Ayala Corp Sec 17a Ending December 31 2014

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COVER SHEET

3 4 2 1 8

A Y A L A C O R P O R A T I O N A N D S U B S I D I A

R I E S

(Company's Full Name)

3 2 F T O 3 5 F , T O W E R O N E A N D E X C H

A N G E P L A Z A , A Y A L A T R I A N G L E , A Y

A L A A V E N U E , M A K A T I C I T Y
(Business Address: No. Street City / Tow n / Province)

Josephine G. De Asis 908-3000


Contact Person Company Telephone Number

1 2 3 1 1 7 - A 0 4 1 0
Month Day Month Day
Fiscal Year Annual Meeting

Secondary License Type, if Applicable

C F D
Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrow ings

6 8 9 1 P 4 0 B. bonds
Total No. Of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document I.D.
Cashier

S TA M P S

Remarks = pls. Use black ink for scanning purposes

1
SEC No. 34218
File No. _____

AYALA CORPORATION
(Company’s Full Name)

32F to 35F, Tower One and Exchange Plaza


Ayala Triangle, Ayala Avenue
Makati City
(Company’s Address)

908-3000
(Telephone Number)

December 31, 2014


(Fiscal Year Ending)
(Month & Day)

SEC Form 17- A


(Form Type)

2
APPLICABLE ONLY TO ISSUERS INVOLVED IN
INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS
DURING THE PRECEEDING FIVE YEARS

14. Check whether the issuer has filed all documents and reports required to be filed by Section 17 of
the Code subsequent to the distribution of securities under a plan confirmed by a court or the
Commission. Not applicable

Yes [ ] No [ ]

DOCUMENTS INCORPORATED BY REFERENCE

15. Briefly describe documents incorporated by reference and identify the part of the SEC Form 17-A
into which the document is incorporated:

2014 Consolidated Financial Statements of Ayala Corporation and Subsidiaries

2014 Consolidated Financial Statements of Bank of the Philippine Islands and Subsidiaries

2014 Consolidated Financial Statements of Globe Telecom, Inc. and Subsidiaries

2014 Opinion on and Individual Supplementary Schedules

2014 Annual Corporate Governance Report

4
TABLE OF CONTENTS

PART I BUSINESS AND GENERAL INFORMATION


Item 1 Business 6
Item 2 Properties 87
Item 3 Legal Proceedings 93
Item 4 Submission of Matters to a Vote of Security Holders 103

PART II OPERATIONAL AND FINANCIAL INFORMATION


Item 5 Market for Registrant’s Common Equity and Related
Stockholder Matters 104
Item 6 Management’s Discussion and Analysis or Plan of Operations 107
Item 7 Financial Statements and Supplementary Schedules 123
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 123

PART III CONTROL AND COMPENSATION INFORMATION


Item 9 Directors and Executive Officers of the Registrant 125
Item 10 Executive Compensation 131
Item 11 Security Ownership of Certain Beneficial Owners and Management 133
Item 12 Certain Relationships and Related Transactions 135

PART IV COPORATE GOVERNANCE


Item 13 Corporate Governance 137

PART V EXHIBITS AND SCHEDULES


Item 14 Exhibits
Reports on SEC Form 17-C (Current Report) 138

SIGNATURES 140

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 141

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PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business

Ayala Corporation (the Company or Ayala) is the holding company of one of the oldest and largest
business groups in the Philippines that traces its history back to the establishment of the Casa Roxas
business house in 1834. The Company was incorporated in January 23, 1968, and its Class A Shares
and Class B Shares were first listed on the Manila and Makati Stock Exchanges (the predecessors of
the PSE) in 1976. In 1997 the Company’s Class A and Class B Shares were declassified and unified
as Common Shares.

As of December 31, 2014, the Company is 49.03% owned by Mermac, Inc., 10.18% owned by
Mitsubishi Corporation and the rest by the public. Its registered office address and principal place of
business is 32F to 35F, Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City.

The Ayala Group’s (the Group) business activities were, for some time, primarily focused on real estate,
banking and insurance. In the 1970s and 1980s, the Group expanded its existing businesses through
organic growth and acquisitions. During this period, the Group also materially diversified its activities
and disposed of interests that it considered peripheral to its business strategy.

Thereafter up to recent years, Ayala’s business activities are divided into: (a) real estate and hotels,
(b) financial services and insurance, (c) telecommunications, (d) water distribution and wastewater
services, (e) electronics, (f) automotive, (g) business process outsourcing (BPO), (h) investments in
international or overseas projects and ventures, (i) power generation, (j) transport infrastructure, and
(k) recently in education. Further discussion of the background of certain Ayala Group companies is
included in certain section of this report.

The list of subsidiaries is contained in the attached Company’s Consolidated Financial Statements for
December 31, 2014.

For management purposes, the Group is organized into the following business units:
 Parent Company - represents operations of the Company including, among others, its financing
entities such as ACIFL and AYCFL; plus results of operations of start-up companies in power
generation, transport infrastructure and education.

 Real estate and hotels - planning and development of large-scale fully integrated residential and
commercial communities; development and sale of residential, leisure and commercial lots and the
development and leasing of retail and office space and land in these communities; construction and
sale of residential condominiums and office buildings; development of industrial and business
parks; development and sale of upper middle-income and affordable housing; strategic land bank
management; hotel, cinema and theater operations; and construction and property management.

 Financial services and insurance - universal banking operations, including savings and time
deposits in local and foreign currencies; commercial, consumer, mortgage and agribusiness loans;
leasing; payment services, including card products, fund transfers, international trade settlement
and remittances from overseas workers; trust and investment services including portfolio
management, unit funds, trust administration and estate planning; fully integrated insurance
operations, including life, non-life, pre-need and reinsurance services; internet banking; on-line
stock trading; corporate finance and consulting services; foreign exchange and securities dealing;
and safety deposit facilities.

 Telecommunications - provider of digital wireless communications services, wireline voice


communication services, consumer broadband services, other wireline communication services,
domestic and international long distance communication or carrier services and mobile commerce
services.

 Water distribution and wastewater services - contractor to manage, operate, repair, decommission,
and refurbish all fixed and movable assets (except certain retained assets) required to provide water
delivery services and sewerage services, pipeworks and management service mainly in the East
Zone Service area of Metro Manila and Rizal province. These services expanded to other parts of
the country like Laguna, Boracay, Clark, Cebu and in development stages in Mindanao region. It
also has presence in Vietnam through a leakage reduction project and two bulk water companies.
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 Electronics - electronics manufacturing services provider for original equipment manufacturers in
the computing, communications, consumer, automotive, industrial and medical electronics markets,
service provider for test development and systems integration and distribution of related products
and services.

 Information technology and BPO services - venture capital for technology businesses and emerging
markets; provision of value-added content for wireless services, on-line business-to-business and
business-to-consumer services; electronic commerce; technology infrastructure hardware and
software sales and technology services; and onshore and offshore outsourcing services in the
research, analytics, legal, electronic discovery, document management, finance and accounting, IT
support, graphics, advertising production, marketing and communications, human resources,
sales, retention, technical support and customer care areas.

 Automotive - manufacture, distribution and sale of passenger cars and commercial vehicles
including related businesses such as automotive service and repairs; sale of parts and accessories;
and collateral services like vehicle insurance and financing.

 International - investments in overseas property companies and projects.

 Others - air-charter services, agri-business, consultancy and others.

Please refer to Note 29 on Operating Segment Information of the Company’s Consolidated Financial
Statements regarding operating segments which presents assets and liabilities as of December 31,
2014 and 2013 and revenue and profit information for the years ended December 31, 2014, 2013 and
2012.

Management monitors the operating results of its business units separately for the purpose of making
decisions about resource allocation and performance assessment. Segment performance is evaluated
based on operating profit or loss and is measured consistently with operating profit or loss in the
consolidated financial statements.

Intersegment transfers or transactions are entered into under the normal commercial terms and
conditions that would also be available to unrelated third parties. Segment revenue, segment expense
and segment results include transfers between operating segments. Those transfers are eliminated in
consolidation.

For the detailed discussion on the specific subsidiaries falling under each business unit as well as the
major transactions of the Group, please refer to Note 2 on Group Information of the Consolidated
Financial Statements for December 31, 2014 which forms part of the Annex of this SEC17A report.
Other major transactions and developments were also disclosed in the Company’s previously filed
SEC17Q and SEC17-C reports, listing of which also forms part of the Annex of this SEC17A report.

The consolidated financial statements of the Group as of December 31, 2014 and 2013 and for the
years ended December 31, 2014, 2013 and 2012 were endorsed for approval by the Audit Committee
on March 5, 2015 and authorized for issue by the Board of Directors (BOD) on March 10, 2015.

Based on SEC’s parameters, the significant subsidiaries of Ayala Corporation as of December 31,
2014 are Manila Water Co, Inc. (MWCI – established in 1997), Ayala Land, Inc. (ALI - organized in
1988), and Integrated Micro Electronics, Inc. (IMI - organized in 1980). Except as stated in the
succeeding paragraphs and in the discussion for each of the Company’s significant subsidiaries, there
has been no other business development such as bankruptcy, receivership or similar proceeding not in
the ordinary course of business that affected the registrant for the past three years.

As to the material reclassification, merger, consolidation or purchase or sale of a significant


amount of assets:
For detailed discussion as to material reclassification, merger, consolidation and purchase transactions
with subsidiaries, please refer to Note 24 on Business Combinations and Transactions with
Noncontrolling Interest of the Company’s Consolidated Financial Statements for December 31, 2014
which forms part of the Annex of this SEC17A report.

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Distribution methods of the company’s products and services
This is not applicable to the Company being a holding company. The Company’s operating companies,
however, have their respective distribution methods of products and services. Please refer to
Significant Subsidiaries, Associates and Joint Ventures portion below.

Competition
The Company is subject to significant competition in each of the industry segments where it operates.
Please refer to Significant Subsidiaries, Associates and Joint Ventures portion below for a discussion
on Ayala Land, Inc. (ALI), Integrated Micro Electronic, Inc. (IMI), and Manila Water Company, Inc.
(MWCI), significant subsidiaries, and Bank of the Philippine Islands (BPI), and Globe Telecom (Globe),
significant associates and joint ventures.

Transactions with related parties


The Company and its subsidiaries, in their regular conduct of business, have entered into transactions
with associates and other related parties principally consisting of advances, loans, reimbursement of
expenses, various guarantees, construction contract, and management, marketing, and administrative
service agreements. Sales and purchases of goods and services to and from related parties are made
at normal commercial prices and terms.

Related party transactions are also discussed in the Note 31 of the accompanying consolidated financial
statements of the Company.

Developmental and Other Activities


Being a holding company, the Company has no material patent, trademark, or intellectual property right
to a product or any of its direct services. The Company’s operating companies, however, may have
these material intellectual property rights, but the dates and terms of their expiration or renewal is not
perceived to have a material adverse effect on the Company. The Company complies with all existing
government regulations and environmental laws, the costs of which are not material. As a holding
company, it has no material development activities.

Employees
The Company has a total workforce of 124 employees as of December 31, 2014, classified as follows:

Staff 45
Managers and Executives 68
Consultants 11
124

The Company expects to increase its number of employees in the next 12 months. The Company has
an existing Collective Bargaining Agreement (CBA) with the Ayala Corporation Employees Union for a
period of 5 years, from January 2012 until December 2016. The CBA generally provides for
improvement in compensation and benefits. Union and Management relations continue to be
harmonious. The Company’s management had not encountered difficulties with its labor force, nor have
strikes been staged in the past.

In addition to the basic salary and 13th month pay, other supplemental benefits provided by the
Company to its employees include: mid-year bonus, performance bonus, monthly rice subsidy,
retirement benefit, life and health insurance, medical and dental benefits, and various loan facilities.

Risks
For detailed discussion on Risks, please refer to Note 32 on Financial Instruments of the Company’s
Consolidated Financial Statements for December 31, 2014 as well as the Company’s 2014 Annual
Corporate Governance Report which both form part of the Annex of this SEC17A report.

8
SIGNIFICANT SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES

AYALA LAND, INC.

Background and Business


Ayala Land, Inc. (alternately referred to as “ALI”, Ayala Land or “the Company” in the entire discussion
of Ayala Land, Inc.) is the real estate arm of the Ayala Group. Its defining project was the 1948
development of a planned mixed-use community on 930 hectares of swamp and grassland in the Makati
district of Metro Manila. Over the course of the following 25 years, the Ayala Group transformed Makati
into the premier central business district of the Philippines and a site of some of Metro Manila’s most
prestigious residential communities. Ayala Land has become the largest real estate company in the
Philippines engaged principally in the planning, development, subdivision and marketing of large-scale
communities having a mix of residential, commercial, leisure and other uses.

Ayala Land was spun-off by Ayala in 1988 to enhance management focus on the Group’s existing real
estate business and to highlight the value of assets, management and capital structure of this business.
The Company’s shares were offered to the public and listed on the Manila and Makati Stock Exchanges
(the predecessors of the PSE) in 1991. This IPO diluted the Ayala’s effective interest in Ayala Land to
88%. Since then, the Ayala’s effective interest has been further reduced to approximately 70.11% as of
31 December 2013 through, among other things, the exercise of stock options by the employees of
Ayala and Ayala Land, disposals of the Company shares by the Ayala, conversions of the Company’s
other securities into the Company’s common shares and top-up placements of the Company’s common
shares in July 2012 and March 2013.

Products / Business Lines


Ayala Land’s businesses are organised into several core and non-core supporting business units. Its
core business units consist of residential property development, strategic landbank management,
shopping centre leasing, office leasing and hotels and resorts. Its non-core, supporting business units
include construction and property management.

Property Development
Residential Business - sale of high-end residential lots and units (including leisure community
developments), office spaces, commercial and industrial lots, middle-income residential lots and units,
affordable lots, units and house and lot packages, economic housing units and house and lot packages,
and socialized housing packages; lease of residential units and marketing of residential developments

Strategic Landbank Management and Visayas-Mindanao - acquisition, development and sale of large,
mixed-use, masterplanned communities; sale of override units or Ayala Land's share in properties made
available to subsidiaries for development; lease of gas station sites and carparks outside Ayala Center;
development, sale and lease of the Company and subsidiaries' product offerings in key cities in the
Visayas and Mindanao regions

Commercial Leasing
Shopping Centers - development of shopping centers and lease to third parties of retail space and land
therein; operation of movie theaters, food courts, entertainment facilities and carparks in these shopping
centers; management and operations of malls which are co-owned with partners

Office Leasing - development and lease or sale of office buildings and lease of factory buildings

Hotels and Resorts - development, operation and management of branded and owner-operated hotels;
lease of land to hotel tenants; development, operation and management of eco-resorts

Services
Construction – land development and construction of ALI and third-party projects

Property Management – facilities management of ALI and third-party projects; operation of water and
sewage treatment facilities in some ALI projects; distribution of district cooling systems; bulk purchase
and supply of electricity for energy solutions

In addition to above business lines, Ayala Land also derives other income from its investment activities
and sale of non-core assets.

Products / Business Lines (with 10% or more contribution to 2014 consolidated revenues):
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Property Development 65%
(Sale of residential lots and units, office spaces and commercial and industrial lots)
Commercial Leasing 22%
(Shopping Centers, Office Leasing and Hotels and Resorts Operations)
Services 32%
(Construction and Property Management)

Distribution Methods of Products


The Company’s residential products are distributed to a wide range of clients through various sales
groups.

Ayala Land (parent company) has its own in-house sales team. In addition, it has a wholly-owned
subsidiary, Ayala Land Sales, Inc. (“ALSI”), which employs commission-based sales people. Ayala
Land uses a sales force of about 12,791 brokers and sales agents guided by a strict Code of Ethics.

The overseas Filipino (OF) market is being pursued through award-winning websites, permanent sales
offices or broker networks, and regular roadshows with strong follow-through marketing support in key
cities abroad. Ayala Land International Sales, Inc. (“ALISI”), created in March 2005, led the marketing,
sales and channel development activities and marketing initiatives of the three residential brands
abroad. ALISI established marketing offices in North America (Miltipas and San Francisco), Hong Kong,
Singapore, Dubai, Rome, London and Milan. ALISI likewise assumed operations of AyalaLand Int’l.
Marketing in Italy and London, in which ownership of these offices are scheduled to be transferred to
ALISI by 2014.

Separate sales groups have also been formed for certain subsidiaries which cater to different market
segments under Bellavita (socialized housing), Amaia (economic housing), Avida (affordable housing)
and Alveo (middle-income housing). To complement these sales groups, Ayala Land and its
subsidiaries also tap external brokers.

Effective second half of 2008, residential sales support transactions of ALP, Alveo, Avida, Amaia and
BellaVita is being undertaken by the shared services company Amicassa Process Solutions, Inc.
(“APSI”) put up by the Company. In 2011, Aprisa Business Solutions, Inc. (APRISA) completed its full
roll-out to handle transactional accounting processes across the Ayala Land group.

Development of the business of the registrant and its key operating subsidiaries/associates and
joint ventures during the past three years
Ayala Land, Inc. - parent company (incorporated in 1988), pursued major residential land development
and condominium projects, office buildings, leisure community project and shopping center operations.
Redevelopment activities have been completed in Glorietta, Alabang Town Center and Ayala Center
Cebu. Operations of traditional headquarter-type and BPO buildings continued as well as the
development of its leisure community project, Anvaya Cove in Bataan.

Property Development
Under the Ayala Land Premier brand, horizontal residential projects include, among others, Abrio,
Santierra, Elaro, Luscara, Ayala Westgrove Heights and Ayala Greenfield Estates. Residential
condominium projects undertaken in the past three years include Park Terraces, West Tower Serendra,
Garden Towers, The Suites, 1016 Residences, Two Roxas Triangle and Parkpoint Residences.

Alveo Land Corp., 100% owned by Ayala Land, offers various residential products to the middle-income
market. Alveo’s projects over the past three years include Verdana Homes Mamplasan, Verdana Village
Center, MarQuee, Treveia NUVALI, Celadon Residences, Celadon Park, The Columns at Ayala
Avenue, The Columns at Legazpi Village, Senta and Ametta Place in Pasig.

Avida Land Corp., a 100%-owned subsidiary, continued to develop affordable housing projects which
offer house-and lot packages and residential lots. Avida also ventured into the development and sale
of residential condominiums. Project launches in the past three years included Avida Towers Sucat,
Avida Towers New Manila, Avida Towers San Lazaro, Avida Towers Makati West, Avida Settings
NUVALI, Avida Residences San Fernando, Avida Residences Sta. Cecilia, and Riego de Dios Village.

Amaia Land Corp., formerly a subsidiary of Avida is now a wholly owned subsidiary of Ayala Land, was
established to pursue a planned expansion of residential development operations to cater to the
country’s economic housing segment.

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BellaVita Land Corp. (formerly South Maya Ventures Corp.), wholly-owned subsidiary ofAyala Land,
aims to establish the country’s first social enterprise community development targeting minimum wage
earners and members of the informal business sector.Its first project in General Trias, Cavite was
launched in December 2011.

Serendra, Inc., 28%-owned by ALI and 39%-owned by Alveo, is engaged in residential development.
In 2004, it launched Serendra, a residential complex at the BGC in Taguig.

Solinea (formerly Bigfoot Palms, Inc.), a landholding entity, was acquired on March 05, 2011 through
Alveo Land Corporation through acquisition of 65% shares of stock.The remaining 35% was acquired
by Cebu Holdings, Inc., an associate of the Group.

Roxas Land Corp., 50% owned, sold-out One Roxas Triangle in 2007.The project was started in 1996
and was completed in September 2001.

Ayala Greenfield Development Corporation (“AGDC”), 50-50% owned by Ayala Land and Greenfield
Development Corporation, started development of Ayala Greenfield Estates in Calamba, Laguna in
1999.Over the past twelve years, AGDC continued to develop and sell lots in this high-end residential
subdivision.

Nuevo Centro, Inc., a wholly-owned subsidiary of Ayala Land, was established primarily to acquire and
hold real estate properties for the purpose of developing them into large-scale, mixed-used and
masterplanned communities.

BG West Properties, Inc., BG South Properties, Inc. and BG North Properties, Inc. were incorporated
to engage in the development of high-end, middle-end and affordable residential and retail projects,
respectively, in Bonifacio Global City.

Avencosouth was incorporated in the Philippines and is currently engaged in condominium


development operations.The Company holds 90% indirect interest in Avencosouth as of December 31,
2012.It is 70% owned by Avida (wholly-owned subsidiary of the Company) and 30% owned by Accendo
(67% owned by the Company). Avencosouth was registered with the SEC on April 26, 2012 and started
commercial operations on August 11, 2012.

AIMI, a wholly-owned subsidiary of ALISI, was incorporated on February 28, 2012 to engage in any
lawful act or activity for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the practice of a profession
permitted to be incorporated by the California Corporations Code.

Strategic Landbank Management


Aurora Properties, Incorporated and Vesta Property Holdings, Inc.and Ceci Realty, Inc. (incorporated
in 1974) are owned by Ayala Land 78%, 70% and 60%, respectively. These companies, joint ventures
with the Yulo Family, finalized plans for the development of nearly 1,700 hectares of land in Canlubang,
Laguna.

Emerging City Holdings, Inc. and Berkshires Holdings, Inc., both 50% owned, served as Ayala Land’s
corporate vehicles in the acquisition of a controlling stake in Bonifacio Land Corp. / Fort Bonifacio
Development Corp. (“FBDC”) through Columbus Holdings, Inc. in 2003. FBDC continues to sell
commercial lots and condominium units at the BGC while it leases out retail spaces.

Regent Time International Limited, 100% owned by Ayala Land, also owns a stake at Bonifacio Land
Corp. / Fort Bonifacio Development Corp.

Shopping Centers
NorthBeacon Commercial Corporation – formerly Alabang Theatres Management Corporation, is Ayala
Land’s wholly-owned vehicle for its MarQuee Mall in Pampanga, which commenced development in
March 2007 and began operations in September 2009.

Station Square East Commercial Corporation, 69% owned subsidiary of Ayala Land, broke ground in
2002 for Market! Market!, a 150,000-sqm mall along C-5 Road in Taguig.It opened Phase 1A of the mall
in 2004 and Phase 1B in 2005.

Accendo Commercial Corp., with a 67% stake, ALI entered into a joint venture agreement with Anflo
Group to develop a mixed-use project in Davao City.
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ALI-CII Development Corporation, a 50-50% joint venture with Concepcion Industries, continued to
operate Metro Point, a mid-market mall at the corner of EDSA and Taft Avenue, which was completed
in the fourth quarter of 2001.

Alabang Commercial Corporation, 50% owned by Ayala Land, continued to manage and operate the
Alabang Town Center.

North Triangle Depot Commercial Corporation, 63.82% owned by Ayala Land, commenced
development of TriNoma (formerly referred to as North Triangle Commercial Center), a 191,000-sqm
mall constructed at the main depot of MRT-3 in Quezon City. TriNoma broke ground in June 2005 and
began operations in May 2007.

Primavera Town Centre, Inc, 100% wholly-owned subsidiary, was also formed to handle the planning,
development and management of small-format retail facilities known as “neighborhood centers” within
the Company’s existing and planned growth centers across the country.

Subic Bay Town Centre, Inc., 100% owned by Ayala Land, was incorporated on March 9, 2010 for the
planning, development management of a mall to be located in Subic Bay Freeport Zone.

Ayala Theaters Management, Inc., 100% owned, continued to manage and operate theaters at the
Ayala Center in Makati.

Five Star Cinema, Inc., also wholly-owned, continued to manage and operate theaters at the Alabang
Town Center.

Leisure and Allied Industries Phils., Inc., a 50-50% joint venture of Ayala Land with Australian company,
LAI Asia Pte. Ltd., continued to operate family entertainment centers called TimeZone in various Ayala
malls, as well as other malls.

CagayanDe Oro Gateway Corp. was established to pursue a mixed-use development with a 47,000
sqm regional mall as its centerpiece.A 150-room boutique hotel shall be located on top of the mall, while
a single tower residential condominium with 21 floors and 522 rooms shall be located right beside the
mall. The project is strategically located in the economic hub of Cagayan de Oro City.

Arvo Commercial Corporation (ACC), a wholly owned subsidiary of the Ayala Land, was established
primarily to develop and operate shopping malls within the ALI identified growth areas across the
country.

Corporate Business
Laguna Technopark, Inc., 75% owned, continued to sell industrial lots to local and foreign company
locators.It also leases ready-built factory units within the Laguna Technopark.

Asian I-Office Properties, Inc - In 2008, the Company was invited by CPVDC, an ALI subsidiary, to be
a partner in the Asian i-Office Properties, Inc. (“AiO”) for a 60% stake. It manages and operates two
BPO buildings located in the Asiatown IT Park in Cebu (eBloc and Peak Building A).In 2013, Ayala
Land sold its 60% interest in Asian I-Office Properties, Inc. to Cebu Property Ventures and Development
Corporation.

ALI Property Partners Corp., is the Company’s 100%-owned vehicle in partnership with MLT
Investments (Goldman Sachs) which handle various BPO projects and investments.

Gisborne Property Holdings, Inc., Sunnyfield E-Office Corporation, Asterion Technopod, Inc., Crestview
E-Office Corporation, Summerhill E-Office Corporation and Hillsford Property Corp. are wholly-owned
entities established to handle, develop and manage all future BPO buildings located at various growth
centers within the Philippines.

Hotels and Resorts


Ayala Hotels, Inc., 50% owned, currently manages hotel land lease operations.

AHRC, a wholly-owned subsidiary of Ayala Land which will serve as a holding company for the Group’s
hotels and resorts operations.

12
Ten Knots Philippines, Inc. and Ten Knots Development Corporation (The Ten Knots Group), 60%
owned by Ayala Land in partnership with Asian Conservation Company Inc. In 2013, the Hotels and
Resorts Group signed an agreement with Asian Conservation Company to acquire its 40% stake in El
Nido Resorts.

Greenhaven Property Venture, Inc., 100% owned by Ayala Land through AHRC established to plan,
develop and manage the hotel being constructed in Glorietta 1 as part of the Ayala Center
redevelopment project.

Visayas-Mindanao
Cebu Holdings, Inc.,50% owned by Ayala Land, continued to manage and operate the Ayala Center
Cebu and sell condominium units and lots within the Cebu Business Park. The company also launched
Amara, a high-end seaside residential subdivision, and continued to sell club shares at City Sports Club
Cebu.Through Cebu Property Ventures Development Corporation, CHI also continued to sell lots at the
Asiatown IT Park.

Adauge, an87% owned subsidiary of the Company, was incorporated on September 5, 2012 for the
acquisition and development of a mixed-use project in Mandurriao, Iloilo City.

International
First Longfield Investments Limited is wholly-owned by Ayala Land. On March 7, 2011, ALI, Ayala Corp
and The Rohatyn Group completed an exchange of ownership interests in Arch Capital and Arch Capital
Asian Partners G.P (a Cayman Islands company), with proceeds and carrying value of the investments
as of the date of exchange amounting to US$3.8 million and US$0.4 million, respectively, resulted to a
gain of US$2.9 million, net of transaction costs. The exchange in ownership interest resulted in TRG
acquiring ALI’s 17% stake and Ayala Corp’s 33% interest. The completed exchange of ownership
interests did not change the activities, management focus and shareholder structure of the ARCH Fund,
with the Company retaining its current 8% interest in the fund

Regent Wise Investments Limited (Regent Wise), a wholly-owned subsidiary of Ayala Land, formed to
enter into an Equity Joint Venture with Sino-Singapore Tianjin Eco-City Investment and Development
Co., Ltdfor the development of a 9.78 hectare residential project in China. The project will be located in
Tianjin Eco-city (“the Eco-City”), a 3,000 hectare collaboration between the Chinese and Singaporean
governments which will showcase future direction of urban planning and sustainable development.

Construction
Makati Development Corporation, 100% owned by Ayala Land, continued to engage in engineering,
design and construction of horizontal and low-rise vertical developments.It continued to service site
development requirements of Ayala related projects while it provided services to third-parties in both
private and public sectors.

MDC Build Plus was formed to cater primarily to projects focusing on the lower end of the base of the
pyramid, particularly the residential brands Amaia and BellaVita.

Property Management
Ayala Property Management Corporation, 100%-owned by Ayala Land, continued to manage properties
of Ayala Land and its subsidiaries.It also provided its services to third-party clients.

Others
AyalaLand Commercial REIT, Inc., a wholly-owned subsidiary of Ayala Land was formed in September
as a vehicle through which Ayala Land will own and operate select investment properties and which
Ayala Land intends to undertake an IPO under Republic Act No. 9856 or the Philippines Real Estate
Investment Trust (“REIT”) Law. Said investment properties shall include prime shopping center and
office assets currently owned by the Company which are mature, have recurring income streams and
have achieved stable occupancy rates.

Aprisa Business Solutions, Inc., a wholly-owned subsidiary of Ayala Land that will initially manage
transactional accounting services.

Philippine Integrated Energy Solutions, Inc.,a 60%owned subsidiary of Ayala Land established for the
supply and operations of a district cooling system, performance contracting by introducing various
energy solutions and bulk purchase of electricity.

13
DirectPower Services, Inc., (DirectPower), a wholly owned subsidiary of the ALI, was formed to engage
in the bulk purchase and supply of electricity and to introduce various energy solutions.

Varejo, a wholly-owned subsidiary of the Company, was incorporated with the Securities and Exchange
Commission (SEC) on June 25, 2012.It is the holding company of the Company for its retail-related
initiatives.In 2012, the Company, through Varejo, formed a partnership with Specialty Investments, Inc.
(SII) to pursue opportunities in the Philippine retail sector.SII is a wholly-owned subsidiary of Stores
Specialists, Inc. (SSI), one of the largest retail companies in the Philippines, with the exclusive rights to
sell, distribute and market in the country a variety of brands from around the world.The partnership with
SII will enable the Company to support its mixed-use developments and, at the same time, grow its
recurring income portfolio.

SDC, a wholly-owned subsidiary of the Company, was incorporated on October 19, 2012 to be involved
in real estate development projects of the Group.

AMNI was incorporated in November 29, 2012 and is a wholly-owned subsidiary of the Company.It is
established primarily to develop and operate shopping malls and offices.

Solerte, Corp., a wholly-owned subsidiary of the Company, was incorporated this year as a shared-
service entity to provide manpower services to the Ayala Malls Group.

Whiteknight Holdings, Inc. (WHI), was registered with the Securities and Exchange Commission on
May 14, 2013.Ayala Land, Inc. entered into an agreement with the Mercado Family to acquire WHI in
July 2013, thereby becoming a wholly-owned subsidiary of ALI.WHI owns a 33% equity stake in
Mercado General Hospital, Inc. owner and operator of the Daniel O. Mercado Medical Center in
Tanauan, Batangas, the University Physicians Medical Center through its subsidiary Mercado
Ambulatory and Surgical Centers, Inc. and DMMC - Institute of Health Sciences, Inc.Ayala Land will
enhance its communities with the introduction of healthcare facilities in its township projects under the
QualiMed brand.

Bankruptcy, Receivership or Similar Proceedings


None for any of the subsidiaries and affiliates above.

Material Reclassification, Merger, Consolidation or Purchase or Sale of a Significant Amount of


Assets (not ordinary) over the past three years
On November 19, 2013, AHRC, a wholly owned subsidiary of the Company entered into an agreement
to acquire 100% interest in ACCI, which effectively consolidates the remaining 40% interest in TKDC
and TKPI (60%-owned subsidiary of the Company prior to this acquisition). This acquisition is in line
with the Company’s thrust to support the country’s flourishing tourism industry. The agreement resulted
in the Company effectively obtaining 100% interest in TKPI and TKDC.

With 8,639 hectares of developable area in its land bank as of December 31, 2014, ALI believes that it
has sufficient properties for development in next 20 to 25 years given its rapid pace of expansion.

Nevertheless, the Company continues to seek new opportunities for additional, large-scale, master-
planned developments in order to replenish its inventory and provide investors with an entry point into
attractive long-term value propositions. The focus is on acquiring key sites in the Mega Manila area and
other geographies with progressive economies that offer attractive potential and where projected value
appreciation will be fastest.

In March 31, 2008, Ayala Land completed the sale of 100% of its equity shareholdings in three wholly-
owned subsidiaries to Megaworld Corporation. The subsidiaries jointly own and operate a public parking
facility in Ayala North, Makati CBD. The properties are considered non-strategic assets.

In a disclosure to the SEC dated August 27, 2009, ALI and the NHA signed a Joint Venture Agreement
to develop the 29.1-hectare North Triangle Property in Quezon City as a priming project of the
government and the private sector. The joint venture represents the conclusion of a public bidding
process conducted by the NHA which began last October 3, 2008.

ALI’s proposal, which has been approved and declared by the NHA as compliant with the Terms of
Reference of the public bidding and the NEDA Joint Venture Guidelines, features the development of a
new CBD in Quezon City. The CBD will be developed as the Philippines’ first transit-oriented mixed-
use CBD that will be a new nexus of commercial activity. The proposal also aims to benefit the NHA in
achieving its mandate of providing housing for informal settlers and transforming a non-performing asset
14
into a model for urban renewal. The development will also generate jobs and revenues both for both
local and national governments.

ALI’s vision for the North Triangle Property is consistent with the mandate of the Urban Triangle
Development (TriDev) Commission to rationalize and speed up the development of the East and North
Triangles of Quezon City into well-planned, integrated and environmentally balanced, mixed-use
communities. The joint venture also conforms with the NHA’s vision of a private sector-led and managed
model for the development of the property, similar to the development experience in Fort Bonifacio.

The total project cost is estimated at P65 billion, inclusive of future development costs and the current
value of the property, which ALI and the NHA will contribute as their respective equity share in the joint
venture. ALI expects to start development within two years.

In March 2010, Ayala Land signed a 35-year lease agreement with the Pison group for a 2-hectare
property in Iloilo City that will be used for the development of BPO buildings.

In April 2010, the Company through wholly-owned subsidiary Amaia signed a joint-development
agreement (“JDA”) with Eton Properties Inc. for the development of a 4-hectare property in Calamba,
Laguna that will form part of Amaia Scapes in Laguna. In addition, Avida also signed a JDA with the
Philippine National Bank for the development of a 2.3-hectare property along EDSA corner Reliance
and Mayflower Sts. in Mandaluyong City into a residential complex.

As reported in the SEC Form 17-Q dated November 9, 2010, the Company announced a 30-year lease
contract agreement signed with Ellimac Prime Holdings (Puregold and S&R Stores Group) for the
development of a 6-hectare property in Fairview, Quezon City.

In a disclosure to the SEC, PSE, and PDEx dated 10 February 2011, the Board of Regents of the
University of the Philippines (U.P.) awarded to the Company the lease contract for the development of
a 7.4-hectare property at the U.P. Diliman East Campus, also known as the U.P. Integrated School
(UP-IS) property along Katipunan Avenue in Quezon City. The Company signed a 25-year lease
contract for the property, with an option to renew said lease for another 25 years by mutual agreement.

The project will involve the construction of a retail establishment with 63,000 sqm of available gross
leasable area (GLA) and a combination of headquarter-and-BPO-office type building with an estimated
8,000 sqm of GLA.

In a disclosure to the SEC, PSE and Philippine Dealing & Exchange Corporation dated March 7, 2011,
Ayala Land, Ayala Corporation and The Rohatyn Group (“TRG”), an emerging markets-focused private
investment firm, completed an exchange of ownership interests in ARCH Capital Management Co., Ltd
(“ARCH Capital”) and ARCH Capital Asian Partners, G.P. (a Cayman Islands company).

Ayala Land and Ayala Corporation, as sponsors of ARCH Capital, co-founded the investment
management firm in 2006 together with Richard Yue. The exchange of ownership interest will result in
TRG acquiring Ayala Land’s 17% stake and Ayala Corporation’s 33% interest, with Richard Yue
retaining his current 50% interest in ARCH Capital. The completed exchange of ownership interests will
leave the activities, management, focus, and shareholder structure of the ARCH Capital Fund
unchanged, with Ayala Land retaining its current 8% stake in the Arch Capital Fund. Arch Capital Fund
has existing projects in India, Thailand and China.

In another disclosure dated February 25, 2011, the Company and its subsidiary, Alveo Land Corp.,
have also entered into an agreement with Philippine Racing Club, Inc. to jointly pursue the development
of the 21-hectare property located in Barangay Carmona, Makati City, more commonly known as the
former “Sta. Ana Racetrack”, subject to the fulfillment of certain closing conditions agreed upon by the
parties. The project is intended as a mixed-use development consisting of residential, retail, and office
components and will form part of the Company’s ongoing developments in the City of Makati.

Last July 2011, the Provincial Government of Negros Occidental (“PGNO”) and Ayala Land Inc. have
completed successful negotiations for the development of the PGNO’s 7.7 hectare property located in
San Juan St., North Capitol Road, Bacolod City (the “Provincial Capitol Property”).An investment of
approximately P6.0 billion is estimated by Ayala Land for the planning and construction of an integrated
mixed-use civic and commercial district that will combine the center of government with commercial and
residential uses, making the growth center of Metro Bacolod and Negros Occidental – the Capitol Civic
Center – a one of a kind convergence of business community and government.

15
In our disclosure dated 17 September 2012, we reiterated that the deed of sale and contract of lease
for the Bacolod property require COA approval for the transaction to proceed.

In our disclosure dated 09 July 2013, we clarified that Gov. Maranon wrote a letter addressed to Ayala
Land dated 20 June 2013, informing the Company of the Commission on Audit’s (COA’s) decision to
approve the Deed of Conditional Sale and render a favorable ruling on the Contract of Lease between
the Province and Ayala Land, Inc. In response to Gov. Maranon’s letter, the Company clarified that is
now open to proceed with discussions on the Bacolod Capitol project but remain concerned with the
pending legal case on the said property as this may compromise Ayala Land’s long-term development
plans for the property and the Province of Negros as a whole.

On November 2011, BellaVita Land Corp. (formerly South Maya Ventures, Corp.), a subsidiary of Ayala
Land, Inc., operating under the brand name BellaVita – the Company’s 5th residential brand – launched
its first residential subdivision project in December 2011 in a 13.6-hectare property in General Trias,
Cavite. The site is highly accessible from different routes and is strategically located at the center of
schools, places of work, public transportation terminals and commercial destinations.

Phase 1 of the project will involve the development of 602 residential units within a 5.4-hectare parcel
of land inside the property. Lot sizes will range from 34-65 sqm with a floor area of 21-23 sqm. Average
prices are between P400,000.00 to P450,000.00 per unit. The project will have an estimated project
cost of P250 million and is expected to be completed by 2013.

On November 23, 2011, the Company and Mitsubishi Corporation (“MC”) of Japan announced that they
have formalized a partnership to jointly engage in operations that will promote increased energy
efficiency in the Philippines. The initiatives of the joint-venture partnership will be conducted through
Philippine Integrated Energy Solutions, Inc. (PhilEnergy), which will be owned 60% by ALI and 40% by
MC.

In 2011, Philenergy has already allocated an investment of close to a billion pesos for the construction
two DCS plants which will serve the needs of the Ayala Center redevelopment in Makati and the
Alabang Town Center. The Company is currently planning other DCS projects in Cebu, Davao,
Cagayan de Oro, and Quezon City and will also tap into the large domestic and even regional market
of facilities that require energy-saving solutions.
In a further disclosure to the SEC, Ayala Land signed a Joint Venture Agreement with Alsons
Development and Investment Corporation (ALDEVINCO) for 25-hectare property in Lanang, Davao to
be developed into a mixed-use, fully-integrated community.

In August 2012, the Group won the public bidding for the purchase of the 74-hectare Food Terminal,
Inc. (FTI) property in Taguig. The bid was conducted in accordance with the Asset Specific Bidding
Rules dated July 4, 2012 and in accordance with the provisions of Executive Order No. 323. The
Group’s bid was P24.3 billion.

In October 2012, the Company entered into a Purchase Agreement wherein the Seller (FTI) agrees to
sell, convey, assign and transfer and deliver to the buyer, and the buyer agrees to purchase and acquire
from the seller, all of the seller’s rights and interests in the property. The property is designed to be a
mixed-use development and will be transformed into a new business district that will serve as Metro
Manila’s gateway to the South.

On October 2, 2012, AHRC, a wholly-owned subsidiary of the Company, entered into an agreement to
acquire the interests of Kingdom Manila B.V., an affiliate of Kingdom Hotel Investments (KHI), and its
nominees in KHI-ALI Manila Inc. (now renamed AMHRI) and 72,124 common shares in KHI Manila
Property Inc. (now renamed AMHPI).

AMHRI and AMHPI are the project companies for the Fairmont Hotel and Raffles Suites and
Residences project in Makati which opened last December 2012. A total of P2.4 billion was paid to
acquire the interests of KHI in AMHRI and AMHPI.

In 2013, the Company finalized its purchase price allocation. Changes to the fair market values of the
assets acquired and liabilities assumed noted are retroactively applied in the 2012 balances.

APPCo owns BPO buildings in Makati, Quezon City and Laguna, with a total leasable area of
approximately 230,000 square meters. This acquisition is aligned with the Company’s thrust of
expanding its office leasing business and increasing its recurring income.

16
In 2006, the Company signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a BPO office building in Dela Rosa Street and to purchase the existing
PeopleSupport Building.

APPHC, the joint-venture company formed, is 60% owned by the Company. APPHC owns 60% interest
in APPCo. The remaining 40% interest in both APPHC and APPCo are split evenly between MIL and
FIL. APPHC and APPCo are joint ventures by the Company, MIL, and FIL.

On December 8, 2008, the Company acquired from FIL its 20% ownership in APPHC and APPCo. This
resulted in an increase in the Company’s effective ownership interest in APPHC from 60% to80% and
APPCo from 36% to 68%, thereby providing the Company with the ability to control the operations of
APPHC and APPCo following the acquisition. Accordingly, APPHC and APPCo’s financial statements
are consolidated on a line-by-line basis with that of the Group as of December 31, 2008.

On November 16, 2011, the SEC approved the merger of APPHC and APPCo, with APPCo as the
surviving entity. The merger was meant to streamline administrative processes and achieve greater
efficiency. From the perspective of the Company, the merger did not affect its effective interest (68%)
in the merged entity.

On April 15, 2013, the Company has entered into a Sale and Purchase Agreement with Global
Technologies International Limited (GTIL) to acquire the latter’s 32% stake in APPCo for P3,520.0
million. Prior to the acquisition, the Company has 68% effective interest in APPCo. The carrying amount
of the non-controlling interest is reduced to nil as APPCo became wholly owned by the Company. The
difference between the fair value of the consideration paid and the amount by which the non-controlling
interest is adjusted is recognized in equity attributable to the Company amounting to P2,722.6 million.

On April 16, 2013, CPVDC (a subsidiary of CHI) acquired the 60% interest of the Company in AiO for
a cash consideration of P436.2 million. AiO was previously 40%-owned by CPVDC and60%-owned by
the Company. This transaction allows the Company to consolidate into CPVDC the development and
operations of BPO offices in Cebu and businesses related thereto, which should lead to value
enhancement, improved efficiencies, streamlined processes and synergy creation among the Company
and its subsidiaries. This is also consistent with the thrust of the CHI group to build up its recurring
income base.

The acquisition resulted to AiO becoming a wholly owned subsidiary of CPVDC. Both AiO and CHI are
under the common control of the Company. As a result, the acquisition was accounted for using the
pooling of interests method. The transaction has no effect on the carrying amounts of the Group’s assets
and liabilities.

On October 31, 2013, the Group Company acquired a 55% interest in TPEPI for a consideration
ofP550.0 million. The acquisition will allow the Group to consolidate its businesses resulting in improved
efficiencies and synergy creation to maximize opportunities in the Cebu real estate market. The
transaction was accounted for as an asset acquisition. The excess of the Group’s cost of investment in
TPEPI over its proportionate share in the underlying net assets at the date of acquisition was allocated
to the “Investment properties” account in the consolidated financial statements. This purchase premium
shall be amortized upon sale of these lots by TPEPI.TPEPI’s underlying net assets acquired by the
Group as of date of acquisition consists of cash in bank, input VAT and investment properties amounting
to P550.0 million.

Various Diversification/new product lines introduced by the Company during the last three years
Economic Housing
In 2010, Ayala Land entered into the economic housing segment with the launch of AmaiaScapes in
Laguna under the Company’s subsidiary Amaia Land Corp. carrying the brand Amaia.This segment is
expected to provide a steady end-user demand in the long-term as one-third of the estimated 18 million
Filipino households and majority of the almost four million national housing backlog units belong to this
segment.

Socialized Housing
In 2011, the Company’s 5th residential brand BellaVita, which will cater to the socialized housing
segment, launched its first residential subdivision project in a 13.6-hectare property in General Trias,
Cavite. The site is highly accessible from different routes and is strategically located at the center of
schools, places of work, public transportation terminals and commercial destinations

17
Hotels and Resorts
Ayala Land also ventured into eco-tourism through the wholly-owned subsidiary, Ten Knots Group, who
owns and manages the world-famous El Nido Resorts in Palawan.

In addition, the Company is successfully operating four (4) Seda hotels in the country; Cagayan De Oro,
Davao, BGC and Nuvali. Seda is positioned as a businessman’s hotel (formerly Kukun) and caters to
the increasing number of business travelers into the country.

Hospitals/Clinics
Ayala Land entered into a strategic partnership with the Mercado Group in July 2013 to establish
hospitals and clinics located in the Company’s integrated mixed-use developments. The Company will
enhance its communities with the introduction of healthcare facilities under the QualiMed brand. In
2014, QualiMed opened three (3) clinics in Trinoma, Fairview Terraces, McKinley Exchange Corporate
Center, and QualiMed Women’s and Children’s Hospital in Atria Park, Iloilo. Qualimed is on track on
the target to grow the hospitals and clinics 10 each till 2020.
Convenience Stores
SIAL CVS Retailers, Inc., a joint venture entity between Varejo Corporation and Specialty Investments,
Inc. (wholly-owned subsidiaries of Ayala Land, Inc. and Stores Specialists, Inc., respectively) signed an
agreement with FamilyMart Co, Ltd and Itochu Corporation to tap opportunities in the convenience store
business. The first FamilyMart store was unveiled last April 7, 2013 at Glorietta 3 in Makati. A total of
87 FamilyMart stores are in operation as of end 2014.

Department Stores
Varejo Corporation and Specialty Investments, Inc. (wholly-owned subsidiaries of Ayala Land, Inc. and
Stores Specialists, Inc., respectively) formed SIAL Specialty Retailers, Inc. to develop and operate
department stores in ALI’s mall developments. The first Wellworth branch opened in March 2014 at
Fairview Terraces in Quezon City. The second branch will open Q2 2015 at UP TownCenter also in
Quezon City.

Supermarkets
ALI Capital Corporation (formerly Varejo Corporation), a subsidiary of Ayala Land, entered into a joint
venture agreement with Entenso Equities Incorporated, a wholly-owned entity of Puregold Price Club,
Inc., to develop and operate mid-market supermarkets for some of Ayala Land’s mixed-use projects.
The first supermarket will open in the 3rd quarter of 2015 at UP Town Center. The Company expects
to roll out 3 mid-brand supermarkets per year.

Other Services
Philenergy operates the two (2) district cooling system (DCS) plants which serve the needs of the Ayala
Center redevelopment in Makati and the Alabang Town Center. The Company is currently planning
other DCS projects in Cebu, Davao, Cagayan de Oro, and Quezon City and will also tap into the large
domestic and even regional market of facilities that require energy-saving solutions.

Competition
Ayala Land is the only full-line real estate developer in the Philippines with a major presence in almost
all sectors of the industry. Ayala Land believes that, at present, there is no other single property
company that has a significant presence in all sectors of the property market. Ayala Land has different
competitors in each of its principal business lines.

With respect to its mall business, Ayala Land’s main competitor is SM Prime whose focus on mall
operations gives SM Prime some edge over the Company in this line of business. Nevertheless, Ayala
Land is able to effectively compete for tenants primarily based on its ability to attract customers -- which
generally depends on the quality and location of its shopping centers, mix of tenants, reputation as a
developer, rental rates and other charges.

For office rental properties, Ayala Land sees competition in smaller developers such as Kuok Properties
(developer of Enterprise Building), Robinsons Land (developer of Robinsons Summit Center) and non-
traditional developers such as the AIG Group (developer of Philam Towers) and RCBC (developer of
RCBC towers). For BPO office buildings, Ayala Land competes with the likes of Megaworld and
Robinsons Land. Ayala Land is able to effectively compete for tenants primarily based upon the quality
and location of its buildings, reputation as a building owner and the quality of support services provided
by its property manager, rental and other charges.

With respect to residential lot and condominium sales, Ayala Land competes with developers such as
Megaworld, DMCI Homes, Robinsons Land, and SM Development Corporation. Ayala Land is able to
18
effectively compete for purchasers primarily on the basis of reputation, price, reliability, and the quality
and location of the community in which the relevant site is located.

For the middle-income/affordable housing business, Ayala Land sees the likes of SM Development
Corp, Megaworld, Filinvest Land and DMCI Homes as key competitors. Alveo and Avida are able to
effectively compete for buyers based on quality and location of the project and availability of attractive
in-house financing terms.

For the economic housing segment, Amaia competes with Camella Homes, DMCI Homes, Filinvest,
Robinsons Land and SM Development Corporation.

BellaVita, a relatively new player in the socialized housing market, will continue to aggressively expand
its geographical footprint with product launches primarily located in provincial areas.

Suppliers
The Company has a broad base of suppliers, both local and foreign. The Company is not dependent
on one or a limited number of suppliers.

Customers
Ayala Land has a broad market base including local and foreign individual and institutional clients. The
Company does not have a customer that will account for twenty percent (20%) or more of its revenues.

Transactions with Related Parties


The Company and its subsidiaries (the “Group”), in their regular conduct of business, have entered into
transactions with associates and other related parties principally consisting of advances and
reimbursement of expenses, purchase and sale of real estate properties, construction contracts, and
development, management, underwriting, marketing, leasing and administrative service agreements.
Sales and purchases of goods and services to and from related parties are made on an arm’s length
basis and at current market prices at the time of the transactions.

However, no other transaction, without proper disclosure, was undertaken by the Group in which any
director or executive officer, any nominee for election as director, any beneficial owner of more than 5%
of the Company’s outstanding shares (direct or indirect) or any member of his immediate family was
involved or had a direct or indirect material interest.

ALI employees are required to promptly disclose any business and family-related transactions with the
Company to ensure that potential conflicts of interest are surfaced and brought to the attention of
management.

Government approvals/regulations
The Company secures various government approvals such as the ECC, development permits, license
to sell, etc. as part of the normal course of its business.

Employees
Ayala Land - parent company has a total workforce of 498 regular employees as of December 31,
2014. The breakdown of the ALI - Parent Company employees according to type is as follows:

Senior Management 26
Middle Management 224
Staff 248
Total 498

Employees take pride in being an ALI employee because of the company’s long history of bringing high
quality developments to the Philippines. With the growth of the business, career advancement
opportunities are created for employees. These attributes positively affect employee engagement and
retention.

The Company aims that its leadership development program and other learning interventions reinforce
ALI’s operating principles and provide participants with a set of tools and frameworks to help them
develop skills and desired qualities of an effective leader. The programs are also venues to build
positive relations and manage networks within the ALI Group.

ALI has a healthy relation with its employees’ union. Both parties openly discuss employee concerns
without necessity of activating the formal grievance procedure.
19
Further, employees are able to report fraud, violations of laws, rules and regulations, or misconduct in
the organization thru reporting channels under the ALI Business Integrity Program.

Risks
Ayala Land is subject to significant competition in each of its principal businesses. Ayala Land competes
with other developers and developments to attract land and condominium buyers, shopping center and
office tenants, and customers of the retail outlets, restaurants, and hotels and resorts across the
country.
However, Ayala Land believes that, at present, there is no single property company that has a significant
presence in all sectors of the property market.

High-End, Middle-Income, Affordable Residential, and Economic and Socialized Housing


Developments
With respect to high-end and middle-income land and condominium sales, Ayala Land competes for
buyers primarily on the basis of reputation, reliability, price and the quality and location of the community
in which the relevant site is located. For the affordable, economic and socialized housing markets,
Ayala Land competes for buyers based on quality of projects, affordability of units and availability of in-
house financing. Ayala Land is also actively tapping the overseas Filipino market.

Shopping Center, Office Space and Land Rental


For its shopping centers, Ayala Land competes for tenants primarily based on the ability of the relevant
shopping center to attract customers - which generally depend on the quality and location of, and mix
of tenants in, the relevant retail center and the reputation of the owner of the retail center - and rental
and other charges. The market for shopping centers has become especially competitive and the
number of competing properties is growing. Some competing shopping centers are located within
relatively close proximity of each of Ayala Land's commercial centers.
With respect to its office rental properties, Ayala Land competes for tenants primarily based on the
quality and location of the relevant building, reputation of the building's owner, quality of support
services provided by the property manager, and rental and other charges. The Company is addressing
the continuing demand from BPOs by providing fully integrated and well maintained developments (high
rise or campus facility) in key locations in the country.

Hotels and Resort Operations


The local hotel and resort sector is largely driven by foreign and local travel for leisure or business
purposes. Any slowdown in tourism and business activity due to global financial and local political
turmoil and security concerns could potentially limit growth of the Company's hotels and resorts.

Construction
Ayala Land's construction business is benefiting from the improved performance of the construction
industry, particularly from an uptick in development activities mostly from the residential and retail
sectors. Any slowdown in the construction business could potentially cap growth of the Company's
construction arm.

Other risks that the company may be exposed to are the following:
 Changes in Philippine and international interest rates
 Changes in the value of the Peso
 Changes in construction material and labor costs, power rates and other costs
 Changes in laws and regulations that apply to the Philippine real estate industry
 Changes in the country's political and economic conditions
 Product and service quality and safety issues that go with the volume and pace of expansion
 Frequent occurrence of natural disasters affecting our developments

To mitigate the above mentioned risks, Ayala Land shall continue to adopt appropriate risk management
measures as well as conservative financial and operational controls and policies to manage the various
business and operational risks it faces.

Working Capital
Ayala Land finances its working capital requirements through a combination of internally-generated
cash, pre-selling, joint ventures and joint development agreements, borrowings and proceeds from the
sale of non-core assets and installment receivables.

20
Domestic and Export Sales
The table below illustrates the amounts of revenue, profitability, and identifiable assets attributable to
domestic and foreign operations for the years ended December 31, 2014, 2013 and 2012: (in P = ’000)

2014 2013 2012


Consolidated revenues
Domestic 95,197,046 81,523,070 59,932,162
Foreign - - -

Net operating income


Domestic 35,801,433 29,683,884 22,906,452
Foreign - - -

Net income (Attributable to equity holders of Ayala Land)


Domestic 14,802,642 11,741,764 9,038,328
Foreign - - -

Total assets
Domestic 388,944,463 325,473,685 254,115,680
Foreign - - -

INTEGRATED MICROELECTRONICS, INC.

Background and Business


Established in 1980, Integrated Micro-Electronics, Inc. (alternately referred to as IMI or “the Company”
in the entire discussion of Integrated Microelectronics, Inc), has grown into a global company offering
core manufacturing capabilities as well as higher value competencies in design, engineering,
prototyping and supply chain management. IMI is a vertically integrated EMS provider to leading global
original equipment manufacturers (“OEMs”) across industries including computing, communications,
consumer, automotive, industrial and medical electronics segments, as well as emerging industries like
renewable energy. IMI also provides power semiconductor assembly and test services.

IMI, a stock corporation organized and registered under the laws of the Republic of the Philippines on
August 8, 1980, has four wholly-owned subsidiaries, namely: IMI International (Singapore) Pte. Ltd. (IMI
Singapore), IMI USA, Inc. (IMI USA), IMI Japan, Inc. (IMI Japan) and PSi Technologies, Inc. (PSi)
(collectively referred to as the “Group”). The Company is 50.92% owned by AYC Holdings, Ltd. (AYC),
a corporation incorporated in the British Virgin Islands and a wholly-owned subsidiary of AC
International Finance Ltd. under the umbrella of Ayala Corporation (AC), a corporation incorporated in
the Republic of the Philippines and listed in the Philippine Stock Exchange (PSE). AC is 49.03% owned
by Mermac, Inc., 10.18% owned by Mitsubishi Corporation and the rest by the public. The registered
office address of the Company is North Science Avenue, Laguna, Technopark, Biñan, Laguna.

The Company was listed by way of introduction in the PSE on January 21, 2010. It has completed its
follow-on offering and listing of 215,000,000 common shares on December 5, 2014.

The Company is registered with the Philippine Economic Zone Authority (PEZA) as an exporter of
printed circuit board assembly (PCBA), flip chip assembly, box build sub-assembly, and enclosure
system, and provider of electronics product design, research and development, product development
outsourcing, and other electronic parts, among others. The Company is also engaged in the business
of providing test development and systems integration services and distributing related products and
equipment and related services.

IMI Singapore was incorporated and is domiciled in Singapore. It is engaged in the procurement of raw
materials, supplies and provision of customer services. Its wholly-owned subsidiary, Speedy-Tech
Electronics Ltd. (STEL), was incorporated and is domiciled also in Singapore. STEL, on its own, has
subsidiaries located in Hong Kong, People’s Republic of China (PRC), and Philippines. STEL and its
subsidiaries (collectively referred to as “STEL Group”) are principally engaged in the provision of
Electronic Manufacturing Services (EMS) and Power Electronics solutions to original equipment
manufacturing (OEM) customers in the consumer electronics, computer peripherals/information
technology, industrial equipment, telecommunications and medical device sectors.

21
On April 16, 2009, IMI Singapore established its Philippine Regional Operating Headquarters (“IMI
International ROHQ” or “IMI ROHQ”). It serves as a supervisory, communications and coordinating
center for the affiliates and subsidiaries of IMI Singapore.

On December 14, 2012, the Directors of STEL approved the assignment of assets and liabilities of its
subsidiary, Speedy-Tech (Philippines), Inc. (STPH), to the Parent Company. On June 13, 2013, the
Board of Directors (BOD) of the Company authorized the transfer of all rights, title and ownership over
all of the assets, and assumption of liabilities and obligations of STPH as of December 31, 2012. The
Deed of Assignment was executed on July 30, 2013.

On July 29, 2011, the Company and EPIQ NV executed a Share Purchase Agreement (SPA) wherein
EPIQ NV agreed to sell to Cooperatief IMI Europe U.A. (Cooperatief), an indirect subsidiary of the
Parent Company, all of its shares in its subsidiaries, Integrated Micro-Electronics Bulgaria EOOD
(formerly EPIQ Electronic Assembly EOOD) (IMI BG), Integrated Micro-Electronics Czech Republic
s.r.o. (formerly EPIQ CZ s.r.o.) (IMI CZ) and Integrated Micro-Electronics Mexico, S.A.P.I. de C.V.
(formerly EPIQ MX, S.A.P.I de C.V.) (IMI MX) (collectively referred to as “IMI EU/MX Subsidiaries”) in
exchange for €43.45 million ($59.77 million) consisting of the Company’s 200 million common shares
with a value of €24.37 million ($28.81 million), and €19.08 million ($27.32 million) to be paid by the
Company in cash, out of which €4.83 million ($6.92 million) will be paid upfront and the balance to be
paid on a deferred basis.

The aggregate purchase consideration of €43.45 million is broken down into: (1) payment of
approximately €11.73 million ($16.80 million) to EPIQ NV in consideration of assumption of the
receivables of EPIQ NV from the IMI EU/MX Subsidiaries that was transferred to Cooperatief; and
(2) payment of approximately €31.72 million ($39.32 million) to EPIQ NV for the purchase of equity
share in the IMI EU/MX Subsidiaries.

IMI EU/MX Subsidiaries design and produce printed circuits and spray casting of plastics, and supply
assembled and tested systems and sub-systems which include drive and control elements for
automotive equipment, household appliances, industrial market and other applications with plastic parts
and electronic components. IMI EU/MX Subsidiaries also provide engineering, research and
development, and logistics management services.

IMI USA acts as direct support to the Group’s customers by providing program management, customer
service, engineering development and prototype manufacturing services to both North American and
European customers, especially for processes using direct die attach to various electronics substrates.
It specializes in prototyping low to medium PCBA and sub-assembly and is at the forefront of technology
with regard to precision assembly capabilities including, but not limited to, Surface Mount Technology
(SMT), Chip on Flex, Chip on Board and Flip Chip on Flex. IMI USA is also engaged in engineering,
design for manufacturing technology, advanced manufacturing process development, new product
introduction (NPI), direct chip attach and small precision assemblies.

IMI Japan was registered and is domiciled in Japan to serve as IMI’s front-end design and product
development and sales support center. IMI Japan was established to attract more Japanese OEMs to
outsource their product development to IMI.

PSi is a power semiconductor assembly and test services (SATS) company serving niche markets in
the global power semiconductor market. It provides comprehensive package design, assembly and
test services for power semiconductors used in various electronic devices.

PSi owns 40% of PSiTech Realty, Inc. (PSiTech Realty), the holding company of Pacsem Realty, Inc.
(Pacsem Realty), which is a real estate company that acquires, holds, develops and disposes any real
estate or interest acquired.

On June 21, 2012, the Philippine Securities and Exchange Commission (SEC) approved the legal
merger of PSi Technologies Laguna, Inc. and PSi, with the former as the absorbed entity and PSi as
the surviving entity. On the same date, the respective BOD of PSi, Pacsem Realty and PSiTech Realty
authorized the dissolution and liquidation of Pacsem Realty and PSiTech Realty by shortening their
corporate life up to December 31, 2013, subject to the approval of the Philippine SEC. As of February
17, 2015, Pacsem Realty and PSiTech Realty are in the process of completing the Philippine SEC
requirements for dissolution.

22
Operations
Design and Engineering Solutions
Partnering with IMI allows a complete and successful product development. This is made possible by
IMI’s capability to design and develop complete products and subsystems, analyze product design and
materials for costs reduction through value and profit engineering, and develop solutions for cost-
effective production and fast time-to-market while safeguarding intellectual property. IMI’s product
development and engineering service offerings include Contract Design and Joint Development
Solutions, Advanced Manufacturing Engineering (AME), Test and Systems Development, and
Reliability/Failure Analysis and Calibration Quality Test solutions.

Supply Chain Solutions


IMI’s supply chain management solutions are equipped to help partners reduce the risk brought about
by a volatile global market. The three-pronged approach include a systematic Order Management
Solution, a dynamic Supply Chain Strategy hinged on Supplier Managed Inventory, Continuous
Replenishment and Buffer Stock Programs, and a comprehensive Cost Management Solution that
revolves around regular price reviews and negotiations with leading materials strategic supplier-
partners, distributors and manufacturers.

Manufacturing Solutions
IMI’s comprehensive manufacturing experience allows a prospective client to leverage its strength in
RoHS-compliant and cleanroom manufacturing process, complex manufacturing using consigned
equipment and materials, complete turnkey manufacturing, and ERP-based planning. IMI has the
essential infrastructure equipment, manpower and quality systems to assure quick start of operations
and turnaround time. These include: PCBA and FCPA Assembly (Flexible PCBA, Aluminum PCBA,
Ceramic PCBA, Flip Chip On Flex, Chip-On-Board, Chip-On-flex, Chip-On-Glass, Hybrid Module
PCBA), Automated Through-Hole Assembly, PCBA with Multiple BGA SMT - Automated Manufacturing,
Complete Box build Solutions, Sub Assembly services, Component Assembly and Manufacturing of
Enclosure Systems.

Business Models
IMI recognizes the uniqueness of each customer’s requirements. To satisfy specific requests, IMI offers
flexible business models that allow it to build the perfect assembly for its client’s manufacturing
requirements.

The “Standard” and “Semi-custom” business models pertain to IMI’s PCBA processes. IMI invests in
SMT lines which support multiple customer requirements. Back-end and box build processes are also
set-up depending on customer requirements.

The “Custom” Business Model gives the client a free hand in designing the systems by offering a
dedicated facility manned by an independent and exclusive organization that will build the system from
ground up. With quality structures and operational procedures compatible with the client’s systems,
IMI’s line serves as the client’s extension plant, assuring that all the parts and processes are customized
to the client’s particular needs.

Capabilities and Solutions


IMI’s capabilities allow it to take on the specific outsourcing needs of its customers, providing them with
flexible solutions that encompass design, manufacturing, and order fulfilment. It develops platforms to
customize solutions in response to its customers’ unique requirements. Its platforms in areas like short-
range wireless systems, embedded systems, and sensors and imaging technology represent
capabilities to manufacture products. New manufacturing capabilities are developed by IMI’s AME
group. Its expertise includes immersion silver process, pre-flow underfill process, thermally enhanced
flip chip technology, traceless flip chip technology, and flip chip on flex assembly, among others. IMI
has a complete range of manufacturing solutions – from PCBA to complete box build. Through its
flexible, efficient, and cost-effective end-to-end EMS solutions, IMI gives OEMs the luxury of focusing
on their core competencies of technology R&D and brand marketing.

Subsidiary in Power Semiconductor Assembly and Test


IMI through its subsidiary, PSi, provides outsourced power semiconductor assembly and test services
for legacy packages, power QFNs, and power modules.

Global Materials and Supply Chain Management


IMI will continue to strengthen and enhance its supply chain management capabilities through its global
scale of operations which it believes will enable it to achieve greater bargaining power with suppliers
and enable it to negotiate for lower costs and better quality of raw materials.
23
IMI’s turnkey capabilities involve major commodities for direct/indirect materials:
passive/active/mechanical/electro-mechanical components, existing vendor base for over 36,000 line
items, and Global sourcing in Asia, US and Europe of over 200 major and strategic suppliers from over
2,000 suppliers listed in our database. IMI is not or is not expected to be dependent upon one supplier
for raw materials or other items. IMI also has Vendor Partnership Programs to leverage for the most
competitive cost and engaged the supply base on vendor qualification, certification and development.

With regard to inbound and outbound logistics, IMI are partners with the best in the industry. The major
lines inbound are Singapore, Japan, Hong Kong, Taiwan, Malaysia, Thailand, Germany, and the U.S..
Major lines outbound are U.S., Germany, Malaysia, Hong Kong, Israel, Switzerland, Vietnam, UK,
Japan, Singapore, and France.

IMI’s warehousing capabilities include housing all direct and indirect materials, management of internal
as well as third party logistics provider, satellite warehouses in other IMI plants and under the mySAPTM
ERP System. Its mission is to offer strategic and competitive Supply Chain Management for complete
order fulfilment of its Customers.

Product Capabilities
IMI has experience in working with some of the world’s leading companies in the following products:

Automotive Electronics
 Automotive Camera
 Electronic Wiper System
 PCBA for Electronic Stability Program (ESP)
 Tire Pressure Sensor PCBA
 Car Windshield Temperature and Humidity Sensor
 Electronic Power Steering (EPS)
 Rotor Position Sensor (RPS)
 PCBA for Headlight
 Switch Controller for Main Light
 Communication Power PCBA
 Body Control Module (BCM)
 Antenna Receiver / DAB Tuner
 Powertrain Control Solutions
 Semiconductors used in Electric Drive/ Hybrid Electric Vehicles
 Fuel Management
 Pump Driver
 Steering Wheel Control Device
 Cockpit Control Device, Audio Processor
 Daytime Running Light
 Interior Plastic Parts
 Front lights
 A/C control panels
 Multi-functional switches
 HVAC
 Mirror control units
 Drives and ECU
 Headlamp
 Door system, seating, closures
 Digital antenna
 Video system

Industrial Electronics
 Automated Meter Reading (AMR)
 Security Device
 Electronic Door Access System
 Smart Card
 Point Of Sales System
 Printer Control Board
 Power Amplifier
 DC-DC Power Converter
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 Engine Controllers
 Welding Machine Inverter
 Motor Drivers for Conveyor
 Fan Motor Control Board
 Computer Numerical Control (CNC) Control Board
 Main power supplies for LED street lighting
 Modules for renewable energy generation, transmission and conversion
 Solar Power Power Regulator
 Mobile Base Station Antenna
 Semiconductor Test Handling Equipment
 Control module for door lock system
 Power supply for printer
 ATM
 Switches for automated conveyor
 Garage door system
 LCD modules for heating system application
 LED lighting
 Card readers
 Aircon damper, multifunction switches
 Access control tags
 Fire alarm system
 Dosimeter
 Sensors for substation
 LCD controls
 Zigbee control unit
 Printer Point Of Sales System (POS)
 Gaming Machine
 Security management
 IGBT power module

Medical Electronics
 Flat Panel Imaging Equipment
 Auto Body Contouring Imaging Equipment
 Dental Imaging System
 Defibrillator ventillator
 Concealed Hearing Aid
 Biomedical and Laboratory Equipment
 Centrifuge Control Board
 Fitness Equipment Control Board
 Medical Instrument Power Supply
 DNA Analyzers
 COF, Medical X-Ray Detectors
 Medical Instrument Power Supply
 Radiation Dosimeter
 Finger Print Sensor

Telecommunications
 Back Panel for Telecommunication Board
 Fiber to the “X” (FFTx) systems
 Booster Amplifier
 GPON (Gigabit Passive Optical Network) Systems
 Wireless Security System
 Base Station Power Supply
 Digital Station Control Board
 Power Transistors for amplifiers in cellular base stations
 Power Conversion ICs in adapters and chargers for cell phones and cordless phones
 DC port and USB port protection for cell phones and satellite radio peripherals
 Communication infrastructure equipment
 Interface board for mobile phone

25
Computing and Storage Devices
 CD/Combo Drive
 DVD Drive
 Blu-Ray Disc Drive
 Hard Disk Drive
 Solid State Drives
 Printer Sensor
 Printer Control Board
 Multi-Function Copier Machine
 DVD Recorder Power Supply
 Power Supplies for Servers, PCs, Notebooks, and Netbooks, DVD recorder
 Over-voltage protection for HDD and DC port protection for keyboard mouse
 Flip Chip
 Cooling Fan Motor
 Thin Client System

Consumer Electronics
 Hybrid IC
 Gas Ignitor and Re-Ignitor
 Air-Conditioning (HVAC) Controller
 Power Management and Home Appliance for Lighting Control
 Refrigerator and Cooker Hood Control Board
 Projector Lamp Drivers
 Household Metering Device
 Bluetooth Headset
 Electric Drive Control for home appliances
 Main Power Supply for Flat-panel TV
 Power Supply for game consoles and entertainment electronics
 High Voltage Power Conversion ICs in adapters and chargers for personal electronics
 Garage Door Control
 Programmable Timer
 Pressure Cooker Modules
 Steamer Controller Modules
 Washing Machine controllers
 Coffee Machine
 Control Power module for cooker hood, Human Machine Interface, Air conditioner, refrigerator,
household appliances
 Car audio ejector
 Digital/internet radio module
 Igniter/re-igniter for cooktop
 Lighting remote
 Power driver for digital projectors
 Power supply
 Security solution for handheld merchandise

Power Semiconductor
 Low-Medium Power Packages:
 TO 220 Fpak 2/3L; TO 220 2/3/5/7L, SOT 82
 PowerFlex 2/3/5/7L, TO252 / TO251, TO 263 3L;
 3 x 3 mm QFN, 3.3 x 3.3mm QFN ; 5x6mm QFN
 Medium-High Power Packages:
 SOT 93 3L, TO 247 3L, TO 264 3/5L, SOT 227
 Standard Packages - SP3, SP4, SP6
 DRF, ARF
 Small Signal Packages - SOT 223 3L, TO 220 2/3/5/7L

Renewable Energy
 Photovolatics (PV) Panel Assembly
 Photovolatics (PV) Co-Design & Development
 Photovolatics (PV) Panel High Volume Manufacturing
 Photovolatics (PV) Panel Platform
26
 Photovolatics (PV) Inverter Platform
 Inverter Electronics

With regard to emerging product capabilities, IMI is pursuing OEMs in the Photovolatics (PV) or Solar
Energy and Sensor and Imaging fields.

Except as otherwise disclosed as above, there are no other publicly-announced new products or
services during the year.

Human Resources
The Company has a total workforce of 15,424 employees as of December 31, 2014, shown in the
following table:

Job Groups Total Philippines China/ USA Japan Europe


Singapore
Managers 394 158 160 6 5 65
Supervisors 1,553 558 712 - - 283
Rank-and-File 1,967 892 623 - - 452
Technicians 1,410 378 1,012 - - 20
Operators 10,100 4,821 3,365 - - 1,914
TOTAL 15,424 6,807 5,872 6 5 2,734

The relationship between management and employees has always been of solidarity and collaboration
from the beginning of its operations up to the present. The Company believes that open communication
and direct engagement between management and employees are the most effective ways to resolve
workplace issues.

IMI has existing supplemental benefits for its employees such as transportation and meal subsidy, group
hospitalization insurance coverage and non-contributory retirement plan.

The Company has or will have no supplemental benefits or incentive arrangements with its employees
other than those mentioned above.

Strategic Partnerships
An active strategic partnership is that with Renewable Energy Test Center, a California-based
engineering services, test and certification provider for PV and renewable energy products. This
partnership was forged in 2009. With IMI Energy Solutions, the partnership aims to offer PV services
including PV panel development, panel prototyping, certification, and mass production. IMI Energy
Solutions focuses on solar panel development and prototyping, while RETC handles product testing
and certification. RETC is right next door to IMI Energy Solutions to ensure fast turnaround time from
prototyping to product certification.

Competition
IMI is an EMS provider to OEM manufacturers in the computing, communications, consumer,
automotive, industrial, and medical electronics segments as well as emerging industries like renewable
energy. Global economy grew by 3.3% in 2014 remain unchanged from 2013 and is estimated to rise
further at 3.5% in 2015. The global electronics equipment production grew 3.3% in 2014 with China up
by 5% as well. 2015 is seen to have better positive estimates with a 4.6% growth in global production
as Europe leaves recession towards a slow yet progressive rise. Combined EMS and original design
manufacturing (ODM) revenues increased by 6.9% in 2014. Global EMS revenues were estimated to
be up 6.7% in 2014. Leading EMS companies continue to seek more innovation by focusing on higher
margins in non-traditional markets as it faces thinning margins and cost pressures from OEM
customers.

IMI competes worldwide, with focus on Asia (including Japan and China), North America, and Europe.

There are two methods of competition: a) price competitiveness and b) robustness of total solution
(service, price, quality, special capabilities or technology). IMI competes with EMS companies ODM
manufacturers all over the world. Some of its fierce EMS provider competitors include Hon Hai,
Flextronics, and Plexus.

HonHai/Foxconn is a Taiwanese company with annual revenues of US$139 billion in 2014. Foxconn’s
growth has ridden on the coattails of Apple who has been achieving spectacular growth over the last

27
five years. HonHai is a competitor of IMI in the computing and telecommunication infrastructure
markets.

Flextronics is a Singapore-headquartered company with annual revenues of US$26.9 billion in 2014;


its cost structure is very competitive it is vertically integrated as well. Flextronics poses competition to
IMI in the automotive space.

Plexus, U.S.-based, recorded US$2.5 billion revenues in 2014. Plexus is a key EMS player in industrial
and medical sectors, which are target markets of IMI.

IMI is focused on delivering customized solutions of highest quality at reasonable prices. It collaborates
with the customers in finding the right solutions to their problems. IMI even challenges its own systems
and processes if needed. It has a distinct advantage in serving customers who value quality over price
and require complex non-standard solutions. Living up to the flexible expertise brand, IMI is adaptable
to the needs and conditions of its customers. This expertise has propelled IMI onto the current list of
the top 30 EMS providers in the world and earned for IMI several accolades from its customers. IMI
also ranked number 8 among the largest EMS providers in the automotive segment based on 2013
revenues.

Transactions with Related Parties


The Company and its subsidiaries, in their regular conduct of business, have entered into transactions
with associates and other related parties principally consisting of advances, loans, reimbursement of
expenses, various guarantees, construction contract, and management, marketing, and administrative
service agreements. Sales and purchases of goods and services to and from related parties are made
at normal commercial prices and terms.

Risk Factors
The Company’s business, financial condition and results of operation could be materially and adversely
affected by risks relating to the Company and the Philippines.

IMI’s operating results may significantly fluctuate from period to period


There is a risk that the Company’s operating results may fluctuate significantly due to various factors
including but not limited to changes in demand for its products and services, customers’ sales outlook,
purchasing patterns, and inventory adjustments, changes in the types of services provided to
customers, variations in the, volume of products, adjustments in the processes and manner of delivery
of services, as well as alterations to product specifications on account of complexity of product maturity,
the extent to which the Company can provide vertically integrated services for a product. The
Company’s operating result is also affected by the Company’s effectiveness in managing its
manufacturing processes, controlling costs, and integrating any potential future acquisitions, the
Company’s ability to make optimal use of its available manufacturing capacity, changes in the cost and
availability of labor, raw materials, and components, which affect its margins and its ability to meet
delivery schedules, and the ability to manage the timing of its component purchases so that components
are available when needed for production while avoiding the risks of accumulating inventory in excess
of immediate production needs. Fluctuations in operating results may also be experienced by the
Company on account of the advent of new technology and customer qualification of technology
employed in the production, and the occurrence of any changes in local conditions or occurrence of
events that may affect production volumes and costs of production, such as, but not limited to labor
conditions, political instability, changes in law and regulation, economic disruptions or changes in
economic policies affecting flow of capital, entry of competition, substantial rate hikes of utilities required
for production, or force majeure.

The factors identified above and other risks discussed in this section affect the Company’s operating
results from time to time.

Some of these factors are beyond the Company’s control. The Company may not be able to effectively
sustain its growth due to restraining factors concerning corporate competencies, competition, global
economies, and market and customer requirements. To meet the needs of its customers, the Company
has expanded its operations in recent years and, in conjunction with the execution of its strategic plans,
the Company expects to continue expanding in terms of geographical reach, customers served,
products, and services. To manage its growth, the Company must continue to enhance its managerial,
technical, operational, and other resources.

The Company’s ongoing operations and future growth may also require funding either through internal
or external sources. There can also be no assurance that any future expansion plans will not adversely
28
affect the Company’s existing operations since execution of said plans may involve challenges. For
instance, the Company may be required to be confronted with such issues as shortages of production
equipment and raw materials or components, capacity constraints, difficulties in ramping up production
at new facilities or upgrading or expanding existing facilities, and training an increasing number of
personnel to manage and operate those facilities. Compounding these issues are other restraining
factors such as more aggressive efforts of competition in expanding business, volatility in global
economies and market and customer requirements. All these challenges could make it difficult for the
Company to implement any expansion plans successfully and in a timely manner.

In response to a very dynamic operating environment and intense industry competition, the Company
focuses on high-growth/high-margin specialized product niches, diversifies its markets and products,
engages in higher value add services, improves its cost structure, and pursues strategies to grow
existing accounts.

IMI is highly dependent on an industry that is characterized by rapid technological changes


The demand for the Company’s solutions is derived from the demand of end customers particularly for
end-use applications in the computing, communications, consumer automotive, industrial and medical
electronics industries. These industries have historically been characterized by rapid technological
change, evolving industry standards, and changing customer needs. There can be no assurance that
the Company will be successful in responding to these industry demands. New services or technologies
may also render the Company’s existing services or technologies less competitive. If the Company does
not promptly make measures to respond to technological developments and industry standard changes,
the eventual integration of new technology or industry standards or the eventual upgrading of its
facilities and production capabilities may require substantial time, effort, and capital investment.

The Company is focusing on longer life cycle industries such as automotive, industrial and
telecommunication infrastructure to reduce the volatility of model and design changes. The Company
also keeps itself abreast of trends and technology development the electronics industry and is
continuously conducting studies to enhance its technologies, capabilities and value proposition to its
customers. It defines and executes technology road maps that are aligned with market and customer
requirements.

The industry where IMI operates in does not serve, generally, firm or long-term volume purchase
commitments
Save for specific engagements peculiar to certain products and services required, the Company’s
customers do not generally contract for firm and long-term volume purchase. Customers may place
lower-than expected orders, cancel existing or future orders or change production quantities. There are
no guaranteed or fixed volume orders that are committed on a monthly or periodic basis.

In addition, the Company makes significant investment decisions, including determining the levels of
business that it will seek and accept capacity expansion, personnel needs, and other resource
requirements. These key decisions are ultimately based on estimates of customer long-term
requirements. The rapid changes in demand for its products reduce its ability to estimate accurately
long-term future customer requirements. Thus, there is the risk that resource investments are not
optimized at a certain period.

In order to manage the effects of these uncertainties, customers are required to place firm orders within
the manufacturing lead time to ensure delivery. The Company does not solely rely on the forecast
provided by the clients. By focusing on the longer cycle industry segments, the volatility that comes with
rapid model changes is reduced and the Company is able to have a more accurate production planning
and inventory management process.

Buy-back agreements are also negotiated by the Company in the event there are excess inventory
when customer products reach their end-of-life .To the extent possible, the Company’s contract include
volume break pricing, and materials buy-back conditions to taper the impact of sudden cancellations,
reductions, and delays in customer requirements.

IMI may encounter difficulties in connection with its global expansion


The Company’s globalization strategy has transformed it from a Philippines-centric company into a
global network with manufacturing and engineering facilities as well as sales offices in Asia, Europe,
and North America. This global expansion may expose the Company to potential difficulties that include
diversion of management’s attention from the normal operations of the Company’s business, potential
loss of key employees and customers of the acquired companies, physical, legal, cultural, and social
impediments in managing and integrating operations in geographically dispersed locations, lack of
29
experience operating in the geographic market of the acquired business, reduction in cash balance and
increases in expenses and working capital requirements, which may reduce return on invested capital,
potential increases in debt, which may increase operating costs as a result of higher interest payments,
and complexities in integrating acquired businesses into existing operations, which may prevent it from
achieving, or may reduce the anticipated synergy.

The Company’s acquisitions of new companies or creation of new units, whether onshore or offshore,
may also have an immediate financial impact to the Company due to the dilution of the percentage of
ownership of current stockholders if the acquisition requires any payment in the form of equity of the
Company, the periodic impairment of goodwill and other intangible assets, and liabilities, litigations,
and/or unanticipated contingent liabilities assumed from the acquired companies.

If the Company is not able to successfully manage these potential difficulties, any such acquisitions
may not result in material revenue enhancement or other anticipated benefits or even adversely affect
its financial and/or operating condition.

To limit its exposure, the Company performs a thorough assessment of the upside and downside of any
merger or acquisition. Supported by a team which focuses on business development, finance, legal,
and engineering units, the vision, long-term strategy, compatibility with the culture, customer
relationship, technology, and financial stability of the company to be acquired is carefully examined
thorough due diligence to ensure exposures are mitigated through proper warranties. In addition, the
Company looks at acquisitions that are immediately accretive to the P&L of the Company. The decision
is then reviewed and endorsed by the Finance Committee, and approved by the Board. The Company
carefully plans any merger or acquisition for a substantial period prior to closing date. Prior to closing
of transactions, the Company forms an integration team and formulates detailed execution plans to
integrate the key functions of the acquired entity into the Company.

IMI may not be able to mitigate the effects of declining prices of goods over the life cycles of its
products or as a result of changes in its mix of new and mature products, mix of turnkey and
consignment business arrangements, and lower prices offered by competition
The price of the Company’s products tends to decline over the later years of the product life cycle,
reflecting decreased costs of input components, improved efficiency, decreased demand, and
increased competition as more manufacturers are able to produce similar or alternative products. The
gross margin for manufacturing services is highest when a product is first developed but as products
mature, average selling prices of a product drop due to various market forces resulting in gross margin
erosion. The Company may be constrained to reduce the price of its service for more mature products
in order to remain competitive against other manufacturing services providers. This is most apparent in
the automotive segment, where the reduction has historically been observed to occur between the first
two to three years. The Company’s gross margin may further decline to be competitive with the lower
prices offered by competition or to absorb excess capacity, liquidate excess inventories, or restructure
or attempt to gain market share.

The Company is moving towards a higher proportion of contracting under a turnkey production (with
the Company providing labor, materials and overhead support), as compared to those under a
consignment model, indicating a possible deterioration in its margins. The Company will also need to
deploy larger amounts of working capital for turnkey engagements.

To mitigate the effects of price declines in the Company’s existing products and to sustain margins, the
Company continues to improve its production efficiency by increasing yields, increasing throughputs
through LEAN and six sigma manufacturing process. In addition, the Company continuous to leverage
on its purchase base and supplier programs to avail of discounts and reduced costs in component
prices. It also utilizes its global procurement network and supply chain capabilities to reduce logistics
costs for components including inventory levels. The Company also intensifies its effort to contract with
customers with highermargin products most of which involve higher engineering value add and more
complex box build or system integration requirements.

IMI operates in a highly competitive industry


Some of the Company’s competitors in the industry may have greater design, engineering,
manufacturing, financial capabilities, or superior resources than the Company. Customers evaluate
EMS and ODMs based on, among other things, global manufacturing capabilities, speed, quality,
engineering services, flexibility, and costs. In outsourcing, OEMs seek to reduce cost. In addition, major
OEMs typically outsource the same type of products to at least two or three outsourcing partners in
order to diversify their supply risks. The competitive nature of the industry may result in substantial price
competition. The Company faces increasing challenges from competitors who are able to put in place
30
a competitive cost structure by consolidating with or acquiring other competitors, relocating to lower
cost areas, strengthening supply chain partnerships, or enhancing solutions through vertical integration,
among others. The Company’s customers may opt to transact with the Company’s competitors instead
of the Company or if the Company fails to develop and provide the technology and skills required by its
customers at a rate comparable to its competitors. There can be no assurance that the Company will
be able to competitively develop the higher value add solutions necessary to retain business or attract
new customers. There can also be no assurance that it will be able to establish a compelling advantage
over its competitors.

The industry could become even more competitive if OEMs fail to significantly increase their overall
levels of outsourcing. Increased competition could result in significant price competition, reduced
revenues, lower profit margins, or loss of market share, any of which would have a material adverse
effect on the Company’s business, financial condition, and results of operations.

The Company regularly assesses the appropriate pricing model (so as to ensure that it is strategic/value
based or demand based, among others) to be applied on its quotation to existing or prospective
customers. The Company is also strengthening its risk management capabilities to be able to turn some
of the risks (e.g., credit risks) into opportunities to gain or maintain new or existing customers,
respectively. The Company also continues to develop high value-add services that fit the dynamic
markets it serves. It continues to enhance capabilities in design and development, advanced
manufacturing engineering, test and systems development, value engineering, and supply chain
management to ensure an efficient product realization experience for its customers.

In addition, the Company’s size, stability and geographical reach allow it to attract global OEMs
customers that look for stable partners that can service them in multiple locations. This is evidenced by
increasing number of global contracts that the Company is able to develop and have multiple sites
serving single customers.

Focusing on high value automotive (such as those for ADAS and Safety-related, power modules and
electronic control units, among others), industrial and medical segments where strict performance and
stringent certification processes are required, the Company is able to establish a high barrier of entry,
business sustainability and better pricing. Generally, the Company has observed that it is usually difficult
for customers in these industries to shift production as they would have to go through a long lead time
in the certification process. The direction the Company has taken resulted in the rise of the Company’s
ranking in the global and automotive EMS spaces.

IMI may be subject to reputation and financial risks due to product quality and liability issues
The contracts the Company enters into with its customers, especially customers from the automotive
and medical industry, typically include warranties that its products will be free from defects and will
perform in accordance with agreed specifications. To the extent that products delivered by the Company
to its customers do not, or are not deemed to, satisfy such warranties, the Company could be
responsible for repairing or replacing any defective products, or, in certain circumstances, for the cost
of effecting a recall of all products which might contain a similar defect in an occurrence of an epidemic
failure, as well as for consequential damages. Defects in the products manufactured by the company
adversely affect its customer relations, standing and reputation in the marketplace, result in monetary
losses, and have a material adverse effect on its business, financial condition, and results of operations.
There can be no assurance that the Company will be able to recover any losses incurred as a result of
product liability in the future from any third party.

In order to prevent or avoid a potential breach of warranties which may expose the Company to liability,
the Company performs a detailed review and documentation of the manufacturing process that is
verified, audited and signed-off by the customers. In addition, customers are encouraged, and in some
cases, required to perform official audits of the Company’s manufacturing and quality assurance
processes, to ensure compliance with specifications. The Company works closely with customers to
define customer specifications and quality requirements, and follow closely these requirements to
mitigate future product liability claims. The Company also insures itself on product liability and recall on
a global basis.

IMI’s production capacity may not correspond precisely to its production demand
The Company’s customers may require it to have a certain percentage of excess capacity that would
allow the Company to meet unexpected increases in purchase orders. On occasion, however,
customers may require rapid increases in production beyond the Company’s production capacity, and
the Company may not have sufficient capacity at any given time to meet sharp increases in these
requirements. On the other hand, there is also a risk of the underutilization of the production line, which
31
may slightly lower the Company’s profit margins. In response, the Company makes the necessary
adjustments in order to have a match between demand and supply. In the case of a lack in supply, the
Company equips itself with flexible systems that allow it to temporarily expand its production lines in
order to lower the overhead costs, and then make corresponding increases in its capacity when there
is a need for it as well.

To soften the impact of this, the Company closely coordinates with customers to provide the parties
with regular capacity reports and action plan/s for common reference and future capacity utilizations.
The Company also closely collaborates with its customers to understand the required technology
roadmaps, anticipate changes in technological requirements, and discuss possible future solutions.

IMI may be involved in intellectual property disputes


The Company’s business depends in part on its ability to provide customers with technologically
sophisticated products. The Company’s failure to protect its intellectual property or the intellectual
property of its customers exposes it to legal liability, loss of business to competition and could hurt
customer relationships and affect its ability to obtain future business. It could incur costs in either
defending or settling any intellectual property disputes. Customers typically require that the Company
indemnify them against claims of intellectual property infringement. If any claims are brought against
the Company’s customers for such infringement, whether these have merit or not, it could be required
to expend significant resources in defending such claims. In the event the Company is subjected to any
infringement claims, it may be required to spend a significant amount of money to develop non-infringing
alternatives or obtain licenses. The Company may not be successful in developing such alternatives or
in obtaining such licenses on reasonable terms or at all, which could disrupt manufacturing processes,
damage its reputation, and affect its profitability.

Since the Company is not positioned as an ODM, the likelihood of the Company infringing upon product
related intellectual property of third parties is significantly reduced. Product designs are prescribed by
and ultimately owned by the customer.

The Company observes strict adherence to approved processes and specifications and adopts
appropriate controls to ensure that the Company’s intellectual property and that of its customers are
protected and respected. It continuously monitors compliance with confidentiality undertakings of the
Company and management. As of the date of this Prospectus, there has been no claim or disputes
involving the Company or between the Company and its customers involving any intellectual property.

Demand for services in the EMS industry depends on the performance and business of the
industry’s customers as well as the demand from end consumers of electronic products
The performance and profitability of the Company’s customers’ industries are partly driven by the
demand for electronic products and equipment by end-consumers. If the end-user demand is low for
the industry’s customers’ products, companies in the Company’s industry may see significant changes
in orders from customers and may experience greater pricing pressures. Therefore, risks that could
harm the customers of its industry could, as a result, adversely affect the Company as well. These risks
include the customer’s inability to manage their operations efficiently and effectively, the reduced
consumer spending in key customers’ markets, the seasonality demand for their products, and failure
of the customer’s products to gain widespread commercial acceptance.

The impact of these risks was very evident in the aftermath of the global financial crisis which resulted
in global reduction of demand for electronics products by end-customers. The Company mitigates the
impact of industry downturns on demand by rationalizing excess labor and capacity to geographical
areas that are most optimal, and by initiating cost containment programs. With indications of global
financial recovery already in place, the Company has been able to re-hire some of its employees. There
are also electronics requirements resulting from global regulations, such as those for improving vehicle
safety and promoting energy-efficient technologies that would increase the demand for electronic
products and equipment.

The Company continuously addresses its concentration risks. There is no single customer that the
Company is dependent on or accounts for more than 15% of the Company’s revenues. The Company
also serves global customers which are not concentrated on a specific geographic market.

IMI’s industry is dependent on the continuous growth of outsourcing by OEMs


The Company belongs to an industry that is dependent on the strong and continuous growth of
outsourcing in the computing, communications, consumer automotive, industrial, and medical
electronics industries where customers choose to outsource production of certain components and

32
parts, as well as functions in the production process. A customer’s decision to outsource is affected by
its ability and capacity for internal manufacturing and the competitive advantages of outsourcing.

The Company’s industry depends on the continuing trend of increased outsourcing by its customers.
Future growth in its revenue depends on new outsourcing opportunities in which it assumes additional
manufacturing and supply chain management responsibilities from its customers. To the extent that
these opportunities do not materialize, either because the customers decide to perform these functions
internally or because they use other providers of these services, the Company’s future growth could be
limited.

The Company believes that its global footprint with manufacturing operations in Asia, Europe, and North
America, its global supply chain systems and capabilities, and its design services will continue to
provide strategic advantages for customers to outsource parts of their product development and
manufacturing processes to the Company.

IMI’s industry may experience shortages in, or rises in the prices of components, which may
adversely affect business
There is a risk that the Company will be unable to acquire necessary components for its business as a
result of strong demand in the industry for those components or if suppliers experience any problems
with production or delivery.

The Company is often required by its customers to source certain key components from customer-
nominated and accredited suppliers only, and it may not be able to obtain alternative sources of supply
should such suppliers be unable to meet the supply of key components in the future. Shortages of
components could limit its production capabilities or cause delays in production, which could prevent it
from making scheduled shipments to customers.

If the Company is unable to make scheduled shipments, it may experience a reduction in its sales, an
increase in costs, and adverse effects on its business. Component shortages may also increase costs
of goods sold because it may be required to pay higher prices for components in short supply and
redesign or reconfigure products to accommodate substitute components.

To the extent possible, the Company works closely with customers to ensure that there are back up
suppliers or manufacturers for customer-supplied components or components supplied by customer-
nominated suppliers to mitigate uncertainties in the supply chain. In addition, the Company has
established supplier certification and development programs designed to assess and improve suppliers’
capability in ensuring uninterrupted supply of components to the Company.

IMI may be exposed to risk of inventory obsolescence and working capital tied up in inventories
As an EMS provider, the Company may be exposed to a risk of inventory obsolescence because of
rapidly changing technology and customer requirements. Inventory obsolescence may require it to
make adjustments to write down inventory to the lower of cost or net realizable value, and its operating
results could be adversely affected. The Company is cognizant of these risks and accordingly exercises
due diligence in materials planning. The Company also provisions in its inventory systems and planning
a reasonable amount for obsolescence. It is working with key suppliers to establish supplier-managed
inventory arrangements that will mutually reduce the risk. In addition, the Company often negotiates
buy back arrangements with customers where, in the event the customers’ purchase orders are
delayed, canceled, or enter in the end-of life phase, the customers assumes the risk and compensates
the Company for the excess inventory.

IMI is highly dependent on the continued service of its directors, members of senior
management and other key officers
The Company’s directors, members of its senior management, and other key officers have been an
integral part of its success, and the experience, knowledge, business relationships and expertise that
would be lost should any such persons depart could be difficult to replace and may result in a decrease
in the Company’s operating efficiency and financial performance. Key executives and members of
management of the Company include CEO, COO, CFO, Chief Procurement Officer, Global Business
Development and Key Account Leader, Global Sales Leader, Global HR, Global Design and
Development, Global Quality and Regional/Site Quality Leaders, and Plant GMs. In the event that the
Company loses the services of any such person and is unable to fill any vacant key executive or
management positions with qualified candidates, or if the qualified individual takes time to learn the
details of the Company, the Company’s business and results of operations may be adversely affected.

33
Any deterioration in IMI’s employee relations could materially and adversely affect IMI’s
operations
The Company’s success depends partially on the ability of the Company, its contractors, and its third
party marketing agents to maintain productive workforces. Any strikes, work stoppages, work
slowdowns, grievances, complaints or claims of unfair practices or other deterioration in the Company’s,
its contractors’ or its third party marketing agents’ employee relations could have a material and adverse
effect on the Company’s financial condition and results of operations. There have been no historical
events related to strikes or protests from its employees or unions, given the well-established employee
relations of the Company.

IMI’s success depends on attracting, engaging, and retaining key talents, including skilled
research and development engineers
In order to sustain its ability to complete contracted services and deliver on commitments and promote
growth, the Company will have to continuously attract, develop, engage and retain skilled workforce
highly capable to achieve business goals. The Company recognizes that its competitiveness is
dependent on its key talent pipeline, including leadership, talent and skill pool, and succession plan.

The Company continuously identifies top-caliber candidates and keeps the pipeline full to be ready to
assume new roles and fuel growth. The Company has a strong ability to hire in terms of the quality of
recruits as well as in scale. Specifically, there is strong recruitment in Philippines and in China, having
been able to tie up with universities. In the case of an immediate need for to provide manpower, there
are contractual agreements at hand to meet the demand. They have the ability to rapidly organize and
train skilled workers for new products and services and retain qualified personnel.

The Company also leverages on its global reach to identify, recruit and develop the right employees
who can be deployed to the various operating units or divisions of the Company. It also implements on
a regular basis pertinent employee training and development programs, including a cadetship program
that enables it to tap and employ capable graduates from different leading universities. The Company
has implemented proactive measures to retain employees through sound retention programs,
encouraging work-life balance among its employees, and providing structured career development
paths to promote career growth within the organization and loyalty to the Company.

Any shortage of raw materials or components could impair the Company’s ability to ship orders
of its products in a cost-efficient manner or could cause the Company to miss its delivery
requirements of its retailers or distributors, which could harm the Company’s business
The ability of the Company’s manufacturers to supply its products is dependent, in part, upon the
availability of raw materials and certain components. The Company’s manufacturers may experience
shortages in the availability of raw materials or components, which could result in delayed delivery of
products to the Company or in increased costs to it. Any shortage of raw materials or components or
inability to control costs associated with manufacturing could increase the costs for the Company’s
products or impair its ability to ship orders in a timely cost-efficient manner. As a result, it could
experience cancellation of orders, refusal to accept deliveries, or a reduction in the Company’s prices
and margins, any of which could harm the Company’s financial performance and results of operations.
Other than for customer-nominated suppliers or specialty components for the manufacture of specific
products, the Company is not dependent on a single supplier for its raw materials.

In addition, since company sources materials from various countries, different natural disasters may
affect supply. Typhoons, earthquakes, and other natural disaster may cause a delay the delivery of the
raw materials to the company, manufacturing of ordered products may not be met, resulting to a loss in
potential sales.

IMI may, from time to time, be involved in legal and other proceedings arising out of its
operations.
The Company may, from time to time, be involved in disputes with its employees and various parties
involved in its manufacturing operations, including contractual disputes with customers or suppliers,
labor disputes with workers or be exposed to damage or personal liability claims. Regardless of the
outcome, these disputes may lead to legal or other proceedings and may result in substantial costs,
delays in the Company’s development schedule, and the diversion of resources and management’s
attention. The Company may also have disagreements with regulatory bodies in the course of its
operations, which may subject it to administrative proceedings and unfavorable decisions that result in
penalties and/or delay the development of its projects. In such cases, the Company’s business, financial
condition, results of operations and cash flows could be materially and adversely affected.

34
Risks Relating to Countries Where the Company Operates (Including the Philippines)

IMI conducts business in various jurisdictions, exposing it to business, political, operational,


financial, and economic risks due to its operations in these jurisdictions.
There is no assurance that there will be no occurrence of an economic slowdown in the countries where
the Company operates, including the Philippines. Factors that may adversely affect an economy include
but are not limited to:

 decreases in business, industrial, manufacturing or financial activity in the Philippines or in the


global market,
 scarcity of credit or other financing, resulting in lower demand for products and services
 the sovereign credit ratings of the country,
 exchange rate fluctuations,
 a prolonged period of inflation or increase in interest rates,
 changes in the relevant government's taxation policies,
 natural disasters, including typhoons, earthquakes, fires, floods and similar events,
 political instability, terrorism or military conflict, and
 other regulatory, political or economic developments in or affecting the Company

Notwithstanding the foregoing, the global operations, marketing, and distribution of the Company’s
products inherently integrate the impact of any economic downturn affecting a single country where the
Company operates, and enables the Company to shift the focus of its operations to other jurisdictions.

The Company’s manufacturing and sales operations are located in a number of countries throughout
Asia, Europe, and North America. As a result, it is affected by business, political, operational, financial,
and economic risks inherent in international business, many of which are beyond the Company’s
control, including difficulties in obtaining domestic and foreign export, import, and other governmental
approvals, permits, and licenses, and compliance with foreign laws, which could halt, interrupt, or delay
the Company’s operations if it is unable to obtain such approvals, permits, and licenses, and could have
a material adverse effect on the Company’s results of operations.

Changes in law including unexpected changes in regulatory requirements affect the Company’s
business plans, such as those relating to labor, environmental compliance and product safety. Delays
or difficulties, burdens, and costs of compliance with a variety of foreign laws, including often conflicting
and highly prescriptive regulations also directly affect the Company’s business plans and operations,
cross-border arrangements and the inter-company systems.

Increases in duties and taxation and a potential reversal of current tax or other currently favorable
policies encouraging foreign investment or foreign trade by host countries leading to the imposition of
government controls, changes in tariffs, or trade restrictions on component or assembled products may
result in adverse tax consequences, including tax consequences which may arise in connection with
inter-company pricing for transactions between separate legal entities within a group operating in
different tax jurisdictions, also result in increases in cost of duties and taxation.

Actions which may be taken by foreign governments pursuant to any trade restrictions, such as “most
favored nation” status and trade preferences, as well as potential foreign exchange and repatriation
controls on foreign earnings, exchange rate fluctuations, and currency conversion restrictions may
adversely affect the Company’s business and financial condition.

Under existing foreign exchange controls in the Philippines, as a general rule, Philippine residents may
freely dispose of their foreign exchange receipts and foreign exchange may be freely sold and
purchased outside the Philippine banking system. Restrictions exist on the sale and purchase of foreign
exchange in the Philippine banking system. In the past, the Government has instituted restrictions on
the ability of foreign companies to use foreign exchange revenues or to convert Philippine pesos into
foreign currencies to satisfy foreign currency- denominated obligations, and no assurance can be given
that the Government will not institute such or other restrictive exchange policies in the future.

A substantial portion of the Company’s manufacturing operations is located in China, which has
regulated financial and foreign exchange regime. The Company continuously evaluates the options
available to the organization to ensure maximum usage of excess liquidity. Among others, excess
liquidity may be repatriated out of China through dividend payments, payment of management service
or royalty fees, use of leading and lagging payment, and transfer pricing.

35
Environmental laws applicable to IMI’s projects could have a material adverse effect on its
business, financial condition or results of operations
The Company cannot predict what environmental legislation or regulations will be amended or enacted
in the future, how existing or future laws or regulations will be enforced, administered or interpreted, or
the amount of future expenditures that may be required to comply with these environmental laws or
regulations or to respond to environmental claims. The introduction or inconsistent application of, or
changes in, laws and regulations applicable to the Company’s business could have a material adverse
effect on its business, financial condition and results of operations.

There can be no assurance that current or future environmental laws and regulations applicable to the
Company will not increase the costs of conducting its business above currently projected levels or
require future capital expenditures. In addition, if a violation of any environmental law or regulation
occurs or if environmental hazards on land where the Company’s projects are located cause damage
or injury to buyers or any third party, the Company may be required to pay a fine, to incur costs in order
to cure the violation and to compensate its buyers and any affected third parties.

Any political instability in the Philippines and the countries where IMI operates may adversely
affect the business operations, plans, and prospects of IMI
The Philippines has from time to time experienced severe political and social instability. The Philippine
Constitution provides that, in times of national emergency, when the public interest so requires, the
Government may take over and direct the operation of any privately owned public utility or business. In
the last few years, there were instances of political instability, including public and military protests
arising from alleged misconduct by the previous administration.

On 12 December 2011, the House of Representatives initiated impeachment proceedings against


Renato Corona, Chief Justice of the Supreme Court of the Philippines. The impeachment complaint
accused Corona of improperly issuing decisions that favored former President Arroyo, as well as failure
to disclose certain properties, in violation of rules applicable to all public employees and officials. The
trial of Chief Justice Corona began in January 2012 and ended in May 2012, with Corona found guilty
with respect to his failure to disclose to the public his statement of assets, liabilities, and net worth, and
was impeached. In July 2013, a major Philippine newspaper exposed a scam relating to the diversion
and misuse of the Priority Assistance Development Fund by some members of Congress through
pseudo-development organizations headed by Janet Lim Napoles. As a result of this exposé, a number
of investigations, including one in the Senate, have been launched to determine the extent of the
diversion of the Priority Assistance Development Fund and the Government officials and the private
individuals responsible for the misappropriation of public funds. On 16 September 2013, cases of
plunder and malversation of public funds were filed with the Office of the Ombudsman against Janet
Lim Napoles, three Senators, a few members of the House of Representatives and other Government
personnel.

Macro-economic conditions of different countries where IMI operates may adversely affect the
Company’s business and prospectus
Historically, the Philippines’ sovereign debt has been rated relatively low by international credit rating
agencies. Although the Philippines’ long-term foreign currency-denominated debt was recently
upgraded by each of Standard & Poor’s, Fitch Ratings and Moody’s to investment-grade, no assurance
can be given that Standard & Poor’s, Fitch Ratings or Moody’s or any other international credit rating
agency will not downgrade the credit ratings of the Government in the future and, therefore, Philippine
companies. Any such downgrade could have an adverse impact on the liquidity in the Philippine
financial markets, the ability of the Government and Philippine companies, including the Parent
Company, to raise additional financing and the interest rates and other commercial terms at which such
additional financing is available.

In addition, some countries in which the Company operates, such as the Czech Republic and Mexico,
have experienced periods of slow or negative growth, high inflation, significant currency devaluations,
or limited liability of foreign exchange. Furthermore, in countries such as China and Mexico,
governmental authorities exercise significant influence over many aspects of the economy which may
significantly affect the Company.

On an as-need basis, the Company seeks the help of consultants and subject matter experts for
changes in laws and regulations that may have a significant impact in the Company’s business
operations. It also maintains good relationship with local government, customs, and tax authorities
through business transparency and compliance and/or payment of all government-related assessments
in a timely manner. The Company has been able to overcome major crises brought about by economic
and political factors affecting the countries where it operates. The strong corporate governance
36
structure of the Company and its prudent management team are the foundations for its continued
success. The Company also constantly monitors its macroeconomic risk exposure, identifies unwanted
risk concentration, and modifies its business policies and activities to navigate such risks. Severe
macroeconomic contractions may conceivably lead the Company to tweak or modify its investment
decisions to meet the downturn. As a holding company, the Company affirms the principles of fiscal
prudence and efficiency in the operations to its subsidiaries operating in various countries.

IMI face risks of international expansion and operation in multiple jurisdictions


The Company expects to have an international customer base which may require worldwide service
and support. The Company may expand its operations internationally and enter additional markets,
which will require significant management attention. Any such expansion may cause a strain in existing
management resources.

The distances between the Company, the customers, and the suppliers globally, create a number of
logistical and communications challenges, including managing operations across multiple time zones,
directing the manufacture and delivery of products across significant distances, coordinating the
procurement of raw materials and their delivery to multiple locations, and coordinating the activities and
decisions of the Company’s management team, the members of which are spread out internationally.

While the Company tries to keep its local expertise, it established global functions to ensure that there
is adequate coordination of activities. In addition, the availability and use of cell phones, e-mails, and
internet based communication tools by the Company resulted in more efficient and timely coordination
of activities and decision making by management from different sites and countries.

The Company aggressively pursues hiring of experienced international managers and staff globally.
This enables the Company to ensure that it has sufficient manpower complement possessed with the
required skills and experience to work with customers, vendors, and other partners in and out of the
relevant country where it operates.

Natural or other catastrophes, including severe weather conditions and epidemics, that may
materially disrupt the Company’s operations, affect its ability to complete projects and result in
losses not covered by its insurance
The Philippines has experienced a number of major natural catastrophes over the years, including
typhoons, droughts, volcanic eruptions and earthquakes. In October 2013, a 7.2 magnitude earthquake
affected Cebu and the island of Bohol, and on November, 2013, Super Typhoon Haiyan (called Yolanda
in the Philippines) caused destruction and casualties of an as yet undetermined amount, in Tacloban,
certain parts of Samar, and certain parts of Cebu City, all of which are located in the Visayas, the
southern part of the Philippines. There can be no assurance that the occurrence of such natural
catastrophes will not materially disrupt the Company’s operations. These factors, which are not within
the Company’s control, could potentially have significant effects on the Company’s manufacturing
facilities. As a result, the occurrence of natural or other catastrophes or severe weather conditions may
adversely affect the Company’s business, financial condition and results of operations.

Natural disasters, such as the 2008 earthquake in China, where most of the Company’s manufacturing
operations are located, could severely disrupt the Company’s manufacturing operations and increase
the Company’s supply chain costs. These events, over which we have little or no control, could cause
a decrease in demand for the Company’s services, make it difficult or impossible for the Company to
manufacture and deliver products and for the Company’s suppliers to deliver components allowing it to
manufacture those products, require large expenditures to repair or replace the Company’s facilities, or
create delays and inefficiencies in the Company’s supply chain.

Any escalation in these events or similar future events may disrupt the Company’s operations and the
operations of the Company’s customers and suppliers, and may affect the availability of materials
needed for the Company’s manufacturing services. Such events may also disrupt the transportation of
materials to the Company’s manufacturing facilities and finished products to the Company’s customers.

There can be no assurance that the Company is fully capable to deal with these situations and that the
insurance coverage it maintains will fully compensate it for all the damages and economic losses
resulting from these catastrophes.

Political instability or threats that may disrupt the Company’s operations could result in losses
not covered by the Company’s insurance
No assurance can be given that the political environment in the Philippines will remain stable and any
political instability in the future could reduce consumer demand, or result in inconsistent or sudden
37
changes in regulations and policies that affect the Company’s business operations, which could have
an adverse effect on the results of operations and the financial condition of the Company.

Increased political instability threats or occurrence of terrorist attacks, enhanced national security
measures, and conflicts in the Middle East and Asia, as well as territorial and other disputes between
China and the Philippines (and a number of Southeast Asian countries), which strain international
relations, may reduce consumer confidence and economic weakness and adversely affect the
Company’s business plans and prospects.

The Philippines, China, and several Southeast Asian nations have been engaged in a series of long
standing territorial disputes over certain islands in the West Philippine Sea, also known as the South
China Sea. Despite efforts to reach a compromise, a dispute arose between the Philippines and China
over a group of small islands and reefs known as the Scarborough Shoal. In April and May 2012, the
Philippines and China accused one another of deploying vessels to the shoal in an attempt to take
control of the area, and both sides unilaterally imposed fishing bans at the shoal during the late spring
and summer of 2012. These actions threatened to disrupt trade and other ties between the two
countries, including a temporary ban by China on Philippine banana imports, as well as a temporary
suspension of tours to the Philippines by Chinese travel agencies. Since July 2012, Chinese vessels
have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the Philippines
has continued to protest China’s presence there. In January 2013, the Philippines sent notice to the
Chinese embassy in Manila that it intended to seek international arbitration to resolve the dispute under
the United Nations Convention on the Law of the Sea. China has rejected and returned the notice sent
by the Philippines requesting arbitral proceedings. Chinese vessels have also recently confronted
Philippine vessels in the area, and the Chinese government has warned the Philippines against what it
calls provocative actions. Recent talks between the Government of the Philippines and the United
States of America about increased American military presence in the country, particularly through
possible American forays into and use of Philippine military installations, may further increase tensions.

In early March 2013, several hundred armed Filipino-Muslim followers of Sultan Jamalul Kiram III, the
self-proclaimed Sultan of Sulu from the south of the Philippines, illegally entered Lahad Datu, Sabah,
Malaysia in a bid to enforce the Sultan of Sulu’s historical claim on the territory. As a result of the illegal
entry, these followers engaged in a three-week standoff with the Malaysian armed forces, resulting in
casualties on both sides. Clashes between the Malaysian authorities and followers of the Sultan of Sulu
have killed at least 98 Filipino-Muslims and 10 Malaysian policemen army since 1 March 2013. In
addition, about 4,000 Filipino- Muslims working in Sabah have reportedly returned to the southern
Philippines.

On 9 May 2013, a Philippine Coast Guard ship opened fire on a Taiwanese fisherman’s vessel in a
disputed exclusive economic zone between Taiwan and the Philippines, killing a 65-year old Taiwanese
fisherman. Although the Philippine government maintained that the loss of life was unintended, Taiwan
imposed economic sanctions on the Philippines in the aftermath of the incident. Taiwan eventually lifted
the sanctions in August 2013 after a formal apology was issued by the Government of the Philippines.
However, the incident has raised tensions between the two countries in recent months.

Should territorial disputes between the Philippines and other countries in the region continue or escalate
further, the Philippines and its economy may be disrupted and the Company’s operations could be
adversely affected as a result. In particular, further disputes between the Philippines and other countries
may lead to reciprocal trade restrictions on the other’s imports or suspension of visa-free access and/or
permits. Any impact from these disputes in countries in which the Company has operations could
materially and adversely affect the Company’s business, financial condition and results of operations.

Investors may face difficulties enforcing judgments against the Company


It may be difficult for investors to enforce judgments against the Company owing to its global operations,
diverse residencies of its different officers, and assets located in different jurisdictions. It may particularly
be difficult for investors to effect service of process upon any officer who is not a resident of the country
where judgments from courts or arbitral tribunals are obtained outside or within the Philippines if these
are predicated upon the laws of jurisdictions other than the country where such judgments are obtained.

The Philippines is party to the United Nations Convention on the Enforcement and Recognition of
Arbitral Awards, though it is not party to any international treaty relating to the recognition or
enforcement of foreign judgments. Nevertheless, the Philippine Rules of Civil Procedure provide that a
judgment or final order of a foreign court is, through the institution of an independent action, enforceable
in the Philippines as a general matter, unless there is evidence that: (i) the foreign court rendering
judgment did not have jurisdiction, (ii) the judgment is contrary to the laws, public policy, customs or
38
public order of the Philippines, (iii) the party against whom enforcement is sought did not receive notice,
or (iv) the rendering of the judgment entailed collusion, fraud, or a clear mistake of law or fact.

MANILA WATER COMPANY, INC.

Background and Business


Manila Water Company, Inc. (alternately referred to as MWC or “the Company” in the entire discussion
of Manila Water Company, Inc), is principally engaged in the business of providing water, sewerage
and sanitation services to over six million people in the East Zone of Metro Manila in the Philippines,
covering 16 cities and municipalities, including Makati, Mandaluyong, San Juan, Taguig, Pateros,
Marikina, Pasig, most of Quezon City and Rizal Province, as well as some parts of Manila. Manila Water
was established and incorporated on 6 January 1997. On 21 February 1997, under a 25-year
Concession Agreement with the MWSS, Manila Water was given the exclusive right to provide services
to the East Zone of Metro Manila, as an agent and contractor of the MWSS. The Concession
Agreement, originally set to expire in 2022, was extended to 2037.

The Company provides water treatment, water distribution, sewerage and sanitation services to more
than six million people in the East Zone, comprising a broad range of residential, commercial and
industrial customers. The East Zone encompasses Makati, Mandaluyong, Pasig, Pateros, San Juan,
Taguig, Marikina, most parts of Quezon City, portions of Manila, as well as the following towns of Rizal:
Angono, Antipolo, Baras, Binangonan, Cardona, Jala-Jala, Morong, Pililia, Rodriguez, San Mateo,
Tanay, Taytay and Teresa.

Under the terms of the CA, the Company has the right to the use of land and operational fixed assets,
and the exclusive right, as agent of MWSS, to extract and treat raw water, distribute and sell water, and
collect, transport, treat and dispose used water, including reusable industrial effluent discharged by the
sewerage system in the East Zone. The Company is entitled to recover over the concession period its
operating, capital maintenance and investment expenditures, business taxes, and concession fee
payments, and to earn a rate of return on these expenditures for the remaining term of the concession.

Aside from the East Zone, the Company currently has three operating subsidiaries in the Philippines,
namely Laguna AAAWater Corporation (“LAWC”), Boracay Island Water Company (“BIWC”), and Clark
Water Corporation (“CWC”).

Cebu Manila Water Development, Inc (“CMWD”) energized the Cebu Bulk Water Project on January 1,
2015 delivering its “first water” to the Metropolitan Cebu Water District. CMWD is a Joint Investment
Agreement between the Manila Water Consortium (formerly Northern Waterworks and Rivers of Cebu)
and the Provincial Government of Cebu for the development and operation of a bulk water supply
system in the province.

On December 19, 2014, the Company received a notice from the ZCWD awarding the project for non-
revenue water reduction activities in Zamboanga City. The project shall be implemented through a joint
venture company to be formed by ZCWD and the Parent Company.

The Company also has presence in Vietnam through two bulk water companies, namely Thu Duc Water
B.O.O Corporation (“TDW”) and Kenh Dong Water Supply Joint Stock Company (“KDW”). In addition,
the Company owns 31.47% of the outstanding capital stock of Saigon Water Infrastructure Corporate
(“SII”) which is the planned vehicle for accomplishing water and used water projects in the country.

On March 17, 2014, the Company and Mitsubishi Corporation, signed a Memorandum of Understanding
with the YCDC in Yangon City, Myanmar for the development of a proposed non-revenue water
reduction project for Yangon City. YCDC is an administrative body of the city government in Yangon in
charge of the water, infrastructure, business licenses and city property management, among others.

The Concession
The following are some of the key terms of the CA:

 Term and Service Area of Concession. The CA took effect on August 1, 1997 (“Commencement
Date”) and will expire on May 6, 2037 or on an early termination date as provided therein. By virtue
of the CA, MWSS transferred its service obligations (i.e., water supply, sewerage and sanitation,
and customer service) in the East Zone to the Company.

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 Ownership of Assets. While the Company has the right to manage, operate, repair, decommission
and refurbish specified MWSS facilities in the East Zone, legal title to these assets remains with
MWSS. The legal title to all fixed assets contributed to MWSS by the Company during the
concession remains with the Company until the expiration date (or an early termination date), at
which time, all rights, titles and interests in such assets will automatically vest in MWSS.

 Ownership of the Company. Under the CA, MWSS granted concessions for water distribution to
private-sector corporations at least 60% of the outstanding capital stock of which is owned and
controlled by Philippine nationals. In addition, the Company represents and warrants to MWSS that
its outstanding voting capital is at least 60% owned by citizens of the Philippines or by corporations
that are themselves at least 60% owned by citizens of the Philippines.

 Sponsor Commitment. Unless waived in writing by the MWSS-RO, Ayala, as local sponsor, and
United Utilities PLC, as international operator, are each required to own, directly or through a
subsidiary that is at least 51% owned or controlled, at least 20.0% of the outstanding capital stock
of the Company for the first five years (through December 31, 2002), and thereafter at least 10%
each.

 Operations and Performance. The Company has the right to bill and collect for water and sewerage
services supplied in the East Zone. In return, the Company is responsible for the management,
operation, repair and refurbishment of MWSS facilities in the East Zone and must provide service
in accordance with specific operating and performance targets described in the CA.

 Concession Fees. The Company is required to pay MWSS the following:


 Concession fees consisting of the peso equivalent of (i) 10% of the payments due under any
MWSS loan that was disbursed prior to the Commencement Date; (ii) 10% of payments due
under any MWSS loan designated for the Umiray-AngatTransbasin Project (UATP) that was
not disbursed prior to the Commencement Date; (iii) 10% of the local component costs and cost
overruns related to the UATP; (iv) 100% of the payments due under any MWSS designated
loans for existing projects in the East Zone that were not disbursed prior to the Commencement
Date and were awarded to third party bidders or elected by the Company for continuation; and
(v) 100% of the local component costs and cost overruns related to existing projects in the East
Zone; and

 Share in the annual operating budget of MWSS amounting to P396 million each year subject
to annual inflation adjustments

MWSS is required to provide the Company with a schedule of concession fees payable during any
year by January 15 of that year and a written notice of amounts due no later than 14 days prior to
the scheduled payment date of principal, interest, fees and other amounts due. Currently, MWSS
gives monthly invoices to the Company for these fees.

 Appropriate Discount Rate. The Company is entitled to earn a rate of return equal to the Appropriate
Discount Rate (“ADR”) on its expenditures prudently and efficiently incurred for the remaining term
of the concession. The ADR is the real (i.e. not inflation adjusted) weighted average cost of capital
after taxes as determined by the MWSS Regulatory Office (MWSS-RO) based on conventionally
and internationally accepted methods, using estimates of the cost of debt in domestic and
international markets, the cost of equity for utility business in the Philippines and abroad with
adjustments to reflect country risk, exchange rate risk and any other project risk.

 Tariff Adjustments and Rate Regulation. Water tariff rates are adjusted according to mechanisms
that relate to inflation, extraordinary events, foreign currency differentials and Rate Rebasing
exercises.

 Early Termination. MWSS has a right to terminate the concession under certain circumstances
which include insolvency of the Company or failure to perform an obligation under the CA, which,
in the reasonable opinion of the MWSS-RO, jeopardizes the provision of essential water and
sewerage supply services to all or any significant part of the East Zone. The Company also has
the right to terminate the concession for the failure of MWSS to perform an obligation under the CA,
which prevents the Company from carrying out its responsibilities or upon occurrence of certain
events that would impair the rights of the Company.

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 Reversion. On the expiration of the CA, all the rights, duties and powers of the Company
automatically revert to MWSS or its successors or assigns. MWSS has the option to rebid the
concession or renew the agreement with the express written consent of the government.

Under the CA, the Company and the concessionaire of the West Zone of Metro Manila, Maynilad Water
Services, Inc. (“Maynilad”), were required to enter into a joint venture or other arrangement that
identifies the responsibilities and liabilities of each with regard to the operation, maintenance, renewal
and decommissioning of Common Purpose Facilities (CPF), as well as an interconnection agreement
which governs such matters as water supply transfers between the East and West Zones and boundary
definitions and identifies the responsibilities and liabilities of parties with regard to the management,
operation and maintenance of certain interconnection facilities. Pursuant to this, the Concessionaires
entered into the Common Purpose Facilities Agreement and the Interconnection Agreement in July
1997.

The Regulatory Office of MWSS


The CA also provided for the establishment of the MWSS Regulatory Office (MWSS –RO) under the
jurisdiction of the MWSS Board of Trustees (MWSS-BOT), to oversee and monitor the operations of
the Concessionaires. The MWSS-RO is composed of five members with five-year term and no member
of the MWSS-RO may have any present or prior affiliation with MWSS, the Company or Maynilad. The
MWSS-RO is funded by MWSS through the concession fee payments of the concessionaires. The CA
provides that major disputes between the Company and the MWSS-RO be referred to an appeals panel
consisting of two (2) members appointed by each of the MWSS-RO and the Company and a third
member appointed by the Chairman of the International Chamber of Commerce. Under the CA, both
parties waive their right to contest decisions of the appeals panel through the courts.

Key Performance Indicators and Business Efficiency Measures


The CA initially set service targets relating to the delivery of services by the Company. As part of the
Rate Rebasing exercise that ended on December 31, 2002, the Company and MWSS mutually agreed
to amend these targets based on the Company’s business and capital investment plan accepted by the
MWSS-RO. In addition, the Company and MWSS adopted a new performance-based framework. This
performance-based framework, designed to mimic the characteristics of a competitive market and help
the MWSS-RO determine prudent and efficient expenditures, utilizes Key Performance Indicators (KPI)
and Business Efficiency Measures (BEM) to monitor the implementation of the Company’s business
plan and will be the basis for certain rewards and penalties on the 2008 Rate Rebasing exercise.

Fourteen KPIs, representing critical performance levels for the range of activities the Company is
responsible for, relate to water service, sewerage and sanitation service and customer service. The
BEMs are intended to enable the MWSS-RO to evaluate the efficiency of the management and
operation of the concessions and gauge progress toward the efficient fulfillment of the concessionaires’
business plans. There are nine (9) BEMs relating to income, operating expenses, capital expenditures
and NRW. The BEMs are evaluated for trends and annual forecasts.

Amendments to the Concession Agreement


The CA was amended under Amendment No. 1 to the Concession Agreement executed on October
26, 2001 (“Amendment No. 1”). Amendment No. 1 adjusted water tariffs to permit adjustment for foreign
exchange losses and reversal of such losses, which under the original CA were recovered only when
the concessionaire petitioned for an Extraordinary Price Adjustment (EPA).

The CA was further amended under the Memorandum of Agreement and Confirmation executed on
October 23, 2009 wherein the Company and the MWSS agree to renew and extend the CA for an
additional period of fifteen (15) years from the year 2022 or until 2037, under the same terms and
conditions.

Organization
The Company is organized into nine functional groups: (1) Operations; (2) Project Delivery; (3) East
Zone Business Operations; (4) Corporate Strategic Affairs; (5) Corporate Strategy and Development;
(6) Corporate Human Resources; (7) Corporate Finance and Governance; (8) Strategic Asset
Management; and (9) Information Technology

1. The Operations Group operates and maintains all of Manila Water’s water and Used Water
facilities. It constantly seek ways to further improve the efficiency and reliability in managing all of
Manila Water’s facilities by developing high quality engineering standards, delivering innovative
technology solutions and support, exploring new technologies and promoting a culture of a safe
work environment while remaining compliant to environmental and regulatory standards. The
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Operations Group is committed to protect the environment through environmental sustainability
programs such as the Three-River Master Plan, the protection and development of our watersheds,
and other various environmental efforts.

 The Operations Group, in cooperation with counterparts from Maynilad, manages the Common
Purpose Facilities (CPF)/Water Source which includes headworks upstream of the La Mesa
Dam: Angat Dam, Ipo Dam and the Novaliches portals. CPF/Water Source ensures that
sufficient raw water allocation is maintained throughout the year.

 From the La Mesa Dam, Water Supply Operations manages the water treatment facilities,
primary transmission lines, pumping stations and service reservoirs to provide 24/7 water
supply at a reliability level of, at least, 99.99% while maintaining 100% compliance in water
quality as defined in the Philippine National Standards for Drinking Water. It is also responsible
for ensuring that water supply meets demand by means of accurate forecasting from source to
production, despite variability in consumer demand or environmental pressures.

 Used Water Operations manages the wastewater treatment facilities and lift stations to ensure
that treated wastewater discharge is consistently compliant to environmental standards. It is
responsible for implementing the wastewater service expansion plan, advocating the Three-
River System targeted to be completed by 2022.

 Encompassing the roles of Water Supply and Used Water, Bonifacio Water Corporation
manages the water and wastewater needs of the Bonifacio Global City, applying the same
philosophies in the regard for quality, efficiency and reliability of its services to this developing
community.

 Maintenance Services provides planned, proactive, reactive maintenance support for all
operations facilities as well as all of the company's physical structures.

 The Business Continuity Department is committed to develop a culture of preparedness,


resiliency and continual improvement towards a world-class water utility company. Thus
ensuring coordination, integration and alignment of national, local and company emergency
plans and protocols. BCD enables Manila Water to immediately respond to emergencies,
especially when there is a need to provide potable water to disaster-stricken areas. Through
BCD, Manila Water is able to extend help even beyond its concession area by providing mobile
water treatment assistance to various flood-stricken areas in the country.

 The Laboratory carries out physical, chemical and microbiological analysis of water and
wastewater samples to true world-class standards. Aside from being accredited by the
Department of Health (DoH), PAO Philippine Accreditation Office, and the Department of the
Environment and Natural Resources (DENR), the Laboratory is also certified to ISO standards.

 The Sustainability Department ensures that Manila Water facilities are not only compliant with
current legislation but are also constructed and maintained within environmental sustainability
parameters. It also undertakes projects to protect and develop watersheds that directly affect
its water sources.

 The Fleet Management is responsible for the dispatch and maintenance of company vehicles
and equipment. It also provides vehicle assistance during incidents / emergencies and special
events of the company.

 The Energy Department monitors power consumption and recommends power-efficiency


measures. It also develops and implements strategies for the company to enjoy advantageous
power rates in all its facilities.

 System Analytics Department facilitates operational data flow, consolidation, analytics and
general information architecture and provides relevant and timely notification, reporting, and
escalation of operational information through the Operations Communications Center.

 The Innovations Department supports optimization initiatives throughout the Operations Group,
most especially for the Water Supply and Used Water. It helps create value (of systems and
processes) through a collaborative approach, as well as provides linkages and resources to
ensure optimum efficiency, quality and reliability of operations.

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 Operations Management Department strategizes a unified management system to ensure the
effectiveness and efficiency of group targets and programs. Operations Management is
accountable for the ISO certifications (Quality, Environment, Health and Safety) and serves as
a framework in order to produce and promote well-balanced implementation of all policies and
processes across Operations Group including specific requirements of the international
standards (ISO 9001,ISO 14001, and OHSAS 18001.

2. The Project Delivery Group (PDG) is tasked with the execution of the major infrastructure projects
that are crucial for the company to achieve regulatory commitments as stipulated in the Concession
Agreement and Rate Rebasing plans. The careful delivery of projects, while strictly adhering to the
target timelines, prudent and efficient cost and highest standards of quality and safety, is the basis
for the achievement of corporate business objectives aligned with the sustainable expansion of
services that improve people's lives and support regional economic growth. PDG is organized for
an integrated, collaborative approach to project execution. It is composed of six (6) departments
namely Engineering, Projects, Quality Assurance, Project Stakeholders Management, Safety
Solutions and Project Management Office.

 The Engineering Department ensures the compliance of projects to established engineering


standards by reviewing design concepts and cost estimates, conducting preliminary and
detailed design (as necessary), spearheading the technical evaluation of technical proposals
during bidding and design submissions during execution and developing high-quality and cost-
effective engineering standards that are used across the business. It is also at the forefront of
studying the latest construction technologies and methodologies in view of value-engineering.

 The Projects Department is tasked with managing the multi-billion project portfolio of the
company. Project Delivery Managers (PDMs) are accountable for keeping the project in line
with time, cost and quality, safety and environmental standards by leading a cross-functional
team that manages the numerous interconnected components of execution. The department is
also a fertile ground for developing project managers not only for the East Zone but also
expansion efforts in and out of the Philippines.

 The Quality Assurance Department is in charge of development and implementation of quality


management procedures and system across PDG through (1) process documentation,
including policy formulation and system rollout, (2) management of the Quality Execution
Academy and, (3) review/analysis of quality execution metrics/statistics for continuous
improvement of PDMs.

 The Project Stakeholders Management Department ensures that the projects have the support
of critical stakeholders such as local governments, national agencies and the public through
proactive project pre-selling and relationship building that ensure the timely acquisition of
stakeholder approvals and smooth resolution of any project concerns.

 The Safety Solutions Department provides a vital role in ensuring that not only are Manila Water
employees empowered to work safely, but also to ensure that our vendors and contractors are
well-trained in keeping worksites safe for employees and the wider public, especially during
construction activities. This utmost regard for a safety environment and mindset has top
management support and carried-out by its employees and contractors.

 The Project Management Office is responsible for (1) project control functions to support
construction projects, (2) implementation of integrated project management system and
facilitation of continuous improvement initiatives, (3) strengthening of project information and
analytics, and (4) building systems to ensure project construction documentation and control.

3. The East Zone Business Operations (EZBO) is responsible in the delivery of water and used
water services to the whole East Zone and deals directly with the Company’s customers. It is
composed of the East Zone Business Area Operations, East Zone Business Support, Technical
Support Services for Water Network and Technical Support Services for Wastewater.

 The East Zone Business Area Operations is the house of the eight (8) Business Areas, Key
Accounts development and Government Affairs and Relations management. This Division is
directly responsible in the delivery of water, used water and sanitation services to the customers
and key accounts, geared towards achieving company targets on billed volume, revenue and
customer service.
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 The East Zone Business Support Division is composed of four departments: Demand
Forecasting and Total Management System (TMS) Management, Billing and Collection,
Customer Service and Stakeholder Management and Program and Policy Development. The
Demand Forecasting and TMS Management department is responsible for revenue
management, demand forecasting, provision of systems and analytical tools and performance
management of all EZBO employees. The Billing and Collection department ensures efficient
meter reading to deliver quality customer bills. It also provides collection support to the business
areas through service provider management and payment facilities sourcing. The Customer
Service and Stakeholder Management department reviews and enhances customer service
processes and standards aimed to drive customer satisfaction. It regularly monitors customer
centricity metrics to ensure that all customers concerns are attended efficiently and
effectively. The Program and Policy Development section handles the rewards and recognition
programs, organization, talent development and policy review and development for EZBO
employees.

 The Technical Support Services Department for Water Network oversees the water network
and ensures efficiency and reliability within the distribution system. It develops programs and
conducts research on the latest technologies to reduce water losses.

 The Technical Support Services Department for Used water manages the maintenance of the
sewer network and the implementation of the company’s desludging services.

 The Business Areas and HQ departments aim towards driving the growth of the business,
reduce water losses, manage water and used water network operations and ensure
achievement of regulatory targets in terms of delivery of quality service to Manila Water
customers.

4. The Corporate Strategic Affairs Group (CSAG) is responsible for creating consistent corporate
messaging and harmonizing communication channels that are aligned with the Company’s
objectives in order to effectively connect with customers and stakeholders. The group is composed
of two departments: Branding and Market Research and Corporate Communications. The Branding
and Market Research Department is in charge of building and differentiating the Manila Water brand
through strategic communications research and development, visual standards management and
advocacies. It also handles the Lakbayan or Water Trail program as the Company’s information,
education and communication program on water and used water appreciation and the Toka Toka
Environmental Movement which is the country’s first and only environmental program focused on
used water management. The Corporate Communications Department handles the execution of
the Company’s strategic as well as tactical and/or crisis communication programs through publicity,
events and other stakeholder services. The department handles all Company publicity in the media
(TV, radio, print and below-the-line), as well as media planning, relations and engagement. It is
also responsible for ensuring a well-informed workforce through the development and
implementation of relevant internal communications. Lastly, it handles new media platforms through
social media and web presence.

5. The Corporate Strategy and Development Group (CSDG) handles three core functions: (1)
regulatory affairs, (2) new business development and (3) corporate strategy. In relation to
regulatory affairs, the Group’s Regulation and Public Policy Department interfaces with the MWSS-
RO on all matters relating to the Concession Agreement, including submitting reports and
disclosures relating to compliance, handling negotiations with the MWSS-RO relating to the
Company’s service targets and distilling information from the Company’s other groups to produce
and periodically update financial projections, which serve as the bases for petitions submitted to
the MWSS-RO for quarterly, annual, and five-year tariff adjustments. The Group’s New Business
Development Department is responsible for identifying and pursuing new business opportunities
both locally and abroad. The Group’s newly formed Corporate Strategy Department handles the
corporate planning process and special projects identified by the Management Committee.

6. The Corporate Human Resources Group is organized into four core functions: (1) Talent
Management and Leadership Development, (2) Total Rewards Management, (3) Employee
Engagement, and (4) Security Management. The Talent Management and Leadership
Development Department is responsible for Strategic Staffing, Training and Development,
Succession, Competency Management, Corporate University Development and Management as
well as Manpower Planning and Organization Development. The Total Rewards Management
Department is responsible for the design and implementation of programs in Performance
44
Management, Compensation and Benefits, and HR Service Delivery functions which include
Wellness Management (employee wellness and occupational health programs). The Employee
Engagement Department handles Employee Programs (employee recognition and sports
programs), and Employee Relations (Code of Conduct and Collective Bargaining Agreement
Administration). The Security Management Department is responsible for employee, asset and
facility security.

7. The Corporate Finance and Governance Group, which is headed by the Chief Finance Officer
and Treasurer, provides financial and legal services to the Company. The Group is composed of
eleven departments namely: Accounting, Financial Controllership, Financial Planning and Investor
Relations, Treasury, Tax Management, Capex Control and Support, Contracts and Vendor
Management, Logistics, Internal Audit, Legal and Corporate Governance, and Enterprise Risk
Management.

 The Accounting Department maintains and safeguards the integrity of the Company’s
computerized accounting system, books of accounts and processes to ensure preparation
of accurate and timely financial reports, for the purpose of providing Management, regulators
and other stakeholders with financial information reflective of the Company’s true financial
performance and condition. It implements a Quality Management System (QMS) at par with
international standards and duly certified under ISO 9001:2008. The certification which was on
its second year in 2014, assures consistent application of relevant accounting standards,
principles, policies, regulations and rules including a functional staff development, all aimed
towards the continuous improvement of the Company’s accounting service.

 The Financial Controllership Department ensures implementation of stringent financial systems


and controls in the East Zone but also in the New Business Operations. The department
monitors the performance of the East Zone and the subsidiaries and associates with particular
focus on revenue growth, improvement of operating margins, asset efficiency and future growth
prospects.

 The Financial Planning and Investor Relations Department is responsible for the budget and
forward plan preparation of the Company and provides reports to management and other
stakeholders on the financial performance of the company. The department also reviews
CAPEX and new business proposals and ensure that the Company’s investment parameters
are met. In addition, the department implements investor-related programs to ensure that
information requirements of investors and analysts are met.

 The Treasury Department is responsible for the effective management of the Company’s cash
resources and financing activities, as well as the inherent risks associated with it. In carrying
out its functions, the department maintains a sustainable and mutually beneficial relationship
with the banking community. The Treasury Department is ISO 9001:2008 certified and is
committed to continuous improvements and innovations in its processes.

 The Tax Management Department provides strategic assistance to the different business and
support units of the Company on matters relating to taxes and tax incentives applicable in the
Company’s operations. The Department also provides a focused analysis, interpretation and
application of relevant tax laws, rules and regulations and ensures compliance with the
reportorial requirements of the Bureau of Internal Revenue, Board of Investments and pertinent
local government units and agencies.

 The CAPEX Control and Support Department is responsible for the acquisition of properties
required for the implementation of water and wastewater projects. It is also responsible for the
clearing and recovery of right-of-way owned by the Company and MWSS. The department is
also in-charge of the management and monitoring of the Company’s CAPEX program through
reliable CAPEX forecasting, implementation of review processes and providing feedback
mechanisms to project proponents and management, and ensures the integrity of contractors’
billings through control systems.

 The Contracts and Vendor Management Department is responsible for the procurement of the
service requirements for the Company’s projects and operations. It is responsible for
implementing a procurement process that meets quality and cost standards and is carried out
with integrity and transparency. The department implements vendor management programs to
ensure availability of quality vendors, contractors and service providers. The Contracts and
Vendor Management Department is ISO 9001:2008 certified.
45
 Logistics Department is responsible for the procurement of supplies and materials to support
operations and project requirements. It ensures integrity in the procurement process and
ensures that supplies and materials are sourced at optimal cost and comply with quality
standards. The department is also responsible for the efficient management of materials
inventory. The Logistics Department is ISO 9001:2008 certified.

 The Internal Audit Department provides an independent and objective assurance and
consulting services and evaluates the effectiveness of the Company’s risk management, control
and governance processes. The department reports functionally to the Audit and Governance
Committee (AGC) and administratively to the Chief Finance Officer. It supports the Committee
in the effective discharge of the Committee’s oversight role and responsibility and provides the
management and the Board of Directors, through the Committee, with analyses,
recommendations, advice and information concerning the activities/ processes reviewed. The
department obtained a “Generally Conforms” rating from the External Quality Assessment
Review performed by IIA-Philippines in June 2012.

 The Legal and Corporate Governance Department provides legal services, advice and support
across the entire organization and ensures prompt compliance with the compliance and
disclosure requirements of the Securities and Exchange Commission and the Philippine Stock
Exchange for listed companies. It also provides corporate secretarial services to the Board of
Directors and the Board Committees and assists the Office of the Corporate Secretary in the
preparation and conduct of the stockholders’ meeting and board meetings.

 The Enterprise Risk and Insurance Management (ERIM) Department is responsible for the
sustained implementation of the Enterprise Risk Management program of the Company and
ensures that key risks are identified and managed by the respective risk owners. The
department also manages the insurance program of the Company with the objective of making
the program optimal, cost-effective, risk-based and responsive to the Company’s needs. The
department reports functionally to the Audit and Governance Committee (AGC) and
administratively to the Chief Finance Officer.

8. The Strategic Asset Management Group is formed to achieve the optimal and sustainable
delivery of services and profitability through the efficient and effective management and
development of assets. The group is mandated to provide a comprehensive, holistic and integrated
master plan that will address capital investments both for water and wastewater systems, the
operation and maintenance of existing and new assets, and the rationalization and disposal of
surplus assets. To deliver these services, the group is organized into four(4) departments namely,
(1) Strategic Asset Planning, (2) Program Management, (3) Asset Management and (4) the Asset
Information Management and Support. The Strategic Asset Planning Department is responsible for
the development of the master plan both for water and wastewater systems and shall ensure the
attainment of business and regulatory commitments. The department’s scope is not be limited to
East Zone alone but will include services to Manila Water subsidiaries. The Program Management
Department is entrusted to manage the execution of capital expenditure programs of the company.
The department ensures timely, cost-efficient delivery of all planned infrastructure projects. The
Asset Management Department is tasked to provide a systematic integration of advance
management techniques to sustain optimum performance of assets at least cost. Lastly, the Asset
Investment Management and Support will provide value adding and accurate information, analytics,
policies, framework and processes to each of the departments in the group. Their operation enables
the whole Strategic Asset Management Group to deliver its corporate commitments with efficiency
and effectiveness.

9. The Information Technology Group is responsible for providing innovative technology solutions
that support the company’s initiatives towards greater efficiency and growth. It is composed of four
(4) Departments: Systems and Solutions, Service Management, Information Security, and IT
Governance. The Systems and Solutions Department is responsible for the development and
maintenance of all projects and systems supporting the business. It is in charge of identifying,
designing, and delivering technology solutions and applications that support the success of the
business. The Service Management Department oversees the day-to-day operations of ITG
including the availability, performance, and capacity of ITG resources. It is responsible for the
development of tactical plans in the deployment of hardware, operating systems, and data
networks, in order to meet business-driven service levels and business continuity requirements.
The Information Security Department is in charge of developing and enforcing the enterprise wide
Information/IT security strategies, policies, standards, procedures, and awareness program and in
46
ensuring compliance with relevant information security standards. It also implements and maintains
technical and procedural controls to protect information flow across networks. The IT Governance
Department handles the governance functions on program management, financial planning and
control, risk management and other IT processes.

Water Operations
The supply of water by the Company to its customers generally involves abstraction from water sources
and the subsequent treatment and distribution to customers’ premises. In 2014, the East Zone
Business Operations supplied approximately 1,386 million liters per day (MLD) and billed 448.96 MCM
of water compared to 1,354 MLD of water supplied and 433.6 MCM billed in 2013. The Company served
a total of 1,342,807 households through 948,230 water service connections as of December 31, 2014,
as compared to last year’s level of 1,305,020 households and 921,898 water service connections.

Water Resources
Under the CA, MWSS is responsible for the supply of raw water to the Company’s distribution system
and is required to supply a maximum quantity of water, currently pegged at 1,600 MLD. In case MWSS
fails to supply the required quantity, the Company is required to distribute available water equitably.

The Company substantially receives all of its water from MWSS, which holds permits to the raw surface
waters of the Angat and Umiray Rivers. The raw surface water which MWSS supplies to the Company
comes from the Angat and Umiray Rivers, abstracted from the Angat Dam, and conveyed to the Ipo
Dam through the Ipo River. Only a very small amount of the Company’s water supply is still ground-
sourced through deep wells, these are for the far reaches of Rizal wherein conveyance from the existing
treatment plants would be impractical. As of December 31, 2014, the Company has only three (3)
operational deep wells with an average production of 1.85 MLD.

Water Treatment
Raw water is stored at the La Mesa reservoir located immediately downstream of the Novaliches portal
interconnection before going to the three (3) treatment plants, two (2) of which are in Balara located
seven (7) kilometers away and the third is nestled just at the northeast of La Mesa Dam.

The Balara treatment plants have a total design capacity of 1,600 MLD and consist of two (2) separate
treatment systems: Balara Filter 1, which was commissioned in 1935 and Balara Filter 2 which was
commissioned 1958. These treatment plants have common use of chemical preparation equipment and
dosing facilities. The treatment process in these plants involves coagulation, flocculation,
sedimentation, filtration and chlorination. The facilities consume higher quantities of chemicals during
the rainy season when the turbidity of water increases, which leads to increased costs of operations.

Both plants are operating with an on-line monitoring system which enables real-time monitoring of water
quality data which, in turn, provide an enhancement in chemical dosing efficiency. All of the filter beds
have been recently upgraded to improve efficiency. The beds were modified using a multi-block
underdrain system that includes an air-scour wash system, a more efficient method of cleaning the
media using less water. Bulk of the sludge management plant was constructed in 2010 and started
operating in 2011. Both plants are currently undergoing a structural retrofit to make the facilities more
resilient to earthquakes.

Water Distribution
After treatment, water is distributed through the Company's network of pipelines, pumping stations and
mini-boosters. As of December 31, 2014, the Company's network consisted of approximately 5,000km
of total pipeline, comprising of primary, secondary and tertiary pipelines ranging in diameter from 50 to
2,200 mm. The pipes are made of steel, cast iron, asbestos cement pipe, polyvinyl chloride and other
materials. Due to pipes' excessive tendency to leak, the Company have replaced most of its Asbestos
Cement Pipes (ACP) down to 0.001% which at the start were estimated to comprise approximately
25.5% of the total pipeline length from the start of the concession in 1997 until the end of 2014, the
Company has laid almost 4,800 km of pipeline through expansion or replacement. This holistic pipe
replacement supported with effective area management has led to a non-revenue water percentage of
11.28%, far from the 1997 value of 63%.

Pumping stations also play a critical part in water distribution. Approximately 66% of the surface water
supplied by the Company is pumped to ensure supply in high elevation areas. Currently, the Company
operates nineteen (19) pumping stations with a combined maximum pumping capacity of 3000 MLD
and an average plant output of 904 MLD. Most of the major pumping stations have reservoirs with a
combined capacity of almost 400 ML.

47
The Company operates twenty-one (21) line boosters in order to reach the fringe areas, which are quite
distant from the treatment plants. Line boosters typically are small facilities aimed at augmenting water
supply for areas that are not sufficiently supplied during the regular pumping operations of the pump
stations.

Non-Revenue Water
NRW refers to the volume of water lost in the Company’s distribution system due to leakage, pilferage,
illegal connections and metering errors. As determined by the MWSS-RO, NRW is calculated as a
percentage of the net volume of water supplied by the Company. The net volume of water supplied by
the Company comprises the total volume of water supplied by the Company net of Cross Border
Volume. Cross Border Volume is the volume of water transferred to the West Zone concessionaire less
transfers received by the East Zone from the West Zone Concessionaire in the past. To date, the cross
border flows have completely stopped.

The Company’s NRW levels have been significantly reduced from an average of 63% at the date of
commencement of operations under the CA to 11.28% for the year ended December 31, 2014. The
significant improvement in the Company’s system losses was accomplished through effective
management of water supply coupled with massive pipe replacement projects.

Water Quality
Since 1998, the Company’s water quality has consistently surpassed the Philippine National Standards
for Drinking Water (PNSDW) set by the Department of Health (DOH) and based on World Health
Organization (WHO) water quality guidelines. The Company’s rating is based on a series of tests
conducted regularly at 843 (4.3% above the PNSDW requirement of 808 as of end of 2014) regulatory
sampling points within the East Zone. The Company’s water samples scored an average bacteriological
compliance of 100%, surpassing the threshold of 95% set in the PNSDW. In 1997, when the concession
began, only 87% of water samples complied with these quality standards. The Company collects and
tests samples for microbial examination and physico-chemical examination from our surface water
sources, (Angat, Ipo, Bicti and La Mesa reservoirs), ground water sources (deepwells), water treatment
plants and distribution points based on frequencies as required in the standard.

Water quality at the Company’s water treatment plants undergoes daily microbial (bacteriological) and
physico-chemical analysis and consistently is 100% compliant on the basic and health significant
parameters required in the PNSDW. Regulatory sampling points are designated at strategic locations
across the distribution system within the coverage area wherein sampling is conducted daily by MWCI.
The MWSS-RO, Local Government Units (LGUs) and DOH likewise collect random samples from these
designated sampling points and have them tested by third party laboratories and designated
government laboratories. The results were consistently beyond the 95% set in the PNSDW.

The samples that we collect are tested at our own Laboratory, which is accredited by the DOH and a
recognized EMB-DENR testing laboratory. The Laboratory has also gained its recognition as an
ISO/IEC 17025:2005 accredited laboratory (meeting the principles of ISO 9001:2008 obtained by the
Company’s laboratory for water/wastewater testing and sampling in October 2006) granted by the
Philippine Accreditation Office, Department of Trade and Industry (DTI). These recognition and
accreditations subject the laboratory to regular surveillance audits. Consistently, the Laboratory has
gained excellent and satisfactory ratings on most proficiency testing programs it has participated
through local and international proficiency testing program providers. In 2010, the Laboratory also
gained certifications for ISO 9001:2008, ISO 14001:2004 and OSHAS 18001:2007. These recognitions
have gained the confidence of the MWSS-Regulatory Office, the DOH and DENR in the tests results
that are regularly provided to them.

Sewerage Operations
The Company is responsible for the provision of sewerage and sanitation services through the operation
of new and existing sewerage systems and a program of regular maintenance of household septic tanks
in the East Zone.

Sewerage and Sanitation System


Since 1997, the Company has significantly improved and expanded the limited wastewater
infrastructure originally operated and maintained by the MWSS. Sewerage services are provided in
areas where treatment facilities are available. Sewered areas are currently located in Quezon City and
Makati, but parts of Manila, Taguig, Cainta, Pasig and Mandaluyong are also connected to sewer
networks.

48
The Company had few facilities for sewerage services in 1997. The Sewage Treatment Plant (STP) in
Magallanes Village is the largest treatment facility in the country with a 40 MLD capacity. The STP in
Magallanes provides sewerage services to the Makati central business district and some residential
villages. Prior to privatization, this facility had poor treatment efficiency and did not meet effluent quality
standards. The Karangalan Bio-module in Karangalan Village serves approximately 100 households
but also produced substandard effluent quality before 1997. An Imhoff tank in Phil-Am Village and thirty-
one communal septic tanks (“CSTs”) in Quezon City were also turned-over in 1997. These facilities
serve approximately 19,000 households. These facilities have been upgraded to secondary treatment
and now meet effluent standards set by the DENR.

In 2001, the Company constructed two (2) pilot package plants to determine if they were feasible in
terms of social, financial, and environmental aspects. These are located in Valle Verde Homes, Pasig
that serves approximately 100 households and another serves some 400 households of the housing
project in Makati together with approximately 4,000 students and employees in Rizal Elementary
School.

With the success of the two (2) pilot STPs, the Company implemented the Manila Second Sewerage
Project (MSSP) funded by World Bank. Under the MSSP, twenty-six (26) STPs were
constructed. Sixteen (16) of these STPs were formerly CSTs and the rest are on-site STPs for medium
and high rise housing establishments and for the UP campus. Takeover and upgrade of the STP in
Diego Silang, Taguig was also part of the MSSP.

In 2007, the Company took over the operations and maintenance of the Bonifacio Water Sewage
Treatment Plant in Fort Bonifacio Taguig City. This facility brought an additional 5MLD treatment
capacity.

As of the end of 2014, the Company has already served through sewer service, 251,868 households
within the East Metro Manila. As of year-end 2014, the Company operates 38 Wastewater Facilities
including two (2) SpTPs, with a total capacity of 134.602 MLD, compared to 40 MLD in 1997.

Customers who are not connected to the sewer network are provided with septic tank maintenance
services through the “Sanitasyon Para Sa Barangay” (SPSB) program. Through cooperation with the
barangays the program aims to desludge all septic tanks in a barangay without charge over a specified,
set schedule.

As part of its commitment to expand this service, the Company constructed and subsequently operated
in 2008 under the Manila Third Sewerage Project (MTSP) two (2) SpTPs aimed at managing septic
tank materials siphoned from the East Concession customers. A total of 77 desludging trucks operate
daily to ensure the desludging service is rendered to the entire East Zone population over the next five
years. Since 1997, the Company has already provided such service to more than 1,000,000
households.

The MTSP is a follow-up to the MSSP and has the ultimate objective of improving sewerage and
sanitation conditions in the East Zone. It was developed as a means of achieving the Company’s
sewerage and sanitation service targets. The remaining components of the MTSP include the
construction of sewer networks and treatment plants in several locations in the East Zone including
upgrading of existing communal septic tanks with secondary treatment levels.

The technical assistance component will focus on information and education campaigns on proper liquid
waste disposal and environment preservation and the preparation of follow-up programs on sewerage
and sanitation, with emphasis on low-cost sanitation systems.

New Business and Investments Outside of the East Zone


It is also the Company’s objective to further bring its expertise in NRW reduction outside of the East
Zone by establishing partnerships with private companies, local water districts and local government
units in top metros of the country and in selected cities in the Asian region. Other water business
models, such as bulk arrangements, operations and maintenance are also being explored and
implemented. Towards this end, the Company has signed joint venture agreements and/or investment
agreements with local and international partners in the last few years.

LAWC is a Joint Venture (“JV”) between AAA Water Corporation, a wholly-owned subsidiary of Manila
Water, and the Province of Laguna (“POL”), with shareholdings of 70% and 30%, respectively. The JV
is for the purpose of undertaking the development, design, construction, operation, maintenance and
financing of the water facilities that will service the needs of the cities of Sta. Rosa and Biňan, and the
49
municipality of Cabuyao in Laguna. Towards this end, LAWC entered into a Concession Agreement
with the POL on April 9, 2002 for an operational period of 25 years.

BIWC is a JV between Manila Water and the Philippine Tourism Authority (“PTA”) with shareholdings
of 80% and 20%, respectively. In December 2009, BIWC entered into a concession agreement with the
PTA (now Tourism Infrastructure and Enterprise Zone Authority) covering the provision of water and
wastewater services in the Island of Boracay.

CWC is the water and wastewater concessionaire of Clark Development Corporation (“CDC”) in the
Clark Freeport Zone in Angeles, Pampanga. By virtue of an amendment agreement executed on August
15, 2014, the 25-year concession agreement with the CDC was extended by another fifteen (15) years
or until October 1, 2040. In November 2011, Manila Water acquired 100% ownership of CWC through
a Sale and Purchase Agreement with Veolia Water Philippines, Inc. and Philippine Water Holdings, Inc.

In December 2011, Manila Water purchased a 49% share ownership of Thu Duc Water BOO
Corporation (“TDW”) which owns the second largest water treatment plant in Ho Chi Minh City. TDW
has a bulk water supply contract with SAWACO for a minimum consumption of 300 MLD on a take-or-
pay arrangement.

In the first quarter of 2012, the Company through Northern Waterworks and Rivers of Cebu, Inc. (now
“Manila Water Consortium, Inc.”, a consortium of Manila Water, Metropac Water Investments
Corporation and Vicsal Development Corporation), signed a Joint Investment Agreement (“JIA”) with
the Provincial Government of Cebu (“PGC”) for the development and operation of a bulk water supply
system in the province. The JIA resulted in the incorporation of Cebu Manila Water Development, Inc.
(“CMWD”), a corporation owned by the consortium and the PGC in the proportion of 51% and 49%
respectively.

In July 2012, the Company completed the acquisition of a 47.35% stake in Kenh Dong Water Supply
Joint Stock Company (“KDW”), a Vietnamese company established in 2003 to build, own, and operate
major water infrastructure facilities in Ho Chi Minh City. .

In October 2013, Manila Water South Asia Holdings Pte. Ltd., a wholly owned subsidiary of Manila
Water in Singapore, completed the acquisition of 31.47% stake in Saigon Water Infrastructure
Corporation (“Saigon Water”), a listed company in Vietnam. In December of the same year, CMWD
signed a 20-year Bulk Water Supply Contract with the Metropolitan Cebu Water District for the supply
of 18 million liters per day of water for the first year and 35 million liters per day of water for years two
up to twenty. Thereafter, in the same month, LAWC signed an Asset Purchase Agreement with the
Laguna Technopark, Inc. (“LTI”) for the acquisition of the water reticulation system of LTI in Laguna
Technopark, a premier industrial park located in Sta. Rosa and Binan, Laguna which is home to some
of the region’s largest and more successful light to medium non-polluting industries.

On March 17, 2014, the Parent Company and Mitsubishi Corporation, signed a Memorandum of
Understanding with the YCDC in Yangon City, Myanmar for the development of a proposed non-
revenue water reduction project for Yangon City. YCDC is an administrative body of the city government
in Yangon in charge of the water, infrastructure, business licenses and city property management,
among others.

On December 19, 2014, the Parent Company received a notice from the ZCWD awarding the project
for nonrevenue water reduction activities in Zamboanga City. The project shall be implemented through
a joint venture company to be formed by ZCWD and the Parent Company.

Environmental Compliance
The Company’s water and wastewater facilities must comply with Philippine environmental standards
set by the Department of Environment and Natural Resources (DENR) on water quality, air quality,
hazardous and solid wastes, and environmental impacts. In keeping with the Company’s commitment
to sustainable development, all projects are assessed for their environmental impact and where
applicable, must obtain an Environmental Compliance Certificate (ECC) from the DENR prior to
construction or expansion and the conditions complied with, along with all other existing environmental
regulations. During and subsequent to construction, ambient conditions and facility-specific emissions
(e.g. air, water, hazardous wastes, treatment by-products) from water and wastewater facilities are
routinely sampled and tested against DENR environmental quality standards using international
sampling, testing and reporting procedures.

50
The Company has made efforts to meet and exceed all statutory and regulatory standards. The
Company employs the appropriate environmental management systems and communicates to its
employees, business partners and customers the need to take environmental responsibility seriously.
The Company uses controlled work practices and preventive measures to minimize risk to the water
supply, public health and the environment. The Company’s regular maintenance procedures involve
regular disinfection of service reservoirs and mains and replacement of corroded pipes. The Company’s
water and wastewater treatment processes meet the current standards of the PNSDW, DOH, DENR
and LLDA. The Company continues to undertake improvements in the way it manages both treated
water and wastewater as well as treatment by-products such as backwash water, sludge and biosolids.

The Company has contingency plans in the event of unforeseen failures in the water and wastewater
treatment or chemical leakage and accidental discharge of septage and sewage. The Company’s
Customer Care Center is used to ensure that environmental incidents are tracked, monitored and
resolved.

A policy on climate change was formulated to define the Company’s commitment to the National
Framework Strategy for Climate Change. While the company is undertaking climate change mitigating
measures such as greenhouse has accounting and reporting along with initiatives to optimize
consumption of fuel and electricity to reduce its carbon footprint, there is a current emphasis towards
climate change adaptation such as intensifying watershed rehabilitation work, vulnerability assessment
of water sources and assets, improving the climate-resiliency of existing and future water and
wastewater facilities, strengthening risk reduction and management systems with a business continuity
plan, and development of new water sources.

Sustainable Development Projects


Sustainability for Manila Water means that while providing excellent water and wastewater services to
its over six million customers, it ensures that it uses water resources efficiently so that its future
customers will have the same level of services that its present customers, including low-income
communities, enjoy.

As part of its efforts to strengthen sustainability in its organization, Manila Water updated its
Sustainability Policy to make it more comprehensive and inclusive, and to align it to international
frameworks such as the ISO26000 guidance on social responsibility. The Company likewise revised its
Climate Change Policy, consistent with the national government’s anchor strategy of adaptation.

Manila Water also championed sustainability among its operating subsidiaries, LAWC, BIWC and CWC,
by assisting them to develop their respective sustainability frameworks and programs.

While continuing to implement its flagship programs for the urban poor such as ‘Tubig Para Sa
Barangay’ (TPSB) and ‘Lingap’ programs for public service institutions, Manila Water initiated Greening
our Future, an environmental education program for employees, and participated in the week-long
Global Handwashing Day celebration in Metro Manila, Laguna, Pampanga and Boracay. It also
engages its employees in volunteer work through the ‘Bawat Patak, Tumatatak’ program.

Employees
As of December 31, 2014, the Company had 1,322 employees. Approximately 16% were non-
management employees and 84% held management positions. Six (6) employees are seconded from
Ayala.

The following table presents the number of employees as of the end of the period indicated:
Seconded from
Year Former MWSS Direct Hires Ayala Corp. Total
2014 649 667 6 1,322

The following table presents the number of employees by function as of the December 31, 2014:

Non-
Group Management Total
Management
Corporate Finance & Governance 123 5 128
Corporate Human Resources 25 1 26
Corporate Strategic Affairs 16 16
Corporate Strategy & Development 54 54
51
East Zone Business Operations 492 98 590
Information Technology 24 24
Manila Water Foundation 4 4
Manila Water Total Solutions 15 15
Office of the President 4 4
Operations 200 106 306
Project Delivery 107 107
Strategic Asset Management 48 48

Total 1112 210 1322

Before privatization, the MWSS had 8.4 employees per 1,000 service connections. Manila Water
Company has improved this ratio to 1.5 employees per 1,000 service connections as of December 31,
2014. This was accomplished through improvements in productivity achieved through, among other
initiatives, value enhancement programs, improvements in work processes, employee coaching and
mentoring, transformation of employees into knowledge workers, and various training programs. Manila
Water’s organizational structure has been streamlined, and has empowered employees through
decentralized teams with responsibility for managing territories. In addition, the company formed multi-
functional working teams which are composed of members of the management team tasked with
addressing corporate issues such as quality and risk, and crisis management.

As of December 31, 2014, 201 or 15 percent of the employees of the company are members of the
Manila Water Employees Union (MWEU). In 2013, the company and the MWEU concluded negotiations
on a new collective bargaining agreement (CBA). MWEU has the option under the law to renegotiate
the non-representation provisions of the CBA by the third quarter of 2016. The CBA provides for a grant
of P500 million in compensation and benefits spread over three years to employees categorized as
non-management collective bargaining unit (CBU) employees. The company believes that its
management maintains a strong partnership with union officials and members as it has not had any
strikes since its inception. Grievances are handled in management-led labor councils. The CBA also
provides for a mechanism for the settlement of grievances.

The company has a two-pronged strategy in talent development – strengthening leadership capabilities,
and building and strengthening technical expertise to maintain its leadership in the water industry and
contribute to national development. Programs were implemented in partnership with the line managers
with the aim of ensuring an agile, enabled, mobile and highly engaged workforce that will support the
corporate growth strategy.

On the leadership front, several initiatives were undertaken to ensure a strategic, well-rounded
approach to leadership development:

 Succession Management: We have expanded our talent pool to strengthen the senior management
leadership pool of Manila Water. Talents receive deliberate development interventions – individual
development planning, stretched assignments, executive coaching, and mentorship to accelerate
their development. We also have conducted talent reviews with the line managers to identify and
develop talents to assume current and emerging roles. Another key initiative was the integration of
Manila Water’s talent and succession management process with the New Business Operations (i.e.
Laguna Water, Clark Water and Boracay Water). This exercise aims to strengthen the talent bench
in our subsidiaries, so that they may become a potential talent source for Manila Water.

 Executive Coaching and Mentorship Program: The members of the Management Committee
(MANCOM) champion an Executive Coaching and Mentorship Program with key talents of the
organization.

 Business Zone Leadership School (BZLS): We launched the competency-based BZLS to ensure a
steady supply of competent talents in the East Zone Business Operations who can assume the
Business Zone Manager (BZM) role as needed by the business.

Complementing leadership development, the same level of focus is given to technical roles where
talents occupying highly technical positions are likewise given technical development to ensure that we
strengthen the technical competencies of our talents in the field that we operate in. A Technical
Coaching Program for our operations and technical groups is in place to support standard and
repeatable knowledge transfer.

52
As the business landscape becomes more complex and customers’ expectations become increasingly
high, the company has prepared and in 2014, progressed in its transition into competency-based
development. The Company launched the Manila Water University (MWU), the Company’s first-ever
corporate university. This learning and development platform will enable our talents to respond to
current and emerging business requirements.

The Company ensures that its reward system is market competitive, performance-based, aligned with
business strategies and results, and within regulatory parameters. In 2005, the company extended an
equal cash incentive to each employee covered by the reward system. In succeeding years, the
company further improved the system by taking care of the gaps in the distribution system and aligning
the reward system with the yearend goals of the company, which are anchored on the KPI/ BEM targets.
2014 marked our second year in engaging the line managers to take ownership and to champion the
implementation of the enhanced rewards programs.

Pursuant to the concession agreement (CA), the Company adopted the Employee Stock Option Plan
(ESOP). The ESOP was instituted to allow employees to participate directly in the growth of the
company and enhance the employees’ commitment toward its long-term profitability. In 2005, the
company adopted an Employee Stock Ownership Plan as part of its incentives and rewards system.

At the Manila Water’s inception, the Company instituted a welfare fund to which it must contribute no
less than five percent of the monthly basic salary of a member who has authorized the company to do
so. In 2005, the company's Board of Directors approved the establishment of an enhanced retirement
and welfare plan. The plan is being administered by a Retirement and Welfare Plan Committee, which
also has the authority to make decisions on the investment parameters to be used by the trustee bank.

Over and above these benefit and reward schemes, the Company gives recognition for employees who
best exemplify the Company’s culture of excellence through the Chairman’s Circle (C2) Awards for
senior managers, the President’s Pride due to Performance (P3) honors for middle managers and the
Huwarang Manggagawa (Model Employee) Awards for the rank-and-file employees. Eight of the
Company’s model employee awardees have also been awarded ‘The Outstanding Workers of the
Republic’ (TOWER) Award by the Rotary Club of Manila from 1999 to 2009, by far the most won by any
single company over that period.

Over the past seventeen years, the Company has been the recipient of numerous awards that include
the following: the Global Grand Prize in the 2010 International Water Association Project Innovation
Awards for the company’s creative approaches in reducing systems losses to benefit its customers, the
“Water Efficiency Project of the Year” from Global Water Intelligence and Water Desalination Report for
the “Manila Water NRW Strategy” that reduced systems losses significantly and improved customer
satisfaction, the Honour Award in the 2010 International Water Association Project Innovation Awards
for the Olandes Sewage Treatment Plant project, 1st Philippine Stock Exchange Bell Awards for
Corporate Governance, Platinum Plus award from the Institute of Corporate Directors, the four Best-
Managed Company Awards from Asiamoney Magazine, the seven corporate governance awards from
CorporateGovernance Asia, the Best-Managed Mid-Cap Company Award from FinanceAsia Magazine,
twenty Anvil awards from the Public Relations Society of the Philippines from 2004 to 2012, twelve Quill
Awards from the International Association of Business Communicators Philippines from 2006 to 2012,
the Distinction Award for the Water Deal of the Year from Global Water Intelligence, the Asia Water
Management Excellence Award-Industry Category, the Intel-Asian Institute of Management Corporate
Responsibility Award in 2009, the Most Integrated into the Core Business Award from the Management
Association of the Philippines and League of Corporate Foundations, and the 2002 Model Company
Award and 2010 Hall of Fame Award from the Department of Trade and Industry, which singled out the
company’s “consistency and passion” in pursuing programs on labor and management cooperation,
quality and productivity improvement, and family welfare and community relations.

A landmark recognition was earned by Company when it was cited the 2006 Employer of the Year by
the People Management Association of the Philippines. Another prestigious award earned by the
Company was the Asian Human Capital Award given by the Singaporean government in 2012. The
2006 Employer of the Year honors were bestowed upon Manila Water for providing a remarkable
example of how a group of much-maligned government workers was transformed into a thoroughly
efficient organization that is now a leader in its industry. The Asian Human Capital Award, meanwhile,
may be the biggest recognition yet earned by the Company as an employer for simply being an award
that is so difficult to obtain due the stringent standards being employed by its giver, the Singaporean
Ministry of Manpower, whose comprehensive selection process did not prevent Manila Water from
becoming the first-ever Filipino company to capture the elite honors. The Singaporean government
deemed the Company worthy of the award for harnessing its people in transforming from a languishing
53
water service provider into a world-class water and wastewater company, citing not only its
accomplishments but also the way it turned around its business using its human resource.

In 2014, the Company bagged the following awards and recognitions: One of 20 Global Growth
Companies (GGC) in East Asia – World Economic Forum (May 2014); No. 2 in the 2014 Sustainability
Ranking – Channel NewsAsia (November 2014); Asia’s Icon on Corporate Governance –
CorporateGovernance Asia (November 2014); 1st in Innovation in Water, Wastewater and Stormwater
Network Modelling and Analysis for the Marikina North STP Project - Bentley Systems, Inc.’s Be
Inspired Awards (November 2014); PSE Bell Award for Corporate Governance, Hall of Fame –
Philippine Stock Exchange (November 2014); Asia Geospatial Excellence Award – Asia Geospatial
Forum (November 2014); Philippine Esri Best Overall Map Award for ‘The Business Risk Exposure
Assessment of Manila Water Network Asset Project Map’ – Philippine Esri User Conference and
2nd Philippine Esri Education GIS Conference (September 2014); First Don Emilio Abello Energy
Efficiency Award for the San Juan Pumping Station – Department of Energy (October 2014); IABC
Quill Awards, Awards of Excellence and Awards of Merit for various business communication programs
– International Association of Business Communicators (IABC) Philippines (2014).

In 2014, Manila Water was also given the ISO 50001 Certification for Energy Management System
(April 2014). (Manila Water is the first Philippine company to receive this certification)

In April 2014, the Laguna Lake Development Authority cited the following employees as Outstanding
Pollution Control Officers – Blue Ratee for the 7 Sewage Treatment Plants of Manila Water: Sharon B.
Cerbito - North Septage Treatment Plant (San Mateo); Jimaima M. Hoque - Sikatuna STP; Jocelyn M.
General (PCO), Johannes Paulus O. Costales (Plant Manager) - Fisheries STP; John Von Wernher C.
Dela Cruz - Pag-Asa STP, Heroes’ Hill STP; Ninya Kristina L. Cabico - Belarmino Stp, Palosapis STP;
and Jeremaine V. Esguerra - East Ave STP.
In August 2014, the Department of Health also gave the Typhoon Yolanda ‘Unsung Heroes’ Plaque of
Recognition for Manila Water’s Mobile Treatment Plant Operations.

Related Party Transactions


In the normal course of business, the Company has transactions with related parties. The sales and
investments with related parties are entered into and/or executed at normal market prices. Furthermore,
service agreement fees are based on rates negotiated and agreed upon by the parties.

As of December 31, 2014, outstanding balances for related party transactions are unsecured and
interest-free. There have been no guarantees provided or received for any related party receivables or
payables. The Company has not made any provision for probable losses relating to amounts owed by
related parties. This assessment is undertaken each financial year by examining the financial position
of the related party and the market in which the related party operates.

The Company has an existing contract with Ayala Corporation for the provision of administrative,
technical and support services in relation to human resources, treasury, accounting, capital works,
corporate services and regulatory affairs and administrative management of the Company.

No other transaction was undertaken by the Company in which any director or executive officer was
involved or had a direct or indirect material interest.

Risks Disclosure

2014 TOP CORPORATE RISKS MITIGATION STRATEGIES


EAST ZONE BUSINESS Weekly quarterbacks are in place to review operational
ENVIRONMENT highlights. Power-saving initiatives and other activities to improve
operational efficiency were implemented. Management of key
Failure to adapt to the changing accounts was strengthened to maximize revenue opportunities.
business environment in the East In addition, the Manila Water Total Solutions was scaled up to
Zone as a result of market generate new revenue sources.
saturation, increasing cost of
operations and increasingly
demanding political and
consumer environment.

INVESTMENT PLAN A capex optimization project is being undertaken to optimize


EXECUTION processes, functions and resources to ensure projects are
implemented within budget and timeline, and at an acceptable
54
Failure to meet CAPEX targets quality level. A rigorous review and approval process for project
within the approved cost, time approval, variation orders and time extensions are in place. Risk
and quality. assessments and action plans are also being developed for
critical projects and are reviewed as part of the project approval
process. A project risk management program is in place wherein
projects are categorized in different tiers with varying frequency
of review and reporting of risks and levels for risk acceptance.
Risk management and business continuity workshops were
conducted to suppliers, vendors and contractors to cascade the
risk management mindset to partners. Furthermore, there is a
random safety audit for on-going projects.
REGULATORY Programs have been implemented to ensure control of regulatory
and socio-political risks at both compliance and strategic levels.
Failure to meet regulatory Monitoring of the Company's compliance with various regulatory
requirements and manage requirements (all regulatory agencies) is done. Organizational
threats/changes to such enhancements were implemented to improve the regulatory
requirements which may compliance of the organization. In addition, the document
adversely affect the organization. management system has been enhanced to improve readiness
in regulatory review and audit.
WATER SUPPLY Activities are being done to further increase reliability and
efficiency of the current water supply system such as the
Failure to ensure adequacy and development of medium-term water sources, weekly monitoring
reliability of raw water supply. and investigation of NRW contributors, preventive and corrective
maintenance of dam facilities, and aqueducts and
implementation of metering at raw water portal and tailrace
metering. The development of new water sources has been
included in the plans.
NEW BUSINESS OPERATIONS There were organizational changes to improve Manila Water’s
control and visibility in the subsidiaries. Risk officers have been
Failure to manage risks/issues appointed to strengthen risk governance in the subsidiaries. The
linked to operating new enterprise risk management framework had been implemented
businesses. by the new businesses and their top risks and action plans are
being reported to Manila Water. To meet the talent requirements
of new businesses, services of third parties and head hunters
were employed.

As the Company continues to embark on expansion projects locally and internationally, the Company
understands the need for effective Risk Management to identify major risks in the Company’s business
operations and development projects. Towards this end, the Company established its Enterprise Risk
Management (“ERM”) Program, taking the existing risk management process to a higher level and
developing a common risk language and framework that is easily understandable. The ERM is a way
of managing risk and uncertainty in the new economy. It aligns the Company’s strategy, processes,
people, technology and knowledge to meet its risk management purpose and achieve its objectives.
The Company aims to make ERM a way of life where managing risks becomes the responsibility of
everyone in the organization with end view of increasing shareholder value and enhancing the already
effective risk management programs of the Company. The Chief Risk Officer is appointed by the Board
to champion the ERM Framework across the entire organization.

Government Regulations
The Company has to comply with environmental laws and regulations which include:

 General Environmental Safeguards


 Presidential Decree No. 1586 (Philippine Environmental Impact Statement System)
 DENR Administrative Order No. 30, Series of 2003 (Implementing Rules and Regulations for
the Philippine Environmental Impact Statement System)
 DENR Administrative Order No. 26, Series of 1992 (Appointment/Designation of Pollution
Control Officers).
 DENR Administrative Order No. 27, Series of 2003 (Self Monitoring Report System)

55
 Water
 Republic Act No. 9275 or the Philippine Clean Water Act of 2004
 DENR Administrative Order No. 10, Series of 2005 (Implementing Rules and Regulations of
R.A. No. 9275)
 DENR Administrative Order No. 35, Series of 1990 (General Effluent Standards)
 DENR Administrative Order No. 39, Series of 2003 (Environmental Users Fees)

 Air
 Republic Act No. 8749 or the Philippine Clean Air Act of 1999
 DENR Administrative Order No. 81, Series of 2000 (Implementing Rules and Regulations of
R.A. 8749)

 Solid Waste
 Republic Act No. 9003 or the Ecological Solid Waste Management Act of 2000
 DENR Administrative Order No. 34, Series of 2001 (Implementing Rules and Regulations of
R.A. No. 9003)

 Hazardous Wastes and Chemicals


 Republic Act No. 6969 or the Toxic Substances, and Hazardous and Nuclear Waste Control
Act of 1990
 DENR Administrative Order No. 29, Series of 1992 and DENR Administrative Order No. 22,
Series of 2013 (Implementing Rules and Regulations of R.A. No. 6969, and Revised
Procedures and Standards)
 Philippine Drug Enforcement Agency – Republic Act 9165- Regulatory Controls in Licit Trade
of Controlled Precursors and Essential Chemicals
 Philippine National Police – License to Possess/Purchase Explosives (Chemical used in the
laboratory that are ingredients/kind of explosives)

 Others
 Republic Act No. 4850 or the Act Creating the Laguna Lake Development Authority (LLDA)
 Relevant LLDA Board Resolutions and Memorandum Circulars, including but not limited to
Resolution No. 25, Series of 1996 (Environmental User Fee System in the Laguna de Bay
Region) and Resolution No. 33, Series of 1996 (Approving the Rules and Regulations
Implementing the Environmental User Fee System in the Laguna de Bay Region)
 Presidential Decree No. 856 or the Philippine Sanitation Code
 Implementing Rules and Regulations of the Philippine Sanitation Code

Other Matters
The Company has not been involved in any bankruptcy, receivership or similar proceeding as of
December 31, 2014. Further, except as discussed above, the Company has not been involved in any
material reclassification, consolidation or purchase or sale of a significant amount of assets not in the
ordinary course of business. The Company is not engaged in sales to foreign markets.

The Company is not dependent on a single customer or a few customers, the loss of any or more of
which would have a material adverse effect on the Company.

Bank of the Phil. Islands (BPI or the Bank), and Globe Telecom (Globe) are significant associate and
joint venture of the Group. Their summarized financial information are therefore presented separately.

56
BANK OF THE PHILIPPINE ISLANDS

Bank of the Philippine Islands (BPI or the Bank) – highlights of balance sheets and income statements
are shown below:

Balance Sheets
(In Million Pesos)

December 2014 December 2013

Total Resources 1,450,197 1,195,364

Total Liabilities 1,303,518 1,089,557


Capital Funds Attributable to the Equity Holders of BPI 144,063 104,535
Capital Funds Attributable to the Noncontrolling Interest 2,616 1,272

Total Liabilities and Capital Funds 1,450,197 1,195,364

Statements of Income
(In Million pesos)
December 2014 December 2013

Interest income 45,992 40,802


Other Income 20,979 22,174
Total revenues 66,971 62,976

Operating expenses 29,960 26,703


Interest expense 11,184 10,478
Impairment losses 2,807 2,648
Provision for income tax 4,958 4,153
Total Expenses 48,909 43,982

Net income for the period 18,062 18,994

Attributable to:
Equity holders of BPI 18,039 18,811
Noncontrolling interest 23 183
18,062 18,994

EPS:
Based on 3,905 million and 3,627 million shares
as of December 31, 2014 and 2013, respectively. 4.62 5.19

For further details on the BPI’s financial condition and operations, please refer to its 2014 Consolidated
Financial Statements which is incorporated herein as part of exhibits.

Background and Business


The Ayala Group conducts its financial services business through Bank of the Philippine Islands
(alternately referred to as BPI, “the Bank” or “the Company” in the entire discussion of Bank of the
Philippine Islands). BPI is a Philippine-based universal bank with an expanded banking license.
Founded in 1851, BPI is the country’s oldest bank. In the post-World War II era, BPI evolved, largely
through a series of mergers and acquisitions during the 1980s and 1990s, from a purely commercial
bank to a fully diversified universal bank with activities encompassing traditional commercial banking
as well as investment and consumer banking.

Together with its subsidiaries, BPI offers a wide range of financial services that include corporate
banking, consumer banking, consumer lending, investment banking, asset management, securities

57
distribution, insurance services and leasing. Such services are offered to a wide range of customers,
including multinationals, government entities, large corporations, SMEs and individuals.

BPI is the third largest commercial bank in the country in terms of total assets and is among the listed
banks with the largest market capitalization. It has a significant market share in deposits, lending, and
asset management and trust business. It is recognized as one of the top commercial banks in overseas
Filipino (OF) remittances and enjoys a significant presence in the finance and operating lease business,
government securities dealership, securities distribution and foreign exchange business. BPI is a
recognized leader in electronic banking, where it has been a first mover and innovator in the use of
automated teller machines (ATMs), cash deposit machines (CDMs), point-of-sale debit systems, kiosk
banking, phone banking, internet banking and mobile banking.

Historical Background
Founded in 1851, BPI was the first bank formed in the Philippines and was the issuer of the country’s
first currency notes in 1855. It opened its first branch in Iloilo in 1897 and pioneered in sugar crop loans
thus paving the way for Iloilo and Negros to emerge as prime sugar exporters. It also financed the first
tram service, telephone system, and electric power utility in Manila and the first steamship in the country.

Business Evolution
For many years after its founding, BPI was the only domestic commercial bank in the Philippines. BPI’s
business was largely focused on deposit taking and extending credit to exporters and local traders of
raw materials and commodities, such as sugar, tobacco, coffee, and indigo, as well as funding public
infrastructure. BPI’s business developed throughout the late 1800s as the economy and the prominence
of the Philippines as an agricultural exporter developed. In keeping with the regulatory model set by the
Glass Steagall Act of 1932, the Bank operated for many years as a private commercial bank. In the
early 1980s, the Monetary Board of the Central Bank of the Philippines (now the BSP) allowed BPI to
evolve into a fully diversified universal bank, with activities encompassing traditional commercial
banking as well as investment and consumer banking. This transformation into a universal bank was
accomplished through both organic growth and mergers and acquisitions with BPI absorbing an
investment house, a stock brokerage company, a leasing company, a savings bank, and a retail finance
company.

BPI consummated three bank mergers since the late 1990s. In 1996, it merged with City Trust Banking
Corporation, a medium sized bank, which further solidified its stronghold in consumer banking, and in
2000, it consummated the biggest merger then in the banking industry when it merged with the former
Far East Bank & Trust Company (FEBTC). This merger established its dominance in the asset
management & trust services and branch banking as well as enhanced its penetration of the middle
market. In 2000, it also formalized its acquisition of three major insurance companies in the life, non-
life and reinsurance fields, a move that further broadened its basket of financial products. In 2005, BPI
acquired and merged with Prudential Bank, a medium sized bank with a clientele of middle market
entrepreneurs.

In March 2011, BPI became the first bank in the Philippines to acquire the trust business of a foreign
bank when it purchased the trust and investment management business and other related assets of
ING Bank N.V. Manila

BPI evolved to its present position of eminence via a continuing process of enhancing its array of
products and services while attaining a balanced and diversified risk structure that guaranteed the
stability of its earning streams.

Business Milestones (2012-2014)


In December 2014, BPI completed its joint venture with Century Tokyo Leasing Corporation, to form
BPI Century Tokyo Lease & Finance Corporation, with BPI retaining 51% of ownership. This strategic
partnership is expected to implement innovation, reach new customers, and enhance services to BPI
Leasing’s valued customers.

Principal Subsidiaries
The bank’s principal subsidiaries are:
1. BPI Family Savings Bank, Inc. (BFSB) serves as BPI’s primary vehicle for retail deposits, housing
loans and auto finance. It has been in the business since 1985.

2. BPI Capital Corporation is an investment house focused on corporate finance and the securities
distribution business. It began operations as an investment house in December 1994. It merged

58
with FEB Investments Inc. on December 27, 2002. It wholly owns BPI Securities Corporation, a
stock brokerage company.

3. BPI Direct Savings Bank is a savings bank that provides internet and mobile banking services to its
customers. It started operating as such on February 17, 2000 upon approval by the Bangko Sentral
ng Pilipinas.

4. BPI International Finance Limited, Hong Kong is a deposit taking company in Hong Kong. It was
originally established in August 1974.

5. Bank of the Philippine Islands (Europe) Plc was granted a UK banking license by the Financial
Services Authority (FSA) on April 26, 2007. It was officially opened to the public on October 1, 2007.
In July 2008, BPI Europe was permitted by the FSA to carry out cross-border services in other
European Economic Area (EEA) Member States.

6. BPI Century Tokyo Lease & Finance Corporation is a non-bank financial institution (NBFI)
registered with SEC to generally carry on the business of a financing company under the Financing
Company Act. It was originally established as Makati Leasing and Finance Corporation in 1970. It
merged with FEB Leasing & Finance Corporation on February 20, 2001. On December 22, 2014,
BPI Leasing Corporation completed its joint venture with Century Tokyo Leasing Corporation, with
BPI retaining 51% ownership. It wholly owns BPI Century Tokyo Rental Corporation which offers
operating leases.

7. Ayala Plans, Inc. is a 98% owned pre-need insurance company acquired through the merger with
Ayala Insurance Holdings Corp (AIHC) in April 2000.

8. BPI/MS Insurance Corporation is a non-life insurance company formed through the merger of FGU
Insurance Corporation and FEB Mitsui Marine Insurance Company on January 7, 2002. FGU and
FEB Mitsui were acquired by the Bank through its merger with AIHC and FEBTC in April 2000.

Business of Issuer

Principal Products & Services


The Bank offers a wide range of corporate, commercial and retail banking products. The bank has two
major categories for products & services. The first category covers its deposit taking and lending /
investment activities. Revenue from this category is collectively termed as net interest income and
accounts for about 62% of revenues. The second category covers services other than and auxiliary to
the core deposit taking, lending, and investing business, and from which it derives commissions, service
charges & fees from turnover volume. These include investment banking & corporate finance fees,
asset management & trust fees, foreign exchange, securities distribution fees, securities trading gains,
credit card membership fees, rental of bank assets, income from insurance subsidiaries and service
charges/ commissions earned on international trade transactions, drafts, fund transfers, various deposit
related services, etc. These services include traditional loan and deposit products, as well as treasury,
trust banking, investment banking, asset management, insurance and credit card services.

Foreign Offices Contribution


2012 2013 2014

Share in Total Revenue (%) 0.86 0.88 0.76


Hong Kong 0.27 0.28 0.30
USA 0.25 0.22 0.14
Europe 0.34 0.38 0.31

Share in Total Net Income (%) 0.04 0.25 0.04


Hong Kong 0.24 0.24 0.17
USA 0.02 0.00 (0.07)
Europe (0.23) 0.01 (0.06)

Distribution Network
BPI has 814 branches across the country, including 57 kiosk branches by the end of 2014. Kiosks are
branches much smaller than the traditional branch but fully equipped with terminals allowing direct
electronic access to product information and customers’ accounts as well as processing of self-service
transactions. They serve as sales outlets in high foot traffic areas such as supermarkets, shopping
59
malls, transit stations, and large commercial establishments. Additionally, there are 6 BPI Globe BanKO
(BanKO) branches set up in strategic locations in the country. BanKO, a joint venture with Ayala Corp.
and Globe Telecom, is the country’s first mobile-based savings bank whose goal is to extend financial
services to the lower end of the market. Overseas, BPI has a total of five (5) branches, one (1) in Hong
Kong (BPI International Finance Limited) and four (4) BPI Europe Plc branches in London.

BPI’s ATM network of 2,575 terminals complements the branch network by providing banking services
to its customers at any place and time of the day. The interconnection with Megalink and Bancnet in
1997 and 2006, respectively, gives BPI ATM cardholders access to over 16,400 ATMs as well as debit
payments through non-BPI point-of-sale terminals. BPI’s ATM network is likewise interconnected with
the Cirrus International ATM network, China Union Pay (CUP), Discover/Diners, JCB, and Visa
International. Real-time Cardless Deposit is also made available in almost 400 Cash Deposit Machines
in the country. In addition, BPI operates the Express Payment System (point-of-sale/debit card system),
which is a facility that allows customers to pay for purchases electronically through their ATM cards in
major department stores, supermarkets and retail establishments among others.

BPI Express Phone, the bank's phone banking platform, continues to service customer inquiries and
transactions through its self-service facility (IVRS). BPI depositors can inquire about their account
balances and latest transactions, transfer funds to other BPI accounts in real time, pay for their various
bills (e.g., credit cards, electricity, cable company, Telco/ISP, condominium dues, insurance premiums)
and reload prepaid phones. Customer concerns and queries received via Express Phone as well as
through SMS, e-mail, and social media, are all ably addressed by the bank’s 24-hour Contact Center.

BPI's B2C web-based platform, Express Online (EOL), provides all the transactional services available
through Express Phone plus the real-time convenience of viewing transactional history and balances
on screen. EOL also introduced an online foreign exchange facility for real-time US Dollar to Philippine
Peso conversion as well as a full-service online investment facility, which allows customers to access
portfolio information, apply for an investment fund account, subscribe to additional funds, redeem
investments, and make regular contributions via the Regular Subscription Plan (RSP). For customers
that need to transact at a branch, EOL also offers an online branch transaction appointment system
where customers can pick their time-slot, branch and submit their branch transactions in advance.

BPI Express Mobile, the bank’s mobile banking platform, offers different variants of Mobile Banking,
depending on customer’s mobile device and available technology. The most comprehensive and robust
of the variants is the BPI Express Mobile App, which can run on iOS, Android, and Blackberry devices.
Customers are able to do banking transactions such as getting real-time balances of their enrolled
accounts, paying bills, and subscribing to and redeeming investment funds using their BPI Express
Online user ID and password. Furthermore, it allows customers to instantly transfer funds to another
BPI account and reload prepaid phones and prepaid cards, all without the need for pre-enrollment.

BPI also maintains a specialized network of remittance centers for servicing overseas remittances from
Filipinos working abroad. To date, BPI has 5 Remittance Centers and Desks located in Hong Kong,
USA and Europe. BPI also maintains tie-ups with various foreign entities in locations where this mode
of operation is more effective and cost-efficient.

On the lending side, BPI maintains 14 Business Centers across the country to process loan
applications, loan releases, and international trade transactions, and provide after-sales servicing to
both corporate and retail loan accounts.

Competition
Mergers, acquisitions and closures continued to trim down the number of players in the industry from a
high of 50 upon the liberalization of rules on the entry of foreign banks to 36 universal and commercial
banks in 2014.

Lending by universal and commercial banks, excluding thrift banks, grew by 20% in 2014. This strong
loan growth was primarily driven by robust credit demand from the manufacturing, power, wholesale &
retail trade, real estate, financial and insurance industries. Consumer loans also grew by 21% year on
year.

The forthcoming ASEAN Economic Integration further intensified the competition among the local
banks. Domestic banks face the challenge of scaling up their size and expanding client reach in order
to compete with the other banks in the region. To do this, domestic banks heightened their focus on
the consumer and SME market where lending opportunities are better. BPI, being an established and

60
long-term player in this line enjoys the advantage of having an undisputed depth of experience in this
demanding business that spans origination/credit selection, collection, and asset recovery activities.

Remittances continued to be one of the main growth drivers of the economy, with a total of USD 24 Bn
flowing into the country in 2014. BPI, cognizant of this fact, sustained its cross selling activities, targeting
the OF segment, among other client segments.

Based on required published statements by the Bangko Sentral ng Pilipinas (BSP) as of December
2014, BPI is the third largest bank operating in the country in terms of assets, deposits and capital and
second in terms of customer loans and asset management and trust business. Total assets of BPI
based on Philippine Financial Reporting Standards (PFRS) compliant audited financial statement are
higher though than the published statements prepared along BSP standards.

Patents, Trademarks, Licenses, Franchises, etc.


BPI sells its products and services through the BPI trademark and/or trade name. All its major financial
subsidiaries carry the BPI name e.g. BPI Family Savings Bank, BPI Capital, BPI Securities, BPI
Leasing, BPI Direct Savings, and so do its major product & service lines.

In addition to the BPI trademark, it markets its products through the “Express” brand name e.g.,
1. BPI Express, for its banking kiosks
2. Express Teller, for its ATM
3. Express Deposit, for its cash acceptance machine
4. Express Payment System or EPS, for its debit card payment facility
5. ExpressNet, for its shared ATM network
6. Express Credit, for its credit cards
7. Express Cash, for its electronic cash card
8. Express Phone, for its call center facility
9. Express Online, for its internet based transaction platform for retail customers
10. Express Mobile, for its mobile banking facility
11. ExpressLink, for its internet based transaction platform for corporate customers
12. Expresslink Mobile, for its mobile banking for corporate customers
13. Express Collect, for its corporate deposit related services

At BPI Family Savings Bank, the product trademarks include the BPI Family Housing Loan with BPI
Family Housing Loan Paybreak variant, the BPI Family Auto Loan, the BPI Family Ka-Negosyo
Business Loans (BPI Family Ka-Negosyo Credit Line, BPI Family Ka-Negosyo Franchising Loan and
BPI Family Ka-Negosyo Term Loan) and the BPI Family Motorcycle Loan. Other product brands of
BPI, BFSB and BPI Direct are Maxi-One, Save-up, and Maxi-Saver.

All the Bank’s Trademark registrations are valid for 10 years with years of expiration varying from year
2013 to 2030. To secure these rights, the Bank files and pays corresponding fees within 1 year from
the Trademark’s 5th Anniversary of use at the IPO. The Bank closely monitors the expiry/renewal dates
of these trademark names to protect the Bank’s brand equity.

In terms of corporate business licenses, BPI has an expanded commercial banking license while BPI
Family Savings Bank and BPI Direct Savings have savings bank licenses. Both BPI and BPI Direct
Savings have e-banking licenses. BPI Capital Corporation has an investment house license. BPI
Century Tokyo Lease & Finance Corporation has a finance company license. BPI Card Finance
Corporation has a quasi-banking license.

Related Parties
In the ordinary course of business, the Bank has entered into various transaction with its Directors,
Officers, Stockholders and their Related Interest or DOSRI including loan transactions. BPI and all its
subsidiaries have always been in compliance with the General Banking Act and the Bangko Sentral ng
Pilipinas Circulars and regulations on DOSRI loans and transactions. As of December 31, 2014, DOSRI
loans amounted to 2.64% of loans and advances as per Note 30 of the 2014 Audited Financial
Statements.

Government Regulations
Under the General Banking Act, the Monetary Board of the BSP is responsible for regulating and
supervising financial intermediaries like BPI. The implementation and enforcement of the BSP
regulations is primarily the responsibility of the supervision and examination sector of the BSP.

61
The General Banking Act was revised in 2000. The revisions allow (1) the issuance of tier 2 capital and
its inclusion in the capital ratio computation, and (2) the 100% acquisition of a local bank by a foreign
bank. The second item removes the advantage of a local bank over a foreign bank in the area of
branching. In 2005, the BSP issued Circular no. 494 covering the guidelines in adopting the provision
of Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS)
effective the annual financial reporting period beginning 1 January 2005. These new accounting
standards aim to promote fairness, transparency and accuracy in financial reporting.

In July 2007, the risk-based Capital Adequacy Ratio (CAR) under the Basel II accord, which assigns
risk weights for credit, market and operational risks, was implemented by the BSP through BSP Circular
538. The circular, which covers all universal and commercial banks including their subsidiary banks
and quasi-banks, also maintained the 10% minimum capital adequacy ratio for both solo and
consolidated basis. Subsequently, the Internal Capital Adequacy Assessment Process (ICAAP)
guidelines were issued in 2009 for adoption by January 2011.

On January 6, 2012, the BSP announced that universal and commercial banks will be required to adopt
the capital adequacy standards under Basel III starting January 1, 2014. On January 15, 2013, the BSP
issued Circular No. 781, which prescribes the new capital adequacy standards in accordance with Basel
III. This circular took effect in January 1, 2014.

On March 29, 2012, the BSP issued Circular No. 753 mandating the unification of the statutory/legal
and liquidity reserves requirements on Peso deposits and Peso deposit substitutes. As such, effective
the week of April 6, 2012, non-foreign currency deposit unit deposit liabilities, including Peso demand,
savings and time deposits, negotiable orders of withdrawal of accounts and deposit substitutes, are
subject to required reserves equivalent of 18%. Likewise, a universal bank is required to set up reserves
of 18% against peso-denominated common trust funds and such other managed funds and reserves of
15% against Peso-denominated “Trust and Other Fiduciary Accounts (TOFA) — Others.”

On October 29, 2014, the BSP issued Circular No. 856 requiring Domestic Systematically Important
Banks (DSIBs) to submit data requirements for identification of DSIBs, starting with 2014 data. DSIBs
will also be required to comply with the additional higher loss absorbency phased-in from January 1,
2017 with full implementation by January 1, 2019. This circular took effect on December 31, 2014.

Research and Development Activities


BPI spent the following for the last three years:

In P M % of Revenues
2012 273.4 0.9
2013 235.1 0.7
2014 431.3 0.8

Employees
Below is a breakdown of the manpower complement of BPI in 2014.

December 31, 2014 Actual


Officers Staff Total
Unibank 4,552 9,557 14,129
Consumer Banking 3,207 7,134 10,341
Corporate Banking 682 1,566 2,248
Investment Banking 121 38 159
Support 542 839 1,381
Insurance Companies 67 346 413
TOTAL 4,619 9,923 14,542

Majority or 95% of the staff are members of various unions and are subject to Collective Bargaining
Agreements (CBAs). The CBA of the parent company was concluded / signed last May 31, 2011 for
the various BPI Provincial Employees Unions and June 9, 2011 for the BPI Metro Manila Employees
Union. The new BPI CBA covers the period April 1, 2011 to March 31, 2014.

CBA for BPI Family Savings Bank was concluded / signed last December 20, 2013. The new BFSB
CBA covers the period November 1, 2013 to October 31, 2015.

62
Risk Management
The Bank espouses a comprehensive risk management and capital management framework, which
integrates the management of all its financial and non-financial risk exposures. The framework
conforms not only to the Bank’s own rigorous standards, but also Bangko Sentral directives in promoting
an effective Internal Capital Adequacy Assessment Process (ICAAP) and other risk management
processes; also ensures that the Bank has adequate liquidity and capital to mitigate risks. The
framework focuses on three (3) key components of –
1. Sound risk management governance;
2. Effective processes, information systems, and controls; and
3. Timely and reliable risk data.

BPI’s Board of Directors fulfills its risk management function through its Risk Management Committee.
At the management level, the Risk Management Office is headed by the Chief Risk Officer. The CRO
is ultimately responsible in leading the formulation of risk management policies and methodologies in
alignment with the overall strategy of the Bank, ensuring that risks are prudently and rationally
undertaken and within the Bank’s risk appetite, as well as commensurate and disciplined to maximize
returns on capital. The CRO and the RMO facilitate risk management learning programs and promote
best practices on an enterprise-wide basis.

The Bank’s risk exposures are tracked according to three (3) major classifications:
1. Credit Risk, the largest single risk for most local banks, arises from the Bank’s core lending and
investing business, and involves the thorough evaluation, appropriate approval, management and
continuous monitoring of exposure risks, such as borrower (or counterparty) risk, facility risk,
concentrations and industry risk relating to each loan account. In BPI, the entire credit risk
management process is governed by stringent underwriting policies and rating parameters, and
lending procedures and standards which are regularly reviewed and updated given regulatory
requirements and market developments. The Bank’s loan portfolio is continuously monitored and
reviewed as to overall quality, concentration and utilization of limits. The Bank recently implemented
its enhanced retail housing credit risk scorecards and an internal credit risk rating model for SMEs
(following its large corporate model), incorporating probability of default estimates, as part of the
Bank’s preparations to transition into a Basel internal ratings-based (foundation IRB) approach.

2. Market Risk arises from the Bank’s business in managing interest rate and liquidity gaps, as well
as in the trading and distribution of fixed income, foreign exchange, and derivative instruments (as
allowed by regulation). Price risk and liquidity risk are managed using a set of established policies
and metrics guided by the Bank's market risk management framework set by the Board/RMC. Price
risk is the risk that the Bank's earnings will decline immediately (or over time) because of volatility
in interest rates, FX rates, or equity prices. The Bank employs various methodologies such as value-
at-risk, loss limits, and earnings-at-risk, supplemented by regular stress tests. Liquidity exposures
on funding mainly come from the mismatches of asset, liability, and exchange contract maturities.
The Bank manages liquidity risk by setting a minimum cumulative liquidity net inflow limit,
conducting liquidity stress tests, and a contingency funding plan.

3. Operational Risk arises from the Bank’s people and processes, its information technology, threats
to the security of its facilities, personnel, or data, business interruption risk, reputational risk, and
compliance obligations to regulatory or taxing authorities, amongst others. Operational and IT risk
management in the Bank involves the formulation of policies, setting and monitoring of key risk
indicators, and overseeing the thoroughness of bank-wide risk and control self-assessments, and
loss incident management; and in the process, creating and maintaining a sound business
operating environment that ensures and protects the integrity of the Bank’s assets, transactions,
reputation, records and data of the Bank and its customers, the enforceability of the Bank’s claims,
and compliance with all pertinent legal and regulatory parameters.

Risk management is carried out by a dedicated team of skilled risk managers and senior officers who
have extensive prior operational experience working within the Bank. The Bank’s risk managers
regularly monitor key risk indicators and report exposures against carefully-established credit, market,
and operational and IT risk metrics and limits approved by the RMC. Finally, independent reviews are
regularly conducted by the bank’s Internal Audit group, regulatory examiners, and external auditors to
ensure that risk controls and mitigants are in place and functioning effectively as intended.

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GLOBE TELECOM, INC.

Globe Telecom’s (alternately referred to as Globe, Globe Telecom or “the Company” in the entire
discussion of Globe Telecom, Inc), highlights of balance sheets and income statements are shown
below

Balance Sheets
(In Million Pesos)

December 2014 December 2013

Current Assets 46,742 35,631


Noncurrent Assets 132,765 123,448
Total Assets 179,507 159,079

Current Liabilities 60,350 54,989


Noncurrent Liabilities 64,619 62,451
Equity Attributable to Equity Holders of the Parent 54,542 41,639
Equity Attributable to Noncontrolling Interest (4) -
Total Liabilities and Equity 179,507 159,079

Statements of Income
(In Million pesos)
December 2014 December 2013

Net Operating Revenues 103,236 95,141


Other Income 1,255 1,228
Total Revenues 104,491 96,369

Costs and Expenses 85,108 89,504


Provision for Income Tax 6,011 1,905
Total Expenses 91,119 91,409

Net Income 13,372 4,960

Total net income attributable to:


Equity holders of the Parent 13,376 4,960
Noncontrolling interest (4) -
Net Income 13,372 4,960

EPS:
Basic
Based on 132,703K and 132,515K common shares
as of December 31, 2014 and 2013, respectively. 100.60 37.25
Diluted
Based on 133,286K and 133,283K common shares
as of December 31, 2014 and 2013, respectively. 100.36 37.22

For further details on the Globe’s financial condition and operations, please refer to its 2014
Consolidated Financial Statements which is incorporated herein as part of exhibits.

Background and Business


The Ayala Group conducts its telecommunications business through Globe Telecom, Inc (alternately
referred to as Globe or “the Company” in the entire discussion of Globe Telecom, Inc.). Globe’s origin
can be traced back to Robert Dollar Company, a California company which provided wireless long
distance message services. After subsequent mergers and re-namings, the company was named Globe
Telecom, Inc. in 1983, when the partnership between Ayala and Singapore Telecom, the principal
shareholders of Globe, was formalized. Since then, Globe has been recognized as the first company to

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offer SMS services in the Philippines and as the first Philippine internet service provider in the
Philippines.

Globe Telecom, Inc. is a major provider of telecommunications services in the Philippines, supported
by over 6,100 employees and over 967,000 retailers, distributors, suppliers, and business partners
nationwide. The Company operates one of the largest and most technologically-advanced mobile, fixed
line and broadband networks in the country, providing reliable, superior communications services to
individual customers, small and medium-sized businesses, and corporate and enterprise clients. Globe
currently has about 44.0 million mobile subscribers, over 2.8 million broadband customers, and over
762 thousand landline subscribers.

Globe’s principal executive offices are located at the The Globe Tower, 32nd Street corner 7 th Avenue,
Bonifacio Global City, Taguig, Metropolitan Manila, Philippines.

Globe is one of the largest and most profitable companies in the country, and has been consistently
recognized both locally and internationally for its corporate governance practices. It is listed on the
Philippine Stock Exchange under the ticker symbol GLO and had a market capitalization of US$5.1
billion as of the end of December 2014.

The Company’s principal shareholders are Ayala Corporation and Singapore Telecom, both industry
leaders in their respective countries. Aside from providing financial support, this partnership has
created various synergies and has enabled the sharing of best practices in the areas of purchasing,
technical operations, and marketing, among others.

Globe is committed to being a responsible corporate citizen. Globe BridgeCom, the company’s umbrella
corporate social responsibility program, leads and supports various initiatives that (1) promote
education and raise the level of computer literacy in the country, (2) support entrepreneurship and
micro-enterprise development particularly in the countryside, and (3) ensure sustainable development
through protection of the environment and excellence in operations. Since its inception in 2003, Globe
BridgeCom has made a positive impact on the lives of thousands of public elementary and high school
students, teachers, community leaders, and micro-entrepreneurs throughout the country. For its efforts,
Globe BridgeCom has been recognized and conferred several awards and citations by various
Philippine and international organizations.

The Globe Group is composed of the following companies:

1. Globe Telecom, Inc. (Globe) provides mobile telecommunications services;


2. Innove Communications Inc. (Innove), a wholly-owned subsidiary, provides fixed line
telecommunications and broadband services, high-speed internet and private data networks for
enterprise clients, services for internal applications, internet protocol-based solutions and
multimedia content delivery;
3. G-Xchange, Inc. (GXI), a wholly-owned subsidiary, provides mobile commerce services under the
GCash brand;
4. Yondu (formerly referred to as Entertainment Gateway Group) is engaged in the development and
creation of wireless products and services accessible through telephones and other forms of
communication devices. It also provides internet and mobile value-added services, information
technology and technical services including software development and related services;
5. GTI Business Holdings, Inc. (GTI) is a wholly-owned subsidiary with authority to provide VOIP
services. Its wholly-owned subsidiaries are: GTI Corporation (GTIC US), a company organized
under the General Corporation Law of the State of Delaware for the purpose of engaging in any
lawful act or activity; Globe Telecom HK Limited (GTHK), a limited company organized under the
Companies Ordinance of Hong Kong; Globetel European Limited and its subsidiaries namely: UK
Globetel Limited, a private limited company under the Companies Act of 2006, wherein the
registered address is in England and Wales; Globe Mobile' Italy S.r.l. (GMI), a limited liability
company to perform, directly, and/or through its subsidiaries, services such as voice calling, SMS,
MMS, load top-up and mobile data to Filipinos based in, or visiting Italy with registered address in
Milan, Italy; and Globetel Internacional European España, S.L., a company with registered address
in Barcelona, Spain;
6. Kickstart Ventures, Inc. (Kickstart), a wholly-owned subsidiary, is a pioneering business incubator
designed to provide aspiring technopreneurs with funds and facilities, mentorship and market
access needed to build new businesses; and
7. Asticom Technology, Inc. a wholly-owned subsidiary is a system integrator and information
technology services provider to domestic and international markets.

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The Company is a grantee of various authorizations and licenses from the National
Telecommunications Commission (NTC) as follows: (1) license to offer and operate facsimile, other
traditional voice and data services and domestic line service using Very Small Aperture Terminal
(VSAT) technology; (2) license for inter-exchange services; and (3) Certificate of Public Convenience
and Necessity (CPCN) for: (a) international digital gateway facility (IGF) in Metro Manila, (b) nationwide
digital cellular mobile telephone system under the GSM standard (CMTS-GSM), (c) nationwide local
exchange carrier (LEC) services after being granted a provisional authority in June 2005, and (d)
international cable landing stations located in Nasugbu, Batangas and Ballesteros, Cagayan.

Business Development and Corporate History


In 1928, Congress passed Act No. 3495 granting the Robert Dollar Company, a corporation organized
and existing under the laws of the State of California, a franchise to operate wireless long distance
message services in the Philippines. Subsequently, Congress passed Act No. 4150 in 1934 to transfer
the franchise and privileges of the Robert Dollar Company to Globe Wireless Limited which was
incorporated in the Philippines on 15 January 1935.

Globe Wireless Limited was later renamed as Globe-Mackay Cable and Radio Corporation (“Globe-
Mackay”). Through Republic Act (“RA”) 4630 enacted in 1965 by Congress, its franchise was further
expanded to allow it to operate international communications systems. Globe-Mackay was granted a
new franchise in 1980 by Batasan Pambansa under Batas Pambansa 95.

In 1974, Globe-Mackay sold 60% of its stock to Ayala Corporation, local investors and its employees.
It offered its shares to the public on 11 August 1975.

In 1992, Globe-Mackay merged with Clavecilla Radio Corporation, a domestic telecommunications


pioneer, to form GMCR, Inc. (“GMCR”). The merger gave GMCR the capability to provide all forms of
telecommunications to address the international and domestic requirements of its customers. GMCR
was subsequently renamed Globe Telecom, Inc. (“Globe”).

In 1993, Globe welcomed a new foreign partner, Singapore Telecom, Inc. (STI), a wholly-owned
subsidiary of Singapore Telecommunications Limited (“SingTel”), after Ayala and STI signed a
Memorandum of Understanding.

In 2001, Globe acquired Isla Communications Company, Inc. (“Islacom”) which became its wholly-
owned subsidiary effective 27 June 2001. In 2003, the National Telecommunications Commission
(“NTC”) granted Globe’s application to transfer its fixed line business assets and subscribers to Islacom,
pursuant to its strategy to integrate all of its fixed line services under Islacom. Subsequently, Islacom
was renamed as Innove Communications, Inc. (“Innove”).

In 2004, Globe invested in G-Xchange, Inc. (“GXI”), a wholly-owned subsidiary, to handle the mobile
payment and remittance service marketed under the GCash brand using Globe’s network as transport
channel. GXI started commercial operations on 16 October 2004.

In November 2004, Globe and seven other leading Asia Pacific mobile operators (‘JV partners’) signed
an agreement (‘JV agreement’) to form Bridge Alliance. The joint venture company operates through a
Singapore-incorporated company, Bridge Mobile Pte. Limited (BMPL) which serves as a commercial
vehicle for the JV partners to build and establish a regional mobile infrastructure and common service
platform to deliver different regional mobile services to their subscribers. The Bridge Alliance currently
has a combined customer base of over 250 million subscribers among its partners in India, Thailand,
Hong Kong, South Korea, Macau, Philippines, Malaysia, Singapore, Australia, Taiwan and Indonesia.

In 2005, Innove was awarded by the NTC with a nationwide franchise for its fixed line business, allowing
it to operate a Local Exchange Carrier service nationwide and expand its network coverage. In
December 2005, the NTC approved Globe’s application for third generation (3G) radio frequency
spectra to support the upgrade of its cellular mobile telephone system (“CMTS”) network to be able to
provide 3G services. The Company was assigned with 10-Megahertz (MHz) of the 3G radio frequency
spectrum.

On 19 May 2008, following the approval of the NTC, the subscriber contracts of Touch Mobile or TM
prepaid service were transferred from Innove to Globe which now operates all wireless prepaid services
using its integrated cellular networks.

In August 2008, and to further grow its mobile data segment, Globe acquired 100% ownership of
Entertainment Gateway Group (“EGG”), a leading mobile content provider in the Philippines. EGG
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offers a wide array of value-added services covering music, news and information, games, chat and
web-to-mobile messaging.

On 25 November 2008, Globe formed GTI Business Holdings, Inc. (GTIBH) primarily to act as an
investment company.

On October 30, 2008, Globe, the Bank of the Philippine Islands (BPI) and Ayala Corporation (AC) signed
a memorandum of agreement to form a joint venture that would allow rural and low-income customers’
access to financial products and services. Last October 2009, the Bangko Sentral ng Pilipinas (BSP)
approved the sale and transfer by BPI of its shares of stock in Pilipinas Savings Bank, Inc. (PSBI),
formalizing the creation of the venture. Globe’s and BPI’s ownership stakes in PSBI is at 40% each,
while AC’s shareholding is at 20%. The partners plan to transform PSBI (now called BPI Globe BanKO,
Inc.) into the country’s first mobile microfinance bank. The bank’s initial focus will be on wholesale
lending to other microfinance institutions but will eventually expand to include retail lending, deposit-
taking, and micro-insurance. BPI Globe BanKO opened its first branch in Metro Manila in the first quarter
of 2011 and now has 6 branches nationwide, over 2,000 partner outlets, 261,000 customers and over
P2.4 billion in its wholesale loan portfolio.

On March 2012, Globe launched Kickstart Ventures, Inc. (Kickstart) to help, support and develop the
dynamic and growing community of technopreneurs in the Philippines. Kickstart is a business incubator
that is focused on providing aspiring technopreneurs with the efficient environment and the necessary
mechanisms to start their own business. Since its launch, Kickstart has 10 companies it its portfolio
covering the digital media and technology, and web/mobile platform space.

On October 2013, following the court's approval of the Amended Rehabilitation Plan (jointly filed by
Globe and Bayantel in May 2013), Globe acquired a 38% interest in Bayantel by converting
Bayantel's unsustainable debt into common shares. This follows Globe's successful tender offer for
close to 97% of Bayantel's outstanding indebtedness as of December 2012. As part of the amended
rehab plan and pending regulatory approvals, Globe would further convert a portion of its sustainable
debt into common shares of Bayantel, bringing up its stake to around 56%. On October 2014, Globe
Telecom received a copy of the temporary restraining order (TRO) issued by the Court of Appeals (CA)
stopping the National Telecommunications Commission’s (NTC) proceedings in connection with the bid
of Globe Telecom Inc. to take over Bayan Telecommunications Inc. (Bayantel). Despite the lapse of the
Temporary Restraining Order (TRO) last December 9, 2014, the Court of Appeals has advised the NTC
to refrain from conducting any proceedings in connection with the bid of Globe assume majority control
of Bayantel.

On June 3, 2014, Globe signed an agreement with Azalea Technology, Inc. and SCS Computer
Systems, acquiring the entire ownership stake in Asticom. Asticom, a systems integrator and
information technology services provider to domestic and international markets, is 49% owned by
Azalea, a 100%-owned subsidiary of Ayala Corporation and 51% owned by SCS Computer Systems,
a subsidiary of Singapore Telecom.

There was no bankruptcy, receivership or similar proceedings initiated during the past four years.

Business Segments
1. Mobile Business
Globe provides digital mobile communication services nationwide using a fully digital network based
on the Global System for Mobile Communication (GSM) technology. It provides voice, data and
value-added services to its mobile subscribers through three major brands: Globe Postpaid, Globe
Prepaid and TM.

Globe Postpaid includes all postpaid plans such as regular G-Plans and consumable G-Flex Plans,
Load Allowance Plans, Load Tipid Plans and Platinum Plans (for the high-end market). In 2010,
the Company introduced the MY SUPERPLAN and MY FULLY LOADED PLAN which allow
subscribers to personalize their plans, choose and combine various unlimited call, text and web
browsing service options. In addition, Globe has made available various add-on roaming and
mobile browsing plans to cater to the needs of its subscribers. In 2011, Globe further improved
postpaid offerings with the All New My Super Plan where subscribers are given the flexibility to
create their own plans by either subscribing to an All-Unlimited Plan or an All-Consumable Plan.
Subscribers also get to choose their freebies and add-ons which they can change on a monthly
basis. A fully-customizable unlimited data plan (Unli Surf Combo Plan) was also made available to
its subscribers in mid-2011 which provides uninterrupted unlimited mobile surfing without the need
for a WIFI connection. The data plan comes with consumable amounts which the subscriber may
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use to either local and international calls and text messages. Taking the product customization to
the next level, the company launched in the second quarter of 2013 the BEST-EVER MY
SUPERPLAN with fully-customizable plan components, bigger plan value and more contract
periods to choose from (6, 12, 18, and 30 months). Each plan has a corresponding “peso value”
that can be converted to avail of a combination of call, text, or surf services, free or discounted
gadgets, and a monthly consumable amount for more calls, texts and surf. In November 2013,
Globe Postpaid launched the iPhone Forever program bannering the latest phone from Apple
(iPhone 5s and iPhone 5c). Under the iPhone Forever program, new and existing Globe subscribers
who are loyal iPhone users may swap their current devices to get a new iPhone every year for free
or with minimal one-time cash out. Following the “iPhone Forever Plan” launched in 2013, Globe
Postpaid launched “Galaxy Forever Plan” in the second quarter of 2014, wherein new and existing
subscribers can acquire or upgrade to newest Samsung Galaxy phone every year by simply
subscribing to any Galaxy Forever Plan (Galaxy Forever Plan 1599; Galaxy Forever Plan1999;
Galaxy Forever Plan 2499).

Globe Prepaid and TM are the prepaid brands of Globe. Globe Prepaid is focused on the
mainstream market while TM caters to the value-conscious segment of the market. Each brand is
positioned at different market segments to address the needs of the subscribers by offering
affordable innovative products and services. In February 2012, the Company introduced a self-
service menu that provides Globe prepaid subscribers an easy access to avail of the latest promos
and services of Globe by simply dialing *143#. In early 2013, this menu was further developed with
Globe Prepaid’s GO SAKTO which allows the subscribers to build their own promos (call, text and
surf promos) that is best suited for their needs and lifestyle. In the third quarter of 2014, the
Company brings even more innovation to beef up its product portfolio by expanding its popular
promo GoSAKTO. With the expanded GoSAKTO, Globe Prepaid customers can personalize their
call, text and surfing needs for 1 day, 2 days, 3 days, 7 days, 15 days or even for 30 days. They
can also select the type and number of call minutes and texts they need and adjust the MBs of
mobile surfing the way they want it.

In addition to digital wireless communications, Globe also offers mobile payments and remittance
services under the GCash brand. GCash is an internationally acclaimed micro payment service
that transforms a mobile phone into a virtual wallet, enabling secure, fast, and convenient money
transfers at the speed and cost of a text message. Since the launch of GCash, wholly-owned
subsidiary GXI has established a wide network of local and international partners that includes
government agencies, utility companies, cooperatives, insurance companies, remittance
companies, universities, and commercial establishments which all accept GCash as a means of
payment for products and services.

Globe offers various top-up or reloading options and facilities for prepaid subscribers including
prepaid call and text cards, bank channels such as ATMs, credit cards, and through internet
banking. Subscribers can also top-up at over 856,000 AutoLoad Max retailers nationwide, all at
affordable denominations and increments. A consumer-to-consumer top-up facility, Share-A-Load,
is also available to enable subscribers to share prepaid load credits via SMS. Globe’s AutoLoad
Max and Share-A-Load services are also available in selected OFW hubs all over the world.

Globe has a loyalty and rewards program called My Rewards, My Globe for Globe Prepaid
subscribers, TM Astig Rewards for TM subscribers and Tattoo+ Rewards for Tattoo Broadband
subscribers. Globe Postpaid subscribers can earn points based on their monthly billed amounts in
excess of their Monthly Subscription Fee. Subscribers have the option to redeem rewards instantly,
or accumulate points to avail of higher value rewards.

Redeemed points in the form of telecom services is netted out against revenues whereas points
redeemed in the form of non-telco services such as gift certificates and other products are reflected
as marketing expense. At the end of each period, Globe estimates and records the amount of
probable future liability for unredeemed points.

In 2014, Globe Postpaid launched the Globe Blue or Platinum Rewards Cards. The new cards can
also work as a GCash Mastercard which can be used to shop anywhere within the Philippines and
even abroad. Membership to Globe Blue is given to postpaid customers who spend an average of
P2,000-P3,499 per month over a 12-month period. Meanwhile membership to the Globe Platinum
is given to postpaid customers who subscribe to plan P3,799 or spend an average of P3,500-P4,999
over a 12-month period; and membership to Platinum Elite Rewards card is given to postpaid
customer who subscribe to All Net P5,000 or P10,000; roaming P5,000 or P10,000 or spend an

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average of P5,000 and above over a 12-month period. Special perks may vary depending on the
plan subscription.

a. Mobile Voice
Globe’s voice services include local, national and international long distance call services. It
has one of the most extensive local calling options designed for multiple calling profiles. In
addition to its standard, pay-per-use rates, subscribers can choose from bulk and unlimited
voice offerings for all-day or off-peak use, and in several denominations to suit different
budgets.

Globe keeps Filipinos connected wherever they may be in the world, made possible by its tie-
up with over 600 roaming partners in more than 200 calling destinations worldwide. Globe also
offers roaming coverage on-board selected shipping lines and airlines, via satellite. Through its
Globe Kababayan program, Globe provides an extensive range of international call and text
services to allow OFWs (Overseas Filipino Workers) to stay connected with their friends and
families in the Philippines. This includes prepaid and reloadable call cards and electronic PINs
available in popular OFW destinations worldwide.

b. Mobile Data and Value-Added Services


Globe’s Mobile SMS service includes local and international SMS offerings. Globe also offers
various bucket and unlimited SMS packages to cater to the different needs and lifestyles of its
postpaid and prepaid subscribers.

Globe’s Mobile Browsing services allow subscribers to access the internet using their internet
capable handsets, devices or laptops with USB modems. Data access can be made using
various technologies including LTE, HSPA+, 3G with HSDPA, EDGE and GPRS. Browsing
subscribers also have multiple charging options available with Globe’s Flexible Mobile Internet
Browsing rates which allow subscribers to choose between time or usage-based rates. They
can also choose between hourly, daily or monthly browsing plans.

Globe’s Value-Added Services offers a full range of downloadable content covering multiple
topics including news, information, and entertainment through its web portal. Subscribers can
purchase or download music, movie pictures and wallpapers, games, mobile advertising,
applications or watch clips of popular TV shows and documentaries as well as participate in
interactive TV, do mobile chat, and play games, among others. Additionally, Globe subscribers
can send and receive Multimedia Messaging Service (MMS) pictures and video, or do local and
international 3G video calling.

Through Globe’s partnership with major banks and remittance companies, and using Globe’s
pioneering GCash platform, subscribers can perform mobile banking and mobile commerce
transactions. Globe subscribers can complete international and domestic remittance
transactions, pay fees, utility bills and income taxes, avail of micro-finance transactions, donate
to charitable institutions, and buy Globe prepaid load credits using its GCash-activated SIM.

2. Fixed Line and Broadband Business


Globe offers a full range of fixed line communications services, wired and wireless broadband
access, and end-to-end connectivity solutions customized for consumers, SMEs (Small & Medium
Enterprises), large corporations and businesses.

a. Fixed Line Voice


Globe’s fixed line voice services include local, national and international long distance calling
services in postpaid and prepaid packages through its Globelines brand. Subscribers get to
enjoy toll-free rates for national long distance calls with other Globelines subscribers
nationwide. Additionally, postpaid fixed line voice consumers enjoy free unlimited dial-up
internet from their Globelines subscriptions. Low-MSF (monthly service fee) fixed line voice
services bundled with internet plans are available nationwide and can be customized with
value-added services including multi-calling, call waiting and forwarding, special numbers and
voice mail. For corporate and enterprise customers, Globe offers voice solutions that include
regular and premium conferencing, enhanced voice mail, IP-PBX solutions and domestic or
international toll free services. With The Company‟s cutting-edge Next Generation Network
(NGN), Globe Business Voice solutions offer enterprises a bevy of fully-managed traditional
and IP-based voice packages that can be custom-fit to their every need.

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b. Fixed Line Data
Fixed line data services include end-to-end data solutions customized according to the needs
of businesses. Globe’s product offerings include international and domestic leased line
services, wholesale and corporate internet access, data center services and other connectivity
solutions tailored to the needs of specific industries.

Globe’s international data services provide corporate and enterprise customers with the most
diverse international connectivity solutions. Globe’s extensive data network allow customers
to manage their own virtual private networks, subscribe to wholesale internet access via
managed international private leased lines, run various applications, and access other networks
with integrated voice services over high-speed, redundant and reliable connections. In addition
to bandwidth access from multiple international submarine cable operators, Globe also has
international cable landing stations situated in different locales to ensure redundancy and
network resiliency.

The Company’s domestic data services include data center solutions such as business
continuity and data recovery services, 24x7 monitoring and management, dedicated server
hosting, maintenance for application-hosting, managed space and carrier-class facilities for co-
location requirements and dedicated hardware from leading partner vendors for off-site
deployment.

Other fixed line data services include premium-grade access solutions combining voice,
broadband and video offerings designed to address specific connectivity requirements. These
include Broadband Internet Zones (BIZ) for broadband-to-room internet access for hotels, and
Internet Exchange (GiX) services for bandwidth-on-demand access packages based on
average usage.

Globe Business also launched in 2013 Cloud Solutions that allows an organization's
infrastructure to match the elasticity of the business climate and increase its business agility.
The new cloud capabilities were the first large-scale, private and public-ready, next generation
cloud in Asia. Globe offers a suite of Business Applications that leverage on the power of cloud
to help enterprises improve their business operations such as: PayrollCloud application – an
innovative Software-as-a-Service or SaaS providing on-time and accurate payroll accounting
system – from automatic calculation of salaries, standard time and attendance reports,
biometric integration, online application and customizable approval hierarchy and online payslip
access; Globe HealthCloud - an end-to-end web-based health ICT solution that enables real-
time, secure and convenient access to health information; Office 365 has the applications that
are always up to date and accessible from virtually anywhere; Canvas which enables
businesses to replace expensive and inefficient paper forms with powerful mobile forms on their
smartphones and tablets; Google Apps which is a cloud-based productivity suite that helps
businesses and its employees connect and get work done from anywhere on any device.
Moreover, The Company likewise offers Infrastructure Services that provides consulting,
managed services, and integrated solutions to establish agile and flexible IT environments. This
enables customers through a strategy covering assessment through design, implementation,
management and optimization to reach a true end-to-end solution. These are: Backup-as-a-
Service platform which is the most advanced backup and restoration software that enables
continuous data protection, local off-site storage and managed services to industries,
enterprises as well as small and medium businesses; Managed Security Services that provides
services such as managed firewalls, intrusion detection and prevention (IDP) and messaging
security (anti-virus/anti-spam and content filtering). Furthermore, Infrastructure-as-a-Service is
also offered to corporate clients such as: Virtual Private Cloud which allows them to acquire
processing power without the high

c. Broadband
Globe offers wired, fixed wireless, and fully mobile internet-on-the-go services across various
technologies and connectivity speeds for its residential and business customers.
Tattoo@Home consists of wired or DSL broadband packages bundled with voice, or broadband
data-only services which are available at download speeds ranging from 1 Mbps up to 15 Mbps.
In selected areas where DSL is not yet available, Globe offers Tattoo WiMAX, a fixed wireless
broadband service using its WiMAX network. Meanwhile, for consumers who require a fully
mobile, internet-on-the-go broadband connection, Tattoo On-the-Go allows subscribers to
access the internet using LTE, 4G HSPA+, 3G with HSDPA, EDGE, GPRS or Wi-Fi at various
hotspots nationwide using a plug-and-play USB modem. This service is available in both
postpaid and prepaid packages. In addition, consumers in selected urban areas who require
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faster connections have the option to subscribe to Tattoo Torque broadband plans using
leading edge GPON (Gigabit Passive Optical Network) technology with speeds of up to 100
Mbps.

In September 2012, the Company officially launched its Long-Term Evolution (LTE) broadband
service with the Tattoo Black Postpaid Plans. The nomadic broadband plans are equipped with
an LTE dongle and LTE superstick that deliver browsing speeds of up to 42 Mbps and
come with personalized customer handling services such as a dedicated hotline, a relationship
manager, and many other perks.

In 2013, Tattoo kicked off the year with lower price propositions for its 4G product suite. Tattoo
4G Flash was made available for only P995 with surfing speeds of up to 7.2 Mbps. Also, Tattoo
At-Home now offers free unlimited calls to Globe/TM in addition to landline and internet service
in every Tattoo@Home Broadband Bundle. During the second quarter, Tattoo Postpaid
strengthens its lifestyle positioning with the unveiling of Tattoo-Enjoy Card which allows new
Tattoo Postpaid subscribers access to perks and discounts to over 240 brand partners
nationwide. Tattoo Prepaid Lifestyle sticks with surfing speed of up to 12 Mbps on the other
hand was made available to consumers for only P1,295. Meanwhile, in order to address the
increasing demand for mobile Wi-Fi and faster internet connectivity, Tattoo Prepaid re-launched
its 4G SuperStick during the third period with a more affordable price of P1,995 from August 15
to December 31, 2013. Tattoo Postpaid also launched its new and improved postpaid
personalized and consumable plans with increased surfing speed now up to 42 Mbps. LTE
plans which start at P1,299 now comes with a FREE LTE dongle or pay a one-time fee of
P2,000 for an upgrade to a mobile Wi-Fi device. Tattoo consumable plans have been further
improved with more browsing hours for Plan 299 (from 30 hours to 50 hours) and for Plan 499
(from 50 hours to 85 hours) which can also be upgraded to a mobile Wi-Fi device for only P150
per month. Also during this period, Tattoo launched another revolutionary offer bannering the
most affordable tablet bundles, wherein its subscribers can get FREE three devices with
unlimited internet browsing and mobile text and call starting at Plan 1,298, consisting of a free
Skyworth S73 tablet or a Cloudpad 705W, a Blackberry Curve 9220 and the country’s fastest
broadband Wi-Fi stick which can power up to 10 devices. Other Tattoo tablet bundles are
likewise available with varying numbers of free browsing hours together with unlimited calls and
texts on free mobile phone and connectivity through the free mobile Wi-Fi starting at Plan 598.

In 2014, the widest range of Tattoo Prepaid mobile Wi-Fi devices was made available including
4G mobile Wi-Fi with speed up to 12mbps, connects up to 10 devices for only P1,995; 4G
mobile Wi-Fi + Powerbank which full charge the phone up to 3x for only P3,795 and LTE mobile
Wi-Fi with speed up to 42mbps, connects up to 10 devices + Powerbank, which full charge the
phone, for only P4,995. Tattoo Postpaid likewise introduced the best value tablet bundle with
no upfront cash out and Postpaid Tattoo Plan with free LTE stick (Plan999) or LTE Mobile WiFi
(Plan1299). Meanwhile, Tattoo Home Broadband unleashes the fastest broadband connection
as it upgrades its speeds within the same and more affordable plan. Starting at Plan 1599, the
formerly 3 Mbps Tattoo Home Broadband bundle has now been upgraded to a faster and more
reliable 5 Mbps speed. Moreover, Tattoo Platinum, the premium broadband product has
continued its expansion to provide fiber powered home broadband experience powering up the
community in Rockwell Makati with the ultra-high speed home broadband service. Together
with residents from Forbes, Urdaneta, Bel-Air and Serendra, Rockwell residents may now enjoy
speeds of up to 100 Mbps. Tattoo Platinum offers speeds of up to 150 Mbps at the same
monthly fees now. Surfing speeds of up to 10 Mbps is now at Plan 3499, 15 Mbps at Plan 3999,
10 Mbps at Plan 4999, 50 Mbps at Plan 6999, 100 Mbps at Plan 11999 and 150 Mbps at Plan
16999. Being the first to launch the Gigabit-capable Passive Optical Network (GPON) internet
service in the Philippines, Tattoo Platinum comes with exclusive offers all for Free such as
Globe landline, Globe-to-Globe landline NDD calls, Unlicalls to Globe and TM mobile, 4-port
modem + Wi-Fi router and a Tattoo Postpaid Stick with 40 surfing hours per month. Beyond
these, Tattoo Platinum subscribers may enjoy exclusive perks and privileges such as priority
servicing in Globe Stores and Hotline, dedicated relationship managers for Plan4999 and up,
discount to partner merchants and concierge services.

Sales and Distribution


Globe has various sales and distribution channels to address the diverse needs of its subscribers.
1. Independent Dealers
Globe utilizes a number of independent dealers throughout the Philippines to sell and distribute its
prepaid wireless services. This includes major distributors of wireless phone handsets who usually
have their own retail networks, direct sales force, and sub-dealers Dealers are compensated based
71
on the type, volume and value of reload made in a given period. This takes the form of fixed
discounts for prepaid airtime cards and SIM packs, and discounted selling price for phonekits.
Additionally, Globe also relies on its distribution network of over 967,000 AutoloadMax retailers
nationwide who offer prepaid reloading services to Globe, TM, and Tattoo subscribers.

2. Globe Stores
As of December 31, 2014, the Company has a total of 211 Globe Stores all over the country where
customers are able to inquire and subscribe to wireless, broadband and fixed line services, reload
prepaid credits, make GCASH transactions, purchase handsets and accessories, request for
handset repairs, try out communications devices, and pay bills. The Globe Stores are also
registered with the Bangko Sentral ng Pilipinas (BSP) as remittance outlets.

In line with the Company’s thrust to become a more customer-focused and service-driven
organization, Globe departed from the traditional store concept which is transactional in nature and
launched the redesigned Globe Store which carries a seamless, semi-circular, two-section design
layout that allows anyone to easily browse around the product display as well as request for after
sales support. It boasts of a wide array of mobile phones that the customers can feel, touch and
test. There are also laptops with high speed internet broadband connections for everyone to try.
The Globe store has an Express Section for fast transactions such as modification of account
information and subscription plans; a Full-Service Section for more complex transactions and
opening of new accounts; and a Cashier Section for bill payments. The store also has a self-help
area where customers can, among others, print a copy of their bill, and use interactive touch
screens for easy access to information about the different mobile phones and Globe products and
services. Globe stores also include NegoStore areas, which serve as additional sales channels for
current and prospective Globe customers. Moreover, select stores also have ‘Tech Coaches’ or
device experts that can help customers with their concerns on their smartphones. The Company
opened the first concept store in Greenbelt 4 in 2010 and accelerated its roll-out throughout 2011,
averaging 4-5 new stores a month.

In 2012, Globe introduced other store formats in response to the need for more customer service
channels to accommodate more subscribers availing of Globe postpaid, prepaid and internet
services. The new store formats - the premium dealership store, pop-up store, microstore, kiosk,
and store-on-the-go – were carefully designed based on demographics, lifestyle and shopping
behaviors of its customers, each providing a different retail mix and experience to subscribers.

In 2013, Globe opened 50 concept stores and will open more concept stores in the country as part
of its commitment to a wonderful customer service experience.

In 2014, Globe simultaneously unveiled its Generation 3 flagship stores in SM North EDSA, Quezon
City, Manila and in Limketkai Mall, Cagayan de Oro. Designed by Tim Kobe, the founder and CEO
of Eight, Inc. and designer of Apple Stores, the Globe Gen3 stores features reconfigurable and
interactive elements, all designed to empower the growing digital lifestyle of customers. The stores
feature four lifestyle zones – music, entertainment, productivity, and life – each with their own
interactive kiosks.

3. Customer Facing Units


To better serve the various needs of its customers, Globe is organized along three key customer
facing units (CFUs) tasked to focus on the integrated mobile and fixed line needs of specific market
segments. The Company has a Consumer CFU with dedicated marketing and sales groups to
address the needs of individual retail customers, and a Business CFU (Globe Business) focused
on the needs of big and small businesses. Globe Business provides end-to-end mobile and fixed
line solutions and is equipped with its own technical and customer relationship teams to serve the
requirements of its client base. In early 2011, Globe organized an International Business Group to
serve the voice and roaming needs of overseas Filipinos, whether transient or permanent. It is
tasked to grow the Company’s international revenues by leveraging on Globe’s product portfolio
and developing and capitalizing on regional and global opportunities.

4. Others
Globe also distributes its prepaid products SIM packs, prepaid call cards and credits through
consumer distribution channels such as convenience stores, gas stations, drugstores and
bookstores. Lower denomination IDD prepaid loads are also available in public utility vehicles, street
vendors, and selected restaurants and retailers nationwide via the IDD Tingi load, an international
voice scratch card in affordable denominations.

72
Operating Revenues

Gross Operating Revenues by Business Year Ended 31 December


Segment
% of % of % of
(in Php Mn) 2014 2013 2012
total total total
Service Revenues
Mobile……………………………………………. 78,069 76% 72,764 76% 67,189 78%
Voice1……………………………………….. 34,684 34% 32,367 34% 32,446 38%
SMS2………………………………………… 29,079 28% 28,794 30% 26,552 31%
Mobile Browsing and Other Data3……….. 14,306 14% 11,603 12% 8,191 9%
Fixed Line and Broadband…………………… 20,956 20% 17,736 19% 15,553 18%
Broadband4……………………………………… 12,687 12% 10,440 11% 8,721 10%
Fixed Line Data5………………………………… 5,480 5% 4,691 5% 4,167 5%
Fixed Line Voice6………………………...……... 2,789 3% 2,605 3% 2,665 3%
Service Revenues*……..…..…………………. 99,025 96% 90,500 95% 82,742 96%
Non Service Revenues……………………….. 4,211 4% 4,641 5% 3,704 4%
Operating Revenues*…………………………. 103,236 100% 95,141 100% 86,446 100%
1
Mobile voice service revenues include the following:
a) Prorated monthly service fees on consumable minutes of postpaid plans;
b) Subscription fees on unlimited and bucket voice promotions including the expiration of the unused value of
denomination loaded;
c) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans,
including currency exchange rate adjustments, or CERA, net of loyalty discounts credited to subscriber billings; and
d) Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or
expiration of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs between
3 and 120 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and
(ii) prepaid reload discounts; and revenues generated from inbound international and national long distance calls and
international roaming calls; and
e) Mobile service revenues of GTI.

Revenues from (a) to (d) are reduced by any payouts to content providers.
2
Mobile SMS revenues consist of local and international revenues from value-added services such as inbound and outbound
SMS and MMS, infotext, and subscription fees on unlimited and bucket prepaid SMS services, net of any interconnection or
settlement payouts to international and local carriers and content providers.
3
Mobile browsing and other data service revenues consist of local and international revenues from value-added services
such as mobile internet browsing and content downloading, mobile commerce services, other add-on VAS, and service
revenues of GXI and EGG, net of any interconnection or settlement payouts to international and local carriers and content
providers.
4
Broadband service revenues consist of the following:
a) Monthly service fees of wired, fixed wireless, and fully mobile broadband data only and bundled voice and data
subscriptions;
b) Browsing revenues from all postpaid and prepaid wired, fixed wireless and fully mobile broadband packages in excess
of allocated free browsing minutes and expiration of unused value of prepaid load credits;
c) Value-added services such as games; and
d) Installation charges and other one-time fees associated with the service.
5
Fixed Line data service revenues consist of the following:
a) Monthly service fees from international and domestic leased lines;
b) Other wholesale transport services;
c) Revenues from value-added services; and
d) One-time connection charges associated with the establishment of service.
6
Fixed Line voice service revenues consist of the following:
a) Monthly service fees;
b) Revenues from local, international and national long distance calls made by postpaid, prepaid fixed line voice
subscribers and payphone customers, as well as broadband customers who have subscribed to data packages bundled
with a voice service. Revenues are net of prepaid and payphone call card discounts;
c) Revenues from inbound local, international and national long distance calls from other carriers terminating on Globe’s
network;
d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice mail,
duplex and hotline numbers and other value-added features;
e) Installation charges and other one-time fees associated with the establishment of the service; and
f) Revenues from DUO and SUPERDUO (fixed line portion) services consisting of monthly service fees for postpaid and
subscription fees for prepaid subscribers.
g) 2011 service revenues have been restated to reflect the change in the presentation of outbound revenues to be at
gross of interconnect expenses (from net previously).

Globe’s mobile business contributed P78.1 billion in 2014 accounting for 79% of total service
revenues, 7% higher compared to last year’s level of P72.8 billion. Its mobile voice service revenues
73
amounted to P34.7 billion in 2014, contributing 44% of total mobile service revenues. Mobile SMS
service revenues, up by 1% year-on-year, contributed P29.1 billion in 2014. Mobile browsing and
other services, on the other hand, posted strong revenue growth of 23% compared to last year’s
level and contributed P14.3 billion in 2014.

Accounting for the remaining 21% of total service revenues, Globe’s fixed line and broadband
business experienced a robust 18% growth, registering P21 billion in 2014, compared to P17.7
billion in 2013. Broadband and Fixed Line Data contributed revenues of P10.4 billion and P4.7
billion in 2013, respectively.

Competition
1. Industry, Competitors and Methods of Competition
a. Mobile Market
The Philippine mobile market has expanded to a total industry SIM base of 114 million. But
despite an industry penetration rate of over 110% as of December 31, 2014, the market is
continuously expanding due to the rise in the demand for more non-traditional services
especially in the form of mobile internet browsing. With the growing penchant of Filipinos for
smartphones, the mobile browsing business in the Philippines presents more opportunities for
revenue growth. Aside from the possible area of growth in the industry through the switch of
prepaid subscribers to postpaid, mobile data usage of both prepaid and postpaid subscribers
continues to be a promising market that is to be developed and penetrated in the coming years.
As of 2014, approximately 96% of industry subscribers remain prepaid, albeit significant growth
in the postpaid segment over the last three years.

The Philippine government liberalized the communications industry in 1993, after a framework
was developed to promote competition in the industry and accelerate the development of the
telecommunications market. Ten (10) operators were granted licenses to provide CMTS
services – Globe, Innove (previously Isla Communications, Inc. or “Islacom”), Bayan
Telecommunications, Inc. (“Bayantel”), Connectivity Unlimited Resources Enterprises
(“CURE”), Digitel Telecommunications Philippines, Inc. (“Digitel”), Express Telecom
(“Extelcom”), MultiMedia Telephony, Inc., Next Mobile (“NEXTEL”), Pilipino Telephone
Corporation (“Piltel”) and Smart Communications, Inc. (“Smart”). Nine of the ten operators
continued on to operate commercially except for Bayantel, which have yet to roll out their CMTS
services commercially

When Sun Cellular, Digitel’s mobile brand, entered the market in 2003, it introduced to the
market value-based unlimited call and text propositions, allowing it to build subscriber scale
over time. With the market’s preference for these value-based unlimited and bulk call and text
services, Globe and Smart responded by creating a new set of value propositions for their
subscribers. Today, with the high level of mobile penetration, driven in part by the prevalence
of multi-SIMming (i.e., individuals having two SIMs), and the continued shift of consumer
preferences to unlimited and bulk offers, the competition in the mobile market remains intense,
albeit in a more rational environment.

The mobile market continued to grow as shown in the table below. With an estimated
cumulative base of 113.89 million SIMs, the mobile industry grew by 5% and reached 116%
nominal penetration. Globe ended 2014 with a SIM base of 44 million, with an estimated SIM
share of approximately 38.7%, up from 35.5% in 2013.

Mobile Subscribers (Mn) Penetration Rates Growth Rate


(%)
1998 1.62 2.5 43%
1999 2.68 3.8 65%
2000 5.26 8.6 96%
2001 10.53 14.2 100%
2002 15.17 19.0 44%
2003 22.31 27.3 47%
2004 32.87 39.4 47%
2005 34.61 40.6 5%
2006 42.04 48.3 21%
2007 54.86 61.2 30%
2008 68.03 74.6 24%
2009 75.43* 82.3 11%
2010 86.15* 93.0 14%
2011 93.74* 98.7 9%
2012 102.99* 106.4 10%
74
2013 108.52* 110.0 5%
2014 113.89* 116.0 5%
* Estimated end of year figures.
Source: National Telecommunications Commission (Statistical Data 2007), publicly available information
and Company estimates

Since 2000, the mobile communications industry has experienced a number of consolidations
and ushered in new entrants, namely:

 In 2000, Philippine Long Distance and Telephone Company (“PLDT”) acquired and
consolidated Smart and Piltel, complementing the former’s fixed line businesses with the
latter’s wireless businesses. Subsequently in 2008, PLDT, through Smart, purchased
CURE, one of the four recipients of 3G licenses awarded by the NTC, and has since
launched another wireless brand in the market in Red Mobile, furthering heightening
competition in the market at that time.

In October 2011, PLDT also acquired 99.4% of the outstanding common stock of Digitel,
which owns the Sun Cellular brand, thereby allowing it to control over two-thirds of the
industry subscribers. As a condition of PLDT’s acquisition of Digitel, PLDT returned to the
NTC the 3G license in CURE, which is expected to be re-auctioned in the near-term.

 In 2008, San Miguel Corporation (“SMC”), partnering with Qatar Telecom, bought interests
in Liberty Telecom Holdings, Inc. (“Liberty”) and announced plans to enter the mobile and
broadband businesses.

In 2010, SMC acquired 100% stake in Bell Telecommunication Philippines, Inc. (“BellTel”),
after acquiring shares in three companies that own the shares of BellTel. Also in 2010,
SMC purchased a 40% stake in Eastern Telecommunications Philippines, Inc. (“ETPI”) to
expand its telecommunications services. SMC subsequently gained a majority stake of
ETPI in 2011. It now owns 77.7% of the telecommunications company.

In 2012, NTC has granted BellTel, San Miguel Corporation’s mobile telephony arm, an
extension to its operating license to provide cellular mobile telephone system (CMTS)
service in the country for another three years.

 In 2001, Globe acquired Islacom (now Innove). Globe, likewise, acquired approximately
96.5% of the total debt of Bayantel, in December 2012. In October 2013, Globe converted
a portion of the debt it holds in Bayantel into a 38% interest in the latter, based on the
Amended Rehabilitation Plan approved by the Rehabilitation Court in August of the same
year. Upon obtaining relevant and regulatory approvals, Globe would further convert debt
into a total 56.6% share of the common stock of Bayantel.

 In May 2013, ABS-CBN Convergence, Inc. (“ABS-C”, formerly Multimedia Telephony, Inc.)
announced the launch of its mobile brand, ABS-CBN Mobile. The launch of the new mobile
brand is being supported through a network sharing agreement with Globe, wherein the
latter provides network capacity and coverage to ABS-C on a nationwide basis. ABS-C
formally launched the brand in November 26, 2013.

Today, only the PLDT Group and the Globe Group have built significant bases of mobile
subscribers.

b. Fixed Line Market


The fixed line market expanded by 11% with the number of lines in service estimated at 3.26
million lines as of December 31, 2014 with PLDT’s subscriber market share at 68%, followed
by Globe (21%) and Bayantel (11%).

Fixed Line Voice


There are at least eight major local exchange carriers (LEC) in the Philippines with licenses to
provide local and domestic long distance services. Each LEC operator (other than PLDT and
Globe, both of whom are authorized to provide nationwide fixed line services) is assigned
service areas in which it must install the required number of fixed lines and provide service.
The NTC has created 15 such service areas in the Philippines. Rates for local exchange and
domestic long distance services are deregulated and operators are allowed to have metered
as well as flat monthly fee tariff plans for the services provided.

75
Competition in the fixed line voice market intensified over the past years as the major players,
Globe, Bayantel, and PLDT introduced fixed wireless voice services with limited mobile phone
capabilities to take advantage of the increasing preference for mobile services. Fixed wireless
services were initially offered in postpaid versions in selected areas where there were no
available fixed line facilities but prepaid kits were eventually made available as coverage was
expanded.

Fixed Line Data


The fixed line data business is a growing segment of the fixed line industry. As the Philippine
economy grows, businesses are increasingly utilizing new networking technologies and the
internet for critical business needs such as sales and marketing, intercompany
communications, database management and data storage. The expansion of the local IT
Enabled Service (ITES) industry which includes call centers and Business Process Outsourcing
(BPO) companies has also helped drive the growth of the corporate data business.

Dedicated business units have been created and organized within the Company to focus on
the mobile and fixed line needs of specific market segments and customers – be they residential
subscribers, wholesalers and other large corporate clients or smaller scale industries. This
structure has also been driven by Globe’s corporate clients’ preferences for integrated mobile
and fixed line communications solutions.

c. Broadband Market
Broadband continues to be a major growth area for the local telecom industry. Total industry
broadband subscribers grew by 25%, from 5.66 million in 2013 to 7.08 million in 2014. The
aggressive network roll-out of the various operators, the wider availability of affordable prepaid
broadband packages, as well as lower USB internet sticks, PC and tablet prices were the main
drivers of subscriber growth. Operators used both wired and wireless technologies to serve the
growing demand for internet connectivity.

While household penetration rates remains low, competition continues to intensify as telecom
operators aim to capture the market by accelerating the rollout of broadband network to provide
subscribers with faster internet connection and introducing more affordable and bundled
offerings.

As of end 2014, Globe had 2.8 million subscribers, up by 37% from the prior year. The
Company’s subscriber share was estimated at 39.4%, up from 36% in 2014. The combined
subscribers of PLDT and Digitel numbered 4.1 million, holding approximately 58% of the
subscribers, down from 60% the prior year. Globe and the PLDT Group accounted for about
97% of cumulative subscribers. Wireless broadband subscribers account for around 78% of the
combined broadband subscribers of Globe and the PLDT Group.

In February 2010, Liberty Telecoms Holdings, Inc, a partnership between San Miguel
Corporation and Qtel Group of Qatar Telecom, launched its WiMAX broadband service under
the brand name Wi-Tribe. It ended the year with an estimated 70,000 subscribers.

d. International Long Distance Market


Consistent with global trends where international traffic is migrated to alternative means of
communication, particularly over-the-top (OTT) applications like Skype, among others, total
inbound international long distance (ILD) traffic for the year was lower against last year’s levels.
International long distance providers in the Philippines generate revenues from both inbound
and outbound international call traffic whereby the pricing of calls is based on agreed
international settlement rates. Similarly, settlement rates for international long distance traffic
are based on bilateral negotiations. Commercial negotiations for these settlement rates are
settled using a termination rate system where the termination rate is determined by the
terminating carrier (e.g. Philippines) in negotiation with the originating foreign correspondent.

To date, there are eleven licensed international long distance operators, nine of which directly
compete with Globe for customers. Both Globe and Innove offer ILD services which cover
international calls between the Philippines and over 200 calling destinations. To drive growth in
this segment, the Company offers discounted call rates to popular calling destinations, sustains
its usage campaigns and marketing efforts for OFW SIM packs, and ensures the availability of
popular prepaid load denominations.

76
2. Principal Competitive Strengths of the Company
a. Market Leadership Position
Globe is a major provider of telecommunications services in the Philippines. It is a strong player
in the market and operates one of the largest and most technologically-advanced mobile, fixed
line and broadband networks in the country, providing reliable, superior communications
services to individual customers, small and medium-sized businesses, and corporate and
enterprise clients. Globe’s distinct competitive strengths include its technologically advanced
mobile, fixed line and broadband network, a substantial subscriber base, high quality customer
service, a well-established brand identity and a solid track record in the industry.

b. Strong Brand Identity


The Company has some of the best-recognized brands in the Philippines. This strong brand
recognition is a critical advantage in securing and growing market share, and significantly
enhances Globe’s ability to cross-sell and push other product and service offerings in the
market.

c. Financial Strength and Prudent Leverage Policies


Globe’s financial position remains strong with ample liquidity, and gearing comfortably within
bank covenants. At the end of 2014, Globe had total interest bearing debt of P65.3 billion
representing 54% of total book capitalization. Consolidated gross debt to equity ratio stood at
1.2:1 and is well within the 2:1 debt to equity limit prescribed by its debt covenants. Additionally,
debt to EBITDA stood at 1.66:1, significantly lower than 3:1 covenant level. Approximately 78%
of its debt is in pesos while the balance of 22% is denominated in US dollars. Expected US
dollar inflows from the business offset any unhedged US dollar liabilities, helping insulate
Globe’s balance sheet from any volatilities in the foreign exchange markets.

Globe intends to maintain its strong financial position through prudent fiscal practices including
close monitoring of its operating expenses and capital expenditures, debt position, investments,
and currency exposures.

d. Proven Management Team


Globe has a strong management team with the proven ability to execute on its business plan
and achieve positive results. With its continued expansion, it has been able to attract and retain
senior managers from the telecommunications, consumer products and finance industries with
experience in managing large scale and complex operations.

e. Strong Shareholder Support


The Company’s principal shareholders are Ayala Corporation (AC) and Singapore Telecom
(STI), both industry leaders in the country and in the region. Apart from providing financial
support, this partnership has created various synergies and has enabled the sharing of best
practices in the areas of purchasing, technical operations, and marketing, among others.

Suppliers
Globe works with both local and foreign suppliers and contractors. Equipment and technology required
to render telecommunications services are mainly sourced from foreign countries. Its principal
suppliers, among others, are as follows:

The Company’s suppliers of mobile equipment include Nokia Solutions and Networks (Finland);
Ericsson Radio Systems AB (Sweden), Alcatel-Lucent (France), and Huawei Technologies Co., Ltd.
(China). For transmission and IP equipment, Company has partnered with NEC (Japan), Alcatel-Lucent
(France), ECI Telecom, Ltd. (Israel), Aviat Networks (USA), Cisco (USA). For the Company’s network
modernization program, Huawei was the selected as the primary partner given its technical expertise
and strong track record of success in international markets. Huawei has likewise committed to establish
a Joint Innovation Center (JIC) that would bring the latest technological developments and help further
the Company’s service innovation initiatives all focused in providing relevant and customizable services
for our various customer segments.

For fixed line and broadband, Globe’s principal equipment suppliers include Fujitsu Ltd. (Japan),
Alcatel-Lucent Technologies (France), NEC (Japan), AT&T Global (US), British Telecom (UK), Huawei
Technologies Co., Ltd . (China), ZTE Corporation (China). Singapore Telecom (Singapore), and
Tellabs (USA/Singapore).

For the Company’s IT modernization program, Globe has selected Amdocs, the leading provider of
customer experience systems and services, to improve and upgrade Globe’s Business Support
77
Systems (BSS) and enterprise data warehouse. As part of the transformation program, Amdocs is
tasked to manage and consolidate all of Globe’s legacy systems onto a single Business Support System
(BSS) platform. This will enable the Company to manage its customer relationships better across all it
various product offerings, simplify business processes and shorten the time to deliver bundled and more
innovative products to the market.

Customers
Globe has a large subscriber base across the country. The Company ended 2014 with over 44 million
mobile subscribers/SIMs, comprised of 2.3 million postpaid and 41.8 million prepaid subscribers.
Meanwhile, Globe has over 762 thousand fixed line voice subscribers and around 2.8 million broadband
customers.

No single customer and contract accounted for more than 20% of the Company’s total sales in 2014.

Transactions with Related Parties


Globe Telecom and Innove, in their regular conduct of business, enter into transactions with their major
stockholders, AC and STI, venturers and certain related parties. Please refer to the details of Related
Party Transactions disclosure in Note 16 of Globe’s 2014 Consolidated Financial Statements, which is
part of exhibits to this report.

Licenses, Patents, and Trademarks


Globe Telecom currently holds the following major licenses:

Service Type of Date Issued or Last Expiration Date


License Extended
Globe
Wireless CPCN (1) July 22, 2002 December 24, 2030
Local Exchange Carrier CPCN (1) July 22, 2002 December 24, 2030
International Long Distance CPCN (1) July 22, 2002 December 24, 2030
Interexchange Carrier CPCN (1) February 14, 2003 December 24, 2030
VSAT CPCN (1) February 6, 1996 February 6, 2021
International Cable Landing CPCN (1) October 19, 2007 December 24, 2030
Station & Submarine Cable
System (Nasugbu, Batangas)
International Cable Landing CPCN (1) June 29, 2010 December 24, 2030
Station & Submarine Cable
System (Ballesteros, Cagayan)

Type of Date Issued or Last Expiration Date


Innove License Extended
Wireless CPCN (1) July 22, 2002 April 10, 2017
Local Fixed line CPCN (1) July 22, 2002 April 10, 2017
International Long Distance CPCN (1) July 22, 2002 April 10, 2017
Interexchange Carrier CPCN (1) April 30, 2004 April 10, 2017
1
Certificate of Public Convenience and Necessity. The term of a CPCN is co-terminus with the franchise term.

In July 2002, the NTC issued CPCNs to Globe and Innove which allow the Company to operate
respective services for a term that will be predicated upon and co-terminus with the Company’s
congressional franchise under RA 7229 (Globe) and RA 7372 (Innove). Globe was granted permanent
licenses after having demonstrated legal, financial and technical capabilities in operating and
maintaining wireless telecommunications systems, local exchange carrier services and international
gateway facilities. Additionally, Globe and Innove have exceeded the 80% minimum roll-out compliance
requirement for coverage of all provincial capitals, including all chartered cities within a period of seven
years.

Globe also registered the following brand names with the Intellectual Property Office, the independent
regulatory agency responsible for registration of patents, trademarks and technology transfers in the
Philippines: Globe, Globe Life Device, Globe Load, Globe Commerce, Globe International, Globe
Platinum, Globe Kababayan, Globe Plans, Globe Calls, Globe Labs, Globe GCash, Connected 24ever
and Device, Gloo Netwrkz, Globe Landline Postpaid Plus, Globe Share-A-Load, Globe Kababayan,
Globe Broadband, Globe Telecom, Pixlink, Unlichat, Appzone, Tipidd, Wizard, Duo Mobile Plus
Landline in One, Astig Ang Signal ng TM, Globe Tattoo, Globe Duo, Astig Ang Signal, Republika Ng
TM Astig Tayo Dito, Tattoo, Astig, Astig Rewards, Astigunli, Astig Load, Astig Pabonus Reward, TM
Diskarte, Immortalload, AstigTawag, Astigtxt, Todo Bigay Habambuhay, Duoplus, Load4life, Call4Life,
Text4Life, Globe Text, Todo Text, Globe Tattoo Youniverse, Immortaltxt, Superduo, Tattoo, Globe All

78
you Can, Ka-Globe Retailer Club, and Muzta!, Ang Wordlwidest, Globe for You, Globe Life, Globe
Content, My Rewards.MyGobe, Tattoo Superstick, Super Unli Call and Text, Tattoo Stick, Tattoo Myfi,
Tattoo Torque, Tattoo Live Without Limits, Globe Life, Enjoy Your Way, I Globe and Heart Device,
Tattoo@Home, Enjoy Your Platinum Your Way, Tattoo DSL, Enjoy Your Globe International Your Way,
Enjoy Your Globe Postpaid Your Way, Enjoy Your Prepaid Your Way, Globe Platinum & Device,
Powersurf, M.Globe, Tattoo Wimax, M2M Solutions, SuperallTxt, Globe Business M2M Solutions, Go
Lang Ng Go, Globe Mobile Internet and Globe Life Device, Globe Load and Globe Life Device, Globe
My Super Surf Plan and Device, Tattoo Stylista, Tattoo Explorer, Globe Gcash and Globe Life Device,
Globe Mobile Internet, Tattoo Player, Guaranteed Globe, Guaranteed Happy, Talk2Globe Your Way,
My Rewards, My Globe Logo, Globe Business Infrastructure-as-a-Service, Tattoo Flash, Globe
Business Cloud Solutions, Globe Business Storage-as-a-Service, Guaranteed Globe. Guaranteed
Happy Logo, Tattoo 3G Sonic, Tattoo Sonic, You're On Logo, Globe Plans, Forever, Globe Bizcam,
Globe Pisonet, Trunklite, Web Builder, Globe MyBusiness and Globe Life Device, Globe MyBusiness,
TxtConnect, Yo!, Yo, Cloud Solutions, Globe MyBusiness Gadget Group Plan, MyWebsite.

Further, Globe also applied and registered the following brand names: Globe Telecom (Australia,
Taiwan, Japan, Singapore, Macau, Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Great Britain, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Korea,
Canada, China, Saudi Arabia), Globe and Globe Life Device (Hong Kong, Taiwan, Singapore, Japan,
Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal,
Slovak Republic, Slovenia, Spain, Sweden, Macau, Qatar, UAE, USA, Saudi Arabia), Globe GCash
(Singapore, Hong Kong, United Kingdom, Taiwan, Japan, Macau, Austria, Belgium, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain,
Sweden, Qatar, Korea, UAE, Saudi Arabia, New Zealand, Ireland, Lebanon, Denmark, Sweden,
Switzerland, Israel), Globe Kababayan (Singapore, Hong Kong, Taiwan, United Kingdom, Australia,
Japan, Macau, USA, Saudi Arabia, Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Great Britain, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden,
Malaysia, UAE, Italy, Korea, Taiwan), Globe Autoload Max (Norway, Singapore, Austria, Belgium,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Greece,
Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak
Republic, Slovenia, Spain, Sweden, Japan, Hong Kong), Globe M-Commerce Hub (Taiwan, Singapore,
Korea, Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great
Britain, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Slovak Republic, Slovenia, Spain, Sweden, Australia, Macau, Qatar, Malaysia), Muzta, and
Smiley With Salakot Device (Japan, UK, Australia, Kuwait, USA, Saudi Arabia, Bahrain, UAE), Smiley
with Salakot (Japan, United Kingdom, Australia, USA, Saudi Arabia, Bahrain, UAE), and Muzta
(Bahrain, UAE, Canada, Qatar, Saudi Arabia, UAE), GCash Remit and Logo (Austria, Belgium, Cyprus,
Czech Republic, Denmark, Estonia, Finland, France, Germany, Great Britain, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia,
Spain, Sweden. Lebanon, Japan, Switzerland, Macau, Hong Kong, Taiwan, New Zealand, China,
Japan, Israel), GCash Express and Logo (Hong Kong, Singapore, Taiwan, Malaysia), Globe Load
(Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Great
Britain, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Macau).

Innove registered "Innove Communications" and Gxchange registered "GXchange," with the Intellectual
Property Office.

Gxchange, Inc. and UTI Pty Ltd. have registered in the Philippines the following:
1. Person-to-Person Virtual Cash Transfer Transaction Using Mobile Phones;
2. A Method of Converting Cash into Virtual Cash and Loading it to Mobile Phone Cash Account;
3. A Method of Cashless, Cardless Purchase Transaction Using Mobile Phones; and
4. A Method of Converting Virtual Cash into Cash and Deducting it to Mobile Phone Cash Account.

Gxchange, Inc. and UTI Pty Ltd. have likewise registered the following patents in the United States:
1. Person-to-Person Virtual Cash Transfer Transaction Using Mobile Phones; and
2. A Method of Converting Virtual Cash into Cash and Deducting it to Mobile Phone Cash Account

Gxchange, Inc. and UTI Pty Ltd. have likewise filed the following patent applications in Indonesia,
Singapore and Europe.
79
1. Person-to-Person Virtual Cash Transfer Transaction Using Mobile Phones;
2. A Method of Converting Cash into Virtual Cash and Loading it to Mobile Phone Cash Account;
3. A Method of Cashless, Cardless Purchase Transaction Using Mobile Phones; and
4. A Method of Converting Virtual Cash into Cash and Deducting it to Mobile Phone Cash Account.

Government approvals/regulations
The Globe Group is regulated by the NTC under the provisions of the Public Service Act (CA 146),
Executive Order (EO) 59, EO 109, and RA 7925. Under these laws, Globe is required to do the following:
a. To secure a CPCN/PA from the NTC for those services it offers which are deemed regulated
services, as well as for those rates which are still deemed regulated, under RA 7925.
b. To observe the regulations of the NTC on interconnection of public telecommunications networks.
c. To observe (and has complied with) the provisions of EO 109 and RA 7925 which impose an
obligation to rollout 700,000 fixed lines as a condition to the grant of its provisional authorities for
the cellular and international gateway services.
d. Globe remains under the supervision of the NTC for other matters stated in CA 146 and RA 7925
and pays annual supervision fees and permit fees to the NTC.

On October 19, 2007, the NTC granted Globe a CPCN to operate and maintain an International Cable
Landing Station and submarine cable system in Nasugbu, Batangas.

On May 19, 2008, Globe Telecom, Inc. announced that the National Telecommunications Commission
(NTC) has approved the assignment by its wholly-owned subsidiary Innove Communications (Innove) of
its Touch Mobile (TM) consumer prepaid subscriber contracts in favor of Globe. Globe would be
managing all migrated consumer mobile subscribers of TM, in addition to existing Globe subscribers in
its integrated cellular network.

On September 11, 2008, the NTC granted Globe a CPCN to operate and maintain an International
Cable Landing Station in Ballesteros, Cagayan Province.

Research and Development


Globe did not incur any research and development costs from 2010 to 2014.

Compliance with Environmental Laws


The Globe Group complies with the Environmental Impact Statement (‘EIS’) system of the Department
of Environment and Natural Resources (‘DENR’) and pays nominal filing fees required for the
submission of applications for Environmental Clearance Certificates (‘ECC’) or Certificates of Non-
Coverage (‘CNC’) for its cell sites and certain other facilities, as well as miscellaneous expenses
incurred in the preparation of applications and the related environmental impact studies. The Globe
Group does not consider these amounts material.

Globe has not been subject to any significant legal or regulatory action regarding non-compliance to
relevant environmental regulations.

Employees
The Globe Group has 6,182 active regular employees as of December 31, 2014, of which about 5.90%
or 365 are covered by a Collective Bargaining Agreement (CBA) through the Globe Telecom
Employee’s Union (GTEU).

Breakdown of employees by main category of activity from 2012 to 2014 are as follows:

Employee Type 2014 2013 2012


Rank & File, CBU 2,347 2,365 2,596
Supervisory 2,167 2,074 1,877
Managerial 1,239 1,131 1,034
Executives 429 417 365
Total * 6,182 5,987 5,872
*Includes Globe, Innove, & GXI (excluding Secondees)

In conformance with the Department of Labor and Employment’s (DOLE) Collective Bargaining
Agreement (CBA), the Globe Telecom Employees Union-Federation of Free Workers (GTEU-FFW)
remains active to pledge the right of every Ka-Globe to form a collective bargaining unit. All employees
are allowed to participate in CBA and through GTEU-FFW, everyone is informed and made aware of
the mandate during employee orientations.

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The Company has a long-standing, healthy, and constructive relationship with the GTEU characterized
by industrial peace. It is a partnership that mutually agrees to focus on shared goals – one that has in
fact allowed the attainment of higher levels of productivity and consistent quality of service to customers
across different segments.

Strong partnership and mutual understanding between the company and the union has been
continuously demonstrated throughout the years. In fact, throughout the many changes and
transformations initiated by the Company to achieve its goals, the union has been there, working hand
in hand with the Company in support of its business goals.

GTEU and Globe have a 5-year collective bargaining agreement for year 2011-2015, a testament to
the strong and peaceful relationship between the two.

Globe Telecom complies with RA 7160 – Special Protection of Children Against Child Abuse,
Exploitation and Discrimination Act and observance of the principles of the Human Rights Act and Child
Labor Law. Benchmarking such regulations generate a happy workplace without presenting any fear of
discrimination or violation towards any employee. The company does not condone the violation of the
rights of indigenous people, nor does the company promote any operational activities that would pose
hazardous risks or damages to children or young employees.

The wonderful world of Globe provides a happy and safe workplace and alongside, implements certain
rules and policies to promote good conduct and behavior. Hence, employees who fail to follow the
Globe Code of Conduct (COC) are given corresponding sanctions. This is to protect the company’s
interests to be able to consistently create a wonderful world for everyone. The sanctions especially
apply to major offenses related to corruption, extortion, bribery or any form that disrespects the
corporate values of the company. From the beginning, employees will be obliged to declare in writing
any involvement or endeavors that may potentially raise conflict with the company. Failure to do so will
subject the employee for a possible outright dismissal.

Globe continues to explore new ways to enhance employee productivity and realize operating
efficiencies. The Company believes that these initiatives will improve corporate agility, enhance Globe’s
overall competitiveness and strengthen its position as a service leader in the telecom industry, thereby
enhancing shareholder value.

Risk Factors
1. Foreign Exchange Risk
Globe’s foreign exchange risk results primarily from movements of the Philippine peso (PHP)
against the US dollar (USD) with respect to its USD-denominated financial assets, liabilities,
revenues and expenditures. Approximately 16% of its total service revenues are in USD while
substantially all of its capital expenditures are in USD. In addition, 22%, 24% and 13% of debt as
of December 31, 2014, 2013 and 2012, respectively, are denominated in USD before taking into
account any swap and hedges.

Globe’s foreign exchange risk management policy is to maintain a hedged financial position after
taking into account expected USD flows from operations and financing transactions. It enters into
short-term foreign currency forwards and long-term foreign currency swap contracts in order to
achieve this target.

The Company mitigates its foreign exchange risk through the following:

First, the Company has foreign currency-linked revenues which include those (a) billed in foreign
currency and settled in foreign currency; (b) billed in pesos at rates linked to a foreign currency tariff
and settled in pesos, or (c) fixed line monthly service fees and the corresponding application of the
Currency Exchange Rate Adjustment (CERA) mechanism under which Globe has the ability to pass
the effects of local currency depreciation to its subscribers.

Second, Globe enters into short-term currency forwards to manage foreign exchange exposure
related to foreign currency denominated monetary assets and liabilities while it enters into long term
foreign currency and interest rate swap contracts to manage foreign exchange and interest rate
exposures of certain long term foreign currency denominated loans.

There are no assurances that declines in the value of the Peso will not occur in the future or that
the availability of foreign exchange will not be limited. Recurrence of these conditions may adversely
affect Globe’s financial condition and results of operations.
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2. Political and Socio-Economic Risks
The growth and profitability of Globe may be influenced by the overall political and economic
situation of the Philippines.
a. Economic Considerations
The first three quarters of 2014 showed decelerated GDP growth for the Philippines. However,
growth accelerated during the fourth quarter, reaching 6.9%, slightly higher than the 6.3% from
the same period last year, resulting to a 6.1% full-year GDP growth rate for the year ended
December 31, 2014. This was driven mostly by the Industry Sector, particularly Manufacturing
and Construction. Aside from this, Real Estate, Renting & Business Activities, Financial
Intermediation and Transport, Storage, and Communication, all part of the Service Sector,
contributed to the robust performance during the last quarter. Despite falling short of the 6.5-
7.5% projection and the decrease in growth rate from the 7.2% in 2013, the country’s economic
outlook remains optimistic.

Zooming into the different sectors that contributed to the GDP growth, it can be seen that the
Service Sector has remained to be the top contributor for the 2014 GDP growth rate with 3.4
percentage points despite decreasing to 6% from 7.2% in 2013. Despite the decrease in growth
rate from 8.7% in 2013 to 8.1% this year, the Real Estate, Renting & Business Activities
subsector has taken the place of Financial Intermediation, which experienced a significant
decrease to 6.7% from 12.6% in 2013, as the subsector under the Service Sector with the
highest growth rate.

Not far behind is the Industry Sector which contributes 2.5 percentage points to the country’s
GDP this year. Its Construction subsector posted the highest growth rate at 8.5% despite
decreasing from last year’s 9.6%. Construction, Manufacturing, and Electricity, Gas, and Water
Supply all decreased by 21%, 11%, and 35% respectively, from 2013. Only Mining and
Quarrying posted an accelerated growth, increasing by 192% from 1.2% in 2013 to 3.5% in
2014.

The Agricultural Sector, despite being the least contributor at 0.2 percentage points, has
showed signs of improvement having increased by 73% in GDP from last year’s 1.1% to 1.9%
in 2014. The Agricultural and Forestry subsector mitigated the decline in the Fishing subsector
by having an increase of 92% in GDP from 1.2% in 2013 to 2.3% this year. This shows positive
signs of recovery from calamities experienced in 2013.

Looking at the demand side, government spending decreased drastically by 77% from 7.7% in
2013 to 1.8% this year. However, it is difficult not to notice the outstanding performance of the
international trade, which, alongside high consumer spending and investments in Fixed Capital
Formation, contributed to the positive economic performance of the country for 2014.

In May 2014, Standard & Poor’s upgraded the country’s long-term sovereign credit rating from
BBB- to a notch higher, BBB and is projected to sustain this rating due to the economic reform
progress that Philippines is experiencing. Aside from this, from a Baa3 investment grade rating,
Moody’s has granted the country a Baa2 Stable rating last December 2014. This is mainly due
to declining debt burden and rising private sector investments.

Economic experts remain positive on the country’s solid economic growth and are optimistic
that this economic success will continue in 2015. Growth of 6.3% to 6.7% for the year 2015 is
expected by economists given the possible surge in foreign investments following the country’s
further improvement in credit ratings. However, it is far from the government’s target of 7-8%.

For the year 2015, the government budget increased by 15.1% mainly for social services,
infrastructure, and investments in agriculture, tourism and manufacturing. Aside from this,
private consumption is expected to be a major contributor to the GDP growth in 2015. External
risks, however, will likely remain amid the uncertainties in the global scene, particularly the debt
and fiscal problem in the US and the continued debt crisis in the Euro zone which could then
again stall regional trade and capital flows. These events could negatively impact the country’s
growth prospects and as such, could materially and adversely affect Globe’s business, financial
condition and results of operations, including Globe’s ability to enhance the growth of its
subscriber base, improve its revenue base and implement its business strategies.

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b. Political Considerations
The Philippines has from time to time experienced political, social and military instability. In
February 1986, a peaceful civilian and military uprising ended the 21-year rule of President
Ferdinand Marcos and installed Corazon Aquino as President of the Philippines. Between 1986
and 1989, there were a number of attempted coups d’état against the Aquino administration,
none of which was successful.

Political conditions in the Philippines were generally stable during the mid to late 1990s
following the election of Fidel Ramos as President in 1992. His successor, Joseph Estrada was
the subject of various allegations of corruption. He was eventually ousted from office following
impeachment proceedings, mass public protests and the withdrawal of support by the military
on corruption charges. Following President Estrada’s resignation, then Vice President Gloria
Macapagal Arroyo was sworn in as President on January 20, 2001. President Arroyo was
subjected to various impeachment complaints during her term. These impeachment complaints
involved various allegations including the manipulation of the results of the presidential election
in 2004, corruption and bribery. These complaints have fueled mass protests led by various
cause-oriented groups calling for the President to resign.

The Philippines held its most recent elections in May 2010, which marked the first attempt of
the Commission on Elections to implement a computerization of the national elections that
includes presidential, legislative and local positions. The elections have been deemed a
success, with the automation of the process and the relative decrease in election-related
violence adding credibility to the results. In June 2010, Benigno “Noynoy” Aquino III was
inaugurated as the 15th President of the Philippines. The son of the late former President
Corazon Aquino garnered over 40% of the vote and has injected the country with renewed
optimism.

The next presidential elections will be held in 2016. In May 2013, the Philippines held its
midterm elections where 12 of the 24 seats of the Senate and all of the seats of the House of
Representatives were elected. The officials elected were sworn in on June 30, 2013, midway
through President Benigno Aquino III’s term of office.

On the judiciary, following the impeachment of the Chief Justice of the Philippine Supreme
Court, Renato Corona in 2012, President Aquino III immediately appointed Supreme Court
Associate Justice Ma. Lourdes Sereno as the new Chief Justice of the Supreme Court. She is
the first female and the second youngest Chief Justice in the country’s history. Her appointment
gives hope of reform and transparency in the justice system of the Philippines. Her
accomplishments as the Chief Justice are yet to be determined given that she is expected to
be in position for the next 16 years.

It was in mid-2013 and early 2014 that the Pork Barrel Scam made noises that resulted to
citizens questioning the credibility of our government. President Aquino, who initially continued
the Priority Development Assistance Fund (PDAF) legacy upon election, decided to abolish it
given the rise of this major issue that can possibly cripple the Philippine government. The Pork
Barrel Scam began when whistleblowers revealed the P10B-scam involving several
government officials and Janet Lim-Napoles, a business owner of several companies that serve
different agencies. The witness claimed that Napoles offered a portion of the PDAF to
commissioners in exchange of the authority to redirect the funds. Since then, several witness
testimonies in court hearings and investigations continue to reveal pieces on this issue.

Despite the recent improvements in the country’s political and economic systems, there can be
no assurance that the future political environment in the Philippines will be stable or future
governments will adopt economic policies conducive to sustaining economic growth. The
growth and profitability of Globe may be influenced by the overall political and economic
situation of the Philippines. Any political instability in the Philippines could negatively affect the
country’s general economic conditions which in turn could adversely affect Globe’s business,
financial condition or results of operations.

3. Industry and Operational Risks


a. Competitive Industry
Competition remains intense in the Philippine telecommunications industry as current operators
seek to increase market share with aggressive offerings while new entrants serve to further
heighten the competitive dynamics amidst a maturing mobile market. Today, Globe’s principal

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competitor is the PLDT Group (composed of PLDT, Smart and Digitel), becoming a two-player
market following PLDT’s acquisition of Digitel in October 2011.

The Philippine telecommunications industry continues to be dominated by the mobile segment


which contributed an estimated 69% of the total industry revenues in 2014, higher than the 66%
contribution it registered in 2013. Nominal penetration rate is now estimated at 113% from
110% in 2013. Industry revenue growth has slowed in recent years, growing only by 3.7% in
2014, lower than the 5% in 2013.

The continued growth and development of the mobile industry will depend on many factors.
Any significant economic, technological or regulatory development could result in either a
slowdown or growth in demand for mobile services and may impact Globe’s business, revenues
and net income. Globe’s mobile revenues in 2014 and 2013 accounted for 79% and 80%,
respectively of its total service revenues.

b. Regulatory Risk
The Globe Group is regulated by the NTC for its telecommunications business, and by the SEC
and the BSP for other aspects of its business. The introduction of, changes in, or practicality of
implementation of certain laws or regulations from time to time, may materially affect the
operations of Globe, and ultimately the earnings of the Company which could impair its ability
to service debt. There is no assurance that the regulatory environment will support any increase
in business and financial activity for Globe.

Globe manages its regulatory risks through proactive engagement with regulators and regular
monitoring of circulars and orders especially those that could negatively impact its businesses.

c. Technology Shift Risk


Globe offers products and services which are dependent on the latest technological
trends. Globe Telecom’s inability to identify, align or adapt to emerging technologies that drive
shifts in customer preference and consider the impact of new devices to existing technology
infrastructure and investments may place it in a competitively disadvantageous position
resulting to non-attainment of revenue and growth targets.

Globe Telecom’s business, product and technical teams continue to keep abreast of the latest
innovations and trends in telecommunications technologies, devices and gadgets. The
information and insights gathered are considered in the roadmap of future products and
services and Globe Telecom’s Network and IT infrastructure evolution. Proper timing of
investments in technology and infrastructure always consider its strategic implications, velocity
of technology cycles and subscriber adaption.

d. Change Program Risk


Globe is in the process of transforming its Network infrastructure mainly to improve network
quality, anticipate the surge in voice and data traffic, decrease total cost of ownership and make
the network robust enough to meet future needs. On the other hand, the IT transformation is
envisioned to re-engineer Globe Telecom’s IT systems and key processes to enhance its ability
to deliver superior customer experience while being able to roll out products to the market in a
more efficient and effective manner.

Should Globe Telecom’s ambitious and complex transformation programs prove to be


unsuccessful, or fail to achieve the desired outcomes, Globe could ultimately lose market share
thus impacting its financial results.

Globe has institutionalized the appropriate program governance organization with senior
management oversight and accountability to ensure program risks are properly considered and
managed with the end objective of improving customer experience. Supporting processes have
been established to closely monitor and provide a venue for regular progress updates,
alignment of efforts, discussion of critical implementation issues and challenges and help
ensure successful execution of its change programs.

e. Reputational Risk
Globe is recognized as one of the Philippines’ top companies which provides innovative voice,
SMS and data services, delivers superior customer sales and after sales experience, and
maintains a socially responsible philosophy. Given the prevailing industry landscape and
considering quickly shifting customer loyalty, Globe is exposed to reputational risk which may
84
result from the actions of the company itself or its competitors; indirectly due to the actions of
an employee or consequently through outsourced partners, suppliers or joint venture partners.

Damage to Globe Telecom’s reputation and erosion of brand equity could also be triggered by
the inability to swiftly and adequately handle negative traditional and social media sentiments
on Globe Telecom’s products and services resulting from unfavorable customer experience.

Regular process effectiveness and efficiency reviews on existing customer-impacting


processes and policies are being conducted to identify and address existing gaps, thus
minimizing exposure to reputational risks arising from problem areas. Front line staff are
regularly trained to enable them to effectively handle customer cases. On the other hand, close
monitoring of customers’ online sentiments is being performed to quickly detect subscriber
issues being surfaced in social media and be able to manage them early on.

f. Compliance Risks
(i) Revenue Leakage
Globe is inherently vulnerable to revenue leakage with the dynamic changes in networks
and IT systems and the multitude of its service offerings given the pace at which new offers
are launched in the market.

Globe is continuously improving controls in its revenue assurance processes in order to


prevent and/or detect cases of revenue leakages. Prior to the launch of new products,
services and new systems, appropriate revenue assurance controls are already embedded
in system capabilities and manual processes.

(ii) Fraud
Globe runs the risk of falling victim to fraud perpetrated by unscrupulous persons or
syndicates either to avail of “free” services, to take advantage of device offers or defraud
its customers. With the increasing complexity of technologies, network and IT architecture,
new types of fraud are becoming more difficult to detect. This risk also involves irregularities
in transactions or activities performed by Globe Telecom’s employees for personal gain.

Globe has institutionalized processes and built capabilities that enable the early detection,
close monitoring and timely reporting of various instances of fraudulent activities.

(iii) Business disruptions


Globe Telecom’s continued delivery of quality services are highly dependent on network
and IT infrastructure which are vulnerable to damages caused by extreme weather
disturbances, natural calamities, fire, acts of terrorism, intentional damage, malicious acts
and other similar events which could negatively impact the attainment of revenue targets
and damage its reputation.

Globe is enhancing its crisis management plans and capabilities and has incorporated
disaster risk reduction and response objectives in its business continuity planning.

(iv) Cyber Threats


The cyber security landscape is rapidly evolving and users are heavily relying on digitized
information and sharing vast amounts of data across complex and inherently vulnerable
networks. This exposes Globe to various forms of cyber attacks which could result in
disruption of business operations, damage to reputation, legal and regulatory fines and
customer claims.

New technologies and systems being installed in the name of advanced capabilities and
processing efficiencies may introduce new risks which could outpace the organization’s
ability to properly identify, assess and address such risks. Further, new business models
that rely heavily on global digitization, use of cloud, big data, mobile devices and social
media increase the organization’s exposure to cyber attacks.

Globe continues to strengthen and enhance its existing security detection, vulnerability and
patch management, configuration management, identity access management, events
monitoring, data loss prevention and network/end-user perimeter capabilities to ensure that
cyber threats are effectively managed.

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(v) Data Privacy
Globe, in the course of regular business acquires personal information of its subscribers
and retains the same in its IT systems. Existing laws require that these information be
adequately protected against unauthorized access and or/disclosure. The risk of data
leakage is high with the level of empowerment granted to in-house and outsourced
employees handling sales and after sales transactions to enable the efficient discharge of
their functions.

Employee awareness on data protection and loss prevention is reinforced through regular
corporate dissemination channels. Further, employees are made accountable for
maintaining the confidentiality of data handled, including disclosures and information
shared in various social media platforms. Controls over processes that require handling of
subscriber’s personal information are being tightened, coupled with enhancements in
existing security capabilities to prevent compromise of subscriber data.

g. Human Capital Risks


Globe Telecom’s greatest asset is its people and its success is largely dependent on its ability
to attract highly skilled personnel and to retain and motivate its best employees. Globe
Telecom’s people is the glue that brings everything together which is why it is crucial to ensure
that the company is able to acquire the right people and enhance their exceptional abilities
further.

Various people-related programs designed to engage and motivate employees are being
implemented in order to retain and attract key talents. Globe also conducts an annual survey
to determine the level of employee engagement across the organization. Below norm employee
engagement criteria are analyzed to determine employees’ key concerns, and correspondingly,
implement programmed interventions to address such concerns and ensure sustainable
engagement.

h. Organizational Agility Risk


In order to maximize the opportunities that may arise from the quickly-evolving changes in the
telecommunications industry, diversification of the business portfolio is critical to maintain Globe
Telecom’s market competitiveness. Failure to drive the entire organization to quickly adapt to
changes and make the right shift in skills and mindsets to take on new investments may lead
to missed business opportunities.

Globe has initiated cultural change programs that focus on customer centricity and cultivating
forward-looking risk aware mindsets. Opportunistic hiring of talents required for innovation and
new investment areas are also carefully considered. Further, through Kickstart Ventures, Globe
invests in building to scale, the technical foundation of digital and tech start-up businesses
operating in the Philippines.

Management of Risks
Cognizant of the dynamism of the business and the industry and in line with its goal to continuously
enhance value for its stakeholders, Globe Telecom has put in place a robust risk management process.

As part of its annual planning cycles, senior management and key leaders regularly conduct an
enterprise–wide assessment of risks focused on identifying the key risks that could threaten the
achievement of Globe’s business objectives, both at the corporate and business unit level, as well as
specific plans to mitigate or manage such risks.

Risks are prioritized, depending on their impact to the overall business and the effectiveness by which
these are managed. Risk mitigation strategies are developed, updated and continuously reviewed for
effectiveness, and are also monitored through various control mechanisms.

Globe employs a two-dimensional view of risk monitoring. Business unit or functional group level
leaders regularly monitor the status of operational, legal, financial, project risks that may threaten the
achievement of defined business outcomes and are accountable for the completion of the approved
mitigation plans meant to address the risks to the business. Senior management’s oversight of
enterprise level risks includes strategic risks, major programme risks, regulatory risks and the status of
risk mitigation plans as they relate to the attainment of key business objectives.

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Item 2. Properties

Ayala Corporation

Ayala Corporation owns 4 floors of the Tower One Building located in Ayala Triangle, Ayala Avenue,
Makati. These units were purchased in 1995 and are used as corporate headquarters of the Company.
Other properties of the Company include various provincial lots relating to its business operations
totaling about 860 hectares and Metro Manila lots totaling 2.6 hectares. The Honda Cars Makati, Honda
Cars Pasig, Honda Cars Alabang, Isuzu Alabang and Honda Cars Global City dealership buildings are
located on its Metro Manila lots which are leased to these dealerships. These properties do not have
any mortgage, lien or encumbrance.

ALI

Landbank / Properties with Mortgage of Lien


The following table provides summary information on ALI’s land bank as of December 31, 2014.
Properties are wholly-owned and free of lien unless noted.

Location Hectares Primary land use


1
Makati 52 Commercial/Residential
Taguig2 84 Commercial/Residential
Makati (outside CBD)3 4 Commercial/Residential
Alabang4 24 Commercial/Residential
Las Piñas/Paranaque 127 Commercial/Residential
Quezon City5 108 Commercial/Residential
Others in Metro Manila 59 Commercial/Residential
Metro Manila 457

NUVALI6 988 Commercial/Residential/Industrial


Laguna 7 1,499 Commercial/Residential/Industrial
Cavite8 1,099 Commercial/Residential
Batangas/Rizal/Quezon9 433 Commercial/Residential
Calabarzon 4,019

Bulacan/Pampanga10 1,011 Commercial/Residential

Others in Luzon11 2,316 Commercial/Residential

Bacolod/Negros Occidental 137 Commercial/Residential


Cebu12 205 Commercial/Residential
Davao13 94 Commercial/Residential
Cagayan De Oro14 336 Commercial/Residential
Iloilo15 49 Commercial/Residential
Others in VisMin 13
Visayas/Mindanao 835

TOTAL 8,639

1
Makati includes sites of Mandarin Hotel (1.6 has.) and Peninsula Hotel (2.0 has.) which are 50% owned through Ayala Hotels,
Inc.,
2
Taguig includes the Arca South Estate with a total of 55 has and the 9.9-ha. site of Market! Market! under lease arrangement
with BCDA; 11.3 has. in Taguig is owned through Fort Bonifacio Development Corporation.

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For Market! Market!, the lease agreement with the BCDA covers a period of 25 years (renewable for another 25 years) and
involves an upfront cash payment of P689 million and annual lease payments with fixed and variable components.
3
Includes a 21-ha. property which is under a joint development agreement with Philippine Racing Club, Inc.
4
Alabang pertains to the 17.6-ha. Alabang Town Center which is 50% owned through Alabang Commercial Corp. (ACC)
5
Includes 45.5 has. under lease arrangement with University of the Philippines; the 13-ha. site of TriNoma which is under lease
arrangement with the Department of Transportation and Communication; a 4.85-has. property which is being leased from Ellimac
Prime Holdings, Inc. and a 29.2-has. property on a joint development agreement with the National Housing Authority

TriNoma is 63.82% owned by ALI through North Triangle Depot Commercial Corp.
6
NUVALI includes 598 has. through Aurora Properties Incorporated and Vesta Holdings, Inc. which are owned 78% and 70%
owned by Ayala Land, respectively; also includes 321 has. which are 60% owned through Ceci Realty, Inc.
7
Laguna includes 92.5 has. which are under a 50-50% joint venture with Greenfield Development Corp.; 4.5 has. in Laguna
Technopark, Inc. which is 75% owned by Ayala Land; and 3.3-ha. site of Pavilion Mall which is under 25-year lease arrangement
with Extra Ordinary Group, with an option to renew every 5 years thereafter.
8
Cavite includes a total of 687 has recently acquired Ex-o lot.
9
Batangas includes 7 has. in Sto. Tomas project which is under an override arrangement.
10
Pampanga includes 804 has. in Alviera which is100% owned under Nuevo Centro.
11
Includes 300 has in Bataan pertaining to the Anvaya Cove property which is under joint development agreement with SUDECO,
a 6.5-has. property in Subic on lease agreement with Subic Bay Management Authority and a 19-has. Land lease with the
government in Palawan.
12
Cebu includes the 8.6 has. lot pad of Ayala Center Cebu which is 49% owned through Cebu Holdings, Inc. (CHI); 0.62-ha.
Cebu Insular Hotel site owned by AyalaLand Hotels and Resorts Corporation and Cebu Holdings, Inc.; 8 has. in Asiatown IT Park
which is owned by Cebu Property Ventures and Development Corporation which in turn is 76% owned by CHI.
13
Davao includes a 9.2 - ha. property which is 67% owned through Accendo Commercial Corp.
14
Cagayan de Oro includes 3.7 has. which are 70% owned through Cagayan de Oro Gateway Corp.
15
Includes a 2.0 has. land lease with Riverside Holdings, Inc for the Iloilo Technohub site, 12.8-ha. property secured through a
JDA agreement with the Pison Group, and the remaining 4.6-ha. Land bank of Avida in Pavia.

Leased Properties
The Company has an existing contract with BCDA to develop, under a lease agreement a mall with an
estimated gross leasable area of 152,000 square meters on a 9.8-hectare lot inside Fort Bonifacio. The
lease agreement covers 25 years, renewable for another 25 years subject to reappraisal of the lot at
market value. The annual fixed lease rental amounts to P106.5 million while the variable rent ranges
from 5% to 20% of gross revenues. Subsequently, the Company transferred its rights and obligations
granted to or imposed under the lease agreement to SSECC, a subsidiary, in exchange for equity.

On January 28, 2011, a notice was given to the Company for the P4.0 billion development of a 7.4-
hectare lot at the University of the Philippines’ Diliman East Campus, also known as the UP Integrated
School, along Katipunan Avenue, Quezon City. The Company signed a 25-year lease contract for the
property last June 22, 2011, with an option to renew for a 58,000 square meters another 25 years by
mutual agreement. The project involves the construction of a retail establishment with 63,000 square
meters of available gross leasable area and a combination of Headquarter-and-BPO- type buildings
with an estimated 8,000 square meters of office space.

Rental Properties
The Company’s properties for lease are largely shopping centers and office buildings. It also leases
land, carparks and some residential units. In the year 2014, rental revenues from these properties
accounted for P21.2 billion or 22% of Ayala Land’s consolidated revenues. Lease terms vary depending
on the type of property and tenant.

Property Acquisitions
With 8,639 hectares in its landbank as of December 31, 2014, Ayala Land believes that it has sufficient
properties for development in next 25 years.

Nevertheless, the Company continues to seek new opportunities for additional, large-scale, master-
planned developments in order to replenish its inventory and provide investors with an entry point into
attractive long-term value propositions. The focus is on acquiring key sites in the Mega Manila area and
other geographies with progressive economies that offer attractive potential and where projected value
appreciation will be fastest.

88
In a disclosure to the SEC dated February 10, 2011, ALI was awarded by the Board of Regents of the
University of the Philippines (U.P.) the lease contract for the development of a 7.4-hectare property at
the U.P. Diliman East Campus, also known as U.P. Integrated School (UP-IS) property along Katipunan
Avenue in Quezon City. The lease contract is for a period of 25 years, with an option to renew said
lease for another 25 years by mutual agreement. The development of the site involves the construction
of a retail establishment with 63,000 square meters of available GLA and a combination of headquarter-
and-BPO office type building with an estimated 8,000 square meters of GLA.

In February 2011, the Company through wholly-owned subsidiary Alveo Land entered into an
agreement with Philippine Racing Club, Inc. to jointly pursue the development of the 21-hectare property
located in Barangay Carmona, Makati City, more commonly known as “Sta. Ana Racetrack.” The project
is intended as a mixed-use development and will form part of the Company’s ongoing developments in
the City of Makati.

In a disclosure to the SEC, PSE and PDEx dated June 29, 2012, the Executive Committee of Ayala
Land authorized the negotiation and entry into a strategic alliance with the Group led by Mr. Ignacio R.
Ortigas for the purpose of allowing Ayala Land to participate in OCLP Holdings, Inc., the parent
company of Ortigas & Company Limited Partnership, and in the development of its various properties
and businesses.

In August 2012, the Group won the public bidding for the purchase of the 74-hectare Food Terminal,
Inc. (FTI) property in Taguig. The bid was conducted in accordance with the Asset Specific Bidding
Rules dated July 4, 2012 and in accordance with the provisions of Executive Order No. 323. The
Group’s bid was P24.3 billion.

In October 2012, the Company entered into a Purchase Agreement wherein the Seller (FTI) agrees to
sell, convey, assign and transfer and deliver to the buyer, and the buyer agrees to purchase and acquire
from the seller, all of the seller’s rights and interests in the property. The property is designed to be a
mixed-use development and will be transformed into a new business district that will serve as Metro
Manila’s gateway to the South.

On October 2, 2012, AHRC, a wholly-owned subsidiary of the Company, entered into an agreement to
acquire the interests of Kingdom Manila B.V., an affiliate of Kingdom Hotel Investments (KHI), and its
nominees in KHI-ALI Manila Inc. (now renamed AMHRI) and 72,124 common shares in KHI Manila
Property Inc. (now renamed AMHPI).

AMHRI and AMHPI are the project companies for the Fairmont Hotel and Raffles Suites and
Residences project in Makati which opened last December 2012. A total of P2,430.4 million was paid
to acquire the interests of KHI in AMHRI and AMHPI.

Please refer to Note 30 of the 2014 Consolidated Financial Statements of Ayala Corporation and
Subsidiaries for further discussion on Leases of ALI.

Mortgage, Lien or Encumbrance over Properties


The Company has a 1.37 hectare property in Makati City mortgaged with BPI in compliance with BSP
ruling on directors, officers, stockholders and related interests.

For 2015, the Company has allotted P100.3 billion for capital expenditures primarily earmarked for the
completion of ongoing developments and launches of new residential and leasing projects which will
help sustain the Company’s growth trajectory in the coming years.

IMI

IMI has production facilities in the Philippines (Laguna, Cavite and Taguig), China (Shenzhen, Jiaxing,
and Chengdu), Singapore, Bulgaria, Czech Republic, and Mexico. It also has a prototyping and NPI
facility located in Tustin, California. Engineering and design centers, on the other hand, are located in
the Philippines, Singapore, China, United States, Bulgaria and Czech Republic. IMI also has a global
network of sales and logistics offices in Asia, North America and Europe.

89
The Company’s global facilities and capabilities of each location as of December 31, 2013 are shown
below:
Location Floor Area (in Capabilities
square meters)
Philippines-Laguna 96,182  37 SMT lines, 2 FC lines
 5 COB/COF lines
 Box build
 Solder Wave, Potting, Al & AG W/B
 Protective Coating
 ICT, FCT, AOI, RF Testing
 Design & Development
 Test & System Development
 Complex Equipment manufacturing
 Cleanroom to class 100
 LVHM, HVLM
Philippines-Cavite 2,350  3 SMT lines
 Box Build
 PTH, Solder Wave
 ICT, FCT, AOI
 LVHM
Singapore 4,000  Central Warehouse, Logistics Services,
HMLV
China-Liantang 18,600  20 SMT lines, 1 COB line
 Box Build
 PTH, Solder Wave
 POP, Auto Pin Insertion
 Potting, Conformal coating and Burn-in
 ICT, FCT, AOI, RF Testing
 Test & System Development
 Design & Development
 LVHM, HVLM
China-Kiuchong 23,480  20 SMT lines
 Box Build
 PTH, Auto Pin Insertion, Solder Wave
 ICT, FCT, AOI, RF Testing
 Test & System Development
 LVHM, HVLM
China-Jiaxing 13,000  13 SMT lines
 Box Build
 PTH, Auto Pin Insertion, Solder Wave
 Conformal Coating, Potting
 ICT, FCT, AOI, RF Testing
 Test & System Development
 LVHM, HVLM
China-Chengdu 7,500  8 SMT lines
 Box Build
 PTH, Auto Pin Insertion, BGA, X-Ray, COB
 Solder Wave
 Automated Conformal Coating
 ICT, FCT, AOI
 HVLM / LVHM
Hong Kong* 300  Procurement, marketing and supply chai
support
Philippines-PSi Taguig 2,322  Customer Specific Quality Requirements
 Low/ Med Power Discrete Packaging and
Processes including Au Wire Bonding
 Al Ribbon, Cu Clip interconnect
 3D Packaging, MCM ,High Reliability OFN
Packages: 3 x 3 mm to 12x12 mm.
Philippines-PSi Laguna 7,536  Power Component Discrete Packaging, e.g.,
3 - 7L TO-220, 3L TO-247, etc..
 Diversified Packaging - from Low to High
Power and Small to Large Outline
 R&D line
Japan* 110  Sales Support
USA-Tustin, CA* 1,184  2 SMT prototyping lines
 Engineering Development
 Prototype Manufacturing Center
 Precision Assembly

90
 SMT, COB FCOF
 Process Development
Botevgrad, Bulgaria 26,928  14 SMT lines
 Box build
 PTH, Auto Pin Insertion, Solder Wave
 Protective Coating
 ICT, FCT, AOI
 Test & System Development
 Design & Development
 Plastic Injection, Embedded Toolshop,
Overmolding
El Salto, Guadalajara, 25,000  6 SMT lines
Mexico  Box build
 PTH, Auto Pin Insertion, Solder Wave,
Protective Coating, Potting
 ICT, FCT, AOI,
 X-ray
 Plastic Injection (50-1,000T)
 Overmolding
 Embedded Toolshop
 Automated BE Assembly
Třemošná, Plzeňská, 7,740  4 SMT lines
Czech Republic  PTH, Auto Pin Insertion, Solder Wave,
Ultrasonic Welding
 Protective Coating
 ICT, FCT, AOI
 Mechanical Assembly
Total 236,232

Leased Properties
Please refer to Note 30 of the 2014 Consolidated Financial Statements of Ayala Corporation and
Subsidiaries for further discussion on Leases of IMI.

For 2015, the Company expects to spend US$27.7 million for capital expenditures to be partially funded
by proceeds from the follow-on offering, cash from operations and debt. The main components of these
expenditures are new buildings and extensions, purchase of equipment for new projects, various
machineries restorations and strategic investments. These will ensure uninterrupted services and
meeting demands of the Company’s customers.

MWCI

The Concession Agreement grants the Company the right to operate, maintain in good working order,
repair, decommission, and refurbish the MWSS facilities in the East Zone, which include treatment
plants, pumping stations, aqueducts and the business area office. However, legal title to these facilities
remains with MWSS. The net book value of these facilities on Commencement Date based on MWSS’
closing audit report amounted to P = 4.6 billion, with a sound value, or the appraised value less observed
depreciation, of P= 10.40 billion. These assets are not reflected in the financial statements of the
Company.

Pursuant to the terms of the Concession Agreement, new assets contributed to the MWSS system by
the Company during the term of the Concession Agreement are reflected in the Company’s financial
statements and remain with the Company until the Expiration Date (as defined in the Concession
Agreement), at which time all right, title and interest in such assets automatically vest to MWSS. The
Concession Agreement allows the Company to mortgage or create security interests over its assets
solely for the purpose of financing, or refinancing, the acquisition or construction of the said assets,
provided that no such mortgage or security interest shall (i) extend beyond the Expiration Date of the
Concession Agreement, and (ii) be subject to foreclosure except following an event of termination as
defined under the Concession Agreement.

On July 17, 2008, the Parent Company, together with all of its Lenders signed an Omnibus Amendment
Agreement and Intercreditor Agreement and these agreements became effective on September 30,
2008.

Prior to the execution of the Omnibus Amendment Agreement, the obligations of the Company to pay
amounts due and owing or committed to be repaid to the lenders under the existing facility agreements

91
were secured by Assignments of Interests by Way of Security executed by the Parent Company in favor
of a trustee acting on behalf of the lenders. The Assignments were also subject to the provisions of the
Amended and Restated Intercreditor Agreement dated March 1, 2004 and its Amendatory Agreement
dated December 15, 2005 executed by the Company, the lenders and their appointed trustee.

Under the Omnibus Amendment Agreement, the lenders effectively released the Company from the
assignment of its present and future fixed assets, receivables and present and future bank accounts,
all the Project Documents (except for the Agreement, Technical Corrections Agreement and the
Department of Finance Undertaking Letter), all insurance policies where the Company is the beneficiary
and performance bonds posted in its favor by contractors or suppliers.

In consideration for the release of the assignment of the above-mentioned assets, the Company agreed
not to create, assume, incur, permit or suffer to exist, any mortgage, lien, pledge, security interest,
charge, encumbrance or other preferential arrangement of any kind, upon or with respect to any of its
properties or assets, whether now owned or hereafter acquired, or upon or with respect to any right to
receive income, subject only to some legal exceptions. The lenders shall continue to enjoy their rights
and privileges as Concessionaire Lenders (as defined under the Agreement), which include the right to
appoint a qualified replacement operator and the right to receive payments and/or other consideration
pursuant to the Agreement in case of a default of either the Company or MWSS. Currently, all lenders
of the Company are considered Concessionaire Lenders and are on pari passu status with one another.

The Company’s corporate head office located in Balara, Quezon City is leased from MWSS and is
subject to yearly renewal. In 2014 and 2013, rent expense of the Company to MWSS amounted to P
=
16.91 million and P= 16.99 million, respectively.

BPI

BPI’s Head Office is located at the BPI Building, 6768 Ayala Avenue, Makati City. Of the 814 local
branches, 671 operate as BPI branches: 352 in Metro Manila/Greater Metro Manila Area and 319 in
the provincial area. The parent bank owns 33% of these branches and leases the remaining 67%.
Total annual lease amounted to Php 678 million. Expiration dates of the lease contracts vary from
branch to branch.

BPI Family Savings Bank (BFSB) operates 143 branches of which 22% are bank owned while 78% are
leased. Total annual lease amounted to Php 134 million.

The head offices of BPI and BPI Family Savings Bank as well as the 814 branches are maintained in
good condition for the benefit of both the employees and the transacting public. The Bank enforces
standards for branch facade, layout, number and types of equipment and upkeep of the premises.

All of the bank-owned properties are free from any lien.

The Bank will continue to reconfigure the mix of its traditional branches, and kiosk branches as it adjusts
to the needs of its customers. To date, the Bank had not identified any property to acquire.

Total lease expense for 2014 for BPI and its subsidiaries amounted to P1,160 million as per Note 24 of
Audited Financial Statement. In 2014, monthly lease payments vary from one property to another,
ranging from a low P6.3 thousand to P1.2 Million, the average of which was P121 thousand.

Globe
Buildings and Leasehold Improvements
Effective 27 August 2013, Globe transferred its Head Office to The Globe Tower, 32 nd Street corner 7th
Avenue, Bonifacio Global City, Taguig from Globe Telecom Plaza, Mandaluyong City.

Globe also owns several floors of Pioneer Highlands Towers 1 and 2, located at Pioneer Street in
Mandaluyong City. In addition, the Company also owns host exchanges in the following areas: Bacoor,
Batangas, Ermita, Iligan, Makati, Mandaluyong, Marikina, Cubao-Aurora, among others.

The Company leases office spaces along Sen. Gil Puyat Avenue, EDSA and Ermita for its technical,
administrative and logistics offices and host exchange, respectively. It also leases the space for most
of its Globe Stores, as well as the Company’s base stations and cell sites scattered throughout the
Philippines.
92
Globe’s existing business centers and cell sites located in strategic locations all over the country are
generally in good condition and are covered by specific lease agreements with various lease payments,
expiration periods and renewal options. As the Company continues to expand its network, Globe intends
to lease more spaces for additional cell sites, stores, and support facilities with lease agreements,
payments, expiration periods and renewal options that are undeterminable at this time.

Item 3. Legal Proceedings

Except as disclosed herein or in the Information Statements of the Company’s subsidiaries or


associates and joint ventures which are themselves public companies or as has been otherwise publicly
disclosed, there are no material pending legal proceedings, bankruptcy petition, conviction by final
judgment, order, judgment or decree or any violation of a securities or commodities law for the past five
years to which the Company or any of its subsidiaries or associates and joint ventures or its directors
or executive officers is a party or of which any of its material properties are subject in any court or
administrative government agency.

In any event, below are the legal proceedings involving the Company and its subsidiaries, associates
and joint ventures that may be significant:

ALI

As of December 31, 2014, ALI, its subsidiaries, and its affiliates, are not involved in any litigation
regarding an event which occurred during the past five (5) years that they consider material.

However, the Group has various contingent liabilities arising in the ordinary conduct of business
including a case related to property restriction violation. The estimate of the probable cost for the
resolution of this claim has been developed in consultation with outside counsel handling the defense
in this matter and is based upon an analysis of potential results. The outcomes of the legal proceedings
for various cases are not properly determinable. Accordingly, no provision for any liability has been
made in the consolidated financial statements.

In the opinion of the management and its legal counsel the eventual liability under these lawsuits or
claims, if any, will not have a material or adverse effect on the Group’s financial position of operations.
Disclosures required by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, were not
provided as it may prejudice the Company’s position in ongoing claims and it can jeopardize the
outcome of the claims and contingencies.

IMI

There are no material pending legal proceedings, bankruptcy petition, conviction by final judgment,
order, judgment or decree or any violation of a securities or commodities law for the past five years to
which the Company or any of its subsidiaries or its directors or executive officers is a party or of which
any of its material properties are subject in any court or administrative government agency.

The Company filed a civil case on April 11, 2011 against Standard Insurance (“Standard”) seeking to
collect Standard’s share in the loss incurred by the Company consisting in damage to production
equipment and machineries as a result of the May 24, 2009 fire at the Company’s Cebu facility which
the Company claims to be covered by Standard’s “Industrial All Risks Material Damage with Machinery
Breakdown and Business Interruption” policy. The share of Standard in the loss is 22% or US
$1,117,056.84 after its co-insurers all paid the amount of loss respectively claimed from them. The
Company had to resort to court action after Standard denied its claim on the ground that the claim is an
excepted peril. Standard filed a motion to dismiss on various grounds, such as lack of cause of action
and of prescription. The Regional Trial Court denied the motion to dismiss but Standard filed a Motion
for Reconsideration with the Court of Appeals (CA). On April 26, 2013, the CA dismissed the case on
the ground that the claim has prescribed. On April 19, 2013, the Company filed a Motion for
Reconsideration. On December 10, 2013, the Company received a decision promulgated on December
2, 2013 denying the said Motion for Reconsideration.

The Company filed a Petition for Review on Certiorari dated January 23, 2014 which is pending with
the Supreme Court.
93
MWCI

The Company is presently involved in the following cases:

Manila Water Company, Inc. vs. MWSS


Arbitration under the Uncitral Rules (1976)
Case No. UNC 136/CYK
In a Resolution dated September 12, 2013, Metropolitan Waterworks and Sewerage System (“MWSS”)
denied the petition of Manila Water Company, Inc. (“Company”) for an upward adjustment of its tariffs
and instead ordered the Company to effect a negative adjustment of 29.47% of its 2012 average water
charge of P24.57 per cubic meter (the “Rate Rebasing Determination”).

The Company filed its formal objection to the Rate Rebasing Determination by serving the MWSS with
a Dispute Notice commencing the arbitration process, the dispute resolution mechanism prescribed
under the Concession Agreement. Pursuant to the said mechanism, MWSS and the Company
convened an Appeals Panel which has since then conducted proceedings in accordance with the
arbitration rules of the United Nations Commission on International Trade Law.

Until this dispute is settled, the current water rates are expected to remain in effect. At present, the
remaining issues between the parties have been submitted for resolution. The Appeals Panel is still
deliberating on the issues submitted by the parties.

Manila Water Company, Inc. and Maynilad Water Services, Inc. vs. Hon. Borbe, et al.
CBAA Case No. L-69
Central Board of Assessment Appeals (“Central Board”)
This is an appeal from the denial by the Local Board of Assessment Appeals of Bulacan Province (the
“Local Board”) of the Company’s (and Maynilad’s) appeal from the Notice of Assessment and Notice of
Demand for Payment of Real Property Tax in the amount of P357,110,945 made by the Municipal
Assessor of Norzagaray, Bulacan. The Company is being assessed for half of the amount. In a letter
dated April 3, 2008, the Municipal Treasurer of Norzagaray and the Provincial Treasurer of the Province
of Bulacan, informed both MWSS concessionaires (Company and Maynilad) that their total real property
tax accountabilities have reached P648,777,944.60 as of December 31, 2007. This amount, if paid by
the concessionaires, will ultimately be charged to the customers as part of the water tariff rate. The
concessionaires (and the MWSS, which intervened as a party in the case) are thus contesting the
legality of the tax on a number of grounds, including the fact that the properties subject of the
assessment, are owned by the MWSS. MWSS is both a government-owned and controlled corporation
and an instrumentality of the National Government that is exempt from taxation under the Local
Government Code.

The Central Board conducted a hearing on June 25, 2009. In the said hearing, parties were given the
opportunity and time to exchange pleadings regarding a motion for reconsideration filed by the
Municipality to have the case remanded to and heard by the Local Board rather than by the Central
Board.

Trial is now on-going and the Province of Bulacan is currently presenting its evidence. Manila Water
and Maynilad have already concluded presentation of their respective evidence and witnesses, while
MWSS has waived the presentation of its evidence.

Manila Water Company, Inc. vs. The Regional Director, Environmental Management Bureau-
National Capital Region, et al.
CA-G.R. No. 112023 (DENR-PAB Case No. NCR-00794-09)
Supreme Court
This case arose from a complaint filed by OIC Regional Director Roberto D. Sheen of the Environmental
Management Bureau-National Capital Region (“EMB-NCR”) before the Pollution Adjudication Board
(“PAB”) against the Company, Maynilad and the MWSS for alleged violation of R.A. No. 9275 (Philippine
Water Act of 2004), particularly the five-year deadline imposed in Section 8 thereof for connecting the
existing sewage line found in all subdivisions, condominiums, commercial centers, hotels, sports and
recreational facilities, hospitals, market places, public buildings, industrial complex and other similar
establishments including households, to an available sewerage system. Two (2) similar complaints
against Maynilad and MWSS were consolidated with this case.

On April 22, 2009, the PAB through DENR Secretary and Chair Jose L. Atienza, Jr., issued a Notice of
Violation finding that the Company, Maynilad and MWSS have committed the aforesaid violation of R.A.
9275. Subsequently, a Technical Conference was scheduled on May 5, 2009. In the said Technical
94
Conference, the Company, MWSS and Maynilad explained to the PAB their respective positions and it
was established that DENR has a great role to play to compel people to connect to existing sewer lines
and those that are yet to be established by the Company and Maynilad.

In addition to the explanations made by the Company during the Technical Conference, the Company
together with MWSS and Maynilad wrote a letter dated May 25, 2009 and addressed to the respondent
Secretary where they outlined their position on the matter.

In response to the May 25, 2009 letter, the OIC, Regional Director for NCR, the Regional Director of
Region IV-A and the Regional Director of EMB Region III submitted their respective Comments. The
Company thereafter submitted its letter dated July 13, 2009 to the PAB where it detailed its compliance
with the provisions of R.A. No. 9275 and reiterated its position that the continuing compliance should
be within the context of the Company’s CA with MWSS. Despite the explanations of the Company, the
PAB issued the Order dated October 7, 2009 which found the Company, Maynilad and MWSS to have
violated R.A. 9275. The Company filed its Motion for Reconsideration dated October 22, 2009 which
the PAB denied in an Order dated December 2, 2009. Hence, the Company filed its Petition for Review
dated December 21, 2009 with the Court of Appeals. The Company thereafter filed an amended Petition
for Review dated January 25, 2010.

In a Decision dated August 14, 2012, the Court of Appeals denied the Company’s Petition for Review
and on September 26, 2012, the Company filed a Motion for Reconsideration of the Court of Appeals’
Decision.

On April 29, 2013, the Company received the Resolution dated April 11, 2013 of the Court of Appeals,
denying its Motion for Reconsideration.

The Company has filed its appeal from the decision and resolution of the Court of Appeals in the form
of a Petition for Review on Certiorari with the Supreme Court on May 29, 2013. In this Petition, the
Company reinforced its argument that it did not violate Section 8 of R.A. 9275 as it was able to connect
existing sewage lines to available sewage facilities contrary to the findings of the Court of Appeals.

The case remains pending with the Supreme Court and is now submitted for decision.

Waterwatch Coalition, Inc. et al. vs. Ramon Alikpala, MWSS, et al.,


G.R. No. 207444,
Supreme Court

Water for All Refund Movement (WARM) vs. MWSS, et al.,


G.R. No. 208207
Supreme Court

Javier vs. MWSS, et al.,


G.R. No. 210147, Supreme Court

Hereafter, the “Consolidated Cases”

The Waterwatch Petition:


On June 25, 2013, the Company received a copy of the “Petition for Certiorari and Mandamus with
Prayer for the Issuance of a Temporary Restraining Order” dated 20 June 2013 filed by the Waterwatch
Coalition, Inc. The issues raised in the Petition are as follows:
a. The Concession Agreements are unconstitutional for granting inherent sovereign powers to the
Concessionaires who insists they are private entities and mere agents of the MWSS;
b. The Concessionaires are public utilities;
c. The Concession system of MWSS, the Company and Maynilad is in a state of regulatory capture;
d. The Concession Agreements are State Contracts and cannot invoke the non-impairment clause in
the Constitution;
e. The Concessionaires have no vested property rights;
f. MWSS is in a state of regulatory capture;

The WARM Petition


On August 14, 2013, the Company received a copy of a Petition for Certiorari, Prohibition and
Mandamus dated August 5, 2013 filed by the Water for All Refund Movement. The issues raised in the
WARM Petition are as follows:

95
a. The Concession Agreements unduly grant to the concessionaires the exercise of governmental
powers even without the benefit of legislation or at the very least, a franchise for such purpose;
b. Concessionaires performing public service and are therefore, governed by the Public Service Law,
and subject to the 12& profit cap;
c. Concessionaires are public utilities and they are not mere agents or contractors of the MWSS;
d. Public utility or not, Concessionaires may not, pass on their income taxes to the water consumers
as expenditures;
e. The Concession Agreements may not cause the creation of a Regulatory Office, a public office
performing public functions, and even source its funding from the concessionaires, which are the
very same entities supposed to be regulated;

The JAVIER Petition


On January 3, 2014, the Company received a copy of a Petition for Certiorari, Prohibition and
Mandamus dated December 13, 2013 filed by the Virginia S. Javier, et.al, who were suing in their
capacity as consumers/customers of the respondents. The issues raised in the Javier Petition are as
follows:
a. The Concession Agreements are unconstitutional and/or ultra vires for being delegations of
sovereign power without consent of the Congress;
b. The Concessionaires are public utilities;
c. Respondents have improperly implemented RORB calculations for purposes of establishing tariffs;
d. The Concession Agreements are not protected by the non-impairment clause;
e. Respondents should be enjoined from proceeding with arbitration;
f. MWSS is in a state of regulatory capture;

On February 4, 2014, the Company received a copy of the Supreme Court’s resolution dated January
14, 2014 consolidating the three (3) cases. The Company filed a consolidated Comment on the
aforesaid Petitions. The arguments raised by Manila Water in response to the Petitions are as follows:
a. The CAs are valid, legal and constitutional as these have statutory basis and do not involve any
grant or delegation of the “inherent sovereign powers of police power, eminent domain and
taxation”.
b. The Concessionaires are not public utilities in themselves but are mere agents and contractors of
a public utility (MWSS).
c. The Concession Agreements are protected by the non-impairment clause. Petitioners cannot
invoke police power for Courts to nullify, modify, alter or supplant the Concession Agreements.
Police Power is exercised by Congress, through the enactment of laws for the general welfare. No
such law or enactment is involved in this case. If and when Congress passes a law affecting the
Concession Agreements, only then will it be proper to examine the interplay between police power
vis-à-vis due process and the non-impairment clause.
d. The rates set under the Concession Agreements are compliant with the 12% rate of return cap in
the MWSS Charter.
e. Not being public utilities but mere agents of the MWSS, the concessionaires are not subject to COA
audit.
f. The concessionaires are authorized to pass on corporate income taxes to water consumers.

The Company has filed its Consolidated Comment to the petitions and these cases remain pending with
the Supreme Court.

ABAKADA Guro Party List vs. MWSS, et al.


G.R. No. 213227
Supreme Court
On September 22, 2014, the Company received another Petition for Certiorari and Prohibition filed by
the Abakada-Guro Party List, represented by Atty. Florante B. legaspi, Jr. This Petition was
consolidated with the Petitions of Waterwatch, WARM and Javier due to similarities in issues raised.

In particular, the petition questions the constitutionality of the Concession Agreements entered into by
MWSS with both the Company and Maynilad and the extension of the Concession Agreements for
another 15 years from the year 2022. The Petition also seeks to nullify the on-going arbitration
proceedings between MWSS and the concessionaires. The Company has filed its Comment on the
Petition.

This Petition has been consolidated with the “Consolidated Cases” discussed above.

96
Ofelia Lim Mendoza, et.al. vs. Manila Water Company, Inc.
NLRC NCR Case No. 06-08649-13
National Labor Relations Commission
On July 5, 2013, the Company and its President, Gerardo C. Ablaza, Jr., received summons from the
National Labor Relations Commission (“NLRC”), regarding the complaint for illegal dismissal (dated
June 11, 2013) filed by Ms. Ofelia L. Mendoza and 142 other former employees of the Company. The
complainants were former employees whose separation from employment was due to the retirement
program implemented by the Company last August 2012.

All of the complainants uniformly pray for reinstatement and payment of full backwages, 13 th month pay,
moral & exemplary damages, and attorney’s fees.

In accordance with the rules and procedures of the NLRC, the mandatory conference was scheduled
on July 15 and 22, 2013. However, Labor Arbiter Eric Chuanico cancelled the mandatory conference
scheduled for July 22, 2013 and instead required the parties to submit their respective Position Papers
on July 25, 2013.

In its Position Paper, the Company and Mr. Ablaza state that Complainants’ employments were validly
terminated on the ground of redundancy. Moreover, the Release, Waiver and Quitclaims voluntarily
executed by the Complainants before a Labor Arbiter of the NLRC are valid are binding and
complainants are not entitled to reinstatement and to their money claims.
Out of the 433 employees who were being terminated, all or 100% received their separation packages
and voluntarily executed quitclaims. The Special Opportunity Package received by the Complainants
include the following:

a. Three months Basic Salary for every year of service (tax free)
b. Cash conversion of all vacation leave and sick leave credits (Tax free)
c. Pro-rated 13th month bonus and year-end bonus (tax free)
d. Extension of the HMO coverage
(i) Retiree up to January 31, 2014
(ii) Existing one free dependent up to January 31, 2013
e. Extension of the Group Life Insurance coverage
(i) Retiree up to December 31, 2013
(ii) Existing one free dependent up to December 31, 2012

The Company and Mr. Ablaza filed their Reply to the Position Paper of the Complainants on August 2,
2013 and the Re-Joinder to the Reply of the Complainants on August 30, 2013.

The Company and Mr. Ablaza filed their Reply to the Position Paper of the Complainants on August 2,
2013 and the Re-Joinder to the Reply of the Complainants on August 30, 2013.

On December 3, 2013 the Commission issued “Notice of Judgment/Decision AO No. 02-06” notifying
all parties that on November 26, 2013 Labor Arbiter Eric Chuanico rendered a Decision dismissing the
Complaint for lack of merit. The Labor Arbiter found that the following requirements for Redundancy as
an authorized cause for dismissal are present:
a. Written notice served on both employees and DOLE at least one month prior to the intended date
of retrenchment;
b. Payment of separation pay equivalent to at least one month pay or at least one month pay for every
year of service, whichever is higher;
c. Good faith in abolishing the redundant positions; and
d. Fair and reasonable criteria in ascertaining what positions are to be declared redundant and
accordingly abolished.

Complainants filed a Memorandum of Appeal dated December 17, 2013, with the Commission. Manila
Water filed an Opposition on January 13, 2014. The Commission rendered a Decision dated April 29,
2014 reversing the decision of the Labor Arbiter.

The NLRC ruled that the last two requirements for valid Redundancy were not complied with. It found
that the evidence presented by the Company to support the existence of said requirements were not
sufficient. In addition, the NLRC ruled that the quitclaims executed by the Complainants were obtained
under force, and their consents thereto were vitiated by fraud and mistake.

The NLRC Decision called for the following:


a. Reinstatement of Complainants to same or equivalent positions or ranks;
97
b. Payment of Complainants’ backwages from times of dismissals until reinstatement;
c. Payment of attorneys’ fees equivalent to 10% of the monetary award.

The amounts previously received by the Complainants shall be deducted from the monetary awards.

On May 19, 2014, the Company filed a Motion for Reconsideration, raising the following arguments: (a)
The Decision to outsource non-core functions is a valid exercise of management prerogative; (b) Manila
Water presented substantial evidence to prove the validity of its redundancy program; (c) Manila Water
has presented substantial evidence to show how Towers Watson identified which positions are
considered non-core and could be contracted out; (d) Manila Water has shown how outsourcing non-
core functions has benefited its operations and its customers; and (e) the complainants’ quitclaims are
valid.

The Motion for Reconsideration is currently pending resolution with the Commission.

Allan Mendoza et al. vs. Manila Water Company, Inc.


Special Civil Action No. R-QZN-14-04863-SC
RTC QC Branch 77
On June 17, 2014, the Company received a copy of an Order from Branch 77 of the Regional Trial
Court in Quezon City requiring it to comment on the Petition for Mandamus filed by a group of separated
and current employees of the Company.

In the said Petition, the petitioners are requesting the court to render a judgment ordering the Company
to reinstitute the Welfare Fund and implement correctly the benefits indicated in Exhibit F of the
Concession Agreement. The petitioners took note of the non-diminution provision in the Concession
Agreement claiming that the Company, as a concessionaire, has the legal duty to grant to all
concessionaire employees benefits no less favorable than those granted to such former employees of
MWSS. Pursuant to said provision, the Company continued the Welfare Fund, but according to
petitioners the Company dissolved the welfare fund and the members were informed that their 100%
contribution and 42% employer share were returned and credited to their BPI accounts. Petitioners
further claim that the balance of the employer share were used, without authority, as seed money for
the newly-established Retirement Fund. Moreover, there was diminution of benefits as the Company
neglected to grant, fully or partially, the benefits enumerated in Exhibit F of the Concession Agreement.

In compliance with the order of the trial court, the Company filed its Comment on June 27, 2014 where
it stated the following:
a. Petitioners have received benefits no less favorable than those granted to such employees by the
MWSS at the time of their separation from MWSS

The Enhanced Retirement and Welfare Plan contains features that improved on the Welfare Fund:

i. The Welfare Fund was contributory (5% of basic monthly salary) whereas the Enhanced Plan
became non-contributory with a defined benefit (one month basic salary for every year of
service)
ii. All regular employees of the Company are covered by the Enhanced Plan whereas the Welfare
Plan was voluntary (only 29% of the employees as of 2004 were included)
iii. The Welfare Plan is subject to tax whereas the Enhanced Plan is non-taxable if the requisites
for early and normal retirement are complied with.

b. That the court has no jurisdiction over the subject matter. The National Labor Relations
Commission has jurisdiction as the action is essentially an action for payment of employee benefits

c. Mandamus does not lie to enforce performance of contractual obligations

d. The claims of petitioners have prescribed

The case remains pending with the trial court.

BPI
BPI does not have any material pending legal proceedings to which the registrant or any of its
subsidiaries or affiliates is a party or of which any of their property is the subject.

98
Globe
a. On 23 July 2009, the NTC issued NTC Memorandum Circular (MC) No. 05-07-2009 (Guidelines
on Unit of Billing of Mobile Voice Service). The MC provides that the maximum unit of billing for the
cellular mobile telephone service (CMTS) whether postpaid or prepaid shall be six (6) seconds per
pulse. The rate for the first two (2) pulses, or equivalent if lower period per pulse is used, may be
higher than the succeeding pulses to recover the cost of the call set-up. Subscribers may still opt
to be billed on a one (1) minute per pulse basis or to subscribe to unlimited service offerings or any
service offerings if they actively and knowingly enroll in the scheme. In compliance with NTC MC
05-07-2009, Globe refreshed and offered to the general public its existing per-second rates that, it
bears emphasizing, comply with the NTC Memorandum Circular. Globe made per second charging
for Globe-Globe/TM-TM/Globe available for Globe Subscribers dialing prefix 232 (GLOBE) OR 803
plus 10-digit TM or Globe number for TM subscribers. The NTC, however, contends that Globe’s
offering does not comply with the circular and with the NTC’s Order of 7 December 2009 which
imposed a three-tiered rate structure with a mandated flag-down of P3.00, a rate of P0.4375 for the
13th to the 160th second of the first minute and P0.65 for every 6-second pulse thereafter. On 9
December 2009, the NTC issued a Cease and Desist Order requiring the carriers to refrain from
charging under the previous billing system or regime and refund consumers.

Globe maintains that the Order of the NTC of 7 December 2009 and the Cease and Desist Order
are void as being without basis in fact and law and in violation of Globe’s rights to due process.
Globe, Smart, Sun and CURE all filed petitions before the Court of Appeals seeking the nullification
of the questioned orders of the NTC. On 18 February 2010, the Court of Appeals issued a
Temporary Restraining Order preventing the NTC from enforcing the disputed Order.

On 25 May 2010, the CA issued a writ of preliminary injunction directing the NTC to cease and
desist from enforcing their assailed Order/s. On 28 December 2010, the CA rendered a Decision
declaring the questioned decisions invalid for being violative of the Petitioners’ right to due process,
among others. The Petitioners and the NTC filed their respective Motions for Partial
Reconsideration. The motions were DENIED by the CA in an Order dated 19 January 2012. Due
to lack of material time, the NTC and the Petitioners seasonably filed their respective Motions for
Extension of Time to File Petition for Review with the Supreme Court. Globe filed its Petition on 12
March 2012. The other Movants are expected to file their respective petitions within the month of
March 2012.

Globe believes that its legal position is strong and that its offering is compliant with the NTC’s
Memorandum Circular 05-07-2009, and therefore believes that it would not be obligated to make a
refund to its subscribers. If, however, Globe would be held as not being in compliance with the
circular, Globe may be contingently liable to refund to any complaining subscribers any charges it
may have collected in excess of what it could have charged under the NTC’s disputed Order of 7
December 2009, if indeed it is proven by any complaining party that Globe charged more with its
per second scheme than it could have under the NTC’s 6-second pulse billing scheme stated in the
disputed Order. Management has no estimate of what amount this could be at this time.

b. On 22 May 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”),
Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority and
Innove from taking any actions to implement the Certificate of Public Convenience and Necessity
granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer
certain telecommunications services within the Subic Bay Freeport Zone would violate the Joint
Venture Agreement (“JVA”) between PLDT and SBMA. The Supreme Court ordered the
reinstatement of the case and has forwarded it to the NTC-Olongapo for trial.

c. PLDT and its affiliate, Bonifacio Communications Corporation (BCC) and Innove are in litigation
over the right of Innove to render services and build telecommunications infrastructure in the
Bonifacio Global City. In the case filed by Innove before the NTC against BCC, PLDT and the Fort
Bonifacio Development Corporation (FBDC), the NTC has issued a Cease and Desist Order
preventing BCC from performing further acts to interfere with Innove’s installations in the Bonifacio
Global City.

In the case filed by PLDT against the NTC in Branch 96 of the Regional Trial Court (RTC) of Quezon
City, where PLDT sought to obtain an injunction to prevent the NTC from hearing the case filed by
Innove, the RTC denied the prayer for a preliminary injunction and the case has been set for further
hearings. PLDT has filed a Motion for Reconsideration and Globe has intervened in this case. In
a resolution dated 28 October 2008, the RTC QC denied BCC’s motion for the issuance of a
temporary restraining order (TRO). On 14 October 2013, the RTC issued an order dismissing the
99
complaint. On 21 October 2013, PLDT elevated the case to the Court of Appeals where the same
is still pending resolution.

In the case filed by BCC against FBDC, Globe Telecom and Innove, Bonifacio Communications
Corp. before the Regional Trial Court of Pasig, which case sought to enjoin Innove from making
any further installations in the BGC and claimed damages from all the parties for the breach of the
exclusivity of BCC in the area, the court did not issue a Temporary Restraining Order and has
instead scheduled several hearings on the case. The case was dismissed by the RTC Pasig.
Dissatisfied with the decision of the RTC, BCC and PLDT elevated the case to the Court of Appeals.
On May 18, 2012, The Court of Appeals dismissed the case. On July 6, 2012, BCC and PLDT filed
a petition for review on certiorari with the Supreme Court on July 6, 2012. Innove filed its Comment
thereon on December 6, 2012. The case is still pending resolution with the Supreme Court.

On 11 November 2008, Bonifacio Communications Corp. (BCC) filed a criminal complaint against
the officers of Innove Communications Inc., the Fort Bonifacio Development Corporation (FBDC)
and Innove contractor Avecs Corporation for malicious mischief and theft arising out of Innove’s
disconnection of BCC’s duct at the Net Square buildings. The accused officers filed their counter-
affidavits and are currently pending before the Prosecutor’s Office of Pasig. The case is still
pending resolution with the Office of the City Prosecutor.

On 21 January 2011, BCC and PLDT filed with the Court of Appeals a Petition for Certiorari and
Prohibition against NTC, et al. seeking to annul the Orders of the NTC dated 28 October 2008
directing BCC, PLDT and FBDC to comply with the provisions of NTC MC 05-05-02 and the CEASE
AND DESIST from performing further acts that will prevent Innove from implementing and providing
telecommunications services in the Fort Bonifacio Global City pursuant to the authorization granted
by the NTC. BCC and PLDT anchor their petition on the grounds that: 1) the NTC has no jurisdiction
over BCC it being a non-telecommunications entity; 2) the NTC violated BCC and PLDT’s right to
due process; and 3) there was no urgency or emergency for the issuance of the cease and desist
order.

On April 25, 2011, Innove Communications, filed its comment on the case filed by PLDT that seeks
to ban all Globe services from the Bonifacio Global City before the CA’s Tenth Division. In its
comment, Globe argued that it is in the public’s best interest that open access and free competition
among telecom operators be allowed at the Bonifacio Global City. The case is still pending with the
Court of Appeals.

On August 16, 2011, the Ninth Division of the CA ruled that PLDT’s case against Innove and the
National Telecommunications Commission (NTC) lacked merit, and thus denied the petition and
dismissed the case. PLDT and its co-petitioner, BCC file their motion for reconsideration. Innove
seasonably filed its Opposition thereto. The case is pending with the Court of Appeals.

d. Other Developments

In November 2004, Globe and seven other leading Asia Pacific mobile operators (‘JV partners’)
signed an agreement (‘JV agreement’) to form Bridge Alliance. The joint venture company operates
through a Singapore-incorporated company, Bridge Mobile Pte. Limited (BMPL) which serves as a
commercial vehicle for the JV partners to build and establish a regional mobile infrastructure and
common service platform to deliver different regional mobile services to their subscribers. The
Bridge Alliance currently has a combined customer base of over 250 million subscribers among its
partners in India, Thailand, Hong Kong, South Korea, Macau, Philippines, Malaysia, Singapore,
Australia, Taiwan and Indonesia.

Globe Group has a ten percent (10%) stake in BMPL. The other joint venture partners each with
equal stake in the alliance include SK Telecom, Co. Ltd., Advanced Info Service Public Company
Limited, Bharti Airtel Limited, Maxis Communications Berhad, Optus Mobile Pty. Limited, Singapore
Telecom Mobile Pte, Ltd., Taiwan Mobile Co. Ltd., PT Telekomunikasi Selular and CSL Ltd. Under
the JV Agreement, each partner shall contribute USD4.00 million based on an agreed schedule of
contribution. Globe Telecom may be called upon to contribute on dates to be determined by the JV.
On November 25, 2014, Globe Telecom received a return of capital amounting to USD1.40 million.
As of December 31, 2014 and 2013, the carrying value of the investment in BMPL amounted to
P21.21 million and P77.12 million, respectively.

In February 2013, Globe obtained approval from its Board of Directors to invest in a Philippine entity
to be named as Taodharma, Inc. to explore growth opportunities in the mobile market.
100
In March 2013, Globe entered into a Shareholders Agreement among three other entities to
incorporate Taodharma Inc. (“Tao”). Globe subscribed for the 25% preferred shares of Tao
amounting to P55.00 million which has been fully paid up as of August 2013. Tao shall carry on
the business of establishing, operating and maintaining retail stores in strategic locations within the
Philippines that will sell telecommunications or internet-related services, and devices, gadgets,
accessories or embellishments in connection and in accordance with the terms and conditions of
the Dealer Agreement executed among all of the entities. Globe also entered into an exclusive
dealership arrangement with Tao that included provisions to build and open retail outlet stores
scattered across in cities and other major high-traffic locations nationwide.

As of December 31, 2014 and 2013, Globe Group has recognized P139.96 million and P67.55
million, respectively, representing share on costs.

ABS-CBN Deal
On 27 May 2013, Globe, Innove and ABS-CBN Convergence Inc. (“ABS-C” and formerly known as
Multimedia Telephony Inc.) have entered into a network sharing arrangement in order to provide
capacity and coverage for new mobile telephony, data and value-added services to be offered by
ABS-C nationwide to its subscribers using shared network and interconnect assets of the parties.

This arrangement will enable Globe Telecom, Innove and ABS-C to improve public service by
enhancing utility, capacity, inter-operability and quality of mobile and local exchange telephony and
data services to the public and allow ABS-C to modernize its existing service and expand to a retail
base on top of its existing subscriber base.

On May 31, 2013, the NTC approved the network sharing agreement and co-use of the number
blocks assigned to Globe Telecom.

Bayantel Update
Globe Telecom, Inc. and Bayan Telecommunications, Inc. (“BTI”) obtained approval from the NTC
for the joint use of the frequencies 1750-1760 MHz / 1845-1855 MHz originally assigned to BTI.
The joint-use agreement will enable Globe to address increasing demand for voice, short message
and mobile data services, and allow BTI to be able to offer mobile-telecommunications services
nationwide.

In another development, the Company announced in November 2012 that it has obtained the
approval by its Board of Directors to commence offers to purchase (the “Debt Offers”) up to 100%
of the financial obligations of BTI and subsidiary Radio Communications of the Philippines, Inc.
(“RCPI”) to their respective financial creditors. The Debt Offers were concluded last 22 December
2012, wherein Globe secured the acceptance of 93.66% of the holders of the unsecured financial
indebtedness of BTI under the US$ 13.5% bonds originally due in 2006; 98.26% of the outstanding
other financial indebtedness owed by BTI; and 100% of the outstanding financial indebtedness
owed by RCPI, based on outstanding aggregate principal amount under the terms of the
rehabilitation plan of BTI and RCPI. BTI has been subject to court-supervised rehabilitation
proceedings since 2003. The current rehabilitation plan anticipates that BTI and RCPI will remain
in rehabilitation until 2023. Globe intends to apply with the rehabilitation court to amend the terms
of the rehabilitation plan in the interest of assuring BTI’s long-term sustainability.

Meanwhile, Globe has also commenced separate discussions with the controlling shareholders of
BTI regarding a wide range of commercial arrangements including a potential acquisition by Globe
of an equity interest in BTI. The approval of the National Telecommunications Commission is
required to complete the acquisition. The parties remain in discussions on the terms of the
commercial arrangements including the price and other conditions under which the acquisition may
be effected. No definitive arrangement has been executed at this time.

Subsequently, last May 30, 2013, Globe, Bayan Telecommunications Holdings Corporation, the
controlling shareholder of BTI, and BTI jointly filed a motion with the court having jurisdiction over
BTI's debts. The motion seeks to significantly restructure BTI 's financial debt in order to prevent
the recurrence of default and ensure BTI's continued viability. Following Globe's tender offers for
the BTI debt in 2012, Globe currently holds approximately 96.5% of the total financial indebtedness
of BTI. The joint motion is intended to achieve a successful rehabilitation of BTI at the earliest
possible date.

101
The current outstanding principal amount of this debt is approximately the equivalent of US$423.3
million. BTI's operations have not generated sufficient revenue to continue making the debt
payments under its existing rehabilitation plan. This has been attributed to a decline in revenue
from traditional fixed line services offered by BTI, increasing competitive pressures in the
telecommunications industry and BTI's inability to make any considerable capital investments while
under its high debt burden. The restructuring would, upon confirmation by the court, significantly
decrease this through a conversion of up to 69% of the debt into BTI shares. As restructured, the
outstanding principal debt balance would be reduced to approximately US$131.3 million, assuming
the debt to equity conversions occur to their fullest extent. The restructuring, including the debt to
equity conversion feature, would apply to all of BTI’s creditors equally upon receipt of certain
regulatory approvals, including the confirmation of the court.

By acquiring the BTI debt, Globe sought to enable BTI's continued viability as a telecommunications
provider. For Globe's part, such a restructuring would allow Globe to further strengthen
collaborative efforts with BTI in respect of their local exchange networks, corporate data and
broadband businesses. Ensuring that BTI remains a going concern would allow both companies
to become more competitive in the current industry environment. On the part of BTI, a restructuring
of its debt and the entry of Globe as a shareholder as well as a Creditor will enable BTI to unlock
and maximize potential of its key business assets and capabilities, and help accelerate its
rehabilitation. Globe appreciates further that BTI's continued operations benefits all of its
employees, suppliers, stakeholders and public telecommunications customers in the Philippines as
a whole.

On September 2013, Globe received a Resolution issued by Branch 158 of the Regional Trial Court
in Pasig City. This is the court having jurisdiction over the debts of BTI and its corporate
rehabilitation proceedings. The Resolution granted the joint motion filed by Globe and BTI to amend
current debt restructuring plan and implement a new Master Restructuring Agreement for all BTI’s
creditors. The Amendments principally involve a conversion of up to 69% of the debt into BTI
shares comprising up to 56.6% of BTI’s capital stock, on a fully diluted basis. Assuming that debt
to equity conversion occur to their fullest extent, the Amendments will reduce BTI’s outstanding
principal debt by 69% from the equivalent of approximately US$423.3 to approximately US$131.3
million. The Amendments also facilitate the entry of Globe into BTI as a shareholder and are
expected to assure BTI’s successful rehabilitation. In addition to Globe, the debt to equity
conversion of the new debt restructuring terms will apply to all BTI’s creditors.

On October 1, 2013, Globe Telecom acquired 38% interest in BTI following the conversion of its
unsustainable debt (Tranche B) into 45 million common shares based on the confirmation of the
court dated August 27, 2013 of the Amended Rehabilitation Plan. Globe Telecom will further convert
its share of the Tranche A debt upon certain regulatory approvals. Globe Telecom’s acquisition of
BTI is intended to increase its current data and DSL businesses using BTI’s existing platform.

On October 10, 2014, Globe Telecom received a copy of the temporary restraining order (TRO)
issued by the Court of Appeals (CA) stopping the National Telecommunications Commission’s
(NTC) proceedings in connection with the bid of Globe Telecom Inc. to take over Bayan
Telecommunications Inc. (Bayantel).

In a six-page resolution penned by Associate Justice Manuel Barrios, the CA’s Special Seventeenth
Division granted the very urgent motion filed by the Philippine Long Distance Telephone Co. (PLDT)
for the issuance of a TRO enjoining the implementation of the orders issued by the NTC on
November 27, 2013, December 13, 2013, and July 3, 2014, which allowed the continuation of the
proceedings in connection with Globe and Bayantel’s joint application for regulatory approval and
denied the petitioner’s motion to dismiss or suspend the same.

The appellate court held that PLDT, which is chaired by businessman Manuel V. Pangilinan, being
a stakeholder in the telecommunications industry, ‘has a clear right to be protected on account of
the State’s policy to protect all telecommunication companies from unfair competition and to due
process.’

On October 30, 2014, the Philippine Long Distance and Telephone Company (PLDT) urged the
government to auction the unused frequencies of Bayan Telecommunications Inc. (Bayantel). In a
disclosure to the Philippine Stock Exchange, PLDT cited that Bayantel’s franchise specifically
prohibits the transfer, sale or assignment of any right or privilege granted it without the approval of
Congress (under Section 13 of Republic Act 3259).

102
Globe Telecom insists that the issue at hand is PLDT’s bid to delay the corporate rehabilitation of
Bayan Telecommunications (Bayan) through their petition of TRO. Atty. Froilan Castelo, General
Legal Counsel of Globe clarified that a congressional approval is no longer needed since Globe
acquisition of Bayan only involves transfer of shares of stocks much like when PLDT purchased
Digitel.

Despite the lapse of the Temporary Restraining Order (TRO) last December 9, 2014, the Court of
Appeals has advised the NTC to refrain from conducting any proceedings in connection with the
bid of Globe assume majority control of Bayantel. The CA said that, due to the numerous pleadings
filed and the fact that the NTC has yet to file its main comment on the petition filed by PLDT, the
application for preliminary injunction by the latter has yet to be resolved. Globe’s internal legal
counsel has advised that it may take several more weeks before any new developments take place.

Item 4. Submission of Matters to a Vote of Security Holders


Except for matters taken up during the annual meeting of stockholders, there was no other matter
submitted to a vote of security holders during the period covered by this report.

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PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

A) Market Information

Principal market where the registrant’s common equity is traded.

The following table shows the high and low prices (in PHP) of Ayala Corporation’s shares in the
Philippine Stock Exchange for the year 2014 and 2013:

2014 2013

High Low High Low


1st qtr 582.50 510.00 590.00 520.50
2nd qtr 658.50 590.00 688.00 519.00
3rd qtr 740.00 643.00 640.00 500.00
4th qtr 694.00 652.00 627.00 516.50
Source: Bloomberg

The market capitalization of the Company’s common shares as of end-2014, based on the closing
price of P694.00/share, was approximately P429.89 billion.

The price information of Ayala common and preferred B series 1 and preferred B series 2 shares
as of the close of the latest practicable trading date, March 13, 2015 is P758.00, P512.00, and
P520.00, respectively.

B) Holders

The following are the top 20 registered holders of the Company’s securities based on the records
of our stock transfer agents:

Common Shares

There are 7,033 registered holders of common shares as of January 31, 2015.

No. of common Percentage of


Stockholder name
shares common shares
1. Mermac, Inc. 303,689,196 49.0261%
2. PCD Nominee Corporation (Non-Filipino) 160,446,419 25.9017%
3. Mitsubishi Corporation 63,077,540 10.1829%
4. PCD Nominee Corporation (Filipino) 56,357,357 9.0980%
5. Shoemart, Inc. 19,539,049 3.1543%
6. Sysmart Corporation 1,500,912 0.2423%
7. SM Investment Corporation 1,418,610 0.2290%
8. Philippine Remnants Co., Inc. 823,046 0.1329%
9. ESOWN Administrator 2014 713,284 0.1151%
10. ESOWN Administrator 2012 680,942 0.1099%
11. ESOWN Administrator 2009 595,478 0.0961%
12. ESOWN Administrator 2008 443,343 0.0716%
13. ESOWN Administrator 2006 412,177 0.0665%
14. Mitsubishi Logistics Corporation 360,512 0.0582%
15. ESOWN Administrator 2007 330,815 0.0534%
16. ESOWN Administrator 2005 254,891 0.0411%
17. Antonino T. Aquino 209,957 0.0339%
18. Telengtan Brothers & Sons, Inc. 136,857 0.0221%
19. Lucio Yan 127,996 0.0207%
20. Xavier Loinaz 126,052 0.0203%

104
Preferred B Series 1 Shares

There are 14 registered holders of preferred B series 1 shares as of January 31, 2015.

No. of preferred B Percentage of


Stockholder name series 1 shares preferred B
series 1 shares
1. PCD Nominee Corp – Filipino 19,869,360 99.3468%
2. PCD Nominee Corp – Non Filipino 64,470 0.3224%
3. Sytin, Dominic, L. &/or Sytin, Ann Marietta L. 19,320 0.0966%
4. One Point Contact, Inc. 10,000 0.0500%
5. Mariano Vicente Lim Tan or Katherine Tan or Elena 8,000 0.0400%
Lim Tan
6. Santos, Leonel A. and/or Santos, Alicia 7,000 0.0350%
7. Chan, Raymond O. or Chan Lynette 5,000 0.0250%
8. Chavez, Felix B. or Aida T. Chavez or Irene T. 5,000
Chavez 0.0250%
9. Philippine British Assurance Company, Inc. 4,000 0.0200%
10. Henry Dy Tan and or Sherly G. Tan 3,400 0.0170%
11. Uy, Miguel F. 2,000 0.0100%
12. Bautista, Feliciano M. and or Bautista, Elisa D. 1,000 0.0050%
13. Ching Bun Teng 1,000 0.0050%
14. Macabuhay, Melchor T. 450 0.0022%

Preferred B Series 2 Shares

There are four registered holders of preferred B series 2 shares as of January 31, 2015.

No. of preferred B Percentage of


Stockholder name series 2 shares preferred B
series 2 shares
1. PCD Nominee Corp – Filipino 26,961,060 99.8558%
2. PCD Nominee Corp – Non Filipino 35,940 0.1331%
3. Teh, Alfonso S. 2,000 0.0074%
4. Luna, Reynaldo H. 1,000 0.0037%

Voting Preferred Shares

There are 1,007 registered holders of voting preferred shares as of January 31, 2015.

No. of voting Percentage of


Stockholder name preferred shares voting preferred
shares
1. Mermac, Inc. 159,577,460 79.7887%
2. Mitsubishi Corporation 32,640,492 16.3203%
3. Deutsche Bank AG Manila OBO UBS HK 1,561,478 0.7807%
4. Fernando Zobel de Ayala 554,983 0.2775%
5. Jaime Augusto Zobel de Ayala 543,802 0.2719%
6. CBNA MLA OBO AC 6002079755 364,810 0.1824%
7. Delfin L. Lazaro 258,297 0.1291%
8. HSBC Manila OBO A/C 000-595686-550 170,064 0.0850%
9. HSBC Manila OBO A/C 000-808154-573 169,803 0.0849%
10. Deutsche Regis Partners, Inc. A/C Clients 137,372 0.0687%
11. AB Capital Securities Inc. 115,873 0.0579%
12. BDO Securities Corporation 115,794 0.0579%
13. Deutsche Bank AG, Manila Branch 111,385 0.0557%
14. HSBC Manila OBO A/C 000-595686-574 106,486 0.0532%
15. Mercedita S. Nolledo 84,996 0.0425%
16. Ariston Dela Rosa Estrada, Jr. 84,396 0.0422%
17. Asiasec Equities Inc. 78,234 0.0391%
18. HSBC Manila OBO A/C 000-083766-550 73,272 0.0366%
19. HSBC Manila OBO A/C 000-171579-567 72,884 0.0364%

105
20. Papa Securities Corporation 69,646 0.0348%

C) Dividends

Stock Dividends
Percent Record Date Payment Date
20% May 22, 2007 June 18, 2007
20% April 24, 2008 May 21, 2008
20% July 5, 2011 July 29, 2011

Cash Dividends On Common Shares


Year Payment Date Rate Record Date
2012 July 12, 2012 2.00/share June 18, 2012
February 1, 2013 2.00/share January 8, 2013
2013 August 12, 2013 2.40/share July 17, 2013
January 3, 2014 2.40/share December 19, 2013
2014 July 25, 2014 2.40/share July 10, 2014
January 3, 2015 2.40/share December 18, 2014

Dividend policy

As a holding company, Ayala’s policy is to provide a fixed-rate, semi-annual cash dividend of P2.40
per share on common shares. For voting preferred shares, the rate is 1.875% per annum. For non-
voting Preferred B Series 1 and 2 shares, the dividends are given 5.25% and 5.575% per annum.

D) Recent Sales of Securities

The following shares were issued to/subscribed by the Company’s executives as a result of the exercise
of stock options (ESOP) and the subscription to the stock ownership (ESOWN) plans:

No. of shares
Year ESOP ESOWN*
2013 766,993 14,474
2014 666,299 768,407
*Net of cancelled subscriptions.

The above shares formed part of the 8,864,000 ESOP and ESOWN shares subject of the Commission’s
resolution dated January 12, 2006 confirming the issuance of such shares as exempt transactions
pursuant to Section 10.2 of the Securities Regulation Code.

On July 23, 2012, the Company sold 15,000,000 common shares held in treasury at P430 per share, a
6% discount to the Company’s closing market price of P458 per common share.

On May 30, 2013, the Company sold its remaining 5,183,740 common shares held in treasury at P647
per share, a 3% discount to the Company’s closing market price of P667 per common share.

On November 25, 2014, Mermac, Inc. executed the placement of, and subscription to the Company’s
18,779,100 common shares at P660.00 per share or an aggregate of $275 million or P12.4 billion. The
placement price of P660.00 per share was at a 5.2% discount on the 30-day volume weighted average
price of the Company’s common stock.

The Company filed Notices of Exemption with the SEC for the above sale of treasury shares and
additional issuance of common shares under the following provisions of the SRC:

 SRC Subsection 10.1 (e), The sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
 SRC Section 10.1 (h), “Broker’s transaction, executed upon customer’s orders, on any registered
Exchange or other trading market.”
 SRC Section 10.1 (l), “The sale of securities to a bank.”

106
Item 6. Management’s Discussion and Analysis of Operations

2014

Ayala Corporation’s consolidated net income attributable to equity holders expanded 46 percent in 2014
to P18.6 billion, primarily driven by the solid performance of its real estate, telecom and electronics
manufacturing units and boosted by a net gain from the divestment of Stream.

On a core net income basis or without the impact of accelerated depreciation from its telecom unit’s
network transformation initiative in the previous year, Ayala grew 25% in 2014. This is the third
consecutive year of above-20% growth for the conglomerate as its diversified portfolio of investments
benefited from the country’s economic gains over the past three years.

Consolidated Sale of Goods and Services

Growth was achieved on the back of a 16% increase in consolidated revenues which reached P184.3
billion. Sale of goods rose 13% to P105.1 billion, while rendering of services grew 16% to P51.3 billion
This was driven by improved residential sales at Ayala Land Inc. coupled with higher revenues
generated by Integrated Micro-Electronics Inc. and increased billed volume recorded by Manila Water
Company Inc.

Real Estate
As the positive momentum in the real estate sector continued, Ayala Land’s net income expanded 26
percent to P14.8 billion year-on-year. The robust performance of its property development and
commercial leasing operations, which rose 21 percent and 18 percent, respectively, fuelled the 18
percent-growth in Ayala Land’s real estate revenues to P93 billion. Residential revenues reached P55.9
billion, up 26 percent from a year ago on new bookings and completion of existing residential projects.
Residential sales take-up remained strong, hitting an all-time high of P102 billion, 11 percent higher
year-on-year. Sales from overseas Filipinos likewise improved as it now comprise 24 percent of Ayala
Land’s residential bookings, which grew 13 percent to P76.7 billion. The sale of office spaces in
Bonifacio Global City and Cebu likewise fuelled Ayala Land’s real estate revenues in 2014.

Electronics
In electronics manufacturing, Integrated Micro-Electronics Inc. (IMI) recorded solid growth in 2014 with
net income soaring nearly threefold to $29.1 million from its year-ago level. Revenue growth was robust,
up by 13 percent, to $844.5 million, outpacing the global electronics manufacturing services, which
posted around 6 percent growth. Strong demand from the telecom, automotive and storage device
markets helped lift IMI’s revenues in 2014.

IMI successfully completed its follow-on offering in December 2014. It listed 215 million common shares,
raising ₱1.6 billion in proceeds and increasing its public float level to 19 percent.

Water Distribution and Wastewater Services


Manila Water ended 2014 at a steady pace, registering a one percent growth in consolidated net income
to ₱5.8 billion primarily driven by improved billed volume and higher contribution from new businesses.

Notwithstanding the absence of a tariff adjustment, the East Zone concession posted profits of ₱5.1
billion on the back of a 4 percent growth in billed volume owing to a modest increase in service
connections. Manila Water sustained its nonrevenue water (NRW) in the East Zone at 11.3 percent.

Manila Water’s operating units outside the East Zone concession all sustained solid growth in billed
volume. Laguna Water registered a 52 percent jump in profits to ₱164 million following the acquisition
of the water reticulation system of Laguna Technopark Inc in January 2014 and new service
connections. Boracay Water and Clark Water both posted double-digit growth, expanding 32 percent
and 17 percent, respectively. Manila Water’s Vietnam-based associates, Thu Duc Water, Kenh Dong
Water and Saigon Water Infrastructure Corporation, contributed a total of ₱357 million in earnings.
Manila Water’s new businesses accounted for 11 percent of its net income in 2014.

Share of Profit of Associates and Joint Ventures

Share of profit of associates and joint ventures amounted to P13.2 billion in 2014, reflecting a 31%
increase mainly driven by higher earnings from Globe which counterbalanced the relatively flat
contribution from BPI. The increase in AC’s ownership interest in BPI in November 2013 was offset by
the impact of the decline in its net income year-on-year.
107
Telecommunications
Globe Telecom posted another record net income, which more than doubled to P13.4 billion year-on-
year buoyed by lower accelerated depreciation charges from its network transformation. The robust
revenue growth from sustained demand for data connectivity across the mobile, broadband and fixed
line businesses also drove year-on-year increase. The solid revenue growth, which balanced out the
subsidy and operating expenses, drove the 8 percent increase in Globe’s earnings before interest taxes
depreciation and amortization (EBITDA) to P39.3 billion.

Mobile revenues, which account for 79 percent of consolidated revenues, grew 7 percent to P78.1
billion, propelled by growth in the postpaid and mass market TM brands. Globe’s postpaid revenues
continued to improve at P29.9 billion, up 11 percent from the previous year. Despite yield pressures on
multi-SIM incidence and value-based bucket offers, its prepaid revenues improved 5 percent to P48.2
billion. Total mobile subscriber base stood at 44 million in 2014, a 14 percent growth from its year-ago
level.

Globe’s broadband business registered a 22 percent growth to P12.7 billion as it continued to launch
affordable products and competitive tablet bundles. Similarly, Globe’s fixed line revenues reported
improvement with data and voice segments reporting a 17 percent and 7 percent, respectively.

Financial Services
BPI reported a net income of P18 billion in 2014, a 4 percent decline from the previous year. This was
largely due to a 5 percent decline in non-interest income as a result of a sharp contraction in trading
gains compared to the previous year as the bank reduced its reliance on securities trading.

The bank’s core lending business, however, continued to drive growth with net interest income growing
15 percent to P34.8 billion. Net loans expanded 27 percent to P800 billion year-on-year. Deposits
jumped 19 percent from a year ago to P1.2 trillion. The bank registered a current and savings account
ratio of 69 percent.

BPI’s operating expenses rose 12 percent attributed to the bank’s investment in infrastructure and
technology as it positions itself for future growth. Cost-to-income ratio stood at 53.7 percent in 2014.

Interest Income

Interest income expanded 79% to P5.5 billion on the back of higher investible funds following the fund
raising activities of the parent company and Ayala Land. This accounts for 3.5% of total income in 2014.

Other Income

Other income ended flat, down 1% to P9.2 billion mainly driven by the lower rehabilitation works of
Manila Water. This was partially counterbalanced by the net gain of P1.8 billion from LiveIt’s sale of
Stream Global Services.

Costs and Expenses

Consolidated cost of sales rose 17% to P77.8 billion attributed to higher sales of Ayala Land, IMI and
Ayala Automotive Holdings Corporation, accounting for 54% and 52% of total costs and expenses in
2014 and 2013, respectively. Cost of rendering services rose 10% to P34.5 billion resulting from higher
revenues from IMI, Manila Water and Ayala Land.

General and administrative expenses increased by 8% to P15.8 billion. The increase was mainly on
account of higher manpower expenses, taxes, and advertising costs related to Ayala Land, certain
provisions at IMI, and start-up costs of AC Energy, AC Infra and Ayala Education.

Interest Expense and Other Financing Charges

Consolidated interest expense and other financing charges increased by 13.5% to P11.9 billion mainly
due to higher borrowings in the latter part of 2013 to 2014. As of end-December 2014, total debt
increased by 26% from year-end 2013 as a result of new borrowings at the parent level to fund its
investments in various power and transport infrastructure projects and increased investment in BPI
through subscription in the bank’s stock rights offering. In addition, Ayala Land and Manila Water for
new expansion projects and investments in operational improvements. Total debt as of end December
2014 stood at P259 billion. Notwithstanding the higher debt levels, gearing ratios remain comfortable
108
and well within limits. Ayala Corp.'s consolidated debt to equity ratio was at 1.39 times while parent debt
to equity ratio was at 0.54 to 1 with net debt to equity at 0.24 to 1.

Balance Sheet Highlights

Consolidated cash and cash equivalents expanded by 38% to P90.7 billion largely attributed to the
proceeds from Ayala parent’s offering of preferred shares, issuance of new common shares, loan
availments and sale of exchangeable bonds. Ayala Land’s higher sales and loan availments as well as
IMI’s higher collections and proceeds from its follow-on offering and sale of property also contributed to
the increase.

Accounts and notes receivables (current) grew by 29% to P72.7 billion as a result of higher sales across
all of Ayala Land's residential brands. Significant growth in revenues from IMI and Ayala Automotive
also pushed up accounts receivables.

Total non-current assets rose by 22% to P471.3 billion from P384.8 billion at the beginning of the year.
This was primarily due to the increased investment of Ayala Corp in BPI through the stock rights,
investments in various power projects, Ayala Land’s increased investment in land acquisitions as well
as additional investments in real properties.

On the liabilities side, long-term debt (noncurrent) reached P227 billion, up 28% mainly due to new
borrowings made through AYC Finance’s issuance of exchangeable bonds to fund Ayala parent’s
investments in power and transport infrastructure as well as its acquisition of additional stake in BPI. In
addition, Ayala Land’s new loans to bankroll its expansion projects contributed to the increase.

Total stockholders’ equity reached P286.9 billion, P51.4 billion higher than the start of the year primarily
resulting from higher earnings during the period, the re-issuance of 27 million AC’s Preferred B shares
which generated P13.4 billion proceeds, and the top-up placement of AC’s 18.8 million common shares
which generated P12.2 billion proceeds, in 4Q 2014.

Consolidated current ratio and debt to equity ratio remained healthy at 1.50x and 1.39x, respectively as
of the end of December 2014. Consolidated net debt to equity ratio was at 0.85X.

In 2015, the Ayala Group has earmarked P185 billion in combined capital expenditures to support the
massive expansion plans of its real estate and telecom units.

Outlook for 2015

As the growth momentum in the Philippine economy continues, Ayala expects the performance of
each of its business units to remain upbeat with mostly double-digit earnings growth in 2015. This
should allow Ayala to achieve its original 2016 target of P20 billion a year earlier.

Key performance indicators of the Company and its significant subsidiaries


The table sets forth the comparative key performance indicators of the Company and its significant
subsidiaries.

Ayala Corporation (Consolidated)

2012
(In million pesos, except ratios) 2014 2013 (As restated4)
Income 184,276 159,412 130,571
Net Income Attributable to Equity Holders 18,609 12,778 10,504
Total Assets 726,048 599,664 510,904
Total Debt 258,845 205,681 175,085
Stockholders' Equity1 185,664 143,476 124,098
Current Ratio2 1.50 1.46 1.46
Debt to Equity Ratio3 1.39 1.43 1.41

109
Ayala Land, Inc.

2012
(In million pesos, except ratios) 2014 2013 (As restated4)
Revenue 95,197 81,523 59,932
Net Income Attributable to Equity Holders 14,803 11,742 9,038
Total Assets 388,944 325,474 254,550
Total Debt 124,666 101,902 74,778
Stockholders' Equity1 106,940 98,470 81,993
Current Ratio2 1.22 1.45 1.41
Debt to Equity Ratio3 1.17 1.03 0.91

Integrated Micro-Electronics, Inc.

2012
(In thousand US dollars, except ratios) 2014 2013 (As restated4)
Revenue 844,474 745,032 661,850
Net Income Attributable to Equity Holders 29,117 10,473 5,585
Total Assets 552,707 488,229 453,353
Total Debt 112,194 110,257 109,707
Stockholders' Equity1 244,051 192,650 193,817
Current Ratio2 1.73 1.53 1.56
Debt to Equity Ratio3 0.46 0.57 0.57

Manila Water Company, Inc.

2012
(In million pesos, except ratios) 2014 2013 (As restated4)
Revenue 16,357 15,926 14,553
Net Income Attributable to Equity Holders 5,813 5,752 5,490
Total Assets 74,860 72,858 67,127
Total Debt 25,471 26,252 24,071
Stockholders' Equity1 34,508 30,477 26,488
Current Ratio2 1.16 1.12 0.83
Debt to Equity Ratio3 0.74 0.86 0.91

1
Stockholders’ Equity attributable to owners of the Parent
2
Current Asset/Current Liabilities
3
Total Debt/ Stockholders’ Equity1 (Total Debt includes short-term debt, long-term debt and current portion of long-term debt).
4
Restatement in Y2012 pertains to impact of the adoption of new accounting standards on employee benefits (PAS 19) and
consolidation (PFRS 10).

There are no known trends, events or uncertainties that will result in the Company’s liquidity increasing
or decreasing in a material way.

There were no events that will trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation.

Likewise, there were no material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships of the Company with unconsolidated entities or other
persons created during the reporting period.

There are no seasonal aspects that may have a material effect on the financial condition of the
Company.

Causes for any material changes


(Increase or decrease of 5% or more in the financial statements)

Balance Sheet Items


As of December 31, 2014 vs. December 31, 2013

Cash and cash equivalents – 38% increase from P


= 65,655 million to P
= 90,770 million

110
Increase mainly attributable to proceeds from: AC parent's offer of preferred shares and top-up
placement of common shares plus loan availments; AYC Finance’s exchangeable bond offer; ALI's
higher collections from sales and loan availments; IMI’s higher collections and proceeds from its follow-
on IPO and sale of property in Singapore; LiveIt’s proceeds from divestment of Stream; and loan
availments of AAHC. These were partially offset by the Group’s loan payments, additional shares
subscription in BPI, infusion in investment on power generation and transport infrastructure; and
expansion in real estate projects. This account is at 13% and 11% of the total assets as of December
31, 2014 and 2013, respectively.

Short-term investments – 8 times higher from P


= 119 million to P
= 1,103 million
Primarily due to ALI’s and MWCI’s short-term investments for the period. This account is at less than
1% of the total assets as of December 31, 2014 and 2013.

Accounts and notes receivable (current) – 29% increase from P = 56,341 million to P
= 72,710 million
Attributable to higher sales from across residential brands, new project launches and existing project
sales of ALI group and significant growth of revenues from all sites of IMI group. This account is at
10% and 9% of the total assets as of December 31, 2014 and 2013, respectively.

Inventories – 10% increase from P = 50,178 million to P


= 54,962 million
Due to increase in real estate and vehicle inventories of ALI and Automotive groups, respectively. This
account is at 8% of the total assets as of December 31, 2014 and 2013.

Other current assets – 10% decrease from P = 39,194 million to P


= 35,157 million
Decrease on account of ALI’s maturities of investment in UITF placements partially offset by reduction
in escrow/ deposit accounts. This account is at 5% and 7% of the total assets as of December 31, 2014
and 2013, respectively.

Noncurrent asset held for sale – 100% decrease from P= 3,329 million to zero balance
Due to the LiveIt’s divestment of Stream in March 2014.

Accounts and notes receivable (noncurrent) – 75% increase from P = 18,283 million to P
= 32,006 million
Mainly due to higher receivables by the ALI group. This account is at 4% and 3% of the total assets as
of December 31, 2014 and 2013, respectively.

Land and improvements – 28% increase from P = 62,475 million to P


= 79,960 million
Increase due to ALI group’s unsubdivided land and certain land acquisitions. This account is at 11%
and 10% of the total assets as of December 31, 2014 and 2013, respectively.

Investments in associates and joint ventures – 28% increase from P


= 119,804 million to P
= 152,765 million
Attributable to Group’s shares subscription in BPI through stock rights offering, infusion in various
investments in power and transport infrastructure and share in earnings offset by dividends from
investees. This account is at 21% and 20% of the total assets as of December 31, 2014 and 2013,
respectively.

Investment in bonds and other securities – 23% increase from P = 2,785 million to P
= 3,432 million
Increase mainly attributable to ALI’s and Bestfull's additional investments. This account is at less than
1% of the total assets as of December 31, 2014 and 2013.

Investment properties – 13% increase from P = 63,157 million to P


= 71,324 million
Increase mainly attributable to ALI group’s additional investment properties. This account is at 10% of
the total assets as of December 31, 2014 and 2013.

Property, plant and equipment – 8% increase from P= 25,883 million to P


= 27,953 million
Increase mainly attributable to ALI and ACEnergy acquisitions made during the year. This account is
at 4% of the total assets as of December 31, 2014 and 2013.

Deferred tax asset - 24% increase from P = 6,514 million to P


= 8,055 million
Increase mainly attributable to ALI group’s higher deferred tax asset due to tax effect of temporary
difference from sale and collection of booked accounts. This account is at 1% of the total assets as of
December 31, 2014 and 2013.

111
Pension and other noncurrent assets - 110% increase from P = 8,016 million to P
= 16,830 million
Increase mainly attributable to ALI group’s higher pre-operating expenses, deferred charges and down
payments pertaining to new projects as well as to AYC’s long-term placement. The account also
includes the Group’s pension asset.1 This account is at 2% and 1% of the total assets as of December
31, 2014 and 2013, respectively.

Accounts payable and accrued expenses - 22% increase from P = 103,604 million to P= 126,102 million
Increase mainly caused by higher trade payables and accruals of ALI group for its new and existing
projects including reclassification of accounts from Other Current Liabilities; higher trade payables and
accruals by IMI group pertaining to their expanded operations; offset by AC parent or Company's
settlement of accounts relating to acquisition of additional ADHI shares and payment of dividends. This
account is at 29% and 28% of the total liabilities as of December 31, 2014 and 2013, respectively.

Short-term debt – 33% increase from P = 15,811 million to P


= 21,084 million
Mainly due to loan availments of the ALI and Automotive groups. This account is at 5% and 4% of the
total liabilities as of December 31, 2014 and 2013, respectively.

Income tax payable – 20% decrease from P= 1,668 million to P


= 1,340 million
Due to lower tax payable of ALI group. As a percentage to total liabilities, this account is at less than
1% as of December 31, 2014 and 2013.

Long-term debt (current) – 9% decrease from P = 11,842 million to P


= 10,761 million
Mainly due to the Company’s lower amount of long-term debt maturing within 1 year partially offset by
ALI’s availment of loans. This account is at 2% and 3% of the total liabilities as of December 31, 2014
and 2013, respectively.

Service concession obligation (current) – 21% decrease from P = 1,290 million to P


= 1,020 million
Decrease was mainly due to lower computed and actual obligation due within one year. This account
is at less than 1% of the total liabilities as of December 31, 2014 and 2013.

Other current liabilities – 14% decrease from P


= 10,992 million to P
= 9,452 million
Net decrease was due to reclassification of accounts to trade payables partially offset by increase in
ALI group’s payable to various contractors, deposits from residential assets and retention payable from
projects. This account is at 2% and 3% of the total liabilities as of December 31, 2014 and 2013,
respectively.

Long-term debt (noncurrent) – 28% increase from P = 178,027 million to P


= 226,999 million
Due to new borrowings made by the Company, directly and through AYC Finance, to fund investments
in power generation, transport infrastructure, BPI stock rights offer and refinance debt; exchangeable
bonds issued by AYC Finance plus ALI group's new loans to fund expansion projects. This account is
at 52% and 49% of the total liabilities as of December 31, 2014 and 2013, respectively.

Deferred tax liabilities – 6% increase from P


= 6,347 million to P
= 6,743 million
Increase attributable to ALI group’s non-taxable income. This account stood at 2% of the total liabilities
as of December 31, 2014 and 2013.

Pension liabilities – 14% increase from P


= 1,915 million to P
= 2,180 million
Increase attributable to the effect of PAS 19- immediate recognition of past service cost and re-
measurement of unrealized actuarial gains or losses. This account is at less than 1% of the total
liabilities as of December 31, 2014 and 2013.

1
The Company's pension fund is known as the AC Employees Welfare and Retirement Fund (ACEWRF). ACEWRF is a legal
entity separate and distinct from the Company, governed by a board of trustees appointed under a Trust Agreement between
the Company and the initial trustees. It holds common and preferred shares of the Company in its portfolio. All such shares
have voting rights under certain conditions, pursuant to law. ACEWRF's portfolio is managed by a committee appointed by the
fund's trustees for that purpose. The members of the committee, all of whom are Managing Directors of the Company, are
Delfin C. Gonzalez, Jr. (the Company's Chief Finance Officer), Solomon M. Hermosura (the Company's Group Head of
Corporate Governance, General Counsel, Corporate Secretary & Compliance Officer), John Philip S. Orbeta (the Company’s
Head for Strategic Human Resources), Ma. Cecilia T. Cruzabra (the Company’s Treasurer), and Josephine G. de Asis (the
Company’s Comptroller). ACEWRF has not exercised voting rights over any shares of the Company that it owns.

112
Paid in capital - 47% increase P
= 50,166 million to P
= 73,571 million
Represents proceeds from the Company’s re-issuance of treasury preferred shares amounting to
P13.4B plus AC’s top-up placement of common shares totaling P12.2B.

Cumulative translation adjustments - 52% decrease (improved) from negative P


= 1,257 million to negative
P
= 604 million
Mainly due to higher foreign denominated net assets held by the international operations groups and
depreciation of Peso from P= 44.395 in December 2013 to P
= 44.720 in December 2014.

Share-based payments – 22% decrease from P= 485 million to P


= 377 million
Decrease in share-based payments of the Company resulting to conversion to common shares.

Remeasurement losses (gains) on defined benefit plans – 24% decrease (improved) from negative P=
1,318 million to negative P
= 1,006 million
Decrease attributable to the effect of PAS 19- immediate recognition of past service cost and re-
measurement of unrealized actuarial gains or losses.

Net unrealized gain on available-for-sale financial assets – 103% decrease from P


= 278 million to
negative P= 7 million
Pertains to the movement in the market value of securities held by BPI group.

Equity-conversion option – 100% increase from zero to P


= 1,114 million
P
= 1.1B arising from exchangeable bonds issued by AYC Finance.

Retained earnings – 15% increase from P= 92,640 million to P


= 107,040 million
Represents share in FY 2014 group net income partially offset by P= 2.9B dividends declared.

Treasury stock - 54% decrease P = 5,000 million to P


= 2,300 million
Attributable to the Company’s re-issuance of treasury preferred shares.

Non-controlling interests – 10% increase from P


= 91,994 million to P
= 101,202 million
Share in FY 2014 group net income partially offset by dividends received.

Income Statement items


For the Year Ended December 31, 2014 vs. December 31, 2013

Sale of goods – 13% increase from P = 92,725 million to P


= 105,141 million
Mainly on account of new projects and improved performance of ALI group from residential sales; higher
revenues across all sites of IMI group plus incremental sales of Automotive group. As a percentage to
total income, this account is at 57% and 58% in December 31, 2014 and 2013, respectively.

Rendering of services – 16% increase from P = 44,216 million to P


= 51,276 million
Improved sales performance of ALI (malls, office leasing & hotel operations specifically full year impact
of sales generated by its newly acquired subsidiaries), MWCI (increase in billed volume and additional
connections) and IMI (growth of customer demand) groups. As a percentage to total income, this
account is at 28% in December 31, 2014 and 2013.

Share of profit of associates and joint ventures – 31% increase from P = 10,091 million to P
= 13,185 million
Increase significantly from the higher equity in net earnings of Globe and BPI. As a percentage to total
income, this account is at 7% and 6% in December 31, 2014 and 2013, respectively.

Interest income – 79% increase from P= 3,072 million to P


= 5,494 million
Mainly from to ALI’s higher investible funds. This account is at 3% and 2% of the total income in
December 31, 2014 and 2013, respectively.

Other income – 1% decrease from P = 9,307 million to P


= 9,180 million
Decrease was a result of the lower rehabilitation works of MWCI group partially offset by LiveIt’s P1.8B
gain from divestment of Stream. This account is at 5% and 6% of the total income in December 31,
2014 and 2013, respectively.

Cost of sales – 17% increase from P = 66,540 million to P


= 77,774 million
Increase attributable to higher sales of ALI, IMI and Automotive groups. As a percentage to total costs
and expenses, this account is at 54% and 52% in December 31, 2014 and 2013, respectively.

113
Cost of rendering services – 10% increase from P
= 31,487 million to P
= 34,496 million
Increase coming from higher revenues from IMI, MWCI and ALI groups. As a percentage to total costs
and expenses, this account is at 24% in December 31, 2014 and 2013, respectively.

General and administrative expenses – 8% increase from P = 14,614 million to P


= 15,830 million
Increase mainly on account of higher manpower expenses, taxes, advertising costs related to ALI;
inventory provisions taken up by IMI; and start-up costs of ACEnergy, ACInfra and Ayala Education.
This expense classification accounts for 11% of the total costs and expenses in December 31, 2014
and 2013.

Interest and other financing charges – 14% increase from P = 10,511 million to P
= 11,934 million
Increase was due to higher loan balance as a result of fundraising activities in late 2013 and new
borrowings in 2014 of the Company (for initiatives for new growth areas like power generation and
transport infrastructure sectors), international and ALI group (for landbanking and expansion of various
existing mixed use projects). This expense classification accounts for 8% of the total costs and
expenses in December 31, 2014 and 2013.

Other charges – 30% decrease from P = 5,481 million to P


= 3,829 million
Decrease coming from lower rehabilitation works of MWCI group due to limited capital expenditure
caused by ongoing arbitration; offset by impairment provisions on goodwill taken up by IMI. This
expense classification accounts for 3% and 4% of the total costs and expenses in December 31, 2014
and 2013, respectively.

Provision for income tax (current and deferred) – 22% increase from P = 6,654 million to P
= 8,138 million
Primarily due to higher taxable income of the several subsidiaries significant part of which comes from
ALI, Automotive and IMI groups on account of better sales and other operating results.

Income attributable to Owners of the parent – 46% increase from P12,778 million to P18,609 million
Resulting from better operating results of most of the subsidiaries and associates of the Group.

Income attributable to Non-controlling interests – 20% increase from P


= 11,347 million to P
= 13,665 million
Better operating results of most of the subsidiaries of the Group.

2013

Ayala Corporation’s consolidated net income attributable to equity holders for the year ended December
31, 2013 amounted to P12.8 billion, 22% higher than 2012. Core net income reached P14.8 billion, 28%
higher than prior year. This excludes the impact of the accelerated depreciation of Globe Telecom as a
result of its network modernization program.

Consolidated Sales of Goods and Services

Ayala’s consolidated sale of goods and services for the year reached P136.9 billion, a 24% increase
from 2012 primarily driven by new projects and improved sales performance of real estate, electronics,
automotive, water distribution and wastewater services and international operations groups. This
accounts for 86% of total income in 2013.

Real Estate
Ayala Land, Inc.’s (ALI) net income attributable to equity holders of ALI rose by 30% to a record P11.7
billion on the back of double-digit revenue growth and stable margins across its business segments.
ALI recorded P81.5 billion in total revenues, a 36% jump from its year-ago level as its property
development, commercial leasing and construction businesses continued to post gains.

Revenues from property development expanded by 51% to P51.9 billion driven by strong gains from its
residential segment as well as the sale of commercial lots in NUVALI development, the large-scale
master planned development and Arca South, the Food Terminal Inc. property ALI acquired in 2012.
Revenues from commercial leasing grew 21% to P18.0 billion on a combination of higher average lease
rates and higher occupancy of gross leasable area in shopping centers and offices coupled with the
opening of new malls. Higher revenues from hotels and resorts (which is a component of revenues from
commercial leasing) also rose by 64% to P4 billion, as new hotels and resorts began to contribute.
Construction and property management generated combined revenues of P26.3 billion, 29% higher
than the previous year.

114
ALI spent a total of P66.3 billion in capital expenditures in 2013, 7% lower than the P71.3 billion spent
the previous year. The bulk of capital expenditures in 2013 were utilized for residential development
(32% of total) and land acquisition (41%), offices (8%), shopping centers (12%), hotels and resorts
(2%), with the balance spent on support business and land development activities in the company’s
strategic landbank areas. For 2014, ALI has allotted another P70.0 billion for capital expenditures
primarily earmarked for the completion of ongoing developments and launches of new residential and
leasing projects. Targeted launches in 2014 include 78 projects, including 55 residential / office for sale,
8 office buildings, 6 shopping centers, 5 hotels and resorts, 2 commercial estates and 2 hospitals.

Water Distribution and Wastewater Services


Manila Water Company’s (MWC) net income attributable to equity holders of MWC expanded by 5% in
2013 to P5.8 billion, driven by higher billed volume in the East Zone and increased contribution from
new businesses. New businesses, which include operations in Laguna, Boracay, Clark and Vietnam,
accounted for 12% of MWC’s earnings in 2013. Additional income from the liquidation of connection
fees in the East Zone was also recognized, boosting net income.

Total revenues grew by 9% to P15.9 billion with total billed volume up 10% versus prior year. Revenues
from its Vietnam operations, which consist of a leakage reduction project and two bulk water companies,
Thu Duc Water B.O.O. Corporation and Kenh Dong Water Supply Joint Stock Company, grew by 42%
in 2013 to P294 million.

MWC recently took over as exclusive water provider within the Laguna Technopark through its
subsidiary, Laguna Water Company. It is also constructing a bulk water project in Cebu, which is
expected to start operations in June.

Electronics
Ayala’s electronics business, Integrated Microelectronics, Inc. (IMI), nearly doubled its net income
attributable to eguity holders of IMI in 2013 to US$10.5 million due mainly to business expansion in
Europe and the Philippines. Despite a contraction in the electronics sector, IMI continued to register
higher revenues in 2013, reaching US$745 million, a 13% growth from the previous year. This resilient
performance was primarily driven by IMI’s diversification strategy. This includes the company’s move
to higher-growth, higher margin niche markets in automotive, industrial, medical, and
telecommunications segments.

Automotive
Consolidated sales of Ayala Automotive Holdings Corporation grew by 6% to P10.8 billion. Vehicle unit
sales grew by 9% from 9,259 to 10,111. Consolidated net income, which includes its equity share and
dividend income from Honda Cars Philippines, Inc. and Isuzu Philippines Corporation, was 81% lower
than the previous year mainly on start-up costs of Volkswagen operations.

In 2012, Volkswagen AG appointed Ayala Automotive as the Philippine importer for Volkswagen
passenger vehicles. This partnership will enhance Ayala Automotive’s existing portfolio of product
offerings along with the Honda and Isuzu brands.

Share of profit of Associates and Joint Ventures

The Company’s share of profit of associates and joint ventures increased by 31% from P7.7 billion in
2012 to P10.1 billion in 2013 mainly due to equity earnings from the Bank of the Philippine Islands partly
offset by lower net income registered by Globe Telecom. As a percentage to total income, this account
is at 6% in 2013 and 2012.

Financial Services
BPI registered a 15% year-on-year growth in net income attributable to equity holders of BPI to P18.8
billion, primarily driven by higher interest income on the back of a 21% growth in the bank’s loan
portfolio. Higher fee-based income and foreign exchange trading also contributed to the bank’s earnings
in 2013, which translated to a return on equity of 18%.

The double-digit loan growth was driven by higher corporate and consumer loans, which grew by 23%
and 13%, respectively. While the net interest income expanded as a result of an 18% growth in the
bank’s average asset base, net interest margin slightly contracted by 26 basis points to 3.3% owing to
the competitive lending environment. BPI’s asset quality further improved with 90-day gross non-
performing loan ratio closing at 1.8% from the 2.1% registered a year ago.

115
BPI’s total assets at the end of 2013 expanded 21% to P1.2 trillion. Deposits jumped 23% to P989
billion as a result of higher savings and demand deposits. The bank’s operating expenses rose 8%, with
increases largely attributed to regulatory, technology and occupancy-related costs. Despite this, BPI
managed to post modest gains in its cost-to-income ratio to 51% from 52% the previous year.

Telecommunications
Globe Telecom sustained its growth momentum with core net income of P11.6 billion, a 13% increase
year-on-year. Service revenues reached P90.5 billion, a 9% increase from the previous year, led by
the continued growth in mobile telephony and the demand for data connectivity across its mobile,
broadband and fixed line businesses.

Mobile revenues, which account for 80% of total revenues, rose 8% to P72.8 billion on the back of
sustained growth in postpaid revenues, which expanded by 18% to P27.1 billion. Prepaid revenues
inched up 3% to P45.7 billion despite yield pressures from the shift to value-based from pay-per-use
bucket. Globe's mobile subscribers climbed 16% in 2013 to 38.5 million from 33.1 million the previous
year. Its broadband business registered a sharp gain in both revenues and customer base, climbing
20% and 22%, respectively year-on-year. Fixed line data expanded by 13% in 2013 to P4.7 billion,
mitigating the decline in traditional fixed line voice services.

Globe's operating expenses rose 13% to P54.08 billion, largely due to subsidy and recontracting costs.
Globe's reported net income after tax declined 28% in 2013 owing to accelerated depreciation charges
arising from its network transformation initiative.

Interest Income

The Company’s interest income decreased 29% from P4.3 billion in 2012 to P3.1 billion in 2013 mainly
due to lower placements and interest rates of Ayala Land and the Company in 2013. As a percentage
to total income, this account s at 2% and 3% in 2013 and 2012, respectively.

Other income

The Company’s other income increased 8% from P8,646 million in 2012 to P9,307 million in 2013 mainly
due to forex gain and derivative asset gain of the electronics, BPO and international operations groups.
As a percentage to total income, this account is at 6% and 7% in 2013 and 2012, respectively.

Costs and Expenses

Consolidated cost of goods increased 20% from P55,3 billion in 2012 to P66.5 billion in 2013 while cost
of rendering services increased 37% from P23.0 billion in 2012 to P31.5 billion in 2013. The increase
was driven by higher sales of the real estate, electronics, automotive, water distribution and wastewater
services and business process outsourcing (BPO) groups. The cost of goods accounts for 52%, while
the cost of rendering services accounts for 24% of total costs and expenses in 2013.

Consolidated general and administrative expenses increased 14% from P12.9 billion in 2012 to P14.6
billion in 2013 mainly due to higher expenses of the real estate group resulting from a line by line
consolidation of AMHRI/AMHPI (Kingdom Investments: Fairmont and Raffles) after the step-up
acquisition in Q4 2012. General and administrative expenses accounts for 11% of total costs and
expenses in 2013.

Interest Expense and Other Financing Charges

Consolidated interest expenses and other financing charges increased 29% from P8.2 billion in 2012
to P10.5 billion in 2013 mainly due to higher loan balance as a result of fundraising activities in late
2012 and new borrowings in 2013 of the Company (for initiatives for new growth areas like the energy
and transport infrastructure sectors) and the real estate group (for landbanking and expansion of various
mixed use projects). As a percentage to total costs and expenses, this account is at 8% in 2013 and
2012.

Other charges

The Company’s other charges decreased 20% from P6.8 billion in 2012 to P5.5 billion in 2013 mainly
due to lower rehabilitation costs of the water distribution and wastewater services group. As a
percentage to total costs and expenses, this account is at 4% and 6% in 2013 and 2012, respectively.

116
Provision for income tax

The Company’s provision for income tax increased 34% from P5.0 billion in 2012 to P6,7 billion in 2013
mainly due to the higher taxable income of several Subsidiaries in the real estate and water distribution
and wastewater services groups on account of better sales and other operating results.

Balance Sheet Highlights

Consolidated cash and short term investments declined by 18% to P65.7 billion as of the end of 2013
compared to P80.3 billion in 2012. Decline was due mainly to placements of funds from short term cash
equivalents to other form of financial instruments, and use of funds for operations and loan payments.

Accounts receivable rose by 32% to P56.3 billion on the back of higher sales from residential brands,
new project launches and existing project sales of the real estate group. The significant growth in
revenues of the electronics group particularly in Europe and the Philippines coupled with higher
receivables of the BPO group also contributed to the increase. This account makes up for 9% of total
assets in 2013.

Noncurrent asset held for sale represents the carrying value of our investment that will be disposed
within Y2014.

Overall, total current assets increased by 18% to P211.5 billion.

Total noncurrent assets rose to P384.8 billion from P331.9 billion in 2012. This was primarily due to an
increase in investments in our banking sector coupled with higher earnings from investee companies,
additional investments in real properties, land and improvements and higher receivables by ALI arising
from ramp up on revenues.

On the liabilities side, total current and noncurrent liabilities reached P364.2 billion, 20% higher than its
level in 2012.

Total consolidated stockholders’ equity reached P235.5 billion, 14% higher than in 2012 mainly as a
result of additional paid up capital from re-issuance of treasury shares and higher earnings during the
period, net of dividends.

On a consolidated basis, gearing remained comfortable with consolidated debt to equity ratio at 1.43 to
1 and consolidated net debt to equity ratio at 0.98 to 1. Gearing at the parent company level also
remained comfortable with debt to equity ratio at 0.49 to 1 and net debt to equity ratio at 0.32 to 1.

In 2014, the Ayala Group earmarked nearly P190 billion in capital expenditures to continue its
investment programs in its real estate, banking, telecommunications, and water businesses as well as
to ramp up its new businesses.

Key performance indicators of the Company and its significant subsidiaries


The table sets forth the comparative key performance indicators of the Company and its significant
subsidiaries.

Ayala Corporation (Consolidated)


2012 2011
(In million pesos, except ratios) 2013 (As restated4) (As restated4)
Income 159,412 130,571 110,828
Net Income Attributable to Equity Holders 12,778 10,504 9,183
Total Assets 599,664 510,904 369,039
Total Debt 205,681 175,085 111,268
Stockholders' Equity1 143,476 124,098 106,353
Current Ratio2 1.46 1.46 1.76
Debt to Equity Ratio3 1.43 1.41 1.05

117
Ayala Land, Inc.
2012 2011
(In million pesos, except ratios) 2013 (As restated4) (As restated4)
Revenue 81,523 59,932 47,668
Net Income Attributable to Equity Holders 11,742 9,038 7,140
Total Assets 325,474 254,550 166,399
Total Debt 101,902 74,778 39,041
Stockholders' Equity1 98,470 81,993 62,184
Current Ratio2 1.45 1.41 1.64
Debt to Equity Ratio3 1.03 0.91 0.63

Integrated Micro-Electronics, Inc.


2012 2011
(In thousand US dollars, except ratios) 2013 (As restated4) (As restated4)
Revenue 745,032 661,850 575,454
Net Income Attributable to Equity Holders 10,473 5,585 3,255
Total Assets 488,229 453,353 441,885
Total Debt 110,257 109,707 99,407
Stockholders' Equity1 192,650 193,817 185,421
Current Ratio2 1.53 1.56 1.51
Debt to Equity Ratio3 0.57 0.57 0.54

Manila Water Company, Inc.


2012 2011
(In million pesos, except ratios) 2013 (As restated4) (As restated4)
Revenue 15,926 14,553 12,004
Net Income Attributable to Equity Holders 5,752 5,490 4,270
Total Assets 72,858 67,127 60,897
Total Debt 26,252 24,071 23,268
Stockholders' Equity1 30,477 26,488 22,538
Current Ratio2 1.12 0.83 1.24
Debt to Equity Ratio3 0.86 0.91 1.03

1
Stockholders’ Equity attributable to owners of the Parent
2
Current Asset/Current Liabilities
3
Total Debt/ Stockholders’ Equity1 (Total Debt includes short-term debt, long-term debt and current portion of long-term debt).
4
Restatement in Y2012 and Y2011 pertains to impact of the adoption of new accounting standards on employee benefits (PAS
19) and consolidation (PFRS 10).

There are no known trends, events or uncertainties that will result in the Company’s liquidity increasing
or decreasing in a material way.

There were no events that will trigger direct or contingent financial obligation that is material to the
Company, including any default or acceleration of an obligation.

Likewise, there were no material off-balance sheet transactions, arrangements, obligations (including
contingent obligations), and other relationships of the Company with unconsolidated entities or other
persons created during the reporting period.

There are no seasonal aspects that may have a material effect on the financial condition of the
Company.

Causes for any material changes


(Increase or decrease of 5% or more in the financial statements)

A. The accounting policies adopted in the preparation of the consolidated financial statements are
consistent with those of the previous financial years except for the new PFRS, amended PFRS and
improvements to PFRS which were adopted beginning January 1, 2013. The Group applied, for
the first time, certain standards and amendments that require restatement of previous financial
statements. These include:

a. PFRS 10 Consolidated Financial Statements*


b. PAS 19 Employee Benefits (Revised 2011)
118
*Accounting for ALI group’s interests in North Triangle Depot Commercial Corporation
(NTDCC), Cebu Holdings, Inc. (CHI), Alabang Commercial Corporation (ACC), BG West
Properties, Inc. (BGW), BG South Properties, Inc. (BGS), BG North Properties, Inc. (BGN). For
all financial years up to December 31, 2012, NTDCC, CHI and ACC were considered to be
associates under the previously existing PAS 28, Investments in Associates while BGW, BGS
and BGN were considered to be joint ventures under the previously existing PAS 31, Interests
in Joint Ventures. These entities were accounted for using the equity method. At the date of
initial application of PFRS 10, the ALI group assessed that it controls these companies based
on the factors explained in Note 4 of the Group’s Consolidated Financial Statements,
Judgments and Estimates and consolidated the financial statements of NTDCC, CHI, ACC,
BGW, BGS and BGN.

B. The consolidated financial statements show several significant increases in Balance Sheet
accounts (vs. December 31, 2012 balances) and Income Statement accounts (vs. December 2012
levels) relating to the ALI group’s acquisitions.

On October 2, 2012, AyalaLand Hotels and Resorts Corp. (AHRC), a wholly owned subsidiary of
ALI, entered into an agreement to acquire the interests of Kingdom Manila B.V., an affiliate of
Kingdom Hotel Investments (KHI), and its nominees in KHI-ALI Manila Inc. (now renamed AMHRI)
and 72,124 common shares in KHI Manila Property Inc. (now renamed AMHPI). AMHRI and AMHPI
are the project companies for the Fairmont Hotel and Raffles Suites and Residences project in
Makati which opened last December 2012.

Balance Sheet Items


(As of December 31, 2013 vs. Restated December 31, 2012)

Cash and cash equivalents – 18% decrease from P = 80,286 million to P


= 65,655 million
Decrease significantly attributable to: real estate group’s placements of funds from short term cash
equivalents to other form of financial instruments as well as their major landbanking, property
acquisitions and new project launches partially offset by the fundraising activities through reissuance of
shares, bonds offering and net new loans; payment of 2012/ new investments and loan payments
partially offset by AC parent’s issuance of treasury shares, bonds offering and new borrowing, plus net
new borrowings of the water distribution and wastewater services group. This account is at 11% and
16% of the total assets as of December 31, 2013 and 2012, respectively.

Short-term investments – 60% decrease from P = 297 million to P


= 119 million
Decrease due to maturities of short-term investments by AC parent and the real estate group. This
account is at less than 1% of the total assets as of December 31, 2013 and 2012.

Accounts and notes receivable (current) – 32% increase from P = 42,550 million to P
= 56,341 million
Mainly due to higher sales from across residential brands, new project launches and existing project
sales of real estate group, significant growth of revenues from Philippines and Europe operations of the
electronics group and higher receivables of BPO and international and others groups. This account is
at 9% and 8% of the total assets as of December 31, 2013 and 2012, respectively.

Inventories – 51% increase from P = 33,269 million to P


= 50,178 million
Increase primarily due to launching of new and completed projects of the real estate group (mostly on
residential projects including those from VizMin areas) and increase in inventories of the electronics
group (from Europe and China operations) and automotive group (stable supply of vehicles and
introduction of a new automotive brand Volkwagen). This account is at 8% and 7% of the total assets
as of December 31, 2013 and 2012, respectively.

Other current assets – 73% increase from P= 22,652 million to P


= 39,194 million
Increase mainly due to additional real estate deposits and prepaid expenses for projects plus
investment in short term fund/ UITF of the real estate group, increase in other current assets of the
automotive and electronics groups (input tax and creditable withholding tax) and international
operations group (higher valuation of investments). This account is at 7% and 4% of the total assets
as of December 31, 2013 and 2012, respectively.

Noncurrent asset held for sale – 100% increase from zero to P


= 3,329 million
Noncurrent asset held for sale represents the carrying value of our investment that will be disposed
within Y2014.

119
Investments in bonds and other securities – 14% decrease from P = 3,244 million to P
= 2,785 million
Mainly attributable to lower investments by AC parent, water and real estate groups. This account is at
less than 1% of the total assets as of December 31, 2013 and 2012.

Land and improvements – 27% increase from P = 49,218 million to P


= 62,475 million
Increase due to new landbanking projects and additional costs recognized for certain land acquisition
of the real estate group. This account is at 10% of the total assets as of December 31, 2013 and 2012.

Investments in associates and joint ventures – 16% increase from P = 102,939 million to P
= 119,804 million
Mainly attributable to additional investments made by AC parent to financial services and insurance
group and to the additional investments made the Group’s energy sector. Also attributed to the increase
was the higher share of profit of associates and joint ventures by the real estate and water distribution
and wastewater services groups partially offset by the reclassification of investment in Stream to
Noncurrent asset held for sale. This account is at 20% of the total assets as of December 31, 2013 and
2012.

Investment properties – 20% increase from P


= 52,449 million to P
= 63,157 million
Increase due to the new acquisitions and developments of the real estate group major of which are
those in Metro Manila, Cebu and Cavite. This account is at 10% of the total assets as of December 31,
2013 and 2012.

Property, plant and equipment – 13% increase from P = 23,002 million to P


= 25,883 million
Increase mainly due to additions in PPE of the real estate group’s hotels and resorts operations. This
account is at 4% of the total assets as of December 31, 2013 and 2012.

Intangible assets – 4% decrease from P= 4,021 million to P


= 4,176 million
Decrease mainly due to the consolidation of associates and joint ventures (effect of PFRS 10) by the
real estate groups. This account is at less than 1% of the total assets as of December 31, 2013 and
2012.

Deferred tax asset - 43% increase from P = 4,547 million to P


= 6,514 million
Increase mainly attributable to real estate group’s increase in realized gross profit on installment sales
brought by collections from previous years and PAS 19 adjustment on retirement benefit. This account
is at 1% of the total assets as of December 31, 2013 and 2012.

Pension and other noncurrent assets - 146% increase from P = 3,254 million to P
= 8,016 million
Increase mainly attributable to the pre-development expenses for projects in the pipeline and still to be
launched by the real estate group. The account also includes the Group’s pension asset. 2 This account
is at 1% of the total assets as of December 31, 2013 and 2012.

Accounts payable and accrued expenses - 26% increase from P = 81,901 million to P= 103,604 million
Increase mainly caused by higher trade payables and accruals of the real estate group for its expansion
in its operations and AC parent’s incremental payable related to its additional investment in BPI,
purchased from DBS Bank, Ltd.. This account is at 28% and 27% of the total liabilities as of December
31, 2013 and 2012, respectively.

Short-term debt – 28% increase from P = 12,343 million to P


= 15,811 million
Mainly due to the additional loans made by the real estate group. This account is at 4% of the total
liabilities as of December 31, 2013 and 2012.

Income tax payable – 13% increase from P = 1,481 million to P= 1,668 million
Due to higher tax payable by the real estate and water distribution and wastewater services groups. As
a percentage to total liabilities, this account is at less than 1% as of December 31, 2013 and 2012.

Long-term debt (current) – 38% decrease from P


= 19,021 million to P
= 11,842 million

2
The Company's pension fund is known as the AC Employees Welfare and Retirement Fund (ACEWRF). ACEWRF is a legal
entity separate and distinct from the Company, governed by a board of trustees appointed under a Trust Agreement between
the Company and the initial trustees. It holds common and preferred shares of the Company in its portfolio. All such shares
have voting rights under certain conditions, pursuant to law. ACEWRF's portfolio is managed by certain persons that are
beneficiaries of the fund, appointed by the fund's trustees for that purpose. These persons have the ability to exercise voting
rights over the shares in its holdings. These persons are Delfin C. Gonzalez, Jr. (who is the Company's Managing Director &
Chief Finance Officer) and Solomon M. Hermosura (who is the Company's Managing Director, Group Head of Corporate
Governance, General Counsel, Corporate Secretary & Compliance Officer). ACEWRF has not exercised voting rights over any
shares of the Company that it owns.
120
Mainly due to the settlement of loans by AC parent, the real estate, and water distribution and
wastewater services groups. This account is at 3% and 6% of the total liabilities as of December 31,
2013 and 2012, respectively.

Service concession obligation (current) – 54% increase from P


= 841 million to P
= 1,290 million
Increase was mainly due to the water distribution and wastewater services group’s higher service
concession obligation due within one year. This account is at less than 1% of the total liabilities as of
December 31, 2013 and 2012.

Other current liabilities – 58% increase from P


= 6,970 million to P
= 10,992 million
Increase pertains mainly to the real estate group’s payable to various contractors, deposits from
residential assets and higher retention payable from projects. This account is at 3% and 2% of the total
liabilities as of December 31, 2013 and 2012, respectively.

Long-term debt (noncurrent) – 24% increase from P = 143,720 million to P


= 178,027 million
Mainly due to net increase in loan amount of AC parent and the real estate (bond offerings and new
loans), water distribution and wastewater services, and international business groups. This account is
at 49% and 47% of the total liabilities as of December 31, 2013 and 2012, respectively.

Service concession obligation (noncurrent) – 7% increase from P = 7,372 million to P


= 7,868 million
Increase was mainly due to the water distribution and wastewater services group’s higher service
concession obligation. This account is at 2% of the total liabilities as of December 31, 2013 and 2012.

Pension liabilities – 21% increase from P


= 1,583 million to P
= 1,915 million
Increase attributable to the effect of PAS 19- immediate recognition of past service cost and re-
measurement of unrealized actuarial gains or losses. This account stood at less than 1% of the total
liabilities as of December 31, 2013 and 2012.

Other noncurrent liabilities – 8% increase from P


= 22,975 million to P
= 24,828 million
Increase mainly attributable to higher deposit from residential customers and increase in retention
payable of the real estate group. This account is at 7% and 8% of the total liabilities as of December
31, 2013 and 2012, respectively.

Paid-in capital - 11% increase from P


= 45,120 million to P
= 50,166 million
Mainly due to reissuances of treasury shares Preferred B and common shares by AC parent during the
year.

Cumulative translation adjustments - 61% increase (improved) from negative P= 3,238 million to negative
P
= 1,257 million
Mainly due to higher foreign exchange translation of foreign denominated net assets held by the
international operations group (due to depreciation of Peso from P
= 41.05 in December 31, 2012 to P =
44.395 in December 31, 2013).

Net unrealized gain on available-for-sale financial assets (including remeasurement gains/losses on


defined benefit plans) – 222% decrease from P = 856 million to negative P
= 1,040 million
Mainly due to movement in the market value of securities held by the financial services and insurance
group and impact of PAS 19 on other comprehensive income component of retirement funds’
investments.

Equity reserve – 39% increase from P = 5,379 million to P


= 7,482 million
In March 2013 and July 2012, the Company participated in the placement and subscription of 399.5
million and 680.0 million common shares of stock in ALI, respectively, whereby the Company sold its
listed ALI common shares through a private placement and infused the proceeds into ALI as
subscription for the same number of new ALI shares at the same price. Following these transactions,
the Company’s ownership interest in ALI’s common stock was reduced from 53.2% to 50.4% as of July
2012 and further reduced to 48.9% as of March 2013. The Company will maintain the same number of
common shares it held in ALI prior to the transaction. The transaction increased the equity reserve
account by P= 2.7 billion and P
= 5.3 billion in 2013 and 2012, respectively. The balance was partially offset
by the equity reserve on the acquisition of additional shares of the water distribution and wastewater
services group by AC parent.

Retained earnings – 11% increase from P= 83,268 million to P


= 92,640 million
Mainly due to share in group net income offset by dividends paid during the year.

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Treasury stock – 33% decrease from P = 7,497 million to P
= 5,000 million
Mainly due to AC parent’s sale/reissuance of common and Preferred B treasury shares

Non-controlling interest (NCI) – 12% increase from P= 82,343 million to P


= 91,994 million
Mainly due to AC parent’s top-up placement and subsequent sale of ALI shares which increased NCI
plus increments due to share in year-to-date net income.

Income Statement items


(For the Year Ended December 31, 2013 vs. Restated December 31, 2012)

Sale of goods – 34% increase from P= 69,335 million to P


= 92,725 million
Mainly on account of new projects and improved sales performance of real estate, electronics (mainly
from Europe operations and new projects in the Philippines) and automotive group (improved and stable
supply of vehicles). As a percentage to total income, this account is at 58% and 53% in December 31,
2013 and 2012, respectively.

Rendering of services – 9% increase from P= 40,554 million to P= 44,216 million


Improved sales performance of real estate (malls, office leasing & hotel operations specifically sales
generated by its newly acquired subsidiary), water distribution and wastewater services (increase in
volume) and international operations (new interactive clients) groups. As a percentage to total income,
this account is at 28% and 31% in December 31, 2013 and 2012, respectively.

Share of profit of associates and joint ventures – 31% increase from P


= 7,682 million to P
= 10,091 million
Increase mainly due to earnings of financial services and insurance partly offset by lower income
registered by investees in telecommunications group. As a percentage to total income, this account is
at 6% in December 31, 2013 and 2012.

Interest income – 29% decrease from P = 4,354 million to P


= 3,072 million
Mainly due to lower placements and interest rates of real estate group and AC parent in 2013. This
account is at 2% and 3% of the total income in December 31, 2013 and 2012, respectively.

Other income – 8% increase from P = 8,646 million to P


= 9,307 million
Mainly due to forex gain and derivative asset gain of electronics, BPO and international operations
groups. This account is at 6% and 7% of the total income in December 31, 2013 and 2012, respectively.

Cost of sales – 20% increase from P


= 55,285 million to P
= 66,540million
Increase attributable to higher sales of the real estate, electronics, automotive and international
operations groups. As a percentage to total costs and expenses, this account is at 52% in December
31, 2013 and 2012.

Cost of rendering services – 37% increase from P = 22,990 million to P


= 31,487 million
Increase mainly due to higher sales of rendering services and consolidation of new hotels by the real
estate, electronics, water distribution and wastewater services and BPO groups. As a percentage to
total costs and expenses, this account is at 24% and 22% in December 31, 2013 and 2012, respectively.

General and administrative expenses – 14% increase from P= 12,852 million to P


= 14,614 million
Increase mainly on account of higher expenses of real estate group [line by line consolidation of
AMHRI/AMHPI (Kingdom Investments: Fairmont and Raffles) after step-up acquisition in Q4 2012].
This expense classification accounts for 11% and 12% of the total costs and expenses in December
31, 2013 and 2012, respectively.

Interest and other financing charges – 29% increase from P = 8,155 million to P
= 10,511 million
Increase mainly due to higher loan balance as a result of fundraising activities in late 2012 and new
borrowings in 2013 of AC parent (for initiatives for new growth areas like Energy and Transport
Infrastructure sectors) and real estate group (for landbanking and expansion of various mixed use
projects). This expense classification accounts for 8% of the total costs and expenses in December 31,
2013 and 2012.

Other charges – 20% decrease from P = 6,812 million to P


= 5,481 million
Decrease mainly due lower rehabilitation costs of the water distribution and wastewater services group.
This expense classification accounts for 4% and 6% of the total costs and expenses in December 31,
2013 and 2012, respectively.

Provision for income tax – 34% increase from P


= 4,976 million to P
= 6,654 million
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Primarily due to higher taxable income of the several subsidiaries significant part of which comes from
real estate and water distribution and wastewater services groups on account of better sales and other
operating results.

Non-controlling interests – 26% increase from P = 8,995 million to P


= 11,347 million
Attributable to the favorable performance of the real estate, water distribution and wastewater services,
electronics and international operations groups in 2013.

Item 7. Financial Statements and Supplementary Schedules

The consolidated financial statements and schedules as listed in the accompanying Index to Financial
Statements and Supplementary Schedules are filed as part of this Form 17 A.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial


Disclosures

The accounting policies and methods of computations adopted in the preparation of the consolidated
financial statements are consistent with those of the previous financial years, except for the adoption of
the new and amended standards as of January 1, 2014. Please refer to Note 3 of the Company’s
Consolidated Financial Statements as well as Annex K of this SEC17A report regarding summary of
significant accounting policies as of December 31, 2014.

The Company has engaged the services of SGV & Co. during the two most recent fiscal years. There
were no disagreements with SGV & Co. on any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure.

Information on Independent Public Accountant


a. The external auditor of the Company is the accounting firm of SyCip, Gorres, Velayo & Company
(SGV & Co.). The Board, upon the recommendation of the Company’s Audit Committee (composed
of Mr. Loinaz, an independent director, as Chairman, Mr. del Rosario, Jr., an independent director,
as member, and Yoshio Amano, a non-executive director as member), approved the re-
appointment of SGV & Co. as the Company’s independent auditor for 2015 based on their
performance and qualifications, and fixed its remuneration amounting to P5 million, inclusive of
VAT, in 2015. The 22% increase in the audit fees is due to the additional audit procedures to cover
the increasing scope and complexities of the Ayala Group and the additional review procedures for
Globe Telecom, Inc. given the latter’s change in external auditors to Navarro Amper & Co./Deloitte
Philippines for 2015.

The re-appointment of the SGV & Co., and the fixing of its remuneration, will be presented to the
stockholders for their approval at the annual stockholders’ meeting.

b. Representatives of SGV & Co. for the current year and for the most recently completed fiscal year
are expected to be present at the annual stockholders’ meeting. They will have the opportunity to
make a statement if they desire to do so and are expected to be available to respond to appropriate
questions.

Pursuant to the General Requirements of SRC Rule 68 (2011 Amended), Par. 3 (Qualifications and
Reports of Independent Auditors), the Company has engaged SGV & Co. as external auditor, and
Ms. Jessie D. Cabaluna has been the Partner In-Charge since audit year 2012.

External Audit Fees and Services

The Company paid or accrued the following fees, including VAT, to its external auditors in the past two
years:

Audit Fees Audit- Tax Fees Non-Audit Fees


related
Fees
2014 P4.12M P9.52 M - P1.97 M
2013 P3.92M P5.82 M - P0.56 M

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SGV & Co. was engaged by the Company to audit its annual financial statements. SGV & Co. was also
engaged to conduct post reviews and other procedures to issue comfort letters for the Company and
the Underwriters for the offering by AYC Finance Limited of Exchangeable Bonds in 2014, and for the
issuance of the Company’s preferred B Shares in 2013 and 2014. The audit-related fees include other
assurance services that are reasonably related to the performance of the audit of the Company’s
financial statements pursuant to regulatory requirements.

No tax consultancy services were secured from SGV & Co. for the past two years.

In 2014, SGV & Co. billed the Company for an aggregate fee of P1.97M for the following services:

i. Accounting advisory services for review of policies and procedures for the offering of AYC Finance
Limited, a wholly-owned subsidiary of the Company, of the US$300 million Exchangeable Bonds
ii. Review of Ayala Rewards Circle (ARC) operational processes
iii. Accounting advisory services for the Southwest Integrated Transport System Project
iv. Validation of stockholders’ votes during the 2014 annual stockholders’ meeting

In 2013, SGV & Co. billed the Company for an aggregate fee of P0.6M for the following services:

i. Updates on Philippine Accounting and Reporting Standards for the entire group of companies and
IFRIC 12 (Service Concession) for select entities in the group.
ii. Review of ARC operational processes
iii. Validation of stockholders’ votes during the 2013 annual stockholders’ meeting

The Audit Committee reviewed the nature of non-audit services rendered by SGV & Co. and the
corresponding fees and concluded that these are not in conflict with the audit functions of the
independent auditors.

The Audit Committee has an existing policy to review and to pre-approve the audit and non-audit
services rendered by the Company’s independent auditors. It does not allow the Company to engage
the independent auditor for certain non-audit services expressly prohibited by regulations of the SEC to
be performed by an independent auditor for its audit clients. This is to ensure that the independent
auditor maintains the highest level of independence from the Company, both in fact and appearance.

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PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Registrant

The following persons have been nominated to the Board for election at the annual stockholders’
meeting and have accepted their nomination:

JAIME AUGUSTO ZOBEL DE AYALA FERNANDO ZOBEL DE AYALA


YOSHIO AMANO XAVIER P. LOINAZ
RAMON R. DEL ROSARIO, JR. ANTONIO JOSE U. PERIQUET
DELFIN L. LAZARO

The nominees were formally nominated to the Nomination Committee of the Board by a shareholder of
the Company, Ms. Remedios D. Wingco. Messrs. Ramon R. del Rosario, Jr., Xavier P. Loinaz and
Antonio Jose U. Periquet, all incumbent directors, are being nominated as independent directors. Ms.
Wingco is not related to any of the nominees including Messrs. Loinaz, Del Rosario, and Periquet. The
Nomination Committee evaluated the qualifications of the nominees and prepared the final list of
nominees in accordance with SRC Rule 38 (Requirements on Nomination and Election of Independent
Directors) and the By-laws of the Company.

Only nominees whose names appear on the final list of candidates are eligible for election as
directors. No nominations will be entertained or allowed on the floor during the annual stockholders’
meeting.

Messrs. Jaime Augusto Zobel de Ayala, Fernando Zobel de Ayala, Lazaro and Loinaz have served as
directors of the Company for more than five years. On the other hand, Messrs. Del Rosario and Periquet
have served as directors of the Company for five years. Mr. Amano has served as director for less than
five years.

The officers of the Company are elected annually by the Board during its organizational meeting.

A summary of the qualifications of the incumbent directors, nominees for directors for election at the
stockholders’ meeting and incumbent officers including positions currently held by the directors and
executive officers, as well as positions held during the past five years is set forth below.

Board of Directors

Jaime Augusto Zobel de Ayala Chairman and Chief Executive Officer


Fernando Zobel de Ayala President and Chief Operating Officer
Yoshio Amano Director
Ramon R. del Rosario, Jr. Independent Director
Delfin L. Lazaro Director
Xavier P. Loinaz Independent Director
Antonio Jose U. Periquet Independent Director

Jaime Augusto Zobel de Ayala, Filipino, 55, Director of Ayala Corporation since May 1987. He is the
Chairman and CEO of Ayala Corporation since April 2006. He holds the following positions in publicly
listed companies: Chairman of Globe Telecom, Inc., Integrated Micro-Electronics, Inc. and Bank of the
Philippine Islands; and Vice Chairman of Ayala land, Inc. and Manila Water Company, Inc. He is also
the Co-Chairman of Ayala Foundation, Inc.; Vice Chairman of AC Energy Holdings, Inc.; Chairman of
Harvard Business School Asia-Pacific Advisory Board; Vice Chairman of the Makati Business Club, and
member of the Harvard Global Advisory Council, Mitsubishi Corporation International Advisory
Committee, JP Morgan International Council, Endeavor Philippines and National Competitiveness
Council; and a Philippine Representative for APEC Business Advisory Council. He graduated with B.A.
in Economics (Cum Laude) at Harvard College in 1981 and took his MBA at the Harvard Graduate
School of Business Administration in 1987.

Fernando Zobel de Ayala, Filipino, 54, Director of Ayala Corporation since May 1994. He is the
President and Chief Operating Officer of Ayala Corporation since April 2006. He holds the following
positions in publicly listed companies: Chairman of Ayala Land, Inc. and Manila Water Company, Inc.;
and Director of Bank of The Philippine Islands, Globe Telecom, Inc. and Integrated Micro-Electronics,
Inc. He is the Chairman of AC International Finance Ltd., AC Energy Holdings, Inc., and Hero
Foundation, Inc.; Co-Chairman of Ayala Foundation, Inc.; Director of LiveIt Investments, Ltd., Ayala
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International Holdings Limited, Honda Cars Philippines, Inc., Isuzu Philippines Corporation, Pilipinas
Shell Petroleum Corp., Manila Peninsula and Habitat for Humanity International; Member of the
INSEAD East Asia Council, World Presidents’ Organization and Habitat for Humanity International;
Chairman of Habitat for Humanity’s Asia-Pacific Capital Campaign Steering Committee; and Member
of the Board of Trustees of Caritas Manila, Pilipinas Shell Foundation, Kapit Bisig para sa Ilog Pasig
Advisory Board, National Museum and the foundation of the Roman Catholic Church. He graduated
with B.A. Liberal Arts at Harvard College in 1982.

Yoshio Amano, Japanese, 56, Director of Ayala Corporation since April 2012. He is a Senior Vice
President of Mitsubishi Corporation and the General Manager of Mitsubishi Corporation-Manila Branch;
Chairman of International Elevator & Equipment Inc., and MCPL (Philippines) Inc.; President of MC
Diamond Realty Investment Phils., Inc., MC Oranbo Investment, Inc. and Japanese Chamber of
Commerce & Industry of the Philippines (JCCIPI); Director of Isuzu Philippines Corporation, Imasen
Philippines Manufacturing Corp., Kepco Ilijan Corporation, UniCharm Philippines Inc., Trans World
Agro-Products Corp., Philippine Resins Industries, Inc., Portico Land Corporation, and The Japanese
Association Manila, Inc. He is not a director of any publicly listed company. Mr. Amano graduated from
the University of Tokyo with a degree on Faculty Engineering in 1982.

Ramon R. del Rosario, Jr., Filipino, 70, Independent Director of Ayala Corporation since April
2010. He holds the following positions in publicly listed companies: President and Chief Executive
Officer of Phinma Corporation; Chairman of Trans-Asia Petroleum Corporation; and Vice Chairman of
Trans-Asia Oil and Energy Development Corporation. He is the President and Chief Executive Officer
of Philippine Investment Management, Inc.; Chairman of Araullo University, University of Iloilo,
University of Pangasinan, Cagayan de Oro College, United Pulp and Paper Co., Inc., Microtel Inns and
Suites (Pilipinas), Inc., Microtel Development Corp., Trans-Asia Power Generation Corporation, Trans-
Asia Renewable Energy Corp., Trans-Asia Gold and Minerals Development Corp., CIP II Power Corp.,
Fuld & Co., Inc., Fuld & Co (Philippines), Inc. and Paramount Building Management & Services Corp.;
Vice-Chairman of Phinma Foundation; Director of Phinma Property Holdings Corp., Union Galvasteel
Corp., and South Luzon Thermal Energy Corp.; Chairman of The National Museum of the Philippines,
the Makati Business Club, Philippine Business for Education, the Philippines-US Business Council, and
the Integrity Initiative; Vice-Chairman of Caritas Manila; and Trustee of De La Salle University. Mr. del
Rosario graduated from De La Salle College in 1967 with a degree in BSC-Accounting and AB Social
Sciences Magna cum Laude and from Harvard Business School in 1969 for his Master in Business
Administration.

Delfin L. Lazaro, Filipino, 68, Director of Ayala Corporation since January 2007. He holds the following
positions in publicly listed companies: Director of Ayala Land, Inc., Integrated Micro-Electronics, Inc.,
Manila Water Company, Inc., and Globe Telecom, Inc.; and Independent Director of Lafarge Republic,
Inc. His other significant positions include: Chairman of Philwater Holdings Company, Inc. and Atlas
Fertilizer & Chemicals Inc., Chairman and President of A.C.S.T. Business Holdings, Inc.; Vice Chairman
and President of Asiacom Philippines, Inc.; Director of AC Energy Holdings, Inc., AC Infrastructure
Holdings Corporation, Ayala International Holdings, Ltd., Bestfull Holdings Limited, Probe Productions,
Inc. and Empire Insurance Company; and Trustee of Insular Life Assurance Co., Ltd. He graduated
with BS Metallurgical Engineering at the University of the Philippines in 1967 and took his MBA (with
Distinction) at Harvard Graduate School of Business in 1971.

Xavier P. Loinaz, Filipino, 71, Independent Director of Ayala Corporation since April 2009. He is also
an Independent Director of Bank of the Philippine Islands, a publicly listed company. He also holds the
following positions: Independent Director of BPI Family Savings Bank, Inc., BPI Direct Savings Bank,
and BPI/MS Insurance Corporation; Trustee of E. Zobel Foundation, BPI Foundation, Inc. and PETA;
and Chairman of Alay Kapwa Kilusan Pangkalusugan and XPL Manitou Properties, Inc.; and Vice
Chairman of XPL MTJL Properties, Inc. He was formerly the President of the Bank of the Philippine
Islands (BPI) from 1982 to 2004. He was also the President of Bankers Association of the Philippines
from 1989 to 1991. He graduated with an AB Economics degree at Ateneo de Manila University in
1963 and took his MBA-Finance at Wharton School, University of Pennsylvania in 1965.

Antonio Jose U. Periquet, Filipino, 53, Independent Director of Ayala Corporation since
September 2010. He is also an Independent Director of other listed companies namely: ABS-CBN
Corporation, ABS-CBN Holdings Corporation, Bank of the Philippine Islands, DMCI Holdings, Inc.
Philippine Seven Corporation, and Max’s Group, Inc. His other significant positions are: Chairman of
Pacific Main Holdings, Inc., Campden Hill Group, Inc., and Campden Hill Advisor, Inc.; Director of The
Straits Wine Company; Independent Director of BPI Capital Corporation, and BPI Family Savings Bank,
Inc.; and Trustee of Lyceum of the Philippines University. He graduated with an AB Economics degree

126
at Ateneo de Manila University in 1982 and took his Masters of Science in Economics at the Oxford
University, UK in 1988 and Masters in Business Administration at University of Virginia, USA in 1990.

Nominees to the Board of Directors for election at the stockholders’ meeting

All the above incumbent directors.

Ayala Group Management Committee Members / Senior Leadership Team

*/*** Jaime Augusto Zobel de Ayala Chairman & Chief Executive Officer
*/*** Fernando Zobel de Ayala President & Chief Operating Officer
*** Gerardo C. Ablaza, Jr. Senior Managing Director, President and CEO of Manila Water Company, Inc.
** Cezar P. Consing Senior Managing Director, President and CEO of Bank of the Philippine Islands
** Arthur R. Tan Senior Managing Director, President and CEO of Integrated Micro-Electronics, Inc.
** Ernest Lawrence L. Cu President and CEO of Globe Telecom, Inc.
** Bernard Vincent O. Dy President and CEO of Ayala Land, Inc.
** Alfredo I. Ayala Managing Director, Chief Executive Officer of LiveIt Investments, Ltd.
**** Maria Lourdes Heras-De Leon Managing Director, President of Ayala Foundation, Inc.
*** John Eric T. Francia Managing Director, President and CEO of AC Energy Holdings, Inc. and AC
Infrastructure Holdings Corporation
***/***** Delfin C. Gonzalez, Jr. Managing Director & Chief Finance Officer (CFO)
*** Solomon M. Hermosura Managing Director, Group Head of Corporate Governance, General Counsel,
Corporate Secretary & Compliance Officer
***** Jose Teodoro K. Limcaoco Managing Director, CFO and Finance Group Head
****** Ruel T. Maranan Managing Director, President of Ayala Foundation, Inc.
*** John Philip S. Orbeta Managing Director, Group Head of Corporate Resources and Chairman and
President of Ayala Automotive Holdings Corporation
*** Paolo Maximo F. Borromeo Executive Director, Group Head of Corporate Strategy and Development
Ma. Cecilia T. Cruzabra Treasurer
Josephine G. De Asis Controller
June Vee D. Monteclaro- Assistant Corporate Secretary
Navarro
* Members of the Board of Directors.
** Ayala Group Management Committee members.
***Ayala Corporation Management Committee and Ayala Group Management Committee members
**** Retired effective December 31, 2014.
***** Mr. Limcaoco was appointed as CFO and Finance Group Head effective April 10, 2015 replacing Mr. Gonzalez.
****** Managing Director effective January 1, 2015 and as President of Ayala Foundation, Inc. effective March 1, 2015.

Gerardo C. Ablaza, Jr. 61, Filipino, has served as member of the Ayala Corporation Management
Committee since April 2009 and the Ayala Group Management Committee since 1998. He also holds
the following positions in other publicly listed companies in the Philippines: President and CEO of Manila
Water Company, Inc. and Co-Vice Chairman of Globe Telecom, Inc. He is also a member of the Board
of Directors of Hochiminh City Infrastructure Investment Joint Stock Company, a listed company on the
Ho Chi Minh Stock Exchange. His other significant positions are: Director of Manila Water Philippine
Ventures, Inc., Boracay Island Water Company, Inc., Cebu Manila Water Development, Inc., Manila
Water Consortium, Inc., Manila Water International Solutions, Inc., Clark Water Corporation, Manila
Water Total Solutions Corporation, Manila Water Asia Pacific Pte. Ltd., Manila Water South Asia
Holdings Pte. Ltd., Kenh Dong Water Holdings Pte. Ltd., and Thu Duc Water Holdings Pte. Ltd., Azalea
International Ventures Partners Ltd., Asiacom Philippines, Inc., LiveIt Investment Ltd.; AC Energy
Holdings, Inc., Purefoods International Investment Ltd., ACST Business Holdings, Inc. and AG Holdings
Limited. He is also a member of the Board of Trustees of the Manila Water Foundation, Inc. and Ayala
Foundation, Inc. From 1998 to April 2009, Mr. Ablaza was the President and CEO of Globe Telecom,
Inc. He was also the Chairman of the Board of Directors of Innove Communications Inc., a wholly owned
subsidiary of Globe Telecom Inc. from October 2003 to April 2009. Before joining the Ayala Group, Mr.
Ablaza was Vice-President and Country Business Manager for Philippines and Guam of Citibank, N.A.
for its Global Consumer Banking Business (1994-1997), Vice President for Consumer Banking of
Citibank, N.A. Singapore (1994-1995). In 2004, Mr. Ablaza was recognized by CNBC as the Asia
Business Leader of the Year, making him the first Filipino CEO to win the award. In the same year, he
was awarded by Telecom Asia as the Best Asian Telecom CEO. In 2013, he was recognized for his
consistent leadership and innovation across the banking, investment, telecommunications and utility
service industries through the Citi Distinguished Alumni Award for Leadership and Ingenuity. Mr. Ablaza
graduated summa cum laude from the De La Salle University in 1974 with a degree in Liberals Arts,
Major in Mathematics (Honors Program). As one of the most accomplished graduates of his alma
mater, he sits as a member of the Board of Trustees in various De La Salle schools in the country.

Cezar P. Consing, Filipino, 55, is a Senior Managing Director of Ayala Corporation and a member of
its Ayala Group Management Committee since April 2013. He also holds the following positions in other
127
publicly listed companies: President and CEO of Bank of the Philippine Islands and Independent
Director of Jollibee Foods Corporation. His other significant positions are: Chairman of BPI Direct
Savings Bank, Inc. and BPI Computer Systems Corporation, Vice Chairman of BPI Capital Corporation,
Director of BPI Family Savings Bank, Inc., BPI Globe BanKo, Inc, BPI/MS Insurance Corporation,
Capital Advisors Partners Asia Sdn Bhd, Capital Islamic Infrastructure Fund (General Partner) Limited,
Capital Asean Infrastructure Fund II (General Partner) Limited, Arch Capital Management Co. Ltd., Arch
Capital Asian Partners, G.P and Filgifts.com , He was a partner at the Rohatyn Group from 2004 to
March 2013; an Investment Banker with J.P. Morgan & Co. from 1985 to 2004; and an independent
director of CIMB Group Holdings Berhad and CIMB Group Sdn. Berhad from 2004 to 2012 and First
Gen Corporation from 2005 to 2013. He graduated with a degree of A.B (Accelerated Program)
Economics (Magna Cum Laude) from De La Salle University in 1979 and took his M.A. Applied
Economics in the University of Michigan in 1980.

Arthur R. Tan, Filipino, 55, has been a member of the Ayala Group Management Committee since
2002. He is a Senior Managing Director of the Company since January 2007. He has been the
President and Chief Executive Officer of Integrated Micro-Electronics, Inc., a publicly listed company,
since April 2002. Concurrently, he is the President and Chief Executive Officer of PSi Technologies
Inc., and President of Speedy-Tech Electronics Ltd. He graduated with B.S. in Electronics
Communications Engineering degree from Mapua Institute of Technology in 1982 and attended post
graduate programs at the University of Idaho, Singapore Institute of Management, IMD and Harvard
Business School.

Ernest Lawrence L. Cu, Filipino, 54, has been a member of the Ayala Group Management Committee
since January 2009. He is the President and Chief Executive Officer of Globe Telecom, Inc., a publicly
listed company. He is a trustee of Ayala Foundation, Inc. and Hero Foundation, Inc. He is also a director
of BPI Globe BanKo, Inc., Systems Technology Institute, Inc., and Prople BPO, Inc. Prior to joining
Globe, he was the President and CEO of SPI Technologies, Inc. In 2014, he was honored as the
Telecommunications Executive of the Year in the Stevies International Business Awards. In 2013, he
was the highest ranked Filipino in the Power 100 of London-based Global Telecoms Business Magazine
that recognizes the 100 most influential telecom leaders worldwide. He earned international accolade
in 2012 as CEO of the Year by Frost & Sullivan Asia Pacific. In 2010, he was adjudged Best CEO by
Finance Asia. He was moreover conferred the International Association of Business Communicators'
(IABC) CEO EXCEL award for communication excellence in telecoms and IT, and he was also voted
as one of the Most Trusted Filipinos in a poll conducted by Readers Digest. He earned a degree in BS
Industrial Management Engineering from De La Salle University in 1982 and took his Master’s Degree
in Business Administration at the JL Kellogg Graduate School of Management in 1984.

Bernard Vincent O. Dy, Filipino, 51, has been a member of the Ayala Group Management Committee
since April 2014. He is the President & Chief Executive Officer of Ayala Land, Inc. (ALI). Prior to this
post, he was the Head of the Residential Business, Commercial Business and Corporate Marketing and
Sales of ALI. He is the Chairman of other two publicly listed companies namely: Cebu Holdings, Inc.
and Cebu Property Ventures and Development Corporation. His other significant positions include:
Chairman of Ayala Land International Sales, Inc., Anvaya Cove Golf & Sports Club and Amicassa
Process Solutions, Inc., Amaia Land Corporation, Avida Land Corp. (“Avida”), Alveo, Alviera Country
Club, Inc., Ayalaland Commercial Reit, Inc., Lagdigan Land Corporation, Cagayan De Oro Gateway
Corp., BGSouth Properties, Inc., BGNorth Properties, Inc., BGWest Properties, Inc., Portico Land Corp.,
Directpower Services, Inc., Philippine Integrated Energy Solutions, Inc., Bonifacio Estate Services
Corporation, Amaia Southern Properties, Inc. ; Vice Chairman of Bellavita Land Corporation and Ayala
Greenfield Development Corporation; President of Serendra, Inc. and Varejo Corporation, Alabang
Commercial Corporation, Accendo Commercial Corp., Aurora Properties Incorporated, Ceci Realty Inc.,
Vesta Property Holdings, Inc., Bonifacio Land Corporation, Berkshires Holdings, Inc. and Columbus
Holdings, Inc.; Director of Fort Bonifacio Development Corporation, Ayala Land Sales, Inc., North
Triangle Depot Commercial Corporation, Station Square East Commercial Corporation, Ayala
Greenfield Golf & Leisure Club, Ayala Property Management Corporation, Makati Development
Corporation and Nuevocentro, Inc.; and Treasurer of SIAL Specialty Retailers, Inc. and SIAL CVS
Retailers, Inc. He earned a degree of B.B.A Accountancy from the University of Notre Dame in 1985
and took his Master’s Degree in Business Administration and International Relations at the University
of Chicago in 1997 and 1989, respectively.

Alfredo I. Ayala, Filipino, 53, has been a Managing Director of Ayala Corporation and a member of the
Ayala Group Management Committee since June 2006. He is the Chief Executive Officer of LiveIt
Investments, Ltd., the holding company of Ayala Corporation for its investments in the BPO sector, and
LiveIt Global Services Management Institute, Inc, Currently, he also holds the following positions:
Chairman of International Business Processing Association of the Philippines and Integreon Managed
128
Solutions (Philippines), Inc.; and Director of Affordable Private Education Centers, Inc., NewBridge
International Investment Limited, Affinity Express Holdings Limited, Affinity Express Philippines, Inc. IQ
BackOffice Holdings, Ltd., HRMall, Inc., Integreon, Inc., and Integreon Managed Solutions Philippines,
Inc. He has an MBA from the Harvard Graduate School of Business Administration and B.A. in
Development Studies and Economics, graduating with honors from Brown University.

Maria Lourdes Heras-De Leon, Filipino, 60, was a Managing Director of Ayala Corporation in October
2011 and President of Ayala Foundation, Inc. in January 2012. She retired from the Company on
December 31, 2014. She was formerly with Chevron Geothermal Philippines Holdings as Vice
President for Policy, Government and Public Affairs. She was expatriated to the Philippines as a
member of the Senior Leadership Team to lead Chevron Geothermal’s and Chevron Malampaya’s
government affairs, policy advocacy and public affairs. She also led the company’s community
engagement and corporate social responsibility programs refocusing its community development
projects from traditional corporate donations into a sustainable, public-private partnership process. She
spearheaded the advocacies of Ayala Foundation: Education, Youth Leadership, Sustainable
Livelihood and Arts & Culture. She graduated with a degree of Bachelor of Arts in Asian Studies from
the University of British Columbia in 1976 and took her Master’s Degree in Business Administration
from Thunderbird School of Global Management in 1981.

John Eric T. Francia, Filipino, 43, is a Managing Director and a member of the Ayala Corporation
Management Committee and the Ayala Group Management Committee since January 2009. He is the
head of Ayala’s Energy and Infrastructure Group since September 2014. He is a Director of publicly
listed companies namely: Manila Water Company, Inc. and Integrated Micro-Electronics, Inc. He also
holds the following positions: President and Chief Executive Officer of AC Energy Holdings, Inc. and
AC Infrastructure Holdings Corp.; Chairman and President of PhilNewEnergy, Inc., PhilnewRiver Power
Corp., PhilnewHydro Power Corp., and Quadriver Power Corp.; and Director of LiveIt Investments Ltd,
Live It Global Services Management Institute, Inc., Northwind Power Development Corp., North Luzon
Renewable Energy Corporation, South Luzon Thermal Energy Corporation, Automated Fare Collection
Services, Inc., Light Rail Manila Corporation, and HCM City Infrastructure Investment Joint Stock
Company. Mr. Francia was the head of the Company’s Corporate Strategy and Development Group,
which is responsible for overseeing Ayala’s portfolio strategy and new business development, from
January 2009 to September 2014. Prior to joining Ayala, Mr. Francia was a senior consultant and
member of the management team of Monitor Group, a strategy consulting firm based in Cambridge,
Massachusetts, USA. Prior to consulting, he spent a few years in the field of academe and media. He
received his undergraduate degree in Humanities and Political Economy from the University of Asia &
the Pacific, graduating magna cum laude. He then completed his Master’s Degree in Management
Studies at the University of Cambridge in the UK, graduating with First Class Honors.

Delfin C. Gonzalez, Jr., Filipino, 65, is the Chief Finance Officer of Ayala Corporation and is also a
member of the Ayala Corporation Management Committee, and the Ayala Group Management
Committee since April 2010. He joined Ayala Corporation in late 2000, assigned as Chief Finance
Officer for its subsidiary, Globe Telecom, Inc. until early 2010. He is a director of Integrated Micro-
Electronic, Inc, a publicly listed company. He also holds the following positions in various companies of
the Ayala Group: Chairman of Darong Agricultural Development Corporation, AC Infrastructure
Holdings Corporation and AYC Finance Ltd.; President and Director of Ayala DBS Holdings Inc.; and
Director of AC International Finance, Ltd., Asiacom Philippines, Inc., AC Energy Holdings, Inc., LiveIt
Investments, Ltd., Ayala Aviation Corporation, AYC Holdings Ltd., Michigan Holdings, Inc., Azalea
International Venture Partners Ltd., Philwater Holdings Company, and various Ayala international
companies. He graduated Magna Cum Laude in Bachelor of Science in Chemical Engineering from
De La Salle College in 1971 and took his Master’s Degree in Business Administration from Harvard
Business School in 1975.

Solomon M. Hermosura, Filipino, 52, has served as Managing Director of Ayala Corporation since
1999 and a member of the Ayala Corporation Management Committee since 2009 and the Ayala Group
Management Committee since 2010. He is also the Group Head of Corporate Governance, General
Counsel, Compliance Officer, and Corporate Secretary of Ayala Corporation. He is the CEO of Ayala
Group Legal. He serves as General Counsel and Corporate Secretary of Ayala Land, Inc., and
Corporate Secretary of Globe Telecom, Inc., Manila Water Company, Inc., Integrated Micro-Electronics,
Inc. and Ayala Foundation, Inc.; and a member of the Board of Directors of a number of companies in
the Ayala group. He graduated valedictorian with Bachelor of Laws degree from San Beda College in
1986 and placed third in the 1986 Bar Examination.

Jose Teodoro K. Limcaoco, Filipino, 52, was appointed Chief Finance Officer and Finance Group
Head of Ayala Corporation effective April 10, 2015. He is currently the President of BPI Family Savings
129
Bank. His prior assignments within the Ayala Group include President of BPI Capital Corporation from
2007 to 2010. He was Officer-in-Charge for Ayala Life Assurance, Inc. and Ayala Plans, Inc., Trustee
and Treasurer of Ayala Foundation, Inc., President of myAyala.com, and CFO of Azalea Technology
Investments, Inc. He graduated with a degree in BS Mathematical Sciences in Standford University in
1984 and took his Master’s Degree in Finance from Wharton School University in 1988.

Ruel T. Maranan, Filipino, 52, is a Managing Director of Ayala Corporation effective January 1, 2015.
He was the Group Director of Manila Water Company, Inc. (MWC)’s Corporate Human Resources
Group from 2004 to 2014. Before joining MWC, he was part of various organizations such as Globe
Telecom, Inc., Vitarich Corporation, and Integrated Farm Management, among others. In MWC, Mr.
Maranan introduced numerous innovations in human resources management, rallying behind the
company’s being the first Filipino company to win the prestigious Asian Human Capital Award in 2011,
an award sponsored by the Singapore Ministry of Manpower, CNBC Asia-Pacific, and INSEAD.
Through his leadership in human resources, MWC was vested the 2006 Outstanding Employer of the
Year by the People Management Association of the Philippines. Mr. Maranan earned his AB Social
Sciences degree from the Ateneo de Manila University and his law degree from the University of Santo
Tomas. He has also completed the Harvard Leadership Management Program.

John Philip S. Orbeta, Filipino, 53, has served as a member of the Ayala Corporation Management
Committee since May 2005 and the Ayala Group Management Committee since April 2009. He is
currently the Managing Director and Group Head for Corporate Resources, covering Strategic Human
Resources, Corporate Communications and Information & Communications Technology at Ayala
Corporation. He is the President and CEO of Ayala Automotive Holdings, Corporation and Automobile
Central Enterprise, Inc. (Philippine importer of Volkswagen). He is Chairman and CEO of Honda Cars
Makati, Inc., Isuzu Automotive Dealership, Inc., and Iconic Dealership, Inc.; Chairman of Ayala Aviation
Corporation and HRMall, Inc./IQBack Office. He also serves as a Director of AG Counselors
Corporation, BPI Family Bank, Inc. and ALFM Growth Fund, Inc. He is concurrently the Chairman of
the following councils at the Ayala Group: Human Resources Council, Corporate Security Council, and
the Ayala Business Clubs and is the Program Director of the Ayala Young Leaders Congress. Prior to
joining Ayala Corporation, he was the Vice President and Global Practice Director of the Human Capital
Consulting Group at Watson Wyatt Worldwide (now Towers Watson), overseeing the firm's practices in
executive compensation, strategic rewards, data services and organization effectiveness around the
world. He was also a member of Watson Wyatt's Board of Directors. He graduated with a degree in
A.B. Economics from the Ateneo de Manila University in 1982.

Paolo Maximo F. Borromeo, Filipino, 37, has served as Group Head of Corporate Strategy and
Development of the Company since September 2014 and has since then been a member of the Ayala
Corporation Management Committee and the Ayala Group Management Committee. He oversees the
overall portfolio strategy and corporate planning process, group-wide innovation projects and new
business development initiatives, and investor relations. He sits on the board of PhilNew Energy, Inc.
Viage Corporation, Moorland Philippines Holdings, Inc., Presage Corporation, Affordable Private
Education Center, Inc., AC College of Enterprise and Technology, Inc., LiveIt Global Services
Management, Inc., LiveIt Investments, Ltd. and LINC Institute, Inc. Prior to joining Ayala, he was a
Principal at Booz & Company, a global strategy consulting firm, based in San Francisco, California,
USA. He obtained his Bachelors of Science degree in Management Engineering from the Ateneo de
Manila University and his Masters in Business Administration with honors from the Wharton School at
the University of Pennsylvania.

Ma. Cecilia T. Cruzabra, Filipino, 49, has served as Treasurer of Ayala Corporation since January 1,
2014. Currently, she also holds the following positions: President/Director of AYC Finance Limited;
Director and Treasurer of Technopark Land, Inc. and AC Infrastructure Holdings Corp.,
respectively; Treasurer of ACST Business Holdings, Inc., Asiacom Philippines, Inc., Ayala Foundation,
Inc., Azalea International Venture Partners Ltd., Azalea Technology Investments, Inc., Lagdigan Land
Corporation and Purefoods International Limited; Director of AYC Finance Limited, AYC Holdings
Limited, Bayan Telecommunications, Inc., Michigan Holdings, Inc. and Workplace Asia Solutions. She
is also an Adjunct Faculty at the Asian Institute of Management. Prior to joining Ayala, she was the
Director/Treasurer of Halo Holdings and the Subsidiaries and the Corporate Finance Head of ALC Explo
and General Services, Inc. and the Chairman of the Board and President of Altimax Broadcasting Co.,
a subsidiary of Halo Holdings. She also served as the Treasury and Enterprise-Wide Risk Management
Head of Globe Telecom, Inc. from 1997 to 2006. She earned a degree in Bachelor of Arts in Economics
from Ateneo de Manila University in 1986 and took her Masters in Business Management at the Asian
Institute of Management in 1990.

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Josephine G. De Asis, Filipino, 43, has been the Controller of Ayala Corporation since August 2012.
Currently, she also holds the following positions: Chairwoman of PPI Prime Ventures, Inc., Director and
Chief Finance Officer of Azalea International Venture Partners Ltd., Azalea Technology Investments,
Inc. and Pameka Holdings, Inc., Director of Darong Agricultural & Development Corporation,
Technopark Land, Inc., and Water Capital Works, Inc.,; Chief Finance Officer of AG Counselors
Corporation and Michigan Holdings, Inc.; and Audit and Risk Committee Member of AC Energy
Holdings, Inc.. Prior to joining Ayala Corporation, she served as the Head of Financial Control Division
of Globe Telecom, Inc. from 2010 to 2012 and Controller of the Wireless Business of Globe Telecom,
Inc. from 2005-2010. She is a Certified Public Accountant. She graduated with a degree in BS
Accountancy (summa cum laude) from Polytechnic University of the Philippines in 1991 and attended
an Executive Management Program of the University of California Los Angeles in 2004-2005.

June Vee D. Monteclaro-Navarro, Filipino, 43, is the Assistant Corporate Secretary of Ayala
Corporation since April 11, 2014. She is a Director of Ayala Group Legal. Currently, she holds the
position of Corporate Secretary of Cebu Holdings, Inc., Cebu Property Ventures Development
Corporation, Aurora Properties, Inc., Vesta Property Holdings, Inc., Ceci Realty, Inc., Buendia
Landholdings, Inc., Avida Land Corporation, Avida Sales Corp., Avencosouth Corp., Alveo Land
Corporation, HLC Development Corporation, OLC Development Corporation, Solerte Corp., Laguna
Phenix Structures, Inc., Alabang Commercial Corporation, Leisure and Allied Industries Phils., Inc.,
North Triangle Depot Commercial Corporation, Food Court Company, Inc., Asterion Technopod
Incorporated; and Assistant Corporate Secretary and Deputy General Counsel of Ayala Land, Inc. She
earned a Bachelor of Laws degree from the University of the Philippines in 1997.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements


The above named executive officers are covered by letters of appointment stating their respective job
functionalities, among others.

Significant Employees
The Company considers its human resources working as a team as a key element for its continued
success. But the Company has no employee who is not an executive officer and who is expected to
make individually on his own a significant contribution to the business.

Family Relationships
Jaime Augusto Zobel de Ayala, Chairman/Chief Executive Officer, and Fernando Zobel de Ayala,
President/Chief Operating Officer, are brothers.

There are no known family relationships between the current members of the Board and key officers
other than the above.

Ownership Structure and Parent Company


As of January 31, 2015, Mermac, Inc. owns 56.53% of the outstanding voting shares of the Company.

Involvement in Certain Legal Proceedings


Please refer to Part I - Item 3. Legal Proceedings.

Resignation of Directors/Management Committee members/Key Officers


To date, no director has resigned from, or declined to stand for re-election to the Board since the date
of the 2014 annual meeting of stockholders due to any disagreement with the Company relative to its
operations, policies and practices.

Item 10. Executive Compensation

Name and Principal Position Year Salary Bonus Other Annual


Compensation
Jaime Augusto Zobel de Ayala
Chairman & CEO

Fernando Zobel de Ayala


President & Chief Operating Officer

John Eric T. Francia


Managing Director

Delfin C. Gonzalez, Jr.


Managing Director & Chief Finance
Officer
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Solomon M. Hermosura
Managing Director, General Counsel,
Corporate Secretary & Compliance
Officer

John Philip S. Orbeta


Managing Director

CEO & Most Highly Compensated Actual 2013 P199M P131M P0


Executive Officers Actual 2014 P215M P175M P0
Projected 2015 P234M P127M P0
All other officers** as a group Actual 2013 P409M P226M P0
unnamed Actual 2014 P465M P313M P0
Projected 2015 P480M P260M P0
**Managers and up (including all above-named officers).

The total annual compensation consists of basic pay and other taxable income (guaranteed bonus and
performance-based bonus).

The Company has no other arrangement with regard to the remuneration of its existing directors and
officers aside from the compensation received as herein stated.

Warrants and options outstanding; repricing

i. Since 1995, the Company has offered its officers options to acquire common shares under its
executive stock option plan (ESOP). Of the above named officers, there were options covering
187,629 shares exercised in 2014 by the following officers, to wit:

Name No. of Shares Date of Exercise Price Market Price at


Grant Date of Grant

John Eric T. Francia Various Various Various


Fernando Zobel de Ayala Various Various Various
Jaime Augusto Zobel de Ayala Various Various Various
All above-named Officers as a group 187,629 358.44 492.04*
All officers ** and Directors as a Group 666,299** 188.02* 236.91*
* Average prices.
** Managers and up including the above-named officers.

ii. The Company has adjusted the exercise price and market price of the options awarded to the above
named officers due to the stock dividend declared by the Company in May 2004, June 2007, May
2008 and July 2011 and to the reverse stock split in May 2005.

Compensation of Directors
Article IV, Section 20, of the By-Laws provides:

Section 20 - Each director shall be entitled to receive from the Corporation, pursuant to a resolution of
the Board of Directors, fees and other compensation for his services as director. The Board of Directors
shall have the sole authority to determine the amount, form and structure of the fees and other
compensation of the directors. In no case shall the total yearly compensation of directors exceed one
percent (1%) of the net income before income tax of the Corporation during the preceding year.

The compensation and remuneration committee of the Board of Directors shall have the responsibility
of recommending to the Board of Directors the fees and other compensation for directors. In discharging
this duty, the committee shall be guided by the objective of ensuring that the level of compensation
should fairly pay directors for work required in a company of the Corporation’s size and scope. (As
amended on 18 April 2011)

i. Standard arrangement
During the 2011 annual stockholders’ meeting, the stockholders approved a resolution fixing the
current remuneration of non-executive directors as follows:

Retainer Fee: P 1,200,000.00


Board Meeting Fee per meeting attended: P 200,000.00
Audit Committee Meeting Fee per meeting attended: P 100,000.00
Other Committee Meeting Fee per meeting attended: P 50,000.00

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Directors who hold executive or management positions do not receive directors’ fees. The
compensation of executive directors is included in the compensation table in Item 10 above.

ii. Other arrangement


None of the directors who are paid fees as set forth above (Standard arrangement) is contracted
and compensated by the Company for services other than those provided as a director.

The Company has no other arrangement with regard to the remuneration of its existing directors
and officers aside from the compensation received as herein stated.

The Company’s Personnel and Compensation Committee is chaired by Mr. del Rosario, an independent
director, with Messrs. Lazaro and Amano as members.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Security ownership of certain record and beneficial owners (of more than 5%) as of January 31, 2015.

Title of Name and address of record owner Name of beneficial Citizenship No. of Percent of
class and relationship with Issuer owner and shares held outstanding
of voting relationship with voting
shares record owner shares
Common Mermac, Inc.3 Mermac, Inc.4 Filipino 303,689,196 37.0604%
Voting 3/F Makati Stock Exchange Building, 159,577,460 19.4739%
Preferred Ayala Triangle,
Ayala Avenue, Makati City
Stockholder
Common PCD Nominee Corporation PCD participants Various 160,446,419 19.5799%
(Non-Filipino)5 acting for
G/F MSE Bldg. themselves or for
Ayala Ave., Makati City their customers6
Common Mitsubishi Corporation7 Mitsubishi Japanese 63,077,540 7.6976%
Voting 3-1, Marunouchi 2- Chome, Chiyoda- Corporation8 32,640,492 3.9832%
Preferred ku, Tokyo 100-8086
Common PCD Nominee Corporation PCD participants Filipino 56,357,357 6.8775%
(Filipino)3 acting for
G/F MSE Bldg. themselves or for
Ayala Ave., Makati City their customers4

3
The Co-Vice Chairmen of Mermac, Inc. (“Mermac”), Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the
Chairman/CEO and President/COO of the Company, respectively. Mr. Jaime Augusto Zobel de Ayala has been named and
appointed to exercise the voting power.
4
The Board of Directors of Mermac has the power to decide how Mermac shares in Ayala are to be voted.
5
PCD is not related to the Company.
6
Each beneficial owner of shares through a PCD participant is the beneficial owner to the extent of the number of shares in his
account with the PCD participant. Out of the 216,803,776 common shares registered in the name of PCD Nominee
Corporation, 69,260,437 (8.4521% of the voting stock) and 54,113,298 (6.6036% of the voting stock) are for the accounts of
Deutsche Bank Manila (DB) and The Hongkong and Shanghai Banking Corporation (HSBC), respectively. The Company has
no record relating to the power to decide how the shares held by PCD are to be voted. As advised to the Company, none of DB
and HSBC or any of their customers beneficially owns more than 5% of the Company’s common shares.
7
Mitsubishi Corporation (“Mitsubishi”) is not related to the Company.
8
The Board of Directors of Mitsubishi has the power to decide how Mitsubishi’s shares in Ayala are to be voted. Mr. Yoshio
Amano has been named and appointed to exercise the voting power.
133
Security ownership of directors and management as of January 31, 2015.

Title of class of Name of beneficial owner Amount and nature of beneficial Citizenship Percent of
voting shares ownership total
outstanding
shares
Directors
Common 177,896 (direct & indirect) 0.0205%
Preferred B 20,000 (indirect) 0.0023%
Jaime Augusto Zobel de Ayala Filipino
Voting 543,802 (direct)
Preferred 0.0628%
Common 177,896 (direct & indirect) 0.0205%
Voting Fernando Zobel de Ayala 554,983 (direct) Filipino
Preferred 0.0641%
Common 181,119 (direct & indirect) 0.0209%
Voting Delfin L. Lazaro 258,297 (direct) Filipino
Preferred 0.0298%
Common Yoshio Amano 1 (direct) Japanese 0.0000%
Common 126,614 (direct) 0.0146%
Voting Xavier P. Loinaz 65,517 (direct) Filipino
Preferred 0.0076%
Common Antonio Jose U. Periquet 1,200 (direct) Filipino 0.0001%
Common Ramon R. Del Rosario, Jr. 1 (direct) Filipino
0.0000%
CEO and most highly compensated officers
Common 177,896 (direct & indirect) 0.0205%
Preferred B 20,000 (indirect) 0.0023%
Jaime Augusto Zobel de Ayala Filipino
Voting 543,802 (direct)
Preferred 0.0628%
Common 177,896 (direct & indirect) 0.0205%
Voting Fernando Zobel de Ayala 554,983 (direct) Filipino
Preferred 0.0641%
Common John Eric T. Francia 93,526 (direct & indirect) Filipino 0.0108%
Common Delfin C. Gonzalez, Jr.* 135,891 (direct & indirect) Filipino 0.0157%
Common 93,392 (indirect) 0.0108%
Voting Solomon M. Hermosura 53,583 (direct) Filipino
Preferred 0.0062%
Common John Philip S. Orbeta 436,147 (indirect) Filipino 0.0503%
Other executive officers (Ayala group ManCom members/Senior Leadership Team)
Common Gerardo C. Ablaza, Jr. 531,833 (direct & indirect) Filipino 0.0614%
Common Cezar P. Consing 18,594 (indirect) Filipino 0.0021%
Common Arthur R. Tan 276,460 (direct & indirect) Filipino 0.0319%
Common Ernest Lawrence L. Cu 41,485 (indirect) Filipino 0.0048%
Common Bernard Vincent O. Dy 0 Filipino 0.0000%
Common Alfredo I. Ayala 141,025 (direct & indirect) Filipino 0.0163%
Common Maria Lourdes Heras-De Leon** 7,609 (indirect) Filipino 0.0009%
Common Jose Teodoro K. Limcaoco* 135,007 (indirect) Filipino 0.0156%
Common Ruel T. Maranan*** 0 Filipino 0.0000%
Common Paolo Maximo F. Borromeo 12,189 (indirect) Filipino 0.0014%
Common Ma. Cecilia T. Cruzabra 5,344 (direct & indirect) Filipino 0.0006%
Common Josephine G. De Asis 1,000 (indirect) Filipino 0.0001%
Common June Vee D. Monteclaro-Navarro 0 Filipino 0.0000%
All Directors and Officers as a group 4,645,394 0.5361%
*Mr. Limcaoco was appointed Chief Finance Officer and Finance Group Head effective April 10, 2015 replacing Mr. Gonzalez.
** Retired effective December 31, 2014.
***Managing Director effective January 1, 2015

None of the Company’s directors and officers owns 2.0% or more of the outstanding capital stock of the
Company.

The Company knows of no person holding more than 5% of common shares under a voting trust or
similar agreement.

No change of control in the Company has occurred since the beginning of its last fiscal year.

134
Item 12. Certain Relationships and Related Transactions

The Company, in the regular conduct of business, has entered into transactions with associates, joint
ventures and other related parties principally consisting of advances, loans and reimbursement of
expenses, purchase and sale of real estate properties, various guarantees, construction contracts, and
development, management, underwriting, marketing and administrative service agreements. Sales and
purchases of goods and services to and from related parties are made at normal commercial prices and
terms.

There has not been any material transaction during the last two years, or proposed transaction, to which
the Company was or is to be a party, in which any of its directors or executive officers, any nominee for
election as a director or any security holder had or is to have a direct or indirect material interest.

To date, there are no complaints received by the Company regarding related-party transactions.

For detailed discussion on related party transactions, please refer to Note 31 of the Consolidated
Financial Statements for December 31, 2014 which forms part of the Annex of this SEC17A report.

Transactions with Promoters

There are no transactions with promoters within the past five (5) years.

Awards and Recognitions

Ayala’s corporate governance practices have been consistently cited in various polls and publications
locally and in the region. Poll results published by Asiamoney ranked Ayala among the best in the
Philippines for Corporate Governance, Disclosure and Transparency, Responsibilities of the
Management and the Board of Directors, and Corporate Social Responsibility. Ayala was ranked first
in Corporate Governance in the country by FinanceAsia and Alpha Southeast Asia in 2014.

In 2014, the Institute of Corporate Directors recognized Ayala as Governance Ambassador for its role
in raising the standard of governance in the private sector through continuing education. With Ayala’s
support, ICD’s Distinguished Corporate Governance Speaker Series brought the world’s thought
leaders and practitioners of good governance to the Philippines to share their insight and experience
with board directors, compliance officers, and the public.

Ayala continued to figure prominently in polls of regional publications in the areas of company
management, corporate governance, corporate social responsibility, and investor relations. Ayala’s
$300 million bond exchangeable into Ayala Land shares was also named by FinanceAsia as the Best
Philippines Deal for 2014. f

Jaime Augusto Zobel de Ayala received the Ramon V. del Rosario Sr. Award for Nation Building. Ayala’s
Delfin C. Gonzalez Jr. and Ayala Land’s Jaime E. Ysmael were among the country’s Best CFOs,
according to CorporateGovernanceAsia and FinanceAsia, respectively. Solomon M. Hermosura was
one of the recipients of the 2nd Asian Company Secretary of the Year Award, also given by
CorporateGovernanceAsia.

On its 180th year, Ayala won the 19th IMD-Lombard Odier Global Family Business Award, regarded as
the most prestigious international recognition for successful family businesses. The award recognizes
firms that unite family interests with those of the business, and combine tradition and innovation while
demonstrating a clear commitment to their local community.

Website

Information on the company’s corporate governance initiatives is available at www.ayala.com.ph. As


part of our stakeholder engagement, Ayala also maintains social media accounts at
Facebook.com/AyalaCorporation and Twitter @Ayala_1834. On the occasion of Ayala’s 180th
anniversary, iPad apps were developed: the 2012 and 2013 Annual Reports and the special publication
Inside Ayala.

135
Other Information

The other major information about the Group are disclosed in appropriate notes in the accompanying
audited Consolidated Financial Statements for December 31, 2014 or discussed in previously filed
SEC17Q and SEC17-C reports for 2014 (listed in the Exhibits and Schedules Reports on SEC Form
17-C also in Annex of this SEC17A report).

In addition, the Group has the following other major information:

Parent Company

a. On November 13, 2014 press statement, AC announced that the Company’s consolidated net
income during the first 9 months of the year expanded by 35% to a total of P14.1 billion.

b. On November 18, 2014, AC clarified the news article titled “Ayala sees 2014 profit growing 25-
30%”, posted on The Manila Times (Internet Edition) on November 17, 2014. AC clarified that the
25-30% net income growth mentioned in the news article pertains to the Company’s year-on-year
target for 2014 and does not serve as profit guidance. Further, the projections of P19 billion and
P16-16.5 billion on Ayala’s 2014 core net income and net income, respectively were not made by
the Company.

On the funding of power projects, AC clarified that the Company is allocating US$300 million to
finance 90% of the equity requirement of its investee companies that will build the 600-megawatt
GNPower Kauswagan in Lanao Del Norte and another US$300 million to fund 50% of the equity
requirement for the 1,320-megawatt expansion of GNPower in Bataan.
In addition, AC clarifed that each of these investee companies will be raising project finance at their
level amounting to about US$600 million and US$1 billion for the Lanao Del Norte and Bataan
plants, respectively. These amounts will be drawn by the investee companies over a three to four-
year period.

Since the debt and project finance will not be raised at the AC parent level, these do not entail any
recourse to the Company.

c. On November 26, 2014, further to the disclosure on the top-up placement covering 18,779,100
common shares, AC advised that the number of issued and outstanding common shares as of
November 25, 2014 is 619,436,152 (inclusive of 28642 shares covering the exercise of stock
options).

d. The proceeds from the Company's re-issuance of Preferred B shares were used as follows: the
P13.5 billion offering proceeds was reduced by P76.2 million offering-related expenses to arrive at
net proceeds of P13.4 billion; out of which an P8.0 billion was used to pre-terminate other existing
long term debt of the Company

e. In April 2015, ALI, through its wholly-owned subsidiary, Regent Wise Investments Limited, has
acquired 9.16% of the shares of Malaysian company GW Plastics Holdings Bhd., to be renamed
Modular Construction Technology (MCT) Bhd., through a private placement for a total amount of
US$43 million (P1.9 billion). MCT Bhd., first established in 1999 as a construction company, is a
property development company specializing in mixed-use projects which include retail, offices,
hotels, and mid-to-affordable residences.

Events after the Reporting Period


For detailed discussion, please refer to Note 41 of the Consolidated Financial Statements for December
31, 2014 which forms part of the Annex of this SEC17A report.

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PART IV – CORPORATE GOVERNANCE

Item 13. Corporate Governance

Please refer to the Annual Corporate Governance Report which forms part of the Annex of this SEC17A
Report and as posted in the Company’s Official Website www.ayala.com.ph. The detailed discussion
of this Section deleted as per SEC Memorandum Circular No. 5, series of 2013, issued last March 20,
2013.

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PART V - EXHIBITS AND SCHEDULES

Item 14. Exhibits and Reports on SEC Form 17-C (Current Report)

(a) Exhibits - See accompanying Index to Financial Statements and Supplementary Schedules

(b) Reports on SEC Form 17-C

Aside from compliance with periodic reporting requirements, Ayala promptly discloses major and
market sensitive information such as dividend declarations, joint ventures and acquisitions, the sale
and disposition of significant assets, and other information that may affect the decision of the investing
public.

In 2014 the Company filed, among others, unstructured disclosures involving the following:
1. Sale by LiveIt Investments Ltd. of its 29% ownership in Stream Global Services, Inc. to Convergys
Corporation
2. Closing of the acquisition of Stream Global Services, Inc. by Convergys Corporation
3. Record of attendance of directors in meetings of the Board of Directors in 2013 and 2014
4. Notice and agenda of the 2014 Annual Stockholders’ Meeting
5. Results of the Annual Stockholders’ Meeting and organizational Board of Directors’ meeting and
the capital expenditures in 2014
6. Notices of Analysts’ Briefing
7. Copy of the certificate of attendance of the Board of Directors and officers in the Corporate
Governance Summit
8. Updates and changes made in the Annual Corporate Governance Report (ACGR)
9. Board approval of the amendment of the Third Article of the Articles of Incorporation and Section
2, Article III of the By-laws
10. Approval of the final terms of the USD300,000,000 exchangeable bonds to be issued by AYC
Finance Limited
11. Completion of the issuance of USD300M 0.5% guaranteed exchangeable bonds of AYC Finance
Limited and its listing with the Singapore Exchange
12. Certifications of the Independent Directors
13. 2014 ESOWN grants
14. Board approval of the creation of a Risk Management Committee
15. Submission of the Revised Corporate Governance Manual
16. Re-issuance and Offering of up to 30M Preferred B Shares
17. SEC Approval of the amended Articles of Incorporation and By-Laws of the Company
18. Appointment of members of the Risk Management Committee
19. Appointment of new Head of the Corporate Strategy and Development Group
20. Appointment of New Chief Finance Officer and Finance Group Head
21. New IR Officer
22. SEC Approval of the Preferred B Series 2 (ACPB2) Shares Re-issuance
23. ACPB2 Dividend Rate
24. ACPB2 Terms and Condition and Implementing Guidelines
25. Preferred B Trading Symbols
26. Results of the ACPB2 Offer
27. Change in the Issued and Outstanding Shares of Company due to ACPB2 Issuance and Top-up
Placement Transaction
28. Use of Proceeds Generated from ACPB2 Offer
29. Placement of and Subscription to 18,779,100 AC Common shares by Mermac, Inc.
30. Press Statement on the Top up Placement Transaction
31. Setting of 2015 Annual Stockholders’ Meeting
32. Board Approval on the Amendments to By-Laws
33. Declaration of cash dividends on all outstanding common and preferred shares
34. Dividend rate re-pricing on the voting preferred shares
35. Notices of interest payments for all outstanding corporate bonds
36. Various transactions of Ayala’s 100%-owned subsidiary, AC Energy Holdings, Inc. (ACEHI):
a. Acquisition of a wholly owned subsidiary of approximately 17% ownership stake in GNPower
Mariveles Coal Plant, Ltd. Co.
b. Signing by GNPower Kauswagan Ltd. Co., the joint venture company between AC Energy
Holdings, Inc. and Power Partners Ltd. Co., of the engineering, procurement and construction
contract for 552MW thermal plant in Mindanao

138
37. Various transactions of Ayala’s 100%-owned subsidiary, AC Infrastructure Holdings Corporation
(AC Infra):
a. Receipt of AF Consortium of the Notice of Award to design and construct the Php1.72B
Automatic Fare Collection System (AFCS) Project
b. Signing by AF Consortium of a ten-year concession agreement to build and implement the
new AFCS project
c. Submission of bid for the LRT1 Cavite Extension Project by Light Rail Manila Consortium,
consisting of AC Infrastructure Holdings Corporation, Metro Pacific Light Rail Corporation,
and Macquarie Infrastructure Holdings (Philippines) Pte. Limited
d. Submission of bid documents by AC Infrastructure Holdings Corporation to the Department of
Public Works and Highways for the bidding of the Cavite-Laguna Expressway (CALAX)
Project
e. Submission by Team Orion Consortium of a Motion to Intervene to the Office of the President
of the Republic of the Philippines
f. Public Announcement of Team Orion Consortium on the filing with the Office of the President
of a comment on the Memorandum of Appeal put forward by Optimal Infrastructure
Development, Inc. (Optimal) for the bidding of CALAX Project
g. Copy of Team Orion’s comment on Optimal’s Memorandum of Appeal filed with the Office of
the President in relation to Optimal’s disqualification from the bidding of the CALAX Project
h. Filing by Team Orion of a Motion to Urge the President to Settle CALAX Stalemate
i. Awarding by DOTC of the LRT1 Project to Light Rail Manila Consortium
j. Signing of Concession Agreement for LRT 1 Cavite Extension Project

38. News Clarifications on:


a. Ayala targets transpo hub south of metro
b. Likely Naga complex bidders named
c. Metro Pacific-led consortium picked for P65B CAVEX Project
d. Submission of bids for Php2.5B Integrated Transport System Southwest Terminal
e. Ayala and Metro Pacific’s interest in the operation and maintenance contract of LRT-2
f. Ayala’s allocation of P4B to debt-servicing funds
g. 25% to 30% growth in 2014 profit

139
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES

I. 2014 Consolidated Financial Statements of Registrant

1. Statement of Management’s Responsibility for Financial Statements


2. Ayala Corporation and Subsidiaries Consolidated Financial Statements
As of December 31, 2014 and 2013 and Years Ended December 31, 2014, 2013 and 2012 and
Independent Auditors’ Report

II. 2014 Supplementary Schedules

1. Independent Auditors’ Opinion on Supplementary Schedules


2. Supplementary Schedules Details
A. Financial Assets (Current Marketable Equity Securities and Other Short-Term Cash
Investments)
B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal
Stockholders (Other than Related Parties)
C.1. Amounts Receivable from Related Parties which are Eliminated during the Consolidation
of Financial Statements
C.2. Amounts Payable to Related Parties which are Eliminated during the Consolidation of
Financial Statements
D. Intangible Assets and Other Assets (Deferred Charges)
E. Long-term Debt
F. Indebtedness to Related Parties (Long-term Loans from Related Parties)
G. Guarantees of Securities of Other Issuers
H. Capital Stock
I. Reconciliation of Retained Earnings Available for Dividend Declaration
J. Map of the Relationships of the Companies within the Group
K. Schedule of All the Effective Standards and Interpretations as of December 31, 2014
L. Financial Ratios
M. Non-Current Marketable Equity Securities, Other Long-term Investment in Stocks and
Other Investments (Non-Current Investments)
N. Indebtedness of Unconsolidated Subsidiaries and Related parties

III. 2014 Consolidated Financial Statements of Associate and Joint Venture

1. Bank of the Philippine Islands and Subsidiaries


2. Globe Telecom, Inc. and Subsidiaries

IV. 2014 Annual Corporate Governance Report

V. 2014 Original BIR/Bank Stamp “Received”:

1. Independent Auditors’ Report on Ayala Corporation (Parent Company) Financial Statements


2. Parent Company Statements of Financial Position as at December 31, 2014 and 2013
3. Parent Company Statements of Income, Comprehensive Income, Changes in Equity and Cash
Flows for the Years Ended December 31, 2014 and 2013

VI. 2014 Ayala Corporation and Subsidiaries Special Form for Financial Statements (SFFS)

1. SFFS Certification by CFO and Comptroller


2. Diskette form (soft copy) of SFFS
3. Printed copy of SFFS

141
I. 2014 Consolidated Financial Statements of Registrant

142
Ayala Corporation and Subsidiaries

Consolidated Financial Statements


December 31, 2014 and 2013
And Years Ended December 31, 2014, 2013 and 2012

and

Independent Auditors’ Report


SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001,
6760 Ayala Avenue Fax: (632) 819 0872 December 28, 2012, valid until December 31, 2015
1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-3 (Group A),
Philippines November 15, 2012, valid until November 16, 2015

INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors


Ayala Corporation

We have audited the accompanying consolidated financial statements of Ayala Corporation and its
subsidiaries, which comprise the consolidated statements of financial position as at December 31,
2014 and 2013, and the consolidated statements of income, statements of comprehensive income,
statements of changes in equity and statements of cash flows for each of the three years in the period
ended December 31, 2014, and a summary of significant accounting policies and other explanatory
information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to
the entity’s preparation and fair presentation of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.

*SGVFS011298*
A member firm of Ernst & Young Global Limited
-2-

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Ayala Corporation and its subsidiaries as at December 31, 2014 and 2013, and their
financial performance and their cash flows for each of the three years in the period ended
December 31, 2014 in accordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Jessie D. Cabaluna
Partner
CPA Certificate No. 36317
SEC Accreditation No. 0069-AR-3 (Group A),
February 14, 2013, valid until February 13, 2016
Tax Identification No. 102-082-365
BIR Accreditation No. 08-001998-10-2012,
April 11, 2012, valid until April 10, 2015
PTR No. 4751262, January 5, 2015, Makati City

March 10, 2015

*SGVFS011298*
A member firm of Ernst & Young Global Limited
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)

December 31
2014 2013
ASSETS
Current Assets
Cash and cash equivalents (Notes 5, 31, 32 and 33) P
= 90,769,525 P
= 65,655,049
Short-term investments (Notes 6, 31, 32 and 33) 1,102,703 119,345
Accounts and notes receivable (Notes 7, 31, 32 and 33) 72,710,512 56,341,044
Inventories (Note 8) 54,962,164 50,178,486
Other current assets (Notes 9 and 32) 35,156,558 39,194,020
Total Current Assets 254,701,462 211,487,944
Noncurrent asset held for sale (Notes 12 and 33) − 3,328,712
254,701,462 214,816,656
Noncurrent Assets
Noncurrent accounts and notes receivable (Notes 7, 32 and 33) 32,006,450 18,282,941
Investments in bonds and other securities
(Notes 10, 31, 32 and 33) 3,432,215 2,784,807
Land and improvements (Note 11) 79,959,887 62,474,802
Investments in associates and joint ventures (Note 12) 152,764,854 119,804,086
Investment properties (Note 13) 71,324,245 63,157,223
Property, plant and equipment (Note 14) 27,953,145 25,883,469
Service concession assets (Note 15) 74,836,633 73,754,407
Intangible assets (Note 16) 4,183,464 4,175,846
Deferred tax assets - net (Note 25) 8,055,020 6,513,585
Pension and other noncurrent assets (Note 17) 16,830,401 8,016,478
Total Noncurrent Assets 471,346,314 384,847,644
Total Assets P
= 726,047,776 P
= 599,664,300

LIABILITIES AND EQUITY


Current Liabilities
Accounts payable and accrued expenses
(Notes 18, 31, 32 and 33) P
= 126,101,836 P
= 103,604,247
Short-term debt (Notes 20, 31, 32 and 33) 21,084,269 15,811,285
Income tax payable 1,340,269 1,667,543
Current portion of:
Long-term debt (Notes 20, 31, 32 and 33) 10,761,443 11,842,519
Service concession obligation (Notes 15, 32 and 33) 1,019,515 1,290,406
Other current liabilities (Notes 19, 32 and 33) 9,452,281 10,991,693
Total Current Liabilities 169,759,613 145,207,693

(Forward)

*SGVFS011298*
-2-

December 31
2014 2013
Noncurrent Liabilities
Long-term debt - net of current portion
(Notes 20, 31, 32 and 33) P
= 226,999,015 P
= 178,027,343
Service concession obligation - net of current portion
(Notes 15, 32 and 33) 7,859,153 7,868,295
Deferred tax liabilities - net (Note 25) 6,742,633 6,347,400
Pension liabilities (Note 27) 2,179,966 1,915,040
Other noncurrent liabilities (Notes 21, 32 and 33) 25,640,911 24,827,938
Total Noncurrent Liabilities 269,421,678 218,986,016
Total Liabilities 439,181,291 364,193,709
Equity
Equity attributable to owners of the parent
Paid-in capital (Note 22) 73,571,505 50,166,129
Share-based payments (Note 28) 377,376 485,187
Remeasurement gains/(losses) on defined benefit plans
(Note 27) (1,005,572) (1,317,954)
Net unrealized gain (loss) on available-for-sale
financial assets (Note 10) (7,211) 277,848
Cumulative translation adjustments (603,765) (1,256,831)
Equity reserve (Note 2) 7,478,259 7,482,121
Equity conversion option (Note 20) 1,113,745 −
Retained earnings (Note 22) 107,039,814 92,639,781
Treasury stock (Note 22) (2,300,000) (5,000,000)
185,664,151 143,476,281
Non-controlling interests 101,202,334 91,994,310
Total Equity 286,866,485 235,470,591
Total Liabilities and Equity P
= 726,047,776 P
= 599,664,300

See accompanying Notes to Consolidated Financial Statements.

*SGVFS011298*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings Per Share Figures)

Years Ended December 31


2014 2013 2012
INCOME
Sale of goods (Note 31) P
= 105,140,825 P
= 92,725,460 P
= 69,335,195
Rendering of services (Notes 13 and 31) 51,275,623 44,216,018 40,553,713
Share of profit of associates and joint ventures 13,185,147 10,091,140 7,681,899
Interest income (Note 31) 5,493,715 3,072,071 4,353,984
Other income (Note 23) 9,180,254 9,306,855 8,645,733
184,275,564 159,411,544 130,570,524
COSTS AND EXPENSES
Costs of sales (Notes 8 and 31) 77,773,560 66,539,860 55,285,281
Costs of rendering services (Notes 23 and 31) 34,495,682 31,486,686 22,989,804
General and administrative (Notes 23, 27 and 31) 15,831,000 14,613,841 12,852,062
Interest and other financing charges (Notes 20, 23
and 31) 11,933,781 10,511,432 8,155,330
Other charges (Note 23) 3,829,020 5,480,816 6,812,352
143,863,043 128,632,635 106,094,829
INCOME BEFORE INCOME TAX 40,412,521 30,778,909 24,475,695
PROVISION FOR INCOME TAX (Note 25)
Current 7,964,375 8,036,780 5,838,415
Deferred 173,543 (1,382,570) (861,978)
8,137,918 6,654,210 4,976,437
NET INCOME P
= 32,274,603 P
= 24,124,699 P
= 19,499,258
Net Income Attributable to:
Owners of the parent (Note 26) P
= 18,609,229 P
= 12,777,932 P
= 10,504,385
Non-controlling interests 13,665,374 11,346,767 8,994,873
P
= 32,274,603 P
= 24,124,699 P
= 19,499,258
EARNINGS PER SHARE (Note 26)
Basic P
= 29.83 P
= 20.53 P
= 17.03
Diluted P
= 29.35 P
= 20.39 P
= 16.92

See accompanying Notes to Consolidated Financial Statements.

*SGVFS011298*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)

Years Ended December 31


2014 2013 2012

NET INCOME P
= 32,274,603 P
= 24,124,699 P
= 19,499,258

OTHER COMPREHENSIVE INCOME (LOSS)


Other comprehensive income that may be
reclassified to profit or loss in subsequent
periods:
Exchange differences arising from translations of
foreign investments 463,755 2,223,630 (1,137,783)
Changes in fair values of available-for-sale
financial assets (18,337) (79,486) (360,318)
Other comprehensive income not to be reclassified to
profit or loss in subsequent periods:
Remeasurement gains/(losses) on defined
benefit plans (Note 27) 304,334 (566,140) (104,709)
Tax effect relating to components of other
comprehensive income (35,348) 72,973 12,858
714,404 1,650,977 (1,589,952)

SHARE OF OTHER COMPREHENSIVE INCOME


OF ASSOCIATES AND JOINT VENTURES
Other comprehensive income that may be
reclassified to profit or loss in subsequent
periods:
Exchange differences arising from translations of
foreign investments (19,454) 112,230 (108,187)
Changes in fair values of available-for-sale
financial assets (204,190) (1,346,297) 296,879
Other comprehensive income not to be reclassified to
profit or loss in subsequent periods:
Remeasurement gains/(losses) on defined
benefit plans 87,797 (104,731) (533,205)
(135,847) (1,338,798) (344,513)

TOTAL OTHER COMPREHENSIVE


INCOME (LOSS), NET OF TAX 578,557 312,179 (1,934,465)

TOTAL COMPREHENSIVE INCOME P


= 32,853,160 P
= 24,436,878 P
= 17,564,793
Total Comprehensive Income Attributable to:
Owners of the parent P
= 19,289,618 P
= 12,863,794 P
= 9,163,498
Non-controlling interests 13,563,542 11,573,084 8,401,295
P
= 32,853,160 P
= 24,436,878 P
= 17,564,793

See accompanying Notes to Consolidated Financial Statements.

*SGVFS011298*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT


Other Comprehensive Income
Remeasurement
Gain (Losses) Net Unrealized
on Defined Gain (Loss) on
Paid-in Share-based Benefit Available-for- Cumulative Equity Equity Retained Treasury Stock (Note 22)
Capital Payments Plans Sale Financial Translation Reserve Coversion Earnings Common Preferred Non-controlling
(Note 22) (Note 28) (Note 27) Assets (Note 10) Adjustments (Note 2) Option (Note 22) Stock Stock - B Total Interests Total Equity
For the year ended December 31, 2014

As of January 1, 2014 P
= 50,166,129 P
= 485,187 (P
= 1,317,954) P
= 277,848 (P
= 1,256,831) P
= 7,482,121 =−
P P
= 92,639,781 P
=– (P
= 5,000,000) P
= 143,476,281 P
= 91,994,310 P
= 235,470,591
Net income − − − − − − − 18,609,229 − − 18,609,229 13,665,374 32,274,603
Other comprehensive income (loss) − − 312,382 (285,059) 653,066 − − − − − 680,389 (101,833) 578,556
Total comprehensive income (loss) − − 312,382 (285,059) 653,066 − − 18,609,229 − − 19,289,618 13,563,541 32,853,159
Exercise of ESOP/ESOWN 444,044 (181,961) − − − − − − − − 262,083 − 262,083
Cost of share-based payments − 74,150 − − − − − − − − 74,150 − 74,150
Sale of treasury stock 10,724,121 − − − − − − − − 2,700,000 13,424,121 − 13,424,121
Issuance of shares 12,237,211 − − − − − − − − − 12,237,211 − 12,237,211
Cash dividends − − − − − − − (4,209,196) − − (4,209,196) (4,522,813) (8,732,009)
Equity-conversion option − − − − − − 1,113,745 − − − 1,113,745 − 1,113,745
Change in non-controlling interests − − − − − (3,862) − − − − (3,862) 167,296 163,434
At December 31, 2014 P
= 73,571,505 P
= 377,376 (P
= 1,005,572) (P
= 7,211) (P
= 603,765) P
= 7,478,259 P
= 1,113,745 P
= 107,039,814 =−
P (P
= 2,300,000) P
= 185,664,151 P
= 101,202,334 P
= 286,866,485

*SGVFS011298*
-2-

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT


Other Comprehensive Income Parent
Remeasurement Company
Gain (Losses) Net Unrealized Preferred
on Defined Gain (Loss) on Shares
Paid-in Share-based Benefit Available-for- Cumulative Equity Retained Held by Treasury Stock (Note 22)
Capital Payments Plans Sale Financial Translation Reserve Earnings Subsidiaries Common Preferred Non-controlling
(Note 22) (Note 28) (Note 27) Assets (Note 10) Adjustments (Note 2) (Note 22) (Note 22) Stock Stock - B Total Interests Total Equity
For the year ended December 31, 2013

As of January 1, 2013 P
= 45,119,932 P
= 460,771 (P
= 943,361) P
= 1,798,964 (P
= 3,238,400) P
= 5,379,074 P
= 83,268,077 (P
= 250,000) (P
= 1,697,344) (P
= 5,800,000) P
= 124,097,713 P
= 82,342,636 P
= 206,440,349
Net income – – – – – – 12,777,932 – – – 12,777,932 11,346,766 24,124,698
Other comprehensive income (loss) – – (374,593) (1,521,116) 1,981,569 – – – – – 85,860 226,319 312,179
Total comprehensive income (loss) – – (374,593) (1,521,116) 1,981,569 – 12,777,932 – – – 12,863,792 11,573,085 24,436,877
Exercise of ESOP/ESOWN 287,338 (90,083) – – – – – – – – 197,255 – 197,255
Cost of share-based payments – 114,499 – – – – – – – – 114,499 – 114,499
Sale of treasury stock 9,558,859 – – – – – – 1,697,344 2,000,000 13,256,203 – 13,256,203
Redemption of preferred shares (4,800,000) – – – – – – 250,000 – (1,200,000) (5,750,000) – (5,750,000)
Cash dividends – – – – – – (3,406,228) – – – (3,406,228) (3,529,114) (6,935,342)
Change in non-controlling interests – – – – – 2,103,047 – – – – 2,103,047 1,607,703 3,710,750
At December 31, 2013 P
= 50,166,129 P
= 485,187 (P
= 1,317,954) P
= 277,848 (P
= 1,256,831) P
= 7,482,121 P
= 92,639,781 P
=– P
=– (P
= 5,000,000) P
= 143,476,281 P
= 91,994,310 P
= 235,470,591

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT


Other Comprehensive Income Parent
Remeasurement Company
Gain (Losses) Net Unrealized Preferred
on Defined Gain (Loss) on Shares
Paid-in Share-based Benefit Available-for- Cumulative Equity Retained Held by Treasury Stock (Note 22)
Capital Payments Plans Sale Financial Translation Reserve Earnings Subsidiaries Common Preferred Non-controlling
(Note 22) (Note 28) (Note 27) Assets (Note 10) Adjustments (Note 2) (Note 22) (Note 22) Stock Stock - B Total Interests Total Equity
For the year ended December 31, 2012

As of January 1, 2012, as restated P


= 42,832,820 P
= 553,743 (P
= 456,254) P
= 1,725,394 (P
= 2,311,050) P
= 1,016,259 P
= 75,651,302 (P
= 250,000) (P
= 6,608,886) (P
= 5,800,000) P
= 106,353,328 P
= 68,115,587 P
= 174,468,915
Net income − − − − − − 10,504,385 − − − 10,504,385 8,994,873 19,499,258
Other comprehensive income (loss) − − (487,107) 73,570 (927,350) − − − − − (1,340,887) (593,578) (1,934,465)
Total comprehensive income (loss) − − (487,107) 73,570 (927,350) − 10,504,385 − − − 9,163,498 8,401,295 17,564,793
Exercise of ESOP/ESOWN 779,027 (171,284) − − − − − − − − 607,743 − 607,743
Cost of share-based payments 36,807 78,312 − − − − − − − − 115,119 − 115,119
Sale of treasury stock 1,471,278 − − − − − − − 4,911,542 − 6,382,820 − 6,382,820
Cash dividends − − − − − − (2,887,610) − − − (2,887,610) (2,478,197) (5,365,807)
Change in non-controlling interests − − − − − 4,362,815 − − − − 4,362,815 8,303,951 12,666,766
At December 31, 2012 P
= 45,119,932 P
= 460,771 (P
= 943,361) P
= 1,798,964 (P
= 3,238,400) P
= 5,379,074 P
= 83,268,077 (P
= 250,000) (P
= 1,697,344) (P
= 5,800,000) P
= 124,097,713 P
= 82,342,636 P
= 206,440,349

See accompanying Notes to Consolidated Financial Statements.

*SGVFS011298*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

Years Ended December 31


2014 2013 2012

CASH FLOWS FROM OPERATING ACTIVITIES


Income before income tax P
= 40,412,521 P
= 30,778,909 P
= 24,475,695
Adjustments for:
Interest and other financing charges - net of
amount capitalized (Note 23) 11,933,781 10,511,432 8,155,330
Depreciation and amortization (Note 23) 9,158,195 8,643,905 7,195,902
Cost of share-based payments (Note 28) 222,417 199,301 217,333
Provision for impairment on (Note 23):
Inventories 149,077 − −
Available-for-sale financial assets 66,834 228,580 61,076
Property, plant and equipment − 222 11,575
Investment properties − 400 19,500
Intangible assets 335,731 31,830 –
Doubtful accounts 182,383 − −
Gain on sale of (Note 23):
Investments (2,633,329) (190,296) (67,847)
Other assets (711,001) (19,382) (26,588)
Other investment income (Note 23) (443,090) (879,951) (531,714)
Interest income (5,493,715) (3,072,071) (4,353,984)
Share of profit of associates and joint ventures (13,185,148) (10,091,139) (7,681,899)
Remeasurement gain arising from business
combinations - net (Notes 23 and 24) − – (593,853)
Operating income before changes in working capital 39,994,656 36,141,740 26,880,526
Increase in:
Accounts and notes receivable – trade (11,576,951) (8,361,297) (9,005,266)
Inventories (1,534,405) (2,285,580) (1,861,119)
Service concession asset (2,997,352) (5,368,835) (5,497,422)
Other current assets (3,933,236) (2,895,043) (10,253,547)
Increase in:
Accounts payable and accrued expenses 31,114,583 19,236,450 13,058,649
Net pension liabilities 479,604 169,723 149,365
Other current liabilities 3,814,709 4,021,260 4,964,574
Net cash generated from operations 55,361,608 40,658,418 18,435,760
Interest received 5,595,767 2,863,872 3,929,058
Interest paid (11,966,127) (10,056,631) (8,398,754)
Income tax paid (9,782,770) (7,849,804) (4,983,373)
Net cash provided by operating activities 39,208,478 25,615,855 8,982,691

(Forward)

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Years Ended December 31


2014 2013 2012

CASH FLOWS FROM INVESTING ACTIVITIES


Proceeds from:
Sale/maturities of available-for-sale financial
assets P
= 717,072 P
= 653,327 P
= 1,281,413
Sale/maturities of financial assets at fair value
through profit or loss 40,417,857 1,046,783 449,557
Sale/redemptions of investments in associates and
joint ventures 7,300,597 681,120 113,858
Disposals of:
Property, plant and equipment (Note 14) 1,657,058 101,797 213,612
Investment propertieis (Note 13) 1,538,984 131,781 1,653
Land and improvements (Note 11) 3,935 – 1,613
Maturities of (additions to) short-term investments (983,358) 177,159 1,316,555
Additions to:
Service concession assets (Note 15) (666,569) (89,054) (1,096,920)
Investments in associates and joint ventures (35,926,256) (18,574,892) (18,776,599)
Property, plant and equipment (Note 14) (6,233,101) (6,838,751) (6,768,129)
Investment properties (Note 13) (13,375,167) (12,086,027) (9,232,788)
Land and improvements (Note 11) (28,841,363) (29,446,957) (31,882,873)
Accounts and notes receivable - non trade (5,171,180) (2,607,547) (7,580,428)
Financial assets at fair value through profit or loss (33,186,064) (13,823,514) (797,175)
Available-for-sale financial assets (562,661) (1,119,885) (647,266)
Intangible assets (Note 16) (172,452) (175,883) (41,538)
Dividends received from associates, joint ventures
and available-for-sale financial assets 5,742,014 6,131,475 6,648,576
Acquisitions through business combinations - net of
cash acquired (Note 24) (274,932) 2,766 (1,096,432)
Increase in other noncurrent assets (14,730,215) (4,906,765) (2,127,413)
Net cash used in investing activities (82,745,801) (80,743,067) (70,020,724)

CASH FLOWS FROM FINANCING ACTIVITIES


Proceeds from short-term and long-term debt 78,310,834 76,845,127 83,427,558
Payments of short-term and long-term debt (25,018,135) (45,973,965) (21,234,866)
Reissuance of treasury shares (Note 22) 13,424,121 13,256,203 6,382,820
Dividends paid (7,581,660) (6,640,418) (5,777,400)
Redemption of preferred shares (Note 22) − (5,750,000) –
Service concession obligation paid (Note 15) (698,927) (924,936) (356,385)
Collections of subscriptions receivable 113,817 112,453 448,040
Issuance of common shares (Note 22) 12,237,211 − −

(Forward)

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Years Ended December 31


2014 2013 2012
Increase (decrease) in:
Other noncurrent liabilities P
= 812,972 P
= 2,044,949 P
= 9,521,838
Non-controlling interests in consolidated
subsidiaries (2,948,434) 7,526,493 12,616,280
Net cash provided by financing activities 68,651,799 40,495,906 85,027,885

NET INCREASE (DECREASE) IN CASH AND


CASH EQUIVALENTS 25,114,476 (14,631,306) 23,989,852

CASH AND CASH EQUIVALENTS AT


BEGINNING OF YEAR 65,655,049 80,286,355 56,296,503

CASH AND CASH EQUIVALENTS AT


END OF YEAR (Note 5) P
= 90,769,525 P
= 65,655,049 P
= 80,286,355

See accompanying Notes to Consolidated Financial Statements.

*SGVFS011298*
AYALA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

Ayala Corporation (the Company) is incorporated in the Republic of the Philippines on


January 23, 1968. The Company’s registered office address and principal place of business is
Tower One, Ayala Triangle, Ayala Avenue, Makati City. The Company is a publicly listed
company which is 49.03% owned by Mermac, Inc., 10.18% owned by Mitsubishi Corporation and
the rest by the public.

The Company is the holding company of the Ayala Group of Companies (the Group), with
principal business interests in real estate and hotels, financial services and insurance,
telecommunications, water distribution and wastewater services, electronics, information
technology, business process outsourcing (BPO) services, automotive, transport infrastructure,
power generation, international, education and others.

2. Group Information

The consolidated financial statements comprise the financial statements of the Company and the
following subsidiaries of the Group:

% of Ownership
Interest held by the Group
Subsidiaries Nature of Business 2014 2013
AC Energy Holdings, Inc. (ACEHI) Power 100.0% 100.0%
AC Infrastructure Holdings Corporation Transport Infrastructure 100.0 100.0
(AC Infra)
AC International Finance Limited Investment Holding 100.0 100.0
(ACIFL)*
AG Counselors Corporation (AGCC) Legal Services 100.0 100.0
Ayala Automotive Holdings Corporation Automotive 100.0 100.0
(AAHC)
Ayala Aviation Corporation (AAC) Air Charter 100.0 100.0
Ayala Land, Inc. (ALI) Real Estate and Hotels 48.9 48.9
AYC Finance Ltd. (AYCFL)* Investment Holding 100.0 100.0
Azalea International Venture Partners BPO 100.0 100.0
Limited (AIVPL)**
Azalea Technology Investments, Inc. Information Technology 100.0 100.0
(Azalea Technology)
Bestfull Holdings Limited (BHL)*** Investment Holding - 100.0 100.0
International
Darong Agricultural and Development Agriculture 100.0 100.0
Corporation (DADC)
Integrated Microelectronics, Inc. (IMI) Electronics Manufacturing 50.9 57.8
LiveIt Global Services Management Education 100.0 100.0
Institute, Inc. (LGSMI)
Manila Water Company, Inc. (MWC) Water Distribution and 48.5 48.8
Wastewater Services
Michigan Holdings, Inc. (MHI) Investment Holding 100.0 100.0
MPM Noodles Corporation (liquidated in Investment Holding − 100.0
2014)
Philwater Holdings Company, Inc. Investment Holding 100.0 100.0
(Philwater)
Purefoods International, Ltd. (PFIL)** Investment Holding 100.0 100.0
Technopark Land, Inc. (TLI) Real Estate 78.8 78.8
Water Capital Works, Inc. (WCW) Investment Holding 100.0 100.0
*Incorporated in Cayman Islands
**Incorporated in British Virgin Islands
***Incorporated in Hong Kong

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Unless otherwise indicated, the principal place of business and country of incorporation of the
Company’s investments in subsidiaries, associates and joint ventures is the Philippines.

Except as discussed below, the voting rights held by the Company in its investments in
subsidiaries, associates and joint ventures are in proportion to its ownership interest.

The following significant transactions affected the Company’s investments in its subsidiaries:

Investment in ACIFL
In June 2014, ACIFL repurchased its 39,585,146 shares which were issued and registered in the
name of the Company, ACIFL’s sole shareholder. The repurchase price was at par of US$1.00 per
share for a total amount of US$39.6 million. ACIFL remained a wholly-owned subsidiary of the
Company after the transaction.

As of December 31, 2014 and 2013, ACIFL, through its wholly-owned subsidiary, AYC Holdings
Inc., owns 50.9% and 57.8% of the common shares of IMI, respectively. The fair value of IMI
shares held by the AYC Holdings amounted to P
= 6.4 billion and P
= 2.4 billion as of
December 31, 2014 and 2013, respectively.

Investment in ACEHI
On various dates in 2014, the Company infused additional capital to ACEHI which amounted to
P
= 9.49 billion. The proceeds were used to finance the various renewable energy and coal projects
of ACEHI to complete its planned 1,000 megawatt capacity.

In September 2013, the Company converted its subscription to ACEHI amounting to P


= 3.4 million
into additional equity for 34.6 million common shares.

Investment in ALI
In March 2013, the Company participated in the placement and subscription of P = 399.5 million
common shares of stock in ALI, whereby the Company sold its listed ALI common shares through
a private placement and infused the proceeds into ALI as subscription for the same number of
new ALI shares at the same price. This transaction supports ALI’s fund raising initiatives to
acquire assets for its next phase of expansion.

Following this transaction, the Company’s ownership in ALI’s common stock was reduced from
50.4% to 48.9% as of March 2013. The Company maintained the same number of common
shares it held in ALI prior to the transaction.

In 2014, there were no changes in the Company’s investment in ALI.

ALI shares with carrying value of P = 301.2 million as of December 31, 2014 and 2013 were
collateralized to secure the Company’s loan facility. Fair value of ALI shares collateralized
amounted to P = 13.3 billion and P
= 9.8 billion as of December 31, 2014 and 2013, respectively (see
Note 20).

The fair value of the ALI shares held by the Company amounted to P= 232.9 billion and
P
= 171.2 billion as of December 31, 2014 and 2013, respectively. The voting rights held by the
Company in ALI is 70.1% in 2014 and 2013.

Investment in AIVPL
In June 2014, AIVPL repurchased its 140,865,770 shares which were issued and registered in the
name of Company, AIVPL's sole shareholder. The repurchase price was at par of US$1.00 per
share for a total amount of US$140.9 million. AIVPL remained a wholly-owned subsidiary of the
Company after the transaction.

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Investment in MWC
In August and December 2013, the Company acquired 0.05 million and 140.0 million common
shares, respectively, for a total consideration of P
= 2.8 billion. The latter represents 5.7% ownership
interest in MWC which resulted to an increase of ownership interest from 26.5% to 32.3%.

In 2014, there were no significant changes in the Company’s investment in MWC.

The fair value of the MWC shares held by the Company amounted to P = 22.8 billion and
P
= 17.3 billion as of December 31, 2014 and 2013, respectively. The voting rights held by the
Group in MWC as of December 31, 2014 and 2013 is 79.7% and 79.3%, respectively.

Investment in BHL
On various dates in 2014, the Company sold to ACIFL 9,835,709 redeemable preferred shares of
BHL amounting to P= 4.5 billion for a total consideration of P
= 5.1 billion. BHL remained a wholly-
owned subsidiary of the Company after the transaction.

Investment in AAHC
In 2014, the Company subscribed to redeemable preferred shares of AAHC amounting to
P
= 450 million.

The redeemable preferred shares have the following features: (a) voting; (b) participating; (c)
preferred in distribution of assets in case of liquidation and in payment of dividend; (d) redeemable
at the option of AAHC, provided that in no case shall the redemption price be less than the cost of
shares as recorded in the books of AAHC at the time of redemption.

In July 2013, the Company infused additional capital to AAHC amounting to P


= 300 million. The
infusion was used to fund the start-up costs of Volkswagen business.

Investment in AAC
The Company infused additional capital to AAC amounting to P= 268.72 million and P
= 40.6 million in
2014 and 2013, respectively. The additional capital was used to purchase new aircrafts.

Investment in AC Infra
On various dates in 2014, the Company infused additional capital to AC Infra amounting to
P
= 925.0 million. The additional capital was used for operating and capital expenditures of AC Infra
and investment in Light Rail Manila Holdings, Inc (see Note 12).

In 2013, the Company partially paid the subscription amounting to P


= 50.0 million.

Investment in IMI
As of December 31, 2014 and 2013, the Company’s investment in IMI includes P = 1.1 billion
investment in IMI Preferred Shares. The IMI Preferred Shares have the following features:
(a) voting; (b) dividends payable quarterly, cumulative; (c) nonconvertible; (d) preferred in
distribution of assets in case of liquidation and in payment of dividends; (e) nonparticipating; (f) no
pre-emptive rights; and (g) redeemable at the option of IMI at issue value after the 5th year issue
anniversary.

In 2013, the Company acquired 460.0 million IMI Preferred Shares from Asiacom for an aggregate
amount of P = 460.0 million. In November 2013, the dividend rate of IMI preferred shares has been
re-priced from 8.25% to 2.9% per annum.

In 2014, IMI has completed its public offering and listing of 215.0 million common shares at an
offer price of P
= 7.50 per share, with a par value of P
= 1.00 per share, raising P
= 1.61 billion
($35.92 million) cash to fund capital expenditure, support business expansion, refinance debt and
fund working capital requirements. The follow-on offering resulted in the Group’s ownership
interest in IMI reduced from 57.8% to 50.9%.

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The fair value of the IMI shares held by the Company amounted to P
= 9.3 million and P
= 3.5 million as
of December 31, 2014 and 2013, respectively. The voting rights held by the Group in IMI as of
December 31, 2014 and 2013 is 63.7% and 70.2%, respectively.

Investment in LGSMI
In 2014 and 2013, the Company infused additional capital to LGSMI amounting to
P
= 389.0 million and P
= 57.1 million respectively. The capital infusion was used for LGSMI’s
investment in Affordable Private Education Center (APEC) and Learning through Industry
Collaboration (LIC).

Investment in PFIL
In August 2014, PFIL redeemed from the Company 3,500,000 shares amounting to
P
= 153.4 million. PFIL remained a wholly-owned subsidiary of the Company after the transaction.

Investment in MPM
In 2014, MPM was dissolved. The Company derecognized its investment amounting to
P
= 81.6 million.

Material partly-owned subsidiaries


Information of subsidiaries that have material non-controlling interests is provided below:

Accumulated Balances of Profit (Loss) Allocated to


Non-controlling Interest Non-controlling Interest
Subsidiary 2014 2013 2014 2013 2012
(In Thousands) (In Thousands)
ALI P
= 68,438,083 P
= 62,779,490 P
= 10,454,204 P
= 8,150,756 P
= 6,368,764
MWC 27,382,229 25,631,434 2,678,153 2,917,444 2,815,231
IMI 4,849,118 3,100,466 560,988 155,840 (21,296)

The summarized financial information of these subsidiaries is provided below. These information
is based on amounts before inter-company eliminations.

2014 ALI MWC IMI*


(In Thousands)
Statement of financial position
Current assets P
= 165,634,445 P
= 9,094,065 P
= 18,603,911
Noncurrent assets 223,310,018 65,765,839 6,113,164
Current liabilities 135,446,156 7,858,162 10,761,152
Noncurrent liabilities 131,502,849 31,900,171 3,032,366
Dividends paid to non-controlling interests 1,342,623 − −
Statement of comprehensive income
Revenue P
= 95,197,046 P
= 16,357,145 P
= 37,764,880
Profit (loss) attributable to:
Equity holders of the parent 14,802,642 5,813,089 1,302,113
Non-controlling interests 2,911,816 16,860 (5,619)
Total comprehensive income attributable
to:
Equity holders of the parent 14,851,119 5,948,616 1,038,034
Non-controlling interests 2,913,188 16,972 (5,619)
Statement of cash flows
Operating activities P
= 37,027,858 P
= 5,031,823 1,822,661
Investing activities (53,948,544) (759,497) (142,914)
Financing activities 17,631,830 (4,999,553) 1,412,333
Effect of changes in foreign exchange on
cash and cash equivalents − − (25,053)
Net increase (decrease) in cash and
cash equivalents P
= 711,144 (P
= 727,227) P
= 3,067,027
*Translated using the exchange rate at the reporting date (US$1:P
= 44.72 in December 31, 2014 )

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2013 ALI MWC IMI*


(In Thousands)
Statement of financial position
Current assets P
= 146,986,957 P
= 9,069,404 P
= 15,017,182
Noncurrent assets 178,486,728 63,788,120 6,657,736
Current liabilities 101,623,207 8,072,931 9,824,702
Noncurrent liabilities 111,752,912 33,730,537 3,413,147
Dividends paid to non-controlling interests 1,109,467 – –

Statement of comprehensive income


Revenue P
= 81,523,070 P
= 15,925,817 P
= 33,075,690
Profit (loss) attributable to:
Equity holders of the parent 11,741,764 5,752,362 464,949
Non-controlling interests 2,562,929 28,199 (56,691)
Total comprehensive income attributable
to:
Equity holders of the parent 11,466,162 5,793,305 310,910
Non-controlling interests 2,557,938 28,102 (56,691)

Statement of cash flows


Operating activities P
= 27,238,649 P
= 4,345,087 P
= 667,817
Investing activities (69,952,151) 15,820 (749,138)
Financing activities 38,557,555 (3,121,277) (233,233)
Effect of changes in foreign exchange on
cash and cash equivalents – – (3,038)
Net increase (decrease) in cash and
cash equivalents (P
= 4,155,947) P
= 1,239,630 (P
= 317,592)
*Translated using the exchange rate at the reporting date (US$1:P
= 44.395 in December 31, 2013)

3. Summary of Significant Accounting Policies

Basis of Preparation
The accompanying consolidated financial statements of the Group have been prepared on a
historical cost basis, except for financial assets at fair value through profit or loss (FVPL),
available-for-sale (AFS) financial assets and derivative financial instruments that have been
measured at fair value. The consolidated financial statements are presented in Philippine Peso
(P
= ) and all values are rounded to the nearest thousand pesos (P = 000) unless otherwise indicated.

The consolidated financial statements provide comparative information in respect of the previous
period.

Statement of Compliance
The consolidated financial statements of the Group have been prepared in compliance with
Philippine Financial Reporting Standards (PFRS).

Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Group as of
December 31, 2014 and 2013 and for each of the three years in the period ended
December 31, 2014.

Control is achieved when the Group is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee. Specifically, the Group controls an investee if and only if the Group has:
a. Power over the investee (i.e. existing rights that give it the current ability to direct the relevant
activities of the investee)
b. Exposure, or rights, to variable returns from its involvement with the investee, and
c. The ability to use its power over the investee to affect its returns

*SGVFS011298*
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When the Group has less than a majority of the voting or similar rights of an investee, the Group
considers all relevant facts and circumstances in assessing whether it has power over an
investee, including:

a. The contractual arrangement with the other vote holders of the investee
b. Rights arising from other contractual arrangements
c. The Group’s voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate
that there are changes to one or more of the three elements of control. Consolidation of a
subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group
loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired
or disposed of during the year are included or excluded in the consolidated financial statements
from the date the Group gains control or until the date the Group ceases to control the subsidiary.

Non-controlling interests pertain to the equity in a subsidiary not attributable, directly or indirectly
to the Company. Any equity instruments issued by a subsidiary that are not owned by the
Company are non-controlling interests including preferred shares and options under share-based
transactions. The portion of profit or loss and net assets in subsidiaries not wholly-owned and are
presented separately in the consolidated statements of income, consolidated statements of
comprehensive income, consolidated statements of changes in equity and consolidated
statements of financial position, separately from the Company’s equity. Non-controlling interests
are net of any outstanding subscription receivable.

Losses within a subsidiary are attributed to the non-controlling interests even if that results in a
deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an
equity transaction. Any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received is recognized directly in equity as
“Equity reserve” and attributed to the owners of the Company. If the Group losses control over a
subsidiary, it:

· Derecognizes the assets (including goodwill) and liabilities of the subsidiary;


· Derecognizes the carrying amount of any non-controlling interests;
· Derecognizes the cumulative translation adjustments recorded in equity;
· Recognizes the fair value of the consideration received;
· Recognizes the fair value of any investment retained;
· Recognizes any surplus or deficit in profit or loss; and
· Reclassifies the parent’s share of components previously recognized in OCI to profit or loss or
retained earnings, as appropriate, as would be required if the Group had directly disposed of
the related assets and liabilities.

Changes in Accounting Policies and disclosures


The accounting policies adopted in the preparation of the consolidated financial statements are
consistent with those of the previous financial years except for the new PFRS, amended PFRS
and improvements to PFRS which were adopted beginning January 1, 2014. The nature and the
impact of each new standards and amendments is described below:

New and amended standards and interpretations


The Group applied for the first time certain standards and amendments, which are effective for
annual periods beginning on or after January 1, 2014.

*SGVFS011298*
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The nature and impact of each new standard and amendment is described below:

Investment Entities (Amendments to PFRS 10, Consolidated Financial Statements, PFRS 12,
Disclosure of Interests in Other Entities, and PAS 27, Separate Financial Statements)
These amendments provide an exception to the consolidation requirement for entities that meet
the definition of an investment entity under PFRS 10. The exception to consolidation requires
investment entities to account for subsidiaries at fair value through profit or loss. The
amendments must be applied retrospectively, subject to certain transition relief. The amendments
must be applied retrospectively, subject to certain transition relief. These amendments have no
impact to the Group, since none of its investee companies qualifies to be an investment entity
under PFRS 10.

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities
(Amendments)
These amendments clarify the meaning of ‘currently has a legally enforceable right to set-off’ and
the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting
and are applied retrospectively. These amendments have no impact on the Group, since none of
the entities in the Group has any offsetting arrangements.

PAS 39, Financial Instruments: Recognition and Measurement - Novation of Derivatives and
Continuation of Hedge Accounting (Amendments)
These amendments provide relief from discontinuing hedge accounting when novation of a
derivative designated as a hedging instrument meets certain criteria and retrospective application
is required. These amendments have no impact on the Group as the Group has not novated its
derivatives during the current or prior periods.

PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets
(Amendments)
These amendments remove the unintended consequences of PFRS 13, Fair Value Measurement,
on the disclosures required under PAS 36. In addition, these amendments require disclosure of
the recoverable amounts for assets or cash-generating units (CGUs) for which impairment loss
has been recognized or reversed during the period. The application of these amendments has no
material impact on the disclosure in the Group’s consolidated financial statements.

Philippine Interpretation IFRIC 21, Levies (IFRIC 21)


IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers
payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon
reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated
before the specified minimum threshold is reached. Retrospective application is required for
IFRIC 21. This interpretation has no impact on the Group as it has applied the recognition
principles under PAS 37, Provisions, Contingent Liabilities and Contingent Assets, consistent with
the requirements of IFRIC 21 in prior years.

Annual Improvements to PFRSs (2010-2012 cycle)


In the 2010 – 2012 annual improvements cycle, seven amendments to six standards were
issued, which included an amendment to PFRS 13, Fair Value Measurement. The amendment to
PFRS 13 is effective immediately and it clarifies that short-term receivables and payables with no
stated interest rates can be measured at invoice amounts when the effect of discounting is
immaterial. This amendment has no impact on the Group.

Annual Improvements to PFRSs (2011-2013 cycle)


In the 2011 – 2013 annual improvements cycle, four amendments to four standards were issued,
which included an amendment to PFRS 1, First-time Adoption of Philippine Financial Reporting
Standards–First-time Adoption of PFRS. The amendment to PFRS 1 is effective immediately. It
clarifies that an entity may choose to apply either a current standard or a new standard that is not
yet mandatory, but permits early application, provided either standard is applied consistently

*SGVFS011298*
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throughout the periods presented in the entity’s first PFRS financial statements. This amendment
has no impact on the Group as it is not a first time PFRS adopter.

Standards and interpretation issued but not yet effective


The Group will adopt the following new and amended Standards and Philippine Interpretations of
International Financial Reporting Interpretations Committee (IFRIC) enumerated below when
these become effective. Except as otherwise indicated, the Group does not expect the adoption
of these new and amended PFRS and Philippine Interpretations to have significant impact on the
consolidated financial statements.

PFRS 9, Financial Instruments – Classification and Measurement (2010 version)


PFRS 9 (2010 version) reflects the first phase on the replacement of PAS 39 and applies to the
classification and measurement of financial assets and liabilities as defined in PAS 39, Financial
Instruments: Recognition and Measurement. PFRS 9 requires all financial assets to be measured
at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not
invoked, be subsequently measured at amortized cost if it is held within a business model that has
the objective to hold the assets to collect the contractual cash flows and its contractual terms give
rise, on specified dates, to cash flows that are solely payments of principal and interest on the
principal outstanding. All other debt instruments are subsequently measured at fair value through
profit or loss. All equity financial assets are measured at fair value either through other
comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be
measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair
value of a liability that is attributable to changes in credit risk must be presented in OCI. The
remainder of the change in fair value is presented in profit or loss, unless presentation of the fair
value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting
mismatch in profit or loss. All other PAS 39 classification and measurement requirements for
financial liabilities have been carried forward into PFRS 9, including the embedded derivative
separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 may
have an effect on the classification and measurement of the Group’s financial assets, but may
potentially have no significant impact on the classification and measurement of financial liabilities.

PFRS 9 (2010 version) is effective for annual periods beginning on or after January 1, 2015. This
mandatory adoption date was moved to January 1, 2018 when the final version of PFRS 9 was
adopted by the Philippine Financial Reporting Standards Council (FRSC). Such adoption,
however, is still for approval by the Board of Accountancy (BOA). The Group will continue to
monitor developments in this reporting standard and assess its impact on or need for adoption.

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. The 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 or
involves rendering of services in which case revenue is recognized based on stage of completion.
Contracts involving provision of services with the construction materials and where the risks and
reward of ownership are transferred to the buyer on a continuous basis will also be accounted for
based on stage of completion. The SEC and the FRSC have deferred the effectivity of this
interpretation until the final Revenue standard is issued by the International Accounting Standards
Board (IASB) and an evaluation of the requirements of the final Revenue standard against the
practices of the Philippine real estate industry is completed.

The following new standards and amendments issued by the IASB were already adopted by the
FRSC but are still for approval by BOA.

*SGVFS011298*
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Effective January 1, 2015

PAS 19, Employee Benefits – Defined Benefit Plans: Employee Contributions (Amendments)
PAS 19 requires an entity to consider contributions from employees or third parties when
accounting for defined benefit plans. Where the contributions are linked to service, they should be
attributed to periods of service as a negative benefit. These amendments clarify that, if the amount
of the contributions is independent of the number of years of service, an entity is permitted to
recognize such contributions as a reduction in the service cost in the period in which the service is
rendered, instead of allocating the contributions to the periods of service. This amendment is
effective for annual periods beginning on or after January 1, 2015. It is not expected that this
amendment would be relevant to the Group, since none of the entities within the Group has
defined benefit plans with contributions from employees or third parties.

Annual Improvements to PFRSs (2010-2012 cycle)


The Annual Improvements to PFRSs (2010-2012 cycle) are effective for annual periods beginning
on or after January 1, 2015 and are not expected to have a material impact on the Group. They
include:

PFRS 2, Share-based Payment – Definition of Vesting Condition


This improvement is applied prospectively and clarifies various issues relating to the definitions of
performance and service conditions which are vesting conditions, including:
· A performance condition must contain a service condition
· A performance target must be met while the counterparty is rendering service
· A performance target may relate to the operations or activities of an entity, or to those of
another entity in the same group
· A performance condition may be a market or non-market condition
· If the counterparty, regardless of the reason, ceases to provide service during the vesting
period, the service condition is not satisfied.

PFRS 3, Business Combinations – Accounting for Contingent Consideration in a Business


Combination
The amendment is applied prospectively for business combinations for which the acquisition date
is on or after July 1, 2014. It clarifies that a contingent consideration that is not classified as equity
is subsequently measured at fair value through profit or loss whether or not it falls within the scope
of PAS 39, Financial Instruments: Recognition and Measurement (or PFRS 9, Financial
Instruments, if early adopted). The Group shall consider this amendment for future business
combinations.

PFRS 8, Operating Segments – Aggregation of Operating Segments and Reconciliation of the


Total of the Reportable Segments’ Assets to the Entity’s Assets
The amendments are applied retrospectively and clarify that:
· An entity must disclose the judgments made by management in applying the aggregation
criteria in the standard, including a brief description of operating segments that have been
aggregated and the economic characteristics (e.g., sales and gross margins) used to assess
whether the segments are ‘similar’.
· The reconciliation of segment assets to total assets is only required to be disclosed if the
reconciliation is reported to the chief operating decision maker, similar to the required
disclosure for segment liabilities.

PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets – Revaluation Method –
Proportionate Restatement of Accumulated Depreciation and Amortization
The amendment is applied retrospectively and clarifies in PAS 16 and PAS 38 that the asset may
be revalued by reference to the observable data on either the gross or the net carrying amount. In
addition, the accumulated depreciation or amortization is the difference between the gross and
carrying amounts of the asset.

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PAS 24, Related Party Disclosures – Key Management Personnel


The amendment is applied retrospectively and clarifies that a management entity, which is an
entity that provides key management personnel services, is a related party subject to the related
party disclosures. In addition, an entity that uses a management entity is required to disclose the
expenses incurred for management services.

Annual Improvements to PFRSs (2011-2013 cycle)


The Annual Improvements to PFRSs (2011-2013 cycle) are effective for annual periods beginning
on or after January 1, 2015 and are not expected to have a material impact on the Group. They
include:

PFRS 3, Business Combinations – Scope Exceptions for Joint Arrangements


The amendment is applied prospectively and clarifies the following regarding the scope exceptions
within PFRS 3:
· Joint arrangements, not just joint ventures, are outside the scope of PFRS 3.
· This scope exception applies only to the accounting in the financial statements of the joint
arrangement itself.

PFRS 13, Fair Value Measurement – Portfolio Exception


The amendment is applied prospectively and clarifies that the portfolio exception in PFRS 13 can
be applied not only to financial assets and financial liabilities, but also to other contracts within the
scope of PAS 39 (or PFRS 9, as applicable).

PAS 40, Investment Property


The amendment is applied prospectively and clarifies that PFRS 3, and not the description of
ancillary services in PAS 40, is used to determine if the transaction is the purchase of an asset or
business combination. The description of ancillary services in PAS 40 only differentiates between
investment property and owner-occupied property (i.e., property, plant and equipment).

Effective January 1, 2016

PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets – Clarification of
Acceptable Methods of Depreciation and Amortization (Amendments)
The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern of
economic benefits that are generated from operating a business (of which the asset is part) rather
than the economic benefits that are consumed through use of the asset. As a result, a revenue-
based method cannot be used to depreciate property, plant and equipment and may only be used
in very limited circumstances to amortize intangible assets. The amendments are effective
prospectively for annual periods beginning on or after January 1, 2016, with early adoption
permitted. These amendments are not expected to have any impact to the Group given that the
Group has not used a revenue-based method to depreciate its non-current assets.

PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture – Bearer Plants (Amendments)
The amendments change the accounting requirements for biological assets that meet the
definition of bearer plants. Under the amendments, biological assets that meet the definition of
bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply. After initial
recognition, bearer plants will be measured under PAS 16 at accumulated cost (before maturity)
and using either the cost model or revaluation model (after maturity). The amendments also
require that produce that grows on bearer plants will remain in the scope of PAS 41 measured at
fair value less costs to sell. For government grants related to bearer plants, PAS 20, Accounting
for Government Grants and Disclosure of Government Assistance, will apply. The amendments
are retrospectively effective for annual periods beginning on or after January 1, 2016, with early
adoption permitted. These amendments are not expected to have any impact to the Group as the
Group does not have any bearer plants.

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PAS 27, Separate Financial Statements – Equity Method in Separate Financial Statements
(Amendments)
The amendments will allow entities to use the equity method to account for investments in
subsidiaries, joint ventures and associates in their separate financial statements. Entities already
applying PFRS and electing to change to the equity method in its separate financial statements
will have to apply that change retrospectively. For first-time adopters of PFRS electing to use the
equity method in its separate financial statements, they will be required to apply this method from
the date of transition to PFRS. The amendments are effective for annual periods beginning on or
after January 1, 2016, with early adoption permitted. These amendments will not have any impact
on the Group’s consolidated financial statements.

PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint
Ventures – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
These amendments address an acknowledged inconsistency between the requirements in PFRS
10 and those in PAS 28 (2011) in dealing with the sale or contribution of assets between an
investor and its associate or joint venture. The amendments require that a full gain or loss is
recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A
partial gain or loss is recognized when a transaction involves assets that do not constitute a
business, even if these assets are housed in a subsidiary. These amendments are effective from
annual periods beginning on or after January 1, 2016.

PFRS 11, Joint Arrangements – Accounting for Acquisitions of Interests in Joint Operations
(Amendments)
The amendments to PFRS 11 require that a joint operator accounting for the acquisition of an
interest in a joint operation, in which the activity of the joint operation constitutes a business must
apply the relevant PFRS 3 principles for business combinations accounting. The amendments
also clarify that a previously held interest in a joint operation is not remeasured on the acquisition
of an additional interest in the same joint operation while joint control is retained. In addition, a
scope exclusion has been added to PFRS 11 to specify that the amendments do not apply when
the parties sharing joint control, including the reporting entity, are under common control of the
same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the
acquisition of any additional interests in the same joint operation and are prospectively effective
for annual periods beginning on or after January 1, 2016, with early adoption permitted. These
amendments are not expected to have any significant impact to the Group.

PFRS 14, Regulatory Deferral Accounts


PFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-
regulation, to continue applying most of its existing accounting policies for regulatory deferral
account balances upon its first-time adoption of PFRS. Entities that adopt PFRS 14 must present
the regulatory deferral accounts as separate line items on the statement of financial position and
present movements in these account balances as separate line items in the statement of profit or
loss and other comprehensive income. The standard requires disclosures on the nature of, and
risks associated with, the entity’s rate-regulation and the effects of that rate-regulation on its
financial statements. PFRS 14 is effective for annual periods beginning on or after January 1,
2016. Since the Group is an existing PFRS preparer, this standard would not apply.

Annual Improvements to PFRSs (2012-2014 cycle)


The Annual Improvements to PFRSs (2012-2014 cycle) are effective for annual periods beginning
on or after January 1, 2016 and are not expected to have a material impact on the Group. They
include:

PFRS 5, Non-current Assets Held for Sale and Discontinued Operations – Changes in Methods of
Disposal
The amendment is applied prospectively and clarifies that changing from a disposal through sale
to a disposal through distribution to owners and vice-versa should not be considered to be a new

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plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption
of the application of the requirements in PFRS 5. The amendment also clarifies that changing the
disposal method does not change the date of classification.

PFRS 7, Financial Instruments: Disclosures – Servicing Contracts


PFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred
asset that is derecognized in its entirety. The amendment clarifies that a servicing contract that
includes a fee can constitute continuing involvement in a financial asset. An entity must assess the
nature of the fee and arrangement against the guidance in PFRS 7 in order to assess whether the
disclosures are required. The amendment is to be applied such that the assessment of which
servicing contracts constitute continuing involvement will need to be done retrospectively.
However, comparative disclosures are not required to be provided for any period beginning before
the annual period in which the entity first applies the amendments.

PFRS 7 - Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements


This amendment is applied retrospectively and clarifies that the disclosures on offsetting of
financial assets and financial liabilities are not required in the condensed interim financial report
unless they provide a significant update to the information reported in the most recent annual
report.

PAS 19, Employee Benefits – regional market issue regarding discount rate
This amendment is applied prospectively and clarifies that market depth of high quality corporate
bonds is assessed based on the currency in which the obligation is denominated, rather than the
country where the obligation is located. When there is no deep market for high quality corporate
bonds in that currency, government bond rates must be used.

PAS 34, Interim Financial Reporting – disclosure of information ‘elsewhere in the interim financial
report’
The amendment is applied retrospectively and clarifies that the required interim disclosures must
either be in the interim financial statements or incorporated by cross-reference between the
interim financial statements and wherever they are included within the greater interim financial
report (e.g., in the management commentary or risk report).

Effective January 1, 2018

PFRS 9, Financial Instruments – Hedge Accounting and amendments to PFRS 9, PFRS 7 and
PAS 39 (2013 version)
PFRS 9 (2013 version) already includes the third phase of the project to replace PAS 39 which
pertains to hedge accounting. This version of PFRS 9 replaces the rules-based hedge accounting
model of PAS 39 with a more principles-based approach. Changes include replacing the rules-
based hedge effectiveness test with an objectives-based test that focuses on the economic
relationship between the hedged item and the hedging instrument, and the effect of credit risk on
that economic relationship; allowing risk components to be designated as the hedged item, not
only for financial items but also for non-financial items, provided that the risk component is
separately identifiable and reliably measurable; and allowing the time value of an option, the
forward element of a forward contract and any foreign currency basis spread to be excluded from
the designation of a derivative instrument as the hedging instrument and accounted for as costs of
hedging. PFRS 9 also requires more extensive disclosures for hedge accounting.

PFRS 9 (2013 version) has no mandatory effective date. The mandatory effective date of
January 1, 2018 was eventually set when the final version of PFRS 9 was adopted by the FRSC.
The adoption of the final version of PFRS 9, however, is still for approval by BOA.

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The adoption of PFRS 9 may have an effect on the classification and measurement of the Group’s
financial assets but will have no impact on the classification and measurement of the Group’s
financial liabilities. The adoption will also have an effect on the Group’s application of hedge
accounting. The Group will continue to monitor developments in this reporting standard and
assess its impact on or need for adoption by the Group.

PFRS 9, Financial Instruments (2014 or final version)


In July 2014, the final version of PFRS 9, Financial Instruments, was issued. PFRS 9 reflects all
phases of the financial instruments project and replaces PAS 39, Financial Instruments:
Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces new
requirements for classification and measurement, impairment, and hedge accounting. PFRS 9 is
effective for annual periods beginning on or after January 1, 2018, with early application permitted.
Retrospective application is required, but comparative information is not compulsory. Early
application of previous versions of PFRS 9 is permitted if the date of initial application is before
February 1, 2015.

The adoption of PFRS 9 may have an effect on the classification and measurement of the Group’s
financial assets and impairment methodology for financial assets, but will have no impact on the
classification and measurement of the Group’s financial liabilities. The adoption may also have an
effect on the Group’s application of hedge accounting. The Group will continue to monitor
developments in this reporting standard and assess its impact on or need for adoption.

The following new standard issued by the IASB has not yet been adopted by the FRSC

IFRS 15 Revenue from Contracts with Customers


IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue
arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that
reflects the consideration to which an entity expects to be entitled in exchange for transferring
goods or services to a customer. The principles in IFRS 15 provide a more structured approach to
measuring and recognising revenue. The new revenue standard is applicable to all entities and
will supersede all current revenue recognition requirements under IFRS. Either a full or modified
retrospective application is required for annual periods beginning on or after 1 January 2017 with
early adoption permitted. The Group is currently assessing the impact of IFRS 15 and plans to
adopt the new standard on the required effective date once adopted locally.

The significant accounting policies that have been used in the preparation of the consolidated
financial statements are summarized below. These policies have been consistently applied to all
the years presented, unless otherwise stated.

Cash and Cash Equivalents


Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of three
months or less from dates of acquisition and which are subject to an insignificant risk of change in
value.

Short-term Investments
Short-term investments are short-term placements with maturities of more than three months but
less than one year from the date of acquisition. These earn interest at the respective short-term
investment rates.

Financial Instruments
Date of recognition
The Group recognizes a financial asset or a financial liability in the consolidated statement of
financial position when it becomes a party to the contractual provisions of the instrument.
Purchases or sales of financial assets that require delivery of assets within the time frame
established by regulation or convention in the marketplace are recognized on the settlement date.
In the case of derivatives, the Group follows trade date accounting.

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Initial recognition of financial instruments


All financial assets and financial liabilities are recognized initially at fair value. Except for financial
instruments at FVPL, the initial measurement of financial instruments includes transaction costs.
The Group classifies its financial assets in the following categories: financial assets at FVPL, loans
and receivables, held-to-maturity (HTM) investments and AFS financial assets. The Group also
classifies its financial liabilities into financial liabilities at FVPL and other financial liabilities. The
classification depends on the purpose for which the investments were acquired and whether they
are quoted in an active market.

The Group determines the classification of its financial instruments at initial recognition and, where
allowed and appropriate, re-evaluates such designation at every reporting date.

Financial instruments are classified as liability or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to equity, net of any
related income tax benefits.

Determination of fair value


The fair value for financial instruments traded in active markets at the reporting date is based on
their quoted market price or dealer price quotations (bid price for long positions and ask price for
short positions), without any deduction for transaction costs. When current bid and ask prices are
not available, the price of the most recent transaction provides evidence of the current fair value
as long as there has not been a significant change in economic circumstances since the time of
the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation methodologies. Valuation methodologies include net present value
techniques, comparison to similar instruments for which market observable prices exist, option
pricing models, and other relevant valuation models.

Day 1 difference
Where the transaction price in a non-active market is different from the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statement of
income under “Interest income” or “Interest and other financing charges” unless it qualifies for
recognition as some other type of asset or liability. In cases where use is made of data which is
not observable, the difference between the transaction price and model value is only recognized in
the consolidated statement of income when the inputs become observable or when the instrument
is derecognized. For each transaction, the Group determines the appropriate method of
recognizing the ‘Day 1’ difference amount.

Financial assets and financial liabilities at FVPL


Financial assets and financial liabilities at FVPL include derivatives, financial assets and financial
liabilities held for trading and financial assets and financial liabilities designated upon initial
recognition as at FVPL.

Financial assets and financial liabilities are classified as held for trading if they are acquired for the
purpose of selling or repurchasing in the near term. Derivatives, including separated embedded
derivatives, are also classified as held for trading unless they are designated as effective hedging
instruments or a financial guarantee contract. Fair value gains or losses on investments held for
trading, net of interest income or expense accrued on these assets, are recognized in the
consolidated statement of income under “Other income” or “Other charges”. Interest earned or
incurred is recorded in “Interest income” or “Interest and other financing charges” while dividend
income is recorded in “Other income” when the right to receive payment has been established.

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Where a contract contains one or more embedded derivatives, the hybrid contract may be
designated as financial asset or financial liability at FVPL, except where the embedded derivative
does not significantly modify the cash flows or it is clear that separation of the embedded
derivative is prohibited.

Financial assets and financial liabilities may be designated at initial recognition as at FVPL if any
of the following criteria are met:
(i) the designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them
on a different basis; or
(ii) the assets or liabilities are part of a group of financial assets, financial liabilities or both which
are managed and their performance evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy; or
(iii) the financial instrument contains an embedded derivative that would need to be separately
recorded.

The Group’s financial assets and financial liabilities at FVPL pertain to government securities,
other investment securities, derivatives not designated as accounting hedges and embedded
derivative arising from the acquisition of PSi.

Derivative instruments (including bifurcated embedded derivatives) are initially recognized at fair
value on the date in which a derivative transaction is entered into or bifurcated, and are
subsequently remeasured at fair value. Any gains or losses arising from changes in fair value of
derivatives that do not qualify for hedge accounting are taken directly to the consolidated
statement of income. Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative.

The Group uses derivative instruments such as structured currency options and currency forwards
to hedge its risks associated with foreign currency fluctuations. Such derivative instruments
provide economic hedges under the Group’s policies but are not designated as accounting
hedges.

An embedded derivative is separated from the host contract and accounted for as a derivative if all
of the following conditions are met: a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract; b)
a separate instrument with the same terms as the embedded derivative would meet the definition
of a derivative; and c) the hybrid or combined instrument is not recognized at FVPL.

The Group assesses whether embedded derivatives are required to be separated from the host
contracts when the Group first becomes a party to the contract. Reassessment of embedded
derivatives is only done when there are changes in the contract that significantly modifies the
contractual cash flows that otherwise would be required under the contract.

HTM investments
HTM investments are quoted nonderivative financial assets with fixed or determinable payments
and fixed maturities that the Group has the positive intention and ability to hold to maturity. Where
the Group sells other than an insignificant amount of HTM investments, the entire category would
be tainted or reclassified as AFS financial assets. After initial measurement, these investments
are measured at amortized cost using the effective interest rate method, less impairment in value.
Amortized cost is calculated by taking into account any discount or premium on acquisition and
fees that are integral parts of the effective interest rate. The amortization is included in “Interest
income” in the consolidated statement of income. Gains and losses are recognized in the
consolidated statement of income when the HTM investments are derecognized or impaired, as
well as through the amortization process. The losses arising from impairment of such investments
are recognized in the consolidated statement of income under “Provision for impairment losses”
account. HTM investments are included under “Other current assets” if the maturity falls within 12
months from reporting date.

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As of December 31, 2014 and 2013, the Group has no outstanding HTM investments.

Loans and receivables


Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are not entered into with the intention of immediate or
short-term resale and are not designated as AFS financial assets or financial asset at FVPL. This
accounting policy relates to the consolidated statement of financial position captions “Cash and
cash equivalents”, “Short-term investments” and “Accounts and notes receivable” (except for
Advances to contractors and suppliers).

After initial measurement, loans and receivables are subsequently measured at amortized cost
using the effective interest rate method, less any allowance for impairment losses. Amortized cost
is calculated by taking into account any discount or premium on acquisition and fees that are
integral parts 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. The amortization is included in the “Interest income” account in
the consolidated statement of income. The losses arising from impairment of such loans and
receivables are recognized under “Provision for doubtful accounts” in the consolidated statement
of income.

Loans and receivables are included in current assets if maturity is within 12 months or when the
Group expects to realize or collect within 12 months from the reporting date. Otherwise, they are
classified as noncurrent assets.

AFS financial assets


AFS financial assets are those which are designated as such or do not qualify to be classified as
designated at FVPL, HTM, or loans and receivables.

Financial assets may be designated at initial recognition as AFS if they are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions.

After initial measurement, AFS financial assets are measured at fair value. The unrealized gains
or losses arising from the fair valuation of AFS financial assets are recognized in other
comprehensive income and are reported as “Net unrealized gain (loss) on available-for-sale
financial assets” (net of tax where applicable) in equity. The Group’s share in its associates’ or
joint ventures’ net unrealized gain (loss) on AFS is likewise included in this account.

When the security is disposed of, the cumulative gain or loss previously recognized in equity is
recognized in the consolidated statement of income under “Other income” or “Other charges”.
Where the Group holds more than one investment in the same security, the cost is determined
using the weighted average method. Interest earned on AFS financial assets is reported as
interest income using the effective interest rate. Dividends earned are recognized under “Other
income” in the consolidated statement of income when the right to receive payment is established.
The losses arising from impairment of such investments are recognized under “Provision for
impairment losses” in the consolidated statement of income.

When the fair value of AFS financial assets cannot be measured reliably because of lack of
reliable estimates of future cash flows and discount rates necessary to calculate the fair value of
unquoted equity instruments, these investments are carried at cost, less any allowance for
impairment losses.

The Group’s AFS financial assets pertain to investments in debt and equity securities included
under “Investments in bonds and other securities” in the consolidated statement of financial
position. AFS financial assets are included under “Other current assets” if expected to be realized
within 12 months from reporting date.

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Other financial liabilities


Issued financial instruments or their components, which are not designated at FVPL are classified
as other financial liabilities where the substance of the contractual arrangement results in the
Group having an obligation either to deliver cash or another financial asset to the holder, or to
satisfy the obligation other than by the exchange of a fixed amount of cash or another financial
asset for a fixed number of its own equity shares. The components of issued financial instruments
that contain both liability and equity elements are accounted for separately, with the equity
component being assigned the residual amount, after deducting from the instrument as a whole
the amount separately determined as the fair value of the liability component on the date of issue.
After initial measurement, other financial liabilities are subsequently measured at amortized cost
using the effective interest rate method. Amortized cost is calculated by taking into account any
discount or premium on the issue and fees that are an integral part of the effective interest rate.
Any effects of restatement of foreign currency-denominated liabilities are recognized in the
consolidated statement of income.

This accounting policy applies primarily to the Group’s short-term and long-term debt, accounts
payable and accrued expenses, and other current and noncurrent liabilities and obligations that
meet the above definition (other than liabilities covered by other accounting standards, such as
income tax payable).

Other financial liabilities are included in current liabilities if maturity is within 12 months or when
the Group expects to realize or collect within 12 months from the reporting date. Otherwise, they
are classified as noncurrent liabilities.

Exchangeable bonds
In 2014, AYCFL issued exchangeable bonds (see Note 20). On issuance of exchangeable bonds,
the proceeds are allocated between the embedded exchange option and the liability component.
The embedded exchange option is recognized at its fair value. The liability component is
recognised as the difference between total proceeds and the fair value of the exchange option.

The exchange option is subsequently carried at its fair value with fair value changes recognized in
profit or loss. The liability component is carried at amortised cost until the liability is extinguished
on exchange or redemption.

When the exchange option is exercsed, the carrying amounts of the liability component and the
exchange option are derecognized. The related investment in equity security of the guarantor is
likewise derecognized.

At the AC Consolidated level, the exchangeable bond is classified as a compound instrument and
accounted for using split accounting. The value allocated to the equity component at initial
recognition is the residual amount after deducting the fair value of the liability component from the
issue proceeds of the exchangeable bonds. Any transaction costs incurred in relation to the
issuance of the exchangeable bonds is to be apportioned between the liability and equity
component based on their values at initial recognition.

Subsequently, the liability component is carried at amortized cost using the effective interest rate
method while the equity component is not revalued. When the convertion option is exercised, the
carrying amount of the liability and equity component is derecognized and their balances
transferred to equity. No gain or loss is recognized upon exercise of the conversion option.

Deposits, retentions payable and customers’ guaranty and other deposits


Deposits, retentions payable and customers’ deposits and other deposits are initially measured at
fair value. After initial recognition, these are subsequently measured at amortized cost using the
effective interest rate method. The difference between the cash received and its fair value is
deferred (included in the “Deferred credits” account in the consolidated statement of financial
position). Deposits are amortized using the straight-line method with the amortization included
under the “Rendering of services” account in the consolidated statement of income while

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customers’ guaranty and other deposits are amortized over the remaining concession period with
the amortization included under “Interest and other financing charges” in the consolidated
statement of income.

Financial guarantee contracts


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
liability is measured at the higher of the best estimate of expenditure required to settle the present
obligation at the reporting date and the amount recognized less cumulative amortization.

Derecognition of Financial Assets and Liabilities


Financial asset
A financial asset (or, where applicable, a part of a financial asset or part of a group of financial
assets) is derecognized where:
· the rights to receive cash flows from the assets have expired;
· the Group retains the right to receive cash flows from the asset, but has assumed an
obligation to pay them in full without material delay to a third-party under a “pass-through”
arrangement; or
· the Group has transferred its right to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred
nor retained the risks and rewards of the asset but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset or has entered into
a pass-through arrangement, and has neither transferred nor retained substantially all the risks
and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent
of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of
a guarantee over the transferred asset is measured at the lower of the original carrying amount of
the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liability
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired. Where an existing financial liability is replaced by another from the
same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability
and the recognition of a new liability, and the difference in the respective carrying amounts is
recognized in the consolidated statement of income.

Impairment of Financial Assets


The Group assesses at each reporting date whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is
deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one
or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)
and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated. Evidence of impairment may
include indications that the borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will enter
bankruptcy or other financial reorganization and where observable data indicate that there is
measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.

Loans and receivables


For loans and receivables carried at amortized cost, the Group first assesses whether objective
evidence of impairment exists individually for financial assets that are individually significant, or
collectively for financial assets that are not individually significant. If the Group determines that no
objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risk
characteristics and collectively assesses for impairment. Those characteristics are relevant to the

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estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability
to pay all amounts due according to the contractual terms of the assets being evaluated. Assets
that are individually assessed for impairment and for which an impairment loss is, or continues to
be, recognized are not included in a collective assessment for impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of
estimated future cash flows (excluding future credit losses that have not been incurred) discounted
at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at
initial recognition). The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is charged to the consolidated statement of income under
“Provision for doubtful accounts”. Interest income continues to be recognized based on the
original effective interest rate of the asset. Loans and receivables, together with the associated
allowance accounts, are written off when there is no realistic prospect of future recovery and all
collateral has been realized. If, in a subsequent period, the amount of the estimated impairment
loss decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in consolidated statement of income, to the extent that the carrying value of the asset
does not exceed its amortized cost at the reversal date.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics such as customer type, payment history, past-due status and
term.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics
similar to those in the group. Historical loss experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that did not affect the period on which
the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Group to reduce any differences between loss estimates
and actual loss experience.

Financial assets carried at cost


If there is an objective evidence that an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value cannot be reliably measured, or on
derivative asset that is linked to and must be settled by delivery of such an unquoted equity
instrument, the amount of the loss is measured as the difference between the carrying amount
and the present value of estimated future cash flows discounted at the current market rate of
return for a similar financial asset.

AFS financial assets


In the case of equity investments classified as AFS financial assets, impairment would include a
significant or prolonged decline in the fair value of the investments below its cost. “Significant” is
to be evaluated against the original cost of the investment and “prolonged” against the period in
which the fair value has been below its original cost. Where there is evidence of impairment loss,
the cumulative loss - measured as the difference between the acquisition cost and the current fair
value, less any impairment loss on that financial asset previously recognized in the consolidated
statement of income - is removed from other comprehensive income and recognized in the
consolidated statement of income under “Other charges.” Impairment losses on equity
investments are not reversed through the consolidated statement of income. Increases in fair
value after impairment are recognized directly in the consolidated statement of comprehensive
income.

In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount and is accrued using the rate of interest used to discount future cash

*SGVFS011298*
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flows for the purpose of measuring impairment loss and is recorded as part of “Interest income”
account in the consolidated statement of income. If, in a subsequent year, the fair value of a debt
instrument increased and the increase can be objectively related to an event occurring after the
impairment loss was recognized in the consolidated statement of income, the impairment loss is
reversed through the consolidated statement of income.

Offsetting Financial Instruments


Financial assets and financial liabilities are offset and the net amount reported in the consolidated
statement of financial position if, and only if, there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net basis, or to realize the asset and
settle the liability simultaneously.

Inventories
Inventories are carried at the lower of cost and net realizable value (NRV). Costs incurred in
bringing each product to its present location and conditions are generally accounted for as follows:

Real estate inventories


· Land cost
· Land improvement cost
· Amounts paid to contractors for construction and development
· Borrowing costs, planning and design costs, costs of site preparation, professional fees,
property transfer taxes, construction overheads and other related costs

Club shares - cost is determined mainly on the basis of the actual development cost incurred plus
the estimated development cost to complete the project based on the estimates as determined by
the in-house engineers, adjusted with the actual costs incurred as the development progresses,
including borrowing costs during the development stage.

Vehicles - purchase cost on specific identification basis.


Finished goods and work-in-process - determined on a moving average basis; cost includes direct
materials and labor and a proportion of manufacturing overhead costs based on normal operating
capacity.

Parts and accessories, materials, supplies and others - purchase cost on a moving average basis.

NRV for real estate inventories, club shares, vehicles, finished goods and work-in-process and
parts and accessories is the estimated selling price in the ordinary course of business, less
estimated costs of completion and estimated costs necessary to make the sale, while NRV for
materials, supplies and others represents the related replacement costs. In the event that NRV is
lower than cost, the decline shall be recognized as an expense in the consolidated statement of
income.

The cost of real estate inventory recognized in the consolidated statement of income on disposal
is determined with reference to the specific costs incurred on the property and allocated to
saleable area based on relative size.

An allowance for inventory losses is provided for slow-moving, obsolete and defective inventories
based on management’s physical inspection and evaluation. When inventories are sold, the cost
and related allowance is removed from the account and the difference is charged against
operations.

Prepaid Expenses
Prepaid expenses are carried at cost less the amortized portion. These typically comprise
prepayments for commissions, marketing fees and promotion, taxes and licenses, rentals and
insurance.

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Creditable Withholding Tax


This pertains to the tax withheld at source by the Group’s customer and is creditable against the
income tax liability of the Group.

Value-Added Tax (VAT)


The input VAT pertains to the 12% indirect tax paid by the Group in the course of the Group’s
trade or business on local purchase of goods or services.

Output VAT pertains to the 12% tax due on the local sale of goods or services by the Group.

If at the end of any taxable month, the output VAT exceeds the input VAT, the outstanding
balance is included under “Other current liabilities” account. If the input VAT exceeds the output
VAT, the excess shall be carried over to the succeeding months and included under “Other current
asset” account.

Noncurrent Assets Held for Sale


Noncurrent assets held for sale are carried at the lower of its carrying amount and fair value less
costs to sell. At reporting date, the Group classifies assets as held for sale (disposal group) when
their carrying amount will be recovered principally through a sale transaction rather than through
continuing use. For this to be the case the asset must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets and
its sale must be highly probable. For the sale to be highly probable, the appropriate level of
management must be committed to a plan to sell the asset and an active program to locate a
buyer and complete the plan must have been initiated. Further, the asset must be actively
marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the
sale should be expected to qualify for recognition as a completed sale within one year from the
date of classification.

Land and Improvements


Land and improvements consist of properties for future development and are carried at the lower
of cost or NRV. NRV is the estimated selling price in the ordinary course of business, less
estimated cost of completion and estimated costs necessary to make the sale. Cost includes cost
of purchase and those costs incurred for development and improvement of the properties.

Investments in Associates and Joint Ventures


An associate is an entity over which the Group has significant influence. Significant influence is
the power to participate in the financial and operating policy decisions of the investee, but is not
control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the joint venture. Joint control is the contractually
agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control are similar to those
necessary to determine control over subsidiaries.

The Group’s investments in associates and joint ventures are accounted for using the equity
method.

Under the equity method, the investment in associates or joint ventures is initially recognized at
cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s
share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to
the associate or joint venture is included in the carrying amount of the investment and is neither
amortized nor individually tested for impairment.

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The consolidated statement of income reflects the Group’s share of the results of operations of the
associate or joint venture. Any change in OCI of these investees is presented as part of the
Group’s OCI. In addition, when there has been a change recognized directly in the equity of the
associate or joint venture, the Group recognizes its share of any changes, when applicable, in the
consolidated statement of changes in equity. Unrealized gains and losses resulting from
transactions between the Group and the associate or joint venture are eliminated to the extent of
the interest in the associate or joint venture.

The aggregate of the Group’s share of profit or loss of associates and joint ventures is shown on
the face of the consolidated statement of income outside operating profit and represents profit or
loss after tax and non-controlling interests in the subsidiaries of the associate or joint venture.
The financial statements of the associate or joint venture are prepared for the same reporting
period as the Group. When necessary, adjustments are made to bring the accounting policies in
line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognize
an impairment loss on its investment in its associate or joint venture. At each reporting date, the
Group determines whether there is objective evidence that the investment in the associate or joint
venture is impaired. If there is such evidence, the Group calculates the amount of impairment as
the difference between the recoverable amount of the associate or joint venture and its carrying
value, then recognizes the loss as “Share of profit of associates and joint ventures” in the
statement of income.

Upon loss of significant influence over the associate or joint control over the joint venture, the
Group measures and recognizes any retained investment at its fair value. Any difference between
the carrying amount of the associate or joint venture upon loss of significant influence or joint
control and the fair value of the retained investment and proceeds from disposal is recognized in
profit or loss.

Interest in a Joint Operation


Makati Development Corporation (MDC), an ALI subsidiary, has an interest in a joint operation,
whereby the venturers have a contractual arrangement that establishes joint control. MDC
recognizes its share of jointly held assets, liabilities, income and expenses of the joint venture with
similar items, line by line, in its financial statements. The financial statements of the joint venture
are prepared for the same reporting period as the Group. Adjustments are made where
necessary to bring the accounting policies into line with those of the Group.

Investment Properties
Investment properties comprise completed property and property under construction or
re-development that are held to earn rentals and for capital appreciation, and are not occupied by
the companies in the Group. The Group uses the cost model in measuring investment properties
since this represents the historical value of the properties subsequent to initial recognition.
Investment properties, except for land, are carried at cost less accumulated depreciation and
amortization and any impairment in value. Land is carried at cost less any impairment in value.

Expenditures incurred after the investment property has been put in operation, such as repairs
and maintenance costs, are normally charged against income in the period in which the costs are
incurred.

Construction-in-progress (including borrowing cost) are carried at cost and transferred to the
related investment property account when the construction and related activities to prepare the
property for its intended use are complete, and the property is ready for occupation.

Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the assets, regardless of utilization. The estimated useful lives and the depreciation
and amortization method are reviewed periodically to ensure that the period and method of

*SGVFS011298*
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depreciation and amortization are consistent with the expected pattern of economic benefits from
items of investment properties.

The estimated useful lives of investment properties follow:

Land improvements 8-40 years


Buildings 20-40 years

Investment properties are derecognized when either they have been disposed of or when the
investment property is permanently withdrawn from use and no future economic benefit is
expected from its disposal. Any gain or loss on the retirement or disposal of an investment
property is recognized in the consolidated statement of income in the year of retirement or
disposal.

Transfers are made to investment property when there is a change in use, evidenced by ending of
owner-occupation, commencement of an operating lease to another party or ending of
construction or development. Transfers are made from investment property when, and only when,
there is a change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or for disclosure purposes.

Property, Plant and Equipment


Property, plant and equipment, except for land, are carried at cost less accumulated depreciation
and amortization and any impairment in value. Land is carried at cost less any impairment in
value. The initial cost of property, plant and equipment consists of its construction cost or
purchase price and any directly attributable costs of bringing the property, plant and equipment to
its working condition and location for its intended use.

Construction-in-progress is stated at cost. This includes cost of construction and other direct
costs. Construction-in-progress is not depreciated until such time that the relevant assets are
completed and put into operational use.

Major repairs are capitalized as part of property, plant and equipment only when it is probable that
future economic benefits associated with the item will flow to the Group and the cost of the items
can be measured reliably. All other repairs and maintenance are charged against current
operations as incurred.

Depreciation and amortization of property, plant and equipment commences once the property,
plant and equipment are available for use and computed on a straight-line basis over the
estimated useful lives of the property, plant and equipment as follows:

Buildings and improvements 3 to 40 years


Machinery and equipment 3 to 10 years
Hotel property and equipment 20 to 50 years
Furniture, fixtures and equipment 2 to 10 years
Transportation equipment 3 to 5 years

The assets’ residual values, useful lives and depreciation and amortization methods are reviewed
periodically to ensure that the amounts, periods and method of depreciation and amortization are
consistent with the expected pattern of economic benefits from items of property, plant and
equipment.

When property, plant and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization and accumulated provision for impairment losses, if
any, are removed from the accounts and any resulting gain or loss is credited to or charged
against current operations.

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Service Concession Assets and Obligations


The Group accounts for its concession arrangements with Department of Public Works and
Highways (DPWH), Metropolitan Waterworks and Sewerage System (MWSS), Province of Laguna
(POL), Tourism Infrastructure and Enterprise Zone Authority (TIEZA) and Clark Development
Corporation (CDC) under the Intangible Asset model as it receives the right (license) to charge
users of public service. Under the Group’s concession agreements, the Group is granted the sole
and exclusive right and discretion during the concession period to manage, occupy, operate,
repair, maintain, decommission and refurbish the identified facilities required to provide the public
water services. The legal title to these assets shall remain with DPWH, MWSS, POL, TIEZA and
CDC at the end of the concession period.

On the other hand, the concession arrangements with the Provincial Government of Cebu are
accounted for under the Financial Asset model as it has an unconditional contractual right to
receive cash or other financial asset for its construction services from or at the direction of the
grantor. Under the concession arrangement, Cebu Manila Water Development, Inc. (CMWD) (a
subsidiary of MWC) is awarded the right to deliver Bulk Water supply to the grantor for a specific
period of time under the concession period.

The “Service concession assets” (SCA) pertain to the fair value of the service concession
obligations at drawdown date and construction costs related to the rehabilitation works performed
by the Group and other local component costs and cost overruns paid by the Group. These are
amortized using the straight-line method over the life of the related concession.

In addition, the Company and MWC recognize and measure revenue from rehabilitation works in
accordance with PAS 11, Construction Contracts, and PAS 18, Revenue, for the services it
performs. Recognition of revenue is by reference to the 'stage of completion method', also known
as the 'percentage of completion method' as provided under PAS 11. Contract revenue and costs
from rehabilitation works are recognized as "Revenue from rehabilitation works" and "Cost of
rehabilitation works" in the consolidated statement of income in the period in which the work is
performed.

Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is the fair value as at the date of acquisition.
Subsequently, intangible assets are measured at cost less accumulated amortization and
provision for impairment loss, if any. Internally generated intangible assets, 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 estimated useful life of intangible assets is assessed as either finite or indefinite.

The estimated useful lives of intangible assets with finite lives are assessed at the individual asset
level. Intangible assets with finite lives are amortized over their estimated useful lives on a
straight line basis. Periods and method of amortization for intangible assets with finite useful lives
are reviewed annually or earlier when an indicator of impairment exists.

The estimated useful lives of intangible assets follow:

Developed software 15 years


Customer relationships 7 years
Order backlog 6 months
Unpatented technology 5 years
Licenses 3 years
Technical service agreement 3 years
Technology and trade name 3-5 years

*SGVFS011298*
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Changes in the expected useful life or the expected pattern of consumption of future economic
benefits embodied in the asset is accounted for by changing the amortization period or method, as
appropriate, and are treated as changes in accounting estimates. The amortization expense on
intangible assets with finite lives is recognized in the consolidated statement of income in the
expense category consistent with the function of the intangible assets.

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment
annually, either individually or at the CGU level. The assessment of indefinite useful life is
reviewed annually to determine whether the indefinite useful life continues to be supportable. If
not, the change in useful life from indefinite to finite is made on a prospective basis.

A gain or loss arising from derecognition of an intangible asset is measured as the difference
between the net disposal proceeds and the carrying amount of the intangible assets and is
recognized in the consolidated statement of income when the intangible asset is derecognized.

As of December 31, 2014 and 2013, intangible asset pertaining to leasehold right is included
under “Other noncurrent assets”.

Research and development costs


Research costs are expensed as incurred. Development expenditures on an individual project are
recognized as an intangible asset when the Group can demonstrate:
· The technical feasibility of completing the intangible asset so that the asset will be available
for use or sale;
· Its intention to complete and its ability to use or sell the asset;
· How the asset will generate future economic benefits;
· The availability of resources to complete the asset;
· The ability to measure reliably the expenditure during development; and,
· The ability to use the intangible asset generated.

Following initial recognition of the development expenditure as an asset, the asset is carried at
cost less any accumulated amortization and accumulated impairment losses. Amortization of the
asset begins when development is complete and the asset is available for use. It is amortized over
the period of expected future benefit. During the period of development, the asset is tested for
impairment annually.

Business Combinations and Goodwill


Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred, measured at acquisition date fair
value and the amount of any non-controlling interest in the acquiree. For each business
combination, the acquirer measures the non-controlling interest in the acquiree either at fair value
or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs are
expensed as incurred.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for
appropriate classification and designation in accordance with the contractual terms, economic
circumstances and pertinent conditions as at the acquisition date. This includes the separation of
embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s
previously held equity interest in the acquiree is remeasured to fair value at the acquisition date
and included under “Remeasurement gain/loss arising from business combination” in the
consolidated statement of income.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at
the acquisition date. Subsequent changes to the fair value of the contingent consideration which
is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in profit
or loss or as a change to other comprehensive income. If the contingent consideration is
classified as equity, it should not be remeasured until it is finally settled within equity.

*SGVFS011298*
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Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred and the amount recognized for non-controlling interest over the net identifiable assets
acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets
of the subsidiary acquired, the difference is recognized in profit or loss as bargain purchase gain.
The Group reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and reviews the procedures used to measure amounts to be recognized at the
acquisition date if the reassessment still results in an excess of the fair value of net assets
acquired over the aggregate consideration transferred, then the gain is recognized in the profit or
loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment loss.
Goodwill is reviewed for impairment, annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired. For purposes of impairment
testing, goodwill acquired in a business combination is, from the acquisition date, allocated to
each of the Group’s cash-generating units (CGUs), or groups of CGUs, that are expected to
benefit from the synergies of the combination, irrespective of whether other assets or liabilities of
the Group are assigned to those units or groups of units.

Each unit or group of units to which the goodwill is allocated should:

· represent the lowest level within the Group at which the goodwill is monitored for internal
management purposes; and
· not be larger than an operating segment determined in accordance with PFRS 8, Operating
Segments.

Impairment is determined by assessing the recoverable amount of the CGU (or group of CGUs),
to which the goodwill relates. Where the recoverable amount of the CGU (or group of CGUs) is
less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a
CGU (or group of CGUs) 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 these
circumstances is measured based on the relative values of the operation disposed of and the
portion of the CGU retained. If the acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities exceeds the cost of the business combination, the acquirer shall
recognize immediately in the consolidated statement of income any excess remaining after
reassessment.

If the initial accounting for a business combination can be determined only provisionally by the end
of the period in which the combination is effected because either the fair values to be assigned to
the acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination
can be determined only provisionally, the acquirer shall account for the combination using those
provisional values. The acquirer shall recognize any adjustments to those provisional values as a
result of completing the initial accounting within twelve months of the acquisition date as follows:
(i) the carrying amount of the identifiable asset, liability or contingent liability that is recognized or
adjusted as a result of completing the initial accounting shall be calculated as if its fair value at the
acquisition date had been recognized from that date; (ii) goodwill or any gain recognized shall be
adjusted by an amount equal to the adjustment to the fair value at the acquisition date of the
identifiable asset, liability or contingent liability being recognized or adjusted; and (iii) comparative
information presented for the periods before the initial accounting for the combination is complete
shall be presented as if the initial accounting has been completed from the acquisition date.

Combinations of entities under common control


Business combinations of entities under common control are accounted for using the pooling of
interests method. The pooling of interests method is generally involve the following:

· The assets and liabilities of the combining entities are reflected in the consolidated financial
statements at their carrying amounts. No adjustments are made to reflect fair values, or

*SGVFS011298*
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recognize any new assets or liabilities, at the date of the combination. The only adjustments
that are made are those adjustments to harmonize accounting policies.
· No new goodwill is recognized as a result of the combination. The only goodwill that is
recognized is any existing goodwill relating to either of the combining entities. Any difference
between the consideration paid or transferred and the equity acquired is reflected within
equity.
· The consolidated statement of income reflects the results of the combining entities for the full
year, irrespective of when the combination took place.
· Comparatives are presented as if the entities had always been combined.

The Group opted not to restate the comparative financial information in the consolidated financial
statements as allowed by the Philippines Interpretations Committee (PIC) Q&A 2012-01.

The effects of intercompany transactions on current assets, current liabilities, revenues, and cost
of sales for the current period presented and on retained earnings at the beginning of the current
period presented are eliminated to the extent possible.

Asset Acquisitions
If the assets acquired and liabilities assumed in an acquisition transaction do not constitute a
business, the transaction is accounted for as an asset acquisition. The Group identifies and
recognizes the individual identifiable assets acquired (including those assets that meet the
definition of, and recognition criteria for, intangible assets) and liabilities assumed. The acquisition
cost is allocated to the individual identifiable assets and liabilities on the basis of their relative fair
values at the date of purchase. Such a transaction or event does not give rise to goodwill. Where
the Group acquires a controlling interest in an entity that is not a business, but obtains less than
100% of the entity, after it has allocated the cost to the individual assets acquired, it notionally
grosses up those assets and recognizes the difference as non-controlling interests.

Impairment of Nonfinancial Assets


The Group assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is required,
the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount
is calculated as the higher of the asset’s or CGU’s fair value less costs to sell and its value in use
and is determined for an individual asset, unless the asset does not generate cash inflows that are
largely independent of those from other assets or groups of assets. Where the carrying amount of
an asset exceeds its recoverable amount, the asset is considered impaired and is written down to
its recoverable amount. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessment of the
time value of money and the risks specific to the asset. In determining fair value less cost to sell,
an appropriate valuation model is used. These calculations are corroborated by valuation
multiples or other fair value indicators. Impairment losses of continuing operations are recognized
in the consolidated statement of income in those expense categories consistent with the function
of the impaired asset.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there
is any indication that previously recognized impairment losses may no longer exist or may have
decreased. If such indication exists, the recoverable amount is estimated. A previously
recognized impairment loss is reversed only if there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was recognized. If that
is the case, the carrying amount of the asset is increased to its recoverable amount. That
increased amount cannot exceed the carrying amount that would have been determined, net of
depreciation and amortization, had no impairment loss been recognized for the asset in prior
years. Such reversal is recognized in the consolidated statement of income unless the asset is
carried at revalued amount, in which case the reversal is treated as revaluation increase. After
such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate
the asset’s revised carrying amount, less any residual value, on a systematic basis over its
remaining useful life.

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Investments in associates and joint ventures


After application of the equity method, the Group determines whether it is necessary to recognize
any additional impairment loss with respect to the Group’s net investment in the investee
company. The Group determines at each reporting date whether there is any objective evidence
that the investment in the investee company is impaired. If this is the case, the Group calculates
the amount of impairment as being the difference between the recoverable amount of the investee
company and the carrying cost and recognizes the amount as a reduction of the “Share of profit of
associates and joint ventures” account in the consolidated statement of income.

Impairment of goodwill
For assessing impairment of goodwill, a test for impairment is performed annually and when
circumstances indicate that the carrying value may be impaired. Impairment is determined for
goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the
goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an
impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future
periods.

Fair Value Measurement


The Group measures financial instruments such as financial assets at FVPL, derivative
instruments and AFS financial assets at fair value at each reporting date. Also, fair values of
financial instruments measured at amortized cost and nonfinancial assets such as investment
properties are disclosed in Note 33 to the consolidated financial statements.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to sell the asset or transfer the
liability takes place either:

· In the principal market for the asset or liability; or


· In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants
would use when pricing the asset or liability, assuming that market participants act in their
economic best interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial
statements are categorized within the fair value hierarchy, described as follows, based on the
lowest level input that is significant to the fair value measurement as a whole:

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets and
liabilities.
· Level 2 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is directly or indirectly observable.
· Level 3 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is unobservable.

For assets and liabilities that are recognized in the consolidated financial statements on a
recurring basis, the Group determines whether transfers have occurred between Levels in the
hierarchy by reassessing categorization (based on the lowest level input that is significant to the
fair value measurement as a whole) at the end of each reporting period.

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For the purpose of fair value disclosures, the Group has determined classes of assets and
liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of
the fair value hierarchy as explained above.

Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligations and a reliable estimate can be made of the amount of the
obligation.

Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a


separate asset but only when the reimbursement is virtually certain. If the effect of the time value
of money is material, provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used, the increase in the
provision due to the passage of time is recognized as interest expense. Provisions are reviewed
at each reporting date and adjusted to reflect the current best estimate.

Equity
Capital stock is measured at par value for all shares subscribed, issued and outstanding. When
the shares are sold at premium, the difference between the proceeds at the par value is credited
to “Additional paid-in capital” (APIC) account. Direct costs incurred related to equity issuance are
chargeable to “Additional paid-in capital” account. If additional paid-in capital is not sufficient, the
excess is charged against retained earnings. When the Group issues more than one class of
stock, a separate account is maintained for each class of stock and the number of shares issued.

Subscriptions receivable pertains to the uncollected portion of the subscribed shares and is
presented as reduction from equity.

Retained earnings represent accumulated earnings of the Group less dividends declared.

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, if reissued, is recognized in additional paid-in
capital. Voting rights related to treasury shares are nullified for the Group and no dividends are
allocated to them respectively. When the shares are retired, the capital stock account is reduced
by its par value and the excess of cost over par value upon retirement is debited to additional
paid-in capital when the shares were issued and to retained earnings for the remaining balance.

Revenue and Cost Recognition


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, regardless of when payment is being made.
Revenue is measured at the fair value of the consideration received or receivable, taking into
account contractually defined terms of payment and excluding taxes or duty. The following specific
recognition criteria must also be met before revenue is recognized:

For real estate sales, the Group assesses whether it is probable that the economic benefits will
flow to the Group when the sales prices are collectible. Collectibility of the sales price is
demonstrated by the buyer’s commitment to pay, which in turn is supported by substantial initial
and continuing investments that give the buyer a stake in the property sufficient that the risk of
loss through default motivates the buyer to honor its obligation to the seller. Collectibility is also
assessed by considering factors such as the credit standing of the buyer, age and location of the
property.

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Revenue from sales of completed real estate projects is accounted for using the full accrual
method. In accordance with Philippine Interpretations Committee (PIC), Q&A 2006-01, the
percentage-of-completion method is used to recognize income from sales of projects where the
Group has material obligations under the sales contract to complete the project after the property
is sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary
stage (i.e., engineering, design work, construction contracts execution, site clearance and
preparation, excavation and the building foundation are finished, and the costs incurred or to be
incurred can be measured reliably). Under this method, revenue is recognized as the related
obligations are fulfilled, measured principally on the basis of the estimated completion of a
physical proportion of the contract work.

Any excess of collections over the recognized receivables are included under “Other current
liabilities” in the liabilities section of the consolidated statement of financial position.

If any of the criteria under the full accrual or percentage-of-completion method is not met, the
deposit method is applied until all the conditions for recording a sale are met. Pending recognition
of sale, cash received from buyers are presented under the “Other current liabilities” account in
the liabilities section of the consolidated statement of financial position.

Cost of real estate sales is recognized consistent with the revenue recognition method applied.
Cost of subdivision land and condominium units sold before the completion of the development is
determined on the basis of the acquisition cost of the land plus its full development costs, which
include estimated costs for future development works, as determined by the Group’s in-house
technical staff.

The cost of real estate inventory recognized in profit or loss on disposal is determined with
reference to the specific costs incurred on the property allocated to saleable area based on
relative size and takes into account the percentage of completion used for revenue recognition
purposes.

Revenue from construction contracts are recognized using the percentage-of-completion method,
measured principally on the basis of the estimated physical completion of the contract work.

Contract costs include all direct materials and labor costs and those indirect costs related to
contract performance. Expected losses on contracts are recognized immediately when it is
probable that the total contract costs will exceed total contract revenue. Changes in contract
performance, contract conditions and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements which may result in revisions to estimated costs
and gross margins are recognized in the year in which the changes are determined.

Rental income under noncancellable and cancellable leases on investment properties is


recognized in the consolidated statement of income on a straight-line basis over the lease term
and the terms of the lease, respectively, or based on a certain percentage of the gross revenue of
the tenants, as provided under the terms of the lease contract.

Rooms revenue from hotel and resort operations are recognized when services are rendered.
Revenue from banquets and other special events are recognized when the events take place.

Water and sewer revenue are recognized when the related water and sewerage services are
rendered. Water and sewerage are billed every month according to the bill cycles of the
customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at
end of the month are estimated and accrued. These estimates are based on historical
consumption of the customers. A certain percentage of the water revenue are recognized as
environmental charges as provided for in the concession agreement. Other customer related fees
such as reconnection and disconnection fees are recognized when these services have been
rendered.

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Revenue from rehabilitation works is recognized and measured by the Group in accordance with
PAS 11 and PAS 18 for the service. This includes revenue from rehabilitation works which is
equivalent to the related cost for the rehabilitation works covered by the service concession
arrangements which is recognized as part of SCA.

When the Group provides construction or upgrade services, the consideration received or
receivable is recognized at its fair value. The Group accounts for revenue and costs relating to
operation services in accordance with PAS 18.

Revenue from sales of electronic products and vehicles and related parts and accessories are
recognized when the significant risks and rewards of ownership of the goods have passed to the
buyer and the amount of revenue can be measured reliably. Revenue is measured at the fair
value of the consideration received excluding discounts, returns, rebates and sales taxes.

Marketing fees, management fees from administrative and property management and revenue
from vehicle repairs are recognized when services are rendered.

Revenue from digitizing and document creation services are recognized when the service is
completed and electronically sent to the customer. Provision for discounts and other adjustments
are provided for in the same period the related sales are recorded.

Revenue from implementation of human resource outsourcing services arising from stand-alone
service contracts that require significant modification or automization of software is recognized
based on percentage-of-completion method.

Revenue from run and maintenance of human resource outsourcing services arising from a stand-
alone post contract customer support or services is recognized on a straight-line basis over the life
of the contract.

Revenue from implementation and run and maintenance of finance and accounting outsourcing
services arising from multiple deliverable software arrangements is recognized on a straight-line
basis over the life of the contract.

Interest income is recognized as it accrues using the effective interest method.

Dividend income is recognized when the right to receive payment is established.

Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception of the lease only if one of the following applies: (a) there is a
change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal
option is exercised or extension granted, unless the term of the renewal or extension was initially
included in the lease term; (c) there is a change in the determination of whether fulfillment is
dependent on a specified asset; or (d) there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when
the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the
date of renewal or extension period for scenario (b).

Group as lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the
consolidated asset are classified as operating leases. Fixed lease payments are recognized as an
expense in the consolidated statement of income on a straight-line basis while the variable rent is
recognized as an expense based on terms of the lease contract.

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Finance leases, which transfer substantially all the risks and benefits incidental to ownership of the
leased item, are capitalized at the inception of the lease at the fair value of the leased property or,
if lower, at the present value of the minimum lease payments. Lease payments are apportioned
between the finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are charged directly against
income.

Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the
assets or the respective lease terms.

Group as lessor
Leases where the Group does not transfer substantially all the risks and benefits of ownership of
the assets are classified as operating leases. Lease payments received are recognized as
income in the consolidated statement of income on a straight-line basis over the lease term. Initial
direct costs incurred in negotiating operating leases are added to the carrying amount of the
leased asset and recognized over the lease term on the same basis as the rental income.
Contingent rent is recognized as revenue in the period in which it is earned.

Commissions
Commissions paid to sales or marketing agents on the sale of pre-completed real estate units are
deferred when recovery is reasonably expected and are charged to expense in the period in which
the related revenue is recognized as earned. Accordingly, when the percentage-of-completion
method is used, commissions are likewise charged to expense in the period the related revenue is
recognized. Commission expense is included in the “Costs of sales” account in the consolidated
statement of income.

Expenses
Costs of rendering services and general and administrative expenses, except for lease
agreements, are recognized as expense as they are incurred.

Borrowing Costs
Borrowing costs directly attributable to the acquisition or construction of an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale are capitalized as part of
the cost of the respective assets (included in “Inventories”, “Investment properties”, “Property,
plant and equipment” and “Service concession assets” accounts in the consolidated statement of
financial position). All other borrowing costs are expensed in the period in which they occur.
Borrowing costs consist of interest and other costs that an entity incurs in connection with the
borrowing of funds.

The interest capitalized is calculated using the Group’s weighted average cost of borrowings after
adjusting for borrowings associated with specific developments. Where borrowings are
associated with specific developments, the amounts capitalized is the gross interest incurred on
those borrowings less any investment income arising on their temporary investment. Interest is
capitalized from the commencement of the development work until the date of practical
completion. The capitalization of borrowing costs is suspended if there are prolonged periods
when development activity is interrupted. If the carrying amount of the asset exceeds its
recoverable amount, an impairment loss is recorded.

Pension Cost
Defined benefit plan
The net defined benefit liability or asset is the aggregate of the present value of the defined benefit
obligation at the end of the reporting period reduced by the fair value of plan assets (if any),
adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling
is the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.

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The cost of providing benefits under the defined benefit plans is actuarially determined using the
projected unit credit method. This method reflects services rendered by employees up to the date
of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial
valuations are conducted with sufficient regularity, with the option to accelerate when significant
changes to underlying assumptions occur.

Defined benefit costs comprise the following:


· Service cost
· Net interest on the net defined benefit liability or asset
· Remeasurements of net defined benefit liability or asset

Service costs which include current service costs, past service costs and gains or losses on non-
routine settlements are recognized as expense in profit or loss. Past service costs are recognized
when plan amendment or curtailment occurs.

Net interest on the net defined benefit liability or asset is the change during the period in the net
defined benefit liability or asset that arises from the passage of time which is determined by
applying the discount rate based on government bonds to the net defined benefit liability or asset.
Net interest on the net defined benefit liability or asset is recognized as expense or income in
profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in
the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized
immediately in other comprehensive income in the period in which they arise. Remeasurements
are not reclassified to profit or loss in subsequent periods.

Pension liabilities are the aggregate of the present value of the defined benefit obligation at the
end of the balance sheet date reduced by the fair value of plan assets, adjusted for any effect of
limiting a net pension asset to the asset ceiling. The asset ceiling is the present value of any
economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not
available to the creditors of the Group, nor can they be paid directly to the Group. Fair value of
plan assets is based on market price information. When no market price is available, the fair
value of plan assets is estimated by discounting expected future cash flows using a discount rate
that reflects both the risk associated with the plan assets and the maturity or expected disposal
date of those assets (or, if they have no maturity, the expected period until the settlement of the
related obligations). If the fair value of the plan assets is higher than the present value of the
defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the
present value of economic benefits available in the form of refunds from the plan or reductions in
future contributions to the plan.

Defined contribution plans


Certain foreign subsidiaries participate in their respective country’s pension schemes which are
considered as defined contribution plans. A defined contribution plan is a pension plan under
which the subsidiary pays fixed contributions. These subsidiaries have no legal or constructive
obligations to pay further contributions if the fund does not hold sufficient assets to pay all the
benefits relating to employee service in the current and prior periods. The required contributions
to the national pension schemes are recognized as pension cost as accrued.

Termination benefit
Termination benefits are employee benefits provided in exchange for the termination of an
employee’s employment as a result of either an entity’s decision to terminate an employee’s
employment before the normal retirement date or an employee’s decision to accept an offer of
benefits in exchange for the termination of employment.

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A liability and expense for a termination benefit is recognized at the earlier of when the entity can
no longer withdraw the offer of those benefits and when the entity recognizes related restructuring
costs. Initial recognition and subsequent changes to termination benefits are measured in
accordance with the nature of the employee benefit, as either post-employment benefits, short-
term employee benefits, or other long-term employee benefits.

Employee leave entitlement


Employee entitlements to annual leave are recognized as a liability when they are accrued to the
employees. The undiscounted liability for leave expected to be settled wholly before twelve
months after the end of the annual reporting period is recognized for services rendered by
employees up to the end of the reporting period.

Income Tax
Current tax
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively enacted as of reporting date.

Current tax relating to items recognized directly in equity is recognized in equity and not in profit or
loss. The Group 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 tax
Deferred income tax is provided, using the liability method, on all temporary differences, with
certain exceptions, at the reporting date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, with certain
exceptions. Deferred tax assets are recognized for all deductible temporary differences,
carryforward benefit of unused tax credits from excess of minimum corporate income tax (MCIT)
over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the
extent that it is probable that taxable income will be available against which the deductible
temporary differences and carryforward benefits of MCIT and NOLCO can be utilized.

Deferred tax liabilities are not provided on nontaxable temporary differences associated with
investments in domestic subsidiaries, associates and interests in joint ventures. With respect to
investments in foreign subsidiaries, associates and interests in joint ventures, deferred tax
liabilities are recognized except where the timing of the reversal of the temporary difference can
be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the
extent that it is no longer probable that sufficient taxable income will be available to allow all as
part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at
each reporting date and are recognized to the extent that it has become probable that future
taxable income will allow all as part of the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rate that is expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates and tax laws that
have been enacted or substantively enacted as at the end of the reporting period. Movements in
the deferred income tax assets and liabilities arising from changes in tax rates are charged or
credited to income for the period.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same
taxable entity and the same authority.

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For periods where the income tax holiday (ITH) is in effect, no deferred taxes are recognized in
the consolidated financial statements as the ITH status of the subsidiary neither results in a
deductible temporary difference or temporary taxable difference. However, for temporary
differences that are expected to reverse beyond the ITH, deferred taxes are recognized.

Foreign Currency Transactions


The functional and presentation currency of Ayala Corporation and its subsidiaries (except for
AYCF, ACIFL, PFIL, BHL, AIVPL and IMI), is the Philippine Peso (P = ). Each entity in the Group
determines its own functional currency and items included in the financial statements of each
entity are measured using that functional currency. Transactions in foreign currencies are initially
recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional currency rate of
exchange ruling at the reporting date. All differences are taken to the consolidated statement of
income with the exception of differences on foreign currency borrowings that provide a hedge
against a net investment in a foreign entity. These are recognized in the consolidated statement
of comprehensive income until the disposal of the net investment, at which time they are
recognized in the consolidated statement of income. Tax charges and credits attributable to
exchange differences on those borrowings are also dealt with in equity. Nonmonetary items that
are measured in terms of historical cost in a foreign currency are translated using the exchange
rate as at the date of initial transaction. Nonmonetary items measured at fair value in a foreign
currency are translated using the exchange rate at the date when the fair value was determined.

The functional currency of AYCF, ACIFL, PFIL, BHL, AIVPL and IMI is the US Dollar (US$). As of
the reporting date, the assets and liabilities of these subsidiaries are translated into the
presentation currency of the Group at the rate of exchange ruling at the reporting date and their
statement of income accounts are translated at the weighted average exchange rates for the year.
The exchange differences arising on the translation are recognized in the consolidated statement
of comprehensive income and reported as a separate component of equity as “Cumulative
Translation Adjustment”. On disposal of a foreign entity, the deferred cumulative amount
recognized in the consolidated statement of comprehensive income relating to that particular
foreign operation shall be recognized in the consolidated statement of income.

Exchange differences arising from elimination of intragroup balances and intragroup transactions
are recognized in profit or loss. As an exception, if the exchange differences arise from intragroup
balances that, in substance, forms part of an entity’s net investment in a foreign operation, the
exchange differences are not to be recognized in profit or loss, but are recognized in OCI and
accumulated in a separate component of equity until the disposal of the foreign operation.

On disposal of a foreign entity, the deferred cumulative amount recognized in the consolidated
statement of comprehensive income relating to that particular foreign operation shall be
recognized in profit or loss.

The Group’s share in the associates’ translation adjustments are likewise included under the
“Cumulative translation adjustments” account in the consolidated statement of comprehensive
income.

MWC
As approved by the MWSS Board of Trustees (BOT) under Amendment No. 1 of the Concession
Agreement, the following will be recovered through billings to customers:

a. Restatement of foreign currency-denominated loans;


b. Excess of actual Concession Fee payment over the amounts of Concession Fees translated
using the base exchange rate assumed in the business plan approved every rate rebasing
exercise. The current base exchange rate is P= 44.0:US$1.0 based on the last rate rebasing
exercise effective on January 1, 2008;
c. Excess of actual interest payment translated at exchange spot rate on settlement date over
the amount of interest translated at drawdown rate; and

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d. Excess of actual payment of other financing charges relating to foreign currency-denominated


loans translated at exchange spot rate on settlement date over the amount of other financing
charges translated at drawdown rate.

In view of the automatic reimbursement mechanism, MWC recognizes deferred foreign currency
differential adjustment (FCDA) (included as part of “Other noncurrent assets” in the consolidated
statement of financial position) for both the realized and unrealized foreign exchange gains and
losses. Other water revenue-FCDA is credited (debited) upon recovery (refund) of realized foreign
exchange losses (gains). The write-off or reversal of the deferred FCDA pertaining to concession
fees will be made upon determination of the rebased foreign exchange rate, which is assumed in
the business plan approved by MWSS-RO during the latest Rate Rebasing exercise, unless
indication of impairment of the deferred FCDA would be evident at an earlier date.

Share-based Payments
The Group has equity-settled, share-based compensation plans with its employees.

PFRS 2 Options
For options granted after November 7, 2002 that have not vested on or before January 1, 2005,
the cost of equity-settled transactions with employees is measured by reference to the fair value at
the date on which they are granted. In valuing equity-settled transactions, vesting conditions,
including performance conditions, other than market conditions (conditions linked to share prices),
shall not be taken into account when estimating the fair value of the shares or share options at the
measurement date. Instead, vesting conditions are taken into account in estimating the number of
equity instruments that will ultimately vest. Fair value is determined by using the Black-Scholes
model, further details of which are provided in Note 28 to the consolidated financial statements.

The cost of equity-settled transactions is recognized, together with a corresponding increase in


equity, over the period in which the performance conditions are fulfilled, ending on the date on
which the relevant employees become fully entitled to the awards (‘vesting date’). The cumulative
expense recognized for equity-settled transactions at each reporting date until the vesting date
reflects the extent to which the vesting period has expired and the Group’s best estimate of the
number of equity instruments that will ultimately vest. The income or expense for a period
represents the movement in cumulative expense recognized as of the beginning and end of that
period.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum, an expense is


recognized as if the terms had not been modified. In addition, an expense is recognized for any
increase in the value of the transaction as a result of the modification, as measured at the date of
modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of


cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a
modification of the original award, as described in the previous paragraph.

Pre-PFRS 2 Options
For options granted before November 7, 2002 that have vested before January 1, 2005, the
intrinsic value of stock options determined as of grant date is recognized as expense over the
vesting period.

The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of diluted earnings per share (see Note 26).

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Employee share purchase plans


The Company and some of its subsidiaries have employee share purchase plans (ESOWN) which
allow the grantees to purchase the Company’s and its respective subsidiaries’ shares at a
discounted price. The Group recognizes stock compensation expense over the holding period.
The Group treats its ESOWN plan as option exercisable within a given period. These are
accounted for similar to the PFRS 2 options. Dividends paid on the awards that have vested are
deducted from equity and those paid on awards that are unvested are charged to profit or loss.
For the unsubscribed shares where the employees still have the option to subscribe in the future,
these are accounted for as options.

Earnings Per Share


Basic earnings per share (EPS) is computed by dividing net income attributable to common equity
holders by the weighted average number of common shares issued and outstanding during the
year. Diluted EPS is computed by dividing net income attributable to common equity holders by
the weighted average number of common shares issued and outstanding during the year plus the
weighted average number of common shares that would be issued on conversion of all the dilutive
potential common shares. Calculation of diluted EPS considers the potential ordinary shares of
subsidiaries, associates and joint ventures that have dilutive effect on the basic EPS of the
Company. The calculation of diluted EPS does not assume conversion, exercise or other issue of
potential common shares that would have an antidilutive effect on earnings per share. Basic and
diluted EPS are adjusted to give retroactive effect to any stock dividends declared during the
period.

Assets Held in Trust


Assets which are owned by MWSS, POL, TIEZA and CDC but are operated by the MWC Group
under the concession agreements are not reflected in the consolidated statement of financial
position but are considered as Assets Held in Trust (see Note 38).

Operating Segments
The Group’s operating businesses are organized and managed separately according to the nature
of the products and services provided, with each segment representing a strategic business unit
that offers different products and serves different markets. Financial information on operating
segments is presented in Note 29 to the consolidated financial statements.

Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets are not recognized in the consolidated financial statements but disclosed when
an inflow of economic benefits is probable.

Events after the Reporting Period


Post year-end events that provide additional information about the Group’s position at the
reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-
end events that are not adjusting events are disclosed in the consolidated financial statements
when material.

4. Significant Accounting Judgments and Estimates

The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The estimates and assumptions used
in the accompanying consolidated financial statements are based upon management’s evaluation
of relevant facts and circumstances as of the date of the consolidated financial statements. Actual
results could differ from such estimates.

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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:

Investment in Subsidiaries
The Group determined that it has control over its subsidiaries (see Note 2) by considering, among
others, its power over the investee, exposure or rights to variable returns from its involvement with
the investee, and the ability to use its power over the investee to affect its returns. The following
were also considered:
· The contractual arrangement with the other vote holders of the investee
· Rights arising from other contractual agreements
· The Group’s voting rights and potential voting rights

Consolidation of entities in which the Group holds only 50% or less than majority of voting rights
ALI Group determined that it controls certain entities even though it owns 50% or less than
majority of the voting rights. The factors considered include, among others, the size of its block of
voting shares, the relative size and dispersion of holdings of other shareholders, and contractual
agreements to direct the relevant activities of the entities.

Investment in Associates
The Group determined that it exercises significant influence over its associates (see Note 12) by
considering, among others, its ownership interest (holding 20% or more of the voting power of the
investee), board representation and participation on board sub-committees, and other contractual
terms.

Classification of joint arrangements


The Group’s investments in joint ventures (see Note 12) are structured in separate incorporated
entities. Even though the Group holds various percentage of ownership interest on these
arrangements, their respective joint arrangement agreements requires unanimous consent from all
parties to the agreement for the relevant activities identified. The Group and the parties to the
agreement only have rights to the net assets of the joint venture through the terms of the
contractual arrangements.

Service concession arrangement


In applying Philippine Interpretation IFRIC 12, Service Concession Arrangements (SCA), the
Group has made a judgment that its concession agreements qualify under the Intangible Asset
and Financial Asset model. The accounting policy on the Group’s SCA under the Intangible Asset
and Financial model is discussed in Note 3.

Operating lease commitments - Group as lessor


The Group has entered into commercial property leases on its investment property portfolio. The
Group has determined that it retains all significant risks and rewards of ownership of these
properties as the Group considered among others the length of the lease term as compared with
the estimated useful life of the assets.

A number of the Group’s operating lease contracts are accounted for as noncancellable operating
leases and the rest are cancellable. In determining whether a lease contract is cancellable or not,
the Group considers among others, the significance of the penalty, including the economic
consequence to the lessee.

Operating lease commitments - Group as lessee


The Group has entered into contracts with various parties to develop commercial or retail
properties. The Group has determined that all significant risks and rewards of ownership of these
properties are retained by the lessor.

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Finance lease commitments - Group as lessee


Certain subsidiaries have entered into finance lease agreements related to office equipment,
machineries and production equipment. They have determined, based on the evaluation of the
terms and conditions of the arrangement, that they bear substantially all the risks and rewards
incidental to ownership of the said machineries and equipment and so account for the contracts as
finance leases.

Classification of property as investment property or real estate inventories


The Group determines whether a property is classified as investment property or real estate
inventory as follows:

· Investment property comprises land and buildings (principally offices, commercial and retail
property) which are not occupied substantially for use by, or in the operations of, the Group,
nor for sale in the ordinary course of business, but are held primarily to earn rental income and
capital appreciation.
· Real estate inventory comprises property that is held for sale in the ordinary course of
business. Principally, this is residential, commercial and industrial property that the Group
develops and intends to sell before or on completion of construction.

Distinction between investment properties and owner-occupied properties


The Group determines whether a property qualifies as investment property. In making its
judgment, the Group considers whether the property is not occupied substantially for use by, or in
operations of the Group, not for sale in the ordinary course of business, but are held primarily to
earn rental income and capital appreciation. Owner-occupied properties generate cash flows that
are attributable not only to property but also to the other assets used in the production or supply
process.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes. If these portions cannot be sold separately as of reporting date, the
property is accounted for as investment property only if an insignificant portion is held for use in
the production or supply of goods or services or for administrative purposes. Judgment is applied
in determining whether ancillary services are so significant that a property does not qualify as
investment property. The Group considers each property separately in making its judgment.

Distinction between real estate inventories and land and improvements


The Group determines whether a property will be classified as real estate inventories or land and
improvements. In making this judgment, the Group considers whether the property will be sold in
the normal operating cycle (real estate inventories) or whether it will be retained as part of the
Group’s strategic landbanking activities for development or sale in the medium or long-term (land
and improvements).

Property acquisitions and business combinations


The Group acquires subsidiaries that own real estate. At the time of acquisition, the Group
considers whether the acquisition represents the acquisition of a business. The Group accounts
for an acquisition as a business combination where an integrated set of activities is acquired in
addition to the property. More specifically, consideration is made of the extent to which significant
processes are acquired and, in particular, the extent of ancillary services provided by
the subsidiary (e.g., maintenance, cleaning, security, bookkeeping, hotel services, etc.). The
significance of any process is judged with reference to the guidance in PAS 40 on ancillary
services.

When the acquisition of subsidiaries does not represent a business, it is accounted for as an
acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets
and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is
recognized.

*SGVFS011298*
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Collectibility of the sales price


For real estate sales, in determining whether the sales prices are collectible, the Group considers
that initial and continuing investments by the buyer of about 10% would demonstrate the buyer’s
commitment to pay.

Impairment of AFS equity investments


The Group treats AFS equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of impairment
exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group
treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted
equity securities. In addition, the Group evaluates other factors, including normal volatility in share
price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Financial assets not quoted in an active market


The Group classifies financial assets by evaluating, among others, whether the asset is quoted or
not in an active market. Included in the evaluation on whether a financial asset is quoted in an
active market is the determination on whether quoted prices are readily and regularly available,
and whether those prices represent actual and regularly occurring market transactions on an
arm’s length basis.

Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with outside counsel
handling the defense in these matters and is based upon an analysis of potential results. The
Group currently does not believe that these proceedings will have a material effect on the Group’s
financial position (see Note 37).

Management’s Use of Estimates


The key assumptions concerning the future and other sources of estimation uncertainty at the
reporting date that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below.

Revenue and cost recognition


The Group’s revenue recognition policies require management to make use of estimates and
assumptions that may affect the reported amounts of revenue and costs. The Group’s revenue
from real estate, pipeworks, construction, management contracts and human resource
outsourcing services are recognized based on the percentage-of-completion measured principally
on the basis of the estimated completion of a physical proportion of the contract work, and by
reference to the actual costs incurred to date over the estimated total costs of the project.

Estimating allowance for impairment losses


The Group maintains allowance for doubtful accounts based on the results of the individual and
collective assessment under PAS 39. Under the individual assessment, the Group is required to
obtain the present value of estimated cash flows using the receivable’s original effective interest
rate. Impairment loss is determined as the difference between the receivable’s carrying balance
and the computed present value. Factors considered in individual assessment are payment
history, past due status and term. The collective assessment would require the Group to group its
receivables based on the credit risk characteristics (customer type, payment history, past-due
status and term) of the customers. Impairment loss is then determined based on historical loss
experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted
on the basis of current observable data to reflect the effects of current conditions that did not affect
the period on which the historical loss experience is based and to remove the effects of conditions
in the historical period that do not exist currently. The methodology and assumptions used for the
individual and collective assessments are based on management’s judgment and estimate.
Therefore, the amount and timing of recorded expense for any period would differ depending on
the judgments and estimates made for the year.

*SGVFS011298*
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Further details on receivables are disclosed in Note 7.

Evaluation of net realizable value of inventories and land and improvements


Inventories and land and improvements are valued at the lower of cost and NRV. This requires
the Group to make an estimate of the inventories’ and land and improvements’ estimated selling
price in the ordinary course of business, cost of completion and costs necessary to make a sale to
determine the NRV. For real estate inventories and land and improvements, the Group adjusts
the cost of its real estate inventories and land and improvements to net realizable value based on
its assessment of the recoverability of the real estate inventories and land and improvements. In
determining the recoverability of the inventories and land and improvements, management
considers whether those inventories and land and improvements are damaged or if their selling
prices have declined. Likewise, management also considers whether the estimated costs of
completion or the estimated costs to be incurred to make the sale have increased.

In the event that NRV is lower than the cost, the decline is recognized as an expense. The
amount and timing of recorded expenses for any period would differ if different judgments were
made or different estimates were utilized.

Further details on inventories and land and improvements are disclosed in Notes 8 and 11,
respectively.

Evaluation of impairment of nonfinancial assets


The Group reviews investments in associates and joint ventures, investment properties, property,
plant and equipment, service concession assets and intangible assets for impairment of value.
Impairment for goodwill is assessed at least annually. This includes considering certain
indications of impairment such as significant changes in asset usage, significant decline in assets’
market value, obsolescence or physical damage of an asset, significant underperformance relative
to expected historical or projected future operating results and significant negative industry or
economic trends.

The Group estimates the recoverable amount as the higher of the fair value less costs to sell and
value in use. For investments in associates and joint ventures, fair value less costs to sell pertain
to quoted prices (listed equities) and to fair values determined using discounted cash flows or
other valuation technique such as multiples. In determining the present value of estimated future
cash flows expected to be generated from the continued use of the assets, the Group is required
to make estimates and assumptions that may affect investments in associates and joint ventures,
investment properties, property, plant and equipment, service concession assets and intangible
assets.

For goodwill, this requires an estimation of the recoverable amount which is the fair value less
costs to sell or value in use of the cash-generating units to which the goodwill is allocated.
Estimating a value in use amount requires management to make an estimate of the expected
future cash flows for the cash generating unit and also to choose a suitable discount rate in order
to calculate the present value of cash flows.

Further details on investments in associates and joint ventures, investment properties, property,
plant and equipment, service concession assets and intangible assets are disclosed in Notes 12,
13, 14, 15 and 16, respectively.

Estimating useful lives of investment properties, property, plant and equipment, and intangible
assets
The Group estimated the useful lives of its investment properties, property, plant and equipment
and intangible assets with finite useful lives based on the period over which the assets are
expected to be available for use. The estimated useful lives of investment properties, property,
plant and equipment and intangible assets are reviewed at least annually and are updated if
expectations differ from previous estimates due to physical wear and tear and technical or
commercial obsolescence on the use of these assets. It is possible that future results of

*SGVFS011298*
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operations could be materially affected by changes in these estimates brought about by changes
in factors mentioned above. A reduction in the estimated useful lives would increase depreciation
and amortization expense and decrease noncurrent assets.

Further details on investment properties, property, plant and equipment, service concession
assets and intangible assets are disclosed in Notes 13, 14, 15 and 16, respectively.

Determining the fair value of investment properties


The Group discloses the fair values of its investment properties. The Group engaged independent
valuation specialist to assess fair value as at December 31, 2014 and 2013. The Group’s
investment properties consist of land and building pertaining to land properties, retail (malls) and
office properties. These were valued by reference to market based evidence using comparable
prices adjusted for specific market factors such as nature, location and condition of the property.

Further details on investment properties assets are disclosed in Note 13.

Deferred FCDA
Under the concession agreements entered into by the MWC Group, MWC and Boracay Island
Water Company (BIWC) are entitled to recover (refund) foreign exchange losses (gains) arising
from concession loans and any concessionaire loans. MWC and BIWC recognized deferred
FCDA (included as part of “Other noncurrent assets” or “Other noncurrent liabilities” in the
consolidated statement of financial position) for both realized and unrealized foreign exchange
gains and losses. Deferred FCDA is set up as an asset for the realized and unrealized exchange
losses since this is a resource controlled by MWC and BIWC as a result of past events and from
which future economic benefits are expected to flow to MWC and BIWC. Realized and unrealized
foreign exchange gains, on the other hand, which will be refunded to the customers, are presented
as liability

Further details on deferred FCDA of MWC and BIWC are disclosed in Note 17.

Deferred tax assets


The Group reviews the carrying amounts of deferred income taxes at each reporting date and
reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable
income will be available to allow all or part of the deferred tax assets to be utilized. However,
there is no assurance that the Group will generate sufficient taxable income to allow all or part of
deferred tax assets to be utilized. The Group looks at its projected performance in assessing the
sufficiency of future taxable income.

Further details on deferred tax assets are disclosed in Note 25.

Recognition and measurement of taxes


The Group has exposure to taxes in numerous jurisdictions. Significant judgment is involved in
determining the group-wide provision for taxes including value-added tax, consumption tax and
customs duty. There are certain transactions and computations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Group recognizes liabilities
for expected tax issues based on estimates of whether additional taxes are due. Where the final
tax outcome of these matters is different from the amounts that were initially recognized, such
differences will impact the profit and loss in the period in which such determination is made.

The carrying amount of the Group’s income taxes payable as of December 31, 2014 and 2013
amounted to P= 1.3 billion and P
= 1.7 billion, respectively.

Share-based payments
The expected life of the options is based on the expected exercise behavior of the stock option
holders and is not necessarily indicative of the exercise patterns that may occur. The volatility is
based on the average historical price volatility which may be different from the expected volatility
of the shares of stock of the Group.

*SGVFS011298*
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Further details on the share-based payments recognized by the Group are disclosed in Note 28.

Defined benefit plans (pension benefits)


The cost of defined benefit pension plans and other post employment medical benefits as well as
the present value of the pension obligation are determined using actuarial valuations. The
actuarial valuation involves making various assumptions. These include the determination of the
discount rates, future salary increases, mortality rates and future pension increases. Due to the
complexity of the valuation, the underlying assumptions and its long-term nature, defined benefit
obligations are highly sensitive to changes in these assumptions. All assumptions are reviewed at
each reporting date.

Further details on net benefit liability are disclosed in Note 27.

In determining the appropriate discount rate, management considers the interest rates of
government bonds that are denominated in the currency in which the benefits will be paid, with
extrapolated maturities corresponding to the expected duration of the defined benefit obligation.

The mortality rate is based on publicly available mortality tables for the specific country and is
modified accordingly with estimates of mortality improvements. Future salary increases and
pension increases are based on expected future inflation rates for the specific country.

Further details about the assumptions used are provided in Note 27.

Fair value of financial instruments


Where the fair values of financial assets and financial liabilities recorded in the consolidated
statement of financial position or disclosed in the notes to the consolidated financial statements
cannot be derived from active markets, they are determined using internal valuation techniques
using generally accepted market valuation models. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, estimates are used in
establishing fair values. These estimates may include considerations of liquidity, volatility, and
correlation. Certain financial assets and liabilities were initially recorded at fair values by using the
discounted cash flow methodology. Further details arefair value of financial instruments are
disclosed in Note 33.

5. Cash and Cash Equivalents

This account consists of the following:

2014 2013
(In Thousands)
Cash on hand and in banks (Note 31) P
= 22,963,793 P
= 22,728,761
Cash equivalents (Note 31) 67,805,732 42,926,288
P
= 90,769,525 P
= 65,655,049

Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-
term, highly liquid investments that are made for varying periods of up to three months depending
on the immediate cash requirements of the Group and earn interest at the prevailing short-term
rates.

6. Short-term Investments

Short-term investments pertain to money market placements made for varying periods of more
than three months up to than one year and earn interest ranging from 0.5% to 2.0% in 2014 and
1.3% to 1.6% in 2013.

*SGVFS011298*
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7. Accounts and Notes Receivable – net

This account consists of the following:

2014 2013
(In Thousands)
Trade:
Real estate P
= 57,898,143 P
= 39,832,997
Electronics manufacturing 8,587,953 7,286,792
Water distribution and wastewater services 1,991,179 1,645,476
Automotive 1,496,794 985,390
Information technology and BPO 202,829 194,584
International and others 5,050 3,618
Advances to other companies 21,173,727 10,912,046
Advances to contractors and suppliers 10,389,240 8,837,924
Receivable from related parties (Note 31) 2,709,445 3,145,472
Receivable from officers and employees (Note 31) 731,336 507,042
Receivable from BWC 529,501 544,374
Investment in bonds classified as loans and
receivables 450,000 1,000,000
Dividend receivable (Note 31) 104 1,412,577
Others (Note 31) 138,202 92,093
106,303,503 76,400,385
Less allowance for doubtful accounts 1,586,541 1,776,400
104,716,962 74,623,985
Less noncurrent portion 32,006,450 18,282,941
P
= 72,710,512 P
= 56,341,044

The classes of trade receivables of the Group follow:

Real estate
Real estate receivables are receivables relating to residential development which pertain to
receivables from the sale of high-end; upper middle-income and affordable residential lots and
units, economic housing development and leisure community developments; construction
contracts which pertain to receivables from third party construction projects; shopping centers
which pertain to lease receivables of retail space; corporate business which pertain to lease
receivables of office and factory buildings and receivables from the sale of office buildings and
industrial lots; and management fees which pertain to facility management fees receivable.

The sales contracts receivable, included under residential development, are collectible in monthly
installments over a period of one (1) to ten (10) years and bear annual interest rates ranging from
3.00% to 16.00% computed on the diminishing balance of the principal. Titles to real estate
properties are not transferred to the buyers until full payment has been made.

Receivables from construction contracts, shopping centers and management fee are due within 30
days upon billing. Corporate business receivables are collectible on a monthly or quarterly basis
depending on the terms of the lease.

Electronics manufacturing
Pertains to receivables arising from manufacturing and other related services for electronic
products and components and billings to customers for production and test equipment and all
other charges agreed with the customers in carrying out business operations. These are
collectible within 30- to 60- days from invoice date.

*SGVFS011298*
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As of December 31, 2013, IMI Bulgaria, a subsidiary of IMI, has pledged receivables with
UniCredit Bulbank amounting to $7.0 million (P
= 310.8 million) (see Note 20):

Water distribution and wastewater services


Water distribution and wastewater services receivables arise from water and sewer services
rendered to residential, commercial, semi-business and industrial customers of MWC Group and
are collectible within 30 days from bill generation.

Automotive
Automotive receivables are receivables relating to sale of passenger cars and commercial
vehicles and are collectible within 30- to 90- days from date of sale.

Information technology and BPO


Information technology and BPO receivables arise from venture capital for technology businesses;
provision of value-added content for wireless services, online business-to-business and business-
to-consumer services; electronic commerce; technology infrastructure sales and technology
services; and onshore- and offshore-BPO services and are normally collected within 30- to 60-
days from invoice date.

International and others


International and other receivables arose from investments in overseas property companies and
projects, charter services, agri-business and others and are generally on 30- to 60- day terms.

The nature of the Group’s other receivables follows:

Advances to other companies


Advances to other companies mainly pertain to ALI’s advances to third party joint venture
partners. These are generally non-interest bearing and are due and demandable. Certain
advances are interest bearing and subject to terms as agreed between the parties. This also
includes MWCI’s receivable from SAWACO which pertains to the unpaid portion of services
rendered by MWC in relation to its management contract with SAWACO. These are offset against
the management billings made by MWC.

Advances to contractors and suppliers


Advances to contractors and suppliers are recouped every progress billing payment date
depending on the percentage of accomplishment or delivery.

Receivables from BWC


Receivables from BWC pertain to the assigned recievables from the share purchase agreement
between MWC and Veolia Water Philippines, Inc. (VWPI) related to the acquisition of VWPI’s
interest in Clark Water Corporation (CWC) in 2011.

Investment in bonds classified as loans and receivables


Investment in bonds classified as loans and receivables pertain to ALI’s investments in various
notes and bonds as follows:

· P
= 200.0 million investment in 7.25% unsecured subordinated notes of Land Bank of the
Philippines (LBP) due 2019, callable with step-up interest in 2014. The note was redeemed in
full by LBP on June 10, 2014.
· P
= 100.0 million investment in 5.88% unsecured subordinated notes of Land Bank of the
Philippines due 2022, callable in 2017.
· P
= 200.0 million investment in 5.75% unsecured subordinated notes of Development Bank of
the Philippines due 2022, callable in 2017.

*SGVFS011298*
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· P
= 500 million investment in 5.75% collateralized bonds of First Metro Investment Corp. due
2019, callable in 2017. As of December 31, 2014, the Company’s investment in the bond
amounted to P = 150 million since the investment was partially redeemed on November 2014.
No gain or loss was recognized on the redemption.

Receivables from officers and employees


Receivable from officers and employees pertain to housing, car, salary and other loans granted to
the Group’s officers and employees which are collectible through salary deduction. These are
interest bearing ranging from 6.0% to 13.5% per annum and have various maturity dates ranging
from 2015 to 2026.

Others
Other receivables include accrued interest receivable and other nontrade receivables which are
non-interest bearing and are due and demandable.

*SGVFS011298*
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Movements in the allowance for doubtful accounts follow (in thousands):


2014
Water
Distribution and Information
Wastewater Technology and
Real Estate Electronics Services Automotive BPO Services Others Total
At January 1 P
= 507,507 P
= 96,397 P
= 540,719 P
= 23,542 P
= 7,370 P
= 600,865 P
= 1,776,400
Provisions during the year (Note 23) 136,774 − 29,025 1,154 2,242 13,188 182,383
Write-offs (33,113) (13,357) − − − (275,965) (322,435)
Reversals (Note 23) − (38,129) − − (4,784) (6,894) (49,807)
At December 31 P
= 611,168 P
= 44,911 ₱569,744 P
= 24,696 P
= 4,828 P
= 331,194 1,586,541
Individually impaired 297,191 38,760 42,010 13,346 2,358 271,897 665,562
Collectively impaired 313,977 6,151 527,734 11,350 2,470 59,297 920,979
Total P
= 611,168 44,911 P
= 569,744 P
= 24,696 P
= 4,828 P
= 331,194 P
= 1,586,541
Gross amount of loans and receivables individually
determined to be impaired P
= 297,191 P
= 38,760 P
= 42,010 P
= 13,346 P
= 2,358 P
= 271,897 P
= 665,562

2013
Water
Distribution and Information
Wastewater Technology and
Real Estate Electronics Services Automotive BPO Services Others Total
At January 1 P
= 324,197 P
= 100,949 P
= 493,646 P
= 23,542 P
= 17,333 P
= 586,262 P
= 1,545,929
Provisions during the year (Note 23) 235,596 (5,364) 47,073 – 2,150 406,639 686,094
Write-offs (51,028) – – – – – (51,028)
Reversals (Note 23) (1,258) 812 – – (12,113) (392,036) (404,595)
At December 31 P
= 507,507 P
= 96,397 P
= 540,719 P
= 23,542 P
= 7,370 P
= 600,865 P
= 1,776,400
Individually impaired 203,828 96,397 33,829 1,688 7,370 264,526 607,638
Collectively impaired 303,679 – 506,890 21,854 – 336,339 1,168,762
Total P
= 507,507 P
= 96,397 P
= 540,719 P
= 23,542 P
= 7,370 P
= 600,865 P
= 1,776,400
Gross amount of loans and receivables individually
determined to be impaired P
= 203,828 P
= 96,397 P
= 33,829 P
= 1,688 P
= 7,370 P
= 264,526 P
= 607,638

*SGVFS011298*
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On March 20, 2014, the long-outstanding receivables of IMI from a customer with an aggregate
nominal amount of US$1.8 million (P
= 80.5 million) were converted to common shares of the
customer. The corresponding allowance for doubtful accounts on these receivables were
reversed accordingly.

As of December 31, 2014 and 2013, certain real estate receivables and receivables from officers
and employees with a nominal amount of P = 66.4 billion and P
= 46.7 billion, respectively, were
recorded initially at fair value. The fair value of the receivables was obtained by discounting future
cash flows using the applicable rates of similar types of instruments.

Movements in the unamortized discount of the Group’s receivables as of December 31, 2014 and
2013 follow:

2014 2013
(In Thousands)
Balance at beginning of the year P
= 4,387,807 P
= 2,524,764
Additions during the year 773,302 3,575,225
Accretion for the year (1,678,252) (1,712,182)
Balance at end of the year P
= 3,482,857 P
= 4,387,807

In 2014, the ALI Group entered into an agreement with Bank of the Philippine Islands (BPI) for
the sale of interest bearing employee receivables amounting to P
= 105.4 million at 6% interest rate.
The transaction was without recourse and did not result to any gain or loss.

In 2013, the Company sold to BPI Family Savings Bank (BPI Family Bank) its notes receivable
from officers and employees amounting to P
= 74.6 million.

In 2012, ALI sold real estate receivables on a without recourse basis to BPI Family Bank and
RCBC Savings amounting to P = 3.0 billion and P= 1.4 billion, respectively. These were sold for a total
average discount rate of 6.0% or P= 2.6 billion to BPI Family Bank and P = 1.2 billion to RCBC
Savings. The total discounting cost on these receivables amounted to P = 498.0 million recognized
under “Interest and other financing charges” in the consolidated statements of income
(see Note 23).

On April 29, 2011, LIL granted promissory notes to two IQ Backoffice officers. The notes have
an aggregate amount of P
= 27.3 million which bear interests at four percent (4%) per annum and will
mature on April 29, 2016. On the same date, the parties to the notes simultaneously entered into
a Pledge Agreement where the officers (Pledgor), who are also shareholders of IQ Backoffice
(Pledgee), pledge their entire 3.9 million shares on LIL as collateral for the notes they have
availed.

8. Inventories
This account consists of the following:
2014 2013
(In Thousands)
At cost:
Subdivision land for sale P
= 25,948,283 P
= 16,854,931
Condominium, residential and commercial units 21,937,355 26,920,259
Vehicles 1,704,711 1,171,478
Finished goods 769,085 354,134
Work-in-process 594,980 432,008
Materials, supplies and others 2,369,019 1,544,821
53,323,433 47,277,631
(Forward)

*SGVFS011298*
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2014 2013
(In Thousands)
At NRV:
Subdivision land for sale P
= 524,158 P
= 524,158
Finished goods 16,237 316,576
Work-in-process – 176,749
Parts and accessories 199,164 168,451
Materials, supplies and others 899,172 1,714,921
1,638,731 2,900,855
P
= 54,962,164 P
= 50,178,486

A summary of the movement of real estate inventories is set out below.


2014
Condominium,
Subdivision residential and
land commercial
for sale units Total
(In Thousands)
Opening balances at January 1 P
= 17,379,089 P
= 26,920,259 ₱44,299,348
Land acquired during the year 7,223,854 1,165,866 8,389,720
Land cost transferred from land and
improvements 4,528,267 6,108,313 10,636,580
Construction/development costs incurred 3,581,001 13,612,708 17,193,709
Disposals (recognized as cost of sales) (6,617,596) (26,108,603) (32,726,199)
Transfers from / to investment properties and
other assets 301,247 387,164 688,411
Other adjustments/reclassifications 76,579 (157,021) (80,442)
Exchange differences − 8,669 8,669
P
= 26,472,441 P
= 21,937,355 P
= 48,409,796

2013
Subdivision Condominium,
land residential and
for sale commercial units Total
(In Thousands)
Opening balances at January 1 P
= 9,899,209 P
= 18,511,527 P
= 28,410,736
Land cost transferred from land and
improvements 7,454,628 7,271,578 14,726,206
Construction/development costs incurred 10,551,863 25,087,265 35,639,128
Disposals (recognized as cost of sales) (10,498,850) (23,938,638) (34,437,488)
Transfers from / to investment properties and
other assets (26,138) 9,831 (16,307)
Exchange differences – (21,304) (21,304)
Other adjustments/reclassifications (1,623) – (1,623)
P
= 17,379,089 P
= 26,920,259 P
= 44,299,348

Inventories recognized as cost of sales amounted to P


= 77.8 billion, P
= 66.5 billion and P
= 55.3 billion in
2014, 2013 and 2012, respectively, and were included under “Costs of sales” in the consolidated
statement of income.

The Group recorded provision for inventory obsolescensce amounting to P = 149.1 million,
P
= 105.7 million and P
= 330.8 million in 2014, 2013 and 2012, respectively. The provision is included
under “General and administrative expenses” in the consolidated statement of income (see
Note 23).

The Group recognized gain from sale of scrapped packaging supplies amounting to
US$0.6 million (P= 26.6 million), US$0.9 million (P
= 39.0 million) and loss amounting to US$1.8
million (P
= 72.8 million) in 2014, 2013 and 2012, respectively. These gains and losses are included
under “Other income” in the consolidated statement of income (see Note 23).

*SGVFS011298*
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As of December 31, 2013, IMI BG’s pledged inventories with UniCredit Bulbank amounted to
$11.04 million (P
= 490.1 million).

9. Other Current Assets

This account consists of the following:

2014 2013
(In Thousands)
Prepaid expenses P
= 10,882,300 P
= 7,708,414
Financial assets at FVPL 10,374,780 17,916,513
Input VAT 5,768,622 3,660,057
Deposits in escrow 5,332,733 6,743,298
Creditable withholding tax 2,231,651 2,068,934
Concession financial receivable 76,914 77,459
Derivative assets (Notes 32 and 33) 8,835 456,768
Others 480,723 562,577
P
= 35,156,558 P
= 39,194,020

Prepaid expenses
Prepaid expenses mainly include prepayments for commissions, marketing fees and promotion,
taxes and licenses, rentals and insurance.

Financial Assets at FVPL


TRG Investments
Financial assets at FVPL includes the Group’s investment in The Rohatyn Group (TRG) Allocation
LLC and TRG Management LP (collectively TRG investments), which have a combined fair value
of US$37.7 million (P
= 1.7 billion) and US$36.2 (P
= 1.6 billion) as of December 31, 2014 and 2013,
respectively.

These investments are accounted for at FVPL. There is no change in management’s intention to
hold the investments for trading purpose. It was concluded in the past that there was no
appropriate valuation method to value these unquoted investments and reference to equity
transactions by external party would be the best approximation to fair value. There were no mark-
to-market gains recognized from the TRG investments in 2014, 2013 and 2012.

In the absence of equity transaction at reporting date, the Group uses the last transaction price as
the fair value as of reporting date.

In December 2012, the Group amended its partnership agreement for the TRG investments to
include a clause on how much the Group will receive (Distributable Amount) in connection with a
liquidation of the Partnership or a sale or other disposition of all or substantially all of the assets of
the Partnership that leads to a liquidation of the Partnership of a Sale of Business. The
Distributable Amount available to the Group will vary as follows:
a. if Distributable Amount is less than US$150 million, the Group and the other strategic partner
would be entitled to receive 2 times the original equity interest, and after that, the remaining
would be divided on a pro-rata basis among the remaining equity interest holders;
b. if the Distributable Amount is between US$150 million and US$334 million, then the first
US$66.8 million would be divided between the Group and the other strategic partner on a pro-
rata basis and after that, the rest would be divided among all the remaining equity interest
holders; and,
c. if the Distributable Amount is above US$334 million, then the Distributable Amount should be
divided among all the equity interest holders, including the Group and the other strategic
partner on a pro-rata basis.

*SGVFS011298*
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In 2014 and 2013, the Group made additional investment in TRG investments amounting to
US$1.6 million and US$2.8 million, respectively, representing capital call for the year.

As of December 31, 2014 and 2013, the Group’s remaining capital commitment with the TRG
Investments amounted to US$5.7 million and US$7.3 million, respectively.

Unit Investment Trust Fund (UITF) investments


The Group started investing in the BPI Short Term Fund (the BPI Fund) in July 2013. The BPI
Fund, which is structured as a money market UITF, aims to generate liquidity and stable income
by investing in a diversified portfolio of primarily short-term fixed income instruments. It has no
minimum holding period and the Bangko Sentral ng Pilipinas (BSP) Special Deposit Account
accounted for close to 70% of the BPI Fund. As of December 31, 2014 and 2013, the fair value of
the Group’s total investment in the BPI Fund amounted to P = 5.6 billion and P
= 12.8 billion,
respectively.

ARCH Fund
In 2007, the private equity fund, called ARCH Capital Asian Partners, L.P. (the Fund) was
established. The Fund achieved its final closing, resulting in a total investor commitment of
US$330.0 million in 2007. As of December 31, 2014 and 2013, the carrying amount of the Fund
amounted to US$13.0 million (P = 581.4 million) and US$27.4 million (P = 1,214.8 million), respectively.

On various dates in 2014 and 2013, the Fund made capital calls where the Group’s share
amounted to US$2.0 million and US$0.1 million, respectively. In 2014 and 2013, the Fund
returned capital amounting to US$17.4 million (P
= 778.1 million) and US$19.2 million
(P
= 858.6 million), respectively.

As of December 31, 2014 and 2013, the Group’s remaining capital commitment with the Fund
amounted to US$7.0 million and US$9.0 million, respectively.

In 2011, the Company, through one of its subsidiaries, committed to invest US$50.0 million in
ARCH Capital’s second real estate fund, ARCH Capital-TRG Asian Partners, L.P. (the Fund II),
which had its first closing on June 30, 2011. As of December 31, 2014 and 2013, the carrying
amount of the Fund II amounted to US$36.0 million (P = 1,609.9 million) and US$37.8 million
(P
= 1,676.8 million), respectively.

On various dates in 2014 and 2013, the Fund II made capital calls where the Group’s share
amounted to US$48.5 million and US$36.6 million, respectively. In 2014 and 2013, the Fund
returned capital amounting to US$20.0 million (P
= 894.4million) and US$0.4 million (P
= 17.8 million),
respectively.

As of December 31, 2014 and 2013, the Group’s remaining capital commitment with the Fund II
amounted to US$1.5 million and US$13.4 million, respectively.

On July 1, 2014, the Company, through one of its subsidiaries, committed to invest 10% of capital
raised, capped at US$50.0 million in ARCH Capital’s third real estate fund, ARCH Capital-TRG
Asian Partners III, L.P. (the Fund III). As of December 31, 2014, the carrying amount of the
investment in the Fund III amounted to US$5.1 million (P = 228.1 million).

As of December 31, 2014, the Group’s remaining capital commitment with the Fund III amounted
to US$12.2 million.

As of December 31, 2014, ARCH Fund I has existing real estate project in Macau called The
Concordia, has successfully sold 100% across Phases 1 to 3. Phase 1 units have been handed
over to buyers and expect to be fully transferred in 1st quarter of 2015. The decrease in the
amount in ARCH Fund 1 was mainly due to the return of capital amounting to US$14.5million in
2014, that arose due to the Phase 1 transfer proceeds. Assuming timely release of government

*SGVFS011298*
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permits, Phase 2 units will commence handover of units to buyers within 1st quarter of 2015 and
Phase 3 units unit 2nd half of 2015.

At BHL level, the Group has a direct interest of 2.975% in The Concordia through Glory High (see
Note 12). There is a shareholder advance to Glory High amounting to US$4.7 million in 2013
which was fully paid in 2014 via distributions from Glory High. Income from investment amounting
to US$9.5 million was recorded in 2014 arising from distributions from Glory High after settling the
shareholder advances. Similarly, these funds were from Phase 1 transfer proceeds. Assuming
timely release of government permits, Phase 2 units will commence handover of units to buyers
within 1st quarter of 2015 and Phase 3 units unit 2nd half of 2015.

Net changes in fair value of financial assets at FVPL is included under “Other income” in the
consolidated statement of income (see Note 23).

Input VAT
Input VAT is applied against output VAT. The remaining balance is recoverable in future periods.

Deposits in escrow
Deposits in escrow pertain to the proceeds from the sales of ALI Group generated from new
projects without the permanent License To Sell (LTS) but are provided with a temporary LTS by
the Housing and Land Use Regulatory Board (HLURB). For projects with temporary LTS, all
payments, inclusive of down payments, reservation, and monthly amortization, among others,
made by the buyer within the selling period shall be deposited in an escrow account.

Creditable withholding tax


The Group will be able to apply the creditable withholding taxes against income tax payable.

Concession financial receivable


Concession financial receivable is accounted for in accordance with IFRIC 12, arising from the
bulk water contract between CMWD and Metropolitan Cebu Water District (MCWD) whereby
potable and treated water shall be delivered by CMWD at an aggregate volume of 18,000 cubic
meters per day for the first year and 35,000 cubic meters per day for the succeeding years up to
20 years in the amount of P = 24.59 per cubic meter or for the total amount of P
= 161.6 million in the
first year.

The breakdown of the concesion financial receivable is as follows:

2014 2013
(In Thousands)
Current P
= 76,914 P
= 77,459
Noncurrent 899,070 603,905
P
= 975,984 P
= 681,364

10. Investments in Bonds and Other Securities

This account consists of investments in:

2014 2013
(In Thousands)
AFS financial assets
Quoted equity investments P
= 1,916,799 P
= 1,241,869
Unquoted equity investments 1,275,497 1,439,637
3,192,296 2,681,506
Quoted debt investments 239,919 103,301
P
= 3,432,215 P
= 2,784,807

*SGVFS011298*
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Quoted Equity Investments


Quoted equity instruments consist mainly of investments in listed equity securities and golf club
shares. It also includes the following quoted equity investments:

Ho Chi Minh City Infrastructure Investment Joint Stock Co. (CII)


The Group, through BHL, has acquired a 10% ownership interest in CII for US$15.9 million in
2012. CII is listed on the Ho Chi Minh City Stock Exchange (HOSE) and is a leading player in the
infrastructure sector in Vietnam with a solid track record in sourcing, implementing and operating
infrastructure assets. CII has a portfolio of strategic infrastructure assets, including water
treatment plants and toll roads serving Ho Chi Minh City and surrounding areas.

BHL has an indirect holding in CII via its investment in joint venture, VinaPhil Technical
Infrastructure Investment Stock Company (VinaPhil) (see Note 12). As of December 31, 2013,
Vinaphil has 16,920,000 shares amounting to VND 415 billion (US$19.9 million). In 2014, Vinaphil
has disposed 14,928,890 shares, acquired additional shares of 114,530 shares and has gained
30,194,707 shares from the conversion of convertible bonds. As of December 31, 2014, Vinaphil
has 32,300,347 shares in CII amounting to VND 516 billion (US$24.68 million).

The carrying amount of the investment in CII amounted to US$10.9 million (P = 487.0 million) and
US$10.3 million (P= 459.2 million) as of December 31, 2014 and 2013, respectively. In 2013, the
Group recognized a provision for probable impairment loss amounting to US$5.4 million
(P
= 228.58 million), including the unrealized loss on this investment amounting to US$3.3 million as
of December 31, 2012, due to the prolonged decline in the value of CII’s share price
(see Note 23).

Unquoted Equity Investments


Unquoted equity investments include unlisted preferred shares in public utility companies which
the Group will continue to carry as part of the infrastructure that it provides for its real estate
development projects, water utilities projects, and to its other operations. It also includes the
following unquoted equity investments:

TRG Global Opportunity Fund (GOF) and TRG Special Opportunity Fund (SOF)
The GOF is a multi-strategy hedge fund which invests primarily in emerging markets securities.
The SOF focuses on less liquid assets in emerging markets (Latin America, Asia, Emerging
Europe, Middle East and Africa) such as distressed debt, NPLs, corporate high yield, mid and
small cap stocks, real estate (debt and equity) and private equity. In 2013, the Group received a
return of capital from SOF amounting to US$4.1 million (P = 182.0 million). In 2014, the Group
received a return on capital from TRG SOF and GOF amounting to US$5.5 million (P = 246.0 million)
(see Note 23).

Red River Holdings (Red River)


Red River is a fund that seeks to achieve a balanced and diversified portfolio of Vietnamese
companies. In 2010, a final capital call was made amounting to US$1.9 million bringing the total
investment in Red River to US$10.0 million. The carrying amount of the investment in Red River
amounted to US$8.5 million (P = 380.1 million) and US$10.4 million (P
= 460.4 million) as of
December 31, 2014 and 2013, respectively. In 2014, Red River returned capital amounting to
US$4.7 million (P
= 210.2 million).

In 2012, the Group recorded a provision for impairment loss on its investment in Red River
amounting to P= 61.1 million (see Note 23).

Victoria 1522 Investments, LP (Victoria)


Victoria is an investment management firm exclusively focused on the emerging markets of Asia,
Latin America, Europe, Middle East and Africa. The Group committed to invest US$1.0 million in
Preferred C units of Victoria. The carrying amount of the investment on Victoria amounted to nil
and US$0.9 million as of December 31, 2014 and 2013, respectively. In 2014, the Group fully
impaired the investment in Victoria.

*SGVFS011298*
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Glory High
Glory High is a property development company with projects in Macau. The carrying amount of
the investment in Glory High amounted to US$0.6 million as of December 31, 2014 and 2013.

Quoted Debt Investments


Quoted debt investments in 2013 consist mainly of government securities such as retail treasury
bonds. These bonds earn interest ranging from 6.25% to 8.25% in 2013 with maturity dates up to
five years. All the quoted debt investments matured in 2014

Quoted debt investments in 2014 includes investments in CII convertible bonds amounting to
US$5.4 million (P
= 239.9 million). The bonds bear interest rate of 12% per annum and will mature 5
years from issue date. The bonds are convertible at the option of the bond holder.

The net unrealized gain (loss) on AFS financial assets as reflected in the equity section is broken
down as follows:
2014 2013
(In Thousands)
Net unrealized gain on AFS financial assets of
the Company and its consolidated subsidiaries P
= 834,185 (P
= 421,595)
Share in the net unrealized gain on AFS financial
assets of associates and jointly-controlled
entities (841,396) 699,443
(P
= 7,211) P
= 277,848

The rollforward of unrealized gain (loss) on AFS financial assets of the Company and its
consolidated subsidiaries is as follows:
2014 2013
(In Thousands)
At January 1 (P
= 421,595) P
= 469,519
Changes in fair value recognized in equity 1,926,410 (873,047)
Recognized in profit and loss (670,630) (18,067)
At December 31 P
= 834,185 (P
= 421,595)

11. Land and Improvements

The rollforward analysis of this account follows:


2014 2013
(In Thousands)
Cost
At January P
= 62,984,927 P
= 49,728,125
Additions 28,604,686 29,446,957
Transfers* (11,119,540) (16,190,155)
Disposals (61) –
At December 31 80,470,012 62,984,927
Allowance for decline in value
At January 1 and December 31 (510,125) (510,125)
P
= 79,959,887 P
= 62,474,802
*Transfers pertain to land to be developed for sale and included under “Real estate inventories” account.

On November 26, 2014, Alveo Land Corporation (Alveo), a wholly owned subsidiary of ALI,
acquired a 6,986 sq. m. property located along Valero St., Salcedo Village, Makati City for
P
= 1.6 billion.

*SGVFS011298*
- 55 -

On September 15, 2014, Alveo acquired on installment a 2,400 square meters. property located
along Ayala Avenue, Makati for P
= 1.2 billion payable until 2015.

In 2012, ALI won the public bidding for the purchase of the 74-hectare Food Terminal, Inc. (FTI)
property in Taguig City. ALI’s bid was P
= 24.3 billion. The bid was conducted in accordance with
the Asset Specific Bidding Rules dated July 4, 2012 and in accordance with the provisions of
Executive Order No. 323.

In October 2012, ALI entered into a Purchase Agreement wherein the Seller (FTI) agrees to sell,
convey, assign and transfer and deliver to the buyer, and the buyer agrees to purchase and
acquire from the seller, all of the seller’s rights and interests in the property. The property is
designed to be a mixed-use development.

On August 27, 2009, ALI and the National Housing Authority (NHA) signed a Joint Venture
Agreement to develop the 29.1-hectare North Triangle Property in Quezon City as a priming
project of the government and the private sector. The joint venture represents the conclusion of a
public bidding process conducted by the NHA which began last October 3, 2008.

ALI’s proposal, which has been approved and declared by the NHA as compliant with the Terms
of Reference of the public bidding and the National Economic Development Authority (NEDA)
Joint Venture Guidelines, features the development of a new Central Business District (CBD) in
Quezon City. The CBD will be developed as the Philippines’ first transit-oriented mixed-use
central business district that will be a new nexus of commercial activity. The proposal also aims to
benefit the NHA in achieving its mandate of providing housing for informal settlers and
transforming a non-performing asset in a model for urban renewal. The development will also
generate jobs and revenues both for the local and national governments.

ALI's vision for the property is consistent with the mandate of the Urban Triangle Development
(TriDev) Commission to rationalize and speed up the development of the East and North Triangles
of Quezon City into well-planned, integrated and environmentally balanced, mixed-use
communities. The joint venture also conforms to NHA's vision of a private sector-led and
managed model for the development of the property, similar to the development experience in Fort
Bonifacio.

The total project cost is estimated at P


= 22.0 billion, inclusive of future development costs and the
current value of the property, which ALI and the NHA will contribute as their respective equity
share in the joint venture. The development of Phase 1 commenced in the second quarter of
2012.

12. Investments in Associates and Joint Ventures

This account consists of the following:

2014 2013
(In Thousands)
Acquisition cost P
= 127,252,199 P
= 98,667,066
Accumulated equity in earnings 27,186,995 24,403,130
Other comprehensive loss (1,674,340) (3,266,110)
P
= 152,764,854 P
= 119,804,086

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Details of the Group’s investments in associates and joint ventures and the related percentages of
ownership are shown below:

Percentage of Ownership Carrying Amounts


2014 2013 2014 2013
Domestic: (In Millions)
Bank of the Philippine Islands (BPI) 32.6% 32.6% P
= 65,811 P= 52,635
Ayala DBS Holdings, Inc. (ADHI)* 73.8 73.8 35,943 29,072
Globe Telecom, Inc. (Globe)* 30.4 30.4 16,321 15,371
GNPower Mariveles Coal Plant Ltd. Co (GNPower) 17.0 − 7,164 −
Philippine Wind Holdings Corporation (PWHC)* 75.0 75.0 4,218 2,180
Emerging City Holdings, Inc. (ECHI)* 50.0 50.0 4,113 3,993
South Luzon Thermal Energy Corp. (SLTEC)* 50.0 50.0 3,513 3,070
Berkshires Holdings, Inc. (BHI)* 50.0 50.0 1,815 1,955
Cebu District Property Enterprise, Inc. (CDPEI)* 42.0 − 1,492 −
Bonifacio Land Corporation (BLC) 10.0 10.0 1,356 1,395
Asiacom Philippines, Inc. (Asiacom)* 60.0 60.0 1,142 1,097
Rize-Ayalaland (Kingsway) GP Inc. (Rize-Ayalaland) 49.0 49.0 697 501
Light Rail Manila Holdings, Inc. (LRMHI) 50.0 − 563 −
Mercado General Hospital, Inc. (MGHI) 33.0 33.0 422 360
SIAL Specialty Retailers, Inc.* 50.0 50.0 332 209
Northwind Power Development Corp.* (Note 24) 50.0 50.0 324 466
SIAL CVS Retailers, Inc.* 50.0 50.0 153 162
Automated Fare Collections Services, Inc. (AFCSI) 10.0 − 144 −

Foreign:
Thu Duc Water B.O.O. Corporation (TDW) (incorporated
in Vietnam) 49.0 49.0 2,258 2,200
Kenh Dong Water Supply Joint Stock Company (KDW)
(incorporated in Vietnam) 47.4 47.4 2,018 1,863
Integreon, Inc. (Integreon) (British Virgin Islands
Company)* 58.7 58.7 961 1,449
VinaPhil Technical Infrastructure Investment Joint Stock
Company (VinaPhil) (incorporated in Vietnam)* 49.0 49.0 723 590
Saigon Water Infrastructure Joint Stock Company (Saigon
Water) (incorporated in Vietnam) 31.5 31.5 686 645
Tianjin Eco-City Ayala Land Development Co., Ltd.
(incorporated in China) 40.0 40.0 484 543
Stream Global Services, Inc. (Stream) (U.S. Company) − 28.9 − 3,329
Others Various Various 112 48
152,765 123,133
Reclassification to noncurrent asset held for sale − (3,329)
P
= 152,765 P
= 119,804
* Joint ventures

Unless otherwise indicated, the principal place of business and country of incorporation of the
Group’s investments in associates and joint ventures is the Philippines.

Except as discussed in subsequent notes, the voting rights held by the Group in its investments in
associates and joint ventures are in proportion to its ownership interest.

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Financial information on significant associates follows:

BPI 2014 2013


(In Millions, except earnings per
share)
Total resources P
= 1,450,197 P
= 1,195,364
Total liabilities 1,303,518 1,089,557
Net interest income and other income 55,787 52,498
Total expenses 37,725 33,504
Net income 18,062 18,994
Other comprehensive income (45) (4,638)
Total comprehensive income 18,017 14,356
Net income attributable to:
Equity holders of the bank 18,039 18,811
Non-controlling interests 23 183
Earnings per share:
Basic and diluted 4.62 5.19
Dividends received from BPI 1,153 2,086

TDW 2014 2013


(In Thousands)
Current assets P
= 102,233 P
= 104,451
Noncurrent assets 2,558,962 2,712,849
Current liabilities 399,688 352,739
Noncurrent liabilities 260,590 800,602
Revenue 770,317 655,427
Net income 444,296 441,449
Dividends received from TDW − 87,749
The conversion rate used was P
= 0.0021 to VND1 as of December 31, 2014 and 2013.

KDW 2014 2013


(In Thousands)
Current assets P
= 654,567 P
= 126,091
Noncurrent assets 2,594,523 2,383,454
Current liabilities 346,204 522,501
Noncurrent liabilities 1,510,063 1,115,527
Revenue 464,796 150,829
Net income 236,114 161,880
The conversion rate used was P
= 0.0021 to VND1 as of December 31, 2014 and 2013.

BLC 2014 2013


(In Thousands)
Current assets P
= 24,747,739 P
= 23,612,217
Non-current assets 20,183,121 21,013,477
Current liabilities 4,785,573 4,895,150
Non-current liabilities 4,903,468 3,693,719
Revenue 9,186,619 8,067,041
Cost and expenses (5,819,431) (5,511,372)
Net income 3,367,188 2,555,669

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Financial information on significant joint ventures (amounts in millions, except earnings per share
figures) follows:

Globe 2014 2013


Current assets, including cash and cash equivalents
amounting to P = 16.8 billion in 2014 and
P
= 7.4 billion in 2013 P
= 46,742 P
= 35,631
Noncurrent assets 132,765 123,448
Current liabilities including financial liabilities* amounting
to P
= 6.1 billion in 2014 and P = 11.2 billion in 2013 60,350 54,989
Noncurrent liabilities, including financial liabilities*
amounting to P = 59.1 billion in 2014 and P = 58.1 billion
in 2013 64,619 62,450
Revenue 103,236 95,141
Interest income 683 688
Costs and expenses
Depreciation and amortization 18,123 27,477
Interest expense 2,566 2,912
Provision for income tax 6,011 1,905
Net income 13,372 4,960
Other comprehensive loss (238) (213)
Total comprehensive income 13,134 4,747
Earnings per share:
Basic 100.60 37.25
Diluted 100.36 37.22
Dividends received from Globe 3,025 2,701
*excluding trade and other payables and provisions

In addition to the interest in associates and joint ventures discussed above, the Group also
has interest in a number of individually immaterial associates and joint ventures. Below is a
summary of certain financial information concerning these immaterial associates and joint
ventures:

2014 2013
(In Millions)
Carrying amount P
= 21,894.0 P
= 17,268.0
Equity in net earnings 399.6 (181.1)
Share in other comprehensive income 187.6 828.9

As of December 31, 2014 and 2013, the Group had total commitments relating to the Group’s
interests in its associates and joint ventures amounting to P
= 11,050.0 million and P
= 3,787.5 million,
respectively (see Note 36).

As of December 31, 2014 and 2013, the Group has not incurred any contingent liabilities in
relation to its investments in associates and joint ventures.

On certain investments in associates and joint ventures, the Group entered into shareholders’
agreements with fellow shareholders. Such shareholders’ agreements include, among others,
restriction as to declaration and payment of dividend, incurrence of debt and transactions with
related parties.

The following significant transactions affected the Group’s investments in associates and joint
ventures:

Investment in BPI
In October 2012, the Company entered into an agreement with DBS Bank, Ltd. (DBS) to
acquire 8.69%, equivalent to 309.3 million of the outstanding common shares held by DBS in BPI
for a total consideration of P
= 21.6 billion. As of December 31, 2014 and 2013, outstanding payable
to DBS in relation to the transaction amounted to P = 3.3 billion and P
= 14.2 billion, respectively.

*SGVFS011298*
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On November 6, 2013, the BOD of BPI approved the offering for subscription of up to 370 million
common shares of BPI by way of a stock rights offering to eligible registered holders of common
shares as of January 16, 2014 at the entitlement ratio of 1 rights share for every 9.602 existing
common shares held by such eligible shareholders. On January 20, 2014, the offer period for the
stock rights offering of BPI started at an offer price of P
= 67.5 per rights share. The Company, MHI
and ADHI participated in the stock rights offering by subscribing to 114.4 million, 7.7 million and
79.8 million common shares, respectively, amounting to P = 7.7 billion, P
= 0.5 billion and P
= 5.4 billion,
respectively. The Company’s share in the subscription of ADHI was P = 3.98 billion representing
58.9 million common shares.

The fair value of the BPI shares held by the Group amounted to P
= 112.8 billion and P
= 92.3 billion as
of December 31, 2014 and 2013, respectively.

As of December 31, 2014 and 2013, the notional goodwill resulting from the difference between
the share in the net assets in BPI and its carrying value amounted to P
= 19.1 billion.

Investment in ADHI
In December 2013, DBS divested its 46.5% remaining ownership interest in ADHI of which the
Company acquired 20.3%. Arran Investment Pte. Ltd., an entity managed and controlled by GIC
Special Investments Pte. Ltd. (GICSI) acquired the remaining interest of 26.2% and replaced DBS
as the new joint venture partner of the Company in ADHI. The total consideration paid by the
Company for the additional 37.6 million ADHI Class B common shares amounted to P = 13.2 billion
(see Note 18).

In January 2014, the Company infused additional capital to ADHI in the form of subscriptions
which amounted to P = 4.0 billion. The proceeds was used for ADHI’s participation in the stock
rights offering of BPI by subscribing to 79.8 million common shares amounting to P = 5.4 billion.

As of December 31, 2014 and 2013, ADHI owns 837.6 million and 757.8 million common shares
of BPI, respectively, representing a direct ownership interest in BPI of 21.3%. The fair value of
BPI shares held by ADHI amounted to P = 78.7 billion and P
= 64.4 billion as of December 31, 2014
and 2013, respectively.

As of December 31, 2014 and 2013, the notional goodwill resulting from the difference between
the share in the net assets in ADHI and its carrying value amounted to P
= 6.1 billion.

The Company and GICSI, as joint venture partners, agreed to vote its BPI shares based on the
common position reached jointly by them as shareholders.

Investment in Globe
On August 8, 2014, the SEC approved Globe's offering of 20.0 million non-voting perpetual
preferred shares with an aggregate issue size of P = 7.0 billion with an oversubscription option of up
to P
= 3.0 billion. On August 15, 2014, the 20.0 billion shares were fully subscribed and issued.
Dividends on this preferred shares is at fixed 5.2006% per annum calculated in respect to each
preferred share in relation to the offer price of P
= 500 per share, redeemable by Globe on the 7th
year.

The fair value of the Globe shares held by the Company amounted to P
= 69.4 billion and
P
= 65.5 billion as of December 31, 2014 and 2013, respectively.

As of December 31, 2014 and 2013, the notional goodwill resulting from the difference of the
share in the net assets in Globe and its carrying value amounted to P
= 2.9 billion.

The Company also holds 60% of Asiacom, which owns 158.5 million Globe preferred shares and
460.0 million AC preferred shares as of December 31, 2014 and 2013. The Company does not
exercise control over Asiacom since it is a joint venture with Singapore Telecommunications
Limited (SingTel).

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Investment in GNPower
On May 30, 2014 AC Energy Holdings,Inc. through its wholly owned subsidiary, ACE Mariveles
Power Ltd. Co (AMPLC), signed a sale and purchase agreement with Arlington Mariveles
Netherlands Holding B.V. (AMNHB) to purchase the 17.02% limited partnership interest and
0.08% General Partnership interest in GN Power Mariveles Coal Plant Ltd. Co. (GMCP) for a
consideration amounting to US$163.9 million (P
= 7.2 billion).

On June 17, 2014, AMPLC and AMNHB closed the acquisition of the GMCP interests and entered
into Deeds of Assignment to assign the GMCP Interests to the AMPLC, subject to fulfillment of
certain post-closing conditions as required by the GMCP financing agreements.

Investment in ECHI, BHI and BLC


ALI’s 5.32% direct investment in BLC and 4.78% through Regent are accounted for using the
equity method because ALI has significant influence over BLC.

On April 17, 2003, the following transactions were consummated pursuant to the terms and
conditions of the Assignment Agreement (Agreement), dated February 8, 2003, among ALI,
Evergreen Holdings, Inc. (EHI), Greenfield Development Corporation and Larouge,
B.V. (Larouge), as amended, and the Agreement, dated November 23, 2002, among ALI, EHI
and Neo Oracle Holdings, Inc. ( [formerly Metro Pacific Corporation (MPC)] as amended:

(a) The assignment to ALI and EHI of the rights and obligations of Larouge under the loan
agreement between Larouge and MPC, pursuant to which, Larouge extended MPC a loan in
the principal amount of US$90.0 million, together with all the rights, title and interests of
Larouge in the pledge constituted on 50.38% of the outstanding shares in BLC. The
consideration paid by ALI and EHI for such assignment was approximately US$90 million,
subject in part to foreign exchange adjustment.

(b) The assignment to ALI and EHI (acting in this instance through the joint venture corporation,
Columbus Holdings, Inc. (Columbus)) of the controlling interests in BLC representing 50.38%
of BLC’s outstanding capital stock. The assignment was effected by MPC under a dacion en
pago arrangement, and included an assignment of payables of BLC in the principal amount of
P
= 655.0 million together with its underlying security in the form of shares in Fort Bonifacio
Development Corporation (FBDC) representing 5.55% of its outstanding capital stock.

The Agreement, as amended, also provides for the constitution of a pledge over 5% of BLC’s
unencumbered shares as security for contingent liabilities and breach of representation and
warranties. The pledge lien over the 5% BLC shares shall continue to subsist until the third
anniversary of the closing date.

ALI and EHI jointly hold the 50.38% equity interest in BLC through ECHI and BHI. ALI and EHI
assigned the notes receivable from MPC to ECHI and BHI, which acquired the shares of stock of
Columbus. Columbus directly owns the 50.38% interest in BLC. BLC owns 55% interest in
FBDC, the primary developer of certain areas in Fort Bonifacio Global City for residential,
commercial and business development.

Columbus accounted for the acquisition of the 50.38% interest in BLC using the purchase method,
resulting in a negative goodwill of P
= 1.4 billion.

Subsequent to this, ALI and EHI acquired additional shares of BLC through a combination of direct
acquisition and through its associates at varying dates as follows:

*SGVFS011298*
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On July 31, 2008, the Group acquired, through ALI, Regent and Columbus, additional 4,360,178
shares of BLC from FBDC amounting to P = 689.0 million, equivalent to 7.66% ownership in BLC. In
January and October 2009, a total of 2,295,207 BLC shares were acquired from Development
Bank of the Philippines and MPC, pertaining to the pledged shares, through Columbus amounting
to P
= 362.6 million. This resulted in an increase in the Group’s effective interest in BLC to 45.05%
as of December 31, 2009.

In 2011, BLC redeemed its 3,485,050 preferred shares with an aggregate redemption price of
P
= 500.0 million.

Investment in PWHC
On July 12, 2013, ACEHI signed an Investment Framework Agreement and Shareholders’
Agreement with UPC Philippines Wind Holdco I B.V. (UPC), a wholly-owned company of UPC
Renewable Partners and the Philippine Investment Alliance for Infrastructure fund (PINAI),
comprised of the Government Service Insurance System, Langoer Investments Holding B.V. and
Macquarie Infrastructure Holdings (Philippines) Pte. Limited, to develop wind power projects in
Ilocos Norte through Northern Luzon UPC Asia Corporation (NLUPC) as their joint venture
company. An initial equity investment has been agreed for the first 81 Megawatt (MW) project
with an investment value of approximately US$220 million with ACEHI funding 64% of equity,
PINAI 32% and UPC 4%.

The 81MW wind power project received a declaration of commerciality on June 17, 2013 from the
Department of Energy (DOE). Accordingly, NLUPC has signed the Turbine Supply, Installation
and Service Availability Agreements with Siemens Wind Power A/S and Siemens Inc. and has
issued the Notice to Proceed.

As of December 31, 2014 and 2013, ACEHI’s total capital commitment on its investments in
PWHC amounted to P = 2.1 billion and P
= 2.5 billion, respectively.

Investment in SLTEC
On June 29, 2011, ACEHI entered into a 50-50 joint venture with Trans-Asia Oil and Energy
Development Corporation to incorporate SLTEC which will undertake the construction and
operation of a 135 MW power plant in Calaca, Batangas. The power plant will employ the
environment-friendly Circulating Fluidized Bed boiler technology. The construction officially
commenced in December 2011for its first of two units, Units 1 and 2, coal power plant both with a
generating capacity of 135MW each. SLTEC will operate as a base load plant to serve the
anticipated demand for power in the Luzon grid. As of December 31, 2014, Unit 1 and 2 is 100%
completed and 88.4% complete, respectively. Unit 1 is currently under testing and commissioning
phase and is expected to be operational by the 1st quarter of 2015. Unit 2 is currently under
construction and is expected to be completed by the 4th Quarter of 2015.

In various dates in 2013, ACEHI infused additional capital to SLTEC amounting to


P
= 1,184.0 million.

On January 15, 2014 and February 14, 2014, ACEHI paid the subscribed shares of stock
amounting to P
= 316.00 million and P
= 175.00 million, respectively.

As of December 31, 2014 and 2013, ACEHI’s total capital commitment on its investment in SLTEC
amounted to P
= 105.0 million and P
= 231.0 million, respectively.

Investment in CDPEI
CDPEI was incorporated on February 20, 2014 and is a 50-50 joint venture between ALI and
Aboitiz Land, Inc. CDPEI’s main purpose is to create a mixed-use commercial and residential
district with the 15.4 hectare property in Subangdaku, Mandaue. On April 11, 2014, ALI assigned
10% and 5% of its equity interest in CDPEI to Cebu Holdings, Inc. and Cebu Property Ventures
Development Corporation, respectively.

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Investment in Light Rail Manila Holdings, Inc. (LRMHI)


LRMHI was incorporated on June 23, 2014, as a holding company for the LRT 1 Cavite extension
project. LRMHI holds 70% of the total equity of Light Rail Manila Corporation (LRMC), the project
company established for the construction, operation and maintenance of the LRT 1 Cavite
extension project. AC Infra owns 50% of the shares of LRMHI that ultimately resulted to a 35%
interest in LRMC.

As of December 31, 2014, AC Infra’s total equity investment commitment for the LRT 1 project
amounts to ₱8.5 billion.

Investment in Stream
On January 7, 2014, LiveIt and its two private equity partners, Ares Management and Providence
Equity Partners, entered into an agreement with Convergys Corporation to sell their 100%
combined interest in Stream subject to satisfaction of customary closing conditions, including
receipt of applicable regulatory approvals. The investment in Stream amounting to P = 3.4 billion is
shown as Noncurrent Asset Held for Sale as of December 31, 2013 in the consolidated statement
of financial position.

On March 4, 2014, the transaction achieved financial close with LiveIt realizing a gain amounting
to P
= 1.8 billion (see Note 23).

Thu Duc Water B.O.O. Corporation (TDW)


On October 12, 2011, Thu Duc Water Holdings Pte. Ltd. (TDWH) (a subsidiary of MWC) and CII
entered into a share sale and purchase agreement whereby CII will sell to TDWH its 49% interest
(2,450,000 common shares) in TDW. On December 8, 2011, TDWH completed the acquisition of
CII’s interest in the common shares of TDW after which TDWH obtained significant influence in
TDW.

The acquisition cost of the investment amounted to P


= 1.8 billion (VND858 billion). The investment
in TDW include notional goodwill amounting to P
= 1.4 billion as of December 31, 2014 and 2013.

Kenh Dong Water Supply Joint Stock Company (KDW)


On May 17, 2012, MWC, through its subsidiary Kenh Dong Water Holding Pte. Ltd. (KDWH),
entered into a Share Purchase Agreement with CII for the purchase of 47.35% of CII’s interest in
KDW. The payment for the shares will be done in two tranches, with additional contingent
considerations subject to the fulfillment of certain conditions precedent for a total purchase price of
P
= 1.7 billion.

The consideration paid by MWC for its investment in KDW amounted to P = 1.6 billion
(VND785.2 billion). Contingent consideration included in the purchase price allocation amounted
to P
= 89.0 million (VND44.5 billion). The share purchase transaction was completed on July 20,
2012 warranting KDWH to obtain significant influence in KDW.

In 2013, KDW finalized its purchase price allocation which resulted in a notional goodwill
amounting to P
= 1.4 billion. MWC also received P= 62.9 million from KDWH as indemnification for the
damages resulting from the delay in operations.

Saigon Water Infrastructure Joint Stock Company (SWI)


On October 8, 2013, MWC thru its subsidiary Manila Water South Asia Holdings Pte. Ltd
(MWSAH) entered into a Investment Agreement with SWI to acquire a 31.47% interest. The
acquisition cost of the investment amounted to P
= 627.9 million (VND310.5 billion). The share
purchase transaction was completed on October 8, 2013.

The investment in SWI includes notional goodwill amounting to P


= 288.8 million as of December 31,
2014 and 2013.

*SGVFS011298*
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Investment in Tianjin Eco-City Ayala Land Development Co., Ltd.


Regent Wise, a wholly-owned subsidiary of ALI, signed an Equity Joint Venture Agreement with
Sino-Singapore Tianjin Eco-City Investment and Development Co., Ltd for the development of a
9.78 hectare residential project in China. The project will be located in Tianjin Eco-City, a 3,000
hectare collaboration between the Chinese and Singaporean governments which will showcase
future direction of urban planning and sustainable development.

Investment in VinaPhil
CII and the Group have entered into an agreement to jointly invest in VinaPhil Technical
Infrastructure Investment JSC (“VinaPhil”), a corporation established under Vietnamese law to
invest in infrastructure projects in Vietnam. VinaPhil will be initially 49%-owned by the Group with
the remainder owned by CII and other Vietnamese investors. VinaPhil will have an initial charter
capital of VND 900 billion (approximately US$43 million).

In 2013, VinaPhil proportionately redeemed 30% of the outstanding shares issued to each
shareholders wherein the Group’s share amounted to VND132.3 billiion (US$6.35 million). The
redemption of the shares did not alter the ownership structure of VinaPhil.

In 2014, the Group, together with CII and other Vietnamese investors, proportionately acquired
additional shares in VinaPhil wherein the Group’s shares amounted to VND15.4 billion
(US$0.7 million). The additional investment did not alter the ownership structure of VinaPhil.
VinaPhil holds 9% interest in CII as of December 31, 2014.

Investment in Rize-Ayalaland
Rize-Ayalaland (Kingsway) GP, Inc. was incorporated on January 25, 2013 under the laws of
British Columbia, Canada. ALI’s effective ownership is 49% through its Vancouver-based
subsidiary, AyalaLand Real Estate Investments Inc.

Investment in MGHI
In July 2013, ALI entered into an agreement with the Mercado Family to acquire Whiteknight
Holdings, Inc. (WHI), a 33% equity stockholder of MGHI. Its acquisition of WHI will allow ALI to
build a strategic partnership with the Mercado Group and support MGHI’s future growth. This
partnership also enhances the potential of ALI’s development of mixed-use communities by
offering the critical component of medical services to complement the residential, shopping
centers, office and hotel developments therein.

Investment in AFCSI
AFCSI was incorporated on February 10, 2014 and is engaged in the design, construction,
installation and operation and maintenance of a contactless automated fare collection system for
public utility transport facilities. AC Infra owns 10% of the total shares and voting interest of
AFCSI.

AFCSI is the project company that will develop and operate the P
= 1.72 billion contactless
Automated Fare Collection Systems (AFCS) project awarded by the Department of Transportation
and Communications to the AF consortium last January 30, 2014. On March 31, 2014, the
Concession and Accession Agreements were signed and executed.

As of December 31, 2014, AC Infra’s total equity investment commitment for the project amounts
to P
= 500.0 million.

*SGVFS011298*
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13. Investment Properties

The movements in investment properties follow:

2014
Construction-
Land Building in-Progress Total
(In Thousands)
Cost
Balance at beginning of the year P
= 10,775,471 P
= 63,591,094 P
= 4,118,138 P
= 78,484,703
Additions 1,752,477 3,862,165 7,470,659 13,085,301
Transfers (880,194) 5,224,265 (5,139,747) (795,676)
Disposals (4,921) (744,842) (512,272) (1,262,035)
Balance at end of the year 11,642,833 71,932,682 5,936,778 89,512,293
Accumulated depreciation and
amortization and impairment loss
Balance at beginning of the year 26,616 15,300,864 – 15,327,480
Depreciation and amortization (Note 23) – 2,878,035 – 2,878,035
Transfer − 9,336 − 9,336
Disposals – (26,803) – (26,803)
Balance at end of the year 26,616 18,161,432 – 18,188,048
Net book value P
= 11,616,217 P
= 53,771,250 P
= 5,936,778 P
= 71,324,245

2013
Construction-
Land Building in-Progress Total
(In Thousands)
Cost
Balance at beginning of the year P
= 5,968,510 P
= 53,452,688 P
= 6,045,271 P
= 65,466,469
Additions 3,246,941 3,247,461 5,591,625 12,086,027
Transfers 1,605,130 7,142,251 (7,502,509) 1,244,872
Disposals (45,110) (251,306) (16,249) (312,665)
Balance at end of the year 10,775,471 63,591,094 4,118,138 78,484,703
Accumulated depreciation and
amortization and impairment loss
Balance at beginning of the year 26,616 12,990,921 – 13,017,537
Depreciation and amortization (Note 23) – 2,490,412 – 2,490,412
Transfers – 415 – 415
Disposals – (180,884) – (180,884)
Balance at end of the year 26,616 15,300,864 – 15,327,480
Net book value P
= 10,748,855 P
= 48,290,230 P
= 4,118,138 P
= 63,157,223

Certain parcels of land are leased to several individuals and corporations. Some of the lease
contracts provide, among others, that within a certain period from the expiration of the contracts,
the lessee will have to demolish and remove all improvements (such as buildings) introduced or
built within the leased properties. Otherwise, the lessor will cause the demolition and removal
thereof and charge the cost to the lessee unless the lessor occupies and appropriates the same
for its own use and benefit.

The aggregate fair value of the Group’s investment properties amounted to P = 234.5 billion in 2014
and P
= 232.9 billion in 2013. The fair values of the investment properties were determined based
on valuations performed by independent professional qualified appraisers.

The fair value of the investment properties was arrived using the Market Data Approach and Cost
Approach for land and building, respectively, and were determined by independent professionally
qualified appraisers.

In Market Data Approach, the value of the land is based on sales and listing of comparable
property registered within the vicinity. The technique of this approach requires the establishment
of comparable property by reducing reasonable comparative sales and listings to a common
denominator. This is done by adjusting the differences between the subject property and those
actual sales and listings regarded as comparable. The properties used as basis of comparison
are situated within the immediate vicinity of the subject property.

*SGVFS011298*
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Cost Approach is a comparative approach to the value of the building and improvements or
another asset that considers as a substitute for the purchase of a given property, the possibility of
constructing another property that is a replica of, or equivalent to, the original or one that could
furnish equal utility with no undue cost resulting from delay. It is based on the reproduction cost
(new) of the subject property or asset, less total (accrued) depreciation, plus the value of the land
to which an estimate of entrepreneurial incentive or developer’s profit/loss is commonly added.

The Company owns certain parcels of idle land which is intended to be sold or developed in the
future. The highest and best use of these parcels of land has been determined to be for
commercial and agricultural land utilization.

Interest capitalized amounted to P


= 76.1 million, P
= 113.5 million and P
= 189.9 million and in 2014,
2013 and 2012, respectively.

Consolidated rental income from investment properties amounted to P = 16.4 billion in 2014,
P
= 13.3 billion in 2013 and P = 13.2 billion in 2012. Consolidated direct operating expenses arising
from the investment properties amounted to P = 5.5 billion in 2014, P
= 4.1 billion in 2013 and
P
= 3.1 billion, respectively.

Depreciation and amortization expense pertaining to investment properties amounted to


P
= 2.9 billion, P
= 2.5 billion and P
= 1.5 billion in 2014, 2013 and 2012, respectively (see Note 23).

14. Property, Plant and Equipment

The movements in property, plant and equipment follow:


2014
Land, Hotel
Buildings and Machinery Property and Furniture,
Improvements and Equipment Fixtures and Transportation Construction-
(Note 19) Equipment (Note 19) Equipment Equipment in-Progress Total
(In Thousands)
Cost
At January 1 P
= 9,601,612 P
= 12,151,848 P
= 13,695,918 P
= 5,873,788 P
= 2,727,877 P
= 683,782 P
= 44,734,825
Additions 1,275,250 2,668,427 818,371 945,498 585,989 474,606 6,768,141
Additions through business
combination (Note 24) 22,357 − − − − − 22,357
Disposals (428,545) (1,729,153) (8) (560,045) (410,411) (6,561) (3,134,723)
Transfers (56,464) 70,767 (15) (45,696) (50,963) (228,408) (310,779)
Exchange differences (41,481) (244,663) − 30,911 (2,785) (13,410) (271,428)
At December 31 10,372,729 12,917,226 14,514,266 6,244,456 2,849,707 910,009 47,808,393
Accumulated depreciation
and amortization and
impairment loss
At January 1 3,573,075 6,503,803 2,749,520 4,536,675 1,488,283 − 18,851,356
Depreciation and amortization
for the year (Note 23) 616,999 980,800 504,217 724,776 248,050 − 3,074,842
Disposals (308,118) (861,284) − (403,387) (346,797) − (1,919,586)
Exchange differences 13,799 (175,545) − 10,783 (401) − (151,364)
At December 31 3,895,755 6,447,774 3,253,737 4,868,847 1,389,135 − 19,855,248
Net book value P
= 6,476,974 P
= 6,469,452 P
= 11,260,529 P
= 1,375,609 P
= 1,460,572 P
= 910,009 P
= 27,953,145

*SGVFS011298*
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2013
Land, Hotel
Buildings and Machinery Property and Furniture,
Improvements and Equipment Fixtures and Trwsansportation Construction-
(Note 19) Equipment (Note 19) Equipment Equipment in-Progress Total
(In Thousands)
Cost
At January 1 P
= 9,942,458 P
= 10,673,309 P
= 12,379,164 P
= 5,083,954 P
= 2,126,377 P
= 390,274 P
= 40,595,536
Additions 1,517,370 2,130,395 1,316,792 875,276 709,532 289,385 6,838,750
Disposals (280,091) (1,274,259) (38) (140,821) (113,045) (126) (1,808,380)
Transfers (1,566,473) 565,811 – 36,422 3,642 – (960,598)
Exchange differences (11,652) 56,592 – 18,957 1,371 4,249 69,517
At December 31 9,601,612 12,151,848 13,695,918 5,873,788 2,727,877 683,782 44,734,825
Accumulated depreciation
and amortization and
impairment loss
At January 1 3,484,905 6,398,522 2,367,590 4,010,374 1,331,695 – 17,593,086
Depreciation and amortization
for the year (Note 23) 350,877 1,315,165 381,968 644,088 268,581 – 2,960,679
Impairment Loss (Note 23) – 222 – – – – 222
Disposals (266,192) (1,232,804) (38) (140,821) (113,045) – (1,752,900)
Transfers (49) 15 – 375 – – 341
Exchange differences 3,534 22,683 – 22,659 1,052 – 49,928
At December 31 3,573,075 6,503,803 2,749,520 4,536,675 1,488,283 – 18,851,356
Net book value P
= 6,028,537 P
= 5,648,045 P
= 10,946,398 P
= 1,337,113 P
= 1,239,594 P
= 683,782 P
= 25,883,469

Consolidated depreciation and amortization expense on property, plant and equipment amounted
to P
= 3.1 billion in 2014, P
= 3.0 billion in 2013 and P
= 2.9 billion in 2012 (see Note 23).

The carrying values of the Group’s equipment under finance lease amounted to US$4.5 million
(P
= 199.4 million) and US$5.9 million (P
= 264.1 million) as of December 31, 2014 and 2013,
respectively (see Note 30).

The cost of fully depreciated property, plant and equipment amounted to P


= 11.5 billion and
P
= 8.8 billion as of December 31, 2014 and 2013, respectively.

On August 27, 2014, IMI Group entered into an agreement with DBS Trustee Limited (in its
capacity as trustee of Soilbuild Business Space REIT) for a purchase consideration of
SGD22.4 million (US$ 17.2 million), subject to the fulfillment of certain conditions precedent. The
cost of the property amounted to US$4.7 million with accumulated depreciation of US$2.05 million.

On December 23, 2014, the transaction was completed and the Group recognized a gain on sale
of the property amounting to US$14.3 million (P= 651.2 million) (see Note 23). Expenses related to
the sale amounted to US$0.2 million (P
= 8.9 million).

As of December 31, 2014, the carrying value of IMI Group’s pledged equipment with BNP Paribas
amounted to US$1.55 million (P
= 69.3 million).

On May 15, 2014, GNPower Kauswagan Ltd. Co. (“GNPK”) entered into an Engineering, Design
and Procurement Agreement, Construction and Supply Agreement and Coordination Agreement
with Shanghai Electric Power Construction Co. Ltd., the effectivity of which was conditioned on the
happening of certain conditions precedent, such as the closing of project financing for GNPK.
GNPK is the project company for the 4 x 135MW Coal Fired Power Generation Facility in
Kauswagan, Lanao Del Norte (the “Kauswagan Power Plant Project”).

*SGVFS011298*
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15. Service Concession Assets and Obligations

Service Concession Assets


The movements in this account follow:

2014 2013
(In Thousands)
Cost
At January 1 P
= 92,222,739 P
= 86,728,953
Additions during the year 4,114,659 5,457,889
Transfers (Note 23) – 35,897
At December 31 96,337,398 92,222,739
Accumulated amortization
At January 1 18,468,332 15,433,554
Amortization (Note 23) 3,032,433 3,034,778
At December 31 21,500,765 18,468,332
Net book value P
= 74,836,633 P
= 73,754,407

SCA consists of the present value of total estimated concession fee payments, including
regulatory costs and local component costs, pursuant to the Group’s concession agreements and
the revenue from rehabilitation works which is equivalent to the related cost for the rehabilitation
works covered by the service concession arrangements.

Total interest and other borrowing costs capitalized as part of SCA amounted to P= 377.7 million
and P
= 299.5 million in 2014 and 2013, respectively. The capitalization rates used range from
7.01% to 8.78% in 2014 and 4.16% to 7.06% in 2013.

Transfers pertain to the acquisition of the water reticulation system of Laguna Technopark, Inc.
(LTI), a subsidiary of ALI, by LAWC on December 23, 2013.

In March 2010, MWC entered into a MOA with MWSS for the repayment of the Export-Import
Bank of China loan which resulted in additional SCA and SCO amounting to P
= 253.9 million in
2013.

The Company has a concession agreement with the DPWH while the MWC Group has
concession agrewsements with MWSS, POL, TIEZA and CDC. These concession agreements
set forth the rights and obligations of the Company and MWC Group throughout the concession
period (see Note 36).

Service Concession Obligation

POL Concession Fees


Under Laguna AAA Water Corporation’s (LAWC) concession agreement with POL, LAWC is
required to pay concession fees to POL computed as a percentage of water sales as follows:

Operational Period Percentage of Water Sales


Years 1 to 5 4%
Years 6 to 10 3%
Years 11 to 25 2%

Advance payment to POL was made for the said concession fees and 70% of the annual
concession fees is applied against the said advances. The remaining thirty percent (30%) of the
annual concession fees is expensed in the period they are incurred. Advances as of
December 31, 2014 and 2013 amounted to P = 102.8 million and P
= 124.2 million, respectively.

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BIWC Concession Fees


The aggregate concession fee pursuant to the Agreement is equal to the sum of the following:

a. Servicing the aggregate peso equivalent of all liabilities of Boracay Water Sewerage System
(BWSS) as of commencement date;

b. 5% of the monthly gross revenue of the Concessionaire, inclusive of all applicable taxes which
are for the account of BIWC.

c. Payment of annual operating budget of the TIEZA Regulatory Office starting 2010. For 2010
and 2011, the amount shall not exceed P
= 15.0 million. For the year 2012 and beyond, the
Concessionaire shall pay not more than P
= 20.0 million, subject to annual consumer price index
(CPI) adjustments.

In addition, advance payment of P = 60.0 million was provided to TIEZA which shall be offset against
the annual concession fees pertaining to the 5% annual gross revenue of BIWC, within a period of
10 years from the signing of the concession agreement or until fully paid. Any amount payable
after application of the advance payment will be expensed in the period this is incurred. The
remaining balance of the advances amounted to P = 4.2 million and P
= 27.7 million as of
December 31, 2014 and 2013, respectively.

CDC Concession Fees


The aggregate concession fee pursuant to the Agreement is equal to the sum of the following:

a. Annual franchise fee of P


= 1.5 million;
b. Semi-annual rental fees of P= 2.8 million for leased facilities from CDC.

MWSS Concession Fees


The aggregate concession fees of MWC pursuant to the Agreement are equal to the sum of the
following:

a. 10% of the aggregate peso equivalent due under any MWSS loan which has been disbursed
prior to the Commencement Date, including MWSS loans for existing projects and the Umiray
Angat Transbasin Project (UATP), on the prescribed payment date;

b. 10% of the aggregate peso equivalent due under any MWSS loan designated for the UATP
which has not been disbursed prior to the Commencement Date, on the prescribed payment
date;

c. 10% of the local component costs and cost overruns related to the UATP;

d. 100% of the aggregate peso equivalent due under MWSS loans designated for existing
projects, which have not been disbursed prior to the Commencement Date and have been
either awarded to third party bidders or elected by the MWC for continuation; and

e. 100% of the local component costs and cost overruns related to existing projects; and

f. MWC’s share in the repayment of MWSS loan for the financing of the Project.

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The schedule of undiscounted future concession fee payments follows:

In Original Currency
Foreign Currency
Denominated
Loans Peso Loans/
(Translated to Project Local Total Peso
Year US Dollars) Support Equivalent*
2015 $7,871,129 P
= 395,714,907 P
= 747,711,806
2016 8,682,118 395,714,907 783,979,212
2017 6,927,835 395,714,907 705,527,673
2018 7,107,025 395,714,907 713,541,071
2019 onwards 51,784,480 7,518,583,229 9,834,385,161
$82,372,587 P
= 9,101,442,857 P= 12,785,144,923
*Peso equivalent is translated using the PDEx closing rate as of December 31, 2014 amounting to P = 44.72 to US$1.

Estimated concession fee payments on future concession projects, excluding MWC’s share in
current operating budget, related to the Extension is still not determinable. It is only determinable
upon loan drawdown of MWSS and actual construction of the related concession projects.

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16. Intangible Assets

The movements in intangible assets follow:


2014
Technical Project
Customer Order Unpatented Developed Service Development
Goodwill Relationships Backlog Technology Software Licenses Agreement Trademarks Cost Total
(In Thousands)
Cost
At January 1 P
= 5,243,079 P
= 1,211,713 P
= 4,128 P
= 4,105 P
= 240,607 P
= 295,999 P
= 84,733 P
= 66,604 P
= 180,953 P
= 7,331,921
Additions during the year – – – – 57,436 3,054 – – 12,730 73,220
Additions through business combination
(Note 24) 10,983 − − − − − − − 365,243 376,226
Exchange differences 49,331 9,839 – – 32,963 – – – – 92,133
At December 31 5,303,393 1,221,552 4,128 4,105 331,006 299,053 84,733 66,604 558,926 7,873,500
Accumulated amortization and
impairment loss
At January 1 1,689,549 991,204 4,128 4,105 67,146 253,772 84,733 41,952 19,486 3,156,075
Amortization (Note 23) − 64,695 – – 89,196 – – 12,394 – 166,285
Impairment (Note 23) 335,731 – – – – – – – – 335,731
Exchange differences (1,271) 9,417 – – 23,799 – – – – 31,945
At December 31 2,024,009 1,065,316 4,128 4,105 180,141 253,772 84,733 54,346 19,486 3,690,036
Net book value P
= 3,279,384 P
= 156,236 P
=– P
=– P
= 150,865 P
= 45,281 P
=– P
= 12,258 P
= 539,440 P
= 4,183,464

2013
Technical
Customer Order Unpatented Developed Service Project
Goodwill Relationships Backlog Technology Software Licenses Agreement Trademarks Development Cost Total
(In Thousands)
Cost
At January 1 P
= 5,103,080 P
= 1,202,746 P
= 4,128 P
= 4,105 P
= 177,114 P
= 295,999 P
= 84,733 P
= 8,405 P
= 89,978 P
= 6,970,288
Additions through business combination
(Note 24) 31,830 – – – – – – – – 31,830
Additions during the year – – – – 34,986 – – 49,922 90,975 175,883
Exchange differences 108,169 8,967 – – 28,507 – – 8,277 – 153,920
At December 31 5,243,079 1,211,713 4,128 4,105 240,607 295,999 84,733 66,604 180,953 7,331,921
Accumulated amortization and
impairment loss
At January 1 1,657,719 910,367 4,128 4,105 11,886 253,772 84,733 3,061 19,486 2,949,257
Amortization (Note 23) – 78,036 – – 38,591 – – 34,732 – 151,359
Impairment (Note 23) 31,830 – – – – – – – – 31,830
Exchange differences – 2,801 – – 16,669 – – 4,159 – 23,629
At December 31 1,689,549 991,204 4,128 4,105 67,146 253,772 84,733 41,952 19,486 3,156,075
Net book value P
= 3,553,530 P
= 220,509 P
=– P
=– P
= 173,461 P
= 42,227 P
=– P
= 24,652 P
= 161,467 P
= 4,175,846

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Goodwill pertains to the excess of the acquisition cost over the fair value of the identifiable assets
and liabilities of companies acquired by the Group.

Impairment testing of goodwill for the Group

IMI Group
Goodwill acquired through business combinations have been allocated to five individual CGUs of
IMI for impairment testing as follows (amounts in thousands):
2014 2013
In US$ In Php* In US$ In Php*
Speedy Tech Electronics, Ltd.
(STEL) US$45,128 P
= 2,018,124 US$45,128 P
= 2,003,458
IMI USA 657 29,381 657 29,168
IMI CZ 650 29,068 650 28,857
IMI Philippines 441 19,722 441 19,578
Psi – – 7,479 332,030
US$46,876 P
= 2,096,295 US$54,355 P
= 2,413,091
*Translated using the PDEx closing exchange rate at the statement of financial position date (US$1:P
= 44.72 in 2014 and
US$1:P= 44.395 in 2013).

STEL Group, PSi and IMI USA and IMI CZ


The recoverable amounts of these CGUs have been based on value in use calculations using
cash flow projections from financial budgets approved by management covering a five-year
period. The post-tax discount rates applied to cash flow are as follows:

2014 2013
STEL Group 10.18% 13.07%
Psi 11.07% 14.11%
IMI USA 8.47% 13.69%
IMI CZ 10.50% 12.73%

Cash flows beyond the five-year period are extrapolated using a steady growth rate of 1%, which
does not exceed the compound annual growth rate for the global EMS industry.

Key assumptions used in value in use calculations


The calculations of value in use for the CGUs are most sensitive to the following assumptions:

· Forecasted gross margins - Gross margins are based on the mix of business model
arrangements with the customers.
· Revenue - Revenue forecasts are management’s best estimates considering factors such as
index growth to market, customer projections and economic factors.
· Pre-tax discount rates - Discount rates represent the current market assessment of the risks
specific to each CGU, taking into consideration the time value of money and individual risks of
the underlying assets that have not been incorporated in the cash flow estimates. This is also
the benchmark used by management to assess operating performance. The discount rate
calculation is based on the specific circumstances of the Group and its operating segments
and is derived from its weighted average cost of capital.

No impairment loss was assessed for STEL Group, IMI USA and IMI CZ in 2014, 2013 and 2012.

For PSi, the assessment resulted in an impairment loss for the remaining balance of goodwill
amounting to US$7.5 million (P= 335.7 million) in 2014 included in “Other charges” in the
consolidated statement of income (see Note 23). The comparison of the recoverable amount and
the carrying amount resulted in no impairment in 2013 and 2012.

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Sensitivity to changes in assumptions


With regard to the assessment of value in use of STEL Group, IMI USA, and IMI CZ, management
believes that no reasonably possible change in any of the above key assumptions would cause
the carrying value of the units to exceed their recoverable amount.

IMI Philippines
This pertains to the goodwill arising from the purchase of M. Hansson Consulting, Inc. (MHCI) in
2006. MHCI was subsequently merged with IMI Philippines as testing and development
department.

The recoverable amount was based on the market price of the IMI’s shares at valuation date less
estimated costs to sell. The comparison of the recoverable amount and the carrying amount
resulted to no impairment loss in 2014, 2013 and 2012.

MWC and Philwater


Goodwill from the acquisition of MWC and Philwater amounted to P= 393.8 million. The recoverable
amount in 2014 and 2013 was based on the market price of MWC shares at valuation date less
estimated cost to sell. The comparison of the recoverable amount and the carrying amount
resulted in no impairment.

CWC
This pertains to the goodwill arising from the purchase of CWC in 2011. MWC’s impairment tests
for goodwill are based on value in use and fair value less cost to sell calculations. The value in
use calculations in 2014 used a discounted cash flow model. The cash flows are derived from the
budget for the next 36 years and assumes a steady growth rate. MWC used the remaining
concession life of CWC, which is a period longer than the maximum of five years. The
recoverable amount is most sensitive to discount rate used for the discounted cash flow model.
The post-tax discount rate applied to cash flows projections is 10.45% for 2014.

The carrying value of goodwill amounted to P


= 130.3 million as of December 31, 2014 and 2013.
No impairment loss was recognized as a result of the impairment testing performed.

ACEHI Group
Goodwill acquired through business combinations have been allocated to two individual CGUs of
ACEHI for impairment testing as follows:

2014 2013
(In Thousands)
Wind Power P
= 411,031 P
= 411,031
Hydro Power 55,424 55,424
P
= 466,455 P
= 466,455

Wind Power Companies


The recoverable amount of the Wind Power CGU is based on value in use calculations using cash
flow projections from financial budgets approved by ACEHI management covering the period the
CGU is expected to be operational. The post-tax discount rates applied to cash flow projections
for the Wind Power CGU is 10% which is based on weighted average cost of capital of
comparable entities. The value in use computation is most sensitive to the discount rate and
growth rate applied to the cash flow projections.

ACEHI management believes that no reasonably possible change in any of the key assumptions
would cause the carrying value of the Wind Power CGU to exceed its recoverable amount.

No impairment loss was assessed for the Wind Power CGU in 2014 and 2013.

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Hydro Power Companies


The recoverable amount of Hydro Power CGU is based on fair value less cost to sell calculations
using cash flow projections from financial budgets approved by ACEHI management covering the
period the Hydro Power CGU is expected to be operational. The post-tax discount rates applied
to cash flow projections for the Hydro Power CGU is 12% which is based on weighted average
cost of capital of comparable entities. The value in use computation is most sensitive to the
discount rate and growth rate applied to the cash flow projections.

ACEHI management believes that no reasonably possible change in any of the key assumptions
would cause the carrying value of the units to exceed their recoverable amount.

No impairment loss was assessed for the Hydro Power CGU in 2014 and 2013.

Customer relationships
Customer relationships pertain to STEL Group’s and IMI BG’s noncontractual and contractual
agreements, respectively, with certain customers which lay out the principal terms upon which the
parties agree to undertake business. Customer relationship of STEL amounting to
US$12.9 million (P= 576.9 million) is fully amortized as of December 31, 2014 and 2013.

Developed software
Developed software pertains to IQ BackOffice's (IQB), a subsidiary of AIVPL, internally developed
web-based process management tool that is used jointly with customers to manage transactions
in real-time. The developed software augments IQB's existing accounting system and automates
traditionally paper-based processes (e.g.,electronic/paper receipt, electronic routing, approvals.
etc.).

Licenses
These pertain to the IMI’s acquisitions of computer applications and modules

17. Pension and Other Noncurrent Assets

This account consists of the following:

2014 2013
(In Thousands)
Deposits P
= 6,654,046 P= 6,611,799
Concession financial receivable (Note 9) 899,070 603,905
Deferred charges 474,470 271,048
Deferred FCDA 141,189 55,407
Leasehold rights 100,100 106,819
Pension assets (Note 27) 19,064 9,156
Others 8,542,462 358,344
P
= 16,830,401 P= 8,016,478

Deposits and Advances - Projects


Deposits and advances for projects include escrow deposits and security deposits on land leases,
electric and water meter deposits.

MWC Group
MWC Group’s deposits include payments for the guarantee deposits in Manila Electric Company
(MERALCO) for the electric connection, its related deferred charges, deposits to Department of
Environment and Natural Resources (DENR), deposits for land acquisitions and right of way and
water banking rights. CMWD entered into a 30-year Right of Way Agreement with certain
individuals for an easement of right of way of a portion of their lands wherein the pipelines and
other appurtenances between the weir and water treatment plant of CMWD will pass through. For

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the water banking rights, the National Water Resources Board (NWRB) approved the assignment
of Water Permit No. 16241 from Central Equity Ventures Inc. (now Stateland Inc.) to MW
Consortium. The NWRB likewise approved the change of the purpose of Water Permit No. 16241
from Domestic to Municipal. It is the intention of MW Consortium to allow CMWD to use the said
water permit for its project.

ACEHI
In 2012, ACEHI deposited in an escrow account potential earn-out amounting to P = 167.7 million in
relation to the Achieved Capacity Factor Adjustment. Payment of which is dependent on the final
resolution of the Arbitration Committee and the final FiT rate to be awarded to NorthWind in 2013
(see Note 39). Management decided not to reverse the FiT contingent consideration on the
grounds that the previous owners of NorthWind may still decide to pursue the transaction. In
February 2014, the previous owners of Northwind signed the arbitration procedures. Interest
income earned on the escrow account amounted to P = 2.9 million and P
= 3.0 million in 2014 and
2013, respectively.

As of December 31, 2014, the arbitration proceedings between the previous owners of Northwind
and ACEHI has not started.

Deferred charges
Deferred charges mainly consist of deposits made for implementation of marketing strategies for
acquisition and development of real estate projects.

Deferred FCDA
Deferred FCDA refers to the unrecovered amounts from (amounts for refund to) customers of
MWC for realized losses (gains) from payments of foreign loans on the difference between the
drawdown or rebased rate versus the closing rate at payment date. This account also covers the
unrealized gains/losses from loan valuations, accrual of interest and accretion of transaction and
related costs.

Leasehold rights
Leasehold rights pertain to the right to use an island property which expires on
December 31, 2029. The cost amounted to P = 127.4 million and accumulated amortization expense
as of December 31, 2014 and 2013 amounted to P = 27.3 million and P
= 20.6 million, respectively.
Amortization expense amounted to P = 6.7 million in 2014, 2013 and 2012.

Others
Others include restricted cash that are not available for use by the Group and therefore are not
highly liquid. These pertain to AYCFL’s money market placements amounting to US$185.0 million
(P
= 8.3 billion) (see Note 31) in BPI that were used as collateral for the Company’s P
= 8.0 billion long
term-debt (see Note 20).

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18. Accounts Payable and Accrued Expenses

This account consists of the following:

2014 2013
(In Thousands)
Accounts payable P
= 73,540,123 P
= 63,198,549
Accrued expenses
Project costs 17,321,785 11,983,222
Personnel costs 3,772,205 2,694,816
Rental and utilities 3,497,019 2,330,388
Professional and management fees 2,703,201 1,801,971
Advertising and promotions 2,371,634 1,115,532
Repairs and maintenance 1,694,872 1,516,026
Various operating expenses 1,328,853 3,230,745
Taxes payable 11,292,425 6,067,957
Dividends payable 2,845,013 2,093,323
Related parties (Note 31) 2,458,817 4,107,009
Interest payable (Note 31) 2,261,525 2,272,458
Retentions payable 1,014,364 1,192,251
P
= 126,101,836 P
= 103,604,247

Accounts payable and accrued expenses are non-interest bearing and are normally settled on
15- to 60-day terms. Other payables are non-interest bearing and are normally settled within one
year.

In 2014 and 2013, accounts payable includes non-interest bearing liability of the Company to DBS
Ltd. in relation to the acquisition of BPI common shares and ADHI Class B common shares
amounting to P = 3.3 billion and P
= 14.2 billion, respectively (see Note 12).

Accrued expenses consist mainly of accruals already incurred but not yet billed for film share,
postal and communication, supplies, transportation and travel, subcontractual costs, security,
insurance and representation.

Project costs represent accrual for direct costs associated with the commercial, residential and
industrial project development and construction like engineering, design works, contract cost of
labor and direct materials.

Taxes payable consists of net output VAT, withholding taxes, business taxes, and other statutory
payables, which are due within one year.

19. Other Current Liabilities

This account consists of:

2014 2013
(In Thousands)
Customers’ deposits P
= 9,161,743 P
= 5,362,355
Nontrade payables 278,407 5,614,201
Installment payable 7,376 11,667
Derivative liability (Note 33) 4,755 3,470
P
= 9,452,281 P
= 10,991,693

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Customers’ deposits consist of tenants’ deposits and construction bonds to be refunded by the
Group through the application of the amount thereof against the rent and service due to the
Group.

Nontrade payables pertain mainly to non-interest bearing real estate-related payables to


contractors and various non-trade suppliers which are due within one year. This account also
includes finance lease payable and miscellaneous non-interest bearing non-trade accounts of the
Group due within one year.

20. Short-term and Long-term Debt

Short-term debt consists of:

2014 2013
(In Thousands)
Philippine peso debt - with interest rates ranging from 2.0%
to 8.0% per annum in 2014 and 1.21% to 8.0% per
annum in 2013 P
= 16,919,900 P
= 12,114,451
Foreign currency debt - with interest rates ranging from
1.1% to 2.55% in 2014, 1.05% to 3.0% over 1 month
EURIBOR in 2013 4,164,369 3,696,834
P
= 21,084,269 P
= 15,811,285

ALI Group
The short-term debt of ALI Group amounted to P= 16.3 billion and P
= 12.4 billion as of December 31,
2014 and 2013, respectively, represent unsecured peso-denominated bank loans and dollar-
denominated bank loans with various interest rates.

AAHC Group
The Philippine peso debt of AAHC Group pertains to short-term loans with various banks
amounting to P
= 2.0 billion and P
= 1.1 billion as of December 31, 2014 and 2013, respectively. These
loans are unsecured and bear interest rate of 2.7% to 2.9% per annum in 2014 and 3.0% to 4.3%
per annum in 2013.

AIVPL Group
The Philippine peso debt of AIVPL Group pertains to short-term loans with various banks
amounting to P
= 275.0 million and P
= 254.0 million as of December 31, 2014 and 2013, respectively.
These loans are unsecured and bear interest rates ranging from 6.0% to 8.0% in 2014 and 7.0%
to 8.0% in 2013.

BHL Group
BHL’s loans are unsecured dollar-denominated bank loans amounting to US$3.9 million
(P
= 173.2 million) as of December 31, 2014 and bear interest rate of 5.0%.

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IMI Group
IMI Philippines
As of December 31, 2014 and 2013, IMI Philippines has short-term loans aggregating to
US$29.0 million (P
= 1,296.9 million) and US$24.0 million (P
= 1,065.5 million), respectively. The loans
have maturities ranging from 30-180 days and fixed interest rates ranging from 1.75% to 2.20% in
2014 and 1.9% to 2.4% in 2013.

PSi
PSi has short-term loans and trust receipts payable to a local bank amounting to US$9.2 million
(P
= 411.4 million) and US$9.4 million (P
= 418.2 million) as of December 31, 2014 and 2013,
respectively.

These loans fall under an unsecured Omnibus Line Credit Facility of US$10.0 million granted on
November 24, 2010. The credit facility includes 30 to 360 days Promissory Notes (maybe
denominated in USD or Philippine peso), Letter of Credit/Trust Receipt (LC/TR) Line, Export
Packing Credit Line, FX Forward Cover, and Foreign Bills Line and Domestic Bill Purchase Line,
subject to interest rates ranging from 2.23% to 2.53% in 2014 and 2.16% to 2.57% in 2013. This
credit facility is renewable annually, and the current term is until May 30, 2015.

As of December 31, 2014 and 2013, the outstanding trust receipts payable amounted to
US$0.4 million (P
= 17.4 million) and US$0.2 million (P
= 9.8 million), respectively.

The undrawn credit facility amounted to US$0.4 million (P


= 17.9 million) and US$0.6 million
(P
= 25.7 million) as of December 31, 2014 and 2013, respectively.

IMI BG
In 2013, IMI BG has short-term loans from the following banks (in thousands):

In US$ In Php*
UniCredit Bulbank US$5,167 P
= 229,389
BNP Paribas 1,380 61,265
US$6,547 P
= 290,654
*Translated using the exchange rate at the reporting date (US$1:P
= 44.395 in 2013)

The loans from UniCredit Bulbank and BNP Paribas are from existing revolving credit facilities with
terms of one year. The loans bear interest based on 1-month EURIBOR plus 3.00% and 3-month
EURIBOR plus 2.50%, respectively.

The credit facility with UniCredit Bulbank is subject to the following collaterals:

· First ranking pledge on materials, ready made and unfinished production at balance sheet
value, minimum of €8.0 million;
· First ranking pledge on receivables from a certain customer; and
· Notary signed Soft Letter of Comfort from IMI Philippines.

As of December 31, 2013, IMI BG’s pledged inventories and receivables with UniCredit Bulbank
amounted to $18.05 million (P
= 801.3 million).

The credit facility with BNP Paribas is subject to the following collaterals:

· First rank pledge on receivables from selected customers of IMI BG, subject to pre- financing
in the amount of 125% of the utilized portion of the facility but not more than €3,750.0 million;
and
· First rank pledge on goods of IMI BG in the amount of 125% of the utilized portion of the
facility but not more than €3,750.0 million.

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IMI BG’s loan with UniCredit Bulbank as of December 31, 2013 amounting to $5.17 million was
fully settled in the first quarter of 2014. The short-term loan with BNP Paribas was refinanced as
long-term in 2014.

STEL
The loans of STEL amounting to $13.5 million (P = 603.72 million) are clean loans from various
Singapore banks from existing revolving credit facilities and bear interest rates of 1.73% to 2.55%
in 2014 and 2.30% to 2.39% in 2013, respectively, and have maturities of 90 to 240 days from the
date of issue with renewal options.

IMI MX
IMI MX has a revolving credit line with Banamex amounting to US$2.2 million (P
= 98.4 million) as of
December 31, 2013, resepectively, with term not exceeding twelve (12) months and bears interest
on LIBOR plus 2%.

Long-term debt consists of:

2014 2013
(In Thousands)
The Company:
Bank loans - with interest rates ranging from 2.7% to
4.3% per annum in 2014 and 0.7% to 3.8% per
annum in 2013 and varying maturity dates up to
2020 P
= 21,171,095 P
= 13,193,780
Bonds due 2017 9,957,982 9,941,761
Bonds due 2019 9,925,168 9,912,239
Bonds due 2021 9,930,244 9,921,802
Bonds due 2027 9,920,501 9,914,072
Syndicated term loans – 2,938,575
Fixed Rate Corporate Notes (FXCNs) with interest
rates ranging from 6.7% to 8.4% per annum and
varying maturity dates up to 2016 – 2,816,443
60,904,990 58,638,672
Subsidiaries:
Loans from banks and other institutions:
Foreign currency - with interest rates ranging from
0.50% to 6-month LIBOR plus 1.5% spread per
annum in 2014 and 3 months LIBOR to 3% in
2013 45,284,334 32,392,171
Philippine peso - with interest rates ranging from
2.02% to 10.21% in 2014 and 1.06% to 12% in
2013 (Note 23) 42,443,993 32,189,740
Bonds:
Exchangeable bonds due 2019 12,247,531 –
Due 2014 – 620,195
Due 2015 986,710 992,460
Due 2016 1,982,700 1,999,650
Due 2019 9,292,190 9,281,120
Due 2020 3,969,010 3,964,465
Due 2022 5,615,067 5,608,377
Due 2024 14,875,092 14,864,568
Due 2025 7,922,131 −
Due 2033 1,982,330 1,981,840
146,601,088 103,894,586

(Forward)

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2014 2013
(In Thousands)
Floating Rate Corporate Notes (FRCNs) P
= 1,000,000 P
= 1,000,000
FXCNs 29,254,380 26,336,604
30,254,380 27,336,604
237,760,458 189,869,862
Less current portion 10,761,443 11,842,519
P
= 226,999,015 P
= 178,027,343

Reconciliation of carrying amount against nominal amount follows:

2014 2013
(In Thousands)
Nominal amount P
= 238,851,638 P
= 190,742,889
Unamortized discount (1,091,180) (873,027)
P
= 237,760,458 P
= 189,869,862

The Company
Generally, the Company’s long-term loans are unsecured. Due to certain regulatory constraints in
the local banking system regarding loans to directors, officers, stockholders and related interest,
some of the Company’s credit facilities with a local bank are secured by shares of stock of a
subsidiary with a fair value of P
= 13.3 billion and P
= 9.8 billion as of December 31, 2014 and 2013,
respectively, in accordance with Bangko Sentral ng Pilipinas (BSP) regulations. All credit facilities
of the Company outside of this local bank are unsecured, and their respective credit agreements
provide for this exception. The Company positions its deals across various currencies, maturities
and product types to provide utmost flexibility in its financing transactions.

In March 2009, the Company issued P = 1.0 billion FXCNs consisting of 7-year note to a local
financial institution with fixed interest rate of 8.40% per annum. The loan was prepaid in full by the
Company in December 2013.

Bonds due on 2017


In April 2010, the Company issued 7.20% Fixed rate Putable Bonds with an aggregate principal of
P
= 10.0 billion to mature in 2017. On the twentieth (20th) Coupon Payment Date
(the “Put Option Date”), each Bondholder shall have the option (but not the obligation) to require
the Company to redeem the outstanding Bonds. The bonds have been rated “PRS Aaa” by
PhilRatings.

Bonds due on 2021


In May 2011, the Company issued 6.80% Fixed Rate Multiple Put Bonds with an aggregate
principal amount of P = 10.0 billion to mature in 2021. On the fifth (5th) anniversary of the Issue
Date, Bondholders shall have the right, but not the obligation, to require the Company to redeem
up to 20% of all outstanding Bonds registered in such Bondholder’s name at such time (the “Five
Year Put Option”); and on the eighth (8th) anniversary of the Issue Date, Bondholders shall have
the right, but not the obligation, to require the Company to redeem up to 100% of all outstanding
Bonds registered in such Bondholder’s name at such time (the “Eight Year Put Option”). The
Bonds have been rated “PRS Aaa” by PhilRatings.

Bonds due on 2027


In May 2012, the Company issued 6.875% Fixed Rate Bonds with an aggregate principal amount
= 10.0 billion to mature in May 2027. On the tenth (10th) anniversary from the Issue Date and
of P
every year thereafter until the fourteenth (14th) anniversary from the Issue Date, the Issuer shall
have the right, but not the obligation, to redeem and pay the principal and all amounts due on
outstanding bonds. The Bonds have been rated “PRS Aaa” by PhilRatings.

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Bonds due on 2019


In November 2012, the Company issued 5.45% Fixed Rate Bonds with an aggregate principal
amount of P= 10.0 billion to mature in November 2019. On the fourth (4th) anniversary from the
Issue date and every year thereafter until the sixth (6th) anniversary from the Issue Date, the
Issuer shall have the right, but not the obligation, to redeem and pay the principal and all amounts
due on outstanding bonds. The Bonds have been rated “PRS Aaa” by PhilRatings.

Bank loans - with interest rates ranging from 1.4% to 3.8% per annum in 2012 and 1.7% to 3.8%
per annum in 2011 and varying maturity dates up to 2019
In October and November 2012, the Company availed P = 2.0 billion and P= 5.0 billion loan from
various banks to mature in 2017 and 2019, respectively. The P = 2.0 billion loans shall have interest
rate per annum equal to the 3-month PDST-R2 plus a spread of seventy five basis points (0.75%)
per annum, or BSP reverse repurchase (RRP) rate, whichever is higher. The P = 5.0 billion loans
shall have interest rate per annum equal to the 3-month PDST-R2 plus a spread of seventy five
basis points (0.75%) or the BSP RRP rate plus spread of twenty five (25) basis points, whichever
is higher. The interest rate shall be set on the first drawdown date and every three months
thereafter.

In November and December 2013, the Company availed P = 2.0 billion and P= 4.3 billion loan from
various banks to mature in 2018 and 2020, respectively. The P = 2.0 billion loans shall have interest
rate per annum equal to the 3-month PDST-R2 plus a spread of 100 basis points (1%) per annum,
or BSP overnight reverse repurchase (RRP) rate plus a spread of 25 basis points (0.25%),
whichever is higher. The P
= 4.3 billion loans shall have interest rate per annum equal to the 6-
month PDST-R1 plus a spread of thirty basis points (0.30%) for the first six months and 3-month
PDST-R1 plus a spread of sixty basis points (0.60%) thereafter.

On January 24, 2014, the Company issued promissory note to BPI amounting to P = 8.0 billion with
principal repayment of 5%, 5% and 90% on end of third year, fourth year and fifth year,
respectively. The loan under this note (including interest, charges, and those taxes for which the
Company is liable under the terms of Loan Agreement) was secured by an assignment of deposits
belonging to AYCFL (see Note 17).

Syndicated term loans


In June and October 2007, the Company issued P = 3.5 billion FXCNs consisting of 5- and 7-year
notes to a local bank with fixed interest rates of 6.725% and 6.70% per annum, respectively. In
June 2011, the Company prepaid in full the P = 2.0 billion 5-year FXCN with a fixed interest rate of
6.725% per annum. In October 2014, the Company paid in full the P = 1.5 billion FXCNs.

In February 2008, the Company availed of a syndicated term loan amounting to P = 1.5 billion which
bears fixed interest rate of 6.75% per annum and will mature in 2018. The loan was prepaid in full
by the Company in December 2014.

Fixed rate corporate noted (FXCNs)


In August 2009, the Company issued P = 3.0 billion FXCNs consisting of a 5-year note to various
institutions with fixed interest rate of 7.45% per annum. In August 2014, the Company paid in full
the P= 3.0 billion FXCNs.

Subsidiaries
On December 16, 2010, AYCFL entered into a 6-year syndicated term loan facility with a foreign
bank with the Company as guarantor for US$229.2 million. On November 16, 2011 and
December 12, 2012, AYCFL drewdown US$100.0 million and US$129.2 million on the syndicated
term loan facility at a rate of 1.46 basis points over the 1-, 3- or 6-month US$ LIBOR at the
Company’s option.

On March 28, 2011, AYCFL entered into a US$150.0 million 6.5-year transferrable term loan
facility with a foreign bank. The transferrable term loan facility was subsequently amended on
September 28, 2012 and on August 30, 2013. On September 5, 2013 and January 7, 2014,

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AYCFL drewdown US$50.0 million and US$100.0 million on the transferrable term loan facility at a
rate of 139.4 basis points over the 1-, 3- or 6-month LIBOR at the Company’s option.

On September 28, 2012, AYCFL entered into a 3-year revolving credit facility with a foreigh bank,
with the Company as guarantor for US$20.0 million. On January 7, 2014, AYCFL drewdown the
full amount of the revolving credit facility with interest rate of 86.67 basis points over the 1-, 3- or
6-month LIBOR at the Company’s option.

On November 28, 2013, AYCFL, entered into a 5-year syndicated term loan with a foreign bank,
with the Company as guarantor, for US$ 225.0 million. On January 14, 2014, AYCFL drewdown
the full amount of the term loan at a rate of 135 basis points over the 1-, 3- or 6-month LIBOR at
the Company’s option.

AYCFL Exchangeable Bonds


On May 2, 2014, AYCFL issued at face US$300.0 million Exchangeable Bonds (the Bonds) due
on May 2, 2019 with a fixed coupon rate of 0.50% per annum, payable semi-annually. The Bonds
are guaranteed by the Company and constitute direct, unsubordinated, unconditional and
unsecured obligations of AYCFL, ranking pari passu and without any preference or priority among
themselves. The Bonds were listed in the Singapore Stock Exchange and include features such
as exchange option, put option and early redemption options. The exchange option entitles the
bondholders to exchange the Bonds for ALI’s common shares at any time on or after June 11,
2014 up to the close of business on the 10th day prior to maturity date, or if such bonds shall have
been called for redemption by AYCFL before the maturity date, then up to the close of business on
a date no later than 10 days prior to the date fixed for redemption. The exchange price per
principal amount to be exchanged, translated into at the fixed exchange rate of P = 44.31/US$1.00,
is equal to 36.48, subject to anti-dilutive adjustments contingent on certain events. The exchange
option was assessed to be an equity component of the Bonds at the consolidated financial
statements as the Bonds are denominated in the functional currency of AYCFL and to be settled
by the Group through issuance of a fixed number of ALI’s common shares.

The put option entitles the bondholders to require AYCFL to redeem, in whole or in part, the
Bonds on May 2, 2017 (put option date) at 100% of the principal amount together with accrued
and unpaid interest. Moreover, if a change of control event occurs (the change of control put) or in
the event that the common shares of ALI are delisted or suspended from trading for a period of
more than 20 consecutive trading days (the delisting put), the bondholders may require AYCFL to
redeem the Bonds, in whole but not in part, at 100% of the principal amount together with accrued
and unpaid interest.

The early redemption option gives the right to AYCFL to redeem the Bonds, in whole but not in
part, at any time after May 2, 2017 at 100% of the principal amount on the date fixed for such
redemption, provided, however, that no such redemption may be made unless the closing price of
the common shares of ALI (translated into US$ at the prevailing average to US$ exchange rate as
published by BSP) for any 30 consecutive trading days was at least 130% of the exchange price
then in effect (translated into US$ at the fixed exchange rate of P
= 44.31/US$1.00). In addition, if at
any time the aggregate principal amount of the Bonds outstanding is less than 10% of the
aggregate principal amount originally issued or if a tax event occurs, AYCFL may redeem the
Bonds, in whole but not in part, at 100% of principal amount together with accrued and unpaid
interest.

The put and early redemption options were assessed to be embedded derivatives that are clearly
and closely related to the host contract, therefore, not required to be bifurcated. As the Bonds
were determined to be a compound instrument at the consolidated level, (i.e., it has liability and an
equity component which pertains to the exchange option), the Group applied split accounting. The
value allocated to the equity component at issue date amounted P = 1.1 billion, being the residual
amount after deducting the fair value of the liability component amounting to P = 11.9 billion from the
issue proceeds of the Bonds.

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IMI Group
IMI Philippines
In October 2011, IMI Philippines obtained a five-year term clean loan from a Philippine bank
amounting to US$40.0 million payable in a single balloon payment at the end of the loan term. IMI
Philippines may, at its option, prepay the loan in part or in full, together with the accrued interest
without penalty. Interest on the loan is payable quarterly and re-priced quarterly at the rate of
three-month LIBOR plus margin of 0.8%.

On February 29, 2012, IMI Philippines obtained a €5.0 million (P = 306.3 million) five-year term clean
loan from a local bank payable in a single balloon payment at the end of the loan term. IMI
Philippines may, at its option, prepay the loan in part or in full, together with the accrued interest
without penalty, if made on an interest payment date, subject to certain conditions. Interest is
payable semi-annually at the rate of six-month LIBOR plus 1.50% spread per annum.

Cooperatief
Cooperatief’s long-term debt aggregating to €14.25 million ($20.40 million) as at July 29, 2011
relates primarily to the acquisition of EPIQ shares and receivables of EPIQ NV from IMI EU/MX
Subsidiaries. Based on the payment schedule in the SPA, this long-term debt will be settled from
2013 to 2018, subject to interest rate of 1.60% plus 1.50%.

As of December 31, 2014, Cooperatief had already paid €4.00 million ($5.3 million).

Below is the amortization schedule:

Due Dates In EUR In USD


2015 €2,000,000 $2,679,600
2016 2,000,000 2,679,600
2017 2,000,000 2,679,600
2018 4,248,743 5,692,466
€10,248,743 $13,731,266

IMI BG
IMI BG has a long-term debt from BNP Paribas that relates to the term loan facility for financing
the construction of a new warehouse with a term of five years and bears interest based on
3-month EURIBOR plus 2.90%. The warehouse was completed in 2013 and no borrowing costs
were capitalized in 2014.

The credit facility with BNP Paribas is subject to the following collateral: Security of Transfer of
Ownership Title relating to office and factory equipment with the carrying value of $1.55 million.

IMI CZ
IMI CZ has a long-term debt from Citibank amounting to €0.59 million (P= 35.9 million) that relates
to term loan facility for the purchase of its new Surface Mount Technology machine. The debt
bears interest of 1-month EURIBOR plus 2.7% and matures on July 31, 2019.

MWC Group
MWC International Finance Corporation (IFC) Loan
On March 28, 2003, MWC entered into a loan agreement with IFC (the “First IFC Loan”) to
partially finance MWC’s investment program from 2002-2005 to expand water supply and
sanitation services, improvement on the existing facilities of the MWC, and concession fee
payments. The First IFC Loan will be made available in Japanese Yen (JPY) in the aggregate
principal amount of JPY3,591.6 million equivalent to US$30.0 million and shall be payable in 25
semi-annual installments, within 12 years starting on July 15, 2006. As of December 31, 2014 and
2013, the carrying value of the loan amounted to JPY992.1 million and JPY1,271.4 million
respectively.

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On May 31, 2004, MWC entered into a loan agreement with IFC (the “Second IFC Loan”)
comprising of regular loan in the amount of up to US$20.0 million and a standby loan in the
amount of up to US$10.0 million to finance the investment program from 2004 to 2007 to expand
water supply and sanitation services, improvement of existing facilities of MWC, and concession
fee payments. This loan was subsequently amended on November 22, 2006, when MWC
executed the Amended and Restated Loan Agreement for the restructuring of the Second IFC
Loan. The terms of the second loan were amended to a loan in the aggregate amount of up to
US$30.0 million, no part of which shall consist of a standby loan. On December 12, 2008, MWC
made a full drawdown on the said facility. As of December 31, 2014 and 2013, the outstanding
balance amounted to US$5.9 million and US$9.8 million, respectively.

On July 31, 2013, MWC, entered into a loan agreement with IFC (the “Fourth” Omnibus
Agreement) in the amount of up to US$100.00 million for financing the Projects in accordance with
the provisions of the Agreement. The loan has a term of 18 years, payable in semi-annual
installments after the grace period. This loan facility has neither been activated nor disbursed and
was consequently cancelled in November 2014.

Land Bank of the Philippines (LBP) Loan


On October 20, 2005, MWC entered into a Subsidiary Loan Agreement with LBP to finance the
improvement of the sewerage and sanitation conditions in the East Zone. The loan has a term of
17 years, and was made available in Japanese Yen in the aggregate principal amount of
JPY6.6 billion payable via semi-annual installments after the 5-year grace period. MWC made its
last drawdown on October 26, 2012.

The total drawn amount for the loan is JPY3.99 billion. As of December 31, 2014 and 2013,
outstanding balance of the LBP loan amounted to JPY2,527.9 million and JPY2,862.1 million,
respectively.

On September 25, 2012, MWC entered into a Subsidiary Loan Agreement with Land Bank of the
Philippines under the Metro Manila Wastewater Management Project (MWMP) with the World
Bank. The MWMP aims to improve wastewater services in Metro Manila through increased
wastewater collection and treatment. The loan has a term of twenty-five (25) years, and was
made available in US Dollars in the aggregated principal amount of US$137.5 million via semi
annual installments after the seven-year grace period. As of December 31, 2014, MWC has not
made any drawdown from the facility.

European Investment Bank (EIB) Loan


On June 20, 2007, MWC entered into a Finance Contract (the “EIB Loan”) with EIB to partially
finance the capital expenditures of MWC from 2007 to 2010, as specified under Schedule 1 of the
Finance Contract. The loan, in the aggregate principal amount of €60 million, having a term of
10 years, is subject to the Relevant Interbank Rate plus a spread to be determined by EIB, and
may be drawn in either fixed-rate or floating-rate tranches. The loan has two tranches as
described below:

· Sub-Credit A: In an amount of €40 million to be disbursed in US Dollars or Japanese yen


payable via semi-annual installments after the two and a half-year grace period. This loan
tranche is guaranteed against all commercial risks by a consortium of international commercial
banks composed of ING Bank, Development Bank of Singapore and Sumitomo-Mitsui
Banking Corporation under a Guaranty Facility Agreement; and

· Sub-Credit B: In an amount of €20 million to be disbursed in US Dollars, European Euro or


Japanese Yen payable via semi-annual installments after the two and a half-year grace
period. This loan tranche is guaranteed against all commercial risks by ING Bank under a
Guaranty Facility Agreement.

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On May 21, 2012, the Sub-Credit A Guarantee Facility Agreement was amended to extend the
effectivity of the guarantee. Two of the original guarantors, ING Bank and Sumitomo Mitsui
Banking Corporation, agreed to extend the guarantee by another five years towards the maturity
of the loan.

On July 30, 2013, the Sub-Credit B Guarantee Facility Agreement was amended to extend the
effectivity of the guarantee. The original guarantor, ING Bank, agreed to extend the guarantee by
another five years towards the maturity of the loan.

The carrying value of the EIB loan amounted to JPY1,755.1 million and US$9.3 million as of
December 31, 2014 and JPY2,433.6 million and US$13.0 million as of December 31, 2013. MWC
decided to prepay the EIB Loan effective February 20, 2015.

NEXI Loan
On October 21, 2010, MWC entered into a term loan agreement (NEXI Loan) amounting to
US$150.0 million to partially finance capital expenditures within the East Zone. The loan has a
tenor of 10 years and is financed by a syndicate of four banks - ING N.V Tokyo, Mizuho Corporate
Bank, Ltd., The Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corporation and
is insured by Nippon Export and Investment Insurance. First, second and third drawdowns of the
loan amounted to US$84.0 million, US$30.0 million and US$36.0 million, respectively. The
carrying value of this loan as of December 31, 2014 and 2013 amounted to US$108.8 million and
US$125.3 million, respectively.

ALI Group
In October 2012, ALI executed and fully withdrawn a US$58.5 million long-term facility. The loan
bears a floating interest rate based on a credit spread over the three-month US Dollar London
Interbank Offered Rate (LIBOR), repriceable quarterly. The loan will mature on the third month
succeeding the tenth anniversary of the initial drawdown date. In January 2014, ALI made a
partial prepayment of US$5.8 million on the loan.

Philippine Peso Debt

MWC Group
MWC
On April 8, 2011, MWC issued P = 10.0 billion FXCNs. The notes were divided to P = 5.0 billion
with an interest rate of 6.385% and have a term of five years and ten years for the remaining
P
= 5.0 billion from the issue date with a fixed interest rate equivalent to 8.25% payable quarterly.
Prior to maturity, MWC may repay the whole, and not in part only, the relevant outstanding bonds
on the seventh anniversary. The amount payable to the holders in respect of such redemptions
shall be calculated based on the principal amount of the bonds being redeemed, as the sum of
102% of the principal amount and accrued interest on the bonds on the optional redemption date.
The carrying value of the notes as of December 31, 2014 and 2013 amounted to P = 9.83 billion and
P
= 9.9 billion, respectively.

On August 16, 2013, MWC entered into a Credit Facility Agreement with a local bank having a
fixed nominal rate of 4.42% and with a term of 7 year from the issue date which is payable
annually. MWC may repay the whole and not a part only of the loan starting on the 3rd
anniversary of the drawdown date of such loan or on any interest payment date thereafter.

The amount payable in respect to such prepayment shall be calculated as 102% of the principal
rd
amount being prepaid and accrued interest if such prepayment occurs on or after the 3
anniversary but before the 4th anniversary of the drawdown date. The amount payable in respect
to such prepayment shall be calculated as 101.5% of the principal amount being prepaid and
th
accrued interest if such prepayment occurs on or after the 4th anniversary but before the 5
anniversary of the drawdown date. The amount payable in respect to such prepayment shall be
calculated as 101% of the principal amount being prepaid and accrued interest if such prepayment

*SGVFS011298*
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occurs on or after the 5th anniversary but before the 6th anniversary of the drawdown date. The
amount payable in respect to such prepayment shall be calculated as 100.5% of the principal
amount being prepaid and accrued interest if such prepayment occurs on or after the 6th
anniversary but before the 7th anniversary of the drawdown date. The carrying value of the loan
as of December 31, 2014 and 2013 amounted to P = 5.00 billion.

On July 17, 2008, MWC, together with all of its Lenders signed an Omnibus Amendment
Agreement and Intercreditor Agreement and these agreements became effective on
September 30, 2008.

Prior to the execution of the Omnibus Amendment Agreement, the obligation of MWC to pay
amounts due and owing committed to be repaid to the lenders under the existing facilty
agreements were secured by Assignemnet of Interest by Way of Security executed by the
Company in favor of a trustee acting on behalf of the lenders. The Assignments were also subject
to the provisions of the Amended and Restated Intercreditor Agreement dated March 1, 2004 and
its Amendatory Agreement dated December 15, 2005 executed by MWC, the lenders and their
appointed trustee.

Under the Omnibus Amendment Agreement, the lenders effectively released MWC from the
assignment of its present and future fixed assets, receivables and present and future bank
accounts, all the Project Documents (except for the Agreement, Technical Corrections Agreement
and the Department of Finance Undertaking Letter), all insurance policies where MWC is the
beneficiary and performance bonds posted in its favor by contractors or suppliers.

In consideration for the release of the assignment of the above-mentioned assets, MWC agreed
not to create, assume, incur, permit or suffer to exist, any mortgage, lien, pledge, security interest,
charge, encumbrance or other preferential arrangement of any kind, upon or with respect to any of
its properties or assets, whether now owned or hereafter acquired, or upon or with respect to any
right to receive income, subject only to some legal exceptions. The lenders shall continue to enjoy
their rights and privileges as Concessionaire Lenders (as defined under the Agreement), which
include the right to appoint a qualified replacement operator and the right to receive payments
and/or other consideration pursuant to the Agreement in case of a default of either MWC or
MWSS. Currently, all lenders of MWC (including the bondholders) are considered Concessionaire
Lenders and are on pari passu status with one another.

In November and December 2014, MWC signed the Amendment Agreements to its loan
agreements with its existing lenders. This effectively relaxed certain provisions in the loan
agreements providing MWC more operational and financial flexibility.

LAWC
On September 7, 2010, LAWC, entered into a loan agreement with two local banks for the
financing of its construction, operation, maintenance and expansion of facilities in its servicing
area. Pursuant to the loan agreement, the lenders have agreed to provide loans to LAWC up to
P
= 500.0 million, principal payments of which will be made in 30 consecutive equal quarterly
installments starting August 2013. First and second drawdowns from the loan were made in
November 2010 and July 2011 amounting to P = 250.0 million each. The carrying value of this loan
amounted to P = 396.6 million and P
= 462.1 million as of December 31, 2014 and 2013, respectively.

On April 29, 2013, LAWC entered into a loan agreement with Development Bank of the Philippines
(DBP) to partially finance the modernization and expansion of the water network system and water
supply facilities in Biñan, Sta. Rosa and Cabuyao, Laguna. Under the loan agreement, the lender
has agreed to provide loans to the borrowers through the Philippine Water Revolving Fund
(PWRF) in the aggregate principal amount of up to P = 500.0 million bearing an effective interest rate
of 7.25%. First and second drawdowns were made in July and December 2013 amounting to
P
= 250.0 million each. The carrying value of this loan as of December 31, 2014 and 2013 amounted
to P
= 498.7 million and P= 496.3 million, respectively.

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On January 9, 2014, LAWC excercised its option to avail of the second tranche of its loan
agreement with DBP to finance its water network and supply projects, including the development
of a well-field network on the Biñan, Sta. Rosa area of Laguna. Under the expanded facility
agreement, DBP provided additional loans to LAWC in the aggregate principal amount of
P
= 833.0 million. The first and second drawdowns were made in January 2014 and May 2014,
respectively, amounting to P = 416.5 million each. The carrying value of the loans amounted to
P
= 830.8 million as of December 31, 2014.

BIWC
On July 29, 2011, BIWC, entered into an omnibus loan and security agreement with the
Development Bank of the Philippines (DBP) and Security Bank Corporation (SBC) to finance the
construction, operation, maintenance and expansion of facilities for the fulfillment of certain
service targets for water supply and waste water services for the Service Area under the
Concession Agreement, as well as the operation and maintenance of the completed drainage
system. The loan shall not exceed the principal amount of P= 500.0 million and is payable in twenty
(20) years inclusive of a three (3)-year grace period.

The loan shall be available in three sub-tranches, as follows:


· Sub-tranche 1A, the loan in the amount of P = 250.0 million to be provided by DBP and funded
through Philippine Water Revolving Fund (PWRF);
· Sub-tranche 1B, the loan in the amount of P = 125.0 million to be provided by SBC and funded
through PWRF; and
· Sub-tranche 1C, the loan in the amount of P = 125.0 million to be provided by SBC and funded
through its internally-generated funds.

The first loan draw down made on August 25, 2011 amounted to P = 150.0 million, second draw
down on August 25, 2012 amounted P = 155.0 million and final draw down on August 23, 2013
amounted to P = 195.0 million. The carrying value of the loan as of December 31, 2014 and 2013
amounted to P = 487.6 million and P
= 494.5 million, respectively.

The Agreement provided BIWC the option to borrow additional loans from the lenders. On
November 14, 2012, BIWC entered into the second omnibus loan and security agreement with
DBP and SBC. The agreed aggregate principal of the loan amounted to P = 500.0 million which is
available in three sub-tranches:

· Sub-tranche 2A, the loan in the amount of P


= 250.0 million to be provided by DBP and funded
through Philippine Water Revolving Fund (PWRF)
· Sub-tranche 2B, the loan in the amount of P
= 125.0 million to be provided by SBC and funded
through PWRF
· Sub-tranche 2C, the loan in the amount of P
= 125.0 million to be provided by SBC and funded
through BIWC’s internally-generated funds.

On November 23, 2012, BIWC made its first loan drawdown amounting to P = 75.0 million and the
second loan drawdown on August 26, 2014 amounted to P = 200.0 million. The carrying value of the
loan as of December 31, 2014 and 2013 amounted to P= 271.4 million and P
= 72.8 million,
respectively.

On October 9, 2014, BIWC signed a Third Omnibus Loan and Security Agreement in the amount
of P
= 650.0 million with SBC. The loan will be used to fund the capital expenditures which will be
used to provide water and sewerage services in the concession area of BIWC.

CMWD
On December 19, 2013, the CMWD entered into an omnibus loan and security agreement
(the Agreement) with DBP to partially finance the construction works in relation to its bulk water
supply project in Cebu, Philippines. The lender has agreed to extend a loan facility in the
aggregate principal amount of P= 800.0 million or up to 70% of the total project cost whichever is
lower.

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The first drawdown made on December 20, 2013 amounted to P = 541.1 million, the second
drawdown made on May 20, 2014 amounted to P = 195.6 million and the third drawdown made on
November 14, 2014 amounted to P= 14.2 million. The carrying value of the loan as of
December 31, 2014 and 2013 amounted to P = 741.0 million and P= 537.1 million, respectively.

ALI Group
The Philippine Peso bank loans include ALI subsidiaries’ loans that will mature on various dates
up to 2024 with floating interest rates at 60 to 80 basis points spread over benchmark 91-day
PDST-R1/R2 and fixed interest rates of 3.26% to 10.21% per annum. Certain loans which are
subject to floating interest rates are subject to floor floating interest rates at the Overnight Reverse
Repurchase Agreement Rate of the Bangko Sentral ng Pilipinas (BSP Overnight Rate) or at the
BSP Overnight Rate plus a spread of 20to 75 basis points

5-Year Bonds due 2013


In 2008, ALI issued P = 4.0 billion bonds due 2013 with fixed rate equivalent to 8.75% per annum.
The PhilRatings assigned a “PRS Aaa” rating on the bonds indicating that it has the smallest
degree of investment risk. Interest payments are protected by a large or by an exceptionally
stable margin and principal is assured. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally strong position of
such issues. PhilRatings maintained its rating of PRS AAA for the P = 4.0 billion bonds in 2014 and
2013. On August 14, 2013, ALI completed the final redemption of its bond issue with aggregate
principal of P
= 4.0 billion.

Philippine Peso Homestarter Bond due 2014


In May 2011, ALI launched a new issue of the Homestarter Bond. The bond is to be issued over a
series of 36 issues, once every month which commenced on May 16, 2011, with an initial issue
amount of up to P = 56.0 million or up to an aggregate issue amount of P= 2.0 billion over a 3-year
period. The bond carries an interest rate of 5% per annum, payable at the final maturity date or
upon the bondholder’s exercise of the option to apply the bond to partial or full payment for a
residential property offered for sale by ALI or its affiliates. In the event of application of the bond
to partial or full payment for a property, the bondholder shall be entitled to, in addition to interest, a
notional credit equivalent to 10% of the aggregate face value of the bond. The bonus credit is also
subject to a maximum of 5% of the net selling price of the property selected. The bond is
alternatively redeemable at par plus accrued interest on the third anniversary of the initial issue
date. As of December 31, 2014 and 2013, outstanding bond issued amounted to nil and P = 620.2
million, respectively.

Philippine Peso Homestarter Bond due 2015


In October 2012, ALI issued P = 1,000.0 million bond due 2015 with fixed rate equivalent to 5.0%
p.a. The Credit Rating and Investors Services Philippines, Inc. (CRISP) assigned a AAA issuer
rating indicating that it has the smallest degree of investment risk for the bond. AAA is the highest
credit rating possible on CRISP’s rating scale for issuers. CRISP also assigned a stable credit
outlook for ALI’s issuer rating as CRISP continues to believe that ALI’s strong financial
performance will continue and roll out of its new development projects will sustain its leadership
position.

Philippine Peso Homestarter Bond due 2016


In May 2013, ALI issued the second tranche of the bonds registered with the SEC in 2012, at an
aggregate principal amount of P = 2.0 billion. The bonds have a term of three (3) years from the
issue date, and will bear interest on its principal amount at a fixed rate of 4.00% p.a. Interest will
not be compounded and shall be payable on maturity date or on the date of effectivity of an Early
Downpayment Application, as may be applicable, less the amount of any applicable withholding
taxes.

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Philippine Peso 7-Year and 10-year Bonds due 2019 and 2022
In April 2012, ALI issued a total of P
= 15.0 billion bonds, broken down into a P= 9.4 billion bond due
2019 at a fixed rate equivalent to 5.625% p.a. and a P = 5.7 billion bond due 2022 at a fixed rate
equivalent to 6.00% p.a. The PhilRatings assigned a PRS AAA rating on the bonds indicating that
it has the smallest degree of investment risk. Interest payments are protected by a large or by an
exceptionally stable margin and principal is assured. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues. PRS AAA is the highest credit rating possible on PhilRatings’
rating scales for long-term issuances.

Philippine Peso 5-,7- and 10-year FXCNs due in 2011, 2013 and 2016
In September 2006, ALI issued P = 3.0 billion FXCNs consisting of 5-, 7- and 10-year notes issued to
various financial institutions and will mature on various dates up to 2016. The FXCNs bear fixed
interest rates ranging from 7.25% to 7.75% p.a. depending on the term of the notes. In January
2011, simultaneous to a new corporate note offering, ALI undertook a liability management
exercise by offering to prepay holders of the corporate notes issued in 2006 while inviting the
same institutions to participate in the new issuance. A number of investors holding up to
P
= 875.0 million of notes maturing in 2013 and 2016 accepted the offer to be prepaid. On
September 23, 2011, the 5-year and one (1) day FXCNs amounting to P = 1.8 billion matured and
were fully paid by ALI. Subsequently in September 2013, the balance of the 7-year FXCNs
amounting to P = 195.0 million matured and was fully repaid by ALI. As of December 31, 2014 and
2013, outstanding balance amounted to P = 100.0 million, respectively.

Philippine Peso 5-, 7- and 10-year FXCN due 2014, 2016 and 2019
In January 2009, ALI issued an aggregate P = 2.4 billion in 5-, 7- and 10-year notes to various
financial institutions and retail investors. The notes will mature on various dates up to 2019. The
FXCNs bear fixed interest rates ranging from 7.76% to 8.90%. P = 220.0 million and P
= 830.0 million
notes due in 2014 and 2016, respectively, were prepaid on January 28, 2013.

Philippine Peso 7-year FRCN due 2016


In October 2009, ALI executed a P = 1.0 billion committed FRCN facility with a local bank, of which
an initial P
= 10.0 million was drawn on October 12, 2009. The balance of P = 990.0 million was
subsequently dr awn on November 18, 2011. The FRCN bears a floating interest rate based on
the 3-month PDST-R1 plus a spread of 0.96%, repriceable quarterly. The FRCNs will mature on
October 12, 2016, the seventh anniversary of the initial drawdown date.

Philippine Peso 5-, 10-, 15-Year FXCN due on 2016, 2021 and 2026
In January 2011, ALI issued P= 10.0 billion FXCNs to various financial institutions and retail
investors. The notes will mature on various dates up to 2026. The FXCNs bear fixed interest
rates ranging from 5.62% to 7.50% p.a. depending on the term of the notes. P = 1.95 billion note
due in 2016 was prepaid on January 19, 2013.

Philippine Peso 10-year FRCN due 2022


In December 2012, ALI executed a P = 5.0 billion committed Corporate Note facility with a local
bank, of which an initial P
= 3.5 billion was drawn in 2012. The balance of P = 1.5 billion was
subsequently drawn in January 2013. Notes currently bear a fixed interest rate of 4.50%. The
Corporate Notes will mature on the third month succeeding the tenth anniversary of the initial
drawdown date.

Philippine Peso 10-year and 6-month Bonds due 2024


In July 2013, ALI issued a total of P
= 15.0 billion bonds due 2024 at a fixed rate equivalent to 5.0%
p.a. CRISP assigned a "AAA" on the bonds indicating that it has a minimal credit risk owing to the
Company’s capacity to repay its debt obligations. AAA is the highest rating assigned by CRISP.

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Philippine Peso 7-Year and 20-year Bonds due 2020 and 2033
In October 2013, ALI issued a total of P
= 6.0 billion bonds, broken down into a P= 4.0 billion bond due
2020 at a fixed rate equivalent to 4.625% p.a. and a P = 2.0 billion bond due 2033 at a fixed rate
equivalent to 6.00% p.a. CRISP assigned a "AAA" rating on the bonds indicating that it has a
minimal credit risk owing ALI’s capacity to repay its debt obligations. AAA is the highest rating
assigned by CRISP.

Philippine Peso 8.0 Billion Fixed Rate Bonds due 2025


In April 2014, ALI issued a total of P
= 8.0 billion bonds due 2025 at a fixed rate equivalent to 5.625%
p.a. The Bonds have been rated PRS Aaa by (“PhilRatings”), indicating that obligor’s capacity to
meet its financial commitment on the obligation is extremely strong.

The loan agreements on long-term debt of the Company and certain subsidiaries provide for
certain restrictions and requirements with respect to, among others, payment of dividends,
incurrence of additional liabilities, investment and guaranties, mergers or consolidations or other
material changes in their ownership, corporate set-up or management, acquisition of treasury
stock, disposition and mortgage of assets and maintenance of financial ratios at certain levels.

These restrictions and requirements were complied with by the Group as of December 31, 2014
and 2013.

Total interest paid amounted to P


= 12.0 billion in 2014, P
= 10.1 billion in 2013 and P
= 8.4 billion in
2012.

Interest capitalized by subsidiaries amounted to P= 453.7 million in 2014, P


= 580.2 million in 2013,
and P= 533.8 million in 2012. The average capitalization rate is 7.01% to 8.78% in 2014, 4.16% to
7.06% in 2013, and 2.06% to 7.23% in 2012.

21. Other Noncurrent Liabilities

This account consists of the following:

2014 2013
(In Thousands)
Deposits and deferred credits P
= 15,450,637 P
= 12,676,476
Estimated liability on property developments 3,999,529 −
Retentions payable 3,925,798 3,654,350
Provisions (Note 37) 1,013,825 861,360
Liability for purchased land 203,329 7,260,101
Others 1,047,793 375,651
P
= 25,640,911 P
= 24,827,938

Deposits and deferred credits


Deposits include rental deposits that serve as security for any damages to the leased property and
which will be refunded at the end of lease term and guaranty deposits from customers for the set-
up of new connections which will be refunded to the customers upon termination of the customers’
water service connection or at the end of the concession, whichever comes first.

Deposits are initially recorded at fair value, which was obtained by discounting future cash flows
using the applicable rates of similar types of instruments. The difference between the cash
received and its fair value is recorded as deferred credits.

Deferred credits also include prepayments received from customers before the completion of
delivery of goods or services.

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Estimated liability on property developments


Estimated liability on property development pertains to the estimate for additional project cost to
be incurred for future development.

Retentions payable
Retentions payable pertains to amount withheld from the contractors’ progress billings which will
be later released after the guarantee period, usually one year after the completion of the project.
The retention serves as a security from the contractor should there be defects in the project.

Provisions
Provisions relate to pending unresolved claims and assessments. The information usually
required by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on
the grounds that it can be expected to prejudice the outcome of these claims and assessments.

Others
Other liabilities mainly include nontrade payables (see Note 31). It also includes liabilities arising
from PSi’s Subcontracting Service Agreement (SSA) with a local customer. On June 28, 2010,
PSi and a local customer entered into a SSA for PSi to provide subcontracted services. In
consideration, the local customer shall pay PSi service fees as provided for in the SSA. The
subcontracted services shall be effective starting from July 15, 2010 and ending February 29,
2020, renewable upon mutual agreement by both parties.

In September 2009, PSi received non-interest bearing cash advances amounting to US$3.0
million from a foreign customer, an affiliate of the local customer. On July 15, 2010, the foreign
customer assigned all of its rights with respect to the cash advances, including payments thereof,
to the local customer. The local customer and PSi agree that the full cash advances amounting to
US$3.0 million will be applied to prepay and cover any, and all of the fees payable under Annex B
of the SSA for the facilities support services that will be rendered by PSi to the local customer.
Moreover, PSi shall return to the local customer, upon termination of the SSA, for any reason, the
cash advances less any amount applied to pay the fees as detailed in the SSA.

The current and noncurrent portion of the advances from the local customer follow (amounts in
thousands):

2014 2013
(In US$) (In Php) (In US$) (In Php)
Total outstanding advances from the local customers $1,742 P
= 77,902 $2,030 P
= 90,166
Less: Current portion 299 13,371 288 12,786
Noncurrent portion $1,443 P
= 64,531 $1,742 P
= 77,380
*Translated using the closing exchange rate at the reporting date (US$1:P
= 44.72 in 2014 and US$1:P
= 44.395 in 2013)

The current portion is included under “Accounts payable and accrued expenses”.

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22. Equity

Information about the Company’s common and preferred shares follow:


Preferred A Voting Preferred
Common shares shares Preferred B shares Preferred C shares shares
2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
(In Thousands, except for par value figures)
Authorized shares 900,000 900,000 12,000 12,000 58,000 58,000 40,000 40,000 200,000 200,000
Par value per share P
= 50 P
= 50 P
= 100 P
= 100 P
= 100 P
= 100 P
= 100 P
= 100 P
=1 P
=1
Issued and subscribed
shares 619,436 599,438 – – 20,000 20,000 – – 200,000 200,000
Outstanding shares
At beginning of year 599,438 593,689 – 12,000 20,000 – – – 200,000 200,000
Issued new common
shares 18,779 – – – – – – – – –
Issued shares on
exercise of share
options 451 550 – – – – – – – –
Subscribed shares 768 15 – – – – – – – –
Treasury stock
Reissuance – 5,184 – – 27,000 20,000 – – – –
Acquisition/
Redemption – – – (12,000) – – – – – –
At end of year 619,436 599,438 – – 47,000 20,000 – – 200,000 200,000

Common Shares
The common shares may be owned or subscribed by or transferred to any person, partnership,
association or corporation regardless of nationality, provided that at anytime at least 60% of the
outstanding capital stock shall be owned by citizens of the Philippines or by partnerships,
associations or corporations with 60% of the voting stock or voting power of which is owned and
controlled by citizens of the Philippines.

In July 2013, the SEC approved the amendments to the Company’s Articles of Incorporation for
the exemption of 100 million common shares from the exercise of pre-emptive rights of holders of
common shares. These shares are allocated to support the financing activities of the Company.

In November 2014, the Company issued 18,779,100 common shares at a price of P = 660 per share
through top-up placement. The top-up placement entails issuance by the Company of equal
number of shares at the same price, with Mermac Inc. as the seller in the placement tranche and
subscriber in the subscription tranche. The top-up placement resulted to recognition of the
Company of P = 939.0 million and P= 11.3 billion increase in common stock and APIC net of direct
expenses, respectively.

All proceeds of the placement were remitted to the Company to support its investments in power
and infrastructure projects.

Preferred Shares
Preferred A shares
On November 11, 2008, the Company filed a primary offer in the Philippines of its Preferred A
shares at an offer price of P
= 500 per share to be listed and traded on the Philippine Stock
Exchange (PSE). The Preferred A shares are cumulative, nonvoting and redeemable at the
option of the Company under such terms that the Company BOD may approve at the time of the
issuance of shares and with a dividend rate of 8.88% per annum. The Preferred A shares may be
redeemed at the option of the Company starting on the fifth year.

On June 28, 2013, the Company BOD approved and authorized the exercise of the call option on
Preferred A shares effective November 25, 2013 based on the dividend rate of 8.88% per annum.
The redemption of Preferred A shares is presented as part of treasury stock.

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Preferred B shares
In July 2006, the Company filed a primary offer in the Philippines of its Preferred B shares at an
offer price of P
= 100 per share to be listed and traded in PSE. The Preferred B shares are
cumulative, nonvoting and redeemable at the option of the Company under such terms that the
BOD may approve at the time of the issuance of shares and with dividend rate of 9.4578% per
annum. The Preferred B shares may be redeemed at the option of the Company starting on the
fifth year from the date of issuance.

On March 14, 2011, the Company BOD approved and authorized the exercise of the call option on
Preferred B shares effective July 21, 2011 based on the dividend rate of 9.5% per annum. The
redemption of Preferred B shares is presented as part of treasury stock.

In September 2013, the Company BOD approved and authorized the re-issuance and offering of
the Preferred B shares for an aggregate amount of P = 10 billion. The Preferred B Series 1 shares
were offered at a price of P
= 500 per share with a fixed quarterly dividend rate of 5.25% per annum.

On August 22, 2014, the Company BOD approved and authorized the re-issuance and offering of
the Preferred B Series 2 shares for an aggregate amount of P = 13.5 billion. The Preferred B Series
2 shares were offered at a price of P
= 500 per share with a fixed quarterly dividend rate of 5.575%.
The reissuance resulted to the Company recognizing P = 10.7 billion APIC net of direct expenses
from re-issuance.

Preferred C shares
Preferred C shares are cumulative, non-participating, non-voting and redeemable at the option of
the Company under such terms that the Company BOD may approve at the time of the issuance
of the shares.

Voting Preferred shares


On March 15, 2010, the Company BOD approved the reclassification of 4.0 million unissued
common shares with a par value of P = 50 per share into 200.0 million Voting Preferred shares with
a par value of P
= 1 per share and the amendment of the Company’s amended Articles of
Incorporation to reflect the reclassification of the unissued common shares into new Voting
Preferred shares.

On April 16, 2010, the Company’s stockholders ratified the reclassification.

On April 22, 2010, the SEC approved the amendments to the Company’s Articles of Incorporation
embodying the reclassification of the unissued common shares to new Voting Preferred shares.

The Voting Preferred shares are cumulative, voting and redeemable at the option of the Company
under such terms that the Company BOD may approve at the time of the issuance of shares and
with a dividend rate of 5.3% per annum. In 2013, the dividend rate was repriced to 1.875%.

Treasury shares
On July 17, 2012, the Company BOD approved the sale of 15.0 million treasury shares at a price
of P
= 430 per share. As of December 31, 2012, 15.0 million shares were sold at a total
consideration of P
= 6.5 billion. As of December 31, 2012, treasury stock arising from common
shares amounted to P = 1.7 billion.

On May 29, 2013, the Company BOD approved the placement of the remaining 5.2 million
treasury shares at a price of P
= 647 per share. As of December 31, 2013, 5.2 million shares were
sold at a total consideration of P
= 3.3 billion.

Following these transactions, all common shares held in treasury by the Company have already
been reissued.

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On November 6, 2014, the Company re-issued 2.7 million Preferred B shares held as treasury
shares. The re-issuance increased total outstanding preferred B shares to 47.0 million.

The details of the Company’s paid-in capital follow:

2014
Preferred Additional Total
Preferred Preferred Stock - Common Paid-in Subscriptions Paid-in
Stock - A Stock – B Voting Stock Subscribed Capital Receivable Capital
(In Thousands)
At January 1, 2014 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 29,821,726 P
= 150,176 P
= 13,432,506 (P
= 438,279) P= 50,166,129
Exercise/ cancellation of
ESOP/ESOWN − − − 22,530 38,420 660,682 (277,588) 444,044
Reclassification of ESOWN
shares − − − 16,786 (16,786) – – –
Issuance of new common
shares − − − 938,955 – 11,298,256 – 12,237,211
Reissuance of treasury
stocks − − − – – 10,724,121 – 10,724,121
At December 31, 2014 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 30,799,997 P
= 171,810 P
= 36,115,565 (P
= 715,867) P
= 73,571,505

2013
Preferred Additional Total
Preferred Preferred Stock - Common Paid-in Subscriptions Paid-in
Stock – A Stock – B Voting Stock Subscribed Capital Receivable Capital
(In Thousands)
As of January 1, 2013 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 29,783,010 P
= 160,652 P
= 8,457,871 (P
= 481,601) P
= 45,119,932
Exercise/Cancellation of
ESOP/ESOWN – – – 27,516 724 215,776 43,322 287,338
Reclassification of ESOWN
shares – – – 11,200 (11,200) – – –
Reissuance of Treasury
Stock – – – – – 9,558,859 – 9,558,859
Redemption of preferred
shares – – – – – (4,800,000) – (4,800,000)
As of December 31, 2013 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 29,821,726 P
= 150,176 P
= 13,432,506 (P
= 438,279) P
= 50,166,129

2012
Preferred Additional Total
Preferred Preferred Stock - Common Paid-in Subscriptions Paid-in
Stock - A Stock – B Voting Stock Subscribed Capital Receivable Capital
(In Thousands)
As of January 1, 2012 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 29,655,833 P
= 216,209 P
= 6,339,594 (P
= 578,816) P
= 42,832,820
Exercise/Cancellation of
ESOP/ESOWN – – – 127,177 (55,557) 647,000 97,215 815,835
Reissuance of Treasury
Stock – – – – – 1,471,277 – 1,471,277
As of December 31, 2012 P
= 1,200,000 P
= 5,800,000 P
= 200,000 P
= 29,783,010 P
= 160,652 P
= 8,457,871 (P
= 481,601) P
= 45,119,932

The movements in the Company’s outstanding number of common shares follow:

2014 2013 2012


(In Thousands)
At January 1 599,438 593,689 577,257
Issuance of new common shares 18,779 – –
Exercise of ESOP/ESOWN 1,219 565 1,432
Reissuance of Treasury stock – 5,184 15,000
At December 31 619,436 599,438 593,689

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In accordance with SRC Rule 68, as Amended (2011), Annex 68-D, below is a summary of the
Company’s track record of registration of securities.

2014 2013
Number of Number of
holders of holders of
Number of shares securities as of securities as of
registered Issue/offer price Date of approval December 31 December 31
Common shares 200,000,000* P
= 1.00 par value**;
P
= 4.21 issue price July 21, 1976 6,891 7,033
Preferred A shares 12,000,000 P
= 100 par value;
P
= 500 issue price November 11, 2008 None*** None***
Preferred B shares- 20,000,000 P= 100 par value;
P
= 500 issue price October 31, 2013
Series 1**** 16 3
Preferred B shares- 20,000,000 P
= 100 par value;
P
= 500 issue price October 17, 2014
Series 2***** 3 –
Voting preferred P
= 1 par value;
200,000,000 P
= 1 issue price March 15, 2010
shares 1,007 994
*Initial number of registered shares only.
**Par value now is P = 50.00
***The Preferred A shares were fully redeemed on November 25, 2013.
****The Preferred B-Series 1 shares were re-issued on November 15, 2013.
*****The Preferred B-Series 2 shares were re-issued on November 6, 2014.

Retained Earnings
Retained earnings include the accumulated equity in undistributed net earnings of consolidated
subsidiaries and associates and joint ventures accounted for under the equity method amounting
to P
= 77,702.0 million, P
= 64,307.3 million and P
= 55,450.0 million as of December 31, 2014, 2013 and
2012, respectively, which are not available for dividend declaration by the Company until these are
declared by the investee companies.

Retained earnings are further restricted for the payment of dividends to the extent of the cost of
the shares held in treasury.

In accordance with the SRC Rule 68, as Amended (2011), Annex 68-C, the Company’s retained
earnings available for dividend declaration as of December 31, 2014 and 2013 amounted to
P
= 27.0 billion and P
= 23.3 billion, respectively.

Dividends consist of the following:

2014 2013 2012


(In Thousands, except dividends per share)
Dividends to common shares
Cash dividends declared during the year P
= 2,927,822 P
= 2,877,477 P
= 2,344,246
Cash dividends per share 4.80 4.80 4.00
Dividends to equity preferred shares declared
during the year
Cash dividends to Preferred A shares – – 532,800
Cash dividends to Preferred B shares 1,277,625 525,000 –
Cash dividends to Voting Preferred
shares 3,750 3,750 10,563

Capital Management
The primary objective of the Company’s capital management policy is to ensure that it maintains a
strong credit rating and healthy capital ratios in order to support its business and maximize
shareholder value.

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The Company manages its capital structure and makes adjustments to it, in light of changes in
economic conditions. To maintain or adjust the capital structure, the Company may adjust the
dividend payment to shareholders or issue new shares. No changes were made in the objectives,
policies or processes for the years ended December 31, 2014, 2013 and 2012.

The Company monitors capital using a gearing ratio of debt to equity and net debt to equity. Debt
consists of short-term and long-term debt. Net debt includes short-term and long-term debt less
cash and cash equivalents, short-term investments and restricted cash. The Company considers
as capital the equity attributable to equity holders of the Company.

2014 2013
(In Thousands)
Short-term debt P
= 21,084,269 P
= 15,811,285
Long-term debt 237,760,458 189,869,862
Total debt 258,844,727 205,681,147
Less:
Cash and cash equivalents 90,769,525 65,655,049
Short-term investments 1,102,703 119,345
Restricted cash 8,273,200 –
Net debt P
= 158,699,299 P
= 139,906,753
Equity attributable to owners of the parent P
= 185,664,151 P
= 143,476,281
Debt to equity 139.4% 143.4%
Net debt to equity 85.5% 97.5%

The Company is not subject to externally imposed capital requirements.

23. Other Income and Costs and Expenses

Other income consists of:

2014 2013 2012


(In Thousands)
Revenue from rehabilitation works
(Note 14) P
= 3,285,900 P
= 5,160,312 P
= 6,037,467
Gain on sale of investments (Notes 11
and 12) 2,633,329 190,296 67,847
Gain on sale of other assets 711,001 19,382 26,588
Revenue from management contracts 645,087 624,424 518,468
Connection fees 496,377 646,109 102,266
Mark to market gain on financial assets
at FVPL and derivatives (Notes 9
and 31) 392,002 1,345,800 351,167
Dividend income 224,767 173,031 180,547
Recoveries of accounts written off
(Note 7) 49,807 404,595 367,415
Insurance claim 40,131 23,891 25,458
Foreign exchange gain/(loss) (Note 31) (177,404) 113,226 306,431
Remeasurement gain arising from
business combination (Note 24) − – 593,853
Others 879,257 605,789 68,226
P
= 9,180,254 P
= 9,306,855 P
= 8,645,733

“Others” mainly includes income derived from ancillary services of consolidated subsidiaries. This
may include, among others, marketing fees, collateral income from vehicle sales and income from
sale of scrap.

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Details of costs of rendering services included in the consolidated statement of income are as
follows:

2014 2013 2012


(In Thousands)
Personnel costs (Notes 27 and 30) P
= 9,466,055 P
= 8,657,801 P
= 6,440,028
Depreciation and amortization
(Notes 13, 14, 15 and 16) 7,981,039 7,526,263 6,196,599
Rental, utilities and supplies 6,223,666 6,468,249 4,250,922
Professional and management fees 5,980,762 4,246,499 2,150,607
Taxes and licenses 1,821,705 2,028,640 1,001,047
Repairs and maintenance 1,664,722 888,370 950,238
Contract labor 353,468 508,047 347,081
Transportation and travel 164,247 658,799 206,954
Insurance 230,036 212,692 194,372
Others 609,982 291,326 1,251,956
P
= 34,495,682 P
= 31,486,686 P
= 22,989,804

“Others” include various costs such as communication, dues and fees and miscellaneous
overhead, among others.

General and administrative expenses included in the consolidated statement of income are as
follows:

2014 2013 2012


(In Thousands)
Personnel costs (Notes 27 and 30) P
= 8,451,329 P
= 7,476,239 P
= 6,476,914
Taxes and licenses 1,203,119 938,430 525,786
Depreciation and amortization
(Notes 13, 14, 15 and 16) 1,177,156 1,117,642 999,303
Professional fees 1,171,376 1,021,964 984,608
Advertising and promotions 540,951 375,341 246,935
Rental and utilities 481,518 453,620 287,917
Transportation and travel 415,097 325,861 279,509
Donations and contributions 360,208 358,441 499,680
Contract labor 314,895 153,342 278,140
Repairs and maintenance 276,481 236,864 238,192
Insurance 203,413 160,066 133,329
Postal and communication 203,296 207,042 164,424
Provision for doubtful accounts (Note 7) 182,383 686,094 719,398
Entertainment, amusement and
recreation 159,620 76,551 120,279
Provision for inventory obsolescence
(Note 8) 149,077 105,702 330,822
Supplies 124,169 159,782 106,999
Dues and fees 93,359 89,352 107,370
Research and development 47,133 94,431 90,164
Others 276,420 577,077 262,293
P
= 15,831,000 P
= 14,613,841 P
= 12,852,062

“Others” include various expenses such as management fees, marketing, collection charges,
sales commission, bank service charge, periodicals and miscellaneous operating expenses.

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Depreciation and amortization expense included in the consolidated statement of income follows:

2014 2013 2012


(In Thousands)
Included in:
Costs of sales and services P
= 7,981,039 P
= 7,526,263 P
= 6,196,599
General and administrative expenses 1,177,156 1,117,642 999,303
P
= 9,158,195 P
= 8,643,905 P
= 7,195,902

Personnel costs included in the consolidated statement of income follow:

2014 2013 2012


(In Thousands)
Included in:
Costs of sales and services P
= 9,466,055 P
= 8,657,801 P
= 6,440,028
General and administrative
expenses 8,451,329 7,476,239 6,476,914
P
= 17,917,384 P
= 16,134,040 P
= 12,916,942

Interest and other financing charges consist of:

2014 2012 2011


(In Thousands)
Interest expense on:
Short-term debt P
= 131,939 P
= 914,214 P
= 259,734
Long-term debt 10,439,736 7,552,952 6,126,583
Amortization of service concession
obligations and deposits 576,757 613,142 418,362
Amortization of discount on
long-term debt 313,730 274,518 267,612
Others 471,619 1,156,606 1,083,039
P
= 11,933,781 P
= 10,511,432 P
= 8,155,330

“Others” include, among others, various charges such as, pretermination costs, bond offering fees,
and credit card charges.

Other charges consist of:

2014 2013 2012


(In Thousands)
Cost of rehabilitation works (Note 15) P
= 3,285,900 P
= 5,161,312 P
= 6,284,542
Provision for impairment losses on:
Goodwill (Notes 16 and 24) 335,731 31,830 –
AFS financial assets (Note 10) 66,834 228,580 61,076
Property, plant and equipment
(Note 14) − 222 11,575
Investment properties (Note 13) − 400 19,500
Write offs and other charges 2,080 – 150,392
Others 138,476 58,472 285,267
P
= 3,829,021 P
= 5,480,816 P
= 6,812,352

“Others” include cost and expenses relating to income derived from ancillary services of
subsidiaries as shown in the other income.

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24. Business Combinations and Transactions with Non-controlling Interests

2014 Acquisitions

GN Power Kauswagan, Ltd. Co.


On July 30, 2013, ACEHI signed a Limited Partnership Agreement (LPA) with Power Partners Ltd.
Co. (PPLC) to build and operate a 4x135 MW coal-fired power facility in Kauswagan, Lanao del
Norte. Along with this, AC Energy GP Corporation, a wholly owned subsidiary of ACEHI was
incorporated. AEGC and ACEHI will be the general partner and limited partner, respectively, for
the development company related to the partnership. PPLC on the other hand incorporated
GNPower Holdings Philippines GP Corp. (GPHP). GPHP and PPLC will be the general partner
and limited partner, respectively, for the development company related to the partnership.
Accordingly, ACEHI and PPLC each subscribed to 49.6% Class A Partnership Interest and AGPC
and GPHP each subscribed to 0.40% Class A Partnership interest in KPHLC.

On November 12, 2013, KPHLC, together with Kauswagan Power GP Corp. (KPGPC),
established GN Power Kausawagan, Ltd. Co. (GNPK) as the project company for the power
facility. GNPK is 87.5% owned by KPGPC and the balance is owned by KPHLC.

As agreed among the partners of KPHLC, all equity required for the project shall be provided by
ACEHI. Accordingly, ACEHI infused capital in various dates in 2014 in the form of Class B Limited
Partnership interest. The capital infusion enabled ACEHI to obtain 98.74% economic interest in
KPHLC thereby obtaining control over KPHLC. ACEHI management assessed that control over
KPHLC was obtained in December 2014. The purchase price allocation have been prepared in a
preliminary basis.

Below is a summary of the fair values of the assets acquired and liabilities assumed as of the date
when control was obtained (amounts in thousands):

Assets
Cash P
= 149,949
Receivables 1,484
Loans receivable 1,399
Other current assets 3,014
Input value-added taxes 15,109
Property and equipment 22,357
Other noncurrent assets 365,243
558,555
Liabilities
Accounts payable and accrued expenses 69,978
Notes payable 74,678
144,656
Net assets 413,899
Goodwill 10,982
Acquisition cost P
= 424,881

The cost of the acquisition is determined as follows (amount in thousands):

Cash paid P
= 424,881
Fair value of equity interest in KPHLC held before
business combination –
Fair value of non-controlling interest in KPHLC −
P
= 424,881

The fair value of the existing ownership interest in KPHLC was determined to be nil due to net
liability position of KPHLC as of acquisition date.

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Cash on acquisition is as follows (amounts in thousand):

Cash acquired from KPHLC P


= 149,949
Cash paid (424,881)
Net cash flow (P
= 274,932)

From the date of acquisition, the Group’s share in the revenue and net loss of KPHLC amounted
to nil. If the combination had taken place at the beginning of the year, the Group's total revenue
would have been 4.35 million and net loss would have been 21.21 million.

2013 Acquisitions

PRP Investors
In the latter part of December 2013, AY Fontana, LLC (AY Fontana), a subsidiary of BHL, bought
the remaining 9.03% interest of the managing member in PRP Investors Fontana, LLC (PRP
Investors) for a nominal amount of US$1 and the related management agreement was likewise
amended thereby giving AY Fontana control over PRP Investors. Below is a summary of the fair
values of assets acquired and liabilities assumed as of the date of the acquisition (amounts in
thousands):

In US$ In Php*
Assets
Cash $62 P
= 2,753
Receivables 410 18,202
Prepaid expense and other current assets 215 9,545
Investment property 24,168 1,072,938
Other noncurrent assets 3,760 166,925
28,615 1,270,363
Liabilities
Accounts payable and accrued expenses 4,745 210,654
Advances from related parties 30,812 1,367,899
Deferred credits 955 42,397
Other payables 40 1,776
36,552 1,622,726
Net assets (7,937) (352,363)
Goodwill 716 31,787
Acquisition cost ($7,221) (P
= 320,576)
*Translated using the exchange rate at the transaction date (US$1:P
= 44.395).

The cost of acquisition is determined as follows (amounts in thousands):

Cash paid $– P
=–
Fair value of equity interest in PRP Investors held
before business combination – –
Share in excess losses on PRP Investors (7,221) (320,576)
($7,221) (P
= 320,576)

The fair value of the existing ownership interest in PRP Investors was determined to be nil due to
the net liability position of PRP Investors as of acquisition date.

From the date of acquisition, the Group's share in the revenue and net loss of PRP Investors
amounted to nil. If the combination had taken place at the beginning of the year, the Group's total
revenue would remain at $23.05 million and net income would have been $0.30 million. Given the
net liability position of PRP Investors, the goodwill arising from the business combination
amounting to $0.72 million was impaired.

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Cash on acquisition follows (amounts in thousands):

Cash acquired from PRP Investors $62 P


= 2,752
Cash paid – –
Net cash flow $62 P
= 2,752

Asian I-Office Properties, Inc. (AiO)


On April 16, 2013, Cebu Property Ventures and Development Corporation (CPVDC) (a subsidiary
of CHI) acquired the 60% interest of ALI in AiO for a cash consideration of P
= 436.2 million. AiO
was previously 40%-owned by CPVDC and 60%-owned by ALI.

This transaction allowed ALI to consolidate into CPVDC the development and operations of BPO
offices in Cebu and businesses related thereto, which should lead to value enhancement,
improved efficiencies, streamlined processes and synergy creation among the Company and its
subsidiaries. This is also consistent with the thrust of the CHI group to build up its recurring
income base.

The acquisition resulted to AiO becoming a wholly owned subsidiary of CPVDC. Both AiO and
CHI are under the common control of the Company. As a result, the acquisition was accounted
for using the pooling of interests method. The transaction has no effect on the carrying amounts
of the Group’s assets and liabilities.

Taft Punta Engaño Property, Inc. (TPEPI)


On October 31, 2013, ALI acquired a 55% interest in TPEPI for a consideration of P = 550.0 million.
The acquisition will allow ALI to consolidate its businesses resulting in improved efficiencies and
synergy creation to maximize opportunities in the Cebu real estate market. The transaction was
accounted for as an asset acquisition.

The excess of the ALI’s cost of investment in TPEPI over its proportionate share in the underlying
net assets at the date of acquisition was allocated to “Investment properties” account in the
consolidated financial statements. This purchase premium shall be amortized upon sale of these
lots by TPEPI.

TPEPI’s underlying net assets acquired by ALI as of date of acquisition consists of cash in bank,
input VAT and investment properties amounting to P= 550.0 million.

2012 Acquisitions

ALI Makati Hotel & Residences, Inc. (AMHRI) and ALI Makati Hotel Property, Inc. (AMHPI)
On October 2, 2012, AyalaLand Hotels and Resorts Corp. (AHRC), a wholly owned subsidiary of
ALI, entered into an agreement to acquire the interests of Kingdom Manila B.V., an affiliate of
Kingdom Hotel Investments (KHI), and its nominees in KHI-ALI Manila Inc. (now renamed AMHRI)
and 72,124 common shares in KHI Manila Property Inc. (now renamed AMHPI).

AMHRI and AMHPI are the project companies for the Fairmont Hotel and Raffles Suites and
Residences project in Makati which opened in December 2012.

Prior to the acquisition, ALI effectively owned 20% economic interest in AMHRI and AMHPI. ALI
acquired the remaining 80% interest in AMHRI and AMHPI for a total consideration of
P
= 2,430.4 million.

The acquisition is in line with KHI’s value realization strategy and with ALI’s thrust to grow its
commercial leasing business. It adds 32 Raffles Suites and 280 Fairmont Hotel rooms to AHRC’s
growing hotel portfolio. The continuing sale of units in the Raffles Residences will also generate
immediate cash, while the operations of the hotel and serviced apartments will augment and
diversify the sources of recurring revenues. Furthermore, this landmark project will complement

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the various offerings of the Makati Central Business District, and fortify its position as the country’s
premier financial district.

The fair value of ALI’s interest prior to the acquisition amounting to P


= 769.0 million was determined
using the adjusted net asset value method. Remeasurement of ALI’s equity interest in both
companies resulted to the recognition of a gain (included under “Other income”) amounting to
P
= 593.9 million (see Note 23).

In 2013, ALI finalized its purchase price allocation. The following are fair values of the identifiable
assets and liabilities assumed (in thousands):

Assets
Cash P
= 1,334,000
Trade and other receivables 1,708,000
Real estate inventories 936,000
Other current assets 202,000
Hotel property and equipment 5,421,000
9,601,000
Liabilities
Accounts and other payables 2,162,000
Loans payable 3,594,000
Deferred tax liabilities 633,698
6,389,698
Net assets 3,211,302
Negative goodwill (11,870)
Acquisition cost P
= 3,199,432

The fair value of the trade and other receivables approximate their carrying amounts. None of the
trade receivables have been impaired and it is expected that the full contractual amounts can be
collected.

From the date of acquisition, the Group’s share in AMHRI and AMHPI’s revenue and net income
amounted to P = 898.9 million and a loss of P
= 96.4 million, respectively. If the combination had taken
place at the beginning of the year, the Group’s total revenue would have been P = 64.2 billion, while
the Group’s net income would have been P = 10.6 billion.

Transactions with Non-controlling Interest

ALI Group
North Triangle Depot Commercial Corporation (NTDCC)
On December 10, 2014, ALI purchased its proportionate share in Anglo Philippine Holdings
Corporation’s 15.79% interest in NTDCC for P = 738.0 million which consists of 539,249 common
shares and 2,265,507 preferred shares. This brings ALI’s ownership in NTDCC from 49.29% to
58.53% of the total outstanding capital stock of NTDCC which owns and operates the Trinoma
Commercial Centre in North Triangle, Quezon City.

Subsequently, on December 22, 2014, ALI purchased the shares of Allante Realty and
Development Corporation and DBH Incorporated in NTDCC for P= 211.0 million each comprises of
154,287 common shares and 648,196 preferred shares for each company. This results to an
increase in ALI’s ownership in NTDCC from 58.53% to 63.82% of the total outstanding capital
stock of NTDCC.

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Philippine Intergrated Energy Solutions, Inc. (PhilEnergy)


ALI acquired Mitsubishi Corporation’s (MC) 40% equity stake in PhilEnergy which effectively made
PhilEnergy a wholly owned subsidiary ALI. The transaction which was executed last March 13,
2014 through a Share Purchase Agreement involving 2,957,200 shares held by MC in PhilEnergy
amounting to a total investment cost of P
= 322.3 million which is equivalent to the par value of the
shares plus 40% of PhilEnergy’s audited retained earnings as of December 31, 2013.

Asian Conservation Company, Inc. (ACCI)


On November 19, 2013, AHRC, a wholly owned subsidiary of ALI entered into an agreement to
acquire 100% interest in ACCI, which effectively consolidates the remaining 40% interest in TKDC
and TKPI (60%-owned subsidiary of the Company prior to this acquisition). This acquisition is in
line with ALI’s thrust to support the country’s tourism industry.

The agreement resulted in ALI effectively obtaining 100% interest in TKPI and TKDC. A total of
P
= 2.0 billion was paid to obtain the 100% interest in ACCI. The carrying amount of the non-
controlling interest is reduced to nil as ALI already owns 100% share in TKDC and TKPI. The
difference between the fair value of the consideration paid and the amount by which the non-
controlling interest is adjusted is recognized in equity under “Equity Reserve” amounting to
P
= 586.0 million.

APPHC and APPCo


On April 15, 2013, ALI entered into a Sale and Purchase Agreement with Global Technologies
International Limited (GTIL) to acquire the latter’s 32% stake in APPCo for P
= 3,520.0 million. Prior
to the acquisition, ALI has 68% effective interest in APPCo.

The carrying amount of the non-controlling interest is reduced to nil as APPCo became a wholly-
owned subsidiary of ALI. The difference between the fair value of the consideration paid and the
amount by which the non-controlling interest is adjusted is recognized in equity under “Equtiy
Reserve” amounting to P= 2,722.6 million.

IMI Group
PSi
On September 26, 2012, amendments relating to the Investors’ Agreement (the Agreement)
entered into between IMI, Narra Venture Capital II, LP (Narra Venture) with PSi Technologies
Holdings, Inc. and Merill Lynch Global Emerging Markets Partners, LLC were made to allow the
parties to respectively exercise their option rights without the need for third party valuation.
Accordingly, a fixed price was established amounting to $0.15 million.

On January 9, 2013, pursuant to the second amendment to the Agreement, the exercise notice,
which is one of the conditions for the completion of the sale and purchase of the option shares,
was received by the parties. The sale and purchase transaction involving the option shares shall
be deemed completed upon compliance of the rest of conditions set forth in the Agreement.

On March 12, 2013, the Deeds of Assignment have been executed and the stock certificates have
been delivered. The exercise of the option rights increased IMI’s ownership interest in PSi from
55.78% to 83.25%.

On January 5, 2015, Deeds of Assignment of Shares effective December 29, 2014 were executed
between IMI and the minority shareholders of PSi namely Narra Venture and Narra Associate II
Limited for the purchase of the remaining 16.75% interest in PSi for a total consideration of
US$0.5 million. The purchase of the remaining minority shares resulted to the 100% ownership of
IMI in PSi.

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Microenergia
In October 2014, IMI BG acquired the remaining 30% ownership interest in Microenergia for a total
consideration of US$138,622.

The details of the transaction are as follow (amounts in thousands):

Non-controlling interest acquired US$200 P


= 8,973,680
Consideration paid to the non-controlling
shareholder (138) (6,210,959)
Total amount recognized in “Additional paid-in
capital” account within equity US$62 P
= 2,762,721

25. Income Tax

The components of the Group’s deferred taxes are as follows:

Net deferred tax assets

2014 2013
(In Thousands)
Deferred tax assets on:
Difference between tax and book basis of
accounting for real estate transactions P
= 4,054,553 P
= 3,358,688
Retirement benefits 1,593,628 1,292,095
Allowance for probable losses 1,051,452 1,020,409
Service concession obligation 855,050 814,269
Advanced rental 130,745 10,285
Accrued expenses 89,224 37,407
Share-based payments 62,794 87,265
Unrealized foreign exchange loss 47,028 52,095
Allowance for doubtful accounts 36,013 17,489
NOLCO and MCIT 35,002 287,757
Remeasurement loss on pension 30,588 −
Allowance for inventory obsolescence 18,339 10,290
Revaluation of property, plant and equipment − 19,722
Others 610,728 100,181
8,615,144 7,107,952
Deferred tax liabilities on:
Capitalized interest and other expenses (557,149) (592,732)
Unrealized foreign exchange gain (2,305) (1,635)
Others (670) –
(560,124) (594,367)
Net deferred tax assets P
= 8,055,020 P
= 6,513,585

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Net deferred tax liabilities

2014 2013
(In Thousands)
Deferred tax assets on:
Fair value adjustments on:
Long-term debt P
= 193,834 P
= 167,492
AFS financial asset 1,116 1,116
Difference between tax and book basis of
accounting for real estate transactions 131,721 320,464
Allowance for probable losses 71,020 −
NOLCO 42,006 11,303
Retirement benefits 39,396
Advanced rental 25,891 −
Others 27,369 139,272
532,353 639,647
Deferred tax liabilities on:
Fair value adjustments on:
Service concession assets (4,498,258) (4,742,672)
Land and improvements (625,490) (625,490)
Property and equipment (396,942) (531,986)
Service concession obligation (34,091) (34,091)
Customers’ guaranty and other deposits (18,691) (18,691)
Investment properties − (12,108)
Difference between tax and book basis of
accounting for real estate transactions (1,258,928) (476,166)
Prepaid expenses (134,665) (149,972)
Unrealized gain on AFS (84,375) (11,804)
Concession finance receivable (67,874) −
Capitalized interest and other expenses (63,801) (45,201)
Unrealized fair value gain less costs to sell of
biological assets (7,142) (6,164)
Revaluation of property, plant and equipment − (73,086)
Unrealized foreign exchange gain (4,141) (19,007)
Service concession obligation (2,495) −
Retirement benefits − (72,756)
Others (78,093) (167,853)
(7,274,986) (6,987,047)
Net deferred tax liabilities (P
= 6,742,633) (P
= 6,347,400)

The Group has NOLCO amounting to P = 13.1 billion and P


= 10.7 billion in 2014 and 2013,
respectively, on which deferred tax have not been recognized. Further, deferred tax assets from
the excess MCIT over regular corporate income tax amounting to P = 83.1 million in 2014 and
P
= 76.7 million in 2013, respectively, were also not recognized, since management believes that
there could be no sufficient taxable income against which the benefits of the deferred tax assets
may be utilized.

As of December 31, 2014, NOLCO and MCIT that can be claimed as deduction from future
taxable income or used as deductions against income tax liabilities, respectively, are as follows:

Year incurred Expiry Date NOLCO MCIT


(In Thousands)
2012 2015 P
= 3,274,417 P
= 22,264
2013 2016 4,076,216 32,167
2014 2017 5,767,695 28,670
P
= 13,118,328 P
= 83,101

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As of December 31, 2014 and 2013 deferred tax liabilities have not been recognized on the
undistributed earnings and cumulative translation adjustment of foreign subsidiaries since the
timing of the reversal of the temporary difference can be controlled by the Group and management
does not expect the reversal of the temporary differences in the foreseeable future. The
undistributed earnings and cumulative translation adjustment amounted to P = 5.1 billion and
P
= 2.9 billion as of December 31, 2014 and 2013, respectively.

The reconciliation between the statutory and the effective income tax rates follows:

2014 2013 2012


Statutory income tax rate 30.00% 30.00% 30.00%
Tax effects of:
Nontaxable share of profit of
associates and jointly
controlled entities (9.79) (9.84) (11.03)
Nondeductible expenses 1.44 − −
Interest income and capital gains
subjected to lower rates (2.03) (1.61) (2.47)
Income under income tax holiday (0.31) (0.48) (0.44)
Others 0.83 3.55 4.27
Effective income tax rate 20.14% 21.62% 20.33%

The income tax on profits of overseas subsidiaires have been calculated at the rates of tax
prevailing in the countries where such subsidiary operates, based on existing legislation,
interpretations and practices in respect thereof.

Revenue Regulations (RR) No. 16-2008


RR No. 16-2008 provided the implementing guidelines for Section 34 of Republic Act No. 9504 on
the use of the Optional Standard Deduction (OSD) for corporations. The OSD allowed shall be an
amount not exceeding 40% of the gross income. Gross income earned refers to gross sales or
gross revenue derived from any business activity, net of returns and allowances, less cost of sales
or direct costs but before any deduction is made for administrative expenses or incidental losses.
This was applied by MWC and for the years ended December 31, 2014, 2013, and 2012.

MWC availed of the income tax holiday granted for Board of Investments (BOI) registered
projects, the Antipolo Water Supply Project in 2011 and East La Mesa (Rodriguez) Water
Treatment Plant Project in 2012.

The tax rate of 18% for the years in which OSD is projected to be utilized was used in computing
the deferred income taxes on the net service concession obligation starting 2009.

The availment of OSD affected the recognition of several deferred tax assets and liabilities, in
which the related income and expenses are not considered in determining gross income for
income tax purposes. MWC forecasts that it will continue to avail of the OSD, such that the
manner by which it will recover or settle the underlying assets and liabilities, for which the deferred
tax assets and liabilities were initially recognized, would not result in any future tax consequence
under OSD.

Registration with the Philippine Export Zone Authority (PEZA) and Board of Investments (BOI)
Incentives
Some activities of certain local subsidiaries are registered with the PEZA and BOI. Under the
registration, these subsidiaries are entitled to certain tax and nontax incentives, which include, but
are not limited to, income tax holiday (ITH) and duty-free importation of inventories and capital
equipment. Upon the expiration of the ITH, the subsidiaries will be liable for payment of a five
percent (5%) tax on gross income earned from sources within the PEZA economic zone in lieu of
payment of national and local taxes.

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26. Earnings Per Share

The following table presents information necessary to calculate EPS on net income attributable to
equity holders of the Company:

2014 2013 2012


(In Thousands, except EPS figures)
Net income P
= 18,609,229 P
= 12,777,932 P
= 10,504,385
Less dividends on preferred stock 622,828 528,750 543,363
17,986,401 12,249,182 9,961,022
Less profit impact of assumed conversions
of potential ordinary shares of investees 205,014 16,342 23,953
P
= 17,781,387 P
= 12,232,840 P
= 9,937,069

Weighted average number of common shares 603,060 596,591 585,027


Dilutive shares arising from stock options 2,751 3,399 2,341
Adjusted weighted average number of
common shares for diluted EPS 605,811 599,990 587,368
Basic EPS P
= 29.83 P
= 20.53 P
= 17.03
Diluted EPS P
= 29.35 P
= 20.39 P
= 16.92

27. Defined Benefit Plan

The Company and certain subsidiaries have their respective funded, noncontributory tax-qualified
defined benefit type of retirement plans covering substantially all of their employees. The benefits
are based on defined formula with minimum lump-sum guarantee of 1.5 months effective salary
per year of service. The consolidated retirement costs charged to operations amounted to
P
= 839.3 million, P
= 651.5 million and P
= 685.9 million in 2014, 2013 and 2012, respectively.

The funds are administered by a trustee bank under the supervision of the Board of Trustees of
the plan. The Board of Trustees is responsible for investment of the assets. It defines the
investment strategy as often as necessary, at least annually, especially in the case of significant
market developments or changes to the structure of the plan participants. When defining the
investment strategy, it takes account of the plans’ objectives, benefit obligations and risk capacity.

The investment strategy is defined in the form of a long-term target structure (investment policy).
The Board of Trustees delegates the implementation of the investment policy in accordance with
the investment strategy as well as various principles and objectives to an Investment Committee,
which also consists of members of the Board of Trustees, a Director and a Controller. The
Controller overseas the entire investment process.

The Company's pension fund is known as the AC Employees Welfare and Retirement Fund
(ACEWRF). ACEWRF is a legal entity separate and distinct from the Company, governed by a
board of trustees appointed under a Trust Agreement between the Company and the initial
trustees. It holds common and preferred shares of the Company in its portfolio. All such shares
have voting rights under certain conditions, pursuant to law. ACEWRF's portfolio is managed by a
committee appointed by the fund's trustees for that purpose.

Under the existing regulatory framework, Republic Act 7641 requires a provision for retirement
pay to qualified private sector employees in the absence of any retirement plan in the entity,
provided however that the employee’s retirement benefits under any collective bargaining and
other agreements shall not be less than those provided under the law. The law does not require
minimum funding of the plan. The Group also provides additional post employment healthcare
benefits to certain senior employees in the Philippines. These benefits are unfunded.

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The components of expense (included in personnel costs under “Cost of services” and “General
and administrative expenses”) in the consolidated statements of income follow:

2014 2013 2012


(In Thousands)
Current service cost P
= 768,166 P
= 592,284 P
= 606,303
Past service cost 6,903 644 (6,861)
Net interest cost on benefit
obligation 64,070 49,542 59,899
Loss on curtailment and
settlements 114 9,009 26,535
Total pension expense P
= 839,253 P
= 651,479 P
= 685,876

The remeasurement effects recognized in other comprehensive income (included in Equity under
“Remeasurement gains/(losses) on defined benefit plans”) in the consolidated statements of
financial position follow:

2014 2013 2012


(In Thousands)
Return (loss) on plan assets (excluding
amount included in net interest) (P
= 193,384) (P
= 172,247) (P
= 434,971)
Actuarial loss due to liability assumption
changes – demographic 300,898 315,393 (29,426)
Actuarial (gain)/loss due to liability
assumption changes – financial
assumptions 196,820 422,994 569,106
Remeasurements in other
comprehensive income P
= 304,334 P
= 566,140 P
= 104,709

The funded status and amounts recognized in the consolidated statement of financial position for
the pension plan as of December 31, 2014 and 2013, as follows:

2014 2013
(In Thousands)
Benefit obligations P
= 9,167,101 P
= 8,176,962
Plan assets (7,006,199) (6,271,078)
Net pension liability position P
= 2,160,902 P
= 1,905,884

As of December 31, 2014 and 2013 pension assets (included under “other noncurrent assets”)
amounted to P
= 19.1 million, and P= 9.2 million (see Note 17), respectively, and pension liabilities
amounted to P
= 2.2 billion and P
= 1.9 billion, respectively.

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The following tables present the changes in the present value of defined benefit obligation and fair
value of plan assets:

Present value of defined benefit obligation

2014 2013
(In Thousands)
Balance at beginning of year P
= 8,176,962 P
= 6,834,086
Current Service Cost 768,166 592,284
Past service cost 6,903 644
Interest cost 374,887 341,299
Loss on curtailment and settlements 114 9,009
Benefits paid from plan assets (674,104) (397,507)
Remeasurements in other comprehensive income:
Actuarial changes arising from changes in
demographic 300,668 337,521
Actuarial changes arising from experience
adjustments 196,820 422,994
Transfers 8,595 45,187
Foreign currency exchange difference 8,090 (8,555)
P
= 9,167,101 P
= 8,176,962

Fair value of plan assets

2014 2013
(In Thousands)
Balance at beginning of year P
= 6,271,078 P
= 5,250,815
Contributions 532,480 906,590
Interest income on plan assets 310,817 291,757
Return on plan assets (excluding amount included in
net interest) 193,154 194,375
Benefits paid (303,266) (397,507)
Transfers 6,229 26,528
Foreign currency exchange difference (4,293) (1,480)
P
= 7,006,199 P
= 6,271,078

The fair value of plan assets by each classes as at the end of the reporting period are as follow:

2014 2013
(In Thousands)
Assets
Cash and Cash Equivalents P
= 334,639 P
= 761,440
Debt investments 3,474,513 2,443,358
Equity Investments 3,149,663 2,775,264
Other Assets 46,980 78,937
7,005,795 6,058,999
Liabilities
Trust fee payable (9,798) (418)
Unamortized tax on premium (60,219) (1,211)
Provision for probable losses − (10)
Other liabilities (609) (572)
(70,626) (2,211)
Net Asset Value* P
= 6,935,169 P
= 6,056,788
*The difference of P
= 71.0 million and P
= 200.0 million in the fair value of plan assets as of December 31, 2014 and
December 31, 2013, respectively, pertains to movements after the valuation date.

*SGVFS011298*
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All equity and debt instruments held have quoted prices in active market. The remaining plan
assets do not have quoted market prices in active market.

The plan assets have diverse investments and do not have any concentration risk.

The cost of defined benefit pension plans and other post-employment medical benefits as well as
the present value of the pension obligation are determined using actuarial valuations. The
actuarial valuation involves making various assumptions. The principal assumptions used in
determining pension and post-employment medical benefit obligations for the defined benefit
plans are shown below:

2014 2013
Discount rates: 4.0% to 5.0% 3.5% to 5.3%
Future salary increases: 4.0% to 8.0% 4.0% to 8.5%

There were no changes from the previous period in the methods and assumptions used in
preparing sensitivity analysis.

The sensitivity analysis below has been determined based on reasonably possible changes of
each significant assumption on the defined benefit obligation as of the end of the reporting period,
assuming if all other assumptions were held constant:

2014 2013
Increase(decrease) Net Pension Liabilities
(In Thousands)
Discount rates 1% (P
= 602,308) (P
= 593,804)
(1%) 771,273 745,298

Future salary increases 1% 749,728 721,656


(1%) (596,164) (586,589)

The management performed an Asset-Liability Matching Study (ALM) annually. The overall
investment policy and strategy of the Group’s defined benefit plans is guided by the objective of
achieving an investment return which, together with contributions, ensures that there will be
sufficient assets to pay pension benefits as they fall due while also mitigating the various risk of
the plans. The Group’s current strategic investment strategy consists of 50.1% of debt
instruments, 45.4% of equity instruments and 4.5% other assets.

The Group expects to contribute P


= 386.2 million to the defined benefit pension plan in 2014.

The average duration of the defined benefit obligation at the end of the reporting period is
5.3 to 26.8 years in 2014 and 8.3 to 23.4 years in 2013.

Shown below is the maturity analysis of the undiscounted benefit payments as of December 31,
2014 (amounts in thousands):

Less than 1 year P


= 1,118,803
More than 1 year to 5 years 2,815,633
More than 5 years to 10 years 5,654,071
More than 10 years 6,932,797
P
= 16,521,304

As of December 31, 2014 and 2013, the plan assets include shares of stock of the Company with
total fair value of P
= 862.2 million and P
= 981.7 million.

*SGVFS011298*
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The carrying value and fair value of the plan assets of the Group as of December 31, 2014
amounted to P= 6.4 billion and P
= 7.0 billion, respectively.

The fund includes investment in securities of its related parties. Details of the investment per type
of security are as follows (in thousands):

2014 Carrying Value Fair Value Unrealized Gains


(In Thousands)
Equity securities P
= 1,218,484 P
= 1,807,843 P
= 589,359
Debt securities 960,644 981,269 20,625
Unit investment trust funds 504,039 518,786 14,747
P
= 2,683,167 P
= 3,307,898 P
= 624,731

2013 Carrying Value Fair Value Unrealized Gains


(In Thousands)
Equity securities P
= 829,780 P
= 1,269,258 P
= 439,478
Debt securities 505,424 509,988 4,564
Unit investment trust funds 357,549 358,094 545
P
= 1,692,753 P
= 2,137,340 P
= 444,587

The overall expected rate of return on assets is determined based on the market prices prevailing
on that date.

The Group’s transactions with the fund mainly pertain to contributions, benefit payments,
settlements and curtailments.

28. Stock Option Purchase Plans

The Company has stock option plans for key officers (Executive Stock Option Plan - ESOP) and
employees (Employee Stock Ownership Plan - ESOWN) covering 3.0% of the Company’s
authorized capital stock. The grantees are selected based on certain criteria like outstanding
performance over a defined period of time.

The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the
vesting percentage and vesting schedule stated in the ESOP. Also, the grantee must be an
employee of the Company or any of its subsidiaries during the 10-year option period. In case the
grantee retires, he is given 3 years to exercise his vested and unvested options. In case the
grantee resigns, he is given 90 days to exercise his vested options.

ESOP
Movements in the number of stock options outstanding under ESOP are as follows:

2014 2013 2012


Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
Outstanding, at beginning of year 2,893,368 P
= 249.13 3,940,680 P
= 177.46 5,313,474 P
= 174.63
Exercised (666,299) (231.63) (766,450) (177.61) (1,019,194) (183.49)
Grants – – 445,064 500 – –
Cancelled (605,463) (127.32) (725,926) (89.41) (353,600) –
Outstanding, at end of year 1,621,606 P
= 301.80 2,893,368 P
= 249.13 3,940,680 P
= 177.46

The options have a contractual term of 10 years. As of December 31, 2014 and 2013, the
weighted average remaining contractual life of options outstanding is 7.3 years and 5 years,
respectively, and the range of exercise prices amounted from P= 227.53 to P
= 500.0, respectively.

*SGVFS011298*
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The fair value of each option is estimated on the date of grant using the Black-Scholes option-
pricing model. The fair values of stock options granted under ESOP at each grant date and the
assumptions used to determine the fair value of the stock options are as follows:

April 26, April 18, April 16, June 30, June 10,
2013 2011 2010 2005 2004
Weighted average share price P
= 640 P
= 352.08 P
= 303.70 P
= 327.50 P
= 244.00
Exercise price P
= 500 P
= 316.87 P
= 273.03 P
= 295.00 P
= 220.00
Expected volatility 42.40% 41.21% 41.31% 46.78% 46.71%
Option life 10 years 10 years 10 years 10 years 10 years
Expected dividends 0.54% 0.86% 0.92% 1.27% 1.43%
Risk-free interest rate 3.04% 6.64% 8.56% 12.03% 12.75%

The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also necessarily be the actual outcome.

ESOWN
The Parent Company also has ESOWN granted to qualified officers and employees wherein
grantees may subscribe in whole or in part to the shares awarded to them based on the 10%
discounted market price as offer price set at grant date. To subscribe, the grantee must be an
employee of the Parent Company or any of its subsidiaries during the 10-year payment period. In
case the grantee resigns, the unsubscribed shares are cancelled, while the subscription may be
paid up to the percent of holding period completed and payments may be converted into the
equivalent number of shares. In case the grantee is separated, not for cause, but through
retrenchment and redundancy, subscribed shares may be paid in full, unsubscribed shares may
be subscribed, or payments may be converted into the equivalent number of shares. In case the
grantee retires, the grantee may subscribe to the unsubscribed shares anytime within the 10-year
period. The plan does not allow sale or assignment of the shares. All shares acquired through
the plan are subject to the Parent Company’s Right to Repurchase.

The subscribed shares are effectively treated as options exercisable within a given period which is
the same time as the grantee’s payment schedule. The fair values of these options are estimated
at the date of grant using the Binomial Tree Model. The Binomial Tree model requires six inputs
to produce an option stock value namely; market value of the share, book value of the share, time
to maturity, volatility rate, dividend yield, and risk free rate.

Shares granted and subscribed under the ESOWN in 2014 follows:

Date of Grant April 11, 2014


Number of shares subscribed 713,284
Exercise price P= 480

Subscriptions receivable from the stock option plans covering the Parent Company’s shares are
presented under equity.

For the unsubscribed shares, the employee still has the option to subscribe from the start of the
fifth year but not later than on the start of the seventh year from date of grant. Movements in the
number of options outstanding under ESOWN as of December 31, 2014 and 2013 follow:

2014 2013
Weighted Weighted
Number of average Number of average
options exercise price options exercise price
At January 1 120,244 P
= 260.22 143,256 P
= 247.93
Granted 8,344 480.00 – –
Exercised/cancelled (67,434) (275.77) (23,012) 183.73
At December 31 61,154 P
= 273.06 120,244 P
= 260.22

*SGVFS011298*
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The fair value of stock options granted is estimated on the date of grant using the Black-Scholes
Merton Formula, taking into account the terms and conditions upon which the options were
granted. The fair value of stock options granted under ESOWN at grant date and the assumptions
used to determine the fair value of the stock options follow:

April 11, 2014 April 30, 2012 April 30, 2009


Number of unsubscribed
shares 8,344 50,229 17,788
Fair value of each option P
= 619 P
= 259.97 P
= 112.87
Weighted average share price P
= 673.96 P
= 434.47 P
= 263.38
Exercise price P
= 480 P
= 322.00 P
= 180.13
Expected volatility 42.13% 41.78% 49.88%
Dividend yield 0.74% 0.74% 1.59%
Interest rate 4.38% 5.59% 7.49%

Total expense arising from share-based payments of the Company (included under “General and
administrative expenses”) in the consolidated statements of income amounted to P
= 222.4 million,
P
= 199.3 million and P
= 217.3 milllion in 2014, 2013 and 2012, respectively.

ALI
ALI has stock option plans for key officers (ESOP) and employees (ESOWN) covering 2.5% of the
ALI’s authorized capital stock. The grantee is selected based on certain criteria like outstanding
performance over a three-year period.

The ESOP grantees may exercise in whole or in part the vested allocation in accordance with the
vesting percentage and vesting schedule stated in the ESOP. Also, the grantee must be an
employee of ALI or any of its subsidiaries during the 10-year option period. In case the grantee
retires, he is given 3 years to exercise his vested and unvested options. In case the grantee
resigns, he is given 90 days to exercise his vested options.

ESOP
Movements in the number of stock options outstanding under ESOP are as follows:

PFRS 2 Options
Weighted Weighted
average average
exercise exercise
2014 price 2013 price
At January 1 10,377,981 P
= 4.58 11,039,666 P
= 4.23
Exercised (5,624,981) 4.26 (661,685) 3.74
Cancelled (1,894,640) − − −
At December 31 2,858,360 P
= 5.63 10,377,981 P
= 4.58

The options exercised had a weighted average exercise price of P


= 4.26 per share or P
= 23.94 million
in 2014, and P
= 3.74 per share or P
= 12.02 million in 2013.

The average fair market value of the shares at the exercise date was P = 31.46 per share or about
P
= 177.0 million in 2014 and P
= 30.00 per share or about P
= 96.4 million in 2013.

*SGVFS011298*
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The fair value of stock options granted are estimated as at the date of grant using the Black-
Scholes option pricing model, taking into account the terms and conditions upon which the options
were granted. The fair value of stock options granted under ESOP at June 30, 2005 grant date,
and the assumptions used to determine the fair value of the stock options are as follows:

Weighted average share price P= 8.36


Exercise price P= 6.75
Expected volatility 46.30%
Option life 10 years
Dividend yield 3.21%
Interest rate 12.60%

The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also necessarily be the actual outcome.

ESOWN
In November 2001, ALI offered all its ESOWN subscribers with outstanding ESOWN subscriptions
the option to cancel the subscriptions within the 5-year holding period. In December 2001, the
program for ESOWN was indefinitely suspended.

In 2005, the ALI introduced a revised ESOWN Plan (the Plan) wherein grantees may subscribe in
whole or in part to the shares awarded to them based on a discounted market price that was
determined by the Compensation Committee of ALI as the offer price set at grant date. The
grantees paid for the shares subscribed through installments over a maximum period of ten (10)
years. The subscription is subject to a holding period stated in the plan. To subscribe, the
grantee must be an employee of ALI or any of its subsidiaries during the ten (10)-year payment
period. In case the grantee resigns, unsubscribed shares are cancelled, while the subscription
may be paid up to the percent of holding period completed and payments may be converted into
the equivalent number of shares. In case the grantee is separated, not for cause, but through
retrenchment and redundancy, subscribed shares may be paid in full, unsubscribed shares may
be subscribed, or payments may be converted into the equivalent number of shares. In case the
grantee retires, the grantee may subscribe to the unsubscribed shares anytime within the ten (10)-
year period. The plan does not allow sale or assignment of the shares. All shares acquired
through the Plan are subject to ALI’s right to repurchase.

The subscribed shares are effectively treated as options exercisable within a given period which is
the same time as the grantee’s payment schedule. The fair values of these options are estimated
on the date of grant using the Binomial Tree Model. The Binomial Tree model requires six inputs
to produce an option stock value namely: market value of the share, book value of the share, time
to maturity, volatility rate, dividend yield, and risk free rate.

For the unsubscribed shares, the employee still has the option to subscribe within seven (7) years.

Movements in the number of options outstanding and weighted average exercise prices (WAEP)
under ESOWN follow:

2014 WAEP 2013 WAEP


At January 1 12,683,257 P
= 14.19 19,149,441 P
= 10.31
Granted 12,640,541 − 15,385,695 −
Subscribed (12,330,426) 21.10 (18,784,577) 18.74
Cancelled availment 279,632 – 792,824 –
Cancelled (993,724) – (3,860,126) –
At December 31 12,279,280 P
= 15.61 12,683,257 P
= 14.19

*SGVFS011298*
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The fair values of stock options granted are estimated on the date of grant using the Binomial Tree
Model and Black-Scholes Merton Formula, taking into account the terms and conditions upon
which the options were granted. The expected volatility was determined based on an independent
valuation. Option maturity is 4 years from the date of grant.

The fair value of stock options granted under ESOWN at grant date and the assumptions used to
determine the fair value of the stock options follow:

Grant Date
March 20, March 18, March 13, March 31, March 31,
2014 2013 2012 2011 2010
Number of unsubscribed shares 1,369,887 1,713,868 3,967,302 3,843,057 2,298,247
Fair value of each option P
= 28.40 P
= 12.07 P
= 6.23 P
= 7.27 P
= 8.88
Weighted average share price P
= 31.46 P
= 30.00 P
= 21.98 P
= 15.5 P
= 13.00
Exercise price P
= 22.55 P
= 21.45 P
= 14.69 P
= 13.2 P
= 9.74
Expected volatility 33.50% 36.25% 33.00% 36.25% 43.57%
Dividend yield 1.42% 1.93% 0.90% 1.01% 0.48%
Interest rate 3.13% 2.78% 5.70% 5.60% 5.95%

Grant Date
September
April 30, May 15, 20, June 5, November
2009 2008 2007 2006 16, 2005
Number of unsubscribed shares 5,418,619 15,057,840 494,400 5,270,333 3,036,933
Fair value of each option P
= 4.05 P
= 6.77 P
= 6.93 P
= 7.33 P
= 5.58
Weighted average share price P
= 6.40 P
= 10.50 P
= 15.00 P
= 13.00 P
= 9.30
Exercise price P
= 4.96 P
= 9.74 P
= 12.00 P
= 10.35 P
= 7.03
Expected volatility 37.45% 32.04% 34.67% 46.03% 46.32%
Dividend yield 0.85% 0.49% 0.41% 1.56% 0.77%
Interest rate 5.94% 8.53% 6.93% 10.55% 11.30%

Total expense (included under “General and administrative expenses”) recognized in 2014, 2013
and 2012 in the consolidated statements of income arising from share-based payments of ALI
amounted to P= 196.1 million, P
= 232.7 million and P
= 248.4 million, respectively.

IMI
IMI has an ESOWN, which is a privilege extended to the Group’s eligible managers and staff
whereby IMI allocates up to 10% of its authorized capital stock for subscription by said personnel
under certain terms and conditions stipulated in the ESOWN. Under the ESOWN, for as long as
IMI remains privately-owned, the subscription price of the shares granted shall be determined
based on the multiples of net book value, Earnings Before Income Tax and Depreciation and
Amortization (EBITDA) and net income of ten comparable Asian EMS companies as at the close
of the calendar year prior to the grant. Once IMI becomes publicly listed, the subscription price
per share shall be based on market price with a discount to be determined by the Compensation
Committee of IMI at the date of grant.

To subscribe, the grantee must be an eligible participant as defined in the ESOWN. However,
should the grantee cease to be employed by or connected with IMI before the full payment is
made for the subscribed shares, the remaining balance becomes due and demandable upon
separation, except for special circumstances as provided by the ESOWN. In such instances, the
grantee/heirs may be allowed to continue paying for the balance for the duration of the original
payment period. If the grantee is separated for cause, shares not fully paid will be forfeited and
whatever the amount the grantee has partially paid will be returned to him with no interest; if fully
paid prior to separation, the shares shall be subject to the Right to Repurchase. If the grantee
separates voluntarily, fully vested but not fully paid shares may be paid for in full upon separation
subject to Right to Repurchase; and payments made for subscribed shares up to the time of

*SGVFS011298*
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separation may be converted into the equivalent number of shares based on the stipulated
subscription price when the shares were availed of. If the grantee separates involuntarily, shares
not fully paid for, whether fully vested or not, may be paid for in full within ninety (90) days from
separation subject to the Right to Repurchase; and payments made for subscribed shares up to
the time of separation may be converted into the equivalent number of shares based on the
stipulated subscription price.

A subscription is declared delinquent when the minimum payment required remains unpaid one
month after the due date. Any cash dividend of a delinquent subscription will be applied to pay the
subscription due. Stock dividends paid while the subscription is delinquent will only be released to
the grantee when the delinquent account is paid. If sixty (60) days after the due date and account
is still delinquent, the remaining shares are forfeited and the employee will not be eligible for future
ESOWN grants.

On February 21, 2007, IMI’s BOD approved the granting of 45,150,000 shares of IMI under the
ESOWN at the subscription price of P = 12.50 to various employees of STEL and to IMI’s top
performers and key personnel. In 2008, additional 1,539,000 shares were granted to STEL and to
IMI’s top performers and key personnel subject to the same terms as the shares subscribed in
2007. All the granted shares have been subscribed. The grantees will pay for the shares
subscribed through installments over a period of eight years, wherein an initial payment of 2.5% of
the value of the subscribed shares is payable upon subscription. It shall serve as a down payment
for the subscription. The subscribed shares have a holding period as follows: (a) 40% after one
year from subscription date; (b) 30% after two years from subscription date; and (c) 30% after
three years from subscription date. The actual grant date of the above two grants was on October
15, 2007. The fair value, determined based on a private bank’s valuation of IMI to be used by a
potential investor, was P= 14.98 per share. The difference between the fair value and the
subscription price will be recognized as employee benefit expense over the required service
period. In 2008, management has approved a 2-year moratorium on the scheduled payments due
in 2008 and 2009, which resulted in an extension of the payment period from eight to ten years.
The outstanding shares under this grant have fully vested in September 2010.

On December 14, 2009, the Chairman of IMI’s BOD approved the terms for granting 30,885,000
shares of the IMI under ESOWN at the subscription price of P = 5.54 per share to various employees
of IMI. The grant date was on January 21, 2010. The payment scheme and holding period for this
grant are similar to the grant in 2007. The fair value per share used in valuing the grant is P
= 9.30,
which is the closing price of IMI’s stock at the PSE at the date of grant.

On October 13, 2014, the Executive Committee of the BOD of IMI approved the grant of stock
options to qualified executives covering up to 35.9 million shares at a subscription price of P
= 5.91
per share. Out of the total shares granted, 31.8 million shares were subscribed by 38 executives
of IMI, of which 7.8 million shares are from unissued shares and 23.9 million shares were issued
from ESOWN Trust Account where all the previously cancelled ESOWN subscriptions were held.
The payment scheme and holding period for this grant are similar to the grant in 2007. The fair
value of stock options granted in 2014 is estimated at the date of grant using the Black-Scholes
Melton Formula, taking into account the terms and conditions upon which the stock options were
granted. The expected volatility was determined based on an independent valuation.

*SGVFS011298*
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Movements in the number of shares outstanding under ESOWN in 2014, 2013 and 2012 follow:

2014 2013 2012


Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
Balances at January 1 107,380,812 P
= 6.95 110,405,814 P
= 6.95 116,250,309 P
= 6.95
Forfeitures (3,276,342) 6.95 (3,025,002) 6.95 (5,844,495) 6.95
Subscriptions 31,797,958 5.91 – – – –
Balances at December 31 135,902,428 P
= 6.71 107,380,812 P
= 6.95 110,405,814 P
= 6.95

Total expense arising from share-based payments of IMI (included under “General and
administrative expenses”) in the consolidated statements of income amounted to US$0.17 million
(P
= 7.5 million), US$0.01 million (P
= 0.4 million), and US$0.07 million (P
= 3.0 million) in 2014, 2013 and
2012, respectively.

MWC
Executive Stock Option Plan (Executive SOP), Expanded Executive SOP and ESOWN
On February 26, 2004, MWC’s BOD authorized the allocation of up to 20.00 million of the treasury
shares for distribution from time to time as may be authorized by the Chairman of the Board
(Chairman) of MWC as incentive and reward to deserving officers of MWC with rank of Manager 2
and above, including senior officers seconded from any parent company, under the Executive
SOP.

On October 28, 2004, MWC’s BOD approved the allocation of an additional 3.6 million shares for
the Executive SOP, which will come from MWC’s unissued shares or common shares held in
treasury. Accordingly, total allocation for the Executive SOP increased to 23.6 million shares.

On the same date, MWC’s BOD approved the allocation of 136.4 million common shares for the
Expanded Executive SOP covering 96.4 million common shares and the ESOWN covering
40.0 million common shares. The common shares for the ESOWN and the Expanded Executive
SOP will come from MWC’s unissued common shares or common shares held in treasury. The
common shares under the Expanded Executive SOP and ESOWN will be distributed from time to
time as an incentive and reward to deserving MWC’s executives (Expanded Executive SOP) and
employees (ESOWN) of MWC as may be authorized by the Chairman.

In March 2005, MWC granted 23.6 million options under the Executive SOP with an exercise price
of P
= 2.71 per share. To enjoy the rights provided for in the plan, the option holder should be with
the MWC at the time the options vest. The vesting schedule of the options is as follows:

Year Vesting Percentage


2006 40%
2007 30%
2008 30%

On November 15, 2005, MWC’s BOD approved the allocation of 25.00 million common shares,
consisting of unissued shares and/or undisposed treasury shares, for distribution from time to time
as may be authorized by the Chairman, as an incentive and reward to deserving executives of
MWC with rank of Manager 1 and above, under the ESOWN.

On February 2, 2006, MWC’s BOD authorized the migration of the Executive SOP covering
23.6 million common shares to ESOWN by giving Executive SOP grantees a one-time opportunity
to convert their Executive SOP allocation into an ESOWN subscription using the Executive SOP
subscription price of P
= 2.71 per share. The ESOWN terms are described in the succeeding
paragraphs.

*SGVFS011298*
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The migration resulted in the recognition of the additional fair value of the replacement options
amounting to P= 26.5 million. For the exercised options, the fair value was computed using the
market price at the date of grant less the discounted strike price.

The subscribed shares are effectively treated as options exercisable within a given period which is
the same time as the grantee’s payment schedule. The fair values of these options are estimated
on the date of grant using the Binomial Tree Model. In computing for the stock option value for
2013 grant, MWC assumed 24.90%, 3.47% and 2.99% as the volatility, dividend yield and risk-free
interest rate, respectively.

For the unsubscribed shares, the employee still has the option to subscribe within seven (7) years.

The fair values of stock options granted are estimated on the date of grant using the Binomial Tree
Model and Black-Scholes Merton Formula, taking into account the terms and conditions upon
which the options were granted. The expected volatility was determined based on an independent
valuation.

The fair value of stock options granted under ESOWN at grant date and the assumptions used to
determine the fair value of the stock options follow:

Grant Dates
November 19, October 5, September April 30, June 15, May 21, May 2,
2013 2012 19, 2011 2009 2008 2007 2006
Number of shares granted 6,627,100 4,772,414 5,073,000 9,241,025 7,798,483 2,130,000 13,625,000
Number of unsubscribed
Shares 351,680 460,000 992,000 1,442,000 1,580,000 520,000 2,265,000
Fair value of each option P
= 10.58 P
= 11.76 P
= 8.68 P
= 5.90 P
= 10.65 P
= 9.85 P
= 4.59
Weighted average share
Price P
= 23.00 P= 26.24 P= 19.80 P= 13.50 P= 18.00 P= 12.00 P= 6.50
Exercise price P
= 22.92 P= 24.07 P= 17.38 P
= 9.63 P= 15.13 P
= 8.08 P
= 5.47
Expected volatility 24.90% 30.66% 33.68% 44.66% 25.64% 27.29% 24.65%
Dividend yield 3.47% 2.56% 2.68% 2.92% 1.96% 2.58% 3.40%
Risk-free interest rate 2.99% 4.57% 4.76% 8.53% 6.93% 10.55% 11.30%
Expected life of option 4 years 4 years 4 years 4 years 4 years 7 years 7 years

The expected life of the options is based on management’s estimate and is not necessarily
indicative of exercise patterns that may occur. The expected volatility used for the 2007 and 2006
grants was based on the average historical price volatility of several water utility companies within
the Asian region. For the grants beginning 2008, MWC’s volatility was used as input in the
valuation. The expected volatility reflects the assumption that the historical volatility is indicative of
future trends, which may also not necessarily reflect the actual outcome.

No other features of the options granted were incorporated into the measurement of fair value.

To enjoy the rights provided for in the ESOWN, the grantee should be with MWC at the time the
holding period expires. The Holding Period of the ESOWN shares follows:

Holding period
After one year from subscription date 40%
After two years from subscription date 30%
After three years from subscription date 30%

The ESOWN grantees are allowed to subscribe fully or partially to whatever allocation may have
been granted to them. In case of partial subscriptions, the employees are still allowed to
subscribe to the remaining unsubscribed shares granted to them provided that this would be made
at the start of Year 5 from grant date up to the end of Year 6. Any additional subscription made by
the employee (after the initial subscription) will be subjected to another 3-year holding period.

*SGVFS011298*
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Movements in the number of stock options outstanding under ESOWN are as follows:

Weighted Weighted
average average
2014 exercise price 2013 exercise price
At January 1 6,745,880 P
= 22.92 5,936,000 P
= 24.07
Granted – – 6,627,100 22.92
Exercised (2,528,708) 22.92 (5,817,220) 22.92
At December 31 4,217,172 P
= 22.92 6,745,880 P
= 22.92

Total expense arising from equity-settled share-based payment transactions of MWC (included
under “General and administrative expenses”) in the consolidated statement of income amounted
to P
= 63.05 million, P
= 50.83 million and P
= 31.86 million in 2014, 2013 and 2012, respectively.

29. Operating Segment Information

For management purposes, the Group is organized into the following business units:

· Parent Company - represents operations of the Company including, among others, its
financing entities such as ACIFL and AYCFL; plus results of operations of start-up companies
in power generation, transport infrastructure and education.

· Real estate and hotels - planning and development of large-scale fully integrated residential
and commercial communities; development and sale of residential, leisure and commercial
lots and the development and leasing of retail and office space and land in these communities;
construction and sale of residential condominiums and office buildings; development of
industrial and business parks; development and sale of upper middle-income and affordable
housing; strategic land bank management; hotel, cinema and theater operations; and
construction and property management.

· Financial services and insurance - universal banking operations, including savings and time
deposits in local and foreign currencies; commercial, consumer, mortgage and
agri-business loans; leasing; payment services, including card products, fund transfers,
international trade settlement and remittances from overseas workers; trust and investment
services including portfolio management, unit funds, trust administration and estate planning;
fully integrated bancassurance operations, including life, non-life, pre-need and reinsurance
services; internet banking; on-line stock trading; corporate finance and consulting services;
foreign exchange and securities dealing; and safety deposit facilities.

· Telecommunications - provider of digital wireless communications services, wireline voice


communication services, consumer broadband services, other wireline communication
services, domestic and international long distance communication or carrier services and
mobile commerce services.

· Water distribution and wastewater services - contractor to manage, operate, repair,


decommission, and refurbish all fixed and movable assets (except certain retained assets)
required to provide water delivery, sewerage and sanitation including waste and wastewater
management in the East Zone Service Area.

· Electronics - electronics manufacturing services provider for original equipment manufacturers


in the computing, communications, consumer, automotive, industrial and medical electronics
markets, service provider for test development and systems integration and distribution of
related products and services.

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· Information technology and BPO services - venture capital for technology businesses and
emerging markets; provision of value-added content for wireless services, on-line business-to-
business and business-to-consumer services; electronic commerce; technology infrastructure
hardware and software sales and technology services; and onshore and offshore outsourcing
services in the research, analytics, legal, electronic discovery, document management,
finance and accounting, IT support, graphics, advertising production, marketing and
communications, human resources, sales, retention, technical support and customer care
areas.

· Automotive – manufacturing, distribution and sale of passenger cars and commercial vehicles.

· International - investments in overseas property companies and projects.

· Others – air-chartered services, agri-business and other operating companies.

Management monitors the operating results of its business units separately for the purpose of
making decisions about resource allocation and performance assessment. Segment performance
is evaluated based on operating profit or loss and is measured consistently with operating profit or
loss in the consolidated financial statements.

Intersegment transfers or transactions are entered into under the normal commercial terms and
conditions that would also be available to unrelated third parties. Segment revenue, segment
expense and segment results include transfers between operating segments. Those transfers are
eliminated in consolidation.

The following tables regarding operating segments present assets and liabilities as of
December 31, 2014 and 2013 and revenue and income information for each of the three years in
the period ended December 31, 2014 (amounts in millions):

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2014
Water
Financial Distribution and Information
Parent Real Estate Services and Telecommunicati Wastewater Technology and Automotive Intersegment
Company and Hotels Insurance ons Services Electronics BPO Services International and Others Eliminations Consolidated
Income
Sales to external customers P
= 754 P
= 88,422 =−
P =−
P P
= 15,412 P
= 37,558 P
= 1,770 P
= 589 P
= 11,912 =−
P P
= 156,417
Intersegment 155 − − − 110 − − − 269 (534) −
Share of profit of associates and joint
ventures (197) 647 8,593 4,017 357 − (379) 95 52 − 13,185
Interest income 460 4,778 − − 186 9 51 10 2 (2) 5,494
Other income 143 709 − − 4,054 647 2,148 977 502 − 9,180
Total income 1,315 94,556 8,593 4,017 20,119 38,214 3,590 1,671 12,737 (536) 184,276
Operating expenses 3,557 65,092 − − 11,755 36,527 2,037 915 12,585 (539) 131,929
Operating profit (2,242) 29,464 8,593 4,017 8,364 1,687 1,553 756 152 3 52,347
Interest expense and other financing
charges 4,562 5,602 − − 1,548 125 25 4 68 − 11,934
Provision for (benefit from) income
tax 44 6,092 − − 1,621 272 31 (11) 89 − 8,138
Net income (P
= 6,848) P
= 17,770 P
= 8,593 P
= 4,017 P
= 5,195 P
= 1,290 P
= 1,497 P
= 763 (P
= 5) P
=3 P
= 32,275
Other information
Segment assets P
= 158,642 P
= 372,509 =−
P =−
P P
= 88,113 P
= 24,616 P
= 2,085 P
= 7,180 P
= 6,442 (P
= 97,791) P
= 561,796
Investments in associates and joint
ventures 133,826 11,735 − − 4,959 23 3,292 1,914 447 − 156,196
Deferred tax assets 149 7,202 − − 881 80 39 − 75 (371) 8,055
Total assets P
= 292,617 391,446 − − P
= 93,953 P
= 24,719 P
= 5,416 P
= 9,094 P
= 6,964 (P
= 98,162) P
= 726,047
Segment liabilities P
= 125,145 P
= 264,761 =−
P =−
P P
= 39,823 P
= 13,724 P
= 745 P
= 300 P
= 3,865 (P
= 15,294) P
= 433,069
Deferred tax liabilities 89 1,967 − − 4,593 64 2 19 9 − 6,743
Total liabilities P
= 125,234 P
= 266,728 =−
P =−
P P
= 44,416 P
= 13,788 P
= 747 P
= 319 P
= 3,874 (P
= 15,294) P
= 439,812
Segment additions to property, plant
and equipment and investment
properties P
= 1,230 P
= 15,782 =−
P =−
P P
= 376 =
P1,091 P
= 121 P
= 163 P
= 657 P
= 211 P
= 19,631
Depreciation and amortization P
= 126 P
= 4,363 P
=– P
=– P
= 3,312 P
= 1,021 P
= 125 P
= 26 P
= 178 P
=7 P
= 9,158
Non-cash expenses other than
depreciation and amortization P
= 114 P
= 139 P
=– P
=– P
= 36 P
= 457 P
= 35 P
= 67 P
= 10 (P
= 28) P
= 830
Cash flows provided by (used in):
Operating activities (P
= 1,518) P
= 36,673 =−
P =−
P P
= 5,030 P
= 1,822 (P
= 404) (P
= 1,742) (P
= 653) =−
P P
= 39,208
Investing activities (P
= 28,627) (P
= 53,594) =−
P =−
P (P
= 759) (P
= 142) (P
= 778) P
= 1,154 =−
P =−
P (P
= 82,746)
Financing activities P
= 52,635 P
= 17,632 =−
P =−
P (P
= 5,000) P
= 1,412 P
= 918 P
= 173 P
= 880 =−
P P
= 68,650

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2013

Financial Water Distribution Information


Parent Real Estate Services and Telecommunicatio and Wastewater Technology and Automotive Intersegment
Company and Hotels Insurance ns Services Electronics BPO Services International and Others Eliminations Consolidated
Income
Sales to external customers P
= 127 P
= 77,770 P
=– P
=– P
= 14,503 P
= 31,661 P
= 1,519 P
= 482 P
= 10,879 P
=– P
= 136,941
Intersegment 216 50 – – 140 – – – 162 (568) –
Share of profit of associates and joint
ventures (133) 550 8,321 1,612 294 – (323) (266) 36 – 10,091
Interest income 670 2,114 – – 174 9 70 416 1 (18) 3,436
Other income 681 1,039 – – 6,621 134 391 403 348 (674) 8,943
Total income 1,561 81,523 8,321 1,612 21,732 31,804 1,657 1,035 11,426 (1,260) 159,411
Operating expenses 2,641 57,795 – – 7,920 31,035 1,798 703 11,362 (665) 112,589
Operating profit (1,080) 23,728 8,321 1,612 13,812 769 (141) 332 64 (595) 46,822
Interest expense and other financing
charges 3,911 4,774 – – 1,631 122 25 23 43 (18) 10,511
Other charges (158) – – – 5,257 53 23 339 18 – 5,532
Provision for (benefit from) income
tax 125 4,657 – – 1,653 195 20 (12) 41 (25) 6,654
Net income (P
= 4,958) P
= 14,297 P
= 8,321 P
= 1,612 P
= 5,271 P
= 399 (P
= 209) (P
= 18) (P
= 38) (P
= 552) P
= 24,125
Other information
Segment assets P
= 112,147 P
= 308,789 P
=– P
=– P
= 85,277 P
= 21,240 P
= 6,751 P
= 9,926 P
= 4,512 (P
= 75,296) P
= 473,346
Investments in associates and joint
ventures 102,349 9,319 – – 4,708 – 2,504 590 334 – 119,804
Deferred tax assets 94 5,485 – – 821 29 3 82 – 6,514
Total assets P
= 214,590 P
= 323,593 – – P
= 90,806 P
= 21,269 P
= 9,258 P
= 10,516 P
= 4,928 (P
= 75,296) P
= 599,664
Segment liabilities (P
= 83,315) (P
= 211,065) P
=– P
=– (P
= 40,646) (P
= 12,642) (P
= 120) P
= 2,112 (P
= 2,309) (P
= 9,862) (P
= 357,847)
Deferred tax liabilities (83) (1,307) – – (4,759) (138) (2) (47) (11) – (6,347)
Total liabilities (P
= 83,398) (P
= 212,372) P
=– P
=– (P
= 45,405) (P
= 12,780) (P
= 122) P
= 2,065 (P
= 2,320) (P
= 9,862) (P
= 364,194)
Segment additions to property, plant
and equipment and investment
properties P
= 83 P
= 16,035 P
=– P
=– P
= 275 =
P926 P
= 319 P
= 1,076 P
= 18 P
= 4,067 P
= 22,799
Depreciation and amortization P
= 94 P
= 3,892 P
=– P
=– P
= 3,329 P
= 935 P
= 162 P
=1 P
= 47 (P
= 100) P
= 8,360
Non-cash expenses other than
depreciation and amortization P
= 275 P
=4 P
=– P
=– P
= 55 P
= 956 P
=3 P
= 1190 P
= 113 P
=– P
= 2,596
Cash flows provided by (used in):
Operating activities (P
= 5,334) P
= 27,239 P
=– P
=– P
= 4,286 =
P693 P
=8 (P
= 859) (P
= 417) P
=– P
= 25,616
Investing activities (P
= 10,090) (P
= 69,952) P
=– P
=– P
= 362 (P
= 777) (P
= 170) P
= 644 (P
= 760) P
=– (P
= 80,743)
Financing activities P
= 4,669 P
= 38,558 P
=– P
=– (P
= 3,567) (P
= 233) P
= 335 (P
= 15) P
= 749 P
=– P
= 40,496

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2012

Financial Water Distribution Information


Parent Real Estate Services and and Wastewater Technology and Automotive Intersegment
Company and Hotels Insurance Telecommunications Services Electronics BPO Services International and Others Eliminations Consolidated
Income
Sales to external customers P
= 230 P
= 55,929 P
=– P
=– P
= 13,962 P
= 27,979 P
= 1,273 P
= 314 P
= 10,202 P
=– P
= 109,889
Intersegment 107 67 – – 158 18 17 – 190 (556) 1
Share of profit (loss) of associates
and joint ventures (58) 536 5,633 2,144 206 – (574) (222) 17 – 7,682
Interest income 858 3,130 – – 237 25 73 305 10 (6) 4,632
Other income 1,070 408 – – 6,672 31 95 405 277 (591) 8,367
Total income 2,207 60,070 5,633 2,144 21,235 28,053 884 802 10,696 (1,153) 130,571
Operating expenses 2,513 41612 – – 7,349 27,670 1,410 806 10,517 (829) 91,048
Operating profit (306) 18,458 5,633 2,144 13,886 383 (526) (4) 179 (324) 39,523
Interest and other financing charges 2,979 3,604 – – 1,371 140 18 22 27 (6) 8,155
Other charges 44 313 – – 6,118 4 139 275 0 – 6,893
Provision for income tax 153 3,471 – – 1,385 165 17 (264) 46 3 4,976
Net income (loss) (P
= 3,482) P
= 11,070 P
= 5,633 P
= 2,144 P
= 5,012 P
= 74 (P
= 700) (P
= 37) P
= 106 (P
= 321) P
= 19,499
Segment additions to property, plant
and equipment and investment
properties P
= 689 P
= 20,142 P
=– P
=– P
= 615 P
= 689 P
= 79 P
=– P
= 75 P
=– P
= 22,289
Depreciation and amortization P
= 92 P
= 2,715 P
=– P
=– P
= 2,320 P
= 1,127 P
= 260 P
=1 P
= 36 P
= 638 P
= 7,189
Non-cash expenses other than
depreciation and amortization P
= 82 P
= 313 P
=– P
=– P
= 83 P
= 15 P
= 139 P
= 319 P
=– (P
= 7,121) (P
= 6,170)

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Geographical Segments

Investment Properties and


Property, Plant and
Revenue Total Assets Equipment Additions
2014 2013 2012 2014 2013 2012 2014 2013 2012
Philippines P
= 143,309 P
= 128,554 P
= 111,122 P
= 701,273 P
= 577,433 P
= 500,806 P
= 18,746 P
= 16,473 P
= 22,223
Japan 3,180 2,944 241 12 9 37 1 − –
USA 12,027 8,927 7,243 2,356 410 347 362 63 33
Europe 18,680 14,759 8,679 4,878 6,872 5,233 291 519 –
Others (mostly
Asia) 7,080 4,228 3,286 17,528 14,940 4,481 231 267 32
P
= 184,276 P
= 159,412 P
= 130,571 P
= 726,047 P
= 599,664 P
= 510,904 P
= 19,631 P
= 17,322 P
= 22,288

30. Leases

Finance leases - as lessee


The Group has finance leases for various items of property, plant and equipment. These leases
have lease terms of 3 to 10 years. Future minimum lease payments under the finance leases
together with the present value of the net minimum lease payments follow:

2014 2013
Present
Minimum values Minimum Present values
Payments of payments Payments of payments
(In Thousands)
Within one year P
= 51,377 P
= 45,727 P
= 60,764 P
= 55,177
After one year but not more than five years 114,284 108,690 142,138 134,151
Total minimum lease payments 165,661 154,417 202,902 189,328
Less amounts 10,313 – 684 –
Present value of minimum lease payments P
= 155,348 P
= 154,417 P
= 202,218 P
= 189,328

Operating lease commitments - as lessee


ALI Group entered into lease agreements with third parties covering real estate properties. These
leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain
percentage of gross revenue, whichever is higher.

Future minimum rentals payable under noncancellable operating leases of lessee subsidiaries are
as follows:

2014 2013
(In Thousands)
Within one year P
= 921,686 P
= 848,509
After one year but not more than five years 2,798,273 2,514,219
More than five years 11,942,690 11,810,476
P
= 15,662,649 P
= 15,173,204

ALI
On January 28, 2011, the Board of Regents of the University of the Philippines awarded to ALI the
P
= 4.0 billion development of a 7.4-hectare lot at the University of the Philippines’ Diliman East
Campus, also known as the UP Integrated School, along Katipunan Avenue, Quezon City. ALI
signed a 25-year lease contract for the property last June 22, 2011, with an option to renew for
another 25 years subject to mutual agreement of the parties. The lease payments shall commence
as soon as sales are registered by the merchants.

A retail establishment with about 63,000 square meters of gross leasable area and an office/BPO
building about 8,000 square meters of gross leasable area shall be constructed on the property.

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For the year ended December 31, 2014, Phase 1a (with gross leasable area of 5,000 sqm.) of the
retail establishment has commenced operations on September 30, 2013.

On December 18, 2013, ALI donated the New UPIS facilities at a total cost of P = 224.7 million and
the rehabilitated and upgraded UPIS “K-2” and “3-6” Buildings at a cost of P
= 40.0 million to the
University of the Philippines.

IMI Group
IMI Singapore and STEL Group, subsidiaries of IMI, have various operating lease agreements in
respect of office premises and land. These noncancellable leases have remaining noncancellable
lease terms of between 1 to 50 years commencing on January 1, 1992 to April 1, 2011 and ending
on February 28, 2010 to April 30, 2050. Most leases contain renewable options. There are no
restrictions placed upon the lessee by entering into these leases.

On August 27, 2014, STEL entered into an agreement relating to the sale and purchase of the
building with DBS Trustee Limited, in its capacity as trustee of Soilbuild Business Space REIT
(see Note 14). The existing building is a part 3 / part 6-storey light industrial building sited on a
land area of 3,992.70 square meters and is held under a lease issued by JTC Corporation (“JTC”)
for a term of 30 years commencing from May 1, 2000 with a covenant by JTC to grant a further
term of 20 years subject to the terms and conditions of the lease.

Pursuant to a Lease Agreement, the Trustee will lease the Property to STEL and will take
assignment of the existing tenancies. In addition, STEL will undertake to commit 100% occupancy
of the property for a term of 10 years commencing from the date of completion of the agreement.
On commencement of the lease term, STEL shall provide a security deposit equivalent to 6
months’ rent and a joint Corporate Guarantee from the immediate and ultimate holding
companies, IMI Singapore and IMI Philippines, respectively.

PSi
PSi has a cancellable fifteen-year operating lease agreement with FTI for its plant facilities, office
spaces and other facilities, with Lot Nos. 92-A and 92-B commencing on August 15, 2004 up to
August 14, 2019. The operating lease agreement with FTI provides for a 5% increase in rental per
year starting on the second year and annually thereafter until the end of the lease term.

PSi leases its plant facilities, office spaces and other facilities in Calamba, Laguna from
Centereach Resources, Inc. (CRI), an unrelated entity. The operating lease agreement will expire
in March 2018.

In 2012, the operating lease agreement for the second facility was executed between CRI and PSi
for office and warehouse use. The operating lease agreement commenced on October 13, 2012
and will expire on October 12, 2015.

The operating lease agreements with CRI provides for the increase in rental at varying rates over
the term of the lease and a penalty interest rate of 3% per month using simple interest.

Operating leases - as lessor


ALI Group have lease agreements with third parties covering their investment properties portfolio.
These leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain
percentage of gross revenue, whichever is higher.

IMI Group
STEL Group has entered into leases on their leasehold building. These non-cancellable leases
have remaining lease terms of between one (1) and five (5) years. The lease income of
recognized by STEL amounted to US$1.26 million (P = 55.9 million) in 2014, US$1.08 million
(P
= 45.8 million) in 2013, and US$0.57 thousand (P
= 2.4 million)in 2012.

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Future minimum rentals receivable under noncancellable operating leases of the Group are as
follows:

2014 2013
(In Thousands)
Within one year P
= 4,043,670 P
= 3,240,947
After one year but not more than five years 8,895,438 7,494,768
More than five years 8,719,812 3,160,333
P
= 21,658,920 P
= 13,896,048

31. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the
other party or exercise significant influence over the other party in making financial and operating
decisions. Parties are also considered to be related if they are subject to common control or
common significant influence which include affiliates. Related parties may be individuals or
corporate entities.

The Group, in its regular conduct of business, has entered into transactions with associates, joint
ventures and other related parties principally consisting of advances, loans and reimbursement of
expenses, purchase and sale of real estate properties, various guarantees, construction contracts,
and development, management, underwriting, marketing and administrative service agreements.
Sales and purchases of goods and services as well as other income and expense to and from
related parties are made at normal commercial prices and terms.

There has not been any material transaction during the last two years, or proposed transaction, to
which the Group was or is to be a party, in which any of its directors or executive officers, any
nominee for election as a director or any security holder identified in this condensed financial
information had or is to have a direct or indirect material interest.

The transactions and balances of accounts with related parties follow:

a. Transactions with BPI, an associate

i. As of December 31, 2014 and 2013, the Group maintains current and savings account,
money market placements and other short-term investments with BPI broken down as
follows (amounts in thousands):

2014 2013
Cash in bank P
= 14,878,169 P
= 14,403,016
Cash equivalents 36,759,229 24,141,865
Financial assets at FVPL 6,264,569 12,794,654
Other non-current asset (Note 17) 8,273,200 −

From the Group’s placements and short-term investments with BPI, the Group has
accrued interest receivable amounting to P= 79.4 million and P
= 8.1 million as of December
31, 2014 and 2013, respectively. Interest income earned amounted to P = 586.5 million in
2014, P
= 648.7 million in 2013 and P
= 1,166.7 million in 2012.

ii. The Group also has short-term and long-term debt payable to BPI amounting to
P
= 38.0 billion and P
= 23.2 billion as of December 31, 2014 and 2013, respectively. These
short-term and long-term debts are interest bearing with varying rates, have various
maturities starting 2015 and varying schedules of payments for interest. The Group has
accrued interest payable pertaining to the outstanding balance of the short-term and long-

*SGVFS011298*
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term debt amounting to P = 190.6 million and P


= 32.2 million as of December 31, 2014 and
2013, respectively. Interest expense incurred from the debt amounted to P = 402.7 million in
2014, P
= 145.2 million in 2013 and P
= 131.1 million in 2012.

b. Outstanding balances of related party transaction follow (amounts in thousands):

Receivables Payables
2014 2013 2014 2013
Associates:
BPI P
= 435,123 P
= 276,659 P
= 257,238 P
= 104,911
First Gen Northern Energy (FGNEC) 5,531 5,531 – –
Bonifacio Land Corp. (BLC) 374 – 212,696 212,696
Stream – 246,488 – –
Ayala System Technology (ASTI) – 15,741 – 90
Naraya Development Co. Ltd. – 4,877 – –
441,028 549,296 469,934 317,697
Joint ventures:
Integreon 543,836 488,221 – –
Globe 165,419 141,939 2,409 2,005
ADHI 10,883 – – –
Asiacom – – 13,617 13,581
720,138 630,160 16,026 15,586
Other related parties:
Columbus Holdings, Inc. (Columbus) 888,953 888,815 1,156,308 1,156,308
Fort Bonifacio Development
Corporation (FBDC) 394,026 274,645 403,297 2,154,003
Honda Cars Philippines, Inc. (HCP) 112,522 72,650 152,457 170,298
myAyala.com, Inc. 2,097 2,098 – –
Lagoon Development Corporation
(Lagoon) 828 5,964 – –
Isuzu Philippines Corporation (IPC) – 25,452 193,537 48,695
GN Power Kauswagan (GNPK) – 69,936 – –
Fort Bonifacio Holdings Corp. – 3,085 – –
Sonoma Services Inc. – 867 33,617 –
Others 149,853 622,504 33,641 244,422
1,548,279 1,966,016 1,972,857 3,773,726
P
= 2,709,445 P
= 3,145,472 P
= 2,458,817 P
= 4,107,009

i. Receivable from BPI includes trade receivables on vehicles sold by AAHC and accrued
interest receivables on short-term placements by the Group.
ii. Receivable from Stream in 2013 represents a convertible promissory note entered into on
April 27, 2012 for the principal sum of US$4.7 million, plus interest at the rate of 10% per
annum maturing on April 29, 2013. To the extent the outstanding balance is not repaid in
full on or prior to the maturity date, AIVPL Group may elect at any time after the maturity
date, upon delivery of conversion notice to Stream, to convert the note into a number of
units of membership interests. On April 19, 2013, Stream and AIVPL Group amended the
maturity date of the loan to April 29, 2014. Interest income earned in 2014 and 2013
amounted to nil and P = 21.7 million, respectively.
iii. Receivables from ASTI and FGNEC are advances made for working capital requirements
which are non-interest bearing and demandable.
iv. Receivable from Integreon represents a convertible promissory note entered into on
February 2010 with a principal of US$7.30 million and bear interest of 14% per annum.
The lender has a conversion option for a period of 30 days beginning on the final maturity
date at a stipulated price per share. Subsequent amendments were made to the
convertible note on February 15, 2011, July 15, 2012 and on March 4, 2014 which
include, among others, extension of the final maturity date and optional coversion period
and change in interest rate. The latest amendment extended the final maturity date from
February 15, 2014 to February 15, 2016 and the optional conversion period from
February 15, 2014 to March 14, 2017. The convertible note bears interest of 12% per
annum. Interest income earned amounted to P = 38.9 million, P
= 37.2 million and
P
= 54.6 million in 2014, 2013 and 2012, respectively.

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v. Receivable from GNPK by ACEHI in 2013 represents an advance for development costs,
non-interest bearing and shall be paid in full within 30 days from financial closing of the
project. GNPK is a project company of ACEHI and Power Partners Ltd. Co. for the
development of 3X135MW coal-fired power plant in Kauswagan Lanao del Norte
vi. Receivable from Columbus represents non-interest bearing advance for future acquisition
of shares in BLC.
vii. Receivable from FBDC largely pertains to management fees which are included under
“Other income.”
viii. Other outstanding balances of receivable from related parties at year-end pertain mostly
to advances and reimbursement of operating expenses. These are unsecured, interest
free, will be settled in cash and are due and demandable.
ix. Payable to Columbus and BLC represent non-interest bearing advances for stock
redemption.
x. Payable to IPC and HCP consist of purchased parts and accessories and vehicles that
are trade in nature, interest-free, unsecured and are payable within 15 to 30 days.
xi. Payable to BPI includes interest payable on Group’s borrowings payable at various
payments terms like monthly or quarterly and insurance premiums payable which are due
in 30-60 days.
xii. The other outstanding balances of payable to related parties at year-end are unsecured,
interest-free, will be settled in cash and are due and demandable.
xiii. Allowance for doubtful accounts on amounts due from related parties amounted to
P
= 135.4 million and P = 145.6 million as of December 31, 2014 and 2013, respectively.
Provision for doubtful accounts amounted to P = 0.3 million, P
= 0.8 million and P
= 15.9 million in
2014, 2013 and 2012, respectively.
xiv. On November 26, 2014, Alveo Land Corporation, a wholly owned subsidiary of ALI,
acquired a 6,986 sq. m. property located along Valero St., Salcedo Vill., Makati City. The
property was purchased from BPI for P = 1,590.0 million, resulting into a gain of
P
= 700.0 million.

c. Receivables from officers and employees pertain to housing, car, salary and other loans
granted to the Group’s officers and employees which are collectible through salary deduction,
are interest bearing ranging from 6.0% to 13.5% per annum and have various maturity dates
ranging from 2015 to 2026.

d. The fair value of the Group’s total investment in the BPI Fund amounted P
= 5.6 billion and
P
= 12.8 billion, as of December 31, 2014 and 2013, respectively.

e. Revenue and expenses from related parties follow:

Revenue Expenses
2014 2013 2012 2014 2013 2012
(In Thousands)
Associates:
BPI P
= 558,814 P
= 702,699 P
= 1,166,696 P
= 427,263 P
= 143,582 P
= 131,004
PPI 60 417 339 – – –
Stream – 21,715 11,859 – – –
ASTI – 826 1,101 – – –
558,874 725,657 1,179,995 427,263 143,582 131,004
Jointly controlled
entities:
Globe 101,381 71,913 16,642 124,563 115,809 32,071
Integreon 38,973 37,226 54,682 – – –
Asiacom 613 1,154 6,998 – – –
Northwind Power
Development
Corp. – – 4,410 – – –
BPI Globe Banko – – 222 – – –
140,967 110,293 82,954 124,563 115,809 32,071

(Forward)

*SGVFS011298*
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Revenue Expenses
2014 2013 2012 2014 2013 2012
(In Thousands)
Other related
parties:
FBDC P
= 176,194 P
= 221,483 P
= 113,471 P
= 155,099 P
= 129,175 P
= 16,959
Lagoon 49,135 41,143 – 1,315 – –
6750 Ayala Avenue 17,697 46,511 – – – –
Others 25,921 27,405 9,258 – 28,351 3,575
268,947 336,542 122,729 156,414 157,526 20,534
P
= 968,788 P
= 1,172,492 P
= 1,385,678 P
= 708,240 P
= 416,917 P
= 183,609

Revenue recognized from related parties includes:


i. Leasing and developmental projects services rendered by ALI group.
ii. Water and sewerage services rendered by MWC.
iii. Automotive sales and repair services rendered by AAHC group.
iv. Interest income from cash deposits and money market placements in BPI.

Expenses recognized from related parties include:


i. Interest expense from short-term and long-term debt payable to BPI.
ii. Purchases of communications software and billings for mobile phone charges and
internet connections with Globe.
iii. Building rental, leased lines, internet connections and ATM connections with Innove,
subsidiary of Globe.

f. The Group’s Compensation of key management personnel by benefit type follows:

2014 2013 2012


(In Thousands)
Short-term employee benefits P
= 1,369,942 P
= 1,242,543 P
= 1,401,840
Post-employment benefits (Note 27) 69,079 139,933 77,177
Share-based payments (Note 28) 37,957 63,571 158,131
P
= 1,476,978 P
= 1,446,047 P
= 1,637,148

32. Financial Instruments

Financial Risk Management

General
Like any other risks, financial risks are inherent in the its business activities and are typical of any
large holding company. The financial risk management of the Company seeks to effectively
contribute to better decision making, enhance performance, and satisfy compliance demands.

The Company defines financial risks as risk that relates to the Company’s ability to meet financial
obligations and mitigate funding risk, credit risk and exposure to broad market risks, including
volatility in foreign currency exchange rates and interest rates. Funding risk refers to the potential
inability to meet contractual or contingent financial obligations as they arise and could potentially
impact the Company’s financial condition or overall financial position. Credit risk is the risk of
financial loss arising from a counterparty’s failure to meet its contractual obligations or non-
payment of an investment. These exposures may result in unexpected losses and volatilities in
the Company’s profit and loss accounts.

The Company maintain a strong focus on its funding strategy to help provide access to sufficient
funding to meet our business needs and financial obligations throughout business cycles. The
Company’s plans are established within the context of our annual strategic and financial planning
processes. The Company also take into account capital allocations and growth objectives,
including dividend pay-out. As a holding company, the Company generate cash primarily on
dividend payments of its subsidiaries, associates and joint ventures and other sources of funding.

*SGVFS011298*
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The Company also establish credit policies setting up limits for counterparties that are reviewed
quarterly and monitoring of any changes in credit standing of counterparties.

In 2014, the Company formalized the foreign exchange and interest rate risk management policy.
The Company actively monitor foreign exchange exposure and interest rate changes. And in
addition, the Company ensure that all loan covenants and regulatory requirements are complied
with.

Risk is inherent in our business; thus, the effective management of risk is vital to the strategic and
sustained growth of the Company and the Ayala Group.

The Ayala Group adopts a formal risk management process as an essential element of sound
corporate governance and an integral part of good management practice. It is designed primarily
to have a structured and disciplined approach of aligning strategy, processes, people, technology,
and knowledge with the purpose of evaluating and managing the uncertainties the Group faces as
it creates value for all stakeholders.

Enterprise Risk Management (ERM) policies and programs are in place, in accordance with an
internationally recognized standards and framework. These are periodically reviewed and
improved to adapt to changes in the business and operating environment, and be responsive to
emerging and changing risks. The risk management framework encompasses the identification
and assessment of risks drivers;measurement of risks impact; formulation of risk management
strategies; assessment of risk management capabilities required to implement risk management
strategies; design and implementation of risk management capability-building initiatives; and
monitoring and evaluating the effectiveness of risk mitigation strategies and management
performance. And as a continuous process, areas and opportunities for improvement in the risk
management process are identified. Also included in the continuous improvement program, the
Group aims to strengthen its ERM practices and benchmark with industry best practices to ensure
they remain relevant, effective, and a key enabler in the achievement of business strategies and
objectives.

Our Chief Risk Officer (CRO) is the ultimate champion of enterprise risk management of the
Group and oversees the entire risk management function. The Group Risk Management Unit
provides support to the CRO and drives the implementation and continuous improvement of the
risk management process. The Unit also provides oversight and assistance to the Ayala group of
companies’ risk management functions.

The Audit and Risk Committee provides oversight to the risk management process in compliance
with the Audit and Risk Committee Charter. The CRO and the Group Risk Management Unit
submit risk management reports to the committee on a quarterly basis, focusing on the
implementation of risk management strategies and action plans for the identified top risks of the
Ayala group, any emerging risks, and developments in risk management. The CRO and the Group
Risk Management Unit report the same to the Ayala Corp and Ayala Group Mancom at least twice
a year.

In November 2014, the charter of the Audit and Risk Committee was revised with the creation of a
separate Risk Committee of the Board.

The Board monitors the effectiveness of risk management through the regular updates on
strategic and operational risks facing the Group from management and reports from the Audit and
Risk Committee. The company’s internal auditors monitor the compliance with risk management
policies to ensure that an effective control environment exists within the entire Ayala group.

The Ayala Group continues to monitor and manage its financial risk exposures in accordance with
Board approved policies. The succeeding discussion focuses on Ayala Group’s financial risk
management.

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Financial Risk Management Objectives and Policies

The Group’s principal financial instruments comprise financial assets at FVPL, AFS financial
assets, bank loans, corporate notes and bonds. The financial debt instruments were issued
primarily to raise financing for the Group’s operations. The Group has various financial assets
such as cash and cash equivalents, short-term investments, accounts and notes receivables and
accounts payable and accrued expenses which arise directly from its operations.

The Group’s main risks arising from the use of financial instruments are interest rate risk,
foreignexchange risk, price risk, liquidity risk, and credit risk.

The Group also uses hedging instruments, the purpose of which is to manage the currency and
interest rate risks arising from its financial instruments.

The Group’s risk management policies relevant to financial risks are summarized below:

Interest rate risk


The Group’s exposure to market risk for changes in interest rates relates primarily to the
Company’s and its subsidiaries’ obligations. The policy is to keep a certain level of the total
obligations as fixed to minimize earnings volatility due to fluctuation in interest rates.

The following table demonstrates the sensitivity of the Group’s profit before tax and equity to a
reasonably possible change in interest rates as of December 31, 2014 and 2013, with all variables
held constant, (through the impact on floating rate borrowings and changes in fair value of AFS
financial assets).

Fair value interest rate risk

Change in
basis points 2014 2013
(In Thousands)
AFS financial assets +100 P
=– (P
= 1,148)
-100 – 1,150

Cash flow interest rate risk

Effect on profit before tax


Change in
basis points 2014 2013
(In Thousands)
Parent Company -
Floating rate
Borrowings +100 (P
= 58,542) (P
= 58,481)
-100 58,542 57,841
Subsidiaries -
Floating rate
Borrowings +100 (420,388) (466,560)
-100 420,388 466,560

There is no other impact on the Group’s equity other than those already affecting the net income.

*SGVFS011298*
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The terms and maturity profile of the interest-bearing financial assets and liabilities, together with its corresponding nominal amounts and carrying values (in thousands),
are shown in the following table:

December 31, 2014

Rate Fixing Nominal


Interest terms (p.a.) Period Amount < 1 year 1 to 5 years > 5 years Carrying Value
Group
Cash and cash equivalents Fixed at the date of investment Various P
= 90,761,860 P
= 90,761,860 P
=– P
=– P
= 90,761,860
Short-term investments Fixed at the date of investment or Various 1,102,703 1,102,703 – – 1,102,703
revaluation cut-off
Accounts and notes receivable Fixed at the date of sale or transaction Various 15,136,805 7,781,795 7,231,704 93,150 15,106,649
AFS financial asset - Fixed at the date of investment or Various 239,919 239,919 – – 239,919
Quoted debt investments revaluation cut-off
Other noncurrent asset Fixed at the date of investment Various 8,273,200 – – 8,273,200 8,273,200
P
= 115,514,487 P
= 99,886,277 P
= 7,231,704 P
= 8,366,350 P
= 115,484,331
Company
Long-term debt
Fixed
Fixed at 6.70% to 8.40% 7 years P
= 20,000,000 P
=– P
= 19,883,150 P
=– P
= 19,883,150
Fixed at 6.75% to 6.80% 10 years 10,000,000 – – 9,930,244 9,930,244
Fixed at 6.88% 15 years 10,000,000 – – 9,920,501 9,920,501
Floating
Variable at 0.50% to 0.67% over 91-day 3 months 21,250,000 142,140 17,008,891 4,020,064 21,171,095
T-bills PDST-R1
Subsidiaries
Short-term debt Ranging from 2.00% to 8.00% Monthly, quarterly 4,164,369 4,164,639 – – 4,164,639
Ranging from 1.10% to 2.55% Monthly, quarterly 16,919,900 16,919,900 – – 16,919,900
Long-term debt
Fixed
Peso and foreign currency Fixed at 0.50% to 10.21% 3,4,5,7,10 and 15 114,478,982 4,175,614 40,479,307 69,391,206 114,046,127
years
Dollar
Exchangeable bond Fixed at 0.50% 5 years 13,461,000 – – 12,247,531 12,247,531

Floating
Variable at Libor+1.50% to 3.50% 3 months, 53,001,484 6,463,131 39,957,883 4,140,796 50,561,810
semi-annual
P
= 263,275,735 P
= 31,865,424 P
= 117,329,231 P
= 109,650,342 P
= 258,844,997

*SGVFS011298*
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December 31, 2013

Rate Fixing Nominal


Interest terms (p.a.) Period Amount < 1 year 1 to 5 years > 5 years Carrying Value
Group
Cash and cash equivalents Fixed at the date of investment Various P
= 65,643,383 P
= 65,643,383 P
=– P
=– P
= 65,643,383
Short-term investments Fixed at the date of investment or Various 119,345 119,345 – – 119,345
revaluation cut-off
Accounts and notes receivable Fixed at the date of sale or transaction Various 18,264,029 7,423,796 8,885,742 254,689 16,564,227
AFS financial asset - Fixed at the date of investment or Various 103,301 103,301 – – 103,301
Quoted debt investments revaluation cut-off
P
= 84,130,058 P
= 73,289,825 P
= 8,885,742 P
= 254,689 P
= 82,430,256
Company
Long-term debt
Fixed
Fixed at 7.45%% 5 years P
= 2,820,000 P
= 2,816,470 P
=– P
=– P
= 2,816,470
Fixed at 6.70% to 8.40% 7 years 21,455,000 1,453,368 9,943,541 9,912,247 21,309,156
Fixed at 6.75% to 6.80% 10 years 11,491,667 1,667 1,490,000 9,921,805 11,413,472
Fixed at 6.88% 15 years 10,000,000 – – 9,909,917 9,909,917
Floating
Variable at 0.50% to 0.67% over 91-day 3 months 13,250,000 39,649 4,242,785 8,907,223 13,189,657
T-bills PDST-R1
Subsidiaries
Short-term debt Ranging from 1.21% to 8.0% Monthly, quarterly 3,696,834 3,696,834 – – 3,696,834
Ranging from 1.05% to 4.13%% Monthly, quarterly 12,114,451 12,114,451 – – 12,114,451
Long-term debt
Fixed
Peso and foreign currency Fixed at 2.4753% to 13.50% 3,4,5,7,10 and 15 89,282,857 2,980,552 29,453,703 56,500,262 88,934,517
years
Floating
Variable at Libor+0.50% to 3.50% 3 months, 42,443,365 4,649,230 32,698,580 4,948,863 42,296,673
semi-annual
P
= 206,554,174 P
= 27,752,221 P
= 77,828,609 P
= 100,100,317 P
= 205,681,147

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Foreign exchange risk


The Group’s foreign exchange risk results primarily from movements of the USD against other
currencies. As a result of significant operating expenses in PHP, the Group’s consolidated
statements of income can be affected significantly by movements in the USD versus the PHP. In
2014 and 2013, the Group entered into currency forward contracts to hedge its risks associated
with foreign currency fluctuations.
IMI Group
The IMI Group’s foreign exchange risk results primarily from movements of the USD against other
currencies. As a result of significant operating expenses in PHP, the IMI Group’s consolidated
statements of income can be affected significantly by movements in the USD versus the PHP. In
2014 and 2013, the IMI Group entered into currency forward contracts to hedge its risks
associated with foreign currency fluctuations.
IMI Group also has transactional currency exposures. Such exposure arises from sales or
purchases denominated in other than IMI Group’s functional currency. Approximately 50% and
45% of the Group’s sales for the years ended December 31, 2014 and 2013, respectively, and
49% and 37% of costs for the years ended December 31, 2014 and 2013, respectively, are
denominated in currencies other than IMI Group’s functional currency.
IMI Group manages its foreign exchange exposure risk by matching, as far as possible, receipts
and payments in each individual currency. Foreign currency is converted into the relevant
domestic currency as and when the management deems necessary. The unhedged exposure is
reviewed and monitored closely on an ongoing basis and management will consider hedging any
material exposure where appropriate.
MWC Group
The MWC Group’s foreign exchange risk results primarily from movements of the PHP against the
USD and Japanese Yen (JPY). Majority of revenues are generated in PHP, and substantially all
capital expenditures are also in PHP. Approximately 34% and 40% of debt as of December 31,
2014 and 2013, respectively, was denominated in foreign currency. Under Amendment 1 of the
Agreement, however, the Group has a natural hedge on its foreign exchange risks on its loans
and concession fee payments through a recovery mechanism in the tariff.
Information on the Group’s foreign currency-denominated monetary assets and liabilities and their
Php equivalent follows:

December 31, 2014 December 31, 2013


Php
US$ Equivalent* US$ Php Equivalent*
(In Thousands)
Assets
Cash and cash equivalents US$44,199 P
= 1,976,586 US$33,352 P
= 1,480,661
Short-term investments 1,247 55,766 – –
Accounts and notes receivables 6,804 304,275 8,440 374,694
Other current assets 375 16,770 – –
Total assets 52,625 2,353,397 41,792 1,855,355
Liabilities
Accounts payable and accrued
expenses 576 25,759 233,917 10,384,727
Short-term debt 37,154 1,661,527 37,840 1,679,905
Long-term debt 281,747 12,599,730 208,085 9,237,920
Other noncurrent liabilities 78,020 3,489,039 86,729 3,850,326
Total liabilities 397,497 17,776,055 566,571 25,152,878
Net foreign currency
denominated liabilities (US$344,872) (P
= 15,422,658) (US$524,778) (P
= 23,297,535)
*Translated using the exchange rate at the reporting date (US$1:P
= 44.720 in December 31, 2014 and US$1: P
= 44.395 in December 31,
2013).

*SGVFS011298*
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December 31, 2014 December 31, 2013


Php Php
JPY Equivalent* JPY Equivalent*
(In Thousands)
Assets
Cash and cash equivalents JPY25,781 P
= 9,578 JPY11,600 P
= 4,919
Accounts and notes receivable 175,708 65,274 224,306 95,106
Other noncurrent assets 2,491 925 2,449 1,038
Total assets 203,980 75,777 238,355 101,063
Liabilities
Accounts payable and accrued
expenses 373,082 138,596 709,951 301,019
Long-term debt 5,274,985 1,954,909 6,567,179 2,784,484
Service concession obligation 1,288,651 477,574 1,363,650 578,188
Total liabilities 6,936,718 2,571,079 8,640,780 3,663,691
Net foreign currency
denominated liabilities (JPY6,732,738) (P
= 2,495,302) (JPY8,402,425) (P
= 3,562,628)
*Translated using the exchange rate at the reporting date (JPY1:P
= 0.37 in December 31, 2014 and JPY1:P
= 0.424 in December 31, 2013).

December 31, 2014 December 31, 2013


Php Php
SGD Equivalent* SGD Equivalent*
(In Thousands)
Assets
Cash and cash equivalents SGD24,377 P
= 824,059 SGD3,334 P
= 116,630
Accounts and notes receivables 400 13,501 298 10,426
Other current assets 16 522 21 733
Total assets 24,793 838,082 3,653 127,789

Liabilities
Accounts payable and accrued
expenses 4,891 165,314 3,900 136,424
Net foreign currency
denominated assets
(liabilities) SGD19,902 P
= 672,768 (SGD247) (P
= 8,635)
*Translated using the exchange rate at the reporting date (SGD1:P
= 33.80 in December 31, 2014 and SGD1:P
= 34.98 in December 31, 2013).

December 31, 2014 December 31, 2013


Php Php
HKD Equivalent* HKD Equivalent*
(In Thousands)
Assets
Cash and cash equivalents HKD11,897 P
= 68,398 HKD13,401 P
= 76,721
Accounts and notes receivables 9,133 52,639 45,153 258,503
Total assets 21,030 121,037 58,554 335,224

Liabilities
Accounts payable and accrued
expenses 2,973 17,134 2,853 16,336
Net foreign currency
denominated assets HKD18,057 P
= 103,903 HKD55,701 P
= 318,888
*Translated using the exchange rate at the reporting date (HKD1:P
= 5.75 in December 31, 2014 and HKD1:P
= 5.725 in December 31, 2013).

*SGVFS011298*
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December 31, 2014 December 31, 2013


Php Php
RMB Equivalent* RMB Equivalent*
(In Thousands)
Assets
Cash and cash equivalents RMB141,839 P
= 1,036,358 RMB53,670 P
= 393,563
Accounts and notes receivables 459,909 3,360,369 402,731 2,953,229
Total assets 601,748 4,396,727 456,401 3,346,792

Liabilities
Accounts payable and accrued
expenses 269,156 1,966,614 275,434 2,019,759
Net foreign currency
denominated assets RMB332,592 P
= 2,430,113 RMB180,967 P
= 1,327,033
*Translated using the exchange rate at the reporting date (RMB1: P
= 7.30 in December 31, 2014 and RMB1: =
P7.333 in December 31, 2013).

December 31, 2014 December 31, 2013


Php Php
INR Equivalent* INR Equivalent
(In Thousands)
Assets
Cash and cash equivalents INR34,068 P
= 23,970 INR1,790 P
= 1,285
Receivables 311,470 219,146 12,167 8,736
Other current assets − − 7,136 5,124
Total assets 345,538 243,116 21,093 15,145

Liabilities
Accounts payable and accrued
expenses 92,499 65,081 16,921 12,150
Net foreign currency
denominated assets
(liabilities) INR253,039 P
= 178,035 INR4,172 P
= 2,995
*Translated using the exchange rate at the reporting date (INR1: =
P0.70 in December 31, 2014 and INR1: =
P0.718 in December 31, 2013).

December 31, 2014 December 31, 2013


Php Php
EUR Equivalent* EUR Equivalent
(In Thousands)
Assets
Cash and cash equivalents EUR 8,651 P
= 471,336 EUR2,445 P
= 148,603
Receivables 37,540 2,045,274 24,394 1,482,929
Total assets 46,191 2,516,610 26,839 1,631,532

Liabilities
Accounts payable and accrued
expenses 13,733 748,200 11,066 672,682
Other current liabilities – – 652 39,663
Short term debt 2,299 125,245 9,745 592,413
Long-term debt 14,199 773,600 – –
Total liabilities 30,231 1,647,045 21,463 1,304,758
Net foreign currency
denominated assets
(liabilities) EUR15,960 P
= 869,565 (EUR5,376) (P
= 326,774)
*Translated using the exchange rate at the reporting date (EUR1: P
= 54.48 in December 31, 2014 and EUR1: P
= 60.79 in December 31, 2013)

*SGVFS011298*
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December 31, 2014 December 31, 2013


Php
CZK Equivalent* CZK Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents CZK4,334 P
= 8,516 CZK894 P
= 1,996
Receivables (782) (1,536) 263 587
Total assets 3,552 6,980 1,157 2,583

Liabilities
Accounts payable and accrued
expenses 51,942 102,066 25,794 57,573
Other current liabilities 122 240 – –
Total liabilities 52,064 102,306 25,794 57,573
Net foreign currency
denominated liabilities (CZK48,512) (P
= 95,326) (CZK24,637) (P
= 54,990)
*Translated using the exchange rate at the reporting date (CZK1:P
= 1.96 in December 31, 2014 and CZK1:P
= 2.232 in December 31, 2013).

December 31, 2014 December 31, 2013


VND Php Equivalent* VND Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents VND35,133,686 P
= 75,055 VND34,533,794 P
= 72,618

Liabilities
Accounts payable and
accrued expenses – – 640,458,604 1,348,732
Net foreign currency
denominated assets
(liabilities) VND35,133,686 P
= 75,055 (VND605,924,810) (P
= 1,276,114)
*Translated using the exchange rate at the reporting date (VND1:P=0.0021 in December 31, 2014 and VND1:P
= 0.0020 in
December 31,2013).

December 31, 2014 December 31, 2013


Php
MXN Equivalent* MXN Php Equivalent
(In Thousands)
Assets
Cash and cash equivalents MXN5,547 P
= 16,884 MXN47,208 P
= 160,560
Receivables 177,303 539,725 123,735 420,834
Total assets 182,850 556,609 170,943 581,394

Liabilities
Accounts payable and accrued
expenses 89,179 271,468 179,946 612,014
Net foreign currency
denominated assets
(liabilities) MXN93,671 P
= 285,141 (MXN9,003) (P
= 30,620)
*Translated using the exchange rate at the reporting date (MXN1:P
= 3.04 in December 31, 2014 and MXN1:P
= 3.404 in December 31, 2013).

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The following table demonstrates the sensitivity to a reasonably possible change in the exchange
rate, with all variables held constant, of the Group’s profit before tax (due to changes in the fair
value of monetary assets and liabilities) and the Group’s equity (amounts in thousands).

2014

Increase Increase
(decrease) in (decrease)
Peso per foreign in profit
Currency currency before tax
US$ P
= 1.00 (P
= 344,872)
(1.00) 344,872
JPY 1.00 (6,732,738)
(1.00) 6,732,738
SGD 1.00 19,902
(1.00) (19,902)
HKD 1.00 18,057
(1.00) (18,057)
RMB 1.00 332,592
(1.00) (332,592)
INR 1.00 253,039
(1.00) (253,039)
EUR 1.00 15,960
(1.00) (15,960)
CZK 1.00 (48,512)
(1.00) 48,512
VND 1.00 35,133,686
(1.00) (35,133,686)
MXN 1.00 93,671
(1.00) (93,671)
2013

Increase Increase
(decrease) in (decrease)
Peso per foreign in profit
Currency currency before tax
US$ P
= 1.00 (P
= 524,778)
(1.00) 524,778
JPY 1.00 (8,402,425)
(1.00) 8,402,425
SGD 1.00 (247)
(1.00) 247
HKD 1.00 55,701
(1.00) (55,701)
RMB 1.00 180,967
(1.00) (180,967)
INR 1.00 4,172
(1.00) (4,172)
THB 1.00 34
(1.00) (34)
MYR 1.00 4,394
(1.00) (4,394)
(Forward)

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Increase Increase
(decrease) in (decrease)
Peso per foreign in profit
Currency currency before tax
EUR 1.00 5,376
(1.00) (5,376)
CZK 1.00 (24,637)
(1.00) 24,637
VND 1.00 (605,924,810)
(1.00) 605,924,810
MXN 1.00 (9,003)
(1.00) 9,003

2012

Increase Increase
(decrease) in (decrease)
Peso per foreign in profit
Currency currency before tax
US$ P
= 1.00 (P= 302,339)
(1.00) 302,339
JPY 1.00 (7,926,008)
(1.00) 7,926,008
SGD 1.00 (2,555)
(1.00) 2,555
HKD 1.00 81,563
(1.00) (81,563)
RMB 1.00 197,470
(1.00) (197,470)
INR 1.00 8,082
(1.00) (8,082)
THB 1.00 (35,038)
(1.00) 35,038)
MYR 1.00 5,041
(1.00) (5,041)
EUR 1.00 (23,112)
(1.00) 23,112
CZK 1.00 (20,327)
(1.00) 20,327
VND 1.00 474,336,336
(1.00) (474,336,336)
MXN 1.00 24,801
(1.00) 24,801

There is no other impact on the Group’s equity other than those already affecting net income.

Equity price risk


AFS financial assets are acquired at certain prices in the market. Such investment securities are
subject to price risk due to changes in market values of instruments arising either from factors
specific to individual instruments or their issuers, or factors affecting all instruments traded in the
market. Depending on several factors such as interest rate movements, the country’s economic
performance, political stability, and domestic inflation rates, these prices change, reflecting how
market participants view the developments. The Group’s investment policy requires it to manage
such risks by setting and monitoring objectives and constraints on investments; diversification
plan; and limits on investment in each sector and market.

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The analysis below demonstrates the sensitivity to a reasonably possible change of market index
with all other variables held constant, of the Group’s equity arising from fair valuation of quoted
AFS financial assets (amounts in thousands).

Effect on
Equity
Change in Increase
Market Index Variables (decrease)
(In Thousands)
2014 PSEi 5% P
= 425,527
(5%) (425,527)
2013 PSEi 5% P
= 310,230
(5%) (310,230)

Liquidity risk
Liquidity risk is defined by the Group as the risk of losses arising from funding difficulties due to
deterioration in market conditions and/or the financial position of the Group that make it difficult to
raise the necessary funds or that forces the Group to raise funds at significantly higher interest
rates than usual.

This is also the possibility of experiencing losses due to the inability to sell or convert marketable
securities into cash immediately or in instances where conversion to cash is possible but at loss
due to wider than normal bid-offer spreads.

The Group seeks to manage its liquidity profile to be able to service its maturing debts and to
finance capital requirements. The Group maintains a level of cash and cash equivalents deemed
sufficient to finance operations. As part of its liquidity risk management, the Group regularly
evaluates its projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund-raising activities. Fund-raising activities may
include bank loans and capital market issues, both on-shore and off-shore.

ALI Group
ALI Group employs scenario analysis and contingency planning to actively manage its liquidity
position and guarantee that all operating, investing and financing needs are met. ALI Group has
come up with a three-layered approach to liquidity through the prudent management of sufficient
cash and cash equivalents, the potential sale of accounts receivables and the maintenance of
short-term revolving credit facilities.

Cash and cash equivalents are maintained at a level that will enable it to fund its general and
administrative expenses as well as to have additional funds as buffer for any opportunities or
emergencies that may arise. Management develops viable funding alternatives through a
continuous program for the sale of its receivables and ensures the availability of ample unused
short-term revolving credit facilities from both local and foreign banks as back-up liquidity.

MWC Group
MWC Group’s objective is to maintain a balance between continuity of funding and flexibility
through the use of bank overdrafts, bank loans, debentures, preference shares, leases and hire
purchase contracts. The Group’s policy is to maintain a level of cash that is sufficient to fund its
monthly cash requirements, at least for the next four to six months. Capital expenditures are
funded through long-term debt, while operating expenses and working capital requirements are
sufficiently funded through cash collections.

*SGVFS011298*
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The table summarizes the maturity profile of the Group’s financial liabilities as of December 31,
2014 and 2013, based on contractual undiscounted payments.

December 31, 2014


< 1 year 1 to < 2 years 2 to < 3 years > 3 years Total
(In Thousands)
Accounts payable and
accrued expenses
Accounts payable P
= 73,540,123 P
=– P
=– P
=– P
= 73,540,123
Project costs 17,321,785 – – – 17,321,785
Accrued expenses 11,595,579 – – – 11,595,579
Related parties 2,458,817 – – – 2,458,817
Retentions payable 1,014,364 – – – 1,014,364
Dividends payable 2,845,013 – – – 2,845,013
Personnel costs 3,772,205 – – – 3,772,205
Derivative liability 4,755 – – – 4,755
Service concession obligation 1,019,515 1,531,691 705,528 10,547,926 13,804,660
Customers’ deposit 9,161,743 – – – 9,161,743
Short-term debt 21,084,269 – – – 21,084,269
Long-term debt (LTD) 10,761,443 11,573,756 60,051,210 156,465,229 238,851,638
Other noncurrent liabilities – 17,178,307 353 6,197,304 23,375,964
Interest payable 10,142,902 13,141,805 12,721,097 24,947,802 60,953,606
P
= 164,722,513 P
= 43,425,559 P
= 73,478,188 P
= 198,158,261 P= 479,784,521

December 31, 2013


< 1 year 1 to < 2 years 2 to < 3 years > 3 years Total
(In Thousands)
Accounts payable and
accrued expenses
Accounts payable P
= 63,198,549 P
=– P
=– P
=– P
= 63,198,549
Project costs 11,983,222 – – – 11,983,222
Accrued expenses 9,994,662 – – – 9,994,662
Related parties 4,107,009 – – – 4,107,009
Retentions payable 1,192,251 – – – 1,192,251
Dividends payable 2,093,323 – – – 2,093,323
Personnel costs 2,694,816 – – – 2,694,816
Derivative liability 3,470 – – – 3,470
Service concession obligation 1,290,406 1,474,349 708,971 10,539,730 14,013,456
Customers’ deposit 5,362,355 – – – 5,362,355
Short-term debt 15,811,285 – – – 15,811,285
Long-term debt (LTD) 11,953,695 4,092,763 47,622,962 127,073,469 190,742,889
Other noncurrent liabilities – 10,057,907 836,059 13,072,611 23,966,577
Interest payable 7,700,799 7,200,769 24,865,468 38,830,272 78,597,308
P
= 137,385,842 P
= 22,825,788 P
= 74,033,460 P
= 189,516,082 P= 423,761,172

Cash and cash equivalents, short-term investments, financial assets at FVPL and AFS debt
investments are used for the Group’s liquidity requirements. Please refer to the terms and
maturity profile of these financial assets under the maturity profile of the interest-bearing financial
assets and liabilities disclosed in the interest rate risk section.

Credit risk
Credit risk is the risk that the Group’s counterparties to its financial assets will fail to discharge
their contractual obligations. The Group’s holding of cash and short-term investments and
receivables from customers and other third parties exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing with institutions for which credit limits have
been established. The Group’s Treasury Policy sets credit limits for each counterparty. The
Group trades only with recognized, creditworthy third parties and has a well-defined credit policy
and established credit procedures.

*SGVFS011298*
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ALI Group
For installments receivable from the sale of properties, credit risk is managed primarily through
credit reviews and an analysis of receivables on a continuous basis. The Group also undertakes
supplemental credit review procedures for certain installment payment structures. The Group’s
stringent customer requirements and policies in place contribute to lower customer default than its
competitors. Customer payments are facilitated through various collection modes including the
use of postdated checks and auto-debit arrangements. Exposure to bad debts is not significant as
titles to real estate properties are not transferred to the buyers until full payment has been made
and the requirement for remedial procedures is minimal given the profile of buyers.

Credit risk arising from rental income from leasing properties is primarily managed through a
tenant selection process. Prospective tenants are evaluated on the basis of payment track record
and other credit information. In accordance with the provisions of the lease contracts, the lessees
are required to make a deposit with the Group (e.g. security deposits and advance rentals) which
helps reduce the Group’s credit risk exposure in case of defaults by the tenants. For existing
tenants, the Group has put in place a monitoring and follow-up system. Receivables are aged and
analyzed on a continuous basis to minimize credit risk associated with these receivables. Regular
meetings with tenants are also undertaken to provide opportunities for counseling and further
assessment of paying capacity.

IMI Group
The credit evaluation reflects the customer’s overall credit strength based on key financial and
credit characteristics such as financial stability, operations, focus market and trade references. All
customers who wish to trade on credit terms are subject to credit verification procedures. In
addition, receivable balances are monitored on an ongoing basis with the result that the Group’s
exposure to bad debts is not significant.

MWC Group
It is the Group’s policy that except for connection fees and other highly meritorious cases, the
Group does not offer credit terms to its customers. Credit risk is managed primarily through credit
reviews and an analysis of receivables on a continuous basis. Customer payments are facilitated
through various collection modes including the use of postdated checks and auto-debit
arrangements.

With respect to credit risk arising from other financial assets of the Group, which comprise cash
and cash equivalents and short-term investments and AFS financial assets, the Group’s exposure
to credit risk arises from default of the counterparty, with a maximum exposure equal to the
carrying amount of the investments.

Given the Group’s diverse base of counterparties, it is not exposed to large concentrations of
credit risk.

*SGVFS011298*
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The table below shows the maximum exposure to credit risk for the components of the
consolidated statement of financial position except for those financial assets whose carrying
amounts approximates fair value. The Group’s maximum exposure for cash and cash equivalents
excludes the carrying amount of cash on hand. The maximum exposure is shown at gross, before
the effect of mitigation through the use of master netting arrangements or collateral agreements.

2014 2013
(In Thousands)
Financial assets at FVPL P
= 10,374,780 P
= 17,916,513
Derivative assets 8,835 456,768
Accounts and notes receivables
Trade
Real estate 57,898,143 39,832,997
Investment in bonds classified as loans and
receivables 450,000 1,000,000
Receivable from officers and employees 731,336 507,042
Receivable from BWC 529,501 544,374
Concession financial receivable 975,984 681,364
AFS financial assets
Quoted equity investments 1,916,799 1,241,869
Unquoted equity investments 1,275,497 1,439,637
Quoted debt investments 239,919 103,301
Total credit risk exposure P
= 74,400,794 P
= 63,723,865

*SGVFS011298*
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The aging analysis of accounts and notes receivables that are past due but not impaired follows:

December 31, 2014

Neither Past
Due nor Past Due but not Impaired
Impaired <30 days 30-60 days 60-90 days 90-120 days >120 days Total Impaired Total
(In Thousands)
Trade:
Real estate P
= 54,076,618 P
= 493,629 P
= 514,089 P
= 346,998 P
= 417,839 P
= 1,437,802 P
= 3,210,357 P
= 611,168 P
= 57,898,143
Electronics manufacturing 7,048,571 951,639 93,569 98,768 89,672 260,823 1,494,471 44,911 8,587,953
Water distribution and wastewater
services 1,421,435 – – – – – – 569,744 1,991,179
Automotive 1,462,348 20,612 – – – – 20,612 13,834 1,496,794
Information technology and BPO 113,817 48,191 9,821 3,853 19,454 2,866 84,185 4,827 202,829
International and others 4,530 73 447 – – – 520 – 5,050
Advances to other companies 20,352,068 275,346 55,270 24,203 16,464 281,165 652,448 169,211 21,173,727
Advances to contractors and suppliers 10,214,501 1,391 – – 5,966 1,266 8,623 166,116 10,389,240
Receivable from related parties 2,514,597 19,479 17,522 44,226 49 107,158 188,434 6,413 2,709,445
Dividend receivable 104 – – – – – – – 104
Receivable from BWC 529,501 – – – – – – – 529,501
Concession financial receivable 975,984 – – – – – – – 975,984
Receivable from officers and employees 651,812 63,163 1,505 2,047 879 11,865 79,459 65 731,336
Investment in bonds classified as
loans and receivables 450,000 – – – – – – – 450,000
Others 113,817 2,283 4,821 3,853 6,026 7,151 24,134 252 138,203
Total P
= 99,929,703 P
= 1,875,806 P
= 697,044 P
= 523,948 P
= 556,349 P
= 2,110,096 P
= 5,763,243 P
= 1,586,541 P
= 107,279,488

*SGVFS011298*
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December 31, 2013

Neither Past
Due nor Past Due but not Impaired
Impaired <30 days 30-60 days 60-90 days 90-120 days >120 days Total Impaired Total
(In Thousands)
Trade:
Real estate P
= 36,449,792 P = 642,028 P
= 386,081 P
= 308,010 P
= 312,357 P
= 1,227,222 P
= 2,875,698 P
= 507,507 P
= 39,832,997
Electronics manufacturing 5,987,296 850,487 83,623 88,270 79,594 101,125 1,203,099 96,397 7,286,792
Water distribution and wastewater services 364,981 196,437 176,192 135,852 102,823 128,472 739,776 540,719 1,645,476
Automotive 528,171 233,620 86,221 61,346 26,533 25,957 433,677 23,542 985,390
Information technology and BPO 187,214 – – – – – – 7,370 194,584
International and others 3,603 – – – 15 – 15 – 3,618
Advances to other companies 9,753,179 247,941 2,011 37,015 16,947 297,074 600,988 557,879 10,912,046
Receivable from related parties 2,610,919 161,100 59,408 37,735 27,212 208,115 493,570 40,983 3,145,472
Dividend receivable 1,412,577 – – – – – – – 1,412,577
Receivable from BWC 544,374 – – – – – – – 544,374
Concession financial receivable 681,364 – – – – – – – 681,364
Receivable from officers and employees 376,636 90,203 4,063 1,415 3,087 29,635 128,403 2,003 507,042
Investment in bonds classified as
loans and receivables 1,000,000 – – – – – – – 1,000,000
Others 72,871 12,934 1,653 1,029 539 3,067 19,222 – 92,093
Total P
= 59,972,977 P
= 2,434,750 P
= 799,252 P
= 670,672 P
= 569,107 P
= 2,020,667 P
= 6,494,448 P
= 1,776,400 P
= 68,243,825

*SGVFS011298*
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The table below shows the credit quality of the Group’s financial assets as of December 31, 2014 and 2013 (amounts in thousands):

December 31, 2014

Neither past due nor impaired Past due but


High Grade Medium Grade Low Grade Total not impaired Impaired Total
Cash and cash equivalents P
= 90,761,860 P
=– P
=– P
= 90,761,860 P
=– P
=– P
= 90,761,860
Short-term investments 1,102,703 – – 1,102,703 – – 1,102,703
FVPL financial assets 10,374,780 – – 10,374,780 – – 10,374,780
Other noncurrent assets 8,273,200 – – 8,273,200 – – 8,273,200
Accounts and notes receivables
Trade
Real estate 47,413,704 3,974,333 2,688,581 54,076,618 3,210,357 611,168 57,898,143
Electronics manufacturing 522,677 6,525,188 706 7,048,571 1,494,471 44,911 8,587,953
Water distribution and wastewater
services 1,406,532 14,903 – 1,421,435 – 569,744 1,991,179
Automotive 1,183,041 195,118 84,189 1,462,348 20,612 13,834 1,496,794
Information technology and BPO – 113,817 – 113,817 84,185 4,827 202,829
International and others – 4,530 – 4,530 520 – 5,050
Advances to other companies 15,245,423 3,525,796 1,580,849 20,352,068 652,448 169,211 21,173,727
Advances to contractors and suppliers 8,718,904 1,175,343 320,254 10,214,501 8,623 166,116 10,389,240
Receivable from related parties 1,767,865 334,792 411,941 2,514,598 188,434 6,413 2,709,445
Dividend receivable 104 – – 104 – – 104
Receivable from BWC 529,501 – – 529,501 – – 529,501
Concession financial receivable 975,984 – – 975,984 – – 975,984
Receivable from officers employees 631,444 15,747 4,621 651,812 79,459 65 731,336
Investments in bonds classified as
loans and receivables 450,000 – – 450,000 – – 450,000
Other receivable 106,283 3,070 4,464 113,817 24,134 252 138,203
AFS Investments
Quoted shares of stocks 1,916,799 – – 1,916,799 – – 1,916,799
Unquoted shares of stocks 1,275,497 – – 1,275,497 – – 1,275,497
Quoted debt investments 239,919 – – 239,919 – – 239,919
P
= 192,896,220 P
= 15,882,637 P
= 5,095,605 P
= 213,874,462 P
= 5,763,243 P
= 1,586,541 P
= 221,224,246

*SGVFS011298*
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December 31, 2013

Neither past due nor impaired Past due but


High Grade Medium Grade Low Grade Total not impaired Impaired Total
Cash and cash equivalents P
= 53,990,229 P
=– P
=– P
= 53,990,229 P=– P
=– P
= 53,990,229
Short-term investments 119,345 – – 119,345 – – 119,345
FVPL financial assets 17,916,513 – – 17,916,513 – – 17,916,513
Accounts and notes receivables
Trade
Real estate 33,767,802 1,251,638 1,430,352 36,449,792 2,875,698 507,507 39,832,997
Electronics manufacturing 275,579 5,155,813 555,904 5,987,296 1,203,099 96,397 7,286,792
Water distribution and wastewater
services 352,650 12,331 – 364,981 739,776 540,719 1,645,476
Automotive 528,171 – – 528,171 433,677 23,542 985,390
Information technology and BPO – 187,214 – 187,214 – 7,370 194,584
International and others 3,603 – – 3,603 15 – 3,618
Advances to other companies 9,753,179 – – 9,753,179 600,988 557,879 10,912,046
Receivable from related parties 2,278,449 332,470 – 2,610,919 493,570 40,983 3,145,472
Dividend receivable 1,412,577 – – 1,412,577 – – 1,412,577
Receivable from BWC 544,374 – – 544,374 – – 544,374
Concession financial receivable 681,364 – – 681,364 – – 681,364
Receivable from officers employees 368,845 7,791 – 376,636 128,403 2,003 507,042
Investments in bonds classified as
loans and receivables 1,000,000 – – 1,000,000 – – 1,000,000
Other receivable 71,119 1,752 – 72,871 19,222 92,093
AFS Investments
Quoted shares of stocks 1,241,869 – – 1,241,869 – – 1,241,869
Unquoted shares of stocks 1,439,637 – – 1,439,637 – – 1,439,637
Quoted debt investments 103,301 – – 103,301 – – 103,301
P
= 125,848,606 P
= 6,949,009 P
= 1,986,256 P
= 134,783,871 P
= 6,494,448 P
= 1,776,400 P
= 143,054,719

*SGVFS011298*
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The credit quality of the financial assets was determined as follows:

Cash and cash equivalents, short-term investments, FVPL financial assets, quoted AFS financial
assets,investment in bonds classified as loans and receivable,advances to other companies and
related party receivables

High grade pertains to cash and cash equivalents and short-term investments, quoted financial
assets, investment in bonds classified as loans and receivable, related party transactions and
receivables with high probability of collection.

Medium grade pertains to unquoted financial assets other than cash and cash equivalents and
short-term investments with nonrelated counterparties and receivables from counterparties with
average capacity to meet their obligation.

Low grade pertains to financial assets with the probability to be impaired based on the nature of
the counterparty.

Trade receivables
Real estate, information technology and BPO and international and others - high grade pertains to
receivables with no default in payment; medium grade pertains to receivables with up to 3 defaults
in payment in the past; and low grade pertains to receivables with more than 3 defaults in
payment.

Electronics manufacturing - high grade pertains to receivable with favorable credit terms and can
be offered with a credit term of 15 to 45 days; medium grade pertains to receivable with normal
credit terms and can be offered with a credit term of 15 to 30 days; and low grade pertains to
receivables under advance payment or confirmed irrevocable Stand-by Letter of Credit and
subjected to semi-annual or quarterly review for possible upgrade or transaction should be under
advance payment or confirmed and irrevocable Stand-By Letters of credit; subject to quarterly
review for possible upgrade after one year.

Water distribution and wastewater services - high grade pertains to receivables that are collectible
within 7 days from bill delivery; medium grade pertains to receivables that are collectible from 11
to 30 days from bill delivery.

Automotive - high grade pertains to receivables from corporate accounts and medium grade for
receivables from noncorporate accounts.

Unquoted AFS financial assets - the unquoted investments are unrated.

*SGVFS011298*
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33. Fair Value Measurement and Derivative Instruments

Fair Value of Financial and Nonfinancial Instruments


The carrying amounts approximate fair values for the Group’s financial assets and liabilities due to
its short-term maturities except for the following financial instruments as of December 31, 2014
and 2013 (amounts in thousands):

2014 2013
Carrying Value Fair Value Carrying Value Fair Value
FINANCIAL ASSETS AT FVPL
Held for trading P
= 10,374,780 P
= 10,374,780 P
= 17,916,513 P
= 17,916,513
Derivative assets
Embedded 8,835 8,835 456,768 456,768
Total financial assets at FVPL 10,383,615 10,383,615 18,373,281 18,373,281

LOANS AND RECEIVABLES


Accounts and notes receivables
Trade receivables
Real estate 50,410,593 50,567,423 39,325,490 39,362,376
Nontrade receivables
Investment in bonds
classified as loans and
receivables 450,000 463,407 1,000,000 1,091,291
Receivable from officers
and employees 260,251 266,824 274,900 274,972
Total loans and receivables 51,120,844 51,297,654 40,600,390 40,728,639
Total other financial assets 61,504,459 61,681,269 58,973,671 59,101,920

AFS FINANCIAL ASSETS


Quoted equity investments 1,916,799 1,916,799 1,241,869 1,241,869
Unquoted equity investments 1,275,497 1,275,497 1,439,637 1,439,637
Quoted debt investments 239,919 239,919 103,301 103,301
Total AFS financial assets 3,432,215 3,432,215 2,784,807 2,784,807
Total financial assets P
= 64,936,674 P
= 65,113,484 P
= 61,758,478 P
= 61,884,318
FINANCIAL LIABILITIES AT
FVPL
Derivative liabilities
Freestanding P
= 4,755 P
= 4,755 P
= 1,803 P
= 1,803
Embedded – – 1,667 1,667
Total derivative liabilities P
= 4,755 P
= 4,755 P
= 3,470 P
= 3,470

OTHER FINANCIAL
LIABILITIES
Noncurrent other financial
liabilities
Service concession obligation 7,859,153 11,806,727 7,868,295 12,738,815
Other noncurrent liabilities 18,441,386 18,940,040 23,738,011 23,809,863
Long-term debt 226,999,015 276,149,199 178,027,343 186,432,252
Total other financial liabilities 253,299,554 306,895,966 209,633,649 222,980,930
Total financial liabilities P
= 253,304,309 P
= 306,900,721 P
= 209,637,119 P
= 222,984,400

The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such value:

Financial assets at FVPL - Fair values of investment securities are based on quoted prices as of
the reporting date. For other investment securities with no reliable measure of fair value, these
are carried at its last transaction price.

*SGVFS011298*
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Derivative instrument - The fair value of the freestanding currency forwards is based on
counterparty valuation. Derivative asset - The fair value is estimated using a modified stock price
binomial tree model for convertible callable bonds. The model involves a two-step process of
generating stock price paths over the life of the note, and subsequently computing for the
convertible bond value using an expected present value technique. The fair value of the derivative
asset is simply the difference in fair values of a straight note and the convertible callable note.
Significant assumptions and estimates used to compute for the value of the derivative asset are as
follows:

a. The stock price was calculated using standard equity valuation techniques, using both the
discounted free cash flows and market comparable approach.
b. Stock price volatility is derived from peers with traded shares.
c. Stock price was assumed to move in only two directions - up or down.
d. Credit spread was implied from current indicative rates given by creditor banks.

Noncurrent trade and nontrade receivables - The fair values are based on the discounted value of
future cash flows using the applicable rates for similar types of instruments. The discount rates
used ranged from 8.0% to 13.25% in 2014, in 0.23% to 13.25% 2013 and 0.30% to 13.25% in
2012.

AFS quoted debt and equity investments - Fair values are based on the quoted prices published in
markets.

AFS unquoted equity investments - Fair value of equity funds are based on the net asset value per
share. For other unquoted equity shares where the fair value is not reasonably determinable due
to the unpredictable nature of future cash flows and the lack of suitable method of arriving at a
reliable fair value, these are carried at cost less impairment, if any.

Customers’ deposits - non-current - The fair values are estimated using the discounted cash flow
methodology using the Group’s current incremental borrowing rates for similar borrowings with
maturities consistent with those remaining for the liability being valued. The discount rates used
for Peso-denominated loans were 1.82% to 6.13% in 2014 and 1.25% to 4.08% in 2013 while the
discount rates used for the foreign currency-denominated loans ranged 1.86% to 5.17% in 2014,
in 0.09% to 4.27% 2013 and 0.13% to 3.01% in 2012.

The fair value of noncurrent other financial liabilities (fixed rate and variable rate loans repriced on
a semi-annual/annual basis and deposits) are estimated using the discounted cash flow
methodology using the current incremental borrowing rates for similar borrowings with maturities
consistent with those remaining for the liability being valued. The discount rates used ranged from
0.02% to 12.26% in 2014, 0.23% to 6.16% in 2013 and 0.28% to 6.37% in 2012.

For variable rate loans that reprice every three months, the carrying value approximates the fair
value because of recent and regular repricing based on current market rates.

*SGVFS011298*
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The following table shows the fair value hierarchy of the Group’s assets and liabilities as at
December 31, 2014 and 2013 (amounts in thousands):
2014
Quoted
Prices in Significant Significant
Active Observable Unobservable
Markets Inputs Inputs
(Level 1) (Level 2) (Level 3) Total
Recurring financial assets measured
at fair value
Financial assets at FVPL P
=– P
= 5,607,838 P
= 4,766,942 P
= 10,374,780
Derivative assets
Embedded – – 8,835 8,835
AFS financial assets
Quoted equity investments 1,916,800 – – 1,916,800
Unquoted equity investments – 1,014,382 261,115 1,275,497
Quoted debt investments 239,919 – – 239,919
P
= 2,156,719 P
= 6,622,220 P
= 5,036,892 P
= 13,815,831
Recurring financial assets for which
fair values are disclosed:
Loans and receivables P
=– P
=– P
= 51,297,654 P
= 51,297,654
Recurring financial liabilities
measured at fair value
Derivative liabilities
Freestanding P
=– P
=– P
= 4,755 P
= 4,755
Recurring financial liabilities for which
fair values are disclosed:
Noncurrent other financial liabilities
Service concession obligation P
=– P
=– P
= 11,806,727 P
= 11,806,727
Other noncurrent liabilities – – 18,940,040 18,940,040
Long-term debt – – 276,149,199 276,149,199
P
=– P
=– P
= 306,895,966 P
= 306,895,966
Nonfinancial assets for which fair
values are disclosed:
Investments in associates and joint
ventures* P
= 182,213,103 P
=– P
=– P
= 182,213,103
Investment properties – – 234,471,109 234,471,109
P
= 182,213,103 P
=– P= 234,471,109 P
= 416,684,212
*Fair value of investments in listed associates and joint ventures for which there are published price quotations

2013
Significant Significant
Quoted Prices in Observable Unobservable
Active Markets Inputs Inputs
(Level 1) (Level 2) (Level 3) Total
Recurring financial assets measured
at fair value
Financial assets at FVPL P
=– P
= 12,799,097 P
= 5,117,416 P
= 17,916,513
Derivative assets
Embedded – – 456,768 456,768
AFS financial assets
Quoted equity investments 1,241,869 – – 1,241,869
Unquoted equity investments – 1,156,055 281,173 1,437,228
Quoted debt investments 103,301 – – 103,301
P
= 1,345,170 P
= 13,955,152 P
= 5,855,357 P
= 21,155,679
Recurring financial assets for which
fair values are disclosed:
Loans and receivables P
=– P
=– P
= 40,728,639 P
= 40,728,639

(Forward)

*SGVFS011298*
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Significant Significant
Quoted Prices in Observable Unobservable
Active Markets Inputs Inputs
(Level 1) (Level 2) (Level 3) Total
Recurring financial liabilities
measured at fair value
Derivative liabilities
Freestanding P
=– P
= 1,803 P
=– P
= 1,803
Embedded – – 1,667 1,667
P
=– P
= 1,803 P
= 1,667 P
= 3,470
Recurring financial liabilities for which
fair values are disclosed:
Noncurrent other financial liabilities
Service concession obligation P
=– P
=– P
= 12,738,815 P
= 12,738,815
Other noncurrent liabilities – – 23,809,863 23,809,863
Long-term debt – – 186,432,252 186,432,252
P
=– P
=– P
= 222,980,930 P
= 222,980,930
Non-recurring financial assets for
which fair values are disclosed:
Noncurrent assets held for sale P
=– P
=– P
= 3,328,712 P
= 3,328,712
Nonfinancial assets for which fair
values are disclosed:
Investments in associates and joint
ventures* P
= 157,782,802 P
=– P
=– P
= 157,782,802
Investment properties – – 232,927,400 232,927,400
P
= 157,782,802 P
=– P
= 232,927,400 P
= 390,710,202
*Fair value of investments in listed associates and joint ventures for which there are published price quotations

There was no change in the valuation techniques used by the Group in determining the fair market
value of the assets and liabilities.

There were no transfers between Level 1 and Level 2 fair value measurements, and no transfers
into and out of Level 3 fair value measurements.

A reconciliation of the beginning and closing balances of Level 3 financial assets at FVPL are
summarized below:

2014 2013
At January 1 P
= 5,855,357 P
= 3,988,597
Additions 1,380,725 1,702,033
Disposals/ redemptions (2,415,755) (451,939)
Recognized in statement of income 216,565 616,666
At December 31 P
= 5,036,892 P
= 5,855,357

Derivatives

2014 2013
Derivative Assets
Conversion option of AIVPL P
= 8,835 P
= 456,768

Derivative Liabilities
Conversion option of AIVPL P
= 4,755 P
= 1,604
Freestanding currency forwards of IMI – 1,803
P
= 4,755 P
= 3,407

*SGVFS011298*
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In 2014 and 2013, IMI entered into various short-term currency forwards with an aggregate
notional amount of US$17.0 million (P = 760.0 million) and US$37.0 million (P = 1,643.0 million),
respectively. As of December 31, 2014 and 2013, the outstanding forward contracts have a net
positive fair value of nil and US$0.04 million, respectively. Net fair value gains (loss) recognized in
2014, 2013 and 2012 amounted to US$0.3 (P = 13.0 million), (US$0.7) million (P
= 30.0 million)and nil,
respectively (see Note 23).

Embedded derivatives
MWC
P
= 10.0 Billion Notes Payable
MWC has an embedded call option on the P = 10.0 Billion Corporate Notes issued on April 8, 2011.
The embedded call option gives MWC the right to redeem all, but not in part, the outstanding
notes starting on the seventh anniversary. The amount payable to the holder in respect of such
redemptions shall be calculated based on the principal amount of the bonds being redeemed, as
the sum of 102% of the principal amount and accrued interest on the notes on the optional
redemption date. As of December 31, 2013, the option has been reassessed which resulted to
the option as clearly and closely related to the host contract since the amortized cost of the loan
approximates the prepayment at each option exercise date.

P
= 5.0 Billion Notes
MWC has an embedded call option on the P = 5.00 Billion Corporate Notes issued on
August 16, 2013. The embedded call option gives MWC the right to redeem all but not in part the
outstanding notes starting on the 3rd anniversary. The amount payable to the holder in respect of
such redemptions shall be calculated based on the principal amount of the bonds being
redeemed, as the sum of 102%-100.5% of the principal amount and accrued interest on the notes,
depending on the optional redemption date.

As of December 31, 2014, the option was assessed as clearly and closely related to the host
contract since the amortized cost of the loan approximates the prepayment at each option
exercise date. However, as of inception date, the value of the option is not material.

AIVPL Group
Note A
In conjunction with the transactions contemplated by the Subscription Agreement among the
Borrower, Lender and Actis, in February 2010, Integreon has settled $22.2 million of the total
outstanding notes receivables. Consequently, upon settlement of the notes, the marked to market
valuation amounting to $1.8 million, which had been recognized in prior years pertaining to the
convertible promissory notes of $7.3 million was reversed and charged to “Other expenses”
account. Simultaneously, Integreon has issued a new 14% one-year convertible promissory note
with a principal of $7.30 million. Certain provisions of the promissory note are as follows:

1. The lender has a conversion option, which set forth that the principal can be converted to
Class A-4 preferred shares, for a period of thirty (30) days beginning on the Final Maturity
Date at a price of US$55.9 per share.

2. The Borrower has the option to prepay the loan in full or in part together with the accrued
interest, which upon exercise shall annul the optional conversion option of the lender on the
extent of the principal paid.

On February 15, 2011, AIVPL, Integreon and Actis have approved amendments on the 14%
convertible note, with a principal amount of $7.3 million dated February 16, 2010, as follows:

a) The Final Maturity Date is extended to February 15, 2012 and if unpaid, interest shall continue
to accrue at the rate of 15% per annum until such time Integreon has settled the note.
b) The Optional Conversion Period shall be from February 16, 2011 through March 15, 2012.
c) The Lender has the right to exercise the Conversion Option as many times during the Optional
Conversion Period provided that Conversion amount shall not exceed the principal amount.

*SGVFS011298*
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As a result of the amendments made on the note, this effectively terminated the rights and
obligations of AIVPL associated with the loan. Thus, the derivative liability initially recognized on
February 16, 2010 expired. The amended note introduced new rights and these have been
recognized as derivative asset in the consolidated statement of financial position.

On July 15, 2012, AIVPL, Integreon and Actis have approved amendments on the 14% convertible
note, with a principal amount of $7.3 million dated February 16, 2010, as follows:

a) The Final Maturity Date is extended from February 15, 2012 to February 15, 2014;
b) The Borrower is liable for the principal sum of $7.3 million, plus accrued interest at the rate of
a) fourteen percent (14%) p.a. until February 15, 2012; and b) twelve percent (12%) p.a. from
February 16, 2012 until the Final Maturity Date.
c) The Optional Conversion Period shall be from February 15, 2014 through March 16, 2015.
d) The Lender has the option to extend the Final Maturity Date to a date that is one (1) year from
the immediately preceding Final Maturity Date. This option shall be exercised during the
Optional Conversion Period.

The abovementioned amendments to the note effectively terminated the rights and obligations of
AIVPL associated with the loan. The derivative asset initially recognized on February 16, 2011
has expired, and thus has been reversed. The amended note introduced new rights and these
have been recognized as derivative asset in the consolidated statement of financial position.

As of December 31, 2014 and 2013, the fair value of the compound embedded derivatives
representing the Conversion Option and the Term Extension Option amount to $0.2 million
(P
= 8.9 million) and $0.7 million (P
= 31.1 million), respectively.

Note B
On April 27, 2012, Stream issued a convertible promissory note to LIL Group (Lender) amounting
to $4.7 million, which bears interest of 10% p.a, compounded annually, calculated on the basis of
a 360-day year and actual days elapsed. The note will mature on April 29, 2013.

Certain provisions of the promissory note are as follows:

a) Conversion option - The Lender may elect at any time after the Maturity Date, upon delivery of
written notice to the Borrower, at least two (2) days prior to the date specified therein for
conversion, to convert the note to a number of units of membership interest in Stream,
determined by dividing the (i) the outstanding principal amount that has not been repaid,
together with all accrued and unpaid interest thereon, as of the date of conversion, by (ii) a
conversion price equal to $3.25 per unit, subject to certain adjustments.

b) Prepayment option - Stream has the option to prepay all (but not less than all) of the unpaid
principal balance of the Note, together with all accrued interest thereon and all other sums
payable thereunder.

*SGVFS011298*
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On April 19, 2013, Stream, LIL Group and certain holders of convertible promissory notes entered
in to an exchange agreement which the original convertible promissory notes issued on
April 27, 2012 was amended and restated into new convertible promissory notes dated
April 19, 2013. The new convertible promissory note issued to LIL Group amounting to
$4.72 million has the following amended provisions:

a) The Final Maturity Date is on April 29, 2014.


b) The Borrower is liable for the principal sum of $4.72 million, plus accrued interest commencing
on April 27, 2012 at the rate of 10% p.a. compounded annually, calculated on the basis of a
360-day year and actual days elapsed.
c) The Conversion price shall be equal to $325.0 per share, subject to certain adjustments.

Management has assessed that the prepayment option is clear and closely-related to the host
contract, thus has not been separately accounted for.

On the other hand, the conversion option is regarded as an embedded derivative for bifurcation.
Accordingly, the net positive fair value of the embedded derivative, which is presented as
derivative asset in the consolidated statement of financial position, amounted to $0.20 million (P =
8.9 million) and $10.3 million (P= 457.7 million) as of December 31, 2014 and 2013, respectively.
The related marked to market gain and interest income amounted to $0.2 million (P = 8.9 million) and
$0.1 million (P
= 4.0 million), respectively, in 2014 and $8.68 million (P
= 368.3 million) and $0.51
million (P
= 21.6 million), respectively, in 2013.

Fair Value Changes on Derivatives


The net movements in fair values of the Group’s derivative instruments as of December 31 follow
(amounts in thousands):

Derivative Assets

2014 2013
Balance at beginning of year P
= 456,768 P
= 184,276
Initial value of long call option 29 –
Net changes in fair value of derivatives 8,777 389,772
465,574 574,048
Fair value of settled instruments (456,739) (117,280)
Balance at end of year P
= 8,835 P
= 456,768

Derivative Liability

2014 2013
Balance at beginning of year P
= 3,470 P
=–
Net changes in fair value of derivatives 3,088 3,470
6,558 3,470
Fair value of settled instruments (1,803) –
Balance at end of year P
= 4,755 P
= 3,470

Net changes in fair value of derivative asets and liabilities was recognized in the consolidated
statement of income under “Other Income”. However, the net changes in fair value of IMI Group’s
freestanding currency forward are recognized in the consolidated statements of comprehensive
income under “Foreign exchange gains (losses)” (see Note 23).

*SGVFS011298*
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34. Notes to Consolidated Statements of Cash Flows

The Group’s noncash investing and financing activities are as follows:

2014
· In November 2013, the Parent Company acquired 37.6 million ADHI Class B common shares
for a total consideration of P
= 13.2 billion. Outstanding payable to DBS arising from this
transaction amounted to P = 3.3 billion
· Transfers from land and improvements to inventories amounted to P = 11.0 billion
· Transfer from inventories to property and equipment amounted to P = 138.8 million
· Transfers from investment properties to inventories amounted to P = 827.2 million
· Transfer from investment properties to property and equipment amounted to P = 2.3 million
· Transfers from property and equipment to other assets amounting P = 239.8 million
· Transfer from investment properties to other assets amounted to P = 8.6 million
· Transfer from prop erty and equipment to investment property amounting to P = 33.1 million in
2014;
· Transfer from other assets to property and equipment amounting to P = 274.4 million
· Transfer from land and improvements to other assets amounted to P = 100.3 million;
· Transfer from land and improvements to intercompany receivables amounted to P = 25.4 million;
· Contingent consideration for the purchase of KDW amounting to P = 90.2 million as of December
31, 2012.
· Capitalization of machinery and facilities equipment under finance lease amounted to
$3.77 million (P
= 168.6 million). Conversion of long-outstanding trade and nontrade receivables
of the IMI Company to Class A common stock amounting to $1.75 million (P = 78.3 million).

2013
· Conversion of subscription and advances of the Company from ACEHI amounting to
P
= 3.4 billion into 33.9 million common shares in 2013.
· In November 2013, the Company acquired 37.6 million ADHI Class B common shares for a
total consideration of P = 13.2 billion. Outstanding payable to ADHI arising from this transaction
amounted to P = 9.9 billion.
· LAWC’s payable to LTI amounting to P = 343.8 million representing 55% of the total purchase
price amounting to P = 625.0 million as of December 31, 2013.
· Noncontrolling interest in shares of subsidiary through business combination pertaining to
purchase of water assets from LTI amounting to P = 282.0 million.
· Capitalization of office equipment under finance lease amounting to P = 134.5 million.
· Transfers from land and improvements to inventories amounting to P = 14.7 billion.
· Transfers from land and improvements to investment properties amounting to P = 1.5 billion.
· Transfers from inventories to investment properties and property and equipment amounting to
P
= 26.1 million in 2013.
· Transfers from investment properties to property and equipment amounting to P = 157.4 million.
· Transfers from property and equipment to other assets amounting to P = 2.2 billion.

2012
· Conversion of subscription and advances from ACEHI amounting to P = 2.2 billion into 21.8
million common shares in 2012.
· In 2012, the Company acquired 309.3 million common shares of DBS in BPI and
15.0 million ADHI Class B common shares for a total consideration of P = 21.6 billion and
P
= 3.98 billion, respectively. As of December 31, 2013 and 2012, outstanding payable to DBS
amounted to P = 4.3 billion and P
= 12.8 billion, respectively. The decrease in accounts payable
and accrued expenses relating to this transaction were classified under investing activities.
· Conversion of receivable from BHL amounting to US$2.7 million (P = 110.8 million) into
0.3 million redeemable preferred shares in 2012.
· Subscription of the Company to 1.4 million common shares of AC Infra, which amounted to
P
= 140.0 million in 2012. The related amount is recorded under subscription payable.

*SGVFS011298*
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· In 2012, cash activity pertaining to service concession assets amounting to P = 907.8 million and
P
= 189.2 million were classified under investing and operating activities, respectively.
· Contingent consideration for the purchase of KDW amounting to P = 90.2 million as of
December 31, 2012 (see Note 12).
· Capitalization of office equipment under finance lease amounting to $32 million.
· Transfers from land and improvements to inventories amounting to P = 1.2 billion.
· Transfers from investment properties to inventories amounting to P = 116.1 million.
· Transfers from investment properties to property and equipment amounting to P = 96.1 million.
· Transfers from property and equipment to other assets amounting to P = 764.4 million.
· Other noncash items pertain to business combinations in 2012 and 2010 (see Note 24).

35. Interest in a Joint Operation

MDC has a 51% interest in Makati Development Corporation - First Balfour, Inc. Joint Venture (the
Joint Venture), a joint operation whose purpose is to design and build St. Luke’s Medical Center
(the Project) in Fort Bonifacio Global City, Taguig. The application of PFRS 11 does not have
significant impact on the Group’s accounting of its interest in a joint operation since it already
reported its share in interest in a joint operation using proportionate consolidation.

The Project, which started on January 31, 2007, is a world-class medical facility comprising, more
or less, of a 611-bed hospital and a 378-unit medical office building, with an approximate gross
floor area of 154,000 square meters, which meets international standards, and all standards and
guidelines of applicable regulatory codes of the Philippines and complies with the criteria of the
Environment of Care of the Joint Commission International Accreditation. The project was
completed on October 30, 2009. Activities in 2011 to 2013 mainly pertain to winding down
operations and punch listing works.

The share of MDC in the net assets and liabilities of the Joint Operation at December 31, 2014,
2013 and 2012 which are included in the consolidated financial statements follow:

2014 2013
(In Thousands)
Current assets:
Cash and cash equivalents P
= 46,557 P
= 65,045
Other current assets 47,205 51,698
Total assets P
= 93,672 P
= 116,743
Total liabilities P
= 10,866 P
= 18,986

The following is the share of the MDC on the net income of the Joint Venture:

2014 2013 2012


(In Thousands)
Revenue from construction contracts P
=– P
=– P
=–
Contract costs (22,440) (1,031) (994)
Interest and other income 6,513 946 1,175
Income (loss) before income tax (15,927) (85) 181
Provision for income tax (51) 85 (181)
Net loss (P
= 15,978) P
=– P
=–

Provision for income tax pertains to the final tax on interest income.

*SGVFS011298*
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36. Commitments

The Company acted as guarantor to AYCFL’s term loans and credit facilities as follows:

2014 2013
Amount
drawn as of
December 31, Outstanding balance as of
Description of Facility Date Contracted 2014 December 31
(Amounts in thousands)
US$229.2 million transferable
term loan facility December 16, 2010 US$229,200 US$229,200 US$229,200
US$150 million transferable
term loan facility March 28, 2011 150,000 150,000 50,000
US$20.0 million revolving
credit facility September 28, 2012 20,000 20,000 –
US$225 million transferable
term loan facility November 28, 2013 225,000 225,000 –
US$100 million transferable
loan facility March 28, 2014 Undrawn – –
US$200 million term loan
facility May 9, 2014 Undrawn – –
US$624,200 US$279,200

The Company unconditionally guaranteed the due and punctual payment of advances if, for any
reason AYCFL does not make timely payment. The Company waived all rights of subrogation,
contribution, and claims of prior exhaustion of remedies. The Company’s obligation as guarantor
will remain in full force until no sum remains to be lent by the lenders, and the lenders recover the
advances.

On May 2, 2014, AYCFL issued at face US$300.0 million Exchangeable Bonds (the Bonds) due
on May 2, 2019 with a fixed coupon rate of 0.5% per annum, payable semi-annually. The Bonds
are guaranteed by the Company and constitute direct, unsubordinated, unconditional and
unsecured obligations of AYCFL, ranking pari passu and without any preference or priority among
themselves. The Bonds were listed in the Singapore Stock Exchange and include features such
as exchange option, put option and early redemption options.

On January 24, 2014, the Company issued promissory note to BPI amounting to P = 8.0 billion. The
loan under this note (including interest, charges, and those taxes for which the Company is liable
under the terms of Loan Agreement) was secured by an assignment of deposits belonging to
AYCFL (the Assignor). For this purpose, the Assignor, cedes, transfers and conveys unto the
Bank, its successors and assigns, by way of assignment, all of the rights, titles and interests of the
Assignor on and over these deposits. The Assignor, while the obligations secured remain
outstanding, shall not withdraw and shall keep renewed for the term of the Note the Assigned
Deposits.

ALI Group
On October 16, 2009, ALI executed a lease agreement with the Subic Bay Metropolitan Authority
(SBMA), for the development of a 7.5-hectare property along Rizal Highway within the Subic Bay
Freeport Zone, located between the two main gates linking the Freeport Zone to Olongapo City.
The lease commitment is expected to be completed in 2060 after the 50-year lease term. The
lease may be renewed for another 25 years upon mutual agreement of the parties. ALI offered to
develop a mall with an estimated gross leasable area of 38,000 square meters.

On March 25, 2010, ALI entered into an assignment of lease agreement whereby ALI assigned its
rights and obligations granted to or imposed under the lease agreement to its subsidiary, SBTCI.
The lease payments to SBMA started from the commencement of the commercial operation of the
mall last April 26, 2012, which was completed during the same period.

*SGVFS011298*
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ALI has an existing contract with Bases Conversion and Development Authority (BCDA) to
develop, under a lease agreement signed in July 2000, a mall with an estimated gross leasable
area of 152,000 square meters on a 9.8-hectare lot inside Fort Bonifacio. The lease agreement
covers 15 years, renewable for another 25 years subject to reappraisal of the lot at market value.
The annual fixed lease rental amounts to P= 106.5 million while the variable rent ranges from 5.0%
to 20.0% of gross revenues. Subsequently, ALI transferred its rights and obligations granted to or
imposed under the lease agreement to Station Square East Commercial Corporation (SSECC), in
exchange for equity. As part of the bid requirement, ALI procured a performance bond in 2003
from the Government Service Insurance System in favor of BCDA amounting to P = 3.9 billion to
guarantee the committed capital to BCDA. Moreover, SSECC obtained stand-by letters of credit
to guarantee the payment of the fixed and variable rent as prescribed in the lease agreement.

MDC, in the normal course of business, furnishes performance bonds in connection with its
construction projects. These bonds shall guarantee MDC’s execution and completion of the work
indicated in the respective construction contracts.

On October 18, 2010, ALI undertook to cause the planning, developing and construction of
Anvaya Golf and Sports Club, Inc.’s leisure and recreational facilities. ALI was able to deliver the
committed facilities and Anvaya Golf and Sports Club officialy opened its doors to its members on
December 7, 2013.

Parent Company’s Concession Agreement


In 2012, the Company entered into a concession agreement with the DPWH to finance, design,
construct, operate and maintain the Daang Hari - SLEX Link Road (the Project). Under the
concession agreement, the Company will:

a. Purchase the advance works on Segment I of the Project from Alabang - Sto. Tomas
Development, Inc. and finance and construct the remaining works thereof;
b. Finance, design, and construct Segment II of the Project;
c. Undertake the operations and maintenance of the Project;
d. Impose and collect tolls from the users of the Project; and
e. Grant business concessions and charge and collect fees for non-toll user related facilities and
toll user related facilities situated in the Project.

The Company is authorized to adjust the toll rates once every two years in accordance with a
prescribed computation as set out in the concession agreement and upon compliance with the
rules and regulations on toll rate implementation as issued or may be issued by the Toll
Regulatory Board.

In the event that the Company is disallowed from charging and collecting the authorized amounts
of the toll rates as prescribed in the concession agreement from the users of the Project, the
Company shall be entitled to either of the following:

a. Compensation from the DPWH of the toll income forgone by the Company which shall be
calculated based on a prescribed computation under the concession agreement.
b. Extension of the concession period to compensate the Company for the forgone toll income
which shall be mutually agreed by the Company and the DPWH.

The Company shall pay the DPWH an amount equal to 5% of all gross revenues arising from non-
toll user and toll user related facilities situated within the Project.

The concession period shall commence on the date of the issuance of the Notice to Proceed with
Segment II and shall end on the date that is 30 years thereafter, unless otherwise extended or
terminated in accordance with the concession agreement. Any extension of the concession period
shall in no event be beyond 50 years after the date of the issuance of the Notice to Proceed with
Segment II.

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As of December 31, 2014 and 2013, the Company’s capital commitment for construction of
service concession asset amounted to P
= 470.0 million and P
= 665.8 million, respectively.

MWC Group
MWC’s Concession Agreement (the “Agreement”)
The significant commitments of MWC under the Agreement and Extension are as follows:

a. To pay MWSS concession fees;

b. To post a performance bond, bank guarantee or other security acceptable to MWSS


amounting to US$70.0 million in favor of MWSS as a bond for the full and prompt performance
of MWC’s obligations under the Agreement. The aggregate amounts drawable in one or more
installments under such performance bond during the Rate Rebasing Period to which it relates
are set out below.

Aggregate amount drawable


under performance bond
Rate Rebasing Period (in US$ millions)
First (August 1, 1997 - December 31, 2002) US$70.0
Second (January 1, 2003 - December 31, 2007) 70.0
Third (January 1, 2008 - December 31, 2012) 60.0
Fourth (January 1, 2013 - December 31, 2017) 60.0
Fifth (January 1, 2018 - December 31, 2022) 50.0
Sixth (January 1, 2013 - December 31, 2027) 50.0
Seventh (January 1, 2028 - December 31, 2032) 50.0
Eighth (January 1, 2033 - May 6, 2037) 50.0

Within 30 days from the commencement of each renewal date, MWC shall cause the
performance bond to be reinstated in the full amount set forth above as applicable for that
year.

Upon not less than 10-day written notice to MWC, MWSS may make one or more drawings
under the performance bond relating to a Rate Rebasing Period to cover amounts due to
MWSS during that period; provided, however, that no such drawing shall be made in respect
of any claim that has been submitted to the Appeals Panel for adjudication until the Appeals
Panel has handed down its decision on the matter.

In the event that any amount payable to MWSS by MWC is not paid when due, such amount
shall accrue interest at a rate equal to that of a 364-day Treasury Bill for each day it remains
unpaid;

c. With the Extension, MWC agreed to increase its annual share in MWSS operating budget by
100% from P= 100.0 million to P
= 395.0 million, subject to annual CPI;

d. To meet certain specific commitments in respect of the provision of water and sewerage
services in the East Zone, unless deferred by MWSS-RO due to unforeseen circumstances or
modified as a result of rate rebasing exercise;

e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner


consistent with the National Building Standards and best industrial practices so that, at all
times, the water and sewerage system in the East Zone is capable of meeting the service
obligations (as such obligations may be revised from time to time by the MWSS-RO following
consultation with MWC);

f. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect
public health or welfare, or cause damage to persons or third party property;

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g. To ensure that at all times, MWC has sufficient financial, material and personnel resources
available to meet its obligations under the Agreement; and

h. To ensure that no debt or liability that would mature after the life of the Agreement will be
incurred unless with the approval of MWSS.

Failure of MWC to perform any of its obligations that is deemed material by MWSS-RO may cause
the Agreement to be terminated.

In March 2012, MWC submitted to MWSS a business plan embodying its rate rebasing proposal
for charging year 2013. MWCC conducted a review of the proposal including MWC’s last five (5)
years financial performance. The financial review process extended up to the third quarter of
2013. On September 10, 2013, MWSS-RO issued Resolution No. 13-09-CA providing for the
MWSS rate rebasing negative adjustment of negative 29.47% to MWC’s 2012 average basic
water charge of P = 24.57 per cubic meter. The adjustment shall be implemented in 5 equal
tranches of negative 5.9% per charging year. MWC objected to MWSS’ Rate Rebasing
determination and formally filed its Dispute Notice on September 24, 2013, before a duly-
constituted Appeals Panel, commencing the arbitration process as provided under Section 12 (in
relation to Section 9.4 of the Concession Agreement).

On December 10, 2013, the MWSS Board of Trustees thru R.O. Resolution No. 13-012 CA,
approved the implementation of a Status Quo for MWC’s Standard Rates and FCDA, until such
time that the Appeals Panel has rendered a final award for the 2013 Rate Rebasing determination.

On December 17, 2014, the MWSS Board of Trustees approved the implementation of an FCDA
adjustment of P = 0.36 per cubic meter based on the exchange rates of USD1:P= 44.80 and
JPY1:P = 0.42 which was published on December 31, 2014 and took effect 15 days after its
publication. The FCDA component of the water bill will be adjusted to 1.32% of the basic charge
in the first quarter of 2015. The FCDA has no impact on the projected net income of MWC.

As of March 10, 2015, MWC continues to implement the current standard rates pending the final
award of the Arbitration Panel.

LAWC’s Concession Agreement


The significant commitments of LAWC under its concession agreement with POL are as follows:

a. To pay POL concession fees;

b. To manage, occupy, operate, repair, maintain, decommission, and refurbish the transferred
facilities;

c. To design, construct and commission the new facilities during the cooperation period;

d. To provide and manage the services;

e. To bill and collect payment from the customer for all services;

f. To extract raw water exclusively from all sources of raw water; and

g. To negotiate in good faith with POL any amendment or supplement to the concession
agreement to establish, operate and maintain wastewater facilities if doing such is financially
and economically feasible.

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BIWC’s Concession Agreement


The significant commitments of BIWC under its concession agreement with TIEZA are as follows:

a. To meet certain commitments in respect of the provision of water and sewerage services in
the service area, unless deferred by the TIEZA Regulatory Office (TIEZA-RO) due to
unforeseen circumstances or modified as a result of rate rebasing exercise;

b. To pay concession fees, subject to the following provisions:


i. Assumption of all liabilities of the BWSS as of Commencement Date and service such
liabilities as they fall due. BWSS has jurisdiction, supervision and control over all
waterworks and sewerage systems within the Boracay island prior to commencement
date. The servicing of such liabilities shall be applied to the concession fees;

ii. Payment of an amount equivalent to 5.0% of the monthly gross revenue of BIWC,
inclusive of all applicable taxes. Such payments shall be subject to adjustment based
on the gross revenue of BIWC as reflected in its separate financial statements;

iii. Provision of the amount of the TIEZA BOD’s approved budget in 2012, payable in
semi-annual installments at the first month of each quarter and not exceeding:

Month Maximum Amount


January P
= 10,000,000
July 10,000,000

iv. Provision of the annual operating budget of the TIEZA-RO, payable in 2 equal
tranches in January and July and not exceeding:

Year Maximum Amount


2011 P
= 15,000,000
2012 20,000,000
2013 and beyond 20,000,000, subject to annual
CPI adjustments

c. To establish, at Boracay Island, a TIEZA-RO building with staff house, the cost of which
should be reasonable and prudent;

d. To pay an incentive fee pegged at P


= 1.00 per tourist, local and foreign, entering the service
area;

e. To raise financing for the improvement and expansion of the BWSS water and wastewater
facilities;

f. To operate, maintain, repair, improve, renew and as appropriate, decommission facilities, as


well as to operate and maintain the drainage system upon its completion, in a manner
consistent with the National Building Standards and best industrial practices so that, at all
times, the water and sewerage system in the service area is capable of meeting the service
obligations (as such obligations may be revised from time to time by the TIEZA-RO following
consultation with BIWC);

g. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect
public health or welfare, or cause damage to persons or third party property; and

h. To ensure that at all times, BIWC has sufficient financial, material and personnel resources
available to meet its obligations under the Agreement.

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In addition, MWC, as the main proponent of BIWC, shall post a bank security in the amount of
US$2.5 million to secure MWC’s and BIWC’s performance of their respective obligations under the
agreement. The amount of the performance security shall be reduced by MWC following the
schedule below:

Amount of
Performance Security
Rate Rebasing Period (in US$ millions)
First US$2.5
Second 2.5
Third 1.1
Fourth 1.1
Fifth 1.1

On or before the start of each year, BIWC shall cause the performance security to be reinstated in
the full amount set forth as applicable for that year.

Upon not less than 10 days written notice to BIWC, TIEZA may take one or more drawings under
the performance security relating to a Rate Rebasing Period to cover amounts due to TIEZA
during that period; provided, however, that no such drawing shall be made in respect of any claim
that has been submitted to the Arbitration Panel for adjudication until the Arbitration Panel has
handed its decision on the matter.

In the event that any amount payable to TIEZA by BIWC is not paid when due, such amount shall
accrue interest at a rate equal to that of a 364-day Treasury Bill for each day it remains unpaid.

Failure of BIWC to perform any of its obligations that is deemed material by TIEZA-RO may cause
the concession agreement to be terminated.

Under its concession agreement, BIWC is entitled to the following rate adjustments:

a. Annual standard rate adjustment to compensate for increases in the consumer price index
(CPI);

b. EPA to account for the financial consequences of the occurrence of certain unforeseen events
stipulated in the Agreement; and

c. FCDA to recover foreign exchange losses including accruals and carrying costs thereof arising
from TIEZA loans and any loans used for capital expenditures and concession fee payments.

These rate adjustments are subject to a rate adjustment limit which is equivalent to the sum of CPI
published in the Philippines, EPA and Rebasing Convergence adjustment as defined in BIWC’s
concession agreement.

The rate rebasing date is set every 5 years starting January 1, 2011. Hence, the first rate
rebasing period shall commence on January 1, 2010 and end on December 31, 2010, and in the
case of subsequent rate rebasing periods, the period commencing on the last rate rebasing date
and ending on December 31 of the fifth year thereafter. No rate rebasing transpired on January 1,
2011.

BIWC requested for the deferment of the rate rebasing since it was not able to commence
operations in June 2009, as originally planned, because the SEC required the Company to seek
conformity from the Department of Finance before it could be incorporated.

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In January 2013, TIEZA approved the new tariff adjustment for BIWC which is equivalent to an
increase from its existing rates of 35.0% to be implemented on a staggered basis for a period of
four years with 10.1% increase in 2013; 9.2% for 2014; 8.4% in 2015; and 7.8% in 2016, effective
February 1, 2013.

For 2013 and 2014, only the approved rate rebasing adjustment was implemented while the CPI
adjustment was deferred due to economic considerations relative to the first time adjustment and
natural calamities in 2013.

Technical services agreement


Simultaneous with the execution of BIWC’s concession agreement, BIWC and MWC executed a
Technical Services Agreement by which MWC is being paid by BIWC a technical services fee
equivalent to 4% of the annual gross revenue of BIWC, for rendering the following services to
BIWC:

a. Financial management, including billing and collection services, accounting methods and
financial control devices; and

b. Operations and project management, including facility operations and maintenance, and
infrastructure project management.

CWC’s Concession Agreement


The significant commitments of CWC under its concession agreement with CDC are follows:

a. To pay franchise and rental fees of CDC;

b. Finance, design, and construct the New Facilities - defined as any improvement and extension
works to (i) all Existing Facilities - defined as all fixed and movable assets specifically listed in
the Concession Agreement; (ii) the Construction Work - defined as the scope of construction
work set out in the Concession Agreement; and (iii) other new works that do not constitute
refurbishment or repair of Existing Facilities undertaken after the commencement date;

c. Manage, exclusively possess, occupy, operate, repair, maintain, decommission and refurbish
the Existing Facilities, except for the private deep wells set out in the Concession Agreement,
the negotiations for the acquisition and control of which shall be the sole responsibility and for
the account of the Company; and manage, own, operate, repair, maintain, decommission and
refurbish the New Facilities;

d. Treat raw water and wastewater in CSEZ;

e. Provide and manage all water and wastewater related services (the Services) like assisting
locator on relocating of pipes and assess internal leaks;

f. Bill and collect payment from the customers for the services (with the exception of SM City
Clark). SM City Clark has been carved out by virtue of Republic Act 9400 effective 2007 even
if it is located within the franchise area; and

g. Extract raw water exclusively from all sources of raw water including all catchment areas,
watersheds, springs, wells and reservoirs in CFZ free of charge by CDC.

On August 15, 2014, the CWC and CDC signed an amendment agreement to the CA dated
March 16, 2000. The Amendment provides for the following:
· Extension of the original concession period for another 15 years up to October 1, 2040;
· Additional investment of P= 4.00 billion provided under the amended CA to be spent for
further improvement and expansion water and waste water services in the area.
Investment requirement under the original CA amounted to P = 3.00 billion;
· Introduction of rate rebasing mechanism for every four years starting 2014;

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· Reduction in tariff rates by 3.9% (from Php25.63/m3 to Php24.63/m3) effective


September 1, 2014 with no tariff change until 2017, subject to the Extraordinary Price
Adjustment; and
· Increase in tariff rates by:
· P = 0.41 (from Php24.63/m3 to Php25.04/m3 ) in 2018
· P = 0.42 (from Php25.04/m3 to Php25.45/m3 ) in 2019
· P = 0.42 (from Php25.45/m3 to Php25.87/m3 ) in 2020
· P = 0.43 (from Php25.87/m3 to Php26.30/m3 ) in 2021

As a result of the extension of the concession period, service concession assets and service
concession obligation as of August 15, 2014 increased by P = 56.6 million. Further, the recovery
period of the Company’s investment is now extended by another 15 years from 2025 to 2040.

MWC Management Contracts

Vietnam Project
On July 22, 2008, MWC entered into a Performance-Based Leakage Reduction and Management
Services Contract with Saigon Water Corporation. The contract involves the following
components:

a. General requirements;
b. District Metering Area establishment;
c. Leakage reduction and management services;
d. System expansion work;
d. Emergency and unforseen works; and
e. Daywork schedule.

In 2014, 2013 and 2012, total revenue from the Vietnam Project amounted to P = 25.5 million,
P
= 174.9 million and P
= 169.5 million, respectively. Total costs related to the Vietnam Project
amounted to P = 54.3 million, P
= 96.2 million and P
= 124.5 million in 2014, 2013 and 2012, respectively.

MWC contracts with the Maynilad Water Services, Inc. (Maynilad)

In relation to the Concession Agreement with MWSS, MWC entered into the following contracts
with Maynilad:

a. Interconnection Agreement wherein the two Concessionaires shall form an unincorporated


joint venture that will manage, operate, and maintain interconnection facilities. The terms of
the agreement provide, among others, the cost and the volume of water to be transferred
between zones.

b. Joint Venture Arrangement that will operate, maintain, renew, and as appropriate,
decommission common purpose facilities, and perform other functions pursuant to and in
accordance with the provisions of the Agreement and perform such other functions relating to
the concession (and the concession of the West Zone Concessionaire) as the
Concessionaires may choose to delegate to the joint venture, subject to the approval of
MWSS.

c. In March 2010, MWSS entered into a loan agreement with The Export-Import Bank of China to
finance the Angat Water Utilization and Aqueduct Improvement Project Phase II (the
Project). Total loan facility is US$116.6 million with maturity of 20 years including 5 years
grace period. Interest rate is 3% per annum. MWSS then entered into a Memorandum of
Agreement with MWC and Maynilad for MWC and Maynilad to shoulder equally the repayment
of the loan, to be part of the concession fees.

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ACEHI

On December 23, 2014, ACEHI entered into an Equity Contribution Agreement with GNPK,
Citicorp International Limited in its capacity as offshore collateral agent and certain other parties,
whereby ACEHI agreed to provide its proportionate share in the equity required for the
construction of the Kauswagan Power Plant Project. On even date, the Company, ACEHI and
Citicorp International Limited, in its capacity as Offshore Collateral Agent for the secured parties,
signed an equity subscription undertaking whereby the Company agreed to make timely capital
subscriptions of up to US$281 million into ACEHI under the subscription agreement as and when
required thereunder to support ACEHI’s commitments under the Equity Contribution Agreement.

On December 22, 2014, ACEHI and GNPK executed a Contract of Lease and Access Agreement
for certain parcels of land in Kasuwagan, Lanao del Norte with an area of approximately 608,642
square meters.. The lease is for 50 years and payments will start in 2015.

On December 23, 2014, the Kauswagan Power Holding Limited Partnership Agreement (KPHLC
LPA) and GNPower Kauswagan Limited Partnersip Agreement (GNPK LPA) were amended to
facilitate the subscription by PINAI investors for the Class C limited partnership interest in KPHLC
and Class B interests in GNPK. Total aggregate committed capital of PINAI and ACEHI per LPA
will be up to US$110.0 million and US$281.0 million, respectively.

AC Infra
Investment commitment in LRT 1 and AFCS projects
As of December 31, 2014, AC Infra’s total equity investment commitment for the LRT 1 and AFCS
projects amounts to ₱8.5 billion and ₱500.0 million, respectively.

37. Contingencies

The Group has various contingent liabilities arising in the ordinary conduct of business which are
either pending decision by the courts or being contested, the outcome of which are not presently
determinable.

In the opinion of the Group’s management and its legal counsel, the eventual liability under these
lawsuits or claims, if any, will not have a material or adverse effect on the Group’s financial
position and results of operations.

MWC
On October 13, 2005, the Municipality of Norzagaray, Bulacan jointly assessed MWC and
Maynilad Water Services, Inc. (jointly, the “Concessionaires”) for real property taxes on certain
common purpose facilities registered in the name of and owned by MWSS purportedly due from
1998 to 2005 amounting to P= 955.3 million. On November 15, 2010, the local government of
Quezon City demanded the payment of P = 302.7 million for deficiency real property taxes from
MWSS on MWSS properties within its territorial jurisdiction. The assessments from the
municipality of Norzagaray and local government of Quezon City have been questioned by the
Concessionaires and MWSS, and are pending resolution before the Central Board of Assessment
Appeals and Suprement Court, respectively.

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38. Assets Held in Trust

MWSS
MWC is granted the right to operate, maintain in good working order, repair, decommission and
refurbish the movable property required to provide the water and sewerage services under the
Agreement. The legal title to all movable property in existence at the Commencement Date,
however, shall be retained by MWSS and upon expiration of the useful life of any such movable
property as may be determined by MWC, such movable property shall be returned to MWSS in its
then-current condition at no charge to MWSS or MWC.

The Agreement also provides for the Concessionaires to have equal access to MWSS facilities
involved in the provision of water supply and sewerage services in both East and West Zones
including, but not limited to, the MWSS management information system, billing system, telemetry
system, central control room and central records.

The net book value of the facilities transferred to MWC on Commencement Date based on MWSS’
closing audit report amounted to P = 4.6 billion with a sound value of P
= 10.4 billion.

A re-appraisal of the MWSS facilities mentioned above as of December 31, 2004 was conducted
by Cuervo Appraisers. The final appraisal report was submitted last November 2006 showing a
total reproduction cost of P
= 27.0 billion with a sound value of P
= 17.2 billion.

In 2009, MWC engaged the services of Cuervo Appraisers to conduct a re-appraisal of the MWSS
assets on record as of December 31, 2008. Total reproduction cost as of December 31, 2008
amounted to P= 37.7 billion with a sound value of P
= 22.9 billion.

MWSS’ corporate headquarters is made available to the Concessionaires starting August 1, 1997,
subject to periodic renewal by mutual agreement of the parties. On October 27, 2006, MWC has
renewed the lease for 5 years, with expiry of October 27, 2011. Rent expense amounted to
P
= 17.0 million and P = 19.8 million in 2013 and 2012, respectively. These are included under “Rental
and utilities” in the consolidated statement of income.

POL
LAWC is granted the right to manage, occupy, operate, repair, maintain, decommission and
refurbish the property required to provide water services under its concession agreement with
POL. The legal title of all property in existence at the commencement date shall be retained by
POL. Upon expiration of the useful life of any such property as may be determined by LAWC,
such property shall be returned to POL in its then condition at no charge to POL or LAWC.

In 2011, LAWC engaged the services of Cuervo Appraisers to conduct a re-appraisal of POL
assets on record as of December 31, 2010. Total reproduction cost as of December 31, 2010
amounted to P= 434.5 million with a sound value of P
= 205.9 million.

TIEZA
BIWC is granted the right to operate, maintain in good working order, repair, decommission and
refurbish the movable property required to provide the water and sewerage services under the
Agreement. The legal title to all movable property in existence at the commencement date,
however, shall be retained by TIEZA and upon expiration of the useful life of any such movable
property as may be determined by MWC, such movable property shall be returned to TIEZA in its
then-current condition at no charge to TIEZA or MWC.

The net book value of the facilities transferred to MWC on commencement date based on TIEZA’s
closing audit report amounted to P = 618.3 million.

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CDC
CWC is granted the right to occupy, operate, repair, maintain, decommission and refurbish all
fixed and movable assets specifically listed in the concession agreement with CDC. Any new
construction, change, alteration, addition or improvement on the facilities is permitted to the extent
allowed under the agreement with CDC or with the prior written consent of CDC. Legal title, free of
all liens and encumbrances, to improvements made or introduced by CWC on the facilities as well
as title to new facilities procured by CWC in the performance of its obligations under the
concession agreement shall automatically pass to CDC on the date when the concession period
expires or the date of receipt of a validly served termination notice, in the latter case, subject to
payment of the amount due as termination payments as defined in the concession agreement.

The net book value of the facilities transferred to CWC on commencement date based on CDC’s
closing audit report amounted to P = 1.4 billion.

39. Renewable Energy Act of 2008

Republic Act No. 9513, An Act Promoting the Development, Utilization and Commercialization of
Renewable Energy Resources and for Other Purposes, which shall be known as the “Renewable
Energy Act of 2008” (the Act), became effective on January 30, 2009. The Act aims to:
(a) accelerate the exploration and development of renewable energy resources such as, but not
limited to, biomass, solar, wind, hydro, geothermal and ocean energy sources, including hybrid
systems, to achieve energy self-reliance, through the adoption of sustainable energy development
strategies to reduce the country’s dependence on fossil fuels and thereby minimize the country’s
exposure to price fluctuations in the international markets, the effects of which spiral down to
almost all sectors of the economy; (b) increase the utilization of renewable energy by
institutionalizing the development of national and local capabilities in the use of renewable energy
systems,and promoting its efficient and cost-effective commercial application by providing fiscal
and non-fiscal incentives; (c) encourage the development and utilization of renewable energy
resources as tools to effectively prevent or reduce harmful emissions and thereby balance the
goals of economic growth and development with the protection of health and environment; (d)
establish the necessary infrastructure and mechanism to carry out mandates specified in the Act
and other laws.

As provided for in the Act, Renewable Energy (RE) developers of RE facilities, including hybrid
systems, in proportion to and to the extent of the RE component, for both power and non-power
applications, as duly certified by the Department of Energy (DOE), in consultation with the Board
of Investments, shall be entitled to the following incentives, among others:

i. Income Tax Holiday (ITH) - For the first seven (7) years of its commercial operations, the duly
registered RE developer shall be exempt from income taxes levied by the National
Government;

ii. Duty-free Importation of RE Machinery, Equipment and Materials - Within the first ten (10)
years upon issuance of a certification of an RE developer, the importation of machinery and
equipment, and materials and parts thereof, including control and communication equipment,
shall not be subject to tariff duties;

iii. Special Realty Tax Rates on Equipment and Machinery - Any law to the contrary
notwithstanding, realty and other taxes on civil works, equipment, machinery, and other
improvements of a registered RE developer actually and exclusively used for RE facilities shall
not exceed 1.5% of their original cost less accumulated normal depreciation or net book value;

iv. NOLCO - the NOLCO of the RE developer during the first three (3) years from the start of
commercial operation which had not been previously offset as deduction from gross income
shall be carried over as deduction from gross income for the next seven (7) consecutive
taxable years immediately following the year of such loss;

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v. Corporate Tax Rate - After seven (7) years of ITH, all RE developers shall pay a corporate tax
of 10% on its net taxable income as defined in the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337;

vi. Accelerated Depreciation - If, and only if, an RE project fails to receive an ITH before full
operation, it may apply for accelerated depreciation in its tax books and be taxed based on
such;

vii. Zero Percent VAT Rate - The sale of fuel or power generated from renewable sources of
energy shall be subject to 0% VAT;

viii. Cash Incentive of RE Developers for Missionary Electrification - An RE developer, established


after the effectivity of the Act, shall be entitled to a cash generation-based incentive per
kilowatt-hour rate generated, equivalent to 50% of the universal charge for power needed to
service missionary areas where it operates the same;

ix. Tax Exemption of Carbon Credits - All proceeds from the sale of carbon emission credits shall
be exempt from any and all taxes; and

x. Tax Credit on Domestic Capital Equipment and Services - A tax credit equivalent to 100% of
the value of the value-added tax and customs duties that would have been paid on the RE
machinery, equipment, materials and parts had these items been imported shall be given to
an RE operating contract holder who purchases machinery, equipment, materials, and parts
from a domestic manufacturer for purposes set forth in the Act.

In addition, to accelerate the development of emerging renewable energy resources, a feed-in tariff
system for electricity produced from wind, solar, ocean, run-of-river hydropower and biomass will
be promulgated which shall include, but not limited to, the following:

a. Priority connections to the grid for electricity generated from emerging renewable energy
resources;
b. The priority purchase and transmission of, and payment for, such electricity by the grid system
operators; and
c. Determine the fixed tariff to be paid to electricity produced from each type of emerging
renewable energy and the mandated number of years for the application of these rates, which
shall not be less than twelve (12) years.

The feed-in tariff to be set shall be applied to the emerging renewable energy to be used in
compliance with the renewable portfolio standard as provided for in the Act and in accordance with
the feed-in-tariff rules to be promulgated by the Energy Regulatory Commission (ERC) in
consultations with the National Renewable Energy Board. On July 27, 2012, ERC approved the
feed-in tariff of 8.53 kilowatt per hour (kWh) for wind renewable energy resource. The approved
subsidy will be reviewed and readjusted, if necessary, after its three-year initial implementation or
when the target installed capacity for each renewable resource set by the DOE has been met.

RE developers and local manufacturers, fabricators and suppliers of locally-produced RE


equipment shall register with the DOE, through the Renewable Energy Management Bureau
(REMB). Upon registration, a certification shall be issued to each RE developer and local
manufacturer, fabricator and supplier of locally-produced renewable energy equipment to serve as
the basis of their entitlement to the incentives provided for in the Act. All certifications required to
qualify RE developers to avail of the incentives provided for under the Act shall be issued by the
DOE through the REMB.

*SGVFS011298*
- 169 -

Within six (6) months from the effectivity of the Act, the DOE shall, in consultation with the Senate
and House of Representatives Committee on Energy, relevant government agencies and RE
stakeholders, promulgate the Implementing Rules and Regulations of the Act. On May 25, 2009,
the DOE issued the Implementing Rules and Regulations of the Act which became effective on
June 12, 2009.

ACEHI and its subsidiaries expect that the Act will impact their future operations and financial
results. The impact of the Act will be disclosed as the need arises.

Northwind
On January 18, 2010, Northwind filed its intent with the REMB for the conversion of its Negotiated
Commercial Contract into Wind Energy Service Contract and Registration as RE Developer as
provided for under the Act. On November 9, 2010, the DOE issued a Provisional Certificate of
Registration as an RE Developer in favor of Northwind, subject to negotiation and execution of a
Wind Energy Service Contract to replace the Negotiated Commercial Contract.

On April 6, 2011, Northwind filed with the ERC an application for a Feed-In Tariff (FiT). The FiT
will provide for a fixed rate per kilowatt of electricity produced over a period of fifteen years. On
June 6, 2011, the ERC granted Northwind a provisional FiT rate of P = 9.30 per kilowatt hour which
shall be effective and collected only upon the final approval of the FiT for emerging renewable
energy technologies, specifically for wind energy.

On October 10, 2014, the DOE granted Northwind a Certificate of Endorsement for Feed-In Tariff
(FIT) Eligibility (COE-FIT No. 2014-10-001) for its Phase III expansion project. The endorsement
qualifies the Phase III expansion under the FIT System and accordingly, will be granted the
national FIT for wind projects amounting to 8.53/kWh. The endorsement shall be the basis for the
Energy Regulatory Commission (ERC) to issue a FIT Certificate of Compliance.

40. Events after the Reporting Period

Parent Company
a) In January 2015, the Company assisted ALI to raise funds through a placement of
484,848,500 common shares of ALI that the Company owns at a price of P = 33.00 per share
(the “Offer Price”). The placement was conducted via a bookbuilt offering structured as a top-
up placement with all the proceeds to be received by ALI.

The equity placement raised an aggregate of P


= 16.0 billion in proceeds which ALI will use for
its expansion projects.

As a result of this transaction, the Company’s holdings in common shares of ALI was reduced
to 47.3% from 48.9% but the Company will retain voting control at over 68.9%.

b) On March 10, 2015, the BOD of the Company approved the following:
· Approval for AI North America, Inc. (“AINA”), a wholly-owned subsidiary of AG Holdings,
to invest US$20.0 million in the Sares Regis Multi-family Value Add Fund II, a real estate
private equity fund to be managed by the Sares-Regis group (SRG) based in California,
USA. The investment will entitle AINA to get a voting interest through 1 (one) board seat
on the Board of Advisors. AINA is also authorized, through its authorized signatories, to
execute the Limited Partnership Agreement with SRG.
· Application of US$20.0 million Term Loan Facility for GN Power Mariveles Coal Plant Ltd.
Co. (GMCP). Arlington BV will grant the loan of up to US$20.0 million in accordance with
the following terms and Ayala-Sithe Global funding terms:
o Interest of 10% per annum compounded semi-annually
o Payable on or before December 31, 2016
o Step-up interest of 20% per annum if the loan is unpaid by maturity date
o Sithe commits to buy-out US$15.0 million of the loan by July 2015

*SGVFS011298*
- 170 -

ALI
a) In February 2015, ALI purchased the remaining non-controlling interest of the following:
· Anglo Philippine Holdings Corporation in NTDCC comprising of 382,072 common shares
and 1,605,169 preferred shares for P
= 523.0 million.
· Remaining interest of Allante Realty and Development Corporation and DBH, Inc.
consisting of 167,548 common shares and 703,904 preferred shares for P = 229.0 million.

This brings ALI’s ownership in NTDCC from 63.8% to 73.2% of the total outstanding capital
stock of NTDCC, which owns and operates the Trinoma Commercial Centre in North Triangle,
Quezon City.

b) On February 20, 2015, the BOD of ALI approved the declaration of regular cash dividends of
= 0.2 per share on the outstanding common shares. The dividends will be paid on
P
March 20, 2015 to stockholders of record as of March 6, 2015.

c) On February 23, 2015, the BOD of ALI approved the declaration of cash dividends of
4.74786% per annum or P = 0.0474786 per share on the outstanding unlisted voting preferred
shares. The dividends will be paid on June 29, 2015 to stockholders of record as of June 15,
2015.

MWC
a) On January 6, 2015, MWC’s Remuneration Committee approved the grant to the qualified
executives, officers and employees of stock options covering up to 7,281,647 common shares
at a subscription price of P
= 26.00 per share.

b) On January 5, 2015, CMWD delivered its initial 18.0 million liters per day bulk water supply to
MCWD. CMWD will increase its bulk water delivery to 35.0 million liters per day in 2016.

c) On January 30, 2015, MWC and the Zamboanga City Water District (ZCWD) have signed and
executed a Joint Venture Agreement to govern their relationship as joint venture partners in
the conduct of Non-Revenue Water Reduction Activities. MWC and ZCWD shall thereafter
cause the incorporation of a Joint Venture Company which shall perform the Non-Revenue
Water Reduction Activities for a period of ten (10) years. MWC shall own seventy percent
(70%) while ZCWD shall own (30%) of the Joint Venture’s outstanding capital stock.

d) On February 20, 2015, the BOD of MWC approved the following:


i. Declaration of cash dividends for the first semester of 2015 of P= 0.4075 per share on the
outstanding Common Shares and P = 0.04075 per share on the outstanding Participating
Preferred Shares. The dividends will be paid on March20, 2015 to stockholders of record
as of March 6, 2015.
ii. Additional investment of P= 492.0 million in Manila Water Total Solutions Corporation and
P
= 250.0 million in Manila Water Philippine Ventures, Inc.

IMI
a) On February 17, 2015, the BOD of IMI approved the declaration of regular cash dividends of
US$0.0042 (P= 0.1868) per share on the outstanding common shares. The dividends will be
paid on March 19, 2015 to stockholders of record as of March 4, 2015.

AC Infrastructure Holdings Corporation


a) On January 27, 2015, together with Metro Pacific Light Rail Corporation, AC Infra submitted its
prequalification bid for the operation and maintenance of LRT Line 2 under Light Rail Manila
Holdings 2, Inc. (LRMH2I). On February 16, 2015, the Department of Transportation and
Communications (DOTC) announced the qualification of LRMH2I to bid for the project
together with three other qualified bidders.

*SGVFS011298*
- 171 -

AC Energy Holdings Inc.


a) On various dates of January to February 2015, the Company infused $14.3 million to ACEHI
to fund the investment in GNPK.

b) On February 9, 2015, the AC Energy guarantee in connection with NLREC P


= 3.0 billion loan
facility was extended by 2 months or until April 10, 2015.

BPI
a) On November 19, 2014, the BOD of BPI approved the declaration of cash dividends of P = 0.90
per outstanding common shares subject to the approval of the BSP. On February 2, 2015, the
BSP approved the dividend declaration which will be paid on March 17, 2015 to stockholders
of record as of February 24, 2015.

c) Approval of the Consolidated Financial Statements

The consolidated financial statements of Ayala Corporation and Subsidiaries (the Group) as of
December 31, 2014, 2013 and 2012 and for each of the three years in the period ended
December 31, 2014 were endorsed for approval by the Audit Committee on March 5, 2015 and
authorized for issue by the Board of Directors (BOD) on March 10, 2015.

*SGVFS011298*
II. 2014 Supplementary Schedules

144
AYALA CORPORATION AND SUBSIDIARIES

Schedule A – Financial Assets (Current Marketable Equity Securities and Other Short-Term
Cash Investments)
As of December 31, 2014
(In Thousand Pesos)

Number of shares or Valued based on market


Name of Issuing entity & principal amount of bonds Amount shown in the quotation at balance Income received &
association of each issue & interest balance sheet sheet date accrued

A. OTHER SHORT-TERM CASH INVESTMENTS 1/

Special Savings Account


BPI 5,938,112
Other Banks 599,979
Sub-Total 6,538,090

Time Deposits (FX)


BPI -
Others 40,292
Sub-Total 40,292

Time Deposits (Peso)


BPI -
Metrobank 24,497
Unionbank -
Citibank -
Others 547,619
Sub-Total 572,115

Money Market Placements (FX)


Banco de Oro 3,717,527
BPI 12,421,747
Union Bank -
RCBC -
Citibank 31,844
Metrobank 10,494,421
Chinabank 44,720
Security Bank 268,320
Mizuho Bank 44,794
OTHERS 973,893
Sub-Total 27,997,266

Money Market Placements (Peso)


BPI 18,399,371
Banco de Oro 4,305,467
Chinabank 43,750
Metrobank 3,360,538
Standard Chartered Bank 322
Security Bank 124,600
RCBC 599,500
Unionbank 170,900
Others 288,600
Sub-Total 27,293,048

Others 5,364,919

Total 67,805,732 4,083,203

B. SHORT-TERM INVESMENTS 2/ NOT APPLICABLE

C. CURRENT MARKETABLE SECURITIES 3/ NOT APPLICABLE

1/ Short-term highly liquid investments with varying periods up to three months shown as part of the Cash and Cash Equivalents account in the Balance Sheet. Cash equivalents is
9.3% of the P726,047,776k total assets as of December 31, 2014.

2/ Money market placements with varying maturity periods of more than three months and up to six months amounting to P1,102,703k is 0.15% of the P726,047,776k total assets as
of December 31, 2014. This is booked under the Short-term investment account.

3/ Current marketable securities are composed of financial assets at FVPL amounting to P10,374,780k. An amount of P5,607,838k is placed under BPI's UITF. The total FVPL
account is shown under the other current assets account and is 1.4% of the P726,047,776k total assets as of December 31, 2014.

145
Schedule B – Amounts Receivable from Directors, Officers, Employees, Related Parties and
Principal Stockholders (Other than Related Parties)
As of December 31, 2014
(In Thousand Pesos)

Beginning Ending
Account Type Balance Additions Deductions Balance Current Non-current Payment Period

Advances to Employees 235,774 731,620 (554,273) 413,121 376,212 36,909 30 days to 1 year
Housing and Related Loan 141,784 94,586 (81,111) 155,259 56,530 98,729 1 year to 15 years
Car and Related Loan 53,331 105,160 (82,628) 75,863 38,043 37,820 1 year to 5 years
Others 76,153 78,974 (68,034) 87,093 43,798 43,295 6 months to 1 year

TOTAL 507,042 1,010,340 (786,046) 731,336 514,583 216,753

Receivables from officers and employees pertain to housing, car, salary and other loans
granted to the Group’s officers and employees w hich are collectible through salary deduction,
are interest bearing ranging from 6.0% to 13.5% per annum and have various maturity dates.

Schedule C.1. – Amounts Receivable from Related Parties which are Eliminated during the
Consolidation of Financial Statements
As of December 31, 2014
(In Thousand Pesos)

Creditor's
Relationship to the Beginning Ending
Creditor Reporting Co. Account Type Balance Movement Balance Nature of Accounts

AC Parent Other receivable 231,382 (230,363) 1,019 Advances, non-interest bearing


AC Parent Dividends receivable 40,000 65,525 105,525 Dividends from AGCC, IMI and PHI
AC Parent Other receivable 76,963 (12,223) 64,741 Rental fees, with interest on overdue accounts
AC Parent Other receivable 31,427 (31,427) - Management fees, non-interest bearing
AC Infra Subsidiary Subscription receivable 90,000 80,000 170,000 Deposits on subscriptions, non-interest bearing
ACIFL Subsidiary Other receivable 566,260 - 566,260 Deposits on options to purchase shares
ACIFL Subsidiary Other receivable 2,366,807 (2,366,807) - Deposits on subscriptions, non-interest bearing
ACIFL Subsidiary Other receivable 441,543 (364,747) 76,796 Deposits on subscriptions, non-interest bearing
ACIFL Subsidiary Other receivable - 1,633,281 1,633,281 Other receivables from PFIL
AIVPL Subsidiary Other receivable 15,621 (15,621) - Advances, non-interest bearing
ALI Subsidiary Other receivable 586,459 (343,133) 243,326 Retention accounts for construction projects
ALI Subsidiary Trade receivable 152,304 (126,091) 26,213 Advances, non-interest bearing
ALI Subsidiary Trade receivable - 243,401 243,401 Advances, non-interest bearing
ALI Subsidiary Other receivable 20,821 120 20,941 Reimbursement of communication costs
AYC Subsidiary Other receivable 4,385,402 7,636,472 12,021,874 Non-interest bearing receivable from ACIFL
AYC Subsidiary Other receivable 419,622 (419,622) - Deposits on options to purchase shares
AzTech Subsidiary Subscription receivable 55,552 (7,040) 48,512 Deposits on subscriptions, non-interest bearing
BHL Subsidiary Other receivable - 821,800 821,800 Other receivables from ACIFL
Others Subsidiary Other receivable 17,052 63,423 80,475 Reimbursement of expenses, etc.
TOTAL 9,497,216 6,626,948 16,124,164

146
Schedule C.2. – Amounts Payable to Related Parties which are Eliminated during the
Consolidation of Financial Statements
As of December 31, 2014
(In Thousand Pesos)

Debtor's
Relationship to the Beginning Ending
Debtor Reporting Co. Account Type Balance Movement Balance Nature of Accounts

AAHC Subsidiary Accounts payable 76,963 (12,223) 64,741 Rental fees, with interest on overdue accounts
AC Parent Subscription payable 55,552 (7,040) 48,512 Deposits on subscriptions, non-interest bearing
AC Parent Accounts payable 152,304 (126,091) 26,213 Advances, non-interest bearing
AC Parent Subscription payable 90,000 80,000 170,000 Deposits on subscriptions, non-interest bearing
AC Parent Accounts payable 419,622 (419,622) - Deposits on options to purchase shares
AC Parent Other payables 566,260 - 566,260 Deposits on options to purchase shares
AC Parent Other payables - 243,401 243,401 Other payables
ACIFL Subsidiary Accounts payable 4,385,402 7,636,472 12,021,874 Non-interest bearing payable to AYC
ACIFL Subsidiary Accounts payable - 821,800 821,800 Other payables to BHL
AGCC Subsidiary Customers' and tenants deposits 20,821 120 20,941 Reimbursement of communication costs
AGCC Subsidiary Dividends payable - 50,000 50,000 Dividends
AIVPL Subsidiary Other payables 441,543 (364,747) 76,796 Deposits on subscriptions, non-interest bearing
ALI Subsidiary Other payables 231,382 (230,363) 1,019 Advances, non-interest bearing
Bestfull Subsidiary Accounts payable 2,366,807 (2,366,807) - Deposits on subscriptions, non-interest bearing
IMI Subsidiary Dividends payable - 17,525 17,525 Dividends
LGSMI Subsidiary Other payables 15,621 (15,621) - Advances, non-interest bearing
MWCI Subsidiary Other payables 31,427 (31,427) - Management fees, non-interest bearing
MWCI Subsidiary Retention payable 586,459 (343,133) 243,326 Retention accounts for construction projects
PFIL Subsidiary Other payables - 1,633,281 1,633,281 Other payables to ACIFL
PHI Subsidiary Dividends payable 40,000 (2,000) 38,000 Dividends
Others Subsidiary Other payables 17,052 63,423 80,475 Reimbursement of expenses, etc.
TOTAL 9,497,216 6,626,948 16,124,164

Schedule D – Intangible Assets and Other Assets (Deferred Charges)


As of December 31, 2014
(In Thousand Pesos)

CHARGED TO CHARGED TO OTHER


BEGINNING ADDITIONS AT COSTS AND OTHER CHANGES ENDING
DESCRIPTION BALANCE COST EXPENSES ACCOUNTS ADD/(DED) BALANCE

INTANGIBLE ASSETS* 4,175,846 449,446 (502,016) 60,188 - 4,183,464


* Please refer to Note 16 of the 2014 Consolidated Audited Financial
Statements for detailed account analysis and discussion.

OTHER ASSETS - DEFERRED CHARGES 271,048 - - 203,422 - 474,470

147
Schedule E – Long-term Debt
As of December 31, 2014
(In Thousand Pesos)

TITLE OF ISSUE & TYPE OF OBLIGATION CURRENT NON-CURRENT TOTAL

PARENT COMPANY:
Bank loans - with interest rates ranging from 2.7% to 4.3% per annum in 2014 and
0.7% to 3.8% per annum in 2013 and varying maturity dates up to 2020 77,376 21,093,719 21,171,095
Bonds due 2017 - 9,957,982 9,957,982
Bonds due 2019 - 9,925,168 9,925,168
Bonds due 2021 - 9,930,244 9,930,244
Bonds due 2027 - 9,920,501 9,920,501
77,376 60,827,614 60,904,990

SUBSIDIARIES:
Loans from banks and other institutions:
Foreign Currency - with interest rates ranging from 0.50%% to 6-month LIBOR
plus 1.5% spread per annum in 2014 and 3m LIBOR to 3% in 2013 5,851,997 39,432,337 45,284,334
MWCI 2,382,077 5,292,388 7,674,465
AYC FINANCE 2,920,003 24,914,985 27,834,988
ALI 422,000 6,662,564 7,084,564
IMI 125,245 2,562,400 2,687,645
Others (BHL) 2,672 - 2,672
Philippine peso - with interest rates ranging from 2.02% to 10.21% in 2014,
1.06% to 12% in 2013 3,644,560 38,799,433 42,443,993
ALI 3,507,393 30,716,972 34,224,365
MWC 127,912 8,047,562 8,175,474
Others 9,255 34,899 44,154
9,496,557 78,231,770 87,728,327
Bonds:
Exchangeable bonds due 2019 - 12,247,531 12,247,531
Due 2014 - - -
Due 2015 986,710 - 986,710
Due 2016 - 1,982,700 1,982,700
Due 2019 - 9,292,190 9,292,190
Due 2020 - 3,969,010 3,969,010
Due 2022 - 5,615,067 5,615,067
Due 2024 - 14,875,092 14,875,092
Due 2025 - 7,922,131 7,922,131
Due 2033 - 1,982,330 1,982,330
986,710 57,886,051 58,872,761

Floating Rate Corporate Notes (FRCNs) - 1,000,000 1,000,000


Fixed Rate Corporate Notes (FXCNs) 200,800 29,053,580 29,254,380

TOTAL 10,761,443 226,999,015 237,760,458

Schedule F – Indebtedness to Related Parties (Long-term Loans from Related Parties)


As of December 31, 2014
(In Thousand Pesos)

Balance at Beginning Balance at End of


Name of Related Parties of Period Period

Bank of the Philippine Islands* 23,093,250 38,012,270


*Please refer to Note 31 of the 2014 Consolidated Audited Financial
Statements for further discussion.

148
Schedule G – Guarantees of Securities of Other Issuers
As of December 31, 2014
(In Thousand Pesos)

Name of issuing Amount owned


entity of securities by person for
guaranteed by the which
company for which Title of issue of each class of securities Total amount guaranteed statement is
this statement is filed guaranteed and outstanding filed Nature of guaranty

AYC Finance Limited US$20M Revolving Credit Facility US$20.0M (Guaranteed and Unconditional and irrevocable guarantee for the
Agreement (Executed on 9/28/2012) Outstanding as of 12/31/14) proper and punctual payment of indebtedness.
The Guarantor shall be liable as if it were the sole
principal debtor.

US$229,230,769.23 Term Loan Facility US$229.2M (Guaranteed and Unconditional & irrevocable guarantee for the
Agreement (Originally $260Mn; 12/16/2010 Outstanding as of 12/31/14) punctual payment of the guaranteed
amended on 12/09/2011) indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

US$150M Transferable Term Loan Facility US$150.0M (Guaranteed and Unconditional & irrevocable guarantee for the
Agreement (Executed on 3/28/2011, with Outstanding as of 12/31/14) punctual payment of the guaranteed
amendments dated 09/28/2012 & 08/30/2013) indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

US$225M Transferable Term Loan Facility US$225.0M (Guaranteed and Unconditional & irrevocable guarantee for the
Agreement (Executed on 11/28/2013) Outstanding as of 12/31/14) punctual payment of the guaranteed
indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

US$300M 0.5% Guaranteed Exchangeable US$300.0M (Guaranteed and Unconditional & irrevocable guarantee for the
Bonds (Executed on 05/02/2014) Outstanding as of 12/31/14) punctual payment of the guaranteed
indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

US$100M Transferable Term Loan Facility US$100.0M (Undrawn as of Unconditional & irrevocable guarantee for the
Agreement (Executed on 03/28/2014) 12/31/14) punctual payment of the guaranteed
indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

US$200M Transferable Term Loan Facility US$200.0M (Undrawn as of Unconditional & irrevocable guarantee for the
Agreement (Executed on 05/09/2014) 12/31/14) punctual payment of the guaranteed
indebtedness. The guarantor shall be liable as if it
is the sole principal debtor and not merely a
surety. The guaranty likewise includes
compliance with financial ratios, semi-annual
submission of financial statements, 100%
ownership of AYC Finance's issued voting share
capital, among others.

149
Schedule H – Capital Stock
As of December 31, 2014
(In Thousand Pesos)

NUMBER OF SHARES
DIRECTORS,
NUMBER OF SHARES NUMBER OF SHARES RESERVED FOR NUMBER OF
TITLE OF ISSUE OFFICERS & OTHERS
AUTHORIZED ISSUED/ SUBSCRIBED OPTIONS, WARRANTS, SHARES HELD BY
EMPLOYEES
CONVERSION & RIGHTS AFFILIATES

Common Stock issued & subscribed a/ 900,000,000 599,438,041 4,252,738


Issued and subscribed on exercise of share
options 1,219,011
Top-up Placement 18,779,100
Common shares outstanding 900,000,000 619,436,152

Preferred A shares b / 12,000,000 0

Preferred B shares d/ 58,000,000 47,000,000 20,000

Preferred C shares 40,000,000

Voting preferreds e/ 200,000,000 200,000,000 1,217,885

a/ Ayala Corporation has stock option plans for


the key officers (Executive Stock Option Plan-
ESOP) and employees (Employee Stock
Ownership Plan - ESOWN) covering 3% of the
Company's capital stock.

b / Cumulative, nonvoting and redeemable with a


par value of P100 per share and is listed at the
Philippine Stock Exchange. It may be redeemed
at the option of Ayala Corporation starting in the
fifth year. The offering price is P500 per share
with a dividend rate of 8.9% per annum. This
security was redeemed on Nov. 25, 2013

d / Cumulative, nonvoting and redeemable with a


par value of P100 per share. It is listed and
traded at the Philippine Stock Exchange and may
redeemed at the option of Ayala Corporation
starting on the fifth year of issue date. The
offering price is P100 per share with a dividend
rate of 5.25% per annum for the Preferred B
Series 1 and 5.575% per annum for the Preferred
B Series 2.

e/ Cumulative, voting and redeemable at the


option of Ayala Corporation with a par value of P1
per share and dividend rate of 1.875% per
annum.

Schedule I – Reconciliation of Retained Earnings Available for Dividend Declaration


As of December 31, 2014
(In Thousand Pesos)

December 2014 December 2013

Unappropriated retained earnings, as adjusted to available for


dividend distribution, beginning * 23,332,441 20,320,778

Add: Net income actually earned/realized during the period - Parent co. 5,214,138 3,920,547

Add (Less):
Dividend declarations during the period (4,209,196) (3,406,228)
Treasury shares 2,700,000 (1,509,196) 2,497,344 (908,884)

TOTAL RETAINED EARNINGS, END AVAILABLE FOR DIVIDEND* 27,037,383 23,332,441

*Reconciliation of consolidated retained earnings to retained earnings


available for dividend follows:
January 2014 December 2014 January 2013 December 2013
Consolidated retained earnings balance 92,639,781 107,039,814 83,268,077 92,639,781
Accumulated equity in net earnings of subsidiaries, associates
and joint ventures (64,307,340) (77,702,431) (55,449,955) (64,307,340)
Treasury shares (5,000,000) (2,300,000) (7,497,344) (5,000,000)
Retained Earnings available for dividends 23,332,441 27,037,383 20,320,778 23,332,441

150
Schedule J – Map of the Relationships of the Companies within the Group (part 1)
As of December 31, 2014

MERMAC, INC. MITSUBISHI


CORPORATION

49.0% 10.2%

AYALA
CORPORATION

100% 100% 100% 100%


AYALA
AYALA AVIATION AC INT'L. AC ENERGY
AUTOMOTIVE
CORP. FINANCE LTD. HOLDINGS, INC.
HOLDINGS CORP.

48.9% 50% 100% 100.00%


50% AZALEA AZALEA INT'L.
AYALA HOTELS,
AYALA LAND, INC. TECHNOLOGY VENTURE
INC. 74.4% INVESTMENTS, INC. PARTNERS LTD.

100% 100% 100% 100%

AG COUNSELORS AYC FINANCE BESTFULL DARONG AGRI


CORP. LTD. HOLDINGS LTD. DEV CORP.

100% 100% 100% 32.2%


AC PHILWATER 16.3%
LIVEIT GLOBAL MLA. WATER CO.
SERVICE INFRASTRUCTURE HOLDINGS
COMPANY, INC. INC. 48.5%
MANAGEMENT HOLDINGS CORP.
INSTITUTE

100% 100% 78.8% 100.0%

MICHIGAN PUREFOODS TECHNOPARK WATER CAPITAL


HOLDINGS, INC. INT'L. LTD. LAND, INC. WORKS, INC.

2.1%
30.5% 73.8% 33.3% 60%
BANK OF THE 21.3% FIRST GEN
AYALA DBS ASIACOM PHILS.,
PHIL. ISLANDS NORTHERN
HOLDINGS, INC. INC.
48.3% ENERGY CORP.

20% 30.4%
BPI GLOBE
40% BANKO INC. 40% GLOBE
51.5% TELECOM, INC.

40%

LAGDIGAN LAND
CORPORATION

Legend:
% of ownership appearing on top of the box - direct % of ownership
% of ownership appearing inside the box - effective/economic % of ownership

151
Schedule J – Map of the Relationships of the Companies within the Group (part 2)
As of December 31, 2014

Subsidiaries
Ayala Land, Inc.

Amaia Land
Amorsedia Ayala Land Crans NorthBeacon
Alveo Land Avida Land Buendia Ayala Land Co. (formerly Crimson Field Ecoholdings Red Creek
Serendra, Inc. Development First Realty International Montana Commercial
Corporation Corporation Corporation Landholdings, Sales, Inc. Sales, Inc. Holdings, Inc. Enterprises, Company, Inc. Corporation Properties,
(100%) (28%) (100%) Inc. (100%) (100%) Communities, Inc. (100%) (100%) Inc. (100%)
(100%) (100%) (100%) (100%)
Inc.) (100%)

Buklod Ayalaland
OLC HLC Amaia
Allysonia Bahayan International
Serendra, Inc. Development Development Realty and Southern
Corporation Corporation International Marketing,
(39%) Ltd (100%) Development Properties,
(100%) (100%) Inc. (AIMI)
Corp. (100%) Inc. (65%) (100%)

Solinea, Inc. Ayala Ayala Land


(formerly Greenfield Avida Sales International
Bigfoot Palms, Development Corp. (100%) (Singapore)
Inc.) (65%) Corp. (50%) Pte. Ltd.
(100%)

Amicassa Ayalaland
BGSouth International
Process
Properties, Solutions, Inc. Marketing
Inc. (50%) (Hong Kong)
(100%)
Limited (100%)

Ayala Land
Portico Land BGNorth International
Corp. (60%) Properties, Marketing ,
Inc. (50%) SRL (100%)

Ayala Land
International
Avenco South Marketing
Corporation London
(70%) (100%)

152
Schedule J – Map of the Relationships of the Companies within the Group (part 3)
As of December 31, 2014

Ayala Land,
Inc.
Westview Fairview Prime AyalaLand Offices,
Regent Time Asterion Commercial Corp. Hillsford Summerhill Sunnyfield Subic Bay Regent Wise AyalaLand Arvo BellaVita
Commercial Primavera Nuevo Inc. (ALO) ( formerly
International Technopod, Ventures Corp (formerly Property E-Office E-Office Town Investments Commercial Commercial Land
, Limited Incorporate Corporation Towncentre, Corporation Corporation Centre, Inc. Limited REIT, Inc. Corporation Corporation Centro, Inc. ALI Property Partners
(formerly Crestview Gisborne Inc. (100%) (100%) Corp. (APPCo))
(100%) d (100%) E-Office Property (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
Corporation) Holdings, Inc.)
(100%) (100%) AyalaLand One Dela
Bonifacio Land AyalaLand Real AyalaLand Advisory Tianjin Eco City
Development Rosa
Corp. (5%) Estate Investments Broadway Inc. (Canada) Inc. Ayala Land
(An Associate Inc. (100%) Development Co., Property
(100%) (100%)
of ALI Group) Ltd. (40%) Developmen
(An Associate of t, Inc.
Rize-AyalaLand (100%)
ALI Group)
Fort Bonifacio (Kingsway) GP Inc.,
Development (49%) (An Associate
First
Corporation of ALI Group)
Gateway
(55%) Real Estate
Corp. (100%)

Glensworth
Developmen
t, Inc.
(100%)

UP North
Property
Holdings,
Inc. (100%)

153
Schedule J – Map of the Relationships of the Companies within the Group (part 4)
As of December 31, 2014

Ayala Land, Inc.


Laguna Aurora Vesta Station Accendo CMPI ALI-CII Roxas Land Makati Ayala AyalaLand Hotels La gdigan La nd
Cagayan de Ceci Realty,
Technopark, Inc. Properties, Property Square East Commercial Holdings, Development Corporation Development Hotels, Inc. and Resorts Corpora tion
Holdings, Commercial Oro Gateway Inc. (60%) Inc. (60%) (50%) (50%)
(75%) Incorporated Corp. (67%) Corporation Corporation (100%) Corporation
(78%) Inc. (70%) Corporation Corp. (70%) (50%) (100%) (60%)
(69%) Soltea CMPI Land,
Avenco Commerci
Ecozone Inc. (60%) MDC - Subic
Soltea South al Corp. Enjay Hotels, Inc.
Power Corporation (100%)
Commercial (20%) (100%)
Management Corp. (20%) (30%)
, Inc. (100%) Cebu Insular Hotel
MDC - Build Company, Inc.
Aviana (63%)
Development Plus (100%)
Corporation Greenhaven
(10%) Property Venture,
MDC Inc. (100%)
Equipment
Solutions, Inc. Bonifacio Hotel
(100%) Ventures, Inc.
(100%)
MDC Southcrest Hotel
Conqrete Inc. Ventures, Inc.
(100%) (67%)

Northgate Hotel
Ventures, Inc.
(70%)

North Triangle
Hotel Ventures,
Inc. (100%)

Ecosouth Hotel
Ventures, Inc.
(100%)

ALI Makati Hotels &


Residences, Inc. (80%)

ALI Makati Hotel


Property, Inc. (80%)

Asian Conservation
Company, Inc. (100%)

Asian Conservation
Company Limited
(100%)
Ten Knots Phils, Inc.
and Subsidiary (40%)

Ten Knots
Development, Corp.
Sentera Hotel and Subs (40%)
Ventures Inc.
(100%)

Econorth Resorts
Ventures, Inc. (100)

ALI Triangle Hotel


Ventures, Inc. (100%)

ArcaSouth Hotel
Ventures, Inc. (ASHVI)
(100%)

Capitol Central Hotel


Ventures, Inc. (CCHVI)
(100%)

Circuit Makati Hotel


Ventures, Inc. (CMHVI)
(100%)

154
Schedule J – Map of the Relationships of the Companies within the Group (part 5)
As of December 31, 2014

Ayala Land, Inc.


Cavite South
Ten Knots Ten Knots Ayala Property Ayala Theatres Five Star Leisure and First Longfield Aprisa DirectPower Philippine Adauge
Commercial Varejo Gateway Ayalaland
Phils, Inc. Development Management Allied ALInet.com, Investments Business Integrated Commercial
Management, Cinema, Town Services, Inc. Corporation Developme MetroNorth
(60%) Corp. (60%) Corporation Inc. (100%) Inc. (100%) Industries Inc. (100%) Limited Process (100%) Energy Corporation
Center, Inc. (100%) nt Corp. , Inc.
(100%) Philippines, (100%) Solutions, Solutions, (72%)
(100%) (100%) (100%)
Inc. (50%) Inc. (100%) Inc. (100%)
Chirica
Bacuit Bay Resorts Green
Development SIAL Specialty AyaGold SIAL CVS Retailers, Inc.
Corp. Horizons
Corporation Retailers, Inc. (50%) Retailers, Inc. (50%)
(100%) Holdings (50%) (Joint
(100%) (A Joint Venture Entity
Limited (Joint Venture Entity of Venture Entity
Kingfisher (100%) ALI group) of ALI group)
Capital of ALI group)
Resources
Corp. Philippine
(100%) FamilyMart CVS,
Inc.(60%)

Ayala Land, Inc.


AyalaLand Club North Triangle Depot Soltea Verde Golf
ALI Commercial Cebu Holdings, Inc. BGWest Properties, Cebu Property Ventures & Whiteknight
Management, Inc. Commercial Corporation Commercial (50%) Inc. (50%) Solerte, Inc. (100%) Development Development Corp. (CPVDC) Alabang Commercial Aviana Development Holdings, Inc. (100%)
Southportal Properties,
Center Inc. (100%) Corp. (60%) Corporation (100%) Corporation (50%) Corporation (50%) Inc. (65%)
(100%) (64%) (7.8%)

Cebu Property Ventures Mercado General


Taft Punta Engaño Development Corp. Cebu Leisure Company, CBP Theatre Cebu Insular Hotel Solinea, Inc. (formerly Amaia Southern Cebu District Property Southportal Properties, Hospital, Inc. (36.01%)
Property Inc. (55%) Inc. (100%) Management Inc. (100%) Company, Inc. (37%) Bigfoot Palms, Inc. (35%) Properties, Inc. (35%) Enterprise, Inc. (10%) Inc. (35%) South Innovative
(76%) Theater Management, (An Associate of ALI
Inc. (100%) Group)

Asian I-Office Properties,


Inc. (100%)

Cebu District Property


Enterprise, Inc. (5%)

155
Schedule J – Map of the Relationships of the Companies within the Group (part 6)
As of December 31, 2014

Direct Investments in Joint Ventures Direct Investments in Associates

Ayala Land, Inc. Ayala Land, Inc.

ALI Makati Hotels & ALI Makati Property, Inc.


Cebu District Property Emerging City Holdings, Inc. Berkshires Holdings, Inc. Lagoon Development Residences, Inc. (20%)
Bonifacio Land Corp. (5%) (20%) (Subsidiary of the
Enterprise, Inc. (35%) (50%) (50%) Corporation (30%)
(An Associate of the Group) (Subsidiary of the Group) Group)

Columbus Holdings, Inc. (70%) Columbus Holdings, Inc. (30%) Fort Bonifacio Development
Corp. (55%)

Bonifacio Land Corp. (70%) Bonifacio Land Corp. (70%)


(An Associate of ALI Group) (An Associate of ALI Group)

Fort Bonifacio Fort Bonifacio


Development Development
Corp. (55%) Corp. (55%)

156
Schedule J – Map of the Relationships of the Companies within the Group (part 7)
As of December 31, 2014

Ayala Corporation

Manila Water
Company, Inc.

Manila Water
Philippine
Manila Water
Manila Water Manila Water Boracay Island Ventures, Inc. Clark Water Manila Water
International
Total Solutions Consortium Inc. Water Company, (formerly Corporation Asia Pacific Pte.
Solutions, Inc.
Corp. (MWTS) (MWC) Inc. (BIWC) AAAWater (CWC) Ltd. (MWAP)
(MWIS)
100% 51% 80% Corporation 100% 100%
100%
(AAA))
100%

Manila Water
Cebu Manila Laguna AAA Thu Duc Water Kenh Dong
South Asia
Water Water Holdings Pte. Water Holdings
Holdings Pte.
Development Corporation Ltd. Pte. Ltd.
Ltd.
(CMWD) (LAWC) (TDWH) (KDWH)
(MWSAH)
51% 70% 100% 100%
100%

Kenh Dong
Saigon Water Water Supply
Thu Duc Water
Infrastructure Joint Stock
BOO (Thu Duc)
Corporation Company
49%
31.47% (WASS)
47.35%

AYALA CORPORATION

AYALA AUTOMOTIVE HOLDINGS CORP.


(100%)

ISUZU AUTOMOTIVE
DEALERSHIP INC. (100%)

ISUZU CEBU INC. ISUZU ILOILO CORP.


(100%) (66.67%)

HONDA CARS MAKATI INC. PRIME INITIATIVES INC. ICONIC DEALERSHIP INC. AUTOMOBILE CENTRAL
(100%) (100%) (100%) ENTERPRISE INC. (100%)

HONDA CARS CEBU


INC. (100%)

157
Schedule J – Map of the Relationships of the Companies within the Group (part 8)
As of December 31, 2014

AYALA
CORPORATION

AC ENERGY
HOLDINGS, INC.

WIND MINI-HYDRO WIND SOLAR COAL COAL COAL COAL

100% 100% 100% 75% 50% 50% 100% 100% 100%


SOUTH LUZON THERMAL
QUADRIVER ENERGY CORP. ENERGY CORP.
MOORLAND PRESAGE (70%) PHILIPPINE WIND PHILNEW ENERGY AC ENERGY GP ACE MARIVELES GP ACE DINGININ GP
VIAGE CORPORATION
PHILIPPINES, INC. CORPORATION PHILNEW HYDRO POWER (70%) HOLDINGS CORP. CORPORATION CORPORATION CORPORATION
ACTA POWER CORP
PHILNEW RIVER POWER (68%)

16.8% 100% 0.40% 99.20% 0.80% 49.50% 0.50%


49.60%
NORTHWIND
24.7% POWER DEV
8.5% KAUSWAGAN POWER ACE MARIVELES POWER DINGININ POWER
ILOCOS WIND HOLDING LTD. CO. LTD. CO. HOLDING LTD. CO.
CORP.

100% 17% 50%


36%
GN POWER
NORTH LUZON KAUSWAGAN LTD. CO. GN POWER MARIVELES GNPOWER DINGININ
RENEWABLE COAL PLANT LTD. CO. LTD. CO.
24% ENERGY CORP

158
Schedule J – Map of the Relationships of the Companies within the Group (part 9)
As of December 31, 2014

AYALA CORPORATION

100%

AC INFRASTRUCTURE HOLDINGS
CORPORATION

50%-1 50%+1 10% 50%-1 80% 50%-1

Light Rail AA Infrastructure Automated Fare A2 Airport Partners, Light Rail Manila
Manila Projects Corporation Collection Services, Inc. Inc. MCX Tollway, Inc. Holdings 2, Inc.
Holdings, Inc. (CALAx Project) (AFCS Project) (MCIA Project) (LRT 2 Project)

70%

Light Rail *LRMC Shareholders


Manila 35% - AC Infra
Corporation 55% - MPIC
10% - MIRA

159
Schedule J – Map of the Relationships of the Companies within the Group (part 10)
As of December 31, 2014

Affinity Express
Holdings 99.6%

IQB Holdings
82.5%

LiveIt Investments
Ltd 100% Integreon Inc.
58.7%

Milestone Group NewBridge Int'l


Pty Ltd. 18.8% 100%

Narra Venture LiveIt ROHQ


AIVPL Capital Mgt. LLC
28.5% 100%

Narra Venture
Capital LP 47.8%

Narra Venture
Capital II LP 20%

160
Schedule J – Map of the Relationships of the Companies within the Group (part 11)
As of December 31, 2014

161
Schedule J – Map of the Relationships of the Companies within the Group (part 12)
As of December 31, 2014

AYALA CORPORATION

100%

BESTFULL HLDGS LTD.

100%

AG HOLDINGS LTD.

100% 100%
VIP 100%
FINE STATE Infrastructure AG REGION
GROUP LTD Holdings Pte. PTE LTD
Ltd.

100% 100% 49% 100% 100% 100%


VinaPhil Technical Aya l a
Ayala Ayala
Total Jade Group Strong Group Infrastructure
International International International
Limited Limited Investment Joint
Properties Pte Ltd Holdings Limitd Pte Ltd / AINA
Stock Company

162
Schedule K – Schedule of All the Effective Standards and Interpretations as of December 31,
2014
As of December 31, 2014

PHILIPPINE FINANCIAL REPORTING STANDARDS AND


INTERPRETATIONS Not Not
Effective as of December 31, 2014 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 First-time Adoption of Philippine Financial Reporting

(Revised) 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 
Amendments to PFRS 1: Borrowing costs 
Amendments to PFRS 1: Meaning of ‘Effective
Not early adopted
PFRSs
PFRS 2 Share-based Payment 
Amendments to PFRS 2: Vesting Conditions and 
Cancellations
Amendments to PFRS 2: Group Cash-settled Share- 
based Payment Transactions
Amendments to PFRS 2: Definition of Vesting
Not early adopted
Condition*
PFRS 3 Business Combinations 
(Revised)
Amendments to PFRS 3: Accounting for Contingent
Not early adopted
Consideration in a Business Combination*
Amendments to PFRS 3: Scope Exceptions for Joint
Not early adopted
Arrangements*
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
Amendments to PFRS 5: Changes in Methods of
Not early adopted
Disposal*
PFRS 6 Exploration for and Evaluation of Mineral Resources 
PFRS 7 Financial Instruments: Disclosures 
163
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS Not Not
Effective as of December 31, 2014 Adopted Adopted Applicable
Amendments to PFRS 7: Transition 
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
Not early adopted
of PFRS 9 and Transition Disclosures
Amendments to PFRS 7: Disclosures - Servicing
Not early adopted
Contracts*
Applicability of the Amendments to PFRS 7 to
Not early adopted
Condensed Interim Financial Statements*
PFRS 8 Operating Segments 
Amendments to PFRS 8: Aggregation of Operating
Segments and Reconciliation of the Total of the Not early adopted
Reportable Segments’ Assets to the Entity’s Assets*
PFRS 9 Financial Instruments: Classification and Movement
Not early adopted
(2010 version)
Financial Instruments - Hedge Accounting and
amendments to PFRS 9, PFRS 7 and PAS 39 (2013 Not early adopted
version)*
Financial Instruments (2014 or final version)* Not early adopted
Amendments to PFRS 9: Mandatory Effective Date
Not early adopted
of PFRS 9 and Transition Disclosures
PFRS 10 Consolidated Financial Statements 
Amendments to PFRS 10: Investment Entities 
Amendments to PFRS 10: Sale or Contribution of
Assets between an Investor and its Associate or Not early adopted
Joint Venture*
PFRS 11 Joint Arrangements 
Amendments to PFRS 11: Accounting for
Not early adopted
Acquisitions of Interests in Joint Operations*
PFRS 12 Disclosure of Interests in Other Entities 
Amendments to PFRS 12: Investment Entities 
PFRS 13 Fair Value Measurement 
Amendments to PFRS 13: Short-term receivable

and payables
Amendments to PFRS 13: Portfolio Exception* Not early adopted
PFRS 14 Regulatory Deferral Accounts* Not early adopted
IFRS 15 Revenue from Contracts with Customers** Not early adopted
164
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS Not Not
Effective as of December 31, 2014 Adopted Adopted Applicable
Philippine Accounting Standards
PAS 1 Presentation of Financial Statements 
(Revised)
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
Amendments to PAS 1: Clarification of the

requirements for comparative information
PAS 2 Inventories 
PAS 7 Statement of Cash Flows 
PAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors
PAS 10 Events after the Reporting Period 
PAS 11 Construction Contracts 
PAS 12 Income Taxes 
Amendment to PAS 12: Deferred Tax: Recovery of

Underlying Assets
PAS 16 Property, Plant and Equipment 
Amendment to PAS 16: Classification of servicing

equipment
Amendment to PAS 16: Revaluation Method -
Proportionate Restatement of Accumulated Not early adopted
Depreciation*
Amendment to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Not early adopted
Amortization*
Amendment to PAS 16: Bearer Plants* Not early adopted
PAS 17 Leases 
PAS 18 Revenue 
PAS 19 Employee Benefits 
Amendments to PAS 19: Actuarial Gains and

Losses, Group Plans and Disclosures
PAS 19 Employee Benefits 
(Amended)
Amendments to PAS 19: Defined Benefit Plans:
Not early adopted
Employee Contributions*
Amendments to PAS 19: Regional Market Issue
Not early adopted
regarding Discount Rate*
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 Borrowing Costs

(Revised)
165
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS Not Not
Effective as of December 31, 2014 Adopted Adopted Applicable
PAS 24 Related Party Disclosures 
(Revised)
Amendments to PAS 24: Key Management
Not early adopted
Personnel*
PAS 26 Accounting and Reporting by Retirement Benefit

Plans
PAS 27 Separate Financial Statements 
(Amended)
Amendments to PAS 27: Investment Entities 
Amendments to PAS 27: Equity Method in Separate
Not early adopted
Financial Statements*
PAS 28 Investments in Associates and Joint Ventures 
(Amended)
Amendments to PAS 28: Sale or Contribution of
Assets between an Investor and its Associate or Not early adopted
Joint Venture*
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
Financial Instruments and Obligations Arising on 
Liquidation
Amendment to PAS 32: Classification of Rights

Issues
Amendments to PAS 32: Tax effect of distribution to

holders of equity instruments
Amendments to PAS 32: Offsetting Financial Assets

and Financial Liabilities
PAS 33 Earnings per Share 
PAS 34 Interim Financial Reporting 
Amendments to PAS 34: Interim financial reporting
and segment information for total assets and Not early adopted
liabilities
Amendments to PAS 34: – Disclosure of information
Not early adopted
‘elsewhere in the interim financial report*
PAS 36 Impairment of Assets 
Amendments to PAS 36: Recoverable Amount

Disclosures for Non-Financial Assets
PAS 37 Provisions, Contingent Liabilities and Contingent

Assets
PAS 38 Intangible Assets 
Amendments to PAS 38: Revaluation Method -
Proportionate Restatement of Accumulated Not early adopted
Amortization*
Amendments to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Not early adopted
Amortization*
PAS 39 Financial Instruments: Recognition and

Measurement

166
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS Not Not
Effective as of December 31, 2014 Adopted Adopted Applicable
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 
Amendment to PAS 39: Novation of Derivatives and

Continuation of Hedge Accounting
PAS 40 Investment Property 
Amendment to PAS 40: Interrelationship between
Not early adopted
PFRS 3 and PAS 40*
PAS 41 Agriculture 
Amendment to PAS 41: Bearer Plants* Not early adopted
Philippine Interpretations
IFRIC 1 Changes in Existing Decommissioning, Restoration

and Similar Liabilities
IFRIC 2 Members' Share in Co-operative Entities and Similar

Instruments
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 

167
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS Not Not
Effective as of December 31, 2014 Adopted Adopted Applicable
Funding Requirements and their Interaction
Amendments to Philippine Interpretations IFRIC- 14,

Prepayments of a Minimum Funding Requirement
IFRIC 15 Agreements for the Construction of Real Estate*** 
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
IFRIC 21 Levies 
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
SIC-15 Operating Leases - Incentives 
SIC-21 Income Taxes - Recovery of Revalued Non- 
Depreciable Assets
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 

* Approved by Financial Reporting Standards Council (FRSC) but still for approval by the Board of Accountancy (BOA)
** New standards and amendments issued by the International Accounting Standards Board (IASB) has not yet been
adopted by the FRSC.
*** Effectivity has been deferred by the Securities and Exchange Commission (SEC) and FRSC

168
Schedule L – Financial Ratios
As of December 31, 2014

December 2014 December 2013


Ratio Formula (Audited) (Audited)

Liquidity Ratio Cash/ Cash equivalents + Short-term cash investments 0.54 0.45
Current Liabilities

Current ratio Current assets 1.50 1.46


Current liabilities

After-Tax Net Profit + (Depreciation + Amortization)+


0.06 0.06
Solvency Ratio Provision for Bad Debts
Total Liabilities

Debt-to-Equity Ratio Long-term Loans + Short Term Loans 1.39 1.43


Equity Attributable to Owners of the Parent

Assets- to-Equity Ratio Total Assets 3.91 4.18


Equity Attributable to Owners of the Parent

Interest Expense Coverage Ratio EBITDA 5.15 4.75


Interest Expense

Return on Equity Net Income to Owners of the Parent 11.3% 9.6%


Equity Attributable to Owners of the Parent (Average)

Net Income to Owners of the Parent Less Dividends on


12.2% 10.2%
Return on Common Equity Preferred Shares
Common Equity Attributable to Owners of the Parent
(Average)

Return on Assets Net Income 4.4% 4.0%


Total Assets

169
Schedule M – Non-Current Marketable Equity Securities, Other Long-term Investment in Stocks and Other Investments (Non-Current
Investments) (part 1)
As of December 31, 2014

BEGINNING BALANCE ADDITIONS DEDUCTIONS ENDING BALANCE


Dividends
Equity in
received/accrued
Amount in Earnings Distribution of Effective %
NAME OF COMPANY Number of Others (Cost & Others-Cost (& Number of Amount in fr investments not
Pesos (Losses) of Earnings by of
Shares Equity Adj ) equity adj) Shares Pesos accounted for by
(Restated) Investees for the Investees Ownership
the equity method
period

INVESTMENTS IN ASSOCIATES & JOINT VENTURES


Domestic:
Bank of the Philippine Islands and subsidiaries 1,085,423,799 52,635,471 5,785,284 9,045,790 (1,152,875) (502,847) 1,280,972,560 32.6% 65,810,823
Ayala DBS Holdings, Inc. 166,786,127 29,071,982 2,782,767 4,331,526 (242,839) 204,433,441 73.8% 35,943,436
Globe Telecom, Inc. and subsidiaries 40,321,095 15,371,450 3,978,185 332,440 (3,024,963) (335,840) 40,344,596 30.4% 16,321,272
GNPower Mariveles Coal Plant Ltd. Co. 145,216 7,213,524 (183,370) (11,674) 17.0% 7,163,696
Philippine Wind Holdings Corporation 472,661 2,180,000 (55,827) 2,139,257 (45,626) 482,049 75.0% 4,217,804
Emerging City Holdings, Inc. 72,150,000 3,992,669 469,628 186,000 (535,000) 72,150,000 50.0% 4,113,296
South Luzon Thermal Energy Corp. 17,915,125 3,070,121 (42,764) 491,000 (5,191) 17,915,125 50.0% 3,513,166
Berkshires Holdings, Inc. 31,000,000 1,955,494 201,269 (240,000) (101,419) 31,000,000 50.0% 1,815,344
Cebu District Property Enterprise, Inc. (CDPEI) (5,594) 1,497,603 10,500,000 42.0% 1,492,009
Bonifacio Land Corporation 4,397,118 1,394,561 102,116 41,707 (122,404) (60,098) 2,812,618 10.0% 1,355,882
Asiacom Philippines, Inc. 10,269,000 1,097,180 39,126 5,400 10,269,000 60.0% 1,141,706
Rize-Ayala Land GP, Inc. 4,900 500,950 (9,011) 204,819 4,900 49.0% 696,757
Light Rail Manila Holdings, Inc. (LRMHI) (4,283) 567,656 427,656,251 50.0% 563,373
Mercado General Hospital Inc. 18,787,600 359,523 12,225 56,089 (5,446) 22,107,854 33.0% 422,392
SIAL Specialty Retailers, Inc. 209,000,000 208,836 (88,521) 212,000 421,000,000 50.0% 332,315
Northwind Power Development Corp. 1,823,597 465,503 (129,019) (12,966) 1,823,597 50.0% 323,518
SIAL CVS Retailers, Inc. 183,000,000 161,611 (53,950) 45,250 226,250,000 50.0% 152,911
Automated Fare Collections Services, Inc. (AFCSI) (6,098) 150,404 150,404,051 10.0% 144,306
- -
Foreign:
Thu Doc Water BOO Corp. 2,734,200 2,199,521 217,705 (159,758) 2,450,000 49.0% 2,257,468
Kenh Dong Water Supply Joint Stock Company 18,941,070 1,863,334 111,800 42,949 18,941,070 47.4% 2,018,083
Integreon, Inc. 57,911,722 1,449,400 (317,468) 69,678 (240,960) 57,911,722 58.7% 960,649
VinaPhil Technical Infrastructure Investment 30,870,000 590,088 95,307 37,822 30,870,000 49.0% 723,217
Saigon Water Infrastructure Joint Stock Company 18,370,000 645,352 27,794 12,803 18,370,000 31.5% 685,949
Tian-Jin Eco City Ayala Land Devt Co. 117,100,000 542,558 (58,577) 117,100,000 40.0% 483,981
Others - 48,482 (12,162) 75,180 111,500

TOTAL-INVESTMENTS IN ASSOCIATES & JOINT VENTURES 119,804,086 13,185,147 26,758,898 (5,271,579) (1,711,698) 152,764,854

170
Schedule M – Non-Current Marketable Equity Securities, Other Long-term Investment in Stocks and Other Investments (Non-Current
Investments) (part 2)
As of December 31, 2014

BEGINNING BALANCE ADDITIONS DEDUCTIONS ENDING BALANCE Dividends


Equity in received/accrued
Earnings Distribution Effective fr investments not
NAME OF COMPANY Number of Amount in Others (Cost Others-Cost Number of Amount in
(Losses) of of Earnings % of accounted for by
Shares Pesos & Equity Adj ) (& equity adj) Shares Pesos
Investees for by Investees Ownership the equity
the period method

INVESTMENTS IN BONDS & OTHER SECURITIES


AFS financial assets:
Quoted equity investments:
IMA 466,119 94,474 560,593
CII 459,234 27,804 487,038
Others 316,516 552,651 869,168
1,241,869 - 674,930 - - 1,916,799
Unquoted equity investments:
Rohatyn Group (SOF & GOF) 416,444 (87,388) 329,056
City Sports Club Cebu, Inc. 164,611 164,611
Tech Ventures 51,131 12,152 63,283
Red River Holdings 460,443 (80,070) 380,373
Glory High 26,299 193 26,491
Anvaya Golf Club 676 (676) -
Others 320,033 (8,351) 311,683
1,439,637 - 12,344 - (176,484) 1,275,497
Quoted debt investments:
CII Convertible Bonds 239,919 239,919
SMIC Bond 51,283 (51,283) -
Others 52,018 (52,018) -
103,301 - 136,618 - - 239,919

TOTAL-INVESTMENTS IN BONDS & OTHER SECURITIES 2,784,807 - 823,893 - (176,484) 3,432,215

Schedule N – Indebtedness of Unconsolidated Subsidiaries and Related Parties


As of December 31, 2014

Name of Related Parties Balance at Beginning of Period Balance at End of Period

The Group has the following indebtedness of unconsolidated subsidiaries and related parties: P2.7B in
receivables. Please refer to Note 31 of the 2014 Consolidated Audited Financial Statements.

171
III. 2014 Consolidated Financial Statements of Associate and Joint Venture

172
Bank of the
Philippine Islands
Financial Statements
As at December 31, 2014 and 2013
and for each of the three years
in the period ended December 31, 2014
BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CONDITION
DECEMBER 31, 2014 and 2013
(In Millions of Pesos)

Consolidated Parent
Notes 2014 2013 2014 2013

RESOURCES

CASH AND OTHER CASH ITEMS 7 38,427 25,696 37,292 24,888


DUE FROM BANGKO SENTRAL NG
PILIPINAS 7 211,946 244,483 170,648 195,076
DUE FROM OTHER BANKS 7 22,227 17,070 15,429 8,789
INTERBANK LOANS RECEIVABLE AND
SECURITIES PURCHASED UNDER
AGREEMENTS TO RESELL 7, 8 5,782 17,397 5,246 10,037
FINANCIAL ASSETS AT FAIR VALUE
THROUGH PROFIT OR LOSS
- DERIVATIVE FINANCIAL ASSETS 9 35,981 16,550 35,981 16,550
- TRADING SECURITIES 10 15,862 4,597 6,620 2,626
AVAILABLE-FOR-SALE SECURITIES, net 11 51,309 87,556 41,866 81,736
HELD-TO-MATURITY SECURITIES 12 209,409 96,172 193,001 85,900
LOANS AND ADVANCES, net 13 800,170 630,203 621,441 475,155
ASSETS HELD FOR SALE, net 5,018 5,852 2,470 3,480
BANK PREMISES, FURNITURE,
FIXTURES AND EQUIPMENT, net 14 12,760 12,205 8,467 8,030
INVESTMENT PROPERTIES, net 15 808 1,597 808 1,597
INVESTMENTS IN SUBSIDIARIES AND
ASSOCIATES, net 16 4,784 4,176 6,726 6,793
ASSETS ATTRIBUTABLE TO INSURANCE
OPERATIONS 5, 7 16,445 14,586 - -
DEFERRED INCOME TAX ASSETS, net 17 5,718 6,176 3,595 4,296
OTHER RESOURCES, net 18 13,551 11,048 8,658 7,414
Total resources 1,450,197 1,195,364 1,158,248 932,367
(forward)
BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CONDITION
DECEMBER 31, 2014 and 2013
(In Millions of Pesos)

Consolidated Parent
Notes 2014 2013 2014 2013

LIABILITIES AND CAPITAL FUNDS

DEPOSIT LIABILITIES 19 1,176,213 988,586 952,681 785,403


DERIVATIVE FINANCIAL LIABILITIES 9 34,846 16,360 34,846 16,360
BILLS PAYABLE 20 32,993 26,179 26,288 18,990
DUE TO BANGKO SENTRAL NG PILIPINAS
AND OTHER BANKS 687 2,051 688 2,052
MANAGER’S CHECKS AND DEMAND
DRAFTS OUTSTANDING 8,353 7,183 6,664 6,026
ACCRUED TAXES, INTEREST AND OTHER
EXPENSES 5,597 4,907 4,017 3,396
LIABILITIES ATTRIBUTABLE TO INSURANCE
OPERATIONS 5 13,561 13,061 - -
DEFERRED CREDITS AND OTHER
LIABILITIES 21 31,268 31,230 25,469 26,338
Total liabilities 1,303,518 1,089,557 1,050,653 858,565
CAPITAL FUNDS ATTRIBUTABLE TO THE
EQUITY HOLDERS OF BPI 22
Share capital 39,272 35,563 39,272 35,563
Share premium 29,341 8,316 29,341 8,316
Reserves 2,098 1,680 2,095 1,680
Surplus 76,575 62,137 41,388 32,053
Accumulated other comprehensive loss (3,223) (3,161) (4,501) (3,810)
144,063 104,535 107,595 73,802
NON-CONTROLLING INTERESTS 2,616 1,272 - -
Total capital funds 146,679 105,807 107,595 73,802
Total liabilities and capital funds 1,450,197 1,195,364 1,158,248 932,367

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos, Except Per Share Amounts)

Consolidated Parent
Notes 2014 2013 2012 2014 2013 2012
INTEREST INCOME
On loans and advances 36,441 32,368 30,790 23,282 20,255 19,356
On held-to-maturity securities 8,141 4,930 5,191 7,545 4,434 4,638
On available-for-sale securities 831 2,615 3,424 778 2,436 3,126
On deposits with BSP and other banks 1,769 1,641 1,230 1,135 904 702
On trading securities 406 690 847 370 628 763
Gross receipts tax (1,596) (1,442) (1,373) (1,147) (1,000) (963)
45,992 40,802 40,109 31,963 27,657 27,622
INTEREST EXPENSE
On deposits 19 10,834 9,530 11,648 6,735 5,187 6,929
On bills payable and other borrowings 20 350 948 1,007 138 597 588
11,184 10,478 12,655 6,873 5,784 7,517
NET INTEREST INCOME 34,808 30,324 27,454 25,090 21,873 20,105
IMPAIRMENT LOSSES 11, 13, 18 2,807 2,648 2,923 1,787 1,599 2,003
NET INTEREST INCOME AFTER
IMPAIRMENT LOSSES 32,001 27,676 24,531 23,303 20,274 18,102
OTHER INCOME
Trading gain on securities 1,362 4,839 5,908 1,034 3,983 4,717
Fees and commissions 7,370 5,885 5,111 5,400 4,823 4,256
Income from foreign exchange trading 2,007 2,042 1,682 1,683 1,652 1,372
Income attributable to insurance operations 5 1,007 1,449 694 - - -
Other operating income 23 10,668 9,514 7,878 9,971 8,556 6,771
Gross receipts tax (1,435) (1,555) (1,342) (1,195) (1,307) (1,122)
20,979 22,174 19,931 16,893 17,707 15,994
OTHER EXPENSES
Compensation and fringe benefits 25 11,850 10,641 10,470 9,568 8,292 8,262
Occupancy and equipment-related expenses 14, 15, 24 9,017 8,040 7,193 7,144 6,460 5,798
Other operating expenses 25 9,093 8,022 7,139 6,593 5,872 5,378
29,960 26,703 24,802 23,305 20,624 19,438
INCOME BEFORE INCOME TAX 23,020 23,147 19,660 16,891 17,357 14,658
PROVISION FOR INCOME TAX 26
Current 5,374 4,147 3,576 3,759 2,644 2,444
Deferred 17 (416) 6 (418) (138) 245 (213)
4,958 4,153 3,158 3,621 2,889 2,231
NET INCOME FOR THE YEAR 18,062 18,994 16,502 13,270 14,468 12,427

Attributable to:
Equity holders of BPI 18,039 18,811 16,352 13,270 14,468 12,427
Non-controlling interests 23 183 150 - - -
18,062 18,994 16,502 13,270 14,468 12,427
Earnings per share for net income attributable to
the equity holders of BPI during the year:
Basic and diluted 22 4.62 5.19 4.60 3.40 3.99 3.49

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF TOTAL COMPREHENSIVE INCOME


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Consolidated Parent
Note 2014 2013 2012 2014 2013 2012
NET INCOME FOR THE YEAR 18,062 18,994 16,502 13,270 14,468 12,427
OTHER COMPREHENSIVE INCOME 22
Items that may be subsequently reclassified
to profit or loss
Net change in fair value reserve on available-
for-sale securities, net of tax effect (903) (3,983) (718) (1,043) (3,671) (550)
Share in other comprehensive income (loss)
of associates 254 (88) 503 - - -
Fair value reserve on investments of
insurance subsidiaries, net of tax effect 169 (309) 161 - - -
Currency translation differences (65) 233 (104) - - -
Item that will not be reclassified to profit or
loss
Actuarial gains (losses) on defined benefit
plan, net of tax effect 500 (491) 1,752 352 (416) 1,390
Total other comprehensive (loss) income, net of
tax effect (45) (4,638) 1,594 (691) (4,087) 840
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR 18,017 14,356 18,096 12,579 10,381 13,267

Attributable to:
Equity holders of BPI 17,972 14,230 17,937 12,579 10,381 13,267
Non-controlling interests 45 126 159 - - -
18,017 14,356 18,096 12,579 10,381 13,267

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CHANGES IN CAPITAL FUNDS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Consolidated
Attributable to equity holders of BPI (Note 22)
Accumulated
other Non-
Share Share comprehensive controlling Total
capital premium Reserves Surplus income (loss) Total interests equity
Balance, January 1, 2012 35,562 8,317 1,462 41,763 (165) 86,939 1,377 88,316
Comprehensive income
Net income for the year - - - 16,352 - 16,352 150 16,502
Other comprehensive income for the
year - - - - 1,585 1,585 9 1,594
Total comprehensive income for
the year - - - 16,352 1,585 17,937 159 18,096
Transactions with owners
Cash dividends - - - (8,180) - (8,180) - (8,180)
Transfer from surplus to reserves - - 141 (141) - - - -
Other changes in non-controlling
interests - - - - - - (110) (110)
Total transactions with owners - - 141 (8,321) - (8,180) (110) (8,290)
Balance, December 31, 2012 35,562 8,317 1,603 49,794 1,420 96,696 1,426 98,122
Balance, January 1, 2013 35,562 8,317 1,603 49,794 1,420 96,696 1,426 98,122
Comprehensive income
Net income for the year - - - 18,811 - 18,811 183 18,994
Other comprehensive loss for the
year - - - - (4,581) (4,581) (57) (4,638)
Total comprehensive income
(loss) for the year - - - 18,811 (4,581) 14,230 126 14,356
Transactions with owners
Cash dividends - - - (6,401) - (6,401) - (6,401)
Transfer from surplus to reserves - - 76 (76) - - - -
Others 1 (1) 1 9 - 10 - 10
Other changes in non-controlling
interests - - - - - - (280) (280)
Total transactions with owners 1 (1) 77 (6,468) - (6,391) (280) (6,671)
Balance, December 31, 2013 35,563 8,316 1,680 62,137 (3,161) 104,535 1,272 105,807
(forward)
BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CHANGES IN CAPITAL FUNDS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Consolidated
Attributable to equity holders of BPI (Note 22)
Accumulated
other Non-
Share Share comprehensive controlling Total
capital premium Reserves Surplus income (loss) Total interests equity
Balance, January 1, 2014 35,563 8,316 1,680 62,137 (3,161) 104,535 1,272 105,807
Comprehensive income
Net income for the year - - - 18,039 - 18,039 23 18,062
Other comprehensive (loss) income for the
year - - - - (67) (67) 22 (45)
Total comprehensive income (loss) for
the year - - - 18,039 (67) 17,972 45 18,017
Transactions with owners
Proceeds from the stock rights offering 3,709 21,025 - - - 24,734 - 24,734
Executive stock plan amortization - - 21 - - 21 - 21
Cash dividends - - - (3,538) - (3,538) - (3,538)
Transfer from surplus to reserves - - 397 (397) - - - -
Change in ownership interest in subsidiary
that did not result in loss of control - - - 336 - 336 - 336
Others - - - (2) 5 3 - 3
Other changes in non-controlling interests - - - - - - 1,299 1,299
Total transactions with owners 3,709 21,025 418 (3,601) 5 21,556 1,299 22,855
Balance, December 31, 2014 39,272 29,341 2,098 76,575 (3,223) 144,063 2,616 146,679

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CHANGES IN CAPITAL FUNDS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Parent (Note 22)


Accumulated
other
Share Share comprehensive
capital premium Reserves Surplus income (loss) Total
Balance, January 1, 2012 35,562 8,317 1,462 19,948 (563) 64,726
Comprehensive income
Net income for the year - - - 12,427 - 12,427
Other comprehensive income for the year - - - - 840 840
Total comprehensive income for the
year - - - 12,427 840 13,267
Transactions with owners
Cash dividends - - - (8,180) - (8,180)
Transfer from surplus to reserves - - 141 (141) - -
Total transactions with owners - - 141 (8,321) - (8,180)
Balance, December 31, 2012 35,562 8,317 1,603 24,054 277 69,813
Balance, January 1, 2013 35,562 8,317 1,603 24,054 277 69,813
Comprehensive income
Net income for the year - - - 14,468 - 14,468
Other comprehensive loss for the year - - - - (4,087) (4,087)
Total comprehensive income (loss) for
the year - - - 14,468 (4,087) 10,381
Transactions with owners
Cash dividends - - - (6,401) - (6,401)
Transfer from surplus to reserves - - 76 (76) - -
Others 1 (1) 1 8 - 9
Total transactions with owners 1 (1) 77 (6,469) - (6,392)
Balance, December 31, 2013 35,563 8,316 1,680 32,053 (3,810) 73,802
(forward)
BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CHANGES IN CAPITAL FUNDS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Parent (Note 22)


Accumulated
other
Share Share comprehensive
capital premium Reserves Surplus income (loss) Total
Balance, January 1, 2014 35,563 8,316 1,680 32,053 (3,810) 73,802
Comprehensive income
Net income for the year - - - 13,270 - 13,270
Other comprehensive loss for the year - - - - (691) (691)
Total comprehensive income (loss) for
the year - - - 13,270 (691) 12,579
Transactions with owners
Proceeds from the stock rights offering 3,709 21,025 - - - 24,734
Executive stock option plan amortization - - 18 - - 18
Cash dividends - - - (3,538) - (3,538)
Transfer from surplus to reserves - - 397 (397) - -
Total transactions with owners 3,709 21,025 415 (3,935) - 21,214
Balance, December 31, 2014 39,272 29,341 2,095 41,388 (4,501) 107,595

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CASH FLOWS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Consolidated Parent
Notes 2014 2013 2012 2014 2013 2012
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax 23,020 23,147 19,660 16,891 17,357 14,658
Adjustments for:
Impairment losses 11, 13, 18 2,807 2,648 2,923 1,787 1,599 2,003
Depreciation and amortization 14, 15 3,587 3,459 3,346 2,299 2,125 2,188
Share in net income of associates 16 (257) (590) (138) - - -
Dividend and other income 2, 23 (22) (28) (27) (2,000) (1,923) (1,383)
Share based compensation 21 1 - 18 1 -
Interest income (47,588) (42,244) (41,482) (33,110) (28,657) (28,585)
Interest expense 11,184 10,478 12,655 6,874 5,784 7,517
Operating loss before changes in
operating assets and liabilities (7,248) (3,129) (3,063) (7,241) (3,714) (3,602)
Changes in operating assets and
liabilities
(Increase) decrease in:
Interbank loans receivable and
securities purchased under
agreements to resell (5,045) - - (5,010) - -
Trading securities, net (11,218) 17,345 (9,887) (3,952) 16,291 (7,593)
Loans and advances, net (167,393) (110,369) (74,049) (142,705) (91,710) (53,801)
Assets held for sale 764 434 1,868 878 900 1,759
Assets attributable to insurance
operations (910) (2,059) (724) - - -
Other resources (2,897) 3,212 (3,661) (1,545) 2,901 (3,603)
Increase (decrease) in:
Deposit liabilities 187,627 186,312 121,173 167,278 157,038 83,951
Due to Bangko Sentral ng Pilipinas
and other banks (1,364) 16 317 (1,364) 16 318
Manager’s checks and demand
drafts outstanding 1,170 1,389 1,663 637 1,518 1,120
Accrued taxes, interest and other
expenses 623 542 557 419 306 652
Liabilities attributable to insurance
operations 500 2,267 856 - - -
Derivative financial instruments (935) (107) 387 (935) (107) 608
Deferred credits and other liabilities 3,737 3,250 3,949 2,684 3,157 3,191
Net cash (used in) from operations (2,589) 99,103 39,386 9,144 86,596 23,000
Interest received 45,984 42,407 41,152 31,608 28,927 27,479
Interest paid (11,117) (10,932) (12,418) (6,672) (6,149) (7,423)
Income taxes paid (4,500) (5,243) (2,961) (2,920) (3,660) (2,079)
Net cash from operating activities 27,778 125,335 65,159 31,160 105,714 40,977
(forward)
BANK OF THE PHILIPPINE ISLANDS

STATEMENTS OF CASH FLOWS


FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2014
(In Millions of Pesos)

Consolidated Parent
Notes 2014 2013 2012 2014 2013 2012
CASH FLOWS FROM INVESTING
ACTIVITIES
(Increase) decrease in:
Available-for-sale securities, net 11 35,013 14,479 (32,756) 38,452 7,078 (28,286)
Held-to-maturity securities 12 (111,906) (19,695) 13,230 (105,811) (17,879) 12,165
Bank premises, furniture, fixtures and
equipment, net 14 (3,434) (2,557) (2,748) (2,061) (1,406) (1,416)
Investment properties, net 709 909 (12) 709 912 (12)
Investment in subsidiaries and
associates, net (95) (349) (24) (248) 302 (80)
Assets attributable to insurance
operations (851) 936 (614) - - -
Dividends received 23 22 28 27 572 1,923 1,383
Proceeds from sale of interest in a
subsidiary 2 - - - 1,744 - -
Net cash used in investing activities (80,542) (6,249) (22,897) (66,643) (9,070) (16,246)
CASH FLOWS FROM FINANCING
ACTIVITIES
Cash dividends paid (6,739) (3,201) (11,380) (6,739) (3,201) (11,380)
Increase (decrease) in:
Collection on stock subscriptions 24,733 - - 24,733 - -
Bills payable 6,812 (100) 7,144 7,300 (2,973) 7,076
Unsecured subordinated debt 20 - (5,000) - - - -
Proceeds from sale of interest in a
subsidiary to a non-controlling interest 2 1,744 - - - - -
Net cash from (used in) financing activities 26,550 (8,301) (4,236) 25,294 (6,174) (4,304)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (26,214) 110,785 38,026 (10,189) 90,470 20,427
CASH AND CASH EQUIVALENTS 7
January 1 299,772 188,987 150,961 233,799 143,329 122,902
December 31 273,558 299,772 188,987 223,610 233,799 143,329

(The notes on pages 1 to 99 are an integral part of these financial statements.)


BANK OF THE PHILIPPINE ISLANDS

NOTES TO FINANCIAL STATEMENTS


AS AT DECEMBER 31, 2014 AND 2013 AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2014

Note 1 - General Information

Bank of the Philippine Islands (“BPI” or the “Parent Bank”) is a domestic commercial bank with an expanded
banking license and has its registered office address, which is also its principal place of business, at BPI Building,
Ayala Avenue corner Paseo de Roxas, Makati City. BPI and its subsidiaries as detailed in Note 2.3 (collectively
referred to as the “BPI Group”) offer a whole breadth of financial services that include corporate banking, consumer
banking, investment banking, asset management, corporate finance, securities distribution, and insurance services.
At December 31, 2014, the BPI Group has 14,542 employees (2013 - 13,024 employees) and operates 825
branches and 2,575 ATMs (2013 - 825 branches and 2,181 ATMs) to support its delivery of services. The BPI
Group also serves its customers through alternative electronic banking channels such as telephone, mobile phone
and the internet. The BPI shares have been traded in the Philippine Stock Exchange (PSE) since
October 12, 1971. The Parent Bank was registered with the Securities and Exchange Commission (SEC) on
January 4, 1943. This license was extended for another 50 years on January 4, 1993.

These financial statements have been approved and authorized for issuance by the Board of Directors of the
Parent Bank on February 18, 2015. There are no material events that occurred subsequent to February 18, 2015
until February 20, 2015.

Note 2 - Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these financial statements are set out below.
These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The financial statements of the BPI Group have been prepared in accordance with Philippine Financial Reporting
Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards
(PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee
(SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the
Financial Reporting Standards Council (FRSC) and adopted by the SEC.

As allowed by the SEC, the pre-need subsidiary of the Parent Bank continues to follow the provisions of the
Pre-Need Uniform Chart of Accounts (PNUCA) prescribed by the SEC and adopted by the Insurance
Commission.

The financial statements comprise the statement of condition, statement of income and statement of total
comprehensive income shown as two statements, statement of changes in capital funds, statement of cash flows
and the notes.

These financial statements have been prepared under the historical cost convention, as modified by the
revaluation of trading securities, available-for-sale financial assets and all derivative contracts.

The preparation of financial statements in conformity with PFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the BPI Group’s
accounting policies. Changes in assumptions may have a significant impact on the financial statements in the
period the assumptions changed. Management believes that the underlying assumptions are appropriate and
that the financial statements therefore fairly present the financial position and results of the BPI Group. The
areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are
significant to the financial statements are disclosed in Note 4.
2.2 Changes in accounting policy and disclosures

New and amended standards adopted by the BPI Group

The following standards have been adopted by the BPI Group effective January 1, 2014:

 Amendment to PAS 32, ‘Financial instruments: Presentation’ on offsetting financial assets and financial
liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must
also be legally enforceable for all counterparties in the normal course of business, as well as in the event of
default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment
did not have a significant effect on the BPI Group’s financial statements.

 Amendment to PAS 36, ‘Impairment of assets’, on the recoverable amount disclosures for non-financial
assets. This amendment removed certain disclosures of the recoverable amount of cash generating units
(CGUs) which had been included in PAS 36 by the issue of PFRS 13, Fair Value Measurement. The
amendment did not have a significant effect on the BPI Group’s financial statements.

 Amendment to PAS 39, ‘Financial instruments: Recognition and measurement’ on the novation of
derivatives and the continuation of hedge accounting. This amendment considers legislative changes to
‘over-the-counter’ derivatives and the establishment of central counterparties. Under PAS 39, novation of
derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment
provides relief from discontinuing hedge accounting when novation of a hedging instrument meets specified
criteria. The amendment did not have a significant effect on the BPI Group’s financial statements.

Other standards, amendments and interpretations which are effective for the financial year beginning on
January 1, 2014 are considered not relevant to the BPI Group.

New standards, amendments and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods
beginning after January 1, 2014, and have not been applied in preparing these financial statements. None of
these standards are expected to have a significant effect on the financial statements of the BPI Group, except
the following as set out below:

 PFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial
assets and financial liabilities. The complete version of PFRS 9 was issued in July 2014. It replaces the
guidance in PAS 39 that relates to the classification and measurement of financial instruments. PFRS 9
retains but simplifies the mixed measurement model and establishes three primary measurement
categories for financial assets: amortized cost, fair value through other comprehensive income and fair value
through profit or loss. The basis of classification depends on the entity’s business model and the contractual
cash flow characteristics of the financial asset. Investments in equity instruments are required to be
measured at fair value through profit or loss with the irrevocable option at inception to present changes in
fair value in other comprehensive income with no recycling to profit or loss. There is now a new expected
credit losses model that replaces the incurred loss impairment model used in PAS 39. For financial liabilities,
there were no changes to classification and measurement except for the recognition of changes in own
credit risk in other comprehensive income for liabilities designated at fair value through profit or loss.
PFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness
tests. It requires an economic relationship between the hedged item and hedging instrument and for the
‘hedged ratio’ to be the same as the one management actually use for risk management purposes.
Contemporaneous documentation is still required but is different to that currently prepared under PAS 39.
The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is
permitted. The BPI Group is assessing the full impact of PFRS 9.

 PFRS 15, ‘Revenue from contracts with customers’, deals with revenue recognition and establishes
principles for reporting useful information to users of financial statements about the nature, amount, timing
and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is
recognized when a customer obtains control of a good or service and thus has the ability to direct the use
and obtain the benefits from the good or service. The standard replaces PAS 18 ‘Revenue’ and PAS 11
‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning
on or after January 1, 2017 and earlier application is permitted. The BPI Group is assessing the impact of
PFRS 15.

(2)
There are no other standards, amendments or interpretations that are not yet effective that have a material
impact on the BPI Group.

2.3 Consolidation

The consolidated financial statements comprise the financial statements of the BPI Group as at
December 31, 2014 and 2013. The subsidiaries financial statements are prepared for the same reporting year as
the Parent Bank. The consolidated financial statements include the financial statements of the Parent Bank and
the following subsidiaries as at December 31:

Country of % of ownership
Subsidiaries incorporation Principal activities 2014 2013
BPI Family Savings Bank, Inc. Philippines Banking 100 100
BPI Capital Corporation Philippines Investment house 100 100
BPI Direct Savings Bank, Inc. Philippines Banking 100 100
BPI International Finance Limited Hong Kong Financing 100 100
BPI Europe Plc. England and Wales Banking (deposit) 100 100
BPI Securities Corp. Philippines Securities dealer 100 100
BPI Card Finance Corp. Philippines Financing 100 100
Filinvest Algo Financial Corp. Philippines Financing 100 100
BPI Investment Management Inc. Philippines Investment management 100 100
Santiago Land Dev. Corp. Philippines Land holding 100 100
BPI Operations Management Corp. Philippines Operations management 100 100
BPI Computer Systems Corp. Philippines Business systems service 100 100
BPI Foreign Exchange Corp. Philippines Foreign exchange 100 100
BPI Express Remittance Corp. USA USA Remittance 100 100
BPI Express Remittance Corp. Nevada USA Remittance 100 100
BPI Express Remittance Center HK (Ltd.) Hong Kong Remittance 100 100
Green Enterprises S. R. L. in Liquidation
(formerly BPI Express Remittance
Europe, S.p.A.) Italy Remittance 100 100
First Far - East Development Corporation Philippines Real estate 100 100
FEB Stock Brokers, Inc. Philippines Securities dealer 100 100
BPI Express Remittance Spain S.A Spain Remittance 100 100
FEB Speed International Philippines Remittance 100 100
Financial management
AF Holdings and Management Corp. Philippines consultancy 100 100
Ayala Plans, Inc. Philippines Pre-need 98.67 98.67
FGU Insurance Corporation Philippines Non-life insurance 94.62 94.62
BPI Century Tokyo Lease and Finance
Corporation (formerly BPI Leasing
Corporation) Philippines Leasing 51 100
BPI Century Tokyo Rental Corporation
(formerly BPI Rental Corporation) Philippines Rental 51 100
CityTrust Securities Corporation Philippines Securities dealer 51 100
BPI/MS Insurance Corporation Philippines Non-life insurance 50.85 50.85
BPI Globe BanKO, Inc. Philippines Banking 40 40

BPI has control over BPI Globe BanKO, Inc. since BPI is largely involved in key decisions concerning financial
and operating policies and activities of, and provision of technological support and technical know-how to BPI
Globe BanKO, Inc.

(3)
On December 23, 2014, BPI sold its 49% interest in BPI Leasing Corporation to Century Tokyo Leasing
Corporation for a total consideration of P1,744 million, thereby bringing its remaining ownership interest to 51%.
The BPI Group recognized an increase in non-controlling interest of P1,231 million and an increase in equity
attributable to owners of the Parent Bank of P336 million. The name of BPI Leasing has also been changed to
BPI Century Tokyo Lease and Finance Corporation as a consequence of the sale. In addition, the Parent Bank’s
effective ownership in BPI Century Tokyo Rental Corporation and CityTrust Securities Corporation, both wholly-
owned subsidiaries of BPI Century Tokyo Lease and Finance Corporation, has been reduced to 51% each as at
December 31, 2014.

The effect of change in the ownership interest in BPI Century Tokyo Lease and Finance Corporation on the
equity attributable to owners of BPI Parent during the year is summarized as follows:

(In Millions of Pesos)


Consideration received from non-controlling interest 1,744
Carrying amount of non-controlling interest sold, net of related cost 1,408
Excess of consideration received recognized in equity 336

At BPI Parent, the gain from sale recognized in the statement of income amounts to P1,428 million.

(a) Subsidiaries

Subsidiaries are all entities over which the BPI Group has control. The BPI Group controls an entity when it is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity. The BPI Group also assesses existence of control where it does not
have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-
facto control. De-facto control may arise in circumstances where the size of the BPI Group’s voting rights
relative to the size and dispersion of holdings of other shareholders give the BPI Group the power to govern the
financial and operating policies.

Subsidiaries are fully consolidated from the date on which control is transferred to the BPI Group. They are de-
consolidated from the date that control ceases.

The BPI Group applies the acquisition method of accounting to account for business combinations. The
consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the equity interests issued by the BPI Group. The
consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration
arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date. On an acquisition-by-acquisition basis, the BPI Group recognizes any non-controlling interest in
the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s
identifiable net assets.

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously
held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the BPI Group is recognized at fair value at the acquisition
date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or
liability is recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive
income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is
not accounted for within equity.

The excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the
acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of
the BPI Group’s share of the identifiable net assets acquired is recorded as goodwill. If the total of consideration
transferred, non-controlling interest recognized and previously held interest measured is less than the fair value
of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized
directly in profit or loss.

(4)
Inter-company transactions, balances and unrealized gains on transactions between group companies are
eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the BPI Group, except for the pre-need subsidiary
which follows the provisions of the PNUCA as allowed by the SEC.

When the BPI Group ceases to have control, any retained interest in the entity is re-measured to its fair value at
the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the
initial carrying amount for purposes of subsequently accounting for the retained interest as an associate, joint
venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in
respect of that entity are accounted for as if the BPI Group had directly disposed of the related assets or
liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to
profit or loss.

(b) Transactions with non-controlling interests

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity
transactions - that is, as transactions with the owners in their capacity as owners. For purchases from non-
controlling interests, the difference between any consideration paid and the relevant share acquired of the
carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-
controlling interests are also recorded in equity.

Interests in the equity of subsidiaries not attributable to the Parent Bank are reported in consolidated equity as
non-controlling interests. Profits or losses attributable to non-controlling interests are reported in the statement
of income as net income (loss) attributable to non-controlling interests.

(c) Associates

Associates are all entities over which the BPI Group has significant influence but not control, generally
accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates in the
consolidated financial statements are accounted for using the equity method of accounting. Under the equity
method, the investment is initially recognized at cost and the carrying amount is increased or decreased to
recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The BPI Group’s
investment in associates includes goodwill identified on acquisition (net of any accumulated impairment loss).

If the ownership interest in an associate is reduced but significant influence is retained, a proportionate share of
the amounts previously recognized in other comprehensive income is reclassified to profit or loss where
appropriate.

The BPI Group’s share of its associates’ post-acquisition profits or losses is recognized in profit or loss, and its
share of post-acquisition movements in reserves is recognized in other comprehensive income. The cumulative
post-acquisition movements are adjusted against the carrying amount of the investment. When the BPI Group’s
share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured
receivables, the BPI Group does not recognize further losses, unless it has incurred legal or constructive
obligations or made payments on behalf of the associate.

The BPI Group determines at each reporting date whether there is any objective evidence that the investment in
the associate is impaired. If this is the case, the BPI Group calculates the amount of impairment as the
difference between the recoverable amount of the associate and its carrying value and recognizes the amount
adjacent to ‘share of profit (loss) of an associate’ in profit or loss.

Unrealized gains on transactions between the BPI Group and its associates are eliminated to the extent of the
BPI Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where
necessary to ensure consistency with the policies adopted by the BPI Group.

(5)
2.4 Investments in subsidiaries and associates

Investments in subsidiaries and associates in the Parent Bank’s separate financial statements are accounted for
using the cost method in accordance with PAS 27. Under this method, income from investment is recognized in
profit or loss only to the extent that the investor receives distributions from accumulated profits of the investee
arising after the acquisition date. Distributions received in excess of such profits are regarded as a recovery of
investment and are recognized as reduction of the cost of the investment.

The Parent Bank recognizes a dividend from a subsidiary or associate in profit or loss in its separate financial
statements when its right to receive the dividend is established.

The Parent Bank determines at each reporting date whether there is any indicator of impairment that the
investment in the subsidiary or associate is impaired. If this is the case, the Parent Bank calculates the amount
of impairment as the difference between the recoverable amount and carrying value and the difference is
recognized in profit or loss.

Investments in subsidiaries and associates are derecognized upon disposal or when no future economic benefits
are expected to be derived from the subsidiaries and associates at which time the cost and the related
accumulated impairment loss are removed in the statement of condition. Any gains and losses on disposal is
determined by comparing the proceeds with the carrying amount of the investment and recognized in profit or
loss.

2.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief
executive officer who allocates resources to, and assesses the performance of the operating segments of the
BPI Group.

All transactions between business segments are conducted on an arm´s length basis, with intra-segment
revenue and costs being eliminated upon consolidation. Income and expenses directly associated with each
segment are included in determining business segment performance.

In accordance with PFRS 8, the BPI Group has the following main banking business segments: consumer
banking, corporate banking and investment banking. Its insurance business is assessed separately from these
banking business segments (Note 6).

2.6 Cash and cash equivalents

Cash and cash equivalents consist of Cash and other cash items, Due from Bangko Sentral ng Pilipinas (BSP),
Due from other banks, and Interbank loans receivable and securities purchased under agreements to resell with
maturities of less than three months from the date of acquisition and that are subject to insignificant risk of
changes in value.

2.7 Repurchase and reverse repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged
assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty
liability is included in deposits from banks or deposits from customers, as appropriate. The difference between
sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective
interest method.

Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other
banks and customers and included in the statement of condition under “Interbank loans receivable and securities
purchased under agreements to resell”. Securities lent to counterparties are also retained in the financial
statements.

(6)
2.8 Financial assets

2.8.1 Classification

The BPI Group classifies its financial assets in the following categories: financial assets at fair value through
profit or loss, loans and receivables, held-to-maturity securities and available-for-sale securities. The
classification depends on the purpose for which the financial assets are acquired. Management determines the
classification of its financial assets at initial recognition.

(a) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading and those designated at fair value through
profit or loss at inception.

A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or
repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial assets
held for trading (other than derivatives) are shown as “Trading securities” in the statement of condition.

Derivatives are also categorized as held for trading unless they are designated as hedging instruments.

Financial assets designated at fair value through profit or loss at inception are those that are managed and their
performance is evaluated on a fair value basis, in accordance with a documented investment strategy.
Information about these financial assets is provided internally on a fair value basis to the BPI Group’s key
management personnel. The BPI Group has no financial assets that are specifically designated at fair value
through profit or loss.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments: (i) that are not
quoted in an active market, (ii) with no intention of being traded, and (iii) that are not designated as available-for-
sale. Significant accounts falling under this category include loans and advances, cash and other cash items,
due from BSP and other banks, interbank loans receivable and securities purchased under agreements to resell
and accounts receivable included under other resources.

(c) Held-to-maturity securities

Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed
maturities that the BPI Group’s management has the positive intention and ability to hold to maturity. If the BPI
Group were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be
tainted and reclassified as available-for-sale.

(d) Available-for-sale securities

Available-for-sale securities are non-derivative financial assets that are either designated in this category or not
classified in any of the other categories.

2.8.2 Recognition and measurement

(a) Initial recognition and measurement

Regular-way purchases and sales of financial assets at fair value through profit or loss, held-to-maturity
securities and available-for-sale securities are recognized on trade date, the date on which the BPI Group
commits to purchase or sell the asset. Loans and receivables are recognized upon origination when cash is
advanced to the borrowers or when the right to receive payment is established. Financial assets not carried at
fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets
carried at fair value through profit or loss are initially recognized at fair value; and transaction costs are
recognized in profit or loss.

(7)
(b) Subsequent measurement

Available-for-sale securities and financial assets at fair value through profit or loss are subsequently carried at
fair value. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost.
Amortized cost is the amount at which the financial instrument was recognized at initial recognition less any
principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment
losses. Accrued interest includes amortization of transaction costs deferred at initial recognition and of any
premium or discount to maturity amount using the effective interest method. Accrued interest income, including
both accrued coupon and amortized discount or premium (including fees deferred at origination, if any), are not
presented separately and are included in the carrying values of the related items in the statement of condition.
Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss are
included in the statement of income (as “Trading gain/loss on securities”) in the year in which they arise.
Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are
recognized directly in other comprehensive income, until the financial asset is derecognized or impaired at which
time the cumulative fair value adjustments previously recognized in other comprehensive income should be
recognized in profit or loss. However, interest is calculated on these securities using the effective interest
method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized
in profit or loss. Dividends on equity instruments are recognized in profit or loss when the BPI Group’s right to
receive payment is established.

2.8.3 Reclassification

The BPI Group may choose to reclassify a non-derivative financial asset held for trading out of the held-for-
trading category if the financial asset is no longer held for the purpose of selling it in the near term. Financial
assets other than loans and receivables are permitted to be reclassified out of the held-for-trading category only
in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In
addition, the BPI Group may choose to reclassify financial assets that would meet the definition of loans and
receivables out of the held-for-trading or available-for-sale categories if the BPI Group has the intention and
ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification.

Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or
amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date
are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and
held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash
flows adjust effective interest rates prospectively.

2.8.4 Derecognition

Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have
ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of
the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the
BPI Group tests control to ensure that continuing involvement on the basis of any retained powers of control
does not prevent derecognition).

2.9 Impairment of financial assets

(a) Assets carried at amortized cost

The BPI Group assesses at each reporting date whether there is objective evidence that a financial asset or
group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment
losses are incurred only if there is objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on
the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

(8)
The criteria that the BPI Group uses to determine that there is objective evidence of an impairment loss include:
 Delinquency in contractual payments of principal or interest;
 Cash flow difficulties experienced by the borrower;
 Breach of loan covenants or conditions;
 Initiation of bankruptcy proceedings;
 Deterioration of the borrower’s competitive position; and
 Deterioration in the value of collateral.

The BPI Group first assesses whether objective evidence of impairment exists individually for financial assets
that are individually significant, and collectively for financial assets that are not individually significant. If the BPI
Group determines that no objective evidence of impairment exists for an individually assessed financial asset,
whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics
and collectively assesses them for impairment. Financial assets that are individually assessed for impairment
and for which an impairment loss is or continues to be recognized are not included in a collective assessment of
impairment.

The amount of impairment loss is measured as the difference between the 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 (recoverable amount). The calculation of
recoverable amount of a collateralized financial asset reflects the cash flows that may result from foreclosure
less costs of obtaining and selling the collateral, whether or not foreclosure is probable. If a loan or held-to-
maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the
current effective interest rate determined under the contract. The carrying amount of the asset is reduced
through the use of an allowance account and the amount of loss is recognized in profit or loss.

For purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit
risk characteristics (i.e., on the basis of the BPI Group’s grading process that considers asset type, industry,
geographical location, collateral type, past-due status and other relevant factors). Those characteristics are
relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability
to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on
the basis of the contractual cash flows of the assets in the BPI Group and historical loss experience for assets
with credit risk characteristics similar to those in the BPI Group. Historical loss experience is adjusted on the
basis of current observable data to reflect the effects of current conditions that did not affect the period on which
the historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly
to reduce any differences between loss estimates and actual loss experience.

When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are
written off after all the necessary procedures have been completed and the amount of loss has been determined.

If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating),
the previously recognized impairment loss is reversed by adjusting the allowance account. Subsequent
recoveries of amounts previously written-off are credited to impairment loss in the statement of income.

(b) Assets classified as available-for-sale

The BPI Group assesses at each reporting date whether there is an objective evidence that a security classified
as available-for-sale is impaired. For debt securities, the BPI Group uses the criteria mentioned in (a) above.
For an equity security classified as available-for-sale, a significant or prolonged decline in the fair value below
cost is considered in determining whether the securities are impaired. Generally, the BPI Group treats
‘significant’ as 20% or more and ‘prolonged’ as greater than twelve months. The cumulative loss (difference
between the acquisition cost and the current fair value less any impairment loss on that financial asset previously
recognized in profit or loss) is removed from other comprehensive income and recognized in profit or loss when
the asset is determined to be impaired. If in a subsequent period, the fair value of a debt instrument previously
impaired increases and the increase can be objectively related to an event occurring after the impairment loss
was recognized, the impairment loss is reversed through profit or loss. Reversal of impairment losses
recognized previously on equity instruments is made directly to other comprehensive income.

(9)
(c) Renegotiated loans

Loans that are either subject to individual or collective impairment assessment and whose terms have been
renegotiated are no longer considered to be past due but are treated as new loans.

2.10 Financial liabilities

2.10.1 Classification

The BPI Group classifies its financial liabilities in the following categories: financial liabilities at fair value through
profit or loss and financial liabilities at amortized cost.

(a) Financial liabilities at fair value through profit or loss

This category comprises two sub-categories: financial liabilities classified as held for trading, and financial
liabilities designated by the BPI Group as at fair value through profit or loss upon initial recognition.

A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling
or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are
also categorized as held for trading unless they are designated and effective as hedging instruments. Gains and
losses arising from changes in fair value of financial liabilities classified as held for trading are included in the
statement of income and are reported as “Trading gains/losses”. The BPI Group has no financial liabilities that
are designated at fair value through profit loss.

(b) Other liabilities measured at amortized cost

Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are
measured at amortized cost. Financial liabilities measured at amortized cost include deposits from customers
and banks, bills payable, amounts due to BSP and other banks, manager’s checks and demand drafts
outstanding, subordinated notes and other financial liabilities under deferred credits and other liabilities.

2.10.2 Recognition and measurement

(a) Initial recognition and measurement

Financial liabilities not carried at fair value through profit or loss are initially recognized at fair value plus
transaction costs. Financial liabilities carried at fair value through profit or loss are initially recognized at fair
value; and transaction costs are recognized as expense in profit or loss.

(b) Subsequent measurement

Financial liabilities at fair value through profit or loss are subsequently carried at fair value. Other liabilities
are measured at amortized cost using the effective interest method.

2.10.3 Derecognition

Financial liabilities are derecognized when they have been redeemed or otherwise extinguished (i.e. when the
obligation is discharged or is cancelled or has expired). Collateral (shares and bonds) furnished by the BPI
Group under standard repurchase agreements and securities lending and borrowing transactions is not
derecognized because the BPI Group retains substantially all the risks and rewards on the basis of the
predetermined repurchase price, and the criteria for derecognition are therefore not met.

2.11 Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.

The fair value of a non-financial asset is measured based on its highest and best use. The asset’s current use is
presumed to be its highest and best use.

(10)
The fair value of financial and non-financial liabilities takes into account non-performance risk, which is the risk
that the entity will not fulfill an obligation.

The BPI Group classifies its fair value measurements using a fair value hierarchy that reflects the significance of
the inputs used in making the measurements. The fair value hierarchy has the following levels:

 Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes
listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc.,
Philippine Dealing and Exchange Corp., etc.).

 Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of
the over-the-counter (“OTC”) derivative contracts. The primary source of input parameters like LIBOR yield
curve or counterparty credit risk is Bloomberg.

 Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
This level includes equity investments and debt instruments with significant unobservable components. This
hierarchy requires the use of observable market data when available. The BPI Group considers relevant and
observable market prices in its valuations where possible. The BPI Group has no assets or liabilities
classified under Level 3 as at December 31, 2014 and 2013.

The appropriate level is determined on the basis of the lowest level input that is significant to the fair value
measurement.

(a) Financial instruments

For financial instruments traded in active markets, the determination of fair values of financial assets and
financial liabilities is based on quoted market prices or dealer price quotations. This includes listed equity
securities and quoted debt instruments on major exchanges and broker quotes mainly from Bloomberg.

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly
available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those
prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria
are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a
wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.

For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair
values are estimated from observable data in respect of similar financial instruments, using models to estimate
the present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR
yield curve, FX rates, volatilities and counterparty spreads) existing at reporting dates. The BPI Group uses
widely recognized valuation models for determining fair values of non-standardized financial instruments of lower
complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into
models are generally market observable.

For more complex instruments, the BPI Group uses internally developed models, which are usually based on
valuation methods and techniques generally recognized as standard within the industry. Valuation models are
used primarily to value derivatives transacted in the OTC market, unlisted debt securities (including those with
embedded derivatives) and other debt instruments for which markets were or have become illiquid. Some of the
inputs to these models may not be market observable and are therefore estimated based on assumptions.

The fair value of OTC derivatives is determined using valuation methods that are commonly accepted in the
financial markets, such as present value techniques and option pricing models. The fair value of foreign
exchange forwards is generally based on current forward exchange rates, with the resulting value discounted
back to present value.

In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are
carried at cost less impairment. The fair value for loans and advances as well as liabilities to banks and
customers are determined using a present value model on the basis of contractually agreed cash flows, taking
into account credit quality, liquidity and costs. The fair values of contingent liabilities and irrevocable loan
commitments correspond to their carrying amounts.

(11)
(b) Non-financial assets or liabilities

The BPI Group uses valuation techniques that are appropriate in the circumstances and applies the technique
consistently. Commonly used valuation techniques are as follows:

 Market approach - A valuation technique that uses observable inputs, such as prices, broker quotes and
other relevant information generated by market transactions involving identical or comparable assets or
group of assets.

 Income approach - A valuation technique that converts future amounts (e.g., cash flows or income and
expenses) to a single current (i.e., discounted) amount. The fair value measurement is determined on the
basis of the value indicated by current market expectations about those future amounts.

 Cost approach - A valuation technique that reflects the amount that would be required currently to replace
the service capacity of an asset (often referred to as current replacement cost).

The fair values were determined in reference to observable market inputs reflecting orderly transactions, i.e.
market listings, published broker quotes and transacted deals from similar and comparable assets, adjusted to
determine the point within the range that is most representative of the fair value under current market conditions.
The fair values of BPI Group’s investment properties and foreclosed assets (shown as Assets held for sale) fall
under level 2 of the fair value hierarchy. The BPI Group has no non-financial assets or liabilities classified under
Level 3 as at December 31, 2014 and 2013.

(12)
2.12 Classes of financial instruments

The BPI Group classifies the financial instruments into classes that reflect the nature of information and take into
account the characteristics of those financial instruments. The classification made can be seen in the table
below:

Classes (as determined by the BPI Group)


Categories
(as defined by PAS 39) Main classes Sub-classes
Financial assets - Debt securities
Financial assets at fair value - Trading securities
- Equity securities
through profit or loss
- Derivative financial assets
- Cash and other cash items
- Due from BSP
- Due from other banks
- Loans and advances
- Interbank loans receivable and
to banks
securities purchased under agreements
to resell
- Real estate
- Loans to mortgages
Loans and receivables
individuals - Auto loans
(retail) - Credit cards
- Loans and advances to
- Others
customers
- Large corporate
- Loans to
customers
corporate
- Small and medium-
entities
sized enterprises
- Others - Accounts receivables
- Sales contracts receivable
- Rental deposits
- Other accrued interest and fees
receivable
- Investment securities - Government
Held-to-maturity investments
(debt securities) - Others
- Investment securities - Government
Available-for-sale financial (debt securities) - Others
assets - Investment securities - Listed
(equity securities) - Unlisted
Financial liabilities Financial liabilities at fair
value through profit or loss - Derivative financial liabilities
- Demand
- Deposits from
- Savings
customers
- Time
- Deposits from banks
- Bills payable
- Due to BSP and other
banks
Financial liabilities at
- Manager’s check and
amortized cost
demand drafts outstanding
- Interest payable
- Unsecured subordinated
debt
- Other liabilities - Accounts payable
- Outstanding acceptances
- Dividend payable
Off-balance sheet Loan commitments
financial
instruments Guarantees, acceptances and other financial facilities

(13)
2.13 Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of condition when there is
a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or
realize the asset and settle the liability simultaneously.

2.14 Derivative financial instruments

Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active
markets including recent market transactions, and valuation techniques (for example for structured notes),
including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as
assets when fair value is positive and as liabilities when fair value is negative.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their
economic characteristics and risks are not closely related to those of the host contract and the host contract is
not carried at fair value through profit or loss. The assessment of whether an embedded derivative is required to
be separated from the host contract is done when the BPI Group first becomes a party to the contract.
Reassessment of embedded derivative is only done when there are changes in the contract that significantly
modify the contractual cash flows. The embedded derivatives are measured at fair value with changes in fair
value recognized in profit or loss.

The BPI Group’s derivative instruments do not qualify for hedge accounting. Changes in the fair value of any
derivative instrument that does not qualify for hedge accounting are recognized immediately in the statement of
income under “Trading gain/loss on securities”.

2.15 Bank premises, furniture, fixtures and equipment

Land and buildings comprise mainly of branches and offices. All bank premises, furniture, fixtures and
equipment are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that
is directly attributable to the acquisition of an asset which comprises its purchase price, import duties and any
directly attributable costs of bringing the asset to its working condition and location for its intended use.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to the BPI
Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit
or loss during the year in which they are incurred.

Land is not depreciated. Depreciation for buildings and furniture and equipment is calculated using the straight-
line method to allocate cost or residual values over the estimated useful lives of the assets, as follows:

Building 25-50 years


Furniture and equipment 3-5 years
Equipment for lease 2-8 years

Leasehold improvements are depreciated over the shorter of the lease term (ranges from 5 to 10 years) and the
useful life of the related improvement (ranges from 5 to 10 years). Major renovations are depreciated over the
remaining useful life of the related asset.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount
is greater than its estimated recoverable amount. The recoverable amount is the higher of an asset’s fair value
less costs to sell and value in use. Bank premises, furniture, fixtures and equipment with carrying value of
P69 million were fully impaired as at December 31, 2014 (2013 - P56 million).

(14)
An item of Bank premises, furniture, fixtures and equipment is derecognized upon disposal or when no future
economic benefits are expected to arise from the continued use of the asset. 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 item) is included in profit or loss in the period the item is derecognized.

2.16 Investment properties

Properties that are held either to earn rental income or for capital appreciation or both, and that are not
significantly occupied by the BPI Group are classified as investment properties. Transfers to, and from,
investment property are made when, and only when, there is a change in use, evidenced by:

(a) Commencement of owner-occupation, for a transfer from investment property to owner-occupied property;
(b) Commencement of development with a view of sale, for a transfer from investment property to real
properties held-for-sale and development;
(c) End of owner occupation, for a transfer from owner-occupied property to investment property; or
(d) Commencement of an operating lease to another party, for a transfer from real properties held-for-sale and
development to investment property.

Transfers to and from investment property do not result in gain or loss.

Investment properties comprise land and building. Investment properties are measured initially at cost, including
transaction costs. Subsequent to initial recognition, investment properties are stated at cost less accumulated
depreciation and impairment losses, if any. Depreciation on investment property is determined using the same
policy as applied to Bank premises, furniture, fixtures, and equipment. Impairment test is conducted when there
is an indication that the carrying amount of the asset may not be recovered. An impairment loss is recognized for
the amount by which the property’s carrying amount exceeds its recoverable amount, which is the higher of the
property’s fair value less costs to sell and value in use.

An item of investment property is derecognized upon disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Any gains and losses arising on derecognition of the asset (calculated as
the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in
the period the item is derecognized.

2.17 Foreclosed assets

Assets foreclosed shown as Assets held for sale in the statement of condition are accounted for at the lower of cost
and fair value less cost to sell similar to the principles of PFRS 5. The cost of assets foreclosed includes the
carrying amount of the related loan less allowance for impairment at the time of foreclosure. Impairment loss is
recognized for any subsequent write-down of the asset to fair value less cost to sell.

Foreclosed assets not classified as Assets held for sale are accounted for in any of the following classification using
the measurement basis appropriate to the asset as follows:

(a) Investment property is accounted for using the cost model under PAS 40;

(b) Bank-occupied property is accounted for using the cost model under PAS 16; and

(c) Financial assets are classified as available-for-sale.

2.18 Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the BPI Group’s share in the net
identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of
subsidiaries is included in “Miscellaneous assets” under Other resources in the consolidated financial statements.
Goodwill on acquisitions of associates is included in Investments in subsidiaries and associates. Separately
recognized goodwill is carried at cost less accumulated impairment losses. Gains and losses on the disposal of a
subsidiary/associate include carrying amount of goodwill relating to the subsidiary/associate sold.

Goodwill is an indefinite-lived intangible asset and hence not subject to amortization.

(15)
Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each cash-generating unit is
represented by each primary reporting segment.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances
indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the
higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense
and is not subsequently reversed.

(b) Contractual customer relationships

Contractual customer relationships acquired in a business combination are recognized at fair value at the
acquisition date. The contractual customer relationships have finite useful lives and are carried at cost less
accumulated amortization. Amortization is calculated using the straight-line method over the expected life of the
customer relationship.

(c) Computer software

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortized on a straight-line basis over the expected useful lives (three to five
years). Computer software is included in “Miscellaneous assets” under Other resources.

Costs associated with maintaining computer software programs are recognized as an expense as incurred.
Development costs that are directly attributable to the design and testing of identifiable and unique software
products controlled by the BPI Group are recognized as intangible assets when the following criteria are met:

 it is technically feasible to complete the software product so that it will be available for use;
 management intends to complete the software product and use or sell it;
 there is an ability to use or sell the software product;
 it can be demonstrated how the software product will generate probable future economic benefits;
 adequate technical, financial and other resources to complete the development and to use or sell the
software product are available; and
 the expenditure attributable to the software product during its development can be reliably measured.

Directly attributable costs that are capitalized as part of the software product include the software development
employee costs and an appropriate portion of relevant overheads.

Other development expenditures that do not meet these criteria are recognized as an expense when incurred.
Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

2.19 Impairment of non-financial assets

Assets that have indefinite useful lives - for example, goodwill or intangible assets not ready for use - are not subject
to amortization and are tested annually for impairment and more frequently if there are indicators of impairment.
Assets that have definite useful lives are subject to amortization and are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-
generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible
reversal of impairment at each reporting date.

2.20 Borrowings and borrowing costs

The BPI Group’s borrowings consist mainly of bills payable and unsecured subordinated debt. Borrowings are
recognized initially at fair value, being their issue proceeds, net of transaction costs incurred. Borrowings are
subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the
redemption value is recognized in profit or loss over the period of the borrowings using the effective interest method.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are
capitalized as part of the cost of the asset. All other borrowing costs are expensed as incurred. The BPI Group has
no qualifying asset as at December 31, 2014 and 2013.

(16)
2.21 Interest income and expense

Interest income and expense are recognized in profit or loss for all interest-bearing financial instruments using the
effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability
and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the
rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial
instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial
liability.

When calculating the effective interest rate, the BPI Group estimates cash flows considering all contractual terms of
the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received
between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss,
interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of
measuring impairment loss.

2.22 Fees and commission income

Fees and commissions are generally recognized on an accrual basis when the service has been provided.
Commission and fees arising from negotiating or participating in the negotiation of a transaction for a third party
(i.e. the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses) are
recognized on completion of underlying transactions. Portfolio and other management advisory and service fees
are recognized based on the applicable service contracts, usually on a time-proportionate basis. Asset
management fees related to investment funds are recognized ratably over the period in which the service is
provided.

2.23 Dividend income

Dividend income is recognized in profit or loss when the BPI Group’s right to receive payment is established.

2.24 Credit card income

Credit card income is recognized upon receipt from merchants of charges arising from credit card transactions.
These are computed based on rates agreed with merchants and are deducted from the payments to
establishments.

2.25 Foreign currency translation

(a) Functional and presentation currency

Items in the financial statements of each entity in the BPI Group are measured using the currency of the primary
economic environment in which the entity operates (the “functional currency”). The financial statements are
presented in Philippine Peso, which is the Parent Bank’s functional and presentation currency.

(17)
(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at
the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Non-monetary
items measured at historical cost denominated in a foreign currency are translated at exchange rates as at the
date of initial recognition. Non-monetary items in a foreign currency that are measured at fair value are
translated using the exchange rates at the date when the fair value is determined.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale
are analyzed between translation differences resulting from changes in the amortized cost of the security, and
other changes in the carrying amount of the security. Translation differences are recognized in profit or loss, and
other changes in carrying amount are recognized in other comprehensive income.

Translation differences on non-monetary financial instruments, such as equities held at fair value through profit
or loss, are reported as part of the fair value gain or loss recognized under “Trading gain (Ioss)” in the statement
of income. Translation differences on non-monetary financial instruments, such as equities classified as
available-for-sale, are included in Accumulated other comprehensive income (loss) in the capital funds.

(c) Foreign subsidiaries

The results and financial position of BPI’s foreign subsidiaries (none of which has the currency of a
hyperinflationary economy) that have a functional currency different from the presentation currency are
translated into the presentation currency as follows:

(i) assets and liabilities are translated at the closing rate at reporting date;

(ii) income and expenses are translated at average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in
which case income and expenses are translated at the dates of the transactions); and

(iii) all resulting exchange differences are recognized as a separate component (Translation adjustments) of
Accumulated other comprehensive income (loss) in the capital funds. When a foreign operation is sold,
such exchange differences are recognized in profit or loss as part of the gain or loss on sale.

2.26 Accrued expenses and other liabilities

Accrued expenses and other liabilities are recognized in the period in which the related money, goods or services
are received or when a legally enforceable claim against the BPI Group is established.

2.27 Provisions for legal or contractual obligations

Provisions are recognized when all of the following conditions are met: (i) the BPI Group has a present legal or
constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to
settle the obligation; and (iii) the amount has been reliably estimated. Provisions are not recognized for future
operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is
determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an
outflow with respect to any one item is included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation
using a pre-tax rate that reflects the current market assessments of the time value of money and the risk specific to
the obligation. The increase in the provision due to the passage of time is recognized as interest expense.

(18)
2.28 Income taxes

(a) Current income tax

Income tax payable is calculated on the basis of the applicable tax law in the respective jurisdiction and is
recognized as an expense for the year except to the extent that current tax is related to items (for example, current
tax on available-for-sale investments) that are charged or credited in other comprehensive income or directly to
capital funds.

The BPI Group has substantial income from its investment in government securities subject to final withholding tax.
Such income is presented at its gross amount and the final tax paid or withheld is included in Provision for income
tax - Current.

(b) Deferred income tax

Deferred income tax is recognized on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it
arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at
the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is
determined using tax rates (and laws) that have been enacted or substantively enacted at the reporting date and
are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability
is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax
losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax
or MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary
differences, unused tax losses and unused tax credits can be utilized. Deferred income tax liabilities are
recognized in full for all taxable temporary differences except to the extent that the deferred tax liability arises
from the initial recognition of goodwill.

The BPI Group reassesses at each reporting date the need to recognize a previously unrecognized deferred
income tax asset.

Deferred income tax assets are recognized on deductible temporary differences arising from investments in
subsidiaries, and associates and joint arrangements only to the extent that it is probable the temporary difference
will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be
utilized.

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in
subsidiaries, and associates and joint arrangements, except for deferred income tax liability where the timing of the
reversal of the temporary difference is controlled by the BPI Group and it is probable that the temporary difference
will not reverse in the foreseeable future. Generally the BPI Group is unable to control the reversal of the temporary
difference for associates except when there is an agreement in place that gives the BPI Group the ability to control
the reversal of the temporary difference.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax
assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes
levied by the same taxation authority on either the taxable entity or different taxable entities where there is an
intention to settle the balances on a net basis.

2.29 Employee benefits

(a) Pension obligations

The BPI Group has a defined benefit plan that shares risks among entities within the group. A defined benefit
plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement,
usually dependent on one or more factors such as age, years of service and compensation.

(19)
The liability recognized in the statement of condition in respect of defined benefit pension plan is the present
value of the defined benefit obligation at the reporting date less the fair value of plan assets. The defined benefit
obligation is calculated annually by independent actuaries using the projected unit credit method. The present
value of the defined benefit obligation is determined by discounting the estimated future cash outflows using
interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and
that have terms to maturity approximating the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
charged or credited to equity in other comprehensive income in the period in which they arise.

Past-service costs are recognized immediately in profit or loss.

For individual financial reporting purposes, the unified plan assets are allocated among the BPI Group entities
based on the level of the defined benefit obligation attributable to each entity to arrive at the net liability or asset
that should be recognized in the individual financial statements.

(b) Share-based compensation

The BPI Group engages in equity-settled share-based payment transactions in respect of services received from
certain employees.

The fair value of the services received is measured by reference to the fair value of the shares or share options
granted on the date of the grant. The cost of employee services received in respect of the shares or share
options granted is recognized in profit or loss (with a corresponding increase in reserve in capital funds) over the
period that the services are received, which is the vesting period.

The fair value of the options granted is determined using option pricing models which take into account the
exercise price of the option, the current share price, the risk-free interest rate, the expected volatility of the share
price over the life of the option and other relevant factors.

When the stock options are exercised, the proceeds received, net of any directly attributable transaction costs,
are credited to share capital (par value) and share premium for the excess of exercise price over par value.

(c) Profit sharing and bonus plans

The BPI Group recognizes a liability and an expense for bonuses and profit-sharing, based on a formula that
takes into consideration the profit attributable to the Parent Bank’s shareholders after certain adjustments. The
BPI Group recognizes a provision where contractually obliged or where there is a past practice that has created
a constructive obligation.

2.30 Capital funds

Common shares and preferred shares are classified as share capital.

Share premium includes any premiums or consideration received in excess of par value on the issuance of share
capital.

Incremental costs directly attributable to the issue of new shares or options are shown in capital funds as a
deduction from the proceeds, net of tax.

2.31 Earnings per share (EPS)

Basic EPS is calculated by dividing income applicable to common shares by the weighted average number of
common shares outstanding during the year with retroactive adjustments for stock dividends. In case of a rights
issue, an adjustment factor is being considered for the weighted average number of shares outstanding for all
periods before the rights issue. Diluted EPS is computed in the same manner as basic EPS, however, net
income attributable to common shares and the weighted average number of shares outstanding are adjusted for
the effects of all dilutive potential common shares.

(20)
2.32 Dividends on common shares

Dividends on common shares are recognized as a liability in the BPI Group’s financial statements in the period in
which the dividends are approved by the Board of Directors and the BSP.

2.33 Fiduciary activities

The BPI Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of
assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income
arising thereon are excluded from these financial statements, as they are not assets of the BPI Group (Note 29).

2.34 Leases

(a) BPI Group is the lessee

(i) Operating lease

Leases in which a significant portion of the risks and rewards of ownership are retained by another
party, the lessor, are classified as operating leases. Payments, including prepayments, made under
operating leases (net of any incentives received from the lessor) are charged to “Occupancy and
equipment-related expenses” in the statement of income on a straight-line basis over the period of the
lease. When an operating lease is terminated before the lease period has expired, any payment
required to be made to the lessor by way of penalty is recognized as an expense in the period in which
the termination takes place.

(ii) Finance lease

Leases of assets, where the BPI Group has substantially all the risks and rewards of ownership, are
classified as finance leases. Finance leases are capitalized at the commencement of the lease at the
lower of the fair value of the leased property and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges so as to achieve a constant
rate on the finance balance outstanding. The interest element of the finance cost is charged to profit or
loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance
of the liability for each period.

(b) BPI Group is the lessor

(i) Operating lease

Properties (land and building) leased out under operating leases are included in “Investment properties”
in the statement of condition. Rental income under operating leases is recognized in profit or loss on a
straight-line basis over the period of the lease.

(ii) Finance lease

When assets are leased out under a finance lease, the present value of the lease payments is
recognized as a receivable. The difference between the gross receivable and the present value of the
receivable is recognized as unearned finance income.

Lease income under finance lease is recognized over the term of the lease using the net investment
method before tax, which reflects a constant periodic rate of return.

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2.35 Insurance and pre-need operations

(a) Non-life insurance

The more significant accounting policies observed by the non-life insurance subsidiaries follow: (a) gross premiums
written from short-term insurance contracts are recognized at the inception date of the risks underwritten and are
earned over the period of cover in accordance with the incidence of risk using the 24th method; (b) acquisition costs
are deferred and charged to expense in proportion to the premium revenue recognized; reinsurance commissions
are deferred and deducted from the applicable deferred acquisition costs, subject to the same amortization method
as the related acquisition costs; (c) a liability adequacy test is performed which compares the subsidiaries’
reported insurance contract liabilities against current best estimates of all contractual future cash flows and
claims handling, and policy administration expenses as well as investment income backing up such liabilities,
with any deficiency immediately charged to profit or loss; (d) amounts recoverable from reinsurers and loss
adjustment expenses are classified as assets, with an allowance for estimated uncollectible amounts; and (e)
financial assets and liabilities are measured following the classification and valuation provisions of PAS 39.

(b) Pre-need

The more significant provisions of the PNUCA as applied by the pre-need subsidiary follow: (a) premium income
from sale of pre-need plans is recognized as earned when collected; (b) costs of contracts issued and other
direct costs and expenses are recognized as expense when incurred; (c) pre-need reserves which represent the
accrued net liabilities of the subsidiary to its plan holders are actuarially computed based on standards and
guidelines set forth by the Insurance Commission; the increase or decrease in the account is charged or credited
to other costs of contracts issued in profit or loss; and (d) insurance premium reserves which represent the
amount that must be set aside by the subsidiary to pay for premiums for insurance coverage of fully paid plan
holders, are actuarially computed based on standards and guidelines set forth by the Insurance Commission.

2.36 Related party relationships and transactions

Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more
intermediaries, the other party or exercises significant influence over the other party in making financial and
operating decisions. Such relationship also exists between and/or among entities which are under common control
with the reporting enterprise, or between and/or among the reporting enterprise and its key management personnel,
directors, or its shareholders. In considering each possible related party relationship, attention is directed to the
substance of the relationship, and not merely the legal form.

2.37 Comparatives

Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed
with comparative information.

Where PAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the
current year. There were no changes to the presentation made during the year.

2.38 Reclassification

Certain amounts have been reclassified in the statement of condition to conform with the current year’s
presentation. This is not considered material and did not change the amount of total resources as at
December 31, 2013.

2.39 Subsequent events (or Events after the reporting date)

Post year-end events that provide additional information about the BPI Group’s financial position at the reporting
date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events
are disclosed in the notes to financial statements when material.

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Note 3 - Financial Risk and Capital Management

Risk management in the BPI Group covers all perceived areas of risk exposure, even as it continuously endeavors
to uncover hidden risks. Capital management is understood to be a facet of risk management. The Board of
Directors, through its Risk Management Committee (RMC), sets the BPI Group’s management tone by specifying
the parameters by which financial and business risks are to be taken and by allocating the appropriate capital for
absorbing potential losses from such risks.

The primary objective of the BPI Group is the generation of recurring acceptable returns to shareholders’ capital.
To this end, the BPI Group’s policies, business strategies, and business activities are directed towards the
generation of cash flows that are in excess of its fiduciary and contractual obligations to its depositors, and to its
various other funders and stakeholders.

To generate acceptable returns to its shareholders’ capital, the BPI Group understands that it has to bear risk, that
risk-taking is inherent in its business. Risk is understood by the BPI Group as the uncertainty in its future income -
an uncertainty that emanates from the possibility of incurring losses that are due to unplanned and unexpected
drops in revenues, increases in expenses, impairment of asset values, or increases in liabilities.

The possibility of incurring losses is, however, compensated by the possibility of earning more than expected
income. Risk-taking is, therefore, not entirely bad to be avoided. Risk-taking presents opportunities if risks are
accounted, deliberately taken, and are kept within rationalized limits.

The most important risks that the BPI Group manages are credit risk, liquidity risk, market risk and other operational
and information technology (IT) risks.

3.1 Credit risk

The BPI Group takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the
BPI Group by failing to discharge an obligation. Significant changes in the economy, or in the prospects of a
particular industry segment that may represent a concentration in the BPI Group’s portfolio, could result in losses
that are different from those provided for at the reporting date. Management therefore carefully manages its
exposure to credit risk. Credit exposures arise principally in loans and advances, debt securities and other bills.
There is also credit risk in off-balance sheet financial arrangements. The Credit Policy Group works with the Credit
Committee in managing credit risk, and reports are regularly provided to the Board of Directors.

3.1.1 Credit risk management

(a) Loans and advances

In measuring credit risk of loans and advances at a counterparty level, the BPI Group considers three
components: (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current
exposures to the counterparty and its likely future development; and (iii) the likely recovery ratio on the defaulted
obligations. In the evaluation process, the BPI Group also considers the conditions of the industry/sector to
which the counterparty is exposed, other existing exposures to the group where the counterparty may be related,
as well as the client and the BPI Group’s fallback position assuming the worst-case scenario. Outstanding and
potential credit exposures are reviewed to likewise ensure that they conform to existing internal credit policies.

The BPI Group assesses the probability of default of individual counterparties using internal rating tools tailored
to the various categories of counterparty. The BPI Group has internal credit risk rating systems, designed for
corporate, small and medium-sized enterprises (SMEs), and retail accounts, that measure the borrower's credit
risk based on quantitative and qualitative factors. The ratings of individual exposures may subsequently migrate
between classes as the assessment of their probabilities of default changes. For retail, the consumer credit
scoring system is a formula-based model for evaluating each credit application against a set of characteristics
that experience has shown to be relevant in predicting repayment. The BPI Group regularly validates the
performance of the rating systems and their predictive power with regard to default events, and enhances them if
necessary. The BPI Group's internal ratings are mapped to the following standard BSP classifications:

 Unclassified - these are loans that do not have a greater-than-normal risk and do not possess the
characteristics of loans classified below. The counterparty has the ability to satisfy the obligation in full and
therefore minimal loss, if any, is anticipated.

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 Loans especially mentioned - these are loans that have potential weaknesses that deserve management’s
close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the loan and
thus increase the credit risk of the BPI Group.

 Substandard - these are loans which appear to involve a substantial degree of risk to the BPI Group
because of unfavorable record or unsatisfactory characteristics. Further, these are loans with well-defined
weaknesses which may include adverse trends or development of a financial, managerial, economic or
political nature, or a significant deterioration in collateral.

 Doubtful - these are loans which have the weaknesses similar to those of the substandard classification with
added characteristics that existing facts, conditions, and values make collection or liquidation in full highly
improbable and substantial loss is probable.

 Loss - these are loans which are considered uncollectible and of such little value that their continuance as
bankable assets is not warranted although the loans may have some recovery or salvage value.

(b) Debt securities and other bills

For debt securities and other bills, external ratings such as Standard & Poor’s, Moody’s and Fitch’s ratings or
their equivalents are used by the BPI Group for managing credit risk exposures. Investments in these securities
and bills are viewed as a way to gain better credit quality mix and at the same time, maintain a readily available
source to meet funding requirements.

3.1.2 Risk limit control and mitigation policies

The BPI Group manages, limits and controls concentrations of credit risk wherever they are identified - in
particular, to individual counterparties and groups, to industries and sovereigns.

The BPI Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in
relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are
monitored on a regular basis and subjected to annual or more frequent review, when considered necessary.
Limits on large exposures and credit concentration are approved by the Board of Directors.

The exposure to any one borrower is further restricted by sub-limits covering on- and off-balance sheet exposures.
Actual exposures against limits are monitored regularly.

Exposure to credit risk is also managed through regular analysis of the ability of existing and potential borrowers
to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

The BPI Group employs a range of policies and practices to mitigate credit risk. Some of these specific control
and mitigation measures are outlined below.

(a) Collateral

One of the most traditional and common practice in mitigating credit risk is requiring security particularly for
loans and advances. The BPI Group implements guidelines on the acceptability of specific classes of collateral
for credit risk mitigation. The principal collateral types for loans and advances are:

 Mortgages over real estate properties and chattels; and


 Hold-out on financial instruments such as debt securities deposits, and equities

In order to minimize credit loss, the BPI Group seeks additional collateral from the counterparty when
impairment indicators are observed for the relevant individual loans and advances.

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(b) Derivatives

The BPI Group maintains strict market limits on net open derivative positions (i.e., the difference between purchase
and sale contracts). Credit risk is limited to the net current fair value of instruments, which in relation to derivatives
is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding.
This credit risk exposure is managed as part of the overall lending limits with customers, together with potential
exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on
these instruments (except where the BPI Group requires margin deposits from counterparties).

Settlement risk arises in any situation where a payment in cash, securities, foreign exchange currencies, or equities
is made in the expectation of a corresponding receipt in cash, securities, foreign exchange currencies, or equities.
Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising
from the BPI Group’s market transactions on any single day. The introduction of the delivery versus payment
facility in the local market has brought down settlement risk significantly.

(c) Master netting arrangements

The BPI Group further restricts its exposure to credit losses by entering into master netting arrangements with
counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not
generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross
basis. However, the credit risk associated with favorable contracts (asset position) is reduced by a master netting
arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a
net basis. The BPI Group’s overall exposure to credit risk on derivative instruments subject to master netting
arrangements can change substantially within a short period, as it is affected by each transaction subject to the
arrangement.

(d) Credit-related commitments

The primary purpose of these instruments is to ensure that funds are available to a customer as required. Standby
letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit - which are
written undertakings by the BPI Group on behalf of a customer authorizing a third party to draw drafts on the BPI
Group up to a stipulated amount under specific terms and conditions - are collateralized by the underlying
shipments of goods to which they relate and therefore carry less risk than a direct loan.

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, or
letters of credit. With respect to credit risk on commitments to extend credit, the BPI Group is potentially exposed to
loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total
unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific
credit standards. The BPI Group monitors the term to maturity of credit commitments because longer-term
commitments generally have a greater degree of credit risk than shorter-term commitments.

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3.1.3 Impairment and provisioning policies

As described in Note 3.1.1, the BPI Group’s credit-quality mapping on loans and advances is based on the standard
BSP loan classifications. Impairment provisions are recognized for financial reporting purposes based on objective
evidence of impairment (Note 2.9).

The table below shows the percentage of the BPI Group’s loans and advances and the related allowance for
impairment.

Consolidated
2014 2013
Loans and Allowance for Loans and Allowance for
advances (%) impairment (%) advances (%) impairment (%)
Unclassified 98.14 0.77 97.61 0.81
Loans especially mentioned 0.26 5.35 0.34 5.46
Substandard 0.64 21.19 0.90 20.12
Doubtful 0.45 63.85 0.52 62.55
Loss 0.51 100.00 0.63 100.00
100.00 100.00

Parent
2014 2013
Loans and Allowance for Loans and Allowance for
advances (%) impairment (%) advances (%) impairment (%)
Unclassified 98.61 0.75 97.99 0.84
Loans especially mentioned 0.16 6.75 0.28 5.37
Substandard 0.55 21.23 0.76 19.23
Doubtful 0.25 72.32 0.38 67.92
Loss 0.43 100.00 0.59 100.00
100.00 100.00

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3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements

Credit risk exposures relating to significant on-balance sheet financial assets are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Due from BSP 211,946 244,483 170,648 195,076
Due from other banks 22,227 17,070 15,429 8,789
Interbank loans receivable and securities
purchased under agreements to resell (SPAR) 5,782 17,397 5,246 10,037
Financial assets at fair value through profit or loss
Derivative financial assets 35,981 16,550 35,981 16,550
Trading securities - debt securities 15,247 4,334 6,620 2,626
Available-for-sale - debt securities 47,484 85,885 41,604 81,486
Held-to-maturity securities 209,409 96,172 193,001 85,900
Loans and advances, net 800,170 630,203 621,441 475,155
Other financial assets
Accounts receivable, net 1,489 879 1,063 623
Other accrued interest and fees receivable 661 662 613 573
Sales contracts receivable, net 39 78 - 27
Rental deposits 366 335 304 280
Others, net 425 444 387 393
1,351,226 1,114,492 1,092,337 877,515

Credit risk exposures relating to off-balance sheet items are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Undrawn loan commitments 154,257 120,792 148,215 114,960
Bills for collection 13,686 14,863 13,679 14,848
Unused letters of credit 12,196 13,117 12,196 13,117
Others 1,213 1,390 1,213 1,390
181,352 150,162 175,303 144,315

The preceding table represents the maximum credit risk exposure at December 31, 2014, and 2013, without taking
into account any collateral held or other credit enhancements. For on-balance-sheet assets, the exposures set out
above are based on net carrying amounts as reported in the statement of condition.

Management is confident in its ability to continue to control and sustain minimal exposure to credit risk of the BPI
Group resulting from its loan and advances portfolio based on the following:

 98% of the loans and advances portfolio is considered to be neither past due nor impaired (2013 - 97%);
 Mortgage loans are backed by collateral; and
 The BPI Group continues to implement stringent selection process of granting loans and advances.

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3.1.5 Credit quality of loans and advances

Loans and advances are summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Neither past due nor impaired 793,702 624,220 617,395 471,920
Past due but not impaired 5,407 7,481 4,454 3,182
Impaired 14,767 11,119 8,770 8,916
813,876 642,820 630,619 484,018
Allowance for impairment (13,706) (12,617) (9,178) (8,863)
800,170 630,203 621,441 475,155

Impaired category as shown in the table above includes loan accounts which are individually (Note 3.1.5c) and
collectively assessed for impairment.

The total consolidated impairment provision for loans and advances is P2,990 million (2013 - P1,886 million), of
which P1,703 million (2013 - P1,334 million) represents provision for individually impaired loans and the remaining
amount of P1,287 million (2013 - P552 million) represents the portfolio provision. Further information of the
impairment allowance for loans and advances is provided in Note 13.

When entering into new markets or new industries, the BPI Group focuses on corporate accounts and retail
customers with good credit rating and customers providing sufficient collateral, where appropriate or necessary.

Collaterals held as security for Loans and advances are described in Note 13.

(a) Loans and advances neither past due nor impaired

Loans and advances that were neither past due nor impaired consist mainly of accounts with Unclassified rating
and those loans accounts in a portfolio to which an impairment has been allocated on a collective basis. Details of
these accounts follow:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Corporate entities:
Large corporate customers 554,372 414,136 534,073 396,663
Small and medium enterprises 88,187 80,369 55,268 50,916
Retail customers:
Mortgages 119,759 102,118 152 147
Credit cards 25,712 22,215 25,367 22,059
Others 5,672 5,382 2,535 2,135
793,702 624,220 617,395 471,920

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(b) Loans and advances past due but not impaired

The table below presents the gross amount of loans and advances that were past due but not impaired classified by
type of borrowers. Collateralized past due loans are not considered impaired when the cash flows that may result
from foreclosure of the related collateral are higher than the carrying amount of the loans.

Consolidated

2014 2013
Large Small and Large Small and
corporate medium Retail corporate medium Retail
customers enterprises customers Total customers enterprises customers Total
(In Millions of Pesos)
Past due up to 30 days 541 292 2,057 2,890 175 226 1,623 2,024
Past due 31 - 90 days 262 148 996 1,406 81 144 888 1,113
Past due 91 - 180 days 466 241 47 754 122 224 1,628 1,974
Over 180 days 124 274 (41) 357 42 444 1,884 2,370
1,393 955 3,059 5,407 420 1,038 6,023 7,481
Fair value of collateral 4,437 4,322

Parent

2014 2013
Large Small and Large Small and
corporate medium Retail corporate medium Retail
customers enterprises customers Total customers enterprises customers Total
(In Millions of Pesos)
Past due up to 30 days 459 193 1,909 2,561 84 63 1,492 1,639
Past due 31 - 90 days 252 80 752 1,084 53 16 656 725
Past due 91 - 180 days 454 144 - 598 72 42 465 579
Over 180 days 76 135 - 211 - 98 141 239
1,241 552 2,661 4,454 209 219 2,754 3,182
Fair value of collateral 1,881 319

(c) Loans and advances individually impaired

The breakdown of the gross amount of individually impaired loans and advances (included in Impaired category) by
class, along with the fair value of related collateral held by the BPI Group as security, are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Corporate entities:
Large corporate customers 3,825 4,661 3,438 4,078
Small and medium enterprises 4,919 4,864 3,333 3,376
Retail customers:
Mortgages 893 6 5 6
Credit cards 1,427 1,370 1,423 1,370
Others 177 10 177 2
11,241 10,911 8,376 8,832
Fair value of collateral 7,602 9,459 6,856 5,385

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3.1.6 Credit quality of other financial assets

a. Due from Bangko Sentral ng Pilipinas

Due from BSP are considered fully performing at December 31, 2014 and 2013. This account consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Clearing account 173,954 130,617 156,348 118,476
Special deposit accounts (SDA) 37,992 113,866 14,300 76,600
211,946 244,483 170,648 195,076

b. Due from other banks

Due from other banks are considered fully performing at December 31, 2014 and 2013. The table below presents
the credit ratings of counterparty banks based on Standard & Poor’s.

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
AA- to AA+ 2,954 6,419 2,954 5,259
A- to A+ 15,818 8,490 11,628 3,099
Lower than A- 45 38 44 7
Unrated 3,410 2,123 803 424
22,227 17,070 15,429 8,789

c. Interbank loans receivable and securities purchased under agreement to resell

Interbank loans receivable are considered fully performing at December 31, 2014 and 2013. The table below
presents the credit ratings of counterparty banks based on Standard & Poor’s.

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Lower than A- - 888 - 888
Unrated 5,282 4,991 5,246 4,991
5,282 5,879 5,246 5,879

Securities purchased under agreements to resell includes reverse repurchase agreements amounting to
P500 million and nil for the BPI Group and Parent Bank, respectively (2013 - P11,518 million and P4,158 million,
respectively), which are made with a sovereign counterparty and are considered fully performing.

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d. Derivative financial assets

The table below presents the Standard & Poor’s credit ratings of counterparties for derivative financial assets at
December 31, 2014 and 2013 presented in the consolidated and parent financial statements.

Consolidated and Parent


2014 2013
(In Millions of Pesos)
AA- to AA+ 383 692
A- to A+ 35,536 14,395
Lower than A- 33 172
Unrated 29 1,291
35,981 16,550

e. Debt securities, treasury bills and other government securities

The table below presents the ratings of debt securities, treasury bills and other government securities at
December 31, 2014 and 2013 based on Standard & Poor’s:

At December 31, 2014

Consolidated Parent
Trading Available- Held-to- Trading Available- Held-to-
securities for-sale maturity Total securities for-sale maturity Total
(In Millions of Pesos)
AAA 1,521 212 280 2,013 1,521 194 173 1,888
AA- to AA+ 1,251 6,011 5,438 12,700 1,251 5,887 5,153 12,291
A- to A+ 122 6,327 4,845 11,294 122 5,395 4,351 9,868
Lower than A- 12,090 32,962 196,608 241,660 3,632 28,369 181,379 213,380
Unrated 263 1,972 2,238 4,473 94 1,759 1,945 3,798
15,247 47,484 209,409 272,140 6,620 41,604 193,001 241,225

At December 31, 2013

Consolidated Parent
Trading Available- Held-to- Trading Available- Held-to-
securities for-sale maturity Total securities for-sale maturity Total
(In Millions of Pesos)
AAA - 487 110 597 - 487 - 487
AA- to AA+ 3,774 4,859 5,293 13,926 2,442 4,790 5,109 12,341
A- to A+ 22 4,560 732 5,314 22 4,484 - 4,506
Lower than A- 353 73,040 89,229 162,622 38 69,833 79,983 149,854
Unrated 185 2,939 808 3,932 124 1,892 808 2,824
4,334 85,885 96,172 186,391 2,626 81,486 85,900 170,012

f. Other financial assets

The BPI Group’s other financial assets (shown under Other resources) at December 31, 2014 and 2013 consist
mainly of sales contracts receivable, accounts receivable, accrued interest and fees receivable from various unrated
counterparties with good credit standing.

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3.1.7 Repossessed or foreclosed collaterals

The BPI Group acquires assets by taking possession of collaterals held as security for loans and advances.
As at December 31, 2014, the BPI Group’s foreclosed collaterals have carrying amount of P5,018 million
(2013 - P5,852 million). The related foreclosed collaterals have aggregate fair value of P6,861 million
(2013 - P7,673 million). Foreclosed collaterals include real estate (land, building, and improvements), auto or
chattel, bond and stocks.

Repossessed properties are sold as soon as practicable and are classified as “Assets held for sale” in the
statement of condition.

3.1.8 Concentrations of risks of financial assets with credit risk exposure

The BPI Group’s main credit exposure at their carrying amounts, as categorized by industry sectors follow:

Consolidated

Financial Less -
institutions Consumer Manufacturing Real estate Others allowance Total
(In Millions of Pesos)
Due from BSP 211,946 - - - - - 211,946
Due from other banks 22,227 - - - - - 22,227
Interbank loans receivable
and SPAR 5,782 - - - - - 5,782
Financial assets at fair
value through profit or
loss
Derivative financial
assets 35,941 - 10 - 30 - 35,981
Trading securities -
debt securities 372 - 6 36 14,833 - 15,247
Available-for-sale - debt
securities 14,814 92 - 209 32,369 - 47,484
Held-to-maturity securities 7,953 - - 502 200,954 - 209,409
Loans and advances, net 95,550 74,991 167,908 179,477 295,950 (13,706) 800,170
Other financial assets
Accounts receivable, net - - - - 2,526 (1,037) 1,489
Other accrued interest
and fees receivable - - - - 661 - 661
Sales contracts
receivable, net - - - - 49 (10) 39
Rental deposits - - - - 366 - 366
Others, net - - - - 523 (98) 425
At December 31, 2014 394,585 75,083 167,924 180,224 548,261 (14,851) 1,351,226

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Financial Less -
institutions Consumer Manufacturing Real estate Others allowance Total
(In Millions of Pesos)
Due from BSP 244,483 - - - - - 244,483
Due from other banks 17,070 - - - - - 17,070
Interbank loans receivable
and SPAR 17,397 - - - - - 17,397
Financial assets at fair
value through profit or
loss
Derivative financial
assets 16,373 - 101 - 76 - 16,550
Trading securities -
debt securities 245 - 2 3 4,084 - 4,334
Available-for-sale - debt
securities 16,886 - - 300 68,699 - 85,885
Held-to-maturity securities 855 - - 502 94,815 - 96,172
Loans and advances, net 50,740 62,670 139,187 173,326 216,897 (12,617) 630,203
Other financial assets
Accounts receivable, net - - - - 2,276 (1,397) 879
Other accrued interest
and fees receivable - - - - 662 - 662
Sales contracts
receivable, net - - - - 82 (4) 78
Rental deposits - - - - 335 - 335
Others, net - - - - 466 (22) 444
At December 31, 2013 364,049 62,670 139,290 174,131 388,392 (14,040) 1,114,492

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Parent

Financial Less -
institutions Consumer Manufacturing Real estate Others allowance Total
(In Millions of Pesos)
Due from BSP 170,648 - - - - - 170,648
Due from other banks 15,429 - - - - - 15,429
Interbank loans receivable
and SPAR 5,246 - - - - - 5,246
Financial assets at fair
value through profit or
loss
Derivative financial
assets 35,941 - 10 - 30 - 35,981
Trading securities -
debt securities 351 - - - 6,269 - 6,620
Available-for-sale - debt
securities 13,562 92 - 199 27,751 - 41,604
Held-to-maturity securities 6,826 - - 502 185,673 193,001
Loans and advances, net 93,098 32,940 163,173 86,753 254,655 (9,178) 621,441
Other financial assets
Accounts receivable, net - - - - 1,964 (901) 1,063
Other accrued interest
and fees receivable - - - - 613 - 613
Sales contracts
receivable, net - - - - 10 (10) -
Rental deposits - - - - 304 - 304
Others, net - - - - 477 (90) 387
At December 31, 2014 341,101 33,032 163,183 87,454 477,746 (10,179) 1,092,337

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Financial Less -
institutions Consumer Manufacturing Real estate Others allowance Total
(In Millions of Pesos)
Due from BSP 195,076 - - - - - 195,076
Due from other banks 8,789 - - - - - 8,789
Interbank loans receivable
and SPAR 10,037 - - - - - 10,037
Financial assets at fair
value through profit or
loss
Derivative financial
assets 16,373 - 101 - 76 - 16,550
Trading securities -
debt securities 245 - - - 2,381 - 2,626
Available-for-sale - debt
securities 15,816 - - 196 65,474 - 81,486
Held-to-maturity securities 95 - - 502 85,303 - 85,900
Loans and advances, net 42,952 26,533 135,394 87,738 191,401 (8,863) 475,155
Other financial assets
Accounts receivable, net - - - - 1,875 (1,252) 623
Other accrued interest
and fees receivable - - - - 573 - 573
Sales contracts
receivable, net - - - - 29 (2) 27
Rental deposits - - - - 280 - 280
Others, net - - - - 407 (14) 393
At December 31, 2013 289,383 26,533 135,495 88,436 347,799 (10,131) 877,515

Trading, available-for-sale and held-to-maturity securities under “Others” category include local and US treasury
bills. Likewise, Loans and advances under the same category pertain to loans granted to individual and retail
borrowers belonging to various industry sectors.

3.2 Market risk

The BPI Group is exposed to market risk - the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. Market risk is managed by the RMO guided by policies and
procedures approved by the RMC and confirmed by the Executive Committee/Board of Directors.

Market risk management

Market risk management is incumbent on the Board of Directors through its RMC. Market risk management in BPI
covers managing exposures to trading risk, foreign exchange risk, counterparty credit risk, interest rate risk of the
banking book and liquidity risk. At the management level, the Bank’s market risk exposure is managed by the Risk
Management Office (RMO), headed by the Bank’s Chief Risk Officer (CRO) who reports directly to the RMC. In
addition, Internal Audit is responsible for the independent review of risk assessment measures and procedures and
the control environment.

The BPI Group reviews and controls market risk exposures of both its trading and non-trading portfolios. Trading
portfolios include those positions arising from the BPI Group’s market-making transactions. Non-trading portfolios
primarily arise from the interest rate management of the BPI Group’s retail and commercial banking assets and
liabilities.

As part of the management of market risk, the BPI Group undertakes various hedging strategies. The BPI Group
also enters into interest rate swaps to match the interest rate risk associated with fixed-rate long-term debt
securities.

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Value-at-Risk (VaR) measurement is an integral part of the BPI Group’s market risk control system. This metric
estimates, at 99% confidence level, the maximum loss that a trading portfolio may incur over a trading day. This
metric indicates as well that there is 1% statistical probability that the trading portfolios’ actual loss would be
greater than the computed VaR. In order to ensure model soundness, the VaR is periodically subject to model
validation and back testing. VaR is supplemented by other risk metrics and measurements that would provide
preliminary signals to Treasury and to the management to assess the vulnerability of Bank’s positions. To control
the risk, the RMC sets risk limits for trading portfolios which are consistent with the Bank’s goals, objectives, risk
appetite, and strategy.

Stress tests indicate the potential losses that could arise in extreme conditions that would have detrimental effect to
the Bank’s positions. The Bank periodically performs stress testing (price risk and liquidity risk) to assess the Bank’s
condition on assumed stress scenarios. Contingency plans are frequently reviewed to ensure the Bank’s
preparedness in the event of real stress. Results of stress tests are reviewed by senior management and by the
RMC.

The average daily VaR for the trading portfolios are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Local fixed-income 230 984 206 911
Foreign fixed-income 66 118 63 114
Foreign exchange 44 33 14 10
Derivatives 75 78 75 78
Equity securities 26 14 - -
Mutual fund 19 26 - -
460 1,253 358 1,113

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3.2.1 Foreign exchange risk

The BPI Group takes on exposure to the effects of fluctuations in the prevailing exchange rates on its foreign
currency financial position and cash flows. The table below summarizes the BPI Group’s exposure to more material
foreign currency exchange rate risk at December 31, 2014 and 2013. Included in the table are the BPI Group’s
financial instruments at carrying amounts, categorized by currency.

Consolidated

Less -
USD JPY EUR GBP allowance Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 1,815 72 79 16 - 1,982
Due from other banks 13,520 755 2,957 1,980 - 19,212
Interbank loans receivable and
SPAR 2,705 - - - - 2,705
Financial assets at fair value
through profit or loss
Derivative financial assets 4,777 - 161 636 - 5,574
Trading securities 1,565 - 55 375 - 1,995
Available-for-sale securities 22,239 - 1,193 107 - 23,539
Held-to-maturity securities 37,382 - 1,530 980 - 39,892
Loans and advances, net 97,772 650 69 20 (451) 98,060
Others financial assets
Accounts receivable, net 79 - 15 5 (11) 88
Other accrued interest and
fees receivable 149 - 125 47 - 321
Others - - - - - -
Total financial assets 182,003 1,477 6,184 4,166 (462) 193,368
Financial Liabilities
Deposit liabilities 154,687 1,152 3,390 1,029 - 160,258
Derivative financial liabilities 3,699 - 171 641 - 4,511
Bills payable 26,077 - - - - 26,077
Due to BSP and other banks 70 - - - - 70
Manager’s checks and demand
drafts outstanding 181 - 15 - - 196
Other financial liabilities
Accounts payable 119 - 38 1 - 158
Others - - - - - -
Total financial liabilities 184,833 1,152 3,614 1,671 - 191,270
Net on-balance sheet financial
position (in Philippine Peso) (2,830) 325 2,570 2,495 (462) 2,098

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Less -
USD JPY EUR GBP allowance Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 1,691 55 89 20 - 1,855
Due from other banks 13,746 747 838 1,185 - 16,516
Interbank loans receivable and
SPAR 888 - - - - 888
Financial assets at fair value
through profit or loss
Derivative financial assets 2,009 - 116 346 - 2,471
Trading securities 3,796 - - - - 3,796
Available-for-sale securities 15,782 - 473 133 - 16,388
Held-to-maturity securities 29,653 - 1,717 657 - 32,027
Loans and advances, net 73,989 713 169 31 (481) 74,421
Others financial assets
Accounts receivable, net 78 - 59 1 (9) 129
Other accrued interest and
fees receivable 99 - 111 45 - 255
Others - - - - - -
Total financial assets 141,731 1,515 3,572 2,418 (490) 148,746
Financial Liabilities
Deposit liabilities 128,301 1,084 3,056 696 - 133,137
Derivative financial liabilities 2,062 - 144 346 - 2,552
Bills payable 17,758 - 37 - - 17,795
Due to BSP and other banks 87 - - - - 87
Manager’s checks and demand
drafts outstanding 49 - 4 2 - 55
Other financial liabilities
Accounts payable 267 - 75 1 - 343
Others 1,565 11 102 6 - 1,684
Total financial liabilities 150,089 1,095 3,418 1,051 - 155,653
Net on-balance sheet financial
position (in Philippine Peso) (8,358) 420 154 1,367 (490) (6,907)

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Parent

Less -
USD JPY EUR GBP allowance Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 1,659 71 71 14 - 1,815
Due from other banks 8,063 751 2,779 1,445 - 13,038
Interbank loans receivable and
SPAR 2,705 - - - - 2,705
Financial assets at fair value
through profit or loss
Derivative financial assets 4,777 - 161 636 - 5,574
Trading securities 1,565 - 55 375 - 1,995
Available-for-sale securities 18,264 - 1,193 107 - 19,564
Held-to-maturity securities 34,630 - 1,530 - - 36,160
Loans and advances, net 97,593 650 69 - (449) 97,863
Other financial assets
Accounts receivable, net 79 - - - (11) 68
Other accrued interest and
fees receivable 149 - 125 32 - 306
Others - - - - - -
Total financial assets 169,484 1,472 5,983 2,609 (460) 179,088
Financial Liabilities
Deposit liabilities 142,702 1,152 3,270 720 - 147,844
Derivative financial liabilities 3,699 - 171 641 - 4,511
Bills payable 26,063 - - - - 26,063
Due to BSP and other banks 70 - - - - 70
Manager’s checks and demand
drafts outstanding 180 - 15 - - 195
Other financial liabilities
Accounts payable 116 - 20 - - 136
Others - - - - - -
Total financial liabilities 172,830 1,152 3,476 1,361 - 178,819
Net on-balance sheet financial
position (in Philippine Peso) (3,346) 320 2,507 1,248 (460) 269

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Less -
USD JPY EUR GBP allowance Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 1,535 55 78 18 - 1,686
Due from other banks 5,864 743 698 243 - 7,548
Interbank loans receivable and
SPAR 888 - - - - 888
Financial assets at fair value
through profit or loss
Derivative financial assets 2,009 - 116 346 - 2,471
Trading securities 2,464 - - - - 2,464
Available-for-sale securities 15,094 - 473 133 - 15,700
Held-to-maturity securities 27,705 - 1,718 - - 29,423
Loans and advances, net 73,989 713 169 7 (479) 74,399
Other financial assets
Accounts receivable, net 68 - - - (9) 59
Other accrued interest and
fees receivable 99 - 111 14 - 224
Others - - - - - -
Total financial assets 129,715 1,511 3,363 761 (488) 134,862
Financial Liabilities
Deposit liabilities 116,608 1,084 3,023 414 - 121,129
Derivative financial liabilities 2,062 - 144 346 - 2,552
Bills payable 17,758 - - - - 17,758
Due to BSP and other banks 87 - - - - 87
Manager’s checks and demand
drafts outstanding 30 - 4 2 - 36
Other financial liabilities
Accounts payable 252 - 2 - - 254
Others 1,565 11 102 6 - 1,684
Total financial liabilities 138,362 1,095 3,275 768 - 143,500
Net on-balance sheet financial
position (in Philippine Peso) (8,647) 416 88 (7) (488) (8,638)

3.2.2 Interest rate risk

There are two types of interest rate risk: (i) fair value interest risk and (ii) cash flow interest risk. Fair value interest
rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest
rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. The BPI Group takes on exposure to the effects of fluctuations in the prevailing
levels of market interest rates on both its fair value which affects mainly the BPI Group’s trading securities portfolio
and cash flow risks on available-for-sale securities portfolio which is carried at market.

Interest rate risk in the banking book arises from the BPI Group’s core banking activities. The main source of this
type of interest rate risk is repricing risk, which reflects the fact that the BPI Group’s assets and liabilities are of
different maturities and are priced at different interest rates. Interest margins may increase as a result of such
changes but may also result in losses in the event that unexpected movements arise. The Board of Directors sets
limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored monthly by the
FRMC.

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The table below summarizes the BPI Group’s exposure to interest rate risk, categorized by the earlier of contractual
repricing or maturity dates.

Consolidated

Repricing
Over 1 up to Non-
Up to 1 year 3 years Over 3 years repricing Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 38,427 - - - 38,427
Due from BSP - - - 211,946 211,946
Due from other banks - - - 22,227 22,227
Interbank loans receivable and SPAR - - - 5,782 5,782
Financial assets at fair value through
profit or loss
Derivative financial assets 12,607 20,224 3,150 - 35,981
Trading securities - debt securities - - - 15,247 15,247
Available-for-sale - debt securities 6,938 - - 40,546 47,484
Held-to-maturity securities 4 - - 209,405 209,409
Loans and advances, net 611,809 43,678 81,386 63,297 800,170
Other financial assets
Accounts receivable, net - - - 1,489 1,489
Other accrued interest and fees
receivable - - - 661 661
Sales contracts receivable, net - - - 39 39
Rental deposits - - - 366 366
Others, net - - - 425 425
Total financial assets 669,785 63,902 84,536 571,430 1,389,653
Financial Liabilities
Deposit liabilities 584,042 509,929 9,440 72,802 1,176,213
Derivative financial liabilities 839 21,769 12,238 - 34,846
Bills payable - - - 32,993 32,993
Due to BSP and other banks - - - 687 687
Manager’s checks and demand drafts
outstanding - - - 8,353 8,353
Other financial liabilities
Accounts payable - - - 4,735 4,735
Outstanding acceptances - - - 947 947
Deposits on lease contract - - - 1,974 1,974
Dividends payable - - - - -
Others - - - 1,838 1,838
Total financial liabilities 584,881 531,698 21,678 124,329 1,262,586
Total interest gap 84,904 (467,796) 62,858 447,101 127,067

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Repricing
Over 1 up to Non-
Up to 1 year 3 years Over 3 years repricing Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 25,696 - - - 25,696
Due from BSP - - - 244,483 244,483
Due from other banks - - - 17,070 17,070
Interbank loans receivable and SPAR - - - 17,397 17,397
Financial assets at fair value through
profit or loss
Derivative financial assets 13,100 665 2,785 - 16,550
Trading securities - debt securities 223 - - 4,111 4,334
Available-for-sale - debt securities 9,265 - - 76,620 85,885
Held-to-maturity securities 4 - - 96,168 96,172
Loans and advances, net 518,048 22,860 45,072 44,223 630,203
Other financial assets
Accounts receivable, net - - - 879 879
Other accrued interest and fees
receivable - - - 662 662
Sales contracts receivable, net - - - 78 78
Rental deposits - - - 335 335
Others, net - - - 444 444
Total financial assets 566,336 23,525 47,857 502,470 1,140,188
Financial Liabilities
Deposit liabilities 460,692 513,541 14,353 - 988,586
Derivative financial liabilities 12,929 719 2,712 - 16,360
Bills payable - - - 26,179 26,179
Due to BSP and other banks - - - 2,051 2,051
Manager’s checks and demand drafts
outstanding - - - 7,183 7,183
Other financial liabilities
Accounts payable - - - 3,551 3,551
Outstanding acceptances - - - 1,677 1,677
Deposits on lease contract - - - 2,076 2,076
Dividends payable - - - 3,201 3,201
Others - - - 1,607 1,607
Total financial liabilities 473,621 514,260 17,065 47,525 1,052,471
Total interest gap 92,715 (490,735) 30,792 454,945 87,717

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Parent

Repricing
Over 1 up to Non-
Up to 1 year 3 years Over 3 years repricing Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 37,292 - - - 37,292
Due from BSP - - - 170,648 170,648
Due from other banks - - - 15,429 15,429
Interbank loans receivable and SPAR - - - 5,246 5,246
Financial assets at fair value through
profit or loss
Derivative financial assets 12,607 20,224 3,150 - 35,981
Trading securities - debt securities - - - 6,620 6,620
Available-for-sale - debt securities 6,938 - - 34,666 41,604
Held-to-maturity securities 4 - - 192,997 193,001
Loans and advances, net 531,154 19,846 44,503 25,938 621,441
Other financial assets
Accounts receivable, net - - - 1,063 1,063
Other accrued interest and fees
receivable - - - 613 613
Sales contracts receivable, net - - - - -
Rental deposits - - - 304 304
Others, net - - - 387 387
Total financial assets 587,995 40,070 47,653 453,911 1,129,629
Financial Liabilities
Deposit liabilities 447,239 434,227 - 71,215 952,681
Derivative financial liabilities 839 21,769 12,238 - 34,846
Bills payable - - - 26,288 26,288
Due to BSP and other banks - - - 688 688
Manager’s checks and demand drafts
outstanding - - - 6,664 6,664
Other financial liabilities
Accounts payable - - - 3,502 3,502
Outstanding acceptances - - - 947 947
Deposits on lease contract - - - - -
Dividends payable - - - - -
Others - - - 1,694 1,694
Total financial liabilities 448,078 455,996 12,238 110,998 1,027,310
Total interest gap 139,917 (415,926) 35,415 342,913 102,319

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Repricing
Over 1 up to Non-
Up to 1 year 3 years Over 3 years repricing Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 24,888 - - - 24,888
Due from BSP - - - 195,076 195,076
Due from other banks - - - 8,789 8,789
Interbank loans receivable and SPAR - - - 10,037 10,037
Financial assets at fair value through
profit or loss
Derivative financial assets 13,100 665 2,785 - 16,550
Trading securities - debt securities 222 - - 2,404 2,626
Available-for-sale - debt securities 9,264 - - 72,222 81,486
Held-to-maturity securities 3 - - 85,897 85,900
Loans and advances, net 447,055 6,196 12,475 9,429 475,155
Other financial assets
Accounts receivable, net - - - 623 623
Other accrued interest and fees
receivable - - - 573 573
Sales contracts receivable, net - - - 27 27
Rental deposits - - - 280 280
Others, net - - - 393 393
Total financial assets 494,532 6,861 15,260 385,750 902,403
Financial Liabilities
Deposit liabilities 310,213 354,198 1,451 119,541 785,403
Derivative financial liabilities 12,929 719 2,712 - 16,360
Bills payable - - - 18,990 18,990
Due to BSP and other banks - - - 2,052 2,052
Manager’s checks and demand drafts
outstanding - - - 6,026 6,026
Other financial liabilities
Accounts payable - - - 2,370 2,370
Outstanding acceptances - - - 1,677 1,677
Deposits on lease contract - - - - -
Dividends payable - - - 3,201 3,201
Others - - - 1,498 1,498
Total financial liabilities 323,142 354,917 4,163 155,355 837,577
Total interest gap 171,390 (348,056) 11,097 230,395 64,826

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In order to measure the interest rate risk in the banking book, the BPI Group employs Balance Sheet VaR (BSVaR)
which measures impact of interest rate movements on the economic value of equity. The BSVaR is founded on re-
pricing gaps, or the difference between the amounts of rate sensitive assets and the amounts of rate sensitive
liabilities. An asset or liability is considered to be rate-sensitive if the interest rate applied to the outstanding
principal balance changes (either contractually or because of a change in a reference rate) during the interval.

The BSVaR estimates the “riskiness of the balance sheet” and compares the degree of risk taking activity in the
banking books from one period to the next. In consideration of the static framework, and the fact that income from
the positions is accrued rather than generated from marking-to-market, the probable loss (that may be exceeded
1% of the time) that is indicated by the BSVaR is not realized in accounting income.

The average BSVaR for the banking or non-trading book are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
BSVaR 1,932 1,511 1,627 1,325

3.3 Liquidity risk

Liquidity risk is the risk that the BPI Group will be unable to meet its payment obligations associated with its
financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be
the failure to meet obligations to repay depositors and fulfill commitments to lend.

3.3.1 Liquidity risk management process

The BPI Group’s liquidity management process, as carried out within the BPI Group and monitored by the RMC
includes:

 Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This
includes replenishment of funds as they mature or as borrowed by customers;
 Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any
unforeseen interruption to cash flow;
 Monitoring liquidity gaps against internal and regulatory requirements (Note 19);
 Managing the concentration and profile of debt maturities; and
 Performing periodic liquidity stress testing on the BPI Group’s liquidity position by assuming a faster rate of
withdrawals in its deposit base.

Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and
month as these are key periods for liquidity management. The starting point for these projections is an analysis
of the contractual maturity of the financial liabilities (Notes 3.3.3 and 3.3.4) and the expected collection date of
the financial assets.

The BPI Group also monitors unmatched medium-term assets, the level and type of undrawn lending
commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of
credit.

3.3.2 Funding approach

Sources of liquidity are regularly reviewed by the BPI Group to maintain a wide diversification by currency,
geography, counterparty, product and term.

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3.3.3 Non-derivative cash flows

The table below presents the maturity profile of non-derivative financial instruments based on undiscounted cash
flows, including interest, which the BPI Group uses to manage the inherent liquidity risk. The maturity analysis is
based on the remaining period from the end of the reporting period to the contractual maturity date or, if earlier,
the expected date the financial asset will be realized or the financial liability will be settled.

Consolidated

Over 1 up to
Up to 1 year 3 years Over 3 years Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 38,427 - - 38,427
Due from BSP 211,971 - - 211,971
Due from other banks 22,227 - - 22,227
Interbank loans receivable and
securities under agreements to
resell (SPAR) 3,045 2,733 225 6,003
Financial assets at fair value through
profit or loss
Trading securities - debt securities 10,280 380 7,356 18,016
Available-for-sale securities - debt
securities 7,933 8,709 45,581 62,223
Held-to-maturity securities 28,853 73,239 186,025 288,117
Loans and advances, net 391,288 101,131 314,765 807,184
Other financial assets
Accounts receivable, net 1,489 - - 1,489
Other accrued interest and fees
receivable 661 - - 661
Sales contracts receivable, net 39 - - 39
Rental deposits 366 - - 366
Others, net 425 - - 425
Total financial assets 717,004 186,192 553,952 1,457,148

Financial Liabilities
Deposit liabilities 660,774 513,147 9,762 1,183,683
Bills payable 36,109 4,968 428 41,505
Due to BSP and other banks 687 - - 687
Manager’s checks and demand drafts
outstanding 8,353 - - 8,353
Other financial liabilities
Accounts payable 4,735 - - 4,735
Outstanding acceptances 947 - - 947
Deposits on lease contract 1,974 - - 1,974
Dividends payable - - - -
Others 1,838 - - 1,838
Total financial liabilities 715,417 518,115 10,190 1,243,722
Total maturity gap 1,587 (331,923) 543,762 213,426

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Over 1 up to
Up to 1 year 3 years Over 3 years Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 25,696 - - 25,696
Due from BSP 244,606 - - 244,606
Due from other banks 17,070 - - 17,070
Interbank loans receivable and
securities under agreements to
resell (SPAR) 14,605 2,761 245 17,611
Financial assets at fair value through
profit or loss
Trading securities - debt securities 3,827 126 605 4,558
Available-for-sale securities - debt
securities 9,517 15,257 87,745 112,519
Held-to-maturity securities 17,492 26,936 104,272 148,700
Loans and advances, net 392,546 82,158 205,191 679,895
Other financial assets
Accounts receivable, net 879 - - 879
Other accrued interest and fees
receivable 662 - - 662
Sales contracts receivable, net 27 51 - 78
Rental deposits 335 - - 335
Others, net 444 - - 444
Total financial assets 727,706 127,289 398,058 1,253,053

Financial Liabilities
Deposit liabilities 290,777 278,941 419,912 989,630
Bills payable 25,466 598 367 26,431
Due to BSP and other banks 2,051 - - 2,051
Manager’s checks and demand drafts
outstanding 7,183 - - 7,183
Other financial liabilities
Accounts payable 3,551 - - 3,551
Outstanding acceptances 1,677 - - 1,677
Deposits on lease contract 2,076 - - 2,076
Dividends payable 3,201 - - 3,201
Others 1,607 - - 1,607
Total financial liabilities 337,589 279,539 420,279 1,037,407
Total maturity gap 390,117 (152,250) (22,221) 215,646

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Parent

Over 1 up to
Up to 1 year 3 years Over 3 years Total
(In Millions of Pesos)
As at December 31, 2014
Financial Assets
Cash and other cash items 37,292 - - 37,292
Due from BSP 170,655 - - 170,655
Due from other banks 15,429 - - 15,429
Interbank loans receivable and
securities under agreements to
resell (SPAR) 2,493 2,733 225 5,451
Financial assets at fair value through
profit or loss
Trading securities - debt securities 2,088 327 6,670 9,085
Available-for-sale - debt securities 5,152 7,305 42,829 55,286
Held-to-maturity securities 20,678 69,723 169,533 259,934
Loans and advances, net 376,748 87,261 166,217 630,226
Other financial assets, net
Accounts receivable, net 1,063 - - 1,063
Other accrued interest and fees
receivable 613 - - 613
Sales contracts receivable, net - - - -
Rental deposits 304 - - 304
Others, net 387 - - 387
Total financial assets 632,902 167,349 385,474 1,185,725
Financial Liabilities
Deposit liabilities 517,730 435,571 - 953,301
Bills payable 27,991 439 396 28,826
Due to BSP and other banks 688 - - 688
Manager’s checks and demand drafts
outstanding 6,664 - - 6,664
Other financial liabilities
Accounts payable 3,502 - - 3,502
Outstanding acceptances 947 - - 947
Deposits on lease contracts - - - -
Dividends payable - - - -
Others 1,694 - - 1,694
Total financial liabilities 559,216 436,010 396 995,622
Total maturity gap 73,686 (268,661) 385,078 190,103

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Over 1 up to
Up to 1 year 3 years Over 3 years Total
(In Millions of Pesos)
As at December 31, 2013
Financial Assets
Cash and other cash items 24,888 - - 24,888
Due from BSP 195,161 - - 195,161
Due from other banks 8,789 - - 8,789
Interbank loans receivable and
securities under agreements to
resell (SPAR) 7,238 2,761 245 10,244
Financial assets at fair value through
profit or loss
Trading securities - debt securities 2,459 38 220 2,717
Available-for-sale - debt securities 7,673 14,907 84,882 107,462
Held-to-maturity securities 14,925 24,185 93,883 132,993
Loans and advances, net 348,050 42,397 126,488 516,935
Other financial assets, net
Accounts receivable, net 623 - - 623
Other accrued interest and fees
receivable 573 - - 573
Sales contracts receivable, net 27 - - 27
Rental deposits 280 - - 280
Others, net 393 - - 393
Total financial assets 611,079 84,288 305,718 1,001,085
Financial Liabilities
Deposit liabilities 230,468 222,030 333,045 785,543
Bills payable 18,215 560 319 19,094
Due to BSP and other banks 2,052 - - 2,052
Manager’s checks and demand drafts
outstanding 6,026 - - 6,026
Unsecured subordinated debt - - - -
Other financial liabilities
Accounts payable 2,370 - - 2,370
Outstanding acceptances 1,677 - - 1,677
Deposits on lease contracts - - - -
Dividends payable 3,201 - - 3,201
Others 1,498 - - 1,498
Total financial liabilities 265,507 222,590 333,364 821,461
Total maturity gap 345,572 (138,302) (27,646) 179,624

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3.3.4 Derivative cash flows

(a) Derivatives settled on a net basis

The BPI Group’s derivatives that are settled on a net basis consist of interest rate swaps, non-deliverable
forwards and non-deliverable swaps. The table below presents the contractual undiscounted cash flows of
interest rate swaps based on the remaining period from December 31 to the contractual maturity dates that are
subject to offsetting, enforceable master netting arrangements and similar agreements.

Consolidated and Parent

Over 1 up to Over 3
Up to 1 year 3 years years Total
2014 (In Millions of Pesos)
Interest rate swap contracts - held for trading
- Inflow 41 9,718 2,815 12,574
- Outflow (58) (9,951) (2,813) (12,822)
- Net inflow (outflow) (17) (233) 2 (248)
Non-deliverable forwards and swaps - held for trading
- Inflow 32,824 8,731 - 41,555
- Outflow (32,836) (8,456) - (41,292)
- Net inflow (12) 275 - 263

Over 1 up to Over 3
Up to 1 year 3 years years Total
2013 (In Millions of Pesos)
Interest rate swap contracts - held for trading
- Inflow 137 615 2,732 3,484
- Outflow (133) (643) (2,712) (3,488)
- Net inflow (outflow) 4 (28) 20 (4)
Non-deliverable forwards and swaps - held for trading
- Inflow 5,559 11,900 - 17,459
- Outflow (5,453) (11,879) - (17,332)
- Net inflow 106 21 - 127

(b) Derivatives settled on a gross basis

The BPI Group’s derivatives that are settled on a gross basis include foreign exchange derivatives mainly,
currency forwards, currency swaps and spot contracts. The table below presents the contractual undiscounted
cash flows of foreign exchange derivatives based on the remaining period from reporting date to the contractual
maturity dates.

Consolidated and Parent

Over 1 up to Over 3
Up to 1 year 3 years years Total
(In Millions of Pesos)
Foreign exchange derivatives - held for trading
2014
- Inflow 110,902 12,501 - 123,403
- Outflow (110,954) (11,396) - (122,350)
- Net inflow (outflow) (52) 1,105 - 1,053
2013
- Inflow 77,495 622 - 78,117
- Outflow (77,456) (665) - (78,121)
- Net inflow (outflow) 39 (43) - (4)

(50)
3.4 Fair value of financial assets and liabilities

The table below summarizes the carrying amount and fair value of those significant financial assets and liabilities
not presented on the statement of condition at fair value at December 31.

Consolidated

Carrying amount Fair value


2014 2013 2014 2013
(In Millions of Pesos)
Financial assets
Cash and other cash items 38,427 25,696 38,427 25,696
Due from BSP 211,946 244,483 211,946 244,483
Due from other banks 22,227 17,070 22,227 17,070
Interbank loans receivable and SPAR 5,782 17,397 5,782 17,397
Held-to-maturity securities 209,409 96,172 220,292 104,563
Loans and advances, net 800,170 630,203 815,038 659,885
Other financial assets
Accounts receivable, net 1,489 879 1,489 879
Other accrued interest and fees receivable 661 662 661 662
Sales contracts receivable, net 39 78 39 78
Rental deposits 366 335 366 335
Others, net 425 444 425 444
Financial liabilities
Deposit liabilities 1,176,213 988,586 1,175,367 963,463
Bills payable 32,993 26,179 32,985 26,352
Due to BSP and other banks 687 2,051 687 2,051
Manager’s checks and demand drafts
outstanding 8,353 7,183 8,353 7,183
Other financial liabilities
Accounts payable 4,787 3,551 4,787 3,551
Deposits on lease contract 1,974 2,076 1,974 2,076
Outstanding acceptances 947 1,677 947 1,677
Dividends payable - 3,201 - 3,201
Others 1,838 1,607 1,838 1,607

(51)
Parent

Carrying amount Fair value


2014 2013 2014 2013
(In Millions of Pesos)
Financial assets
Cash and other cash items 37,292 24,888 37,292 24,888
Due from BSP 170,648 195,076 170,648 195,076
Due from other banks 15,429 8,789 15,429 8,789
Interbank loans receivable and SPAR 5,246 10,037 5,246 10,037
Held-to-maturity securities 193,001 85,900 202,888 93,586
Loans and advances, net 621,441 475,155 621,097 488,832
Other financial assets
Accounts receivable, net 1,063 623 1,063 623
Other accrued interest and fees receivable 613 573 613 573
Sales contracts receivable, net - 27 - 27
Rental deposits 304 280 304 280
Others, net 387 393 387 393
Financial liabilities
Deposit liabilities 952,681 785,403 949,453 710,719
Bills payable 26,288 18,990 26,280 19,022
Due to BSP and other banks 688 2,052 688 2,052
Manager’s checks and demand drafts
outstanding 6,664 6,026 6,664 6,026
Other financial liabilities
Accounts payable 3,502 2,370 3,502 2,370
Outstanding acceptances 947 1,677 947 1,677
Deposit on lease contracts - - - -
Dividends payable - 3,201 - 3,201
Others 1,694 1,498 1,694 1,498

(i) Cash and other cash items, due from BSP and other banks and interbank loans receivable and SPAR

The fair value of floating rate placements and overnight deposits approximates their carrying amount. The
estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-
market interest rates for debts with similar credit risk and remaining maturity. All of these financial assets have a
maturity of one year, thus their fair values approximate their carrying amounts.

(ii) Investment securities

Fair value of held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this
information is not available, fair value is estimated using quoted market prices for securities with similar credit,
maturity and yield characteristics.

(iii) Loans and advances

The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows
expected to be received. Expected cash flows are discounted with the use of assumptions regarding appropriate
credit spread for the loan, derived from other market instruments.

(iv) Financial liabilities

The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the
amount repayable on demand.

(52)
The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is
based on discounted cash flows using market interest rates for new debts with similar remaining maturity.

(v) Other financial assets / liabilities

Carrying amounts of other financial assets / liabilities which have no definite repayment dates are assumed to be
their fair values.

3.5 Fair value hierarchy

The following table presents the fair value hierarchy of the BPI Group’s assets and liabilities at December 31:

Consolidated

Fair value
2014 Level 1 Level 2 Total
Recurring measurements (In Millions of Pesos)
Financial assets
Financial assets at fair value through profit or loss
Derivative financial assets - 35,981 35,981
Trading securities
- Debt securities 14,932 315 15,247
- Equity securities 615 - 615
Available-for-sale financial assets
- Debt securities 43,750 3,734 47,484
- Equity securities 2,216 1,514 3,730
61,513 41,544 103,057
Financial liabilities
Derivative financial liabilities - 34,846 34,846

Non-recurring measurements
Assets held for sale, net - 3,033 3,033

(53)
Fair value
2014 Level 1 Level 2 Total
Fair values disclosed
Financial assets
Cash and other cash items - 38,427 38,427
Due from BSP - 211,946 211,946
Due from other banks - 22,227 22,227
Interbank loans receivable and SPAR - 5,782 5,782
Held-to-maturity securities 219,648 644 220,292
Loans and advances, net - 815,038 815,038
Other financial assets
Accounts receivable, net - 1,489 1,489
Other accrued interest and fees receivable - 661 661
Sales contracts receivable, net - 39 39
Rental deposits - 366 366
Others, net - 425 425
Financial liabilities
Deposit liabilities - 1,175,367 1,175,367
Bills payable - 32,985 32,985
Due to BSP and other banks - 687 687
Manager’s checks and demand drafts outstanding - 8,353 8,353
Other financial liabilities
Accounts payable - 4,787 4,787
Outstanding acceptances - 947 947
Deposits on lease contract - 1,974 1,974
Dividends payable - - -
Others - 1,838 1,838
Non-financial assets
Investment properties - 2,057 2,057

Fair value
2013 Level 1 Level 2 Total
Recurring measurements (In Millions of Pesos)
Financial assets
Financial assets at fair value through profit or loss
Derivative financial assets - 16,550 16,550
Trading securities
- Debt securities 3,926 408 4,334
- Equity securities 263 - 263
Available-for-sale financial assets
- Debt securities 74,208 11,677 85,885
- Equity securities 1,285 - 1,285
79,682 28,635 108,317
Financial liabilities
Derivative financial liabilities - 16,360 16,360

Non-recurring measurements
Assets held for sale, net - 3,078 3,078

(54)
Fair value
2013 Level 1 Level 2 Total
Fair values disclosed
Financial assets
Cash and other cash items - 25,696 25,696
Due from BSP - 244,483 244,483
Due from other banks - 17,070 17,070
Interbank loans receivable and SPAR - 17,397 17,397
Held-to-maturity securities 104,563 - 104,563
Loans and advances, net - 659,885 659,885
Other financial assets
Accounts receivable, net - 879 879
Other accrued interest and fees receivable - 662 662
Sales contracts receivable, net - 78 78
Rental deposits - 335 335
Others, net - 444 444
Financial liabilities
Deposit liabilities - 963,463 963,463
Bills payable - 26,352 26,352
Due to BSP and other banks - 2,051 2,051
Manager’s checks and demand drafts outstanding - 7,183 7,183
Other financial liabilities
Accounts payable - 3,551 3,551
Outstanding acceptances - 1,677 1,677
Deposits on lease contract - 2,076 2,076
Dividends payable - 3,201 3,201
Others - 1,607 1,607
Non-financial assets
Investment properties - 3,289 3,289

Parent

Level 1 Level 2 Total


2014 (In Millions of Pesos)
Financial assets
Financial assets at fair value through profit or loss
Derivative financial assets - 35,981 35,981
Trading securities - debt securities 6,475 145 6,620
Available-for-sale financial assets
- Debt securities 38,435 3,169 41,604
- Equity securities 203 - 203
45,113 39,295 84,408
Financial liabilities
Derivative financial liabilities - 34,846 34,846

Non-recurring measurements
Assets held for sale, net - 1,865 1,865

(55)
Fair value
2014 Level 1 Level 2 Total
Fair values disclosed
Financial assets
Cash and other cash items - 37,292 37,292
Due from BSP - 170,648 170,648
Due from other banks - 15,429 15,429
Interbank loans receivable and SPAR - 5,246 5,246
Held-to-maturity securities 202,244 644 202,888
Loans and advances, net - 621,097 621,097
Other financial assets
Accounts receivable, net - 1,063 1,063
Other accrued interest and fees receivable - 613 613
Sales contracts receivable, net - - -
Rental deposits - 294 294
Others, net - 387 387
Financial liabilities
Deposit liabilities - 949,453 949,453
Bills payable - 26,280 26,280
Due to BSP and other banks - 688 688
Manager’s checks and demand drafts outstanding - 6,664 6,664
Other financial liabilities
Accounts payable - 3,554 3,554
Outstanding acceptances - 947 947
Deposits on lease contract - - -
Dividends payable - - -
Others - 1,694 1,694
Non-financial assets
Investment properties - 2,057 2,057

Level 1 Level 2 Total


2013 (In Millions of Pesos)
Financial assets
Financial assets at fair value through profit or loss
Derivative financial assets - 16,550 16,550
Trading securities - debt securities 2,280 346 2,626
Available-for-sale financial assets
- Debt securities 69,809 11,677 81,486
- Equity securities 136 - 136
72,225 28,573 100,798
Financial liabilities
Derivative financial liabilities - 16,360 16,360

Non-recurring measurements
Assets held for sale, net - 2,094 2,094

(56)
Fair value
2013 Level 1 Level 2 Total
Fair values disclosed
Financial assets
Cash and other cash items - 24,888 24,888
Due from BSP - 195,076 195,076
Due from other banks - 8,789 8,789
Interbank loans receivable and SPAR - 10,037 10,037
Held-to-maturity securities 93,586 - 93,586
Loans and advances, net - 488,832 488,832
Other financial assets
Accounts receivable, net - 623 623
Other accrued interest and fees receivable - 573 573
Sales contracts receivable, net - 27 27
Rental deposits - 280 280
Others, net - 393 393
Financial liabilities
Deposit liabilities - 710,719 710,719
Bills payable - 19,022 19,022
Due to BSP and other banks - 2,052 2,052
Manager’s checks and demand drafts outstanding - 6,026 6,026
Other financial liabilities
Accounts payable - 2,370 2,370
Outstanding acceptances - 1,677 1,677
Deposits on lease contract - - -
Dividends payable - 3,201 3,201
Others - 1,498 1,498
Non-financial assets
Investment properties - 3,289 3,289

The BPI Group has no financial instruments, other assets or liabilities with non-recurring fair value
measurements or with fair values disclosed that fall under the Level 3 category as at December 31, 2014 and
2013. There were no transfers between Level 1 and Level 2 during the years ended December 31, 2014 and
2013.

3.6 Insurance risk management

The non-life insurance entities decide on the retention, or the absolute amount that they are ready to assume
insurance risk from one event. The retention amount is a function of capital, experience, actuarial study and risk
appetite or aversion.

In excess of the retention, these entities arrange reinsurances either thru treaties or facultative placements.
They also accredit reinsurers based on certain criteria and set limits as to what can be reinsured. The
reinsurance treaties and the accreditation of reinsurers require Board of Directors’ approval.

3.7 Capital management

Cognizant of its exposure to risks, the BPI Group understands that it must maintain sufficient capital to absorb
unexpected losses, to stay in business for the long haul, and to satisfy regulatory requirements. The BPI Group
further understands that its performance, as well as the performance of its various units, should be measured in
terms of returns generated vis-à-vis allocated capital and the amount of risk borne in the conduct of business.

(57)
The BPI Group manages its capital following the framework of Basel Committee on Banking Supervision
Accord II (Basel II) and its implementation in the Philippines by the BSP. The BSP through its Circular 538
requires each bank and its financial affiliated subsidiaries to keep its Capital Adequacy Ratio (CAR) - the ratio of
qualified capital to risk-weighted exposures - to be no less than 10%. In quantifying its CAR, BPI currently uses
the Standardized Approach (for credit risk and market risk) and the Basic Indicator Approach (for operational
risk). Capital adequacy reports are filed with the BSP every quarter.

Qualifying capital and risk-weighted assets are computed based on BSP regulations. The qualifying capital of the
Parent Bank consists of core tier 1 capital and tier 2 capital. Tier 1 capital comprises paid-up capital stock, paid-
in surplus, surplus including net income for the year, surplus reserves and minority interest less deductions such
as deferred income tax, unsecured credit accommodations to DOSRI, goodwill and unrealized fair value losses
on available-for-sale securities. Tier 2 capital includes net unrealized fair value gains on available-for-sale
investments and general loan loss provisions for BSP reporting purposes.

The Basel II framework following BSP Circular 538 took into effect on July 1, 2007 and was relevant until 2013.

Effective January 1, 2014, the BSP, through its Circular 781, requires each bank and its financial affiliated
subsidiaries to adopt new capital requirements in accordance with the provisions of Basel III. The new guidelines
are meant to strengthen the composition of the Bank's capital by increasing the level of core capital and
regulatory capital. The Circular sets out minimum Common Equity Tier 1 (CET1) ratio and Tier 1 Capital ratios of
6.0% and 7.5%, respectively. A capital conservation buffer of 2.5%, comprised of CET1 capital, was likewise
imposed. The minimum required capital adequacy ratio remains at 10% which includes the capital conservation
buffer.

In addition, existing capital requirements as at December 31, 2010 which do not meet the eligibility criteria for
capital instruments under the revised capital framework shall no longer be recognized as capital upon the
effectivity of Basel III.

The table below summarizes the CAR under the Basel III and Basel II framework for the years ended
December 31, 2014 and 2013, respectively.

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Tier 1 capital 139,604 93,616 139,105 95,634
Tier 2 capital 7,579 6,257 6,199 5,041
Gross qualifying capital 147,183 99,873 145,304 100,675
Less: Regulatory adjustments/required deductions 18,664 3,218 50,102 32,170
Total qualifying capital 128,519 96,655 95,202 68,505

Risk weighted assets 865,708 705,556 701,290 563,773


CAR (%) 14.85 13.70 13.58 12.15

The BPI Group has fully complied with the CAR requirement of the BSP.

Likewise, the BPI Group manages the capital of its non-life insurance subsidiaries, pre-need subsidiary and
securities dealer subsidiaries in accordance with the capital requirements of the relevant regulatory agency, such as
Insurance Commission, Philippine SEC and PSE. These subsidiaries have fully complied with the relevant capital
requirements.

As part of the reforms of the PSE to expand capital market and improve transparency among listed firms, PSE
requires listed entities to maintain a minimum of ten percent (10%) of their issued and outstanding shares, exclusive
of any treasury shares, held by the public. The Parent Bank has fully complied with this requirement.

Note 4 - Critical Accounting Estimates and Judgments

The BPI Group makes estimates and assumptions that affect the reported amounts of assets and liabilities.
Estimates and judgments are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. It is reasonably
possible that the outcomes within the next financial year could differ from assumptions made at reporting date and
could result in the adjustment to the carrying amount of affected assets or liabilities.

(58)
A. Critical accounting estimates

(i) Impairment losses on loans and advances (Note 13)

The BPI Group reviews its loan portfolios to assess impairment on a regular basis. In determining whether an
impairment loss should be recorded in profit or loss, the BPI Group makes judgments as to whether there is any
observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of
loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include
observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or
national or local economic conditions that correlate with defaults on assets in the group. Management uses
estimates based on historical loss experience for loans with credit risk characteristics and objective evidence of
impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and
assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce
any differences between loss estimates and actual loss experience. To the extent that the net present value of
estimated cash flows of individually impaired accounts and the estimated impairment for collectively assessed
accounts differs by +/- 5%, impairment provision for the year ended December 31, 2014 would be an estimated
P524 million (2013 - P428 million) higher or lower.

(ii) Fair value of derivatives and other financial instruments (Notes 3.4 and 9)

The fair values of financial instruments that are not quoted in active markets are determined by using generally
accepted valuation techniques. Where valuation techniques (for example, discounted cash flow models) are used
to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area
that created them. Inputs used in these models are from observable data and quoted market prices in respect of
similar financial instruments.

All models are approved by the Board of Directors before they are used, and models are calibrated to ensure that
outputs reflect actual data and comparative market prices. Changes in assumptions about these factors could affect
reported fair value of financial instruments. The BPI Group considers that it is impracticable to disclose with
sufficient reliability the possible effects of sensitivities surrounding the fair value of financial instruments that are not
quoted in active markets.

(iii) Pension liability on defined benefit plan (Note 28)

The BPI Group estimates its pension benefit obligation and expense for defined benefit pension plans based on the
selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are
described in Note 28 and include, among others, the discount rate and future salary increases. The BPI Group
determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to
determine the present value of estimated future cash outflows expected to be required to settle the retirement
obligations. The present value of the defined benefit obligations of the BPI Group at December 31, 2014 and
2013 are determined using the market yields on Philippine government bonds with terms consistent with the
expected payments of employee benefits. Plan assets are invested in either equity securities, debt securities or
other forms of investments. Equity markets may experience volatility, which could affect the value of pension
plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual
results that differ from the BPI Group’s assumptions are reflected as remeasurements in other comprehensive
income. The BPI Group’s assumptions are based on actual historical experience and external data regarding
compensation and discount rate trends. The sensitivity analysis on key assumptions is disclosed in Note 28.

(iv) Valuation of assets held for sale

In determining the fair value of assets held for sale, the BPI Group analyzed the sales prices by applying
appropriate units of comparison, adjusted by differences between the subject asset or property and related
market data. Should there be a subsequent write-down of the asset to fair value less cost to sell, such write-
down is recognized as impairment loss in the statement of income.

In 2014, the BPI Group has recognized an impairment loss on its foreclosed assets amounting to P65 million
(2013 - P599 million) as a result of reduction in fair market values.

The BPI Group considers that it is impracticable to disclose with sufficient reliability the possible effects of
sensitivities surrounding the fair value of assets held for sale.

(59)
B. Critical accounting judgments

(i) Impairment of available-for-sale securities (Note 11)

The BPI Group follows the guidance of PAS 39 to determine when an available-for-sale security is impaired. This
determination requires significant judgment. In making this judgment, the BPI Group evaluates, among other
factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health
and near-term business outlook of the issuer, including factors such as industry and sector performance, changes in
technology and operational and financing cash flows.

(ii) Classification of held-to-maturity securities (Note 12)

The BPI Group follows the guidance of PAS 39 in classifying non-derivative financial assets with fixed or
determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment. In
making this judgment, the BPI Group evaluates its intention and ability to hold such investments to maturity. If the
BPI Group fails to keep these investments to maturity other than for the specific circumstances - for example selling
an insignificant amount close to maturity - it will be required to reclassify the entire class as available-for-sale. The
investments would therefore be measured at fair value and not at amortized cost.

(iii) Classification of assets held for sale

Management follows the principles in PFRS 5 in classifying certain foreclosed assets (consisting of real estate and
auto or chattel), as assets held for sale when the carrying amount of the assets will be recovered principally through
sale. Management is committed to a plan to sell these foreclosed assets and the assets are actively marketed for
sale at a price that is reasonable in relation to their current fair value.

(iv) Realization of deferred income tax assets (Note 17)

Management reviews at each reporting date the carrying amounts of deferred tax assets. The carrying amount of
deferred tax assets is reduced to the extent that the related tax assets cannot be utilized due to insufficient taxable
profit against which the deferred tax losses will be applied. Management believes that sufficient taxable profit will
be generated to allow all or part of the deferred income tax assets to be utilized.

Note 5 - Assets and Liabilities Attributable to Insurance Operations

Details of assets and liabilities attributable to insurance operations at December 31 are as follows:

2014 2013
(In Millions of Pesos)
Assets
Cash and cash equivalents (Note 7) 215 117
Insurance balances receivable, net 4,810 3,803
Investment securities
Available-for-sale 5,390 4,477
Held-to-maturity 3,765 3,827
Land, building and equipment 144 131
Accounts receivable and other assets, net 2,121 2,231
16,445 14,586

Liabilities
Reserves and other balances 12,658 12,273
Accounts payable, accrued expenses and other payables 903 788
13,561 13,061

(60)
Details of income attributable to insurance operations before income tax and minority interest for the years ended
December 31 are as follows:

2014 2013 2012


(In Millions of Pesos)
Premiums earned and related income 2,868 3,020 2,441
Investment and other income 423 457 426
3,291 3,477 2,867
Benefits, claims and maturities 1,363 1,133 972
Increase (decrease) in actuarial reserve liabilities (162) (80) 271
Management and general expenses 515 452 433
Commissions 554 518 478
Other expenses 14 5 19
2,284 2,028 2,173
Income before income tax and minority interest 1,007 1,449 694

Note 6 - Business Segments

Operating segments are reported in accordance with the internal reporting provided to the chief executive officer,
who is responsible for allocating resources to the reportable segments and assessing their performance. All
operating segments used by the BPI Group meet the definition of a reportable segment under PFRS 8.

The BPI Group has determined the operating segments based on the nature of the services provided and the
different markets served representing a strategic business unit.

The BPI Group’s main operating business segments follow:

 Consumer Banking - this segment addresses the individual and retail markets. It covers deposit taking and
servicing, consumer lending such as home mortgages, auto loans and credit card finance as well as the
remittance business. It includes the entire transaction processing and service delivery infrastructure consisting
of the BPI and BPI Family Bank network of branches, ATMs and point-of-sale terminals as well as phone and
Internet-based banking platforms.

 Corporate Banking - this segment consists of the entire lending, leasing, trade and cash management services
provided by the BPI Group to corporate and institutional customers. These customers include both high-end
corporations as well as various middle market clients.

 Investment Banking - this segment includes the various business groups operating in the investment markets
and dealing in activities other than lending and deposit taking. These services cover corporate finance,
securities distribution, asset management, trust and fiduciary services as well as proprietary trading and
investment activities.

The performance of the Parent Bank is assessed as a single unit using financial information presented in the
separate or Parent only financial statements. Likewise, the chief executive officer assesses the performance of its
insurance business as a separate segment from its banking and allied financial undertakings. Information on the
assets, liabilities and results of operations of the insurance business is fully disclosed in Note 5.

The BPI Group and the Parent Bank mainly derive revenue (more than 90%) within the Philippines, accordingly,
no geographical segment is presented.

Revenues of the BPI Group’s segment operations are derived from interest (net interest income). The segment
report forms part of management’s assessment of the performance of the segment, among other performance
indicators.

(61)
There were no changes in the reportable segments during the year. Transactions between the business segments
are carried out at arm’s length. The revenue from external parties reported to management is measured in a
manner consistent with that in profit or loss until 2013. Funds are ordinarily allocated between segments, resulting
in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is based on
the BPI Group’s cost of capital. The funds transfer pricing (FTP) prior to 2014 was computed on a gross basis. In
2014, the manner of reporting has changed, in which interest income and interest expense are no longer presented
separately, considering that the calculation of FTP shifted from gross to net. In addition, majority of the segment’s
revenues are from interest and the chief executive officer relies primarily on net interest income to assess the
performance of the segments and to make decisions concerning the segments.

Internal charges and transfer pricing adjustments have been reflected in the performance of each business.
Revenue-sharing agreements are used to allocate external customer revenues to a business segment on a
reasonable basis. Inter-segment revenues however, are deemed insignificant for financial reporting purposes, thus,
not reported in segment analysis below.

The BPI Group’s management reporting is based on a measure of operating profit comprising net income, loan
impairment charges, fee and commission income, other income and non-interest income.

Segment assets and liabilities comprise majority of operating assets and liabilities, measured in a manner
consistent with that shown in the statement of condition, but exclude items such as taxation.

The segment assets, liabilities and results of operations of the reportable segments of the BPI Group as at and for
the years ended December 31, 2014, 2013 and 2012 are as follows:

2014
Total per
Consumer Corporate Investment management
banking banking banking reporting
(In Millions of Pesos)
Net interest income 21,984 7,242 5,956 35,182
Impairment charge 2,047 755 - 2,802
Net interest income after impairment charge 19,937 6,487 5,956 32,380
Fees and commission income 5,294 649 1,677 7,620
Other income 6,632 1,958 4,673 13,263
Gross receipts tax (775) (44) (502) (1,321)
Other income, net 11,151 2,563 5,848 19,562
Compensation and fringe benefits 8,122 1,041 904 10,067
Occupancy and equipment - related expenses 4,392 1,174 132 5,698
Other operating expenses 7,031 4,147 1,402 12,580
Total operating expenses 19,545 6,362 2,438 28,345
Operating profit 11,543 2,688 9,366 23,597
Share in net income of associates 257
Provision for income tax 4,958
Total assets 463,989 598,184 361,061 1,423,234
Total liabilities 1,205,684 10,168 70,255 1,286,107

(62)
2013
Total per
Consumer Corporate Investment management
banking banking banking reporting
(In Millions of Pesos)
Interest income 29,563 7,754 3,912 41,229
Interest expense 9,561 377 139 10,077
Net interest income 20,002 7,377 3,773 31,152
Impairment charge 2,316 1,304 - 3,620
Net interest income after impairment charge 17,686 6,073 3,773 27,532
Fees and commission income 4,775 524 782 6,081
Other income 5,812 2,028 8,483 16,323
Gross receipts tax (685) (46) (785) (1,516)
Other income, net 9,902 2,506 8,480 20,888
Compensation and fringe benefits 7,498 923 674 9,095
Occupancy and equipment - related expenses 4,302 1,198 144 5,644
Other operating expenses 5,695 3,459 1,150 10,304
Total operating expenses 17,495 5,580 1,968 25,043
Operating profit 10,093 2,999 10,285 23,377
Share in net income of associates 590
Provision for income tax 4,153
Total assets 384,670 460,029 329,460 1,174,159
Total liabilities 1,014,263 14,918 42,299 1,071,480

2012
Total per
Consumer Corporate Investment management
banking banking banking reporting
(In Millions of Pesos)
Interest income 27,138 8,226 4,926 40,290
Interest expense 11,726 475 107 12,308
Net interest income 15,412 7,751 4,819 27,982
Impairment charge 2,103 817 - 2,920
Net interest income after impairment charge 13,309 6,934 4,819 25,062
Fees and commission income 4,192 523 641 5,356
Other income 4,546 1,686 8,816 15,048
Gross receipts tax (547) (55) (697) (1,299)
Other income, net 8,191 2,154 8,760 19,105
Compensation and fringe benefits 7,189 921 559 8,669
Occupancy and equipment - related expenses 4,204 1,070 124 5,398
Other operating expenses 5,230 3,074 1,015 9,319
Total operating expenses 16,623 5,065 1,698 23,386
Operating profit 4,877 4,023 11,881 20,781
Share in net income of associates 138
Provision for income tax 3,158
Total assets 336,125 366,674 264,426 967,225
Total liabilities 829,128 16,626 29,794 875,548

(63)
Reconciliation of segment results to consolidated results of operations:

2014
Total per
Total per Consolidation consolidated
management adjustments/ financial
reporting Others statements
(In Millions of Pesos)
Net interest income 35,182 (374) 34,808
Impairment charge 2,802 5 2,807
Net interest income after impairment charge 32,380 (379) 32,001
Fees and commission income 7,620 (250) 7,370
Other income 13,263 1,781 15,044
Gross receipts tax (1,321) (114) (1,435)
Other income, net 19,562 1,417 20,979
Compensation and fringe benefits 10,067 1,783 11,850
Occupancy and equipment - related expenses 5,698 3,319 9,017
Other operating expenses 12,580 (3,487) 9,093
Total operating expenses 28,345 1,615 29,960
Operating profit 23,597 (577) 23,020
Share in net income of associates (included in Other income) 257 - 257
Provision for income tax 4,958 - 4,958
Total assets 1,423,234 26,963 1,450,197
Total liabilities 1,286,107 17,411 1,303,518

2013
Total per
Total per Consolidation consolidated
management adjustments/ financial
reporting Others statements
(In Millions of Pesos)
Interest income 41,229 (427) 40,802
Interest expense 10,077 401 10,478
Net interest income 31,152 (828) 30,324
Impairment charge 3,620 (972) 2,648
Net interest income after impairment charge 27,532 144 27,676
Fees and commission income 6,081 (196) 5,885
Other income 16,323 1,521 17,844
Gross receipts tax (1,516) (39) (1,555)
Other income, net 20,888 1,286 22,174
Compensation and fringe benefits 9,095 1,546 10,641
Occupancy and equipment - related expenses 5,644 2,396 8,040
Other operating expenses 10,304 (2,282) 8,022
Total operating expenses 25,043 1,660 26,703
Operating profit 23,377 (230) 23,147
Share in net income of associates (included in Other income) 590 - 590
Provision for income tax 4,153 - 4,153
Total assets 1,174,159 21,205 1,195,364
Total liabilities 1,071,480 18,077 1,089,557

(64)
2012
Total per
Total per Consolidation consolidated
management adjustments/ financial
reporting Others statements
(In Millions of Pesos)
Interest income 40,290 (181) 40,109
Interest expense 12,308 347 12,655
Net interest income 27,982 (528) 27,454
Impairment charge 2,920 3 2,923
Net interest income after impairment charge 25,062 (531) 24,531
Fees and commission income 5,356 (245) 5,111
Other income 15,048 1,114 16,162
Gross receipts tax (1,299) (43) (1,342)
Other income, net 19,105 826 19,931
Compensation and fringe benefits 8,669 1,801 10,470
Occupancy and equipment - related expenses 5,398 1,795 7,193
Other operating expenses 9,319 (2,180) 7,139
Total operating expenses 23,386 1,416 24,802
Operating profit 20,781 (1,121) 19,660
Share in net income of associates (included in Other income) 138 - 138
Provision for income tax 3,158 - 3,158
Total assets 967,225 18,016 985,241
Total liabilities 875,548 11,571 887,119

“Consolidation adjustments/Others” pertain to balances of insurance operations, support units and inter-segment
elimination in accordance with the BPI Group’s internal reporting.

Note 7 - Cash and Cash Equivalents

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Cash and other cash items 38,427 25,696 37,292 24,888
Due from BSP 211,946 244,483 170,648 195,076
Due from other banks 22,227 17,070 15,429 8,789
Interbank loans receivable and securities
purchased under agreements
to resell (Note 8) 743 12,406 241 5,046
Cash and cash equivalents attributable to
insurance operations (Note 5) 215 117 - -
273,558 299,772 223,610 233,799

(65)
Note 8 - Interbank Loans Receivable and Securities Purchased under Agreements to Resell (SPAR)

The account at December 31 consists of transactions with:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
BSP 500 11,505 - 4,150
Other banks 5,266 5,879 5,231 5,879
5,766 17,384 5,231 10,029
Accrued interest receivable 16 13 15 8
5,782 17,397 5,246 10,037

Interbank loans receivable and SPAR maturing within 90 days from the date of acquisition are classified as cash
equivalents in the statement of cash flows (Note 7).

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 2,905 14,531 2,369 7,171
Non-current 2,877 2,866 2,877 2,866
5,782 17,397 5,246 10,037

Government bonds are pledged by the BSP as collateral under reverse repurchase agreements. The face value of
securities pledged is equivalent to the total balance of outstanding placements as at reporting date. All collateral
agreements mature within 12 months.

The range of average interest rates (%) of interbank loans receivable of the BPI Group for the years ended
December 31 follows:

2014 2013
Peso-denominated 3.16 - 3.54 3.50 - 3.62
US dollar-denominated 0.07 - 0.13 0.13 - 0.16

Note 9 - Derivative Financial Instruments

Derivatives held by the BPI Group for non-hedging purposes mainly consist of the following:

 Foreign exchange forwards represent commitments to purchase or sell one currency against another at an
agreed forward rate on a specified date in the future. Settlement can be made via full delivery of forward
proceeds or via payment of the difference (non-deliverable forward) between the contracted forward rate
and the prevailing market rate on maturity.

 Foreign exchange swaps refer to spot purchase or sale of one currency against another with an agreement
to sell or purchase the same currency at an agreed forward rate in the future.

 Interest rate swaps refer to agreement to exchange fixed rate versus floating interest payments (or vice
versa) on a reference notional amount over an agreed period of time.

 Cross currency swaps refer to spot exchange of notional amounts on two currencies at a given exchange
rate and with an agreement to re-exchange the same notional amounts at a specified maturity date based
on the original exchange rate. Parties on the transaction agree to pay a stated interest rate on the borrowed
notional amount and receive a stated interest rate on the lent notional amount, payable or receivable
periodically over the term of the transaction.

 Credit-Linked Notes (CLNs) are structured notes whose value is derived from the creditworthiness of an
underlying reference entity. A CLN may be viewed as a bundled note that consists of a bond and a credit
default swap, allowing the issuer to transfer the credit risk of a reference entity to the investor during the
reference period.

(66)
The BPI Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to
fulfill their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a
proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit
risk taken, the BPI Group assesses counterparties using the same techniques as for its lending activities.

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments
recognized on the statement of condition. They do not necessarily represent the amounts of future cash flows
involved or the current fair values of the instruments and therefore are not indicative of the BPI Group’s exposure
to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a
result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate
contractual or notional amount of derivative financial instruments on hand and the extent at which the
instruments can become favorable or unfavorable in fair values can fluctuate significantly from time to time.

The contract/ notional amount and fair values of derivative instruments held as at December 31 are set out
below:

Consolidated and Parent

Contract/ Fair Values


Notional Amount Assets Liabilities
2014 2013 2014 2013 2014 2013
(In Millions of Pesos)
Free-standing derivatives
Foreign exchange derivatives
Currency swaps 122,364 70,312 21,828 12,294 (21,359) (12,252)
Currency forwards 101,657 60,661 1,487 700 (652) (621)
Interest rate swaps 87,499 46,862 12,544 3,471 (12,791) (3,478)
Credit default swaps 1,342 888 28 13 (44) (9)
Embedded credit derivatives 5,009 5,327 94 72 - -
Total derivatives assets (liabilities) held for
trading 317,871 184,050 35,981 16,550 (34,846) (16,360)

Note 10 - Trading Securities

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Debt securities
Government securities 14,537 3,900 6,085 2,258
Commercial papers of private companies 658 429 492 367
15,195 4,329 6,577 2,625
Accrued interest receivable 52 5 43 1
15,247 4,334 6,620 2,626
Equity securities - listed 615 263 - -
15,862 4,597 6,620 2,626

All trading securities are classified as current.

(67)
Note 11 - Available-for-Sale Securities

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
Debt securities (In Millions of Pesos)
Government securities 28,046 65,808 23,650 62,636
Others 18,806 19,115 17,422 17,944
46,852 84,923 41,072 80,580
Accrued interest receivable 632 962 532 906
47,484 85,885 41,604 81,486
Equity securities
Listed 2,474 643 355 350
Unlisted 1,663 1,614 113 113
4,137 2,257 468 463
51,621 88,142 42,072 81,949
Allowance for impairment (312) (586) (206) (213)
51,309 87,556 41,866 81,736

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 5,295 5,038 2,992 3,352
Non-current 46,326 83,104 39,080 78,597
51,621 88,142 42,072 81,949

The reconciliation of the allowance for impairment at December 31 is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 586 586 213 213
Reversal of impairment losses (274) - (7) -
At December 31 312 586 206 213

The range of average interest rates (%) of available-for-sale debt securities of the BPI Group for the years ended
December 31 follows:

2014 2013
Peso-denominated 2.84 - 3.18 3.30 - 4.60
Foreign currency-denominated 2.39 - 2.71 1.96 - 2.46

The movement in available-for-sale securities is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 87,556 106,403 81,736 92,845
Additions 72,240 264,840 58,135 241,745
Disposals (107,387) (280,663) (96,923) (249,990)
Amortization of premium, net (2,365) (507) (2,252) (505)
Fair value adjustments 1,831 (3,347) 1,525 (3,129)
Exchange differences 38 1,214 26 1,129
Net change in allowance for impairment (274) - (7) -
Net change in accrued interest receivable (330) (384) (374) (359)
At December 31 51,309 87,556 41,866 81,736

(68)
On January 9, 2014, the BPI Group reclassified certain available-for-sale securities aggregating P63.4 billion to
held-to-maturity category. The reclassification was triggered by management’s change in intention over the
securities in the light of volatile market prices due to rising interest rate environment. Management believes that
despite the market uncertainties, the BPI Group has the capability to hold those reclassified securities until
maturity dates.

The aggregate fair value loss of those securities at reclassification dates that are still recognized in Accumulated
other comprehensive income (under Capital funds), and which will be amortized over the remaining lives of the
instruments using the effective interest rate method amounts to P4,534 million. Unamortized fair value loss as at
December 31, 2014 amounts to P4,201 million. Fair value gain that would have been recognized in other
comprehensive income if the available-for-sale securities had not been reclassified amounts to P3,678 million for
the year ended December 31, 2014. There are no gains or losses recognized in profit or loss or other
comprehensive income.

On October 22, 2008, the BPI Group reclassified certain available-for-sale securities aggregating P19.1 billion to
held-to-maturity category. Likewise, on November 12, 2008, an additional portfolio of US dollar-denominated
available-for-sale securities totaling US$171.6 million (or peso equivalent of P9.2 billion) was further reclassified
from available-for-sale to held-to-maturity. The reclassification was triggered by management’s change in
intention over the securities in the light of volatile market prices due to global economic downturn. Management
believes that despite the market uncertainties, the BPI Group has the capability to hold those reclassified
securities until maturity dates.

The aggregate fair value loss of those securities at reclassification dates still recognized in Accumulated other
comprehensive income (under Capital funds), and which will be amortized over the remaining lives of the
instruments using the effective interest rate method amounts to P1,757 million. Unamortized fair value loss as at
December 31, 2014 amounts to P269 million (2013 - P371 million). Fair value loss that would have been
recognized in other comprehensive income if the available-for-sale securities had not been reclassified amounts to
P123 million for the year ended December 31, 2014 (2013 - P277 million loss). There are no gains or losses
recognized in profit or loss or other comprehensive income.

Note 12 - Held-to-Maturity Securities

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Government securities 195,779 91,277 180,547 82,129
Commercial papers of private companies 10,301 2,898 9,428 2,034
206,080 94,175 189,975 84,163
Accrued interest receivable 3,329 1,997 3,026 1,737
209,409 96,172 193,001 85,900

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 8,625 9,851 7,571 8,350
Non-current 200,784 86,321 185,430 77,550
209,409 96,172 193,001 85,900

The range of average interest rates (%) of held-to-maturity securities of the BPI Group for the years ended
December 31 follows:

2014 2013
Peso-denominated 4.27 - 4.98 6.82 - 7.89
Foreign currency-denominated 4.25 - 4.71 4.55 - 4.75

(69)
The movement in held-to-maturity securities is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 96,172 76,243 85,900 67,822
Additions 127,125 48,508 118,981 42,493
Maturities (13,580) (29,906) (11,843) (25,815)
Amortization of premium, net (1,698) (1,374) (1,369) (1,067)
Exchange differences 58 2,478 43 2,269
Net change in accrued interest receivable 1,332 223 1,289 198
At December 31 209,409 96,172 193,001 85,900

Note 13 - Loans and Advances

Major classifications of this account at December 31 are as follows:

Consolidated Parent
2014 2013 2014 2013
Corporate entities (In Millions of Pesos)
Large corporate customers 553,493 417,537 532,181 399,235
Small and medium enterprise 94,185 86,740 58,875 54,471
Retail customers
Credit cards 31,010 27,222 30,931 27,054
Mortgages 123,965 106,413 182 180
Others 10,719 5,759 7,390 2,291
813,372 643,671 629,559 483,231
Accrued interest receivable 2,753 2,175 1,973 1,449
Unearned discount/income (2,249) (3,026) (913) (662)
813,876 642,820 630,619 484,018
Allowance for impairment (13,706) (12,617) (9,178) (8,863)
800,170 630,203 621,441 475,155

The Parent balances above include amounts due from related parties (Note 30).

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 649,056 390,421 619,169 345,925
Non-current 164,820 252,399 11,450 138,093
813,876 642,820 630,619 484,018

The amount of loans and advances above include finance lease receivables as follows:

Consolidated
2014 2013
(In Millions of Pesos)
Total future minimum lease collections 6,507 6,546
Unearned finance income (817) (821)
Present value of future minimum lease collections 5,690 5,725
Allowance for impairment (132) (121)
5,558 5,604

(70)
Details of future minimum lease collections follow:

Consolidated
2014 2013
(In Millions of Pesos)
Not later than one year 3,578 3,047
Later than one year but not later than five years 2,929 3,499
6,507 6,546
Unearned finance income (817) (821)
5,690 5,725

The BPI Group, through BPI Leasing Century Tokyo Lease and Finance Corporation, mainly leases out vehicle
and equipment under various finance lease agreements which typically run for a non-cancellable period of two to
five years. The contracts generally include an option to purchase the leased asset after the lease period at a
price that generally lies between 5% to 20% of the fair value of the asset at the inception of the lease. In the
event that the residual value of the leased asset exceeds the guaranteed deposit liability at the end of the lease
term, the BPI Group receives additional payment from the lessee prior to the transfer of the leased asset. On the
other hand, the BPI Group sets up a liability to the lessee for any excess of the guaranteed deposit liability over
residual value of the leased asset.

The Parent Bank has no finance lease receivables as at December 31, 2014 and 2013.

There is no contingent rent recognized as income during the years ended December 31, 2014 and 2013.

Details of the loans and advances portfolio of the BPI Group at December 31 are as follows:

1) As to industry/economic sector (in %)

Consolidated Parent
2014 2013 2014 2013
Consumer 9.38 10.04 5.34 5.87
Manufacturing 21.00 21.65 26.45 27.97
Real estate, renting and other related
activities 22.45 26.97 14.06 18.13
Agriculture and forestry 2.15 1.62 2.68 2.03
Wholesale and retail trade 12.88 12.62 14.99 15.03
Financial institutions 11.95 7.89 15.09 8.87
Others 20.19 19.21 21.39 22.10
100.00 100.00 100.00 100.00

2) As to collateral

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Secured loans
Real estate mortgage 187,605 179,228 97,983 80,650
Chattel mortgage 40,146 35,968 141 2,673
Others 245,778 159,988 210,919 146,969
473,529 375,184 309,043 230,292
Unsecured loans 337,594 265,461 319,603 252,277
811,123 640,645 628,646 482,569

Other collaterals include hold-out deposits, mortgage trust indentures, government securities and bonds,
quedan/warehouse receipts, standby letters of credit, trust receipts, and deposit substitutes.

Loans and advances aggregating P479 million (2013 - P1,310 million) and P461 million (2013 - P1,232 million)
are used as security for bills payable (Note 20) of the BPI Group and Parent Bank, respectively.

(71)
The range of average interest rates (%) of loans and advances of the BPI Group for the years ended
December 31 follows:

2014 2013
Commercial loans
Peso-denominated loans 3.99 - 4.05 4.50 - 4.73
Foreign currency-denominated loans 2.33 - 2.59 2.43 - 2.66
Real estate mortgages 7.44 - 7.65 7.76 - 8.13
Auto loans 10.04 - 10.18 9.68 - 10.12

Non-performing accounts (over 30 days past due) of the BPI Group and the Parent Bank, net of specific
allowance for credit losses, following BSP Circular 772 are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Non-performing accounts (NPL 30) 12,540 11,452 7,205 6,788
Specific allowance for credit losses 7,477 8,268 4,560 5,399
Net NPL 30 5,063 3,184 2,645 1,389

Reconciliation of allowance for impairment by class at December 31 follows:

Consolidated

2014
Corporate entities Retail customers
Large Small and
corporate medium Credit
customers enterprises Mortgages cards Others Total
(In Millions of Pesos)
At January 1 5,059 2,154 1,478 2,390 1,536 12,617
Provision for impairment
losses 727 306 153 1,079 725 2,990
Write-off/disposal (152) (127) - (1,179) (177) (1,635)
Unwind of discount (76) (47) - - - (123)
Transfers 23 30 (92) 2 (106) (143)
At December 31 5,581 2,316 1,539 2,292 1,978 13,706

2013
Corporate entities Retail customers
Large Small and
corporate medium Credit
customers enterprises Mortgages cards Others Total
(In Millions of Pesos)
At January 1 3,054 2,780 1,510 2,305 1,448 11,097
Provision for impairment
losses 212 138 74 1,200 262 1,886
Write-off/disposal (432) (46) (4) (1,115) (72) (1,669)
Unwind of discount (87) (60) - - - (147)
Transfers 2,312 (658) (102) - (102) 1,450
At December 31 5,059 2,154 1,478 2,390 1,536 12,617

(72)
Parent

2014
Corporate entities Retail customers
Large Small and
corporate medium Credit
customers enterprises Mortgages cards Others Total
(In Millions of Pesos)
At January 1 4,307 1,923 65 2,390 178 8,863
Provision for impairment
losses 566 179 (2) 1,067 104 1,914
Write-off/disposal (152) (99) - (1,177) (74) (1,502)
Unwind of discount (76) (47) - - - (123)
Transfers 53 7 (34) (1) 1 26
At December 31 4,698 1,963 29 2,279 209 9,178

2013
Corporate entities Retail customers
Large Small and
corporate medium Credit
customers enterprises Mortgages cards Others Total
(In Millions of Pesos)
At January 1 2,950 2,143 38 2,305 95 7,531
Provision for impairment
losses 104 109 15 1,200 82 1,510
Write-off/disposal (432) (38) (4) (1,115) (3) (1,592)
Unwind of discount (87) (60) - - - (147)
Transfers 1,772 (231) 16 - 4 1,561
At December 31 4,307 1,923 65 2,390 178 8,863

Transfers pertain to reclassification of allowance for impairment between accounts.

(73)
Note 14 - Bank Premises, Furniture, Fixtures and Equipment

This account at December 31 consists of:

Consolidated

2014
Buildings and Furniture
leasehold and Equipment
Land improvements equipment for lease Total
(In Millions of Pesos)
Cost
January 1, 2014 3,074 5,395 12,857 4,786 26,112
Additions - 946 1,494 1,797 4,237
Disposals (1) - (512) (1,671) (2,184)
Amortization - (175) - - (175)
Transfers 1 - - - 1
Others - (4) - - (4)
December 31, 2014 3,074 6,162 13,839 4,912 27,987
Accumulated depreciation
January 1, 2014 - 2,253 10,027 1,628 13,908
Depreciation - 236 1,378 1,109 2,723
Disposals/transfers - 32 (403) (1,033) (1,404)
December 31, 2014 - 2,521 11,002 1,704 15,227
Net book value, December 31, 2014 3,074 3,641 2,837 3,208 12,760

2013
Buildings and Furniture
leasehold and Equipment
Land improvements equipment for lease Total
(In Millions of Pesos)
Cost
January 1, 2013 3,146 5,844 11,890 4,852 25,732
Additions - 389 1,957 1,883 4,229
Disposals (76) (611) (987) (1,949) (3,623)
Amortization - (151) - - (151)
Transfers 4 (76) (3) - (75)
December 31, 2013 3,074 5,395 12,857 4,786 26,112
Accumulated depreciation
January 1, 2013 - 2,352 9,322 1,637 13,311
Depreciation - 215 1,317 1,095 2,627
Disposals/transfers - (314) (612) (1,105) (2,031)
December 31, 2013 - 2,253 10,027 1,627 13,907
Net book value, December 31, 2013 3,074 3,142 2,830 3,159 12,205

(74)
Parent

2014
Buildings and
leasehold Furniture and
Land improvements equipment Total
(In Millions of Pesos)
Cost
January 1, 2014 2,664 4,670 11,912 19,246
Additions - 848 1,331 2,179
Disposals (1) - (432) (433)
Amortization - (129) - (129)
Transfers 1 - - 1
December 31, 2014 2,664 5,389 12,811 20,864
Accumulated depreciation
January 1, 2014 - 1,976 9,241 11,217
Depreciation - 206 1,289 1,495
Disposals/transfers - 32 (347) (315)
December 31, 2014 - 2,214 10,183 12,397
Net book value, December 31, 2014 2,664 3,175 2,628 8,467

2013
Buildings and
leasehold Furniture and
Land improvements equipment Total
(In Millions of Pesos)
Cost
January 1, 2013 2,692 5,055 10,985 18,732
Additions - 342 1,850 2,192
Disposals (28) (528) (923) (1,479)
Amortization - (114) - (114)
Transfers - (85) - (85)
December 31, 2013 2,664 4,670 11,912 19,246
Accumulated depreciation
January 1, 2013 - 2,057 8,574 10,631
Depreciation - 185 1,237 1,422
Disposals/transfers - (266) (571) (837)
December 31, 2013 - 1,976 9,240 11,216
Net book value, December 31, 2013 2,664 2,694 2,672 8,030

Depreciation is included in Occupancy and equipment-related expenses in the statement of income.

Note 15 - Investment Properties

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Land 97 963 97 963
Buildings 2,013 1,856 2,013 1,856
2,110 2,819 2,110 2,819
Accumulated depreciation (1,300) (1,220) (1,300) (1,220)
Allowance for impairment (2) (2) (2) (2)
808 1,597 808 1,597

(75)
The movement in investment properties is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 1,597 2,582 1,597 2,575
Additions 157 - 157 -
Disposals (866) (994) (866) (987)
Transfers - 85 - 85
Depreciation (80) (76) (80) (76)
At December 31 808 1,597 808 1,597

Investment properties have aggregate fair value of P2,057 million as at December 31, 2014
(2013 - P3,289 million). The fair value of investment property is determined on the basis of appraisal made by
an internal or an external appraiser duly certified by the BPI Group’s Credit Policy group. Valuation method
employed by the appraisers mainly includes the market data approach.

Depreciation is included in Occupancy and equipment-related expenses in the statement of income.

All investment properties generate rental income. Rental income from investment properties recognized in the
statement of income, as part of Other operating income, amounts to P298 million for the year ended
December 31, 2014 (2013 - P255 million; 2012 - P260 million). Direct operating expenses (including repairs and
maintenance) arising from these investment properties amount to P23 million for the year ended
December 31, 2014 (2013 - P21 million; 2012 - P193 million).

Note 16 - Investments in Subsidiaries and Associates

This account at December 31 consists of investments in shares of stock:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Carrying value (net of impairment)
Investments at equity method 4,784 4,176 - -
Investments at cost method - - 6,726 6,793
4,784 4,176 6,726 6,793

Investments in associates carried at equity method in the consolidated statement of condition follow:

Place of business/ Percentage of


country of ownership interest Measurement
incorporation (%) Acquisition cost method
Name of entity 2014 2013 2014 2013

BPI - Philamlife Assurance Corporation Philippines 47.67 47.67 371 371 Equity
Automated Fare Collection
Services, Inc. Philippines 20.00 - 300 - Equity
National Reinsurance Corporation* Philippines 13.69 15.38 204 204 Equity
Beacon Properties Philippines 20.00 20.00 100 100 Equity
Victoria 1552 Investments, LP Delaware, USA 35.00 35.00 7 7 Equity
Citytrust Realty Corporation Philippines 40.00 40.00 2 2 Equity
984 684
Allowance for impairment (7) (7)
977 677
*BPI Group has significant influence due to its representation on the governing body of National Reinsurance Corporation

(76)
For BPI-Philamlife Assurance Corporation, BPI acts as distribution channel for the former’s insurance products.
In 2014, the distribution agreement with Philamlife has been extended for another twenty years or until
November 27, 2039 unless earlier terminated.

Details and movements of investments in associates carried at equity method in the consolidated financial
statements follow:

2014 2013
(In Millions of Pesos)
Acquisition cost
At January 1 677 677
Addition 300 -
Allowance for impairment - -
At December 31 977 677
Accumulated equity in net income
At January 1 1,968 1,385
Share in net income for the year 257 590
Dividends received (201) (7)
At December 31 2,024 1,968
Accumulated share in other comprehensive income
At January 1 1,530 1,618
Share in other comprehensive income for the year 253 (87)
At December 31 1,783 1,531
4,784 4,176

As the associates are not considered to be individually material to impact the financial statements of the BPI
Group, the unaudited financial information of associates as at and for the years ended December 31 has been
aggregated as follows:

2014 2013
(In Millions of Pesos)
Total assets 79,092 66,239
Total liabilities 63,083 52,042
Total revenues 18,667 17,898
Total net income 480 1,414

(77)
The details of equity investments at cost method in the separate financial statements of the Parent Bank follow:

Allowance for
Acquisition cost impairment Carrying value
2014 2013 2014 2013 2014 2013
(In Millions of Pesos)
Subsidiaries
BPI Europe Plc. 1,910 1,910 - - 1,910 1,910
Ayala Plans, Inc. 863 863 - - 863 863
BPI Capital Corporation 623 623 - - 623 623
BPI Direct Savings Bank, Inc. 392 392 - - 392 392
BPI Century Tokyo Lease and
Finance Corporation (formerly
BPI Leasing Corporation) 329 644 - - 329 644
FGU Insurance Corporation 303 303 - - 303 303
BPI Globe BanKO, Inc. 607 359 - - 607 359
BPI Foreign Exchange Corp. 195 195 - - 195 195
BPI Express Remittance Corp. USA 191 191 - - 191 191
BPI Family Savings Bank, Inc. 150 150 - - 150 150
First Far-East Development
Corporation 91 91 - - 91 91
Green Enterprises S.R.L. in
Liquidation (formerly BPI
Express Remittance Europe,
S.p.A) 54 54 - - 54 54
BPI Card Finance Corp. 50 50 - - 50 50
FEB Stock Brokers, Inc. 25 25 - - 25 25
BPI Computer Systems Corp. 23 23 - - 23 23
BPI Express Remittance Spain S.A 25 25 - - 25 25
Others 322 322 (104) (104) 218 218
Associates 677 677 - - 677 677
6,830 6,897 (104) (104) 6,726 6,793

In 2014, the Parent Bank made additional capital infusion to BPI Globe BanKO, Inc. amounting to P248 million.

Note 17 - Deferred Income Taxes

The significant components of deferred income tax assets and liabilities at December 31 are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Deferred income tax assets
Allowance for impairment 5,919 5,662 3,901 3,813
Net operating loss carry over (NOLCO) 117 10 - -
Minimum corporate income tax (MCIT) 1 2 - -
Pension liability 298 370 268 283
Others 1 1,007 - 1,035
Total deferred income tax assets 6,336 7,051 4,169 5,131
Deferred income tax liabilities
Revaluation gain on properties acquired from a
business combination (543) (767) (543) (731)
Fair value gain on available-for-sale securities (42) - - -
Others (33) (108) (31) (104)
Total deferred income tax liabilities (618) (875) (574) (835)
5,718 6,176 3,595 4,296

(78)
Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Deferred income tax assets
Amount to be recovered within 12 months 444 612 431 559
Amount to be recovered after 12 months 5,892 6,439 3,738 4,572
6,336 7,051 4,169 5,131
Deferred income tax liabilities
Amount to be settled within 12 months 449 175 449 175
Amount to be settled after 12 months 169 700 125 660
618 875 574 835

The movement in the deferred income tax account is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 6,176 5,087 4,296 3,525
Amounts credited to (charged against) statement
of income 416 (6) 138 (245)
Amounts (charged against) credited to other
comprehensive income (874) 1,095 (839) 1,016
At December 31 5,718 6,176 3,595 4,296

The deferred tax charge (credit) in the statement of income comprises the following temporary differences:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Allowance for impairment (298) (94) (436) (163) 191 (210)
NOLCO (107) (3) (3) - - -
Pension 76 82 22 75 52 19
Others (87) 21 (1) (50) 2 (22)
(416) 6 (418) (138) 245 (213)

The outstanding NOLCO at December 31 consists of:

Consolidated Parent
Year of Incurrence Year of Expiration 2014 2013 2014 2013
(In Millions of Pesos)
2014 2017 361 - - -
2013 2016 20 20 - -
2012 2015 10 10 - -
2011 2014 3 3 - -
2010 2013 - 11 - -
394 44 - -
Used portion/ expired during the year (3) (11) - -
391 33 - -
Tax rate 30% 30% 30% 30%
Deferred income tax asset on NOLCO 117 10 - -

(79)
The details of MCIT at December 31 are as follows:

Consolidated Parent
Year of Incurrence Year of Expiration 2014 2013 2014 2013
(In Millions of Pesos)
2014 2017 1 - - -
2013 2016 - - - -
2012 2015 - - - -
2011 2014 3 3 - -
4 3 - -
Used portion during the year (3) (1) - -
1 2 - -

Note 18 - Other Resources

The account at December 31 consists of the following:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Intangible assets 2,334 2,744 2,282 2,689
Accounts receivable 2,574 2,356 1,974 1,902
Residual value of equipment for lease 1,974 1,994 - -
Sundry debits 3,196 1,167 2,310 1,149
Accrued trust and other fees 1,213 1,153 1,109 1,004
Creditable withholding tax 482 1,334 210 1,076
Prepaid expenses 732 725 508 494
Rental deposits 366 335 304 280
Miscellaneous assets 2,158 999 1,291 420
15,029 12,807 9,988 9,014
Allowance for impairment (1,478) (1,759) (1,330) (1,600)
13,551 11,048 8,658 7,414

Miscellaneous assets include returned checks, prepaid taxes and other office supplies.

The reconciliation of the allowance for impairment at December 31 is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 1,759 1,662 1,600 1,523
(Reversal of) provision for impairment losses (246) 159 (255) 88
Write-off (35) (62) (15) (11)
At December 31 1,478 1,759 1,330 1,600

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 10,366 8,405 8,481 7,513
Non-current 4,663 4,402 1,507 1,501
15,029 12,807 9,988 9,014

(80)
Note 19 - Deposit Liabilities

This account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Demand 199,690 179,681 191,954 171,731
Savings 616,448 505,538 525,129 430,185
Time 360,075 303,367 235,598 183,487
1,176,213 988,586 952,681 785,403

The Parent balances above include amounts due to related parties (Note 30).

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 584,042 288,733 447,239 429,754
Non-current 592,171 699,853 505,442 355,649
1,176,213 988,586 952,681 785,403

Related interest expense on deposit liabilities is broken down as follows:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Demand 452 448 550 405 403 505
Savings 5,584 3,032 2,651 4,320 2,351 2,190
Time 4,798 6,050 8,447 2,010 2,433 4,234
10,834 9,530 11,648 6,735 5,187 6,929

Under current and existing BSP regulations as at December 31, 2014 and 2013, the BPI Group should comply
with a simplified minimum reserve requirement instead of the separate liquidity and statutory reserve
requirements. Further, BSP requires all reserves be kept at the central bank. The BPI Group is in full compliance
with the simplified reserve requirement.

The required liquidity and statutory reserves as reported to BSP at December 31 comprise of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Due from BSP 177,871 128,276 160,625 116,419

(81)
Note 20 - Bills Payable; Unsecured Subordinated Debt

The account at December 31 consists of:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Bangko Sentral ng Pilipinas - 990 - 919
Local banks 6,916 7,395 225 313
Foreign banks 26,077 17,794 26,063 17,758
32,993 26,179 26,288 18,990

The range of average interest rates (%) of bills payable of the BPI Group for the years ended December 31 follows:

2014 2013
Bangko Sentral ng Pilipinas 3.32 - 3.72 3.87 - 4.10
Private firms and local banks - Peso-denominated 3.06 - 3.43 5.81 - 6.31
Foreign banks 0.90 - 1.05 1.04 - 1.31

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Interest expense 350 545 584 138 194 165

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 28,476 25,313 26,103 18,209
Non-current 4,517 866 185 781
32,993 26,179 26,288 18,990

Bills payable include funds borrowed from Land Bank of the Philippines (LBP), Development Bank of the
Philippines (DBP) and Social Security System (SSS) which were relent to customers of the BPI Group in
accordance with the financing programs of LBP, DBP and SSS and credit balances of settlement bank accounts.
The average payment term of these bills payable is 1.03 years (2013 - 1.35 years). Loans and advances of the
BPI Group arising from these financing programs serve as security for the related bills payable (Note 13).

On August 20, 2013, the Board of Directors of the Parent Bank approved the exercise of its option to call or
redeem the P5,000 million BPI Lower Tier 2 Notes on the optional redemption date, being December 13, 2013.

Note 21 - Deferred Credits and Other Liabilities

The account at December 31 consists of the following:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Bills purchased - contra 13,854 11,797 13,817 11,786
Accounts payable 4,787 3,550 3,554 2,370
Deposit on lease contract 1,974 2,076 - -
Outstanding acceptances 947 1,677 947 1,677
Withholding tax payable 545 502 435 402
Vouchers payable 531 731 531 731
Other deferred credits 419 425 92 35
Due to the Treasurer of the Philippines 301 366 270 328
Dividends payable - 3,201 - 3,201
Miscellaneous liabilities 7,910 6,905 5,823 5,808
31,268 31,230 25,469 26,338

(82)
Bills purchased - contra represents liabilities arising from the outright purchases of checks before actual clearing
as a means of immediate financing offered by the BPI Group. Miscellaneous liabilities include insurance and
other employee-related payables.

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Current 19,955 20,354 17,868 18,449
Non-current 11,313 10,876 7,601 7,889
31,268 31,230 25,469 26,338

Note 22 - Capital Funds

Details of authorized share capital of the Parent Bank follow:

2014 2013 2012


(In Millions of Pesos,
Except Par Value Per Share)
Authorized capital (at P10 par value per share)
Common shares 49,000 49,000 49,000
Preferred A shares 600 600 600
49,600 49,600 49,600

Details of outstanding common shares follow:

2014 2013 2012


(In Number of Shares)
Issued common shares
At January 1 3,558,720,023 3,556,356,173 3,556,356,173
Issuance of shares during the year 373,494,161 2,363,850 -
At December 31 3,932,214,184 3,558,720,023 3,556,356,173
Subscribed common shares 5,056,319 2,363,850 -

Share premium as at December 31, 2014 amounts to P29,341 million (2013 - P8,316 million).

As at December 31, 2014, 2013 and 2012, the Parent Bank has 11,858, 12,111 and 12,447 common
shareholders, respectively. There are no preferred shares issued and outstanding at December 31, 2014, 2013
and 2012.

(83)
Details of and movements in Accumulated other comprehensive income (loss) for the years ended December 31
follow:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Fair value reserve on available-for-sale
securities
At January 1 (2,952) 1,030 1,748 (3,029) 642 1,192
Unrealized fair value (loss) gain before tax (1,406) (4,901) (987) (1,525) (4,592) (809)
Deferred income tax effect 503 919 269 482 921 259
At December 31 (3,855) (2,952) 1,030 (4,072) (3,029) 642
Share in other comprehensive income (loss)
of insurance subsidiaries
At January 1 36 289 137 - - -
Share in other comprehensive income
(loss) for the year, before tax 157 (331) 169 - - -
Deferred income tax effect (5) 78 (17) - - -
At December 31 188 36 289 - - -
Share in other comprehensive income (loss)
of associates
At January 1 1,530 1,618 1,116 - - -
Share in other comprehensive income
(loss) for the year 254 (88) 502 - - -
At December 31 1,784 1,530 1,618 - - -
Translation adjustment on foreign operations
At January 1 (703) (936) (832) - - -
Translation differences (65) 233 (104) - - -
At December 31 (768) (703) (936) - - -
Actuarial (losses) gains on defined benefit
plan, net
At January 1 (1,072) (581) (2,333) (781) (365) (1,755)
Actuarial (losses) gains for the year 713 (702) 2,504 503 (594) 1,986
Deferred income tax effect (213) 211 (752) (151) 178 (596)
At December 31 (572) (1,072) (581) (429) (781) (365)
(3,223) (3,161) 1,420 (4,501) (3,810) 277

On November 12, 2014, the Board of Directors of the Parent Bank approved to grant to qualified
beneficiaries/participants up to 3,200,000 shares for Executive Stock Option Plan (ESOP) and 4,100,000 shares
for Executive Stock Purchase Plan (ESPP).

On November 27, 2013, the Board of Directors of the Parent Bank approved to grant to qualified beneficiaries/
participants up to 3,500,000 shares for ESOP and up to 4,300,000 shares for ESPP.

The ESOP has a three-year vesting period with 1/3 of the option being vested at the end of each year from grant
date while the ESPP has a five-year payment period.

The exercise price for ESOP is equal to the volume weighted average of BPI share price for the most recent
previous 30-trading days from grant date. The weighted average fair value of options granted during 2014
determined using the Black-Scholes valuation model was P16.20 per option (2013 - P17.54).

Movements in the number of employee share options are as follows:

2014 2013
At January 1 3,250,000 -
Granted 3,175,000 3,250,000
Exercised - -
Cancelled (75,000) -
At December 31 6,350,000 3,250,000
Exercisable 1,058,333 -

(84)
The subscription price for ESPP is equivalent to 15% below the volume weighted average of BPI share price for
the most recent previous 30-trading days from grant date. The subscription dates for ESPP were on
November 12, 2014 and December 23, 2013.

The impact of ESOP is not considered material to the 2013 financial statements; thus, the disclosures were only
limited to the information mentioned above.

Details of and movements in Reserves for the years ended December 31 follow:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Surplus reserves
At January 1 1,680 1,603 1,462 1,680 1,603 1,462
Transfer from surplus 397 76 141 397 76 141
Executive stock plan amortization 21 1 - 18 1 -
At December 31 2,098 1,680 1,603 2,095 1,680 1,603

Surplus reserves consist of:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Reserve for trust business 2,043 1,645 1,569 2,043 1,645 1,569
Reserve for self-insurance 34 34 34 34 34 34
Executive stock option plan amortization 21 1 - 18 1 -
2,098 1,680 1,603 2,095 1,680 1,603

In compliance with existing BSP regulations, 10% of the Parent Bank’s income from trust business is
appropriated to surplus reserve. This yearly appropriation is required until the surplus reserve for trust business
reaches 20% of the Parent Bank’s regulatory net worth.

Reserve for self-insurance represents the amount set aside to cover losses due to fire, defalcation by and other
unlawful acts of personnel and third parties.

Cash dividends declared by the Board of Directors of the Parent Bank during the years 2012 to 2014 follow:

Amount of dividends
Total
Date declared Date approved by the BSP Per share (In Millions of Pesos)
March 21, 2012 April 10, 2012 0.50 1,778
March 21, 2012 April 10, 2012 0.90 3,201
October 21, 2012 November 16, 2012 0.90 3,201
April 17, 2013 May 15, 2013 0.90 3,201
November 6, 2013 December 5, 2013 0.90 3,201
May 21, 2014 June 19, 2014 0.90 3,538

On November 19, 2014, cash dividend of P0.90 per share was declared by the Board of Directors, which was
approved by the BSP on February 2, 2015.

Cash dividends declared are payable to common shareholders of record as of 15th working day from receipt by
the Parent Bank of the approval by the BSP and distributable on the 15th working day from the said record date.

(85)
The calculation of earnings per share (EPS) is shown below:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions, Except Earnings Per Share Amounts)
a) Net income attributable to equity holders
of the Parent Bank 18,039 18,811 16,352 13,270 14,468 12,427
b) Weighted average number of common
shares outstanding during the year 3,905 3,627 3,556 3,905 3,627 3,556
c) Basic EPS (a/b) 4.62 5.19 4.60 3.40 3.99 3.49

For 2013, the weighted average number of common shares outstanding during the year has been adjusted to take
into consideration the rights issue approved by the Board of Directors on November 6, 2013. The Parent Bank
offered for subscription a total of 370,370,370 common shares to eligible shareholders on a pre-emptive rights basis
at P67.50 per share. The stock rights have been fully subscribed and listed on February 10, 2014. The proceeds
from the rights offer amounting to P25 billion has increased the Parent Bank’s capital base.

The basic and diluted EPS are the same for the years presented as the stock options outstanding is not significant
to impact the weighted average number of common shares.

Note 23 - Other Operating Income

Details of other operating income follow:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Trust and asset management fees 3,433 3,723 2,913 2,793 3,026 2,453
Rental income 1,796 1,830 1,698 439 425 415
Credit card income 1,550 1,359 1,342 1,548 1,359 1,342
Gain on sale of assets 1,363 1,296 1,192 2,418 1,028 640
Dividend income 22 28 27 572 1,923 1,383
Others 2,504 1,278 706 2,201 795 538
10,668 9,514 7,878 9,971 8,556 6,771

Trust and asset management fees arise from the BPI Group’s asset management and trust services and are based
on agreed terms with various managed funds and investments.

Rental income is earned by the BPI Group by leasing out its investment properties (Note 15) and other assets which
consist mainly of fleet of vehicles.

Gain on sale of assets arises mainly from disposals of properties (including equity investments), foreclosed
collaterals and non-performing assets.

Dividend income recognized by the Parent Bank substantially pertains to dividend distribution of subsidiaries.

Other income includes recoveries on charged-off assets and revenues from service arrangements with
customers and a related party.

(86)
Note 24 - Leases

The BPI Group and the Parent Bank have various lease agreements which mainly pertain to branch premises that
are renewable under certain terms and conditions. The rentals (included in Occupancy and equipment-related
expenses) under these lease contracts are as follows:

Consolidated Parent
(In Millions of Pesos)
2014 1,160 937
2013 1,071 869
2012 936 745

The future minimum lease payments under non-cancellable operating leases of the BPI Group are as follows:

2014 2013
(In Millions of Pesos)
No later than 1 year 59 67
Later than 1 year but no later than 5 years 90 85
149 152

Note 25 - Operating Expenses

Details of compensation and fringe benefits expenses follow:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Salaries and wages 9,516 8,788 8,328 7,610 6,831 6,565
Retirement expense (Note 28) 826 786 1,032 670 639 822
Other employee benefit expenses 1,508 1,067 1,110 1,288 822 875
11,850 10,641 10,470 9,568 8,292 8,262

Details of other operating expenses follow:

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Insurance 2,513 1,908 1,685 1,642 1,269 1,127
Advertising 1,335 1,346 1,457 1,163 1,104 1,268
Travel and communication 722 696 662 601 594 556
Supervision and examination fees 497 500 398 436 441 351
Taxes and licenses 469 461 237 295 239 130
Litigation expenses 417 521 444 224 349 321
Amortization expense 316 337 334 312 333 332
Management and other
professional fees 297 261 188 251 197 134
Office supplies 275 256 248 226 215 207
Shared expenses - - - 22 18 33
Others 2,252 1,736 1,486 1,421 1,113 919
9,093 8,022 7,139 6,593 5,872 5,378

Others include fees and incentives paid to agents, outsourcing fees and other business expense.

(87)
Note 26 - Income Taxes

A reconciliation between the provision for income tax at the statutory tax rate and the actual provision for income
tax for the years ended December 31 follows:

Consolidated
2014 2013 2012
Rate Rate Rate
Amount (%) Amount (%) Amount (%)
(In Millions of Pesos)
Statutory income tax 6,906 30.00 6,944 30.00 5,898 30.00
Effect of items not subject to statutory tax rate:
Income subjected to lower tax rates (1,571) (6.82) (689) (2.98) (1,132) (5.76)
Tax-exempt income (2,062) (8.96) (2,938) (12.69) (2,850) (14.50)
Others, net 1,685 7.31 836 3.61 1,242 6.32
Actual income tax 4,958 21.53 4,153 17.94 3,158 16.06

Parent
2014 2013 2012
Rate Rate Rate
Amount (%) Amount (%) Amount (%)
(In Millions of Pesos)
Statutory income tax 5,067 30.00 5,207 30.00 4,397 30.00
Effect of items not subject to statutory tax rate:
Income subjected to lower tax rates (1,491) (8.83) (645) (3.72) (868) (5.92)
Tax-exempt income (1,035) (6.13) (1,993) (11.48) (1,982) (13.52)
Others, net 1,080 6.39 320 1.85 684 4.66
Actual income tax 3,621 21.43 2,889 16.65 2,231 15.22

Note 27 - Basic Quantitative Indicators of Financial Performance

The key financial performance indicators follow (in %):

Consolidated Parent
2014 2013 2014 2013
Return on average equity 13.75 18.05 13.37 19.05
Return on average assets 1.44 1.87 1.33 1.87
Net interest margin 3.03 3.31 2.73 3.09

Note 28 - Retirement Plans

BPI and its subsidiaries, and a non-life insurance subsidiary have separate trusteed, noncontributory retirement
benefit plans covering all qualified officers and employees. The description of the plans follows:

BPI

BPI has a unified plan which includes its subsidiaries other than insurance companies. Under this plan, the
normal retirement age is 60 years. Normal retirement benefit consists of a lump sum benefit equivalent to 200%
of the basic monthly salary of the employee at the time of his retirement for each year of service, if he has
rendered at least 10 years of service, or to 150% of his basic monthly salary, if he has rendered less than 10
years of service. For voluntary retirement, the benefit is equivalent to 112.50% of the employee’s basic monthly
salary for a minimum of 10 years of service with the rate factor progressing to a maximum of 200% of basic
monthly salary for service years of 25 or more. Death or disability benefit, on the other hand, shall be
determined on the same basis as in voluntary retirement.

The net defined benefit cost and contributions to be paid by the entities within the BPI Group are determined by
an independent actuary.

Plan assets are held in trusts, governed by local regulations and practice in the Philippines.

(88)
Non-life insurance subsidiary

BPI/MS has a separate trusteed defined benefit plan. Under the plan, the normal retirement age is 60 years or
the employee should have completed at least 10 years of service, whichever is earlier. The normal retirement
benefit is equal to 150% of the final basic monthly salary for each year of service for below 10 years and 175% of
the final basic monthly salary for each year of service for 10 years and above.

Death or disability benefit for all employees of the non-life insurance subsidiary shall be determined on the same
basis as in normal or voluntary retirement as the case may be.

Following are the amounts recognized based on recent actuarial valuations:

(a) Pension liability as at December 31 recognized in the statement of condition

Consolidated
2014 2013
(In Millions of Pesos)
Present value of defined benefit obligations 11,541 11,495
Fair value of plan assets (11,133) (10,261)
Pension liability recognized in the statement of condition 408 1,234

Parent
2014 2013
(In Millions of Pesos)
Present value of defined benefit obligations 9,498 9,277
Fair value of plan assets (9,165) (8,332)
Pension liability recognized in the statement of condition 333 945

Pension liability is shown as part of “Miscellaneous liabilities” within Deferred credits and other liabilities
(Note 21).

The movement in plan assets is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 10,261 10,406 8,332 8,385
Fund transfer due to transferred employees from a
subsidiary - - 108 -
Asset return in net interest cost 544 687 448 553
Contributions 942 756 766 605
Benefit payments (1,110) (1,158) (897) (866)
Remeasurement - return on plan assets 496 (430) 408 (345)
At December 31 11,133 10,261 9,165 8,332

The carrying value of the plan assets as at December 31, 2014 is equivalent to the fair value of P11,133 million
(2013 - P10,261 million).

The plan assets are comprised of the following:

Consolidated Parent
2014 2013 2014 2013
Amount % Amount % Amount % Amount %
(In Millions of Pesos Except for Rates)
Debt securities 5,940 53 5,306 52 4,890 53 4,309 52
Equity securities 5,177 47 4,933 48 4,262 47 4,006 48
Others 16 - 22 - 13 - 17 -
11,133 100 10,261 100 9,165 100 8,332 100

(89)
Pension plan assets of the unified retirement plan include investment in BPI’s common shares with carrying
amount of P958 million (2013 - P1,232 million) and fair value of P2,365 million at December 31, 2014
(2013 - P2,750 million). Realized and unrealized gains coming from BPI’s common shares amount to
P489 million and P1,407 million in 2014, respectively (2013 - P474 million and P1,518 million). The actual return
on plan assets of the BPI Group was P1,040 million in 2014 (2013 - P257 million). An officer of the Parent Bank
exercises the voting rights over the plan’s investment in BPI’s common shares.

The movement in the present value of defined benefit obligation is summarized as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
At January 1 11,495 10,909 9,277 8,702
Present value of defined benefit obligation for transferred
employees from a subsidiary - - 95 -
Current service cost 759 764 621 618
Past service cost - (11) - -
Interest cost 611 720 497 574
Benefit payments (1,110) (1,158) (897) (866)
Remeasurement - changes in financial assumptions (214) 271 (95) 249
At December 31 11,541 11,495 9,498 9,277

The BPI Group has no other transactions with the plan other than the contributions presented above for the
years ended December 31, 2014 and 2013.

(b) Expense recognized in the statement of income

Consolidated Parent
2014 2013 2012 2014 2013 2012
(In Millions of Pesos)
Current service cost 759 764 816 621 618 657
Net interest cost 67 33 216 49 21 165
Past service cost - (11) - - - -
826 786 1,032 670 639 822

The principal assumptions used for the actuarial valuations of the unified plan of the BPI Group are as follows:

2014 2013
Discount rate 5.31% 5.31%
Future salary increases 5.00% 4.00%

Assumptions regarding future mortality and disability experience are based on published statistics generally used
for local actuarial valuation purposes.

The defined benefit plan typically exposes the BPI Group to a number of risks such as investment risk, interest rate
risk and salary risk. The most significant of which relate to investment and interest rate risk. The present value of
the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of
government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to
maturity approximating the terms of the related pension liability. A decrease in government bond yields will increase
the defined benefit obligation although this will also be partially offset by an increase in the value of the plan’s fixed
income holdings. Hence, the present value of defined benefit obligation is directly affected by the discount rate to be
applied by the BPI Group. However, the BPI Group believes that due to the long-term nature of the pension liability
and the strength of the BPI Group itself, the mix of debt and equity securities holdings of the plan is an appropriate
element of the BPI Group’s long term strategy to manage the plan efficiently.

(90)
The BPI Group ensures that the investment positions are managed within an asset-liability matching framework that
has been developed to achieve long-term investments that are in line with the obligations under the plan. The BPI
Group’s main objective is to match assets to the defined benefit obligation by investing primarily in long-term debt
securities with maturities that match the benefit payments as they fall due. The asset-liability matching is being
monitored on a regular basis and potential change in investment mix is being discussed with the trustor, as
necessary to better ensure the appropriate asset-liability matching.

The average remaining service life of employees under the BPI unified retirement plan as at December 31, 2014
is 12 years (2013 - 20 years). The BPI Group contributes to the plan depending on the suggested funding
contribution as calculated by an independent actuary. The expected contribution for the year ending
December 31, 2015 for the BPI Group and Parent amounts to P968 million and P797 million, respectively.

The projected maturity analysis of retirement benefit payments as at December 31 are as follows:

Consolidated

(In Millions of Pesos) 2014 2013


Less than a year 868 865
Between 1 to 5 years 3,485 3,327
Between 5 to 10 years 4,829 4,370
Between 10 to 15 years 8,623 6,768
Between 15 to 20 years 12,962 10,463
Over 20 years 74,609 47,518

Parent

(In Millions of Pesos) 2014 2013


Less than a year 637 692
Between 1 to 5 years 2,709 2,516
Between 5 to 10 years 4,000 3,392
Between 10 to 15 years 7,558 5,905
Between 15 to 20 years 10,873 8,722
Over 20 years 54,499 36,697

The sensitivity of the defined benefit obligation as at December 31 to changes in the weighted principal
assumptions follows:

Consolidated

2014
Impact on defined benefit obligation
Change in Increase in
assumption assumption Decrease in assumption
Discount rate 0.5% Decrease by 0.94% Increase by 1.52%
Salary growth rate 1.0% Increase by 3.92% Decrease by 1.60%

2013
Impact on defined benefit obligation
Change in Increase in
assumption assumption Decrease in assumption
Discount rate 0.5% Decrease by 1.66% Increase by 3.02%
Salary growth rate 1.0% Increase by 7.13% Decrease by 2.57%

(91)
Parent

2014
Impact on defined benefit obligation
Change in Increase in
assumption assumption Decrease in assumption
Discount rate 0.5% Decrease by 0.95% Increase by 1.55%
Salary growth rate 1.0% Increase by 3.99% Decrease by 1.61%

2013
Impact on defined benefit obligation
Change in Increase in
assumption assumption Decrease in assumption
Discount rate 0.5% Decrease by 1.69% Increase by 3.13%
Salary growth rate 1.0% Increase by 7.39% Decrease by 2.61%

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions
constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.
When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same
method (present value of the defined benefit obligation calculated with the projected unit credit method at the
end of the reporting period) has been applied as when calculating the retirement liability recognized within the
statement of condition.

Note 29 - Trust Assets

At December 31, 2014, the net asset value of trust and fund assets administered by the BPI Group amounts to
P619 billion (2013 - P580 billion).

Government securities deposited by the BPI Group and the Parent Bank with the BSP in compliance with the
requirements of the General Banking Act relative to the trust functions follow:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Government securities 9,425 6,702 5,386 6,650

Note 30 - Related Party Transactions

In the normal course of the business, the Parent Bank transacts with related parties consisting of its subsidiaries
and associates. Likewise, the BPI Group has transactions with Ayala Corporation (AC) and its subsidiaries (Ayala
Group). AC has a significant influence over the BPI Group as at reporting date.

These transactions such as loans and advances, deposit arrangements, trading of government securities and
commercial papers, sale of assets, lease of bank premises, investment advisory/management, service
arrangements and advances for operating expenses are made in the normal banking activities and have terms and
conditions that are generally comparable to those offered to non-related parties or to similar transactions in the
market.

The Parent Bank has a Related Party Transactions Committee that reviews and endorses all related party
transactions, including those involving DOSRI, which shall require final Board approval. The Committee consists
of four directors, two of whom are independent directors including the Chairman.

(92)
Significant related party transactions and outstanding balances as at and for the years ended December 31 are
summarized below (transactions with subsidiaries have been eliminated in the consolidated financial statements):

Consolidated

2014
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries (163) 31 These are loans and advances granted
Associates - - to related parties that are generally
AC 8,000 14,250 secured with interest rates ranging from
Subsidiaries of AC 56,464 72,529 0.99% to 5.49% and with maturity
Key management personnel - - periods ranging from 23 days to
Other related parties 863 863 10 years. Additional information on
DOSRI loans are discussed below.
65,164 87,673
Deposits from:
Subsidiaries (910) 6,026 These are demand, savings and time
Associates 317 989 deposits bearing the following average
Ayala Group 10,232 31,391 interest rates:
Key management personnel 1,707 2,721 Demand - 0.23% to 0.24%
Savings - 0.83% to 0.86%
Time - 1.70% to 1.76%
11,346 41,127

(93)
2013
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries (202) 194 These are loans and advances granted
Associates - - to related parties that are generally
AC - 6,250 secured with interest rates ranging from
Subsidiaries of AC 11,403 16,065 0.65% to 8.04% and with maturity
Key management personnel - - periods ranging from 8 days to
12 years. Additional information on
DOSRI loans are discussed below.
11,201 22,509
Deposits from:
Subsidiaries 2,885 6,936 These are demand, savings and time
Associates 613 672 deposits bearing the following average
Ayala Group (17,910) 21,159 interest rates:
Key management personnel 704 1,014 Demand - 0.28% to 0.36%
Savings - 0.70% to 0.98%
Time - 2.20% to 3.25%
(13,708) 29,781

2012
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries (1,285) 396 These are loans and advances granted
Associates - - to related parties that are generally
AC 1,750 6,250 secured with interest rates ranging from
Subsidiaries of AC 4,460 4,662 1.19% to 6.50% and with maturity
Key management personnel - - periods ranging from 2 days to
12 years. Additional information on
DOSRI loans are discussed below.
4,925 11,308
Deposits from:
Subsidiaries 724 4,051 These are demand, savings and time
Associates 16 59 deposits bearing the following average
Ayala Group 21,216 39,069 interest rates:
Key management personnel (32) 310 Demand - 0.40% to 0.55%
Savings - 0.95% to 1.06%
Time - 3.45% to 3.71%
21,924 43,489

(94)
Parent

2014
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries (163) 31 These are loans and advances granted
Associates - - to related parties that are generally
AC 8,000 14,250 secured with interest rates ranging from
Subsidiaries of AC 56,464 72,529 0.99% to 5.49% and with maturity
Key management personnel - - periods ranging from 23 days to
Other related parties 863 863 10 years. Additional information on
DOSRI loans are discussed below.
65,164 87,673
Deposits from:
Subsidiaries 647 5,945 These are demand, savings and time
Associates 303 975 deposits bearing the following average
Ayala Group 9,286 30,445 interest rates:
Key management personnel 1,454 2,468 Demand - 0.21% to 0.23%
Savings - 0.77% to 0.80%
Time - 0.78% to 0.94%
11,690 39,833

2013
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries 194 194 These are loans and advances granted
Associates - - to related parties that are generally
AC - 6,250 secured with interest rates ranging from
Subsidiaries of AC 11,653 16,065 0.65% to 8.04% and with maturity
Key management personnel - - periods ranging from 8 days to
12 years. Additional information on
DOSRI loans are discussed below.
11,847 22,509
Deposits from:
Subsidiaries 1,955 5,298 These are demand, savings and time
Associates 613 672 deposits bearing the following average
Ayala Group (17,910) 21,159 interest rates:
Key management personnel 704 1,014 Demand - 0.26% to 0.35%
Savings - 0.64% to 0.92%
Time - 1.42% to 2.61%
(14,638) 28,143

(95)
2012
Outstanding
Transactions balances Terms and conditions
(In Millions of Pesos)
Loans and advances from:
Subsidiaries (1,681) - These are loans and advances granted
Associates - - to related parties that are generally
AC (1,750) 6,250 secured with interest rates ranging from
Subsidiaries of AC 4,210 4,412 1.19% to 6.50% and with maturity
Key management personnel - - periods ranging from 5 days to
12 years. Additional information on
DOSRI loans are discussed below.
779 10,662
Deposits from:
Subsidiaries 277 3,343 These are demand, savings and time
Associates 16 59 deposits bearing the following average
Ayala Group 21,216 39,069 interest rates:
Key management personnel (342) 310 Demand - 0.39% to 0.55%
Savings - 0.92% to 1.05%
Time - 2.87% to 3.18%
21,167 42,781

The aggregate amounts included in the determination of income before income tax that resulted from
transactions with each class of related parties are as follows:

Consolidated

2014 2013 2012


(In Millions of Pesos)
Interest income
Subsidiaries 10 5 76
Associates - - 3
AC 384 127 119
Subsidiaries of AC 582 368 88
Key management personnel - - -
Other related parties 16 - -
992 500 286
Other income
Subsidiaries 817 1,018 973
Associates - 577 370
AC 37 16 22
Subsidiaries of AC 798 (75) 62
Key management personnel - - -
1,652 1,536 1,427
Interest expense
Subsidiaries 10 5 21
Associates 2 3 -
Ayala Group 118 68 301
Key management personnel 20 5 2
150 81 324

(96)
2014 2013 2012
Other expenses
Subsidiaries 101 1,003 905
Associates - - -
AC 116 175 132
Subsidiaries of AC 277 42 49
Key management personnel - - -
494 1,220 1,086
Retirement benefits
Key management personnel 58 33 39
Salaries, allowances and other short-term benefits
Key management personnel 673 701 556
Directors’ remuneration 69 57 51

Parent

2014 2013 2012


(In Millions of Pesos)
Interest income
Subsidiaries 1 2 56
Associates - - 3
AC 384 127 119
Subsidiaries of AC 582 368 82
Key management personnel - - -
Other related parties 16 - -
983 497 260
Other income
Subsidiaries 708 585 577
Associates - 577 370
AC - - -
Subsidiaries of AC 729 (131) -
Key management personnel - - -
1,437 1,031 947
Interest expense
Subsidiaries 9 5 7
Associates 2 3 -
Ayala Group 115 68 301
Key management personnel 15 5 2
141 81 310
Other expenses
Subsidiaries 45 900 343
Associates - - -
AC 116 175 132
Subsidiaries of AC 51 42 49
Key management personnel - - -
212 1,117 524
Retirement benefits
Key management personnel 49 29 36
Salaries, allowances and other short-term benefits
Key management personnel 570 570 487
Directors’ remuneration 61 50 38

Other income mainly consists of rental income and revenue from service arrangements with related parties. Also,
in November 2014, an investment property was sold to a related party for P1.59 billion resulting in a gain of
P729 million. In March 2013, a loss arising from sale of an impaired investment property was recognized.

Other expenses mainly consist of rental expenses and management fees.

(97)
There were no provisions recognized against receivables from related parties. Also, no additional provision was
recognized during the year.

Details of DOSRI loans are as follows:

Consolidated Parent
2014 2013 2014 2013
(In Millions of Pesos)
Outstanding DOSRI loans 21,458 6,871 21,428 6,837
In percentages (%)
Consolidated Parent
2014 2013 2014 2013
% to total outstanding loans and advances 2.65 1.07 3.41 1.42
% to total outstanding DOSRI loans
Unsecured DOSRI loans 17.26 28.23 17.28 28.23
Past due DOSRI loans 0.05 0.15 0.05 0.15
Non-performing DOSRI loans 0.04 0.14 0.04 0.14

At December 31, 2014 and 2013, the BPI Group is in full compliance with the General Banking Act and the BSP
regulations on DOSRI loans.

Note 31 - Commitments and Contingencies

At present, there are lawsuits, claims and tax assessments pending against the BPI Group. In the opinion of
management, after reviewing all actions and proceedings and court decisions with legal counsels, the aggregate
liability or loss, if any, arising therefrom will not have a material effect on the BPI Group’s financial position or
financial performance.

BPI and some of its subsidiaries are defendants in legal actions arising from normal business activities.
Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will
not materially affect the financial statements.

In the normal course of business, the BPI Group makes various commitments (Note 3.1.4) that are not presented
in the financial statements. The BPI Group does not anticipate any material losses from these commitments.

Note 32 - Events After the Reporting Date

BPI entered into an agreement to sell its merchant acquiring business to Global Payments Asia Pacific-Philippines,
Inc. (GPAP) and to subscribe to primary shares of GPAP for a 49% stake in the entity. The transaction is currently
pending regulatory approval and is expected to be completed in the second quarter of 2015.

Note 33 - Supplementary information required by the Bureau of Internal Revenue

Supplementary information required by Revenue Regulations No. 15-2010

On December 28, 2010, Revenue Regulations (RR) No. 15-2010 became effective and amended certain provisions
of RR No. 21-2002 prescribing the manner of compliance with any documentary and/or procedural requirements in
connection with the preparation and submission of financial statements and income tax returns. Section 2 of RR
No. 21-2002 was further amended to include in the Notes to Financial Statements information on taxes, duties and
license fees paid or accrued during the year in addition to what is mandated by PFRS.

(98)
Below is the additional information required by RR No. 15-2010 that is relevant to the Parent Bank. This information
is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic
financial statements.

(i) Documentary stamp tax

Documentary stamp taxes paid for the year ended December 31, 2014 consist of:

(In Millions of Pesos) Amount


Deposit and loan documents 2,749
Trade finance documents 178
Mortgage documents 90
Others 4
3,021

A portion of the amount disclosed above was passed on to the counterparties.

(ii) Withholding taxes

Withholding taxes paid/accrued and/or withheld for the year ended December 31, 2014 consist of:

Amount
(In Millions of Pesos) Paid Accrued Total
Income taxes withheld on compensation 1,835 199 2,034
Final income taxes withheld on interest on deposits and yield on deposit
substitutes 903 116 1,019
Creditable income taxes withheld (expanded) 706 85 791
Final income taxes withheld on income payment 606 25 631
Fringe benefit tax 35 30 65
VAT withholding tax 26 10 36
4,111 465 4,576

(iii) All other local and national taxes

All other local and national taxes paid/accrued for the year ended December 31, 2014 consist of:

Amount
(In Millions of Pesos) Paid Accrued Total
Gross receipts tax 2,310 259 2,569
Real property tax 116 - 116
Municipal taxes 83 - 83
Others 34 - 34
2,543 259 2,802

(iv) Tax cases and assessments

As at reporting date, the Parent Bank has outstanding cases filed in courts against local government units
contesting certain local tax assessments and with the tax authorities for various claims for tax refund.
Management is of the opinion that the ultimate outcome of these cases will not have a material impact on
the financial statements of the Parent Bank. Also, the taxable years 2011, 2012 and 2013 remain open, for
which no assessment has yet been received.

(99)
COVER SHEET
for
AUDITED FINANCIAL STATEMENTS

SEC Registration Number

1 1 7 7

Company Name
G L O B E T E L E C O M , I N C . A N D

S U B S I D I A R I E S

Principal Office (No./Street/Barangay/City/Town/Province)


T h e G l o b e T o w e r , 3 2 n d S t r e e t

c o r n e r 7 t h A v e n u e , B o n i f a c i o

G l o b a l C i t y , T a g u i g

Form Type Department requiring the report Secondary License Type, If Applicable

A A C F S

COMPANY INFORMATION
Company’s Email Address Company’s Telephone Number/s Mobile Number

730-2000

Annual Meeting Fiscal Year


No. of Stockholders Month/Day Month/Day

04/08 12/31

CONTACT PERSON INFORMATION


The designated contact person MUST be an Officer of the Corporation
Name of Contact Person Email Address Telephone Number/s Mobile Number

Alberto M. de Larrazabal amdelarrazabal@globe.com.ph 797-4889

Contact Person’s Address

Note: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission
within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated.

*SGVFS010845*
SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001,
6760 Ayala Avenue Fax: (632) 819 0872 December 28, 2012, valid until December 31, 2015
1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-3 (Group A),
Philippines November 15, 2012, valid until November 16, 2015

INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors


Globe Telecom, Inc.
The Globe Tower
32nd Street corner 7th Avenue
Bonifacio Global City, Taguig

We have audited the accompanying consolidated financial statements of Globe Telecom, Inc. and
Subsidiaries, which comprise the consolidated statements of financial position as at
December 31, 2014 and 2013 and the consolidated statements of comprehensive income, consolidated
statements of changes in equity and consolidated statements of cash flows for each of the three years
in the period ended December 31, 2014, and a summary of significant accounting policies and other
explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditors consider internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.

*SGVFS010845*
A member firm of Ernst & Young Global Limited
-2-

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Globe Telecom, Inc. and Subsidiaries as at December 31, 2014 and 2013 and
their financial performance and their cash flows for each of the three years in the period ended
December 31, 2014 in accordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Lucy L. Chan
Partner
CPA Certificate No. 88118
SEC Accreditation No. 0114-AR-3 (Group A),
February 4, 2013, valid until February 3, 2016
Tax Identification No. 152-884-511
BIR Accreditation No. 08-001998-46-2012,
April 11, 2012, valid until April 10, 2015
PTR No. 4751267, January 5, 2015, Makati City

February 4, 2015

*SGVFS010845*
A member firm of Ernst & Young Global Limited
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31

Notes 2014 2013


(In Thousand Pesos)
ASSETS
Current Assets
Cash and cash equivalents 28, 30 ₱16,756,908 ₱7,420,735
Receivables 4, 16, 28 17,860,750 15,200,923
Inventories and supplies 5 3,186,415 3,544,887
Derivative assets 28 8,319 1,834
Prepayments and other current assets 6 8,929,671 9,462,823
46,742,063 35,631,202
Noncurrent Assets
Property and equipment 7 117,229,158 110,424,072
Intangible assets and goodwill 7,8 5,671,644 3,840,660
Investments and advances 10 450,717 162,754
Deferred income tax assets - net 24 1,904,298 1,916,878
Derivative assets 28 580,224 553,562
Other noncurrent assets 11 6,928,848 6,549,805
132,764,889 123,447,731
Total Assets ₱179,506,952 ₱159,078,933

LIABILITIES AND EQUITY


Current Liabilities
Accounts payable and accrued expenses 12, 16, 28 ₱47,526,559 ₱37,993,010
Notes payable 14, 28 – 5,219,900
Current portion of long-term debt 14, 28 6,129,663 5,980,300
Unearned revenues 4 4,609,967 4,253,464
Income tax payable 24 1,587,428 1,028,263
Provisions 13 401,288 294,700
Derivative liabilities 28 94,809 219,694
60,349,714 54,989,331
Noncurrent Liabilities
Long-term debt - net of current portion 14, 28 59,146,140 58,100,749
Deferred income tax liabilities - net 24 399 –
Other long-term liabilities 15, 28 5,473,033 4,349,602
64,619,572 62,450,351
Total Liabilities 124,969,286 117,439,682
Equity
Equity attributable to equity holders of the parent
Paid-up capital 17 44,478,242 34,402,396
Cost of share-based payments 16, 17 189,433 261,144
Other reserves 17, 28 (977,853) (739,575)
Retained earnings 17 10,852,478 7,715,286
Equity attributable to equity holders of the parent 54,542,300 41,639,251
Non-controlling interest (4,634) –
Total Equity 54,537,666 41,639,251
Total Liabilities and Equity ₱179,506,952 ₱159,078,933

See accompanying Notes to Consolidated Financial Statements.

*SGVFS010845*
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31


Notes 2014 2013 2012
(In Thousand Pesos, Except Per Share Figures)
REVENUES
Service revenues 16, 29 ₱99,024,604 ₱90,500,137 ₱82,742,565
Nonservice revenues 29 4,211,109 4,640,848 3,703,584
103,235,713 95,140,985 86,446,149
INCOME
Interest income 19, 25.5, 29 682,998 688,249 579,851
Gain on disposals of property and equipment - net 7, 29 101,159 64,333 42,447
Other income - net 20, 29 470,647 475,246 716,371
1,254,804 1,227,828 1,338,669
COSTS AND EXPENSES
General, selling and administrative 21 41,382,877 37,318,839 33,602,411
Depreciation and amortization: 7, 8, 29
Incremental effect of network modernization 1,623,172 9,065,966 5,080,471
Others 16,500,352 18,411,528 18,502,946
Interconnect costs 29 8,429,934 9,280,229 8,859,309
Cost of sales 5 10,661,344 9,953,106 7,678,359
Financing costs 14, 22, 25, 29 2,565,706 2,911,785 2,362,609
Impairment losses and others 5, 23 3,720,169 2,482,628 1,863,584
Equity in net losses of associates and joint ventures 10, 29 224,257 79,959 83,582
85,107,811 89,504,040 78,033,271

INCOME BEFORE INCOME TAX 19,382,706 6,864,773 9,751,547

PROVISION FOR INCOME TAX


Current 24 5,879,878 4,995,416 4,355,699
Deferred 130,636 (3,090,888) (1,449,406)
6,010,514 1,904,528 2,906,293

NET INCOME 13,372,192 4,960,245 6,845,254

OTHER COMPREHENSIVE INCOME (LOSS) 17


Items that will not be reclassified into profit or loss
in subsequent periods:
Remeasurement losses on defined benefit plan (397,930) (492,009) (289,283)
Income tax effect 119,379 147,603 86,785
(278,551) (344,406) (202,498)
Items that will be reclassified into profit or loss in
subsequent periods:
Transactions on cash flow hedges - net 7,724 223,182 45,529
Changes in fair value of available-for-sale
investments in equity securities 20,392 (22,500) 43,974
Exchange differences arising from translations of
foreign investments 14,474 (2,357) 4,470
Income tax effect (2,317) (66,955) (13,659)
40,273 131,370 80,314
(238,278) (213,036) (122,184)
TOTAL COMPREHENSIVE INCOME ₱13,133,914 ₱4,747,209 ₱6,723,070
(Forward)

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Years Ended December 31


Notes 2014 2013 2012
(In Thousand Pesos, Except Per Share Figures)
Total net income (loss) attributable to:
Equity holders of the parent ₱13,376,381 ₱4,960,245 ₱6,845,254
Non-controlling interest (4,189) – –
₱13,372,192 ₱4,960,245 ₱6,845,254

Total comprehensive income (loss) attributable to:


Equity holders of the parent ₱13,138,103 ₱4,747,209 ₱6,723,070
Non-controlling interest (4,189) – –
₱13,133,914 ₱4,747,209 ₱6,723,070

Earnings Per Share 27


Basic ₱100.60 ₱37.25 ₱51.45
Diluted ₱100.36 ₱37.22 ₱51.38
Cash dividends declared per common share 17 ₱75.00 ₱67.00 ₱65.00

See accompanying Notes to Consolidated Financial Statements.

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GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Year Ended December 31, 2014


Attributable to Equity Holders of the Parent

Cost of
Capital Additional Share-based Other
Stock Paid-in Payments Reserves Retained Non-controlling
Notes (Note 17) Capital (Note 16.5) (Note 17) Earnings Subtotal Interest Total
(In Thousand Pesos)
As of January 1, 2014 ₱7,422,360 ₱26,980,036 ₱261,144 (₱739,575) ₱7,715,286 ₱41,639,251 ₱– ₱41,639,251
Total comprehensive income for the year – – – (238,278) 13,376,381 13,138,103 (4,189) 13,133,914
Dividends on: 17.3
Common stock – – – – (9,952,702) (9,952,702) – (9,952,702)
Preferred stock - voting – – – – (26,457) (26,457) – (26,457)
Preferred stock - non-voting – – – – (260,030) (260,030) – (260,030)
Cost of share-based payments 18.1 – – 31,841 – – 31,841 – 31,841
Issuance of non-voting preferred stock 1,000,000 9,000,000 – – – 10,000,000 – 10,000,000
Equity transaction costs on non-voting preferred stock – (61,429) – – – (61,429) – (61,429)
Non-controlling interest arising from a business combination – – – – – – (445) (445)
Exercise of stock options 17.2 6,869 130,406 (103,552) – – 33,723 – 33,723
As of December 31, 2014 ₱8,429,229 ₱36,049,013 ₱189,433 (₱977,853) ₱10,852,478 54,542,300 (₱4,634) ₱54,537,666

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For the Year Ended December 31, 2013


Capital Additional Cost of Other
Stock Paid-in Share-based Reserves Retained
Notes (Note 17) Capital Payments (Note 17) Earnings Total
(In Thousand Pesos)
As of January 1, 2013 ₱7,412,866 ₱26,683,110 ₱472,911 (₱526,539) ₱11,655,643 ₱45,697,991
Total comprehensive income for the year – – – (213,036) 4,960,245 4,747,209
Dividends on: 17.3
Common stock – – – – (8,876,764) (8,876,764)
Preferred stock – – – – (23,838) (23,838)
Cost of share-based payments 18.1 – – 50,000 – – 50,000
Exercise of stock options 17.2 9,494 296,926 (261,767) – – 44,653
As of December 31, 2013 ₱7,422,360 ₱26,980,036 ₱261,144 (₱739,575) ₱7,715,286 ₱41,639,251

For the Year Ended December 31, 2012


Capital Additional Cost of Other
Stock Paid-in Share-based Reserves Retained
Notes (Note 17) Capital Payments (Note 17) Earnings Total
(In Thousand Pesos)
As of January 1, 2012 ₱7,410,226 ₱26,557,250 ₱573,436 (₱404,355) ₱13,449,162 ₱47,585,719
Total comprehensive income for the year – – – (122,184) 6,845,254 6,723,070
Dividends on: 17.3
Common stock – – – – (8,605,628) (8,605,628)
Preferred stock – – – – (33,145) (33,145)
Cost of share-based payments 18.1 – – 11,502 – – 11,502
Exercise of stock options 17.2 2,640 125,860 (112,027) – – 16,473
As of December 31, 2012 ₱7,412,866 ₱26,683,110 ₱472,911 (₱526,539) ₱11,655,643 ₱45,697,991
See accompanying Notes to Consolidated Financial Statements.

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GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31


Notes 2014 2013 2012
(In Thousand Pesos)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax ₱19,382,706 ₱6,864,773 ₱9,751,547
Adjustments for:
Depreciation and amortization 7, 8 18,123,524 27,477,494 23,583,417
Equity in net losses of associates and joint ventures 10 224,257 79,959 83,582
Impairment losses on property and equipment and
intangible assets 23 110,238 26,312 259,262
Provisions for claims and assessments 23 137,185 88,333 56,327
Loss (gain) on derivative instruments 20, 22 (103,560) 59,282 9,593
Cost of share-based payments 16, 18 31,841 50,000 11,502
Interest income 19 (682,998) (688,249) (579,851)
Interest expense 22 2,326,171 2,091,915 2,104,792
Foreign exchange losses (gains) - net 20, 22 (884) 486,308 (318,334)
Gain on disposals of property and equipment - net 7 (101,159) (64,333) (42,447)
Operating income before working capital changes 39,447,321 36,471,794 34,919,390
Changes in operating assets and liabilities:
Decrease (increase) in:
Receivables (3,240,009) (3,607,858) (2,235,848)
Inventories and supplies 358,472 (1,468,350) (164,986)
Prepayments and other current assets 201,119 3,547,877 (6,996,121)
Other noncurrent assets (275,508) 727,308 (4,854,588)
Increase (decrease) in:
Accounts payable and accrued expenses 4,047,846 965,321 2,485,946
Unearned revenues 356,504 1,750,561 121,524
Other long-term liabilities 633,143 677,032 (106,783)
Cash generated from operations 41,528,888 39,063,685 23,168,534
Income tax paid (5,073,730) (5,103,438) (3,802,665)
Net cash flows provided by operating activities 36,455,158 33,960,247 19,365,869

CASH FLOWS FROM INVESTING ACTIVITIES


Additions to:
Property and equipment 7 (21,120,217) (28,999,480) (20,124,476)
Intangible assets 8 (114,913) (101,956) (152,056)
Investments and advances 10 (548,000) (59,010) (20,990)
Interest received 786,531 771,868 465,711
Proceeds from loans receivable 6, 11 532,027 187,536 –
Proceeds from sale of property and equipment 197,773 105,760 70,070
Proceeds from return of capital 10 62,944 – –
Acquisition of subsidiaries, net of cash acquired 9 (12,251) – –
Net cash flows used in investing activities (20,216,106) (28,095,282) (19,761,741)
(Forward)

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Years Ended December 31


Notes 2014 2013 2012
(In Thousand Pesos)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings: 14
Long-term ₱7,000,000 ₱16,695,035 ₱25,847,770
Short-term 1,700,112 3,428,880 5,052,430
Repayments of borrowings: 14
Long-term (6,025,143) (13,613,525) (12,810,082)
Short-term (6,917,068) (432,070) (4,694,020)
Payments of dividends to stockholders: 17
Common (9,952,702) (8,876,764) (8,605,628)
Preferred - voting (26,457) (56,983) (35,295)
Issuance of non-voting preferred stock 17 9,938,571 – –
Exercise of stock options 33,723 44,653 16,473
Interest paid (2,693,173) (2,665,459) (2,573,745)
Net cash provided by (used in) financing activities (6,942,137) (5,476,233) 2,197,903
NET INCREASE IN CASH
AND CASH EQUIVALENTS 9,296,915 388,732 1,802,031
NET FOREIGN EXCHANGE DIFFERENCE ON
CASH AND CASH EQUIVALENTS 39,258 272,248 (201,322)
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF YEAR 7,420,735 6,759,755 5,159,046
CASH AND CASH EQUIVALENTS
AT THE END OF YEAR 28, 30 ₱16,756,908 ₱7,420,735 ₱6,759,755
See accompanying Notes to Consolidated Financial Statements.

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GLOBE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

Globe Telecom, Inc. (hereafter referred to as “Globe Telecom”) is a stock corporation organized
under the laws of the Philippines, and enfranchised under Republic Act (RA) No. 7229 and its
related laws to render any and all types of domestic and international telecommunications
services. Globe Telecom is one of the leading providers of digital wireless communications
services in the Philippines under the Globe Postpaid and Prepaid, Touch Mobile (TM) and Tattoo
brands using a fully digital network. It also offers domestic and international long distance
communication services or carrier services. Globe Telecom’s head office is located at The Globe
Tower, 32nd Street corner 7th Avenue, Bonifacio Global City, Taguig, Metropolitan Manila,
Philippines. Globe Telecom is listed in the Philippine Stock Exchange (PSE) and has been
included in the PSE composite index since September 17, 2001. Major stockholders of Globe
Telecom include Ayala Corporation (AC), Singapore Telecom International Pte Ltd. (STI) and
Asiacom Philippines, Inc. None of these companies exercise control over Globe Telecom.
Globe Telecom owns 100% of Innove Communications, Inc. (Innove). Innove is a stock
corporation organized under the laws of the Philippines and enfranchised under RA No. 7372 and
its related laws to render any and all types of domestic and international telecommunications
services. Innove holds a license to provide digital wireless communication services in the
Philippines. Innove also offers a broad range of broadband internet and wireline voice and data
communication services, as well as domestic and international long distance communication
services or carrier services. Innove also has a license to establish, install, operate and maintain a
nationwide local exchange carrier (LEC) service, particularly integrated local telephone service
with public payphone facilities and public calling stations, and to render and provide international
and domestic carrier and leased line services.

Globe Telecom owns 100% of G-Xchange, Inc. (GXI). GXI is a stock corporation organized
under the laws of the Philippines and formed for the purpose of developing, designing,
administering, managing and operating software applications and systems, including systems
designed for the operations of bill payment and money remittance, payment and delivery facilities
through various telecommunications systems operated by telecommunications carriers in the
Philippines and throughout the world and to supply software and hardware facilities for such
purposes. GXI is registered with the Bangko Sentral ng Pilipinas (BSP) as a remittance agent and
electronic money issuer. GXI handles the mobile payment and remittance service using Globe
Telecom’s network as transport channel under the GCash brand. The service, which is integrated
into the cellular services of Globe Telecom and Innove, enables easy and convenient person-to-
person fund transfers via short messaging services (SMS) and allows Globe Telecom and Innove
subscribers to easily and conveniently put cash into and get cash out of the GCash system.

Globe Telecom owns 100% of Yondu, Inc. (formerly known as Entertainment Gateway Group
Corp. [EGGC]) and EGGstreme (Hong Kong) Limited (EHL) (collectively referred here as “EGG
Group”). EGG Group is engaged in the development and creation of wireless products and
services accessible through telephones or other forms of communication devices. It also provides
internet and mobile value added services, information technology and technical services including
software development and related services. EGGC is registered with the Department of
Transportation and Communication (DOTC) as a content provider. On May 15, 2014, EGGC
changed its corporate name from Entertainment Gateway Group Corp. to Yondu, Inc.
(Yondu). On February 1, 2013, EHL was liquidated and the cost of investment amounting to
P
=11.48 million was derecognized in the consolidated statements of financial position.

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Globe Telecom owns 100% of GTI Business Holdings, Inc. (GTI). The primary purpose of this
company is to invest, purchase, subscribe for or otherwise acquire and own, hold, sell or otherwise
dispose of real and personal property of every kind and description, provided that GTI shall not
engage in the business of an open-ended investment company as defined in the Investment
Company Act (Republic Act 2629). GTI was incorporated on November 25, 2008. In July 2009,
GTI incorporated its wholly owned subsidiary, GTI Corporation (GTIC), a company organized
under the General Corporation Law of the United States of America, State of Delaware, for the
purpose of engaging in any lawful act or activity for which corporations may be organized under
the Delaware General Corporation Law. GTIC has started commercial operations on
April 1, 2011. In December 2011, GTI incorporated another wholly owned subsidiary, Globe
Telecom HK Limited (GTHK), a limited company organized under the Companies Ordinance
(Chapter 32 of the Laws of Hong Kong). GTHK has started commercial operations on
August 1, 2012. On May 10, 2013, GTI incorporated its wholly owned subsidiary, Globetel
European Limited (GTEU) and the latter’s wholly owned subsidiary, UK Globetel Limited
(UKGT). It was incorporated to act as holding company for the operating companies of Globe
Telecom, which proposed to establish operations in Europe, marketing and selling mobile
telecommunications services, as a mobile network operator, or through any other appropriate
vehicle, to Filipino individuals and businesses located within, and to Filipino visitors, initially, in
the United Kingdom, Spain and Italy. These entities are private limited companies under the
Companies Act of 2006, wherein the registered address is in England and Wales, and incorporated
to market and sell mobile telecommunications, as a mobile virtual network operator, to Filipino
individuals and businesses located within the United Kingdom and to Filipino visitors in the
United Kingdom. GTEU started commercial operations on the same date of incorporation while
UKGT’s commercial operations commenced on July 22, 2013.

On July 22, 2013 and October 4, 2013, respectively, GTEU incorporated additional two European
wholly owned subsidiaries which are Globe Mobile’ Italy S.r.l. (GMI), a limited liability
company, with registered address in Milan, Italy and Globetel Internacional European
España, S.L. (GIEE), with registered address in Barcelona, Spain. GMI and GIEE commenced
commercial operations on November 24, 2013 and August 7, 2014, respectively.

On November 12, 2014, GTI incorporated Globetel Singapore Pte. Ltd. (GTSG), a wholly owned
subsidiary, to provide international cable services that will help strengthen connectivity between
Singapore and the Philippines, and to provide business support services operating in the two
countries.

On March 28, 2012, Globe Telecom incorporated Kickstart Ventures, Inc. (Kickstart or KVI), a
stock corporation organized under the laws of the Philippines and formed for the purpose of
investing in individual, corporate, or start-up businesses, and to do research, technology
development and commercializing of new business ventures. Kickstart has started commercial
operations on March 29, 2012. In February 2014, Kickstart acquired 40% equity interest in
Flipside Publishing Services, Inc. (FPSI) which was accounted for as a subsidiary based on
Kickstart’s assessment of relevant facts and circumstances. FPSI was consolidated starting
February 2014.

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-3-

On June 3, 2014, Globe signed an agreement with Azalea Technology, Inc. and SCS Computer
Systems, Pte. Ltd. acquiring 100% ownership stake in Asticom Technology, Inc. (Asticom). It is
engaged in trading, marketing, installing and servicing of computer equipment, peripherals,
software and other data processing devices. Asticom was consolidated starting June 2014.

2. Summary of Significant Accounting Policies

2.1 Basis of Preparation

The accompanying consolidated financial statements of Globe Telecom, Inc. and Subsidiaries,
collectively referred to as the “Globe Group”, have been prepared under the historical cost
convention method, except for derivative financial instruments and available-for-sale (AFS)
investments that are measured at fair value.

The consolidated financial statements of the Globe Group are presented in Philippine Peso (₱),
Globe Telecom’s functional currency, and rounded to the nearest thousands, except when
otherwise indicated.

On February 4, 2015, the Board of Directors (BOD) approved and authorized the release of the
consolidated financial statements of Globe Telecom, Inc. and Subsidiaries as of
December 31, 2014 and 2013 and for each of the three years in the period ended
December 31, 2014.

2.2 Statement of Compliance


The consolidated financial statements of the Globe Group have been prepared in compliance
with Philippine Financial Reporting Standards (PFRS), which includes all applicable PFRS,
Philippine Accounting Standards (PAS), and Interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC), Philippine Interpretations Committee
(PIC), and Standing Interpretations Committee (SIC) as approved by the Financial Reporting
Standards Council (FRSC) and the Board of Accountancy, and adopted by the SEC.

2.3 Basis of Consolidation


The accompanying consolidated financial statements include the accounts of Globe Telecom and
the following subsidiaries:

Percentage of
Ownership
Place of
Name of Subsidiary Incorporation Principal Activity 2014 2013
Wireless and wireline voice and
Innove Philippines data communication services 100% 100%
Software development for
telecommunications
applications and money
GXI Philippines remittance services 100% 100%
Mobile content and application
Yondu Philippines development services 100% 100%
(Forward)

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Percentage of
Ownership
Place of
Name of Subsidiary Incorporation Principal Activity 2014 2013
GTI Philippines Investment and holding company 100% 100%
Wireless and data communication
GTIC United States services 100% 100%
Marketing and selling of products
and services under
GTHK Hong Kong distributorship agreement 100% 100%
GTEU United Kingdom Investment and holding company 100% 100%
Wireless and data communication
UKGT United Kingdom services 100% 100%
Wireless and data communication
GMI Italy services 100% 100%
Wireless and data communication
GIEE Spain services 100% 100%
Wireless and data communication
GTSG Singapore services 100% –
Investment, research, technology
development and
commercializing for business
KVI Philippines ventures 100% 100%
FPSI Philippines E-book solutions 40% –
Trading, marketing and installation
of computer equipment and
Asticom Philippines other data devices 100% –

The assets, liabilities, income and expense of subsidiaries are consolidated from the date on which
control is transferred to the Globe Group and ceases to be consolidated from the date on which
control is transferred out of the Globe Group.

Control is achieved when the Globe Group is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee. Specifically, the Globe Group controls an investee if and only if the Globe Group has:
(a) power over the investee (i.e. existing rights that give it the current ability to direct the relevant
activities of the investee); (b) exposure, or rights, to variable returns from its involvement with the
investee; and (c) the ability to use its power over the investee to affect its returns.

When the Globe Group has less than a majority of the voting or similar rights of an investee, the
Globe Group considers all relevant facts and circumstances in assessing whether it has power over
an investee, including: (a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and (c) the Globe Group’s voting rights and
potential voting rights.

The Globe Group re-assesses whether or not it controls an investee if facts and circumstances
indicate that there are changes to one or more of the three elements of control.

Non-controlling interests pertain to the equity in a subsidiary not attributable, directly or indirectly
to the Globe Group. Non-controlling interests represent the portion of profit or loss and net assets
in subsidiaries not wholly-owned and are presented in the consolidated statements of
comprehensive income, consolidated statements of changes in equity and consolidated statements
of financial position, separately from the equity attributable to the parent.

*SGVFS010845*
-5-

Profit or loss and each component of other comprehensive income (OCI) are attributed to the
equity holders of the parent of the Group and to the non-controlling interests, even if this results in
the non-controlling interests having deficit balance. When necessary, adjustments are made to the
financial statements of the subsidiaries to bring their accounting policies into line with the Globe
Group’s accounting policies.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an
equity transaction. Any difference between the amount by which the non-controlling interest are
adjusted and the fair value of the consideration paid or received is recognized directly in equity
and attributed to the equity holders of the parent.

If the Globe Group loses control over a subsidiary, it derecognizes the related assets (including
goodwill), liabilities, non-controlling interest and other components of equity while any resultant
gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value.

The financial statements of the subsidiaries are prepared for the same reporting year as Globe
Telecom, except for Asticom wherein the annual reporting period is March 31, using uniform
accounting policies for like transactions and other events in similar circumstances. All significant
intercompany balances and transactions, including intercompany profits and losses, were
eliminated in full during consolidation in accordance with the accounting policy on consolidation.

2.4 Adoption of New Standards, Amendments to Standards and Interpretations


The accounting policies adopted in the preparation of the consolidated financial statements are
consistent with those followed in the preparation of the Globe Group’s consolidated financial
statements as of and for the year ended December 31, 2013, except for the adoption of following
new standards and amendment to standards and interpretations effective on January 1, 2014.

The nature and impact of each new standard and amendment is described below:

· Investment Entities (Amendments to PFRS 10, Consolidated Financial Statements, PFRS


12, Disclosure of Interests in Other Entities and PAS 27, Separate Financial Statements)
These amendments provide an exception to the consolidation requirement for entities that
meet the definition of an investment entity under PFRS 10. The exception to
consolidation requires investment entities to account for subsidiaries at fair value through
profit or loss. The amendments must be applied retrospectively subject to certain relief.
These amendments have no impact to the Globe Group since none of the entities within
the Globe Group qualifies as an investment entity under PFRS 10.

· Amendments to PAS 36, Impairment of Assets - Recoverable Amount Disclosures for


Non-Financial Assets
These amendments remove the unintended consequences of PFRS 13, Fair Value
Measurement, on the disclosures required under PAS 36. In addition, these amendments
require disclosure of the recoverable amounts for assets or cash-generating units (CGUs)
for which impairment loss has been recognized or reversed during the period. The
amendments have no impact on the disclosure in the Globe Group’s consolidated financial
statements.

· Philippine Interpretation IFRIC 21, Levies


IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that
triggers payment, as identified by the relevant legislation, occurs. For a levy that is
triggered upon reaching a minimum threshold, the interpretation clarifies that no liability

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-6-

should be anticipated before the specified minimum threshold is reached. The adoption of
the standard has no impact on the Globe Group’s consolidated financial statements.

· Amendments to PAS 39, Financial Instruments: Recognition and Measurement -


Novation of Derivatives and Continuation of Hedge Accounting
These amendments provide relief from discontinuing hedge accounting when novation of
a derivative designated as a hedging instrument meets certain criteria and retrospective
application is required. These amendments have no impact on the Globe Group as the
Globe Group has not novated its derivatives during the current period. However, these
amendments would be considered for future novations.

· Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial


Assets and Financial Liabilities
The amendments clarify the meaning of “currently has a legally enforceable right to set-
off” and the criteria for non-simultaneous settlement mechanisms of clearing houses to
qualify for offsetting and are applied simultaneously. The amendments have no impact on
the Globe Group’s financial position or performance.

· Annual Improvements to PFRSs (2010-2012 cycle)


In the 2010 - 2012 annual improvements cycle, seven amendments to six standards were
issued, which included an amendment to PFRS 13, Fair Value Measurement. The
amendment to PFRS 13 is effective immediately and it clarifies that short-term
receivables and payables with no stated interest rates can be measured at invoice amounts
when the effect of discounting is immaterial. This amendment has no impact on the
Globe Group.

· Annual Improvements to PFRSs (2011-2013 cycle)


In the 2011 - 2013 annual improvements cycle, four amendments to four standards were
issued, which included an amendment to PFRS 1, First-time Adoption of Philippine
Financial Reporting Standards - First-time Adoption of PFRS. The amendment to
PFRS 1 is effective immediately. It clarifies that an entity may choose to apply either a
current standard or a new standard that is not yet mandatory, but permits early application,
provided either standard is applied consistently throughout the periods presented in the
entity’s first PFRS financial statements. This amendment has no impact on the Globe
Group as it is not a first time PFRS adopter.

2.5 Future Adoption of New Standards and Amendments to Standards


The Globe Group will adopt the following new standards and amendment to standards enumerated
below when these become effective. Except as otherwise indicated, the Globe Group does not
expect the adoption of these new standards and amendments to standards to have significant
impact on the consolidated financial statements.

· PFRS 9, Financial Instruments - Classification and Measurement (2010 version)


PFRS 9 (2010 version) reflects the first phase on the replacement of PAS 39 and applies to the
classification and measurement of financial assets and liabilities as defined in
PAS 39, Financial Instruments: Recognition and Measurement. PFRS 9 requires all financial
assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair
value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held
within a business model that has the objective to hold the assets to collect the contractual cash
flows and its contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal outstanding. All other debt instruments are
subsequently measured at fair value through profit or loss. All equity financial assets are

*SGVFS010845*
-7-

measured at fair value either through other comprehensive income (OCI) or profit or loss.
Equity financial assets held for trading must be measured at fair value through profit or loss.
For FVO liabilities, the amount of change in the fair value of a liability that is attributable to
changes in credit risk must be presented in OCI. The remainder of the change in fair value is
presented in profit or loss, unless presentation of the fair value change in respect of the
liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss.
All other PAS 39 classification and measurement requirements for financial liabilities have
been carried forward into PFRS 9, including the embedded derivative separation rules and the
criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the
classification and measurement of the Globe Group’s financial assets, but will potentially have
no impact on the classification and measurement of financial liabilities.

PFRS 9 (2010 version) is effective for annual periods beginning on or after January 1, 2015.
This mandatory adoption date was moved to January 1, 2018 when the final version of PFRS 9
was adopted by the Philippine FRSC. Such adoption, however, is still for approval by the BOA.

· Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. The SEC and the
Financial Reporting Standards Council (FRSC) have deferred the effectivity of this
interpretation until the final Revenue standard is issued by the International Accounting
Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard
against the practices of the Philippine real estate industry is completed. Adoption of the
interpretation when it becomes effective will not have any impact on the consolidated financial
statements of the Globe Group.

The following new standards and amendments issued by the IASB were already adopted by the
FRSC but are still for approval of the Board of Accountancy (BOA).

Effective January 1, 2015

· Amendments to PAS 19, Employee Benefits - Defined Benefit Plans: Employee Contributions
PAS 19 requires an entity to consider contributions from employees or third parties when
accounting for defined benefit plans. Where the contributions are linked to service, they
should be attributed to periods of service as a negative benefit. These amendments clarify that,
if the amount of the contributions is independent of the number of years of service, an entity is
permitted to recognize such contributions as a reduction in the service cost in the period in
which the service is rendered, instead of allocating the contributions to the periods of service.
This amendment is effective for annual periods beginning on or after January 1, 2015. It is not
expected that this amendment would be relevant to Globe Group, since it has no defined
benefit plans with contributions from employees or third parties.

Annual Improvements to PFRS (2010-2012 cycle)


The Annual Improvements to PFRSs (2010-2012 cycle) are effective for annual periods beginning
on or after January 1, 2015 and are not expected to have a material impact to Globe Group. They
include:

· PFRS 2, Share-based Payment -Definition of Vesting Condition


This improvement is applied prospectively and clarifies various issues relating to the
definitions of performance and service conditions which are vesting conditions, including:
· A performance condition must contain a service condition
· A performance target must be met while the counterparty is rendering service

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· A performance target may relate to the operations or activities of an entity, or to those of


another entity in the same group
· A performance condition may be a market or non-market condition
· If the counterparty, regardless of the reason, ceases to provide service during the vesting
period, the service condition is not satisfied.

· PFRS 3, Business Combinations - Accounting for Contingent Consideration in a Business


Combination
The amendment is applied prospectively for business combinations for which the acquisition
date is on or after July 1, 2014. It clarifies that a contingent consideration that is not classified
as equity is subsequently measured at fair value through profit or loss whether or not it falls
within the scope of PAS 39, Financial Instruments: Recognition and Measurement (or
PFRS 9, Financial Instruments, if early adopted). The Globe Group shall consider this
amendment for future business combinations.

· PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of the


Total of the Reportable Segments’ Assets to the Entity’s Assets
The amendments are applied retrospectively and clarify that:
· An entity must disclose the judgments made by management in applying the aggregation
criteria in the standard, including a brief description of operating segments that have been
aggregated and the economic characteristics (e.g., sales and gross margins) used to assess
whether the segments are ‘similar’.
· The reconciliation of segment assets to total assets is only required to be disclosed if the
reconciliation is reported to the chief operating decision maker, similar to the required
disclosure for segment liabilities.

· PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Revaluation Method
- Proportionate Restatement of Accumulated Depreciation and Amortization
The amendment is applied retrospectively and clarifies in PAS 16 and PAS 38 that the asset
may be revalued by reference to the observable data on either the gross or the net carrying
amount. In addition, the accumulated depreciation or amortization is the difference between
the gross and carrying amounts of the asset.

· PAS 24, Related Party Disclosures - Key Management Personnel


The amendment is applied retrospectively and clarifies that a management entity, which is an
entity that provides key management personnel services, is a related party subject to the
related party disclosures. In addition, an entity that uses a management entity is required to
disclose the expenses incurred for management services.

Annual Improvements to PFRSs (2011-2013 cycle)


The Annual Improvements to PFRSs (2011-2013 cycle) are effective for annual periods beginning
on or after January 1, 2015 and are not expected to have a material impact to Globe Group. They
include:

· PFRS 3, Business Combinations - Scope Exceptions for Joint Arrangements


The amendment is applied prospectively and clarifies the following regarding the scope
exceptions within PFRS 3:
· Joint arrangements, not just joint ventures, are outside the scope of PFRS 3.
· This scope exception applies only to the accounting in the financial statements of the joint
arrangement itself.

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· PFRS 13, Fair Value Measurement - Portfolio Exception


The amendment is applied prospectively and clarifies that the portfolio exception in PFRS 13
can be applied not only to financial assets and financial liabilities, but also to other contracts
within the scope of PAS 39 (or PFRS 9, as applicable).

· PAS 40, Investment Property


The amendment is applied prospectively and clarifies that PFRS 3, and not the description of
ancillary services in PAS 40, is used to determine if the transaction is the purchase of an asset
or business combination. The description of ancillary services in PAS 40 only differentiates
between investment property and owner-occupied property (i.e., property, plant and
equipment).

Effective January 1, 2016

· PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Clarification of
Acceptable Methods of Depreciation and Amortization (Amendments)
The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern of
economic benefits that are generated from operating a business (of which the asset is part)
rather than the economic benefits that are consumed through use of the asset. As a result, a
revenue-based method cannot be used to depreciate property, plant and equipment and may
only be used in very limited circumstances to amortize intangible assets. The amendments are
effective prospectively for annual periods beginning on or after January 1, 2016, with early
adoption permitted. These amendments are not expected to have any impact to Globe Group
given that it has not used a revenue-based method to depreciate its non-current assets.

· PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants
(Amendments)
The amendments change the accounting requirements for biological assets that meet the
definition of bearer plants. Under the amendments, biological assets that meet the definition of
bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply. After
initial recognition, bearer plants will be measured under PAS 16 at accumulated cost (before
maturity) and using either the cost model or revaluation model (after maturity). The
amendments also require that produce that grows on bearer plants will remain in the scope of
PAS 41 measured at fair value less costs to sell. For government grants related to bearer
plants, PAS 20, Accounting for Government Grants and Disclosure of Government Assistance,
will apply. The amendments are retrospectively effective for annual periods beginning on or
after January 1, 2016, with early adoption permitted. These amendments are not expected to
have any impact to Globe Group as the Globe Group does not have any bearer plants.

· PAS 27, Separate Financial Statements - Equity Method in Separate Financial Statements
(Amendments)
The amendments will allow entities to use the equity method to account for investments in
subsidiaries, joint ventures and associates in their separate financial statements. Entities
already applying PFRS and electing to change to the equity method in its separate financial
statements will have to apply that change retrospectively. For first-time adopters of PFRS
electing to use the equity method in its separate financial statements, they will be required to
apply this method from the date of transition to PFRS. The amendments are effective for
annual periods beginning on or after January 1, 2016, with early adoption permitted. These
amendments will not have any impact to the Globe Group’s financial statements.

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· PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint
Ventures - Sale or Contribution of Assets between an Investor and its Associate or Joint
Venture
These amendments address an acknowledged inconsistency between the requirements in
PFRS 10 and those in PAS 28 (2011) in dealing with the sale or contribution of assets between
an investor and its associate or joint venture. The amendments require that a full gain or loss is
recognized when a transaction involves a business (whether it is housed in a subsidiary or
not). A partial gain or loss is recognized when a transaction involves assets that do not
constitute a business, even if these assets are housed in a subsidiary. These amendments are
effective from annual periods beginning on or after 1 January 2016.

· PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests in Joint Operations
(Amendments)
The amendments to PFRS 11 require that a joint operator accounting for the acquisition of an
interest in a joint operation, in which the activity of the joint operation constitutes a business
must apply the relevant PFRS 3 principles for business combinations accounting. The
amendments also clarify that a previously held interest in a joint operation is not remeasured
on the acquisition of an additional interest in the same joint operation while joint control is
retained. In addition, a scope exclusion has been added to PFRS 11 to specify that the
amendments do not apply when the parties sharing joint control, including the reporting entity,
are under common control of the same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the
acquisition of any additional interests in the same joint operation and are prospectively
effective for annual periods beginning on or after January 1, 2016, with early adoption
permitted. These amendments are not expected to have any impact to Globe Group.

· PFRS 14, Regulatory Deferral Accounts


PFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-
regulation, to continue applying most of its existing accounting policies for regulatory deferral
account balances upon its first-time adoption of PFRS. Entities that adopt PFRS 14 must
present the regulatory deferral accounts as separate line items on the statement of financial
position and present movements in these account balances as separate line items in the
statement of profit or loss and other comprehensive income. The standard requires disclosures
on the nature of, and risks associated with, the entity’s rate-regulation and the effects of that
rate-regulation on its financial statements. PFRS 14 is effective for annual periods beginning
on or after January 1, 2016. Since the Globe Group is an existing PFRS preparer, this standard
would not apply.

Annual Improvements to PFRSs (2012-2014 cycle)


The Annual Improvements to PFRSs (2012-2014 cycle) are effective for annual periods beginning
on or after January 1, 2016 and are not expected to have a material impact to Globe Group. They
include:

· PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - Changes in
Methods of Disposal
The amendment is applied prospectively and clarifies that changing from a disposal through
sale to a disposal through distribution to owners and vice-versa should not be considered to be
a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no
interruption of the application of the requirements in PFRS 5. The amendment also clarifies
that changing the disposal method does not change the date of classification.

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· PFRS 7, Financial Instruments: Disclosures - Servicing Contracts


PFRS 7 requires an entity to provide disclosures for any continuing involvement in a
transferred asset that is derecognized in its entirety. The amendment clarifies that a servicing
contract that includes a fee can constitute continuing involvement in a financial asset. An
entity must assess the nature of the fee and arrangement against the guidance in PFRS 7 in
order to assess whether the disclosures are required. The amendment is to be applied such that
the assessment of which servicing contracts constitute continuing involvement will need to be
done retrospectively. However, comparative disclosures are not required to be provided for
any period beginning before the annual period in which the entity first applies the
amendments.

· PFRS 7 - Applicability of the Amendments to PFRS 7 to Condensed Interim Financial


Statements
This amendment is applied retrospectively and clarifies that the disclosures on offsetting of
financial assets and financial liabilities are not required in the condensed interim financial
report unless they provide a significant update to the information reported in the most recent
annual report.

· PAS 19, Employee Benefits - Regional Market Issue Regarding Discount Rate
This amendment is applied prospectively and clarifies that market depth of high quality
corporate bonds is assessed based on the currency in which the obligation is denominated,
rather than the country where the obligation is located. When there is no deep market for high
quality corporate bonds in that currency, government bond rates must be used.

· PAS 34, Interim Financial Reporting - Disclosure of Information ‘Elsewhere in the Interim
Financial Report’
The amendment is applied retrospectively and clarifies that the required interim disclosures
must either be in the interim financial statements or incorporated by cross-reference between
the interim financial statements and wherever they are included within the greater interim
financial report (e.g., in the management commentary or risk report).

Effective January 1, 2018

· PFRS 9, Financial Instruments - Hedge Accounting and amendments to PFRS 9, PFRS 7 and
PAS 39 (2013 version)
PFRS 9 (2013 version) already includes the third phase of the project to replace PAS 39 which
pertains to hedge accounting. This version of PFRS 9 replaces the rules-based hedge
accounting model of PAS 39 with a more principles-based approach. Changes include
replacing the rules-based hedge effectiveness test with an objectives-based test that focuses on
the economic relationship between the hedged item and the hedging instrument, and the effect
of credit risk on that economic relationship; allowing risk components to be designated as the
hedged item, not only for financial items but also for non-financial items, provided that the
risk component is separately identifiable and reliably measurable; and allowing the time value
of an option, the forward element of a forward contract and any foreign currency basis spread
to be excluded from the designation of a derivative instrument as the hedging instrument and
accounted for as costs of hedging. PFRS 9 also requires more extensive disclosures for hedge
accounting.

PFRS 9 (2013 version) has no mandatory effective date. The mandatory effective date of
January 1, 2018 was eventually set when the final version of PFRS 9 was adopted by the
FRSC. The adoption of the final version of PFRS 9, however, is still for approval by BOA.

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The adoption of PFRS 9 will have an effect on the classification and measurement of the
Globe Group’s financial assets but will have no impact on the classification and measurement
of the Globe Group’s financial liabilities. The adoption will also have an effect on the Globe
Group’s application of hedge accounting. The Globe Group is currently assessing the impact
of adopting this standard. The Globe Group will not early adopt PFRS 9 for the current year.

· PFRS 9, Financial Instruments (2014 or final version)


In July 2014, the final version of PFRS 9, Financial Instruments, was issued. PFRS 9 reflects
all phases of the financial instruments project and replaces PAS 39, Financial Instruments:
Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces
new requirements for classification and measurement, impairment, and hedge accounting.
PFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early
application permitted. Retrospective application is required, but comparative information is
not compulsory. Early application of previous versions of PFRS 9 is permitted if the date of
initial application is before February 1, 2015.

The adoption of PFRS 9 will have an effect on the classification and measurement of the
Group’s financial assets and impairment methodology for financial assets, but will have no
impact on the classification and measurement of the Globe Group’s financial liabilities. The
adoption will also have an effect on the Globe Group’s application of hedge accounting. The
Group is currently assessing the impact of adopting this standard. The Globe Group will not
early adopt PFRS 9 for the current year.

The following new standard issued by the IASB has not yet been adopted by the FRSC:

· IFRS 15, Revenue from Contracts with Customers


IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to
revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an
amount that reflects the consideration to which an entity expects to be entitled in exchange for
transferring goods or services to a customer.

The principles in IFRS 15 provide a more structured approach to measuring and recognizing
revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue
recognition requirements under IFRS. Either a full or modified retrospective application is
required for annual periods beginning on or after January 1, 2017 with early adoption
permitted. The Globe Group is currently assessing the impact of IFRS 15 and plans to adopt
the new standard on the required effective date once adopted locally.

2.6 Significant Accounting Policies

2.6.1 Revenue Recognition

The Globe Group provides mobile and wireline voice, data communication and
broadband internet services which are both provided under postpaid and prepaid
arrangements.

The Globe Group assesses its revenue arrangements against specific criteria in order to
determine if it is acting as principal or agent (see Note 3.1.5).

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Revenue is recognized when the delivery of the products or services has occurred and
collectability is reasonably assured.

Revenue is stated at amounts invoiced and accrued to customers, taking into


consideration the bill cycle cut-off (for postpaid subscribers), the amount charged
against preloaded airtime value (for prepaid subscribers), switch-monitored traffic (for
carriers and content providers) and excludes value-added tax (VAT) and overseas
communication tax. Inbound and outbound traffic charges, net of discounts, are accrued
based on actual volume of traffic monitored by Globe Group’s network and in the traffic
settlement system.

2.6.1.1 Service Revenue

2.6.1.1.1 Subscribers
Revenues from subscribers principally consist of: (1) fixed monthly service fees for
postpaid wireless, wireline voice, broadband internet, data subscribers and wireless
prepaid and postpaid subscription fees for promotional offers; (2) usage of airtime and
toll fees for local, domestic and international long distance calls in excess of
consumable fixed monthly service fees and subscription fees for the promotional offer
and, less (a) bonus airtime and short messaging services (SMS) on free Subscribers’
Identification Module (SIM), and (b) prepaid reload discounts, (3) revenues from
value-added services (VAS) such as SMS in excess of consumable fixed monthly
service fees (for postpaid) and free SMS allocations (for prepaid), multimedia
messaging services (MMS), content and infotext services, net of payout to content
providers; (4) mobile data services, (5) inbound revenues from other carriers which
terminate their calls to the Globe Group’s network less discounts; (6) revenues from
international roaming services for Voice, SMS and Data on top of the subscription
promo offers; (7) usage of broadband and internet services in excess of fixed monthly
service fees; and (8) service connection fees (for wireline voice and data subscribers).

Postpaid service arrangements include fixed monthly service fees, which are
recognized over the subscription period on a pro-rata basis. Monthly service fees
billed in advance are initially deferred and recognized as revenues during the period
when earned. Telecommunications services provided to postpaid subscribers are
billed throughout the month according to the bill cycles of subscribers. As a result of
bill cycle cut-off, monthly service revenues earned but not yet billed at the end of the
month are estimated and accrued. These estimates are based on actual usage less
estimated consumable usage using historical ratio of consumable usage and free
minutes.

Proceeds from over-the-air reloading channels and the sale of prepaid cards are
deferred and shown as “Unearned revenues” in the consolidated statement of financial
position. Revenue is recognized upon actual usage of airtime value net of discounts
on promotional calls and net of free airtime value or SMS and bonus reloads. Unused
load value is recognized as revenue upon expiration based on the load denomination.

The Globe Group offers loyalty programs which allow its subscribers to accumulate
points when they purchase services from the Globe Group. The points can then be
redeemed for free services and discounts for future billings, subject to a minimum
number of points being obtained. The consideration received or receivable is allocated
between the sale of services and award credits. The portion of the consideration

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allocated to the award credits is accounted for as unearned revenues. This will be
recognized as revenue upon the award redemption.

2.6.1.1.2 Traffic
Inbound revenues refer to traffic originating from other telecommunications providers
terminating to the Globe Group’s network, while outbound charges represent traffic sent
out or mobile content delivered using agreed termination rates and/or revenue sharing
with other foreign and local carriers and content providers. Adjustments are made to the
accrued amount for discrepancies between the traffic volume per Globe Group’s records
and per records of the other carriers as these are determined and/or mutually agreed upon
by the parties. Outstanding inbound revenues are shown as traffic settlements receivable
under the “Receivables” account, while unpaid outbound charges are shown as traffic
settlements payable under the “Accounts payable and accrued expenses” account in the
consolidated statement of financial position unless a legal right of offset exists in which
case the net amount is shown either under “Receivables” or “Accounts payable and
accrued expenses” account.

2.6.1.1.3 GCash
Service revenues of GXI consist of SMS revenue arising from GCash transactions passing
through the telecom networks of Globe Telecom. Service revenue also includes
transaction fees and discounts earned from arrangements with partners and from
remittances made through GCash partners using the Globe Group’s facilities. The Globe
Group earns service revenue from one-time connection fee received from new partners.
Depending on the arrangement with partners and when the fee is nonconsumable, outright
service revenue is recognized upon cash receipt.

2.6.1.2 Nonservice Revenues


Proceeds from sale of handsets, nomadic broadband sticks (Tattoos), modems, other
mobile devices and accessories, SIM packs, call cards and others are recognized as
revenue upon delivery of the items and the related cost or net realizable value are
presented as “Cost of sales” in the consolidated statement of comprehensive income.

2.6.1.3 Others
Interest income is recognized as it accrues using the effective interest rate method.

Lease income from operating lease is recognized on a straight-line basis over the lease
term.

Dividend income is recognized when the Globe Group’s right to receive payment is
established.

2.6.2 Subscriber Acquisition and Retention Costs


The related costs incurred in connection with the acquisition of wireless and wireline voice
subscribers are charged against current operations, while the related acquisition costs of data
communication and broadband internet subscribers are capitalized. Subscriber acquisition
costs primarily include commissions, handset, phonekit, modems, mobile internet kit
subsidies, device subsidies and selling expenses. Those that meet the recognition criteria are
capitalized while others are expensed outright. Subsidies represent the difference between the
cost of handsets, nomadic broadband sticks (Tattoos), modems, other mobile devices and
accessories, SIM packs, call cards and others (included in the “Cost of sales” and “Impairment
losses and others” account), and the price offered to the subscribers (included in the

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“Nonservice revenues” account). The data communication and broadband internet costs
represent the acquisition cost of modems (included in the “Property and Equipment” account)
which are depreciated over a period of two years (included in the “Depreciation and
amortization” account). Retention costs for existing postpaid subscribers are in the form of
free handsets, devices and bill credits. Retention costs are charged against current operations
and included under the “General, selling and administrative expenses” account in the
consolidated statement of comprehensive income upon delivery or when there is a contractual
obligation to deliver. Bill credits are deducted from service revenues upon application against
qualifying subscriber bills.

2.6.3 Cash and Cash Equivalents


Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of
three months or less from date of placement and that are subject to an insignificant risk of
change in value.

2.6.4 Financial Instruments

2.6.4.1 General

2.6.4.1.1 Initial Recognition and Measurement


Financial instruments are recognized in the Globe Group’s consolidated statement of
financial position when the Globe Group becomes a party to the contractual
provisions of the instrument. Purchases or sales of financial assets that require
delivery of assets within the time frame established by regulation or convention in the
marketplace are recognized (regular way trades) on the trade date, i.e., the date that
the Globe Group commits to purchase or sell the asset.

Financial instruments are recognized initially at fair value. Except for financial
instruments at fair value through profit or loss (FVPL), the initial measurement of
financial assets includes directly attributable transaction costs.

The Globe Group classifies its financial assets into the following categories: financial
assets at FVPL, held-to-maturity (HTM) investments, AFS investments, and loans and
receivables. The Globe Group classifies its financial liabilities into financial liabilities
at FVPL and other financial liabilities. The classification depends on the purpose for
which the investments were acquired and whether they are quoted in an active market.
Management determines the classification of its investments at initial recognition and,
where allowed and appropriate, re-evaluates such designation every reporting date.

2.6.4.1.2 Financial Assets or Financial Liabilities at FVPL


This category consists of financial assets or financial liabilities that are held for
trading or designated by management as FVPL on initial recognition. Financial
assets or financial liabilities are classified as held for sale if they are acquired for the
purpose of selling or repurchasing in the near term. Derivatives, including separated
embedded derivatives, are also classified as held for trading, unless they are
designated as effective hedging instruments as defined by PAS 39.

Financial assets or financial liabilities at FVPL are recorded in the consolidated


statement of financial position at fair value, with changes in fair value being
recorded in the consolidated profit or loss. Interest earned or incurred is recorded as
“Interest income or expense”, respectively, while dividend income is recorded when

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the right to receive payment has been established. Both are recorded in the
consolidated profit or loss.

Financial assets or financial liabilities are classified in this category as designated


by management on initial recognition when any of the following criteria are met:

· the designation eliminates or significantly reduces the inconsistent treatment that


would otherwise arise from measuring the assets or liabilities or recognizing
gains or losses on a different basis; or

· the assets and liabilities are part of a group of financial assets, financial liabilities
or both which are managed and their performance are evaluated on a fair value
basis, in accordance with a documented risk management or investment strategy;
or

· the financial instrument contains an embedded derivative, unless the embedded


derivative does not significantly modify the cash flows or it is clear, with little or
no analysis, that it would not be separately recorded.

The Globe Group evaluates its financial assets held for trading, other than
derivatives, to determine whether the intention to sell them in the near term is still
appropriate. When in rare circumstances the Globe Group is unable to trade these
financial assets due to inactive markets and management’s intention to sell them in
the foreseeable future significantly changes, the Globe Group may elect to reclassify
these financial assets. The reclassification to loans and receivables, AFS or HTM
depends on the nature of the asset. This evaluation does not affect any financial
assets designated at FVPL using the fair value option at designation because these
instruments cannot be reclassified after initial recognition.

Derivatives embedded in host contracts are accounted for as separate derivatives and
recorded at fair value if their economic characteristics and risks are not closely
related to those of the host contracts and the host contracts are not held for trading
or designated at fair value though profit or loss. These embedded derivatives are
measured at fair value with changes in fair value recognized in the consolidated
profit or loss. 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.

2.6.4.1.3 HTM Investments


HTM investments are quoted non-derivative financial assets with fixed or determinable
payments and fixed maturities for which the Globe Group’s management has the
positive intention and ability to hold to maturity. Where the Globe Group sells other
than an insignificant amount of HTM investments, the entire category would be tainted
and reclassified as AFS investments. After initial measurement, HTM investments are
subsequently measured at amortized cost using the effective interest rate method, less
any impairment losses. Amortized cost is calculated by taking into account any
discount or premium on acquisition and fees that are an integral part of the effective
interest rate. Gains and losses are recognized in the consolidated profit or loss when
the HTM investments are derecognized or impaired, as well as through the
amortization process. The amortization is included in “Interest income” in the
consolidated statement of comprehensive income. The effects of restatement of
foreign currency-denominated HTM investments are recognized in the consolidated
profit or loss.

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There are no outstanding HTM investments as of December 31, 2014 and 2013.

2.6.4.1.4 Loans and Receivables


Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They are not entered into with the
intention of immediate or short-term resale and are not classified as financial assets
held for trading, designated as AFS investments or designated at FVPL.

This accounting policy relates to the consolidated statement of financial position


caption “Receivables”, which arise primarily from subscriber and traffic revenues and
other types of receivables, cash and cash equivalents, other nontrade receivables
included under “Prepayments and other current assets” and loans receivables included
under “Other noncurrent assets”.

Receivables are recognized initially at fair value. After initial measurement,


receivables are subsequently measured at amortized cost using the effective interest
rate method, less any allowance for impairment losses. Amortized cost is calculated
by taking into account any discount or premium on the issue and fees that are an
integral part of the effective interest rate.

Penalties, termination fees and surcharges on past due accounts of postpaid


subscribers are recognized as revenues upon collection. The losses arising from
impairment of receivables are recognized in the “Impairment losses and others”
account in the consolidated statement of comprehensive income. The level of
allowance for impairment losses is evaluated by management on the basis of factors
that affect the collectability of accounts (see accounting policy on 2.6.4.2 Impairment
of Financial Assets).

Other nontrade receivables and loans receivable are recognized initially at fair value,
which normally pertains to the consideration paid. Similar to receivables, subsequent
to initial recognition, other nontrade receivables and loans receivables are measured at
amortized cost using the effective interest rate method, less any allowance for
impairment losses.

2.6.4.1.5 AFS Investments


AFS investments are those investments which are designated as such or do not qualify
to be classified or designated as 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. They include equity investments.

After initial measurement, AFS investments are subsequently measured at fair value.
Interest earned on holding AFS investments are reported as interest income using the
effective interest rate. The unrealized gains and losses arising from the fair value
changes of AFS investments are included in other comprehensive income and are
reported as “Other reserves” (net of tax where applicable) in the equity section of the
consolidated statement of financial position. When the investment is disposed of, the
cumulative gains or losses previously recognized in equity is recognized in the
consolidated profit or loss.

When the fair value of AFS investments cannot be measured reliably because of lack
of reliable estimates of future cash flows and discount rates necessary to calculate the
fair value of unquoted equity instruments, these investments are carried at cost, less
any allowance for impairment losses. Dividends earned on holding AFS investments

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are recognized in the consolidated profit or loss when the right to receive payment has
been established.

The losses arising from impairment of such investments are recognized as “Impairment
losses and others” in the consolidated statement of comprehensive income.

2.6.4.1.6 Other Financial Liabilities


Issued financial instruments or their components, which are not designated at FVPL are
classified as other financial liabilities where the substance of the contractual arrangement
results in the Globe Group having an obligation either to deliver cash or another financial
asset to the holder, or to satisfy the obligation other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of own equity shares. The
components of issued financial instruments that contain both liability and equity elements
are accounted for separately, with the equity component being assigned the residual
amount after deducting from the instrument as a whole the amount separately determined
as the fair value of the liability component on the date of issue. After initial measurement,
other financial liabilities are subsequently measured at amortized cost using the effective
interest rate method. Amortized cost is calculated by taking into account any discount or
premium on the issue and fees that are an integral part of the effective interest rate. Any
effects of restatement of foreign currency-denominated liabilities are recognized in the
consolidated profit or loss.

This accounting policy applies primarily to the Globe Group’s debt, accounts payable and
other obligations that meet the above definition (other than liabilities covered by other
accounting standards, such as income tax payable).

2.6.4.1.7 Derivative Instruments

2.6.4.1.7.1 General
The Globe Group enters into short-term deliverable and nondeliverable currency
forward contracts to manage its currency exchange exposure related to short-term
foreign currency-denominated monetary assets and liabilities and foreign
currency linked revenues.

The Globe Group also enters into long-term currency and interest rate swap
contracts to manage its foreign currency and interest rate exposures arising from
its long-term loan. Such swap contracts are sometimes entered into in
combination with options.

2.6.4.1.7.2 Recognition and Measurement


Derivative financial instruments are initially recognized at fair value on the date
on which a derivative contract is entered into and are subsequently remeasured at
fair value. Derivatives are carried as financial assets when the fair value is
positive and as financial liabilities when the fair value is negative. The method of
recognizing the resulting gain or loss depends on whether the derivative is
designated as a hedge of an identified risk and qualifies for hedge accounting
treatment. The objective of hedge accounting is to match the impact of the
hedged item and the hedging instrument in the consolidated profit or loss. To
qualify for hedge accounting, the hedging relationship must comply with strict
requirements such as the designation of the derivative as a hedge of an identified
risk exposure, hedge documentation, probability of occurrence of the forecasted
transaction in a cash flow hedge, assessment (both prospective and retrospective

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bases) and measurement of hedge effectiveness, and reliability of the


measurement bases of the derivative instruments.

Upon inception of the hedge, the Globe Group documents the relationship
between the hedging instrument and the hedged item, its risk management
objective and strategy for undertaking various hedge transactions, and the details
of the hedging instrument and the hedged item. The Globe Group also documents
its hedge effectiveness assessment methodology, both at the hedge inception and
on an ongoing basis, as to whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows
of hedged items.

Hedge effectiveness is likewise measured, with any ineffectiveness being


reported immediately in the consolidated profit or loss.

2.6.4.1.7.3 Types of Hedges


The Globe Group designates derivatives which qualify as accounting hedges as
either: (a) a hedge of the fair value of a recognized fixed rate asset, liability or
unrecognized firm commitment (fair value hedge); or (b) a hedge of the cash
flow variability of recognized floating rate asset and liability or forecasted sales
transaction (cash flow hedge).

Fair Value Hedges


Fair value hedges are hedges of the exposure to variability in the fair value of
recognized assets, liabilities or unrecognized firm commitments. The gain or loss
on a derivative instrument designated and qualifying as a fair value hedge, as well
as the offsetting loss or gain on the hedged item attributable to the hedged risk,
are recognized in the consolidated profit or loss in the same accounting period.
Hedge effectiveness is determined based on the hedge ratio of the fair value
changes of the hedging instrument and the underlying hedged item. When the
hedge ceases to be highly effective, hedge accounting is discontinued.

As of December 31, 2014 and 2013, there were no derivatives designated and
accounted for as fair value hedges.

Cash Flow Hedges


The Globe Group designates as cash flow hedges the following derivatives:
(a) cross currency swaps as cash flow hedge of foreign exchange and interest
rate risk of United States Dollar (USD) loans (b) interest rate swaps as cash
flow hedge of the interest rate risk of a floating rate obligation, and (c) certain
foreign exchange forward contracts as cash flow hedge of expected USD
revenues.

A cash flow hedge is a hedge of the exposure to variability in future cash flows
related to a recognized asset, liability or a forecasted sales transaction. Changes
in the fair value of a hedging instrument that qualifies as a highly effective cash
flow hedge are recognized in “Other reserves,” which is a component of equity.
Any hedge ineffectiveness is immediately recognized in the consolidated profit
or loss.

If the hedged cash flow results in the recognition of a nonfinancial asset or


liability, gains and losses previously recognized directly in equity are
transferred from equity and included in the initial measurement of the cost or

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carrying value of the asset or liability. Otherwise, for all other cash flow
hedges, gains and losses initially recognized in equity are transferred from
equity to consolidated profit or loss in the same period or periods during which
the hedged forecasted transaction or recognized asset or liability affect earnings.

Hedge accounting is discontinued prospectively when the hedge ceases to be


highly effective. When hedge accounting is discontinued, the cumulative gains
or losses on the hedging instrument that has been recognized in OCI is retained
in “Other reserves” until the hedged transaction impacts consolidated profit or
loss. When the forecasted transaction is no longer expected to occur, any net
cumulative gains or losses previously recognized in “Other reserves” is
immediately recycled in the consolidated profit or loss.

For cash flow hedges of USD revenues, the effective portion of the hedge
transaction coming from the fair value changes of the currency forwards are
subsequently recycled from equity to consolidated profit or loss and is
presented as part of the US dollar-based revenues upon consummation of the
transaction or when the hedge become ineffective.

2.6.4.1.7.4 Other Derivative Instruments Not Accounted for as Accounting


Hedges
Certain freestanding derivative instruments that provide economic hedges under
the Globe Group’s policies either do not qualify for hedge accounting or are not
designated as accounting hedges. Changes in the fair values of derivative
instruments not designated as hedges are recognized immediately in the
consolidated profit or loss. For bifurcated embedded derivatives in financial and
nonfinancial contracts that are not designated or do not qualify as hedges, changes
in the fair values of such transactions are recognized in the consolidated profit or
loss.

2.6.4.1.7.5 Offsetting
Financial assets and financial liabilities are offset and the net amount is reported
in the consolidated statements of financial position if, and only if, there is a
currently enforceable legal right to offset the recognized amounts and there is an
intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. This is not generally the case with master netting agreements;
thus, the related assets and liabilities are presented gross in the consolidated
statements of financial position.

2.6.4.2 Impairment of Financial Assets


The Globe Group assesses at end of the reporting date whether a financial asset or
group of financial assets is impaired.

2.6.4.2.1 Assets Carried at Amortized Cost


If there is objective evidence that an impairment loss on financial assets carried at
amortized cost (e.g., receivables) has been incurred, the amount of the loss is measured as
the difference between the asset’s carrying amount and the present value of estimated
future cash flows discounted at the asset’s original effective interest rate. Time value is
generally not considered when the effect of discounting is not material. The carrying
amount of the asset is reduced through the use of an allowance account. The amount of
the loss is to be recognized in the consolidated profit or loss.

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The Globe Group first assesses whether objective evidence of impairment exists
individually for financial assets that are individually significant, and individually or
collectively for financial assets that are not individually significant. If it is determined that
no objective evidence of impairment exists for an individually assessed financial asset,
whether significant or not, the asset is included in a group of financial assets with similar
credit risk characteristics and that group of financial assets is collectively assessed for
impairment.

Assets that are individually assessed for impairment and for which an impairment loss is
or continues to be recognized are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease
can be related objectively to an event occurring after the impairment was recognized, the
previously recognized impairment loss is reversed. Any subsequent reversal of an
impairment loss is recognized in the consolidated profit or loss to the extent that the
carrying value of the asset does not exceed what should have been its amortized cost at the
reversal date.

With respect to receivables, the Globe Group performs a regular review of the risk profile
of accounts, designed to identify accounts with objective evidence of impairment and
provide the appropriate allowance for impairment losses. The review is accomplished
using a combination of specific and collective assessment approaches, with the
impairment losses being determined for each risk grouping identified by the Globe Group.

2.6.4.2.1.1 Subscribers
Management regularly reviews its portfolio and assesses if there are accounts
requiring specific provisioning based on objective evidence of high default
probability. Observable data indicating high impairment probability could be
deterioration in payment status, declaration of bankruptcy or national/local
economic indicators that might affect payment capacity of accounts.

Full allowance for impairment losses, net of average recoveries, is provided for
receivables from permanently disconnected wireless, wireline and broadband
subscribers. Permanent disconnections are made after a series of collection steps
following nonpayment by postpaid subscribers. Such permanent disconnections
generally occur within a predetermined period from due date.

Impairment losses are applied to active wireless, wireline and broadband accounts
specifically identified to be doubtful of collection where there is information on
financial incapacity after considering the other contractual obligations between
Globe Group and the subscriber. Allowance is applied regardless of age bucket of
identified accounts.

Application of impairment losses to receivables, net of receivables with applied


specific loss, is also determined based on the results of net flow to permanent
disconnection methodology.

For wireless, net flow tables are derived from account-level monitoring of
subscriber accounts between different age brackets depending on the defined
permanent disconnection timeline, from current to 150 days past due and up. The
net flow to permanent disconnection methodology relies on the historical data of
net flow tables to establish a percentage (“net flow rate”) of subscriber receivables
that are current or in any state of delinquency as of reporting date that will

*SGVFS010845*
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eventually result to permanent disconnection. The allowance for impairment


losses is then computed based on the outstanding balances of the receivables at
the end of reporting date and the net flow rates determined for the current and
each delinquency bucket. Full allowance is provided for receivables of active
consumer accounts in the 150 days past due and up bucket.

For active wireline voice and broadband subscribers, the allowance for
impairment loss is also determined based on the results of net flow rate to
permanent disconnection computed from account-level monitoring of accounts
from current to 90 days past due and up age bucket except for consumer where
impairment rate applied at 90 days past due and up bucket is full allowance net of
average recoveries prior to permanent disconnection.

2.6.4.2.1.2 Traffic
As per PAS 39, impairment provision is recognized in the light of actual losses
incurred by the Globe Group as a result of one or more events that occurred after
the initial recognition of the asset (a “loss event”) and that loss event (or events)
has an impact on the estimated future cash flows of the financial asset or group of
assets that can be reliably estimated.

For traffic receivables, impairment losses are provided on specific or per carrier
basis observing objective evidence of impairment. Objective evidence of
impairment includes the following: a) financial difficulty of interconnect carriers;
b) default or delinquency; c) high probability of bankruptcy or financial re-
organization; and d) historical pattern of collections that amounts due will not be
collected. For receivable balances that appear doubtful of collection, allowance is
provided after review of the status of settlement with each carrier and roaming
partner, taking into consideration normal payment cycles, recovery experience
and credit history of the counterparties.

2.6.4.2.1.3 Other Receivables


Other receivables from dealers, credit card companies and other parties are
provided with allowance for impairment losses if specifically identified to be
doubtful of collection regardless of the age of the account.

2.6.4.2.2 AFS Investments Carried at Cost


If there is objective evidence that an impairment loss has been incurred on an unquoted
equity instrument that is not carried at fair value because its fair value cannot be reliably
measured, or on a derivative asset that is linked to and must be settled by delivery of such
unquoted equity instrument, the amount of the loss is measured as the difference between
the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset. The carrying
amount of the asset is reduced through the use of an allowance account.

2.6.4.2.3 AFS Investments Carried at Fair Value


If an AFS investment carried at fair value is impaired, an amount comprising the
difference between its cost (net of any principal repayment and amortization) and its
current fair value, less any impairment loss previously recognized in the consolidated
profit or loss, is transferred from equity to profit or loss. Reversals of impairment losses
in respect of equity instruments classified as AFS are not recognized in the consolidated
profit or loss. Reversals of impairment losses on debt instruments are made through profit
or loss if the increase in fair value of the instrument can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated profit or loss.

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2.6.4.3 Derecognition of Financial Instruments

2.6.4.3.1 Financial Asset


A financial asset (or, where applicable a part of a financial asset or part of a group of
financial assets) is derecognized where:

· the rights to receive cash flows from the asset have expired;
· the Globe Group retains the right to receive cash flows from the asset, but has
assumed an obligation to pay them in full without material delay to a third party
under a “pass-through” arrangement; or
· the Globe Group has transferred its rights to receive cash flows from the asset
and either (a) has transferred substantially all the risks and rewards of ownership
or (b) has neither transferred nor retained the risk and rewards of the asset but
has transferred the control of the asset.

Where the Globe Group has transferred its rights to receive cash flows from an asset
and has neither transferred nor retained substantially all the risks and rewards of the
asset nor transferred control of the asset, the asset is recognized to the extent of the
Globe Group’s continuing involvement in the asset. Continuing involvement that
takes the form of a guarantee over the transferred asset, which is measured at the
lower of the original carrying amount of the asset and the maximum amount of
consideration that the Globe Group could be required to pay.

2.6.4.3.2 Financial Liability


A financial liability is derecognized when the obligation under the liability is
discharged or cancelled or has expired. Where an existing financial liability is
replaced by another from the same lender on substantially different terms, or the terms
of an existing liability are substantially modified, such an exchange or modification is
treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the
consolidated profit or loss.

2.6.5 Fair Value Measurement


Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to sell the asset or transfer the
liability takes place either:

· In the principal market for the asset or liability, or


· In the absence of a principal market, in the most advantageous market for the asset or
liability

The principal or the most advantageous market must be accessible to the Globe Group.

The fair value of an asset or a liability is measured using the assumptions that market
participants would use when pricing the asset or liability, assuming that market participants
act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s
ability to generate economic benefits by using the asset in its highest and best use or by selling
it to another market participant that would use the asset in its highest and best use.

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The Globe Group uses valuation techniques that are appropriate in the circumstances and for
which sufficient data are available to measure fair value, maximizing the use of relevant
observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial
statements are categorized within the fair value hierarchy, described as follows, based on the
lowest level input that is significant to the fair value measurement as a whole:

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or
liabilities
· Level 2 - Valuation techniques for which the lowest level input that is significant to the
fair value measurement is directly or indirectly observable
· Level 3 - Valuation techniques for which the lowest level input that is significant to the
fair value measurement is unobservable

For assets and liabilities that are recognized in the consolidated financial statements on a
recurring basis, the Globe Group determines whether transfers have occurred between Levels
in the hierarchy by re-assessing categorization (based on the lowest level input that is
significant to the fair value measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Globe Group has determined classes of assets
and liabilities on the basis of the nature, characteristics and risks of the asset or liability and
the level of the fair value hierarchy as explained above.

2.6.6 Inventories and Supplies


Inventories and supplies are stated at the lower of cost and net realizable value (NRV).
NRV for handsets, modems, devices and accessories is the selling price in the ordinary
course of business less direct costs to sell, while NRV for SIM packs, call cards, spare parts
and supplies consists of the related replacement costs. In determining the NRV, the
Company considers any adjustment necessary for obsolescence, which is generally an
allowance for non-moving items after a certain period. Cost is determined using the moving
average method.

2.6.7 Noncurrent Assets Held for Sale


Non-current assets classified as held for sale are measured at the lower of carrying amount and
fair value less cost to sell. Non-current assets (and the related liabilities) are classified as held
for sale if their carrying amounts will be recovered 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 is available for immediate sale in its present condition.

Events or circumstances may extend the period to complete the sale beyond one year. An
extension of the period required to complete a sale does not preclude an asset from being
classified as held for sale if the delay is caused by events or circumstances beyond the entity's
control and there is sufficient evidence that the entity remains committed to its plan to sell the
asset.

Items of property and equipment and intangible assets once classified as held for sale are not
depreciated/amortized.

Assets that cease to be classified as held for sale are measured at the lower of its carrying
value before the assets were classified as held for sale, adjusted for any depreciation that
would have been recognized had the asset not been classified as held for sale, and its

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recoverable amount at the date of the changes to the plan of sale. Adjustment is recognized in
profit or loss.

2.6.8 Prepayments
Prepayments, included under “Other current assets” account in the consolidated statement of
financial position, are expenses paid in advance and recorded as asset before they are utilized.
This account comprises of advance payment to suppliers and contractors, prepaid rentals and
insurance premiums and other prepaid items and creditable withholding taxes. Prepaid rentals
and insurance premiums and other prepaid items are apportioned over the period covered by
the payment and charged to the appropriate accounts in profit or loss when incurred.
Creditable withholding taxes are deducted from income tax payable. Prepayments that are
expected to be realized for no more than 12 months after the balance sheet date are classified
as current assets; otherwise, these are classified as other noncurrent assets.

2.6.9 Value Added Tax (VAT)


Input VAT is recognized when the Globe Group purchases goods or services from a VAT
registered supplier or vendor. This account is offset against any output VAT previously
recognized. Input VAT on capital goods exceeding ₱1 million and input VAT from purchases
of goods and services which remain unpaid at each reporting date are recognized as “Deferred
input VAT.”

2.6.10 Property and Equipment


Property and equipment, except land, are carried at cost less accumulated depreciation,
amortization and impairment losses. Land is stated at cost less any impairment losses.

The initial cost of an item of property and equipment includes its purchase price and any
cost attributable in bringing the property and equipment to its intended location and working
condition. Cost also includes: (a) interest and other financing charges on borrowed funds
specifically used to finance the acquisition of property and equipment to the extent incurred
during the period of installation and construction; and (b) asset retirement obligations
(ARO) specifically on property and equipment installed/constructed on leased properties.

Expenditures incurred after the property and equipment have been put into operation, such
as repairs and maintenance, are normally charged to income in the period when the costs are
incurred. In situations where it can be clearly demonstrated that the expenditures have
resulted in an increase in the future economic benefits expected to be obtained from the use
of an item of property and equipment beyond its originally assessed standard of
performance, the expenditures are capitalized as additional costs of property and equipment.

Subsequent costs are capitalized as part of property and equipment only when it is probable
that future economic benefits associated with the item will flow to the Globe Group and the
cost of the item can be measured reliably.

Assets under construction (AUC) are carried at cost and transferred to the related property and
equipment account when the construction or installation and the related activities necessary to
prepare the property and equipment for their intended use are complete, and the property and
equipment are ready for service.

Depreciation and amortization of property and equipment commences once the property and
equipment are available for use and computed using the straight-line method over the
estimated useful lives (EUL) of the property and equipment.

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Leasehold improvements are amortized over the shorter of their EUL or the corresponding
lease terms.

The EUL of property and equipment are reviewed annually based on expected asset utilization
as anchored on business plans and strategies that also consider expected future technological
developments and market behavior to ensure that the period of depreciation and amortization
is consistent with the expected pattern of economic benefits from items of property and
equipment.

The residual values of property and equipment are reviewed at each financial year end and
adjusted prospectively, if appropriate.

When property and equipment is retired or otherwise disposed of, the cost and the related
accumulated depreciation, amortization and impairment losses are removed from the accounts.
Any resulting gain or loss is credited to or charged against current operations.

2.6.11 ARO
The Globe Group is legally required under various contracts to restore leased property to its
original condition and to bear the cost of dismantling and deinstallation at the end of the contract
period. The Globe Group recognizes the present value of these obligations and capitalizes these
costs as part of the carrying value of the related property and equipment accounts, and are
depreciated on a straight-line basis over the useful life of the related property and equipment or
the contract period, whichever is shorter.

The amount of ARO is recognized at present value and the related accretion is recognized as
interest expense.

2.6.12 Intangible Assets


Intangible assets consist of: 1) costs incurred to acquire application software (not an integral part
of its related hardware or equipment) and telecommunications equipment software licenses; 2)
intangible assets identified to exist during the acquisition of Yondu Group for its existing customer
contracts; and (3) exclusive dealership right in Taodharma, Inc. (Taodharma). Costs directly
associated with the development of identifiable software that generate expected future benefits to
the Globe Group are recognized as intangible assets. All other costs of developing and
maintaining software programs are recognized as expense when incurred.

Subsequent to initial recognition, intangible assets are measured at cost less accumulated
amortization and any impairment losses. The EUL of intangible assets with finite lives are
assessed at the individual asset level. Intangible assets with finite lives are amortized on a straight-
line basis over their useful lives. The periods and method of amortization for intangible assets
with finite useful lives are reviewed annually or more frequently when an indicator of impairment
exists.

A gain or loss arising from derecognition of an intangible asset is measured as the difference
between the net disposal proceeds and the carrying amount of the asset and is recognized in the
consolidated statements of comprehensive income when the asset is derecognized.

2.6.13 Business Combinations and Goodwill


Business combinations are accounted for using the purchase method. The cost of an
acquisition is measured as the aggregate of the consideration transferred, measured at
acquisition date fair value and the amount of any non-controlling interest in the acquiree. For
each business combination, the Globe Group elects whether it measures the non-controlling

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interest in the acquiree either at fair value or at the proportionate share of the acquiree’s
identifiable net assets. Acquisition costs incurred are expensed and included in administrative
expenses in the consolidated statements of comprehensive income.

When the Globe Group acquires a business, it assesses the financial assets and financial
liabilities assumed for appropriate classification and designation in accordance with the
contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, any previously held equity interest is
remeasured at its acquisition date fair value and any resulting gain or loss is recognized in the
consolidated profit or loss. It is then considered in the determination of goodwill. Any
contingent consideration to be transferred by the acquirer will be recognized at fair value at
the acquisition date. Subsequent changes to the fair value of the contingent consideration that
is deemed to be an asset or liability will be recognized in accordance with PAS 39 either in
profit or loss or as a change to OCI. If the contingent consideration is classified as equity, it
will not be remeasured. Subsequent settlement is accounted for within equity. In instances
where the contingent consideration does not fall within the scope of PAS 39, it is measured in
accordance with the appropriate PFRS.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration
transferred and the amount recognized for non-controlling interest over the net identifiable
assets acquired and liabilities assumed. If this consideration is lower than the fair value of the
net assets of the subsidiary acquired, the difference is recognized in the consolidated profit or
loss.

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 Globe Group’s cash-generating units (CGUs) that
are expected to benefit from the combination, irrespective of whether other assets or liabilities
of the acquiree are assigned to those units.

Where goodwill forms part of a CGU 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 CGU retained.

2.6.14 Investments in Associate and Joint Ventures


An associate is an entity over which the Globe Group has significant influence. Significant
influence is the power to participate in the financial and operating policy decisions of the
investee, but is not control or joint control over those policies.

A joint venture (JV) is a type of joint arrangement whereby the parties that have joint control
of the arrangement have rights to the net assets of the joint venture. Joint control is the
contractually agreed sharing of control of an arrangement, which exists only when decisions
about the relevant activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control are similar to
those necessary to determine control over subsidiaries.

The Globe Group’s investments in its associate and JV are accounted for using the equity
method.

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Under the equity method, the investments in an associate and JV are carried in the
consolidated statement of financial position at cost plus post-acquisition changes in the Globe
Group’s share in net assets of the associate and JV, less any allowance for impairment losses.
The profit or loss includes Globe Group’s share in the results of operations of its associate or
JV. Any change in OCI of those investees is presented as part of the Globe Group’s OCI. In
addition, where there has been a change recognized directly in the equity of the associate or
JV, the Globe Group recognizes its share of any changes and discloses this, when applicable,
in OCI.

When the share of losses recognized under the equity method has reduced the investment to
zero, the Globe Group shall discontinue recognizing its share or further losses and apply it to
other interests that, in substance, for part of Globe Group’s net investment in the associate or
JV. If the associate or JV subsequently reports profits, the Globe Group will resume
recognizing its share of those profits only after its share of the profits equal the share in losses
not recognized.

The financial statements of the associate or JV are prepared for the same reporting period as
the Globe Group.

Upon loss of significant influence over the associate or joint control over the JV, the Globe
Group measures and recognizes any retained investment at its fair value. Any difference
between the carrying amount of the associate or JV upon loss of significant influence or joint
control and the fair value of the retained investment and proceeds from disposal is recognized
in the consolidated profit or loss.

2.6.15 Impairment of Nonfinancial Assets


For nonfinancial assets, excluding goodwill, an assessment is made at the end of the reporting
date to determine whether there is any indication that an asset may be impaired, or whether
there is any indication that an impairment loss previously recognized for an asset in prior
periods may no longer exist or may have decreased. If any such indication exists and when
the carrying value of an asset exceeds its estimated recoverable amount, the asset or CGU to
which the asset belongs is written down to its recoverable amount. The recoverable amount of
an asset is the higher of its fair value less cost to sell and value in use. Recoverable amounts
are estimated for individual assets or investments or, if it is not possible, for the CGU to which
the asset belongs. For impairment loss on specific assets or investments, the recoverable
amount represents the fair value 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 assessments of the time value of
money and the risks specific to the asset.

An impairment loss is recognized only if the carrying amount of an asset exceeds its
recoverable amount. An impairment loss is charged against operations in the year in which it
arises. A previously recognized impairment loss is reversed only if there has been a change in
estimate 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 accumulated
depreciation and amortization for property and equipment and intangible assets) had no
impairment loss been recognized for the asset in prior years. A reversal of an impairment loss
is credited to current operations.

After application of the equity method, the Globe Group determines whether it is necessary to
recognize an impairment loss on its investment in its associate or joint venture. At each
reporting date, the Globe Group determines whether there is objective evidence that the

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investment in the associate or joint venture is impaired. If there is such evidence, the Globe
Group calculates the amount of impairment as the difference between the recoverable amount
of the associate or joint venture and its carrying value, and then recognizes the loss as “Equity
in net losses of associates and joint ventures” account in the consolidated profit or loss.

For assessing impairment of goodwill, a test for impairment is performed annually and when
circumstances indicate that the carrying value may be impaired. Impairment is determined for
goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the
goodwill relates. Where the recoverable amount of the CGU is less than their carrying
amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be
reversed in future periods.

2.6.16 Unearned Revenues


Unearned revenues are recognized when proceeds are collected from wireless subscribers
under prepaid arrangements. These also represent advance payments for leased lines,
installation fees and monthly service fees and points expected to be redeemed under its
Loyalty programmes.

2.6.17 Income Tax

2.6.17.1Current Income Tax


Current tax assets and liabilities for the current and prior periods are measured at the
amount expected to be recovered from or paid to the tax authority. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively enacted as at
the end of the reporting date.

2.6.17.2Deferred Income Tax


Deferred income tax is provided using the balance sheet liability method on all temporary
differences, with certain exceptions, at the end of the reporting 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, with
certain exceptions. Deferred income tax assets are recognized for all deductible temporary
differences, with certain exceptions, and carryforward benefits of unused tax credits from
excess minimum corporate income tax (MCIT) over regular corporate income tax (RCIT)
and net operating loss carryover (NOLCO) to the extent that it is probable that taxable
income will be available against which the deductible temporary differences and the
carryforward benefits of unused MCIT and NOLCO can be used.

Deferred income tax is not recognized when it arises from the initial recognition of an asset
or liability in a transaction that is not a business combination and, at the time of
transaction, affects neither the accounting income nor taxable income or loss. Deferred
income tax liabilities/assets are not recognized for taxable/deductible temporary
differences associated with investments in foreign subsidiaries when 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 relating to items recognized directly in equity or OCI is included in
the related equity or OCI account and not in profit or loss.

The carrying amounts of deferred income tax assets are reviewed every end of reporting
date and reduced to the extent that it is no longer probable that sufficient taxable income
will be available to allow all or part of the deferred income tax assets to be utilized.

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Deferred income tax assets and liabilities are offset, if a legally enforceable right exists to
set off current income tax assets against current income tax liabilities and the deferred
income taxes relate to the same taxable entity and the same taxation authority.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to
apply in the year when the assets are realized or the liabilities are settled based on tax rates
(and tax laws) that have been enacted or substantively enacted as at the end of the reporting
date.

Movements in the deferred income tax assets and liabilities arising from changes in tax
rates are charged or credited to income for the period.

2.6.18 Provisions
Provisions are recognized when: (a) the Globe Group has a present obligation (legal or
constructive) as a result of a 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) a reliable estimate can be made of the amount of the obligation. Provisions are
reviewed every end of the reporting period and adjusted to reflect the current best estimate. If
the effect of the time value of money is material, provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market assessment of the time
value of money and, where appropriate, the risks specific to the liability. Where discounting
is used, the increase in the provision due to the passage of time is recognized as interest
expense under “Financing costs” in the consolidated statement of comprehensive income.

2.6.19 Share-based Payment Transactions


Certain employees (including directors) of the Globe Group receive remuneration in the form
of share-based payment transactions, whereby employees render services in exchange for
shares or rights over shares (“equity-settled transactions”) (see Note 18).

The cost of equity-settled transactions with employees is measured by reference to the fair
value at the date at which they are granted. In valuing equity-settled transactions, vesting
conditions, including performance conditions, other than market conditions (conditions linked
to share prices), shall not be taken into account when estimating the fair value of the shares or
share options at the measurement date. Instead, vesting conditions are taken into account in
estimating the number of equity instruments that will vest.

The cost of equity-settled transactions is recognized in the consolidated profit or loss, together
with a corresponding increase in equity, over the period in which the service conditions are
fulfilled, ending on the date on which the relevant employees become fully entitled to the
award (‘vesting date’). The cumulative expense recognized for equity-settled transactions at
each reporting date until the vesting date reflects the extent to which the vesting period has
expired and the number of awards that, in the opinion of the management of the Globe Group
at that date, based on the best available estimate of the number of equity instruments, will
ultimately vest. Costs of exercised awards plus the corresponding strike amount are
reclassified to the capital accounts.

No expense is recognized for awards that do not ultimately vest, except for awards where
vesting is conditional upon a market condition, which are treated as vesting irrespective of
whether or not the market condition is satisfied, provided that all other performance conditions
are satisfied.

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Where the terms of an equity-settled award are modified, as a minimum, an expense is


recognized as if the terms had not been modified. In addition, an expense is recognized for
any increase in the value of the transaction as a result of the modification, measured at the date
of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of


cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a
replacement award on the date that it is granted, the cancelled and new awards are treated as if
they were a modification of the original award, as described in the previous paragraph. The
dilutive effect of outstanding options is reflected as additional share dilution in the
computation of earnings per share (EPS) (see Note 27).

2.6.20 Capital Stock


Capital stock is recognized as issued when the stock is paid for or subscribed under a binding
subscription agreement and is measured at par value. The transaction costs incurred as a
necessary part of completing an equity transaction are accounted for as part of that transaction
and are deducted from additional paid-in capital, net of related income tax benefits.

2.6.21 Additional Paid-in Capital


Additional paid-in capital includes any premium received in excess of par value on the
issuance of capital stock.

2.6.22 Treasury Stock


Treasury stock is recorded at cost and is presented as a deduction from equity. When the
shares are retired, the capital stock account is reduced by its par value and the excess of cost
over par value upon retirement is debited to additional paid-in capital to the extent of the
specific or average additional paid-in capital when the shares were issued and to retained
earnings for the remaining balance.

2.6.23 Other Comprehensive Income


OCI are items of income and expense that are not recognized in the consolidated profit or loss
for the year in accordance with PFRS.

2.6.24 Pension Cost


The net defined benefit liability or asset is the aggregate of the present value of the defined
benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if
any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The
asset ceiling is the present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using
the projected unit credit method. Defined benefit costs comprise service cost, net interest on
the net defined benefit liability or asset and remeasurements of net defined benefit liability or
asset.

Service costs which include current service costs, past service costs and gains or losses on
non-routine settlements are recognized as expense in the consolidated profit or loss. Past
service costs are recognized when plan amendment or curtailment occurs. These amounts are
calculated periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the
net defined benefit liability or asset that arises from the passage of time which is determined

*SGVFS010845*
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by applying the discount rate based on government bonds to the net defined benefit liability or
asset. Net interest on the net defined benefit liability or asset is recognized as expense or
income in the consolidated profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change
in the effect of the asset ceiling (excluding net interest on defined benefit liability) are
recognized immediately in OCI in the period in which they arise. Remeasurements are not
reclassified to the consolidated profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not
available to the creditors of the Globe Group, nor can they be paid directly to the Globe
Group. Fair value of plan assets is based on market price information. When no market price
is available, the fair value of plan assets is estimated by discounting expected future cash
flows using a discount rate that reflects both the risk associated with the plan assets and the
maturity or expected disposal date of those assets (or, if they have no maturity, the expected
period until the settlement of the related obligations). If the fair value of the plan assets is
higher than the present value of the defined benefit obligation, the measurement of the
resulting defined benefit asset is limited to the present value of economic benefits available in
the form of refunds from the plan or reductions in future contributions to the plan.

2.6.25 Borrowing Costs


Borrowing costs are capitalized if these are directly attributable to the acquisition, construction
or production of a qualifying asset. Capitalization of borrowing costs commences when the
activities for the asset’s intended use are in progress and expenditures and borrowing costs are
being incurred. Borrowing costs are capitalized until the assets are ready for their intended use.
These costs are amortized using the straight-line method over the EUL of the related property
and equipment. If the resulting carrying amount of the asset exceeds its recoverable amount, an
impairment loss is recognized. Borrowing costs include interest charges and other related
financing charges incurred in connection with the borrowing of funds, as well as exchange
differences arising from foreign currency borrowings used to finance these projects to the
extent that they are regarded as an adjustment to interest costs. Premiums on long-term debt
are included under the “Long-term debt” account in the consolidated statement of financial
position and are amortized using the effective interest rate method.

Other borrowing costs are recognized as expense in the period in which these are incurred.

2.6.26 Leases
The determination of whether an arrangement is, or contains a lease, is based on the substance
of the arrangement and requires 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. A reassessment is made after inception of the lease only if one of the following applies:

· there is a change in contractual terms, other than a renewal or extension of the


arrangement;
· a renewal option is exercised or an extension granted, unless that term of the renewal
or extension was initially included in the lease term;
· there is a change in the determination of whether fulfillment is dependent on a
specified asset; or
· there is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when
the change in circumstances gave rise to the reassessment for any of the scenarios above, and
at the date of renewal or extension period for the second scenario.

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2.6.26.1Group as Lessee
Finance leases, which transfer to the Globe Group substantially all the risks and rewards
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 and included in the “Property and equipment” account with the corresponding
liability to the lessor included in the “Other long-term liabilities” account in the
consolidated statement of financial position. Lease payments are apportioned between the
finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are charged directly as
“Interest expense” in the consolidated statement of comprehensive income.

Capitalized leased assets are depreciated over the shorter of the EUL of the assets and the
respective lease terms.

Leases where the lessor retains substantially all the risks and rewards of ownership of the
asset are classified as operating leases. Operating lease payments are recognized as an
expense in the consolidated profit or loss on a straight-line basis over the lease term.

2.6.26.2Globe Group as Lessor


Finance leases, where the Globe Group transfers substantially all the risk and rewards
incidental to ownership of the leased item to the lessee, are included in the consolidated
statements of financial position under “Prepayments and other current assets” account. A
lease receivable is recognized equivalent to the net investment (asset cost) in the lease.
All income resulting from the receivable is included in the “Interest income” account in
the consolidated statement of comprehensive income.

Leases where the Globe Group does not transfer substantially all the risk and rewards of
ownership of the assets are classified as operating leases. Initial direct costs incurred in
negotiating operating leases are added to the carrying amount of the leased asset and
recognized over the lease term on the same basis as the rental income. Contingent rents
are recognized as revenue in the period in which they are earned.

2.6.27 General, Selling and Administrative Expenses


General, selling and administrative expenses, except for rent, are charged against current
operations as incurred.

2.6.28 Foreign Currency Transactions


The functional and presentation currency of the Globe Group is the Philippine Peso, except for
GTHK and GTIC US whose functional currency is the USD, GTEU, GTUK, GMI and GIEE
whose functional currency is Euro and GTSG whose functional currency is the Singapore
Dollar (SGD). Transactions in foreign currencies are initially recorded at the functional
currency rate prevailing at the date of the transaction. Outstanding monetary assets and
liabilities denominated in foreign currencies are retranslated at the functional currency rate of
exchange at the end of reporting period.

Nonmonetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rate as at the date of the initial transaction and are not
subsequently restated. Nonmonetary items measured at fair value in a foreign currency are
translated using the exchange rate at the date when the fair value was determined. All foreign
exchange differences are taken to the consolidated profit or loss, except where it relates to
equity securities where gains or losses are recognized directly in OCI.

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As at the reporting date, the assets and liabilities of GTIC and GTHK, GTEU, UKGT, GMI and
GIEE and GTSG are translated into the presentation currency of the Globe Group at the rate of
exchange prevailing at the end of reporting period and its profit or loss is translated at the
monthly weighted average exchange rates during the year. The exchange differences arising on
the translation are taken directly to a separate component of equity under “Other reserves”
account. Upon disposal of GTIC, GTHK, GTEU, UKGT, GMI, GIEE and GTSG the
cumulative translation adjustments shall be recognized in the consolidated profit or loss.

2.6.29 EPS
Basic EPS is computed by dividing net income attributable to common stock by the weighted
average number of common shares outstanding, after giving retroactive effect for any stock
dividends, stock splits or reverse stock splits during the period.
Diluted EPS is computed by dividing net income by the weighted average number of common
shares outstanding during the period, after giving retroactive effect for any stock dividends,
stock splits or reverse stock splits during the period, and adjusted for the effect of dilutive
options and dilutive convertible preferred shares. Outstanding stock options will have a
dilutive effect under the treasury stock method only when the average market price of the
underlying common share during the period exceeds the exercise price of the option. If the
required dividends to be declared on convertible preferred shares divided by the number of
equivalent common shares, assuming such shares are converted, would decrease the basic
EPS, then such convertible preferred shares would be deemed dilutive. Where the effect of
the assumed conversion of the preferred shares and the exercise of all outstanding options
have anti-dilutive effect, basic and diluted EPS are stated at the same amount.

2.6.30 Operating Segment


The Globe Group’s major operating business units are the basis upon which the Globe Group
reports its primary segment information. The Globe Group’s business segments consist of: (1)
mobile communications services; and (2) wireline communications services. The Globe Group
generally accounts for intersegment revenues and expenses at agreed transfer prices.

2.6.31 Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but are
disclosed when an inflow of economic benefits is probable.

2.6.32 Events after the Reporting Period


Any post period-end event up to the date of approval of the BOD of the consolidated financial
statements that provides additional information about the Globe Group’s position at the end of
reporting period (adjusting event) is reflected in the consolidated financial statements. Any
post period-end event that is not an adjusting event is disclosed in the consolidated financial
statements when material.

3. Management’s Significant Accounting Judgments and Use of Estimates and Assumptions

The preparation of the accompanying consolidated financial statements in conformity with


PFRS requires management to make judgments, estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. The
judgments, estimates and assumptions used in the accompanying consolidated financial
statements are based upon management’s evaluation of relevant facts and circumstances as of
the date of the consolidated financial statements. Actual results could differ from such

*SGVFS010845*
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judgments, estimates and assumptions.

Judgments, estimates and assumptions 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.

3.1 Judgments

3.1.1 Leases

3.1.1.1 Operating Lease Commitments as Lessor


The Globe Group has entered into lease agreements as a lessor. Critical judgment was
exercised by management to distinguish the lease agreement as either an operating or
finance lease by looking at the transfer or retention of significant risk and rewards of
ownership of the properties covered by the agreements. The Globe Group has determined
that it retains all the significant risks and rewards of ownership of the properties and so
accounts for the agreement as an operating leases (see Note 25.1.1).

3.1.1.2 Operating Lease Commitments as Lessee


The Globe Group has entered into various lease agreements as a lessee where it has
determined that the lessors retain all the significant risks and rewards of ownership of the
properties and, as such, accounts for the agreements as operating lease (see Note 25.1.1).

3.1.1.3 Finance Lease Commitments as Lessee


The Globe Group has entered into finance lease agreements related to hardware
infrastructure and information equipment. They have determined, based on the evaluation
of the terms and conditions of the arrangements, that they bear substantially all the risks
and rewards incidental to ownership of the said machineries and equipment and so
account for the contracts as finance leases (see Note 25.1.2).

3.1.2 Fair Value of Financial Instruments


When the fair value of financial assets and financial liabilities recorded in the consolidated
statement of financial position cannot be derived from active markets, their fair value is
determined using valuation techniques including the discounted cash flow model. The inputs
to these models are taken from observable markets where possible, but where this is not
feasible, a degree of judgment is required in establishing fair values. The judgments include
considerations of inputs such as liquidity risk, credit risk and volatility. Changes in
assumptions about these factors could affect the reported fair value of financial instruments.

3.1.3 Financial Assets not Quoted in an Active Market


The Globe Group classifies financial assets by evaluating, among others, whether the asset
is quoted or not in an active market. Included in the evaluation on whether a financial asset
is quoted in an active market is the determination on whether quoted prices are readily and
regularly available, and whether those prices represent actual and regularly occurring
market transactions on an arm’s-length basis.

3.1.4 Allocation of Goodwill to Cash-Generating Units


The Globe Group allocated the carrying amount of goodwill to the mobile content and
application development services business CGU, for the Globe Group believes that this
CGU represents the lowest level within the Globe Group at which the goodwill is monitored
for internal management reporting purposes; and not larger than an operating segment
determined in accordance with PFRS 8.

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3.1.5 Determination of Whether the Globe Group is Acting as a Principal or an Agent


The Globe Group assesses its revenue arrangements against the following criteria to
determine whether it is acting as a principal or an agent:

· whether the Globe Group has primary responsibility for providing the goods and
services;
· whether the Globe Group has inventory risk;
· whether the Globe Group has discretion in establishing prices; and
· whether the Globe Group bears the credit risk.

If the Globe Group has determined it is acting as a principal, the Globe Group recognizes
revenue on a gross basis, with the amount remitted to the other party being accounted for as
part of costs and expenses.

If the Globe Group has determined it is acting as an agent, only the net amount retained is
recognized as revenue.

The Globe Group assessed its revenue arrangements and concluded that it is acting as a
principal in some arrangements and as an agent in other arrangements.

3.1.6 Provisions and Contingencies


Globe Group is currently involved in various legal proceedings and tax assessments. The
estimate of the probable costs for the resolution of these claims has been developed in
consultation with internal and external counsel handling Globe Group’s defense in these
matters and is based upon an analysis of potential results. Globe Group currently does not
believe that these proceedings will have a material adverse effect on the consolidated
statements of 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 the strategies relating to these proceedings (see Notes 13 and 26).

3.1.7 Classification of Non-current Assets Held for Sale


The Globe Group classified certain non-current assets as held-for-sale in 2010. PFRS 5,
Noncurrent Assets Held for Sale and Discontinued Operations, requires that the sale should
be expected to qualify for recognition as a completed sale within one year from the date of
classification, with certain exceptions. Globe Group has determined that circumstances
have occurred which will qualify as exception to the timing of the recognition of the sale in
previous years.

In 2013, the Globe Group ceased to classify these assets as held for sale due to the
substantial delay in the completion of the transaction. The Globe Group recognized a catch-
up depreciation amounting to ₱397.00 million for the year ended December 31, 2013 (see
Note 25.4).

3.1.8 Assessment of Investment in Bayan Telecommunications Inc. (BTI) and Receivables


from BTI
The Globe Group purchased BTI’s outstanding debts from its creditors and was recognized
at transaction price which was considered its fair value. The total debt of BTI is comprised
of sustainable Tranche A and unsustainable Tranche B. A portion of the debt (Tranche B)
was converted into equity and was valued at nil while the total consideration at point of
tender was assigned to the collectible portion of Tranche A (see Notes 6, 11 and 16.6).

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Critical judgment was exercised to assess the facts and circumstances indicating the
elements of control or level of influence of Globe Group over BTI. The Globe Group
determines that it has significant influence in the financial and operating policy decisions of
BTI but not control over those policies. The converted portion of debt (Tranche B) to the
Globe Group’s interest is recognized as investment in an associate and is accounted for
using the equity method.

The collectible portion of Tranche A is determined to be a financial asset classified as


“Loans receivable” and not as trading assets nor designated at FVPL or AFS since this has
fixed or determinable payments that are not quoted in an active market and is measured at
amortized cost using the effective interest rate reasonably determined by the Globe Group.

3.1.9 Assessment of Investment in Automated Fare Collection Services, Inc. (AFCS)


On February 10, 2014, the AF Consortium, composed of BPI Card Finance Corporation, AC
Infrastructure Holdings Corp., Smart Communications, Inc., Meralco Financial Services
Corporation, Metro Pacific Investments Corporation and Globe Telecom was awarded the
rights to design, build and operate the ₱1.72 billion automated fare collection system.

Critical judgment was exercised to assess the facts and circumstances indicating the
elements of control or level of influence of Globe Group over AFCS. The Globe Group
determines that it has significant influence in the financial and operating policy decisions of
FCS but not control over those policies. The total capital contribution of ₱300.00 million
equivalent to 20% ownership is recognized as investment in an associate and is accounted
for using the equity method (see Note 10.2).

3.1.10 Consolidation of Flipside Publishing Services, Inc. (FPSI)


The Globe Group considers that it controls FPSI even though it owns less than 50% of the
voting rights. The Globe Group has contractual arrangement to purchase additional equity
interest in FPSI to bring the Globe Group’s total ownership in FPSI to 65% and has rights
arising from this agreement to exercise control.

3.2 Estimates

3.2.1 Revenue Recognition


The Globe Group’s revenue recognition policies require management to make use of estimates
and assumptions that may affect the reported amounts of revenues and receivables.

The Globe Group estimates the fair value of points awarded under its Loyalty programmes,
which are within the scope of Philippine Interpretation IFRIC 13, Customer Loyalty
Programmes, by applying estimation procedures using historical data and trends. The points
expected to be redeemed is estimated based on the remaining points, the run-rate redemption
by the subscribers and the points to peso conversion. As of December 31, 2014 and 2013, the
estimated liability for unredeemed points included in “Unearned revenues” amounted to
₱265.50 million and ₱323.38 million, respectively.

3.2.2 Allowance for Impairment Losses on Receivables


The Globe Group maintains an allowance for impairment losses at a level considered
adequate to provide for potential uncollectible receivables. The Globe Group performs a
regular review of the age and status of these accounts, designed to identify accounts with
objective evidence of impairment and provide the appropriate allowance for impairment
losses. The review is accomplished using a combination of specific and collective
assessment approaches, with the impairment losses being determined for each risk grouping
identified by the Globe Group. The amount and timing of recorded expenses for any period

*SGVFS010845*
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would differ if the Globe Group made different judgments or utilized different
methodologies. An increase in allowance for impairment losses would increase the recorded
operating expenses and decrease current assets.

Impairment losses on receivables for the years ended December 31, 2014, 2013 and 2012
amounted to ₱3,035.24 million, ₱2,046.52 million and ₱1,377.32 million, respectively (see
Note 23). Receivables, net of allowance for impairment losses, amounted to
₱17,860.75 million and ₱15,200.92 million as of December 31, 2014 and 2013, respectively
(see Note 4).

The carrying value of loans receivable presented under prepayments and other current assets
and other noncurrent assets as of December 31, 2014 and 2013 amounted to
₱5,570.58 million and ₱6,164.27 million, respectively.

3.2.3 Obsolescence and Market Decline


The Globe Group, in determining the NRV, considers any adjustment necessary for
obsolescence. The Globe Group adjusts the cost of inventory to the recoverable value at a
level considered adequate to reflect market decline in the value of the recorded inventories.
The Globe Group reviews the classification of the inventories and generally provides
adjustments for recoverable values of new, actively sold and slow-moving inventories by
reference to prevailing values of the same inventories in the market.

The amount and timing of recorded expenses for any period would differ if different
judgments were made or different estimates were utilized. An increase in allowance for
obsolescence and market decline would increase recorded operating expenses and decrease
current assets.

Inventory obsolescence and market decline for the years ended December 31, 2014, 2013
and 2012 amounted to ₱437.51 million, ₱321.46 million and ₱170.68 million, respectively
(see Note 23).

Inventories and supplies, net of allowances, amounted to ₱3,186.41 million and ₱3,544.89
million as of December 31, 2014 and 2013, respectively (see Note 5).

3.2.4 ARO
The Globe Group is legally required under various contracts to restore leased property to its
original condition and to bear the costs of dismantling and deinstallation at the end of the
contract period. These costs are accrued based on an in-house estimate, which incorporates
estimates of asset retirement costs and interest rates. The Globe Group recognizes the
present value of these obligations and capitalizes the present value of these costs as part of
the balance of the related property and equipment accounts, which are being depreciated and
amortized on a straight-line basis over the EUL of the related asset or the lease term,
whichever is shorter.

The present value of dismantling costs is computed based on an average credit-adjusted


risk-free rate of 6.64% and 6.67% for the years ended December 31, 2014 and 2013,
respectively. Assumptions used to compute ARO are reviewed and updated annually.

The amount and timing of recorded expenses for any period would differ if different
judgments were made or different estimates were utilized. An increase in ARO would
increase recorded operating expenses and increase noncurrent liabilities.

*SGVFS010845*
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The Globe Group updated its assumptions on timing of settlement and estimated cash
outflows arising from ARO on its leased premises. As a result of the changes in estimates,
the Globe Group adjusted downward its ARO liability (included under “Other long-term
liabilities” account) by ₱2.71 million and ₱16.03 million for the years ended December 31,
2014 and 2013 respectively, against the book value of the assets on leased premises (see
Note 15).

As of December 31, 2014 and 2013, ARO amounted to ₱1,868.01 million and ₱1,724.30
million, respectively (see Note 15).

3.2.5 EUL of Property and Equipment and Intangible Assets


The Globe Group reviews annually the EUL of these assets based on expected asset utilization
as anchored on business plans and strategies that also consider expected future technological
developments and market behavior. It is possible that future results of operations could be
materially affected by changes in these estimates brought about by changes in the factors
mentioned.

A reduction in the EUL of property and equipment and intangible assets would increase the
recorded depreciation and amortization expense and decrease noncurrent assets.

The EUL of property and equipment are as follows:

Years
Telecommunications equipment:
Tower 20
Switch 7 and 10
Outside plant, cellsite structures and improvements 10-20
Distribution dropwires and other wireline assets 2-10
Cellular equipment and others 3-10
Buildings 20
Leasehold improvements 5 years or lease term,
whichever is shorter
Investments in cable systems 15
Office equipment 3-5
Transportation equipment 3-5

Intangible assets comprising of licenses and application software are amortized over the EUL
of the related hardware or equipment ranging from three (3) to ten (10) years or life of the
telecommunications equipment where it is assigned while exclusive dealership rights are
amortized over the life of the dealership agreement.

In 2012, the Globe Group changed the EUL of certain wireless and wireline telecommunications
equipment and licenses resulting from new information affecting the expected utilization of these
assets. The net effect of the change in EUL resulted in higher depreciation of ₱1,623.17 million
and ₱9,065.97 million in 2014 and 2013, respectively. There will be no future effect on
depreciation expense due to network transformation as these assets are already carried at its
residual value. In 2014 and 2013, there was no change in the EUL of property and equipment and
intangible assets.

As of December 31, 2014 and 2013, the aggregate carrying value of property and equipment and
intangible assets (excluding goodwill) amounted to ₱122,573.68 million and
₱113,937.61 million, respectively (see Notes 7 and 8).

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3.2.6 Estimation of Residual Value


The Globe Group estimates a residual value (RV) for assets subjected to accelerated depreciation
caused by network transformation. The Globe Group adjusted the RV based on the progress of
disposal of decommissioned assets as of December 31, 2014 and 2013.

The Globe Group regularly assesses the need to adjust the RV on a periodic basis.

3.2.7 Asset Impairment

3.2.7.1 Impairment of Nonfinancial Assets Other Than Goodwill


The Globe Group assesses impairment of assets (property and equipment, intangible
assets and investments and advances) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Globe Group considers important which could trigger an impairment review include the
following:

· significant underperformance relative to expected historical or projected future


operating results;
· significant changes in the manner of use of the acquired assets or the strategy for
the overall business; and,
· significant negative industry or economic trends.

An impairment loss is recognized whenever the carrying amount of an asset or investment


exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less cost to sell and value in use. The fair value less cost to sell is the amount
obtainable from the sale of an asset in an arm’s length transaction, while value in use is
the present value of estimated future cash flows expected to arise from the continuing use
of an asset and from its disposal at the end of its useful life. Recoverable amounts are
estimated for individual assets or investments or, if it is not possible, for the CGU to
which the asset belongs.

For impairment loss on specific assets or investments, the recoverable amount represents
the fair value less cost to sell.

For the Globe Group, the CGU is the combined mobile and wireline asset groups of Globe
Telecom and Innove. This asset grouping is predicated upon the requirement contained in
Executive Order (EO) No.109 and Republic Act (RA) No.7925 requiring licensees of
Cellular Mobile Telephone System (CMTS) and International Digital Gateway Facility
(IGF) services to provide 400,000 and 300,000 Local Exchange Carrier lines, respectively,
as a condition for the grant of such licenses.

In determining the present value of estimated future cash flows expected to be generated
from the continued use of the assets or holding of an investment, the Globe Group is
required to make estimates and assumptions that can materially affect the consolidated
financial statements.

The aggregate carrying value of property and equipment, intangible assets, goodwill and
investments and advances amounted to ₱123,351.51 million and ₱114,427.49 million as
of December 31, 2014 and 2013, respectively (see Notes 7, 8 and 10).

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3.2.7.2 Impairment of Goodwill


The Globe Group’s impairment test for goodwill is based on value in use calculations that
use a discounted cash flow model. The cash flows are derived from the budget for the
next five years and do not include restructuring activities that the Globe Group is not yet
committed to or significant future investments that will enhance the asset base of the CGU
being tested. The recoverable amount is most sensitive to the discount rate used for the
discounted cash flow model as well, as the expected future cash inflows and the growth
rate used for extrapolation purposes. As of December 31, 2014 and 2013, the carrying
value of goodwill amounted to ₱327.13 million (see Note 8).

Goodwill acquired through business combination with Yondu was allocated to the mobile
content and applications development services business CGU, which is part of the
“Mobile Communications Services” reporting segment (see Note 29).

The recoverable amount of the CGU, which exceeds the carrying amount of the related
goodwill by ₱3,899.79 million and ₱3,967.15 million as of December 31, 2014 and 2013,
respectively, has been determined based on value in use calculations using cash flow
projections from financial budgets covering a five-year period. The pre-tax discount rate
applied to cash flow projections was 9.40% in 2014 and 2013 and cash flows beyond the
five-year period are extrapolated using a 3% long-term growth rate in 2014 and 2013.

3.2.8 Deferred Income Tax Assets


The carrying amounts of deferred income tax assets are reviewed at each reporting date and
reduced to the extent that it is no longer probable that sufficient taxable income will be
available to allow all or part of the deferred income tax assets to be utilized (see Note 24).

As of December 31, 2014, the combined net deferred income tax assets of Globe Telecom,
Innove, GXI, Yondu, KVI and Asticom amounted to ₱1,904.30 million. As of
December 31, 2013, the combined net deferred income tax assets of Globe Telecom, Innove,
GXI and Yondu amounted to ₱1,916.88 million (see Note 24).

As of December 31, 2014, GTI has net deferred income tax liabilities amounting to
₱0.40 million.
3.2.9 Financial Assets and Financial Liabilities
The Globe Group carries certain financial assets and liabilities at fair value, which requires
extensive use of accounting estimates and judgment. While significant components of fair
value measurement were determined using verifiable objective evidence (i.e., foreign
exchange rates, interest rates), the amount of changes in fair value would differ if the Globe
Group utilized different valuation methodologies. Any changes in fair value of these financial
assets and liabilities would affect the consolidated statement of comprehensive income and
consolidated statement of changes in equity.

Financial assets comprising AFS investments and derivative assets carried at fair values as of
December 31, 2014 and 2013 amounted to ₱853.33 million and ₱778.11 million, respectively,
and financial liabilities comprising derivative liabilities carried at fair values as of
December 31, 2014 and 2013 amounted to ₱94.81 million and ₱219.69 million (see Note
28.10).

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3.2.10 Estimation of Losses and Recognition of Claims from Insurer


The Globe Group assesses the extent of losses arising from natural calamities. Certain
methodology and reasonable estimates are exercised considering all factors including
insurance coverage, type of losses sustained. The Globe Group determines the recoverability
of losses from insured assets.

Provision for impairment of assets recognized in 2013 amounted to P


=139.00 million (see
Note 23).

3.2.11 Pension and Other Employee Benefits


The cost of defined benefit pension plans as well as the present value of the pension
obligation are determined using actuarial valuations. The actuarial valuation involves
making various assumptions. These include the determination of the discount rates, future
salary increases and mortality rates. Due to the complexity of the valuation, the underlying
assumptions and its long-term nature, defined benefit obligations are highly sensitive to
changes in these assumptions. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, management considers the interest rates of
government bonds that are denominated in the currency in which the benefits will be paid,
with extrapolated maturities corresponding to the expected duration of the defined benefit
obligation.

The mortality rate is based on the 1994 Group Annuity Mortality Table developed by the
Society of Actuaries, which provides separate rates for males and females and is modified
accordingly with estimates of mortality improvements. Future salary increases and pension
increases are based on expected future inflation rates for the specific country.

The net pension liability as at December 31, 2014 and 2013 amounted to ₱2,321.20 million
and ₱1,607.30 million, respectively. Further details are provided in Note 18.

The Globe Group also determines the cost of equity-settled transactions using assumptions
on the appropriate pricing model. Significant assumptions for the cost of share-based
payments include, among others, share price, exercise price, option life, expected dividend
and expected volatility rate.

Cost of share-based payments in 2014, 2013 and 2012 amounted to ₱31.84 million, ₱50.00
million and ₱11.50 million, respectively (see Notes 16.5 and 18.1).

The Globe Group also estimates other employee benefit obligations and expenses, including
cost of paid leaves based on historical leave availments of employees, subject to the Globe
Group’s policy. These estimates may vary depending on the future changes in salaries and
actual experiences during the year.

The accrued balance of other employee benefits (included in the “Accounts payable and
accrued expenses” account and in the “Other long-term liabilities” account in the
consolidated statements of financial position) as of December 31, 2014 and 2013 amounted
₱614.23 million and ₱545.36 million, respectively (see Notes 12 and 15).

While the Globe Group believes that the assumptions are reasonable and appropriate,
significant differences between actual experiences and assumptions may materially affect
the cost of employee benefits and related obligations.

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4. Receivables

This account consists of receivables from:


Notes 2014 2013
(In Thousand Pesos)
Subscribers 16, 28.2.2 ₱19,361,384 ₱15,616,059
Traffic settlements - net 12, 16, 28.2.2 2,045,919 1,503,841
Dealers 28.2.2 1,655,366 1,210,535
Others 28.2.2 479,963 1,060,533
23,542,632 19,390,968
Less allowance for impairment losses:
Subscribers 28.2.2 5,372,535 3,970,421
Traffic settlements and others 28.2.2 309,347 219,624
5,681,882 4,190,045
₱17,860,750 ₱15,200,923

Receivables are noninterest-bearing and are generally collectible in the short-term.

Subscriber receivables arise from wireless and wireline voice, data communications and
broadband internet services provided under postpaid arrangements.

Traffic settlements receivables are presented net of traffic settlements payable from the same
carrier amounting to ₱1,611.47 million and ₱1,487.25 million as of December 31, 2014 and 2013,
respectively.

Amounts collected from wireless subscribers under prepaid arrangements are reported under
“Unearned revenues” in the consolidated statements of financial position and recognized as
revenues upon actual usage of airtime value or upon expiration of the unused load value prepaid
credit. The unearned revenues from these subscribers amounted to ₱2,603.91 million and
₱2,428.79 million as of December 31, 2014 and 2013, respectively.

Advance monthly service fee which is also reported under “Unearned revenue” account in the
parent company statements of financial position amounted to ₱1,727.42 million and ₱1,493.82
million as of December 31, 2014 and 2013, respectively.

5. Inventories and Supplies


This account consists of:

2014 2013
(In Thousand Pesos)
At cost:
Call cards and others ₱9,474 ₱2,805
SIM cards and SIM packs 8,877 61
Spare parts and supplies 6,933 3,110
Modem and accessories 1,327 112,668
26,611 118,644
At NRV:
Handsets, devices and accessories 2,122,255 2,562,689
Nomadic broadband device 588,712 390,646
(Forward)

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2014 2013
(In Thousand Pesos)
Spare parts and supplies P288,403
= P313,092
=
SIM cards and SIM packs 121,801 111,252
Modem and accessories 35,661 44,824
Call cards and others 2,972 3,740
3,159,804 3,426,243
₱3,186,415 ₱3,544,887

Inventories recognized as expense during the year amounting to ₱11,098.47 million,


₱10,274.57 million and ₱7,849.04 million in 2014, 2013 and 2012, respectively, are included as part of
“Cost of sales” and “Impairment losses and others” accounts (see Note 23) in the consolidated
statements of comprehensive income. An insignificant amount is included under “General, selling and
administrative expenses” as part of “Utilities, supplies and other administrative expenses” account (see
Note 21).

Cost of sales incurred consists of:

2014 2013 2012


(In Thousand Pesos)
Inventories:
Handsets, devices and accessories ₱7,734,702 ₱8,028,405 ₱6,565,510
Nomadic broadband device 2,370,154 1,314,176 561,310
SIM cards and SIM packs 498,986 349,558 245,462
Call cards and others 48,318 251,692 228,198
Spare parts and supplies 8,386 8,014 4,472
Modems and accessories 414 1,261 73,407
Services 384 – –
₱10,661,344 ₱9,953,106 ₱7,678,359

There are no unusual purchase commitments and accrued net losses as of December 31, 2014.

6. Prepayments and Other Current Assets

This account consists of:

Notes 2014 2013


(In Thousand Pesos)
Advance payments to suppliers and
contractors 25.3 ₱5,731,121 ₱5,223,600
Prepayments 25.1 792,820 949,203
Deferred input VAT 10 504,213 466,982
Input VAT - net 321,368 450,525
Miscellaneous receivable - net 16 225,827 220,025
Current portion of loan receivable from
Bayan Telecommunications, Inc. (BTI) 11, 16.6 424,761 481,366
Globe Group retirement plan (GGRP) 11, 16.3 – 968,000
Bethlehem Holdings, Inc. (BHI) 11,16.3, 25.5 – 158,620
Creditable withholding tax 532,966 225,079
Other current assets 25.11 396,595 319,423
₱8,929,671 ₱9,462,823

The “Prepayments” account includes prepaid insurance, rent, maintenance, and National
Telecommunications Commission (NTC) spectrum users’ fee among others.

*SGVFS010845*
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Other current assets include advances to employees amounting to P


=200.21 million and
P
=120.49 million as of December 31, 2014 and 2013.
Deferred input VAT pertains to various purchases of goods and services which cannot be claimed
yet as credits against output VAT liabilities, pursuant to the existing VAT rules and regulations.
However, these can be applied against future output VAT liabilities.
As of December 31, 2014, Innove, GTI and Asticom reported net input VAT amounting to
P
=321.37 million, net of output VAT of =
P781.65 million. As of December 31, 2013, Innove, GXI,
GTI and KVI reported net input VAT amounting to = P450.53 million, net of output VAT of
=
P125.84 million.

7. Property and Equipment

This rollforward analysis of this account follows:

2014
Buildings and Investments
Telecommunications Leasehold in Cable Office Transportation Assets Under
Equipment Improvements Systems Equipment Equipment Land Construction Total
(In Thousand Pesos)
Cost
At January 1 ₱199,195,469 ₱34,805,499 ₱18,979,908 ₱9,223,985 ₱2,338,024 ₱1,600,413 ₱20,318,463 ₱286,461,761
Additions 9,775,049 851,755 159,749 276,089 353,632 – 15,452,572 26,868,846
Retirements/disposals (6,355,088) (7,560) – (45,184) (279,754) – (13,712) (6,701,298)
Reclassifications/adjustments (Note 8) 11,233,274 3,261,303 642,795 1,194,861 21,235 9,649 (19,836,058) (3,472,941)
At December 31 213,848,704 38,910,997 19,782,452 10,649,751 2,433,137 1,610,062 15,921,265 303,156,368

Accumulated Depreciation
and Amortization
At January 1 141,480,546 16,003,575 8,689,260 7,544,300 1,700,206 – – 175,417,887
Depreciation and amortization
Incremental effect of
network modernization 1,347,141 2,423 – 12,157 – – – 1,361,721
Others 10,738,834 1,835,548 1,198,452 987,195 263,802 – – 15,023,831
Retirements/disposals (6,189,854) (2,444) – (41,339) (262,212) – – (6,495,849)
Reclassifications/adjustments (16,305) 10,350 3 5,684 12,958 – – 12,690
At December 31 147,360,362 17,849,452 9,887,715 8,507,997 1,714,754 – – 185,320,280
At January 1 243,822 – – 3,182 – – 372,798 619,802
Additions (Note 23) – – – – – – 110,238 110,238
Writeoff/adjustments (92,245) – – (3,182) 9,860 – (37,543) (123,110)
At December 31 151,577 – – – 9,860 – 445,493 606,930
Net Book Value at December 31 ₱66,336,765 ₱21,061,545 ₱9,894,737 ₱2,141,754 ₱708,523 ₱1,610,062 ₱15,475,772 ₱117,229,158

2013
Buildings and
Telecommunications Leasehold Investments in Office Transportation Assets Under
Equipment Improvements Cable Systems Equipment Equipment Land Construction Total
(In Thousand Pesos)
Cost
At January 1 ₱202,201,632 ₱28,852,761 ₱14,144,444 ₱7,951,568 ₱2,311,840 ₱1,573,994 ₱17,596,471 ₱274,632,710
Additions 13,784,885 348,336 251,136 284,219 257,635 - 20,754,416 35,680,627
Retirements/disposals (22,281,856) (3,649) - (32,931) (243,245) - (1,015) (22,562,696)
Reclassifications/adjustments (Note 8) 5,490,808 5,608,051 4,584,328 1,021,129 11,794 26,419 (18,031,409) (1,288,880)
At December 31 199,195,469 34,805,499 18,979,908 9,223,985 2,338,024 1,600,413 20,318,463 286,461,761

Accumulated Depreciation
and Amortization
At January 1 143,047,869 14,551,973 6,485,043 6,834,232 1,680,991 - - 172,600,108
Depreciation and amortization
Incremental effect of
network modernization 7,747,607 23,880 1,259 56,978 - - - 7,829,724
Others 12,938,614 1,436,398 1,394,939 833,998 247,540 - - 16,851,489
Retirements/disposals (22,239,228) (3,386) - (32,139) (229,768) - - (22,504,521)
Reclassifications/adjustments (14,316) (5,290) 808,019 (148,769) 1,443 - - 641,087
At December 31 141,480,546 16,003,575 8,689,260 7,544,300 1,700,206 - - 175,417,887

Impairment Losses
At January 1 138,069 - - 3,182 - - 468,987 610,238
Additions (reversals) (Note 23) 123,852 - - - - - (97,540) 26,312
Writeoff/adjustments (18,099) - - - - - 1,351 (16,748)
At December 31 243,822 - - 3,182 - - 372,798 619,802
Net Book Value at December 31 ₱57,471,101 ₱18,801,924 ₱10,290,648 ₱1,676,503 ₱637,818 ₱1,600,413 ₱19,945,665 ₱110,424,072

*SGVFS010845*
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In the last quarter of 2011, the Globe Group announced its network and IT transformation
program for an estimated investment of USD790.00 million over the next two to three years.
External partners were engaged in 2011 to help manage the modernization effort. In the first
quarter of 2012, the EUL of certain wireless telecommunications equipment were changed as a
result of continuing upgrade and migration to a modernized network. The net effect of the change
in EUL resulted in higher depreciation expense of ₱1,361.72 million, ₱7,829.72 million and
₱4,245.30 million for the years ended December 31, 2014, 2013 and 2012, respectively.

In 2013, the Globe Group ceased to classify these assets as held for sale due to the substantial
delay in the completion of the transaction. The carrying value of these assets amounted to
₱778.32 million.

Assets under construction include intangible components of a network system which are to be
reclassified to depreciable intangible assets only when assets become available for use
(see Note 8).

Investments in cable systems include the cost of the Globe Group’s ownership share in the
capacity of certain cable systems under a joint venture or a consortium or private cable set-up and
indefeasible rights of use (IRUs) of circuits in various cable systems. It also includes the cost of
cable landing station and transmission facilities where the Globe Group is the landing party.

The costs of fully depreciated property and equipment that are still being used in the network
amounted to ₱119,393.98 million and ₱129,699.68 million as of December 31, 2014 and 2013,
respectively.

The Globe Group uses its borrowed funds to finance the acquisition of property and equipment
and bring it to its intended location and working condition. Borrowing costs incurred relating to
these acquisitions were included in the cost of property and equipment using 3.05% , 2.83% and
3.01% capitalization rates in 2014, 2013 and 2012, respectively. The Globe Group’s total
capitalized borrowing costs amounted to ₱647.98 million, ₱823.90 million and ₱808.25 million
for the years ended December 31, 2014, 2013 and 2012, respectively (see Note 22).

The Company is currently recovering decommissioned network assets affected by the conversion
to new upgraded equipment from its continuing network modernization project.

The carrying value of the hardware infrastructure and information equipment held under finance
lease included under “Office and Equipment”, “Asset under Construction” and “Intangible assets
amounted to ₱318.85 million, ₱300.68 million, ₱77.98 million, respectively, as of
December 31, 2014 and ₱389.71 million, ₱364.14 million and nil, respectively, as of
December 31, 2013 (see Note 25.1.2).

Included under asset retirement and disposals for the year ended December 31, 2014 are network
assets damaged by a typhoon amounting to ₱73.71 million which is covered under existing
insurance contracts. Partial recoveries from insurance company, which is presented under “Gain
on disposals of property and equipment - net” in the consolidated statements of comprehensive
income, amounted to ₱125.47 million for the year ended December 31, 2014.

*SGVFS010845*
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8. Intangible Assets and Goodwill

The rollforward analysis of this account follows:

December 31, 2014

Exclusive Total
Licenses and Dealership Total Intangible
Application Customer Right Intangible Assets and
Software Contracts (Note 25.10) Assets Goodwill Goodwill
(In Thousand Pesos)
Cost
At January 1 P
= 13,681,879 P
= 28,381 P
= 67,552 P
= 13,777,812 P
= 327,125 P
= 14,104,937
Additions 114,913 – – 114,913 – 114,913
Reclassifications/
adjustments (Note 7) 3,374,206 – 72,408 3,446,614 – 3,446,614
At December 31 17,170,998 28,381 139,960 17,339,339 327,125 17,666,464
Accumulated Amortization
At January 1 10,232,761 28,381 3,135 10,264,277 – 10,264,277
Amortization
Incremental effect of
network
modernization – –
261,451 – 261,451 261,451
Others 1,453,616 – 22,905 1,476,521 – 1,476,521
Reclassifications/adjustments (7,429) – – (7,429) – (7,429)
At December 31 11,940,399 28,381 26,040 11,994,820 – 11,994,820
Net Book Value at December P
= 5,230,599 P
=– P
= 113,920 P
= 5,344,519 P
= 327,125 P
= 5,671,644
31

December 31, 2013


Exclusive Total
Licenses and Dealership Total Intangible
Application Customer Right Intangible Assets and
Software Contracts (Note 25.10) Assets Goodwill Goodwill
(In Thousand Pesos)
Cost
At January 1 P
=11,260,680 P
=28,381 =
P– P
=11,289,061 P
=327,125 P
=11,616,186
Additions 30,486 – 67,552 98,038 – 98,038
Retirements/disposals (351,474) – – (351,474) – (351,474)
Reclassifications/
adjustments (Note 7) 2,742,187 – – 2,742,187 – 2,742,187
At December 31 13,681,879 28,381 67,552 13,777,812 327,125 14,104,937

Accumulated Amortization
At January 1 7,796,686 25,542 – 7,822,228 – 7,822,228
Amortization
Incremental effect of
network
modernization 1,236,242 – – 1,236,242 – 1,236,242
Others 1,554,065 2,839 3,135 1,560,039 – 1,560,039
Retirements/disposals (351,474) – – (351,474) – (351,474)
Reclassifications/adjustments (2,758) – – (2,758) – (2,758)
At December 31 10,232,761 28,381 3,135 10,264,277 – 10,264,277
Net Book Value at December P
=3,449,118 =
P– P
=64,417 P
=3,513,535 P
=327,125 P
=3,840,660

No impairment loss on intangible assets was recognized in 2014, 2013 and 2012.

In the first quarter of 2012, the EUL of certain wireless licenses were changed as a result of continuing
upgrade and migration to a modernized network. The net effect of the change in EUL resulted to
higher amortization expense of ₱261.45 million, ₱1,236.24 million and ₱835.17 million for the years
ended December 31, 2014, 2013 and 2012, respectively.

*SGVFS010845*
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Intangible assets pertain to (1) telecommunications equipment software licenses, corporate


application software and licenses and other VAS software applications that are not integral to the
hardware or equipment; (2) costs of the web application system developed by a third party for
Kickstart; (3) intangible assets identified to exist during the acquisition of Yondu for its existing
customer contracts and (4) exclusive dealership right in Taodharma (see Note 25.10).

9. Business Combinations

9.1 Investment in FPSI


On December 19, 2013, Kickstart entered into a Memorandum of Agreement with FPSI and
FPSI’s stockholders to subscribe the 5.07 million common shares of FPSI for a total subscription
price of ₱18.88 million.

FPSI is engaged in acquiring publishing rights to produce, publish, market and sell printed and
electronic books and other electronic documents and content for international and domestic sales.

On February 4, 2014, Kickstart entered into a subscription agreement with FPSI for the acquisition
of 2.08 million common shares for a total subscription price of ₱8.22 million which constitutes
40% ownership as of reporting period. The remaining balance will be paid upon completion of
certain conditions. The transaction was accounted for as acquisition of a subsidiary.

The Globe Group’s acquisition of Flipside Publishing Services, Inc. (FPSI) aims to promote the
use of electronic books (e-books) in educational and corporate institutions nationwide.
The share in the fair values of the identifiable assets and liabilities of FPSI as at the date of
acquisition is equal to the purchase price consideration.
Net cash outflow from the acquisition is as follows (in thousand pesos):

Total cash paid on acquisition =8,216


P
Cash and cash equivalents acquired from FPSI (198)
Net cash outflow on acquisition =8,018
P

From the date of acquisition, FPSI has contributed ₱1.13 million of revenue and loss before
income tax of ₱2.83 million. If the combination had taken place at the beginning of the year,
revenue from would have been ₱1.27 million and loss before tax would have been ₱2.99 million.

9.2 Investment in Asticom


On June 3, 2014, Globe Telecom signed an agreement with Azalea Technology, Inc. and SCS
Computer Systems, Pte. Ltd. acquiring 100% ownership of Asticom for a total consideration of
₱12.45 million. The transaction was accounted for as an acquisition of a subsidiary.

Formerly known as Ayala Systems Technology, Inc., Asticom provides enterprise resource
planning, customer relationship management systems, other systems integration and information
technology services to domestic and international markets. Asticom was 49% owned by Azalea, a
100%-owned subsidiary of Ayala Corporation and 51% owned by SCS Computer Systems, a
subsidiary of Singapore Telecom.

Globe Telecom’s acquisition of Asticom is in line with its strategy to expand its business
operations in the information technology space. The acquisition has been accounted for using the
acquisition method. The consolidated financial statements include the results of Asticom for the
seven-month period from the acquisition date.

*SGVFS010845*
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The purchase price consideration had been allocated to the identifiable assets and liabilities of
Asticom on the basis of its book values. As allowed under the relevant standard, Globe Telecom
will recognize any adjustment to those provisional values as an adjustment to goodwill upon
determining the final fair values of identifiable assets and liabilities within 12 months from
acquisition date.

The provisional fair values of the identifiable assets and liabilities of Asticom as at the date of
acquisition are as follows (in thousand pesos):

Current assets =81,674


P
Noncurrent assets 7,705
Current liabilities (27,860)
Total identifiable net assets at fair value 61,519
Gain arising from acquisition (provisional) (49,065)
Purchase consideration transferred =12,454
P

Gain arising from acquisition of Asticom is reported under “Other income” in the 2014
consolidated statements of comprehensive income (see Note 20).

Net cash outflow from the acquisition is as follows (in thousand pesos):

Total cash paid on acquisition =12,454


P
Cash and cash equivalents acquired from Asticom (8,221)
Net cash outflow on acquisition =4,233
P

From the date of acquisition, Asticom has contributed ₱27.56 million of revenue and loss before
income tax of ₱2.04 million. If the combination had taken place at the beginning of the year,
revenue from would have been ₱39.01 million and income before tax would have been
₱9.66 million.

10. Investments and Advances

This account consists of the following as of December 31:

2014 2013
(In Thousand Pesos)
Investments at equity P
=307,150 =162,754
P
Advances - net of share in equity in net losses of JV of
=104.43 million in 2014
P 143,567 –
P
=450,717 =162,754
P

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Details of the Globe Group’s investments in associates and joint ventures and the related
percentages of ownership are shown below:
Country of
Incorporation Principal Activities 2014 2013
Associates
Telecommunication
BTI Philippines services 38% 38%
Construction and
Automatic Fare Collection System Inc. establishment of systems,
(AFCS) Philippines infrastructure 20% –
Joint Ventures
BPI Globe BanKO Inc., A Savings Bank Micro-finance enterprises
(BPI Globe BanKO) Philippines banking services 40% 40%
Mobile technology
infrastructure and common
Bridge Mobile Pte. Ltd. (BMPL) Singapore service 10% 10%

The movement in investments in associates and joint ventures are as follows:

2014 2013
(In Thousand Pesos)
Acquisition Cost
At January 1 P
=411,620 =352,010
P
Acquisition during the year 300,000 59,010
Return of capital during the year (62,944) –
At December 31 648,676 411,620
Accumulated Equity in Net Losses:
At January 1 (238,614) (158,655)
Equity in net losses (119,824) (79,959)
At December 31 (358,438) (238,614)
Other Comprehensive Income
At January 1 (10,252) (10,762)
Net foreign exchange difference 965 510
Others 26,199 –
At December 31 16,912 (10,252)
Carrying Value at December 31 P
=307,150 =162,754
P

Investment in Associate
10.1 Investment in BTI
On October 1, 2013, Globe Telecom acquired 38% interest in BTI following the conversion of its
unsustainable debt (Tranche B) into 45 million common shares equity based on the confirmation
of the Court dated August 27, 2013 on the Amended Rehabilitation Plan. Globe Telecom shall
further convert its share of the Tranche A debt upon certain regulatory approvals. Globe
Telecom's acquisition of BTI is intended to augment its current data and DSL businesses using
BTI's existing platform.

As of December 31, 2014 and 2013, the equity in BTI was recognized as investment in an
associate carried at acquisition cost valued at nil. BTI remains in a capital deficiency after Tranche
B conversion with a negative book value of ₱45.75 and = P57.62 per common share as of
December 31, 2014 and 2013, respectively.

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The following is the share in net losses and other comprehensive loss of BTI as of December 31,
which is not considered material:

2014 2013*
(In Thousand Pesos)
Share in net loss ₱830,679 ₱574,672
Share in other comprehensive loss 32,362 31,881
Share in total comprehensive loss - unrecognized* ₱863,041 ₱606,553
*2013 consist of October to December only

The Globe Group has no share of any contingent liabilities as of December 31, 2014.

10.2 Investments in AFCS


On January 30, 2014, following a competitive bidding process, the Department of Transportation
and Communication awarded to AF Consortium, composed of AC Infrastructure Holdings Corp.,
BPI Card Finance Corp., Globe Telecom, Inc., Meralco Financial Services, Inc., Metro Pacific
Investments Corp., and Smart Communications, Inc. the rights to design, build and operate the
P
=1.72 billion automated fare collection system. This is a public-private partnership project
intended to upgrade and consolidate the fare collection systems of the three urban rail transit
systems which presently serve Metro Manila.

On February 10, 2014, AF Consortium incorporated AFCS, a special purpose company, which
will assume the rights and obligations of the concessionaire. These rights and obligations include
the construction and establishment of systems, infrastructure including implementation, test,
acceptance and maintenance plans, and operate the urban transit system for a period of 10 years.

As of December 31, 2014, Globe Telecom has invested a total of ₱300.00 million in the
consortium with 20% equivalent equity interest.

The following tables present the summarized financial information of the AFCS as at
December 31, 2014 and for the year ended December 31, 2014 (in thousand pesos).

Statement of Financial Position:


Current assets, including cash and cash equivalents P
=794,042 ₱831,671
Noncurrent assets 671,975
Current liabilities 73,925
Equity 1,429,721

Statement of Comprehensive Income:


Revenue ₱8,511
Cost and expenses 65,098
Loss before tax (56,587)
Provision for income tax –
Net loss for the year (56,587)
Other comprehensive income –
Total comprehensive income (56,587)
Globe Group’s share in net loss for the year (₱11,318)

On January 20, 2015, AFCS’ BOD approved the additional capital contribution of ₱160.00 million
to be paid on or before March 31, 2015.

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Investments in Joint Ventures


10.3 Investment in BPI Globe BanKO
On July 17, 2009, Globe acquired a 40% stake in BPI Globe BanKO (formerly Pilipinas Savings
Bank, Inc. or PS Bank) for ₱141.33 million, pursuant to a Shareholder Agreement with Bank of
the Philippine Islands (BPI), AC and PS Bank, and a Deed of Absolute Sale with BPI. BPI Globe
BanKO will have the capability to provide services to micro-finance institutions and retail clients
through mobile and related technology.

On May 10, 2011, the BOD of Globe Telecom approved the additional investment of
₱100.00 million as share for BPI Globe BanKO’s increase in capitalization to cover its expansion
plan for the next three years. Globe Telecom made the initial capital infusion of ₱79.01 million on
May 10, 2011, and ₱20.99 million last March 28, 2012. Globe infused additional capital recorded
under “Investments and advances” account amounting to ₱248.00 million in 2014. As of
December 31, 2014 and 2013, the investment and advances of Globe Telecom in BPI Globe
BanKO amounted to ₱143.57 million and ₱85.63 million, respectively, representing 40% interest.

10.4 Investment in BMPL


Globe Telecom and other leading Asia Pacific mobile operators (JV partners) signed an
Agreement in 2004 (JV Agreement) to form a regional mobile alliance, which will operate through
a Singapore-incorporated company, BMPL. The JV company is a commercial vehicle for the JV
partners to build and establish a regional mobile infrastructure and common service platform and
deliver different regional mobile services to their subscribers.

Globe Group has a ten percent (10%) stake in BMPL. The other joint venture partners each with
equal stake in the alliance include SK Telecom, Co. Ltd., Advanced Info Service Public Company
Limited, Bharti Airtel Limited, Maxis Communications Berhad, Optus Mobile Pty. Limited,
Singapore Telecom Mobile Pte, Ltd., Taiwan Mobile Co. Ltd., PT Telekomunikasi Selular and
CSL Ltd. Under the JV Agreement, each partner shall contribute USD4.00 million based on an
agreed schedule of contribution. Globe Telecom may be called upon to contribute on dates to be
determined by the JV. On November 25, 2014, Globe Telecom received a return of capital
amounting to USD1.40 million.

As of December 31, 2014 and 2013, the carrying value of the investment in BMPL amounted to
₱21.21 million and ₱77.12 million, respectively.

The following tables present the aggregate summarized financial information of BPI Globe
BanKO and BMPL that are individually immaterial as at December 31, 2014 and 2013 and for the
years ended December 31, 2014 and 2013.

2014 2013
(In Thousand Pesos)
Statements of Financial Position
Current assets, including cash and cash equivalents
P
=295,441 (2013: P =785,631) P
=1,420,895 P
=2,976,759
Noncurrent assets 250,440 212,169
Current liabilities 1,433,771 2,129,732
Equity 237,563 1,059,196

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2014 2013
(In Thousand Pesos)
Statements of Comprehensive Income
Revenue P293,656
= P410,524
=
Cost and expenses 827,194 593,347
Income before tax (533,538) (182,824)
Provision for income tax (25,912) (3,380)
Net income for the year (507,626) (179,444)
Other comprehensive income – –
Total comprehensive income (507,626) (179,444)
Globe Group’s share in net loss for the year (₱212,939) (₱79,959)

The Globe Group has no share of any contingent liabilities of the joint ventures as of
December 31, 2014 and 2013.

11. Other Noncurrent Assets

This account consists of:


Notes 2014 2013
(In Thousand Pesos)
Loans receivable from:
BTI - net of current portion 6 ₱4,019,195 ₱4,556,287
GGRP 6, 16.3, 18.2 968,000 –
BHI 16.3, 18.2, 25.5 158,620 –
AFS investment in equity securities 25.10, 28.12 264,785 222,712
Deferred input VAT 6 740,927 1,013,833
Miscellaneous deposits 25.1 750,010 694,487
Others - net 27,311 62,486
₱6,928,848 ₱6,549,805

Loans Receivable from BTI

On November 5, 2012, Globe Telecom obtained internal approvals to commence offers to


purchase up to 100% of the financial obligations of BTI and Radio Communications of the
Philippines, Inc. (RCPI), a subsidiary of BTI, collectively referred to as “BTI loans”, to their
respective financial creditors.

On December 21, 2012, Globe Telecom settled its tender offers for:

i. 93.66% of the aggregate remaining principal amount of the USD-denominated notes originally
due in 2006;
ii. 98.26% of the aggregate remaining principal amount of peso and USD-denominated BTI
loans; and
iii. 100% of the aggregate remaining principal amount of peso and USD-denominated RCPI
loans.

The total consideration for the tender offers is USD/₱310.00 per USD/₱1,000.00 face amount, for
a total payment of ₱5,354.76 million, composed of US Dollar and Philippine peso-denominated
loans amounting to USD110.55 million and ₱818.74 million, respectively.

The acquired loans were part of the original debt subjected to rehabilitation plan approved on
June 28, 2004. The plan was reviewed and evaluated by a court appointed receiver who was

*SGVFS010845*
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tasked to monitor and oversee the implementation of the Plan. The implementing term sheet
submitted by the receiver was approved on March 15, 2005.

The restructured loan is divided into sustainable (Tranche A) and unsustainable debt (Tranche B)
and is denominated in existing currencies with an option for any of the creditors in Tranche B to
convert their USD-denominated restructured debt into PHP at an agreed exchange rate on the date
of implementation.

Tranche A is repayable semi-annually on a pari passu basis up to December 31, 2023 based on a
table of debt reduction computed at certain percentages of the principal. Tranche B is a non-
interest bearing convertible debt and to be repaid only if there are sufficient future cash flows and
upon full repayment of Tranche A. At the conclusion of the rehabilitation period, other than as the
result of an event of default, Tranche B to the extent not previously converted is to be converted
into new BTI shares considering no conversion had been previously made. The conversion rights
in relation to Tranche B are up to a maximum of 40% of the authorized share capital as at the
effective date. The loans were initially accounted for at fair value, and the entire acquisition price
was allocated to Tranche A.

On May 30, 2013, Globe Telecom and BTI agreed to jointly file a motion with the court having
jurisdiction over BTI’s debt to significantly restructure the financial debt in order to prevent the
recurrence of default and ensure BTI’s continued viability. The joint motion is intended to achieve
a successful rehabilitation at the earliest possible date. The restructuring, including the debt to
equity conversion feature would apply to all BTI’s creditors equally upon receipt of certain
regulatory approvals, including the confirmation of the court.

On July 1, 2013, Globe Telecom purchased additional BTI bonds with face value of USD2.80
million, part of the BTI loans from their financial creditors, bringing total aggregate principal
amount of the USD-denominated notes originally due in 2006 from 93.66% to 95.10%.

On August 27, 2013, the joint motion to amend BTI’s current debt restructuring plan was granted
by the Court. Accordingly, a new Master Restructuring Agreement (MRA) for all BTI creditors
will be implemented. This principally involves a conversion of up to 56.60% of its capital stock.
Globe Telecom and BTI were directed to provide separate reports on the implementation
procedures of the Amended Rehabilitation Plan and its accompanying MRA within a certain
period as mandated by the Court. Likewise, Globe Telecom and BTI were directed by the Court to
ensure that the details of the mechanics for converting debt positions are clear and properly
communicated to the creditors involved.

Pursuant to the resolution of the Court dated August 27, 2013 confirming the Amended
Rehabilitation Plan jointly filed by Globe Telecom and BTI, BTI issued common shares certificate
to Globe Telecom on October 1, 2013 for the conversion of its unsustainable debt (Tranche B) into
38% equity (Note 10.1). Globe Telecom intends to further convert portion of Tranche A debt,
which together with the converted Tranche B debt would represent more than 50% of BTI’s
outstanding shares upon certain regulatory approvals.

On October 29, 2013, Globe filed a report with the court covering the mechanics for converting
debt positions as provided for under MRA.

On October 9, 2014, the Court of Appeals issued a 60-day temporary restraining order (TRO) on
the petition of Philippine Long Distance Company (PLDT), preventing the NTC from acting on
Globe Telecom and BTI’s joint application for the acquisition by Globe of a majority stake in BTI.

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In a Joint Rejoinder Globe and BTI filed on October 30, 2014, both asked the CA to
correspondingly lift the TRO issued against NTC. The TRO automatically ended last
December 19, 2014 as the Court of Appeals did not extend it.

As of December 31, 2014 and 2013, loans receivable from BTI amounted to ₱4,443.96 million and
₱5,037.65 million comprising of principal and interest due until 2023, with quarterly interest
payments and semi-annual principal payments (see Note 16.6).

12. Accounts Payable and Accrued Expenses

This account consists of:

Notes 2014 2013


(In Thousand Pesos)
Accrued project costs 25.3 P
=22,015,721 P
=16,557,492
Accounts payable 16 12,458,225 10,046,748
Accrued expenses 16
General, selling and administrative 2,093,660 2,239,867
Services 2,118,356 1,428,743
Manpower 2,031,114 1,408,912
Advertising 1,877,680 1,769,515
Repairs and maintenance 1,590,523 787,375
Utilities 809,122 1,072,107
Lease 665,367 504,078
Interest 392,632 361,705
Traffic settlements - net 4 1,182,691 1,596,233
Output VAT - net 31,438 220,235
Dividends payable 17.3 260,030 –
P
=47,526,559 =37,993,010
P

General, selling and administrative accrued expenses include travel, professional fees, supplies,
commissions and miscellaneous, which are individually immaterial.

Traffic settlements payables are presented net of traffic settlements receivable from the same
carrier amounting to ₱1,425.25 million and ₱3,312.39 million as of December 31, 2014 and 2013,
respectively.

As of December 31, 2014, Globe, GXI, Yondu and KVI reported net output VAT amounting to
₱31.44 million, net of input VAT of ₱782.00 million. As of December 31, 2013, Globe and
Yondu reported net output VAT amounting to ₱220.24 million, net of input VAT of
₱621.33 million.

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13. Provisions

The rollforward analysis of this account follows:

Note 2014 2013


(In Thousand Pesos)
At beginning of year ₱294,700 ₱203,191
Provisions for claims and assessments 23 137,185 93,309
Payments/reversals (30,597) (1,800)
At end of year ₱401,288 ₱294,700

Provisions relate to various pending unresolved claims and assessments over the Globe Group’s
mobile and wireline businesses. The information required by PAS 37, Provisions, Contingent
Liabilities and Contingent Assets, is not disclosed as it may prejudice the outcome of these on-
going claims and assessments. As of February 4, 2015, the remaining pending claims and
assessments are still being resolved.

14. Notes Payable and Long-term Debt

Notes payable consists of short-term, unsecured US dollar and peso-denominated promissory notes
from local banks for working capital requirements amounting to ₱5,219.90 million, which bears
interest ranging from 1.12% to 3.00% as of December 31, 2013. There are no short-term notes
payable outstanding as of December 31, 2014.

Long-term debt consists of:

2014 2013
(In Thousand Pesos)
Term Loans:
Peso P
=31,834,026 =28,018,106
P
Dollar 14,464,146 14,321,158
Corporate notes 2,086,067 4,877,621
Retail bonds 16,891,564 16,864,164
65,275,803 64,081,049
Less current portion 6,129,663 5,980,300
P
=59,146,140 =58,100,749
P

The maturities of long-term debt at nominal values as of December 31, 2014 follow (in
thousands):

Due in:
2015 =6,136,366
P
2016 7,636,854
2017 9,993,954
2018 7,283,954
2019 and thereafter 34,553,272
=65,604,400
P

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Unamortized debt issuance costs included in the above long-term debt as of December 31, 2014
and 2013 amounted to ₱328.60 million and ₱402.34 million, respectively (see Note 28.2.3).

Interest expense recognized related to long-term debt and short-term notes payable, excluding the
capitalized interest, amounted to ₱2,067.34 million, ₱1,850.02 million and ₱1,843.41 million in
2014, 2013 and 2012, respectively (see Notes 7 and 22).

The interest rates and maturities of the above debt are as follows:

Maturities Interest Rates


Term Loans:
Peso 2015-2022 1.02% to 6.00% in 2014
0.99% to 6.00% in 2013
Dollar 2015-2022 1.25% to 1.75% in 2014
1.27% to 1.80% in 2013
Corporate notes 2015-2016 1.65% to 8.43% in 2014
1.65% to 8.43% in 2013
Retail bonds 2017-2023 4.89% to 6.00% in 2014
4.89% to 6.00% in 2013

14.1 Term Loans and Corporate Notes

Globe Group’s unsecured term loans and corporate notes, which consist of fixed and floating
rate notes and dollar and peso-denominated bank loans, bear interest at stipulated and prevailing
market rates.

On March 6, 2013, Globe Telecom signed a USD75 million 3-year term loan with floating
interest rate with Bank of Tokyo - Mitsubishi UFJ, Ltd., Singapore Branch as lender. The
purpose of the loan is to fund Globe Group’s capital expenditures.

On March 22, 2013, Globe Telecom signed a USD120 million 7-year term loan with floating
interest rate with Metrobank as lender to finance Globe Group’s capital expenditure.

On July 29, 2013, Globe Telecom signed a USD40 million 3-year term loan with floating
interest rate with Mizuho Bank Ltd. as lender to prepay and refinance certain debts.

On December 4, 2013, Globe Telecom signed a ₱7,000 million 7-year term loan credit facility
with fixed interest rate with Land Bank of the Philippines as lender. The proceeds of the loan
were used to partially finance Globe Telecom’s general financing and corporate requirements for
capital expenditures.

The loan agreements with banks and other financial institutions provide for certain restrictions and
requirements with respect to, among others, maintenance of financial ratios and percentage of
ownership of specific shareholders, incurrence of additional long-term indebtedness or guarantees
and creation of property encumbrances.

The financial tests under Globe’s loan agreements include compliance with the following ratios:
· Total debt* to equity not exceeding 2:1;
· Total debt* to EBITDA not exceeding 3:1;
· Debt service coverage exceeding 1.3 times; and
· Secured debt ratio not exceeding 0.2 times.
*Composed of notes payable and long term debt.

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As of December 31, 2014, the Globe Group is not in breach of any loan covenants.

14.2 Retail Bonds


On June 1, 2012, the Globe Group issued ₱10,000.00 million fixed rate bonds. The amount
comprises ₱4,500.00 million and ₱5,500.00 million fixed rate bonds due in 2017 and 2019, with
interest rate of 5.75% and 6.00%, respectively. The net proceeds of the issue were used to partially
finance the Globe Group’s capital expenditure requirements in 2012.

The five-year and seven-year retail bonds may be redeemed in whole, but not in part, starting two
years before maturity date and on the anniversary thereafter at a price equal to 101.00% and
100.50%, respectively, of the principal amount of the bonds and all accrued interest to the date of
the redemption.

On July 17, 2013, the Globe Group issued ₱7,000.00 million fixed rate bond. The amount
comprises ₱4,000.00 million and ₱3,000.00 million bonds due in 2020 and 2023, with interest rate
of 4.8875% and 5.2792%, respectively. The net proceeds of the issue were used to partially finance
the Globe Group’s capital expenditure requirements in 2013.

The seven-year and ten-year retail bonds may be redeemed in whole, but not in part only, starting
two years for the seven-year bonds and three years for the ten-year bonds before the maturity date
and on the anniversary thereafter at a price ranging from 101.0% to 100.5% and 102.0% to 100.5%,
respectively, of the principal amount of the bonds and all accrued interest depending on the year of
redemption.

The prepayment feature is assessed as clearly and closely related to the host debt instrument, and
hence need not be separately accounted for at FVPL.

The Globe Group has to meet certain bond covenants including a maximum debt-to-equity ratio of
2 to 1. As of December 31, 2014, the Globe Group is not in breach of any bond covenants.

15. Other Long-term Liabilities

This account consists of:


Notes 2014 2013
(In Thousand Pesos)
Accrued pension 18.2 ₱2,321,195 ₱1,607,299
ARO 3.2.4, 7 1,868,006 1,724,304
Accrued lease obligations and others 25.1.2 1,283,832 1,017,999
₱5,473,033 ₱4,349,602

The rollforward analysis of the Globe Group’s ARO follows:

Notes 2014 2013


(In Thousand Pesos)
At beginning of year ₱1,724,304 ₱1,594,633
Capitalized to property and equipment 30 9,495 15,675
Accretion expense during the year 22 141,358 130,021
Reversals (4,442) –
Adjustments due to changes in estimates 3.2.4 (2,709) (16,025)
At end of year ₱1,868,006 ₱1,724,304

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16. Related Party Transactions

Parties are considered to be related to Globe Group if it has the ability, directly or indirectly, to
control the Group or exercise significant influence over the Group in making financial and
operating decisions, or vice versa, or where the Group and the party are subject to common control
or common significant influence. Related parties may be individuals (being members of key
management personnel, significant shareholders and/or their close family members) or entities and
include entities which are under the significant influence of related parties of the Group where
those parties are individuals, and post-employment benefit plan which are for the benefit of
employees of the Group or of any entity that is a related party of the Group.

The Globe Group, in their regular conduct of business, enter into transactions with their major
stockholders, AC and STI, associates, joint ventures and certain related parties.

16.1 Entities with Joint Control over Globe Group - AC and STI
· Globe Telecom has interconnection agreements with STI. The related net traffic settlements
receivable (included in “Receivables” account in the consolidated statements of financial
position) and the interconnection revenues earned (included in “Service revenues” account in
the consolidated statements of comprehensive income) are as follows:

2014 2013 2012


(In Thousand Pesos)
Traffic settlements receivable - net ₱79,191 ₱201,216 ₱126,277
Interconnection revenues 784,965 921,540 1,117,420
Interconnection costs 112,976 116,477 151,382

· Globe Telecom and STI have a technical assistance agreement whereby STI will provide
consultancy and advisory services, including those with respect to the construction and
operation of Globe Telecom’s networks and communication services (see Note 25.6),
equipment procurement and personnel services. In addition, Globe Telecom has software
development, supply, license and support arrangements, lease of cable facilities, maintenance
and restoration costs and other transactions with STI.

The details of fees (included in repairs and maintenance under the “General, selling and
administrative expenses” account in the consolidated statements of comprehensive income)
incurred under these agreements are as follows:

2014 2013 2012


(In Thousand Pesos)
Technical assistance fee ₱160,534 ₱163,004 ₱140,083
Maintenance and restoration costs and
other transactions 63,695 61,841 64,835
Software development, supply, license
and support 19,642 16,681 12,590

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The outstanding balances due to STI (included in the “Accounts payable and accrued
expenses” account in the consolidated statements of financial position) arising from these
transactions are as follows:

2014 2013 2012


(In Thousand Pesos)
Technical assistance fee ₱135,877 ₱35,775 ₱45,326
Maintenance and restoration costs and
other transactions 10,882 20,695 32,372
Software development, supply, license
and support – 4,014 35,268

· Globe Group earns subscriber revenues from AC. The outstanding subscribers receivable
from AC (included in “Receivables” account in the consolidated statements of financial
position) and the amount earned as service revenue (included in the “Service revenues”
account in the consolidated statements of comprehensive income) are as follows:

2014 2013 2012


(In Thousand Pesos)
Subscriber receivables ₱9,662 ₱14,761 ₱2,143
Service revenues 18,990 14,107 14,720

· Globe Telecom reimburses AC for certain operating expenses. The net outstanding liabilities
to (included in “Accounts payable and accrued expenses” account in the consolidated
statements of financial position) and the amount of expenses incurred (included in the
“General, selling and administrative expenses” account in the consolidated statements of
comprehensive income) are as follows:

2014 2013 2012


(In Thousand Pesos)
General, selling and administrative
expenses ₱37,135 ₱7,768 ₱9,145
Accounts payable and accrued expenses 755 – –

16.2 Joint Ventures in which the Globe Group is a venturer (see Note 10)
· Globe Telecom has preferred roaming service contract with BMPL. Under this contract,
Globe Telecom will pay BMPL for services rendered by the latter which include, among
others, coordination and facilitation of preferred roaming arrangement among JV partners, and
procurement and maintenance of telecommunications equipment necessary for delivery of
seamless roaming experience to customers. Globe Telecom also earns or incurs commission
from BMPL for regional top-up service provided by the JV partners. The net outstanding
liabilities to BMPL related to these transactions amounted to ₱2.37 million and ₱0.98 million
as of December 31, 2014 and 2013, respectively. Balances related to these transactions
(included in “General, selling and administrative expenses” account in the consolidated
statements of comprehensive income) amounted to ₱23.76 million and ₱3.76 million, as of
December 31, 2014 and 2013, respectively.

· In October 2009, the Globe Group entered into an agreement with BPI Globe BanKO for the
pursuit of services that will expand the usage of GCash technology. As a result, the Globe
Group recognized revenue amounting to ₱6.81 million and ₱0.54 million in 2014 and 2013,

*SGVFS010845*
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respectively. The related receivables amounted to ₱7.16 million and ₱1.11 million in 2014
and 2013, respectively.

16.3 Transactions with the GGRP (see Note 11)


· In 2008, Globe Telecom, Innove and GXI pooled its plan assets for single administration by
the GGRP, which was created for the management of the retirement fund. The decisions of the
GGRP are made through collective decision of the Board of Trustees. The chairman of the
BOT approves the retirement plan’s transactions of Globe Group and is a member of the
BOD.

The plan is funded by contributions as recommended by the independent actuary on the basis
of reasonable actuarial assumptions. These assumptions and the funded status of the pension
plan are disclosed in Note 18.2.

The unfunded status for the pension plan of Globe Group as of December 31, 2014 and 2013
amounted to ₱2,321.20 million and ₱1,607.30 million, respectively (see Note 18.2).

The fair value of plan assets by each class held by the retirement fund, on a pooled basis
follows:

2014 2013
(In Thousand Pesos)
Cash and cash equivalents ₱143,746 ₱121,330
Loans receivables 968,000 968,000
Investment in fixed income securities
Government 796,424 696,382
Corporate 200,488 298,750
Loans 4,945 22,801
Others 128,035 9,033
Investment in equity securities 1,636,204 1,506,611
Liabilities (968,000) (968,000)
₱2,909,842 ₱2,654,907

All equity and debt instruments held, except for investment in preferred shares of HALO
Group, debt securities issued by private corporations and long-term negotiable certificates of
deposit, have quoted prices in active market. The remaining plan assets do not have quoted
market prices in active market.

Loans and receivables consist of interest and dividend receivables, receivable on securities
sold to brokers and loan granted by the plan to BHI.

Liabilities pertain to interest and trust fee payables, accrued professional fees and loan granted
to the plan by Globe Telecom.

The plan assets have diverse investments and do not have any concentration risk.

· As of December 31, 2014 and 2013, the pension plan assets of the retirement plan include
shares of stock of Globe Telecom with total fair value of ₱26.32 million and ₱24.77 million,
respectively, and shares of stock of other related parties with total fair value of
₱115.08 million and ₱83.31 million, respectively. Gains arising from these investments
amounted to ₱12.91 million and ₱8.34 million in 2014 and 2013, respectively.

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· In 2008, the Globe Group granted a short-term loan to the GGRP amounting to ₱800.00
million with interest at 6.20%. Upon maturity in 2009, the loan was rolled over until
September 2014 with interest at 7.75%. Further, in 2009, the Globe Group granted an
additional loan to the retirement fund amounting to ₱168.00 million which bears interest at
7.75% and is due also in September 2014.

On September 16, 2014, the maturity of the outstanding balance of loan receivable from
GGRP amounting to ₱968.00 million was extended to September 11, 2017 and the interest
rate was reduced to 5% per annum effective on September 11, 2014. Interest income
amounted to ₱68.02 million, ₱76.26 million and ₱76.27 million in 2014, 2013 and 2012,
respectively (see Note 19).

The retirement plan utilized the loan to fund its investments in BHI, a domestic corporation
organized to invest in media ventures. BHI has controlling interest in Altimax Broadcasting
Co., Inc. (Altimax) and Broadcast Enterprises and Affiliated Media Inc. (BEAM),
respectively.

· On August 13 and December 21, 2009, the Globe Group granted five-year loans amounting to
₱250.00 million and ₱45.00 million, respectively, to BHI at 8.275% interest. The ₱250.00
million loan is covered by a pledge agreement whereby in the event of default, the Globe
Group shall be entitled to offset whatever amount is due to BHI from any unpaid fees to
BEAM from the Globe Group. The ₱45.00 million loan is fully secured by a chattel mortgage
agreement dated December 21, 2009 between Globe Group and BEAM. Interest income
amounted to ₱11.30 million, ₱13.72 million and ₱24.82 million in 2014, 2013 and 2012,
respectively (see Note 25.5).

On August 13, 2014, the maturity of the outstanding balance of loan receivable from BHI
amounting to ₱158.62 million was extended to August 13, 2017 and the interest rate was
reduced to 5% per annum effective August 14, 2014 (see Note 11).

· On February 1, 2009, the Globe Group entered into a memorandum of agreement (MOA) with
BEAM for the latter to render mobile television broadcast service to Globe subscribers using
the mobile TV service. As a result, the Globe Group recognized an expense (included in
“Professional and other contracted services”) amounting to ₱155.00 million in 2014 and 2013
and ₱194.00 million in 2012. Effective January 1, 2015, BEAM will charge an increased
service fee rate to Globe Group as a result of an amendment to the MOA.

· On October 1, 2009, the Globe Group entered into a MOA with Altimax for the Globe
Group’s co-use of specific frequencies of Altimax’s for the rollout of broadband wireless
access to the Globe Group’s subscribers. As a result, the Globe Group recognized an expense
(included in “General, selling and administrative expenses” account in the consolidated
statements of comprehensive income) amounting to ₱90.00 million in 2014 and 2013.

16.4 Transactions with other related parties


Globe Telecom has money market placements and bank balances, and subscriber receivables
(included in “Cash and cash equivalents” and “Receivables” accounts in the consolidated
statements of financial position, respectively) and earns service revenues (included in the
“Service revenues” account in the consolidated statements of comprehensive income) from its
other related parties namely, Ayala Land Inc., Ayala Property Management Corporation, Bank
of the Philippine Islands, Manila Water Company, Inc., Integrated Microelectronics, Inc.,
Stream Global Services, Inc., HR Mall Inc., Honda Cars, Inc., Isuzu Automotive Dealership,
Inc., Accendo Commercial Corp., Affinity Express Philippines, Inc., Alveo Land Corp., Asian
I-Office Properties,Inc., Avida Land Corp., Avida Sales Corporation, Ayala Hotels, Inc.,

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Ayala Plans, Inc., Ayala Systems Technology, Inc., Cebu Holdings, Inc., Makati Development
Corp., myAyala.com, Inc., North Triangle Depot Commercial Corp., PSI Technologies, Inc.,
Roxas Land Corp, Serendra, Inc., Station Square East Commercial Corp., Ten Knots
Development, KHI ALI Manila, Inc., Lagoon Development Corp., Subic Bay Town Center,
Inc., Ayala Aviation Corporation, Laguna AAA Water Corp., Liveit Solution, Inc., Liveit
Investments, Ltd., Integreon, Inc., Arvo Commercial Corp., Amaia Land Corp., Michigan
Power, Philippine Intergrated Energy Solutions, Inc., Southcrest Hotel Ventures, Inc.,
Bonifacio Hotels and Crestview E-Office.

The balances with other related parties are recorded under the following accounts:

Notes 2014 2013 2012


(In Thousand Pesos)
Cash and cash equivalents 30 ₱1,385,635 ₱166,074 ₱199,392
General, selling and administrative
expenses 21 171,873 346,280 345,004
Property and equipment 7 64,300 60,437 71,272
Revenues 29 479,923 439,702 344,206
Accounts payable and accrued 12 15,454 72,440 50,008
expenses
Subscriber receivables (included in
“Receivables” account) 4 218,837 212,391 102,454

The balances under “General, selling and administrative expenses” and “Property and
equipment” accounts consist of expenses incurred on rent, utilities, customer contract services,
other miscellaneous services and purchase of vehicles, respectively.

These related parties are either controlled or significantly influenced by AC.

16.5 Transactions with key management personnel of the Globe Group

The Globe Group’s compensation of key management personnel by benefit type are as
follows:

Notes 2014 2013


(In Thousand Pesos)
Short-term employee benefits 21 ₱237,100 ₱157,272
Share-based payments 18.1 9,649 15,151
Post-employment benefits 18.2 30,466 18,090
₱277,215 ₱190,513

There are no agreements between the Globe Group and any of its directors and key officers
providing for benefits upon termination of employment, except for such benefits to which they
may be entitled under the Globe Group’s retirement plans.

The Globe Group has no non-interest bearing short-term loans to its key management
personnel in 2014 and 2013, respectively.

16.6 Transaction with BTI


The Globe group purchased BTI’s outstanding debts from its creditors and was recognized at
transaction price which was considered its fair value. The total debt of BTI is comprised of
sustainable Tranche A and unsustainable Tranche B. A portion of the debt (Tranche B) was

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converted into equity and was valued at nil while the total consideration at point of tender was
assigned to the collectible portion of Tranche A.
As of December 31, 2014 and 2013, loans receivable from BTI amounted to
P
=4,443.96 million and = P5,037.65 million comprising of principal and interest due until 2023,
with quarterly interest payments and semi-annual principal payments (see Notes 6 and 11).
Interest income amounted to =P504.67 million and =P475.82 million in 2014 and 2013,
respectively.

Globe Telecom and BTI executed an agreement to jointly use BTI frequencies for their
respective telecommunications services (see Note 25.8).

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The summary of balances arising from related party transactions for the relevant financial year follows (in thousands):

2014
Amount/Volume Outstanding Balance

Property and Cash and Cash Amounts owed Amounts


Cost and Equipment Equivalents by Related Owed to
Revenue Expenses (Note 7) (Note 30) Parties Related Parties Terms Conditions
Entities with joint control
over the Company
Interest-free,
AC ₱18,990 ₱37,135 ₱– ₱– ₱9,662 ₱755 settlement in cash Unsecured, no impairment
Interest-free, settlement
STI 671,989 243,871 – – 79,191 146,759 in cash Unsecured, no impairment
Jointly ventures
Interest-free, settlement
BMPL – 23,765 – – – 2,367 in cash Unsecured, no impairment
Interest-free, settlement
BPI Globe BanKO 6,812 – – – 7,160 – in cash Unsecured, no impairment
Associate
Loan receivable - 20
years, 9.60%
to 11.55%; lease capacity
provisioning - interest-
BTI 504,671 5,000 – – 4,443,956 80,334 free, settlement in cash Unsecured, no impairment
Other related parties
3 years, 5%, settlement
GGRP 68,015 – – – 968,000 – in cash Unsecured, no impairment
The ₱250.00 million is covered by a
pledge agreement while the ₱45.00
3 years, 5%, settlement million is fully secured by chattel
BHI 11,304 – – – 158,620 – in cash mortgage agreement.
Interest-free, settlement
BEAM – 155,000 – – – – in cash
Interest-free, settlement
Altimax – 90,000 – – – – in cash
Key management personnel – 277,215 – – – – Unsecured, no impairment
Interest-free, excluding
cash and cash
equivalents, settlement in
Others 479,923 171,873 64,300 1,385,635 218,837 15,454 cash Unsecured, no impairment
₱1,761,704 ₱1,003,859 ₱64,300 ₱1,385,635 ₱5,885,426 ₱245,669

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2013
Amount/Volume Outstanding Balance

Property and Cash and Cash Amounts owed Amounts Owed


Cost and Equipment Equivalents by Related to Related
Revenue Expenses (Note 7) (Note 30) Parties Parties Terms Conditions
Entities with joint control
over the Company
Interest-free, settlement
AC ₱14,107 ₱7,768 ₱– ₱– ₱14,761 ₱– in cash Unsecured, no impairment
Interest-free, settlement
STI 957,232 241,526 – – 201,216 60,484 in cash Unsecured, no impairment
Joint ventures
Interest-free, settlement
BMPL – 3,762 – – – 977 in cash Unsecured, no impairment
BPI Globe BanKO 541 – – – 1,107 –
Associate
BTI 475,822 5,000 – – 5,037,653 9,500
Other related parties
5 years, 7.75%, settlement
GGRP 76,257 – – – 968,000 – in cash Unsecured, no impairment
The ₱250.00 million is covered by a
pledge agreement while the ₱45.00
5 years, 8.275%, settlement million is fully secured by chattel
BHI 13,721 – – – 158,620 – in cash mortgage agreement.
Interest-free, settlement in
BEAM – 155,000 – – – – cash
Interest-free, settlement in
Altimax – 90,000 – – – – cash
Interest-free, settlement
Key management personnel – 190,513 – – – – in cash Unsecured, no impairment
Interest-free, excluding
cash and cash equivalents,
settlement
Others 439,702 346,280 60,437 166,074 212,391 72,440 in cash Unsecured, no impairment
₱1,977,382 ₱1,039,849 ₱60,437 ₱166,074 ₱6,593,748 ₱143,401

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17. Equity and Other Comprehensive Income

Globe Telecom’s authorized capital stock consists of:

2014 2013
Shares Amount Shares Amount
(In Thousand Pesos and Number of Shares)
Voting preferred stock -
₱5 per share 160,000 ₱800,000 250,000 ₱1,250,000
Non-voting preferred stock -
₱50 per share 40,000 2,000,000 – –
Common stock - ₱50 per share 148,934 7,446,719 179,934 8,996,719

Globe Telecom’s issued and subscribed capital stock consists of:

2014 2013
Shares Amount Shares Amount
(In Thousand Pesos and Number of Shares)
Voting preferred stock 158,515 ₱792,575 158,515 ₱792,575
Non-voting preferred stock 20,000 1,000,000 – –
Common stock 132,733 6,636,654 132,596 6,629,785
Total capital stock ₱8,429,229 ₱7,422,360

Below is a summary of the Globe Telecom’s track record of registration of securities.

Number of
shares Issue/offer
registered price Date of approval

Voting preferred stock 158,515,021 ₱500.00 June 2001


Non-voting preferred stock 20,000,000 5.00 August 11, 2014
Common stock 30,000,000 0.50 August 11, 1975
*Initial number of registered shares only.

17.1 Preferred Stock

Non-Voting Preferred Stock

On February 10, 2014, the Globe Telecom’s BOD approved the amendment of Articles of
Incorporation (AOI) to reclassify 31 million of unissued common shares with par value of
₱50 per share and 90 million of unissued voting preferred shares with par value of ₱5 per share
into a new class of 40 million non-voting preferred shares with par value of ₱50 per share.

On April 8, 2014, the stockholders approved the issuance, offer and listing of up to 20 million
non-voting preferred shares, with an issue volume of up to ₱10 billion. The non-voting
preferred shares shall be redeemable, non-convertible, non-voting, cumulative and may be
issued in series.

On June 6, 2014, the Securities and Exchange Commission (SEC) approved the amendment of
AOI to implement the foregoing reclassification of shares.

On August 8, 2014, the SEC approved the offer of non-voting preferred perpetual shares and on
August 15, 2014, the 20 million non-voting preferred shares were fully subscribed and issued.
Subsequently, the shares were listed at the Philippines Stock Exchange (PSE) on
August 22, 2014.

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Proceeds from preferred issuance were used to partially finance capital expenditures for the year.

Non-voting preferred stock has the following features:

a) Issued at ₱50 par;


b) Dividend rate to be determined by the BOD at the time of issue;
c) Redemption - at Globe’s option at such times and price(s) as may be determined by the BOD
at the time of issue, which price may not be less than the par value thereof plus accrued
dividends;
d) Eligibility of investors - Any person, partnership, association or corporation regardless of
nationality wherein at least 60% of the outstanding capital stock shall be owned by Filipino
e) No voting rights;
f) Cumulative and non-participating;
g) No pre-emptive rights over any sale or issuance of any share in Globe Telecom’s capital
stock; and
h) Shares shall rank ahead of the common shares and equally with the voting preferred shares in
the event of liquidation.

Voting Preferred Stock

Voting preferred stock has the following features:

(a) Issued at ₱5 par;


(b) Dividend rate to be determined by the BOD at the time of issue;
(c) One preferred share is convertible to one common share starting at the end of the 10th year of
the issue date at a price to be determined by the Globe Telecom’s BOD at the time of issue
which shall not be less than the market price of the common share less the par value of the
preferred share;
(d) Call option - Exercisable any time by Globe Telecom starting at the end of the 5th year from
issue date at a price to be determined by the BOD at the time of issue;
(e) Eligibility of investors - Only Filipino citizens or corporations or partnerships wherein 60%
of the voting stock or voting power is owned by Filipino;
(f) With voting rights;
(g) Cumulative and non-participating;
(h) Preference as to dividends and in the event of liquidation; and
(i) No pre-emptive rights to any share issue of Globe Telecom, and subject to yield protection in
case of change in tax laws.

The dividends for preferred shares are declared upon the sole discretion of Globe Telecom’s BOD.

17.2 Common Stock

The rollforward of outstanding common shares follows:

2014 2013 2012


Shares Amount Shares Amount Shares Amount
(In Thousand Pesos and Number of Shares)
At beginning of year 132,596 ₱6,629,785 132,406 ₱6,620,291 132,353 ₱6,617,651
Exercise of stock options 137 6,869 190 9,494 53 2,640
At end of year 132,733 ₱6,636,654 132,596 ₱6,629,785 132,406 ₱6,620,291

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17.3 Cash Dividends

Information on the Globe Telecom’s BOD declaration of cash dividends follows:


Date
Per Share Amount Record Payable
(In Thousand Pesos, Except Per Share Figures)
Voting preferred stock dividends declared on:
December 11, 2012 ₱0.21 ₱33,145 December 27, 2012 January 24, 2013
November 8, 2013 0.15 23,838 November 22, 2013 December 8, 2013
November 11, 2014 0.03 26,457 November 25, 2014 December 11, 2014

Non-voting preferred stock dividends declared on:


December 12, 2014 12.50 260,030 January 26, 2015 February 22, 2015

Common stock dividends declared on:


February 10, 2012 32.50 4,302,737 February 24, 2012 March 16, 2012
August 5, 2012 32.50 4,302,891 August 28, 2012 September 18, 2012
February 5, 2013 33.50 4,435,828 February 19, 2013 March 12, 2013
August 6, 2013 33.50 4,440,936 August 22, 2013 September 13, 2013
February 10, 2014 37.50 4,975,351 February 26, 2014 March 20, 2014
August 5, 2014 18.75 2,488,624 August 19, 2014 September 4, 2014
November 11, 2014 18.75 2,488,727 November 25, 2014 December 11, 2014

17.4 Common Stock Dividend


The dividend policy of Globe Telecom as approved by the BOD is to declare cash dividends to its
common stockholders on a regular basis as may be determined by the BOD. On November 8,
2011, the BOD approved the current dividend policy of Globe Telecom to distribute cash
dividends at the rate of 75% to 90% of prior year's core net income. On August 6, 2013, the BOD
further approved the change in distribution from semi-annual dividend payments to quarterly
dividend distributions. However, on December 10, 2013, the BOD approved to defer the
implementation of the quarterly dividend payout to the second semester of 2014.

The dividend distribution policy is reviewed annually and subsequently each quarter of the year,
taking into account Globe Telecom's operating results, cash flows, debt covenants, capital
expenditure levels and liquidity.

17.5 Retained Earnings Available for Dividend Declaration


The total unrestricted retained earnings available for dividend declaration amounted to ₱4,219.82
million as of December 31, 2014. This amount excludes the undistributed net earnings of
consolidated subsidiaries, accumulated equity in net earnings of joint ventures accounted for under
the equity method, and unrealized gains recognized on asset and liability currency translations and
unrealized gains on fair value adjustments. The Globe Group is also subject to loan covenants that
restrict its ability to pay dividends (see Note 14).

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17.6 Other Comprehensive Income

Other Reserves
December 31, 2014

Exchange
differences arising
AFS from translations Remeassurement
Cash flow financial of foreign losses on defined
hedges assets investments benefit plan Total
(In Thousand Pesos)
As of January 1, 2014 ₱35,027 ₱57,775 (₱6,020) (₱826,357) (₱739,575)
Fair value changes (207,522) 20,392 – – (187,130)
Remeasurement losses on defined
benefit plan – – – (397,930) (397,930)
Transferred to profit or loss 215,246 – – – 215,246
Income tax effect (2,317) – – 119,379 117,062
to or transferred
Exchange from equity
differences – – 14,474 – 14,474
As of December 31, 2014 ₱40,434 ₱78,167 ₱8,454 (₱1,104,908) (₱977,853)

December 31, 2013

Exchange
differences arising
AFS from translations Remeassurement
Cash flow financial of foreign losses on defined
hedges assets investments benefit plan Total
(In Thousand Pesos)
As of January 1, 2013 (₱121,200) ₱80,275 (₱3,663) (₱481,951) (₱526,539)
Fair value changes 406,194 (22,500) – – 383,694
Remeasurement losses on defined
benefit plan – – – (492,009) (492,009)
Transferred to profit or loss (183,012) – – – (183,012)
Income tax effect (66,955) – – 147,603 80,648
Exchange differences – – (2,357) – (2,357)
As of December 31, 2013 ₱35,027 ₱57,775 (₱6,020) (₱826,357) (₱739,575)

December 31, 2012

Exchange
differences arising
AFS from translations Remeassurement
Cash flow financial of foreign losses on defined
hedges assets investments benefit plan Total
(In Thousand Pesos)
As of January 1, 2012 (₱153,070) ₱36,301 (₱8,133) (₱279,453) (₱404,355)
Fair value changes 32,760 43,974 – – 76,734
Remeasurement losses on defined
benefit plan – – – (289,283) (289,283)
Transferred to profit or loss 12,769 – – – 12,769
Income tax effect (13,659) – – 86,785 73,126
Exchange differences – – 4,470 – 4,470
As of December 31, 2012 (₱121,200) ₱80,275 (₱3,663) (₱481,951) (₱526,539)

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18. Employee Benefits

18.1 Stock Plans

The Globe Group has Executive Stock Option Plan (ESOP) and Long-Term Incentive Plan
(LTIP). The number of shares allocated under these plans shall not exceed the aggregate
equivalent of 6% of the authorized capital stock.

18.1.1 Executive Stock Option Plan


Since 2003, the Globe Group had a share-based compensation plan called the Executive Stock
Option Plan (ESOP).

The number of shares allocated under the above plans shall not exceed the aggregate
equivalent of 6% of the authorized capital stock.

The following are the stock option grants to key executives and senior management personnel
of the Globe Group under the ESOP from 2003 to 2014:
Fair Value
Number of Each Fair Value
Date of Grant of Options Exercise Price Exercise Dates Option Measurement
April 4, 2003 680,200 ₱547.00 per share 50% of options exercisable from April 4, ₱283.11 Black-Scholes
2005 to April 14, 2013; the remaining 50% option pricing
exercisable from April 4, 2006 to April 14, model
2013

July 1, 2004 803,800 840.75 per share 50% of options exercisable from July 1, 357.94 Black-Scholes
2006 to June 30, 2014; the remaining 50% option pricing
from July 1, 2007 to June 30, 2014 model

March 24, 749,500 854.75 per share 50% of the options become exercisable from 292.12 Trinomial option
2006 March 24, 2008 to March 23, 2016; the pricing model
remaining 50% become exercisable from
March 24, 2009 to March 23, 2016

May 17, 2007 604,000 1,270.50 per share 50% of the options become exercisable from 375.89 Trinomial option
May 17, 2009 to May 16, 2017, the pricing model
remaining 50% become exercisable from
May 17, 2010 to May 16, 2017

August 1, 635,750 1,064.00 per share 50% of the options become exercisable from 305.03 Trinomial option
2008 August 1, 2010 to July 31, 2018, the pricing model
remaining 50% become exercisable from
August 1, 2011 to July 31, 2018

October 1, 298,950 993.75 per share 50% of the options become exercisable from 346.79 Trinomial option
2009 October 1, 2011 to September 30, 2019, the pricing model
remaining 50% become exercisable from
October 1, 2012 to September 30, 2019

The exercise price is based on the average quoted market price for the last 20 trading days
preceding the approval date of the stock option grant.

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A summary of the Globe Group’s ESOP activity and related information follows:

2014 2013
Weighted
Average Weighted
Number of Exercise Number of Average Exercise
Shares Price Shares Price
(In Thousand Number of Shares, Except per Share Figures)

Outstanding, at beginning of year 574 ₱1,087.26 1,366 ₱1,081.01


Exercised (302) 1,109.96 (771) 1,085.79
Expired/forfeited (5) 840.75 (21) 729.82
Outstanding, at end of year 267 1,068.56 574 1,087.76
Exercisable, at end of year 267 1,068.56 574 1,087.76

The average share prices at dates of exercise of the stock options in 2014, 2013 and 2012
amounted to ₱1,697.34, ₱1,586.10 and ₱1,213.00, respectively.

As of December 31, 2014 and 2013, the weighted average remaining contractual life of
options outstanding is 2.87 years and 3.85 years, respectively.

The following assumptions were used to determine the fair value of the stock options at
effective grant dates:

October 1, August 1, May 17, March 24, July 1, April 4,


2009 2008 2007 2006 2004 2003
Share price ₱995.00 ₱1,130.00 ₱1,340.00 ₱930.00 ₱835.00 ₱580.00
Exercise price ₱993.75 ₱1,064.00 ₱1,270.50 ₱854.75 ₱840.75 ₱547.00
Expected volatility 48.49% 31.73% 38.14% 29.51% 39.50% 34.64%
Option life 10 years 10 years 10 years 10 years 10 years 10 years
Expected dividends 6.43% 6.64% 4.93% 5.38% 4.31% 2.70%
Risk-free interest rate 8.08% 9.62% 7.04% 10.30% 12.91% 11.46%

The expected volatility measured at the standard deviation of expected share price returns was
based on analysis of share prices for the past 365 days. Cost of share-based payments for the
years ended December 31, 2014, 2013 and 2012 amounted to ₱31.84 million, ₱50.00 million
and ₱11.50 million, respectively (Note 16.5).

18.1.2 Long-Term Incentive Plan


In November 2014, Globe has obtained approval from the Board to implement another Long-
Term Incentive Plan (LTIP) also called a Performance Share Plan (PSP). Eligible to this plan
are key executives and senior management. Under the PSP, the grantees are awarded a
specific number of shares at the start of the performance period and get vested over a
specified performance period and contingent upon the achievement of specified long-term
goals.
The following are the stock grants to key executives and senior management personnel of the
Globe Group under the LTIP:

Number Fair Value of Fair Value


Date of Grant of Grants Settlement Dates Each Grant Measurement

100% after 3 years subject to attainment of


November 28, plan targets and subject to stock ownership Share price on grant
2014 106,293 requirements ₱1,630.35 date

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18.2 Pension Plan


The Globe Group has a funded, noncontributory, defined benefit pension plan covering
substantially all of its regular employees. The benefits are based on years of service and
compensation on the last year of employment.

The Plan is managed and administered by a Board of Trustees (BOT) whose members are
unanimously appointed by the Globe Group acting through its BOD. The BOT is authorized to
appoint one or more fund managers to hold, invest and reinvest the assets of the Plan and execute
an Investment Agreement with the said fund managers. The Plan is held and invested by the fund
managers, in accordance with the guidelines set by the BOT.

Under the existing regulatory framework, Republic Act 7641 requires a provision for retirement
pay to qualified private sector employees in the absence of any retirement plan in the entity,
provided however that the employee’s retirement benefits under any collective bargaining and
other agreements shall not be less than those provided under the law. The law does not require
minimum funding of the plan.

The components of pension expense (included in staff costs under “General, selling and
administrative expenses” account) in the consolidated Globe Group statements of comprehensive
income are as follows:

2014 2013 2012


(In Thousand Pesos)
Current service cost ₱417,653 ₱348,399 ₱282,746

The accrued pension is as follows:

2014 2013
(In Thousand Pesos)
Present value of benefit obligation ₱5,236,037 ₱4,262,206
Fair value of plan assets (2,914,842) (2,654,907)
Liabilities recognized in the consolidated statements of
financial position ₱2,321,195 ₱1,607,299

The following tables present the changes in the present value of defined benefit obligation and
fair value of plan assets:

Present value of defined benefit obligation

2014 2013
(In Thousand Pesos)
Balance at beginning of year ₱4,262,206 ₱3,437,028
Current service cost 417,653 ₱348,399
Past service cost – 217
Interest cost 208,358 184,708
Benefits paid from plan assets (106,988) (165,182)
Benefits paid directly by the Globe Group – (957)
Remeasurements in other comprehensive income:
Actuarial changes arising from changes in demographic 336,002 271,077
assumptions
Actuarial changes arising from experience adjustments 118,806 186,916
Balance at end of year ₱5,236,037 ₱4,262,206

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Fair value of plan assets


2014 2013
(In Thousand Pesos)

Balance at beginning of year ₱2,654,907 ₱2,593,117


Contributions 172,440 119,392
Interest income on plan assets 137,606 141,597
Return on plan assets (excluding amount included in
net interest) 56,877 (34,017)
Benefits paid (106,988) (165,182)
Balance at end of year ₱2,914,842 ₱2,654,907
Actual return on plan assets ₱194,483 ₱107,580

The recommended contribution for the Globe Group retirement fund for the year 2015 amounted
to ₱217.78 million. This amount is based on the Globe Group’s actuarial valuation report as of
December 31, 2014.

As of December 31, 2014 and 2013, the allocation of the fair value of the plan assets of the Globe
Group follows:
2014 2013
(In Thousand Pesos)
Cash and cash equivalents ₱148,746 ₱121,330
Loans receivables 968,000 968,000
Investment in fixed income securities
Government 796,424 696,382
Corporate 200,488 298,750
Loans 4,945 22,801
Others 128,035 9,033
Investment in equity securities
Quoted
Holding firm 164,202 166,382
Property 133,920 104,323
Industrial 123,543 99,160
Financials 88,342 59,513
Mining and oil 30,550 19,226
Others 95,647 58,007
Unquoted 1,000,000 1000,000
Liabilities (968,000) (968,000)
₱2,914,842 ₱2,654,907

The assumptions used to determine pension benefits for the Globe Group are as follows:
2014 2013
Discount rate 4.50% 5.27%
Salary rate increase 4.50% 5.13%

The assumptions regarding future mortality rates are based on the 1994 Group
Annuity Mortality Table developed by the Society of Actuaries, which provides separate rate for
males and females.

In 2014 and 2013, the Globe Group applied a single weighted average discount rate that reflects
the estimated timing and amount of benefit payments.

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The sensitivity analysis below has been determined based on reasonably possible changes of each
significant assumption on the defined benefit obligation as of December 31, 2014 and 2013,
assuming all other assumptions were held constant (in thousand pesos):

2014 2013
Impact on Impact on
defined benefit defined benefit
obligation obligation
Increase Increase Increase Increase
(decrease) (decrease) (decrease) (decrease)

Discount rates +0.50% (₱335,974) +0.50% (₱270,806)


-0.50% 370,470 -0.50% 298,757
Future salary increases +1% 772,823 +1% 622,604
-1% (646,860) -1% (521,273)
Mortality +10% (1,044) +10% (566)
-10% 1,044 -10% 620

There were no changes from the previous period in the methods and assumptions used in
preparing sensitivity analysis.

The objective of the plan’s portfolio is capital preservation by earning higher than regular deposit
rates over a long period given a small degree of risk on principal and interest. Asset purchases and
sales are determined by the plan’s investment managers, who have been given discretionary
authority to manage the distribution of assets to achieve the plan’s investment objectives. The
compliance with target asset allocations and composition of the investment portfolio is monitored
by the BOT on a regular basis.

The defined benefit retirement plan is funded by the participating companies, namely Globe,
Innove and G-Xchange. The plan contributions are based on the actuarial present value of
accumulated plan benefits and fair value of plan assets are determined using an independent
actuarial valuation.

The average duration of the defined benefit obligation at the end of the reporting period is 17.38
years in 2014 and 22.21 years in 2013.

Shown below is the maturity analysis of the undiscounted benefit payments as of


December 31, 2014 and 2013:

2014 2013
(In Thousand Pesos)
Within 1 year ₱215,168 ₱181,324
More than 1 year to 5 years 1,115,523 971,056
More than 5 years 2,148,394 1,883,478
₱3,479,085 ₱3,035,858

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19. Interest Income

Interest income is earned from the following sources:

Notes 2014 2013 2012


(In Thousand Pesos)
Loans receivable: 6, 11
BTI 16.6 ₱504,671 ₱475,822 ₱138,385
GGRP 16.3 68,015 76,257 76,273
BHI 16.3, 25.5 11,304 13,721 24,818
Others – 24,431 6,384
Short-term placements 30 91,044 79,813 316,894
Cash in banks 30 7,964 18,205 17,097
₱682,998 ₱688,249 ₱579,851

20. Other Income

This account consists of:

Notes 2014 2013 2012


(In Thousand Pesos)
Foreign exchange gain - net 22, 28.2.1.2 ₱884 ₱– ₱318,334
Lease income 25.1.1, 25.4 172,499 172,499 172,499
Gain on derivative instruments - net 22, 28 70,829 – –
Others 9 226,435 302,747 225,538
₱470,647 ₱475,246 ₱716,371

The peso to US dollar exchange rates amounted to ₱44.740, ₱44.398 and ₱44.078 as of
December 31, 2014, 2013 and 2012, respectively.
The Globe Group’s net foreign currency-denominated liabilities amounted to USD312.43 million,
USD357.85 million and USD161.22 million as of December 31, 2014, 2013 and 2012,
respectively (see Note 28.2.1.2).
These combinations of net liability movements and peso rate depreciation/appreciation resulted in
net foreign exchange gain in 2014 and net foreign exchange loss in 2013 (see Note 22).
The “Others” account includes insurance claims and other items that are individually immaterial.

21. General, Selling and Administrative Expenses

This account consists of:


Notes 2014 2013 2012
(In Thousand Pesos)
Staff costs 16.5, 18 ₱8,665,757 ₱7,473,499 ₱6,426,592
Selling, advertising and promotions 8,000,982 7,014,729 6,440,554
Professional and other contracted
services 16 6,653,441 5,966,481 5,193,217
Utilities, supplies and other
administrative expenses 5 4,481,830 4,399,110 4,260,773

(Forward)

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Notes 2014 2013 2012


(In Thousand Pesos)
Rent 16, 25 P
=4,116,372 P
=3,534,975 P
=3,153,505
Repairs and maintenance 16 4,099,986 3,656,671 3,672,038
Taxes and licenses 1,787,694 2,055,909 1,595,842
Courier, delivery and miscellaneous
expenses 1,486,356 1,320,112 1,055,375
Insurance and security services 1,439,942 1,383,294 1,330,648
Others 650,517 514,059 473,867
₱41,382,877 ₱37,318,839 ₱33,602,411

The “Others” account includes various other items that are individually immaterial.

22. Financing Costs

This account consists of:

Notes 2014 2013 2012


(In Thousand Pesos)

Interest expense - net* 7, 14 ₱2,326,171 ₱2,091,915 ₱2,104,792


Swap and other financing costs 28.4 239,535 245,187 183,007
Foreign exchange loss - net 20, 28.2.1.2 – 486,308 –
Loss on derivative instruments - net 20, 28.4 – 88,375 74,810
₱2,565,706 ₱2,911,785 ₱2,362,609
*This account is net of the amount of capitalized borrowing costs (see Note 7).

In 2014, gain on derivative instruments amounting to ₱70.83 million (nil in 2013 and 2012) and
net foreign exchange gain in 2014 and 2012 amounting to ₱0.88 million and ₱318.33 million (nil
in 2013), respectively, was presented as part of the “Other income” account in the consolidated
statements of comprehensive income (see Note 20).

Interest expense-net is incurred on the following:

Notes 2014 2013 2012


(In Thousand Pesos)
Long-term debt 14 ₱1,958,594 ₱1,660,094 ₱1,657,862
Accretion expense 15, 24.4 171,493 193,815 168,707
Amortization of debt issuance cost 14 108,746 131,967 103,497
Short-term notes payable 14 – 57,954 82,047
Net interest cost on defined
benefit obligation 70,752 43,111 18,714
Others 16,586 4,974 73,965
₱2,326,171 ₱2,091,915 ₱2,104,792

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23. Impairment Losses and Others


This account consists of:
Notes 2014 2013 2012
(In Thousand Pesos)
Impairment losses on:
Receivables 4 ₱3,035,235 ₱2,046,523 ₱1,377,317
Property and equipment and 28.2.2
intangible assets 7, 8 110,238 26,312 259,262
Provisions for:
Inventory obsolescence and
market decline 5 437,511 321,460 170,678
Claims and assessments 13 137,185 88,333 56,327
₱3,720,169 ₱2,482,628 ₱1,863,584

24. Income Tax


The significant components of the deferred income tax assets and liabilities of the Globe Group
represent the deferred income tax effects of the following:
2014 2013
(In Thousand Pesos)
Deferred income tax assets on:
Allowance for impairment losses
on receivables ₱1,725,002 ₱1,267,463
Unearned revenues and advances
already subjected to income tax 864,049 801,636
Accrued pension 826,097 643,823
Accrued manpower cost 709,141 116,561
ARO 519,885 476,901
Inventory obsolescence and market
decline 183,384 146,965
Accumulated impairment losses
on property and equipment 179,121 185,941
Accrued rent expense under PAS 17 122,248 119,087
Cost of share-based payments 71,115 136,424
Unrealized foreign exchange losses 69,067 128,713
Provision for claims and assessment 64,858 52,696
Allowance for doubtful accounts for
long-outstanding net advances 58,532 40,497
NOLCO 561 –
Unrealized loss on derivative
transactions – 26,414
Others 43,958 29,390
5,437,018 4,172,511
Deferred income tax liabilities on:
Excess of accumulated depreciation
and amortization of Globe Telecom
equipment for (a) tax reporting over
(b) financial reporting 2,004,385 815,677
Undepreciated capitalized borrowing
costs already claimed as deduction for tax 1,513,860 1,432,724
reporting
(Forward)

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2014 2013
Unrealized foreign exchange gain P
=2,217 =–
P
Unamortized discount on noninterest
bearing liability 5,583 850
Unrealized gain on derivative transaction 6,970 –
Others 103 6,382
3,533,119 2,255,633
Net deferred income tax assets ₱1,903,899 ₱1,916,878
(a)
Sum-of-the-years digit method
(b)
Straight-line method

Net deferred tax assets and liabilities presented in the consolidated statements of financial
position on a net basis by entity are as follows:

2014 2013
(In Thousand Pesos)
Net deferred tax assets* ₱1,904,298 ₱1,916,878
Net deferred tax liabilities (GTI) 399 –
*2014 consist of Globe Telecom, Innove, GXI, Yondu. KVI and Asticom
2013 consist of Innove, GTI and Yondu

The composition of deferred income tax assets follows:

2014 2013
(In Thousand Pesos)
Deferred income tax recognized in profit or loss ₱1,447,696 ₱1,577,737
Deferred income tax recognized in OCI 456,203 339,141
₱1,903,899 ₱1,916,878

The reconciliation of the provision for income tax at statutory tax rate and the actual current and
deferred provision for income tax follows:

2014 2013 2012


(In Thousand Pesos)
Provision at statutory income tax rate ₱5,814,812 ₱2,059,432 ₱2,925,464
Add (deduct) tax effects of:
Equity in net losses of associates and joint
ventures 67,277 23,988 25,075
Deferred tax on unexercised stock options
and basis differences on deductible and
reported stock compensation expense 3,252 (176,949) (54,524)
Income subjected to lower tax rates (64,633) (16,861) (823,505)
Others 189,806 14,918 833,783
Actual provision for income tax ₱6,010,514 ₱1,904,528 ₱2,906,293

The current provision for income tax includes the following:

2014 2013 2012


(In Thousand Pesos)
RCIT or MCIT whichever is higher ₱5,830,006 ₱4,949,057 ₱4,291,409
Final Tax 49,872 46,359 64,290
₱5,879,878 ₱4,995,416 ₱4,355,699

The corporate tax rate is 30% in 2014, 2013 and 2012.

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Globe Telecom and Innove are entitled to certain tax and nontax incentives and have availed of
incentives for tax and duty-free importation of capital equipment for their services under their
respective franchises.

25. Agreements and Commitments

25.1 Lease Commitments

25.1.1 Operating Lease Commitments

a) Globe Group as lessee

The Globe Group leases certain premises for some of its telecommunications facilities and
equipment and for most of its business centers and network sites. The operating lease
agreements are for periods ranging from one (1) to ten (10) years from the date of the
contracts and are renewable under certain terms and conditions. The agreements generally
require certain amounts of deposit and advance rentals, which are shown as part of the
“Prepayment and other current assets” and “Other noncurrent assets” accounts in the
consolidated statements of financial position (see Notes 6 and 11). The Globe Group also
has short-term renewable leases on transmission cables and equipment. The Globe
Group’s rentals incurred on these various leases (included in the “General, selling and
administrative expenses” account in the consolidated statements of comprehensive income)
amounted to₱4,116.37 million, ₱3,534.98 million and ₱3,153.51 million, respectively, for
the years ended December 31, 2014, 2013 and 2012, respectively.

The future minimum lease payments under these operating leases are as follows:

2014 2013
(In Thousand Pesos)
Not later than one year ₱1,003,867 ₱798,706
After one year but not more than five years 6,773,893 4,374,751
After five years 4,216,802 2,309,172
₱11,994,562 ₱7,482,629

b) Globe Group as lessor


Globe Telecom have certain lease agreements on equipment and office spaces. The
operating lease agreements are for periods ranging from one (1) to fourteen (14) years from
the date of contracts. These include Globe Telecom’s lease agreement with C2C Pte. Ltd.
(C2C) (see Note 25.4).
Total lease income amounted to ₱172.50 million for the years ended December 31, 2014,
2013 and 2012, respectively (included in “Other income” account in the consolidated
statements of comprehensive income) (see Note 20).
The future minimum lease receivables under these operating leases are as follows:
2014 2013
(In Thousand Pesos)

Within one year ₱159,686 ₱146,694


After one year but not more than five years 39,921 183,367
₱199,607 ₱330,061

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25.1.2 Finance lease commitments


Globe Group as lessee
The Globe Group engaged the services of various suppliers for the upgrade of its wireless,
data and telephony network. In partnership with equipment and service providers and the
appointment of a project and program manager, the Globe Group undertook a
transformation upgrade and overhaul of its business support systems within the
USD790.00 million modernization project.
Part of the managed service engagement with the service provider is a lease for hardware
infrastructure and information equipment valued over the seven-year term of the lease at
₱893.28 million. Total lease payments as of December 31, 2014 and 2013 amounted to
₱306.90 million and ₱168.26 million, respectively. The managed service engagement has
terms of renewal and purchase options, among others.
Future minimum lease payments under finance leases with the present value of the net
minimum lease payments are as follows:
2014 2013
Minimum Present Value Minimum Present Value
Payments of Payments Payments of Payments
(In Thousand Pesos)
Within one year ₱123,070 ₱114,279 ₱183,726 ₱168,707
After one year but not
more than five years 463,502 449,686 510,561 491,311
More than five years – – 30,938 30,483
Total minimum lease payments 586,572 563,965 725,225 690,501
Less amounts representing finance charges (22,607) – (34,724) –
Present value of minimum lease payments ₱563,965 ₱563,965 ₱690,501 ₱690,501

In addition, total payments to service providers based on the seven-year agreement for the
maintenance of servers, which includes application development and maintenance, service
design, managed network services, office automation or end-user computing, service desk
services and business supports systems amounted to ₱131.31 million and ₱95.70 million
as of December 31, 2014 and 2013, respectively.

25.2 Agreements and Commitments with Other Carriers


Globe Telecom and Innove have existing international telecommunications service agreements
with various foreign administrations and interconnection agreements with local
telecommunications companies for their various services. Globe also has international roaming
agreements with other foreign operators, which allow its subscribers access to foreign networks.
The agreements provide for sharing of toll revenues derived from the mutual use of
telecommunication networks.

25.3 Arrangements and Commitments with Suppliers


Globe Telecom and Innove have entered into agreements with various suppliers for the
development or construction, delivery and installation of property and equipment. Under the
terms of these agreements, advance payments are made to suppliers and delivery, installation,
development or construction commences only when purchase orders are served. While the
development or construction is in progress, project costs are accrued based on the billings
received. Billings are based on the progress of the development or construction and advance
payments are being applied proportionately to the milestone billings. When development or
construction and installation are completed and the property and equipment is ready for service,
the balance of the value of the related purchase orders is accrued.

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The accrued project costs as of December 31, 2014 and 2013 included in the “Accounts payable
and accrued expenses” account in the consolidated statements of financial position amounted to
₱22,015.72 million and ₱16,557.49 million, respectively (see Note 12). As of December 31, 2014
and 2013, the consolidated expected future billings on the unaccrued portion of purchase orders
issued amounted to ₱36,381.74 million and ₱38,320.44 million, respectively. The settlement of
these liabilities is dependent on the payment terms and project milestones agreed with the
suppliers and contractors. As of December 31, 2014 and 2013, the unapplied advances made to
suppliers and contractors relating to purchase orders issued amounted to ₱5,731.12 million and
₱5,223.60 million, respectively (see Note 6).

25.4 Agreements with C2C/Pacnet


In 2001, Globe Telecom signed a cable equipment supply agreement with C2C as the supplier. In
March 2002, Globe Telecom as a lessor entered into an equipment lease agreement for the said
equipment with GB21 Hong Kong Limited (GB21).

Subsequently, GB21, in consideration of C2C’s agreement to assume all payment obligations


pursuant to the lease agreement, assigned all its rights, obligations and interest in the equipment
lease agreement to C2C. As a result of the said assignment of payables by GB21 to C2C, the
Globe Group’s liability arising from the cable equipment supply agreement with C2C was
effectively converted into a noninterest bearing long-term obligation accounted for at net present
value under PAS 39 starting 2005.

In January 2003, the Globe Group received advance lease payments from C2C for its use of a
portion of the Globe Group’s cable landing station facilities. Based on the amortization schedule,
the Globe Group recognized lease income amounting to ₱12.26 million for the years ended
December 31, 2014, 2013 and 2012.

On November 17, 2009, Globe Telecom and Pacnet Cable Ltd. (Pacnet), formerly C2C, signed a
memorandum of agreement (MOA) to terminate and unwind their Landing Party Agreement dated
August 15, 2000 (LPA). The MOA further requires Globe Telecom, being duly licensed and
authorized by the NTC to land the C2C Cable Network in the Philippines and operate the C2C
Cable Landing Station (CLS) in Nasugbu, Batangas, Philippines, to transfer to Pacnet’s designated
qualified partner, the license of the C2C CLS, the CLS, a portion of the property on which the
CLS is situated, certain equipment and associated facilities thereof.

In return, Pacnet will compensate Globe Telecom in cash and by way of C2C cable capacities
deliverable upon completion of certain closing conditions. The MOA also provided for novation
of abovementioned equipment supply and lease agreements and reciprocal options for Globe
Telecom to purchase future capacities from Pacnet and Pacnet to purchase backhaul and ducts
from Globe Telecom at agreed prices.

In the second quarter of 2010, the specific equipment, portion of the property and facilities, and
the liabilities associated with the transfer were identified, classified and shown separately in the
consolidated statement of financial position as “Assets classified as held for sale” and “Liabilities
directly associated with the assets classified as held for sale”.

In 2013, the Globe Group ceased to classify its non-current assets as held for sale due to
substantial delay in the completion of the transaction. Globe Group recognized a catch-up
depreciation amounting to ₱397.0 million for the year ended December 31, 2013.

25.5 Agreement with BHI


On August 11, 2009, Globe Telecom signed a credit facility agreement with BHI amounting to
₱750.00 million. As of December 31, 2014 and 2013, the total drawdown of BHI amounted to

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₱295.00 million. The loan is payable in one full payment, five years from the date of initial
drawdown, with a prepayment option in whole or in part on an interest payment date. Interest is at
the rate of 8.275%, payable semi-annually in arrears and the loan is secured by a pledge and
chattel mortgage agreement. Interest income amounted to ₱11.30 million, ₱13.72 million and
₱24.82 million in 2014, 2013 and 2012, respectively (see Note 19). As of December 31, 2014 and
2013, the outstanding balance of loan receivable from BHI amounted to ₱158.62 million (see
Notes 6 and 11).

On August 13, 2014, the maturity of the outstanding balance of loan receivable from BHI
amounting to ₱158.62 million was extended to August 13, 2017 and the interest rate was reduced
to 5% per annum effective August 14, 2014.

As of December 31, 2014 and 2013, the outstanding balance of the loan receivable amounted to
₱158.62 million (see Notes 6 and 11).

25.6 Agreement with STI


In 2009, STI agreed to sell to Globe Telecom its own capacity in a certain cable system. In 2009
also, Globe Telecom agreed to sell to STI capacities that it owns in a certain cable system (see
Note 16.1). In March 2011, the final agreements were executed between Globe Telecom and STI
whereby the Globe Telecom conveyed and transferred ownership of certain IRU of certain
international cables systems in exchange for IRUs of certain cables systems of STI. The assets
received were booked at its fair value amounting to ₱120.19 million.

25.7 Construction Maintenance Agreement for South-East Asia Japan Cable System (SJC)
In April 2011, the global consortium of telecommunication companies formed to build and operate
the South-East Asia Japan Cable (SJC) system officially started the construction of the project that
will link Brunei, China Mainland, Hong Kong, Philippines, Japan, and Singapore with options to
extend to Thailand. The SJC consortium is composed of the Globe Group and nine other
international carriers. The Globe Telecom’s investment for this project amounts to USD63.91
million and total expenditures incurred was at 100% and 95% as of December 31, 2014 and 2013,
respectively (see Note 7).

25.8 Agreement with BTI


On July 26, 2012, Globe Telecom and BTI executed an agreement to jointly use BTI frequencies
for their respective telecommunications services. Globe Telecom agreed to pay BTI a capacity
provision fee per annum and grant access to each other’s network, resources and facilities to
enable joint and efficient use of the frequency.

On October 1, 2012, the NTC provisionally approved the joint use by the Globe Group and BTI
the frequencies assigned to BTI. The joint use agreement will allow the Globe Group to address
the increasing demand for voice, SMS and mobile data services; and for BTI to be able to offer
mobile telecommunications services nationwide. The NTC imposed conditions to both parties,
which includes the continuous payment of annual spectrum usage fee (SUF) imposed by the NTC
to both parties, and where the Globe Telecom shall improve and maintain the required quality
service in order to continue the joint use of the assigned frequencies.

25.9 Network Sharing Arrangement with ABS-CBN Convergence Inc.


On May 27, 2013, Globe Telecom, Innove and ABS-CBN Convergence Inc. (ABS-C) entered into
a network sharing arrangement in order to provide capacity and coverage for new mobile
telephony, data and value-added services to be offered by ABS-C nationwide to its subscribers
using shared network and interconnect assets of the parties.

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This arrangement will enable Globe Telecom, Innove and ABS-C to improve public service by
enhancing utility, capacity, inter-operability and quality of mobile and local exchange telephony
and data services to the public and allow ABS-C to modernize its existing service and expand to a
retail base on top of its existing subscriber base.

On May 31, 2013, NTC approved the network sharing agreement and co-use of the number blocks
assigned to Globe Telecom.
25.10 Shareholders’ and dealership agreement with Taodharma
In March 2013, Globe Telecom entered into a Shareholders Agreement among four other entities
to incorporate Taodharma.

Globe Telecom subscribed for the 25% preferred shares of Taodharma amounting to
P
=55.00 million which has been fully paid up as of August 2013 (see Note 11). Taodharma shall
carry on the business of establishing, operating and maintaining retail stores in strategic locations
within the Philippines that will sell telecommunications or internet-related services, and devices,
gadgets, accessories or embellishments in connection and in accordance with the terms and
conditions of the Dealer Agreement executed among all of the entities.

In March 2013, Globe Telecom also entered into an exclusive dealership arrangement with
Taodharma that included provisions to build and open retail outlet stores scattered across cities
and other major high-traffic locations nationwide.

As of December 31, 2014 and 2013, Globe Group has recognized P =139.96 million and = P67.55
million, respectively, representing share on costs classified under “Intangible assets and goodwill -
net” account in the consolidated statements of financial position (see Note 8).

25.11 Deed of Assignment of Certificate of Public Convenience and Necessity by Wordwide


Communication Inc. (WWCI)
On July 5, 2013, the NTC approved the “Deed of Assignment” (DoA) dated February 13, 2013
executed by WWCI in favor of Globe Telecom. Through the DoA, WWCI assigned and
transferred its entire interest including the operation of its Trunk Radio Network, the Certificate of
Public Convenience and Necessity granted by the NTC and the pertinent permits necessary to
operate the trunk radio to Globe Telecom. The total consideration under the said original DoA
was ₱30.00 million.

On April 1, 2014, Globe Telecom and WWCI signed the Supplemental Agreement to the DoA for
final consideration of ₱150.00 million to be paid in tranches upon fulfillment of stated conditions.

Conditions include reassignment and reallocation of Radio Station Licenses and issuance of
associated Frequency Assignment Sheets in the name of Globe Telecom. Pending compliance on
the conditions, payments will be recorded as advances classified under “Prepayments and other
current assets” in the consolidated statements of financial position.

On January 29, 2015, WWCI and Globe Telecom have agreed to wind down the transaction as the
conditions for closing can no longer be met. The advances made amounting to ₱45.00 million will
be due to Globe Telecom on or before July 31, 2015 (see Note 6).

25.12 Southeast Asia- United States (SEA - US) Project


Globe has joined a consortium of seven international telecommunication companies for the
construction of a new submarine cable system directly connecting Southeast Asia and the United

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States. Other members of the consortium include PT Telekomunikasi Indonesia International


(Telin), Telkom USA, RAM Telecom International (RTI), Hawaiian Telcom, and Teleguam
Holdings (GTA). The 15,000-kilometer cable system would link Manado in Indonesia, Davao in
the Philippines, Piti in Guam, Oahu in Hawaii, and Los Angeles in California, providing superior
latency delivering additional 20 terabits per second (Tbps), utilizing 100 gigabits per second
(Gbps) transmission equipment. Globe and GTIC US is spending more than $80 million for the
SEA-US undersea cable system slated for completion in the last quarter of 2016.

25.13 Facilities-based Operations License granted to Globetel Singapore Pte. Ltd (GTSG)
On November 25, 2014, Globetel Singapore Pte. Ltd. has applied for a facilities-based operations
license (FBO License) with Infocomm Development Authority of Singapore (IDA) which was
subsequently granted on January 7, 2015. GTSG will provide IDA with performance bond for the
aggregate sum of USD75,400 to secure its obligation to fulfill the installation of equipment
required to support Southeast Asia Japan cable system and activation of its capacity between
Singapore, Philippines and Hongkong.

26. Contingencies

(a) On October 10, 2011, the NTC issued Memorandum Circular No. 02-10-2011 titled
Interconnection Charge for Short Messaging Service requiring all public telecommunication
entities to reduce their interconnection charge to each other from P=0.35 to =
P0.15 per text, which
Globe Telecom complied as early as November 2011. On December 11, 2011, the NTC One
Stop Public Assistance Center (OSPAC) filed a complaint against Globe, Smart and Digitel
alleging violation of the said MC No. 02-10-2011 and asking for the reduction of SMS off-net
retail price from =
P1.00 to =P0.80 per text. Globe Telecom filed its answer maintaining the position
that the reduction of the SMS interconnection charges does not automatically translate to a
reduction in the SMS retail charge per text.

On November 20, 2012, the NTC rendered a decision directing Globe Telecom to:

1. Reduce its regular SMS retail rate from =


P1.00 to not more than P
=0.80;
2. Refund/reimburse its subscribers the excess charge of P
=0.20; and
3. Pay a fine of =
P200.00 per day from December 1, 2011 until date of compliance.
On May 7, 2014, NTC denied the Motion for Reconsideration (MR) filed by Globe Telecom last
December 5, 2012 in relation to the November 20, 2012 decision. Globe Telecom’s assessment is
that Globe Telecom is in compliant with the NTC Memorandum Circular No. 02-10-2011. On
June 9, 2014, Globe filed petition for review of the NTC decision and resolution with the
Court of Appeals (CA).
The CA granted the petition in a resolution dated September 3, 2014 by issuing a 60-day
temporary restraining order against Memorandum Circular 02-10-2011 by the NTC. On
October 15, 2014, Globe posted a surety bond to compensate for possible damages as directed by
the CA.
(b) On 22 May 2006, Innove received a copy of the Complaint of Subic Telecom Company
(Subictel), Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay
Metropolitan Authority and Innove from taking any actions to implement the Certificate of
Public Convenience and Necessity granted by SBMA to Innove. Subictel claimed that the grant
of a CPCN allowing Innove to offer certain telecommunications services within the Subic Bay
Freeport Zone would violate the Joint Venture Agreement (JVA) between PLDT and SBMA.

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(c) The Supreme Court ordered the reinstatement of the case and has forwarded it to the NTC-
Olongapo for trial. The case is now being tried before the Olongapo RTC.

(d) PLDT and its affiliate, Bonifacio Communications Corporation (BCC) and Innove and Globe
Telecom are in litigation over the right of Innove to render services and build
telecommunications infrastructure in the Bonifacio Global City. In the case filed by Innove
before the NTC against BCC, PLDT and the Fort Bonifacio Development Corporation
(FBDC), the NTC has issued a Cease and Desist Order 100 preventing BCC from performing
further acts to interfere with Innove’s installations in the Bonifacio Global City.

In the case filed by PLDT against the NTC in Branch 96 of the Regional Trial Court (RTC) of
Quezon City, where PLDT sought to obtain an injunction to prevent the NTC from hearing the
case filed by Innove, the RTC denied the prayer for a preliminary injunction and the case has
been set for further hearings. PLDT has filed a Motion for Reconsideration and Globe has
intervened in this case. In a resolution dated October 28, 2008, the RTC QC denied BCC‘s
motion for the issuance of a temporary restraining order (TRO). The case is still pending with
the QC RTC.

In the case filed by BCC against FBDC, Globe Telecom and Innove, Bonifacio
Communications Corp. before the Regional Trial Court of Pasig, which case sought to enjoin
Innove from making any further installations in the BGC and claimed damages from all the
parties for the breach of the exclusivity of BCC in the area, the court did not issue a Temporary
Restraining Order and has instead scheduled several hearings on the case. The defendants filed
their respective motions to dismiss the complaint on the grounds of forum shopping and lack of
jurisdiction, among others. On 30 March 2012, the RTC of Pasig, as prayed for, dismissed the
complaint on the aforesaid grounds. Dissatisfied with the decision of the RTC, BCC and PLDT
elevated the case to the Court of Appeals. On 18 May 2012, The Court of Appeals dismissed
the case. On July 6, 2012, BCC and PLDT filed a petition for review on certiorari with the
Supreme Court on July 6, 2012. Innove filed its Comment thereon on 6 December 2012. The
case is still pending resolution with the Supreme Court.

On 11 November 2008, Bonifacio Communications Corp. (BCC) filed a criminal complaint


against the officers of Innove Communications Inc., the Fort Bonifacio Development
Corporation (FBDC) and Innove contractor Avecs Corporation for malicious mischief and theft
arising out of Innove’s disconnection of BCC‘s duct at the Net Square buildings. The accused
officers filed their counter affidavits and are currently pending before the Prosecutor‘s Office
of Pasig. The case is still pending resolution with the Office of the City Prosecutor.

On 21 January 2011, BCC and PLDT filed with the Court of Appeals a Petition for Certiorari
and Prohibition against NTC, et al. seeking to annul the Orders of the NTC dated 28 October
2008 directing BCC, PLDT and FBDC to comply with the provisions of NTC MC 05-05-02
and the CEASE AND DESIST from performing further acts that will prevent Innove from
implementing and providing telecommunications services in the Fort Bonifacio Global City
pursuant to the authorization granted by the NTC. BCC and PLDT anchor their petition on the
grounds that: 1) the NTC has no jurisdiction over BCC it being a non telecommunications
entity; 2) the NTC violated BCC and PLDT’s right to due process; and 3) there was no
urgency or emergency for the issuance of the cease and desist order. The case is pending with
the court of appeals.

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On April 25, 2011, Innove Communications, filed its comment on the case filed by PLDT that
seeks to ban all Globe services from the Bonifacio Global City before the CA’s Tenth
Division. In its comment, Globe argued that Innove is duly authorised to provide services in
the BGC, that BCC and PLDT have no right to maintain their monopolistic hold of the BGC
telecommunications market; and it is in the public’s best interest that open access and free
competition among telecom operators be allowed at the Bonifacio Global City.

On August 16, 2011, the Ninth Division of the CA ruled that PLDT’s case against Innove and
the National Telecommunications Commission (NTC) lacked merit, and thus denied the
petition and DISMISSED the case. PLDT and its co-petitioner, BCC file their motion for
reconsideration. The same is still pending resolution.

(e) On July 23, 2009, the NTC issued NTC Memorandum Circular (MC) No. 05-07-2009
(Guidelines on Unit of Billing of Mobile Voice Service). The MC provides that the maximum
unit of billing for the CMTS whether postpaid or prepaid shall be six (6) seconds per pulse.
The rate for the first two (2) pulses, or equivalent if lower period per pulse is used, may be
higher than the succeeding pulses to recover the cost of the call set-up. Subscribers may still
opt to be billed on a one (1) minute per pulse basis or to subscribe to unlimited service
offerings or any service offerings if they actively and knowingly enroll in the scheme.

On December 28, 2010, the Court of Appeals (CA) rendered its decision declaring null and
void and reversing the decisions of the NTC in the rates applications cases for having been
issued in violation of Globe Telecom and the other carrier’s constitutional and statutory right to
due process. However, while the decision is in Globe’s favor, there is a provision in the
decision that NTC did not violate the right of petitioners to due process when it declared via
circular that the per pulse billing scheme shall be the default.

Last January 21, 2011, Globe Telecom and two other telecom carriers, filed their respective
Motions for Partial Reconsideration (MR) on the pronouncement that “the Per Pulse Billing
Scheme shall be the default”. The MR is pending resolution as of February 4, 2015.

The Globe Group is contingently liable for various claims arising in the ordinary conduct of
business and certain tax assessments which are either pending decision by the courts or are being
contested, the outcome of which are not presently determinable. In the opinion of management and
legal counsel, the possibility of outflow of economic resources to settle the contingent liability is
remote.

27. Earnings Per Share

The Globe Group’s earnings per share amounts were computed as follows:

2014 2013 2012


(In Thousand Pesos and Number of Shares,
Except Per Share Figures)
Net income attributable to common shareholders for
basic earnings per share ₱13,089,894 ₱4,936,407 ₱6,812,109
Add dividends on convertible preferred shares 26,457 23,838 33,145
Net income attributable to shareholders for diluted
earnings per share ₱13,376,381 ₱4,960,245 ₱6,845,254

(Forward)

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2014 2013 2012


(In Thousand Pesos and Number of Shares,
Except Per Share Figures)

Weighted average number of common shares outstanding,


beginning 132,596 132,406 132,353
Add weighted average number of exercised stock options 107 109 41
Weighted average number of common shares for basic
earnings 132,703 132,515 132,394
pershares
Dilutive share arising from:
Convertible preferred shares 467 535 699
Stock options 117 233 136
Adjusted weighted average number of common shares
for diluted earnings per share 133,286 133,283 133,229
Basic earnings per share ₱100.60 ₱37.25 ₱51.45
Diluted earnings per share ₱100.36 ₱37.22 ₱51.38

28. Capital and Risk Management and Financial Instruments

28.1 General
The Globe Group adopts an expanded corporate governance approach in managing its business
risks. An Enterprise Risk Management Policy was developed to systematically view the risks and
to provide a better understanding of the different risks that could threaten the achievement of the
Globe Group’s mission, vision, strategies, and goals, and to provide emphasis on how
management and employees play a vital role in achieving the Globe Group’s mission of
transforming and enriching lives through communications.

The policies are not intended to eliminate risk but to manage it in such a way that opportunities to
create value for the stakeholders are achieved. Globe Group risk management takes place in the
context of the normal business processes such as strategic planning, business planning, operational
and support processes.

The application of these policies is the responsibility of the BOD through the Chief Executive
Officer. The Chief Financial Officer and concurrent Chief Risk Officer champions and oversees
the entire risk management function. Risk owners have been identified for each risk and they are
responsible for coordinating and continuously improving risk strategies, processes and measures
on an enterprise-wide basis in accordance with established business objectives.

The risks are managed through the delegation of management and financial authority and
individual accountability as documented in employment contracts, consultancy contracts, letters of
authority, letters of appointment, performance planning and evaluation forms, key result areas,
terms of reference and other policies that provide guidelines for managing specific risks arising
from the Globe Group’s business operations and environment.

The Globe Group continues to monitor and manage its financial risk exposures according to its
BOD approved policies.

The succeeding discussion focuses on Globe Group’s capital and financial risk management.

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28.2 Capital and Financial Risk Management Objectives and Policies


Capital represents equity attributable to equity holders of the parent.

The primary objective of the Globe Group’s capital management is to ensure that it maintains a
strong credit rating and healthy capital ratios in order to support its business and maximize
shareholder value.

The Globe Group monitors its use of capital using leverage ratios, such as debt to total
capitalization and makes adjustments to it in light of changes in economic conditions and its
financial position.

The Globe Group is not subject to regulatory imposed capital requirements. The ratio of debt to
total capitalization for the years ended December 31, 2014 and 2013 was at 54% and 62%,
respectively.

The main purpose of the Globe Group’s financial risk management is to fund its operations and
capital expenditures. The main risks arising from the use of financial instruments are market risk,
credit risk and liquidity risk. The Globe Group also enters into derivative transactions, the
purpose of which is to manage the currency and interest rate risk arising from its financial
instruments.

Globe Telecom’s BOD reviews and approves the policies for managing each of these risks. The
Globe Group monitors market price risk arising from all financial instruments and regularly
reports financial management activities and the results of these activities to the BOD.

The Globe Group’s risk management policies are summarized below:

28.2.1 Market Risk


Market risk is the risk that the fair value of future cash flows of a financial instrument will
fluctuate because of changes in market prices. Globe Group is mainly exposed to two types of
market risk: interest rate risk and currency risk.

Financial instruments affected by market risk include loans and borrowings, AFS investments,
and derivative financial instruments.

The sensitivity analyses in the following sections relate to the position as at December 31,
2014 and 2013. The analyses exclude the impact of movements in market variables on the
carrying value of pension, provisions and on the non-financial assets and liabilities of foreign
operations.

The following assumptions have been made in calculating the sensitivity analyses:

· The statement of financial position sensitivity relates to derivatives.

· The sensitivity of the relevant income statement item is the effect of the assumed changes
in respective market risks. This is based on the financial assets and financial liabilities
held as at December 31, 2014 and 2013 including the effect of hedge accounting.

· The sensitivity of equity is calculated by considering the effect of any associated cash
flow hedges for the effects of the assumed changes in the underlying.

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28.2.1.1Interest Rate Risk


The Globe Group’s exposure to market risk from changes in interest rates relates primarily
to the Globe Group’s long-term debt obligations. Please refer to table presented under
28.2.3 Liquidity Risk.

Globe Group’s policy is to manage its interest cost using a mix of fixed and variable rate
debt, targeting a ratio of between 31%-62% fixed rate USD debt to total USD debt, and
between 44%-88% fixed rate PHP debt to total PHP debt. To manage this mix in a cost-
efficient manner, Globe Group enters into interest rate swaps, in which Globe Group
agrees to exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal amount.

After taking into account the effect of currency and interest rate swaps, 51% and 69% and
46% and 63% of the Globe Group’s USD and PHP borrowings as of December 31, 2014
and 2013, respectively, are at a fixed rate of interest.

The following tables demonstrate the sensitivity of income before tax to a reasonably
possible change in interest rates after the impact of hedge accounting, with all other
variables held constant.

2014

Effect on income
Increase/ decrease before income tax Effect on equity
in basis Points Increase (decrease) Increase (decrease)
(In Thousand Pesos)
USD +20bps (₱12,896) (₱40)
-20bps 12,896 40
PHP +150bps (203,468) 2,367
-150bps 203,435 (2,635)

2013
Effect on income
Increase/ decrease before income tax Effect on equity
in basis Points Increase (decrease) Increase (decrease)
(In Thousand Pesos)
USD +35bps (₱22,496) (₱58)
-35bps 22,496 58
PHP +100bps (209,419) 1,648
-100bps 209,032 (2,100)

28.2.1.2Foreign Exchange Risk


The Globe Group’s foreign exchange risk results primarily from movements of the PHP
against the USD with respect to USD-denominated financial assets, USD-denominated
financial liabilities and certain USD-denominated revenues. Majority of revenues are
generated in PHP, while substantially all of capital expenditures are in USD. In addition,
22% and 24% of debt as of December 31, 2014 and 2013, respectively, are denominated
in USD before taking into account any swap and hedges.

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Information on the Globe Group’s foreign currency-denominated monetary assets and


liabilities and their PHP equivalents are as follows:

2014 2013
US Peso US Peso
Dollar Equivalent Dollar Equivalent
(In Thousand Pesos)
Assets
Cash and cash equivalents $70,244 ₱3,142,696 $25,572 ₱1,135,339
Receivables 75,276 3,367,838 68,178 3,026,975
Long-term notes receivable 85,561 3,828,015 97,578 4,332,248
$231,081 10,338,549 $191,328 8,494,562
Liabilities
Accounts payable and accrued
expenses 218,507 9,776,020 174,181 7,733,269
Short-term notes payable – – 50,000 2,219,900
Long-term debt 325,000 14,540,500 325,000 14,429,350
543,507 24,316,520 549,181 24,382,519
Net foreign currency -
denominated liabilities $312,426 ₱13,977,971 $357 ₱15,887,957

The following tables demonstrate the sensitivity to a reasonably possible change in the
PHP to USD exchange rate, with all other variables held constant, of the Globe Group’s
income before tax (due to changes in the fair value of foreign currency-denominated
assets and liabilities).

2014

Increase/decrease Effect on income before


in Peso to income tax Effect on equity
US Dollar exchange rate Increase (decrease) Increase (decrease)
(In Thousand Pesos)
+0.60 (₱187,456) ₱101,520
-0.60 187,456 (101,520)

2013
Increase/decrease Effect on income before
in Peso to income tax Effect on equity Increase
US Dollar exchange rate Increase (decrease) (decrease)
(In Thousand Pesos)
+0.40 (₱145,199) ₱51,882
-0.40 145,199 (51,882)

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The movement on the effect on income before income tax is a result of a change in the fair
value of derivative financial instruments not designated in a hedging relationship and
monetary assets and liabilities denominated in US dollars, where the functional currency
of the Group is Philippine Peso. Although the derivatives have not been designated in a
hedge relationship, they act as a commercial hedge and will offset the underlying
transactions when they occur.

The movement in equity arises from changes in the fair values of derivative financial
instruments designated as cash flow hedges.

In addition, the consolidated expected future payments on foreign currency-denominated


purchase orders related to capital projects amounted to USD685.20 million and
USD666.22 million as of December 31, 2014 and 2013, respectively (see Note 25.3).
The settlement of these liabilities is dependent on the achievement of project milestones
and payment terms agreed with the suppliers and contractors. Foreign exchange exposure
assuming a +/-60 centavos in 2014 and +/- 40 centavos in 2013 movement in PHP to USD
rate on commitments amounted to ₱411.12 million and ₱266.49 million gain or loss,
respectively.

The Globe Group’s foreign exchange risk management policy is to maintain a hedged
financial position, after taking into account expected USD flows from operations and
financing transactions. Globe Telecom enters into short-term foreign currency forwards
and long-term foreign currency swap contracts in order to achieve this target.

28.2.2 Credit Risk


Applications for postpaid service are subjected to standard credit evaluation and verification
procedures. The Credit and Billing Management of the Globe Group continuously reviews
credit policies and processes and implements various credit actions, depending on assessed
risks, to minimize credit exposure. Receivable balances of postpaid subscribers are being
monitored on a regular basis and appropriate credit treatments are applied at various stages of
delinquency. Likewise, net receivable balances from carriers of traffic are also being
monitored and subjected to appropriate actions to manage credit risk. The maximum credit
exposure relates to receivables net of any allowances provided.

With respect to credit risk arising from other financial assets of the Globe Group, which
comprise cash and cash equivalents, AFS financial investments and certain derivative
instruments, the Globe Group’s exposure to credit risk arises from the default of the
counterparty, with a maximum exposure equal to the carrying amount of these instruments.
The Globe Group’s investments comprise short-term bank deposits. Credit risk from these
investments is managed on a Globe Group basis. For its investments with banks, the Globe
Group has a counterparty risk management policy which allocates investment limits based on
counterparty credit rating and credit risk profile.

The Globe Group makes a quarterly assessment of the credit standing of its investment
counterparties, and allocates investment limits based on size, liquidity, profitability, and asset
quality. The usage of limits is regularly monitored. For its derivative counterparties, the
Globe Group deals only with counterparty banks with investment grade ratings and large local
banks. Credit ratings of derivative counterparties are reviewed quarterly.

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Following are the Globe Group exposures with its investment counterparties for cash and cash
equivalents as of December 31:

2014 2013 2012


Local bank deposits 60% 30% 36%
Onshore foreign bank 36% 70% 36%
Special deposit account – – 20%
Offshore bank deposit 4% – 8%

The Globe Group has not executed any credit guarantees in favor of other parties. There is
also minimal concentration of credit risk within the Globe Group. Credit exposures from
subscribers and carrier partners continue to be managed closely for possible deterioration.
When necessary, credit management measures are proactively implemented and identified
collection risks are being provided for accordingly. Outstanding credit exposures from
financial instruments are monitored daily and allowable exposures are reviewed quarterly.
The tables below show the aging analysis of the Globe Group’s receivables as of
December 31.
2014
Neither Past Past Due But Not Impaired Impaired
Due Nor Less than 30 More than 90 Financial
31 to 60 days 61 to 90 days
Impaired days days Assets Total
(In Thousand Pesos)

Cash and cash equivalents ₱16,743,176 ₱– ₱– ₱– ₱– ₱– ₱16,743,176


Receivables
Wireless receivables:
Consumer 507,838 1,079,923 665,874 397,132 4,254,175 2,591,260 9,496,202
Key corporate accounts 4,192 50,451 111,579 140,953 1,927,838 216,371 2,451,384
Other corporations and
Small and Medium
Enterprises (SME) 54,832 124,263 109,210 82,004 923,175 249,927 1,543,412
566,862 1,254,637 886,663 620,089 7,105,188 3,057,558 13,490,997
Wireline receivables
Consumer 267,675 409,490 127,917 90,188 89,515 1,553,436 2,538,221
Key corporate accounts 67,272 315,865 299,526 367,002 1,514,434 352,081 2,916,180
Other corporations and
SME 31,745 62,577 30,167 16,719 37,518 118,679 297,405
366,692 787,932 457,610 473,909 1,641,467 2,024,196 5,751,806
Other trade receivables 574 115,560 – 535 293 1,619 118,581
Traffic receivables:
Foreign 20,435 – – – – 154,231 174,666
Local 1,725,381 2,796 2,828 2,386 – 137,861 1,871,252
1,745,816 2,796 2,828 2,386 – 292,092 2,045,918
Other receivables 2,119,971 – – – – 15,358 2,135,329
Receivables 4,799,914 2,160,925 1,347,101 1,096,919 8,746,948 5,393,320 23,542,632
Loans receivables 5,570,576 – – – – – 5,570,576
Total ₱27,113,667 ₱2,160,925 ₱1,347,101 ₱1,096,918 ₱8,746,948 ₱5,390,823 ₱45,856,384

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2013
Neither Past Past Due But Not Impaired Impaired
Due Nor Less than 30 More than 90 Financial
31 to 60 days 61 to 90 days
Impaired days days Assets Total
(In Thousand Pesos)

Cash and cash equivalents ₱7,405,677 ₱– ₱– ₱– ₱– ₱– ₱7,405,677


Receivables:
Wireless receivables:
Consumer 421,441 830,032 540,192 297,678 3,313,742 1,501,094 6,904,179
Key corporate accounts 5,865 54,851 121,562 133,771 1,790,681 170,412 2,277,142
Other corporations and
Small and Medium
Enterprises (SME) 8,276 139,846 139,840 89,979 685,456 344,817 1,408,214
435,582 1,024,729 801,594 521,428 5,789,879 2,016,323 10,589,535
Wireline receivables:
Consumer 269,178 239,189 155,270 65,571 81,820 1,459,396 2,270,424
Key corporate accounts 131,074 179,856 432,353 230,771 1,083,291 314,513 2,371,858
Other corporations and
SME 48,501 51,385 47,539 19,076 34,055 143,508 344,064
448,753 470,430 635,162 315,418 1,199,166 1,917,417 4,986,346
Other trade receivables 22 40,156 – – – – 40,178
Traffic receivables:
Foreign 1,189,372 – – – – 161,362 1,350,734
Local 122,033 – – – – 31,074 153,107
1,311,405 – – – – 192,436 1,503,841
Other receivables 2,256,332 – – – – 14,736 2,271,068
Receivables 4,452,094 1,535,315 1,436,756 836,846 6,989,045 4,140,912 19,390,968
Loans receivables 6,164,273 – – – - – 6,164,273
Total ₱18,022,044 ₱1,535,315 ₱1,436,756 ₱836,846 ₱6,989,045 ₱4,140,912 ₱32,960,918

Total allowance for impairment losses of ₱5,681.88 million and ₱4,190.05 million includes
allowance for impairment losses arising from specific and collective assessment which
amounted to ₱966.60 million and ₱341.73 million as of December 31, 2014 and 2013,
respectively (see Note 4).

The table below provides information regarding the credit risk exposure of the Globe Group
by classifying assets according to the Globe Group’s credit ratings of receivables as of
December 31. The Globe Group’s credit rating is based on individual borrower characteristics
and their relationship to credit event experiences.

2014
Neither Past Due Nor Impaired
High Quality Medium Quality Low Quality Total
(In Thousand Pesos)
Cash and cash equivalents P=16,743,176 P
=– P
=– P
=16,743,176
Wireless receivables:
Consumer 229,210 263,607 15,021 507,838
Key corporate accounts 1,695 2,440 57 4,192
Other corporations and SME 25,524 12,427 16,881 54,832
256,429 278,474 31,959 566,862
Wireline receivables:
Consumer 232,864 34,773 38 267,675
Key corporate accounts 61,286 5,965 21 67,272
Other corporations and SME 28,308 3,284 153 31,745
322,458 44,022 212 366,692
Other trade receivables 574 – – 574
Loans receivables – 5,570,576 – 5,570,576
Total P
=17,322,637 P
=5,893,072 P
=32,171 P
=23,247.880

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2013
Neither Past Due Nor Impaired
High Quality Medium Quality Low Quality Total
(In Thousand Pesos)
Cash and cash equivalents =7,405,677
P P
=– P
=– ₱7,405,677
Wireless receivables:
Consumer 169,064 234,119 18,258 421,441
Key corporate accounts 2,976 2,804 85 5,865
Other corporations and SME 5,617 698 1,961 8,276
177,657 237,621 20,304 435,582
Wireline receivables:
Consumer 228,761 40,413 4 269,178
Key corporate accounts 124,166 6,331 577 131,074
Other corporations and SME 44,126 4,179 196 48,501
397,053 50,923 777 448,753
Other trade receivables 22 – – 22
Loans receivables – 6,164,273 – 6,164,273
Total =7,980,409
P =6,452,817
P =21,081
P =14,454,070
P

High quality accounts are accounts considered to be high value and have consistently
exhibited good paying habits. Medium quality accounts are active accounts with propensity of
deteriorating to mid-range age buckets. These accounts do not flow through to permanent
disconnection status as they generally respond to credit actions and update their payments
accordingly. Low quality accounts are accounts which have probability of impairment based
on historical trend. These accounts show propensity to default in payment despite regular
follow-up actions and extended payment terms. Impairment losses are also provided for these
accounts based on net flow rate.

Traffic receivables that are neither past due nor impaired are considered to be high quality
given the reciprocal nature of the Globe Group’s interconnect and roaming partner agreements
with the carriers and the Globe Group’s historical collection experience.

Other receivables are considered high quality accounts as these are substantially from credit
card companies and Globe dealers.

The following is a reconciliation of the changes in the allowance for impairment losses for
receivables as of December 31 (in thousand pesos) (see Notes 4 and 23):

2014
Subscribers
Key Other Traffic
corporate Corporations Settlements
Consumer accounts and SME and Others Non-trade Total
(In Thousand Pesos)
At beginning of the year ₱2,742,022 ₱540,525 ₱687,874 ₱219,624 ₱58,414 ₱4,248,459
Charges for the period 2,623,783 117,676 162,176 97,288 34,312 3,035,235
Reversals/write
offs/adjustments (1,085,263) 57,017 (473,275) (7,565) (2,920) (1,512,006)
At end of year ₱4,280,542 ₱715,218 ₱376,775 ₱309,347 ₱89,806 ₱5,771,688

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2013
Subscribers
Key Other Traffic
corporate Corporations Settlements
Consumer accounts and SME and Others Non-trade Total
(In Thousand Pesos)
At beginning of the year P2,453,266
= P320,404
= P543,344
= =221,058
P P124,082
= P3,662,154
=
Charges for the period 1,665,993 225,907 203,343 14,254 (62,974) 2,046,523
Reversals/write
offs/adjustments (1,377,237) (5,786) (58,813) (15,688) (2,694) (1,460,218)
At end of year =2,742,022
P =540,525
P P687,874
= P219,624
= P58,414 P
= =4,248,459

28.2.3 Liquidity Risk


The Globe Group seeks to manage its liquidity profile to be able to finance capital
expenditures and service maturing debts. To cover its financing requirements, the Globe
Group intends to use internally generated funds and available long-term and short-term credit
facilities. As of December 31, 2014 and 2013, the Globe Group has available uncommitted
short-term credit facilities of USD79.40 million and ₱12,945.00 million, USD6.90 million and
₱7,920.00 million, respectively.

As of December 31, 2014 and 2013, the Globe Group has nil and ₱7,000.00 million,
respectively, in committed long-term facilities.

As part of its liquidity risk management, the Globe Group regularly evaluates its projected and
actual cash flows. It also continuously assesses conditions in the financial markets for
opportunities to pursue fund raising activities, in case any requirements arise. Fund raising
activities may include bank loans, export credit agency facilities and capital market issues.

The following tables show comparative information about the Globe Group’s financial
instruments as of December 31 that are exposed to liquidity risk and interest rate risk and
presented by maturity profile including forecasted interest payments for the next five years
from December 31 figures (in thousands).

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Long-term Liabilities

2014
Debt Carrying
2019 and Total Total Issuance Value Fair Value
2015 2016 2017 2018 thereafter (in USD) (in PHP) Costs (in PHP) (in PHP)
Liabilities:
Long-term debt
Fixed Rate
Philippine peso ₱71,100 ₱2,327,800 ₱4,830,000 ₱330,000 ₱25,480,000 $– ₱33,038,900 ₱206,045 ₱32,832,855 ₱36,813,735
Interest rate 4.85%;8.36% 5.24%;4.93%; 5.24%;4.93%; 5.24%;4.93%; 5.24%;4.93%;
4.85%;8.36%;4.91% 5.75%;4.85%;4.9 4.85%;4.91% 4.89%;6.00%;
1% 4.85%;4.91%;
5.28%;6.00%
Floating rate
USD notes $900 $117,100 $2,100 $2,100 $202,800 $325,000 ₱– 76,354 14,464,146 14,762,429
Interest rate Libor 3mo. + Libor 6-mo. + Libor 6-mo. + Libor 6-mo. + Libor 6-mo. +
1.50% margin 1.00% margin; 1.00% margin; 1.00% margin; 1.00% margin;
Libor 3mo. + .90% Libor 3mo. + Libor 3mo. + Libor 3mo. +
margin; Libor 3mo. 1.50% margin 1.50% margin 1.50% margin
+ 1.00% margin;
Libor 3mo. +
1.50% margin
Philippine peso ₱6,025,000 ₱70,000 ₱5,070,000 ₱6,860,000 – $– ₱18,025,000 46,198 17,978,802 18,653,802
Interest rate PDSTF 3mo. + PDSTF 3mo. + .60% PDSTF 3mo. + PDSTF 3mo. +
0.75% margin; margin .50% margin; .60% margin
PDSTF 3mo. + PDSTF 3mo. +
0.65% margin .60% margin
$325,000 ₱51,063,900 ₱328,597 ₱65,275,803 ₱70,229,966
Interest payable*
PHP debt ₱2,439,494 ₱2,201,279 ₱1,880,879 ₱1,448,319 ₱2,553,672 $– ₱10,523,643 ₱– ₱– ₱–
USD debt $4,785 $3,826 $3,168 $3,136 $7,662 $22,578 ₱– $– $– $–
*Used month-end USD LIBOR and Philippine Dealing and Exchange Corporation (PDEX) rates.
* Using ₱44.740 - USD exchange rate as of December 31, 2014.

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2013
Debt Carrying
2018 and Total Total Issuance Value Fair Value
2014 2015 2016 2017 thereafter (in USD) (in PHP) Costs (in PHP) (in PHP)
Liabilities:
Long-term debt
Fixed Rate
Philippine peso ₱1,386,300 ₱71,100 ₱2,117,800 ₱4,550,000 ₱19,300,000 $– ₱27,425,200 ₱221,887 ₱27,203,313 ₱30,731,664
Interest rate 4.85%;7.40%; 4.85%;8.36% 4.85%;8.36% 5.75%;4.85% 4.89%;5.28%;
8.36% 6.00%;
4.85%
Floating rate
USD notes – $900 $117,100 $2,100 $204,900 325,000 – 108,192 14,321,158 14,747,965
Interest rate Libor 3mo. + 1.50% Libor 6-mo. + Libor 6-mo. + Libor 6-mo. +
margin 1.00% margin; 1.00% margin; 1.00% margin;
Libor 3mo. + .90% Libor 3mo. + Libor 3mo. +
margin; Libor 3mo. 1.50% margin 1.50% margin
+ 1.00% margin;
Libor 3mo. +
1.50% margin
Philippine peso ₱4,603,843 ₱6,025,000 ₱70,000 ₱120,000 ₱11,810,000 – 22,628,843 72,265 22,556,578 22,566,560
Interest rate PDSTF 6mo. + PDSTF 3mo. + PDSTF 3mo. + PDSTF 3mo. + PDSTF 3mo. +
1.25% margin; 0.75% margin; .60% margin .50% margin; .50% margin;
PDSTF 3mo. + PDSTF 3mo. + PDSTF 3mo. + PDSTF 3mo. +
0.75% margin; 0.65% margin .60% margin .60% margin
PDSTF 3mo. +
1.25% margin;
PDSTF 3mo. + 1%
margin

$325,000 ₱50,054,043 ₱402,344 ₱64,081,049 ₱68,046,189


Interest payable*
PHP debt ₱1,996,351 ₱1,834,261 ₱1,656,312 ₱1,492,003 ₱3,113,584 $– ₱10,092,511 ₱– ₱– ₱–
USD debt $4,799 $4,776 $3,799 $3,146 $10,733 $27,252 ₱– $– $– $–
*Used month-end LIBOR and Philippine Dealing and Exchange Corporation (PDEX) rates.
*Using ₱44.398 USD exchange rate as of December 31, 2013.

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The following tables present the maturity profile of the Globe Group’s other liabilities and derivative instruments (undiscounted cash flows including swap
costs payments/receipts except for other long-term liabilities) as of December 31, 2014 and 2013 (in thousands):
2014

Other Financial Liabilities


Less than
On Demand 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Over 5 years Total
(In Thousand Pesos)
Accounts payable and accrued expenses* ₱5,544,310 ₱38,347,933 ₱– ₱– ₱– ₱– ₱– ₱43,892,243
Other long-term liabilities 1,283,832 – – – – – – 1,283,832
₱5,544,310 ₱38,347,933 ₱– ₱– ₱– ₱– ₱1,283,832 ₱45,176,075
*Excludes taxes payable which is not a financial instrument.

Derivative Instruments
2015 2016 2017 2018 2019 and beyond
Receive Pay Receive Pay Receive Pay Receive Pay Receive Pay
Projected Swap Coupons*:
Interest Rate Swaps – PHP ₱23,083 ₱50,428 ₱– ₱– ₱– ₱– ₱– ₱– ₱– ₱23,083
Interest Rate Swaps – USD $– $– $– $– $– $– $– $– $– $–
Cross Currency Swaps –USD $112,377 $213,125 $86,412 $139,097 $63,106 $84,794 $74,619 $84,794 $118,963 $127,656
*Projected USD swap coupons were converted to PHP at the balance sheet date

2015 2016 2017 2018 2019 and beyond


Receive Pay Receive Pay Receive Pay Receive Pay Receive Pay
Projected Principal Exchanges*:
Cross Currency Swaps- PHP ₱– ₱– ₱– ₱4,847,850 ₱– ₱– ₱– ₱– ₱– ₱2,063,750
Cross Currency Swaps- USD $– $– $115,000 $– $– $– $– $– $50,000 $–

*SGVFS010845*
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2013

Other Financial Liabilities


Less than
Total
On Demand 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years Over 5 years
(In Thousand Pesos)
Accounts payable and accrued expenses* ₱2,737,211 ₱33,971,965 ₱– ₱– ₱– ₱– ₱– ₱36,709,176
Notes payable – 5,219,900 – – – – – 5,219,900
Other long-term liabilities 1,017,680 – – – – – – 1,017,680
₱2,737,211 ₱39,191,865 ₱- ₱- ₱- ₱- ₱1,017,680 ₱42,946,756
*Excludes taxes payable which is not a financial instrument.

Derivative Instruments
2014 2015 2016 2017 2018 and beyond
Receive Pay Receive Pay Receive Pay Receive Pay Receive Pay
Projected Swap Coupons*:
Interest Rate Swaps - PHP ₱28,606 ₱173,464 ₱32,285 ₱50,461 ₱– ₱– ₱– ₱– ₱– ₱–
Interest Rate Swaps - USD $1,554 $3,904 $– $– $– $– $– $– $– $–
Cross Currency Swaps - USD 84,749 162,025 81,963 162,025 65,966 102,602 76,720 84,794 264,525 212,450
Projected Principal Exchanges*:
Cross Currency Swaps- PHP ₱– ₱– ₱– ₱– ₱– ₱3,062,250 ₱– ₱– ₱– ₱2,063,750
Cross Currency Swaps- USD $– $– $– $– $75,000 $– $– $– $50,000 $–
*Projected USD swap coupons were converted to PHP at the balance sheet date.

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28.2.4 Hedging Objectives and Policies


The Globe Group uses a combination of natural hedges and derivative hedging to manage its
foreign exchange exposure. It uses interest rate derivatives to reduce earnings volatility related to
interest rate movements.

It is the Globe Group’s policy to ensure that capabilities exist for active but conservative
management of its foreign exchange and interest rate risks. The Globe Group does not engage
in any speculative derivative transactions. Authorized derivative instruments include currency
forward contracts (embedded), currency swap contracts, interest rate swap contracts and
currency option contracts (embedded). Certain swaps are entered with option combination or
structured provisions.

28.3 Derivative Financial Instruments


The Globe Group’s freestanding and embedded derivative financial instruments are accounted for
as hedges or transactions not designated as hedges. The table below sets out information about the
Globe Group’s derivative financial instruments and the related fair values as of December 31:

2014
USD PHP
Notional Notional Derivative Derivative
Amount Amount Asset Liability
(In Thousands)
Derivative instruments designated as hedges
Cash flow hedges
Cross currency swaps $165,000 ₱– ₱580,224 ₱65,666
Derivative instruments not designated
as hedges
Freestanding
Interest rate swaps – 2,025,000 – 23,176
Embedded
Currency forwards* 18,080 – 8,319 5,967
Net ₱588,543 ₱94,809
*The embedded currency forwards are at a net sell position.

2013
USD PHP
Notional Notional Derivative Derivative
Amount Amount Asset Liability
(In Thousands)
Derivative instruments designated as hedges
Cash flow hedges
Cross currency swaps $125,000 ₱– ₱553,562 ₱62,174
Interest rate swaps 26,000 187,500 – 3,484
Derivative instruments not designated
as hedges
Freestanding
Interest rate swaps – 4,125,000 – 148,009
Embedded
Currency forwards* 6,849 – 1,834 6,027
Net ₱555,396 ₱219,694
*The embedded currency forwards are at a net sell position.

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The table below also sets out information about the maturities of Globe Group’s derivative
instruments as of December 31 that were entered into to manage interest and foreign exchange
risks related to the long-term debt and US dollar-based revenues (in thousands).

2014
>1-<2 >2-<3 >3-<4 >4-<5
<1 Year Years Years Years Years Total
Derivatives
Interest Rate Swaps
Floating-Fixed
Notional PHP ₱2,025,000 ₱– ₱– ₱– ₱– ₱2,025,000
Notional USD $– $- $– $– $– $–
Pay-fixed rate 4.92% for PHP
Receive-floating 3mo PDSTF
rate
Cross Currency Swaps
Floating-Fixed
Notional USD $– $115,000 $– $– $50,000 $165,000
Pay-fixed rate 2.48% - 4.12% for PHP;
Receive-floating USD LIBOR +0.9%-
rate 1.0%

2013
>1-<2 >2-<3 >3-<4 >4-<5
<1 Year Years Years Years Years Total
Derivatives
Interest Rate Swaps:
Floating-Fixed:
Notional PHP ₱2,287,500 ₱2,025,000 ₱– ₱– ₱– ₱4,312,500
Notional USD $26,000 $– $– $– $– $26,000
Pay-fixed rate 3.9%-4.92% for PHP;
0.67% for USD
Receive-floating USD LIBOR 3mo. ,
rate PDSTF 3mo.
Cross Currency Swaps:
Fixed-Floating :
Notional USD $– $– $75,000 $– $50,000 $125,000
Pay-fixed rate 2.48% - 4.12% for PHP
Receive-floating USD LIBOR + 1.0%
rate

The Globe Group’s other financial instruments that are exposed to interest rate risk are cash and
cash equivalents. These mature in less than a year and are subject to market interest rate
fluctuations.

The Globe Group’s other financial instruments which are non-interest bearing and therefore not
subject to interest rate risk are trade and other receivables, accounts payable and accrued expenses
and long-term liabilities. Loans receivable are also not subject to interest rate risk due to fixed
interest rates.

The subsequent sections will discuss the Globe Group’s derivative financial instruments according
to the type of financial risk being managed and the details of derivative financial instruments that
are categorized into those accounted for as hedges and those that are not designated as hedges.

*SGVFS010845*
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28.4 Derivative Instruments Accounted for as Hedges


The following sections discuss in detail the derivative instruments accounted for as cash flow
hedges.

· Cross Currency Swaps


The Globe Group entered into cross currency swap contracts to hedge the foreign exchange
and interest rate risk on dollar loans with maturities until April 2020. These cross currency
swaps have a notional amount of USD165.00 million and USD125.00 million as of
December 31, 2014 and 2013, respectively. The fair values on the cross currency swaps as of
December 31, 2014 and 2013 amounted to net gain of ₱514.55 million and ₱491.39 million,
of which ₱30.84 million and ₱47.35 million (net of tax) is reported in the equity section of the
consolidated statemens of financial position (see Note 17.6).

· Interest Rate Swaps


As of December 31, 2014 and 2013, the Globe Group has nil and USD26.00 million,
respectively, in notional amount of USD interest rate swap that have been designated as cash
flow hedge of interest rate risk from USD loans. The interest rate swap effectively fixed the
benchmark rate of the hedged USD loan at 0.67% over the duration of the agreement, which
involves quarterly payment intervals up to April 2014.

The Globe Group also has PHP interest rate swap contracts with a total notional amount of
₱187.50 million as of December 31, 2013 which have been designated as cash flow hedges of
interest rate risk from PHP loans. These interest rate swaps effectively fixed the benchmark
rate of the hedged PHP loans at 3.90% over the duration of the swaps, with quarterly payment
intervals up to July 2014.

As of December 31, 2014 and 2013, the fair value of the outstanding swap amounted to nil and
₱3.48 million losses, respectively, of which ₱12.32 million (net of tax), is reported as “Other
reserves” in the equity section of the consolidated statements of financial position (see Note
17.5).

Accumulated swap cost for the years ended December 31, 2014, 2013 and 2012 amounted to
₱43.64 million, ₱67.80 million and ₱35.46, respectively (see Note 22).

· Deliverable and Nondeliverable Forwards


The Globe Group has no outstanding deliverable and nondeliverable forwards as of
December 31, 2014 and December 31, 2013.

Hedging gains/losses on derivatives intended to manage foreign currency fluctuations on


dollar based revenues for the years ended December 31, 2014, 2013 and 2012 amounted to
₱4.74 million gain, ₱144.70 million loss and ₱21.29 million gain, respectively. These hedging
gains/losses are reflected under “Service revenues” in the consolidated statements of
comprehensive income.

28.5 Other Derivative Instruments Not Designated as Hedges


The Globe Group enters into certain derivatives as economic hedges of certain underlying
exposures. Such derivatives, which include embedded and freestanding currency forwards,
embedded call options, and certain currency and interest rate swaps with option combination or
structured provisions, are not designated as accounting hedges. The gains or losses on these
instruments are accounted for directly in profit or loss in the consolidated statements of
comprehensive income. This section consists of freestanding derivatives and embedded
derivatives found in both financial and nonfinancial contracts.

*SGVFS010845*
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28.6 Freestanding Derivatives


Freestanding derivatives that are not designated as hedges consist of currency forwards and
interest rate swaps entered into by the Globe Group. Fair value changes on these instruments are
accounted for directly in profit or loss in the consolidated statements of comprehensive income.

· Interest Rate Swaps


The Globe Group also has an outstanding PHP interest rate swap contract which swaps a
floating PHP loan into fixed rate of 4.92% and involves quarterly payment intervals up to
September 2015. Outstanding notional as of December 31, 2014 and 2013 amounts to
₱2,025.00 million and ₱4,125.00 million, respectively.

The fair values on the interest rate swaps as of December 31, 2014 and 2013, amounted
to net loss of ₱23.18 million and ₱148.01 million, respectively.

· Deliverable and Nondeliverable Forwards


As of December 31, 2014 and 2013, the Globe Group has no outstanding deliverable and
nondeliverable currency forward contracts not designated as hedges.

28.7 Embedded Derivatives and Other Financial Instruments


The Globe Group has instituted a process to identify any derivatives embedded in its financial
or nonfinancial contracts. Based on PAS 39, the Globe Group assesses whether these
derivatives are required to be bifurcated or are exempted based on the qualifications provided
by the said standard. The Globe Group’s embedded derivatives include embedded currency
derivatives noted in non-financial contracts.

· Embedded Currency Forwards


As of December 31, 2014 and 2013, the total outstanding notional amount of currency
forwards embedded in nonfinancial contracts amounted to USD18.08 million and USD6.85
million, respectively. The nonfinancial contracts consist mainly of foreign currency-
denominated purchase orders with various expected delivery dates and unbilled leaselines
receivables and payables denominated in foreign currency with domestic counterparties. The
net fair value gains of the embedded currency forwards as of December 31, 2014 amounted to
₱2.35 million while net fair value losses as of December 31, 2013 amounted to ₱4.19 million.

28.8 Fair Value Changes on Derivatives


The net movements in fair value changes of all derivative instruments are as follows:

2014 2013
(In Thousand Pesos)
At beginning of year ₱335,702 (₱240,233)
Net changes in fair value of derivatives:
Designated as cash flow hedges (263,856) 307,431
Not designated as cash flow hedges (229,371) (138,765)
(157,525) (71,567)
Less fair value of settled instruments (651,259) (407,269)
At end of period ₱493,734 ₱335,702

28.9 Hedge Effectiveness Results


As of December 31, 2014 and 2013, the effective fair value changes on the Globe Group’s cash
flow hedges that were deferred in equity amounted to ₱40.43 million and ₱35.03 million losses, net
of tax, respectively. Total ineffectiveness for the years ended December 31, 2014 and 2013 is
immaterial.

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The distinction of the results of hedge accounting into “Effective” or “Ineffective” represent
designations based on PAS 39 and are not necessarily reflective of the economic effectiveness of
the instruments.

28.10 Categories of Financial Assets and Financial Liabilities


The table below presents the carrying value of the Globe Group’s financial instruments by
category as of December 31:

2014 2013
(In Thousand Pesos)
Financial Assets
Financial assets at FVPL:
Derivative assets designated as cash flow hedges ₱580,224 ₱553,562
Derivative assets not designated as hedges 8,319 1,834
AFS investment in equity securities (Note 11) 264,785 222,712
Loans and receivables - net* 40,642,772 29,166,805
₱41,496,100 ₱29,944,913
Financial Liabilities
Financial liabilities at FVPL:
Derivative liabilities designated as cash flow
hedges ₱65,666 ₱65,658
Derivative liabilities not designated as hedges 29,143 154,036
Financial liabilities at amortized cost** 112,179,300 107,027,805
₱112,274,109 ₱107,247,499
*This consists of cash and cash equivalents, receivables (subscribers, traffic settlements - net, dealers and other receivables),
non-trade receivables (employee receivables, miscellaneous receivables and accrued interest receivables and loans
receivables.
**This consists of accounts payable, accrued expenses, accrued project cost, traffic settlement-net, dividends payable, notes
payable, long-term debt (including current portion) and other long-term liabilities (including current portion).

As of December 31, 2014 and 2013, the Globe Group has no investments in foreign securities.

28.11 Offsetting Financial Assets and Financial Liabilities


The Globe Group has derivative financial instruments that have offsetting arrangements. Upon
adoption of the amendment to PFRS 7, the Globe Group has determined that there is no impact on
financial position or on profit or loss, but resulted in additional disclosures about such offsetting
arrangements. Accordingly, these additional disclosures are set forth below.

December 31, 2014

Reported Amounts offset Amounts


amounts in under master offset by
Amounts the consolidated netting financial
offset statement of arrangements or collateral
Gross under PAS financial other similar received or Net
amounts 32 position contracts pledged exposure
(In Thousand Pesos)
Derivative assets ₱588,543 ₱– ₱588,543 (₱88,842) ₱– ₱499,701
Derivative liabilities 94,809 – 94,809 (88,842) – 5,967
Traffic settlements receivable 3,657,393 (1,611,474) 2,045,919 – – 2,045,919
Traffic settlements payable 2,607,937 (1,425,246)) 1,182,691 – – 1,182,691

*SGVFS010845*
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December 31, 2013


Reported
amounts in Amounts
the Amounts offset offset by
consolidatestate under master netting financial
Amounts ment of arrangements or collateral
offset under financial other similar received or Net
Gross amounts PAS 32 position contracts pledged exposure
(In Thousand Pesos)
Derivative assets ₱493,222 ₱– ₱493,222 (₱148,009) ₱– ₱345,213
Derivative liabilities 157,521 – 157,521 (148,009) – 9,512
Traffic settlements receivable 2,991,096 (1,487,255) 1,503,841 – – 1,503,841
Traffic settlements payable 4,908,628 (3,312,395) 1,596,233 – – 1,596,233

The Globe Group makes use of master netting agreements with counterparties with whom a
significant volume of transactions are undertaken. Such arrangements provide for single net
settlement of all financial instruments covered by the agreements in the event of default on any
one contract. Master netting arrangements do not normally result in an offset of balance sheet
assets and liabilities unless certain conditions for offsetting under PAS 32 apply.

Although master netting arrangements may significantly reduce credit risk, it should be noted that:

a) Credit risk is eliminated only to the extent that amounts due to the same counterparty will be
settled after the assets are realized; and
b) The extent to which overall credit risk is reduced may change substantially within a short
period because the exposure is affected by each transaction subject to the arrangement and
fluctuations in market factors.

28.12 Fair Values of Financial Assets and Financial Liabilities


The table below presents a comparison of carrying amounts and estimated fair values of the Globe
Group’s financial instruments as of December 31:

2014 2013
Carrying Fair Carrying Fair
Value Value Value Value
(In Thousand Pesos)
Financial Assets
Derivative assets P
=588,543 P
=588,543 P
=555,396 P
=555,396
AFS investment in equity securities
(Note 11) 264,785 264,785 222,712 222,712
P
=853,328 P
=853,328 P
=778,108 P
=778,108

Financial Liabilities
Derivative liabilities (including current portion) ₱94,809 ₱94,809 ₱219,694 ₱219,694
Long-term debt (including
current portion) 65,275,803 70,229,966 64,081,049 68,046,189
₱65,370,612 ₱70,324,775 ₱64,300,743 ₱68,265,883

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The following discussions are methods and assumptions used to estimate the fair value of each
class of financial instrument for which it is practicable to estimate such value.

28.12.1 Non-Derivative Financial Instruments


The fair values of cash and cash equivalents, subscriber receivables, traffic settlements
receivable, current portion of loan receivable, miscellaneous receivables, accrued interest
receivables, accounts payable, accrued expenses and notes payable are approximately equal to
their carrying amounts considering the short-term maturities of these financial instruments.

The fair value of AFS investments are based on quoted prices. Unquoted AFS equity
securities are carried at cost, subject to impairment.

The carrying value of loans receivables approximates carrying value after calculations.

For variable rate financial instruments that reprice every three months, the carrying value
approximates the fair value because of recent and regular repricing based on current market
rates. For variable rate financial instruments that reprice every six months, the fair value is
determined by discounting the principal amount plus the next interest payment using the
prevailing market rate for the period up to the next repricing date. The discount rates used
range from 0.26% to 1.80% for USD floating loans. For noninterest bearing obligations, the
fair value is estimated as the present value of all future cash flows discounted using the
prevailing market rate of interest for a similar instrument.

28.12.2 Derivative Instruments


The fair value of freestanding and embedded forward exchange contracts is calculated by
using the interest rate parity concept.

The fair values of interest rate swaps and cross currency swap transactions are determined
using valuation techniques with inputs and assumptions that are based on market observable
data and conditions and reflect appropriate risk adjustments that market participants would
make for credit and liquidity risks existing at the end each of reporting period. The fair value
of interest rate swap transactions is the net present value of the estimated future cash flows.
The fair values of currency and cross currency swap transactions are determined based on
changes in the term structure of interest rates of each currency and the spot rate.

The fair values were tested to determine the impact of credit valuation adjustments. However,
the impact is immaterial given that the Globe Group deals its derivatives with large foreign
and local banks with very minimal risk of default.

Embedded currency options are valued using the simple option pricing model of third party
provider.

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28.12.3 Fair Value Hierarchy


The following tables provide the fair value measurement hierarchy of the Globe Group’s
assets and liabilities:

December 31, 2014


Fair value measurement using
Quoted No
prices in Significant significant
active observable observable
markets inputs inputs
(Level 1) (Level 2) (Level 3) Total
(In Thousand Pesos)
Assets measured at fair value:
AFS investment in equity securities – net ₱264,785 ₱– ₱– ₱264,785
Derivative assets:
Cross currency swaps – 580,224 – 580,224
Embedded currency forwards – 8,319 – 8,319
Liabilities measured at fair value:
Derivative liabilities:
Cross currency swaps – 65,666 – 65,666
Interest rate swaps – 23,176 – 23,176
Embedded currency forwards – 5,967 – 5,967
Liabilities for which fair values are disclosed:
Long-term debt (including current portion) – 70,229,966 – 70,229,966

December 31, 2013


Fair value measurement using
Quoted
prices in Significant No significant
active observable observable
markets inputs inputs
(Level 1) (Level 2) (Level 3) Total
(In Thousand Pesos)
Assets measured at fair value:
Derivative assets:
Cross currency swaps P–
= ₱553,562 P–
= ₱553,562
Embedded currency forwards – 1,834 – 1,834
AFS investment in equity securities - net 222,712 – – 222,712
Liabilities measured at fair value:
Derivative liabilities:
Cross currency swaps – 62,174 62,174 62,174
Interest rate swaps – 151,493 151,493 151,493
Embedded currency forwards – 6,027 6,027 6,027
Liabilities for which fair values are disclosed:
Long-term debt (including current portion) – 68,046,189 68,046,189 68,046,189

There were no transfers from Level 1 and Level 2 fair value measurements for the years ended
December 31, 2014 and 2013.

*SGVFS010845*
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29. Operating Segment Information

The Globe Group’s reportable segments consist of: (1) mobile communications services; and
(2) wireline communications services; which the Globe Group operates and manages as strategic
business units and organize by products and services. The Globe Group presents its various
operating segments based on segment net income.

The mobile value added data content and application development services coming from various
revenue streams are reported under “Others” in the 2013 interim consolidated financial statements.
In the second quarter of 2014, the Globe Group restated the segment reporting disclosure to
conform with the current presentation of internal management reports by including this under
mobile communications services segment.

Intersegment transfers or transactions are entered into under the normal commercial terms and
conditions that would also be available to unrelated third parties. Segment revenue, segment
expense and segment result include transfers between business segments. Those transfers are
eliminated in consolidation.

Most of revenues are derived from operations within the Philippines, hence, the Globe Group does
not present geographical information required by PFRS 8, Operating Segments. The Globe Group
does not have a single customer that will meet the 10% reporting criteria.

The Globe Group also presents the different product types that are included in the report that is
regularly reviewed by the chief operating decision maker in assessing the operating segments
performance.

Segment assets and liabilities are not measures used by the chief operating decision maker since
the assets and liabilities are managed on a group basis.

The Globe Group’s segment information is as follows (in thousand pesos):

2014
Mobile Wireline
Communications Communications
Services Services Consolidated
REVENUES:
Service revenues:
External customers:
Voice ₱34,683,538 ₱2,789,304 ₱37,472,842
SMS 29,078,791 – 29,078,791
Data 14,306,227 5,480,245 19,786,472
Broadband – 12,686,499 12,686,499
Nonservice revenues:
External customers 2,981,383 1,229,726 4,211,109
Segment revenues 81,049,939 22,185,774 103,235,713

EBITDA 34,068,215 5,203,166 39,271,381


Depreciation and amortization (9,197,603) (8,925,922) (18,123,525)
EBIT 24,870,612 (3,722,756) 21,147,856

INCOME (LOSS) BEFORE TAX 23,295,190 (3,912,484) 19,382,706


Provision for income tax (4,787,141) (1,223,373) (6,010,514)
NET INCOME (LOSS) ₱18,508,049 (₱5,135,857) ₱13,372,192
Core net income after tax ₱14,489,176
(Forward)

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2014
Mobile Wireline
Communications Communications
Services Services Consolidated
Other segment information
Intersegment revenues (₱2,039,736) (₱540,210) (₱2,579,946)
Subsidy1 (6,185,207) (265,028) (6,450,235)
Interest income2 627,464 6,665 634,129
Interest expense (2,192,498) (133,673) (2,326,171)
Equity in net losses of associates
and joint ventures (224,257) – (224,257)
Impairment losses and others 2,846,665 873,504 3,720,169
Capital expenditure 22,741,742 4,242,016 26,983,758
Cost of sales (9,166,590) (1,494,754) (10,661,344)

Cash Flows
Net cash provided by (used in):
Operating activities 30,681,003 5,774,155 36,455,158
Investing activities (15,723,193) (4,492,913) (20,216,106)
Financing activities (6,942,137) – (6,942,137)
1
Computed as non-service revenues less cost of sales
2
Net of final tax

2013
Mobile Wireline
Communications Communications
Services Services Consolidated
REVENUES:
Service revenues:
External customers:
Voice ₱32,367,171 ₱2,605,121 ₱34,972,292
SMS 28,794,052 – 28,794,052
Data 11,602,470 4,691,004 16,293,474
Broadband – 10,440,319 10,440,319
Nonservice revenues:
External customers 3,833,070 807,778 4,640,848
Segment revenues 76,596,763 18,544,222 95,140,985

EBITDA 32,544,044 3,969,773 36,513,817


Depreciation and amortization (17,058,605) (10,418,889) (27,477,494)
EBIT 15,485,439 (6,449,116) 9,036,323

INCOME (LOSS) BEFORE TAX2 13,517,040 (6,652,267) 6,864,773


Provision for income tax (1,755,619) (148,909) (1,904,528)
NET INCOME (LOSS) ₱11,761,421 (₱6,801,176) ₱4,960,245
Core net income after tax ₱11,616,512

Other segment information


Intersegment revenues (₱607,967) (₱556,902) (₱1,164,869)
Subsidy1 (5,014,970) (297,288) (5,312,258)
Interest income2 631,030 53,977 685,007
Interest expense (2,087,571) (4,344) (2,091,915)
Equity in net losses of joint ventures (79,959) – (79,959)
Impairment losses and others 3,318,192 (835,564) 2,482,628
Capital expenditure (32,058,333) – (35,778,666)
Cost of sales (8,848,040) (1,105,066) (9,953,106)
(Forward)

*SGVFS010845*
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2013
Mobile Wireline
Communications Communications
Services Services Consolidated
Cash Flows
Net cash provided by (used in):
Operating activities P
=26,388,852 P
=7,571,395 P
=33,960,247
Investing activities (24,466,931) (3,628,351) (28,095,282)
Financing activities (2,476,233) (3,000,000) (5,476,233)
1
Computed as non-service revenues less cost of sales
2
Net of final tax

2012
Mobile Wireline
Communications Communications
Services Services Consolidated
REVENUES:
Service revenues:
External customers:
Voice ₱32,551,516 ₱2,665,559 ₱35,217,075
SMS 26,551,913 – 26,551,913
Data 8,085,727 4,166,919 12,252,646
Broadband – 8,720,931 8,720,931
Nonservice revenues:
External customers 2,773,992 929,592 3,703,584
Segment revenues 69,963,148 16,483,001 86,446,149

EBITDA 32,273,018 2,737,792 35,010,810


Depreciation and amortization (13,232,506) (10,350,911) (23,583,417)
EBIT 19,040,512 (7,613,119) 11,427,393

INCOME (LOSS) BEFORE TAX2 17,483,863 (7,732,316) 9,751,547


Provision for income tax2 (3,599,530) 693,237 (2,906,293)
NET INCOME (LOSS) ₱13,884,332 (₱7,039,079) ₱6,845,254
Core net income after tax ₱10,263,062

Other segment information


Intersegment revenues (₱285,133) (₱206,911) (₱492,044)
Subsidy1 (4,036,892) 62,117 (3,974,775)
Interest income2 448,481 67,081 515,562
Interest expense (2,021,345) (83,447) (2,104,792)
Equity in net losses of joint ventures (83,582) – (83,582)
Impairment losses and others (1,186,031) (677,553) (1,863,584)
Capital expenditure (23,193,951) (3,615,609) (26,809,560)
Cost of sales (6,810,884) (867,475) (7,678,359)

*SGVFS010845*
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2012
Mobile Wireline
Communications Communications
Services Services Consolidated
Cash Flows
Net cash provided by (used in):
Operating activities P
=13,106,654 P
=6,259,215 P
=19,365,869
Investing activities (19,417,376) (344,365) (19,761,741)
Financing activities 2,197,903 – 2,197,903
1
Computed as non-service revenues less cost of sales
2
Net of final tax

A breakdown of revenues and a reconciliation of segment revenues to the total revenues presented
in the consolidated statements of comprehensive income are shown below:

2014 2013 2012


(In Thousand Pesos)
Gross service revenues ₱99,024,604 ₱90,500,137 ₱82,742,565
Interconnection charges (8,429,934) (9,280,229) (8,859,309)
Net service revenues 90,594,670 81,219,908 73,883,256
Nonservice revenues 4,211,109 4,640,848 3,703,584
Segment revenues 94,805,779 85,860,756 77,586,840
Interest income 682,998 688,249 579,851
Other income - net 470,647 475,246 716,371
Total Revenues ₱95,959,424 ₱87,024,251 ₱78,883,062

The reconciliation of the EBITDA to income before income tax presented in the consolidated
statements of comprehensive income is shown below:

2014 2013 2012


(In Thousand Pesos)
EBITDA ₱39,271,381 ₱36,513,817 ₱35,010,810
Gain on disposals of property and
equipment - net 101,159 64,333 42,447
Interest income 682,998 688,249 579,851
Equity in net losses of associates and
joint ventures (224,257) (79,959) (83,582)
Financing costs (2,565,706) (2,911,785) (2,362,609)
Depreciation and amortization (18,123,525) (27,477,494) (23,583,417)
Other items 240,656 67,612 148,046
Income before income tax ₱19,382,706 ₱6,864,773 ₱9,751,547

The reconciliation of core net income after tax (NIAT) to NIAT is shown below:

2014 2013 2012

Core NIAT ₱14,489,176 ₱11,616,512 ₱10,263,062


Accelerated depreciation 1 (1,136,220) (6,346,176) (3,556,330)
Mark-to-market gains (losses)1 49,581 (61,863) (52,367)
Foreign exchange gains1 619 (340,416) 222,834
Non-recurring items1 (30,964) 92,188 (31,945)
NIAT ₱13,372,192 ₱4,960,245 ₱6,845,254
1
Net of income taxes

*SGVFS010845*
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29.1 Mobile Communications Services


This reporting segment is made up of digital cellular telecommunications services that allow
subscribers to make and receive local, domestic long distance and international long distance
calls, international roaming calls and other value added services (VAS) in any place within
the coverage areas.

29.1.1 Mobile communication voice net service revenues include the following:
a) Pro-rated monthly service fees on postpaid plans;
b) Charges for intra-network and outbound calls in excess of the consumable
minutes for various Globe Postpaid plans, including currency exchange rate
adjustments (CERA) net of loyalty discounts credited to subscriber billings;
c) Airtime fees for intra-network and outbound calls recognized upon the earlier
of actual usage of the airtime value or expiration of the unused value of the
prepaid reload denomination (for Globe Prepaid and TM) which occurs
between 3 and 120 days after activation depending on the prepaid value
reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload
discounts;
d) Revenues generated from inbound international and national long distance calls
and international roaming calls; and
e) Mobile service revenues of GTI.

29.1.2 Mobile SMS service revenues consist of local and international revenues from value-
added services such as inbound and outbound SMS and MMS, and infotext,
subscription fees on unlimited and bucket prepaid SMS services, net of any payouts to
content providers.

29.1.3 Mobile communication data net service revenues consist of local and international
revenues from value-added services such as mobile internet browsing and content
downloading, mobile commerce services, other add-on VAS and service revenues of
GXI and EGG, net of payouts to content providers.

29.1.4 Globe Telecom offers its wireless communications services to consumers, corporate
and small and medium enterprise (SME) clients through the following three (3)
brands: Globe Postpaid, Globe Prepaid and Touch Mobile.

The Globe Group also provides its subscribers with mobile payment and remittance
services under the GCash brand.

29.2 Wireline Communications Services


This reporting segment is made up of fixed line telecommunications services which offer
subscribers local, domestic long distance and international long distance voice services in
addition to broadband and mobile internet services and a number of VAS in various areas
covered by the Certificate of Public Convenience and Necessity (CPCN) granted by the
NTC.

29.2.1 Wireline voice service revenues consist of the following:


a) Monthly service fees including CERA of voice-only subscriptions;
b) Revenues from local, international and national long distance calls made by
postpaid and prepaid wireline subscribers, as well as broadband customers who
have subscribed to data packages bundled with a voice service. Revenues are
net of prepaid call card discounts;
c) Revenues from inbound local, international and national long distance calls
from other carriers terminating on Globe’s network;

*SGVFS010845*
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d) Revenues from additional landline features such as caller ID, call waiting, call
forwarding, multi-calling, voice mail, duplex and hotline numbers and other
value-added features;
e) Installation charges and other one-time fees associated with the establishment
of the service; and
f) Revenues from DUO and SUPERDUO (fixed line portion) service consisting
of monthly service fees for postpaid and subscription fees for prepaid.

29.2.2 Wireline data service revenues consist of the following:


a) Monthly service fees from international and domestic leased lines;
b) Other wholesale transport services;
c) Revenues from value-added services; and
d) One-time connection charges associated with the establishment of service.

29.2.3 Broadband service revenues consist of the following:


a) Monthly service fees of wired, fixed wireless and fully mobile broadband data
only and bundled voice and data subscriptions;
b) Browsing revenues from all postpaid and prepaid wired, fixed mobile and fully
mobile broadband packages in excess of allocated free browsing minutes and
expiration of unused value of prepaid load credits;
c) Value-added services such as games; and
d) Installation charges and other one-time fees associated with the service.

29.2.4 The Globe Group provides wireline voice communications (local, national and
international long distance), data and broadband and data services to consumers,
corporate and SME clients in the Philippines.

· Consumers - the Globe Group’s postpaid voice service provides basic landline
services including toll-free NDD calls to other Globe landline subscribers for a
fixed monthly fee. For wired broadband, consumers can choose between
broadband services bundled with a voice line, or a broadband data-only service.
For fixed wireless broadband connection using Long-Term Evolution (LTE) or
Worldwide Interoperability for Microwave Access (WiMax), the Globe Group
offers broadband packages bundled with voice, or broadband data-only service.
For subscribers who require full mobility, Globe Broadband Tattoo service come
in postpaid and prepaid packages and allow them to access the internet via LTE,
3G with HSDPA, Enhanced Datarate for GSM Evolution (EDGE), General
Packet Radio Service (GPRS) or WiFi at hotspots located nationwide.

· Corporate/SME clients - for corporate and SME enterprise clients wireline voice
communication needs, the Globe Group offers postpaid service bundles which
come with a business landline and unlimited dial-up internet access. The Globe
Group also provides a full suite of telephony services from basic direct lines to
Integrated Services Digital Network (ISDN) services, 1-800 numbers,
International Direct Dialing (IDD) and National Direct Dialing (NDD) access as
well as managed voice solutions such as Voice Over Internet Protocol (VOIP)
and managed Internet Protocol (IP) communications. Value-priced, high speed
data services, wholesale and corporate internet access, data center services and
segment-specific solutions customized to the needs of vertical industries.

*SGVFS010845*
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30. Notes to Consolidated Statements of Cash Flows

The principal noncash transactions are as follows:


Note 2014 2013 2012
(In Thousand Pesos)
Increase in liabilities related to the
acquisition of property and equipment ₱5,091,154 ₱5,838,624 ₱5,699,760
Capitalized ARO 14 9,495 15,675 25,022
Dividends on preferred shares – – 33,145

The cash and cash equivalents account consists of the following:

2014 2013 2012


(In Thousand Pesos)
Cash on hand and in banks ₱6,126,034 ₱4,468,305 ₱2,632,954
Short-term placements 10,630,874 2,952,430 4,126,801
₱16,756,908 ₱7,420,735 ₱6,759,755

Cash in banks earn interest at respective bank deposit rates. Short-term placements represent
short-term money market placements.

The ranges of interest rates of the above placements are as follows:

2014 2013 2012


Placements:
PHP 0.20% to 1.50% 0.15% to 3.90% 1.35% to 4.69%
USD 0.01% to 1.75% 0.02% to 1.75% 0.06% to 1.85%

31. Event After Reporting Period

Dividend Declaration
On February 4, 2015, the BOD approved the declaration of the first quarterly cash dividend of
P
=20.75 per common share, payable to common stockholders of record as of February 18, 2015.
Total dividends amounting to =
P2.8 billion will be payable on March 4, 2015.

*SGVFS010845*
IV. 2014 Annual Corporate Governance Report

173
TABLE OF CONTENTS
A. BOARD MATTERS……………………………………………………………………………………………………………….. 5

1) BOARD OF DIRECTORS…………………………………………………………………………………………………

(a) Composition of the Board……………………………………………………………………………………… 5

(b) Directorship in Other Companies………………………………………………………………………….. 6

(c) Shareholding in the Company………………………………………………………………………………… 9

2) CHAIRMAN AND CEO………………………………………………………………………………………………………… 9

3) OTHER EXECUTIVE, NON-EXECUTIVE AND INDEPENDENT DIRECTORS………………………………. 10

4) CHANGES IN THE BOARD OF DIRECTORS…………………………………………………………………………… 12

5) ORIENTATION AND EDUCATION PROGRAM……………………………………………………………………… 17

B. CODE OF BUSINESS CONDUCT & ETHICS………………………………………………………………………………….. 18

1) POLICIES……………………………………………………………………………………………………………………………. 18

2) DISSEMINATION OF CODE………………………………………………………………………………………………… 19

3) COMPLIANCE WITH CODE…………………………………………………………………………………………………. 19

4) RELATED PARTY TRANSACTIONS………………………………………………………………………………………. 19

(a) Policies and Procedures…………………………………………………………………………………………. 20

(b) Conflict of Interest…………………………………………………………………………………………………. 20

5) FAMILY, COMMERCIAL AND CONTRACTUAL RELATIONS…………………………………………………… 21

6) ALTERNATIVE DISPUTE RESOLUTION………………………………………………………………………………… 22

C. BOARD MEETINGS & ATTENDANCE…………………………………………………………………………………………. 23

1) SCHEDULE OF MEETINGS………………………………………………………………………………………………….. 23

2) DETAILS OF ATTENDANCE OF DIRECTORS…………………………………………………………………………. 23

3) SEPARATE MEETING OF NON-EXECUTIVE DIRECTORS………………………………………………………. 23

4) ACCESS TO INFORMATION………………………………………………………………………………………………… 24

5) EXTERNAL ADVICE…………………………………………………………………………………………………………….. 25

6) CHANGES IN EXISTING POLICIES……………………………………………………………………………………….. 25

D. REMUNERATION MATTERS……………………………………………………………………………………………………… 25

1) REMUNERATION PROCESS………………………………………………………………………………………………… 25

2
2) REMUNERATION POLICY AND STRUCTURE FOR DIRECTORS……………………………………………… 25

3) AGGREGATE REMUNERATION…………………………………………………………………………………………… 27

4) STOCK RIGHTS, OPTIONS AND WARRANTS……………………………………………………………………….. 28

5) REMUNERATION OF MANAGEMENT………………………………………………………………………………… 28

E. BOARD COMMITTEES………………………………………………………………………………………………………………. 30

1) NUMBER OF MEMBERS, FUNCTIONS AND RESPONSIBILITIES……………………………………………. 30

2) COMMITTEE MEMBERS……………………………………………………………………………………………………. 34

3) CHANGES IN COMMITTEE MEMBERS….……………………………………………………………………………. 37

4) WORK DONE AND ISSUES ADDRESSED……………………………………………………………………………… 38

5) COMMITTEE PROGRAM……………………………………………………………………………………………………. 40

F. RISK MANAGEMENT SYSTEM…………………………………………………………………………………………………... 43

1) STATEMENT ON EFFECTIVENESS OF RISK MANAGEMENT SYSTEM……………………………………. 43

2) RISK POLICY………………………………………………………………………………………………………………………. 45

3) CONTROL SYSTEM…………………………………………………………………………………………………………….. 46

G. INTERNAL AUDIT AND CONTROL……………………………………………………………………………………………… 54

1) STATEMENT ON EFFECTIVENESS OF INTERNAL CONTROL SYSTEM……………………………………. 54

2) INTERNAL AUDIT………………………………………………………………………………………………………………. 54

(a) Role, Scope and Internal Audit Function………………………………………………………….. 54

(b) Appointment/Removal of Internal Auditor……………………………………………………… 56

(c) Reporting Relationship with the Audit Committee………………………………………… 56

(d) Resignation, Re-assignment and Reasons……………………………………………………… 57

(e) Progress against Plans, Issues, Findings and Examination Trends…………………. 57

(f) Audit Control Policies and Procedures…………………………………………………………. 58

(g) Mechanisms and Safeguards………………………………………………………………………… 58

H. ROLES OF STAKEHOLDERS……………………………………………………………………………………………………….. 59

I. DISCLOSURES & TRANSPARENCY……………………………………………………………………………………………… 62

3
J. RIGHTS OF STOCKHOLDERS……………………………………………………………………………………………………… 68

1) RIGHT TO PARTICIPATE EFFECTIVELY IN STOCKHOLDERS’ MEETINGS……………………………… 68

2) TREATMENT OF MINORITY STOCKHOLDERS……………………………………………………………………… 77

K. INVESTORS RELATIONS PROGRAM…………………………………………………………………………………………… 77

L. CORPORATE SOCIAL RESPONSIBILITY INITIATIVES……………………………………………………………………. 80

M. BOARD, DIRECTOR, COMMITTEE AND CEO APPRAISAL……………………………………………………………. 82

N. INTERNAL BREACHES AND SANCTIONS………………………………………………………………………………….. 84

4
A. BOARD MATTERS

1) Board of Directors

Number of Directors per Articles of Incorporation Seven

Actual number of Directors for the year Seven

(a) Composition of the Board

Complete the table with information on the Board of Directors:

The following are the directors of the Corporation, classified in accordance with the Revised Code of Corporate
Governance and SEC Memorandum Circular No. 16, series of 2002:

Date last
Type If nominee, elected (if No. of
Nominator in Elected
[Executive (ED), identify the ID, state years
the last election when
Non-Executive principal Date first the served
Director’s Name (if ID, state the (Annual
(NED) or elected number of as
relationship with /Special
Independent years director
the nominator) Meeting)
Director (ID)] served as
ID)1
Jaime Augusto ED Mermac, Remedios D. May 1987 April 10, Annual 28
Zobel de Ayala Inc. Wingco & 2015 Meeting
Mermac, Inc.
Fernando Zobel ED Mermac, Remedios D. May 1994 April 10, Annual 21
de Ayala Inc. Wingco & 2015 Meeting
Mermac, Inc.
Delfin L. Lazaro NED N.A. Remedios D. January April 10, Annual 8
Wingco 2007 2015 Meeting
Yoshio Amano NED Mitsubishi Remedios D. April 2012 April 10, Annual 3
Corporati Wingco & 2015 Meeting
on (MC) MC
Ramon R. Del ID N.A. Remedios D. April 2010 April 10, Annual 5
Rosario, Jr. Wingco (not 2015 Meeting
related to Mr. (Served
Del Rosario) as ID for
3 years
from
April
2012)
Xavier P. Loinaz ID N.A. Remedios D. April 2009 April 10, Annual 6
Wingco (not (as ID) 2015 Meeting
related to Mr. (Served
Loinaz) as ID for
3 years
from
April
2012)
Antonio Jose U. ID N.A. Remedios D. September April 10, Annual 4
Periquet Wingco (not 2010 2015 Meeting
related to Mr. (Served
Periquet) as ID for
3 years

1
Reckoned from the election immediately following January 2, 2012.
5
from
April
2012)

(b) Provide a brief summary of the corporate governance policy that the board of directors has adopted. Please
emphasize the policy/ies relative to the treatment of all shareholders, respect for the rights of minority
shareholders and of other stakeholders, disclosure duties, and board responsibilities.

It is the duty of the directors to promote shareholders rights, remove impediments to the exercise of
shareholders rights and provide effective redress for violation of those rights. The directors shall encourage
the exercise of shareholders’ voting rights and the resolution of collective action problems through
appropriate mechanisms. They shall be instrumental in reducing or eliminating costs and other administrative
or practical impediments to shareholders participating in meetings and/or voting in person. The directors shall
pave the way for the electronic filing and distribution of shareholders information necessary to make informed
decisions subject to legal constraints.

(c) How often does the Board review and approve the vision and mission?

The Board reviews and approves the vision and mission at least once a year, as part of the review and
approval of the Company’s strategy as recommended by Management. The Board and Management also
revisit the Company’s vision and mission as part of the budget review process.

(d) Directorship in Other Companies

(i) Directorship in the Company’s Group2

Identify, as and if applicable, the members of the company’s Board of Directors who hold the office of
director in other companies within its Group:

Type of Directorship
Corporate Name of the (Executive, Non-Executive,
Director’s Name
Group Company Independent). Indicate if
director is also the Chairman.
Jaime Augusto Zobel de Ayala Bank of the Philippine Islands Chairman, Non-Executive
Director
Integrated Micro-Electronics, Chairman, Non- Executive
Inc. Director
Globe Telecom, Inc. Chairman, Non-Executive
Director
Ayala Land, Inc. Vice Chairman, Non-Executive
Director
Manila Water Company, Inc. Vice Chairman, Non-Executive
Director
Mermac, Inc. Co-Vice Chairman, Non-
Executive Director
Alabang Commercial Non-Executive Director
Corporation
Ayala International Pte Ltd. Non-Executive Director
AC Energy Holdings, Inc. Non-Executive Director

2 The Group is composed of the parent, subsidiaries, associates and joint ventures of the company.
6
Fernando Zobel de Ayala AC International Finance Limited Chairman, Non-Executive
Director
Ayala International Pte., Ltd. Chairman, Non-Executive
Director
Bank of the Philippine Islands Vice Chairman, Non-Executive
Director
LiveIt Investments, Ltd. Vice Chairman, Non-Executive
Director
Mermac, Inc. Co-Vice Chairman, Non-
Executive Director
Globe Telecom, Inc. Non-Executive Director
Integrated Micro-Electronics, Inc. Non-Executive Director
Asiacom Philippines, Inc. Non-Executive Director
AG Holdings Limited Non-Executive Director
Ayala International Holdings Non-Executive Director
Limited
AI North America, Inc. Non-Executive Director
Accendo Commercial Chairman, Non-Executive
Corporation Director
Ceci Realty, Inc. Vice Chairman, Non-Executive
Director
Sonoma Services, Inc. Non-Executive Director
Vesta Property Holdings, Inc. Vice Chairman, Non-Executive
Director
Columbus Holdings, Inc Vice Chairman, Non-Executive
Director
Emerging City Holdings, Inc. Vice Chairman, Non-Executive
Director
Fort Bonifacio Development Vice Chairman, Non-Executive
Corporation Director
Bonifacio Land Corporation Vice Chairman, Non-Executive
Director
Delfin L. Lazaro Philwater Holdings Company, Chairman, Non-Executive
Inc. Director
AYC Holdings, Ltd. Chairman, Non-Executive
Director
Purefoods International, Ltd. Chairman, Non-Executive
Director
A.C.S.T. Business Holdings, Inc. Chairman, Non-Executive
Director
Globe Telecom, Inc. Non-Executive Director
Ayala Land, Inc. Non-Executive Director
Integrated Micro-Electronics, Non-Executive Director
Inc.
Manila Water Co., Inc. Non-Executive Director
Ayala DBS Holdings, Inc. Non-Executive Director
AC Energy Holdings, Inc. Non-Executive Director
Ayala International Holdings, Non-Executive Director
Ltd.
Bestfull Holdings Limited Non-Executive Director
AG Holdings Limited Non-Executive Director
AI North America, Inc. Non-Executive Director
7
Xavier P. Loinaz Bank of the Philippine Islands Independent Director
and Subsidiaries
Ramon R. Del Rosario, Jr. South Luzon Thermal Energy Non-Executive Director
Corp.*

Yoshio Amano Portico Land Corporation Non-Executive Director


Antonio Jose U. Periquet Bank of the Philippine Islands Independent Director
and subsidiaries
* The Company has no power to elect a majority of the members of the board of directors of South Luzon Thermal
Energy Corporation.

(ii) Directorship in Other Listed Companies

Identify, as and if applicable, the members of the company’s Board of Directors who are also directors of
publicly-listed companies outside of its Group:

Type of Directorship
(Executive, Non-Executive,
Director’s Name Name of Listed Company
Independent). Indicate if
director is also the Chairman.
Antonio Jose U. Periquet ABS-CBN Holdings Corporation Independent Director
ABS-CBN Corporation Independent Director
DMCI Holdings, Inc. Independent Director
Philippine Seven Corporation Independent Director
Max’s Group, Inc. Independent Director
Ramon R. del Rosario, Jr. Phinma Corporation Executive Director
Trans-Asia Petroleum Corporation Executive Director
Trans-Asia Oil & Energy Dev’t. Executive Director
Corp.

(iii) Relationship within the Company and its Group

Provide details, as and if applicable, of any relation among the members of the Board of Directors, which
links them to significant shareholders in the company and/or in its group:

Name of the
Director’s Name Description of the relationship
Significant Shareholder
Jaime Agusto Zobel de Ayala Mermac, Inc. Mr. Zobel is an officer and a
stockholder of Mermac, Inc.
Fernando Zobel de Ayala Mermac, Inc. Mr. Zobel is an officer and a
stockholder of Mermac, Inc.
Yoshio Amano Mitsubishi Corporation Mr. Amano is the General
Manager of Mitsubishi
Corporation-Manila Branch

(iv) Has the company set a limit on the number of board seats in other companies (publicly listed, ordinary
and companies with secondary license) that an individual director or CEO may hold simultaneously? In
particular, is the limit of five board seats in other publicly listed companies imposed and observed? If yes,
briefly describe other guidelines:

Yes. The Corporation ensure that adequate time and attention is given to the fulfillment of the directors of
their duties. The independent directors hold no more than five board seats in publicly-listed companies
and executive directors hold no more than two board seats in listed companies outside the Corporation’s
group. In the implementation of this policy, the Board may consider several directorships in related
companies or companies in the same industry as one. (Charter of the Board of Directors, Section 3.4)

8
(e) Shareholding in the Company

Complete the following table on the members of the company’s Board of Directors who directly and indirectly
own shares in the company:

Number of
Number of Direct % of Capital
Name of Director Indirect shares / Through
shares* Stock
(name of record owner)*
Jaime Augusto Zobel de Common-39,731 Common (through ESOWN
Ayala subscription)-98,435
Voting Preferred-543,802 0.0810%
Preferred B (through PCD) –
20,000
Fernando Zobel de Ayala Common-94,825 Common (through ESOWN
subscription)-43,341 0.0800%
Voting Preferred-554,983
Delfin L. Lazaro Common-1 Common (through ESOWN
subscription)-181,039
Voting Preferred-258,297 0.0507%
Common (through PCD
Nominee)-79
Yoshio Amano Common-1 None 0.0000%
Xavier P. Loinaz Common-126,614 None
0.0222%
Voting Preferred-65,517
Ramon R. Del Rosario, Jr. Common-1 None 0.0000%
Common-1,200 Preferred B (through PCD) –
Antonio Jose U. Periquet 0.0463%
400,000
TOTAL 1,684,972 742,894 0.2802%

2) Chairman and CEO

(a) Do different persons assume the role of Chairman of the Board of Directors and CEO? If no, describe the
checks and balances laid down to ensure that the Board gets the benefit of independent views.

Yes No X

Identify the Chair and CEO:

Chairman of the Board Jaime Augusto Zobel de Ayala


Jamie Augusto Zobel de Ayala (CEO)/
CEO/President
Fernando Zobel de Ayala (President)

Among the checks and balances laid down to ensure that the Board gets the benefit of independent views are:
(1) the powers and responsibilities of the Chairman and of the CEO are specified and separate in the By-laws;
(2) only two of the seven directors are executive directors and the powers and responsibilities of directors are
clearly delineated from the powers and responsibilities of management; and (3) three of the seven directors
are independent directors.

(b) Roles, Accountabilities and Deliverables

Define and clarify the roles, accountabilities and deliverables of the Chairman and CEO.

Chairman Chief Executive Officer


Role 1. Schedule meetings to enable the
1. Have general supervision of the
Board to perform its duties
Accountabilities business, affairs, and property of

9
responsibly while not interfering with the Corporation, and over its
the flow of the Corporation’s employees and officers;
operations; 2. See that all orders and
2. Prepare the meeting agenda; resolutions of the Board of
3. Exercise control over quality, Directors are carried into effect;
quantity and timeliness of the flow of 3. Submit to the Board as soon as
information between Management possible after the close of each
and the Board; and fiscal year, and to the
4. Assist in ensuring compliance with stockholders at the annual
Deliverables
the Corporation’s guidelines on meeting, a complete report of
corporate governance. the operations of the Corporation
for the preceding year, and the
state of its affairs; and
4. Report to the Board from time to
time all matters within its
knowledge which the interest of
the Corporation may require to
be brought to their notice.

3) Explain how the board of directors plan for the succession of the CEO/Managing Director/President and the top
key management positions?

The Nomination Committee of the Board conducts a review and evaluation of the qualifications of all persons
nominated to positions in the Corporation which require appointment by the Board. In conducting its review, the
Committee shall consider the following factors:

a) Duties and responsibilities of the position/s under consideration;


b) For the nominees:
(i) level of knowledge on the Corporation’s business;
(ii) potential to assume greater responsibility in the organization;
(iii) ability, integrity and expertise; and
(iv) results of previous performance assessments.

The Committee’s review of the management succession plan shall also take into account relevant human resource
policies of the Corporation and its vision, mission and overall corporate strategy. (Charter of the Nomination
Committee, Section 4)

The Board approves the succession plans for the CEO/Managing Director/President and the top key management
positions based on the recommendations of the Committee and other factors that the Board may deem proper and
relevant. (Charter of the Board of Directors, Section 6.1 (t), and Annex B)

4) Other Executive, Non-Executive and Independent Directors

Does the company have a policy of ensuring diversity of experience and background of directors in the board?
Please explain.

The Board shall be composed of members who possess the necessary knowledge, skills and experience required to
properly perform the duties of the Board.

The Board shall encourage the selection of a mix of competent directors, each of whom can add value and
independent judgment in the formulation of sound corporate strategies and policies. Careful attention must be
given to ensure that there is independence and diversity, and appropriate representation of women in the Board to
the greatest extent possible. (Charter of the Board of Directors, Section 2.2)

Does it ensure that at least one non-executive director has an experience in the sector or industry the company
belongs to? Please explain.

Yes. Mr. Amano, a Non-Executive Director of the Corporation, is the General Manager of Mitsubishi Corporation-
Manila Branch. Mitsubishi Corporation is also a holding company. Mr. del Rosario, an Independent Director of the
10
Corporation, has been the President and CEO of Phinma, Corporation, a holding company, for at least ten years.

Define and clarify the roles, accountabilities and deliverables of the Executive, Non-Executive and Independent
Directors:

Executive Directors Non-Executive Directors Independent Directors


Role 1. Conduct fair business transaction with the Perform the same roles
corporation and ensure that personal interest and deliverables as those
Deliverables
does not bias Board decisions. given to the executive
2. Devote time and attention necessary to properly and non-executive
discharge his duties and responsibilities. directors. In addition,
3. Before deciding on any matter brought before independent directors
the Board, every director should carefully study serve as chairs of the
the issue. Audit Committee, Risk
4. The director should view each company issues Management
objectively and support plans and ideas which Committee,
he believes are beneficial to the Company. Compensation
5. The director should be knowledgeable of the Committee and
statutory and regulatory requirements affecting Nomination Committee
the corporation. of the Company.
6. The director should not disclose any non-public
information of the Company to any person
without the authority of the Board.
7. Each director is responsible for assuring that
actions taken by the Board maintain the
adequacy of the control environment within the
Corporation.
8. Prior to assuming office, the director is expected
to attend a seminar on corporate governance
conducted by a duly recognized private or
government institution.
Accountabilities Directors who willfully and knowingly vote for or assent to patently unlawful acts
of the Corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the Corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, shall be liable jointly and severally for
all damages resulting therefrom suffered by the Corporation, its stockholders
and other persons.

When a director attempts to acquire or acquires, in violation of his duty, any


interest adverse to the Corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the Corporation and
must account for the profits which otherwise would have accrued to the
Corporation.

Provide the company’s definition of "independence" and describe the company’s compliance to the definition.

The Corporation adheres to both Philippine law and the rules of the Securities and Exchange Commission and of
the Philippine Stock Exchange (the “Philippine Requirements”) and the standards set by the Association of
Southeast Asian Nations (ASEAN) for the strengthening of the ASEAN capital market development and integration
for the establishment of an ASEAN Economic Community (the “ASEAN Standards”) in the determination of
independent directors. In line with this, the Corporation has adopted two classes of independent directors: the first
class is for compliance with Philippine Requirements, while the second class is for compliance with ASEAN
Standards.

Independent directors under the Philippine Requirements shall, apart from their fees and shareholdings, hold no
interests or relationships with the Corporation that may hinder their independence from the Corporation,
Management or shareholders which could or could reasonably be perceived to, materially interfere with the

11
exercise of independent judgment in carrying out the responsibilities of a director. For this purpose, each
independent director submits to the Corporate Secretary a letter of confirmation stating that he holds no interest
affiliated with the Corporation, the Management or controlling stockholder at the time of his election or re-
election.

On the other hand, independent directors under the ASEAN standards shall also possess the qualifications and
none of the disqualifications for independent directors under the Philippine Requirements provided and except
that, when relevant in the application of the qualifications and disqualifications, a “substantial stockholder” shall
mean a stockholder who possesses the power to direct or govern, directly or indirectly, the financial and operating
policies of the Corporation so as to obtain benefits from its activities. (Charter of the Board of Directors, Section 2.4
and Annex A)

Does the company have a term limit of five consecutive years for independent directors? If after two years, the
company wishes to bring back an independent director who had served for five years, does it limit the term for no
more than four additional years? Please explain.

Yes. The independent directors of the Corporation, considered as such in accordance with SEC Memorandum
Circular No. 16, series of 2002, can serve for five (5) consecutive years, provided that service for the a period of at
least six (6) months shall be equivalent to one (1) year, regardless of the manner by which the independent
director position was relinquished or terminated. After completion of the five-year service period, an independent
director shall be ineligible for election as such in the Corporation unless the independent director has undergone a
“cooling off” period of two (2) years, provided, that during such period, the independent director concerned has
not engaged in any activity that under existing rules of the SEC disqualifies a person from being elected as
independent director of the Corporation. An independent director re-elected as such in the Corporation after the
“cooling off” period can serve for another four (4) consecutive years under the conditions mentioned above. After
serving as independent director for nine (9) years, the independent director shall be perpetually barred from being
elected as such in the Corporation, without prejudice to being elected as independent director in other companies
outside of the business conglomerate, where applicable, under the same conditions provided for in the rules and
regulations of the Securities and Exchange Commission. (Charter of the Board of Directors, Sections 4.6 - 4.8)

5) Changes in the Board of Directors (Executive, Non-Executive and Independent Directors)

(a) Resignation/Death/Removal

Indicate any changes in the composition of the Board of Directors that happened during the period:

None.

Name Position Date of Cessation Reason


N.A.

(b) Selection/Appointment, Re-election, Disqualification, Removal, Reinstatement and Suspension

Describe the procedures for the selection/appointment, re-election, disqualification, removal, reinstatement
and suspension of the members of the Board of Directors. Provide details of the processes adopted
(including the frequency of election) and the criteria employed in each procedure:

Procedure Process Adopted Criteria


a. Selection/Appointment
(i) Executive Directors The stockholders of the A director of the Company
Company may submit written shall have the following
(ii) Non-Executive Directors
nominations to the Board at qualifications:
(iii) Independent Directors least 30 business days before 1. Ownership of at least one
the next annual meeting of the (1) share of the capital
stockholders. The Nomination stock of the Company;
Committee evaluates the 2. College degree or its
nominees and approves a list equivalent or adequate

12
of nominees eligible to be competence and
elected as members of the understanding of the
Board. fundamentals of doing
business or sufficient
The Nomination Committee experience and
likewise identifies and competence in managing
recommends qualified a business;
individuals for nomination and 3. Relevant qualifications,
election to the Board through such as previous business
the use of professional search experience, membership in
firms and other external good standing in relevant
sources of candidates. industry and membership
in business or professional
organizations;
4. Integrity, probity,
diligence and
assiduousness in the
performance of his
functions;
5. Directorships in other
companies, taking into
account the following
factors:
i) the nature of the
business of the
Corporation
ii) the number of directors
in other companies;
iii) any possible conflict of
interest; and
iv) the age of the director;
and
6. For independent directors,
beneficial equity
ownership in the
Corporation or in its
related companies, which
must not exceed two
percent (2%).
b. Re-appointment
(i) Executive Directors The stockholders of the A director of the Company
Company may submit written shall have the following
(ii) Non-Executive Directors
nominations to the Board at qualifications:
(iii) Independent Directors least 30 business days before 1. Ownership of at least one
the next annual meeting of the (1) share of the capital
stockholders. The Nomination stock of the Company;
Committee evaluates the 2. College degree or its
nominees and comes up with equivalent or adequate
list of nominees eligible to be competence and
elected as members of the understanding of the
Board. fundamentals of doing
business or sufficient
The Nomination Committee experience and
likewise identifies and competence in managing
recommends qualified a business;
individuals for nomination and 3. Relevant qualifications,
election to the Board through such as previous business
the use of professional search experience, membership in
13
firms and other external good standing in relevant
sources of candidates. industry and membership
in business or professional
organizations;
4. Integrity, probity,
diligence and
assiduousness in the
performance of his
functions;
5. Directorships in other
companies, taking into
account the following
factors:
i) the nature of the
business of the
Corporation
ii) the number of directors
in other companies;
iii) any possible conflict of
interest; and
iv) the age of the director;
6. For independent directors,
beneficial equity
ownership in the
Corporation or in its
related companies, which
must not exceed two
percent (2%); and
7. The term limit set for
independent directors
under applicable laws,
rules and regulations.
c. Permanent Disqualification
(i) Executive Directors The Company abides with the The following persons are
rules set forth in its Manual of disqualified from being a
(ii) Non-Executive Directors
Corporate Governance, the SEC director of the Corporation:
(iii) Independent Directors Code of Corporate Governance 1. Any person who has been
and existing laws. finally convicted by a
competent judicial or
administrative body of any
crime involving the
purchase or sale securities,
arising out of the person’s
conduct as an underwriter,
broker, dealer, and arising
out of his relationship with
a bank, quasi-bank and
investment house.
2. Any person finally convicted
judicially of an offense
involving moral turpitude or
fraudulent acts or
transgressions;
3. Any person finally found by
the SEC or a court or other
administrative body to have
willfully violated or willfully
aided any provision of the
14
Securities Regulation Code;
4. Any person judicially
declared to be insolvent;
5. Any person finally found
guilty by a foreign court or
equivalent financial
regulatory authority of
acts, violation or
misconduct listed above;
6. Any person convicted by
final and executory
judgment of an offense
punishable by
imprisonment for a period
exceeding six (6) years, or a
violation of the Corporation
Code, committed within
five (5) years prior to the
date of his election of
appointment;
7. Any person engaged in any
business which competes
with or is antagonistic to
that of the Corporation;
and
8. After serving as
independent director for
nine years, the independent
director shall be perpetually
barred from being elected
as such in the Corporation,
without prejudice to being
elected as independent
director in other companies
outside of the business
conglomerate, where
applicable, under the same
conditions provided for in
the rules and regulations of
the SEC.
d. Temporary Disqualification
(i) Executive Directors The Company abides with the 1. The following are the
rules set forth in its Manual of grounds for temporary
(ii) Non-Executive Directors
Corporate Governance, the SEC disqualification of
(iii) Independent Directors Code of Corporate Governance incumbent directors:
and existing laws. The Refusal to fully disclose
temporary disqualification of the extent of his business
the director requires a interest as required under
resolution of a majority of the the Securities Regulation
Board Code and Implementing
Rules and Regulations.
2. Absence or non-
participation for whatever
reason/s other than
illness, death of
immediate family or
serious accident in at least
75% of all board meetings
15
during his incumbency, or
any twelve month period
during his incumbency.
3. Dismissal or termination
from directorship in
another listed corporation;
4. Being under preventive
suspension by the
Corporation for any
reason; and
5. Conviction that has not yet
become final referred to in
the grounds for
disqualification of
directors
e. Removal
(i) Executive Directors The removal of directors A director may be removed
requires an affirmative vote of with or without cause with
(ii) Non-Executive Directors
2/3 of the outstanding capital the affirmative vote of
(iii) Independent Directors stock of the Company. shareholders owning 2/3 of
outstanding capital stock.
However, a director may not
be removed without cause if it
will deny minority
shareholders representation
in the Board.
f. Re-instatement
(i) Executive Directors A temporary disqualified director shall, within 60 business days
from such disqualification, take the appropriate action to
(ii) Non-Executive Directors
remedy or correct the disqualification.
(iii) Independent Directors
If the beneficial security ownership of an independent director in
the Corporation or in its related companies exceeds 2%, the
Corporation shall cease to consider him as an independent
director until his beneficial security ownership is reduced to 2%
or lower.
g. Suspension

(i) Executive Directors After due notice and hearing, a director who violates the
Manual of Corporate Governance will be subjected to the
(ii) Non-Executive Directors
penalties as set forth in the said Manual.
(iii) Independent Directors

Voting Result of the last Annual General Meeting

Name of Director Votes Received (in favor)*


Jaime Augusto Zobel de Ayala 620,331,407 (93.40%)
Fernando Zobel de Ayala 620,045,688 (93.36%)
Delfin L. Lazaro 620,190,375 (93.38%)
Yoshio Amano 619,108,485 (93.21%)
Xavier P. Loinaz 626,321,226 (94.30%)
Ramon R. Del Rosario, Jr. 622,893,401 (93.78%)
Antonio Jose U. Periquet 623,167,531 (93.83%)
*Percentage out of the registered voting shares

16
6) Orientation and Education Program

(a) Disclose details of the company’s orientation program for new directors, if any.

The Corporate Secretary briefs each new director of the By-laws and Manual of Corporate Governance, the
schedule of regular meetings of the Board and Board committees, their rights, including access to information
and advice, and the procedure and processes for the provision of information to them.

The Office of Corporate Strategy and the Chief Finance Officer give each new director a briefing of existing and
planned investments, current strategic directions, budgets and internal controls and processes.

Prior to assuming office, each director is required to attend a seminar on corporate governance conducted by
a duly recognized private or government institution.

(b) State any in-house training and external courses attended by Directors and Senior Management3 for the past
three (3) years:

• Ayala-LEAP (Ayala Leadership Acceleration Program)


• EAGLE (Emerging Ayala Group Leaders Program)
• The Leadership Circle (integrated within Ayala-LEAP and EAGLE)
• LEAP Alumni Learning Series (presentations by visiting professors and practitioners in the fields of
customer centricity, strategy, leadership, etc.)
• Executive Coaching
 Ayala Group Corporate Governance Summit
 Corporate Governance and Risk Management for Banks
 Corporate Governance Orientation Program by the Institute of Corporate Directors (ICD)
 Corporate Governance Seminar by SyCip Gorres Velayo & Co. (SGV)
 Ayala Group Sustainability Summit
 Ayala Group Corporate Governance and Risk Management Summit held on 4 February 2014
 Ayala Group Corporate Governance Summit held on 18 February 2015

(c) Continuing education programs for directors: programs and seminars and roundtables attended during the
year.

Name of Name of Training


Date of Training Program
Director/Officer Institution
Jaime Augusto Zobel February 18, 2015 Ayala Group Corporate Institute of Corporate
de Ayala Governance Summit Directors, Inc.
Fernando Zobel de
Ayala
Yoshio Amano (NED)
Delfin L. Lazaro (NED)
Xavier P. Loinaz (ID)
Ramon R. del Rosario
(ID)
Antonio Jose U.
Periquet (ID)

The directors of the Corporation, in their own capacity or as sponsored by the Corporation, attend education
programs, seminars, and roundtable discussions on corporate governance with service providers that are duly
accredited by the SEC.

3Senior Management refers to the CEO and other persons having authority and responsibility for planning, directing
and controlling the activities of the company.

17
B. CODE OF BUSINESS CONDUCT & ETHICS

1) Discuss briefly the company’s policies on the following business conduct or ethics affecting directors, senior
management and employees:

Business Conduct &


Directors Senior Management Employees
Ethics
(a) Conflict of Interest All the Corporation’s directors, officers and employees are expected to avoid
situations of conflicts of interest or impropriety. Directors, officers and employees
who have personal or pecuniary interest on any enterprise with which the
Corporation has an existing or intended transaction shall fully disclose the relevant
facts of the situation.
(b) Conduct of Business All directors, officers, and employees shall:
and Fair Dealings 1. Deal fairly with the Corporation’s customers, suppliers and business partners,
and with the government, competitors and colleagues;
2. Not take undue advantage through misrepresentation of material facts,
concealment, manipulation, or any other form of unfair dealing practice; and
3. Treat everyone with respect and act in good faith and with integrity and sense of
professionalism at all times.
(c) Receipt of gifts from Directors, officers and employees shall not accept gifts or invitations of any form
third parties from any supplier, customer or business partner of the Corporation, or from any
third person or entity with existing or intended business dealings with the
Corporation, except when the gift or invitation is:
 directly attributable to purely familial or personal relationships;
 only of nominal value;
 a simple promotional item or is part of the supplier’s public relations program;
or
 part of business meetings or discussions.

However, when the gift does not fall under any of the above-mentioned conditions,
the Company encourages the employee to turn over the gift to Strategic Human
Resources and Organization Development for inclusion in the Company Christmas
party raffle.

Directors, officers and employees must immediately report any offer or gift of any
value given to them or their immediate family with a view to get favors or to
influence business recommendations, proposals or decisions affecting the
Corporation or any of its related companies. The report shall be made to the
Chairman of the Board in the case of the directors, President and CEO, to the
President in case of the Managing Directors, and to the Group Head and Unit Heads
in the case of employees. All disclosures shall be submitted to the Managing
Director for Strategic Human Resources.
(d) Compliance with Ayala expects its directors, officers and employees to conduct business in
Laws & Regulations accordance with Philippine laws and regulations. Employees are encouraged to
consult with Corporate Governance Group and the Office of General Counsel
whenever there is any doubt concerning the legality of any matter.

Any suspected criminal violations will be reported to the appropriate authorities.


Non-criminal violations will be investigated and addressed as appropriate.
(e) Respect for Trade The directors, officers and employees shall strictly observe company rules that
Secrets/Use of Non- provide for restrictions to access to classified information and controls on the
public Information release of such information to other companies, agencies, parties or to the general
public. The directors, officers and employees shall not release classified information
unless authorized by Management. They should shall maintain the integrity of all
company documents and records and protect them against unauthorized or
improper alteration, forgery, concealment or destruction.

18
(f) Use of Company All directors, officers and employees shall be responsible for the proper use of all
Funds, Assets and company assets and resources, which include, but are not limited to, information,
Information facilities, equipment, software, vehicles and supplies owned or leased by the
Corporation or are otherwise in its possession, They shall use company assets and
resources efficiently, responsibly and for legitimate business purposes only.
(g) Employment & The Company is consistently compliant with the Philippine labor laws, its
Labor Laws & implementing rules & regulations, DOLE department orders and circulars. The Ayala
Policies Group (AG) networks on Labor and Employee Relations, with oversight provided by
the AG Human Resource Council, meet regularly to, among other functions, monitor
and share current trends in, including strict observance of, legislation and
jurisprudence on laws, proclamations and orders involving employee and labor
relations .
(h) Disciplinary action The Company, in the spirit of its shared and corporate values, holds all its employees
in esteem and believes in protecting their rights, implementing discipline with firm
but fair actions. At the same time, it expects each of its employees to respect the
rights of fellow employees at all times and strive to live out these shared values in
conducting personal and business affairs with: integrity; long-term vision;
empowering leadership; commitment to national development.

All offenses or violations of Company policies and rules shall be dealt with
accordingly.
(i) Whistle Blower As expressly provided in its Code of Conduct and Ethics and the Whistleblower
Policy, the Company encourages directors, officers, and employees, and all
suppliers, business partners, contractors and sub-contractors to come forward and
raise serious concerns about a perceived wrongdoing, malpractice or risk involving
the Corporation. The whistleblower may send or communicate a report, formally or
anonymously, through a face-to-face meeting with the members of the Disclosure
Committee, or email to whistleblower@ayala.com.ph.

The Disclosure Committee will forthwith conduct investigations and, applying the
rules of due process, make the appropriate recommendations on personnel actions.

Should it be determined by the Committee that a whistleblower knowingly (a)


submitted a report containing false allegations or (b) presented fabricated evidence,
the whistleblower shall be subject to disciplinary or legal action pursuant to the
policies and procedures of the Corporation, and any applicable laws.
(j) Conflict Resolution The Company adheres to the ideals of justice and fairness in its business and in all
its dealings with its Employees. The Company provides for an Investigation
Committee to look into serious violations of Company policies, rules and regulations.

2) Has the code of ethics or conduct been disseminated to all directors, senior management and employees?

Yes. All employees have copies of the Code of Conduct and Ethics. Part of the on-boarding program of all newly
hired employees is the orientation on the Code of Conduct and Ethics to keep them informed in the same manner
that the existing employees, as well as the directors, chairman, and senior management, are aware and informed.
They are provided with the Code of Conduct and Ethics handbook.

3) Discuss how the company implements and monitors compliance with the code of ethics or conduct.

The Strategic Human Resources has the specific task of implementing and monitoring compliance with the
provisions of the Code. It is responsible for:
 ensuring that the contents of the Code are communicated to all existing and new directors, officers and
employees, and requiring each to sign an acknowledgment receipt that he/she has read and understood the
same and agrees to abide with the standards and norms set forth therein;
 making the Code available on the company intranet for ease of access;
 requiring all directors, officers and employees to declare annually that they have complied with the Code,
specifically on the provisions of conflict of interest and insider trading;
 investigating reported violations of the Code and impose sanctions for violations determined after investigation;
19
 reviewing and continuously updating the Code; and
 drafting and promulgating the Implementing Rules for the effective implementation of the Code, subject to the
approval of the President and CEO.

Management is also responsible for enforcing and monitoring compliance with the Code within their respective
area of jurisdiction and taking or implementing disciplinary action after proper investigation.

All directors, officers and employees have the duty to report non-compliance with the Code and its Implementing
Rules that may come to their knowledge and attention, in accordance with the relevant company rules and
procedures.

Any violation shall be dealt with in accordance with the procedures provided in the Implementing Rules, the
Corporation’s Human Resources Manual of Policies and Procedures, the Employee Handbook and other existing
company policies and proper observance of the requirements of due process. This shall be without prejudice to the
filing of any legal action against the party concerned under existing laws.

4) Related Party Transactions

(a) Policies and Procedures

Describe the company’s policies and procedures for the review, approval or ratification, monitoring and
recording of related party transactions between and among the company and its parent, joint ventures,
subsidiaries, associates, affiliates, substantial stockholders, officers and directors, including their spouses,
children and dependent siblings and parents and of interlocking director relationships of members of the
Board.

The Company’s Related Party Transactions (RPT) policy was revised, approved and was in effect in December
2014.

It is the policy of Ayala Corporation (‘Corporation’) that related party transactions between the Corporation
and related parties shall be subject to review and approval to ensure that they are at “arm’s length”, the
terms are fair, and they will inure to the best interest of the Corporation and its shareholders.

Related party transactions shall be disclosed, reviewed and approved in accordance with the policy consistent
with the principles of transparency and fairness.

The policy also defines related party as a person or entity that is related to the entity that is preparing its
financial statements, also referred to as the reporting entity.
 A person or a close member of that person’s family is related to a reporting entity if that person has
control or joint control over the reporting entity; has significant influence over the reporting entity; or
is a member of the key management personnel of the reporting entity or of a parent of the reporting
entity.
 An entity is related to a reporting entity if any of the following conditions applies:
o The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others)
o One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member)
o Both entities are joint ventures of the same third party.
o One entity is a joint venture of a third entity and the other entity is an associate of the third
party
o The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself
such a plan, the sponsoring employers are also related to the reporting entity.
o The entity is controlled or jointly controlled by a person of the reporting entity
o A person of the reporting entity has significant influence over the entity or is a member of
the key management personnel of the entity (or of a parent of the entity).
o The entity, or any member of a group of which it is a part, provides key management
personnel service to the reporting entity or to the parent of the reporting entity.

20
Material/significant related party transactions shall be reviewed by the Risk Management Committee and
endorsed to the Board of Directors for approval. Material/significant related party transactions are those
transactions involving Php50 million and over.

The Board shall approve a material/significant RPT before its commencement. If not identified beforehand,
the material/significant RPT must be subsequently reviewed by the Committee and ratified by the Board or the
same may be discontinued, rescinded or modified to make it acceptable for ratification.

The Committee considers the following factors in the review of the RPTs:
 The terms of the transaction;
 The aggregate value of the transaction;
 Whether the terms of the transaction are no less favorable than those generally available to non-
related parties under the same or similar circumstances;
 The extent of Related Party’s interest in the transaction;
 Purpose and timing of the transaction;
 Whether the transaction would present an improper conflict of interest or special risks or
contingencies for the Corporation, or the related party taking into account the size of the transaction
and the overall financial position of the Related Party; and
 Any material information or other factors the Committee deems relevant.

The Group Risk Management Unit monitors RPTs for approval of the Risk Management Committee while the
Controllership Unit ensures that RPTs are properly disclosed in the Corporation’s financial statements, and
other applicable fillings in accordance with the relevant rules and issuances of the Securities and Exchange
Commission and other regulatory bodies.

Related Party Transactions Policies and Procedures


(1) Parent Company All transactions with related parties are made on terms
(2) Joint Ventures equivalent to those that prevail in arm’s length transactions.
(3) Subsidiaries There have been no guarantees provided or received for any
(4) Entities Under Common Control related party receivables or payables. An assessment is
undertaken each financial year through examining the
(5) Substantial Stockholders
financial position of the related parties and the markets in
which the related parties operate.
(6) Officers including Annual disclosure of business interests and adherence to AC’s
spouse/children/siblings/parents Insider Trading Policy to uphold transparency and practice
(7) Directors including corporate governance.
spouse/children/siblings/parents
(8) Interlocking director relationship
of Board of Directors

(b) Conflict of Interest

(i) Directors/Officers and 5% or more Shareholders

Identify any actual or probable conflict of interest to which directors/officers/5% or more shareholders
may be involved.

Details of Conflict
of Interest (Actual or Probable)
Name of Director/s N.A.
Name of Officer/s N.A.
Name of Significant Shareholders N.A.

(ii) Mechanism

Describe the mechanism laid down to detect, determine and resolve any possible conflict of interest
21
between the company and/or its group and their directors, officers and significant shareholders.

Directors/Officers/Significant Shareholders
Company The Company’s Human Resources Manual of Policies and
Procedures, the Employee Handbook, and the Code of
Conduct and Ethics apply to directors, officers and
employees. They provide principles, guidelines and
standards by which officers are expected to conduct
themselves.

Directors, employees and officers are required to submit


Annual Disclosure of business interests and adherence to the
company’s Insider Trading Policy to uphold transparency
and practice corporate governance.

If a director has an interest in a matter under consideration


by the board, then the director is not allowed to participate
in those discussions and the board should follow any further
appropriate processes. Individual directors should be
conscious of shareholder and public perceptions and seek to
avoid situations where there might be an appearance of a
conflict of interest.

Independent directors are aware of the shareholders’ and


public’s perceptions and they are guided to avoid situations
where there could be an appearance of conflict of interest.
Group Each company in the Group has its Manual of Policies and
Procedures and Code of Conduct which apply to directors,
officers and employees.

5) Family, Commercial and Contractual Relations

(a) Indicate, if applicable, any relation of a family,4 commercial, contractual or business nature that exists
between the holders of significant equity (5% or more), to the extent that they are known to the company:

Names of Related Brief Description of the


Type of Relationship
Significant Shareholders Relationship
None

(b) Indicate, if applicable, any relation of a commercial, contractual or business nature that exists between the
holders of significant equity (5% or more) and the company:

Names of Related
Type of Relationship Brief Description
Significant Shareholders
None

(c) Indicate any shareholder agreements that may impact on the control, ownership and strategic direction of
the company:

4 Family relationship up to the fourth civil degree either by consanguinity or affinity.


22
% of Capital Stock affected Brief Description of the
Name of Shareholders
(Parties) Transaction
None that the Company is
aware of.

6) Alternative Dispute Resolution

Describe the alternative dispute resolution system adopted by the company for the last three (3) years in amicably
settling conflicts or differences between the corporation and its stockholders, and the corporation and third
parties, including regulatory authorities.
Alternative Dispute Resolution System
Corporation & Stockholders The Company has no record of conflicts
Corporation & Third Parties or differences with its stockholders,
Corporation & Regulatory Authorities regulatory authorities and other third
parties.

However, it is the policy of the Company


to resolve disputes or differences with
stockholders, regulatory authorities and
other third parties, if and when such
disputes or differences arise, through
mutual consultation or negotiation,
mediation or arbitration.

C. BOARD MEETINGS & ATTENDANCE

1) Are Board of Directors’ meetings scheduled before or at the beginning of the year?

Yes. . At the beginning of the year, the Office of the Corporate Secretary sends to the directors, though email, the
schedule of board meetings for the year as follows:

January 14, 2015


March 10, 2015
April 10, 2015
June 25, 2015
September 3, 2015 and
December 3, 2015

2) Attendance of Directors

No. of
No. of
Date of Meetings Held
Board Name Meetings %
Election during the
Attended*
year*
Chairman Jaime Augusto Zobel de Ayala April 10, 2015 6 6 100%

Member Fernando Zobel de Ayala April 10, 2015 6 6 100%

Member Delfin L. Lazaro April 10, 2015 6 6 100%

Member Yoshio Amano April 10, 2015 6 6 100%

Independent Xavier P. Loinaz April 10, 2015 6 6 100%

23
Independent Ramon R. Del Rosario, Jr. April 10, 2015 6 6 100%

Independent Antonio Jose U. Periquet April 10, 2015 6 6 100%

*Meetings in 2014 and during the incumbency of the director.

3) Do non-executive directors have a separate meeting during the year without the presence of any executive? If
yes, how many times?

Yes, once in 2014.

4) Is the minimum quorum requirement for Board decisions set at two-thirds of board members? Please explain.

Yes. Two-thirds (2/3) of the number of directors as fixed in the articles of incorporation constitute a quorum for the
transaction of corporate business.

5) Access to Information

(a) How many days in advance are board papers5 for board of directors meetings provided to the board?

The board materials for the board of directors’ meetings are being distributed to the directors at least five
business days before the meeting.

(b) Do board members have independent access to Management and the Corporate Secretary?

Yes, board members are free to contact the General Counsel and Corporate Secretary, and any of the
management team to discuss issues or matters that need clarification in the discharge of their duties as
members of the Corporation’s board of directors.

(c) State the policy of the role of the company secretary. Does such role include assisting the Chairman in
preparing the board agenda, facilitating training of directors, keeping directors updated regarding any
relevant statutory and regulatory changes, etc?

The Corporate Secretary of the Corporation has the following functions:


(a) Serve as an adviser to the directors on their responsibilities and obligations;
(b) Keep the minutes of meetings of the stockholders, the Board of Directors, the Executive Committee, and
all other committees in a book or books kept for that purpose, and shall furnish copies thereof to the
Chairman, the President and other members of the Board as appropriate;
(c) Keep in safe custody the seal of the Corporation and affix it to any instrument requiring the same;
(d) Have charge of the stock certificate book and such other books and papers as the Board may direct;
(e) Attend to the giving and serving of notices of Board and shareholder meetings;
(f) Be fully informed and be part of the scheduling process of other activities of the Board;
(g) Prepare an annual schedule of board meetings and the regular agendas of meetings, and put the Board
on notice of such agenda at every meeting;
(h) Oversee the adequate flow of information to the Board prior to meetings;
(i) Ensure fulfillment of disclosure requirements of the Securities and Exchange Commission and the
Philippine Stock Exchange.

Yes, the role of the Corporate Secretary includes assisting the Chairman in preparing the board agenda,
facilitating training of directors, keeping directors updated regarding any relevant statutory and regulatory
changes, etc.

(d) Is the company secretary trained in legal, accountancy or company secretarial practices? Please explain
should the answer be in the negative.

5 Board papers consist of complete and adequate information about the matters to be taken in the board meeting.
Information includes the background or explanation on matters brought before the Board, disclosures, budgets,
forecasts and internal financial documents.
24
Yes. The Corporate Secretary possesses organizational and interpersonal skills, and the legal skills of a chief
legal officer. He also has financial and accounting knowledge.

(e) Committee Procedures

Disclose whether there is a procedure that Directors can avail of to enable them to get information necessary
to be able to prepare in advance for the meetings of different committees:

Yes X No

Committee Details of the procedures


Executive 1. The Office of the Corporate Secretary sends the board
Audit materials at least five business days before the scheduled
Risk Management meeting.
Nomination 2. The board materials provide supporting information for
Remuneration matters for approval of the directors during the meeting.
Finance 3. The Company meets with the independent directors, non-
Inspectors of Proxies and Ballots executive directors and executive directors, individually or in
groups, as may be necessary for management to keep the
directors informed and to seek guidance.

6) External Advice

Indicate whether or not a procedure exists whereby directors can receive external advice and, if so, provide
details:

The General Counsel and Corporate Secretary of the Company attends to the directors’ concerns. When necessary,
the General Counsel and Corporate Secretary may recommend to the directors to seek for an advice from third
parties.

7) Change/s in existing policies

Indicate, if applicable, any change/s introduced by the Board of Directors (during its most recent term) on existing
policies that may have an effect on the business of the company and the reason/s for the change:

Existing Policies Changes Reason


None

D. REMUNERATION MATTERS

1) Remuneration Process

Disclose the process used for determining the remuneration of the CEO and the four (4) most highly compensated
management officers:

Top 4 Highest Paid


Process CEO
Management Officers
(1) Fixed remuneration Approved by the Board of Approved by the Board of
Directors upon the Directors upon the
recommendation of the recommendation of the
Compensation Committee of Compensation Committee of the
the Board. Board and the Chairman of the
Board
(2) Variable remuneration The Company adopts a The Company adopts a
performance-based variable performance-based variable pay

25
pay program aligned with program aligned with business
business strategy. It is strategy. The Performance
determined by the Bonus Pie is approved by the
Compensation Committee of Compensation Committee of the
the Board and duly approved by Board. Individual amount is
the Board of Directors. approved by the Chairman and
CEO and the President and COO.
(3) Per diem allowance In the conduct of business abroad, per diem allowance is provided
to reimburse miscellaneous expenses like airport fees, travel tax,
taxi fare, laundry and phone allowance.
(4) Bonus The Company adopts a The Company adopts a
performance-based variable performance-based variable pay
pay program aligned with program aligned with business
business strategy. It is strategy. The Performance
determined by the Bonus Pie is approved by the
Compensation Committee of Compensation Committee of the
the Board and duly approved by Board. Individual amount is
the Board of Directors. approved by the Chairman and
CEO and the President and COO.
(5) Stock Options and The Stock Option Plan is used as a guide in the selection of
other financial grantees, the size of the grant, the offer price and the discount. The
instruments grant is approved by the Board of Directors upon the
recommendation of the Compensation Committee of the Board.
(6) Others (specify) N.A. N.A.

2) Remuneration Policy and Structure for Executive and Non-Executive Directors

Disclose the company’s policy on remuneration and the structure of its compensation package. Explain how the
compensation of Executive and Non-Executive Directors is calculated.

How
Remuneration Structure of
Compensation is
Policy Compensation Packages
Calculated
Executive Directors Directors who hold Fixed and variable Based on the role,
executive or compensation, stock responsibility,
management options and other performance of the
positions do not benefits (for the executive company and the
receive directors’ position). individual,
fees. contribution to the
organization, and
market.
Non-Executive Directors Each director shall Retainer fee: P1,200,000; The Board of
be entitled to Board meeting fee per Directors shall
receive from the meeting attended: have the sole
Corporation, P200,000; authority to
pursuant to a Audit committee meeting determine the
resolution of the fee per meeting attended: amount, form and
Board of directors, P100,000; structure of the
fees and other Other committee meeting fees and other
compensation for fee per meeting attended: compensation of
his services as P50,000. the directors. In no
director. The Board case shall the total
of Directors shall yearly
have the sole compensation of
authority to directors exceed
determine the one percent (1%) of
amount, form and the net income
structure of the fees before tax of the
26
and other Corporation during
compensation of the the preceding year.
directors. The
Compensation
Committee shall
have the
responsibility of
recommending to
the Board of
Directors the fees
and other
compensation for
directors. In
discharging this
duty, the committee
shall be guided by
the objective of
ensuring that the
level of
compensation
should fairly pay
directors for work
required in a
company of the
Corporation’s size
and scope.

Do stockholders have the opportunity to approve the decision on total remuneration (fees, allowances, benefits-
in-kind and other emoluments) of board of directors? Provide details for the last three (3) years.

Yes. On April 18, 2011, the stockholders of the Corporation approved the increase in the compensation of the non-
executive directors. The rationale for such increase in compensation is to recognize the invaluable services
rendered by the directors of the Corporation in successfully governing the business of the Corporation.

Date of
Remuneration Scheme
Stockholders’ Approval
Retainer Fee: P1.2 Million annually April 18, 2011
Board Meeting Fee: P200,000 for every meeting
April 18, 2011
attended
Audit Committee Meeting: P100,000 for every
April 18, 2011
meeting attended
Other Committee Meeting: P50,000 for every
April 18, 2011
meeting attended

3) Aggregate Remuneration

Complete the following table on the aggregate remuneration accrued during the most recent year:

Non-Executive Directors
Executive Independent
Remuneration Item (other than independent
Directors Directors
directors)
(a) Fixed Remuneration The Executive P2,400,000.00 P3,600,000.00
(b) Variable Remuneration Directors do none none
(c) Per diem Allowance not receive P3,500,000.00 P5,550,000.00
(d) Bonuses remuneration none none
as directors.
(e) Stock Options and/or none none
other financial

27
instruments

(f) Others (Specify) none none


Total P 5,900,000.00 P 9,150,000.00

Non-Executive Director
Executive Independent
Other Benefits (other than independent
Directors Directors
directors)
(a) Advances The Executive none none
Directors do not
(b) Credit granted receive none none
(c) Pension Plan/s remuneration
none none
Contributions as directors.
(d) Pension Plans, Obligations
none none
incurred
(e) Life Insurance Premium none none
(f) Hospitalization Plan none none
(g) Car Plan none none
(h) Others (Specify) none none

Total

4) Stock Rights, Options and Warrants

(a) Board of Directors

Complete the following table, on the members of the company’s Board of Directors who own or are entitled
to stock rights, options or warrants over the company’s shares:

Number of
Number of Direct Number of
Indirect Total % from
Director’s Name Option/Rights/ Equivalent
Option/Rights/ Capital Stock
Warrants Shares
Warrants
Delfin L. Lazaro 46,826 None 46,826 0.0078%
Fernando Zobel 140,559 None 140,559 0.0234%
de Ayala
Jaime Augusto 140,559 None 140,559 0.0234%
Zobel de Ayala

No rights and warrants were given to directors with their position as director of the company. Non-executive
and Independent Directors do not receive any compensation as director other than the retainer fee and per
diem as set forth above.

(b) Amendments of Incentive Programs

Indicate any amendments and discontinuation of any incentive programs introduced, including the criteria
used in the creation of the program. Disclose whether these are subject to approval during the Annual
Stockholders’ Meeting:

Date of
Incentive Program Amendments
Stockholders’ Approval
None

5) Remuneration of Management

28
Identify the five (5) members of management who are not at the same time executive directors and indicate the
total remuneration received during the financial year:

Name of Officer/Position Total Remuneration

John Eric T. Francia


Delfin C. Gonzalez, Jr.
Solomon M. Hermosura P176M
Paolo Maximo F. Borromeo
John Philip S. Orbeta

29
E. BOARD COMMITTEES

1) Number of Members, Functions and Responsibilities

Provide details on the number of members of each committee, its functions, key responsibilities and the
power/authority delegated to it by the Board:

No. of Members
Non- Key
Executiv Committee
executiv Independe
Committee e Functions Responsibiliti Power
Director
e nt Director Charter
Director (ID) es
(ED)
(NED)
Executive 2 1 0 Yes The Committee, in accordance with the
authority granted by the Board, or during
the absence of the Board, shall act by
majority vote of all its members on such
specific matters within the competence of
the Board of Directors as may from time to
time be delegated to the Executive
Committee in accordance with Corporation’s
By-Laws, except with respect to:
1. Approval of any action for which
shareholders’ approval is also required;
2. Filling of vacancies on the Board or in the
Executive Committee;
3. Amendment or repeal of By-Laws or the
adoption of new By-Laws;
4. Amendment or repeal of any resolution
of the Board of Directors which by its
express terms is not so amendable or
repealable;
5. Distribution of cash dividends; and
6. Exercise of powers delegated by the
Board exclusively to other committees, if
any.
Audit 0 1 2 Yes Assists the Board of Directors in fulfilling its
responsibility for oversight of the
organization’s corporate governance
processes, with the following particular
duties:
1. Regularly reports to the Board on the
results of the audits conducted by the
independent and internal auditors, the
integrity of the company’s financial
statements, the appropriateness and
effectiveness of the systems of internal
controls, risk management, and
governance processes.
2. Recommends the appointment or re-
appointment of the independent
auditors; reviews and approves all audit,
audit-related, and permissible non-audit
services provided by the independent
auditors to Ayala and the related fees to
ensure that their independence is not
compromised.
3. Reviews and approves the Internal Audit

30
Charter to ensure the independence and
effectiveness of the internal audit
function; ensures that the internal audit
function is adequately resourced and all
its activities are performed in
accordance with the International
Standards for the Professional Practice
of Internal Auditing.
4. Reviews and approves the overall scope
and plans for the respective audits of
the company’s internal auditors and
independent auditors, and the results of
their assessment of the company’s
internal controls and overall quality of
the financial reporting process.
5. Reviews the quarterly and annual
financial statements and all related
disclosures with Management and the
independent auditors.
6. Reviews and assesses the adequacy of
the Audit Committee Charter at least
annually, requesting Board approval for
proposed changes.
7. Conducts self-assessment to evaluate
the effectiveness of their performance
as against the requirements of its
Charter and in accordance with the SEC
Memorandum Circular Number 4, Series
of 2012.
Reports annually to the Board of Directors
describing the committee’s composition,
responsibilities and how they were
discharged, and any other information
required by law; confirms annually that all
responsibilities outlined in its charter have
been carried out.

Risk 0 1 2 Yes The Risk Management Committee of the


Management Board of Directors is established by the
Board to provide assistance in fulfilling the
Board’s oversight responsibilities in relation
to risk governance. The assistance includes
ensuring that Management maintains a
sound risk management framework and
internal control system, and identifies and
assesses material risk exposures, In
addition, the Committee:

1. Promotes an open discussion regarding


risks faced by the Corporation, as well
as risks faced by its subsidiaries that
may have potential impact on the
Corporation’s operations, and ensures
that risk awareness culture is pervasive
throughout the organization.
2. Reviews and discusses with
Management the Corporation’s risk
governance structure and adequacy of
policies and processes for risk
31
identification, assessment and
mitigation.
3. Reviews and recommends to the
Management the Corporation’s levels
of risk appetite and risk tolerance, and
risk exposure allocation for approval by
the Board of Directors.
4. Reviews the Corporation’s risk profile
on an ongoing basis and re-evaluate
the likelihood of occurrence, severity of
impact of risk exposures, and any
mitigating measures affecting those
risks.
5. Monitors the implementation of the
Corporation’s risk mitigation plans and
other risk management activities with
the assistance of the risk management
function.
6. Reviews and discusses risk
management-related reports and issues
raised by the Management, internal
auditors, external auditors, legal
counsel and regulators that impact the
Corporation’s risk management
framework.
7. Reviews disclosures regarding risk
contained in the Corporation’s Annual
Report and other publicly-issued
statements.
8. Reviews the objectivity, effectiveness
and efficiency of the Corporation’s risk
management function in the context of
the Corporation’s size, scale, complexity
and scope of operations.
9. Secures independent expert advice on
risk management matters where
considered necessary or desirable.
10. In coordination with the Audit
Committee, ensures that the
Corporation’s internal audit work plan
is aligned with risk management
activities and that the internal control
system considers all risks identified in
the risk assessment process.
11. Determines the advisability of, and
review and evaluate the terms and
conditions of any material or significant
related party transactions and their
required reporting disclosures.
12. Performs other activities related to this
Charter as requested by the Board.

Nomination 2 0 2 Yes 1. Review and monitor the structure, size


and composition of the Board and
make recommendations to ensure
compliance with applicable laws, rules
and regulations as well as the
Corporation’s By-laws and Manual of
Corporate Governance
32
2. Encourage the selection of a mix of
competent directors, each of whom can
add value and contribute independent
judgment to the formulation of sound
corporate strategies and policies;
3. Ensure that all nominations to the
Board are fair and transparent, and
that all nominees are qualified in
accordance with the By-laws, Manual
of Corporate Governance and relevant
laws, rules and regulations;
4. Review and evaluate the qualifications
of persons nominated to positions
which require appointment by the
Board, and provide guidance and
advice as necessary for appointments
by the Chairman or President to
positions below Managing Director;
5. Review succession plans for members
of the Board and senior executives
(from group heads to the Chief
Executive Officer);
6. Assess the effectiveness of the Board’s
processes and procedures in the
election or replacement of Board
members and in appointing officers or
advisors, and develop, update and
recommend to the Board policies for
considering nominees for directors,
officers or advisors; and
7. Perform such other duties and
responsibilities that may be delegated
to the Committee by the Board from
time to time.
Personnel and 0 2 1 Yes 1. Establish a formal and transparent
Compensation procedure for developing a policy on
executive remuneration and for fixing the
remuneration packages of corporate
officers and directors, and provide
oversight over remuneration of senior
management and other key personnel
ensuring that compensation is consistent
with the Corporation’s culture, strategy
and control environment;
2. Designate the amount of remuneration,
which shall be in a sufficient level to
attract and retain directors and officers
who are needed to run the Corporation
successfully;
3. Develop a form on Full Business Interest
Disclosure as part of the pre-employment
requirements for all incoming officers,
which among others compel all officers to
declare under the penalty of perjury all
their existing business interest or
shareholdings that may directly or
indirectly conflict in their performance of
duties once hired;

33
4. Disallow any director to decide his own
remuneration during his incumbent term;
5. Provide in the Corporation’s annual
reports, information and proxy statements
a clear, concise and understandable
disclosure of compensation of its
executive officers for the previous fiscal
year and the ensuring year;
6. Review the existing Human Resources
Development or Personnel Handbook, to
strengthen provisions on conflict of
interest, salaries and benefits policies,
promotion and career advancement
directives and compliance of personnel
concerned with all statutory requirements
that must be periodically met in their
respective posts;
7. In the absence of a Personnel Handbook,
cause the development of such covering
the same parameters of governance
stated above.
Finance 1 1 1 Yes 1. Responsible for reviewing and evaluating
the financial affairs of the Corporation
from time to time.
2. Conduct an annual financial review and
operations review prior to each annual
stockholder’s meeting.
Inspectors of 3* 0 0 Yes Has the power to pass on the validity of
Proxies and proxies submitted by the stockholders for the
Ballots annual or special meetings.
* Officers of the company who are not members of the company’s Board of Directors.

2) Committee Members

(a) Executive Committee

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment the
Held Attended
Committee
Jaime Augusto Zobel de May 10,
Chairman (ED) N.A. N.A. 19
Ayala 1996
May 10,
Member (ED) Fernando Zobel de Ayala None N.A. N.A. 19
1996
April 30,
Member (NED) Yoshio Amano N.A. N.A. 3
2012

The actions of the Executive Committee may also be taken by written consent (in physical, electronic or digital
format) by majority of the members when deemed necessary or desirable by the Committee or its Chairman.

(b) Audit Committee

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment Attended*
the
Held*
Committee
Chairman (ID) Xavier P. Loinaz April 3, 2009 5 100% 6
Member (NED) Yoshio Amano April 20, 2012 5 5 100% 3
Member (ID) Ramon R. Del Rosario, Jr. April 16, 2010 5 100% 5
34
* In 2014

Disclose the profile or qualifications of the Audit Committee members.

Xavier P. Loinaz, Filipino, 71, Independent Director of Ayala Corporation since April 2009. He is also an
Independent Director of Bank of the Philippine Islands, a publicly listed company. He also holds the following
positions: Independent Director of BPI Family Savings Bank, Inc., BPI Direct Savings Bank, and BPI/MS
Insurance Corporation; Trustee of E. Zobel Foundation, BPI Foundation, Inc. and PETA; and Chairman of Alay
Kapwa Kilusan Pangkalusugan and XPL Manitou Properties, Inc.; and Vice Chairman of XPL MTJL Properties,
Inc. He was formerly the President of the Bank of the Philippine Islands (BPI) from 1982 to 2004. He was also
the President of Bankers Association of the Philippines from 1989 to 1991. He graduated with an AB
Economics degree at Ateneo de Manila University in 1963 and took his MBA-Finance at Wharton School,
University of Pennsylvania in 1965.

Yoshio Amano, Japanese, 56, Director of Ayala Corporation since April 2012. He is a Senior Vice President of
Mitsubishi Corporation and the General Manager of Mitsubishi Corporation-Manila Branch; Chairman of
International Elevator & Equipment Inc., and MCPL (Philippines) Inc.; President of MC Diamond Realty
Investment Phils., Inc., MC Oranbo Investment, Inc. and Japanese Chamber of Commerce & Industry of the
Philippines (JCCIPI); Director of Isuzu Philippines Corporation, Imasen Philippines Manufacturing Corp., Kepco
Ilijan Corporation, UniCharm Philippines Inc., Trans World Agro-Products Corp., Philippine Resins Industries,
Inc., Portico Land Corporation, and The Japanese Association Manila, Inc. He is not a director of any publicly
listed company. Mr. Amano graduated from the University of Tokyo with a degree on Faculty Engineering in
1982.

Ramon R. del Rosario, Jr., Filipino, 70, Independent Director of Ayala Corporation since April 2010. He holds
the following positions in publicly listed companies: President and Chief Executive Officer of Phinma
Corporation; Chairman of Trans-Asia Petroleum Corporation; and Vice Chairman of Trans-Asia Oil and Energy
Development Corporation. He is the President and Chief Executive Officer of Philippine Investment
Management, Inc.; Chairman of Araullo University, University of Iloilo, University of Pangasinan, Cagayan de
Oro College, United Pulp and Paper Co., Inc., Microtel Inns and Suites (Pilipinas), Inc., Microtel Development
Corp., Trans-Asia Power Generation Corporation, Trans-Asia Renewable Energy Corp., Trans-Asia Gold and
Minerals Development Corp., CIP II Power Corp., Fuld & Co., Inc., Fuld & Co (Philippines), Inc. and Paramount
Building Management & Services Corp.; Vice-Chairman of Phinma Foundation; Director of Phinma Property
Holdings Corp., Union Galvasteel Corp., and South Luzon Thermal Energy Corp.; Chairman of The National
Museum of the Philippines, the Makati Business Club, Philippine Business for Education, the Philippines-US
Business Council, and the Integrity Initiative; Vice-Chairman of Caritas Manila; and Trustee of De La Salle
University. Mr. del Rosario graduated from De La Salle College in 1967 with a degree in BSC-Accounting and
AB Social Sciences Magna cum Laude and from Harvard Business School in 1969 for his Master in Business
Administration.

Describe the Audit Committee’s responsibility relative to the external auditor.

1. Review the performance and recommend the appointment, retention or discharge of the Independent
Auditors, including the fixing of their remuneration to the Board of Directors. In case of resignation or
cessation from service of an independent auditor, ensure that there is a process for reporting in the
annual and current reports the reason for cessation from service, and the date thereof, of an independent
auditor.

A preliminary copy of the said report shall be given by the corporation to the independent auditor before
its submission.

2. Ensure the rotation of the lead engagement partner at least once every five (5) years and consider
whether there should be a regular rotation of the audit firm itself.

3. Review and pre-approve the Independent Auditor's plans and ascertain the basis for their risk assessment
and financial statement materiality, including the scope and frequency of the audit.

35
In this regard, the Committee shall discuss with the Independent Auditors, before the audit commences,
the nature and scope of the audit, and ensure cooperation when more than one professional service firm
is needed.

4. Monitor the coordination of efforts between the external and internal auditors. The Committee shall
ensure that the internal and external auditors act independently from each other.

5. Review of the reports of the Independent Auditors, where applicable, and ensure that management is
taking appropriate corrective actions in a timely manner, including addressing control, governance, and
compliance issues.

6. Conduct a separate meeting in executive session, with the external auditors to discuss any matter that the
committee or auditors believe should be discussed privately, including the results of the audit, year-end
financial statements, the quality of management, financial and accounting controls.

7. Review and approve the proportion of audit versus non-audit work both in relation to their significance to
the auditor and in relation to the Corporation's year-end financial statements, and total expenditure on
consultancy, to ensure that non-audit work will not be in conflict with the audit functions of the
independent auditor. The amount of both audit and non-audit work of independent auditors shall be
disclosed in the annual report.

8. Ensure that the independent auditor has unrestricted access to all records, properties and personnel to
enable performance of the required audit.

9. Review with the independent auditor any problems or difficulties, including any restrictions on the scope
of the independent auditor's activities or on access to requested information and any significant
disagreements with management. The review may also include discussion of any proposed accounting
adjustments that were "passed' or not recorded.

10. Review of the independent auditor's evaluation of internal accounting controls. Independent auditors
shall provide feedback to the Audit Committee on their observations of internal control weaknesses
arising from statutory financial audits. Independent auditors should highlight findings which are disputed
by Management or where Management has not agreed to implement remedial actions that would rectify
the identified weaknesses.

(c) Nomination Committee

No. of Length of
No. of
Date of Meetings Service in
Office Name Meetings %
Appointment Attended the
Held*
* Committee
Chairman (ID) Ramon R. Del April 18, 2011 4 100% 4
Rosario, Jr.
Member (ED) Jaime Augusto Zobel April 4, 2008 4 100% 7
de Ayala
4
Member (ED) Fernando Zobel de March 26, 4 100% 11
Ayala 2004
Member (ID) Antonio Jose U. April 20, 2012 4 100% 3
Periquet
* In 2014

(d) Personnel and Compensation Committee

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment Attended*
the
Held*
Committee
Chairman (ID) Ramon R. del April 16, 2010 2 2 100% 5

36
Rosario, Jr.
Member Delfin L. Lazaro March 30, 2 100% 8
(NED) 2007
Member Yoshio Amano April 20, 2012 2 100% 3
(NED)
* In 2014

(e) Others

Provide the same information on all other committees constituted by the Board of Directors:

Finance Committee

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment Attended* the
Held*
Committee
Chairman (NED) Delfin L. Lazaro April 16, 2010 5 100% 5
Member (ED) Jaime Augusto May 29, 2012 5 100% 3
Zobel de Ayala 5
Member (ID) Antonio Jose U. April 18, 2011 5 100% 4
Periquet
* In 2014

Committee of Inspectors of Proxies and Ballots

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment Attended*
the
Held*
Committee
Chairman Solomon M. April 16, 2010 1 100% 4
Hermosura
1
Member Catherine H. Ang April 11, 2014 1 100% 1
Member Josephine G. De Asis April 19, 2013 1 100% 2
* In 2014

Risk Management Committee

Length of
No. of No. of
Date of Service in
Office Name Meetings Meetings %
Appointment Attended*
the
Held*
Committee
Chairman (ID) Antonio Jose U. September 1, 1 100% 0
Periquet 2014
Member (ID) Ramon R. del September 1, 1 100% 0
1
Rosario, Jr. 2014
Member (NED) Yoshio Amano September 1, 1 !00% 0
2014

3) Changes in Committee Members

Indicate any changes in committee membership that occurred during the year and the reason for the changes:

Name of Committee Name Reason


Executive None
Audit None
Nomination Jaime Augusto Zobel de Ayala Stepped down in April 2015 to limit

37
the members of the committee to
three in accordance with the
Company’s Charter of the
Nomination Committee
Remuneration None
Finance Committee None .
Committee of None
Inspectors of Proxies
and Ballots
Risk Management Chairman: Mr. Antonio Jose U. Newly established committee in
Committee Periquet 2014
Members: Mr. Ramon R. Del
Rosario, Jr. and Mr. Yoshio Amano

4) Work Done and Issues Addressed

Describe the work done by each committee and the significant issues addressed during the year.

Name of Committee Work Done Issues Addressed


Executive 1. Donations and disposals of Properties;
2. Additional cash infusions and advances to wholly-owned
subsidiaries of the Company;
3. Participation in BPI Stock Rights Offer;
4. Investment in GN Power Mariveles under subsidiary AC Energy
Holdings, Inc.;
5. Divestment in Stream Global Services, Inc., a BPO associate under
subsidiary AIVPL/ LiveIt;
6. Drawdown of US$ 345M loan facility and issuance of US$ 300M
exchangeable bonds thru subsidiary AYC Finance Ltd.;
7. Participation of AC Infrastructure Holdings, Inc. in the bidding of LRT
1 Extension and CALA Expressway Projects;
8. Re-issuance of 10B to 15B Class “B” Series 2 Preferred Shares;
9. Approval of 3B and 17B term loan facilities with Metropolitan Bank
and Trust Company, and Bank of the Philippine Islands, respectively;
10. Placement and subscription of the Company’s 22M common shares
to certain qualified third party buyers or investors;
11. Approval of short-term credit facilities from Security Bank
Corporation and UnionBank of the Philippines; and
12.
Audit 1. Reviewed and approved the Integrity of the Company’s financial
quarterly unaudited consolidated statements, the financial reporting
financial statements and the process; and the systems of internal
annual audited consolidated controls.
financial statements of Ayala
Corporation and Subsidiaries,
and the annual Parent Company
Financial Statements, including
the Management’s Discussion
and Analysis of Financial
Condition and Results of
Operations, with management,
internal auditors, and external
auditors, SGV & Co.;
2. Discussed with external auditors
the matters required by
applicable Auditing Standard and
required communication with the
Audit Committee;
38
3. Discussed and approved the Performance of the Company’s
overall scope and plans for the internal audit function and
respective audits of the independent auditors
Company’s internal auditors and
external auditors, and the results
of their assessment of the
Company’s internal controls and
overall quality of the financial
reporting process;
4. Discussed the reports and
updates of the internal auditors
to ensure adequacy of its
resource and all its activities are
performed in accordance with
the International Standards for
the Professional Practice of
Internal Auditing;
5. Discussed and approved the
appointment of the Internal
Audit Head given the scheduled
retirement of the previous
Internal Audit Head;
6. Reviewed the reports of the Chief Quality and integrity of the risk
Risk Officer and the periodic management process
updates regarding the
Company’s enterprise risk
management procedures and
processes, the business risks and
the mitigating steps to address
such risks;
7. Reviewed and approved all audit, Independence and performance of
audit-related, and permissible external auditors
non-audit services provided by
the external auditor to Ayala
Corporation and the related fees,
and concluded that the non-audit
fees are not significant to impair
their independence;
8. Recommended the appointment
of SGV as the Company’s
external auditor for the year and
the approval of the audit fees of
SGV based on their performance
and qualifications;
9. Recommended the inclusion of Governance and disclosure
the audited consolidated
financial statements in the
Annual Report for the year ended
December 31, 2014 for filing with
the Securities and Exchange
Commission and the Philippine
Stock Exchange;
10. Reviewed the existing Committee
Charter; and
11. Conducted a self-assessment to Effectiveness and performance of the
evaluate the effectives of their Committee
performance as against the
requirements of its Charter and in

39
accordance with the SEC
Memorandum Circular Number 4,
Series of 2012.
Nomination 1. Reviewed the qualifications of all persons nominated to positions
requiring appointment by the Board; and
2. Approved the final list of nominees for directors for election at the 2014
annual stockholders’ meeting after ensuring that all nominees to the
Board have met all the qualifications and none of the disqualifications as
set forth in the Corporation’s By-Laws, Revised Manual of Corporate
Governance and the rules of the SEC.
Remuneration 1. Approved the performance bonus, merit increase of the employees of the
Corporation; and
2. Approved the 2014 Employee Stock Ownership Plan (ESOWN).
Finance Committee
1. Approved the final terms of the US$300 Million AYC Finance Limited
Exchangeable Bonds; and
2. Approved the LRT1 and Cavite-Laguna Expressway Project Bid
Risk Management 1. Ensured that Management maintained a sound risk management
Committee framework and internal control system and identified material risk
exposures and their impact to the Company’s objectives.
2. Reviewed the objectivity, effectives and efficiency of the Company’s risk
management function as evidenced by:
i. The Chief Risk Officer, as supported by the Group Risk Management
Unit, led the overall review of the Company’s risk management
framework which resulted to the adoption of the ISO 31000 Risk
Management Framework, introduction of the Black Swans
workshop as a tool in improving its risk-sensing capability,
redefinition of the risk tolerance matrix, and updating of key risks
register to promote and support the active management of
important risks. The key risk register provides further clarity around
ownership, accountability, and mitigation strategies.
ii. The Management showed a great deal of support with all Managing
Directors making themselves available to discuss their respective
risk management plans and to answer any question raised by the
Committee.
3. Noted the other programs by the Group Risk Management Unit designed
to create risk awareness and to promote good risk management
processes achieving appropriate risk and reward in the Company’s
businesses.
4. Determined the advisability of, and reviewed and evaluated the terms
and conditions of any material or significant related party transactions
and their required reporting disclosures. The Chief Finance Officer,
through the Controllership Unit, reported and disclosed any related party
transactions.
5. Revisited the Risk Management Committee Charter to ensure that
proper coordination with Audit Committee existed and that the output of
the enterprise risk management process was an input to the annual risk-
based planning of the Internal Audit Unit.

5) Committee Program

Provide a list of programs that each committee plans to undertake to address relevant issues in the improvement
or enforcement of effective governance for the coming year.

Name of Committee Planned Programs Issues to be Addressed


Executive The Executive Committee, in accordance with the authority granted by the Board,
or during the absence of the Board, shall act by majority vote of all its members

40
on such specific matters within the competence of the Board of Directors as may
from time to time be delegated to the Executive Committee in accordance with
the Corporation's By-Laws.
Audit a. Review and approve the quarterly Integrity of the Company’s financial
unaudited consolidated financial statements, the financial reporting
statements and the annual process; and the systems of internal
audited consolidated financial controls.
statements of Ayala Corporation
and Subsidiaries, and the annual
Parent Company Financial
Statements, including the
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations, with
management, internal auditors,
and external auditors, SGV & Co.;
b. Discuss with external auditors the
matters required by applicable
Auditing Standard and required
communication with the Audit
Committee;
c. Discuss and approve the overall Performance of the Company’s
scope and plans for the internal audit function and
respective audits of the independent auditors
Company’s internal auditors and
external auditors, and the results
of their assessment of the
Company’s internal controls and
overall quality of the financial
reporting process;
d. Discuss the reports and updates
of the internal auditors to ensure
adequacy of its resource and all
its activities are performed in
accordance with the
International Standards for the
Professional Practice of Internal
Auditing;
e. Discuss and approve the
appointment of the Internal Audit
Head given the scheduled
retirement of the previous IA
Head; Quality and integrity of the risk
f. Review the reports of the Chief management process
Risk Officer and the periodic
updates regarding the Company’s
enterprise risk management
procedures and processes, the
business risks and the mitigating
steps to address such risks; Independence and performance of
g. Review and approve all audit, external auditors
audit-related, and permissible
non-audit services provided by
the external auditor to Ayala
Corporation and the related fees ,
and concluded that the non-audit
fees are not significant to impair
their independence; Governance and disclosure
h. Recommend the appointment of
41
SGV as the Company’s external
auditor for 2014 and the
approval of the audit fees of SGV
based on their performance and
qualifications;
i. Recommend the inclusion of the
audited consolidated financial
statements in the Annual Report
for the year ended December 31,
2013 for filing with the Securities
and Exchange Commission and
the Philippine Stock Exchange;
j. Review the existing Committee
Charter; and Effectiveness and performance of the
k. Conduct a self-assessment to Committee
evaluate the effectives of their
performance as against the
requirements of its Charter and
in accordance with the SEC
Memorandum Circular Number
4 Series of 2012.
Risk Management To carry out its Board Oversight responsibilities in relation to risk governance
and related party transactions approval, the Committee:
1. Promotes an open discussion regarding risks faced by the
Corporation, as well as risk faced by its subsidiaries that may have
potential impact on the Corporation’s operations, and ensures that
risk awareness culture is pervasive throughout the organization
2. Reviews and discusses with Management the Corporation’s risk
governance structure and adequacy of policies and processes for
risk identification, assessment and mitigation
3. Reviews and recommends to the Management the Corporation’s
level of risk appetite and risk tolerance, and risk exposure allocation
for approval by the Board of Directors
4. Reviews the Corporation’s risk profile on an ongoing basis and re-
evaluate the likelihood of occurrence, severity of impact of risk
exposures, and any mitigating measures affecting those risks
5. Monitors the implementation of the Corporation’s risk mitigation
plans and other risk management activities with the assistance of
the risk management function
6. Reviews and discusses risk management-related reports and issues
raised by the Management, internal auditors, external auditors,
legal counsel and regulators that impact the Corporation’s risk
management framework
7. Reviews disclosures regarding risk contained in the Corporation’s
Annual Report and other publicly-issued statements
8. Reviews the objectivity, effectiveness and efficiency of the
Corporation’s risk management function in the context of the
Corporation’s size, scale, complexity and scope of operations
9. Secures independent expert advice on risk management matters
where considered necessary or desirable
10. In coordination with the Audit Committee, ensures that the
Corporation’s internal audit work plan is aligned with the risk
management activities and that the internal control system
considers all risks identified during the risk assessment process.
11. Determines the advisability of, and reviews and evaluated the terms
and conditions of any material or significant related party
transactions and their required reporting disclosures
12. Performs other activities related to the Charter as requested by the

42
Board
13. Regularly reports to the Board updates in all actions initiated by the
Committee
14. Reviews the Charter annually
15. Conducts annual self-assessment with respect to the fulfillment of
its functions and responsibilities as mandated in this Charter.
Nomination Annually, the Committee oversees the selection and nomination process for
the Board of Directors of the Company to ensure that nominees to the Board
are qualified for election in accordance with the By-laws, Manual of
Corporate Governance and relevant laws, rules and regulations.

The Committee also reviews annually the succession plans for members of
the Board and senior executives (from group heads to the CEO).

The Committee also provides assessment on the Board's effectiveness in


directing the process of renewing and replacing Board members and in
appointing officers or advisors and develop, update as necessary and
recommend to the Board policies for considering nominees for directors,
officers or advisors.
Remuneration The Committee annually approves the performance bonus, merit increase
and stock options of the employees of the Corporation.
Finance The Committee annually reviews and approves the Corporation’s dividend
policy and recommends dividend actions to the Board of Directors.

The Committee will review the financial terms of mergers, acquisitions, or


other strategic investments, as well as divestitures of any material
operations of the Company for the coming years and make the appropriate
recommendations to the Board of Directors.

The Committee oversees Corporation’s Treasury activities such as but not


limited to policies with respect to cash flow management, policies with
respect to investment of the company’s cash, and policies with respect to
financial risk management, including the use of derivatives.

The Committee approves Letters of Parental Guarantee and/or Letters of


Comfort and Awareness between the Corporation and its subsidiaries except
for those issued in the ordinary course of business or in compliance with law
and court orders.

The Committee reviews and evaluates the financial affairs of the Corporation
from time to time and carry out such other duties as may be delegated to it
by the Board of Directors from time to time.
Inspectors of Proxies Annually, the committee ensures that only proxy forms received at least
and Ballots seven days before the meeting will be validated for the year’s annual
stockholders’ meeting.

Guided by SRC Rule 20 on Proxy Voting, the committee will validate the proxy
forms five days before the actual stockholders’ meeting.

All validated proxies will be tabulated and registered in the system.

F. RISK MANAGEMENT SYSTEM

1) Disclose the following:

(a) Overall risk management philosophy of the company

Risk Management: An Act of Balancing Risk and Reward

43
Risk lies in every sector of our businesses and presents both positive and negative opportunities. Hence an
effective risk management system is necessary to explore and maximize positive opportunities and mitigate
adverse outcomes of the negatives ones in order to secure long-term value for our stakeholders.

Institutionalized in 2002, the Company has adopted an integrated enterprise risk management (ERM)
framework that is continuously being enhanced and improved as conventional risk management may not be
enough to achieve the Corporation's objectives.

An appropriate organizational structure is put in place that promotes good governance, ownership and
accountability for risk taking. Our risk governance structure is applied throughout all operational levels within
the Company and within the Group.

 The Board retains the overall responsibility for setting the Company’s risk appetite and risk tolerance
and for reviewing the Company’s risk management process.
 The Risk Management Committee, constituted by the Board in June 2014 to assist in discharging this
responsibility, focuses on the robustness of the risk management process and reviews the
appropriateness of risk appetite and risk tolerance in pursuit of business objectives.
 The Management Committee is the principal executive forum that reviews enterprise, project and
investment risks and is responsible for the assurance of the risk management framework approved by
the Board.
 The Chief Risk officer advocates the enterprise risk management for the company and for the group.
He oversees the entire risk management function thru the Group Risk Management Unit that
implements programs and activities designed to improve the risk taking capability of the company
and the group.
 Internal Audit Unit assists the Audit Committee by conducting internal reviews of the Company’s
operations, in particular, the review of material controls in the areas identified as critical risks. The
Unit also looks into the effectiveness and adequacy of the risk management process.
 Business Units ensure compliance with risk management policies, and monitor and report risk profiles
and implement actions. They embed risk management in their day-to-day activities.

(b) A statement that the directors have reviewed the effectiveness of the risk management system and
commenting on the adequacy thereof

As set forth in its Charter approved by the Board of Directors, the Risk Management Committee has reviewed
and assessed the adequacy and the effectiveness of the Corporation's enterprise risk management process.
Although the Committee, which was constituted in June 2014, had only one meeting in 2014:

 The Committee had reviewed the enterprise risk management policy, risk governance structure, and risk
appetite of the Corporation.
 Thru the Chief Risk Officer, as supported by the Group Risk Management Unit, the Committee had
ascertained that an effective risk management process was in place. The Corporation had adopted the ISO
31000 framework, improved its risk sensing capability thru the Black Swans workshop facilitated by
experts, and implemented other activities designed to increase risk awareness within the Corporation and
across the group.
 The Committee had also noted the Management’ support as the Managing Directors made themselves
available to discuss their risk strategies and to respond to queries raised by the Committee.

(c) Period covered by the review;

For the year ended December 31, 2014

(d) How often the risk management system is reviewed and the directors’ criteria for assessing its effectiveness

In addition to the regular reports of the CRO thru the Group Risk Management Unit, an annual self-
assessment of the Corporation's risk management maturity, based on the criteria listed below, is completed:
44
 Governance and organization
 Risk Management Strategy
 Reporting and Communication
 Tools and technology
 Culture and Capability

The planned external assurance of risk management process was not carried out due to a limited number of local
service providers that could meet our requirements.

(e) Where no review was conducted during the year, an explanation why not.

Not Applicable.

2) Risk Policy

(a) Company

Give a general description of the company’s risk management policy, setting out and assessing the risk/s
covered by the system (ranked according to priority), along with the objective behind the policy for each kind
of risk:

Risk Exposure Risk Management Policy Objective


Portfolio Management The Corporation’s diversification To continue the long-term value
and portfolio management creation process for the
strategy is sufficient to maximize Corporation's stakeholders.
profitability and shield the
Corporation from undue risk.

Governance and The Corporation’s reputation of To maintain and improve the


Control; Brand and high integrity and strong strong AYALA brand, identified as
Reputation governance makes it a company its core value.
of choice for:
a) Partner/investors
b) Talent
c) Customers
d) Capital Markets

Capital Market The Corporation will hold up well To ensure that the Corporation’s
in the event of significant financial assets and liabilities will
Philippine and global economic not be affected by market factors
disruption. . including foreign exchange,
interest rates and others, as well
as credit events, which may result
in actual cash losses and volatility
in Profit and Loss.

(b) Group

Give a general description of the Group’s risk management policy, setting out and assessing the risk/s covered
by the system (ranked according to priority), along with the objective behind the policy for each kind of risk:

Since the Corporation is one of the most diversified conglomerates in the country with leadership positions in
real estate, financial services, telecommunications, and a broad range of investments in water, electronics
manufacturing, automotive, business process outsourcing, education, power generation and transport
infrastructure, the following are the common risks across the Group:

Risk Exposure Risk Management Policy Objective


Regulatory and Political The regulatory landscape, while To improve the Group’s ability to
45
challenging, will not seriously anticipate regulatory and political
impact the Group’s ongoing changes which may impact the
profitable growth or ongoing Group’s business models.
viability.
Future changes in the Philippine
political landscape will not
seriously threaten the Group’s
ongoing viability.
Competition Market share growth will be To continue the long-term value
protected at all times. creation for the Group’
stakeholders.
Talent The Group has sufficient,  To continue our talent
qualified, fresh and diverse talent management program from
pool which ensures operational recruitment, development,
excellence and which brings succession planning, and
debate and new ideas. until resignation/retirement
of our employees.
 To continue to be the
employer of choice.

(c) Minority Shareholders

Indicate the principal risk of the exercise of controlling shareholders’ voting power.

Risk to Minority Shareholders


The Company’s Related Party Transactions policy that took effect last December 2014 ensures that
the rights of the minority shareholders are protected. The Corporation established a mechanism to
ensure that related party transactions are at arms-length, the terms are fair, and that they inure to
the best interest of the Corporation and all of its shareholders. The Corporation strictly monitored,
reported, and disclosed related party transactions as well as inter-company transactions.

3) Control System Set Up

(a) Company

Briefly describe the control systems set up to assess, manage and control the main issue/s faced by the
company:

Risk Assessment Risk Management and Control


Risk Exposure
(Monitoring and Measurement Process) (Structures, Procedures, Actions Taken)
Strategic  Structured and periodic  Investment in processes and
strategic planning process technologies are made to
and portfolio strategy review support the requirements of
 Monitoring of achievement of new businesses
strategic targets  Rigorous portfolio analytics and
 Continuous monitoring of reviews including resource
existing, as well as of new allocation and strategy
and emerging, risks through  Portfolio and strategic
the business unit risk initiatives visibility and
management champions and discussions at various
the office of the CRO governance committees
 Development of formal policies
and processes
Operational  Business planning and  Regular review of financial and
budgeting operations metrics and
 Monitoring of actual results reporting to senior
vs. objectives management, and management
 Identified key risk indicators and board committees
and metrics to measure the  Monthly and annual portfolio
46
effectiveness of the risk analysis/review
mitigation strategies  Policies are regularly reviewed
and updated to remain relevant
Talent/Knowledge  Regular discussions among  Organizational structure,
Management the Strategic HR Groups on leadership and talent
initiatives and staffing needs management, and development
including timing programs are reviewed
 Regular talent reviews regularly to respond to the
changing needs, new business
models and strategies
 Development of succession
planning
Governance and  Annual risk assessment and  Compliance with the mandates
Internal Controls regular reporting to the Audit of the Company’s Manual on
Committee and Risk Corporate Governance for the
Management Committee Board of Directors to ensure the
 Periodic review of internal presence of organizational and
controls procedural controls supported
by an effective management
information system and risk
management reporting system.
 Compliance with laws and
regulations
 Regular benchmarking with
industry best practices and
development of continuous
improvement program to
strengthen the Company’s
practices and policies

(b) Group

Briefly describe the control systems set up to assess, manage and control the main issue/s faced by the
company:

Risk Assessment Risk Management and Control


Risk Exposure
(Monitoring and Measurement Process) (Structures, Procedures, Actions Taken)
Strategic  Structured strategic planning  Adopt a disciplined approach in
process investment evaluation and
 Discussions on new business decision process
development, strategy  Continue to evaluate the risks
execution, and synergy and opportunities in relation to
initiatives happen at various both the company’s business
levels in the organization portfolio and the integration to
including at Management existing business operations
and Board oversight  Formal/institutionalized process
committees. and improving discipline in
investment and divestment
decisions
Operational  Business planning and  Regular review of financial and
budgeting operations metrics and
 Regular management reporting to senior
meetings and performance management, and management
review process and board committees
 Monitoring of actual results vs.
objectives
Talent/Knowledge  Regular discussions among  Annual talent review process for
Management the Strategic HR Groups on all subsidiaries
47
initiatives and staffing needs  Development of a succession
including timing plan
 Monitoring attrition rates in  Implementation of service level
the group agreements (SLAs) on hiring
 Results of employee  Implementation of employee
satisfaction surveys engagement and retention
programs
Governance and  Regular benchmarking with  Institutionalize good
Internal Controls industry best practices governance and sound internal
 Periodic review of internal controls for all companies in the
controls group
 Ensuring the Board and all its
committees have approved
Charters
 Adopting and conducting good
governance and internal
controls assessment checklist
 Development of continuous
improvement program to
strengthen the Group’s
practices and policies

(c) Committee

Identify the committee or any other body of corporate governance in charge of laying down and supervising
these control mechanisms, and give details of its functions:

Committee/Unit Control Mechanism Details of its Functions


Executive Committee (ExCom)  Corporate governance The Executive Committee, in
control and mechanisms accordance with the authority
 Supports the Board of granted by the Board, or
Directors in the review and during the absence of the
approval of resolutions that Board, shall act by majority
drive business strategy and vote of all its members on such
operations of the company specific matters within the
competence of the Board of
Directors as may from time to
time be delegated to the
Executive Committee in
accordance with the
Corporation’s By-Laws, except
with respect to --
i. approval of any action for
which shareholders’ approval
is also required;
ii. the filling of vacancies on
the Board or in the Executive
Committee;
iii. the amendment or repeal
of any resolution of the Board
of Directors which by its
express terms is not so
amendable or repealable;
iv. the distribution of cash
dividends;
v. the exercise of powers
delegated by the Board
exclusively to other
48
committees, if any.
Nomination Committee  Corporate governance The Nomination Committee of
control and mechanisms the Board of Directors shall:
 Ensures that all nominees to (a) install and maintain a
the Board have all the process to ensure that
qualifications and none of nominees to the Board for
the disqualifications under election by the stockholders or
the Company’s By-Laws, its the Board are qualified in
Manual of Corporate accordance with the By-laws,
Governance, and the rules of Manual of Corporate
the SEC. Governance and relevant laws,
 Reviews the qualifications of rules and regulations;
all persons nominated to (b) encourage the selection of
positions requiring a mix of competent directors,
appointment by the Board. each of whom can add value
and contribute independent
judgment to the formulation of
sound corporate strategies and
policies;
(c) review and evaluate the
qualifications of persons
nominated for Managing
Director (Vice President) or
higher rank, which shall
require appointment by the
Board, and provide guidance
and advice as necessary for
appointments by the Chairman
or President to positions below
Managing Director (Vice
President);
(d) review succession plans for
members of the Board and
senior executives (from group
heads to the CEO);
(e) provide assessment on the
Board's effectiveness in
directing the process of
renewing and replacing Board
members and in appointing
officers or advisors and
develop, update as necessary
and recommend to the Board
policies for considering
nominees for directors, officers
or advisors; and
(f) discharge any other duties
and responsibilities delegated
to the Committee by the Board
from time to time.

The Committee shall be guided


by the Company's mission and
vision in the fulfilment of its
functions.
Personnel and Compensation  Corporate governance The Committee shall have the
Committee control and mechanisms following powers, duties and
 Establishes a policy for a responsibilities:

49
formal and transparent 1. Establish a formal and
procedure for determining transparent procedure for
the salaries of officers and developing a policy on
directors executive remuneration and
 Supports the Board in the for fixing the remuneration
determination of executive packages of corporate officers
compensation and and directors, and provide
remuneration oversight over remuneration of
senior management and other
key personnel ensuring that
compensation is consistent
with the Corporation's culture,
strategy and control
environment;
2. Review, at least annually,
the performance of each of the
Chairman of the Board, the
Chief Executive Officer (CEO),
the President and Chief
Operating Officer (COO) and
measure such performance
against each of his or her goals
and objectives pursuant to the
Corporation's plans and
determine his or her
compensation for approval of
the Board;
3. Review the structure and
competitiveness of the
Corporation's executive officer
compensation programs
considering the following
factors: (i) the attraction and
retention of executive officers;
(ii) the motivation of executive
officers to achieve the
Corporation's business
objectives, and (iii) the
alignment of the interest of
executive officers with the
long-term interests of the
Corporation's shareholders.
4. Develop and periodically
review a form on Full Business
Interest Disclosure, which
among others compel all
incoming and incumbent
officers to declare under the
penalty of perjury all their
existing business interests or
shareholdings that may
directly or indirectly conflict in
their performance of duties
once hired;
5. Provide in the Corporation's
annual reports, information
and proxy statements a clear,
concise and understandable

50
disclosure of compensation of
its executive officers for the
previous fiscal year and the
ensuring year; and
6. Periodically review the
Human Resources
Development or Personnel
Handbook, to strengthen
provisions on conflict of
interest, salaries and benefits
policies, promotion and career
advancement directives and
compliance of personnel
concerned with all statutory
requirements that must be
periodically met in their
respective posts.
No member of the Committee
will act to fix his or her own
compensation except for
uniform compensation to
directors for their services as a
director.
Finance Committee  Corporate governance The Finance Committee shall
control and mechanisms carry out the following duties,
 Oversees the company’s in each case in line with the
financial policy and Board’s policies and directives:
strategy, including capital 1. The Committee shall
structure, dividend policy, review the company’s capital
acquisitions and structure strategies. The
divestments, and makes Committee shall also review
the appropriate and approve the Corporation’s
recommendations to the dividend policy and
Board of Directors recommend dividend actions to
 Oversight responsibility the Board of Directors.
over the Company’s 2. The Committee shall
Treasury activities, and review the financial terms of
reviews and approves mergers, acquisitions, or other
changes in Treasury Policies strategic investments, as well
 Responsible for reviewing as divestitures of any material
and evaluating the financial operations of the Company,
affairs of the company on a and make the appropriate
regular basis and carrying recommendations to the Board
out such other duties as of Directors.
may be delegated to it by 3. The Committee shall have
the Board of Directors. general oversight responsibility
over the Corporation’s
Treasury activities. The
Committee shall review and
approve changes in Treasury
Policies, including:
a. Policies with respect to
cash flow management,
b. Policies with respect to
investment of the
company’s cash, and
c. Policies with respect to
financial risk

51
management, including
the use of derivatives.
The Committee shall approve
Letters of Parental Guarantee
and/or Letters of Comfort and
Awareness between the
Corporation and its
subsidiaries except for those
issued in the ordinary course of
business or in compliance with
law and court orders.
Audit Committee  Corporate governance The Audit Committee provides
control and mechanisms assistance to the Board of
 Oversees the internal Directors in fulfilling their
control, internal auditors, oversight responsibility to the
external auditors, financial shareholders relating to:
reporting.  the integrity of the
Company's financial
statements and the
financial reporting process;
 the appointment,
remuneration,
qualifications,
independence and
performance of the
independent external
auditors and the integrity of
the audit process as a
whole;
 the effectiveness of the
systems of internal control
and the risk management
process;
 the performance and
leadership of the internal
audit function;
 the company's compliance
with applicable legal,
regulatory and corporate
governance requirements;
and
 the preparation of year-end
report of the Committee for
approval of the Board and
to be included in the annual
report.
Risk Management Committee  Risk Governance  Ensure that Management
 Related Part Transactions maintains a sound risk
Review management framework
and internal controls
system and identifies
material risk exposures
and their impact in
achieving the
Corporation’s objectives.
 Determine the advisability
of, and review and
evaluate the terms and
52
conditions of any
material/significant
related party transactions
and their required
reporting disclosures.

53
G. INTERNAL AUDIT AND CONTROL

1) Internal Control System

Disclose the following information pertaining to the internal control system of the company:

(a) Explain how the internal control system is defined for the company;

Internal Control System is the framework under which internal controls are developed and implemented
(alone or in concert with other policies or procedures) to manage and control a particular risk or business
activity, or combination of risks or business activities, to which the corporation is exposed. To be effective, the
internal control system needs to adapt to changing business and operating environments, mitigate risks to
acceptable levels, and support sound decision-making and governance of the organization. Internal control
effected by the company’s board of directors, management, and all employees, is designed to provide
reasonable assurance regarding the achievement of the company’s objectives.

Everyone in the organization has responsibility for internal control. Management owns the internal control
system and is responsible for establishing sound internal control policies and procedures. Management is
accountable to the Board of Directors who provides governance, guidance, and oversight. Internal auditors
play an important role in evaluating the effectiveness of control systems, and contribute to ongoing
effectiveness by providing recommendations.

(b) A statement that the directors have reviewed the effectiveness of the internal control system and whether
they consider them effective and adequate;

The Board of Directors, through the Audit and the Risk Management Committees, has reviewed the internal
control system of the Company based on the assessments completed and reported by the internal and
external auditors. The Board found the internal control system to be effective.

The statement of the directors on the effectiveness of the company’s internal control system is embodied in
the Report of the Audit Committee to the Board of Directors which is part of the company’s 2014 Annual
Report.

(c) Period covered by the review;

For the year ended December 31, 2014.

(d) How often internal controls are reviewed and the directors’ criteria for assessing the effectiveness of the
internal control system; and

Management reviews the adequacy and effectiveness of internal controls continuously throughout the year as
part of its day-to-day function. Internal Audit assists management to attain company goals through
independent risk-based planned reviews and evaluation of the effectiveness of controls.

The directors’ criteria for assessing the effectiveness of the internal control system include:

1. Control Environment-the tone of the top and ethical behavior culture in the company.
2. Risk Assessment-the identification and analysis of relevant risks to the achievement of objectives, forming
a basis for how the risks should be managed and provide reasonable assurance that risks are reduced to
an acceptable level.
3. Information and Communication-systems or processes that support the identification, capture, and
exchange of accurate and complete information.
4. Control Activities- policies and procedures, international standards and industry best practices to ensure
compliance with laws, regulations, supervisory requirements, and relevant internal policies.
5. Monitoring-processes used to regularly assess the continuing quality of internal control and risk
management activities.

54
(e) Where no review was conducted during the year, an explanation why not.

Not applicable. Review was conducted during the year.

2) Internal Audit

(a) Role, Scope and Internal Audit Function

Give a general description of the role, scope of internal audit work and other details of the internal audit
function.

The Internal Audit Group governs its work in adherence to The Institute of Internal Auditors’ “Code of Ethics”
and the Company’s Code of Conduct. The Internal Audit also conducts its activities in conformance with the
International Standards for the Professional Practice of Internal Auditing (ISPPIA) of The Institute of Internal
Auditors and guided by the COSO framework on internal control.

Indicate whether
Name of Chief
In-house or
Internal Reporting
Role Scope Outsource
Auditor/Auditing process
Internal Audit
Firm
Function
 Assist the Board The scope of work In-house Catherine H. Ang To maintain its
and the Audit of the internal independence,
Committee in audit function is to Internal Audit
discharging its determine whether reports
governance Ayala functionally to
responsibility Corporation’s risk the Board of
 Evaluates and management, Directors,
provides control, and through the
reasonable governance Audit
assurance that processes is Committee, and
risk adequate and administratively
management, functioning to the President
control, and effectively to and Chief
governance ensure: Operating
systems are  Risks are Officer or his
functioning as appropriately designate.
intended and will identified and
enable the managed;
company’s  Financial
strategy, information is
objectives and accurate,
goals to be met reliable, and
timely;
 Reports risk  Compliance with Reports are
management policies, issued to
issues and standards, management
internal controls procedures and and the Audit
deficiencies applicable laws Committee upon
identified directly and regulations completion of
to the Audit is achieved; the audit
Committee and  Resources are reviews.
provides safeguarded; Significant
recommendation and findings and
s to improve the  Achievement of issues are taken
company’s programs, plans up in the
operations, in and objectives quarterly
terms of both are reasonably meetings of the
efficient and assured. Audit
55
effective Committee.
performance In carrying out
 Evaluates their duties and
information responsibilities,
security and members of the
associated risk internal audit
exposures function have full,
 Evaluates free, and
regulatory unrestricted access
compliance to all
program with organizational
consultation from activities, records,
legal counsel and property and
other relevant personnel of Ayala
units or external Corporation.
advisors, as
necessary
 Evaluates the
company’s
readiness in case
of business
interruption
 Maintains open
communication
with
management and
the Audit
Committee
 Teams with other
internal and
external
resources as
appropriate for
assurance and
advisory work
 Engages in
continuous
education and
staff
development
 Provides support
to the company's
anti-fraud and
whistleblower
programs.

(b) Do the appointment and/or removal of the Internal Auditor or the accounting /auditing firm or corporation to
which the internal audit function is outsourced require the approval of the audit committee?

As provided in the Audit Committee Charter and the Internal Audit Charter, the Audit Committee is responsible
for the setting up of the Internal Audit Department, including the qualification criteria and appointment of the
Chief Internal Auditor. The Committee evaluates the performance of the Chief Internal Auditor and the
Internal Auditors taken as a whole. Moreover, the Committee having appointed the Chief Internal Auditor,
also approves his/her replacement, re-assignment, or dismissal. The Committee also reviews and approves
any outsourcing of the internal audit function.

(c) Discuss the internal auditor’s reporting relationship with the audit committee. Does the internal auditor have
direct and unfettered access to the board of directors and the audit committee and to all records, properties

56
and personnel?

The Chief Internal Auditor reports directly to the Board of Directors through the Audit Committee and has
direct access to all members of the Audit Committee. The internal audit function as empowered by the Audit
Committee Charter and the Internal Audit Charter has free access to all records, properties and personnel.

(d) Resignation, Re-assignment and Reasons

Disclose any resignation/s or re-assignment of the internal audit staff (including those employed by the third-
party auditing firm) and the reason/s for them.

Name of Audit Staff Reason


Roxanne Kate L. Petilla, Internal
Additional headcount as approved by the Audit Committee.
Auditor

(e) Progress against Plans, Issues, Findings and Examination Trends

State the internal audit’s progress against plans, significant issues, significant findings and examination
trends.

The activities of Internal Audit is guided by the


Audit Committee approved, risk-based audit plan.
Internal Audit submit periodic reports to the
Progress Against Plans Committee on the status of its activity,
accomplishments, key findings and
recommendations, as well as management’s
responses thereto
There are no significant issues noted based on the
results of the audit reviews conducted. Noted
Issues6
issues are on enhancements of and compliance to
existing policies and procedures
There are no significant findings noted based on
the results of the audit reviews conducted.
Reported findings are primarily on the
enhancements and documentation of corporate
governance policies and guidelines, and
consistent implementation of procedural controls.
Findings7
Report on the results of the audit review is
provided to the responsible personnel,
department heads, senior management, and the
Audit Committee based on the Committee
approved Risk Reporting Framework.
High risk areas are reviewed at least annually.
Based on follow-up of audit recommendations,
management are addressing reported risk issues,
Examination Trends
control weaknesses and opportunities for
improvement within the audit period and
committed timeline.

[The relationship among progress, plans, issues and findings should be viewed as an internal control review
cycle which involves the following step-by-step activities:
a. Preparation of an audit plan inclusive of a timeline and milestones;
b. Conduct of examination based on the plan;
c. Evaluation of the progress in the implementation of the plan;

6
“Issues” are compliance matters that arise from adopting different interpretations.
7
“Findings” are those with concrete basis under the company’s policies and rules.
57
d. Documentation of issues and findings as a result of the examination;
e. Determination of the pervasive issues and findings (“examination trends”) based on single
year result and/or year-to-year results;
f. Conduct of the foregoing procedures on a regular basis.]

(f) Audit Control Policies and Procedures

Disclose all internal audit controls, policies and procedures that have been established by the company and
the result of an assessment as to whether the established controls, policies and procedures have been
implemented under the column “Implementation.”

Policies & Procedures Implementation


Finance Manual Implemented
Treasury Manual Implemented
Information Technology Manual Implemented
Human Resources Manual Implemented

(g) Mechanism and Safeguards

State the mechanism established by the company to safeguard the independence of the auditors, financial
analysts, investment banks and rating agencies (example, restrictions on trading in the company’s shares and
imposition of internal approval procedures for these transactions, limitation on the non-audit services that an
external auditor may provide to the company):

Auditors
Financial Analysts Investment Banks Rating Agencies
(Internal and External)
Rotation of partner-in- Equitable access to Approval of the Approval of the
charge every five years company Investment Committee Investment Committee
for external auditors representatives by and/or the Finance and/or the Finance
analysts, regardless of Committee and the Committee and the
their prior research, Board of Directors prior Board of Directors prior
opinions, to any engagement to engagement of
recommendations, with Investment Banks. rating agency.
earnings estimates or
research conclusions on
the company.
Functional reporting to Equitable release of Use of different Periodic submission of
the Audit Committee disclosure/information Investment Banks for reports and data to the
by the internal auditors (i.e. no analyst gets each deal. Rating Agency
more information than
the other) in terms of
content and timing (i.e.
no one gets ahead of
information over
another)
Abide by the Independence and Use of multiple Management interview
company’s Code of impartiality in the Investment Banks sessions prior to
Ethics opinions, estimates or instead of just one or ratings.
forecasts made by two for bond deals.
analysts on Ayala’s
performance.
Abide by the Open flow of
company’s policy on communication with
Conflict of interest and analysts without
Insider Trading Policy compromising material
non-public information.

58
(h) State the officers (preferably the Chairman and the CEO) who will have to attest to the company’s full
compliance with the SEC Code of Corporate Governance. Such confirmation must state that all directors,
officers and employees of the company have been given proper instruction on their respective duties as
mandated by the Code and that internal mechanisms are in place to ensure that compliance.

On January 16, 2013, the Company submitted to the SEC the certification on the compliance with the revised
manual of corporate governance for the year 2012. The certification was signed by the Company’s Compliance
Officer and the President and COO.

On July 1, 2013, the Company has also submitted to the SEC the notarized Annual Corporate Governance
Report for 2012 signed by the Chairman and CEO, the President and COO, and two independent directors of
the Company.

On January 9, 2015, the Company submitted to the SEC the Consolidated Changes in the Annual Corporate
Governance Report for 2014 that was reviewed and approved by the Board of Directors of the Company at
their meeting on December 4, 2014.

H. ROLE OF STAKEHOLDERS

1) Disclose the company’s policy and activities relative to the following:

Policy Activities
Customers' welfare We take innovative approaches to Our stakeholder engagements are
increase customer value and designed and implemented to
enhance customer experience; understand our customers well.
empower more customers including We offer our customers
those with limited access to essential sustainable lifestyle as we design
goods and services. our products and services.
We also provide customer touch
points to ensure that their
feedback and concerns are
monitored and acted upon.
We do an annual customer
satisfaction survey so we can
improve the overall customer
experience.
Supplier/contractor selection In our supply chains, we include Accreditation of suppliers follows
practice environmental parameters in the an accreditation procedure and
accreditation of our suppliers. criteria. In every required
purchase of significant value we
observe reviewing quotation
submitted by at least three (3)
accredited suppliers.
Environmentally friendly value- Members of the Ayala group 1. In our operations, we consciously
chain management committee recognize move towards the continuous
the role of business in social reductions of our energy, water,
development and its impact to the and solid waste footprints. Where
environment. possible, we move beyond
regulatory compliance and apply
best practices and global
voluntary standards on
environmental and social
responsibility.
2. In our supply chains, we include
environmental parameters in the
accreditation of our suppliers. We
also consciously use our buying
59
volume to enable communities to
develop by providing
opportunities to entrepreneurs
and cooperatives.
3. In our products and services, we
innovate to be able to serve and
empower more customers,
particularly those that are
disadvantaged and who do not
have access to essential goods
and services. Our product
development explicitly include
environmental and social factors,
and we continuously look for
ways to design our products and
services for lower environmental
impact.
4. In our human resource practices,
we ensure that our employees
work in the safest and healthiest
environments possible and in a
manner that enable them to
reach their highest potential. We
also encourage sustainability
initiatives to build positive
momentum for sustainable
business practices within the
workforce.
5. In our community involvement,
we provide, to the best of our
ability, the resources needed to
help address that issues of quality
education, vibrant
microenterprises, and a healthy
environment for our communities
for the sake of economic
advancement and nation
building.
6. In our management approach, we
strive for material impact and
measurable results on
sustainability while finding
opportunities to improve
operating efficiencies and satisfy
our shareholder requirements.

Community interaction The company, directly and through AFI actively consults its program
Ayala Foundation, Inc. (AFI): On communities to understand their
Community Engagement- dreams, needs, aspirations, and
Understanding community realities even their capacities. AFI’s
and engages people in the change interventions in education, youth
process. leadership, sustainable livelihood,
and arts and culture ensure great
participation from the members
of the communities. Each
community member is an active
partner, not just a beneficiary or
recipient. AFI conducts

60
community insighting and other
forms of intensive on-the-ground
work and research prior to
starting projects. AFI conducts
program reviews on a periodic
basis to ensure the effectiveness
of the programs.

AFI is a strong believer in public-


On Stakeholder Engagement- The
private partnerships. Every sector
company builds and nurtures
in its program communities has a
partnerships with the public and
role to play to ensure the
private groups and the civil society to
effectiveness and sustainability of
achieve impact, scale, and
its programs.
sustainability for everyone involved.
The Foundation is consistently in
consultation with its stakeholders
(donors, project partners,
LGUs/government
representatives, etc.) before,
during, and after the intervention.
Anti-corruption programmes and Values drive behavior in our Among the other guidelines on
procedures? organization. One of our Core Values anti-corruption, the Company sets
is Integrity, which to all AC citizens guidelines for dealing with
mean "doing the right thing" - being business gifts and gratuities to
held accountable for all our actions. protect the integrity of its
And doing the right thing has earned employees and its business
Ayala a commanding position of interests.
trust among its stakeholders. But
integrity starts with individuals, the
kind of individuals we engage at
Ayala. Their individual ethics are
perpetuated and reinforced by our
corporate culture.
Safeguarding creditors' rights Creditors as integral stakeholders. The Company protects the rights
of all creditors by endeavoring to
be faithful to the terms and
conditions of credit agreements,
such as timely principal interest
payments, compliance with
positive and negative covenants,
and timely disclosure of relevant
and accurate information. The
Company also endeavors to the
extent applicable that all similarly
classed obligations will rank pari
passu with each other.

2) Does the company have a separate corporate responsibility (CR) report/section or sustainability report/section?

Yes, the Company has a published Sustainability Report. A write up on sustainable developments and corporate
social responsibility are also included in the Annual Report. A section on Sustainability is also available at the
company website (www.ayala.com.ph)

3) Performance-enhancing mechanisms for employee participation.

(a) What are the company’s policy for its employees’ safety, health, and welfare?

The Company maintains a comprehensive medical and wellness program which provides for in-patient and

61
out-patient benefits for employees, dependents and retirees. It is designed to provide payments of the actual,
reasonable and customary expenses incurred by an employee and eligible dependents and retirees, subject to
a maximum amount limit.

We also encourage employees to undergo annual executive check-up or physical examinations for health
maintenance. The company pays for memberships in gym, sports club and interest clubs. We maintain a
chapel in the office vicinity for daily masses and spiritual growth.

(b) Show data relating to health, safety and welfare of its employees.
Programs
Gym Membership 46% of the population availed of the
free membership
Sports Club & Interest Club Golf, Badminton, Volleyball,
Bowling tournaments are in place
as well as Yoga sessions
Annual Physical Exams / Executive Majority of the employees and their
Check-ups dependents avail of the services
Vaccination Program 48% availed of the free vaccination

(c) State the company’s training and development programmes for its employees. Show the data.

Various training and development programs are made available to Ayala employees. From the beginning of
their career in Ayala, they are provided with core programs to assist them in their on-boarding and to allow
them to become fully integrated into the organization.

Employees have continuous access to both technical training programs and soft skills programs and are
encouraged to actively participate training that will be helpful in growing their functional expertise and in
making them more effective in their day-to-day work.

A major focus has been on leadership development not only within Ayala but across its group of companies.
The aim has been to develop a deeper leadership bench across the conglomerate by strengthening the general
management skills at the executive and middle management levels.

(d) State the company’s reward/compensation policy that accounts for the performance of the company beyond
short-term financial measures

The company rewards qualified employees with long-term stock options or stock ownership. The company
promotes an ownership culture within the company which aligns the interests of the stock plan participants
with those of the shareholders.

4) What are the company’s procedures for handling complaints by employees concerning illegal (including
corruption) and unethical behaviour? Explain how employees are protected from retaliation.

Impartial investigation composed of a Committee of representatives from Human Resources, Legal and the Labor
Union. Results of the investigation are managed discreetly.

I. DISCLOSURE AND TRANSPARENCY

1) Ownership Structure

(a) Holding 5% shareholding or more

Shareholder Number of Shares Percent* Beneficial Owner


Mermac, Inc. Common-303,689,196 56.5270% Mermac, Inc.
Voting Preferred-
159,577,460
PCD Nominee Common-160,446,419 19.5774% PCD Participants
Corporation (Non- acting for themselves
62
Filipino) or for their customers
Mitsubishi Common-63,077,540 11.6794% Mitsubishi
Corporation Voting Preferred- Corporation
32,640,492
PCD Nominee Common-56,357,357 6.8766% PCD Participants
Corporation (Filipino) acting for themselves
or for their customers
*of outstanding voting shares

Number of % of
Name of Senior
Number of Direct shares Indirect shares / Through Capital
Management
(name of record owner) Stock
Jaime Augusto Zobel de Common-39,731 Common (through ESOWN 0.0810%
Ayala Voting Preferred-543,802 subscription)-98,435
Preferred B (through PCD) –
20,000
Fernando Zobel de Ayala Common-94,825 Common (through ESOWN 0.0800%
Voting Preferred-554,983 subscription)-43,341
Gerardo C. Ablaza, Jr. Common-270,086 Common (through ESOWN 0.0625%
subscription)-201,724
Common (through PCD
Nominee)-60,023
Preferred B (through PCD) –
10,000
Cezar P. Consing None Common (through ESOWN 0.0021%
subscription)-18,594
Bernard Vincent O. Dy None None -
Arthur R. Tan Common-80,754 Common (through ESOWN 0.0319%
subscription)-135,864
Common (through PCD
Nominee)-59,842
Alfredo I. Ayala Common-25,760 Common (through ESOWN 0.0161%
subscription)-113,907
John Eric T. Francia None Common (through ESOWN 0.0096%
subscription)-83,375
Common (through PCD
Nominee)-1
Delfin C. Gonzalez* Common-50,750 Common (through ESOWN 0.0210%
subscription)-101,947
Common (through PCD
Nominee)-18,944
Preferred B (through PCD) –
10,000
Solomon M. Hermosura Voting Preferred Shares – Common (through ESOWN 0.0147%
53,583 subscription)-58,124
Common (through PCD
Nominee)-15,707
Jose Teodoro K. Limcaoco* None Common (through ESOWN 0.0153%
subscription)-125,665
Common (through PCD
Nominee)-7,342
Ruel T. Maranan None None -
John Philip S. Orbeta None Common (through ESOWN 0.0503%
subscription)-370,462
Common (though PCD
Nominee) – 65,685

63
Paolo Maximo F. None Common (through ESOWN 0.0014%
Borromeo subscription)-12,189
Ma. Cecilia T. Cruzabra Common-240 Common (through ESOWN 0.0006%
subscription)-5,104
Josephine G. De Asis None Common (through ESOWN 0.0001%
subscription)-1,000
Catherine H. Ang None Voting Preferred Shares – 0.0006%
5,290
Dodjie D. Lagazo None None -
Charlene Mae C. Tapic- None None -
Castro
TOTAL 1,714,514 1,642,565 0.3874%
*Mr. Limcaoco was appointed as CFO and Finance Group Head effective April 10, 2015 replacing Mr.
Gonzalez.

2) Does the Annual Report disclose the following:

Key risks Yes


Corporate objectives Yes
Financial performance indicators Yes
Non-financial performance indicators Yes
Dividend policy Yes
Details of whistle-blowing policy Yes
Biographical details (at least age, qualifications, date of first appointment, relevant Yes
experience, and any other directorships of listed companies) of
directors/commissioners
Yes
Training and/or continuing education program attended by each director/commissioner

Number of board of directors/commissioners meetings held during the year Yes

Yes
Attendance details of each director/commissioner in respect of meetings held
Details of remuneration of the CEO and each member of the board of Yes
directors/commissioners

Should the Annual Report not disclose any of the above, please indicate the reason for the non-disclosure.

The training and/or continuing education programs attended by each of the company’s directors will be disclosed
in the 2014 Annual Report.

3) External Auditor’s fee

Name of auditor Audit Fee Non-audit Fee


Sycip, Gorres, Velayo & Co. P4.12million P1.97million

4) Medium of Communication

List down the mode/s of communication that the company is using for disseminating information.

Ayala employs the following modes of communication for disseminating corporate developments and financial and
operational results on a regular basis to its stakeholders:

a. Structured and unstructured corporate disclosures


b. Company website
c. Analysts’ briefings

64
d. Press releases
e. Press briefings
f. One-on-one meetings between company officers and analysts/institutional investors
g. Annual report
h. International and local investor conferences
i. International non-deal roadshows
j. Stockholders’ meeting
k. Conference calls
l. Email alerts

5) Date of release of audited financial report: March 17, 2015

6) Company Website

Does the company have a website disclosing up-to-date information about the following?

Business operations Yes


Financial statements/reports (current and prior years) Yes

Materials provided in briefings to analysts and media Yes

Shareholding structure Yes

Group corporate structure Yes


Downloadable annual report Yes

Notice of AGM and/or EGM Yes


Company's constitution (company's by-laws, memorandum and articles of
Yes
association)

Should any of the foregoing information be not disclosed, please indicate the reason thereto.

7) Disclosure of RPT

Below are the details of the Company’s Related Party Transactions which formed part of the Company’s December
2014 audited financial statements:

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common significant influence which include
affiliates. Related parties may be individuals or corporate entities.

The Group, in its regular conduct of business, has entered into transactions with associates, joint ventures and
other related parties principally consisting of advances, loans and reimbursement of expenses, purchase and sale
of real estate properties, various guarantees, construction contracts, and development, management,
underwriting, marketing and administrative service agreements. Sales and purchases of goods and services as
well as other income and expense to and from related parties are made at normal commercial prices and terms.

There has not been any material transaction during the last two years, or proposed transaction, to which the
Group was or is to be a party, in which any of its directors or executive officers, any nominee for election as a
director or any security holder identified in this condensed financial information had or is to have a direct or
indirect material interest.

The transactions and balances of accounts with related parties follow:

a. Transactions with BPI, an associate

65
i. As of December 31, 2014 and 2013, the Group maintains current and savings account, money market
placements and other short-term investments with BPI broken down as follows (amounts in thousands):

2014 2013
Cash in bank P
=14,878,169 =P14,403,016
Cash equivalents 36,759,229 24,141,865
Financial assets at FVPL 6,264,569 12,794,654
Other non-current asset (Note 17) 8,273,200 −

From the Group’s placements and short-term investments with BPI, the Group has accrued interest
receivable amounting to P
=79.4 million and P
=8.1 million as of December 31, 2014 and 2013, respectively.
Interest income earned amounted to P =586.5 million in 2014, P
=648.7 million in 2013 and P
=1,166.7 million
in 2012.

ii. The Group also has short-term and long-term debt payable to BPI amounting to
=38.0 billion and P
P =23.2 billion as of December 31, 2014 and 2013, respectively. These short-term and
long-term debts are interest bearing with varying rates, have various maturities starting 2015 and varying
schedules of payments for interest. The Group has accrued interest payable pertaining to the outstanding
balance of the short-term and long-term debt amounting to P =190.6 million and P =32.2 million as of
December 31, 2014 and 2013, respectively. Interest expense incurred from the debt amounted to =P402.7
million in 2014, P
=145.2 million in 2013 and P
=131.1 million in 2012.

b. Outstanding balances of related party transaction follow (amounts in thousands):

Receivables Payables
2014 2013 2014 2013
Associates:
BPI P
=435,123 =276,659
P P
=257,238 =104,911
P
First Gen Northern Energy (FGNEC) 5,531 5,531 – –
Bonifacio Land Corp. (BLC) 374 – 212,696 212,696
Stream – 246,488 – –
Ayala System Technology (ASTI) – 15,741 – 90
Naraya Development Co. Ltd. – 4,877 – –
441,028 549,296 469,934 317,697
Joint ventures:
Integreon 543,836 488,221 – –
Globe 165,419 141,939 2,409 2,005
ADHI 10,883 – – –
Asiacom – – 13,617 13,581
720,138 630,160 16,026 15,586
Other related parties:
Columbus Holdings, Inc. (Columbus) 888,953 888,815 1,156,308 1,156,308
Fort Bonifacio Development Corporation
(FBDC) 394,026 274,645 403,297 2,154,003
Honda Cars Philippines, Inc. (HCP) 112,522 72,650 152,457 170,298
myAyala.com, Inc. 2,097 2,098 – –
Lagoon Development Corporation
(Lagoon) 828 5,964 – –
Isuzu Philippines Corporation (IPC) – 25,452 193,537 48,695
GN Power Kauswagan (GNPK) – 69,936 – –
Fort Bonifacio Holdings Corp. – 3,085 – –
Sonoma Services Inc. – 867 33,617 –
Others 149,853 622,504 33,641 244,422
1,548,279 1,966,016 1,972,857 3,773,726
P
=2,709,445 =3,145,472
P P
=2,458,817 =4,107,009
P

i. Receivable from BPI includes trade receivables on vehicles sold by AAHC and accrued interest receivables
on short-term placements by the Group.
ii. Receivable from Stream in 2013 represents a convertible promissory note entered into on
April 27, 2012 for the principal sum of US$4.7 million, plus interest at the rate of 10% per annum
maturing on April 29, 2013. To the extent the outstanding balance is not repaid in full on or prior to the
maturity date, AIVPL Group may elect at any time after the maturity date, upon delivery of conversion
notice to Stream, to convert the note into a number of units of membership interests. On April 19, 2013,

66
Stream and AIVPL Group amended the maturity date of the loan to April 29, 2014. Interest income
earned in 2014 and 2013 amounted to nil and P =21.7 million, respectively.
iii. Receivables from ASTI and FGNEC are advances made for working capital requirements which are non-
interest bearing and demandable.
iv. Receivable from Integreon represents a convertible promissory note entered into on February 2010 with
a principal of US$7.30 million and bear interest of 14% per annum. The lender has a conversion option
for a period of 30 days beginning on the final maturity date at a stipulated price per share. Subsequent
amendments were made to the convertible note on February 15, 2011, July 15, 2012 and on March 4,
2014 which include, among others, extension of the final maturity date and optional conversion period
and change in interest rate. The latest amendment extended the final maturity date from February 15,
2014 to February 15, 2016 and the optional conversion period from February 15, 2014 to March 14,
2017. The convertible note bears interest of 12% per annum. Interest income earned amounted to P =38.9
million, P
=37.2 million and P=54.6 million in 2014, 2013 and 2012, respectively.
v. Receivable from GNPK by ACEHI in 2013 represents an advance for development costs, non-interest
bearing and shall be paid in full within 30 days from financial closing of the project. GNPK is a project
company of ACEHI and Power Partners Ltd. Co. for the development of 3X135MW coal-fired power plant
in Kauswagan Lanao del Norte
vi. Receivable from Columbus represents non-interest bearing advance for future acquisition of shares in
BLC.
vii. Receivable from FBDC largely pertains to management fees which are included under “Other income.”
viii. Other outstanding balances of receivable from related parties at year-end pertain mostly to advances
and reimbursement of operating expenses. These are unsecured, interest free, will be settled in cash and
are due and demandable.
ix. Payable to Columbus and BLC represent non-interest bearing advances for stock redemption.
x. Payable to IPC and HCP consist of purchased parts and accessories and vehicles that are trade in nature,
interest-free, unsecured and are payable within 15 to 30 days.
xi. Payable to BPI includes interest payable on Group’s borrowings payable at various payments terms like
monthly or quarterly and insurance premiums payable which are due in 30-60 days.
xii. The other outstanding balances of payable to related parties at year-end are unsecured, interest-free,
will be settled in cash and are due and demandable.
xiii. Allowance for doubtful accounts on amounts due from related parties amounted to P =135.4 million and P
=
145.6 million as of December 31, 2014 and 2013, respectively. Provision for doubtful accounts amounted
to P
=0.3 million, P
=0.8 million and P
=15.9 million in 2014, 2013 and 2012, respectively.
xiv. On November 26, 2014, Alveo Land Corporation, a wholly owned subsidiary of ALI, acquired a 6,986 sq.
m. property located along Valero St., Salcedo Vill., Makati City. The property was purchased from BPI for
=1,590.0 million, resulting into a gain of
P
=700.0 million.
P

c. Receivables from officers and employees pertain to housing, car, salary and other loans granted to the
Group’s officers and employees which are collectible through salary deduction, are interest bearing ranging
from 6.0% to 13.5% per annum and have various maturity dates ranging from 2015 to 2026.

d. The fair value of the Group’s total investment in the BPI Fund amounted P
=5.6 billion and P
=12.8 billion, as of
December 31, 2014 and 2013, respectively.

e. Revenue and expenses from related parties follow:

Revenue Expenses
2014 2013 2012 2014 2013 2012
(In Thousands)
Associates:
BPI P
=558,814 =702,699
P =1,166,696
P P
=427,263 =143,582
P =131,004
P
PPI 60 417 339 – – –
Stream – 21,715 11,859 – – –
ASTI – 826 1,101 – – –
558,874 725,657 1,179,995 427,263 143,582 131,004
Jointly controlled
entities:
Globe 101,381 71,913 16,642 124,563 115,809 32,071
Integreon 38,973 37,226 54,682 – – –
Asiacom 613 1,154 6,998 – – –

67
Northwind Power
Development
Corp. – – 4,410 – – –
BPI Globe Banko – – 222 – – –
140,967 110,293 82,954 124,563 115,809 32,071

(Forward)

Revenue Expenses
2014 2013 2012 2014 2013 2012
(In Thousands)
Other related
parties:
FBDC P
=176,194 =221,483
P =113,471
P P
=155,099 =129,175
P =16,959
P
Lagoon 49,135 41,143 – 1,315 – –
6750 Ayala Avenue 17,697 46,511 – – – –
Others 25,921 27,405 9,258 – 28,351 3,575
268,947 336,542 122,729 156,414 157,526 20,534
P
=968,788 =1,172,492
P =1,385,678
P P
=708,240 =416,917
P =183,609
P

Revenue recognized from related parties includes:


i. Leasing and developmental projects services rendered by ALI group.
ii. Water and sewerage services rendered by MWC.
iii. Automotive sales and repair services rendered by AAHC group.
iv. Interest income from cash deposits and money market placements in BPI.

Expenses recognized from related parties include:


i. Interest expense from short-term and long-term debt payable to BPI.
ii. Purchases of communications software and billings for mobile phone charges and internet connections
with Globe.
iii. Building rental, leased lines, internet connections and ATM connections with Innove, subsidiary of Globe.

f. The Group’s Compensation of key management personnel by benefit type follows:

2014 2013 2012


(In Thousands)
Short-term employee benefits P
=1,369,942 =1,242,543
P =1,401,840
P
Post-employment benefits (Note 27) 69,079 139,933 77,177
Share-based payments (Note 28) 37,957 63,571 158,131
P
=1,476,978 =1,446,047
P =1,637,148
P

When RPTs are involved, what processes are in place to address them in the manner that will safeguard the
interest of the company and in particular of its minority shareholders and other stakeholders?

The Company and its subsidiaries observe the following:


 Each business unit which may be a related party has corporate governance policy that ensures propriety of
business conduct. The representation of minority stakeholders and other stakeholders in the Board of Directors
and various Board Committees form part of the corporate governance. The Board of Directors and committees
review the critical and key operating areas.
 Each business unit which may be a related party has its own set of management team responsible in achieving
their respective overall operating goals.
 All transactions with related parties are on arms-length basis, the terms are fair and they will inure to the
benefit of the Corporation and all of its shareholders.

J. RIGHTS OF STOCKHOLDERS

1) Right to participate effectively in and vote in Annual/Special Stockholders’ Meetings

(a) Quorum

Give details on the quorum required to convene the Annual/Special Stockholders’ Meeting as set forth in its
By-laws.

68
One-half of the outstanding stock
is present or represented except
Quorum Required
in cases where the Corporation
Law requires a greater number.

(b) System Used to Approve Corporate Acts

Explain the system used to approve corporate acts.

System Used By poll.


Description Straight and cumulative voting.

In all items for approval, each voting share of stock entitles its registered
owner as of the Record Date to one vote.

In the case of the election of directors, each stockholder may vote such
number of shares for as many persons as there are directors to be elected or
he may cumulate the aforesaid shares and give one nominee as many votes
as the number of directors to be elected multiplied by the number of his
shares, or he may distribute them on the same principle among as many
nominees as he shall see fit; provided that, the whole number of votes cast
by him shall not exceed the number of shares owned by him multiplied by the
total number of directors to be elected.

Voting will be by poll. Upon registration at the annual stockholders’ meeting,


each stockholder will be given a ballot to enable him to vote in writing on each
item or proposal in the Agenda. Nonetheless, each stockholder may vote viva
voce or by other means of communicating his approval or objection.

All votes will be counted and tabulated by the Office of the Corporate
Secretary and the results will be validated by the external auditor of the
Company, SGV & Co.

(c) Stockholders’ Rights

List any Stockholders’ Rights concerning Annual/Special Stockholders’ Meeting that differ from those laid
down in the Corporation Code.

Stockholders’ Rights under Stockholders’ Rights not in


The Corporation Code The Corporation Code
Voting Right None
Pre-emptive Right
Right of Inspection
Right to Information
Right to Dividends
Appraisal Right

Dividends

Cash Dividend on Common Shares


Declaration Date Record Date Payment Date
June 26, 2014 July 10, 2014 July 25, 2014
December 4, 2014 December 18, 2014 January 3, 2015

69
Cash Dividend on Preferred B Series 1 Shares
Declaration Date Record Date Payment Date
December 4, 2014 January 21, 2015 February 15, 2015
December 4, 2014 April 20, 2015 May 15, 2015
December 4, 2014 July 22, 2015 August 15, 2015
December 4, 2014 October 21, 2015 November 15, 2015

Cash Dividend on Preferred B Series 2 Shares


Declaration Date Record Date Payment Date
December 4, 2014 January 12, 2015 February 5, 2015
December 4, 2014 April 7, 2015 May 5, 2015
December 4, 2014 July 10, 2015 August 5, 2015
December 4, 2014 October 12, 2015 November 5, 2015

Cash Dividend on Voting Preferred Shares


Declaration Date Record Date Payment Date
December 4, 2015 April 23, 2015 May 20, 2015

(d) Stockholders’ Participation

1. State, if any, the measures adopted to promote stockholder participation in the Annual/Special Stockholders’
Meeting, including the procedure on how stockholders and other parties interested may communicate
directly with the Chairman of the Board, individual directors or board committees. Include in the discussion
the steps the Board has taken to solicit and understand the views of the stockholders as well as procedures
for putting forward proposals at stockholders’ meetings.

The agenda for the Annual Stockholders’ Meeting, the detailed Definitive Information Statement and the
unbundled proxy form are distributed to the stockholders on record 15 business days prior to the meeting to
enable the stockholders to study and understand every agenda item of the meeting. During the annual
stockholders’ meeting, the Chairman of the Board encourages the stockholders to ask questions for each
agenda or matters for approval during the meeting. The question and answer portion is documented in the
minutes of the meeting.

2. State the company policy of asking shareholders to actively participate in corporate decisions regarding:

a. Amendments to the company's constitution


b. Authorization of additional shares
c. Transfer of all or substantially all assets, which in effect results in the sale of the company

The Company calls for a regular or special stockholders’ meeting to propose to the stockholders the actions
listed above. The details of the proposed actions are presented in the Definitive Information Statement which
is made available to the stockholders. During the meeting, the Company’s board and/or management present
the proposed actions and encourage stockholders to ask questions. The affirmative vote of stockholders
representing at least 2/3 of the issued and outstanding capital stock of the Company is required for the
approval of the above items.

In cases of amendment of the Articles of Incorporation where written assent is allowed, a stockholder may
deliver, in person or by mail, his vote directly to the Corporation.

70
3. Does the company observe a minimum of 21 business days for giving out of notices to the AGM where items
to be resolved by shareholders are taken up?

a. Date of sending out notices:

March 20, 2014 (The Company is compliant with paragraph (3)(c) of the SRC Rule 20 wherein the notice
and the Definitive Information Statement is given to the security holders at least fifteen (15) business days
prior to the meeting date.)

b. Date of the Annual/Special Stockholders’ Meeting:

April 11, 2014

4. State, if any, questions and answers during the Annual/Special Stockholders’ Meeting.

Below is the list of questions and answers during the 2014 Annual Stockholders’ Meeting:

Q & A No. 1
Question: A stockholder of the Company inquired regarding the assets of the Company that are available for
sale but which remain unsold.

Answer: The CFO responded that the Company’s assets that are available for sale are valued every year based
on the current market value. Some of these assets may have fallen in value but not necessarily for a long time
while others are seen to rise in value. The Chairman added that the Company has very good portfolio of
assets and that although the value of the assets available for sale fluctuates over time, the Company ensures
that these are reflected on accounting standards.

Q & A No. 2
Question: A stockholder commented that the Company has a very high increase in growth but not so much
growth in terms of profitability.

Answer: The Chairman replied that to a large extent this is because the Company has decided to redo its
whole telecommunication infrastructure which has a large depreciation hit right up-front. However, the
Chairman said that taking away the accelerated depreciation number, the net income has been moving up
quite comfortably.

Q & A No. 3
Question: A stockholder inquired on the Company’s investments.

Answer: The Chairman responded that the Company bought out a significant stake in BPI from DBS Bank. GIS
of Singapore came in but its investment was not significant. The Company also bought the shares of
Mitsubishi Corporation in MWC.

Q & A No. 4
Question: A stockholder noted that compared to the other subsidiaries of the Company which have fairly high,
stable margins and which have been established over the years, IMI is challenged on margins. The
stockholder then asked about the Company’s plans for IMI.

Answer: The Chairman stated that IMI will balance its portfolio by expanding globally from being a Philippine-
based company. Dealing with Japanese-related businesses, the Company has tried to lower IMI’s risk profile
but it has plans of expanding in China and moving on to Eastern Europe and Mexico. By having a global
footprint and by trying to link-up with higher value-creative customers, the Company has tried to change the
margin component of the business of IMI. The Chairman added that while it is not easy to work in a global
environment, IMI has a unique capability and is probably the only Philippine company that has established a
footprint of its kind. While it is really a competitive world for electronics, IMI has tried to expand its portfolio
and the net income figures from IMI have been increasing.

Q& A No. 5
Question: A stockholder inquired about the figures in the acquisition of Family Mart.
71
Answer: Mr. Bernard Vincent O. Dy, ALI’s President and CEO, replied that the acquisition was through a
partnership with Store Specialists, Inc. (SSI), with the Rustan’s Group and Japan Family Mart. The local
partners, the Company and SSI, own 60% equity while Japan Family Mart owns 40%. Thirty stores were
opened last year and the plan for this year is to open 100 stores. The medium-term goal for the next five
years is to put up 500 stores.

Q& A No. 6
Question: A stockholder asked the average percentage of MWC in the Company’s portfolio.

Answer: Mr. Delfin C. Gonzalez stated that the contribution of MWC to the Company’s net income last year
was 10%.

Q& A No. 7
Question: A stockholder asked if the Company is taking action to prevent further losses in the event MWC
would not get a favorable resolution in the arbitration with MWSS.

Answer: The Chairman replied that in view of the on-going arbitration, it is not possible to make any
comment. However, he added that the Company’s purchase of additional shares in MWC should send the
message to the market that the Company is confident of the future prospects of MWC.

Q& A No. 8
Question: A stockholder asked if the Company has any plans of expanding the business of MWC in some areas
other than Metro Manila.

Answer: The Chairman replied that MWC has businesses in Clark, Laguna and Boracay and it also has a water
project in Cebu. While these may take some time to grow, they will be major contributions in the future. It
was also added that MWC signed a Memorandum of Understanding with the Government of Myanmar for the
development of a proposed non-revenue water reduction project for Yangon City. Thus, it is expected that
there would be major contributions in the future from new businesses that are growing very rapidly.

Q& A No. 9
Question: A stockholder inquired which segment of real estate is most vulnerable today from the demand-
supply perspective.

Answer: The Chairman answered that ALI has a very broad range of products throughout the country and in
terms of the income groups. The results continue to be very strong for ALI as it has the benefit of having
horizontal products, high-rise products and diversity in terms of its recurring businesses.

Q& A No. 10
Question: A stockholder inquired about IMI being penalized by the PSE for not conducting stock rights offering
or making public offering.

Answer: Mr. Hermosura clarified that IMI has been given by the PSE an extension of time within which to
make a public offering of shares.

Q& A No. 11
Question: A stockholder inquired on the Ayala Land Real Estate Investment Trust.

Answer: The Chairman responded that the Ayala group, as a whole, including ALI, is quite keen to look at the
tight structure of real estate investment trust as a way of creating liquidity in the Company, which is
dependent on government policy. The dialogue between the government and the real estate industry in
inconclusive. As of now, there is no clear structure that has been accepted by the executive department of the
government.

Q& A No. 12
Question: A stockholder inquired about the rate of sale of the vehicles.

Answer: Mr. Gonzalez responded that the sale is about 7% but the net income is down at 81% principally on
72
account of the start-up cost for the Volkswagen dealership and distributorship. Units sold are up by 9%. The
Company expects some growth this year.

Q& A No. 13
Question: A stockholder inquired on the impact of the ASEAN Integration by 2015 to the Ayala group.

Answer: The Chairman stated that the Company is of the view that ASEAN Integration as a whole has a
potential benefit to the country. He added that each of the company in the Ayala group is well prepared to
compete.

5. Result of Annual/Special Stockholders’ Meeting’s Resolutions

Resolution Approving Dissenting Abstaining


Resolution No. S-01-15: 626,714,725 shares or 0 0
“RESOLVED, to approve the 94.36%
minutes of the annual
stockholders’ meeting held on
April 11, 2014.”
Resolution No. S-02-15: 626,713,702 shares or 1,007 shares or 0
“RESOLVED, to note the 94.36% 0.00015%
Corporation’s Annual Report,
which consists of the Chairman’s
Message, the President’s Report,
and the audio-visual presentation
to the stockholders, and to
approve the consolidated audited
financial statements of the
Corporation and its subsidiaries as
of December 31, 2014, as audited
by the Corporation’s external
auditor SyCip Gorres Velayo &
Co.”
Resolution No. S-03-15: 626,331,407 shares or 1,007 or 0.0015% 378,714 shares or
“RESOLVED, to approve, confirm, 94.30% 0.06%
and ratify all resolutions of the
Board of Directors and the
Executive Committee, and other
Board Committees, as well as all
acts of Management taken or
adopted since the annual
stockholders’ meeting on April 11,
2014 until today, as reported by
the Corporate Secretary.”
Resolution No. S-04-15:
“RESOLVED, to elect the following
as directors of the Corporation to
serve as such beginning today
until their successors are elected
and qualified:
Jaime Augusto Zobel de Ayala 620,350,710 shares or 3,943,204 shares 2,040,170 shares or
93.40% or 0.59% 0.1%

Fernando Zobel de Ayala 620,045,688 shares or 6,268,530 shares 19,840 shares or


93.36% or 0.94% 0.003%

Delfin L. Lazaro 620,190,375 shares or 6,130,960 shares -


93.38% or 0.92%
73
Xavier P. Loinaz 626,321,226 shares or 110 shares or -
94.30% 0.00002%

Ramon R. Del Rosario, Jr. 622,893,401 shares or 3,309,834 shares 118,100 shares or
93.78% or 0.50% 0.012%

Yoshio Amano 619,108,485 shares or 7,212,50 shares or -


93.21% 1.09%

Antonio Jose U. Periquet” 619,108,485 shares or 3,133,864 shares 19,840 shares or


93.21% or 0.47% 0.003%
Resolution No. S-05-15: 624,151,249 shares or 1,861,100 shares 702,376 shares or
“RESOLVED, as endorsed by the 93.97% or 0.28% 0.11%
Board of Directors, to approve
the re-election of SyCip Gorres
Velayo & Company as the
external auditor of the
Corporation for the year 2015 for
an audit fee of PhP5 Million,
inclusive of value-added tax.”

6. Date of publishing of the result of the votes taken during the most recent AGM for all resolutions:

April 11, 2015 or the following business day after the annual stockholders’ meeting.

(a) Modifications

State, if any, the modifications made in the Annual/Special Stockholders’ Meeting regulations during the most
recent year and the reason for such modification:

Modifications Reason for Modification

None

(b) Stockholders’ Attendance

(i) Details of Attendance in the Annual/Special Stockholders’ Meeting Held:

Names of Board Voting


members / Procedure % of SH Total % of
Type of Date of % of SH in
Officers present (by poll, Attending SH
Meeting Meeting show of Proxy
in Person attendance
hands, etc.)
Annual Jaime Augusto April 10, By poll 67.35% 9.44% 76.79%
Zobel de Ayala, 2015
Fernando Zobel
de Ayala, Delfin
L. Lazaro, Yoshio
Amano, Xavier P.
Loinaz, Antonio
Jose U. Periquet
and Ramon R.
Del Rosario, Jr.,
and all other
members of the
Senior
Leadership Team

74
Special Not Applicable

(ii) Does the company appoint an independent party (inspectors) to count and/or validate the votes at the
ASM/SSMs?

Yes. The company has engaged SyCip Gorres Velayo & Co. to validate the voting results of the company’s
annual stockholders’ meeting since 2014.

(iii) Do the company’s common shares carry one vote for one share? If not, disclose and give reasons for any
divergence to this standard. Where the company has more than one class of shares, describe the voting
rights attached to each class of shares.

One vote per share for common and voting preferred shares. One vote per share for preferred “B” on
matters where holders of non-voting shares are entitled to vote under Section 6 of the Corporation Code.

(c) Proxy Voting Policies


State the policies followed by the company regarding proxy voting in the Annual/Special Stockholders’
Meeting.

Company’s Policies
Execution and acceptance of proxies Proxies shall be in writing, signed by the stockholder or his
duly authorized representative and filed before the scheduled
meeting with the Corporate Secretary.

A stockholder may designate any person of his choice to act


as his proxy. Absent such designation or in cases where the
designated proxy should fail to appear at the meeting, the
Chairman of the meeting shall be deemed authorized and
hereby directed to cast the vote as indicated by the voting
stockholder or his proxy.

If a duly accomplished and executed proxy is undated, the


postmark or date of dispatch indicated in the electronic mail
or, if not mailed, its actual date of presentation, shall be
considered as the date of the proxy.
Notary Not required
Submission of Proxy The stockholder may deliver in person or by mail his or her
proxy forms directly to the Corporation through the Office of
the Corporate Secretary not later than seven (7) business
days prior to the meeting.
Several Proxies Where a proxy is given to two or more persons in the
alternative in one instrument, the proxy designated as an
alternate can only act as proxy in the event of non-
attendance of the other designated person. If the
stockholder designates several proxies, the number of shares
of stock to be represented by each proxy will be specifically
indicated in the proxy form. Where the same stockholder
gives two or more proxy forms, the latest one given is to be
deemed to revoke all former proxies.
Validity of Proxy The duly accomplished proxy form should be submitted to the
Office of the Corporate Secretary not later than seven (7)
business days prior to the date of the annual stockholders’
meeting. Unless provided in the proxy, it will be valid only for
the meeting for which it is intended. No proxy will be valid
and effective for a period longer than five (5) years at any
75
one time. Stockholders may vote by proxy at other corporate
meetings even when the purpose thereof is not solely to elect
the directors of the Corporation.

Any reasonable doubt about the validity of the proxy shall be


resolved in favor of the stockholder.
Proxies executed abroad Proxies executed abroad should be authenticated by the
Philippine Embassy or Consular Office.
Invalidated Proxy Proxy forms received after the prescribed date of submission
shall be invalid. A proxy may be revoked at any time before
the right granted is exercised, unless it is coupled with
interest. The revocation may be done in writing, orally or by
conduct (e.g. appearance of the stockholder of record at the
meeting).
Validation of Proxy The validation of proxy shall be conducted by the Committee
of Inspectors of Proxies and Ballots at least five (5) business
days prior to the date of the stockholders’ meeting.
Violation of Proxy No person making a solicitation shall solicit any undated or
post-dated proxy or any proxy which provides that it shall be
deemed to be dated as of any date subsequent to the date on
which it is signed by the security holder. No security broker
shall give any proxy, consent or authorization, in respect of
any security carried for the account of a customer, to a
person other than the customer, without the express written
authorization of such customer.

(d) Sending of Notices

State the company’s policies and procedure on the sending of notices of Annual/Special Stockholders’
Meeting.

Policies Procedure
In accordance with the company’s By-laws and The Company abides by its policies in sending out
applicable rules, written notice of the time, date, of notices of Annual/Special Stockholders’
place, and purposes of the meeting shall be sent Meeting.
to all stockholders as of the record date for the
annual/special stockholders’ meeting.
The notice of the annual/special stockholders’
meeting shall be sent to the stockholders at least
15 business days before the meeting.
The notice of the meeting shall be deemed to have
been given at the time when delivered personally
or deposited in the post office, or sent
electronically or by e-mail.
The Corporation shall give the notice and provide
electronically only to stockholders who have
consented to receive notices by e-mail or
electronic transmission.

(e) Definitive Information Statements and Management Report

Number of Stockholders entitled to receive


Definitive Information Statements and 7,914
Management Report and Other Materials
Date of Actual Distribution of Definitive
Information Statement and Management Report
March 17, 2015
and Other Materials held by market
participants/certain beneficial owners
76
Date of Actual Distribution of Definitive
Information Statement and Management Report March 17, 2015
and Other Materials held by stockholders
State whether CD format or hard copies were
CD format, hard copies and electronic mail
distributed
Yes, stockholders who wished to receive paper
If yes, indicate whether requesting stockholders
copies of the Definitive Information Statement
were provided hard copies
were provided with paper copies.

(f) Does the Notice of Annual/Special Stockholders’ Meeting include the following:

Each resolution to be taken up deals with only one item. Yes

Profiles of directors (at least age, qualification, date of first appointment,


experience, and directorships in other listed companies) nominated for Yes
election/re-election.

The auditors to be appointed or re-appointed. Yes

An explanation of the dividend policy, if any dividend is to be declared. Yes

The amount payable for final dividends. Yes

Documents required for proxy vote. Yes

Should any of the foregoing information be not disclosed, please indicate the reason thereto.

2) Treatment of Minority Stockholders

(a) State the company’s policies with respect to the treatment of minority stockholders.

Policies Implementation
A Director may be removed with or without cause, The Company strictly adheres with its policies
but directors shall not be removed without cause with respect to the treatment of minority
if it will deny minority shareholders representation stockholders.
in the Board.
The minority shareholders shall have the right to
propose the holding of a meeting, and the right to
propose items in the agenda of the meeting,
provided the items are for legitimate business
purposes.
The minority shareholders shall have access to any
and all information relating to matters for which
the management is accountable for and to those
relating to matters for which the management
should include such matters in the agenda of the
meeting provided always that this right of access
is conditioned upon the requesting shareholder’s
having a legitimate purpose for such access.

(b) Do minority stockholders have a right to nominate candidates for board of directors?

Yes, the company’s Board Charter and the Charter of the Nomination Committee allows any stockholder,
including minority stockholders, to nominate candidates for board of directors.

K. INVESTORS RELATIONS PROGRAM

77
1) Discuss the company’s external and internal communications policies and how frequently they are reviewed.
Disclose who reviews and approves major company announcements. Identify the committee with this
responsibility, if it has been assigned to a committee.

Ayala’s external and internal communications programs are handled by both the Corporate Communications and
Investor Relations units. Major company announcements are reviewed and approved by the Chairman and Chief
Executive Officer, President and Chief Operating Officer, Chief Finance Officer and Group Head of Corporate
Strategy and Development.

The company’s communication policies are reviewed in conjunction with enterprise risk management reviews or as
needed or required.

2) Describe the company’s investor relations program including its communications strategy to promote effective
communication with its stockholders, other stakeholders and the public in general. Disclose the contact details
(e.g. telephone, fax and email) of the officer responsible for investor relations.

Details
(1) Objectives The company’s investor communications program is aimed at
promoting greater understanding among the investing public of
the company’s investment proposition, its performance targets
and strategies, and its long-term value creation objectives.

Through its Investor Relations Unit under Corporate Strategy


and Development, information requirements of the investing
public and minority shareholders are fully disclosed to the
Philippine Stock Exchange on time, as well as through quarterly
briefings, annual reports, stockholders’ meetings, one-on-one
meetings, conference calls, roadshows, investor conferences,
website, email alerts and conference calls.

The Investor Relations Unit also provides feedback to company


management of perspectives and views of the investing public
on the company and its stated goals/strategies.
(2) Principles Ayala’s investor relations program is guided by the principles of
full disclosure, transparency and fairness. The company also
implements uniform disclosure standards across all
stakeholders (whether minority, retail, institutional, local or
foreign shareholders). Ayala also practices proper internal
checks across all communications and ensures these do not
compromise competitive information.
(3) Modes of Communications Ayala employs the following modes of communications for its
stakeholders:
1. Structured and unstructured corporate disclosures
2. Company website
3. Analysts’ briefings
4. Press releases
5. Press briefings
6. One-on-one meetings between company officers and
analysts/institutional investors
7. Annual report
8. International and local investor conferences
9. International non-deal roadshows
10. Stockholders’ meeting
11. Conference calls
12. Email alerts
(4) Investors Relations Officer Ms. Ma. Margarita G. Villanueva
Head, Investor Relations
Tel: +632 908-3434
78
Email: villanueva.mg@ayala.com.ph
Fax: +632 848 5846

Ms. Celeste M. Jovenir


Investor Relations Manager
Tel:+632 908 3394
Email: jovenir.cm@ayala.com.ph
Fax: +632 848 5846

3) What are the company’s rules and procedures governing the acquisition of corporate control in the capital
markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets?

Company’s Rules and Procedures for Mergers and Acquisitions:

1. Starts with Strategy and Planning where a potential transaction is assessed in the context of strategic goals of
the Company, its subsidiaries and affiliates;
2. Once this is pre-cleared through the Investment Committee (IC), the transaction then goes to the second
stage of evaluation and screening for a more detailed due diligence procedure. In this stage, a project lead,
team members (from financial, technical, legal, commercial, environmental, etc.), steering committee
members (preferably composed of business unit, finance and legal representatives) and external advisors are
formed and engaged;
3. An inventory of risks with various risk levels / probability of occurrence and suggested risk mitigants are
reported to the Steering Committee for evaluation, recommendation and discussion of risk levels, tolerance
and mitigation strategies;
4. The key transaction risks and mitigation strategies identified along with the proposed offer, structure and
authorized signatories are then subject to IC approval;
5. When necessary, the proposal will also pass through the Finance Committee, Executive Committee and the
Board of Directors;
6. Once approved, the final bid or offer is prepared and the binding terms of the definitive agreements are
negotiated and discussed.
7. After signing, the transaction is then disclosed to the public.

Company’s Rules and Procedures for Divestments:

1. Starts with strategy and planning on the account of the portfolio review or business unit initiative in the
context of strategic goals of Company, its subsidiaries and affiliates;
2. Approval of the Investment Committee is needed in order to determine initial position of whether to hold or
sell;
3. Once pre-cleared, a project lead, team members (from financial, technical, legal, commercial, environmental,
etc.), steering committee members (preferably composed of business unit, finance and legal representatives)
and external advisors are formed and engaged;
4. Divestment plans (with identification of potential buyers and target selling price) are prepared;
5. Investment teaser is provided to the interested buyers and they are asked to sign an Non-Disclosure
Agreement (NDA);
6. After signing the NDA/exclusivity agreement, buyers can then perform its own due diligence;
7. Offers are evaluated by the team and steering committee and presented to the IC (then Finance
Committee/Executive Committee/Board of Directors, if necessary) for approval;
8. Once approved, the final bid or offer is prepared and the binding terms of the definitive agreements are
negotiated and discussed;
9. After signing, the transaction is then disclosed to the public.

Name of the independent party the board of directors of the company appointed to evaluate the fairness of the
transaction price.

The company engaged various accredited independent parties to issue fairness opinion reports for the Company’s
mergers, acquisitions of assets and divestment transactions.

79
L. CORPORATE SOCIAL RESPONSIBILITY INITIATIVES

Discuss any initiative undertaken or proposed to be undertaken by the company.

Initiative Beneficiary
EDUCATION The bright children of economically disadvantaged
families in Manila and Batangas.
Center of Excellence in Public Elementary Education in
two public elementary schools (Tondo, Manila, and In 2013, both CENTEX schools had a total enrollment
Bauan, Batangas), implemented in partnership with of 997 students. Thirty-nine from the first batch of 75
CENTEX students completed their college education,
the Department of Education.
with more graduating soon. CENTEX also organized
the JPMorgan Chase – CENTEX Principals and
Teachers Training Institute for 334 Principals and
Teachers.
EDUCATION Public elementary school students (grade 5 and 6),
teachers, and principals.
Text2Teach, a partnership program with the
Department of Education, Nokia, Pearson, Globe, and In 2013, Text2Teach connected 340 new public
local government units. elementary schools to Text2Teach, reaching over
30,000 students and training over 2,000 teachers.
Text2Teach was also included in the list of 100 most
inspiring social tech innovations as compiled by UK
funder for tech projects, Nominet Trust. Since it
started, Text2Teach has reached 897 schools
nationwide.

YOUTH LEADERSHIP Top student leaders from universities and colleges


nationwide.
Ayala Young Leaders Congress (AYLC), the flagship
youth leadership program of the Ayala group of In 2013, 81 student leaders from around the country
companies. participated in the 15th year of the AYLC. The AYLC
also celebrated its 15th year anniversary, staging its
third AYLC Grand Reunion with more than 500 alumni
from across the 15 batches present. In 2013, AYLC
alumni, as a way of paying forward what they have
learned from their AYLC experience, conducted 22
community-based Leadership Camps, and trained
2,641 student leaders all over the country.

YOUTH LEADERSHIP Community-based young leaders committed to


bringing positive change in their respective
Leadership Communities, empowers youth communities.
organizations to help address pressing needs and
issues in their local community through projects they In 2013, LeadCom was brought to Southville 7, the
themselves propose, plan, and implement. resettlement in Calauan, Laguna in partnership with
the municipal government of Calauan and the Don
Bosco Brothers. LeadCom trained 25 young people
from Calauan, Laguna. They are now implementing 4
community projects in their area.

YOUTH LEADERSHIP 150 youth leaders from all over the ASEAN.

LEAD ASEAN Youth Summit, a youth summit In 2013, the LEAD ASEAN Youth Summit brought
organized in partnership with the United States together 150 youth leaders from all over the ASEAN
80
Embassy in Manila. to network and address pressing issues in the region.
The summit resulted into 4 cross-country
collaborative projects.

SUSTAINABLE LIVELIHOOD Members of the indigenous Iraya-Mangyan


community in Talipanan, Oriental Mindoro.
Iraya-Mangyan Project
AFI’s work among the Iraya-Mangyans included
educational assistance for 56 Iraya-Mangyan
students (46 high school and 10 college) and a
computer center was set up with 10 computers for
educational and additional livelihood skills training.
AFI is helping the Iraya-Mangyan market and sell
their nito baskets, the community joined 3 product
fairs to showcase their products.

SUSTAINABLE LIVELIHOOD Residents of Southville 7, Calauan, Laguna, home to


4,500 families.
Calauan, Laguna Project focuses on Southville 7 in
Calauan, Laguna, a 107 hectare relocation site for In 2013, AFI implemented several livelihood
families displaced by Typhoon Ondoy and the Pasig enterprises and livelihood skills training opportunities
River rehabilitation. Owned by the National Housing for residents of Southville 7 which included a Job Fair
Authority, the property is home to 4,500 families. AFI that attracted over 200 job applicants with 23
is implementing sustainable livelihood projects for the residents hired on the spot and a Landscape Training
families in the area in partnership with the Municipal for 25 residents. AFI also piloted mushroom-growing
Government of Calauan, Salesians of Don Bosco, enterprise for 10 families and an ube-growing
Franciscan Sisters of Sacred Heart, e-Skills Network, enterprise for 12 families.
Consuelo Foundation, Habitat for Humanity, and ABS-
CBN Foundation.

81
SUSTAINABLE LIVELIHOOD Residents of barangay Sibaltan and Villa Libertad in El
Nido, Palawan
El Nido Project works closely with the local
communities in their efforts towards gaining In 2013, AFI provided training for the weavers of
employment or diversified sources of income and Sibaltan, El Nido, on production scale and studied the
developing and strengthening local industries such as production time of the weaving process. Fifty women
weaving, cashew production, local tourism and weavers have been reached through the Sibaltan-Buri
others. Pandan Weavers association. Master women
weavers have also been identified to help speed up
the weaving process. AFI has also taken steps in
helping scale-up cashew production and local “way of
life” tourism in partnership with the Sibaltan Heritage
Council.

ARTS AND CULTURE In 2013, the Ayala Museum had a total of 111,501
visitors. It staged 37 workshops and other
Ayala Museum educational programs with 2,743 participants
attending its educational programs. The Ayala
Museum joined the Musee du quai Branly’s
Philippines: Archipel des Echanges exhibit in Paris.
The Ayala Museum also launched the Botong
Francisco: A Nation Imagined traveling exhibit and its
accompanying short film directed by Peque Gallaga
was screened at the Cinemalaya Independent Film
Festival. It presented several major exhibitions, such
as The Real HR Ocampo; I Love Kusama; Media Art
Sensorium; and Constancio Bernardo, 1913-2013.

ARTS AND CULTURE In 2013, FHL opened its new space on the sixth floor
of the Ayala Museum, presenting itself as a
Filipinas Heritage Library (FHL) “contemporary space for the contemporary
researcher,” with a strong commitment to
digitization. It served 1,543 researchers and reached
323 people through its educational programs.
Through its five FHL-managed websites, it drew a
total of 350,341 visitors online. Through its
digitization project, it digitized 450 rare books. The
FHL also acquired 573 books from the family of
former Spanish Ambassador to the Philippines Pedro
Ortiz Armengol, who was a distinguished writer,
historian, traveler and Philippine scholar.

M. BOARD, DIRECTOR, COMMITTEE AND CEO APPRAISAL

Disclose the process followed and criteria used in assessing the annual performance of the board and its
committees, individual director, and the CEO/President.

Process Criteria
Board of Directors The directors are requested  Knowledge – Whether the
annually to answer a Board possesses adequate
performance assessment survey information on industry trends
form where they will evaluate
82
their performance as a director and overall business
and the performance of the environment;
Board. The directors may  Strategy and Implementation
answer the survey – Whether the Board has
anonymously. The Corporate adopted appropriate
Secretary summarizes the result corporate strategy and
of the survey. An outside
whether the same has been
consultant may be employed to
effectively implemented;
conduct simultaneous
evaluation of the Board’s  Risk Management – Whether
performance. the Board has a keen
understanding of the types of
risks to which the Corporation
may be exposed and would be
vulnerable, and whether it has
adopted appropriate systems
and processes to manage
these risks;
 Corporate Ethics – Whether
the Board has taken the lead
role to ensure faithful
compliance with all the
applicable laws and rules, and
the Corporation’s By-laws,
Manual of Corporate
Governance, Code of Conduct
and Ethics, and other relevant
company policies; and
 Internal Control/Oversight
Function – Whether the Board
has taken reasonable steps to
ensure that the Corporation is
properly managed, including
monitoring of the operational
and financial results.
Board Committees Audit Committee fills out a self-  Committee Organization –
assessment questionnaire that Whether the Committee is
shall benchmark its practices composed of appropriate
against the expectations set number of Directors with the
forth in the Audit Committee right balance of skills,
Charter. experiences and backgrounds
to ensure the proper
performance of the roles and
responsibilities of the
Committee;
 Committee Meetings –
Whether the Committee had
adequate number of meetings
to sufficiently focus on
significant matters of concern;
and
 Committee Processes and
Procedures – Whether the
Committee adopted processes
and procedures to ensure
timely resolution of matters
83
before it.

Individual Directors The directors are requested  Knowledge – Whether the


annually to answer a Director has an in-depth
performance assessment survey knowledge of the
form where they will evaluate Corporation’s business and
their performance as a director strategic direction;
and the performance of the
 Participation – Whether the
Board. The directors may
Director attended all, some or
answer the survey
only a few of the meetings of
anonymously. The Corporate
Secretary summarizes the result the Board and of the
of the survey. committees in which he/she is
a member, and whether
he/she made valuable
contributions in the discussion
of matters before the Board
and/or the committees; and
 Fair Dealing – Whether the
Director conducted fair
business transactions with the
Corporation and ensured that
his/her personal interest did
not conflict with the interest
of the Corporation.

CEO/President The performance of the Senior The company’s Performance


Management Group, including Evaluation System includes
the Chairman and the President, metrics, deliverables,
are regularly evaluated. The accomplishments and
Company uses an Evaluation development plan.
System which includes self-
assessment and discussions.

N. INTERNAL BREACHES AND SANCTIONS

Discuss the internal policies on sanctions imposed for any violation or breach of the corporate governance manual
involving directors, officers, management and employees

After due notice and hearing, a director, officer or employee who violates the Manual of Corporate Governance of
the company will be subjected to the following penalties:

Violations Sanctions
First Violation Reprimand.
Second Violation Suspension from office. The duration shall be at the reasonable
discretion of the Board, depending on the gravity of the violation.
Third Violation Removal from office.

84
V. 2014 Original BIR/Bank Stamp “Received”

174
VI. 2014 Ayala Corporation and Subsidiaries Special Form for Financial Statements (SFFS)

175

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