A study on the

Financial Statements
Of Cebu Air Inc.

A Portfolio
Presented to the
Accountancy Department
De La Salle University

In partial fulfillment
Of the course requirements
In Financial Accounting and Reporting
For Equity and Special Topics (MODFIN4)

SUBMITTED TO:
Professor Herminigilda E. Salendrez

SUBMITTED BY:
ROSARIO, Gianna Lea V. (K32)
August 26, 2016

INTRODUCTION

Cebu Air, commonly known as Cebu Pacific, is a low-cost airline in the

Philippines that ground in different airports like Ninoy Aquino International
Airport, Mactan-Cebu International Airport, Clark International Airport,
Kalibo International Airport. The company is a subsidiary of the JG Summit
Holdings, owned by Lance Gokongwei, the heir of John Gokongwei. The Cebu
Pacific Air started as an aviation industry on March 1996 that have carried
over 130 million passengers and counting. Cebu Pacific caters to 36 flights
around the Philippines and 30 international destinations like Asia, Australia,
Middle East, and the USA.
The company caters to different products that they want to offer to
their customers. CEB Fare Bundles, is a product that helps clients book their
travel

essentials,

such

as

Fly+Bag

for

baggage

allowance,

and

Fly+Bag+Meal for additional meal to their package. Another product is

GetGo, wherein they make lifestyle rewards programs that makes customers
accumulate points by flying with Cebu Pacific. Through this they could
redeem free flights. These are only some of the products that make their
customers come back and use their services.
SHAREHOLDERS EQUITY AND ITS ACCOUNTS
A corporation is the form of business that needs the shareholders
equity. The shareholders equity of a company is very important in different
aspects. It symbolizes what the shareholders contributed to the company; it
is the percentage of assets that is contributed by the owners and not by
debt. The ordinary share capital is the share capital of the common
shareholders. They enjoy voting rights, share in net income, and a share in

the liquidation after all creditors have been paid. Once the company is
experiencing losses, the ordinary shareholders will suffer these losses. The
preference shareholders are the one with a fixed dividend. If a company will
only issue one kind of share, it is supposed to be the ordinary share capital.
Based from the Cebu Pacific Inc. financial statements, the company
seemed to be not in accordance to the prescription of the International
Financial

Reporting

Standards

(IFRS),

created

by

the

International

Accounting Standards Board (IASB). Based from the shareholders equity of

the company, the ordinary share capital is still named Common Stock; the
Share Premium is still called Capital paid in Excess of Par Value. They only
have common stock for the issuance of their shares, and does not issue
preference share capital. The company is publicly listed with the Philippine
Stock Exchange, with having 212,419,700 shares issued to the public at
P125 each, but having a par value of P1.
It is also noticeable that the company has not issued any new shares
for the past years; there was no increase in the number of shares issued.
The companys parent company has 7,283,220 shares, with a deduction in
the shareholders equity of P529,319,321. There have been restrictions in
the

companys

Retained

Earnings.

The

company

appropriated

P7,916,762,000, for pre-delivery payments and aircraft lease commitments,

and also for the companys treasury shares. For the unrestricted retained
earnings, it is for the benefit of the shareholders to be able to receive
dividends, or a return for their investment. During the year, the company
declared cash dividends of 606,000,000.
It seems, based from observations, the company is very precise in
giving out information for the users of their financial statements. Based from

their notes, it is easier to understand where the money of the company is

coming from. The company also reiterated the specific standard that governs
the shareholders equity. For the common stock, it is recorded at par and any
excess is recorded in the capital paid in excess of par commonly known as
the Share Premium. The costs attributable to the issuance of shares are
deducted to the proceeds. The treasury shares are recognized at cost, and
as a deduction of equity. Dividends are recognized at liability upon
declaration of the company.
QUASI-REORGANIZATION
Quasi-reorganization

is

process

of

eliminating

deficit-retained

earnings. As discussed in class, there are two ways that a company can
undergo Quasi-reorganization. First, the company could revalue their
property plant and equipment according to its fair value. With this, the
increase in the Property, plant and equipment is recognized as Revaluation
Surplus or added to the Other Comprehensive Income. This will now
shoulder the deficit of the retained earnings, bringing the retained earnings
to a balance of zero. The second way is to revalue the share capital of
companies. This can be done through recapitalization. The company could do
a share-split, change from par to no par, etc. Through this, the share
premium that will be garnered will shoulder the deficit that the company has
been experiencing. But before quasi-reorganization, the company needs to
file this to the Securities and Exchange Commission of a country.
Based on the financial statements of the company, they have not been
experiencing deficit in their retained earnings. In fact, their retained
earnings have increased by P3,000,000 compared to 2014. Because of
positive retained earnings, the company is not going to need Quasi-

reorganization. Disclosure to this event would not be necessary for the

company.
SHARE BASED COMPENSATION
What is a share-based compensation? A share-based compensation is
an arrangement between an employee and an employer where the employee
will receive capital in forms of shares, in exchange for the services they have
rendered for the company. These compensations come it three forms: Cash
settled share-based payments and Equity settled share-based payments, or
a combination of both. The equity settled share based payments are
compensations that issues share options to the employees that rewarded of
them. The cash settled share based payments is when the company incurs a
liability that will be given to the employees, also known as the share
appreciation rights. The third kind is the combination of both, which the
accounting problem depends on which party is responsible in picking
whether it is cash settled or equity settled. If the employee is the one to
choose eventually which compensation he/she will accept, the company will
recognize a liability and equity.
Cebu Air disclosed in the Accounting Policies section details about the
Share-Based Payment. The company disclosed that this policy is not
applicable to them because they are not issuing share-based payments to
their company. With this information, it is recommended to issue sharebased payments to their employees. Sometimes it is important to value a
companys employees,

since

they

contribute

to the

betterment and

improvement of the welfare of the company. These compensations would

motivate these employees, and also make the employees stay in the

company

to

be

able

to

do

the

conditions

before

receiving

these

compensations.
EVENTS AFTER THE REPORTING DATE
The events after the reporting period is defined as the favourable or
the unfavourable even that occurred after the reporting period but before
the authorization of the financial statements. This IAS 10 governs the idea
whether to decide if an event is considered as an adjusting event or a nonadjusting event. An event can be considered an adjusting event if the events
existed at the end of the period. On the other hand, an event is a nonadjusting event is the conditions arose after the reporting period. For a nonadjusting event, it only requires a disclosure.
From the financial statements that the company issued to the public,
they did not disclose the events after the reporting date.
OPERATING SEGMENTS
What is an Operating Segment? An operating segment is a disclosure
of particular classes of entities information about the segments, products
and services, geographical areas, and the major customers. This reporting is
solely based o internal management and based on the judgment of a Chief
Operating

Decision

Maker.

The

operating

segment

disclosure

is

requirement to the publicly listed companies or the companies that are in

the process of filing with the Securities and Exchange Commission to publicly
sell their shares. For a segment to be considered an operating segment, it
needs to be engaged in activities that let it generate revenues and expenses,
it is reviewed by the CODM regularly and the information is discretely

available. The accounting problem would be, which one is reportable? A

reportable segment is the one that passed the 10% threshold. It means that
its assets, revenues and profit and loss is greater than 10% in total.
For the segment reporting, the company only has one reportable
company, the airline business (system-wide). The company has a Chief
Operating

Decision

Maker

(CODM),

who

is

responsible

in

allocating

resources, assessing performance and making decisions. The CODM of the

company is the President and CEO of the Parent Company, since CODM acts
as a function not as a title or position. The revenue of their only reporting
segment comes from rendering transportation services, which is their main
line of business.
The segment information being studied by the Chief Operating
Decision Maker are Revenue, Net income, Depreciation and Amortization,
Interest Expense, Interest Income, Earnings before Interest and Tax,
EBITDAR (the operating income after adding depreciation and amortization),
Capital expenditures. The capital expenditures is derived from the acquisition
of Property and Equipment during the period. The company disclosed the
reconciliation of their segment revenue to the revenue stated in the
consolidated statement of comprehensive income. From P56,501,654,516
adding P118,425,424 from non-transport revenue and income to arrive to
the consolidated revenue of P56,620,079,940. As to the requirement of the
IFRS, the company is also required to reconcile the assets of the revenue to
the consolidated total assets. The company disclosed that they have no
significant customer that contributes to the 10% or more of their revenue.
From observations, the company is in accordance to the requirements
of the IFRS8, also known as the Operating Segments. The company

disclosed that an entity should disclose the judgments made management

and that they should include a brief description of the segments that have
been aggregated, and the economic characteristics, to assess that the
segments are similar. Also, they disclosed that companies are required to
disclose assets and liabilities. From their disclosure, they have the Chief
Operating Decision Maker, the details of their reportable segment, the
reconciliations, and the details about the significant customer. Unlike to what
discussed in class, there was incomplete information about the entity-wide
disclosure. There were no information about the geographical aspect of the
segment and no information about the companys products and services. It
is also a suggestion to add other segment, through engaging in other types
of products and services, which would yield additional revenue for the
company.
BOOK VALUE PER SHARE
The book value is referred as the shareholders equity, or the
companys assets less liabilities. This is the amount paid to each shareholder
holding at least one share, assuming that the company will liquidate in the
near future. The amount to be distributed to each holder is the amount equal
to the shareholders equity. To be specific, the book value per share is
determined to be equity available to shareholder divided by the common
shareholders.
Through this book value per share, investors can determine if the
stock price is undervalued. The company has a shareholders equity of
P24,955,195,156 and common shares of 212,419,700, so through this the
book value per share will be calculated garnering P117.48. Reading through
the financial statements of Cebu Air Inc., they failed to disclose the book

value per share of the company. It may not be somewhat a requirement to

disclose since no standard governs to the book value per share, but it is
something that could help companies and investors decide if they are going
to invest in the company.
EARNINGS PER SHARE
What are the Earnings per share? The earnings per share is the
amount per share from the earnings of the company within a period. The
earnings per share only govern to the ordinary shareholders, and not for the
preference shareholders, since they have a fixed amount of return for their
investment. The earnings per share disclosure is only required for the
companies that are publicly listed or in the process of issuing ordinary shares
to the public, thus non-publicly listed companies are only encourage to
disclose this amount. This disclosure aids the viewers of the financial
statements to measure the performance of the company, as a comparability
factor to the other companies that they want to invest on. Thus, it is the
basis of the internal management on how to measure the market price of
their ordinary shares, and the basis on how they will measure the issuance
of their dividends.
There are two kinds of EPS that are required to be disclosed by the
International Accounting Standards Board. First is the Basic Earnings Per
Share. The basic earnings per share is calculated by dividing the net income
attributable to the ordinary shares, which is done by subtracting the
necessary dividends for the preferences, to the outstanding ordinary shares
of the company. The other requirement is the Diluted Earnings per Share.
This is somehow calculated the same way as the basic earnings per share,
but the denominator includes the potential ordinary shares, such as

convertible bonds, convertible preference shares and share options. The

diluted earnings per share helps the investors know how much the earnings
per share will decrease more knowing that there are ordinary shares that will
be added in the future. Somehow that is the reason why it is called the
worst case scenario.
With the huge amount of net income that the company has been
garnering, the basic and diluted earnings per share would be proportional to
this increase. As disclosed in the financial statements, the basic earnings per
share increased to P7.24, compared to the 2014 basic earnings per share of
P1.41. Based on their notes to financial statements, the company shows that
the net income attributable to the common or ordinary shareholders is
P4,387,225,875, and weighted average number of ordinary shares of
605,953,330. Dividing these will yield to the Basic earnings per share. The
company disclosed that the basic earnings per share and diluted earnings
per share are equal since they do not issue dilutive potential ordinary shares
CORRECTION OF ERRORS
A company cannot fully share with conviction that they have done a
free of error financial statements. There will always be mistakes done, thats
why these mistakes should be resolved and adjusted to be able to faithfully
give out accurate information for the viewers of the financial statements.
The correction of error is governed by a standard called Correction of Prior
Period Accounting Errors or the IAS 8. Accounting errors may include Fraud,
Misapplication of accounting policies, mathematical errors, and omissions of
transactions on the financial statements.

The company, Cebu Air Inc., did not disclose that they have found out
an error in 2015, and that they retrospectively resolved this correction. They
may have not found an error that they need to correct that is why disclosure
to such will not be needed in the financial statements.
CONCLUSION
Reading and browsing through the financial statements of the Cebu Air
tend to be enjoyable with the way they presented their financial statements.
It seems lively with all the colors trying to catch the attention of possible
inventors that would want to be interested in their company. They also are
complete in terms of disclosure of the necessary accounting policies that
they need to show in order to aid the readers on how to understand their
statements.
With all the enjoyment of reading their annual report, Cebu Air Inc.
seemed to have incomplete disclosure of the requirements that the
International Financial Reporting Standards are requiring. There are some
disclosures that one needs to judge the financial statements that are not
disclosed by the company. From the annual report, the company first
disclosed the Board of Directors, with John L. Gokongwei as their Director.
Then they disclosed the products that they are giving to their customers
creatively. It was absolutely amazing to read the financial statements that
they have come up. Then, they disclosed the important things that happened
in their company, such as an increase in profit of 414% comparing 2015 to
2014, they reached they number of passengers target. They also disclosed
the changes that happened in Cebu Pacific such as the new logo that they
have came up. Another disclosure is the Corporate Social Responsibility that
is also required by the International Financial Reporting Standards.

In conclusion, the Modular program helps one understand how to read

financial statements. Through the understanding of the different accounts
that are being disclosed in the company, one can truly have a good
judgment of the financial statements of a company, and how a company is
standing. With all the knowledge that the program imparted on me, I believe
I can now that help an investor judge if a company is worth the investment,
or someday be an investor myself.