July 2020 Articles - Suits the C-Suite | SGV & Co. | EY

27 July 2020

Meynard A. Bonoen

Impairment considerations during COVID-19 Part 1

(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.

24 July 2020

Alma Angeli D. Placido

Threading through recovery: Health or wealth?

On Aug. 2, the Philippines hit the 100,000 mark for COVID-19 cases, with 50,000 new cases recorded in July. Some would associate this increase with the gradual reopening of the economy and the transition to what we now call the “new normal.” As of Aug. 20, the Philippines ranked 22nd out of 188 countries in terms of COVID-19 cases, just behind two other populous Asian countries: Bangladesh and India. On the same day that the country breached its 100,000 COVID-19 cases, the President heeded the call of the medical community for a stricter enhanced community quarantine as the number of cases continued to increase nationwide. He announced a modified enhanced community quarantine (MECQ) over Metro Manila, Bulacan, Laguna, Cavite and Rizal between Aug. 4 and 18. As these designated areas reverted to MECQ, a slower economic recovery was anticipated, leaving businesses to navigate further uncertainties. Subsequently, on Aug. 17, the President declared the lifting of MECQ in Metro Manila and four other provinces into a less stringent General Community Quarantine (GCQ) by Aug. 19. IMPACT ON THE PHILIPPINE ECONOMY Based on the Oxford COVID-19 government stringency index, the Philippines implemented the most rigorous social distancing policies and health protocols in the ASEAN region to prevent the rapid spread of COVID-19. However, it may be worthy to note that Singapore, Indonesia and Malaysia implemented social distancing measures ahead of the Philippines. The Greater Capital Region (GCR), which includes the National Capital Region (NCR), Central Luzon (Region III), and CALABARZON (Region IV-A), accounts for 61.6% of the Philippines’ Gross Domestic Product (GDP). Because Metro Manila and several other areas within GCR have been under quarantine since March 16, the economy took a huge hit, resulting in a recession with several major industries heavily impacted. The Philippines recorded a 16.5% GDP contraction in the second quarter. Leading the GDP retreat were the manufacturing, construction, and transportation and storage sectors, with double-digit drops of -21.3%, -33.5% and -59.2% respectively. The Philippines’ sharp GDP decline is the second-worst in ASEAN, after Malaysia’s -17.1%. Most countries in ASEAN posted GDP contractions in the second quarter, with the exception of Vietnam, which managed to grow 0.4%. Cash remittances from Overseas Filipinos Workers (OFWs) came in at $14.0 billion in the six months to June, down 4.2% from a year earlier. In addition, 300,000 OFWs displaced by the COVID-19 pandemic are expected to return to the country within the next three months, according to Vivencio Dizon, National Policy Against COVID-19 deputy chief implementer. This will further jeopardize future cash remittances. As of July 28, the Development Budget Coordination Committee (DBCC) revised its initial projection of the Philippines’ 2020 GDP growth rate to -5.5% from the previous -2.0 to -3.4%. This is after considering updated indicators on the impact of the pandemic on tourism, trade and remittances for the year. THE GOVERNMENT’S ECONOMIC RECOVERY PLAN In the fifth State of the Nation Address (SONA) by President Rodrigo Duterte in July, he announced a list of government priority programs to address the adverse economic impact of the pandemic. These include the strict implementation of the Ease of Doing Business and Efficient Government Service Delivery Act; the enhancement of the Build, Build, Build Program; the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which reduces corporate income tax rate and rationalizes certain tax incentives; and the Bayanihan to Recover as One Act (Bayanihan II), which represents the government’s response to the economic impact of the pandemic. The huge slump in second-quarter GDP growth prompted the National Economic and Development Authority (NEDA) to reconsider its original recovery plan (Philippine Program for Recovery with Equity and Solidarity or PH Progreso). The NEDA created the Recharge PH program to ease the negative impact of the pandemic and lead the Philippine economy towards recovery. It is set to be implemented this year and into 2021 and will likewise be incorporated in the updated Philippine Development Plan 2017-2020. RESHAPING STRATEGIES Considering the effects of the community quarantine felt in the second quarter, it is likely that similar or worse consequences will hit the country as varying levels of quarantine continue to be maintained in various localities. As confirmed COVID-19 cases continue to rise daily, businesses will experience further losses from changes in consumer spending and constantly changing restrictions on business operations. Additional business costs are also anticipated as stricter health protocols are implemented. Businesses will be keen to manage short-term cash flows to ensure that operations stay afloat as the economy stagnates. More businesses are expected to shift to digital platforms and reinvent themselves to address uncertainties through value chain transformation. As the global health community grapples for a cure for COVID-19, businesses must do their part to ensure the safety of their people by establishing effective health guidelines. Businesses will have to devise strategies built around safeguarding the well-being of employees and customers. Digital transformation enhances their ability to deal with the changes in market requirements, without compromising the safety of employees. For businesses to successfully navigate this particular moment, they must identify and address sources of uncertainty to preserve organizational stability and build resilience. Addressing underperformance is a challenge as businesses work through numerous constraints. It is critical for businesses to revisit their strategies to build a sustainable competitive advantage even during periods of disruption. This period has driven the government to prioritize developing a strong digital economy. Balancing regional economic development is one of the government’s pillar programs, and one way to get there is to focus on developing competitiveness in information and communications technology (ICT). To address the need for physical distancing and reduced face-to-face interaction, the government must expand the coverage of its National Single Window (NSW) program. The program is meant to allow parties involved in trade and transport to lodge standardized information in a secure, electronic single-entry point to complete all import, export and transit-related regulatory requirements with respect to each transaction. In this way, trade can continue without compromising the health of the workers both in the public and private sectors. The government and private sector must work together to strike a balance between public health vis-à-vis the economy. Lockdowns are proven to be effective in curbing the spread of the virus, yet are also detrimental to the health of the economy. Recovery need not be a choice between health or wealth, but a carefully plotted path that strategically achieves both goals. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.

20 July 2020

Ma. Emilita L. Villanueva

COVID-19 and its accounting implications Part 2

(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.

13 July 2020

Ma. Emilita L. Villanueva

COVID-19 and its accounting implications

(First of two parts) The COVID-19 pandemic has resulted in challenges and difficulties previously unknown to economies and businesses worldwide. Travel bans, quarantines and lockdowns have become standard measures implemented by governments. Most businesses, regardless of industry, are losing revenue, experiencing disrupted supply chains and even possibly facing permanent closure. Economies are severely impacted with recession looming large on the horizon. The Philippines has not been immune to the havoc caused by the pandemic, with substantial parts of the country placed under varying levels of community quarantine for extended periods. Even as quarantine conditions ease in most parts of the country, we are all looking at a “new normal” in going about our lives, with no guarantee when we can return to the way things were before COVID-19. As the situation evolves, entities may find themselves hard-pressed to assess the full impact of the pandemic not only on their business operations but also on their financials. Consequently, entities may face certain challenges in the process of closing the books and their preparation of interim and annual Philippine Financial Reporting Standards (PFRSs) financial statements. LEASES One of the key items for consideration is lessor and lessee accounting under PFRS 16, the standard on leases. With the lease concessions and temporary closures experienced during the past three months, both lessor and lessee need to take a step back and assess how such events will impact their lease accounting moving forward. Our two-part publication, “Consensus in lease concessions due to COVID-19,” which was issued on June 8 and 15, provides a more detailed discussion on Leases. GOING CONCERN One such challenge is the assessment of whether an entity will continue to be a going concern (i.e., will continue to operate). The management, regardless of the entity’s size or business, is required by PFRSs (particularly, Philippine Accounting Standards or PAS 1, Presentation of Financial Statements) to assess the appropriateness of the going concern assumption when they prepare financial statements. Disclosures must be made if such an assumption is no longer valid or if there is significant doubt that the entity will continue as a going concern in the future. However, if management assesses that such an assumption is no longer valid, the disclosures are not the only ones affected; the financial statements (as a whole) should no longer be prepared on a going-concern basis and the basis for measuring assets and recognizing liabilities will change. The assets will have to be written down to their recoverable amounts. For liabilities, provisions should be measured and recognized only when there is a present obligation, in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets. The assessment should be performed until the financial statements are approved for issuance, and all facts and circumstances should be considered. Although the pandemic has affected all entities, the extent and manner are not the same. Thus, the degree of consideration and the conclusions reached will differ from entity to entity. Given the uncertainties involved and the evolving implications of COVID-19, management must exercise significant judgment and continuously update its assessment until the date of the issuance of the financial statements. FINANCIAL INSTRUMENTS The accounting for financial instruments is another area greatly challenged by our current situation. Entities that have identified increasing concentrations of risk in areas and industries affected by the pandemic should consider whether they need to make any disclosure on such risk concentrations, including the amount of the exposure. The entities’ liquidity risk will also need to be assessed if such is increasing under the current environment. If this is the case, PFRS 9, Financial Instruments, requires these entities to make the necessary disclosures not readily evident from existing risk disclosures. Another aspect to consider is if there are any liquidity issues faced by the entities’ customers, as well as any potential deterioration in the credit quality of the trade receivables of these entities. These issues will have an impact on the expected credit loss (ECL or bad debts) of the entity as a supplier or lender. Entities will need to consider all available information regarding not only the current conditions or events brought about by COVID-19, but also forecasts of future economic conditions when they apply judgment and estimation on the ECL calculation. Entities also need to consider additional disclosures on the financial statements on the judgments and estimates applied to incorporate the effects of the pandemic in measuring the ECL. IMPAIRMENT PAS 36, Impairment of Assets, requires entities to assess if there are any indicators of impairment on non-financial assets every reporting period. If there are, it requires them to perform impairment testing. The assessment of any indicators of impairment entails looking at both external and internal sources of information. With recent developments, current information such as the volatility of financial markets, declining market interest rates, shutdowns or even closures of businesses and declining demand and supply may indicate that an asset is impaired. Although these indicators do not necessarily mean that entities will recognize impairment losses, entities need to exercise care and significant judgment to ensure that the assumptions (such as discount rate, future cash flows, terminal values, etc.) made in performing impairment testing are reasonable and valid under conditions existing as of the reporting date. As most of these assumptions are subject to significant uncertainties, entities will also need to consider providing more detailed disclosures in the financial statements on these assumptions and the sensitivities involved. REVENUE RECOGNITION The situation can affect the estimation process in existing customer contracts that are within the scope of PFRS 15, Revenue from Contracts with Customers. If ongoing customer contracts have variable considerations (e.g., discounts, rebates, price concessions, bonuses and penalties), entities will need to estimate the variable considerations and their effect on the transaction price (i.e., amount of revenue to be recognized) and to assess whether to constrain these variable considerations. Entities are required to update such estimations throughout the life of the contract. These requirements may prove to be a challenge to certain entities as they will need to consider the impact of the pandemic and the uncertainties involved in their estimation process. The pandemic may also result in entities modifying their contracts with customers by amending the scope and/or the price of the contract. Entities will have to assess the impact of such modifications in their revenue accounting and the related disclosures. In the second part of this article, we will briefly discuss additional challenges in estimating the pandemic’s business impact on the preparation of financial statements, namely inventory costing and valuation, the recognition of compensation or penalties from potentially onerous contracts, and the assessment of adjusting or non-adjusting events after the reporting period. 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.

06 July 2020

Miguel Carlo S. Rancap

Are companies willing to divest after the pandemic?

In 2019, companies in the Asia Pacific sought to sharpen their focus on capital allocation, which include, among others, carving out non-core businesses or underperforming assets. In fact, the 2019 EY Global Corporate Divestment Study reported that 82% of executives in these companies planned to divest within the next two years. However, in light of the COVID-19 crisis — with governments implementing border closures and lockdowns that have triggered business shocks and disruption — will the appetite for divestment remain high among Asia Pacific companies as they look beyond the crisis? Before the crisis, EY surveyed Asia Pacific companies in early 2020 then conducted a resurvey in April 2020. The results affirmed that many companies still had a high intent to divest. Of these companies, 75% said that they planned to initiate their next divestment in the next two years — marginally up from 74% pre-crisis — with 59% saying that they aim to divest in the next 12 months. HOW WILL THE CRISIS INFLUENCE ASIA-PACIFIC DIVESTMENT ACTIVITY? There are four key factors that will, individually and collectively, likely drive and influence regional corporate divestment activity in the next six to 12 months. Factor 1: Balance sheet strength Some companies have turned to the capital markets to build up weakened balance sheets, which reduces the need to divest to raise liquidity at this volatile time. For example, several well-known Philippine companies are raising up to P30 billion this year via bond issues, with tenors ranging from two to 30 years. These will be used to fund new and existing projects, working capital, refinance costly existing debts, and general corporate purposes. Additionally, a bank plans to issue the Philippines’ first bonds aimed at raising fresh funds in response to the pandemic, specifically for eligible micro, small and medium enterprises. However, companies that have difficulty in accessing capital markets may need to think more proactively around capital recycling through a divestment strategy. These strategic capital decisions were teased out in the April 2020 survey where 54% of Asia Pacific companies said they are contemplating raising capital in response to the pandemic. Moreover, 64% said they would seek to reduce debt through divestments. Factor 2: Digital transformation If digital transformation was not a strategic priority pre-crisis, it is and should be now. A number of companies were forced to rely almost entirely on their existing digital infrastructure to function and communicate. The survey revealed that 56% of Asia Pacific companies will likely divest for this purpose, a significant increase from 31% of respondents pre-crisis. Remarkably, 67% of executives from Greater China said they would divest to fund technology investments — up from 42%. It seems that divestments have become an even more attractive option to fund needed technology investments. Factor 3: Supply chain diversification Globally, 36% of companies (27% pre-crisis) were planning to focus more on their supply chains prior to divesting. US-China trade tensions had already brought this issue into focus. The crisis has now led them to reevaluate and reengineer their supply chains to increase control and minimize the risk of future disruption. This will likely lead to increased investment and divestment activity. Consider how Japan recently set aside $2.2 billion of its economic stimulus package to aid its manufacturers shift production out of China as the crisis disrupted supply chains. Additionally, according to the most recent EY Global Capital Confidence Barometer, 67% of Asia Pacific companies (73% of Greater China respondents) said that they had already taken steps to restructure their supply chains. Factor 4: Portfolio optimization According to 54% of Asia Pacific companies surveyed, asset portfolios will need to be re-shaped for a post-crisis world. Another 68% of the companies surveyed stated that they had held on to assets for too long, triggering portfolio optimization moves, which they expect to accelerate due to the crisis. Moreover, 58% of the companies expect to see an increase in distressed divestments over the next 12 months. While it’s difficult to anticipate what the future holds, companies should start making adjustments based on macroeconomic scenarios that are likely to emerge. HOW SHOULD SELLERS PREPARE? Companies should actively refocus their attention on preparing assets for sale as part of pursuing their medium-term divestment strategies, most of which were developed pre-crisis and remain in-play. In some cases, the pandemic may have caused an acceleration in divestment plans. However, these strategic capital decisions need to be reassessed due to the crisis. For instance, about 53% of Asia Pacific companies surveyed said that the economic impact of COVID-19 will likely increase the price gap between what sellers expect and buyers are offering. In addition, 52% said there will be less certainty regarding which assets to divest — a sharp increase from 28% pre-crisis. Some 46% stated that their level of divestment preparation would also have to be revamped as how companies prepare their assets is crucial for a successful sale. The standard approach for sellers is to ensure that the business is as attractive as possible by aligning management incentives with a good sale outcome and ensuring that corporate overhead allocations are thought through. However, this approach will now need to be fortified by other key considerations. As a result of the impact on financials in the first two quarters, sellers should craft a credible story based on reasonable assumptions that would explain to prospective buyers how their companies will look and perform in a post-crisis world. This could be an opportunity as COVID-19 resulted in rethinking the way many organizations run their businesses and the close scrutiny of cost models. Sellers should also present a story depicting at least the next 12 to 18 months. The more clarity and certainty they can provide prospective buyers over a longer period of time, the higher the likelihood of receiving higher bids for their assets. They must evaluate the vulnerability of supply chains to post-crisis-type risks. Prospective buyers will likely focus on this, so sellers should have a robust action plan to mitigate this risk. As companies rethink sourcing, there will be inevitable consequences for lead times, cost efficiency and, hence, working capital. COVID-19 has been the ultimate test of demand elasticity, for which the aftermath analysis will provide very interesting insights. PORTFOLIO MANAGEMENT WILL NEED A STRATEGY RETHINK While some large companies across the Asia Pacific had increasingly sophisticated approaches to divestment and active portfolio management, a buy-and-hold strategy still remains all too common among many companies in the region. However, the impact of COVID-19 could help accelerate this shift towards a more sophisticated, focused and intensive portfolio management approach in the region. Coming out of this crisis, EY teams expect to see far more sophisticated ways of thinking and strategies around topics like balance sheet strength, capital allocation, and supply chain vulnerabilities among others, ultimately provoking a strategic rethink around portfolio management and driving both investment and divestment activities. EMERGING WITH AGILITY AND RESILIENCE Now is a crucial time for Asia Pacific companies to be decisive as they position themselves to emerge from the crisis with greater operational agility and resilience. Essential to that will be a divestment strategy shaped by various key factors and the need for portfolio optimization in preparation for a post-crisis world. These include rebalancing portfolios and preserving value — with 71% of Asia Pacific sellers reporting that they would only accept a 10% or less reduction in sales price in the next six to 12 months. The Asia Pacific region has a history of coming out stronger after major crises. The decisiveness shown by governments to deal with COVID-19 gives confidence and hope that the region will potentially lead a resurgence in global economic activity. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms. Miguel Carlo S. Rancap is a Senior Manager from the Strategy and Transactions Service line of SGV & Co.

July 2020

Impairment considerations during COVID-19 Part 1

Threading through recovery: Health or wealth?

COVID-19 and its accounting implications Part 2

COVID-19 and its accounting implications

Are companies willing to divest after the pandemic?

Other SGV News and Publications

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links