MAJOR SPECIALIZED INDUSTRIES

A. Banking and Other Financial Institution Industry

a1. Bank
a2. Non-bank
B. Business Process Outsourcing Industry

A. BANKING AND OTHER FINANCIAL INSTITUTION INDUSTRY

The banking and finance sector performs a critical function in the Philippine economy as it is primarily
responsible for the mobilization of domestic savings and the conversion of these funds into directly
productive investments. Financing the needs of firms that desire to raise productive capacity by
purchasing additional capital equipment, acquiring, or leasing idle property, building, and expanding
factories, and increasing inventory is responsible for sustaining economic growth in the long term,
alongside the creation of new jobs. It is very important for the banking and finance sector to continue
finding ways to encourage households to save their unspent income in various financial assets so that
these resources could be used and transformed into loans that will finance the expansion of directly
productive business ventures.

The Philippines' banks are classified into three types: universal and commercial banking, rural and
cooperative banking, and thrift banking. Of these segments, universal and commercial banks that
accepted domestic deposits and offered to check account services dominated the Philippines' banking
industry, with its total deposits valued at approximately 12 trillion Philippine pesos.

Nature and Background of Specialized Industry

The banking and finance sector is primarily responsible for mobilizing domestic savings and converting
these funds into directly productive investments. Financing the needs of firms that desire to raise
productive capacity by purchasing additional capital equipment, acquiring or leasing idle property,
building and expanding factories, and increasing inventory is responsible for sustaining economic growth
in the long term, alongside the creation of new jobs.

Banks perform the function of safekeeping money and valuables and extending loans, credit and
payment services in the form of checking accounts, money orders, cashier’s checks as well as the
issuance of debit and credit cards. Large banks (particularly the universal and commercial banks) are
also allowed to engage in other intermediation activities such as investment banking (underwriting debt
instruments and or stocks for other firms) and may offer other forms of portfolio investment
instruments and insurance products.

The financial system is composed of two general groups namely: banks and non-bank financial
institutions. Banking institutions include: universal banks, commercial banks, thrift or savings banks
and the rural and cooperative banks. These institutions are allowed to collect savings and time deposits
to fund loans and perform the function of providing credit and payment services. Large banks,
particularly the universal and commercial banks, can engage in other intermediation activities such as
investment banking and may offer other forms of portfolio investment instruments and insurance
products.

Non-bank financial institutions on the other hand, are composed of insurance companies, pension fund
institutions, investment banks, financing companies, pawnshops, and mutual fund institutions. These
institutions are not allowed to collect deposits but may encourage the general public to invest
household savings in various financial instruments. Premium payments for term insurance policies,
regular contributions to pension funds, investment into mutual funds, or purchases of shares of stock in
financing companies and pawnshops are some of the ways by which non-bank financial institutions can
source funds to finance lending and or investment operations.

Universal and commercial banks have the largest resources and offer the widest variety of banking
services outside of collecting deposits and providing loans. These other services include underwriting
and other functions of investment houses, investing in equities and non-allied undertakings. Thrift banks
include savings and mortgage banks, private development banks, stock savings and loan associations
and microfinance thrift banks. They accumulate the savings of depositors and provide housing loans and
financing for short-term working capital as well as medium- and long-term financing to small and
medium scale enterprises engaged in agriculture, services, and industry. Rural and cooperative banks
promote and expand the rural community by mobilizing savings and extending loans and other financial
services to farmers to help with the purchase of seeds, livestock, fertilizers, and other farm inputs and
the marketing of their produce. Non-bank financial institutions, on the other hand, are composed of
insurance companies, pension fund institutions, investment banks, financing companies, pawnshops,
and mutual fund institutions. There are several types of non-bank financial institutions offering a wide
variety of services such as investment houses, financing companies, investment companies, securities
dealers/brokers, lending investors, government non-bank financial institutions, venture capital
corporations, non-stock savings and loans associations, pawnshops and credit card companies.

BANK’S BASIC OPERATIONAL MODEL

Accounting Compliance

Banks - The objective of IAS 30 is to prescribe appropriate presentation and disclosure standards for
banks and similar financial institutions (hereafter called 'banks'), which supplement the requirements of
other Standards. The intention is to provide users with appropriate information to assist them in
evaluating the financial position and performance of banks, and to enable them to obtain a better
understanding of the special characteristics of the operations of banks.

A bank's income statement or notes should report the following specific amounts: [IAS 30.10]

 interest income
 interest expense
 dividend income
 fee and commission income
 fee and commission expense
 net gains/losses from securities dealing
 net gains/losses from investment securities
 net gains/losses from foreign currency dealing
 other operating income
 loan losses
 general administrative expenses
 other operating expenses

A bank's balance sheet should group assets and liabilities by nature and list them in liquidity sequence.
[IAS 30.18] IAS 30.19 sets out the specific line items requiring disclosure.

IAS 30.13 and IAS 30.23 include guidelines for the limited circumstances in which income and expense
items or asset and liability items are offset. (IAS 1 no offsetting)

A bank must disclose the fair values of each class of its financial assets and financial liabilities as required
by IAS 32 and IAS 39. [IAS 30.24]

Insurance - IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts
(including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light
of the IASB's comprehensive project on insurance contracts, the standard provides a temporary
exemption from the requirements of some other IFRSs, including the requirement to consider IAS 8
Accounting Policies, Changes in Accounting Estimates, and Errors when selecting accounting policies for
insurance contracts.

The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project) from
some requirements of other IFRSs, including the requirement to consider IAS 8 Accounting Policies,
Changes in Accounting Estimates, and Errors in selecting accounting policies for insurance contracts.
However, the standard: [IFRS 4.14]

 prohibits provisions for possible claims under contracts that are not in existence at the reporting
date (such as catastrophe and equalization provisions)
 requires a test for the adequacy of recognized insurance liabilities and an impairment test for
reinsurance assets
 requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or
cancelled, or expire, and prohibits offsetting insurance liabilities against related reinsurance
assets and income or expense from reinsurance contracts against the expense or income from
the related insurance contract.
 IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a result,
its financial statements present information that is more relevant and no less reliable, or more
reliable and no less relevant. [IFRS 4.22] In particular, an insurer cannot introduce any of the
following practices, although it may continue using accounting policies that involve them: [IFRS 4.25]

 measuring insurance liabilities on an undiscounted basis

 measuring contractual rights to future investment management fees at an amount that
exceeds their fair value as implied by a comparison with current market-based fees for
similar services
 using non-uniform accounting policies for the insurance liabilities of subsidiaries.

Retirement Fund - IAS 26 Accounting and Reporting by Retirement Benefit Plans outlines the
requirements for the preparation of financial statements of retirement benefit plans. It outlines the
financial statements required and discusses the measurement of various line items, particularly the
actuarial present value of promised retirement benefits for defined benefit plans.

The objective of IAS 26 is to specify measurement and disclosure principles for the reports of retirement
benefit plans. All plans should include in their reports a statement of changes in net assets available for
benefits, a summary of significant accounting policies and a description of the plan and the effect of any
changes in the plan during the period.

 Retirement benefit plan: An arrangement by which an entity provides benefits (annual income
or lump sum) to employees after they terminate from service. [IAS 26.8]
 Defined contribution plan: A retirement benefit plan by which benefits to employees are based
on the number of funds contributed to the plan plus investment earnings thereon. [IAS 26.8]
 Defined benefit plan: A retirement benefit plan by which employees receive benefits based on a
formula usually linked to employee earnings. [IAS 26.8]
 Defined contribution plans: The report of a defined contribution plan should contain a
statement of net assets available for benefits and a description of the funding policy. [IAS 26.13]

Investment - Accounting for Investments is widely used and deals with accounting for investments in
financial statements prepared by a Company and prescribes various disclosure requirements.

Accounting for Investments doesn’t deal with the following:

 PAS 32 Financial Instruments: Disclosure and Presentation 01/01/05 This Standard establishes
principles for presenting financial instruments as liabilities or equity and for offsetting financial
assets and financial liabilities.
 PAS 39 establishes principles for recognizing, measuring and disclosing information about
financial assets and financial liabilities.
 PAS 40 requires all entities to measure the fair value of investment property, for the purpose of
either measurement (if the entity uses the fair value model) or disclosure (if it uses the cost
model).
Financing companies - Financing companies shall be organized in the form of the stock corporation in
accordance with the provisions of the Corporation Code of the Philippines, subject to the following:

a. At least forty percent (40%) of the voting stock of the corporations owned by citizens of the
Philippines
b. A minimum paid-up capital of
i. P10,000,000 for financing companies located in Metro Manila and Other 1st Class Cities
ii. P5,000,000 for financing companies located in other classes of Cities
iii. P2,500,000 for financing companies located in Municipalities

Financing companies duly existing and in operation before the effectivity of R.A. 8556 shall comply with
the minimum capital requirement within one (1) year from the date of the said effectivity.

c. The corporate name of financing companies shall contain the term "financing company",
"finance company", or "finance and investment company" or other title or word(s)
descriptive of its operations and activities as a financing company.

Pawnshop - the pawnshops do not apply accounting rules available for credit institutions, but they
prepare the financial statements according to the regulation applied by commercial companies. The
paper addresses the peculiarities of the pawnshops’ activities in terms of legal, fiscal, and accounting
aspects. By giving a practical example, the paper emphasizes the application of the specific Romanian
legislation, considering three different scenarios. The paper discusses the fiscal aspects (mainly the
value-added tax) that rise from the sale of the items or the cashing of the interest and loan.

Mutual fund institutions - Mutual fund accounting encompasses a variety of basic tasks, which may be
performed by in-house staff or outsourced to other providers, such as custodian banks. These processes
include:

 Calculating the value of its investment portfolio on a daily basis—known as the net asset value
(NAV).
 Anticipating and recording all income, such as dividends and interest.
 Recording accruing interest on bonds and other similar fixed income securities held in the
investment portfolio.
 Properly amortizing the discount or premium on bond purchases. See the detailed explanation
below.
 Recording all securities transactions, such as buys and sells of portfolio investments.
 Recording all realized capital gains, both short-term and long-term, that result from securities
transactions in the fund.
 Recording all inflows and outflows of funds due to purchases and redemptions of shares by
investors.
 Maintaining records of the shares owned, and transactions made, by each shareholder in the
fund.
 Tracking distributions of income and capital gains made to shareholders in the fund.
B. BUSINESS PROCESS OUTSOURCING INDUSTRY
Today, many multinational organizations are going through finance, tax, or IT transformation project to
drive efficiency and reduce costs. Often, these transformations include the use of technology to
automate processes or centralize common functions using shared centers. No matter what delivery
model your organization finds best to support statutory reporting or other compliance tasks, there are
four elements that must work together in harmony to enable success: people, process, data, and
technology.

Business process outsourcing (BPO) remains a strong trend among organizations regardless of size. As
early as 2010, 60 percent of CEOs at global enterprises believed that BPO played a very important role in
supporting business models (Forbes Insights survey). Today, nearly all companies outsource some part
of their operations. Oxford Business Group predicts that the global business process outsourcing
industry will be worth $250 billion by the year 2020. Business process outsourcing in the Philippines
accounts for 10 to 15 percent of the global BPO market, where the local BPO sector has grown at a
compound annual rate of 10 percent over the past decade. The Philippines has also consistently ranked
among the top five outsourcing destinations in the world.

Nature and Background of Specialized Industry

Business process outsourcing (BPO) is the practice of contracting a specific work process or processes to
an external service provider. The services can include payroll, accounting, telemarketing, data
recording, social media marketing, customer support, and more. BPO usually fills supplementary — as
opposed to core — business functions, with services that could be either technical or nontechnical.

From fledgling startups to massive Fortune 500 companies, businesses of all sizes outsource processes,
and the demand continues to grow, as new and innovative services are introduced and businesses seek
advantages to get ahead of the competition. BPO can be an alternative to labor migration, allowing the
labor force to remain in their home country while contributing their skills abroad.

BPO is often divided into two main types of services: back office and front office. Back-office services
include internal business processes, such as billing or purchasing. Front-office services pertain to the
contracting company’s customers, such as marketing and tech support. BPOs can combine these
services so that they work together, not independently.

The BPO industry is divided into three categories, based on the location of the vendor. A business can
achieve total process optimization by combining the three categories:
1. Offshore vendors are located outside of the company’s own country. For example, a U.S. company
may use an offshore BPO vendor in the Philippines.

2. Nearshore vendors are located in countries that neighbor the contracting company’s country. For
example, in the United States, a BPO in Mexico is considered a nearshore vendor.

3. Onshore vendors operate within the same country as the contractor, although they may be located in
a different city or state. For example, a company in Seattle, Washington, could use an onshore
outsourcing vendor located in Seattle, Washington, or in Huntsville, Alabama.
Each BPO company will specialize in specific services. They may be grouped as follows:

Customer interaction services: The BPO company would cover a business’s voicemail services,
appointment schedules, email services, marketing program, telemarketing, surveys, payment
processing, order processing, quality assurance, customer support, warranty administration, and other
customer feedback.

Back-office transactions: This includes check, credit, and debit card processing; collection; receivables;
direct and indirect procurement; transportation administration; logistics and dispatch; and warehouse
management.

IT and software operations: These technical support functions include application development and
testing, implementation services, and IT helpdesk. For example, manual data entry can be replaced with
automated data capture, increasing data intake and reducing cycle time.

Finance and accounting services: These functions include billing services, accounts payable, receivables,
general accounting, auditing, and regulatory compliance.

Human resource services: BPOs can help address workforce challenges. They can also cover payroll
services, healthcare administration, hiring and recruitment, workforce training, insurance processing,
and retirement benefits.

Knowledge services: These higher-level processes may include data analytics, data mining, data and
knowledge management, and internet and web research, as well as developing an information
governance program and providing the voice of customer feedback.

How does BPO work?

Organizational executives arrive at the decision to outsource a business process through a variety of
avenues. Startup companies, for example, often need to outsource back-office and front-office functions
because they do not have the resources to build the staff and supporting functions to preform them in-
house. On the other hand, an established company may opt to outsource a task that it had been
performing all along after an analysis determined that an outsourced provider could do the job better
and at a lower cost.

Management experts advise enterprise executives to identify functions that can be outsourced and
then evaluate that function against the pros and cons of outsourcing to determine if shifting that task to
an outsourced provider makes strategic sense for the organization. If so, the organization then must go
through the process of not only identifying the best vendor for the work, but also shifting the work itself
from in-house to the external provider. This requires a significant amount of change management, as
the move to an outsourced provider generally impacts staff, established processes and existing
workflows.

The shift also impacts the organization's finances -- not only in terms of shifting costs from the internal
function to the outsourced providers, but often also in terms of taxes and reporting requirements.

The organization may also have to invest in a technology solution to enable the smooth flow of work
from the organization itself to the outsource provider, with the extent and cost of that technology
solution dependent on the scope of the function being outsourced and the maturity of the technology
infrastructure in place at both enterprises.

Scope of work

As an organization moves a function to a new outsourced provider, it must identify the scope of the
work shifting from in-house staff to the external partner. Executives should identify the workflows and
processes impacted by this shift and adjust, if necessary, those workflows and processes to
accommodate the outsourcing of the work.

Executives should also identify the key objectives for outsourcing a function -- whether it's cost savings,
increased quality, quicker turnaround or some other objective -- and then use that criteria to determine
which provider would be best suited to handle the work. Those objectives should also serve as the basis
for contractual obligations that can be used to help assess the performance of the outsourced provider
and success of the function once it is outsourced.

Benefits of Business Process Outsourcing

Outsourcing accounting is a simple idea to understand. You hire a third-party organization to manage
your business’s affairs instead of having an accounting team.

Businesses can outsource accounting services that want to benefit from tasks including payroll, accounts
receivable, and financial reporting.

Here are many advantages to hiring outsourced accounting services for your small business, the
following are the most important ones that apply to all organizations, regardless of size or industry:

1. Cost-effective - Outsourced bookkeeping is most appealing since it saves organizations money. It

does so in various ways, including minimizing the cost of hiring an in-house team and saving you
time to focus on the core business.
2. Scalability - The value of an outsourced accounting firm is primarily determined by its scalability.
You shouldn’t feel obligated to sign a binding contract while using outsourced accounting
services. It is all about allowing you to be more independent. It also has a sliding pay scale that
fits your business model.
3. Saves time - Outsourced accounting experts can handle the management of financial operations
currently carried out internally. Their knowledge takes the uncertainty out of responsibilities like
reconciliation, budgeting, payroll processing, and debt management, allowing greater peace of
mind.
4. Business continuity - Disruption in accounting functions can harm the organization as accounting
is a time-sensitive fundamental operation. On the other hand, Outsourced accounting allows
you to work with companies usually equipped with cloud-based systems and automation
capabilities and can offer you consistent services. Furthermore, you can ask the provider to
supply time-bound services by adding a business continuity plan in the service agreement.
5. Expert accountants and bookkeepers - You may be able to engage a professional with a higher
standard of expertise at a lower cost by outsourcing. To be competitive in the market
outsourced service providers must continually improve their abilities and certifications. Consider
 working in a workplace with 50 people. They’ll have the ability to discuss new accounting trends
quickly, solutions, and technologies. Furthermore, top accounting firms have greater access to
training and courses, and they attend them regularly.

Accounting Compliance

The purpose of the work is to explore the specifics of financial reporting of offshore zones in the
Global Economy, how it functions and influences global capital.

The severity of taxation of almost any state encourages economic entities to engage in tax planning
and look for legal ways to reduce the tax burden. Tax planning aimed at reducing payments is not just
competent accounting, but a legitimate opportunity not to pay any taxes, or to minimize them. In this
connection, the desire of many businessmen to transfer business to offshore zones or to establish
a clear scheme of interaction with offshore companies in order to optimize taxes becomes relevant.

The main feature of offshore jurisdiction is the preferential nature of taxation: low tax rates or
a fixed annual fee. If earlier offshore was needed mainly for the export of capital, now it is a rather
effective tool for stabilizing payments, regulating the price of export-import contracts, paying foreign
exchange contracts, transferring equipment on leasing, supplying raw materials, purchasing real estate
abroad, storing cash funds, as well as conducting investment and speculative activities in global
financial markets.

Foreign Currency Translation

IAS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency
transactions and operations in financial statements, and also how to translate financial statements into
a presentation currency. An entity is required to determine a functional currency (for each of its
operations if necessary) based on the primary economic environment in which it operates and
generally records foreign currency transactions using the spot conversion rate to that functional
currency on the date of the transaction.

Tax Incentives
The Philippines affecting information technology and business process outsourcing (IT-BPO) firms,
particularly those located in ecozones administered by the Philippine Economic Zone Authority (PEZA),
keeping fiscal incentives.

Among the most cited laws governing the framework for BPO firms operating in PEZA would be
Republic Act No. 7844 (Export Development Act), Republic Act No. 7916 (Special Economic Zone Act),
and Republic Act No. 11534 (CREATE Act). The following would attempt to summarize some of the
incentives BPOs may have to let go if they choose to move away from ecozones.

Income Tax Holiday

An income tax holiday refers to a period of time when companies are either exempted or would pay
less taxes. Formerly ranging from four years (for non-pioneer firms) to six years (for pioneer firms) in
accordance to Executive Order No. 226, s. 1987 (Omnibus Investments Code), which defines the
income tax holiday as “full exemption” from income taxes, the CREATE Act has updated this
classification for export enterprises as follows:
-Four years ITH for those located in the National Capital Region
-Five years ITH in metropolitan areas or those contiguous to Metro Manila
-Six years ITH in all other areas

Special Corporate Income Tax

For export enterprises, a tax rate equivalent to 5 percent effective July 1, 2020 based on gross income
earned would be paid in lieu of all national and local taxes. With Tier I industries like BPOs, they have
10 years to avail the SCIT. This is the difference under the CREATE era, for the 5 percent tax rate did
not have a sunset provision in the earlier Special Economic Zone Act. Also prior to CREATE, the
corporate income tax (CIT) in the Philippines was at 30 percent, regarded as the highest in Southeast
Asia. One could only imagine the disparity between the unlimited SCIT rate of 5 percent, as enjoyed by
BPOs, and the regular 30 percent CIT under the previous legal framework.

Certification
Offshore Business Processing has passed the accreditation process and attained its ISO 9001:2015
certification as the company successfully complied with the requirements for quality management
systems.

ISO 9001:2015 is an international standard dedicated to Quality Management Systems (QMS). It

outlines a framework for improving quality and a vocabulary of understanding for any organization
looking to provide products and services that consistently meet the requirements and expectations of
customers and other relevant interested parties in the most efficient manner possible.