Be updated on our latest insights

A flexible benefits plan is like ordering a cup of coffee where the cashier will give you a plethora of choices and the barista will make each beverage according to your preferences. Hot or cold? Short, tall or grande? Regular, low-fat or non-fat? Caffeinated or decaffeinated? White, brown or Splenda? To make it even more personalized, you can even use your own mug. Flexible benefits plan—popularly known as cafeteria plan—has been around since the late 70’s, but most of the companies in the Philippines are still into traditional “one-size fits all” benefit plans. Recently, flexible benefits plan is getting traction. Why do companies nowadays need to consider adopting flexible benefits? Companies realize there is a war on talent—not just on hiring new employees but also on retaining good ones. Most, if not all, job seekers these days are concerned about not only the salary package but also about other the benefits employers offer. A good remuneration package will assure employers a better chance to attract the kind of talents they seek to bring in to their organization. BPO companies and other multinationals are disciples of flexible benefits. Some of the not-so-common benefits offered by these entities include health cards of the employees, which are only awarded to the top Health Maintenance Organizations (HMO), tuition subsidies, gym memberships, generous medical reimbursements per sickness on top of those medicines already covered by HMO during confinement, housing assistance, free overseas or local trips including generous pocket money for top performers, free lunch and dinner all year round for all employees, long-term overseas work secondments, etc. Flexible benefits plan addresses the issue of diversity among employees—from age, hobbies and life priorities. Having a workforce that includes a family person, a health buff, a food lover, a mountaineer, or a traveler will require companies a distinct set of benefits. But how does a company transition from the traditional one-size-fits-all benefits plan to a flexible benefits plan? First, for each employee, quantify the peso equivalent of the existing benefits plan. This process of data assessment is the most tedious part and it is the duty of human resources personnel to do so. Normally, this is only done when the management of the company has already decided on the transition to a flexible benefits plan. Secondly, identify the core benefits. These are benefits that are very important to employers such as health and group insurance, annual rank and file check-ups, executive check-ups, medical allowances, sick leaves, vacation leaves (minimum of five days under the Labor Code), among others. Core benefits are non-flexible and not convertible to cash. Hence, each employee must avail for himself or purchase these benefits. Lastly, identify benefits that are non-core and fully flexible. These can be in the form of transportation allowance, communication allowance, and vacation leaves more than five days (some companies provide 12 days of vacation leave in a year, which can be accumulated for two or three years). The company has to create or develop a platform where the employees can purchase the array of benefits. However, there are already a number of providers in the market that can assist a company in converting to a flexible benefits plan. They can set up or provide a platform where a wide array of benefits can be chosen. These platform providers help the companies in converting the peso value of the benefits into units or points. Say, if the converted peso value of benefits of a certain employee is P30,000 which is equivalent to 30 points, the employee has to use these points to avail first of the core benefits by purchasing them via the platform. Once the core benefits are purchased, the employee could now select and choose from an array of benefits that fits the lifestyle and preferences. Assuming further that the employee only utilized 25 points, the remaining five points can be converted into cash at the end of the fiscal or calendar year. However, if the employee purchased more than the allocated benefits, such excess will be deducted from his or her salary. Companies are always looking for competitive advantages. Flexible benefits plan is deemed by some companies as a leg up on the competition. There is a high cost for hiring and training employees and even higher cost for replacing good and potential leaders of the companies. Millennials are already in the workplace and they have different views on work and lifestyle. The flexible benefits plan is becoming more attractive in attracting and retaining talents. Ramil Nañola is a Partner, Audit & Assurance of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firms in the Philippines, with 21 Partners and over 700 staff members.

Our era is characterized by ever-changing technological advancement. Technology has touched our human existence including the way we educate ourselves, the way we deal and communicate, and the way we travel from one place to another. It has affected our interactions with one another such as shopping and socializing. From a business perspective, technology continues to play a vital role on how entities conduct their operation and maintain their competitive advantage.

Last week, President Rodrigo Duterte sent to Congress the proposed national budget for 2017. This P3.35-trillion budget, which represents an increase of 11.6 percent over the current year’s budget, is by far the country’s biggest. The President described his budget proposals as “for the people and by the people.” That seems true. Look at the budget details, provisions by sector. The largest allocation, P1.34 trillion, is for social services, more than half of which for education, culture, and manpower development. Actually, the increase in intended expenses for social services is even higher compared with the increases in all other sectors combined. On the other hand, if we view the proposed budget in terms of program or objective, we’ll see that an increasing share of the budget is allocated for public infrastructure with capital outlays 15.6 percent larger than the current operating expenditures which will increase by a little over 10 percent. This supports the President’s assessment that this is an expansionary budget. The government is intentionally increasing the share of public spending at 21 percent of the gross domestic product (GDP), which is much higher than the average government spending of 16.6 percent of GDP over the past ten years. Also, consistent with the President’s strong platform of social order, the provision collectively for the Philippine National Police (PNP) and Armed Forces of the Philippines (AFP) has risen by about 19 percent, and this does not yet include his promised increase in salaries for the police and soldiers which will be made in another proposal. All of these increases in cash outflows come with an expected strain on the country’s fiscal position. The deficit, or excess of expenses over revenues, is expected to be higher at almost P480 billion or 3 percent of the GDP (previously targeted at 2 percent by the Aquino government for both 2015 and 2016). Fiscal conservatives might want to sound the alarm, but we have to put this in perspective. Perhaps the easiest way to do this is to view the operations of the national government like a regular corporation. For example, if we are to lend money to Philippines Inc. to fund this 2017 plan, should we be worried? The quick answer is: No. First, a higher deficit need not be a serious concern because the Philippines has a healthy level of international reserves (or foreign currency financial assets of the government that can back its liabilities). Latest data from the Bangko Sentral ng Pilipinas (BSP) puts the country’s international reserves at $85.5 billion—a respectable level that is even higher compared with those of richer countries like Canada, Australia and several large European economies. Second, the peso value of the country’s debt may be increasing but the country’s debt-to-GDP ratio is at its lowest level. If we simplify GDP as the country’s total revenues, we can say that its debt is more sustainable because the country’s ability to pay back its borrowed money has significantly improved these past few years. A testament to this improvement is the numerous credit rating upgrades we received during Aquino’s term. Third, a creditor will be happy to note that there is a steady stream of cash inflows to Philippines, Inc. We all know of the contributions of our OFWs—remittances of $28.5 billion were recorded for 2015 according to the BSP, and the yearly increase is expected to continue. Besides the OFWs, our local workers in the BPO sector are also bringing in foreign currency inflows. Revenues of the BPO sector is estimated conservatively at $22 billion in 2015 and we can assume that a large part of this represents salaries of the industry’s 1.3 million employees. Fourth, the President and his finance team promised a tax reform package that aims to increase the government’s tax revenues. At the center of the soon-to-be proposed tax package is the lowering of tax rates for corporations and a more progressive income tax brackets for individuals. These will then be compensated by the expansion of the value-added tax base and the indexation to inflation excise taxes on oil. Overall, the President believes that the government’s revenue collections as a percentage of the GDP will even improve to 18 percent by 2022 versus the 2015 level of 15.8 percent. Lastly, the increase in deficit is actually lower than the combined increases in education and infrastructure budgets. A creditor might observe that Philippines, Inc. is borrowing funds to support the training of its employees (citizens) and to expand its property, plant and equipment—areas that are expected to provide higher returns in the future compared with the cost of borrowing today. What they say in the private sector is also true for the public sector—you have to spend money to make money. Renan Piamonte is an Audit & Assurance partner of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 21 Partners and over 700 staff members.

This should be a good year for Goodyear Philippines as it has finally secured the confirmation of the Supreme Court (SC) on its 6-year-old refund case involving erroneously remitted tax on dividends amounting to about P14 million. The SC ruled that gains from the redemption of preferred shares are exempt from Philippine income tax if the provisions of the tax treaty between the Philippines and the US are complied with. The tax treaty with the US provides that gains derived by a US resident from the sale of shares in a Philippine company shall only be taxable in the US if the Philippine company’s assets do not consist principally of real property. The gains should not be treated as dividends.

The most significant accounting change, bigger than the initial adoption of IFRS in 2005, is coming! International Financial Reporting Standards (IFRS) 9—Financial Instruments, a new accounting standard that will take effect on January 1, 2018, carries a provision where impairment losses will be measured based on expected credit loss model (ECL), a measurement method significantly different from the currently-used incurred credit loss model. Under the old model, impairment loss is recognized retrospectively—when the default event occurs—so it is relatively easy to determine. The ECL model, on the other hand, is prospective, since the financial asset is provided with impairment loss at origination or purchase based on the expectation of what will happen to the financial asset over its life, making it more complex because of the involvement of estimates and judgment of future events. The most affected industries such as banks and financing companies need to prepare now, as the implementation is less than 17 months away. It is expected that the implementation would be complex and costly so the adopters would have to consider the following: 1. Profitability and capital—It is expected that the amount of impairment loss under the ECL model will be higher than that under the current model, consequently resulting in reduced profitability and maybe even leading to additional capital infusion for entities with regulatory capital requirements. 2. Organizational involvement—Collaboration from different units across the organization is critical as some of the needed information or expertise may not be provided by the Accounting or Finance department alone. 3. Methodologies, policies and procedures—Most entities may not have the necessary existing methodologies, policies and procedures to determine and obtain critical information needed for this upcoming impairment model. Some of these policies include establishing its own definition of default, coming up with procedures to determine the probability of default, assessing the stage of the financial asset and incorporating forward-looking information. 4. Information systems—The standard may entail enhancing the existing system or acquiring a new system particularly for entities with significant financial assets such as banks. The system is needed to ensure that appropriate data are gathered for proper pooling of financial assets with shared risk characteristics for staging assessment and collective impairment computation as well as generate information about default, the probability of default, discount rate, loss-given default and exposure at default. Some of the data needed for the impairment computation may not yet be available in the current system and the management would need to identify what are lacking. At the core of this implementation is the support and commitment of the board of directors and management or whoever is in charge with governance. To highlight the criticality and importance of the successful implementation of IFRS 9—Financial Instruments, the Global Public Policy Committee (GPPC), a global forum of representatives of the six largest international accounting networks including Grant Thornton International, in a rare move, released The Implementation of IFRS 9 Impairment Requirement by Banks (the paper). Although the paper focuses on banks as it is among the heavily affected industry, the guidance provided in this paper is also applicable to other industries. The paper is organized into two main sections. The first section covers the areas of focus for those charged with governance and addresses the following key areas: (a) The importance of strong governance and controls surrounding ECL models and processes, (b) Considerations regarding sophistication and proportionality—the paper noted that the GPPC networks believe that there is no one-size-fits-all approach and do not expect the same level of sophistication of implementation across all institutions and all portfolios, (c) Key issues on transition—the paper acknowledges that IFRS 9 builds upon existing credit practices, but may also require the development of new processes specifically for the estimation of ECLs pursuant to IFRS 9 and (d) Ten questions that those charged with governance may wish to discuss to help assess the quality of management’s implementation of IFRS 9’s impairment. The second section deals with modeling principles and covers the following: ECL methodology, default, the probability of default, exposure at default, loss-given default, discounting, staging assessment, and forward-looking information. Each of the areas within the modeling principles section presents the discussion in terms of a sophisticated approach that may be appropriate for more complex or material institutions or portfolios; a simpler approach that may be appropriate for less complex or material institutions or portfolios; and also approaches that would be inconsistent with the high-quality implementation of the standard. Participation, support and commitment from those charged with governance are critical for the successful implementation of this new standard. Seventeen months is such a short time. It is better for the company to start doing the necessary impact assessment now as the implementation can be complex and costly. This assessment covers not only the impact on profitability and capital but also its effects on system, policies and organizational architecture needed for the implementation. Boyet Murcia is Partner, Audit & Assurance of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 21 Partners and over 700 staff members.

Finally, after much debate and months of delay, the Implementing Rules and Regulations (IRR) of Republic Act (RA) No. 10708, otherwise known as the Tax Incentives Management and Transparency Act (TIMTA), have been finalized and jointly issued by the Department of Finance (DoF) and Department of Trade and Industry (DTI) through Joint Administrative Order No. 1-2016. TIMTA aims to monitor and evaluate the fiscal incentives granted by investment promotion agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI) and others.

In today’s digital and social media world where company’s actions, strategic decisions, press releases and statements, andeven the behavior of top executives could be talked about, applauded, criticized, or condemned, brand building and reputation management become more important than ever. Thus, both have become regular agenda in boardroom discussions and hot topics at business gatherings. Considering the importance of these topics, P&A Grant Thornton held its 4th Growth Series, featuring two experts: Sarah Croot, the head of business development at Grant Thornton International (GTIL) and Chiqui Escareal-Go, the founder and CEO of Mansmith and Fielders.

We have come to a time when we are no longer afraid of change. We welcome change, believing that such will be a catalyst for improvement. We are all very excited by blow-by-blow developments. We have seen it slowly happening within the ranks of the Bureau of Internal Revenue (BIR) vis-à-vis the proposed amendments of the Tax Code.