
Cognizant of its exposure to risks, the BPI Group understands that it must maintain sufficient capital to absorb
unexpected losses, to stay in business for the long haul, and to satisfy regulatory requirements. The BPI Group
further understands that its performance, as well as the performance of its various units, should be measured in
terms of returns generated vis-à-vis allocated capital and the amount of risk borne in the conduct of business.
The BPI Group manages its capital following the framework of Basel Committee on Banking Supervision Accord II
(Basel II) and its implementation in the Philippines by the BSP. The BSP through its Circular 538 requires each
bank and its financial affiliated subsidiaries to keep its Capital Adequacy Ratio (CAR) - the ratio of qualified capital
to risk-weighted exposures - to be no less than 10%. In quantifying its CAR, BPI currently uses the Standardized
Approach (for credit risk and market risk) and the Basic Indicator Approach (for operational risk). Capital
adequacy reports are filed with the BSP every quarter.
Qualifying capital and risk-weighted assets are computed based on BSP regulations. The qualifying capital of the
Parent Bank consists of core tier 1 capital and tier 2 capital. Tier 1 capital comprises paid-up capital stock, paid-in
surplus, surplus including net income for the year, surplus reserves and minority interest less deductions such as
deferred income tax, unsecured credit accommodations to DOSRI, goodwill and unrealized fair value losses on
available-for-sale securities. Tier 2 capital includes unsecured subordinated debt (see Note 21), net unrealized fair
value gains on available-for-sale investments, and general loan loss provisions for BSP reporting purposes.
(53)
The Basel II framework following BSP Circular 538 took into effect on July 1, 2007. The table below summarizes
the CAR under the Basel II framework for the years ended December 31, 2009 and 2008.
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
56,352
53,800
57,433
8,426
8,258
7,679
64,778
62,058
65,112
2,826
4,693
20,582
61,952
57,365
44,530
Tier 1 capital
Tier 2 capital
Gross qualifying capital
Less: Required deductions
Total qualifying capital
Risk weighted assets
CAR (%)
422,646
14.66
405,016
14.16
333,099
13.37
2008
54,820
7,561
62,381
21,499
40,882
326,593
12.52
The BPI Group has fully complied with the CAR requirement of the BSP.
Note 4 - Critical Accounting Estimates and Judgments
The BPI Group makes estimates and assumptions that affect the reported amounts of assets and liabilities.
Estimates and judgments are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. It is reasonably
possible that the outcomes within the next financial year could differ from assumptions made at reporting date and
could result in the adjustment to the carrying amount of affected assets or liabilities.
A. Critical accounting estimates
(i)
Impairment losses on loans and advances (Note 13)
The BPI Group reviews its loan portfolios to assess impairment at least on a monthly basis. In determining whether
an impairment loss should be recorded in the statement of income, the BPI Group makes judgments as to whether
there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a
portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may
include observable data indicating that there has been an adverse change in the payment status of borrowers in a
group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses
estimates based on historical loss experience for loans with credit risk characteristics and objective evidence of
impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions
used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows
differs by +/-5%, the provision for the year ended December 31, 2009 would be estimated P166 million higher or
lower.
(ii) Fair value of derivatives and other financial instruments (Notes 3.4 and 9)
The fair value of financial instruments that are not quoted in active markets are determined by using valuation
techniques. Where valuation techniques (for example, models) are used to determine fair values, they are validated
and periodically reviewed by qualified personnel independent of the area that created them. All models are approved
by the Board of Directors before they are used, and models are calibrated to ensure that outputs reflect actual data
and comparative market prices. To the extent practical, the models use only observable data; however, areas such
as credit risk (both own and counterparty), volatilities and correlations require management to make estimates.
Changes in assumptions about these factors could affect reported fair value of financial instruments.
(54)
(iii) Pension liability on defined benefit plan (Note 30)
The BPI Group estimates its pension benefit obligation and expense for defined benefit pension plans based on the
selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described
in Note 30 and include, among others, the discount rate, expected return on plan assets and future salary
increases. The present value of the defined benefit obligations of the BPI Group at December 31, 2009 and 2008
are determined using the market yields on Philippine government bonds with terms consistent with the expected
payments of employee benefits. Plan assets are invested in either equity securities, debt securities or other forms
of investments. Equity markets may experience volatility, which could affect the value of pension plan assets. This
volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual results that differ from
the BPI Group’s assumptions are accumulated and amortized over future periods and therefore generally affect
the BPI Group’s recognized expense and recorded obligation in such future periods. The BPI Group’s
assumptions are based on actual historical experience and external data regarding compensation and discount
rate trends.
B. Critical accounting judgments
(i)
Impairment of available-for-sale securities (Note 11)
The BPI Group follows the guidance of PAS 39 to determine when an available-for-sale security is impaired. This
determination requires significant judgment. In making this judgment, the BPI Group evaluates, among other factors,
the duration and extent to which the fair value of an investment is less than its cost; and the financial health and nearterm business outlook of the issuer, including factors such as industry and sector performance, changes in
technology and operational and financing cash flows.
(ii) Held-to-maturity securities (Note 12)
The BPI Group follows the guidance of PAS 39 in classifying non-derivative financial assets with fixed or
determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment. In
making this judgment, the BPI Group evaluates its intention and ability to hold such investments to maturity. If the
BPI Group fails to keep these investments to maturity other than for the specific circumstances - for example selling
an insignificant amount close to maturity - it will be required to reclassify the entire class as available-for-sale. The
investments would therefore be measured at fair value and not at amortized cost.
(iii) Valuation and classification of assets held for sale
Management follows the principles in PFRS 5 in classifying certain foreclosed assets (consisting of real estate and
auto or chattel), as assets held for sale when the carrying amount of the assets will be recovered principally through
sale. Management is committed to a plan to sell these foreclosed assets and the assets are actively marketed for
sale at a price that is reasonable in relation to their current fair value. In determining the fair value of assets held for
sale, sales prices are analyzed by applying appropriate units of comparison, adjusted by differences between the
subject asset or property and related market data. Should there be a subsequent write-down of the asset to fair value
less cost to sell, such write-down is recognized as impairment loss in the statement of income.
In 2009, the BPI Group has recognized an impairment loss on its foreclosed assets amounting to P199 million
(2008 - P699 million).
(iv) Realization of deferred income tax assets (Note 17)
Management reviews at each reporting date the carrying amounts of deferred tax assets. The carrying amount of
deferred tax assets is reduced to the extent that the related tax assets can not be utilized due to insufficient taxable
profit against which the deferred tax losses will be applied. Management believes that sufficient taxable profit will be
generated to allow all or part of the deferred income tax assets to be utilized.
(55)
Note 5 - Assets and Liabilities Attributable to Insurance Operations
Details of the assets and liabilities attributable to insurance operations as of December 31 are as follows:
2009
2008
(In Millions of Pesos)
Assets
Cash and cash equivalents (Note 7)
Insurance balances receivable, net
Investment securities
Available-for-sale
Held-to-maturity
Land, building and equipment
Accounts receivable and other assets, net
Liabilities
Reserves and other balances
Accounts payable, accrued expenses and other payables
48
1,760
63
2,476
2,609
5,405
201
927
10,950
2,601
15,134
701
1,093
22,068
8,311
451
8,762
17,562
1,251
18,813
Details of income attributable to insurance operations, before income tax and minority interest for the years ended
December are as follows:
2009
Premiums earned and related income
Investment and other income
Benefits, claims and maturities
Increase in actuarial reserve liabilities
Management and general expenses
Commissions
Other expenses
Income before income tax and minority interest
2008
(In Millions of Pesos)
5,817
4,534
910
333
6,727
4,867
1,886
1,669
2,574
1,068
698
755
515
581
256
206
5,929
4,279
798
588
2007
3,822
1,333
5,155
1,280
969
755
248
48
3,300
1,855
In 2009, the BPI Group lost control over a life insurance subsidiary following the sale of its majority stake in the
said subsidiary (see Note 16).
Note 6 - Business Segments
In 2009, segment reporting by the BPI Group was prepared for the first time in accordance with PFRS 8. Following
the management approach of PFRS 8, operating segments are reported in accordance with the internal reporting
provided to the chief executive officer, who is responsible for allocating resources to the reportable segments and
assesses their performance. All operating segments used by the BPI Group meet the definition of a reportable
segment under PFRS 8.
The BPI Group has determined the operating segments based on the nature of the services provided and the
different markets served representing a strategic business unit.
(56)
The BPI Group’s main operating business segments follow:
Consumer Banking - this segment addresses the individual and retail markets. It covers deposit taking and
servicing, consumer lending such as home mortgages, auto loans and credit card finance as well as the
remittance business. It includes the entire transaction processing and service delivery infrastructure consisting
of the BPI and BPI Family Bank network of branches, ATMs and point-of-sale terminals as well as phone and
Internet-based banking platforms.
Corporate Banking - this segment consists of the entire lending, leasing, trade and cash management services
provided by the BPI Group to corporate and institutional customers. These customers include both high-end
corporations as well as various middle market clients.
Investment Banking - this segment includes the various business groups operating in the investment markets,
and dealing in activities other than lending and deposit taking. These services cover corporate finance,
securities distribution, asset management, trust and fiduciary services as well as proprietary trading and
investment activities.
The performance of the Parent Bank is assessed as a single unit using financial information presented in the
separate or Parent only financial statements. Likewise, the chief executive officer assesses the performance of its
insurance business separately from the banking and allied financial undertakings. Information on the assets,
liabilities and results of operations of the insurance business is fully disclosed in Note 5.
The BPI Group and the Parent Bank mainly derive revenue (more than 90%) within the Philippines, accordingly,
no geographical segment is presented.
Revenues of the BPI Group’s segment operations are derived from interest (net interest income). The segment
report forms part of management’s assessment of the performance of the segment, among other performance
indicators.
There were no changes in the reportable segments during the year. Transactions between the business segments
are carried out at arm’s length. The revenue from external parties reported to the management is measured in a
manner consistent with that in the statement of income.
Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net
interest income. Interest charged for these funds is based on the BPI Group’s cost of capital.
Internal charges and transfer pricing adjustments have been reflected in the performance of each business.
Revenue-sharing agreements are used to allocate external customer revenues to a business segment on a
reasonable basis. Inter-segment revenues however, are deemed insignificant for financial reporting purposes, thus,
not reported in segment analysis below.
The BPI Group’s management reporting is based on a measure of operating profit comprising net income, loan
impairment charges, fee and commission income, other income and non-interest income.
Segment assets and liabilities comprise majority of operating assets and liabilities as shown in the statement of
condition, but exclude items such as taxation.
(57)
The segment assets, liabilities and results of operations of the reportable segments of the BPI Group as of and for the
years ended December 31, 2009, 2008 and 2007 are as follows:
2009
Consumer
banking
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
23,712
11,282
12,430
1,476
10,954
2,875
3,362
(361)
5,876
6,456
3,407
5,450
15,313
1,517
239,711
606,170
Corporate Investment
banking
banking
(In Millions of Pesos)
7,107
3,113
804
57
6,303
3,056
1,059
5,244
3,056
399
292
856
4,742
(28)
(412)
1,227
4,622
548
382
1,143
92
864
423
2,555
897
3,916
6,781
221,206
33,786
249,471
2,820
Total per
management
reporting
33,932
12,143
21,789
2,535
19,254
3,566
8,960
(801)
11,725
7,386
4,642
6,737
18,765
12,214
(21)
3,510
749,752
660,259
(58)
2008
Consumer
banking
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
26,278
13,368
12,910
800
12,110
1,035
5,778
(392)
6,421
5,901
3,303
4,909
14,113
4,418
218,480
561,584
Corporate
Investment
banking
banking
(In Millions of Pesos)
6,089
2,443
368
171
5,721
2,272
1,129
1
4,592
2,271
322
1,835
1,003
448
(45)
(167)
1,280
2,116
521
348
1,028
96
1,145
430
2,694
874
3,178
3,513
224,565
9,716
202,127
8,370
Total per
management
reporting
34,810
13,907
20,903
1,930
18,973
3,192
7,229
(604)
9,817
6,770
4,427
6,484
17,681
11,109
(28)
2,980
688,038
602,275
(59)
2007
Consumer
banking
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
24,555
13,030
11,525
880
10,645
763
4,360
(335)
4,788
5,842
3,082
5,456
14,380
1,053
204,420
535,887
Corporate
Investment
banking
banking
(In Millions of Pesos)
4,127
4,016
359
186
3,768
3,830
972
2,796
3,830
322
1,876
1,416
3,801
(74)
(430)
1,664
5,247
526
353
817
91
533
363
1,876
807
2,584
8,270
187,387
8,124
223,065
5,612
Total per
management
reporting
32,698
13,575
19,123
1,852
17,271
2,961
9,577
(839)
11,699
6,721
3,990
6,352
17,063
11,907
(9)
2,767
667,086
568,724
(60)
Reconciliation of segment results to consolidated results of operations:
2009
Total per
Consolidation
consolidated
adjustments/
financial
Others
statements
(In Millions of Pesos)
33,932
(45)
33,887
12,143
342
12,485
21,789
(387)
21,402
2,535
2,535
19,254
(387)
18,867
3,566
(136)
3,430
8,960
1,475
10,435
(801)
(71)
(872)
11,725
1,268
12,993
7,386
1,769
9,155
4,642
1,003
5,645
6,737
(1,861)
4,876
18,765
911
19,676
12,214
(30)
12,184
(21)
(21)
3,510
9
3,519
749,752
(25,332)
724,420
660,259
(3,604)
656,655
Total per
management
reporting
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
(61)
2008
Total per
Consolidation
consolidated
adjustments/
financial
Others
statements
(In Millions of Pesos)
34,810
(1,513)
33,297
13,907
(73)
13,834
20,903
(1,440)
19,463
1,930
1,930
18,973
(1,440)
17,533
3,192
(136)
3,056
7,229
653
7,882
(604)
(13)
(617)
9,817
504
10,321
6,770
1,328
8,098
4,427
876
5,303
6,484
(1,573)
4,911
17,681
631
18,312
11,109
(1,567)
9,542
(28)
(28)
2,980
5
2,985
688,038
(21,426)
666,612
602,275
465
602,740
Total per
management
reporting
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
(62)
2007
Total per
Consolidation
consolidated
adjustments/
financial
Others
statements
(In Millions of Pesos)
32,698
(283)
32,415
13,575
(110)
13,465
19,123
(173)
18,950
1,852
(602)
1,250
17,271
429
17,700
2,961
(214)
2,747
9,577
2,178
11,755
(839)
(59)
(898)
11,699
1,905
13,604
6,721
1,472
8,193
3,990
863
4,853
6,352
(1,087)
5,265
17,063
1,248
18,311
11,907
1,086
12,993
(9)
(9)
2,767
2,767
667,086
(29,801)
637,285
568,724
(2,570)
566,154
Total per
management
reporting
Interest income
Interest expense
Net interest income
Impairment charge
Net interest income after impairment charge
Fees and commission income
Other income
Gross receipts tax
Other income, net
Compensation and fringe benefits
Occupancy and equipment - related expenses
Other operating expenses
Total operating expenses
Operating profit
Share in net loss of associates
Provision for income tax
Total assets
Total liabilities
“Consolidation adjustments/Others” pertains to balances of support units and inter-segment elimination in accordance
with the BPI Group’s internal reporting.
Note 7 - Cash and Cash Equivalents
This account at December 31 consists of:
2009
Cash and other cash items
Due from Bangko Sentral ng Pilipinas
Due from other banks
Interbank loans receivable and securities
purchased under agreements to resell
Cash and cash equivalents attributable to
insurance operations
Consolidated
2008
2007
2009
(In Millions of Pesos)
13,243
17,987
37,152
14,755
6,969
3,363
18,780
21,172
7,147
22,366
11,924
14,278
28,282
14,159
24,856
48
75,429
63
62,790
79
82,299
Parent
2008
2007
21,781
6,613
8,114
12,760
28,257
1,845
21,342
12,682
22,245
57,447
49,190
65,107
(63)
Note 8 - Interbank Loans Receivable and Securities Purchased under Agreements to Resell (SPAR)
The account at December 31 consists of transactions with:
BSP
BPI Leasing Corporation
Other banks
Accrued interest receivable
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
21,737
9,445
14,800
553
30,787
13,034
30,787
52,524
22,479
46,140
22
105
20
52,546
22,584
46,160
2008
7,790
180
13,034
21,004
103
21,107
Interbank loans receivable and SPAR maturing within 90 days from the date of acquisition are classified as cash
equivalents in the statement of cash flows (Note 7).
Average effective interest rate (%) of interbank loans receivable of the BPI Group at December 31 follow:
Peso-denominated
US dollar-denominated
2009
4.32
0.65
2008
5.53
2.68
Note 9 - Derivative Financial Instruments
Derivatives held by the BPI Group for non-hedging purposes are as follows:
Foreign exchange forwards represent commitments to purchase or sell one currency against another at an
agreed forward rate on a specified date in the future. Settlement can be made via full delivery of forward
proceeds or via payment of the difference between the contracted forward rate and the prevailing market rate
on maturity.
Foreign exchange swaps refer to spot purchase or sale of one currency against another with an agreement to
sell or purchase the same currency at an agreed forward rate in the future.
Interest rate swaps refer to agreement to exchange fixed rate versus floating interest payments (or vice versa)
on a reference notional amount over an agreed period of time.
Cross currency swaps refer to spot exchange of notional amounts on two currencies at a given exchange rate
and with an agreement to re-exchange the same notional amounts at a specified maturity date based on the
original exchange rate. Parties on the transaction agree to pay a stated interest rate on the borrowed notional
amount and receive a stated interest rate on the lent notional amount, payable or receivable periodically over
the term of the transaction.
The BPI Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to fulfill
their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of
the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the
BPI Group assesses counterparties using the same techniques as for its lending activities.
(64)
The notional amounts of certain types of financial instruments provide a basis for comparison with instruments
recognized on the statement of condition. They do not necessarily represent the amounts of future cash flows
involved or the current fair values of the instruments and therefore are not indicative of the BPI Group’s exposure
to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result
of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual
or notional amount of derivative financial instruments on hand and the extent at which the instruments can become
favorable or unfavorable in fair values can fluctuate significantly from time to time. The fair values of derivative
instruments held are set out below.
Consolidated and Parent
Contract/
Notional Amount
2009
2008
Freestanding derivatives
Foreign exchange derivatives
Currency swaps
Currency forwards
Interest rate swaps
Embedded credit derivatives
Total derivatives assets (liabilities)
held for trading
129,714
21,754
26,637
-
Fair Values
Assets
Liabilities
2009
2008
2009
2008
(In Millions of Pesos)
79,802
5,063
32,497
-
1,491
78
569
8
1,171
88
914
9
(851)
(130)
(610)
(2)
(1,348)
(12)
(1,152)
(35)
2,146
2,182
(1,593)
(2,547)
Note 10 - Trading Securities
The account at December 31 consists of:
Debt securities
Government securities
Commercial papers of private companies
Accrued interest receivable
Equity securities - listed
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2008
52,600
249
52,849
169
53,018
238
53,256
31,587
1,339
32,926
73
32,999
32,999
32,882
1,349
34,231
87
34,318
81
34,399
51,997
51,997
162
52,159
52,159
(65)
Note 11 - Available-for-Sale Securities
This account at December 31 consists of:
Debt securities
Government securities
Others
Accrued interest receivable
Equity securities
Listed
Unlisted
Allowance for impairment
Current
Non-current
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
54,630
53,091
45,374
15,046
8,134
14,209
69,676
61,225
59,583
753
969
707
70,429
62,194
60,290
41,656
7,980
49,636
896
50,532
1,051
480
1,531
71,960
(254)
71,706
11
423
434
50,966
(200)
50,766
1,268
569
1,837
64,031
(202)
63,829
15
346
361
60,651
(218)
60,433
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
22,207
12,435
14,027
49,753
51,596
46,624
71,960
64,031
60,651
2008
2008
4,315
46,651
50,966
Average effective interest rates (%) of available-for-sale debt securities of the BPI Group at December 31 follow:
2009
5.74
2.56
Peso-denominated
Foreign currency-denominated
2008
6.07
4.23
The movement in available-for-sale securities is summarized as follows:
At January 1
Additions
Disposals
Reclassification to Held-to-maturity (Note 12)
Amortization of discount
Fair value adjustments (Note 23)
Exchange differences
Net change in allowance for impairment
Net change in accrued interest receivable
At December 31
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
63,829
103,568
50,766
81,971
241,648
248,245
214,053
204,470
(233,584)
(257,866)
(204,317)
(207,759)
(26,914)
(28,276)
206
930
148
632
487
(4,329)
414
(2,768)
(612)
1,972
(424)
1,439
(18)
7
(52)
78
(216)
(493)
(189)
(312)
71,706
63,829
60,433
50,766
On October 22, 2008, the BPI Group reclassified certain available-for-sale securities aggregating P19.1 billion to
held-to-maturity category. Likewise, on November 12, 2008, an additional portfolio of US dollar-denominated
available-for-sale securities totaling US$171.6 million (or peso equivalent of P9.2 billion) was further reclassified from
available-for-sale to held-to-maturity (Note 12).
(66)
The reclassification was triggered by management’s change in intention over the securities in the light of volatile
market prices due to global economic downturn. Management believes that despite the market uncertainties, the BPI
Group has the capability to hold those reclassified securities until maturity dates.
The aggregate fair value loss of those securities at reclassification dates still recognized in Accumulated other
comprehensive income (under Capital funds), and which will be amortized over the remaining lives of the instruments
using the effective interest rate method amounts to P1,757 million. Unamortized fair value loss as of December 31,
2009 and 2008, amounts to P1,273 million and P1,711 million, respectively.
The reconciliation of the allowance for impairment at December 31 is summarized as follows:
At January 1
Provision for (reversal of) impairment losses
At December 31
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
202
280
200
52
(78)
18
254
202
218
2008
207
(7)
200
Note 12 - Held-to-Maturity Securities
This account at December 31 consists of:
Government securities
Commercial papers of private companies
Accrued interest receivable
Current
Non-current
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
72,348
67,581
60,930
783
3,445
2,164
73,131
71,026
63,094
1,900
1,858
1,693
75,031
72,884
64,787
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
7,945
6,284
4,894
67,086
66,600
59,893
75,031
72,884
64,787
2008
58,204
3,348
61,552
1,644
63,196
2008
5,462
57,734
63,196
Average effective interest rates (%) of held-to-maturity securities of the BPI Group at December 31 follow:
Peso-denominated
Foreign currency-denominated
2009
7.92
5.49
2008
8.73
4.42
(67)
The movement in held-to-maturity securities is summarized as follows:
At January 1
Additions
Maturities
Reclassification from Available-for-sale (Note 11)
Amortization of premium
Exchange differences
Net change in accrued interest receivable
At December 31
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
72,884
52,432
63,196
45,555
55,656
63,853
53,336
60,133
(52,008)
(72,334)
(50,365)
(70,024)
28,276
26,914
(1,076)
(613)
(1,000)
(584)
(467)
729
(429)
725
42
541
49
477
75,031
72,884
64,787
63,196
Note 13 - Loans and Advances
Major classifications of this account at December 31 are as follows:
Corporate entities
Large corporate customers
Small and medium enterprise
Retail customers
Credit cards
Mortgages
Others
Accrued interest receivable
Unearned discount/income
Allowance for impairment
Current
Non-current
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
189,445
198,864
180,488
191,449
63,422
58,150
46,543
36,923
17,003
63,282
5,964
339,116
1,613
(4,299)
336,430
(8,956)
327,474
14,713
52,703
5,170
329,600
2,019
(3,886)
327,733
(7,517)
320,216
17,003
759
1,402
246,195
1,255
(328)
247,122
(6,794)
240,328
14,713
1,193
919
245,197
1,627
(277)
246,547
(5,866)
240,681
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
80,898
160,196
63,636
145,150
255,532
167,537
183,486
101,397
336,430
327,733
247,122
246,547
The amount of loans and advances above include finance lease receivables as follows:
Total future minimum lease payments
Unearned finance income
Present value of future minimum lease payments
Allowance for impairment
Consolidated
2009
2008
(In Millions of Pesos)
4,472
3,878
(707)
(626)
3,765
3,252
(50)
(63)
3,715
3,189
(68)
Details of future minimum lease payments follow:
Consolidated
2009
2008
(In Millions of Pesos)
1,884
1,714
2,588
2,164
4,472
3,878
(707)
(626)
3,765
3,252
Not later than one year
Later than one year but not later than five years
Unearned finance income
The Parent Bank has no finance lease receivables as of December 31, 2009 and 2008.
Details of the loans and advances portfolio of the BPI Group at December 31 are as follows:
1)
As to industry/economic sector (in %)
Consumer
Manufacturing
Real estate, renting and other related
activities
Agriculture and forestry
Wholesale and retail trade
Financial institutions
Others
2)
Consolidated
2009
2008
28.18
30.72
24.09
20.47
2009
7.53
27.68
2008
6.10
31.80
8.53
10.87
9.65
6.21
12.47
100.00
12.66
12.64
15.80
6.28
17.41
100.00
11.16
14.34
12.53
8.20
15.87
100.00
9.49
9.31
11.82
4.62
13.57
100.00
Parent
As to collateral
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
Secured loans
Real estate mortgage
Chattel mortgage
Others
Unsecured loans
122,411
20,602
69,848
212,861
121,956
334,817
111,615
16,148
68,991
196,754
128,960
325,714
61,406
2,090
67,845
131,341
114,526
245,867
58,163
2,144
63,892
124,199
120,721
244,920
Other collaterals include hold-out deposits, mortgage trust indentures, government securities and bonds,
quedan/warehouse receipts, standby letters of credit, trust receipts, and deposit substitutes.
Loans and advances aggregating P32,009 million (2008 - P6,837 million) and P24,616 million (2008 - P2,276
million) are used as security for bills payable (Note 20) of the BPI Group and Parent Bank, respectively.
(69)
Average effective interest rates (%) of loans and advances of the BPI Group at December 31 follow:
Commercial loans
Peso-denominated loans
Foreign currency-denominated loans
Real estate mortgages
Auto loans
2009
2008
6.66
3.12
9.84
10.71
6.77
4.37
9.71
11.06
Non-performing accounts (over 30 days past due) of the BPI Group and the Parent Bank, net of accounts in the
“loss” category and covered with 100% reserves (excluded under BSP Circular 351), are as follows:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
13,059
12,984
9,370
2,006
2,451
1,964
11,053
10,533
7,406
Non-performing accounts (NPL 30)
“Loss” category loans with 100% reserves
Net NPL 30
2008
10,213
2,408
7,805
Reconciliation of allowance for impairment by class at December 31 follows:
Consolidated
Corporate entities
Large
Small and
corporate
medium
customers
enterprises
At January 1
Provision for (reversal of)
impairment losses
Write-off/disposal
Unwind of discount
Others
At December 31
2,490
2,205
(41)
(296)
(11)
12
2,154
1,206
(50)
(18)
(20)
3,323
2009
Retail customers
Credit
Mortgages
cards
(In Millions of Pesos)
766
1,381
53
36
855
928
(614)
(1)
1,694
Others
Total
675
7,517
254
1
930
2,400
(960)
(29)
28
8,956
(70)
Corporate entities
Large
Small and
corporate
medium
customers
enterprises
At January 1
Provision for impairment
losses
Write-off/disposal
Unwind of discount
Others
At December 31
4,041
193
113
(75)
(16)
(1,573)
2,490
469
(23)
(20)
1,586
2,205
2008
Retail customers
Credit
Mortgages
cards
(In Millions of Pesos)
636
1,088
129
1
766
515
(222)
1,381
Others
Total
660
6,618
19
(21)
17
675
1,245
(341)
(36)
31
7,517
Parent
Corporate entities
Large
Small and
corporate
medium
customers
enterprises
At January 1
Provision for (reversal of)
impairment losses
Write-off/disposal
Unwind of discount
Others
At December 31
2,608
1,660
(41)
(296)
(11)
12
2,272
1,137
(50)
(17)
17
2,747
Corporate entities
Large
Small and
corporate
medium
customers
enterprises
At January 1
Provision for (reversal of)
impairment losses
Write-off/disposal
Unwind of discount
Others
At December 31
720
3,273
112
(74)
(16)
1,866
2,608
249
(7)
(19)
(1,836)
1,660
2009
Retail customers
Credit
Mortgages
cards
(In Millions of Pesos)
202
1,381
(135)
67
928
(614)
(1)
1,694
Others
Total
15
5,866
(1)
14
1,888
(960)
(28)
28
6,794
2008
Retail customers
Credit
Mortgages
cards
(In Millions of Pesos)
221
1,088
(19)
202
515
(222)
1,381
Others
Total
3
5,305
33
(21)
15
890
(324)
(35)
30
5,866
(71)
Note 14 - Bank Premises, Furniture, Fixtures and Equipment
This account at December 31 consists of:
Consolidated
Land
Cost
January 1, 2009
Additions
Disposals
Amortization
Transfers
December 31, 2009
Accumulated depreciation
January 1, 2009
Depreciation
Disposals/transfers
December 31, 2009
Net book value, December 31, 2009
Total
3,527
38
(194)
1
3,372
4,597
782
(69)
(159)
(33)
5,118
11,101
1,199
(711)
(3)
11,586
3,573
1,303
(980)
3,896
22,798
3,322
(1,954)
(159)
(35)
23,972
3,372
1,732
170
(37)
1,865
3,253
8,769
1,093
(584)
9,278
2,308
1,121
756
(458)
1,419
2,477
11,622
2,019
(1,079)
12,562
11,410
Land
Cost
January 1, 2008
Additions
Disposals
Amortization
Transfers
December 31, 2008
Accumulated depreciation
January 1, 2008
Depreciation
Disposals/transfers
December 31, 2008
Net book value, December 31, 2008
2009
Furniture
Buildings and
leasehold
and
Equipment
improvements equipment
for lease
(In Millions of Pesos)
2008
Furniture
Buildings and
and
Equipment
leasehold
for lease
improvements equipment
(In Millions of Pesos)
Total
3,763
5
(209)
(32)
3,527
4,385
388
(134)
(74)
32
4,597
10,784
1,178
(860)
(1)
11,101
2,786
1,327
(540)
3,573
21,718
2,898
(1,743)
(74)
(1)
22,798
3,527
1,634
150
(52)
1,732
2,865
8,506
1,039
(776)
8,769
2,332
680
652
(211)
1,121
2,452
10,820
1,841
(1,039)
11,622
11,176
(72)
Parent
Land
Cost
January 1, 2009
Additions
Disposals
Amortization
Transfers
December 31, 2009
Accumulated depreciation
January 1, 2009
Depreciation
Disposals/transfers
December 31, 2009
Net book value, December 31, 2009
Total
3,079
38
(187)
3
2,933
3,959
680
(67)
(128)
4,444
10,337
1,058
(678)
10,717
17,375
1,776
(932)
(128)
3
18,094
2,933
1,525
146
(28)
1,643
2,801
8,196
960
(538)
8,618
2,099
9,721
1,106
(566)
10,261
7,833
Land
Cost
January 1, 2008
Additions
Disposals
Amortization
Transfers
December 31, 2008
Accumulated depreciation
January 1, 2008
Depreciation
Disposals/transfers
December 31, 2008
Net book value, December 31, 2008
2009
Buildings and
leasehold
Furniture and
improvements
equipment
(In Millions of Pesos)
2008
Buildings and
leasehold
Furniture and
improvements
equipment
(In Millions of Pesos)
Total
3,307
4
(192)
(40)
3,079
3,826
286
(131)
(56)
34
3,959
10,037
1,024
(724)
10,337
17,170
1,314
(1,047)
(56)
(6)
17,375
3,079
1,449
124
(48)
1,525
2,434
7,880
925
(609)
8,196
2,141
9,329
1,049
(657)
9,721
7,654
Depreciation is included in Occupancy and equipment-related expenses in the statement of income.
(73)
Note 15 - Investment Properties
This account at December 31 consists of:
Land
Buildings
Accumulated depreciation
Allowance for impairment
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
3,208
3,208
3,202
1,754
1,754
1,747
4,962
4,962
4,949
(947)
(881)
(945)
(1,253)
(1,253)
(1,253)
2,762
2,828
2,751
2008
3,202
1,747
4,949
(879)
(1,253)
2,817
The movement in investment properties is summarized as follows:
At January 1
Transfers
Disposals
Depreciation
At December 31
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2,828
2,816
2,817
(2)
94
(2)
(20)
(64)
(62)
(64)
2,762
2,828
2,751
2008
2,785
94
(62)
2,817
Investment properties have aggregate fair value of P4,228 million as of December 2009 and 2008.
Depreciation is included in Occupancy and equipment-related expenses in the statement of income.
Note 16 - Equity Investments
This account at December 31 consists of investments in shares of stock:
Carrying value (net of impairment)
Investments at equity method
Investments at cost method
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2008
1,639
1,639
6,712
6,712
730
730
6,952
6,952
(74)
Investments in associates carried at equity method in the consolidated statement of condition follow:
Name of entity
BPI - Philamlife Assurance Corporation*
National Reinsurance Corporation**
Beacon Properties
BPI Globe BanKo*
Victoria 1552 Investments, LP
Citytrust Realty Corporation
Percentage of ownership
interest (%)
2009
2008
47.67
15.74
20.00
40.00
35.00
40.00
16.41
20.00
35.00
40.00
Acquisition cost
2009
2008
(In Millions of Pesos)
371
204
204
100
100
200
7
7
2
2
884
313
*Became an associate due to loss of control in 2009
**BPI Group has significant influence
Details and movements of investments in associates carried at equity method in the consolidated financial
statements follow:
2009
2008
(In Millions of Pesos)
Acquisition cost
At January 1
Additions
Disposals
At December 31
Accumulated equity in net income
At January 1
Share in net loss for the year
Share in accumulated net income of former subsidiaries
Dividends received
At December 31
Accumulated share in other comprehensive income (loss)
At January 1
Share in accumulated other comprehensive loss of former subsidiaries
Share in other comprehensive loss for the year
At December 31
313
571
884
368
(55)
313
348
(21)
507
(14)
820
447
(28)
(71)
348
69
(69)
(65)
(65)
1,639
69
69
730
“Additions” in acquisition cost represents costs of remaining investments in former subsidiaries which became
associates in 2009 due to loss of control. Similarly, the BPI Group’s accumulated share in net income and other
comprehensive income based on the remaining equity interest in the associates are also reclassified following the
loss of control (Note 23).
Summarized unaudited financial information of associates follows:
Total assets
Total liabilities
Total revenues
2009
2008
(In Millions of Pesos)
33,862
18,734
19,681
6,327
2,205
139
(75)
The details of equity investments at cost method in the separate financial statements of the Parent Bank follow:
Acquisition cost
2009
2008
Subsidiaries
BPI Europe Plc.
Ayala Plans, Inc. (API)
BPI Leasing Corporation
BPI Capital Corporation
BPI Direct Savings Bank
FGU Insurance Corporation
Prudential Investments
BPI Foreign Exchange
Corporation
BPI Express Remittance
Corporation
BPI Family Savings Bank, Inc.
Ayala Life Assurance Inc. (ALAI)**
Pilipinas Savings Bank (PSB)***
Others
Associates (see above)
Allowance for
impairment
2009
2008
(In Millions of Pesos)
Carrying value
2009
2008
1,910
863
644
573
392
303
300
1,910
644
573
392
303
300
-
-
1,910
863
644
573
392
303
300
1,910
195
195
-
-
195
195
191
150
651
884
7,056
191
150
768
429
648
313
6,816
(104)
(104)
(104)
(104)
191
150
547
884
6,952
644
573
392
303
300
191
150
768
429
544
313
6,712
**Renamed as BPI Philamlife Assurance Corporation in 2009
***Renamed as BPI Globe BanKo in 2009
In November 2009, ALAI declared its entire equity holdings in API as property dividend to its shareholders, which
include the Parent Bank. Consequently, the Parent Bank recognized dividend income of P863 million on its
separate financial statements (see Note 25) and API became a direct subsidiary of the Parent Bank with 100%
equity interest.
In September 2009, BPI and the Philippine American Life and General Insurance Company (Philamlife) signed a
strategic bancassurance joint venture, wherein Philamlife agreed to acquire a 51% stake in ALAI. Proceeds from
the sale calculated based on the initial net worth valuation amounted to P1,696 million which allowed BPI to
generate a gain of P680 million. The joint venture is expected to benefit from the combined synergies, first-class
resources and strength of the two leading companies in the Philippines’ financial industry. Following the sale,
BPI’s ownership in ALAI was reduced to 47.67% and the latter ceased to be a subsidiary of BPI due to loss of
control. As a result, ALAI became an associate and is accounted for at equity method in the BPI Group’s
consolidated financial statements. Further, ALAI, as joint venture between Philamlife and BPI was renamed as
BPI-Philamlife Assurance Corporation.
Also, in relation to the joint venture, BPI and Philamlife entered into a Distribution Agreement (the “Agreement”)
whereby Philamlife will have access to BPI’s customer base for life insurance products and BPI will have
reciprocal access to Philamlife's customers for banking products. The Agreement shall take effect for a period of
10 years starting in November 2009 and may be extended for another 5 years upon mutual agreement by the
parties. Subject to performance of its obligations and meeting certain conditions, BPI will receive a total fee of
P465 million under the said Agreement.
(76)
As approved by the BSP in October 2009, BPI sold 60% of its equity interest in PSB to Globe Telecom, Inc. (40%)
and Ayala Corporation (20%). Total proceeds from the sale amounted to P212 million resulting in a gain of
P13.6 million. Subsequently, PSB which was renamed as BPI-Globe BanKo Savings Bank, ceased to be a
subsidiary and the remaining 40% equity interest of BPI in the said company is accounted for at equity method in
the consolidated financial statements.
In 2008, BPI Capital, at its option, redeemed its previously issued preferred shares held by the Parent Bank. The
preferred shares were redeemed at par value totaling P1,000 million.
Note 17 - Deferred Income Taxes
The significant components of deferred income tax assets and liabilities at December 31 are as follows:
Deferred income tax assets
Allowance for impairment
Net operating loss carry over (NOLCO)
Fair value loss on available-for-sale securities
Minimum corporate income tax (MCIT)
Others
Total deferred income tax assets
Deferred income tax liabilities
Revaluation gain on properties
Leasing income differential between finance
and operating leases
Excess pension asset contribution
Others
Total deferred income tax liabilities
Deferred income tax assets
Amount to be recovered within 12 months
Amount to be recovered after 12 months
Deferred income tax liabilities
Amount to be settled within 12 months
Amount to be settled after 12 months
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2008
4,530
475
201
467
556
6,229
4,092
1,429
298
529
480
6,828
3,704
466
271
461
506
5,408
3,413
1,412
290
457
513
6,085
(1,068)
(1,104)
(1,068)
(1,104)
(6)
(10)
(273)
(1,357)
4,872
(11)
(37)
(1,152)
5,676
(202)
(1,270)
4,138
(1,104)
4,981
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2008
1,132
5,097
6,229
1,239
5,589
6,828
1,082
4,326
5,408
1,239
4,846
6,085
126
1,231
1,357
22
1,130
1,152
121
1,149
1,270
11
1,093
1,104
(77)
The movement in the deferred income tax account is summarized as follows:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
5,676
6,151
4,981
(922)
(862)
(1,055)
(97)
74
(19)
215
313
231
4,872
5,676
4,138
At January 1
Income statement charge
Fair value adjustment on available-for-sale securities
MCIT
At December 31
2008
5,544
(864)
72
229
4,981
The deferred tax charge in the statement of income comprises the following temporary differences:
2009
Allowance for impairment
NOLCO
Pension
Leasing income differential
Others
Consolidated
2008
(438)
954
(229)
(5)
640
922
(214)
708
(34)
57
345
862
2007
2009
(In Millions of Pesos)
754
(291)
(187)
946
10
(176)
(94)
(124)
576
359
1,055
Parent
2008
(188)
722
(12)
342
864
2007
712
(185)
7
(85)
449
The outstanding NOLCO at December 31 consists of:
Year of Incurrence
Year of Expiration
2009
2008
2007
2004/2006
2005
2012
2011
2010
2009
2008
Used portion during the year
Expired portion during the year
Tax rate
Deferred income tax asset on NOLCO
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
110
92
47
48
1,469
1,469
1,462
1,462
3,245
3,245
3,245
3,245
1,389
1,389
4,871
6,151
4,799
6,096
(44)
(1,116)
(1,116)
(3,245)
(273)
(3,245)
(273)
1,582
4,762
1,554
4,707
30%
30%
30%
30%
475
1,429
466
1,412
NOLCO which expired in 2009 includes losses sustained from sale of non-performing assets to special purpose
vehicle (SPV) entities in 2004 which are carried forward for a period of five years in accordance with the Philippine
SPV law.
(78)
The details of MCIT at December 31 are as follows:
Year of Incurrence
Year of Expiration
2009
2008
2007
2006
2012
2011
2010
2009
Used portion during the year
Derecognized MCIT
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
234
232
268
268
229
258
258
228
3
208
763
734
689
(68)
(228)
(205)
(228)
467
529
461
2008
229
228
205
662
(205)
457
Note 18 - Other Resources
The account at December 31 consists of the following:
Accounts receivable
Residual value of equipment for lease
Creditable withholding tax
Prepaid expenses
Other accrued interest and fees receivable
Deferred charges
Sales contracts receivable
Inter-office float items
Accrued trust income
Returned checks and other cash items
Documentary stamp tax
Miscellaneous assets
Allowance for impairment
Current
Non-current
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
2,828
2,572
2,649
1,160
1,051
677
480
483
459
690
381
416
486
366
344
434
291
301
290
273
340
201
306
213
198
206
134
92
122
115
325
82
1,749
2,344
1,287
8,736
9,163
6,446
(1,020)
(1,026)
(976)
7,716
8,137
5,470
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
4,770
4,564
4,112
3,966
4,599
2,334
8,736
9,163
6,446
2008
3,202
323
623
426
361
254
332
190
86
269
1,724
7,790
(990)
6,800
2008
5,128
2,662
7,790
Miscellaneous assets include deposits on leased properties, goodwill and miscellaneous checks.
(79)
The reconciliation of the allowance for impairment at December 31 is summarized as follows:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
1,026
1,029
990
10
6
2
(16)
(9)
(16)
1,020
1,026
976
At January 1
Provision for impairment losses
Write-off
At December 31
2008
995
4
(9)
990
Note 19 - Deposit Liabilities
This account at December 31 consists of:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
108,040
92,496
101,348
202,708
162,465
174,849
268,723
285,391
195,834
579,471
540,352
472,031
Demand
Savings
Time
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
563,655
486,329
466,298
15,816
54,023
5,733
579,471
540,352
472,031
Current
Non-current
2008
86,116
140,543
214,230
440,889
2008
429,528
11,361
440,889
Related interest expense on deposit liabilities is broken down as follows:
Consolidated
2008
2007
2009
(In Millions of Pesos)
607
603
529
563
1,136
1,049
985
938
9,486
11,700
11,488
5,798
11,229
13,352
13,002
7,299
2009
Demand
Savings
Time
Parent
2008
559
875
7,524
8,958
2007
488
818
8,033
9,339
Under existing BSP regulations, the BPI Group is subject to liquidity and statutory reserve requirements with
respect to certain of its deposit liabilities. The BPI Group is in full compliance with all applicable liquidity reserve
requirements.
(80)
The required liquidity and statutory reserves as reported to BSP as of December 31 comprise as follows:
Due from BSP
Reserve deposit account
Special deposit account
Cash in vault
Available for sale securities
Due from local banks
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
40,810
36,491
38,953
34,815
17,773
9,642
14,386
6,267
15,696
20,609
15,151
20,183
2,084
1,958
1,544
1,418
3
3
76,366
68,703
70,034
62,683
Note 20 - Bills Payable
This account at December 31 consists of:
Bangko Sentral ng Pilipinas
Private firms
Local banks
Foreign banks
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
26,334
870
23,782
4,174
4,533
1,501
1,434
834
3,097
32,009
9,934
24,616
2008
870
1,406
3,097
5,373
Average interest rates (%) of bills payable of the BPI Group follow:
Bangko Sentral ng Pilipinas
Private firms
Local banks - peso-denominated
Foreign banks
2009
3.56
8.97
6.34
-
2008
5.96
10.00
7.27
2.30
Bills payable include funds borrowed from Land Bank of the Philippines (LBP), Development Bank of the
Philippines (DBP) and Social Security System (SSS) which were relent to customers of the BPI Group in
accordance with the financing programs of LBP, DBP and SSS. The average payment terms of these bills
payable is 1.23 years. Loans and advances of the BPI Group arising from these financing programs serve as
security for the related bills payable (Note 13).
Note 21 - Unsecured Subordinated Debt
On December 12, 2008 (issue date), the Parent Bank issued P5,000 million worth of unsecured subordinated
notes (the “Notes”) eligible as Lower Tier 2 capital pursuant to BSP Circular No. 280, series of 2001, as amended.
The Notes will at all times, rank pari passu and without any preference among themselves and at least equally with
all other present and future unsecured and subordinated obligations of the Parent Bank, except obligations
mandatorily preferred by law. The Notes bear interest at the rate of 8.45% per annum and will mature on
December 12, 2018 (maturity date). The interest is payable quarterly in arrears from December 12, 2008 until
December 11, 2018. The Notes are redeemable in whole and not only in part at the exclusive option of the Parent
Bank on December 13, 2013 (redemption date) subject to the satisfaction of certain regulatory approval
requirements. Unless the Notes are earlier redeemed on December 13, 2013, the applicable interest rate will be
increased to the rate equal to 80% multiplied by the 5-year on-the-run Philippine Treasury benchmark bid yield
(benchmark rate) on the first day of the 21st interest period plus the step-up spread. The step-up spread is equal
to 150% of 8.45% less 80% multiplied by the benchmark rate.
(81)
Note 22 - Deferred Credits and Other Liabilities
The account at December 31 consists of the following:
Bills purchased - contra
Accounts payable
Deposit on lease contract
Acceptances outstanding
Pension liability (see Note 30)
Vouchers payable
Withholding tax payable
Other credits - dormant
Due to the Treasurer of the Philippines
Cash overages
Cash letters of credit
Sundry credits
Miscellaneous liabilities
Current
Non-current
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
11,388
8,673
11,376
2,486
2,444
1,803
1,378
1,187
1,064
750
1,064
817
54
838
583
774
583
433
392
356
413
396
367
220
178
200
98
128
98
83
87
83
76
1,082
1,341
1,580
963
20,380
17,725
17,731
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
16,123
14,235
15,007
4,257
3,490
2,724
20,380
17,725
17,731
2008
8,667
1,762
750
251
774
311
335
164
128
87
607
1,091
14,927
2008
12,775
2,152
14,927
Note 23 - Capital Funds
Details of authorized capital stock of the Parent Bank follow:
2009
2008
(In Millions of Pesos
Except Par Value Per Share)
Authorized capital (at P10 par value per share)
Common shares
Preferred A shares
49,000
600
49,600
49,000
600
49,600
2007
29,000
600
29,600
On March 18, 2008, the Parent Bank declared 20% stock dividends on total issued and outstanding common
shares, distributed to all common shareholders of record 15 working days after the approval by the SEC of the
increase in authorized capital stock of the Parent Bank as discussed below.
(82)
On June 24, 2008, the SEC approved the Parent Bank’s application for increase in its authorized capital stock
from P29.6 billion to P49.6 billion as follows:
From
Number of
shares
Authorized shares (at P10 par value per share)
Common shares
Preferred A shares
2,900,000,000
60,000,000
To
Amount
(In Millions of
Pesos)
29,000
600
29,600
Number of
shares
4,900,000,000
60,000,000
Amount
(In Millions
of Pesos)
49,000
600
49,600
Details of outstanding common shares follow:
2009
Issued common shares
At January 1
Transfer from subscribed shares
Stock dividends
Issuance of shares during the year
At December 31
Subscribed common shares
At January 1
Full payment of common shares subscribed
At December 31
2008
(In Number of Shares)
3,245,711,238
1,059,096
3,246,770,334
2,704,452,240
540,940,769
318,229
3,245,711,238
28,170
28,170
28,170
28,170
2007
2,704,370,414
1,450
80,376
2,704,452,240
29,620
(1,450)
28,170
As of December 31, 2009 and 2008, the Parent Bank has 13,681 and 13,792 common stockholders, respectively.
There are no preferred shares issued and outstanding at December 31, 2009 and 2008.
(83)
Details of and movements in Accumulated other comprehensive income (loss) for the years ended December 31
follow:
2009
Fair value reserve on available-for-sale
securities
At January 1
Unrealized fair value gain (loss), before
tax (Note 11)
Deferred income tax effect
At December 31
Share in other comprehensive income (loss)
of insurance subsidiaries
At January 1
Share in other comprehensive income
(loss) for the year, before tax
Impact of sale of investment in a
subsidiary
Deferred income tax effect
At December 31
Share in other comprehensive income (loss)
of associates
At January 1
Share in other comprehensive loss
for the year
Transfer
At December 31
Translation adjustment on foreign operations
At January 1
Translation differences
At December 31
Consolidated
2008
(1,269)
487
(97)
(879)
(959)
676
2007
2009
(In Millions of Pesos)
Parent
2008
2,986
4,150
(1,719)
(4,329)
74
(1,269)
(1,089)
(75)
2,986
414
(19)
(1,324)
(2,768)
72
(1,719)
403
-
-
-
(249)
-
-
-
154
(1,113)
977
2007
1,972
(922)
(73)
977
185
20
(78)
(959)
154
-
-
-
69
69
69
-
-
-
(65)
(69)
(65)
69
69
-
-
-
(1,324)
(1,719)
(692)
79
(613)
(1,635)
(580)
(112)
(692)
(2,851)
(95)
(485)
(580)
2,629
977
“Transfer” pertains to the BPI Group’s share in the fair value reserve on investments of former subsidiaries
following the loss of control (Note 16).
(84)
Details of and movements in Reserves for the years ended December 31 follow:
2009
Stock option scheme (Note 24)
At January 1
Exercise of options
Value of employee services
At December 31
Surplus reserves
At January 1
Transfer from surplus
At December 31
Consolidated
2008
253
(74)
179
1,043
172
1,215
1,394
2007
2009
(In Millions of Pesos)
230
(21)
44
253
89
(5)
146
230
963
80
1,043
1,296
833
130
963
1,193
198
(62)
136
1,043
172
1,215
1,351
Parent
2008
182
(21)
37
198
963
80
1,043
1,241
2007
70
(5)
117
182
833
130
963
1,145
Surplus reserves consist of:
2009
Reserve for trust business
Reserve for self-insurance
1,181
34
1,215
2008
(In Millions of Pesos)
1,009
34
1,043
2007
929
34
963
In compliance with existing BSP regulations, 10% of the Parent Bank’s income from trust business is appropriated
to surplus reserve. This yearly appropriation is required until the surplus reserve for trust business reaches 20% of
the Parent Bank’s regulatory net worth.
Reserve for self-insurance represents the amount set aside to cover losses due to fire, defalcation by and other
unlawful acts of personnel and third parties.
Cash dividends declared by the Board of Directors of the Parent Bank during the years 2007 to 2009 follow:
Date declared
April 18, 2007
November 21, 2007
November 21, 2007
June 18, 2008
December 17, 2008
June 17, 2009
December 16, 2009
Date approved by the BSP
June 7, 2007
January 18, 2008
January 18, 2008
August 3, 2008
February 18, 2009
August 3, 2009
January 25, 2010
Amount of dividends
Total
Per share
(In Millions of Pesos)
0.90
2,434
0.90
2,434
1.00
2,705
0.90
2,921
0.90
2,921
0.90
2,922
0.90
2,922
Cash dividends declared are payable to common shareholders of record as of 15th day from receipt by the Parent
Bank of the approval by the Bangko Sentral and distributable on the 15th day from the said record date.
(85)
The calculation of earnings per share (EPS) is shown below:
2009
a) Net income attributable to equity holders
of the Parent Bank
b) Weighted average number of common
shares outstanding during the year after
retroactive effect of stock dividends
c) Basic EPS (a/b)
Consolidated
Parent
2008
2007
2009
2008
2007
(In Millions, Except Earnings Per Share Amounts)
8,516
6,423
10,012
8,753
8,305
7,984
3,246
2.62
3,246
1.98
3,245
3.09
3,246
2.69
3,246
2.56
3,245
2.46
The equivalent common shares arising from potential exercise of stock options (Note 24) have insignificant effect
on the calculation of diluted EPS thus, basic and diluted EPS are the same for the years presented.
Note 24 - Stock Option Plan
The BPI Group grants options to qualified officers under its Executive Stock Option Plan (ESOP). The options vest
over a period of three years as follows: (a) 40% after the second anniversary of the option grant date; and (b) 60%
after the third anniversary of the option grant date. The option to purchase shares under this plan shall expire five
years from grant date.
Movements in the number of share options are as follows:
At January 1
Granted
Exercised
Cancelled
At December 31
Exercisable
2009
12,728,067
(5,110,680)
7,617,387
7,617,387
2008
11,926,290
2,201,663
(1,345,182)
(54,704)
12,728,067
12,728,067
Options granted in 2008 represent additional entitlement as a result of the declaration of stock dividends by the
Parent Bank (Note 23). The significant inputs into the model were share prices of P61.50 at the grant date, exercise
price of P37.78, standard deviation of expected share price returns of 30%, option life of 3 years, and annual risk free
interest rate of 5.25%. The volatility measured at the standard deviation of expected share price returns is based on
statistical analysis of daily share prices over the last three years.
The weighted average share price for share options exercised in 2009 and 2008 is P31.48. Options outstanding at
December 31, 2009 have remaining contractual life of 1 year (2008 - 2 years) and weighted exercise price of P31.48.
All outstanding options are fully exercisable as at December 31, 2009.
(86)
Note 25 - Other Operating Income
Details of other operating income follow:
2009
Gain on sale of assets
Trust and asset management fees
Rental income
Credit card income
Dividend income
Others
1,759
1,685
1,411
1,063
124
375
6,417
Consolidated
2008
1,437
1,604
1,259
785
67
946
6,098
2007
2009
(In Millions of Pesos)
1,478
1,512
1,041
703
53
1,611
6,398
1,800
1,556
356
1,063
2,906
224
7,905
Parent
2008
986
1,488
309
785
4,061
672
8,301
2007
615
1,418
301
703
2,631
931
6,599
Gain on sale of assets arises mainly from disposals of properties (including equity investments), foreclosed collaterals
and non-performing assets.
Dividend income recognized by the Parent Bank substantially pertains to dividend distribution of subsidiaries.
Note 26 - Leases
The BPI Group and the Parent Bank have various lease agreements which are renewable under certain terms and
conditions. The rentals (included in Occupancy and equipment-related expenses) under these lease contracts are as
follows:
2009
2008
2007
Consolidated
Parent
(In Millions of Pesos)
777
607
813
562
763
524
The future minimum lease payments under non-cancellable operating leases of the BPI Group are as follows:
No later than 1 year
Later than 1 year but no later than 5 years
2009
2008
(In Millions of Pesos)
49
30
73
54
122
84
(87)
Note 27 - Other Operating Expenses
Details of other operating expenses follow:
2009
Supervision and examination fees
Advertising
Travel and communication
Litigation expenses
Management and other
professional fees
Office supplies
Insurance
Documentary stamps
Representation and entertainment
Others
Consolidated
2008
1,347
833
503
492
1,219
802
511
586
261
223
206
48
38
925
4,876
252
226
148
118
38
1,011
4,911
2007
2009
(In Millions of Pesos)
1,170
1,100
765
708
517
392
680
343
178
256
125
348
31
1,195
5,265
Parent
2008
194
184
36
21
32
872
3,882
2007
997
628
388
467
960
609
404
538
198
183
53
58
30
956
3,958
110
199
37
344
24
1,354
4,579
Note 28 - Income Taxes
A reconciliation between the provision for income tax at the statutory tax rate and the actual provision for income
tax for the years ended December 31 follows:
2009
Statutory income tax
Effect of items not subject to statutory tax rate:
Income subjected to lower tax rates
Tax-exempt income
Others, net
Actual income tax
Amount
Rate
(%)
3,655
30.00
(368)
(2,115)
2,347
3,519
(2.82)
(17.42)
18.76
28.52
2009
Amount
Statutory income tax
Effect of items not subject to statutory tax rate:
Income subjected to lower tax rates
Tax-exempt income
Others, net
Actual income tax
3,506
(400)
(1,479)
1,308
2,935
Consolidated
2008
Rate
Amount
(%)
(In Millions of Pesos)
3,340
35.00
(285)
(1,768)
1,698
2,985
(2.98)
(18.53)
17.80
31.29
Parent
2008
Rate
Rate
(%)
Amount
(%)
(In Millions of Pesos)
30.00
3,688
35.00
(3.42)
(12.66)
11.20
25.12
(105)
(1,900)
551
2,234
(1.00)
(18.03)
5.23
21.20
2007
Rate
(%)
Amount
4,548
35.00
(428)
(2,463)
1,110
2,767
(3.29)
(18.96)
8.54
21.29
2007
Amount
Rate
(%)
3,450
35.00
(336)
(1,868)
627
1,873
(3.41)
(18.95)
6.36
19.00
“Others, net” in 2008 includes impact of change in corporate income tax rates from 35% to 30% on future
deductible and taxable differences.
(88)
Note 29 - Basic Quantitative Indicators of Financial Performance
The key financial performance indicators follow (in %):
Return on average equity
Return on average assets
Net interest margin
Consolidated
2009
2008
12.96
10.01
1.29
1.06
3.72
3.76
Parent
2009
17.42
1.69
3.54
2008
16.46
1.76
3.72
Note 30 - Retirement Plans
BPI and its subsidiaries, and the insurance company subsidiaries have separate trusteed, noncontributory retirement
benefit plans covering all qualified officers and employees. The description of the plans follows:
BPI
BPI has a unified plan which includes its subsidiaries other than insurance companies. Under this plan, the normal
retirement age is 60 years. Normal retirement benefit consists of a lump sum benefit equivalent to 200% of the
basic monthly salary of the employee at the time of his retirement for each year of service, if he has rendered at
least 10 years of service, or to 150% of his basic monthly salary, if he has rendered less than 10 years of service.
For voluntary retirement, the benefit is equivalent to 112.50% of the employee’s basic monthly salary for a
minimum of 10 years of service with the rate factor progressing to a maximum of 200% of basic monthly salary for
service years of 25 or more. Death or disability benefit, on the other hand, shall be determined on the same basis
as in voluntary retirement.
Insurance company subsidiaries
The insurance company subsidiaries have separate retirement benefit plans which are either funded or unfunded
and non-contributory. The normal retirement age under these plans is 60 years.
Normal retirement benefits for ALAI employees consist of a lump sum benefit equivalent to 175% of the monthly
salary of the employee at the time of his retirement for each year of service or the sum of all contributions made by
the respective companies on his behalf including related investment earnings, whichever is larger. Voluntary
retirement is allowed for ALAI employees who have attained at least age 50 years and have completed at least 20
years of continuous service and the benefit is determined on the same basis as normal retirement.
BPI/MS has a separate trusteed defined benefit plan. Under the plan, the normal retirement age is 60 years or the
employee should have completed at least 10 years of service, whichever is earlier. The normal retirement benefit
is equal to 150% of the final basic monthly salary for each year of service for below 10 years and 175% of the final
basic monthly salary for each year of service for 10 years and above.
Death or disability benefit for all employees of the insurance company subsidiaries shall be determined on the
same basis as in normal or voluntary retirement as the case may be.
(89)
Following are the amounts recognized based on recent actuarial valuations:
(a) Pension liability (asset) recognized in the statement of condition
2009
Present value of defined benefit obligations
Fair value of plan assets
Deficit in the plan
Unrecognized actuarial losses
Pension liability (asset) recognized in the
statement of condition
10,260
6,576
3,684
(2,867)
817
2009
Present value of defined benefit obligations
Fair value of plan assets
Deficit in the plan
Unrecognized actuarial losses
Pension liability (asset) recognized in the
statement of condition
7,985
(5,097)
2,888
(2,050)
838
Consolidated
2008
2007
2006
(In Millions of Pesos)
9,607
9,262
8,645
(6,664)
(6,831)
(5,615)
3,992
2,598
1,814
(3,938)
(2,919)
(2,138)
54
(321)
(324)
Parent
2008
2007
2006
(In Millions of Pesos)
7,475
7,199
6,487
(4,373)
(5,180)
(4,968)
3,102
2,019
1,519
(2,851)
(2,053)
(1,566)
251
(34)
2005
5,846
(5,272)
574
(745)
(171)
2005
4,500
(3,883)
617
(523)
(47)
94
Pension liability is included in “Deferred credits and other liabilities” (Note 22). Pension asset is shown as part of
“Miscellaneous assets” within Other resources (Note 18).
Experience adjustments at December 31 follow:
2009
Experience gain (loss) on plan liabilities
Experience gain (loss) on plan assets
(151)
755
2009
Experience gain (loss) on plan liabilities
Experience gain (loss) on plan assets
(99)
583
Consolidated
2008
2007
(In Millions of Pesos)
34
1,386
(1,223)
(493)
Parent
2008
2007
(In Millions of Pesos)
16
1,349
(952)
5
2006
2,456
1,033
2006
1,898
707
(90)
The movement in plan assets is summarized as follows:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
5,615
6,664
4,373
344
553
268
496
471
383
(850)
(510)
(634)
755
(1,223)
583
6,576
5,615
5,097
At January 1
Expected return on plan assets
Contributions
Benefit payments
Actuarial gains (losses)
At December 31
2008
5,180
430
363
(648)
(952)
4,373
The plan assets are comprised of the following:
Consolidated
2009
Amount
%
3,258
3,255
63
6,576
50
49
1
100
Debt securities
Equity securities
Others
Parent
2008
2009
2008
Amount
%
Amount
%
Amount
%
(In Millions of Pesos Except for Rates)
2,636
47
2,548
50
2,041
47
2,920
52
2,498
49
2,274
52
59
1
51
1
58
1
5,615
100
5,097
100
4,373
100
Pension plan assets of the unified retirement plan include investment in BPI’s common shares with fair value of
P2,597 million and P2,370 million at December 31, 2009 and 2008, respectively. The actual return on plan assets
was P1,099 million gain and P670 million loss in 2009 and 2008, respectively.
The movement in the present value of defined benefit obligation is summarized as follows:
Consolidated
Parent
2009
2008
2009
(In Millions of Pesos)
9,607
9,262
7,475
407
536
316
1,056
769
821
(634)
(850)
(510)
(176)
(110)
(117)
10,260
9,607
7,985
At January 1
Current service cost
Interest cost
Benefit payments
Actuarial gains
At December 31
2008
7,199
417
598
(648)
(91)
7,475
(b) Expense recognized in the statement of income
Current service cost
Interest cost
Expected return on plan assets
Net actuarial loss recognized during
the year
Total expense included in Compensation
and fringe benefits
Consolidated
2009
2008
2007
2009
(In Millions of Pesos)
407
536
530
316
1,056
769
692
821
(344)
(553)
(820)
(268)
Parent
2008
2007
417
598
(430)
396
519
(596)
141
95
61
100
64
44
1,260
847
463
969
649
363
(91)
The principal assumptions used for the actuarial valuations of the unified plan of the BPI Group were as follows:
Discount rate
Expected return on plan assets
Future salary increases
2009
10.69%
10.52%
6.00%
2008
10.98%
6.13%
6.00%
2007
8.31%
12.00%
6.00%
The expected return on plan assets was determined by considering the expected returns available on the assets
underlying the current investment policy. Expected yields on fixed interest investments are based on gross
redemption yields as at the reporting date. Expected returns on equity securities and property investments reflect
long-term real rates of return experienced in the respective markets.
Assumptions regarding future mortality and disability experience are based on published statistics generally used
for local actuarial valuation purposes.
The average remaining service life of employees under the BPI unified retirement plan as at December 31, 2009
and 2008 is 21 years. The BPI Group’s expected retirement contribution for the year ending December 31, 2010
amounts to P967 million.
Note 31 - Trust Assets
At December 31, 2009 and 2008, the net asset value of trust assets administered by the BPI Group amounts to
P435 billion and P290 billion, respectively.
Government securities deposited by the BPI Group and the Parent Bank with the Bangko Sentral in compliance with
the requirements of the General Banking Act relative to the trust functions follow:
Government securities
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
4,105
2,714
3,941
2,546
Note 32 - Related Party Transactions
Included in the financial statements are various transactions of the Parent Bank with its domestic and foreign
subsidiaries and affiliates, and with its directors, officers, stockholders and related interest (DOSRI). These
transactions usually arise from normal banking activities such as deposit arrangements, trading of government
securities and commercial papers, sale of assets, lending/borrowing of funds, lease of bank premises, investment
advisory/management, service arrangements and advances for operating expenses.
(92)
Significant related party transactions are summarized below:
a)
Loans and advances and deposits from related parties
Details of DOSRI loans are as follows:
Outstanding DOSRI loans
% to total outstanding loans and advances
% to total outstanding DOSRI loans
Unsecured DOSRI loans
Past due DOSRI loans
Non-performing DOSRI loans
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
7,184
7,339
7,123
7,269
2.15
2.26
2.90
2.97
25.31
Nil
Nil
14.69
Nil
Nil
25.53
Nil
Nil
14.83
Nil
Nil
At December 31, 2009 and 2008, the BPI Group is in full compliance with the General Banking Act and the BSP
regulations on DOSRI loans.
Deposits from related parties at December 31, 2008 follow:
Subsidiaries
Associates and entities under common control
b)
Consolidated
Parent
2009
2008
2009
2008
(In Millions of Pesos)
1,897
1,781
1,811
1,685
12,714
32,696
12,714
32,696
14,611
34,477
14,525
34,381
Details of income earned by and expenses charged to the Parent Bank are as follows:
Interest income
Other income
Interest expense
Subsidiaries
Associates and entities under common control
Other expenses
Subsidiaries
2009
2008
(In Millions of Pesos)
393
263
9
8
2007
2009
2008
(In Millions of Pesos)
2007
70
8
8
91
20
221
22
140
212
220
297
(93)
c)
Key management compensation
Details of key management compensation and directors’ remuneration follow:
2009
Key management compensation
Salaries and other short-term benefits
Post-employment benefits
Share-based compensation
Directors’ remuneration
417
32
34
Consolidated
2008
2007
2009
(In Millions of Pesos)
404
99
8
40
316
89
28
36
276
19
27
Parent
2008
240
70
4
34
2007
175
61
15
31
Note 33 - Commitments and Contingencies
At present, there are lawsuits, claims and tax assessments pending against the BPI Group. In the opinion of
management, after reviewing all actions and proceedings and court decisions with legal counsels, the aggregate
liability or loss, if any, arising therefrom will not have a material effect on the BPI Group’s financial position or financial
performance.
BPI and some of its subsidiaries are defendants in legal actions arising from normal business activities. Management
believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially
affect the financial statements.
In the normal course of business, the BPI Group makes various commitments (Note 3.1.4) that are not presented in
the financial statements. The BPI Group does not anticipate any material losses from these commitments.
(94)
Globe Telecom, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2009, 2008 and 2007
and
Independent Auditors’ Report
SyCip Gorres Velayo & Co.
SyCip Go rres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891 0307
Fax:
(632) 819 0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-2
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Globe Telecom, Inc.
We have audited the accompanying consolidated financial statements of Globe Telecom, Inc. and
Subsidiaries, which comprise the consolidated statement of financial position as at
December 31, 2009, 2008 and 2007, and the consolidated statements of comprehensive income,
consolidated statements of changes in equity and consolidated statements of cash flows for the years
then ended, and a summary of significant accounting policies and other explanatory notes.
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. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
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 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.
A member firm of Ernst & Young Global Limited
-2We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Globe Telecom, Inc. and Subsidiaries as of December 31, 2009, 2008 and 2007,
and its financial performance and its cash flows for the years then ended in accordance with
Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Arnel F. de Jesus
Partner
CPA Certificate No. 43285
SEC Accreditation No. 0075-AR-1
Tax Identification No. 152-884-385
PTR No. 2087528, January 04, 2010, Makati City
February 4, 2010
*SGVMC113950*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Held-to-maturity investments
Receivables - net
Inventories and supplies
Derivative assets
Prepayments and other current assets - net
Total Current Assets
Noncurrent Assets
Property and equipment - net
Investment property - net
Intangible assets and goodwill - net
Investments in joint ventures
Deferred income tax - net
Other noncurrent assets - net
Total Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses
Provisions
Derivative liabilities
Income tax payable
Unearned revenues
Notes payable
Current portion of:
Long-term debt
Other long-term liabilities
Total Current Liabilities
Noncurrent Liabilities
Deferred income tax - net
Long-term debt - net of current portion
Derivative liabilities
Other long-term liabilities - net of current portion
Total Noncurrent Liabilities
Total Liabilities
Equity
Paid-up capital
Cost of share-based payments
Other reserves
Retained earnings
Total Equity
December 31
2008
(As restated)
(In Thousand Pesos)
Notes
2009
28, 30
28
28
4, 28
5
28
6, 28
P
=5,939,927
2,784
–
6,583,228
1,653,750
36,305
4,199,320
18,415,314
=5,782,224
P
–
–
7,473,346
1,124,322
169,012
5,106,429
19,655,333
=6,191,004
P
500,000
2,350,032
6,383,541
1,112,146
528,646
2,667,216
19,732,585
7
8
9
10
24
11
101,693,868
236,739
2,982,856
233,800
742,538
3,338,410
109,228,211
P
=127,643,525
93,540,390
259,223
3,338,796
73,529
523,722
2,360,195
100,095,855
=119,751,188
P
91,527,820
291,207
2,434,623
83,257
637,721
1,913,639
96,888,267
=116,620,852
P
12, 28
13
28
24
4
14, 28
P
=20,838,681
89,404
85,867
1,107,721
2,981,880
2,000,829
=17,032,474
P
202,514
163,989
1,237,969
3,247,711
4,002,160
=18,435,453
P
219,687
326,721
1,361,420
1,866,531
500,000
14, 28
15, 28
5,667,965
803,617
33,575,964
7,742,227
99,145
33,728,189
4,803,341
86,416
27,599,569
24
14, 28
28
15, 28
4,627,294
39,808,057
6,589
1,916,707
46,358,647
79,934,611
4,590,429
28,843,711
21,665
2,475,639
35,931,444
69,659,633
5,502,890
25,069,511
14,110
3,017,962
33,604,473
61,204,042
17
16, 18
17, 28
17
33,912,158
468,367
18,518
13,309,871
47,708,914
P
=127,643,525
33,861,398
386,905
(35,382)
15,878,634
50,091,555
=119,751,188
P
2007
33,720,380
306,358
184,408
21,205,664
55,416,810
=116,620,852
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113950*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Notes
REVENUES
Service revenues
Nonservice revenues
Interest income
Others - net
Gain on disposal of property
and equipment - net
COSTS AND EXPENSES
General, selling and administrative
Depreciation and amortization
Cost of sales
Financing costs
Impairment losses and others
Equity in net losses of joint ventures
16
P
=62,443,518
1,418,614
271,806
1,064,476
65,198,414
=62,894,488
P
1,923,560
420,425
700,874
65,939,347
=63,208,652
P
2,300,064
728,621
1,789,571
68,026,908
7
608,400
65,806,814
24,837
65,964,184
14,910
68,041,818
21
7, 8, 9
5
22
23
10
24,496,882
17,388,430
2,947,950
2,182,881
810,960
7,009
47,834,112
23,757,126
17,028,068
3,117,172
3,000,391
1,205,679
9,728
48,118,164
21,304,473
17,188,998
3,322,777
5,224,939
941,260
9,023
47,991,470
17,972,702
17,846,020
20,050,348
19
20
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current
Deferred
24
5,583,809
(179,980)
5,403,829
NET INCOME
OTHER COMPREHENSIVE INCOME
(EXPENSE)
Transactions on cash flow hedges - net
Changes in fair value of available-for-sale investment
in equity securities
Exchange differences arising from translations of
foreign investments
Tax effect relating to components of other
comprehensive income
12,568,873
11,275,878
6,841,240
(67,911)
6,773,329
13,277,019
25,040
(310,099)
167,096
14,553
(19,734)
16,158
24,682
1,508
(10,375)
53,900
108,535
(219,790)
–
194,944
378,198
P
=12,622,773
=11,056,088
P
=13,655,217
P
P
=94.59
=84.75
P
=100.07
P
27
Diluted
Cash dividends declared per common share
7,268,584
(698,442)
6,570,142
17
TOTAL COMPREHENSIVE INCOME
Earnings Per Share
Basic
Years Ended December 31
2008
2007
2009
(In Thousand Pesos, Except Per Share Figures)
17
P
=94.31
=84.61
P
=99.58
P
P
=114.00
=125.00
P
=116.00
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113950*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Notes
Capital
Stock
(Note 17)
Cost of
Additional
Paid-in Share-Based
Payments
Capital
Other
Reserves
(Note 17)
Retained
Earnings
Total
For the Year Ended December 31, 2009 (In Thousand Pesos)
As of January 1, 2009
Total comprehensive income for the year
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2009
P
=7,408,075
–
P
=26,453,323
–
P
=386,905
–
–
–
–
732
272
P
=7,409,079
–
–
–
–
49,756
P
=26,503,079
–
–
126,437
–
(44,975)
P
=468,367
(P
=35,382) P
=15,878,634
53,900
12,568,873
P
=50,091,555
12,622,773
17.3
18.1
–
–
–
–
–
P
=18,518
(15,087,144) (15,087,144)
(50,492)
(50,492)
–
126,437
–
732
–
5,053
P
=13,309,871 P
=47,708,914
For the Year Ended December 31, 2008 (In Thousand Pesos)
As of January 1, 2008
Total comprehensive income (expense)
for the year
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2008
=7,367,002
P
P
=26,353,378
=306,358
P
–
–
–
–
–
–
40,742
331
=7,408,075
P
–
–
–
–
99,945
P
=26,453,323
=184,408
P
P
=21,205,664
P
=55,416,810
(219,790)
11,275,878
11,056,088
17.3
18.1
–
–
182,324
–
(101,777)
=386,905
P
– (16,542,271) (16,542,271)
–
(60,637)
(60,637)
–
–
182,324
–
–
40,742
–
–
(1,501)
(P
=35,382) =
P15,878,634 P
=50,091,555
For the Year Ended December 31, 2007 (In Thousand Pesos)
As of January 1, 2007
Total comprehensive income for the year
Dividends on:
Common stock
Preferred stock
Cost of share-based payments
Collection of subscriptions receivable
Exercise of stock options
As of December 31, 2007
=7,349,654
P
–
P
=26,134,707
–
=340,743
P
–
–
–
–
4,660
12,688
=7,367,002
P
–
–
–
–
218,671
P
=26,353,378
–
–
129,914
–
(164,299)
=306,358
P
(P
=193,790) =
P23,316,837
378,198
13,277,019
P
=56,948,151
13,655,217
17.3
18.1
–
–
–
–
–
=184,408
P
(15,338,743) (15,338,743)
(49,449)
(49,449)
–
129,914
–
4,660
–
67,060
P
=21,205,664 P
=55,416,810
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113950*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization
Interest expense
Bond redemption cost
Cost of share-based payments
Gain on disposal of property and equipment
Equity in net losses of a joint venture
Provisions for (reversals of) other probable losses
Loss (gain) on derivative instruments
Impairment losses (reversal of impairment losses) on
property and equipment
Foreign exchange losses (gains) - net
Interest income
Dividend income
Operating income before working capital changes
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables
Inventories and supplies
Prepayments and other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Unearned revenues
Other long-term liabilities
Cash generated from operations
Interest paid
Income tax paid
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to:
Property and equipment
Intangible assets
Proceeds from sale of property and equipment
Decrease (increase) in:
Short-term investments
Available-for-sale investments
Held-to-maturity investments
Other noncurrent assets
Acquisition of subsidiaries
Dividend received
Interest received
Net cash flows used in investing activities
2009
P
=17,972,702
Years Ended December 31
2008
(In Thousand Pesos)
=17,846,020
P
2007
=20,050,348
P
7, 8, 9
22
14, 22
16, 18
7
10
23
22
17,388,430
2,096,945
–
126,437
(608,400)
7,009
(88,047)
64,547
17,028,068
2,255,878
–
182,324
(24,837)
9,728
(5,031)
(105,642)
17,188,998
2,996,347
614,697
129,914
(14,910)
9,023
3,179
(61,463)
23
20, 22
19
85,631
(286,530)
(271,806)
(592)
36,486,326
(31,172)
759,299
(420,425)
(27)
37,494,183
(71,431)
(1,431,214)
(728,621)
–
38,684,867
833,760
(529,428)
754,837
(751,361)
(12,176)
(2,482,801)
(1,095,336)
(118,652)
(1,332,436)
1,617,432
(265,831)
68,345
38,965,441
(3,009,233)
(5,589,227)
30,366,981
(2,778,052)
1,381,180
(818,774)
32,032,199
(2,407,243)
(7,117,556)
22,507,400
3,229,966
596,456
1,463,490
41,428,355
(3,231,924)
(6,193,383)
32,003,048
(20,988,768)
(99,164)
58,145
(18,754,502)
(196,052)
137,124
(13,824,879)
(191,738)
36,979
(2,784)
–
–
(863,889)
(141,330)
592
208,094
(21,829,104)
500,000
–
2,350,032
(619,397)
(351,499)
27
352,990
(16,581,277)
5,655,349
293,567
(1,492,469)
(273,333)
–
–
696,015
(9,100,509)
7
9
9
(Forward)
*SGVMC113950*
-2-
Notes
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings:
Long-term
Short-term
Repayments of borrowings:
Long-term
Short-term
Payments of dividends to stockholders:
Common
Preferred
Collection of subscriptions receivable and exercise of
stock options
Net cash flows used in financing activities
Years Ended December 31
2008
(In Thousand Pesos)
2007
14
P
=18,629,170
2,000,000
=11,500,000
P
6,603,375
=13,121,044
P
500,000
14
(9,820,330)
(4,001,330)
(4,814,990)
(3,100,540)
(22,107,813)
–
(15,087,144)
(60,637)
(16,542,271)
(49,449)
(15,338,743)
(64,669)
5,785
(8,334,486)
39,241
(6,364,634)
71,720
(23,818,461)
203,391
(45,688)
(438,511)
29,731
(915,922)
(398,789)
17
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
NET FOREIGN EXCHANGE DIFFERENCE
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE YEAR
CASH AND CASH EQUIVALENTS AT
END OF YEAR
2009
28, 30
5,782,224
6,191,004
7,505,715
P
=5,939,927
=5,782,224
P
=6,191,004
P
See accompanying Notes to Consolidated Financial Statements.
*SGVMC113950*
GLOBE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Globe Telecom, Inc. (hereafter referred to as “Globe Telecom”) is a stock corporation organized
under the laws of the Philippines, and enfranchised under Republic Act (RA) No. 7229 and its
related laws to render any and all types of domestic and international telecommunications
services. Globe Telecom is one of the leading providers of digital wireless communications
services in the Philippines under the Globe and Touch Mobile (TM) brand using a fully digital
network. It also offers domestic and international long distance communication services or carrier
services. Globe Telecom’s principal executive offices are located at 5th Floor, Globe Telecom
Plaza, Pioneer Highlands, Pioneer corner Madison Streets, Mandaluyong City, Metropolitan
Manila, Philippines. Globe Telecom is listed in the Philippine Stock Exchange (PSE) and has
been included in the PSE composite index since September 17, 2001. Major stockholders of
Globe Telecom include Ayala Corporation (AC), Singapore Telecom, Inc. (STI) and Asiacom
Philippines, Inc. None of these companies exercise control over Globe Telecom.
Globe Telecom owns 100% of Innove Communications, Inc. (Innove). Innove is a stock
corporation organized under the laws of the Philippines and enfranchised under RA No. 7372 and
its related laws to render any and all types of domestic and international telecommunications
services. Innove holds a license to provide digital wireless communication services in the
Philippines. Innove also offers a broad range of wireline voice and data communication services,
including domestic and international long distance communication services or carrier services as
well as broadband internet services. Innove also has a license to establish, install, operate and
maintain a nationwide local exchange carrier (LEC) service, particularly integrated local
telephone service with public payphone facilities and public calling stations, and to render and
provide international and domestic carrier and leased line services.
Globe Telecom owns 100% of G-Xchange, Inc. (GXI), a corporation formed for the purpose of
developing, designing, administering, managing and operating software applications and systems,
including systems designed for the operations of bill payment and money remittance, payment and
delivery facilities through various telecommunications systems operated by telecommunications
carriers in the Philippines and throughout the world and to supply software and hardware facilities
for such purposes. GXI is registered with the Bangko Sentral ng Pilipinas (BSP) as a remittance
agent. GXI handles the mobile payment and remittance service using Globe Telecom’s network
as transport channel under the GCash brand. The service, which is integrated into the cellular
services of Globe Telecom and Innove, enables easy and convenient person-to-person fund
transfers via short messaging services (SMS) and allows Globe Telecom and Innove subscribers
to easily and conveniently put cash into and get cash out of the GCash system.
Globe Telecom acquired 100% of Entertainment Gateway Group Corporation (EGGC) and
EGGstreme (Hong Kong) Limited (EHL) (collectively referred here as “EGG Group”) on
June 26, 2008 (see Note 9). EGG Group is engaged in the development and creation of wireless
products and services accessible through telephones or other forms of communication devices.
EGGC is registered with the Department of Transportation and Communication (DOTC) as a
content provider.
-2Globe Telecom owns 100% of GTI Business Holdings, Inc. (GTI). The primary purpose of this
company is to invest, purchase, subscribe for or otherwise acquire and own, hold, sell or
otherwise dispose of real and personal property of every kind and description. GTI was
incorporated on November 25, 2008. In July 2009, GTI incorporated its wholly owned
subsidiary, GTI Corporation (GTIC), a company organized under the General Corporation Law of
the State of Delaware for the purpose of engaging in any lawful act or activity for which
corporations may be organized under the Delaware General Corporation Law. GTIC has not yet
started commercial operations as of December 31, 2009.
2. Summary of Significant Accounting Policies
2.1 Basis of Financial Statement Preparation
The accompanying consolidated financial statements of Globe Telecom and its wholly-owned
subsidiaries, collectively referred to as the “Globe Group”, have been prepared under the
historical cost convention method, except for derivative financial instruments and availablefor-sale (AFS) investments that are measured at fair value.
The consolidated financial statements of the Globe Group are presented in Philippine Peso
(PHP), Globe Telecom’s functional currency, and rounded to the nearest thousands except
when otherwise indicated.
On February 4, 2010, the Board of Directors (BOD) approved and authorized the release of
the consolidated financial statements of Globe Telecom, Inc. and Subsidiaries as of and for
the years ended December 31, 2009, 2008 and 2007.
2.2 Statement of Compliance
The consolidated financial statements of the Globe Group have been prepared in compliance
with Philippine Financial Reporting Standards (PFRS).
2.3 Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Globe Telecom
and its subsidiaries as of and for the years ended December 31, 2009, 2008 and 2007. The
subsidiaries, are as follows:
Name of Subsidiary
Innove
GXI
EGG Group
EGGC
Place of Incorporation
Principal Activity
Philippines
Wireless and wireline voice and data
communication services
Philippines
Software development for
telecommunications applications
and money remittance services
Philippines
EHL
Hong Kong
GTIC
Philippines
United States
GTI
Mobile content and application
development services
Mobile content and application
development services
Investment and holding company
No operations
Percentage of
Ownership
100%
100%
100%
100%
100%
100%
*SGVMC113950*
-3Subsidiaries are consolidated from the date on which control is transferred to the Globe
Group and cease to be consolidated from the date on which control is transferred out of the
Globe Group. The financial statements of the subsidiaries are prepared for the same reporting
year as Globe Telecom using uniform accounting policies for like transactions and other
events in similar circumstances. All significant intercompany balances and transactions,
including intercompany profits and losses, were eliminated during consolidation in
accordance with the accounting policy on consolidation.
2.4 Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year
except for the adoption of the following new and amended PFRS and Philippine
Interpretations of International Financial Reporting Interpretations Committee (IFRIC) which
became effective on January 1, 2009. Except as otherwise indicated, the adoption of the new
and amended Standards and Interpretations did not have a significant impact on the
consolidated financial statements.
·
Amendments to PAS 1, Presentation of Financial Statements
In accordance with the Amendments to PAS 1, the statement of changes in equity shall
include only transactions with owners, while all non-owner changes will be presented in
equity as a single line with details included in a separate statement. Owners are defined
as holders of instruments classified as equity.
In addition, the Amendments to PAS 1 provide for the introduction of a new statement of
comprehensive income that combines all items of income and expenses recognized in the
profit or loss together with “Other comprehensive income”. Entities may choose to
present all items in one statement, or to present two linked statements, a separate
statement of income and a statement of comprehensive income. These Amendments also
require enhancements in the presentation of the consolidated statements of financial
position and owner’s equity as well as additional disclosures to be included in the
financial statements. Adoption of these Amendments resulted in the following:
(a) change in the title from consolidated balance sheet to consolidated statements of
financial position; (b) change in the presentation of changes in equity and of
comprehensive income, i.e., non-owner changes in equity are now presented in one
consolidated statement of comprehensive income; and (c) additional disclosures in the
notes to the consolidated financial statements relating to the movement in and income tax
effects of other reserves (see Note 17).
·
Amendment to PAS 23, Borrowing Costs
This Amendment requires the capitalization of borrowing costs when such costs relate to
a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. Accordingly, borrowing costs are
capitalized on qualifying assets with a commencement date after January 1, 2009. No
changes will be made for borrowing costs incurred to this date that have been expensed.
*SGVMC113950*
-4·
PFRS 8, Operating Segments
It replaces PAS 14, Segment Reporting, and adopts a full management approach to
identifying, measuring and disclosing the results of an entity’s operating segments. The
information reported would be that which management uses internally for evaluating the
performance of operating segments and allocating resources to those segments. Such
information may be different from that reported in the consolidated statements of
financial position and consolidated statements of comprehensive income and the Globe
Group will provide explanations and reconciliations of the differences. This Standard is
only applicable to an entity that has debt or equity instruments that are traded in a public
market or that files (or is in the process of filing) its financial statements with a securities
commission or similar party. The Globe Group has enhanced its current manner of
reporting segment information to include additional information used by management
internally (see Note 29). Segment information for prior years was restated to include the
additional information.
·
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation
This Interpretation provides guidance on identifying foreign currency risks that qualify
for hedge accounting in the hedge of net investment; where within the group the hedging
instrument can be held as a hedge of a net investment; and how an entity should
determine the amount of foreign currency gains or losses, relating to both the net
investment and the hedging instrument, to be recycled on disposal of the net investment.
·
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate
The amended PFRS 1 allows an entity to determine the ‘cost’ of investments in
subsidiaries, jointly controlled entities or associates in its opening PFRS financial
statements in accordance with PAS 27, Consolidated and Separate Financial Statements,
or using a deemed cost method. The amendment to PAS 27 required all dividends from a
subsidiary, jointly controlled entity or associate to be recognized in the statements of
comprehensive income in the separate financial statement.
·
PFRS 2, Share-based Payment - Vesting Condition and Cancellations
This Standard has been revised to clarify the definition of a vesting condition and
prescribes the treatment for an award that is effectively cancelled. It defines a vesting
condition as a condition that includes an explicit or implicit requirement to provide
services. It further requires non-vesting conditions to be treated in a similar fashion to
market conditions. Failure to satisfy a non-vesting condition that is within the control of
either the entity or the counterparty is accounted for as cancellation. However, failure to
satisfy a non-vesting condition that is beyond the control of either party does not give rise
to a cancellation.
·
Amendments to PFRS 7, Financial Instruments: Disclosures - Improving Disclosures
about Financial Instruments
The amendments to PFRS 7 introduce enhanced disclosures about fair value measurement
and liquidity risk. The amendments to PFRS 7 require fair value measurements for each
class of financial instruments to be disclosed by the source of inputs, using the following
three-level hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets
*SGVMC113950*
-5or liabilities (Level 1); (b) inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (as prices) or indirectly (derived from
prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable
market data (unobservable inputs) (Level 3). The level within which the fair value
measurement is categorized must be based on the lowest level of input to the instrument’s
valuation that is significant to the fair value measurement in its entirety.
Additional disclosures required in the amendments to PFRS 7 are shown in Note 28 Capital and Risk Management and Financial Instruments. The amendments to PFRS 7
also introduce two major changes in liquidity risk disclosures as follows: (a) exclusion of
derivative liabilities from maturity analysis unless the contractual maturities are essential
for an understanding of the timing of the cash flows and (b) inclusion of financial
guarantee contracts in the contractual maturity analysis based on the maximum amount
guaranteed.
·
Amendments to PAS 32, Financial Instruments: Presentation, and PAS 1, Presentation
of Financial Statements - Puttable Financial Instruments and Obligations Arising on
Liquidation
These Amendments specify, among others, that puttable financial instruments will be
classified as equity if they have all of the following specified features: (a) the instrument
entitles the holder to require the entity to repurchase or redeem the instrument (either on
an ongoing basis or on liquidation) for a pro rata share of the entity’s net assets; (b) the
instrument is in the most subordinate class of instruments, with no priority over other
claims to the assets of the entity on liquidation; (c) all instruments in the subordinate
class have identical features; (d) the instrument does not include any contractual
obligation to pay cash or financial assets other than the holder’s right to a pro rata share
of the entity’s net assets; and (e) the total expected cash flows attributable to the
instrument over its life are based substantially on the profit or loss, a change in
recognized net assets, or a change in the fair value of the recognized and unrecognized
net assets of the entity over the life of the instrument.
·
Philippine Interpretation IFRIC-9 and PAS 39 Amendments - Embedded Derivatives
This Amendment to Philippine Interpretation IFRIC-9, Reassessment of Embedded
Derivatives, requires an entity to assess whether an embedded derivative must be
separated from a host contract when the entity reclassifies a hybrid financial asset out of
the fair value through profit or loss category. This assessment is to be made based on
circumstances that existed on the later of the date the entity first became a party to the
contract and the date of any contract amendments that significantly change the cash flows
of the contract. PAS 39, Financial Instruments: Recognition and Measurement, now
states that if an embedded derivative cannot be reliably measured, the entire hybrid
instrument must remain classified as at fair value through profit or loss.
2.4.1
Improvements to PFRSs
In May 2008 and April 2009, the International Accounting Standards Board (IASB)
issued omnibus amendments to certain standards, primarily with a view to removing
inconsistencies and clarifying wordings. There are separate transitional provisions for
each standard. The adoption of these amended standards did not have any significant
impact on the consolidated financial statements of the Globe Group, unless otherwise
indicated.
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-6·
PAS 18, Revenue
The Amendment adds guidance (which accompanies the Standard) to determine
whether an entity is acting as a principal or as an agent. The features to consider are
whether the entity (a) has primary responsibility for providing the goods or service;
(b) has inventory risk; (c) has discretion in establishing prices; and (d) bears the
credit risk. The Group assessed its revenue arrangements against these criteria and
concluded that it is acting as principal in some arrangements and as an agent in other
arrangements.
·
PAS 1, Presentation of Financial Statements
Assets and liabilities classified as held for trading are not automatically classified
as current in the consolidated statements of financial position.
·
PAS 16, Property, Plant and Equipment
The Amendment replaces the term ‘net selling price’ with ‘fair value less costs to
sell’, to be consistent with PFRS 5, Non-current Assets Held for Sale and
Discontinued Operations, and PAS 36, Impairment of Asset.
In addition, items of property, plant and equipment held for rental that are routinely
sold in the ordinary course of business after rental, are transferred to inventory when
rental ceases and they are held for sale. Proceeds of such sales are subsequently
shown as revenue. Cash payments on initial recognition of such items, the cash
receipts from rents and subsequent sales are all shown as cash flows from operating
activities.
·
PAS 19, Employee Benefits
It revises the definition of: (a) “past service costs” to include reductions in benefits
related to past services (“negative past service costs”) and to exclude reductions in
benefits related to future services that arise from plan amendments. Amendments to
plans that result in a reduction in benefits related to future services are accounted for
as a curtailment, (b) “return on plan assets” to exclude plan administration costs if
they have already been included in the actuarial assumptions used to measure the
defined benefit obligation, and (c) “short-term” and “other long-term” employee
benefits to focus on the point in time at which the liability is due to be settled. Also,
it deletes the reference to the recognition of contingent liabilities to ensure
consistency with PAS 37, Provisions, Contingent Liabilities and Contingent Assets.
·
PAS 23, Borrowing Costs
This revises the definition of borrowing costs to consolidate the types of items that
are considered components of ‘borrowing costs’, i.e., components of the interest
expense calculated using the effective interest rate method.
·
PAS 28, Investment in Associates
If an associate is accounted for at fair value in accordance with PAS 39, only the
requirement of PAS 28 to disclose the nature and extent of any significant
restrictions on the ability of the associate to transfer funds to the entity in the form
of cash or repayment of loans applies. Also, an investment in an associate is a
single asset for the purpose of conducting the impairment test. Therefore, there is
no separate allocation to the goodwill included in the investment balance.
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-7·
PAS 31, Interests in Joint Ventures
If a joint venture is accounted for at fair value in accordance with PAS 39, only the
requirements of PAS 31 to disclose the commitments of the venturer and the joint
venture, as well as summary of financial information about the assets, liabilities,
income and expenses will apply.
·
PAS 36, Impairment of Assets
When discounted cash flows are used to estimate “fair value less cost to sell”
additional disclosure is required about the discount rate, consistent with disclosures
required when the discounted cash flows are used to estimate “value in use”.
·
PAS 38, Intangible Assets
Expenditure on advertising and promotional activities is recognized as an expense
when the Group either has the right to access the goods or has received the services.
·
PAS 39, Financial Instruments: Recognition and Measurement
Improvements to PAS 39 are: (a) changes in circumstances relating to derivatives specifically derivatives designated or de-designated as hedging instruments after
initial recognition - are not reclassifications; (b) when financial assets are
reclassified as a result of an insurance company changing its accounting policy in
accordance with paragraph 45 of PFRS 4, Insurance Contracts, this is a change in
circumstance, not a reclassification; (c) removes the reference to a “segment” when
determining whether an instrument qualifies as a hedge; and (d) requires use of the
revised effective interest rate (rather than the original effective interest rate) when
re-measuring a debt instrument on the cessation of fair value hedge accounting.
·
PAS 40, Investment Properties
It revises the scope (and the scope of PAS 16) to include property that is being
constructed or developed for future use as an investment property. Where an entity
is unable to determine the fair value of an investment property under construction,
but expects to be able to determine its fair value on completion, the investment
under construction will be measured at cost until such time as fair value can be
determined or construction is complete.
2.5 Future Changes in Accounting Policies
The Globe Group will adopt the following standards and interpretations enumerated below
when these become effective. Except as otherwise indicated, the Globe Group does not
expect the adoption of these new and amended PFRS and Philippine Interpretations to have
significant impact on the consolidated financial statements.
· Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate
Financial Statements
The revised standards are effective for annual periods beginning on or after July 1, 2009.
The revised PFRS 3 introduces a number of changes in the accounting for business
combinations that will impact the amount of goodwill recognized, the reported results in
the period that an acquisition occurs, and future reported results. The revised PAS 27
requires, among others, that (a) change in ownership interests of a subsidiary (that do not
result in loss of control) will be accounted for as an equity transaction and will have no
impact on goodwill nor will it give rise to a gain or loss; (b) losses incurred by the
subsidiary will be allocated between the controlling and non-controlling interests
*SGVMC113950*
-8(previously referred to as ‘minority interests’), even if the losses exceed the noncontrolling equity investment in the subsidiary; and (c) on loss of control of a subsidiary,
any retained interest will be remeasured to fair value and this will impact the gain or loss
recognized on disposal.
The changes introduced by the revised PFRS 3 must be applied prospectively, while
changes introduced by the revised PAS 27 must be applied retrospectively with a few
exceptions. The changes will affect future acquisitions and transactions with noncontrolling interests.
· Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate
This Interpretation, which will be effective January 1, 2012, covers accounting for revenue
and associated expenses by entities that undertake the construction of real estate directly or
through subcontractors. This Interpretation requires that revenue on construction of real
estate be recognized only upon completion, except when such contract qualifies as
construction contract to be accounted for under PAS 11, Construction Contracts, or
involves rendering of services in which case revenue is recognized based on stage of
completion. Contracts involving provision of services with the construction materials and
where the risks and reward of ownership are transferred to the buyer on a continuous basis,
will also be accounted for based on stage of completion. This Interpretation will not be
applicable to the Globe Group.
· Philippine Interpretation IFRIC 17, Distributions of Non-cash Assets to Owners
This Interpretation provides guidance on non-reciprocal distribution of assets by an entity
to its owners acting in their capacity as owners, including distributions of non-cash assets
and those giving the shareholders a choice of receiving non-cash assets or cash, provided
that: (a) all owners of the same class of equity instruments are treated equally; and (b) the
non-cash assets distributed are not ultimately controlled by the same party or parties both
before and after the distribution, and as such, excluding transactions under common
control. This Interpretation is applied prospectively and is applicable for annual periods
beginning on or after July 1, 2009 with early application permitted.
· Amendment to PAS 39, Financial Instruments: Recognition and Measurement Eligible
Hedged Items
This Amendment, which will be effective for annual periods beginning on or after
July 1, 2009, addresses only the designation of a one-sided risk in a hedged item, and the
designation of inflation as a hedged risk or portion in particular situations. The
Amendment clarifies that an entity is permitted to designate a portion of the fair value
changes or cash flow variability of a financial instrument as a hedged item. The Globe
Group will assess the impact of this Amendment on its current manner of accounting for
hedged items.
· Amendments to PFRS 2, Share-based Payment: Group Cash-settled Transactions
The IASB amended the IFRS 2 to clarify its scope and the accounting for group cashsettled share-based payment transactions in the separate or individual financial statement
of the entity receiving the goods or services when that entity has no obligation to settle the
share-based payment transaction. This Amendment is effective January 1, 2010. It
supersedes IFRIC 8, Scope of IFRS 2 and IFRIC 11, IFRIC 2 - Group and Treasury Share
Transactions.
*SGVMC113950*
-9· Philippine Interpretation IFRIC 18, Transfer of Assets from Customers
This Interpretation is to be applied prospectively to transfers of assets from customers
received on or after July 1, 2009. The Interpretation provides guidance on how to account
for items of property, plant and equipment received from customers or cash that is received
and used to acquire or construct assets that are used to connect the customer to a network
or to provide ongoing access to a supply of goods or services or both. When the transferred
item meets the definition of an asset, the asset is measured at fair value on initial
recognition as part of an exchange transaction. The service(s) delivered are identified and
the consideration received (the fair value of the asset) allocated to each identifiable
service. Revenue is recognized as each service is delivered by the entity.
2.5.1. Improvements to PFRSs
The omnibus amendments to PFRSs issued in 2009 were issued primarily with a view to
removing inconsistencies and clarifying wordings. There are separate transitional
provisions for each standard and will become effective January 1, 2010. Except otherwise
stated, the Globe Group does not except the adoption of these new standards to have
significant impact on the consolidated financial statements.
·
PFRS 2, Share-based Payment
This Amendment clarifies that the contribution of a business on formation of a joint
venture and combinations under common control are not within the scope of PFRS 2
even though they are out of scope of PFRS 3. The amendment is effective for
financial years on or after July 1, 2009.
·
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations
This Amendment clarifies that the disclosures required in respect of non-current
assets and disposal groups classified as held for sale or discontinued operations are
only those set out in PFRS 5. The disclosure requirements of other PFRSs only apply
if specifically required for such non-current assets or discontinued operations.
·
PFRS 8, Operating Segments
The Amendment clarifies that segment assets and liabilities need only be reported
when those assets and liabilities are included in measures that are used by the chief
operating decision maker.
·
PAS 1, Presentation of Financial Statements
The Amendment clarifies that the terms of a liability that could result, at anytime, in
its settlement by the issuance of equity instruments at the option of the counterparty
do not affect its classification.
·
PAS 7, Statement of Cash Flows
This Amendment explicitly states that only expenditure that results in a recognized
asset can be classified as a cash flow from investing activities.
·
PAS 17, Leases
Removes the specific guidance on classifying land as a lease. Prior to the amendment,
leases of land were classified as operating leases. The Amendment now requires that
leases of land are classified as either ‘finance’ or ‘operating’ in accordance with the
general principles of PAS 17. The amendments will be applied retrospectively.
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- 10 ·
PAS 36, Impairment of Assets
This Amendment clarifies that the largest unit permitted for allocating goodwill,
acquired in a business combination, is the operating segment as defined in PFRS 8
before aggregation for reporting purposes.
·
PAS 38, Intangible Assets
This Amendment clarifies that if an intangible asset acquired in a business
combination is identifiable only with another intangible asset, the acquirer may
recognize the group of intangible assets as a single asset provided the individual
assets have similar useful lives. Also clarifies that the valuation techniques presented
for determining the fair value of intangible assets acquired in a business combination
that are not traded in active markets are only examples and are not restrictive on the
methods that can be used.
·
PAS 39, Financial Instruments: Recognition and Measurement
This Amendment clarifies the following: 1) that a prepayment option is considered
closely related to the host contract when the exercise price of a prepayment option
reimburses the lender up to the approximate present value of lost interest for the
remaining term of the host contract; 2) that the scope exemption for contracts between
an acquirer and a vendor in a business combination to buy or sell an acquiree at a
future date applies only to binding forward contracts, and not derivative contracts
where further actions by either party are still to be taken and 3) that gains or losses on
cash flow hedges of a forecast transaction that subsequently results in the recognition
of a financial instrument or on cash flow hedges of recognized financial instruments
should be reclassified in the period that the hedged forecast cash flows affect profit or
loss.
·
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives
This Interpretation clarifies that it does not apply to possible reassessment, at the date
of acquisition, to embedded derivatives in contracts acquired in a combination
between entities or businesses under common control or the formation of a joint
venture.
·
Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign
Operation
This Interpretation states that, in a hedge of a net investment in a foreign operation,
qualifying hedging instruments may be held by any entity or entities within the group,
including the foreign operation itself, as long as the designation, documentation and
effectiveness requirements of PAS 39 that relate to a net investment hedge are
satisfied.
2.6 Significant Accounting Policies
2.6.1
Revenue Recognition
The Globe Group provides mobile and wireline voice and data communication
services which are both provided under postpaid and prepaid arrangements.
*SGVMC113950*
- 11 The Globe Group assesses its revenue arrangements against specific criteria in order
to determine if it is acting as principal or agent. The following specific recognition
criteria must also be met before revenue is recognized.
Revenue is recognized when the delivery of the products or services has occurred and
collectibility is reasonably assured.
Revenue is stated at amounts invoiced and accrued to customers, taking into
consideration the bill cycle cut-off (for postpaid subscribers), the amount charged
against preloaded airtime value (for prepaid subscribers), switch-monitored traffic
(for carriers and content providers) and excludes value-added tax (VAT) and overseas
communication tax. Inbound traffic charges, net of discounts and outbound traffics
charges, are accrued based on actual volume of traffic monitored by Globe Group’s
network and in the traffic settlement system.
2.6.1.1 Service Revenue
2.6.1.1.1
Subscribers
Revenues from subscribers principally consist of: (1) fixed
monthly service fees for postpaid wireless and wireline voice and
data subscribers and wireless prepaid subscription fees for
discounted promotional short messaging services (SMS);
(2) usage of airtime and toll fees for local, domestic and
international long distance calls in excess of consumable fixed
monthly service fees, less (a) bonus airtime credits and airtime on
free Subscribers’ Identification module (SIM), and (b) prepaid
reload discounts, (3) revenues from value-added services (VAS)
such as SMS in excess of consumable fixed monthly service fees
(for postpaid) and free SMS allocations (for prepaid), multimedia
messaging services (MMS), content and infotext services, net of
amounts settled with carriers owning the network where the
outgoing voice call or sms terminates and payout to content
providers; (4) inbound revenues from other carriers which
terminate their calls to the Globe Group’s network less discounts;
(5) revenues from international roaming services; (6) usage of
broadband and internet services in excess of fixed monthly
service fees; and (7) one-time service connection fees (for
wireline voice and data subscribers).
Postpaid service arrangements include fixed monthly service
fees, which are recognized over the subscription period on a prorata basis. Monthly service fees billed in advance are initially
deferred and recognized as revenues during the period when
earned. Telecommunications services provided to postpaid
subscribers are billed throughout the month according to the bill
cycles of subscribers. As a result of bill cycle cut-off, monthly
service revenues earned but not yet billed at the end of the month
are estimated and accrued. These estimates are based on actual
usage less estimated consumable usage using historical ratio of
consumable usage over billable usage.
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- 12 Proceeds from over-the-air reloading channels and the sale of
prepaid cards are deferred and shown as “Unearned revenues” in
the consolidated statements of financial position. Revenue is
recognized upon actual usage of airtime value net of discounts on
promotional calls and net of discounted promotional SMS usage
and bonus reloads. Unused airtime value is recognized as
revenue upon expiration.
The Globe Group offers loyalty programmes which allow its
subscribers to accumulate points when they purchase services
from the Globe Group. The points can then be redeemed for free
services, discounts and raffle coupons, subject to a minimum
number of points being obtained. The consideration received or
receivable is allocated between the sale of services and award
credits. The portion of the consideration allocated to the award
credits is accounted for as unearned revenues. This will be
recognized as revenue upon the award redemption.
2.6.1.1.2
Traffic
Inbound revenues refer to traffic originating from other
telecommunications providers terminating to the Globe Group’s
network, while outbound charges represent traffic sent out or
mobile content delivered using agreed termination rates and/or
revenue sharing with other foreign and local carriers and content
providers. Adjustments are made to the accrued amount for
discrepancies between the traffic volume per Globe Group’s
records and per records of the other carriers as these are
determined and/or mutually agreed upon by the parties.
Uncollected inbound revenues are shown as traffic settlements
receivable under the “Receivables” account, while unpaid
outbound charges are shown as traffic settlements
payable under the “Accounts payable and accrued expenses”
account in the consolidated statements of financial position
unless a legal right of offset exists.
2.6.1.2 Nonservice revenues
Proceeds from sale of handsets, phonekits, SIM packs, modems and
accessories are recognized upon delivery of the item. The related cost or net
realizable value of handsets, phonekits, modems, SIM packs and accessories
sold to customers are presented as “Cost of sales”, in the consolidated
statements of comprehensive income.
2.6.1.3 Others
Interest income is recognized as it accrues using the effective interest rate
method.
Lease income from operating lease is recognized on a straight-line basis over
the lease term.
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- 13 Dividend income is recognized when the Globe Group’s right to receive
payment is established.
2.6.2
Subscriber Acquisition and Retention Costs
The related costs incurred in connection with the acquisition of subscribers are
charged against current operations. Subscriber acquisition costs primarily include
commissions, handset, phonekit and device subsidies and selling expenses. Subsidies
represent the difference between the cost of handsets, phonekits, SIM cards, modems
and accessories (included in the “Cost of sales” and “Impairment losses and others”
account), and the price offered to the subscribers (included in the “Nonservice
revenues” account). Retention costs for existing postpaid subscribers are in the form
of free handsets and bill credits. Free handsets are charged against current operations
and included under the “General, selling and administrative expenses” account in the
consolidated statements of comprehensive income upon delivery or when there is a
contractual obligation to deliver. Bill credits are deducted from service revenues
upon application against qualifying subscriber bills.
2.6.3
Cash and Cash Equivalents
Cash includes cash on hand and in banks. 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 date of placement and that are subject to an
insignificant risk of changes in value.
2.6.4
Financial Instruments
2.6.4.1 General
2.6.4.1.1
Initial recognition and fair value measurement
Financial instruments are recognized in the Globe Group’s
consolidated statements of financial position when the Globe
Group becomes a party to the contractual provisions of the
instrument. 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 (regular way
trades) on the trade date, i.e., the date that the Group commits to
purchase or sell the asset.
Financial instruments are recognized initially at fair value.
Except for financial instruments at fair value through profit or
loss (FVPL), the initial measurement of financial assets includes
directly attributable transaction costs.
The Globe Group classifies its financial assets into the following
categories: financial assets at FVPL, held-to-maturity (HTM)
investments, AFS investments, and loans and receivables. The
Globe Group classifies its financial liabilities into financial
liabilities at FVPL and other financial liabilities. 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
*SGVMC113950*
- 14 initial recognition and, where allowed and appropriate, reevaluates such designation every reporting date.
The fair value for financial instruments traded in active markets
at the end of reporting date is based on their quoted market price
or dealer price quotations (bid price for long positions and ask
price for short positions), without any deduction for transaction
costs. When current bid and ask prices are not available, the
price of the most recent transaction provides evidence of the
current fair value as long as there has not been a significant
change in economic circumstances since the time of the
transaction.
For all other financial instruments not listed in an active market,
the fair value is determined by using appropriate valuation
techniques. Valuation techniques include net present value
techniques, comparison to similar instruments for which market
observable prices exist, option pricing models, and other relevant
valuation models. Any difference noted between the fair value
and the transaction price is treated as expense or income, unless
it qualifies for recognition as some type of asset or liability.
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 Globe Group recognizes the difference between the
transaction price and fair value (a “Day 1” profit) in profit or
loss. In cases where no observable data is used, 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 Globe
Group determines the appropriate method of recognizing the
“Day 1” profit amount.
2.6.4.1.2
Financial Assets or Financial Liabilities at FVPL
This category consists of financial assets or financial liabilities
that are held for trading or designated by management as FVPL
on initial recognition. Derivative instruments, except those
designated as hedging instruments in hedge relationships as
defined by PAS 39, are classified under this category.
Derivatives, including separated embedded derivatives, are also
classified as held for trading unless they are designated as
effective hedging instruments.
Financial assets or financial liabilities at FVPL are recorded in
the consolidated statements of financial position at fair value,
with changes in fair value being recorded in profit and loss.
Interest earned or incurred is recorded as “Interest income or
expense”, respectively, in profit and loss while dividend income
is recorded when the right of payment has been established.
*SGVMC113950*
- 15 Financial assets or financial liabilities are classified in this
category as designated by management on initial recognition
when any of the following criteria are met:
· the designation eliminates or significantly reduces the
inconsistent treatment that would otherwise arise from
measuring the assets or liabilities or recognizing gains or
losses on a different basis; or
· the assets and liabilities are part of a group of financial assets,
financial liabilities or both which are managed and their
performance are evaluated on a fair value basis in accordance
with a documented risk management or investment strategy;
or
· the financial instrument contains an embedded derivative,
unless the embedded derivative does not significantly modify
the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
As of December 31, 2009, 2008 and 2007, the Globe Group has
not classified any financial asset or liability as Financial Assets
or Financial Liabilities at FVPL.
2.6.4.1.3
HTM investments
HTM investments are quoted non-derivative financial assets with
fixed or determinable payments and fixed maturities for which
the Globe Group’s management has the positive intention and
ability to hold to maturity. Where the Globe Group sells other
than an insignificant amount of HTM investments, the entire
category would be tainted and reclassified as AFS investments.
After initial measurement, HTM investments are subsequently
measured at amortized cost using the effective interest rate
method, less any impairment losses. Amortized cost is calculated
by taking into account any discount or premium on acquisition
and fees that are an integral part of the effective interest rate.
The amortization is included in “Interest income” in the
consolidated statements of comprehensive income. Gains and
losses are recognized in profit or loss when the HTM investments
are derecognized and impaired, as well as through the
amortization process. The effects of restatement of foreign
currency-denominated HTM investments are recognized in profit
or loss.
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- 16 As of December 31, 2007, the Globe Group has classified certain
special deposits as HTM investments. These investments
matured in 2008. There are no outstanding HTM investments as
of December 31, 2009 and 2008.
2.6.4.1.4
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are not entered into with the intention of
immediate or short-term resale and are not classified as financial
assets held for trading, designated as AFS investments or
designated at FVPL.
This accounting policy relates to the consolidated statements of
financial position caption “Receivables”, which arise primarily
from subscriber and traffic revenues and other types of
receivables, “Short-term investments”, which arise primarily
from unquoted debt securities, and other nontrade receivables
included under “Prepayments and other current assets” and loans
receivable included under “Other noncurrent assets”.
Receivables are recognized initially at fair value, which normally
pertains to the billable amount. After initial measurement,
receivables are subsequently measured at amortized cost using
the effective interest rate method, less any allowance for
impairment losses. Amortized cost is calculated by taking into
account any discount or premium on the issue and fees that are an
integral part of the effective interest rate. Penalties, termination
fees and surcharges on past due accounts of postpaid subscribers
are recognized as revenues upon collection. The losses arising
from impairment of receivables are recognized in the
“Impairment losses and others” account in the consolidated
statements of comprehensive income. The level of allowance for
impairment losses is evaluated by management on the basis of
factors that affect the collectibility of accounts (see accounting
policy on 2.6.4.2 Impairment of Financial Assets).
Short-term investments, other nontrade receivables and loans
receivable are recognized initially at fair value, which normally
pertains to the consideration paid. Similar to receivables,
subsequent to initial recognition, short-term investments, other
nontrade receivables and loans receivables are measured at
amortized cost using the effective interest rate method, less any
allowance for impairment losses.
*SGVMC113950*
- 17 2.6.4.1.5
AFS investments
AFS investments are those investments which are designated as
such or do not qualify to be classified as designated as FVPL,
HTM investments or loans and receivables. They are purchased
and held indefinitely, and may be sold in response to liquidity
requirements or changes in market conditions. They include
equity investments, money market papers and other debt
instruments.
After initial measurement, AFS investments are subsequently
measured at fair value. Interest earned on holding AFS
investments are reported as interest income using the effective
interest rate. The unrealized gains and losses arising from the
fair valuation of AFS investments are excluded from reported
earnings and are reported as “Other reserves” (net of tax where
applicable) in the equity section of the consolidated statements of
financial position. When the investment is disposed of, the
cumulative gains or losses previously recognized in equity is
recognized in profit or loss.
When the fair value of AFS investments cannot be measured
reliably because of lack of reliable estimates of future cash flows
and discount rates necessary to calculate the fair value of
unquoted equity instruments, these investments are carried at
cost, less any allowance for impairment losses. Dividends earned
on holding AFS investments are recognized in profit or loss when
the right of payment has been established.
The Globe Group evaluates its AFS investments whether the
ability and intention to sell them in the near term is still
appropriate. When the Globe Group is unable to trade the AFS
investments due to inactive markets and management intent
significantly changes to do so in the foreseeable future, the Globe
Group may elect to reclassify it in rare circumstances.
The losses arising from impairment of such investments are
recognized as “Impairment losses and others” in consolidated
statements of comprehensive income.
2.6.4.1.6
Other financial liabilities
Issued financial instruments or their components, which are not
designated at FVPL are classified as other financial liabilities
where the substance of the contractual arrangement results in the
Globe Group having an obligation either to deliver cash or
another financial asset to the holder, or to satisfy the obligation
other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of own equity shares. The
components of issued financial instruments that contain both
liability and equity elements are accounted for separately, with
the equity component being assigned the residual amount after
*SGVMC113950*
- 18 deducting from the instrument as a whole the amount separately
determined as the fair value of the liability component on the date
of issue. After initial measurement, other financial liabilities are
subsequently measured at amortized cost using the effective
interest rate method. Amortized cost is calculated by taking into
account any discount or premium on the issue and fees that are an
integral part of the effective interest rate. Any effects of
restatement of foreign currency-denominated liabilities are
recognized in profit or loss.
This accounting policy applies primarily to the Globe Group’s
debt, accounts payable and other obligations that meet the above
definition (other than liabilities covered by other accounting
standards, such as income tax payable).
2.6.4.1.7
Derivative Instruments
2.6.4.1.7.1 General
The Globe Group enters into short-term deliverable and
nondeliverable currency forward contracts to manage its
currency exchange exposure related to short-term foreign
currency-denominated monetary assets and liabilities and
foreign currency linked revenues. The Globe Group also
enters into structured currency forward contracts where call
options are sold in combination with such currency forward
contracts.
The Globe Group enters into deliverable prepaid forward
contracts that entitle the Globe Group to a discount on the
contracted forward rate. Such contracts contain embedded
currency derivatives that are bifurcated and marked-tomarket through earnings, with the host debt instrument being
accreted to its face value.
The Globe Group enters into short-term interest rate swap
contracts to manage its interest rate exposures on certain
short-term floating rate peso investments. The Globe Group
also enters into long-term currency and interest rate swap
contracts to manage its foreign currency and interest rate
exposures arising from its long-term loan. Such swap
contracts are sometimes entered into in combination with
options. The Globe Group also sells covered currency
options as cost subsidy for outstanding currency swap
contracts.
*SGVMC113950*
- 19 2.6.4.1.7.2 Recognition and measurement
Derivative financial instruments are initially recognized at
fair value on the date on which a derivative contract is
entered into and are subsequently remeasured at fair value.
Derivatives are carried as financial assets when the fair value
is positive and as financial liabilities when the fair value is
negative. The method of recognizing the resulting gain or
loss depends on whether the derivative is designated as a
hedge of an identified risk and qualifies for hedge accounting
treatment. The objective of hedge accounting is to match the
impact of the hedged item and the hedging instrument in
profit or loss. To qualify for hedge accounting, the hedging
relationship must comply with strict requirements such as the
designation of the derivative as a hedge of an identified risk
exposure, hedge documentation, probability of occurrence of
the forecasted transaction in a cash flow hedge, assessment
(both prospective and retrospective bases) and measurement
of hedge effectiveness, and reliability of the measurement
bases of the derivative instruments.
Upon inception of the hedge, the Globe Group documents the
relationship between the hedging instrument and the hedged
item, its risk management objective and strategy for
undertaking various hedge transactions, and the details of the
hedging instrument and the hedged item. The Globe Group
also documents its hedge effectiveness assessment
methodology, both at the hedge inception and on an ongoing
basis, as to whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
Hedge effectiveness is likewise measured, with any
ineffectiveness being reported immediately in profit or loss.
2.6.4.1.7.3 Types of Hedges
The Globe Group designates derivatives which qualify as
accounting hedges as either: (a) a hedge of the fair value of a
recognized fixed rate asset, liability or unrecognized firm
commitment (fair value hedge); or (b) a hedge of the cash
flow variability of recognized floating rate asset and liability
or forecasted sales transaction (cash flow hedge).
Fair Value Hedges
Fair value hedges are hedges of the exposure to variability in
the fair value of recognized assets, liabilities or unrecognized
firm commitments. The gain or loss on a derivative
*SGVMC113950*
- 20 instrument designated and qualifying as a fair value hedge, as
well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in profit or loss
in the same accounting period. Hedge effectiveness is
determined based on the hedge ratio of the fair value changes
of the hedging instrument and the underlying hedged item.
When the hedge ceases to be highly effective, hedge
accounting is discontinued.
As of December 31, 2009, 2008 and 2007, there were no
derivatives designated and accounted for as fair value hedges.
Cash Flow Hedges
The Globe Group designates as cash flow hedges the
following derivatives: (a) interest rate swaps as cash flow
hedge of the interest rate risk of a floating rate foreign
currency-denominated obligation and (b) certain foreign
exchange forward contracts as cash flow hedge of expected
United States Dollar (USD) revenues.
A cash flow hedge is a hedge of the exposure to variability in
future cash flows related to a recognized asset, liability or a
forecasted sales transaction. Changes in the fair value of a
hedging instrument that qualifies as a highly effective cash
flow hedge are recognized in “Other reserves,” which is a
component of equity. Any hedge ineffectiveness is
immediately recognized in profit or loss.
If the hedged cash flow results in the recognition of a
nonfinancial asset or liability, gains and losses previously
recognized directly in equity are transferred from equity and
included in the initial measurement of the cost or carrying
value of the asset or liability. Otherwise, for all other cash
flow hedges, gains and losses initially recognized in equity
are transferred from equity to profit or loss in the same
period or periods during which the hedged forecasted
transaction or recognized asset or liability affect earnings.
Hedge accounting is discontinued prospectively when the
hedge ceases to be highly effective. When hedge accounting
is discontinued, the cumulative gains or losses on the hedging
instrument that has been reported in “Other reserves” is
retained in other comprehensive income until the hedged
transaction impacts profit or loss. When the forecasted
transaction is no longer expected to occur, any net
cumulative gains or losses previously reported in “Other
reserves” is recognized immediately in profit or loss.
*SGVMC113950*
- 21 The effective portion of the hedge transaction coming from
the fair value changes of the currency forwards are
subsequently recycled from equity to profit or loss and is
presented as part of the US dollar-based revenues.
2.6.4.1.7.4 Other Derivative Instruments Not Accounted for as
Accounting Hedges
Certain freestanding derivative instruments that provide
economic hedges under the Globe Group’s policies either do
not qualify for hedge accounting or are not designated as
accounting hedges. Changes in the fair values of derivative
instruments not designated as hedges are recognized
immediately in profit or loss. For bifurcated embedded
derivatives in financial and nonfinancial contracts that are
not designated or do not qualify as hedges, changes in the fair
values of such transactions are recognized in profit or loss.
2.6.4.1.8
Offsetting
Financial assets and financial liabilities are offset and the net
amount is reported in the consolidated statements of financial
position if, and only if, there is a currently enforceable legal right
to offset the recognized amounts and there is an intention to settle
on a net basis, or to realize the asset and settle the liability
simultaneously. This is not generally the case with master
netting agreements; thus, the related assets and liabilities are
presented gross in the consolidated statements of financial
position.
2.6.4.2 Impairment of Financial Assets
The Globe Group assesses at end of the reporting date whether a financial
asset or group of financial assets is impaired.
2.6.4.2.1
Assets carried at amortized cost
If there is objective evidence that an impairment loss on financial
assets carried at amortized cost (e.g. receivables) has been
incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of
estimated future cash flows discounted at the asset’s original
effective interest rate. Time value is generally not considered
when the effect of discounting is not material. The carrying
amount of the asset is reduced through the use of an allowance
account. The amount of the loss shall be recognized in profit or
loss.
The Globe Group first assesses whether objective evidence of
impairment exists individually for financial assets that are
individually significant, and individually or collectively for
financial assets that are not individually significant. If it is
determined that no objective evidence of impairment exists for an
individually assessed financial asset, whether significant or not,
*SGVMC113950*
- 22 the asset is included in a group of financial assets with similar
credit risk characteristics and that group of financial assets is
collectively assessed for impairment. 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 of impairment.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal
of an impairment loss is recognized in profit or loss to the extent
that the carrying value of the asset does not exceed its amortized
cost at the reversal date.
With respect to receivables, the Globe Group performs a regular
review of the age and status of these accounts, designed to
identify accounts with objective evidence of impairment and
provide the appropriate allowance for impairment losses. The
review is accomplished using a combination of specific and
collective assessment approaches, with the impairment losses
being determined for each risk grouping identified by the Globe
Group.
2.6.4.2.1.1 Subscribers
Full allowance for impairment losses is provided for
receivables from permanently disconnected wireless and
wireline subscribers. Permanent disconnections are made
after a series of collection steps following nonpayment by
postpaid subscribers. Such permanent disconnections
generally occur within a predetermined period from
statement date.
The allowance for impairment loss on wireless subscriber
accounts is determined based on the results of the net flow to
write-off methodology. Net flow tables are derived from
account-level monitoring of subscriber accounts between
different age brackets, from current to 1 day past due to 210
days past due. The net flow to write-off methodology relies
on the historical data of net flow tables to establish a
percentage (“net flow rate”) of subscriber receivables that are
current or in any state of delinquency as of reporting date that
will eventually result in write-off. The allowance for
impairment losses is then computed based on the outstanding
balances of the receivables at the end of reporting date and
the net flow rates determined for the current and each
delinquency bracket.
*SGVMC113950*
- 23 For active residential and business wireline voice
subscribers, full allowance is generally provided for
outstanding receivables that are past due by 90 and 150 days,
respectively. Full allowance is likewise provided for
receivables from wireline data corporate accounts that are
past due by 150 days.
Regardless of the age of the account, additional impairment
losses are also made for wireless and wireline accounts
specifically identified to be doubtful of collection when there
is information on financial incapacity after considering the
other contractual obligations between the Globe Group and
the subscriber.
2.6.4.2.1.2 Traffic
For traffic receivables, impairment losses are made for
accounts specifically identified to be doubtful of collection
regardless of the age of the account. For receivable balances
that appear doubtful of collection, allowance is provided after
review of the status of settlement with each carrier and
roaming partner, taking into consideration normal payment
cycles, recovery experience and credit history of the parties.
2.6.4.2.1.3 Other receivables
Other receivables from dealers, credit card companies and
other parties are provided with allowance for impairment
losses if specifically identified to be doubtful of collection
regardless of the age of the account.
2.6.4.2.2
AFS investments carried at cost
If there is objective evidence that an impairment loss has been
incurred on an unquoted equity instrument that is not carried at
fair value because its fair value cannot be reliably measured, or
on a derivative asset that is linked to and must be settled by
delivery of such unquoted equity instrument, the amount of the
loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar
financial asset. The carrying amount of the asset is reduced
through the use of an allowance account.
*SGVMC113950*
- 24 2.6.4.2.3
AFS investments carried at fair value
If an AFS investments carried at fair value is impaired, an
amount comprising the difference between its cost (net of any
principal repayment and amortization) and its current fair value,
less any impairment loss previously recognized in profit or loss,
is transferred from equity to profit or loss. Reversals of
impairment losses in respect of equity instruments classified as
AFS are not recognized in profit or loss. Reversals of
impairment losses on debt instruments are made through profit or
loss if the increase in fair value of the instrument can be
objectively related to an event occurring after the impairment loss
was recognized in profit or loss.
2.6.4.3 Derecognition of Financial Instruments
2.6.4.3.1
Financial Asset
A financial asset (or, where applicable a part of a financial asset
or part of a group of financial assets) is derecognized where:
·
the rights to receive cash flows from the asset have expired;
·
the Globe Group retains the right to receive cash flows from
the asset, but has assumed an obligation to pay them in full
without material delay to a third party under a “pass-through”
arrangement; or
·
the Globe Group has transferred its rights to receive
cashflows from the asset and either (a) has transferred
substantially all the risks and rewards of ownership or (b) has
neither transferred nor retained the risk and rewards of the
asset but has transferred the control of the asset.
Where the Globe Group has transferred its rights to receive cash
flows from an asset and has neither transferred nor retained
substantially all the risks and rewards of the asset nor transferred
control of the asset, the asset is recognized to the extent of the
Globe Group’s continuing involvement in the asset.
2.6.4.3.2
Financial Liability
A financial liability is derecognized when the obligation under
the liability is discharged or cancelled or expires. 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.
*SGVMC113950*
- 25 2.6.5
Inventories and Supplies
Inventories and supplies are stated at the lower of cost or net realizable value (NRV).
NRV for handsets, modems and accessories is the selling price in the ordinary course
of business less direct costs to sell, while NRV for SIM packs, call cards, spare parts
and supplies consists of the related replacement costs. In determining the NRV, the
Globe Group considers any adjustment necessary for obsolescence, which is
generally provided 100% for nonmoving items after a certain period. Cost is
determined using the moving average method.
2.6.6
Property and Equipment
Property and equipment, except land, are carried at cost less accumulated
depreciation, amortization and impairment losses. Land is stated at cost less any
impairment losses.
The initial cost of an item of property and equipment includes its purchase price and
any cost attributable in bringing the property and equipment to its intended location
and working condition. Cost also includes: (a) interest and other financing charges
on borrowed funds used to finance the acquisition of property and equipment to the
extent incurred during the period of installation and construction; and (b) asset
retirement obligations (ARO) specifically on property and equipment
installed/constructed on leased properties.
Subsequent costs are capitalized as part of property and equipment only when it is
probable that future economic benefits associated with the item will flow to the Globe
Group and the cost of the item can be measured reliably. All other repairs and
maintenance are charged against current operations as incurred.
Assets under construction (AUC) are carried at cost and transferred to the related
property and equipment account when the construction or installation and related
activities necessary to prepare the property and equipment for their intended use are
complete, and the property and equipment are ready for service.
Depreciation and amortization of property and equipment commences once the
property and equipment are available for use and computed using the straight-line
method over the estimated useful lives (EUL) of the property and equipment.
Leasehold improvements are amortized over the shorter of their EUL or the
corresponding lease terms.
The EUL of property and equipment are reviewed annually based on expected asset
utilizatio