phi-6k_20200630.htm

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F ☒ Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (1): Yes ☐ No ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (7): Yes ☐ No ☒

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes ☐ No ☒

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

In accordance with Section 17.1(b) of the Securities Regulation Code and SRC Rule 17.1.1.1.2, we submit herewith two (2) copies of SEC Form 17-Q with Management’s Discussion and Analysis and accompanying unaudited consolidated financial statements for the six months (6) months ended June 30, 2020.

Note: 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.

Our consolidated financial statements as at June 30, 2020 (unaudited) and December 31, 2019 (audited) and for the six months ended June 30, 2020 and 2019 (unaudited) and related notes (pages F-1 to F-171) are filed as part of this report on Form 17-Q.

In the following discussion and analysis of our financial condition and results of operations, unless the context indicates or otherwise requires, references to “we,” “us,” “our” or “PLDT Group” mean PLDT Inc. and its consolidated subsidiaries, and references to “PLDT” mean PLDT Inc., not including its consolidated subsidiaries (please see Note 2 – Summary of Significant Accounting Policies to the accompanying unaudited consolidated financial statements for the list of these subsidiaries, including a description of their respective principal business activities and PLDT’s direct and/or indirect equity interest).

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes. Our unaudited consolidated financial statements, and the financial information discussed below, have been prepared in accordance with Philippine Financial Reporting Standards, or PFRS, which is virtually converged with International Financial Reporting Standards as issued by the International Accounting Standards Board. PFRS differs in certain significant respects from generally accepted accounting principles, or GAAP, in the U.S.

The financial information appearing in this report and in the accompanying unaudited consolidated financial statements is stated in Philippine pesos. Unless otherwise indicated, translations of Philippine peso amounts into U.S. dollars in this report and in the accompanying unaudited consolidated financial statements were made based on the exchange rate of Php49.79 to US$1.00, the exchange rate as at June 30,2020 quoted through the Bankers Association of the Philippines.

Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similar words.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors. When considering forward-looking statements, you should keep in mind the description of risks and other cautionary statements in this report. You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as at the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the statements in this report after the date hereof. In light of these risks and uncertainties, you should keep in mind that actual results may differ materially from any forward-looking statement made in this report or elsewhere.

We use a number of non-GAAP performance indicators to monitor financial performance. These are summarized below and discussed later in this report.

EBITDA is measured as net income excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing costs – net, interest income, equity share in net earnings (losses) of associates and joint ventures, foreign exchange gains (losses) – net, gains (losses) on derivative financial instruments – net, provision for (benefit from) income tax and other income – net. EBITDA is monitored by management for each business unit separately for purposes of making decisions about resource allocation and performance assessment. EBITDA is presented because our management believes that it is widely used by investors in their analysis of the performance of PLDT and can assist them in their comparison of PLDT’s performance with those of other companies in the technology, media and telecommunications sector. We also present EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Companies in the technology, media and telecommunications sector have historically reported EBITDA as a supplement to financial measures in accordance with PFRS. EBITDA should not be considered as an alternative to net income as an indicator of our performance, nor should EBITDA be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to any other measure determined in accordance with PFRS. Unlike net income, EBITDA does not include depreciation and amortization, and financing costs and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using EBITDA as only one of several comparative tools, together with PFRS-based measurements, to assist in the evaluation of operating performance. Such PFRS-based measurements include income before income tax, net income, and operating, investing and financing cash flows. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in EBITDA. Our calculation of EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

Core income is measured as net income attributable to equity holders of PLDT (net income less net income attributable to noncontrolling interests), excluding foreign exchange gains (losses) – net, gains (losses) on derivative financial instruments – net (excluding hedge costs), asset impairment on noncurrent assets, non-recurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures. Core income results are monitored by management for each business unit separately for purposes of making decisions about resource allocation and performance assessment.

Also, Telco core income is measured as net income attributable to equity holders of PLDT (net income less net income attributable to noncontrolling interests), excluding foreign exchange gains (losses) – net, gains (losses) on derivative financial instruments – net (excluding hedge costs), asset impairment on noncurrent assets, non-recurring gains (losses), net of tax effect of aforementioned adjustments, as applicable, and similar adjustments to equity share in net earnings (losses) of associates and joint ventures, adjusted for the effect of the share in Voyager Innovations Holdings, Pte. Ltd., or VIH, losses, asset sales, and accelerated depreciation. Telco core income is used by the management as a basis for determining the level of dividend payouts to shareholders and a basis of granting incentives to employees.

Core income and Telco core income should not be considered as an alternative to income before income tax or net income determined in accordance with PFRS as an indicator of our performance. Unlike net income, core income does not include foreign exchange gains and losses, gains and losses on derivative financial instruments, asset impairments and non-recurring gains and losses. We compensate for these limitations by using core income as only one of several comparative tools, together with PFRS-based measurements, to assist in the evaluation of operating performance. Such PFRS-based measurements include income before income tax and net income. Our calculation of core income may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

We are one of the leading telecommunications and digital services providers in the Philippines, in terms of both subscribers and revenues, serving the fixed line, wireless and broadband markets. Through our three principal business segments, Wireless, Fixed Line and Others, we offer a diverse range of telecommunications and digital services across our extensive fiber optic backbone and wireless and fixed line networks.

We serve 75.7 million users through the provision of mobile, fixed line and data services. In addition to the business segments discussed below, PLDT has found it beneficial to view its business from a customer-served perspective. Accordingly, we also assign metrics along the following marketing verticals: Home, Individual, Enterprise and International customers.

As at June 30, 2020, our chief operating decision maker, or our Management Committee, views our business activities in three business units: Wireless, Fixed Line and Others.

In addition to consolidated net income, we use EBITDA and core income to assess our operating performance. The reconciliation of our consolidated net income to our consolidated EBITDA and our consolidated core income for the six months ended June 30, 2020 and 2019 are set forth below.

The following table shows the reconciliation of our consolidated net income to our consolidated EBITDA for the six months ended June 30, 2020 and 2019:

The following table shows the reconciliation of our consolidated net income to our consolidated core income and telco core income for the six months ended June 30, 2020 and 2019:

The following table shows the contribution by each of our business segments to our consolidated revenues, expenses, other income (expense), income (loss) before income tax, provision for (benefit from) income tax, net income (loss)/segment profit (loss), EBITDA, EBITDA margin, core income and telco core income for the six months ended June 30, 2020 and 2019. In each of the six months ended June 30, 2020 and 2019, majority of our revenues are derived from our operations within the Philippines. Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.

	Wireless			Fixed Line			Others			Inter-segment Transactions			Consolidated
	(amounts in million Php, except for EBITDA margin)
For the six months ended June 30, 2020
Revenues		49,911			46,483			—			(9,659	)		86,735
Expenses		37,055			37,404			8			(9,648	)		64,819
Other income (expenses) – net		(2,635	)		(217	)		(1,997	)		52			(4,797	)
Income (loss) before income tax		10,221			8,862			(2,005	)		41			17,119
Provision for (benefit from) income tax		2,337			2,403			(217	)		173			4,696
Net income (loss)/Segment profit (loss)		7,884			6,459			(1,788	)		(132	)		12,423
EBITDA		29,012			17,373			(8	)		(3,212	)		43,165
EBITDA margin⁽¹⁾		61	%		38	%		—			—			52	%
Core income (loss)		7,867			6,163			(913	)		(136	)		12,981
Telco core income		7,867			6,163			(26	)		(136	)		13,868

For the six months ended June 30, 2019
Revenues		46,231			44,217			—			(8,464	)		81,984
Expenses		34,249			35,877			10			(8,523	)		61,613
Other income (expenses) – net		(2,292	)		(627	)		(462	)		81			(3,300	)
Income (loss) before income tax		9,690			7,713			(472	)		140			17,071
Provision for (benefit from) income tax		2,531			2,331			(207	)		181			4,836
Net income (loss)/Segment profit (loss)		7,159			5,382			(265	)		(41	)		12,235
EBITDA		26,005			16,389			(10	)		(2,718	)		39,666
EBITDA margin⁽¹⁾		60	%		38	%		—			—			51	%
Core income (loss)		7,166			5,461			(266	)		(41	)		12,320
Telco core income		7,544			5,461			239			(41	)		13,203

Increase (Decrease)
Revenues		3,680			2,266			—			(1,195	)		4,751
Expenses		2,806			1,527			(2	)		(1,125	)		3,206
Other income (expenses) – net		(343	)		410			(1,535	)		(29	)		(1,497	)
Income (loss) before income tax		531			1,149			(1,533	)		(99	)		48
Provision for (benefit from) income tax		(194	)		72			(10	)		(8	)		(140	)
Net income (loss)/Segment profit (loss)		725			1,077			(1,523	)		(91	)		188
EBITDA		3,007			984			2			(494	)		3,499
Core income (loss)		701			702			(647	)		(95	)		661
Telco core income		323			702			(265	)		(95	)		665

We reported consolidated revenues of Php86,735 million for the six months ended June 30, 2020, an increase of Php4,751 million, or 6%, as compared with Php81,984 million in the same period in 2019, primarily due to higher revenues from data services in our Wireless and Fixed Line business segments, partially offset by lower revenues from voice and SMS services in our Wireless business segment.

Our consolidated service revenues of Php83,482 million for the six months ended June 30, 2020, increased by Php5,126 million, or 7%, from Php78,356 million in the same period in 2019, while our consolidated non-service revenues of Php3,253 million for the six months ended June 30, 2020, decreased by Php375 million, or 10%, from Php3,628 million in the same period in 2019.

Consolidated service revenues, net of interconnection costs, amounted to Php82,841 million for the six months ended June 30, 2020, an increase of Php6,186 million, or 8%, from Php76,655 million in the same period in 2019.

In 2019, R.A. 11202, otherwise known as the Mobile Number Portability, or MNP, Act, was enacted, which provides that a customer can retain his mobile number when he moves from one mobile service provider to another, or changes the type of subscription from postpaid to prepaid or vice versa. It also contains provision that no interconnection fee or charge shall be imposed by any mobile service provider for domestic calls and SMS made by a subscriber. Effective January 2, 2020, we implemented the removal of mobile interconnection fees for domestic calls and SMS from Php0.50 per minute for voice calls and Php0.05 per message for SMS.

The following table shows the breakdown of our consolidated revenues by services for the six months ended June 30, 2020 and 2019:

	Wireless		Fixed Line		Inter- segment Transactions			Consolidated
			(amounts in million Php)
For the six months ended June 30, 2020
Service Revenues
Wireless		47,190				(980	)		46,210
Mobile		46,836				(721	)		46,115
Home broadband		25				—			25
MVNO and others		329				(259	)		70
Fixed Line				45,951		(8,679	)		37,272
Voice				13,319		(4,031	)		9,288
Data				32,270		(4,475	)		27,795
Home broadband				15,360		(45	)		15,315
Corporate data and ICT				16,910		(4,430	)		12,480
Miscellaneous				362		(173	)		189
Total Service Revenues		47,190		45,951		(9,659	)		83,482
Non-Service Revenues
Sale of computers, phone units, mobile handsets and broadband data modems		2,721		508		—			3,229
Point-product sales		—		24		—			24
Total Non-Service Revenues		2,721		532		—			3,253
Total Revenues		49,911		46,483		(9,659	)		86,735
For the six months ended June 30, 2019
Service Revenues
Wireless		43,435				(1,233	)		42,202
Mobile		42,408				(442	)		41,966
Home broadband		50				—			50
MVNO and others		977				(791	)		186
Fixed Line				43,384		(7,230	)		36,154
Voice				13,109		(3,058	)		10,051
Data				29,887		(3,996	)		25,891
Home broadband				13,882		(83	)		13,799
Corporate data and ICT				16,005		(3,913	)		12,092
Miscellaneous				388		(176	)		212
Total Service Revenues		43,435		43,384		(8,463	)		78,356
Non-Service Revenues
Sale of computers, phone units, mobile handsets and broadband data modems		2,796		647		(2	)		3,441
Point-product sales		—		186		1			187
Total Non-Service Revenues		2,796		833		(1	)		3,628
Total Revenues		46,231		44,217		(8,464	)		81,984

The following table shows the breakdown of our consolidated revenues by business segment for the six months ended June 30, 2020 and 2019:

Our consolidated revenues are further segmented by Market, based on the type of customers served. Home refers to household subscribers, Individual covers mobile wireless individual customers, Enterprise encompasses business-based customers, corporate or otherwise, and International refers to international carrier customers.

The following table shows our consolidated revenues by market segment for each of our business segments for the six months ended June 30, 2020 and 2019.

													Change
	2020			%			2019			%			Amount			%
	(amounts in million Php)
Wireless		47,190			54			43,435			53			3,755			9
Individual		40,121			46			35,174			43			4,947			14
Home		492			—			1,079			1			(587	)		(54	)
Enterprise		3,993			5			3,282			4			711			22
International		2,584			3			3,899			5			(1,315	)		(34	)
Others		—			—			1			—			(1	)		(100	)
Fixed Line		45,951			53			43,384			53			2,567			6
Home		19,617			23			18,415			22			1,202			7
Enterprise		21,103			24			20,417			25			686			3
International		5,164			6			4,463			5			701			16
Others		67			—			89			—			(22	)		(25	)
Inter-segment Transactions		(9,659	)		(11	)		(8,463	)		(10	)		(1,196	)		(14	)
Total Service Revenues		83,482			96			78,356			96			5,126			7
Wireless		2,721			3			2,796			3			(75	)		(3	)
Individual		1,837			2			1,854			2			(17	)		(1	)
Enterprise		882			1			935			1			(53	)		(6	)
International		2			—			7			—			(5	)		(71	)
Fixed Line		532			1			833			1			(301	)		(36	)
Home		322			1			589			1			(267	)		(45	)
Enterprise		210			—			244			—			(34	)		(14	)
Inter-segment Transactions		—			—			(1	)		—			1			100
Total Non-Service Revenues		3,253			4			3,628			4			(375	)		(10	)
Total Revenues		86,735		100				81,984		100				4,751			6

Consolidated expenses increased by Php3,206 million, or 5%, to Php64,819 million for the six months ended June 30, 2020 from Php61,613 million in the same period in 2019, primarily due to higher selling, general and administrative expenses, which include advance 13^th month pay of employees and other enhanced community quarantine, or ECQ, related expenses, and depreciation and amortization in our Wireless and Fixed Line business segments, as well as higher provision for expected credit losses in our Wireless business segment and higher interconnection costs in our Fixed Line business segment, partially offset by lower interconnection costs, and cost of sales and services in our Wireless business segment.

The following table shows the breakdown of our consolidated expenses by business segment for the six months ended June 30, 2020 and 2019:

Consolidated other expenses amounted to Php4,797 million for the six months ended June 30, 2020, an increase of Php1,497 million, or 45%, from Php3,300 million in the same period in 2019, primarily due to the combined effects of the following: (i) impairment of iflix investment, losses on fair value in 2020 as against gains on fair value in 2019 of Rocket Internet investment, and higher equity share in net losses of VIH from our Other business segment; (ii) higher financing costs from our Wireless and Fixed Line business segments; and (iii) lower interest income from our Wireless, Fixed Line and Other business segments.

The following table shows the breakdown of our consolidated other income (expenses) – net by business segment for the six months ended June 30, 2020 and 2019:

Consolidated net income increased by Php188 million, or 2%, to Php12,423 million for the six months ended June 30, 2020, from Php12,235 million in the same period in 2019, primarily due to higher net income from our Wireless and Fixed Line business segments, partially offset by higher net loss from our Other business segment. Our consolidated basic and diluted EPS increased to Php56.70 for the six months ended June 30, 2020 from Php56.37 in the same period in 2019. Our weighted average number of outstanding common shares was approximately 216.06 million in each of the first six months of 2020 and 2019.

The following table shows the breakdown of our consolidated net income (loss) by business segment for the six months ended June 30, 2020 and 2019:

Our consolidated EBITDA amounted to Php43,165 million for the six months ended June 30, 2020, an increase of Php3,499 million, or 9%, as compared with Php39,666 million in the same period in 2019, primarily due to higher EBITDA in our Wireless and Fixed Line business segments.

The following table shows the breakdown of our consolidated EBITDA by business segment for the six months ended June 30, 2020 and 2019:

Our consolidated EBITDA excluding MRP amounted to Php43,210 million for the six months ended June 30, 2020, an increase of Php3,252 million, or 8%, as compared with Php39,958 million in the same period in 2019.

Our consolidated core income amounted to Php12,981 million for the six months ended June 30, 2020, an increase of Php661 million, or 5%, as compared with Php12,320 million in the same period in 2019 mainly on account of higher EBITDA, partly offset by higher depreciation and amortization and financing costs, as well as higher equity share in net losses. Our consolidated basic and diluted core EPS increased to Php59.95 for the six months ended June 30, 2020 from Php56.89 in the same period in 2019.

The following table shows the breakdown of our consolidated core income by business segment for the six months ended June 30, 2020 and 2019:

Our consolidated telco core income amounted to Php13,868 million for the six months ended June 30, 2020, an increase of Php665 million, or 5%, as compared with Php13,203 million in the same period in 2019 mainly due to higher EBITDA, partially offset by higher depreciation and amortization, and financing costs.

The following table shows the breakdown of our consolidated telco core income by business segment for the six months ended June 30, 2020 and 2019:

We generated revenues of Php49,911 million from our Wireless business segment for the six months ended June 30, 2020, an increase of Php3,680 million, or 8%, from Php46,231 million in the same period in 2019.

The following table summarizes our total revenues by service from our Wireless business segment for the six months ended June 30, 2020 and 2019:

Our wireless service revenues increased by Php3,755 million, or 9%, to Php47,190 million for the six months ended June 30, 2020 as compared with Php43,435 million in the same period in 2019, primarily due to higher mobile revenues, partly offset by lower revenues from home broadband and MVNO and other services. As a percentage of our total wireless revenues, service revenues accounted for 95% and 94% for the six months ended June 30, 2020 and 2019, respectively.

Our mobile service revenues amounted to Php46,836 million for the six months ended June 30, 2020, an increase of Php4,428 million, or 10%, from Php42,408 million in the same period in 2019. Mobile service revenues accounted for 99% and 98% of our wireless service revenues for the six months ended June 30, 2020 and 2019, respectively.

The following table shows the breakdown of our mobile service revenues for the six months ended June 30, 2020 and 2019:

Mobile revenues from our data services, which include mobile internet, mobile broadband and other data services, increased by Php7,112 million, or 29%, to Php31,335 million for the six months ended June 30, 2020 from Php24,223 million in the same period in 2019 due to the growth in mobile internet usage driven mainly by the increased demand for data connectivity amidst the pandemic and meeting “new normal”, augmented by enhanced data products, consumer engagement promotions, advertising campaigns, and continuous network improvement and LTE migration. Data services accounted for 67% and 57% of our mobile service revenues for the six months ended June 30, 2020 and 2019, respectively.

The following table shows the breakdown of our mobile data service revenues for the six months ended June 30, 2020 and 2019:

Mobile internet service revenues increased by Php7,372 million, or 34%, to Php29,355 million for the six months ended June 30, 2020 from Php21,983 million in the same period in 2019, primarily due to the following:
(i) campaign refresh of the Prepaid business’s data and content-led products such as Giga Work, Giga Video, Giga Games, Giga Stories and Giga Music for mobile prepaid services, which increased the usage of video, gaming and social media by Smart, TNT and Sun subscribers; (ii) continuation of promotions such as Free Stories For All, which increased the number of mobile data users and further stimulated data usage; (iii) data usage growth resulting from content consumption from video applications and services, games and social media while staying at home during community quarantine (iv) expansion of accessible channels for customers to discover and purchase mobile data services, such as *123#, the new Smart app, the Smart online store and through the online platforms of key account partners; (v) introduction of new data-led postpaid plans with the launch of Smart Signature; (vi) LTE migration initiatives which further increased the number of LTE device and data users among our subscriber base; and (vii) Smart Brand Thematic Relaunch with Korean Superstar Hyun Bin endorsing Smart as the fastest Mobile Network in the Philippines as verified by independent third party agencies, Ookla and OpenSignal. Mobile internet services accounted for 63% and 52% of our mobile service revenues for the six months ended June 30, 2020 and 2019, respectively.

Mobile broadband revenues amounted to Php1,430 million for the six months ended June 30, 2020, a decrease of Php406 million, or 22%, from Php1,836 million in the same period in 2019, primarily due to a decrease in the number of subscribers using dongles as users shift to using mobile internet, home fiber and WiFi services. Mobile broadband services accounted for 3% and 4% of our mobile service revenues for the six months ended June 30, 2020 and 2019, respectively.

Revenues from our other data services, which include value-added services, or VAS, domestic leased lines and share in revenue from PLDT WeRoam, increased by Php146 million, or 36%, to Php550 million for the six months ended June 30, 2020 from Php404 million in the same period in 2019, primarily due to higher revenues from domestic leased lines and VAS, which includes revenues from video subscriptions and mobile gaming in-app purchases influenced by Mobile Legend: Bang Bang online tournament in the second quarter of 2020.

Mobile revenues from our voice services, which include all voice traffic, decreased by Php1,327 million, or 11%, to Php11,026 million for the six months ended June 30, 2020 from Php12,353 million in the same period in 2019, due to subscribers’ shift to alternative calling options and other OTT services. Mobile voice services accounted for 24% and 29% of our mobile service revenues for the six months ended June 30, 2020 and 2019, respectively.

Domestic voice service revenues decreased by Php1,164 million, or 11%, to Php9,617 million for the six months ended June 30, 2020 from Php10,781 million in the same period in 2019, due to lower domestic outbound revenues, and lower inbound voice service revenues due to the impact of the removal of interconnection rates for domestic mobile voice services.

International voice service revenues decreased by Php163 million, or 10%, to Php1,409 million for the six months ended June 30, 2020 from Php1,572 million in the same period in 2019, primarily due to decrease in international inbound and outbound voice service revenues as a result of lower international voice traffic from overseas Filipino workers and international travellers due to the pandemic.

Mobile revenues from our SMS services, which include all SMS-related services, decreased by Php1,612 million, or 31%, to Php3,530 million for the six months ended June 30, 2020 from Php5,142 million in the same period in 2019 mainly due to the declining SMS volumes as a result of the increased adoption of alternative text messaging options, such as OTT services, social media, and messenger application, combined with the impact of removal of interconnection charges for domestic mobile SMS services. Mobile SMS services accounted for 7% and 12% of our mobile service revenues for the six months ended June 30, 2020 and 2019, respectively.

Mobile revenues from inbound roaming and other services increased by Php255 million, or 37%, to Php945 million for the six months ended June 30, 2020 from Php690 million in the same period in 2019 mainly due to facility service fees related to fixed wireless business.

The following table shows the breakdown of our mobile service revenues by service type for the six months ended June 30, 2020 and 2019:

Revenues generated from our mobile prepaid services amounted to Php36,130 million for the six months ended June 30, 2020, an increase of Php4,024 million, or 13%, as compared with Php32,106 million in the same period in 2019. Mobile prepaid service revenues accounted for 77% and 76% of mobile service revenues for the six months ended June 30, 2020 and 2019, respectively. The increase in revenues from our mobile prepaid services was attributed to the increase in our mobile prepaid subscriber base, combined with higher average daily top-ups, driven by the sustained growth in mobile internet usages.

Revenues generated from mobile postpaid services amounted to Php9,761 million for the six months ended June 30, 2020, higher by Php149 million, or 2%, as compared with Php9,612 million in the same period in 2019, and accounted for 21% and 22% of mobile service revenues for the six months ended June 30, 2020 and 2019, respectively, driven by the increase in corporate subscriptions to enable work-from-home set-up and flexible learning arrangements.

The following table shows our mobile subscriber base as at June 30, 2020 and 2019:

Our current policy is to recognize a prepaid subscriber as active only when the subscriber activates and uses the SIM card. A prepaid mobile subscriber is considered inactive if the subscriber does not reload within 90 days after the full usage or expiry of the last reload.

The average monthly churn rates for Smart Prepaid subscribers were 5.8% and 3.6% for the six months ended June 30, 2020 and 2019, respectively, while the average monthly churn rates for TNT subscribers were 4.6% and 3.7% for the six months ended June 30, 2020 and 2019, respectively. The average monthly churn rates for Sun Prepaid subscribers were 7.7% and 5.1% for the six months ended June 30, 2020 and 2019, respectively.

The average monthly churn rates for Smart Postpaid subscribers were 1.7% and 2.1% for the six months ended June 30, 2020 and 2019, respectively. The average monthly churn rates for Sun Postpaid subscribers were 1.1% and 1.2% for the six months ended June 30, 2020 and 2019, respectively.

The following table summarizes our average monthly ARPUs for the six months ended June 30, 2020 and 2019:

Revenues from our Home Broadband services amounted to Php25 million for the six months ended June 30, 2020, a decrease of Php25 million, or 50%, from Php50 million in the same period in 2019, primarily due to a decrease in the number of subscribers.

Revenues from our MVNO and other services amounted to Php329 million for the six months ended June 30, 2020, a decrease of Php648 million, or 66%, from Php977 million in the same period in 2019 primarily due to lower facility service fees.

Our wireless non-service revenues consist of sale of mobile handsets, mobile broadband data modems, tablets and accessories. Our wireless non-service revenues decreased by Php75 million, or 3%, to Php2,721 million for the six months ended June 30, 2020 from Php2,796 million in the same period in 2019, primarily due to lower number of units issued for mobile handsets resulting from the temporary closure of Smart wireless centers and Sun shops brought by community quarantine measures.

Expenses associated with our Wireless business segment amounted to Php37,055 million for the six months ended June 30, 2020, an increase of Php2,806 million, or 8%, from Php34,249 million in the same period in 2019. The increase was mainly attributable to higher depreciation and amortization, selling, general and administrative expenses, and provisions, partially offset by lower interconnection costs, and cost of sales and services. As a percentage of our total wireless revenues, expenses associated with our Wireless business segment accounted for 74% in each of the six months ended June 30, 2020 and 2019.

The following table summarizes the breakdown of our total wireless-related expenses for the six months ended June 30, 2020 and 2019 and the percentage of each expense item in relation to the total:

Selling, general and administrative expenses increased by Php1,333 million, or 9%, to Php16,265 million, primarily due to higher expenses related to taxes and licenses, selling and promotions, compensation and employee benefits, and repairs and maintenance, partly offset by lower expenses related to professional and contracted services.

Depreciation and amortization charges increased by Php2,173 million, or 16%, to Php15,804 million, mainly on account of higher depreciation on network equipment, combined with higher depreciation of right-of-use asset.

Cost of sales and services decreased by Php575 million, or 14%, to Php3,397 million, primarily due to lower number of units issued for mobile handsets during the temporary closure of Smart wireless centers and Sun shops as a result of the community quarantine.

Provisions increased by Php737 million to Php1,279 million, primarily driven by the impact of pandemic to the economy resulting in higher receivables from our subscribers and expected credit losses, partially offset by lower provision for inventory obsolescence for both trade inventories and network materials.

Interconnection costs decreased by Php861 million, or 77%, to Php252 million, primarily due to lower interconnection cost on domestic voice and SMS services, as a result of the removal of mobile domestic interconnection fees.

Asset impairment, consisting mainly of impairment of contract assets, decreased by Php1 million, or 2%, to Php58 million.

The following table summarizes the breakdown of our total wireless-related other income (expenses) – net for the six months ended June 30, 2020 and 2019:

Our Wireless business segment’s other expenses amounted to Php2,635 million for the six months ended June 30, 2020, an increase of Php343 million, or 15%, from Php2,292 million in the same period in 2019, primarily due to the combined effects of the following: (i) higher net financing costs by Php317 million mainly due to higher interest expense on loans resulting from higher outstanding loan balance and higher weighted average interest rate, and lower capitalized interest, partially offset by lower accretion on lease liabilities; (ii) lower interest income by Php69 million; (iii) lower net foreign exchange gains by Php8 million; (iv) lower net losses on derivative financial instruments by Php44 million; and (v) higher other income – net by Php7 million.

Provision for income tax amounted to Php2,337 million for the six months ended June 30, 2020, a decrease of Php194 million, or 8%, from Php2,531 million in the same period in 2019.

As a result of the foregoing, our Wireless business segment’s net income increased by Php725 million, or 10%, to Php7,884 million for the six months ended June 30, 2020 from Php7,159 million in the same period in 2019.

Our Wireless business segment’s EBITDA increased by Php3,007 million, or 12%, to Php29,012 million for the six months ended June 30, 2020 from Php26,005 million in the same period in 2019. EBITDA margin increased to 61% for the six months ended June 30, 2020 from 60% in the same period in 2019.

Our Wireless business segment’s core income increased by Php701 million, or 10%, to Php7,867 million for the six months ended June 30, 2020 from Php7,166 million in the same period in 2019, mainly on account of higher EBITDA, partially offset by higher depreciation and amortization and net financing costs.

Revenues generated from our Fixed Line business segment amounted to Php46,483 million for the six months ended June 30, 2020, an increase of Php2,266 million, or 5%, from Php44,217 million in the same period in 2019.

The following table summarizes our total revenues by service from our Fixed Line business segment for the six months ended June 30, 2020 and 2019:

Our fixed line service revenues increased by Php2,567 million, or 6%, to Php45,951 million for the six months ended June 30, 2020 from Php43,384 million in the same period in 2019, primarily due to higher revenues from our data and voice services.

Our data services posted revenues of Php32,270 million for the six months ended June 30, 2020, an increase of Php2,383 million, or 8%, from Php29,887 million in the same period in 2019, primarily due to higher revenues from home broadband, corporate data and leased lines, and data center and ICT services. The percentage contribution of this service segment to our fixed line service revenues accounted for 70% and 69% for the six months ended June 30, 2020 and 2019, respectively.

The following table shows information of our data service revenues for the six months ended June 30, 2020 and 2019:

Corporate data services amounted to Php13,877 million for the six months ended June 30, 2020, an increase of Php786 million, or 6%, as compared with Php13,091 million in the same period in 2019, mainly due to the sustained demand for broadband internet and data networking services. Corporate data revenues accounted for 43% and 44% of total data services for the six months ended June 30, 2020 and 2019, respectively.

ICT revenues increased by Php119 million, or 4%, to Php3,033 million for the six months ended June 30, 2020 from Php2,914 million in the same period in 2019 mainly due to higher revenues from Data Centers, Cloud, Cybersecurity and managed IT services. The percentage contribution of this service segment to our total data service revenues accounted for 9% and 10% for the six months ended June 30, 2020 and 2019, respectively.

Home broadband data revenues amounted to Php15,360 million for the six months ended June 30, 2020, an increase of Php1,478 million, or 11%, from Php13,882 million in the same period in 2019. This growth is driven by increasing demand for broadband services, including fixed wired (PLDT Home Fibr) and fixed wireless (PLDT Home WiFi), which the company is providing through its existing copper network and a nationwide roll-out of its fiber-to-the-home, or FTTH, network. Home broadband revenues accounted for 48% and 46% of total data service revenues for the six months ended June 30, 2020 and 2019, respectively. PLDT’s FTTH nationwide network roll-out has reached 7.8 million homes passed as of June 30, 2020.

Revenues from our voice services increased by Php210 million, or 2%, to Php13,319 million for the six months ended June 30, 2020 from Php13,109 million in the same period in 2019, primarily due to higher revenues from international services of PLDT Global, partly offset by lower revenues from domestic and local exchange services. The decline in domestic and local exchange services was partly due to the continued popularity of services such as Skype, Viber, Line, Facebook Messenger, Google Talk and WhatsApp, offering free OTT calling services, and other similar services, as well as subscribers’ shift to mobile services. The percentage contribution of voice service revenues to our fixed line service revenues accounted for 29% and 30% for the six months ended June 30, 2020 and 2019, respectively.

Miscellaneous service revenues are derived mostly from rentals and management fees. These service revenues decreased by Php26 million, or 7%, to Php362 million for the six months ended June 30, 2020 from Php388 million in the same period in 2019. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues accounted for 1% in each of the six months ended June 30, 2020 and 2019.

Non-service revenues decreased by Php301 million, or 36%, to Php532 million for the six months ended June 30, 2020 from Php833 million in the same period in 2019, primarily due to lower sale of hardware, Telpad units, and computer bundles, partially offset by higher sale of Prepaid Home WiFi and managed ICT equipment.

Expenses related to our Fixed Line business segment totaled Php37,404 million for the six months ended June 30, 2020, an increase of Php1,527 million, or 4%, as compared with Php35,877 million in the same period in 2019. The increase was primarily due to higher interconnection costs, selling, general and administrative expenses, depreciation and amortization, and provisions, partly offset by lower expenses related to cost of sales and services, and asset impairment. As a percentage of our total fixed line revenues, expenses associated with our Fixed Line business segment accounted for 80% and 81% for the six months ended June 30, 2020 and 2019, respectively.

The following table shows the breakdown of our total fixed line-related expenses for the six months ended June 30, 2020 and 2019 and the percentage of each expense item in relation to the total:

Selling, general and administrative expenses increased by Php499 million, or 3%, to Php20,321 million primarily due to higher expenses related to repairs and maintenance, and compensation and employee benefits, partly offset by lower expenses related to selling and promotions, professional and other contracted services, communication, training and travel, and taxes and licenses.

Depreciation and amortization charges increased by Php245 million, or 3%, to Php8,294 million mainly on account of higher depreciable asset base.

Interconnection costs increased by Php777 million, or 21%, to Php4,406 million, primarily due to higher international interconnection costs of PLDT Global, partly offset by lower domestic interconnection costs, mainly due to the impact of reduction in interconnection rate for voice services.

Cost of sales and services decreased by Php90 million, or 4%, to Php2,244 million, primarily due to lower cost of services, as well as lower cost of hardware, Telpad units and computer bundles.

Provisions increased by Php149 million, or 8%, to Php2,091 million, primarily due to higher provision for inventory obsolescence.

Asset impairment, consisting mainly of impairment of contract assets, decreased by Php53 million, or 52%, to Php48 million.

The following table summarizes the breakdown of our total fixed line-related other income (expenses) – net for the six months ended June 30, 2020 and 2019:

Our Fixed Line business segment’s other expenses amounted to Php217 million for the six months ended June 30, 2020, a decrease of Php410 million, or 65%, from Php627 million in the same period in 2019, primarily due to the combined effects of the following: (i) higher other income – net by Php618 million mainly due to higher miscellaneous income; (ii) lower net losses on derivative financial instruments by Php132 million; (iii) higher net foreign exchange gains by Php23 million; (iv) lower equity share in net earnings of associates by Php39 million; (v) lower interest income by Php116 million; and (vi) higher net financing costs by Php208 million mainly due to higher interest expense on loans resulting from higher outstanding loan balance, partially offset by higher capitalized interest and lower accretion on lease liabilities.

Provision for income tax amounted to Php2,403 million for the six months ended June 30, 2020, an increase of Php72 million, or 3%, from Php2,331 million in the same period in 2019, primarily due to higher taxable income.

As a result of the foregoing, our Fixed Line business segment registered a net income of Php6,459 million for the six months ended June 30, 2020, an increase of Php1,077 million, or 20%, as compared with Php5,382 million in the same period in 2019.

Our Fixed Line business segment’s EBITDA increased by Php984 million, or 6%, to Php17,373 million for the six months ended June 30, 2020 from Php16,389 million in the same period in 2019. EBITDA margin remained at 38% for each of the six months ended June 30, 2020 and 2019.

Our Fixed Line business segment’s core income increased by Php702 million, or 13%, to Php6,163 million for the six months ended June 30, 2020 from Php5,461 million in the same period in 2019, primarily due to higher EBITDA, partially offset by higher depreciation and amortization, and net financing costs.

Revenues generated from our Other business segment amounted to nil in each of the six months ended June 30, 2020 and 2019.

Expenses related to our Other business segment decreased by Php2 million, or 20%, to Php8 million for the six months ended June 30, 2020 from Php10 million in the same period in 2019.

The following table summarizes the breakdown of other income (expenses) – net for Other business segment for the six months ended June 30, 2020 and 2019:

Our Other business segment’s other expenses amounted to Php1,997 million for the six months ended June 30, 2020, an increase of Php1,535 million from Php462 million in the same period in 2019, primarily due to the combined effects of the following: (i) other expenses – net of Php991 million in 2020 as against other income – net of Php256 million in 2019 mainly due to impairment of iflix investment, and losses on fair value in 2020 as against gains on fair value in 2019 of Rocket Internet investment; (ii) higher equity share in net losses of associates and joint ventures by Php283 million mainly due to higher equity share in net losses of VIH; (iii) lower interest income by Php172 million mainly due to lower outstanding balance of receivables from Metro Pacific Investments Corporation, or MPIC; (iv) lower net financing costs by Php31 million; and (v) net foreign exchange gains of Php45 million in 2020 as against net foreign exchange losses of Php91 million in 2019.

As a result of the foregoing, our Other business segment registered a net loss of Php1,788 million for the six months ended June 30, 2020, an increase of Php1,523 million from Php265 million in the same period in 2019.

Our Other business segment’s core loss increased by Php647 million to Php913 million for the six months ended June 30, 2020 from Php266 million in the same period in 2019.

The following table shows our consolidated cash flows for the six months ended June 30, 2020 and 2019, as well as our consolidated capitalization and other consolidated selected financial data as at June 30, 2020 and December 31, 2019:

Our consolidated cash and cash equivalents and short-term investments totaled Php47,493 million as at June 30, 2020. Principal sources of consolidated cash and cash equivalents for the six months ended June 30, 2020 were proceeds from availment of long-term and short-term debt of Php47,541 million and Php10,000 million, respectively, cash flows from operating activities amounting to Php33,890 million, proceeds from maturity of short-term investments of Php2,940 million, collection of MPIC receivables of Php2,826 million and interest received of Php742 million. These funds were used principally for: (1) purchase of property and equipment, including capitalized interest, of Php41,046 million; (2) payment of short-term debt of Php10,000 million; (3) cash dividend payments of Php8,448 million; (4) debt principal and interest payments of Php3,733 million and Php4,086 million, respectively; (5) payment for purchase of short-term investments of Php4,943 million; and (6) settlement of obligations under lease liabilities of Php3,018 million.

Our consolidated cash and cash equivalents and short-term investments totaled Php32,129 million as at June 30, 2019. Principal sources of consolidated cash and cash equivalents for the six months ended June 30, 2019 were cash flows from operating activities amounting to Php35,828 million, proceeds from availment of long-term debt of Php6,000 million, collection of MPIC receivables of Php1,771 million, net proceeds from maturity of short-term investments of Php1,138 million, interest received of Php1,065 million and proceeds from disposal of Rocket Internet shares of Php681 million. These funds were used principally for: (1) purchase of property and equipment, including capitalized interest, of Php40,961 million; (2) debt principal and interest payments of Php8,921 million and Php3,529 million, respectively; (3) cash dividend payments of Php7,796 million; and (4) settlement of obligations under lease liabilities of Php3,147 million.

Our consolidated net cash flows provided by operating activities decreased by Php1,938 million, or 5%, to Php33,890 million for the six months ended June 30, 2020 from Php35,828 million in the same period in 2019, primarily due to lower level of collection of receivables, and higher level of settlement of accounts payable, accrued expense and other current liabilities, partially offset by lower prepayments, higher operating income, and lower pension contribution.

Cash flows provided by operating activities of our Wireless business segment increased by Php4,552 million, or 21%, to Php25,759 million for the six months ended June 30, 2020 from Php21,207 million in the same period in 2019, primarily due to lower prepayments and higher operating income, partially offset by lower level of collection of receivables and higher level of settlement of other noncurrent liabilities. Cash flows provided by operating activities of our Fixed Line business segment decreased by Php7,119 million, or 48%, to Php7,841 million for the six months ended June 30, 2020 from Php14,960 million in the same period in 2019 primarily due to lower level of collection of receivables and higher level of settlement of accounts payable, and accrued expense and other current liabilities, partially offset by lower prepayments, higher operating income, lower pension contribution and lower level of settlement of other noncurrent liabilities. Cash flows used in operating activities of our Other business segment decreased by Php360 million, or 69%, to Php161 million for the six months ended June 30, 2020 from Php521 million in the same period in 2019, primarily due to higher level of collection of receivables, partially offset by higher level of settlement of accounts payables and accrued expenses and other current liabilities.

Consolidated net cash flows used in investing activities amounted to Php39,578 million for the six months ended June 30, 2020, an increase of Php2,443 million, or 7%, from Php37,135 million in the same period in 2019, primarily due to the combined effects of the following: (1) net payment for purchase of short-term investment of Php2,003 million in 2020 as against net proceeds from maturity of short-term investments of Php1,138 million in 2019; (2) net payment for purchase of investment in debt securities of Php498 million in 2020; (3) lower interest received by Php323 million; (4) higher payment for purchase of property and equipment, including capitalized interest, by Php85 million; (5) higher dividends received by Php314 million; and (6) higher level of collection of MPIC receivables by Php1,055 million.

Our consolidated payment for purchase of property and equipment, including capitalized interest, for the six months ended June 30, 2020 totaled Php41,046 million, an increase of Php85 million as compared with Php40,961 million in the same period in 2019. Smart’s capital spending decreased by Php5,115 million, or 18%, to Php22,746 million for the six months ended June 30, 2020 from Php27,861 million in the same period in 2019. Smart’s capex spending was primarily focused on expansion of LTE (4G) coverage and capacity. PLDT’s capital spending increased by Php5,469 million, or 44%, to Php17,845 million for the six months ended June 30, 2020 from Php12,376 million in the same period in 2019. PLDT’s capex spending was used to finance the fixed line modernization program and the continuous facility roll-out and expansion of our domestic and international fiber optic network. The balance represents other subsidiaries’ capital spending.

As part of our growth strategy, we may from time to time, continue to make acquisitions and investments in companies or businesses.

On a consolidated basis, cash flows provided by financing activities amounted to Php27,396 million for the six months ended June 30, 2020, as against cash flows used in financing activities of Php17,517 million in the same period in 2019, primarily due to the combined effects of the following: (1) higher proceeds from availment of long-term debt by Php41,541 million; (2) lower payments of long-term debt by Php5,188 million; (3) lower settlement of obligations under lease liabilities by Php129 million; (4) higher interest paid by Php557 million; (5) higher payment of debt issuance costs by Php631 million; and (6) higher cash dividends paid by Php652 million.

Proceeds from availment of long-term and short-term debt for the six months ended June 30, 2020 amounted to Php47,541 million and Php10,000 million, respectively, mainly from PLDT’s issuance of fixed rate U.S. Dollar notes and PLDT’s and Smart’s drawings related to refinancing of maturing loan obligations, prepayment of outstanding loans and financing of capital expenditure requirements. Payments of principal and interest on our total debt amounted to Php13,733 million and Php4,086 million, respectively, for the six months ended June 30, 2020.

Our consolidated long-term debt increased by Php42,744 million, or 22%, to Php235,300 million as at June 30, 2020 from Php192,556 million as at December 31, 2019, primarily due to issuance of fixed rate U.S. Dollar notes and drawings from our long-term and short-term facilities, partly offset by debt amortizations and prepayments. As at June 30, 2020, Smart’s long-term debt level increased by 2% to Php79,394 million from Php78,152 as at December 31, 2019, and PLDT’s long-term debt level increased by 36% to Php155,906 million from Php114,404 million as at December 31, 2019.

See Note 21 – Interest-bearing Financial Liabilities – Long-term Debt to the accompanying unaudited consolidated financial statements for a more detailed discussion of our long-term debt.

Our consolidated debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS, at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments.

As at June 30, 2020 and 2019, we are in compliance with all of our debt covenants.

See Note 21 – Interest-bearing Financial Liabilities – Compliance with Debt Covenants to the accompanying unaudited consolidated financial statements for a more detailed discussion of our debt covenants.

We believe that our available cash, including cash flows from operations, will provide sufficient liquidity to fund our projected operating, investment, capital expenditures and debt service requirements for the next 12 months; however, we may finance a portion of these from external sources if we consider it prudent to do so.

The following table shows the dividends declared to shareholders for the six months ended June 30, 2020 and 2019:

See Note 20 – Equity to the accompanying unaudited consolidated financial statements for further details.

Our total assets amounted to Php557,692 million as at June 30, 2020, an increase of Php32,665 million, or 6%, from Php525,027 million as at December 31, 2019, primarily due to higher property and equipment, cash and cash equivalents, and trade receivables and other receivables, and short-term investments.

Our total liabilities amounted to Php438,459 million as at June 30, 2020, an increase of Php29,722 million, or 7%, from Php408,737 million as at December 31, 2019, primarily due to higher interest-bearing financial liabilities, partially offset by lower accounts payable.

There are no off-balance sheet arrangements that have or are reasonably likely to have any current or future effect on our financial position, results of operations, cash flows, changes in stockholders’ equity, liquidity, capital expenditures or capital resources that are material to investors.

On August 2, 2016, the PLDT Board of Directors approved the amendment of our dividend policy, reducing our dividend payout rate to 60% of our core earnings per share as regular dividends. This was in view of the elevated capital expenditures to support the build-out of a resilient and reliable data network, lower EBITDA primarily due to higher subsidies to grow the data business and defend market share, and the resources required to support the acquisition of SMC’s telecommunications business. In declaring dividends, we take into consideration the interest of our shareholders, as well as our working capital, capital expenditures and debt servicing requirements. The retention of earnings may be necessary to meet the funding requirements of our business expansion and development programs. However, in the event that no investment opportunities arise, we may consider the option of returning additional cash to our shareholders in the form of special dividends of up to the balance of our core earnings or to undertake share buybacks. We were able to pay out approximately 100% of our core earnings for seven consecutive years from 2007 to 2013, approximately 90% of our core earnings for 2014, 75% of our core earnings for 2015, 60% of our core earnings for 2016, 2017 and 2018, and 60% of our telco core income for 2019. The accumulated equity in the net earnings of our subsidiaries, which form part of our retained earnings, are not available for distribution unless realized in the form of dividends from such subsidiaries. Dividends are generally paid in Philippine pesos. In the case of shareholders residing outside the Philippines, PLDT’s transfer agent in Manila, Philippines, as the dividend-disbursing agent, converts the Philippine peso dividends into U.S. dollars at the prevailing exchange rate and remits the dollar dividends abroad, net of any applicable withholding tax.

Our subsidiaries pay dividends subject to the requirements of applicable laws and regulations and availability of unrestricted retained earnings, without any restriction imposed by the terms of contractual agreements. Notwithstanding the foregoing, the subsidiaries of PLDT may, at any time, declare and pay such dividends depending upon the results of operations and future projects and plans, the respective subsidiary’s earnings, cash flow, financial condition, capital investment requirements and other factors.

Consolidated cash dividend payments amounted to Php8,448 million for the six months ended June 30, 2020 as compared with Php7,796 million paid to shareholders in the same period in 2019.

For a detailed discussion of our consolidated contractual undiscounted obligations as at June 30, 2020 and December 31, 2019, see Note 28 – Financial Assets and Liabilities to the accompanying unaudited consolidated financial statements.

Our outstanding consolidated commercial commitments, in the form of letters of credit, amounted to nil as at June 30, 2020 and December 31, 2019.

The main risks arising from our financial instruments are liquidity risk, foreign currency exchange risk, interest rate risk and credit risk. The importance of managing those risks has significantly increased in light of the considerable change and volatility in both the Philippine and international financial markets. Our Board of Directors reviews and approves policies for managing each of these risks. We also monitor the market price risk arising from all financial instruments.

For further discussions of these risks, see Note 28 – Financial Assets and Liabilities to the accompanying unaudited consolidated financial statements.

The following table sets forth the estimated consolidated fair values of our financial assets and liabilities recognized as at June 30, 2020 and December 31, 2019 other than those whose carrying amounts are reasonable approximations of fair values:

The following table sets forth the amount of gains (losses) recognized for the financial assets and liabilities for the six months ended June 30, 2020 and the three months ended March 31, 2020:

Inflation can be a significant factor in the Philippine economy, and we are continually seeking ways to minimize its impact. The average inflation rate in the Philippines for the six months ended June 30, 2020 and 2019 were 2.5% and 3.4%, respectively. We expect inflation to stay within the 2% to 4% target range of the BSP.

In a move to contain the COVID-19 outbreak, on March 12, 2020, the Office of the President of the Philippines issued a memorandum directive to impose stringent social distancing measures in the National Capital Region effective March 15, 2020. On March 16, 2020, Presidential Proclamation No. 929 was issued, declaring a State of Calamity throughout the Philippines for a period of six months from March 17, 2020 (at midnight), unless earlier lifted or extended as circumstances may warrant, and imposed an enhanced community quarantine, ECQ, throughout the island of Luzon until April 12, 2020, unless earlier lifted or extended as circumstances may warrant. On March 24, 2020, Republic Act No. 11469, otherwise known as the “Bayanihan to Heal As One Act”, was signed into law, declaring a state of national emergency over the entire country, and authorizing the President of the Philippines to exercise certain powers necessary to address the COVID-19 pandemic. On April 7, 2020, the Office of the President of the Philippines released a memorandum extending the ECQ over the entire Luzon island until April 30, 2020. On May 1, 2020, the Government further extended the ECQ over, among others, certain portions of Luzon, including Metro Manila, until May 15, 2020, while easing restrictions in other parts of the country. On May 11, 2020, the Inter-Agency Task Force of Emerging Infectious Disease, IATF, placed high-risk local government units under modified ECQ, or MECQ, from May 16, 2020 until May 31, 2020, where certain industries were allowed to operate under strict compliance with minimum safety standards and protocols. On May 27, 2020, the IATF reclassified various provinces, highly urbanized cities and independent component cities depending on the risk-level. Meanwhile, on May 28, 2020, the Government placed Metro Manila under general community quarantine, allowing for the partial reopening of certain businesses and public transportation while continuing to limit general movements. Pursuant to the declaration of the President on August 2, 2020, the National Capital Region and the provinces of Laguna, Cavite, Rizal and Bulacan were placed under modified ECQ from August 4, 2020 until August 18, 2020. These measures have caused disruption to businesses and economic activities, and their impact on businesses continues to evolve.

In light of the foregoing, we have conducted an analysis of PLDT’s risks, and have implemented the following measures to protect our employees, customers and trade partners.

On March 9, 2020, we instituted a travel ban to high risk countries covering our employees and implemented a partial lockdown of our corporate premises with access limited only to employees. On March 12, 2020, we imposed a ban on all foreign travel.

To minimize exposure of our employees to the COVID-19 virus as well as to prevent its further spreading, we implemented a Work from Home, or WFH, policy, which came into effect on March 11, 2020. Certain of our employees are allowed to work from home until the spread of the virus is brought under control in the Philippines. To ensure minimal disruption to our operations, we have taken steps to ensure that employees working from home are properly equipped with the appropriate digital equipment, including internet connection. For the employees that continue to work on-site, we have taken steps to try and minimize their risk of exposure to the COVID-19 virus.

On May 27, 2020, we began a partial “return to work” process under guidelines that aligned with the minimum workplace requirements for areas under MECQ and general community quarantine as set out in the latest issuances by various Government agencies.

While the Government has clarified that COVID-19 testing is not mandatory or a pre-requisite to resuming operations, we have partnered with Metro Pacific Hospital Holdings, Inc. and accredited clinics to conduct rapid testing on our employees nationwide in phases to help prevent the risk of infection in the workplace. The rapid test assesses whether a person has been exposed to the virus, aiding doctors in evaluating the patient and determining whether additional testing is required. Testing commenced on May 20, 2020 and was done in batches, prioritizing field-based and store-based personnel. Given the lack of public transportation, employees with private vehicles and who test negative will be prioritized for return to work operations. For those without private vehicles or other safe and reliable means of transport, we are evaluating various options, including the possibility of shuttle services to ensure employees are safely transported to and from work.

To ensure that our workplace is safe and ready for re-occupancy, we have implemented a number of policies and procedures and are undertaking various initiatives. For example, employees are required to wear proper personal protective equipment in the workplace at all times and in the proper manner. We will provide protective equipment to each employee depending on his/her work arrangement — whether in the field, in an office, or a retail store. In addition, we implemented physical distancing guidelines and various protocols, including temperature scanning, daily health declarations, observance of one-way traffic on all corridors, general disinfection of common areas every two hours, ultraviolet cleaning and a visitor screening policy. We have also installed markers, signage, sneeze guards and high efficiency particulate air (HEPA) filter appliances and cleaned our airconditioning ducts.

In preparation for our employees’ return to the workplace, e-learning modules focused on health and safety protocols were deployed, with 10,000 employees completing the course to date. A webinar on “Getting Back on Tracking: The Right Mindset for the New Normal” was also rolled out to 3,353 targeted employees. Along with this, company-wide virtual talks with Q&A sessions for “Mental Health Amid COVID-19” and “Mental Wellness in the New Normal” were conducted by health professionals to help employees cope with COVID-19-related anxieties.

To further protect our employees’ welfare, PLDT Medical Services readily supplies maintenance medicines and multivitamins through our in-house clinics nationwide, and in partnership with Mercury Drugstores and MedExpress Delivery. Internal channels for 24/7 COVID-19-related assistance are also available for our workforce.

On top of this is a 24/7 InfoMed hotline that is ready to address medical-related concerns and health benefits PLDT personnel may have. Employees can reach out to advisers on questions related to internal guidelines, safety protocols, rapid testing, shuttle services and the like through the COVID-19 Employee Hotline from Mondays to Fridays from 8AM to 5PM. A COVID-19 Online Helpdesk on Workplace by Facebook was also set up for all internal inquiries.

We have identified the types of employees who are most at risk of COVID-19 based on local guidelines issued by various Government agencies. This includes pregnant employees, those with pre-existing conditions or co-morbidities and those aged 60 years or above. Employees who fall within this group and have asked or are asked to report for work in the workplace must first obtain clearance from the PLDT medical services team and strictly comply with all health and safety protocols to ensure their continued well-being.

For health monitoring purposes, a coronavirus online form is required to be completed by employees if they are experiencing symptoms or have been exposed to a COVID-19 patient or suspect. The COVID-19 self-check chatbot, our employees’ daily health assessment and security requirement for returning to work, is housed in the company’s internal social media platform (Workplace by Facebook). The PLDT medical services team closely monitors both the coronavirus online form and chatbot.

We have issued instructions and guidelines to our trade partners on how to best deal with the COVID-19 outbreak

As more and more people in the Philippines choose to work from home, we have been experiencing a significant increase in the usage of our internet services. Since the beginning of the COVID-19 outbreak in the Philippines, we have been closely monitoring our network traffic for usage spikes and possible congestion. As of the date of this report, we have sufficient capacity to serve the increased needs of all our subscribers. We have added international and domestic internet capacity, upgraded our local content delivery network, and reassigned our 2G frequencies to LTE and temporarily reassigned our 5G frequencies to LTE in order to augment our internet capacity. We have taken steps to enhance security for premises in which our critical network and IT systems are kept. We have also moved essential spare parts and supplies from our remote warehouses to Metropolitan Manila to help us undertake maintenance and repairs more efficiently.

To provide customers with connectivity when they need it the most, we provided zero-rated access to certain government agencies and emergency hotlines, boosted minimum speeds for our PLDT Home subscribers, increased data allocations for postpaid and prepaid customers, equipped our corporate customers with telecommuting solutions, suspended disconnections for our postpaid customers, free use of selected business corporations for corporate customers and for our OFWs extended duration of free calls through our Free Bee app. On May 1, 2020, we implemented a six-month installment payment program for the outstanding monthly bills of our postpaid subscribers. Under this payment program, PLDT Home, Smart and Sun consumer postpaid subscribers can settle their unpaid balances as of April 30, 2020 in six equal monthly payments with 0% interest and no penalties.

In cases where our service teams need to enter customers’ homes or business premises, we have equipped them with protective gear such as face masks and gloves. Members of our service teams have also been trained in the proper health protocols for before, during, and after site visits, including maintaining proper social distances with customers at all times.

On June 23, 2020, PLDT issued US$300 million long 10-year and US$300 million 30-year senior unsecured fixed-rate notes with coupon of 2.50% and 3.45%, respectively. Proceeds from the issuance of these notes will be used to refinance maturing debt obligations, prepay outstanding loans, and partially finance capital expenditures. The 2031 Notes will mature on January 23, 2031 and the 2050 Notes will mature on June 23, 2050.

Asia Direct Cable Consortium, or the ADC Consortium, to Build a New Asia Pacific Submarine

The ADC Consortium, to which the PLDT is party, is in the process of constructing a 9,400 kilometer-long high-performance submarine cable line connecting six major countries in East Asia and Southeast Asia. Construction began in February 2020 and is expected to be completed in the fourth quarter of 2022. The cable is expected to feature multiple pairs of high capacity optical fibers and is designed to carry more than 140 Tbps of traffic, enabling high capacity transmission of data across the East Asia and Southeast Asia regions.

In May 2020, PLDT announced that it had entered into a partnership with Orange, the wholesale arm of the Orange Group, for international voice aggregation services to deliver better quality service to millions of customers globally. As the preferred aggregator for voice traffic, Orange will handle all global inbound traffic terminating on the PLDT and Smart networks.

Orange’s experience and expertise will be available to PLDT for the management of its global partner portfolio. The partnership agreement also includes support from Orange’s global sales team in the joint implementation of various voice traffic management solutions. Additionally, in a move to increase voice traffic and security, Orange will guarantee the value of PLDT voice traffic with its industry-leading anti-fraud voice solutions.

Commitment of New Investments in Voyager Innovations Holdings, Pte. Ltd., or VIH

On April 16, 2020, PLDT, through PCEV, KRR, Tencent, IFC and IFC Emerging Asia Fund, or the Subscribers, entered into a new subscription agreement with VIH to commit up to US$120 million of new funding. The Notes Subscription Agreement covers the issuance of VIH’s Convertible Loan Notes, or the VIH Notes, with an aggregate principal amount of US$65 million and issuance of Warrants with an aggregate subscription amount of US$55 million.

On May 14, 2020, VIH issued the Convertible Loan Note Instruments and Warrant Certificates to the Subscribers. PCEV paid US$10.8 million for the VIH Notes and received a Warrant Certificate amounting to US$9.2 million.

VIH will use the funds to support PayMaya’s rapid growth as it pursues its mission to accelerate digital and financial inclusion in the Philippines and enable the wider Filipino population to participate in the digital economy.

On April 8, 2020 and June 9, 2020, the Board of Directors and stockholders, respectively, approved the amendment of the Second Article of the Articles of Incorporation of PLDT, or the Amendment, (a) to reflect the current focus of PLDT’s business, which is the provision of telecommunications services through trending and constantly evolving technologies and innovative products and services; and (b) to allow sufficient flexibility for the PLDT business units to design their operations and expand their products and services by constantly transforming PLDT from being the country’s leading telecommunications company to a dynamic and customer-centric multi-media organization.

The Amended Articles of Incorporation will be submitted to the Philippine SEC for approval.

Effective April 27, 2020, Maratel ceased to operate as a telecommunications service provider, following the expiration of its legislative franchise, Republic Act No. 7970. In order to ensure continued customer service, Maratel will assign its assets and subscribers to PLDT who undertakes to offer its services to Maratel subscribers subject to conditions as may be imposed by the NTC. The NTC did not object to the transfer of Maratel subscribers to PLDT, subject to certain conditions. On November 7, 2019, the PLDT Board of Directors approved the acquisition of Maratel’s assets and subscribers for a total consideration of Php442 million. PLDT has committed to provide financial support to discharge Maratel’s liabilities as the need arises. This transaction was eliminated in our consolidated financial statements.

On January 28, 2020, the Board authorized the redemption of shares of PLDT’s Series JJ 10% Cumulative Convertible Preferred Stock (the “SIP Shares”) which were issued in the year 2014, effective May 12, 2020. The record date for the determination of the holders of outstanding SIP Shares subject for redemption is February 11, 2020.

Effective January 23, 2020, PLDT Subic Telecom, Inc., or SubicTel ceased to operate as a telecommunications service provider, pursuant to the expiration of its franchise issued by the Subic Bay Metropolitan Authority, or SBMA. In order to facilitate continued customer service, arrangements have been made between SubicTel and PLDT where PLDT would make its services available to the affected SubicTel subscribers on voluntary basis. The NTC interposed no objection to the transfer of SubicTel’s subscribers to PLDT, subject to certain conditions. Likewise, the SBMA Board approved the issuance of Certificate of Registration to PLDT to operate within SBMA. On September 24, 2019, the PLDT Board of Directors approved the acquisition of the assets and subscribers of SubicTel for a total consideration of Php675 million. PLDT has committed to provide financial support to discharge SubicTel’s liabilities as the need arises. This transaction was eliminated in our consolidated financial statements.

In 2019, Smart, along with Globe and Dito entered into an agreement to form a joint venture that will address the requirements of Republic Act No. 11202, or the MNP Act. The newly enacted law allows mobile phone users to switch networks or change their subscription from prepaid to postpaid or vice versa, without changing their mobile numbers.

The joint venture company, TCI was incorporated in the Philippines on December 26, 2019 and registered with the Philippine SEC on January 17, 2020. The primary purpose of the joint venture is to serve as a clearing house for MNP. TCI will ensure smooth implementation of mobile number porting services. Smart subscribed to Php10 million representing 33.3% equity interest in TCI, which is equivalent to 10 million shares at a subscription price of Php1.00 per share.

This is a Petition for Mandamus filed on October 23, 2018 by Attys. Joseph Lemuel Baligod Baquiran and Ferdinand C. Tecson against the Respondents NTC, the PCC, Liberty, BellTel, Globe, PLDT and Smart. Briefly, the case involves the 700 MHz frequency, among others, or Subject Frequencies, that was originally assigned to Liberty and which eventually became subject of the Co-Use Agreement between Globe, on the one hand, and PLDT and Smart, on the other.

For updates relating to the above discussion, please see Note 27 – Provisions and Contingencies to the accompanying unaudited consolidated financial statements.

For updates on matters relating to the (1) Department of Labor and Employment, or DOLE, Compliance Order to PLDT, see Note 27 – Provisions and Contingencies; (2) Petition against the Philippine Competition Commission, see Note 11 – Investment in Associates and Joint Ventures; and (3) Wilson Gamboa and Jose M. Roy III Petition, see Note 27 – Provisions and Contingencies, to the accompanying unaudited consolidated financial statements.

For a detailed discussion of the related party transactions, see Note 25 – Related Party Transactions to the accompanying unaudited consolidated financial statements.

The following table shows the aging of our consolidated receivables as at June 30, 2020:

The following table shows our financial soundness indicators as at June 30, 2020 and December 31, 2019:

EBITDA for the period is measured as net income for the period excluding depreciation and amortization, amortization of intangible assets, asset impairment on noncurrent assets, financing cost, interest income, equity share in net earnings (losses) of associated and joint ventures, foreign exchange gains (losses) – net, gains (losses) on derivative financial instruments – net, provision for (benefit from) income tax and other income (expenses) – net for the period.

Pursuant to the requirements of the Securities Regulation Code, the registrant has duly caused this report for the first half of 2020 to be signed on its behalf by the undersigned thereunto duly authorized.

	June 30, 2020			December 31, 2019
	(Unaudited)			(Audited)
ASSETS
Noncurrent Assets
Property and equipment (Notes 9 and 22)		245,064			232,134
Right-of-use assets (Note 10)		16,155			15,890
Investments in associates and joint ventures (Note 11)		52,449			53,863
Financial assets at fair value through profit or loss (Note 12)		2,405			3,369
Debt instruments at amortized cost – net of current portion (Note 13)		498			—
Investment properties (Notes 6 and 14)		872			778
Goodwill and intangible assets (Note 15)		67,473			67,825
Deferred income tax assets – net (Note 7)		20,323			23,623
Derivative financial assets – net of current portion (Note 28)		—			1
Prepayments – net of current portion (Notes 19 and 25)		48,903			48,933
Financial assets at fair value through other comprehensive income – net of current portion (Notes 6, 11 and 25)		—			162
Contract assets – net of current portion (Note 5)		626			750
Other financial assets – net of current portion (Note 28)		2,986			1,986
Other non-financial assets – net of current portion		129			136
Total Noncurrent Assets		457,883			449,450
Current Assets
Cash and cash equivalents (Note 16)		45,771			24,369
Short-term investments (Note 28)		1,722			314
Trade and other receivables (Note 17)		29,041			22,436
Inventories and supplies (Note 18)		2,785			3,412
Current portion of contract assets (Note 5)		1,881			1,997
Current portion of derivative financial assets (Note 28)		22			41
Current portion of debt instruments at amortized cost (Note 13)		—			150
Current portion of prepayments (Notes 19 and 25)		10,576			11,298
Current portion of financial assets at fair value through other comprehensive income (Notes 6, 11 and 25)		164			2,757
Current portion of other financial assets (Notes 20 and 28)		6,902			8,086
Current portion of other non-financial assets		945			717
Total Current Assets		99,809			75,577
TOTAL ASSETS		557,692			525,027

EQUITY AND LIABILITIES
Equity
Non-voting serial preferred stock (Note 20)		360			360
Voting preferred stock (Note 20)		150			150
Common stock (Note 20)		1,093			1,093
Treasury stock (Note 20)		(6,505	)		(6,505	)
Treasury shares under employee benefit trust (Note 26)		(21	)		(394	)
Capital in excess of par value (Note 20)		130,312			130,312
Other equity reserves (Note 26)		21			276
Retained earnings (Note 20)		21,887			18,063
Other comprehensive loss (Note 6)		(32,395	)		(31,368	)
Total Equity Attributable to Equity Holders of PLDT (Note 28)		114,902			111,987
Noncontrolling interests (Note 6)		4,331			4,303
TOTAL EQUITY		119,233			116,290

	Six Months Ended June 30,						Three Months Ended June 30,
	2020			2019			2020			2019
	(Unaudited)
REVENUES
Service revenues (Note 5)		83,482			78,356			41,685			39,564
Non-service revenues (Note 5)		3,253			3,628			1,404			1,802
		86,735			81,984			43,089			41,366
EXPENSES
Selling, general and administrative expenses (Note 5)		34,188			32,063			16,337			16,172
Depreciation and amortization (Notes 9 and 10)		20,897			18,903			10,611			9,557
Cost of sales and services (Note 5)		5,616			6,302			2,587			3,418
Asset impairment (Note 5)		3,477			2,644			2,417			1,287
Interconnection costs		641			1,701			339			866
		64,819			61,613			32,291			31,300
		21,916			20,371			10,798			10,066

OTHER EXPENSES – NET (Note 5)		(4,797	)		(3,300	)		(2,010	)		(2,008	)
INCOME BEFORE INCOME TAX		17,119			17,071			8,788			8,058

PROVISION FOR INCOME TAX (Note 7)		4,696			4,836			2,340			2,546
NET INCOME		12,423			12,235			6,448			5,512
ATTRIBUTABLE TO:
Equity holders of PLDT (Note 8)		12,280			12,207			6,368			5,499
Noncontrolling interests		143			28			80			13
		12,423			12,235			6,448			5,512
Earnings Per Share Attributable to Common Equity Holders of PLDT (Note 8)
Basic		56.70			56.37			29.40			25.39
Diluted		56.70			56.37			29.40			25.39

	Six Months Ended June 30,						Three Months Ended June 30,
	2020			2019			2020			2019
	(Unaudited)
NET INCOME		12,423			12,235			6,448			5,512
OTHER COMPREHENSIVE INCOME (LOSS) – NET OF TAX (Note 6)
Fair value changes of financial assets at fair value through other comprehensive income (Note 25)		40			90			38			57
Net transactions on cash flow hedges:		(35	)		(197	)		(20	)		(121	)
Net fair value losses on cash flow hedges (Note 28)		(47	)		(257	)		(24	)		(154	)
Income tax related to fair value adjustments charged directly to equity (Note 7)		12			60			4			33
Foreign currency translation differences of subsidiaries		(437	)		(68	)		(107	)		(111	)
Net other comprehensive loss to be reclassified to profit or loss in subsequent periods		(432	)		(175	)		(89	)		(175	)
Revaluation increment on investment properties:		(1	)		(1	)		(1	)		(1	)
Depreciation of revaluation increment in investment properties transferred to property and equipment (Note 9)		(1	)		(1	)		(1	)		(1	)
Share in the other comprehensive income (loss) of associates and joint ventures accounted for using the equity method (Note 11)		(9	)		1			(4	)		7
Actuarial losses on defined benefit obligations:		(587	)		(948	)		(79	)		(398	)
Remeasurement in actuarial losses on defined benefit obligations (Note 26)		(837	)		(1,361	)		(112	)		(575	)
Income tax related to remeasurement adjustments (Note 7)		250			413			33			177
Net other comprehensive loss not to be reclassified to profit or loss in subsequent periods		(597	)		(948	)		(84	)		(392	)
Total Other Comprehensive Loss – Net of Tax		(1,029	)		(1,123	)		(173	)		(567	)
TOTAL COMPREHENSIVE INCOME		11,394			11,112			6,275			4,945
ATTRIBUTABLE TO:
Equity holders of PLDT		11,253			11,087			6,197			4,935
Noncontrolling interests		141			25			78			10
		11,394			11,112			6,275			4,945

	Preferred Stock		Common Stock		Treasury Stock			Treasury Shares under Employee Benefit Trust			Capital in Excess of Par Value		Other Equity Reserves			Retained Earnings			Other Comprehensive (Loss)			Total Equity Attributable to Equity Holders of PLDT			Noncontrolling Interests			Total Equity
Balances as at January 1, 2020		510		1,093		(6,505	)		(394	)		130,312		276			18,063			(31,368	)		111,987			4,303			116,290
Treasury shares under employee benefit trust (Note 26)		—		—		—			373			—		—			—			—			373			—			373
Other equity reserves (Note 26)		—		—		—			—			—		(255	)		—			—			(255	)		—			(255	)
Cash dividends (Note 20)		—		—		—			—			—		—			(8,456	)		—			(8,456	)		—			(8,456	)
Total comprehensive income (loss):		—		—		—			—			—		—			12,280			(1,027	)		11,253			141			11,394
Net income (Note 8)		—		—		—			—			—		—			12,280			—			12,280			143			12,423
Other comprehensive loss (Note 6)		—		—		—			—			—		—			—			(1,027	)		(1,027	)		(2	)		(1,029	)
Distribution charges on perpetual notes (Note 20)		—		—		—			—			—		—			—			—			—			(118	)		(118	)
Acquisition and dilution of noncontrolling interests		—		—		—			—			—		—			—			—			—			5			5
Balances as at June 30, 2020 (Unaudited)		510		1,093		(6,505	)		(21	)		130,312		21			21,887			(32,395	)		114,902			4,331			119,233

Balances as at January 1, 2019 (as previously stated)		510		1,093		(6,505	)		(854	)		130,526		697			12,081			(25,190	)		112,358			4,308			116,666
Effect of adoption of PFRS 16		—		—		—			—			—		—			(1,455	)		—			(1,455	)		—			(1,455	)
Effect of adoption of PFRS 9		—		—		—			—			—		—			—			(3	)		(3	)		—			(3	)
Balances as at January 1, 2019 (as restated)		510		1,093		(6,505	)		(854	)		130,526		697			10,626			(25,193	)		110,900			4,308			115,208
Treasury shares under employee benefit trust (Note 26)		—		—		—			460			—		—			—			—			460			—			460
Other equity reserves (Note 26)		—		—		—			—			—		(266	)		—			—			(266	)		—			(266	)
Cash dividends (Note 20)		—		—		—			—			—		—			(7,807	)		—			(7,807	)		(18	)		(7,825	)
Total comprehensive income (loss):		—		—		—			—			—		—			12,207			(1,120	)		11,087			25			11,112
Net income (Note 8)		—		—		—			—			—		—			12,207			—			12,207			28			12,235
Other comprehensive loss (Note 6)		—		—		—			—			—		—			—			(1,120	)		(1,120	)		(3	)		(1,123	)
Distribution charges on perpetual notes (Note 20)		—		—		—			—			—		—			—			—			—			(118	)		(118	)
Acquisition and dilution of noncontrolling interests		—		—		—			—			—		—			—			—			—			(2	)		(2	)
Balances as at June 30, 2019 (Unaudited)		510		1,093		(6,505	)		(394	)		130,526		431			15,026			(26,313	)		114,374			4,195			118,569

	2020			2019
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax		17,119			17,071
Adjustments for:
Depreciation and amortization (Notes 9 and 10)		20,897			18,903
Interest on loans and other related items – net (Note 5)		4,207			3,434
Asset impairment (Note 5)		3,477			2,644
Equity share in net losses of associates and joint ventures (Notes 5 and 11)		1,028			706
Pension benefit costs (Notes 5 and 26)		959			749
Losses from changes in fair value of financial assets at fair value through profit or loss (Note 12)		599			—
Accretion on lease liabilities (Notes 5, 10 and 29)		518			757
Incentive plan (Notes 5 and 26)		517			195
Amortization of intangible assets (Notes 5 and 15)		352			392
Losses on derivative financial instruments – net (Notes 5 and 28)		132			308
Losses on disposal of property and equipment (Note 9)		67			17
Accretion on financial liabilities (Notes 5 and 21)		63			63
Impairment of investments (Note 11)		60			34
Foreign exchange gains – net (Notes 5 and 9)		(513	)		(362	)
Interest income (Note 5)		(686	)		(1,012	)
Losses on disposal of investments in subsidiaries – net		—			2
Others		37			(611	)
Operating income before changes in assets and liabilities		48,833			43,290
Decrease (increase) in:
Prepayments		(431	)		(12,435	)
Other financial and non-financial assets		452			(461	)
Trade and other receivables		(9,484	)		2,995
Inventories and supplies		589			227
Contract assets		(83	)		320
Increase (decrease) in:
Customers’ deposits		8			5
Pension and other employee benefits		(1,530	)		(3,267	)
Other noncurrent liabilities		(1,777	)		(1,885	)
Accounts payable		(2,913	)		5,773
Accrued expenses and other current liabilities		1,075			2,442
Net cash flows generated from operations		34,739			37,004
Income taxes paid		(849	)		(1,176	)
Net cash flows from operating activities		33,890			35,828

	2020			2019
	(Unaudited)
CASH FLOWS USED IN INVESTING ACTIVITIES
Interest received		742			1,065
Proceeds from:
Maturity of short-term investments		2,940			1,263
Collection of notes receivable		2,826			1,771
Dividends received (Note 11)		316			2
Redemption of investment in debt securities (Note 13)		150			—
Disposal of property and equipment (Note 9)		57			74
Disposal of financial assets at fair value through profit or loss (Note 12)		—			681
Payments for:
Acquisition of investments in associates and joint ventures (Note 11)		(60	)		(70	)
Purchase of investment in debt securities (Note 13)		(498	)		—
Interest capitalized to property and equipment (Notes 5 and 9)		(819	)		(768	)
Purchase of short-term investments		(4,943	)		(125	)
Purchase of property and equipment (Note 9)		(40,227	)		(40,193	)
Cash from deconsolidated subsidiaries		—			(2	)
Purchase of financial assets at fair value through profit or loss (Note 12)		—			(82	)
Increase in other financial and non-financial assets		(62	)		(751	)
Net cash flows used in investing activities		(39,578	)		(37,135	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from:
Availments of long-term debt (Notes 21 and 29)		47,541			6,000
Availments of short-term debt (Note 21)		10,000			—
Derivative financial instruments (Notes 28 and 29)		—			25
Payments for:
Derivative financial instruments (Notes 28 and 29)		(81	)		—
Distribution charges on perpetual notes (Note 20)		(118	)		(118	)
Debt issuance costs (Notes 21 and 29)		(661	)		(30	)
Obligations under lease liabilities (Notes 10 and 29)		(3,018	)		(3,147	)
Long-term debt		(3,733	)		(8,921	)
Interest – net of capitalized portion (Notes 5, 21 and 29)		(4,086	)		(3,529	)
Cash dividends (Notes 20 and 29)		(8,448	)		(7,796	)
Short-term debt (Note 21)		(10,000	)		—
Redemption liabilities		—			(1	)
Net cash flows from (used in) financing activities		27,396			(17,517	)
NET EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(306	)		(729	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		21,402			(19,553	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD (Note 16)		24,369			51,654
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD (Note 16)		45,771			32,101

PLDT Inc. (formerly Philippine Long Distance Telephone Company), which we refer to as PLDT or the Parent Company, was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common U.S. ownership. Under its amended Articles of Incorporation, PLDT’s corporate term is currently limited through 2028. In 1967, effective control of PLDT was sold by the General Telephone and Electronics Corporation, then a major shareholder since PLDT’s incorporation, to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company, which at that time was the second largest telephone company in the Philippines. In 1998, certain subsidiaries of First Pacific Company Limited, or First Pacific, and its Philippine affiliates (collectively the First Pacific Group and its Philippine affiliates), acquired a significant interest in PLDT. On March 24, 2000, NTT Communications Corporation, or NTT Communications, through its wholly-owned subsidiary NTT Communications Capital (UK) Ltd., became PLDT’s strategic partner with approximately 15% economic and voting interest in the issued and outstanding common stock of PLDT at that time. Simultaneous with NTT Communications’ investment in PLDT, the latter acquired 100% of Smart Communications, Inc., or Smart. On March 14, 2006, NTT DOCOMO, Inc., or NTT DOCOMO, acquired from NTT Communications approximately 7% of PLDT’s then outstanding common shares held by NTT Communications with NTT Communications retaining ownership of approximately 7% of PLDT’s common shares. Since March 14, 2006, NTT DOCOMO has made additional purchases of shares of PLDT, and together with NTT Communications beneficially owned approximately 20% of PLDT’s outstanding common stock as at June 30, 2020. NTT Communications and NTT DOCOMO are subsidiaries of NTT Holding Company. On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliate of First Pacific, completed the acquisition of an approximately 46% interest in Philippine Telecommunications Investment Corporation, or PTIC, a shareholder of PLDT. This investment in PTIC represented an attributable interest of approximately 6% of the then outstanding common shares of PLDT and thereby raised First Pacific Group’s and its Philippine affiliates’ beneficial ownership to approximately 28% of PLDT’s outstanding common stock as at that date. Since then, First Pacific Group’s beneficial ownership interest in PLDT decreased by approximately 2%, mainly due to the holders of Exchangeable Notes, which were issued in 2005 by a subsidiary of First Pacific and exchangeable into PLDT shares owned by First Pacific Group, who fully exchanged their notes. First Pacific Group and its Philippine affiliates had beneficial ownership of approximately 26% in PLDT’s outstanding common stock as at June 30, 2020. On October 26, 2011, PLDT completed the acquisition of a controlling interest in Digital Telecommunications Phils., Inc., or Digitel, from JG Summit Holdings, Inc., or JGSHI, and its affiliates, or JG Summit Group. As payment for the assets acquired from JGSHI, PLDT issued approximately 27.7 million common shares. In November 2011, JGSHI sold 5.81 million and 4.56 million PLDT shares to a Philippine affiliate of First Pacific and NTT DOCOMO, respectively, pursuant to separate option agreements that JGSHI had entered into with a Philippine affiliate of First Pacific and NTT DOCOMO, respectively. As at June 30, 2020, the JG Summit Group beneficially owned approximately 11% of PLDT’s outstanding common shares.

On October 16, 2012, BTF Holdings, Inc., or BTFHI, a wholly-owned company of the Board of Trustees for the Account of the Beneficial Trust Fund, or PLDT Beneficial Trust Fund, created pursuant to PLDT’s Benefit Plan, subscribed to 150 million newly issued shares of Voting Preferred Stock of PLDT, or Voting Preferred Shares, at a subscription price of Php1.00 per share for a total subscription price of Php150 million pursuant to a subscription agreement between BTFHI and PLDT dated October 15, 2012. As a result of the issuance of Voting Preferred Shares, the voting power of the NTT Group (NTT DOCOMO and NTT Communications), First Pacific Group and its Philippine affiliates, and JG Summit Group was reduced to 12%, 15% and 7%, respectively, as at June 30, 2020. See Note 20 – Equity – Preferred Stock – Voting Preferred Stock and Note 27 – Provisions and Contingencies – In the Matter of the Wilson Gamboa Case and Jose M. Roy III Petition.

The common shares of PLDT are listed and traded on the Philippine Stock Exchange, Inc., or PSE. On October 19, 1994, an American Depositary Receipt, or ADR, facility was established, pursuant to which Citibank N.A., as the depositary, issued American Depositary Shares, or ADSs, with each ADS representing one PLDT common share with a par value of Php5.00 per share. Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary for PLDT’s ADR facility. The ADSs are listed on the New York Stock Exchange, or NYSE, in the United States and are traded on the NYSE under the symbol “PHI”. There were approximately 18.5 million ADSs outstanding as at June 30, 2020.

PLDT and our Philippine-based fixed line and wireless subsidiaries operate under the jurisdiction of the Philippine National Telecommunications Commission, or NTC, which jurisdiction extends, among other things, to approving major services offered and certain rates charged to customers.

We are the largest and most diversified telecommunications company in the Philippines which delivers data and multi-media services nationwide. We have organized our business into business units based on our products and services and have three reportable operating segments which serve as the bases for management’s decision to allocate resources and evaluate operating performance. Our principal activities are discussed in Note 4 – Operating Segment Information.

Our registered office address is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines. Information on our structure is provided in Note 2 – Summary of Significant Accounting Policies – Basis of Consolidation. Information on other related party relationships of the PLDT Group is provided in Note 25 – Related Party Transactions.

Our consolidated financial statements as at June 30, 2020 and December 31, 2019, and for the six months ended June 30, 2020 and 2019 were approved and authorized for issuance by the Board of Directors on August 6, 2020.

The Amended Articles of Incorporation will be submitted to the Philippine SEC for approval.

Our consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards, or PFRSs, as issued by the Philippine Financial Reporting Standards Council, or FRSC.

Our consolidated financial statements have been prepared under the historical cost basis, except for financial instruments at fair value through profit or loss, or FVPL, financial instruments at fair value through other comprehensive income, or FVOCI, and investment properties that are measured at fair values.

Our consolidated financial statements include adjustments consisting only of normal recurring adjustments, necessary to present fairly the results of operations for the interim periods. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the full year.

Our consolidated financial statements are presented in Philippine Peso, PLDT’s functional currency, and all values are rounded to the nearest million, except when otherwise indicated.

Our consolidated financial statements provide comparative information in respect of the previous period.

Our consolidated financial statements include the financial statements of PLDT and the following subsidiaries (collectively, the “PLDT Group”) as at June 30, 2020 and December 31, 2019:

			June 30, 2020				December 31, 2019
			(Unaudited)				(Audited)
	Place of		Percentage of Ownership
Name of Subsidiary	Incorporation	Principal Business Activity	Direct		Indirect		Direct		Indirect
Wireless
Smart:	Philippines	Cellular mobile services		100.0		—		100.0		—
Smart Broadband, Inc., or SBI, and Subsidiary	Philippines	Internet broadband distribution services		—		100.0		—		100.0
Primeworld Digital Systems, Inc., or PDSI	Philippines	Internet broadband distribution services		—		100.0		—		100.0
I-Contacts Corporation	Philippines	Operations support servicing business		—		100.0		—		100.0
Smart Money Holdings Corporation, or SMHC^(a)	Cayman Islands	Investment company		—		100.0		—		100.0
Far East Capital Limited, or FECL^(b)	Cayman Islands	Cost effective offshore financing and risk management activities for Smart		—		100.0		—		100.0
PH Communications Holdings Corporation	Philippines	Investment company		—		100.0		—		100.0
Connectivity Unlimited Resource Enterprise	Philippines	Cellular mobile services		—		100.0		—		100.0
Francom Holdings, Inc.:	Philippines	Investment company		—		100.0		—		100.0
Chikka Holdings Limited, or Chikka, and Subsidiaries, or Chikka Group^(b)	British Virgin Islands	Content provider, mobile applications development and services		—		100.0		—		100.0
Wifun, Inc.	Philippines	Software developer and selling of WiFi access equipment		—		100.0		—		100.0
Telesat, Inc.^(b)	Philippines	Satellite communications services		100.0		—		100.0		—
ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines	Philippines	Satellite information and messaging services		88.5		11.5		88.5		11.5
Digitel Mobile Philippines, Inc., or DMPI, (a wholly-owned subsidiary of Digitel)	Philippines	Cellular mobile services		—		99.6		—		99.6
Fixed Line
PLDT Clark Telecom, Inc., or ClarkTel	Philippines	Telecommunications services		100.0		—		100.0		—
PLDT Subic Telecom, Inc., or SubicTel	Philippines	Telecommunications services		100.0		—		100.0		—
PLDT Global Corporation, or PLDT Global, and Subsidiaries	British Virgin Islands	Telecommunications services		100.0		—		100.0		—
Smart-NTT Multimedia, Inc.^(b)	Philippines	Data and network services		100.0		—		100.0		—
PLDT-Philcom, Inc., or Philcom, and Subsidiaries, or Philcom Group	Philippines	Telecommunications services		100.0		—		100.0		—
Talas Data Intelligence, Inc.	Philippines	Business infrastructure and solutions; intelligent data processing and implementation services and data analytics insight generation		100.0		—		100.0		—
ePLDT, Inc., or ePLDT:	Philippines	Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and IT related services		100.0		—		100.0		—
IP Converge Data Services, Inc., or IPCDSI, and Subsidiary, or IPCDSI Group	Philippines	Information and communications infrastructure for internet-based services, e-commerce, customer relationship management and IT related services		—		100.0		—		100.0
Curo Teknika, Inc., or Curo	Philippines	Managed IT outsourcing		—		100.0		—		100.0
ABM Global Solutions, Inc., or AGS, and Subsidiaries, or AGS Group	Philippines	Internet-based purchasing, IT consulting and professional services		—		100.0		—		100.0
ePDS, Inc., or ePDS	Philippines	Bills printing and other related value-added services, or VAS		—		100.0		—		100.0
netGames, Inc.^(b)	Philippines	Gaming support services		—		57.5		—		57.5
MVP Rewards Loyalty Solutions, Inc., or MRSI	Philippines	Full-services customer rewards and loyalty programs		—		100.0		—		100.0
Digitel:	Philippines	Telecommunications services		99.6		—		99.6		—
Digitel Information Technology Services, Inc.^(b)	Philippines	Internet services		—		99.6		—		99.6
PLDT-Maratel, Inc., or Maratel	Philippines	Telecommunications services		98.0		—		98.0		—
Bonifacio Communications Corporation, or BCC	Philippines	Telecommunications, infrastructure and related VAS		75.0		—		75.0		—
Pacific Global One Aviation Company, Inc., or PG1	Philippines	Air transportation business		65.3		—		65.0		—
Pilipinas Global Network Limited, or PGNL, and Subsidiaries	British Virgin Islands	Internal distributor of Filipino channels and content		64.6		—		64.6		—
Others
PLDT Global Investments Holdings, Inc., or PGIH	Philippines	Investment company		100.0		—		100.0		—
PLDT Digital Investments Pte. Ltd., or PLDT Digital, and Subsidiaries	Singapore	Investment company		100.0		—		100.0		—
Mabuhay Investments Corporation^(b)	Philippines	Investment company		67.0		—		67.0		—
PLDT Global Investments Corporation, or PGIC	British Virgin Islands	Investment company		—		100.0		—		100.0
PLDT Communications and Energy Ventures, Inc., or PCEV	Philippines	Investment company		—		99.9		—		99.9

Subsidiaries are fully consolidated from the date of acquisition, being the date on which PLDT obtains control, and continue to be consolidated until the date that such control ceases. We control an investee when we are exposed, or have rights, to variable returns from our involvement with the investee and when we have the ability to affect those returns through our power over the investee.

The financial statements of our subsidiaries are prepared for the same reporting period as PLDT. We prepare our consolidated financial statements using uniform accounting policies for like transactions and other events with similar circumstances.

Profit or loss and each component of other comprehensive income are attributed to the equity holders of PLDT and to the noncontrolling interests, even if this results in the noncontrolling interests having a deficit balance.

Noncontrolling interests share in losses even if the losses exceed the noncontrolling equity interest in the subsidiary.

A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction and impact is presented as part of other equity reserves.

If PLDT loses control over a subsidiary, it: (a) derecognizes the assets (including goodwill) and liabilities of the subsidiary; (b) derecognizes the carrying amount of any noncontrolling interest; (c) derecognizes the cumulative translation differences recorded in equity; (d) recognizes the fair value of the consideration received; (e) recognizes the fair value of any investment retained; (f) recognizes any surplus or deficit in profit or loss; and (g) reclassifies the Parent Company’s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate.

On March 5, 2018 and August 7, 2018, the Board of Directors of ePLDT approved the additional investment in ePDS amounting to Php134 million and Php66 million, respectively, thereby increasing its equity interest in ePDS from 67% to 95%. On November 7, 2019, ePLDT acquired the 5% minority interest in ePDS for a consideration of Php20 million, thereby increasing its equity interest in ePDS from 95% to 100%. This transaction was eliminated in our consolidated financial statements.

On February 17, 1994, the Philippine Congress granted a legislative franchise to Digitel under R.A. No. 7678 to install, operate and maintain telecommunications systems throughout the Philippines for public domestic and international telecommunications, and for other purposes. R.A. No. 7678 expired on February 17, 2019 and was not renewed due to the migration of all of its subscribers to PLDT in January 2018. Our management is currently assessing the business direction of Digitel moving forward. PLDT has committed to provide financial support to discharge its liabilities as the need arises.

On May 10, 2019 and June 25, 2019, PCEV’s Board of Directors and stockholders, respectively, approved the following resolutions and amendments to the articles of incorporation of PCEV: (a) decrease in the par value of common stock; and (b) decrease in the authorized capital stock as follows:

The decrease in PCEV’s authorized capital was approved by the Philippine SEC on December 19, 2019. Consequently, the partial return of capital representing their proportionate share in the decrease in par value amounting to Php6,825 million and Php4 million were paid to Smart and PCEV’s minority shareholders, respectively. This transaction was eliminated in our consolidated financial statements.

Effective September 15, 2019, Philcom ceased to operate as a telecommunications service provider, pursuant to the expiration of its legislative franchise, R.A. 7783. In order to facilitate continued customer service, arrangements have been made between Philcom and PLDT where PLDT would make its services available to the affected Philcom subscribers on voluntary basis. The NTC interposed no objection to the transfer of Philcom’s subscribers to PLDT, subject to certain conditions. Consequently, Philcom and PLDT executed a Deed of Assignment on August 15, 2019 and September 13, 2019 wherein all property and equipment of Philcom, accounts receivable, inventories and subscribers were transferred to PLDT for a total consideration of Php1,760 million and Php319 million, respectively, after complying with the conditions imposed by NTC. PLDT has committed to provide financial support to discharge its liabilities as the need arises. This transaction was eliminated in our consolidated financial statements.

Effective January 23, 2020, SubicTel ceased to operate as a telecommunications service provider, pursuant to the expiration of its franchise issued by the Subic Bay Metropolitan Authority, or SBMA. In order to facilitate continued customer service, arrangements have been made between SubicTel and PLDT where PLDT would make its services available to the affected SubicTel subscribers on voluntary basis. The NTC interposed no objection to the transfer of SubicTel’s subscribers to PLDT, subject to certain conditions. Likewise, the SBMA Board approved the issuance of Certificate of Registration to PLDT to operate within SBMA. On September 24, 2019, the PLDT Board of Directors approved the acquisition of the assets and subscribers of SubicTel for a total consideration of Php675 million. PLDT has committed to provide financial support to discharge its liabilities as the need arises. This transaction was eliminated in our consolidated financial statements.

Effective April 27, 2020, Maratel ceased to operate as a telecommunications service provider, following the expiration of its legislative franchise, R.A. 7970. In order to ensure continued customer service, Maratel assigned its assets and subscribers, or the “Maratel Subscribers”, to PLDT who undertakes to offer its services to Maratel Subscribers on voluntary basis. The NTC interposed no objection to the transfer of Maratel’s subscribers to PLDT, subject to certain conditions. On November 7, 2019, the PLDT Board of Directors approved the acquisition of the assets and Maratel Subscribers for a total consideration of Php442 million. PLDT has committed to provide financial support to discharge its liabilities as the need arises. This transaction was eliminated in our consolidated financial statements.

In a move to contain the Covid-19 outbreak, on March 12, 2020, the Office of the President of the Philippines issued a memorandum directive to impose stringent social distancing measures in the National Capital Region effective March 15, 2020. On March 16, 2020, Presidential Proclamation No. 929 was issued, declaring a State of Calamity throughout the Philippines for a period of six months from March 17, 2020 (at midnight), unless earlier lifted or extended as circumstances may warrant, and imposed an enhanced community quarantine, or ECQ, throughout the island of Luzon until April 12, 2020, unless earlier lifted or extended as circumstances may warrant. On March 24, 2020, Republic Act No. 11469, otherwise known as the “Bayanihan to Heal As One Act”, was signed into law, declaring a state of national emergency over the entire country, and authorizing the President of the Philippines to exercise certain powers necessary to address the Covid-19 pandemic. On April 7, 2020, the Office of the President of the Philippines released a memorandum extending the ECQ over the entire Luzon island until April 30, 2020. On May 1, 2020, the Government further extended the ECQ over, among others, certain portions of Luzon, including Metro Manila, until May 15, 2020, while easing restrictions in other parts of the country. On May 11, 2020, the Inter-Agency Task Force of Emerging Infectious Disease, or IATF, placed high-risk local government units under modified ECQ from May 16, 2020 until May 31, 2020, where certain industries were allowed to operate under strict compliance with minimum safety standards and protocols. On May 27, 2020, the IATF reclassified various provinces, highly urbanized cities and independent

component cities depending on the risk-level. Meanwhile, on May 28, 2020, the Government placed Metro Manila under general community quarantine, allowing for the partial reopening of certain businesses and public transportation while continuing to limit general movements. Pursuant to the declaration of the President on August 2, 2020, the National Capital Region and the provinces of Laguna, Cavite, Rizal and Bulacan were placed under modified ECQ from August 4, 2020 until August 18, 2020. These measures have caused disruption to businesses and economic activities, and their impact on businesses continues to evolve.

In the first semester of 2020, total expenses related to our Covid-19 measures amounted Php648 million. Considering the evolving nature of the outbreak, we cannot determine at this time the future impact to our financial position, performance and cash flows. We will continue to monitor the situation.

The accounting policies adopted are consistent with those of the previous financial year, except that we have adopted the following amended standards starting January 1, 2020. The adoption of these amended standards did not have significant impact on our financial position or performance.

The amendments to PFRS 3 clarify that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments may impact future periods should the Group enter into any business combinations.

The amendments provide a new definition of material that states “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.

The amendments to PFRS 9 provide a number of reliefs, which apply to all hedging relationships that are directly affected by the interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument.

The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the standard-setters in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards.

The revised Conceptual Framework includes new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts.

The amendments provide relief to lessees from applying the PFRS 16 requirement on lease modifications to rent concessions arising as a direct consequence of the Covid-19 pandemic. A lessee may elect not to assess whether a rent concession from a lessor is a lease modification if it meets all of the following criteria:

A lessee that applies this practical expedient will account for any change in lease payments resulting from the Covid-19 related rent concession in the same way it would account for a change that is not a lease modification, i.e., as a variable lease payment.

The amendments are effective for annual reporting periods beginning on or after June 1, 2020. Early adoption is permitted.

The effect of Covid-19 on our business continues to evolve and we are currently assessing the quantitative impact of the adoption.

The following is the summary of significant accounting policies we applied in preparing our consolidated financial statements:

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any noncontrolling interest in the acquiree. For each business combination, we elect whether to measure the components of the noncontrolling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in selling, general and administrative expenses.

When we acquire a business, we assess the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss. The fair value of previously held equity interest is then included in the amount of total consideration transferred.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument within the scope of PFRS 9 is measured at fair value with the changes in fair value recognized in profit or loss. In accordance with PFRS 9, other contingent consideration that is not within the scope of PFRS 9 is measured at fair value at each reporting date with changes in fair value recognized in profit or loss.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for noncontrolling interests and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, we reassess whether we correctly identified all of the assets acquired and all of the liabilities assumed and review the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain on a bargain purchase is recognized in profit or loss.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we report in our consolidated financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, which is no longer than one year from the acquisition date, the provisional amounts recognized at acquisition date are retrospectively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date. During the measurement period, we also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of our cash-generating units, or CGUs, that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill acquired in a business combination has yet to be allocated to identifiable CGUs because the initial accounting is incomplete, such provisional goodwill is not tested for impairment unless indicators of impairment exist and we can reliably allocate the carrying amount of goodwill to a CGU or group of CGUs that are expected to benefit from the synergies of the business combination.

Where goodwill has been allocated to a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the disposed operation and the portion of the CGU retained.

An associate is an entity in which we have significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but has no control nor joint control over those policies. The existence of significant influence is presumed to exist when we hold 20% or more, but less than 50% of the voting power of another entity. Significant influence is also exemplified when we have one or more of the following: (a) a representation on the board of directors or the equivalent governing body of the investee; (b) participation in policy-making processes, including participation in decisions about dividends or other distributions; (c) material transactions with the investee; (d) interchange of managerial personnel with the investee; or (e) provision of essential technical information.

Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The cost of the investments includes directly attributable transaction costs. The details of our investments in associates are disclosed in Note 11 – Investments in Associates and Joint Ventures – Investments in Associates.

Under the equity method, an investment in an associate is carried at cost plus post acquisition changes in our share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized nor individually tested for impairment. Our consolidated income statements reflect our share in the financial performance of our associates. Where there has been a change recognized directly in the equity of the associate, we recognize our share in such change and disclose this, when applicable, in our consolidated statement of comprehensive income and consolidated statement of changes in equity. Unrealized gains and losses resulting from our transactions with and among our associates are eliminated to the extent of our interests in those associates.

Our share in the profits or losses of our associates is included under “Other income (expenses)” in our consolidated income statement. This is the profit or loss attributable to equity holders of the associate and therefore is profit or loss after tax and net of noncontrolling interest in the subsidiaries of the associate.

When our share of losses exceeds our interest in an associate, the carrying amount of the investment, including any long-term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that we have an obligation or have made payments on behalf of the investee.

Our reporting dates and that of our associates are identical and our associates’ accounting policies conform to those used by us for like transactions and events in similar circumstances. When necessary, adjustments are made to bring such accounting policies in line with our policies.

After application of the equity method, we determine whether it is necessary to recognize an additional impairment loss on our investments in associates. We determine at the end of each reporting period whether there is any objective evidence that our investment in associate is impaired. If this is the case, we calculate the amount of impairment as the difference between the recoverable amount of our investment in the associate and its carrying value and recognize the amount in our consolidated income statements.

Upon loss of significant influence over the associate, we measure and recognize any retained investment at its fair value. Any difference between the carrying amounts of our investment in the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognized in our consolidated financial statements.

Joint arrangements are arrangements with respect to which we have joint control, established by contracts requiring unanimous consent from the parties sharing control for decisions about the activities that significantly affect the arrangements’ returns. They are classified and accounted for as follows:

The financial statements of the joint venture are prepared for the same reporting period as our consolidated financial statements. Where necessary, adjustments are made to bring the accounting policies of the joint venture in line with our policies. The details of our investments in joint ventures are disclosed in Note 11 – Investments in Associates and Joint Ventures – Investments in Joint Ventures.

Adjustments are made in our consolidated financial statements to eliminate our share of unrealized gains and losses on transactions between us and our joint venture. Our investment in the joint venture is carried at equity method until the date on which we cease to have joint control over the joint venture.

Upon loss of joint control over the joint venture, we measure and recognize our retained investment at fair value. Any difference between the carrying amount of the former joint venture upon loss of joint control and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted for as an investment in an associate with no remeasurement.

We present assets and liabilities in our consolidated statements of financial position based on current or noncurrent classification.

The terms of the liquidity that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

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

Our consolidated financial statements are presented in Philippine Peso, which is also the Parent Company’s functional currency. The Philippine Peso is the currency of the primary economic environment in which we operate. This is also the currency that mainly influences the revenue from and cost of rendering products and services. Each entity in our Group determines its own functional currency and items included in the separate financial statements of each entity are measured using that functional currency.

The functional and presentation currency of the entities under PLDT Group (except for the subsidiaries discussed below) is the Philippine Peso.

Transactions in foreign currencies are initially recorded by entities under our Group at the respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency closing rate of exchange prevailing at the end of the reporting period. All differences arising on settlement or translation of monetary items are recognized in our consolidated income statement except for foreign exchange differences that qualify as capitalizable borrowing costs for qualifying assets. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss arising from transactions of non-monetary items measured at fair value is treated in line with the recognition of this gain or loss on the change in fair value of the items (i.e., translation differences on items whose fair value gain or loss is recognized in other comprehensive income or profit or loss are also recognized in other comprehensive income or profit or loss, respectively).

The functional currency of SMHC, FECL Group, PLDT Global and certain of its subsidiaries, PGNL and certain of its subsidiaries, Chikka and certain of its subsidiaries and PGIC is the U.S. Dollar; the functional currency of iCommerce Investments Pte. Ltd., or iCommerce, Chikka Pte. Ltd., or CPL, and ABM Global Solutions Pte. Ltd., or AGSPL, is the Singaporean Dollar; and the functional currency of PT Advance Business Microsystems Global Solutions, or AGS Indonesia, is the Indonesian Rupiah. As at the reporting date, the assets and liabilities of these subsidiaries are translated into Philippine Peso at the rate of exchange prevailing at the end of the reporting period, and income and expenses of these subsidiaries are translated monthly using the weighted average exchange rate for the month. The exchange differences arising on translation are recognized as a separate component of other comprehensive income as cumulative translation adjustments. Upon disposal of these subsidiaries, the amount of deferred cumulative translation adjustments recognized in other comprehensive income relating to subsidiaries is recognized in our consolidated income statement.

When there is a change in an entity’s functional currency, the entity applies the translation procedures applicable to the new functional currency prospectively from the date of the change. The entity translates all assets and liabilities into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as the new historical cost. Exchange differences arising from the translation of a foreign operation previously recognized in other comprehensive income are not reclassified from equity to profit or loss until the disposal of the operation.

Foreign exchange gains or losses of the Parent Company and our Philippine-based subsidiaries are treated as taxable income or deductible expenses in the period such exchange gains or losses are realized.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate as at reporting date.

Financial assets are classified in their entirety based on the contractual cash flows characteristics of the financial assets and our business model for managing the financial assets. We classify our financial assets into the following measurement categories:

In order for us to identify the measurement of our debt financial assets, a solely payments of principal and interest, or SPPI, test needs to be initially performed in order to determine whether the contractual terms of the financial asset gives rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Once a debt financial asset passed the SPPI test, business model assessment, which identifies our objective of holding the financial assets – hold to collect or hold to collect and sell, will be performed. Otherwise, if the debt financial asset failed the test, such will be measured at FVPL.

In making the assessment, we determine whether the contractual cash flows are consistent with a basic lending arrangement, i.e., interest includes consideration only for the time value of money, credit risk and other basic lending risks and costs associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement. The assessment as to whether the cash flows meet the SPPI test is made in the currency in which the financial asset is denominated. Any other contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding.

Our business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. Our business model does not depend on management’s intentions for an individual instrument.

Our business model refers to how we manage our financial assets in order to generate cash flows. Our business model determines whether cash flows will result from collecting contractual cash flows, collecting contractual cash flows and selling financial assets or neither.

A financial asset is measured at amortized cost if: (i) it is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and (ii) 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. These financial assets are initially recognized at fair value plus directly attributable transaction costs and subsequently measured at amortized cost using the effective interest rate, or EIR, method, less any impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in ‘Interest income’ in our consolidated income statements and is calculated by applying the EIR to the gross carrying amount of the financial asset, except for (i) purchased or originated credit-impaired financial assets and (ii) financial assets that have subsequently become credit-impaired, where, in both cases, the EIR is applied to the amortized cost of the financial asset. Losses arising from impairment are recognized in ‘Asset impairment’ in our consolidated income statements.

Our financial assets at amortized cost include debt instruments at amortized cost, cash and cash equivalents, short-term investments, trade and other receivables, and portions of other financial assets as at June 30, 2020 and December 31, 2019. See Note 13 – Debt Instruments at Amortized Cost, Note 16 – Cash and Cash Equivalents, Note 17 – Trade and Other Receivables and Note 28 – Financial Assets and Liabilities.

A financial asset is measured at FVOCI if: (i) it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and (ii) its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These financial assets are initially recognized at fair value plus directly attributable transaction costs and subsequently measured at fair value. Gains and losses arising from changes in fair value are included in other comprehensive income within a separate component of equity. Impairment losses or reversals, interest income and foreign exchange gains and losses are recognized in profit and loss until the financial asset is derecognized. Upon derecognition, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. This reflects the gain or loss that would have been recognized in profit or loss upon derecognition if the financial asset had been measured at amortized cost. Impairment is measured based on the ECL model.

Our financial assets at FVOCI include receivables from MPIC as at June 30, 2020 and December 31, 2019. See Note 25 – Related Party Transactions and Note 28 – Financial Assets and Liabilities.

Financial assets at FVPL are measured at fair value. Included in this classification are derivative financial assets, equity investments held for trading and debt instruments with contractual terms that do not represent solely payments of principal and interest. Financial assets held at FVPL are initially recognized at fair value, with transaction costs recognized in our consolidated income statements as incurred. Subsequently, they are measured at fair value and any gains or losses are recognized in our consolidated income statements.

Additionally, even if the asset meets the amortized cost or the FVOCI criteria, we may choose at initial recognition to designate the financial asset at FVPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch) that would otherwise arise from measuring financial assets on a different basis.

Trading gains or losses are calculated based on the results arising from trading activities of the PLDT Group, including all gains and losses from changes in fair value for financial assets and financial liabilities at FVPL, and the gains or losses from disposal of financial investments.

Our financial assets at FVPL include derivative financial assets and equity investments as at June 30, 2020 and December 31, 2019. See Note 12 – Financial Assets at FVPL and Note 28 – Financial Assets and Liabilities.

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

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

Our financial liabilities at FVPL include forward foreign exchange contracts, long-term principal only-currency swaps, interest rate swaps and liability from redemption of preferred stock as at June 30, 2020 and December 31, 2019. See Note 28 – Financial Assets and Liabilities.

Our other financial liabilities include interest-bearing financial liabilities, lease liabilities, customers’ deposits, dividends payable, certain accounts payable and certain accrued expenses and other current liabilities and certain deferred credits and other noncurrent liabilities, (except for statutory payables) as at June 30, 2020 and December 31, 2019. See Note 21 – Interest-bearing Financial Liabilities and Note 28 – Financial Assets and Liabilities.

We reclassify our financial assets when, and only when, there is a change in the business model for managing the financial assets. Reclassifications shall be applied prospectively and any previously recognized gains, losses or interest shall not be restated. We do not reclassify our financial liabilities.

We recognize ECL for the following financial assets that are not measured at FVPL.

Financial assets migrate through the following three stages based on the change in credit quality since initial recognition:

For credit exposures where there have not been significant increases in credit risk since initial recognition and that are not credit-impaired upon origination, the portion of lifetime ECLs that represent the ECLs that result from default events that are possible within the 12-months after the reporting date are recognized.

For credit exposures where there have been significant increases in credit risk since initial recognition on an individual or collective basis but are not credit-impaired, lifetime ECLs representing the ECLs that result from all possible default events over the expected life of the financial asset are recognized.

Financial assets are credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of those financial assets have occurred. For these credit exposures, lifetime ECLs are recognized and interest revenue is calculated by applying the credit-adjusted EIR to the amortized cost of the financial asset.

Loss allowances are recognized based on 12-month ECL for debt instruments that are assessed to have low credit risk at the reporting date. A financial asset is considered to have low credit risk if:

We consider a debt instruments to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade’, or when the exposure is less than 30 days past due.

The loss allowances recognized in the period is impacted by a variety of factors, as described below:

We write-off a financial asset measured at amortized cost, in whole or in part, when the asset is considered uncollectible, it has exhausted all practical recovery efforts and has concluded that it has no reasonable expectations of recovering the financial asset in its entirety or a portion thereof. We write-off an account when all of the following conditions are met:

The simplified approach, where changes in credit risk are not tracked and loss allowances are measured at amounts equal to lifetime ECL, is applied to ‘Trade and other receivables’ and ‘Contract assets’. We have established a provision matrix for billed trade receivables and a vintage analysis for contract assets and unbilled trade receivables that is based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

A financial asset (or where applicable as part of a financial asset or part of a group of similar financial assets) is primarily derecognized when: (1) the right to receive cash flows from the asset has expired; or (2) we have transferred the right to receive cash flows from the asset or have assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either:
(a) we have transferred substantially all the risks and rewards of the asset; or (b) we have neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset.

When we have transferred the right to receive cash flows from an asset or have entered into a “pass-through” arrangement and have neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognized to the extent of our continuing involvement in the asset.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that we could be required to repay.

When continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of our continuing involvement is the amount of the transferred asset that we may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of our continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

A financial liability is derecognized when the obligation under the liability is discharged or 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 carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in consolidated income statement.

The financial liability is also derecognized when equity instruments are issued to extinguish all or part of the financial liability. The equity instruments issued are recognized at fair value if it can be reliably measured, otherwise, it is recognized at the fair value of the financial liability extinguished. Any difference between the fair value of the equity instruments issued and the carrying value of the financial liability extinguished is recognized in consolidated income statement.

We use derivative financial instruments, such as long-term currency swaps, foreign currency options, forward currency contracts and interest rate swaps to hedge our risks associated with foreign currency fluctuations and interest rates. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of long-term currency swaps, foreign currency options, forward currency contracts and interest rate swap contracts is determined using applicable valuation techniques. See Note 28 – Financial Assets and Liabilities.

Any gains or losses arising from changes in fair value on derivatives during the period that do not qualify for hedge accounting are taken directly to the “Other income (expense) – Gains (losses) on derivative financial instruments – net” in our consolidated income statements.

For the purpose of hedge accounting, hedges are classified as: (1) fair value hedges when hedging the exposure to changes in the fair value of a recognized financial asset or liability or an unrecognized firm commitment (except for foreign currency risk); or (2) cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized financial asset or liability, a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or (3) hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how we will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated. In a situation when that hedged item is a forecast transaction, we assess whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect our consolidated income statements.

Hedges which meet the criteria for hedge accounting are accounted for as follows:

The change in the fair value of a hedging instrument is recognized in our consolidated income statements as financing cost. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognized in our consolidated income statements.

For fair value hedges relating to items carried at amortized cost, any adjustment to carrying value is amortized through profit or loss over the remaining term of the hedge using the EIR method. EIR amortization may begin as soon as adjustment exists and no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.

If the hedged item is derecognized, the unamortized fair value is recognized immediately in our consolidated income statements.

When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in our consolidated income statements.

The effective portion of the gain or loss on the hedging instrument is recognized in other comprehensive income, while any ineffective portion is recognized immediately in our consolidated income statements. See Note 28 – Financial Assets and Liabilities for more details.

Amounts taken to other comprehensive income are transferred to our consolidated income statement when the hedged transaction affects our consolidated income statement, such as when the hedged financial income or financial expense is recognized or when a forecast transaction occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognized in other comprehensive income are transferred to our consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in other comprehensive income remain in other comprehensive income until the forecast transaction or firm commitment occurs.

We use an interest rate swap agreement to hedge our interest rate exposure and a long-term principal only-currency swap agreement to hedge our foreign exchange exposure on certain outstanding loan balances. See Note 28 – Financial Assets and Liabilities.

Derivative instruments that are not designated as effective hedging instruments are classified as current or noncurrent or separated into a current and noncurrent portion based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows).

Where we expect to hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond 12 months after the reporting date, the derivative is classified as noncurrent (or separated into current and noncurrent portions) consistent with the classification of the underlying item.

Embedded derivatives that are not closely related to the host contract are classified consistent with the cash flows of the host contract.

Derivative instruments that are designated as effective hedging instruments are classified consistently with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and a noncurrent portion only if a reliable allocation can be made.

We recognize transfers into and transfers out of fair value hierarchy levels as at the date of the event or change in circumstances that caused the transfer.

Property and equipment, except for land, is stated at cost less accumulated depreciation and amortization and any accumulated impairment losses. Land is stated at cost less any impairment in value. The initial cost of property and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the property and equipment to its working condition and location for its intended use. Such cost includes the cost of replacing component parts of the property and equipment when the cost is incurred, if the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, we recognize such parts as individual assets with specific useful lives and depreciate them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. All other repairs and maintenance costs are recognized as expense as incurred. The present value of the expected cost for the decommissioning of the asset after use is included in the cost of the asset if the recognition criteria for a provision are met.

Depreciation and amortization commence once the property and equipment are available for their intended use and are calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used in depreciating our property and equipment are disclosed in Note 9 – Property and Equipment.

The residual values, estimated useful lives, and methods of depreciation and amortization are reviewed at least at each financial year-end and adjusted prospectively, if appropriate.

An item of property and equipment and any significant part initially recognized are derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in consolidated income statement when the asset is derecognized.

Property under construction is stated at cost less any impairment in value. This includes cost of construction, plant and equipment, capitalizable borrowing costs and other direct costs associated to construction. Property under construction is not depreciated until such time that the relevant assets are completed and available for its intended use.

Property under construction is transferred to the related property and equipment when the construction or installation and related activities necessary to prepare the property and equipment for their intended use have been completed, and the property and equipment are ready for operational use.

Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Capitalization of borrowing costs commences when the activities to prepare the asset for its intended use or sale are in progress and the expenditures and borrowing costs are incurred. Borrowing costs are capitalized until the assets are substantially completed for their intended use or sale.

All other borrowing costs are expensed as incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

We are legally required under various lease agreements to dismantle the installation in leased sites and restore such sites to their original condition at the end of the lease contract term. We recognize the liability measured at the present value of the estimated costs of these obligations and capitalize such costs as part of the balance of the related item of property and equipment. The amount of asset retirement obligations is accreted and such accretion is recognized as interest expense. See Note 10 – Leases and Note 22 – Deferred Credits and Other Noncurrent Liabilities.

Investment properties are initially measured at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in our consolidated income statement in the period in which they arise, including the corresponding tax effect. Fair values are determined based on an amount evaluation performed by a Philippine SEC accredited external independent valuer applying a valuation model recommended by the International Valuation Standards Committee.

Investment properties are derecognized when they are disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in our consolidated income statement in the year of retirement or disposal.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner-occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner-occupied property becomes an investment property, we account for such property in accordance with the policy stated under property and equipment up to the date of change in use. The difference between the carrying amount of the owner-occupied property and its fair value at the date of change is accounted for as revaluation increment recognized in other comprehensive income. On subsequent disposal of the investment property, the revaluation increment recognized in other comprehensive income is transferred to retained earnings.

No assets held under operating lease have been classified as investment properties.

Intangible assets acquired separately are measured at cost on initial recognition. The cost of intangible assets acquired from business combinations is initially recognized at fair value on the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed at the individual asset level as either finite or indefinite.

Intangible assets with finite lives are amortized over the economic useful life using the straight-line method and assessed for impairment whenever there is an indication that the intangible assets may be impaired. At the minimum, the amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in our consolidated income statements.

Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually either individually or at the CGU level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

The estimated useful lives used in amortizing our intangible assets are disclosed in Note 15 – Goodwill and Intangible Assets.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in our consolidated income statements when the asset is derecognized.

Internally generated intangibles are not capitalized, and the related expenditures are charged against operations in the period in which the expenditures are incurred.

Inventories and supplies, which include cellular and landline phone units, materials, spare parts, terminal units and accessories, are valued at the lower of cost and net realizable value.

Costs incurred in bringing inventories and supplies to its present location and condition are accounted for using the weighted average cost method. Net realizable value is determined by either estimating the selling price in the ordinary course of business, less the estimated cost to sell or determining the prevailing replacement costs.

We assess at each reporting period whether there is an indication that an asset may be impaired. If any indication exists, or when the annual impairment testing for an asset is required, we make an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use, or VIU. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from those of other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing the VIU, 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. In determining the fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. Impairment losses are recognized in our consolidated income statements.

For assets, excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, we make an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in our consolidated income statements. After such reversal, the depreciation and amortization charges are adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining economic useful life.

Property and equipment, right-of-use, or ROU, assets, and intangible assets with definite useful lives

For property and equipment and ROU assets, we assess for impairment on the basis of impairment indicators such as evidence of internal obsolescence or physical damage. For intangible assets with definite useful lives, we assess for impairment whenever there is an indication that the intangible assets may be impaired. See Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Impairment of non-financial assets, Note 9 – Property and Equipment, Note 10 – Leases and Note 15 – Goodwill and Intangible Assets for further disclosures relating to impairment of non-financial assets.

We determine at the end of each reporting period whether there is any objective evidence that our investments in associates and joint ventures are impaired. If this is the case, the amount of impairment is calculated as the difference between the recoverable amount of the investments in associates and joint ventures, and its carrying amount. The amount of impairment loss is recognized in our consolidated income statements. See Note 11 – Investments in Associates and Joint Ventures for further disclosures relating to impairment of non-financial assets.

Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU, or group of CGUs, to which the goodwill relates. When the recoverable amount of the CGU, or group of CGUs, is less than the carrying amount of the CGU, or group of CGUs, to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

See Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Impairment of non-financial assets and Note 15 – Goodwill and Intangible Assets – Impairment testing of goodwill and intangible assets with indefinite useful life for further disclosures relating to impairment of non-financial assets.

Intangible asset with indefinite useful life is not amortized but is tested for impairment annually either individually or at the CGU level, as appropriate. We calculate the amount of impairment as being the difference between the recoverable amount of the intangible asset or the CGU, and its carrying amount and recognize the amount of impairment in our consolidated income statements. Impairment losses relating to intangible assets can be reversed in future periods.

Investment in debt securities consists of time deposits and government securities which are carried at amortized cost using the EIR method. Interest earned from these securities is recognized under “Other income (expenses) – net – Interest income” in our consolidated income statements.

Cash includes cash on hand and in banks. Cash equivalents, which include temporary cash investments, are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from the date of acquisition, and for which there is an insignificant risk of change in value.

Short-term investments are money market placements, which are highly liquid with maturities of more than three months but less than one year from the date of acquisition.

We measure financial instruments such as derivatives, financial assets at FVPL, financial assets at FVOCI and non-financial assets such as investment properties, at fair value at each reporting date. The fair values of financial instruments measured at amortized cost are disclosed in Note 28 – Financial Assets and Liabilities. The fair values of investment properties are disclosed in Note 14 – Investment Properties.

Fair value is the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (i) in the principal market for the asset or liability; or (ii) in the absence of a principal market, in the most advantageous market for the asset or liability.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in our consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: (i) Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities; (ii) Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and (iii) Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in our consolidated financial statements on a recurring basis, we determine whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

We determine the policies and procedures for both recurring fair value measurement, such as investment properties and unquoted FVPL financial assets, and for non-recurring measurement, such as assets held for distribution in discontinued operation.

External valuers are involved for valuation of significant assets, such as certain short-term investments and investment properties. Involvement of external valuers is decided upon annually. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. At each reporting date, we analyze the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per our accounting policies. For this analysis, we verify the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

We, in conjunction with our external valuers, also compare the changes in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable. This includes a discussion of the major assumptions used in the valuations. For the purpose of fair value disclosures, we have determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which we expect to be entitled to in exchange for those goods or services. PFRS 15 prescribes a five-step model to be followed in the recognition of revenue, wherein we take into consideration the performance obligations which we need to perform in the agreements we have entered into with our customers. Revenue is measured by allocating the transaction price, which includes variable considerations, to each performance obligation on a relative stand-alone selling price basis, taking into account contractually defined terms of payment and excluding value-added tax, or VAT, or overseas communication tax, or OCT, where applicable. Transaction prices are adjusted for the effects of a significant financing component if we expect, at contract inception, that the period between the transfer of the promised goods or services to the customer and when the customer pays for that good or service will be more than one year.

When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of end of the reporting period. In determining the transaction price allocated, we do not include nonrecurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of one year or less.

Remaining performance obligations are associated with our wireless and fixed line subscription contracts. As at June 30, 2020, excluding the performance obligations for contracts with original expected duration of less than one year, the aggregate amount of the transaction price allocated to remaining performance obligations was Php8,858 million, of which we expect to recognize approximately 40% in July to December 2020 and 60% in 2021 and onwards. As at December 31, 2019, excluding the performance obligations for contracts with original expected duration of less than one year, the aggregate amount of the transaction price allocated to remaining performance obligations was Php22,864 million, of which we expect to recognize approximately 68% in 2020 and 32% in 2021 and onwards.

When determining our performance obligations, we assess our revenue arrangements against specific criteria to determine if we are acting as principal or agent. We consider both the legal form and the substance of our agreement, to determine each party’s respective roles in the agreement. We are a principal and record revenue on a gross basis if we control the promised goods or services before transferring them or rendering those to the customer. However, if our role is only to arrange for another entity to provide the goods or services, then we are an agent and will need to record revenue at the net amount that we retain for our agency services.

The disclosures of significant accounting judgments, estimates and assumptions relating to revenue from contracts with customers are provided in Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Identifying performance obligations.

Our revenues are principally derived from providing the following telecommunications services: cellular voice and data services in the wireless business; and local exchange, international and national long distance, data and other network, and information and communications services in the fixed line business.

Services may be rendered separately or bundled with goods or other services. The specific recognition criteria are as follows:

Postpaid service arrangements include fixed monthly charges (including excess of consumable fixed monthly service fees) generated from cellular voice, short messaging services, or SMS, and data services through the postpaid plans of Smart, Sun Cellular and Infinity brands, from local exchange services primarily through landline and related services, and from fixed line and other network services primarily through broadband and leased line services, which we recognize on a straight-line basis over the customer’s subscription period. Services provided to postpaid subscribers are billed throughout the month according to the billing cycles of subscribers. Services availed by subscribers in addition to these fixed fee arrangements are charged separately at their stand-alone selling prices and recognized as the additional service is provided or as availed by the subscribers.

Our prepaid service revenues arise from the usage of airtime load from channels and prepaid cards provided by Smart, Sun Cellular, TNT, SmartBro and Sun Broadband brands. Proceeds from over-the-air reloading channels and prepaid cards are initially recognized as contract liability and realized upon actual usage of the airtime value for voice, SMS, mobile data and other VAS, prepaid unlimited and bucket-priced SMS and call subscriptions, net of bonus credits from load packages purchased, such as free additional call minutes, SMS, data allocation or airtime load, or upon expiration, whichever comes earlier.

We also consider recognizing revenue from the expected breakage or expiry of airtime load in proportion to the pattern of rights exercised by the customer if it expects to be entitled to that breakage amount. If we do not expect to be entitled to a breakage amount based on historical experience with the customers, then we recognize the expected breakage amount as revenue when the likelihood of the prepaid customer exercising its remaining rights becomes remote.

Interconnection fees and charges arising from the actual usage of airtime value or subscriptions are recorded as incurred.

Revenue from international and national long-distance calls carried via our network is generally based on rates which vary with distance and type of service (direct dial or operator-assisted, paid or collect, etc.). Revenue from both wireless and fixed line long distance calls is recognized as the service is provided. In general, non-refundable upfront fees, such as activation fees, that do not relate to the transfer of a promised good or service, are deferred and recognized as revenue throughout the estimated average length of the customer relationship, and the related incremental costs incurred are similarly deferred and recognized as expense over the same period, if such costs generate or enhance resources of the entity and are expected to be recovered.

Installation fees for voice services are considered as a single performance obligation together with monthly service fees, recognized over the customer subscription period since the subscriber cannot benefit from the installation services on its own or together with other resources that are readily available to the subscriber. Installation fees for data services are also not capable of being distinct from the sale of modem since the subscriber obtains benefit from the combined output of the installation services and the device, and is recognized upon delivery of the modem and performance of modem installation. The related incremental costs are recognized in the same manner in our consolidated income statements, if such costs are expected to be recovered.

In revenue arrangements, which involve bundled sales of mobile devices and accessories (non-service component), and telecommunication services (service component), the total transaction price is allocated based on the relative stand-alone selling prices of each distinct performance obligation. Stand-alone selling price is the price at which we sell the good or service separately to a customer. However, if goods or services are not currently offered separately, we use the adjusted market or cost-plus margin method to determine the stand-alone selling price to be used in the transaction price allocation. We adjust the transaction price for the effects of the time value of money if the timing of the payment and delivery of goods or services do not coincide, effects of which are considered as containing a significant financing component.

Revenues from the sale of non-service component are recognized at the point in time when the goods are delivered while revenues from telecommunication services component are recognized over on a straight-line basis over the contract period when the services are provided to subscribers.

The non-service component included in contracts with customers have significant financing component considering the period between the time of the transfer of control over the mobile device and the customer’s payment of the price of the mobile device, which is more than one year.

The transaction price for such contracts is determined by discounting the amount of promised consideration using the appropriate discount rate. We concluded that there is a significant financing component for those contracts where the customer elects to pay in arrears considering the length of time between the transfer of mobile device to the customer and the customer’s payment, as well as the prevailing interest rates in the market adjusted with customer credit spread.

We operate customer engagement and loyalty programs which allows customers to accumulate points when postpaid customers pay their bills on time and in full, purchase products or services, and load or top-up for prepaid customers once registered to the program. Customers may avail of the “MVP Rewards Card” for free, powered by PayMaya, which allows for instant conversion of points into the PayMaya wallet of the customer that can be used for all purchases transacted using the “MVP Rewards Card”. The new customer loyalty program is not treated as separate performance obligation but as a reduction of revenue when earned, which is booked under loyalty expense.

Interconnection revenues for call termination, call transit and network usages are recognized in the period in which the traffic occurs. Revenues related to local, long distance, network-to-network, roaming and international call connection services are recognized when the call is placed, or connection is provided, and the equivalent amounts charged to us by other carriers are recorded under interconnection costs in our consolidated income statements. Inbound revenue and outbound charges are based on agreed transit and termination rates with other foreign and local carriers.

We assessed that a variable consideration exists in certain interconnection agreements where there is a monthly aggregation period and the rates applied for the total monthly traffic will depend on the total traffic for the month. We also consider whether contracts with carriers contain volume commitment or tiering arrangement whereby the rate being charged will change upon meeting certain volume of traffic. We estimate the amount of variable consideration to which we are entitled and include in the transaction price some or all of an amount of variable consideration estimated arising from these agreements, unless the impact is not material.

Revenues from VAS include streaming and downloading of games, music, video contents, loan services, messaging services, applications and other digital services which are only arranged for by us on behalf of third-party content providers. The amount of revenue recognized is net of content provider’s share in revenue. Revenue is recognized upon service availment. We act as an agent for certain VAS arrangements.

Revenue from server hosting, co-location services and customer support services are recognized at point in time as the services are performed.

A contract asset is initially recognized for revenue earned from installation services because the receipt of consideration is conditional on successful completion of the installation. Upon completion of the installation and acceptance by the customer, the amount recognized as contract assets is reclassified to trade receivables when billed. Contract assets are subject to impairment assessment. Refer to accounting policies on impairment of financial assets in section Financial instruments – initial recognition and subsequent measurement.

A receivable is recognized if an amount of consideration that is unconditional is due from the customer (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in section Financial instruments – initial recognition and subsequent measurement.

A contract liability is the obligation to transfer goods or services to a customer for which we have received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before we transfer goods or services to the customer, a contract liability is recognized when the payment is made or the payment is due (whichever is earlier). Contract liabilities and unearned revenues are recognized as revenue when we perform under the contract.

We often give commissions and incentives to sales agent for meeting certain volume of new connections and corresponding value of plans contracted. These costs are incremental costs to obtain as we would have not incurred these if the contract had not been obtained. These are capitalized as an asset if these are expected to be recovered. Any capitalized incremental costs to obtain would be amortized and recognized as expense over customer subscription period.

Interest income is recognized as it accrues on a time proportion basis taking into account the principal amount outstanding and the EIR.

We recognize a provision when we have a present obligation, legal or constructive, as a result of a past event, and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When we expect some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain to be received if the entity settles the obligation. The expense relating to any provision is presented in our consolidated income statements, net of any reimbursements. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense in our consolidated income statements.

PLDT and certain of its subsidiaries are covered under R.A. 7641 otherwise known as “The Philippine Retirement Law”.

PLDT has separate and distinct retirement plans for itself and majority of its Philippine-based operating subsidiaries, administered by the respective Funds’ Trustees, covering permanent employees. Retirement costs are separately determined using the projected unit credit method. This method reflects services rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries.

Service cost (which includes current service costs, past service costs and gains or losses on curtailments and non-routine settlements) is recognized as part of “Selling, general and administrative expenses – Compensation and employee benefits” account in our consolidated income statements. These amounts are calculated periodically by an independent qualified actuary.

Net interest on the net defined benefit asset or obligation is the change during the period in the net defined benefit asset or obligation that arises from the passage of time which is determined by applying the discount rate based on the government bonds to the net defined benefit asset or obligation. Net defined benefit asset is recognized as part of advances and other noncurrent assets and net defined benefit obligation is recognized as part of pension and other employee benefits in our consolidated statements of financial position.

Remeasurements, comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit obligation) are recognized immediately in other comprehensive income in the period in which they occur. Remeasurements are not classified to profit or loss in subsequent periods.

The net defined benefit asset or obligation comprises the present value of the defined benefit obligation (using a discount rate based on government bonds, as explained in Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Estimating pension benefit costs and other employee benefits), net of the fair value of plan assets out of which the obligations are to be settled directly. Plan assets are assets held by a long-term employee benefit fund or qualifying insurance policies and are not available to our creditors nor can they be paid directly to us. Fair value is based on market price information and in the case of quoted securities, the published bid price and in the case of unquoted securities, the discounted cash flow using the income approach. The value of any defined benefit asset recognized is restricted to the asset ceiling which is the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. See Note 26 – Pension and Other Employee Benefits – Defined Benefit Pension Plans for more details.

Smart and certain of its subsidiaries maintain a defined contribution plan that covers all regular full-time employees under which it pays fixed contributions based on the employees’ monthly salaries and provides for qualified employees to receive a defined benefit minimum guarantee. The defined benefit minimum guarantee is equivalent to a certain percentage of the monthly salary payable to an employee at normal retirement age with the required credited years of service based on the provisions of R.A. 7641.

Accordingly, Smart and certain of its subsidiaries account for their retirement obligation under the higher of the defined benefit obligation related to the minimum guarantee and the obligation arising from the defined contribution plan.

For the defined benefit minimum guarantee plan, the liability is determined based on the present value of the excess of the projected defined benefit obligation over the projected defined contribution obligation at the end of the reporting period. The defined benefit obligation is calculated annually by a qualified independent actuary using the projected unit credit method. Smart and certain of its subsidiaries determines the net interest expense (income) on the net defined benefit liability (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 (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense (income) and other expenses (income) related to the defined benefit plan are recognized in our consolidated income statement.

The defined contribution liability, on the other hand, is measured at the fair value of the defined contribution assets upon which the defined contribution benefits depend, with an adjustment for margin on asset returns, if any, where this is reflected in the defined contribution benefits.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in our other comprehensive income.

When the benefits of the plan are changed or when the plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in our profit or loss. Gains or losses on the settlement of the defined benefit plan are recognized when the settlement occurs. See Note 26 – Pension and Other Employee Benefits – Defined Contribution Plans for more details.

Employee benefit costs include current service cost, net interest on the net defined benefit obligation, and remeasurements of the net defined benefit obligation. Past service costs and actuarial gains and losses are recognized immediately in our consolidated income statement.

The long-term employee benefit liability comprises the present value of the defined benefit obligation (using a discount rate based on government bonds) at the end of the reporting period and is determined using the projected unit credit method. See Note 26 – Pension and Other Employee Benefits – Other Long-term Employee Benefits for more details.

PLDT provides incentive compensation to key officers, executives and other eligible participants, in the PLDT Group in the form of PLDT Inc. common shares of stock, or Performance Shares, over a three-year vesting period from January 1, 2017 to December 31, 2019. The award of the performance shares is contingent on the achievement of Performance Targets based on PLDT Group’s cumulative consolidated core net income.

The starting point of expense recognition is the date of grant, which is the date when the formal invitation letter was sent to the eligible participants. The fair value of the award (excluding the effect of any service and non-market performance vesting conditions) is determined at the grant date. At each subsequent reporting date until vesting, a best estimate of the cumulative charge to profit or loss at that date is computed. As the share-based payments vests in installments over the service period, the award is treated as expense over the vesting period.

On December 11, 2018, the Executive Compensation Committee, or ECC, of the Board approved Management’s recommended modifications to the Plan, and partial equity and cash settled set-up was implemented for the 2019 TIP Grant. The revised set-up includes a fixed number of shares that will be granted (“equity award”) and the estimated fair value of the difference between the number of shares granted in the original equity grant and the equity award will be paid in cash (“cash award”). The fair value of the cash award is determined at each reporting date using the estimated fair value of the corresponding shares. Please see Note 3 – Management’s Use of Accounting Judgments, Estimates and Assumptions – Estimating pension benefit cost and other employee benefits.

We assess at contract inception whether the contract is, or contains, a lease. That is, if the contract conveys right to control the use of an identified asset for a period of time in exchange for a consideration.

As a Lessee. We apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. We recognize lease liabilities to make lease payments and ROU assets representing the right to use assets to the underlying assets.

We recognize ROU assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). ROU assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of ROU assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless it is reasonably certain that we obtain ownership of the leased asset at the end of the lease term, the recognized ROU assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. ROU assets are subject to impairment. Refer to the accounting policies in impairment of non-financial assets section.

At the commencement date of the lease, we recognize lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised and payments of penalties for terminating a lease, if the lease term reflects exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, we use the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

We apply the short-term lease recognition exemption to our short-term leases of machinery and equipment (i.e., those leases that have a lease term ending within 12 months or less from the commencement date and do not contain a purchase option). We also apply the lease of low-value assets recognition exemption to leases that are considered of low value (i.e., below Php250 thousand). Lease payments on short-term leases and leases of low-value assets are recognized as expense in our consolidated income statement on a straight-line basis over the lease term.

As a Lessor. Leases in which we do not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income is accounted for on a straight-line basis over the lease term and is included in revenue in our consolidated income statements due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the bases as rental income.

Current income tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the end of the reporting period where we operate and generate taxable income.

Current income tax relating to items recognized directly in equity is recognized in equity and not in our consolidated income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred income tax is provided on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the end of the reporting period.

Deferred income tax liabilities are recognized for all taxable temporary differences except: (1) when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (2) with respect to taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, the carryforward benefits of unused tax credits from excess minimum corporate income tax, or MCIT, over regular corporate income tax, or RCIT, and unused net operating loss carry over, or NOLCO. Deferred income tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward benefits of unused tax credits and unused tax losses can be utilized, except: (1) when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and (2) with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred income tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as at the end of the reporting period.

Deferred income tax relating to items recognized in “Other comprehensive income” account is included in our consolidated statements of comprehensive income and not in our consolidated income statements.

Deferred income tax assets and liabilities are offset, if a legally enforceable right exists to offset current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it is incurred during the measurement period or in our consolidated income statement.

Revenues, expenses and assets are recognized net of the amount of VAT, if applicable. When VAT from sales of goods and/or services (output VAT) exceeds VAT passed on from purchases of goods or services (input VAT), the excess is recognized as payable in our consolidated statements of financial position. When VAT passed on from purchases of goods or services (input VAT) exceeds VAT from sales of goods and/or services (output VAT), the excess is recognized as an asset in our consolidated statements of financial position to the extent of the recoverable amount.

Contingent liabilities are not recognized in our consolidated financial statements. They are disclosed in the notes to our consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in our consolidated financial statements but are disclosed in the notes to our consolidated financial statements when an inflow of economic benefits is probable.

Post period-end events up to the date of approval of the Board of Directors that provide additional information about our financial position at the end of the reporting period (adjusting events) are reflected in our consolidated financial statements. Post period-end events that are not adjusting events are disclosed in the notes to our consolidated financial statements when material.

Preferred and common stocks are measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Proceeds and/or fair value of considerations received in excess of par value are recognized as capital in excess of par value in our consolidated statement of changes in equity and consolidated statements of financial position.

Treasury stocks are our own equity instruments which are reacquired and recognized at cost and presented as reduction in equity. No gain or loss is recognized in our consolidated income statements on the purchase, sale, reissuance or cancellation of our own equity instruments. Any difference between the carrying amount and the consideration upon reissuance or cancellation of shares is recognized as capital in excess of par value in our consolidated statement of changes in equity and consolidated statements of financial position.

Change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction and any impact is presented as part of capital in excess of par value in our consolidated statement of changes in equity.

Retained earnings represent our net accumulated earnings less cumulative dividends declared.

Other comprehensive income comprises of income and expense, including reclassification adjustments that are not recognized in our consolidated income statement as required or permitted by PFRS.

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the consolidated financial statements are listed below. We will adopt these standards and amendments to existing standards which are relevant to us when these become effective.

The amendment prohibits an entity from deducting from the cost of an item of PPE any proceeds received from selling items produced while the entity is preparing the asset for its intended use (for example, the proceeds from selling samples produced when testing a machine to see if it is functioning properly). The proceeds from selling such samples, together with the costs of producing them, are now recognized in profit or loss. An entity will use PAS 2, Inventories, to measure the cost of those items. Cost will not include depreciation of the asset being tested because it is not ready for its intended use.

An entity applies those amendments retrospectively for annual reporting periods beginning on or after January 1, 2022 with early application permitted.