COVER SHEET 4 4 0 9 SEC Registration Number A B O I T I Z T R A N S P O R T C O R P O R A T I O N A N D S Y S T E M ( A T S C ) S U B S I D I A R I E S (Company’s Full Name) 1 2 t h F l o o r , U n i t e d T i m e s N a t i o n s A v e n u e , P l a z a A v e n u e E r m i t a , B u i l d i n g , c o r n e r T a f t M a n i l a (Business Address: No. Street City/Town/Province) Lilian P. Cariaso (02) 528-7600 (Contact Person) (Company Telephone Number) 1 2 3 1 Month Day 1 7 - Q (Form Type) (Fiscal Year) 0 5 2 7 Month Day (Annual Meeting) (Secondary License Type, If Applicable) Corporate Finance March 31, 2010 Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings 2,143 Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document ID Cashier STAMPS Remarks: Please use BLACK ink for scanning purposes. 1 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended March 31, 2010 2. Commission identification number 4409 3. BIR Tax Identification No 000-313-401 Aboitiz Transport System (ATSC) Corporation 4. Exact name of issuer as specified in its charter 5. Province, country or other jurisdiction of incorporation or organization Philippines 6. Industry Classification Code: (SEC Use Only) 12th Floor Times Plaza Building United Nations Avenue corner Taft Avenue Ermita, Manila /1000 7. Address of issuer's principal office Postal Code (02) 528-7630, (02) 528-7516, (02) 528-7608 and (02) 5287609 8. Issuer's telephone number, including area code William Gothong and Aboitiz, Inc. Serging Osmeña Blvd. North Reclamation Area, Cebu City 9. Former name, former address and former fiscal year, if changed since last report 10.Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA Title of each Class Common Stock Redeemable Preferred Stock Number of shares of common Stock outstanding and amount of debt outstanding 2,446,136,400 4,560,417 11. Are any or all of the securities listed on a Stock Exchange? Yes [ X ] No [ ] Common and Redeemable Preferred Stock Philippine Stock Exchange 12. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding twelve (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 ninety (90) days. Yes [ X ] No [ ] 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following Financial Statements are filed as part of this SEC Form 17-Q: 1. Unaudited Consolidated Balance Sheets as of March 31, 2010 and Audited Consolidated Balance Sheets as of December 31, 2009 Page 11 2. Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009 Page 12 3. Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 Page 13 4. Unaudited Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2010 and 2009 Page 14 5. Unaudited Consolidated Cash Flows for the Three Months Ended March 31, 2010 and 2009. Page 16 6. Noted to Consolidated Financial Statements Page 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1st QUARTER ENDING MARCH 31, 2010 Key Performance Indicators (KPI) The following KPI’s are used to evaluate the financial performance of ATS and its subsidiaries. The amounts are in millions of Pesos except for the financial ratios. 2009 financial ratios on the table below are based on latest audited December 31, 2009. a. Revenues – ATS revenues are mainly composed of freight and passage revenues and they are recognized when the related services are rendered. Total Revenue for the three months ended March 31, 2010 is P3.1 billion. b. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) - is calculated by adding back interest expense, amortization and depreciation into income before income tax, excluding extraordinary gains or losses. EBITDA for March 31, 2010 is P94 million. c. Income (Loss) before income tax (IBT) – is the earnings of the company before income (loss) tax expense. The Loss Before Income Tax for March 31, 2010 is P201.4 million. 3 d. Debt-to-equity ratio – is determined by dividing total liabilities over stockholders’ equity. ATS’ debt-to-equity ratio in 2010 is 1.5:1.0. Total liabilities increased by P2.0 billion due to additional borrowings and Total equity stood at P5.04 billion or 2% lower compared to 2009 due to the loss for the first quarter of 2010. e. Current ratio – is measured by dividing total current assets by total current liabilities. The Company’s current ratio as of March 31, 2010 is 0.75:1:00. Total current assets is P5.6 billion or 16% higher than 2009. Total current liabilities are P7.4 billion or 37% increase compared to 2009. The following table shows comparative figures of the Top Five key performance indicators (KPI) for 2010 versus 2009 (amounts in millions except for the financial ratios) based on the consolidated financial statements of ATS and its subsidiaries: Consolidated Revenues EBITDA (a) IBT (b) Debt-to-Equity Ratio(c) Current Ratio (d) a) b) c) d) 2009 2010 2,853 456 201 1.06:1.00 0.89:1.00 3,139 94 (201) 1.5:1.0 0.75:1.00 Earnings before interest, taxes, depreciation and amortization (calculated by adding back interest expense and amortization and depreciation into income before income tax, excluding extraordinary gains and losses). Income before income tax or loss before income tax Total liabilities/total stockholders’ equity. The 2009 figures are based on the latest audited December 31, 2009. Total current assets/total current liabilities. The 2009 figures are based on latest audited December 31, 2009. Consolidated Income Statement ATS registered P3.1 billion consolidated revenues for the first quarter ending March 31, 2010. This is a P286 million or 10% improvement versus P2.9 billion registered during the same period last year. The increase in revenues is mainly led by our international ship chartering business and our supply chain management solutions. More and more it is evident that customers are recognizing ATS’ value added services. The sale of goods from our trading business increased P244M or 65% with the entry of new principals. Local freight business contributed P1.2 billion in revenues, a 5% decrease versus 2009. This is a result of lower freight rates. Volumes increased however, as we maintain our 77% load factor with higher capacity at lower asset cost. Our Passage business operated at very limited capacity during the first quarter as we had three SuperFerry vessels under maintenance and drydocking. This caused a P210 million reduction in revenues (inclusive of ancillary revenues) to register at P527.4 million. To partly replace lost capacity from the sale of vessels in the past, ATS purchased two new roro 4 passenger (ropax) vessels at low market prices. The two vessels are expected to operate during the latter part of the year. Having most of our vessels on offhire due to maintenance during the 1st quarter of this year resulted in the company operating only 64% of our total passenger fleet capacity and 82% of freight capacity. These affected our volumes since we were not able to give our customers the much needed frequency and speed and hindered our earning capacity. During the period in review, ATS registered P141.9 million Net Loss Attributable to Holders of the Parent. Total operating expenses reached P2.0 billion, 31% higher from 2009. This is largely caused by close to 50% higher fuel prices versus the same period last year. Earnings per Share Earnings Per Share is computed by dividing Net Income Attributable to Equity Holders of the Parent over weighted average number of common shares outstanding for the year. Earnings per share for the first three months of 2010 stood at (P0.06)/share compared to P0.05/share last year. In co m e S ta te m e n t % to T o ta l R e ve n u e M ar 10 M ar 09 '1 0 vs '0 9 % Va r ia n c e M ar 10 M ar 09 REVENUE Fre igh t - n e t 1,5 83 1,47 7 10 6 7% 5 0% 5 2% P as s age - n e t 4 99 63 5 (1 36 ) -2 1% 1 6% 2 2% Se r vice fee s 3 22 22 1 10 1 46% 1 0% 8% Sa le o f G o o ds (A O D I an d SO I) O th e rs 6 20 37 7 24 4 65% 2 0% 1 3% 1 15 14 4 (29 ) -2 0% 4% 5% 3 ,1 39 2,8 5 3 286 10% 10 0% 10 0% C O S TS A N D E X P E N S E S O p er atin g 2,0 19 1,53 6 48 3 31% 6 4% 5 4% Te rm in al 2 51 30 3 (51 ) -1 7% 8% 1 1% O v er h ea d C o s t o f Sa le s (A O D I an d S O I) 5 15 5 40 51 3 30 8 1 23 2 0% 75% 1 6% 1 7% 1 8% 1 1% 3 ,3 25 2,6 6 0 665 25% 10 6% 9 3% O T H E R IN C O M E (C H A R G E S ) Fin an c e c os ts - n et G a in on dis po s al o f pro pe r ty a nd e qu ipm e n t Fo re ign e xch an ge ga in – n et E qu ity in n et e ar nin gs (los s e s) of a ss o cia te s O th e rs - n e t IN C O M E B E F O R E IN C O M E TA X (28 ) (6) 27% -1% -1% 4 (2 2) 9 (5) -5 6% 0% 0% (10 ) 4 (14 ) -3 40 % 0% 0% 6 2 4 1 81 % 0% 0% 12 15 (2) -1 7% 0% 1% (16 ) 8 (2 4 ) -2 88 % -1% 0% (2 01 ) 201 (4 03 ) -2 00 % -6% 7% P R O V IS IO N FO R (B E N E FIT F R O M ) IN C O M E TA X C u rr e nt D e fe rre d N E T IN C O M E 7 22 (15 ) -6 9% 0% 1% (81 ) 30 (1 11 ) -3 71 % -3% 1% (74 ) 52 (1 26 ) -2 43 % -2% 2% (1 27 ) 149 (2 76 ) -1 85 % -4% 5% (1 42 ) 15 132 17 (2 74 ) (2) -2 07 % -1 2% -5% 0% 5% 1% (1 27 ) 14 9 (2 76 ) -1 85 % -4% 5% A TT R IB U T A B L E T O : E q u ity h o lde r s o f th e pa r e n t M ino r ity in te r es ts The figures above are in millions except otherwise indicated 5 Other changes (+/-5% or more) in the financial statement not covered in the above discussion 7% increase in freight revenue generated by the international chartering business 21% lower passage revenues due to lower number of ships operating 46% increase in service fees from value added services 65% increase in sale of goods due to increased revenues from trading and third party logistics. 25% higher total costs and expenses attributed to 31% higher operating costs from higher fuel expenses and 75% higher cost of sales from increased supply chain sales 27% higher finance cost from additional borrowings 340% higher foreign exchange loss due to peso-dollar exchange rates Balance Sheet Total assets recorded as of March 31, 2010 is P12.5 billion. Property and equipment increased P985 million from the acquisition of two ropax vessels. Receivables also increased by 38% largely due to higher transactions related to Abojeb’s crewing principals. Total liabilities of ATS increased P2.0 billion attributable to P1.4 billion higher short term loans. The company borrowed from financial institutions to fund vessel acquisition. Total interest bearing loans at the end of the quarter stood at P2.9 billion. Accounts payable also increased by P610 million or 15% from international shipping services still to be rendered but already paid. Total equity decreased by P122.1 million or 2% due to lower retained earnings brought about by lower net income for the first quarter of 2010. Cashflow Statement Total capital expenditures reached P1.25 billion because of vessel acquisitions and drydocking of three ships to ensure their future reliability. These expenditures were financed by short term debt. The company however is working on raising long term fixed rate notes. Cash and cash equivalents at the end of the period, stood at P850.7 million. 6 Mar 10 Dec 09 20-09 var. 2010 % to total ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepaid expenses and other current assets Total Current Assets Noncurrent Assets Investments in associates Available-for-sale investments Property and equipment - net Deferred income tax - net Goodwill Other noncurrent assets - net Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Loans payable Accounts payable and other current liabilities Current portion of obligations under finance lease Income tax payable Total Current Liabilities 851 3,246 615 877 5,588 1,096 2,348 571 785 4,800 88 43 5,802 353 256 413 6,956 12,545 74 43 4,818 256 256 375 5,822 10,622 2,802 4,593 5 11 7,411 Noncurrent Liabilities Obligations under finance lease - net of current portion 25 Redeemable preferred shares 20 Pension liability 31 Other Noncurrent Liabilities 20 Total Noncurrent Liabilities 96 Equity Attributable to Equity Holders of the Parent Common shares 2,485 Capital in excess of par value 911 Unrealized mark-to-market gain on available-for-sale investments 18 Cummulative Translation Adjustment (3) Share in Cumulative translation adjustments of an associate 8 Excess of cost over net asset valuation (12) Acquisition of minority interests 6 Retained earnings 1,619 Treasury shares (59) 4,973 Equity Attributable to Minority Interests 64 Total Stockholders’ Equity 5,037 TOTAL LIABLITIES AND STOCKHOLDERS’ EQUITY12,545 (245) 898 43 92 788 (22%) 38% 8% 12% 16% 7% 26% 5% 7% 45% 14 0 985 98 0 38 1,134 1,923 19% 0% 20% 38% 0% 10% 19% 18% 1,392 3,983 6 13 5,394 1,409 610 (1) (2) 2,017 101% 15% (20%) (14%) 37% 37% 61% 0% 0% 99% 25 20 18 4 68 (0) 0 12 16 28 (1%) 0% 69% 349% 41% 0% 0% 0% 0% 1% 0 0% 0 0% 0 0% (1) 30% 7 1,383% 0 0% 0 0% (142) (8%) 0 0% (135) (3%) 13 26% (122) (2%) 1,923 18% 33% 12% 0% 0% 0% 0% 0% 22% -1% 66% 1% 67% 167% 2,485 911 18 (2) 1 (12) 6 1,761 (59) 5,109 51 5,160 10,622 1% 0% 46% 3% 2% 3% 55% 100% The figures above are in millions except otherwise indicated Other changes (+/-5% or more) in the financial statement not covered in the above discussion None. 7 Other Information Other material events and uncertainties known to management that would address the past and would have an impact on ATS’ future operations are discussed below. i. Total fuel/lubes expense is a major component of ATS’ total cost and expenses. ATS is constantly looking for ways to reduce fuel consumption to lessen the impact of the increasing fuel prices on the bottom line. ii. For 2010, ATS estimates over P2.5 billion in capital expenditures. The bulk of these expenditures is earmarked for vessel purchase and maintenance. It is the policy of the company for vessels to be drydocked every 30 months. ATS will also continue to right-size and replace old tonnage. iii. On May 6, 2010 ATS signed a Notes Facility Agreement with SB Capital Investment and BPI Capital Corporation as Joint Lead Managers for the issuance of 5-year pesodenominated corporate fixed rate notes in the aggregate amount of P2 billion. The Notes will be issued in a private placement to not more than 19 institutional investors pursuant to Section 9.2 of the Securities Regulation Code (SRC) and Rule 9.2(2)(B) of the SRC Rules. ATS expects to issue the Notes shortly after the signing. iv. Except as disclosed in the management discussion and notes to the financial statements, there are no other known events that will trigger direct or contingent financial obligation that is material to ATS, including any default or acceleration of an obligation. There are also no other known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on revenues or income from operations. v. All significant elements of income or loss from continuing operations are already discussed in the management discussion and notes to financial statements. Likewise any significant elements of income or loss that did not arise from ATS’ continuing operations are disclosed either in the management discussion or notes to financial statements. vi. There is no material off-balance sheet transaction, arrangement, obligation, and other relationships of ATS with unconsolidated entities or other persons created during the reporting period. vii. Seasonal aspects of the business are considered in ATS’ financial forecast. viii. ATS does not expect any liquidity or cash problem within the next twelve months. Capital expenditures are funded through cash generated from operations and additional borrowings. ix. As markets contract, the business climate will become more competitive. These factors may have an unfavorable impact on our financial performance. 8 Company Outlook We continue to be the preferred solutions provider of customers and we see that demand is growing. We are looking forward to satisfying it as our complete fleet becomes fully operational by the second half of the year, after the majority of the vessels complete their drydocking and maintenance. In addition, the two recently bought SuperFerries will contribute to the existing fleet. This means ATS will have 82% higher passenger capacity compared to the 1st quarter capacity. Freight capacity will like increase by 46%. The earnings potential of the company is better reflected at these levels. Although its operating environment will continue to be a challenging one as it faces uncertainties in fuel prices and the purchasing power of its customers. Efforts are continuously placed on operational excellence at all levels of the organization. Last March, the board of directors approved the statutory merger of ATS and its wholly-owned subsidiary Zoom in Packages, Inc. (ZIP), with ATS as the surviving entity. The merger will result in integrated processes and systems, further improving the effectiveness and efficiency of the delivery of 2GO freight solutions. With ATS passion for better ways, we continue to strive in providing solutions to serve customers at the lowest cost. 9 SIGNATURE Pursuant to the requirements of the Securities Regulation Code, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Registrant Aboitiz Transport System (ATSC) Corporation Signature and Title Ismael R. Cabonse Date May 13, 2010 Officer in Charge 10 ABOITIZ TRANSPORT SYSTEM CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) Amounts in Thousands March 31, 2010 Mar-10 Dec-09 850,737 3,246,022 614,565 877,011 5,588,335 1,095,711 2,347,627 571,179 785,366 4,799,883 87,994 43,346 5,802,063 353,452 256,463 94,290 318,691 6,956,299 12,544,634 74,208 43,323 4,817,558 255,531 256,463 112,127 262,903 5,822,114 10,621,997 2,801,795 4,593,098 0 4,965 11,160 7,411,019 1,392,390 3,982,707 0 6,222 12,974 5,394,293 ASSETS Current Assets Cash and cash equivalents Receivables - net Inventories Prepaid expenses and other current assets Total Current Assets Noncurrent Assets Investments in associates Available-for-sale investments Property and equipment - net Deferred income tax Goodwill Software development costs - net Other noncurrent assets - net Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Loans payable Accounts payable and other current liabilities Current portion of long-term debt Current portion of obligations under finance lease Income tax payable Total Current Liabilities Noncurrent Liabilities Long-term debt - net of current portion 0 Obligations under finance lease - net of current portion 25,213 Redeemable preferred shares 20,176 Pension liability 30,577 Other Noncurrent Liabilities 20,182 Total Noncurrent Liabilities 96,148 Equity Attributable to Equity Holders of the Parent Common shares 2,484,653 Capital in excess of par value 910,901 Unrealized mark-to-market gain on available-for-sale investments 18,312 Unrealized loss on marketable equity securities 0 Cummulative Translation Adjustment (2,633) Share in Cumulative translation adjustments of an associate 7,609 Excess of cost over net asset valuation (11,700) Acquisition of minority interests 5,940 Reserves of disposal group classified as held for sale 0 Retained earnings 1,618,924 Treasury shares (58,715) 4,973,291 Equity Attributable to Minority Interests 64,177 Total Stockholders’ Equity 5,037,468 TOTAL LIABLITIES AND STOCKHOLDERS’ EQUITY 12,544,634 0 25,346 20,176 18,115 4,494 68,132 2,484,653 910,901 18,312 0 (2,026) 513 (11,700) 5,940 0 1,760,853 (58,715) 5,108,730 50,842 5,159,572 10,621,997 11 ABOITIZ TRANSPORT SYSTEM CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Amounts in Thousands March 31, 2010 REVENUE Freight - net Passage - net Service fees Sale of Goods (AODI and SOI) Others COSTS AND EXPENSES Operating Terminal Overhead Cost of Sales (AODI and SOI) OTHER INCOME (CHARGES) Finance costs Interest Income Gain on disposal of property and equipment Gain on disposal of investment Foreign exchange gain – net Equity in net earnings (losses) of associates Others - net INCOME BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX Current Deferred NET INCOME ATTRIBUTABLE TO: Equity holders of the parent Minority interests Mar-10 Mar-09 1,583,090 498,758 321,866 620,394 115,276 3,139,384 1,476,876 635,144 220,525 376,604 144,129 2,853,278 2,018,846 251,444 514,709 540,069 3,325,068 1,536,312 302,529 513,257 308,157 2,660,255 (29,329) 1,595 4,136 0 (9,914) 5,566 12,182 (15,764) (201,448) (24,794) 2,982 9,469 0 4,137 1,983 14,604 8,381 201,404 6,887 (81,306) (74,419) (127,029) 22,007 30,050 52,057 149,347 (141,929) 14,900 (127,029) 132,331 17,016 149,347 12 ABOITIZ TRANSPORT SYSTEM (ATSC) CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) NET INCOME OTHER COMPREHENSIVE INCOME Unrealized gains (losses) on AFS investments Realized losses (gains) on AFS investments Changes in cumulative translation adjustments Cash Dividend Income tax relating to the components of other comprehensive income OTHER COMPREHENSIVE INCOME, NET OF TAX TOTAL COMPREHENSIVE INCOME, NET OF TAX ATTRIBUTABLE TO: Equity holders of the parent Non-controlling interests Mar-10 (127,029) 5,886 - 5,886 Mar-09 149,347 (513) (6,099) (6,612) (121,144) 142,734 (135,439) 14,295 (121,144) 128,893 13,841 142,734 See accompanying Notes to Consolidated Financial Statements. 13 ABOITIZ TRANSPORT SYSTEM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited) FOR THE PERIODS ENDED 31 MARCH 2010 Attributable to owners of the parent Common Shares Balances at January 1, 2010 Changes in equity for 2010: Issuance of capital stock Purchase of treasury shares Gain on Dilution Acquisition of minority interest Cash dividends Changes in minority interest Total comprehensive income for the year Balances at March 31, 2010 2,484,653 - Share in Other Excess of Cost Capital in Available-for- Comprehensive Over Net Asset Acquisition NonExcess of sale financial Income of Valuation of an of Minority Retained Treasury controlling Par Value assets Associates Investment Interest Earnings Stock Total Interests 910,901 16,799 (11,700) 5,940 1,760,853 (58,715) 5,108,731 50,842 - - 2,484,653 910,901 - 6,490 23,289 (11,700) 5,940 (141,929) 1,618,924 (135,439) (58,715) 4,973,292 Total 5,159,573 (960) (960) (121,144) 14,295 64,177 5,037,469 ABOITIZ TRANSPORT SYSTEM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited) FOR THE PERIODS ENDED 31 MARCH 2009 Common Shares Balances at January 1, 2009 Changes in equity for 2009: Issuance of capital stock Purchase of treasury shares Gain on Dilution Acquisition of minority interest Cash dividends Changes in minority interest Total comprehensive income for the year Balances at March 31, 2009 2,484,653 - AvailableCapital in for-sale Excess of financial Par Value assets 910,901 - Attributable to owners of the parent Share in Other Excess of Cost Comprehensive Over Net Asset Acquisition Income of Valuation of an of Minority Retained Associates Investment Interest Earnings 10,491 (11,700) 5,940 1,214,711 - - 2,484,653 910,901 - (3,438) 7,053 (11,700) 132,331 5,940 1,347,042 NonTreasury controlling Stock Total Interests (58,715) 4,556,281 34,505 128,893 (58,715) 4,685,174 101 13,841 48,447 Total 4,590,786 101 142,734 4,733,621 ABOITIZ TRANSPORT SYSTEM (ATSC) CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) March 31, 2010 March 31, 2009 CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before tax Adjustments to reconcile net income (loss): Depreciation and amortization Loss on impairment of assets Provision for: Probable losses on CWT Probable cargo losses and damages Inventory losses Doubtful accounts Interest expense Interest income Loss (gain) on disposal of property and equipment Loss (gain) on available-for-sael investments Writeoff of AFS investment Provision for retirement benefits Recovery of provision Equity in net losses (earnings) of associates Unrealized foreign exchange loss (gain) Dividend income Operating income (loss) before working capital changes Decrease (increase) in: Receivables Inventories Prepaid expenses and other current assets Increase (decrease) in: Accounts payable and accrued expense Other non current liabilities Cash generated from (used for) operations Interest received Income tax paid Net cash provided by operating activities (201,448) 201,403 280,019 262,880 3,113 29,329 (1,595) (4,136) 15,996 24,794 (2,982) (9,469) (5,566) 326 (82) 99,961 (1,983) (8,611) (22) 482,006 (901,311) (43,386) (84,758) (164,464) (46,860) (91,472) 606,329 28,150 (295,015) 1,398 (6,887) (300,504) 236,315 (9,469) 406,056 (12,299) (1,251,421) (264,883) (70,748) (8,220) (23) (1,634) (9,504) 393,757 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment Decrease (increase) in: Other noncurrent assets Investments in and advances to subsidiaries Short term investments/AFS Proceeds from: Disposal of property and equipment and tied-up vessel Sale of AFS Investment Dividend received Net cash used in investing activities (Forward) 7,213 82 (1,323,117) 11,805 0 22 (264,194) -2CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Notes/loans payable Payments of: Notes/loans payable Long term debt/obligations under capital lease Interest paid (Increase) decrease in minority interest Net cash provided (used in) financing activities 1,462,528 91,736 (53,124) (1,390) (27,804) (1,565) 1,378,646 (145,957) (20,137) (24,621) 13,564 (85,415) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (244,975) 44,149 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 1,095,711 850,737 1,092,842 1,136,991 EFFECT OF FOREIGN EXCHANGE LOSS ON CASH AND CASH EQUIVALENTS See accompanying Notes to Consolidated Financial Statements. ABOITIZ TRANSPORT SYSTEM (ATSC) CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Share and Exchange Rate Data and When Otherwise Indicated) 1. Corporate Information Aboitiz Transport System (ATSC) Corporation (the Parent Company) was incorporated in the Philippines on May 26, 1949. The Parent Company’s shares of stocks are listed in the Philippine Stock Exchange. The Parent Company and its Subsidiaries (collectively referred to as “the Group”) are primarily engaged in the business of operating steamships, motorboats and other kinds of watercrafts; operating flight equipment and trucks; and acting as agent for domestic and foreign shipping companies for purposes of transportation of cargoes and passengers by air, land and sea within the waters and territorial jurisdiction of the Philippines. The Parent Company’s registered office address is 12th Floor, Times Plaza Building, United Nations Avenue corner Taft Avenue, Ermita, Manila. The Company’s parent is Aboitiz Equity Ventures, Inc. (AEV), a publicly-listed company incorporated in the Philippines, and the ultimate parent company is Aboitiz & Company, Inc. (ACO), also incorporated in the Philippines. On September 23, 2008, AEV together with ACO entered into a Memorandum of Agreement (MOA) with KGLI-NM Holdings Inc. (KGLI-NM). The MOA states that KGLI-NM will purchase all of the shareholdings of AEV and ACO in the Parent Company on a per share purchase price to be computed based on the Group’s equity value of = P5 billion or equivalent to = P2.044 per share. The final terms of the sale will be subject to the due diligence audit and the execution of a definitive share purchase agreement between the parties. AEV owns 1,889,482,107 common shares of the Parent Company while ACO owns 390,322,384 common shares of the Parent Company, representing 77.24% and 15.96 %, respectively, of the Parent Company’s total outstanding capital stock. The MOA also provides that should KGLI-NM decide to proceed with the purchase, it shall also undertake a tender offer of the shares owned by the minority shareholders at the same terms offered to ACO and AEV in accordance with the requirements of the Securities Regulation Code. KGLI-NM further undertakes to pay in cash for the Parent Company shares acquired under the tender offer. The planned acquisition would include all the shipping and logistics businesses of the Group except for the following subsidiaries: Aboitiz Jebsen Bulk Transport Corporation (AJBTC) and Subsidiaries, Jebsen Maritime, Inc. (JMI), Aboitiz Jebsen Manpower Solutions, Inc. (AJMSI) and Jebsen Management Limited (JMBVI) and Subsidiaries (collectively called “Aboitiz Jebsen Group”). On December 19, 2008, the Parent Company received written advice that AEV, together with ACO, accepted the Term Sheet offered by KGLI-NM for the acquisition by KGLI-NM of 49% equity stake in the Parent Company instead of the total buy-out proposed in the MOA. The 49% equity stake shall include the 7% equity stake of the public in the Parent Company. Under the agreement, which was expected to close on or before April 30, 2009, the purchase price will be based on a total equity value of the Group in the amount of P =4.5 billion or equivalent to P =1.84 per share. Accordingly, the Aboitiz Jebsen Group will be acquired by AEV and ACO on or before April 30, 2009. The agreement also gives KGLI-NM an option to acquire the remaining 51% 2 equity stake of AEV and ACO anytime from May 1, 2009 to September 30, 2009 at the same price of = P1.84 per share plus a premium of 9.5% annualized price per share calculated from April 30, 2009 to September 30, 2009 or to date of acquisition. On April 30, 2009, the Parent Company received written advice from AEV and ACO that KGLI-NM will not proceed with the purchase of US$30 million worth of the Parent Company’s common shares owned by the former. KGLI-NM cited the current constraints in the debt markets as the reason for its decision not to push through with its planned purchase of the Parent Company shares owned by AEV and ACO. KGLI-NM had previously informed AEV and ACO on March 31, 2009 that the former is exercising its option under Section 5 (c) (i) of the Term Sheet dated December 19, 2008 to purchase US$30 million worth of the Parent Company’s shares from AEV and ACO. In view of KGLI-NM’s decision not to close pursuant to the Term Sheet and its notice dated March 31, 2009, the Term Sheet dated December 19, 2008 as well as the Memorandum of Agreement dated September 23, 2008 between AEV and ACO, on one hand, and KGLI-NM, on the other hand, have been deemed terminated. The consolidated financial statements as at December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009, were authorized for issue by the Board of Directors (BOD) on February 25, 2010. 2. Summary of Significant Accounting Policies Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis, except for AFS investments which have been measured at fair value. The financial statements are presented in Philippine pesos, and all values are rounded to the nearest thousand (P =000), except when otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries as at December 31 of each year. The following are the subsidiaries: Subsidiaries W G & A Supercommerce, Inc. (WSI)1 Zoom In Packages, Inc. (ZIP) Aboitiz One, Inc. (AOI) and Subsidiaries: Reefer Van Specialist Inc. (RVSI) Aboitiz One Distribution, Inc.(AODI) Scanasia Overseas Inc. (SOI)4 Hapag-Lloyd Philippines, Inc.(HLP) Reefer Truck Specialists Inc. (RTSI)5 Cox Trucking Corporation (COX)4 (Forward) Nature of Business Ships’ hotel management Transportation/ logistics Transportation/ logistics Transportation Distribution Distribution Transportation/ logistics Transportation Transportation Percentage of Ownership 2009 2008 Direct Indirect Direct Indirect 100.0 – 100.0 – 2007 Direct Indirect 100.0 – 100.0 – 100.0 – 100.0 – 100.0 – 100.0 – 100.0 – – – – – 100.0 100.0 100.0 94.0 – – – – 100.0 100.0 100.0 94.0 – – – – 100.0 100.0 – 85.0 – – – – – – – – – – 100.0 80.0 3 Subsidiaries Supercat Fast Ferry Corp. (SFFC)2 Aboitiz Jebsen Bulk Transport Corporation (AJBTC) and Subsidiaries: 6 Filscan Shipping, Inc. (FILSCAN) Nature of Business Shipping Ship management Manning and crew management services General Charterer, Inc (GCI) Manning and crew management services NOR-PHIL Ocean Shipping, Inc. Manning and crew (NOR-PHIL) management services Overseas Bulk Transport, Inc. Manning and crew (OVERSEAS) management services Viking International Carriers, Inc. Manning and crew (VIKING) management services Joss Asian Feeders, Inc. (JOSSAF) Shipping Harbor Training Center, Inc. (HTC) Training EMS Crew Management Philippines,Inc. Manning and crew (EMS) management services Aboitiz Jebsen Manpower Solutions, Inc. Manpower services 6 AJMSI) 6 Jebsen Maritime, Inc. (JMI) Manpower services Jebsen Management (JMBVI) Limited Shipping and Subsidiaries: 3 and 6 Jebsens International (Australia) Chartering Pty. Ltd. and Shipping Jebsen Orient Shipping Services AS Chartering and Shipping Jebsens International (Singapore) Chartering Pte. Ltd and Shipping Jebsens Logistics Services Fertilizer Bagging Cebu Ferries Corporation5 Shipping Percentage of Ownership 2009 2008 Direct Indirect Direct Indirect 100.0 – 100.0 – 62.5 – 62.5 – 2007 Direct Indirect 100.0 – 62.5 – – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – 62.5 – – – 62.5 62.5 46.9 – – – 62.5 62.5 46.9 – – – 62.5 62.5 46.9 62.5 – 62.5 – 62.5 – 62.5 50.0 – – 62.5 50.0 – – 62.5 50.0 – – 50.0 – 50.0 – 50.0 – 50.0 – 50.0 – 50.0 – 50.0 – 50.0 – 50.0 – – 50.0 – – – 50.0 – – 100 50.0 – 1 Ceased operations in February 2006 Acquired from Accuria, Inc., an affiliate under common control, on August 30, 2007. 3 Parent Company exercises power to govern the financial and operating policies. 4 Acquired SOI in July 2008, and disposed COX and RTSI in August and September 2008, respectively 5 Liquidated in May 2008. 6 Classified as disposal group held for sale in December 2008 2 Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All significant intra-group balances, income and expenses, and unrealized profits and losses resulting from intra-group transactions are eliminated in the consolidation. Minority interests represent the portion of profit or loss and net assets in the subsidiaries not held by the Group and are presented separately in the consolidated statement of income and within equity in the consolidated balance sheet, separately from the equity attributable to equity holders of the parent. Acquisitions of minority interests are accounted for using the entity concept method, whereby, the difference between the consideration paid or payable and the book value of the share of the net assets acquired is recognized as an equity transaction. Merger On July 2, 2007, the SEC approved the merger of ALI and AOI, with the latter as the surviving entity, effective July 2, 2007. ALI is a wholly owned subsidiary of the AOI. Consequently, by operation of law, the separate corporate existence of ALI ceased as provided under the Corporation Code. Thus, upon the implementation of the merger, all outstanding shares of capital stock of ALI were cancelled. 4 Changes in Accounting Policies and Disclosures The Group has adopted the following new, revised and amended standards and interpretations that have been issued and are effective as of January 1, 2009. Except as otherwise indicated, adoption of these new standards and interpretations did not have significant impact on the Group’s consolidated financial statements. PAS 1, Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group has elected to present two linked statements. PAS 23, Borrowing Costs (Revised) The revised PAS 23 requires capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. PFRS 8, Operating Segments PFRS 8 replaced PAS 14, Segment Reporting, upon its effective date. The Group concluded that the operating segments determined in accordance with PFRS 8 are the same as the business segments previously identified under PAS 14. Philippine Interpretation IFRIC-13, Customer Loyalty Programmes Philippine Interpretation IFRIC-13 requires customer loyalty credits to be accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred. This is then recognized as revenue over the period that the award credits are redeemed. This interpretation did not have any impact in the Group’s financial statements as it does not have any loyalty programs with customers. Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation This Interpretation is to be applied prospectively. Philippine Interpretation IFRIC-16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. This interpretation did not have any impact on the Group’s financial statements. Philippine Interpretation IFRIC 18, Transfers of Assets from Customers This Interpretation is to be applied prospectively to transfers of assets from customers received on or after July 1, 2009. The Interpretation provides guidance on how to account for items of property, plant and equipment received from customers or cash that is received and used to acquire or construct assets that are used to connect the customer to a network or to provide ongoing access to a supply of goods or services or both. When the transferred item meets the definition of an asset, the asset is measured at fair value on initial recognition as part of an exchange transaction. The service(s) delivered are identified and the consideration received (the fair value of the asset) allocated to each identifiable service. Revenue is recognized as each service is delivered by the entity. This interpretation did not have any impact on the Group’s financial statements. 5 Amendments to Standards PAS 32 and PAS 1 Amendments - Puttable Financial Instruments and Obligations Arising on Liquidation The standards have been amended to allow a limited scope exception for puttable financial instruments to be classified as equity if they fulfill a number of specified criteria. The adoption of these amendments did not have any impact on the financial position or the performance of the Group. PFRS 1 and PAS 27 Amendments - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate The amendments to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, allowed an entity to determine the ‘cost’ of investments in subsidiaries, jointly controlled entities or associates in its opening PFRS financial statements in accordance with PAS 27, Consolidated and Separate Financial Statements, or using a deemed cost method. The amendment to PAS 27 required all dividends from a subsidiary, jointly controlled entity or associate to be recognized in the income statement in the separate financial statement. The revision to PAS 27 did not have an impact in the financial position or performance of the Group since the investments in subsidiaries and associates were already accounted for using the cost method. PFRS 2, Amendment - Vesting Conditions and Cancellations The amendment to PFRS 2, Share-based Payments, clarifies the definition of vesting conditions and prescribes the treatment for an award that is cancelled. It did not have an impact on the financial position or performance of the Group. PFRS 7 Amendments - Improving Disclosures about Financial Instruments The amendments to PFRS 7, Financial Instruments: Disclosures, require additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognized at fair value. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and financial assets used for liquidity management. The fair value measurement disclosures are presented in Note35. The liquidity risk disclosures are not significantly impacted by the amendments and are presented in Note34. Philippine Interpretation IFRIC 9 and PAS 39 Amendments - Embedded Derivatives This amendment to Philippine Interpretation IFRIC-9, Reassessment of Embedded Derivatives, requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. PAS 39, Financial Instruments: Recognition and Measurement, now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit or loss. 6 Improvements to PFRS 2008 The omnibus amendments to PFRS issued in 2008 (and 2009) were issued primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes in accounting policies but did not have any impact on the financial position or performance of the Group. PAS 18, Revenue: The amendment adds guidance (which accompanies the standard) to determine whether an entity is acting as a principal or as an agent. The features to consider are whether the entity: has primary responsibility for providing the goods or service; has inventory risk; has discretion in establishing prices; and bears the credit risk. The Group has assessed its revenue arrangements against these criteria and concluded that it is acting as principal in all arrangements. The revenue recognition policy has been updated accordingly. New Accounting Standards, Interpretations, and Amendments to Existing Standards Effective Subsequent to December 31, 2009 The Group will adopt the following standards and interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements. PFRS 3, Business Combinations (Revised) and PAS 27, Consolidated and Separate Financial Statements (Amended) The revised standards are effective for annual periods beginning on or after July 1, 2009. PFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of minority interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs and future reported results. PAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes in PFRS 3 (Revised) and PAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with minority interests. PFRS 3 (Revised) will be applied prospectively while PAS 27 (Amended) will be applied retrospectively with a few exceptions. Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to Owners This interpretation is effective for annual periods beginning on or after July 1, 2009 with early application permitted. It provides guidance on how to account for non-cash distributions to owners. The interpretation clarifies when to recognize a liability, how to measure it and the associated assets, and when to derecognize the asset and liability. The Group does not expect the 7 Interpretation to have an impact on the consolidated financial statements as the Group has not made non-cash distributions to shareholders in the past. Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate This interpretation, effective for annual periods beginning on or after January 1, 2012, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. Amendments to Standards PAS 39 Amendment - Eligible Hedged Items The amendment to PAS 39, Financial Instruments: Recognition and Measurement, effective for annual periods beginning on or after July 1, 2009, clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. The Group has concluded that the amendment will have no impact on the financial position or performance of the Group, as the Group has not entered into any such hedges. PFRS 2 Amendments - Group Cash-settled Share-based Payment Transactions The amendments to PFRS 2, Share-based Payments, effective for annual periods beginning on or after January 1, 2010, clarify the scope and the accounting for group cash-settled share-based payment transactions. The Group has concluded that the amendment will have no impact on the financial position or performance of the Group as the Group has not entered into any such sharebased payment transactions. Improvement to PFRS 2009 The omnibus amendments to PFRS issued in 2009 were issued primarily with a view to removing inconsistencies and clarifying wording. The amendments are effective for annual periods financial years January 1, 2010 except otherwise stated. The Group has not yet adopted the following amendments and anticipates that these changes will have no material effect on the financial statements. PFRS 2, Share-based Payment: clarifies that the contribution of a business on formation of a joint venture and combinations under common control are not within the scope of PFRS 2 even though they are out of scope of PFRS 3, Business Combinations (Revised). The amendment is effective for financial years on or after July 1, 2009. PFRS 5, Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in PFRS 5. The disclosure requirements of other PFRSs only apply if specifically required for such non-current assets or discontinued operations. 8 PFRS 8, Operating Segment Information: clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. PAS 1, Presentation of Financial Statements: clarifies that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. PAS 7, Statement of Cash Flows: explicitly states that only expenditure that results in a recognized asset can be classified as a cash flow from investing activities. PAS 17, Leases: removes the specific guidance on classifying land as a lease. Prior to the amendment, leases of land were classified as operating leases. The amendment now requires that leases of land are classified as either ‘finance’ or ‘operating’ in accordance with the general principles of PAS 17. The amendments will be applied retrospectively. PAS 36, Impairment of Assets: clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes. PAS 38, Intangible Assets: clarifies that if an intangible asset acquired in a business combination is identifiable only with another intangible asset, the acquirer may recognize the group of intangible assets as a single asset provided the individual assets have similar useful lives. Also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination that are not traded in active markets are only examples and are not restrictive on the methods that can be used. PAS 39, Financial Instruments: Recognition and Measurement: clarifies the following: that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken. that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives: clarifies that it does not apply to possible reassessment at the date of acquisition, to embedded derivatives in contracts acquired in a business combination between entities or businesses under common control or the formation of joint venture. Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation: states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of PAS 39 that relate to a net investment hedge are satisfied. 9 Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, with original maturities of three months or less, and are subject to an insignificant risk of change in value. Inventories Inventories are valued at the lower of cost or net realizable value (NRV). Cost is determined using the moving average method for materials, parts and supplies, flight equipment expendable parts and supplies and the first-in, first-out method for trading goods, truck and trailer expendable parts, fuel, lubricants and spare parts. NRV is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Business Combinations and Goodwill Business combinations are accounted for using the purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the date of acquisition, irrespective of the extent of any minority interest. Goodwill is initially measured at cost being the excess of the cost of business combination over the Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of 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 synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where the 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. When the Group acquires a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition unless the business combination results in a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract. Business combination of entities under common control is accounted for using a method similar to pooling of interest. Under the pooling of interest method, any excess of acquisition cost over the net asset value of the acquired entity is recorded in equity. When subsidiaries are sold, the difference between the selling and the net assets plus cumulative translation differences and unamortized goodwill is recognized in the consolidated statement of income. 10 Investments in Associates The Group’s investments in associates are accounted for under 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. Under the equity method, the investments in associates are carried in the consolidated balance sheet at cost plus post acquisition changes in the Group’s share in the net assets of associates. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized or separately tested for impairment. The consolidated statement of income reflects the share in the results of operations of the associates. Where there has been a change recognized directly in the consolidated statement of changes in equity of the associate, the Group recognizes its share of any changes and discloses it, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and the associates are eliminated to the extent of the interest in the associate. The share of profit of associates is shown on the face of the consolidated statement of income. This is the profit attributable to equity holders of the associate and therefore is profit after tax and minority interest in the subsidiaries of the associates. The financial statements of the associate are prepared for the same reporting period as the parent company and the associates’ accounting policies conform to those used by the Group for like transactions and events in similar circumstances. After the application of the equity method, the Group determines whether it is necessary to recognize an additional impairment loss on the Group’s investment in its associates. The Group determines at each balance sheet date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the consolidated statement of income. Interest in a Joint Venture The Group has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The Group recognizes its interest in the joint venture using the proportionate consolidation method. The Group combines its proportionate share of each of the assets, liabilities, income and expenses of the joint venture with similar items, line by line, in its consolidated financial statements. The financial statements of the joint venture are prepared for the same reporting period as the parent company. Adjustments are made where necessary to bring the accounting policies in line with those of the Group. Adjustments are made in the Group’s consolidated financial statements to eliminate the Group’s share of intragroup balances, income and expenses and unrealized gains and losses on transactions between the Group and its jointly controlled entity. Losses on transactions are recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets or an impairment loss. The joint venture is proportionately consolidated until the date on which the Group ceases to have joint control over the joint venture. Upon loss of joint control and provided the former joint control entity does not become a subsidiary or associate, the Group measures and recognizes its remaining investment at its fair value. Any difference between the carrying amount of the former joint controlled entity upon loss 11 of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in the consolidated statement of income. When the remaining investment constitutes significant influence, it is accounted for as investment in an associate. Property and Equipment Property and equipment other than land are stated at cost, less accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property and equipment are required to be replaced in intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciation, respectively. Repairs and maintenance costs are recognized in the consolidated statement of income as incurred. Land is carried at cost less accumulated impairment losses. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the property and equipment as follows: Number of Years Ships in operation, excluding drydocking costs and vessel equipment and improvements 15-30 years Drydocking costs 2 ½-5 years Vessel equipment and improvements 3-5 years Containers 5-7 years Handling equipment 5-7 years Furniture and equipment 3-5 years Land improvements 5-10 years Buildings and warehouses 5-20 years Transportation equipment 5-10 years Leasehold improvements 5-12 years Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Flight equipment is depreciated based on the estimated number of flying hours. Drydocking costs, consisting mainly of replacement of steel plate of the ships’ hull and related expenditures, are capitalized as a component of “Ships in operation”. Steel components are depreciated over five (5) years or the remaining life of the vessel whichever is shorter. Other components are depreciated over two and one-half (2 ½) years. When drydocking costs occur prior to the end of this period, the remaining unamortized balance of the previous drydocking cost is derecognized in consolidated statement of income. Ships under refurbishment include the acquisition cost of the ships, the cost of ongoing refurbishments and other direct costs. Construction in progress represents structures under construction and is stated at cost. This includes cost of construction and other direct costs. Borrowing costs that are directly attributable to the refurbishment of ships and construction of property and equipment are capitalized during the refurbishment and construction period. Ships under refurbishment and construction in progress are not depreciated until such time the relevant assets are complete and available for use. 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 the consolidated statement of income in the year the asset is derecognized. 12 The asset’s residual values, useful lives and depreciation methods are reviewed at each financial year end, and adjusted prospectively if appropriate. Fully depreciated assets are retained in the accounts until these are no longer in use. When property and equipment are sold or retired, their cost and accumulated depreciation and any allowance for impairment in value are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated statement of income. Noncurrent Assets Classified as Held for Sale Noncurrent assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less cost to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Liabilities associated with these assets are presented separately in the consolidated balance sheet. In the consolidated statement of income of the reporting period and the comparable period of the previous year, income and expenses from discontinued operations are reported separate from normal income and expenses down to the level of profit after taxes, even when the Group retains a minority interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statement of income. Property and equipment and intangible assets once classified as held for sale are not depreciated or amortized. If there are changes to a plan of sale, and the criteria for the asset or disposal group to be classified as held for sale are no longer met, the Group ceases to classify the asset or disposal group as held for sale and it shall be measured at the lower of: a) its carrying amount before the asset was classified as held for sale adjusted for any depreciation, amortization or revaluations that would have been recognized had the asset not been classified as held for sale, and b) its recoverable amount at the date of the subsequent decision not to sell. The Group includes any required adjustment to the carrying amount of a noncurrent asset or disposal group that ceases to be classified as held for sale in the consolidated statement of income from continuing operations in the period in which the criteria for the asset or disposal group to be classified as held for sale are no longer met. The Group presents that adjustment in the same caption in the consolidated statement of comprehensive income used to present a gain or loss recognized, if any. If the Group ceases to classify a component of an entity as held for sale, the results of operations of the component previously presented in discontinued operations shall be reclassified and included in income from continuing operations for all periods presented. The amounts for prior periods shall be described as having been re-presented. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of the acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, 13 excluding capitalized development costs, are not capitalized and expenditure is reflected in the consolidated statement of income in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Software development costs Software development costs are initially recognized at cost. Following initial recognition, the software development costs are carried at cost less accumulated amortization and any accumulated impairment in value. The software development costs is amortized on a straight-line basis over its estimated useful economic life of three to five years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization commences when the software development costs is available for use. The amortization period and the amortization method for the software development costs are reviewed at each financial year end. Changes in the estimated useful life is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense is recognized in the consolidated statement of income in the expense category consistent with the function of the software development costs. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of income when the asset is derecognized. Impairment of Nonfinancial Assets The Group assesses at each balance sheet date whether there is an indication that nonfinancial asset may be impaired. If any such indication exists, or when annual impairment testing for nonfinancial 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 unit’s (CGU) fair value less costs to sell and its value in use (VIU) and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses of continuing operations are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. 14 For nonfinancial assets excluding goodwill, an assessment is made at each balance sheet 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 Group makes an estimate of the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions 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 the consolidated statement of income 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 expense 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. Goodwill Goodwill is tested for impairment on December 31 of each year and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cashgenerating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of each cash-generating unit is less than their carrying amount an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Treasury Shares The Group’s own equity instruments which are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration is recognized in other capital reserves. Financial Instruments Financial assets Initial recognition Financial assets within the scope of PAS 39 are classified as financial assets at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity (HTM) investments, AFS investments, 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 and, where allowed and appropriate, re-evaluates such designation at every balance sheet date. Financial assets are recognized initially at fair value plus, in the case of investments not at FVPL, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases) are recognized on the trade date i.e., the date that the Group commits to purchase or sell the asset. Subsequent measurement The subsequent measurement of financial assets depends on their classification as follows: 15 Financial assets at FVPL Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets at FVPL are carried in the consolidated balance sheet at fair value with gains and losses recognized in the consolidated statement of income. Financial assets may be designated at initial recognition as at FVPL if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognizing the gains or losses on them on a different basis; or (ii) the assets are part of a group of financial assets which are managed and their performance evaluated on fair value basis, in accordance with a documented risk management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded. As at December 31, 2009 and 2008 the Group does not have any financial asset as at FVPL. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, they are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. Loans and receivables are carried at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within 12 months from the balance sheet date. As at December 31, 2009 and 2008, financial assets included under this classification are the Group’s cash in bank and cash equivalents, trade and other receivables and refundable deposits (presented as part of “Other current assets” in the consolidated balance sheet). HTM investments HTM investments are quoted non-derivative financial assets which carry fixed or determinable payments and fixed maturities and which the Group has the positive intention and ability to hold to maturity. After initial measurement, HTM investments are measured at amortized cost using the effective interest method. This method uses an effective interest rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. Gains and losses are recognized in the consolidated statement of income when the investments are derecognized or impaired, as well as through the amortization process. As at December 31, 2009 and 2008, the Group has no HTM investments. AFS investments AFS investments are those non-derivative financial assets which are designated as such or do not qualify to be classified as financial assets designated at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are 16 measured at fair value with unrealized gains or losses recognized in the consolidated statement of comprehensive income and consolidated statement of changes in equity in the “Unrealized markto-market gain on AFS investments” until the AFS investments is derecognized, at which time the cumulative gain or loss recorded in equity is recognized in the consolidated statement of income. Assets under this category are classified as current assets if expected to be realized within twelve months from the balance sheet date and as noncurrent assets if maturity date is more than a year from balance sheet date. The Group’s AFS investments as at December 31, 2009 and 2008 included investment in quoted and unquoted shares of stock. Financial liabilities Initial recognition Financial liabilities within the scope of PAS 39 are classified as financial liabilities at FVPL, other financial liabilities, 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 and, where allowed and appropriate, reevaluates such designation at every balance sheet date. Financial liabilities are recognized initially at fair value plus, in the case of investments not at FVPL, directly attributable transaction costs. Other financial liabilities Financial liabilities are classified in this category if these are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. The Group’s financial liabilities include debt and other borrowings (presented as loans payable in the consolidated balance sheet), trade and other payables, obligations under finance lease, and redeemable preferred shares. Subsequent measurement The measurement of financial liabilities depends on their classification as follows: Financial liabilities at FVPL Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at FVPL. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that do not meet the hedge accounting criteria as defined by PAS 39. Gains and losses on liabilities held for trading are recognized in the consolidated statement of income. As at December 31, 2009 and 2008, the Group does not have a financial liability held for trading and has not designated any financial liabilities as at FVPL. Other financial liabilities Other financial liabilities are initially recognized at fair value of the consideration received, less directly attributable transaction costs. After initial recognition, other financial liabilities are 17 subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any related issue costs, discount or premium. Gains and losses are recognized in the consolidated statement of income when the liabilities are derecognized, as well as through the amortization process. Financial guarantee contracts Financial guarantee contracts issued by the Parent Company to its Subsidiaries are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognized initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the ability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the balance sheet date and the amount recognized less cumulative amortization. Embedded Derivatives Derivatives embedded in host contracts are separated from the host contract and accounted for as a derivative if all of the following conditions are met: (a) the economic characteristics and risks of the embedded derivative are not closely related to the risks and characteristics of the host contract; (b) a separate instrument with the same terms as the embedded derivatives would meet the definition of a derivative; and (c) the hybrid or combined instrument is not recognized at FVPL. These embedded derivatives are measured at fair value with gains and losses arising from changes in fair value recognized in the consolidated statement of income. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet 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. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated balance sheet. Fair value of financial instruments The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. ‘Day 1’ profit and loss 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 profit and loss) in the consolidated statement 18 of income unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘Day 1’ profit and loss amount. 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 financial 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. 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. Impairment of Financial Assets The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if and only if, there is an 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 where 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. Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses individually whether objective evidence of impairment exists 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, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If 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 carrying amount of the asset is reduced through the use of an allowance account and the amount 19 of the loss is recognized in the consolidated statement of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the financial asset. 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 period, the amount of the impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss increased or decreased by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. In relation to trade receivables, a provision for impairment loss is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all the amounts due under the original terms of the invoice. The carrying amount of the receivables is reduced through use of an allowance account. Impaired debts are derecognized when they are assessed as uncollectible. Assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS investments For AFS investments, the Group assess at each balance sheet date whether there is objective evidence that an investment or Group of investment is impaired. In the case of equity investments classified as AFS, objective evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income) is removed from equity and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in fair value after impairment are recognized in other comprehensive income. In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest income” in the consolidated statement of income. If, in subsequent period, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income. Redeemable Preferred Shares (RPS) The component of the RPS that exhibits characteristics of a liability is recognized as a liability in the consolidated balance sheet, net of transaction costs. The corresponding dividends on those shares are charged as interest expense in the consolidated statement of income. On issuance of the RPS, the fair value of the liability component is determined using a market rate for an 20 equivalent non-convertible bond; and this amount is carried as a long term liability on the amortized cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognized and included in consolidated statement of changes in equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years. Transaction costs are apportioned between the liability and equity components of the convertible preference shares based on the allocation of proceeds to the liability and equity components when the instruments are first recognized. Derecognition of Financial Assets and Liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “passthrough” arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. In such 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 A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income. Revenue Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the 21 consideration received, excluding discounts, rebates, sales taxes or duty. The Group assesses its revenue arrangement against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized: Freight and passage Freight and passage revenues are recognized when the related services are rendered. Customer payments for services which have not yet been rendered are classified as unearned revenue under “Trade and other payables” in the consolidated balance sheet. Manning and crewing services Revenue is recognized upon embarkation of qualified ship crew based on agreed rates and when the corresponding training courses have been conducted. Management services Management fee is recognized when the related services are rendered. Sale of goods Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods. Commissions Commissions are recognized as revenue in accordance with the terms of the agreement with the principal and when the related services have been rendered. Charter revenues Charter revenues from short-term chartering arrangements are recognized in accordance with the terms of the charter agreements. Rental income Rental income arising from operating leases is recognized on a straight-line basis over the lease term. Interest income and expense For all financial instruments measured at amortized cost and interest bearing financial assets classified as AFS, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Dividend income Dividend income is recognized when the shareholders’ right to receive the payment is established. Borrowing Costs Borrowing costs, including foreign exchange difference arising from foreign currency borrowings that are regarded as an adjustment to interest costs, are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. All other borrowing costs that the Group incurs in connection with the borrowing of funds are expensed in the period they occur. 22 Pension Benefits The Group has thirteen (13) defined benefit pension plans, which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting year exceeded 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 plans. The past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately. The defined benefit asset or liability comprises the present value of the defined benefit obligation, less past service costs and actuarial gains and losses not yet recognized and less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value is based on market price information and in the case of quoted securities it is the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service costs and actuarial gains and losses not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies: (a) There is a change in contractual terms, other than a renewal or extension of the arrangement; (b) A renewal option is exercised and extension granted, unless the term of the renewal or extension was initially included in the lease term; (c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) There is a substantial change to the asset. When a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances give rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b). Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated statement of income. 23 Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. 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 the consolidated statement of income on a straight-line basis over the lease term. Group as a lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset 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 bases as rental income. Contingent rents are recognized as revenue in the period in which they are earned. Foreign Currency Translation The Group’s consolidated financial statements are presented in Philippine 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 financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated statement of income with the exception of all monetary items that provide an effective hedge for a net investment in a foreign operation. These are recognized in other comprehensive income until the disposal of the net investment, at which time they are recognized in the consolidated statement of income. Tax charges and credits attributable to exchange differences on those monetary items are also recorded 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. Non-monetary items are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The functional currency of JMBVI and Subsidiaries is the United States (US) dollars. The assets and liabilities of foreign operations are translated into Philippine peso using the Philippine Dealing System (PDS) closing rate at the balance sheet date and their statements of income are translated at the PDS weighted average exchange rates for the year. The exchange differences arising from the translation are taken directly to a separate component of equity, under the “Cumulative translation adjustments (CTA)” account. On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that particular foreign operation is recognized in the consolidated statement of income. Income Taxes Current income tax Current income tax assets and liabilities for the current periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted, by the balance sheet date, in the countries where the Group operates and generates taxable income. 24 Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income tax Deferred income tax is provided using the balance sheet liability method on temporary differences on the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences, except: where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences, carryforward benefits of net operating loss carryover (NOLCO) and minimum corporate income tax (MCIT), to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized except: where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted on the balance sheet date. Deferred income tax relating to items recognized either in other comprehensive income or directly in equity is recognized in consolidated statement of comprehensive income or consolidated statement of changes in equity and not in the consolidated statement of income. 25 Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Sales tax Revenues, expenses, and assets are recognized net of amount of sales tax except: where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivable and payables that are stated with the amount of sales tax are included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated balance sheet. 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 presented in the consolidated statement of income 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 provision due to the passage of time is recognized as an interest expense. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. Events After Balance Sheet Date Post year events that provide evidence of conditions that existed on the balance sheet date are reflected in the consolidated financial statements. Subsequent events that are indicative of conditions that arose after balance sheet date are disclosed in the notes to consolidated financial statements when material. Earnings Per Common Share Basic earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding, after retroactive adjustment for any stock dividends and stock splits declared during the year. Diluted earnings per common share amounts are calculated by dividing the net income for the year attributable to the ordinary equity holders of the parent by the weighted average number of common shares outstanding during the year plus the weighted average number of ordinary shares that would be issued for any outstanding common stock equivalents. 26 3. Significant Accounting Judgments and Estimates The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities, as at December 31, 2009, 2008 and 2007. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in the future periods. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial statements: Operating lease commitments - Group as lessee The Group has entered into commercial property leases on its distribution warehouses, sales outlets, trucking facilities and administrative office locations. The Group has determined that it does not acquire all the significant risks and rewards of ownership of these properties which are leased on operating leases. Operating lease commitments - Group as lessor The Group has entered into short-term leases or chartering arrangements. The Group has determined that it retains all the significant risks and rewards of ownership of these equipment and so accounts for it as an operating lease. Disposal group classified as held for sale On December 19, 2008, AEV, together with ACO accepted the Term Sheet offered by KGLI-NM for the acquisition of ATSC and Subsidiaries subject to the terms and conditions that the Aboitiz Jebsen Group will be sold to AEV and ACO on or before April 30, 2009. The Management considered the investments in Aboitiz Jebsen Group met the criteria to be classified as held for sale as at December 19, 2008 for the following reasons: Aboitiz Jebsen Group is available for immediate sale and can be sold to AEV in its current condition. The Board has plan to sell the Aboitiz Jebsen Group to AEV according to the terms of MOA. The Board expects the sale of Aboitiz Jebsen Group to be completed by April 30, 2009. On April 30, 2009, the Parent Company was advised by AEV and ACO that KGLI-NM will no longer proceed with the purchase of the Parent Company’s shares. Consequently, AEV and ACO will no longer acquire the Aboitiz Jebsen Group from the Parent Company. As the sale of Aboitiz Jebsen Group did not materialize, the Group ceased to classify the Aboitiz Jebsen Group as held for sale in 2009. Determining functional currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the companies in the Group has been determined to be the Philippine peso, except for subsidiaries whose functional currency is the US dollar. The Philippine peso is the 27 currency of the primary economic environment in which the Group generally operates. It is the currency that mainly influences the sale of services and the costs of the rendering of services. Legal contingencies The Group is currently involved in legal and administrative proceedings. The Group’s estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsels handling defense in these matters and is based upon an analysis of potential results. The Group and its legal counsels currently do not believe these proceedings will have a material adverse effect on its financial position and results of operations. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings (see Note30). Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimating allowance for impairment losses on trade and other receivables The Group maintains allowances for impairment losses on trade and other receivables at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with debtors, their payment behavior and known market factors. The Group reviews the age and status of the receivables, and identifies accounts that are to be provided with allowance on a continuous basis. The amount and timing of recorded expenses for any period would differ if the Group made different judgment or utilized different estimates. An increase in the Group’s allowance for impairment losses would increase the Group’s recorded expenses and decrease current assets. The main considerations for impairment assessment include whether any payments are overdue or if there are any known difficulties in the cash flows of the counterparties. The Group assesses impairment into two areas: individually assessed allowances and collectively assessed allowances. The Group determines allowance for each significant receivable on an individual basis. Among the items that the Group considers in assessing impairment is the inability to collect from the counterparty based on the contractual terms of the receivables. Receivables included in the specific assessment are the accounts that have been endorsed to the legal department, nonmoving account receivables, accounts of defaulted agents and accounts from closed stations. For collective assessment, allowances are assessed for receivables that are not individually significant and for individually significant receivables where there is no objective evidence of individual impairment. Impairment losses are estimated by taking into consideration the age of the receivables, past collection experience and other factors that may affect collectibility. As at March 31, 2010 and December 31, 2009, allowance for impairment losses on trade and other receivables amounted to P =264,243 and = P259,359, respectively. Carrying values of the Group’s trade and other receivables as at March 31, 2010 and December 31, 2009 amounted to =3,246,022 and = P P2,347,627, respectively (see Notes 8 and34). Estimating allowance for inventory losses The Group provides an allowance for inventories whenever the value of inventories becomes lower than its cost due to damage, physical deterioration, obsolescence, changes in price levels or 28 other causes. The allowance account is reviewed on an annual basis. Inventory items identified to be obsolete and unusable are written off and charged as expense for the period. As at March 31, 2010 and December 31, 2009, the net carrying value of inventories amounted to =614,565 and P P =571,179, respectively (see Note 9). Estimating useful lives of property and equipment The estimated useful lives used as basis for depreciating property and equipment items were determined on the basis of management’s assessment of the period within which the benefits of these asset items are expected to be realized taking into account actual historical information on the use of such assets as well as industry standards and averages applicable to the Group’s assets. In 2007, management extended the estimated useful life of Super Ferry 2, one of the ships in operation, by five (5) years. Also, the estimated useful life of the steel component of each of the vessels was revised from 2 ½ years to 7 years or the remaining useful life of the related vessel whichever is shorter. The extension is based on management’s assessment of the period within which the benefit of using these assets is expected to be realized, after the extensive improvements done to the assets. The change in estimated useful life has reduced depreciation expense by = P3.0 million in 2007. In 2009, the estimated useful life of the vessel’s steel component was changed from 7 years to 5 years mainly because of the increased utilization of vessels resulting from the rationalization of the Parent Company’s fleet. The change in estimated useful life has increased depreciation expense by P =4.2 million in 2009. The Group’s property and equipment balance amounted to = P5,802,063 and P =4,817,558 as at March 31, 2010 and December 31, 2009, respectively (see Note 14). Estimating residual value The residual value of the Group’s property and equipment asset is estimated based on the amount that would be obtained from disposal of the asset, after deducting estimated costs of disposal, if the assets are already of the age and in the condition expected at the end of its useful life. Such estimation is based on the prevailing price of scrap steel. The estimated residual value of each asset is reviewed periodically and updated if expectations differ from previous estimates due to changes in the prevailing price of scrap steel. Estimating useful life of software development costs The estimated useful life used as a basis for amortizing software development costs was determined on the basis of management’s assessment of the period within which the benefits of these costs are expected to be realized by the Group. As at March 31, 2010 and December 31, 2009, the carrying value of software development costs amounted to = P94,290 and = P112,127, respectively (see Note 15). Deferred income tax assets The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Significant management judgment is required to determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with the future tax planning strategies. Management expects future operations will generate sufficient taxable profit that will allow part of the deferred income tax assets to be utilized. 29 The Group’s gross deferred income tax assets amounted to P =353,452 and P =255,531 as at March 31, 2010 and December 31, 2009, respectively (see Note 29). Impairment of AFS investments The Group considers AFS financial assets as impaired when there has been a significant or prolonged decline in the fair value of such investments below their cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Group treats “significant” generally as 20% or more and “prolonged” as greater than twelve months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and future cash flows and discount factors for unquoted equities in determining the amount to be impaired. The carrying value of AFS investments amounted to P =43,346 and P =43,323 as at March 31, 2010 and December 31, 2009, respectively (see Notes 13 and 34). Fair value of financial instruments Where the fair value of financial assets and liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to the models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing the fair values. The judgments include considerations of inputs such as liquidity risk and credit risk. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The carrying values and corresponding fair values of financial assets and financial liabilities and the manner in which fair values were determined are described in Note 35. Impairment of nonfinancial asset Determining the recoverable amounts of the nonfinancial assets listed below, which involves the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the use of estimates and assumptions that can materially affect the consolidated financial statements. Future events could indicate that these nonfinancial assets are impaired. Any resulting impairment loss could have a material adverse impact on the financial condition and results of operations of the Group. The preparation of estimated future cash flows involves significant judgment and estimations. While the Group believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect its assessment of recoverable values and may lead to future additional impairment changes under PFRS. Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill as at March 31, 2010 and December 31, 2009 amounted to P =256,463 (see Note 6). Pension benefit The determination of the obligation and cost for pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. 30 Those assumptions were described in Note 30 and include among others, discount rate, expected return on plan assets and rate of compensation increase. In accordance with PFRS, 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 it is believed that the Group’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group’s pension and other retirement obligations. The Group’s pension asset and pension liability as at March 31, 2010 amounted to = P67,589 and = P 30,577, respectively and as at December 31, 2009 amounted to P =67,589 and P =18,115, respectively, (see Notes 16). 4. Operating Segment Information For management purposes, the Group is organized into business units based on their products and services and has three reportable operating segments as follows. The shipping and transportation segment renders passage transportation and cargo freight services. The distribution segment provides supply chain management. The manpower services segment renders manning and personnel, particularly crew management services. No operating segments have been aggregated to form the above reportable operating segments. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, Group financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments. Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. 31 Financial information about business segments follows: Mar-10 Shipping and Transportation Manpower Distribution Elimination Services Consolidated Revenue External customer 2,441,240 Inter-segment Total revenue 231,577 2,672,817 620,394 77,749 620,394 13,949 91,698 (245,526) (245,526) 3,139,384 0 3,139,384 142 0 5,566 540,069 Results Share in Equity Earmings Cost of Sale 5,424 0 540,069 Fuel 625,889 113 0 (1,426) 624,577 Depreciation and amortization 266,193 9,151 4,676 0 280,019 28,912 0 0 0 28,912 298,717 0 0 0 298,717 (231,203) 14,704 15,051 0 (201,448) (152,536) 14,704 10,803 0 (127,029) 11,900,638 6,600,495 1,052,280 909,215 1,396,993 1,295,090 (1,805,276) (1,297,633) 12,544,634 7,507,166 1,246,102 81,834 2,101 0 4,243 6,159 Food and subsistence Charter hire Segment income (loss) before income tax Segment income (loss) Segment assets Segment liabilities Other information: Capital expenditures Investment in associate 1,252,446 87,994 Mar-09 Shipping and Transportation Manpower Distribution Elimination Services Consolidated Revenue External customer 2,390,334 Inter-segment Total revenue 257,903 2,648,236 376,604 86,341 376,604 18,670 105,011 (276,573) (276,573) 2,853,278 0 (571) 0 0 2,853,278 Results Share in Equity Earmings 2,554 Cost of Sale 308,157 1,983 308,157 Fuel 485,642 175 0 (1,132) 484,685 Depreciation and amortization 250,390 8,868 3,621 0 262,880 40,836 0 0 0 40,836 144,920 0 0 0 144,920 174,433 (5,183) 32,154 0 201,404 131,239 (5,183) 23,291 0 149,347 9,635,113 4,587,482 705,385 607,129 958,325 857,065 (1,555,165) (1,041,639) 9,743,658 5,010,037 269,448 24,415 3,242 0 2,257 4,418 Food and subsistence Charter hire Segment income (loss) before income tax Segment income (loss) Segment assets Segment liabilities Other information: Capital expenditures Investment in associate 5. Business Combinations and Goodwill On June 3, 2008, AOI acquired 100% ownership in SOI, a company engaged in the business of sales, marketing, warehousing and transportation of temperature-controlled and ambient food products to its customers in the Philippines. The fair value of the identifiable assets and liabilities of SOI as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition were: 274,947 28,833 32 Cash and cash equivalents Trade and other receivables Merchandise inventory Prepayments and other current assets Property and equipment Trade and other payables Other liabilities Net assets Goodwill arising from acquisition Total consideration satisfied by cash Cashflow on acquisition: Net cash acquired with the subsidiary Cash paid Net cash outflow Fair value recognized on acquisition =148,246 P 119,070 68,651 64,822 11,009 411,798 223,096 65,282 123,420 250,450 =373,870 P Previous carrying value =148,246 P 119,070 68,651 64,822 11,009 411,798 223,096 65,282 =123,420 P P148,246 = (373,870) (P =225,624) SOI has contributed = P0.704 million net loss and = P10.5 million to the net income of the Group in March 31, 2010 and December 31, 2009, respectively. The following table shows the movement of goodwill: Balances at beginning of year Addition Disposal Balances at end of year 2009 P =256,463 – – P =256,463 2008 P10,323 = 250,450 (4,310) =256,463 P On January 22, 2009, AOI entered into an Investor’s Agreement (the Agreement) with Kerry Logistics Network Limited (KLN), a Hong-Kong based logistics company. In accordance with the Agreement, AOI invested = P4.8 million in a wholly-owned subsidiary, KLN Investment Holdings Philippines, Inc. (KLN Investment) on February 26, 2009. On August 1, 2009, AOI subsequently sold its investment in KLN Investment to Kerry Freight Services (Far East) Pte. Ltd, a subsidiary of KLN, which resulted in a gain of P =52.5 million. 6. Impairment Testing of Goodwill Goodwill acquired through business combinations have been attributed to each cash-generating unit. The recoverable amount of the investments has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The discount rate applied to cash flow projections is 11.40% in 2009, and cash flows beyond the five-year period are extrapolated using a zero percent growth rate. 33 Key assumptions used in value in use calculation for December 31, 2009 The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill. Foreign exchange rates In 2008, the assumption used to determine foreign exchange rate is a fluctuating Philippine peso which starts at a rate of = P40 to a dollar starting 2008 until the fifth year. In 2009, the rate used in the assumption is = P48.50 to a dollar starting 2009 until the fifth year. Materials price inflation In 2008, the assumption used to determine the value assigned to the materials price inflation is a 2% basis point increase in inflation in 2009, which then decreased by 1% basis points on the second year and remains steady on the third until the fifth year. The starting point of 2009 is consistent with external information sources. In 2009, the assumption used to determine the value assigned to the materials price inflation is a 4.74% basis point increase in inflation in 2010. As at December 31, 2009, the Group has not recognized any impairment in goodwill. 7. Cash and Cash Equivalents Cash on hand and in banks Cash equivalents Mar-10 815,797 34,940 850,737 Dec-09 1,020,498 75,213 1,095,711 Cash in banks earns interest at the respective bank deposit rates. Cash equivalents are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term investment rates. Total interest income earned by the Group from cash in banks and cash equivalents amounted to =1,595 and P P =25,098 in March 31, 2010 and December 31, 2009, respectively. 8. Trade and Other Receivables Trade Service fees Freight Passage Others Nontrade Advances to officers and employees Less allowance for doubtful accounts Mar-10 2,095,358 1,280,125 687,921 18,046 109,266 1,130,259 59,487 3,510,265 (264,243) 3,246,022 Dec-09 2,062,889 694,874 751,912 27,955 588,148 269,805 50,636 2,606,986 (259,359) 2,347,627 34 Trade receivables are non-interest bearing and are generally on 30 days’ terms. Insurance claims receivables pertain to the Group’s claims for reimbursement of losses against insurance coverages for hull and machinery, cargo and personal accidents. Nontrade receivables are non-interest bearing and include advances to affiliates and suppliers. 9. Inventories Fuel and lubricants (at cost) Materials, parts and supplies: At net realizable value Total inventories at lower of cost or net realizable value Mar-10 124,945 Dec-09 119,496 489,620 451,683 614,565 571,179 The cost of inventories recognized as “Cost of sales” in the consolidated statements of income amounted to P =540,069 and P =1,460,875 in March 31, 2010 and December 31, 2009, respectively. 10. Other Current Assets Prepaid Expenses Input value-added tax Others Less: allowance for probable losses Mar-10 702,938 147,072 27,000 877,011 0 877,011 Dec-09 683,043 94,099 8,224 785,366 0 785,366 11. Investments in Associates Mar-10 Acquisition Cost: Balance at beginning of the year Additions during the year Acquisition of subsidiaries previously accounted for as associate Disposal during the year Balance at end of the year (forward) Dec-09 22,449 1,637 18,849 3,600 24,086 22,449 35 Accumulated equity in net earnings: Balance at beginning of the year Equity in net earnings(losses) during the year Reversal of equity in net earnings of acquired subsidiaries previously accounted for as associate Disposal during the year Dividends received Balance at end of the year Share in CTA of associates Investments in associates included in the disposal group classified as held for sale 51,246 5,566 (2,188) 53,434 56,812 80,898 7,096 87,994 51,246 73,695 513 74,208 87,994 74,208 12. Interest in Joint Ventures On March 18, 2009, AOI and KLN Investments formed KLN Holdings, a jointly controlled entity. In accordance with the Agreement, AOI and KLN Investments (the venturers) will hold ownership interests of 78.4% and 21.6%, respectively, in KLN Holdings. However, the venturers have the power to govern the financial and operating policies of KLN Holdings unanimously. As at December 31, 2009, AOI’s investment in KLN Holdings amounted to P =7.5 million. In March 30, 2009, KLN Holdings and KLN Investments formed another jointly controlled entity, Kerry-Aboitiz Logistics, Inc. (KALI), to engage in the business of international freight and cargo forwarding. In accordance with the Agreement, KLN Holdings and KLN Investments will hold 62.5% and 37.5% interest in KALI, respectively. However, the venturers have the power to govern the financial and operating policies of KALI unanimously. As of December 31, 2009, KLN Holdings’ investment in KALI amounted to = P9.6 million. In accordance with the Agreement, AOI indirectly holds a 49% interest in KALI. To account for this, KALI is proportionately consolidated by KLN Holdings using the latter’s 62.5% share. The consolidated balances of KLN Holdings are then proportionately consolidated by AOI using the latter’s 78.4% share. 13. AFS Investments Listed shares of stock Club shares Unlisted shares of stock - at cost Mar-10 26,812 5,500 11,034 43,346 Dec-09 26,789 5,500 11,034 43,323 36 Listed shares of stocks and club shares are carried at market value. Unrealized mark-to-market gains or losses on AFS investments are recognized in the statement of comprehensive income and included in the “Equity” section of the consolidated balance sheet. Unquoted shares of stocks pertain to preferred shares which has a fixed number of shares that can be redeemed every year. 14. Property and Equipment The Parent Company’s ships in operation, land and improvements, and buildings and warehouses, were appraised for the purpose of determining their market values. Based on the latest appraisal dated September 2008 made by Eagle Marine Consultants Inc, the related ships in operation have an aggregate market value of =P4,445 million against net book value of P =2,607 million. Containers include units acquired under finance lease arrangements (see Note 19). The related depreciation of the leased containers amounting to = P29.0 million in 2009, P =62.1 million in 2008 and P =128.8 million in 2007 were computed on the basis of the Company’s depreciation policy for owned assets. To ensure the maintenance of the ships in operation in accordance with international standards, the Parent Company has availed of the services of its subsidiary and ship management company, AJBTC, to oversee the regular upgrading and maintenance of the ships. The Parent Company disposed three ships in operation in 2007 resulting in a gain of =623.1 million. In 2008, the Parent Company disposed Tagbilaran properties, leasehold P improvements related to the vessel, MV2Go1, and containers that resulted to a net gain of =117.8 million. P In 2008 and 2007, the Group recorded an impairment loss amounting to P =15.2 million and =19.6 million, respectively, to write down flight and handling equipment to the recoverable P amount. This has been recognized in the consolidated statements of income in the line item “Overhead Expenses”. In 2009, the Parent Company’s disposal of Our Lady of Medjugorje and containers resulted in a net gain of = P19.7 million. The retirement of Super Ferry 9 due to the incident that happened in September 2009 resulted in a net gain from insurance proceeds on marine hull of = P79.5 million which was presented as “Other income” in the consolidated statements of income. The net book value of Super Ferry 9 that was retired amounted to = P255.5 million. In 2009 and 2008, the Group recognized a reversal of impairment loss and an impairment loss of =0.2 million and = P P15.2 million, respectively, on its flight equipment due to irreparable damage on its aircraft engines. 37 As at March 31, 2010 Cost At January 1 Additions Disposals Transfers/Reclassifications Balance, end Ships in Operation and Improvments Containers Handling Equipment Flight Equipment 5,879,221 1,473,739 436,577 13,898 (97) (10,767) 0 0 6,315,701 1,476,869 1,232,955 17,243 0 1,035 1,251,233 50,621 18 (5) 13,590 64,224 741,089 448,538 19,026 522 (1,882) 0 12,786 0 771,018 449,060 211,873 8,766 (1,260) 1,714 221,093 369,539 3,256 0 0 372,795 268,237 11,205 (7,318) 105,926 378,051 4,285 740,910 0 0 745,195 10,680,096 1,251,421 (21,330) 135,051 12,045,238 9,994,143 1,941,456 (772,475) (483,028) 10,680,096 1,127,308 14,132 0 (10,316) 10,897 1,142,022 50,621 253 (5) (21,075) 34,430 64,224 578,843 21,602 (1,766) 15,236 0 613,916 76,926 3,196 0 0 0 80,122 145,780 2,798 0 1,665 0 150,243 211,985 8,679 0 0 0 220,665 118,547 9,636 (6,049) 104,624 209 226,966 0 0 0 0 0 0 5,862,538 263,220 (18,253) 90,134 45,536 6,243,175 5,756,894 951,210 (641,600) (203,966) 5,862,538 368,938 70,849 152,130 151,084 5,802,063 4,817,558 Accumulated Depreciation and Amortization At January 1 2,220,913 1,331,613 Depreciation for the year 196,939 5,984 Disposals (97) (10,336) Transfers/Reclassification 0 0 Impairment for the year 0 0 Balance, end 2,417,755 1,327,261 Net Book Value 3,897,946 149,608 109,211 (0) Furniture and Equipment Ships under Transport Refurbishment Land and Buildings Leasehold ation and Improve and Improvem Equipmen Construction in ments Warehouses ents t Progress March 2010 157,102 745,195 December 2009 - 38 - 15. Software Development Costs Movement of the Group’s software development costs follows: Mar-10 Dec-09 Cost: Balances at beg of the year Additions Reclassifications Disposal/retirement Balances at end of the year 578,556 1,026 (2,063) (10,181) 567,338 577,309 6,264 Accumulated amortization: Balances at beg of the year Amortization for the year Adjustment Balances at end of the year 466,429 16,799 (10,181) 473,048 389,099 82,335 (5,005) 466,429 94,290 112,127 Mar-10 67,589 251,102 318,691 Dec-09 67,589 195,314 262,903 Mar-10 259,728 73,467 2,468,600 2,801,795 Dec-09 113,190 0 1,279,200 1,392,390 Net Book Values (5,017) 578,556 16. Other Noncurrent Asset Pension assets Refundable deposits and others 17. Loans Payable US dollar loan US dollar overdraft facility Peso Loans The peso loans pertain to unsecured short-term notes payable obtained by the Parent Company and AOI from local banks with annual interest rates ranging from 4.875% to 7.80% in March 2010 and 5.35% to 8.75% in December 2009. These loans will mature on various dates up to September 2010. - 39 - The US dollar loans represent unsecured short-term notes payable obtained by AJBTC and JMI from local banks and have outstanding balances amounting to US$5.75 million and US$2.5 million as at March 31, 2010 and December 31, 2009, respectively. These loans bear interest rates of 4.0% to 4.75% in March 2010 and 4.0% to 6.5% in December 2009. These loans will mature on various dates up to October 2011. The US dollar overdraft facility pertains to a loan obtained from a foreign bank by Jebsens Orient Shipping AS, a wholly owned subsidiary of JMBVI based in Norway, with interest at the aggregate of London Inter-bank Offered Rate (LIBOR) plus a margin of 1.50% per year. This loan is secured by an assignment of the borrower’s earnings and a guarantee of JMBVI shareholder. Total interest expense incurred by the Group for the loans amounted to P =4.48 million and P =63.7 million in March 2010 and December 2009, respectively. 18. Trade and Other Payables Trade Accrued expenses Nontrade Unearned revenue- net of deferred discounts Dividends payable Mar-10 1,876,096 1,539,404 889,474 288,125 4,593,098 Dec-09 1,623,585 1,474,183 766,449 88,461 30,030 3,982,707 Trade and other payables are non-interest bearing and are normally on 30 days’ term. The dividend payable pertains to dividend declared by JMBVI to its minority shareholders on December 31, 2009, which was paid on February 1, 2010. 19. Finance Lease The Group has certain containers and transportation equipment under finance lease arrangements denominated in US dollars. Assets under finance lease as at March 31, 2010 and December 31, 2009, shown under “Property and equipment” account in the consolidated balance sheets, include the following amounts: Cost Less: accumulated depreciation Mar-10 43,670 7,728 35,942 Dec-09 44,526 6,679 37,847 - 40 - Future minimum lease payments under finance lease, together with the present value of the minimum lease payments, are as follows: Minimum lease payments due within 1 year Beyond 1 year but not later than 5 years More than 5 years Total minimum lease obligation Less: amount representing interest Present value of minimum lease payment Less: current portion Mar-10 6,640 26,996 3,310 36,946 6,768 30,178 4,965 25,213 Dec-09 8,466 27,069 3,308 38,843 7,275 31,568 6,222 25,346 The outstanding balance of the US dollar-denominated finance lease obligation of US$0.7 million and US$2.4 million as at December 31, 2009 and 2008, respectively, have been restated at the rate prevailing as of those dates of = P46.20 and = P47.52 to US$1, respectively. 20. Redeemable Preferred Shares (RPS) On January 7, 2003, the Parent Company issued 374,520,487 RPS in the form of stock dividends out of capital in excess of par value at the rate of one share for every four common shares held by the shareholders. The RPS has the following features: non-voting; preference on dividends at the same rate as common share; redeemable at any time, in whole or in part, as may be determined by the BOD within a period not exceeding 10 years from the date of issuance at a price of not lower than P =6 per share as may be determined by the BOD. The shares must be redeemed in the amount of at least = P250,000 per calendar year; if not redeemed in accordance with the foregoing, the RPS may be converted to a bond bearing interest at 4% over prevailing treasury bill rate to be issued by the Parent Company; and, preference over assets in the event of liquidation. On May 25, 2006, the Parent Company’s shareholders approved the Amendment of Article 7 of the Articles of Incorporation to add a convertibility feature to the RPS so as to allow holders of RPS, at their option, to convert every RPS into two (2) common shares of the Parent Company, which conversion must be exercised on or before December 29, 2006 or within 120 days from the approval by the SEC of such amendment, whichever occurs earlier. On June 15, 2006, the SEC approved the Parent Company’s application for the amendment of its Articles of Incorporation for the addition of this convertibility feature on the RPS. On July 27, 2006, the BOD approved the call to all preferred shareholders to convert at their option preferred shares into common shares at the stipulated conversion price of = P3.20 for one (1) - 41 - preferred share or two common shares for every one (1) RPS held. During the Conversion Period from September 1 to October 13, 2006, a total of 70,343,670 preferred shares or 93.91% were converted to common shares. Consequently, the Parent Company issued a total of 140,687,340 new common shares to those RPS holders who opted to convert their preferred shares. The capital stock was increased by P =140.7 million representing the issuance of new common shares. The excess between the carrying value of the preferred shares converted over the par value of the common shares issued was credited to “Capital in excess of par value” amounting to =67.2 million. P The remaining carrying value of the RPS shown under “Noncurrent Liabilities” section of the consolidated balance sheets is presented at amortized cost. Increase in carrying value represents accretion of interest expense amounting to = P2.4 million, = P2.1 million and = P1.9 million in 2009, 2008 and 2007, respectively (see Note34). There are 4,560,417 outstanding preferred shares as at December 31, 2009. 21. Equity a. Capital stock On August 7, 2008, the SEC approved the Parent Company’s application for the amendment of its Articles of Incorporation for the reclassification of 70,343,670 converted preferred shares to common shares resulting to an increase in common shares’ authorized capital stock of 70,343,670 and a decrease of the redeemable preferred shares’ authorized capital stock of the same amount. The Company has authorized capital stock of 4,070,343,670 shares with = P1 par value. Outstanding capital stock are as follows: Common shares issued: Balance at beginning of year Less treasury shares Number of Shares Peso Values 2,484,653 38,517 2,446,136 =2,484,653 P 58,715 =2,425,938 P b. Retained earnings Retained earnings include undistributed earnings amounting to = P168.6 million in 2009 and =157.7 million in 2008 representing accumulated equity in net earnings of subsidiaries and P associates, which are not available for dividend declaration until received in the form of dividends from such subsidiaries and associates. Retained earnings are further restricted for the payment of dividends to the extent of the cost of the shares held in treasury. On December 31, 2009, AJBTC, AJMSI and JMI paid dividends to minority interests amounting to P =18.8 million, = P0.4 million and P =3.8 million, respectively. - 42 - 22. Related Party Transactions Transaction with associates and other related parties In the normal course of business, transactions with associates and other related companies consist of shipping services, charter hire, management services, ship management services, purchases of steward supplies, availment of stevedoring, arrastre, trucking, and repair services and rental. Those transactions were entered into at terms no less favorable than could have been obtained if the transactions were entered into with unrelated parties. The amounts included in the consolidated financial statements with respect to these transactions are as follows: Mar-10 Mar-09 Purchases/ Revenue Pilmico Foods Corporation (PFC) Purchases/ Expenses Revenue Expenses 21,041 0 29,133 0 0 0 120 42 601 0 0 0 327 65 280 37 Total Distribution Logistics Systems, Inc. (TDLSI) 0 16,510 RVSI Abotrans Brokerage Corporation (ABC) Pilmico-Mauri Foods Corporation (PMFC) 0 0 0 0 0 0 0 0 66 0 0 17,443 Aboitiz Equity Ventures (AEV) 0 6,880 0 41,838 J&A Services 0 2,917 0 42,062 Aboitiz & Co. (ACO) 0 0 0 32,002 556 22,198 139 26,446 8,132 39,241 6,536 259,433 Fil-am Foods, Inc, (FFI) APTSC Aboitiz Construction Group, Inc. (ACGI) Others 1,397 119,194 The consolidated balance sheets include the following amounts with respect to the transactions with the above related parties: Mar-10 Mar-09 Trade/Nontrade Trade Trade/Nontrade Trade Receivables Payable and Receivables Payable and Other Current Other Current Liabilities Liabilities PFC 0 0 23,787 0 FFI 0 0 0 0 15,646 0 2,092 0 APTSC ACO TDLSI J&A Services 0 0 1,500 0 158 705 1,641 434 320 0 0 6 0 362 0 0 AEV 4 0 77 ACGI 0 0 0 111,804 0 60,424 76,595 62,346 63,058 19,971 49,068 436,238 548,797 PMFC Others - 43 - As at December 31, 2009, AEV owns 77.24% of the common shares of the Parent Company. ACO is the ultimate parent of the Group and owns 15.96% of the common shares of the Parent Company. In the normal course of business, the Group enters into transactions with related parties, principally consisting of the following: a. The Parent Company provided management services to SFFC, ZIP, AOI, RVSI, AODI, HLP, APTSC, Cox and TDLSI at fees based on agreed rates. Management and other services provided by the Parent Company amounted to P =23.1 million and P =59.3 million in March 2010 and December 2009, respectively. b. AJBTC provided ship management services to the Parent Company that amounted to =12.5 million and = P P47.6 million in March 2010 and December 2009, respectively. c. AOI, ZIP, WSI and AJBTC place temporary cash advances to Parent Company that amounted to = P116.5 million and = P139.5 million as at March 31, 2010 and December 31, 2009, respectively. The advances are non-interest bearing. d. SFFC obtained long-term cash advances from the Parent Company for working capital requirements. The advances are interest bearing at an average rate of 9% per annum. As at March 31, 2010 and December 31, 2009, the outstanding balance of long term cash advances amounted to = P464.3 million and = P428.5 million, respectively. e. Interest income earned by the Parent Company from SFFC advances amounted to =9.7 million and = P P27.1 million in March 2010 and December 2009, respectively. 23. Operating Expenses Fuel and Lubricants Charter Hire Depreciation and amortization Outside Services Personnel Repairs and maintenance Insurance Food and subsistence Commissions Steward supplies Rentals Communication, light and water Sales Concession Others Mar-10 616,570 298,717 205,912 333,864 111,773 135,735 67,536 28,912 9,680 21,041 54,887 15,397 9,715 109,109 2,018,846 Mar-09 477,441 144,920 178,548 254,179 100,637 120,334 60,740 40,836 9,147 19,248 0 16,874 11,958 101,451 1,536,312 - 44 - 24. Terminal Expenses Outside Services Depreciation and amortization Transportation and delivery Repairs and maintenance Personnel Rent Fuel and Lubricants Others Mar-10 67,739 28,663 64,151 16,580 29,862 10,711 8,007 25,731 251,444 Mar-09 67,336 32,522 108,229 20,665 29,950 11,887 7,244 24,696 302,529 Mar-10 246,141 45,445 48,982 28,251 25,270 24,516 3,113 6,143 10,561 18,570 4,465 4,704 10,237 38,311 514,709 Mar-09 229,963 51,810 49,585 33,530 23,263 21,329 6,942 6,529 9,088 16,947 4,266 4,438 5,981 49,585 513,257 Mar-10 196,430 66,790 16,799 280,019 Mar-09 168,505 71,772 22,603 262,880 25. Overhead Expenses Personnel Depreciation and amortization Outside Services Advertising Communication, light and water Rent Provision for doubtful accounts Entertainment, amusement and recreation Transportation and travel Taxes and licenses Repairs and maintenance Office Supplies Computer charges Others 26. Depreciation and Amortization Expenses Ships in operation and improvement Other property and equipment Software development costs - 45 - 27. Personnel Costs Salaries and wages Crewing costs Retirement benefits Other employee benefits Mar-10 263,357 64,093 17,220 43,105 387,775 Mar-09 245,586 58,202 14,574 42,188 360,549 Mar-10 26,220,191 3,109,152 29,329,343 Mar-09 24,506,895 286,666 24,220,229 Mar-10 156,029 Dec-09 74,050 71,185 17,645 59,343 48,853 396 353,452 71,185 17,645 59,351 46,452 2,166 270,849 14,263 1,055 15,318 255,531 28. Finance Costs Interest expense Other financing costs 29. Income Tax The components of deferred income taxes are as follows: NOLCO Allowance for: Doubtful accounts and probable losses Inventory obsolescence MCIT Accrued pension benefits and others Unrealized foreign exchange loss (gain) Prepaid pension costs Others 0 353,452 In computing deferred income tax assets and liabilities as at December 31, 2009 and 2008, the rates used were 30% and 35%, respectively, which are the rates expected to apply to taxable income in the years in which the deferred income tax assets and liabilities are expected to be recovered or settled. 30. Contingencies There are certain legal cases filed against the Group in the normal course of business. Management and its legal counsel believe that the Group has substantial legal and factual bases for - 46 - its position and are of the opinion that losses arising from these cases, if any, will not have a material adverse impact on the consolidated financial statements. Also, the Parent Company has pending insurance claims (presented as part of Insurance and Other Claims) amounting to = P150.6 million as at December 31, 2009 which management believes is probable of collection. As at December 31, 2009, the Parent Company has provided guarantees on the bank loans of AOI, AODI and ZIP amounting to = P200.0 million. 31. Earnings Per Common Share Basic and diluted earnings per common share were computed as follows: Net income attributable to equity holders of the parent (a) Weighted average number of common shares outstanding for the year (b): Basic Earnings per share (a/b) Mar-10 (141,929) Mar-09 132,331 2,446,136 (58.02) 2,446,136 (0.02) There are no dilutive potential common shares as at December 31, 2009, 2008 and 2007. 32. Registration with the BOI The Parent Company is registered with the BOI under the Omnibus Investment Code (OIC) of 1987 as a new operator of inter-island shipping through its SuperFerries 15, 16, 17 and 18 vessels on a pioneer status starting February 13, 2003, SuperFerry 19 starting December 29, 2004, and SuperFerry 12 starting May 4, 2005. Such registration entitles the Parent Company to income tax holiday for a period of three to six years from the date of registration. Upon the request of the Parent Company, the BOI cancelled the registrations of SuperFerry 19 and SuperFerries 15, 16, 17 and 18 last October 18, 2006 and January 12, 2007 including all incentives granted thereunder. The Parent Company requested the cancellation of the said registrations due to the change in activity of SuperFerry 19 and the sale of SuperFerries 15, 16, 17 and 18 leaving only SuperFerry 12 as the remaining vessel entitled to ITH incentives up to May 3, 2008. ZIP is registered with BOI under OIC of 1987 as a non-pioneer operator of logistics service facilities. Such registration entitles ZIP to income tax holiday (ITH) for a period of four (4) years from May 2005 or actual start of commercial operations, whichever is earlier. On October 30, 2007, the BOI approved ZIP’s application under Executed Order 226 as an expanding operator of logistics service facilities, the new registration entitles ZIP to ITH for a period of three (3) years from the date of registration. Incentives availed amounted to = P23.7 million in 2009, P =68.6 million in 2008 and P =55.8 million in 2007. On February 19, 2008, the BOI approved SFFC’s application for registration as a New Operator of Domestic Shipping (Passenger Vessel) on a Non-Pioneer status. The Company is entitled to four (4) years ITH from date of registration. Incentives availed amounted to = P63.6 million in 2009 and nil in 2008 due to net taxable loss position in non-registered activities. - 47 - 33. Commitments and Other Matters a. In 2002, the Parent Company entered into a Memorandum of Agreement (Agreement) with Asian Terminals, Inc. (ATI) for the use of the ATI’s facilities and services at the South Harbor for the embarkation and disembarkation of the Parent Company’s domestic passengers, as well as loading, unloading and storage of cargoes. The Agreement shall be for a period of five years, which shall commence from the first scheduled service of the Parent Company at the South Harbor. The Agreement is renewable for another five years under such terms as may be agreed by the parties in writing. If the total term of the Agreement is less than ten years, then the Parent Company shall pay the penalty equivalent to the unamortized reimbursement of capital expenditures and other related costs incurred by ATI in the development of South Harbor. The Agreement became effective on January 14, 2003. Under the terms and conditions of the Agreement, the Parent Company shall avail of the terminal services of ATI, which include, among others, stevedoring, arrastre, storage, warehousing and passenger terminal. Domestic tariff for such services (at various rates per type of service as enumerated in the Agreement) shall be subject to an escalation of 5% every year. Total service fees charged to operations amounted to = P128.8 million, P =159.4 million and =160.1 million in 2009, 2008 and 2007, respectively (see Note 24). P b. AJBTC, JMI and AJMSI (Agents) have outstanding agreements with foreign shipping principals, wherein the Agents render manning and crew management services consisting primarily of the employment of crew for the principals’ vessels. As such, the principals have authorized the Agents to act on their behalf with respect to all matters relating to the manning of the vessels. Total service fees revenues recognized in the consolidated statements of income from these agreements amounted to P =400.0 million in 2009, P =387.8 million in 2008 and P =326.0 million in 2007. c. JMBVI and Subsidiaries have outstanding Charter Party Agreements with vessels’ owners for the use of the vessels or for sublease to third parties within the specified periods of one (1) to three (3) years under the terms and conditions covered in the agreements. In consideration thereof, JMBVI recognized charter hire expense amounted to P =529.4 million, P =1,962 million and P =2,245 million in 2009, 2008 and 2007, respectively (see Note 23). d. The Group has entered into various operating lease agreements for its office spaces. The future minimum rentals payable under the noncancellable operating leases are as follows: Within one year After one year but not more than five years More than five years 2009 P =162,177 286,360 10,934 P =459,471 2008 =141,648 P 319,499 15,545 =476,692 P - 48 - e. In 2009, the Parent Company entered into various agreements to charter the following vessels: Charter Period From To 15-Aug-08 20-Dec-09 05-Dec-09 18-Jul-10 02-Feb-09 23-Apr-09 11-May-09 31-Oct-09 02-Dec-09 03-Mar-10 10-Aug-09 27-Nov-09 f. Vessel MV MYRIAD MV MYRIAD MV INGENUITY MV MARKELLA MV MARKELLA MV EPONYMA Rate per day $4,250 4,050 3,400 4,100 3,125 3,200 The Parent Company acquired SFFC from its affiliate, Accuria, Inc. on August 30, 2007 for a total consideration of P =13,700. The pooling of interest method was applied to account for the acquisition since the Parent Company and Accuria, Inc. are entities under common control. The excess of cost over SFFC’s net assets during the time of acquisition, amounting to =11,700 is recorded in equity as “Excess of cost over net asset value of an investment”. P 34. Financial Risk Management Objectives and Policies The Group’s principal financial instruments comprise of cash and cash equivalents, trade and other receivables, trade and other payables, redeemable preferred shares, and interest-bearing loans. Trade and other receivables and trade and other payables arise from the Group’s operations. Redeemable preferred shares and interest-bearing loans are used by the Group to finance its operations. The main risks arising from the Group’s financial instruments are cash flow interest rate risk resulting from movements in interest rates that may have an impact on interest bearing financial instruments; credit risk involving possible exposure to counter-party default, primarily, on its cash investments and receivables; liquidity risk in terms of the proper matching of the type of financing required for specific investments and maturing obligations; and foreign exchange risk in terms of foreign exchange fluctuations that may significantly affect its foreign currency denominated placements and borrowings. Risk Management Structure BOD The BOD is mainly responsible for the overall risk management approach and for the approval of risk strategies and policies of the Group. Financial Risk Committee The Financial Risk Committee has the overall responsibility for the development of risk strategies, principles, frameworks, policies and limits. It establishes a forum of discussion of the Group’s approach to risk issues in order to make relevant decisions. Treasury Risk Office The Treasury Risk Office is responsible for the comprehensive monitoring, evaluating and analyzing of the Group’s risks in line with the policies and limits set by the Treasury Risk Committee. - 49 - Interest rate risk The Group’s exposure to market risk for changes in interest rates relates primarily to its long-term debt and obligations under finance lease. To manage this risk, the Group determines the mix of its debt portfolio as a function of the level of current interest rates, the required tenor of the loan, and the general use of the proceeds of its various fund raising activities. In 2009, interest rates of obligations under finance lease range from 7.0% to 9.0% (see Note 19). Shown below are the carrying amounts, by maturity, of the Group’s interest bearing financial instruments: As at December 31, 2009 Cash in banks Cash equivalents Refundable deposits Loans payable Obligations under finance lease Redeemable preferred shares <1 year =889,265 P 168,063 – =1,057,328 P 1-5 years =– P – 15,000 =15,000 P Total P =889,265 168,063 15,000 P =1,072,328 =1,392,390 P 6,222 – P =1,398,612 P– = 25,346 20,176 P =45,522 P =1,392,390 31,568 20,176 P =1,444,134 As at December 31, 2008 Cash in banks Cash equivalents Refundable deposits Loans payable Obligations under finance lease Redeemable preferred shares <1 year =927,063 P 100,911 – =1,027,974 P 1-5 years =– P – 15,000 =15,000 P Total =927,063 P 100,911 15,000 =1,043,974 P =829,879 P 81,692 – =911,571 P =– P 30,832 17,790 =48,622 P =829,879 P 112,524 17,790 =960,193 P In 2008, the Group paid in full its Banco De Oro bilateral loan and Vereins Bank clean loan amounting to P =46.3 million and P =8.7 million, respectively. As a result of the repayment of the loans in 2008, the Group is no longer subject to cash flow interest rate risk. The Group’s remaining financial liabilities have fixed interest rates and are not subject to cash flow interest rate risk. Equity price risk Equity price risk is the risk that the fair value of traded equity instruments decrease as the result of the changes in the levels of equity indices and the value of the individual stocks. As at December 31, 2009 and 2008, the Group’s exposure to equity price risk is minimal. - 50 - Credit risk The Group trades only with recognized, creditworthy third parties and the exposure to credit risk is monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. Since the Group trades only with the recognized third parties, collateral is not required in respect of financial assets. For its cash investments, the Group’s credit risk is generally concentrated on possible default of the counter-party, with a maximum exposure equal to the carrying amount of these investments (see Note35). The risk is mitigated by the short-term and/or liquid nature of its cash investments mainly in bank deposits and placements, which are placed with financial institutions of high credit standing. The credit quality per class of financial assets that were neither past due nor impaired is as follows: As at December 31, 2009 Cash in banks Cash equivalents Trade receivables Service fees Freight Passage Others Nontrade receivables Insurance and other claims Advances to officers and employees Quoted equity investments Listed shares of stocks Club shares Unquoted equity investments Refundable deposits Total Neither past due nor impaired High Medium =889,265 P =– P 168,063 – Low =– P – Past due or individually impaired =– P – Total P889,265 = 168,063 233,997 347,851 27,953 392,302 28,319 18,525 49,245 155,126 7,968 – – – 12,026 – 233,580 149,026 – – 5,455 – – 129,208 190,029 2 195,846 236,031 193,105 1,391 751,911 694,874 27,955 588,148 269,805 223,656 50,636 26,789 5,500 11,034 66,640 = 2,265,483 P – – – – = 175,120 P – – – – = 388,061 P – – – – = 945,612 P 26,789 5,500 11,034 66,640 = 3,774,276 P Low =– P – Past due or individually impaired =– P – Total =927,063 P 100,911 As at December 31, 2008 Cash in banks Cash equivalents Trade receivables Service fees Freight Passage Others Nontrade receivables Insurance and other claims Advances to officers and employees Quoted equity investments Listed shares of stocks Club shares Unquoted equity investments Refundable deposits Total Neither past due nor impaired High Medium =927,063 P =– P 100,911 – 708,806 35,961 10,347 158,393 172,345 6,115 18,154 226,985 – 31,152 – – 30,764 27,473 – 5,853 2,096 – 74,897 504,019 1,733 126,157 68,226 35,409 832,621 794,438 12,080 321,555 242,667 41,524 35,995 – 3,496 925 40,416 17,225 4,000 15,828 40,801 =2,233,790 P – – – – =276,291 P – – – – =69,682 P – – – – =811,366 P 17,225 4,000 15,828 40,801 =3,391,129 P - 51 - High quality receivables pertain to receivables from related parties and customers with good favorable credit standing. Medium quality receivables pertain to receivables from customers that slide beyond the credit terms but pay a week after being past due are classified under medium quality. Low quality receivables are accounts from new customers and forwarders. For new customers, the Group has no basis yet as far payment habit is concerned. With regards to the forwarders, most of them are either under legal or suspended. In addition, their payment habits extend beyond the approved credit terms because their funds are not sufficient to conduct their operations. The Group evaluated its cash in bank and cash equivalents as high quality financial assets since these are placed in financial institutions of high credit standing. With respect to AFS investments and refundable deposits, the Group evaluates the counterparty’s external credit rating in establishing credit quality. The aging analysis per class of financial assets that were past due but not impaired is as follows: As at December 31, 2009 Past due but not impaired Neither past due nor impaired =889,265 P 168,063 Cash in banks Cash equivalents Trade receivables Service fees 622,704 Freight 504,845 Passage 27,953 Others 392,302 Nontrade receivables 33,774 Insurance and other 30,551 claims Advances to officers and employees 49,245 Quoted equity investments Listed shares of stocks 26,789 Club shares 5,500 Unquoted equity investments 11,034 Refundable deposits 66,640 Total = 2,828,665 P Less than 30 days =– P – 31 to 60 days =– P – 61 to 90 days =– P – Over 90 days =– P – Impaired financial assets =– P – Total P889,265 = 168,063 33,814 19,635 – 154,775 25,492 9,278 2,995 2 4,391 41,253 4,916 2,585 – 6,741 122,955 14,148 479 – 27,218 41,704 67,052 164,335 – 2,721 4,627 751,912 694,874 27,955 588,148 269,805 – – 172,481 20,624 223,656 730 121 81 459 – 50,636 – – – – – – – – – – 26,789 5,500 – – = 234,446 P – – = 58,040 P – – = 309,759 P – – = 84,008 P – – = 259,359 P 11,034 66,640 3,774,277 - 52 - As at December 31, 2008 Past due but not impaired Neither past due nor impaired =927,063 P 100,911 Cash in banks Cash equivalents Trade receivables Service fees 757,724 Freight 290,419 Passage 10,347 Others 195,398 Nontrade receivables 174,441 Insurance and other claims 6,115 Advances to officers and employees 39,491 Quoted equity investments Listed shares of stocks 17,225 Club shares 4,000 Unquoted equity 15,828 investments Refundable deposits 40,801 Total =2,579,763 P Less than 30 days =– P – 31 to 60 days =– P – 61 to 90 days =– P – Over 90 days =– P – Impaired financial assets =– P – Total =927,063 P 100,911 – 87,617 1,575 81,976 28,183 34 – 78,336 119 16,662 464 345 6,718 102,062 – 2,835 14,916 10,990 5,801 33,267 39 21,963 16,701 111 62,378 202,737 – 2,721 7,962 23,929 832,621 794,438 12,080 321,555 242,667 41,524 172 88 215 450 – 40,416 – – – – – – – – – – 17,225 4,000 – – =199,557 P – – =96,014 P – – =137,736 P – – =78,332 P – – =299,727 P 15,828 40,801 =3,391,129 P Liquidity risk The Group maintains sufficient cash and cash equivalents to finance its operations. Any excess cash is invested in short-term money market placements. These placements are maintained to meet maturing obligations and pay dividend declarations. The Group’s policy is that not more than 35% of borrowings should mature in any 12-month period. As at December 31, 2009 and 2008, the Company has no long-term debt. The Group’s existing credit facilities with various banks are covered by the Continuing Suretyship for the accounts of the Group. The liability of the Surety is primary and solidary and is not contingent upon the pursuit by the bank of whatever remedies it may have against the debtor or collaterals/liens it may possess. If any of the secured obligations is not paid or performed on due date (at stated maturity or by acceleration), the Surety shall, without need for any notice, demand or any other account or deed, immediately be liable therefore and the Surety shall pay and perform the same. The table below summarizes the maturity profile of the Group’s financial assets and liabilities at the balance sheet date based on contractual undiscounted repayment obligations: 2008 2009 Financial assets: Cash Trade and other receivables AFS investments Refundable deposits Total undiscounted financial assets (Forward) Total Less than 1 year 1 to 5 years Total P =– – 43,323 66,640 P =1,095,711 2,606,986 43,323 66,640 P1,092,843 = 2,285,301 – – P– = – 37,053 40,801 P1,092,843 = 2,285,301 37,053 40,801 109,963 3,812,660 3,378,144 77,854 3,455,998 Less than 1 year 1 to 5 years P =1,095,711 2,606,986 – – 3,702,697 - 53 - 2008 2009 Less than 1 year Financial liabilities: Trade and other payables P =3,894,247 Loans payable 1,399,833 Redeemable preferred shares – Obligation under capital lease 8,466 Other noncurrent liabilities – Total undiscounted financial liabilities 5,302,546 Total net undiscounted financial liabilities (P =1,599,849) 1 to 5 years Total Less than 1 year P =– – 27,363 30,377 257 P =3,894,247 1,399,833 27,363 38,843 257 =3,826,507 P 855,258 – 87,401 – P– = – 27,363 38,025 3,736 =3,826,507 P 855,258 27,363 125,426 3,736 57,997 5,360,543 4,769,166 69,124 4,838,290 1 to 5 years Total =1,391,022) (P = 51,966) (P =1,547,883) (P (P =8,730) (P =1,382,292) Foreign exchange risk The foreign exchange risk of the Group relates primarily to its foreign currency-denominated bank loans, obligation under finance lease, revenues and crew salaries. Management closely monitors the fluctuations in exchange rates so as to anticipate the impact of foreign currency risks associated with the financial instruments. To mitigate the risk of incurring foreign exchange losses, the Group maintains cash in banks in foreign currency to match its financial liabilities. The following table sets forth the financial assets and financial liabilities denominated in foreign currency: As at December 31, 2009 Financial Assets Cash Trade receivables Amounts owed by related parties Total Financial Assets Financial Liabilities Loans payable Trade payables Advances from shipping principals Amounts owed to a related party Obligations under finance lease Total Financial Liabilities Net foreign currency denominated liabilities 1 4 2 5 $1 = P =41.1395 $1 = P =44.4747 3 kr 1 =P =8.9572 6 €1 = P =66.6646 $1 = P =32.8207 $1 = P =46.2000 AUD1 CAD2 DKK3 EUR4 NZD5 USD6 Total Peso Equivalent $– – – $– $– – – $– kr – – – kr – €– – – €– $2 – – $2 $4,273 3,910 1,234 $9,417 P197,478 = 180,642 57,011 = 435,131 P $– 173 $– 9 kr – 850 €– 137 $– 25 $2,450 11,775 P113,190 = 569,090 – – – $173 – – – $9 – – – kr850 – – – €137 – – – $25 212 607 683 $15,727 9,794 28,043 31,568 = 751,685 P ($173) ($9) (kr850) (€137) ($23) ($6,310) (P = 316,554) - 54 - As at December 31, 2008 Financial Assets Cash Trade receivables Amounts owed by related parties Total Financial Assets Financial Liabilities Loans payable Trade payables Advances from shipping principals Amounts owed to a related party Obligations under finance lease Total Financial Liabilities Net foreign currency denominated liabilities 1 4 2 5 $1 = P =32.2194 $1 = P =39.0566 3 kr 1 = P =8.8940 6 AUD1 CAD2 DKK3 EUR4 NZD5 USD6 Total Peso Equivalent $7 – – $7 $– – – $– kr – – – kr – €– – – €– $6 – – $6 $4,781 9,516 1,313 $15,610 =227,580 P 452,200 62,394 =742,174 P $– 364 $– 9 kr – 1,550 €– 186 $– 180 $5,869 7,568 =278,895 P 402,655 – – – $364 – – – $9 – – – kr 1,550 – – – €186 – – – $180 1,334 536 2,368 $17,675 63,392 25,471 112,524 =882,937 P ($357) ($9) (kr 1,550) (€186) ($174) ($2,065) (P =140,763) €1 = P =66.2463 $1 = P =26.8717 $1 = P =47.5200 The following table demonstrates the sensitivity to a reasonably possible change in the foreign currency exchange rates, with all other variables held constant, of the Group’s profit before tax as at December 31, 2009 and 2008. Australian Dollar (AUD) Appreciation/ (Depreciation) of Foreign Currency +5% (5%) Effect on Income Before Tax 2008 2009 (P =575) (P =356) 575 356 Canadian Dollar (CAD) +5% (5%) (20) 20 (18) 18 Danish Krone (DKK) +5% (5%) (381) 381 (689) 689 Euro (EUR) +5% (5%) (457) 457 (616) 616 New Zealand Dollar (NZD) +5% (5%) (38) 38 (234) 234 US Dollar (USD) +5% (5%) (14,576) 14,576 (4,906) 4,906 - 55 - There is no other impact on the Group’s equity other than those already affecting the consolidated statement of income. The table below demonstrates the income, expense, gains or losses of the Group’s financial instruments for the years ended December 31, 2009, 2008 and 2007. Effect in Profit or Loss Increase (Decrease) 2008 2009 Loans and receivables: Interest income on: Cash in banks Cash equivalents Advances to a subsidiary Impairment loss on receivables Reversal of allowance for impairment losses AFS investments: Gain (loss) on sale Unrealized mark-tomarket gains (losses) Realized mark-tomarket loss Financial liabilities at amortized cost: Interest expense on: Loans payable Advances from affiliate Obligations under finance lease Interest accretion on redeemable preferred shares 2007 Effect in Equity Increase (Decrease) 2008 2009 2007 P =23,995 1,103 =12,646 P 2,178 =23,592 P 1,965 P =– – P– = – P– = – 3,432 4,581 7,147 – – – 30,129 8,504 11,906 – – – 60,884 – – – – – – (74) 2,732 – – – – – – 11,219 (5,040) (5,374) – – – – – (3,465) (63,705) (24,270) (64,953) – – – (21,961) (31,899) (20,473) – – – (11,058) (18,712) (15,305) – – – (2,386) (2,104) (1,855) – – – Capital Management Capital includes equity attributable to the equity holders of the parent. The Group adopts a prudent approach on capital management to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders, or issue new shares. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes during the years ending December 31, 2009 and 2008. - 56 - The Group monitors capital using a gearing ratio, which is net debt divided by equity attributable to equity holders of parent plus net debt. The Group includes within net debt are loans payable, obligation under capital lease, long-term debt, redeemable preferred shares, less cash and cash equivalents. The table below summarized the Group’s net debt and capital: Loans payable Obligation under capital lease Redeemable preferred shares Cash and cash equivalents Net debt Equity attributable to equity holders of the Parent Capital and net debt Gearing ratio 2009 P =1,392,390 31,568 20,176 (1,095,711) 348,423 2008 =829,879 P 112,524 17,790 (1,092,843) (132,650) 5,108,730 4,556,281 P =5,457,153 =4,423,631 P 6.38% (3.00%) 35. Fair Value of Financial Instruments Set out below is a comparison by category of carrying amounts and fair values of all the Group’s financial instruments as at December 31, 2009 and 2008: 2009 Carrying Amount Fair Value FINANCIAL ASSETS Loans and receivables Cash on hand and in banks Cash equivalents Trade and other receivables Trade receivables Service fees Freight Passage Others Nontrade Insurance and other claims Advances to officers and employees Refundable deposits AFS investments Quoted shares of stocks Listed shares of stocks Club shares Unquoted shares of stocks (Forward) 2008 Carrying Amount Fair Value P927,648 = 168,063 P927,648 = 168,063 P991,932 = 100,911 P991,932 = 100,911 684,860 530,539 27,955 585,427 265,178 203,032 684,860 530,539 27,955 585,427 265,178 203,032 770,243 591,701 12,080 318,833 221,601 30,700 770,243 591,701 12,080 318,833 221,601 30,700 50,636 66,640 3,509,978 50,636 66,640 3,509,978 40,416 40,801 3,119,218 40,416 40,801 3,119,218 26,789 5,500 11,034 43,323 =3,553,301 P 26,789 5,500 11,034 43,323 =3,553,301 P 17,225 4,000 15,828 37,053 =3,156,271 P 17,225 4,000 15,828 37,053 =3,156,271 P - 57 - 2009 Carrying Amount FINANCIAL LIABILITIES Other financial liabilities Trade and other payables Trade Accrued expenses Nontrade Loans payable Obligations under finance lease Redeemable preferred shares Fair Value 2008 Carrying Amount Fair Value P1,623,585 = 1,474,183 766,449 1,392,390 P1,623,585 = 1,474,183 766,449 1,392,390 P1,460,437 = 1,176,008 1,050,130 829,879 P1,460,437 = 1,176,008 1,050,130 829,879 31,568 20,176 =5,308,351 P 23,208 24,096 =5,303,911 P 112,524 17,790 =4,646,768 P 100,357 21,935 =4,638,746 P Fair value is defined as the amount at which the financial instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s-length transaction, other than in a forced liquidation or sale. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models, as appropriate. The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and cash equivalents and trade and other receivable, trade and other payables and loans payable The carrying amounts of cash and cash equivalents, trade and other receivables and trade and other payables approximate fair value due to the relatively short-term maturity of these financial instruments. Loans payable Loans payable that reprice every three (3) months, the carrying value approximates the fair value because of recent and regular repricing based on current market rate. For fixed rate loans, the carrying value approximates fair value due to its short term maturities, ranging from three months to twelve months. Redeemable preferred shares The fair values of the redeemable preferred shares are based on the discounted value of future cash flows using the applicable market interest rates. Discount rates ranging from 4.8% to 5.6% in 2009 and 6.2% to 6.7% in 2008 were used in calculating the fair value of the Group’s redeemable preferred shares. Refundable deposits As at December 31, 2009, the carrying value of refundable deposits approximates fair value due to the relatively short-term maturity of this financial instrument. As at December 31, 2008, the fair values of refundable deposits are based on the discounted value of future cash flows using the applicable market interest rates. Discount rates ranging from 6.4% to 6.5% in 2008 were used in calculating the fair value of the Company’s refundable deposits. - 58 - AFS investments The fair values of AFS investments are based on quoted market prices, except for unquoted equity shares which are carried at cost since fair values are not readily determinable. Obligations under finance lease The fair values of obligation under finance lease are based on the discounted net present value of cash flows using discount rates of 6.79% to 9.03% as at December 31, 2009 and 8.21% to 9.13% as at December 31, 2008. 36. Dividendable Retained Earnings ABOITIZ TRANSPORT SYSTEM (ATSC) CORP. 12/F Times Plaza Bldg., cor. Taft, UN. Ave., Ermita Manila STATEMENTS OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION MARCH 31, 2010 and DECEMBER 31, 2009 (Amount in Philippine Currency) Mar 2010 Unappropriated Retained Earnings, Beginning, as adjusted to available for dividends distribution Add: Net income actually earned/realized during the period Net income (loss) during the period closed to Retained Earnings Less: Non-actual/unrealized income net of tax for the period/accumulated Tax benefit (Deferred Tax Asset) during the period Other unrealized gains or adjustments to the retained earnings as a result of certain transactions accounted for under the PFRS, negative goodwill Sub-total Add: Non-actual losses Accretion of interest on RPS under PAS 39 Unrealized foreign exchange gain - net (except those attributable to Cash and Cash Equivalents) in 2004 realized in 2008 Sub-total Add(Less): Movement during the period Treasury shares TOTAL RETAINED EARNINGS, END, AVAILABLE FOR DIVIDEND 2009 1,288,642,944.67 677,710,280.89 (187,749,274.99) 479,544,768.19 (148,575,987.84) 117,875,882.40 (336,325,262.83) 597,420,650.59 13,512,013.19 13,512,013.19 13,512,013.19 13,512,013.19 965,829,695.02 1,288,642,944.67 - 59 - Aboitiz Transport System Corporation and Subsidiaries AGING OF RECEIVABLES March 31, 2010 Amounts in Thousands 30 Days A/R - Trade 60 Days Over 90 Days 90 Days ADA/Under Litigation Total 1,683,433 168,063 46,097 159,365 38,400 2,095,358 534,668 7,092 22,470 478,674 0 1,042,904 A/R - Others 84,640 2,715 0 0 0 87,355 Advances to Officers/Employees 48,999 772 233 9,484 0 59,487 127,137 75,592 (5,654) 28,084 0 225,160 (139) (127) (171) (155,982) (107,824) (264,243) 0 0 0 0 0 0 A/R - Non Trade/Affiliates Receivable from insurance and other claims Allowance for Doubful Accounts Items Under Litigation 0 TOTAL 2,478,738 254,107 62,976 519,625 (69,424) 3,246,022
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