SGV & Co. Philippines

IFRS 17: In search of better answers

SUITS THE C-SUITE By Charisse Rossielin Y. Cruz

Business World (10/09/2017 – p.S1/4)

(First of two parts)

According to Kurt Lewin’s Change Management Model: Understanding the Three Stages of Change, the change process includes three steps: unfreezing, change, and freezing. Unfreezing is overcoming a current mindset or accepting that a current state cannot continue; change is when people begin to resolve their uncertainty and look for new ways to do things; and freezing means embracing the new ways of working.

Since International Financial Reporting Standards (IFRS) 17, the new standard on insurance contracts, was issued last May 2017, most, if not all, local insurance companies are understandably still in the process of trying to fully comprehend the significant change that is to come. A good number of insurance companies, though, have already taken steps to get used to the challenge of a totally different way of measuring and accounting for insurance contracts, and have started performing preliminary impact assessment exercises.

In June 2017, we published a BusinessWorld article (https://goo.gl/gPvjyZ) summarizing the requirements of IFRS 17 and the potential impact on local insurers when they adopt the standard. In this article, we will highlight the provisions in the standard that may bring about the biggest operational challenges that insurance companies may need to address on their implementation journey.

CLASSIFYING AND ACCOUNTING FOR INSURANCE CONTRACTS

Under Philippine Financial Reporting Standards (PFRS) 4, the current standard on insurance contracts, companies are required to assess whether the insurance contracts they issue meet the definition of an insurance contract, i.e. these contain significant insurance risk. Although there are certain guidelines, no specific accounting treatment is required under PFRS 4 and therefore the current accounting treatment used for statutory reporting purposes is allowed.

However, under IFRS 17, entities will have to follow one of the three measurement models (depending on the characteristics of the insurance contract) and the corresponding accounting treatment for each model as prescribed in the standard. In the Philippine setting, the valuation models are closer in principle to the newly implemented Gross Premium Valuation (GPV) method for life insurance companies and the previously applied 24th method for non-life insurance companies. However, the accounting treatment poses a significant difference with the current Financial Reporting Framework (FRF) for long-duration contracts.

Insurance companies should assess their current product classification process to determine whether this is robust enough to clearly define which contracts fall under IFRS 17 and which contracts will have to be accounted for under different standards, such as IFRS 9 or IFRS 15, and if the process is flexible enough to supplement the determination of the appropriate accounting treatment for each insurance contract the companies issue.

DEFINING THE UNIT OF ACCOUNT

Insurance companies currently manage their contracts on the basis of portfolios or lines of business. Grouping accounts on this basis will be a good starting point to meet the requirement of level of aggregation or unit of account under IFRS 17. The challenges come when companies start grouping their contracts by cohort and by profitability.

Insurance companies would need to evaluate their data quality and availability to enable them to group the contracts according to profitability. Companies will also have to establish a process to ensure a seamless flow in grouping the insurance contracts, considering there will always be new groups created at least annually. They may need to obtain additional information from policyholders in order to group the contracts to comply with the standard, possibly requiring modifications to existing application forms. They should also think about whether to align the grouping of insurance contracts with their reporting frequency or keep the group of insurance contracts open up to the maximum allowable period of one year. Companies should revisit their current cost allocation methods to align with the unit of account requirement, i.e. allocate costs to different groups of contracts and may have to undertake a cost analysis/study to determine a systematic and consistent way of allocating expenses.

DETERMINING THE MEASUREMENT MODEL

By default, insurance contracts are assumed to be valued using the Building Block Approach (BBA), also referred to as the general model. But for direct participating contracts, such as the variable or unit-linked insurance contracts which have been popular locally, these contracts will have to be measured under the Variable Fee Approach (VFA). For short-duration insurance contracts that meet the criteria under the Premium Allocation Approach (PAA), the insurance company may opt to use the PAA for valuing its contracts. However, for contracts with terms of over a year, the company will still be required to value the contract under BBA to show that the amounts under both measurement models are approximately the same.

IFRS 17 also introduces the concept of contract boundary, to distinguish the cash flows relating to existing insurance contracts from the cash flows relating to future insurance contracts.

Insurance companies may consider applying BBA to all of their insurance contracts, even if some of their contracts qualify for PAA, given that it will have to set up the process and system to value contracts under BBA. They should also start thinking about how to define the cash flows within and outside the contract boundary.

SETTING AND UPDATING ASSUMPTIONS

In setting discount rates for insurance contracts measured under the BBA, local insurance companies may use, as a starting point, the current rate provided by the Insurance Commission (IC) and add on an illiquidity premium to reflect the characteristics of the insurance contract.

In calculating the risk adjustment, local insurance companies may also initially use the confidence level technique that is currently being applied when they compute for the margin for adverse deviation, taking note, though, to apply the risk adjustment only to non-financial risks.

Insurance companies may have to consider setting one illiquidity premium to be applied across all contracts they issue. Companies should also look at whether a significant amount of judgment required in setting the discount rate and risk adjustment would lead to more variability in the valuation of insurance contracts. They may have to set up a governance committee specifically tasked to review and approve the judgments and estimates applied in setting and updating the assumptions. From the points of view of the IC, the companies’ internal audit function, and their external auditors, there may be the question of what would be the basis for agreeing or disagreeing with the individual insurance company’s judgment regarding the discount rate and risk adjustment when there is no prescriptive guidance provided in the standard. Given this, the IC may have to step in and provide some guidance.

In the second part of this article, we will continue the discussion on the specific provisions of IFRS 17, including its interaction with IFRS 9, Financial Instruments, amortizing and tracking contractual service margins, presenting and disclosing results, and transitioning 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 authors and do not necessarily represent the views of SGV & Co.

Charisse Rossielin Y. Cruz is a partner of SGV & Co.

Reflections at 90

SUITS THE C-SUITE By Washington Sycip

Business World (10/16/2017 – p.S1/4)

In remembrance of Mr. Washington SyCip, who passed away at the age of 96 on 7 October 2017, we will be reprinting his articles “Reflections at 90,” which he wrote on his 90th birthday in 2011. We believe that these articles offer an insight into the timeless values that defined his character.

The Chinese philosopher Lao Tzu once said, “The way to do is to be.”

As I interpret it, what Lao Tzu meant simply is that for something to be accomplished, we would have to make it happen. And this is what inspired me, 65 years ago, to start a one-man accounting firm shortly after the liberation of Manila when World War II ended. I had big dreams but I was also realistic enough to acknowledge that I had to take it one step at a time.

I had spent a great part of the war in India as a cryptographer, breaking codes of intercepted Japanese communications. My doctoral studies in Columbia University had been unceremoniously interrupted but I knew that I had to make myself useful. Decoding enemy messages in the middle of nowhere may not sound attractive to most but it gave me a perspective on how, in time, the world will become smaller through communication links. My experience there taught me that what would be considered remote will eventually be connected to the mainstream. Players in different industries will come from large, emerging and small economies; this makes it essential to speak a common financial language.

After the war, I had to take a long route via sea to return to Manila. While I was already in India, I first had to take a ship back to the US and from there, journeyed homeward. Post-war accommodations on a ship, to say the least, were obviously far from ideal. However, crisscrossing oceans under these conditions taught me to be persevering and more importantly, it impressed upon me the idea that in the future, the world will be precisely this — a crisscrossing of human activities; that there will be leaps in the exchange of ideas, commodities, and services through trade, commerce and tourism.

With these in mind, I was excited to return to the Philippines because I was confident and convinced that it was poised to become a major player in this next phenomenal phase of modern human history. Despite the war and its physical devastation, the country ranked second to Japan in terms of economic and scientific development. This boded well, indeed.

It was with this optimism of a 25 year-old that I envisioned what was to become SGV & Company. In my mind’s eye, I had seen a Filipino professional services firm that would, at first, help in the reconstruction of businesses damaged by war. It would be a firm run by Filipinos for Filipinos at a time when American and British firms dominated the field. In March 1946, I opened W. SyCip & Company with a desk in my brother’s law office in the Trade & Commerce Building in Binondo, one of the few structures that survived the bombing of the city. Thus began the first step of a journey fraught with many challenges, much learning and significant contributions to society at large.

For a time, I was concurrently the senior partner, receptionist, messenger and janitor before the firm started to grow. My people philosophy then was simple: hire the best and brightest. This was combined with a retention philosophy that also sounded just as simple: provide the best training possible. The formula worked well and soon enough, we not only needed more desks but required a new building to house us. Then, on our fifth year, we began opening branch offices in the provinces because the entire country was energized by a vibrant economy. Eventually, the quality of SGV professionals will be replicated around Asia when the SGV Group was formed and became the first truly multinational Filipino firm.

Lifelong learning is a value that has been ingrained in SGV’s corporate culture. Besides the training one receives on the job, it was the first professional services firm to institutionalize its training program. In addition, as early as the 1950s, staff members were already being sent abroad as scholars to the best graduate schools. Since the Asian Institute of Management was established in the late 1960s, generations of SGV professionals have graduated from the school. To this day, there remains a very close association between the two institutions.

Continuous knowledge breeds excellence — another SGV value. In a sense, SGV had been global even before the term became fashionable. Its standards have always been set against international benchmarks. While I no longer have any involvement whatsoever in running the firm, I understand that the current leadership continues to invest in learning tools, information technology and other resources for the firm to remain relevant to the public.

While training and excellence have been hallmarks of SGV, there is one overarching value that I believe differentiates SGV and that is integrity. For a professional services firm, it is reputation that matters. From Day 1, it is instilled in every professional that integrity should be built into one’s actions, work, decisions and relationships. It is a weighty challenge for anyone, particularly in our society, but it can be done. To borrow another Chinese proverb, “A clear conscience never fears midnight knocking.”

Values such as excellence and integrity are intangible assets that define a person or company. Breathing such values into life is nothing less than hard work. SGV was built on this — that work cannot wait because market forces are so dynamic and that any inaction can cause impediments even to the progress of the nation. In fact, it has been my enduring belief that success can only be significant if it redounds on the advancement of other individuals, a community or even the country.

Well into the 20th year of SGV, we established the SGV Foundation to address the social responsibility projects of the firm. Later, I would help organize the Philippine Business for Social Progress. These two entities continue to be engaged in activities that give back to society and to aid in uplifting the bottom groups. And since my retirement from SGV in 1996, I have focused my energies on pressing social needs like improvements in public education, microfinance, entrepreneurship and public health. In the second part of this article, I will share my thoughts about these advocacies and how every Filipino can contribute to these causes. For now, allow me to leave you with this thought:

“It is not the knowing that is difficult, but the doing.”

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.

Washington SyCip was the Founder of SGV & Co.

Reflections at 90

SUITS THE C-SUITE By Washington Sycip

Business World (10/23/2017 – p.S1/2)

(Second of two parts)

In remembrance of Mr. Washington SyCip, who passed away at the age of 96 on Oct. 7, we will be reprinting his articles “Reflections at 90,” which he wrote on his 90th birthday in 2011. We believe that these articles offer an insight into the timeless values that defined his character.

In the first part of this article, I ended with a quote from Chinese philosopher Lao Tzu that says, “It is not the knowing that is difficult, but the doing.” I hope that those who read it have pondered on what this means.

Fifty years after I established SGV & Co. from a one-man operation, I retired from the company and confidently left it in the hands of much younger partners. Today it has become a 2,600-strong firm, the largest in the Philippines. I had passed on the value of stewardship — that no one person owns the firm and partners are only caretakers of the company for future generations to come.

What retirement brought me was the freedom to be involved in various projects and to sit in the boards of companies. What retirement actually taught me is that it does not exist; that time is finite and too precious for anyone to waste. What keeps me preoccupied is the knowledge that there are so many problems to be solved in the country.

On my 90th birthday last week, I was given the opportunity to address a large group regarding my current advocacies. I welcome every chance to speak about these causes and I now would like to share them in writing.

There are three causes that I am passionate about. To reduce the high percentage of poverty in our country, I am convinced that we should concentrate our attention in three areas.

The first is to have every Filipino child complete basic education. If a child drops out and is illiterate he or she is sure to be poor. It gladdens me that President Benigno S. Aquino III and Secretary of Education Bro. Armin Luistro are united in focusing on improving basic education and hopefully reducing to zero the dropout rate. This is a major component of the President’s Agenda for Basic Education which he spoke of in his very first State of the Nation Address.

What I know about basic education I learned from Dr. Nene Guevara of Synergeia Foundation. Synergeia works closely with local governments, the Department of Education, schools, parents, students and socio-civic groups to improve the learning and teaching processes in public elementary schools. Its programs aim to improve the proficiency in reading and math of students in Grade 1 to 6 so that they do not drop out and hopefully, can move on to high school. I have personally seen how Dr. Guevara worked with three Muslim communities, reducing their dropout rate in basic education from 80% to 30% in three years. This has completely changed the lives of the people in those three communities in Mindanao.

Another organization that works to enhance education is the Philippine Business for Education or PBEd led by Ramon del Rosario, Jr. PBEd believes that by filling the gaps in the system — such as providing quality training to teachers — what is wrong can be corrected.

The second major concern that I am helping address is the cost of credit to the poor. This is an issue that has given rise to micro financing as an institutional option for the poor to gain credit. In this matter, I have worked closely with the Center for Agriculture and Rural Development or CARD led by Dr. Aris Alip that has evolved into an outstanding microfinance institution in the Philippines. Since it started in 1986, CARD has reached out to more than 700,000 clients. It has a portfolio of over P3 billion with a repayment rate by its poor borrowers of 98.4%. Dr. Alip has a very successful small loan fund for basic education. He has enthusiastically responded to my suggestion of expanding this fund to significantly reduce illiteracy in poor communities.

My third advocacy is rural health. I am currently learning from the Zuellig Foundation about how to improve the health of the poor in rural areas. Stephen Zuellig, the best strategic thinker I have met, has kindly set a fund in my name with this Foundation to combine the improvement of rural health with the other factors to reduce poverty.

Filipino and foreign donors are noticing the positive results from Synergeia’s and CARD’s programs. This is important because we need more people who believe that poverty can be eradicated and who are willing to invest in the programs that address the problem. Very recently, an American investor and philanthropist, Paul Kazarian, has generously presented me with a fund to expand services in basic education and microfinance. The Kazarian Foundation has also set aside a second fund for research, education, and training on microfinance to see how their studies can benefit our microfinance industry and to assess how CARD can also help other microfinance organizations abroad. All these will supplement an amount that I have set aside to provide Synergeia and CARD with funds for basic education that I hope will help in President Aquino’s program to reduce poverty.

Being a public school graduate, I have always maintained that education is the greatest of equalizers. We all can help in improving the lives of our people through better basic education.

The late Former President Cory Aquino led efforts to spread microfinance throughout the country and Stephen Zuellig’s Foundation is working on improving rural health. All this will contribute to make a more equal and prosperous Philippines!

Lao Tzu’s words that I borrowed to start this article were meant to inspire you. We all know what problems exist but it is a matter of making a commitment to be involved in them. I personally hope to continue using my time and resources for these worthy causes for the remaining years of my life because as the great philosopher also said, “If I keep a green bough in my heart, the singing bird will come.” In other words, for as long as you keep yourself useful, life will be worthwhile.

Guest Columnist Washington SyCip was a retired Partner and the Founder of SGV & Co.

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.

Washington SyCip was the Founder of SGV & Co.

IFRS 17: In search of better answers

SUITS THE C-SUITE By Charisse Rossielin Y. Cruz

Business World (10/30/2017 – p.S1/4)

(Second of two parts)

In the first part of this article, we took a deeper look at the newly released International Financial Reporting Standards (IFRS) 17, Insurance Contracts, issued in May 2017. Specifically, we discussed some of the provisions in the new standard which may prove most challenging to insurance companies as they begin implementing the new standard, including classifying and accounting for insurance contracts, defining the unit of account, determining the measurement model and setting and updating assumptions.

We will now present other significant areas that companies need to take into account.

CONSIDERING THE INTERACTION WITH IFRS 9

The International Accounting Standards Board recognizes the importance of the interaction between IFRS 9 and IFRS 17 and therefore gave insurance companies: (1) temporary exemption from IFRS 9, i.e., an option to defer adoption of IFRS 9 alongside adoption of IFRS 17 to Jan. 1, 2021; and (2) the overlay approach, i.e. exclusion from profit or loss of the difference between the amounts recognized under IFRS 9 and Philippine Accounting Standards (PAS) 39 for specified assets relating to insurance contracts. It also provides some relief to companies that will adopt IFRS 9 on Jan. 1, 2018 by granting them the ability to reclassify and re-measure the financial instruments upon adoption of IFRS 17.

Local insurance companies, to some extent, have asset-liability matching in place, but given the limited investible options, most of the liabilities would usually run well beyond the maturities of the corresponding assets.

Insurance companies may have to revisit their asset-liability strategy in light of applying Philippine Financial Reporting Standards (PFRS) 9 alongside IFRS 17. Companies may also consider holding a dialogue with the Insurance Commission (IC) regarding certain restrictions on investments in order to enable proper matching of their liabilities against the assets.

AMORTIZING AND TRACKING THE CONTRACTUAL SERVICE MARGIN

The amortization and tracking of the contractual service margin (CSM) pose a significant challenge to insurance companies, particularly for life insurance companies, as these should be done over the contract period. While the concept of setting up and maintaining subsidiary ledger balances is not new to insurance companies, sub-ledger amounts are usually transactional in nature, the CSM balances are actuarially computed and updated at each reporting date.

Insurance companies may consider amortizing and tracking the CSM balances in the actuarial valuation system, in the general ledger system, or in a separate data warehouse. They will have to evaluate which solution would be both economically feasible in the short-term (i.e. initial cost of investment) and in the long-term (the cost of compliance every reporting period).

PRESENTING AND DISCLOSING RESULTS

Meeting the requirements under IFRS 17 will lead to more transparency in the financial statements regarding the insurance company’s source of earnings. The additional disclosure requirements, particularly around the roll-forward analyses of insurance contract liabilities, would entail that the insurance company have granular data, efficient processes and robust systems to produce the information in a timely manner.

Insurance companies may have to review how to structure the data in their systems to meet the required presentation and disclosures of IFRS 17. Given the level of detail required as disclosures, companies may also consider using this information as part of their internal or management reports.

TRANSITIONING FROM PFRS 4 TO IFRS 17

While the effective date of adoption of IFRS 17 is on Jan. 1, 2021, comparative figures are required for the period beginning Jan. 1, 2020. The standard provides two alternatives to the full retrospective approach if this approach is impractical — the modified retrospective approach and the fair value approach. The insurance company may apply a different approach to each group of contracts.

Insurance companies may have to assess whether they have sufficient quality data required to calculate the balances at transition and the implication on the company’s data collection, maintenance and reporting processes moving forward. Companies would also have to address the inconsistency that comes with the first set of numbers reported under IFRS 17, given that various transition approaches may have to be applied to different groups of contracts.

MOVING TOWARDS BUSINESS-AS-USUAL (BAU)

Transitioning to IFRS 17 is only half the battle — the next challenge for insurance companies is to ensure a seamless move to BAU. Insurance companies will most probably be able to identify areas for improvement after the first set of numbers under IFRS 17 is produced. The goal is to get to a state of BAU that is sustainable, yet flexible enough to accommodate any changes that may arise from any new interpretative guidance or amendments that will be issued in the future. Furthermore, insurance companies will have to anticipate that the IC and the Bureau of Internal Revenue (BIR) may prescribe additional requirements to meet their respective objectives. Both IC and the BIR have the option of aligning their requirements with IFRS 17 or not.

The effective date of IFRS 17 is more than a couple of years away, but it will be most beneficial for insurance companies to start seeking the answers to these questions as early as now in order to more fully explore what options are available to them.

Charisse Rossielin Y. Cruz is a partner of SGV & Co.

IFRS 17: In search of better answers

SUITS THE C-SUITE By Ana Katrina C. Celis-De Jesus

Business World (11/06/2017 – p.S1/2)

Gone are the days when brick-and-mortar businesses dominated the market. Recent trends show that many businesses are now shifting to online platforms. These may range from home-based start-ups tapping the online market, to a small to medium-sized enterprise expanding its reach, or even to a multinational enterprise (MNE) that has gone global. To ensure success and continuity, businesses are rapidly moving forward on the digital track.

For many MNEs, technology is an inevitable medium to help them penetrate the international market. Due to the growing complexity of evolving business models, more and more MNEs are adopting cloud computing into their operations.

Cloud computing is generally defined as the practice of using a network of remote servers hosted on the internet to store, manage and process data, rather than on a local server or a personal computer. Web-based e-mails are commonly in the cloud. An e-mail user creates a local e-mail account (e.g. user@mail.com.ph). This e-mail account can be accessed by the user from any device as long as there is access to the internet. The e-mail service provider, which has local presence, neither owns the hardware nor software to deliver the online e-mail service. The local e-mail service provider engages the services of its related party operating on a global scale to capitalize on its reputation for on-demand network access to a shared pool of applications and servers located offshore.

The nature of cloud computing for MNEs, with related party transactions, is potentially relevant from a tax perspective, specifically, in transfer pricing. Transfer price is the price charged by one entity to a related party for property or services. Transfer pricing rules apply an arm’s length standard wherein transactions between related parties must be that which unrelated parties would have realized in a comparable transaction under comparable circumstances.

To achieve economies of scale, MNEs often procure their information technology infrastructure on a regional or global level. Capital and maintenance costs encompass several jurisdictions but overall costs are reduced as data storage and software applications are managed from one location accessible through the cloud. This is where transfer pricing kicks in.

For example, a cloud computing service provider with servers located offshore allows its related party in the Philippines access to its applications and remote facilities in the cloud. Though the related Philippine entity derives profits directly from its customers, how then do we determine if the price charged by the cloud computing service provider to its affiliate company in the Philippines is at arm’s length?

Some MNEs may shift profits to low-tax jurisdictions to reduce their overall tax burden. By doing so, these MNEs can minimize their overall tax liability by artificially shifting profits towards jurisdictions with favorable tax regimes. Thus, it is important to have adequate transfer pricing rules to address profit shifting and for the concerned jurisdictions to have a fair share of taxes that should be due to them.

In most jurisdictions, transfer pricing is governed by regulations mostly based from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. The OECD, under the Base Erosion and Profit Shifting (BEPS) project termed as Action Plans initiated by G20 countries, has addressed issues on old tax frameworks that no longer match the current practice of doing business across borders.

While the Philippines is not a member of the OECD, the local tax authorities adhere to the guidelines set by the OECD. As such, it may be prudent to anticipate that the local tax authorities may eventually adopt the BEPS Actions Plans.

The OECD’s BEPS Action Plan on Addressing the Tax Challenges of the Digital Economy complemented by its Action Plan on Aligning Transfer Pricing Outcomes with Value Creation has caught up with the rapid growth and sophistication of information technology. However despite the OECD’s robust Actions Plans, there still exist challenges on each jurisdiction’s right to tax its portion of the profits under its local laws.

Though the BEPS Action Plan serves as guidance on the tax challenges of the digital economy, at present, there is no concrete set of guidelines on the application of transfer pricing rules to cloud computing transactions between related parties. Thus, MNEs may be able to maneuver around current transfer pricing rules to structure their cloud operations with minimal overall tax liability.

There is still uncertainty on how cloud computing should be characterized from a transfer pricing perspective. Is there a provision of service or a transfer of intangible assets or rights? While an analysis of the value chain would be a good foundation in a transfer pricing analysis, how then should the most appropriate transfer pricing method in benchmarking the pricing of related party cloud computing transactions be identified? It is also a challenge to identify value drivers in related party cloud computing transactions as to which entity performs relevant functions, incurs economically significant risks and employs or contributes assets to arrive at an appropriate return reflecting the value of their contributions. This in turn leads to further challenges in searching for comparable independent transactions to benchmark cloud computing transactions between related parties. An equally important challenge is to determine the location of cloud-based services being virtual in nature.

Cloud computing at non-arm’s length pricing could possibly occur. With rapid changes in business models brought about by the digital economy, it is imperative to specifically address the issue on the appropriateness of the return or charge of member entities of MNEs providing cloud computing services. Ultimately, MNEs as well as tax authorities should carefully consider and address the transfer pricing challenges in these transactions.

Ana Katrina C. Celis-De Jesus is a Tax Senior Director of SGV & Co.

Financial inclusion in the age of digital disruption

SUITS THE C-SUITE By Christian G. Lauron and Ruben D. Simon, Jr.

Business World (11/13/2017 – p.S1/4)

A study conducted by the Bangko Sentral ng Pilipinas (BSP) showed that only two out of 10 households have bank accounts and, with an economy that has been growing 6% to 7% in recent years, this shows a disparity between consumption spending and actually saving for the future. Given this situation, confronting the challenge of inclusive growth requires a discussion on financial inclusion. If the flow of capital from financial institutions to important industries has contributed to the country’s economic growth, how then can those on the fringes of the society be included in this growth?

Some schools of thought consider the ‘brick and mortar’ approach to financial inclusion as passé. However, in a country dominated by cash transactions and with a number of technological glitches among big banks in recent months, physical access to financial institutions remains relevant. People still prefer face-to-face interaction with bank personnel — an interaction that creates a sense of assurance that their money is safe with the bank.

It is encouraging to see that the BSP, as regulator, has been putting enablers in place such as circulars on the establishment of other banking offices (OBOs), micro banking offices (MBOs) and the easing of bank branch rules in strategic locations in order to address physical accessibility. In fact, BSP data show that 1,052 cities and municipalities have a banking presence. Other financial service access points (such as microfinance entities, cooperatives, remittance agents, and pawnshops) have also significantly covered other areas that are unserved or underserved by banks.

Hindrances to access include geographical distance and documentary requirements for opening accounts and applying for loans. This is clearly illustrated in areas where there are banks and yet, borrowers prefer informal money lenders. Solutions do not simply lie in easing requirements (which is an important Know-Your-Customer control as espoused by the regulators), but in complementing physical presence with a virtual one. Traditional access points must not be completely replaced by technological solutions, but upgraded instead by technology.

Industries perceive emerging technological solutions as disruptive and, therefore, a threat to their existing businesses. This is particularly the case for technologies that ride on the platform of peer-to-peer (P2P) connectivity. What started with P2P file transfers are now full-blown P2P service business models that connect people to services directly, bypassing traditional platforms. This model has encroached on industries such as hospitality, transportation, media, retail consumer goods, and even lending.

In the area of financial inclusion especially in the countryside, technological platform solutions have been on the rise where crowd funding mechanisms have placed the farmers closer to retail investors. An industry that, for the longest time, has been seen as a high-risk market by the financial sector, has been made viable by technology. Rather than being seen as a threat, the banking industry (as well as the whole financial institution apparatus) must take this as a challenge. It is encouraging to see the increase in institutions using technological enablers in their operations, such as mobile and internet banking. It is just a matter of improving services, security and ensuring operability amidst system interruptions. The Internet of Things has been the buzzword for this fourth industrial revolution, and the banking and financial sectors need to take this into account.

While the use of online payment systems is growing, particularly among the younger demographic, majority still prefer cash transactions. This is primarily evident when dealing with micro, small, and medium enterprises (MSMEs), which comprise almost 90% of registered businesses in the Philippines as well as with overseas Filipinos workers and their dependents.

In 2016, total remittances hit a record $26.9 billion. Remitted through financial access points, what started as cash in their country of origin was converted to virtual “money” and then converted back to cash upon reaching the country of destination. Only a small portion of the virtual money, if any, is used for online transactions. There are key opportunities that can be gleaned from this situation. First, an ecosystem may be created where virtual cash is used for purchases, payments or remain in deposit accounts as savings. Second, more cash conversion access points such as ATMs or point-of-sale (PoS) terminals may be created. These solutions, while not entirely new, can create fee-based income opportunities.

About a decade ago, there were pioneering moves to integrate mobile banking platforms with microfinance operations in the country. Its main vision was to create an ecosystem at the barangay level where loan proceeds were disbursed via mobile wallet and could be spent using online payment systems of merchants. It envisioned a system where mobile money revolves around individuals in an entrepreneurship ecosystem where it does not need to be converted to cash — as converting mobile money to cash entails cost. While the business model has not yet materialized, the idea of a seamless, cashless ecosystem was beyond its years. At the time, apps and cloud computing were not as mainstream as they are today and short message system syntaxes were the way to operate — what one-click/tap access is for apps now were long lines of SMS commands sent to dedicated 4-digit numbers before.

Creating an ecosystem — where cash and online transactions intermingle — is an ideal environment for financial institutions. Financial service access points can be a rich source of data which can be used for decision making and strategy formulation. However, data alone will not amount to anything if it is not analyzed and presented well. Therefore, data analytics has emerged as one of the most, if not the most, important skills that an institution must develop. Advanced analytical models can be used to strategize and scale the presence of banks in certain locations (e.g., full-blown branch, MBO, OBO, or just ATM/PoS terminals). It can even be used to create predictive algorithms to assess credit viability among individuals or SMEs — which in turn can be used for risk-based pricing. The prospects for this latent tool are enormous and it has seen increased usage in various industries, most notably, in surge pricing among transport network vehicle services (TNVS).

The two-pronged strategy of physical accessibility and technological enablement can provide financial institutions with the tools to make banking more reachable to the unbanked/under-banked sector. However, it should also be noted that digital may not always be the best solution; in some cases, a refreshed, innovative, and pragmatic way of thinking can propound traditional solutions to new and emerging problems.

For example, in far-flung communities, the simple act of owning an ATM card (which is sometimes repurposed to double as an identification card) can be a source of fulfillment. Support mechanisms must be in place so that usage is ensured for that ATM card, such as appropriate infrastructure (accessible ATMs), deposit-taking mechanisms, and most importantly, financial education. Financial education, if implemented well, can empower individuals to accumulate useful lump sums — which can be used for personal development and education, business, and asset acquisition.

What sets apart doing business in the 21st century is that disruption is the new norm. Traditional business models are constantly being challenged. Innovation has been fast-paced and ideas can easily be converted into marketable products and services, with an unprecedented time-to-market. The key takeaway is not to go against the new wave, but ride it.

Christian G. Lauron is a Partner and Ruben D. Simon, Jr. is a Manager of SGV & Co.

Agriculture 3.0: Farms go digital

SUITS THE C-SUITE By Jose Raoul J. Balisalisa

Business World (11/20/2017 – p.S1/4)

In the course of an ocular inspection for a client, an alternative to a physical visit was proposed — to view video footage of the plantation captured by drones. The client explained that they have a dedicated team that conducts aerial view captures through drones on a weekly basis per location/plantation. This allows them to gather and store data more frequently and accurately, with the option to create a detailed archive of video footage.

Given the pace at which technological disruption is sweeping all industries, it should come as no surprise that export-producing agricultural companies’ data collection processes have evolved from literally manual inspections and hand-written notes to automatic data capture via equipment, software, remote sensors and aerial drones, among others. Some also have weather stations located strategically within the plantation to capture relevant weather data (e.g., rainfall, sunlight, wind speed, photosynthetic radiation, etc.). GPS is installed in aerial spray planes to achieve accuracy and complete coverage during spraying. Weighing machines are not only used for fruits received at packing houses, but also to record the source fields/farms. The value of the resulting combined data is then used to provide farmers with insights to help them make informed decisions for optimal production.

These new technological systems demonstrate that the agriculture industry is no exception to the trend in big data and analytics.

However, it is also true that for many other farmers in our country, these developments are just “stories” because they have yet to see them in action in their own farms.

The question therefore is, are we ready for Agriculture 3.0?

An article by Ernst & Young, “Digital agriculture: Helping to feed a growing world,” states that digital agriculture is widely recognized as the third great revolution of modern agriculture (Agriculture 3.0 or Ag 3.0). The article stated that the introduction and implementation of mechanization (1900 to 1930) and genetic modification (1990 to 2005) are referred to as Ag 1.0 and Ag 2.0, respectively. Both revolutions drove efficiency, yield and profitability to levels that were previously unattainable. Today, these levels are considered conventional in developed countries around the world.

A similar paradigm shift can be expected with Ag 3.0, which is anticipated to be the most transformative and disruptive, not just at the farm, but also all throughout the entire agricultural value chain.

Research has shown that data-driven agriculture has had a large impact on the industry. In this light, we can expect data creation, analysis and decision making to increase even more at the field level, while also affecting farming operations such as through targeted field solutions, data-driven agronomic advice and smarter inputs. New software is also being developed to help emerging countries adopt modern farming practices. As technology supports automation and economies of scale, farms are also anticipated to undergo more consolidation. Companies who reap more profits from data-driven efficiency are likely to then invest in better farming technology in a beneficial cycle.

While Ag 1.0 and Ag 2.0 significantly revolutionized agriculture, digital agriculture is expected to fundamentally transform every aspect of the agribusiness value chain. It will affect not only producer buying behavior and seed and equipment product design, it could also enable dynamic pricing at the consumer retail level, with resulting implications across various business functions, including business strategy, product design, customer preferences and even the company’s organizational structure.

However, as technological advancements reach parity in the industry, companies will need to look further into digital strategy in order to compete. This has the potential to challenge traditional company roles, intercompany relationships, incentive systems and even whole business models. As with most disruptors today, digital in agriculture is increasing competition between traditional and non-traditional competitors. Given this, visionary agribusinesses are now working to strengthen their positions in Ag 3.0, some by investing in internal data activities such as standardization, storage, software and analytics, while others are looking at outsourcing strategies or licensing software from external vendors. Yet others are taking a wait-and-see approach.

As recent trends have shown us, disruption will follow in the wake of increasing digital adoption, further highlighting the need for agribusinesses to already take steps to evolve themselves in order to stand out from competitors and deliver more value-added services and products.

Despite the compelling benefits of digital agriculture, the industry still has to hurdle significant challenges, such as the potential difficulty of using software, data usage concerns, disparate and proprietary data formats, and unclear returns on investment. Additionally, it is difficult to demonstrate immediate, tangible results. Having different stakeholder groups will also make data gathering and standardization more challenging. This is further compounded in emerging countries where weak digital network infrastructure and limited capital make adoption prohibitive. The gap between modern, advanced farming and subsistence farming is growing at an alarming rate. All of these factors raise important questions for the industry.

With the world’s increasing population, rapidly depleting natural resources, and growing environmental and regulatory pressures, precision planting needs to become the new normal in order to achieve an optimum volume of production per hectare. As the industry moves forward, farmers who are not yet in the digital space should consider giving digital strategies serious thought. In spite of the very real barriers to digital adoption, today’s farmers need to take steps to empower themselves in order to gain more knowledge of how to use their time and resources more efficiently.

Digital agriculture is a game changer, and agribusinesses that are leveling up their digital strategies have demonstrated effective best practices. These include allocating annual budgets for investing for infrastructure modernization, new technologies and new techniques to interpret and analyze data. They are also collaborating with government, academe, and stakeholders from the private sector to acquire relevant training and experience for their people. Given the rapid and sweeping digital changes already happening in the agricultural sphere, players need to act now to protect their position in the food value chain.

Jose Raoul J. Balisalisa is a Partner of SGV & Co.

Are productivity incentive schemes benefits considered De minimis or other benefits?

SUITS THE C-SUITE By Hentje Leo L. Leaño

Business World (11/27/2017 – p.S1/4)

As we approach the end of the calendar year, employees’ excitement builds as bonuses and incentives such as collective bargaining agreement (CBA) and productivity incentives are expected to be paid out. But for most companies providing these bonuses and incentives, tax questions arise, like what are the applicable tax rules if the CBA and productivity incentive schemes exceed the de minimis ceiling?

The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 5-2011, as amended, providing a specific list of de minimis benefits, e.g. rice subsidy, uniform and clothing allowance, laundry allowance, medical cash allowance to dependents, actual medical assistance, etc. each with specific tax exemption ceilings. De minimis benefits are facilities and privileges of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees. It also indicates that if the employer pays more than the ceiling amount for de minimis benefits, the excess shall be considered taxable income. This excess, however, is still taken into account in an individual’s personal tax exclusion threshold as indicated below.

In January 2015, the BIR issued RR No. 1-15, which provided additional tax-exempt de minimis benefits to employees by virtue of a CBA and productivity incentive schemes. These are exempt from withholding tax on wages (WTW) or fringe benefits tax (FBT), provided that the combined annual monetary value received from both the CBA and productivity incentive schemes does not exceed P10,000 per employee per taxable year.

Regarding personal tax exclusions, Section 2.78.1 (B) (11) of RR No. 2-98, as amended by RR No. 3-15, provides that the 13th month pay of private and government employees (including government-owned or -controlled corporations), and any other benefits, such as Christmas bonuses, productivity incentive bonuses, loyalty awards, gifts in cash or in kind and other benefits of similar nature paid or accrued during the year, are considered income payments exempt from income tax, and consequently, withholding tax, provided that the total amount shall not exceed Php 82,000 pursuant to Republic Act (RA) No. 10653. Hence, any amount in excess of P82,000 shall be subject to income tax, and consequently, to WTW/FBT. Any excess de minimis payments beyond the ceilings specified in RR No. 5-2011, as amended would be considered here, and if still below the P82,000 threshold, remain tax exempt pursuant to the rules laid out in RR No. 8-2000.

These BIR issuances were later followed by BIR Ruling No. 293-2015 dated Aug. 27, 2015, which defined the productivity incentive scheme as benefits given by management to labor that incentivize performance of an employee for certain economic factors, i.e., increase in productivity, etc. with the establishment.

Based on the foregoing, the following rules on benefits arising from CBA and productivity incentive schemes may apply:

· The benefits are exempt from WTW to the extent of P10,000.
· The excess of the benefit over P10,000 is exempt from WTW to the extent of Php 82,000 when considered together with other benefits.
· The benefit in excess of the P10,000 and the Php 82,000 when considered together with other benefits is subject to WTW (for rank-and-file employees) or to FBT (for non-rank-and-file employees).

While it is clear that CBA and productivity incentives are now among those considered de minimis benefits if these fall under the ambit of the definition under RR No. 1-15 and BIR Ruling No. 293-2015 and the amount is within the ceiling of P10,000, an important question to address is whether the CBA and productivity incentive schemes that exceed the de minimis ceiling will still qualify as de minimis or considered as “other benefits”?

In BIR Ruling No. 293-2015 (August 2015), the BIR was requested to clarify the treatment of amounts over the income tax exempt de minimis Collective Negotiation Agreement (CNA) benefits received by employees in the public sector, in relation to the increase in the exempt 13th Month Pay and other benefits brought about by RA No. 10653. The BIR ruled that any CBA or productivity incentives scheme benefits shall only be exempt as “de minimis” benefits if the total amount thereof does not exceed P10,000 per taxable year. Otherwise, it shall be treated as “other benefits,” the gross of which, not exceeding P82,000, shall be excluded from gross compensation income of the employee receiving the same. Otherwise, it shall be subject to normal income tax rates.

What this means is that if CBA/CNA benefits under a productivity incentive scheme is below the P10,000 ceiling, it is considered a tax-exempt de minimis benefit. However, if the incentive exceeds the ceiling, the ENTIRE amount does not qualify as a de minimis benefit and is then treated as “other benefits” and is then tested to the P82,000 threshold to determine its taxability

Given the above, it would seem that the application of the rules on the taxability of CNA/CBA benefits and productivity incentive scheme benefits under BIR Ruling No. 293-2015 appear to deviate from the earlier rules presented under RR No. 8-2000, as amended.

Considering that BIR Ruling No. 293-2015 is the current interpretation of the BIR with regard the tax treatment on the excess of the CNA/CBA benefits and productivity incentive scheme benefits over the de minimis ceiling, this prompts the question on whether such an interpretation would prevail in determining the tax treatment for all other de minimis benefits exceeding their respective tax exempt ceilings.

For example, if an employee’s rice subsidy were to exceed the ceiling of P1,500 or one (1) sack of 50 kg. of rice per month amounting to not more than P1,500, would it disqualify this from being considered a de minimis benefit and thus have to fall under the “other benefits” category? Or only the excess beyond the de minimis ceiling of P1,500?

In this regard, since the clarification in BIR Ruling No. 293-2015 was specific to CNA/CBA benefits and productivity incentive schemes, it can be argued that such a rule is to be applied only to CNA/CBA benefits and productivity incentive scheme benefits and should not be made as a basis for the tax treatment for the rest of de minimis benefits.

Towards the year end, employees’ performance results (on which most productivity incentive schemes are based) are expected to be reported and the year-end annualization of compensation benefits will most likely take place. When that happens, we hope that the above clarification on the limited impact of BIR Ruling No. 293-2015 would be taken in consideration.

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.

Hentje Leo L. Leaño is a Tax Partner of SGV & Co.

Reinventing internal audit in the age of disruption

SUITS THE C-SUITE By Christiane Joymiel C. Say-Mendoza

Business World (12/04/2017 – p.S1/2)

CHANGE IS COMING faster than ever. As technology and the world economy changes at an accelerated pace, so too does the level of emerging risks that come with it due to regulatory requirements and globalization, among others. These changes are having a significant impact on how Internal audit (IA) functions in an organization.

Management relies on IA to provide assurance on the effectiveness of internal controls and company processes, while also providing support to a diverse array of risk management and business process improvements. Because of how recent developments in technology are affecting the way business is operationalized, stakeholders also expect IA to cope with the volatility. It is further expected to elevate its profile to have the ability to identify, anticipate, assess and address emerging risks coming out of business changes; transform the IA function to provide improved strategic value to stakeholders; and provide cost efficiencies to the business.

Current trends in technology and emerging risks are significantly challenging how IA strategy and approach are designed and executed.

DATA ANALYTICS AS A GAME CHANGER

Traditionally, when audit is performed, auditors focus on what could go wrong. They identify and test controls that address what could go wrong by extracting and selecting a representative sample out of the population. Given that the process of sample selection is random, the sample might not be properly representative and the resulting audit may miss critical areas and fail to identify all relevant issues.

Using analytics, IA can examine an entire population by mining past data to better understand what has already happened, anticipate future events, and help determine the effectiveness of future decisions and actions. It allows analysis of the full population versus sample data in order to identify anomalies, see patterns and note any trends that may point to significant control or process deficiencies.

IA’s adoption of analytics does not only mean acquisition of tools and techniques but also requires a change of mindset. IA needs to know what it is looking for to identify the appropriate data to pull, and the analytics program to develop. This is only the first step. The ability to institutionalize the process to make it repeatable and scalable across the organization is a journey that will require the right resources, project management and governance.

RISE OF ROBOTICS TO DRIVE EFFICIENCIES

In past columns, we have written about how robotic process automation (RPA) is working to streamline operations, enhance productivity and reduce mistakes in organizations, as well as how companies can leverage RPA to upskill existing talent to create combined human and robotic work forces. The same holds true for IA, where RPA can handle the execution of repetitive and controllable processes thereby freeing up human talent for more critical, value-added, judgment-based work. Robotics can also be integrated with analytics, thereby leveraging large volumes of data to perform cognitive tasks.

An example is a global engineering company that uses robotics during the IA process to perform analytics on bank transactions in identifying any mismatched amounts, dates, currencies or bank account numbers. Similarly, another use of RPA can be to format and upload data into an analytics tool, allowing the system to ensure 100% coverage of data, with faster processing time and reduced chance of human error.

AMPLIFIED RISK RELATED TO SOCIAL MEDIA

Social media are redefining the way we develop our networks and even manage businesses. A majority of online adults use social networking sites to do business or share opinions, views, photos and media. This disruption presents new challenges and opportunities to companies, which result in the rise of significant risks, such as employees inadvertently leaking sensitive company information, criminal hackers and multiple platforms creating more access to viruses, malware and phishing. IA’s business insight and control expertise play an important role in providing awareness on how social media can be better managed across the organization and identifying and evaluating threats brought by social media to the organization’s information security protocols.

BUILDING TRUST IN A CLOUD ENVIRONMENT

Cloud computing has become a force in the marketplace and has become common as companies seek cost reductions and streamline operations. When systems are moved to the cloud and managed by third parties, due diligence related to controls are often missed out. Use of cloud computing presents certain risks that need to be considered when IA designs its audit procedures. Examples include infrastructure and architectural risks (ability of providers to achieve agreed performance), regulatory and compliance risks (transparency in security controls), contractual risks and business continuity risks among others. IA’s role is vital in evaluating whether proper governance is in place, adequate information security policies and practices exist, and clear metrics are documented to assess a service provider’s performance.

INCREASING IMPORTANCE OF CYBERSECURITY

The increased reliance on information emerging from technology-driven channels also increases technology-based risks. Greater ease of access to information is now the new normal, and companies need to find the balance between enabling technology and protecting assets from malicious individuals. As discussed in previous articles in this column, cybersecurity risks are a challenge for every company. Companies, regardless of size, are often targeted for their intellectual property. Given the heightened cybersecurity threats environment, companies need to upgrade existing controls in anticipation of worst case scenarios. In this area, IA will be significant in evaluating the company’s information security programs, the adequacy of the company’s incident-handling process in identifying potential vulnerabilities and threats, and the management of access to critical information and privacy.

KEEPING PACE – IA OF THE FUTURE

IA is only one of many business functions now being transformed by data, technology and innovation. Automation frees up resources so that they may be put to better use. While having in-house IA knowledge of technology generally makes operational sense, applying strategic partnerships to areas such as data analytics and robotics may yield better results.

IA leaders can continue to stay relevant to stakeholders and drive effectiveness and efficiencies for the company by rethinking audit delivery through investment in digital enablers such as RPA and optimizing the use of analytics in execution. The rise of new audit topics and the application of new tools require reinventing the future of talent as well. The required skills of an IA professional will now shift from pure audit expertise to those that address industry insight, technology advancement, and cultural adaptation. IA leaders should align these skillsets when recruiting new talent. While some skills may be developed internally, companies can also consider tapping an external flexible work force using co-source consultants or external subject matter resources so that internal talents can be refocused to higher impact audits.

IA must balance its priorities and resources to help organizations address the risks companies face today, anticipate emerging risks and stay in or ahead of the game. IA needs to adapt to today’s rapidly changing business environment and leverage on the newest developments in order to stay ahead of the curve. To give an old saying a new twist — necessity, after all, is the mother of reinvention.

Christiane Joymiel C. Say-Mendoza is an Advisory Partner of SGV & Co.

SGV tabulates votes in Miss Global Philippines, Miss Philippines Earth and Miss Earth pageants

SGV was the official tabulator of the 2017 Miss Global Philippines, Miss Philippines Earth and Miss Earth beauty pageants.

Transaction Advisory Services Head and Market Group 2 Leader Ramon Dizon led the SGV team that independently tabulated the judges’ scores for the Miss Global Philippines 2017 pageant held at the Newport Performing Arts Theater, Resorts World Manila in Pasay City. Miss Global Philippines is a tourism- oriented pageant which aims to provide support to government initiatives in the promotion of Philippine tourism, in both international and local markets, through the concerted efforts of the organization and the pageant’s eventual winners. Completing the team were Mariecris Barbaso (MNB), Ernesto Clarin, Richard Ragragio, Luigi Bacarro, Nomelito Flores, Claudette Nicolai Peralta, Angela Isabel Calimlim, Julius Ceasar Mercado, Hazel Mae Baggay, Precylou Burburan, Aryana Nicola Martinez and Rheyma Tamaray.

Mary Ann Mungcal of Arayat, Pampanga bested 21 other candidates and was crowned Miss Global Philippines 2017, succeeding Miss Global Philippines 2016 Camille Hirro. She is the Philippines’ representative to the Miss Global 2017 pageant.

The Miss Philippines Earth 2017 pageant was held at the Mall of Asia Arena in Pasay City. Already on its 17th year, the environmental advocacy-driven beauty pageant seeks to promote environmental awareness and protection, as well as tourism.

TAS Head and MG2 Leader Ramon Dizon led the SGV team in conducting an independent tabulation of the scores cast by the judges. Completing the team were Mariecris Barbaso, Allan Ocho, Elvin Mercader, Crystal Aleli Cornell, Ma. Isabel Herrera, Andrea Bernardo, Kevin Lelis, Jamil Lumbang, Pamela Gale Baldosano, John Lorenz Marquez, Anna Isabel Sablan, Angelu Daphne Villanueva, Bea Luzia Ebreo and Roylene Jane Asuero.

Karen Ibasco from the City of Manila was crowned as the new Miss Earth Philippines. Karen succeeded Miss Philippines Earth 2016, Loren Artajos.

SGV was the official tabulator during the Miss Earth 2017 pageant held last November 4, 2017 at the Mall of Asia Arena in Pasay City. Apart from a strong emphasis on environmental protection programs, the pageant aims to showcase and promote various tourist destinations.

TAS Head and MG 2 Leader Ramon Dizon led the SGV tabulation team. Completing the team were Mariecris Barbaso, Allan Ocho, Johnny Ang, Crystal Aleli Cornell, Elvin Mercader, Ma. Isabel Herrera, Carlo Bryan Cortez, Denise Michel Bones, Brent Matthew Ng, Patricia Anne Arriola, Ma. Sheralyn Peroche, Marla Eunice Sasis, Pamela Gale Baldosano, Anna Isabel Sablan, John Lorenz Marquez, Luigi Bacarro, Paul Vincent Montenegro, Angelu Daphne Villanueva, Bea Luzia Ebreo, Roylene Jane Asuero and Julius Ceasar Mercado.

Karen Ibasco from the Philippines was crowned as the new Miss Earth 2017. Karen succeeded Miss Earth 2016, Katherine Elizabeth Espin from Ecuador.

FSO staff members pass SOA actuarial exams

A senior associate and three associates from the FSO Advisory team recently passed actuarial exams administered by the Society of Actuaries (SOA), a US-based organization of actuaries.

Senior Associate Lino Carandang passed Exam MLC/3L (Models for Life Contingencies). It covers the core actuarial mathematics, particularly calculation of premiums and reserves, contingent payment models, and application of these models to insurance and other financial risks. MLC is one of the toughest exams among the five foundational exams of the SOA.

Associate Vincent Ty passed Exam MFE/3F (Models for Financial Economics) and Exam C/4 (Construction and Evaluation of Actuarial Models). Exam MFE covers the valuation of financial instruments, particularly options, and how these financial models are applied to insurance and other risks. Meanwhile, Exam C introduces a variety of statistical models and methods used in actuarial modeling.

Associate Mark Camilo Mamaril passed Exam P/1 (Probability). Exam P aims to develop knowledge of the fundamental probability tools to quantitatively assess risk.

Associate Wayne Fuentes passed Exam FM/2 (Financial Mathematics). This examination aims to provide an understanding of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows.

Passing the SOA exams is one of the prerequisites of the Actuarial Society of the Philippines (ASP) to become a qualified actuary in the country.

Congratulations, Lino, Vincent, Mark and Wayne!

Assurance manager completes BAP Treasury Certification Program

Assurance manager Anna Karissa Cabanisas successfully completed the 78th Banker’s Association of the Philippines (BAP) Treasury Certification Program from 18 September-4 October, in which an examination took place on the last day.

Held by the BAP in coordination with the Ateneo de Manila University Center for Continuing Education, the program standardizes the minimum working knowledge requirements for foreign exchange and money market dealers to be at par with their ASEAN counterparts; upgrades the level of market professionalism, specifically compliance with the Code of Ethics and Market Practices for treasury dealers to approximate international standards; and provides the impetus for treasury dealers to pursue the ACI diploma–the global standard for dealers.

Congratulations!

Uratex Chair and CEO wins EOY Philippines

Chair and CEO of Multiflex RNC Philippines, Inc. (Uratex) Natividad Cheng was named the Entrepreneur Of The Year Philippines (EOYP) in the recent 2017 Entrepreneur Of The Year awards banquet. She was also named the Master Entrepreneur Of The Year. Co-Founder and Chief Brand Officer of Happy Skin Cosmetics Rissa Mananquil Trillo was named the Women Entrepreneur Of The Year; Founder and CEO of Fruitas Holdings Inc. Lester Yu was named Emerging Entrepreneur Of The Year, and President and CEO of Cebu Landmasters, Inc. Jose Soberano III was named Industry Entrepreneur Of The Year.

The awards banquet was the culmination of an eight-month search that was launched last February with the theme Igniting Innovation. There were 19 finalists who vied for the awards.

EOYP Natividad Cheng will represent the Philippines in the World Entrepreneur Of The Year event in Monte Carlo, Monaco in June 2018.

Disruption and corporate training

SUITS THE C-SUITE By Jennifer Jeanne S. Lim Bok-Uyking

Business World (12/11/2017 – p.S1/4)

In a professional services organization like SGV, we recognize that developing talent in all its forms is integral to our underlying objective of building a better working world. With businesses evolving rapidly, we understand how training our people well is vital to our ability to deliver the quality audits and exceptional service that our clients deserve.

This is particularly true in light of the regular disruption that is happening across the global business environment. Digitalization and the rise of the millennials are some of the forces that drive the current wave of disruption.

In order to deliver new value to customers, companies are transforming their business models by using digital technologies. We have seen the unprecedented rise of e-commerce, with retailers seeking to improve the performance of their brick-and-mortar stores by using digital channels. This, in turn, has led to opportunities for retailers to create new customer experiences, such as allowing customers to customize their orders and providing recommendations based on the customer’s historical purchases. While these new business ideas are propelling growth, they are also posing new risks to the companies. This is the reason why digitalization is high on the agenda of the C-suites of every company.

Another important force that drives the current wave of disruption is the rise of the millennial work force. According to a report released by the Philippine Statistics Authority in September, the largest group of employed persons (about 26.6%) is between 25 to 34 years. The second largest group of employed persons was the age group 35 to 44, making up 23.1% of the total labor force. This is followed by the age group 15 to 24 with 16.7%. In the Philippines, if we look at the current labor force, millennials take up 43.3% of our labor force. Understanding this statistic is important because each demographic cohort is typically defined by unique characteristics — each have different needs and respond to different motivational triggers.

Disruption can bring about both opportunities and threats. Nevertheless, disruption is an inevitable phenomenon. How well a company can cope or take advantage of this opportunity depends on how well-equipped its people and leaders are. They need to be as dynamic as the changes and the complexities that organizations face. They need to be able to adapt and learn new things very quickly. This includes how an organization looks at enhancing or developing the skills of its people.

Case in point, EY Global, of which SGV is a member firm, undertook a transformation journey to “disrupt” the way we train and develop our people, particularly in our Assurance practice. This is in response to the changes in the business landscape and the demographics of our work force. The aim is to prepare our auditors to be more agile and more adaptable to changes. This project paved the way for what EY now call the Audit Academy. In this project, auditors were gathered from different areas and regions to develop courses tailored for a new generation of auditors. Working closely to identify, address and anticipate complexities in our evolving working environment and common pain points encountered, the team designed transformative learning solutions to help our people on the ground perform better.

The Audit Academy identified five key change points:

• “What to think” versus “how to think.” The core principle of the Audit Academy is finding the right balance of teaching people not just “what to think” but also “how to think” — the critical thinking, creative thinking and systemic thinking required to make good decisions and exercise professional judgment.

• The right learning solution. The Academy uses blended-learning solutions including self-paced learning, simulations and gamification to deliver the right content in the right form and at the right time. It recognizes that the typical instructor-monologue style of training is outmoded. It also recognizes that extremely long courses are no longer effective. Therefore, the Academy developed bite-sized courses deliver just in time to ensure proper consumption of learning. Modern training needs to proactively engage the millennials and deliver the right motivational triggers.

• Mental model shifts. In simple words, a mental model is the lens through which a person sees the world. Every role in an organization requires a specific set of mental models. When someone transitions from one role to another, a mental model shift should happen. Our training programs were designed to proactively help learners to stop, think and re-evaluate their mental models. Activities were designed to allow them to analyze situations, apply their theoretical knowledge and challenge their old practices.

• Asking better questions. In traditional lecture-style training, instructors are commonly comfortable doing the presentation and providing the learners with all the solutions. In the Audit Academy, we train facilitators to pose intelligent and relevant questions to the learners to help them reach their own insights into how to eliminate their limiting beliefs and adjust their own thinking or behavior.

• On-the-job learning. We continue the learning in Audit Academy on the job by providing the right experience and coaching to our people. There is real application of learning as they work where the auditors are challenged but guided. This helps our people actively apply the learning to real-world situations, thereby enhancing their personal development.

Most organizations today understand the competitive value of training its people, whether in-house or through external providers. However, we should also keep in mind that training is not just an exercise but it should rise from a deep and embedded culture of continuous learning that is part of an organization’s corporate DNA. At the same time, training should be fluid enough to continuously adapt to changing business needs so that the professionals we are developing are taught not just “what to think,” but more importantly, “how to think.”

Jennifer Jeanne S. Lim Bok-Uyking is a Senior Director of SGV & Co.

Effective reporting of expected credit loss estimates under IFRS 9

SUITS THE C-SUITE By Geraldine Rose V. Ogerio

Business World (12/18/2017 – p.S1/4)

INTERNATIONAL Financial Reporting Standards (IFRS) 9, the replacement standard for International Accounting Standards (IAS) 39, Financial Instruments: Recognition and Measurement, is slated for mandatory adoption by entities starting Jan. 1, 2018. A key change in IFRS 9 is the introduction of a new impairment model — the Expected Credit Loss (ECL) model. The ECL model, which replaces the incurred credit loss model under IAS 39, incorporates forward-looking information in measuring impairment loss on financial instruments, with the aim of providing timely and more useful information about an entity’s expected credit losses to the users of financial statement.

In June 2016, the Global Public Policy Committee (GPPC), which comprises representatives from the six largest accounting networks, issued a paper which describes the key components of the implementation of the ECL model and provides guidance to audit committees in evaluating a bank’s progress during the implementation and transition phase.

In July 2017, the GPPC issued a second paper focused on the major components of the ECL estimation process and implications for banks and auditors to consider, and the audit committee’s role in evaluating the effectiveness of the auditor’s response to the risks of material misstatement posed by ECL estimates.

The estimation of ECL under IFRS 9 will be a significant change in a bank’s financial reporting. Given the importance of banks in the global capital markets, it is critical for bank management teams, audit committees and auditors to develop reliable and reasonable estimates of ECL and to ensure the completeness, reliability and accuracy of financial statement disclosures. It also highlights the need for auditors to perform high-quality audits on ECL estimates so that the users of financial statements can rely on these estimates and disclosures.

In order for users to better understand and evaluate the judgments used in ECL estimations, banks will need to base their disclosures on the following elements: accounting policies, operational procedures and systems of internal control, information systems and data, and estimation models.

ACCOUNTING POLICIES

The bank should ensure that its accounting policies completely capture the applicable requirements of IFRS 9 to help users understand the key decisions, judgements and interpretations applied by the bank. Moreover, the bank should consistently apply its accounting policies and periodically reassess the appropriateness of its accounting policies for any changes that may be relevant in the estimation of ECL.

OPERATIONAL PROCEDURES AND SYSTEMS OF INTERNAL CONTROL

The bank should have effective internal controls over the critical sources of information, processes and models upon which the ECL estimates are based. They should address the following:

· The appropriateness of its accounting policies and conformity with the requirements of IFRS 9;

· The completeness, accuracy, relevance and reliability of historical and forward-looking information obtained from internal and external sources;

· The development, maintenance and validation of estimation models used to determine the ECL amount, including the appropriateness of any adjustments or overlays;

· The controls in place to review the ECL estimates used, including controls designed to identify and mitigate potential management bias; and,

· The completeness, reliability and accuracy of financial statement disclosures on ECL estimates.

INFORMATION SYSTEMS AND DATA

The bank should have a robust governance process over its information systems development and implementation, including post implementation changes. The information systems should have automated controls (or manual controls if no automated controls are embedded into the information systems) to ensure the completeness and accuracy of information and the reliability of the information systems’ processing logic.

ESTIMATION MODELS

The bank should have a comprehensive framework over the model development and model validation, including policies and procedures outlining roles and responsibilities, and on model adjustments or overlays, to ensure that the models generate accurate, consistent and predictive estimates. The bank’s model validation process may include the evaluation of the model’s mathematical, theoretical or conceptual soundness, including the appropriateness of model parameters and completeness and accuracy of the model’s data, and the continued appropriateness of the models by performing back testing, stress testing and benchmarking. Model inputs must also be relevant, reliable and appropriate in the context of IFRS 9.

Accordingly, these elements will be the auditors’ key areas of focus when auditing a bank’s estimation of ECL:

· Assess the risks of material misstatement associated with the bank’s ECL estimates by gaining an understanding of the bank’s ECL estimation process, including the internal controls and information systems used in the ECL estimation process and testing the design and operating effectiveness of the key controls identified;

· Engage IT experts to evaluate the operating effectiveness of Information Technology General Controls (ITGCs) over the applications used in the bank’s ECL estimation process, which include testing the ITGCs over logical access and program change management;

· Identify the significant judgments and assumptions used by the bank that give rise to the risks of material misstatement on ECL estimates (e.g., assessment of significant increase in credit risk in a particular portfolio, selection of estimation models, use of overlays, selection and relative weighting of forward-looking economic scenarios);

· Design appropriate audit procedures to address the identified risks of material misstatement posed by the degree of complexity, extent of management judgment and estimation uncertainty in determining the ECL amount;

· Apply professional skepticism throughout the audit by developing independent estimates, performing sensitivity analyses, back testing and benchmarking, and examining subsequent events to evaluate the reasonableness of ECL estimates, assessing and reviewing the bank’s controls in mitigating potential management bias (e.g., management override of internal controls), critically evaluating all available audit evidence, and assessing the appropriateness and accuracy of the bank’s responses to questions; and,

· Assess the completeness, reliability and accuracy of financial statement disclosures, including the disclosures on the accounting policies applied by the bank, key assumptions used in ECL estimates and the credit risk in the bank’s portfolios.

As banks’ management teams prepare for the transition to and adoption of IFRS 9, audit committees will play a significant role in ensuring that banks produce high-quality estimates of ECL, financial statement disclosures and evaluating the effectiveness of the auditor’s response to the risks of material misstatement posed by ECL estimates. Audit committees will need to assess and monitor the effectiveness of auditors by considering whether auditors have the appropriate skills, knowledge and resources to address the risks involved in the bank’s estimation of ECL, assessing the appropriateness of the planned audit approach, as well as any deviations from the planned audit approach during the course of the audit, and evaluating the auditors’ findings based on the auditors’ understanding of the bank’s processes, systems and controls.

Looking ahead, the GPPC anticipates the evolution of general banking practices regarding the estimation of ECL because of new challenges and insights that may arise. In this context, banks, regulators and auditors will need to continuously monitor upcoming developments and assess any effects and changes on their respective responsibilities.

Suits the C-Suite resumes on 8 January 2018. Warmest greetings of the season and a happy New Year to all our readers!

Geraldine Rose V. Ogerio is a Senior Director of SGV & Co.

SGV Cebu helps light up homes

SGV Cebu partners and staff, supported by the SGV Foundation, partnered with JCI Cebu Philippines to extend a hand in lighting up households in Caohagan Island through the Light Up Cebu Project. This project aims to promote renewable energy in off-the-grid communities by installing solar panels to light homes.

Caohagan Island, with a population of approximately 700, has electricity only from 6 p.m. to 10 p.m. each day, leaving residents in darkness for the rest of the night, and greatly affecting the study times of the young students on the island.

Twenty-one honor students of Caohagan Elementary School were selected to be beneficiaries of this project, which provided each of their households with a solar panel as a reward for their diligence in studying despite the absence of light. The project aimed to provide the hope of a brighter future for these children to maximize their potential and reach their dreams – all the while promoting the use of renewable solar energy, helping in the fight against climate change.

SGV Cebu tabulates for Globe media tilt

On its sixth year of promoting excellent and responsible journalism and upholding its commitment to sustainable development, Globe Telecom, Inc. selected SGV Cebu as the official tabulator for the 2017 Globe Media Excellence Awards (GMEA) Visayas leg.

The awards night was recently held at the Radisson Blu Hotel, Cebu City. Globe Telecom, Inc., through GMEA, anchored on its commitment to promoting the United Nations Sustainable Development Goals covering four focus areas: Care for the Environment, Innate Care for our People, Positive Societal Impact and Digital Nation.

SGV Cebu Assurance partner Gen Arevalo led the SGV team that conducted the independent tabulation of scores. Completing the team were Ian Jayme, Jowls Acuña, Jasper Amorin and Kerwin Tabiliran. SGV Cebu has been the official tabulator of GMEA for five years.

FIDS professionals acquire certifications

Senior Associate Ma. Kristina Libres and Associate Gian Franco Evidente recently passed a data analytics examination and are now Tableau Desktop 10 Certified Professionals.

Meanwhile, Associate Adrian Perez underwent a computer forensics training course and is now a Certified Computer Hacking Forensic Investigator V9.

Good job, Kristina, Gian and Adrian!

Congratulations to our new CSRAs!

Services (CCaSS) partners Clairma Mangangey and Ian Canlas, as well as Senior Director Katrina Francisco, recently passed the Certified Sustainability Reporting Assurer (CSRA) course held last September 2017 in Jakarta, Indonesia.

Offered by the National Center for Sustainability Reporting (NCSR), the CSRA is a professional certification program in the field of Sustainability Report Assurance using the AA1000 Assurance Standard (2008). This is the 9th batch of certification courses held in Indonesia. SGV is now an AA Licensed Assurance Provider.

Kudos, CTM, JMC and Ina!

JMC elected 2018 IIAP President

Advisory partner Ian Canlas has been elected President of the Institute of Internal Auditors Philippines (IIAP) for the calendar year 2018. The IIAP aims to develop and promote internal audit, having a vision of being a globally recognized organization and valued for having IA professionals who are indispensable to effective governance, risk management and control.

Congratulations, JMC!

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Are productivity incentive schemes benefits considered De minimis or other benefits? By Hentje Leo L. Leaño November 27, 2017

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Reinventing internal audit in the age of disruption By Christiane Joymiel C. Say-Mendoza December 4, 2017

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SGV tabulates votes in Miss Global Philippines, Miss Philippines Earth and Miss Earth pageants

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FSO staff members pass SOA actuarial exams

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Assurance manager completes BAP Treasury Certification Program

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Uratex Chair and CEO wins EOY Philippines

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Disruption and corporate training By Jennifer Jeanne S. Lim Bok-Uyking December 11, 2017

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Effective reporting of expected credit loss estimates under IFRS 9 By Geraldine Rose V. Ogerio December 18, 2017

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SGV Cebu helps light up homes

SGV Cebu helps light up homes

SGV Cebu tabulates for Globe media tilt

SGV Cebu tabulates for Globe media tilt

FIDS professionals acquire certifications

FIDS professionals acquire certifications

Congratulations to our new CSRAs!

Congratulations to our new CSRAs!

JMC elected 2018 IIAP President

JMC elected 2018 IIAP President