SGV team tabulates for Miss Philippines Earth and Miss Global Philippines

As the tabulator of choice for local pageants, SGV was tapped to tabulate the Miss Philippines Earth and Miss Global Philippines pageants.

The Miss Philippines Earth 2016 pageant was held last 11 June 2016 at the University Theater of UP Diliman. On its 16th year, the environmental advocacy-driven pageant focuses on the fight for climate change through the 5R’s: Re-think, Reduce, Re-use, Recycle and Respect. Imelda Schweighart from Puerto Princesa City was crowned the 2016 Miss Philippines Earth. Imelda succeeded Miss Philippines Earth 2015 and reigning Miss Earth Angelia Ong. She will represent the country in the 2016 Miss Earth pageant.

Market Group 2 leader Ramon Dizon (RDD) headed the SGV team in conducting an independent tabulation of scores cast by the judges. Completing the team were Partners Mariecris Barbaso, Johnny Ang and Allan Ocho; Senior Director Ernesto Clarin; Directors Elvin Mercader and Crystal Cornell; Senior Associates Kathleen Faye Natividad and Rodel Tria; and Associates Luigi Bacarro, Pamela Gale Baldosano, Andre-Karl Dela Peńa and Erika Goto.

RDD also led the tabulation team for the Miss Global Philippines pageant 2016 held last 4 June 2016 at the Resorts World Manila. Miss Global searches for the deserving woman who will serve as a global ambassador of goodwill and cultural diversity. Miss Global is also the only beauty pageant today that is open to single moms.

Camille Hirro, 28, of Pampanga, emerged as the winner. She will represent the country in Miss Global 2016, which will be held at the Philippine International Convention Center in September.

Completing the team were Assurance Partner Mariecris Barbaso, Senior Director Ernesto Clarin, Senior Associates Rodel Tria and Keren Valderamos, and Associates Wilhelm Jayobo, Monica Agsalud, Angela Calimlim, Gerald Cumlat, Nomelito Flores, Matthew Gopez, and Nicolai Peralta.

SGV Davao holds CSR event for Love the Children Foundation, Inc.

Last 23 May 2016, SGV Davao held a block screening of X-Men Apocalypse as a “Movie for a Cause” for the benefit of the Back to School Drive of Love the Children Foundation, Inc. The proceeds of the cause were used to fill 32 backpacks with school supplies.

On 2 June 2016, SGV Davao, led by Partner-in-Charge Alvin Pinpin, distributed the 32 backpacks to the children of Love the Children Foundation, Inc. at San Pedro St. Marapangi 3, Toril, Davao City.

MG7 associate clinches top spot in SGV’s Got Talent Year 5!

Over 3,000 SGVeans filled the World Trade Center in Pasay City to watch an amazing display of talent during the SGV’s Got Talent Year 5 Grand Finals held last 14 June 2016. MGs cheered and supported the 18 performances that qualified from over 150 individuals who auditioned, including those who auditioned from SGV Davao, Cebu and Bacolod.

The finalists crooned and grooved before the audience and judges composed of G-force dance instructor, Ray-an Manglo; Philpop 2013 finalist and recording artist, Lara Maigue; Viva artist, singer and lead in the musical Bituing Walang Ningning, Monica Cuenco; award-winning composer and music producer, Jungee Marcelo; TV personality and member of the dance group, Manoeuvers, Joshua Zamora; actress and singer, Marissa Sanchez; and former lead in the musical Miss Saigon, Ima Castro. The scores were determined by a combination of judges’ votes (60%) and audience votes (40%).

Since SGV is celebrating its 70th anniversary, the top 7 were announced instead of the usual top 3. The Grand Winner, 2nd and 3rd placers walked away with P50,000, P30,000 and P20,000, respectively, while the next four placers received P10,000. A consolation prize of P5,000 was given to the rest of the grand finalists.

· Cyra Krizna Jureidini (MG7) – SGV’s Got Talent Year 5 Grand Winner
· Paula Jean Dungca (MG1) – 2nd place
· Chase Francine Pagtacconan (MG3) – 3rd place
· John Israel Tipsay (MG1), Revee Saluria and Reina Cariaga (MG8), The Beatniks (MG1, MG7, MG6 & THG) and ELEV8 (ASG, MG2, MG5 & MG8) – runners up in no particular order

Highlights of the evening included the appearance of the Jollibee mascot during the pre-show, a song number from BENCH model and singer, Ruru Madrid, and performances by some of the judges during the main program.

Watch the top 3 winners perform during this year’s 70th Staff Anniversary on Monday, 11 July at the SMX Convention Center, SM Mall of Asia Complex in Pasay City.

New BIR guidelines on tax-free exchanges

Business World (07/11/2016 – p.S1/4)

SUITS THE C-SUITE By Margaux A. Advincula

As part of its efforts to streamline the Philippine tax system, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 17-2016 (RMO 17-16) dated May 5, 2016 to supplement the guidelines in recording the tax-free exchange of properties for issuance of shares under Section 40(C)(2), in relation to Section 40 (C)(6)(c) of the 1997 Tax Code.

Section 40(C)(2) includes transactions involving a corporation which exchanges property for stock, a shareholder who exchanges stock for stock of another corporation, or a security holder who exchanges his securities for stock of another corporation, that is also a party to a merger/consolidation. It also includes transfer to a controlled corporation where not more than five persons transfer property in exchange for at least 51% of the voting shares of the transferee corporation. In these instances, no gain or loss will be recognized.

Revenue Regulations (RR) No. 18-2001 (RR 18-01), as amended by RMO No. 32-2001, contain the existing guidelines in monitoring the basis (amount to be used as cost) of the property transferred and shares issued under Section 40(C)(2). These guidelines require a certification or ruling signed by the Commissioner of Internal Revenue on the tax-free exchange and also provide for penalties for non-compliance.

There are two valuation bases in a tax-free exchange under Section 40(C)(2): the basis of the transferee (issuer of shares) in recording the property; and, the substituted basis of the transferor (of the property) in recording the shares received. The substituted basis is also relevant in computing gain or loss in subsequent transfers of the property and the shares.

Under RMO 17-16, the basis for the transferee in recording the property is the asset’s fair market value (FMV). The value of the shares issued should be equal to the FMV of the property transferred (value for value exchange). Additional paid-in capital is not allowed.

The FMV depends on the kind of property transferred. When the property consists of shares, RMO 17-16 cites the rules under RR 06-2013, that is, the FMV of listed shares is the closing price on the day of the transfer, or the day nearest if no sale is made on that date. The FMV of shares not listed and not traded is the book value in the annual financial statements duly certified by an independent CPA nearest to the date of sale. The assets in the financial statements should be adjusted to its FMV as of a date not earlier than 90 days from the date of transaction.

On the other hand, for the transferor, the substituted basis is used in recording the shares received in consideration for the property exchanged. We must stress that Section 40(C)(2) merely defers recognition of the gain or loss from the transaction. Accordingly, gain or loss may eventually be recognized in a subsequent transfer of the property or shares.

What then is the substituted basis? Under Section 40(C)(5), the substituted basis of stocks or securities received by the transferor is the original basis of the property, stock or securities transferred minus the money received, and the FMV of other property received, plus the amount treated as dividend and any gain recognized on the exchange. If the transferee assumes a liability, or acquires from the transferor property that is subject to a liability, it shall be treated as money received. As to the transferee, the basis of the property should be the same as it was in the hands of the transferor, plus any gain recognized to the transferor.

RMO 17-16 provides pro-forma entries in recording the property and shares in a tax-free exchange, which both the transferor and the transferee can refer to. It additionally states that failure to annotate the tax-free exchange in the certificate of title of ownership of properties would render the ruling null and void. However, it is interesting to note that the Court of Tax Appeals (CTA) En Banc, in Commissioner of Internal Revenue v. Dakudao & Sons, Incorporated promulgated on May 15, 2015, and more recently, in the CTA Division ruling in Lucio L. Co, Susan P. Co, Ferdinand Vincent P. Co and Pamela Justice P. Co vs. CIR promulgated on June 2, 2016, held that securing a BIR ruling under RR 18-01 is not a condition precedent for the availment of tax exemption under Section 40(C)(2) of the Tax Code.

Interestingly, RMO 17-16 would be a basis for taxpayers in explaining the treatment of the tax-free exchange transactions and the differences, if any, with Philippine Financial Reporting Standards. While other directives issued by former Commissioner Kim Jacinto-Henares in her last month in office were either revoked or suspended, RMO 17-16, having been issued in May, continues to be in effect. As such, taxpayers who plan to enter into tax-free exchanges must still comply with the guidelines provided in the issuance.

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.

Margaux A. Advincula is a Tax Senior Director of SGV & Co.

Ready, set, IPO!

Business World (07/18/2016 – p.S1/4)

SUITS THE C-SUITE By Dolmar C. Montañez

(First of two parts)

Many companies consider doing an initial public offering (IPO) as the pinnacle of success, the achievement that not only affirms the company’s business model, but also quantifies the trust and faith of stakeholders and investors. A successful IPO is a great opportunity to fund growth and increase a company’s exposure to stakeholders and the public. It can enhance the company’s reputation and market standing, as well as attract new talent. It also helps raise capital for a company while allowing its owners to keep control of the company and continue executing strategic decisions without being absorbed by a larger entity, such as in a merger or acquisition.

Without a doubt, going public comes with greater exposure and increased responsibility, notably in the areas of financial reporting, governance and internal controls. The company also has to address increased regulatory requirements, risks and the need to communicate regularly with stakeholders to maintain investor confidence.

In recent years, various Philippine companies have undertaken their own IPOs, with varying levels of success. Historically, we would see an average of around seven to 10 companies do an IPO in a year. Last year, only four companies were able to complete their IPO due to volatile market conditions towards the end of 2015. A number of hopefuls have already submitted applications to the Securities and Exchange Commission and Philippine Stock Exchange but we have only seen the first IPO of 2016 weeks ago amid the uncertainties brought about by the recent elections. Given the long lull in IPOs, investors have positively accepted the first IPO of the year which is also the first death-care business listed in the PSE. The equity market in the Philippines has also opened its door to small players, kicked off by two successful IPOs in the SME Board in 2014.

GROWING THE FAMILY BUSINESS

Many of the emerging and successful companies in the country are still private family businesses. Raising growth capital, monetizing investment, succession and estate planning are among the reasons private family businesses typically consider in going public, even as they prepare to address critical pre-IPO strategic issues while managing the day-to-day operations of the business. Some of these critical pre-IPO strategic issues are highlighted in the publication, EY IPO leaders’ insights, such as:

· What is the optimal capital structure for the company? This is a key question if the goal of the IPO is to raise growth capital, since funds are allocated as capital to various business functions as needed.

· Is an IPO the right equity solution? IPOs come with significant public scrutiny and oversight. Family members need to weigh if an IPO is the right capital-raising option for them or depending on the circumstances, other options may be more appropriate — such as private placement, syndicated loans, etc.

· What is the transaction perimeter? It is vital to clearly define the exact scope of the business to be listed since this will determine the equity story and influence pricing. It is also important to identify business relationships between different affiliates that may need to be formalized prior to IPO.

· What will the board composition be? Listed companies are typically required by regulators to have a strong corporate governance framework, including independent directors. This means that before the IPO, the family business owners will not only have to decide on the board composition, they should also be familiar with their roles and responsibilities as directors before and after the IPO.

· What is the equity story and expected valuation? The family needs to craft and deliver a clear equity story — the key reasons why investors should buy into the IPO. Management and directors, who will likely be members of the family, need to be able to clearly articulate the equity story during investor road shows and presentation to regulators.

WHERE ARE YOU AT

Beyond raising capital, public listing can involve a complete transformation of business processes and corporate culture. Considering how much planning, coordination and teamwork are required to do a successful IPO, it is crucial for companies to undergo an IPO readiness assessment as early as possible.

The assessment can help senior managers and executives better understand how to win in the capital markets, and whether the organization has already established the necessary financial reputation to attract investors. EY IPO leaders’ insight discusses eight main areas for assessing readiness for the IPO, which should take place 12-24 months before the actual listing date. These include the overall strategy, the structure of the organizations, tax planning, financials to comply with regulatory requirements, determining internal control systems, identifying old and new functions, designating leadership and managing the timing for the IPO.

We will discuss these eight points in more detail in next week’s column.

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.

Dolmar C. Montañez is a Partner of SGV & Co. and a member of SGV’s Capital Markets Group.

SGV Foundation participates in Cebu Business Month 2016

The Cebu Chamber of Commerce & Industry (CCCI) holds its flagship project, the Cebu Business Month (CBM), annually in the month of June. The main objective of CBM is to inspire, promote and grow Cebu business. For 2016, industry stakeholders gathered month-long activities and events in the areas of Tourism, ICT & BPM, Entrepreneurship and Creative Industries, under the theme “Digital Cebu.”

Living up to its mission of inculcating the values of education, discipline, integrity and excellence in Filipinos, the SGV Foundation participated as an exhibitor in the Technology and Innovation Expo at Robinsons Galleria Cebu last 22-24 June 2016 and in the Social Entrepreneurship Conference at Marriott Hotel on 23-24 June 2016. In the booth, SGV Advantage and Doing Business in the Philippines brochures were displayed. Meanwhile, an Entrepreneur of the Year (EOY) Philippines video presentation was shown to educate visitors on the program’s aim to recognize the strength, dynamism and resilience of Filipino entrepreneurs who take the lead in founding and operating sustainable, successful enterprises. Through its participation in CCCI’s CBM, the SGV Foundation hopes to improve the general welfare of the society even further.

SGV conducts 2nd Executive Briefing for 2016

Last 31 May, SGV conducted the second Executive Briefing for the 2016 series at the WSDC Training Room. The briefing focused on sustainability reporting and the latest cyber trends and threats, and how these affect businesses and industries. Nearly 80 representatives from client companies and regulatory agencies attended the event.

Chairman and Managing Partner Vic Noel welcomed the participants to the briefing. Assurance Partner and Learning & Development Team Leader Clair Mangangey provided an overview on sustainability reporting, while Fraud Investigation and Dispute Services (FIDS) Partner Erick Vega discussed cybercrime and security. The lecture was followed by an open forum.

The briefing was organized by the ASG Core Team led by Emie Villanueva.

MPT conducts CMTA briefing before the AMCHAM

Tax Partner and Indirect Tax/Global Trade and Customs Head, Mark Anthony P. Tamayo (MPT), conducted a briefing on the salient changes under the Customs Modernization and Tariff Act (CMTA) before the American Chamber of Commerce (AMCHAM) last 22 June 2016. The CMTA, which has been signed into law (Republic Act No. 10863) by President Benigno Aquino II, took effect last 16 June 2016.

FSO hosts seminar on Cybersecurity and Anti-money Laundering

SGV’s Financial Services Organization (FSO) team, led by Financial Services Leader, Vicky Lee-Salas, hosted a seminar on Cybersecurity and Anti-Money Laundering on 10 June 2016 at the Makati Shangri-La Hotel. Close to a hundred representatives from different banking and financial institutions participated in the seminar.

The keynote speaker was Bangko Sentral ng Pilipinas Deputy Governor, Nestor A. Espenilla, Jr., who started the first of three lectures with the Regulator’s View on Recent Developments in AML and Cybersecurity. He was followed by EY Partner and Asia Pacific Cybersecurity Lead Paul O’Rourke who discussed cybersecurity issues today and how to stay ahead of cybercrime and the results of the 2015 EY Global Information Security Survey. EY Partner and Asia Pacific AML Lead Philip Rodd ended the seminar with a lecture on how to maintain an effective and up-to-date AML Program.

The seminar was organized by a core team comprising Director Leslie Huang, Senior Associates Faye Año and Julius Macaraig, Associate Josel Rivera, and Janette Padlan from CBS.

MPT team conducts public seminar on CMTA in SGV Cebu

Tax Partner and Indirect Tax/Global Trade and Customs Head Mark Tamayo (MPT), together with his team, conducted a public seminar in SGV Cebu titled “Customs Updates: A Seminar on the Customs Modernization and Tariff Act (CMTA) and A Workshop in Handling Customs Audits.” Held on 21 June, the seminar involved a comprehensive discussion on the CMTA, the WTO Rules on Valuation, managing customs audits (both at the border and during post-entry/clearance) and best customs practices.

Other speakers were Tax Principal Victor de Dios, Director Jan Manuelle Reyes, and Associate Director Jo Ann Marie Casio. The seminar participants were Cebu-based importers-clients belonging to various industries.

SGV honors WS on his 95th birthday

SGV hosted a dinner party on the 30th of June to celebrate the birthday of its founder, Mr. Washington SyCip. Family and friends gathered at the Makati Shangri-La Hotel’s Rizal Ballroom to honor Mr. SyCip and celebrate his lifelong commitment to education.

SGV Chairman and Managing Partner Vic Noel welcomed everyone to the celebration. He also gave a moving tribute to Mr. SyCip. In part, he said, “With the strength of his will and vision, Mr. SyCip transformed and Filipinized the accounting profession in our country – helping it to become an industry where intelligence, diligence and ability – not wealth nor influence – would determine an individual’s success.”

As a firm believer in education as the greatest social equalizer, SGV surprised Mr. SyCip by donating an e-classroom to the Padre Burgos Elementary School – the same school where he began his formal education. A special song number was also presented to Mr. SyCip by the Padre Burgos Elementary School children.

Happy 95th birthday, Mr. SyCip!

SGV celebrates 70 years of strength, growth and vision

Over 6,000 SGV professionals dressed in their best formal attire attended the 70th SGV Staff Anniversary Party on 11 July at the SMX Convention Center in Pasay City. The event was punctuated by flashbacks of the Firm’s many milestones and memories over the last seven decades. Highlights of the event included the recognition of our outstanding people who earned promotions and awards from the past fiscal year. Joining the celebrations were SGV Founder Mr. Washington SyCip, EY Global Chair and Chief Executive Officer Mark Weinberger, EY Regional Managing Partner for ASEAN Max Loh, EY Global Delivery Services leaders, retired partners and special guests.

Country Managing Partner-Designate Itos Cruz formally welcomed the audience to the first part of the anniversary celebrations, where the much-awaited staff promotions were announced. The latter part of the anniversary party kicked off with a performance of SGV’s Got Talent Season 5 finalists, volunteers and partners who danced through the decades from the 1940s to the present. Chairman and Managing Partner Vic Noel then delivered an inspiring message, followed by a celebratory speech from Mark Weinberger.

After a special video presentation in honor of his 95th birthday, Mr. SyCip gave an inspiring message to the SGV staff. He shared, “At 95, it is not always easy to be optimistic, but I want to tell all of you here that you’ll be proud that you’re an alumni of SGV. We are one of the fastest growing in Asia. This will further repeat as the years go by. And our cooperation with the neighboring countries will further increase. I’m proud to be an alumni of SGV.”

Twelve new partners were welcomed into the partnership: Chin Say-Mendoza, Gen Arevalo, Noli Elle, Gaile Macapinlac, Carlo Manalang, AZ Zaragoza III, Jay Ballesteros, Marga Mallari, Saha Bulagsak, Vic de Dios, Din Marco-Go and TL Guanzon.

Also called on stage were individuals and teams who received Special Awards for their outstanding performance in FY 16. Loyalty awardees and top placers from the October 2015 and May 2016 CPA board and November 2015 bar examinations were likewise recognized. In a special tribute, the SGV staff thanked and honored retiring partner Daks Balili.

The celebrations were punctuated with exciting raffle prizes and high-energy performances.

The staff anniversary party was followed by a thrilling after-party where the staff were entertained by beatbox performer Neil Llanes, KZ Tandingan, Up Dharma Down and DJ Tom Taus.

Happy 70th anniversary, SGV!

Ready, set, IPO!

SUITS THE C-SUITE By Dolmar C. Montañez

Business World (07/25/2016 – p.S1/2)

(Second of two parts)

In last week’s column, we talked about how companies see an initial public offering (IPO) as a crowning achievement for the organization, and yet the reality is that an IPO should be seen as a milestone and not an end in itself. We also discussed the challenges that family-owned businesses face when considering an IPO. In this column, we will look into eight key areas that a company has to consider in assessing their readiness for an IPO, as discussed in the publication, EY IPO leaders’ insights.

STRATEGY

This involves a thorough review of the IPO value journey and the destination, including the motivation and reasons behind the IPO, how the company plans to make use of the proceeds, selecting the right PSE board to list in, evaluate the strength of the equity story and the main elements of the offering concept in an IPO base case.

STRUCTURE

This involves identifying the potential issuer and the optimum group structure to bring to the market. Considering the extent of post-IPO regulation, this area will require significant thought and planning. For example, the use of a newly incorporated entity or an existing holding company, the articles of incorporation will need to be reexamined to cover such areas as the transition from a private to a publicly listed company, share capital and number of shares, timing of general meetings, and the composition of the board. It is also important to determine the owner structure, i.e. will the owners retain majority voting rights and will shares be issued to management.

TAXES

Tax planning also has to be a priority during the IPO process, particularly in the early stages where tax risks and exposures should be identified, assessed, managed and resolved. Any outstanding tax audits and work streams should be concluded as the company’s tax situation will be covered in the IPO due diligence and prospectus. Having outstanding tax risks and exposures will need to be discussed with analysts and investors, which may adversely impact valuation. Companies should implement leading best practices on taxation as part of its IPO readiness activities.

Key shareholders should also evaluate the company’s tax situation and the potential tax consequences of an IPO, especially since key shareholders will often have to remain shareholders for a “lock-up” period after the IPO. For example, the tax treatment of IPO costs and taxes on transfer of shares listed and traded at the PSE.

An IPO can require companies to undergo reorganization, which, unless handled properly, can possibly trigger huge taxes. Project managers should also note that tax assets are not lost during the transformation.

FINANCIALS

Part of the IPO process is to work to make the company more attractive to external investors, and this often requires comprehensive improvement of any existing closing-the-books processes to develop the ability to close fast to cope with the increased financial reporting requirements. This is a complex and time-consuming process on its own — from diagnostic assessment to developing and implementing changes to existing processes — but becomes more so, when this coincides with all the other activities and demands or preparing for the IPO. This is why companies should consider engaging external providers that are well-versed in improving the financial statement closing process in order to leverage on past knowledge, experience and best practices.

Companies will need to invest resources in performance forecasting, planning and controlling to guide analysts and investors. Reliable financial reports are also important in monitoring KPIs and treasury function post-IPO.

IPO requires the preparation of a prospectus which typically contains financial information that goes back three years. It also requires the latest available information before the transaction is launched to the investors. Auditors are involved in the review of the financial information and will issue comfort letters to underwriters as part of the latter’s due diligence. Only companies with fast and efficient closing-the-book processes perform well with these demanding requirements.

SYSTEMS

The project team needs to evaluate the company’s level of internal controls, its ability to manage enterprise risk and the capability to comply with regulatory requirements. Often, this may entail investment in new systems and infrastructure and in the development of new processes, which also includes the necessary training for the company’s people. Companies should also beef up their internal audit department, or create one if it does not yet exist, to monitor compliance with leading internal control practices which maintain investor confidence.

FUNCTIONS

Closely linked to the structure component of the assessment process, the organization will need to designate new functions such as corporate governance and investor relations, among others. Having established roles and responsibilities for investor relations is important since listed companies will face extensive disclosure requirements. The company will also need to establish protocols for internal communications that will mitigate any risks of insider trading. Finally, directors and management may also have to appoint committees to take on necessary roles and functions during and post-IPO.

LEADERSHIP

The business owners will need to define the leadership structure of the new organization, including selecting the C-level executives and the board of directors. This is a complex and often delicate process that will require much discussion and negotiation. It is also the time to look at remuneration packages and strategy.

The level of corporate governance must be assessed to see if they need to be strengthened post-IPO, particularly since corporate governance requirements for listed companies are more stringent. It is important to consider the background, experience and level of governance experience of board members. By understanding the capabilities of the planned board, the company can already consider the need for additional corporate governance training as mandated by regulators.

TIMING

At the end of the IPO readiness assessment, executives will need to choose the right IPO window and agree on the IPO schedule. With early planning and preparation, the company can already marshal the necessary internal resources to carry out the IPO. At the same time, project managers should look at plotting out a Plan B in case there are unexpected complications along the way.

Following this in-depth assessment, an IPO readiness exercise should provide the IPO project team with a clear picture to assist in decision making. The outcome will define the initial strategy and identify the gaps between the company’s current status and the target IPO-ready status. It can also help establish a road map that plots out the timeline to achieve readiness and the resources that will be needed. It can likewise help provide greater transparency on what organizational changes have to be implemented to successfully execute the IPO, which can reduce costs for the company.

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.

Dolmar C. Montañez is a Partner of SGV & Co. and a member of SGV’s Capital Markets Group.

IFRS 15: More than an accounting change

SUITS THE C-SUITE By Erwin A. Paigma

Business World (08/01/2016 – p.S1/4)

Management, analysts and other users of financial statements almost always consider a company’s revenue as its key performance indicator. To stay competitive and increase revenue, companies may add flexibility and value to their products and service offerings — be it an enhancement in the price, additional services or guarantees or other add-ons in the contract terms. However, these diverse marketing strategies give rise to complexity in revenue recognition.

One criticism of the current revenue standards is the limited guidance for certain transactions. For instance, there is no detailed guidance under International Financial Reporting Standards (IFRS) for multiple deliverable arrangements. To address this limited guidance and the differing guidance under IFRS and US Generally Accepted Accounting Principles (US GAAP), the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) jointly developed a common revenue standard that aims to: (1) remove inconsistencies and weaknesses in previous revenue requirements; (2) provide detailed guidance for addressing revenue issues; (3) improve comparability across entities and industries; (4) improve disclosure requirements; and (5) reduce the number of reference standards for revenue recognition. The new revenue recognition standard is known as IFRS 15, Revenue from Contracts Customers (ASU 2014-09 Topic 606 under US GAAP). It was released in May 2014 and will replace virtually all the current revenue standards under IFRS.

THE NEW REVENUE RECOGNITION MODEL

IFRS 15 is based on the core principle that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to.” To apply this principle, entities must go through the following five-step model in recognizing revenue:

· Step 1: Identify the contract with a customer. A contract (whether written, oral or implied by customary business practices) is an agreement between two or more parties that creates enforceable rights and obligations. In some cases, IFRS 15 requires an entity to combine contracts and account for them as one. IFRS 15 also provides guidance on accounting for contract modifications.

· Step 2: Identify the performance obligations in the contract. Performance obligations involve the transfer of goods or services to a customer. If there are multiple deliverables under a contract, IFRS 15 provides guidance on determining whether the goods or services are distinct and should, therefore, be accounted for separately.

· Step 3: Determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services. The transaction price can be a fixed amount, but may sometimes include variable or non-cash considerations. The transaction price also considers the time value of money.

· Step 4: Allocate the transaction price to the performance obligations in the contract. The transaction price is allocated to each distinct performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service. Under certain criteria, the residual allocation method can be used.

· Step 5: Recognize revenue when or as the entity satisfies a performance obligation. A performance obligation may be satisfied at a point in time or over time.

MORE THAN AN ACCOUNTING CHANGE

Adoption of this new standard will result in major changes in the current way of accounting for revenue transactions. The following is an overview of some of these major changes:

· Oral and implied contracts, in addition to written contracts, are scoped in by IFRS 15. This would result in earlier recognition of revenue for some entities whose customary business practice is to start providing the goods or services even before a written contract has been signed.

· Unlike current revenue recognition standards, IFRS 15 provides more explicit requirements on how to account for contract modifications and when to combine contracts.

· For a single contract with multiple deliverables, applying the new standard may result in the identification of new or different performance obligations or deliverables compared to the deliverables identified under the current standards. IFRS 15 also has detailed guidance in assessing whether these deliverables are distinct from each other and, therefore, to be accounted for separately.

· Revenue is now measured based on the consideration that the entity expects to be entitled to. This is a significant change from the current measurement basis of fair value of the consideration received or receivable.

The new standard requires entities to consider in their transaction price elements other than the fixed contract price, such as variable considerations. Some examples of variable considerations are rebates, discounts, refunds and bonuses. Currently, entities may defer measurement of these variable considerations until the uncertainty is removed, which is usually when the final payment is received or these are granted. However, under IFRS 15, these variable considerations should be identified, estimated and constrained at contract inception date and reassessed moving forward. Thus, the transaction price or amount by which the revenue will be recorded may differ from the fixed contract price.

· The current standards provide limited requirements on multiple-element arrangements, particularly on the allocation of the contract price to these arrangements. IFRS 15 now prescribes the allocation methods and introduces the new concept of “relative stand-alone selling prices” in allocating transaction price. Thus, the amounts that will be allocated under the new standard may differ from the amounts allocated under the current standards.

· From the current revenue recognition trigger of transfer of risks and rewards, revenue is now recognized when control is transferred. Revenue can only be recognized over time when certain criteria are met. Otherwise, it is recognized at a specific point in time.

· IFRS 15 also provides explicit guidance on certain topics such as costs to obtain and fulfill a contract, warranties, right of return, breakage, and customer options for additional goods or services. One significant change is that costs to obtain a contract (e.g., commissions), if they are expected to be recovered in the future, will be capitalized under the new standard.

· Lastly, IFRS 15 requires expanded disclosures on contracts with customers.

With these new requirements, the impact of IFRS 15 may vary among industries and entities depending on how entities structure their revenue arrangements. Some entities may see significant changes on how and when they recognize revenue while others may not be impacted significantly. For those entities that fall in the second category, this does not mean that they are spared. They still need to validate this expectation by evaluating their existing revenue contracts vis-à-vis the requirements of IFRS 15. They also need to plan and take the needed steps to capture and to comply with the expanded disclosure requirements of the new standard.

TRANSITION

Once adopted by the Philippine Financial Reporting Standards Council (FRSC) and approved by the Board of Accountancy, the new standard is effective for calendar year 2018. Companies have the option to transition using the full retrospective or modified retrospective approach. Under the full retrospective approach, contracts outstanding as of the beginning of the earliest period presented (Jan. 1, 2016 for publicly listed companies) have to be assessed under IFRS 15 and any restatement should be recognized on the same date. In the modified retrospective approach, only contracts existing as of Jan. 1, 2018 are revisited, with any restatement reflected in the opening balance of retained earnings on the same date. Additional disclosures are required to compensate for non-comparative revenue figures.

The standard was originally intended to be effective in 2017 but the IASB eventually approved a one-year deferral. This deferral acknowledges the fact that applying IFRS 15 will not be an easy task and that companies need more time to implement this standard. The impact of IFRS 15 is not constrained to the financials; it has a wider business impact, affecting multiple business functions. The implementation effort should not only involve the finance or accounting departments, but should also involve other functions such as (among others) tax, legal, sales, human resources, marketing, investor relations, and Information Technology.

Even prior to the effectivity of the new standard, entities should already study the provisions and implications of IFRS 15 and make an early assessment of the standard’s impact on their revenue streams and systems and processes. With the magnitude of anticipated impact, education and early preparation are the keys to ensure a smooth transition to the new standard.

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.

Erwin A. Paigma is a Senior Director of SGV & Co.

SGV at 70: Commemorative memorabilia over the years

Since SGV was established, memorabilia have been released to immortalize the Firm’s milestones over the years.

From a tie clip in 1956 to watches this year, SGV’s memorabilia involve everyday items such as keychains, pencils and rulers, among others. A display at the SGV Museum at the Shang Grand Tower has been dedicated to house and feature SGV memorabilia through the years. They remind us that excellence and integrity are meant to be demonstrated every day.

RMM Cluster participates in Takbo.ph’s RunFest 2016

Last 17 July 2016, Tax Partner Rey Marcelo and Associates Jimwell Bartolome, Mark Francis Aguda and Samm Quiniquini ran in the 10km division of Takbo.ph’s RunFest 2016, which was held in Bonifacio Global City. The Takbo.ph RunFest is

an annual running event series that celebrates runners all over the country.

VCD conducts CMTA briefing for the Philippine Institute of Petroleum

On 7 July 2016, the Indirect Tax-Customs and Global Trade group of SGV, among other speakers, conducted a customs seminar for the members of the Philippine Institute of Petroleum. SGV’s section focused on the salient provisions of the Customs Modernization and Tariff Act (CMTA) and a glimpse of its draft Implementing Rules and Regulations. The seminar was mainly facilitated by Tax Principal Vic de Dios (VCD) with the support of Tax Partner and Head of Indirect Tax practice Mark Tamayo (MPT) and Tax Principal Lucil Vicerra (LQV).

SGV launches the APAC FAAS Hub

On 14 July 2016, SGV, with the support of the Global and APAC Financial Accounting Advisory Services (FAAS) Leadership, formally announced the start of the APAC FAAS Hub operations.

Established to support the growth of the FAAS practice in APAC and with headquarters in Makati City, the APAC FAAS Hub leverages on the capabilities and capacity of the Philippine practice. It is composed of FAAS professionals and supported by the Asia-Pacific Talent Hub. The APAC FAAS Hub offers support on key FAAS solutions, which include contract reviews for IFRS 9, IFRS 15, and IFRS 16 engagements, treasury work, hedge accounting, financial instruments, accounting memos for IFRS conversion and transaction accounting, and accounting policy reviews. It is headed by FAAS Partner Benjamin Villacorte (BNV) and supported by ASEAN and Philippine FAAS Leader Aris Malantic (ACM).

In his opening remarks, SGV Chairman and Managing Partner Vic Noel said, “As part of our commitment as a global organization to deliver exceptional service to our clients worldwide, the APAC FAAS Hub aims to leverage on the capabilities and capacity of the Philippine FAAS practice in order to support the growth of our FAAS practice in the region.”

Global FAAS Leader Peter Wollmert, together with Global FAAS Markets Leader Karsten Füser and member of the Global FAAS team Detmar Ordemann graced the launch. In his speech, Mr. Wollmert mentioned that AsiaPac FAAS will grow over the next few years. Joon Arn Chiang, APAC FAAS Leader, supported this point by highlighting the Hub’s contribution to the FAAS practice: “What you are doing here will be a big difference for us in AsiaPac FAAS and for us in achieving our Vision 2020 goals.”

After the ribbon-cutting ceremony, SGV Country Managing Partner-Designate Itos Cruz closed the program with a toast. He said, “This FAAS Hub is a testament to the purpose that EY and SGV have: building a better working world.”

Other guests include Global Delivery Services Assurance Leader Robert Akright, APAC FAAS Markets Leader Kieren Cummings and SGV Vice Chair for Client Service Wilson Tan.

Outstanding SGVeans receive Special Awards

Staff members who demonstrated exceptional performance, excellence and integrity in the past fiscal year were awarded Special Awards during the 70th Staff Anniversary Party on 11 July 2016 at the SMX Convention Center in Pasay City.
The Special Awards were presented to 12 individuals and 4 groups:

Individual awardees

· Dempsey Antonio; Belvin Armenion; Jonathan Bino; Marnelli Eileen Fullon; Sophia Marie Ilagan; Benigno Leongson; Jennifer Jeanne Lim Bok; Diorella M. Ontimare; Cherry Liez Rafal-Roble; Margem Tagalog; Leomar Velez and Frances Rose Villamayor.

Group awardees

· The SGV Campus Recruitment Team (Julie Ann Rubia, Ysabel Angeline Bongolan, Christian Vjien Bringas, Paolo Miguel Delos Reyes, Julia-Anne Deypalan, George Christian Dumatol, Faith Geneva Guevarra, Alfred Vincent Lim, Rei Katrin Marcelo and Marie Aleksis Ventura); the SGV Dover Team (Ian Jaymes Aguayo, Ruby Krista Alcantara, April Antiporta, Camille Bastes, Evert de Bock, Charlito Bustillo, Jamine Cambaling, Bernadine Cayabyab, Ralph Dacanay, Harold Vy Dela Cruz, Irish Fancubit, Monart Raian Flores, John Arnel Gimarino, Charles Edmund Go, Katrizia Gale Ignacio, Rexcel Lagare, William Miguel Locañas, Advisory Partner Kaye Macaisa, Camille Angeli Orallo, Stephanie Miezette Ranera, Thea Nicolle Sta. Ana, Daniel Tolentino and Aileen Marie Vetus); the IMAS Core Team (Marilou Amor, Alvin Arada, Jonard Salazar, Jodel Ralph Balastigue, Jericho Villafuerte, Reynante Amandy and Richard Valiente); and the Regulatory Alignment Project Team for the Philippine Insurance Industry (Rachelle Anne Hernando, Catherine Laigo, Dennis Sam Lim, Olyca Llanes and Edgar Allan Vicencio).

Congratulations to our Special Awardees for a job well done!

EY Global Chairman and CEO Mark Weinberger meets Philippine VP

On his recent visit to the Philippines to attend the SGV 70th anniversary celebration, EY Global Chairman and CEO Mark Weinberger met with newly elected Philippine Vice President Leni Robredo at a relaxed luncheon. The luncheon was also attended by SGV Founder Wash SyCip and SGV’s Executive Committee.

Before meeting Vice President Robredo, Mark was interviewed on the ABS-CBN News Channel about EY in Asia and the Philippines, doing business in the Philippines under the new administration, and the impact of the UK’s vote to leave the European Union or Brexit.

“We have a big focus on ASEAN. We had another strong year of growth in ASEAN at over 11%,” he shared. When it comes to the Philippines, he said, “Because of the tremendous education, the English language knowledge, and the skill set in the Philippines, we’re investing in people here who will serve across the entire region and across the world through our Global Delivery Services… This is becoming a hub for us. And we see our investment in the Philippines and across ASEAN continuing to increase at a very good rate.” In addition to these strengths, he remarked on the legacy of SGV in the Philippines: “We have a dominant market share here, which helps. And I do see it as being near the top of our investment areas… There’re 32,000 alumni from SGV around the world in C-suites, in industry, in academia, in government. We just had new people join this government, the new government, from SGV. So we’re really proud of our organization here, and it’s made us stronger for sure.”

He also looks forward to seeing the economic policy of the Philippines’ new administration. “Increasing foreign direct investment in new sectors, expanding trade with the TPP, investing in infrastructure, bringing inclusive growth, and making sure that they deal with the poverty situation are all things businesses are watching,” he shared. “The Philippines is doing very well with a 6% growth rate, low inflation and low energy cost, but they still have to compete with the rest of ASEAN. They have to look to lower their taxes, be more competitive and get rid of some of the bureaucracy. Over time, the whole area is going to come together and the Philippines has got to continue to liberalize its economic positions.”

Mark believes that Brexit will have no direct impact on the Philippines and ASEAN, saying, “The UK is not a huge trading partner with the Philippines. That being said, the global uncertainty the Brexit creates and the questions about what’s going to happen next in Europe slow down the overall growth of the global economy… so it’s harder for some exports from the Philippines perhaps. But it doesn’t have a direct effect. In fact, the ASEAN community is continuing to grow strong and they benefit to some degree by being a more safe haven.”