Ayala Land, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2016 and 2015 and Years Ended December 31, 2016, 2015 and 2014 and Independent Auditor’s Report SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001, 6760 Ayala Avenue Fax: (632) 819 0872 December 14, 2015, valid until December 31, 2018 1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-4 (Group A), Philippines November 10, 2015, valid until November 9, 2018 INDEPENDENT AUDITOR’S REPORT The Board of Directors and Stockholders Ayala Land, Inc. Opinion We have audited the accompanying consolidated financial statements of Ayala Land, Inc. and its subsidiaries (the Group), which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2016, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December 31, 2016 in accordance with Philippine Financial Reporting Standards (PFRSs). Basis for Opinion We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. *SGVFS021416* A member firm of Ernst & Young Global Limited - 2 - Recognition of real estate revenue and costs The Group is involved in real estate project developments under the Ayala Land Premier, Alveo, Avida and Amaia brands for which it applies the percentage of completion (POC) method in determining real estate revenue and costs. The POC is based on the physical proportion of work and the cost of sales is determined based on the estimated project development costs applied with the respective project’s POC. The assessment process for the POC and the estimated project development costs requires technical determination by management’s specialists (project engineers) and involves significant management judgment as disclosed in Note 3 to the consolidated financial statements. Audit Response We obtained an understanding of the Group’s process for determining the POC, including the cost accumulation process, and for determining and updating the total estimated project development costs, and performed tests of the relevant controls. We obtained the certified POC reports prepared by the project engineers and assessed the competence, capabilities and objectivity of the project engineers by considering their qualifications, experience and reporting responsibilities. For selected projects, we compared the certified POC against supporting documents such as the accomplishment reports from the contractors. We conducted ocular inspections of selected projects, together with the project managers, and made relevant inquiries. For selected projects, we obtained the project reserve memorandum indicating the work breakdown structure and total project development costs as estimated by the project engineers. For changes in estimated cost components, we compared these against the special budget appropriations request form and supporting contractor’s change order form. For changes in total project development costs, we obtained the revised project reserve memorandum, compared this against the supporting documents and inquired about the rationale for such changes with the project engineers. Accounting for business combination As disclosed in Note 24 to the consolidated financial statements, Ayala Land, Inc. acquired 51% of Prime Orion Philippines, Inc. (POPI) for a total consideration of ₱5,625.0 million. The negative goodwill recognized based on the provisional purchase price allocation performed was ₱188.1 million. We consider the accounting for this acquisition to be a key audit matter because it required a significant amount of management judgment and estimation in identifying the underlying acquired assets and liabilities and in determining their fair values, specifically the acquired real estate properties and intangible assets. Audit Response We reviewed the purchase agreement covering the acquisition, the consideration paid and the provisional purchase price allocation. We reviewed the identification of POPI’s underlying assets and liabilities, specifically the real estate properties and intangible assets, based on our understanding of POPI’s business and management’s explanations on the rationale for the acquisition. We assessed the competence, capabilities and objectivity of the external appraiser who prepared the appraisal report by considering their qualifications, experience and reporting responsibilities. We involved our internal specialist in evaluating the methodologies and assumptions used in arriving at the fair values of the real estate properties and leasehold rights. We compared the key assumptions used such as the list prices and adjustment factors by reference to relevant market data. We tested the forecasted cash flows by reference to the existing contractual terms such as contract period and lease rates. We tested the parameters used in the derivation of the discount rate against market data. *SGVFS021416* A member firm of Ernst & Young Global Limited - 3 - Concession Agreement for the South Integrated Transport System On January 26, 2016, Arca South Integrated Terminal Inc. (ASITI), a subsidiary, entered into a Concession Agreement (CA) with the Department of Transportation (DOTr) regarding the South Integrated Transport System (Terminal), as further discussed in Note 35 to the consolidated financial statements. Assessing whether this agreement falls under the scope of Philippine Interpretation IFRIC 12, Service Concession Arrangements, requires significant management judgment. Furthermore, accounting for concession arrangements under Philippine Interpretation IFRIC 12, requires analysis of the provisions of the concession agreement and significant judgment in assessing and selecting the appropriate accounting model to be implemented. The accounting model that will be implemented affects the various asset accounts in the consolidated statements of financial position and revenue account in the consolidated statements of income. Audit Response We reviewed the CA between ASITI and DOTr and evaluated management’s assessment on whether the criteria under Philippine Interpretation IFRIC 12 were met by reference to the responsibilities of ASITI and DOTr, as provided under the CA. In addition, we focused our analysis on management’s assumptions regarding the projected revenue, costs of construction and operating costs and expenses of the Terminal and commercial assets, as well as management’s assessment on whether these assets are physically separable and capable of being operated separately. We also considered the payment provisions required of DOTr under the agreement in assessing the accounting model that ASITI selected to use. Consolidation Process The consolidated financial statements of the Group represents the consolidation of the financial statements of Ayala Land, Inc. and its numerous direct and indirect subsidiaries as summarized in Note 1 to the consolidated financial statements. We consider the Group’s consolidation process as a significant risk area because of the complexity involved due to the numerous component entities within the Group requiring layers of consolidation, voluminous intercompany transactions that require elimination and subsequent realization of profit or revenue,