COVER SHEET C S 2 0 0 9 0 1 2 6 9 S,E.C Registration Number C A L A P A N V E N T U R E S , I N C . B E R G H A V E . Q U E (Company's Full Name) 4 T H F L O O R 2 0 1 7 0 T O M A S M O S C O C A S O R U T T R L A N A T O S T . S , Z P L A C O R . O N C C E I T Y ( Business address: No. Street City / Town / Province ) 1 2 3 ORTRUD T. YAO 373-30-38 Contact Person Company Telephone Number 1 Month Day (Fiscal Year) 1 7 - Q 2ND QUARTER 2013 FORM TYPE 0 6 Month Day (Annual Meeting) Secondary License Type, If Applicable Amended Articles Number/Section Dept. Requiring this Doc. Total amount of borrowings Domestic Total No. of Stockholders complished by SEC Personnel concerned File Number LCU Document I.D. Cashier STAMPS Foreign - CALAPAN VENTURES, INC. SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(b)(2) THEREUNDER 1. For the quarterly period ended: June 30, 2013 2. SEC Identification No. CS200901269 3. BIR Tax Identification No. 007-236-853-000 4. Exact name of registrant as specified in its charter : CALAPAN VENTURES, INC. 5. Province, Country or other jurisdiction of incorporation or organization: PHILIPPINES 6. Industry Classification Code : _________ (SEC Use Only) 7. Address of principal office and Postal Code: 4th Floor 20 Lansbergh Place, Tomas Morato Ave. cor. Scout Castor St., 1103 Quezon City 8. Registrant’s telephone no. and area code: (632) 373-3038 9. Former name, address, and fiscal year, if changed since last report: Not applicable 10. Securities registered pursuant to Sections 4 & 8 of the RSA: Title of Each Class Common Stock, P 1 par value No. of Shares of Common Stock Outstanding &/or Amount of Outstanding 162,161,000 shares Debt 11. Are any or all of these securities listed on the Philippine Stock Exchange? Yes [x] No [ ] 12. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Securities Regulation Code and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding 12 months (or for such shorter period that the registrant was required to file such reports): Yes [x] No [ ] (b) has been subject to such filing requirements for the past 90 days: Yes [x] No [ ] TABLE OF CONTENTS FINANCIAL INFORMATION Section 1 Page No. Financial Statements Consolidated Balance Sheets Consolidated Statements of Income and Expenses Consolidated Statements of Changes in Shareholder’s Equity Consolidated Statements of Cash Flows 2 3 4 5 Section 2 Notes to Financial Statements 6 Section 3 Section 4 Management’s Discussion and Analysis of Financial Condition and Results of Operations Aging of Accounts Receivable 24 30 Section 5 Summary of Adoption of Philippine Financial Reporting Standards 31 Section 6 Schedule of Retained Earnings Available for Dividends 33 CALAPAN VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Philippine Pesos) June 30, 2013 (Unaudited) Notes December 31, 2012 (Audited) ASSETS Current Assets Cash and cash equivalents Receivables – net Due from related parties Other current assets Total Current Assets Noncurrent Assets Available-for-sale investments Investment property Property and equipment – net Deferred tax assets Other noncurrent assets – net Total Noncurrent Assets P 36,479,288 23,899,459 20,420,686 5,449,177 86,248,610 P 1,371,776 80,357,000 311,181,611 2,397,385 11,940,146 407,247,918 7 86,413,856 22,258,607 19,862,911 3,248,306 131,783,680 1,371,776 80,357,000 316,738,180 2,397,385 11,937,346 412,801,687 P 493,496,528 P 544,585,367 P 35,558,013 15,473,590 6,526,075 57,557,678 P 101,410,645 10,377,319 7,934,834 119,722,798 LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Due to related parties Income tax payable Total Current Liabilities Noncurrent Liabilities Loan payable Retirement benefit obligation Deferred tax liability Customers' deposits Total Noncurrent Liabilities 6 5 7 Equity Attributable to Equity Holders of Parent Company Share capital – 1 par value Authorized – 200,000,000 shares Subscribed and issued – 120,000,000 shares Additional paid-in capital Revaluation surplus in property and equipment Gain on available-for-sale investments Accumulated profit Minority Interest P See accompanying Notes to Consolidated Financial Statements. 4 76,130,712 2,566,750 11,866,221 7,700,915 98,264,598 80,137,592 2,566,750 11,866,221 7,600,215 102,170,778 162,161,000 58,073,612 9,444,169 370,522 106,591,783 336,641,086 162,161,000 58,073,612 9,444,169 370,522 91,688,123 321,737,426 1,033,165 954,365 493,496,528 P 544,585,367 CALAPAN VENTURES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Philippine Pesos) Quarters Ended June 30 2013 2012 Notes REVENUES Water services Sales of goods P P 36,110,097 4,150,944 40,261,041 33,486,769 5,154,520 38,641,289 Six Months Ended June 30 2013 2012 P 70,662,483 9,163,588 79,826,071 P 65,761,060 9,850,624 75,611,684 COST OF SALES AND SERVICES 15,223,396 13,724,394 31,911,613 28,887,218 GROSS PROFIT 25,037,646 24,916,895 47,914,459 46,724,466 OPERATING EXPENSES 11,802,324 11,740,910 23,748,559 23,050,285 PROFIT FROM OPERATIONS 13,235,322 13,175,985 24,165,900 23,674,181 OTHER INCOME (CHARGES) -net (1,041,077) (1,623,517) (2,189,273) (2,718,336) PROFIT BEFORE INCOME TAX 12,194,245 11,552,468 21,976,627 20,955,845 3,687,580 3,687,580 3,484,247 3,484,247 6,994,166 6,994,166 6,410,737 6,410,737 INCOME TAX EXPENSE –net Current 7 TOTAL COMPREHENSIVE INCOME P TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Equity holders of the parent Minority interest 8 8,068,221 P 8,036,474 31,747 8,458,122 48,542 P EARNINGS PER SHARE P 8,506,665 P 8,506,665 8,068,221 0.0496 0.0522 See accompanying Notes to Consolidated Financial Statements. 4 14,982,461 P 14,486,703 58,405 14,903,660 78,800 P 14,982,461 0.0919 14,545,108 P 14,545,108 0.0893 CALAPAN VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE UNAUDITED SIX MONTHS ENDED JUNE 30 (Amounts in Philippine Pesos) Attributable to Equity Holders of Parent Company Revaluation Gain on Additional surplus in available paid-in property and for-sale Accumulated capital equipment investments profit Share capital Balance at December 31, 2011 P 162,161,000 P 58,073,612 P 9,438,247 P 256,068 P Profit for the period Cash dividends declared Balance at June 30, 2012 Balance at December 31, 2012 P P 319,814,600 14,486,703 14,486,703 (32,432,200) (32,432,200) P 822,323 58,405 – 162,161,000 58,073,612 9,438,247 256,068 71,940,176 301,869,103 822,323 162,161,000 58,073,612 9,444,169 370,522 91,688,123 321,737,426 954,365 14,903,660 14,903,660 78,800 Profit for the period Balance at June 30, 2013 89,885,673 Minority interest Total 162,161,000 P 58,073,612 P 9,444,169 P See accompanying Notes to Consolidated Financial Statements. 4 370,522 P 106,591,783 P 336,641,086 P 1,033,165 CALAPAN VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE UNAUDITED SIX MONTHS ENDED JUNE 30 (Amounts in Philippine Pesos) 2012 2013 CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax and minority interest Adjustments for: Depreciation and amortization Provision for income tax Operating profit before working capital changes Increase in: Receivables Other current assets Increase (decrease) in: Accounts payable and accrued expenses Customers' deposits Cash generated from operations Income tax paid Net cash provided by operating activities P P CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Due from related parties Property and equipment Minority interest 14,903,660 P 14,486,703 4,054,943 6,994,166 25,952,770 7,190,341 6,410,737 28,087,781 (1,640,852) (2,200,871) (3,640,647) (88,879) (65,852,633) 100,700 (43,640,885) (8,402,926) (52,043,811) (17,068,775) 110,200 7,399,680 (10,419,270) (3,019,590) P (857,432) (2,854,900) 58,405 4,538,496 1,501,626 78,800 Decrease (increase) in other noncurrent assets Net cash used in investing activities P (2,800) 6,116,122 P 2,230,000 (1,423,927) CASH FLOWS FROM FINANCING ACTIVITIES Additional loan loan payments P (4,006,880) P (3,339,066) NET INCREASE IN CASH (7,782,584) (49,934,568) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD See accompanying Notes to Consolidated Financial Statements. 4 126,370,197 86,413,856 P 36,479,288 P 118,587,613 CALAPAN VENTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Philippine Pesos) 1. Corporate Information Calapan Ventures, Inc. (“CVI” or “the Parent Company” formerly Calapan Equity Ventures Inc.) and subsidiaries, collectively referred to as “the Group”, were incorporated in the Philippines and were registered with the Securities and Exchange Commission (SEC) on January 30, 2009. The consolidated financial statements include the accounts of the Parent Company and the following subsidiaries: Name of Subsidiary Calapan Waterworks Corporation (CWC) Tabuk Water Corp. (Tabuk Water)* Kristal Water Source Corp. (Kristal Water)* * preoperating stage Dates of Incorporation May 23, 1991 August 14, 2006 May 11, 2007 Percentage of Ownership 99.61 100.00 100.00 The Parent Company was incorporated primarily to engage in, operate, conduct and maintain the business of trading, processing, assembling, manufacturing, and/or fabricating and exporting, importing, buying, acquiring, holding, or otherwise disposing of and dealing in goods, wares, supplies, materials, articles, merchandise, commodities, equipment, hardware, appliances, minerals, metals, timber, lumber and real and personal properties of every kind, class and description, whether natural or artificial which may become articles of commerce. On July 8, 2009, Jolliville Holdings Corporation (JOH), CVI’s Parent Company, passed a resolution declaring 32% property dividends corresponding to 90,080,000 shares of the Parent Company. The declaration was approved by JOH’s stockholders during the annual stockholders’ meeting on August 18, 2009. On January 28, 2010, the SEC approved the notice of property dividend declaration of JOH amounting to = P 90,080,000 payable to JOH’s stockholders of record as of December 15, 2009. Subsequently on December 22, 2009, a stockholder of JOH executed a deed of assignment of shares of stocks of the Parent Company equivalent to 40 million shares in favor of certain subsidiaries of JOH. On December 16, 2009, Elgeete Holdings, Inc. assigned its 100% ownership in Kristal Water to the Parent Company amounting to =250,000 P equal to 250,000 shares. Also in December 16, 2009, CWC and Ormina Realty and Development Corporation (ORDC) assigned their 67% and 33% ownership, respectively, in Tabuk Water to the Parent Company amounting to =6.7 P million and =3.3 P million, respectively. 6 The principal activities of the subsidiaries are as follows: Name of subsidiary CWC Tabuk Water Kristal Water MAWI* Principal activity Operates, manages and maintains the general business of development and utilization of water resources to harness, produce and supply water for domestic, municipal, agricultural, industrial, commercial or recreational purposes. Will engage in the operation, management and maintenance of development and utilization of water resources. Also, will acquire, own, lease, construct, install, equip, operate, manage and maintain plants. Will engage in the operation, management and maintenance of, development and utilization of water resources. Also, will acquire, own, lease, construct, install, equip, operate, manage and maintain plants as well as production, sale and distribution of ice. Will engage in the operation, management and maintenance of development and utilization of water resources. Also, will acquire, own, lease, construct, install, equip, operate, manage and maintain plants * preoperating stage On October 23, 2002, the 12th Congress of the Republic of the Philippines enacted Republic Act No. 9185 whereby CWC was granted a franchise to construct, install, operate, and maintain for commercial purposes and in the public interest, a water supply and sewerage system for the purpose of distributing water for sale and for sanitation in the City of Calapan, province of Oriental Mindoro. The franchise is for a period of 25 years from the date of enactment. The act took effect on February 9, 2003. CWC was also granted a certificate of public convenience by the National Water Resources Board (NWRB) on December 18, 2002 and will expire on January 17, 2013. As of financial reporting date, approval of application for renewal is still under process of NWRB. CVI started commercial operations when JOH assigned to CVI its shares in CWC on March 31, 2009. On May 18, 2012, CWC’s Board of Directors (BOD) unanimously approved to accept =100 P million from CVI as an additional equity investment in CWC, in consideration for the latter’s additional subscription of 14,285,714 shares, valued at =7 P per share. On the same date, CVI’s BOD approved the sale of its investment in Kristal Water. The decision was reached in order for the Group to focus its resources to the growth of its core water utility business. The investment was sold at cost to the Group’s affiliates on July 5, 2012. On June 4, 2012, CWC’s BOD approved the declaration of cash dividends of =0.35 P per share, or a total of = P 35.5 million to stockholders of record as of June 8, 2012. Dividend still payable to CWC’s noncontrolling interests amounted to = P 302,279. 7 On June 13, 2012, CVI’s BOD approved the declaration of cash dividends of =0.2 P per share, with an aggregate amount of =32.4 P million to stockholders of record as of June 29, 2012. During the year, the CWC subscribed to 84.84% equivalent to 2,121,000 shares of MAWI and paid an amount equal to =527,250. P Related subscription payable amounts to = P 1,593,750. The registered address of the Parent Company is at 4th Floor 20 Lansbergh Place Bldg., 170 Tomas Morato, Quezon City. 2. Basis of Preparation The consolidated financial statements of the Group have been prepared on the historical cost basis except for available-for-sale investment, investment property and certain property and equipment which are stated at fair values. These consolidated financial statements are presented in Philippine pesos, which is the Group’s functional and presentation currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest peso, except when otherwise indicated. Statement of Compliance The accompanying financial statements of the Company have been prepared in compliance with PFRS. PFRS includes statements named PFRS, Philippine Accounting Standards (PAS) and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by SEC. Basis of Consolidation The consolidated financial statements include the accounts of Parent Company and the aforementioned subsidiaries (see Note 1) held directly or indirectly through wholly and majority-owned subsidiaries. Subsidiaries are consolidated from the date on which control is transferred to the Parent Company and cease to be consolidated from the date on which control is transferred out of the Parent Company. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant intercompany accounts, transactions, and income and expenses and losses are eliminated upon consolidation. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by other members of the Group. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company using consistent accounting policies. 8 Noncontrolling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Noncontrolling interests consist of the amount of those interests at the date of the original business combination and the noncontrolling interest’s share of changes in equity since the date of the combination. Losses applicable to the noncontrolling interest in excess of the noncontrolling interest’s in the subsidiary’s equity are allocated against the interest of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover losses. Disposals of equity investments to noncontrolling interests result in gains and losses for the Parent Company are recorded in the consolidated statement of comprehensive income. Purchase of equity shares from noncontrolling interests are accounted for as equity transaction (i.e., transactions with owners in their capacity as owners). In such circumstances, the carrying amounts of the controlling and noncontrolling interests shall be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid shall be recognized directly in equity. 3. Changes in Accounting and Financial Reporting Policies The accounting policies adopted by the Group are consistent with those of the previous financial year except for the following amended PFRS and PAS which became effective in 2012: • Amendment to PFRS 1, First-Time Adoption of PFRS – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters The amendment to PFRS 1 is effective for annual periods beginning on or after July 1, 2011. When an entity’s date of transition to PFRS is on or after the functional normalization date, the entity may elect to measure all assets and liabilities held before the currency normalization date, at fair value on the date of transition to PFRS. This fair value may be used as the deemed cost of those assets and liabilities in the opening PFRS statement of financial position. However, this exemption may only be applied to assets and liabilities that were subject to severe hyperinflation. This is not applicable to the Group. • Amendment to PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets The amendments to PFRS 7 are effective for annual periods beginning on or after July 1, 2011 with no comparative requirements. The disclosures relate to assets transferred as defined under PAS 39. If the assets transferred are not derecognized entirely in the consolidated financial statements, an entity has to disclose information that enables users of consolidated financial statements to understand the relationship between those assets which are not derecognized and their associated liabilities. If those assets are derecognized entirely, but the entity retains a continuing involvement, disclosures have to be provided that enable users of financial statements to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those derecognized assets. The Group has no transactions during the year that would require such disclosures. 9 • Amendment to PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets The amendment to PAS 12 is effective for annual periods beginning on or after January 1, 2012. It includes a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40 will be recovered through sale and, accordingly, that any related deferred tax should be measured on a sale rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time, rather than through sale. Specifically, PAS 12 will require that deferred tax arising from a non-depreciable asset measured using revaluation model in PAS 16 should always reflect that tax consequences of recovering the carrying amount of the underlying assets though sale. This is not applicable to the Group. Future Changes in Accounting Policies The Group did not early adopt the following standards or Philippine Interpretations that have been approved but are not yet effective: Effective in 2013 • Amendment to PFRS 1, Government Loans The amendment to PFRS 1 is effective for annual periods beginning on or after January 1, 2013. Current PFRS requires entities to measure government loans with belowmarket interest rates at fair value, with the benefit accounted for as a government grant. Amendment to PFRS 1 requires a first-time adopter to apply this requirement prospectively to government loans existing at the date of transition to PFRS. A firsttime adopter may choose to apply these requirements retrospectively to any government loan, if the information needed had been obtained at the time of initially accounting for the loan. • Amendment to PFRS 7, Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities These amendments require an entity to disclose information about rights of offset and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are offset in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting agreement or “similar agreement”, irrespective of whether they are offset in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are offset in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; c) The net amounts presented in the statement of financial position; d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and e) The net amount after deducting the amounts in (d) from the amounts in (c) above. 10 The amendments to PFRS 7 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendment affects disclosures only and has no impact on the Group’s financial position or performance. • PFRS 10, Consolidated Financial Statements and PAS 27, Separate Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes issues raised in SIC 12, Consolidation for Special Purpose Entities, resulting in SIC 12 being withdrawn. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by the Parent, compared with the requirements of PAS 27. • PFRS 11, Joint Arrangements and PAS 28, Investments in Associates and Joint Ventures PFRS 11 replaces PAS 31, Interest in Joint Ventures and SIC-13, Jointly-controlled Entities– Non-monetary Contributions by Venturers • PFRS 12, Disclosure of Interest in Other Entities PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all the disclosures that were previously in PAS 31, and PAS 28. These disclosures related to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. • PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. PFRS 13 does not change when and entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. • Amendments to PAS 1, Presentation of Consolidated Financial Statements – Presentation of Items of Other Comprehensive Income or OCI The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be recycled. The amendments affect presentation only and have no impact on the Group’s financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1, 2012. The amendments will be applied retrospectively and will result to the modification of the presentation of items in OCI. • PAS 27, Separate Financial Statements (as revised in 2011) As a consequence of the new PFRS 10 and 12, what remains of PAS 27 is limited to accounting for subsidiaries, jointly-controlled entities and associates in separate financial statements. • PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new PFRS 10 and 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. 11 Effective 2014 • PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (Amendments) The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. The amendments clarify the meaning of “currently has alegally enforceable right to offset” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact on the Group’s financial position or performance. The Group is currently assessing the relevance and impact of the above new and amendments to standards, Philippine Interpretations and improvements to existing accounting standards. The revised disclosures on the financial statements required by the above new and amendments to standards, Philippine Interpretations and improvements to existing accounting standards will be included in the Group’s financial statements when these are adopted. 4. Changes in Accounting and Financial Reporting Policies Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of change in value. Receivables Trade and other receivables are carried at original invoice amount less any allowance for impairment in value. Financial Assets and Liabilities Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit and loss. Fair value is determined by preference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market rates of interest for a similar instrument with similar maturities. The Group recognizes a financial asset or liability in the statement of financial position when it becomes a party to the contractual provisions of the instrument. A financial liability (or a part of a financial liability) is derecognized when the obligation is extinguished. In the case of a regular purchase or sale of financial assets, recognition and derecognition, as applicable, is done using settlement date accounting. 12 Financial assets are classified into the following categories: financial assets at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity investments, and available-for-sale investments as appropriate. Financial liabilities are classified into the following categories: financial liabilities at FVPL and other financial liabilities. The Group determines the classification at initial recognition and, where allowance is appropriate, reevaluates this designation at every reporting date. As of September 30, 2012, the Group has financial assets and liabilities under loans and receivables, available-for-sale financial assets and other financial liabilities. • Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments and are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Such assets are carried at cost or amortized cost in the statement of financial position. Amortization is determined using the effective interest method. Loans and receivables are included in current assets if maturity is within 12 months from the end of financial reporting period. Otherwise, these are classified as noncurrent assets. This category includes cash and cash equivalents, receivables, due from related parties and special bank deposits. • Available-for-sale investments Available-for-sale (AFS) investments are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the preceding categories. After initial recognition, AFS financial assets are measured at fair value with gains or losses being recognized as separate component of stockholders’ equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the statement of comprehensive income. The fair value of investments that are actively traded in organized financial market is determined by reference to quoted market bid prices at the close of business at the end of each financial reporting period. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include recent arm’s length market transaction; reference to the current market value of another instrument which is substantially the same; discounted cash flows analysis and option pricing models. This category includes investment in mutual fund managed by an insurance company. • Other Financial Liabilities Other financial liabilities pertain to liabilities that are not held for trading or not designated as at FVPL upon inception of the liability. A financial liability at FVPL is acquired principally for the purpose of repurchasing in the near term or upon initial recognition, it is designated by management as at fair value through profit or loss. Other financial liabilities are initially recorded at fair value less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using effective interest method. These include liabilities arising from operations and borrowings. This category includes accounts payable and accrued expenses, due to related parties, loan payable and customers’ deposits. 13 Impairment of Financial Assets The Group assesses at each end of financial reporting period whether a financial asset or group of financial assets is impaired. Assets carried at amortized cost If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in the Group’s consolidated statement of comprehensive income. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial asset is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of comprehensive income to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. Assets carried at cost If there is objective evidence that an impairment loss has been incurred in 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, 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. Available-for-Sale investments. If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to the statements of income. Reversals in respect of equity instruments classified as available-for-sale are not recognized in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss. 14 Derecognition of Financial Assets and Liabilities Financial assets A financial asset is derecognized when (1) the rights to receive cash flows from the financial instruments expire, (2) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement, or (3) the Group has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or 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 or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of an asset nor transferred control of the assets, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial Liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Where the 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 consolidated statement of comprehensive income. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position. Investment Property Investment property, which is property held to earn rentals and/or for capital appreciation, is carried at fair value at end of financial reporting period. Gains or losses arising from changes in the fair value of investment property are included in profit or loss for the period in which they arise. A company-occupied property classified under property and equipment account becomes an investment property when it ends company-occupation. Decrease in the carrying amount is recognized in statement of comprehensive income. However, to the extent that an amount is included in its revaluation surplus, the decrease is charged against that revaluation surplus. Increase in carrying amount is recognized in statement of comprehensive income to the extent that the increase reverses a previous impairment loss for such property. The amount recognized in statement of comprehensive income does not exceed the amount needed to restore the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized. Any remaining part of the increase is credited directly to equity in revaluation surplus. Revaluation surplus included in equity maybe transferred to accumulated profits. The transfer from revaluation surplus to accumulated profits is not made through profit or loss. 15 Investment property is derecognized on disposal, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of comprehensive income in the year of retirement or disposal. Where there is clear evidence that the fair value of an investment property is not reliably determinable on a continuing basis, the cost model under PAS 16 “Property, Plant and Equipment”, shall be used. The Company’s investment property consists of parcels of land located in Calapan, Oriental Mindoro. Property and Equipment Property and equipment are carried at cost less accumulated depreciation, amortization and any allowance for impairment in value except for land. Land is carried at appraised values as determined by an independent firm of appraisers on December 22, 2009. The appraisal increment resulting from the revaluation was credited to “Revaluation surplus in land” shown under “Equity” section in the consolidated statement of financial position and consolidated statement of changes in equity. Initial cost of property and equipment comprises its construction cost or purchase price and any directly attributable cost of bringing the assets to its working condition and location for its intended use. Expenses incurred and paid after the property and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to income when the costs are incurred. In situation where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. Depreciation and amortization commence once the assets are available for use and is computed using the straight-line method over the following estimated useful lives: Years Land improvements Water utilities and distribution system Office furniture and equipment Service vehicles Staffhouse, warehouse and office 20 5 – 50 5 5 5 The useful life and depreciation and amortization methods are reviewed periodically to ensure that the method and period of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. Construction in progress and equipment for installation, included in the property and equipment, are stated at cost. These include cost of construction, equipments and other direct costs. Construction in progress and equipment for installation are not depreciated until such time as the relevant assets are completed or installed and put into operational use. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are eliminated from the accounts, and any gain or loss resulting from their disposal is credited or charged to current operations. 16 Goodwill Goodwill arising from the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently, if events of changes in circumstances indicate that the carrying value may be impaired. An impairment loss recognized for goodwill is not reversed in a subsequent period. Negative goodwill, which is the excess of net fair value of subsidiaries’ identifiable assets, liabilities and contingent liabilities over the cost of business combination, is immediately recognized as income. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Impairment of Non-financial Assets The carrying values of long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the smallest cash-generating unit to which the asset belongs. Impairment losses are recognized in the statement of comprehensive income in the period in which it arises unless the asset is carried at a revalued amount in which case the impairment is charged to the revaluation surplus of the said asset. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however, not to an amount higher than the carrying amount that would have been determined (net of any depreciation and amortization) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations. Related Party Transactions Transactions between related parties are based on terms similar to those offered to nonrelated parties. Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions and the parties are subject to common control or common significant influence. Related parties may be individuals or corporate entities. 17 Revenue and Cost Recognition Revenue is recognized when it is probable that the economic benefit associated with the transactions will flow to the Group and the amount can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: • Water revenues are recognized when the related water services are rendered. • Sales are recognized upon delivery of goods sold, and the transfer of risks and rewards to the customer has been completed. • Interest income is recognized on a time proportion basis that reflects the effective yield on the asset. • Other income is recorded when the related income/service is earned. Cost and expenses are recognized upon receipt of goods, utilization of the service or at the date they are incurred. Except for borrowing costs attributable to qualifying assets, all finance costs are reported on an accrual basis. Leases Leases are classified as finance leases whenever the term of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Retirement Benefit Costs The Group’s retirement cost is actuarially determined using the projected unit credit method. This method reflects service rendered by employees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient regularity with option to accelerate when significant changes to underlying assumptions occur. Retirement expense includes current service cost, interest cost and amortization of unrecognized past service cost and recognition of actuarial gains or losses. The current service cost is a level annual amount or a fixed percentage of salary which, when invested at the rate of interest assumed in the actuarial valuation, is sufficient to provide the required retirement benefit at the employee’s retirement. Past service cost is the present value of the excess of the projected retirement benefits over the amount expected to be provided by future contributions based on the service cost. Past service cost is recognized immediately to the extent that the benefits are already vested, and otherwise is amortized on a straight-line basis over the average period until the benefits become vested. Actuarial gains and losses that exceed 10% of the greater of the present value of the Group’s defined benefit obligation and the fair value of plan assets are amortized over the expected average remaining working lives of the participating employees. The retirement benefit obligation recognized in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and as reduced by the fair value of plan assets, if any. Any assets resulting from this calculation is limited to unrecognized actuarial losses and past service costs, plus the present value of available refunds and reductions in future contributions to the plan. 18 Borrowing Costs Borrowing costs incurred during the construction period on loans and advances used to finance construction and property development are capitalized as part of construction and development costs included under “Property and Equipment” account in the statement of financial position. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Capitalized borrowing cost is based on applicable weighted average borrowing rate. All other borrowing costs are charged to operation in the period in which they are incurred. Rental expenses under operating leases are charged to profit or loss on a straight-line basis over the term of the lease. The Group determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Income Taxes Income taxes represent the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable income for the year. Taxable income differs from income as reported in the statement of comprehensive income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current income tax is calculated using tax rates that have been enacted or substantively enacted at the end of financial reporting period. Deferred tax is provided, using the liability method, on all temporary differences at the end of financial reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes and carryforward benefits of net operating loss carryover (NOLCO) and minimum corporate income tax (MCIT). Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets and liabilities are measured using the tax rate that is expected to apply to the period when the asset is realized or the liability is settled. The carrying amount of deferred tax assets is reviewed at each end of financial reporting period and reduced to the extent that it is not probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. Income tax relating to items recognized directly in equity is recognized in equity and in other comprehensive income in the consolidated statement of comprehensive income. 19 Provisions Provisions are recognized only when the following conditions are met: a) there exists a present obligation (legal or constructive) as a result of past event; b) it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and, c) reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each end of financial reporting period and adjusted to reflect the current best estimate. 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. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefit is probable. Events after the End of Financial Reporting Period Post year-end events that provide additional information about the Group’s position at the end of financial reporting period (adjusting events) are reflected in the Group’s financial statements. Post year-end events that are not-adjusting events are disclosed in the notes to financial statements when material. Earnings per Share (EPS) EPS is determined by dividing net income for the year by the weighted average number of shares outstanding during the year including fully paid but unissued shares as of the end of the year, adjusted for any subsequent stock dividends declared. Management’s Use of Judgments and Estimates The preparation of the Group’s financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The judgments, estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the financial statements. Actual results could differ from such estimates. The effect of any changes in estimates will be recorded in the Group’s financial statements when determinable. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations which have the most significant effect on the amounts recognized in the consolidated financial statements: • Distinction between Investment Property and Owner-Occupied Property The Group determines whether a property qualifies as investment property. In making its judgments, the Group considers whether the property generates cash flows largely independent of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to the property but also other assets used in the supply process. 20 Some properties are held to earn rentals or for capital appreciation and other properties are held for use in rendering of services or for administrative purposes. If the portion cannot be sold separately, the property is accounted for as an investment property only if an insignificant portion is held for use in the production or supply of goods and services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making its judgment. Estimates The key assumptions concerning the future and other sources of estimation uncertainty at the end of financial reporting period 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: • Estimation of Impairment on Receivables The Group maintains allowances for impairment losses on receivables at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the management on the basis of factors that affect the collectibility of the accounts. The factors include, but are not limited to, the length of relationship with the customer, the customer’s payment behavior and known market factors. The Group reviews the age and status of receivables, and identifies accounts that are to be provided with allowances on a continuous basis. The Group provides full allowance for receivables that it deems uncollectible. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different estimates. An increase in the allowance for impairment losses on receivables would increase recorded operating expenses and decrease current assets. • Estimation of Useful Lives of Property and Equipment Useful lives of property and equipment are estimated based on the period over which these assets are expected to be available for use. Such estimation is based on a collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. Any reduction in the estimated useful lives of property and equipment would increase the Group’s recorded operating expenses and decrease on the related asset accounts. • Judgment on classification of Financial Assets and Liabilities The Group classifies a financial instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the Group’s statement of financial position. The Parent Company determines the classification at initial recognition and reevaluates this designation at every reporting date. 21 PFRS requires that certain financial assets and liabilities be carried at fair value, which requires the use of extensive accounting estimates and judgments. While significant components of fair value measurement are determined using verifiable objective evidence (i.e. interest rates, volatility rates), the timing and amount of changes in fair value would differ with the valuation methodology used. Any change in the fair value of these financial assets and liabilities would directly affect income and equity • Estimation of Impairment on Non-Financial Assets Impairment review is performed when certain impairment indicators are present. Such indicators would include significant changes in asset usage, significant decline in market value and obsolescence or physical damage on an asset. If such indicators are present and where the carrying amount of the asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Determining the net recoverable value of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse impact on the results of operations. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. • Estimation of Retirement and Other Benefits The determination of the Group’s obligation and cost for pension and other retirement benefits is dependent on management’s selection of certain assumptions used by actuaries in calculating such amounts. The assumptions for pension costs and other retirement benefits are described in Note 14, and include among others, discount and salary increase rates. Actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the Group’s recognized expense and recorded obligation in such future periods. While management believes that the assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in management assumptions may materially affect the Group’s pension and other retirement obligations. The Group also estimates other employee benefits obligation and expense, including the cost of paid leaves based on historical leave availment of employees, subject to the Group’s policy. These estimates may vary depending on the future changes in salaries and actual experiences during the year. • Deferred Income Tax Assets The carrying amount of deferred tax assets is reviewed at each end of financial reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Management expects future operations will generate sufficient taxable profit that will allow all or part of the deferred income tax assets to be utilized. 22 • Financial Assets and Liabilities PFRS requires that certain financial assets and liabilities be carried at fair value, which requires the use of extensive accounting estimates and judgments. While significant components of fair value measurement are determined using verifiable objective evidence (i.e. interest rates, volatility rates), the timing and amount of changes in fair value would differ with the valuation methodology used. Any change in the fair value of these financial assets and liabilities would directly affect income and equity. 5. Loan Payable This account pertains to long-term loans availed from the Development Bank of the Philippines for the rehabilitation, expansion and improvements of the waterworks system of CWWC for = P 137 million payable in fifteen (15) years on a monthly basis. Interest is fixed at 10.5% per annum, reviewable and subject to adjustment annually thereafter but not to exceed 15% per annum. The Company was able to negotiate the interest rate at 6.25% in 2012 and 9% in 2011 and 2010. CWWC executed a deed of assignment relative to the loan, in favor of the bank of (a) a portion of CWWC’s Reserve Fund (via Savings or Other Investment Account) equivalent to two monthly interest amortization during the grace period, to increase to two monthly principal and interest amortization after the grace period onwards. The Reserve Fund shall be mainted for CWWC’s expenses for maintenance, operation and emergency fund; and (b) billed water/receivables until the amount of the loan is fully paid. Also, CWWC mortgaged its real estate and other equipment all situated in Calapan, Oriental Mindoro in favor of the bank. 6. Related Party Transactions The Group has the following transactions with related parties: a. Non-interest bearing cash advances with affiliates for investing and working capital purposes. Also, the Group availed non-interest bearing cash advances from its major stockholder and affiliate for the acquisition of operating machinery and equipment. b. Management and consultancy agreement with an affiliate renewable annually upon such terms and conditions as may be mutually agreed upon by both parties. c. Lease of office space from an affiliate for a period of one year, renewable upon mutual agreement of both parties. 7. Income Taxes The provision for income tax differs from the amount computed by applying the statutory income tax rate to income before income tax due mainly to interest income already subjected to final tax at a lower rate. The deferred tax assets represent the tax consequences of NOLCO, accrued retirement expenses, and allowances for impairment losses and parts obsolescence. The deferred tax liability pertains to tax consequences of capitalized borrowing costs and appraisal increase in land under property and equipment. 23 8. Earnings Per Share (EPS) Computation of EPS is as follows: Net income Divided by weighted average number of common shares For the Six Month Ended June 30 2013 2012 = P 14,903,461 =14,486,708 P 162,161,000 = P 0.0919 162,161,000 =0.0893 P There were no potential dilutive shares in 2013, 2012, 2011 and 2010. 9. Other Matters On May 18, 2012, the Company’s Board of Directors approved an additional equity investment of =100 P million in CWC to finance the latter’s zoning and expansion program. This will be taken from the recent initial public offering. On July 4, 2012, the Company completed the sale of its shares in Kristal Water. A total of 249,995 shares were sold for = P 1 per share. As a result of the sale, Kristal Water ceases to be a subsidiary. The decision to sell was reached in order for the Company to focus on its core water utility business. There are no material events subsequent to the end of the interim period that has not been reflected in the financial statements. Neither are there any material contingencies and any other events or transactions that are material to an understanding of the current interim period aside from those already included in our report. 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financial Position (Balance Sheet) Total assets decreased by 9.38% or about = P 51.1 million to =493,496,528 P as of 30 June 2013. The decrease can be attributed to settlement of amounts due to suppliers and contractor as may be seen from the decrease in the cash and cash equivalents and accounts payable and accrued expenses accounts by 57.8% and 64.94%, respectively. Cash and cash equivalents decreased to =36,479,288 P and accounts payable and accrued expenses decreased to =35,558,013 P as of the end of the period. The increase in sales causes the receivables to increase by 7.37% or =1,640,852 P from =22,258,607 P as of year-end to the present = P 23,899,459. The increase in the related party transactions is dependent upon the liquidity and financial status of the concerned parties at any given point in time. None of the parties involved is in financial distress and there is no reason to believe that any accounts may be impaired in the immediate or near future. Also, these accounts have no definite call dates and do not bear interest. The purpose of these advances is for operating and investing activities. Other current assets increased by 67.75% to =5,449,177. P The increase of = P 2,200,871 pertains mainly to unapplied creditable withholding taxes of CVI. The property and equipment account decreased from the additional depreciation from the acquisition of a new office building acquired by CWWC worth around = P 57.36 million located in Barangay Bayanan, Calapan City. CWWC has already moved its offices to this new building in the last quarter of 2012. Available-for-sale investments, investment property and deferred tax assets were unchanged from their balances as of June 30, 2013. Accounts payable and accrued expenses decreased by 64.94% from =101.41 P million as of December 31, 2012 to =35.56 P million as of June 30, 2013. Much of this was contributed by CWWC’s settlement of amounts due to its contractor for its development projects. The income tax liability as of December 31, 2012 was paid last April 2013. The income tax liability as of June 30, 2013 consists of the accrual for the first and second quarter of 2013 results. This explains why income tax payable decreases by 17.75%. The retirement benefit obligation and deferred tax liability were unchanged from year-end. The loan payable of =76.0 P M pertains to Calapan Water’s loan with DBP mentioned earlier. The decrease in this account by 5.0% or =4,006,880 P pertains to principal payments for the six months ended June 30, 2013. Minority interest pertains to Calapan Water. This represents the share of its minority shareholders in the net assets of said subsidiary. The change in this account represents the share of minority shareholders in the results of operations for this period. 25 Results of Operations Water service revenues have been steadily increasing and this may be attributed to additional billed volume from the increase in the number of subscribers which stood at 13,050 at periodend as against 12,046 last year. Revenues grew by = P 2,278,095 or 7.06% from =33,486,769 P to =36,110,097 P for the quarter. Sales of goods of =9.2 P million for the period pertain to the trading activity of CVI. It started operation only last December 2009 and the decrease as against the same year-to-date figure is =687,036 P (6.97%). Cost of sales and services have been increasing due to higher depreciation (due to office building acquired end of last year) and power costs (due to additional booster stations put up to augment water pressure) of CWWC. The increase of 10.47% or = P 3.0M for this period as conscious efforts were done to keep costs at relatively the same levels. Further, the increase in sales from the trading activity also affected this account. Most of the same factors affecting year-to-date figures also apply. Operating expenses have increased due to higher salaries, utilities and taxes this period as against the same period last year. This account increased by 3.0% or =0.7M. P Net other charges decreased by 19.46% or = P 583,429 for the period. The decrease is attributed to interest charges on CWWC’s loan with DBP charged to expense this quarter. The interest on CWWC’s loan was capitalized as part of property and equipment in prior years. The increase or decrease in the interest income earned is dependent upon the duration of the higher-yielding placements and not necessarily on the balance as of the end of the period. Minority interest represents minority stockholders’ share in the net income or loss of Calapan Water. The fluctuation in this account is tied-in to the operating results of Calapan Water and to the Company’s overall ownership in the former. Liquidity and Solvency The Company’s cash balance decreased from end-2012 of =86.4 P million to =36.5 P million as of 30 June 2013. A significant portion of the cash balance came from the proceeds of CVI’s IPO last 2011. The IPO proceeds are intended for CWWC’s expansion and zoning works. Meanwhile, the decrease for this period was a result of payment of obligations mentioned earlier. The Company seeks to manage its liquidity profile to be able to finance its capital expenditures and serve its maturing obligations. The objective is to maintain a balance between continuity of funding and flexibility through valuation of projected and actual cash flow information. The Company manages liquidity by maintaining adequate reserves through advances from related parties and loan facilities with local banks. The IPO proceeds improved our current ratio considerably. Nonetheless, the Company is not in danger of insolvency as it could readily draw funds from related parties and banks. Further, its strong relations with suppliers and creditors enable the Company to negotiate and stretch credit terms. It may also be worth mentioning that payment terms of accounts with related parties have no definite call dates. The retirement benefit obligation and deferred tax liabilities may also be regarded as provisions and are not due immediately. 26 Dividends In the Board of Directors’ meeting held on June 13, 2012 a resolution was passed declaring cash dividends of = P 0.20 per share. Record date for determination of stockholders entitled to the cash dividends was the close of business on June 29, 2012. July 25, 2012 was set as the payment date. Issuances, Repurchases, and Repayments of Debt and Equity Securities None Events that will trigger Direct or Contingent Financial Obligation that is Material to the Company, including any Default or Acceleration of an Obligation None Material Off-Balance Sheet Transactions, Arrangements, Obligations (including Contingent Obligations), and Other Relationships of the Company with Unconsolidated Entities or Other Persons created during the Reporting Period None Known Trends, Demands, Commitments, Events or Uncertainties that will have a Material Impact on Liquidity or that are reasonably expected to have a Material Favorable or Unfavorable Impact on Net Sales/Revenues/Income from Continuing Operations None Cause for any Material Change from period to period which shall include Vertical and Horizontal Analyses of any Material Item This is already incorporated in the discussion under “Results of Operations” and “Financial Position”. Seasonal Aspects that has a Material Effect on the Financial Statements None Material Commitments for Capital Expenditures, General Commitments, Expected Sources of Funds for such Expenditures Purpose of such Calapan Water has completed its rehabilitation, expansion and improvement plan of its waterworks system in Calapan City, Oriental Mindoro. The purpose of the plan is to bolster water pressure, improve water quality, and to increase production so as to accommodate more subscribers. A contractor was awarded the project for the total contract price of about =168 P million. The =137 P million-loan facilities from DBP are earmarked for the contract and the differential between the total contract price and the loan facility will be sourced from internally generated sources. Calapan Water has various projects lined up as detailed in the following table. Fifty Two Million and Five Hundred Thousand Pesos (=52,500,000.00) P will be used for expansion of storage facilities, particularly for the construction of one (1) overhead reservoir and the installation of transmission and distribution lines from the reservoir to the water system. Ninety Two Million Eight Hundred and Fifty Thousand Pesos (=92,850,000.00) P will be used for zoning works to be undertaken in twenty six (26) barangays, such as installation of district meters and isolation valves. 27 Also included in zoning works is the cost of massive meter replacement that will be implemented in order to reduce non revenue water to its target level of twenty percent (20%). Cost (In = P Millions) Zoning Works Expansion Grand Total Timeline 92.85 Q4 of 2011 to Q3 of 2012 52.50 Q1 to Q2 of 2012 145.35 The stated amounts include the estimated cost of transmission and distribution pipes, district meters and isolation valves, and water meters; however, as of the date of this report no specific supplier has been identified from whom these assets will be bought. The proceeds of the recent initial public offering of CVI will be used to finance the above projects. Priority shall be given to zoning works and the development of expansion facilities, in that order. As the proceeds is below the project cost, the balance shall be funded through internally generated funds. Any Significant Elements of Income or Loss that did not arise from Continuing Operations None Financial Risk Disclosure Please refer to page 6 of the Notes to Consolidated Financial Statements for the description, classification and measurements applied for financial instruments of the Group. The Group’s principal financial instruments comprise of cash, receivables, short-term bank deposits, available-for-sale investments, bank loans, trade payables and due to related parties. The main purpose of the Group’s financial instruments is to fund the Group’s operations and to acquire and improve property and equipment. The main risks arising from the use of financial instruments are liquidity risk, interest rate risk and credit risk. The main objectives of the Group’s financial risk management areas are as follows: • • • To identify and monitor such risks on an ongoing basis; To minimize and mitigate such risks; and To provide a degree of certainty about costs. The Group’s Board reviews and agrees with policies for managing each of these risks. These are summarized below: Liquidity risk The Group seeks to manage its liquid funds through cash planning on a weekly basis. The Group uses historical figures and experiences and forecasts from its collections and disbursements. The Group’s objective is to maintain a balance between continuity of funding and flexibility through valuation of projected and actual cash flow information. 28 Interest rate risk The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s long-term borrowings. The Group’s policy is to minimize interest rate cash flow risk exposures. Long-term borrowings are therefore usually at agreed interest rates. Also, the Group manages its exposure to interest rate risk by closely monitoring bank interest rates with various banks and maximizing borrowing period based on market volatility of interest rates. Credit risk This risk refers to the risk that a customer/debtor will default on its contractual obligations resulting in financial loss to the Group. The Group controls this risk through monitoring procedures and regular coordination with the customers. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The Group also controls this risk by cutting its services and refusal to reconnect until the customer’s account is cleared or paid. The Group’s credit risk is primarily attributable to its trade receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Given the Group’s diverse customer base, it is not exposed to large concentration of credit risk. Currency risk is the risk that a business' operations or an investment's value will be affected by changes in exchange rates. If Philippine pesos, the Group’s functional currency, has to be converted into another currency to buy or sell goods and services, or to make certain investments, a gain or loss may arise when these are converted back into pesos. This risk has been assessed to be insignificant given that all the Group’s transactions are made in pesos. The Group has no investments in foreign securities. Market risk is the risk of losses arising from changes in market prices. This usually affects an entire class of assets or liabilities. The value of investments may decline over a given period of time simply because of economic changes or other events that impact large portions of the market. Management has assessed this risk to be insignificant since the Group’s financial instruments are not openly traded in the open market (stock exchange, foreign exchange, commodity market, etc.) nor does it engage in exotic financial instruments such as derivatives, spot or forward contracts and the like. The fair values of the Group’s financial instruments did not change between this period and the preceding period thus no gain or loss was recognized. 29 Calapan Ventures, Inc. Schedule of Financial Indicators KEY PERFORMANCE INDICATORS JUNE 2013 I PROFITABILITY Net income after Tax ROA= 14,982,461 14,545,108 519,040,948 501,994,855 0.0289 0.0290 14,982,461 14,545,108 330,183,021 311,693,377 0.0454 0.0467 70,662,483 65,761,060 12,548 11,807 5,631 5,570 Total Liabilities 155,822,276 194,364,491 Total Assets 493,496,528 497,114,321 0.3158 0.3910 Total Liabilities 155,822,276 194,364,491 Shareholder's Equity 337,674,252 302,749,831 0.4615 0.6420 Market value/share 7.00 2.40 Book value/share 2.08 1.87 3.36 1.28 Ave. Total Assets Return on Total Assets It measures efficiency of the Company in using its assets to generate net income. Annual Net Income ROE= Ave. Stockholders Equity Return on Equity It is a measure of profitability of stockholders' investments. It shows net income as percentage of shareholder equity. Water Revenue WRS= Ave. No. of Water Subscribers Water Revenue per Subscriber Measures how well service and facilities improvements have influence consumer's usage II FINANCIAL LEVERAGE Debt Ratio= Debt Ratio It is a solvency ratio and it measures the portion of the assets of a business which are financed through debt. Debt to Equity= Debt to Equity Ratio It measures the degree to which the assets of the business are financed by the debts and the shareholders' equity of a business. III 2012 MARKET VALUATION Price to Book Ratio PB ratio= Relates the Company's stock to its book value per share 30 Below is the aging analysis of receivables: Current Trade Advances and nontrade =5,904,511 P Total =6,566,648 P 31 to 60 days = P 5,663,281 662,137 June 30, 2013 61 to 90 days = P 6,019,336 - - = P 5,663,281 = P 6,019,336 31 More than 90 days =5,650,194 P =5,650,194 P Total =23,237,322 P 662,137 =23,899,459 P CALAPAN VENTURES, INC. AND SUBSIDIARIES (A Subsidiary of Jolliville Holdings Corporation) SCHEDULE OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION JUNE 30, 2013 Beginning Unappopriated Retained Earnings, As adjusted Less: Net loss during the period Retained Earnings Available for Dividend Declaration 32 =15,267,520 P (1,065,537) =14,201,983 P CALAPAN VENTURES, INC. SUMMARY OF EFFECTIVE STANDARDS AND INTERPRETATIONS UNDER PHILIPPINE FINANCIAL REPORTING STANDARDS AS OF JUNE 30, 2013 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Not Not Adopted Adopted Applicable Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics PFRSs Practice Statement Management Commentary Philippine Financial Reporting Standards PFRS 1 (Revised) First-time Adoption of Philippine Financial Reporting Standards Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments to PFRS 1: Additional Exemptions for First-time Adopters Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters Amendments to PFRS 1: Government Loans PFRS 2 * Share-based Payment * Amendments to PFRS 2: Vesting Conditions and Cancellations * Amendments to PFRS 2: Group Cash-settled Sharebased Payment Transactions PFRS 3 (Revised) Business Combinations PFRS 4 Insurance Contracts Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts PFRS 5 Non-current Assets Held for Sale and Discontinued Operations 33 * PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS PFRS 6 Exploration for and Evaluation of Mineral Resources PFRS 7 Financial Instruments: Disclosures Not Not Adopted Adopted Applicable * Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets * Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition Amendments to PFRS 7: Improving Disclosures about Financial Instruments * Amendments to PFRS 7: Disclosures - Transfers of Financial Assets Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures PFRS 8 Operating Segments PFRS 9 Financial Instruments Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures PFRS 10 Consolidated Financial Statements PFRS 11 Joint Arrangements PFRS 12 Disclosure of Interests in Other Entities PFRS 13 Fair Value Measurement Philippine Accounting Standards PAS 1 (Revised) Presentation of Financial Statements Amendment to PAS 1: Capital Disclosures * Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Comprehensive Income PAS 2 Inventories PAS 7 Statement of Cash Flows PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 34 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS PAS 10 Events after the Reporting Period PAS 11 Construction Contracts PAS 12 Income Taxes Not Not Adopted Adopted Applicable * Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets PAS 16 Property, Plant and Equipment PAS 17 Leases PAS 18 Revenue PAS 19 Employee Benefits * Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures PAS 19 (Amended) Employee Benefits PAS 20 Accounting for Government Grants and Disclosure of Government Assistance PAS 21 The Effects of Changes in Foreign Exchange Rates * Amendment: Net Investment in a Foreign Operation * PAS 23 (Revised) Borrowing Costs PAS 24 (Revised) Related Party Disclosures PAS 26 Accounting and Reporting by Retirement Benefit Plans PAS 27 Consolidated and Separate Financial Statements PAS 27 (Amended) Separate Financial Statements PAS 28 Investments in Associates PAS 28 (Amended) Investments in Associates and Joint Ventures PAS 29 Financial Reporting in Hyperinflationary Economies PAS 31 Interests in Joint Ventures * PAS 32 Financial Instruments: Disclosure and Presentation * Amendments to PAS 32 and PAS 1: Puttable 35 * PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Not Not Adopted Adopted Applicable Financial Instruments and Obligations Arising on Liquidation * Amendment to PAS 32: Classification of Rights Issues Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities PAS 33 Earnings per Share PAS 34 Interim Financial Reporting PAS 36 Impairment of Assets PAS 37 Provisions, Contingent Liabilities and Contingent Assets PAS 38 Intangible Assets PAS 39 Financial Instruments: Recognition and Measurement * * Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities * Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions * Amendments to PAS 39: The Fair Value Option * Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts * Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets * Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition * Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives * Amendment to PAS 39: Eligible Hedged Items PAS 40 Investment Property PAS 41 Agriculture Philippine Interpretations IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members' Share in Co-operative Entities and Similar Instruments 36 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Not Not Adopted Adopted Applicable IFRIC 4 Determining Whether an Arrangement Contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of PFRS 2 * IFRIC 9 Reassessment of Embedded Derivatives * * Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment * IFRIC 11 PFRS 2- Group and Treasury Share Transactions * IFRIC 12 Service Concession Arrangements * IFRIC 13 Customer Loyalty Programmes * IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction * Amendments to Philippine Interpretations IFRIC-14, Prepayments of a Minimum Funding Requirement IFRIC 16 Hedges of a Net Investment in a Foreign Operation * IFRIC 17 Distributions of Non-cash Assets to Owners * IFRIC 18 Transfers of Assets from Customers * IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC-7 Introduction of the Euro SIC-10 Government Assistance - No Specific Relation to Operating Activities SIC-12 Consolidation - Special Purpose Entities Amendment to SIC - 12: Scope of SIC 12 SIC-13 * Jointly Controlled Entities - Non-Monetary Contributions by Venturers 37 * PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Not Not Adopted Adopted Applicable * SIC-15 Operating Leases - Incentives SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC-29 Service Concession Arrangements: Disclosures. SIC-31 Revenue - Barter Transactions Involving Advertising Services SIC-32 Intangible Assets - Web Site Costs 38 * * * * *
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