2019 Articles - Suits the C-Suite | SGV & Co. | EY

26 December 2019

Piyali Roy

Avoid these pitfalls on the road to digital transformation

While digital transformation is one of today’s most frequently-used buzzwords, the concept itself is constantly transforming. This is because every digital transformation journey is different for every company, and it can be difficult to have a single definition that applies to all. In general terms, we define digital transformation as the integration of digital technology into all areas of a business, resulting in fundamental changes to how businesses operate and how they deliver value to customers. Simply put, digital transformation should result in more efficient operations, optimized controls, and better customer service. With every industry getting disrupted by the “digital wave,” organizations have no choice but to transform. Many companies who are leaders in their industries do it by choice to seize opportunities brought about by new technology, innovation and trends, allowing them to stay ahead in the game. Other companies however, embark on transformation because disruption is impacting their business and they have no choice but to transform or risk falling behind or even becoming extinct. THE KEY PILLARS OF DIGITAL TRANSFORMATION For digital transformation to be successful, companies need to focus on six pillars beyond technology: experiences, people, change, innovation, leadership, and culture. Digital transformation is enabled by technology, but it is only possible if the organization embraces the possibilities that transformation offers. Over and over, it is reiterated that digital transformation is a business and cultural transformation rather than just a transformation driven by technology. PITFALLS TO AVOID Since digital transformation is an organizational transformation encompassing both business and cultural change aided by technology, each journey should be customized to the organization undergoing transformation for it to be successful. This is why it is so important for companies to have a digital transformation strategy. As new technology emerges, companies can avoid pitfalls such as embracing advancements too quickly, rolling them out in a way that could cause too much or too little disruption, and not properly tracking the changes within the organization. Outlined here are five pitfalls that any company undergoing digital transformation should address or manage: Not having a transformation strategy. Basic concepts involved in a digital transformation strategy include analyzing a company’s own needs as well as its company culture. However, transformation cannot only be driven by IT; it must be fully aligned with the organization’s overall path, goals, mission and planned future. The digital strategy must therefore support the corporate, functional and business strategy to align with the overall vision of the company, which entails analyzing the market, customizing the customer experience, and assessing the current standing and adjustment of the company’s infrastructure. Industry experts who can bring in industry-wide knowledge of the framework can be consulted to help build the overall strategy. In the agile digital world where everyone wants to fail fast and keep moving, it does not mean that failure is a necessity; there are learnings which can definitely be made available to minimize failures and increase the potential for success. Not setting up practical steps for change. An organization’s current state is the starting point of all transformations and cannot be forgotten while trying to embrace the trend. It is important to have a digital road map keeping in mind the state of the company as is, while outlining well-defined milestones will be key to driving change in a coordinated and effective way. Careful planning and a methodical process can help ensure actualization of goals, avoiding excessive detours and unnecessary costs. All projects, programs methods and framework (agile) should be aligned with that road map. This reduces the risk of misalignment, redundancies, or even projects that do not address a strategic objective. Costly projects that are at risk of being scrapped can be avoided. Not having the right leadership. Whoever will take charge of the digital transformation needs to have the right mandate for change and the influence to make it happen. This space requires great leadership, collaborative skills, and support to help leaders develop the right digital skills. This can come in the form of advice from peers, or from outsourcing expertise. Not investing in cultural change. If we address everything but culture, any progress made will eventually regress in time. Addressing culture will allow an organization’s investment into digital transformation to take care of itself automatically. However, culture is also the most difficult to change, and cannot be transformed by a simple memo from the top. Culture is omnipresent in any organization; it is what happens every single day, how leaders behave every single day, how decisions are made, how people work, and what is incentivized. INEFFECTIVE INTERNAL COMMUNICATION Digital transformation will inevitably involve continued change management and ensuring that people are aligned. Internal communication teams need to work hard on campaigns to motivate employees, celebrate successes and offer encouragement when going digital feels uncomfortable or difficult. While the road to digital transformation entails change on several levels throughout an organization and is unique for every business, the potential pitfalls are a common ground that can be anticipated. Several companies massively invest in developing new capabilities in Digital and Omni channel (a multichannel sales strategy used to provide a seamless customer experience across digital and brick-and-mortar locations) interfaces while building analytical capabilities, allowing them to upgrade and utilize technology to deliver a better customer experience. Many others run “business” or IT transformation programs that modernize their architecture and systems, while some have started simplifying their products and processes by reassessing their operating models. Whatever way each company decides to initiate its digital transformation journey, the end goal is the same — to enhance the organization’s business, culture and level of innovation to maintain its competitive edge by seamlessly and effectively integrating technology into every aspect of its operations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Any tax advice contained herein may be insufficient for US penalty protection. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Piyali RoY is a Senior Director of SGV & Co.

23 December 2019

J. Carlitos G. Cruz

On purpose, passion and possibilities

Whenever the calendar year winds down, many among us find it an opportune moment to reflect and reevaluate the last 12 months. We recall the challenges we faced, revisit the dramatic changes in the business landscape, and ponder how we, as individuals and organizations, have grown and evolved. We have seen how companies have shifted their focus to global trends and technologies, how people are taking on new jobs that didn’t even exist a few years ago, and how the challenges of sustainable development have become the top priority for organizations. At the start of 2019, I wrote about how the SGV team recommitted itself to the firm’s collective purpose to nurture leaders and enable businesses for a better Philippines. I described how purpose motivates people, becoming the primary driver of strategy and transformative development in every aspect of business. Purpose can empower individuals and teams by creating a deep sense of meaning that enhances personal commitment and energizes them with the power of positive action. Purpose is like having an internal compass, one that guides a person’s every action by never compromising values. At the same time, people who believe in and are proud to be part of an organization go the extra mile and tend to be at their creative best. Becoming a purpose-driven organization is one thing, however. Sustaining that purpose for the long term is another. How, then, can organizations ensure that its people and culture will remain steadfast in its chosen purpose? ALIGN YOUR PEOPLE TO YOUR PURPOSE For a purpose to work, it is vital for the organization’s people, culture, work practices and leadership behavior to be aligned with it. Think of your purpose as your road map — those travelling on the road will need to adjust their course if they wish to remain on track. The truth of your purpose needs to permeate every aspect of your business. Purpose has to be a living covenant. When SGV launched its purpose, we asked our people if they were willing to commit to the purpose and journey together to live it out. Each member wrote his or her commitment and placed it on a visual map as a symbolic reference. They were also encouraged to integrate our purpose with their own personal career journey, and internalize how such a purpose could energize and validate their progress, from initial recruitment to their continuing professional growth to their involvement in our CSR programs. Eventually, we see our people carrying our purpose with them even if they continue their journeys outside SGV as alumni. Speaking of recruitment, purpose-driven organizations also need to consider adjusting their metrics for hiring people. Most companies hire for talent, skill or potential. Purpose-driven companies also hire for values, taking into consideration whether a candidate’s values align with those of the organization. STEER YOUR PURPOSE Simply declaring a purpose is not enough. Organizations need to have leaders who will set the pace for positive change by transforming the organization’s culture and ways of working to become more purpose-led. Purpose should not be the sole responsibility of one leader in the organization, it needs to be supported by the collective will and wisdom of various stakeholders. In SGV, a steering committee (aptly named the Purpose Council) meets regularly to identify areas for improvement and design programs to continually ensure that our practices reflect our purpose. COMMUNICATE AND DEMONSTRATE PURPOSE-DRIVEN CONDUCT As with any transformative program, constant communication is key. An organization’s leaders need to actively and constantly communicate the company’s vision and encourage people to embrace the meaning behind the purpose on a personal level. Leaders not only have to “walk the talk” when it comes to purposeful behavior, but they also need to regularly keep the channels of dialogue open. We continue to sustain our purpose through regular, inspirational internal communications from leaders and partners to further strengthen our people’s collective resolve. HELP YOUR PEOPLE FIND THE PURPOSE ‘SWEET SPOT’ Leadership advisor Peter Fisk references an interesting duality between passion and purpose, which he attributes to Ha Nguyen of Omidyar Networks. Passion, he says, is about finding yourself. It’s about doing what you love and possibly building your life and career around it. Purpose is about losing yourself in something bigger than you. It’s about wanting to make a difference, to leave a lasting and meaningful legacy. Finding one’s passion may not always have purpose and finding one’s purpose may not necessarily fit one’s passion. However, for those individuals who can both do what they love while serving the greater good, that is where true fulfilment lies. I wish to take this opportunity to share with our readers how fortunate I had been — that in my 38 years of working with SGV — I had personally found deep fulfilment in the unique intersection between my passions and our purpose. As I turn over SGV’s leadership to Wilson P. Tan, the next SGV Country Managing Partner, I am excited about the limitless possibilities of a fresh, new decade with full confidence that SGV’s Purpose will thrive and endure for generations of SGV professionals yet to come. A Merry Christmas and a purposeful 2020 to all! This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. J. Carlitos G. Cruz is the Chairman and outgoing Country Managing Partner of SGV & Co.

09 December 2019

Jocelyn M. Magaway

Act fast before the FAST Act interferes with US Passports

This article applies to US citizens, US nationals and their employers, the latter to ensure US Federal tax compliance. “Seriously Delinquent” tax debts can cause suspension, denial, or nonrenewal of US Passports. The US passport is said to be one of the most powerful in the world. Its holders enjoy visa-free access or visa-on-arrival access to almost 200 countries. For an American who lives overseas, the US passport is even more important as it may be the only valid proof of identification in the host country. Furthermore, a US passport may be the only acceptable ID document when entering into any legal transactions, such as signing a lease agreement or an employment contract or opening a bank account. However, what if this powerful passport were rendered useless, revoked or refused renewal due to tax compliance issues? On Dec. 4, 2015, former President Barack Obama signed into law the Fixing America’s Surface Transportation (FAST) Act. The Act provides funds for Federal highways, highway safety and transit programs, and related needs. To help cover the costs involved, it added a new Internal Revenue Code (IRC) section (Section 7345) that allows the Internal Revenue Service (IRS) to work with the State Department to revoke, deny, or limit the passport of any taxpayer with a “seriously delinquent tax debt.” This procedure has raised an estimated $1 billion so far — considerably more than the anticipated $400 million. Given this level of success, we can expect the IRS to continue using passport suspensions, denials, and non-renewals to motivate taxpayers to settle tax compliance issues. WHO ARE THE FAST ACT’S TARGETS? The operative phrase here is “seriously delinquent tax debt.” Under the Act and the IRS’s implementing guidelines, this refers to an individual’s unpaid, legally enforceable Federal tax liability of at least $52,000, including interest and penalties, as formally assessed by the IRS. Also, IRS must have already filed a notice of lien, issued a levy on the taxpayer’s assets, or the taxpayer must have either exhausted administrative appeal rights or allowed them to lapse. So, when is a tax debt not considered seriously delinquent? The FAST Act clarifies that debts that are being paid in a timely manner in accordance with an IRS-approved offer in compromise or installment agreement are not considered seriously delinquent. Tax cases for which a due process hearing has been filed or is pending or that are subject to a claim that can result in a zero balance are also not included. IRS rules also have certain compassionate provisions that exempt taxpayers who have filed for innocent spouse relief or for personnel who are currently serving in a combat zone. IRS rules also allow for discretionary exemption (which means IRS may or may not allow an exemption) in cases involving financial hardship or identity theft, for taxpayers in federally-designated disaster zones, bankrupt individuals, or for deceased taxpayers. WHAT HAPPENS IF A TAXPAYER’S PASSPORT IS AT RISK? If the taxpayer’s debt is seriously delinquent and none of the exceptions or discretionary exclusions apply, the IRS will send a certification that the taxpayer’s passport is subject to suspension or non-renewal to the Treasury Secretary who then forwards that certification to the Secretary of State. Concurrently, the IRS will notify the taxpayer of this action at his or her last known address. To contest a certification, a taxpayer may file suit in a US district court or the US Tax court. Given the expense and time involved in litigation, a recent IRS Notice may provide a more attractive option for taxpayers who act fast. If the State Department receives a passport application from a certified delinquent taxpayer, it will now inform the taxpayer and hold the application for 90 calendar days instead of immediately rejecting it. This provides time for the taxpayer to contact the IRS and request a decertification by convincing the IRS that the certification is in error, by settling the tax liabilities in full, or by entering into an offer in compromise or installment payment agreement with the IRS. Affected taxpayers should bear in mind that the $52,000 threshold for 2019 is not difficult to breach. Under the general statute of limitations for federal taxes, the IRS usually has just three years from the due date of a return or, if later, from the actual filing date to assess additional taxes. However, this limit becomes six years in cases where there is a substantial understatement of income (i.e., omission of over 25% of gross income). The statute is unlimited in cases where the understatement is fraudulent or where the taxpayer has failed to file. The statute of limitations is also unlimited if the taxpayer fails to include certain forms related to foreign assets when required. Since the time frame to calculate liabilities can run from three to an unlimited number of years, the tax plus interest and penalties can easily add up to $52,000 or more. ACT FAST TO PROTECT YOUR US PASSPORT Anyone who receives a notice from the IRS or State Department of a seriously delinquent tax debt or who is certified for passport denial or limitation must act quickly. Affected US passport holders who have been identified as delinquent taxpayers should immediately consult a tax advisor and resolve any tax compliance issues before the FAST Act takes away their passport. It should be noted that an application to renew an expiring US passport can be submitted up to nine months before its expiration date. Passport holders who have any inkling of a pending tax problem should file their renewal as early as possible to give themselves and their advisor time to work out a solution. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Any tax advice contained herein may be insufficient for US penalty protection. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Jocelyn M. Magaway is a tax senior director and IRS enrolled agent of SGV & Co.

02 December 2019

Narciso T. Torres, Jr.

Cars, not horses: Creating a sustainable growth advantage

Realizing growth is a challenge for all entrepreneurs who dream of creating and scaling their startups into tomorrow’s multinational corporations. However, early successes in the fast-paced initial phase of development do not necessarily guarantee an enduring competitive advantage and business sustainability. What then sets apart market-leading entrepreneurs from those who failed? In Daring to Compete, a new EY book exploring studies based on interactions with winning entrepreneurs of the EY Entrepreneur of the Year program, it was established that despite their differences in size and industry, leading entrepreneurs share a disciplined framework for growth. Such a framework helps companies align their capabilities with their growth strategies and find gaps by focusing on the seven drivers of growth: customer, people, behavior and culture, technology, operations, transactions and alliances, finance and funding, and risk. This framework, which the book identified as the EY 7 Drivers of Growth, discovers what all businesses will need to manage and evolve as they progress through their various stages of development. PRIORITIZING CUSTOMER-FOCUSED DIGITAL TRANSFORMATION Most companies service their customers directly in the early stages of business, equipping them with the ability to build direct relationships. However, competing operational priorities can easily cause a business to lose focus on its customers. Successful entrepreneurs know that to become market leaders, they must not only meet their customers’ expectations – they must exceed them. It should be noted, however, that this does not always mean giving the customer what they want, such as the case with Henry Ford. The father of the automobile industry famously said that if he’d asked what his customers wanted, they would have asked for faster horses. By finding an alternative perspective of the customer’s needs and wants, a company can disrupt the market, and create a truly sustainable advantage. Moreover, by challenging traditional business models and continuously raising the bar, today’s companies are bound to seek digital innovation. Evolving businesses do not initiate digital transformation out of a simple interest in technology; they do so to focus on customer agility and business change. Digital technologies such as data analytics allow them to make faster, smarter decisions to improve business performance, manage risk, and enhance operations. While this potential value is recognized, businesses still find it difficult to successfully utilize information technology to deliver business change. This means business leaders need to ask themselves the question of how to adapt their business model to create new opportunities, roles, and skills in light of new technologies, and effectively integrate these new technologies into the relevant aspects of their business. BALANCING SPEED AND SUSTAINABILITY A modernized workforce is key to leveraging new technologies, but companies, particularly those in their nascent stages, face their own challenges in attracting and retaining skilled individuals. For this reason, market-leading entrepreneurs prioritize attitude over skills when recruiting talent and make it a point to invest in training their workforce to meet the evolving demands of their business. As businesses scale from start-ups into multinational corporations, they also face the need to adapt their performance and reward structures to recognize behaviors that contribute to their long-term growth. Investing in both people and technology requires the right amount of funding at the right time. Leading entrepreneurs time their capital needs by planning their cash flow, setting key milestones, and sourcing for appropriate types of financing. Both human and financial capital can only grow at a certain rate, requiring a consistency that produces the highest likelihood of sustainable progress by strategically planning ahead instead of being opportunistic when it comes to growth. This poses the question to entrepreneurs of how to balance sustainability and speed in their businesses. EMBRACING CALCULATED RISKS New technologies and business processes lead to new risks. But while stereotypical entrepreneurship introduces the idea of risking everything, it is neither a useful nor healthy mindset in terms of effective risk management. It is true that market-leading entrepreneurs embrace the positive forces of risk, but they also employ a discipline that leads to taking only calculated risks. This involves weighing any potential disadvantages and assessing their ability to absorb the potentially negative impact of their decisions. Leadership plays the role of gatekeeping risks in the early stages of a company’s growth, but as the business grows, company leaders will need to formalize or refresh procedures and internal controls. Business risk increases and diversifies with growth and can come from both inorganic and organic expansions. Entrepreneurs can mitigate the risks from accessing product segments and new markets through strategic acquisitions, alliances, and partnerships. Evaluating these risks and performing thorough assessments are key components of the structuring and deal negotiation process. Circumstances may evolve at any point through this development, resulting in adjustments in price, revisions of terms and conditions, or the decision to simply let it go and walk away. Even as the customer remains the focus of growth strategies, entrepreneurs must effectively pace the growth of their business by balancing their investments and attention across the seven growth drivers. This not only provides an increased potential for sustainable growth, but an enduring advantage in the competitive businesses landscape. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Narciso T. Torres, Jr. is a Partner and a Market Group Leader of SGV & Co.

25 November 2019

Benjamin N. Villacorte

Are sustainability reports a fad?

Wider corporate reporting is being promoted as a means to improve corporate governance, as stated by International Accounting Standards Board (IASB) Chairman Hans Hoogervorst in his speech in Tokyo on Aug. 29, 2018. The IASB chair admitted that financial reporting has its limitations and cannot adequately capture certain elements that might be important to stakeholders, such as the intangibles that are vital to the company’s business model and its strategy for long-term value creation. Financial statements are essentially backward-looking reports that contain limited forward-looking information, which means that in their current state, financial statements do not address emerging sustainability issues that might impact a company’s future cash flow. However, the IASB Chair made it clear that the Board is not equipped to enter the field of sustainability reporting directly. He recognizes in a speech about sustainability reporting in April at Cambridge University that the Board does not have the expertise required to set sustainability reporting standards. Additionally, he notes that there are already several standard setters in this space. Mr. Hoogervorst also pointed out that regulators and stakeholders should not have exaggerated expectations that sustainability reporting will act as an agent of change and will be effective in forcing companies to “prioritize planet over profit.” That being said, clear public policies can certainly help effect change, and financial incentives are crucial to swaying companies to address material sustainability issues. The rise of sustainability reporting that focuses on stakeholders and provides information about the impact of sustainability issues on the future returns of the company is the most promising development in this space, according to the IASB Chair. While the IASB will not directly participate in sustainability reporting, it is addressing the limitations of financial reporting through its “Better Communication in Financial Reporting” project. This initiative aims to improve financial communication not by creating new standards, but by providing guidelines on how to better present information that has already been collected. The project contains several strands of work, one of which is revising and updating the Management Commentary (Practice Statement) to include a report on how material sustainability issues may impact the business. The IASB is expected to publish an Exposure Draft of the Practice Statement in the second half of 2020. On the local front, the Securities and Exchange Commission (SEC) has released a memorandum requiring publicly-listed companies (PLCs) to submit their Sustainability Report together with the 2019 Annual Report (SEC Form 17-A) in 2020. The memorandum issued early this year stated that the guidelines are to be adopted on a “comply or explain” approach for the first three years upon implementation. This means that “companies will be required to attach the template to their Annual Reports but they can provide explanations for items where they still have no available data. However, by 2023, PLCs will need to comply with the Sustainability Reporting Guidelines specified in the memo, or be subjected to the penalty for Incomplete Annual Report (under SEC Memorandum Circular No. 6, Series of 2005). Like traditional financial reporting, rigorous climate-related financial disclosures do not happen overnight. The path from start to finish can involve twists and turns, as well as the coordination of many moving parts, thereby requiring the collaboration and expertise of a variety of corporate functions to achieve an organization’s ultimate reporting objectives. The following are key action steps companies can take now to prepare themselves for reporting non-financial information. 1. Secure the support of your board of directors and executive leadership team. 2. Integrate climate change into key governance processes, enhancing board-level oversight through audit and risk committees. 3. Bring together sustainability, governance, finance, and compliance colleagues to agree on roles. 4. Look specifically at the financial impacts of climate risk and how it relates to revenues, expenditures, assets, liabilities, and financial capital. 5. Assess your business against at least two scenarios. 6. Adapt existing enterprise-level and other risk management processes to take account of climate risk. 7. Solicit feedback from engaged investors about what information they need to know about climate-related financial risks and opportunities. 8. Look at existing tools you may already use to help you collect and report climate-related financial information. 9. Plan to use the same quality assurance and compliance approaches for climate-related financial information as for finance, management, and governance disclosures. 10. Prepare the information you report as if it were going to be assured, even if you decide not to do so right now. 11. Look at the existing structure of your annual report and think about how you can incorporate the information into your discussion of risks, management’s discussion and analysis (MD&A), and the governance section. The recent pronouncements of the IASB and SEC on the need for reliable and accurate sustainability reporting underlines the necessity for companies to assess and manage its non-financial performance towards achieving the universal target of improved sustainability. However, for sustainability reporting to be effective and useful, companies should not only view it as an exercise in compliance, but actually a responsibility of every corporate citizen to measure and document their best practices towards achieving the goals of sustainable development to meet the needs of the present without compromising the ability of future generations to meet their own needs. It would seem then that need for sustainability reporting is here for good. In which case, companies are encouraged not to wait for sustainability reporting standards, or a regulatory requirement, to be mandatory. The time to act for the greater good is now. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Benjamin N. Villacorte is a Partner of SGV & Co.

19 November 2019

Wilson P. Tan

Suits The C-Suite By Wilson P. Tan

With the dizzying speed of digital disruption occurring in the global business environment, small and medium enterprises (SMEs) are increasingly realizing the urgent need to explore digitalization. Incorporating digitalization in their business will help expand and create new sources of value for their enterprises to remain competitive and relevant to their markets. In my recent article, I wrote about the findings of a recent EY study, Redesigning for the digital economy: A study of SMEs in Southeast Asia. In the report, almost 370 SME executives expressed as their top priorities leveraging digital technology and prioritizing the improvement of their customer service. However, to properly implement digitally-enabled operations and meet the consumer’s increasing demand for personalization and convenience, businesses will need the support of a modernized workforce to actualize their strategies. The function of modernized talent is critical to a company’s digital transformation. This increasing demand for appropriate digital services gives rise to new digital roles, such as digital marketers, data scientists, and automation engineers. At the same time, current employees will, by necessity, be disrupted by digital solutions that replace repetitive tasks, such as intelligent automation technologies and robotics process automation (RPA). While the use of intelligent and automated platforms to enhance efficiency will require the traditional workforce to adapt, these new and enhanced roles present the opportunity for companies to reboot their people programs and help employees focus on strategic, more value-added tasks. THE CHALLENGES OF WORKFORCE ADAPTATION The same study on SMEs had identified two main constraints that enterprises face in adapting their workforce to enhanced, digital roles. First is capacity and second is resources. SMEs specifically lack access to digital talent and face challenges in upgrading the skills of their employees, which understandably creates a gap between smaller enterprises and their multinational counterparts. Many SMEs also have the disadvantage of looking less attractive to potential candidates with the right digital skills compared to larger companies with more established names and deeper pockets. In addition, they face the struggle of prioritizing effective development programs to upskill their current workforce in light of other competing business priorities. REDESIGNING THE MODERNIZED WORKFORCE Challenges aside, SMEs will need to go beyond identifying the roles and skills required to achieve their digital transformation. They are expected to also dedicate employees to specific digital roles instead of merely assigning these roles to existing employees as secondary positions. For example, the role of social media manager can often be a full-time job, yet some companies simply assign this task to existing sales or marketing personnel who may not have the experience and exposure to maximize and manage social media assets. SMEs will have to consciously take active steps to evolve their current workforce into one that can maximize digital investment insights and productivity gains. One means to achieve this is by developing a clear view of critical digital roles, functions and skills instead of falling into the trap of blindly following hiring trends. SMEs need to assess and identify what roles are specifically designed to support their own digital transformation strategy. These roles and skills should then be adapted to form the career pathways of an organization, allowing management to conduct effective strategic workforce planning for the company’s future needs. A clear overview of their talent needs also allows management to further maximize their limited pool of human resources by deploying them into strategic roles. Furthermore, this allows management to address capability gaps through targeted employee skill development initiatives and talent attraction. For companies to effectively redesign job functions and business processes, they must leverage insights from the analysis of people data to support changes and decisions. SMEs also need to consider how to best incorporate digital solutions into any redesigned roles to improve efficiency as well as employee and customer satisfaction. This alleviates the pressure on talent shortages by expanding the workforce’s capacity to take on enhanced roles. PRIORITIZING THE ROLE OF DIGITAL Over and beyond considering technological or digital solutions, what is more essential is for SMEs to adopt a digital mindset and develop a digital work culture. This mindset and culture will effectively develop agility and further drive innovation. Attaining this end-goals will entail an assessment and the transformation of traditional policies, processes and platforms to better adopt and support digital thinking. As an organization undergoes digital transformation, SMEs will benefit from engaging their employees by working together with them to minimize resistance and drive the necessary behaviors to integrate digitalization into the company. They can achieve this through effective change management and positive reinforcement through rewards linked to performance and employee recognition, both of which can go a long way in nurturing a digital work culture. The leveraging of transformative technologies should serve as an enabler for SMEs instead of a complete replacement of their human workforce. Disruptive forces will continue to challenge SMEs in the digital age, making it increasingly apparent that digitalization cannot be relegated to a one-off project — it is by necessity a continuous and evolving journey with great impact on the entire workforce. SMEs that prioritize digital roles and fully embrace a digital mindset will, in all likelihood, achieve a competitive edge that leads to success in the digital economy. The question now for individual SMEs is, is it better for you to reboot your digital people strategy or invest in robotic processes? Or find a solution that combines both? This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Wilson P. Tan is the Vice Chairman and Deputy Managing Partner of SGV & Co.

11 November 2019

Faith Mariel N. Reoyan

Seven lessons from IFRS 17 live engagements

The financial statements of companies issuing insurance contracts are bound to change dramatically beginning Jan. 1, 2022, as the date marks the global adoption of International Financial Reporting Standard (IFRS) 17. IFRS 17 introduces the concept of deferring profit and recognizing this profit over the duration of the contract. This significantly changes the way companies measure and account for long-term insurance contracts. This poses the question of whether current financial metrics will remain relevant (such as gross premiums as a basis for ranking) and even if so, new metrics will surely be introduced (such as the future profits for new business) upon adoption of IFRS 17. Along with this key change, several requirements of IFRS 17 will force companies to implement changes to their data, systems and processes. While local companies are given an additional one-year reprieve at this time, companies should ideally be either in the last stage of their impact assessment or in the early phase of their implementation. Though the implementation experience varies from one company to another, several unique insights and lessons can be gained from each company’s IFRS 17 journey. We present seven important lessons learned from our own live IFRS 17 engagements which are bound to benefit the insurance industry. 1. DO IT NOW It is essential for companies that have not started any IFRS 17 activity to begin with a comprehensive data gap analysis. This will provide a view of the extent of work needed to implement IFRS 17. While 2023 might seem far away, it will easily take an average of 12-15 months to change systems and processes that conform with the new rules. Extra time will be better spent on parallel runs rather than on impact assessment. A detailed timeline including milestones and key dates should be clearly in place, with leeway for potential setbacks, whether these are caused internally or externally. Several key decision points that can affect the overall implementation journey also need to be addressed early on. The most critical of these is deciding whether the ambition level for change is for minimal compliance, smarter reporting, or a full finance transformation. 2. THE OPPORTUNITY TO UNLOCK THE POTENTIAL OF CROSS-FUNCTIONAL TEAMS Implementing IFRS 17 is more than just an accounting and compliance task; it should encompass a team that consists, at a minimum, of the following competencies: a. Accountants b. Actuaries c. Finance Subject Matter Experts d. Technology Subject Matter Experts e. Project and Change Managers Currently, there is a scarcity of talent equipped with IFRS 17 knowledge and experience to lead and drive the implementation. A reasonable assessment of a company’s internal resources should be performed to match each employee’s skills and availability to identified workstreams. Accountants and actuarial resources for most insurers are already stretched with business-as-usual (BAU) activities and other ongoing conflicting internal initiatives. This resulting gap must then be properly addressed with IFRS 17 content owners and drivers, whether to hire new employees or contract external advisors. The team should also have a strong and effective project manager with IFRS 17 content knowledge to ensure everyone is on the same boat and that key stakeholders are well-briefed and engaged. To plan for a sustainable future, companies need to adapt to an evolving relevant mix of resources, skills and capabilities to properly implement expected changes in the business under the new standard. A clear governance structure should also be in place to enable the timely alignment of key decision points. 3. LEARN TO MANAGE THE DETAILS IN THE DATA IFRS 17 has extensive requirements for data quality, calculation, transfer and storage. Experience suggests that data cleansing should be initiated, considering both accounting and actuarial perspectives, before embarking on any data transformation. Though it may vary from one company to another, securing the availability of clean and controlled source data to be extracted can take longer than expected. Significant time in the project plan must be invested to determine how information would feed smoothly into the IFRS 17 Information Technology solution. The vast data requirements will then need to be managed continually and effectively. This can be particularly useful for decision-making factors such as real-time data driven pricing models, “what if” scenarios, determining the most critical key performance indicators, and identifying high-risk transactions or customers. 4. EMBRACE TECHNOLOGY AS A KEY ENABLER For large multinational companies, it is apparent that one of the significant line items in the IFRS 17 budget will be the cost of acquiring a new system or changing an existing one. Most companies expect to change existing systems to operationalize and further centralize their modelling systems. While certain life companies have decided on a software vendor, most are still in the process of vendor evaluation and selection. One of the challenges encountered is the current assessment of system architecture. This pertains, but is not limited, to the complexity of system architecture, data granularity to support required reporting in the future, current functionality uses and existing model updates, the number of reporting basis and ledgers, and the alignment of various processes under one workflow software, whether this is built in-house or purchased. There is no magic “one size fits all” solution available but companies in the midst of designing or upgrading their systems, need to revisit their programs to consider the potential impact of the proposed IFRS 17 amendments. In addition, a big consideration is to have an integrated data model covering both actuarial and finance systems, ensuring that the technology and data are aligned and not just the workstreams. 5. THE NEED FOR KNOWLEDGE TRANSFER AND STAKEHOLDER AWARENESS IFRS 17 training should be provided to core team members to keep them abreast of current developments and proposed amendments. Collaborative awareness and education sessions must be continually adopted with a phased rollout approach not only for key team members but also for other relevant internal and external stakeholders. Moreover, members of the core team should be expanded to include members of BAU processes to facilitate a smooth transition. 6. TALK TO THE RIGHT PEOPLE EARLY ON Participating in industry working groups, advocacy initiatives with local regulatory bodies, and submitting comments and feedback to the International Accounting Standards Board will enable companies to raise peculiarities or transactions requiring special handling. The earlier the concerns and challenges are heard and addressed, the easier it will be for companies to incorporate necessary action required in their implementation activities. Proactiveness in reaching out to national standard-setting bodies and regional groups has a vital role in ensuring that the interests of the company are heard. These groups undertake relevant research, conduct surveys and identify emerging issues, thus providing further opportunities for companies to benchmark against the experiences and best practices of one another. 7. FORM A CHANGE MANAGEMENT TEAM Consideration to turnover, the language, and communication methods for employees to manage resistance and change fatigue, should be in put in place. External stakeholders must also be included in the plan, as many will be interested to know the projected changes to key performance indicators and revenue-driven metrics that will serve as the new language when presenting business results. A WAITING OPPORTUNITY As the timeline shortens with the approaching deadline, the key to a successful and relatively smooth adoption generally rests on management ensuring that the collaboration of the several moving pieces is closely monitored. Companies can take this as an opportunity to adapt and emerge from the change to further drive growth and agility. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Faith Mariel N. Reoyan is an Advisory Senior Manager of SGV & Co.

04 November 2019

Clairma T. Mangangey

Digital audits: the advantages add up

The rules of business have changed. Gone are the days when business leaders had the luxury of time to ponder significant business decisions and make momentous changes to their organizations or processes. Now, businesses are transacting and making decisions practically in real time, which also necessitates that businesses manage risks and leverage opportunities with speed, accuracy and efficiency. As auditors, we have an unparalleled view of all the aspects of a business — both up-close from an operational standpoint, as well as from a larger perspective in the global business environment. This combination of macro and micro views allows auditors to be well-placed to advise businesses on possible risks. But given the changes in the business environment, it is not enough to simply have a deep understanding of business, accounting principles and regulatory requirements — auditors in today’s digital age also need to adopt a digital-first mindset in order to elevate traditional audits with more digital dimensions. MANAGING AUDIT DATA We operate in an age where connectivity is becoming ever more seamless, making the sharing of data among businesses, customers and even governments a standard practice. As connectivity increases, we move into a time where operational, transactional and financial data will eventually reside on shared networks instead of physically with companies. Auditors who can connect to these networks directly and issue audit instructions instantaneously through a secure and dedicated online platform can greatly streamline the audit process. No longer will clients have to manually transfer massive data files and communicate via e-mails — all parties involved in an audit can now manage and view their data on one shared platform or client portal. In fact, SGV, as a member firm of EY Global, leverages such a proprietary global tool called EY Canvas. The client portal linked to EY Canvas provides live, real-time reporting on the actual status of audit requirements and issues alerts to all parties on any concerns as they occur. This means that everyone from the audit engagement team to a client’s management team are always on the same page in the audit, increasing efficiency, flexibility and transparency. This is particularly useful for companies with a large global footprint since the superior connectivity effectively removes physical boundaries and enables operations to be digitally enabled across locations. Even as a business spreads out globally, auditors can have the flexibility and scalability to conduct an audit regardless of size, complexity or location. Understandably, such data-sharing platforms also necessitate a greater focus on data security and privacy. The greater challenge and opportunity, however, is in mining the data for valuable insights and information. ANALYZING AUDIT DATA The sheer volume of data generated through data sharing platforms can make identifying risks more challenging. Auditors have to develop new approaches to process data and document information, which thankfully, rules-based automation can now handle with ease and accuracy. The advent of technology now allows auditors to focus on areas that require judgment, which makes the case for data analytics-driven audits. By today’s evolving standards, a high-quality audit is one that can both process and interpret data in meaningful and consistent ways, helping businesses identify anomalies, operational, financial and non-financial risks. This requires a suite of powerful data analytics technologies, such as the array of data analyzers we have with our EY Helix platform. Why is data analytics so important? First, the high processing speed and capabilities of data processing technologies can cover the entire data population loaded into EY Canvas, rather than the traditional method of random sampling. This complete coverage provides even greater assurance to the people who oversee governance and compliance. Second, by applying data analyzers to comprehensive and granular data, auditors are able to do deeper analysis to uncover new perspectives and improvement areas. Third, data analytics technologies are able to conduct a “continuous audit,” allowing audit efforts to be spread out across the year instead of only during peak periods. This allows an audit that is more efficient and productive, and where clients and auditors can focus on issues rather than processes. MAXIMIZING AUDIT DATA With the insights gleaned through thorough data analytics across a seamlessly connected audit data management platform, robotic process automation (RPA) and artificial intelligence (AI) technologies are now applied to further digitize the audit. By using RPA and AI, tedious mundane processes such as bank and accounts receivable audit confirmations can be done without human error. At the same time, digitizing these transactions open the possibility of data analytics providing even more insights and alerts to audit teams for necessary actions. Intelligent automation and AI in the audit process can help filter data or deliver initial findings, which allows auditors to focus on higher value analysis and raise audit quality. CROSSING THE DIGITAL DIVIDE At its core, the idea of a digital audit, however, implies more than just using digital tools and technologies in the audit process. A digital audit requires adopting a truly digital mindset, one that embodies seamless project management and drives global audit coordination. Having a digital mindset means developing new attitudes and behaviors that allow auditors — and clients — to foresee possibilities while being increasingly resourceful, innovative, adaptable and open to leveraging emerging technologies to change traditional processes. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Clairma T. Mangangey is a Partner and the Quality Enablement Leader of SGV & Co.

29 October 2019

Fahkriemar H. Limpasan

Is there a sweet spot in the new tax laws? Part 2

(Second of two parts) In the previous article, we discussed the salient points of the excise tax on Sweetened Beverages (SBs), the costs associated with its implementation, compliance with applicable regulations, and the applicability of the Prior Disclosure Program (PDP) to importers of SBs. In this second part of the article, we will examine some business considerations which importers as well as producers in the SB industry should consider, including possible opportunities brought about by the new excise tax law. IMMEDIATE IMPACT Given the law’s health objective, its impact was immediately felt upon implementation. According to Nielsen Retail Index, the sales of SBs weakened in the first few months due to the implementation of the excise tax. This was expected considering price increases normally push away consumers. An importer should consider ways to manage the immediate short–term impact of the new tax while waiting for the market to adapt and adjust to the increase in prices. There should be initiatives to address additional costs, while at the same time, maintain market share. For instance, sales efforts may become more targeted, such as towards SB consumers who are not price sensitive, or for whom promotional activities may be effective. At the same time, companies may wish to consider making price increases more gradual to ease the price impact on existing consumers and better manage their expectations. An importer of SBs may also consider sourcing goods from suppliers in countries that have Free Trade Agreements with the Philippines to avail of lower or preferential tariff rates, if any. This would help manage the cost that would have to be incurred by the business and passed on to customers. TAX SAVINGS VS IMPORTATION COSTS Based on the letter of the law, the only way for an SB importer to be exempt from the tax is to use purely coconut sap sugar and purely steviol glycosides. Otherwise, the importation becomes subject to the excise tax. Some companies have already gone this route and changed their formulations to use purely coconut sap sugar and steviol glycosides as sweeteners. Previously, this was considered a more expensive option, but with the imposition of the excise tax, these companies opted to reconstitute their imported products. However, the importers should consider the actual costs of the sweeteners exempt from excise tax. For instance, stevia is more expensive compared to the sweeteners subject to excise tax. Importers will need to conduct proper cost-benefit studies specific to their processes and operations to weigh the benefits of a change in sweetener used. Moreover, the importers should also consider the possibility of losing market share if there is a change in the sweetener used in the SBs, particularly if their market is taste-sensitive. While a change in the sweetening ingredient of the SB may result in possible tax savings, an importer should also factor in the preferences of the target market. OPPORTUNITY TO TARGET A HEALTH-CONSCIOUS MARKET The reality is that the Philippines is not the only country to implement a tax on SBs. Other countries have implemented or will implement similar taxes. The underlying factor among all these is the objective of improving the overall health of a country’s population. Given this general direction among different jurisdictions, there is an opportunity for players in the SB industry to cater to a specific market, i.e. those who look for healthy alternatives to SBs. In fact, developing “healthier” SB brands or formulations may even present new market possibilities abroad, with local producers eventually exporting SBs to health-conscious consumers outside the Philippines. In the Philippines, according to the National Tax Research Center, citing data from the Philippine Statistics Authority in 2015, the annual family expenditure on soft drinks reached as high as 20%. On the assumption that only half of this number would look for healthy alternatives, such number may constitute a good enough market size for an industry player to target. Companies should also take notice of the change in the consumption behavior of Filipinos. In a recent study, Filipinos are slowly becoming more health conscious in their food and beverage choices, opting for “light” variants or those with more nutritional benefits. While the increase in product cost is solely attributable to the excise tax, the decline in sales, however, may not be solely attributed to the same as changes in consumer behavior may also be a substantial factor. Resourceful companies can take this business gap as an opportunity to cater to the change in consumption behavior as well as meet the legislative intent to promote better health and address the alarming rates of diabetes and obesity in the country. In this way, perhaps a new “sweet spot” can be found that balances business gain with innovative product development and socially responsive market strategies. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Fahkriemar Limpasan is a Tax Senior Director of SGV & Co.

07 October 2019

Cyril Jasmin B. Valencia

Will REITs soon be within reach?

Real Estate Investment Trusts (REITs) had been gaining propulsion globally for many years. Locally however, since the introduction of REITs a decade ago, industry players have yet to launch the first such offering to the public. Recently, there have been positive regulatory developments that are expected to provide an attractive landscape for potential players to proceed. While it is true that there are many opportunities in this field, players must find ways to operate within the regulatory framework, allocate the asset portfolio effectively, comply with governance requirements, and adapt to continuing industry disruption. THE SPONSOR The big players in the real estate industry see REITs as an alternative venue for capital raising. It is a platform where Sponsors can unlock the value of their existing properties and receive upfront cash proceeds which can be redeployed to future growth projects. These big players act as Sponsors, who own the assets. They will need to weigh options as to the type of assets, among their portfolio, that can be contributed to the REIT company (REIT Co.), which will in turn operate the asset. A key point for the Sponsor in deciding on which asset to contribute is the asset’s ability to generate steady income since the law requires annual dividend declarations by the REIT Co. It is also equally important for the Sponsor to determine the proper valuation of the asset transferred, to ensure that shares received from the REIT Co. are commensurate to the value of the assets given up. The Sponsor will have to be prepared for how the transaction will impact its financial reporting, for both the separate and consolidated financial statements given the continuing need for transparency to its stakeholders and compliance with governance requirements. Before the actual transaction, it is important for the Sponsor to simulate the accounting implications in its books, particularly for the transfer of property to the REIT Co. in exchange for cash/shares or other considerations, and the treatment of its investment in REIT Co., on a continuing basis. It should be noted that in the separate financial statements, if the asset contributed by the Sponsor is other than cash, there is a need to assess how the value of the investment in REIT Co. will be booked, which may result in a gain or loss. Assuming the REIT Co. is controlled by the Sponsor at initial contribution, the transfer is a non-event transaction in the consolidated financial statements reporting. Under the legal framework, the REIT Co. is required to sell its shares during the initial public offering (IPO) and this will continue in the subsequent three-year period to meet the Minimum Public Ownership (MPO) requirement of 33% to 67%. Given the MPO requirement, there should be a continuing assessment if the Sponsor still has control over the REIT Co., or if such control has been reduced to joint control or significant influence or a simple investment in a financial asset. The accounting for the type of relationship will impact the income reported and balance sheet of the Sponsor. THE REIT CO. Given the MPO requirement, the REIT Co. should have a clear plan on the timing of the share offering and the continuing ability to price the shares commensurate to their underlying value. Another strategic decision for the REIT Co. is to determine the composition of a Fund Manager, who will implement investment strategies, and a Property Manager, who will manage the real estate assets considering the need to sustain the annual earnings. As contained in the law, such earnings will be tax-free to the extent of income that is distributed, but the savings from taxes will have to be escrowed in the meantime with the Bureau of Internal Revenue (BIR) until the MPO requirement is met. There is a need for a strong backbone to ensure continuing transparency and above-par governance. The REIT Co. will have to consider the financial reporting implications of the accounting for the asset received from the Sponsor; the classification of shares issued; the treatment of dividends; and the treatment of cash escrowed by tax authorities in relation to the MPO requirement. Furthermore, the relationships of the REIT Co. and the Sponsor with each of the Property Manager and Fund Managers will have to be studied carefully to determine the existence of control, joint control or significant influence, or possible treatment as a financial asset investment. Any tax implications from the perspective of all parties involved will have to be studied as well in order to ensure that the structure and the contracts are designed in a most tax efficient way. THE NEED TO BE AGILE The potential players will have to be cognizant of the continuing disruptive influences that are happening in the REITs space in other parts of the world. REIT assets today can just be in the form of malls, office space and industrial buildings. In the future, they can be assets in alternative sectors, such as data centers, wireline, communication towers, electronic vehicle charging zones, solar canopies, or battery storage, among others. In fact, several REIT jurisdictions have granted REIT status to these alternative property types. These influences may come from changing customer behaviors among space occupants, continuing demand for work and play balance, technological advancements and easing regulatory frameworks. Given these, it is of the utmost for the management to keep an open mind to these changes and be able shift the gears as quickly as needed. Regulators on the other hand will have to continue paving the way for business-friendly legislation, which can translate to strong job growth, high occupancy and additional tax collections. There are many moving parts in the REITs web. Hopefully, once the above fundamentals and preparations are put in place, the once blurry and far off horizon for REITs can soon be within reach. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Cyril Jasmin B. Valencia is the Real Estate Sector Leader and Partner of SGV & Co.

2019