COVID-19 and its accounting implications

Business World | July 20, 2020

Suits The C-Suite By Ma. Emilita L. Villanueva

(Second of two parts)

In last week’s article, we discussed the challenges of assessing an entity’s status as a going concern, accounting for financial instruments, impairment of non-financial assets and revenue recognition. This week’s article will provide brief discussions on inventory costing and valuation, addressing onerous contracts and assessing whether events surrounding the pandemic and the resulting developments are adjusting or non-adjusting events.

INVENTORY COSTING AND VALUATION
Inventories are required to be accounted for at the lower of their cost or net realizable value (NRV). The pandemic and resulting government measures have caused certain entities to reduce their usual production volume, with some completely stopping production during the second quarter. These entities may need to revisit the cost of their inventories. This is particularly true for those manufacturers that allocate fixed production overheads based on normal production capacity. If the production volume of these entities are lower than what was determined to be “normal capacity,” the fixed production overhead should not be allocated to the units produced as this will unduly inflate their costs. Rather, any unallocated fixed production overhead will need to be expensed as incurred.

Determining the NRV (or the selling price less cost to sell and/or cost to complete) is another matter as this entails estimation on the part of management. The pandemic may have resulted in reduced demand for the entities’ goods, which in turn will cause the entities to decrease their prices. In such a case, entities will have to determine whether they need to write down the cost of their inventories to NRV. In other cases, entities with goods that are perishable may even find themselves disposing of their products that they are unable to sell, thus resulting in the write off of these inventories.

In all of the above, entities will need to also consider making additional disclosures to further describe the impact of the pandemic in their inventory costing and valuation.

ONEROUS CONTRACTS
Onerous contracts are defined under PAS 37, Provisions, Contingent Liabilities and Contingent Assets, as contracts where the “unavoidable costs of meeting the obligations… exceed the economic benefits expected to be received.” If a contract is found to be onerous, PFRSs require the entity to recognize a provision for such a contract and even possibly recognize an impairment on the related asset or assets.

With the disruption in supply chains brought about by the pandemic, entities will need to consider whether their contracts are onerous and if there is any need to quantify and recognize any compensation or penalties from these contracts. For example, a manufacturing entity has to shut down its facilities as required under ECQ. The entity, however, has contracts to sell goods at a fixed price, which may force the entity to procure the goods from another party at a significantly higher cost. The entity will need to review its contracts to determine if there are any compensation or penalties if the entity is unable to fulfill its obligations. The entity will also need to check if there are any special terms that may relieve the entity from its obligations (e.g., force majeure). If the entity can cancel the contract without paying any compensation or penalty to the other entity, the contract is not onerous. Thus, the entity will not need to recognize any provision or impairment losses under the contract.

EVENTS AFTER REPORTING DATE
Events after the reporting period (or balance sheet date) are favorable or unfavorable events that “occur between the end of the reporting period and the date when the financial statements are authorized for issue.” Such events may be adjusting events (i.e., they have an impact on the financial statements) or non-adjusting events (i.e., they have no impact on the financial statements but may have an impact in terms of the disclosures). Events after the reporting date are adjusting events if they “provide evidence of conditions that existed at the end of the reporting period.”

Management needs to exercise critical judgment in order to assess if the events surrounding COVID-19 are adjusting or non-adjusting events. If the events are adjusting events, the entity will need to make the necessary changes (e.g., recognize provisions for court cases existing at the end of the reporting period but were subsequently settled, recognize impairment loss on receivables for customers that declared bankruptcy after the balance sheet date, etc.) in the amounts recognized in the financial statements. If the events are non-adjusting events, the entities will then need to assess if the impact is material. If such is the case, they must make the necessary disclosures in their financial statements.

DISCLOSURES (FOR INTERIM REPORTING PURPOSES)
The abovementioned implications carry with them the corresponding disclosures required by the relevant standards. However, entities that are required to prepare interim financial statements will also need to consider the required disclosures under PAS 34, Interim Financial Reporting. Under this standard, an entity should disclose events or transactions that have significant impact on its balances since the end of the last annual reporting period. Some examples of these events and transactions are those that impact the valuation of financial assets, such as equity or debt instruments, any loan default or breach of a loan agreement.

Since the disclosures under PAS 34 are basically updates of the disclosures or information presented in the most recent annual reporting period (i.e., Dec. 31, 2019), entities should also consider the extent of information they presented in the annual financial statements. However, since the local impact of the pandemic was felt only in the latter part of the first quarter of 2020, it is possible that this information may not have been included in the 2019 annual financial statements. Entities will then need to include more comprehensive disclosures in their interim financial statements.

ACCOUNTING CHALLENGES FROM COVID-19
This article briefly touches on some of the challenges COVID–19 poses in preparing financial statements. These challenges may differ from entity to entity and as developments surrounding the outbreak continue to evolve, but there can be no denial that all entities will feel the pandemic’s repercussions on people’s lives and the economy. Entities will thus need to be constantly alert to the implications of the outbreak on their financial statements.

This two-part article is the first of a series covering the accounting impact of the coronavirus outbreak. Other articles that will follow will provide more in-depth discussion on certain areas such as impairment and revenue recognition.

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

Ma. Emilita L. Villanueva is a Partner from the Assurance Service Line of SGV & Co.

JMC speaks at IIAP webinar

SGV Consulting Partner and EY ASEAN Consulting Quality Leader Joseph Ian M. Canlas (JMC) was one of the panelists at a webinar titled Benefits and Challenges of Continuous Auditing hosted by the Institute of Internal Auditors Philippines (IIAP). Other panelists and participants included risk, compliance and governance professionals in the Philippines.

The webinar covered the benefits and challenges of continuous auditing, its effects on organizations, and its difference from continuous monitoring. Drawing from his experience as an internal audit professional, JMC provided tips and techniques on how companies can implement continuous auditing to positively impact their organizations. He discussed how a technology-driven continuous auditing program can help organizations detect fraud and errors, accomplish compliance with regulatory guidelines and policies, and minimize cost while increasing productivity and effectiveness. He also emphasized the difference between continuous auditing and continuous monitoring as explained in the Global Audit Technology Guide of the Institute of Internal Auditors. Continuous auditing is primarily a method used by auditors while continuous monitoring is overseen by management functions. However, with proper coordination between the two activities, continuous auditing and monitoring can more effectively identify the gaps and weaknesses in risk management and control, and create a more responsive environment.

Consulting Partners join EY Sri Lanka webinar

SGV Consulting Partners Christiane Say-Mendoza (EY ASEAN Risk Competency Leader) and Ian Canlas (EY ASEAN Consulting Quality Leader) were among the speakers at a webinar titled Building Resilience through Risk Management hosted by EY Sri Lanka. They led the discussion on the areas that companies have focused on during the pandemic and the significant role of internal auditors in working with management throughout the crisis. They also shared insights on the planned initiatives of various internal audit departments aimed to respond to the pandemic’s various challenges. 

Other speakers included EY Sri Lanka Consulting Partner Ranil de Saram and EY ASEAN Cybersecurity Leader Gerry Chng. Ranil presented insights from the Sri Lankan market about the pandemic’s effects on different industries. He also discussed the key areas of concern companies may consider when managing risk. Gerry provided an overview of the pandemic’s effect on cybersecurity.

EY Sri Lanka Consulting Principal Brian Goudian moderated the session. Participants included audit committee members, chief financial officers and chief audit executives from various industries and conglomerates in Sri Lanka.

CCaSS organizes EHS and ERM webinar

SGV’s Climate Change and Sustainability Services (CCaSS) team conducted a webinar on COVID-19 Environment, Health & Safety (EHS) and Enterprise Risk Management (ERM) considerations last 25 June. SGV Chairman and Country Managing Partner Wilson Tan welcomed over 350 participants from the real estate, hospitality, construction, power and utilities, consumer products, retail, and banking industries. Vice Chair and Deputy Managing Partner Vivian Ruiz provided an overview of the webinar’s main agenda and points of discussion.

CCaSS Senior Director Katrina Francisco began the session with an overview of the community quarantine measures implemented in the country. FAAS and CCaSS Partner Benjamin N. Villacorte (BNV) discussed the EHS considerations, key regulatory responses for EHS, and the EY EHS Maturity Model. SGV Consulting Partner and EY ASEAN Consulting Quality Leader Joseph Ian M. Canlas (JMC) spoke on ERM and its related sustainability risk considerations. He also emphasized the value of a well-designed ERM function in sustainability risk management.

BNV, JMC and Ms. Francisco then led an open forum where they discussed how companies can develop and sustain their EHS practices and how sustainability risks can be considered in a company’s ERM across three dimensions: now, next and beyond. They explained that companies should assess and address the pandemic’s immediate problems; explore the possible changes to the company’s EHS and ERM strategies and processes; and prepare for future crises by prioritizing areas that boost business resilience. 

The SGV CCaSS team supports organizations as they develop and implement their climate risk and sustainability strategies. The team’s services cover sustainability and supply chain advisory, non-financial and sustainability reporting advisory and assurance, EHS, sustainable finance, and climate change risk analysis and advisory.

Consulting holds CAE roundtable sessions

SGV Consulting held a series of virtual roundtable sessions titled Maintaining Trust through COVID-19 for selected Chief Audit Executives (CAEs) and Internal Audit (IA) heads. During each session, SGV and CAE participants shared insights on topics related to how organizations and their IA departments have responded to the pandemic across three dimensions: Now: Managing the Crisis, Next: Restarting the Business, and Beyond: Building Resilience for the Next Crisis.

SGV Chief Risk Officer, Consulting Markets Leader, and EY ASEAN Regional Risk Management Leader Leonardo J. Matignas Jr. (LJM) and EY ASEAN Risk Competency Leader and SGV Consulting Partner Christiane Say-Mendoza discussed the challenges that organizations are facing due to the pandemic, their responses, and the areas of focus during crisis management. LJM mentioned how some CAEs reached out to him for leading practices and business playbooks to address the situation. The speakers also shared insights on how IA professionals and their organizations are responding to the challenges of working under the new normal, a time when community quarantines are imposed, and operations are disrupted.  

SGV Business Consulting Leader Ryan Chua discussed how organizations are managing their operations with the gradual lifting of community quarantine measures. He also provided insights on the expected challenges and potential new areas of focus that organizations may consider as they restart their businesses and the ongoing and planned initiatives of IA to address emerging risks.

EY ASEAN Consulting Quality Leader and SGV Consulting Partner Ian Canlas discussed building resilience for the next crisis. He talked about the future of IA operations after the COVID-19 disruption, how companies are coping with the new normal and maximizing the use of technology. The participants were also given the chance to share their own experiences and ask questions throughout the session. Over 30 CAEs from local and international companies participated in the roundtable sessions, including members from the banking, power and utilities, insurance, and manufacturing industries, among others.

Tax team hosts PCS webinar

The Private Client Services (PCS) group of SGV Tax hosted a webinar titled Tax Insights: Wealth Planning Considerations for Dual Citizens on 10 July. The roundtable discussion provided insights on succession planning, wealth management, and the process of setting up a trust and its various tax implications. These include the tax impact of being a beneficiary of a trust and the marital property regimes under the Family Code of the Philippines.

Speakers included EY ASEAN and SGV Business Tax Services Leader Jules Riego; EY US Tax Principal Marianne R. Kayan; EY ASEAN Tax Leader, Asia-Pacific Private Family Enterprise Leader and Private Tax Partner Desmond Teo; Atlas Asia Law (Singapore) Director Benjamin Szeto; and EY ASEAN US Tax Help Desk Senior Manager Michael Xiang. SGV Tax Partner Cheryl Ong moderated the session.

Over 180 participants attended the webinar, including business owners who are dual citizens or have family members who are dual citizens. The event’s organizing team included Tax Partner Thyrza Marbas, Tax Director Anne Margaret Momongan, and Tax Associate Directors Marian Kris Santos and Rosalie Nuñeza.

Impairment considerations during COVID-19

Business World | July 27, 2020

Suits The C-Suite By Meynard A. Bonoen

(First of two parts)

The unprecedented disruption caused by the COVID-19 pandemic has brought economies to a standstill — shutting down markets, halting international and domestic trade, forcing businesses to close, and displacing workers on a massive scale. Governments are grappling with the situation, struggling to come up with measures to combat the disease and preparing record stimulus programs to help keep their respective economies afloat while balancing this against the need to protect their citizens. This pandemic has reset the way we live, dictating what is considered the new normal, and drastically impacting financial markets around the world.

It is turning swiftly into a critical situation, notably for industries such as travel, hospitality, retail and entertainment. Financial markets are reeling and businesses have had to shut down with revenue reduced to zero, dwindling cash, overdue debt, limited accessible to capital, and assets that have become stale, unusable and unproductive. This begs the question: Is there still value left for businesses and the assets that remain in their balance sheets?

Companies reporting their financial performance and condition will be hard-pressed to report the influence of the pandemic on their businesses and on the value of their long-lived assets, including goodwill. These assets are the bread and butter of most companies, comprising a substantial portion of their asset portfolio. Given the unfolding impact of this crisis, there is a rebuttable presumption that the recoverability of their assets may be put into question.

The first part of our previous article published on July 13, COVID-19 Pandemic and its Accounting Implications, briefly discussed the impairment of non-financial assets. We will now discuss the sets of accounting, disclosure and financial reporting matters related to annual and interim impairment review that companies must consider.

TIMING OF ASSESSMENT
For financial reporting purposes, Philippine Accounting Standard (PAS) 36, Impairment, requires an entity to assess, at the end of each reporting period, whether there is any impairment for an entity’s non-financial assets. Non-financial assets include, among others, property, plant and equipment, intangibles, and goodwill. For goodwill and intangible assets with indefinite useful lives, the standard requires an annual impairment test and a testing of when indicators of impairment exist. The reporting period can be quarterly, semi-annual, annual or any other periods that regulations may require. An entity that is required to prepare an interim report (i.e., listed companies and public companies) needs to assess if there are any indicators of impairment or if there is a need to perform impairment testing on its assets at the end of each interim period and not only at year-end.

EXISTENCE OF IMPAIRMENT INDICATORS
Except for the mandatory annual testing for goodwill and intangible assets with indefinite useful lives, an entity must first determine if there are indicators of impairment (i.e., events or changes in circumstances suggesting that the carrying amount of an asset may no longer be recoverable). The pandemic and its corresponding effects (e.g., the Enhanced Community Quarantine) are likely indicators of impairment but the analysis should go beyond the surface. Determining indicators of impairment requires significant judgment, as well as identification of the events and circumstances that really drive and determine the value of the assets. The source of information can be internal or external. High-level indicators might include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Specific circumstances can include, among others, the decline in stock and commodity prices, fall of market interest rates, manufacturing plant and shop closures, distribution and supply chain issues, reduced demand or selling prices, and limits to accessing capital. Indicators can vary for each business and type of asset, but the assessment must be robust enough before concluding whether such indicators of impairment are present and thus require impairment testing.

PERVASIVE EFFECTS OF THE PANDEMIC
As the search for proper intervention against this pandemic continues, the more uncertain the financial market becomes. Measures must be taken to anticipate further impact from this crisis.

In the second part of this article, we continue our discussion by covering how to estimate the recoverable amount of an asset, the recognition and reversal of impairment, and providing detailed disclosure on assumptions used in impairment assessment.

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

Meynard A. Bonoen is an Assurance Partner of SGV & Co.

Tax Senior Associate inspires AdDU Law Freshmen

SGV Davao Tax Senior Associate Kristine Confesor was a guest speaker at the Ateneo de Davao University (AdDU) College of Law freshman orientation on 24 June. Organized by the College’s Supreme Student Council, the virtual orientation provided the incoming freshmen with a quick overview of the law school experience and introduced them to the faculty and key department heads.

As an alumna of AdDU who passed the 2019 bar exams, Kristine gave tips on how to succeed in law school and become a lawyer. Citing her own experiences, Kristine highlighted the contribution of her professors and the significance of their lectures. She also emphasized the value of self-discipline and explained that today’s students are faced with unique challenges created by the pandemic and must learn to adapt to the new online learning environment.

Over 4,000 participants viewed the event that was webcast via the AdDU Facebook page. Attendees included AdDU Legal Counsel Dean Manuel Quibod, Assistant Dean Jazzie Sarona-Lozare, Judge Maria Eloisa Maglana, and other faculty and staff of AdDU Law.

Impairment considerations during COVID-19

Business World | August 3, 2020

Suits The C-Suite By Meynard A. Bonoen

(Second of two parts)

In last week’s article, we discussed how to determine the timing of assessment for any impairment for non-financial assets, as well as the indicators of impairment. This article will cover how to measure and estimate the recoverable amount of an asset, how to determine the recognition and reversal of impairment, and provide detailed disclosure on assumptions used to fully understand an impairment assessment especially in these uncertain times.

MEASUREMENT
An asset is impaired when an entity is not able to recover its carrying value (i.e., the amount shown on the entity’s balance sheet) either by using it or selling it. The recoverable amount is the higher of the asset’s (or group of assets’) fair value less costs of disposal (FVLCD) and value in use (VIU).

VIU involves estimating the future cash inflows and outflows that will be derived from the use of the asset and from its ultimate disposal and discounting the cash flows at an appropriate rate. The calculation of an asset’s VIU incorporates an estimate of expected future cash flows, and expectations about possible variations of such cash flows. The forecasted cash flows should reflect management’s best estimate at the end of the reporting period of the economic conditions that will exist over the remaining useful life of the asset. This means entities should consider both short-term effects and long-term effects on assets with longer useful life, such as capital assets and goodwill.

Due to the evolving COVID-19 situation, there are significant challenges to preparing the forecast or budgets for future cash flows. In these circumstances, an expected cash-flows approach based on probability-weighted scenarios may be more appropriate than the traditional single best estimate when estimating VIU. In coming up with scenarios, entities should consider the length and severity of the pandemic, government measures, availability of proper intervention (i.e., vaccine), distribution and supply chains, revenue growth and collections, capital, changes in regulations, and changes in customer behaviors, among others.

Cash flows are discounted at an appropriate rate, which is a pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks for which future cash flow estimates have not been adjusted. The discount rate should likewise consider the price for bearing the uncertainty inherent in the asset, and other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. It is therefore highly important to exercise careful judgement when determining the discount rate to be applied.

RECOGNITION AND REVERSAL OF IMPAIRMENT
An impairment loss is recognized to the extent the carrying amount exceeds its recoverable amount. In subsequent periods, external and internal sources of information (such as significant favorable changes in the market conditions, the asset’s value, use and performance) may indicate that an impairment loss recognized for an asset, other than goodwill, may no longer exist or may have decreased. In this case, previous impairment losses may be reversed. Note, however, that an impairment reversal cannot be recognized merely from the passage of time or improvement in general market conditions. When an impairment reversal is recognized for assets other than goodwill, the adjusted carrying amount of the asset may not exceed the carrying amount of the asset that would have been determined had no impairment loss been previously recognized.

PAS 36 specifically prohibits the reversal of impairment losses for goodwill. If impairment on goodwill was determined and recognized in the interim period, it cannot be reversed in the subsequent interim periods or at year-end.

DISCLOSURE
Disclosure is particularly crucial in these times. Due to sensitivity, it is critical for an entity to provide detailed disclosures on the assumptions used, the evidence these are based on, and the impact of a change in key assumptions. Disclosures include, among others, the valuation methodology used and the approach in determining the appropriate assumptions and key assumptions used in cash flow projections aside from long-term growth rate and discount rate; the values of the key assumptions and the probability weights of multiple scenarios when using an expected outcome approach; and inputs used in determining the discount rate and the source thereof. This makes it also important to go beyond minimum disclosure requirements to help users better understand the impairment assessment.

KEY TAKEAWAY
With the COVID-19 situation, impairment assessment will be a complex and difficult undertaking. Hence, it is imperative for management to be judicious, more prudent and to employ careful judgment in making assumptions, especially when forecasting cash flows and determining the discount rate to be used.

It must be noted that cash flow forecasts may now be substantially — if not completely — different from pre-pandemic or existing budgets. Moreover, historical and comparative data may no longer be relevant and helpful in making such forecasts. Assumptions must be updated and should be drawn from and be reflective of the current pandemic circumstances.

This naturally requires a more cautious outlook for the future. As previously mentioned, the impact of COVID-19 may no longer be reflected in a single set of cash flows due to the high degree of uncertainty involved; there may be a need to develop multiple scenarios and apply probabilities to each scenario to arrive at the expected cash flows. In evaluating these scenarios, those with a downward impact on cash flows and on the value of the asset should be given more weight to reflect the market view of risk and uncertainty.

On the other hand, determining the discount rate is equally challenging given the current market volatility, and that most relevant parameters and inputs to determine discount rates have become unpredictable. Values and assumptions which were accepted, used and applied in the past and in previous impairment assessments and testing may no longer be reasonable or appropriate.

For instance, beta and cost of equity may have increased significantly due to capital market volatility; risk-free rates are reaching lows; and debt liquidity issues are severely affecting the cost of debt for many companies. That said, the risk-adjusted discount rates to be used should be calculated with serious considerations for the current market and economic conditions, the value of comparable reporting entities or assets that is available and evident in the market, and the risks of the asset or cash-generating unit to be valued.

The pandemic continues to evolve and until such time that a proper and permanent intervention is identified, there remains significant uncertainty about our future, our economy and business viability. Until then, the recoverability of most entities’ assets remains the focus and they will need to continuously reassess, recalibrate and be transparent about their assumptions and outlook for the future of their business. Disclosure is key — if not paramount — to understanding all these under the current situation.

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

Meynard A. Bonoen is an Assurance Partner of SGV & Co.

JMC leads IIAP sustainability webinar

SGV Consulting Partner and EY ASEAN Consulting Quality Leader Joseph Ian M. Canlas (JMC) facilitated a session on sustainability and climate risk at the Institute of Internal Auditors Philippines (IIAP) Risk Summit on 30 July. Over 100 internal auditors from various companies in the Philippines attended the summit, which aimed to discuss the importance of sustainability and climate change risk considerations in a company’s enterprise risk management (ERM) process.

JMC discussed research-based climate change risks and their related causes and their impact on both a local and global scale. He also explained the possible impact on the economy and gave examples of damage to the environment. He emphasized that companies should consider climate change and sustainability risks in their ERM process and provided examples of how businesses can minimize the effects of the related risks and maximize potential opportunities. He also shared some actions that the Philippine Government and different private companies are taking to address climate change issues.

KSM presents at FINEX-SAP webinar

SGV Consulting Markets Co-Leader and EY ASEAN Finance Fields of Play Leader Kathrina S. Macaisa (KSM) was one of the speakers at a webinar titled Transform to Agile by Leveraging Emerging Technologies hosted by the Financial Executives Institute of the Philippines (FINEX) and SAP on 28 July. Other speakers included executives from the banking and technology solutions industries. SGV Chairman and Country Managing Partner and FINEX Professional Development Committee Co-Chair Wilson Tan delivered the opening remarks.

KSM with other speakers at the FINEX-SAP webinar

KSM led a session titled Finance of the Future and discussed the challenges that CFOs face caused by disruptive forces such as digital transformation and COVID-19. She shared that transforming to agile goes beyond embracing tools and technology. Emphasizing the need to embrace technological innovations available in the market, KSM explained that companies also need to equip their finance functions and teams with the right tools to increase efficiency and enhance agility. She also discussed the importance of anchoring transformation programs on a vision that is aligned with the company’s overall vision and strategy. She added that companies should consider the dynamic value drivers shaping the future of finance to protect and enhance their finance functions.

Tax Partners speak at ACPAPP webinar

Tax Partners Deonah Marco-Go (DMG) and Margaux A. Advincula (MAA) facilitated a tax webinar for members of the Association of Certified Public Accountants in Public Practice (ACPAPP).

MAA kicked off the session with an in-depth discussion on what taxpayers can expect of audits conducted by the Bureau of Internal Revenue (BIR) in the new normal. She outlined the tax assessment process and explained its significant stages. She also discussed due-process requirements, assessment notices served on taxpayers, and issues raised with Letters of Authority and Assessment Notices issued by the BIR. MAA also explained tax audit-related topics, such as the rules on the issuance and enforcement of Subpoenas Duces Tecum, and key takeaways from the issuances published by the BIR in light of the COVID-19 pandemic.

Speakers and participants at the ACPAPP webinar

DMG discussed the latest tax updates and emphasized the recent BIR regulations and issuances such as RR 19-2020 which prescribes the use of the new BIR Form No. 1709. She also spoke on the provisions of RMO 21-2020 which provides the policies and guidelines for the inspection and supervision over the destruction and disposal of wastes, and obsolete goods and assets. She explained the salient provisions of each issuance, detailing its prescribed procedures — the BIR guidelines on the implementation of the forms to be used and the tasks described, and the penalties for violations of the provisions.

The session culminated with a lively question & answer period. The event brought together over 250 participants including SGV Assurance Partner and former Chairman Itos Cruz; Tax Partner Sonia Segovia; former Board of Accountancy Chair Joel Tan Torres; ACPAPP President Anita Rodriguez; and former ACPAPP Presidents Atty. Arminda Guerrero, Carlito Dimar, Jerome Antonio Constantino, and George Villaruz.

RAF joins MBC roundtable discussion

EY ASEAN Business Consulting Leader and SGV Consulting Leader Rossana A. Fajardo (RAF) was a keynote speaker at a virtual roundtable discussion hosted by the Makati Business Club (MBC).

She led a discussion on digital leadership and the habits of leaders who successfully execute digital transformation. RAF shared, “Digital transformation leaders are fully embedding digital transformation across their business. They are generating financial value from their technological innovations and making efforts to build a transformation culture – transformation is woven into the fabric of their business.”

RAF also discussed how digital leaders are responding to the challenges caused by latest disruptions and how digital transformation, collaboration and connection are critical to a company’s success after the COVID-19 pandemic. She also gave tips on how newly remote teams can leverage on different technologies to enhance collaboration and increase productivity.

MBC Executive Director Coco Alcuaz moderated the session. Participants included MBC members and executives from the private sector.

Read more about the roundtable discussion at MBC.com.

Tax conducts transfer pricing webinars

SGV’s Tax Team conducted a series of webinars on the new BIR Requirement for the Submission of an Information Return on Related Party Transactions (BIR Form No. 1709) on 29-30 July and 3 August. SGV Vice Chair and Deputy Managing Partner Vivian Ruiz and Tax Leader Fame delos Santos welcomed over 2,500 tax and finance officers to the sessions.

Speakers at the transfer pricing webinars and members of the Tax organizing team

Tax Partner Deonah Marco-Go (DMG) and Senior Manager Joyce Francisco discussed the salient features of Revenue Regulations No. 19-2020 which require the submission of BIR Form No. 1709 attached to the annual income tax returns of taxpayers covering fiscal years ending 31 March 2020 and subsequent taxable years.

Revenue Memorandum Circular No. 76-2020, which clarifies certain issues on the filing of BIR Form No. 1709, was released after the event’s second session on 29 July. Speakers discussed the salient features of RMC 76-2020 during the succeeding sessions. Each session concluded with a panel discussion facilitated by International Tax and Transaction Services Leader Romy Danao, Transfer Pricing Leader Rey Marcelo, DMG and Ms. Francisco. The event’s organizing team included Tax Senior Manager Auresana Torres, Manager Maxine Victor Manuel and other managers and staff of the Transfer Pricing Tax team.

More than just a form

Business World | August 10, 2020

Suits The C-Suite By Joyce A. Francisco

The sensitivities of the new RPT Information Return

With the drive for more transparency on related party arrangements, tax authorities worldwide have been increasing their focus on transfer pricing (TP). In the Philippines, the Bureau of Internal Revenue (BIR) has also been taking strides to strengthen its rules regarding Related-Party Transactions (RPT).

To improve the TP risk assessment and audit of taxpayers, the BIR has issued Revenue Regulations (RR) No. 19-2020, requiring the submission of a three-page Information Return on Related Party Transactions or RPT Form (BIR Form No. 1709), to be attached, together with supporting documents, to the Annual Income Tax Return (AITR). This form will help the BIR monitor taxpayer compliance with the TP documentation requirement prescribed by the TP Regulations, which the BIR issued in 2013. More importantly, the BIR will use the data gathered from the forms to select which taxpayers to prioritize for TP audits given its limited resources.

RPT FORM FILING
The RPT Form requires a granular disclosure by Philippine taxpayers, corporations and individuals alike, of all RPTs, whether international or domestic. While the filing of the RPT form is also intended to implement Philippine Accounting Standards (PAS) 24 on Related-Party Disclosures, more details, especially on the taxation aspect of income paid or received from related parties, need to be supplied in the form and its attachments as compared to the disclosure for financial reporting purposes. Thus, taxpayers must prepare the form judiciously, and merely reproducing the related-party disclosures in their financial statements may not be sufficient to comply with the requirements under RR No. 19-2020.

There is no threshold, either in terms of amount or volume, on the RPTs that should be disclosed. As the term “related parties” under PAS 24 is a broad concept, taxpayers must also take extra care to determine their relationships with other entities to ensure that all transactions with those considered as “related parties” are properly reported, and that disclosures are consistent among the entities involved in the transactions. In ascertaining whether a person or entity is a related party, the substance of relationships between entities shall be considered and not merely the legal form.

INFORMATION DISCLOSURE
Bearing in mind that one of the objectives of the RPT Form is to ensure that taxpayers are reporting their true taxable income, questions are thus raised on the level of information that may be disclosed on related-party transactions. Of particular note is the disclosure on transfer under financial arrangements, such as equity contributions. As clarified by the BIR in its Revenue Memorandum Circular (RMC) No. 76-2020, dividends and redemption of shares between and among related parties, though not usually covered by a TP documentation, should likewise be disclosed in the RPT Form. However, investments in another entity do not affect the income or expense of either the investee or investor. Hence, there is no possibility of erosion of the tax base which the BIR intends to guard against by the submission of this RPT Form.

Companies are also required to disclose in detail transactions with each member of their key management personnel even if these pertain only to salaries received during the covered year. These officers are correspondingly required to submit the RPT Form in their individual capacities. An issue to take note of is the disclosure of sensitive information, such as the names and addresses of these officers. However, the BIR emphasized that the power of the Commissioner of Internal Revenue to obtain the necessary information to ascertain the correctness of any return, or in determining the liability of any person for any internal revenue tax, or in evaluating tax compliance serves as an exception to the Data Privacy Act (DPA).

In addition to the RPT Form, taxpayers also need to submit a certified true copy of the relevant contracts or proof of transactions, withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR, proof of payment of foreign taxes, certified true copy of advance pricing agreement (if any), and any transfer pricing documentation.

CONTRACTS AND OTHER DOCUMENTS
Contracts are deemed the primary proof of the transactions with related parties. Other documents such as receipts and invoices are considered corroborating evidence only. Hence, all contracts executed by the parties to substantiate the RPTs in the covered taxable year have to be attached to the RPT Form. In case of voluminous contracts and documents, electronic copies may be submitted under certain conditions.

It is important to note that the RMC specifically mentions certain RPTs that should be covered by a formal written contract. Agreements on cost-sharing arrangements among members of a group of companies need to be submitted to prove that they are for legitimate expenses. This is in addition to documents (e.g. receipts, proof of payment) needed to substantiate the expenses. Moreover, contracts for the importation of goods or any equivalent genuine document must be submitted aside from other proof of transactions.

The TP documentation to be attached to the RPT Form should be the same documentation that the taxpayers relied upon to determine the transfer pricing prior to or at the time of undertaking the RPTs and must have been prepared contemporaneously — that is, not later than the filing due date of the tax return for the taxable year in which the transactions took place. The date of its preparation should also be indicated on the report so that the BIR can evaluate if the TP documentation was prepared contemporaneously. According to the BIR, requiring the submission of contemporaneous documentation ensures the integrity of the taxpayer’s position.

TRANSACTION DISCLOSURE
Again, since there is no threshold on the amount and volume of RPTs for purposes of the preparation of a TP documentation, a question is raised on whether all the transactions disclosed in the RPT Form should be covered by the TP documentation. As recognized in the RMC, there are RPTs that are not usually covered by a TP documentation such as dividends and redemption of shares. Transactions which do not have an impact on the revenue and taxable income of taxpayers, e.g. equity contributions, are usually not covered by TP documentation. It must be emphasized that the purpose of TP documentation is to demonstrate that the TP policies of a taxpayer are compliant with the arm’s-length principle, thereby ensuring that it is reporting its true taxable income.

Reference to the OECD TP Guidelines, which was largely adopted in the TP Regulations, may be made to determine the amount of transactions that must be included in the TP documentation. The OECD TP Guidelines suggests that a balance between the tax authority’s needs and taxpayers’ costs should be maintained in determining the scope and the extent of the information to be included in a TP documentation. Taxpayers should, thus, not be expected to go through such lengths that compliance costs for the preparation of documentation are disproportionate to the amount of tax revenue at risk or to the complexity of the transactions.

COMPLIANCE AND CONSISTENCY AMID COVID
With the COVID-19 pandemic, many companies will find it challenging to comply with this new RPT Form, faced as they are with the imposition of travel bans and lockdowns as well as the added pressures for workforce safety and well-being. Nonetheless, it would be imprudent to disregard this regulatory requirement. With the large amount of information that needs to be supplied, taxpayers must work closely with their related parties to ensure that transactions are disclosed in a consistent manner among the entities involved. Companies should also consider accelerating the digitization of their systems to more efficiently manage any information requested by the BIR.

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

Joyce A. Francisco is a Tax Senior Director of SGV & Co.

Digital transformation: A growth necessity

Business World | August 17, 2020

Suits The C-Suite By Akhil Hemrajani

The coronavirus pandemic has irreversibly altered society and the global economy. This forced companies in every sector to reflect on how they have been dealing with market forces in the past and, moving forward, how can they address the rapid shifts in consumer behavior. Some of the biggest shifts are going to be witnessed in the financial, telecommunications and retail sectors, with significantly accelerated steps taken towards digitalization.

Even before the pandemic, disruptive technology startups (created in the digital age with purely online marketplaces or platforms) that organically intensify disruption in various sectors forced industry leaders to undergo digital transformation to compete and, for some, to survive. For many entities, it has become critical to develop a digital customer experience that creates a personalized, seamless process across every touchpoint a consumer has with a brand.

For banks, COVID-19 has accelerated shifts in consumer behavior patterns, while elevating the risk of financial distress for businesses and customers. Telecommunications providers find themselves in a unique situation where they provide the very platform that so many disruptive technology startups depend upon — powering the phones that make their mobile apps possible. And yet telcos find that they too, must still digitally transform to remain relevant. Traditional retail companies find themselves in the precarious position of seeing a dramatic drop in foot traffic as consumers shift almost exclusively to online purchases.

UNDERTAKING THE DUAL TRANSFORMATION JOURNEY
Although digital transformation is multi-faceted, this segment will cover just two aspects of it.

• Increasing current customer value — This segment of the dual transformation initiative relies on companies offering better experiences and more services to its existing customers. This enhances the likelihood of “stickiness” for their customers, meaning it is more likely that those customers will continue to transact with the company, but it also increases the customer lifetime value through availing of new subscriptions and upselling/cross-selling various other products. The perfect example of this are the telcos that not only offer consumers an online platform to pay their bills but also additional services such as savings, investment products, and small ticket loans. One particular telco offers its consumers an opportunity to borrow load amounts via its digital payments app. Another telco is utilizing alternative credit scoring data to offer gadget loans to its customer base, albeit offline. Financial institutions are similarly undertaking this journey to enable customers to not only transact digitally but be able to avail of various products for their needs.

• New customer acquisition — This segment of the dual transformation journey pertains to how organizations can transform digitally, thus enabling them to broaden their customer base in cost-effective ways. For financial institutions, this is critical: 66.4% of the population in the Philippines remain unbanked or underbanked (BusinessWorld article dated May 22: “Unbanked Filipinos to decline by 2025”). Traditional financial institutions are increasingly adopting an omni channel model to enable branchless banking. Initiatives such as agency banking, virtual onboarding, and relying on alternative credit scoring models to lend to more retail customers enable banks to significantly reduce friction in reaching untapped segments. For telcos, the race to develop the next super app is imperative for them to reach new customers in a market where Internet penetration is at 67% (Datareportal Digital 2020 Report). Since new demand for traditional telco products has stagnated, they must shift to offering more innovative products through cost effective digital channels.

To execute a dual transformation strategy, it is critical for organizations to establish a viable channel strategy that can accelerate their objectives and can provide an effective route-to-market.

CHANNEL STRATEGY
To accelerate their digital transformation, traditional organizations are increasingly moving towards an omni-channel approach. This approach enables companies to cater to their customers in a more efficient and effective way by reducing overhead and expenses and marketing a new service or product to a certain geographical demographic.

Organizations such as banks, telcos and retailers can analyze data to better understand the prospective adoption rates of digital services so that they can better expand to those markets digitally rather than physically. For example, a bank can analyze which consumers in which areas are more likely to undertake simple transactions (check deposits, money transfer, cash withdrawals) to better understand which customer bases can be reached through a digital platform that offers the same service. Areas where a majority of the transactions are complex (high-value loans, wealth management services, etc.) can still be catered to via the bricks and mortar route.

Similarly, telcos can use their own data to ascertain which customers are more interested in transacting online, thereby giving the telcos more initiative to reduce overhead through shorter branch hours and fewer personnel, among others. The shift from offline to online can also be accelerated through the gamification of tasks that can tie into rewards programs, especially those catering to a more digital-savvy generation of customers. One online retailer, for example, offers additional coins or rewards points on their app in exchange for completing tasks such as watching livestreams or reviewing products. Some banks or telcos are also adopting this approach by offering reward points in exchange for additional information about their customers on their apps.

THE ULTIMATE SHIFT
As we move through challenging times because of the pandemic, it will be important to see how organizations and even countries maneuver to address the ultimate shift to the digital sphere, the timeline of which has been accelerated. Organizations need to disrupt internally to meet the future demands of changing consumer preference, behavior and real-time priorities. At the same time, governments need to promote regulations that not only encourage improvements in existing technological infrastructure, but also create an environment that strongly supports and encourages innovation. We live in troubling times, and the only way to see our way to the future is by taking the necessary steps to evolve and adapt digitally, rapidly and efficiently.

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

Akhil Hemrajani is a Consulting Senior Director of SGV & Co.

SGV Partners speak at AmCham-BLP session

SGV Partners facilitated an online session at the 2020 American Chamber of Commerce of the Philippines Inc. Business Leadership Program (AmCham-BLP) last 27 July. Selected students from different courses and universities in the Philippines attended the session.

SGV Talent Leader and Assurance Partner Julie O. Mateo (JOM) provided an overview of SGV, its services and Purpose, emphasizing the importance of aligning an SGVean’s personal purpose with the Firm’s Purpose. She encouraged participants to define their own purpose and work towards achieving it. JOM also discussed how the Firm has addressed and adapted to the disruptions caused by the pandemic. She shared how SGV is leveraging on digital platforms to encourage virtual employee engagement.

JOM and JMC with the AmCham-BLP session organizing team

Business Consulting Partner and EY ASEAN Consulting Quality Leader Joseph Ian M. Canlas (JMC) discussed sustainability and the importance of managing sustainability issues. As a global concern with social and environmental aspects, sustainability affects not only businesses but other sectors as well. He explained the opportunities to address sustainability issues and the possible risks involved if they are ignored. JMC also discussed the actions that the Philippine Government and different private companies, including SGV, are taking to address sustainability issues. He also explained the Firm’s projects and initiatives for clients and employees during the COVID-19 pandemic.

JMC and BNV with members of the organizing team during the open forum

The session concluded with an interactive open forum led by JOM, JMC and Financial Accounting Advisory Services and Climate Change and Sustainability Services Partner Benjamin N. Villacorte (BNV). They addressed questions about the Firm’s opportunities and internal programs for its people as well as queries on sustainability and climate change issues.

Business Consulting facilitates MCCI webinar

SGV’s Business Consulting Team led a webinar titled Zooming in to a Better Normal for members of the Mandaue Chamber of Commerce and Industry (MCCI) on 29 July. The webinar discussed how to effectively manage and reopen businesses during the pandemic. MCCI President Steven Yu welcomed participants to the webinar which included MCCI Vice President for Internal Affairs Kellie Ko, Event Co-Chair Walter Ong and Board of Directors Member Marc Anthony Ynoc.

Business Consulting Partner Marnelli Eileen J. Fullon (MJF) discussed a human-centered response to disruption, emphasizing that market leaders should not only focus on short-term actions to transition to the new normal but also innovate and transform their business models to adapt to the changing world. She explained the impact of the pandemic on consumer behavior and how it resulted in the emergence and transition of consumer segments. She also discussed how businesses can address employee concerns by transforming their workplace and making decisions that benefit their long-term agenda and are anchored on their organization’s purpose.

Business Consulting Partner Jan Ray G. Manlapaz (RGM) provided tips on how to achieve supply chain (SC) resilience through the key capabilities of the Prepare, Sense, and Respond Framework. He also explained the traditional global SC structure and its gaps. He then presented insights on the future of the global SC network, emphasizing the value of “coopetition” or cooperative competition between companies that form a collaborative relationship to mutually benefit both businesses.

MJF, RGM, and Maan presenting at the MCCI webinar

Business Consulting Senior Manager Mary Andrea “Maan” Bacani discussed the SC resilience capability build-out and demonstrated SC control tower scenario planning. The speakers also presented EY’s COVID-19 Enterprise Resilience Assessment Tool and its impact on SC, global trade, customer and brand.

Over 1,200 participants viewed the event which was webcast through the MCCI Facebook page. The event’s organizing team included SGV Cebu Partner-in-Charge and Tax Partner Cheryl Ong, Tax Manager Virnee Joy Agot, Business Consulting Senior Manager Paulo Lastimosa, Managers Ismael Tupaz, Karen Baraquel, Ruby Alcantara-Seville and Patrick De Leon, and Associate Venessa Villanueva.

For more information about MCCI webinars and events, please visit the MCCI Facebook page.

KSM discusses resiliency at CCCI webinar

SGV Consulting Markets Co-Leader and EY ASEAN Finance Fields of Play Leader Kathrina S. Macaisa (KSM) spoke at a webinar on building enterprise resiliency hosted by the Cebu Chamber of Commerce and Industry (CCCI) last 24 July. CCCI President Felix Taguiam welcomed nearly 50 participants to the webinar, including managers and executives from local businesses and member companies of CCCI.

KSM presented the EY COVID-19 Resilience Framework, a structured and comprehensive approach to building business resiliency during the pandemic. She discussed its nine pillars: employee health and wellbeing, talent and workforce, supply chain and global trade, customer and brand, financial and investor, risk, government and public policy, technology and information security, and insurance and legal disputes across three dimensions — now, next and beyond. She also discussed the EY COVID-19 Preparedness Tool that aims to help businesses assess their level of crisis preparedness and enable them to address gaps and weaknesses.

KSM presenting at the CCCI webinar

The webinar concluded with an insightful question & answer session. CCCI Board of Trustees Member Engr. Leonora Salvane delivered the closing remarks. The CCCI Business Development and Management Services Division and SGV Cebu Partner-in-Charge and Tax Partner Cheryl Ong led the webinar’s organizing team which included Tax Manager Virnee Joy Agot, Business Consulting Senior Manager Paulo Lastimosa, Managers Ruby Alcantara-Seville and Patrick De Leon, and Associate Venessa Villanueva.

For more information about CCCI webinars and events, please visit the CCCI website and Facebook page.

WPT speaks at ACPAPP Day

SGV Chairman and Country Managing Partner Wilson P. Tan (WPT) was a guest speaker at the ACPAPP Day (Association of Certified Public Accountants in Public Practice) of the 2020 Accountancy Week Celebration. With the theme Filipino CPAs rising amidst challenging times, the celebration featured how the accountancy profession is managing and addressing the issues caused by the pandemic.

WPT presenting at ACPAPP Day of Accountancy Week

WPT discussed the challenges that CEOs face during the pandemic, emphasizing the need to lead with empathy, protect the health and wellbeing of people, develop proactive measures to reopen business, and contribute to economic recovery.

He explained the measures that the Firm has implemented to ensure business continuity and resilience. He shared that SGV activated a crisis management team composed of representatives from critical business units within the Firm. SGV also regularly coordinates with clients and provides them with thought-leadership materials to help them develop or adjust their resiliency plans in the face of the pandemic. Prioritizing the wellbeing of its people, the Firm has also implemented alternative work arrangements and organized wellness programs for staff. SGV has also leveraged on technology to strengthen company culture and enhance collaboration and productivity.

Over 600 participants tuned in to the session. Other speakers included chief executives from other professional services firms.