James Robert D. Aguila graduated from Polytechnic University of the Philippines – Manila , Cum Laude

He placed FIFTH in 2016 CPA Board Exam.

Sharmaine Dianne C. Mamaed graduated from Ateneo de Davao University , Summa Cum Laude

She placed FOURTH in 2016 CPA Board Exam.

Ronna Mae E. Ferrer graduated from Polytechnic University of the Philippines – Manila, Magna Cum Laude

She placed THIRD in 2016 CPA Board Exam.

Ian Kier J. Valencia graduated from Batangas State University, Cum Laude

He placed SECOND in 2016 CPA Board Exam.

Ralley S. Paragas graduated from Colegio de Dagupan, Summa Cum Laude

He placed FIRST in 2016 CPA Board Exam.

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Current issues facing technology companies

SUITS THE C-SUITE By Manolito R. Elle

Business World (04/18/2016 – p.S1/2)

The pace of change within the technology sector is rapidly accelerating. Even within an industry that is accustomed to rapid waves of change, C-level executives and boards now find themselves navigating an unprecedented period of disruption and innovation. The era of cloud computing and smart mobility is bringing about change faster, more continuously and from different directions, allowing more fluid access and/or transfer of data. As a result, executives and top management are also becoming increasingly concerned about intellectual property (IP) protection and information security. This transformational force is global and highly complex, encompassing new business models, new entrants and new markets — and always with the looming prospect of next-wave technology disruptors.

Clearly, today’s multiple waves of disruption (and their magnitude) are defining a historic transformation for the technology sector. To deal with the changing times, technology executives need to understand what the technology risks are and the related strategies, as well as transformation initiatives, to address these risks in today’s environment.

Here are some of these potential technology risks:

Social media and networking

By now, everyone knows that social media technology has become a force that businesses must reckon with at breathtaking speed. Its effects are cutting across the entire spectrum of business activities — from product development to marketing and sales to customer support.

This leads to a conundrum where most organizations find themselves needing a strategy to engage social media. However, the change social media has wrought is happening so fast and at so large a scale that the “why’s” and “how’s” of such a strategy — and the risks involved — are not yet fully understood.

As urgent as the need is to establish a social media strategy, businesses should do so with full awareness of the potential risks, such as: employees inadvertently leaking sensitive company information; criminal hackers “re-engineering” confidential data; employees misusing social applications while at work; and damage to the brand or company reputation due to negative employee or customer posts.

Despite these risks, leading companies recognize the potential value they can derive from social media. They are creating and communicating social media strategy, objectives and measurement plans, as well as developing enterprise-wide social media policies to guide employee usage. They are taking steps to proactively educate and train their staff to operate safely and effectively in social media.

Use of cloud computing

Cloud computing is a new paradigm where resources are available to enterprises and users on-demand and on a pay-per-use basis. It uses the Internet to access someone else’s software running on someone else’s hardware in someone else’s data center.

The cloud has evolved from a buzzword into a topic of conversation among Chief Information Officers and Boards of Directors. Companies of all sizes are venturing into the cloud to address a variety of business needs. However, as with any major technology shift, the principal challenges are on how to adopt and transform the existing landscape while building a secure, trusted and audit-ready environment.

The use of cloud computing could pose different risks such as: unauthorized administrative access, inadequate data management (i.e., in terms of location, compliance, recovery and security), and the unexpected unavailability of the cloud provider or a stable Internet connection.

To have a more effective cloud adoption strategy, companies should consider the three core elements in the cloud transformation journey — adopt, transform and trust. “Adopt” means creating a strategy and vision for implementing cloud technology. “Transform” means changing the way companies use the cloud to achieve business objectives. “Trust,” on the other hand, means providing a secure, trusted and audit-ready cloud environment.

IP protection and information security

Many companies often experience active and constant threats from outsiders to steal IP data. IP theft is a global concern and significant risk to businesses. In some countries, IP theft is common and becomes part of a company’s business growth strategy to keep up with its more innovative competitors.

One of the issues with technology and security compromises is that many companies do not know when files and data are migrating from their enterprise. For example, there is a limited ability to secure data when employees save work files to external devices. E-mail systems can also be the gateway for intruders to enter a company’s network and compromise data.

IP protection is such an important issue that it prompted Europe’s highest court to strike down on Oct. 6, 2015 an international agreement that had made it easy for companies like the global technology giants to move digital data from their millions of users in the 28-member European Union (EU) to the United States. The ruling empowers data-privacy regulators in each of the EU nations to evaluate how data are moved from their countries of origin to the United States, and it will permit national authorities to impose tougher restrictions on specific data transfers.

Consequently, protecting IP against increasing cyber threats has become a primary business concern for technology companies, where IP is often their most valued asset. Companies should consider leveraging on the leading practices to protect their IP, such as increasing executive commitment, regular inventory of IP assets and review of access rights, implementing enhanced controls and enhancing IP governance. Integrating these efforts into the overall enterprise risk program is crucial to a well-managed information security program.

While these are but some of the risks and challenges facing technology companies, it is clear that enterprises need to implement defensive programs that are relevant to the rapid technological evolution happening every day. Such moves will require both top-down executive support as well as changes in the business culture from the ground up. Only then can a successful business transformation occur.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Manolito R. Elle is a Senior Director of SGV & Co.

Claiming CWT credits

SUITS THE C-SUITE By Cherry Liez O. Rafal-Roble

Business World (04/25/2016 – p.S1/2)

One of the withholding tax schemes adopted in the Philippines is the creditable withholding tax (CWT) system. Under the CWT, income payments made to Philippine residents enumerated in the CWT regulations should be subjected to the different CWT rates. The income subject to CWT still needs to be reported in the income tax return of the recipient, the income tax calculated thereon, and the CWT claimed against the CWT so withheld. Any excess of the tax income due on the return over the CWT withheld should then be paid by the recipient to the Bureau of Internal Revenue (BIR). On the other hand, if the CWT exceeds the income tax due on the return, then the excess CWT may either be refunded or carried over to the next period by the taxpayer.

While this withholding system might appear straightforward and mechanical, taxpayers whose income was subjected to the creditable withholding tax need to be aware of the requirements needed to prove the entitlement to the CWT credits.

Section 2.58.3 of Revenue Regulations No. 2-98 requires that claims for tax credit or refund of any creditable income tax, which was deducted and withheld on income payments, shall be given due course only when it is shown that (1) the income payment has been declared as part of the gross income, and (2) the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor/withholding agent to the payee/recipient, known as the Certificate of Creditable Tax Withheld at Source or BIR Form No. 2307, showing the amount paid and the amount of tax withheld therefrom.

The regulations also require that the CWT “shall be allowed” as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received. In other words, the CWT credits should be claimed in the same quarter when the related income was earned or received. If, for example, the CWT credit is related to an income earned or received in 2015, and duly reported in 2015, the tax credit is allowed to be deducted from the tax due on such income in 2015.

A question arises if the CWT credits may still be claimed by the payee/recipient in a subsequent period if the CWT credits are not claimed within the same period when the related income was received or earned. For example, if the CWT credit pertains to income earned/received and reported in 2015, but the CWT is not claimed in 2015, can the said CWT be claimed in 2016 when the related certificate or BIR Form No. 2306 is received by the payee/recipient?

In a 2013 decision of the Court of Tax Appeals, CWT credits were disallowed on the grounds that the CWT credits actually pertained to income earned and reported in a prior year.

If the CWT credits are claimed in the same period when the related income is earned/ received and reported by the income payee, the regulations also require that the fact of withholding is established by a copy of BIR Form No. 2307, duly issued by the payor/withholding agent to the payee/recipient showing the amount paid and the amount of tax withheld therefrom. It is thus required that the corresponding BIR Form 2307 be presented to prove the fact of withholding.

There are court decisions that ruled that the Certificate of Creditable Tax Withheld at Source or BIR Form 2307 is the competent proof to establish the fact that taxes were withheld, making it unnecessary for the person who prepared and executed BIR Form 2307 to be presented and to testify personally to prove the authenticity of the CWT certificates.

However, in a recent Supreme Court decision, Philippine National Bank vs Commissioner of Internal Revenue (G.R. No. 206019 promulgated on March 18, 2015), the court held that the fact of withholding may be established by documents other than the certificate or BIR Form No. 2307. In the said case, the fact of withholding was established by a copy of the withholding tax return, BIR Form No. 1606, or the withholding tax return on the sale of a real property other than capital asset. The said form showed the amount of tax withheld and paid by the withholding agent, date of remittance, name of payor and payee, description of the property subject of the transaction, and the determination of the taxable base and tax rate applied. The court said that these are the very same key information that would be gathered from BIR Form No. 2307; thus, the presentation of BIR Form 2307 would be a superfluity, of little or no value.

The question that now arises is this: Is the above decision sufficient reason to disregard or dispense with compliance with BIR Form No. 2307? We think not. We believe it is still more prudent for the income recipient to require its income payors to provide it with BIR Form 2307 in a timely manner, so that its CWT credits are secure. While the above decision offers the income payee with another option to prove its CWT credits in the absence of BIR Form No. 2307, we remind the reader that the above decision arose from a transaction on which the CWT was paid in 2003 and the claim for refund for the CWT was filed in 2005.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Cherry Liez O. Rafal-Roble is a Tax Senior Director of SGV & Co.

SGV at 70: Celebrating 50 years of investing in people

By 1966, SGV was well on its way to becoming the largest accounting multinational entity in the region – proving its ability to blaze new trails and redefine its future. When the SGV Foundation (SGVF) was established on 30 April 1966, it also proved the Firm’s capacity
for compassion and commitment to nation-building.

Instituted by SGV Founders Washington SyCip and Alfredo Velayo, as well as partners Cesar Virata, Benjamin Abela, and Erlinda Villanueva, the Foundation sought to develop social consciousness among SGVeans and to contribute to the country’s development by empowering people. Just as the Firm continues to provide training and learning opportunities to its partners and staff, the Foundation also focuses on education, providing scholarships, financial support, and grants.

As part of its programs and advocacies, the Foundation also has projects that relate to the social, moral and economic development of communities and families. It works closely with other foundations on relevant and aligned projects.

CGL speaks at Infrastructure Forum

Financial Risk Services Management Partner Ian Lauron (CGL) and Manager Alister Benedict Rodriguez were among the participants during the recent UK Financial and Professional Services Seminar organized by UK Trade & Investment, which focused on Public-Private Partnerships (PPP) and Infrastructure Development and Finance. CGL served as an industry panelist during the session focusing on detailed technical design, procurement and project management with an emphasis on the need for data science and impact analysis to support a corridor approach to development.

Held at the New World Hotel in Makati, the seminar aimed to bring together world-class British legal, advisory, and engineering firms to discuss best practices for successful project delivery. The seminar also aimed to raise awareness on how British expertise could be tapped to add value throughout a project’s cycle and facilitated discussions around current issues regarding implementation of infrastructure projects and how these could be addressed.

SGV attends GRI G4 Certified Training on the Sustainability Reporting

The National Center for Sustainability Reporting (Indonesia), in collaboration with the University of Asia and Pacific (UA&P), conducted the Global Reporting Initiative (GRI) G4 Certified Training on Sustainability Reporting at the UA&P campus in Pasig City last April 6 to 8. SGV’s Climate Change and Sustainability Services (CCaSS) Team, headed by CCaSS Partner Clairma Mangangey attended the training together with Advisory Partner Joseph Ian Canlas, Advisory Senior Director Conrad Allan Alviz and CCaSS Senior Director Katrina Francisco.

The training’s objectives were for the participants to (1) recognize the business case and value of sustainability reporting; (2) understand, interpret and implement the GRI’s G4 concepts; (3) begin or improve their sustainability reporting process using GRI G4; and (4) evaluate the quality of sustainability reports written applying the GRI G4 guidelines.

Another successful busy season ends!

Last Friday, 15 April 2016, marked the end of another successful busy season of long hours and diligent efforts to meet the annual filing deadline. To celebrate, our various Market Groups (MGs) shared buffet lunches and meriendas in their respective areas, while the Core Business Services (CBS) group enjoyed filling afternoon snacks at the eCafé.

Chairman and Managing Partner Vic Noel and Vice Chairman and Deputy Managing Partner Itos Cruz expressed their gratitude for our people’s consistent quality service and professionalism.

They also acknowledged the significance of SGV’s 70th anniversary in building a better working world. “As we all observe our 70th Anniversary this year, let us all celebrate the Strength, Growth and Vision that is embodied in each of you, our outstanding people. Let us all work even more closely together to uphold SGV’s legacy, sustain our time-honored values and, in the long run, build a better working world for each other and for our clients and communities.”

Congratulations to all!

The turning point for higher education

SUITS THE C-SUITE By Reginald Angelo S. Gripal

Business World (05/02/2016 – p.S1/2)

(First of two parts)

With the passage of Republic Act 10533, or the Enhanced Basic Education Act of 2013, otherwise known as the K-12 Basic Education Program, the Philippines adopted a globally-accepted system that will better equip students to meet the increasing demand for a highly-skilled work force.

The education sector has not substantially changed since the public school system was introduced at the turn of the 20th century. As a result, the Philippines was the last country in Asia and one of only three countries worldwide (Angola and Djibouti are the other two) with a 10-year pre-university cycle.

According to Government’s FAQs on the K-12 program, “a 12-year program is found to be the best period for learning under basic education. It is also the recognized standard for students and professionals globally.”

The K-12 program adds two more years of basic education, also known as Senior High School, in order to give students more avenues to specialize in certain fields based on their aptitude, interests and school capacity. By introducing specialization at an early stage of learning, it is believed that the youth will be able to work, earn and contribute to the growth of the economy even without the traditional four-year college degree. The K-12 program may also reduce unemployment as it minimizes job mismatches as certain tracks equip students with the appropriate skills for certain jobs at an earlier stage of learning.

While the program may boost Philippine economic growth and support it in the ASEAN integration, there are also perceived drawbacks.

The K-12 program may negatively impact both public educational institutions and private institutions, particularly higher educational institutions. For public institutions, the main issue is the capability and capacity of the public school system to service the additional two years of basic education. In 2011, the IBON Foundation reported shortages of 152,569 classrooms for school year 2011-2012, more than 150,000 water and sanitation facilities, 13.23 million school chairs, and 95,600,000 textbooks. In addition, it also highlighted the shortage of 104,000 teachers. According to Government’s count, from 2010-2014, there have been 86,478 classrooms constructed, 128,105 teachers hired, and a 1:1 student-textbook ratio has already been achieved. It is expected that the two additional years of basic education will heighten the need for more facilities and teachers.

For private higher educational institutions, the shift to the K-12 program may significantly impact profitability, since no new enrollments (excluding transferees or late enrollees) for school years (SY) 2016-2017 and 2017-2018 are expected. The estimated normalization of earnings as a result of the lack of new students is seen only in SY 2021-2022, or a total of six years of significantly reduced revenue.

Thus, unless there is a financial buffer to address the reduced revenue for six years, many private educational institutions are at risk of incurring large losses and may eventually close down.

A look at the educational institutions that are listed in the Philippine Stock Exchange reveals that for the past 3 SYs, total revenue growth has averaged between 3%-16%, buoyed mainly by new student enrollment and increases in tuition fees. It remains to be seen whether revenue growth will still be sustained with the K-12 program.

There is also the added burden on the students and their families to consider. Two more years of basic education translate to additional tuition fees, allowances and other incidental costs. For families who barely make ends meet, it will take more time before the students can earn a living and provide for their families. A further shift in the student population, where some students in private schools will transfer to public schools, is also possible, with some entirely dropping out. Further, since the curriculum is supposed to provide students with the skills to make them eligible for hiring after finishing basic education, some may no longer pursue a four-year college degree, which could make a dent on the cash flow of higher learning institutions.

Not surprisingly, there are several groups opposed to this new educational system, either because they believe the old system was working perfectly, or that Government is not yet ready to implement such a radical change. Some have elevated the issue to the Supreme Court, which denied the plea to set the case for oral arguments. As such, there appears to be no urgency to hear the petitions against K-12, much less the issuance of a restraining order against its continuing implementation.

In next week’s column, we will look at some of the measures that private educational institutions can consider taking in order to mitigate the impact of the K-12 program, including raising tuition and other fees or expanding course and program offerings.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Reginald Angelo S. Gripal is a Director of SGV & Co.

The turning point for higher education

SUITS THE C-SUITE By Reginald Angelo S. Gripal

Business World (05/09/2016 – p.S1/2)

(Second of two parts)

In last week’s column, we wrote about Republic Act 10533, or the Enhanced Basic Education Act of 2013, otherwise known as the K-12 Basic Education Program, and the potential issues faced by both public and private schools in the implementation of the K-12 program. We now continue with a discussion on measures that private institutions can take in order to address the anticipated challenges.

Some higher educational institutions may be able to find other sources of revenue to maintain their operations during the two-year enrollment drought, such as:

· Exploring the possibility of offering basic education;

· Venturing into new, less traditional and more importantly, less costly, educational approaches, such as home-study programs, online courses or open universities;

· Temporarily transform unusable capacity and rent it out to interested parties;

· Vertical or lateral expansion through mergers or acquisitions to streamline the business and achieve economies of scale; or

· Counterintuitively, but possibly a better option, is to invest, improve and upgrade facilities or open up branches in other areas where there is high demand but low supply of consistent quality education.

However, educational institutions must take note that some of these options — particularly those options involving non-education-related income, places them at risk of being subjected to the regular corporate income tax (RCIT) rate, in lieu of the 10% preferential tax rate under the law. Under the Tax Code, proprietary educational institutions shall pay a tax of 10% on taxable income, provided that gross income from unrelated trade, business or other activity does not exceed 50% of total gross income. Otherwise, the entire taxable income will be subject to 30% RCIT. Although income from education-related activities of non-stock, non-profit institutions may be exempt from income tax, the income from unrelated activities may be subject to RCIT.

Raising tuition fees to cover the reduction in student enrollment may not be a sound primary action plan in light of Commission on Higher Education Memorandum Order No. 13, Series of 1998. Under the “Guidelines on the Procedure to be Followed by Higher Education Institutions (HEIs) Intending to Increase their Tuition Fees, Effective Beginning School Year 1998-1999,” 70% of the proceeds derived from the tuition fee increase for the current school year should be used for the payment of increase in salaries and wages, allowances and other benefits of its teaching and non-teaching personnel and other staff, except for those who are principal stockholders of the HEIs.

EXPENSE REDUCTION MAY BE AN OPTION.

Educational institutions listed on the PSE have reported Instructor and Administrative Salaries Expenses as their main expenditures. For the past 3 school years, these expenses account for between 32% to as high as 61% of total expenses. A direct approach to mitigating the lack of student enrollment is to reduce the current roster of instructors and administrative personnel — which is always a difficult decision to make because of the impact on their families. Colleges and universities that do not offer basic education can derive tuition fee revenues over the course of four years or two years for associate degrees. However, if these institutions offer Senior High School, and are able to entice the students to continue on to the traditional four-year college courses, they would now be able to earn tuition fee revenue from the same number of students, over the course of six years, effectively increasing revenues between 50% to 100% depending on the composition of its students. The downside is increased credit risk especially for institutions with more students availing of installment scheme in paying their tuition fees. In addition, there is a need to train existing instructors on the new curriculum or hire new instructors, as well as make some adjustments to existing facilities to be able to offer the new curriculums.

The bottom line is that institutions that opt to offer Senior High School should be able to balance the need to increase revenue and the related costs of implementing the new program.

There are opportunities which this shift may provide to higher educational institutions, such as increasing net inflows of international students. Because of lower costs compared to schools abroad, and especially since the Philippines’ English language proficiency is very high, more foreign students may consider enrollment in local HEIs. Opportunities for transnational education and/or distance education have also opened up. Some HEIs may also partner with foreign HEIs to collaborate on certain programs or courses which can also be offered in the Philippines and can further enhance the capabilities of local HEIs. Opportunities also arise for HEIs to go global by establishing foreign operations (e.g., branch campuses, twinning programs, dual or joint award programs, franchising, validation or articulation), especially in high growth potential markets such as China, Vietnam and Myanmar, where there is high demand for quality tertiary education.

According to a partial list published by the Department of Education, as of April 7, there are 4,761 private high schools, private and public universities and colleges, and technical-vocational schools that will begin offering Grade 11 in the 2016-2017 school year, the first year of no college entrants. Pilot programs are already in place in some institutions. However, we can only begin to know the full extent of the costs, as well as the opportunities presented by the K-12 program, both in government and the private sector, once 2016-2017 starts.

The K-12 program has the potential to enhance the capabilities of our country’s work force and become a defining achievement for the Aquino administration. And if future administrations become similarly proactive, this may even lead to the implementation of new education programs targeted to make us a brighter and more productive nation.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Reginald Angelo S. Gripal is a Director of SGV & Co.

Role of financial inclusion in poverty reduction

SUITS THE C-SUITE By Belvin L. Armenion

Business World (05/16/2016 – p.S1/2)

According to the Bangko Sentral ng Pilipinas (BSP), there is “financial inclusion” when everyone is able to use financial products and services (e.g., credit, savings, payments and insurance) effectively to their benefit. Such products and services must be appropriately designed, of good quality and relevant to benefit the person accessing them.

At a global level, significant progress has been made toward financial inclusion. According to The Global Findex Database 2014 of the World Bank, unbanked people worldwide decreased by 20% from 2.5 billion in 2011 to 2 billion in 2014. The percentage of banked adults (i.e., adults having an account with a bank, another type of financial institution, or a mobile money provider) worldwide increased to 62% (up from 51% in 2011). The data also showed that 94% of adults in the developed world are banked, while in the developing world only 54% are banked.

NATIONAL INCLUSION AGENDA

In the Philippines, we recognize the diligent work of the BSP to realize financial inclusion. It is, in fact, the first central bank in the world to establish an office dedicated to financial inclusion. The BSP recognizes financial inclusion as a worthy policy objective to be pursued, alongside the promotion of stability and efficiency in the financial system.

The BSP defines the financial inclusion agenda around a three-pronged framework: (1) access to financial products and services; (2) financial education and literacy; and (3) financial consumer protection.

The BSP reports on Financial Inclusion Initiatives and Financial Inclusion in the Philippines summarizes the country’s accomplishments and significant milestones in financial inclusion. These reports show that 4 out of 10 Filipinos saved money in 2015 (up from 2 out of 10 in 2009). Among Filipino adults, 24.5% never saved and only 31.3% (up from 26.6%) have an account at a formal financial institution. The lack of enough money was cited as the main reason for not having a bank account.

While there has been significant progress, there is still much to be done.

As an emerging country with a sizeable number of people living in poverty, access to financial services remains an important challenge. Based on a March 18, 2016 report from the Philippine Statistics Authority, the country’s 2015 poverty incidence (the proportion of people below the poverty line versus the total population) is at 26.3% while the subsistence incidence (the proportion of Filipinos in extreme or subsistence poverty) is at 12.1%. This means that there are around 26 million Filipinos who are still living below the poverty line.

ACCELERATING FINANCIAL INCLUSION

There is an urgent need for the collective and individual efforts of government institutions, non-government organizations (NGOs), business entities, and the general public to accelerate inclusive finance as a means to alleviate poverty. Filipinos at the bottom group need far more than access to financial services. They need both effective access and use of these services.

With the BSP leading strategic efforts, the Philippines is on track toward achieving effective access, which is best implemented top-down. In fact, the country is now considered a thought leader in the area of financial inclusion. This can be attributed to the BSP initiatives and programs especially in its work in developing relevant policies and regulations. These include the national strategy for financial inclusion and general policy work that facilitates banking for the poor (e.g., micro-banking offices, a regional approach to unbanked areas), as well as public awareness campaigns on economic and financial issues.

STRENGTHENING FINANCIAL EDUCATION

Deliberate programs to encourage the effective use of financial services are needed, in conjunction with developing effective access. This can only happen if users have the necessary financial knowledge and capabilities. In other words, financial education is a must and this is best addressed through capacity-building of people on the ground, particularly among the unbanked.

Based on the Financial Education in Asia 2015 report of the Asian Development Bank (ADB), the Philippines is still in the process of finalizing its national strategy for financial education, while India, Indonesia, and Japan have already implemented their programs.

Our financial inclusion strategy should give greater weight to financial education.

It may come as a surprise that despite daily encounters with money, Filipinos do not usually talk about finance and its proper management.

According to the ADB report, only Japan includes financial education in its school curriculum. Including financial literacy programs in schools, starting from the elementary levels, would certainly help expedite financial inclusion. This means, however, that our school teachers will also have to undergo relevant and rigorous training so that they can teach financial literacy more effectively. Programs in local barangays that champion financial literacy to local communities can also make a big difference.

On the other hand, there are already NGOs, cooperatives, and microfinance institutions that provide capacity-building services to socially- and economically-challenged families. They should be commended for instilling financial discipline to their members through weekly meetings. Members are given access to microcredit with weekly repayments. This discipline helps them save and maintain micro-savings accounts. Through such practical training programs, members gain the necessary financial education that eventually help them transition into micro-entrepreneurs and be qualified for bigger amounts of uncollateralized loans to finance their micro-businesses. Several of these businesses have actually matured into small and medium-sized entities.

The BSP 2014 Report on the State of Financial Inclusion in the Philippines identifies Laguna as the top province in terms of financial inclusion index (a single number ranging from 0 to 1 which takes into account two basic dimensions of financial inclusion: access and usage), probably because it has the highest concentration of microfinance institutions dedicated to inclusive finance.

CAUTION WITH TECHNOLOGY

Mobile technology and mobile financial services offer considerable opportunities to expand financial inclusion. Mobile banking has the potential to expand access to financial services to remote areas at lower costs. Mobile technology may help those who have no credit history gain access to credit. It can also provide easy access to data that can be used to continually refine financial products and services according to the changing needs and preferences of customers.

Caution is, however, called for. The success of microfinance institutions hinges on financial discipline, which is best molded through manual intervention and personal contact. It is critical to carefully balance the advantages of online technology with the financial discipline of human relationships, which are vital to the success of traditional microfinance institutions. Technology solutions may be worth pursuing only after financial education has been embraced and understood.

DRIVING THE RIGHT BEHAVIOR

With appropriate government incentives for NGOs, cooperatives, and microfinance institutions, there could be an exponential growth in the country’s financial inclusion efforts. Further growth can be achieved if traditional bank and non-bank financial institutions (including remittance agents, money changers/foreign exchange dealers, pawnshops), and other businesses take the opportunity to reach out to the 26 million Filipinos living below the poverty line. They can develop strategic alliances with NGOs, cooperatives, and microfinance institutions that have a proven pro-poor business model to reach a broader scale of poor people more efficiently and effectively, and potentially reduce costs for end customers.

Financial inclusion is everyone’s responsibility. Studies have shown that people with higher financial education have better chances to succeed in life and are better equipped to break the cycle of poverty. Given this, it may be worthwhile for profit-oriented entities — in order to maintain the balance between commercial returns and the financial inclusion agenda — to monitor social return or impact metrics, in addition to the usual financial performance indicators.

Impact is a measure of social change on the lives of customers as a result of using the services and products offered to them. Impact assessment results can be used to ensure that actions are aligned with the established purpose of the organizations they serve. It is best implemented as an additional performance metric that is regularly monitored by senior management, the board of directors, and other stakeholders.

Having demonstrable impact metrics can help drive the right behavior toward inclusive finance while garnering more support from both the public and private sectors. In the context of poverty reduction, inclusive finance is an essential component of the inclusive growth that has been very much in the news these days.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Belvin L. Armenion is a Director of SGV & Co.

MAY – DECEMBER 2016 TAX SEMINAR

The quest for effective disclosure continues

Business World (05/23/2016 – p.S1/2)

SUITS THE C-SUITE By Lloyd Kenneth S. Chua

In 2014, we wrote an article in this column on the efforts and initiatives of the International Accounting Standards Board, the Financial Accounting Standards Board (FASB), and the United States Securities and Exchange Commission (US SEC) on how to improve disclosures in financial statements.

In September 2015, the US SEC released a formal request to various parties to obtain comments on how it can improve disclosure effectiveness. Meanwhile, the FASB proposed guidance in applying materiality to disclosures as part of its disclosure framework project which aims to improve notes in financial reporting.

Encouraged by the initiatives from standard-setting and regulatory bodies, companies have stepped up their own efforts to maximize disclosure effectiveness. These efforts have resulted in measurable benefits for both organizations and users of financial statements.

In a bid to find out more about the progress and benefits of the disclosure initiatives of companies, the Financial Executives Research Foundation, in collaboration with Ernst & Young, surveyed and interviewed more than 120 finance and accounting executives from various industries in the US. Of the companies surveyed, almost 75% have already taken action towards improving their financial reports, with a majority being focused on annual and quarterly financial reports.

MOTIVATION FOR THE CHANGE
The survey revealed that the primary motivation for companies to improve their financial reports came from senior-level executives who questioned the level of clarity and readability of disclosures that were prepared in a compliance-driven language. Meanwhile, benchmarking studies and comparisons of the financial reports with their peers also provided companies with the needed impetus to launch their own disclosure initiatives project. For others, embarking on the improvement stemmed from their need to continuously provide more effective financial information to their users.

Nowadays, investors do not just focus on the numbers; they also look at other information in the financial reports to help them better assess the companies’ performance and plan their investment strategy more effectively. Because of this, the survey respondents said that they are shifting their focus to streamlining and improving the comprehensibility of their financial reports, particularly in these three areas:

(1) Eliminating immaterial information and disclosing material information;
(2) Utilizing more cross-referencing and reducing redundancies in their disclosures; and,
(3) Eliminating outdated information.

EARLY BENEFITS
Although the process of improving disclosures is far from over, proactive companies have already begun seeing benefits. Positive responses were elicited from stakeholders — such as board members, senior management, and investors — since they believe they were making more informed decisions through information that were easier to read and understand. The enhanced clarity of the information resulting from the removal of unnecessary or redundant disclosures was one of the most noticeable improvements. Significantly, 40% of the companies surveyed disclosed that they improved their process efficiencies in that they saved, or are expecting to save, one to three days’ worth of manpower costs in preparing their financial reports.

CHALLENGES
One major challenge in efforts to improve and streamline disclosures in the financial statements is the materiality concept — or the question of what information is considered material. Clearly, this has an impact on deciding what should be included in the financial reports. The consistency of materiality considerations, or the basis for calculating materiality, poses another challenge as the companies surveyed disclosed varying calculation practices. A majority responded that they used a percentage of net income as their basis for calculating materiality, while around 25% adopted an assortment of quantitative measures. Interestingly, some 40% revealed that they also considered qualitative measures.

Another challenge is the prescriptive nature of disclosure checklist, which was cited as limiting the flexibility of some companies when it came to emphasizing material information or scaling back on disclosures. Completing such a disclosure checklist may be a tedious process for many companies as they have to provide explanations for all the “no” answers on the checklist. To address this, some companies identify the reasons upfront to avoid any delays in the process later on.

Still another challenge comes from management, particularly those who sign the financial reports. These executives often have a view of how the information should be disclosed and often resist any revisions to traditional processes. This can, however, be mitigated by close communication with these executives, as well as coordination with the investors’ relations team.

Lastly, some companies hesitate to cut back on disclosures for fear of being questioned or commented on by the SEC.

LESSONS LEARNED
The companies surveyed shared some lessons they learned in the process. One is that the process involves various functions (i.e., finance and accounting, investor relations, internal and even external counsels) and positions (from the Audit Committee to the senior management to the middle management). The involvement of various levels of management and stakeholders is needed right from the start to ensure that all opinions, comments, and thoughts are completely captured and considered. Starting early and planning ahead are also critical when engaging the people involved. Lastly, consistent communication between the management team and the companies’ key stakeholders is pertinent to ensure that all expectations are aligned and misunderstandings are avoided along the way.

STARTING THE PROCESS
For companies that are planning to embark on their own disclosure initiative project, the surveyed companies offer some advice:

Starting early is the first step, as this project requires time for design, review, approval and ultimately, implementation. Obtaining the support of top management will also help support efforts towards ensuring disclosure effectiveness.

Engaging key stakeholders is another vital step as they need to be brought up to speed with the plan and to allow them to provide timely feedback on the project. Active discussions with audit committee members should also be made to obtain their views on matters of importance and to share how other companies are faring in their disclosure initiatives. Similarly, companies should also look into discussing the changes with local regulators (i.e., the SEC) and their external auditors to provide them the rationale for the changes being made.

The next steps involve removing immaterial, redundant, or outdated information and looking at ways to improve not only the content, but also how this content is presented in the financial reports. A fresh look at opportunities to make information more understandable is also another step in this process. To this end, companies should assess what information is actually important to their investors and focus their disclosures on those areas.

In summary, while there is still a long way to go towards the completion of the disclosure initiative projects, many companies are already proactively looking into improving their own financial reports. These companies have already seen that such efforts are not easy with many challenges along the way, but the benefits are evidently worthwhile. They also recognize that improving the financial reports is not a one-time exercise but is a continuous process to ensure that the financial reports continuously adapt to the changes in the business and regulatory environment, as well as to the changes in accounting rules.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Lloyd Kenneth S. Chua is a Partner of SGV & Co.

SGV at 70: Sharing knowledge over the years

As a firm believer in the importance of sharing knowledge, SGV released publications as part of our value-added services to clients as well as business and government entities.

Two of our oldest publications are the Tax Bulletin, first released in 1952, and Doing Business in the Philippines, which was first published in 1968. Both publications continue to provide up-to-date information on tax and business matters. The monthly Tax Bulletin [EY – Tax Bulletin – Philippines] features the latest issuances and rulings on taxation, while Doing Business in the Philippines offers information on setting up business in the country.

SGV and JPIA-SLU conduct career seminar

SGV, in collaboration with the Junior Philippine Institute of Accountants – Saint Louis University (JPIA-SLU) chapter, held a seminar last 3 April entitled, “CPA: Cores of IT Audit and Career Compass.” The talk was conducted to foster educational advancement in the field of Accountancy and was attended by 620 JPIA members and non-members from across all levels.

The seminar was graced by SGV Learning and Development Leader and Assurance Partner Clair Mangangey, who shared the Firm’s profile and the available careers and opportunities in SGV, and Risk Services Associate Director Alvin Manuel, who talked about IT Audit.