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Globe 2012 annual reportfinancial reportequivalent to the net investment (asset cost) in the lease. All income resulting from the receivable isincluded in the “Interest income” account in the consolidated statements of comprehensive income.Leases where the Globe Group does not transfer substantially all the risk and benefits of ownership ofthe assets are classified as operating leases. Initial direct costs incurred in negotiating operatingleases are added to the carrying amount of the leased asset and recognized over the lease term on thesame basis as the rental income. Contingent rents are recognized as revenue in the period in whichthey are earned.2.7.24 General, Selling and Administrative ExpensesGeneral, selling and administrative expenses, except for rent, are charged against current operations asincurred (see Note 2.7.23.1).2.7.25 Foreign Currency TransactionsThe functional and presentation currency of the Globe Group is the Philippine Peso, except for EHL andGTIC HK whose functional currency is the Hong Kong Dollar (HKD) and GTIC US whose functionalcurrency is the USD. Transactions in foreign currencies are initially recorded at the functional currency rateprevailing at the date of the transaction. Outstanding monetary assets and liabilities denominated in foreigncurrencies are retranslated at the functional currency rate of exchange ruling at the end of reporting period.Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated usingthe exchange rate as at the date of the initial transaction and are not subsequently restated. Nonmonetaryitems measured at fair value in a foreign currency are translated using the exchange rate at the date whenthe fair value was determined. All foreign exchange differences are taken to profit or loss, except where itrelates to equity securities where gains or losses are recognized directly in other OCI.As at the reporting date, the assets and liabilities of EHL, GTIC US and HK are translated into thepresentation currency of the Globe Group at the rate of exchange prevailing at the end of reporting periodand its profit or loss is translated at the monthly weighted average exchange rates during the year. Theexchange differences arising on the translation are taken directly to a separate component of equity under“Other reserves” account. Upon disposal of EHL, GTIC US and HK, the cumulative translation adjustmentsshall be recognized in profit or loss.2.7.26 EPSBasic EPS is computed by dividing net income attributable to common stock by the weighted averagenumber of common shares outstanding, after giving retroactive effect for any stock dividends, stock splits orreverse stock splits during the period.Diluted EPS is computed by dividing net income by the weighted average number of common sharesoutstanding during the period, after giving retroactive effect for any stock dividends, stock splits or reversestock splits during the period, and adjusted for the effect of dilutive options and dilutive convertible preferredshares. Outstanding stock options will have a dilutive effect under the treasury stock method only when theaverage market price of the underlying common share during the period exceeds the exercise price of theoption. If the required dividends to be declared on convertible preferred shares divided by the number ofequivalent common shares, assuming such shares are converted, would decrease the basic EPS, thensuch convertible preferred shares would be deemed dilutive. Where the effect of the assumed conversionof the preferred shares and the exercise of all outstanding options have anti-dilutive effect, basic and dilutedEPS are stated at the same amount.2.7.27 Operating SegmentThe Globe Group’s major operating business units are the basis upon which the Globe Group reports itsprimary segment information. The Globe Group’s business segments consist of: (1) mobile communicationservices; (2) wireline communication services; and (3) others. The Globe Group generally accounts forintersegment revenues and expenses at agreed transfer prices.2.7.28 ContingenciesContingent liabilities are not recognized in the consolidated financial statements. These are disclosedunless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assetsare not recognized in the consolidated financial statements but are disclosed when an inflow of economicbenefits is probable.2.7.29 Events after the Reporting PeriodAny post period-end event up to the date of approval of the BOD of the consolidated financial statementsthat 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 notan adjusting event is disclosed in the consolidated financial statements when material.3. Management’s Significant Accounting Judgments and Use of EstimatesThe preparation of the accompanying consolidated financial statements in conformity with PFRS requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. The estimates and assumptions used in the accompanying consolidatedfinancial statements are based upon management’s evaluation of relevant facts and circumstances as of thedate of the consolidated financial statements. Actual results could differ from such estimates.Judgments and estimates 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 Judgments3.1.1 Leases3.1.1.1 Operating lease commitments as lessorThe Group has entered into a lease agreements as a lessor. Critical judgment was exercised bymanagement to distinguish the lease agreement as either an operating or finance lease by looking atthe transfer or retention of significant risk and rewards of ownership of the properties covered by theagreements. The Group has determined that it retains all the significant risks and rewards ofownership of the properties and so accounts for the agreement as an operating lease(see Note 25.1.1).3.1.1.2 Operating lease commitments as lesseeThe Group has entered into various lease agreements as a lessee where it has determined that thelessors 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 leaseThe Globe Group has entered into a finance lease agreement related to hardware infrastructure andinformation equipment. They have determined, based on the evaluation of the terms and conditions ofthe arrangement, that they bear substantially all the risks and rewards incidental to ownership of thesaid machineries and equipment and so account for the contracts as finance leases (see note 25.1.2).3.1.2 Fair value of financial instrumentsWhen the fair value of financial assets and financial liabilities recorded in the consolidated statement offinancial position cannot be derived from active markets, their fair value is determined using valuationtechniques including the discounted cash flow model. The inputs to these models are taken fromobservable markets where possible, but where this is not feasible, a degree of judgment is required inestablishing fair values. The judgments include considerations of inputs such as liquidity risk, credit riskand volatility. Changes in assumptions about these factors could affect the reported fair value of financialinstruments.3.1.3 Financial assets not quoted in an active marketThe Globe Group classifies financial assets by evaluating, among others, whether the asset is quoted or notin an active market. Included in the evaluation on whether a financial asset is quoted in an active market isthe determination on whether quoted prices are readily and regularly available, and whether those pricesrepresent actual and regularly occurring market transactions on an arm’s-length basis.3.1.4 Allocation of goodwill to cash-generating unitsThe Globe Group allocated the carrying amount of goodwill to the mobile content and applicationdevelopment services business CGU, for the Group believes that this CGU represents the lowest levelwithin the Globe Group at which the goodwill is monitored for internal management reporting purposes; andnot larger than an operating segment determined in accordance with PFRS 8.3.1.5 Determination of whether the Globe Group is acting as a principal or an agentThe Globe Group assesses its revenue arrangements against the following criteria to determine whether itis acting as a principal or an agent:whether the Globe Group has primary responsibility for providing the goods and services;162 163