July 2021 Articles - Suits the C-Suite | SGV & Co. | EY

26 July 2021

Karen Kaye M. Sta. Maria-Constantino

Reimagining healthcare

A year and a half into the pandemic, we have seen how almost every industry has had to undergo rapid transformation in order to develop new methods of product and service delivery. One industry that has perhaps been forced to rapidly move beyond traditional processes is healthcare. In the Philippines, we have seen a dramatic shift to using technology to promote telemedicine and virtual healthcare to allow for personalized, effective and convenient healthcare in socially-distanced safety.However, developments such as video or online consultations serve as a beginning, not an end point. Companies now have the opportunity to permanently transform how healthcare is delivered in a way that addresses the increased needs of care providers and their patients. To tackle the evolving needs of consumers, we look at three key areas identified in an EY article, Five trends redefining the health sciences and wellness operating model that companies should closely consider in their strategic focus and in the deployment of their human and financial capital and efforts.DEVELOPING INTEGRATED SOLUTIONS AND PERSONALIZED HEALTH OUTCOMESThe current health infrastructure is provider-driven, supply-oriented and siloed, placing consumers in a disparate model. In the future, consumer demand will drive a seamlessly connected healthcare system with humans at the center, delivering a personalized and informed experience. Imagine, for example, a one-stop system where a patient only needs to use one platform for initial consultation, treatment, the delivery of medication and follow-up consultation, all with centralized medical record access.While such a platform is yet to be developed, Philippine healthcare providers can start reimagining a future where technology and patient-centricity can drive a competitive advantage. Such a patient-centered model will require aggregated data that is shared to fully understand and more quickly respond to the needs and wants of a patient. Healthcare will have to take a more proactive role, bringing care to a patient instead of forcing a patient to spend time, money and energy searching for the care they need.For companies to put humans at the center, they must partner or collaborate with companies to gain capabilities in user-centered design, behavioral science and services. They can also build or employ the services of experts in artificial intelligence and machine learning algorithms as well as interoperable system integration. Already there have been several developments around the world in using AI to provide personalized healthcare, such as the launch of a cloud-based platform by one company to help patients manage chronic disease by managing both medication and patient responses to the medication remotely. Another is developing a system to conduct liquid biopsy and remote monitoring so that patients do not have to go to a hospital and undergo invasive tests. Another system does real-time monitoring of patient biometrics, allowing for a quick response in case of a medical situation.While such technologies may not be immediately available to Philippine healthcare providers, the continuing development of 5G technology and other innovations here could open the door to rich opportunities that healthcare providers can explore as part of their post-pandemic strategies.OPENING UP ACCESS TO DATAIt has been estimated that humanity generates up to 2.5 quintillion bytes of data each day. For the healthcare industry, an estimated 50 terabytes of data were created in 2020 alone, and the number is expected to increase exponentially as the effects of the pandemic continue. However, having all the data means little if we cannot properly analyze the information. Most of the data generated by the healthcare industry sit in siloes every year, but the difficulty in extracting the information’s true and extended value lies in various technical and ownership issues as well as regulatory reluctance. In addition, most companies tend to be very protective of their data, considering the information a source of potential intellectual property assets and new discoveries.However, the reality is that no single company is able to or should own more than a fraction of the total volume. At the same time, the monetary value of proprietary data is significantly less than the data that a company can actually access, interrogate and apply to the operations and product development. Simply owning data generates costs but accessing and assessing data can generate valuable insights for the health system. Moreover, refusing to share or grant access to data impedes meaningful progress in healthcare.While this is certainly a thorny conundrum, it is something that the healthcare industry should explore. Two key questions come to mind: How can companies mine their data to get the right information that is critical to their business model, and how they can share access to their data with selected, tightly regulated partners so that more long-term value can be gained by combining resources, knowledge and insight?Answering these will take time, investment, and no little amount of compromise. But consider the possible discoveries in such a situation. For example, a hospital that shares data on the most and least effective COVID-19 treatments and medication with a company that manufactures diagnostic machines might be able to develop more effective, life-saving technology. Or if we wish to consider recent news, there has been talk of combining various vaccine brands to achieve a greater protective effect — this is a potentially game-changing area where sharing and combining data could have incredible benefits.Of course, companies will need to develop structured data system arrangements to protect proprietary data while allowing access to vetted companies. They will also need to work with government, regulators and data security experts to establish norms that are acceptable and fair to all parties and while protecting data integrity. In addition, healthcare companies may need to retrain or acquire talent that can develop proprietary data processing technologies to help speed up the R&D process.BUILDING SUSTAINABILITY INTO OPERATIONSAn EY survey with almost 15,000 respondents discovered that up to 45% of consumers believe in the increased importance of sustainability compared to a year earlier. In the Philippines, we hear about the challenges that medical facilities and providers are now having in dealing with medical waste and used protective equipment. Consider as well the number of disposable syringes that are being consumed daily all over the world due to vaccination and we can better realize the increasing need for companies to measure and report sustainability practices tied to environmental, social and governance (ESG) disclosures.Though it may seem obvious that products and services that help people treat or manage disease have significant social value, more and more people are also weighing the import of environmental and economic issues.For companies to demonstrate their commitment to sustainability, they need to establish a measurement framework to gauge the impact of their sustainability programs based on their business model, and also be able to communicate the value of their sustainability initiatives to their patients, customers, stakeholders and investors.ACCELERATED TRANSFORMATION FOR BETTER HEALTHCARE DELIVERYCOVID-19 has highlighted the gaps between what companies are capable of now and what they will need to accomplish for future growth. With the acceptance and adoption of new technologies fueled by data and driven by consumer demand, companies in the healthcare industry need to start reimagining how they can generate innovative, long-term value for their business and use that to springboard into post-pandemic recovery.The pandemic is not the first, nor will it be the last, major disruption that will trigger forced transformation and evolution for companies. While we cannot predict what the future may bring, we can certainly reimagine how it should be. 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.Karen Kaye M. Sta. Maria-Constantino is a Tax Partner of SGV & Co.

19 July 2021

Benigno F. Leongson

The inestimable value of reliable accounting for estimation transactions

This challenging period during the COVID-19 pandemic has made demand for reliable and transparent financial reporting rise even higher. The increasing uncertainty in accounting for complex business transactions requires not only present information, but in certain cases, also requires estimation in order to be properly accounted for in the books of account and sufficiently reported in the financial statements.This pandemic has added a layer of uncertainty to an entity’s ability to achieve its long-term goals, requiring management to implement more frequent reviews of financial budgets and forecasts in assessing the valuation of corporate assets. In many respects, management applies estimation in financial accounting and reporting, posing unique challenges. For example, in accounting for the acquisition of a business, management estimates the valuation of assets and liabilities acquired and, in the process, must determine what information will be used and where such information will be sourced. Management also has to have a robust process for ensuring that the estimation transactions are processed and accounted for consistently, including the determination and application of the appropriate methodology especially when there are various acceptable approaches in the industry. While it is true that accounting estimation is not a new concept in management and financial reporting, it has become complicated yet inestimably valuable in this period of uncertainty.Given such challenges, management can only put its best foot forward by using its deep experience and knowledge of the industry and exercise sound judgment based on the available information to properly measure and report these transactions in the books.A PRUDENT EXERCISE OF JUDGEMENTManagement needs to exercise sound judgment in accounting for and recording estimation transactions based on the latest available information at the time the estimate is made.To exercise prudence of judgment when dealing with estimation transactions, management needs to use the most up-to-date information about the transaction, select the most appropriate measurement method, and gather other relevant data in supporting the assumptions to be used in arriving at the estimate.To make the most reasonable estimate, management must also ensure that there are appropriate controls in place within the financial accounting and reporting process. The entire financial accounting and reporting process generates the financial statement amounts, making it necessary to establish the appropriate and sufficient controls to ensure that the output from processing estimation transactions is reliable. This process includes the necessary risk assessments and related activities necessary to ensure adequate financial statement disclosures. These estimated amounts largely drive what should be recorded in the books and disclosed in the financial statements.Management also needs to identify areas in the estimation process that are prone to error, and thus increase the risks of material misstatement and unreliable information in financial reporting. It must revisit the previous bases of accounting for estimates especially when the data and assumptions used are highly dependent on macroeconomic factors and thus are subject to frequent changes and would require regular reassessment. It will also need to be conscious of potential biases to ensure that it continues to objectively evaluate all required information when arriving at the estimates. It is likewise important to remember that anything that has been proven and accepted in the past may no longer be relevant considering the changing business landscape and business outlook.ACCOUNTABILITY FOR ESTIMATIONSTop management and those charged with governance bear the responsibility of formalizing and approving the estimation process. At times, management may need the assistance of experts particularly for more complex estimates. However, this does not relieve it of its responsibility to carefully evaluate the work of experts. The same is true in the selection of an appropriate financial accounting and reporting policy that will be used for such transactions, assessing the need to change from previous years’ assumptions and addressing the potential impact of the changes on certain financial reporting assumptions. The process to be used will depend on the level of risk and the nature of the estimate. Any significant changes in assumptions and models from previous years must be fully supported and the basis of the change should be documented.Management may further need to thoroughly document the rationale behind the selection of estimation models and assumptions among various alternatives. This is to respond to any questions from users of the financial statements by showing the bases and processes that led to the amounts and disclosures. The more complex the estimate is, the more structured the process and risk assessment is expected to be.WHAT’S NEXT FOR MANAGEMENT AND THOSE CHARGED WITH GOVERNANCEThe adoption of new and complex accounting standards as well as the evolving business landscape increases the demand for sound financial reporting that maximizes the use of available external information to produce reliable estimates. At the same time, management needs to ensure that it is still able to satisfy the information needs of stakeholders and users of financial statements. It will also need a robust assessment of all inputs used and strong justification behind the selection among various models in accounting for estimation transactions.Beyond just compliance, management must consider how the disclosures help users of financial statements better understand the relevance of the estimate and its impact on the financial statements — from having adequate to reasonable disclosures. A robust risk assessment for estimates should be part of entity-level controls as it will set the tone for how transaction level controls will be set. For more complex and significant estimates, management and those charged with governance need to revisit their processes and controls and address the related risks identified on the estimation transaction.Management must have its own stand-back approach to revisit and assess the effectiveness of the processes that are in place. This should enable it to accordingly revise the processes based on the evaluations done.RISING TO THE CHALLENGEThe use of reliable estimates in financial reporting has become increasingly complex because of the pandemic. It is quite likely for regulators and other users of the financial statements to scrutinize and challenge financial statement estimates, as the estimation of these values are judgmental in nature. Accordingly, this would require closer collaboration between management and those charged with governance to ensure reliable and transparent financial reporting. 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.Benigno F. Leongson is an Assurance Partner of SGV & Co.

12 July 2021

Anne Margaret E. Momongan

The need to properly close up

With the seemingly never-ending economic and public health uncertainty brought about by COVID-19, we have seen a number of greatly affected businesses incur continued losses. Several have even been forced to close down and cease operations. It seems that despite the grant of perpetual existence under the Revised Corporation Code (RCC), some corporations die natural deaths due to the unprecedented challenges caused by the pandemic.Unlike the joy and excitement of starting a business, ceasing to do business is a painful undertaking. However, will physically closing shop be enough to say that business operations are terminated? Unfortunately, from a legal setting standpoint, it is not as easy. Some business owners believe that for as long as the business conducts no operations, the business is successfully closed and need no further steps to take.Another inaccurate view some may hold is that for as long as the corporation ceases to exist in the eyes of the Securities and Exchange Commission (SEC), that suffices as business closure. This may be partially correct since the RCC provides that if a corporation becomes inoperative for at least five consecutive years, the corporation is placed under delinquent status. Thereafter, the delinquent corporation will be given two years to resume operations and comply with the requirements; otherwise, the corporation’s Certificate of Incorporation may be revoked. However, it should be emphasized that though the RCC provides for delinquency and/or revocation, the closure of the business does not end there. This is where problems usually arise; as a result, business owners tend to overlook the importance of properly deregistering the corporation.While a corporation may have achieved delinquent status in the eyes of the SEC, it is still considered to be in business in the eyes of the Bureau of Internal Revenue (BIR) and the Local Government Unit (LGU). This can cause headaches for business owners — simply because the business was not properly closed and deregistered with all the necessary government agencies. As a result, a corporation will be penalized heftily for failure to file and pay the taxes and returns due from it and/or obtaining the necessary permits. The solution is to ensure that the corporation goes through the proper deregistration processes with urgency.CONSIDERATIONS WHEN CLOSING SHOPSince business deregistration with various government agencies may take time — spanning years for some — it should be highlighted that during the process of deregistration, the corporation stays alive and maintains its separate juridical personality for dissolution purposes. During the dissolution process, the management and/or the Board of Directors (BoD) have several factors to consider, such as deciding which functions are necessary for the dissolution or at a minimum, during the deregistration process. The accounting and finance team may need to prepare various documents, financial statements, tax returns and schedules for submission to various government agencies. The human resource team (HR) must also handle final pay, separation pay, and others.The management and/or the BoD also need to weigh whether to outsource necessary functions to third parties or keep these in-house. More factors for deliberation include the cost of keeping salaried employees as compared to paying consultancy fees. This will depend on the skill set required, hours needed, and the level of control the management wants to exercise over the work performed. Another challenge is when employees jump ship to join another entity. As a result, a corporation may have no employees left to address the government agencies’ clarifications while in the process of deregistration. It is likely for this reason why some opt to hire business professionals/consultants to take care of deregistration matters and at the same time, safeguard business records for easy retrieval.Business owners also need to determine how long the business space needs to be maintained. This will rely on management intent or the availability of an agent or authorized person to receive notices on their behalf. Although the deregistration and dissolution process may take years, the corporation does not necessarily need to keep its business space and employees during this period.DEREGISTRATION WITH THE BIR, LGU AND OTHER GOVERNMENT AGENCIESEmbarking on the deregistration process may appear lengthy, costly and dreary. There is also a tendency to neglect a corporation that is no longer profitable and operative. Is it then worth going through the deregistration process? Will it not be worthwhile to simply be inactive for a long time and wait for the BIR and/or LGU to act? Just like with any other strategy, the impact of inaction or even delay can be frustrating and devastating. When visible and quantifiable, delays or failure to deregister may translate into potentially hefty penalties from the BIR and the LGU.To formally close a business in the LGU, a company needs to obtain clearances such as but not limited to Barangay Clearance; City Treasurer’s Clearance; and other relevant clearances particular to the LGU concerned. The LGU will also assess deficiency taxes and any unpaid annual permits.As for deregistration with the BIR, retiring corporations that have completely paid off their tax liabilities will be issued a Certificate of Tax Clearance. This confirms that the corporation no longer has any outstanding tax obligations to the government. The law is clear that corporations shall not be dissolved until cleared of any tax liability. It should be underscored that the processing of the tax clearance triggers a mandatory audit or assessment for the last three open years prior to the dissolution. Such an examination may result in a deficiency tax assessment unless the corporation has no operations during the periods under audit. Another matter worth emphasizing for the BIR deregistration process is the relevance of end-dating for tax return filing purposes. Prior to end-dating and notwithstanding the plan to dissolve, the company is still required to file returns, which can be nil returns if already non-operational, for reporting or compliance purposes.The corporation must also submit an application for the cancellation of registration or an equivalent notice document in order to formally stop its obligation as a contributing employer to SSS, PhilHealth and Pag-IBIG.It is worth noting that to engage in the deregistration process at the earliest time possible will also make it easier to retrieve accounting records and documents, smoothening coordination with the corporation’s employees who prepared these records. As the corporation ceases to be a going concern, is there an assurance that employees will remain to see through the dissolution process? Human nature can drive employees to look for other employment opportunities. When already employed by another entity, coordination on record-keeping and providing clarifications can be troublesome. Challenges in document retrieval and obtaining clarifications from previous process owners are usually encountered when years have passed before a corporation is properly deregistered.A PROPER GOODBYE THROUGH PROPER DISSOLUTION AND DEREGISTRATIONProper deregistration of a business may be a subject that business owners do not want to confront immediately, especially after the pain of loss. Despite the fact that dissolution and deregistration can be long and tedious, it can still be achieved fairly painlessly with the guidance and assistance of a trusted tax professional — especially when matters on assessments or audit findings come in.Furthermore, in consideration of penalties that may be imposed, it is important for the company to go through the deregistration processes with the assurance and comfort that, in the future, no unresolved matters will haunt the business owners.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.Anne Margaret E. Momongan is a Tax Senior Manager of SGV & Co.

05 July 2021

Randall C. Antonio

A new world where transformation is a precondition

In the last decade before the COVID-19 pandemic, businesses were preoccupied with understanding, harnessing, integrating, and enjoying the benefits of the Fourth Industrial Revolution. Many progressive companies joined the conversation and launched their respective versions of their transformation agenda. Today, a quick look back shows how Business Transformation appears to have been reduced to a buzzword, an empty promise of most corporations trying to reinvent themselves. Articles and anecdotes suggest that during this period, most transformation efforts may have failed for a host of reasons — but while some were external and uncontrollable, most were internal and in fact, preventable. Often, it comes down to the lack of stakeholder support for the scope, prioritization, and scale the business needs to change.As we continue to make sense of the additional brick wall created by COVID-19, and without an end in sight, we need to ride the wave as we reimagine the post-pandemic world. Certainly, the landscape and market have changed, and technology has even more use cases than ever before. This poses the question: Is your company post-COVID-19-ready?TRANSFORMATION STARTS WITH RISK RECOGNITION AND ACCEPTANCETransformation starts when an organization reflects, collectively understands the risks and accepts that their ambitions and goals could get disrupted, or worse, that they could become irrelevant and quickly obliterated. Many organizations do not realize this until it is too late. This may sound simple but depending on a company’s culture and values, it could be very complicated — and sometimes even a painful process.While a transformation agenda, with all its imperatives and financial goals, is usually defined by management and well-supported by the board, the participation, engagement, and cooperation of everyone in the organization is an absolute must for it to succeed. A compelling story of change that resonates with everyone and inspires every member of the organization must be clearly communicated on a sustained basis.In each of the following steps to transformation, executives must consider these questions to determine their own transformation initiatives.BLUE SKYINGAfter a thorough assessment of headwinds and tailwinds, companies must ask themselves where they see the business, and where they want to play. Are there new or emerging markets they had not recognized before?Whether the direction is to complement an existing business or change the business model, the common goal is to stay relevant and profitable, now and in the future. Executives need to set the direction for their future vision for the organization and identify what needs to be done to get there.BASELINE AND KPI SETTINGDo the customers love the product or service offered by a company? Do they love the brand? Does the company meet all Service Level Agreements with their customers and partners? Does the company have a healthy profit and loss (P&L) with a stable source of revenue and an efficient cost management strategy? Does the company have the right people on board?Before anything can begin, companies must know exactly how things are, both internally and externally. This is the stage where all the pain points and improvement opportunities are identified. Once a future state has been defined, a roadmap is developed. Processes and systems are assessed, employee and customer inputs are heard, and clear next steps are drawn. The communication of updates, action plans, and time-based milestones are important to all stakeholders, from the Board and management team to the employees.BUILD OR OPTIMIZE?Whether the decision is to build or optimize, robust business systems are needed to carry the business forward into the future. This lies at the very heart of any transformation initiative. Customer data, supply chain and logistics, manufacturing and accounting are only some of the important business systems that must be put in place and integrated. While the customer is king, nowadays data is queen. Data now, more than ever, holds an important piece in predicting outcomes in this ever-changing world.The resource that must go into transforming a business or its systems is almost always a sore point, as it often hinges on the leaders’ investment principles and priorities. As the strongest and most credible sponsor of a transformation agenda, the CEO must push for any big-ticket expense attached to it.A dedicated, highly skilled and experienced transformation team must also be deployed. To effect change, this team needs organizational and business acumen, the passion to understand the business, its operations, and its customers from top to bottom. Information and data must be made freely available to them.Regular cadence meetings must be scheduled to report on progress and resolve challenges to allow the opportunity to pivot and re-calibrate plans if needed. Prioritizing transformation-related issues and making timely decisions must be paramount, and stalemate positions must be immediately resolved to meet commitments on time and on budget.DELIVERYTransformation will disrupt current operations. An experienced transformation agent is needed to architect and deliver a sound change management program to seamlessly steer the business from its current to its future state. This plan must also have the buy-in of top management, be equipped with the right resources, and get communicated as a non-negotiable priority to the entire organization.There are cases where a business seems to be on business-as-usual mode, and nothing seems to be going wrong. Should it then consider undergoing transformation? There are studies that prove that a parallel transformation — where the core business is free to operate as usual, as a parallel effort reengineers its version 2.0 — has seen some successes.Ultimately, transformation, with all the disruption, changes and opportunities created by digital technology, and more recently, the pandemic, is a precondition for any company that wants to stay relevant. Technology will only continue to develop at breakneck speed and force those who understand the risk of being disrupted to innovate at scale. Companies need to continuously innovate, pivot, and always be open to change — while executives must always be aware of the question, what will put me out of business tomorrow?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.Randall C. Antonio is a Consulting Principal of SGV & Co.

July 2021

Reimagining healthcare

The inestimable value of reliable accounting for estimation transactions

The need to properly close up

A new world where transformation is a precondition

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