Suits the C-Suite

13 July 2020

Ma. Emilita L. Villanueva

COVID-19 and its accounting implications

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 Disclosures must be made if such an assumption is no longer valid or if there is significant doubt that the entity will continue as a going concern in the future. However, if management assesses that such an assumption is no longer valid, the disclosures are not the only ones affected; the financial statements (as a whole) should no longer be prepared on a going-concern basis and the basis for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

06 July 2020

Miguel Carlo S. Rancap

Are companies willing to divest after the pandemic?

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

29 June 2020

Donna Frances G Ylade-Torres

CREATE: Tax reform response to COVID-19 PART 2

In last week’s article, we discussed the salient features of the CREATE bill: the immediate Corporate Income Tax (CIT) rate cut; Lorem ipsum dolor sit amet, consectetur adipiscing elit. Praesent sit amet congue diam, quis dignissim lorem. Donec ac tincidunt libero. Sed id tortor vitae odio maximus laoreet. Curabitur imperdiet viverra hendrerit. Aliquam nunc quam, ultricies non dolor vel, eleifend imperdiet magna. Fusce varius diam sed nulla rhoncus, eu porttitor mi lobortis. Etiam elementum lectus pellentesque maximus pulvinar. Fusce vel euismod orci, vel aliquet magna. Sed pharetra, lorem ut malesuada lacinia, elit tortor dapibus nisl, at luctus augue arcu et ligula. Pellentesque a feugiat augue. Etiam dignissim nisl vitae enim ultricies tempus. Integer venenatis est eu sem rhoncus convallis nec vitae eros. Curabitur orci massa, venenatis ut porttitor in, placerat non tortor. Donec iaculis orci finibus eros consequat, eu tincidunt metus sagittis. Mauris quis blandit tellus, vitae congue velit. Sed ac felis in ligula volutpat consequat. Aliquam porttitor pellentesque tempus. Mauris non nibh in dolor lobortis viverra. Aliquam malesuada nulla nec ultrices imperdiet. Proin molestie quam vel leo ultricies convallis. Morbi ac mattis augue, sed vehicula mauris. Vestibulum mi massa, imperdiet at metus nec, aliquam egestas libero. Maecenas sem risus, gravida ac lorem vel, sagittis commodo nibh. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Donec egestas placerat risus, at gravida lectus. Curabitur ultrices risus eu enim condimentum pulvinar. Duis nec lacus ut dolor eleifend fringilla. Donec sem enim, efficitur id augue sit amet, congue scelerisque dui. Phasellus vel eros turpis. Aenean finibus, ex et tempor dictum, purus odio bibendum augue, sit amet ornare ante libero at ipsum. Donec magna elit, sagittis vel dignissim et, lobortis ut lorem. Duis in elit dui. Pellentesque laoreet nisl ut sodales dignissim. Vestibulum nisi turpis, cursus ut vehicula at, pulvinar eu magna. Suspendisse id fringilla sem. Duis eu semper ex, vel tempus odio.

22 June 2020

Donna Frances G. Ylade-Torres

CREATE: Tax reform response to COVID-19

(First of two parts) To recover from economic recession and to advance towards corporate healing, the Department of Finance (DoF) fine-tuned several provisions of the Tax Reform Package 2 bill. The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) is the latest incarnation of the TRABAHO and CITIRA bills and is now part of the COVID-19 stimulus package put together by the government’s economic team. The DoF calls CREATE the largest tax stimulus program and the first ever revenue-eroding package in the country’s history. According to the DoF, CREATE is expected to free up almost P42 billion in capital over the second half of 2020 and P625 billion in the next five years, with the government assuming that businesses reinvest their tax savings to create sustainable economic opportunities. In a nutshell, the CREATE bill proposes to (1) accelerate Corporate Income Tax (CIT) rate reduction; (2) extend the Net Operating Loss Carry Over (NOLCO) period; and, (3) rationalize fiscal incentives to adopt to the changing business needs brought about by the pandemic. ACCELERATED CIT RATE REDUCTION The CREATE proposes an outright CIT rate reduction from 30% to 25%, then a gradual 1 percentage point reduction every year starting from 2023 until it hits 20% by 2027. The acceleration of the CIT reduction timetable will help restore confidence, especially among micro, small and medium enterprises (MSMEs) that have been battered by the effects of COVID-19. The tax savings can then be used for additional working capital and sustain a massive employment drive for displaced workers. This will also attract potential multinational investors seeking to diversify their supply chains here. By 2027, our CIT rate will be comparable to Thailand and Vietnam, which are both currently at 20%. It will then be just a matter of time before our country matches the ASEAN average of 23%. EXTENDED NOLCO PERIOD Non-large taxpayers will be allowed to carry over net operating losses incurred in 2020 over a period of five years from the current three years. This is a practical incentive to help MSMEs and enterprises rebuild their business operations. However, CREATE has not yet given details on whether the extended NOLCO may be claimed by an enterprise eventually classified as a large taxpayer by the BIR within the five-year period for losses incurred back in 2020. It also appears that qualified taxpayers will have to keep operating post-pandemic to fully maximize the benefit of NOLCO. RATIONALIZATION OF FISCAL INCENTIVES Instead of keeping several sets of incentives currently offered by various investment promotion agencies (IPAs), CREATE proposes to rationalize and tailor-fit fiscal incentives to qualified investments. IPAs will continue to process applications for registration but these shall be placed under the oversight of the Fiscal Incentives Review Board (FIRB). The latter will determine the target performance metrics as conditions for availing tax incentives, and unless delegated to the President or a respective IPA in certain cases, shall grant or deny the incentives recommended by the IPAs. Together with IPAs, it will formulate a Strategic Investment Priority Plan (SIPP) itemizing the priority projects and industry-location tiers, among others. Careful reading of this proposal reveals that the FIRB will technically absorb several key functions of the IPAs. Nevertheless, streamlining the fiscal incentives can definitely change the way investors perceive our investment programs as we compete internationally for high-value projects. Investors can no longer cherry-pick from the incentives menu and go forum-shopping among the 13 current IPAs. OTHER SALIENT FEATURES Other proposed features in CREATE worth noting are: 1.The tax exemption on income derived from foreign currency transactions by offshore banking units and the related 10% final tax on interest income from foreign currency loans will be removed. 2.Regional Operating Headquarters (ROHQs) will be subject to CIT after two years from the effectivity of the Act. 3.Branch profit remittance tax exemption of Philippine Economic Zone Authority (PEZA)-registered entities is retained, which the CITIRA initially proposed to be eliminated. 4.The final tax rate on capital gains from the sale of shares not listed and traded on the stock exchange by foreign (resident and non-resident) corporations, as well as on interest income from FCDUs by resident foreign corporations is increased to 15%. 5.The interest arbitrage rate will be lowered until it is completely removed once the CIT rate drops to 20%. 6.The optional standard deduction for individuals and corporations, which CITIRA initially proposed to restrict, will be retained. PENDING SENATE DELIBERATION Unfortunately, the first regular session of the 18th Congress ran out of time to take up the bill under the Senate’s deliberations before the session adjourned on June 5. Congress, however, can convene in a special session to tackle the bill even during the break if called on by the President. Otherwise, this will be taken up in the second regular session of the 18th Congress, with the Senate to resume on July 27. Even with the tight schedule, hopes are high that CREATE will be passed and implemented by the second half of the year. After all, CREATE was certified by the President as urgent and it is supported by various organizations and industry leaders. CREATE BILL AS A RESPONSE TO THE COVID-19 CRISIS Nearly all countries have moved to cushion their respective economies against the impact of COVID-19. Wage subsidies, stimulus checks, payment concessions and various financial bailouts to enterprises, among others, were implemented at varying speeds, approaches and levels of effectiveness. No country in the world has been spared from the sharp decline and contractions of economic growth. Two years after the TRAIN Package 1 and several bill versions since, CREATE has been repurposed as a pandemic-responsive tax reform as well as a government’s intervention to stimulate recovery and avoid long-term economic damage. The US-China Trade War has also forced ASEAN countries into a race to cut taxes and offer more incentives to investors who are either shifting their supply chains from China or are planning to diversify within Asia. The time is now ripe for legislators to pass a responsive tax reform at this critical period. However, caution must still be in place and pace should not be equated with haste. It behooves not just the legislators but also ourselves as taxpayers to understand the important duty of dissecting the proposed measures and their finer details to arrive at a truly effective tax reform that is adaptive to the challenging needs of our time. In the second part of this article, we will discuss in detail the rationalization of fiscal incentives through a calibrated income tax holiday, special corporate income tax, enhanced deductions and other available incentives to existing registered entities under the transitory period, as well as strategies to capitalize the fiscal incentives under the CREATE bill. Donna Frances G. Ylade-Torres is a Senior Manager from Private Client Services, a Tax Sub-Service Line of SGV & Co.

16 June 2020

Jerome B. Ching

Consensus in lease concessions due to COVID-19

(Second of two parts) In the first part of this two-part series, we discussed how to assess whether changes in lease contracts are lease modifications, and covered lease concessions that are treated as variable rent, lease modifications, and accounted for as government grants. We continue our discussion by reassessing lease terms, including the exercise of purchase, renewal or termination options, as well as the impairment of lease-related assets and a recent amendment issued on May 28 to IFRS 16 on pandemic-related rent concessions. REASSESSMENT OF LEASE TERM INCLUDING THE EXERCISE OF PURCHASE, RENEWAL OR TERMINATION OPTIONS In view of the adverse effects brought about by the COVID-19 outbreak, lessees and lessors should revisit the lease terms of their existing contracts. In particular, they must revisit whether or not the lessees are reasonably certain to exercise their options to extend or terminate the leases, and even their rights to purchase the leased assets at the end of the lease term. PFRS 16 requires that lease terms should be reassessed upon the occurrence of either a significant event or a change in circumstances that will affect the lessee’s assessment as to whether or not it is reasonably certain to exercise those options. A change in the lease term brought about by a reassessment — as to whether or not a lessee is reasonably certain to exercise a renewal or purchase option, or not to exercise an option to terminate the lease — constitutes a lease modification. This will trigger lease modification accounting as discussed in the preceding part of this article. IMPAIRMENT OF LEASE-RELATED ASSETS The pandemic also has a possible effect on the impairment of the lessee’s right-of-use (ROU) asset and the lessor’s leased asset or lease receivable. PAS 36, Impairment of Assets, requires that both the lessee and lessor should assess if there are indicators that their respective lease-related assets may be impaired, and could therefore trigger an impairment test in accordance with PAS 36. In the case of a lessee, the adverse effect of the pandemic on their business might make it difficult to recover the value of their ROU asset, particularly if they are not able to negotiate for a lease concession from the lessor. In the case of a lessor in an operating lease, the lessor might have to deal with the same impairment issue as they might encounter difficulties in recovering the value of their leased asset. Similarly, in the case of a lessor in a finance lease, the lessor should factor the impact of the outbreak on the collectability of their lease receivable in estimating credit losses in accordance with PFRS 9. Lease renegotiations are thus expected to result in balancing the interests of both parties to ensure the least amount of impairment if it cannot be avoided. AMENDMENT TO IFRS 16 ON PANDEMIC-RELATED RENT CONCESSIONS As discussed previously, the guidance under PFRS 16 in accounting for pandemic-related lease concessions can be difficult, especially if there are many contracts to deal with and the rent concessions qualify as lease modifications. In order to help ease the accounting burden, the International Accounting Standards Board issued on May 28 an amendment to IFRS 16 that provides an option to lessees not to account for qualified pandemic-related lease concessions as lease modifications. A lessee shall apply the amendment for annual reporting periods beginning on or after June 1. Earlier application is permitted, including financial statements not authorized for issue by 28 May 2020. In order to apply this option, the following criteria must be satisfied: 1.The concession must be a direct consequence of the pandemic; 2.The concession results in a revised consideration that is substantially the same or lower than that immediately preceding the grant of the concession; 3.The reduction in lease payments affects only payments originally due on or before 30 June 2021; and 4.There is no substantive change in other terms and conditions of the lease. While the amendment aims to provide relief, it also poses some challenges even to lessees. First, the amendment does not prescribe an accounting treatment for lease concessions if the expedient is invoked. However, the basis for conclusion to the amendment provides that if a qualified lease concession is not accounted for as a lease modification, then a lessee will generally account for it as a variable lease payment with a charge to profit and loss for the period. Absent one accounting treatment for the same type of concession, it can result in diversity in practice among lessees. It is also noteworthy that while lessees that elect to apply the expedient do not need to assess whether a concession constitutes a modification, lessees still need to evaluate the appropriate accounting for each concession as the terms of the concession granted may vary. Second, since the amendment provides an option, a lessee that avails of it may produce financial results that may be incomparable to those produced by one that does not. Treating lease concessions as variable lease payments, for example, will likely result in a higher net income for a period; however, this will also result in an unadjusted or higher ROU asset which can trigger impairment concerns. Third, in order to qualify for the expedient, the concession should only affect lease payments originally due on or before June 30. While there are currently only a few lease concessions in the Philippines that extend beyond this date, the uncertainties surrounding the pandemic pose possible issues in respect of future concessions that may not qualify for the expedient. Finally, while the amendment provides relief to lessees, lessors do not enjoy the same. They may therefore need to account for lease concessions in accordance with PFRS 16 as discussed above. CONSENSUS IN CONCESSIONS The pandemic significantly impacted our economy, with many businesses left with no choice but to rationalize operations for fear of not being able to pay their rents on time. For both lessors and lessees, there is the question of the continuing impact on their existing lease agreements if the pandemic continues. Perhaps the best and most sustainable approach is for both parties to develop a joint strategy to compensate any rental loss suffered during the outbreak. Parties can seek help from their legal counsels to better understand their contracts in the hope that both will be able to arrive at a mutually beneficial solution. In most cases, agreements based on mutual trust and consent produce the best economic results, especially during these challenging times. After all, consensus is the foundation of contracts and the economic successes of both lessor and lessee are not separate but rather shared. 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. Jerome B. Ching is a Senior Manager from the Assurance Service Line of SGV & Co.

06 June 2020

Jerome B. Ching

Consensus in lease concessions due to COVID-19

(First of two parts) Almost every part of the country has been, and remains, under community quarantine to help curb the COVID-19 pandemic. Business owners were forced to announce the temporary closure of non-essential establishments such as shopping centers, schools and office buildings, supermarkets, drugstores and other essential businesses which saw changes in operating hours and on-site operations, while food providers such as restaurants were only allowed to provide take away and food delivery services. As a result, commercial tenants found themselves in a dramatic situation where they lost all their revenue overnight while their obligations under their lease agreements continue to apply. Although some lease contracts have provisions relating to force majeure events, most, if not all of these contracts do not include clauses on rent concessions specific to pandemics. In view of the situation, some lessors have announced that they are giving concessions to their lessees in the form of rent holidays or rent reductions during the lockdown, interest-free delays in rental payments, and even the restructuring of the amount and timing of rental payments until the end of the lease term. In lease contracts without force majeure clauses, lessors technically retain the discretion on whether to grant these reliefs, the extent of the relief to be provided, and over who they consider is entitled. Meanwhile, some lessees also proactively seek rent concessions (e.g., deferral of lease payments) or even amendments to the lease contracts to cushion their economic burden until the end of lease term, given that the full adverse effect of the pandemic remains unknown to this day. Considering the voluntary nature of these concessions in this instance, many are curious as to how the lessors and lessees should account for these under PFRS 16, Leases. ASSESSING WHETHER CHANGES IN CONTRACT ARE LEASE MODIFICATIONS When changes are made to the terms of lease contracts (e.g., in lease payments or lease terms), the accounting for those changes will depend on whether they meet the definition of a lease modification under PFRS 16, which is defined as “a change in the scope of or consideration for a lease that was not part of the original terms and conditions of the lease.” In assessing whether there has been a change in the scope of a lease, an entity considers whether there has been a change in the right of use granted to the lessee, which can be manifested in adding or terminating the right to use one or more underlying assets or extending or shortening the lease term. For example, a lessee may decide to rationalize operations and agree with the lessor to decrease the leased area from 1,000 square meters to 500 square meters. Another example would be a lessee negotiating with the lessor to extend or reduce the lease term. On the other hand, when assessing whether there was a change in the consideration for a lease, the lessee and lessor should consider the overall effect of the change in the lease payments due under the contract. For example, there is a change in consideration when the lessor decides to provide a rental waiver during periods of the pandemic or when the lessor and lessee agree to change the lease payments from fixed to variable. If there is no change in either the scope of or the consideration for the lease, then there is no lease modification. Even if there are such changes, but those would have resulted from clauses in the original lease contract or in the law or regulation covering the said contract, those changes are considered part of the original terms and conditions of the lease, hence there would still be no lease modification even if the effect of those clauses was not previously contemplated. In considering whether changes in the scope or consideration are part of the original terms and conditions of a lease contract, an entity should consider all relevant facts and circumstances which may include the lease contract itself, or the law or regulation applicable to the lease contract. A paper by the International Accounting Standards Board (IASB) mentioned that for a change to be part of the original terms and conditions of the contract, there should be a clause present in either the contract itself or in the law or regulation governing the lease contract that provides an automatic adjustment of lease payments if a particular event occurs or circumstance arises. In some instances, it can be demonstrated by the presence of a force majeure clause in the contract, which allows for possible renegotiations or revisions when a specific situation occurs, such as when lease payments are suspended in cases of a prolonged market instability. The presence of force majeure clauses in contracts would not automatically make the changes part of the original terms and conditions of those contracts. Oftentimes, these clauses are broadly written and do not specify what contractual rights and obligations are consequential to the occurrence of a force majeure event, much less what events would constitute force majeure. Therefore, the lessor and lessee may need to revisit the lease contract and agree on the coverage of the force majeure clause. In many cases, the parties may need to involve expert legal interpretation. LEASE CONCESSIONS TREATED AS VARIABLE RENT When it is established that a change in scope or lease consideration is not a lease modification, said change will generally be accounted for as a variable lease payment. Accordingly, each party should continue to account for the lease under the original lease contract, with the rent concession accounted for as an adjustment to lease income or expense in the period in which the concession arises. LEASE CONCESSIONS TREATED AS LEASE MODIFICATIONS When the change in lease payments is considered a lease modification, both the lessee and lessor should apply the guidelines for lease modifications under PFRS 16. The lessee in this case will remeasure the lease liability by discounting the revised lease payments using a revised discount rate, with a corresponding adjustment to the right-of-use (ROU) asset. This accounting treatment has an effect of recognizing the impact of the concession over the remaining lease term. Since the modification requires the remeasurement of lease liability using a revised discount rate, it is necessary for the lessee to determine an incremental borrowing rate at the date of modification. The problem, however, is that the outbreak has driven market volatility, which could pose difficulties in estimating the revised incremental borrowing rate. On the other hand, lessors will need to check whether the modification triggers a change in lease classification. For finance leases, if the modification changes the lease classification to an operating lease, then the lessor at the time of modification will derecognize the finance lease receivable and recognize the underlying assets according to their nature (i.e., property and equipment or investment property) at an amount equal to the investment in the lease immediately before the effective date of the modification. If the modification does not change the lease classification, the lessor shall recalculate on the modification date the present value of the renegotiated cash flows discounted at the lease receivable’s original effective interest rate, and recognize a gain or loss applying the concepts in PFRS 9, Financial Instruments. For operating leases, the lessor treats the modification prospectively by recalculating the straight-line lease income, considering the effects of the concession and any prepaid or accrued rent at the time of modification over the remainder of the lease term. LEASE CONCESSIONS ACCOUNTED FOR AS GOVERNMENT GRANTS We observed that in some countries, governments roll out financial relief measures to support local businesses impacted by the pandemic. For example, in countries where most land properties are government-owned, the government provides relief to the lessees of these properties such as a waiver of rent, one-time property tax rebates and cash assistance during the outbreak. These government measures are not yet observed here at this point, although we may expect the same from the Philippine government to help drive the economy should the pandemic continue for a longer period. These actions by the government are outside the scope of PFRS 16 and may qualify as government grants to be accounted for in accordance with PAS 20, Accounting for Government Grants and Disclosure of Government Assistance. LEASE TERM REASSESSMENT AND THE IMPAIRMENT OF LEASE-RELATED ASSETS In the second part of this article, we will discuss the reassessment of lease terms, including the exercise of purchase, renewal or termination options, as well as the impairment of lease-related assets and a recent amendment issued on 28 May 2020 to IFRS 16 on pandemic-related rent concessions. 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. Jerome B. Ching is a Senior Manager from the Assurance Service Line of SGV & Co.

02 June 2020

Christiane Joymiel Say-Mendoza, Pia Isabella Pagdanganan, and Meleusipo C. Fonollera

Transforming IA during the pandemic

The COVID-19 pandemic caught the world off guard, adversely affecting peoples’ lives and businesses on an unprecedented scale. According to the EY Global Risk Survey in 2020, four out of five of companies’ board members and CEOs across the globe said their businesses were not well-prepared to face the pandemic crisis head on. Companies have been employing various, often reactive actions, and even alternative methods to address the growing concerns impacting their businesses. These add pressure as they try to keep their business operations afloat. Furthermore, it has dramatically changed the risk landscape and given rise to new risk hot zones: Health, safety and mobility: The community transmission of the virus poses a huge health risk. This immensely affected the life and ways of working for customers, business owners and employees as their mobility becomes limited. Macroeconomics: The health crisis crippled the global economy. Supply chains across countries remain stressed, disrupting both demand and supply. Cybersecurity: The lockdown has forced people to work remotely and connect virtually. The spike in use of technology and cyberspace opens cracks for cybercriminals to hack, phish and even infect vulnerable IT networks and infrastructure. Compliance and stakeholder perception: The pandemic has caused governments to implement urgent measures and programs to fight the novel coronavirus, disrupting various industries. This event has further challenged companies to fulfill their obligation to issue fair disclosures to their stakeholders and maintain their societal brand and reputation. These disruptions open opportunities for the company’s Internal Audit (IA) function to play a pivotal role as companies are challenged to successfully steer a course towards survival and growth amidst the pandemic. IA can build trust by exhibiting reliability and continuing to be engaged as co-stewards of the company. It presents a real opportunity to collaborate with other business functions and enable company continuity. This can be achieved by being at the forefront of this pandemic through rapid assessments to identify focus risk areas; being agile in engaging and responding to stakeholder needs; and the continuous monitoring of the pandemic risks and impact on the company. ACTIVATING IA AS A TRUSTED BUSINESS ADVISOR IA is in a unique position as its experience allows it to assist in evaluating and managing internal and external business risks in the changing risk landscape. It can provide strategic business continuity advice, acting as consultants and crisis managers. It can start assessing business readiness on the new risk hot zones and potentially identify other risk areas. Results of the assessment can be used to further understand the current impact of the disruption, foresee upcoming impacts that the disruptions may bring about, and plan how to appropriately respond to ensure public safety, business continuity and social responsibility. LEVERAGING COLLABORATION TO DRIVE CHANGE IA is a key contributor in defining the necessary actions that key stakeholders should consider in addressing new threats as a result of the “new normal.” Constant communication is critical to keep key stakeholders aware of and aligned with plans despite the continuing uncertainty. IA can have more frequent, real-time discussions with the Audit Committee and Management to provide real-time advice on escalating risk focus areas, including critical action plans that they can consider taking. As governments apply strict social distancing guidelines and curtail travel, IA can assist businesses and provide advice on adjusting to a remote work environment, such as how usual controls can be executed or mitigating possible changes in roles. It is also a good opportunity to proactively engage and collaborate with external auditors to discuss the impact of the situation, especially for some procedures that may need to be performed differently due to limited face-to-face interaction. ADVANCING TECHNOLOGY TO ANTICIPATE EMERGING RISKS IA can implement a process supported by data analytics and technology to continuously monitor emerging risks. This will open avenues for key stakeholders to collaborate within various business functions. It will also be able to determine areas in their critical processes to stress-test and proactively identify resiliency plans and crisis protocols that can support sustainability of business functions. STEP CHANGE: NOW, NEXT AND BEYOND As companies slowly regain momentum to address the impact of the pandemic and prepare for their new normal, there is increasing pressure to reprioritize company resources and drive spending where it matters most. NOW IA as a function is called on to adapt to disruption by being more innovative and dynamic in its approach. There is a need to reassess audit priorities and expand the IA lens to clearly evaluate the impact of the pandemic on the organization’s financial, IT and operations risks. IA can invigorate decision-making as IA resources can be repurposed to directly support the business by providing real-time advice on crisis management, business continuity, cybersecurity issues, employee well-being, brand protection and working capital management. It is also a good opportunity for IA to proactively revisit control design changes and discuss internal control focus areas. In particular, key controls on processes such as inventory count or financial close may need to be performed remotely because of social distancing requirements, or in the event that the individual executing the control is ill for an extended period. NEXT Audit scope may shift focus to escalating risks such as data privacy and information security, liquidity and working capital, employee health and well-being, business resiliency and regulatory changes. As IA reprioritizes the audit plan, it needs to assess whether IA resources have the right skills, methodology and technology to enable them to execute its work. IA work can be continued, but with considerations on cost and the least disruption to the business. With the possibility of an extended economic downturn, more IA departments may face budget cuts. Hence, IA will need to find innovative solutions to enable them to do more with less. It may also consider performing analytics-based procedures which can be performed remotely, or leverage on third party IA service providers as subject matter experts for audits where IA either does not have expertise yet or are in locations currently restricted in lieu of on-site audit procedures. BEYOND Chief Audit Executives (CAEs) should continue to innovate their ways of working and interaction with key stakeholders. Short sprints and focused, real-time reports may replace traditional detailed reporting. Internal auditor requirements may also need revisiting as the need for data analysis and automation skills increases while on-site procedures decrease due to social distancing protocols. A flexible workforce structure can also be considered, such as the use of third-party resources, developing an offshore workforce and enabling business rotations to give access to the right subject matter skills at the right place and time. CAEs must examine their efforts to transform their organization through a new lens with renewed motivation and optimism. IA should continue to act in an advisory capacity to the business to address escalating and emerging risks upfront. As companies face difficult budget decisions, having an IA function that is viewed as a trusted business advisor is key in withstanding tightening budgets and workforce reductions. While there is no one-size-fits-all solution, CAEs as leaders can be catalysts for change in defining the new normal. The question is, in a world of uncertainty, will they just watch the events unfold or will they have the resilience to reimagine and reinvent the future? 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 authors and do not necessarily represent the views of SGV & Co. Partner Christiane Joymiel Say-Mendoza, Manager Pia Isabella Pagdanganan, and Manager Meleusipo C. Fonollera are from the Advisory Service Line of SGV & Co.

25 May 2020

Philip B. Casanova and Nathaniel F. Dizon

Stay safe! Cybersecurity during COVID-19

The COVID-19 pandemic has forced a majority of companies to promote work from home (WFH) arrangements. What used to be considered a benefit to improve employee work-life balance is now the new normal for most companies as a safety measure against coronavirus infection. While some companies have proven to be technologically well-equipped for WFH arrangements, unfortunately, many are also not ready. The ill-equipped are once again the targets of cyber threat actors. These insidious groups know very well the meaning of Winston Churchill’s words, “Never let a good crisis go to waste” and they will take advantage of the seemingly chaotic situation. They are even more active now due to three reasons: weakened corporate cybersecurity controls, taking advantage of FUD (Fear, Uncertainty and Doubt), and heightened use of technology. WEAKENED CORPORATE CYBERSECURITY Some companies are loosening, bypassing, or simply turning off cybersecurity controls in order to allow employees to access company systems while at home. They are turning off their secure remote network access controls (i.e., Virtual Private Networks and token authentication) because they only have a fraction of the licenses to accommodate the employees working from home or remote locations. In this scenario, the only protection the company has is a text password which could be eventually guessed by cyber threat actors. Critical security patches and updates may not be installed on employees’ computers in time, if at all. The deployment of these security patches is typically done from a central server in the company’s network. It’s easier to deploy the security patch in the office since the network speed is usually fast. However, in most cases, the security patch will be hard to deploy through the narrow bandwidth of the employee’s home Internet connection. This means that many of these unpatched company computers are left vulnerable to cyber threat actors while connected to the Internet. There will also be employees who will try to disable or bypass the company security controls in their laptops in order to install unauthorized software or access restricted websites. This action leads to inviting a wide range of malware to infect the computer (e.g., keyboard stroke loggers, audio/video recorder, or ransomware). TAKING ADVANTAGE OF FUD Cyber threat actors are also using the current atmosphere of Fear, Uncertainty, and Doubt for unjust monetary gain. They are using COVID-19 to target both people and companies with carefully crafted phishing messages. Many of the phishing campaigns currently in progress have frequently been related to groups specializing in ransomware attacks. The current crisis has led people to be more curious about the virus and what’s happening, especially in their communities. Sophisticated phishing emails and malicious websites now abound to exploit this knowing that somebody who wants to stay updated on the pandemic will eventually make that “click” and compromise his or her computer. HEIGHTENED USE OF TECHNOLOGY The use of technology and the Internet is unprecedented at this time. One can really just stay at home to purchase goods, pay bills, or watch a movie with just a few clicks. There is a rise in the usage of video conferencing and online banking systems. Almost immediately, new fake domains have been set up to mimic these systems. Moreover, malicious executable files were also quickly developed around these popular systems with the goal of making people install malware onto their devices to harvest usernames and passwords, among others. STAY SAFE! “Stay Safe” is now a common expression when ending a conversation. Similar to all the precautions that we take to keep the COVID-19 from infecting us, we must do the same for our technology. To help mitigate the risks, consider some recommendations from the article of EY’s Global Advisory Cybersecurity Leader, Kris Lovejoy, “Seven ways to keep ahead of cyber attackers during COVID-19.” 1. Understand your company’s remote connectivity and authentication capabilities. Be mindful of potential workarounds which employees might be using to do their work and keep in mind insecure use of these technologies is the easiest path for an attacker. 2. Assess and implement new security analytics models to account for privileged activity and use of new administrative tools and services (i.e., system administrator’s activities). 3. Review your current e-mail security controls and take into consideration current remote workforce conditions. Utilize current controls provided by your e-mail provider to the fullest before looking to purchase additional services or technologies. 4. Assess the current visibility of assets (i.e., computers) and network traffic to identify what has changed due to workforce relocation. 5. Update and test your incident response and disaster recovery plans to ensure they are applicable to the current state of your workforce. Update your external incident response provider and consider an additional external provider if a more appropriate response time is needed. 6. Test the ability to recover from your backups in a timely manner with a keen eye to ensuring that your organization is backing up all the data it needs in a format that is accessible yet secure to prevent both explicit or inadvertent tampering or corruption. 7. Review, update and recommunicate cybersecurity training to all employees. Ensure that the latest threats to your organization and employees are highlighted. The unprecedented scale of global disruption caused by the COVID-19 pandemic has wrought significant paradigm shifts in nearly every sector and aspect of society. However, companies that take decisive action to deal with the situation now, create contingencies for what happens next, and proactively plan for the world beyond the pandemic will have better chances to survive and thrive in the new normal. 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. Philip B. Casanova is an Advisory Partner and Nathaniel F. Dizon is a Manager of SGV & Co.

18 May 2020

Smith Lim

Short-term financial management for COVID-19

May 18, 2020COVID-19 is generating unprecedented levels of challenges in company ecosystems — including supply chains, customer demand, strategic planning and operations, and liquidity — alongside high levels of uncertainty and volatility. Given this, it has become more essential than ever for companies to focus on short-term financial management as part of their overall business continuity plans. This article discusses methods of short-term financial management, specifically (1) generating cash and protecting liquidity; (2) preserving working capital; and (3) creditor and debt management. GENERATING CASH AND PROTECTING LIQUIDITY To generate cash and protect liquidity, companies can look into cash reserves in subsidiaries and business units, as well as ways to repatriate said cash to areas of the business where it is most needed. Untapped loan facilities and other lines of credit are also options, but these require communication with lenders to confirm availability given these challenging times. Liquidating short-term securities and other non-essential assets can also be a source of cash. However, care must be taken as to which assets to sell, given the current all-time low in asset valuations. Government stimulus funds and moratoriums on payment of certain bills can also help companies stay afloat. Similarly, insurance claims specifically for business interruptions should be explored. However, given insurers’ recent experience with SARS and MERS, it should be noted that some insurance contracts may include specific exclusions on pandemics or epidemics. Even so, the cash generation exercise should not be short-lived, given the continuing uncertainty of the COVID-19 situation. Companies need to identify and sequence longer-term cash sources and maintain discipline to perform daily cash tracking, cash flow planning, and determining liquidity strategies. These longer-term cash sources can involve identifying alternative revenue sources for the company and looking at areas within the business where costs can be further optimized. PRESERVING WORKING CAPITAL Another area that needs to be managed is how to preserve the company’s working capital reserves. This requires looking into the three aspects of working capital: suppliers (payables), customers (receivables), and inventories. Delaying payments to suppliers is one possible way to manage working capital. However, care must be taken to distinguish which suppliers are considered essential and non-essential for business continuity. In the case of essential suppliers, open, clear, and transparent communication is key. Companies cannot unilaterally decide to delay all outstanding payments when such payments may make or break key supplier relationships in these challenging times and further worsen the state of an already troubled supply chain. For businesses that have healthy financials, the situation may present a potential opportunity to re-negotiate more favorable payment terms. Our present situation requires company customer relationship management teams to be more proactive with customers. One approach is for companies to offer discounts on receivables to accelerate payment. As with suppliers, this situation presents an opportunity to re-negotiate pricing and payment terms for existing contracts with customers while taking into consideration their respective financial health. It is crucial to establish better levels of communication with existing customers to establish stronger relationships and generate longer term value that benefits both parties. In the case of inventory, the general tendency is for companies to liquidate excess inventory to generate as much cash as possible. However, care should be taken given the uncertainty of the pandemic in terms of reliability of the supply chain. There may actually be a need to increase the amount of inventory at hand to decrease the risk of shortages and further damaging customer relationships. Companies will need to reassess their traditional assumptions on economic order quantity and optimal inventory levels, among others. CREDITOR AND DEBT MANAGEMENT In the wake of disruption brought about by COVID-19, company short and long-term cash flow forecasts will need to be taken into account and reassessed to determine the likelihood of breaching any debt covenants, as well as the potential inability to service debts as they come due. Scenario planning and analysis should be considered when forecasting said cash flows, while aggressive, base, and conservative (ABC) assumptions must be developed to take into account indeterminate factors. As an example, “aggressive” can assume fast recovery post-COVID (V-shaped), “base” can assume slower recovery post-COVID (U-shaped), and “conservative” can assume a prolonged impact of COVID (L-shaped). It will be best for companies to be proactive when it comes to discussions with lenders, who will especially appreciate transparency as key stakeholders in the business. Practicing transparency may even open doors to negotiating for better terms or even additional facilities. This is, of course, provided that the negotiating company can clearly prove that they have robust financial management plans in place, and have substantial, well-thought out assessments of how COVID-19 has impacted them. STAYING ONE STEP AHEAD COVID-19 continues to present unique challenges for companies today, dampening demand while simultaneously disrupting supply. Staying one step ahead and being proactive in short-term financial management as well as long-term value creation will allow companies to emerge stronger and wiser after this global crisis comes to pass. 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. Smith Lim is a Senior Director from the Transaction Advisory Services of SGV & Co.

11 May 2020

Maria Kathrina S. Macaisa

Strengthening today’s supply chains for tomorrow

Ever since the World Health Organization (WHO) declared the global COVID-19 outbreak a pandemic on March 11, nearly every country has been hard-pressed to contain the spread of the coronavirus. The global economic turmoil caused by the rapid spread of COVID-19 has significantly impacted businesses and industries — in particular, their supply chains. Many companies were shut down while others had to ramp up to deal with panic-buying of essential goods. Many companies struggled to read and plan for demand, with panic-buying and inadequate supply altering consumer buying behaviors and patterns. Manufacturers in Luzon also struggled to maintain staffing and output under social distancing and the enhanced community quarantine (ECQ) rules. Many enterprises experienced the disruption of their distribution and logistics due to the resulting lockdown. These conditions were experienced by all companies, from small third-tier suppliers to billion-dollar conglomerates, with the likelihood that many will not recover for years to come. The lockdown struck various industries, but not all to the same extent. Industries such as automotive, tourism, consumer goods, electronics and retail in particular have been profoundly affected by the ECQ. Car manufacturers, for example, had to shut down their factories due to their suppliers’ inability to deliver critical components. While there are efforts to revisit and identify new suppliers, preventive measures such as maintaining multi-tier relationships with vendors and alternative providers could have helped companies minimize the impact and maintain a minimal level of utilization or productivity in their manufacturing lines. The tourism sector was also severely affected with the government expecting roughly 30,000 to 60,000 jobs lost due to travel restrictions. Consumer goods firms, on the other hand, have had to modify their demand forecasting because prior sales history is no longer an effective predictor of future sales considering the abrupt market shift. Retail companies have also had to revisit their omnichannel strategy, as the demand shifts to online purchases from bricks and mortar stores which were shuttered by the lockdown, or, even if still open, affected by social distancing rules. Business leaders must take bold action to manage their supply chains, and they must realize that understanding and planning for disruption is more critical than ever. How business leaders combat the current disruption will have a direct follow-on effect on their companies’ performance. This challenges business leaders to provide well-thought-out and agile solutions for their current supply chain while avoiding any adverse impact on their future supply chain. Based on the developments from this pandemic, coupled with learnings from past disruptive events, this article lists key considerations to help companies build a resilient supply chain. END-TO-END SUPPLY CHAIN RISK ASSESSMENTS As companies address the new normal, proactive engagement and strategic partnerships with supply chain ecosystem partners are vital. Regular checks must identify changing demand and inventory levels to locate critical gaps in supply, production capacity, warehousing and transportation. These should then be further synthesized to create an outcome-driven resiliency strategy with the aim of efficiently and effectively leveraging additional networks within the pool of production and distribution networks of various suppliers. A real-time supply chain risk intelligence system should also be in place to provide early warning in case of potential and pervasive disruption to the supply chain. ROBUST RISK MANAGEMENT AND DIVERSIFIED SUPPLIER NETWORK Enterprises should map out supply chain networks from end consumers to tier-N suppliers. Firms should establish a methodology to measure risk for each supply chain node/arc-like channel, warehouse, factory, supplier, or transportation mode. DIGITAL AND AUTOMATED MANUFACTURING CAPABILITY Several manufacturers are now looking at leveraging automation and Internet of Things (IoT) solutions for smart manufacturing operations to mitigate reliance on labor-intensive processes. While companies in the Philippines tend to take advantage of low labor costs, manufacturers should balance labor and manufacturing productivity needs in case of disruption. A strong manufacturing excellence program enabled by digital technology can allow the standardization of daily work and job aids, relieving the pressure of relying on specific individuals to maintain operational performance. IoT capabilities can help foster a digital ecosystem of connected systems providing users with relevant and updated data to make the most informed decision at any given time. Automated manufacturing capabilities will also enable a company to run a manufacturing operation using interchangeable personnel while reducing labor requirements. EVALUATE AND ADJUST PROCUREMENT CATEGORY STRATEGIC PRIORITIES Procurement should be transformed into a value-generation function through timely reviews and adjustments to category strategic priorities, defining new business relationships with suppliers to meet the company’s overall supply chain objectives. An agile procurement operations system enabled by various technologies and factoring in category strategic priorities across variables such as cost, quality, delivery, innovation, etc. will also help drive resiliency. Companies can introduce digital procurement technologies to benefit from supplier social networks. Implementing such networks in sourcing and in supplier lifecycle management can strengthen sourcing capability and collaboration under challenging circumstances. MORE COLLABORATIVE AND AGILE PLANNING AND FULFILLMENT CAPABILITY The art-of-possible concept today in technologies that can bring more agility and collaboration within the enterprise as well as across business partners is endless. IoT devices for demand sensing and goods movement tracking to advanced forecasting solutions and social media demand behavior monitoring are heavily impacting how companies understand demand signals and how quickly they can react to them. These capabilities are extremely important for business performance even in normal business conditions and they increase the supply chain resilience during challenging events like the pandemic. BUILDING A RESILIENT SUPPLY CHAIN The pandemic has inevitably caused disruption in all sectors, with various degrees of impact. Through the chaos of recovery, it will be very easy to overlook the root causes and gaps within a supply chain that may have paralyzed businesses during this unprecedented global event. However, it is time for companies to rapidly assess, recover, and respond quickly through numerous obstacles and challenges that remain, as building towards a resilient supply chain will be at the epicenter of future discussions for years to come. This article is for general information only and is not a substitute for professional advice 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. Maria Kathrina S. Macaisa is a Partner from the Performance Improvement Service Line of SGV & Co.

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CREATE: Tax reform response to COVID-19 PART 2

CREATE: Tax reform response to COVID-19

Consensus in lease concessions due to COVID-19

Consensus in lease concessions due to COVID-19

Transforming IA during the pandemic

Stay safe! Cybersecurity during COVID-19

Short-term financial management for COVID-19

Strengthening today’s supply chains for tomorrow

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