Suits the C-Suite

22 September 2020

Jonald Vergara and Betheena Dizon

Simplifying share valuation

The COVID-19 pandemic may have unwittingly triggered acquisition activity as private equity investors demonstrate an increased appetite for Philippine companies. Despite the expected economic slowdown, investors continue to look for opportunities, with many entities needing sufficient capital to sustain their businesses. Whether it be due to corporate restructuring or a simple divestment, the sale or transfer of shares of stock in a domestic corporation remains a routine commercial transaction. Under the Tax Code, the sale, barter, exchange or transfer of shares in a domestic corporation, not traded on the stock exchange, is subject to capital gains tax and documentary stamp tax. Donor’s tax may also be imposed if the consideration for the transfer of the shares is below fair market value, though amendments to the Tax Code by the TRAIN Law emphasizes that the sale, transfer, or exchange of property made in the ordinary course of business will be considered as made for an adequate and full consideration. As such, the Department of Finance (DoF), on the recommendation of the Bureau of Internal Revenue (BIR), recently issued Revenue Regulations (RR) No. 20-2020 effective Sept. 3, which simplified the process of determining the fair market value (FMV) of shares of stock for sale, exchange, or transfer. RR No. 20-2020 Under RR No. 20-2020, the FMV of common shares is prima facie equivalent to the book value based on the latest audited financial statement (AFS) prior to the sale, but not earlier than the immediately preceding taxable year. For preferred shares, the FMV is set at the liquidation value equivalent to the redemption price as of the balance sheet nearest the transaction date, including any cumulative and preferred dividends in arrears. If the investee corporation has both common and preferred shares, the book value of the common shares will be derived by deducting the liquidation value of the preferred shares from the equity and dividing the result by the number of the issued and outstanding common shares. Thus, RR No. 20-2020 underscores the difference in the valuation for common and preferred shares, given the nature and rights of each class of shares. This clarity on the valuation of preferred shares is a welcome development since, for the longest time, previous rules did not provide details in determining the FMV of preferred shares. NET BOOK VALUE ADJUSTMENT Prior to the effectivity of RR No. 20-2020, FMV was determined following the provisions of RR No. 6-2013. The 2013 regulations prescribed that to determine the FMV of shares of stock, the book value of the shares, based on the investee corporation’s (corporation selling shares) latest AFS, must be adjusted to take into account the actual FMV of the real properties owned, if any, by the investee corporation. This net book value (NBV) adjustment requires, among others, the actual valuation of the real property by an accredited appraiser and the tax declaration of the real property as issued by the City or Provincial Assessor. The highest FMV of the real property (among the appraisal report, the tax declaration, or the BIR’s zonal value) will be used to adjust the book value of the shares for FMV purposes. Consequently, the independent appraisal report and the tax declaration must be submitted to the BIR during the processing of the Certificate Authorizing Registration (CAR) covering the transfer of the shares of stock. Without the CAR, the transfer of the shares from the buyer to the seller cannot be recorded in the investee corporation’s books. Such requirements have complicated the processes of transferring shares, depriving the government of revenue from the taxes on such transactions. The preparation of an appraisal report may take some time, depending on the properties of the investee corporations to be assessed, and entails additional costs since the appraisal report must be prepared by an independent appraiser. STREAMLINING TAX PROCEDURES FOR COMPLIANCE RR No. 20-2020 also appears to be consistent with the government’s objectives to streamline tax procedures. It can be recalled that RR No. 12-2018 (or the consolidated regulations to Donor’s and Estate Taxes incorporating the TRAIN Law amendments), expressly exempted the valuation of shares of stock of a decedent for Estate Tax purposes from the provisions of RR No. 6-2013 in requiring the valuation report. Both RRs give credence to the government’s intent to streamline procedures. We can expect the simplified requirements under RR No. 20-2020 to lead to an increase in tax compliance. Without the need for a costly and complicated appraisal report, more parties may be encouraged to transfer shares. Establishing the FMV will also be easier and will minimize disputes among parties since the latest AFS should be able to provide the FMV that will serve as the base consideration. RR No. 20-2020 can also be expected to expedite the process of securing the CAR since the independent appraisal report and the tax declaration are no longer necessary, taxpayers will need to submit fewer documents to process and secure the CAR. Implicit in RR No. 20-2020 is the need for the investee corporation to maintain its AFS, which must also be submitted to the BIR and the Securities and Exchange Commission. Since the RR now requires that book value be based on the latest AFS not earlier than the immediately preceding taxable year, it is now imperative for corporations to always have the AFS of the immediately preceding taxable year prepared. POTENTIAL IMPACT ON OTHER REGULATIONS However, RR No. 20-2020 may also have an impact on other regulations that refer to RR No. 6-2013. For instance, Revenue Memorandum Order (RMO) No. 17-2016 requires that shares to be transferred from an absorbed corporation to the surviving corporation in a merger should also be valued following the guidelines under RR No. 6-2013. Now that RR No. 6-2013 has been superseded by RR No. 20-2020, it remains to be seen how the BIR will interpret the requirement in RMO No. 17-2016 on the adjustment of the FMV of shares to be transferred in a merger, as well as whether it will also adopt RR No. 20-2020 for such valuation purposes. RR No. 20-2020 is a welcome respite for taxpayers. With greater facility of transactions comes a potential increase in compliance. In turn, improved compliance can lead to an increase in the Government’s tax revenues, which could go a long way to support Government efforts in these challenging times. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the authors and do not necessarily reflect the views of SGV, the global EY organization or its member firms. Partner Jonald Vergara and Senior Manager Betheena Dizon are from the Tax Service Line of SGV & Co.

14 September 2020

Joanne Macainag-Cobacha

Aiding recovery: VAT exemptions on imported medicine

Health is wealth, particularly during the COVID-19 pandemic. It would seem that the government concurs when it passed Republic Act (RA) No. 9502, otherwise known as the “Universally Accessible Cheaper and Quality Medicines Act of 2008.” The RA empowers the Department of Health (DoH) to keep medicine affordable and accessible to promote the health and well-being of Filipinos. In light of this, the House and Senate included in RA No. 10963 (the TRAIN Law) a value-added tax (VAT) exemption on the sale of drugs prescribed for diabetes, high cholesterol and hypertension beginning Jan. 1, 2019. Revenue Memorandum Circular (RMC) No. 2-2018 clarified that the sale by manufacturers, distributors, wholesalers and retailers of drugs prescribed for the treatment of diabetes, high cholesterol and hypertension in its final form shall be exempt from VAT while the importation are subject to VAT. Evidently, the TRAIN Law and RMC No. 2-2018 were issued to address the objectives of RA No. 9502. However, apparently not taken into consideration when the law was passed was the effect on the pharmaceutical industry (manufacturers, importers, distributors, wholesalers and retailers) of imports not covered by the VAT exemption. VAT-EXEMPT SALES Prior to the passage of TRAIN Law, sales of drugs and medicines prescribed for diabetes, high cholesterol and hypertension were subject to 12% VAT. In turn, input VAT passed on to pharmaceutical companies from imports and local purchases of goods and services could be claimed against the output VAT. Due to the TRAIN Law and under Revenue Regulations (RR) No. 16-05, as amended, the input tax attributable to VAT-exempt sales was not allowed to be credited against output tax but should be treated as an expense. This finds support in Bureau of Internal Revenue (BIR) Ruling [DA-646-06] and BIR Ruling [DA-234-04] where the BIR held that the input taxes directly attributable or allocable to exempt transactions become part of the cost of capital goods purchased or of operating expenses. In other words, the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense. Input VAT from the following purchases which are directly attributable to VAT-exempt sales should be treated as follows: Purchases of goods for sale — should form part of the cost of the inventory Purchases of capital goods — should form part of the capitalized cost subject to depreciation Purchases of services/consumable goods — should form part of the operating expenses Since the VAT paid on imports is being paid and passed on to the pharmaceutical companies and forms part of the cost or expense, these companies are unable to significantly reduce the selling price to the public, which was not the intention of the legislators when the TRAIN Law was passed. INPUT TAX ON IMPORTED GOODS Pursuant to Section 110 (A) (2) of the 1997 Tax Code, as amended, input tax on imported goods or property by a VAT-registered person is creditable to the importer upon payment of the VAT prior to the release from the custody of the Bureau of Customs (BoC). To address this issue, the BIR issued RMC No. 34-2019 which provides that considering that input tax attributable to VAT-exempt sale cannot be passed on to the buyer, the inventory list as of Dec. 31, 2018 of drugs and medicine which became VAT-exempt beginning Jan. 1, 2019 is required from all manufacturers, wholesalers, distributors and retailers regardless of whether or not there is an existing excess input tax. As the sale of VAT-exempt drugs and medicines are made, the input tax corresponding to the sale shall be closed to cost or expense. It appears that the BIR, in issuing RMC No. 34-2019, has given credence to the Tax Code provision that input taxes attributable to VAT-exempt sales cannot be claimed as input tax credits but should be expensed out. Under the RMC, if the input VAT was already claimed in the 2018 VAT returns when VAT was paid on imports prior to release from the BoC’s custody, the RMC resolved to reverse the input taxes previously claimed at the time the related inventories were sold. This had a negative impact on the industry since the pharmaceutical companies were not able to recover fully the VAT paid on the importation of these VAT-exempt medicines. NEW HOPE FOR RECOVERY RA No. 11467 was signed and approved on Jan. 22, 2020. This law amended the VAT-exempt provision to now cover imports of these medicines beginning Jan. 1 2020 and to include the sale or importation of prescription drugs for cancer, mental illness, tuberculosis, and kidney diseases beginning Jan. 1, 2023. Another positive development for the industry is the issuance of RR No. 18-2020. In its transitory provisions, the RR specified that the VAT on imports of DoH-approved prescription drugs for diabetes, high cholesterol and hypertension from the effectivity of RA No. 11467 on Jan. 27, 2020 until the effectivity of RR No. 18-2020, shall be refunded in accordance with the existing procedures for refund of VAT on imports, provided that the input tax on the imported items has not been reported and claimed as input tax credit in the monthly and/or quarterly VAT declarations/returns. This is certainly good news for pharmaceutical companies, as including the imports as VAT-exempt transactions and allowing companies to claim refunds will surely help ease the strain on them during these trying times. 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. Joanne Macainag-Cobacha is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

07 September 2020

Clairma T. Mangangey

Environmental, social and governance factors take center stage

We are increasingly seeing the need for accelerated change in businesses to pave the way for recovery from the COVID-19 pandemic. Digital transformation has become necessary for many to continue operations, and the rules for capital markets are being rewritten as the pandemic’s economic and social impact plays out worldwide. This poses the question of how investors will direct capital to support economic recovery. Based on the findings of the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey, institutional investors are raising the stakes in assessing company performance through environmental, social and governance (ESG) factors as they look to build insight into long-term value. Companies unable to meet investor expectations in terms of ESG factors risk losing access to capital markets. ESG information is more important than ever. The survey showed that investors were increasingly dissatisfied with the information received on ESG risks compared to 2018. At 98%, the majority of the investors surveyed signaled a move to a more rigorous approach to evaluating non-financial performance, while 91% also identified how non-financial performance played a pivotal role in investment decision-making. To meet the expectations of investors, companies must prioritize building a more robust approach to analyzing the risks and opportunities from climate change, build strong connections between financial and non-financial performance, and instill discipline into non-financial reporting processes and controls in order to build confidence and trust. A ROBUST APPROACH TO TCFD RISK DISCLOSURES Capital markets are heavily considering the potent impact of environmental disruption, with the failure to consider social and environmental risks leaving many to wonder how well-prepared capital markets are to withstand such shocks. Investors from the survey are building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework in their investment decision-making. While regulators look to companies to play a leading role in rebuilding global economies, investors are more concerned about whether risks such as climate change will be sufficiently addressed. The survey notes that 72% of investors conduct a methodical evaluation of non-financial disclosures, which is a significant jump from the 32% who said that they used a structured approach in 2018. Though the research shifts toward a structured approach, the quality of the approach remains critical. The research also shows significant investor appetite for a formal framework that allows companies to communicate intangible value, allowing investors to evaluate long-term value-creation strategies. Companies should ensure a connection between nonfinancial and financial reporting to provide investors a comprehensive view of their plans to create, communicate and measure long-term value. CONNECTING FINANCIAL AND NONFINANCIAL INFORMATION Expectation gaps between investors and companies could come at a significant price, where companies may find it harder to access capital, and investors may respond to a lack of risk insight by raising a company’s risk profile. Investors may come to their own conclusions should companies choose not to engage in ESG or weigh performance solely towards positive aspects. A growing area of disconnect is how companies disclose ESG risks in their current business models, and research shows dissatisfaction with risk disclosures rose across all areas since 2018. Environmental risk in particular is a key issue for investors, and when asked, the TCFD framework emerged as the most valuable way companies can report on this ESG information. The research also points to concerns about the provided information, with risk management highlighted as the area where investors received the least developed information. Some companies disclose that they have processes to manage climate risks in their organizational risk management system but described in general terms without the necessary connection between climate-related risks and overall risk management. BUILDING TRUST AND CREDIBILITY IN NON-FINANCIAL REPORTIN With ESG performance seen as a core element in investment decisions, it is likely that the trend of using non-financial information to determine the value of a business is likely to continue in the post-pandemic world. Investors look not only at the resiliency of a business, but also on its focus on long-term value creation. Climate change plays a key role in investor considerations because investors seek to understand what it means to companies, as well as gauge how business leaders adapt to climate risk due to its potential to disrupt supply chains and damage infrastructure. Because ESG risks will play a key role in how investors understand a company’s resilience maturity, credible ESG disclosures will be essential. Investors will only find environmental and climate change disclosures useful if they have confidence in what is reported. The investor community will therefore play an active part in driving companies toward non-financial assurance, and companies that will want to communicate their story to investors to access capital must respond to this demand. REINFORCING A SUSTAINABLE FUTURE With investors increasingly using non-financial factors when it comes to assessing a company’s performance, they also seek a formal framework to measure and communicate intangible value, as well as establish closer connections between ESG and mainstream financial reporting. Rather than distracting us from the necessity of driving a sustainable future, the COVID-19 pandemic actually reinforces it. Transitioning to a decarbonized future is a critical component to long-term company resilience as well as that of the economy, while strong ESG frameworks and strategies will be critical to recovery. Recovery itself will be closely observed by investors, and companies and national economies with an agenda for climate-resilient growth and the ability to withstand systemic shocks will have the highest potential of being seen as an attractive prospect. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms. Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

01 September 2020

Fatma Aleah A. Datukon

Transforming tax and finance functions

As we continue to navigate the disruption brought about by the COVID-19 pandemic, companies are reshaping their operations in the new normal to focus on business continuity and to prepare for recovery once the economy bounces back. Part of this transformation strategy is to revisit and reimagine the tax and finance function. The 2020 Tax and Finance Operate (TFO) survey sponsored by EY and conducted by Euromoney Thought Leadership Consulting with over 1,000 executives representing 42 jurisdictions (including the Philippines), 17 industries and 178 publicly listed organizations, demonstrated that the tax and finance function in organizations is generally struggling to cope with digital advances and rapidly evolving global and local conditions. While the survey was conducted before the pandemic, nearly all respondents (99%) indicated that they are taking steps to transform their tax and finance operating models due to deficiencies in their current target operating model. Meanwhile, 73% are looking to co-source critical activities in the next two years as a solution to relieve growing pressures. This also aims to aid in successfully adapting to the constantly evolving tax environment and rapidly transforming digital landscape, which have been amplified by the unforeseen business and human impact of COVID-19. DEFICITS IN DATA AND TECHNOLOGY TRANSFORMATION Based on the survey, 65% of respondents cited the lack of a sustainable plan for data and technology as their biggest barrier to delivering the tax function’s long-term purpose and vision. In fact, 73% of the respondents said that their organizations do not have a formal tax technology strategy in place. The unprecedented operational disruption due to the pandemic — where organizations struggle to manage business continuity amidst the abrupt need to shift to telecommuting and develop digital workspaces — only highlighted the deficit in the technological capabilities of most organizations. This has brought the urgent need for digital readiness in organizations to the forefront. Contributing to the urgency are the growing demands for tax and finance functions to quickly and effectively respond to the dynamic tax landscape, due in part to the Philippine government’s tax reform programs and the implementation of the digital transformation roadmap, which is a priority program of the Philippine Bureau of Internal Revenue (BIR). Organizations that are not pushing to operate in new ways or investing in data and technology adoption (e.g., automation, cloud storage and data governance, data analytics and reporting) may eventually find themselves at a competitive disadvantage. This is in comparison to others that have fast-tracked their digital transformation and have integrated digital technologies into their tax and finance functions to manage tax risks and provide greater focus on value generation. EVOLVING TALENT NEEDS Under their current tax operating models, 62% of the survey respondents spend majority of their tax function time on routine compliance activities. Examples of these include data collection and processing, workpaper preparation, tax returns and reconciliations — as opposed to higher value/higher risk activities — with nearly half (45%) of the organizations struggling to provide new responsibilities and career advancement opportunities for their tax and finance personnel. With the move towards digitally transforming the tax and finance function, a corresponding reimagination of the tax and finance workforce would necessarily follow. This will, however, pose a challenge for organizations to search for and retain the appropriate talent in today’s evolving tax and finance function. In fact, 83% of the survey respondents believe that the core technical competencies of their tax and finance personnel will shift from traditional technical skills to data, process and technology skills over the next three years. However, 61% admit that they are unable to attract and retain talent with the skills required for the tax and finance function of the future. As talent demands continue to evolve, organizations will have to revisit, reskill and/or upskill their tax and finance workforce. This can be achieved by either providing their current employees with the necessary learning and skills development (e.g., digital fluency, data analytics proficiency) to cope with the evolving tax and finance function, or by considering an entirely different strategy to bridge the talent and skills gap (e.g., establishing new tax operating models, co-sourcing) to improve the financial operational effectiveness and efficiency of their tax departments in the new and next normal operations. TAX AND FINANCE OPERATE (TFO) SOLUTIONS Organizations need to use the right mix of people, process and technology to maximize the value of their tax and finance functions and meet the evolving organizational goals now and in the future. One way to do this in the shorter term is by engaging an experienced external TFO solutions provider who can deliver a customized and flexible technology-driven tax service delivery model that can help business leaders reimagine their tax and finance functions. With the right TFO provider, organizations can achieve a sustainable corporate tax function that can support their strategic efforts and bring new innovation and transformation to their tax function. ACCELERATED TRANSFORMATION In today’s highly dynamic tax and regulatory environment, which has been further complicated by the COVID-19 pandemic, sustaining a strong and stable tax and finance function with the right technological and talent capabilities may be one of the most difficult challenges of an organization. In order to more effectively navigate through these changes, organizations should consider accelerating the transformation of their tax and finance functions into agile and cost-effective tax operating models. This will allow businesses to prioritize long-term value creation and risk management as well as redirect valuable internal tax and finance resources to more strategic activities and efforts. A focused effort will manage and boost business continuity and resilience, achieving operational optimization for the now, next and beyond. 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. Fatma Aleah A. Datukon is a Senior Director of SGV & Co.

17 August 2020

Akhil Hemrajani

Digital transformation: A growth necessity

The coronavirus pandemic has irreversibly altered society and the global economy. This forced companies in every sector to reflect on how they have been dealing with market forces in the past and, moving forward, how can they address the rapid shifts in consumer behavior. Some of the biggest shifts are going to be witnessed in the financial, telecommunications and retail sectors, with significantly accelerated steps taken towards digitalization. Even before the pandemic, disruptive technology startups (created in the digital age with purely online marketplaces or platforms) that organically intensify disruption in various sectors forced industry leaders to undergo digital transformation to compete and, for some, to survive. For many entities, it has become critical to develop a digital customer experience that creates a personalized, seamless process across every touchpoint a consumer has with a brand. For banks, COVID-19 has accelerated shifts in consumer behavior patterns, while elevating the risk of financial distress for businesses and customers. Telecommunications providers find themselves in a unique situation where they provide the very platform that so many disruptive technology startups depend upon — powering the phones that make their mobile apps possible. And yet telcos find that they too, must still digitally transform to remain relevant. Traditional retail companies find themselves in the precarious position of seeing a dramatic drop in foot traffic as consumers shift almost exclusively to online purchases. UNDERTAKING THE DUAL TRANSFORMATION JOURNEY Although digital transformation is multi-faceted, this segment will cover just two aspects of it. • Increasing current customer value — This segment of the dual transformation initiative relies on companies offering better experiences and more services to its existing customers. This enhances the likelihood of “stickiness” for their customers, meaning it is more likely that those customers will continue to transact with the company, but it also increases the customer lifetime value through availing of new subscriptions and upselling/cross-selling various other products. The perfect example of this are the telcos that not only offer consumers an online platform to pay their bills but also additional services such as savings, investment products, and small ticket loans. One particular telco offers its consumers an opportunity to borrow load amounts via its digital payments app. Another telco is utilizing alternative credit scoring data to offer gadget loans to its customer base, albeit offline. Financial institutions are similarly undertaking this journey to enable customers to not only transact digitally but be able to avail of various products for their needs. • New customer acquisition — This segment of the dual transformation journey pertains to how organizations can transform digitally, thus enabling them to broaden their customer base in cost-effective ways. For financial institutions, this is critical: 66.4% of the population in the Philippines remain unbanked or underbanked (BusinessWorld article dated May 22: “Unbanked Filipinos to decline by 2025”). Traditional financial institutions are increasingly adopting an omni channel model to enable branchless banking. Initiatives such as agency banking, virtual onboarding, and relying on alternative credit scoring models to lend to more retail customers enable banks to significantly reduce friction in reaching untapped segments. For telcos, the race to develop the next super app is imperative for them to reach new customers in a market where Internet penetration is at 67% (Datareportal Digital 2020 Report). Since new demand for traditional telco products has stagnated, they must shift to offering more innovative products through cost effective digital channels. To execute a dual transformation strategy, it is critical for organizations to establish a viable channel strategy that can accelerate their objectives and can provide an effective route-to-market. CHANNEL STRATEGY To accelerate their digital transformation, traditional organizations are increasingly moving towards an omni-channel approach. This approach enables companies to cater to their customers in a more efficient and effective way by reducing overhead and expenses and marketing a new service or product to a certain geographical demographic. Organizations such as banks, telcos and retailers can analyze data to better understand the prospective adoption rates of digital services so that they can better expand to those markets digitally rather than physically. For example, a bank can analyze which consumers in which areas are more likely to undertake simple transactions (check deposits, money transfer, cash withdrawals) to better understand which customer bases can be reached through a digital platform that offers the same service. Areas where a majority of the transactions are complex (high-value loans, wealth management services, etc.) can still be catered to via the bricks and mortar route. Similarly, telcos can use their own data to ascertain which customers are more interested in transacting online, thereby giving the telcos more initiative to reduce overhead through shorter branch hours and fewer personnel, among others. The shift from offline to online can also be accelerated through the gamification of tasks that can tie into rewards programs, especially those catering to a more digital-savvy generation of customers. One online retailer, for example, offers additional coins or rewards points on their app in exchange for completing tasks such as watching livestreams or reviewing products. Some banks or telcos are also adopting this approach by offering reward points in exchange for additional information about their customers on their apps. THE ULTIMATE SHIFT As we move through challenging times because of the pandemic, it will be important to see how organizations and even countries maneuver to address the ultimate shift to the digital sphere, the timeline of which has been accelerated. Organizations need to disrupt internally to meet the future demands of changing consumer preference, behavior and real-time priorities. At the same time, governments need to promote regulations that not only encourage improvements in existing technological infrastructure, but also create an environment that strongly supports and encourages innovation. We live in troubling times, and the only way to see our way to the future is by taking the necessary steps to evolve and adapt digitally, rapidly and efficiently. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Akhil Hemrajani is a Consulting Senior Director of SGV & Co.

10 August 2020

Joyce A. Francisco

More than just a form

The sensitivities of the new RPT Information Return With the drive for more transparency on related party arrangements, tax authorities worldwide have been increasing their focus on transfer pricing (TP). In the Philippines, the Bureau of Internal Revenue (BIR) has also been taking strides to strengthen its rules regarding Related-Party Transactions (RPT). To improve the TP risk assessment and audit of taxpayers, the BIR has issued Revenue Regulations (RR) No. 19-2020, requiring the submission of a three-page Information Return on Related Party Transactions or RPT Form (BIR Form No. 1709), to be attached, together with supporting documents, to the Annual Income Tax Return (AITR). This form will help the BIR monitor taxpayer compliance with the TP documentation requirement prescribed by the TP Regulations, which the BIR issued in 2013. More importantly, the BIR will use the data gathered from the forms to select which taxpayers to prioritize for TP audits given its limited resources. RPT FORM FILING The RPT Form requires a granular disclosure by Philippine taxpayers, corporations and individuals alike, of all RPTs, whether international or domestic. While the filing of the RPT form is also intended to implement Philippine Accounting Standards (PAS) 24 on Related-Party Disclosures, more details, especially on the taxation aspect of income paid or received from related parties, need to be supplied in the form and its attachments as compared to the disclosure for financial reporting purposes. Thus, taxpayers must prepare the form judiciously, and merely reproducing the related-party disclosures in their financial statements may not be sufficient to comply with the requirements under RR No. 19-2020. There is no threshold, either in terms of amount or volume, on the RPTs that should be disclosed. As the term “related parties” under PAS 24 is a broad concept, taxpayers must also take extra care to determine their relationships with other entities to ensure that all transactions with those considered as “related parties” are properly reported, and that disclosures are consistent among the entities involved in the transactions. In ascertaining whether a person or entity is a related party, the substance of relationships between entities shall be considered and not merely the legal form. INFORMATION DISCLOSURE Bearing in mind that one of the objectives of the RPT Form is to ensure that taxpayers are reporting their true taxable income, questions are thus raised on the level of information that may be disclosed on related-party transactions. Of particular note is the disclosure on transfer under financial arrangements, such as equity contributions. As clarified by the BIR in its Revenue Memorandum Circular (RMC) No. 76-2020, dividends and redemption of shares between and among related parties, though not usually covered by a TP documentation, should likewise be disclosed in the RPT Form. However, investments in another entity do not affect the income or expense of either the investee or investor. Hence, there is no possibility of erosion of the tax base which the BIR intends to guard against by the submission of this RPT Form. Companies are also required to disclose in detail transactions with each member of their key management personnel even if these pertain only to salaries received during the covered year. These officers are correspondingly required to submit the RPT Form in their individual capacities. An issue to take note of is the disclosure of sensitive information, such as the names and addresses of these officers. However, the BIR emphasized that the power of the Commissioner of Internal Revenue to obtain the necessary information to ascertain the correctness of any return, or in determining the liability of any person for any internal revenue tax, or in evaluating tax compliance serves as an exception to the Data Privacy Act (DPA). In addition to the RPT Form, taxpayers also need to submit a certified true copy of the relevant contracts or proof of transactions, withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR, proof of payment of foreign taxes, certified true copy of advance pricing agreement (if any), and any transfer pricing documentation. CONTRACTS AND OTHER DOCUMENTS Contracts are deemed the primary proof of the transactions with related parties. Other documents such as receipts and invoices are considered corroborating evidence only. Hence, all contracts executed by the parties to substantiate the RPTs in the covered taxable year have to be attached to the RPT Form. In case of voluminous contracts and documents, electronic copies may be submitted under certain conditions. It is important to note that the RMC specifically mentions certain RPTs that should be covered by a formal written contract. Agreements on cost-sharing arrangements among members of a group of companies need to be submitted to prove that they are for legitimate expenses. This is in addition to documents (e.g. receipts, proof of payment) needed to substantiate the expenses. Moreover, contracts for the importation of goods or any equivalent genuine document must be submitted aside from other proof of transactions. The TP documentation to be attached to the RPT Form should be the same documentation that the taxpayers relied upon to determine the transfer pricing prior to or at the time of undertaking the RPTs and must have been prepared contemporaneously — that is, not later than the filing due date of the tax return for the taxable year in which the transactions took place. The date of its preparation should also be indicated on the report so that the BIR can evaluate if the TP documentation was prepared contemporaneously. According to the BIR, requiring the submission of contemporaneous documentation ensures the integrity of the taxpayer’s position. TRANSACTION DISCLOSURE Again, since there is no threshold on the amount and volume of RPTs for purposes of the preparation of a TP documentation, a question is raised on whether all the transactions disclosed in the RPT Form should be covered by the TP documentation. As recognized in the RMC, there are RPTs that are not usually covered by a TP documentation such as dividends and redemption of shares. Transactions which do not have an impact on the revenue and taxable income of taxpayers, e.g. equity contributions, are usually not covered by TP documentation. It must be emphasized that the purpose of TP documentation is to demonstrate that the TP policies of a taxpayer are compliant with the arm’s-length principle, thereby ensuring that it is reporting its true taxable income. Reference to the OECD TP Guidelines, which was largely adopted in the TP Regulations, may be made to determine the amount of transactions that must be included in the TP documentation. The OECD TP Guidelines suggests that a balance between the tax authority’s needs and taxpayers’ costs should be maintained in determining the scope and the extent of the information to be included in a TP documentation. Taxpayers should, thus, not be expected to go through such lengths that compliance costs for the preparation of documentation are disproportionate to the amount of tax revenue at risk or to the complexity of the transactions. COMPLIANCE AND CONSISTENCY AMID COVID With the COVID-19 pandemic, many companies will find it challenging to comply with this new RPT Form, faced as they are with the imposition of travel bans and lockdowns as well as the added pressures for workforce safety and well-being. Nonetheless, it would be imprudent to disregard this regulatory requirement. With the large amount of information that needs to be supplied, taxpayers must work closely with their related parties to ensure that transactions are disclosed in a consistent manner among the entities involved. Companies should also consider accelerating the digitization of their systems to more efficiently manage any information requested by the BIR. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Joyce A. Francisco is a Tax Senior Director of SGV & Co.

03 August 2020

Meynard A. Bonoen

Impairment considerations during COVID-19 Part 2

(Second of two parts) In last week’s article, we discussed how to determine the timing of assessment for any impairment for non-financial assets, as well as the indicators of impairment. This article will cover how to measure and estimate the recoverable amount of an asset, how to determine the recognition and reversal of impairment, and provide detailed disclosure on assumptions used to fully understand an impairment assessment especially in these uncertain times. MEASUREMENT An asset is impaired when an entity is not able to recover its carrying value (i.e., the amount shown on the entity’s balance sheet) either by using it or selling it. The recoverable amount is the higher of the asset’s (or group of assets’) fair value less costs of disposal (FVLCD) and value in use (VIU). VIU involves estimating the future cash inflows and outflows that will be derived from the use of the asset and from its ultimate disposal and discounting the cash flows at an appropriate rate. The calculation of an asset’s VIU incorporates an estimate of expected future cash flows, and expectations about possible variations of such cash flows. The forecasted cash flows should reflect management’s best estimate at the end of the reporting period of the economic conditions that will exist over the remaining useful life of the asset. This means entities should consider both short-term effects and long-term effects on assets with longer useful life, such as capital assets and goodwill. Due to the evolving COVID-19 situation, there are significant challenges to preparing the forecast or budgets for future cash flows. In these circumstances, an expected cash-flows approach based on probability-weighted scenarios may be more appropriate than the traditional single best estimate when estimating VIU. In coming up with scenarios, entities should consider the length and severity of the pandemic, government measures, availability of proper intervention (i.e., vaccine), distribution and supply chains, revenue growth and collections, capital, changes in regulations, and changes in customer behaviors, among others. Cash flows are discounted at an appropriate rate, which is a pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks for which future cash flow estimates have not been adjusted. The discount rate should likewise consider the price for bearing the uncertainty inherent in the asset, and other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. It is therefore highly important to exercise careful judgement when determining the discount rate to be applied. RECOGNITION AND REVERSAL OF IMPAIRMENT An impairment loss is recognized to the extent the carrying amount exceeds its recoverable amount. In subsequent periods, external and internal sources of information (such as significant favorable changes in the market conditions, the asset’s value, use and performance) may indicate that an impairment loss recognized for an asset, other than goodwill, may no longer exist or may have decreased. In this case, previous impairment losses may be reversed. Note, however, that an impairment reversal cannot be recognized merely from the passage of time or improvement in general market conditions. When an impairment reversal is recognized for assets other than goodwill, the adjusted carrying amount of the asset may not exceed the carrying amount of the asset that would have been determined had no impairment loss been previously recognized. PAS 36 specifically prohibits the reversal of impairment losses for goodwill. If impairment on goodwill was determined and recognized in the interim period, it cannot be reversed in the subsequent interim periods or at year-end. DISCLOSURE Disclosure is particularly crucial in these times. Due to sensitivity, it is critical for an entity to provide detailed disclosures on the assumptions used, the evidence these are based on, and the impact of a change in key assumptions. Disclosures include, among others, the valuation methodology used and the approach in determining the appropriate assumptions and key assumptions used in cash flow projections aside from long-term growth rate and discount rate; the values of the key assumptions and the probability weights of multiple scenarios when using an expected outcome approach; and inputs used in determining the discount rate and the source thereof. This makes it also important to go beyond minimum disclosure requirements to help users better understand the impairment assessment. KEY TAKEAWAY With the COVID-19 situation, impairment assessment will be a complex and difficult undertaking. Hence, it is imperative for management to be judicious, more prudent and to employ careful judgment in making assumptions, especially when forecasting cash flows and determining the discount rate to be used. It must be noted that cash flow forecasts may now be substantially — if not completely — different from pre-pandemic or existing budgets. Moreover, historical and comparative data may no longer be relevant and helpful in making such forecasts. Assumptions must be updated and should be drawn from and be reflective of the current pandemic circumstances. This naturally requires a more cautious outlook for the future. As previously mentioned, the impact of COVID-19 may no longer be reflected in a single set of cash flows due to the high degree of uncertainty involved; there may be a need to develop multiple scenarios and apply probabilities to each scenario to arrive at the expected cash flows. In evaluating these scenarios, those with a downward impact on cash flows and on the value of the asset should be given more weight to reflect the market view of risk and uncertainty. On the other hand, determining the discount rate is equally challenging given the current market volatility, and that most relevant parameters and inputs to determine discount rates have become unpredictable. Values and assumptions which were accepted, used and applied in the past and in previous impairment assessments and testing may no longer be reasonable or appropriate. For instance, beta and cost of equity may have increased significantly due to capital market volatility; risk-free rates are reaching lows; and debt liquidity issues are severely affecting the cost of debt for many companies. That said, the risk-adjusted discount rates to be used should be calculated with serious considerations for the current market and economic conditions, the value of comparable reporting entities or assets that is available and evident in the market, and the risks of the asset or cash-generating unit to be valued. The pandemic continues to evolve and until such time that a proper and permanent intervention is identified, there remains significant uncertainty about our future, our economy and business viability. Until then, the recoverability of most entities’ assets remains the focus and they will need to continuously reassess, recalibrate and be transparent about their assumptions and outlook for the future of their business. Disclosure is key — if not paramount — to understanding all these under the current situation. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Meynard A. Bonoen is an Assurance Partner of SGV & Co.

27 July 2020

Meynard A. Bonoen

Impairment considerations during COVID-19 Part 1

(First of two parts) The unprecedented disruption caused by the COVID-19 pandemic has brought economies to a standstill — shutting down markets, halting international and domestic trade, forcing businesses to close, and displacing workers on a massive scale. Governments are grappling with the situation, struggling to come up with measures to combat the disease and preparing record stimulus programs to help keep their respective economies afloat while balancing this against the need to protect their citizens. This pandemic has reset the way we live, dictating what is considered the new normal, and drastically impacting financial markets around the world. It is turning swiftly into a critical situation, notably for industries such as travel, hospitality, retail and entertainment. Financial markets are reeling and businesses have had to shut down with revenue reduced to zero, dwindling cash, overdue debt, limited accessible to capital, and assets that have become stale, unusable and unproductive. This begs the question: Is there still value left for businesses and the assets that remain in their balance sheets? Companies reporting their financial performance and condition will be hard-pressed to report the influence of the pandemic on their businesses and on the value of their long-lived assets, including goodwill. These assets are the bread and butter of most companies, comprising a substantial portion of their asset portfolio. Given the unfolding impact of this crisis, there is a rebuttable presumption that the recoverability of their assets may be put into question. The first part of our previous article published on July 13, COVID-19 Pandemic and its Accounting Implications, briefly discussed the impairment of non-financial assets. We will now discuss the sets of accounting, disclosure and financial reporting matters related to annual and interim impairment review that companies must consider. TIMING OF ASSESSMENT For financial reporting purposes, Philippine Accounting Standard (PAS) 36, Impairment, requires an entity to assess, at the end of each reporting period, whether there is any impairment for an entity’s non-financial assets. Non-financial assets include, among others, property, plant and equipment, intangibles, and goodwill. For goodwill and intangible assets with indefinite useful lives, the standard requires an annual impairment test and a testing of when indicators of impairment exist. The reporting period can be quarterly, semi-annual, annual or any other periods that regulations may require. An entity that is required to prepare an interim report (i.e., listed companies and public companies) needs to assess if there are any indicators of impairment or if there is a need to perform impairment testing on its assets at the end of each interim period and not only at year-end. EXISTENCE OF IMPAIRMENT INDICATORS Except for the mandatory annual testing for goodwill and intangible assets with indefinite useful lives, an entity must first determine if there are indicators of impairment (i.e., events or changes in circumstances suggesting that the carrying amount of an asset may no longer be recoverable). The pandemic and its corresponding effects (e.g., the Enhanced Community Quarantine) are likely indicators of impairment but the analysis should go beyond the surface. Determining indicators of impairment requires significant judgment, as well as identification of the events and circumstances that really drive and determine the value of the assets. The source of information can be internal or external. High-level indicators might include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Specific circumstances can include, among others, the decline in stock and commodity prices, fall of market interest rates, manufacturing plant and shop closures, distribution and supply chain issues, reduced demand or selling prices, and limits to accessing capital. Indicators can vary for each business and type of asset, but the assessment must be robust enough before concluding whether such indicators of impairment are present and thus require impairment testing. PERVASIVE EFFECTS OF THE PANDEMIC As the search for proper intervention against this pandemic continues, the more uncertain the financial market becomes. Measures must be taken to anticipate further impact from this crisis. In the second part of this article, we continue our discussion by covering how to estimate the recoverable amount of an asset, the recognition and reversal of impairment, and providing detailed disclosure on assumptions used in impairment assessment. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Meynard A. Bonoen is an Assurance Partner of SGV & Co.

24 July 2020

Alma Angeli D. Placido

Threading through recovery: Health or wealth?

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

20 July 2020

Ma. Emilita L. Villanueva

COVID-19 and its accounting implications Part 2

(Second of two parts) In last week’s article, we discussed the challenges of assessing an entity’s status as a going concern, accounting for financial instruments, impairment of non-financial assets and revenue recognition. This week’s article will provide brief discussions on inventory costing and valuation, addressing onerous contracts and assessing whether events surrounding the pandemic and the resulting developments are adjusting or non-adjusting events. INVENTORY COSTING AND VALUATION Inventories are required to be accounted for at the lower of their cost or net realizable value (NRV). The pandemic and resulting government measures have caused certain entities to reduce their usual production volume, with some completely stopping production during the second quarter. These entities may need to revisit the cost of their inventories. This is particularly true for those manufacturers that allocate fixed production overheads based on normal production capacity. If the production volume of these entities are lower than what was determined to be “normal capacity,” the fixed production overhead should not be allocated to the units produced as this will unduly inflate their costs. Rather, any unallocated fixed production overhead will need to be expensed as incurred. Determining the NRV (or the selling price less cost to sell and/or cost to complete) is another matter as this entails estimation on the part of management. The pandemic may have resulted in reduced demand for the entities’ goods, which in turn will cause the entities to decrease their prices. In such a case, entities will have to determine whether they need to write down the cost of their inventories to NRV. In other cases, entities with goods that are perishable may even find themselves disposing of their products that they are unable to sell, thus resulting in the write off of these inventories. In all of the above, entities will need to also consider making additional disclosures to further describe the impact of the pandemic in their inventory costing and valuation. ONEROUS CONTRACTS Onerous contracts are defined under PAS 37, Provisions, Contingent Liabilities and Contingent Assets, as contracts where the “unavoidable costs of meeting the obligations… exceed the economic benefits expected to be received.” If a contract is found to be onerous, PFRSs require the entity to recognize a provision for such a contract and even possibly recognize an impairment on the related asset or assets. With the disruption in supply chains brought about by the pandemic, entities will need to consider whether their contracts are onerous and if there is any need to quantify and recognize any compensation or penalties from these contracts. For example, a manufacturing entity has to shut down its facilities as required under ECQ. The entity, however, has contracts to sell goods at a fixed price, which may force the entity to procure the goods from another party at a significantly higher cost. The entity will need to review its contracts to determine if there are any compensation or penalties if the entity is unable to fulfill its obligations. The entity will also need to check if there are any special terms that may relieve the entity from its obligations (e.g., force majeure). If the entity can cancel the contract without paying any compensation or penalty to the other entity, the contract is not onerous. Thus, the entity will not need to recognize any provision or impairment losses under the contract. EVENTS AFTER REPORTING DATE Events after the reporting period (or balance sheet date) are favorable or unfavorable events that “occur between the end of the reporting period and the date when the financial statements are authorized for issue.” Such events may be adjusting events (i.e., they have an impact on the financial statements) or non-adjusting events (i.e., they have no impact on the financial statements but may have an impact in terms of the disclosures). Events after the reporting date are adjusting events if they “provide evidence of conditions that existed at the end of the reporting period.” Management needs to exercise critical judgment in order to assess if the events surrounding COVID-19 are adjusting or non-adjusting events. If the events are adjusting events, the entity will need to make the necessary changes (e.g., recognize provisions for court cases existing at the end of the reporting period but were subsequently settled, recognize impairment loss on receivables for customers that declared bankruptcy after the balance sheet date, etc.) in the amounts recognized in the financial statements. If the events are non-adjusting events, the entities will then need to assess if the impact is material. If such is the case, they must make the necessary disclosures in their financial statements. DISCLOSURES (FOR INTERIM REPORTING PURPOSES) The abovementioned implications carry with them the corresponding disclosures required by the relevant standards. However, entities that are required to prepare interim financial statements will also need to consider the required disclosures under PAS 34, Interim Financial Reporting. Under this standard, an entity should disclose events or transactions that have significant impact on its balances since the end of the last annual reporting period. Some examples of these events and transactions are those that impact the valuation of financial assets, such as equity or debt instruments, any loan default or breach of a loan agreement. Since the disclosures under PAS 34 are basically updates of the disclosures or information presented in the most recent annual reporting period (i.e., Dec. 31, 2019), entities should also consider the extent of information they presented in the annual financial statements. However, since the local impact of the pandemic was felt only in the latter part of the first quarter of 2020, it is possible that this information may not have been included in the 2019 annual financial statements. Entities will then need to include more comprehensive disclosures in their interim financial statements. ACCOUNTING CHALLENGES FROM COVID-19 This article briefly touches on some of the challenges COVID–19 poses in preparing financial statements. These challenges may differ from entity to entity and as developments surrounding the outbreak continue to evolve, but there can be no denial that all entities will feel the pandemic’s repercussions on people’s lives and the economy. Entities will thus need to be constantly alert to the implications of the outbreak on their financial statements. This two-part article is the first of a series covering the accounting impact of the coronavirus outbreak. Other articles that will follow will provide more in-depth discussion on certain areas such as impairment and revenue recognition. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Ma. Emilita L. Villanueva is a Partner from the Assurance Service Line of SGV & Co.