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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Grand Plaza Hotel Corporation

Grand Plaza Hotel Corporation