1. business and industrial
2. company
3. annual report

COVER SHEET
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S.E.C. Registration Number
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(Company’s Full Name)
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(Business Address: No. Street/City/Province)
Czarina G. Turla
818-0973
Contact Person
Company Telephone Number
JUNE 30, 2013
1
2
3 1
Month
Day
Fiscal Year
SEC Form 17-Q
FORM TYPE
Month
Day
Annual Meeting
August 14, 2013
Secondary License Type, If Applicable
C
F
D
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 I.D.
Cashier
STAMPS
Remarks = pls. Use black ink for scanning purposes
SEC REG. NO. A199908874
DFNN INC.
(Consolidated Second Quarter)
Office Address:
3/F Bonifacio Global Center
31st Street corner 2nd Avenue
e-Square IT Park-SEZ
Bonifacio Global City
Taguig, Metro Manila
1634
Telephone No.: 818-0973
Fiscal Year Ending: December 31, 2013
SEC FORM 17-Q
Active Secondary License Type and File Number: None
August 14, 2013
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
1. For the quarterly period ended June 30, 2013
2. Commission identification number A199908874
3. BIR Tax Identification No. 202-955-796-000
4. Exact name of registrant as specified in its charter
DFNN INC.
5. Province, country or other jurisdiction of incorporation or organization
Manila, Philippines
6. Industry Classification Code:
(SEC Use Only)
.................................................................................................................
.........................
7. Address of registrant's principal office
Postal Code 1634
3rd Floor Bonifacio Technology Center
31st Street corner 2nd Avenue, E-Square IT Park - SEZ
Bonifacio Global City, Taguig
Metro Manila, Philippines
8. Registrant's telephone number, including area code
(632) 8180973
9. Former name, former address and former fiscal year, if changed since last
report
Not Applicable
10. Securities registered pursuant to Sections 4 and 8 of the RSA
Title of each Class
Common Shares, PhP 1.00 par value
Number of shares of common
stock outstanding and amount
of debt outstanding
122,851,882
11. Are any or all of the securities listed on the Philippine Stock Exchange?
Yes
[X]
No
[ ]
12. Indicate by check mark whether the registrant:
(a) has filed all reports required to be filed by Section 11 of the Revised
Securities Act (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 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
[ ]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See attached Financial Reports
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the accompanying consolidated financial statements,
which form part of the report. Such consolidated financial statements have been prepared in conformity with
…accounting principles generally accepted in the Philippines ("Philippine GAAP”).
The Company does not experience any seasonality or cyclicality in its interim operations.
Most of the Company’s projects have implementation cycles between 6 months to 24
months. As such revenue comparisons on a quarterly basis may not be comparable. In the
interim period, there were no unusual incidents in nature, size or events affecting assets,
liabilities, equity, net income or cash flows.
Six Months ended June 30
2013 vs. 2012
On a consolidated basis, the Company posted net loss of Php12.5 million in the first six
months of 2013, a Php5.7 million favorable variance from the same period last year.
The Company posted an EBITDA of Php(11.2) million versus EBITDA of Php(25.1) million for
the same period last year. This was a 55.3% favorable change from the same period last
year.
Consolidated Results of Operation
For the 6 months ended
June 30
Fav/(Unfav)
Fav/(Unfav)
in Php millions
2013
2012
Variance
%
Revenue
EBITDA/(Loss)
Net Income
43.1
-11.2
-12.5
31.0
-25.1
-18.2
12.1
13.9
5.7
39.0
55.3
31.3
1
Three Months ended June 30 2013 vs. 2012
On a consolidated basis, the Company posted revenues of Php30.3 million in the second
three months of 2013, a Php11.6 million or 62.0% increase from the same period last year.
This was an increase due to substantial sale of licenses by IWave as compared to same
period of last year.
The Company posted an EBITDA of Php4.0 million versus EBITDA of Php(18.6) million for
the same period last year. This favorably increased by Php22.6 million or 121.5% from the
same period last year.
The Company registered a net loss of P0.1 million in the second quarter, a P12.8 million
favorable variance from the same period last year.
Consolidated Results of Operation
For the 3 months ended
June 30
Fav/(Unfav)
Fav/(Unfav)
in Php millions
2013
2012
Variance
%
Revenue
EBITDA/(Loss)
Net Income
30.3
4.0
-.1
18.7
-18.6
-12.9
11.6
22.6
12.8
62.0
121.5
99.2
Sales by Product (Revenue Breakdown)
For the 3 months ended
June 30
Fav/(Unfav)
in Php millions
2013
2012
Variance
%
Service Fees
Sale of Licenses
Rental
Total
11.5
10.9
7.9
30.3
8.8
3.7
6.2
18.7
2.7
7.2
1.7
11.6
30.6
194.5
27.4
62.0
Material Changes for Revenue
(2nd Quarter 2013 vs. 2012)
Service Revenue and Sale of Licenses.
There were more sales generated by
subsidiaries iWave and IEST in the second quarter of 2013 as compared to the second
quarter of 2012.
2
Rental Fees. Hatchasia had a slight increase in its lease occupancies comparably with last
year’s same period.
Costs and Expenses
Three Months ended June 30 2013 vs. 2012
For the three months ended June 30, 2013, the DFNN group spent a consolidated total of
approximately Php26.3 million, a Php11.0 million less than the same period last year. This
is a favorable 29.4% variance for the comparable period.
For the 3 months ended
June 30
in Php millions
Personnel
Service and other fees
Other Operating Costs
Total
Fav/(Unfav)
Fav/(Unfav)
%
2013
2012
Variance
6.2
5.3
-0.9
-16.9
11.4
8.7
26.3
12.7
19.3
37.3
1.3
10.6
11.0
10.2
54.9
29.4
Material Changes for Costs and Expenses
(2nd Quarter 2013 vs. 2012)
Personnel. In line with the Group’s expansion of its project operations, added manpower
costs contributed to the increase in this account.
Service Fees and Others. The Group was able to lessen its service costs.
Other operating expenses.
With the Group’s continuing efforts to cut costs, these
accounts substantially decreased as compared to last same period.
Key Performance Indicators
1. Revenue Growth
The first six months of this year registered a 39% increase in revenues and a 62% favorable
variance this second quarter of the year.
3
2. Cost
The Group’s total second quarter spending posted a favorable 29.4% decrease or a P11
million savings as compared to last year’s second quarter.
3. Profitability
Caused by increased revenues and decreased costs, the second three months profit position
increased by Php12.8 million or a 99% variance from the same period last year.
4. Liquidity
Current ratio improved slightly from .30 to .31 for the comparable period in 2012. Current
assets ratio maintained its level of 14% from last year.
5. Solvency
Capital accounts declined to Php4.8 million as of June 30, 2013 from a level of Php7.6
million as at December 31, 2012.
FINANCIAL CONDITION
As of June 30, 2013 DFNN’s consolidated assets totaled approximately Php375.6 million.
DFNN had no long-term debt. The Group reflected approximately Php4.8 million as
stockholders’ equity.
The Company's cash position remained liquid throughout the 3-month period. DFNN had
consolidated cash and cash equivalents amounting to approximately Php17.6 million as of
June 30, 2013.
On April 9, 2003, DFNN signed an equipment lease agreement with the Philippine Charity
Sweepstakes Office (PCSO) to lease to the PCSO the necessary hardware and software for
its wireless and payment solutions. As of the First Quarter of 2005, the PCSO has accepted
the system, released the Performance Bond posted by the GSIS for DFNN. As of date, the
PCSO has not launched its Wireless Payment service. The Company has filed a case with
Office of the Ombudsman for the illegal cancellation of the contract to work towards moving
this contract to implementation or the recovery of costs and damages. The filing with the
Office of the Ombudsman does not preclude other legal action, which the company may
take, to insure and protect the shareholder’s interest.
On February 9, 2010, the Company filed a Petition for the Issuance of an Interim Measure
of Protection in Aid of Arbitration specifically for preliminary injunction, with an application
for the urgent issuance of a temporary order of protection (“TOP”) against PCSO (the
“Petition”), for the illegal cancellation/termination of the ELA with the RTC Branch 220 of
Quezon City. The Petition was filed in relation to an arbitration that the Company will soon
commence against PCSO, pursuant to an arbitration clause contained in the ELA. On March
22, 2010, RTC Branch 220 issued an Order granting the issuance of a writ preliminary
injunction enjoining the PCSO from awarding the PCSO wireless betting project to other
parties while arbitration is ongoing with DFNN.
4
On 25 April 2012, the Parent Company filed its Manifestation/Motion to manifest that PCSO
instituted the appeal by way of a notice of appeal, which is the improper mode to appeal the
30 November 2010 Order. Hence, for using an improper mode of appeal, the Parent
Company asked the Court to dismiss the appeal filed by PCSO. For the same reason, the
Parent Company manifested that it should not be required to, and thus declined, to file its’
Appellee’s Brief.
In a Resolution dated 21 March 2013, the CA granted the Parent Company’s Motion to
Dismiss and dismissed the appeal filed by PCSO. On 5 April 2013, the Parent Company
reiterated its earlier demand on PCSO to nominate its arbitrator in order that the arbitration
proceedings may finally commence.
On 13 June 2013, the Parent Company disclosed that it has received a letter from the
Philippine Charity Sweepstakes Office informing the Company that it has nominated Atty.
Fulgencio S. Factoran, Jr. as its “arbitrator in the Ad Hoc Arbitral Tribunal subject to the
nomination of the third arbitrator (to act as Chairman) by our respective arbitrators.”
DFNN will be spending a budget for capital expenditures in the next few months in line with
its gaming expansions this current year.
Material Changes of more than 5% in the financial condition of DFNN
(Yearend 2012 vs. 2nd Quarter 2013)
Receivables.
The increased billings from revenues increased this account.
Property and Equipment.
DFNN continues to purchase gaming equipment and
terminals to increase its percentage of net wins earned from the gaming revenues which
will financially benefit the company in the long run. These are cabinet style gaming
terminals that are deployed in PAGCOR authorized outlets.
Accounts payable and other current liabilities. DFNN Group’s increased liability is
mainly attributed to its lease with FBDC. In line with the Group’s expansion, it is
considering to extend leasing space for the Group’s Gaming partners.
Short term loans payable. DFNN’s investors and stockholders continue to spend for
the Group’s expansion as working capital that attributed to the increase in this account.
Due to related parties.
Decreased due to the settlement of liabilities to IEST
shareholders in relation to the DFNN 63.37% IEST shares acquisition.
Income tax payable.
Iwave’s settlement of its tax liabilities attributed to the
movement in this account.
Deposits for future stock subscriptions.
pertaining to its ESOP.
DFNN continues to receive deposits
Capital Stock. Increase is attributable to the IEST subscription and payment of DFNN
shares as per its share swap arrangement via a MOA executed in 2012.
5
Other than those stated above and to the best of the Company Management’s knowledge,
Management is not aware of any trend, demand, commitment, event or uncertainty that will
have a material impact on the issuer’s liquidity. Management is not aware of any event that
may trigger any material direct or contingent financial obligation, including any default or
acceleration of an obligation. Management is not aware of any material off-balance sheet
transaction, arrangement, obligation (including contingent obligations), and other
relationships of the Company with unconsolidated entities or other persons created during
the reporting period. Management is not aware of any trend, event or uncertainty that may
have a material impact (favorable or unfavorable) on the Company’s net
sales/revenues/income from continuing operations. Management is not aware of any
significant element of income or loss that did not arise from the Company’s continuing
operations.
6
DFNN Group of Companies
SEC 17Q2-2013-MDA Financial Indicators
Financial Soundness
Indicators
LIQUIDITY
NB
Current Ratio
% Current Assets to
Total Assets
SOLVENCY
Current Assets/Current
Liabilities
Debt-to-Equity ratio
Current Assets/Total Assets
Total Liabilities/Total
Stockholders' Equity
Capital Accounts
movement
Increase &/ decrease in
Stockholders' Equity
Asset-to-equity ratio
Total Assets/Total
Stockholders' Equity
PROFITABILITY
Net Operating Margin
Income from
Operations/Service Revenue
Revenue Growth
Increase & / decrease in
Gross Revenues
Increase &/ decrease in Costs
Cost & Expenses Growth
& Expenses
Interest rate coverage
ratio
Income Before Interest and
Income Tax
Expenses/Interest Expense
YTD June
30,2013
YTD Dec 31
2012
P
0.32
0.31
P
15%
15%
76.97
47.57
P
PHP
(2.78) PHP (136.86) mm
77.97
YTD June
30,2013
48.57
YTD June
30,2012
-0.31
-1.77
P
PHP
12.10 PHP
(10.39) mm
P
PHP
(1.85) PHP
12.14 mm
-25.40
-1081.78
DFNN INC. And Subsidiaries
Consolidated Financial Statements as at December 31, 2012
and Quarters ended June 2013 and June 2012
DFNN INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In Philippine Pesos)
AS OF
UNAUDITED
AUDITED
JUNE 30
DECEMBER 31
2013
ASSETS
Current Assets
Cash
Marketable securities
Receivables - net
Due from related parties
Prepaid expenses and other current assets
Total Current Assets
Noncurrent Assets
Property and equipment - net
Accrued rental receivable-net of current portion
Investment in an associate
Derivative assets
Goodwill
Other noncurrent assets - net
Total Noncurrent Assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and other current liabilities
Short-term loans payable
Due to related parties
Income tax payable
Total Current Liabilities
P
P
P
9,471,834
8,161,524
10,474,993
12,037,985
13,505,547
53,651,883
15,045,878
1,518,845
800,897
170,160,913
134,495,519
322,022,052
375,673,934
133,934,923
31,299,247
7,168,981
125,156
172,528,306
2012
P
P
P
7,229,567
11,109,700
9,321,746
11,737,985
13,132,895
52,531,893
11,450,432
1,518,845
800,897
170,160,913
132,740,099
316,671,186
369,203,079
110,488,188
22,569,044
34,627,211
2,583,412
170,267,855
(forward)
Noncurrent Liabilities
Accrued employee benefits
5,984,291
5,869,951
27,650,252
19,619,852
143,069,344
1,367,979
635,636
198,327,353
370,855,660
27,650,252
19,619,852
136,189,793
1,367,979
635,636
191,333,463
361,601,318
150,000,000
122,851,882
Additional paid-in capital
184,736,234
184,736,234
Stock options outstanding
81,095,219
81,095,219
Accrued rent
Convertible loan
Deposits for future stock subscription
Rental deposits
Deferred income tax liabilities
Derivative liabilities
Total Noncurrent Liabilities
Total Liabilities
Stockholders' Equity
Equity attributable to equity holders of the Parent Company
Capital stock- P1 par value
Authorized - 150,000,000 shares
Paid Up - 150,000,000 shares
Other equity
Cumulative translation adjustment
Equity component of convertible loan
Deficit
Shares held by subsidiaries -3,295,704 shares in 2013 and 2012
Non-controlling interest
Total Stockholders' Equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
P
63,828,471
(23,200,348)
2,513,260
(469,930,972)
(20,269,754)
(31,227,890)
36,046,164
4,818,274
375,673,934 P
63,828,471
(6,656,928)
2,513,260
(457,413,671)
(20,269,754)
(29,315,287)
36,917,048
7,601,761
369,203,079
DFNN INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Philippine Pesos)
For the 3 months ended
April to June
2013
REVENUE
Service fees
P
Rental Income
Sale of Licences
For the 6 months ended
JUNE 30
2012
11,495,660
P
2013
8,763,077
P
2012
17,847,827
P
9,726,828
7,982,417
10,915,179
30,393,255
6,233,075
3,759,384
18,755,536
14,366,494
10,915,179
43,129,499
10,228,278
11,077,628
31,032,734
6,233,375
11,408,389
7,143,413
589,400
147,756
798,288
26,320,622
5,333,809
12,794,635
13,694,591
483,810
1,868,578
3,207,711
37,383,134
12,587,567
19,597,307
17,654,844
1,633,174
1,020,227
1,884,538
54,377,657
9,211,695
17,971,096
19,967,465
1,949,525
2,911,501
4,215,070
56,226,352
INCOME(LOSS) BEFORE DEPRECIATION AND
AMORTIZATION
4,072,633
(18,627,598)
(11,248,158)
(25,193,618)
DEPRECIATION AND AMORTIZATION
1,140,589
1,793,818
1,196,227
INCOME (LOSS) FROM OPERATIONS
2,932,045
(18,966,553)
(13,041,975)
(26,389,845)
(325,443)
(15,709)
29,868
89,523
285,320
(502,457)
6,949
221,849
53,365
(879,744)
(24,106)
49,801
(35,414)
1,177,851
COST AND EXPENSES
Personnel
Service & other fees
Rent
Travel and Entertainment
Utilities
Others
Share in net loss in an associate
Interest expense
Interest Income
Foreign exchange losses-net
Other income-net
(349,954)
1,977
308,870
(59,771)
INCOME (LOSS) BEFORE INCOME TAX
2,833,167
PROVISION FOR (BENEFIT FROM)
INCOME TAX
125,449
338,955
(18,902,994)
710
(13,262,270) -
125,912
(26,101,457)
17,585
NET INCOME (LOSS)
2,707,718
(18,903,704)
(13,388,182)
(26,119,042)
Minority Interest
2,843,416
(3,102,333)
(870,884)
(4,975,094)
(135,698) P
(15,801,371) P
(12,517,298) P
(21,143,948)
-
(2,873,848)
(135,698) P
(12,927,523) P
NET INCOME (LOSS)
P
Cumulative Translation Adjustment
TOTAL COMPREHENSIVE INCOME (LOSS) P
Earnings /(Loss) Per Share
(0.001)
(0.105)
(12,517,298) P
(0.083)
(2,873,848)
(18,270,100)
(0.149)
DFNN INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In Philippine Pesos)
Equity
Capital Stock
Balances at December 31,2011
P
122,851,882
Additional
Paid-In Capital
P
81,083,313
Deposits for
Future Stock
Subscriptions
P
39,536,827
Stock Options
Outstanding
P
147,063,140
Other
Equity
P
63,828,471
Translation
Adjustment
P
Deposits for Future Stock Subscriptions
Translation Adjustment
Net loss for the period
Minority Interest
Total loss recognized for the year
Balances at June 30,2012
P
122,851,882
P
81,083,313
P
39,536,827
P
147,063,140
P
63,828,471
P
Balances at December 31,2012
122,851,882
P
184,736,234
P
-
P
81,095,219
P
63,828,471
P
Translation Adjustment
Issuance of Paid in shares
Net loss for the period
Minority Interest
Total loss recognized for the year
Balances at June 30,2013
P
Deficit
Component of
Convertible Loan
(8,080,308) P
P
(334,727,558) P
Shares held
by Subsidiaries
(20,269,754) P
Minority
Interest
53,170,862
Total
P
3,605,573
(26,119,044)
(4,975,094)
3,605,573
(26,119,044)
(4,975,094)
(4,474,735) P
-
P
(360,846,602) P
(20,269,754) P
48,195,768
P
116,968,310
(6,656,928) P
2,513,260
P
(457,413,671) P
(20,269,754) P
36,917,048
P
7,601,761(16,543,420)
27,148,118
(12,517,301)
(870,884)
P
4,818,274
(16,543,420)
27,148,118
(12,517,301)
(870,884)
P
150,000,000
P
184,736,234
P
-
P
81,095,219
P
63,828,471
P
144,456,875
(23,200,348) P
2,513,260
P
(469,930,972) P
(20,269,754) P
36,046,164
DFNN INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Philippine Pesos)
For the 6 months ended
June 30
2013
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) before income tax
Adjustments for:
Depreciation and amortization
Interest Expense
Interest Income
Other/miscellaneous income
Unrealized foreign exchange gain
Share in net loss in an associate
Share in Minority Interest
Operating income (loss) before working capital changes
Decrease (increase) in:
Receivables
Prepaid expenses and other current assets
(Decrease) increase in:
Accounts payable and other current liabilities
Net cash from (used in) operations
Income taxes paid
Net cash from (used In) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment
Decrease (increase) in other noncurrent assets
Cumulative Translation Adjustment
Net cash from (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short term loans
Proceeds from (payments to) related parties
(Decrease) Increase of rental deposits
Deposits for future stock subscription
Net cash from (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
P
(12,517,298) P
(18,270,101)
1,793,818
502,457
(6,949)
(53,365)
(221,849)
870,884
(9,632,302)
1,196,227
24,106
(49,801)
(1,177,851)
35,414
879,744
(4,975,094)
(22,337,356)
(1,153,247)
(672,652)
230,322
(1,088,559)
23,561,074
12,102,873
(2,458,256)
14,667,841
(8,527,752)
(265,992)
P
9,644,617 P
(8,793,744)
p
p
(3,595,446)
(1,755,420) p
10,096,991
4,746,126 P
(141,736,616)
7,182,219
(134,554,397)
8,730,203 P
(27,758,230)
6,879,551
(12,148,476) P
229,919
140,365,011
841,300
141,436,230
P
P
P
CASH AND CASH EQUIVALENT AT
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR
2012
P
2,242,267
(1,911,911)
7,229,567
10,490,409
9,471,834 P
8,578,499
DFNN Inc. AND SUBSIDIARIES
AR Aging Schedule
(In Philippine Pesos)
June 30, 2013
Current
Trade (Net)
Loans Receivable
Current portion of Rent Receivable
Total
p
P
5,046,491
5,046,491
1-30
1,770,122
1,770,122
31-60
1,627,449
1,627,449
61-90
1,835,337
132,840
62,754
2,030,931
Total
P
10,279,399
132,840
62,754
10,474,993
DFNN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information, Status of Operations and Authorization for the Issuance
of Consolidated Financial Statements
Corporate Information
DFNN Inc. (DFNN or the “Parent Company”) was incorporated and registered with the Philippine
Securities and Exchange Commission (SEC) on June 14, 1999. The Parent Company and its
subsidiaries (collectively referred to as “the Group”) are established to engage in providing
information technology services relating to financial institutions and gaming companies. The
Group also develops, operates and maintains web-based and wireless applications for major
corporate customers with strength in solutions for financial institutions and gaming companies and
provides proprietary order routing software technology and web-advertising services to stock
brokerage firms.
The Parent Company is registered under the Omnibus Investments Code of 1987, otherwise
known as Executive Order No. 226 as Existing and Expanding Information Technology (IT)
Service Firm Providing Application Services, Web-Based Advertising and Design and
Development of E-Commerce Solutions on a Pioneer Status. As a BOI-registered enterprise, the
Parent Company is entitled to certain tax and non-tax incentives, which includes a three-year
income tax holiday (ITH) from March 2011 or from the actual start of commercial operations
whichever comes first, subject to compliance with certain requirements.
The Parent Company is also registered with the BOI as a pioneer IT Service Firm in the field of
Payment Infrastructure System under the Omnibus Investments Code of 1987. As a BOIregistered enterprise, the Parent Company is entitled to certain tax and nontax incentives, which
includes a six-year ITH from October 2004 or actual registration of commercial operations
whichever comes first, subject to compliance with certain requirements.
The Parent Company has not claimed any tax incentives from these BOI registered activities in
2012, 2011 and 2010.
Status of Operations
§ DFNN. The Parent Company has incurred significant costs and invested substantial funds
towards the acquisition of a signed and executed contract (the Project) with the Philippine
Charity Sweepstakes Office (PCSO), as well as the development and delivery of work under
this contract. These costs and investments, had in the past, created a tight cash flow situation
within the Parent Company. This Project was unilaterally suspended by PCSO, despite the
fact that the Parent Company had already fulfilled all of its deliverables under the contract.
On March 21, 2013, the Parent Company received a resolution from the Court of Appeals
granting DFNN’s Motion to Dismiss and dismissing the Appeal filed by PCSO (see Note 25).
§
Inter-active Entertainment Solutions Technologies, Inc. (IEST). IEST, a subsidiary, has started
to seek new investors to help successfully roll out its plans of opening new Instawin and
Openbet outlets and terminals throughout the duration of its Instawin projects or until the
expiration of the present charter of PAGCOR on July 11, 2033. IEST plans to open 58
Xchangebet terminals and 85 new Instawin outlets in 2013.
*SGVFS001330*
-2§
HatchAsia, Inc. (HatchAsia). On April 16, 2013, HatchAsia’s BOD approved the increase in
the authorized capital stock of HatchAsia from 100,000,000 to 200,000,000 shares with a par
value of =
P1 per share, and the amendment of the articles of incorporation and bylaws to
include gaming operations. HatchAsia will market to and invite Filipino and International
software providers to create gaming content that may be used in the operations of DFNN.
HatchAsia will also provide technical support and incubation facilities to deserving software
companies. HatchAsia is one of DFNN’s subsidiaries.
The registered business address of the Parent Company is 3rd Floor, Bonifacio Technology
Center, 31st Street corner 2nd Avenue, E-Square IT Park - SEZ, Bonifacio Global City, Taguig
City.
The consolidated financial statements were approved and authorized for issue by the BOD on
May 16, 2013.
2. Summary of Significant Accounting Policies and Financial Reporting Practices
Basis of Preparation
The consolidated financial statements have been prepared in accordance with Philippine Financial
Reporting Standards (PFRS). PFRS includes standards named PFRS, Philippine Accounting
Standards (PAS) and Philippine Interpretations of International Financial Reporting Interpretations
Committee (IFRIC) and Standing Interpretations Committee issued by the Financial Reporting
Standards Council.
The consolidated financial statements have been prepared on a historical cost basis, except for
financial assets and liabilities at fair value through profit or loss (FVPL) which have been
measured at fair value. The consolidated financial statements are presented in Philippine Peso,
which is the Parent Company’s functional and presentation currency. All values are rounded to
the nearest Peso, except when otherwise indicated.
The functional currency of Pacific Gaming Investments Pte Ltd. (PGI), iWave Asia, Inc. (iWave
Asia) and iWave, Inc. (iWave) and subsidiaries, is the United States Dollar. As at the reporting
date, assets and liabilities of PGI and iWave Asia are restated into the functional and presentation
currency of the Parent Company, the Philippine Peso, using the closing exchange rate at the
reporting date and the items in the consolidated statement of comprehensive income are translated
at weighted average exchange rates for each month of the year. The exchange rate differences
arising from translation adjustments are reported as other comprehensive income in the
consolidated statement of comprehensive income and taken directly as a separate component of
equity as “Cumulative translation adjustments”.
Basis of Consolidation and Non-controlling Interest
The consolidated financial statements consist of the financial statements of the Parent Company
and subsidiaries as at December 31, 2012 and 2011 and January 1, 2011 and for each of the three
years in the period ended December 31, 2012. The financial statements of the subsidiaries are
prepared for the same reporting period as the Parent Company using consistent accounting
policies.
Subsidiary. A subsidiary is an entity over which the Parent Company has the power to govern the
financial and operating policies of the entity, or generally has an interest of more than one half of
the voting rights of the entities. The existence and effect of potential voting rights that are
currently exercisable or convertible are considered when assessing whether the Parent Company
*SGVFS001330*
-3controls another entity. A subsidiary is fully consolidated from the date control is transferred to
the Parent Company directly or through the holding companies. Control is achieved when the
Parent Company has the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred
out of the Parent Company.
All intra-group balances, transactions, income and expenses and unrealized gains and losses from
intra-group transactions are eliminated in full.
The following is a list of subsidiaries including its principal activities, which the Parent Company
controls:
Subsidiaries
HatchAsia
PGI
iWave
iWave Asia*
IEST**
Nature of Business
Incorporated in the Philippines primarily to engage in
the leasing out of certain floors of Bonifacio
Technology Center and in the establishment and
operation of educational institution or learning
center which provides courses in computer and
information technology.
Incorporated in Singapore to engage in the
development and marketing of application
software and the provision of internet-based,
value-added services and other related
consultancy.
Incorporated in the Philippines to provide turnkey
solutions to the information system requirements
of retail finance institutions with high volume
transactions.
Incorporated in Hongkong primarily to provide
software development services.
Incorporated in the Philippines as an information
technology solutions provider in the Philippines
which provides betting and gaming technologies
to the Philippine Amusement and Gaming
Corporation (PAGCOR).
2012
75.24%
Percentage of Ownership
2011
2010
75.24%
75.24%
73.24%
73.24%
74.10%
55.94%
55.94%
55.94%
55.94%
55.94%
55.94%
91.52%
23.20%
23.20%
*Indirect ownership through iWave.
**Control over IEST became effective on December 28, 2012 (see Note 4).
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an
equity transaction. If the Group loses control over a subsidiary, it:
§
§
§
§
§
§
§
Derecognizes the assets (including goodwill) and liabilities of the subsidiary
Derecognizes the carrying amount of any non-controlling interest
Derecognizes the cumulative translation differences recorded in equity
Recognizes the fair value of the consideration received
Recognizes the fair value of any investment retained
Recognizes any surplus or deficit in profit or loss
Reclassifies the Parent Company’s share of components previously recognized in other
comprehensive income to profit or loss or retained earnings, as appropriate.
Losses within a subsidiary are attributed to the non-controlling interest even if that results in a
deficit balance.
*SGVFS001330*
-4Non-controlling Interest. Non-controlling interest represents the portion of profit or loss and other
comprehensive income and the net assets not held by the Parent Company and are presented
separately in the consolidated statement of financial position, separately from equity attributable to
holders of the Parent Company.
Business Combination
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred, measured at acquisition date fair
value and the amount of any noncontrolling interest in the acquiree. For each business
combination, the acquirer measures the noncontrolling interest in the acquiree either at fair value
or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred
are expensed and included in administrative expenses.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for
appropriate classification and designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as at the acquisition date. This includes the separation of
embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s
previously held equity interest in the acquiree is remeasured to fair value at the acquisition date
through profit or loss.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at
the acquisition date. Subsequent changes to the fair value of the contingent consideration which is
deemed to be an asset or liability will be recognized in accordance with PAS 39, Financial
Instruments: Recognition and Measurement, either in profit or loss or as a change to other
comprehensive income. If the contingent consideration is classified as equity, it should not be
remeasured until it is finally settled within equity.
Goodwill
Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred and the amount recognized for non-controlling interest over the net identifiable assets
acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets
of the subsidiary acquired, the difference is recognized as gain on bargain purchase in profit or
loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Goodwill is reviewed for impairment, annually or more frequently, if events or changes in
circumstances indicate that the carrying value may be impaired. For the purpose of impairment
testing, goodwill acquired in a business combination is, from the acquisition date, allocated to
each of the Group’s cash-generating units that are expected to benefit from the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a cash-generating unit and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative values of the operation disposed
of and the portion of the cash-generating unit retained.
*SGVFS001330*
-5Changes in Accounting Policies and Disclosures
The accounting policies adopted are consistent with those of the previous financial year except for
the following amended PFRSs, which were adopted as at January 1, 2012. The adoption of these
standards or interpretations did not have an impact on the consolidated financial statements.
§
PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets (Amendments)
§
PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (Amendments)
Standards Issued but not yet Effective
Standards issued but not yet effective up to the date of issuance of the consolidated financial
statements are listed below. The Group intends to adopt these standards when they become
effective. Except as otherwise indicated, the Group does not expect the adoption of these new and
amended standards and interpretations to have significant impact on the consolidated financial
statements.
§
PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial
Liabilities (Amendments) — These amendments require an entity to disclose information
about rights of set-off and related arrangements (such as collateral agreements). The new
disclosures are required for all recognized financial instruments that are set off in accordance
with PAS 32, Financial Instruments: Presentation. These disclosures also apply to
recognized financial instruments that are subject to an enforceable master netting arrangement
or “similar agreement”, irrespective of whether they are set-off in accordance with PAS 32.
The amendments require entities to disclose, in a tabular format unless another format is more
appropriate, the following minimum quantitative information.
This is presented separately for financial assets and financial liabilities recognized at the end
of the reporting period:
a.
b.
c.
d.
e.
The gross amounts of those recognized financial assets and recognized financial
liabilities;
The amounts that are set off in accordance with the criteria in PAS 32 when determining
the net amounts presented in the statement of financial position;
The net amounts presented in the statement of financial position;
The amounts subject to an enforceable master netting arrangement or similar agreement
that are not otherwise included in (b) above, including:
i. Amounts related to recognized financial instruments that do not meet some or all of
the offsetting criteria in PAS 32; and
ii. Amounts related to financial collateral (including cash collateral); and
The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments to PFRS 7 are to be retrospectively applied and are effective for annual
periods beginning on or after January 1, 2013. The amendments affect disclosures only and
have no impact on the Group’s financial position or performance.
§
PFRS 10, Consolidated Financial Statements — PFRS 10 replaces the portion of PAS 27,
Consolidated and Separate Financial Statements, that addresses the accounting for
consolidated financial statements. It also includes the issues raised in SIC 12, Consolidation Special Purpose Entities. PFRS 10 establishes a single control model that applies to all
entities including special purpose entities. The changes introduced by PFRS 10 will require
management to exercise significant judgment to determine which entities are controlled, and
therefore, are required to be consolidated by a parent, compared with the requirements that
*SGVFS001330*
-6were in PAS 27. The standard becomes effective for annual periods beginning on or after
January 1, 2013.
§
PFRS 11, Joint Arrangements — PFRS 11 replaces PAS 31, Interests in Joint Ventures, and
SIC 13, Jointly Controlled Entities - Non-Monetary Contributions by Venturers. PFRS 11
removes the option to account for jointly controlled entities using proportionate consolidation.
Instead, jointly controlled entities that meet the definition of a joint venture must be accounted
for using the equity method. The standard becomes effective for annual periods beginning on
or after January 1, 2013.
§
PFRS 12, Disclosure of Interests in Other Entities — PFRS 12 includes all of the disclosures
related to consolidated financial statements that were previously in PAS 27, as well as all the
disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates.
These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates
and structured entities. A number of new disclosures are also required. The standard becomes
effective for annual periods beginning on or after January 1, 2013.
§ PFRS 13, Fair Value Measurement — PFRS 13 establishes a single source of guidance under
PFRSs for all fair value measurements. PFRS 13 does not change when an entity is required
to use fair value, but rather provides guidance on how to measure fair value under PFRS when
fair value is required or permitted. This standard should be applied prospectively as at the
beginning of the annual period in which it is initially applied. Its disclosure requirements need
not be applied in comparative information provided for periods before initial application of
PFRS 13. The standard becomes effective for annual periods beginning on or after
January 1, 2013.
§ PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive
Income (Amendments) — The amendments to PAS 1 change the grouping of items presented
in other comprehensive income. Items that can be reclassified (or “recycled”) to profit or loss
at a future point in time (for example, upon derecognition or settlement) will be presented
separately from items that will never be recycled. The amendment becomes effective for
annual periods beginning on or after July 1, 2012.
§ PAS 19, Employee Benefits (Revised) — Amendments to PAS 19 range from fundamental
changes such as removing the corridor mechanism and the concept of expected returns on plan
assets to simple clarifications and rewording. The revised standard also requires new
disclosures such as, among others, a sensitivity analysis for each significant actuarial
assumption, information on asset-liability matching strategies, duration of the defined benefit
obligation, and disaggregation of plan assets by nature and risk. The amendments become
effective for annual periods beginning on or after January 1, 2013. Once effective, the Group
has to apply the amendments retroactively to the earliest period presented.
*SGVFS001330*
-7The Group reviewed its existing employee benefits and obtained the services of an external
actuary to compute the impact to the financial statements upon adoption of the standard. The
effects are detailed below:
As at
December 31,
2012
Increase (decrease) in:
Consolidated Statements of Financial Position
Net defined benefit liability
Other comprehensive income
Retained earnings
Consolidated Statement of Comprehensive Income
Net benefit expense
Other comprehensive income
P1,639,335
=
(1,634,539)
(4,796)
As at
December 31,
2011
(P
=910,177)
911,615
(1,438)
For year-ended
December 31,
2012
=3,358
P
(2,546,154)
§ PAS 27, Separate Financial Statements (as revised in 2011) — As a consequence of the
issuance of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, what remains
of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates
in the separate financial statements. The amendment becomes effective for annual periods
beginning on or after January 1, 2013.
§ PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) — As a
consequence of the issuance of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28
has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the
application of the equity method to investments in joint ventures in addition to associates. The
amendment becomes effective for annual periods beginning on or after January 1, 2013.
§ Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface
Mine — This interpretation applies to waste removal (stripping) costs incurred in surface
mining activity, during the production phase of the mine. The interpretation addresses the
accounting for the benefit from the stripping activity. The interpretation is effective for annual
periods beginning on or after January 1, 2013. This new interpretation is not relevant to the
Group.
§
PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial
Liabilities (Amendments) — The amendments clarify the meaning of “currently has a legally
enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to
settlement systems (such as central clearing house systems) which apply gross settlement
mechanisms that are not simultaneous. The amendments affect presentation only and have no
impact on the Group’s financial position or performance. The amendments to PAS 32 are to
be retrospectively applied for annual periods beginning on or after January 1, 2014.
§
PFRS 9, Financial Instruments — PFRS 9, as issued, reflects the first phase on the
replacement of PAS 39 and applies to the classification and measurement of financial assets
and liabilities as defined in PAS 39. Work on impairment of financial instruments and hedge
accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires
all financial assets to be measured at fair value at initial recognition. A debt financial asset
may, if the fair value option is not invoked, be subsequently measured at amortized cost if it is
*SGVFS001330*
-8held within a business model that has the objective to hold the assets to collect the contractual
cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal outstanding. All other debt instruments are
subsequently measured at FVPL. All equity financial assets are measured at fair value either
through other comprehensive income or profit or loss. Equity financial assets held for trading
must be measured at FVPL. For fair value option liabilities, the amount of change in the fair
value of a liability that is attributable to changes in credit risk must be presented in other
comprehensive income. The remainder of the change in fair value is presented in profit or
loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI
would create or enlarge an accounting mismatch in profit or loss. All other PAS 39
classification and measurement requirements for financial liabilities have been carried forward
into PFRS 9, including the embedded derivative separation rules and the criteria for using the
fair value option. PFRS 9 becomes effective for annual periods beginning on or after
January 1, 2015.
The Group decided not to early adopt PFRS 9 for the 2012 reporting ahead of its effectivity
date on January 1, 2015. Only financial assets and liabilities will be affected by the adoption
of the first phase of PFRS 9. Based on initial evaluation, loans and receivables (which include
cash, receivables, due from related parties) which are carried at amortized cost will continue to
be carried at their amortized cost, thus, will not be significantly affected. For financial assets
at FVPL and AFS financial assets, the Group is still in the process of evaluating the full
impact of the adoption of PFRS 9 on the consolidated financial statements upon its adoption in
2015.
§
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate — This
interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. The SEC and the
Financial Reporting Standards Council have deferred the effectivity of this interpretation until
the final Revenue standard is issued by the International Accounting Standards Board and an
evaluation of the requirements of the final Revenue standard against the practices of the
Philippine real estate industry is completed.
Annual Improvements to PFRS (2009-2011 cycle)
The Annual Improvements to PFRS (2009-2011 cycle) contain non-urgent but necessary
amendments to PFRSs. The amendments are effective for annual periods beginning on or after
January 1, 2013 and are applied retrospectively. Earlier application is permitted. The Group
expects that the amendments will not have any impact on its financial position or performance.
§
PFRS 1, First-time Adoption of PFRS - Borrowing Costs — The amendment clarifies that,
upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its
previous generally accepted accounting principles, may carry forward, without any
adjustment, the amount previously capitalized in its opening statement of financial position at
the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in
accordance with PAS 23, Borrowing Costs.
§
PAS 1, Presentation of Financial Statements - Clarification of the requirements for
comparative information — The amendments clarify the requirements for comparative
information that are disclosed voluntarily and those that are mandatory due to retrospective
application of an accounting policy, or retrospective restatement or reclassification of items in
the financial statements. An entity must include comparative information in the related notes
to the financial statements when it voluntarily provides comparative information beyond the
minimum required comparative period. The additional comparative period does not need to
*SGVFS001330*
-9contain a complete set of financial statements. On the other hand, supporting notes for the
third statement of financial position (mandatory when there is a retrospective application of an
accounting policy, or retrospective restatement or reclassification of items in the financial
statements) are not required.
§
PAS 16, Property, Plant and Equipment - Classification of servicing equipment — The
amendment clarifies that spare parts, stand-by equipment and servicing equipment should be
recognized as property, plant and equipment when they meet the definition of property, plant
and equipment and should be recognized as inventory if otherwise.
§
PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity
instruments — The amendment clarifies that income taxes relating to distributions to equity
holders and to transaction costs of an equity transaction are accounted for in accordance with
PAS 12, Income Taxes.
§
PAS 34, Interim Financial Reporting - Interim financial reporting and segment information
for total assets and liabilities — The amendment clarifies that the total assets and liabilities for
a particular reportable segment need to be disclosed only when the amounts are regularly
provided to the chief operating decision maker and there has been a material change from the
amount disclosed in the entity’s previous annual financial statements for that reportable
segment.
Financial Assets
Initial Recognition and Measurement. Financial assets within the scope of PAS 39 are classified
as financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, availablefor-sale (AFS) financial assets, or as derivatives designated as hedging instruments in an effective
hedge, as appropriate. The Group determines the classification of its financial assets at initial
recognition.
All financial assets are recognized initially at fair value plus transaction costs, except in the case of
financial assets recorded at FVPL.
Purchases or sales of financial assets that require delivery of assets within a time frame established
by regulation or convention in the market place (regular way trades) are recognized on the trade
date, i.e., the date that the Group commits to purchase or sell the asset.
The Group’s financial assets include cash, receivables, due from related parties and advances to an
officer which are classified as loans and receivables; marketable securities and derivative assets
which are classified as financial assets at FVPL.
The Group has no AFS financial assets and HTM investments as at December 31, 2012 and 2011.
Subsequent Measurement. The subsequent measurement of financial assets depends on their
classification as described below:
§
Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market. After initial measurement,
such financial assets are subsequently measured at amortized cost using the effective interest
rate method, less impairment. Amortized cost is calculated by taking into account any
discount or premium on acquisition and fees or costs that are an integral part of the effective
interest rate. The effective interest rate amortization is included as finance income in profit or
loss. Losses arising from impairment are recognized in profit or loss.
*SGVFS001330*
- 10 §
Financial assets at FVPL. Financial assets at FVPL include financial assets held for trading
and financial assets designated upon initial recognition at FVPL. Financial assets are
classified as held for trading if they are acquired for the purpose of selling or repurchasing in
the near term. Derivatives, including separated embedded derivatives are also classified as
held for trading unless they are designated as effective hedging instruments as defined by
PAS 39.
Financial assets at FVPL are carried in the consolidated statement of financial position at fair
value with net changes in fair value presented as finance costs (negative net changes in fair
value) or finance income (positive net changes in fair value) in profit or loss.
An embedded derivative is a component of a hybrid (combined) instrument that also includes
a non-derivative host contract with the effect that some of the cash flows of the combined
instrument vary in a way similar to a stand-alone derivative.
Embedded derivatives are bifurcated from their host contracts, when all the following
conditions are met: (a) the entire hybrid contracts (composed of both the host contract and the
embedded derivative) are not accounted for as financial assets at FVPL; (b) when their
economic risks and characteristics are not closely related to those of their respective host
contracts; and (c) a separate instrument with the same terms as the embedded derivative would
meet the definition of a derivative.
The Group assesses whether an embedded derivative is required to be separated from the host
contract and accounted for as a derivative when the entity first becomes a party to the contract.
Subsequent reassessment is prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the contract, in
which case reassessment is required. The Group 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.
As at December 31, 2012 and 2011, the Group has derivative assets and marketable securities
which are classified as financial assets at FVPL.
Impairment of Financial Assets. The Group assesses, at each reporting date, whether there is any
objective evidence that a financial asset or a group of financial assets is impaired. A financial
asset or a group of financial assets is deemed to be impaired if, and only if, there is objective
evidence of impairment as a result of one or more events that has occurred after the initial
recognition of the asset (an incurred ‘loss event’) and that loss event 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 debtors or a group of
debtors 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 when observable data indicate that there is a measurable decrease in the
estimated future cash flows, such as changes in arrears or economic conditions that correlate with
defaults.
For financial assets 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
*SGVFS001330*
- 11 characteristics and collectively assesses them for impairment. Assets that are individually
assessed for impairment and for which an impairment loss is, or continues to be, recognized are
included in a collective assessment of 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 expected credit losses that have not yet been incurred). The
present value of the estimated future cash flows is discounted at the financial asset’s original
effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the
amount of the loss recognized in profit or loss. Interest income continues to be accrued on the
reduced carrying amount and is accrued using the rate of interest used to discount the future cash
flows for the purpose of measuring the impairment loss. The interest income is recorded as part of
finance income in profit or loss. Loans together with the associated allowance are written off
when there is no realistic prospect of future recovery and all collateral has been realized or has
been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment
loss increases or decreases because of an event occurring after the impairment was recognized, the
previously recognized impairment loss is increased or reduced by adjusting the allowance account.
If a future write-off is later recovered, the recovery is credited to finance costs in profit or loss.
Derecognition. A financial asset (or, where applicable, a part of a financial asset or part of a
group of similar financial assets) is derecognized when:
§
§
The Group’s rights to receive cash flows from the asset have expired;
The Group has transferred its rights to receive cash flows from the asset or has assumed an
obligation to pay the received cash flows in full without material delay to a third party under a
“pass-through” arrangement; and either (a) the Group has transferred substantially all the risks
and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all
the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of
ownership. When it has neither transferred nor retained substantially all of the risks and rewards
of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Group’s
continuing involvement in the asset. In that case, the Group also recognizes an associated
liability. The transferred asset and the associated liability are measured on a basis that reflects the
rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured
at the lower of the original carrying amount of the asset and the maximum amount of
consideration that the Group could be required to repay.
Financial Liabilities
Initial Recognition and Measurement. Financial liabilities within the scope of PAS 39 are
classified as financial liabilities at FVPL, loans and borrowings, or as derivatives designated as
hedging instruments in an effective hedge, as appropriate. The Group determines the
classification of its financial liabilities at initial recognition.
*SGVFS001330*
- 12 Issued financial instruments or their components, which are not classified as financial liabilities 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 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. Any effects of restatement of foreign currency denominated liabilities are
recognized in profit or loss.
As at December 31, 2012 and 2011, the Group has accounts payable and other current liabilities
(excluding statutory payables, short-term loans payable, due to related parties which are classified
under loans and borrowings; and derivative liabilities which is classified as financial liabilities at
FVPL.
The Group has no derivative liabilities designated as hedging instruments as at December 31, 2012
and 2011.
Loans and borrowings. This category pertains to financial liabilities that are not held for trading
or not designated as at FVPL upon the inception of the liability. These include liabilities arising
from operations (e.g., accounts payable and other current liabilities) or borrowings (e.g., loans
payable and long-term debt).
Subsequent Measurement. After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortized cost using the effective interest method. Gains and losses are
recognized in profit or loss when the liabilities are derecognized as well as through the
amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and
fees or costs that are an integral part of the effective interest rate. The amortization is included in
interest expense in profit or loss.
§
Loans and borrowings. Loans and borrowings are recognized initially at fair value and are
subsequently carried at amortized cost, taking into account the impact of applying the
effective interest method of amortization (or accretion) for any related premium, discount
and any directly attributable transaction costs. Gains or losses are recognized in profit or
loss when the liabilities are derecognized as well as through the effective interest
amortization process. Other financial liabilities are included in current liabilities if maturity
is within twelve months from the reporting date or the Group does not have an unconditional
right to defer payment for at least twelve months from the reporting date. Otherwise, these
are classified as noncurrent liabilities.
§
Financial liabilities at FVPL include financial liabilities held for trading and financial
liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are acquired for the purpose of
selling in the near term. This category includes derivatives financial instruments entered into
by the Group that are not designated as hedging instruments in hedge relationships as
defined by PAS 39. Separated embedded derivatives are also classified as held for trading
are recognized in profit or loss.
*SGVFS001330*
- 13 Gain or losses on liabilities held for trading are recognized in profit or loss.
Derecognition. A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired.
When 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 the derecognition of the original liability and the recognition of a new
liability. The difference in the respective carrying amounts is recognized in profit or loss.
Classification of Financial Instruments between Debt and Equity
A financial instrument is classified as debt if it provides for a contractual obligation to:
§
deliver cash or another financial asset to another entity; or
§
exchange financial assets or liabilities with another entity under conditions that are potentially
unfavorable to the Group; or
§
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.
If the Group does not have an unconditional right to avoid delivering cash or another financial
asset to settle its contractual obligation, the obligation meets the definition of a financial liability.
“Day 1” Difference
Where the transaction price in a non-active market is different from the fair value of other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and fair value (a “Day 1” difference) in profit or loss unless it
qualifies for recognition as some other type of asset. In cases where data used is not observable,
the difference between the transaction price and model value is only recognized in profit or loss
when the inputs become observable or when the instrument is derecognized. For each transaction,
the Group determines the appropriate method of recognizing the “Day 1” difference amount.
Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and the net amount 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 assets
and settle the liabilities simultaneously.
Fair Value of Financial Instruments
The fair value of financial instruments that are traded in active markets at each reporting date is
determined by reference to quoted market prices or dealer price quotations (bid price for long
positions and ask price for short positions), without any deduction for transaction costs.
For financial instruments not traded in an active market, the fair value is determined using
appropriate valuation techniques. Such techniques may include:
§
§
§
Using recent arm’s length market transactions;
Reference to the current fair value of another instrument that is substantially the same; and
A discounted cash flow analysis or other valuation models.
*SGVFS001330*
- 14 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; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value
that are not based on observable market data.
Other Current Assets
Input Taxes. Input taxes represent amounts paid to suppliers that can be claimed as deduction
against the Group’s value-added tax liabilities.
Creditable Withholding Tax. Creditable withholding tax is initially measured at the amount paid
in advance by the Group from delivery of goods and services and subsequently decreased by
credits against the Group’s income tax liability.
Investment in Associates
Investment in associates is accounted for using the equity method. An associate is an entity in
which the Group has significant influence and which is neither a subsidiary nor a joint venture.
The investment in associates is carried in the consolidated statement of financial position at cost
plus post-acquisition changes in the Group’s share in the net assets of the associate less any
impairment in value. The consolidated statement of comprehensive income reflects the Group’s
share in the results of operations of the associate. Unrealized gains and losses resulting from
transactions between the Group and the associate are eliminated to the extent of the interest in the
associate.
The carrying value of investment in associates is reviewed for impairment when events or changes
in circumstances exist and where the carrying value exceeds the estimated recoverable amount.
The recoverable amount of the asset is the greater of the net selling price and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value using a
pretax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. Any impairment loss is recognized in profit or loss.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and impairment loss, if
any. The initial cost of an item of property and equipment comprises its purchase price and any
cost attributable in bringing the asset to its intended location and working condition. Such cost
includes the cost of replacing the part of such property and equipment when the cost incurred
meets the recognition criteria.
Subsequent costs are capitalized as part of property and equipment account only when it is
probable that future economic benefits associated with the item will flow to the Group and the cost
of the item can be measured reliably. All other repairs and maintenance are charged to profit or
loss as incurred.
*SGVFS001330*
- 15 Depreciation is computed using the straight-line basis over the estimated useful life of all
property and equipment as follows:
Computer equipment and software
Furniture, fixtures and office equipment
Transportation equipment
Number of Years
3 to 5
5
5
The property and equipment’s residual values, useful lives and depreciation method are reviewed
and adjusted prospectively, if appropriate, at each financial year-end.
Fully depreciated property and equipment are retained in the accounts until these are no longer in
use although no further depreciation is charged to current operations.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is included in profit or loss in the year the asset is derecognized.
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
the higher of an asset’s or cash-generating units (CGU) 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. When the carrying amount
of an asset or CGU 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 the fair
value less cost to sell, recent market transactions are taken into account, if available. If no such
transactions can be identified, an appropriate valuation model is used. These calculations are
corroborated by valuation multiples or the fair value indicators. The Group bases its impairment
calculation on detailed budgets and forecast calculations, which are prepared separately for each
of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast
calculations generally cover a period of five years. For longer periods, a long-term growth rate is
calculated and applied to project future cash flows after the fifth year. Any impairment loss is
recognized in profit or loss in the expense category consistent with the function of the impaired
asset.
An assessment is made at each reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or may have decreased. If such indication
exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed
only if there has been a change in the estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognized. If that is the case, the carrying amount of the asset
is increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss been recognized for
the asset in prior years. Such reversal is recognized in profit or loss, unless the asset is carried at
revalued amount, in which case the reversal is treated as a revaluation increase. After such a
reversal, the depreciation 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.
*SGVFS001330*
- 16 Deposits for Future Stock Subscription
The deposits for future stock subscription account represents funds received by the Group which it
records as such with a view to applying the same as payment for additional issuance of shares or
increase in capital stock. Deposits for future stock subscription is reported as part of consolidated
statement of changes in equity and as a separate item in the equity section of the consolidated
statement of financial position, if the following criteria are met, otherwise, this is classified as
noncurrent liability:
§
§
§
§
the unissued authorized capital stock of the entity is insufficient to cover the amount of shares
indicated in the contract;
there is BOD’s approval on the proposed increase in authorized capital stock (for which a
deposit was received by the corporation);
there is stockholders’ approval of said proposed increase; and
the application for the approval of the proposed increase has been filed with the SEC on or
before the financial reporting date.
Equity
Capital Stock. Capital stock is measured at par value for all shares issued. Incremental costs
directly attributable to the issuance of new shares are shown as a deduction from equity, net of any
tax. When the Group issues more than one class of stock, a separate account is maintained for
each class of stock and number of shares issued.
Additional Paid-in Capital. When the shares are sold at premium, the difference between the
proceeds and the par value is credited to the “Additional paid-in capital” account. When shares
are issued for a consideration other than cash, the proceeds are measured by the fair value of the
consideration received. In case the shares are issued to extinguish or settle the liability of the
Group, the shares shall be measured either at the fair value of the shares issued or fair value of the
liability settled, whichever is more reliably determinable.
Shares Held by Subsidiaries. Own equity instruments that are held by subsidiaries are treated as
treasury shares and are recognized at cost and 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.
Other Comprehensive Income. Other comprehensive income comprises of items of income and
expenses (including previously presented under the consolidated statement of changes in equity)
that are not recognized in profit or loss for the year in accordance with PFRS.
Cumulative Translation Adjustments. The financial statements of the consolidated subsidiaries
and associates with functional currency other than Peso are translated to Peso as follows:
§
§
§
Assets and liabilities using the spot rate of exchange prevailing at the financial reporting date;
Components of equity using historical exchange rates; and
Income and expenses using the monthly weighted average exchange rate.
The exchange differences arising on the translation are recognized as other comprehensive income
(loss). Upon disposal of any of these subsidiaries and associates, the deferred cumulative amount
recognized in other comprehensive income (loss) relating to that particular subsidiary or associate
will be recognized in the consolidated statement of income.
iWave Asia and PGI have identified the U.S. dollar as their functional currency. All other
subsidiaries have identified Philippine Peso as their functional currency.
*SGVFS001330*
- 17 Deficit. Deficit includes loss attributable to the Group’s equity holders.
Deficit may also include effect of changes in accounting policies as may be required by the
standard’s transitional provisions.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits associated with
the transaction will flow to the Group and the amount of revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received or receivable, excluding
discounts and sales taxes, as applicable. The Group assesses its revenue arrangements against
specific criteria in order to determine if it is acting as principal or agent. The Group has concluded
that it is acting as principal in all of its revenue arrangements except for the commission income it
receives from gaming revenue which is based on pre-agreed rates as stated in existing contracts.
The following specific recognition criteria must also be met before income is recognized:
Service Fees and Software Solutions. Revenue from providing internet services and maintenance
services is recognized when the service is performed with reference to the agreement for the
period covered.
Revenue from developing software solutions is recognized by reference to the percentage of
completion when it can be measured reliably. The percentage of completion is determined based
on surveys of work performed.
Sale of Licenses. Sale of licenses is recognized when the right to use the software is approved
through the license agreement.
Rental Income. Rental income arising from sub-leased properties is accounted for on a straightline basis over the lease terms on ongoing sub-leases.
Interest Income. Interest income is recognized as the interest accrues taking into account the
effective yield on the asset.
Dividend Income. Dividend income is recognized when the Group’s right to receive the payment
is established.
Cost and Expenses
Cost and expenses are decreases in economic benefits during the accounting period in the form of
outflows or decrease of assets or incurrence of liabilities that result in decrease in equity, other
than those relating to distributions to equity participants. General and administrative expenses,
interest and bank charges and other expenses are recognized in profit or loss in the period these are
incurred.
Retirement Benefits Cost
iWave. Retirement benefits cost is actuarially determined using the projected unit credit method.
Actuarial gains and losses are recognized as income or expense when the net cumulative
unrecognized actuarial gains and losses for the Group’s retirement plan at the end of the previous
reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan
assets at that date. These gains or losses are recognized over the expected average remaining
working lives of the employees participating in the plan.
*SGVFS001330*
- 18 Past service cost is recognized as an expense on a straight-line basis over the average period that
the benefits become vested. If the benefits are vested immediately following the introduction of,
or changes to, the retirement plan, past service cost is recognized immediately.
DFNN. The Parent Company accrues estimated retirement benefits costs for its regular employees
pursuant to Republic Act (RA) No. 7641. Under PAS 19, the cost of defined retirement benefits,
including those mandated under RA No. 7641, should be determined using an accrued benefit
valuation method or a projected benefit valuation method. These methods require an independent
actuarial valuation, which the Parent Company did not undertake. Management believes,
however, that the effect on the financial statements of the difference between the amount
determined using the current method of the Parent Company and the required actuarially
determined valuation method is not significant.
Leases
The determination of whether an arrangement is or contains a lease is based on the substance of
the arrangement at the inception date or whether the fulfillment of the arrangement is dependent
on the use of a specific asset or arrangement conveys a right to use the asset, even if that right is
not explicitly specified in an arrangement.
Group as a Lessor. Leases where the Group retains substantially all the risks and benefits of
ownership of the assets are classified as operating leases. Initial direct costs incurred in
negotiating an operating lease are added to the carrying amount of the leased asset and recognized
over the lease term on the same basis as rental income. Operating lease receipts from lessees are
recognized as income in profit or loss on a straight-line basis over the lease term.
Group as a Lessee. Leases where the lessor retains substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Operating lease payments are recognized
as expense in profit or loss on a straight line basis over the lease term.
Share-based Payment
Certain officers, directors, employees and consultants of the Group receive remuneration in the
form of share-based payments, whereby equity instruments (or “equity-settled transactions”) are
awarded in recognition of their services.
The cost of equity-settled transactions with employees is measured by reference to their fair value
at the date they are granted, determined using the Black-Scholes valuation model (see Note 15).
The cost of equity-settled transactions, together with a corresponding increase in equity, is
recognized over the period in which the performance and/or service conditions are fulfilled ending
on the date on which the employees become fully entitled to the award (“vesting date”). The
cumulative expense recognized for equity-settled transactions at each financial reporting date up
to and until the vesting date reflects the extent to which the vesting period has expired, as well as
the Group’s best estimate of the number of equity instruments that will ultimately vest. The profit
or loss charge or credit for the period represents the movement in cumulative expense recognized
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
awards are treated as vesting irrespective of whether or not the market condition is satisfied,
provided that all other performance conditions are satisfied.
*SGVFS001330*
- 19 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. An additional expense is recognized for any modification
that increases the total fair value of the share-based payment transaction, or which is otherwise
beneficial to the employee 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. If a
new award, however, is substituted for the cancelled awards and designated as a replacement
award, the cancelled and new awards are treated as if they were a modification of the original
award, as described in the previous paragraph.
Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale are
capitalized as part of the cost of respective assets. All other borrowing costs are expensed in the
period they occur. Borrowing costs consist of interest and other costs that an entity incurs in
connection with the borrowing of funds.
Foreign Currency-denominated Transactions and Translations
The consolidated financial statements are presented in Peso, which is the Parent Company’s
functional and presentation currency. Each entity in the Group determines its own functional
currency and items included in the consolidated financial statements of each entity are carried
using that functional currency. Transactions in foreign currencies are initially recorded at the
functional currency rate ruling at the date of the transaction. Outstanding monetary assets and
liabilities denominated in foreign currencies are retranslated at the exchange rate ruling at the
financial reporting date. All differences are taken to profit or loss with the exception of
differences on foreign currency borrowings that provide a hedge against a net investment in a
foreign entity. These are taken directly to the equity until the disposal of the net investment, at
which time they are recognized in profit or loss. Tax charges and credits attributable to exchange
differences on those borrowings are also dealt with in equity. Non-monetary items that are
measured in terms of historical cost in a foreign currency are translated using the exchange rates
as at the dates of the initial transactions.
On consolidation, the assets and liabilities of foreign operations are translated into Philippine Peso
at the rate of exchange prevailing at the reporting date and their income statements are translated
at weighted average exchange rates for each month of the year. The exchange rate differences
arising on the translation are reported as other comprehensive income in the consolidated
statement of comprehensive income and taken directly as a separate component of equity as
“Cumulative translation adjustments”.
On disposal of a foreign operation, the component of other comprehensive income relating to that
particular foreign operation is recognized in profit or loss.
Loss Per Share Attributable to the Equity Holders of the Parent Company
Basic loss per share amounts is computed by dividing net loss for the year attributable to ordinary
equity holders of the Parent Company and total comprehensive loss for the year attributable to
ordinary equity holders of the Parent Company by the weighted average number of common
shares outstanding during the year, excluding treasury shares, adjusted for any subsequent stock
dividends declared.
*SGVFS001330*
- 20 Diluted earnings per share amounts is computed by dividing the net loss for the year attributable to
equity holders of the Parent Company and total comprehensive loss for the year attributable to
ordinary equity holders of the Parent Company by the weighted average number of common
shares outstanding, excluding treasury shares, during the year plus the weighted average number
of common shares that would be issued on the conversion of all the dilutive potential common
shares into common shares.
Taxes
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 have been enacted or substantively enacted at the
financial reporting date.
Deferred Tax. Deferred tax is recognized on all temporary differences at the liability method
between the tax bases of assets and liabilities and their carrying amounts for financial reporting
purposes at the financial reporting date.
Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits
of unused net operating loss carryover (NOLCO) and unapplied excess of minimum corporate
income tax (MCIT) over regular corporate income tax (RCIT) to the extent that it is probable that
sufficient future taxable income will be available against which the deductible temporary
differences, carryforward benefits of unused NOLCO and excess of MCIT over RCIT can be
utilized.
Deferred tax liabilities are not recognized when the deferred tax liability arises from the initial
recognition of goodwill or an asset or liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither the accounting income nor taxable income or
loss. With respect to taxable differences associated with investments in subsidiaries, associates
and interests in joint ventures, deferred income 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 financial reporting date and
reduced to the extent that it is no longer probable that sufficient future taxable income will be
available to allow all or part of the deferred tax assets to be utilized.
Unrecognized deferred tax assets are reassessed at each financial reporting date and are recognized
to the extent that it has become probable that sufficient future taxable income will allow all or part
of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are 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 at the financial reporting date.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to offset current tax
assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the
same taxation authority.
*SGVFS001330*
- 21 Value-added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT,
except:
§
when the tax incurred on a purchase of assets or services is not recoverable from the tax
authority, in which case the tax is recognized as part of the cost of acquisition of the asset or
as part of the expense item as applicable; and
§
when receivables and payables are stated with the amount of VAT included.
The net amount of sales tax recoverable from, or payable to the taxation authority is included as
part of “Prepaid expenses and other current assets” or “Accounts payable or other current
liabilities” in the consolidated statement of financial position.
Segment Reporting
Operating segments are components of an entity for which separate financial information is
available and evaluated regularly by management in deciding how to allocate resources and
assessing performance. The Group considers the entire business as one segment.
The Group is primarily involved in providing turnkey solutions to the information systems
requirements of various companies with high value transactions. In terms of geographic segments,
the Group currently has three geographical segments, Philippines, Singapore and Hongkong.
Revenue generated from these projects consists mainly of software development fees.
Management monitors the operating results of its business unit separately based on geographic
location for the purpose of making decisions about resource allocation and performance
assessment. Segment performance is evaluated based on operating profit or loss which in certain
respects is measured differently from operating income or loss in the consolidated financial
statements. Group financing, excluding interest income and expense and income taxes are
managed on a group basis and are not allocated to operating segments.
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 obligation; and a reliable estimate can be made of the amount of the
obligation. Where the Group expects some or all of a provision to be reimbursed, for example
under an insurance contract, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain. The expense relating to any provision is recognized in the
profit or loss, net of any reimbursement. If the effect of the time value of money is material,
provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks
specific to the liability. Where discounting is used, the increase in the provisions due to the
passage of time is recognized as interest expense.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements but these are
disclosed in the notes to consolidated financial statements unless the possibility of an outflow of
resources embodying economic benefits is remote. Contingent assets are not recognized in the
consolidated financial statements but these are disclosed in the notes to consolidated financial
statements when an inflow of economic benefits is probable.
*SGVFS001330*
- 22 Events after the Reporting Date
Post year-end events that provide additional information about the Group’s financial position at
the financial reporting date (adjusting events) are reflected in the consolidated financial
statements. Post year-end events that are not adjusting events are disclosed in the notes to the
consolidated financial statements when material.
3. Significant Accounting Judgments, Estimates and Assumptions
The preparation of the Group’s consolidated financial statements require management to make
judgments, estimates and assumptions that effect the reported amounts of revenues, expenses,
assets and liabilities at the reporting date. However, uncertainty about these assumptions and
estimates could result in outcomes that could require a material adjustment to the carrying amount
of the asset or liability affected in the future.
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
amounts recognized in the consolidated financial statements:
Determination of the Functional Currency. The Parent Company and all other subsidiaries and
associate, except for iWave Asia and PGI, have determined that their functional currency is
Philippine Peso. It is the currency of the primary economic environment in which the Parent
Company and all other subsidiaries and an associate, except for those entities mentioned earlier,
operate. Peso is also the currency that mainly influences the sale of goods and services as well as
the costs of selling such goods and providing such services. iWave Asia and PGI have determined
the U.S. dollar to be their functional currency. The accounts of the Group entities using U.S.
dollar as functional currency are translated to Peso for purposes of consolidation to the Group.
Classification of Financial Instruments. The Group classifies a financial instrument depending on
the purpose for which the financial instrument was acquired or originated (see Note 22).
Operating Leases Commitments - Group as Lessee. The Group has entered into property leases,
where it was determined that the risks and rewards related to those properties are retained by the
lessor. These lease agreements are accounted for as operating leases.
Rent expense amounted to =
P21,885,449 in 2012, P
=24,052,978 in 2011 and =
P23,179,200 in 2010
(see Notes 16, 17 and 21).
Operating Leases Commitments - Group as Lessor. The Group has entered into property
subleases on its leased properties. The Group determined that the lessors retain all the significant
risks and rewards of ownership of these properties which are leased out as operating leases.
Rent income amounted to =
P27,710,940 in 2012, P
=20,693,319 in 2011 and =
P22,582,773 in 2010
(see Note 21).
Estimates and Assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the
financial reporting date, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next calendar year are as follows:
*SGVFS001330*
- 23 Business Combination. In 2012, the Parent Company acquired 68.32% direct equity interest in IEST,
increasing its interest from 28.15% in 2011 to 91.52% in 2012.
As permitted by PFRS 3, the Parent Company accounted for the business combination using
provisional amounts while it is still in the process of completing the purchase price allocation.
PFRS 3 allows a measurement period not exceeding one year from the acquisition date or up to
December 28, 2013. The measurement period is the period after the acquisition date, which the
acquirer may adjust the provisional amounts recognized for a business combination. The
measurement period is the period after the acquisition date during which the acquirer may adjust the
provisional amounts recognized for a business combination. The measurement period provides the
Parent Company with a reasonable time to obtain the information necessary to identify the
requirements of PFRS 3:
§
§
§
§
the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquire;
the consideration transferred for the acquisition;
in a business combination achieved in stages, the equity interest in the acquiree previously held
by the acquirer; and
the resulting goodwill or gain on a bargain purchase.
The Group will recognize adjustments to the provisional amounts as if the accounting for the business
combination had been completed at the acquisition date. Thus, the Group shall revise comparative
information for period presented in the consolidated financial statements, as needed.
The provisional amount of goodwill amounted to P
=170,160,913 as at December 31, 2012
(see Note 4).
Impairment of Loans and Receivables. The Group maintains allowance for impairment at a level
based on the result of individual and collective assessments under PAS 39. Under the individual
assessment, the Group is required to obtain the present value of estimated cash flows using the
financial asset’s original effective interest rate. Impairment loss is determined as the difference
between the financial asset’s carrying value 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 financial assets based on the credit risk characteristics such
as customer type, payment history, past-due status and term of the customers. Impairment loss is
then determined based on historical loss experience of the financial assets grouped per credit risk
profile. Historical loss profile is adjusted on the basis of current observable data to reflect the
effects of current conditions that did not affect the periods 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.
The aggregate carrying amount of receivables and due from related parties follows:
Receivables (see Note 5)
Due from related parties (see Note 14)
2012
P
=9,321,746
11,737,985
P
=21,059,731
2011
=24,096,337
P
28,556,542
=52,652,879
P
Allowance for impairment amounted to P
=17,430,421 and =
P8,688,167 as at December 31, 2012 and
2011, respectively (see Notes 5 and 9).
*SGVFS001330*
- 24 Evaluation of Lease Commitments. The evaluation of whether an arrangement contains a lease is
based on its substance. An arrangement is, or contains a lease, when fulfillment of the
arrangement depends on specific asset or assets and the arrangement conveys a right to use the
asset.
The Group, as a lessor, has entered into commercial property leases. The Group has determined
that it retains all the significant risks and rewards of ownership of these properties because of the
following factors: (a) the lessee will not acquire ownership of the leased property upon
termination of the lease; and, (b) at the inception of the lease, the present value of the minimum
lease payments by the lessee is substantially lower than the fair value of the leased asset.
Rent expense amounted to =
P21,885,449 in 2012, P
=24,052,978 in 2011 and =
P23,179,200 in 2010
(see Notes 16, 17 and 21).
Rent income amounted to =
P27,710,940 in 2012, P
=20,693,319 in 2011 and =
P22,582,773 in 2010
(see Note 21).
Estimation of Useful Lives of Property and Equipment. The Group estimates the useful lives of
property and equipment based on the internal technical evaluation and experience with similar
assets. The estimated useful lives are periodically reviewed and updated if expectations differ
from previous estimates due to physical wear and tear, technical or commercial obsolescence and
legal or other limits on the use of the assets. 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 expense and
decrease the property and equipment’s value.
There is no change in the estimated useful lives of property and equipment during the years ended
December 31, 2012, 2011 and 2010.
Impairment of Nonfinancial Assets. The Group assesses whether there are any indicators of
impairment for all nonfinancial assets which includes prepaid expenses and other current assets,
property and equipment, investment in an associate and other noncurrent assets at each reporting
date. These are tested for impairment when there are indicators that the carrying amounts may not
be recoverable. If any such indication exists and where the carrying values exceed the estimated
recoverable amount, the assets or cash-generating units are written down to their recoverable
amount. Impairment losses, if any, are recognized in profit or loss.
As at December 31, 2012 and 2011, accumulated impairment loss amounting to P
=8,903,819 was
recognized on computer equipment relative to the PCSO Project (see Note 25). The Group
recognized impairment loss on nonfinancial assets amounting to P
=12,550,827 in 2012 and
=5,080,011 in 2011 on the following:
P
Inventories (see Note 6)
Other current assets (see Note 6)
Advances and deposits for future stock subscription
(see Note 9)
2012
P
=732,191
1,818,636
2011
=–
P
5,080,011
10,000,000
P
=12,550,827
–
=5,080,011
P
Impairment loss on inventories recognized in 2012 is due to inventory obsolescence while
impairment loss on other current assets represents probable losses on creditable withholding taxes.
*SGVFS001330*
- 25 The Group recognized impairment loss on advances amounting to P10,000,000 in 2012 for
probable losses on these advances.
The aggregate carrying amount of property and equipment, investment in associates and advances
and deposits for future stock subscription follows:
Property and equipment (see Note 7)
Investment in associates (see Note 8)
Advances and deposits for future stock subscription
(see Note 9)
2012
P
=11,450,432
416,526
2011
=13,203,922
P
8,451,794
126,492,289
P
=138,359,247
176,499,932
=198,155,648
P
Estimation of Employee Benefits. The determination of the obligation and employee benefits cost
is dependent on the selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions include among others, discount rates and rates of salary increases. Actual
results that differ from the Group’s assumptions are accumulated and amortized over future
periods and therefore, generally affect the recognized expense and recorded obligation in such
future periods. While the Group believes that the assumptions are reasonable and appropriate,
significant differences in the actual experience or significant changes in the assumptions may
materially affect the retirement obligations.
In 2012 and 2011, management assessed that there is no significant change in the accrued
retirement benefits if the Parent Company and other subsidiaries obtain actuarial valuations of its
retirement benefits.
The carrying values of accrued employee benefits recognized in the Group’s consolidated
statements of financial position amounted to =
P5,869,951 and =
P5,186,383 as at December 31, 2012
and 2011, respectively (see Note 19).
Estimation of Income from Software Solutions. The determination of the income recognized from
developing software solutions mainly relies on the percentage of completion. The percentage of
completion is determined based on the number of hours worked over the total estimated number of
hours on a certain project. The contract amount less the cost of services using the percentage of
completion is the estimated amount of income recognized by the Group.
Revenue from developing software amounted to =
P35,218,177 in 2012, P
=58,550,877 in 2011 and
=
P61,478,955 in 2010 which is presented under “Service fees and software solutions” in the
consolidated statements of comprehensive income.
Realizability of Deferred Tax Assets. The Group reviews the carrying amounts at each financial
reporting date and adjusts the balance of deferred income tax assets to the extent that it is no
longer probable that sufficient future taxable income will be available to allow all or part of the
deferred income tax assets to be utilized.
The Group’s unrecognized deferred income tax assets amounted to P
=80,707,003 and
=
P84,684,420 as at December 31, 2012 and 2011, respectively (see Note 20). Deferred tax assets
were not recognized because the Group believes that there will be no sufficient future taxable
income available for which these deferred tax assets can be utilized.
*SGVFS001330*
- 26 4. Business Combination
In 2012, DFNN and IEST executed the following transactions to acquire direct ownership in IEST.
In 2012, the shareholders of DFNN and IEST agreed for DFNN to acquire 68.32% of IEST shares
via a combination of a debt to equity conversion, a primary share infusion and a share swap
between DFNN and IEST at an enterprise value of =
P650,000,000.
On September 3, 2012, a Memorandum of Agreement (MOA) was executed between the Parent
Company, IEST and IEST Selling Shareholders (collectively referred to as the “Parties”). The
MOA summarized the procedures and conditions for DFNN to acquire 19,009,545 shares of IEST
from IEST Selling Shareholders for a total consideration of =
P30,000,000 and for the latter to
subscribe to DFNN shares at a total subscription price of P
=27,458,299 or 27,458,299 shares at
=
P1 per share subject to the relevant conditions as set-out in the MOA. The Parties agreed that the
enterprise value of IEST shall form the basis for the purchase by DFNN of the IEST shares. In
addition, the Parties agreed that from execution and closing date, IEST Selling Shareholders shall
not vote on the IEST shares without prior written consent of DFNN on the acts as specified in the
MOA.
Acquisition of 4.95% of IEST through debt-to-equity conversion. In November 2012, DFNN and
IEST agreed to convert the existing receivables of DFNN from IEST amounting to =
P32,189,857 as
at May 31, 2012 to 1,485,684 IEST shares at a conversion price of P
=21.667 per share for an
aggregate price of P
=32,189,857, thereby giving DFNN 4.95% direct ownership in IEST as at
May 31, 2012.
DFNN’s Acquisition of 63.37% IEST shares from Selling Shareholders. On December 28, 2012,
DFNN and IEST Selling Shareholders executed a Deed of Absolute Sale wherein the Selling
Shareholders agreed to assign and transfer to DFNN their 19,009,545 shares in IEST for a total
consideration of =
P30,000,000.
Pending determination of the final fair values of the assets and liabilities acquired, the Parent
Company recorded its shares in the identifiable assets and liabilities of IEST using provisional fair
values. As permitted by PFRS 3, the Parent Company will recognize any adjustment to those
provisional values as an adjustment to goodwill upon determining the final fair values of
identifiable assets and liabilities within 12 months from acquisition date.
The allocation of the total cost of acquisition to identifiable assets and liabilities using provisional
fair values as at December 28, 2012, the acquisition date, is shown below.
Cash and cash equivalents
Receivables
Inventories
Due from a related party
Other current assets
Property and equipment
Intangible assets
Accounts payable and other current liabilities
Due to related parties
Total identifiable net liability at provisional fair value (Carried Forward)
=152,778
P
2,002,893
787,166
1,105,909
1,887,563
57,677
295,526
(15,004,704)
(3,651,602)
(12,366,794)
*SGVFS001330*
- 27 Total identifiable net liability at provisional fair value (Brought Forward)
Aggregate of:
Consideration transferred
Non-controlling interest
Goodwill
(P
=12,366,794)
158,842,823
(1,048,704)
157,794,119
=170,160,913
P
Total consideration consists of the following:
Market value of DFNN’s shares*
Carrying value of the extinguished debt
Net cash to be settled
=124,111,195
P
32,189,857
2,541,771
=158,842,823
P
*Market value of shares as at December 28, 2012.
Net cash flow on the acquisition follows:
Net cash acquired with the subsidiary
=152,778
P
If the combination had taken place at the beginning of the year, revenue would have been higher
by P
=1,533,646 and the loss before income tax for the Group would have been higher by
=
P13,364,270.
Based on provisional fair values, goodwill arising from the acquisition of IEST amounted to
=
P170,160,913, which is the amount that the identifiable net liabilities exceeds the total
consideration. The provisional amount of goodwill arising from the acquisition comprises the
expectation of future growth in the gaming industry that cannot be recognized separately as
identifiable intangible assets at the date of acquisition. The provisional amount will be reassessed
in the final purchase price allocation.
Prior to this acquisition, Parent Company has an existing 23.20% indirect interest in IEST. The
acquisition by Parent Company of the additional 68.32% effectively brings the Parent Company’s
total ownership in IEST to 91.52%. Under PFRS 3, if the acquirer holds a non-controlling equity
investment in the acquiree immediately before obtaining control, the acquirer remeasures that
previously held interest at its acquisition-date fair value and recognizes any resulting gain or loss
in profit or loss. In 2012, the Parent Company has recognized the provisional fair value of
previously held interest as nil pending completion of the final purchase price allocation.
The Group will recognize adjustments to the provisional amounts as if the accounting for the
business combination had been completed at the acquisition date. Thus, the Group shall revise
comparative information for prior periods presented in the consolidated financial statements, as
needed.
The fair value of the receivables amounted to =
P2,002,893. The gross amount of receivable
amounted to =
P4,234,770. If the acquisition by the Parent Company of the additional 68.32% had
taken place at the beginning of the year, the revenues and net loss from IEST included in the
consolidated statements of comprehensive income would have been higher by P
=1,533,646 and
=13,364,276, respectively. No revenue and profit or loss of IEST is included in the 2012
P
consolidated statement of comprehensive income.
*SGVFS001330*
- 28 Subscription of IEST’s Selling Shareholders to the Parent Company. On February 1, 2013,
IEST’s Selling Shareholders and the Parent Company executed subscription agreements to
exercise their options to subscribe to 27,458,230 DFNN shares. These shall be issued in
2 tranches at a price of P
=1.00 per share:
§
§
27,148,118 shares from the Parent Company’s authorized but unissued capital stock; and
310,112 common shares to be created by the Parent Company through an increase in
authorized capital stock to be filed with SEC.
5. Receivables
Trade
Advances to officers and employees
Accrued interest receivable (see Note 14)
Loans receivable (see Note 14)
Current portion of accrued rental receivable
(see Note 21)
Others
Less allowance for impairment
2012
P
=15,712,217
6,388,333
1,311,673
132,840
2011
=23,513,722
P
6,731,647
1,293,972
50,000
62,754
3,144,350
26,752,167
17,430,421
P
=9,321,746
13,202
1,181,961
32,784,504
8,688,167
=24,096,337
P
Trade receivables are noninterest-bearing and are normally settled on 15 to 90-day terms but may
go beyond as agreed.
Loans receivable pertains to short-term peso-denominated, interest-bearing cash advances to
Kirschner Games International, Inc. (KGI). These loans are collectible upon demand and bear
interest ranging from 12% to 16% per annum in 2012 and 2011, respectively. Interest income
earned from loans receivable amounted to =
P17,701 in 2012, =
P1,293,972 in 2011 and P
=1,246,155 in
2010.
Advances and other receivables are normally settled within 30 days.
Movements in the allowance for impairment are as follows:
Beginning balance
Provisions (see Note 17)
Ending balance
Trade
P
=2,104,170
6,619,062
P
=8,723,232
2012
Advances to
officers and
employees
Others
P
=6,051,498
P
=532,499
–
2,123,192
P
=6,051,498
P
=2,655,691
Total
P
=8,688,167
8,742,254
P
=17,430,421
*SGVFS001330*
- 29 -
Beginning balance
Provisions (see Note 17)
Write-off
Ending balance
Trade
=2,790,792
P
1,787,345
(2,473,967)
=2,104,170
P
2011
Advances to
officers and
employees
=–
P
6,051,498
–
=6,051,498
P
Others
=–
P
532,499
–
=532,499
P
Total
=2,790,792
P
8,371,342
(2,473,967)
=8,688,167
P
The above balances were identified by the Group using individual impairment assessment.
6. Other Current Assets
2012
P
=6,250,621
4,793,796
3,493,831
1,519,357
4,998,068
21,055,673
7,922,778
P
=13,132,895
Input VAT
Creditable withholding tax
Prepaid expense
Inventories
Others
Allowance for impairment
2011
=6,758,356
P
1,554,197
5,735,864
–
268,597
14,317,014
5,371,951
=8,945,063
P
Prepaid expenses include prepayments of insurance, underwriter’s fee, rent and legal services.
Movements in the allowance for impairment of other current assets are as follows:
2012
P
=5,371,951
2,550,827
P
=7,922,778
Beginning balance
Provisions for the year (see Note 17)
Ending balance
2011
P291,940
=
5,080,011
=5,371,951
P
7. Property and Equipment
Computer
Equipment
and Software
Cost
Balance at beginning of year
Additions
Disposal
Balance at end of year
Accumulated Depreciation, Amortization
and Impairment in Value
Balance at beginning of year
Depreciation and amortization
(see Notes 16 and 17)
Disposal
Balance at end of year
Net Book Values
= 50,359,064
P
1,300,070
(715,344)
50,943,790
2012
Furniture,
Fixtures
and Office Transportation
Equipment
Equipment
Leasehold
Improvements
Total
= 8,651,736
P
493,436
–
9,145,172
= 4,538,487
P
703,571
–
5,242,058
= 39,573,822
P
–
–
39,573,822
= 103,123,109
P
2,497,077
(715,344)
104,904,842
48,408,760
8,244,809
4,538,487
28,727,131
89,919,187
1,038,250
(178,837)
49,268,173
= 1,675,617
P
222,317
–
8,467,126
= 678,046
P
140,712
–
4,679,199
= 562,859
P
2,312,781
–
31,039,912
= 8,533,910
P
3,714,060
(178,837)
93,454,410
= 11,450,432
P
*SGVFS001330*
- 30 2011
Cost
Balance at beginning of year
Additions
Balance at end of year
Accumulated Depreciation and
Amortization and Impairment in
value
Balance at beginning of year
Depreciation and amortization
(see Notes 16 and 17)
Balance at end of year
Net Book Values
Computer
Equipment
and Software
Furniture,
Fixtures
and Office
Equipment
Transportation
Equipment
Leasehold
Improvements
Total
=49,172,950
P
1,186,114
50,359,064
=8,440,138
P
211,598
8,651,736
=4,538,487
P
–
4,538,487
=39,573,822
P
–
39,573,822
=101,725,397
P
1,397,712
103,123,109
47,533,809
8,036,158
4,538,487
25,607,265
85,715,719
874,951
48,408,760
=1,950,304
P
208,651
8,244,809
=406,927
P
–
4,538,487
=–
P
3,119,866
28,727,131
=10,846,691
P
4,203,468
89,919,187
=13,203,922
P
As at December 31, 2012 and 2011, accumulated impairment loss amounting to P
=8,903,819 was
recognized on computer equipment relative to the PCSO Project (see Note 25).
Fully depreciated property and equipment still being used in the operations amounted to
=
P65,116,308 and P
=63,196,271 as at December 31, 2012 and 2011, respectively.
8. Investments
Marketable Securities
Financial assets at FVPL pertain to equity shares held for trading purposes and are composed of
the following:
2011
2012
Alliance Global Group, Inc.
Megaworld Corporation
Manila Jockey Club, Inc.
Others
Number
of shares
250,000
1,410,000
1,100,000
–
2,760,000
Amount
P4,190,000
=
3,905,700
3,014,000
–
=11,109,700
P
Number
of shares
250,000
2,700,000
–
50
2,950,050
Amount
P2,585,000
=
4,773,500
–
563
=7,359,063
P
Investment in Associates
In 2012, investment in associates represents the Parent Company’s 40% investment in shares of
stock of Essence Asia Philippines, Inc. (EAP). In 2011, this account includes the Parent
Company’s indirect interest in IEST through PGI.
In 2012 and 2011, PGI’s interest in IEST is 33.33% and 20%, respectively.
The following table shows the movements of the investments:
2012
Cost:
Beginning balance
Additions
Effect of consolidation of IEST (see Note 4)
Ending balance (Carried Forward)
P
=20,775,984
–
(19,576,384)
1,199,600
2011
=19,576,384
P
1,199,600
–
20,775,984
*SGVFS001330*
- 31 -
Cost, ending balance (Brought Forward)
Accumulated equity in losses:
Beginning balance
Share in net losses for the year
Effect of consolidation of IEST (see Note 4)
Ending balance
2012
P
=1,199,600
2011
=20,775,984
P
(12,324,190)
(1,199,600)
12,324,190
(1,199,600)
P
=–
(10,227,708)
(2,096,482)
–
(12,324,190)
=8,451,794
P
The summarized financial information of investments in associates follows:
Total assets
Total liabilities
Total revenue
Net loss
2012
P
=300,245
1,461,324
523,707
1,957,686
2011
P6,798,956
=
45,491,334
1,402,330
10,482,411
2012
2011
P
=136,492,289
5,394,710
821,000
–
32,100
P
=142,740,099
=176,499,932
P
5,144,020
–
4,164,800
151,187
=185,959,939
P
(10,000,000)
P
=132,740,099
–
=185,959,939
P
9. Other Noncurrent Assets
Advances and deposits for future stock subscription
(see Notes 4 and 14)
Rental deposits (see Note 21)
Deposit for software development
Advances to an officer
Others
Allowance for impairment on advances and deposits
for future stock subscription
The advances and deposits for future stock subscription amounting to P
=30,641,902 in 2011 pertain
to deposits of PGI to IEST for the purpose of acquiring additional interest. In 2012, this deposit
was converted to common stock. PGI’s interest in IEST increased from 20% in 2011 to 31.68% in
2012 (see Note 4).
Advances and deposits for future stock subscription amounting to P
=136,492,289 and
=145,858,030 in 2012 and 2011, respectively, pertain to advances to KGI. In 2011, PGI and KGI
P
entered into an agreement to convert KGI’s debt into ordinary shares of KGI. As at May 16, 2013,
the advances and deposits for future stock subscription has not yet been converted. The 2011
balance of due from KGI has been reclassified accordingly. The reclassification increased total
noncurrent assets by P
=145,858,030 in 2011 and decreased total current assets by the same amount.
The reclassification did not have an impact on total liabilities and equity and profit or loss in 2011.
The Group recognized impairment loss on these advances amounting to P10,000,000 in 2012.
*SGVFS001330*
- 32 -
10. Accounts Payable and Other Current Liabilities
Trade
Accrual for:
Interest and penalties
Rent (see Note 21)
Interest (see Note 11)
Others
VAT payable
Withholding tax payable
2012
P
=24,284,463
2011
=24,446,815
P
41,871,059
5,285,010
3,610,704
3,920,252
16,601,806
14,914,894
P
=110,488,188
–
4,265,394
2,203,468
5,176,141
8,831,843
10,087,950
=55,011,611
P
Trade payables are noninterest-bearing and are normally settled between 15 to 60 days term.
Accrued expenses include accruals of interest and penalties, salaries, employee benefits and
interests on loans pertaining to a refund to third party due to cancellation of a project. Accrued
expenses are normally settled within one year from financial reporting date.
VAT payable and withholding tax payable pertain to statutory payables to government that are due
within the year.
11. Loans Payable
Short-term Loans
Short-term loans pertain to the Parent Company’s peso-denominated, interest-bearing loans
obtained from a stockholder and financing companies. These loans are payable upon demand and
bear interest of 15.00% per annum. As at December 31, 2012 and 2011, short-term loans
amounted to =
P22,569,044 and =
P9,973,242, respectively.
Interest expense amounted to =
P1,487,640 in 2012 and P
=619,434 in 2011.
Convertible Loans
Convertible loans pertain to the Parent Company’s interest-bearing loans obtained from third
parties and a shareholder. The loans contain a short equity call option which gives the holders an
option to convert the amount due into equivalent common shares of the Parent Company, and long
call option which gives the Parent Company the right to redeem the loans prior to maturity date
(see Note 22).
The equity call options of the loans with ADAC (Loan 1), Allteams, Westdale and Winteam were
assessed as embedded derivatives. Meanwhile, the equity call option arising from the pesodenominated loan from ADAC (Loan 2) is exercisable at any time during the period of 1 year and
11 months commencing on the drawdown date of the loan at a fixed conversion price of =
P2.95 per
share. As the loan may be settled by the exchange of a fixed amount of cash for a fixed number of
the Parent Company’s own shares, the equity call option is an equity component which was
separated from the compound instrument. As at the drawdown date and December 31, 2012, the
equity component of convertible loan reported in the consolidated statements of financial position
amounted to P
=2,513,260.
*SGVFS001330*
- 33 As at December 31, 2012 and 2011, outstanding convertible loans are as follows:
Loan
Asia Defense and Armament
Corporation (ADAC)
Loan 1
Loan 2
Allteams Investment, Inc.
(Allteams)
Westdale Group Limited
(Westdale)
Winteam Limited (Winteam)
Interest Rate
Treasury bill
rate + 12%
20%
9.75%
Treasury bill
rate + 12%
Treasury bill
rate + 12%
Maturity
2012
USD
June 16, 2013
July 30, 2015
PhP
2011
USD
PhP
$125,028
–
P5,383,407
=
5,000,000
$125,028
–
=5,711,742
P
–
August 31, 2014
49,472
2,077,396
–
–
March 15, 2013
100,000
4,336,026
50,000
2,336,938
May 4, 2013
100,000
Less debt issue costs
4,354,222
21,151,051
(1,531,199)
= 19,619,852
P
50,000
2,336,937
10,385,617
(369,724)
=10,015,893
P
Details of unamortized debt issue cost, presented as a deduction from the Parent Company’s
long-term debt as at December 31, 2012 and 2011, are as follows:
2012
P
=2,466,596
(935,397)
P
=1,531,199
Debt issue cost at inception date
Accretion
Ending balance
2011
=411,113
P
(41,389)
=369,724
P
12. Loss Per Share
The calculation of loss per share for the years ended December 31 follows:
Net loss applicable to equity
holders of the Parent
Company
Weighted average number of
outstanding common shares,
less treasury shares
Basic/diluted loss per share
2012
2011
2010
=122,686,113
P
=40,045,061
P
=61,249,705
P
122,851,882
122,851,882
121,310,282
=1.00
P
=0.33
P
=0.50
P
*SGVFS001330*
- 34 -
13. Capital Stock and Deposits for Future Stock Subscription
Capital Stock
Below is the Parent Company’s track record of the registration of securities:
Date of SEC Order
Rendered Effective
or Permit to Sell
October 10, 2000
May 16, 2003
July 25, 2003
April 9, 2008
December 31, 2010
Authorized
Event
Capital Stock
Initial Public Offering 100,000,000
Private Placement
100,000,000
Stock Rights
100,000,000
Convertibles listing
100,000,000
Employee stock option
plan and convertible
listings
150,000,000
150,000,000
Issued Shares
Issue Price
59,384,873
=10.00
P
7,000,000
4.20
26,553,949
2.00
7,061,178 2.00/4.12/4.20
22,851,882
122,851,882
2.00
On July 19, 2012, the BOD approved and authorized the increase in the capital stock of the Parent
Company from =
P150,000,000 divided into 150,000,000 shares with a par value a par value of
=1.00 to 500,000,000 divided into 500,000,000 shares with a par value of P
P
=1.00 per share.
Deposit for Future Stock Subscription
As at December 31, 2012 and 2011 and January 1, 2011, deposit for future stock subscriptions
amounted to =
P136,189,793, =
P39,536,827 and =
P26,006,023, respectively.
In 2012 and 2011, the Parent Company received additional deposits for future stock subscription
amounting to =
P96,652,966 and P
=13,530,804, respectively.
In accordance with SEC Financial Reporting Bulletin No. 006, the Parent Company reclassified
deposits for future stock subscription from “Equity” to “Noncurrent liability” in 2012. The
reclassification was made for 2011 and required the presentation, at a minimum, of three
statements of financial position. The reclassification resulted in a decrease in equity by
=39,536,827 and =
P
P26,006,023; and an increase in noncurrent liabilities by P
=39,536,827 and
=26,006,023, as at December 31, 2011 and January 1, 2011, respectively. The reclassification has
P
no effect on total assets as at December 31, 2011 and January 1, 2011. Accordingly, the notes to
the consolidated financial statements do not include balances as at January 1, 2011 since there is
no change as a result of the reclassification. Also, the reclassification has no effect on the
consolidated statements of comprehensive income and consolidated statements of cash flows for
the years ended December 31, 2011 and 2010.
14. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the
other party or exercise significant influence over the other party in making financial and operating
decisions. Parties are considered to be related if they are subject to common control.
Entities owning, directly or indirectly, an interest in the voting power of the Group that gives them
significant influence over the enterprise, key management personnel, including directors and
officers of the Group and close members of the family of these individuals and companies
associated with these individuals also constitute related parties.
*SGVFS001330*
- 35 In considering each possible related entity relationship, attention is directed to the substance of the
relationship, and not merely the legal form.
The table below summarizes the transactions which have been entered into with related parties:
Category
Year
Associate
EAP
Advances/Due from related parties 2012
2011
Under Common Stockholders
DFNN Global
Advances/Due from related parties 2012
2011
KGI
Advances for future stock
2012
subscription
2011
Loans receivable
Interest
2012
2011
2012
2011
IEST
Advances/Due from related parties 2012
2011
Advances for future stock
2012
subscription
2011
Diversified Securities, Inc.
Advances/Due from related parties 2012
2011
Common Stockholders
ADAC
Convertible loans
2012
2011
Amount/
Volume of
Transactions
Outstanding
Balance
P
=123,450
–
P
=123,450
–
Due and Noninterest-bearing;
demandable
not impaired
92,569
–
92,569
–
Due and Noninterest-bearing;
demandable
not impaired
–
2,738,112
136,492,289
145,858,030
82,840
50,000
17,701
1,293,972
132,840
50,000
1,311,673
1,293,972
Noncurrent Noninterest-bearing;
with allowance for
impairment
amounting to
=10,000,000
P
Due and Interest-bearing; not
demandable
impaired
Due and
Not applicable
demandable
–
–
–
–
–
28,556,542
–
30,641,902
Due and Noninterest-bearing;
demandable
not impaired
–
–
208,249
–
Due and Noninterest-bearing;
demandable
not impaired
5,000,000
–
Terms
(10,383,407) Loan 1- June 16,
2013
(5,711,742)
Loan 2- July 30,
2015
Westdale
Convertible loans
Other related parties
IEST’s stockholders (see Note 8)
Purchase of IEST shares/Due to
related parties
Officers
Due to related parties
Advances to officers and
employees
Advances for future stock
subscription (net of allowance for
impairment) (see Note 9)
Due from related parties
Due to related parties
Due and
demandable
Conditions
Interest-bearing,
Treasury bill rate +
12%
20%
Interest-bearing,
Treasury bill rate +
12%
2012
2011
1,999,088
2,336,938
(4,336,026)
(2,336,938)
2012
2011
30,000,000
–
(30,000,000)
–
Due and Noninterest-bearing
demandable
2012
2011
2012
2011
16,658,745
2,500
–
–
(4,627,211)
(28,899,933)
6,034,865
6,034,865
Due and Noninterest-bearing
demandable
Due and
demandable
Fully impaired
2012
2011
2012
2011
2012
2011
P
=126,492,289
176,499,932
11,737,985
28,556,542
(34,627,211)
(28,899,933)
(Forward)
*SGVFS001330*
- 36 -
Category
Convertible loans (see Note 11)
Accrued interest receivable
(see Note 5)
Loans receivable (see Note 5)
Year
2012
2011
2012
2011
2012
2011
Amount/
Volume of
Transactions
Outstanding
Balance
(P
= 14,719,433)
(8,048,680)
1,311,673
1,293,972
132,840
50,000
Terms
Conditions
Compensation of key management personnel consists of the following:
2012
P
=37,685,000
20,384,384
1,293,293
P
=59,362,677
Stock options
Salaries and wages
Retirement benefits
2011
=–
P
15,942,442
1,192,839
=17,135,281
P
2010
=22,332,228
P
28,183,317
1,232,235
=51,747,780
P
15. Share-based Payment
The provisions of the employees’ stock option plan (ESOP) were approved in 2007. On various
dates in 2007, 2009, 2010 and 2012, the Parent Company granted stock options to its officers,
employees, directors and consultants in accordance with its ESOP as approved by the BOD.
Among the salient terms and features of the stock option plan are as follows:
Grant Date
September 17, 2007
Exercise
Price
=2.00
P
Average
Share Price
=9.70
P
December 7, 2007
December 12, 2007
February 12, 2009
June 22, 2009
July 16, 2009
July 31, 2009
April 14, 2010
April 15, 2010
July 19, 2010
September 17, 2010
February 14, 2012
2.00
2.00
2.00
2.00
2.00
2.00
3.50
3.50
3.50
3.50
3.50
14.50
15.50
3.90
7.50
7.90
7.70
8.20
8.00
6.90
7.02
8.87
Vesting period
33.33% vesting immediately, with the
remaining vesting annually at the rate of
33.33% over two years
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Vesting immediately
Upon exercise of the share option, the full cash payment of the exercise price must be tendered
and a subscription agreement should be executed for the shares actually purchased.
*SGVFS001330*
- 37 The Parent Company used the Black-Scholes to compute for the fair value of the options together
with the following assumptions in 2010:
2010
P6.90-P
=
=8.20
Immediately
24%-44%
0.00%
Spot price per share
Time to maturity
Volatility*
Dividend yield
* Volatility is calculated using historical stock prices and their corresponding logarithmic returns.
The Parent Company used the fair value of the shares at grant date for the fair value of the stock
options granted on February 14, 2012.
There were no expired or forfeited stock options in 2012, 2011 and 2010.
The following table summarizes the movements of the stock options:
January 1
Granted
Exercised
December 31
Number of Options
2011
2010
2012
8,231,500 15,980,500
8,231,500
–
5,433,000
10,500,000
– (13,182,000)
–
8,231,500
8,231,500
18,731,500
Weighted Average Exercise Price
2011
2010
2012
=3.25
P
=2.98
P
P
=3.25
–
3.50
3.50
–
3.05
–
=3.25
P
=3.25
P
P
=3.40
All outstanding options as at December 31, 2012, 2011 and 2010 are exercisable.
As at December 31, 2012, 2011 and 2010, outstanding stock options pertaining to the ESOP
amounted P
=81,095,219, P
=43,410,219 and =
P43,410,219, respectively.
The employee benefits expense recognized pertaining to ESOP amounted to =
P37,685,000 in 2012
(see Note 18). There were no employee benefits expense recognized in 2011 pertaining to ESOP.
In 2010, stock options outstanding amounting to P
=103,652,921 were reclassified to “Additional
paid in capital” account for the exercise of stock options. The reclassification did not have an
impact on assets and liabilities and total equity.
On March 1, 2013, the BOD approved the grant of employee stock option plans to directors,
officers, employees and consultants of the Parent Company equivalent to 29,455,500 common
shares under the same terms and conditions previously approved by the stockholders to be offered
at =
P3.50 per share.
*SGVFS001330*
- 38 -
16. Cost of Services
Personnel costs (see Note 18)
Rent (see Note 21)
Outside services
Software development costs
Utilities
Transportation and travel
Depreciation and amortization
(see Note 7)
Parking
Data service fee
Dues and fees
Supplies
Marketing
Others
2012
P31,829,656
=
21,530,700
19,416,972
11,403,648
3,404,802
2,812,165
2011
P11,249,182
=
23,445,892
27,969,851
3,486,179
3,019,418
2,542,069
2010
P26,631,993
=
23,141,400
13,567,718
7,560,088
2,034,736
2,245,837
2,307,429
1,300,288
753,287
588,820
409,624
6,900
1,692,809
=97,457,100
P
3,082,999
–
477,585
1,567,993
147,243
429,861
332,308
=77,750,580
P
3,848,527
–
484,332
1,183,395
149,437
182,769
1,784,138
=82,814,370
P
2012
P39,400,912
=
31,778,899
2011
P1,047,759
=
9,349,898
2010
P1,366,862
=
18,923,193
8,742,254
2,550,827
5,604,347
5,416,474
8,371,342
5,080,011
3,218,923
–
3,648,055
–
5,099,888
–
1,406,631
1,251,748
886,474
884,293
610,710
592,331
396,041
354,749
1,120,469
3,126,386
638,625
560,644
230,551
1,067,067
430,364
607,086
1,538,232
14,516,953
777,908
568,563
1,348,257
4,584,306
651,430
37,800
155,698
42,460
15,415
14,580
–
3,683,816
=103,788,659
P
393,291
767,190
42,982
–
–
1,505,348
=37,557,936
P
496,506
2,171,356
68,367
9,179,303
182,241
646,561
=65,805,781
P
17. General and Administrative Expenses
Taxes and licenses
Personnel costs (see Note 18)
Provision for impairment :
Receivables (see Note 5)
Other current assets (see Note 6)
Outside services
Penalties and surcharges
Depreciation and amortization
(see Note 7)
Professional fee
Supplies
Data service fees
Utilities
Transportation and travel
Dues, fees and subscriptions
Rent (see Note 21)
Entertainment, amusement and
representation
Sales and marketing
Insurance
Directors’ fee
Commission expense
Others
*SGVFS001330*
- 39 -
18. Personnel Costs
Stock options (see Note 15)
Salaries and wages
Employee benefits (see Note 19)
2012
P37,685,000
=
25,575,173
348,382
=63,608,555
P
2011
=–
P
20,287,825
311,255
=20,599,080
P
2010
P22,332,228
=
23,222,958
–
=45,555,186
P
19. Employee Benefits
The accrued retirement benefits recognized by the Group in the statements of financial position
follows:
Parent Company
iWave
2012
P
=4,033,389
1,836,562
P
=5,869,951
2011
=1,540,456
P
3,645,927
=5,186,383
P
Parent Company
The Parent Company accrues estimated retirement benefits costs for its regular employees
pursuant to Republic Act (RA) No. 7641. Under PAS 19 the cost of defined retirement benefits,
including those mandated under RA No. 7641, should be determined using an accrued benefit
valuation method or a projected benefit valuation method. These methods require an independent
actuarial valuation, which the Parent Company did not undertake. Management believes,
however, that the effect on the financial statements of the difference between the amount
determined using the current method of the Parent Company and the required actuarially
determined valuation method is not significant. The Parent Company’s accrued retirement
benefits amounted to P
=4,033,389 and =
P1,540,456 as at December 31, 2012 and 2011, respectively.
iWave
iWave has a funded, noncontributory defined retirement benefit plan covering qualified employees
and executives. An independent actuary, using the projected unit credit method, conducts an
actuarial valuation of the fund. The accrued liability is determined according to the plan formula
taking into account service rendered and compensation of covered employees as at valuation date.
Actuarial valuations are generally obtained for the plan every two to three years.
The following tables summarize the components of net retirement benefits costs recognized in
profit or loss and in the consolidated statements of financial position.
Retirement Benefit Expense
Current service cost
Interest cost
Expected return on plan assets
Actuarial gain
Past service cost
2012
P
=295,288
173,879
(79,264)
(27,153)
(17,687)
P
=345,063
2011
=131,470
P
146,456
(74,735)
(22,862)
(17,687)
=162,642
P
*SGVFS001330*
- 40 Accrued Retirement Benefits
2012
P
=4,841,350
(1,365,453)
3,475,897
(1,798,520)
159,185
P
=1,836,562
Present value of defined benefit obligation
Fair value of plan assets
Unfunded obligation
Unrecognized net actuarial losses (gains)
Unrecognized past service cost
2011
P1,902,391
=
(1,321,069)
581,322
733,305
176,872
=1,491,499
P
Changes in present value of defined benefit obligation are as follows:
Balance at beginning of year
Interest cost
Current service cost
Actuarial loss on defined benefit obligation
Balance at end of year
2012
P
=1,902,391
173,879
295,288
2,469,792
P
=4,841,350
2011
=1,602,363
P
146,456
131,470
22,102
=1,902,391
P
2012
P
=1,321,069
79,264
(34,880)
P
=1,365,453
2011
=1,245,575
P
74,735
759
=1,321,069
P
Changes in the fair value of plan assets are as follows:
Balance at beginning of the year
Expected return on plan assets
Actuarial gain (loss)
Balance at end of year
The plan assets of iWave are maintained by a trustee bank. The details of the carrying value and
fair value of the plan assets as at December 31, 2012 and 2011 are equal and are shown below.
2012
P
=236,143
1,101,163
29,856
(1,709)
P
=1,365,453
Cash (a)
Investments in government securities (b)
Receivables (c)
Payables (d)
a.
b.
c.
d.
2011
P147,624
=
1,145,487
29,596
(1,638)
=1,321,069
P
Cash consists of current account, savings deposits and special savings deposits.
Investments held for trading are investments in government securities.
Receivables consist of interest receivables.
Payables consist of accrued transfer fees payable.
The principal assumptions used in determining the retirement benefits cost as at December 31 are
as follows:
Discount rate
Salary increase
Expected return on plan assets
Number of employees covered
2012
5.33%
10.00%
6.00%
3
2011
9.14%
10.00%
6.00%
6
2010
9.14%
10.00%
6.00%
6
*SGVFS001330*
- 41 Amounts for current and previous four periods are as follows:
Defined benefit obligation
Plan assets
Unfunded
Experience adjustments-gain (loss)
2012
P
=4,841,350
(1,365,453)
3,475,897
(34,880)
2011
P1,902,391
=
(1,321,069)
581,322
162,564
2010
P1,602,363
=
(1,245,575)
356,788
326,512
2009
P5,730,938
=
(3,011,387)
2,719,551
7,215,250
2008
P6,437,300
=
(3,011,300)
3,426,000
14,445,900
In 2012, accrued employee benefits pertaining to service bonus amounting to P
=2,154,427 were
reversed.
20. Income Taxes
The following table shows the details of the Group’s provision for income taxes:
2012
Current:
RCIT
Final tax
MCIT
Deferred
P
=3,221,909
2,265
–
3,224,174
(216,730)
P
=3,007,444
2011
2010
=–
P
22,074
478,621
500,695
985,910
=1,486,605
P
=–
P
3,255
89,899
93,154
24,780,721
=24,873,875
P
The reconciliation of the benefit from income tax computed at the statutory income tax rate to the
provision from income tax as shown in the consolidated statements of comprehensive income
follows:
Benefit from income tax
Expired NOLCO
Nondeductible expenses
Movement in unrecognized deferred
income tax
Expired MCIT
Other nontaxable income
Interest income subjected to final tax
Application of NOLCO
Write-off of creditable withholding
taxes
Provision for probable loss - penalties
Dividend income
Others
2012
(P
=40,851,233)
27,845,175
12,754,029
2011
(P
=12,698,696)
9,485,521
176,318
2010
(P
=9,266,465)
16,671,155
75,989
(2,816,423)
252,520
(64,827)
(8,459)
–
6,289,843
86,450
(57,963)
(8,533)
(3,517,062)
19,354,004
37,338
(1,217,275)
(4,529)
(113,102)
–
–
–
5,896,662
P
=3,007,444
2,060,570
276,511
–
(606,354)
=1,486,605
P
–
164,340
(48,694)
(778,886)
=24,873,875
P
*SGVFS001330*
- 42 The Group’s recognized deferred tax liability pertains to the tax effects of the following items:
Accrued rent receivable
Accretion of interest
Derivative assets
Unrealized foreign exchange gain
2011
=1,733,780
P
1,065,716
321,323
430,791
=3,551,610
P
2012
P
=2,798,376
901,847
800,897
58,809
P
=4,559,929
The Group applied MCIT amounting to P
=536,334 in 2012.
Deferred tax assets have not been recognized for the following temporary differences, NOLCO
and MCIT since the Group believes that it is not probable that it will have sufficient future taxable
profits against which the deductible temporary differences, NOLCO and MCIT can be utilized:
NOLCO
Allowance for impairment
Employee stock options
Accrued rent
Accrued employee benefits
Provision for interest on deficiency taxes
Provision for unrecoverable creditable withholding
tax
Accretion of interest expense
Mark to market loss on derivatives
Past service cost
Unrealized foreign exchange loss
Unrealized loss on FVPL
Tax rate
MCIT
2012
P
=134,759,427
53,317,097
37,685,000
32,935,262
5,869,951
1,789,238
705,364
635,760
635,636
286,700
257,599
–
268,877,034
30%
80,663,110
43,893
P
=80,707,003
2011
=206,030,655
P
25,535,814
–
40,048,776
5,186,383
–
–
–
–
344,040
75,746
2,312,677
279,534,091
30%
83,860,227
824,193
=84,684,420
P
As at December 31, 2012, the Group’s NOLCO and MCIT will expire as follows:
Year Incurred
2012
2011
2010
Expiry Date
2015
2014
2013
MCIT
=–
P
–
43,893
=43,893
P
NOLCO
=39,588,985
P
39,641,254
55,529,188
=134,759,427
P
*SGVFS001330*
- 43 -
21. Lease Commitments
a. HatchAsia entered into a Master Lease Agreement (Agreement) with Fort Bonifacio
Development Corporation (FBDC) for the lease of a portion of a building (approximately
12,000 square meters) located at the Fort Bonifacio Global City on May 6, 2000. The lease
shall be effective for a period of 15 years commencing from the turnover of the structure to
the lessee or upon receipt of the certification indicating that the structure is ready for
occupancy, whichever comes later. The lease may be extended beyond the lease period under
such terms and conditions mutually acceptable to the parties.
HatchAsia and FBDC entered into an Agreed New Terms and Conditions Agreement
amending certain provisions of the aforementioned agreement in September 2002. The new
agreement reduced the leased area from approximately 12,000 square meters to 5,086 square
meters.
The rental deposit equivalent to three-month rent amounting to P
=5,394,710 and P
=5,144,020 as
at December 31, 2012 and 2011, respectively, is included in “Other noncurrent assets” account
in the consolidated statements of financial position (see Note 9). The rental deposits shall
answer for any and all unpaid obligations of the Group, including any damage to leased
properties. Any remaining rental deposits will be applied on the Group’s rental payments
upon the expiration of the lease contract. Unpaid monthly rentals are subject to 2% interest
and 2% penalty per month.
Rent expense charged to operations amounted to =
P21,885,449 in 2012, P
=24,052,978 in 2011
and P
=23,179,200 in 2010 (see Notes 16 and 17).
The excess of the total rent expense over total amount paid is accounted for as follows:
Accrued rent
Less current portion (see Note 10)
2012
P
=32,935,262
5,285,010
P
=27,650,252
2011
=37,200,656
P
4,265,394
=32,935,262
P
Future minimum rentals payable under the non-cancellable operating lease as at December 31:
Within one year
Beyond one year but not more than five years
2012
P
=27,601,821
86,073,565
P
=113,675,386
2011
P25,796,094
=
113,675,385
=139,471,479
P
b. HatchAsia subleases the building it leases from Fort Bonifacio Development Corporation to
various locators. These non-cancellable leases have remaining non-cancellable lease terms of
between 3 to 15 years. All leases include a clause to enable upward revision of the rental
charge on an annual basis based on prevailing market conditions.
Rent income is accounted for on a straight-line basis over the lease term. Rent income
amounted to =
P27,710,940 in 2012, P
=20,693,319 in 2011 and P
=22,582,773 in 2010.
The security deposit equivalent to three-month rent amounted to nil and =
P335,081 as at
December 31, 2012 and 2011, respectively. These shall answer for any and all unpaid
obligations of the sub-lessees, including any damage to the leased properties.
*SGVFS001330*
- 44 PAS 17 requires the recognition of rental revenue for the noncancellable portion of an
operating lease on a straight-line basis. The amounts by which rental revenue recognized
under the straight-line method exceeded the rental amounts due in accordance with the terms
of the lease agreements are charged to “accrued rental receivables” account in the consolidated
statements of financial position.
The excess of the total lease income over total rent received is accounted for as follows:
2011
=774,567
P
13,202
=761,365
P
2012
P
=1,581,599
62,754
P
=1,518,845
Accrued rent receivable
Less current portion (see Note 5)
In 2011, HatchAsia reversed accrued rent receivable amounting to P
=22,168,402 as a result of
pre-termination of lease contracts which were originally recognized on a straight-line method.
Future minimum rentals receivable under the non-cancellable operating leases as at
December 31 are as follows:
2012
P
=27,085,207
42,870,106
–
P
=69,955,313
Within one year
Beyond one year but not more than five years
Beyond five years
2011
=19,386,680
P
56,583,008
–
=75,969,688
P
22. Fair Values of Financial Instruments
The following tables present a comparison of carrying amounts and estimated fair values of the
Group’s financial instruments by category:
2012
Financial Assets
Financial assets at FVPL:
Marketable securities
Derivative assets
Loans and receivables:
Cash*
Receivables
Trade
Advances to officers and
employees
Accrued interest receivable
Loans receivable
Other
Due from related parties
Advances to an officer
2011
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
=11,109,700
P
800,897
=11,109,700
P
800,897
=7,359,063
P
321,321
=7,359,063
P
321,321
7,114,112
7,114,112
10,415,814
10,415,814
6,988,985
6,988,985
21,409,552
21,409,552
336,835
1,311,673
132,840
488,659
11,737,985
–
=40,021,686
P
336,835
1,311,673
132,840
488,659
11,737,985
–
=40,021,686
P
680,149
1,293,972
50,000
649,462
28,556,542
4,164,800
=74,900,675
P
680,149
1,293,972
50,000
649,462
28,556,542
4,164,800
=74,900,675
P
*SGVFS001330*
- 45 2012
Financial Liabilities
Loans and borrowings:
Accounts payable and other
current liabilities:
Trade
Accrued expenses**
Due to related parties
Short-term loans payable
Convertible loans
Rental deposits
Financial liabilities at FVPL Derivative liabilities
2011
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
=24,284,463
P
3,317,295
34,627,211
22,569,044
19,619,852
–
104,417,865
=24,284,463
P
3,317,295
34,627,211
22,569,044
17,283,283
–
102,081,296
=24,446,815
P
4,473,041
28,899,933
9,973,242
10,015,893
335,081
78,144,005
=24,446,815
P
4,473,041
28,899,933
9,973,242
9,292,934
335,081
77,421,046
635,636
=105,053,501
P
635,636
=102,716,932
P
–
=78,144,005
P
–
=77,421,046
P
*Excluding cash on hand amounting to =
P115,455 and =
P74,595 as at December 31, 2012 and 2011, respectively.
**Excluding withholding tax, SSS, PHIC and HDMF payables and other statutory liabilities amounting to P
=602,957
and =
P703,100 as at December 31, 2012 and 2011, respectively.
Fair Value Information
Marketable Securities. The fair values of quoted equity securities are based on quoted market
prices as at the financial reporting date.
Derivative Assets. The fair value of derivative assets are determined using the Binomial Option
Pricing Model which allows for the specification of points in time until the option expiry dates.
Inputs used are based on prevailing market information and include assumptions in computing the
Parent Company’s credit spread.
Current Financial Assets and Liabilities. The fair values of cash, trade receivables, advances to
officers and employees, accrued interest receivable, loans receivable, nontrade receivables, other
receivables, rental deposits, due from related parties, due to related parties, accounts payable and
other current liabilities and loans payable approximate their carrying values due to their short-term
nature or the interest rates that they carry approximate the interest rates for comparable
instruments in the market.
Derivative Financial Instruments
The Parent Company’s convertible loans from ADAC, Allteams, Westdale and Winteam
(the Loans) (see Note 11) contain embedded short equity call options and long call options.
Below is a summary of the values of the embedded derivatives which were separated from their
respective host contracts and accounted for as single compound derivatives as of December 31:
Derivative assets* ADAC (Loan 1), Westdale and Winteam
Derivative liability* Allteams
Net fair value of derivatives
Equity component of convertible loan ADAC (Loan 2)
2012
2011
P
=800,897
=321,321
P
635,636
P
=165,621
–
=321,321
P
P
=2,513,260
=–
P
*Pertains to the value of the compound embedded derivatives.
*SGVFS001330*
- 46 The embedded short equity call options and long call options were bifurcated from the respective
host contracts and accounted for as single compound derivatives. Details of each of the embedded
derivatives are as follows:
Short Equity Call Options
The short equity call options pertain to the option of the lenders to convert the Loans into the
Parent Company’s common shares.
The equity call options arising from the Parent Company’s U.S dollar-denominated loans from
ADAC (Loan 1), Westdale and Winteam are exercisable at any time within 60 days from the
initial drawdown dates of the respective loans at a conversion price based on the average price of
the Parent Company’s common shares over a period of 120 previous trading days on the
Philippine Stock Exchange from exercise date up to maturity.
The equity call option arising from the U.S dollar-denominated loan from Allteams is exercisable
at any time during the period of 1 year and 11 months commencing on the drawdown date of the
loan at a fixed conversion price of P
=2.50 per share.
The embedded equity call options from ADAC (Loan 1), Allteams, Westlade and Winteam were
assessed as not clearly and closely related to the host contracts, and were bifurcated from the
respective host contracts at each drawdown date.
Long Call Options
The long call options pertain to the option of the Parent Company to redeem the convertible loans
at face amount plus accrued interest at any time after 1 year from the initial drawdown dates of the
respective loans. In addition to the above, the loan from Allteams requires an effective
prepayment interest penalty ranging from 9.75% to 13.75% depending on the date of prepayment,
while the loan from ADAC (Loan 2) requires an effective interest penalty ranging from 10.00% to
20.00% depending on the date of prepayment. The embedded long call options were assessed as
not clearly and closely related to the host contracts, and were bifurcated from the respective host
contracts at each drawdown date.
For the loans from ADAC (Loan 1), Allteams, Westlade and Winteam, the embedded short equity
call options and long call options were accounted for as compound derivatives. As at the
drawdown date and December 31, 2012, the embedded long call option in the peso-denominated
loan from ADAC (Loan 2) has nil value.
Total drawdowns from the Loans amounted to =
P10,836,253 and =
P10,401,040 in 2012 and 2011,
respectively.
The movements in the Group’s derivative financial instruments follow:
Balance at beginning of year
Bifurcation during the year
Fair value changes during the year
Balance at end of year
2012
P
=321,321
(1,964,037)
1,807,977
P
=165,261
2011
=–
P
(340,295)
661,616
=321,321
P
Fair value changes during 2012 and 2011 were recognized in the consolidated statements of
comprehensive income under “Mark-to-market gain on derivatives”.
*SGVFS001330*
- 47 Fair Value Hierarchy
The Group uses the following hierarchy for determining the fair value of financial instruments
carried at fair value:
Level 1 - Fair values determined using observable market inputs that reflect quoted prices in active
markets for identical assets or liabilities.
Level 2 - Fair values determined using inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly.
Level 3 - Fair values determined using inputs for asset or liability that are not based on observable
market data.
As at December 31, 2012 and 2011, the Group’s marketable securities amounting P
=11,109,700
and P
=7,359,063, respectively, are measured at fair value under Level 1 of the fair value hierarchy.
The financial instruments classified under Level 3 pertain to the derivative assets and liabilities
arising from options embedded in the Parent Company’s convertible loans. These were classified
under Level 3 because of the credit spreads used as inputs to the fair value calculation of the
options which were assessed by the Group as having a significant impact to their fair values.
These embedded options were bifurcated. Positive fair value changes arising from these options
recognized in the Parent Company’s comprehensive income under “Mark to market gain on
derivatives” amounted to =
P1,807,977 and =
P661,616 in 2012 and 2011, respectively.
To assess the impact of the credit spreads used, the Group performed a sensitivity analysis using
an increase (decrease) assumption in the credit spreads, the results of which are shown below:
2012
2011
Increase (Decrease) in Credit Spread
100 bps
(100) bps
100 bps
(100) bps
Net Effect on the Option’s Fair Values
(P
=4,477)
4,515
(65,429)
66,463
During the years ended December 31, 2012 and 2011, there were no transfers between levels in
the fair value hierarchy.
23. Financial Risk Management Objectives and Policies
The primary objective of the Group’s financial risk management framework is to protect the
Group’s equity holders from events that hinder the sustainable achievement of financial
performance objectives, including failing to exploit opportunities. Key management recognizes
the critical importance of having efficient and effective risk management systems in place.
The Group’s financial instruments consist of cash, receivables, marketable securities, derivative
assets, due to related parties convertible loans due from related parties, accounts payable and other
current liabilities, loans payable and rental deposits. The Group’s activities expose it to credit
risk, liquidity risk and foreign currency risk.
*SGVFS001330*
- 48 Financial Risk
Credit Risk. Credit risk is the risk that one party to a financial instrument will fail to discharge an
obligation and cause the other party to incur a financial loss. The Group has no significant credit
concentrations of credit risks. The Group transacts only with a few recognized and creditworthy
customers with whom it has already firmly established good business relationship.
The Group’s exposure to credit risk arises from default of the counterparty, with a maximum
exposure equal to the carrying amount of the related financial instrument.
The following table summarizes the Group’s credit risk exposure as at December 31:
Financial assets at FVPL:
Derivative assets
Loans and receivables:
Cash*
Receivables:
Trade receivables
Advances to officers and employees
Accrued interest receivable
Loans receivable
Other receivables
Due from related parties
Advances to an officer
2012
2011
P
=800,897
=321,321
P
7,114,112
10,415,814
6,988,985
336,835
1,311,673
132,840
488,659
11,737,985
–
P
=28,911,986
21,409,552
680,149
1,293,972
50,000
649,462
28,556,542
4,164,800
=67,541,612
P
*Excluding cash on hand amounting to =
P115,455 and =
P74,595 as at December 31, 2012 and 2011, respectively.
It is the Group’s policy that all customers who wish to contract on credit terms are subject to credit
verification procedures. In addition, receivable balances are monitored on an ongoing basis with
the result that the Group’s exposure to bad debts is not significant.
The following tables provide the credit quality of the Group’s financial assets that are neither past
due nor impaired:
2012
Neither Past Due nor Impaired
High
Past Due and
Grade
Standard
Impaired
Financial assets at FVPL:
Derivative assets
Loans and receivables:
Cash*
Trade receivables
Advances to officers and employees
Accrued interest receivable
Loans receivable
Other receivables
Due from related parties
P
=–
Total
P
=800,897
P
=–
P
=800,897
7,114,112
–
–
6,988,985
–
336,835
–
1,311,673
–
132,840
488,659
–
–
11,737,985
P
=21,797,874
P
=7,114,112
*Excluding cash on hand amounting to =
P115,455 as at December 31, 2012.
–
8,723,232
6,051,498
–
–
2,655,691
–
P
=17,430,421
7,114,112
15,712,217
6,388,333
1,311,673
132,840
3,144,350
11,737,985
P
=46,342,407
*SGVFS001330*
- 49 2011
Neither Past Due nor Impaired
High
Past Due and
Grade
Standard
Impaired
Financial assets at FVPL:
Derivative assets
Loans and receivables:
Cash in banks*
Trade receivables
Advances to officers and employees
Accrued interest receivable
Loans receivable
Other receivables
Due from related parties
Advances to an officer
=–
P
Total
=321,321
P
=–
P
=321,321
P
10,415,814
–
–
21,409,552
–
680,149
–
1,293,972
–
50,000
–
649,462
–
28,556,542
–
4,164,800
=10,415,814
P
=57,125,798
P
*Excluding cash on hand amounting to =
P74,595 as at December 31, 2011.
–
2,104,170
6,051,498
–
–
532,499
–
–
=8,688,167
P
10,415,814
23,513,722
6,731,647
1,293,972
50,000
1,181,961
28,556,542
4,164,800
=76,229,779
P
The Group uses a credit rating concept based on the borrowers and counterparties’ overall credit
worthiness, as follows:
§
High grade - rating given to borrowers and counterparties who possess strong to very high
capacity to meet its obligations.
§
Standard - rating given to borrowers and counterparties who possess above average capacities
to meet its obligations.
The Group’s financial assets amounting to P
=163,456,299 and P
=213,399,642 as at
December 31, 2012 and 2011, respectively, excluding the impaired receivables amounting to
=
P17,430,421 and P
=8,688,167 as at December 31, 2012 and 2011, respectively, are considered as
neither past due nor impaired.
Liquidity Risk. Liquidity or funding risk is the risk that an entity will encounter difficulty in
raising funds to meet commitments associated with financial instruments.
The table below summarizes the maturity profile of the financial instruments of the Group based
on remaining undiscounted contractual cash flows. It also summarizes the maturity profile of the
financial assets based on expected realizability.
Financial assets at FVPL:
Marketable securities
Loans and receivable:
Cash*
Trade receivables
Advances to officers and employees
Accrued interest receivable
Loans receivable
Other receivables
Due from related parties
Total financial assets (Carried Forward)
Up to a Year
2012
1–5 Years
Total
=11,109,700
P
–
=11,109,700
P
7,114,112
6,988,985
336,835
1,311,673
132,840
488,659
11,737,985
39,220,789
–
–
–
–
–
–
–
–
7,114,112
6,988,985
336,835
1,311,673
132,840
488,659
11,737,985
39,220,789
*SGVFS001330*
- 50 -
Total financial assets (Brought Forward)
Other financial liabilities:
Accounts payable and other current liabilities:
Trade
Accrued expenses**
Due to related parties
Short-term loans payable
Convertible loan
Liquidity gap
Up to a Year
=39,220,789
P
24,284,463
3,317,295
34,627,211
22,569,044
–
84,798,013
(P
=45,577,224)
2012
1–5 Years
=–
P
–
–
–
–
19,619,852
19,619,852
(P
=19,619,852)
Total
=39,220,789
P
24,284,463
3,317,295
34,627,211
22,569,044
19,619,852
104,417,865
(P
=65,197,076)
* Excluding cash on hand amounting to =
P115,455 as at December 31, 2012. Ex*
** Excluding withholding tax, SSS, PHIC and HDMF payables amounting to P
=602,957 as at December 31, 2012.
Financial assets at FVPL Marketable securities
Loans and receivable:
Cash*
Trade receivables
Advances to officers and employees
Accrued interest receivable
Loans receivable
Other receivables*
Due from related parties
Advances to an officer
Other financial liabilities:
Accounts payable and other current liabilities:
Trade
Accrued expenses**
Due to related parties
Short-term loans payable***
Rental deposits
Convertible loan
Liquidity gap
Up to a Year
2011
1–5 Years
Total
=7,359,063
P
=–
P
=7,359,063
P
10,415,814
21,409,552
680,149
1,293,972
50,000
649,462
28,556,542
–
70,414,554
–
–
–
–
–
–
–
4,164,800
4,164,800
10,415,814
21,409,552
680,149
1,293,972
50,000
649,462
28,556,542
4,164,800
74,579,354
24,446,815
4,473,041
28,899,933
9,973,242
–
–
67,793,031
=2,621,523
P
–
–
–
–
335,081
10,015,893
10,350,974
(P
=6,186,174)
24,446,815
4,473,041
28,899,933
9,973,242
335,081
10,015,893
78,144,005
(P
=3,564,651)
* Excluding cash on hand amounting to =
P74,595 as at December 31, 2011.
** Excluding withholding tax, SSS, PHIC and HDMF payables amounting to P
=703,100 as at December 31, 2011
The Group’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank loans and extension of suppliers’ credit. The strong credit worthiness of
the Group gives it the ability to save funds as the need arises.
Foreign Currency Risk. Foreign currency risk is the risk that the fair value of future cash flows of
a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s
transactional currency exposures arise from revenue transactions in currencies other than its
functional currency.
The Group’s objective is to keep transactional currencies at an acceptable level to its operations to
minimize foreign exchange exposures.
*SGVFS001330*
- 51 The Group’s foreign currency-denominated assets consist of the following:
2012
US$
Peso
Value
Equivalent
Assets:
Cash
Receivables
Liabilities:
Accounts payable and other
current liabilities
Convertible loans
2011
US$
Value
Peso
Equivalent
$13,053
–
$13,053
=535,826
P
–
=535,826
P
$113,503
102,916
$216,419
P4,975,972
=
4,511,837
=9,487,809
P
US$
Value
Peso
Equivalent
US$
Value
Peso
Equivalent
$21,192
374,501
$395,693
=869,932
P
15,373,225
=16,243,157
P
$129,303
192,294
$321,597
P5,668,654
=
8,430,168
=14,098,822
P
The closing functional currency exchange rates as at December 31 are as follows:
2012
P
=41.05
U.S. Dollar
2011
=43.84
P
The following table presents the impact on the Group’s income before income tax and equity as at
December 31, 2012 and 2011 due to a reasonably possible change in fair value of monetary assets
and liabilities brought about by a change in Peso to Dollar exchange rate as at December 31:
2012
2011
Changes in Foreign
Exchange Rates
Increase by 5%
Decrease by 5%
Increase by 5%
Decrease by 5%
Impact on Income
Before Income Tax
(P
=785,367)
785,367
(232,959)
232,959
There is no other impact on the Group’s equity other than those affecting profit and loss.
24. Capital Management
The primary objective of the Group’s capital management is to maintain its capital at a level
adequate to support the funding requirements of its on going projects and considering changes in
economic conditions and risk characteristics of the Group’s activities. No significant changes
have been made in the objectives, policies, and processes of the Group from the previous year.
*SGVFS001330*
- 52 The capital considered by the Group is summarized below:
Capital stock
Additional paid-in capital
Deposits for future stock subscriptions
Other equity
Deficit
2012
P
=122,851,882
184,736,234
136,189,793
63,828,471
(450,089,671)
P
=57,516,709
2011
=122,851,882
P
184,736,234
39,536,827
63,828,471
(334,727,558)
=76,225,856
P
25. Significant Contracts and Agreements
Parent Company
a. PortWise AB
In 2008, the Parent Company entered into Distributorship and Trade Mark License Agreement
with PortWise AB, a company incorporated under the laws of Sweden. The agreement states
that PortWise AB grants the Parent Company a non-exclusive and non-transferable license for
the internal use of the software (PortWise), which is a comprehensive, integrated and
completely secure platform for identity and access management. It enables the enterprise to
create secure connections to its employees for remote access, to its business partners for
online business relationships, and to its customers for secure transactions and documentation
and any error corrections provided by PortWise, by the number of users for which the
corresponding fee has been paid.
No income was recognized in 2012, 2011 and 2010.
b. Equipment Lease Agreement with PCSO
On April 9, 2003, the Parent Company entered into an Equipment Lease Agreement with the
PCSO, a government-owned corporation. The agreement shall be for a period of eight years,
commencing on the date of commercial operation of the equipment system. Under the
agreement, PCSO shall pay the Parent Company a fee equal to a percentage of the gross
amount of sales placed and received through the equipment system.
On April 4, 2004, the Parent Company already fulfilled all of its deliverables. In 2004, the
implementation of the Project was put on hold following the unilateral suspension of the
PCSO Project. In 2004, the Parent Company recognized impairment amounting to
=8,903,819 on computer equipment relative to PCSO Project (see Note 7).
P
In 2009, the Parent Company filed for a civil case entitled an “Application for Interim
Measure of Protection in Aid of Arbitration - Preliminary Injunction with Application for
Temporary Order for Protection”. Pursuant to this case, the court granted the Parent
Company’s petition restraining the PCSO to implement text betting and to prevent PCSO from
awarding any contract to any entity.
On March 19, 2010, the Regional Trial Court granted the Parent Company’s petition for,
among others, the issuance of a writ preliminary injunction (WPI) restraining PCSO from
implementing betting through wireless technologies with possible vendors. The WPI was
issued by the court to prevent PCSO from awarding any contract to any entity for wireless
*SGVFS001330*
- 53 betting while the Parent Company is commencing arbitration proceedings in connection with
the cancellation of its Equipment Lease Agreement with PCSO. On August 20, 2010, the
Parent Company commenced arbitration by serving on PCSO a demand for arbitration in
relation to the parties’ disputes relating to the Equipment Lease Agreement.
On November 30, 2010, the Regional Trial Court issued an Order denying PCSO’s Omnibus
Motion dated March 26, 2010 on the ground that all of the motions contained therein were
without merit.
On February 4, 2011, PCSO filed with the Regional Trial Court its Notice of Appeal, and on
February 8, 2011, the Regional Trial Court gave due course to the same and ordered that the
entire record of the case be forwarded to the Court of Appeals for further proceedings. On
January 3, 2012, the Court of Appeals issued a notice directing PCSO to file its Appellant’s
Brief.
On April 25, 2012, the Parent Company filed its Manifestation/Motion to manifest that PCSO
instituted the appeal by way of a notice of appeal, which is the improper mode to appeal the
November 30, 2010 Order. Hence, for using an improper mode of appeal, the Parent
Company asked the Court to dismiss the appeal filed by PCSO. For the same reason, the
Parent Company manifested that it should not be required to, and thus declined, to file its’
Appellee’s Brief.
In a Resolution dated March 21, 2013, the CA granted the Parent Company’s Motion to
Dismiss and dismissed the appeal filed by PCSO. On April 5, 2013, the Parent Company
reiterated its earlier demand on PCSO to nominate its arbitrator in order that the arbitration
proceedings may finally commence.
IEST
a. Philippine Amusement and Gaming Corporation (PAGCOR) and Betfair International
ENC (Betfair)
IEST has an existing MOA with PAGCOR dated July 27, 2004 and amended on
February 22, 2005. Under the agreement, IEST shall customize, modify and optimize the
Automated Trading System and Remote Trading System software to develop automated
betting exchange system software (XCHANGEBET) according to PAGCOR specifications.
Aside from supplying the betting exchange software, IEST shall provide PAGCOR the design
of the XCHANGEBET Betting System and development of payment platforms.
In 2009, IEST signed an agreement with Betfair, a third party, to provide solutions which
would enhance liquidity of its XCHANGEBET solutions in the Philippines. With this
agreement, XCHANGEBET solutions are now sold together with a POS terminal which were
bought from BetXtech Limited, an acknowledged supplier of Betfair.
On November 30, 2012, the agreement with Betfair had been officially terminated. The
contract had been terminated because of the failure of the machines to pass the User
Acceptance Test (UAT).
Commission income recognized in profit or loss of IEST amounted to =
P44,422 and =
P982,335
in 2012 and 2011, respectively.
*SGVFS001330*
- 54 Income earned from sale of terminal amounted to nil and =
P460,080 in 2012 and 2011,
respectively.
b. PAGCOR
On March 30, 2009, IEST entered into an intellectual property license and management
agreement with PAGCOR wherein IEST grants an exclusive Intellectual Property License to
PAGCOR to use IEST’s propriety software system and the collateral hardware necessary for
PAGCOR to operate Instawin. The operation of Instawin games shall entail the establishment
of Instawin outlets subject to PAGCOR’s approval.
In consideration of the use of the software system and necessary hardware collateral, IEST
will receive a commission as indicated per agreement.
Commission income recognized in profit or loss of IEST amounted to =
P1,489,224 and
=15,281 in 2012 and 2011, respectively.
P
c. Silver Heritage Limited (SHL) Software and Service Agreement
On April 5, 2011, IEST entered into an agreement with SHL, a third party, to provide software
and certain hardware to IEST for use under its existing PAGCOR license in return for a
software fee, in accordance with the software license fee structure approved by PAGCOR.
SHL will also provide IEST’s Operational Management and Advisory Services (OMAS)
wherein they shall be responsible for the fixed operating costs such as internet and broadcast
costs, as well as technical support of the terminals.
In return for the OMAS, IEST will pay SHL on a monthly basis management service fee
equivalent to 10% of gross winnings.
The operations of SHL software commenced in December 2011.
26. Segment Information
Since the Group has only one business segment, the primary segment reporting format is
determined to be its geographical segment as the Group’s risks and rates of return are affected
predominantly by differences in the operating locations. The Group’s geographical segments are
based on the location of the Group’s offices where external revenues are generated.
*SGVFS001330*
- 55 The following table presents the Group’s revenue, expenses and certain asset information by reference to its geographical segments:
2012
Philippines
DFNN
iWave*
HatchAsia
Singapore
PGI
Revenue
P
=8,384,985
P
=65,684,718
P
=27,710,940
P
=1,252,025
Cost of services
(31,475,889)
(55,302,124)
(26,702,025)
(1,475,388)
Gross profit (loss)
(23,090,904)
10,382,594
1,008,915
General and administrative expenses
(44,351,479)
(13,205,537)
(49,314,582)
Provision for impairment of advances and
deposit for future stock subscription
Segment results
Interest income
Interest expense
Foreign exchange gain(loss)
Others – net
–
(67,442,383)
86,531
(9,128,505)
91,214
(2,822,943)
804,442
(25,785)
(478,474)
–
(48,305,667)
–
(453,686)
–
Consolidated
Financial
Statements
(P
=22,899,606)
P
=80,133,062
17,498,326
(97,457,100)
(5,401,280)
(17,324,038)
(2,318,341)
5,401,280
(103,788,659)
(10,000,000)
–
(10,000,000)
(12,541,704)
–
(131,112,697)
(223,363)
–
(294,270)
(67,245)
294,270
1,185,243
(294,270)
(10,196,516)
–
(175,971)
1,039,433
(161,515)
(2,575,711)
(270,218)
–
Net loss
(P
=74,506,110)
(P
=1,343,842)
(P
=49,205,542)
(P
=11,863,786)
Segment assets
P
=271,077,689
P
=98,235,230
P
=19,169,948
P
=172,352,625
(P
=191,632,413)
P
=369,203,079
Segment liabilities
P
=258,458,642
P
=58,002,239
P
=120,029,680
P
=117,182,548
(P
=192,071,790)
P
=361,601,318
P
=256,396
P
=408,670
P
=434,299
P
=1,397,712
Capital expenditures for the year
(2,258,940)
(454,505)
3,754,629
Provision for income tax
2,048,548
–
Eliminating
Entries
–
4,407,699
(3,007,444)
(P
=2,258,940) (P
=139,178,220)
P
=–
P
=2,497,077
*Consolidated figures with iWave, Asia.
*SGVFS001330*
- 56 2011
Philippines
Eliminating
Entries
Consolidated
Financial
Statements
(P
=6,763,565)
=87,003,867
P
DFNN
iWave*
HatchAsia
Singapore
PGI
Revenue
=3,061,473
P
=64,932,757
P
=25,773,202
P
=–
P
Cost of services
(10,978,829)
(42,552,122)
(26,235,791)
–
2,016,162
(77,750,580)
(7,917,356)
22,380,635
(462,589)
–
(4,747,403)
9,253,287
General and administrative expenses
(15,096,251)
(16,532,192)
(2,437,950)
(8,238,946)
4,747,403
(37,557,936)
Segment results
(23,013,607)
5,848,443
(2,900,539)
(8,238,946)
–
(28,304,649)
Interest income
4,803,472
99,163
(3,028)
Interest expense
(1,197,998)
–
(3,560)
Foreign exchange gain (loss)
(28,512)
404,013
Others - net
748,569
Gross profit (loss)
Provision for income tax
(104,951)
9,718,098
(541,805)
890
–
(2,079,846)
3,864,027
(28,718,566)
459,369
(839,849)
–
2,825,817
2,079,846
(1,201,558)
–
(2,096,483)
–
(19,889,013)
(1,486,605)
(P
=18,793,027)
=15,527,912
P
(P
=32,464,652)
Segment assets
=132,736,514
P
=65,431,336
P
=23,436,430
P
=189,361,696
P
(P
=122,820,221)
=288,145,755
P
=85,809,622
P
=18,915,977
P
=75,136,515
P
=94,237,877
P
(P
=90,874,284)
=183,225,707
P
=910,510
P
=452,211
P
=34,991
P
=–
P
Capital expenditures for the year
(P
=2,090,427)
4,240,418
Net income (loss)
Segment liabilities
(P
=5,995,396)
(2,073,790)
=–
P
(P
=43,815,590)
=1,397,712
P
*Consolidated figures with iWave Asia.
*SGVFS001330*
- 57 2010
Philippines
Eliminating
Entries
Consolidated
Financial
Statements
(P
=9,179,533)
=102,528,934
P
DFNN
iWave*
HatchAsia
Singapore
PGI
Revenue
=5,723,063
P
=69,562,909
P
=27,918,251
P
=8,504,244
P
Cost of services
(23,072,774)
(36,134,327)
(25,280,475)
(2,681,004)
4,354,210
(82,814,370)
Gross profit (loss)
(17,349,711)
33,428,582
2,637,776
5,823,240
(4,825,323)
19,714,564
General and administrative expenses
(22,842,377)
(27,719,531)
(19,995,927)
5,228,524
(65,805,781)
Segment results
(40,192,088)
5,709,051
2,161,306
(14,172,687)
403,201
(46,091,217)
Interest income
4,247,683
22,476
575
Interest expense
(1,103,811)
Foreign exchange loss
Others - net
Provision for income tax
(196,826)
122,125
(24,701,573)
–
(63,052)
20,922,567
(131,562)
(476,470)
(1,171,578)
3,099,156
(1,171,579)
1,171,580
(1,396,541)
–
(651,830)
–
(911,708)
2,610,712
(203,330)
(292,731)
(40,740)
–
–
(9,039,982)
–
14,412,092
(24,873,875)
Net income (loss)
(P
=61,824,490)
=26,459,480
P
=4,439,122
P
(P
=16,199,426)
(P
=8,636,779)
(P
=55,762,093)
Segment assets
=117,654,085
P
=29,678,455
P
=50,797,156
P
=125,436,136
P
(P
=6,787,292)
=316,778,540
P
=51,980,842
P
=28,454,650
P
=70,037,754
P
=30,406,345
P
(P
=17,009,132)
=153,870,459
P
=–
P
=180,975
P
=–
P
=–
P
Segment liabilities
Capital expenditures for the year
=–
P
=180,975
P
*Consolidated figures with iWave Asia.
*SGVFS001330*