COVER SHEET - Victorias Milling...Victorias Milling Company, Inc. (VMC or the Company) is an...

COVER SHEET COMPANY REGISTRATION AND MONITORING DEPARTMENT

Nature of Application S.E.C. Registration Number

Company Name

V I C T O R I A S M I L L I N G C O M P A N Y , I N C .

Principal Office (No./Street/Barangay/City/Town/Province)

V M C C O M P O U N D , J J O S S O R I O S T .

B R G Y . X V I V I C T O R I A S C I T Y N E G . O C C .

COMPANY INFORMATION

Company’s Email Address Company’s Telephone Number Company’s Facsimile Number

Contact Person Information

Name of Contact Person Email Address Telephone Number/s Facsimile Number/s

Contact Person’s Address

To be accomplished by CRMD Personnel

Date Signature

Assigned processor: ___________________________________ __________________________ __________________

___________________________________ __________________________ __________________

__________________________ ___________________ ______________

Document I.D.

Received by Corporate Filing and Records Division (CFRD) _________________________ ___________________

Forwarded to: Corporate and Partnership Registration Division ________________________ ___________________

Green Lane Unit ________________________ ___________________

Financial Analysis and Audit Division ________________________ ___________________

Licensing Unit ________________________ ___________________

P W 0 0 0 0 0 3 6 4

034-488-7900 -

EVA V. RODRIGUEZ 034-488-7900 -

J.J. Ossorio Street, Barangay XVI, Victorias City, Negros Occidental

SEC FORM 17-A

of 19

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A

ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended: August 31, 2019 2. SEC Identification Number: PW-364 3. BIR Tax Identification No.: 000-270-220-000 4. Exact name of Issuer as specified in its charter: VICTORIAS MILLING COMPANY, INC. 5. Plant Site: Victorias City, Negros Occidental Province, Country or other jurisdiction of incorporation or organization 6. Industry Classification Code: (SEC Use Only) 7. VMC Compound, J.J. Ossorio St., Brgy. XVI, Victorias City, 6119 Negros Occidental Address of office Postal Code 8. (034) 488-7900; (034) 488-7998 Issuer's telephone number, including area code 9. Not Applicable Former name, former address, and former fiscal year, if changed since last report. 10. Securities registered pursuant to Sections 8 and 12 of the SRC, or Sec. 4 and 8 of the RSA

Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding

Common Stock (Par Value of P1.00 per share)

Authorized Capital Stock 3,042,061,094 shares

Subscribed and Paid-up 3,042,061,094 shares

Amount of Debt Outstanding as of August 31, 2019:

Php 495,000,000 long-term loan

20200

7

of 19

11. Are any or all of these securities listed on a Stock Exchange. Yes [ X ] No [ ] If yes, state the name of such stock exchange and the classes of securities listed therein:

Philippine Stock Exchange, Inc. - Common Stocks

12. Check whether the issuer:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder or Section 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports);

Yes [ X ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days. Yes [ X ] No [ ] 13. Aggregate market value of the voting stock held by non-affiliates: Php 6,703,754,302.70

(at P1.00 par value) APPLICABLE ONLY TO ISSUERS INVOLVED IN INSOLVENCY/SUSPENSION OF PAYMENTS PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 14. Check whether the issuer has filed all documents and reports required to be filed by Section

17 of the Code subsequent to the distribution of securities under a plan confirmed by a court or the Commission.

Yes [ X ] No [ ] DOCUMENTS INCORPORATED BY REFERENCE 15. Briefly describe the documents incorporated by reference and identify the part of the SEC

Form 17-A into which the document is incorporated: 2018-2019 Consolidated Financial Statements (Incorporated as reference for Item 7 of SEC Form 17- A)

of 19

TABLE OF CONTENTS PART I - BUSINESS AND GENERAL INFORMATION

Page

Item 1. Business 4

Item 2. Property 7

Item 3. Legal Proceedings 7

Item 4. Submission of Matters to a Vote of Security Holders 7

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Issuer’s Common Equity and Related Stockholder Matters

8

Item 6. Management's Discussion and Analysis 9

Item 7. Financial Statements 10

Item 8. Changes in and Disagreements With Auditors on Accounting and Financial Disclosure

10

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Issuer 11

Item 10. Executive Compensation 15

Item 11. Security Ownership of Certain Beneficial Owners and Management

16

Item 12. Certain Relationships and Related Transactions 17

PART IV – CORPORATE GOVERNANCE

Item 13. Corporate Governance 17

PART V- EXHIBITS AND SCHEDULES

(a) Exhibits and Schedules (b) Reports on SEC Form 17-C

17

18

of 19

PART I- BUSINESS AND GENERAL INFORMATION ITEM 1 - BUSINESS DESCRIPTION OF BUSINESS Victorias Milling Company, Inc. (VMC or the Company) is an integrated raw and refined sugar Company located in Barangay XVI, Victorias City, Negros Occidental, Philippines. VMC was founded on May 7, 1919 by Don Miguel J. Ossorio. The Company has since diversified, and formed Victorias Foods Corporation, Canetown Development Corporation, Victoria's Golf & Country Club, Inc., Victorias Agricultural Land Corporation and Victorias Green Energy Corporation (VGEC).

DATE OF REGISTRATION

% Ownership

Brief Description of Business

Victorias Foods Corporation (VFC)

February 24, 1993

100% produces and sells canned sardines, hot bangus, mackerel, luncheon meat, lechon paksiw, ham, bacon and other meat products

Canetown Development Corporation (CDC)

February 9, 1979 88% develops and sells real estate properties; develops, operates and sells memorial lots

Victorias Golf and Country Club, Inc. (VGCCI)

May 5, 1994 81% operates a golf club

Victorias Agricultural Land Corporation (VALCO)

June 30, 1987 100% acquires and owns agricultural lands and properties

Victorias Green Energy Corporation (VGEC)

April 13, 2015 100% co-generation of energy; operating stage but not selling to the grid yet.

BUSINESS DEVELOPMENT VMC is continuously improving its operations, product quality and services. It has invested in major improvements and optimization programs to satisfy its stakeholders. CURRENT STATUS OF REHABILITATION PROGRAM On July 4, 1997, the Company filed with the Securities and Exchange Commission (SEC) a Petition for the Declaration of Suspension of Payments, for the Approval of a Rehabilitation Plan, and the appointment of a Management Committee. Pursuant to the approved Rehabilitation Plan, the Company and the creditor banks executed a Debt Restructuring Agreement (DRA) on 29 April 2002.

of 19

The Company plunged into several strategic initiatives to attain financial health, sustain its operations and pay off its debts. In 2013, more than five years ahead of schedule, the Company was able to pay the remaining balance of its restructured loan and the interests accruing thereon, as well as other restructured liabilities. The Company also converted its convertible notes in accordance with the conversion periods as stated in the DRA. In 2014, the Company fully redeemed the remaining notes held by original noteholders. As of August 31, 2019, the Company only has P5.45M convertible notes awaiting conversion held by transferee noteholders, which is inclusive of accrued interest amounting to P2.45M. On April 17, 2018, the Company filed a Motion for the Alteration or Modification (Motion) of the Alternative Rehabilitation Plan with respect to the Refined Sugar Delivery Orders (RSDO) and Refined Sugar Quedans (RSQ) purportedly used by the Company's subsidiary North Negros Marketing Company Inc. to avail of loans from several banks. The Company continues to contest the claims and asserts that it has neither incurred nor benefited from those loans, but in order to achieve the objectives of the rehabilitation, to buy peace, promote stability in its operations, and avoid further protracted litigation, the Company agreed to pay a certain amount over a period of ten years as full settlement of claims. The SEC Special Hearing Panel (SHP) 1 granted the Motion. As of reporting date, the Company is still under rehabilitation proceedings. A Rehabilitation Receiver continues to monitor, together with the elected Board of Directors (BOD) and committees, the successful rehabilitation of the Company. RISKS Strategic Risk

The Company’s raw material supply chain is dependent on the production output of the province, which has been declining over the years. Due to this, stiff competition on cane supply triggered the establishment of various transloading stations by different mills which ultimately increased the cost of cane. Declining cane quality due to weather factors and low farm inputs, as well as high labor cost and decreasing labor force remain as significant industry issues. Another key challenge in the industry is the sugar import liberalization, which could significantly reduce sugar prices. Recently, this threat was put on hold due to a senate resolution opposing moves to allow more sugar imports into the country. Financial Risk The Company is currently exposed to credit, liquidity and market risks. Sugar being a commodity is highly susceptible to volatile prices driven by market forces exposing the Company to price risks. Regulatory, Compliance and Legal Risk

The Company is subject to laws and regulations in the Philippines in which it operates. It is primarily regulated by Republic Act (RA) 10659 or the Sugarcane Industry Development Act of 2015 and the policies and rules and regulations of the Philippine Sugar Regulatory Administration (SRA). It is also covered by Local Government Code (LGC), environmental laws implemented by the DENR, among others. The Company has established policies and procedures in compliance with local and other laws. VMC also undergoes various audits for food safety, good manufacturing practices, and other quality audits to ensure that its products are safe for human consumption. As a listed company, the Company needs to comply with the reportorial and disclosure requirements of the Securities & Exchange Commission (SEC) and Philippine Stock Exchange (PSE). The Company is also exposed to changes in the tax laws, particularly the adoption of the Tax Reform for Acceleration and Inclusion (TRAIN) law which increased the tax on sugar-sweetened beverages.

of 19

The numerous legal cases are likewise a source of risk for the Company. Majority of the claims filed are currently under suspension, due to the rehabilitation status of the Company. Management continues to perform regular reviews to identify regulatory, compliance and legal risks and to ensure that the systems in place are adequate to manage those risks.

CANE SUPPLY For Crop Year 2018-2019, total cane milled is slightly lower at 2. 7 million tons cane as a result of a 6% decline in provincial output from 12.72 million tons last crop year to only 11.88 million tons this year. The drop in production was attributed to the El Niño weather that limits soil moisture needed for optimum growth of the sugarcane crop and resulting to a drop in cane productivity or the tonnage per hectare (TC/Ha.). However, the quality of cane juice improved which contributed to the increase in Lkg/TC to 1.89 compared to 1.85 in the previous crop year. SALE OF SUGAR AND BY-PRODUCTS The Company sells raw sugar, refined sugar, molasses, alcohol, ethanol and exports power. It also offers tolling services to raw sugar owners. Breakdown of Consolidated Revenue

2018-2019 2017-2018 2016-2017

Refined Sugar 53% 73% 75%

Raw Sugar 30% 15% 17%

Ethanol 11% - -

Molasses 4% 6% 2%

Alcohol 0% 4% 5%

Power Generation 1% 1% 0%

Others 1% 1% 1%

100% 100% 100%

Aging of Trade Receivable

Consolidated Amounts (in thousands)

Neither past due nor impaired

Past due but not impaired Past due and impaired

Total <30 days

31-60 days 61-90 days >90 days

216,212 53,827 62,995 16,509 16,689 17,771 384,003

MANPOWER As of August 31, 2019, the Company has four (4) Executive Officers, four (4) senior officers, and four (4) Division Heads, with 696 regular employees and 178 outsourced workers for Off-Season Repair Period and 657 outsourced workers during Milling Season Period. The Company also has 7 consultants and none under special contract.

of 19

ITEM 2 – PROPERTY The total landholdings of the Company is approximately 690 hectares located in various locations all over Negros Occidental such as in Victorias City, municipality of Manapla, Cadiz City, Bacolod City and Talisay City as well some landholdings in Iloilo and Antipolo, Rizal. The Company owns the sugar milling facilities located in Victorias City as well as improvements, machineries and equipment, office and residential buildings, warehouses, furniture and fixtures, and transportation equipment. It also owns a co-generation plant and a distillery plant. VGCCI owns an 18-hole golf course, clubhouse, improvements, equipment, furniture and fixtures and transportation equipment. VFC owns a food processing plant as well as improvements, warehouses, machineries and equipment, office building, and transportation equipment. CDC mainly owns subdivision lots, memorial garden and other landholdings in Victorias and Manapla VALCO owns agricultural land and an industrial tree plantation. ITEM 3 – LEGAL PROCEEDINGS Cases filed for and against VMC are being handled by the Company’s in-house and external counsels. ITEM 4 – SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Except for the matters taken up during the Annual Stockholders’ Meeting, there was no other matter submitted to a vote of security holders during the period covered by this report.

of 19

PART II – OPERATION AND FINANCIAL INFORMATION ITEM 5 – MARKET FOR ISSUER’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of August 31, 2019, the number of stockholders on record stood at 5,199 and 2,742,050,564 common shares outstanding. Top 20 Stockholders as of August 31, 2019

Name Citizenship No. of Shares

Percentage (%)

1. Premier Network International Limited Foreign (BVI) 777,721,925 28.36%

2. LT Group, Inc. Filipino 545,370,189 19.89%

3. Narra Capital Investment Corporation Filipino 505,894,656 18.45%

4. Tanduay Holdings, Inc. Filipino 170,133,159 6.20%

5. PCD Nominee Corporation Filipino/Foreign 162,978,288 5.94%

6. Fortune Tobacco Corporation Filipino 131,863,677 4.81%

7. MC Metroplex Holdings, Inc. Filipino 89,752,734 3.27%

8. Silverbox Equities, Inc. Filipino 69,826,000 2.55%

9. Sullases Holdings, Inc. Filipino 49,331,844 1.80%

10. FEBTC TA #401-00012 Filipino 27,360,373 1.00%

11. Hayson Investments Limited BVI 24,077,000 0.88%

12. Miguel, Jurdayne N. Filipino 17,049,926 0.62%

13. AB Capital & Investment Corporation – Trust & Investment Division

Filipino 11,712,681 0.43%

14. North Negros Marketing Co., Inc. Filipino 10,173,459 0.37%

15. Bank of the Philippine Islands Filipino 5,658,157 0.21%

16. Liberty Trading/ Navigation Co. American 4,772,380 0.17%

17. Alrac, Inc. Filipino 4,654,944 0.17%

18. FEBTC TA #401-0008 Filipino 4,159,990 0.15%

19. Victorias Insurance Factors Corporation Filipino 3,456,975 0.13%

20. Asset Pool A (SPV-AMC), Inc. Filipino 3,313,417 0.12%

of 19

ITEM 6 – MANAGEMENT’S DISCUSSION AND ANALYSIS The following Management’s Discussion and Analysis should be read in connection with the submitted Audited Consolidated Financial Statements for the years ended August 31, 2019 and 2018.

I. Results of Operations

The Group realized a net income of P816 million for the year ended August 31, 2019, which

is 7% or P52 million higher than last year. This was mainly due to higher sugar price levels

compared last year and the early start of commercial operations of the distillery plant which

generated 27% of the Group’s gross profit.

Even with the decline in revenue of 16%, gross profit improved from 18% to 25% mainly from

comparatively high sugar prices which compensated for the high cost of cane hauling in the

current year. Operating expenses are significantly higher than last year at 15% of sales due

to higher provisions, professional fees and contracted services cost, representation expenses

and taxes paid. During the year, the Group also recognized one-off transactions which

resulted to an increase in net income.

II. Financial Condition

The Group continues to maintain a strong balance sheet with an increase in stockholder’s

equity of 13% to P7.2 billion from P6.4 billion last year. Debt level has declined significantly

due to early repayment of long-term loan, which is down to P495 million from P1.2 billion last

year. The Group’s total assets of P9.1 billion mainly comprise fixed assets. The Group

continues to invest on capital expenditure aimed to upgrade the plant, improve operational

efficiencies, expand capacity of a key segment and to ensure environmental protection.

There is a significant improvement in the Group’s financial key performance indicators across the

board compared last year. The Group’s current ratio significantly increased from 2.19 to 3.0

while debt to equity ratio of 0.27 is the lowest in the last ten years. Return on assets and

equity increased to 9% and 11%, respectively, despite the sustained challenges in the

industry.

III. Financial Key Performance Indicators

(All amounts in thousands of Philippine Peso) Revenue Performance

2019 2018 2017

Revenue 5,579,629 6,618,914 8,712,581

% Growth (decline) vs PY (16%) (24%) 64%

of 19

Net Income Margin

2019 2018 2017

Net Income 816,378 764,163 654,193

% Growth (decline) vs PY 7% 17% (14%)

Return on Assets (ROA)

2019 2018 2017

Return on Assets 8% 9% 7%

Net Income 816,378 764,163 654,193

Total Assets 9,085,900 8,977,435 9,306,804

Basic Earnings per share (EPS)

2019 2018 2017

EPS 0.30 0.28 0.25

% Growth (decline) vs PY 20% 14% (19%)

Debt-to-Equity Ratio

2019 2018 2017

Debt to equity ratio .26 0.41 0.65

Debt 1,906,910 2,610,860 3,671,773

Equity 7,178,990 6,366,575 5,635,031

ITEM 7 – FINANCIAL STATEMENTS Please see attached duly signed Group’s Consolidated Financial Statements as of August 31, 2019, together with the notarized Statement of Management’s Responsibility, which was audited by Reyes Tacandong and Co., the Group’s external auditor for crop year 2018-2019, as Exhibit “A“. ITEM 8 – CHANGES IN & DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no disagreement with the external auditor on accounting, financial concerns, and disclosures in the consolidated financial statements, which is attached hereto as Exhibit “A”.

INFORMATION ON INDEPENDENT AUDITORS For Crop Year 2018-2019, the services of the accounting firm Reyes Tacandong & Co., with office address at Citibank Tower, 8741 Paseo de Roxas, Makati, 1226 Metro Manila, was engaged as the Group’s external auditors. In compliance with the Company’s Code of Corporate Governance, the Company’s external auditor shall be rotated or the handling partner shall be changed every five (5) years or earlier.

of 19

EXTERNAL AUDIT FEES Audit and Audit-Related Fees The aggregate fees billed for each of the last two (2) fiscal years for professional services rendered by the external auditor for the audit of the annual consolidated and separate financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagement for the Company and the Group for those fiscal years were:

CY 17-18 - P2 million - inclusive of VAT and out of pocket expenses CY 18-19 - P1.2 million - inclusive of VAT and out of pocket expenses

Tax Fees Fees billed for the last two (2) fiscal years for professional services rendered by an external auditor for tax accounting, compliance, advice, planning and any other form of tax services were as follows:

CY 17-18 – P0.3 million

CY 18-19 - None PART III – CONTROL AND COMPENSATION INFORMATION ITEM 9 – DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER

VMC BOARD OF DIRECTORS During VMC’s Annual Stockholder’s Meeting held on February 6, 2018, the following were elected as members of the VMC Board of Directors to serve as such from February 6, 2018 and until their successors shall have been duly elected and qualified:

1. Wilson T. Young, Filipino, is currently Chairman of the Board of VMC and director of BK Titans, Inc., Perf Restaurants, Inc. (franchisee of Burger King in the Philippines). He is also a member of the Board of Trustees of the University of the East and Vice-Chairman of the University of the East Ramon Magsaysay Memorial Medical Center, Inc., member of the International Board of Advisers of the Philippine School of Prosthetics and Orthotics, as well as member of the Board of the following foundations: Mithing Pangarap Foundation, Inc., Norfil Foundation, Inc., and the National Defense College of the Philippines Educational and Development Foundation, Inc. He also serves as member of the Board of Admissions of the National Defense College of the Philippines and Chairman of Total Credit Cooperative. He was formerly an instructor of Taxation and Accounting at Assumption College, San Lorenzo Makati and Financial Accounting at the Ateneo de Manila-Loyola. He is likewise a director and/or officer of various family-owned and controlled corporations, and was a former director and officer of certain companies of LT Group, Inc. Mr. Young is a Certified Public Accountant and holds a Master’s Degree in National Security Administration.

2. *Brian Keith F. Hosaka, Filipino, is the Corporate Secretary and a director of VMC. He is one of the founding partners of Paner Hosaka & Ypil Attorneys-at-Law. He graduated from the Ateneo de Manila University in 1993, and thereafter obtained a Juris Doctor degree from the Ateneo de Manila Law School in 1998. He was admitted to the Philippine Bar in 1999 and has been practicing law since then. He previously worked for the Supreme Court of the Philippines, and served as Deputy General Counsel of the Integrated Bar of the Philippines from 2006 to

of 19

2007. Atty. Hosaka resigned as Director in January 2019, due to appointment in government office.

3. **Eduardo V. Concepcion, Filipino, is the President and Chief Executive Officer

of VMC. He graduated with Honors at the De La Salle University with a Bachelor of Science in Chemical Engineering. He is a licensed Chemical Engineer and took his Master’s in Business Administration (without thesis) at the University of San Agustin-Iloilo. He served as Vice President/Resident Manager of Central Azucarera de La Carlota, Inc. and likewise rendered service to Ma-ao Sugar Central and Passi (Iloilo) Sugar Central, Inc. He has been working with the sugar industry for more than 43 years. Mr. Concepcion retired from his post as Chief Executive Officer on October 2019.

4. William Y. Chua, Filipino, is the President of Agro Bulk Marine Corporation,

Wilch Realty Corporation and MC Metroplex Holding Corp. He is also the Vice President of Oro Allado Commodities, Inc., and Federation of Sugar Traders of the Phils.

5. Peter Y. Ong, Filipino. He was elected to the Board of VMC on May 27, 2016 and

is a member of the Audit and Risk Committee and Budget Committee. He serves as President of Network Holdings & Equities Corp. He also serves as Treasurer of Cosmic Holdings Corporation and Merit Holdings & Equities Corp. He is a consultant of Philippine Airlines, Inc., and served as President of Air Philippines Corporation. He is a director of Fortune Tobacco Corporation where he also served as Senior Vice President for Production. He served as Senior Vice President of Allied Savings Bank from 2001 to 2009. He is a director of LT Group, Inc., Allied Bankers Insurance Corporation Allied Leasing & Finance Corporation, Solar Holdings Corporation, Basic Capital Investment Corp., Iris Holdings & Development Corp., Allied Savings Bank and Eton Properties Philippines Inc.

6. ***Lucio K. Tan, Jr., Filipino, has been a director of VMC since June 6, 2014. He held a Master’s Degree under the Executive Master of Business Administration Program (EMBA) from the Kellogg School of Management at Northwestern University and the Hong Kong University of Science and Technology. He obtained his Bachelor of Science in Civil Engineering from the University of California, Davis. He served as an Executive Vice President of Fortune Tobacco Corporation and Foremost Farms Inc. He was the Chief Executive Officer, as well as a director of Tanduay Distillers Inc. He was also a director as well as the Officer-in-Charge of Eton Properties Philippines, Inc. He was a director of LT Group, Inc., Philippine National Bank, Macroasia Corp., Allied Savings Bank, Dynamic Holdings Limited, PAL Holdings, Inc. (formerly Baguio Gold Holdings Corp.), Tanduay Brands International Inc., Tanduay Distillers, Inc., and Philippine Airlines Inc.

7. Michael G. Tan, Filipino, is presently the Chief Operating Officer of Asia

Brewery, Inc. and the President and Chief Operating Officer of LT Group, Inc. (formerly Tanduay Holdings Inc.). For the past years, he served as a director of the following corporations: Abacus Distribution Systems Philippines, Inc., Allied Banking Corporation, Eton Properties, Inc., Philippine National Bank and PMFTC.

8. ****Terence D. Son Keng Po, Filipino, is the Treasurer of VMC. He holds a

degree in Business Administration and Accountancy (MCL) from the University of the Philippines and a Master’s Degree in Business from the University of Chicago. He is the President & CEO of Victorias Foods Corporation (“VFC”). He is currently a director of Victorias Golf & Country Club, Inc. (“VGCCI”) and Canetown Development Corporation (“CDC”). He also served as a director of Cargill Financial Services, Inc. and Carval Investor Services (both subsidiaries of Cargill, Inc.).

of 19

9. Victor T. Yu, Filipino, is presently the Consultant of Sales and Business Development of VMC. He took up BS Management and Industrial Engineering at Mapua Institute of Technology. He is also a Master’s Degree holder in Business Administration from University of the Philippines, Diliman, Quezon City. He is currently the General Manager of Victorias Golf & Country Club, Inc. and has been a director of VMC since February 7, 2017. Moreover, he is the President of Victorias Foods Corporation.

10. Alvin C. Yu, Filipino, is the President of Narra Capital Investment Corporation,

Bacolod DN Triumph Steel Corporation and Bacolod Twinstar Shipping Corporation. He is the Vice President of VCY Sales Corporation and the Manager of Bacolod Triumph Hardware. He graduated from the Ateneo de Manila University with a Management Engineering degree and completed the Owner/President Management Program from Harvard Business School.

11. Martin C. Yu, Filipino, he has been a director of VMC since February 4, 2014, and

President of Firefly Electric & Lighting Corporation since 2001. Mr. Yu has also been a director of VCY Sales Corporation since 1998. He took up Business Management at the Ateneo de Manila University and completed the Owner/President Management Program from Harvard Business School. (*Atty. Hosaka served as Director until January 2019 only due to his appointment in government office; ** Mr. Concepcion retired from his post as Chief Executive Officer on October 2019; ***Mr. Lucio K. Tan, Jr. served the Company until November 2019 due to his untimely demise; **** Mr. Son Keng Po served as Treasurer until February 5, 2019)

The following are the duly elected members of the Board effective February 6, 2019.

1. Wilson T. Young – Please see above. 2. Minnie O. Chua, Filipino, is the Vice Chairman, President and Chief Operating

Officer of VMC. She is a Certified Public Accountant. She graduated Magna Cum Laude from the University of St. La Salle with the degree of Bachelor of Science in Commerce major in Accounting. Prior to VMC, she had extensive banking experience having worked for Solidbank and Metrobank. She previously served as Assistant Treasurer and Deputy Chief Operating Officer for VMC. She also serves as Director of VFC and CDC.

3. Anna Rosario V. Paner, Filipino, is the Chair of the Legal, Nominations,

Corporate Governance and Related Party Transactions Committee. She has been a private law practitioner since 1996 and is one of the founding partners of Paner Hosaka & Ypil Attorneys-at-Law. She is currently the President of Victorias Golf and Country Club, Inc. (VGCCI) and a Vice-Chairman of Victorias Foods Corporation (VFC). She is the Corporate Secretary of Canetown Development Corporation (CDC) and Victorias Agricultural Land Corporation (VALCO). For the past years, she has been connected with Philippine Opportunities for Growth, Income (SPV-AMC), Inc., Techbox International Inc. and Nota Bene as their director.

4. William Y. Chua - Please see above. 5. Alvin C. Yu - Please see above. 6. Martin C. Yu - Please see above.

of 19

7. Reggie Hannah Y. Lorenzo – Filipino, is the Treasurer of VMC, and Chairman of the Audit and Risk Committee. She is a Certified Public Accountant. She graduated in the top 10% of her class from the University of St. La Salle with the degree of Bachelor of Science in Accountancy. She holds a Masters of Business Administration Degree from the Hong Kong University of Science & Technology. She served as Junior Auditor of Sycip, Gorres, Velayo & Co. and as General Manager of VCY Sales Corporation. She is presently the Investment Manager of the VCY Group of Companies.

8. Lucio K. Tan, Jr. - Please see above. 9. Michael G. Tan - Please see above. 10. Peter Y. Ong - Please see above. 11. Victor T. Yu - Please see above. The following are the appointed corporate officers effective February 6, 2019:

1. Wilson T. Young, Chairman of the Board of Directors 2. Minnie O. Chua, Vice Chairman; President & Chief Operating Officer 3. Eduardo V. Concepcion, Chief Executive Officer (until October 2019) 4. Reggie Hannah Y. Lorenzo, Treasurer 5. Emmanuel S. Ypil, Corporate Secretary 6. Teresita V. Ilagan, Creditor-Appointed Controller (until January 2019) 7. Kristine D. Cabuguason, Chief Finance Officer and Creditor-Appointed

Controller 8. Linley A. Retirado, Chief Manufacturing Officer 9. Eva A. Vicencio-Rodriguez, Assistant Corporate Secretary, Compliance and

Information Officer, and Chief Administrative Officer VMC Executive Officers

1. Minnie O. Chua (Please see above.)

2. Eduardo V. Concepcion, Chief Executive Officer of VMC. (Please see above.)

3. Linley A. Retirado, Filipino, is currently occupying the position of the Chief

Manufacturing Officer. He is a licensed Chemical Engineer. He was Chairman and President of Philippine Sugar Technologists Association, Inc. and currently a member of its Board of Trustees.

4. Kristine D. Cabuguason, Filipino, is the Chief Finance Officer/Creditor-

Appointed Controller of VMC. She served as the Audit Director in SGV & Co. and previously Assistant Manager in EY assurance practice with combined experience of more than seven years in audit of publicly-listed and private companies in real estate and construction, retail, manufacturing, asset management, educational institutions, and small and medium-sized entities in the Philippines and Bahrain. She is a Certified Public Accountant in the Philippines and in the state of California, USA. She completed a Bachelor's Degree in Accountancy in 2007 at the University of St. La Salle. She is also the Treasurer of the following VMC subsidiaries: VFC, VGCCI, VGEC, VALCO and CDC.

5. Eva A. Vicencio-Rodriguez, Filipino, is the Chief Administrative Officer of

VMC. A lawyer, she holds a Master in Business Administration degree from the University of St. La Salle and finished her BS Psychology from West Negros College,

of 19

Magna Cum Laude. She is also the Assistant Corporate Secretary and Compliance and Information Officer of VMC. She is likewise the Head of VMC’s Legal & Compliance Division and the Corporate Secretary of the following VMC subsidiaries: VFC, and VGCCI. She serves as President and Director of CDC, and also a President and Director of VALCO. She is currently the Chairperson of the Victorias Mill District Development Council Foundation, Inc.

6. Teresita V. Ilagan, Filipino, is the Creditor-Appointed Controller of VMC. She is

the Treasurer and director of various VMC subsidiaries, particularly, CDC, VALCO, and VGCCI. She is also a director of VFC. She is a Certified Public Accountant and holds a Master’s degree in Business Administration from the Ateneo Business Graduate School. Ms. Ilagan retired as Creditor-Appointed Controller on January 2019.

To the knowledge and/or information of the Company, the above elected members of the Board of Directors, are not, presently or during the last (5) years, involved or have been involved in any legal proceedings affecting/involving themselves and/or their property before any court of law or administrative body in the Philippines or elsewhere and have not been convicted by final judgment of any offense.

There is no person who is not a corporate officer of the Company who is expected to make a significant contribution to the business. There were no transactions during the last two years or any proposed transactions, to which the Company was or is to be a party, in which any director or officers, any nominee for election as a director, any security holder or any member of the immediate family of any of the person mentioned had or is to have a direct or indirect material interest. ITEM 10 – EXECUTIVE COMPENSATION As of August 31, 2019, the top officers of VMC are its President and Chief Operating Officer (COO), Chief Executive Officer (CEO), Chief Manufacturing Officer (CMO), Chief Administrative Officer (CAO), and Chief Finance Officer and Creditor-Appointed Controller.

The annual compensation paid to all executive officers was paid in cash. The total annual compensation, which includes the basic salary, bonus and other compensation, in 2019 amounted to P17.8 million.

Annual Compensation

Salary Bonus and Other Compensation

Year 2020 (Projected

)

2019 2018 2020 (Projected)

2019 2018

Top Five Most Highly Compensated Officers (President and COO, CEO, CMO, CFO and CAO)

9.5 million 13.3 million 17.1 million 4.7 million 4.5 million 8 million

All other officers as a group unnamed

There are no other executive officers apart from the President and COO, the CEO, the CMO, CFO and CAO.

of 19

Compensation of VMC Board of Directors There is no compensatory plan or arrangement including payments to be received from the registrant with respect to a named officer. Change in Control (from list of top 20 stockholders as of Aug. 31, 2019) As of August 31, 2019, the following are VMC’s principal stockholders: Premier Network International, Ltd - 28.36%; LT Group, Inc. – 19.89%; Narra Capital Investment Corporation – 18.45%; Tanduay Holdings, Inc. 6.20% and PCD Nominee Corporation – 5.94%. ITEM 11 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Record and Beneficial Owners and Management

The following are known to VMC to be directly or indirectly the record or beneficial owner of more than five percent (5%) of registrant’s voting securities (VMC has only one class of voting security, i.e. common shares) as of August 31, 2019:

TITLE of CLASS

Name & Address of Record Owner and Relationship with Issuer

Citizenship

Number of Shares

Held

Percentage (%)

Common PCD Nominee Corporation Filipino/Other Alien

162,978,288

5.94%

Common *Premier Network International Ltd. BVI 777,721,925 28.36%

Common **LT Group, Inc. Filipino 847,367,024 30.90%

Common ***Narra Capital Investment Corporation

Filipino 566,109,504 20.65%

*SEC Form 23-B dated 11 July 2018 **Inclusive of 170,133,159 shares in Tanduay Holdings, Inc., ***SEC Form23-B dated 30 May 2017 Security Ownership of Management as of August 31, 2019

Title of Class

Name Citizenship No. of Shares Percentage (%)

Common Eduardo V. Concepcion – CEO

Filipino 1,000 (D) 1,000 (ID, through broker)

0.000%

Common Minnie O. Chua President & COO

Filipino 2,942 (ID, held by a member of immediate family sharing the same household) and 4,000 (D)

0.000%

*Based on submitted SEC Form 23-A dated 6 February 2019.

of 19

ITEM 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS VMC, in the interest of transparency and good corporate practice, hereby discloses that the law firm of Paner Hosaka & Ypil Attorneys-at-Law (PHYLAW) is among the law firms retained by VMC. Effective October 1, 2013, the said firm was engaged as counsel of VMC in the VMC Rehabilitation Case (In the Matter of the Petition for Declaration of a State of Suspension of Payment: For the Approval of the Rehabilitation Plan and Appointment of a Management Committee”, Victorias Milling Company, Inc., Petitioner, SEC Case No. 07-97-5693) pending before the SEC. Director Anna Rosario V. Paner is a partner of PHYLAW. She did not participate when the Board deliberated and voted on the engagement of PHYLAW. During the year, VMC has paid PHYLAW legal fees that VMC believes to be reasonable for the services provided. On July 2, 2019, the Board approved the recommendation of the President and Chief Operating Officer to lease warehouse spaces from MC Metroplex Holdings, Inc. Director William Y. Chua is the President of MC Metroplex Holdings, Inc. as well as a stockholder of VMC. He did not take part in the deliberations and approval of the lease proposal. The said lease is still effective as of this date. PART IV – COPRORATE GOVERNANCE ITEM 13 – CORPORATE GOVERNANCE

COMPLIANCE WITH LEADING PRACTICES ON CORPORATE GOVERNANCE

VMC has developed a Corporate Governance Manual designed as a governance operating model in running the affairs of the Company. Adherence thereof as well as to the other corporate principles and best practices is strongly advised all throughout VMC in all its activities and undertakings. It is committed and is doing its best as a corporate citizen and pursuant to SEC Memorandum Circular No. 20, series of 2013 the Company’s key officers and members of the Board attended Corporate Governance Trainings.

INTEGRATED ANNUAL CORPORATE GOVERNANCE REPORT (I-ACGR)

The Company has duly submitted its Integrated Annual Corporate Governance Report (I-ACGR) on May 30, 2019 pursuant to the Securities and Exchange Commission’s (SEC) SEC Memorandum Circular No. 15, Series of 2017. VMC’s I-ACGR for the year 2018 can be viewed and downloaded through

http://victoriasmilling.com/uploads/pdfs/I-ACGR_for_year_20181.pdf. DEVIATION There is no deviation from the provisions of the Manual on the election of independent directors, considering that the composition of the Corporation’s Board of Directors is determined under its rehabilitation plan. PART V- EXHIBITS AND SCHEDULES A. EXHIBITS AND SCHEDULES

1. EXHIBIT “A” – Consolidated Audited Financial Statement as of August 31, 2019 2. EXHIBIT “B” – Reports on SEC Form 17-C

of 19

B. REPORTS ON SEC FORM 17-C (EXHIBIT”B”)

1. November 7, 2018 - attendance of VMC Board to Corporate Governance Orientation Program on November 7, 2018.

2. December 10, 2018 - attendance of VMC Board to Corporate Governance Orientation Program on December 5, 2018 and December 6, 2018, respectively.

3. December 14, 2018 - attendance of VMC Board to Corporate Governance Orientation Program on December 6, 2018.

4. January 9, 2019 - Board approval of nominees to Board of Directors for year 2019-2020 for election at the February 6, 2019 Annual Stockholders’ Meeting.

5. January 28, 2019 - resignation of Corporate Secretary and member of the Board of Directors, and appointment of Acting Corporate Secretary.

6. February 6, 2019 - results of Annual Stockholders’ Meeting and Organizational Meeting.

7. March 6, 2019 – signing of Memorandum of Agreement with the Philippine Postal Corp. for the release of VMC’s commemorative stamp.

8. April 5, 2019 - change of corporate contact information.

9. May 7, 2019 - inauguration of 40MW Biomass Cogeneration Plant.

10. July 2, 2019 - Conferment of Chairman Emeritus title.

11. August 2, 2019 - participation of VMC member of the Board and Audit Committee Chairman to Enhancing Audit Committee Effectiveness seminar on July 25, 2019.

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES

AUDITED CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY SCHEDULES FOR THE SECURITIES AND EXCHANGE COMMISSION

AUGUST 31, 2019

TABLE OF CONTENTS

First Section

Management Representation Letter

Report of Independent Auditors

Consolidated Statement of Financial Position

Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of cash flows

Notes to Consolidated Financial Statements

Second Section

Supplementary Schedules Schedule

Financial Assets A

Amounts Receivable from Directors, Officers, Employees,

Related Parties and Principal Stockholders B

Amounts Receivable from Related Parties which are

eliminated during Consolidation Of Financial Statements C

Intangible Assets - Other Assets D

Long-term Debt E

Supplementary Schedules Schedule

Indebtedness to Related Parties F

Guarantee of Securities of Other Issuers G

Capital Stock H

Reconciliation of Retained Earnings Available for Dividend

Declaration I

Map of Relationships of the Companies within the Group J

List of Applicable Standards and Interpretations K

Schedule of Financial Soundness Indicators L

With independent auditors’ report provided by

REYES TACANDONG & CO. FIRM PRINCIPLES. WISE SOLUTIONS.

Victorias Milling Company, Inc. and Subsidiaries

Consolidated Financial Statements August 31, 2019

(With Comparative Figures for 2018 and 2017)

SEC Registration Number

P W 0 0 0 0 0 3 6 4

C O M P A N Y N A M E

V I C T O R I A S M I L L I N G C O M P A N Y , I N C . A N D

S U B S I D I A R I E S

PRINCIPAL OFFICE (No./Street/Barangay/City/Town/Province)

V M C C o m p o u n d , J . J . O s s o r i o S t r e e t ,

B a r a n g a y X V I , V i c t o r i a s C i t y , N e g r o s

O c c i d e n t a l

Form Type Department requiring the report Secondary License Type, If Applicable

A A C F S C R M D N / A

C O M P A N Y I N F O R M A T I O N

Company’s Email Address Company’s Telephone Number/s Mobile Number

[email protected] 034-399-3588 –

No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day)

5,199 First Tuesday of February August 31

CONTACT PERSON INFORMATION

The designated contact person MUST be an Officer of the Corporation

Name of Contact Person Email Address Telephone Number/s Mobile Number

Atty. Eva V. Rodriguez [email protected] 034-399-3588 –

CONTACT PERSON’S ADDRESS

VMC Compound, J.J. Ossorio Street, Barangay XVI, Victorias City, Negros Occidental

NOTE 1: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated.

NOTE 2: All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt shall not excuse the corporation from liability for its deficiencies.

C O V E R S H E E T

for

AUDITED FINANCIAL STATEMENTS

Reyes Tacandong & Co. is a member of the RSM network. Each member of the RSM network is an independent accounting and consulting firm, and practices in its own right. The RSM network is

not itself a separate legal entity of any description in any jurisdiction.

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors Victorias Milling Company, Inc. VMC Compound, J.J. Ossorio Street, Barangay XVI Victorias City, Negros Occidental Opinion

We have audited the accompanying consolidated financial statements of Victorias Milling Company, Inc. and Subsidiaries (the Group), which comprise the consolidated statement of financial position as at August 31, 2019 and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended and notes to consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at August 31, 2019, and their consolidated financial performance and their cash flows for the year then ended in accordance with Philippine Financial Reporting Standards (PFRS).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSA). Our responsibilities under those standards are further described in the Auditors’ 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 the 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.

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. Accounting for Sugar Inventories Sugar inventories amounted to P=399.0 million as at August 31, 2019. The accounting for sugar inventories is significant to our audit because it represents 17% of total current assets and includes accounting for quedans, a negotiable instrument representing sugar ownership, and sugar delivery orders. Count procedures require estimates and the determination of sugar inventory accountabilities to third parties.

BOA/PRC Accreditation No. 4782

October 4, 2018, valid until August 15, 2021

SEC Accreditation No. 0207-FR-3 (Group A)

August 29, 2019, valid until August 28, 2022

Citibank Tower

8741 Paseo de Roxas

Makati City 1226 Philippines

Phone : +632 8 982 9100

Fax : +632 8 982 9111

Website : www.reyestacandong.com

- 2 -

Our procedures included, among others, understanding of the inventory management process, including quedan monitoring, testing of relevant controls and inventory cost, observation of physical inventory count, review of inventory count summarization and testing of inventory count reconciliation. The sugar inventories as at August 31, 2019 were fairly accounted for.

Necessary disclosures are included in Note 5, Inventories.

Estimating Provision for Legal Claims

Provision for legal claims amounted to P=296.3 million as at August 31, 2019. Estimating provision for legal claims is significant to our audit because it represents 26% of total noncurrent liabilities. Moreover, it involves significant assumptions and high degree of judgment in estimating timing and amount of the claims.

Our procedures included, among others, confirmation with legal counsel of the likely outcomes and best estimates of claims, evaluation of competence of legal counsel engaged by management, testing reasonableness of assumptions used in determining the amount of provision and review of accuracy and completeness of the necessary disclosures in the consolidated financial statements. Necessary disclosures are included in Note 11, Provisions for Legal Claims.

Other Matter

The consolidated financial statements of the Group as at and for the years ended August 31, 2018 and 2017 were audited by another auditor, whose report dated December 6, 2018 expressed an unmodified opinion on those statements.

Other Information

Management is responsible for the other information. The other information comprises the information included in the Securities and Exchange Commission (SEC) Form 20-IS (Definitive Information Statement), SEC Form 17-A and Annual Report for the year ended August 31, 2019, but does not include the consolidated financial statements and our auditors’ report thereon. The SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A and Annual Report for the year ended August 31, 2019 are expected to be made available to us after the date of this auditors’ 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 audit of the consolidated financial statements, our responsibility is to read the other information identified in the foregoing 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 audit or otherwise appears to be materially misstated.

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 PFRS, 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.

- 3 -

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.

Auditors’ Responsibility 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 auditors’ 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 PSA 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, these 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 PSA, 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 auditors’ 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 auditors’ 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 subsidiaries within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.


CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at August 31, 2019

(With Comparative Figures for 2018) Amounts in Thousands

Note 2019 2018

ASSETS

Current Assets Cash and cash equivalents 2 P=657,653 P=398,666 Trade and other receivables 3 378,155 459,735 Investments in Unit Investment Trust Fund 4 109,437 272,783 Inventories 5 729,745 697,479 Other current assets 6 493,861 598,447

Total current assets 2,368,851 2,427,110

Non-current Assets Property, plant and equipment 7 5,861,700 5,863,753 Investment properties 8 585,791 596,716 Other non-current assets 9 269,558 89,856

Total non-current assets 6,717,049 6,550,325

P=9,085,900 P=8,977,435

LIABILITIES AND EQUITY

Current Liabilities

Trade payables and other current liabilities 10 P=433,017 P=548,412 Current portion of borrowings 12 330,000 500,000 Income tax payable 25,553 58,600

Total current liabilities 788,570 1,107,012

Non-current Liabilities Borrowings, net of current portion 12 165,000 750,000 Payable to claimants, net of current portion 10 180,091 – Provisions for legal claims 11 296,344 401,465 Retirement liability 21 44,195 38,809 Net deferred tax liabilities 20 426,710 307,574 Other non-current liabilities 6,000 6,000

Total non-current liabilities 1,118,340 1,503,848

Total liabilities 1,906,910 2,610,860

Equity attributable to Shareholders of Parent Company Capital stock 13 3,042,061 3,042,061 Additional paid-in capital 13 840,720 840,720 Convertible notes awaiting conversion 1 5,450 5,450 Retained earnings 13 4,469,212 3,606,172 Other equity reserves 13 318,591 368,100 Treasury stock - at cost 13 (1,501,882) (1,501,882)

Total Equity attributable to Shareholders of Parent Company 7,174,152 6,360,621 Non-controlling Interests 4,838 5,954

Total equity 7,178,990 6,366,575

P=9,085,900 P=8,977,435

See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED STATEMENT OF INCOME For the Year Ended August 31, 2019

(With Comparative Figures for 2018 and 2017) Amounts in Thousands, except Basic/Diluted Earnings per Share

Note 2019 2018 2017

REVENUE 16 Sale of goods P=5,012,023 P=6,130,634 P=8,372,235 Service income 567,606 488,280 340,346

5,579,629 6,618,914 8,712,581

COST OF SALES AND SERVICES RENDERED 17 Cost of sales 3,815,978 5,188,007 7,164,465 Cost of services rendered 340,604 245,079 206,652

4,156,582 5,433,086 7,371,117

GROSS PROFIT 1,423,047 1,185,828 1,341,464

OPERATING EXPENSES 18 General and administrative 670,515 455,317 639,392 Selling 179,596 159,223 151,094

850,111 614,540 790,486

FINANCE COST 12 (58,093) (3,608) (99,294)

OTHER INCOME (CHARGES) Insurance claims 7 517,155 – – Provision for impairment losses on property, plant and

equipment 7 (69,782) (512,173) – Net reversal of (additions to) provisions for legal claims 11 (67,849) 876,228 367,084 Other income - net 19 164,646 157,205 157,717

544,170 521,260 524,801

INCOME BEFORE INCOME TAX 1,059,013 1,088,940 976,485

INCOME TAX EXPENSE 20 Current 121,207 183,597 299,955 Deferred 121,428 141,180 22,337

242,635 324,777 322,292

NET INCOME P=816,378 P=764,163 P=654,193

Net Income (Loss) attributable to: Shareholders of Parent Company P=817,494 P=765,713 P=656,186 Non-controlling interests (1,116) (1,550) (1,993)

P=816,378 P=764,163 P=654,193

Earnings per Share for Net Income attributable to Shareholders of Parent Company Basic and Diluted 14 P=0.30 P=0.28 P=0.25



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the Year Ended August 31, 2019

(With Comparative Figures for 2018 and 2017) Amounts in Thousands, except Basic/Diluted Earnings per Share

Note 2019 2018 2017

NET INCOME P=816,378 P=764,163 P=654,193

OTHER COMPREHENSIVE INCOME (LOSS) Items that will not be subsequently reclassified to

profit or loss: Remeasurement gain (loss) on retirement liability 13 (5,662) 7,462 1,151 Revaluation increment of property, plant and

equipment 13 – (54,370) – Deferred tax relating to components of other

comprehensive income (loss) 1,699 14,074 (346) Item that may be subsequently reclassified

to profit or loss: Net unrealized gain (loss) on investments

in Unit Investment Trust Fund 4 – 215 (968)

(3,963) (32,619) (163)

TOTAL COMPREHENSIVE INCOME P=812,415 P=731,544 P=654,030

Total Comprehensive Income (Loss) attributable to: Shareholders of Parent Company P=813,599 P=733,094 P=656,023 Non-controlling interests (1,184) (1,550) (1,993)

P=812,415 P=731,544 P=654,030



CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the Year Ended August 31, 2019

(With Comparative Figures for 2018 and 2017) Amounts in Thousands

Equity Attributable to Shareholders of Parent Company

Capital Stock

(Note 13)

Additional Paid-in Capital

(Note 13)

Convertible Notes Awaiting

Conversion (Note 1)

Retained Earnings (Note 13)

Other Equity Reserves (Note 13)

Treasury Stock (Note 13) Total

Non-controlling Interests Total Equity

Balances as at September 1, 2016 P=2,913,251 P=735,544 P=239,436 P=2,079,730 P=505,425 (P=1,501,882) P=4,971,504 P=9,497 P=4,981,001 Comprehensive income: Net income (loss) – – – 656,186 – – 656,186 (1,993) 654,193 Other comprehensive loss – – – – (163) – (163) – (163)

Total comprehensive income (loss) – – – 656,186 (163) – 656,023 (1,993) 654,030

Transaction with owners - Equity conversion of convertible notes 128,810 105,176 (233,986) – – – – – –

Transfer of revaluation increment to retained earnings – – – 21,803 (21,803) – – – –

Balances as at August 31, 2017 3,042,061 840,720 5,450 2,757,719 483,459 (1,501,882) 5,627,527 7,504 5,635,031

Comprehensive income: Net income (loss) – – – 765,713 – – 765,713 (1,550) 764,163 Other comprehensive loss – – – – (32,619) – (32,619) – (32,619)

Total comprehensive income (loss) – – – 765,713 (32,619) – 733,094 (1,550) 731,544


Balances as at August 31, 2018: As previously presented 3,042,061 840,720 5,450 3,606,172 368,100 (1,501,882) 6,360,621 5,954 6,366,575 Effect of adoption of Philippine Financial

Reporting Standard 9 (Note 28) – – – 1,660 (1,660) – – – –

As restated 3,042,061 840,720 5,450 3,607,832 366,440 (1,501,882) 6,360,621 5,954 6,366,575

Comprehensive income: Net income (loss) – – – 817,494 – – 817,494 (1,116) 816,378 Other comprehensive loss – – – – (3,963) – (3,963) – (3,963)

Total comprehensive income (loss) – – – 819,154 (5,623) – 813,531 (1,116) 812,415


Balances as at August 31, 2019 P=3,042,061 P=840,720 P=5,450 P=4,469,212 P=318,591 (P=1,501,882) P=7,174,152 P=4,838 P=7,178,990



CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended August 31, 2019

(With Comparative Figures for 2018 and 2017) Amounts in Thousands

Note 2019 2018 2017

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=1,059,013 P=1,088,940 P=976,485 Adjustments for:

Insurance claims 7 (517,155) – – Depreciation and amortization 7 340,990 361,652 345,041 Provisions for impairment losses on:

Property, plant and equipment 7 69,782 512,173 – Input and advance output value-added tax 6 55,204 – – Advances to a supplier 9 38,000 – – Trade and other receivables 3 7,997 – 3,777 Inventory write-down and obsolescence – – 289

Net additions to (reversal of) provisions for legal claims 11 67,849 (876,228) (367,084) Finance cost 12 58,093 3,608 99,294

Gain on sale of investments in Unit Investment Trust Fund (UITF) 4 (17,789) (9,013) (12,226)

Loss (gain) on fair value changes of investment properties 8 (14,630) (42,563) 3,838

Net retirement benefits 21 11,038 11,477 14,897

Interest income 2 (10,486) (3,479) (5,038) Unrealized gain on fair value changes of investments

in UITF 4 (2,157) – – Net gain on disposal of property and equipment 7 – (912) (1,572)

Loss on disposal of investment properties – – 298

Operating income before working capital changes 1,145,749 1,045,655 1,057,999 Changes in operating assets and liabilities: Decrease (increase) in assets: Trade and other receivables 35,583 (145,549) (131,541) Inventories (32,267) 221,204 (592,438) Other current assets 49,384 (214,553) 79,977 Increase (decrease) in trade payables and other

current liabilities (145,888) (115,819) 178,157

Net cash generated from operations 1,052,561 790,938 592,154 Income tax paid (154,256) (139,047) (348,991) Interest received 10,486 3,479 5,038 Contribution to the retirement fund 21 (10,000) (3,000) - Retirement benefits paid 21 (1,315) (742) (731)

Net cash provided by operating activities 897,476 651,628 247,470

CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Investments in UITF 4 (970,229) (870,555) (445,000)

Property, plant and equipment 7 (436,566) (560,053) (1,098,989) Proceeds from disposal of: Investments in UITF 4 1,153,521 826,168 990,208 Investment properties 8 – 4,100 –

Property, plant and equipment 7 – 912 2,986 Proceeds from insurance claims 7 517,155 – – Decrease (increase) in other non-current assets (126,891) (674) 111,603

Net cash provided by (used in) investing activities 136,990 (600,102) (439,192)

(Forward)

- 2 -

Note 2019 2018 2017

CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term borrowings 12 (P=755,000) (P=250,000) (P=1,000,000) Proceeds from availments of long-term borrowings 12 – – 1,350,000 Interest paid 12 (20,479) (3,608) (9,210)

Net cash provided by (used in) financing activities (775,479) (253,608) 340,790

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 258,987 (202,082) 149,068

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 398,666 600,748 451,680

CASH AND CASH EQUIVALENTS AT END OF YEAR 2 P=657,653 P=398,666 P=600,748



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED AUGUST 31, 2019 (With Comparative Information for 2018 and 2017)

All Amounts are in Thousands unless otherwise Stated

1. Corporate Information and Status of Operations and Rehabilitation Victorias Milling Company, Inc. (herein referred to as the “Parent Company” or “VMC”) was originally organized and registered on May 7, 1919 with the Philippine Securities and Exchange Commission (“SEC”) primarily to operate mill and refinery facilities for sugar and allied products, as well as to render engineering services. On July 3, 2013, the SEC approved the Parent Company’s amended articles of incorporation to include, as among its business purposes, ethanol and/or potable alcohol production, infrastructure development, transportation, telecommunication, mining, water, power generation, recreation, and financial or credit consultancy. VMC’s common shares are listed in the Philippine Stock Exchange (“PSE”). VMC undertook a public offering of its common shares in 1993. There has been no subsequent listing made after its initial offering. The Parent Company has the following subsidiaries:

Subsidiaries Nature of Business

Percentage of

Effective Ownership

Victorias Foods Corporation (VFC) Food Processing and Canning 100%

Victorias Agricultural Land Corporation (VALCO) Agricultural Land Leasing and Cultivation 100

Victorias Green Energy Corporation (VGEC) Co-generation of energy 100

Canetown Development Corporation (CDC)* Real Estate Development and Selling 93

Victorias Golf and Country Club, Inc. (VGCCI) Not-for-profit Golf Facilities 81

Victorias Quality Packaging Company, Inc. (VQPC)

Manufacture of Bags and Packaging Materials 55

*The effective ownership is inclusive of 5% indirect ownership.

The Parent Company and its subsidiaries (collectively herein referred to as the “Group”) were incorporated in the Philippines. On July 4, 1997, VMC filed a petition for rehabilitation with the SEC because of financial difficulties. The trading of VMC shares in the PSE was temporarily suspended but on May 21, 2012, the SEC and the PSE lifted the suspension order. Based on the SEC Orders dated June 2, 1999, August 17, 1999 and August 19, 1999, the SEC approved VMC’s Updated Rehabilitation Plan dated September 25, 1998, subject to the First Addendum to the Rehabilitation Plan as at February 5, 1999 and the Second Amendment to the Rehabilitation Plan dated July 22, 1999 (collectively the “Original Rehabilitation Plan”).

- 2 -

As part of the implementation of the Original Rehabilitation Plan, VMC and the Management Committee created by the SEC (the “VMC Mancom”) conducted a public bidding of 53.35% of VMC’s outstanding capital stock, which bidding was declared a failure by the VMC Mancom for the reason that the deadline for the submission of the bids had expired without any bid having been submitted. In view of the failure of the bidding, the VMC Mancom, as mandated by the Original Rehabilitation Plan, submitted to the SEC on May 11, 2000 an Alternative Rehabilitation Plan (the “Plan”), which was duly approved on November 29, 2000. A key element of the Plan is the restructuring of VMC loans. VMC and its creditors executed a Debt Restructuring Agreement (“DRA”) dated April 29, 2002. The main basic features of the Plan and the DRA are as follows: 1. Increase in authorized capital stock from P=496.0 million, consisting of 496.0 million common

shares at P=1 par value a share, to P=4.61 billion, consisting of 4.61 billion common shares at the same par value.

2. Conversion of a portion of the principal of the unsecured loans and all unpaid interest into equity

amounting to P=1.1 billion. 3. Conversion of a portion of unsecured loans into Convertible Notes (CN) amounting to P=2.4 billion

(Note 13).

4. Restructuring of the secured and unsecured loans aggregating P=4.4 billion over a period of 15 years, including a three-year grace period for the principal, at 10% annual interest for Philippine Peso-denominated loans and at 6% for U.S. Dollar-denominated loans.

Pursuant to the Plan, VMC has implemented the following: 1. VMC has increased its authorized capital stock to P=3.04 billion at P=1 par value a share as at

August 31, 2019 and 2018. 2. P=1.1 billion loans from unsecured creditors were converted into VMC common shares at P=1 of

debt to one common share at P=1 par value a share. 3. Loans from unsecured creditors of P=2.4 billion were converted to CN at 8% interest, payable in

15 years. As at August 31, 2019 and 2018, CN awaiting conversion amounted to P=5.45 million, which includes accrued interest amounting to P=2.5 million.

4. The unsecured and secured creditors who have restructured loans aggregating P=4.4 billion at

10% interest for Philippine Peso-denominated loans and 6% interest for U.S. dollar-denominated loans were fully paid as at May 31, 2013.

As part of VMC’s debt restructuring, restructured trade liabilities were also fully paid in 2013. As at August 31, 2019 and 2018, VMC is compliant with the provisions of the Plan. There were, however, claims against VMC for Refined Sugar Delivery Order (RSDO) and Refined Sugar Quedan (RSQ) purportedly issued by VMC, which were allegedly used by North Negros Marketing Company, Inc. (NONEMARCO) to avail of bank loans for NONEMARCO’S own use and benefit. These were subject to a litigation before the SEC.

- 3 -

In its Order dated December 3, 2018, the SEC approved the (i) alteration or amendment of the Plan and DRA dated April 29, 2002 of VMC; and (ii) payment to the RSDO and RSQ claimants as full settlement of their claims payable beginning December 2019 over a period of 10 years (Notes 11 and 24). Consequently, VMC is still under rehabilitation as at August 31, 2019 and 2018. A Rehabilitation Receiver continues to monitor, together with the elected Board of Directors (BOD) and committees, the successful rehabilitation of VMC. In its efforts to achieve continuing successful operations, VMC has continuously focused its corporate objectives, goals, strategies, and measures to attain sustainable financial stability through, among others: (a) synchronization of refined sugar and raw sugar operations; (b) significant improvements in plant efficiency; (c) increase in profitability by addressing cost efficiency by trimming down corporate expenses; (d) ongoing programs for the optimization of human resources and (e) effective cash flows management leading to early repayment of debts. The Parent Company’s registered principal place of business is located at VMC Compound, J.J. Ossorio Street, Barangay XVI, Victorias City, Negros Occidental.

The accompanying consolidated financial statements were approved and authorized for issue by the BOD on December 10, 2019, as reviewed and recommended for approval by the Audit and Risk Committee on the same date.

2. Cash and Cash Equivalents

This account consists of:

2019 2018

Cash on hand P=936 P=15,434 Cash in banks 423,843 262,555 Cash equivalents 232,874 120,677

P=657,653 P=398,666

Cash in banks earn interest at the prevailing bank deposit rates. Cash equivalents are short-term,

highly liquid investments with maturities of no longer than 90 days from date of acquisition, and

bear annual interest rates as follows:

2019 2018

Philippine peso 0.10% to 3.25% 1.25% to 2.25% US dollar 2.00% to 2.10% 0.75% to 1.75%

Interest income on cash and cash equivalents amounted to P=10.49 million (P=3.48 million and P=5.04 million in 2018 and 2017, respectively) (Note 19).

- 4 -

3. Trade and Other Receivables


Note 2019 2018

Trade: Third parties P=223,716 P=391,731 Related parties 22 160,287 61,807 Advances to: Planters’ associations 267 1,898 Officers and employees 740 2,219 Others 21,211 23,282

406,221 480,937 Allowance for impairment losses (28,066) (21,202)

P=378,155 P=459,735

Trade receivables pertain to noninterest-bearing amounts due from customers for sale of raw sugar, refined sugar, molasses, ethanol and alcohol and for rendering of tolling services. The average credit period is 30 days.

Advances to planters’ associations are noninterest-bearing and are collectible within one year.

Advances to officers and employees pertain to cash advances made to employees, which are collected through salary deduction.

Other receivables consist of receivable from rental and sale of properties.

Movements in the allowance for impairment losses are as follows:

Note 2019 2018

Balance as at beginning of year P=21,202 P=24,350 Provision 18 7,997 – Write-off (1,133) (3,148)

Balance as at end of year P=28,066 P=21,202

Based on its assessment, management believes that the allowance for impairment losses recognized as at August 31, 2019 and 2018 is reasonable and adequate.

4. Investments in Unit Investment Trust Fund (UITF)

This account pertains to underlying portfolio with short-term fixed income.

Details of this account are as follows:

2019 2018

Cost P=107,072 P=271,219 Unrealized fair value gain 2,365 1,564

P=109,437 P=272,783

- 5 -

Movements in this account are as follows:

2019 2018

Balance as at beginning of year P=272,783 P=219,168 Additions 970,229 870,555 Disposals (1,135,732) (817,155) Fair value gain 2,157 215


Proceeds from sale of investments in UITF amounted to P=1.26 million in 2019 (P=0.82 million and P=0.99 million in 2018 and 2017, respectively) resulting to gain from sale of investments in UITF amounting to P=17.79 million (P=9.01 million and P=12.23 million in 2018 and 2017, respectively) (Note 19). Fair value changes recognized in profit or loss amounted to P=2.16 million in 2019 (Note 19). The fair value of UITF is based on the published net asset value per unit (NAVPU). NAVPU is computed as total assets of the fund less total liabilities divided by the total units outstanding as of the end of the reporting period. The fair value of investments in UITF was determined using Level 1 valuation technique. There was no change in the valuation technique applied on investments in UITF.

5. Inventories


Note 2019 2018

At cost: Raw sugar P=330,726 P=228,583 Refined sugar 68,265 167,902

398,991 396,485 Molasses 65,336 – Real estate held-for-sale 20,496 20,735 Processed food:

Finished goods 12,925 12,606 Work-in-process 4,815 7,492

Ethanol 11,005 30,756 Alcohol 3,829 12,887

Manufactured and fabricated products 1,168 1,168

518,565 482,129 At net realizable value (NRV) - Materials and supplies 211,180 215,350

P=729,745 P=697,479

Cost of materials and supplies carried at NRV amounted to P=227.53 million as at August 31, 2019

(P=231.70 million as at August 31, 2018).

- 6 -

Movements in inventories (excluding materials and supplies, and manufactured and fabricated

products) are as follows:

Raw Sugar Refined Sugar Molasses Real Estate

Held-for- Sale Processed Food Ethanol Alcohol Power Total

Balances as at September 1, 2017 P=374,661 P=285,220 P=– P=20,984 P= 20,670 P=– P=49,776 P=– P=751,311

Amount charged to cost of sales (1,117,806) (3,591,443) (235,413) (249) (50,674) – (178,142) (14,280) (5,188,007)

Production and purchase cost 971,728 3,474,125 235,413 – 50,102 30,756 141,253 14,280 4,917,657

Balances as at August 31, 2018 228,583 167,902 – 20,735 20,098 30,756 12,887 – 480,961

Production and purchase cost 1,325,340 1,961,698 294,622 – 60,570 203,038 – 16,310 3,861,578

Amount charged to cost of sales (1,223,197) (2,061,335) (229,286) (239) (62,928) (222,789) (9,058) (16,310) (3,825,142)

Balances as at August 31, 2019 P=330,726 P=68,265 P=65,336 P=20,496 P=17,740 P=11,005 P=3,829 P=– P=517,397

Materials and supplies charged to cost of sales and services rendered amounted to P=260.58 million in 2019 (P=273.65 million and P=378.73 million in 2018 and 2017, respectively) (Note 17).

6. Other Current Assets

The account consists of:

2019 2018

Input and advance output value-added tax (VAT), net of allowance for impairment losses P=297,422 P=302,554

Advances to suppliers 130,507 170,811 Prepaid expenses 45,054 56,433 Biological assets 20,148 17,340 Refundable deposits – 49,669 Others 730 1,640

P=493,861 P=598,447

Input and advance output VAT include claims for refund of P=172.6 million, net of allowance for impairment loss of P=55.20 million as at August 31, 2019. Provision for impairment loss amounting to P=55.20 million was recognized in 2019.

Advances to suppliers represent amounts paid for purchase orders not yet received by the Group. These are noninterest-bearing and are expected to be settled through delivery of goods and services by the suppliers within one year.

Prepaid expenses pertain to advance payments for real property tax, utilities and other supplies. Biological assets represent costs of fry and fingerlings and other related cultivation and growing expenses. Due to the absence of an active market and reliable basis of the fair value, the Group carries its biological assets at cost less any impairment in value.

- 7 -

7. Property, Plant and Equipment Movements of this account follows:

August 31, 2019 Note Land Land

Improvements Buildings and

Structures

Community Buildings and

Equipment Machinery and

Equipment

Project under Construction

(PUC) Total

Acquisition Cost At September 1, 2018 P=411,461 P=213,380 P=711,997 P=20,205 P=5,885,216 P=2,217,990 P=9,460,249 Write-off of damaged portion of power

generation plant – – – – (573,953) – (573,953) Additions – 9,043 16,610 669 233,936 176,308 436,566 Reclassification to computer software 9 – – – – – (39,235) (39,235) Transfer from investment properties 8 2,393 – 2,053 – – – 4,446 Disposals/retirements – – – – (4,410) – (4,410) Reclassification of completed projects – 1,719 21,089 – 1,772,027 (1,794,835) –

At August 31, 2019 413,854 224,142 751,749 20,874 7,312,816 560,228 9,283,663

Accumulated Depreciation and Amortization

At September 1, 2018 – 162,384 595,289 11,799 3,469,625 – 4,239,097 Depreciation and amortization – 8,516 20,756 502 241,579 – 271,353 Disposals/retirements – – – – (4,410) – (4,410)

At August 31, 2019 – 170,900 616,045 12,301 3,706,794 – 4,506,040

Allowance for Impairment Loss At September 1, 2018 – 8,002 – – – 504,171 512,173 Write-off of damaged portion of power

generation plant – – – – (573,953) – (573,953) Provision for impairment loss – – – – 69,782 – 69,782 Reclassification of provision for

impairment loss – – – – 504,171 (504,171) –

At August 31, 2019 – 8,002 – – – – 8,002

413,854 45,240 135,704 8,573 3,606,022 560,228 4,769,621

(Forward)

- 8 -



Structures



Equipment


(PUC) Total

Appraisal Increase At September 1, 2018 and

August 31, 2019 P=690,460 P=249,921 P=652,459 P=1,370 P=3,983,301 P=– P=5,577,511


At September 1, 2018 – 183,364 652,459 1,370 3,585,544 – 4,422,737 Depreciation and amortization – 12,794 – – 49,901 – 62,695

At August 31, 2019 – 196,158 652,459 1,370 3,635,445 – 4,485,432

690,460 53,763 – – 347,856 – 1,092,079

Net Carrying Value P=1,104,314 P=99,003 P=135,704 P=8,573 P=3,953,878 P=560,228 P=5,861,700



Structures



Equipment


(PUC) Total

Acquisition Cost At September 1, 2017 P=372,998 P=201,843 P=690,762 P=17,741 P=5,713,408 P=1,865,001 P=8,861,753 Additions – 9,539 8,229 – 111,349 430,936 560,053 Transfer from investment properties 8 38,463 – – – – – 38,463 Disposals/retirements – – – – (20) – (20)

Reclassification of completed projects – 1,998 13,006 2,464 60,479 (77,947) –

At August 31, 2018 411,461 213,380 711,997 20,205 5,885,216 2,217,990 9,460,249


At September 1, 2017 – 153,359 578,166 11,484 3,260,707 – 4,003,716 Depreciation and amortization – 9,025 17,123 315 208,938 – 235,401 Disposals/retirements – – – – (20) – (20)

At August 31, 2018 – 162,384 595,289 11,799 3,469,625 – 4,239,097

Allowance for Impairment Loss At September 1, 2017 – – – – – – – Provision for impairment loss – 8,002 – – – 504,171 512,173

At August 31, 2018 – 8,002 – – – 504,171 512,173

411,461 42,994 116,708 8,406 2,415,591 1,713,819 4,708,979

- 9 -



Structures



Equipment


(PUC) Total

(Forward)

Appraisal Increase At September 1, 2017 P=565,054 P=259,870 P=648,459 P=1,370 P=4,157,128 P=– P=5,631,881 Increase (decrease) 125,406 (9,949) 4,000 – (173,827) – (54,370)

As at August 31, 2018 690,460 249,921 652,459 1,370 3,983,301 – 5,577,511


At September 1, 2017 – 173,565 650,114 1,370 3,471,437 – 4,296,486 Depreciation and amortization – 9,799 2,345 – 114,107 – 126,251

At August 31, 2018 – 183,364 652,459 1,370 3,585,544 – 4,422,737

690,460 66,557 – – 397,757 – 1,154,774

Net Carrying Value P=1,101,921 P=109,551 P=116,708 P=8,406 P=2,813,348 P=1,713,819 P=5,863,753

- 10 -

Additions to PUC mainly include costs of construction of power generation plant, major repair of buildings, construction and assembly of boilers and mill equipment. Completed projects amounting to P=1,794.84 million in 2019 (P=77.95 million in 2018) were transferred to the appropriate fixed asset category. Capitalized borrowing costs on loans specifically used for PUC amounted to P=29.78 million in 2019 (P=69.64 million in 2018) (Note 12). The outstanding purchase commitments of the Group as at August 31, 2019 amounted to P=104.69 million (P=165.48 million as at August 31, 2018). The Group disposed certain property and equipment resulting in net gain of P=0.91 million and P=1.57 million in 2018 and 2017, respectively (Note 19). On October 10, 2017, the fully insured power generation plant under construction sustained damage. As a result, the Parent Company recognized provision for impairment loss amounting to P=504.2 million. The amount recognized as provision for impairment loss is the difference between the carrying amount of the asset and its recoverable amount. Recoverable amount of the asset was arrived at by computing its value in use. Value in use was calculated using the discounted future cash flows expected to be derived from the asset. The discount rate of 10.33% applied to the cash flows of the operations is based on the risk-free rate for 15-year Philippine government bonds. The risk-free rate is adjusted for a risk premium applicable to the Parent Company. In making this adjustment, inputs required are the equity market risk premium (that is the required increased return required over and above a risk-free rate by an investor who is investing in the market as a whole) and the risk adjustment, beta, applied to reflect the risk of the Parent Company relative to the market as a whole. Likewise, in 2018, a provision for impairment loss amounting to P=8.00 million was recognized on the land improvements as the carrying amount exceeds the recoverable amount based on fair value less costs to sell. The fair value was based on the latest independent appraisal made in April 2018. In 2019, a third-party claims adjuster determined that the actual loss of the damaged portion of the power generation plant amounted to P=573.95 million. Accordingly, additional provision for impairment loss amounting to P=69.78 million was recognized and the cost of the damaged portion of the power generation plant amounting to P=573.95 million was written off. In the same year, the Parent Company received insurance claims aggregating P=517.16 million recognized as other income in the consolidated statement of income. Moreover, management assessed that the estimated useful life of the power generation plant was reduced from 25 years to 20 years because of the damage it sustained from the incident. Consequently, the depreciation of the power generation plant increased from P=21.4 million to P=26.9 million in 2019. The fair values of property, plant and equipment were based on the appraisal reports issued by qualified independent firm of appraisers engaged by management. The latest appraisal was conducted in April 2018. The fair value of the land was computed using the Market Data Approach (Level 2). In this approach, the value of the land was based on sales and listings of comparable property registered within the vicinity.

- 11 -

The fair values of other property, plant and equipment were computed using the Cost Approach (Level 3). Under this approach, an estimate is made of the current Cost of Replacement of the buildings and land improvements, in accordance with the prevailing market prices for materials, labor and overhead. Adjustments are then made to reflect depreciation resulting from physical deterioration, functional and economic obsolescence based on inspection by the appraiser of the buildings and other land improvements. Depreciation and amortization recognized consist of: Note 2018 2017 2016

Property and equipment P=334,048 P=361,652 P=345,041 Computer software 11 6,942 – –

P=340,990 P=361,652 P=345,041

Details of depreciation and amortization are presented in the consolidated statement of income as follows:

Note 2019 2018 2017

Cost of sales 17 P=207,153 P=282,805 P=257,837 Cost of rendering services 17 54,840 39,034 7,334 General and administrative expenses 18 43,227 33,071 72,937 Selling expenses 18 8,050 6,742 6,933 Other income 27,720 – –

P=340,990 P=361,652 P=345,041

On September 1, 2003, the Group’s parcels of land, buildings and machinery and equipment with aggregate carrying value of P=2.48 billion are used as mortgage lien for loans under the Mortgage Trust Indenture (MTI). In 2013, when the restructured loans were fully paid, the Group filed a motion to direct the banks to discharge the MTI liens on the subject properties. This motion is still pending resolution as at report date.

8. Investment Properties Investments properties are held for lease and capital appreciation. The details of this account follow: Note Land Buildings Total

Balance as at August 31, 2017 P=575,489 P=17,127 P=592,616 Fair value gain (loss) 44,288 (1,725) 42,563 Transfer to property, plant and

equipment due to change in use 7 (38,463) – (38,463)

Balance as at August 31, 2018 581,314 15,402 596,716 Disposal (21,109) – (21,109) Fair value gain (loss) 11,237 3,393 14,630 Transfer to property, plant and

equipment due to change in use 7 (2,393) (2,053) (4,446)

Balance as at August 31, 2019 P=569,049 P=16,742 P=585,791

- 12 -

The fair values of investment properties were based on the appraisal reports issued by qualified independent firm of appraisers engaged by management. The latest appraisal was conducted in April 2019. The fair value of the land was computed using the Market Data Approach (Level 2). In this approach, the value of the land was based on sales and listings of comparable property registered within the vicinity. The fair value of buildings was computed using the Cost Approach (Level 3). Under this approach, an estimate is made of the current cost of replacement of the buildings and other land improvements, in accordance with the prevailing market prices for materials, labor and overhead. Adjustments are then made to reflect depreciation resulting from physical deterioration, functional and economic obsolescence based on inspection by the appraise r of the buildings and other land improvements.

Other information related to investment properties is shown below:

Note 2019 2018 2017

Rental income (included in other income) 19 P=9,578 P=11,075 P=12,497

Direct expenses (mainly real property taxes) 6,235 5,960 5,690

9. Other Non-current Assets


2019 2018

Refundable deposits P=159,233 P=822 Receivable from a government bank 51,280 26,171 Advances to a supplier 38,000 38,000 Computer software, net 32,293 – Cash surety bonds 25,934 24,578 Investment in an associate 5,727 5,727 Others 818 285

313,285 95,583 Allowance for impairment losses on:

Advances to a supplier (38,000) – Investment in an associate (5,727) (5,727)

P=269,558 P=89,856

Refundable deposits as at August 31, 2019 mainly pertain to cash bond paid to Sugar Regulatory Administration required for sugar importation. Receivable from a government bank pertains to uncollected proceeds on the land subject to Voluntary Offer to Sell and Compulsory Acquisition pursuant to the Comprehensive Agrarian Reform Program.

- 13 -

Computer software amounting to P=39.24 million was reclassified from PUC to other non-current asset in 2019. Amortization amounted to P=6.94 million in 2019 (Note 7). Cash surety bonds pertain to cash collateral for the labor cases against the Group (Note 24). The Group owns 30% of Victorias Industrial Gases Corporation (VIGASCO). VIGASCO was incorporated and registered with the SEC on November 19, 1992 primarily to engage in importing, exporting, buying and selling, at wholesale or at retail, of gases, particularly oxygen, acetylene, hydrogen, liquefied petroleum gas and any types of gases. VIGASCO ceased business operations effective December 31, 2014. The investment in associate amounting to P=5.73 million is fully provided with allowance for impairment loss. Advances to a supplier is fully provided with allowance for impairment loss in 2019.

10. Trade Payables and Other Current Liabilities


2019 2018

Trade P=181,587 P=218,320 Accrued expenses 87,813 67,927 Retention payable 60,043 60,407 Current portion of payable to claimants 30,492 – Liens payable 26,868 21,508 Customers’ deposits 24,264 158,677 Due to government agencies 6,180 6,057 Others 15,770 15,516

P=433,017 P=548,412

Trade payable represents obligations of the Group to third parties. These are noninterest-bearing and are normally settled on 30 to 90 day term. Accrued expenses pertain to accruals made for contracted services, janitorial and security services, utilities, postage and other operating expenses which are payable within one year. Retention payable represents amounts withheld from contact price for construction contracts entered into by the Group which is normally set at 10% of the total contract price or to an amount equal as stipulated in the contract. This becomes payable upon completion or performance of terms and conditions as stated in the contract.

- 14 -

Payable to claimants as at August 31, 2019 pertains to the agreed compromise amount with the RSDO and RSQ claimants payable beginning December 2019 over 10 years (Notes 11 and 24). The current and non-current portion of this account are as follows:

Payable to claimants P=304,923 Unamortized discount (94,340)

210,583 Current portion (30,492)

Noncurrent portion P=180,091

Interest incurred on payable to claimants, included under “Finance Cost”, amounted to P=18.04 million in 2019 (Note 12). As at August 31, 2019, payable to claimants are discounted at a rate of 7.45% Liens payable represent amounts payable to the Sugar Regulatory Authority based on the volume of sugar produced. These are payable within one year. Customers’ deposits represent payments received in advance by the Group for sale of sugar and molasses. These are recognized as revenue upon transfer of quedans for raw sugar or molasses warehouse receipts for molasses and approval of RSDO or delivery for refined sugar. Due to government agencies includes statutory taxes withheld due for remittance, contributions payable to Social Security System, Home Mutual Development Fund and Philippine Health Insurance Corporation. Others represent amounts pertaining to social amelioration fund set aside for the sugar workers and association dues payable to the different planters association accredited by the Group. Management considers that the carrying amount of trade payables and other current liabilities approximates fair value due to their short-term maturities.

11. Provisions for Legal Claims The Parent Company is currently involved in various legal proceedings which are still pending resolution or under suspension in view of the Parent Company’s rehabilitation status (Notes 1 and 24). Estimates of probable costs resulting from the resolution of these claims have been developed in consultation with legal counsels handling the defense in these matters and are based upon an analysis of potential results. Based on the progress of the legal cases (Note 24) as at reporting date, management has revised its previous estimate resulting to a net additional provisions of P=67.85 million in 2019 (reversal of provision amounted to P=876.23 million and P=367.08 million in 2018 and 2017, respectively).

- 15 -

Movements in this account are as follows:

Note 2019 2018 2017

Balance as at beginning of year P=401,465 P=1,277,693 P=1,554,693 Reclassification to payables (192,542) – – Net additions (reversal) 67,849 (876,228) (367,084) Unwinding of discount 12 19,572 – 90,084

Balance as at end of year P=296,344 P=401,465 P=1,277,693

On December 3, 2018, VMC and the RSDO and RSQ claimants agreed to settle at P=304.92 million, payable beginning December 2019 over a period of 10 years (Note 24). The liability was recognized at its present value of P=192.54 million. Accordingly, the current and non-current portion of the claims were reclassified to “Trade payables and other current liabilities” and “Payable to claimants, net of current portion” accounts, respectively, in the consolidated statement of financial position (Note 10). The undiscounted amount and the related amortized discount follow:

2019 2018 2017

Provisions for legal claims, undiscounted P=444,391 P=679,128 P=1,277,693

Unamortized discount (148,047) (277,663) –

P=296,344 P=401,465 P=1,277,693

On an annual basis, the provisions are re-evaluated and recalculated based on latest available information. As at August 31, 2019, the provisions were discounted ranging from 6.69% to 7.45% (9.37% in 2018).

12. Borrowings Following the full repayment of the restructured loans (Note 1), the Parent Company obtained loans from local banks to fund its working capital requirements and capital projects as follows: Short-term Borrowings Short-term borrowings consist of unsecured loans availed from a local bank for the Parent Company’s working capital requirements. These borrowings have interest rate of 6.25% (3.5% to 3.75% in 2018).

Short-term borrowings availed by the Group amounting to P=450.00 million in 2019 (P=550.00 million in 2018) are fully paid. There are no outstanding short-term borrowings as at August 31, 2019 and 2018.

Long-term Borrowings

Long-term borrowings represent unsecured loans availed from a local bank to fund the Parent Company’s power generation project (Note 7) with 4.625% interest, payable quarterly beginning March 14, 2018 until December 14, 2020.

- 16 -

Changes in long-term borrowings arising from financing activities are as follows:

2019 2018

Balance as at beginning of year P=1,250,000 P=1,500,000 Repayments (755,000) (250,000)

Balance as at end of year P=495,000 P=1,250,000

The debt covenant for the long-term borrowings require the Parent Company to maintain certain financial ratios. As at August 31, 2019 and 2018, the Parent Company is compliant with the debt covenant.

Borrowings are presented in the consolidated statement of financial position as follows:

2019 2018

Current P=330,000 P=500,000 Non-current 165,000 750,000

P=495,000 P=1,250,000

Borrowing Costs

Borrowing costs arising from the foregoing bank loans follow:

2019 Capitalized Portion

Charged to Profit or Loss (included in

Finance Cost) Total

Long-term P=29,781 P=14,749 P=44,530 Short-term – 5,731 5,731

P=29,781 P=20,480 P=50,261

2018 Capitalized

Portion


Finance Cost) Total

Long-term P=69,640 P=– P=69,640 Short-term – 3,608 3,608

P=69,640 P=3,608 P=73,248

2017 Capitalized

Portion


Finance Cost) Total


P=64,820 P=9,210 P=74,030

- 17 -

Details of finance cost are as follows:

Note 2019 2018 2017

Borrowings P=20,480 P=3,608 P=9,210 Provisions for legal claims 11 19,572 – 90,084 Payable to claimants 10 18,041 – –

P=58,093 P=3,608 P=99,294

13. Equity

Capital Stock / Treasury Stock Details are as follows:

2019 2018 2017

Number

of Shares Amount Number

of Shares Amount Number of

Shares Amount

Common shares at P=1 par value per share

Authorized: Balance as at beginning of year 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061 2,913,250,850 P=2,913,251 Increase in authorized share

capital – – – – 128,810,244 128,810

Balance as at end of year 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061

Issued and outstanding: Balance as at beginning of year 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061 2,913,250,850 P=2,913,251 Conversion of CN – – – – 128,810,244 128,810

3,042,061,094 3,042,061 3,042,061,094 3,042,061 3,042,061,094 3,042,061 Treasury shares (300,010,530) (1,501,882) (300,010,530) (1,501,882) (300,010,530) (1,501,882)

Balance as at end of year 2,742,050,564 P=1,540,179 2,742,050,564 P=1,540,179 2,742,050,564 P=1,540,179

On May 23, 2017, the SEC approved the Parent Company’s application for increase in its authorized capital stock from 2.91 billion shares to 3.04 billion shares with par value of P=1 per share. A total of 128.81 million shares was issued through conversion of CN to equity. On February 15, 2016, the BOD approved the acquisition of 365 million shares of the Parent Company. Following the execution of the sale agreement on February 18, 2016, the Parent Company acquired 300 million treasury shares at P=5 per share or a total of P=1.50 billion.

Additional Paid-in Capital Movements in this account follow:

Note 2019 2018 2017

Balance as at beginning of year P=840,720 P=840,720 P=735,544 Conversion of interest on CN 1 – – 105,176

Balance as at end of year P=840,720 P=840,720 P=840,720

- 18 -

CN Awaiting for Conversion

Movements in the CN awaiting conversion follow:

Note 2019 2018 2017

Balance as at beginning of year P=5,450 P=5,450 P=239,436 Conversion of CN into capital stock 1 – – (233,986)

Balance as at end of year P=5,450 P=5,450 P=5,450

CN awaiting for conversion includes accrued interest amounting to P=2.45 million as at August 31, 2019 (P=2.45 million in 2018 and 2017).

Retained Earnings The Second Amendment to the Rehabilitation Plan, dated July 22, 1999 and approved by the SEC in its order dated August 17, 1999, provided for the reduction of the capital stock and revaluation increment as at actual implementation was used to reduce the deficit of the Parent Company at the time of the implementation of the quasi reorganization. Under paragraph 7 of the SEC’s Guidelines for Quasi Reorganization, for the purpose of dividend declaration, any retained earnings of the Parent Company shall be restricted to the extent of the deficit wiped out and not recovered by accumulated depreciation or appraisal increment by the appraisal surplus. However, in another SEC Order dated August 17, 1999, the SEC granted the Parent Company’s prayer for exemption from the application of said paragraph 7. Retained earnings are restricted for the declaration and payment of dividends to the extent of the cost of treasury shares amounting to P=1,501.88 million as at August 31, 2019 and 2018.

Other Equity Reserves Details and movement in this account follow: Note 2019 2018 2017

Revaluation increment on property, plant and equipment:

Balance at beginning of year P=362,049 P=482,849 P=504,652 Transfer of revaluation increment

to retained earnings (62,695) (118,199) (31,147) Decrease in revaluation increment 7 – (54,370) – Deferred income tax effect 18,810 51,770 9,344

Balance at end of year 318,164 362,050 482,849

Cumulative remeasurement gain (loss) on retirement liability: 21

Balance at beginning of year 4,390 (834) (1,640) Remeasurement gains (loss) (5,662) 7,462 1,151 Deferred income tax effect 1,699 (2,238) (346)

Balance at end of year 427 4,390 (835)

(Forward)

- 19 -

Note 2019 2018 2017

Cumulative fair value changes on investments in UITF:

Balance at beginning of year As previously presented P=1,660 P=1,445 P=2,413 Effect of adoption of PFRS 9 28 (1,660) – –

As restated – 1,445 2,413 Unrealized fair value gain (loss) – 215 (968)

Balance at end of year – 1,660 1,445

P=318,591 P=368,100 P=483,459

Total other equity reserves attributable to: Shareholders of Parent Company P=304,144 P=352,470 P=469,822 Non-controlling interests 14,447 15,630 13,637

P=318,591 P=368,100 P=483,459

14. Earnings per Share (EPS)

EPS is calculated as follows:

2019 2018 2017

(Amounts in Thousands)

Net income attributable to the Parent Company P=817,494 P=765,713 P=656,186

Weighted average number of common shares 2,742,050 2,742,050 2,582,203

Basic and Diluted EPS P=0.30 P=0.28 P=0.25

The weighted average number of common shares includes the mandatory convertible shares arising from the Parent Company’s DRA (Note 13).

15. Operating Segment Information Business segment information is required on the basis that is used internally for evaluating segment performance and deciding how to allocate resources in operating segment. The segment information is provided to the Chief Operating Decision Maker (CODM), as represented by the President, in making operating decisions with regard to the business segments. Accordingly, the segment information is reported based on the nature of goods and services provided by the Group. Segment performance is evaluated based on operating profit or loss. A detailed description of each

segment is set below.

Sugar Milling and Refinery Operations Revenue from sugar milling consist of the following: a. sale of raw sugar and molasses (mill share) b. sale of refined sugar c. tolling fees

- 20 -

For its raw sugar and molasses operations, the Group operates a raw sugar mill with a daily capacity of 15,000 metric tons. Cane supply is sourced from both district and non-district planters with a sharing allocation of 69.5% for planters and 30.5% for VMC. Effective December 1, 2018, the sharing allocation is 69.7% for the planters, 30% for VMC and 0.3% for the sugar workers (Note 23). The Group also operates a refinery plant with a daily capacity of 25,000 Lkg. (1 Lkg = 50 kilograms). To ensure maximum utilization of the refinery, VMC also provides toll refinery services to traders and planters for their raw sugar milled by other sugar centrals.

Distillery Operations The division produces alcohol and ethanol with an actual daily capacity of 50,000 liters with molasses as the primary raw material. Molasses is sourced from sugar operations which produces it as a by-product. Power Generation A newly established segment with a primary purpose to carry on the business of power generation derived from renewable energy resources for wholesale of electricity to power companies, distribution utilities, electric cooperatives, retail electricity suppliers, aggregators and other customers. Other Operating Segments Common revenues and expenses are allocated to the various business segments. All other segment revenues and expenses are directly attributable to the segments. Other operations of the Group include food processing, real estate sales, leasing and entertainment.

Food processing is involved primarily to sell processed, preserved and packaged food products such as canned sardines and luncheon meat. Real estate is involved in the development and sale of subdivision and memorial lots. Among its projects are Phase I to III of Canetown Subdivision and the St. Joseph Memorial Garden which are both located in Victorias City. These projects were initially intended to provide for the housing and personal needs of the officers and employees of the Group. In recent years, however, certain lots had also been made available to the general public. Leasing derives income from the lease of certain parcels of land to planters. Entertainment derives income from membership fees when billed and when corresponding services are rendered. Segment Assets and Liabilities Segment assets include all operating assets used by a segment and consist principally of operating cash, receivables, inventories, prepaid expenses, and property, plant and equipment, net of related allowance for impairment loss and depreciation. The carrying amount of certain assets used jointly by the various segments is allocated to the segments on a systematic basis. Segment liabilities include all operating liabilities and consist principally of trade payables, accruals, VAT and other taxes, and customers’ deposits. Segment assets and liabilities do not include deferred income taxes.

- 21 -

The following tables regarding operating segments present assets and liabilities as at August 31, 2019 and 2018 and revenue, income and expenses information for each of the three years in the period ended August 31:

2019

Sugar Milling Distillery

Operations Power

Generation Others Elimination

Items Total

Revenue External sales P=4,873,405 P=611,914 P=24,036 P=70,274 P=– P=5,579,629 Inter-segment sales 3,895 – 5,340 3,967 (13,202) –

4,877,299 611,913 29,376 74,243 (13,202) 5,579,629 Segment results 1,027,287 380,271 13,066 6,461 (4,038) 1,423,047 Unallocated corporate expenses (785,706) – – (69,567) 5,161 (850,112)

Operating profit 241,581 380,271 13,066 (63,106) 1,123 572,935 Provisions for legal claims (67,849) – – – – (67,849) Finance cost (58,093) – – – – (58,093) Interest income 10,486 – – – – 10,486 Provision for Impairment loss on

property, plant and equipment (69,782) – – – – (69,782) Insurance claims 517,155 – – – – 517,155 Other income (charges) - net 146,415 – – 8,868 (1,123) 154,161 Income tax expense (256,075) – – 13,440 – (242,635)

Net income P=463,838 P=380,271 P=13,066 (P=40,798) P=– P=816,378

2018

Sugar milling Distillery

operations Power

generation Others Elimination

items Total

Revenue External sales P=6,250,750 P=259,845 P=34,661 P=73,658 P=– P=6,618,914 Inter-segment sales 2,086 – 5,566 2,620 (10,272) –

6,252,836 259,845 40,227 76,278 (10,272) 6,618,914 Segment results 1,067,704 81,703 25,948 10,607 (133) 1,185,828 Unallocated corporate expense (587,178) – – (27,624) 262 (614,540)

Operating profit 480,526 81,703 25,948 (17,017) 129 571,288 Reversal of provisions for legal

claims 876,228 – – – – 876,228 Finance cost (3,608) – – – – (3,608) Interest income 3,479 – – – – 3,479 Provision for Impairment loss on

property, plant and equipment (528,010) – – – 15,837 (512,173) Other income (charges) - net 151,461 – – 2,394 (129) 153,726 Income tax expense (322,775) – – 2,749 (4,751) (324,777)

Net income P=657,301 P=81,703 P=25,948 (P=11,874) P= 11,086 P=764,163

2017

Sugar milling Distillery

operations Power

generation Others Elimination

items Total

Revenue External sales P=8,170,167 P=451,331 P=26,230 P=64,853 P=– P=8,712,581 Inter-segment sales – – 6,484 1,135 (7,619) –

8,170,167 451,331 32,714 65,988 (7,619) 8,712,581 Segment results 1,039,204 286,624 2,887 6,265 6,484 1,341,464 Unallocated corporate expense (745,118) – (46,503) 1,135 (790,486)

Operating profit 294,086 286,624 2,887 (40,238) 7,619 550,978 Reversal of provisions for legal

claims 367,084 – – – – 367,084 Finance cost (99,294) – – – – (99,294) Interest income 4,908 – – 130 – 5,038 Other income (charges) 148,124 – – 12,174 (7,619) 152,679 Income tax expense (321,340) – – (952) – (322,292)

Net income P=393,568 P=286,624 P=2,887 (P=28,886) P=– P=654,193

- 22 -

Segment assets Segment liabilities

Amounts in Millions 2019 2018 2019 2018

Sugar milling P=6,501 P=6,433 P=908 P=2,495 Power generation 2,004 1,979 877 2 Distillery operations 303 270 3 1 Others 795 583 562 325 Eliminations (517) (288) (443) (212)

P=9,086 P=8,977 P=1,907 P=2,611

16. Revenue Revenue consists of:

2019 2018 2017

Sale of goods: Refined sugar P=2,416,540 P=4,323,494 P=6,157,314 Raw sugar 1,683,237 1,024,944 1,497,164

Ethanol 594,257 – – Molasses 208,398 20,903 181,207 Power 24,036 34,661 26,230 Alcohol 17,657 259,845 451,331 Others 67,898 66,787 58,989

5,012,023 6,130,634 8,372,235

Service income: Tolling fees 565,230 481,410 334,482 Others 2,376 6,870 5,864

567,606 488,280 340,346

P=5,579,629 P=6,618,914 P=8,712,581

17. Cost of Sales and Services Rendered

(a) Cost of Sales


Note 2019 2018 2017

Inventories used P=1,556,236 P=2,788,919 P=4,537,315 Cost of hauling 1,250,679 1,171,544 1,368,141 Repairs and maintenance 269,325 345,689 371,969 Depreciation and amortization 7 207,153 282,805 257,837 Materials and supplies 5 159,638 196,251 206,965 Direct labor 127,233 135,494 138,352 Fuel 84,038 61,812 53,484 Professional fees and

contracted services 80,639 78,738 73,706 Light and water 38,385 55,592 45,537 Taxes and licenses 32,098 48,296 96,436

Others 10,554 22,867 14,723

P=3,815,978 P=5,188,007 P=7,164,465

- 23 -

Cost of hauling pertains to cane trucking, hauling allowances and other incentives to encourage planters to mill with the Group.

(b) Cost of Services Rendered


Note 2019 2018 2017

Materials and supplies 5 P=100,946 P=77,396 P=171,764 Repairs and maintenance 56,787 51,219 11,945 Depreciation and amortization 7 54,840 39,034 7,334 Fuel 45,134 23,345 911 Direct labor 42,835 26,451 6,076 Professional fees and contracted services 22,266 15,708 1,827 Light and water 6,308 5,039 2,779 Taxes and licenses 6,042 4,344 116 Others 5,446 2,543 3,900

P=340,604 P=245,079 P=206,652

18. Operating Expenses

(a) General and Administrative Expenses

The account consists of: Note 2019 2018 2017

Taxes and licenses P=154,821 P=89,172 P=191,809 Professional fees and contracted services 144,266 119,315 130,952 Provisions for impairment loss on:

Input and advance output VAT 6 55,204 – – Advances to a supplier 9 38,000 – – Trade and other receivables 3 7,997 – –

Salaries and employee benefits 89,315 87,154 106,292 Representation and entertainment 69,224 42,727 33,556 Depreciation and amortization 7 43,227 33,071 72,937 Supplies 22,443 21,619 16,647 Repairs and maintenance 11,205 11,051 33,625 Travel and transportation 11,078 20,438 10,583 Net retirement benefits 21 11,038 11,477 14,897 Others 12,697 19,293 28,094

P=670,515 P=455,317 P=639,392

- 24 -

(b) Selling Expenses


Note 2019 2018 2017

Freight and handling P=118,423 P=95,416 P=78,040 Rental 21,210 18,279 17,842 Taxes and licenses 11,878 17,810 17,139 Salaries and employee benefits 8,827 7,518 11,373 Depreciation and amortization 7 8,050 6,742 6,933 Repairs and maintenance 1,915 3,737 3,268 Materials and supplies 1,692 5,458 12,164 Others 7,601 4,263 4,335

P=179,596 P=159,223 P=151,094

19. Other Income (Charges)


Note 2019 2018 2017

Storage, handling and insurance fees P=96,113 P=82,565 P=75,175 Gain on sale of investments in UITF 4 17,789 9,013 12,226 Net gain (loss) on fair value changes of

investment properties 8 14,630 42,563 (3,838) Interest income from cash and cash

equivalents 2 10,486 3,479 5,038 Rental income 8 9,578 11,075 12,497 Net foreign exchange gain 5,823 1,512 14,900 Scrap sales 5,479 17,128 6,370 Unrealized gain on fair value changes of

investments in UITF 4 2,157 – – Net gain on disposal of property, plant

and equipment 7 –

912 1,572 Sale of bagasse – – 26,048 Others - net 2,591 (11,042) 7,729

P=164,646 P=157,205 P=157,717

Storage, handling and insurance fees pertain to warehousing fees, trucking services and fuel costs which are charged to traders and planters.

- 25 -

20. Income Tax

The reconciliation of income tax expense computed at the applicable statutory rate to the effective income tax expense.

2019 2018 2017

Non-taxable

Income

Taxable Income

at 30% Total Non-taxable

Income

Taxable Income

at 30% Total

Taxable Income

at 30%

Income before income tax P=354,318 P=704,695 P=1,059,013 P=40,227 P=1,048,713 P=1,088,940 P=973,598

Income tax expense at statutory rate – 211,408 211,408 – 314,615 314,615 292,079 Tax effects of: Non-deductible deficiency payment – 16,909 16,909 – – – – Other non-deductible expenses – 13,306 13,306 – 9,055 9,055 28,018 Interest income subject to final tax – (3,130) (3,130) – (1,247) (1,247) (1,489) Expired NOLCO and MCIT – 2,845 2,845 – 2,026 2,026 2,835 Non-deductible interest expense – 1,297 1,297 – 328 328 849

Income tax expense P=– P=242,635 P=242,635 P=– P=324,777 P=324,777 P=322,292

Non-taxable income pertains to income from the sale of power and sale of bioethanol, where both activities are registered with the Board of Investments (BOI) on January 23, 2015 and November 28, 2018, respectively. Both activities are entitled to income tax holiday (ITH) for a period of seven years until 2022 and 2025, respectively.

The composition of net deferred income tax liabilities follows:

2019 2018

Deferred income tax liabilities: Fair value gain on investment properties P=322,351 P=300,315 Net appraisal increase on property, plant

and equipment 280,907 318,031 Capitalized borrowing costs 54,893 45,959

658,151 664,305

Deferred income tax assets: Provisions for legal claims 152,078 120,440 Allowance for impairment losses 50,565 171,070 Retirement liability 16,333 11,641 Customers’ deposits and accrued expenses 7,019 46,694 Net operating loss carry-over (NOLCO) 5,019 6,095 Others 427 791

231,441 356,731

P=426,710 P=307,574

Details of carry forward benefits arising from NOLCO and excess MCIT over RCIT are as follows:

NOLCO

Year Incurred Balance as at

August 31,2018 Additions Expired Balance as at

August 31, 2019 Available

Until

2016 P=714 P=– (P=714) P=– 2019 2017 3,465 – – 3,465 2020 2018 1,851 – – 1,851 2021 2019 – 83 – 83 2022

P=6,030 P=83 (P=714) P=5,399

- 26 -

MCIT

Year Incurred Balance as at

August 31,2018 Additions Applied/ Expired

Balance as at August 31, 2019

Available Until

2016 P=13 P=– (P=13) P=– 2019 2017 1 – – 1 2020 2018 60 – – 60 2021 2019 – 95 – 95 2022

P=74 P=95 (P=13) P=156

21. Retirement Plan

The Parent Company has a formal retirement plan covering all qualified employees. The Parent Company estimates its retirement benefits under Republic Act No. 7641, Retirement Pay Law, in which retirement benefit due to qualified employee is equivalent to 22.5 days pay of final monthly basic salary for every year of credited service.

Retirement benefit obligation is actuarially calculated using the projected unit credit method. The Parent Company's latest actuarial valuation was performed by independent actuary as at August 31, 2019. Components of retirement benefits are as follows:

2019 2018 2017

Current service cost P=8,383 P=9,603 P=8,058 Interest cost 2,482 1,874 967 Past service cost 173 – 5,872

P=11,038 P=11,477 P=14,897

Retirement benefits recognized in profit or loss is included under general and administrative expenses in the consolidated statement of income. The movements in the cumulative remeasurement gain (loss) on retirement liability recognized in other comprehensive income are as follows (Note 13):

2019 2018 2017

Balance at beginning of year, net of tax effect P=4,390 (P=834) (P=1,639)

Remeasurement gain (loss) (5,662) 7,462 1,151

(1,272) 6,628 (488) Deferred income tax charged to other

comprehensive income 1,699 (2,238) (346)

Balance at end of year, net of tax effect P=427 P=4,390 (P=834)

- 27 -

The amounts recognized as retirement liability in the consolidated statement of financial position for the retirement plan are determined as follows:

2019 2018

Present value of defined benefit obligation P=49,726 P=41,823 Fair value of plan asset (5,531) (3,014)

Retirement liability P=44,195 P=38,809

The movements in the present value of retirement benefit obligation for the years ended August 31 are as follows:

2019 2018

Balance at beginning of year P=41,823 P=38,536 Current service cost 8,383 9,603 Past service cost 173 – Interest cost 2,691 1,874 Benefits paid from:

Plan asset (7,685) – Operations (1,315) (742)

Remeasurement (gain) loss: Changes in financial assumptions 7,543 (5,453) Changes in experience (1,887) (3,747) Changes in demographic assumptions – 1,752

Balance at end of year P=49,726 P=41,823

In 2018, the Parent Company has set up a formal retirement fund managed by external trustee-bank. Plan asset as at August 31, 2019 comprises investments in UITF with underlying portfolio of money market instruments.

Changes in the fair value of plan asset are as follows:

2019 2018

Balance at beginning of year P=3,014 P=– Interest income 208 – Benefits paid (7,685) – Actual return (6) 14 Actual contributions 10,000 3,000


The principal actuarial assumptions used were as follows:

2019 2018

Discount rate 4.6% 6.9% Salary increase rate 3.0% 3.0%

- 28 -

The average remaining service life of employees as at August 31, 2019 is 12 years (11 years in 2018).

The plan exposes the Group to the following risks:

Salary risk - any increase in the retirement plan participants’ salary will increase the retirement plan’s liability

Longevity risk - any increase in the plan participants’ life expectancy will increase the retirement plan’s liability

Interest rate risk - a decrease in the bond interest rate will increase the present value of the retirement liability. However, partially counterbalanced by an increase in the return on the plan assets

Investment risk - if the actual return on plan assets is below the discount rate used in calculating the present value of the retirement liability, a plan deficit will arise. However, the compositions of plan assets are balanced enough not to expose the Company to significant concentrations of investment risk

The expected maturity analysis of undiscounted retirement benefit payments are as follows:

2019 2018

0 to 5 years P=33,499 P=37,328 6 to 10 years 37,054 44,984 11 to 15 years 36,831 39,894 16 years and up 158,195 219,921

Impact on retirement liability

Change in

assumption Increase in

assumption Decrease in assumption

Discount rate 1% Decrease by Increase by

P=5,160 P=3,356

Salary increase rate 1% Increase by Decrease by

P=295 P=8,248

The foregoing sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the retirement liability recognized within the consolidated statement of financial position.

- 29 -

22. Related Party Transactions and Balances

Related party transactions are as follows:

August 31, 2019 Transactions Outstanding

Balance Terms and Conditions

Shareholder with significant influence Sale of goods P=373,665 P=160,287 - Unguaranteed and unsecured

- Noninterest-bearing Cash in bank, money market placements and

UITF investments 23,287 137,166

P=396,952 P=297,453

Salaries and wages Key management personnel P=17,800 P=– Payable in cash



Shareholder with significant influence Sale of goods P=1,209,029 P=61,807 - Unguaranteed and unsecured

- Noninterest-bearing Cash in bank, money market placements and

UITF investments (199,314) 113,879

P=1,009,715 P=175,686

Salaries and wages Key management personnel P=25,084 P=– Payable in cash

23. Agreements and Commitments The significant agreements are as follows: a. Under Republic Act No. 809, The Sugar Act of 1952, VMC and the planters should share from the

sugar and molasses produced from sugar canes owned by the planters milled by VMC. It provides for a 69.5% share to the planters and 30.5 % share to VMC. The Sugar Industry Development Act of 2015 provides that, to ensure the immediate payment of farmers and secure their income from sugarcane, farmers may enter into any payment method with the sugar mill. Effective December 1, 2018, the sharing allocation is 69.7% for the planters, 30% for VMC and 0.3% for the sugar workers.

b. As at August 31, 2019, the Parent Company has in its custody sugar owned by several quedan

and delivery order holders with volume of 0.64 million Lkg (0.28 million Lkg as at August 31, 2018). The said volume of sugar is not reflected in the consolidated statement of financial position since this is not owned by the Group. The Group is accountable to both quedan holders and sugar traders for the value of these trusteed sugar or their sales proceeds.

- 30 -

24. Provisions and Contingencies The Group’s management and legal counsels are of the opinion that the positions taken by the Group in the legal proceedings briefly discussed below are highly meritorious. However, the Group cannot anticipate with certainty the progress and the outcome of the legal proceedings, the appreciation of the available evidence by the relevant courts or tribunals involved and the development of jurisprudence or precedents that will be decided by the highest court, which will be relevant to the pending cases.

a. RSDO and RSQ Claims

NONEMARCO availed of bank loans and used RSDO and RSQ, allegedly issued by VMC, as security. NONEMARCO defaulted payments on these loans. Consequently, the creditor banks filed collection cases aggregating P=1.19 billion against NONEMARCO. VMC denied liability to creditor banks on the RSDO and RSQ claims because these claims lacked factual or legal basis and that these were issued by officers who acted fraudulently. In 2015 and 2016, the SEC Special Hearing Panel (“SHP”) ordered VMC to settle the claims of certain claimant banks. VMC appealed the relevant orders of the SHP to the SEC En Banc, but were denied. In 2017, VMC filed separate Petitions for Review with Prayer for Preliminary Injunction and Temporary Restraining Order (“Petitions for Review”) before the Court of Appeals (CA) relating to the decisions of the SEC En Banc. On October 13, 2017, the CA granted the Petitions for Review and set aside the SEC En Banc decisions. VMC continues to contest the claims, but in order to achieve the objectives of the rehabilitation, to buy peace, promote stability in its operations, and avoid further protracted litigation, VMC filed a Motion for the Alteration or Modification of its Plan (“Motion for Alteration”) on April 17, 2018 with respect to the RSDO and RSQ claims. The concerned parties interposed no objection to, agreed with, and supported the Motion for Alteration. On December 3, 2018, the SEC granted the Motion for Alteration and approved the (i) alteration or amendment of the Plan and DRA; and (ii) payment to the RSDO and RSQ claimants a total compromise amount of P=304 million as full settlement of their claims payable beginning December 2019 over a period of 10 years. Accordingly, a portion of the provision for RSDO and RSQ claims was reversed in 2018 (Note 11). The current portion of the claims amounting to P=30.49 million and noncurrent portion amounting to P=180.09 million as at August 31, 2019 were reclassified to “Trade payable and other current liabilities” and “Payable to claimants, net of current portion” accounts, respectively (Note 10). Provision for legal claims on RSDO and RSQ claims amounted to P=192.54 million as at August 31, 2018.

b. Labor, Civil and Other Cases

There are various lawsuits and claims such as labor and collection cases filed by third parties against VMC. Relative to this, VMC is required to put up surety bonds (Note 9). On December 3, 2018, the SEC SHP issued an order directing VMC to validate other pending claims of the third parties. VMC continues to monitor these claims and has recognized provisions accordingly. VMC also has legal actions against third parties in the ordinary course of business.

- 31 -

c. Proceeding with the Pollution Adjudication Board (PAB)

VMC has an on-going proceeding with the PAB on non-compliance with water and air standards. To comply with the order of the Department of Energy and Natural Resources, VMC acquired, constructed and installed air and water pollution control devices amounting to about P=350 million. VMC submitted a number of pleadings to the PAB to prevent a re-imposition of the Cease and Desist Order on which the PAB issued temporary lifting orders (TLO). VMC also filed Position Papers, praying for the reduction of fines imposed by the PAB. On June 19, 2017, VMC filed a Motion for issuance of Formal Lifting Order before the PAB, which was denied on April 19, 2018. On May 17, 2018, VMC filed a Motion for Reconsideration and Clarification, stating that the denial of the request for Formal Lifting Order was prematurely issued. On November 29, 2019, VMC paid the fines imposed by the PAB at an agreed settlement amount. However, as at the report date, the decision on VMC’s Motion for Reconsideration and Clarification is still pending resolution and the Formal Lifting Order was not yet issued.

d. Convertible Note Case against Eastwest Bank Corporation (EWBC) In 2014, VMC redeemed the convertible note held by EWBC (“EWBC CN”) in accordance with the Plan, DRA and convertible note provisions. However, EWBC did not accept the redemption. On a letter dated September 25, 2014, VMC consigned to the SEC-appointed rehabilitation receiver the checks amounting to P=366.12 million as full payment of the EWBC CN. On August 11, 2015, the SEC En Banc confirmed VMC’s redemption of the EWBC CN and consignation of payments. The SEC En Banc likewise denied EWBC’s motion to compel VMC to allow EWBC to exercise its option to convert the EWBC CN. Accordingly, the "Checks payable to EWBC" was extinguished as at August 31, 2015. These were affirmed by the CA in its Decision dated January 19, 2016. On June 27, 2016, VMC received a copy of the Petition for Review (with application for the issuance of a preliminary injunction) dated June 10, 2016 (“EWBC Petition”) filed by EWBC with the SC to appeal the CA’s decision. However, on September 23, 2016, the CA resolved that “in view of the result of Case Management Information System verification on September 16, 2016 which shows that no Supreme Court petition has been filed, the decision became final on June 12, 2016. An entry of judgment is ordered issued.” Based on the CA Entry of Judgment dated September 23, 2016, the CA decision dated January 19, 2016 became final and executory on June 12, 2016. EWBC filed a Manifestation dated November 15, 2016 with the CA stating that it filed a Petition for Review before the SC on June 10, 2016. However, EWBC did not seek reconsideration of the CA Resolution dated September 23, 2016. Accordingly, the CA Resolution dated September 23, 2016 and CA Entry of Judgment dated September 23, 2016 may be deemed to have become final and executory. On February 6, 2017, VMC filed its Motion to Dismiss dated February 3, 2017 (“Motion to Dismiss”) vis-à-vis the EWBC Petition with the SC. As at reporting date, the Motion to Dismiss is still pending resolution with the SC.

- 32 -

Provisions for legal claims amounted to P=296.34 million as at August 31, 2019 (P=401.47 million as at August 31, 2018) (Note 11). Management believes that the provisions for legal claims are reasonable and adequate to cover for potential losses from these legal cases.

25. Significant Accounting Judgments and Estimates The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates, assumptions and judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Critical Accounting Judgments a. Recognizing Revenue (Note 16)

For revenue recognized over time, the Group recognizes revenue if any of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the Group performance as the entity performs.

The Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

The Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

Otherwise, revenue is recognized at a point in time. b. Determining Operating Segments (Note 15)

Determination of operating segments is based on the information about components of the Group that management uses to make decisions about the operating matters. Operating segments use internal reports that are regularly reviewed by the Parent Company’s chief operating decision maker in order to allocate resources to the segment and assess its performance. The Parent Company reports separate information about an operating segment that meets any of the following quantitative thresholds: (a) its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments; (b) the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss; and (c) its assets are 10% or more of the combined assets of all operating segments.

- 33 -

The Group determined that its operating segments are organized and managed separately based on the nature of the business segment, with each business representing a strategic business segment.

c. Determining Classification of Financial Instruments (Note 27)

Classification of financial instruments under PFRS 9 depends on the results of the business model test and “sole payment of principal and interest” (SPPI) test performed by the Group. The Group exercises judgment in determining the business model to be used in managing its financial instruments to achieve their business objectives.

d. Recoverability of Deferred Tax Assets (Note 20)

The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits together with future tax planning strategies. However, there is no assurance that the Group will utilize all or part of the deferred tax assets. Any deferred tax asset will be re-measured if it might result to derecognition in cases where the expected tax law to be enacted will impose a possible risk on its realization.

e. Distinction between Investment Properties and Owner-occupied Properties (Notes 7 and 8)

The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generates cash flows largely independent of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to the other assets used in the production or supply process.

Some properties comprise a portion that is either held to earn rentals or for capital appreciation and another portion is held for use in the production or supply of goods or services or for administrative purposes. If these portions cannot be sold separately as at reporting date, the property is accounted for as investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making its judgment.

Critical Accounting Estimates a. Estimating NRV of Inventories (Note 5)

In estimating NRV of inventories, management takes into account the most reliable evidence available at the time the estimates are made. The Group’s business is subject to changes which may cause inventory obsolescence and the nature of the Group’s inventories is susceptible to physical deterioration, damage, breakage and technological changes. Moreover, future realization of the carrying amounts of inventories is affected by price changes in the market. These aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Group's inventories within the next financial year.

- 34 -

b. Allocation of Cost to Molasses Inventory (Note 5) Management uses judgment to measure and allocate cost to the molasses inventory. When the costs of conversion of each product are not separately identifiable, these are allocated among the products on a rational and consistent basis.

c. Impairment of Financial Assets (Notes 3 and 4)

Upon adoption of PFRS 9, impairment losses on financial assets are determined based on expected credit losses (ECL). In assessing the ECL, the Group uses historical loss experience adjusted for forward-looking factors, as appropriate.

The Group's cash and cash equivalents are maintained at reputable financial institutions with good industry rating and score.

For investments in UITF, the Group estimates impairment based on 12-month expected credit loss. Investment in UITF, which have credit quality equivalent to “high grade” and have low credit risk at reporting date, are presumed to have no significant increase in credit risk since initial recognition.

The Group estimates impairment on trade receivables based on lifetime expected credit loss using a provision matrix that is based on days past due and takes into consideration historical credit loss experience, adjusted for forward-looking factors, as applicable. Management recognizes losses on credit-impaired receivables from related parties considering its ability to pay based on its available assets. For other receivables, ECL is based on 12-month ECL, which pertains to the portion of lifetime ECL that result from default events on a financial instrument that are possible within 12 months after the reporting date. Prior to adoption of PFRS 9, the Group maintains an allowance for impairment losses based on the result of the individual and collective assessment. Factors considered in the individual assessment are payment history, past due status and term. The collective assessment would require the Group to group its receivables based on the credit risk characteristics (industry, customer type, customer location, past-due status and term) of the customers.

Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any period would differ depending on the judgments and estimates made for the year.

d. Impairment of Non-financial Assets (Notes 7 and 8)

The Group assesses impairment on property, plant and equipment and investment properties whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

- 35 -

The factors that the Group considers important which could trigger an impairment review include the following:

i) significant underperformance relative to expected historical or projected future operating

results; ii) significant changes in the manner of use of the acquired assets or the strategy for overall

business; and iii) significant negative industry or economic trends.

As disclosed in Note 7, the Group recognized provision for impairment loss on partially damaged components of the power generation plant amounting to P= 69.78 million in 2019 (P=504.17 million in 2018). The provision for impairment loss in 2019 of P=69.78 million pertains to the difference of actual loss on the damaged portion of the power generation plant amounting to P=573.95 million and the previously recognized provision for impairment loss amounting to P=504.17 million as at August 31, 2018. In 2018, the impairment was based on the Discounted Cash Flow method. The key assumptions used in the calculation of the recoverable amount are disclosed in Note 7. For sensitivity analysis purposes, a 1% reduction in the discount rate would increase the allowance for impairment loss by P=7.38 million, while an increase of 1% in the discount rate would reduce the allowance for impairment loss by P=7.34 million.

e. Estimating Useful Lives of Property, Plant and Equipment (Note 7)

The Group estimates useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The Group reviews regularly the estimated useful lives of property, plant and equipment based on factors that include asset utilization, internal technical evaluation, technological changes, environmental and anticipated use of the assets tempered by related industry benchmark information.

It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in factors mentioned. A reduction in the estimated useful lives of property, plant and equipment would increase depreciation and amortization and decrease noncurrent assets.

f. Fair Value of Financial Assets (Note 4)

Certain financial assets are carried at fair value. When the fair values of financial assets recorded in the consolidated statements of financial position cannot be measured based on quoted prices in active market, their fair value is measured using valuation techniques including the Discounted Cash Flow model. The inputs to this model are taken from observable market where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

- 36 -

g. Fair Value of Non-financial Assets (Notes 7 and 8)

The fair values of the Group's property, plant and equipment and investment properties are determined from market-based evidence by appraisal that was undertaken by an independent firm of appraisers in calculating such amounts. While management believes that the assumptions and market-based evidences used are reasonable and appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the valuation of the Group's property, plant and equipment and investment properties.

Since several factors are considered in the estimation fair values of property, plant and equipment and investment properties, the Group has deemed it impracticable to perform a reasonable sensitivity analysis.

h. Determination of Retirement Liability (Note 21) The determination of the cost of retirement benefits and related retirement liability is dependent on the selection of certain assumptions used by the actuary in calculating such amounts. The assumptions, which include among others, discount rate and rate of salary increase are described in Note 21. Actual results that differ from the assumptions are accumulated and are recognized as part of other comprehensive income. While management believes that the assumptions are reasonable and appropriate, significant differences in the Group’s actual experience of significant changes in the assumptions may materially affect the retirement liability.

i. Estimating Provisions and Contingencies (Notes 11 and 24)

The Group is currently involved in various legal proceedings (Note 24) which are still pending resolution or under suspension in view of the Group's rehabilitations status. Estimates of probable costs resulting from the resolution of these claims have been developed in consultation with the legal counsels handling the defense in these matters and are based upon an analysis of potential results. The Group discounts its provisions over the period such provisions are expected to be settled. The discount rate used by the Group is a government bond rate which is a pre-tax rate that reflects current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Since several factors are considered in the estimation of provision for legal claims, the Group has deemed it impracticable to perform a reasonable sensitivity analysis. The future results of operations could be materially affected by changes in the estimates or in the effectiveness of the Group's strategies relating to the foregoing proceedings.

- 37 -

26. Risk Management, Objectives and Policies Regulatory Risk The Group is subject to laws and regulations in the Philippines in which it operates. The Group has established policies and procedures in compliance with local and other laws. Management performs regular reviews to identify compliance risks and to ensure that the systems in place are adequate to manage those risks.

Financial Risk Management The Group’s activities expose it to a variety of financial risks: credit risk, market risk (including price risk and cash flow and fair value interest rate risk) and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The BOD of the Parent Company has overall responsibility for the establishment and oversight of the Group’s risk management framework. Moreover, market and credit risk management is carried out by the Group’s Treasury department. The objective is to minimize potential adverse effects on its financial performance due to unpredictability of financial markets.

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group trades only with recognized and creditworthy third parties. All customers who wish to transact on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. The amounts presented in the consolidated statement of financial position are net of allowances for impairment losses on receivables, estimated by the Group's management based on prior experience and their assessment of the prevailing economic environment at any given time.

The Group uses a provision matrix to calculate ECL for receivables. The provision rates are based on days past due for each type of customers. The Group adjusts historical default rates to forward-looking default rate by determining the closely related economic factor affecting each year. At each reporting date, the observed historical default rates are updated and changes in the forward-looking estimates are analyzed.

Receivables for which an impairment provision was recognized were written off against the provision when there was no expectation of recovering additional cash.

For the Group’s other financial instruments measured at amortized cost, it is the Group’s policy to measure ECL on the above instruments on a 12-month basis. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL.

- 38 -

When determining if there has been a significant increase in credit risk, the Group considers reasonable and supportable information that is available without undue cost or effort and that is relevant for the particular financial instrument being assessed, as discussed in Note 25 to the consolidated financial statements.

As at August 31, 2019 and 2018, the Group’s maximum credit exposure is equal to the carrying values of the following financial assets:

2019 2018

Cash and cash equivalents (1) P=656,717 P=383,232 Trade and other current receivables (2) 377,415 457,516 Investments in UITF 109,437 272,783 Refundable deposits 159,233 822 Receivable from a government bank 51,280 26,171 Cash surety bonds 25,934 24,578 Short-term investments – 354

P=1,380,016 P=1,165,456 (1) excluding cash on hand (2) excluding advances to officers and employees; net of allowance for impairment losses

At the reporting date, there were no significant concentrations of credit risk as the Group’s financial assets are actively monitored.

The table below presents the summary of the Group’s exposure to credit risk and shows the credit quality of the assets by indicating whether the assets are subjected to 12-month ECL or lifetime ECL as at August 31, 2019. 2019

12-month ECL –

not impaired 12-month ECL – credit impaired

Lifetime ECL – not impaired

Lifetime ECL – credit impaired Total

Financial assets at amortized cost Cash and cash equivalents* P=656,717 P=– P=– P=– P=656,717 Trade receivables: Related parties 160,287 – – – 160,287 Third parties 201,785 163 3,997 17,771 223,716 Advances to planters’ associations – – 267 – 267 Other receivables 8,444 – 3,314 9,453 21,211 Refundable deposits 159,233 – – – 159,233 Receivable from a government

bank 51,280 – – – 51,280 Cash surety bonds 25,934 – – – 25,934 Financial assets at FVPL Investments in UITF 109,437 – – – 109,437

P=1,373,117 P=163 P=7,578 P=27,224 P=1,408,082

- 39 -

As at August 31, 2018, the credit quality of the Group’s financial assets is as follows: 2018

Neither Past due past due or Past due but not impaired and

impaired <30 days 31-60 days 61-90 days >90 days impaired Total

Cash and cash equivalents* P=383,232 P=– P=– P=– P=– P=– P=383,232

Trade receivables: Related parties 357 51,344 73 – 10,033 – 61,807 Third parties 132,421 28,453 70,050 104,493 35,112 21,202 391,731

Advances to planters’ associations – – – – 1,898 – 1,898

Other receivables 7,927 1,246 1,093 636 12,380 – 23,282 Investments in UITF 272,783 – – – – – 272,783 Short-term investments 354 – – – – – 354 Refundable deposits 822 – – – – – 822 Receivable from a

government bank 26,171 – – – – – 26,171 Cash surety bonds 24,578 – – – – – 24,578 Other non-current assets 25,599 29,410 – – – – 55,009

P=874,244 P=110,453 P=71,216 P=105,129 P=59,423 P=21,202 P=1,241,667

*excluding cash on hand

Information on the Group’s other current receivables and other noncurrent assets that are impaired as at August 31, 2019 and 2018 and the movements of the allowance used to record the impairment losses are disclosed in Notes 3, 6 and 9 to the consolidated financial statements. Liquidity Risk Liquidity risk is the risk of not meeting obligations as they become due because of an inability to liquidate assets or obtain adequate funding. The Group monitors and maintains a level of cash deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows. The following tables summarize the maturity profile of the Group’s financial assets and financial liabilities as at August 31, 2019 and 2018 based on contractual undiscounted payments:

2019

On demand Within

One year More than

One year Total

Financial Assets Loans and receivables: Cash and cash equivalents P=657,653 P=– P=– P=657,653 Trade receivables: Third parties 56,228 103,896 – 160,124 Related parties (1) 114,205 109,511 – 223,716 Advances to planters’ associations 267 – – 267 Others (1) 21,211 – – 21,211 Investments in UITF 109,437 – – 109,437 Other non-current assets (1) – 197,233 25,934 223,167

959,001 410,640 25,934 1,395,575

(Forward)

- 40 -

2019

On demand Within

One year More than

One year Total

Financial Liabilities Other financial liabilities: Borrowings P=– P=342,893 P=166,908 P=509,801 Trade and other current liabilities (2) 345,211 – – 345,211 Payable to claimants – 30,492 180,091 210,583

345,211 373,385 346,999 1,065,595

P=613,790 P=37,255 (P=321,065) P=329,980 (1) net of allowance for impairment losses (2) excluding customers’ deposits, liens payable and due to government agencies

2018

On demand Within

One year More than

One year Total

Financial Assets Loans and receivables:

Cash and cash equivalents P=398,666 P=– P=– P=398,666 Trade receivables:

Third parties 132,421 238,107 – 370,528 Related parties (1) 357 61,450 – 61,807

Advances to planters’ associations – 1,898 – 1,898 Others (1) 23,282 – – 23,282

Investments in UITF 272,783 – – 272,783 Short-term investments 354 – – 354 Other non-current assets (1) 16,187 – 38,822 55,009

844,050 301,455 38,822 1,184,327

Financial Liabilities Other financial liabilities:

Borrowings – 543,359 770,234 1,313,593 Trade and other current liabilities(2) 362,170 – – 362,170

362,170 543,359 770,234 1,675,763

P=481,880 (P=241,904) (P=731,412) (P=491,436) (1) net of allowance for impairment losses (2) excluding customers’ deposits, liens payable and due to government agencies

Market Risk

Market risk is the risk that the fair value of financial instruments of the Group from fluctuation in market interest rates (interest rate risk), price with respect to sugar (price risk), foreign exchange rates (foreign currency risk) and equity price (equity price risk), whether such change in prices is caused by factors specific to the individual instruments or its issuer, or factors affecting all instruments traded in the market.

a. Interest Rate Risk

Interest rate risk is the risk that changes in interest rates will affect future cash flows or the fair values of financial instruments.

The Parent Company’s borrowings (Note 12) are not sensitive to movements in interest rates as they carry fixed interest rates.

- 41 -

The Group’s exposure to interest rate risk is limited only to holdings of investments in UITF classified as financial assets at FVPL (Note 4). The underlying pool of assets for these UITFs is consist however, of short-term money market instruments which are not exposed to significant interest rate risks.

b. Foreign Currency Risk

Foreign exchange risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates. It arises on financial instruments that are denominated in a foreign currency other than the functional currency.

The Group’s exposure to foreign currency risk is very minimal and is limited only to its bank deposits (included in cash and cash equivalents) denominated in US dollar (USD) amounting to US$4,809.98 thousand as at August 31, 2019 (US$278.73 thousand as at August 31, 2018). Accordingly, no sensitivity analysis is deemed necessary.

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, trade and other current receivables and trade and other current payables approximate their fair values due to the short-term maturity of these instruments.

The carrying value of long-term debt approximates its fair value and is calculated by discounting the expected future cash outflows at prevailing effective interest rate. The carrying values of advances to and from subsidiaries approximate their fair values because these represent the expected cash flow should they be settled or realized at reporting date.

27. Capital Management

Capital is managed to ensure that the Group will continue as a going concern while maximizing the return on the investments of shareholders. For this purpose, capital is defined as total equity attributable to the shareholders of Parent Company as presented in the consolidated statement of financial position. As part of the reforms of the PSE to expand capital market and improve transparency among listed

firms, PSE has required a minimum of 10% of the listed companies’ issued and outstanding shares,

exclusive of any treasury shares, to be held by the public. The Group is compliant with respect to this

requirement.

The Group is governed by the Plan as submitted and approved by the SEC. The details of these plans or programs are disclosed in Note 1.

The debt to asset ratio of the Group as at August 31, 2019 and 2018, which has been within the Group's acceptable range as set by the BOD, is calculated as follows:

2019 2018

Total liabilities P=1,906,910 P=2,610,860 Total asset 9,085,900 8,977,435

0.21:1 0.29:1

- 42 -

28. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of Preparation

These consolidated financial statements of the Group have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, PAS and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.

The consolidated financial statements have been prepared under the historical cost convention, as modified by revaluation of investments in UITF, revaluation of certain property, plant and equipment and investment properties. The preparation of consolidated financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 25. Basis of Consolidation

The consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries In June 2012, the BOD of VQPC approved to cease VQPC's operations effective July 2012. As at August 31, 2019 and 2018, VQPC is undergoing liquidation process as approved by its BOD and shareholders. On April 13, 2016, the Group incorporated VGEC, a wholly-owned subsidiary. Its primary purpose is to carry on the business of generation of power derived from renewable energy resources for wholesale of electricity to power companies, distribution utilities, electric cooperatives, retail electricity suppliers, aggregators and other customers. VGEC is yet to commence operations as at August 31, 2019. (a) Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group also assesses existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. De-facto control may arise in circumstances where the size of the Group’s voting rights relative to the size and dispersion of holdings of other shareholders give the Group the power to govern the financial and operating policies.

- 43 -

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. These are de-consolidated from the date that control ceases.

The Group applies the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests Issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with PFRS 9 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is not accounted for within equity.

The excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in profit or loss.

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.

- 44 -

(b) Transactions with Non-controlling Interests Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions - that is, as transactions with the owners in their capacity as owners. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Interests in the equity of subsidiaries not attributable to the Parent Company are reported in consolidated equity as non-controlling interests. Profits or losses attributable to non-controlling interests are reported in the consolidated statement of income as net income (loss) attributable to non-controlling interests. Non-controlling interests represent the interest not held by the Parent Company in CDC, VGCCI and VQPC in 2019 and 2018 (Note 1).

Changes in Accounting Policy and Disclosures

Adoption of New and Amended PFRS The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following new and amended PFRS which the Group adopted effective September 1, 2018.

PFRS 9, Financial Instruments – This standard replaces PAS 39, Financial Instruments: Recognition and Measurement (and all the previous versions of PFRS 9). It provides requirements for the classification and measurement of financial assets and liabilities, impairment, hedge accounting, recognition, and derecognition. o PFRS 9 requires all recognized financial assets to be subsequently measured at amortized

cost or fair value (through profit or loss or through other comprehensive income), depending on their classification by reference to the business model within which these are held and its contractual cash flow characteristics.

o For financial liabilities, the most significant effect of PFRS 9 relates to cases where the fair value option is taken: the amount of change in fair value of a financial liability designated as at fair value through profit or loss that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (rather than in profit or loss), unless this creates an accounting mismatch.

o For the impairment of financial assets, PFRS 9 introduces an “expected credit loss” model based on the concept of providing for expected losses at inception of a contract; recognition of a credit loss should no longer wait for there to be objective evidence of impairment.

o For hedge accounting, PFRS 9 introduces a substantial overhaul allowing financial statements to better reflect how risk management activities are undertaken when hedging financial and non-financial risk exposures.

o The derecognition provisions are carried over almost unchanged from PAS 39.

- 45 -

Based on the Group’s analysis of its business model and the contractual cash flow characteristics of its financial assets and liabilities as at September 1, 2018, the Group has assessed that its financial assets and liabilities should be classified under the new classification categories of PFRS 9.

The following table shows the classification categories under PAS 39 and the new classification categories under PFRS 9 for each class of the Group’s financial assets as at September 1, 2018.

Balance as at Classification under PFRS 9 as at

September 1, 2018

August 31, Financial Assets at

Classification under PAS 39 2018 FVPL Amortized cost

Loans and receivables

Cash and cash equivalents P=398,666 P=– P=398,666

Trade and other receivables 459,735 – 459,735 Available-for-sale (AFS) financial assets

Investments in UITF 272,783 272,783 –

P=1,131,184 P=272,783 P=858,401

Financial assets at FVPL are acquired for the purpose of selling in the near term.

The impact of the adjustment from the adoption of PFRS 9 resulting from the reclassification of investments in UITF from AFS financial assets to financial assets at FVPL resulted to restatement of September 1, 2018 retained earnings amounting to P=1.66 million (Note 13).

The Group assessed that the adoption of PFRS 9, specifically on determining impairment loss, has no impact on the carrying amounts of the Group’s financial assets.

PFRS 15, Revenue from Contracts with Customers – The new standard replaces PAS 11, Construction Contracts, PAS 18, Revenue, and their related interpretations. It establishes a single comprehensive framework for revenue recognition to apply consistently across transactions, industries and capital markets, with a core principle (based on a five-step model to be applied to all contracts with customers), enhanced disclosures, and new or improved guidance (e.g. the point at which revenue is recognized, accounting for variable considerations, costs of fulfilling and obtaining a contract, etc.). With the effectivity of PFRS 15 on September 1, 2018, as approved by the Financial Reporting Standards Council (FRSC), the Philippine Interpretations Committee (PIC) issued PIC Q&A 2019-3, Revenue Recognition Guidance for Sugar Millers, to assist the companies operating in the sugar industry in the adoption of PFRS 15. The interpretation states that a miller should recognize revenue arising from its sugar milling operation under either an output sharing agreement or cane purchase agreement, and that providing free storage constitutes a separate performance obligation in the case of an output sharing agreement. In response to concerns raised by the sugar industry on the implementation and adoption of the PIC Q&A, the SEC issued MC No. 06 on April 4, 2019, deferring the application of the provisions of the above-mentioned PIC Q&A for a period of one year. Effective September 1, 2019, the Group will adopt PIC Q&A No. 2019-3 and any subsequent amendments thereto retrospectively or as the SEC will later prescribe.

- 46 -

The Group availed of the deferral of adoption of the above specific provisions. Had these provisions been adopted, it would have affected retained earnings as at September 1, 2018 and revenue from milling, cost of sales, cost of milling and raw sugar inventories for 2018. As at the report date, the Group is currently assessing the impact of the adoption of PIC Q&A 2019-3. With the deferral of the implementation of certain provisions of PIC Q&A 2019-3, the adoption of PFRS 15 for sugar milling did not have any significant impact to the consolidated financial statements. The Group adopted PFRS 15 using the modified retrospective method of adoption with the date of initial application of September 1, 2018. Under this method, the standard can be applied either to all contracts at the date of initial application or only to contracts that are not completed at this date. The Group elected to apply the standard to all contracts that are not completed as at the date of initial application. There were no adjustments recognized to the beginning balances of retained earnings as at September 1, 2018 resulting from the adoption of PFRS 15.

Amendments to PFRS 15, Revenue from Contract with Customers - Clarification to PFRS 15 – The amendments provide clarifications on the following topics: (a) identifying performance obligations; (b) principal versus agent considerations; and (c) licensing. The amendments also provide some transition relief for modified contracts and completed contracts.

Amendments to PAS 28, Investments in Associates and Joint Ventures - Measuring an Associate or Joint Venture at Fair Value – The amendments are part of the Annual Improvements to PFRS 2014-2016 Cycle and clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organization, mutual fund, unit trust or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition.

Amendments to PAS 40, Investment Property - Transfers of Investment Property – The amendments clarify that transfers to, or from, investment property (including assets under construction and development) should be made when, and only when, there is evidence that a change in use of a property has occurred.

Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration – The interpretation provides guidance clarifying that the exchange rate to use in transactions that involve advance consideration paid or received in a foreign currency is the one at the date of initial recognition of the non-monetary prepayment asset or deferred income liability.

The adoption of the foregoing new and amended PFRS did not have any material effect on the consolidated financial statements. Additional disclosures have been included in the notes to consolidated financial statements, as applicable.

- 47 -

New and Amended PFRS Issued But Not Yet Effective Relevant new and amended PFRS, which are not yet effective for the year ended August 31, 2019 and have not been applied in preparing the financial statements, are summarized below.

Effective for annual periods beginning on or after September 1, 2019:

PFRS 16, Leases – This standard will replace PAS 17, Leases and its related interpretations. The most significant change introduced by the new standard is that almost all leases will be brought onto lessees’ statement of financial position under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance lease is retained.

For the Group’s non-cancellable operating lease commitments as at December 31, 2018, a preliminary assessment indicates that these arrangements will continue to meet the definition of a lease under PFRS 16. Thus, the Group will have to recognize a right-of-use asset and a corresponding liability in respect of all these leases - unless these qualify for low value or short-term leases upon the application of PFRS 16 – which might have a significant impact on the amounts recognized in the Group’s financial statements. However, it is not practicable to provide a reasonable estimate of that effect until the Group complete the review.

Philippine Interpretation IFRIC 23, Uncertainty Over Income Tax Treatments – The interpretation provides guidance on how to reflect the effects of uncertainty in accounting for income taxes under PAS 12, Income Taxes, in particular (i) whether uncertain tax treatments should be considered separately, (ii) assumptions for taxation authorities’ examinations, (iii) determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and (iv) effect of changes in facts and circumstances.

Amendments to PFRS 9, Financial Instruments - Prepayment Features with Negative Compensation – The amendments allow entities to measure particular prepayable financial assets with negative compensation at amortized cost or at fair value through other comprehensive income (instead of at fair value through profit or loss) if a specified condition is met. It also clarifies the requirements in PFRS 9, Financial Instruments, for adjusting the amortized cost of a financial liability when a modification or exchange does not result in its derecognition (as opposed to adjusting the effective interest rate).

Amendments to PAS 28, Investments in Associates and Joint Ventures - Long-term Interests in Associates and Joint Ventures – The amendments clarify that long-term interests in an associate or joint venture that, in substance, form part of the entity’s net investment but to which the equity method is not applied, are accounted for using PFRS 9, Financial Instruments.

Amendments to PAS 19, Employee Benefits - Plan Amendment, Curtailment or Settlement – The amendments specify how companies remeasure a defined benefit plan when a change - an amendment, curtailment or settlement - to a plan takes place during a reporting period. It requires entities to use the updated assumptions from this remeasurement to determine current service cost and net interest cost for the remainder of the reporting period after the change to the plan.

- 48 -

Amendments to PAS 12, Income Taxes - Income Tax Consequences of Payments on Financial Instruments Classified as Equity – The amendments are part of the Annual Improvements to PFRS 2015-2017 Cycle and clarify that income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distribution to owners and thus, should be recognized in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events.

Amendments to PAS 23, Borrowing Costs - Borrowing Costs Eligible for Capitalization – The amendments are part of the Annual Improvements to PFRS 2015-2017 and clarify that in calculating the capitalization rate on general borrowings, if any specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally.

Deferred effectivity -

Amendments to PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint Ventures - Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture – The amendments address a current conflict between the two standards and clarify that a gain or loss should be recognized fully when the transaction involves a business, and partially if it involves assets that do not constitute a business. The effective date of the amendments, initially set for annual periods beginning on or after January 1, 2016, was deferred indefinitely in December 2015 but earlier application is still permitted.

Under prevailing circumstances, the adoption of the foregoing new and amended PFRS is not expected to have any material effect on the consolidated financial statements of the Group, except for PFRS 16. Additional disclosures will be included in the consolidated financial statements, as applicable.

The Group is assessing the impact of PFRS 16 on the consolidated financial statements based on the facts and circumstances that exist as at August 31, 2019. However, it is not practicable to provide a reasonable estimate of that effect until the detailed review that is in progress has been completed. Revenue Recognition Revenue from contract with customers is recognized when the performance obligation in the contract has been satisfied, either at a point in time or over time. Revenue is recognized over time if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits as the Group perform its obligations; (b) the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognized at a point in time. The Group also assesses its revenue arrangements to determine if it is acting as a principal or as an agent. The Group has assessed that it acts as a principal in all of its revenue sources. The following specific recognition criteria must also be met before revenue is recognized. Sale of Raw Sugar. Revenue is recognized upon endorsement and transfer of quedans which represents ownership title over the raw sugar.

- 49 -

Sale of Refined Sugar. Revenue is recognized upon approval and release of refined sugar delivery order. Sale of Molasses. Revenue is recognized upon transfer of molasses warehouse receipts which represents ownership title over the molasses inventories. Sale of Alcohol and Ethanol. Revenue is recognized upon delivery of alcohol and ethanol inventories to customers. Tolling Revenues. Revenue is recognized when the tolling services have been rendered. Sale of Power. Revenue from sales of power is recognized on the period the electricity is provided to the Wholesale Electricity Spot Market (WESM). Sale of Canned Goods and Processed Meat. Revenue is recognized when the products are delivered to the customer. Real Estate Sales and Internment Services. Revenue from real estate is recognized using full accrual method upon reaching 20% collection of net contract price. Internment services is recognized when the services were already performed to clients who have acquired the said services. The services include fabrication of internment vault, marker services, fees for funeral mass, and other related services. Interest Income. Interest is recognized as interest accrues, taking into account the effective yield of the asset, net of final tax. Rental Income. Income is recognized on a straight-line basis over the lease term. Other Income. Other income such as income from scrap sales, sale of canned goods and gains from disposal is recorded when earned.

Cost and Expense Recognition Costs and expenses are recognized in the Group’s consolidated statement of income when a decrease in future economic benefit related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Cost of goods sold and services rendered the direct and allocated indirect costs which are incurred upon processing of the Group’s products and rendering of its tolling services. These are recognized when the related goods are sold or the related services are rendered. Operating expenses are recognized by the Group when incurred. These are the expenses which are not directly related to the cost of goods sold and services of the Group Financial Assets and Liabilities Date of Recognition. The Group recognizes a financial asset or liability in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of a financial instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, is done using settlement date accounting.

- 50 -

Initial Recognition and Measurement. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those measured or designated at FVPL, includes transaction cost. “Day 1” Difference. Where the transaction in a non-active market is different from the fair value of 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. In cases where there is no observable data on inception, the Group deems the transaction price as the best estimate of fair value and recognizes “Day 1” difference 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 Assets Classification. The Group classifies its financial assets at initial recognition under the following categories: (a) financial assets at FVPL, (b) financial assets at amortized cost and (c) financial assets at FVOCI. The classification of a financial instrument largely depends on the Group’s business model and its contractual cash flow characteristics.

As at August 31, 2019, the Group has no financial assets classified and measured at FVOCI. Financial Assets at Amortized Cost. A financial asset should be measured at amortized cost if both of the following conditions are met:

the financial asset is held within a business model whose objective is 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.

After initial recognition, financial assets at amortized cost are subsequently measured at amortized cost using the effective interest method, less allowance for impairment, if any. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the financial assets are derecognized and through amortization process. Financial assets at amortized cost are included under current assets if realizability or collectability is within 12 months after the reporting period. Otherwise, these are classified as noncurrent assets. Financial assets at amortized cost are included in current assets if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets. The Group classifies its cash and cash equivalents, trade and other receivables, refundable deposits, receivable from a government bank and cash surety bonds under this category. Under PAS 39, cash and cash equivalents and trade and other receivables were classified as loans and receivables.

- 51 -

Financial Assets at FVPL. Financial assets that do not meet the criteria for being measured at amortized cost or FVOCI are classified under this category. Specifically, financial assets at FVPL include financial assets that are (a) held for trading, (b) designated upon initial recognition at FVPL, or (c) mandatorily required to be measured at fair value. Financial assets are classified as held for trading if these are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless these are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at FVPL, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at FVOCI, debt instruments may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at FVPL are measured at fair value at each reporting date, with any fair value gains or losses recognized in profit or loss to the extent these are not part of a designated hedging relationship. This category includes investments in UITF, which was previously classified as AFS financial assets under PAS 39. Prior to adoption of PFRS 9, the Group classifies its financial assets into the following categories: financial assets at FVPL, loans and receivables, HTM investments and AFS financial assets. The Group classifies its financial liabilities as either financial liabilities at FVPL or other financial liabilities. The classification of financial instruments depends on the purpose for which these were acquired and whether these are quoted in an active market. The Group does not have financial instruments classified as HTM investments and financial assets at FVPL as at August 31, 2018. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not designated as financial assets at FVPL or AFS financial assets. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest method, less any allowance for impairment losses in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. Gains or losses are recognized in profit or loss when loans and receivables are derecognized or impaired, as well as through the amortization process. AFS Financial Assets. AFS financial assets are those non-derivative financial assets which are designated as such or are not classified in any other categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS financial assets are subsequently measured at fair value with unrealized gains and losses recognized as other comprehensive income until the investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported as other comprehensive income is recognized in profit or loss. The effective yield component of AFS financial assets, as well as the impact on foreign currency-denominated AFS

- 52 -

financial assets, is recognized in profit or loss. Interest earned on holding AFS financial assets is recognized as “Interest income” using effective interest method. Financial Liabilities Classification. The Group classifies its financial liabilities at initial recognition as either financial liabilities at FVPL or financial liabilities at amortized cost. The classification of a financial instrument largely depends on the Group’s business model and its contractual cash flow characteristics. The Group does not have financial instruments classified as financial liabilities at FVPL. Financial Liabilities at Amortized Cost. Financial liabilities are categorized as financial liabilities at amortized cost unless either the financial liability is held for trading and is therefore required to be measured at FVPL or the entity elects to measure the liability at FVPL. Financial liabilities are recognized when the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to settle the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. These financial liabilities are initially recognized at fair value less any directly attributable transaction costs. After initial recognition, these financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the liabilities are derecognized or impaired or through the amortization process. The Group classifies its trade and other current liabilities (excluding statutory payables), borrowings and payable to claimants under this category. Reclassification The Group reclassifies its financial assets when, and only when, the Group changes its business model for managing those financial assets. The reclassification is applied prospectively from the first day of the first reporting year following the change in the business model (reclassification date). For a financial asset reclassified out of the financial assets at amortized cost category to financial assets at FVPL, any gain or loss arising from the difference between the previous amortized cost of the financial asset and fair value is recognized in profit or loss. For a financial asset reclassified out of the financial assets at FVPL category to financial assets at amortized cost, its fair value at the reclassification date becomes its new gross carrying amount. Impairment of Financial Assets The Group assesses at the end of each reporting year whether a financial asset or a group of financial assets is impaired. The Group recognizes impairment loss based on ECL, which is the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive. The difference is then discounted at an approximation to the asset’s original effective interest rate.

- 53 -

For trade receivables, the Group has applied the simplified approach and has calculated ECL based on the lifetime expected credit losses. The Group has established 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. For other financial assets at amortized cost, which comprise cash equivalents, other receivables (including due from related parties) and UITF, ECL is based on 12-month ECL, which pertains to the portion of lifetime ECL that result from default events on a financial instrument that are possible within 12 months after the reporting date. Prior to adoption of PFRS 9, an allowance for impairment losses is recognized when a financial asset or a group of financial assets is deemed to be impaired, i.e., if, and only if, there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. For loans and receivables, evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If there is objective evidence that an impairment loss has been incurred on debt instruments, the amount of the loss is measured as the excess of financial asset’s carrying amount over its net realizable value, normally based on the present value of the estimated future cash flows from the financial asset. For financial instruments classified as AFS financial assets, impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on the financial asset previously recognized in profit or loss, is removed from equity and recognized in profit or loss. Derecognition of Financial Assets and Liabilities A financial asset (or where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized by the Group when:

The rights to receive cash flows from the asset has expired; or

The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and benefits of the asset, or (b) has neither transferred nor retained substantially all the risks and benefits of the asset, but has transferred control over the asset.

- 54 -

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and benefits of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset, if any, is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to pay. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. When 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. A modification is considered substantial if the present value of the cash flows under the new terms, including net fees paid or received and discounted using the original effective interest rate, is different by at least 10% from the discounted present value of remaining cash flows of the original liability. The fair value of the modified financial liability is determined based on its expected cash flows, discounted using the interest rate at which the Group could raise debt with similar terms and conditions in the market. The difference between the carrying value of the original liability and fair value of the new liability is recognized in the profit or loss. On the other hand, if the difference does not meet the 10% threshold, the original debt is not extinguished but merely modified. In such case, the carrying amount is adjusted by the costs or fees paid or received in the restructuring.

Offsetting of Financial Assets and Liabilities Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position.

Classification of Financial Instrument 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.

- 55 -

Inventories Inventories are valued at the lower of cost and net realizable value (NRV). Net realizable value is the estimated selling price less the costs to sell. Inventories are accounted for as follows:

Raw and Refined Sugar, Molasses, Alcohol and Ethanol. Determined using weighted average method; consists of cost of production and related direct labor and overhead cost incurred in the conversion of sugar cane to different outputs. Production costs are allocated to inventories based on a rational and consistent basis.

Processed Food. Determined using the specific identification method; cost includes direct materials, labor and a proportion of manufacturing overhead costs based on normal operating capacity.

Materials and Supplies. Determined using weighted average method; cost includes purchase and other directly attributable costs determined based on their original purchase price.

Manufactured and Fabricated Products. Determined using current replacement cost as its net realizable value. Real Estate Held-for-sale. Real estate held for sale is carried at the lower of cost or NRV. The cost includes acquisition and development costs of the real estate property plus other costs and expenses incurred incidental to the development of the property. Cost is further reduced by any provision for write-down. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost to complete and the estimated cost necessary to make the sale.

The excess of cost over the net realizable value is recognized as write-down in profit or loss. Reversals of previously recorded write-downs are credited to profit or loss based on the result of management’s update assessment, considering the available facts and circumstances, including but not limited to net realizable value at the time of disposal.

Real estate held for sale is derecognized when sold or written-off. When real estate under development is sold, the carrying amount of the asset is recognized as an expense in the period in which the related revenue is recognized.

For raw and refined sugar, alcohol, ethanol, molasses, work-in-process and real estate held-for-sale, NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. For materials and supplies, the NRV is the current replacement cost.

An allowance for inventory losses is provided for slow-moving, obsolete and defective inventories based on management’s physical inspection and evaluation. When inventories are sold, the cost and related allowance is removed from the account and the difference is charged against operations.

Inventories are derecognized when these are sold. The carrying amount of those inventories is recognized as an expense (reported as cost of goods sold in profit or loss) in the period in which the related sale is recognized.

- 56 -

Other Current Assets Other current assets are expenses already paid but not yet incurred and are initially recorded at face value and subsequently measured at carrying value less impairment loss, if any. These include excess input VAT and creditable withholding taxes. Biological asset pertains to the accumulated costs of purchasing, cultivating and propagating the live and unharvested fish. Since there is no active market for the biological asset and due to the absence of a reliable estimate to measure the fair value less estimated point-of-sale costs, biological asset is measured at cost less any impairment in value as permitted under PAS 41, Biological Assets. Investment in an Associate Investment in an associate is accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. An investment is accounted for using the equity method from the day it becomes an associate. On acquisition of investment, the excess of the cost of investment over the investor's share in the net fair value of the investee's identifiable assets, liabilities and contingent liabilities is accounted for as goodwill and included in the carrying amount of the investment and not amortized. Any excess of the investor's share of the net fair value of the investee's identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment, and is instead included as income in the determination of the share in the earnings of the investees. Under the equity method, the investments in the investee companies are carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group's share in the net assets of the investee companies, less any impairment in values. The consolidated statement of income reflects the share of the results of the operations of the investee companies. The Group's share of post-acquisition movements in the investee's equity reserves is recognized directly in equity. Profits and losses resulting from transactions between the Group and the investee companies are eliminated to the extent of the interest in the investee companies and for unrealized losses to the extent that there is no evidence of impairment of the asset transferred. Dividends received are treated as a reduction of the carrying value of the investment. The Group discontinues applying the equity method when their investments in investee companies are reduced to zero. Accordingly, additional losses are not recognized unless the Group has guaranteed certain obligations of the investee companies. When the investee companies subsequently report net income, the Group will resume applying the equity method but only after its share of that net income equals the share of net losses not recognized during the year the equity method was suspended. The reporting date of the investee and the Group are identical and the investee’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances.

Upon loss of significant influence over the associate, the Group measures and recognizes any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognized in the consolidated statement of income.

- 57 -

Related Party Relationship and Transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprises, or between, and/or among the reporting enterprise and its key management personnel, directors, or its shareholder. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

Property, Plant and Equipment Property, plant and equipment are initially recognized at cost and subsequently revalued based on periodic valuations by external independent appraisers, less accumulated depreciation, amortization and impairment losses, except for land. The net appraisal increase resulting from the revaluation is credited to "Revaluation increment on property, plant and equipment" account, net of corresponding deferred tax liability in the consolidated statement of financial position and consolidated statement of changes in equity. The amount of revaluation increment absorbed through depreciation and revaluation increment approved by the SEC for quasi-reorganization are transferred directly to retained earnings. Initially, an item of property, plant and equipment is measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to the location and condition for its intended use. Subsequent costs that can be measured reliably are added to the carrying amount of the asset when it is probable that future economic benefits associated with the asset will flow to the Group. The costs of day-to-day servicing of an asset are recognized as an expense in the year in which these are incurred. All costs that are directly and clearly associated with the construction of certain property, plant and equipment, including borrowing costs, are capitalized. Projects under construction, included in property, plant and equipment, represent structures under construction and are stated at cost. These include cost of construction and other direct costs. Projects under construction are not depreciated until such time as the relevant assets are completed and put into operational use. Major spare parts and stand-by equipment qualify as property, plant and equipment when the Group expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment. Estimated future dismantlement costs of items of property, plant and equipment arising from legal or constructive obligations are recognized as part of property, plant and equipment and are measured at present value at the time when the obligation was incurred.

- 58 -

Depreciation and amortization are computed using the straight-line method over the assets’ estimated useful lives. The estimated useful lives are as follows:

Number of Years

Land improvements 12.5 Buildings and structures 20 Community buildings and equipment 20 Machinery and equipment 3 to 20

Leasehold improvements are amortized over the term of the lease or life of the asset, whichever is shorter. The assets’ estimated useful lives are reviewed, and adjusted if appropriate, at each reporting date. Stand-by equipment should be depreciated from the date it is made available for use over the shorter of the life of the stand-by equipment or the life of the asset the stand-by equipment is part of, while major spare parts should be depreciated over the period starting when it is brought into service, continuing over the lesser of its useful life and the remaining expected useful life of the asset to which it relates. Fully depreciated assets are retained in the accounts until they are no longer in use and no further charge for depreciation is made in respect of those assets. When an asset is disposed of, or is permanently withdrawn from use and no future economic benefits are expected from its disposal, the cost and related accumulated depreciation, amortization and impairment losses are removed from the accounts and any resulting gain or loss arising from the retirement or disposal is recognized in profit or loss. The carrying amount of the Group’s property, plant and equipment is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its recoverable amount. The recoverable amount of the Group’s property, plant and equipment is the higher between their fair values less cost of disposal and value in use. If the carrying amount of the Group’s asset is decreased as a result of revaluation, this decrease is recognized as other comprehensive loss to the extent of any credit balance existing in the revaluation increment in respect of that asset. The excess of such decrease over the existing balance in the revaluation increment is recognized in profit or loss. An increase in the carrying amount of the Group’s property, plant and equipment is recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

Investment Properties Investment properties composed of land and buildings, which are properties held by the Group either to earn rentals or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment properties are initially measured at cost. Subsequently, investment properties are measured at fair value with any change therein recognized in profit or loss following the fair value model. Gains or losses arising from changes in the fair value of investment properties are included in profit or loss for the year in which these arise.

- 59 -

Transfers are made to investment properties, when there is a change in use, evidenced by the commencement of an operating lease to another party or completion of construction or development. Transfers are made from investment properties when, and only when, there is a change in use, evidenced by the commencement of owner-occupation or commencement of development with the intention to sell. Investment property is derecognized when it has either been disposed of or permanently withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the derecognition of an investment property is recognized in profit or loss in the year of derecognition.

Computer Software Computer software acquired is measured on initial recognition at cost. Following initial recognition, computer software is carried at cost less accumulated amortization and any impairment losses.

Computer software is amortized over the estimated economic life of five years and assessed for impairment whenever there is an indication that the computer software may be impaired. The amortization period and method are reviewed at each reporting 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 are treated as changes in accounting estimates.

Gains or losses arising from derecognition of computer software are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

Impairment of Non-financial Assets The carrying amount of the Group’s non-financial assets which include investment in an associate, property, plant and equipment and investment properties are reviewed for at each reporting date to determine whether there is any indication of impairment. If such indication exists, the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of the asset’s fair value less costs of disposal and value in use. Fair value less costs of disposal is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, less the costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized whenever the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. Impairment losses, if any, are recognized in profit or loss unless the asset is carried at revalued amounts. Any impairment loss on a revalued asset is treated as a revaluation decrease. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.

- 60 -

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. A reversal of an impairment loss in respect of a revalued asset is recognized in profit or loss to the extent that it reverses an impairment loss that was previously recognized in the profit or loss. Any additional increase in the carrying amount of the asset is treated as a revaluation increase.

Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a non-financial asset is measured based on its highest and best use. The asset’s current use is presumed to be its highest and best use. The fair value of financial and non-financial liabilities takes into account non-performance risk, which is the risk that the entity will not fulfill an obligation. The Group classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The appropriate level is determined on the basis of the lowest level input that is significant to the fair value measurement. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. Note that under PFRS 13, Fair value measurement, the use of bid and asking prices is still permitted but not required. These instruments are included in Level 1. The fair value of investments in UITF was determined using Level 1 valuation technique. The fair value of assets and liabilities that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the asset or liability is included in Level 2. If one or more of the significant inputs is not based on observable market data, the asset or liability is included in Level 3. As at reporting date, the Group does not have financial assets or liabilities included in Levels 2 and 3.

- 61 -

The Group uses valuation techniques that are appropriate in the circumstances and applies the technique consistently. Commonly used valuation techniques for non-financial assets are as follows:

Market approach - A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities, such as a business.

Income approach - Valuation techniques that convert future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

Cost approach - A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Specific valuation techniques used to value financial instruments include:

Quoted market prices or dealer quotes for similar instruments.

The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.

The fair value of forward foreign exchange contracts is determined using forward exchange rates at the reporting date, with the resulting value discounted back to present value.

Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.

Equity Instruments An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Capital stock is classified as equity and is determined using the nominal value of shares that have been issued. Additional paid-in capital (APIC) includes any premiums received on the initial issuance of capital shares. Any transaction costs associated with the issuing of shares are deducted from additional paid-in capital, net of any related income tax benefits. When capital stock are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified as treasury stock and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings, after considering any remaining APIC related to treasury stock, if any. Compound financial instruments issued by the Group comprise CN that can be converted to capital stock at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

- 62 -

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. The mandatorily CN of the Group are presented as an equity item under the “Convertible notes awaiting for conversion” account. These are non-derivative instrument for which the entity is or may be obliged to deliver a fixed number of the entity’s own equity instruments. The Group already fixed the number of shares to be converted into common shares based from the 1:1 share of the principal CN to common shares. The 8% interests accrued from the CN are treated as APIC upon conversion rather than a determinant in identifying the number of shares to be converted. Retained Earnings Retained earnings represent the accumulated net income or losses, net of any dividend distributions and other capital adjustments.

Other Comprehensive Income Other comprehensive income comprise items of income and expenses (including items previously presented as other equity reserves under the consolidated statement of changes in equity) that are not recognized in profit or loss for the year. Other comprehensive income, which are presented as “Other equity reserves,” includes revaluation increment on property, plant and equipment, cumulative fair value changes on investments in UITF and cumulative remeasurement gain or loss on retirement liability. Earnings per Share (EPS) The Group presents both basic and diluted EPS. Basic EPS is computed by dividing the net income applicable to common shareholders by the weighted average number of common shares outstanding during the year, adjusted for treasury stock, conversion of convertible instruments and with retroactive adjustments for stock splits. Diluted EPS is computed in the same manner as basic EPS, except that the net income attributable to common shareholders and the weighted average number of shares outstanding are adjusted for the effects of all dilutive potential common shares. The Group’s potential common shares comprise CN.

Leases - Operating lease Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases.

The Group as a Lessor Lease income under operating leases is recognized as income in the Group statements of comprehensive income on a straight-line basis over the lease term. The Group as a Lessee Operating lease payments are recognized in profit or loss on a straight-line basis over the lease term. The Group determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

- 63 -

Employee Benefits

Short-term Benefits The Group recognizes a liability net of amount already paid and an expense for services rendered by employees during the accounting period. Short-term benefits given to its employees include salaries and wages, social security contributions, short-term compensated absences and bonuses, and non-monetary benefits.

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

Retirement Benefits The Group’s net obligation in respect of the defined benefit plan is calculated by estimating the amount of the future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligation and valuation of the plan asset is performed on a periodic basis by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Group, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. Remeasurements of the net defined benefit liability or asset, which comprise actuarial gains and losses, the return on plan assets (excluding interest), if any, and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in Other Comprehensive Income (OCI). The Group determines the net interest expense or income on the net defined benefit liability or asset for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability or asset, taking into account any changes in the net defined liability or asset during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to the defined benefit plan are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. Comparatives Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information. Where PAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the current year. There were no changes to the presentation made for the years ended August 31, 2018 and 2017.

- 64 -

Foreign Currency Transactions and Translations Functional and presentation currency. Items included in the Group’s financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Group’s financial statements are presented in Philippine Peso, which is the Group’s functional and presentation currency.

Transactions and balances. Foreign currency transactions are translated into Philippine Peso using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Income Tax The income tax expense for the period comprises current tax and deferred tax. Tax is recognized in profit or loss, except to the extent that it relates to items recognized directly in equity, in which case the tax is also recognized directly in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using the tax rate (and laws) that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary differences, unused tax losses and unused tax credits can be utilized. The Group reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax liabilities are recognized in full for all taxable temporary differences. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

- 65 -

Provisions and Contingencies Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the increases specific to the liability. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Contingent liabilities are not recognized in the financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. Borrowings and Borrowing Cost

Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Borrowings are derecognized when the obligation is settled, paid or discharged. Borrowing costs Borrowing costs incurred for the construction of any qualifying asset, if any, are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are recognized and charged to profit or loss in the year in which these are incurred.

- 66 -

Events after the Reporting Year The Group identifies post year-end events as events that occurred after the reporting date but before the date when the consolidated financial statements were authorized for issue. Any post year-end events that provide additional information about the consolidated statements of financial position at the reporting date (adjusting events) are recognized in the consolidated financial statements. Events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

SCHEDULE A


FINANCIAL ASSETS

AUGUST 31, 2019 (in thousands of Philippine Peso)

NAME OF ISSUING ENTITY AND ASSOCIATION OF EACH ISSUE

NAME OF SHARE OR PRINCIPAL AMOUNT

AMOUNT IN THE BALANCE SHEET

INCOME RECEIVED AND ACCRUED

Financial Assets at Amortized Cost

Cash and cash equivalents from various banks P=656,717 P=10,486

Trade and other receivables:

Third parties 223,716

Related parties 160,287

Refundable deposits from third parties 159,233

Others 25,934

Financial Assets at Fair Value through Profit or Loss

Investments in Unit Investment Trust Fund from various banks 109,437

*This schedule shall be filed in support of the caption of each class of “Financial Assets: if the greater of the aggregate c ost of the aggregate

market value of FVPL as of the end of reporting period constitute 5% or more of the total asset

SCHEDULE B


AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES AND PRINCIPAL STOCKHOLDERS

AUGUST 31, 2019 (in thousands of Philippine Peso)

NAME BEGINNING BALANCE

ADDITIONS AMOUNTS COLLECTED

AMOUNTS WRITTEN OFF

ENDING BALANCE

CURRENT NON-CURRENT TOTAL

Advances to Officers and Employees

P=2,219 P=3,662 (P=5,141) P=– P=740 P=– P=740

SCHEDULE C


AMOUNTS RECEIVABLE FROM RELATED PARTIES WHICH ARE ELIMINATED DURING THE

CONSOLIDATION PERIOD

AUGUST 31, 2019

(in thousands of Philippine Peso)

Deductions

Name and designation of debtor

1-Sep-18

Additions

Amount Collected

Amount written off

Amount others

Current Non-current 31-Aug-19

Victorias Foods Corporation P=20,150 ₱237,213 (₱3,769) P=– P=– ₱253,594 P=– ₱253,594

Canetown Development Corporation 36,815 67

–

–

– 36,882 – 36,882

Victorias Agricultural Land Corporation 754 64

–

–

– 818 – 818

Victorias Golf and Country Club 24,147 60 (513) –

– 23,694 – 23,694

Victorias Quality Packaging Co.Inc. 12,016 – – – – 12,016 – 12,016

P=93,882 ₱237,404 (₱4,282) P=– P=– P=327,004 P=– ₱327,004

SCHEDULE D

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES INTANGIBLE ASSETS - OTHER ASSET

AUGUST 31, 2019

DESCRIPTION BEGINNING BALANCE

ADDITIONS AT COST

CHARGED TO COSTS & EXPENSES

CHARGED TO OTHER ACCTS

OTHER CHANGES ADDITIONS

(DEDUCTIONS)

ENDING BALANCE

Computer Software P=– P=39,235 P=6,942 P=– P=– P=32,293

SCHEDULE E

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES LONG-TERM DEBT

AUGUST 31, 2019

(in thousands of Philippine Peso)

TITLE OF

ISSUE AND TYPE OF

OBLIGATION

AMOUNT AUTHORIZED

BY INDENTURE/FA

CILITY

CURRENT PORTION OF LONG-TERM DEBT

LONG-TERM DEBT (NET OF CURRENT

PORTION)

INTEREST RATE

NO. OF PERIODIC

INSTALLMENT

MATURITY DATE

Term Loan P=495,000 P=330,000 P=165,000 4.625% 12 12/14/2020

SCHEDULE F


INDEBTEDNESS TO RELATED PARTIES

AUGUST 31, 2019

NAME OF RELATED PARTY BALANCE AT BALANCE AT

BEGINNING OF END OF PERIOD PERIOD

SCHEDULE G


GUARANTEE OF SECURITIES OF OTHER ISSUERS

AUGUST 31. 2019

NAME OF ISSUING ENTITY OF SECURITIES GUARANTEED BY THE COMPANY FOR W/C THIS STATEMENT IS FILED

TITLE OF ISSUE OF EACH CLASS OF SECURITIES

GUARANTEED

TOTAL AMOUNT GUARANTEED & OUTSTANDING

AMOUNT OWNED BY PERSON FOR W/C

STATEMENT IS FILED

NATURE OFGUARANTEE

SCHEDULE H

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES CAPITAL STOCK AUGUST 31, 2019

TITLE OF ISSUE NUMBER OF

SHARES AUTHORIZED

NUMBER OF SHARES ISSUED AND OUTSTANDING AT SHOWN UNDER RELATED BALANCE SHEET CAPTION

NUMBER OF SHARES RESERVED FOR

OPTIONS, WARRANTS,

CONVERSION AND OTHER RIGHTS

NUMBER OF SHARES HELD BY RELATED PARTIES

DIRECTORS, OFFICERS

AND EMPLOYEES

OTHERS*

ISSUED SUBSCRIBED TREASURY SHARES

TOTAL

Common Stock

3,042,061,094 3,042,061,094 – (300,010,530) 2,742,050,564 – 2,204,493,273 91,657,141 445,900,150

*Based from the Public Ownership Report as of September 30, 2019.

SCHEDULE I

VICTORIAS MILLING COMPANY, INC. RECONCILIATION OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION

FOR THE YEAR ENDED AUGUST 31, 2019

Amount (In Thousands)

Retained Earnings Available for Dividend Declaration as at September 1, 2018 P=2,227,939

Net Income 857,176

Non-actual Losses:

Provisions for legal claims, net of tax effect of P=26,226 61,195 Provisions for impairment losses on:

Property, plant and equipment, net of tax effect of P=20,935 48,847 Input and advance output VAT, net of tax effect of P=16,561 38,643

Trade and other receivables, net of tax effect of P=2,399 5,598 Depreciation and amortization of appraisal increase of property, plant and equipment,

net of tax effect of P=15,870

37,030

191,313 Actual loss not part of net income - Write-off of damaged portion of power generation plant (401,767) Unrealized income - Net unrealized fair value gain on investment properties, net of tax effect of P=4,856 (11,330)

(413,097)

Net Income Realized 635,392

Retained Earnings as at August 31, 2019, as Adjusted P=2,863,331

Reconciliation of Retained Earnings as Presented in the Separate Financial Statements

Amount (In Thousands)

Retained Earnings as at August 31, 2019 P=4,521,361

Treasury Stock (1,501,882)

Accumulated Unrealized Income

Cumulative unrealized fair value gain on investment properties (874,549) Accumulated Non-actual Losses

Provisions for legal claims 488,886 Allowance for impairment losses on:

Property, plant and equipment 8,001 Trade and other receivables 46,406

Investments in subsidiaries and associate 38,064 Input and advance output value-added tax 55,204

Allowance for inventory write-down and obsolescence 16,061 Effect of adoption of PFRS 9 (800)

(22,725) Tax Effect 66,578

Accumulated Net Non-actual Losses and Unrealized Income, net of tax (156,148)

Retained Earnings as at September 1, 2018 Available for Dividend Declaration P=2,863,331

SCHEDULE J

VICTORIAS MILLING COMPANY, INC. AND SUBSIDIARIES MAP OF RELATIONSHIPS OF THE COMPANIES WITHIN THE GROUP AUGUST 31, 2019

*Effectively wholly-owned subsidiary of the Group **All of the above-entities are subsidiaries of the Group, except for VIGASCO which is an associate of the Group

Victorias Milling Company, Inc.

Victorias Foods Corporation (VFC)

(100%)

Victorias Agricultural Land

Corporation (VALCO) (100%)

Canetown Development

Corporation (CDC) (5%)*

Victorias Green Energy Corporation

(VGEC) (100%)

Victorias Golf and Country Club, Inc.

(VGCCI) (81%)

Canetown Development

Corporation (CDC) (88%)*

Victorias Quality Packaging

Company, Inc. (VQPC) (55%)

Victorias Industrial Gases Corporation (VIGASCO) (30%)**

SCHEDULE K

VICTORIAS MILLING COMPANY, INC. & SUBSIDIARIES Schedule of Philippine Financial Reporting Standards

Effective as at August 31, 2019

Adopted Not

Adopted Not

Applicable

Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics

PFRSs Practice Statement Management Commentary

Philippine Financial Reporting Standards

PFRS 1 (Revised)

First-time Adoption of Philippine Financial Reporting Standards

Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

Amendments to PFRS 1: Additional Exemptions for First-time Adopters

Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters

Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters

Amendments to PFRS 1: Government Loans

PFRS 2 Share-based Payment

Amendments to PFRS 2: Vesting Conditions and Cancellations

Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions

PFRS 3 (Revised)

Business Combinations

PFRS 4 Insurance Contracts

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations

PFRS 6 Exploration for and Evaluation of Mineral Resources

PFRS 7 Financial Instruments: Disclosures

Amendments to PFRS 7: Transition Disclosures’

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition

Amendments to PFRS 7: Improving Disclosures about Financial Instruments

Amendments to PFRS 7: Disclosures - Transfers of Financial Assets

Amendments to PFRS 7: Disclosures - Offsetting Financial Assets and Financial Liabilities

Amendments to PFRS 7: Disclosures - Hedge Accounting*

PFRS 8 Operating Segments

PFRS 9 Financial Instruments

Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures

Adopted Not

Adopted Not

Applicable

PFRS 10 Consolidated Financial Statements

Amendments to PFRS 10, 12 and PAS 27: Consolidation for investment entities

Amendments to PFRS 10 and PAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture*

Amendments to PFRS 10, PFRS 12 and PAS 28: Application of the Consolidation Exception

PFRS 11 Joint Arrangements

Amendments to PFRS 11: Acquisitions of an Interest in a Joint Operation

PFRS 12 Disclosure of Interests in Other Entities

Amendments to PFRS 10, PFRS 12 and PAS 28: Application of the Consolidation Exception

PFRS 13 Fair Value Measurement

PFRS 14 Regulatory Deferral Accounts

PFRS 15 Revenue from Contracts with Customers

PFRS 16 Leases

Philippine Accounting Standards

PAS 1 (Revised)

Presentation of Financial Statements

Amendment to PAS 1: Capital Disclosures

Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation

Amendments to PAS 1: Presentation of Items of Other Comprehensive Income

PAS 2 Inventories

PAS 7 Statement of Cash Flows

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

PAS 10 Events after the Reporting Period

PAS 11 Construction Contracts

PAS 12 Income Taxes

Amendment to PAS 16 - Deferred Tax: Recovery of Underlying Assets

Amendments to PAS 12: Recognition of Deferred Tax Assets for Unrealized Losses*

PAS 16 Property, Plant and Equipment

Amendments to PAS 16 and PAS 38: Acceptable Methods of Depreciation and Amortization

Amendments to PAS 16 and PAS 41: Bearer Plants

PAS 17 Leases

PAS 19 (Revised)

Employee Benefits

Amendments to PAS 19: Contributions from Employees or Third Parties*

PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

PAS 21 The Effects of Changes in Foreign Exchange Rates

Adopted Not

Adopted Not

Applicable

Amendment to PAS 21: Net Investment in a Foreign Operation

PAS 23 (Revised)

Borrowing Costs

PAS 24 (Revised)

Related Party Disclosures

PAS 26 Accounting and Reporting by Retirement Benefit Plans

PAS 27 (Revised)

Separate Financial Statements

Amendments to PFRS 10, PFRS 12 and PAS 27: Consolidation for Investment Entities

Amendments to PAS 27: Use of Equity Method in Separate Financial Statements

PAS 28 (Revised)

Investments in Associates and Joint Ventures

Amendments to PFRS 10 and PAS 28: Sale or Contributions of Assets between an Investor and its Associate or Joint Venture*

Amendments of PFRS 10, PFRS 12 and PAS 28: Application of the Consolidation Exception

PAS 29 Financial Reporting in Hyperinflationary Economies

PAS 33 Earnings per Share

PAS 34 Interim Financial Reporting

PAS 36

Impairment of Assets

Amendment to PAS 36: Impairment of assets - Recoverable amount disclosures

PAS 37 Provisions, Contingent Liabilities and Contingent Assets

PAS 38 Intangible Assets

PAS 39 Financial Instruments: Recognition and Measurement

Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities

Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions

Amendments to PAS 39: The Fair Value Option

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition

Amendments to Philippine Interpretation IFRIC-9 and PAS 39: Embedded Derivatives

Amendment to PAS 39: Eligible Hedged Items

Amendment to PAS 39: Financial Instruments: Recognition and Measurement - Novation of Derivatives and Hedge Accounting

PAS 40 Investment Property

PAS 41 Agriculture

Philippine Interpretations

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2 Members' Share in Co-operative Entities and Similar Instruments

Adopted Not

Adopted Not

Applicable

IFRIC 4 Determining Whether an Arrangement Contains a Lease

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment

IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies

IFRIC 10 Interim Financial Reporting and Impairment

IFRIC 12 Service Concession Arrangements

IFRIC 13 Customer Loyalty Programmes

IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement

IFRIC 15 Agreements for the Construction of Real Estate

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 17 Distributions of Non-cash Assets to Owners

IFRIC 18 Transfers of Assets from Customers

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

IFRIC 21 Levies

SIC-7 Introduction of the Euro

SIC-10 Government Assistance - No Specific Relation to Operating Activities

SIC-15 Operating Leases - Incentives

SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders

SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

SIC-29 Service Concession Arrangements: Disclosures

SIC-31 Revenue - Barter Transactions Involving Advertising Services

SIC-32 Intangible Assets - Web Site Costs

The standards and interpretations that are labeled as “Not Applicable” are already effective as at August 31, 2019 but will never be relevant/applicable to the Company or are currently not relevant to the Company because it has currently no related transactions. The standards, amendments and interpretations that have been issued but are not yet effective as at September 1, 2018 are marked as “Not Adopted”

SCHEDULE L


SCHEDULE OF FINANCIAL SOUNDNESS INDICATORS AUGUST 31, 2019

(With Comparative Figures for 2018)

2019 2018

(Amounts in Thousands)

Current/liquidity ratios

Currents assets P=2,368,851 P=2,427,110

Currents liabilities 788,570 1,107,012

Current ratios 3.00 2.19

Currents assets P=2,368,851 P=2,427,110

Inventories (729,745) (697,479)

Quick assets 1,639,106 1,729,631

Currents liabilities 788,570 1,107,012

Current ratios 2.08 1.56

Solvency/debt-to-equity ratios

Debt P=1,906,910 P=2,610,860

Equity 7,178,990 6,366,575

Unrealized gain on investments in Unit Investment Trust Fund

(992) (216)

Equity, net of unrealized gain 7,177,998 6,366,359

Debt to equity ratio 0.27 0.41

Asset to equity ratios

Total assets P=9,085,900 P=8,977,435

Total equity 7,178,990 6,366,575

Asset to Equity Ratio 1.27 1.41

Profitability ratios

Net Income attributable to Shareholders of Parent Company

P=817,494 P=765,713

Revenue 5,579,629 6,618,914

Net income margin 14.65% 11.57%

Net income P=816,378 P=764,163

Average total assets 9,031,667 9,142,120

Return on total assets 9.04% 8.36%

Net income P=816,378 P=764,163

Average total equity 6,772,782 6,000,803

Return on total equity 12.05% 12.73%

With independent auditors’ report provided by

REYES TACANDONG & CO. FIRM PRINCIPLES. WISE SOLUTIONS.

Victorias Milling Company, Inc.

Separate Financial Statements August 31, 2019

(With Comparative Figures for 2018)

SEC Registration Number

P W 0 0 0 0 0 3 6 4

C O M P A N Y N A M E

V I C T O R I A S M I L L I N G C O M P A N Y , I N C .

PRINCIPAL OFFICE (No./Street/Barangay/City/Town/Province)

V M C C o m p o u n d , J . J . O s s o r i o S t r e e t ,

B a r a n g a y X V I , V i c t o r i a s C i t y , N e g r o s

O c c i d e n t a l

Form Type Department requiring the report Secondary License Type, If Applicable

A A S F S C R M D N / A

C O M P A N Y I N F O R M A T I O N

Company’s Email Address Company’s Telephone Number/s Mobile Number

[email protected] 034-399-3588 –

No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day)

5,199 First Tuesday of February August 31

CONTACT PERSON INFORMATION

The designated contact person MUST be an Officer of the Corporation

Name of Contact Person Email Address Telephone Number/s Mobile Number

Atty. Eva V. Rodriguez [email protected] 034-399-3588 –

CONTACT PERSON’S ADDRESS

VMC Compound, J.J. Ossorio Street, Barangay XVI, Victorias City, Negros Occidental

NOTE 1: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated.

NOTE 2: All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt shall not excuse the corporation from liability for its deficiencies.

C O V E R S H E E T

for

AUDITED FINANCIAL STATEMENTS

Reyes Tacandong & Co. is a member of the RSM network. Each member of the RSM network is an independent accounting and consulting firm, and practices in its own right. The RSM network is

not itself a separate legal entity of any description in any jurisdiction.

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors Victorias Milling Company, Inc. VMC Compound, J.J. Ossorio Street, Barangay XVI Victorias City, Negros Occidental Report on the Financial Statements Opinion

We have audited the accompanying separate financial statements of Victorias Milling Company, Inc. (the Company), which comprise the separate statement of financial position as at August 31, 2019 and the separate statement of income, separate statement of comprehensive income, separate statement of changes in equity and separate statement of cash flows for the year then ended, and notes to separate financial statements, including a summary of significant accounting policies.

In our opinion, the separate financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2019, and its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards (PFRS).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSA). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Separate Financial Statements section of our report. We are independent of the Company 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 the audit of the separate 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.

Other Matter

The financial statements of the Company as at and for the years ended August 31, 2018 and 2017 were audited by another auditor, whose report dated December 6, 2018 expressed an unmodified opinion on those statements.

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

Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with PFRS, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error.

BOA/PRC Accreditation No. 4782

October 4, 2018, valid until August 15, 2021

SEC Accreditation No. 0207-FR-3 (Group A)

August 29, 2019, valid until August 28, 2022

Citibank Tower

8741 Paseo de Roxas

Makati City 1226 Philippines

Phone : +632 8 982 9100

Fax : +632 8 982 9111

Website : www.reyestacandong.com

- 2 -

In preparing the separate 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.

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

Auditors’ Responsibilities for the Audit of the Separate Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ 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 PSA 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, these could reasonably be expected to influence the economic decisions of users taken on the basis of the separate financial statements.

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

Identify and assess the risks of material misstatement of the separate 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 Company’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 Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the separate 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 auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

VICTORIAS MILLING COMPANY, INC.

SEPARATE STATEMENT OF FINANCIAL POSITION As at August 31, 2019

(With Comparative Figures for 2018) Amounts in Thousands

Note 2019 2018

ASSETS

Current Assets Cash and cash equivalents 2 P=585,999 P=349,592 Trade and other receivables 3 650,923 499,913 Investments in Unit Investment Trust Fund 4 71,662 242,799 Inventories 5 627,486 643,447 Other current assets 6 472,304 579,237

Total current assets 2,408,374 2,314,988

Non-current Assets Investments in subsidiaries and an associate 7 218,906 218,906 Property, plant and equipment 8 5,420,244 5,412,434 Investment properties 9 645,169 652,146 Other non-current assets 10 115,740 51,484

Total non-current assets 6,400,059 6,334,970

P=8,808,433 P=8,649,958

LIABILITIES AND EQUITY

Current Liabilities Trade payables and other current liabilities 11 P=410,484 P=531,495 Current portion of borrowings 13 330,000 500,000 Income tax payable 25,471 58,544

Total current liabilities 765,955 1,090,039

Non-current Liabilities Borrowings, net of current portion 13 165,000 750,000 Payable to claimants, net current portion 11 180,091 – Provisions for legal claims 12 296,344 401,465 Retirement liability 20 41,643 35,991 Deferred tax liabilities 19 338,461 204,737

Total non-current liabilities 1,021,539 1,392,193

Total liabilities 1,787,494 2,482,232

Equity Capital stock 14 3,042,061 3,042,061 Additional paid-in capital 840,720 840,720 Convertible notes awaiting conversion 1 5,450 5,450 Retained earnings 14 4,521,361 3,626,355 Other equity reserves 14 113,229 155,022 Treasury stock - at cost 14 (1,501,882) (1,501,882)

Total equity 7,020,939 6,167,726

P=8,808,433 P=8,649,958

See accompanying Notes to Separate Financial Statements.


SEPARATE STATEMENT OF INCOME

For the Year Ended August 31, 2019 (With Comparative Figures for 2018)

Amounts in Thousands

Note 2019 2018

REVENUE 15 Sale of goods P=4,953,358 P=6,071,499 Service income 565,230 481,410

5,518,588 6,552,909

COST OF SALES AND SERVICES RENDERED 16 Cost of sales 3,761,975 5,137,084 Cost of services rendered 335,989 240,470

4,097,964 5,377,554

GROSS PROFIT 1,420,624 1,175,355

OPERATING EXPENSES 17 General and administrative 612,494 432,704 Selling 173,212 154,474

785,706 587,178

FINANCE COST 13 (58,093) (3,608)

OTHER INCOME (CHARGES) Insurance claims 8 517,155 – Provision for impairment losses on property, plant and equipment 8 (69,782) (512,173) Net reversal of (additions to) provisions for legal claims 12 (67,849) 876,228 Other income - net 18 156,902 139,103

536,426 503,158

INCOME BEFORE INCOME TAX 1,113,251 1,087,727

INCOME TAX EXPENSE Current 120,653 183,359 Deferred 135,422 139,416

19 256,075 322,775

NET INCOME P=857,176 P=764,952



SEPARATE STATEMENT OF COMPREHENSIVE INCOME For the Year Ended August 31, 2019 (With Comparative Figures for 2018)

Amounts in Thousands Note 2019 2018

NET INCOME P=857,176 P=764,952

OTHER COMPREHENSIVE INCOME (LOSS) Items that will not be subsequently reclassified to profit

or loss: Remeasurement gain (loss) on retirement liability 14 (5,662) 7,455

Revaluation increment of property, plant and equipment 14 – (61,840) Deferred tax relating to components of other

comprehensive income (loss) 19 1,699 16,316 Item that may be subsequently reclassified to profit

or loss - Net unrealized gain on investments in Unit Investment

Trust Fund 14 – 405

(3,963) (37,664)

TOTAL COMPREHENSIVE INCOME P=853,213 P=727,288



SEPARATE STATEMENT OF CHANGES IN EQUITY For the Year Ended August 31, 2019 (With Comparative Figures for 2018)


Capital Stock

(Note 14)

Additional Paid-in Capital

(Note 14)

Convertible Notes Awaiting

Conversion (Note 14)

Retained Earnings (Note 14)

Other Equity Reserves (Note 14)

Treasury Shares (Note 14) Total

Balance as at August 31, 2017 P=3,042,061 P=840,720 P=5,450 P=2,779,324 P=274,765 (P=1,501,882) P=5,440,438

Comprehensive income (loss): Net income – – – 764,952 – – 764,952 Other comprehensive loss – – – – (37,664) – (37,664)

Total comprehensive income (loss) – – – 764,952 (37,664) – 727,288

Transfer of revaluation increment to retained earnings – – – 82,079 (82,079) – –

Balance as at August 31, 2018: As previously presented 3,042,061 840,720 5,450 3,626,355 155,022 (1,501,882) 6,167,726

Effect of adoption of Philippine Financial Reporting Standard 9 (Note 29) – – – 800 (800) – –

As restated 3,042,061 840,720 5,450 3,627,155 154,222 (1,501,882) 6,167,726

Comprehensive income (loss): Net income – – – 857,176 – – 857,176 Other comprehensive loss – – – – (3,963) – (3,963)

Total comprehensive income (loss) – – – 857,176 (3,963) – 853,213

Transfer of revaluation increment to retained earnings – – – 37,030 (37,030) – –

Balance as at August 31, 2019 P=3,042,061 P=840,720 P=5,450 P=4,521,361 P=113,229 (P=1,501,882) P=7,020,939



SEPARATE STATEMENT OF CASH FLOWS For the Year Ended August 31, 2019 (With Comparative Figures for 2018)


Note 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES Income before for income tax P=1,113,251 P=1,087,727 Adjustments for:

Insurance claims 8 (517,155) – Depreciation and amortization 8 326,121 346,868 Provisions for impairment losses on: Property, plant and equipment 8 69,782 512,173 Input and advance output value-added tax 6 55,204 – Trade and other receivables 3 7,186 – Investments in subsidiaries 7 – 15,837 Net additions to (reversal of) provisions for legal claims 12 67,849 (876,228) Finance cost 13 58,093 3,608 Gain on sale of investments in Unit Investment Trust

Fund 4 (17,855) (7,636) Loss (gain) on fair value changes of investment properties 9 (16,185) (35,735) Net retirement benefits 20 10,740 11,223 Interest income 18 (10,426) (3,340) Net gain on disposal of property and equipment 18 – (912)

Operating income before working capital changes 1,146,605 1,053,585 Changes in operating assets and liabilities: Decrease (increase) in: Trade and other receivables (158,196) (157,965) Inventories 15,960 228,478 Other current and non-current assets 98,278 (207,730) Increase (decrease) in trade payables and other current liabilities (151,504) (111,651)

Net cash generated from operations 951,143 804,717 Income tax paid (153,726) (137,019) Interest received 10,426 3,340 Contribution to the retirement fund 20 (10,251) (3,000) Retirement benefits paid 20 (499) (558)

Net cash provided by operating activities 797,093 667,480

CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Investments in Unit Investment Trust Fund 4 (962,729) (862,000) Property, plant and equipment 8 (433,952) (559,168) Proceeds from disposal of: Investments in Unit Investment Trust Fund 4 1,151,721 777,636 Property, plant and equipment – 912 Proceeds from insurance claims 517,155 – Increase in other non-current assets (57,402) (1,203)

Net cash provided by (used in) investing activities 214,793 (643,823)

(Forward)

- 2 -

Note 2019 2018

CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term borrowings 13 (P=1,205,000) (P=800,000) Proceeds from availments of long-term borrowings 13 450,000 550,000 Interest paid (20,479) (3,608)

Net cash used in financing activities (775,479) (253,608)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 236,407 (229,951)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 349,592 579,543

CASH AND CASH EQUIVALENTS AT END OF YEAR 2 P=585,999 P=349,592



NOTES TO SEPARATE FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED AUGUST 31, 2019

(With Comparative Information for 2018) All Amounts are in Thousands, unless otherwise Stated

1. Corporate Information and Status of Operations and Rehabilitation

Victorias Milling Company, Inc. (herein referred to as “the Company” or “VMC”) was originally organized and registered on May 7, 1919 with the Philippine Securities and Exchange Commission (“SEC”) primarily to operate mill and refinery facilities for sugar and allied products, as well as to render engineering services. On July 3, 2013, the SEC approved the Company’s amended articles of incorporation to include, as among its business purposes, ethanol and/or potable alcohol production, infrastructure development, transportation, telecommunication, mining, water, power generation, recreation, and financial or credit consultancy. The Company’s common shares are listed in the Philippine Stock Exchange (“PSE”). It undertook a public offering of its common shares in 1993. There has been no subsequent listing made after its initial offering. The Company has the following subsidiaries:

Nature of Business Percentage of

Effective Ownership

Subsidiaries Victorias Foods Corporation (VFC) Food processing and canning 100% Victorias Agricultural Land Corporation

(VALCO) Agricultural land leasing and cultivation 100 Victorias Green Energy Corporation (VGEC) Co-generation of energy 100 Canetown Development Corporation

(CDC)* Real estate development and selling 93 Victorias Golf and Country Club, Inc.

(VGCCI) Non-profit golf facilities 81 Victorias Quality Packaging Company, Inc.

(VQPC) Manufacture of bags and packaging

materials 55 Associate Victorias Industrial Gases Corporation

(VIGASCO) Industrial gas dealership 30

* The effective ownership is inclusive of 5% indirect ownership

The Company, its subsidiaries and associate were incorporated in the Philippines. On July 4, 1997, VMC filed a petition for rehabilitation with the SEC because of financial difficulties. The trading of VMC shares in the PSE was temporarily suspended but on May 21, 2012, the SEC and the PSE lifted the suspension order. Bases on SEC Orders dated June 2, 1999, August 17, 1999 and August 19, 1999, the SEC approved VMC’s Updated Rehabilitation Plan dated September 25, 1998, subject to the First Addendum to the Rehabilitation Plan as of February 5, 1999 and the Second Amendment to the Rehabilitation Plan dated July 22, 1999 (collectively the “Original Rehabilitation Plan”).

- 2 -

As part of the implementation of the Original Rehabilitation Plan, VMC and the Management Committee created by the SEC (the “VMC Mancom”) conducted a public bidding of 53.35% of VMC’s outstanding capital stock, which bidding was declared a failure by the VMC Mancom for the reason that the deadline for the submission of bids had expired without any bid having been submitted. In view of the failure of bidding, the VMC Mancom, as mandated by the Original Rehabilitation Plan, submitted to the SEC on May 11, 2000 an Alternative Rehabilitation Plan (the “Plan”), which was duly approved on November 29, 2000. A key element of the Plan is the restructuring of loans. Accordingly, VMC and its creditors executed a Debt Restructuring Agreement (“DRA”) dated April 29, 2002. The main basic features of the Plan and DRA are as follows: 1. Increase in authorized capital stock from P=496.0 million, consisting of 496.0 million common

shares at P=1 par value a share, to P=4.61 billion, consisting of 4.61 billion common shares at the same par value.

2. Conversion of a portion of the principal of the unsecured loans and all unpaid interest into equity

amounting to P=1.1 billion. 3. Conversion of a portion of unsecured loans into Convertible Notes (CN) amounting to P=2.4 billion

(Note 14).

4. Restructuring of the secured and unsecured loans aggregating P=4.4 billion over a period of 15 years, including a three-year grace period for the principal, at 10% annual interest for Philippine Peso-denominated loans and at 6% for U.S. Dollar-denominated loans.

Pursuant to the Plan, VMC has implemented the following: 1. VMC has increased its authorized capital stock to P=3.04 billion at P=1 par value a share as at

August 31, 2019 and 2018. 2. P=1.1 billion loans from unsecured creditors were converted into VMC common shares at P=1 of

debt to one common share at P=1 par value a share. 3. Loans from unsecured creditors of P=2.4 billion were converted to CN at 8% interest, payable in

15 years. As at August 31, 2019 and 2018, CN awaiting conversion amounted to P=5.45 million, which includes accrued interest amounting to P=2.5 million.

4. The unsecured and secured creditors who have restructured loans aggregating P=5 billion at 10%

interest for Philippine Peso-denominated loans and 6% interest for U.S. dollar-denominated loans were fully paid as at May 31, 2013.

As part of VMC’s debt restructuring, restructured trade liabilities were also fully paid in 2013. As at August 31, 2019 and 2018, VMC is in full compliance with the provisions of the Plan. There were, however, claims against VMC for Refined Sugar Delivery Order (RSDO) and Refined Sugar Quedan (RSQ) purportedly issued by VMC, which were allegedly used by North Negros Marketing Company, Inc. (NONEMARCO) to avail of bank loans for NONEMARCO’S own use and benefit. These were subject to a litigation before the SEC.

- 3 -

In its Order dated December 3, 2018, the SEC approved the (i) alteration or amendment of the Plan and DRA dated April 29, 2002 of VMC; and (ii) payment to the RSDO and RSQ claimants as full settlement of their claims payable beginning December 2019 over a period of 10 years (Notes 12 and 23). Consequently, VMC is still under rehabilitation as at August 31, 2019 and 2018. A Rehabilitation Receiver continues to monitor, together with the elected Board of Directors (BOD) and committees, the successful rehabilitation of VMC. In its efforts to achieve continuing successful operations, VMC has continuously focused its corporate objectives, goals, strategies, and measures to attain sustainable financial stability through, among others: (a) synchronization of refined sugar and raw sugar operations; (b) significant improvements in plant efficiency; (c) increase in profitability by addressing cost efficiency by trimming down corporate expenses; (d) ongoing programs for the optimization of human resources and (e) effective cash flows management leading to early repayment of debts. The Company’s registered principal place of business is located at VMC Compound, J.J. Ossorio Street, Barangay XVI, Victorias City, Negros Occidental.

The accompanying financial statements were approved and authorized for issue by the BOD on December 10, 2019, as reviewed and recommended for approval by the Audit and Risk Committee on the same date.

2. Cash and Cash Equivalents This account consists of:

2019 2018

Cash on hand P=562 P=11,391 Cash in banks 358,078 224,900 Cash equivalents 227,359 113,301

P=585,999 P=349,592

Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are composed of short-term, highly liquid investments with maturities of no longer than 90 days, and bear annual interest rates as follows:

2019 2018

Philippine peso 0.10% to 3.25% 0.10% to 3.25% US Dollar 2.00% to 2.10% 0.01% to 0.25%

Interest income on cash and cash equivalents amounted to P=10.43 million in 2019 (P=3.34 million in 2018) (Note 18).

- 4 -

3. Trade and Other Receivables This account consists of:

Note 2019 2018

Trade: Third parties P=191,245 P=359,346 Related parties 21 160,287 61,807 Advances to: Related parties 21 327,608 93,882 Planters’ associations 267 1,898 Officers and employees 289 1,729 Others 16,822 19,660

696,518 538,322 Allowance for impairment losses (45,595) (38,409)

P=650,923 P=499,913

Trade receivables pertain to noninterest-bearing amounts due from customers for sale of raw sugar, refined sugar, molasses, ethanol and alcohol and for rendering of tolling services. The average credit period is 30 days.

Advances to planters' associations are noninterest-bearing and are collectible within one year.

Advances to officers and employees pertain to cash advances made to employees, which are collectible through salary deduction.

Other receivables consist of receivables from rental and sale of properties.

Movements in the allowance for impairment losses are as follows:

Note 2019 2018

Balance at beginning of year P=38,409 P= 44,781 Provision 17 7,186 – Write-off – (6,372)


Based on its assessment, management believes that the allowance for impairment losses on trade and other receivables as at August 31, 2019 and 2018 is reasonable and adequate.

4. Investments in Unit Investment Trust Fund (UITF)

This account pertains to underlying portfolio with short-term fixed income. Details of this account are as follows:

2019 2018

Cost P=71,516 P=242,000 Unrealized fair value gain 146 799

P=71,662 P=242,799

- 5 -

Movements in the account are as follows:

2019 2018

Balance at beginning of year P=242,799 P=150,395 Disposals (1,133,213) (770,000) Additions 962,729 862,000 Fair value adjustments (653) 404


Proceeds from sale of investments in UITF amounted to P=1.15 million (P=0.77 in 2018) resulting to gain from sale of investments in UITF amounting to P=17.86 million (P=7.64 million in 2018) (Note 18). Fair value changes recognized in profit or loss amounted to P=0.65 million in 2019 (Note 18).

The fair value of UITF is based on the published net asset value per unit (NAVPU). NAVPU is

computed as total assets of the fund less total liabilities divided by the total units outstanding as of

the end of the reporting period. The fair value of investments in UITF was determined using Level 1

valuation technique. There was no change in the valuation technique applied on investments in

UITF.

5. Inventories


2019 2018

At cost: Raw sugar P=330,725 P=228,583 Refined sugar 16,940 167,902

347,665 396,485 Molasses 65,336 – Ethanol 11,005 30,756 Alcohol 3,829 12,887 Manufactured and fabricated

products 1,168 1,168

429,003 441,296 At net realizable value (NRV) - Materials and supplies 198,483 202,151

P=627,486 P=643,447

Cost of materials and supplies carried at NRV amounted to P=214.54 million as at August 31, 2019

(P=218.21 million as at August 31, 2018).

- 6 -

Movements in inventories (excluding materials and supplies, and manufactured and fabricated

products) are as follows:

Note Raw sugar Refined

sugar Molasses Alcohol Ethanol Power Total

Balance as at September 1, 2017 P=374,661 P=285,220 P=– P=49,776 P=– P=– P=709,657 Amount charged to cost

of sales 16 (1,117,806) (3,591,443) (235,413) (178,142) – (14,280) (5,137,084) Production cost 971,728 3,474,125 235,413 141,253 30,756 14,280 4,867,555

Balance as at August 31, 2018 228,583 167,902 – 12,887 30,756 – 440,128 Production cost 1,325,339 1,910,373 294,622 – 203,038 16,310 3,749,682 Amount charged to cost

of sales 16 (1,223,197) (2,061,335) (229,286) (9,058) (222,789) (16,310) (3,761,975)

Balance as at August 31, 2019 P=330,725 P=16,940 P=65,336 P=3,829 P=11,005 P=– P=427,835

Materials and supplies charged to cost of sales and services amounted to P=220.65 million in 2019 (P=235.85 million in 2018) (Note 16).

6. Other Current Assets This account consists of:

2019 2018

Input and advance output value-added tax (VAT), net of allowance for impairment losses P=297,371 P=302,517

Advances to suppliers 130,507 170,811 Prepaid expenses 44,239 56,107 Refundable deposits – 49,669 Others 187 133

P=472,304 P=579,237

Input and advance output VAT include claims for refund of P=172.6 million, net of allowance for impairment loss of P=55.20 million as at August 31, 2019. The provision for impairment loss amounting to P=55.20 million was recognized in 2019.

Advances to suppliers are amounts paid for purchase orders not yet received by the Company. These are noninterest-bearing and are expected to be settled through delivery of goods and services by the suppliers within one year. Prepaid expenses pertain to advance payments for real property tax, utilities and other supplies.

- 7 -

7. Investments in Subsidiaries and an Associate Details investments in subsidiaries and an associate as at August 31, 2019 and 2018 are as follows:

Percentage of

Direct Ownership Carrying Amount

Cost Subsidiaries:

VFC* 100% P=111,693 CDC 88% 42,952 VALCO* 100% 33,168 VGEC 100% 31,250 VQPC 55% 16,500 VGCCI 81% 15,680

Associate - VIGASCO 30% 5,727

256,970

Allowance for impairment loss VQPC (16,500) VFC (15,837) VIGASCO (5,727)

(38,064)

P=218,906

*Inclusive of advances for future stock subscriptions

Summarized financial information relating to subsidiaries is shown below:

2019 Total Assets Total Liabilities Revenue Net Income

(Loss)

VFC P=314,353 P=342,322 P=65,949 (P=33,482) VALCO 142,496 33,218 15 (393) CDC 214,689 112,695 3,284 (1,048) VGCCI 91,036 54,040 4,995 (5,873) VGEC 32,002 1,796 – (1)

2018 Total Assets Total Liabilities Revenue Net Income

(Loss)

VFC P=127,317 P=121,918 P=67,729 (P=4,278) VALCO 142,966 33,294 1,262 138 CDC 217,094 108,332 3,591 (301) VGCCI 100,516 57,647 4,943 (8,160) VGEC 32,004 1,797 – 726

Investment in VFC VFC, a wholly-owned subsidiary, was registered and incorporated with the SEC on February 24, 1993 primarily to engage in and to acquire or own factories and other manufacturing facilities by lease, purchase or otherwise and to operate the same for the proc essing, preservation and packaging of food products and to sell the same at wholesale. The corporate office and production plant of VFC is located at VICMICO Compound, Victorias City, Negros Occidental.

- 8 -

In 2018, the Company recognized an allowance for impairment on its investment in VFC amounting to P=15.84 million. The recoverable amount is based on the value in use. The allowance for impairment is assessed annually. Investment in VALCO VALCO, a wholly-owned subsidiary, was incorporated and registered with the SEC on June 30, 1987 primarily to acquire and own agricultural and other real estate properties, by purchase, lease or otherwise to improve and develop the same, and to plant thereon all kinds of farm products. The registered address of VALCO is at VICMICO Compound, Victorias City, Negros Occidental. In 2014, the Company entered into an agreement with VALCO whereby the latter will issue shares of stock in exchange for the former's certain parcels of land. A total amount of P=33.07 million was recorded in the books of VALCO as “Deposits for future stock subscriptions” pending the transfer of the certificate of land title in the name of VALCO. In 2014, deposits amounting to P=10.45 million were reversed with respect to the rescission of the Deed of Exchange due to inability of the Company to transfer the Transfer Certificate Titles in the name of VALCO as those were covered by the Company's mortgage trust indenture with various banks.

Investment in CDC CDC, an 88% owned subsidiary, was incorporated and registered with the SEC on February 19, 1974 primarily to purchase, improve, develop, lease, exchange and sell real estate. The registered address of CDC is at VICMICO Compound, Victorias City, Negros Occidental. In 2016, the accrued interest of P=19.56 million from loan to CDC has been converted as an additional investment in subsidiary. This is carried in the books of CDC as additional paid-in capital.

Investment in VGCCI

VGCCI, an 81% owned subsidiary, is a non-profit corporation registered with the SEC on October 8, 1992 primarily to engage exclusively in social, recreational and athletic activities on a non-profit basis among its stockholders, the core of which will be the acquisition and maintenance of a golf course and tennis courts, residential and other simil ar facilities. The registered office of VGCCI is located in VICMICO Compound, Victorias City, Negros Occidental. Investment in VQPC VQPC, 55% owned subsidiary, was incorporated and registered with the SEC on May 14, 1990 primarily to engage in the manufacture and sale of polyethylene bags, boxes, packages and special packaging products. The registered address and production plant of VQPC is at VICMICO Compound, Victorias City, Negros Occidental. In June 2012, VQPC has ceased operations and liquidated its assets as approved by the BOD. Accordingly, the Company has fully impaired its investment in VQPC. As at reporting date, VQPC has no assets and is only waiting for final government clearances.

- 9 -

Investment in VGEC VGEC, a wholly-owned subsidiary, was incorporated and registered with the SEC on April 13, 2015 primarily to engage in the business of power generation derived from coal, fossil fuels, geothermal, nuclear, natural gas, hydroelectric, biomass, solar, wind and other renewable energy resources and other viable sources of power, and services for steam and electricity for lightning and power purposes and wholesale of electricity to power companies, distribution utilities, electric cooperatives, retail electricity suppliers, aggregators and other customers to such extent and in such manner as may be permitted by applicable laws and regulations. The registered office of VGEC is located in VICMICO Compound, Victorias City, Negros Occidental. VGEC has yet to commence commercial operations as at reporting date.

Investment in VIGASCO

VIGASCO, a 30%-owned associate, was incorporated and registered with the SEC on November 19, 1992 primarily to engage in importing, exporting, buying and selling, at wholesale or at retail, of gases, particularly oxygen, acetylene, hydrogen, liquefied petroleum gas and any types of gases. The registered office of VIGASCO is located in VICMICO Compound, Victorias City, Negros Occidental.

VIGASCO ceased its business operations effective December 31, 2014. Accordingly, the investment is fully provided with allowance for impairment loss.

- 10 -

8. Property, Plant and Equipment Movements in this account are as follows:



Structures



Equipment


(PUC)

Total

Acquisition Cost At September 1, 2018 P=278,885 P=146,720 P=682,984 P=20,205 P=5,799,385 P=2,216,743 P=9,144,922 Write-off of damaged portion of power

generation plant – – – – (573,953) – (573,953) Additions – 8,789 16,516 669 231,670 176,308 433,952 Reclassification of completed projects – 1,719 21,089 – 1,772,027 (1,794,835) – Reclassification of computer software 10 – – – – – (39,234) (39,234) Disposals/retirement – – – – (4,410) – (4,410) Transfer from investment properties 9 – – 2,053 – – – 2,053

At August 31, 2019 278,885 157,228 722,642 20,874 7,224,719 558,982 8,963,330

Accumulated Depreciation and Amortization At September 1, 2018 – 104,161 567,399 11,770 3,405,020 – 4,088,350 Depreciation and amortization – 5,552 19,928 502 240,297 – 266,279 Disposals/retirement – – – – (4,410) – (4,410)

At August 31, 2019 – 109,713 587,327 12,272 3,640,907 – 4,350,219

Allowance for Impairment Loss At September 1, 2018 – 8,002 – – – 504,171 512,173 Write-off of damaged portion of power

generation plant – – – – (573,953) – (573,953) Provision for impairment loss – – – – 69,782 – 69,782 Reclassification of impairment loss – – – – 504,171 (504,171) –

– 8,002 – – – – 8,002

278,885 39,513 135,315 8,602 3,583,812 558,982 4,605,109

Appraisal Increase At September 30, 2018 and August 31, 2019 474,249 139,591 644,404 1,370 3,960,292 – 5,219,906

Accumulated Depreciation and Amortization At September 1, 2018 – 139,591 639,428 1,370 3,571,482 – 4,351,871 Depreciation and amortization – – 3,186 – 49,714 – 52,900

At August 31, 2019 – 139,591 642,614 1,370 3,621,196 – 4,404,771

474,249 – 1,790 – 339,096 – 815,135

Net Carrying Value P=753,134 P=39,513 P=137,105 P=8,602 P=3,922,908 P=558,982 P=5,420,244

- 11 -

August 31, 2018 Land Land

Improvements

Buildings and

Structures



Equipment


(PUC)

Total

Acquisition Cost At September 1, 2017 P=278,885 P=135,232 P=661,749 P=17,741 P=5,628,413 P=1,863,754 P=8,585,774 Additions – 9,490 8,229 – 110,513 430,936 559,168 Disposals / retirement – – – – (20) – (20) Reclassification of completed projects – 1,998 13,006 2,464 60,479 (77,947) –

At August 31, 2018 278,885 146,720 682,984 20,205 5,799,385 2,216,743 9,144,922

Accumulated Depreciation and Amortization At September 1, 2017 – 99,128 550,838 11,455 3,197,336 – 3,858,757 Depreciation and amortization – 5,033 16,561 315 207,704 – 229,613 Disposals/retirement – – – – (20) – (20)

At August 31, 2018 – 104,161 567,399 11,770 3,405,020 – 4,088,350

278,885 42,559 115,585 8,435 2,394,365 2,216,743 5,056,572

Allowance for Impairment Loss At September 1, 2017 – – – – – – – Provision for impairment loss – 8,002 – – – 504,171 512,173

At August 31, 2018 – 8,002 – – – 504,171 512,173

Appraisal Increase At September 1, 2017 P=351,962 P=149,540 P=638,101 P=1,370 P=4,140,773 P=– P=5,281,746 Increase (decrease) 122,287 (9,949) 6,303 – (180,481) – (61,840)

At August 31, 2018 474,249 139,591 644,404 1,370 3,960,292 – 5,219,906

Accumulated Depreciation and Amortization At September 1, 2017 – 137,521 638,101 1,370 3,457,624 – 4,234,616 Depreciation and amortization – 2,070 1,327 – 113,858 – 117,255

At August 31, 2018 – 139,591 639,428 1,370 3,571,482 – 4,351,871

474,249 – 4,976 – 388,810 – 868,035

Net Carrying Value P=753,134 P=34,557 P=120,561 P=8,435 P=2,783,175 P=1,712,572 P=5,412,434

- 12 -

Additions to PUC mainly include costs of the construction of power generation plant, major repair of buildings, construction and assembly of boilers and mill equipment. Completed projects amounting to P=1,795.83 million in 2019 (P=77.95 million in 2018) were transferred to the appropriate property and equipment category. Capitalized borrowing costs on loans specifically used for PUC amounted to P=29.78 million in 2019 (P=69.64 million in 2018) (Note 13). The outstanding purchase commitments of the Company as at August 31, 2019 amounted to P=104.69 million (P=165.48 million as at August 31, 2018). The Company disposed certain property and equipment resulting in net gain of P=0.91 million in 2018 (Note 18). On October 10, 2017, the fully insured power generation plant under construction sustained damage. As a result, the Company recognized provision for impairment loss amounting to P=504.2 million. The amount recognized as provision for impairment loss is the difference between the carrying amount of the asset and its recoverable amount. Recoverable amount of the asset was arrived at by computing its value in use. Value in use was calculated using the discounted future cash flows expected to be derived from the asset. The discount rate of 10.33% applied to the cash flows of the operations is based on the risk-free rate for 15-year Philippine government bonds. The risk-free rate is adjusted for a risk premium applicable to the Company. In making this adjustment, inputs required are the equity market risk premium (that is the required increased return required over and above a risk-free rate by an investor who is investing in the market as a whole) and the risk adjustment, beta, applied to reflect the risk of the Company relative to the market as a whole. Likewise, in 2018, a provision for impairment loss amounting to P=8.00 million was recognized on the land improvements as the carrying amount exceeds the recoverable amount based on fair value less costs to sell. The fair value was based on the latest independent appraisal made in April 2018. In 2019, a third-party claims adjuster determined that the actual loss of the damaged portion of the power generation plant amounted to P=573.95 million. Accordingly, additional provision for impairment loss amounting to P=69.78 million was recognized and the cost of the damaged portion of the power generation plant amounting to P=573.95 million was written off. In the same year, the Company received insurance claims aggregating P=517.16 million recognized as other income in the separate statement of income. Moreover, management assessed that the estimated useful life of the power generation plant was reduced from 25 years to 20 years because of the damage it sustained from the incident. Consequently, the depreciation of the power generation plant increased from P=21.4 million to P=26.9 million in 2019. The fair values of property, plant and equipment were based on the appraisal reports issued by qualified independent firm of appraisers engaged by management. The latest appraisal was conducted in April 2018. The fair value of the land was computed using the Market Data Approach (Level 2). In this approach, the value of the land was based on sales and listings of comparable property registered within the vicinity. The fair values of other property, plant and equipment were computed using the Cost Approach (Level 3). Under this approach, an estimate is made of the current Cost of Replacement of the

- 13 -

buildings and land improvements, in accordance with the prevailing market prices for materials, labor and overhead. Adjustments are then made to reflect depreciation resulting from physical deterioration, functional and economic obsolescence based on inspection by the appraiser of the buildings and other land improvements. Depreciation and amortization recognized consist of:

Note 2019 2018

Property and equipment P=319,179 P=346,868 Computer software 10 6,942 –

P=326,121 P=346,868

Depreciation and amortization based on cost and on appraisal increase are charged to operations as follows:

Note 2019 2018

Cost of sales 16 P=203,470 P=279,359 Cost of rendering services 16 54,840 39,034 General and administrative expenses 17 32,383 22,053 Selling expenses 17 7,708 6,422 Other income 27,720 –

P=326,121 P=346,868

On September 1, 2003, the Company’s parcels of land, buildings and machinery and equipment with aggregate carrying value of P=2.48 billion are used as mortgage lien for loans under the Mortgage Trust Indenture (MTI). In 2013, when the restructured loans were fully paid, the Company filed a motion to direct the banks to discharge the MTI liens on the subject properties. This motion is still pending resolution as at August 31, 2019.

9. Investment Properties Investments properties are held for lease and capital appreciation. The details of this account follow:

Note Land Buildings Total

Balance as at September 1, 2017 P=599,204 P=17,207 P=616,411 Fair value gain (loss) 18 37,446 (1,711) 35,735

Balance as at August 31, 2018 636,650 15,496 652,146 Disposal (21,109) – (21,109) Fair value gain 18 12,792 3,393 16,185 Transfer to property, plant

and equipment due to change in use 8 – (2,053) (2,053)

Balance as at August 31, 2019 P=628,333 P=16,836 P=645,169

- 14 -

The fair values of investment properties were based on the appraisal reports issued by qualified independent firm of appraisers engaged by management. The latest appraisal was conducted in August 2019.

The fair value of land was computed using the Market Data Approach (Level 2). In this approach, the value of the land was based on sales and listings of comparable property registered within the vicinity.

The fair value of buildings was computed using the Cost Approach (Level 3). Under this approach, an estimate is made on the current cost of replacement of the buildings, in accordance with the prevailing market prices for materials, labor and overhead. Adjustments are then made to reflect depreciation resulting from physical deterioration, functional and economic obsolescence based on inspection by the appraiser of the buildings.

Other information related to investment properties are shown below:

Note 2019 2018

Rental income (included in other income) 18 P=9,578 P=11,075 Direct expenses (mainly real property taxes) 5,151 5,960

10. Other Non-current Assets


2019 2018

Receivable from a government bank P=51,280 P=26,171 Computer software, net 32,293 – Cash surety bond 25,934 24,578 Refundable deposits 6,233 735

P=115,740 P=51,484

Receivable from a government bank pertains to uncollected proceeds on the land subject to Voluntary Offer to Sell and Compulsory Acquisition pursuant to the Comprehensive Agrarian Reform Program. Computer software amounting to P=39.24 million was reclassified from PUC to other non-current asset in 2019. Amortization amounted to P=6.94 million in 2019 (Note 8).

Cash surety bonds pertain to cash collateral for the labor cases against the Company (Note 23).

Refundable deposits represent advances held by lessors to cover any possible damage to the leased premises aside from ordinary wear and tear, and any unpaid obligation and liabilities of the Company at the end of the lease term.

- 15 -

11. Trade Payables and Other Current Liabilities

The account is consists of:

2019 2018

Trade P=169,444 P=209,857 Accrued expenses 85,265 65,177 Retention payable 60,043 60,407 Current portion of payable to claimants 30,492 – Liens payable 26,868 21,507 Customers’ deposits 23,432 154,669 Others 14,940 19,878

P=410,484 P=531,495

Trade payable represents amounts of obligation of the Company to third parties. These are noninterest-bearing and are normally settled on 30 to 90 day term.

Accrued expenses represent accruals for contracted services, janitorial and security services, utilities, postage and other operating expenses, which are payable within one year. Retention payable represents amounts withheld from contact price for construction contracts entered into by the Group which is normally set at 10% of the total contract price or to an amount equal as stipulated in the contract. This becomes payable upon completion or performance of terms and conditions as stated in the contract. Payable to claimants as at August 31, 2019 pertains to the agreed compromise amount with the RSDO and RSQ claimants payable beginning December 2019 over 10 years (Notes 12 and 23). The current and non-current portion of this account are as follows:

Payable to claimants P=304,923 Unamortized discount (94,340)

210,583 Current portion (30,492)

Noncurrent portion P=180,091

Interest incurred on payable to claimants, included under “Finance Cost”, amounted to P=18.04 million in 2019 (Note 13).

Liens payable represents amounts payable to the Sugar Regulatory Authority (“SRA”) as imposed based on the volume of sugar produced, due to be settled within one year. Customers’ deposits represent payments received in advance by the Company for sale of sugar and molasses. These are recognized as revenue upon transfer of quedans for raw sugar or molasses warehouse receipts for molasses and approval of RSDO or delivery for refined sugar. Others represent amounts pertaining to social amelioration fund set aside for the sugar workers and association dues payable to the different planters association accredited by the Company.

Management considers that the carrying amount of trade payables and other current liabilities approximates fair value due to their short-term maturities.

- 16 -

12. Provisions for Legal Claims

The Company is currently involved in various legal proceedings which are still pending resolution or under suspension in view of the Company's rehabilitations status (Note 23). Estimates of probable costs resulting from the resolution of these claims have been developed in consultation with legal counsels handling the defense in these matters and are based upon an analysis of potential results. Based on the progress of the legal cases (Note 23) as at reporting date, management has revised its previous estimate resulting a net additional provisions of P=67.85 million in 2019 (reversal of provisions for legal claims amounting to P=876.23 million in 2018). Movements in this account are as follows:

Note 2019 2018

Balance as at beginning of year P=401,465 P=1,277,693 Reclassification to payables (192,542) – Net additions (reversal) 67,849 (876,228) Unwinding of discount 13 19,572 –


On December 3, 2018, VMC and the RSDO and RSQ claimants agreed to settle at P=304.92 million, payable beginning December 2019 over a period of 10 years (Note 23). The liability was recognized at its present value of P=192.54 million. Accordingly, the current and non-current portion of the claims were reclassified to “Trade payables and other current liabilities” and “Payable to claimants, net of current portion” accounts, respectively, in the separate statement of financial position (Note 11).

The undiscounted amount and the related amortized discount are as follows:

2019 2018

Provisions for legal cases, gross P=444,391 P=679,128 Unamortized discount (148,047) (277,663)

P=296,344 P=401,465

On an annual basis, the provisions are re-evaluated and recalculated based on latest available information. As at August 31, 2019, the provisions were discounted at a rate of 6.69% to 7.45% (9.37% in 2018).

13. Borrowings Following the full repayment of the restructured loans (Note 1), the Company obtained loans from local banks to fund its working capital requirements and capital projects as follows: Short-term Borrowings Short-term borrowings consist of unsecured loans availed from various banks for the Company’s working capital requirements. These borrowings have interest rate of 6.25% (3.5% to 3.75% in 2018).

- 17 -

Short-term borrowings availed by the Company amounting to P=450.00 million in 2019 (P=550.00 million in 2018) are fully paid. There are no outstanding short-term borrowings as at August 31, 2019 and 2018. Long-term Borrowing Long-term borrowing represents unsecured loan availed from a bank to fund the Company’s power generation project (Note 8) with 4.625% interest, payable quarterly beginning March 14, 2018 until December 14, 2020.

Changes in long-term borrowing arising from financing activities are as follows:

2019 2018

Balance at beginning of year P=1,250,000 P=1,500,000 Repayments (755,000) (250,000)

Balance at end of year P=495,000 P=1,250,000

Borrowings are presented in the separate statement of financial position as follows:

2019 2018

Current P=330,000 P=500,000 Non-current 165,000 750,000

P=495,000 P=1,250,000

Borrowing Costs Borrowing costs arising from the above bank loans are as follows:

2019 Capitalized

Portion Charged to Profit or Loss

(included in Finance Cost) Total

Long-term P=29,781 P=14,749 P=44,530 Short-term – 5,731 5,731

P=29,781 P=20,480 P=50,261

2018 Capitalized

Portion Charged to Profit or Loss

(included in Finance Cost) Total


P=69,640 P=3,608 P=73,248

Details of finance cost are as follows:

Note 2019 2018

Borrowings P=20,480 P=3,608 Provisions for legal claims 12 19,572 – Payable to claimants 11 18,041 –

P=58,093 P=3,608

- 18 -

The debt covenant for the long-term borrowing requires the Company to maintain certain financial ratios. As at August 31, 2019 and 2018, the Company is compliant with the debt covenant.

14. Equity

Capital Stock/Treasury Stock

2019 2018

Number of Shares Amount

Number of Shares Amount

Common shares at P=1 par value per share Authorized 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061

Issued and outstanding 3,042,061,094 P=3,042,061 3,042,061,094 P=3,042,061 Treasury shares (300,010,530) (1,501,882) (300,010,530) (1,501,882)

2,742,050,564 P=1,540,179 2,742,050,564 P=1,540,179

On May 23, 2017, the SEC approved the Company’s application for increase in its authorized capital stock from 2.91 billion shares to 3.04 billion shares with par value of P=1 per share. A total of 128.81 million shares was issued through conversion of CN to equity. On February 15, 2016, the BOD approved the acquisition of 365 million shares. Following the execution of the sale agreement on February 18, 2016, the Company acquired 300 million treasury shares at P=5.0 per share or a total of P=1.50 billion. CN awaiting for conversion amounted to P=5.45 million, which includes accrued interest amounting to P=2.45 million as at August 31, 2019 and 2018. Retained Earnings The Second Amendment to the Rehabilitation Plan dated July 22, 1999 provided for the reduction of the capital stock and revaluation increment as at actual implementation which was used to reduce the deficit of the Company at the time of the implementation of the quasi reorganization. The Second Amendment to the Rehabilitation was approved by the SEC in its order dated August 17, 1999. Under paragraph 7 of the SEC’s Guidelines for Quasi Reorganization, for the purpose of dividend declaration, any retained earnings of the Company shall be restricted to the extent of the deficit wiped out and not recovered by accumulated depreciation or revaluation increment by the revaluation surplus. However, in another SEC Order dated August 17, 1999, the SEC granted the Company’s prayer for exemption from the application of said paragraph 7.

Retained earnings are restricted for the declaration and payment of dividends to the extent of the cost of treasury shares amounting to P=1,501.88 million August 31, 2019 and 2018.

- 19 -

Other Equity Reserves Details and movement in this account follow:

Note 2019 2018

Revaluation increment on property, plant and equipment:

Balance at beginning of year P=148,819 P=274,186 Transfer of revaluation increment to retained

earnings (52,900) (117,255) Deferred income tax effect 15,870 53,728 Decrease in revaluation increment 8 – (61,840)

Balance at end of year 111,789 148,819

Cumulative remeasurement gain (loss) on retirement liability:

Balance at beginning of year 5,403 184 Remeasurement gains (loss) (5,662) 7,455 Deferred income tax effect 1,699 (2,236)

Balance at end of year 20 1,440 5,403

Cumulative fair value changes on investments in UITF:

Balance at beginning of year: As previously presented P=800 P=395 Effect of adoption of Philippine Financial

Standard (PFRS) 9 27 (800) –

As restated – 395 Net changes in fair value – 8,041 Amount recycled to profit or loss – (7,636)

Balance at end of year 4 – 800

P=113,229 P=155,022

15. Revenue Revenue consists of:

2019 2018

Sale of goods: Refined sugar P=2,420,434 P=4,325,580 Raw sugar 1,683,236 1,024,944 Ethanol 594,257 – Molasses 208,398 420,903 Power generation 29,376 40,227 Alcohol 17,657 259,845

4,953,358 6,071,499 Service income - Tolling fees 565,230 481,410

P=5,518,588 P=6,552,909

- 20 -

16. Cost of Sales and Services Rendered

(a) Cost of Sales


Note 2019 2018

Inventories used P=1,557,535 P=2,788,098 Cost of hauling 1,250,679 1,171,544 Repairs and maintenance 268,484 345,092 Depreciation and amortization 8 203,470 279,359 Materials and supplies 5 119,779 159,074 Direct labor 122,353 130,718 Fuel 84,035 61,812 Professional fees and contracted services 74,989 76,062 Light and water 38,313 55,544 Taxes and licenses 31,922 48,165 Others 10,416 21,616

P=3,761,975 P=5,137,084

Cost of hauling pertains to cane trucking, hauling allowances and other incentives to encourage planters to mill with the Company.

(b) Cost of Services Rendered


Note 2019 2018

Materials and supplies 5 P=100,876 P=76,773 Repairs and maintenance 56,784 51,202 Depreciation and amortization 8 54,840 39,034 Fuel 44,520 23,345 Direct labor 42,835 26,451 Professional and contracted services 19,254 11,746 Light and water 6,308 5,039 Taxes and licenses 6,042 4,344 Others 4,530 2,536

P=335,989 P=240,470

- 21 -

17. Operating Expenses (a) General and Administrative Expenses


Note 2019 2018

Taxes and licenses P=152,997 P=87,362 Professional fees and contracted services 136,746 114,854 Salaries and employee benefits 88,008 85,462 Representation and entertainment 73,017 42,653 Provisions for impairment losses on: Input and advance output VAT 55,204 – Trade and other receivables 3 7,186 – Depreciation and amortization 8 32,383 22,053 Supplies 21,998 21,517 Travel and transportation 17,533 19,389 Repairs and maintenance 11,031 22,380 Net retirement benefits 20 10,740 11,223 Others 5,651 5,811

P=612,494 P=432,704

(b) Selling Expenses


Note 2019 2018

Freight and handling P=115,137 P=92,656 Rental 21,210 18,279 Taxes and licenses 11,878 17,810 Depreciation and amortization 8 7,708 6,422 Salaries and employee benefits 7,707 6,865 Others 9,572 12,442

P=173,212 P=154,474

18. Other Income (Charges)


Note 2019 2018

Storage, handling and insurance fee P=96,113 P=82,565 Gain on sale of investments in UITF 4 17,858 7,636 Net gain on fair value changes

of investment properties 9 16,185 35,735 Interest income 2 10,426 3,340 Rental income 9 9,578 11,075 Net foreign exchange gain 6,086 1,449 Scrap sales 5,479 17,128 (Forward)

- 22 -

Note 2019 2018

Unrealized gain on fair value changes of investments in UITF 4 P=653 P=–

Provision for impairment losses on investment in subsidiaries – (15,837)

Net gain on disposal of property and equipment 8 – 912

Others - net (5,476) (4,900)

P=156,902 P=139,103

Storage, handling and insurance fees pertain to warehousing fees, trucking services and fuel costs which are charged to traders and planters.

19. Income Tax

The reconciliation of income tax expense computed at the applicable statutory rate to the effective tax expense is as follows:

2019 2018

Non-taxable

Income

Taxable Income at 30% Total

Non-taxable Income

Taxable Income at 30% Total

Income before income tax P=354,318 P=758,933 P=1,113,251 P=40,227 P=1,047,500 P=1,087,727

Income tax expense at statutory rate – 227,679 227,679 – 314,251 314,251 Tax effects of:

Non-deductible deficiency payments – 16,909 16,909 – – – Other non-deductible expenses – 13,302 13,302 – 9,183 9,183 Interest income subject to final tax – (3,112) (3,112) – (987) (987) Non-deductible interest expense – 1,297 1,297 – 328 328

Income tax expense P=– P=256,075 P=256,075 P=– P=322,775 P=322,775

Non-taxable income pertains to income from the sale of power and sale of bioethanol, where both activities are registered with the Board of Investments (BOI) on January 23, 2015 and November 28, 2018, respectively. Both activities are entitled to income tax holiday (ITH) for a period of seven years until 2022 and 2025, respectively.

The composition of net deferred income tax liabilities follows:

2019 2018

Deferred tax liabilities: Cumulative fair value gain on investment properties P=259,384 P=257,509 Net appraisal increase on property, plant

and equipment 244,541 260,411 Capitalized borrowing costs 54,893 45,959 Unrealized foreign exchange gain 122 –

558,940 563,879

(Forward)

- 23 -

2019 2018

Deferred tax assets: Provisions for legal claims P=88,903 P=120,440 Payable to claimants 63,175 – Allowance for impairment losses on: Input and advanced output VAT 16,561 – Trade and other receivables 13,679 11,523 Investments in subsidiaries and an associate 11,419 11,419 Property, plant and equipment 2,401 153,652 Retirement liability 12,493 10,797 Customers’ deposits 7,030 46,401 Allowance for Inventory write-down and obsolescence 4,818 4,818 Unrealized foreign exchange loss – 92

220,479 359,142

P=338,461 P=204,737

20. Retirement Plan

The Parent Company has a formal retirement plan covering all qualified employees. The Parent Company estimates its retirement benefits under Republic Act No. 7641, Retirement Pay Law, in which retirement benefit due to qualified employee is equivalent to 22.5 days pay of final monthly basic salary for every year of credited service. Retirement benefit obligation is actuarially calculated using the projected unit credit method. The Company's latest actuarial valuation was performed by independent actuary as at August 31, 2019. Components of retirement benefits are as follows:

Note 2019 2018

Current service cost P=8,257 P=9,470 Interest cost 2,483 1,753

17 P=10,740 P=11,223

Retirement benefits recognized in profit or loss is included under general and administrative expenses in the separate statement of comprehensive income. The movements in the cumulative remeasurement gain (loss) on retirement liability recognized in other comprehensive income are as follows (Note 14):

2019 2018

Balance at beginning of year, net of tax effect (P=5,403) (P=184) Remeasurement gain (loss) 5,662 (7,455)

259 (7,639)

Deferred income tax charged to other comprehensive income (1,699) 2,236

Balance at end of year, net of tax effect (P=1,440) (P=5,403)

- 24 -

The amounts recognized as retirement liability in the separate statement of financial position for the retirement plan are determined as follows:

2019 2018

Present value of defined benefit obligation P=47,174 P=39,005 Fair value of plan asset (5,531) (3,014)

P=41,643 P=35,991

The movements in the present value of retirement benefit obligation for the years ended August 31 are as follows:

2019 2018

Balance as at beginning of year P=39,005 P=35,780 Current service cost 8,257 9,470 Benefits paid from: Plan assets (7,937) – Operations (499) (558) Interest cost 2,691 1,753 Remeasurement (gain) loss: Changes in financial assumptions 7,543 (5,286) Changes in experience (1,886) (3,905) Changes in demographic assumptions – 1,751


In 2018, the Company has set up a formal retirement fund managed by external trustee-bank. Plan asset as at August 31, 2019 comprise investments in UITF with underlying portfolio of money market instruments.

Changes in the fair value of plan asset are as follows:

2019 2018

Balance at beginning of year P=3,014 P=– Interest income 208 – Benefits paid (7,937) – Actual return (5) 14 Actual contributions 10,251 3,000


The principal actuarial assumptions used were as follows:

2019 2018

Discount rate 4.60% 6.90% Salary increase rate 3.00% 3.00%

The average remaining service life of employees is 8.7 years as at August 31, 2019 (9.3 years in August 31, 2018).

- 25 -

The expected maturity analysis of undiscounted retirement benefit payments are as follows:

2019 2018

0 to 5 years P=33,499 P=37,328 6 to 10 years 37,054 44,984 11 to 15 years 36,831 39,894 16 years and up 158,195 219,921

P=265,579 P=342,127

Impact on retirement liability

Change in assumption Increase in

assumption Decrease in assumption

Discount rate 1% Increase by P=43,578 Decrease by P=51,391 Salary increase rate 1% Increase by P=51,140 Decrease by P=43,746

The foregoing sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the retirement liability recognized within the separate statement of financial position.

21. Related Party Transactions

Related party transactions are as follows:



Subsidiaries: Advances to subsidiaries (Note 3) P=83,726 P=327,608 Unguaranteed and unsecured Advances from subsidiaries (62) (441) Unguaranteed and unsecured

P=83,664 P=327,167

Shareholder with significant influence: Sale of goods (Note 3) P=590,892 P=160,287 Unguaranteed and unsecured;

noninterest-bearing Cash in bank, money market placements and

investments in UITF (70,891) 31,071

P=520,001 P=191,358

Salaries and wages - Key management personnel P=17,800 P=– Payable in cash

- 26 -


balance Terms and conditions

Subsidiaries: Advances to subsidiaries (Note 3) P=6,895 P=93,882 Unguaranteed and unsecured Advances from subsidiaries (56) (379) Unguaranteed and unsecured

P=6,839 P=93,503

Shareholder with significant influence Sale of goods (Note 3) P=1,209,029 P=61,807 Unguaranteed and unsecured;

noninterest-bearing Cash in bank, money market placements and

investments in UITF (199,314) 113,879

P=1,009,715 P=175,686

Salaries and wages - Key management personnel P=25,084 P=– Payable in cash

Advances to Subsidiaries In the normal course of business, the Company has transactions with related parties principally consisting of advance payments for operating expenses made on behalf of the subsidiaries. These advances are unsecured and are due and demandable.

As of August 31, 2019 and 2018, the Company has provided an allowance for impairment amounting P=38.4 million. This assessment is undertaken at each reporting date by examining the financial position of the related party and the market in which the related party operates. Advances from Subsidiaries The Company entered into an operating lease agreement with CDC and VALCO for the lease of 2.93 hectares of agricultural land. In consideration for the lease, the Company shall pay P=5,000 per hectare per month.

22. Agreements and Commitments The significant agreements are as follows: a. Under Republic Act No. 809, The Sugar Act of 1952, VMC and the planters should share from the

sugar and molasses produced from sugar canes owned by the planters milled by VMC. It provides for a 69.5% share to the planters and 30.5 % share to VMC. The Sugar Industry Development Act of 2015 provides that, to ensure the immediate payment of farmers and secure their income from sugarcane, farmers may enter into any payment method with the sugar mill. Effective December 1, 2018, the sharing allocation is 69.7% for the planters, 30% for VMC and 0.3% for the sugar workers.

a. As at August 31, 2019, the Parent Company has in its custody sugar owned by several quedan and delivery order holders with volume of 0.64 million Lkg (0.28 million Lkg as at August 31, 2018). The said volume of sugar is not reflected in the separate statement of financial position since this is not owned by the Company. The Company is accountable to both quedan holders and sugar traders for the value of these trusteed sugar or their sales proceeds.

- 27 -

b. In 1993, the Company has entered into a deed of assignment and exchange of shares of stock with VGCCI for the latter to issue shares of stock with a total par value of P=224,000 in exchange for the Company's land with an appraised value of P=13.21 million the difference of P=12.98 million to be accounted for as additional paid-in capital of the Company to VGCCI.

As provided for in the agreement, VGCCI is in possession of the abovementioned land without any consideration yet until such time that the assignment of the aforementioned land is completed. As at August 31, 2019, the certificate of title has not yet been transferred in the name of VGCCI since the land to be transferred is covered by the MTI of the Company with various creditor banks as disclosed in Note 9. Accordingly, the transaction is on hold until the subject land is released as collateral.

23. Provisions and Contingencies The Company’s management and legal counsels are of the opinion that the positions taken by the Company in the legal proceedings briefly discussed below are highly meritorious. However, the Company cannot anticipate with certainty the progress and the outcome of the legal proceedings, the appreciation of the available evidence by the relevant courts or tribunals involved and the development of jurisprudence or precedents that will be decided by the highest court, which will be relevant to the pending cases. a. RSDO and RSQ Claims

NONEMARCO availed of bank loans and used RSDO and RSQ, allegedly issued by VMC, as security. NONEMARCO defaulted payments on these loans. Consequently, the creditor banks filed collection cases aggregating P=1.19 billion against NONEMARCO. VMC denied liability to creditor banks on the RSDO and RSQ claims because these claims lacked factual or legal basis and that these were issued by officers who acted fraudulently. In 2015 and 2016, the SEC Special Hearing Panel (“SHP”) ordered VMC to settle the claims of certain claimant banks. VMC appealed the relevant orders of the SHP to the SEC En Banc, but were denied. In 2017, VMC filed separate Petitions for Review with Prayer for Preliminary Injunction and Temporary Restraining Order (“Petitions for Review”) before the Court of Appeals (CA) relating to the decisions of the SEC En Banc. On October 13, 2017, the CA granted the Petitions for Review and set aside the SEC En Banc decisions. VMC continues to contest the claims, but in order to achieve the objectives of the rehabilitation, to buy peace, promote stability in its operations, and avoid further protracted litigation, VMC filed a Motion for the Alteration or Modification of its Plan (“Motion for Alteration”) on April 17, 2018 with respect to the RSDO and RSQ claims. The concerned parties interposed no objection to, agreed with, and supported the Motion for Alteration. On December 3, 2018, the SEC granted the Motion for Alteration and approved the (i) alteration or amendment of the Plan and DRA; and (ii) payment to the RSDO and RSQ claimants a total compromise amount of P=304 million as full settlement of their claims payable beginning December 2019 over a period of 10 years. Accordingly, a portion of the provision for RSDO and RSQ claims was reversed in 2018 (Note 11).

- 28 -

The current portion of the claims amounting to P=30.49 million and noncurrent portion amounting to P=180.09 million as at August 31, 2019 were reclassified to “Trade payable and other current liabilities” and “Payable to claimants, net of current portion” accounts, respectively (Note 11). Provisions for legal claims on RSDO and RSQ claims amounted to P=192.54 million as at August 31, 2018.

b. Labor, Civil and Other Cases

There are various lawsuits and claims such as labor and collection cases filed by third parties against VMC. Relative to this, VMC is required to put up surety bonds (Note 10). On December 3, 2018, the SEC SHP issued an order directing VMC to validate other pending claims of the third parties. VMC continues to monitor these claims and has recognized provisions accordingly. VMC also has legal actions against third parties in the ordinary course of business.

c. Proceeding with the Pollution Adjudication Board (PAB)

VMC has an on-going proceeding with the PAB on non-compliance with water and air standards. To comply with the order of the Department of Energy and Natural Resources, VMC acquired, constructed and installed air and water pollution control devices amounting to about P=350 million. VMC submitted a number of pleadings to the PAB to prevent a re-imposition of the Cease and Desist Order on which the PAB issued temporary lifting orders (TLO). VMC also filed Position Papers, praying for the reduction of fines imposed by the PAB. On June 19, 2017, VMC filed a Motion for issuance of Formal Lifting Order before the PAB, which was denied on April 19, 2018. On May 17, 2018, VMC filed a Motion for Reconsideration and Clarification, stating that the denial of the request for Formal Lifting Order was prematurely issued. On November 29, 2019, VMC paid the fines imposed by the PAB at an agreed settlement amount. However, as at the report date, the decision on VMC’s Motion for Reconsideration and Clarification is still pending resolution and the Formal Lifting Order was not yet issued.

d. Convertible Note Case against Eastwest Bank Corporation (EWBC) In 2014, VMC redeemed the convertible note held by EWBC (“EWBC CN”) in accordance with the Plan, DRA and convertible note provisions. However, EWBC did not accept the redemption. On a letter dated September 25, 2014, VMC consigned to the SEC-appointed rehabilitation receiver the checks amounting to P=366.12 million as full payment of the EWBC CN. On August 11, 2015, the SEC En Banc confirmed VMC’s redemption of the EWBC CN and consignation of payments. The SEC En Banc likewise denied EWBC’s motion to compel VMC to allow EWBC to exercise its option to convert the EWBC CN. Accordingly, the "Checks payable to EWBC" was extinguished as at August 31, 2015. These were affirmed by the CA in its Decision dated January 19, 2016.

- 29 -

On June 27, 2016, VMC received a copy of the Petition for Review (with application for the issuance of a preliminary injunction) dated June 10, 2016 (“EWBC Petition”) filed by EWBC with the SC to appeal the CA’s decision. However, on September 23, 2016, the CA resolved that “in view of the result of Case Management Information System verification on September 16, 2016 which shows that no Supreme Court petition has been filed, the decision became final on June 12, 2016. An entry of judgment is ordered issued.” Based on the CA Entry of Judgment dated September 23, 2016, the CA decision dated January 19, 2016 became final and executory on June 12, 2016. EWBC filed a Manifestation dated November 15, 2016 with the CA stating that it filed a Petition for Review before the SC on June 10, 2016. However, EWBC did not seek reconsideration of the CA Resolution dated September 23, 2016. Accordingly, the CA Resolution dated September 23, 2016 and CA Entry of Judgment dated September 23, 2016 may be deemed to have become final and executory. On February 6, 2017, VMC filed its Motion to Dismiss dated February 3, 2017 (“Motion to Dismiss”) vis-à-vis the EWBC Petition with the SC. As at reporting date, the Motion to Dismiss is still pending resolution with the SC.

Provisions for legal claims amounted to P=296.34 million as at August 31, 2019 (P=401.47 million as at August 31, 2018). Management believes that the provisions for legal claims are reasonable and adequate to cover for potential losses from the foregoing legal cases.

24. Significant Accounting Judgments and Estimates The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates, assumptions and judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Critical Accounting Judgments a. Recognizing Revenue (Note 15)

For revenue recognized over time, the Company recognizes revenue if any of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the Company performance as the entity performs.

The Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

- 30 -

The Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date.

Otherwise, revenue is recognized at a point in time. b. Recoverability of Deferred Tax Assets (Note 19)

The Company reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits together with future tax planning strategies. However, there is no assurance that the Company will utilize all or part of the deferred tax assets. Any deferred tax asset will be re-measured if it might result to derecognition in cases where the expected tax law to be enacted will impose a possible risk on its realization.

c. Distinction between Investment Properties and Owner-Occupied Properties (Notes 8 and 9)

The Company determines whether a property qualifies as investment property. In making its judgment, the Company considers whether the property generates cash flows largely independent of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to the other assets used in the production or supply process.

Some properties comprise a portion that is either held to earn rentals or for capital appreciation and another portion is held for use in the production or supply of goods or services or for administrative purposes. If these portions cannot be sold separately as of reporting date, the property is accounted for as investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Company considers each property separately in making its judgment.

Critical Accounting Estimates

a. Estimating NRV of Inventories (Note 5)

In estimating NRV of inventories, management takes into account the most reliable evidence available at the time the estimates are made. The Company's business is subject to changes which may cause inventory obsolescence and the nature of the Company's inventories is susceptible to physical deterioration, damage, breakage and technological changes. Moreover, future realization of the carrying amounts of inventories is affected by price changes in the market. These aspects are considered key sources of estimation uncertainty and may cause significant adjustments to the Company's inventories within the next financial year.

b. Impairment of Financial Assets (Notes 3 and 4)

Upon adoption of PFRS 9, impairment losses on financial assets are determined based on expected credit losses (ECL). In assessing the ECL, the Group uses historical loss experience adjusted for forward-looking factors, as appropriate.

- 31 -

The Company's cash and cash equivalents are maintained at reputable financial institutions with good industry rating and score.

For investments in UITF, the Company estimates impairment based on 12-month ECL. Investment in UITF, which have credit quality equivalent to “high grade” and have low credit risk at reporting date, are presumed to have no significant increase in credit risk since initial recognition.

The Company estimates impairment on trade receivables based on lifetime ECL using a provision matrix that is based on days past due and takes into consideration historical credit loss experience, adjusted for forward-looking factors, as applicable. Management recognizes losses on credit-impaired receivables from related parties considering its ability to pay based on its available assets. Prior to adoption of PFRS 9, the Company maintains an allowance for impairment losses based on the result of the individual and collective assessment. Factors considered in the individual assessment are payment history, past due status and term. The collective assessment would require the Company to group its receivables based on the credit risk characteristics (industry, customer type, customer location, past-due status and term) of the customers.

Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management’s judgment and estimate. Therefore, the amount and timing of recorded expense for any period would differ depending on the judgments and estimates made for the year.

c. Impairment of Nonfinancial Assets (Notes 7, 8, and 9)

The Company assesses impairment on property, plant and equipment, investment properties and investments in subsidiaries and an associate whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

The factors that the Company considers important which could trigger an impairment review include the following:

i) significant underperformance relative to expected historical or projected future operating results;

ii) significant changes in the manner of use of the acquired assets or the strategy for overall business; and,

iii) significant negative industry or economic trends.

As disclosed in Note 8, the Company recognized provision for impairment loss on partially damaged components of the power generation plant amounting to P=69.78 million in 2019 (P=504.17 million in 2018). The provision for impairment loss in 2019 of P=69.78 million pertains to the difference of actual loss on the damaged portion of the power generation plant amounting to P=573.95 million and the previously recognized provision for impairment loss amounting to P=504.17 million as at August 31, 2018.

- 32 -

In 2018, the impairment was based on the Discounted Cash Flow method. The key assumptions used in the calculation of the recoverable amount are disclosed in Note 8. For sensitivity analysis purposes, a 1% reduction in the discount rate would increase the allowance for impairment loss by P=7.38 million, while an increase of 1% in the discount rate would reduce the allowance for impairment loss by P=7.34 million.

d. Estimating Useful Lives of Property, Plant And Equipment (Note 8)

The Company estimates useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The Company reviews regularly the estimated useful lives of property, plant and equipment based on factors that include asset utilization, internal technical evaluation, technological changes, environmental and anticipated use of the assets tempered by related industry benchmark information.

It is possible that future results of operation could be materially affected by changes in these estimates brought about by changes in factors mentioned. A reduction in the estimated useful lives of property, plant and equipment would increase depreciation and amortization and decrease noncurrent assets.

e. Fair Value of Financial Assets (Note 4)

Certain financial assets are carried at fair value. When the fair values of financial assets recorded in the consolidated statements of financial position cannot be measured based on quoted prices in active market, their fair value is measured using valuation techniques including the Discounted Cash Flow model. The inputs to this model are taken from observable market where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

f. Fair Value of Non-Financial Assets (Notes 8 and 9)

The fair values of the Company's property, plant and equipment and investment properties are determined from market-based evidence by appraisal that was undertaken by an independent firm of appraisers in calculating such amounts. While management believes that the assumptions and market-based evidences used are reasonable and appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the valuation of the Company's property, plant and equipment and investment properties. Since several factors are considered in the estimation fair values of property, plant and equipment and investment properties, the Company has deemed it impracticable to perform a reasonable sensitivity analysis.

g. Determination of Retirement Liability (Note 20) The determination of the cost of retirement benefits and related retirement liability is dependent on the selection of certain assumptions used by the actuary in calculating such amounts. The assumptions, which include among others, discount rate and rate of salary increase are described in Note 20.

- 33 -

Actual results that differ from the assumptions are accumulated and are recognized as part of other comprehensive income. While management believes that the assumptions are reasonable and appropriate, significant differences in the Company’s actual experience of significant changes in the assumptions may materially affect the retirement liability.

h. Estimating Provisions and Contingencies (Notes 12 and 23)

The Company is currently involved in various legal proceedings (Note 23) which are still pending resolution or under suspension in view of the Company's rehabilitations status. Estimates of probable costs resulting from the resolution of these claims have been developed in consultation with the legal counsels handling the defense in these matters and are based upon an analysis of potential results.

The Company discounts its provisions over the period such provisions are expected to be settled. The discount rate used by the Company is a government bond rate which is a pre-tax rate that reflects current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.

Since several factors are considered in the estimation of provision for legal claims, the Company has deemed it impracticable to perform a reasonable sensitivity analysis. The future results of operations could be materially affected by changes in the estimates or in the effectiveness of the Company's strategies relating to the foregoing proceedings.

25. Risk Management, Objectives and Policies

Regulatory Risk

The Company is subject to laws and regulations in the Philippines in which it operates.

The Company has established policies and procedures in compliance with local and other laws. Management performs regular reviews to identify compliance risks and to ensure that the systems in place are adequate to manage those risks.

Financial Risk Management

The Company's financial assets comprise of cash and cash equivalents, trade and other current receivables (excluding advances to officers and employees), investments in UITF, short-term and long-term investments and cash surety bond. The financial liabilities of the Company, which arise directly from its operations, comprise trade payables and other liabilities (excluding due from government agencies), advances from related parties and borrowings.

The Company’s activities expose it to a variety of financial risks: credit risk, market risk (including price risk, and cash flow and fair value interest rate risk) and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.

- 34 -

The BOD of the Company has overall responsibility for the establishment and oversight of the Company's risk management framework. Moreover, market and credit risk management is carried out by the Company's Treasury. The objective is to minimize potential adverse effects on its financial performance due to unpredictability of financial markets.

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company.

The Company trades only with recognized and creditworthy third parties. All customers who wish to transact on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. The amounts presented in the separate statement of financial position are net of allowances for impairment losses on receivables, estimated by the Company's management based on prior experience and their assessment of the prevailing economic environment at any given time.

The Company uses a provision matrix to calculate ECL for receivables. The provision rates are based on days past due for each type of customers. The Company adjusts historical default rates to forward-looking default rate by determining the closely related economic factor affecting each year. At each reporting date, the observed historical default rates are updated and changes in the forward-looking estimates are analyzed.

Receivables for which an impairment provision was recognized were written off against the provision when there was no expectation of recovering additional cash.

For the Company’s other financial instruments measured at amortized cost, it is the Company’s policy to measure ECL on the above instruments on a 12-month basis. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL.

When determining if there has been a significant increase in credit risk, the Company considers reasonable and supportable information that is available without undue cost or effort and that is relevant for the particular financial instrument being assessed, as discussed in Note 24 to the separate financial statements.

As at August 31, 2019 and 2018, the Company's maximum credit exposure is equal to the carrying values of the following financial assets:

2019 2018

Cash and cash equivalents (1) P=585,437 P=338,201 Trade and other current receivables (2) 650,634 498,184 Investments in UITF 71,662 242,799 Receivable from a government bank 51,280 26,171 Cash surety bonds 25,934 24,578 Refundable deposits 6,233 735

P=1,391,180 P=1,130,668

(1) excluding cash on hand (2) excluding advances to officers and employees ; net of allowance for impairment loss

- 35 -

At the reporting date, there were no significant concentrations of credit risk as the Company's financial assets are actively monitored. The table below presents the summary of the Company’s exposure to credit risk and shows the credit quality of the assets by indicating whether the assets are subjected to 12-month ECL or lifetime ECL. 2019

12-month ECL –

Not Impaired 12-month ECL –

Credit Impaired Lifetime ECL – Not Impaired

Lifetime ECL – Credit Impaired Total

Financial Assets at Amortized Cost Cash and cash equivalents* P=585,437 P=– P=– P=– P=585,437 Trade receivables:

Third parties 191,082 163 – – 191,245 Related parties 160,287 – – – 160,287

Advances to planters associations – 267 – 267 Other receivables 7,241 – 128 9,453 16,822 Receivable from a government bank 51,280 – – – 51,280 Cash surety bonds 25,934 – – – 25,934 Refundable deposits 6,233 – – – 6,233 Financial Assets at Fair Value through

Profit or Loss (FVPL) Investments in UITF 71,662 – – – 71,662

P=1,099,156 P=163 P=395 P=9,453 P=1,109,167


As at August 31, 2018, the credit quality of the Company’s financial assets is as follows:

Past due but not impaired

2018

Neither past due nor

impaired <30 days 31-60 days 61-90 days >90 days

Past due and

impaired Total

Cash and cash equivalents* P=338,201 – – – – – P=338,201 Trade receivables:

Third parties 128,165 27,258 68,824 104,492 30,607 – 359,346 Related parties 357 51,344 73 – 10,033 – 61,807

Advances to: Related parties 1,781 771 318 497 52,106 38,409 93,882 Planter’s associations – – – – 1,898 – 1,898

Other receivables 7,958 1,246 1,093 637 8,726 – 19,660 AFS financial assets 242,799 – – – – – 242,799 Other non-current assets 25,313 – – – – – 25,313

Total P=744,574 P=80,619 P=70,308 P=105,626 P=103,370 P=38,409 P=1,142,906


Information on the Company's trade and other receivables that are impaired as at August 31, 2019 and August 31, 2018 and the movements of allowance for the impairment loss are disclosed in Note 3 of the separate financial statements. Liquidity risk Liquidity risk is the risk of not meeting obligations as these become due because of an inability to liquidate assets or obtain adequate funding. The Company monitors and maintains a level of cash deemed adequate by the management to finance the Company's operations and mitigate the effects of fluctuations in cash flows.

- 36 -

The following tables summarize the maturity profile of the Company's financial assets and liabilities as at August 31, 2019 and 2018 based on contractual undiscounted payments:

2019

On demand Within

One Year More than One Year Total

Financial Assets Cash and cash equivalents P=585,999 P=– P=– P=585,999 Trade receivables:

Third parties 81,734 109,511 – 191,245 Related parties 56,391 103,896 – 160,287

Advances to: Related parties (1) 291,628 – – 291,628 Planters’ associations 267 – – 267

Other receivables(1) 7,369 – – 7,369 Investments in UITF 71,662 – – 71,662 Other non-current assets 32,167 – – 32,167

1,127,217 213,407 – 1,340,624

Financial Liabilities Borrowings – 342,893 166,908 509,801 Payable to claimants – 30,492 180,091 210,583 Trade payables 169,444 – – 169,444 Accrued expenses – 85,265 – 85,265 Retention payable – 60,043 – 60,043 Other payables 10,171 – – 10,171

179,615 518,693 346,999 1,045,307

P=947,602 (P=305,286) (P=346,999) P=295,317

(1) net of allowance for impairment loss

2018

On demand Within

One Year More than One Year Total

Financial Assets Cash and cash equivalents P=349,592 – – P=349,592 Trade receivables

Third parties 359,346 – – 359,346 Related parties 61,807 – – 61,807

Advances to: Related parties (1) 55,473 – – 55,473 Planters’ associations 1,898 – – 1,898

Other receivables(1)

19,660 – – 19,660 Investments in UITF 242,799 – – 242,799 Other non-current assets 25,313 – – 25,313

1,115,888 – – 1,115,888

Financial Liabilities Borrowings – 543,359 770,234 1,313,593 Trade payables 209,857 – – 209,857 Retention payable – 60,407 – 60,407 Accrued expenses – 65,177 – 65,177 Other payables 11,256 – – 11,256

221,113 668,943 770,234 1,660,290

P=894,775 (P=668,943) (P=770,234) (P=544,402)

(1) net of allowance for impairment loss

- 37 -

Market Risk Market risk is the risk that the fair value of financial instruments of the Group from fluctuation in market interest rates (interest rate risk), price with respect to sugar (price risk), foreign exchange rates (foreign currency risk) and equity price (equity price risk), whether such change in prices is caused by factors specific to the individual instruments or its issuer, or factors affecting all instruments traded in the market. a. Interest Rate Risk

Interest rate risk is the risk that changes in interest rates will affect future cash flows or the fair values of financial instruments.

The Company’s borrowings (Note 13) are not sensitive to movements in interest rates as they carry fixed interest rates.

The Company’s exposure to interest rate risk is limited only to investments in UITF (Note 4). The underlying pool of assets for these UITFs is consist however, of short-term money market instruments which are not exposed to significant interest rate risks.

b. Foreign Currency Risk

Foreign exchange risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates. It arises on financial instruments that are denominated in a foreign currency other than the functional currency.

The Company’s exposure to foreign currency risk is very minimal and is limited only to its bank deposits (included in Cash and cash equivalents) denominated in US dollar (US$) amounting to US$373.80 thousand as at August 31, 2019 (US$248.73 thousand as at August 31, 2018). Accordingly, no sensitivity analysis is deemed necessary.

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, trade and other current receivables and trade payables and other current liabilities approximate their fair values due to the short-term maturity of these instruments.

The carrying value of long-term debt approximates its fair value and is calculated by discounting the expected future cash outflows at prevailing effective interest rate. The carrying values of advances to and from subsidiaries approximate their fair values because these represent the expected cash flow should they be settled or realized at reporting date.

26. Capital Management

The Company manages its capital to ensure that it will be able to continue as a going concern while maximizing the return on the investments of stockholders.

- 38 -

As part of the reforms of the PSE to expand capital market and improve transparency among listed firms, PSE has required a minimum of 10% of the listed companies’ issued and outstanding shares, exclusive of any treasury shares, to be held by the public. The Parent Company is compliant with respect to this requirement. The Company is governed by the Plan as submitted and approved by the SEC. The details of these plans or programs are disclosed in Note 1.

The debt to total assets ratio of the Company as at August 31, 2019 and 2018, which has been within the Company's acceptable range as set by the BOD, is calculated as follows:

2019 2018

Total liabilities P=1,787,494 P=2,482,232 Total assets 8,808,433 8,649,958

0.20:1 0.29:1

27. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these separate financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of Preparation

These separate financial statements of the Company have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, PAS and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC.

The separate financial statements of the Company have been prepared under the historical cost convention, as modified by the revaluation of investments in UITF, certain property, plant and equipment and investment properties.

The preparation of these financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and that the financial statements therefore fairly present the financial position and results of the Company. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 24.

- 39 -

Changes in Accounting Policy and Disclosures Adoption of New and Amended PFRS The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following new and amended PFRS which the Company adopted effective September 1, 2018.

PFRS 9, Financial Instruments – This standard replaces PAS 39, Financial Instruments: Recognition and Measurement (and all the previous versions of PFRS 9). It provides requirements for the classification and measurement of financial assets and liabilities, impairment, hedge accounting, recognition, and derecognition. o PFRS 9 requires all recognized financial assets to be subsequently measured at amortized

cost or fair value (through profit or loss or through other comprehensive income), depending on their classification by reference to the business model within which these are held and its contractual cash flow characteristics.

o For financial liabilities, the most significant effect of PFRS 9 relates to cases where the fair

value option is taken: the amount of change in fair value of a financial liability designated as at fair value through profit or loss that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (rather than in profit or loss), unless this creates an accounting mismatch.

o For the impairment of financial assets, PFRS 9 introduces an ECL model based on the concept

of providing for expected losses at inception of a contract; recognition of a credit loss should no longer wait for there to be objective evidence of impairment.

o For hedge accounting, PFRS 9 introduces a substantial overhaul allowing financial statements

to better reflect how risk management activities are undertaken when hedging financial and non-financial risk exposures.

o The derecognition provisions are carried over almost unchanged from PAS 39. Based on the Company’s analysis of its business model and the contractual cash flow characteristics of its financial assets and liabilities as at September 1, 2018, the Company has assessed that its financial assets and liabilities should be classified under the new classification categories of PFRS 9. The following table shows the classification categories under PAS 39 and the new classification categories under PFRS 9 for each class of the Company’s financial assets as at September 1, 2018.

Balance as at Classification under PFRS 9 as at

September 1, 2018

August 31, Financial Assets at

Classification under PAS 39 2018 FVPL Amortized Cost

Loans and receivables Cash and cash equivalents P=349,592 – P=349,592 Trade and other receivables 499,913 – 499,913

Available-for-sale (AFS) financial assets Investments in UITF 242,799 242,799 –

P=1,092,304 P=242,799 P=849,505

- 40 -

Financial assets at FVPL are acquired for the purpose of selling in the near term. The impact of the adjustment from the adoption of PFRS 9 resulting from the reclassification of investments in UITF from AFS financial assets to financial assets at FVPL resulted to restatement of September 1, 2018 retained earnings amounting to P=0.8 million (Note 14). The Company assessed that the adoption of PFRS 9, specifically on determining impairment loss, has no impact on the carrying amounts of the Company’s financial assets.

PFRS 15, Revenue from Contracts with Customers – The new standard replaces PAS 11, Construction Contracts, PAS 18, Revenue, and their related interpretations. It establishes a single comprehensive framework for revenue recognition to apply consistently across transactions, industries and capital markets, with a core principle (based on a five-step model to be applied to all contracts with customers), enhanced disclosures, and new or improved guidance (e.g. the point at which revenue is recognized, accounting for variable considerations, costs of fulfilling and obtaining a contract, etc.). With the effectivity of PFRS 15 on September 1, 2018, as approved by the Financial Reporting Standards Council (FRSC), the PIC issued PIC Q&A 2019-3, Revenue Recognition Guidance for Sugar Millers, to assist the companies operating in the sugar industry in the adoption of PFRS 15. The interpretation states that a miller should recognize revenue arising from its sugar milling operation under either an output sharing agreement or cane purchase agreement, and that providing free storage constitutes a separate performance obligation in the case of an output sharing agreement. In response to concerns raised by the sugar industry on the implementation and adoption of the PIC Q&A, the SEC issued Memorandum Circular No. 06 on April 4, 2019, deferring the application of the provisions of the abovementioned PIC Q&A for a period of one year. Effective January 1, 2019, the Company will adopt PIC Q&A No. 2019-3 and any subsequent amendments thereto retrospectively or as the SEC will later prescribe. The Company availed of the deferral of adoption of the above specific provisions. Had these provisions been adopted, it would have affected retained earnings as at September 1, 2018 and revenue from milling, cost of sales, cost of milling and raw sugar inventories for 2018. As at report date, the Company is currently assessing the impact of the adoption of PIC Q&A 2019-3 With the deferral of the implementation of certain provisions of PIC Q&A 2019-3, the adoption of PFRS 15 for sugar milling did not have any significant impact to the separate financial statements. The Company adopted PFRS 15 using the modified retrospective method of adoption with the date of initial application of September 1, 2018. Under this method, the standard can be applied either to all contracts at the date of initial application or only to contracts that are not completed at this date. The Company elected to apply the standard to all contracts that are not completed as at the date of initial application. There were no adjustments recognized to the beginning balance of retained earnings as at September 1, 2018 upon the adoption of PFRS 15.

- 41 -

Amendments to PFRS 15, Revenue from Contract with Customers - Clarification to PFRS 15 – The amendments provide clarifications on the following topics: (a) identifying performance obligations; (b) principal versus agent considerations; and (c) licensing. The amendments also provide some transition relief for modified contracts and completed contracts.

Amendments to PAS 28, Investments in Associates and Joint Ventures - Measuring an Associate or Joint Venture at Fair Value – The amendments are part of the Annual Improvements to PFRS 2014-2016 Cycle and clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organization, mutual fund, unit trust or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition.

Amendments to PAS 40, Investment Property - Transfers of Investment Property – The amendments clarify that transfers to, or from, investment property (including assets under construction and development) should be made when, and only when, there is evidence that a change in use of a property has occurred.

Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration – The interpretation provides guidance clarifying that the exchange rate to use in transactions that involve advance consideration paid or received in a foreign currency is the one at the date of initial recognition of the non-monetary prepayment asset or deferred income liability.

The adoption of the foregoing new and amended PFRS did not have any material effect on the separate financial statements. Additional disclosures have been included in the notes to separate financial statements, as applicable.

New and Amended PFRS Issued But Not Yet Effective Relevant new and amended PFRS, which are not yet effective for the year ended August 31, 2018 and have not been applied in preparing the separate financial statements, are summarized below. Effective for annual periods beginning on or after September 1, 2019:

PFRS 16, Leases – This standard will replace PAS 17, Leases and its related interpretations. The most significant change introduced by the new standard is that almost all leases will be brought onto lessees’ statement of financial position under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance lease is retained. For the Company’s non-cancellable operating lease commitments as at December 31, 2018, a preliminary assessment indicates that these arrangements will continue to meet the definition of a lease under PFRS 16. Thus, the Company will have to recognize a right-of-use asset and a corresponding liability in respect of all these leases - unless these qualify for low value or short-term leases upon the application of PFRS 16 – which might have a significant impact on the amounts recognized in the Company’s financial statements. However, it is not practicable to provide a reasonable estimate of that effect until the Company complete the review.

- 42 -

Philippine Interpretation IFRIC 23, Uncertainty Over Income Tax Treatments – The interpretation provides guidance on how to reflect the effects of uncertainty in accounting for income taxes under PAS 12, Income Taxes, in particular (i) whether uncertain tax treatments should be considered separately, (ii) assumptions for taxation authorities’ examinations, (iii) determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and (iv) effect of changes in facts and circumstances.

Amendments to PFRS 9, Financial Instruments - Prepayment Features with Negative Compensation – The amendments allow entities to measure particular prepayable financial assets with negative compensation at amortized cost or at fair value through other comprehensive income (instead of at fair value through profit or loss) if a specified condition is met. It also clarifies the requirements in PFRS 9, Financial Instruments for adjusting the amortized cost of a financial liability when a modification or exchange does not result in its derecognition (as opposed to adjusting the effective interest rate).

Amendments to PAS 28, Investments in Associates and Joint Ventures - Long-term Interests in Associates and Joint Ventures – The amendments clarify that long-term interests in an associate or joint venture that, in substance, form part of the entity’s net investment but to which the equity method is not applied, are accounted for using PFRS 9.

Amendments to PAS 19, Employee Benefits - Plan Amendment, Curtailment or Settlement – The amendments specify how companies remeasure a defined benefit plan when a change - an amendment, curtailment or settlement - to a plan takes place during a reporting period. It requires entities to use the updated assumptions from this remeasurement to determine current service cost and net interest cost for the remainder of the reporting period after the change to the plan.

Amendments to PAS 12, Income Taxes - Income Tax Consequences of Payments on Financial Instruments Classified as Equity – The amendments are part of the Annual Improvements to PFRS 2015-2017 Cycle and clarify that income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distribution to owners and thus, should be recognized in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events.

Amendments to PAS 23, Borrowing Costs - Borrowing Costs Eligible for Capitalization – The amendments are part of the Annual Improvements to PFRS 2015-2017 and clarify that in calculating the capitalization rate on general borrowings, if any specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally.

Deferred effectivity –

Amendments to PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint Ventures - Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture – The amendments address a current conflict between the two standards and clarify that a gain or loss should be recognized fully when the transaction involves a business, and partially if it involves assets that do not constitute a business. The effective date of the amendments, initially set for annual periods beginning on or after January 1, 2016, was deferred indefinitely in December 2015 but earlier application is still permitted.

- 43 -

Under prevailing circumstances, the adoption of the foregoing new and amended PFRS is not expected to have any material effect on the separate financial statements of the Company, except for PFRS 16. Additional disclosures will be included in the separate financial statements, as applicable.

The Company is assessing the impact of PFRS 16 on the separate financial statements based on the facts and circumstances that exist as at August 31, 2019. However, it is not practicable to provide a reasonable estimate of that effect until the detailed review that is in progress has been completed.

Revenue Recognition

Revenue from contract with customers is recognized when the performance obligation in the contract has been satisfied, either at a point in time or over time. Revenue is recognized over time if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits as the Group perform its obligations; (b) the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognized at a point in time. The Group also assesses its revenue arrangements to determine if it is acting as a principal or as an agent. The Group has assessed that it acts as a principal in all of its revenue sources.

The following specific recognition criteria must also be met before revenue is recognized.

Sale of Raw Sugar. Revenue is recognized upon endorsement and transfer of quedans which represents ownership title over the raw sugar.

Sale of Refined Sugar. Revenue is recognized upon approval and release of refined sugar delivery order.

Sale of Molasses. Revenue is recognized upon transfer of molasses warehouse receipts which represents ownership title over the molasses inventories.

Sale of Alcohol and Ethanol. Revenue is recognized upon delivery of alcohol and ethanol inventories to customers.

Tolling Revenues. Revenue is recognized when the tolling services have been rendered.

Sale of Power. Revenue from sales of power is recognized on the period the electricity is provided to the Wholesale Electricity Spot Market. Interest Income. Interest is recognized as interest accrues, taking into account the effective yield of the asset, net of final tax.

Rental Income. Income is recognized on a straight-line basis over the lease term.

Other Income. Other income such as income from scrap sales, sale of canned goods and gains from disposal is recorded when earned.

- 44 -

Cost and Expense Recognition Costs and expenses are recognized in the separate statement of income when a decrease in future economic benefit related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.

Cost of goods sold and services rendered the direct and allocated indirect costs which are incurred upon processing of the Company’s products and rendering of its tolling services. These are recognized when the related goods are sold or the related services are rendered.

Operating expenses are recognized in the Company’s books when incurred. These are the expenses which are not directly related to the cost of goods sold and services of the Company.

Financial Assets and Liabilities Date of Recognition. The Company recognizes a financial asset or liability in the separate statement of financial position when the Company becomes a party to the contractual provisions of a financial instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, is done using settlement date accounting.

Initial Recognition and Measurement. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those measured or designated at FVPL, includes transaction cost.

“Day 1” Difference. Where the transaction in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a “Day 1” difference) in profit or loss. In cases where there is no observable data on inception, the Company deems the transaction price as the best estimate of fair value and recognizes “Day 1” difference in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the “Day 1” difference.

Financial Assets Classification. The Company classifies its financial assets at initial recognition under the following categories: (a) financial assets at FVPL, (b) financial assets at amortized cost and (c) financial assets at fair value through other comprehensive income (FVOCI). The classification of a financial instrument largely depends on the Company’s business model and its contractual cash flow characteristics.

As at August 31, 2019, the Company has no financial assets classified and measured at FVOCI.

Financial Assets at Amortized Cost. A financial asset should be measured at amortized cost if both of the following conditions are met:

the financial asset is held within a business model whose objective is 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.

- 45 -

After initial recognition, financial assets at amortized cost are subsequently measured at amortized cost using the effective interest method, less allowance for impairment, if any. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the financial assets are derecognized and through amortization process. Financial assets at amortized cost are included under current assets if realizability or collectability is within 12 months after the reporting period. Otherwise, these are classified as noncurrent assets.

Financial assets at amortized cost are included in current assets if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Company classifies its cash and cash equivalents, trade and other receivables, receivable from a government bank, cash surety bonds and refundable deposits under this category. Under PAS 39, cash and cash equivalents, trade and other receivables, receivable from a government bank, cash surety bonds and refundable deposits were classified as loans and receivables. Financial Assets at FVPL. Financial assets that do not meet the criteria for being measured at amortized cost or FVOCI are classified under this category. Specifically, financial assets at FVPL include financial assets that are (a) held for trading, (b) designated upon initial recognition at FVPL, or (c) mandatorily required to be measured at fair value. Financial assets are classified as held for trading if these are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless these are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at FVPL, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at FVOCI, debt instruments may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at FVPL are measured at fair value at each reporting date, with any fair value gains or losses recognized in profit or loss to the extent these are not part of a designated hedging relationship. This category includes investments in UITF, which was previously classified as AFS financial asset under PAS 39. Prior to adoption of PFRS 9, the Company classifies its financial assets into the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments and AFS financial assets. The Company classifies its financial liabilities as either financial liabilities at FVPL or other financial liabilities. The classification of financial instruments depends on the purpose for which these were acquired and whether these are quoted in an active market. The Company does not have financial instruments classified as HTM investments and financial assets at FVPL as at August 31, 2018.

- 46 -

Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not designated as financial assets at FVPL or AFS financial assets. Subsequent to initial measurement, loans and receivables are carried at amortized cost using the effective interest method, less any allowance for impairment losses in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. Gains or losses are recognized in profit or loss when loans and receivables are derecognized or impaired, as well as through the amortization process. AFS Financial Assets. AFS financial assets are those non-derivative financial assets which are designated as such or are not classified in any other categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, AFS financial assets are subsequently measured at fair value with unrealized gains and losses recognized as other comprehensive income until the investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported as other comprehensive income is recognized in profit or loss. The effective yield component of AFS financial assets, as well as the impact on foreign currency-denominated AFS financial assets, is recognized in profit or loss. Interest earned on holding AFS financial assets is recognized as “Interest income” using effective interest method. Financial Liabilities Classification. The Company classifies its financial liabilities at initial recognition as either financial liabilities at FVPL or financial liabilities at amortized cost. The classification of a financial instrument largely depends on the Company’s business model and its contractual cash flow characteristics. The Company does not have financial instruments classified as financial liabilities at FVPL. Financial Liabilities at Amortized Cost. Financial liabilities are categorized as financial liabilities at amortized cost unless either the financial liability is held for trading and is therefore required to be measured at FVPL or the entity elects to measure the liability at FVPL. Financial liabilities are recognized when the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to settle the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. These financial liabilities are initially recognized at fair value less any directly attributable transaction costs. After initial recognition, these financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the liabilities are derecognized or impaired or through the amortization process. The Company classifies its trade payables and other current liabilities, borrowings and payable to claimants under this category.

- 47 -

Reclassification The Company reclassifies its financial assets when, and only when, the Company changes its business model for managing those financial assets. The reclassification is applied prospectively from the first day of the first reporting year following the change in the business model (reclassification date). For a financial asset reclassified out of the financial assets at amortized cost category to financial assets at FVPL, any gain or loss arising from the difference between the previous amortized cost of the financial asset and fair value is recognized in profit or loss. For a financial asset reclassified out of the financial assets at FVPL category to financial assets at amortized cost, its fair value at the reclassification date becomes its new gross carrying amount. Impairment of Financial Assets The Company assesses at the end of each reporting year whether a financial asset or a Company of financial assets is impaired. The Company recognizes impairment loss based on ECL, which is the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive. The difference is then discounted at an approximation to the asset’s original effective interest rate. For trade receivables, the Company has applied the simplified approach and has calculated ECL based on the lifetime ECL. The Company has established 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. For other financial assets at amortized cost, which comprise cash equivalents, other receivables (including due from related parties) and UITFs, ECL is based on 12-month ECL, which pertains to the portion of lifetime ECL that result from default events on a financial instrument that are possible within 12 months after the reporting date. Prior to adoption of PFRS 9, an allowance for impairment losses is recognized when a financial asset or a Company of financial assets is deemed to be impaired, i.e., if, and only if, there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the Company of financial assets that can be reliably estimated. For loans and receivables, evidence of impairment may include indications that the borrower or a Company of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If there is objective evidence that an impairment loss has been incurred on debt instruments, the amount of the loss is measured as the excess of financial asset’s carrying amount over its net realizable value, normally based on the present value of the estimated future cash flows from the financial asset.

- 48 -

For financial instruments classified as AFS financial assets, impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value less any impairment loss on the financial asset previously recognized in profit or loss, is removed from equity and recognized in profit or loss. Derecognition of Financial Assets and Liabilities A financial asset (or where applicable, a part of a financial asset or part of a Company of similar financial assets) is derecognized by the Company when:

The rights to receive cash flows from the asset has expired; or

The Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

The Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and benefits of the asset, or (b) has neither transferred nor retained substantially all the risks and benefits of the asset, but has transferred control over the asset.

Where the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and benefits of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset, if any, is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Company could be required to pay. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. When 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. A modification is considered substantial if the present value of the cash flows under the new terms, including net fees paid or received and discounted using the original effective interest rate, is different by at least 10% from the discounted present value of remaining cash flows of the original liability. The fair value of the modified financial liability is determined based on its expected cash flows, discounted using the interest rate at which the Company could raise debt with similar terms and conditions in the market. The difference between the carrying value of the original liability and fair value of the new liability is recognized in the profit or loss. On the other hand, if the difference does not meet the 10% threshold, the original debt is not extinguished but merely modified. In such case, the carrying amount is adjusted by the costs or fees paid or received in the restructuring.

- 49 -

Offsetting of Financial Assets and Liabilities Financial assets and financial liabilities are offset and the net amount reported in the separate statement of financial position if, and only 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. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the separate statement of financial position.

Classification of Financial Instrument 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 Company; 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 Company 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. Inventories Inventories are valued at the lower of cost and NRV. Inventories are accounted for as follows: Raw and Refined Sugar, Molasses, Alcohol and Ethanol. Determined using weighted average method; consists of cost of production and related direct labor and overhead cost incurred in the conversion of sugar cane to different outputs. Production costs are allocated to inventories based on a rational and consistent basis. Materials and Supplies. Determined using weighted average method; cost includes purchase and other directly attributable costs determined based on their original purchase price. The excess of cost over the net realizable value is recognized as write-down in profit or loss. Reversals of previously recorded write-downs are credited to profit or loss based on the result of management’s update assessment, considering the available facts and circumstances, including but not limited to net realizable value at the time of disposal. For raw and refined sugar, molasses, alcohol and ethanol, NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. For materials and supplies, the NRV is the current replacement cost. An allowance for inventory losses is provided for slow-moving, obsolete and defective inventories based on management’s physical inspection and evaluation. When inventories are sold, the cost and related allowance is removed from the account and the difference is charged against operations. Inventories are derecognized when these are sold. The carrying amount of those inventories is recognized as an expense (reported as cost of goods sold in profit or loss) in the period in which the related sale is recognized.

- 50 -

Other Current Assets Other current assets are expenses already paid but not yet incurred and are initially recorded at face value and subsequently measured at carrying value less impairment loss, if any. These include excess input VAT and creditable withholding taxes.

Other current assets are included in current assets, except when the related goods or services are expected to be received or rendered more than twelve months after the reporting date which are classified as non-current assets.

Investments in Subsidiaries and Associate

Investment in Subsidiaries. A subsidiary is an entity (including structured entities) over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity (Note 8).

The investment in subsidiaries is carried in the separate statement of financial position at cost, less any impairment in value. The investment in subsidiary includes the excess of the cost of the acquisition over the fair value of identifiable net assets of the subsidiary at the date of acquisition and is not amortized.

The Company recognizes income from investment in subsidiaries when the Company’s right to receive dividends is established.

When investment in subsidiaries is disposed of, the cost and the related accumulated provision for impairment, if any, are removed from the accounts and any resulting gain or loss is credited or charged against current operations.

The Company determines whether it is necessary to recognize any impairment with respect to the Company’s investment in subsidiaries. The Company determines at each reporting date whether there is any objective evidence that the investment in subsidiaries is impaired. If this is the case, the Company calculates the amount of impairment as being the difference between the recoverable amount of the subsidiaries and the carrying cost and recognizes the amount against profit or loss for the year.

Investment in Associate. An associate is an entity over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights (Note 8). Investment in an associate is accounted for under the equity method of accounting.

An investment is accounted for using the equity method from the day it becomes an associate. On acquisition of investment, the excess of the cost of investment over the investor’s share in the net fair value of the investee’s identifiable assets, liabilities and contingent liabilities is accounted for as goodwill and included in the carrying amount of the investment and not amortized. Any excess of the investor’s share of the net fair value of the investee’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment, and is instead included as income in the determination of the share in the earnings of the investees.

- 51 -

Under the equity method, the investments in the investee companies are carried in the statement of financial position at cost plus post-acquisition changes in the Company’s share in the net assets of the investee companies, less any impairment in values. The statement of income reflects the share of the results of the operations of the investee companies. The Company’s share of post-acquisition movements in the investee’s equity reserves is recognized directly in equity. Profits and losses resulting from transactions between the Company and the investee companies are eliminated to the extent of the interest in the investee companies and for unrealized losses to the extent that there is no evidence of impairment of the asset transferred. Dividends received are treated as a reduction of the carrying value of the investment.

The Company discontinues applying the equity method when their investments in investee companies are reduced to zero. Accordingly, additional losses are not recognized unless the Company has guaranteed certain obligations of the investee companies. When the investee companies subsequently report net income, the Company will resume applying the equity method but only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

The reporting dates of the investee companies and the Company are identical and the investee companies' accounting policies conform to those used by the Company for like transactions and events in similar circumstances.

Upon loss of significant influence over the associate, the Company measures and recognizes any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognized in the separate statement of income.

Property, Plant and Equipment Property, plant and equipment are initially recognized at cost and subsequently revalued based on periodic valuations by external independent appraisers, less subsequent depreciation and impairment losses, if there is any, except for land.

The net appraisal increase resulting from the revaluation is credited to “Revaluation increment on property, plant and equipment” account, net of corresponding deferred tax liability in the separate statement of financial position and separate statement of changes in equity.

The amount of revaluation increment absorbed through depreciation and amortization and revaluation increment approved by the SEC for quasi-reorganization are transferred directly to retained earnings. Initially, an item of property, plant and equipment is measured at its cost, which comprises its purchase price and any directly attributable costs of bringing the asset to the location and condition for its intended use. Subsequent costs that can be measured reliably are added to the carrying amount of the asset when it is probable that future economic benefits associated with the asset will flow to the Company. The costs of day-to-day servicing of an asset are recognized as an expense in the period in which they are incurred.

All costs that are directly and clearly associated with the construction of certain property, plant and equipment, including borrowing costs, are capitalized.

Projects under construction, included in property, plant and equipment, represent structures under construction and are stated at cost. These include cost of construction and other direct costs. Projects under construction are not depreciated until such time as the relevant assets are completed and put into operational use.

- 52 -

Major spare parts and stand-by equipment qualify as property, plant and equipment when the Company expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment.

Depreciation and amortization are computed using the straight-line method over the assets’ estimated useful lives. The estimated useful lives are as follows:

Number of Years

Land improvements 12.5 20 20

3 to 20

Buildings and structures Community buildings and equipment Machinery and equipment

Leasehold improvements are amortized over the term of the lease or life of the asset, whichever is shorter.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.

Stand-by equipment should be depreciated from the date it is made available for use over the shorter of the life of the stand-by equipment or the life of the asset the stand-by equipment is part of, while major spare parts should be depreciated over the period starting when it is brought into service, continuing over the lesser of its useful life and the remaining expected useful life of the asset to which it relates.

Fully depreciated and amortized assets are retained in the accounts until they are no longer in use and no further charge for depreciation is made in respect of those assets.

When an asset is disposed of, or is permanently withdrawn from use and no future economic benefits are expected from its disposal, the cost and related accumulated depreciation and impairment losses, if any, are removed from the accounts and any resulting gain or loss arising from the retirement or disposal is recognized in profit or loss.

The carrying amount of the Company's property, plant and equipment is written down immediately to its recoverable amount if the asset's carrying amount is greater than its recoverable amount. The recoverable amount of the Company's property, plant and equipment is the higher between their fair values less cost of disposal and value in use.

If the carrying amount of the Company's asset is decreased as a result of revaluation, this decrease is recognized as other comprehensive loss to the extent of any credit balance existing in the revaluation increment in respect of that asset. The excess of such decrease over the existing balance in the revaluation increment is recognized in the profit or loss.

An increase in the carrying amount of the Company's property, plant and equipment is recognized in the profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

- 53 -

Investment Properties Investment properties composed of land and building, which are properties held by the Company either to earn rentals or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment properties are initially measured at cost. Subsequently, investment properties are measured at fair value with any change therein recognized in profit or loss following the fair value model. Gains or losses arising from changes in the fair value of investment properties are included in profit or loss for the period in which they arise. Transfers are made to investment properties, when there is a change in use, evidenced by the commencement of an operating lease to another party or completion of construction or development. Transfers are made from investment properties when, and only when, there is a change in use, evidenced by the commencement of owner-occupation or commencement of development with the intention to sell. Investment property is derecognized when it has either been disposed of or permanently withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the derecognition of an investment property is recognized in profit or loss in the period of derecognition.

Computer Software Computer software acquired is measured on initial recognition at cost. Following initial recognition, computer software is carried at cost less accumulated amortization and any impairment losses.

Computer software is amortized over the estimated economic life of five years and assessed for impairment whenever there is an indication that the computer software may be impaired. The amortization period and method are reviewed at each reporting 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 are treated as changes in accounting estimates.

Gains or losses arising from derecognition of computer software are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

Impairment of Non-financial Assets The carrying amount of the Company's non-financial assets which include investment in subsidiaries and an associate, property, plant and equipment and investment properties are reviewed for at each reporting date to determine whether there is any indication of impairment. If such indication exists, the asset's recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of the asset's fair value less costs of disposal and value in use. Fair value less costs of disposal is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, less the costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

- 54 -

An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses, if any, are recognized in profit or loss unless the asset is carried at revalued amounts. Any impairment loss on a revalued asset is treated as a revaluation decrease.

All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation and amortization, if no impairment loss had been recognized. A reversal of an impairment loss in respect of a revalued asset is recognized in profit or loss to the extent that it reverses an impairment loss that was previously recognized in the profit or loss. Any additional increase in the carrying amount of the asset is treated as a revaluation increase. Borrowings and Borrowing Costs Borrowings. Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Borrowings are derecognized when the obligation is settled, paid or discharged. Borrowing Costs. Borrowing costs incurred for the construction of any qualifying asset, if any, are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are recognized and charged to profit or loss in the year in which these are incurred. Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value of a non-financial asset is measured based on its highest and best use. The asset’s current use is presumed to be its highest and best use.

The fair value of financial and non-financial liabilities takes into account non-performance risk, which is the risk that the entity will not fulfil an obligation.

- 55 -

The Company classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The appropriate level is determined on the basis of the lowest level input that is significant to the fair value measurement.

The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Company is the current bid price. Note that under PFRS 13, Fair value measurement, the use of bid and asking prices is still permitted but not required. These instruments are included in Level 1. The fair value of investments in UITF was determined using Level 1 valuation technique.

The fair value of assets and liabilities that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the asset or liability is included in Level 2. If one or more of the significant inputs is not based on observable market data, the asset or liability is included in Level 3. As at reporting date, the Company does not have financial assets or liabilities included in Levels 2 and 3.

The Company uses valuation techniques that are appropriate in the circumstances and applies the technique consistently. Commonly used valuation techniques for non-financial assets are as follows:

Market approach - A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities, such as a business.

Income approach - Valuation techniques that convert future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

Cost approach - A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

- 56 -

Specific valuation techniques used to value financial instruments include:

Quoted market prices or dealer quotes for similar instruments.

The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.

The fair value of forward foreign exchange contracts is determined using forward exchange rates at the reporting date, with the resulting value discounted back to present value.

Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.

Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.

Capital stock is classified as equity and is determined using the nominal value of shares that have been issued. Additional paid-in capital (APIC) includes any premiums received on the initial issuance of capital stock. Any transaction costs associated with the issuing of shares are deducted from additional paid-in capital, net of any related income tax benefits.

When capital stocks are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified as treasury stock and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings, after considering any remaining APIC related to treasury stock, if any.

Compound financial instruments issued by the Company comprise convertible notes that can be converted to capital stock at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

The mandatorily CN of the Company are presented as an equity item under the “Convertible notes awaiting conversion” account. These are non-derivative instrument for which the entity is or may be obliged to deliver a fixed number of the entity’s own equity instruments. The Company already fixed the number of shares to be converted into common shares based from the 1:1 share of the principal convertible notes to common shares. The 8% interests accrued from the convertible notes are treated as APIC upon conversion rather than a determinant in identifying the number of shares to be converted (Note 14).

Retained Earnings Retained earnings represent the accumulated net income or losses, net of any dividend distributions and other capital adjustments.

- 57 -

Other Comprehensive Income Other comprehensive income comprise items of income and expenses (including items previously presented as other equity reserves under the consolidated statement of changes in equity) that are not recognized in profit or loss for the year. Other comprehensive income, which are presented as “Other equity reserves,” includes revaluation increment on property, plant and equipment, cumulative fair value changes on investments in UITF and cumulative remeasurement gain or loss on retirement liability.

Leases - Operating Lease Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases.

The Company as a Lessor Lease income under operating leases is recognized as income in the separate statement of income on a straight- line basis over the lease term.

The Company as a Lessee Operating lease payments are recognized in the separate statement of income on a straight-line basis over the lease term.

The Company determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Employee Benefits

Short-term Benefits. The Company recognizes a liability net of amount already paid and an expense for services rendered by employees during the accounting period. Short-term benefits given to its employees include salaries and wages, social security contributions, short-term compensated absences and bonuses, and non-monetary benefits. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. Retirement Benefits. The Company’s net obligation in respect of the defined benefit plan is calculated by estimating the amount of the future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligation and valuation of the plan asset is performed on a periodic basis by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan.

- 58 -

Remeasurements of the net defined benefit liability or asset, which comprise actuarial gains and losses, the return on plan assets (excluding interest), if any, and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense or income on the net defined benefit liability or asset for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability or asset, taking into account any changes in the net defined liability or asset during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to the defined benefit plan are recognized in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss.

The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Comparatives Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information.

Where PAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the current year. There were no changes to the presentation made for the years ended August 31, 2019 and 2018. Foreign Currency Transactions and Translations

Functional and Presentation Currency. Items included in the separate financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Company’s financial statements are presented in Philippine Peso, which is the Company’s functional and presentation currency. Transactions and Balances. Foreign currency transactions are translated into Philippine Peso using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Transactions in foreign currencies are translated into Philippine peso using the exchange rates prevailing at the time of such transactions. Monetary assets and liabilities denominated in foreign currencies are translated using exchange rates prevailing at reporting date. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the profit or loss.

Income Taxes The income tax expense for the period comprises current tax and deferred tax. Tax is recognized in profit or loss, except to the extent that it relates to items recognized directly in equity, in which case the tax is also recognized directly in equity.

- 59 -

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using the tax rate (and laws) that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary differences, unused tax losses and unused tax credits can be utilized. The Company reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset.

Deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax liabilities are recognized in full for all taxable temporary differences.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Related Party Relationship and Transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprises, or between, and/or among the reporting enterprise and its key management personnel, directors, or its shareholder. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

Provisions and Contingencies Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

- 60 -

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the increases specific to the liability.

Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

Events after Reporting Year The Company identifies post year-end events as events that occurred after the reporting year but before the date when the separate financial statements were authorized for issue. Any post year-end events that provide additional information about the separate statements of financial position at the reporting year (adjusting events) are recognized in the separate financial statements. Events that are not adjusting events are disclosed in the notes to the separate financial statements when material.

- 61 -

28. Supplementary Tax Information under Revenue Regulations No. 15-2010

I. Value-Added Tax (VAT)

Details of the Company’s net sales/receipts, output VAT and input VAT accounts are as follows:

a. Net sales/receipts and output VAT declared in the Company's VAT returns filed for 2019

VAT exempt Zero-rated

sales Vatable Sales Output VAT

Taxable sales Sales of services P=– P=– P=686,738 P=82,409 Sale of goods 2,291,014 699,024 2,460,811 295,297

P=2,291,014 P=699,024 P=3,147,549 P=377,706

b. The roll forward of Input VAT for 2019 follows:

Amount

Balance as at September 1, 2018 P=571 Input VAT on purchase of goods and services including importation 216,844

217,415

Claims for tax credit/refund and other adjustments (214,932)

Balance as at August 31, 2019 P=2,483

The Company’s sales of services are based on actual collections received, hence, may not be the same as amounts accrued in the profit or loss.

II. Other Taxes and Licenses

Taxes and licenses, local and national, include documentary stamp taxes, real estate taxes, licenses and permit fees included in operating expenses and cost of sales and services rendered for 2019:

Amount

Real property taxes P=53,595 Input tax allocated to exempt transactions 38,227 Business taxes 18,334 Liens 13,219 Licenses and registration fees 2,790 Others 565

P=126,730

III. Withholding Taxes

Paid Accrued Total

Withholding tax on compensation P=11,167 P=584 P=11,751 Expanded withholding tax 50,270 1,531 51,801

P=61,437 P=2,115 P=63,552

- 62 -

Accrued withholding taxes are included as part of Trade payables and other current liabilities in the separate statement of financial position.

IV. Deficiency Tax Assessments

Preliminary Assessment Notices (PAN) were issued on July 2018 covering assessment for various tax deficiencies for taxable years ending August 31, 2015 to 2017 amounting to P=79 million, inclusive of surcharges and interest. The said assessment was paid in 2019.

COVER SHEET - Victorias Milling...Victorias Milling Company, Inc. (VMC or the Company) is an...

Documents

Transcript of COVER SHEET - Victorias Milling...Victorias Milling Company, Inc. (VMC or the Company) is an...