[PDF] 2014 SMB Annual Report - San Miguel Brewery Inc.

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SAN MIGUEL BREWERY INC.

MESSAGE TO SHAREHOLDERS As we celebrate the 125th anniversary of San Miguel Pale Pilsen and the long history of our parent company, San Miguel Corporation (SMC), we, San Miguel Brewery Inc. (SMB), we renew our commitment to work hard to create a strong and dynamic business for our consumers, customers, business partners, employees and stakeholders. Our founder, Don Enrique María Barretto de Ycaza, was a man of vision. His vision allowed him to found La Fabrica de Cerveza de San Miguel in 1890, then the pioneering brewery in the Philippines and Southeast Asia. Visionary as he was, Barretto had no way of knowing that his single-product business would eventually become one of the largest and most respected companies in the Philippines and that San Miguel Beer would become the beer of choice, selling nine out of ten. country beers. Since then, SMB's success has always been its enduring relationship with Filipino. Over the years, our brand has been woven into national history: a legacy brand and the beer for people who go beyond friendship: Kahit Kailan Kaibigan.

in a performance we can all celebrate and be proud of as revenue totaled P79 billion while operating profit increased to P22 billion. We achieved our targets and achieved excellent results by maintaining our discipline and following our proven strategy of leveraging our excellent brands and distribution network, developing our brand building programs and pursuing selected growth opportunities. As we move forward, we also recognize the relationships we have built over the years as they have been an integral contribution to the company's success. Managing the business so that all stakeholders benefit from our success has allowed us to expand the reach of our network.

Though more than a century has passed, we have never lost sight of the principles that have made our business successful. Despite the ever-competitive industry landscape, we exist to enrich the lives of all our stakeholders through our iconic brands.

The company's goal of taking our products beyond Asia and being a leading brewer in the international market received a boost when SMB teamed up with leading Spanish brewer MahouSanMiguel(MSM). This will allow both companies to access strategic markets where our brands can compete with other traditional beers.

And indeed, it is the efforts of the men and women of SMB that have enabled our company to recover from a very challenging 2013 and, in 2014,

At the end of 2014, we took the opportunity to take advantage of a market that has expanded at a faster pace over the last five years.

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Ramón S. Ang Chairman of the Board

We also recognize the relationships we have built over the years, as they have been an integral contribution to Roberto N. Huang President

company's success.

Our entry, or expansion as the story goes, into the non-alcoholic beverage market will help us achieve our vision of expanding our company's reach in the Philippine market and attracting new consumers to our planned new brands and product offerings. We are taking the right steps to fuel growth for years to come and are confident that our passion for quality products and extensive distribution network will help drive our success in the soft drinks market, ensuring that all of our products are available. Anytime, anywhere. We are very proud of our history, at SanMiguel Brewery Inc. we will never stop

growing and building the legacy that has made us leaders in the brewing industry. We will move forward, always remembering what matters most to our success: cultivating friendships, relationships and delighting our consumers with the best beers we can offer. We hope you will join us on our journey into the next 125 years. Health!

Ramón S. Ang Chairman of the Board

Robert N. Huang President

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A kettle of beer at the Polo Brewery. Acquired by the corporation in 1947, Polo became the main brewery after Avilés went out of business in 1976.

Pale Pilsen: really a great beer

The first print ad for San Miguel Beer.

In this undated photo, a sales force poses outside a commercial warehouse in Luzon. 125 Years of Unrivaled Quality: San Miguel Brewery brews and bottles only the finest quality beer.

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MANAGEMENT DISCUSSION AND ANALYSIS Built on 125 years of brewing excellence, San Miguel Brewery Inc. (SMB) showed strength of character in 2014 as it recovered from the challenging business environment of 2013. SMB posted stronger results in 2014 with improved financial performance attributed to volume growth, pricing strategy, efficient cash management and prudent spending . Consolidated sales revenue increased by 5.3% to P79 billion. Meanwhile, operating profit increased to P22.1 billion with a strong margin of 27.9%, resulting in higher net income of P13.5 billion. DOMESTIC OPERATIONS In its home market, SMB has asserted its dominance in the brewing industry while capturing a sizable share of the broader spirits market. With the objective of stimulating the consumption of beer, it focused on generating demand at the base level, supported by the intensification of the execution of defense programs to face the competition. Opportunities for growth arose from the country's dynamic economy and demographic improvement, while reconstruction, rehabilitation and livelihood projects provided additional impetus. To strengthen San Miguel's heritage, SMB conducted brand building programs alongside consumer promotions and volume generation activities across the country. the annual

San Miguel's Oktoberfest Beer and Music Festival featured a inaugural party featuring the first beer shower in the Philippines, as well as popular entertainment and sports celebrities, complemented by over 70 barangay street parties. Another iconic event, the annual National Beer Drinking Contest, was held by SMB with the aim of crowning the fastest beer drinkers among beer enthusiasts across the country. The year 2014 marked the return of the SanMiguel Beermen to Filipino basketball and this brought the San Miguel brand closer to the hearts and minds of Filipino beer drinkers. To reinforce San Miguel as a responsible brewer, the company also continued its responsible drinking campaign and launched its You Drink, We Drive program in selected bar clusters in Metro Manila. San Miguel Pale Pilsen, as our flagship brand, launched a new Sarap themed campaign at Nakakabilib in its 125th year, further establishing the brand as the standard for beer taste and a true Filipino icon. Limited edition Bilib Ako Sa'yo tins for personalized messages have been made available for

SAN MIGUEL BREWERY INC.

support the campaign along with barangay parties for the Sarap Mag Babad summer program, consumer promotions at external points of sale, as well as visits to breweries and pubs.

a themed campaign, Bucket Nights program and Party All Night events. Also introduced was the new app-based loyalty program On All Night, which enables online customer engagement for the brand.

Red Horse Beer has remained the undisputed #1 extra strong beer in the country as it has reinforced its capital city of Astig through its new Kaya Mo Na campaign. The Pambansang Muziklaban, culminating in the Muziklaban Rakollision judging night, brought together legends and enthusiasts of Pinoy Rock music to recognize the best amateur rock band in the country. Supporting them were Pasiklaban barangay events and other activities down the line.

Gold Eagle Beer's upbeat sales were boosted by the Sama-Sama Mag-Jamming, Sama-Sama Mag-Gold Eagle Beer campaign, which involved the radio jingle UnliJamming, community events Jamming sa Taboan, as well as commercial and marketing promotions. sa Tindahan which strengthened the brand presence in Visayas and Mindanao.

San Mig Light reinforced its relevance for the consumer by insisting on its Look Good and Feel Good All Night communication carried out through

San Miguel Flavored Beer continued its dynamic sales primarily due to increased in-store presence as well as lead generation programs.

THERE'S NO OTHER PARTY LIKE SAN MIGUEL'S OKTOBERFEST In many ways, the Filipino party speaks volumes about Filipinos' penchant for community gatherings. And in these gatherings there will always be a bottle or two of Cerveja San Miguel. In 1982, San Miguel hosted the first San Miguel Oktoberfest in Manila to celebrate the country's most beloved beer. Since then, the San Miguel Oktoberfest has been one of the most anticipated festivals in the country. While the schedule for the San Miguel Oktoberfest in the Philippines is very similar to the Munich version, the company distinguishes its party from other events through a combination of fun, music and beer. It is not surprising that San Miguel's Oktoberfest has gained such a prominent place in the events scene that the Department of Tourism has included it in the list of official festivals in the country. Now in its 33rd year, Oktoberfest San Miguel continues to find ways to increase interest in the annual event, which attracts throngs of loyal beer customers who have contributed to the success and popularity of San Miguel's various beer brands. In 2014, SMB kicked off the Oktoberfest season with 12 hours of music from top Filipino artists playing a diverse selection of beats. Next to the never seen before

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such as Game Tayo's ads and digital campaign that communicated Cerveja com Sabor SanMiguel as a very fun beer. Building on the brand's growth momentum, the company launched six-pack containers, canned variants and a new package design.

SMB won awards

San Miguel Lifestyle Brews has focused on establishing San Miguel Premium All-Malt, SanMiguel Super Dry and Cerveza Negra as a line of specialty beers, highlighting their premium ingredients and numerous awards for superior quality. Visibility programs, consumer promotions, pub crawls and participation in various food events have supported San Miguel Lifestyle Brews as the preferred set of brands in the exclusive market.

government regulations

mash-ups, Oktoberfest 2014 was marked by the first rain of beer in the country. Indeed, the Oktoberfest Beer and Music festival lives up to the innovations that SMB offers at its annual event with its brands. In the past, San Miguel Oktoberfest parties have featured different acts each year to keep the excitement and interest going among our brands' loyal fans. To celebrate Oktoberfest in 2008, revelers enjoyed the longest-running 120-day beer and music festival. SMB hosted the country's first 3D light and sound show in 2010, while top Filipino bands kept the music playing well into the night. A fireworks display capped off the success of San Miguel's Oktoberfest. The following year, SMB built a giant pyramid overflowing with beer, as each San Miguel Beer brand set up an activity tent where drinkers enjoyed their beer and the music genre of their choice. In 2012, Oktoberfest again brought improved branded tents and international artist apl.de.ap to headline the party and became Pale Pilsen's newest sponsor. To bring the Oktoberfest vibe closer to the people, we brought San Miguel's Oktoberfest to the barangays in 2013, with almost weekly parties across the country. Different bands played in different venues simultaneously.

from various local and international organizations in recognition of their quality products, compliance and best labor practices.

San Mig Zero has been gaining ground by beating volume expectations in 2014 attributed to its Zero Bitterness campaign supported by increased product availability, test lead initiatives, targeted point-of-sale marketing programs and consumer promotions to take advantage of. and people calorie counting. Meanwhile, the company expanded its reach to consumers through the expansion of the home delivery service in the main cities of the country, promotions of draft beer packages, online sales and non-traditional events with the objective of maximizing growth opportunities in new markets. and emerging. To further improve supply and distribution, the company updated its sales network and strengthened support for points of sale and business partners. Given the unpredictability of weather patterns, SMB implemented contingency plans, rehabilitating and opening sales offices to ensure the availability of its products. In addition, cost management initiatives were intensified to strengthen the bottom line and maintain superior product quality. Improvements in equipment and manufacturing processes, improvements in material sourcing and improvements in quality control were implemented to increase operational efficiency and maintain high quality standards. As a result, SMB has won awards from numerous local and international organizations in recognition of the quality of its products, compliance with government regulations and best labor practices.

SAN MIGUEL BREWERY INC.

With SMEs focused on boosting beer consumption, 2014 was another landmark year for the company, which took the first steps to expand its business in the non-alcoholic beverage category, in line with its multi-beverage strategy. The move is expected to further strengthen the growth potential of SMEs as it explores new sources of growth in the beverage industry while at the same time strengthening leadership in the beer business, ensuring long-term value for the parties. company stakeholders. INTERNATIONAL OPERATIONS San Miguel Brewing International Limited (SMBIL) continued to deliver strong financial performance, driven primarily by volume growth from higher-margin San Miguel brands, strict cost management and greater operational efficiency. San Miguel global brands volume increased 5% driven by brand building activities as well as commercial and consumer programs. Despite experiencing a slight drop in consolidated volumes, SMBIL managed to maintain its profit growth trend for the fourth consecutive year, achieving an 18% increase in operating profit. Thailand's domestic volumes and profits increased in 2014 due to increased availability, marketing campaigns and the holding of Fit&Firm and San Miguel Beer Garden events that raised awareness and increased consumption of San Miguel Pale Pilsen and San Mig Light. 2014 marked the entry into the Black Draft Beer market, while San Miguel Thailand continued to increase Kirin Ichiban's presence in the Japanese premium segment. Operations in southern China further improved as domestic volumes increased moderately, driven by the growth of the San Miguel brands across the Shenzhen, East Guangdong and West Guangdong retail chains. Gains from increased production volumes for export also contributed to the better performance in southern China.

EXPORTING BEER SINCE THE TURN OF THE CENTURY Since its inception, San Miguel Beer has always been destined to be shared with the world. Just six years after its foundation, the superior quality of Cerveja San Miguel resisted the imported beers that competitors tried to introduce to the market. Proof of this is that San Miguel sold more than five bottles for each bottle of imported beer purchased, establishing itself in the incipient beer market before entering the 20th century. But a good beer is always better for sharing. As the demand for beer steadily grew in the Philippines, SanMiguelBeer was brought to other parts of Southeast Asia. In 1914, Manila exported San Miguel beer to Shanghai, Hong Kong and Guam, embarking on a mission to introduce possibly the best beer this side of the world. The international focus helped build the SanMiguel brand as an iconic drink. Since then, the company has focused on exporting its beers through a network of importers and distributors. Given its global presence in terms of sourcing raw materials and extensive network, San Miguel Beer has easily found its way to different countries around the world.

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SAN MIGUEL TRAVELS TO EUROPE San Miguel began its foray into the Spanish market in 1953, when senior officials signed the Manila Agreement, which paved the way for the creation of a new Spanish brewery, La Segarra, S.A. The new entity would brew and sell beer under the San Miguel brand. After the completion of the Lérida brewery in 1957, the company was renamed San Miguel Fabricas de CervezayMalta, which became an independent company that held the exclusive rights to use the San Miguel brand in Europe. Although the new company operated separately, it was still a subsidiary of SMC, and the Philippine company owned a significant minority stake in the Spanish brewery. San Miguel also signed a product development and technical assistance agreement to help the Spanish brewer establish the company's first brewery in Lleida, Spain. In the 1960s, San Miguel S.A. had already started distributing in Europe.

Both companies continued their collaboration until 1983, when the San Miguel Corporation got rid of its ownership interest. Two years later, the companies agreed to territories with SanMiguel Spain with brand rights in Europe and selected Mediterranean countries, and SanMiguelCorporation remained the owner and authorized user of the San Miguel brand for the rest of the world, mainly in Asia, the Americas and Africa. and Australia. San Miguel Brewery Inc. and Mahou San Miguel have written another chapter in their shared history. In May 2014, the international arm of SMB San Miguel Brewing International Ltd. and Mahou San Miguel signed a cooperation agreement to promote their international business, working together to position San Miguel as an iconic brand around the world and further strengthen San Miguel's global presence in their respective territories. 🇧🇷

Courtesy call with Mr. Ramon S. Ang by the shareholders of Mahou San Miguel Spain on March 6, 2015. From left to right: Cecile Caroline de Ocampo (Vice President of SMC Mergers and Acquisitions), Roberto Huang (President of SMB), Eduardo Petrossi ( Shareholder of MSM), Francisco Javier López del Hierro (Shareholder of MSM), Ramón Ang (President and COO of SMC), José Antonio Herraiz (Shareholder of MSM), Carlos Berba (Director General of SMBIL), Alberto Toquero (General Manager of HSH), Carmela Ortiz (SMBIL Business Planning Manager), Mariano Navarro (HSH CFO)

San Miguel Brewing International Limited (SMBIL) continued to deliver strong financial performance, primarily driven by volume growth from San Miguel's higher margin brands, strict cost management and improved operating efficiencies.

SAN MIGUEL BREWERY INC.

During most of 2014, Hong Kong's operating profit increased significantly. However, the withdrawal of premium partner brands in the last quarter affected the results for the year. In order to strengthen its portfolio and create excitement in the market, SMBHK launched Black Draft and RedHorse Draft Beer, as well as a new selection of premium draft beer brands from the US, Spain, New Zealand and the UK. These product launches have received positive consumer and trade feedback, which should provide further opportunity in 2015. Indonesia sustained operating profit growth in 2014 as a result of better margins and prudent spending on fixed costs. Sales volume, on the other hand, was negatively affected by the price adjustment implemented in early 2014 and was further aggravated by market uncertainties caused by the evolution of anti-alcohol regulations in the country. Domestic volumes in Vietnam recorded double-digit growth, with higher SanMigLight sales driven by market-wide promotions, while W1nBia's expansion was supported by commercial incentives. However, total production volume and operating profit were reduced due to lower exports as a result of the political crisis in some of its markets. Total export volume for the San Miguel brands increased in 2014 driven by double-digit expansion in the UAE, Taiwan, South Korea, Qatar, Bahrain and the United States, as well as increases in new markets for Australia and Africa. The launch of Black Draft Beer in Korea and Taiwan also boosted volumes for the year. However, the phasing out of a private label has reduced total export volumes. Despite the decline in total export volumes, operating profit grew by double digits due to better margins and lower cost of production as a result of its regional sourcing strategy.

AGGRESSIVE EXPANSION IN THE 1990s

Quickly realizing the worldwide potential of its products, SanMiguel expanded its beer business from a single market in the Philippines and began exporting beer to different parts of Asia, particularly China and Hong Kong, before San Miguel even turned 20. San Miguel's bold and pioneering efforts in 1948 saw the emergence of its first offshore brewery in Hong Kong, as the British mainland recovered from the devastation of the Second World War. In a matter of years, San Miguel managed to become the Pale Pilsen among locals who considered it their home brew. Exports would soon expand to areas as diverse as Japan, Australia, Malaysia, Singapore and Saudi Arabia. Later, SanMiguel realized that it could better meet the demand for its beers by installing international facilities in certain locations. In 1987, San Miguel began brewing beer in Nepal through a licensing agreement with a large local brewery. Three years later, San Miguel embarked on an aggressive outsourcing strategy as the company celebrated its 100th anniversary. San Miguel Brewing International Ltd. was founded in 1991 to capitalize on the fast-growing economies and thriving beer markets of Asia. Joint ventures were forged and breweries established in China, Indonesia and Vietnam, while a sales office was established in Taiwan to tap into its growing draft beer market. San Miguel sealed its dominant presence in the Southeast Asian market with the acquisition of a brewery in Thailand in 2004 and the creation of a dedicated sales organization in Cambodia. Meanwhile, the Export operation has become an increasingly important driver of SMB's international business growth. The company's diverse beer products are now available in more than 40 countries and territories around the world, including Malaysia, Korea, Singapore, Japan, EE. UU., United Arab Emirates and African countries selected as some of its main export destinations.

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The bold and authentic flavor of San Miguel Pale Pilsen has found a place in the hearts and minds of Filipinos. Its unique heritage is representative of a friendship between the Filipino drinker and their beer that lasts over a hundred years. Filipinos' love affair with PalePilsen began in 1890, when the beer was first brewed in Manila. After years of refining the formula, the beer's unmistakable light golden ale earned it a reputation as the "Pride of the Pacific" at the 1895 Manila Regional Exposition. Since then, Pale Pilsen has won several awards, including the prestigious MondeSelectionInternational. Pale Pilsen was not an overnight success, gaining competition throughout its formative years. Some produced packages similar to Pale Pilsen, while others tried to imitate the formula of the drink. Pale Pilsen's stature as a flagship brand is the amber colored beer bottle that makes Pale Pilsen one of the most recognizable brands in the Philippines. Although the exact date when the steinie was introduced to the market is still not known.

once verified, advertisements from 1938-1939 showed that the new bottle was first sold on the market during those years. No matter how much the other beers tried to fight, the taste and high quality of Pale Pilsen prevailed over rival beers. One by one, the competition withdrew as the strength of the brand continued to grow over the years. One of the aspects in which SanMiguelPale Pilsen has left its mark on society's conscience is its publicity. Screen icons Paraluman and Ric Rodrigo were among the first stars to grace ads for San Miguel Brewery Inc. Bottles of San Miguel Pale Pilsen can also be seen in movies and TV shows from time to time, especially when the scene requires a bar or a neighborhood tagayan. While some shows tend to wrap a piece of paper around the label, the neck of the PalePilsen bottle reveals the brand of beer the actors are holding. In fact, Pale Pilsen is a truly satisfying beer, with a distinct aroma and full flavor. Its smooth, rich flavor reminds drinkers why this classic ale is the standard in beers.

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CORPORATE SOCIAL RESPONSIBILITY As communities move forward, lasting partnerships with SMEs show the value of building trust between people. The strength of San Miguel Brewery Inc. comes from the people who make up the company. Collaborating with our stakeholders to make our partner communities a better place has been the guiding principle of our various corporate social responsibility initiatives. More than improving the lives and livelihoods of our stakeholders, SMB always strives to be a responsible pillar of the community. In many ways, the company is an anchor that keeps the ship where it is, no matter how strong the tides. We recognize that our products touch the lives of people from different walks of life. As such, our CSR programs are designed to have the greatest impact on our stakeholders so they can thrive in their communities. Of all the programs we support and implement, we prioritize our resources on initiatives related to the environment. SMB's flagship Buhayin ang Kalikasan program is making progress in rejuvenating key areas where forest cover is rapidly declining and water supplies are slowly diminishing.

We credit the program's continued success to our government and community partners. The government helps SMEs by identifying critical areas where our support can help make the biggest impact. Communities, on the other hand, ensure that trees live to their full potential by maintaining and preserving target areas. In addition to our environmental orientation, SMB improves the lives of our partner communities through a combination of projects that form part of the company's social development framework. By implementing concurrent projects in the education, livelihood and health sectors, the entire program equips beneficiaries with the knowledge and skills needed to improve their way of life. Our support comes in different forms, depending on the needs of our partner communities. As we respond during disasters by providing immediate assistance, we also strive to go beyond assets, assessing and implementing long-term projects to ensure beneficiaries can sustain their lives on their own. It is through our partnership forged by trust and time that SMB and its stakeholders work together in harmony to move forward for years to come.

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SAN MIGUEL BREWERY INC.

Daughter of the Sea She was silent as she struggled to tie the catamaran to her shore, a small fishing boat that would soon be hers. Remedios Enero, or Nang Remy, was the only woman in the group of fishermen who came to San Remegio, Cebu, to receive the fishing boats donated by SMB. The program, anchored in the administration, delivered boats to families affected by super typhoon Yolanda so that they could start supporting their families again. After Yolanda's rampage, NangRemy's house was badly damaged and her family's fishing boat was destroyed by the strong waves. Leaving nothing but hope, he walked along the shore to collect debris that could still be sold. Many times he looked out to sea, an undeniable desire to get back to his livelihood. At 58, Nang Remy shows the strength of a 20-year-old. At dawn he goes diving for shells when the sea is nothing but a swaying black mass. He can hold his breath long enough to dig up shells on the sea floor, sometimes staying underwater longer when necessary. “I swam towards the sea from three to six in the morning. I dove in to get some seafood. Sometimes I win a lot and I can take P500 home. On other days I only earn P100. Shoppers were always asking for a bargain and I just agreed to get some money to buy food,” Nang Remy shared. Asked why he chose this way of life, he said: “The sea is my friend. Since childhood, this has been our livelihood. My father would take me to our little pond to help him. When I got married, my husband and I also bought a fish pond, but it was destroyed by a severe storm.” Nang Remy has always believed in rising above the tide. “We must not allow ourselves to weaken. We have to try our best," he said. Having just celebrated his birthday that month, Nang Remy said that SMB's new bank is now his most precious gift. "It's a good program. Besides providing for us, we also have the opportunity to take care of this sea”.

With his new fishing boat and tools, Nang Remy can get back to what he does best: deep sea fishing. SMB donated boats to a community in northern Cebu hit by Super Typhoon Yolanda in 2013.

Nang Remy was even more shocked when he discovered that his bank comes with a generator to power his boat and some fishing equipment he could use.

Integral well-being of communities Carmen Cahegas looked at her toes. She now cuts her nails properly, following the doctor's advice to be careful when cutting her nails, as she can hurt her feet. Nang Carmen, a diabetic, is one of 68 patients now enjoying services at the SMB community clinic in Mandaue City, which opened in 2013. When she heard about the services offered by the clinic, he thought she was just one of them. medical missions: a temporary one-day initiative from big companies you'll never see again. “I used to work as a seamstress,” she said in Cebuano, “but since I could barely see my work, I had to stop. I thought it was just because I was getting old," he said. "Then in 2008 I had a mild stroke. I was walking around and suddenly I got weak. They rushed me to the hospital and it was after that episode that I found out who had diabetes", he recalled.

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The community clinic serves underprivileged patients from SMB's host community, Barangay Tipolo in Cebu, and other villages close to where Nang Carmen is from. SMB has three other community clinics in the city of Valenzuela, in the city of San Fernando in Pampanga and Sta. Cross in Davao del Sur. A fifth clinic is being prepared in the city of Bacolod. Identified beneficiaries get free consultations and medication for diabetes and hypertension, among other illnesses. In February 2014, the community clinic celebrated its first anniversary with a diabetes conference hosted by resident physicians and representatives of the National Nutrition Council. They talked about proper nutrition for people with diabetes. “I am pleased to note that my patients have shown better health. My biggest reward is seeing them improving day by day”, said resident Dr. JoselitoTes. Leonora Saplad, who has been diabetic for nearly 20 years, has struggled with her medication and regular doctor visits. She and her husband depend on odd jobs to support their family. Sometimes, she has to stop buying medicine in order to buy food for her family.

“Before, I thought it was an additional expense for us,” Leonora said of the lab tests that Dr. He demands you strictly from his patients. “I am very happy with our doctor because he is very concerned. We saw how we progressed.” Like Leonora, Lydia Tanguan said her family's needs also take precedence over the medications of her husband Mario, a stroke survivor. As a breadwinner for the family, Mario drives a taxi to support Lydia and their four children. She helps her husband by doing odd jobs, doing manicures and pedicures to increase the family income. “We can't buy their medicine regularly,” said Lydia, who attended the clinic's anniversary conference. “So when SMB gave our barangay a clinic to support needy families like us, it was a prayer answered.” “We are very happy with this program in San Miguel,” said Nang Carmen. “We cannot maintain our medication regularly on our own. But because of this program, our health is taken care of.”

In February 2014, Mandaue Brewery celebrated the community clinic's first anniversary with a diabetes management conference. The resident physician, Dr. Joselito Te, discussed how to care for a diabetic patient at home. SMB patients and staff shared stories about how the community clinic has impacted their lives.

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HONG KONG

Hunger Defense

Taiwanese rock legends Wu Bai and China Blue headlined BeerFest, joined by the biggest names in the Hong Kong rock scene such as SugarClub, Kolor and Red Noon. When all the screaming and banging ended, the officials collected HK$11,100 from the event. They chose Food Angel as their charity, a food assistance and rescue program launched by the BoCharityFoundation. With hunger being a growing problem in Hong Kong, the Food Angel program tries to solve the problem by "rescuing surplus edible food from different sectors of the food industry that would otherwise be discarded".

SMB Hong Kong (SMBHK) employees took on the challenge to serve as beer ambassadors at the highly anticipated San Miguel BeerFest and donated HK$100 to charity for every employee shift.

The recovered food would undergo strict food safety protocols before being prepared into hot and nutritious meals, which are served to needy communities in the territory.

Every year, throngs of tourists, locals and athletes party in Victoria Harbor and celebrate with overflowing San Miguel beer, food, dragon boat themed activities and the best music lineup.

By March of last year, Food Angel had recovered around 500 tons of food, converting it into more than 800,000 hot food boxes and around 150,000 non-perishable food packages.

INDONESIA

Caring for Host Communities Three villages close to the facilities are among the communities that benefit from the annual medical mission. These cities are in need of medical attention, as approximately three-quarters of the population is mired in poverty. Last year, around 600 residents underwent health screenings to assess their well-being and received medicine to treat minor ailments such as colds, coughs, high blood pressure or skin conditions.

PT Delta (PTD), our subsidiary in Indonesia, is committed to improving the well-being of neighboring communities around its factories. To this end, it carries out an annual medical mission, designed to assess and respond to urgent medical problems of people in different communities.

For serious illnesses discovered during the medical mission, patients are asked to immediately consult with specialists to better assess their condition and provide treatment. Milk is also provided to over 320 children during the medical mission.

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BOARD OF DIRECTORS Ramón S. Ang Chairman

Robert N. Huang President

Ferdinand K. Constantino Keisuke Nishimura Alonzo Q. Ancheta Independent Director

Carmelo L. Santiago Independent Director

Carlos Antonio M. Berba Virgilio S. Jacinto Teruyuki Daino Takashi Hayashi Toshiya Miyoshi* * substituiu Hajime Nakajima em 27 de março de 2015

SAN MIGUEL BREWERY INC.

Ramon S. Ang, 61, a Filipino, has served as the company's president since July 26, 2007 and is the chairman of the company's executive committee. He also holds, among others, the following positions: vice president, president and chief operating officer of San Miguel Corporation (“SMC”); Director, President and CEO of Petron Corporation ("Petron") and Top Frontier Investment Holdings, Inc. ("Top Frontier"); President and CEO of SMC Global Power Holdings Corp. ("SMC Power"); President of Sea Refinery Corporation, Petron Malaysia Refining & Marketing Berhad (Malaysia), San Miguel Foods, Inc. ("SMFI"), San Miguel Yamamura Packaging Corporation ("SMYPC"), Anchor Insurance Brokerage Corporation ("AIBC"), San Miguel Brewery Hong Kong Limited ("SMBHK") (Hong Kong) and San Miguel Properties, Inc.; and Vice President of Ginebra San Miguel, Inc. (“GSMI”) and the San Miguel Pure Foods Company, Inc. (“SMPFC”). He is also President of Liberty Telecoms Holdings Inc., Philippine Diamond Hotel & Resort, Inc., Philippine Oriental Realty Development, Inc. and Atea Tierra Corporation. Mr. Ang has held management positions at various SMC subsidiaries over the past five (5) years and was previously the company's president (2007-2009). He has also been director/manager at other publicly traded companies outside Grupo San Miguel for the last three (3) years. Mr. Ang holds a BS in Mechanical Engineering from Far Eastern University. Roberto N. Huang, 66 years old, Filipino, has been a Director since October 8, 2007 and Chairman of the Company since April 30, 2009. He is also a member of the Company's Executive Committee; Director of San Miguel Brewing International Limited (“SMBIL”) and SMBHK; and president of Iconic Beverages, Inc. ("IBI"), Brewery Properties Inc. ("BPI") and Brewery Landholdings, Inc. ("BLI"). He also served as General Manager of the Company (2007-2009). Mr. Huang holds a BS in Mechanical Engineering from Mapua Institute of Technology and completed the academic requirements for a Master of Business Administration from De La Salle University.

Ferdinand K. Constantino, 63 years old, Filipino, has served as a Director of the Company since July 26, 2007 and is the Chairman of the Executive Compensation Committee of the Company and a member of the Audit Committee. He also holds, among others, the following positions: Director, Senior Vice President, CFO and Treasurer of SMC; President of AIBC; Director and Vice President of SMC Power; and Director of SMYPC, Top Frontier, GSMI and SMFI. He was also the company's chief financial officer and treasurer (2007-2009). Mr. Constantino has held management positions in several SMC subsidiaries over the last 5 (five) years and has also been a director in other publicly traded companies outside the San Miguel Group over the last 3 (three) years. Mr. Constantino holds a Bachelor of Economics from the University of the Philippines and has completed the academic requirements for a Master of Economics from the University of the Philippines. Keisuke Nishimura, 58, Japanese, has served as a director of the company since April 30, 2009. He is the representative director of the board and senior executive director of Kirin Holdings Company, Limited ("Kirin"). Previously, he was a director of China Resources Kirin Beverages (Greater China) Company, Limited; Executive Director and General Manager of Kirin's Strategic Planning Department; the Executive Vice-President of the Company (2009-2011); and Director of SMBHK (2010-2011) and SMBIL (2010-2011). Mr. Nishimura holds a Bachelor of Business from Yokohoma National University and a Master of Business from the University of Washington. Carmelo L. Santiago, 72 years old, Filipino, has served as an Independent Director of the Company since February 25, 2010. He was also an Independent Director of the Company from October 8, 2007 to April 30, 2009. He is the Chairman of the Board of the Company's Management. Audit Committee and member of its Executive Committee, Executive Remuneration Committee and Governance and Nomination Committee. He is currently an Independent Director of SMPFC and Liberty Telecoms Holdings Inc.; an independent non-executive director of SMBHK; and director of Terbo Concept, Inc. He was an independent director at SMC (2008-2013), GSMI (2010-2012) and AIBC. Mr. Santiago is the founder and owner of several branches of Restaurante Melo's and founder of Restaurante Wagyu. Mr. Santiago holds a BA in Business Administration from Universidad del Este.

ANNUAL REPORT 2014

Alonzo Q. Ancheta, 82, Filipino, has served as an Independent Director of the Company since April 30, 2009 and is Chairman of the Company's Governance and Nominating Committee and a member of the Audit Committee. Abogado Ancheta is a director of the Philippine Tobacco Flue-Curing and Redrying Corporation; President of Zobella & Co. (A.Q. Ancheta and Partners), Ogilvy & Mather (Philippines), Inc. and Growe Investments Ltd.; Member of the Board of Trustees and Corporate Secretary of the St. Luke's Medical Center; Advisor to the Board of the Intellectual Property Association of the Philippines; and a member of the National Committee of the Philippines and Vice President of the ASEAN Law Association. He was Senior Vice President (2000-2006) and President (2006-2009) of the Asian Association of Patent Lawyers. Attorney Ancheta holds a Bachelor of Arts and a Law Degree from the University of Manila. Carlos Antonio M. Berba, 50 years old, Filipino, has been a Director of the Company since August 10, 2010. He has been General Director of SMBIL since January 1, 2008. He is currently also Vice-President of SMBHK, Commissioner of PT Delta Djarkarta Tbk ( Indonesia) ("PTD"); and President/Director of other SMBIL subsidiaries. Mr. Berba holds a BS in Electrical Engineering from the University of the Philippines, an MBA in Japanese Business Studies from the Japan Institute of Management Sciences America and Chaminade University of Honolulu, and an MBA from the Wharton School, University of Pennsylvania. Virgilio S. Jacinto, 58, Filipino, has been a Director of the Company since October 14, 2010 and is a member of the Audit Committee and the Governance and Nominating Committee. He is Corporate Secretary, Chief Compliance Officer, Senior Vice President and General Counsel for SMC; Petrona Director; Corporate Secretary and Compliance Officer at Top Frontier and GSMI. Previously, he was Vice President and First Deputy General Counsel of SMC (2006-2010). He was Director and Corporate Secretary of United Coconut Planters Bank; Partner at Villareal Law Offices and Associate at SyCip Salazar Feliciano & Hernandez Law Office. Abogado Jacinto is an Associate Professor at the University of the Philippines School of Law. He has held various management positions at various SMC subsidiaries over the last five (5) years. Attorney Jacinto holds a BA in Philosophy and a BA in Law from the University of the Philippines and holds an LL.M. by Harvard University.

Teruyuki Daino, 55, Japanese, has served as a Director of the Company since April 12, 2011 and as Executive Vice President since October 11, 2011. He is a member of the Executive Committee and the Executive Compensation Committee; and Director of SMBHK, SMBIL, IBI, BPI, BLI, San Miguel Beer (Thailand) Limited (“SMBTL”) and San Miguel Holdings (Thailand) Ltd. Previously, he was Executive Financial Advisor to the Company (April-October 2011) and served the Kirin group of companies in various capacities. Mr. Daino holds a BA in Economics from Hitotsubashi University and an MBA from the Massachusetts Institute of Technology. Takashi Hayashi, 48 years old, Japanese, has been a Director of the Company and Executive Financial Advisor since May 27, 2014. He is a member of the Executive Committee and the Audit Committee; and Director of SMBHK, SMBIL and SMBTL. He has also served in the Kirin group of companies in various capacities. Mr. Hayashi graduated from Keio University with a BA in economics and is an official member of the Japan Securities Analysts Association. Toshiya Miyoshi*, 56, Japanese, has been a director of the company since March 27, 2015. He is currently a Director and Senior Executive Director of Kirin and Senior Executive Director of Kirin Company, Ltd. director, Director of Personnel Department and General Affairs of Kirin Group and Senior Executive Director, General Manager of Personnel Department of Kirin Company, Ltd. He also acted in the Kirin group in various roles. Mr. Miyoshi holds a Bachelor of Commerce from Waseda University, Japan. * replaced Hajime Nakajima on March 27, 2015

SAN MIGUEL BREWERY INC.

CORPORATE GOVERNANCE San Miguel Brewery Inc. recognizes the importance of good governance in creating and maintaining shareholder value and protecting shareholder rights and interests. You remain committed to conducting your business fairly and transparently and to maintaining the highest ethical standards in all your business dealings. This section describes the corporate governance practices observed by the Company. RELATIONS WITH SHAREHOLDERS AND STAKEHOLDERS The Company adopts corporate governance practices that promote the rights of shareholders and interest groups, in order to establish long-term and mutually beneficial relationships. Voting and General Meeting Each share in the name of the shareholder entitles you to one vote, which may be exercised in person or by proxy at general meetings, including the Ordinary General Meeting (AGO). The agenda, date, time and place of the AGO meeting and the deadlines for presentation and validation of powers are disclosed more than one month before the AGO is held. In 2014, the Statement of Definitive Information and the AGO 2014 were sent to shareholders on April 28, 2014. Shareholders have the right to elect, remove and replace directors, as well as to vote on certain corporate acts in accordance with the Corporations Code. Shareholders vote by voice unless a motion to cast votes by ballot is made, duly seconded and approved by a majority of shareholders present or represented at the meeting as the method of voting.

Investor Relations and Information The Company keeps the investor community and its stakeholders informed about its finances and performance, as well as its leadership and governance, through periodic disclosures, announcements and reports filed with the Securities and Exchange Commission (SEC) and the Philippine Dealing & Exchange . Corp. (PDEx), regular quarterly reports, ASM, investor conferences, website, emails and phone calls. The Company, through Investor Relations of the San Miguel Group of Companies, also holds periodic briefings and meetings with financial and investment analysts. Dividends In accordance with the Company's dividend policy, common shareholders will receive annual cash dividends based on prior period recurring net income in the amount determined by the Board of Directors after taking into account the implementation of business plans, service requirements of the debt, expenses, budgets, financing for new investments, acquisitions, appropriate reserves and working capital. The Company paid cash dividends of P0.56 per share in 2014. Preemptive Rights Pursuant to the Company's amended by-laws, shareholders may not subscribe to all issues of Company shares. Suppliers, Creditors and Customers The Company recognizes the importance of its suppliers, creditors and customers in the creation and growth of value, stability and long-term competitiveness of its businesses. The Company honors its obligations to its suppliers and creditors, including timely payment in accordance with

ANNUAL REPORT 2014

agreements. The Company is committed to offering products and services that delight and retain its customers. DISCLOSURE AND TRANSPARENCY San Miguel Brewery Inc. regularly observes a high level of corporate disclosure and transparency regarding the company's financial condition and state of corporate governance. Ownership structure The Company's 20 principal common shareholders, including the interests of certain registered and beneficial owners with more than 5% of its share capital, its directors and key executive officers, are disclosed annually in its Statement of Definitive Information distributed to shareholders prior to the ASM. Financial Reporting Regular updates on financial and operating information are provided to the investment community and interested parties through appropriate and timely disclosures filed with the SEC and PDEx. Audited quarterly and annual interim financial statements are disclosed and filed with the SEC and PDEx in accordance with prescribed rules. These financial statements are in accordance with Philippine Accounting Standards and Philippine Financial Reporting Standards, which comply with International Accounting Standards. Financial results are presented to financial and investment analysts through a quarterly analyst report. Annual results are also distributed to shareholders prior to the ASM. In addition to complying with structural reporting requirements, the Company timely discloses market-sensitive information such as dividend declarations, joint ventures and acquisitions, sales and divestitures of significant assets that affect share price performance. These disclosures and other relevant and up-to-date information about the Company can be found on its website, www.sanmiguelbrewery.com.ph.

Annual Corporate Governance Report The Annual Corporate Governance Report (IAGC) of the Company contains complete information, among others, on the composition of the Company's board of directors, disclosure policies, code of conduct and ethics policies, operations with related parties, risk management system, compensation process, policies related to shareholder and stakeholder rights, and investor relations programs. It is published on the company's website and is updated in accordance with structured reports and advisory letters submitted to the SEC from time to time. The SEC treated the company as a publicly traded company for purposes of SEC ACGR compliance as the company's securities are listed on the PDEx. The SEC required the Company to comply with ACGR guidelines while its bond issues were listed on the PDEx. ACCOUNTABILITY AND AUDIT The Audit Committee supervises the external and internal auditors. External Auditor The accounting firm of R.G. Manabat & Co. served as the Company's external auditor during fiscal years 2014 and 2013. The external auditor is selected and appointed by shareholders on the recommendation of the Board after consultation with the Audit Committee and rotates every five years or earlier in accordance with SEC regulations. Audit fees of P6.68 million in 2014 and 2013 and other fees of P3.0 million in 2014 were paid by the Company to the external auditor. Other fees were for services rendered in connection with the Company's $15 billion fixed rate bond issuance. The external auditor facilitates an environment of good corporate governance as reflected in the Company's financial records and reports by conducting an annual independent audit of the Company's business and issuing an objective opinion on the reasonableness of such records.

SAN MIGUEL BREWERY INC.

reports. They also participate in ASM and answer appropriate questions during the meeting. They also have the opportunity to make a statement if they wish. In cases where the external auditor suspects fraud or error during the audit, it must disclose and express its conclusions in this regard. Internal audit Internal audit is conducted by an independent internal audit group that helps the organization achieve its objectives by bringing a systematic and disciplined approach to assessing and improving the effectiveness of risk management, control and governance processes. The Company's internal audit group functionally reports directly to the Audit Committee. The Company's internal audit group is responsible for identifying and evaluating significant exposures to risks and contributing to the improvement of risk management and control systems, assessing the adequacy and effectiveness of controls that cover governance, operations and control systems. organization information. By evaluating its effectiveness and efficiency, and by promoting continuous improvement, the group maintains effective controls of its responsibilities and functions. BOARD OF DIRECTORS The Company's Board of Directors is the core of the Company's corporate governance structure and practice. It is the Board's responsibility to promote the Company's long-term success and ensure its sustained competitiveness consistent with its fiduciary responsibility, exercised in the best interests of the Company, its shareholders and other stakeholders. Exercises oversight of the Company's business, affairs and integrity; and determines the Company's mission, long-term strategy and objectives. The Board of Directors is also responsible for reviewing and approving the Company's financial statements. Management considers that the Company's financial situation

The financial statements have been prepared in accordance with Philippine Financial Reporting Standards and reflect amounts based on best estimates and the reasonable, informed and prudent judgment of management and the Board with due regard to materiality. Composition The Board of Directors is composed of eleven members, each elected by the voting shareholders during the AGO. Board members remain in office for one year until successors are duly elected and installed in accordance with the Company's amended by-laws, its Corporate Governance Manual (Manual) and applicable rules and regulations. The directors' broad range of skills, knowledge and experience in the areas of business, finance, accounting and law ensure a comprehensive assessment and sound judgment on matters relevant to the Company's business and related interests. Two of the directors, Lcdo. Alonzo Q. Ancheta and Mr. Carmelo L. Santiago act as independent and non-executive directors. The Company defines an independent director as a director who, other than his or her fees and equity interests, has no business or relationship with the Company that could, or could reasonably be perceived as, materially interfering with the exercise of its independent judgment in the performance of its responsibilities. as a Director Independent directors are appointed and elected in accordance with SEC rules. In accordance with said rules, independent directors issue a certificate attesting their independence at the time of their election and/or re-election. The Chairman The Chairman of the Board is Mr. Ramon S. Ang, a non-executive director, while Mr. Roberto N. Huang holds the position of President. These positions are held by separate individuals with their respective roles clearly defined to ensure independence, accountability and accountability in the performance of their roles.

SAN MIGUEL BREWERY INC.

and any other powers that may be specifically limited by the Board or by law. The Executive Committee met in 2014 to approve the alignment of certain negative clauses of its outstanding bonds to allow the Company to engage in the business of manufacturing, distributing and selling all types of beverages. Governance and Nominating Committee The Governance and Nominating Committee currently comprises three voting directors: Atty. Alonzo Q. Ancheta, independent director and Chairman of the Committee, Atty. Virgilio S. Jacinto and Mr. Carmelo L. Santiago (also an independent director), and two non-voting members: Ms. Mercy Marie J. L. Amador, Chief Financial Officer and Treasurer of the Company, and Ms. Lynn B. Santos, General Manager Director of the Company. Deputy Vice President of Business Planning and Quality and Productivity Management. The Governance and Nomination Committee is responsible for making recommendations to the Board of Directors on matters related to the nomination, election and succession of directors, with the aim of appointing people to the Board of Directors with relevant experience and skills to maintain and improve competitiveness. of the Company and increase its value. The Committee screens and selects candidates for Board leadership in accordance with the qualifications and disqualifications for directors set forth in the Company Handbook, amended articles of incorporation and amended Company bylaws and applicable laws, rules and regulations. The Governance and Nominating Committee also assists the Board in its oversight responsibilities in the development and implementation of the Company's principles, policies and systems of corporate governance, and in establishing and implementing mechanisms for evaluating and improving performance.

of the Board of Directors, its members and Board Committees, and assessment of the Company's compliance with the Manual. The Committee held three meetings in 2014 at which the Committee discussed and resolved, among other matters, on the qualification of candidates for election to the Board both to replace existing directors and for election at the 2014 AGM. The Committee also approved amendments to the Manual to update you with new SEC requirements. Executive Compensation Committee Three directors currently serve on the Executive Compensation Committee: Mr. Ferdinand K. Constantino, Sr. Teruyuki Daino and Mr. Carmelo L. Santiago, an independent director. Mr. Ferdinand K. Constantino is the Chairman of the Committee. The Executive Compensation Committee advises and assists the Board in establishing formal and transparent policies and practices on director and executive compensation, succession planning, promotion and career advancement, and oversees the compensation of directors, senior management and other key employees. to ensure that the Company's compensation scheme is fair and rewards directors and officers with accountability based on their performance and the Company's performance, and remains competitive in attracting and retaining the key directors and officers necessary to successfully manage the Company. The Committee held two meetings in 2014 to analyze, discuss and endorse for Board approval the promotions proposed by Management. Audit Committee The Audit Committee is currently composed of five members, two of which are independent directors, Mr. Carmelo L. Santiago, who also serves as Chairman of the Committee, and Esq. Alonso Q. Ancheta. The other members are Mr. Ferdinand K. Constantino, Lt. Virgílio S. Jacinto, and Mr. Takashi Hayashi.

SAN MIGUEL BREWERY INC.

MANAGEMENT Management is primarily responsible for the Company's day-to-day operations and business. The annual remuneration of the President and the main executives of the Company is established in the Definitive Newsletter distributed to shareholders. HUMAN RESOURCES The Company continues to support and dedicate resources to the training and development of its human resources. As such, the Company provides career development and advancement opportunities through various training programs and seminars. The Company guarantees its employees a safe and healthy work environment. The Company has an internal outpatient clinic at its headquarters to meet the medical needs of employees. Each brewery also has its own clinic. Employees are required to undergo an annual medical examination. In addition, the Company also started activities focused on the safety, health and well-being of its employees. The Company's permanent employees also have a capitalized, non-contributory retirement plan. The benefits and privileges that accrue to all regular employees are similarly discussed in the Employee Handbook. The Employee Handbook, issued to each employee, also contains the policies and guidelines for the duties and responsibilities of an employee of San Miguel Brewery Inc. Through internal company newsletters and e-mails, all facilitated by the Business and Human Resources Department and the Company's Communications Department, employees are kept up-to-date on material developments within the organization.

POLICIES Securities Trading The Company has adopted a policy that governs the acquisition and disposition of Company stock by its directors, officers and employees, and the use and disclosure of material non-public information by persons who have knowledge or possession thereof. Whistleblowing Policy Procedures have also been established for communicating and investigating concerns related to the Company's accounting, internal accounting controls, auditing and financial reporting to the Audit Committee in accordance with its whistleblowing policy. These policies are available on the Company's website. Code of Conduct The Company also adopts a Code of Ethics that establishes fundamental standards of conduct and values consistent with the principles of good governance and business practices that will guide and define the actions and decisions of the directors, officers and employees of the company. 🇧🇷 COMPLIANCE MONITORING Lic. Rosabel Socorro T. Balan is the Company's Chief Compliance Officer. The Compliance Officer is responsible for monitoring the Company's compliance with the provisions and requirements of its Manual and ensuring adherence to corporate principles and best practices. The Compliance Officer holds the position of vice president and has direct reporting responsibilities to the chairman of the board.

ANNUAL REPORT 2014

DOMESTIC OPERATIONS COMMITTEE

INTERNATIONAL OPERATIONS

Roberto N Huang

Carlos Antonio M. Berba

Teruyuki Daino

Takeshi Wada

Mercy Maria Jacqueline L. Amador

Hercila M. Reis

Takashi Hayashi*

Jesus J. Flores, Jr.

Minerva Lourdes B. Bibonia

Frederick Gerard S. Martelino

Atty. Rosabel Socorro T. Balan

Ernest John F. Palha

president

Executive Vice President Vice President and Chief Financial Officer and Treasurer Executive Financial Advisor Senior Vice President and Marketing Manager

Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer

Debbie D. Lame

VP and National Sales Manager

Josephine C Cruz

Manufacturing Manager

Rebecca S. Flores

AVP and Manager of the Technical Brewing Group

René T. Ash

AVP and National Logistics Manager

Enrico E. Reis

AVP and Head of Human Resources and Commercial Affairs and Communications

Feliciano M. Madlansacay AVP and CFO for Philippine Operations

Rodney Ralph D. Holmes

AVP and Financial Planning and Analysis Manager

Lynn B Santos

AVP and Manager of Business Planning and Quality and Productivity Management

Alma Leonora C. Javenia AVP and Information Systems Management Manager

Charity Anne A. Chiong

AVP and Business Procurement Group Manager* replaced Shobu Nishitani in May 2014

Director General SMBIL

SMBIL VP Executive Vice President and SMBIL VP Finance Director and SMBIL VP International Sales Manager and SMBIL VP Export Development Manager and SMBIL Marketing Manager

Daniel B. Trajan

AVP and SMBIL Logistics Manager

Daniel T. de Castro

AVP and SMBIL Human Resources Manager

carmela ortiz

AVP and SMBIL Business Planning Manager

Clifford T. Que

AVP and SMBIL Information Systems Management Manager

SAN MIGUEL BREWERY INC.

STATEMENT OF MANAGEMENT RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The management of San Miguel Brewery Inc. is responsible for the preparation and fair presentation of the consolidated financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012. including additional components attached thereto, in accordance with the financial reporting framework prescribed therein. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. . The Board of Directors reviews and approves the consolidated financial statements and presents them to shareholders. R. G. Manabat & Co., the independent auditors appointed by the shareholders, audited the consolidated financial statements of the company in accordance with Philippine auditing standards and, in its report to shareholders, expressed its opinion on the fairness of the presentation upon completion of that audit. Dated March 11, 2015.

Ramón S. Ang Chairman of the Board

Robert N. Huang President

Mercy Marie J. L. Amador Chief Financial Officer and Treasurer

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ANNUAL REPORT 2014

AUDIT COMMITTEE REPORT

The Audit Committee assists the Board of Directors in its oversight and corporate governance responsibilities in relation to financial reporting, risk management, internal controls and internal and external audit processes and methodologies. In fulfilling these responsibilities, the Audit Committee proceeded in 2014: •

recommended to the Board of Directors the re-election of R.G. Manabat & Co. as the Company's external auditors for the year 2014;

•

reviewed and approved the terms of engagement of the external auditors, including the audit services, audit-related and non-audit services provided by the external auditors to the Company and the fees for such services, and ensured that they will not affect the performance of the external auditors. independence and objectivity;

•

reviewed and approved the internal and external auditors' audit scope and programs and discussed the results of their audit processes and their findings and assessments of the Company's internal controls and financial reporting systems;

•

reviewed, discussed and recommended for approval by the Board of Directors the consolidated annual and quarterly financial statements of the Company, and the reports required to be filed with regulatory bodies in connection with such consolidated financial statements, to ensure that the information contained in such financial statements consolidated financial statements and reports present a true and balanced assessment of the Company's position and condition and comply with the regulatory requirements of the Securities and Exchange Commission; y

•

reviewed the effectiveness and adequacy of the Company's financial and internal controls, risk management systems and control and governance processes and ensured that, where appropriate, steps are taken to address any concerns or issues arising therefrom.

Carmelo L. Santiago President

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Ferdinand K. Constantine Membro

Alonzo Q. Voice Investigation

Virgílio S. Jacinto Vocals

Takashi Hayashi Miembro

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SAN MIGUEL BREWERY INC.

REPORT OF INDEPENDENT AUDITOR R.G. Manabat & Co. The KPMG Center, 9/F 6787 Ayala Avenue, Makati City, Philippines

Phone +63 (2) 885 7000 Fax +63 (2) 894 1985 Internet www.kpmg.com.ph Email[email protected]

Branches • Subic • Cebu • Bacolod • Iloilo

The Shareholders and Board of Directors San Miguel Brewery Inc. We audited the consolidated financial statements of San Miguel Brewery Inc. and Subsidiaries (a subsidiary of San Miguel Corporation), which comprise the consolidated financial statements as of December 31, 2014 and 2013, 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 for the period ended December 31, 2014 and notes, which include a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards and for such internal control as management deems necessary to enable the preparation of financial statements that are free from material misstatement. , either by fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conduct our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing selected procedures to obtain evidence about the amounts and disclosures in the consolidated financial statements. The selected procedures depend on the auditors' judgment, including the assessment of the risks of material misstatement in the consolidated financial statements, regardless of whether caused by fraud or error. In making these risk assessments, auditors consider internal control relevant to the preparation and fair presentation of the entity's consolidated financial statements, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the consolidated financial statements. entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence obtained provides a sufficient and appropriate basis for our audit opinion. Opinion In our opinion, the consolidated financial statements fairly present, in all material respects, the consolidated financial position of San Miguel Brewery Inc. and Subsidiaries (a subsidiary of San Miguel Corporation) as of December 31, 2014 and 2013, and their consolidated financial condition, performance and their consolidated cash flows for each of the three years in the period ended December 31, 2014, in accordance with Philippine Financial Reporting Standards. R.G. MANABAT & CO.,

ENRICO E. BALUYUT CPA Partner License No. 065537 SEC Accreditation No. 1177-A, Group A, valid until April 30, 2015 RUT No. 131-029-752 BIR Accreditation No. 08-001987-26-2014 Issued September 26, 2014; valid until September 25, 2017 PTR No. 4748099MC Issued January 5, 2015 Makati City March 11, 2015 Makati City, Metro Manila

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ANNUAL REPORT 2014

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (San Miguel Corporation subsidiary) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2014 AND 2013 (In millions)

ASSETS Current assets Cash and cash equivalents Debtors and other receivables - net Inventories Prepaid expenses and other current assets Total Current assets Non-current assets Investments - net Property, plant and equipment - net Investment property - net Intangible assets - net Deferred tax assets Other assets non-current - Total net non-current assets

LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued expenses Income and other taxes payable Current maturities of long-term debt - net of debt issuance costs Total Current liabilities Non-current liabilities Long-term debt - net of current maturities and costs debt issuance Deferred tax liabilities Other non-current liabilities Total Non-current liabilities Shareholders' equity Attributable to the Company's shareholders Share capital Premium on placement of shares Cumulative conversion adjustments Retirement plan reserve Retained earnings Treasury shares Non-controlling interests Total Shareholders' equity

To use

2014

2013

6, 31, 32 4, 7, 26, 31, 32 4, 8 9, 31, 32

P9.886 6.005 3.460 1.062 20.413

$ 14.198 6.352 3.254 938 24.742

10, 31, 32 4, 11 4, 12 4, 13 4, 17 4, 14, 26, 27, 28, 31, 32

60 20.120 1.416 35.998 1.610 8.931 68.135 P88.548

62 20,544 733 36,009 1,909 8,911 68,168 P92,910

15, 26, 31, 32 17

$ 6.455 2.650

$ 7.861 2.869

16, 31, 32

9.105

22.386 33.116

16, 31, 32 17 4, 28

37.518 383 3.288 41.189

22.627 17 4.115 26.759

15.410 515 (774) (2.498) 24.164 (1.029) 35.788 2.466 38.254 P88.548

15,410 515 (847) (2,870) 19,740 (1,029) 30,919 2,116 33,035 P92,910

33 18 2

See Notes to the Consolidated Financial Statements.

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SAN MIGUEL BREWERY INC.

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (San Miguel Corporation subsidiary) CONSOLIDATED INCOME STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (In millions, except per share)

SALES COST OF SALES

To use

2014

2013

2012

$ 79.005

P75.053

$ 75.580

19, 26

42.794

39.405

38.030

36.211

35.648

37.550

GROSS PROFIT FROM SALES AND ADMINISTRATIVE EXPENSES

(14.132)

(14.094)

(15.217)

INTEREST EXPENSES AND OTHER FINANCIAL CHARGES

16, 23

(2.722)

(3.872)

(4.072)

INTEREST INCOME

188

463 -

RETROFLOWS DUE TO IMPAIRMENT OF NON-CURRENT ASSETS - Net

OTHER REVENUE (CHARGES) - Net

RESULT BEFORE INCOME TAX

(294)

724 1.367 586

19.595

17.851

20.938

6.080

5.330

5.840

GREEN GRANDCHILDREN

$ 13.515

12521

$ 15.098

Attributable to: Shareholders of the Company Non-controlling interest

$ 13.029 486

$ 12.051 470

$ 14.360 738

$ 13.515

12521

$ 15.098

P0.85

P0.78

P0.93

INCOME FROM TAX EXPENSES

Basic and diluted earnings per share

See Notes to the Consolidated Financial Statements.

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ANNUAL REPORT 2014

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (San Miguel Corporation subsidiary) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (In millions)

Note NET INCOME

2014

2013

2012

$ 13.515

12521

$ 15.098

OTHER INTEGRAL INCOME Items that will not be reclassified to income Equity reserve for retirement - net of taxes

Items that will be reclassified to income Gain (loss) on exchange rate differences on the translation of foreign operations Net loss on available-for-sale financial assets

OTHER COMPREHENSIVE INCOME (LOSSES) - Net of taxes TOTAL COMPREHENSIVE INCOME Net of taxes Attributable to: Company shareholders Non-controlling interests

368

77 (2) 75 443

(674)

(379)

636 (1) 635

(1.021) (6) (1.027)

(39)

(1.406)

$ 13.958

12.482

$ 13.692

$ 13.474 484 $ 13.958

$ 12.037 445 $ 12.482

$ 13.194 498 $ 13.692

See Notes to the Consolidated Financial Statements.

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SMBI FS 2014 C5 6.indd 36

P515

$ 15.410

Other comprehensive income (losses) Net income

Total comprehensive income (loss) Additions to non-controlling interests Cash dividends

advance

On December 31, 2014

Equity reserve for retirement plan Exchange rate difference on the conversion of foreign operations Net loss of available-for-sale financial assets - net of taxes

P515

$ 15.410

As of January 1, 2014

10 33

To use

Additional payment on principal

capital social

(P765)

(P840)

translation reservation

(P9)

(2) -

(2)

(P7)

fair value reserve

Cumulative Conversion Adjustments

(P2.498)

372 -

372

(P2.870)

Retirement Plan Reserve

P24.164

13.029 (8.605)

13.029

$ 19.740

Retained earnings

Equity attributable to the Company's shareholders

(In millions)

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (San Miguel Corporation subsidiary) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

(P1,029)

autocart

$ 35.788

13.474 (8.605)

445 13.029

(2)

372

$ 30.919

Total

2466

484 232 (366)

(2) 486

(4)

P2.116

No interest rate control

P38.254

13.958 232 (8.971)

443 13.515

(2)

368

$ 33.035

total equity

36 SAN MIGUEL BREWERY INC.

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SMBI FS 2014 C5 6.indd 37

advance

On December 31, 2013

33 P15.410

Total Comprehensive Income (Loss) Redemption of Common Shares Cash Dividends P515

(P840)

656 -

656

(P1,496)

P515 -

translation reservation

Additional payment on principal

$ 15.410

Other comprehensive income (losses) Net income

Equity reserve for retirement plan Gain (loss) on exchange rate differences on conversion of foreign operations Net loss on available-for-sale financial assets - net of taxes

As of January 1, 2013

To use

capital social

(P7)

(1) -

(1)

(P6)

fair value reserve

Cumulative Conversion Adjustments

(P2.870)

(668) -

(668)

(P2,202)

Retirement Plan Reserve

(1)

$ 19.740

12.050 (8.622)

(Video) Celebs Who Got Fired From the Industry

(1) 12.051

P16,312

Retained earnings

Equity attributable to the Company's shareholders

(P1,029)

(1.029) -

P-

autocart

$ 30.919

12.037 (1.029) (8.622)

(14) 12.051

(1)

655

(668)

$ 28.533

Total

P2.116

445 (401)

(25) 470

(19)

(6)

P2.072

$ 33.035

12.482 (1.029) (9.023)

(39) 12.521

(1)

636

(674)

$ 30.605

Total non-controlling interests

ANNUAL REPORT 2014

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SMBI FS 2014 C5 6.indd 38

See Notes to the Consolidated Financial Statements.

On December 31, 2012

$ 15.410

P515

Total comprehensive income (loss) Cash dividends

Other comprehensive losses Net income

P515

$ 15.410

Equity reserve for retirement plan Loss on exchange variation arising from the conversion of operations abroad Net loss on available-for-sale financial assets - net of taxes

As of January 1, 2012

To use

Additional payment on principal

capital social

(P1,496)

(823) -

(821)

(2)

(P673)

(P6)

(6) -

(6)

P-

Accumulated Conversion Adjustments Fair Conversion Value Reserve Reserve

(P2,202)

(335) -

(335)

(P1,867)

Retirement Plan Reserve

P16,312

14.358 (8.630)

(2) 14.360

(2)

$ 10.584

Retained earnings

Equity attributable to the Company's shareholders

P-

autocart

$ 28.533

13.194 (8.630)

(1.166) 14.360

(6)

(821)

(339)

$ 23.969

Total

P2.072

498 (385)

(240) 738

(200)

(40)

$ 1.959

No interest rate control

$ 30.605

13.692 (9.015)

(1.406) 15.098

(6)

(1.021)

(379)

$ 25.928

total equity

38 SAN MIGUEL BREWERY INC.

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ANNUAL REPORT 2014

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (San Miguel Corporation subsidiary) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 (In millions)

2014

2013

2012

$ 19.595

$ 17.851

$ 20.938

21 23 28

2.979 2.722 632

3.093 3.872 582

2.501 4.072 527

7, 8

162

342

360

(188)

(463)

(1.367) (724)

(4)

(77)

25.898

25.200

26.311

776 (293) (134)

(1.508) (136) (53)

(148) 266 55

(1.271) 97

353 52

287 (18)

Cash generated by operations Interest paid Income tax paid Contributions paid

25.073 (2.949) (5.744) (923)

23.908 (3.695) (5.792) (751)

26.753 (3.773) (5.709) (472)

Net cash flows provided by operating activities

15.457

13.670

16.799

To use

CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Depreciation, amortization and other Interest expenses and other financial charges Costs of disposal Provision for impairment losses on accounts receivable, inventories and other Reversals from impairment recoverable amount of non-current assets - net Financial income Loss (gain) on the sale of fixed, investment and intangible assets Operating income before changes in working capital Decrease (increase) in: Debtors from customers and other accounts receivable Inventories Expenses paid in advance and other current assets Increase (decrease) in: Accounts payable and accrued expenses Other taxes payable

advance

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SAN MIGUEL BREWERY INC.

To use

CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment Acquisition of investment property Income from the sale of property, plant and equipment and intangible assets Income from the sale of investments Increase in intangible assets and other non-current assets Interest received

2014

2013

2012

(P927) (695)

(P1,022) (8)

140 3

(2.078) 192

(3.424) 472

(3.054) 725

(3.501)

(3.839)

(3.136)

14.851

21.078

(22.400) (365) 232 (6)

(7.884) (401) (1.008)

(1.757) (19.989) (385) -

4 (8.606)

(7) (8.618)

(6) (8.630)

(16.290)

(17.918)

(9.689)

326

(294)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(4.312)

(7.761)

3.680

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR

14.198

21.959

18.279

9886

14198

$ 21.959

11 12

Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Income from long-term loans Payments on: Short-term loans Long-term loans Dividends paid to minority shareholders Increase in minority interests Redemption of common shares Increase (decrease) other non-current liabilities cash dividends paid

Net cash flows used in financing activities EFFECT OF EXCHANGE RATE VARIATIONS ON CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

(P790) (25) -

See Notes to the Consolidated Financial Statements.

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ANNUAL REPORT 2014

SAN MIGUEL CERVEJARIA INC. AND SUBSIDIARIES (a subsidiary of San Miguel Corporation) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions, except per share and number of shares)

1. The reporting entity San Miguel Brewery Inc. (SMB or the Company) was incorporated and registered with the Philippine Securities and Exchange Commission (SEC) on July 26, 2007. The accompanying consolidated financial statements comprise the financial statements of the Company and its Subsidiaries (collectively referred to as the Group). The Company is a public company pursuant to Section 17.2 of the Securities Regulatory Code and its peso denominated fixed rate securities issued in 2009, 2012 and 2014 are listed on the Philippine Dealing & Exchange Corp. (PDEx). The company's common stock was listed on the Philippine Stock Exchange, Inc. (PSE) on May 12, 2008. The company filed a de-registration petition with PSE after PSE adopted the minimum public notice ownership rule and the SEC's denial of all requests (including the Company's ) to extend the grace period for compliance with said rule. The request was approved by PSE on April 24, 2013 and the Company's common shares were canceled as of May 15, 2013 (Notes 16 and 18). Corporación San Miguel (SMC) is the parent company of the Group. Top Frontier Investment Holdings, Inc. is the parent company of the Group. The Group is primarily engaged in the manufacture, sale and distribution of fermented and malt-based beverages. The Group is also involved in the acquisition, development and licensing of brands and intellectual property rights and in the management, sale, exchange, lease and holding of investments in real estate of all types, including buildings and other structures. The registered office address of the company is No. 40 San Miguel Avenue, Mandaluyong City, Philippines. 2. Basis of Preparation Statement of Compliance The accompanying consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). IFRS are based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The PFRS consists of the PFRS, the Philippine Accounting Standards (PAS) and the Philippine Interpretations issued by the Financial Reporting Standards Board (FRSC). The consolidated financial statements were authorized for issue by the Board of Directors (BOD) on March 11, 2015. Measurement basis The Group's consolidated financial statements have been prepared based on historical carrying cost, except for the following items which are measured on a alternative basis at each reporting date: Items Derivative financial instruments Financial assets available for sale (AFS) Defined benefit withdrawal liability

Measurement basis Fair value Fair value Fair value of plan assets less the present value of the defined benefit retirement obligation

Functional and presentation currency The consolidated financial statements are presented in Philippine pesos, which is the Company's functional currency. All financial information is rounded to the nearest million (000,000) unless otherwise noted.

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SAN MIGUEL BREWERY INC.

Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries as follows:

Nome da Subsidiária da Iconic Beverages, Inc. (IBI) San Miguel Brewing International Ltd. (SMBIL) Neptunia Corporation Limited (NCL) San Miguel Company Limited

Proportion of equity interest held by the owner

Effective Interest in the Company's Capital Stock *

Workplace

Company

Subsidiaries

Filipinas

100

british virgin islands

100

Hong Kong

100

Hong Kong

100

65,8

100 100

65,8 65,8

100 92

65,8 60,5

100

60,5

61.2

42,8

100

58.3

40 -

100

40 40

San Miguel Company Limited Taiwan Filial em Taiwan San Miguel Brewery Hong Kong Hong Kong Limited (SMBHK) Ravelin Limited Hong Kong Best Investments International, Ilhas Virgens Britânicas Inc. Hong Kong Brewery Limited Hong Kong St. Michael Shunde Holdings Hong Kong Limited (SMSH) St. Michael (Guangdong) República Popular da China Brewery Company Limited (SMGB) St. Michael (Guangdong) Limited Hong Kong (SMGL) Guangzhou St. Republic of China Brewery Company Limited (GSMB) St. Michael (China) Investments People's Republic of China Company Limited (SMCIC) ) St. Michael (Baoding) Brewery People's Republic of China Company Limited (SMBB) St. Michael Holdings (Thailand) Ltd Tailândia (SMHTL) St. Michael Beer (Tailândia) Thailand Limited (SMBTL) San Miguel Marketing (Tailândia) Thailand Limited (SMMTL) Dragon Island Investments British Virgin Islands Limited (DIIL) San Miguel (Vietnã) Limited Bermuda (SMVL) San Miguel Brewery Vietnam Republic of Vietnam Limited (SMBVL) San Miguel Malaysia Pte . Ltd Malásia PT. Jacarta Delta Tbk. e Subsidiária da República da Indonésia (PTD) Brewery Properties Inc. (BPI) Philippine Brewery Landholdings, Inc. (BLI) Filipinas

Line of Business Brand Licensing Beer Manufacture and Sale Participation Participation Distribution Beer Ownership Participation Beer Manufacture and Marketing Participation Latent Investment Participation Participation Production and Beer Marketing Participation Participation Distribution Beer Participation Beer Production and Marketing Participation in Investment Manufacture and Marketing of Beer Trading Investment Holding Investment Holding Beer Brewing and Sales Investment Holding Beer Brewing and Sales Property Property Property Property

* Represents the final equity interest in the subsidiary at the Company level after considering the dilutive effects of non-controlling interests at the different intermediate levels of ownership.

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ANNUAL REPORT 2014

There are no changes in the ownership structure of the Group as at 31 December 2014 and 2013, except for the merger of San Miguel (Baoding) Utility Limited in 2014 with SMBB. SMBB is the surviving entity. A subsidiary is an entity controlled by the Group. The Group controls an entity if, and only if, the Group is exposed to, or has rights to, variable returns from its interest in the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether or not it controls an investee if the facts and circumstances indicate that there are changes in one or more of the three elements of control. When the Group holds less than a majority of the voting rights or similar rights of an investee, the Group considers all relevant facts and circumstances to assess whether it has power over an investee, including the contractual agreement with the other voting shareholders of the investee. investee, the rights derived from other contractual arrangements and the Group's voting rights and potential voting rights. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which the Group obtains control and continue to be consolidated until the date on which control ceases. The financial statements of subsidiaries are prepared for the same reporting period as that of the parent company, using uniform accounting practices for similar transactions and other events in similar circumstances. Intergroup balances and transactions, including unrealized intergroup gains and losses, are eliminated in preparing the consolidated financial statements. Non-controlling interests represent the portion of profit or loss and net assets that the Group does not own and are presented in the consolidated statements of income, consolidated statements of comprehensive income and in equity in the consolidated statements of financial position, but separate from those of the group . shareholders' equity attributable to the Company's shareholders. Non-controlling interests represent the interests not held by the Group in PTD, SMHTL, SMBHK group and BPI group in 2014 and 2013. A change in the interest of a subsidiary, without loss of control, is accounted for as equity transaction. 🇧🇷 If the Group loses control of a subsidiary, the Group: (i) writes off the assets (including goodwill) and liabilities of the subsidiary, the carrying amount of any non-controlling interests and any accumulated transaction differences recorded in equity; (ii) recognizes the fair value of the consideration received, the fair value of any retained investment and any surplus or deficit in earnings; and (iii) reclassify the Company's interest in components previously recognized in other comprehensive income to profit or loss or retained earnings, as applicable, as required if the Group had directly disposed of the related assets or liabilities. When the Group loses control over a subsidiary, it writes off the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any retained interest in the former subsidiary is measured at fair value when control is lost.

3. Significant accounting policies The accounting policies set out below have been consistently applied to all periods presented in the consolidated financial statements, except for the changes in accounting policies explained below. Adoption of new and amended standards and interpretations The FRSC has approved the adoption of several new and amended standards and interpretations as part of the IFRS. Changes in standards and interpretations adopted in 2014 The Group adopted the following IFRS as of January 1, 2014 and, consequently, changed its accounting policies in the following areas: •

SMBI FS 2014 C5 6.indd 43

Disclosures of recoverable amount for non-financial assets (amendments to PAS 36, impairment of assets). These limited scope amendments to PAS 36 address disclosure of the recoverable amount of impaired assets if that amount is based on fair value less disposal costs. The amendments clarified that the scope of these disclosures is limited to the recoverable amount of impaired assets which is based on fair value less disposal costs. The adoption of these amendments had no effect on the consolidated financial statements.

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SAN MIGUEL BREWERY INC.

•

Offsetting Financial Assets and Financial Liabilities (Amendments to PAS 32, Financial Instruments). The amendments clarify that: (a) an entity currently has a legally enforceable right to compensation if that right: (i) is not contingent on a future event; and (ii) payable in the ordinary course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties; and (b) gross settlement is equivalent to net settlement if and only if the gross settlement mechanism has features that: (i) eliminate or result in negligible liquidity and credit risk; and (ii) process receivables and payables in a single settlement process or cycle. The adoption of these amendments had no effect on the consolidated financial statements.

• Measurement of short-term receivables and payables (amendment to IAS 13, Fair Value Measurement). The amendment clarifies that, when issuing IFRS 13 and making the consequent amendments to IFRS 39 and IFRS 9, Financial Instruments, the intention is not to prevent entities from measuring short-term receivables and payables that do not have an interest rate declared for their undiscounted values. invoiced amounts, if the effect of the non-discount is immaterial. The adoption of this amendment had no effect on the consolidated financial statements. 🇧🇷

Novation of Derivatives and Continuation of Hedge Accounting (Amendments to PAS 39, Financial Instruments: Recognition and Measurement). The amendments allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is renewed for clearing with a central counterparty as a result of laws or regulations, if specific conditions are met (in this context, a novation indicates that the parties to a contract agree to replace their original counterparty with a new one). The adoption of these amendments had no effect on the consolidated financial statements.

•

Philippine Interpretation IFRIC 21, Liens. The interpretation provides guidance on accounting for encumbrances in accordance with the requirements of PAS 37, Provisions, Contingent Liabilities and Contingent Assets. The interpretation confirms that an entity recognizes a liability for encumbrance when, and only when, the triggering event specified in the legislation occurs. An entity does not recognize a liability at an earlier date, even if it does not have a realistic opportunity to avoid the triggering event. Other standards must be applied to determine whether the debit side is an asset or an expense. Outputs within the scope of PAS 12, Income Taxes, fines and penalties, and liabilities arising from emissions trading schemes are explicitly excluded from the scope. The adoption of this interpretation had no effects on the consolidated financial statements.

Additional disclosures required by the new and amended standards and interpretations have been included in the consolidated financial statements, when appropriate. New and amended standards not yet adopted Several new and amended standards and interpretations are effective for annual periods beginning after January 1, 2014 and have not been applied in the preparation of these consolidated financial statements. Unless otherwise indicated, none of them are expected to have a material effect on the consolidated financial statements. The Group will adopt the following new and modified standards on their respective effective dates: •

The Annual Improvements of the 2010-2012 and 2011-2013 IFRS Cycles contain 11 amendments to nine standards with consequent amendments to other standards and interpretations, of which only the following are applicable to the Group. o Meaning of 'Irrevocability condition' (Amendment to IFRS 2, Share-based payments). IFRS 2 was amended to clarify the definition of "vesting condition" by defining "performance condition" and "service condition" separately. The amendment also clarifies the following: (i) how to distinguish between a market performance condition and a non-market condition; and (ii) the basis on which a performance condition can be distinguished from a non-vesting condition. The amendment shall be applied prospectively for annual periods beginning on or after July 1, 2014. or

Exclusion from the Scope for Forming Joint Arrangements (Amendment to IFRS 3, ). IAS 3 was amended to clarify that the standard does not apply to accounting for the formation of all types of joint arrangements in IAS 11, Joint arrangements, ie including joint operations, in the financial statements of the joint ventures themselves. The amendment is to be applied prospectively for annual periods beginning on or after July 1, 2014.

o Information to be disclosed on the Aggregation of Operating Segments (Amendments to IFRS 8, Operating Segments). IFRS 8 was amended to explicitly require disclosure of judgments made by management in applying

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ANNUAL REPORT 2014

the aggregation criteria. The disclosures include: (i) a brief description of the operating segments that have been added; and (ii) the economic indicators that were evaluated to determine whether the operating segments share similar economic characteristics. Furthermore, the amendments clarify that a reconciliation of the segment's total reportable assets to the entity's assets is only required if that information is regularly provided to the entity's highest operating decision maker. This amendment aligns the disclosure requirements with those for segment liabilities. The amendments shall apply prospectively for annual periods beginning on or after July 1, 2014.

SMBI FS 2014 C5 6.indd 45

Scope of Portfolio Exception (Amendment to IFRS 13). The amendment clarifies that the scope of the exception to measure the fair value of a group of financial assets and financial liabilities with net offsetting risk positions (portfolio exception) applies to contracts within the scope of PAS 39 and IAS 9, regardless of whether they meet the definition of financial assets or financial liabilities under PAS 32, for example, certain contracts to buy or sell non-financial items that may be settled in cash or another financial instrument. The amendment is to be applied prospectively for annual periods beginning on or after July 1, 2014.

Update of accumulated depreciation (amortization) due to revaluation (Amendments to PAS 16, Fixed Assets and PAS 38, Intangible Assets). The amendments clarify the requirements of the revaluation model in PAS 16 and PAS 38, recognizing that the update of accumulated depreciation (amortization) is not always proportional to the change in the gross carrying amount of the asset. PAS 16 and PAS 38 were amended to clarify that, on the revaluation date: the gross carrying amount is adjusted to be consistent with the reassessment of the asset's carrying amount, e.g. restated proportionally to the change in carrying amount or by reference to observable market data; and accumulated depreciation (amortization) is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses; o Accumulated depreciation (amortization) is removed against the gross book value of the asset.

Definition of 'Related Party' (Amendments to PAS 24, Related Parties). The definition of "related party" is expanded to include a management entity that provides key management personnel (KMP) services to the reporting entity, either directly or through a group entity. For related party transactions that arise when KMP services are provided to a reporting entity, the reporting entity is required to separately disclose the amounts it recognized as an expense for services provided by a management entity; however, it is not necessary to “see through” the managing body and disclose the remuneration paid by the managing body to persons providing KMP services. The reporting entity will also need to disclose other transactions with the collecting entity under existing PAS 24 disclosure requirements, for example loans. The amendment is to be applied prospectively for annual periods beginning on or after July 1, 2014.

Interrelation of IFRS 3 and PAS 40 (Amendment to PAS 40, Investment Property). PAS 40 was amended to clarify that an entity must assess whether an acquired property is investment property in accordance with PAS 40 and perform a separate assessment in accordance with IFRS 3 to determine whether the acquisition of the investment property constitutes a combination of business. Entities will still need to use judgment to determine whether an acquisition of investment property is an acquisition of a business under IFRS 3. The amendment should be applied prospectively for annual periods beginning on or after 1 July 2014.

•

Clarification on acceptable depreciation and amortization methods (amendments to PAS 16, Fixed Assets and PAS 38, Intangible Assets). The amendments to PAS 38, Intangible Assets, introduce a rebuttable presumption that the use of income-based amortization methods for intangible assets is inappropriate. This presumption can be overcome only when income and consumption of the economic benefits of the intangible asset are “highly correlated” or when the intangible asset is expressed as a measure of income. Amendments to PAS 16 explicitly state that profit-based depreciation methods cannot be used for property, plant and equipment. This is because such methods reflect factors other than consumption of the economic benefits embodied in the asset, for example, changes in sales volumes and prices. Changes are required for annual periods beginning on or after January 1, 2016 and will apply prospectively. Early application is allowed.

•

IFRS 9, Financial Instruments (2014). IFRS 9 (2014) supersedes PAS 39 and supersedes previously published versions of IFRS 9 that introduced new classifications and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). IFRS 9 includes revised guidance on classifying and measuring financial assets, including a new model of expected credit loss to calculate impairment, guidance on own credit risk on financial liabilities measured at fair value. It also complements the new general hedge accounting requirements published in 2013. IFRS 9 introduces new hedge accounting requirements that represent a major overhaul of hedge accounting and introduces significant improvements by aligning accounting more closely with risk.

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SAN MIGUEL BREWERY INC.

management. The new standard is to be applied retrospectively for annual periods beginning on or after January 1, 2018. Early adoption is permitted. Date of Recognition of Financial Assets and Liabilities. The Group recognizes a financial asset or financial liability in the consolidated statements of financial position when it becomes part of the contractual provisions of the instrument. In the case of regular purchase or sale of financial assets, recognition is made by accounting for the settlement date. Initial Recognition of Financial Instruments. Financial instruments are initially recognized at the fair value of the consideration given (in the case of an asset) or received (in the case of a liability). The initial measurement of financial instruments, except those designated at fair value through profit or loss (FVPL), includes transaction costs. Financial assets The Group classifies its financial assets, upon initial recognition, into the following categories: investments held to maturity (HTM), AFS financial assets, FVPL financial assets and loans and receivables. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and liabilities at initial recognition and, where permitted and appropriate, reassesses this designation at each reporting date. Financial Assets in FVPL. A financial asset is classified as FVPL if it is classified as held for trading or designated as such upon initial recognition. Financial assets are designated as FVPL if the Group manages such investments and makes purchase and sale decisions based on their fair values in accordance with the Group's documented risk management or investment strategy. Derivative instruments (including embedded derivatives), other than those covered by hedge accounting relationships, are classified in this category. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the short term. Financial assets may be designated by management on initial recognition as FVPL when any of the following criteria are met: •

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise result from measuring assets or recognizing gains or losses on a different basis;

•

the assets are part of a group of financial assets that are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; any

•

the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly alter the cash flows or it is clear, with little or no analysis, that it would not be recognized separately.

The Group transfers financial assets to FVPL using their fair values. Attributable transaction costs are recognized in profit or loss as incurred. Changes in fair value and realized gains or losses are recognized in profit or loss. Changes in the fair value of derivatives accounted for as part of an effective cash flow hedge are recognized in other comprehensive income and presented in the consolidated statement of changes in equity. Any accrued interest forms part of the “Interest income” account in the consolidated statement of income. Any income from dividends on equity securities classified as FVPL is recognized in profit or loss when the right to receive payment is established. The Group's derivative assets are classified in this category (Notes 9 and 32). Loans and accounts receivable. Loans and receivables are non-derivative financial assets with fixed or determinable payments and maturities that are not quoted in an active market. They are not held for immediate or short-term resale and are not designated as AFS financial assets or FVPL financial assets. After initial measurement, loans and receivables are carried at amortized cost using the effective interest rate method, less any impairment. Any accrued interest on loans and accounts receivable is recognized as part of “Interest income” in the consolidated income statement on an accrual basis. Amortized cost is calculated taking into account any discounts or premiums on acquisition and commissions that are an integral part of the effective interest rate. Periodic amortization is also included as part of the “Interest income” account in the consolidated income statement. Gains or losses are recognized in income when loans and receivables are written off or become non-recoverable.

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Cash includes cash on hand and in banks that are expressed at face value. Cash equivalents are highly liquid financial investments, readily convertible into a known amount of cash and with insignificant risk of change in value. This category includes cash and cash equivalents, trade receivables and other receivables and non-current receivables of the Group (Notes 6, 7, 14 and 26). AFS Financial Assets. AFS financial assets are non-derivative financial assets that are designated in this category or not classified in any of the other financial asset categories. After initial recognition, AFS financial assets are measured at fair value and changes thereto, except impairment losses and foreign currency differences on AFS debt instruments, are recognized in other comprehensive income and are presented in the account “ Fair value reserve” in the consolidated statements. of changes in equity. The effective yield component of AFS debt securities is reported as part of the 'Interest income' account in the consolidated income statement. Dividends earned from holding AFS equity securities are recognized as dividend income when the right to receive payment is established. When individual AFS financial assets are derecognized or impaired, the cumulative unrealized gains or losses previously recorded in equity are transferred and recognized in profit or loss. AFS financial assets also include unlisted equity instruments with fair values that cannot be reliably determined. These instruments are recorded at cost less impairment, if any. The Group's investments in variable-yield securities included in the caption “Investments” in the consolidated statement of financial position are classified in this category (Note 10). The Group has no financial assets classified as HTM investments as of December 31, 2014 and 2013. 'Day 1' results. When the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables only include observable market data, the Group recognizes the difference between transaction price and fair value (a 'Day 1' gain) in profit or loss, unless it qualifies for recognition as some other type of asset. In cases where the data used are not observable, the difference between the transaction price and the model value is only recognized in profit or loss when the input data become observable or when the instrument is derecognised. For each transaction, the Group determines the appropriate method for recognizing the 'Day 1' gain amount. Financial liabilities The Group classifies its financial liabilities, upon initial recognition, into the following categories: financial liabilities to the FVPL and other financial liabilities, as the case may be. The Group determines the classification of its financial liabilities upon initial recognition and, when permitted and appropriate, reassesses such designation at each year-end. All financial liabilities are recognized initially at fair value and, in the case of loans and receivables, net of directly attributable transaction costs. Financial Liabilities in FVPL. Financial liabilities are classified in this category using the fair value option. Derivative instruments (including embedded derivatives) with a negative fair value, other than those covered by hedge accounting relationships, are also classified in this category. The Group carries financial liabilities to FVPL using their fair values and recognizes changes in fair value in profit or loss. Changes in the fair value of derivatives accounted for as part of effective hedge accounting are recognized in other comprehensive income and presented in the consolidated statement of changes in equity. Any interest expense incurred will be recognized as part of “Interest expense and other finance charges” in the consolidated statement of income. The Group's derivative liabilities are classified in this category (Notes 15 and 32). Other financial liabilities. This category pertains to financial liabilities that are not designated or classified in the FVPL. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest rate method. The amortized cost is calculated taking into account any premium or discount and any directly attributable transaction cost that is considered an integral part of the liability's effective interest rate. Amortization at the effective interest rate is included in “Interest expenses and other financial charges” in the consolidated statement of income. Gains and losses are recognized in income when liabilities are written off, as well as during the amortization process.

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This category includes the Group's liabilities arising from its commercial operations or debt, such as accounts payable and accrued expenses, current maturities of long-term debt and long-term debt (Notes 15, 16 and 26). Embedded derivatives The Group assesses whether it is necessary to separate embedded derivatives from the host contracts when the Group becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized in the FVPL. The reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Derecognition of Financial Assets and Financial Liabilities Financial Assets. A financial asset (or, where appropriate, part of a financial asset or part of a group of similar financial assets) is derecognized primarily when: •

the rights to receive cash flows from the asset have expired; any

•

the Group has transferred its rights to receive cash flows from the asset or assumed the obligation to pay them in full without material delay to a third party under a “transfer” arrangement; and: (a) has transferred substantially all the risks and rewards of the asset; or (b) has not transferred or retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group transfers its rights to receive cash flows from an asset or enters into a transfer agreement, it assesses whether and to what extent it has retained the risks and rewards of ownership. When it has not transferred or retained substantially all the risks and rewards of the asset or transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group's continued involvement. In this case, the Group also recognizes the associated liability. The transferred asset and the associated liability are measured based on the rights and obligations retained by the Group. Financial liabilities. A financial liability is derecognized when the obligation arising from the liability is paid, canceled or expires. When an existing financial liability is replaced by another of the same creditor on substantially different terms, or the terms of an existing liability are substantially modified, such exchange or modification is treated as derecognition of the original liability and recognition of a new liability. 🇧🇷 The difference in the respective book values is recognized in profit or loss. Impairment of financial assets The Group assesses, at the reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is considered impaired if, and only if, there is objective evidence of impairment as a result of one or more events occurring after initial recognition of the asset (an incurred loss event) and that loss event has a impact on the estimated future cash flows of the financial asset or group of financial assets that can be estimated reliably. Assets recorded at amortized cost. For financial assets measured at amortized cost, such as loans and receivables, the Group first assesses whether there is objective evidence of impairment individually for individually significant financial assets, or collectively for financial assets that are not individually significant. If no objective evidence of impairment is identified for a given financial asset that has been assessed individually, the Group includes the asset as part of a group of financial assets with similar credit risk characteristics and collectively assesses the group for impairment. Assets whose impairment is individually assessed and for which an impairment loss is recognized or continues to be recognized are not included in the collective impairment assessment. Evidence of impairment for specific impairment purposes may include indications that the borrower or a group of borrowers is experiencing financial difficulties, defaults or defaults on principal or interest payments, or may enter into bankruptcy or other form of financial reorganization intended to to ease the financial status of the borrower. For collective impairment purposes, evidence of impairment may include observable data about existing economic conditions.

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or industry-wide developments that indicate there is a measurable decline in the estimated future cash flows from the related assets. If there is objective evidence of impairment, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows (excluding future credit losses) discounted at the original effective interest rate. financial asset (ie the effective interest rate calculated on initial recognition). Time value is generally not considered when the effect of discounting cash flows is not material. If a loan or receivable has a variable rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. For the purposes of collective impairment, the impairment loss is calculated based on the respective past experience of default and loss. The carrying amount of the asset is reduced either directly or through an allowance account. The impairment loss for the period is recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying amount of the asset does not exceed its amortized cost on the reversal date. AFS Financial Assets. For equity instruments recorded at fair value, the Group assesses, at each reporting date, whether there is objective evidence of impairment. Objective evidence of impairment includes a significant or prolonged decline in the fair value of an equity instrument below its cost. 'Significant' is measured against the original cost of the investment and 'extended' is measured against the period in which the fair value was below its original cost. The Group generally considers that the decrease in fair value is significant when the decrease is greater than 25%. A decline in the quoted market price that persists for 12 months is generally considered to be prolonged. If an AFS financial asset is impaired, an amount comprising the difference between cost (net of any principal payments and amortization) and its current fair value, less any impairment loss on that financial asset previously recognized in profit or loss, is transferred of equity. for profit or loss. Reversals of impairment losses relating to equity instruments classified as AFS financial assets are not recognized in profit or loss. Reversals of impairment losses on debt instruments are recognized in profit or loss if the increase in the instrument's fair value can be objectively related to an event that occurs after the impairment loss was recognized in profit or loss. In the case of an unlisted equity instrument or a linked derivative asset that must be settled by delivery of an unlisted equity instrument whose fair value cannot be reliably measured, the amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the asset's estimated future cash flows discounted using the asset's historical effective rate of return. Classification of financial instruments between debt and equity From the point of view of the issuer, a financial instrument is classified as a debt instrument if it provides for a contractual obligation to: •

deliver cash or other financial assets to another entity;

•

exchange financial assets or financial liabilities with another entity under conditions potentially unfavorable to the Group; any

•

satisfy the obligation, except by exchanging a fixed amount of cash or another financial asset for a fixed number of shares of equity.

If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. Debt issuance costs Debt issuance costs are considered as an adjustment to the effective yield of the respective debt and are deferred and amortized using the effective interest rate method. When a loan is repaid, unamortized debt issuance costs related to the amortization date are recognized in profit or loss. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle at an amount net, or realize the assets and settle the liabilities simultaneously. This is usually not

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in the case of master compensation arrangements, and the related assets and liabilities are presented gross in the consolidated statements of financial position. Inventories Finished goods, work in process and materials and supplies are valued at the lower of cost and net realizable value. Costs incurred to bring each inventory to its current location and condition are accounted for as follows: Finished Goods and Work in Progress

Materials and Supplies

at cost, which includes direct materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs; costs are determined by the moving average method; to cost using the moving average method.

Finished products. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale. Goods in Process. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to complete the sale. Materials and supplies. Net realizable value is current replacement cost. Any reduction in the value of inventories to net realizable value and all losses of inventories are recognized as an expense in the year in which the reduction or loss occurs. The amount of reversals, if any, of the decrease in the value of inventories resulting from an increase in net realizable value is recognized as a reduction in the value of inventories recognized as an expense in the period in which the reversal occurs. Containers (i.e. returnable bottles and caps). They are expressed at the value of deposits minus any impairment of value. The excess of the acquisition cost of containers over their deposit value is presented under the caption deferred containers included in the caption "Other non-current assets" in the consolidated statement of financial position and is amortized over an estimated useful life of two to ten years. Amortization of deferred containers is included in “Selling and administrative expenses” in the consolidated statement of income. Business combinations Business combinations are accounted for using the acquisition method at the acquisition date. The cost of an acquisition is measured by the sum of the consideration transferred, measured at fair value on the acquisition date, and the value of any non-controlling interest in the acquiree. For each business combination, the Group chooses whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are charged to income as incurred and are included as part of “Selling and administrative expenses” in the consolidated statement of income. When the Group acquires a business, it evaluates the financial assets and liabilities assumed for their correct classification and designation in accordance with the contractual terms, economic circumstances and conditions relevant to the acquisition date. If the business combination is carried out in stages, the acquisition-date fair value of the interest previously held by the acquirer in the acquiree is remeasured to the acquisition-date fair value and any resulting gain or loss is recognized in profit or loss. The Group measures goodwill on the acquisition date as: a) the fair value of the consideration transferred; plus b) the recognized amount of any non-controlling interest in the acquiree; plus c) if the business combination is carried out in stages, the fair value of the existing equity interest in the acquiree; less d) the net recognized amount (generally the fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, the advantageous purchase gain is immediately recognized in profit or loss. Subsequently, goodwill is measured at cost less any accumulated impairment. The value of goodwill is reviewed annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.

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The transferred consideration does not include amounts related to the liquidation of pre-existing relationships. Such amounts are generally recognized in profit or loss. Acquisition-related costs, except those associated with the issuance of debt securities or shares that the Group incurs in connection with a business combination, are charged to income when incurred. Any contingent consideration payable is measured at its fair value on the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and the settlement is accounted for in equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. 🇧🇷

Goodwill in a business combination Goodwill acquired in a business combination is allocated, from the acquisition date, to each of the cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination, regardless of of other assets or liabilities are assigned to these units or groups of units. Each unit or group of units to which goodwill is allocated: •

represents the lowest level within the Group at which goodwill is monitored for internal management purposes; y

•

is not larger than an operating segment determined in accordance with IFRS 8.

Impairment is determined by assessing the recoverable amount of the cash-generating unit or group of cash-generating units to which the goodwill is related. When the recoverable amount of the cash-generating unit or group of cash-generating units is less than the carrying amount, an impairment loss is recognized. When goodwill forms part of a cash-generating unit or group of cash-generating units and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the transaction when determining the gain or loss on disposal of the transaction. Goodwill disposed of in this circumstance is valued based on the relative values of the operation disposed of and the part of the cash-generating unit retained. An impairment loss in relation to goodwill is not reversed. 🇧🇷

Intangible assets acquired in a business combination The cost of an intangible asset acquired in a business combination is the fair value on the acquisition date, determined using the discounted cash flows resulting from ownership of the asset. After initial recognition, an intangible asset is recorded at cost less accumulated amortization and impairment losses, if any. The useful life of an intangible asset is assessed as definite or indefinite.

Transactions under common control Transactions under common control entered into for mutual consideration and business combinations under common control intended to achieve general business effect are treated as a single transaction. Asset transfers between controlled entities are commonly accounted for using book value accounting. Non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners acting as owners and, therefore, no goodwill is recognized as a result of such transactions. Any difference between the purchase price and the net assets of the acquired entity is recognized in equity. Adjustments for non-controlling interests are based on a proportionate amount of the acquired subsidiary's identifiable net assets. Property, plant and equipment Property, plant and equipment, except land, is valued at cost less accumulated depreciation and amortization and any accumulated impairment. Such cost includes the cost of replacing part of the property, plant and equipment at the time the cost is incurred, if the recognition criteria are met, and excludes day-to-day service costs. Land is valued at cost less any loss in value. The initial cost of property, plant and equipment comprises its cost of construction or purchase price, including import duties, taxes and any costs directly attributable to bringing the asset to its working condition and location for its intended use. The cost also includes any related asset retirement obligation (ARO). Expenses incurred after the asset comes into operation, such as repair, maintenance and reconditioning costs, are normally recognized as expenses in the period in which the costs are incurred. Major repairs are capitalized as part of property, plant and equipment only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be reliably measured.

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Construction in progress (CIP) represents structures under construction and is stated at cost. This includes construction costs and other direct costs. Borrowing costs that are directly attributable to the construction of plant and equipment are capitalized during the construction period. CIP is not depreciated until the relevant assets are ready for use. Depreciation and amortization, which begin when the assets are available for their intended use, are calculated using the straight-line method based on the following estimated useful lives of the assets: Number of years Machinery and equipment Buildings and improvements Transport equipment Improvements to leased facilities Office equipment, furniture and fixtures Tools and small equipment

4 - 50 5 - 50 3-7 3 - 50 or lease term, whichever is less 2 - 20 2 - 10

The remaining useful life, residual values and methods of depreciation and amortization are periodically reviewed and adjusted, if applicable, to ensure that such periods and methods of depreciation and amortization are consistent with the expected pattern of economic benefits of the asset items immobilized. 🇧🇷 The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Fully depreciated assets are held in accounts until they are no longer in use. An item of property, plant and equipment is derecognized when it is disposed of or permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising from the retirement and disposal of an item of property, plant and equipment (calculated as the difference between the net sale price and the carrying amount of the asset) is included in profit or loss in the period of disposal or disposal. 🇧🇷 Investment property Investment property consists of property held for rent and/or capital gains, but not for sale in the ordinary course of business, used in the production or supply of goods or services or for administrative purposes. Investment property, other than land, is measured at cost, including transaction costs less accumulated depreciation and amortization and any accumulated impairment. The carrying amount includes the cost to replace part of an investment property existing at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day maintenance of an investment property. Land is valued at cost less any loss in value. Depreciation and amortization, which begin when the assets are available for their intended use, are calculated using the straight-line method based on the following estimated useful lives of the assets: Number of Years Land improvements Buildings and improvements

5 - 50 5 - 50

Useful lives, residual values and the method of depreciation and amortization are reviewed and adjusted, if applicable, at each reporting date. Investment properties are derecognized when they are disposed of or when they are permanently withdrawn from use and no future economic benefits are expected to be obtained from the disposal. Any gain or loss on decommissioning and disposal of investment properties is recognized in profit or loss in the period of deactivation or disposal.

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Transfers to investment property are made when, and only when, there is a change in use, evidenced by termination of owner occupancy or commencement of an operating lease to another party. Investment property transfers are carried out when, and only when, there is a change of use, evidenced by the beginning of occupation by the owner or the beginning of development with a view to sale. For a transfer from investment property to owner-occupied property or inventories, the cost of the property for subsequent accounting is its carrying amount on the date of change in use. If the property occupied by the Group as its own property becomes an investment property, the Group accounts for said property in accordance with the policy established in property, plant and equipment up to the date of change of use. Intangible assets Intangible assets acquired separately are measured at initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value on the acquisition date. Subsequently, intangible assets are measured at cost less accumulated amortization and any accumulated impairment loss. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditures are recognized in profit or loss in the year in which the related expenditures are incurred. The useful lives of intangible assets are assessed as definite or indefinite. Intangible assets with defined useful lives are amortized over their useful lives and evaluated for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method used for an intangible asset with a finite useful life are reviewed at a minimum at each reporting date. Changes in the expected useful life or in the expected pattern of consumption of the future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as the case may be, and are treated as changes in accounting estimates. The amortization expense of intangible assets with finite lives is recognized in profit or loss according to the function of the intangible asset. Amortization is calculated using the straight-line method based on the following estimated useful lives of other intangible assets with finite lives: Number of years Computer applications Land use rights

2 - 10 42 - 50 or lease term, whichever is less

The Group assessed the useful life of the brands, some licenses and trade names as indefinite. Based on the analysis of all relevant factors, there is no foreseeable limit to the period over which the assets are expected to generate cash inflows for the Group. Brands, licenses and trade names with indefinite useful lives are tested annually for impairment, individually or at the cash-generating unit level. These intangibles are not amortized. The useful life of an intangible asset with an indefinite useful life is reviewed annually to determine whether the indefinite useful life assessment continues to be supportable. Otherwise, the change in the useful life assessment from indefinite to definite is done on a prospective basis. Gains or losses arising from the sale of an intangible asset are measured as the difference between the net profit from the sale and the book value of the asset and are recognized in income when the asset is written off. Impairment of non-financial assets The carrying amounts of property, plant and equipment, investment property, deferred containers and intangible assets with defined useful lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Brands, licenses and trade names with indefinite useful lives are tested annually for impairment, individually or at the cash-generating unit level. If there is such an indication, and if the carrying amount exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The asset's recoverable amount is the higher of its fair value less costs to sell and its value in use. Fair value less costs to sell is the amount that can be obtained from the sale of an asset in an arm's length transaction between knowledgeable, interested parties, less disposal costs. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss in expense categories consistent with the function of the asset with impairment.

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An assessment is carried out at each reporting date as to whether there are indications that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is only reversed if there has been a change in the estimates used to determine the recoverable amount of the asset since the last impairment loss was recognised. If applicable, the carrying amount of the asset is increased to its recoverable amount. This added value cannot exceed the book value that would have been determined, net of depreciation and amortization, if an impairment loss had not been recognized for the asset in previous years. Such reversal is recognized in income. After such a reversal, the depreciation and amortization charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, systematically over its remaining useful life. Fair value measurement The Group measures a number of financial and non-financial assets and liabilities at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the assumption that the transaction to sell the asset or transfer the liability takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset. passive. responsibility. The main or most advantageous market must be accessible to the Group. The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are classified in the fair value hierarchy, described below, based on the lowest entry level that is significant for measuring fair value as a all: • Level 1 :

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

• Level 2:

inputs other than quoted prices included in Level 1 that are observable for the asset or liability, directly or indirectly; y

• Level 3:

entries for the asset or liability that are not based on observable market data.

For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether there have been transfers between levels in the hierarchy by reassessing the categorization at the end of each reporting period. For fair value disclosure purposes, the Group has determined asset and liability classes based on the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. Provisions Provisions are recognized when: (a) the Group has a present obligation (legal or presumptive) as a result of past events; (b) it is probable (ie more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made if the effect of the time value of money is significant, provisions are determined by discounting expected future cash flows at a pre-tax rate that reflects current valuation. of money and specific liability risks. When the discount is used, the increase in the provision due to the passage of time is recognized as interest expense. When part or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset only when it is virtually certain that the reimbursement will be received. The amount recognized for reimbursement cannot exceed the provision amount. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Capital Stock Common Shares Common shares are classified as shareholders' equity. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from shareholders' equity for tax purposes.

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Treasury shares in portfolio Repurchased equity instruments are recorded at cost and deducted from equity. No gain or loss is recognized on the purchase, sale, reissue or cancellation of the Company's own equity instruments. When shares are withdrawn, the share capital account is reduced by their par value and the excess cost over par value at the time of retirement is charged to the share placement premium to the extent of the specific or average share placement premium. when the shares were issued and for retained earnings for the remaining balance. Revenue recognition Revenue is recognized to the extent that it is probable that economic benefits associated with the transaction will flow to the Group and the amount of revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sale of goods. Revenue from the sale of products in the ordinary course of business is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume discounts. Revenue is recognized when the significant risks and rewards of ownership of the goods are transferred to the buyer, which normally occurs upon delivery, and the amount of revenue can be reliably measured. Interest. Revenue is recognized as interest accrues, taking into account the effective yield on the asset. Rent. Income from investment property is recognized on a straight-line basis over the lease term. Others. Revenue is recognized when earned. Recognition of costs and expenses Costs and expenses are recognized upon receipt of goods, use of services or on the date they are incurred. Expenses are also recognized when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability that can be reliably measured. Expenses are recognized in the consolidated statements of income based on the direct association between costs incurred and obtaining specific items of income; based on systematic and rational allocation procedures when economic benefits are expected to arise over several accounting periods and the association can only be broadly or indirectly determined; or immediately when a disbursement does not produce future economic benefits or when, and to the extent, future economic benefits do not, or no longer, qualify for recognition as an asset. Share-based payment transactions Pursuant to SMC's Employee Share Purchase Plan (ESPP), Group employees receive compensation in the form of share-based payment transactions, whereby employees provide services such as consideration for the equity instruments of SMC. These transactions are handled centrally by SMC. Share-based transactions in which SMC grants option rights on its equity instruments directly to Group employees are accounted for as share-settled transactions. SMC charges the Group for costs related to such transactions with its employees. The amount is allocated to the Group's operations. The ESPP cost is measured by reference to the market price at the time of grant minus the subscription price. The cumulative expense recognized for share-based payment transactions at each reporting date through the grant date reflects the extent to which the grant period has expired and SMC's best estimate of the number of equity instruments that will ultimately be granted. When the terms of a share-based award are changed, at least one expense is recognized as if the terms had not been changed. In addition, an expense is recognized for any modification that increases the aggregate fair value of the share-based payment arrangement or is otherwise beneficial to the employee measured at the date of the modification. When an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the canceled award and is designated as the replacement award on the date it is awarded, the canceled and new awards will be treated as if they were a modification of the original award. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the performance of the arrangement depends on the use of a specific asset or assets.

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and the agreement conveys the right to use the asset. The reassessment is carried out after the beginning of the lease contract only if one of the following situations occurs: (a) there is a change in the contractual conditions, other than renewal or extension of the contract; (b) a renewal option is exercised or an extension is granted, unless the renewal or extension term was originally included in the lease term; (c) there is a change in the determination of whether compliance depends on a specific asset; or (d) there is a material change in the asset. When a reassessment is made, accounting for the lease will start or stop from the date on which the change in circumstances gives rise to the reassessment for scenarios (a), (c) or (d), and the date of renewal or extension of the time frame for scenario (b) above. Operating lease group as lessee. Leases that do not substantially transfer to the Group all the risks and benefits inherent in ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are charged to income when incurred. Group as Landlord. Leases in which the Group does not substantially transfer all the risks and rewards inherent in ownership of the assets are classified as operating leases. Operating lease rental income is recognized as income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and are recognized as an expense over the lease term on the same basis as rental income. Contingent rents are recognized as income in the period in which they are incurred. Borrowing costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs begins when activities to prepare the asset are under way and borrowing costs and expenses are incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. Research and Development Costs Research costs are expensed as incurred. Development costs incurred on an individual project are carried forward when their future recoverability can be reasonably assured. Any expense carried forward is amortized against expected future sales of the related project. The carrying amount of development costs is reviewed annually for impairment when the related asset is not yet in use. Otherwise, it is reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Employee benefits Short-term employee benefits. Short-term employee benefits are expensed as the related service is provided. A liability is recognized at the amount expected to be paid if the Group has a current legal or constructive obligation to pay that amount as a result of past service provided by the employee and the obligation can be reliably estimated. Withdrawal costs. The Company and most of its subsidiaries have non-contributory capitalized retirement plans, managed by the respective trustees, which cover their respective effective employees. The cost of providing defined benefit retirement plan benefits is determined actuarially using the projected unit credit method. The projected unit credit method reflects the services rendered by employees at the valuation date and incorporates assumptions related to projected employee salaries. Actuarial gains and losses are fully recognized in the period in which they occur in other comprehensive income. These actuarial gains and losses are also recognized immediately in equity and are not reclassified to income in subsequent periods. The net defined benefit retirement liability or asset is the sum of the present value of the amount of future benefits that employees have earned in exchange for their service in the current and prior periods, less the fair value of plan assets. (if applicable), adjusted for any effect of capping a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of economic benefits available in the form of reductions in future contributions to the plan.

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ANNUAL REPORT 2014

Defined benefit costs comprise the following: • Service costs • Net interest on the defined benefit retirement asset or liability • Remeasurements of the defined benefit retirement asset or liability Service costs include current service costs, service costs past and non-routine gains or losses settlements are recognized as an expense in profit or loss. Past service costs are recognized when the plan is modified or reduced. These amounts are calculated periodically by a qualified and independent actuary, using the projected unit credit method. The net interest on the defined benefit withdrawal liability or net asset is the change during the period as a result of contributions and benefit payments, which is determined by applying the government bond-based discount rate to the net asset or withdrawal liability of defined benefits. Net interest on the liability or net asset for withdrawing defined benefits is recognized as an expense or income in profit or loss. Remeasurements of the net defined benefit retirement liability or asset that include actuarial gains and losses, return on plan assets and the effect of the asset cap (excluding net interest) are recognized immediately in other comprehensive income in the period in which they occur. When a plan's benefits are modified, or when a plan is reduced, the resulting change in benefit relating to past service or gain or loss from the reduction is recognized immediately in profit or loss. The Group recognizes settlement gains and losses on a defined benefit pension plan when settlement occurs. Foreign Currency Foreign Currency Conversions. Transactions in foreign currency are translated into the respective functional currencies of the Group's entities at the exchange rates on the dates of the transactions. Monetary assets and liabilities denominated in a foreign currency at the balance sheet date are translated into the functional currency at the exchange rate on that date. Exchange gain or loss on monetary items is the difference between amortized cost in functional currency at the beginning of the year, adjusted for interest and payments effective during the year, and amortized cost in foreign currency translated at the exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currency that are measured at fair value are translated into the functional currency at the exchange rate on the date on which the fair value was determined. Non-monetary items in foreign currency measured at historical cost are translated at the exchange rate on the transaction date. Exchange differences arising on translation are recognized in profit or loss, except for differences arising on the translation of AFS financial assets, a financial liability designated as an effective hedge of the net investment in a foreign operation, or qualified cash flow hedges, which are recognized in other comprehensive results. Foreign Operations. Assets and liabilities from foreign operations, including goodwill and fair value adjustments arising from the acquisition, are translated into Philippine pesos at the exchange rate in effect on the reporting date. Revenues and expenses from overseas operations, excluding foreign operations in hyperinflationary economies, are translated into Philippine pesos at the average exchange rate for the period. Exchange differences are recognized in other comprehensive income and presented under “Conversion reserve” in the consolidated statement of changes in equity. However, if the operation is not a wholly-owned subsidiary, then the relevant pro rata portion of the translation difference is allocated to non-controlling interests. When a foreign operation is disposed of in such a way that control, significant influence or joint control is lost, the amount accumulated in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group sells only part of its interest in a subsidiary that includes a foreign operation, while maintaining control, the corresponding proportion of the accumulated value is redistributed to non-controlling interests. When the settlement of a monetary item receivable or payable from a foreign operation is not planned or is not likely to occur in the foreseeable future, the foreign exchange gains and losses arising on that monetary item are considered part of a net investment in a foreign operation. outside. operation and are recognized in other comprehensive income and are presented in the “Conversion reserve” account in the consolidated statements of changes in equity.

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Taxes Current Tax. Current tax is the expected tax payable or receivable on taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date of the financial statements and any adjustments to taxes payable in respect of prior years. Deferred tax. Deferred tax is recognized in connection with temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: •

when the deferred tax liability results from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, does not affect accounting profit or tax gain or loss; y

•

with respect to taxable temporary differences associated with investments in subsidiaries, where 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 tax assets are recognized for all deductible temporary differences, unused tax losses (NOLCO) to the extent that it is probable that taxable profit will be available against which the differences will apply deductible and carry forward NOLCO benefits can be used, except: •

when the deferred tax asset related to the deductible temporary difference results 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, does not affect accounting profit or tax gain or loss; y

•

With respect to deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and there are available taxable profits against which the temporary differences can be used. .

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that there will be sufficient taxable profit available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it is probable that future taxable income will allow the deferred tax asset to be recovered. The measurement of deferred tax reflects the tax consequences that would arise from the way in which the Group expects, at the end of the year, to recover or settle the book value of its assets and liabilities. Deferred tax assets and liabilities are measured at the rates expected to apply in the year in which the asset is realized or the liability settled, based on the rates (and tax laws) that were enacted or substantially enacted on the Filing Date. When determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be payable. The Group believes that its provisions for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretation of tax laws and past experience. This assessment is based on estimates and assumptions and may imply a series of judgments about future events. New information may emerge that causes the Group to change its judgment as to the adequacy of existing tax obligations; such changes in tax obligations will impact tax expenditures in the period in which such determination is made. Current tax and deferred tax are recognized in profit or loss, except to the extent that they relate to a business combination, or items recognized directly in equity or other comprehensive income. Deferred tax assets and deferred tax liabilities are offset if there is a legally enforceable right to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and tax authority. Value Added Tax (VAT). Income, expenses and assets are recognized net of VAT, except: •

SMBI FS 2014 C5 6.indd 58

when the tax incurred on the acquisition of goods or services is not recoverable from the tax authority, in which case the tax is recognized as part of the acquisition cost of the asset or as part of the expense item, as the case may be; y

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ANNUAL REPORT 2014

•

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accounts receivable and accounts payable that are expressed with the amount of tax included.

The net amount of tax recoverable or payable to the tax authority is included in the accounts “Advances and other current assets” or “Income and other taxes payable” in the consolidated statements of financial position. Related parties Parties are considered related when one party has the ability, directly or indirectly, to control the other party or exert significant influence over the other party in making financial and operating decisions. Parties are also considered related if they are subject to common control. Related parties can be individuals or legal entities. Basic and diluted earnings per share (EPS) Basic earnings per share are calculated by dividing the net income for the period attributable to the Company's shareholders by the weighted average number of common shares issued and outstanding during the period, retroactively adjusted for any dividends in shares. declared. Diluted earnings per share are calculated in the same way, adjusted for the effects of all diluted common shares. Operating segments The Group's operating segments are organized and managed separately by geographic location, each segment being a strategic business unit offering different products and serving different markets. The financial information of the operating segments is presented in Note 5 to the consolidated financial statements. The CEO (the chief operating decision maker) reviews management reports on a regular basis. The measurement policies that the Group used for segment reporting in accordance with IFRS 8 are the same as those used in its consolidated financial statements. There have been no changes to the measurement methods used to determine reported segment profit or loss from prior periods. All transfers between segments are made at regular prices. Segment revenue, expense, and performance include sales and purchases across business segments and across geographic segments. These sales and purchases are eliminated on consolidation. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements, unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements, but are disclosed in the explanatory notes to the consolidated financial statements when economic benefits are probable. Events after the reporting date Events occurring after the end of the financial year that provide additional information on the Group's financial situation at the reporting date (adjustment events) are reflected in the consolidated financial statements. Events occurring after the end of the year that are not adjusting events are disclosed in the notes to the consolidated financial statements when they are significant. 4. Significant accounting judgments, estimates and assumptions The preparation of consolidated financial statements in accordance with the TIN requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expenses reported in the financial statements. consolidated financial statements at the date of presentation. However, uncertainty about these judgments, estimates and assumptions may give rise to a result that may require a material adjustment to the carrying amount of the affected asset or liability in the future. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events deemed reasonable under the circumstances. Revisions are recognized in the period in which the judgments and estimates are revised and in any affected future period. Judgments In the process of applying the Group's accounting policies, Management made the following judgments, in addition to those involving estimates, which have the most significant effect on the amounts recognized in the consolidated financial statements:

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Control assessment. Although the Company owned less than half of BPI and less than half of its voting power, the Company determined that the Company controls BPI. The Company receives substantially all the returns related to BPI's operations and net assets and has the current capacity to direct the BPI activities that most significantly affect returns. Operating Lease Commitments - Group as Landlord/Leaseholder. The Group has entered into several leasing agreements as lessor or lessee. The Group has determined that it retains all significant risks and rewards of ownership of assets leased under operating leases, while the significant risks and rewards of assets leased to third parties are retained by lessors. Rental income recognized as part of other income amounted to $84, $65 and $74 in 2014, 2013 and 2012, respectively (Notes 24 and 27). The rental expense charged to income totaled $568, $583 and $559 in 2014, 2013 and 2012, respectively (Notes 19, 20 and 27). Valuation of Intangible Assets with an Indefinite Useful Life. The Group assessed that intangible assets have an indefinite useful life when, based on the analysis of all relevant factors, there is no foreseeable limit to the period during which the assets are expected to generate cash inflows for the entity (Note 13). contingencies. The Group is currently involved in pending tax refunds and tax proceedings which may be decided for or against the Group. The Group's estimate of the likely costs of resolving these claims and pending tax proceedings has been developed in consultation with the internal and external legal counsel responsible for prosecuting and defending these matters and is based on an analysis of the potential outcomes. The Group does not currently believe that these pending tax claims and proceedings will have a material adverse effect on its financial position and financial performance. It's possible; however, this future financial performance could be affected by changes in estimates or the effectiveness of strategies related to these procedures. No provisions were set up in relation to these proceedings (Note 34). Estimates and assumptions The main estimates and assumptions used in the consolidated financial statements are based on management's assessment of the relevant facts and circumstances at the date of the consolidated financial statements. Actual results may differ from these estimates. Fair value measurements. Several accounting policies and disclosures of the Group require the measurement of fair values for financial and non-financial assets and liabilities. The Group has an established control structure regarding the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third-party information is used to measure fair values, the valuation team assesses the evidence obtained to support the conclusion that these valuations meet the IFRS requirements, including the level in the fair value hierarchy at which they should be classified. The Group uses observable market data to measure the fair value of an asset or liability. Fair values are classified at different levels in a fair value hierarchy based on data used in valuation techniques (Note 3). If the inputs used to measure the fair value of an asset or liability can be classified at different levels of the fair value hierarchy, then the fair value measurement is classified in its entirety at the same level of the fair value hierarchy based on the highest value. low. level entry that is meaningful for the entire measurement. The methods and assumptions used to estimate the fair values of financial and non-financial assets and liabilities are discussed in Notes 12 and 32. Provision for impairment of trade accounts and other accounts receivable. Provisions are set up for specific accounts and groups of accounts, for which there is objective evidence of impairment. The Group values these accounts based on factors that affect the billing of the accounts. These factors include, among others, the length of the Group's relationships with customers and counterparties, current credit status based on third-party credit reports and known market forces, average age of accounts, collections experience and historical loss experience. The amount and timing of expenses recorded in any period would differ if the Group made different judgments or used different methodologies. An increase in the provision for impairment losses would increase recorded selling and administrative expenses and decrease current assets.

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ANNUAL REPORT 2014

The protective provision for impairment losses amounted to $792 and $1,282 as of December 31, 2014 and 2013, respectively. The carrying amount of trade debtors and other receivables is $6,005 and $6,352 as of December 31, 2014 and 2013, respectively (Notes 7, 31 and 32). Inventory depreciation. The Group reduces the cost of inventories to their net realizable value when the net realizable value becomes less than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. Estimates of net realizable value are based on the most reliable evidence available at the time when estimates of the amount of inventories expected to be realized are made. These estimates take into account fluctuations in prices or costs directly related to events that occur after the reporting date to the extent that such events confirm the conditions existing at the reporting date. Inventory drawdowns totaled $587 and $500 as of December 31, 2014 and 2013, respectively. The book value of inventories is $3,460 and $3,254 as of December 31, 2014 and 2013, respectively (Note 8). Estimated useful life of assets, plant and equipment, investment properties and deferred containers. The Group estimates the useful lives of property, plant and equipment, investment property and deferred containers based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment, investment property and deferred containers are periodically reviewed and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. 🇧🇷 In addition, the estimated useful life of property, plant and equipment, investment property and deferred recipients is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. However, future financial performance could be materially affected by changes in estimates caused by changes in the factors listed above. The amounts and timing of expenses recorded in any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property, plant and equipment, investment property and deferred containers would increase recorded cost of sales and selling and administrative expenses and decrease non-current assets. Property, plant and equipment, net of accumulated depreciation and amortization and impairment losses, amounts to ARS 20,120 and ARS 20,544 as of December 31, 2014 and 2013, respectively (Note 11). Investment properties net of accumulated depreciation and impairment losses amount to $1,416 and $733 as of December 31, 2014 and 2013, respectively (Note 12). Accumulated depreciation, amortization and impairment of property, plant and equipment and investment property amounted to $40,635 and $39,302 as of December 31, 2014 and 2013, respectively (Notes 11 and 12). Deferred containers, net of accumulated amortization included in "Other non-current assets" in the consolidated statement of financial position, amount to $8,785 and $8,750 as of December 31, 2014 and 2013, respectively. Accumulated amortization of deferred containers amounted to $9,602 and $8,427 as of December 31, 2014 and 2013, respectively (Note 14). Estimated Useful Lives of Intangible Assets with Finite Lives. The useful life of intangible assets is assessed individually as if they had a definite or indefinite life. Intangible assets are considered to have an indefinite useful life when, based on the analysis of all relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. Intangible assets with finite useful lives amount to ARS 788 and ARS 813 on December 31, 2014 and 2013, respectively (Note 13). Deterioration of Marks, Licenses and Trade Names with Indefinite Life. The Group determines whether trademarks, licenses and trade names are impaired at least annually. The basis for determining the recoverable amount is the value in use of brands, licenses and trade names. Estimating value in use requires management to estimate the expected future cash flows from the cash-generating unit and brands, licenses and trade names and choose an appropriate discount rate to calculate the present value of these cash flows. The carrying amounts of brands, licenses and trade names with indefinite useful lives amount to $35,210 and $35,196 as of December 31, 2014 and 2013, respectively (Note 13).

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SAN MIGUEL BREWERY INC.

Realization of the Deferred Tax Asset. The Group reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that taxable profits will be available to allow the utilization of all or part of the deferred tax assets. The Group's assessment of the recognition of deferred tax assets on deductible temporary differences is based on the projection of taxable income for the coming periods. Deferred tax assets amount to $1,610 and $1,909 as of December 31, 2014 and 2013, respectively (Note 17). Impairment of Non-Financial Assets. IFRS requires that an impairment review of property, plant and equipment, investment property, deferred containers and intangible assets with finite useful lives be carried out when events or changes in circumstances indicate that the carrying amount may not be recoverable. Determining the recoverable amount of these assets requires estimating the cash flows expected to be generated with the continued use and final disposal of these assets. Although the assumptions used in estimating the fair values reflected in the consolidated financial statements are considered appropriate and reasonable, significant changes in those assumptions could materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on financial performance. Accumulated impairment losses on property, plant and equipment, investment property and intangible assets of finite duration amounted to $9,639 and $9,600 as of December 31, 2014 and 2013, respectively. The combined carrying amounts of property, plant and equipment, investment property, deferred containers and finite-life intangible assets totaled $31,109 and $30,840 as of December 31, 2014 and 2013, respectively (Notes 11, 12, 13 and 14). 🇧🇷 Present Value of the Defined Benefit Withdrawal Obligation. The present value of the defined benefit retirement obligation depends on several factors that are determined actuarially using various assumptions. These assumptions are described in Note 28 to the consolidated financial statements and include the discount rate and salary increase rate. The Group determines the appropriate discount rate at the end of each reporting period. It is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle retirement obligations. In determining the appropriate discount rate, the Group considers interest rates on government bonds denominated in the currency in which benefits will be paid. The maturities of these bonds should approximate the terms of the related retirement obligation. Other important assumptions for the defined benefit withdrawal obligation are based in part on current market conditions. Although the Group's assumptions are considered reasonable and appropriate, significant differences in actual experience or significant changes in assumptions could materially affect the Group's defined benefit withdrawal obligation. The present value of the defined benefit retirement obligation is $9,996 and $10,085 as of December 31, 2014 and 2013, respectively (Note 28). Obligation to withdraw goods. The ARO determination requires an estimate of the costs of dismantling and restoring the leased properties to their original condition. The Group has determined that there is no significant ARO as of December 31, 2014 and 2013. 5. Segment information Operating segments The information format of the Group's operating segments is determined based on the Group's risks and rates of return that are predominantly affected by differences in the products produced. Operating businesses are organized and managed separately based on geographic location, with each segment representing a strategic business unit offering different products and serving different markets. The Group's reportable segments are domestic and international operations. Domestic operations produce and market malt and fermented beverages in the Philippines and distribute products to some export markets.

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ANNUAL REPORT 2014

International operations produce and market fermented and malt-based beverages in various foreign markets. Segment Assets and Liabilities Segment assets include all operating assets used by a segment and consist primarily of operating cash, accounts receivable, inventories and property, plant and equipment, net of provisions, accumulated depreciation and amortization and impairment. Segment liabilities include all operating liabilities and consist primarily of accrued accounts payable and expenses, wages and accrued liabilities. Segment assets and liabilities do not include deferred taxes. Inter-segment transactions Segment income, expense and performance include sales and purchases between operating segments. Transfer prices between operating segments are set under normal market conditions similar to transactions with third parties. Such transactions are eliminated on consolidation. Main customer The Group does not have a single external customer whose generated sales revenue represents 10% or more of the Group's total revenue. The financial information for the operating segments is presented below: For the year ended December 31, 2014 Sales External sales Inter-segment sales Total sales Results Segment income Interest expenses and other financial charges Interest income Other income - net Interest expenses Income tax Net income attributable to: Company shareholders Non-controlling interests Net income

SMBI FS 2014 C5 6.indd 63

Domestic

International

eliminations

Total

$ 64.569 54 $ 64.623

$ 14.436 $ 14.436

P (54) (P54)

$ 79.005 $ 79.005

$ 20.773

P1,306

P-

P22.079

(2.722)

(2.722) 188 50 (6.080) $ 13.515 $ 13.029 486 $ 13.515

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SAN MIGUEL BREWERY INC.

As of and for the year ended December 31, 2014 Other information Segment assets Brands and trade names Other assets Deferred tax assets Total consolidated assets Segment liabilities Long-term debt, including current maturities - net of debt issuance costs Taxes on income and other taxes payable Dividends payable and other deferred tax liabilities Consolidated total liabilities Capital expenditures Depreciation of property, plant and equipment Non-monetary items, except depreciation of property, plant and equipment

Domestic

International

eliminations

Consolidated

$ 49.048 32.000

$ 18.479 1.422

(P14.078)

$ 6.795

P2.402

(P57)

$ 53.449 33.422 67 1.610 $ 88.548 $ 9.140

37.518

P776

P151

P-

37,518 2,650 603 383 P50.294 P927

933

443

1.376

1.426

177

1.603

eliminations

Total

P (41) (P41)

$ 75.053 $ 75.053

P-

$ 21.554

For the year ended December 31, 2013 Domestic sales Foreign sales Intersegment sales Total sales result Segment result Interest expense and other financial charges Interest income Other changes - net Income tax expense Net income Attributable to : Company shareholders Non-controlling interests Net income

SMBI FS 2014 C5 6.indd 64

International

$ 60.720 41 $ 60.761

$ 14.333 $ 14.333

P20.446

P1.108

(3.845)

(27)

(3.872) 463 (294) (5.330) $ 12.521

$ 12.051 470 $ 12.521

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ANNUAL REPORT 2014

sixty-five

As of and for the year ended December 31, 2013 Other national information Segment assets Brands and trade names Other assets Deferred tax assets Total consolidated assets Segment liabilities Long-term debt, including current maturities, net of issuance costs Debt Tax income and other taxes payable Dividends payable and other deferred tax liabilities Consolidated total liabilities Capital expenditures Depreciation of property, plant and equipment Non-monetary items, except depreciation of property, plant and equipment

International

eliminations

Consolidated $57,515 33,412 73 1,910 $92,910 $11,240

$ 53.632 32.000

$ 17.956 1.412

(P14,073) -

$ 8.735

2558

(P53)

45.013

P932

P90

P-

2.869.736 17 $ 59.875 $ 1.022

963

472

1.435

(32)

1.658

1.690

For the year ended December 31, 2012 Sales External sales Inter-segment sales Total sales Results Segment income Interest expense and other financial charges Interest income Reversals for impairment of non-current assets - net Other income - net Income of expenses with income tax Net income Attributable to: Company shareholders Non-controlling interest Net income

SMBI FS 2014 C5 6.indd 65

Domestic

International

eliminations

Total

$ 61.572 46 $ 61.618

$ 14.008 $ 14.008

P (46) (P46)

$ 75.580 $ 75.580

21.472

P795

P66

P22.333

(3.997)

(75)

(4.072) 724 1.367 586 (5.840) $ 15.098 $ 14.360 738 $ 15.098

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SAN MIGUEL BREWERY INC.

As of and for the year ended December 31, 2012 Other national information Segment assets Brands and trade names Other assets Deferred tax assets Total consolidated assets Segment liabilities Long-term debt, including current maturities, net of issuance costs Debt Taxes on Income and other taxes payable Dividends payable and other deferred tax liabilities Total consolidated liabilities Equity investments Depreciation of property, plant and equipment Non-monetary items, except depreciation of property, plant and equipment Reversal of impairment of non-current assets - net

International

eliminations

Consolidated $61,979 33,305 82 1,260 $96,626 $10,136

$ 57.957 32.000

$ 18.089 1.305

(P14,067) -

P7.851

P2.337

(P52)

50.995

1.227

52.222

P659

P131

P-

2,761 883 19 P66,021 P790

1.044

422

1.466

1.181

(146)

1.035

(1.367)

6. Cash and Cash Equivalents This account comprises: Note

2014

2013

31, 32

$ 2.625 7.261 $ 9.886

$ 2.991 11.207 $ 14.198

Cash on hand and in banks Short-term investments

Money in banks earns interest at the respective deposit rates. Financial investments include demand deposits that can be withdrawn at any time depending on the Group's immediate cash needs and bear interest at the respective short-term investment rates.

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ANNUAL REPORT 2014

7. Suppliers and Other Accounts Receivable This account comprises: Note

2014

2013

$ 5.814 20

P6.746 17

100,863 6,797,792 P6,005

101,770 7,634 1,282 P6,352

Accounts Receivable Amounts Due from Related Parties Non-Business Amounts Due from Related Parties Other

4 4, 31, 32

Less provision for impairment losses

Accounts receivable from customers do not bear interest and generally have a credit term of seven to 30 days. “Other” includes employee receivables, insurance and freight claims, interest and miscellaneous receivables. The movement in the preventive provision for impairment losses is as follows: 2014 $ 1,282 5 (494) (1) $ 792

Balance at the beginning of the year Charges for the year Write-offs and reversals Currency translation adjustments Balance at the end of the year

2013 $ 1.268 61 (43) (4) $ 1.282

The provision for impairment losses related to amounts owed by related parties on December 31, 2014 and 2013 is P13 (Note 26). As of December 31, 2014 and 2013, the aging of customers and other accounts receivable is as follows:

Exchange

Amounts owed by related parties

Others

Total

$ 5.325

P84

P796

P6.205

235 37 43 174 P5.814

16 6 1 13 P120

19 6 7 35 P863

270 49 51 222 P6,797

2013

Exchange

Amounts owed by related parties

Others

Total

Current Expired Less than 30 days 30 - 60 days 61 - 90 days More than 90 days

$ 5.838

P86

P545

P6,469

425,165 11,307 P6,746

1 15 3 13 P118

16 25 98 86 P770

442 205 112 406 P7.634

2014 Current Expired Less than 30 days 30 - 60 days 61 - 90 days More than 90 days

The Group maintains various guarantees for trade receivables, such as bank guarantees, time deposits and real estate mortgages, for certain credit limits.

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SAN MIGUEL BREWERY INC.

8. Inventories This account comprises:

At net realizable value Finished goods and work in progress Packaging materials and supplies

2014

2013

US$ 1.376 1.116.968 US$ 3.460

$ 1.385.984.885 $ 3.254

The cost of finished goods and work in progress as of December 31, 2014 and 2013 is $1,394 and $1,399, respectively. The cost of the containers as of December 31, 2014 and 2013 amounted to $1,670 and $1,453, respectively. The cost of materials and supplies as of December 31, 2014 and 2013 is $983 and $902, respectively. Inventory write-off recognized as an expense amounted to $534, $403 and $181 for the years ended December 31, 2014, 2013 and 2012, respectively. 9. Prepaid Expenses and Other Current Assets This account comprises: Promissory Note Prepaid taxes and licenses Prepaid insurance Derivative assets Prepaid rent Others

31, 32

2014

2013

P770 91 5 24 172 P1,062

P660 90 1 27 160 P938

“Other” includes prepaid supplies, prepaid promotional expenses, and prepaid other miscellaneous expenses. 10. Investments Following are the developments relating to the Company's investments in shares of the share capital of the subsidiaries: BPI On April 7, 2014, the board of directors and the shareholders of BPI approved the increase of its authorized share capital from P800 million to P1 , 600 million consisting of 3,200,000 common shares with a par value of P350 per share and 4,800,000 preferred shares with a par value of P100 per share. The Company has subscribed and paid for an additional 1,546,000 shares of common stock worth P541 million, while the San Miguel Brewery Inc. (SMBRP) subscribed and paid for an additional 2,319,000 preferred shares worth P232 million. The increase in BPI's authorized share capital was approved by the SEC on 18 November 2014. AFS Financial Assets The Group's AFS financial assets correspond to investments in shares and club quotas worth P60 and P62 on 31 December 2014 and 2013, respectively (Notes 31 and 32). The methods and assumptions used to estimate the fair value of AFS financial assets are discussed in Note 32.

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SMBI FS 2014 C5 6.indd 69

7% 60%

51%

42%

P-

P233

P10

P259 1 (27)

P P34 (24) -

P246 (45) (241)

P66 (35) (26)

P87 (691) 752

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Effects of exchange rate changes on cash and cash equivalents (P41)

P229

P-

(P205)

P1,013

P203

P170

Total comprehensive income (loss)

P229 -

P-

(P217) 12

$ 1.062 (49)

P212 (9)

P170-

Net income (loss) Other comprehensive income (losses)

P148

P215

P-

Net increase (decrease) in cash and cash equivalents

P-

P6 P1,486

(P20) P6.707

(P3) P4.190

P16

P214

P-

(P111)

Sales

P442

P24

Other comprehensive income (losses) attributable to non-controlling interests

P72

P12

Net income (loss) attributable to non-controlling interests

P-

1426

P-

P308

P14

P33

(P1,852)

2736

3297

Liquid assets P16

Current Assets Non-Current Assets Current Liabilities Non-Current Liabilities $2,354

P396 1.110 (79) (1)

P6 169 (142)

$ 1.449 2.252 (1.630) (3.923)

$ 2.890 723 (726) (151)

$ 1.862 3.555 (889) (1.231)

P588 1,805 (38) (1)

Book value of non-controlling interest

Cash dividends for minority assets

60% P255

9% P16

9% (P944)

42% of P1,140

34% of P1,129

60% P483

Percentage of non-controlling voting interest

Non-controlling profit or loss percentage

BPI

SMHT

34%

SMBTL

DPT

60%

SMBHK

Percentage of non-controlling ownership

BPI

December 31, 2014

P62

P119 (9) (48)

P173

P141 32

$ 3.775

P11

P48

P14

P3.113

$ 1.890 3.622 (1.116) (1.283)

P1,065

34%

SMBHK

P102

(116)

P577 (3) (356)

P531

$ 1.099 (568)

P6,924

(P237)

P458

P348

2465

$ 2.529 641 (567) (138)

P1,027

42%

DPT

P25

(1)

P62 (6) (30)

(P94)

(P204) 110

$ 1.691

P56

(P104)

P-

(P1,632)

$ 1.362 2.440 (1.521) (3.913)

(P833)

51%

SMBTL

December 31, 2013

The following table summarizes the financial information related to each of the Group's subsidiaries that have significant non-controlling interests:

P-

(P2)

PAG (2)

P-

(P1)

P-

P32

P6 168 (142)

P17

51%

SMHT

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SMBI FS 2014 C5 6.indd 70

(1) 857

11.754 91 (2) 37 11.880

37.789 708 (71) 66 38.492

7.995 -

326

103

681 29.503 1.376 (131) 33 30.781

4 51 7 (2) 56

7 413 34 (12) 435

2 129 25 (1) 1 154

(1) 511 93 (45) (1) 558

170 4.453 244 (2) 10 4.705

499 23.946 973 (69) 23 24.873

December 31, 2013 Additions Withdrawals/Reclassifications Currency Conversion Adjustments

December 31, 2014

advance

27.672 1.435 (285) 46 5 (4) 394 34 (22) 96 31 -

60.529

578 78 (144)

547

105

4.085 226 (28)

327

277 50 (1) 85 20 (2) 533 25 (12)

324 4 (1) -

2.094 6

59.637 927 (140)

$ 56.877 1.022 (356) $ 341 (62) (2)

Total

P759 (5)

construction in progress

P508 36 (22)

Tools and other equipment

P293 29 -

Tenant Improvements

22.473 1.061 (87)

7.997

880 29 (51)

636

1.433

(6)

$ 11.036 115 (33)

US$ 35.669.785 (98)

P919 110 (149)

transport team

$ 8.036 (47)

Buildings and Improvements

Office equipment, furniture and accessories

Accumulated Depreciation and Amortization January 1, 2013 Additions Withdrawals/Reclassifications Currency Conversion Adjustments

December 31, 2014

December 31, 2013 Additions Withdrawals/Reclassifications Currency Conversion Adjustments

Cost January 1, 2013 Additions Withdrawals/Reclassifications Currency Conversion Adjustments

Terra

machinery and equipment

The movements of this account are as follows:

11. Fixed Assets

70 SAN MIGUEL BREWERY INC.

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SMBI FS 2014 C5 6.indd 71

7995

7997

December 31, 2014

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Net Book Value on December 31, 2013

December 31, 2014

$ 4.907

P5.041

2.268

2.260 -

235

P2.025

Buildings and Improvements

P290

P356

13 (4)

P12

transport team

P172

P194

Tenant Improvements

P73

P80

40 (1)

P37

P33

P20

14-

P13

Tools and other equipment

P326

P277

P-

construction in progress

20.120

P20.544

9.628

9.590 (5)

924

P8.666

Total

Depreciation and amortization charged on operations amounted to $1,376, $1,435 and $1,466 in 2014, 2013 and 2012, respectively (Notes 19, 20 and 21). No interest was capitalized in 2014 and 2013. The reversal of deterioration, net of the respective depreciation, recognized in profit or loss amounted to P123 in 2012.

P6.322

P6.581

7.297

7.262 -

684

6578

P-

December 31, 2013 Disposals/reclassifications Currency translation adjustments

Accumulated impairment losses January 1, 2013 Currency translation adjustments

Terra

machinery and equipment

Office equipment, furniture and accessories

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SAN MIGUEL BREWERY INC.

12. Investment properties Movements in investment properties, including the effects of exchange rate adjustments, are as follows: Land and Improvements

Buildings and Improvements

Total

P545 7 26 578 694 3 1,275

P336 1 27 364 1 2 367

P881 8 53 942 695 5 1.642

57 8 6 71 8 79

121 7 10 138 8 1 147

178 15 16 209 16 1 226

P507 P1.196

P226 P220

P733 P1.416

Cost January 1, 2013 Additions Currency Translation Adjustments December 31, 2013 Additions Currency Translation Adjustments December 31, 2014 Accumulated Depreciation and Amortization January 1, 2013 Additions Currency Translation Adjustments December 31, 2013 Additions Adjustments currency translation Dec 31, 2014 Net book value Dec 31, Dec 31, 2013, 2014

No impairment losses were recognized in 2014, 2013 and 2012. The fair value of investment properties of $2,693 and $1,944 at December 31, 2014 and 2013, respectively, was classified as Level 3 in the fair value hierarchy based on inputs used in valuation techniques (Note 4). The fair value of the investment properties was determined by independent third-party real estate appraisers, with the appropriate recognized professional qualifications and recent experience in the location and category of the appraised property. Independent appraisers periodically provide the fair value of the Group's investment properties. Valuation technique and national significant unobservable data. Market value was determined using the sales comparison method. The sales comparison approach considers the sale of a similar or substitute property, listed in the neighborhood and related market data. The estimated value is established through a comparison process. The property being appraised is then compared to sales of similar properties being traded on the market. Listings and offers may also be considered. The observable inputs to determine the market value of the property are as follows: characteristics of location, size, time element, quality and potential use, margin of negotiation and marketability. The rental value of the property in question was determined using the income method. Under the rent approach, the property's market value is determined first, and then the appropriate capitalization rate is applied to arrive at its rental value. The rental value of the property is determined based on what a prudent owner or potential tenant is willing to pay for its use and occupancy, taking into account the prevailing rental rates for a similar property and/or the rate of return that a prudent owner usually expects a return on his investment. A study of current market conditions indicates that the return on equity for similar real estate investments ranges from 3% to 5%. International. The valuation is determined using the Investment Approach which considers the capitalization of the net rental income receivable on existing leases and the reversal value of the property after the leases expire with reference to market sales transactions. The important unobservable input in measuring fair value is the discount rate, which ranged from 2.9% to 3.4%.

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ANNUAL REPORT 2014

13. Intangible Assets The movement of this account is as follows:

Cost December 31, 2012 Additions Withdrawn/reclassifications Conversion adjustments December 31, 2013 Additions Withdrawn/reclassifications Conversion adjustments December 31, 2014 Accumulated amortization December 31, 2012 Additions Withdrawals/reclassifications Conversion adjustments December 31, 2013 Additions Withdrawals/reclassifications Conversion December 31, 2013 Accumulated impairment losses December 31, 2012 Currency translation adjustments December 31, 2013 Additions Currency translation adjustments December 31, 2014 Book value December 31, 2013 December 31 2013 December 2014

Computer software and other intangibles

Brands and trade names

licenses

Land use rights

$ 33.517 -

$ 1.832 3 -

P1,016 -

P110 1 (1)

$ 36.475 4 (1)

124 33.641 -

18 1.853 4 -

104 1.120 -

3 113 3 1

249 36.727 7 1

12 33.653

4 1.861

6 1.126

1 118

23 36.758

26 15

282 22 -

3 38

41 9

97 4 (1)

Total

440 41 (1)

31 335 23 -

3 103 4 -

37 517 36 -

2 360

1 108

3 556

177

186

14 191 -

sixteen

4 1

15 201 1

2 193

2 204

P1,812 P1,811

P779 P760

P6 P5

$ 36.009 $ 35.998

$ 33.412 $ 33.422

Indefinite-lived trademarks and trade names totaled $33,422 and $33,412 as of December 31, 2014 and 2013, respectively. Indefinite lifetime licenses total $1,788 and $1,784 as of December 31, 2014 and 2013, respectively. Defined-life licenses total P23 and P28 as of December 31, 2014 and 2013, respectively.

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SAN MIGUEL BREWERY INC.

Trademarks and trade names a. National Operations The recoverable amount of trademarks and trade names was determined based on an assessment using cash flow projections (value in use) covering a period of five years based on long-term plans approved by management. Cash flows beyond the five-year period are extrapolated using a given constant growth rate to arrive at their terminal value. The 2% growth rate used is consistent with the industry's average long-term growth rate. The discount rate applied to the after-tax cash flow projections is 8.00% as of December 31, 2014 and 2013. b. International Operations The recoverable amount of trademarks and trade names was determined based on an assessment using cash flow projections (value in use) covering a period of five years based on long-term plans approved by management. Cash flows beyond the five-year period are extrapolated using a given constant growth rate to arrive at their terminal value. The 2% to 3% growth rate used is consistent with the average long-term growth rate for the industry. The discount rates applied to the after-tax cash flow projections range from 6.4% to 16.6% and from 7.4% to 16.0% in 2014 and 2013, respectively. Management assessed that there is no impairment loss for brands and trade names in 2014, 2013 and 2012. Management believes that any reasonably possible change in the key assumptions on which the recoverable value of brands and trade names is based would not cause that its carrying amount exceeds its recoverable amount. Value-in-use calculations are most sensitive to the following assumptions: Discount rate. The Group uses the weighted average cost of capital as the discount rate, which reflects management's estimate of risk. This is the benchmark used by management to assess operating performance and assess future investment proposals. Growth rate. Revenue growth is projected based on the average levels of growth experienced over the last five years and the estimated sales volume and price growth for the next five years.

14. Other non-current assets This account comprises:

Note Deferred packaging - liquid Bottles Peels Other

4 26, 27, 28, 31, 32

2014

2013

$ 6.924 1.861 8.785 146 $ 8.931

6.830 1.920 8.750 161 8.911

“Other” includes the unamortized cost of CO2 pallets, kegs and cylinders, defined benefit retirement assets, non-current portion of long-term receivables and other non-current assets.

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ANNUAL REPORT 2014

The movement of deferred containers is as follows: Note Cost Balance at the beginning of the year Additions Withdrawals/reclassifications Conversion adjustments Balance at the end of the year Accumulated amortizations Balance at the beginning of the year Amortizations Withdrawals/reclassifications Conversion adjustments Balance at the end of the year

2014

2013

$ 17.177 2.053 (838) (5) 18.387

$ 14.093 3.407 (318) (5) 17.177

8.427 1.453 (274) (4) 9.602 P8.785

7.084 1.376 (53) 20 8.427 P8.750

To use

2014

2013

$ 3.437.981

$ 3.770 2.131

26 31, 32

286 27

216 22

591,573 23,74,463 P6,455

724 522 21 20 435 P7.861

15. Accounts payable and accrued expenses This account comprises:

Trade payables Amounts owed to related parties Non-trade amounts owed to related parties Derivative liabilities Provisions Interest Payroll Utilities Contracted services Materials Other

Accounts payable and accrued expenses are not guaranteed and do not accrue interest. "Other" includes provisions for repairs and maintenance, advertising and promotion expenses, freight, transportation and handling, supplies, dividends payable and other payables.

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SAN MIGUEL BREWERY INC.

16. Long-term debt This account comprises:

Unsecured bonds denominated in pesos: Series B bonds, fixed interest rate of 8.875% Series C bonds, fixed interest rate of 10.50% Series D bonds, fixed interest rate of 6.05% Series bonds E, 5.93% fixed interest rate Series F bonds, 6.60% fixed interest rate Series G bonds, 5.50% fixed interest rate Series H bonds, fixed interest rate of 6 .00% Less current maturities

2014

2013

P2.793 2.985 9.933 6.944 12.349 2.514 37.518 P37.518

$ 22.386 2.790 2.979 9.920 6.938 45.013 22.386 $ 22.627

The amount represents the unsecured long-term debt contracted by the Company: (a) to finance the acquisition of SMC's interest in IBI and BPI; (b) backing the amortization of Series A Bonds due on April 3, 2012; (c) to support partial prepayment of the $300 unsecured loan agreement (paid in full in 2013); and (d) to support the redemption of Series B notes that matured on April 4, 2014. The Company's long-term unsecured notes comprise fixed rate notes denominated in Philippine pesos for an aggregate principal amount of: (a ) P2, 810 corresponding to the total principal amount of the outstanding Series C bonds of the $38,800 bonds ($38,800 bonds) that were issued on April 3, 2009 (issuance date of the $38,800 bonds); (b) P20,000 (P20,000 Bonds) that were issued on April 2, 2012 (P20,000 Bonds on Issue Date); and (c) P15,000 (P15,000 Bonds) that were issued on April 2, 2014 (P15,000 Bonds on Issue Date). The $38,800 bonds, which originally consisted of the Series A bonds (with a term of three years from the date of issuance of the $38,800 bonds), the Series B bonds (with a term of five years and one day from the $38,800 Notes Issuance Date) and the Series C Notes (term ten years from the Issuance Date of the $38,800 Notes), were sold to the public pursuant to a statement of registration which became effective and a permission to sell was issued by the SEC on March 17, 2009. The Series A bonds matured on April 3, 2012 and therefore were redeemed by the Company on April 3, 2012. 2012. Part of the proceeds from the Company's P20,000 bonds were used to pay said maturities. The Series B bonds with an aggregate principal amount of P22,400 matured on April 4, 2014 and were therefore redeemed by the Company on April 4, 2014. Proceeds from the Company's P15,000 bonds were used to partially pay off the said maturity bonds. Of the P38,800 bonds, only Series C bonds remain outstanding and are listed on the PDEx for trading. The debt issuance costs outstanding related to these long-term debts amounted to P17 and P34 as of December 31, 2014 and 2013, respectively. The $20,000 bonds are comprised of Series D bonds (with a term of five years and one day from the date of issuance of the $20,000 bonds), Series E bonds (with a maturity of seven years from the issuance of the $20,000 Notes) and the Series F Notes (term ten years from the Issue Date of the $20,000 Notes). The P20,000 Notes were sold to the public pursuant to a registration statement that became effective and permission to sell was issued by the SEC on March 16, 2012. The Series E Notes and the P20,000 Series F Notes were included in the PDEx for negotiation. on April 2, 2012, while the Series D bonds were listed on the PDEx for trading on October 3, 2012. The outstanding debt issuance costs related to these long-term debts amounted to P138 and P163 as of April 31, 2012. 2012. December 2014 and 2013, respectively. 🇧🇷 The $15,000 bonds are comprised of Series G bonds (with a maturity of seven years from the date of issue of the $15,000 bonds) and Series H bonds (with a maturity of ten years from the date of issue of the $15,000 bonds). of $15,000). $15,000). The P15,000 Notes were sold to the public pursuant to an effective registration statement and an authorization to sell issued by the SEC on March 17, 2014 and were listed on the PDEx for trading on March 2, 2014. April 31, 2014. Unamortized debt Issuance costs related to these long-term debt amounted to P137 as of December 31, 2014. Interest on the Series C notes is paid semiannually, on April 3 and October 3 of each year. Interest on the $20,000 bonds is paid semi-annually on April 2 and October 2 of each year (each interest payment date on the $20,000 bonds), except for the first interest payment on the Series D bonds which was Done October 3, 2012. The Company may (but shall not be obligated to) redeem all (not just a portion) of the $20,000 outstanding bonds the day after October 10

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ANNUAL REPORT 2014

Interest Payment Date on the $20,000 Notes for the Series E Notes and the 14th Interest Payment Date on the $20,000 Notes for the Series F Notes. Interest on the P15,000 Notes is paid every 2 April and October 2 of each year (each Interest Payment Date on P15,000 Bonds). The Company may also (but shall not be obligated to) redeem all (and not just a portion) of the outstanding P15,000 Notes on the 11th day of the P15,000 Note Interest Payment Date for Series G notes, and on the 14th, 16th or 18th of the Series H Notes' P15,000 Interest Payment Dates. ) approved the undertaking of a consent solicitation process for holders of record on 15 December 2014 of Series C notes, Series D notes, Series E notes and Series F notes (Registration Bondholders) for the modification of the provisions negatives in the trust deeds covering the Series C Bonds, Series D Bonds, Series E Bonds and Series F Bonds to align them with the negative covenants in the Series G Bonds and Series H Bonds, and allow the Company hire or amend your Articles of Association to dedicate yourself to the business manufacturing, v sale, distribution and/or trading, in any and all types of beverages (Negative Amendment to the Agreement). The Company has obtained the consent of Registered Bondholders representing 90% of the total outstanding principal amount of the Series C bonds and 81.05% of the total outstanding principal amount of the Series D bonds, Series E Bonds and Series F Bonds for the Modification of the Negative Pact. The complementary agreements that modify the fiduciary agreements of Series C bonds, Series D Bonds, Series E Bonds and Series F Bonds to reflect the Modification of the Negative Agreement were entered into between the Company and the respective fiduciary agents of said bonds on February 2, 2015 On December 31, 2014 and 2013, the Company is in compliance with its restrictive clauses. On December 31, the movement in debt issuance costs is as follows: Note Balance at the beginning of the year Addition Amortization Balance at the end of the year

2014

2013

P197 149 (54) P292

P377 (180) P197

Amortization schedule As of December 31, 2014, the annual maturities of long-term debt are as follows: Year 2017 2019 2021 2022 2024

Gross value

Debt issuance costs

Red

$ 3.000 12.810 12.462 7.000 2.538 $ 37.810

P15 84 113 56 24 P292

$ 2.985 12.726 12.349 6.944 2.514 $ 37.518

Interest expense recognized in the consolidated income statement amounted to ARS 2,668, ARS 3,692 and ARS 3,757 in 2014, 2013 and 2012, respectively (Note 23). Valuation technique The market value was determined using the market comparison technique. Fair values are based on PDEX. Bonds are traded in an active market and prices reflect actual transactions in similar instruments. The fair value of long-term debt for P42,022 and P49,311 as of December 31, 2014 and 2013, respectively, has been classified as Level 1 in the fair value hierarchy based on the information used in the valuation techniques.

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SAN MIGUEL BREWERY INC.

17. Income taxes Deferred tax assets and liabilities arise from the following:

Items recognized in profit or loss Provision for impairment losses on accounts receivable Net obligation to withdraw defined benefits Provision for losses on inventories Unrealized gains on derivatives Unrealized gains in foreign currency - net Other Items recognized directly in other comprehensive income Reserve from wealth to retirement plan

2014

2013

P220 200 169 (670) 294

P358 171 144 (18) (2) 62

1,014 P1,227

1,177 P1,892

The above amounts are presented in the consolidated statements of financial position as follows: Note Deferred tax assets Deferred tax liabilities

2014

2013

$ 1.610 (383) $ 1.227

$ 1.909 (17) $ 1.892

The components of the income tax expense are shown below:

current deferred

2014

2013

2012

$ 5.998 82 $ 6.080

$ 5.710 (380) $ 5.330

$ 5.881 (41) $ 5.840

The reconciliation between the statutory pre-tax profit tax rate and the Group's effective income tax rates is as follows: income resulting from: Income subject to final tax Other Effective income tax rate

SMBI FS 2014 C5 6.indd 78

2013

2012

30,00%

(0,29) 1,32 31,03%

(0,78) 0,64 29,86%

(1,04) (1,07) 27,89%

15/05/15 13:51

ANNUAL REPORT 2014

18. Share Capital Pursuant to the current registration statement and permission to sell issued by the SEC on April 28, 2008, 15,488,309,960 shares of the Company's common stock have been registered and may be offered for sale at an offering price of $8. 00 per common share. Share. The Company's common stock was listed on the PSE on May 12, 2008. After the SEC denied all requests (including the Company's request) to extend the grace period requirement for publicly traded companies to meet the minimum public ownership of the PSE and the PSE imposition of the suspension of the listing of the Company's common shares as of January 1, 2013 as a result of such refusal, the Company's Board of Directors approved on February 15, 2013, the voluntary cancellation of the shares shares of the PSE Company. Subsequently, SMB filed an application with the PSE on February 20, 2013. In order to comply with the deregistration requirements of the PSE, the Company made a tender offer to repurchase all common shares held by the public. (except those held by its major shareholders and directors) at an offering price of P20.00 per common share. The OPA began on March 4, 2013 and ended on April 3, 2013. A total of 51,425,799 common shares were offered and accepted by the Company, equivalent to 0.3337% of the total shares issued and in circulation, by which were registered in treasury shares. 🇧🇷 The PSE subsequently approved the Company's deregistration request at its board meeting on April 24, 2013 and authorized the deregistration of the Company's common shares from its official registration effective April 15, 2013. May 31 December 2013. As of December 31, 2014 and 2013, the Company has a total of 15,359,053,161 common shares issued and outstanding (excluding the 51,425,799 common shares offered and accepted by the Company during the public offering and registered as treasury shares ) and 1,210 and 1,332 registered shareholders, respectively. On December 31, 2014 and 2013, the Registration Authorization Certificate (CAR) of 41,465,000 common shares and 28,005,900 common shares, respectively, of the 51,425,799 common shares offered and accepted in the public offering (equivalent to 80 63 % and 54%, respectively) of the total offered and accepted) were insured and presented to the Company. The Bureau of Internal Revenue (BIR) has not yet issued CARs for the remaining common stock offered and accepted during the public offering. Movements in the number of common shares outstanding are as follows: 2014

2013

15.359.053.161 15.359.053.161

15.410.478.960 51.425.799 15.359.053.161

2014

2013

2012

$ 27.719 10.004

$ 24.537 9.766

$ 21.974 10.507

2.115 1.298

2.136 1.272

2.426 1.256

1.044 413 21 180 P42.794

1.035 345 20 294 P39.405

1.138 424 19 286 P38.030

Balance at the start of the year Less redemption of common stock Balance at the end of the year 19. Cost of Sales This account is made up of: Note Taxes and licenses Inventories Communications, electricity, fuel and water Personnel Depreciation and amortization Repairs and maintenance Rent other

22 21 4, 27

Taxes and licenses include excise, real estate and commercial taxes.

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SAN MIGUEL BREWERY INC.

20. Selling and administrative expenses This account comprises:

Administrative Sale

2014

2013

2012

$ 6.292 7.840 $ 14.132

$ 6.820 7.274 $ 14.094

US$ 7.549 7.668 US$ 15.217

2014

2013

2012

P2.107 1,665 1,639 417 164 154

P2.076 1,605 1,786 421 172 169

P2.288 1,571 2,235 426 161 170

119

126

125

103 91

100 87

99 91

61,217 P6,820

177 206 P7.549

Selling expenses consist of: Promissory Note Freight, transportation and handling Personnel Advertising and promotion Rentals Taxes and licenses Travel and transportation Communications, electricity, fuel and water Depreciation and amortization Repairs and maintenance Allowance for impairment losses on accounts receivable Others

22 4, 27

(431) 264 P6.292

Administrative expenses consist of:

Personnel Depreciation and amortization Advertising and promotion Provision for inventory losses Contract services Management fees Communications, electricity, fuel and water Taxes and licenses Rent Professional fees Travel and transportation Repairs and maintenance Research and development Shipping costs Other

SMBI FS 2014 C5 6.indd 80

To use

2014

2013

2012

P2.812

P2.554

2548

1.767 905

1.765 692

2.146 877

528 466 286

368 373 265

181 335 277

171 148 130 115 109 90 31 16 266 P7.840

116 124 142 156 137 194 53 22 313 P7.274

107 98 114 118 143 213 70 27 414 P7.668

4, 27

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ANNUAL REPORT 2014

21. Depreciation and Amortization Depreciation and amortization are distributed as follows:

Cost of sales: Fixed Assets Selling and administrative expenses: Containers deferred Fixed Assets Other

To use

2014

2013

2012

11, 19

P1,044

P1,035

P1,138

1.453

1.376

1.832

11 12, 13, 14

332 85 1.870 P2.914

400 89 1.865 P2.900

328 85 2.245 P3.383

“Others” includes the amortization of real estate investments, computer applications and other intangible assets, pallets, barrels and CO2 bottles. 22. Personnel Expenses This account comprises:

Wages and Salaries Other Employee Benefits Retirement Costs

To use

2014

2013

2012

$ 3.339 1.804 632 $ 5.775

US$ 3.399 1.450 582 US$ 5.431

$ 3.180 1.668 527 $ 5.375

To use

2014

2013

2012

19 20 20

$ 1.298 1.665 2.812 $ 5.775

$ 1.272 1.605 2.554 $ 5.431

$ 1.256 1.571 2.548 $ 5.375

To use

2014

2013

2012

sixteen

2668

$ 3.692

$ 3.757

sixteen

54 P2.722

180 P3.872

246 69 P4.072

Personnel expenses are broken down as follows:

Cost of sales Selling expenses Administrative expenses

23. Interest and other financing charges This account comprises:

Interest expenses Amortization of debt issuance costs Other financing costs

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SAN MIGUEL BREWERY INC.

24. Other Income (Charges) This account comprises:

Rental income Foreign exchange gains (losses) - net Gains (losses) on the sale of: Property, plant and equipment Losses on investments in derivatives - net Banking expenses Other

To use

2014

2013

2012

4, 27

P84

P65

P74

(60)

(449)

577

4 (9) (3) 34 P50

76 1 (47) (6) 66 (P294)

10 32

(4)

(9) (11) (41) P586

25. Impairment reversals of non-current assets The Group determined that no further impairment losses or reversals of impairment losses previously recognized in 2014 and 2013 are required. The recoverable amount, which is the value in use, exceeds the carrying amount. Reversals due to impairment of non-current assets are presented in the consolidated statement of income as follows: 2012

Provision for impairment losses: Property, plant and equipment Other Reversal of impairment losses - net

USD

equivalent weight

(US$ 0,3) (1,6) (1,9) 35,1 US$ 33,2

(P11) (70) (81) 1,448 P1,367

The Group has assessed the recoverable amounts of the cash-generating unit to which these assets belong (cash-generating unit China) and, as a result, the carrying amount of the assets in the cash-generating unit China has been reduced by USD 0.5 ( P20) in 2012. one. Operations in Mainland China

In 2012, the Group noted that fierce competition in the market had resulted in lower demand for its products in mainland China compared to previous sales forecasts. Consequently, operating losses occurred. These factors are indications that the non-current assets of the mainland China operations, which mainly comprise the production facility located in Shunde, Guangdong Province and other tangible assets, may be affected.

Estimates of recoverable amount were based on fair values of assets less costs to sell, determined by reference to observable market prices for similar assets. To estimate this figure, the Group engaged an independent survey company, LCH (Asia-Pacific) Surveyors Limited, which employs members of the Hong Kong Institute of Surveyors.

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ANNUAL REPORT 2014

The breakdown of losses is as follows: 2012

Provision for impairment losses: Property, plant and equipment Other

USD

equivalent weight

(US$ 0,3) (0,2) (US$ 0,5)

(P11) (9) (P20)

B. Hong Kong (HK) Manufacturing Operations (SMBHK)

In 2012, there was a change in the estimates used to determine the recoverable amount of the Hong Kong cash-generating unit, as the Group was able to determine fair value less costs to sell based on a reliable estimate of the attainable amount. from the sale of the majority of assets belonging to the Hong Kong cash-generating unit in a transaction between knowledgeable and interested parties, due to the recent availability of comparable transaction data. The Hong Kong cash-generating unit's fair value less costs to sell was greater than its value in use at 31 December 2012. Therefore, the Group determined the recoverable amount based on fair value less costs to sell and reversed a portion of the previously recognized impairment losses in respect of the Hong Kong cash-generating unit to the extent that the revised carrying amount of individual assets does not exceed the lower of: (i) fair value less costs to sell as of December 31, 2012 ; and (ii) what would have been determined if an impairment loss had not been recognized in prior years.

Estimates of fair value less costs to sell for the Hong Kong cash-generating unit were determined by reference to observable market prices for similar assets. To estimate this figure, the Group engaged an independent survey company, LCH (Asia-Pacific) Surveyors Limited, which employs members of the Hong Kong Institute of Surveyors.

Also in 2012, the Group recorded an increase in the recoverable value of investment properties, mainly due to the increase in fair value less costs to sell, which exceeded the respective book value. Therefore, the Group has reversed previously recognized impairment losses on investment property to the extent that the revised carrying amount does not exceed the lower of: (i) fair value less costs to sell as of December 31, 2012; and (ii) what would have been determined if an impairment loss had not been recognized in prior years.

Estimates of the fair value of investment properties less costs to sell have been determined by reference to observable market prices for similar assets. To estimate this figure, the Group engaged an independent survey company, LCH (Asia-Pacific) Surveyors Limited, which employs members of the Hong Kong Institute of Surveyors.

A reversal of an impairment loss has been made to the carrying amount that would have been determined if no impairment loss had been recognized in prior years in respect of interests in leased land held for own use under operating leases, as there has been a favorable change in the estimates used to determine the recoverable amount.

The details of the reversal are as follows: 2012 Reversal of impairment losses - net

USD

equivalent weight

$ 35,1

$ 1.488

C. DPT

SMBI FS 2014 C5 6.indd 83

In 2012, the Company tested PTD's equity investment for impairment due to the current state of business at PT San Miguel Indonesia Foods and Beverages (PTSMIFB). The test resulted in an impairment loss of $1.4 (P61) in 2012.

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SAN MIGUEL BREWERY INC.

26. Information to be disclosed about related parties The Group, in the normal course of its operations, acquires products and services and sells products to related parties. Transactions with related parties are carried out under market conditions and at normal market prices and conditions. Each fiscal year, an assessment is made by examining the financial situation of the related party and the market in which the related party operates.

Again

Related party revenue

Related party purchases

Amounts owed by related parties

Retirement plan (Note 28)

2014 2013 2012

P-

padre

2014 2013 2012

Shareholder

2014 2013 2012

Ultimate Matrix Associate

2014 2013 2012

Matrix Associate

2014 2013 2012

under common control

2014 2013 2012 2014 2013 2012

238 292 199 P250 P309 P209

11 9 10 -

965 999 643

(Video) Ransomware - Funny Sunday' OST (FNF)

4,620 6,967 6,515 P5,585 P7,970 P7,158

Terms

Conditions

P10 15 18

On demand; interest-free

No warranty no deterioration

381 565 477

On demand; interest-free

No warranty no deterioration

1 4 4

On demand; interest-free

No warranty no deterioration

On demand; interest-free

No warranty no deterioration

20 13 26

1 2

Amounts owed to related parties

1 1.232

On demand; interest-free

No warranty no deterioration

129 135 168 P150 P155 P198

876 1,766 1,790 P1.267 P2.347 P3.517

On demand; interest-free

Insecure; with deterioration

All current outstanding balances with related parties are expected to be settled in cash within 12 months of the reporting date. None of the balances are guaranteed. one. Amounts owed by related parties consist of trade and non-trade receivables, expense sharing and toll services. The balances owed by related parties included under “Other non-current assets” in the consolidated statement of financial position amount to P11 and P19 on 31 December 2014 and 2013, respectively (Note 14). The balances owed by related parties included in the caption “Prepaid expenses and other current assets” of the consolidated statement of financial position amount to P19 and P18 at 31 December 2014 and 2013, respectively (Note 9). B. Amounts owed to related parties consist of accounts payable to suppliers, professional fees, insurance and administration fees arising from purchases of materials, bottles, caps, boxes, reimbursement of expenses and services provided by/from related parties. C. The remuneration of the Group's key management personnel, by type of benefit, is as follows:

Short-term employee benefits Retirement costs Share-based payments

SMBI FS 2014 C5 6.indd 84

2014

2013

2012

P152 24 P176

P137 17 3 P157

P133 19 5 P157

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ANNUAL REPORT 2014

27. Lease Agreements Operating Lease Group as Lessor The Group leases part of its investment property, office space and machinery and equipment under operating lease agreements to third parties. Leases generally last from one to five years. Some leases offer the option to renew at the end of the lease term and are subject to revision to reflect current market rents. Accounts receivable for leasing offices and machinery and equipment are broken down as follows:

Cancelable Less than one year Between one and five years

Non-cancellable Less than one year Between one and five years

2014

2013

P11 3 14

P8 11 19

34 20 54 P68

39 16 55 P74

Rental revenue recognized in the consolidated income statement amounted to $84, $65 and $74 in 2014, 2013 and 2012, respectively (Notes 4 and 24). The Group as Lessee The Group leases the land and buildings where some of its offices and warehouses are located, and transport equipment through operating lease agreements. Leases generally last from one to ten years. Some leases offer the option to renew at the end of the lease term and are subject to revision to reflect current market rents. Lease payments for land, buildings and transport equipment are as follows:

Cancelable Less than one year Between one and five years More than five years Non-cancellable Less than one year Between one and five years

2014

2013

2012

P119 79 31 229

P109 90 38 237

P118 80 7 205

8 14 22 P251

12 26 38 P275

9 24 33 P238

The rent expense recognized in the consolidated income statement amounted to $568, $583 and $559 in 2014, 2013 and 2012, respectively (Notes 4, 19 and 20).

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SAN MIGUEL BREWERY INC.

28. Retirement Plans The Company and some of its international subsidiaries have funded, non-contributory, defined benefit retirement plans (collectively, the Retirement Plans) that cover a certain number of their permanent employees. The Enterprise Retirement Plan is an ultimate salary plan. Contributions and costs are determined in accordance with actuarial studies carried out for Retirement Plans. The annual cost is determined using the projected unit credit method. The last actuarial valuation date for the Group is December 31, 2014. Valuations are obtained periodically. The Company Retirement Plan, the San Miguel Brewery Inc. (SMBRP) is registered with the BIR as a tax-eligible plan pursuant to Republic Law No. 4,917, as amended. The control and administration of the Group's retirement plans are the responsibility of the Board of Trustees (BOT) of each Retirement Plan. The Group Retirement Plans BOT exercises voting rights over shares and approves significant transactions. Accounting and administrative functions for the SMBRP are performed by the Office of Retirement Funds at the SMC. Retirement benefits recognized in income by the Company totaled P569, P518 and P467 in 2014, 2013 and 2012, respectively, while those collected by the subsidiaries totaled P63, P64 and P60 in 2014, 2013 and 2012, respectively. The Group's annual contributions to Retirement Plans consist of payments covering current service cost. The following table shows a reconciliation of the net defined benefit withdrawal liability and its components:

Present value of the defined benefit retirement obligation

Balance at the beginning of the year Recognized in profit or loss Current service cost Interest expense Interest income Administrative expenses paid on plan assets Recognized in other comprehensive income Remeasurements: Actuarial losses (gains) arising from: Experience adjustments Changes in financial assumptions Changes in assumptions Demographics Yield on interest-free plan assets Other Benefits Paid Contributions Transfers from other plans Conversion adjustment Balance at year-end

Fair value of plan assets

Net defined benefit retirement liability

2014

2013

2014

2013

2014

2013

$ 10.085

P9.106

P5.982

P5.737

P4.103

3369

469 408 -

394 454 -

245 -

269 (3)

469 408 (245) -

394 454 (269) 3

877

848

245

266

632

582

(12) (179) (18) -

216 420 (5) -

317

(332)

(12) (179) (18) (317)

216 420 (5) 332

(209)

631

317

(332)

(526)

963

(756) (1)

(507) 14 (7)

(747) 923 -

(501) 751 14 47

(9) (923) (1)

(6) (751) (54)

(757)

(500)

176

311

(933)

(811)

P6,720

P5.982

9996

$ 10.085

P3.276

P4.103

As of December 31, 2014 and 2013, the defined benefit withdrawal liability included as part of "Other non-current liabilities" in the consolidated statement of financial position amounts to $3,280 and $4,115, respectively. As of December 31, 2014 and 2013, the defined benefit retirement asset included as part of the "Other non-current assets" account in the consolidated financial statements is P4 and P5, respectively. Retirement benefits of $632, $582 and $527 in 2014, 2013 and 2012, respectively, are recognized as part of "Personnel expense account" in the consolidated income statement (Note 22).

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ANNUAL REPORT 2014

The Group's pension fund book values approximate fair values at 31 December 2014 and 2013. The Group's plan assets are as follows: In percentages 2014 2013 Investment in marketable securities and shares Investment in common funds : Stock Trading Portfolio Fixed Income Portfolio Other

15 4 7

5 20 3

Investments in Bonds and Securities As of December 31, 2014, plan assets include: 28,549,900 common shares of the Company with a fair market value per share of P20; 2,035,000 preferred shares of Petron Corporation with a fair market value per share of P101.8; 695,432 common shares of Ginebra San Miguel, Inc. (GSMI) with a fair market value per share of P15.88; 556,740 shares of SMC common stock with a fair market value per share of P73.80; 2,615,420 Subseries A Preferred Shares of SMC with a fair market value per share of P75.60; 53,000 SMC Subseries B Preferred Shares with a fair market value per share of P78.15; and 55,674 shares of Top Frontier Holdings Inc. common stock. with a fair market value per share of P124. As of December 31, 2013, plan assets include: 28,549,900 common shares of the Company with a fair market value per share of P20; 2,035,000 preferred shares of Petron Corporation with a fair market value per share of P109; 695,432 shares of GSMI common stock at a fair market value per share of P23; and 556,740 shares of SMC common stock with a fair market value per share of P62.50. The fair market value per share of the above negotiable securities is determined based on quoted market prices in active markets at the balance sheet date (Note 4). SMBRP recognized losses for the investment in marketable securities of SMC and its subsidiaries for P11 and P272 in 2014 and 2013, respectively. SMBRP's dividend income from investing in shares of SMC and its subsidiaries amounted to P48 and P46 in 2014 and 2013, respectively. Investments in common shares As at 31 December 2014 and 2013, SMBRP has an investment in BPI of 4,708,494 and 2,389,494 preferred shares, respectively, accounted for using the cost method. Participation in Pooled Funds Investments in pooled funds were constituted mainly to pool part of the resources of the Retirement Plans of SMC and its national subsidiaries (including SMBRP) in order to rotate, negotiate and obtain the best conditions and financial agreements for the investments. resulting from high-volume transactions. The BOT approved the percentage of assets to be allocated in fixed income and variable income instruments. The SMBRP has established maximum exposure limits for each type of

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SAN MIGUEL BREWERY INC.

permitted investments in negotiable securities and deposit instruments. The BOT may, from time to time, in the exercise of its reasonable discretion and taking into account existing investment opportunities, review and revise such allocation and limits. Approximately 6.74% and 5.99% of the Retirement Plans' investment in pooled funds in the equity trading book includes investments in shares of SMC and its subsidiaries as of December 31, 2014 and 2013, respectively. Approximately 7.67% and 5.46% of the Retirement Plans' investment in joint funds in the fixed income portfolio include investments in shares of SMC and its subsidiaries as of December 31, 2014 and 2013, respectively. Other Other includes cash and cash equivalents, interest receivable, accounts receivable from BLI and other SMC Group retirement plans. The BOT analyzes the level of funding required for the retirement fund. This review includes the Asset Liability Adjustment (ALM) strategy and the investment risk management policy. The purpose of the Group's ALM is to match the maturities of plan assets with the retirement benefit obligation as they mature. The Group monitors how the expected duration and return on investments correspond to the expected cash outflows arising from the retirement benefit obligation. The Group is expected to contribute P927 to the retirement plan in 2015. The Retirement Plans expose the Group to certain risks such as investment risk, interest rate risk, longevity risk and salary risk as follows: investment and interest rate. The present value of the defined benefit retirement obligation is calculated using a discount rate determined by reference to market yields on government bonds. Generally, a decrease in the interest rate on a benchmark government bond will increase the defined benefit retirement obligation. However, this will be partially offset by an increase in the Retirement Plan's return on investments and if the return on plan assets falls below this rate, this will create a deficit in the Retirement Plans. Due to the long-term nature of the defined benefit retirement obligation, a continuing level of capital investments is an appropriate element of the Group's long-term strategy to manage the Retirement Plans efficiently. Longevity and Salary Risks. The present value of the defined benefit withdrawal obligation is calculated by reference to the best estimates of: (1) the mortality of plan participants, during and after employment, and (2) the future salaries of plan participants. Consequently, increases in the life expectancy and salary of plan participants will result in an increase in the defined benefit retirement obligation. The expected global rate of return is determined based on the historical performance of the investments. The main actuarial assumptions used in determining retirement benefits are as follows: In Percentages 2014 2013 1.7 - 8.0 5.0 - 10.0

Discount rate Salary increase rate

2,1 - 8,6 5,0 - 10,0

Assumptions for the death and disability rate are based on published statistics and mortality and disability tables. As of December 31, 2014 and 2013, the weighted average duration of the defined benefit retirement obligation is 6.80 - 11.07 years and 7.50 - 11.25 years, respectively. As at December 31, 2014 and 2013, reasonably possible changes in one of the relevant actuarial assumptions, keeping the other assumptions constant, would have affected the obligation to withdraw the defined benefit in the amounts indicated below. Defined Benefit Retirement Obligation 2014 1% Increase Discount Rate Salary Increase Rate

SMBI FS 2014 C5 6.indd 88

(P1,980) 2,133

2013 1% reduction P2,159 (2,044)

1 Percentage increase (P1,998) 2,112

1% reduction 2,144 (1,999)

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ANNUAL REPORT 2014

BLI has debts with SMBRP of P10 and P15 as of December 31, 2014 and 2013, respectively, included under “Accounts payable and accrued expenses” in the consolidated financial statements (Notes 15 and 26). Transactions with Retirement Plans are carried out at normal market prices. Outstanding balances on December 31, 2014 and 2013 are unsecured and settlements are made in cash. 29. Earnings per share Basic and diluted earnings per share are calculated as follows: Net income attributable to the Company's shareholders (a) Weighted average number of shares outstanding (in millions) (b) Basic/diluted earnings per share (a / B)

2014

2013

2012

P13.029

P12.051

$ 14.360

15.359 P0.85

15.372 P0.78

15,410 P0.93

As at 31 December 2014, 2013 and 2012, the Group has no diluted debt or equity instruments. 30. Employee Stock Purchase Plan SMC offers shares to employees of SMC and its subsidiaries under the ESPP. Pursuant to the ESPP, all permanent employees of SMC and its subsidiaries in the Philippines who have worked for a continuous period of one year prior to the subscription period will be able to apply at a 15% discount off the market price equivalent to the weighted average of daily closing prices for the three months prior to the offering period. A participating employee can purchase at least 100 shares through payroll deduction. The ESPP requires that the subscribed shares and corresponding dividends be pledged to SMC until the subscription is paid in full. The right to subscribe to the ESPP cannot be assigned or transferred. A participant may sell its shares after the second year from the exercise date. The ESPP also permits the subsequent withdrawal and cancellation of participant subscriptions under certain terms and conditions. Expenses with share-based payments charged in the operations of the “Management Fees” account totaled P17 and P48 in 2013 and 2012, respectively (Note 20). 31. Financial risk and capital management Objectives and policies Objectives and policies The Group has significant exposure to the following financial risks mainly through the use of financial instruments:

Interest rate risk Exchange rate risk Liquidity risk Credit risk

This note presents information on exposure to each of the above risks, objectives, policies and processes for measuring and managing these risks and for capital management. The Group's main non-trading financial instruments include cash and cash equivalents, AFS financial assets, non-current receivables, long-term borrowings and derivative instruments. Cash and cash equivalents are primarily used for working capital management purposes. The Group's trade-related financial assets and liabilities, such as trade receivables and other receivables and accrued expenses, arise directly and are used to facilitate its day-to-day operations.

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SAN MIGUEL BREWERY INC.

The Group's outstanding derivative instruments are used primarily for risk management purposes. The Group uses derivatives to manage its exposure to interest rate and exchange rate risks arising from its operating and financial activities. The BOD has overall responsibility for establishing and overseeing the Group's risk management framework. The Group's risk management policies are established to identify and analyze the risks faced by the Group, establish appropriate risk limits and controls, and monitor risks and compliance with limits. Risk management policies and systems are periodically reviewed to reflect changes in market conditions and activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Committee oversees how management oversees compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks facing the Group. The Audit Committee is assisted in its supervisory function by the Internal Audit. Internal Audit conducts periodic and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The BOD established the Audit Committee to assist the BOD in fulfilling its responsibility for overseeing the Group's corporate governance process in relation to: a) the quality and integrity of the financial statements and financial reporting process and internal and financial controls of the accounting systems; b) performance of the internal auditors; c) the annual independent audit of the financial statements, the hiring of independent auditors and the evaluation of the qualifications, independence and performance of the independent auditors; d) compliance with legal and regulatory requirements, including control and disclosure procedures; e) assessment of the management process for assessing and managing the Group's business risk problems; and f) fulfillment of other attributions indicated by the Board of Directors. The Audit Committee will also prepare the reports that must be included in the Group's annual report. Accounting policies relating to derivatives are set out in Note 3 to the consolidated financial statements. Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument (cash flow interest rate risk) or its fair value (fair value interest rate risk) fluctuate due to changes in market interest rates. The Group's exposure to changes in interest rates is mainly related to long-term loans. Fundraising issued at fixed rates exposes the Group to fair value interest rate risk. On the other hand, foreign funds issued at variable rates expose the Group to cash flow interest rate risk. The Group manages its interest cost using an optimal mix of fixed and floating rate debt instruments. Management is responsible for monitoring the prevailing interest rate in the market and ensuring that the margin rates charged on its loans are optimal and compared with the rates charged by other creditor banks. In managing interest rate risk, the Group seeks to reduce the impact of short-term fluctuations on results. However, in the long term, permanent changes in interest rates would impact results. The Company does not account for any fixed rate financial assets or liabilities in the FVPL and the Company does not designate derivatives as hedging instruments in a fair value hedge accounting model. Therefore, a change in interest rates at the balance sheet date would not affect the result. The Group has no variable rate loans in 2014 and 2013. The terms and maturity profile of interest-bearing financial instruments, together with their gross amounts, are presented in the following tables: December 31, 2014 Fixed interest rate Interest denominated in Philippine weights

13 years

> 3 - 5 years

> 5 years

Total

3.000 pesos 6,05%

$ 12.810 5,93% 10,5% $ 12.810

22,000 pesos 5.5% 6.6% 22,000 pesos

$ 37.810

3000 rupees

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$ 37.810

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ANNUAL REPORT 2014

December 31, 2013 Fixed interest rate in Philippine pesos

13 years

> 3 - 5 years

$ 22.400 8,875%

3.000 pesos 6,05%

22.400 pesos

3000 rupees

> 5 years

Total

$ 19.810 5,93% 10,5% $ 19.810

$ 45.210

Currency risk The Company's functional currency is the Philippine peso, which is the denomination of most of the Group's revenues. Exposure to exchange rate risk results from significant movements in exchange rates that adversely affect the Group's transactions denominated in foreign currency. The objective of risk management with respect to currency risk is to reduce or eliminate the volatility of earnings and any adverse impact on equity. The Group uses natural hedging operations and/or currency purchases at the spot exchange rate, when necessary, to address short-term imbalances arising from imports, income and expense transactions and other currency-denominated obligations. Information on the Group's foreign currency-denominated monetary assets and liabilities and their equivalents in Philippine pesos is as follows: 2014

Assets Cash and cash equivalents Trade accounts receivable and other receivables Non-current receivables Liabilities Accounts payable and accrued expenses Net monetary assets denominated in foreign currency

2013

United States Dollar (US)*

equivalent weight

United States Dollar (US)*

equivalent weight

$ 89,8 63,8 0,4 154,0

P4,015 2,854 17 6,886

$ 89,5 52,3 0,2 142,0

$ 3.971 2.322 10 6.303

48,0

2.146

51.6

2.289

$ 106,0

$ 4.740

$ 90,4

P4.014

* US dollar equivalent of balances denominated in foreign currency at the balance sheet date.

The Group reported net foreign exchange gains (losses) of $60, (P449) and P577 in 2014, 2013 and 2012, respectively, on the translation of its foreign currency denominated assets and liabilities (Note 24). This was primarily a result of movements in the Philippine Peso against the US Dollar as shown in the following table: US Dollar to Philippine Peso Dec 31, 2014 Dec 31, 2013 Dec 31, 2012

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SAN MIGUEL BREWERY INC.

The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group's pre-tax profit (due to changes in the fair value of assets and liabilities monetary) and the Group's shareholders' equity (through conversion of results and financial position of operations abroad): P1 Decrease in the US dollar exchange rate

December 31, 2014 Cash and cash equivalents Suppliers and other receivables Non-current receivables Accounts payable and accrued expenses

Effect on Income before Income Tax

Effect on equity

Effect on Income before Income Tax

Effect on equity

(P2) (2) (4)

(P89) (63) (1) (153)

P2 2 4

P89 63 1 153

2 (P2)

48 (P105)

(2) P2

(48) P105

P1 Fall in the US dollar exchange rate

December 31, 2013 Cash and cash equivalents Suppliers and other accounts receivable Accounts payable and accrued expenses

P1 Increase in the US dollar exchange rate

Effect on Income before Income Tax

Effect on equity

Effect on Income before Income Tax

Effect on equity

(P8) (1) (9)

(P87) (52) (139)

P8 1 9

P87 52 139

1 (P8)

51 (P88)

(1) P8

(51) P88

Exposures to exchange rates vary throughout the year depending on the volume of transactions abroad. However, the above analysis is considered to be representative of the Group's currency risk. Liquidity risk Liquidity risk refers to the risk that the Group will have difficulty meeting its payment obligations under normal and stressed circumstances. The Group's objectives for managing its liquidity risk are the following: a) ensuring the availability of adequate funding at all times; b) fulfill commitments as they arise without incurring unnecessary costs; c) being able to access financing when necessary at the lowest possible cost; and d) maintain an adequate schedule for refinancing maturities. The Group monitors and manages its liquidity position, gaps or excess liquidity on a daily basis. A committed stand-by line of credit is also available at several local banks to ensure funds are available when needed. The following table summarizes the maturity profile of the Group's financial assets and liabilities based on undiscounted contractual receipts and payments used for liquidity management.

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ANNUAL REPORT 2014 December 31, 2014

Financial assets Cash and cash equivalents Trade receivables and other receivables - net Derivative assets (included in the “Prepaid expenses and other current assets” account) AFS financial assets (included in the “Investments” account) Non-current receivables ( included in the account "Other non-current assets") Financial Liabilities Accounts payable and accrued expenses (excluding cash dividends payable) Derivative liabilities (included in the account "Accounts payable and accrued expenses") Long-term debt (including maturities current) December 31, 2013

Financial assets Cash and cash equivalents Trade receivables and other receivables - net Derivative assets (included in the “Prepaid expenses and other current assets” account) AFS financial assets (included in the “Investments” account) Non-current receivables ( included in the account “Other non-current assets”) Financial Liabilities Accounts payable and accrued expenses (excluding cash dividends payable) Derivative liabilities (included in the account “Accounts payable and accrued expenses”) Long-term debt (including maturities chains)

book value

contractual cash flow

1 year or less

> 1 year 2 years

>2 years 5 years

more than 5 years

$ 9.886 6.005

P-

6.416

37.518

51.042

2.369

21.757

24.547

book value

contractual cash flow

1 year or less

> 1 year 2 years

>2 years 5 years

more than 5 years

$ 14.198 6.352

P-

7.827

45.013

54.788

24.440

1.532

7.278

21.538

62 29

Credit risk Credit risk is the risk of financial loss to the Group if a customer or the counterparty to a financial instrument does not fulfill its contractual obligations and arises mainly from trade accounts receivable and other accounts receivable and investment securities . The Group manages its credit risk primarily through the application of transaction limits and close risk monitoring. It is the Group's policy to transact with a wide range of reputable counterparties to mitigate any significant concentration of credit risk. The Group has periodic reviews of internal controls to monitor the granting of credit and the management of credit exposures. Debtors from customers and other accounts receivable Exposure to credit risk is mainly influenced by the individual characteristics of each customer. However, management also considers the demographics of the Group's customer base, including the default risk of distributors, wholesalers and retailers, as these factors can influence credit risk.

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SAN MIGUEL BREWERY INC.

The Group has established a credit policy whereby the solvency of each new customer is analyzed individually before offering standard payment and delivery terms. The Group ensures that installment sales are made to customers with an adequate credit history. The Group has detailed credit criteria and various levels of credit approval requirements before engaging a particular customer or counterparty. The review includes external qualifications where available and, in some cases, bank references. Purchase limits are established for each customer and are reviewed periodically. Customers who do not comply with the Group's benchmark solvency will only be able to carry out transactions with the Group in the form of an advance payment or in cash. When monitoring customers' credit risk, customers are grouped according to their credit characteristics, namely whether they are natural or legal persons, wholesale or retail customers, age profile, maturity and existence of previous financial difficulties. Customers classified as “high risk” are placed on a shortlist of customers and future sales are made in cash. The Group establishes a provision for impairment that represents its estimate of losses incurred in respect of accounts receivable and other accounts receivable. The main components of this provision include a specific loss component that refers to individually significant exposures and a collective loss component established for groups of similar assets in relation to losses incurred but not yet identified. The provision for collective losses is determined based on historical data from payment statistics for similar financial assets. Financial information on the Group's maximum exposure to credit risk is presented below, without considering the effects of guarantees and other risk mitigation techniques.

Cash and cash equivalents (excluding cash) Accounts receivable and other accounts receivable - net AFS financial assets Derivative assets Non-current accounts receivable

To use

2014

2013

6 7

US$ 9.798 6.005 60 5 29 US$ 15.897

$ 14.193 6.352 62 1 38 $ 20.646

9 14

Credit risk for cash and cash equivalents and derivative assets is considered negligible as the counterparties are reputable entities with high quality external credit ratings. The Group's exposure to credit risk stems from default by the counterparty. Generally, the maximum exposure to credit risk of customer accounts and other receivables is the carrying amount without taking into account guarantees or credit enhancements, if any. The Group does not have a significant concentration of credit risk as the Group deals with a large number of homogeneous counterparties. The Group does not execute any credit guarantee in favor of any counterparty. Capital management The Group maintains a strong capital base to ensure its ability to continue as a going concern and therefore continue to deliver returns to shareholders and benefits to other stakeholders and maintain an optimal capital structure to reduce the cost of capital. The Group manages its capital structure and makes adjustments in line with changing economic conditions. In order to maintain or adjust the capital structure, the Group may adjust the payment of dividends to shareholders, liquidate existing debt, return capital to shareholders or issue new shares. The Group defines capital as paid-in share capital, additional paid-in capital and retained earnings. Other components of equity, such as accumulated translation adjustments, are excluded from equity for equity management purposes. The BOD has overall responsibility for monitoring capital in proportion to risk. Capital ratio profiles are established in light of changes in the external environment and the risks inherent in the Group's businesses, operations and industry. The Group monitors capital on the basis of the debt/equity ratio, calculated as total debt divided by total capital. Total debt is defined as total current liabilities and total non-current liabilities, while equity is total shareholders' equity, as shown in the consolidated statements of financial position. There were no changes in the Group's approach to capital management during the year.

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ANNUAL REPORT 2014

32. Financial assets and liabilities The table below presents a comparison by category of the carrying and fair values of the Group's financial instruments: December 31, 2014 Book value Financial assets Cash and cash equivalents Accounts receivable and other accounts receivable - Assets net derivatives (included in the “Prepaid expenses and other current assets” account) AFS financial assets (included in the “Investments” account) Non-current receivables (included in the “Other non-current assets” account) Financial liabilities Accounts payable and accrued expenses (excluding cash dividends payable) Derivative liabilities (included in Accounts payable and accrued expenses) Long-term debt (including current maturities)

December 31, 2013

fair value

book value

fair value

$ 9.886 6.005

$ 14.198 6.352

6.416

7.827

37.518

42.022

45.013

49.311

The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Cash and cash equivalents, Trade accounts receivable and other accounts receivable and Non-current accounts receivable. The carrying amount of cash and cash equivalents and accounts receivable and other accounts receivable approximate fair value primarily due to the relatively short maturities of these financial instruments. In the case of non-current receivables, fair value is based on the present value of expected future cash flows using applicable discount rates based on current market rates for identical or similar quoted instruments. Derivatives. The fair values of forward exchange contracts are calculated by reference to current forward exchange rates. Fair values of embedded derivatives are based on valuation models used for similar instruments that use observable and unobservable inputs. AFS Financial Assets. The fair values of publicly traded instruments and similar investments are based on quoted market prices in an active market. Unlisted variable-income securities are recorded at cost less impairment. Accounts payable and accrued expenses. The carrying amount of accrued accounts payable and expenses approximate fair value due to the relatively short maturities of these financial instruments. Long term debt. The fair value of fixed rate borrowings is based on the discounted value of expected future cash flows using applicable market rates for similar types of instruments at the balance sheet date. As at 31 December 2014 and 2013, the discount rates used fluctuated between 2.54% and 4.33% and between 0.49% and 3.75%, respectively. Derivative financial instruments The Group's derivative financial instruments according to the type of financial risk it manages and the detail of the implicit derivative financial instruments that are not designated as hedges are analyzed below.

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SAN MIGUEL BREWERY INC.

Derivative instruments not designated as hedge The Group contracts certain derivatives as economic hedge of certain underlying exposures. This includes embedded derivatives found in master contracts, which are not designated as hedge accounting. Changes in the fair value of these instruments are recorded directly in profit or loss. Embedded Currency Forwards The total notional outstanding amount of currency forwards embedded in non-financial contracts was $38 and $21 as of December 31, 2014 and 2013, respectively. These non-financial contracts consist primarily of foreign currency purchase orders, sales agreements and capital expenditures. Embedded referrals are not clearly and closely related to their respective host contracts. The negative net fair value of these embedded currency forward contracts amounted to P22 and P21, respectively. The Group recognized losses at market value of embedded derivatives for P9, P47 and P9 in 2014, 2013 and 2012, respectively (Note 24). Changes in fair value of derivatives The net changes in fair value of all derivative instruments are as follows: 2014

2013

(P21) (9) (30) (8) (P22)

Balance at the beginning of the year Net changes in the fair value of non-accounting hedges Less fair value of settled instruments Balance at the end of the year

P3 (47) (44) (23) (P21)

Fair value hierarchy Financial assets and liabilities measured at fair value in the consolidated statements of financial position are classified according to the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the importance of the information used to measure the fair value of financial assets and liabilities (Note 3). The following table analyzes financial instruments recorded at fair value, by valuation method. December 31, 2014 Financial assets Derivative assets Financial assets AFS Financial liabilities Derivative liabilities

December 31, 2013

Level 1

Level 2

Total

Level 1

Level 2

Total

P 60

P5 -

P5 60

page 62

P1-

P1 62

The Group has no financial instruments rated on a Level 3 basis as of December 31, 2014 and 2013. During the year, there were no transfers between Level 1 and Level 2 fair value measurements, and there were no transfers to and from Level 1 3 fair value measurements Tier 3 fair value measurements. 33. Cash dividends Cash dividends declared by the Company's Board of Directors to shareholders amounted to P0.56 per share in 2014 and 2013. As of March 11, 2015, the The Company's Board of Directors declared cash dividends of P0.15 per share payable on May 6, 2015 to all shareholders of record on April 20, 2015.

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ANNUAL REPORT 2014

34. Other Matters a. Modification of the amended social contract

On December 5, 2014, the BOD approved the amendment of Article II (Main Purpose) of the Company's Amended Bylaws (AOI) to include the non-alcoholic beverage business (Amendment Proposal). Likewise, the Company obtained the affirmative vote of the shareholders who own or represent at least two-thirds of the Company's outstanding share capital to the Amendment Proposal, through their respective written consent received by the Company on February 20, 2015. The SEC approved the proposed Amendment to the Company's AOI on March 11, 2015.

B. Acquisition of Assets of Ginebra San Miguel Inc.

On December 5, 2014, the BOD authorized the acquisition by the Company of the non-alcoholic beverage assets of GSMI, comprising property, plant and equipment as of December 31, 2014, and finished goods and other inventories comprising containers (pallets, boxes, bottles and caps), packaging materials and raw materials as of March 31, 2015, used in GSMI's non-alcoholic beverage business (Acquisition).

The BOD further authorized management to negotiate and finalize the final terms of the Acquisition.

appointments

The Group's outstanding purchase commitments as of December 31, 2014 and 2013 total $4,654 and $5,998, respectively.

The amount committed but not yet disbursed for capital projects as at 31 December 2014 and 2013 is approximately P490 and P330 respectively.

d. Exchange rates

The exchange rates used to convert foreign subsidiaries' US dollar accounts to Philippine pesos in 2014 and 2013 were closing rates of P44.72 and P44.40, respectively, for the balance sheet consolidated accounts, and average rates of P44 .39 . P42.43 and P42.24 in 2014, 2013 and 2012, respectively, for income and expense accounts.

I. Tax refund claims

SMBI FS 2014 C5 6.indd 97

eu.

Archived by SMC

On April 12, 2004 and May 26, 2004, SMC was fined by BIR for lack of excise tax on “San Mig Light”, one of its brewing products. SMC challenged the determinations before the First Chamber of the Tax Appeals Court (CTA) in two cases, CTA Cases Nos. 7052 and 7053. In these cases, SMC's request for the refund of taxes paid in excess of what was What do you think is excise tax? corresponding rate for its “San Mig Light” product for the period from February 2, 2004 to November 30, 2005 (registered as CTA File No. 7,405). Both the CTA, through its First Chamber, and the CTA En Banc (on appeal), ruled in favor of the SMC. On April 1, 2013, BIR submitted the consolidated cases to the Federal Supreme Court (registered as G.R. No. 20573) where they are still pending in its Third Chamber.

SMC filed with the CTA, through a review appeal (Third Chamber and registered as Process CTA nº 7.708), a second request for refund of excess payment of taxes in the period from December 1, 2005 to July 31, 2007 on November 27, 2007, as SMC was forced to continue to pay excise duties in excess of what it believes to be the applicable excise duty rate. The Third Division of the CTA granted SMC's request for review and condemned BIR to return or issue a tax credit certificate in favor of SMC. BIR submitted the decision of the Third Chamber to CTA En Banc but its appeal was denied. Subsequently, BIR filed a review appeal before the Supreme Court of Justice (registered under number G.R. 205045). The process is being processed by the Third Division.

Subsequently, G.R. No. 20573 was consolidated with G.R. No. 205045. SMC and BIR presented their respective memorandums required by the Third Panel of the Federal Supreme Court. The cases are now considered adjudicated.

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SAN MIGUEL BREWERY INC.

SMC filed its third refund claim with the CTA (Third Division registered as CTA Case No. 7953) on July 24, 2009 for overpayments of excise duties in the period from August 1, 2007 to September 30, 2007. This case is still pending in the CTA.

ii.

Archived by SMB

Meanwhile, effective October 1, 2007, SMC spun off its domestic beer business into SMB. SMB continued to pay excise duty on “San Mig Light” at the higher rate required by the BIR and above what it believes to be the excise duty applicable to it.

The SMB submitted to BIR six requests for reimbursement of undue payments which were subsequently submitted to CTA via review appeal on the following dates: (a) first request for refund of undue payments for the period from October 1, 2007 to September 31, December 2008 - Second Panel registered as CTA Process No. 7973 (September 28, 2009); (b) second demand for refund of overpayment referring to the period from January 1, 2009 to December 31, 2009 - First Division registered as Process CTA No. 8209 (December 28, 2010); (c) third demand for reimbursement of overpayment referring to the period from January 1, 2010 to December 31, 2010 - Third Division registered as Process CTA No. 8,400 (December 23, 2011); (d) fourth demand for return of overpayment referring to the period from January 1, 2011 to December 31, 2011 - Second Panel registered as Process CTA No. 8591 (December 21, 2012); (e) fifth demand for restitution of overpayment referring to the period from January 1, 2012 to December 31, 2012 - Second Chamber registered as Process CTA No. 8748 (December 19, 2013); and (f) sixth request for reimbursement of overpayment referring to the period from January 1, 2013 to December 31, 2013 - registered as Process CTA No. 8955 (December 2014).

CTA Cases 7973, 8209, 8400 and 8591 were decided by the respective CTA Divisions where they are pending, in favor of the SMB. BIR is in the process of appealing before the CTA En Banc the decisions handed down by the Third Chamber in CTA cases nºs 7973 and 8400.

On the other hand, the judgment of Process CTA nº 8.209 was declared final and unappealable by the First Chamber due to the failure of the BIR to file an Appeal to Reform the sentence. In CTA Process No. 8591, BIR filed an Interlocutory Appeal, which was contested by the Company and subsequently denied by the Second Chamber. CTA Case No. 8748 remains pending at the Second Chamber, while BIR has requested additional time to file its Response to CTA Case No. 8955.

Pending tax cases

BIR issued a Notice of Final Assessment dated March 30, 2012 (2009 Assessment), imposing deficiency tax obligations, including interest and penalties, on IBI for the 2009 fiscal year. of licenses of its intellectual properties to the Company as passive income and therefore subject to the final tax of 20%. However, BIR is of the position that said royalties are commercial income subject to 30% of regular corporate tax.

On May 16, 2012, IBI filed a protest against the 2009 Notice of Infraction. In its Final Decision on the Contested Resolution, issued on January 7, 2013, BIR denied IBI's protest and reiterated the demand for payment of the income tax, including interest and penalties. On February 6, 2013, IBI filed a Revision Request with the CTA questioning the 2009 Notice of Violation. The process was registered as CTA Process No. 8607 and is already on trial.

On November 17, 2013, IBI received a Letter of Formal Demand with the Final Settlement Notice for the fiscal year 2010 (2010 Settlement) from BIR with a requirement to pay income tax and ICMS with administrative penalties. BIR maintained its position that royalties are business income subject to the regular 30% corporate tax. The 2010 Assessment was protested by IBI to the BIR through a closed letter on November 29, 2013. A Petition for Revision was presented to the CTA and the case was registered as Case CTA No. 8813. The case remains pending until this date.

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CONTACT US CORPORATE HEADQUARTERS San Miguel Brewery Inc. 40 San Miguel Avenue, Mandaluyong City 1550 Metro Manila, Philippines P.O. Box 271 Manila Central Post Office, Philippines Phone: (632) 632-3000 Fax: (632) 632-3605 Website: http://www.sanmiguelbrewery.com.ph SHAREHOLDERS' MEETING The Company's Annual Shareholders' Meeting is held at on the last Tuesday of May. SHAREHOLDER SERVICES AND ASSISTANCE SMC Stock Transfer Services Corporation serves as the stock transfer agent and registrar for the company. For inquiries regarding dividend payments, change of address and account statement, lost or damaged stock certificates, write or call: SMC Stock Transfer Service Corporation 40 San Miguel Avenue, Mandaluyong City 1550 Metro Manila, Philippines Phone: (632) 632 -3450 Fax: (632) 631-6951 INSTITUTIONAL INVESTOR INQUIRIES San Miguel Brewery Inc. receives inquiries from institutional investors, analysts and the financial community. Write or call: Investor Relations San Miguel Brewery Inc. Phone: (632) 632-3000 Fax: (632) 632-3111 CUSTOMER AND CUSTOMER SERVICE For questions, comments, and requests, write or call the Beer Account SMC-1 customer service hotline: Phone: (632) 632-2000 Toll Free: 1-800-1-888-762-1 Fax: (632) 632-7621

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