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Annual

Report

TABLE

OF CONTENTS

Statement of Management’s Responsibility for Financial Statements

Independent Auditor’s Report

Consolidated Statements of Changes in Equity

Consolidated Statements of Financial Position

Consolidated Statements of Cash Flows

Consolidated Statements of Comprehensive Income

Notes to Consolidated Financial Statements

Store Directory

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STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

The management of Philippine Seven Corporation is responsible for the preparation and fair

presentation of the consolidated financial statements including the schedules attached therein, for

the years ended December 31, 2019 and 2018, in accordance with the prescribed financial

reporting framework indicated therein, and for such internal control as management determines is

necessary to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s

ability to continue as a going concern, disclosing, as applicable matters related to going concern

and using the going concern basis of accounting unless management either intends to liquidate

the Company or to cease operations, or has no realistic alternative but to do so.

The Board of Directors is responsible for overseeing the Company’s financial reporting process.

The Board of Directors or the Executive Committee or the Audit & Risk Committee, as authorized

by the Board, reviews and approves the financial statements including the schedules attached

therein, and submits the same to the stockholders.

SyCip Gorres Velayo & Co., the independent auditor appointed by the stockholders for the period

December 31, 2019 and 2018, respectively, has audited the consolidated financial statements of

the company in accordance with Philippine Standards on Auditing, and in its reports to the

stockholders, has expressed its opinion on the fairness of presentation upon completion of such

audit..

JOSE T. PARDO

Chairman of the Board

JOSE VICTOR P. PATERNO

Chief Executive Officer

JUN-YA LIU

Treasurer & Chief Financial Officer

TIN: 727-653-

LAWRENCE M. DE LEON

Head

Finance & Accounting Services Division

Signed this 21st day of February, 2020.

Annual Report 2019

INDEPENDENT AUDITOR’S REPORT

The Board of Directors and Stockholders Philippine Seven Corporation

Opinion

We have audited the consolidated financial statements of Philippine Seven Corporation and its subsidiaries (theGroup), which comprise the consolidated statements of financial position as at December31,2019 and 2018, 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 December31,2019, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated statements of financial position of the Group as at December31,2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December31,2019 in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those

standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of

our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For the matter in the next page, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the^ Auditor’s Responsibilities for the Audit of the Consolidated Financial

Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of

procedures designed to respond to our assessment of the risks of material mis statements of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Adoption of PFRS 16, Leases

Effective January 1, 2019, the Group adopted the new lease standard, PFRS 16, Leases, under the modified retrospective approach which resulted to significant changes in the Group’s lease recognition policies, processes, procedures and controls. The Group’s adoption of PFRS 16 is significant to our audit because the Group’s nature of activities entails high volume of lease agreements covering its convenience stores, warehouses, kitchens and office spaces, and the resulting recorded amounts are material to the consolidated financial statements. In addition, the implementation of PFRS 16 involves application of significant management judgement and estimation in the following areas: (1) whether the contract contains a lease; (2)determining the lease term, including evaluating whether the Group is reasonably certain to exercise options to extend or terminate the lease or to purchase the underlying asset; (3) determining the incremental borrowing rate (IBR); (4) whether sublease is accounted for as derecognition of right-of-use asset (ROU) assets and lease liability; and (5) selection and application of accounting policy elections and practical expedients available under modified retrospective approach.

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph

BOA/PRC Reg. No. 0001, October 4, 201 8 , valid until August 24, 2021 SEC Accreditation No. 0012-FR- 5 (Group A), November 6 , 201 8 , valid until November 5, 2021

Bearing Fruit: Reaping Innovation’s Rewards

The Group recognized ROU asset and lease liability amounting to P=8,301,945,803 and P=9,194,699,647 respectively, as of January1, 2019. In addition, the Group also recognized depreciation expense and interest expense of P=1,523,839,225 and P=817,382,956, respectively, for the year ended December 31, 2019.

The disclosures related to the adoption of PFRS 16 applied by the Group, are included in Note 26 to the consolidated financial statements.

Audit Response

We obtained an understanding of the Group’s process in implementing the new standard on leases, including the determination of the population of the lease contracts covered by PFRS 16, the application of the short-term and low-value assets exemption, the selection of the transition approach and any election of available practical expedients. We selected sample lease agreements (i.e., lease agreements existing prior to the adoption of PFRS 16 and new lease agreements in 2019) from the Master Lease Schedule and identified their contractual terms and conditions. We traced the underlying lease data used (e.g., lease payments, lease term) of these selected contracts to the lease calculation prepared by management, which covers the calculation of financial impact of PFRS 16, including the transition adjustments.

For selected lease contracts with renewal and/or termination option, we reviewed the management’s assessment of whether it is reasonably certain that the Group will exercise the option to renew or not exercise the option to terminate. We tested the parameters used in the determination of the IBR by reference to market data. We test computed the lease calculation prepared by management, including the transition adjustments.

We reviewed the disclosures related to leases, including the transition adjustments, based on the requirements of PFRS 16 and

PAS 8,Accounting Policies, Changes in Accounting Estimates and Errors.

Existence and Completeness of Inventories

The Group’s inventories comprise 14% of its total assets as at December31, 2019. It has 14 warehouses and 1,345 company- owned stores as at December 31, 2019 throughout the country. We focused on this area since inventories are material to the consolidated financial statements and are located in various sites across the country.

The Group’s disclosures about inventories are included in Note 6 to the consolidated financial statements.

Audit Response

We updated our understanding of the inventory process and performed test of controls for selected stores and warehouses. We observed the conduct of inventory count at selected stores and warehouses and traced test counts to the inventory compilation to determine if the inventory compilation reflects actual inventory count results. We performed testing on a sample basis of the rollforward and rollback procedures on inventory quantities from the date of inventory count to reporting date. We reviewed the reconciliation of the valued rollforward and rollback inventories with the general ledger account balances and tested other reconciling items.

Other Information

Management is responsible for the other information. The other information comprises the information included in the SECForm20-IS (Definitive Information Statement), SECForm17-A and Annual Report for the year ended December31,2019 but does not include the consolidated financial statements and our auditor’s report thereon. The SECForm20-IS (Definitive Information Statement), SECForm17-A and Annual Report for the year ended December31,2019 are expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits, or otherwise appears to be materially misstated.

Annual Report 2019

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with PFRSs, 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.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

Bearing Fruit: Reaping Innovation’s Rewards

Annual Report 2019

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31 2019 2018

ASSETS

Current Assets Cash and cash equivalents (Notes 4, 29 and 30) =4,624,655,095P P=3,181,666, Short-term investment (Notes 4, 29 and 30) 11,389,621 11,286, Receivables (Notes 5, 26, 29 and 30) 3,430,979,113 1,637,846, Inventories (Notes 6 and 18) 4,164,073,340 3,543,379, Prepayments and other current assets (Notes 7, 29 and 30) 472,351,337 614,451, Total Current Assets 12,703,448,506 8,988,629,

Noncurrent Assets Property and equipment (Note 8) 7,023,486,002 6,750,513, Right-of-use asset (Note 26) 7,549,790,375 – Goodwill and other noncurrent assets (Notes 10 and 30) 670,343,702 467,175, Receivables - net of current portion (Notes 5, 29 and 30) 207,766,169 4,088, Deposits (Notes 9, 29 and 30) 1,002,878,994 937,695, Deferred tax assets - net (Notes 2 and 27) 515,950,406 254,543, Total Noncurrent Assets 16,970,215,648 8,414,017,

TOTAL ASSETS =29,673,664,154P P=17,402,647,

LIABILITIES AND EQUITY

Current Liabilities Bank loans (Notes 11, 29 and 30) P=65,000,000 P=410,000, Current portion of long-term debt (Notes 11, 29 and 30) 160,440,058 371,666, Accounts payable and accrued expenses (Notes 12, 29 and 30) 6,785,772,198 5,507,381, Lease liabilities - current (Note 26) 2,006,019,727 – Current portion of contract liabilities (Note 13) 418,715,881 303,602, Income tax payable 218,851,309 327,448, Other current liabilities (Notes 14, 25, 29 and 30) 4,051,960,551 2,332,573, Total Current Liabilities 13,706,759,724 9,252,671,

Noncurrent Liabilities Long-term debt - net of current portion (Notes 11, 29 and 30) 333,415,205 468,750, Lease liabilities - net of current portion (Note 26) 6,753,525,570 – Deposits payable (Note 15) 313,328,714 289,056, Contract liabilities - net of current portion (Note 13) 191,702,318 193,545, Net retirement obligations (Note 24) 331,343,566 117,758, Cumulative redeemable preferred shares (Notes 16, 29 and 30) 6,000,000 6,000, Total Noncurrent Liabilities 7,929,315,373 1,075,110, Total Liabilities 21,636,075,097 10,327,782,

Equity Common stock (Note 17) 757,104,533 757,104, Additional paid-in capital 293,525,037 293,525, Retained earnings (Note 17) Appropriated 6,100,000,000 5,100,000, Unappropriated 978,334,123 911,969, Other comprehensive income (loss) Remeasurement gain (loss) on net retirement obligations - net of tax (Note 24) (88,451,390) 15,189, 8,040,512,303 7,077,788, Cost of own shares held in treasury (Notes 17 and 31) (2,923,246) (2,923,246) Total Equity 8,037,589,057 7,074,865,

TOTAL LIABILITIES AND EQUITY =29,673,664,154P =17,402,647,674P

See accompanying Notes to Consolidated Financial Statements.

Bearing Fruit: Reaping Innovation’s Rewards

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31 2019 2018 2017

INCOME

Revenue from contracts with customers (Note 13) P=52,950,902,607 P=43,770,478,130 P=– Revenue from merchandise sales – – 32,088,441, Franchise revenue (Note 32) – – 3,176,699, Marketing income (Note 20) – – 1,252,614, Commission income (Note 32) – – 126,707, Rental income (Note 26) 137,107,640 62,704,247 76,666, Interest income (Note 22) 37,582,393 17,103,612 16,403, Other income 62,037,334 49,843,414 270,130,

53,187,629,974 43,900,129,403 37,007,662,

EXPENSES

Cost of merchandise sales (Note 18) 34,368,460,873 27,911,183,499 23,776,474, General and administrative expenses (Note 19) 15,794,863,340 13,652,608,770 11,226,202, Interest expense (Note 21) 897,502,571 76,542,124 56,559, Other expenses 45,862,835 46,486,514 32,596, 51,106,689,619 41,686,820,907 35,091,833,

INCOME BEFORE INCOME TAX 2,080,940,355 2,213,308,496 1,915,828,

PROVISION FOR INCOME TAX (Note 27) 636,366,870 681,552,230 597,958,

NET INCOME 1,444,573,485 1,531,756,266 1,317,870,

OTHER COMPREHENSIVE INCOME (LOSS) NOT TO BE

RECLASSIFIED TO PROFIT AND LOSS IN SUBSEQUENT

PERIODS

Remeasurement gain (loss) on net retirement obligations (Note 24) (148,058,013) 73,699,282 (22,143,945) Income tax effect 44,417,404 (22,109,783) 6,643,

OTHER COMPREHENSIVE INCOME – NET OF TAX 103,640,609 51,589,499 15,500,

TOTAL COMPREHENSIVE INCOME P=1,340,932,876 P=1,583,345,765 P=1,302,369,

BASIC/DILUTED EARNINGS PER SHARE (Note 28) P=1.91 P=2.03 P=1.

See accompanying Notes to Consolidated Financial Statements.

Annual Report 2019

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017

Common Stock Additional Retained Earnings (Note 17)

Remeasurement Gain (Loss) on Net Retirement Obligations- net of tax

Treasury Stock (Note 17) Paid-in Capital Appropriated Unappropriated (Note 24) Total (Note 17) Total Balances at January 1, 2019 =757,104,533P P=293,525,037 P=5,100,000,000 =911,969,780P P=15,189,219 P=7,077,788,569 (P=2,923,246) =7,074,865,323P Net income – – – 1,444,573,485 – 1,444,573,485 – 1,444,573, Remeasurement gain on net retirement obligations – – – – (103,640,609) (103,640,609) – (103,640,609) Total comprehensive income – – – 1,444,573,485 (103,640,609) 1,340,932,876 – 1,340,932, Reversal of appropriations – – (900,000,000) 900,000,000 – – – – Appropriations – – 1,900,000,000 (1,900,000,000) – – – – Cash dividends – – (378,209,142) – (378,209,142) – (378,209,142) Balances at December 31, 2019 =757,104,533P P=293,525,037 P=6,100,000,000 P=978,334,123 (P=88,451,390) P=8,040,512,303 (P=2,923,246) P=8,037,589,

Balances as at January 1, 2018 P=757,104,533 P=293,525,037 P=4,350,000,000 P=666,193,426 (P=36,400,280) P=6,030,422,716 (P=2,923,246) P=6,027,499, Effect of change in accounting policy (Note 2) – – – (210,720,051) – (210,720,051) – (210,720,051) As restated 757,104,533 293,525,037 4,350,000,000 455,473,375 (36,400,280) 5,819,702,665 (2,923,246) 5,816,779, Net income – – – 1,531,756,266 – 1,531,756,266 – 1,531,756, Remeasurement gain on net retirement obligations – – – – 51,589,499 51,589,499 – 51,589, Total comprehensive income – – – 1,531,756,266 51,589,499 1,583,345,765 – 1,583,345, Reversal of appropriations – – (2,450,000,000) 2,450,000,000 – – – – Appropriations – – 3,200,000,000 (3,200,000,000) – – – – Cash dividends – – – (325,259,861) – (325,259,861) – (325,259,861) Balances at December 31, 2018 P=757,104,533 P=293,525,037 P=5,100,000,000 =911,969,780P P=15,189,219 P=7,077,788,569 (P=2,923,246) P=7,074,865,

Balances at January 1, 2017 P=459,121,573 P=293,525,037 P=3,350,000,000 P=944,288,887 (P=20,899,518) P=5,026,035,979 (P=2,923,246) P=5,023,112, Net income – – – 1,317,870,459 – 1,317,870,459 – 1,317,870, Remeasurement loss on net retirement obligations – – – – (15,500,762) (15,500,762) – (15,500,762) Total comprehensive income – – – 1,317,870,459 (15,500,762) 1,302,369,697 – 1,302,369, Appropriations – – 1,000,000,000 (1,000,000,000) – – – – Stock dividend 297,982,960 – – (297,982,960) – – – – Cash dividends – – – (297,982,960) – (297,982,960) – (297,982,960) Balances at December 31, 2017 P=757,104,533 P=293,525,037 P=4,350,000,000 P=666,193,426 (P=36,400,280) P=6,030,422,716 (P=2,923,246) P=6,027,499,

See accompanying Notes to Consolidated Financial Statements.

Bearing Fruit: Reaping Innovation’s Rewards

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31 2019 2018 2017

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=2,080,940,355 =2,213,308,496P P=1,915,828, Adjustments for: Depreciation and amortization (Notes 8, 19, and 26) 3,833,029,584 1,946,617,252 1,622,990, Interest expense (Note 21) 897,502,571 76,542,124 56,559, Amortization of: Deferred lease (Notes 7 and 26) – 8,706,319 9,551, Software and other program costs (Notes 10 and 19) 9,238,968 946,389 1,237, Net retirement benefits cost (Notes 23 and 24) 90,158,015 44,888,237 32,386, Write-off of property and equipment (Note 8) 4,472,711 – – Interest income (Note 22) (37,582,393) (17,103,612) (16,403,134) Unrealized foreign exchange loss (gain) 170,037 (195,410) (12,016) Loss on sale of property and equipment – – 243, Operating income before working capital changes 6,877,929,848 4,273,709,795 3,622,383, Decrease (increase) in: Receivables (395,551,729) (470,881,692) (26,566,019) Inventories (620,693,891) (795,467,273) (616,470,888) Prepayments and other current assets 100,210,016 (72,448,706) (15,133,414) Increase in: Accounts payable and accrued expenses 1,351,910,041 1,324,974,586 712,937, Other current liabilities 1,719,387,016 809,314,545 283,307, Contract liabilities 94,878,199 32,071,821 – Deposits payable 24,272,036 27,306,851 22,309, Deferred revenue – – 43,413, Retirement benefits paid (Note 24) (1,630,917) – – Retirement benefits contributions (Note 24) (23,000,000) (11,000,000) (14,000,000) Net cash generated from operations 9,127,710,619 5,117,579,927 4,012,181, Income taxes paid (961,953,298) (696,726,174) (561,757,577) Interest received 24,514,484 8,370,792 7,323, Net cash provided by operating activities 8,190,271,805 4,429,224,545 3,457,747,

CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment (Note 8) (3,118,424,273) (2,234,656,893) (2,400,793,097) Software and other program costs (Note 10) (13,963,034) – (263,147) Increase in: Deposits (52,919,734) (95,206,528) (135,656,843) Goodwill and other noncurrent assets (420,803,935) (21,517,179) (6,459,686) Short-term investments (102,942) (102,012) (101,090) Proceeds from sale of property and equipment 62,292 – 300, Net cash used in investing activities (3,606,151,626) (2,351,482,612) (2,542,973,863)

CASH FLOWS FROM FINANCING ACTIVITIES Availments of: Bank loans (Note 11) 230,000,000 720,000,000 425,000, Long-term debt (Note 11) 200,000,000 75,000,000 600,000, Payments of: Bank loans (Note 11) (575,000,000) (970,000,000) (985,000,000) Long-term debt (Note 11) (546,561,404) (305,416,666) (183,666,667) Leases (Note 26) (2,005,362,761) – – Cash dividends paid (Note 17) (378,209,142) (325,259,861) (297,982,960) Interest paid (65,828,396) (59,553,145) (55,149,851) Net cash provided by financing activities (3,140,961,703) (865,229,672) (496,799,478)

NET INCREASE IN CASH AND CASH EQUIVALENTS 1,443,158,476 1,212,512,261 417,974,

EFFECT OF EXCHANGE RATE CHANGES ON CASH (170,037) 195,410 12,

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,181,666,656 1,968,958,985 1,550,972,

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) P=4,624,655,095 P=3,181,666,656 P=1,968,958,

See accompanying Notes to Consolidated Financial Statements.

Annual Report 2019

PHILIPPINE SEVEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information and Authorization for Issuance of the Consolidated Financial Statements

Corporate Information Philippine Seven Corporation (the Company or PSC) was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC) on November 24, 1982. The Company and its subsidiaries (collectively referred to as the “Group”), are primarily engaged in the business of retailing, merchandising, buying, selling, marketing, importing, exporting, franchising, acquiring, holding, distributing, warehousing, trading, exchanging, collection and acceptance of payments or otherwise dealing in all kinds of grocery items, dry goods, food or foodstuff, beverages, drinks and all kinds of consumer needs or requirements and in connection therewith, operating or maintaining warehouses, storages, delivery vehicles and similar or incidental facilities. The Group is also engaged in the management, development, sale, exchange, and holding for investment or otherwise of real estate of all kinds, including buildings, houses and apartments and other structures.

The Company is controlled by President Chain Store (Labuan) Holdings, Ltd., an investment holding Company incorporated in Malaysia, which owns 52.22% of the Company’s outstanding shares. The remaining 47.78% of the shares are widely held including the public float. The ultimate parent of the Company is Uni-President Enterprises Corporation, which is incorporated in Taiwan, Republic of China.

The Company had its primary listing on the Philippine Stock Exchange on February 4, 1998.

The registered business address of the Company is 7th Floor, The Columbia Tower, Ortigas Avenue, Mandaluyong City.

As at December 31, 2019, the Company is operating 2,864 stores, 1,519 of which are franchise stores and the remaining 1, are company-owned stores (see Note 32).

Authorization for Issuance of the Consolidated Financial Statements The consolidated financial statements were authorized for issue by the Board of Directors (BOD) on February 21, 2020.

2. Summary of Significant Accounting Policies and Financial Reporting Practices

Basis of Preparation The consolidated financial statements are prepared under the historical cost basis. The consolidated financial statements are presented in Philippine Peso (Peso), which is the Company’s functional currency and all amounts are rounded to the nearest Peso except when otherwise indicated.

Statement of Compliance The consolidated financial statements are prepared in compliance with Philippine Financial Reporting Standards (PFRS).

Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except that the Group has adopted the following new accounting pronouncements starting January 1, 2019:

▪ PFRS 16,Leases

PFRS 16 supersedes PAS 17,Leases, Philippine Interpretation IFRIC 4,Determining whether an Arrangement contains a

Lease, Philippine Interpretation SIC-15,Operating Leases-Incentives and Philippine Interpretation SIC-27,Evaluating the

Substance of Transactions Involving the Legal Form of a Lease. The new standard sets out the principles for the

recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases in the consolidated statements of financial position.

Lessor accounting under PFRS 16 is substantially unchanged from the prescribed accounting under PAS 17. Lessors will continue to classify all leases using the same classification principle as in PAS 17 and distinguish between two (2) types of leases: operating and finance leases. PFRS 16 requires lessees and lessors to make more extensive disclosures than under PAS 17.

The Group adopted PFRS 16 using the modified retrospective method of adoption, with the date of initial application as January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized only at the date of initial application. The comparative information was not restated and continues to be reported under PAS 17 and related interpretations. The Group elected to use the transition practical expedient to not reassess whethera contract is, or contains, a lease as at January 1, 2019. The Group will therefore not

Bearing Fruit: Reaping Innovation’s Rewards

apply the standard to contracts that were not identified as containing a lease applying PAS 17 and Philippine Interpretation IFRIC 4.

The effect of adoption of PFRS 16 at January 1, 2019 is, as follows:

Increase (decrease) Consolidated statements of financial position ASSETS Lease receivable =865,854,466P Right-of-use (ROU) assets 8,301,945, Prepayments and other current assets (42,518,500) Net impact in total assets P=9,125,281,

LIABILITIES

Lease liabilities P=9,194,699, Accounts payable and accrued expenses (69,417,878) Net impact in total liabilities P=9,125,281,

The Group has various lease contracts for its company-owned and franchised convenience stores, office spaces, kitchens and warehouses. Prior to the adoption of PFRS 16, the Group classified each of its leases (as lessee) at the inception date as operating leases. The Group also enters into sublease arrangements with its franchisees, and prior to the adoption of PFRS 16 recognizes these as operating leases.

Upon adoption of PFRS 16, the Group applied a single recognition and measurement approach for all the leases except for short-term leases and leases of low-value assets. All existing sublease arrangement with franchisees were assessed as of January 1, 2019 whether it will qualify as finance lease or operating lease and accounted for accordingly.

Leases previously accounted for as operating leases

The Group recognized right-of-use (ROU) assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The ROU assets for most leases were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate (IBR) at the date of initial application. In some leases, the ROU assets were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the IBR at the date of initial application.

The Group also applied the following available practical expedients:

• Use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Application of the short-term lease exemptions to lease contracts with lease term that ends within 12 months of the date of initial application; and
• Exclusion of initial direct costs from measuring the ROU asset at the date of initial application.

Based on the above, as at January 1, 2019:

• ROU asset of =8,301,945,803, after accounting for sublease arrangements, and lease liabilities of PP =9,194,699,647, net of lease receivable of P=398,156,502,were recognized and presented separately in the consolidated statements of financial position, representing the amount set up at the date of initial application.
• Lease receivable of P=865,854,466, recognized and presented under “Receivables”, resulting from derecognition of ROU assets amounting to P=1,264,010,968 to account for the sublease arrangement of the Group that qualify as finance lease (see Note 26).
• Prepayments and other current assets and accounts payable and accrued expenses amounting to P=42,518, and P=69,417,878, respectively, relating to previous operating lease were derecognized and closed to ROU assets (see Note 26).
• Deferred tax asset for PAS 17 previously setup prior to adoption were derecognized amounting to P=10,748,997 and subsequently recognized to account for transition to PFRS 16 for the same amount.

The Group recognized lease liabilities in relation to leases which had previously been recognized as “Operating leases” under PAS 17. These liabilities were measured at present value of the remaining lease payments, discounted using the lessee’s IBR as of January 1, 2019. The Group used a single discount rate to a portfolio of leases with reasonably similar characteristics. The weighted average IBR applied to the lease liabilities on January 1, 2019 is 8.67%.

Annual Report 2019

Below provides the reconciliation between the operating lease commitments disclosed applying PAS 17 as at December 31, 2018 and the ROU assets and lease liabilities recognized in the statements of financial position at the date of initial application of PFRS 16:

Operating lease commitments as of December 31, 2018 P=13,385,864, Less: Short-term leases 342,117, Low-value assets 15,809, Operating lease commitments scoped-in under PFRS 16 13,027,938, Less present value discount using the Group’s IBR 3,435,082, Lease liabilities recognized as of January 1, 2019 P=9,592,856,

Due to the adoption of PFRS 16, the Group’s income before tax in 2019 decreased, depreciation and interest expenses are generally higher in the earlier part of the lease term and gradually decrease at the latter half of the lease term.

The adoption of PFRS 16 did not have an impact on total consolidated equity as at January 1, 2019, since the Group elected to measure the ROU assets at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statements of financial position immediately before the date of initial application.

▪ Philippine Interpretation IFRIC-23,Uncertainty over Income Tax Treatments

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the

application of PAS 12,Income Taxes. It does not apply to taxes or levies outside the scope of PAS 12, nor does it

specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

• Whether an entity considers uncertain tax treatments separately;
• The assumptions an entity makes about the examination of tax treatments by taxation authorities;
• How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and
• How an entity considers changes in facts and circumstances.

The entity is required to determine whether to consider each certain tax treatments separately or together with one or more other uncertain tax treatments and use the approach that better predicts the resolution of the uncertainty. The entity shall assume that the taxation authority will examine amounts that it has a right to examine and have full knowledge of all related information when making those examinations. If an entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, it shall reflect the effect of the uncertainty for each uncertain tax treatment using the method the entity expects to better predict the resolution of the uncertainty.

Based on the Group’s assessment, it has no material uncertain tax treatments, accordingly, the adoption of this Interpretation has no significant impact on the financial statements.

▪ Amendments to PFRS 9,Prepayment Features with Negative Compensation

Under PFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income (FVOCI), provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to PFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract.

These amendments had no impact on the consolidated financial statements of the Group.

▪ Amendments to PAS 19,Employee Benefits, Plan Amendment, Curtailment or Settlement

The amendments to PAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to:

• Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and
• Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure that net defined benefit liability (asset).

Bearing Fruit: Reaping Innovation’s Rewards

The amendments also clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognized in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognized in other comprehensive income.

The Group considered in its actuarial valuation and computation for employee benefits its amended retirement plan benefits during the period.

▪ Amendments to PAS 28,Long-term Interests in Associates and Joint Ventures

The amendments clarify that an entity applies PFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in PFRS 9 applies to such long-term interests.

The amendments also clarified that, in applying PFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognized as adjustments to the net investment in

the associate or joint venture that arise from applying PAS 28,Investments in Associates and Joint Ventures.

These amendments had no impact on the consolidated financial statements as the Group does not have long-term interests in its associate and joint venture.

▪ Annual Improvements to PFRSs 2015-2017 Cycle

• Amendments to PFRS 3,Business Combinations, and PFRS 11,Joint Arrangements,Previously Held Interest in a Joint

Operation

The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.

A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in PFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured.

An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January1, 2019 and to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early application permitted.

These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where joint control is obtained.

• Amendments to PAS 12,Income Tax Consequences of Payments on Financial Instruments Classified as Equity

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events.

An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application is permitted.

These amendments had no impact on the consolidated financial statements of the Group because no financial instruments classified as equity.

• Amendments to PAS 23,Borrowing Costs, Borrowing Costs Eligible for Capitalization

The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.

An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after January 1, 2019, with early application permitted.

Annual Report 2019

Since the Group’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group.

Standards Issued but not yet Effective Pronouncements issued but not yet effective are listed below. Unless otherwise indicated, the Group does not expect that the future adoption of the said pronouncements will have a significant impact on its consolidated financial statements. The Group intends to adopt the following pronouncements when they become effective.

Effective beginning on or after January 1, 2020

▪ Amendments to PFRS 3,Definition of a Business

The amendments to PFRS 3 clarify the minimum requirements to be a business, remove the assessment of a market participant’s ability to replace missing elements, and narrow the definition of outputs. The amendments also add guidance to assess whether an acquired process is substantive and add illustrative examples. An optional fair value concentration test is introduced which permits a simplified assessment of whether an acquired set of activities and assets is not a business.

An entity applies those amendments prospectively for annual reporting periods beginning on or after January 1, 2020, with earlier application permitted.

These amendments will apply on future business combinations of the Group.

▪ Amendments to PAS 1,Presentation of Financial Statements, and PAS 8,Accounting Policies, Changes in Accounting

Estimates and Errors,Definition of Material

The amendments refine the definition of material in PAS 1 and align the definitions used across PFRSs and other pronouncements. They are intended to improve the understanding of the existing requirements rather than to significantly impact an entity’s materiality judgements.

An entity applies those amendments prospectively for annual reporting periods beginning on or after January 1, 2020, with earlier application permitted.

Effective beginning on or after January 1, 2021

▪ PFRS 17,Insurance Contracts

PFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement,

presentation and disclosure. Once effective, PFRS 17 will replace PFRS4,Insurance Contracts. This new standard on

insurance contracts applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply.

The overall objective of PFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in PFRS 4, which are largely based on grandfathering previous local accounting policies, PFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of PFRS 17 is the general model, supplemented by:

• A specific adaptation for contracts with direct participation features (the variable fee approach); and
• A simplified approach (the premium allocation approach) mainly for short-duration contracts.

PFRS 17 is not applicable to the Group since it is not engaged in providing insurance nor issuing insurance contracts.

Deferred effectivity

▪ Amendments to PFRS 10,Consolidated Financial Statements, and PAS 28,Sale or Contribution of Assets between an

Investor and its Associate or Joint Venture

The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognized when a transfer to an associate or joint venture involves a business as defined in PFRS 3. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognized only to the extent of unrelated investors’ interests in the associate or joint venture.

On January 13, 2016, the Financial Reporting Standards Council deferred the original effective date of January 1, 2016 of the said amendments until the International Accounting Standards Board (IASB) completes its broader review of the research project on equity accounting that may result in the simplification of accounting for such transactions and of other aspects of accounting for associates and joint ventures.

Bearing Fruit: Reaping Innovation’s Rewards

Basis of Consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries. 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:

• Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of 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.

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:

• The contractual arrangement with the other vote holders of the investee;
• Rights arising from other contractual arrangements; and
• The Group’s voting rights and potential voting rights.

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one (1) or more of the three (3) 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 in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses 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 differences 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 Company’s share of components previously recognized in other comprehensive income (OCI) to profit or loss or retained earnings, as appropriate, as would be required if the Company had directly disposed of the related assets or liabilities.

The consolidated financial statements include the accounts of the Company and the following wholly owned subsidiaries:

Country of Incorporation Principal Activity

Percentage of Ownership

Convenience Distribution, Inc. (CDI) Philippines

Warehousing, Distribution and Retailing 100% Store Sites Holding, Inc. (SSHI) Philippines Holding^ 100%

SSHI’s capital stock, which is divided into 40% common shares and 60% preferred shares, are owned by the Company and by Philippine Seven Corporation-Employees Retirement Plan (PSC-ERP), respectively. These preferred shares, which accrue and pay guaranteed preferred dividends and are redeemable at the option of the holder, are recognized as a financial liability in accordance with PFRS (see Note 16). The Company owns 100% of SSHI’s common shares, which, together with common key management, gives the Company control over SSHI.

The financial statements of the subsidiaries are prepared for the same financial reporting period as the Company, using uniform accounting policies. Intercompany transactions, balances and unrealized gains and losses are eliminated in full.

Cash and Cash Equivalents Cash includes cash on hand and cash in banks. Cash in banks earn interest at the prevailing bank deposit rates. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of 3 months or less from the date of acquisition and are subject to insignificant risk of change in value.

Financial Instruments A financial instrument is any contract that gives rise to a financial asset of an entity and a financial liability or equity instrument of another entity.

Annual Report 2019

Date of Recognition

The Group recognizes a financial asset or a financial liability in the consolidated statements of financial position when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require deliver y of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date.

Financial Assets

Initial Recognition and Measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, FVOCI, and fair value through profit or loss (FVPL).

The classification at initial recognition depends on the contractual cash flow characteristics of financial assets and the Group’s business model for managing them. The initial measurement of financial assets, except for those classified as FVPL, includes the transaction cost. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at FVPL, transaction costs. Trade receivables that do not contain significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under PFRS

In order for a financial asset to be classified and measured at amortized cost or FVOCI, it needs to give rise to cash flows that are SPPI on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at instrument level.

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Subsequent Measurement

For purposes of subsequent measurement, financial assets are classified in four (4) categories:

• Financial assets at amortized cost (debt instruments);
• Financial assets at FVOCI with recycling of cumulative gains and losses (debt instruments);
• Financial assets at FVOCI with no recycling of cumulative gains and losses upon derecognition (equity instruments); and
• Financial assets at FVPL.

The Group measures financial assets at amortized cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortized cost are subsequently measured using effective interest rate (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

Financial assets at amortized cost are classified as current assets when the Group expects to realize the asset within 12 months from reporting date. Otherwise, these are classified as noncurrent assets.

The Group’s financial assets at amortized cost consist of cash and cash equivalents, short-term investment, receivables and deposits (excluding non-refundable rent deposits) (see Notes 4, 5 and 9). The Group has no financial assets at FVOCI (debt instruments), financial assets designated at FVOCI (equity instruments) and financial assets at FVPL.

Impairment of Financial Assets

The Group recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognized in 2 stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12- months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

Bearing Fruit: Reaping Innovation’s Rewards

For receivables, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group establishes a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

The Group considers a financial asset in default when contractual payments are 360 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Financial liabilities

Initial Recognition and Measurement

Financial liabilities are measured at amortized cost, except for the following:

• Financial liabilities measured at FVPL;
• Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition of when the Group retains continuing involvement;
• Financial guarantee contracts;
• Commitments to provide a loan at a below-market interest rate; and
• Contingent consideration recognized by an acquirer in accordance with PFRS 3.

Subsequent Measurement

A financial liability may be designated at FVPL if it eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch):

• If a host contract contains 1 or more embedded derivatives; or
• If a group of financial liabilities or financial assets and liabilities is managed and its performance evaluated on a fair value basis is accordance with a documented risk management or investment strategy.

Where a financial liability is designated at FVPL, the movement in fair value attributable to changes in the Group’s own credit quality is calculated by determining the changes in credit spreads above observable market interest rates and is presented separately in OCI.

The Group’s financial liabilities measured at amortized cost include bank loans, long-term debt, accounts payable and accrued expenses, lease liabilities, deposit payables and other current liabilities (excluding statutory liabilities), and cumulative redeemable preferred shares (see Notes 11, 12, 14, 15, 16, 26 and 30).

The Group has no financial liabilities at FVPL, and derivatives designated as hedging instruments in an effective hedge.

Derecognition of Financial Assets and Liabilities

Financial asset

A financial asset (or, where applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized (i.e., removed from the Group’s consolidated statements of financial position) when:

• The contractual rights to the cash flows from the financial asset expire; or
• The Group transfer the contractual rights to receive cash flows of the financial asset in a transaction in which it either (i) transfers substantially all the risks and rewards of ownership of the financial asset, or (ii) the Group neither transfers nor retains substantially all risks and rewards of ownership of the financial asset and the Group has not retained control.

When the Group retains the contractual rights to receive the cash flows of a financial asset but assumes a contractual obligation to pay those cash flows to 1 or more entities, the Group treats the transaction as a transfer of a financial asset if the Group:

• Has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset;
• Is prohibited by the terms of the transfer contract from selling of pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows; and
• Has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay.

Where the Group has transferred its rights to receive cash flows from an asset or has entered into pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Annual Report 2019

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, 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 profit or loss.

Classification of Financial Instruments Between Liability and Equity

A financial instrument is classified as liability if it provides for a contractual obligation to:

• Deliver cash or another financial asset to another entity;
• Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or
• 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.

If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. 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.

Modification of contractual cash flows

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset, the Group recalculates the gross carrying amount of the financial assets as the present value of the renegotiated or modified contractual cash flows discounted at the original EIR (of credit-adjusted EIR for purchased or original credit-impaired financial assets) and recognizes a modification gain or loss in the consolidated statements of comprehensive income.

When the modification of a financial asset results in the derecognition of the existing financial asset and the subsequent recognition of the modified financial asset, the modified asset is considered a ‘new’ financial asset. Accordingly, the date of the modification shall be treated as the date of initial recognition of that financial asset when applying the impairment requirements to the modified financial asset.

A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.

Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

The Group assesses that it has a currently enforceable right of offset if the right is not contingent on a future event and is legally enforceable in the normal course of business, event of default, and event of insolvency or bankruptcy of the Group and all of the counterparties.

“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 profit or loss unless it qualifies for recognition as some other type of asset.

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 profit or loss 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.

Financial Instruments (effective prior to January 1, 2018)

Financial Assets

Initial Recognition and Measurement

The Group recognizes financial assets in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. Financial assets are classified as financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, available-for-sale (AFS) financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition and where allowed and appropriate, re-evaluates such classification every financial reporting date.

Bearing Fruit: Reaping Innovation’s Rewards

All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date the Group commits to purchase or sell the financial asset. Regular way purchases or sales of financial assets require delivery of assets within the time frame generally established by regulation in the marketplace.

Subsequent Measurement

The Group classifies its financial assets as financial assets at FVPL, loans and receivables, AFS financial assets or HTM investments. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates classification at every balance sheet date.

The Group has no AFS financial assets and HTM investments and has not designated any financial assets at FVPL as at December 31, 2017.

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 or immediate or short-term resale and are not classified as financial asset at FVPL, HTM investments or AFS financial assets. After initial measurement, loans and receivables are subsequently measured at amortized cost using the EIR method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are not integral part of the EIR. The amortization is included as part of interest income in the consolidated statements of comprehensive income. Loans and receivables are classified as current assets if maturity is within 12 months from the balance sheet date. Otherwise, these are classified as noncurrent.

Impairment

The Group assesses at each balance sheet date whether a financial asset or a group of financial assets is impaired.

Impairment of Financial Assets Carried at Amortized Cost

The Group first assesses whether objective evidence of impairment exists for financial assets that are individually significant and collectively for financial assets that are not individually significant. Objective evidence includes observable data that comes to the attention of the Group about loss events such as but not limited to significant financial difficulty of the counterparty, a breach of contract, such as a default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial reorganization. If it is determined that no objective evidence of impairment exists for an individually or collectively assessed financial asset, whether significant or not, the asset is included in the 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 continue to be recognized are not included in a collective assessment of impairment. The impairment assessment is performed at each balance sheet 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.

If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of impairment loss is measured as the difference between the financial asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the EIR computed at initial recognition). The carrying amount of the asset is reduced by the impairment loss, which is recognized in profit or loss.

Financial assets, together with the related allowance, 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 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 profit or loss to the extent tha t the carrying value of the asset does not exceed what its amortized cost would have been had the impairment not been recognized at the date the impairment is reversed.

Financial Liabilities

Initial Recognition and Measurement

Financial liabilities are classified as financial liabilities at FVPL or other financial liabilities which are measured at am ortized cost or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

The Group determines the classification of its financial liabilities at initial recognition and where allowed and appropriate, re- evaluates such classification every financial reporting date.

The Group has no financial liabilities measured at FVPL nor derivatives as at December 31, 2017.

Annual Report 2019

Subsequent Measurement

The measurement of financial liabilities depends on their classification, as described below:

Other Financial Liabilities

This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability where the substance of the contractual arrangements results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to exchange financial assets or financial liabilities with the holder under conditions that are potentially unfavorable to the Group. These include liabilities arising from operations or borrowings.

After initial recognition, other financial liabilities are subsequently measured at amortized cost using the EIR. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of th e EIR. Gains and losses are recognized in profit or loss in the consolidated statements of comprehensive income when the liabilities are derecognized as well as through the amortization process.

Other financial liabilities are included in current liabilities if maturity is within 12 months from the reporting date or the Group does not have an unconditional right to defer payment for at least 12 months from the reporting date. Otherwise, these are classified as noncurrent liabilities.

As at December 31, 2017, The Group’s other financial liabilities consist of bank loans, long-term debt, accounts payable and accrued expenses, other current liabilities (excluding statutory liabilities), and cumulative redeemable preferred shares.

Current versus Noncurrent Classification The Group presents assets and liabilities in the consolidated statements of financial position based on current/noncurrent classification.

An asset is current when it is:

• Expected to be realized or intended to be sold or consumed in normal operating cycle;
• Held primarily for the purpose of trading;
• Expected to be realized within twelve months after the reporting period; or
• Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

All other assets are classified as noncurrent.

A liability is current when:

• It is expected to be settled in normal operating cycle;
• It is held primarily for the purpose of trading;
• It is due to be settled within twelve months after the reporting period; or
• There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

The Group classifies all other liabilities as noncurrent.

Deferred tax assets and liabilities are classified as noncurrent assets and liabilities, respectively.

Fair Value Measurement Fair value is the estimated 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 t he 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 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.

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.

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 lowest level of input that is significant to the fair value measurement as a whole:

• Level 1 - Quoted (unadjusted) 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

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• 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 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.

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 assts and liabilities for which fair value is measured and disclosed in the financial statements are categorized within the fair value hierarchy.

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.

Fair value measurements disclosures are presented in Note 29 to the consolidated financial statements.

Inventories Inventories are stated at the lower of cost and net realizable value (NRV). Cost of inventories is determined using the first- in, first-out method. NRV is the selling price in the ordinary course of business, less the estimated cost of marketing and distribution.

Prepayments and Other Current Assets Prepayments and other current assets are primarily comprised of deferred input value-added tax (VAT), deferred lease, prepaid rent, prepaid taxes, prepaid store expenses, prepaid gift cards, prepaid uniform, advances for expenses, supplies, and advances to suppliers. Prepayments and other current assets 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. These are recorded as assets and expensed when utilized or expired.

Deferred lease assets comprised of the excess of principal amount of the deposit over the fair value of the deposit as of receipt date. Until December 31, 2018 the amount of deferred lease assets is amortized over the term of the lease and presented as part of rental expense. Effective January 1, 2019, Deferred lease assets is presented as part of ROU assets and depreciated accordingly over the term of the lease.

Advances to suppliers are down payments for acquisitions of property and equipment not yet received. Once the property and equipment are received, the amount of advances to suppliers is reclassified to property and equipment. These are stated at cost less any impairment in value.

Property and Equipment Property and equipment, except for land, are carried at cost less accumulated depreciation and amortization, and any impairment in value.

The initial cost of property and equipment consists of its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, are recognized in profit or loss in the period in which 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 an additional cost of the assets.

Construction in progress includes cost of construction and other direct costs and is stated at cost less any impairment in value. Construction in progress is not depreciated until such time the relevant assets are completed and put into operationa l use.

The cost of land comprises its purchase price and directly attributable cost incurred. Land is stated at cost less any impairment in value. Depreciation and amortization commence once the assets are available for use. It ceases at the earlier of the date that it is classified as noncurrent asset held-for-sale and the date the asset is derecognized.

Depreciation is computed on a straight-line method over the estimated useful lives of the assets as follows:

Years Buildings and improvements 10 to 12 Store furniture and equipment 5 to 10 Furniture and equipment 3 to 5 Transportation equipment 3 to 5 Computer equipment 3

Annual Report 2019

Leasehold improvements are amortized over the estimated useful life of the improvements, eight (8) years, or the term of the lease, whichever is shorter.

The assets’ estimated useful lives and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of property and equipment. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and any impairment in value are removed from the accounts and any resulting gain or loss is recognized in profit or loss.

Fully depreciated assets are retained in the books until disposed.

Deposits Assets Deposits are amounts paid as guarantee in relation to non-cancellable lease agreements entered into by the Group. These are initially recognized at fair value. The excess of the principal amount of the deposit over its fair value. The fair value of the deposit is determined based on the prevailing market rate of interest implicit to the term.

The excess of the principal amount of the deposit over its fair value is accounted for by the Group as deferred lease assets. Until December 31, 2018, the amount of deferred lease assets is amortized over the term of the lease and presented as part of rental expense. Effective January 1, 2019, deferred lease assets is presented as part of ROU assets and depreciated accordingly over the term of the lease. Interest on the deposit asset is accounted for using the EIR method by both the Group and lessor.

Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment loss, if any. Internally-generated intangible assets, if any, excluding capitalized development costs, are not capitalized and expenditure is reflected in profi t or loss in which the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and amortization method for an intangible asset with a finite useful life is reviewed at least at each balance sheet date. 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 treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in profit or loss in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually at the cash generating unit (CGU) level and are not amortized. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite useful life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds, if any, and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

Goodwill

Goodwill, included in “Goodwill and other noncurrent assets” account in the consolidated statements of financial position, represents the excess of the cost of an acquisition over the fair value of the businesses acquired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually at the CGU level and are not amortized.

Software and Program Cost

Software and program cost, which are not specifically identifiable and integral to a specific computer hardware, are shown under “Goodwill and other noncurrent assets” account in the consolidated statements of financial position. These are carried at cost, less accumulated amortization and any impairment in value. Amortization is computed on a straight-line method over their estimated useful life of five (5) years.

Impairment of Non-Financial Assets The Group assesses at each balance sheet date whether there is an indication that its non-financial assets such as ROU asset, property and equipment, rent deposits and intangible assets 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 the higher of an 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. For goodwill, the asset’s recoverable amount is its value in use.

When 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 assessments of the time value of money and risks specific to the asset. Impairment losses, if any, are recognized in consolidated statements of comprehensive income.

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For non-financial assets, excluding goodwill, an assessment is made at each balance sheet 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 previous years. Such reversal is recognized in consolidated statements of comprehensive income, unless the asset is carried at revalued amount, in which case, the reversal is treated as a revaluation increase. After such reversal, the depreciation charge is adjusted in the future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Goodwill is tested for impairment, annually or more frequently if event or changes in circumstances indicate that the carryin g value may be impaired. Impairment is determined for goodwill 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 of the CGU or group of CGUs to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Deposits Payable Deposits payable are amounts received from franchisees, store operators and sublessees as guarantee in relation to various agreements entered into by the Group. These are initially accounted for at fair value. The fair value of the deposit is determined based on the prevailing market rate of interest implicit to the lease.

The excess of the principal amount of the deposit over its fair value is accounted for by both the lessee and the Group as a prepaid lease payment. The lessee includes these amounts in the costs of its ROU asset at the lease commencement date. For the Group, if the lease is classified as an operating lease, the prepaid lease payment is included in the total lease payments that are recognized as income on either a straight-line basis or another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. If the lease is classified as a finance lease, the Group includes the prepaid lease payment in the consideration for the lease (i.e. lease payments) and, therefore, in the determination of the gain or loss on derecognition of the underlying asset, if any. Interest on the deposit, meanwhile, is accounted for using the EIR method by both the lessee and the Group.

Cumulative Redeemable Preferred Shares Cumulative redeemable preferred shares that exhibit characteristics of a liability is recognized as a financial liability in the consolidated statements of financial position, net of transaction cost. The corresponding dividends on those shares are charged as interest expense in profit or loss.

Equity

Common Stock

Common stock is measured at par value for all shares issued and outstanding.

Additional Paid-in Capital

When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received.

In case the shares are issued to extinguish or settle the liability of the Group, the shares shall be measured either at the fair value of the shares issued or fair value of the liability settled, whichever is more reliably determinable.

Retained Earnings

Retained earnings represent the cumulative balance of net income or loss, dividend distributions, prior period adjustments, effects of the changes in accounting policy and other capital adjustments.

Stock Dividends

Stock dividends are distribution of the earnings in the form of own shares. When stock dividends are declared, the amount of stock dividends is transferred from retained earnings to capital stock.

Treasury Stock

Treasury stock is stated at acquisition cost and is deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of the Group’s own equity instruments.

OCI OCI comprises of items of income and expenses that are not recognized in profit or loss as required or permitted by other PFRS. The Group’s OCI pertains to actuarial gains and losses from retirement benefits and revaluation increment on land which are recognized in full in the period in which they occur.

Annual Report 2019