The Company has exposure to the following risks from its use of financial instruments:
- Credit Risk
- Liquidity Risk
- Market Risk
This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risks, and the Company’s management of capital.
The main purpose of the Company’s dealings in financial instruments is to fund its operations and capital expenditures.
The BOD has overall responsibility for the establishment and oversight of the Company’s risk management framework. The BOD, through the Executive Committee, is responsible for developing and monitoring the Company’s risk management policies. The committee identifies all issues affecting the operations of the Company and reports regularly to the BOD on its activities.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. All risks faced by the Company are incorporated in the annual operating budget. Mitigating strategies and procedures are also devised to address the risks that inevitably occur so as not to affect the Company’s operations and detriment forecasted results. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company’s Audit Committee assists the BOD in fulfilling its oversight responsibility of the Company’s corporate governance process relating to the: a) quality and integrity of the Company’s financial statements and financial reporting process and the Company’s systems of internal accounting and financial controls; b) performance of the internal auditors; c) annual independent audit of the Company’s financial statements, the engagement of the independent auditors and the evaluation of the independent auditors’ qualifications, independence and performance; d) compliance by the Company with legal and regulatory requirements, including the Company’s disclosure control and procedures; e) evaluation of management’s process to assess and manage the Company’s enterprise risk issues; and f) fulfillment of the other responsibilities set out by the BOD. The Audit Committee also prepares the reports required to be included in the Company’s annual report.
Credit Risk
Credit risk represents the risk of loss the Company would incur if credit customers and counterparties fail to perform their contractual obligations. The Company’s credit risk arises principally from the Company’s trade receivables.
Exposure to credit risk is monitored on an ongoing basis. Credit checks are being performed on all clients requesting credit over certain amounts. Credit is not extended beyond authorized limits, established where appropriate through consultation with a professional credit vetting organization. Credit granted is subject to regular review, to ensure it remains consistent with the clients’ current credit worthiness and appropriate to the anticipated volume of business.
The investment of the Company’s cash resources is managed so as to minimize risk while seeking to enhance yield. The Company’s holding of cash and money market placements expose the Company to credit risk of the counterparty if the counterparty is unwilling or unable to fulfill its obligations and the Company consequently suffers financial loss. Credit risk management involves entering into financial transactions only with counterparties with acceptable credit rating. The treasury policy sets aggregate credit limits of any one counterparty and management annually reviews the exposure limits and credit ratings of the counterparties.
Receivable balance is being monitored on a regular basis to ensure timely execution of necessary intervention efforts.
The carrying amount of financial assets as of December 31, 2014 and 2013 represents the maximum credit exposure. The maximum exposure to credit risk at the reporting dates is as follows:
| Note | 2014 | 2013 | |
| Cash and cash equivalents (excluding cash on hand) | 4 | P237,078,063 | P205,293,155 |
| Receivables – net | 5, 14 | 304,110,706 | 322,009,422 |
| Loan receivable | 9, 14 | 15,500,000 | 15,500,000 |
| Due from related parties | 14 | 350 | 1,885,100 |
| Lease deposit | 11 | 78,000,000 | 78,000,000 |
| P634,689,119 | P622,687,677 |
Details of trade receivables from charge customers as at December 31, 2014 and 2013 by type of customer are as follows:
| Note | 2014 | 2013 | |
| PAGCOR | P8,936,199 | P8,936,199 | |
| Credit cards | 4,158,078 | 5,394,442 | |
| Airlines | 7,310,132 | 4,960,973 | |
| Corporations | 5,216,038 | 4,313,158 | |
| Travel agencies | 3,389,789 | 4,223,105 | |
| Others | 7,438,374 | 3,125,398 | |
| 5 | 36,448,610 | 30,953,275 | |
| Less allowance for impairment losses on trade receivables | 5 | 13,312,179 | 155,621 |
| P23,136,431 | P30,797,654 |
The Company’s most significant customer, PAGCOR, accounts for 24.52% and 28.87% of the trade receivables from charge customers as at December 31, 2014 and 2013, respectively. Revenues from PAGCOR approximately amounted to P98,193,426 and P202,933,825 in 2013 and 2012, respectively and represent 17% and 30% of the Company’s total revenues, respectively. As mentioned in previous note, PAGCOR has decided not to renew the contract of lease which ended on July 10, 2013.
The aging of trade receivables from charge customers as at December 31, 2014 and 2013 is as follows:
| 2014 | 2013 | |||
| Gross
Amount |
Impairment | Gross Amount | Impairment | |
| Current | P17,083,679 | P – | P14,792,658 | P – |
| Over 30 days | 7,006,072 | – | 5,982,920 | – |
| Over 60 days | 2,908,643 | – | 795,860 | – |
| Over 90 days | 9,450,216 | 13,312,179 | 9,381,837 | 155,621 |
| P36,448,610 | P13,312,179 | P30,953,275 | P155,621 | |
Receivables from PAGCOR amounting to P8,936,199 included in over 90 days are still collectible based on management’s assessment of collection history, thus no impairment was provided.
The movements in the allowance for impairment in respect of trade receivables during the year are as follows:
| Amount | |
| Balance at January 1, 2013 | P128,361 |
| Provision in 2013 | 27,260 |
| Balance at December 31, 2013 | 155,621 |
| Provision in 2014 | 13,156,558 |
| Balance at December 31, 2014 | P13,312,179 |
The allowance for impairment losses on trade receivables as of December 31, 2014 and 2013 of P13,312,179 and P155,621, respectively, relates to outstanding accounts of customers that are more than 90 days past due.
The table below shows the credit quality of the Company’s financial assets based on their historical experience with the corresponding debtors.
| As at December 31, 2014 | ||||
| Grade A | Grade B | Grade C | Total | |
| Cash and cash equivalents | 237,078,063 | P – | P – | 237,078,063 |
| Receivables – net | 36,388,353 | 35,140,204 | 232,582,149 | 304,110,706 |
| Loan receivable | – | 15,500,000 | – | 15,500,000 |
| Due from related parties | 350 | – | – | 350 |
| Lease deposit | 78,000,000 | – | – | 78,000,000 |
| P351,466,766 | P50,640,204 | P232,582,149 | P634,689,119 | |
| As at December 31, 2013 | ||||
| Grade A | Grade B | Grade C | Total | |
| Cash and cash equivalents | P205,890,655 | P – | P – | P205,890,655 |
| Receivables – net | 32,239,657 | 54,675,306 | 235,094,459 | 322,009,422 |
| Loan receivable | – | 15,500,000 | – | 15,500,000 |
| Due from related parties | – | 1,885,100 | – | 1,885,100 |
| Lease deposit | 78,000,000 | – | – | 78,000,000 |
| P316,130,312 | P72,060,406 | P235,094,459 | P623,285,177 | |
Grade A receivables pertain to those receivables from customers that always pay on time or even before the maturity date. Grade B includes receivables that are collected on their due dates provided that they were reminded or followed up by the Company. Those receivables which are collected consistently beyond their due dates and require persistent effort from the Company are included under Grade C.
Cash in banks is considered good quality (Grade A) as this pertains to deposits in reputable banks.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk by forecasting projected cash flows and maintaining a balance between continuity of funding and flexibility in operations. Treasury controls and procedures are in place to ensure that sufficient cash is maintained to cover daily operational and working capital requirements. Management closely monitors the Company’s future and contingent obligations and sets up required cash reserves as necessary in accordance with internal requirements.
The Company’s total current liabilities as at December 31, 2014 and 2013 amounted to P316,573,695 and P306,869,660, respectively, which are less than its total current assets of P582,912,986 and P577,350,558, respectively. Thus, the Company has sufficient funds to pay for its current liabilities and has minimal liquidity risk.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and other market prices will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
The Company is subject to various market risks, including risks from changes in room rates, interest rates and currency exchange rates.
Room Rates
The risk from room rate changes relates to the Company’s ability to recover higher operating costs through price increases to customers, which may be limited due to the competitive pricing environment that exists in the Philippine hotel industry and the willingness of customers to avail of hotel rooms at higher prices.
The Company minimizes its exposure to risks in changes in room rates by signing contracts with short period of expiry so this gives the Company the flexibility to adjust its room rates in accordance to market conditions. Also, there are minimal changes in room rates in the hotel industry.
Interest Rate Risk
The Company has no interest-bearing debt obligations to third parties and its receivables are subject to fixed interest rates. As such, the Company has minimal interest rate risk.
Foreign Currency Risk
Financial assets and financing facilities extended to the Company were mainly denominated in Philippine peso and have minimal transactions in foreign currency. Net foreign exchange gain (loss) from the revaluation of its short-term investments amounted to P1,380,287 and P3,497,543 as at December 31, 2014 and 2013, respectively. As such, the Company’s foreign currency risk is minimal.
Fair Values
The fair values together with the carrying amounts of the financial assets and liabilities shown in the statements of financial position are as follows:
| 2014 | 2013 | |||
| Carrying
Amount |
Fair Value | Carrying Amount | Fair Value | |
| Cash and cash equivalents | P237,078,063 | P237,078,063 | P205,890,655 | P205,890,655 |
| Receivables – net | 304,110,706 | 317,035,206 | 322,009,422 | 322,009,422 |
| Loan receivable | 15,500,000 | 15,500,000 | 15,500,000 | 15,500,000 |
| Due from related parties | 350 | 350 | 1,885,100 | 1,885,100 |
| Lease deposit | 84,095,791 | 84,095,791 | 78,000,000 | 78,000,000 |
| Accounts payable and accrued expenses | 77,919,262 | 77,919,262 | 77,567,689 | 77,567,689 |
| Due to related parties | 6,090,243 | 6,090,243 | 2,115,421 | 2,115,421 |
| Other current liabilities* | 20,752,217 | 33,676,717 | 18,669,841 | 18,669,841 |
| *excluding payables to government | ||||
Estimation of Fair Values
The following summarizes the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table:
Cash and Cash Equivalents
The fair value of cash approximates its carrying amount due to the short-term nature of these assets.
Receivables/Due from Related Parties/Loan Receivable/Accounts Payable and Accrued Expenses/Due to Related Parties/Other Current Liabilities Except for Output VAT Liability and Withholding Taxes Payables, and Deferred Rental
Current receivables are reported at their net realizable values, at total amounts less allowances for estimated uncollectible accounts. Current liabilities are stated at amounts reasonably expected to be paid within the next twelve months or within the Company’s operating cycle. Due to/from related parties and loan receivable are payable on demand.
Short-term Investments/Other Noncurrent Assets
Short-term investments and other noncurrent assets are interest bearing. The carrying value of short-term investments approximates its fair value, because the effective interest rate used for discounting the short-term investment and other noncurrent assets approximates the current market rate of interest for similar transactions.
Capital Management
The Company’s objectives when managing capital are to increase the value of shareholders’ investment and maintain high growth by applying free cash flow to selective investments. The Company sets strategies with the objective of establishing a versatile and resourceful financial management and capital structure.
The Chief Financial Officer has overall responsibility for monitoring of capital in proportion to risk. Profiles for capital ratios are set in the light of changes in the Company’s external environment and the risks underlying the Company’s business operations and industry.
The Company is not subject to externally-imposed capital requirements.
The Company monitors capital on the basis of the debt-to-equity ratio which is calculated as total debt divided by total equity. Total debt is equivalent to accounts payable and accrued expenses, income tax payable, due to related parties, other current liabilities, refundable deposits and accrued retirement benefits liability. Total equity comprises mainly of the capital stock, additional paid-in capital and retained earnings.
There were no changes in the Company’s approach to capital management during the year.
As at December 31, 2014 and 2013, the Company is compliant with the minimum public float requirement by the Philippine Stock Exchange (PSE).
The Company has 115,000,000 shares registered with the SEC as at December 31, 2014 and 2013. As at December 31, 2014 and 2013, the Company issue/offer price is P25 and P45 based on the Philippine Stock Exchange (PSE) website. The total number of shareholders is 506 as at December 31, 2014 and 2013.
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