2010 Accounting Alert - PFRS For SMEs

Member firm within Grant Thornton International Ltd
Accounting Alert
Philippine Financial Reporting Standard
for Small and Medium-sized Entities
November 2010
page 2
Philippine Financial Reporting Standard
for Small and Medium-sized Entities
Accounting Alert
Copyright 2010 by Punongbayan & Araullo
All rights reserved.
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ISBN 978-971-93586-4-0
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Recommended entry:
Punongbayan & Araullo
Accounting Alert
Philippine Financial Reporting Standard for Small and Medium-sized Entities
by Punongbayan & AraulloFirst EditionMakati City
Copyright 2010 by Punongbayan & Araullo
Contents Contents Contents Contents Contents P PP PPages ages ages ages ages
A. Introduction 1
B. Who can use the PFRS for SMEs? 2
C. What are Small and Medium-sized Entities? 3
D. When does the PFRS for SMEs take effect? 5
E. What are the components of an SMEs financial statements? 5
F. What are the general recognition and measurement
principles under PFRS for SMEs? 6
G. How does the PFRS for SMEs diverge from the full PFRS? 7
Topics omitted
Differences in specific areas of recognition and
measurement guidance
Summary of main areas of differences in recognition
and measurement guidance
H. How does the PFRS for SMEs differ from PAS 101? 18
I. What specialized activities are covered in the PFRS for SMEs? 21
J. How will entities transition to the PFRS for SMEs? 21
Areas where retrospective application is prohibited
Optional exemptions
Disclosure on first-time adoption
Philippine SEC implementation guidelines
K. What other guidance is included in the PFRS for SMEs? 23
L. P&A concluding comment 25
Potential benefits
Challenges of adopting the PFRS for SMEs
Potential areas of impact
Assistance from P&A 28
Appendices 29
The new Philippine Financial Reporting Standard for Small
and Medium-sized Entities (PFRS for SMEs) became
effective on January 1, 2010, with earlier application
allowed. The standard was adopted by the Financial
Reporting Standards Council (FRSC) from the
international version issued by the International
Accounting Standards Board (IASB). The Securities and
Exchange Commission (SEC) has made the PFRS for
SMEs a part of its rules and regulations, requiring
covered companies to implement the new standard
starting with 2010 financial statements to be filed with
the SEC.
The PFRS for SMEs could transform the way privately
held businesses in the Philippines prepare their financial
statements and accounts. We believe the new standard
offers a unique opportunity to create a standardized
accounting framework for privately held businesses in
the country, and throughout the world as enterprises
transition to the International Financial Reporting
Standards from which the PFRS for SMEs is adopted.
To our valued clients and friends
The PFRS for SMEs provides a substantially simplified
set of internationally recognised accounting principles
for privately held businesses. Based on the full PFRSs,
which were developed primarily for listed companies,
the PFRS for SMEs will particularly benefit businesses
that operate internationally.
Converting to new accounting principles always
involves some degree of financial and resource cost.
Businesses and their advisers will have to learn new
terminology and accounting techniques and make
changes to their accounting software. And there could
be other implications. Despite these challenges,
Punongbayan & Araullo (P&A) believes the short-
term disruption will be outweighed by the longer term
benefits for many privately held businesses.
We have prepared this Accounting Alert to assist you
in understanding and transitioning to the PFRS for
SMEs. We at P&A will be glad to provide further
assistance, if needed, in your implementation of the
standard in your respective organization.
November 2010
Introduction
The Philippine Financial Reporting Standard for Small and
Medium-sized Entities (PFRS for SMEs) was approved by
the Financial Reporting Standards Council (FRSC) in
October 2009 for implementation in the Philippines.
The standard was adopted by the FRSC from the
International Financial Reporting Standard for Small and
Medium-sized Entities (IFRS for SMEs) published by the
International Accounting Standards Board (IASB) in
July 2009. The Preface to PFRS for SMEs issued by the
FRSC adopting the standard in the Philippines is
presented in Appendix A.
The IASB issued the IFRS for SMEs to respond to a
demand. The full IFRS were developed primarily for
publicly-traded entities. However, there are far more
privately held companies than publicly-traded ones.
Many private companies prepare financial statements
but, in much of the world, these statements are based
on local requirements that differ from the full IFRS.
The IASBs full IFRS were designed to meet the needs
of equity investors and other users of financial
statements in public capital markets and, therefore,
cover a wide range of issues, as well as a sizeable
amount of implementation guidance and disclosures
appropriate for public companies.
Users of the financial statements of SMEs do not have
the same needs, but are more focused on assessing
shorter-term cash flows, liquidity and solvency. In
addition, many SMEs have observed that full IFRS
impose a burden on them, and that this burden has
grown as IFRS have become more detailed and more
countries have begun to use them. The IASB has,
therefore, developed the IFRS for SMEs with the twin
goals of meeting user needs while balancing costs and
benefits from a preparer perspective.
The Philippine scenario is not different from much of
the world. In consideration of the needs of the users
of financial statements of privately held companies, as
well as the burden to preparers of those financial
statements, the then Accounting Standards Council
(ASC, now the FRSC) provided temporary relief to
private companies referred to as non-publicly
accountable entities (or NPAEs) in October 2005
by permitting entities that qualified as NPAEs not to
use the full PFRS. The temporary relief was given
under Philippine Accounting Standards (PAS) 101,
Financial Reporting Standards for Non-publicly Accountable
Entities. A copy of PAS 101 is presented in
Appendix B.
PAS 101 previously permitted NPAEs to apply the
applicable financial reporting standards effective as of
December 31, 2004, i.e., NPAEs were given the option
to apply or not to apply any new FRSC
pronouncements that became effective after
December 31, 2004.
Upon the adoption of the PFRS for SMEs, PAS 101
was withdrawn; hence it is no longer applicable in the
Philippines.
This Accounting Alert aims to provide concerned
entities with some guidance in using the PFRS for
SMEs, mainly by providing discussions on the
differences between the PFRS for SMEs and the full
PFRS on one hand, and between the PFRS for SMEs
and PAS 101 on the other hand, as well as some issues
relating to transitioning to the PFRS for SMEs.
A.
2 22 22 Accounting Aler Accounting Aler Accounting Aler Accounting Aler Accounting Alert: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs
B.
Who can use the PFRS for SMEs?
The PFRS for SMEs does not itself
deal with this question. It provides
instead that the decision as to which
entities are required or permitted to
use the PFRS for SMEs will rest
with legislative and regulatory
authorities and standard-setters in
individual jurisdictions.
However, it does contain a clear
definition of the class of entity for
which the standard is intended (see
definition of the term small and medium-
sized entities in Section C). This
definition is essential so that (a) the
IASB can decide on the accounting
and disclosure requirements that are
appropriate for that class of entity,
and (b) the legislative and regulatory
authorities, standard-setters,
reporting entities and their auditors
will be informed of the intended
scope of applicability of the
standard.
The Philippine Securities and
Exchange Commission (SEC), in a
notice to the public issued on
December 11, 2009 (see Appendix
C), announced that the Commission
En Banc in its meeting on
December 3, 2009 resolved to
adopt the PFRS for SMEs as part
of its rules and regulations. The
SEC Notice also included a
definition of small and medium-
sized entities that includes size
criteria (see Section C).
In the abovementioned notice of
December 11, 2009, the SEC
required entities that meet the
definition of SMEs to apply the
PFRS for SMEs as of the effective
date (which was set for annual
periods beginning January 1, 2010
see Section D). This requirement has
been clarified by the SEC to mean
that entities qualifying as SMEs
shall use the PFRS for SMEs; such
entities are not allowed to use other
financial reporting frameworks,
such as the full PFRS, for their
general purpose financial
statements. This requirement is
somewhat restrictive, but for the
SEC, this fulfills the goal to allow
comparability of financial
statements of SMEs.
The SEC, however, provided
exemptions from the mandatory
adoption of PFRS for SMEs to
SMEs that meet certain criteria. The
SEC notice to the public
issued on October 11, 2010 (see
Appendix F) provides a list of those
SMEs that are exempted, which
include the following:
an SME is part of a group,
either as a subsidiary, associate
or jointly controlled entity,
reporting under full PFRS;
an SME is a subsidiary or
branch office of a foreign
subsidiary that will be moving
towards IFRS pursuant to the
foreign countrys published
convergence plan;
an SMEs short-term
projections show that it will
breach the quantitative
thresholds set in the criteria
for SME, and the breach is
expected to be significant and
continuing due to its long-
term effect on the entitys
total assets or liabilities;
an SME has concrete plans to
conduct an initial public
offering within the next two
years;
an SME has a subsidiary that
is mandated to report under
full PFRS; and
an SME has been preparing
financial statements using full
PFRS and has decided to
liquidate its assets.
C.
What are Small and Medium-sized Entities?
SMEs as defined in PFRS for SMEs as defined in PFRS for SMEs as defined in PFRS for SMEs as defined in PFRS for SMEs as defined in PFRS for
SMEs SMEs SMEs SMEs SMEs
As defined in the PFRS for SMEs,
the term Small and Medium-sized
Entities (or SMEs) is not associated
with any size criteria.
Small and medium-sized entities are
instead defined under the PFRS for
SMEs as entities that:
a. do not have public
accountability, and
b. publish general purpose
financial statements for
external users.
An entity has public accountability
if:
a. it files, or it is in the process
of filing, its financial
statements with a securities
commission or other
regulatory organization for the
purpose of issuing any class
of instruments in a public
market; or
b. it holds assets in a fiduciary
capacity for a broad group of
outsiders as one of its primary
businesses. This is typically the
case for banks, credit unions,
insurance companies,
securities brokers/dealers,
mutual funds and investment
banks.
Entities holding assets in a fiduciary
capacity for reasons incidental to a
primary business are not, however,
considered to be publicly
accountable and, hence, can use the
PFRS for SMEs. Examples of
where this may be the case are
travel or real estate agents, schools,
charitable organizations,
cooperative enterprises requiring a
nominal membership deposit and
sellers that receive payment in
advance of delivery of goods and
services such as utility companies.
Accounting Aler Accounting Aler Accounting Aler Accounting Aler Accounting Alert: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs 3 33 33
SMEs as defined by the SMEs as defined by the SMEs as defined by the SMEs as defined by the SMEs as defined by the
Philippine SEC Philippine SEC Philippine SEC Philippine SEC Philippine SEC
As mentioned earlier, the above
definition of SMEs under the PFRS
for SMEs does not include any size
criteria. However, the Philippine
SEC, in its notice of December 11,
2009 cited earlier, adopted the
following definition of small and
medium-sized entities that includes
size criteria:
1. The entity has total assets of
between P3 million and P350
million or total liabilities of
between P3 million and P250
million;
2. It is not required to file
financial statements under
SRC Rule 68.1;
3. It is not in the process of
filing its financial statements
for the purpose of issuing any
class of instruments in a
public market;
4. It is not a holder of a
secondary license issued by a
regulatory agency, such as a
bank (all types of banks), an
investment house, a finance
company, an insurance
company, a securities broker/
dealer, a mutual fund and a
pre-need company; and
5. It is not a public utility.
The above SEC definition of SMEs
is essentially the same as the
definition of NPAEs adopted by
the then Accounting Standards
Council (now the FRSC) under PAS
101, with the exception of the
amounts set for the size criteria. For
the definition of SMEs, the size
criteria set by the SEC include a
floor (P3 million for both total
assets and total liabilities) and a
ceiling (P350 million for total assets
and P250 million for total
liabilities). For the definition of
NPAEs, the size criteria were
pegged at a single amount for total
assets (P250 million) and total
liabilities (P150 million); there was
no ceiling or floor similar to that
provided for the definition of
SMEs.
This difference in size criteria has
some implications with regard to
the implementation in the
Philippines of the PFRS for SMEs,
specifically on the matter relating to
transition to the PFRS for SMEs (see
relevant discussion in Section J).
D.
When does the PFRS for SMEs take effect?
The SEC has set the effective date
of PFRS for SMEs for annual
periods beginning January 1, 2010.
This effective date was later on
revised by the SEC to allow early
application of the PFRS for SMEs
in 2009 as long as the SMEs are
capable, in terms of systems and
resources, to efficiently transition to
PFRS for SMEs and provided the
impact of the early adoption is
disclosed in the financial statements
(see related discussion under Philippine
SEC Implementation Guidelines in
Section J).
The PFRS for SMEs defines what
statements and disclosures shall be
presented as part of a complete set
of financial statements, which are
the same components required
under the full PFRS. These include
the following:
a statement of financial
position as at the reporting
date;
either (i) a single statement of
comprehensive income or (ii)
a separate income statement
and a separate statement of
comprehensive income;
a statement of changes in
equity for the reporting
period;
a statement of cash flows for
the reporting period, with the
cash flows from operating
activities presented using
either the indirect method
(i.e., profit or loss is adjusted
for the effects of non-cash
transactions, any deferrals or
accruals of past or future
operating cash receipts or
payments, and items of
income or expenses associated
with investing or financing
cash flows) or the direct
method (i.e., major classes of
gross cash receipts and gross
cash payments are disclosed);
and
notes, comprising a summary
of significant accounting
policies and other explanatory
information.
In general, comparative information
is required in respect of the
previous comparable period for all
amounts presented.
As a simplification in comparison to
full PFRS, where the only changes
to equity during the periods for
which financial statements are
presented arise from profit or loss,
payment of dividends, corrections
of prior period errors, and changes
in accounting policy, the entity may
present a single statement of
income and retained earnings in
place of a separate statement of
comprehensive income and a
statement of changes in equity.
E.
What are the components of an SMEs
financial statements?
The PFRS for SMEs has been
designed essentially to work as a
stand-alone document, with no
mandatory cross references to full
PFRS. Where full PFRS permits a
number of possible accounting
options for a particular transaction,
the standard presents SMEs with a
simplified version of the full
requirements and reduces the
number of options available to
them.
The requirements contained in the
PFRS for SMEs for recognizing and
measuring assets, liabilities, income
and expenses are based on
pervasive principles that are derived
from the FRSCs Framework for the
Preparation and Presentation of
Financial Statements and from the full
PFRS.
Where the PFRS for SMEs does not
contain a requirement that applies
specifically to a transaction or other
event or condition, the standard
requires that management applies
judgment in developing an
accounting policy that results in
information that is relevant and
reliable.
In making such a judgment, a
hierarchy is provided, with
management being advised to refer
to and consider the applicability of
the following sources in descending
order:
a. the requirements and guidance
in the PFRS for SMEs dealing
with similar and related issues,
and
b. the definitions, recognition
criteria and measurement
concepts for assets, liabilities,
income and expenses and the
pervasive principles in the
section in the IFRS for SMEs
on Concepts and Pervasive
Principles.
In making the judgment,
management may also consider the
requirements and guidance in the
full PFRS dealing with similar and
related issues, but this is not
mandatory.
F.
What are the general recognition and
measurement principles under PFRS for
SMEs?
The table below provides a snapshot of how the PFRS
for SMEs compares with the full PFRS:
A snapshot of the PFRS for SMEs containing the
section no., title and description of the various sections
of the standard is presented in Appendix D.
G.
How does the PFRS for SMEs diverge
from the full PFRS?
Compared to the full PFRS, the PFRS for SMEs
contains a number of simplifications. Principal among
these are using simplified drafting in writing the
standard, making the final document easier to
understand and follow, and reducing the number of
disclosures to be made when preparing the financial
statements.
The IASB has indicated that future revisions to the
IFRS for SMEs (from which the PFRS for SMEs is
adopted) will be made once every three years, providing
a stable platform to both preparers and users of
financial statements prepared under the standard.
The IASB also indicated that it expects to undertake a
thorough review of the SMEs experience in applying
the IFRS for SMEs when two years of financial
statements using the standard have been published by a
broad range of entities. The IASB expects that it will
then propose amendments to address the
implementation issues identified in that review. It will
also address issues arising from new and amended IFRS
that are published in the intervening period.
Any such amendments made by the IASB are expected
to be adopted by the FRSC for implementation by
SMEs in the Philippines.
F FF FFull PFRS ull PFRS ull PFRS ull PFRS ull PFRS PFRS for SMEs PFRS for SMEs PFRS for SMEs PFRS for SMEs PFRS for SMEs
Numbered by standard
Around 3,000 potential
disclosures
Organized by topic
(e.g., inventories)
Around 300 potential
disclosures
Around 2,800 pages in
length
Less than 230 pages
Updated several times
a year
Anticipated to be
updated on a three-
yearly basis
T TT TTopics omitted opics omitted opics omitted opics omitted opics omitted
The PFRS for SMEs also omits a
number of topics found in the full
PFRS that are not considered
relevant to the needs of small and
medium-sized entities. Topics
omitted from the PFRS for SMEs
are:
Segment reporting
Interim reporting
Earnings per share
Insurance
Assets held for sale
Differences in specific areas of Differences in specific areas of Differences in specific areas of Differences in specific areas of Differences in specific areas of
recognition and measurement recognition and measurement recognition and measurement recognition and measurement recognition and measurement
guidance guidance guidance guidance guidance
The following paragraphs set out
some particular areas of interest,
where the requirements in the PFRS
for SMEs diverge from those of the
full PFRS. The issues listed are by
no means exhaustive, and reference
should be made to the text of the
standard itself for a proper
understanding of all the potential
differences that may arise.
Financial instruments
(Sections 11 and 12)
In seeking to meet user needs while
balancing costs and benefits from a
preparers perspective, the PFRS for
SMEs divides its requirements on
financial instruments into two
sections one dealing with basic
financial instruments and the other
with more complex financial
instruments and transactions.
Examples of financial instruments
that are normally considered basic
financial instruments (covered
under Section 11 of the PFRS for
SMEs) include:
cash
demand and fixed-term
deposits when the entity is the
depositor (e.g., banks
accounts)
commercial paper and
commercial bills held
accounts, notes and loans
receivable and payable
(including loans to or from
subsidiaries or associates that
are due on demand)
bonds and similar debt
instruments
investments in non-
convertible preference shares
and non-puttable ordinary and
preference shares
commitments to receive a loan
if the commitment cannot be
net settled in cash
Examples of financial instruments
that will normally be considered
more complex financial instruments
and transactions (covered under
Section 12) include:
asset-backed securities, such as
collateralized mortgage
obligations, repurchase
agreements and securitized
packages of receivables
options, rights, warrants,
futures contracts, forward
contracts and interest rate
swaps that can be settled in
cash or by exchanging another
financial instrument
financial instruments that
qualify and are designated as
hedging instruments
commitments to make a loan
to another entity
commitments to receive a loan
if the commitment can be net
settled in cash
The PFRS for SMEs gives entities a
choice to apply either:
a. the provisions of both
Sections 11 and 12 of the
PFRS for SMEs in full, or
b. the recognition and
measurement provisions of
PAS 39, Financial Instruments:
Recognition and Measurement.
Where an entity does choose to
adopt the recognition and
measurement provisions of PAS 39,
however, it still makes the
disclosures for financial instruments
that are required by Sections 11 and
12 of the PFRS for SMEs rather
than those in PFRS 7, Financial
Instruments: Disclosures.
Basic financial instruments
(Section 11)
Under PFRS for SMEs, basic
financial instruments are
categorized as either measured at:
a. amortized cost or cost less
impairment; or
b. fair value with changes in fair
value recognized in profit or
loss (this will cover
investments in non-
convertible and non-puttable
preference shares and non-
puttable ordinary shares that
are publicly traded or whose
fair value can otherwise be
measured reliably).
Under the full PFRS, there are four
categories of financial instruments,
for example:
a. a financial asset or financial
liability at fair value through
profit or loss
b. held-to-maturity investments
(carried at amortized cost)
c. loans and receivables (carried
at amortized cost)
d. available-for-sale financial
assets (carried at fair value)
(As additional information, the
IASB has completed the initial
phase of its project to replace IAS
39 in its entirety. The initial phase
addresses the classification and
measurement of financial assets,
reducing the complexity in
accounting for financial instruments
by having fewer categories of
financial assets and a principle-
based approach to their
classification. Under this new
requirement, which will take effect
when the other phases of the
project are completed and become
effective, entities are required to
classify a financial asset at either
amortized cost or fair value on the
basis of the entitys business model
for managing the financial asset,
and the contractual cash flow
characteristics of the financial
asset.)
Other financial instruments
issues (Section 12)
In general, financial instruments
that do not meet the criteria set out
in the PFRS for SMEs for treatment
as basic financial instruments are
subsequently measured at fair value
at the end of each reporting period,
with changes in their fair value
being recognized in profit or loss.
(The equivalents of PAS 39s
classifications on available-for-sale
financial assets and held-to-maturity
investments are not included in the
PFRS for SMEs.)
Section 12 of PFRS for SMEs also
sets out the conditions that must be
met for hedge accounting to be
used and how it is to be applied.
Compared with PAS 39, the
guidance contained in PFRS for
SMEs is a simplified version but is
more restrictive as it permits hedge
accounting only for certain
specified risks and only if the
hedging instrument complies with
all the prescribed terms and
conditions.
In In In In Inv vv vvestments in associa estments in associa estments in associa estments in associa estments in associates tes tes tes tes
(Section 14)
The PFRS for SMEs contains an
accounting policy election in respect
of investments in associates. This
applies to the accounting in
consolidated financial statements
and in the financial statements of
an investor that is not a parent but
has an investment in one or more
associates.
Under the accounting policy
election for investments in
associates, an investor shall account
for all such investments under
either:
the cost model (cost less any
accumulated impairments
losses);
the equity model (initial
recognition at the transaction
price, with subsequent
adjustments to reflect the
investors share of the profit
or loss and other
comprehensive income of the
associate); or
the fair value model
The cost model should not be
applied to investments in associates
for which there is a published price
quotation (the fair value model
must be used where this is the case).
Under the full PFRS, there are no
similar options provided in PAS 28,
Investments in Associates. Instead,
investments in associates are
required to be accounted for using
the equity method.
In In In In Inv vv vvestments in joint v estments in joint v estments in joint v estments in joint v estments in joint ventur entur entur entur entures es es es es
(Section 15)
A similar accounting policy election
(allowed for investments in
associates see above) applies to
investments in jointly controlled
entities (JCEs). The PFRS for SMEs
does not permit the use of
proportionate consolidation.
Under the full PFRS, PAS 31,
Interests in Joint Ventures, a venturer
shall recognize its interest in a JCE
using proportionate consolidation
or, as an alternative, the equity
method.
(As additional information, there is
a proposed amendment to PAS 31
to eliminate the proportionate
consolidation method as an
alternative for measurement of
interests in joint ventures.)
In In In In Inv vv vvestment pr estment pr estment pr estment pr estment proper oper oper oper operty ty ty ty ty
(Section 16)
Under the PFRS for SMEs,
investment property with fair value
that can be measured reliably
without undue cost or effort on an
ongoing basis is accounted for at
fair value, with changes in fair value
being accounted for through profit
or loss. (It is not possible to elect to
use the cost-depreciation-
impairment model for such
property.)
All other investment properties are
accounted for as property, plant and
equipment using the cost-
depreciation-impairment model.
Under PAS 40, Investment Property,
with certain exceptions, an entity
shall measure its investment
property using either the fair value
model or the cost model. The
accounting policy chosen shall be
applied to all of the investment
properties.
10 10 10 10 10 Accounting Aler Accounting Aler Accounting Aler Accounting Aler Accounting Alert: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs
Accounting Aler Accounting Aler Accounting Aler Accounting Aler Accounting Alert: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs t: PFRS for SMEs 11 11 11 11 11
Pr Pr Pr Pr Proper oper oper oper operty ty ty ty ty, ,, ,, plant and equipment plant and equipment plant and equipment plant and equipment plant and equipment
(Section 17)
Items of property, plant and
equipment are measured under the
PFRS for SMEs using the cost-
depreciation-impairment model.
There is no option to use a
revaluation model.
On the other hand, full PFRS under
PAS 16, Property, Plant and Equipment,
allows measurement of property,
plant and equipment using either
the cost model or the revaluation
model. The accounting policy
chosen shall be applied to an entire
class of property, plant and
equipment.
Intangible assets other than Intangible assets other than Intangible assets other than Intangible assets other than Intangible assets other than
g gg ggood ood ood ood oodwill will will will will (Section 18)
Initial measurement
Under full PFRS, PAS 38, Intangible
Assets, allows the recognition of an
intangible asset from development
(or from the development phase of
an internal project) when certain
conditions are complied with.
The PFRS for SMEs, on the other
hand, requires an entity to recognize
an expenditure incurred internally
on an intangible item, including all
expenditures for both research and
development activities, as an
expense when it is incurred, unless
it forms part of the cost of another
asset that meets the recognition
criteria under the PFRS for SMEs.
The criteria for recognition as assets
are always considered satisfied for
intangible assets that are separately
acquired. Intangibles acquired in a
business combination are normally
recognized as assets on the
assumption that their fair value can
be measured with sufficient
reliability.
Measurement after recognition
For those that meet the criteria for
recognition as assets, the PFRS for
SMEs requires intangible assets to
be measured at cost less
accumulated amortization and
accumulated impairment losses. For
the purpose of the PFRS for SMEs,
all intangible assets are considered
to have a finite useful life. Where an
entity is unable to make a reliable
estimate of the useful life of an
intangible asset, the life is presumed
to be ten years.
PAS 38, on the other hand, allows
an entity to choose either the cost
model or the revaluation model in
valuing intangible assets. Intangible
assets with finite useful lives are
amortized over their useful lives;
those with infinite useful lives are
not amortized.
Business combina Business combina Business combina Business combina Business combinations and tions and tions and tions and tions and
g gg ggood ood ood ood oodwill will will will will (Section 19)
Under the PFRS for SMEs, the
acquirer in a business combination
is required to allocate the cost of a
business combination at the
acquisition date, by recognizing the
acquirees identifiable assets and
liabilities and a provision for those
contingent liabilities that satisfy the
recognition criteria under the PFRS
for SMEs at their fair values at that
date.
Any excess of the cost of the
business combination over the
acquirers interest in the net fair
value of the identifiable assets,
liabilities and provisions for
contingent liabilities so recognized
shall be accounted for as goodwill
(positive); any excess of the
acquirers interest in the net fair
value of the identifiable assets,
liabilities and provisions for
contingent liabilities over cost shall
be accounted for as the so-called
negative goodwill.
Where a negative goodwill is
identified, the identification and
measurement of the acquirees
assets, liabilities and contingent
liabilities and the measurement of
the cost of the combination is first
of all reassessed. After this
reassessment, any remaining
negative goodwill is recognized
immediately in profit or loss.
After initial recognition, the
acquirer shall measure goodwill
acquired in a business combination
at cost less accumulated
amortization and accumulated
impairment losses. Where an entity
is unable to make a reliable estimate
of the useful life of goodwill, the
life is presumed to be ten years.
The process for the determination
of goodwill or negative goodwill
under the PFRS for SMEs is
generally similar to that in the full
PFRS under PFRS 3, Business
Combinations. However, under PAS
38, Intangible Assets, intangible assets
with indefinite useful lives are not
amortized; therefore, goodwill,
being considered as having
indefinite useful life, is not
amortized under the full PFRS.
Additionally, PAS 36, Impairment of
Assets, requires annual testing of
goodwill acquired in business
combination for impairment,
irrespective of whether there is any
indication of impairment.
The requirement under the PFRS
for SMEs to amortize goodwill is an
important simplification compared
to the requirements in full IFRS, as
it eliminates the need for a detailed
annual impairment test. Under the
PFRS for SMEs, an impairment test
is only needed for goodwill where
there is an indicator of impairment.
Impairment of goodwill
(Section 27)
In testing for impairment of
goodwill (in cases where there is an
indicator of impairment), the PFRS
for SMEs requires that where
goodwill cannot be allocated to
individual cash-generating units (or
groups of cash-generating units) on
a non-arbitrary basis, then for the
purpose of testing goodwill, a
reporting entity tests impairment by
determining the recoverable amount
of either:
a. the acquired entity in its
entirety, if the goodwill relates
to an acquired entity that has
not been integrated
(integrated means the acquired
business has been restructured
or dissolved into the reporting
entity or other subsidiaries), or
b. the entire group of entities,
excluding any entities that
have not been integrated, if
the goodwill relates to an
entity that has been integrated
This treatment allows goodwill to
be allocated and tested for
impairment at a higher level than
that required by full PFRS under
PAS 36 where goodwill is allocated
to the lowest level within the entity
at which the goodwill is associated
and monitored for internal
management purposes.
Bor Bor Bor Bor Borr rr rro oo oowing costs wing costs wing costs wing costs wing costs (Section 25)
The PFRS for SMEs requires an
entity to recognize all borrowing
costs as an expense in profit or loss
in the period in which they are
incurred. Capitalization of
borrowing costs is not permitted.
The full PFRS, under PAS 23,
Borrowing Costs, requires an entity to
capitalize borrowing costs that are
directly attributable to the
acquisition, construction or
production of a qualifying asset as
part of the cost of that asset. Other
borrowing costs are recognized as
expense in the period when
incurred. A qualifying asset is an
asset that necessarily takes a
substantial period of time to get
ready for its intended use or sale.
Shar Shar Shar Shar Share-based pa e-based pa e-based pa e-based pa e-based payment yment yment yment yment
(Section 26)
The requirements for the
recognition and measurement of
share-based payment under the
PFRS for SMEs are based on those
contained in the full PFRS, under
PFRS 2, Share-based Payment.
The PFRS for SMEs does, however,
provide simplified guidance on
measuring the fair value of share
options and other forms of share-
based payment with the following
three-tier measurement hierarchy:
a. If an observable market price
is available for the equity
instruments granted, that price
shall be used.
b. If an observable market price
is not available, the fair value
of share options granted shall
be measured using entity-
specific observable market
data such as for a recent
transaction in the share
options.
c. If an observable market price
is not available and obtaining a
reliable measurement of fair
value under (b) is
impracticable, an entity shall
indirectly measure the fair
value of share options using
an option pricing model. The
inputs for the model should
use market data to the greatest
extent possible.
A similar hierarchy applies to the
measurement of shares and share
appreciation rights.
Employee benefits (Section 28)
Determination of cost for the
period for defined benefit plans
Under the PFRS for SMEs, for
defined benefit plans, the
determination of the defined
benefit liability (or asset) and related
cost of the defined benefit plan is
much simpler than that in the full
PFRS under PAS 19, Employee
Benefits. An SMEs cost of its
defined benefit plans for the period
is simply computed as the net
change in its defined benefit liability
during the period (the latter being
determined as the present value of
the obligations minus the present
value of plan assets at the reporting
date).
Allocation of actuarial gains and
losses
The PFRS for SMEs gives entities
an accounting policy election in
respect of the allocation of their
actuarial gains and losses. Under
this election, an entity shall either:
a. recognize all actuarial gains
and losses in profit or loss, or
b. recognize all actuarial gains
and losses in other
comprehensive income
In computing the defined benefit
liability under PAS 19, a limit is
applied to the portion of actuarial
gains and losses that can be
recognized in profit or loss
(referred to as the corridor
approach). Under the PFRS for
SMEs, there is no ability to use such
corridor approach.
(As additional information, there is
a proposed amendment to PAS 19
to remove the corridor approach.)
Actuarial valuation model
If an entity is able, without undue
cost or effort, to use the projected
unit credit method (which is the
method required by PAS 19) to
measure its defined benefit
obligation and the related expense,
it shall do so.
However, where an entity is unable
to do so without undue cost or
effort, it is permitted to make the
following simplifications in
measuring its defined benefit
obligation with respect to current
employees. It may:
ignore estimated future salary
increases;
ignore future service of
current employees; and
ignore possible in-service-
mortality of current
employees between the
reporting date and the date
employees are expected to
begin receiving post-
employment benefits.
However, mortality after
service (i.e., life expectancy)
will still need to be
considered.
The PFRS for SMEs does not
require an independent actuary to
be engaged to perform the actuarial
valuation, nor does it require a
comprehensive actuarial valuation
to be performed annually. If the
principal actuarial assumptions have
not changed significantly during the
periods between actuarial
valuations, the defined benefit
obligation can be measured by
adjusting the prior period
measurement for changes in
employee demographics such as
number of employees and salary
levels.
Income tax Income tax Income tax Income tax Income tax (Section 29)
The PFRS for SMEs requires SMEs
to measure deferred tax assets and
liabilities at an amount that includes
the effect of possible outcomes of
a review by the tax authorities since
the uncertainty about whether the
tax authorities will accept the
amounts reported to them by the
entity affects the amount of the
current tax and deferred tax. The
entity shall use the probability-
weighted average amount of all
possible outcomes. The effect on
deferred tax expense arising from a
change in the effect of the possible
outcomes of a review by the tax
authorities shall be disclosed.
The full PFRS at present does not
include the above-mentioned
requirements (sometimes referred
to as uncertain tax positions).
However, there is another standard
(PAS 37, Provisions, Contingent
Liabilities and Contingent Assets) that
applies as well to income tax
matters that may result in the
recognition or disclosure of
contingencies relating to taxes.
Summar Summar Summar Summar Summary of main areas of differences in recognition and measurement guidance y of main areas of differences in recognition and measurement guidance y of main areas of differences in recognition and measurement guidance y of main areas of differences in recognition and measurement guidance y of main areas of differences in recognition and measurement guidance
The following table summarizes some of the main simplifications made in the PFRS for SMEs, as well as some
examples of options available under full PFRS that are not included in the PFRS for SMEs:
Subject Subject Subject Subject Subject F FF FFull PFRS ull PFRS ull PFRS ull PFRS ull PFRS PFRS for SMEs PFRS for SMEs PFRS for SMEs PFRS for SMEs PFRS for SMEs
Basic financial
instruments
Other financial
instruments issues
There are four categories of financial
instruments.
Hedge accounting is only possible
where strict documentation and
effectiveness requirements are met.
There are two categories, i.e.,
(a) amortized cost or cost less
impairment, and (b) fair value
through profit or loss.
Rules on the use of hedge
accounting are much simplified
(although more restricted).
Allows option to use PAS 39 for
recognition and measurement (if this
option is taken, SME still makes
disclosures required under PFRS for
SMEs and not under PFRS 7).
Investments in associ-
ates (in consolidated FS
or in FS of investor that
is not a parent)
Requires use of equity method of
accounting
Option to account for investments
at: (a) cost; (b) under the equity
method; or (c) at fair value through
profit or loss (compulsory where a
quoted price is available)
Investments in joint
ventures (in consolidated
FS or in FS of investor
that is not a parent)
Option to account for investments at:
(a) proportionate consolidation; or
(b) under the equity method
Option to account for investments
at: (a) cost; (b) under the equity
method; or (c) at fair value through
profit or loss (compulsory where a
quoted price is available)
No proportionate consolidation
option
Investment property Option to measure asset at: (a) cost-
depreciation-impairment model; or
(b) fair value model
Must be accounted for at fair value if
such a value is available without
undue cost or effort. Cost model
should be used only when fair value
is not available.
Measurement at cost or fair value is
driven by circumstances (i.e.,
availability of fair value without
undue cost or effort) rather than by
choice.
Property, plant and
equipment
Option to measure asset at: (a) the
cost model; or (b) revaluation model
Requires use of the cost-
depreciation-impairment model
No revaluation option
Intangible assets other
than goodwill
Development costs are capitalized
where the six specific criteria are
met.
Option to measure asset at: (a) the
cost model; or (b) revaluation model
Intangible asset with infinite life is
not amortized but impairment testing
is required annually, and whenever
indicator of impairment exists.
Expenditures incurred internally on
intangible item, including all
research and development costs,
are expensed.
Requires subsequent measurement
of capitalized intangible assets
(such as those separately acquired)
at cost less accumulated
amortization and impairment losses
No revaluation option for capitalized
intangible assets
All intangible assets are considered
to have a finite life, hence, are
amortized. If there is no reliable
estimate of useful life, presumed life
is ten years.
Business combinations
and goodwill
Goodwill is not amortized.
Impairment testing is required
annually, and whenever indicator of
impairment exists.
Goodwill is allocated to and tested
for impairment at the lowest level
within the entity at which goodwill is
associated and monitored for
internal management purposes.
Goodwill is amortized (presumed life
of ten years is used where reliable
estimate of useful life cannot be
made).
Impairment testing is only needed
when indicator of impairment exists.
Goodwill is allocated and tested for
impairment at a higher level.
Borrowing costs Borrowing costs directly attributable
to acquisition, construction or
production of a qualifying asset are
capitalized.
Other borrowing costs are expensed
when incurred.
All borrowing costs are expensed.
Share-based payment In case market prices are not
available, fair value of shares and
share options is estimated using a
valuation technique that
incorporates all relevant factors and
assumptions. Detailed guidance on
many valuation issues is provided.
A simplified guidance (i.e., a three-
tier measurement hierarchy) for
measuring the fair value of share
options and other form of share-
based payment is provided.
Post-employment
defined benefit plans
Actuarial gains and losses are not
recognized as an income or expense
unless unrecognized gain or loss
exceeds 10% of the greater of the
defined benefit obligation and fair
value of plan assets. The amount
exceeding this 10% corridor is
charged or credited to profit or loss
over the employees expected
average remaining working lives, or
through any systematic method that
results in faster recognition of
actuarial gains or losses.
The corridor approach for
recognizing actuarial gains and
losses is not permitted. Any change
in the defined benefit liability is
recognized as the cost of the
defined benefit plan for the period.
Income tax There is no specific provision on
consideration (and disclosure) of the
effect of uncertain tax positions (i.e.,
possible outcomes of a review by tax
authorities) on deferred tax
accounts.
Requires measurement of deferred
tax assets and liabilities at an
amount that includes the possible
effect of uncertain tax positions and
requires disclosure of related
information in the financial
statements.
H.
How does the PFRS for SMEs differ from
PAS 101?
As mentioned in Section A earlier,
PAS 101 previously permitted
NPAEs to apply the applicable
financial reporting standards
effective as of December 31, 2004,
i.e., NPAEs were given the option
to apply or not to apply any new
FRSC pronouncements that became
effective after December 31, 2004.
Having been given such an option:
some NPAEs adopted the
pronouncements effective as
of December 31, 2004 but did
not adopt any new
pronouncements made
effective after December 31,
2004;
other NPAEs adopted the
pronouncements effective as
of December 31, 2004 and
applied some new standards
made effective after
December 31, 2004; while
some other NPAEs applied
the full PFRS.
Those NPAEs that now qualify as
SMEs under the PFRS for SMEs
are required to apply the PFRS for
SMEs, except for those entities
exempted by the SEC from the
mandatory adoption of the PFRS
for SMEs (see discussion in Section B
and Appendix F).
For the guidance of NPAEs that
previously used PAS 101, we
present below some of the major
differences between PAS 101 and
the PFRS for SMEs. (For NPAEs
that previously used the full PFRS
and are now required to use the
PFRS for SMEs, the discussions in
Section G above will be relevant.)
The issues listed below are by no
means exhaustive and, therefore,
reference should be made to the
text of the relevant standards for a
proper understanding of those
issues.
Size criteria The size
criteria for NPAEs (as the
term is used and defined
under PAS 101) were pegged
at a single amount for total
assets (P250 million) and total
liabilities (P150 million); there
was no ceiling or floor similar
to that provided for SMEs (as
the term is defined and used
under the PFRS for SMEs).
The size criteria for SMEs
include a floor (P3 million for
both total assets and total
liabilities) and a ceiling (P350
million for total assets and
P250 million for total
liabilities).
Option to choose financial
reporting framework/
standards NPAEs were
given the option to apply
accounting standards effective
as of December 31, 2004 and
to apply or not to apply any
new FRSC pronouncements
that became effective after
December 31, 2004, or to
apply the full PFRS.
Qualifying SMEs, on the other
hand, are required to apply the
PFRS for SMEs, save for
those entities that are
exempted by the SEC from
the mandatory adoption of
the PFRS for SMEs (see Section
A and Appendix F).
Components of financial
statements NPAEs
financial statements do not
include a statement of
comprehensive income.
SMEs financial statements
shall include either a single
statement of comprehensive
income or two statements, i.e.,
a separate statement of
income and a separate
statement of comprehensive
income.
Valuation of inventories
The last-in, first-out (LIFO)
method was allowed as an
alternative valuation for
inventories of NPAEs.
include the LIFO method as
an alternative inventory
valuation method.
Financial assets The
terminologies, recognition and
measurement principles,
presentation and disclosures
of financial assets allowed for
NPAEs are very different
from those required under the
PFRS for SMEs. Financial
assets of NPAEs were
categorized as either
marketable securities (current)
that were measured at the
lower of cost or market with
the unrealized losses
recognized in profit or loss; or
marketable securities (non-
current) that were measured at
the lower of cost or market
with the unrealized losses
taken into the equity section
of the balance sheet and other
long-term investments that
were accounted for under the
equity method or the cost
method. Disclosures required
were minimum and not
detailed.
SMEs, on the other hand,
have the option to follow
PAS 39, or the relevant
provisions under the PFRS for
SMEs (which are also based
on PAS 39). Those
requirements, while simplified
for SMEs, are definitely more
complex and detailed than
those allowed the NPAEs
under PAS 101.
Borrowing costs NPAEs
were allowed to capitalize
borrowing costs attributable
to qualifying assets.
Borrowing costs incurred by
SMEs are required to be
charged to expense when
incurred; capitalization of
borrowing costs is not
allowed.
Income taxes There is no
requirement for NPAEs to
consider (and disclose) the
effect of uncertain tax
positions (i.e., possible
outcomes of a review by tax
authorities) on deferred tax
accounts.
The PFRS for SMEs requires
an SME to measure deferred
tax assets and liabilities at an
amount that includes the
possible effect of uncertain
tax positions and to make the
related disclosures in the
financial statements.
Plant, property and
equipment NPAEs were
allowed to revalue plant,
property and equipment (as an
alternative to using the cost
method). They were not
required to de-componentize
the fixed assets when
computing depreciation. (De-
componentization refers to
the process wherein major
components of a fixed asset
are identified, cost is allocated
to such components, and the
components are depreciated
over their specific useful lives.)
The PFRS for SMEs
eliminates the revaluation
method as an alternative
measurement of property,
plant and equipment of
SMEs. It requires de-
componentization for
purposes of depreciation
computation.
Goodwill and other
intangible assets For
NPAEs, goodwill arising from
business combinations (as well
as other intangible assets) was
allowed to be amortized over
a period of 20 years unless the
use of a useful life of more
than 20 years could be
justified.
For SMEs, goodwill and other
intangibles qualifying for
recognition are also allowed to
be amortized; amortization
period is over the estimated
useful life, or ten years if
useful life cannot be
estimated.
Consolidated financial
statements Minority
interests were presented in the
consolidated financial
statements of an NPAE
between the liability section
and the equity section of the
balance sheet.
non-controlling interests (the
new term for minority
interests) are presented under
the equity section of the
statements of financial
position.
Investments in associates
Investments in associates were
required to be accounted for
under the equity method in
consolidated financial
statements of an NPAE.
there are options in the
measurement of investments
in associates in consolidated
financial statements: cost
model, equity model and the
fair value model.
Interests in joint ventures
NPAEs were allowed to carry
interests in joint ventures
using the proportionate
consolidation method or the
equity method.
allow proportionate
consolidation in accounting
for interests in joint ventures.
Options allowed are the same
as in accounting for
investments in associates as
presented above.
I.
What specialized activities are covered in
the PFRS for SMEs?
Section 34 of the PFRS for SMEs
deals with the following specialized
activities:
a. agriculture
b. extractive activities
c. service concession
arrangements
In relation to agricultural activity,
the PFRS for SMEs requires fair
value to be used for biological
assets where fair value is readily
determinable without undue cost or
effort. All other biological assets are
accounted for at cost.
The pronouncements effective as
of December 31, 2004 applied by
most NPAEs did not include
standards that deal with the above
specialized activities.
J.
How will entities transition to the PFRS
for SMEs?
The default position under the
PFRS for SMEs is that an entity
shall, in its opening statement of
financial position as of its date of
transition (being the beginning of
the earliest period for which the
entity presents full comparative
information):
a. recognize all assets and
liabilities whose recognition is
required by the PFRS for
SMEs;
b. not recognize items as assets
or liabilities if the PFRS for
SMEs does not permit such
recognition;
c. reclassify items that it
recognized under its previous
financial reporting framework
as one type of asset, liability
or component of equity, but
are now a different type of
asset, liability or component
of equity under the PFRS for
SMEs; and
d. apply the PFRS for SMEs in
measuring all recognized
assets and liabilities.
The accounting policies that an
entity uses in its opening statement
of financial position prepared in
accordance with the PFRS for
SMEs may differ from those that it
used for the same date using its
previous financial reporting
framework. The transition to the
PFRS for SMEs, therefore, will
result in adjustments that arise from
transactions, other events or
conditions that occurred before the
date of transition to the PFRS for
SMEs; such adjustments are
recognized directly in retained
earnings (or, if appropriate, another
category of equity) at the date of
transition to the PFRS for SMEs.
The PFRS for SMEs does, however,
contain certain exemptions and
simplifications that apply only to a
first-time adopter of the PFRS for
SMEs. (An entity is a first-time
adopter where it prepares its annual
financial statements in accordance
with the PFRS for SMEs for the
first time, regardless of whether its
previous accounting framework was
full PFRSs or another set of
accounting framework.)
Areas where retrospective Areas where retrospective Areas where retrospective Areas where retrospective Areas where retrospective
application is prohibited application is prohibited application is prohibited application is prohibited application is prohibited
On first-time adoption of the PFRS
for SMEs, an entity shall not
retrospectively change the
accounting that it followed under its
previous financial reporting
framework for any of the following
transactions:
derecognition of financial
assets and financial liabilities
hedge accounting
accounting estimates
discontinued operations
measuring non-controlling
interests
Optional exemptions Optional exemptions Optional exemptions Optional exemptions Optional exemptions
An entity may use one or more of a
number of exemptions in preparing
its first financial statements that
conform to the PFRS for SMEs.
These exemptions are similar to
those contained in PFRS 1, First-
time Adoption of Philippine Financial
Reporting Standards.
Disclosure on first-time Disclosure on first-time Disclosure on first-time Disclosure on first-time Disclosure on first-time
adoption adoption adoption adoption adoption
In order to explain the process of
transition, the PFRS for SMEs
contains requirements for a first-
time adopter to disclose a number
of reconciliations to its most recent
financial statements prepared under
its previous financial reporting
framework.
If it is impracticable for an entity to
restate the opening statement of
financial position at the date of
transition in accordance with the
requirements of the PFRS for
SMEs, the entity shall apply the
procedures for preparing financial
statements at the date of transition
in the earliest period for which it is
practicable to do so, and shall
identify the data presented for prior
periods that are not comparable
with the data that conforms to the
PFRS for SMEs.
Philippine SEC implementation Philippine SEC implementation Philippine SEC implementation Philippine SEC implementation Philippine SEC implementation
guidelines guidelines guidelines guidelines guidelines
A number of issues have emerged
regarding transitioning of entities to
the PFRS for SMEs. Entities that
need to transition to the PFRS for
SMEs generally will fall under one
of the following categories:
Entities that previously
qualified as NPAEs and used
PAS 101 now qualify as SMEs;
these entities will transition
from PAS 101 to the PFRS for
SMEs.
qualified as NPAEs and used
PAS 101 now do not qualify as
SMEs because they crossed
the ceiling for the size criteria
for SMEs; these entities will
transition from PAS 101 to
the full PFRS.
qualified as NPAEs but opted
to use full PFRS now qualify
as SMEs; these entities (with
the exception of entities that
are exempted by the SEC
from the mandatory adoption
of the PFRS for SMEs) will
transition from the full PFRS
to the PFRS for SMEs.
Entities that did not
previously qualify as NPAEs
because they exceeded the size
criteria and, hence, used the
full PFRS, now qualify as
SMEs because of the higher
ceiling for the size criteria for
SMEs; these entities will
transition from the full PFRS
to the PFRS for SMEs.
Entities that did not qualify as
NPAEs and used other non-
PFRS-based financial
reporting frameworks (such as
cash or modified cash basis
and tax basis) now qualify as
SMEs; these entities shall
transition from their previous
non-PFRS-based financial
reporting frameworks to the
PFRS for SMEs.
To address the more important
emerging issues on the adoption of
the PFRS for SMEs, especially on
the transition to the PFRS for
SMEs, the SEC, in a Commission
En Banc meeting on February 4,
2010, adopted some
implementation guidelines.
Presented in Appendix E is a copy
of the full SEC Implementation
Guidelines.
K.
What other guidance is included in the
PFRS for SMEs?
The PFRS for SMEs includes some
other sections:
a. Glossary of Terms
provides the definition of
certain terms used in the
PFRS for SMEs
b. Derivation Table identifies
the primary sources in full
PFRS from which the
principles in each section of
the PFRS for SMEs were
derived
c. Basis for Conclusion
provides the discussions and
various considerations made
in coming out with the
conclusions adopted in the
PFRS for SMEs
d. Illustrative Financial
Statements includes a
complete set of illustrative
financial statements prepared
in accordance with the PFRS
for SMEs to illustrate major
aspects of the standard
e. Presentation and
Disclosure Checklist
summarizes the presentation
and disclosure requirements
throughout the PFRS for
SMEs
Views from the experts
L.
P&A concluding comment
P&A welcomes the publication of
the PFRS for SMEs. We believe
there is a strong demand from this
sector for an international approach
to reporting that is less onerous
than full PFRS. We also believe that
users of financial information in the
non-publicly accountable sector do
not have the same requirements as
users of listed company financial
statements.
The introduction of an
international approach to the
accounting for entities in this sector
should bring credibility to their
financial statements as banks and
other financial institutions take
comfort in the fact that an
internationally recognized set of
standards is being applied by these
smaller entities.
While the cost of preparing general
purpose financial statements using
the PFRS for SMEs means that it
may not be suitable for very small
entities, we expect the standard to
be beneficial for many other
companies in the non-publicly
accountable sector.
As mentioned earlier, the SEC
requires mandatory application of
the PFRS for SMEs by entities
qualifying as SMEs save for those
SMEs that were given exemption by
the SEC (see Section A and
Appendix F). Hence, SMEs that
presently use the full PFRS will
have to transition to the PFRS for
SMEs to comply with such SEC
requirement.
We have indicated that such
mandatory requirement is
somewhat restrictive and we believe
giving the SMEs the option to
adopt the full PFRS is a more
appropriate approach to
implementing the new standard.
The SECs move to allow more
exemptions from the mandatory
adoption of the PFRS for SMEs is
a welcome development. However,
unless the concerned SMEs fall
clearly under those exempt
situations, we advise them to apply
the PFRS for SMEs to avoid any
possible sanctions for
noncompliance.
Potential benefits
Potential benefits of adopting the
PFRS for SMEs are many, among
others:
improved access to capital
improved quality and
comparability of reporting
facilitates cross-border
trading
focused on the needs of
users of SME financial
statements
audit efficiencies
stability initial two-year
comprehensive review
followed by three-yearly
omnibus update
eases burden where the full
PFRS was previously
required
stepping stone to full PFRS
for private entities aiming for
an Initial Public Offering
Challenges of adopting PFRS for Challenges of adopting PFRS for Challenges of adopting PFRS for Challenges of adopting PFRS for Challenges of adopting PFRS for
SMEs SMEs SMEs SMEs SMEs
On the other hand, there are
challenges that come with adopting
the PFRS for SMEs.
As noted above, the IASB took a
cost-benefit approach in developing
the standard. Nevertheless,
converting to new accounting
principles always involves some
degree of financial and resource
cost, which can sometimes be
harder for smaller companies to
handle.
These costs need to be carefully
considered by companies that are
adopting the PFRS for SMEs.
Challenges that private businesses
may face include:
Learning new terminology and
accounting techniques
Businesses and their advisers
will have to learn new
terminology and accounting
techniques and make changes
to their information systems
and accounting software.
Management reporting
processes may need to be
reviewed.
Businesses may need to collect
additional data about some of
their transactions.
New concepts
For companies that have used
a financial reporting
framework that is not based
on PFRS, some of the
terminology and concepts in
the PFRS for SMEs may be
unfamiliar: for example, the
need to apply fair value
accounting for some
transactions, to prepare a
statement of cash flows or to
consolidate subsidiaries.
Valuation issue
While the PFRS for SMEs has
attempted to limit the use of
fair value to situations where
the benefits from its use
outweigh the costs, the use of
fair values under the PFRS for
SMEs may still be more
widespread than under a
financial reporting framework
that is not based on PFRS.
For example, the requirement
to recognize an expense for
share-based payments based
on the fair value of the
instruments provided will be a
new concept to smaller
entities. The use of a valuation
expert may be necessary in
some situations in order to
arrive at the fair value.
P PP PPotential areas of impact otential areas of impact otential areas of impact otential areas of impact otential areas of impact
Changing to the PFRS for SMEs
may have an effect on the actual
operations of the company.
Potential areas of impact include:
Distributable profits
As the profits available for
distribution are not the same
as the accounting profits,
consideration will need to be
given to the impact of any
changes resulting from
adopting the PFRS for SMEs.
For example, the effect of
items that are accounted for at
fair value through profit or
loss is considered a
reconciling item in
determining the amount of
retained earnings available for
distribution under an SEC
rule.
Tax
For a number of SMEs using
another basis for reporting
taxable income (such as cash
basis or tax basis), a move
away from such basis will have
tax implications. Where this is
the case, in decision making,
given to the effect on cash
payments and future tax
planning.
Impact on loan covenants
In decision making,
given to the effect of adopting
the PFRS for SMEs (changes
in gearing, etc.) on loan
covenants and other
agreements with borrowers.
Where the PFRS for SMEs is to be
adopted, more detailed study,
planning and analysis will need to
be made relating to the transition to
the new standard. For example,
advance planning may be required
to gather the information needed
for prior years that will be presented
as comparatives in the financial
statements and the opening balance
sheet at the start of the earliest
comparative period presented.
Assistance from P&A
Should you have any questions or should you need
assistance on matters covered in this Accounting Alert,
please contact the P&A engagement partner assigned to
your company, or send an e-mail to any of the
following partners of the Firm:
Marivic Espao, Managing Partner & COO
Marivic.Espano@ph.gt.com
Jun Cuaresma, Head - Audit & Assurance Division
Jun.Cuaresma@ph.gt.com
Dally Duque, Head - Audit Technical Group
Dally.Duque@ph.gt.com
Mabel Comedia, Partner - Audit Technical Group
Mabel.Comedia@ph.gt.com
Copies of the PFRS for SMEs can be downloaded
from the IASB website at www.iasb.org.
Copies of this Accounting Alert can be downloaded
from the P&A website at www.punongbayan-
araullo.com. Hardcopies can be obtained from P&A at
the 20th Floor, Tower 1, The Enterprise Center, 6766
Ayala Avenue, Makati City.
Appendices Appendices Appendices Appendices Appendices P PP PPages ages ages ages ages
Appendix A: Preface to PFRS for SMEs issued by the FRSC 30
Appendix B: Philippine Accounting Standard 101 32
Appendix C: SEC Notice dated December 11, 2009 on the
adoption of PFRS for SMEs as part of the
SEC rules and regulations 38
Appendix D: Snapshot of the PFRS for SMEs 40
Appendix E: SEC Notice dated February 9, 2010 providing
the Implementation Guidelines to address
certain issues on the adoption of the PFRS for
SMEs 44
Appendix F SEC Notice dated October 11, 2010
providing exemption from mandatory adoption
of PFRS for SMEs 48
Preface to Philippine Financial Reporting Standard
for Small and Medium-sized Entities (PFRS for SMEs)
Appendix A
1. The Financial Reporting Standards Council (FRSC)
approved on 13 October 2009, the adoption of
International Financial Reporting Standard for Small
and Medium-sized Entities (IFRS for SMEs) issued
by the International Accounting Standards Board
(IASB), as Philippine Financial Reporting Standard
for Small and Medium-sized Entities (PFRS for
SMEs).
Scope of PFRS for SMEs Scope of PFRS for SMEs Scope of PFRS for SMEs Scope of PFRS for SMEs Scope of PFRS for SMEs
2. The IASB describes SMEs as entities that (a) do not
have public accountability, and (b) do not publish
general purpose financial statements for external
users. (See Section 1 of the PFRS for SMEs.) An
entity has public accountability if:
a. its debt or equity instruments are traded in a
public market or it is in the process of issuing
such instruments for trading in a public market
(a domestic or foreign stock exchange or an
over-the-counter market, including local and
regional markets),
b. it holds assets in a fiduciary capacity for a broad
group of outsiders as one of its primary
businesses. This is typically the case for banks,
credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment
banks.
3. The IASB, however, recognizes that many
jurisdictions around the world have developed their
own definitions of SMEs for a broad range of
purposes including prescribing financial reporting
obligations. Often those national or regional
definitions include quantified criteria based on
revenue, assets, employees or other factors.
4. In the Philippines, the PFRS for SMEs shall be used
by entities that meet the definition of an SME as set
forth in the Securities and Exchange Commission
(SEC) En Banc Resolution dated 13 August 2009.
The SEC defines an SME for financial reporting
only as an entity:
a. With total assets between P3 Million and P350
Million or total liabilities of between P3 Million
and P250 Million;
b. That is not required to file financial statements
under SRC Rule 68.1;
c. That is not in the process of filing its financial
statements for the purpose of issuing any class
of instruments in a public market;
d. That is not a holder of a secondary license
issued by a regulatory agency, such as a bank (all
types of banks), an investment house, a finance
company, an insurance company, a securities
broker/dealer, a mutual fund and a pre-need
company; and
e. That is not a public utility.
Effective Date and T Effective Date and T Effective Date and T Effective Date and T Effective Date and Transition ransition ransition ransition ransition
5. An entity that meets the definition of an SME in
paragraph 4 above shall apply the PFRS for SMEs
for annual periods beginning on or before 1 January
2010.
However, the guidance for applying the

requirements of Section 23, Revenue, in recognizing
revenue from agreements for the construction of
real estate set forth in paragraph 23A.14 and 23A.15
shall apply for annual periods beginning on or after
1 January 2012.
6. The amount of total assets and total liabilities stated
in paragraph 4(a) above shall be based on the
audited financial statements as of 31 December
2009.
7. An entity that applies the PFRS for SMEs for the
first time (i.e., a first-time adopter of the PFRS for
SMEs) shall apply the transition provisions in
Section 35 of the PFRS for SMEs. A first-time
adopter of the PFRS for SMEs is an entity that
presents its first annual financial statements that
conform to the PFRS for SMEs, regardless of
whether its previous accounting framework was full
PFRS or another set of accounting standards (e.g.,
the standards set forth in PAS 101, Financial Reporting
Standards for Non-Publicly Accountable Entities).
W WW WWithdrawal of P ithdrawal of P ithdrawal of P ithdrawal of P ithdrawal of PAS 101 AS 101 AS 101 AS 101 AS 101
8. PAS 101 is hereby withdrawn.
*
The Preface to PRFS for SMEs was subsequently amended to allow the early adoption of the PFRS for SMEs by SMEs that are capable, in
terms of systems and resources, to efficiently transition to the new standard for their financial statements as of that earlier date.
FRSC Members FRSC Members FRSC Members FRSC Members FRSC Members
Carlos R. Alindada, Chairman
Maximo C. Roque Jr.
Thaddeus E. Venturanza/
Ma. Gracia Casals-Diaz
Ma. Violeta V. Vicente
Ma. Dolores B. Yuvienco
Romeo C. Alba
Eugene Mateo/
Ma. Elenita B. Cabrera
Ester F. Ledesma
Alfredo B. Parungao
Philippine Accounting Standard (PAS) 101
(Withdrawn in October 2009 when FRSC approved the adoption of
the PFRS for SMES -- see Appendix A)
Appendix B
F FF FFinancial R inancial R inancial R inancial R inancial Repor epor epor epor eporting Standards for Non-publicly Accountable Entities ting Standards for Non-publicly Accountable Entities ting Standards for Non-publicly Accountable Entities ting Standards for Non-publicly Accountable Entities ting Standards for Non-publicly Accountable Entities
Contents Contents Contents Contents Contents P PP PParagraphs aragraphs aragraphs aragraphs aragraphs
Introduction 1-5
Objective 6
Qualifying entities 7-10
Option available to qualifying entities 11-13
Financial Reporting Standards applicable to qualifying entities 14
Disclosure 15
Effective date 16
Appendix
Financial reporting standards effective as of December 2004
applicable to qualifying entities
Approval of PAS 101 by the ASC
Introduction Introduction Introduction Introduction Introduction
1. The Accounting Standard Council (ASC), in line with
the accounting professions objective to converge
Philippine accounting standards with international
accounting standards, issued a number of new
accounting standards, referred to as Philippine
Financial Reporting Standards (PFRSs) that became
effective in 2005. The adoption of the new accounting
standards was approved by the Securities and Exchange
Commission (SEC), the Board of Accountancy (BOA)
and Professional Regulation Commission (PRC); and
the Bangko Sentral ng Pilipinas (BSP). The PFRSs
were intended at that time to be applicable to all
reporting entities that prepared financial statements
in conformity with generally accepted accounting
principles in the Philippines.
2. Considering the significant number of small and
medium-sized entities (SMEs) in the Philippines, the
ASC has considered providing a temporary relief to
SMEs in the application of the new standards.
3. The ASC plan was given impetus by the decision of
the International Accounting Standards Board (IASB)
in 2005 to undertake a project to develop accounting
standards suitable for entities that (1) do not have
public accountability and (2) publish general purpose
financial statements for external users (e.g., owners who
are not involved in managing the business, existing and
potential creditors, and credit rating agencies). The
IASB refers to this group of entities as Non-Publicly
Accountable Entities, or NPAEs. The IASB has
decided to use the term non-publicly accountable
entities, rather than small and medium-sized entities
because the latter term has different meanings around
the world.
4. Under the IASB project, an entity has public
accountability if:
it has filed, or it is in the process of filing, its
financial statements with a securities commission
or other regulatory organization for the purpose
of issuing any class of instruments in a public
market;
it holds assets in a fiduciary capacity for a broad
group of outsiders, such as a bank, insurance
company, securities broker/dealer, pension fund,
mutual fund or investment banking entity;
it is a public utility or similar entity that provides
an essential public service; or
it is economically significant in its home country
on the basis of criteria such as total assets, total
income, number of employees, degree of market
dominance, and nature and extent of external
borrowings.
5. The IASB expects to issue an exposure draft on
accounting by NPAEs in March 2006 and the final
standard in 2007.
Philippine Accounting Standard 101
Financial Reporting Standards for Non-publicly Accountable Entities
3. an issuer with assets of at
least P50 million and
having 200 or more
holders each holding at
least 100 shares of a class
of its equity securities as
of the first day of the
issuers fiscal year;
b. if it is in the process of filing
its financial statements for the
purpose of issuing any class of
instruments in a public market;
c. if it holds assets in a fiduciary
capacity for a broad group of
outsiders, such as a bank (all
types of banks), an investment
house, a finance company, an
i nsurance company, a
securities broker/dealer, a
mutual fund and a pre-need
company;
d. if it is a public utility or similar
entity that provi des an
essential public service;
e. if it is economically significant,
as described in paragraph 8; or
f. i f it is considered by i ts
primary regulator to have
public accountability.
8. For purposes of paragraph 7(e),
an entity is considered
economically significant if it
exceeds either of the following:
total assets of P250 million or
total liabilities of P150 million.
The total assets and total liabilities
are based on the entitys annual
financial statements and on
consolidated totals, if the entity
presents consolidated financial
statements.
9. The criteria for an economically
significant entity are arbitrary and
will be reviewed when the IASB
has issued its final standard on
NPAEs or earlier if necessary.
10. For purposes of this Standard, an
entity that is a subsidiary of a
parent that is considered to have
public accountability under
paragraph 7 is similarly considered
to have public accountability.
Objective Objective Objective Objective Objective
6. The objective of this Standard is
to provide temporary relief in the
application of the new PFRSs that
became effective in 2005 to
entities that are covered by this
Standard. The Standard identifies
whi ch entities are covered,
provides an option to these
entities in the application of the
new PFRSs, and specifies the
applicable to these entities.
7. This Standard shall be applied in
the general purpose financial
statements prepared and
presented by an entity with no
public accountability. An entity
has public accountability:
a. if it is required to file financial
statements under SEC Rule
68.1, Special Rule on Financial
Statements of Reporting Companies
under Section 17.2 of the Securities
Regulation Code. Under the SEC
rules, these would include:
1. an issuer which has sold a
class of their securities
pursuant to a registration
under Section 12 of the
Code;
2. an issuer with a class of
securities listed for trading
on an Exchange; and
Option A Option A Option A Option A Option Available to Qualif vailable to Qualif vailable to Qualif vailable to Qualif vailable to Qualifying ying ying ying ying
Entities Entities Entities Entities Entities
11. A qualifying entity under this
Standard is allowed not to apply
in its general purpose financial
statements the new PFRSs that
became effective in 2005.
12. A qualifying entity, however, may
still choose to apply any or all of
the new PFRSs.
13. An entity that has public
accountability, as provided in
paragraphs 7 and 10, is required
to apply the new PFRSs in its
financial statements for 2005,
unless its primary regulator issues
a pronouncement exempting the
entity from applying a new
standard or certain provisions of
a new standard.
F FF FFinancial R inancial R inancial R inancial R inancial Repor epor epor epor eporting Standards ting Standards ting Standards ting Standards ting Standards
Applicable to Qualif Applicable to Qualif Applicable to Qualif Applicable to Qualif Applicable to Qualifying Entities ying Entities ying Entities ying Entities ying Entities
14. A qualifying entity under this
Standard that chooses to avail of
the option not to apply the new
PFRSs shall apply the applicable
effective as of December 2004 in
preparing its general purpose
financial statements. The
Appendix lists these standards.
Disclosure Disclosure Disclosure Disclosure Disclosure
15. A qualifying entity shall disclose
the basis of preparation of its
financial statements and the
specific accounting policies used.
*
The effectivity of PAS 101 was extended from 2007; it was withdrawn only in October 2009 when the PFRS for SMEs was adopted by the
FRSC.
Effective Date Effective Date Effective Date Effective Date Effective Date
16. A qualifying entity shall apply this
Standard for annual periods
beginning on or after January 1,
2005. The Standard shall be
effective for 2005 to 2007, unless
revoked earlier.
Appendix Appendix Appendix Appendix Appendix

Financial Reporting Standards
Effective as of December 2004
Applicable to Qualifying NPAEs under PAS 101
F FF FFramework for the P ramework for the P ramework for the P ramework for the P ramework for the Preparation and P reparation and P reparation and P reparation and P reparation and Presentation of F resentation of F resentation of F resentation of F resentation of Financial Statements inancial Statements inancial Statements inancial Statements inancial Statements
SFAS 1 (rev) Presentation of Financial Statements
SFAS 4 (rev) Inventories
SFAS 8 Accounting for the Effects of Changes in Foreign Exchange Rates
SFAS 8A Deferral of Foreign Exchange Differences (an amendment of SFAS 8)
SFAS 10 Summary of Generally Accepted Accounting Principles on Investments
SFAS 13 (rev) Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting
Policies
SFAS 18 Summary of Generally Accepted Accounting Principles on Stockholders Equity
SFAS 22 (rev) Cash Flow Statements
SFAS 24 Retirement Benefit Costs
SFAS 25 Borrowing Costs
SFAS 26 Construction Contracts
SFAS 28 Revenue
SFAS 10/IAS 10 Events After the Balance Sheet Date
SFAS 12/IAS 12 Income Taxes
SFAS 16/IAS 16 Property, Plant and Equipment
SFAS 17/IAS 17 Leases
SFAS 20/IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
SFAS 22/IAS 22 Business Combinations
SFAS 24/IAS 24 Related Party Disclosures
SFAS 26/IAS 26 Accounting and Reporting by Retirement Benefit Plans
SFAS 27/IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries
SFAS 28/IAS 28 Accounting for Investments in Associates
SFAS 31/IAS 31 Financial Reporting of Interests in Joint Ventures
SFAS 35/IAS 35 Discontinuing Operations
SFAS 36/IAS 36 Impairment of Assets
SFAS 37/IAS 37 Provisions, Contingent Liabilities and Contingent Assets
SFAS 38/IAS 38 Intangible Assets
Approval of P Approval of P Approval of P Approval of P Approval of PAS 101 by the ASC AS 101 by the ASC AS 101 by the ASC AS 101 by the ASC AS 101 by the ASC
The Accounting Standards Council (ASC) has approved
in October 2005 the issuance of Philippine Accounting
Standard (PAS) 101, Financial Reporting Standards for Non-
publicly Accountable Entities.
ASC Members ASC Members ASC Members ASC Members ASC Members
Carlos R. Alindada, Chairman
Romeo C. Alba
Nestor A. Espenilla Jr./ Ma. Dolores B. Yuvienco
Roberto G. Manabat
Eugene T. Mateo
Alfredo Parungao
Maximo C. Roque
Violeta V. Vicente
REPUBLIC OF THE PHILIPPINES
Department of Trade and Industry
SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION
SEC Building, EDSA, Greenhills, Mandaluyong City
Appendix C
NOTICE
Notice is hereby given that the Commission En Banc in its meeting of 03 December 2009 resolved to adopt the
Philippine Financial Reporting Standards for Small and Medium Entities (PFRS for SMEs) as part of its rules and
regulations. The PFRS for SMEs were adopted on 13 October 2009 by the Philippine Financial Reporting Standards
Council form the International Financial Reporting Standards (IFRS) for Small and Medium Entities by the International
Accounting Standards Board.
In this PFRS for SMEs, many of the principles in full Philippine Financial Reporting Standards (PFRS) for
recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that are not relevant to
small and medium entities (SMEs) have been omitted, and the required disclosures have been significantly reduced.
As the PFRS for SMEs is a stand-alone standard, it includes a section on concepts and pervasive principles that
underlie the financial statements of SMEs. These concepts address various issues including the objective of financial
statements for SMEs, the qualitatitve characteristics of information contained in those financial statements, and
general recognition and measurement principles.
A complete set of financial statements of an entity reporting under the PFRS for SMEs is similar to that provided
for by full PFRS. It requires the following documents:
1. A statement of financial position;
2. Either a single statement of comprehensive income, or a separate income statement and a separate statement
of comprehensive income;
3. A statement of changes in equity;
4. A statement of cash flows;
5. Notes including a summary of significant accounting policies.
Comparative information in respect of the previous comparable period must be included, although an opening
statement of financial position is not needed in the instances described by PAS 1, Presentation of Financial Statements.
The PFRS for SMEs includes a set of illustrative financial statements and a presentation and disclosure checklist to
assist entities in the preparation of their financial statements.
PFRS for SMEs has transition rules that apply equally to all entities on first-time adoption of the standards. The
transition rules are based on the requirements of PFRS 1, First-time Adoption of International Financial Reporting Standards
but, in certain cases, the standard has been designed to make the transition rules simpler to apply.
PFRS for SMEs shall cover corporations that:
a. Have total assets of between P3 Million and P350 Million or total liabilities of between P3 Million and P250
Million;
b. Are not required to file financial statements under SRC Rule 68.1;
c. Are not in the process of filing their financial statements for the purpose of issuing any class of instruments
in a public market;
d. Are not holders of secondary licenses issued by a regulatory agency, such as banks, investment houses, finance
companies, insurance companies, securities brokers/dealers, mutual funds and pre-need companies; and
e. Are not public utilities.
Entities that meet all of the foregoing criteria shall apply PFRS for SMEs for annual periods beginning 01 January
2010.
Copies of the PFRS for SMEs are available at the offices of the Philippine Institute of Certified Public Accountants.
Issued this 11
th
day of December 2009, Mandaluyong City, Philippines.
For the Commission:
FE B. BARIN
Chairperson
Snapshot of the PFRS for SMEs
Appendix D
Section No Section No Section No Section No Section No. .. .. T TT TTitle itle itle itle itle Description Description Description Description Description
1 Small and Medium-sized
Entities (SMEs)
Defined as entities that (a) do not have public
accountability, and (b) publish general purpose financial
statements for external users.
2 Concepts and Pervasive
Principles
Major concepts and basic principles underlying the
financial statements of SMEs, such as definitions of
assets, liabilities, income and expenses.
3 Financial Statement
Presentation
A complete set of financial statement comprises:
a. a statement of financial position;
b. either a single statement of comprehensive income,
or separate income statement and a separate
statement of comprehensive income;
c. a statement of changes in equity;
d. a statement of cash flows; and
e. notes, comprising a summary of significant
accounting policies, other explanatory information,
and comparatives.
4 Statement of Financial Position A Statement of Financial Position consists of certain
minimum line items. These items are classified as either
current or non-current unless a presentation based on the
liquidity of the items provides information that is more
reliable and relevant.
5 Statement of Comprehensive
Income and Income Statement
Total comprehensive income is presented in either a
single statement of comprehensive income or in two
statements (an income statement and a statement of
comprehensive income).
6 Statement of Changes in Equity
and Statement of Income and
Retained Earnings
Changes in an entitys equity for a period are presented
either in a statement of changes in equity or, if certain
conditions are met and an entity chooses, in a statement
of income and retained earnings.
A statement of income and retained earnings can be used
where the only changes to the entitys equity during the
period arise from profit or loss, payment of dividends,
corrections of prior period errors, and changes in
accounting policy.
7 Statement of Cash Flows Changes in cash and cash equivalents are reported,
showing separately changes from operating activities,
investing activities and financing activities.
8 Notes to the Financial
Statements
Significant accounting policies are disclosed, together
with details of judgments made and key sources of
estimation uncertainty.
9 Consolidated and Separate
Financial Statements
A parent entity is required to present consolidated
financial statements in which all its subsidiaries are
included. There are some limited exceptions to this rule.
10 Accounting Policies, Estimates
and Errors
Prior period errors are accounted for on a retrospective
basis.
Changes in accounting estimates are recognized
prospectively.
Changes in accounting policy are accounted for on a
retrospective basis unless specific transitional provisions
apply.
11 Basic Financial Instruments An amortized cost or cost less impairment model is used
for basic financial instruments such as cash, loans and
trade receivables and payables.
12 Other Financial Instruments
Issues
Other financial instruments are generally measured at fair
value through profit or loss. Examples of such
instruments include asset backed securities, options,
futures contracts, forward contracts, and interest rate
swaps.
Hedge accounting is permitted only for certain specific
types of risk. Certain conditions must be met in order to
use hedge accounting.
13 Inventories Inventories are measured at the lower of cost and net
realizable value.
14 Investments in Associates Investments in associates are measured using any of the
following:
The cost model (cost less accumulated impairment);
The equity model (initial recognition at cost, with
subsequent adjustments to reflect the investors
share of the profit or loss and other comprehensive
income of the associate); or
The fair value model (compulsory where a published
price exists for the investment).
15 Investments in Joint Ventures An accounting policy election similar to that for
associates applies to investments in joint ventures.
Proportionate consolidation is not permitted.
16 Investment Property Investment property with fair value that can be measured
reliably without undue cost or effort is accounted for at
fair value through profit or loss. Otherwise investment
property is accounted for at cost less depreciation and
impairment.
17 Property, Plant and Equipment Property, plant and equipment are measured at cost less
depreciation and impairment.
18 Intangible Assets other than
Goodwill
All internally developed intangibles, including all research
and development activities, are expensed as incurred.
Acquired intangibles meeting the criteria for recognition
are capitalized as assets and measured at cost less
amortization and impairment. All intangible assets are
considered to have a finite useful life. Revaluation of
intangible assets is not permitted.
19 Business Combinations and
Goodwill
Goodwill is measured at cost less amortization and
impairment. Where an entity is unable to make a reliable
estimate of the useful life of goodwill, its life is presumed
to be ten years and amortized over that period.
20 Leases Finance leases are recognized as an asset by the lessee.
Lease payments under operating leases are recognized
by the lessee as an expense.
Classification of leases depends on the substance of the
transaction rather than the form of the contract.
21 Provisions and Contingencies Present obligations are recognized as provisions when
there is a probable outflow of economic benefits and the
amount of the obligation can be estimated reliably.
Contingent liabilities and contingent assets are not
recognized but are disclosed in the notes.
22 Liabilities and Equity Equity is the residual interest in the assets of an entity
after deducting all its liabilities. A financial liability is a
present obligation of the entity arising from past events,
which is expected to result in an outflow of economic
benefits.
Split accounting must be applied to compound financial
instruments (such as convertible debt), which contain
both a liability and an equity component.
23 Revenue For the sale of goods, revenue is recognized on transfer
of the significant risks and rewards of ownership. In most
cases, this will coincide with the transfer of legal title or
the passing of possession to the buyer.
For services and construction contracts, revenue is
recognized according to the stage of completion at the
end of the reporting period.
Interest and royalties receivable are recognized on an
accrual basis. Dividends are recognized when the right to
receive the payment is established.
24 Government Grants Government grants are recognized in income when any
specified performance conditions have been met. Where
there are no such conditions, the grant is recognized in
income upon receipt.
25 Borrowing Costs All borrowing costs are expensed as incurred.
26 Share-based Payment Employee share awards and share options are
recognized as an expense in profit or loss over the
vesting period. A corresponding credit is recognized in
equity. These amounts are measured at the fair value of
the instruments provided.
27 Impairment of Assets An impairment loss is recognized when the carrying
amount of an asset exceeds its recoverable amount.
28 Employee Benefits Contributions payable under defined contribution plans
are recognized as expenses in the period in which they
are due.
For defined benefit pension plans, an entity recognizes a
liability for its obligations net of the plans assets. The net
change in the liability during the period is recognized as
the cost of the plan during the period. Entities can choose
to recognize all actuarial gains and losses in either profit
or loss or in other comprehensive income.
29 Income Tax Deferred tax is calculated using a temporary difference
approach based on the difference between the carrying
amount of an asset and its tax base.
30 Foreign currency Translation Foreign currency transactions are translated into the
functional currency of the reporting entity. All monetary
items and those non-monetary items that are measured
at fair value are subsequently retranslated at the end of
each reporting period.
31 Hyperinflation Entities subject to hyperinflation are required to state all
amounts at the prices that are current at the end of the
reporting period.
32 Events after the End of the
Reporting Period
Adjustment is made for events that provide evidence of
conditions that existed at the end of the reporting period.
No adjustment is made for events that are indicative of
conditions that arose after the end of the reporting period,
although they are disclosed.
33 Related Party Disclosures Disclosures draw attention to the existence of related
parties and transactions and balances with such parties.
34 Specialized Activities Guidance is provided for three types of specialized
activities agriculture, extractive activities and service
concessions.
35 Transition to the IFRS for SMEs Mandatory exceptions to and optional exemptions from
the full requirements of the IFRS for SMEs enable the
Standard to be applied more easily by entities adopting it
for the first time.
Appendix E
NOTICE
The Commission En Banc, in its meeting of 04 February 2010, resolved to adopt the following Implementation
Guidelines to address certain issues on the adoption of the Philippine Financial Reporting Standards (PFRS)
for Small and Medium Entities (SMEs):
1. 1. 1. 1. 1. T TT TTransition from full PFRS to PFRS for SMEs ransition from full PFRS to PFRS for SMEs ransition from full PFRS to PFRS for SMEs ransition from full PFRS to PFRS for SMEs ransition from full PFRS to PFRS for SMEs
Some entities are currently using full PFRS either because they (a) opted to although they qualify as Non-
Publicly Accountable Entities (NPAE), or (b) are required to use full PFRS as they do not qualify as NPAE
under PAS 101. These entities may now qualify as SMEs under the definitions in PFRS for SMEs and the 13
August 2009 SEC En Banc Resolution (the SEC Resolution).
If they qualify and adopt the PFRS for SMEs, they shall be considered as first- time adopter of the PFRS for
SMEs and, therefore, should apply Section 35 (Transition to the PFRS for SMEs). Paragraphs 35.1 and 35.2 of
said section state that:
35.1 This section applies to a first-time adopter of the IFRS for SMEs, regardless of whether its previous accounting
framework was full IFRS or another set of generally accepted accounting principles (GAAP) such as its national accounting
standards, or another framework such as the local income tax basis.
35.2 An entity can be a first time adopter of the IFRS for SMEs only once. x x x
2. 2. 2. 2. 2. T TT TTransition of NP ransition of NP ransition of NP ransition of NP ransition of NPAEs from P AEs from P AEs from P AEs from P AEs from PAS 101 to PFRS to SMEs only AS 101 to PFRS to SMEs only AS 101 to PFRS to SMEs only AS 101 to PFRS to SMEs only AS 101 to PFRS to SMEs only
NPAEs that are currently using PAS 101 may qualify as SMEs under the PFRS for SMEs and the SEC
Resolution. If they qualify, they may use the PFRS for SMEs and will be considered as first-time adopter of
the PFRS for SMEs and should apply paragraphs 35.1 and 35.2 thereof (Refer to Item 1 above.)
3. 3. 3. 3. 3. T TT TTransition of NP ransition of NP ransition of NP ransition of NP ransition of NPAEs from P AEs from P AEs from P AEs from P AEs from PAS 101 to full PFRS AS 101 to full PFRS AS 101 to full PFRS AS 101 to full PFRS AS 101 to full PFRS
NPAEs that currently use PAS 101 may not qualify as SMEs under the PFRS for SMEs and the SEC Resolution
(for example, entities that crossed the ceiling threshold for total assets of P350 million).
NPAEs that currently use PAS 101 but (a) no longer qualify as SMEs under the PFRS for SMEs and the SEC
Resolution, and (b) are not considered micro-business entities (i.e., entities whose total assets or total liabilities
are below the P3 million floor threshold for the size criteria see item 4 below), should use the full PFRS. If
this is the first time that such entities will adopt full PFRS, they should apply PFRS 1, First-time Adoption of
Philippine Financial Reporting Standards.
4. 4. 4. 4. 4. F FF FFinancial R inancial R inancial R inancial R inancial Repor epor epor epor eporting F ting F ting F ting F ting Framework of Entities now covered by either the full PFRS or PFRS for SMEs ramework of Entities now covered by either the full PFRS or PFRS for SMEs ramework of Entities now covered by either the full PFRS or PFRS for SMEs ramework of Entities now covered by either the full PFRS or PFRS for SMEs ramework of Entities now covered by either the full PFRS or PFRS for SMEs
Micro-business entities have the option to use any of these bases of accounting in the preparation of their
financial statements: (a) full PFRS, (b) PFRS for SMEs, or (c) another acceptable basis of accounting.
1
If the entity uses a basis of accounting other than full PFRS and the PFRS for SMEs in the preparation of
its financial statements, its management shall assess the acceptability of such basis of accounting in the
light of the nature of the entity and the objective of the financial statements, or the requirements of the
law or regulators and standard-setter. By way of illustration, tax regulations permit taxpayers to use the
income tax basis of accounting; on the other hand, the SEC allows the use of the cash basis of accounting
by micro-business entities.
5. 5. 5. 5. 5. Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs
The PFRS for SMEs shall be effective for annual periods beginning on or after January 1, 2010, except for the
guidance in applying the requirements of Section 23 (Revenue) in recognizing revenue from agreements for the
construction of real estate, which shall apply to annual periods beginning on or after January 1, 2012.
As indicated in the Preface to the PFRS for SMEs, the amount of total assets and total liabilities shall be based
on the entitys audited financial statements as of December 31, 2009.
Thus, an SME whose accounting period begins on January 1, 2010 shall apply the size criteria based on the
entitys audited total assets or audited total liabilities as of December 31, 2009. An SME whose accounting
period begins on a date other than January 1, 2010 (i.e., it uses a fiscal year, for example, January 31, 2010 to
January 31, 2011) shall apply the size criteria using the entitys audited financial statements for the immediately
preceding fiscal year (i.e., for the fiscal year ending January 31, 2010).
1
Both the full PFRS and the PFRS for SMEs define what statements/disclosures shall be presented as part of a complete set of financial
statements. These include a statement of financial position, a statement of comprehensive income for the period, a statement of changes in
equity for the period, and a statement of cash flows for the period. In the absence of a similar definition of statements to be presented for
another basis of accounting, the provisions of the full PFRS and PFRS for SMEs may be used as a guide. For example, if the basis of
accounting is prescribed or permitted by a government regulatory agency and is substantially an accrual basis, the financial may include the
same financial statements required under the full PFRS and the PFRS for SMEs. On the other hand, a separate statement of cash flows
ordinarily is not needed when financial statements are prepared on a cash receipts and disbursements basis or an income tax basis that is
essentially a cash basis. These bases already accommodate the equivalent of a cash flow statement presentation. Therefore, such presentations
need not conform with the requirements for a statement of cash flows that would be included in a full PFRS or PFRS for SMEs presentation.
For stock corporations with paid-up capital stock of more than P50,000.00, and non-stock corporations with total assets of more than
P500,000.00 and total contributions of more than P100,000.00, the relevant requirements of SRC Rule 68 shall be complied with,
particularly, the submission of a complete set of financial statements (i.e., Balance Sheet, Income Statement, Cash Flow Statement (if cash
basis, non-mandatory), Statement of Changes in Equity/Fund Balance, Notes to Financial Statements), Statement of Managements
Responsibility and Auditors Report.
If an SME that uses the PFRS for SMEs in the current year (for example, calendar year 2010) breaches the
floor or ceiling of the size criteria at the end of that current year (i.e., December 31, 2010), and the event that
caused the change is considered significant and continuing, the entity should transition to the applicable
financial reporting framework (i.e., full PFRS if the ceiling threshold is breached, or another acceptable
accounting basis if the floor threshold is breached) in the next accounting period (or calendar year 2011). If
the event is not considered significant and continuing, the entity can continue to use the same financial
reporting framework it currently uses.
The determination of what is significant and continuing shall be based on managements judgment, taking
into consideration relevant qualitative and quantitative factors. As a general rule, 20% or more of total assets
or total liabilities would be considered significant.
6. 6. 6. 6. 6. Date for applying the size criteria if the PFRS for SMEs is adopted early Date for applying the size criteria if the PFRS for SMEs is adopted early Date for applying the size criteria if the PFRS for SMEs is adopted early Date for applying the size criteria if the PFRS for SMEs is adopted early Date for applying the size criteria if the PFRS for SMEs is adopted early
If an entity opts to apply early the PFRS for SMEs (for example, in calendar year 2009), it shall apply the size
criteria using the entitys audited financial statements for the immediately preceding calendar year (i.e., for the
calendar year ended December 31, 2008).
7. 7. 7. 7. 7. Subsidiaries of a parent company that use full PFRS Subsidiaries of a parent company that use full PFRS Subsidiaries of a parent company that use full PFRS Subsidiaries of a parent company that use full PFRS Subsidiaries of a parent company that use full PFRS
There are situations where a parent company that uses full PFRS has subsidiaries that qualify as SMEs under
the PFRS for SMEs and the SEC Resolution.
The subsidiaries that qualify as SMEs under the PFRS for SMEs and the SEC Resolution (such as they are not
listed, have no public accountability, are not holders of secondary licenses from the SEC, etc.), may use the
PFRS for SMEs even if their parent company uses full PFRS. Paragraph 1.6 of Section 1 of the PFRS for
SMEs provides that:
1.6 A subsidiary whose parent uses full IFRS, or that is part of a consolidated group that uses the full IFRS, is not
prohibited from using this IFRS in its own financial statements if that subsidiary by itself does not have public accountability.
If its financial statements are described as conforming to the IFRS for SMEs, it must comply with all the provisions of this
IFRS.
One issue to consider, however, with regard to a subsidiary whose financial statements are consolidated into
group financial statements is the requirement under the PFRS for SMEs and the full PFRS on the use by a
group of uniform accounting policies. If a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for similar transactions and events under the same
circumstances, appropriate adjustments should be made in the financial statements of that entity in the
preparation of the consolidated financial statements.
8. 8. 8. 8. 8. R RR RRequired disclosures equired disclosures equired disclosures equired disclosures equired disclosures
If an SMEs first financial statements use the PFRS for SMEs, it shall make the required disclosures, which
include an explanation of the transition to the PFRS for SMEs (under paragraphs 35.13 to 35.15) of Section
35 of the PFRS for SMEs.
If an SME does not opt to make an early application of the PFRS for SMEs, it shall disclose the impact on its
financial statements of the future adoption or application of the PFRS for SMEs.
9. 9. 9. 9. 9. Early adoption of PFRS for SMEs Early adoption of PFRS for SMEs Early adoption of PFRS for SMEs Early adoption of PFRS for SMEs Early adoption of PFRS for SMEs
As earlier stated, PFRS for SMEs shall be effective for periods beginning January 1, 2010. Although the
International Financial Reporting Standards for SMEs and the PFRS for SMEs do not provide for early
adoption, the same may, however, be allowed for SMEs which are capable, in terms of systems and resources,
to efficiently transition to PFRS for SMEs for their financial statements as of 31 December 2009, provided
that such entities discuss in their financial statements the impact of such early adoption.
If an SME is capable and opts to early adopt the PFRS for SMEs, it should be considered a first-time
adopter of the PFRS for SMEs and, therefore, should apply Section 35 (Transition to the PFRS for SMEs).
Issued this 9
th
day of February, 2010.
For the Commission:
FE B. BARIN
Chairperson
Appendix F
NOTICE
The Commission En Banc, in its meeting on 07 October 2010, resolved to exempt from the mandatory adoption of
the Philippine Financial Reporting Standards for Small and Medium Entities (PFRS for SMEs) small or medium
entities (SMEs) that meet any of the following criteria:
1. It is a subsidiary of a parent company reporting under full Philippine Financial Reporting Standards (full
PFRS);
2. It is a subsidiary of a foreign parent company that will be moving towards International Financial Reporting
Standards (IFRS) pursuant to the foreign countrys published convergence plan;
3. It is a subsidiary of a foreign parent company that has been applying the standards for a non-publicly accountable
entity for local reporting purposes, and is considering moving to full PFRS intead of the PFRS for SMEs in
order to align its policies with the expected move to full IFRS by its foreign parent company pursuant to its
countrys published convergence plan;
4. It has short-term projections that show that it will breach the quantitative thresholds set in the criteria for an
SME, and the breach is expected to be significant and continuing due to its long-term effect on the companys
asset or liability size;
5. It is part of a group, either as a significant joint venture or an associate, that is reporting under full PFRS;
6. It is a branch office of a foreign company reporting under full IFRS;
7. It has concrete plans to conduct an initial public offering within the next two (2) years;
8. It has a subsidiary that is mandated to report under full PFRS;
9. It has been preparing financial statements using full PFRS and has decided to liquidate its assets.
An SME that wants to avail of any of the foregoing grounds for exemption shall provide a discussion in its notes to
financial statements of the facts supporting its adoption of full PFRS instead of PFRS for SMEs.
October 11, 2010, Mandaluyong City, Philippines.
For the Commission:
Fe B. Barin
Chairperson
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Contacts
Our offices
P&As main office is located in the
central business district of Makati
City, with branches in three other
locations in the Philippines. Here is
a list of our offices, together with
the primary contact persons.
Makati Makati Makati Makati Makati
20th Floor, Tower 1, The Enterprise Center
6766 Ayala Avenue, Makati City
T +63 2 886-5511
F +63 2 886-5506
W www.punongbayan-araullo.com
Maria V Maria V Maria V Maria V Maria Victoria C. Espao ictoria C. Espao ictoria C. Espao ictoria C. Espao ictoria C. Espao
Managing Partner & COO
T +63 2 886-5579
E Marivic.Espano@ph.gt.com
Leonardo D. Cuaresma Jr Leonardo D. Cuaresma Jr Leonardo D. Cuaresma Jr Leonardo D. Cuaresma Jr Leonardo D. Cuaresma Jr. .. ..
Head, Audit & Assurance
T +63 2 887-9405
E Jun.Cuaresma@ph.gt.com
Lilian S. Linsangan Lilian S. Linsangan Lilian S. Linsangan Lilian S. Linsangan Lilian S. Linsangan
Head, Advisory Services
T +63 2 887-9403
E Lily.Linsangan@ph.gt.com
Eleanor L. R Eleanor L. R Eleanor L. R Eleanor L. R Eleanor L. Roque oque oque oque oque
Head, Tax Advisory & Compliance
T +63 2 887-9457
E Lea.Roque@ph.gt.com
Jessie C. Carpio Jessie C. Carpio Jessie C. Carpio Jessie C. Carpio Jessie C. Carpio
Head, Finance & Accounting Outsourcing
T +63 2 813-6957
E Jessie.Carpio@ph.gt.com
Cavite Cavite Cavite Cavite Cavite
2nd Floor, Unit E
12B Gen. Emilio Aguinaldo Highway
Sampaloc 1, Pala-Pala
Dasmarias, Cavite
Philippines
T +63 46 416-2935; +63 46 416-4884
F +63 46 416-2935; +63 46 416-4884
Nelson J. Dinio Nelson J. Dinio Nelson J. Dinio Nelson J. Dinio Nelson J. Dinio
Partner-in-charge
T +63 2 887-9476
F +63 2 886-5506
E Nelson.Dinio@ph.gt.com
Cebu Cebu Cebu Cebu Cebu
Unit 603, 6th Floor, Ayala Life - FGU Center
Mindanao Avenue corner Biliran Road
Cebu Business Park, Cebu City 6000
Philippines
T +63 32 231-6090; +63 32 233-0574
F +63 32 231-0693
R RR RRamilito L. Naola amilito L. Naola amilito L. Naola amilito L. Naola amilito L. Naola
Partner-in-charge
T +63 2 887-9497
F +63 2 886-5506
E Ramil.Nanola@ph.gt.com
W WW WWendell D. Ganhinhin endell D. Ganhinhin endell D. Ganhinhin endell D. Ganhinhin endell D. Ganhinhin
Director, Cebu Branch
T +63 32 231-6090; 233-0577; 234-1540
F +63 32 231-0693
E Wendell.Ganhinhin@ph.gt.com
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The Landco - PDCP Corporate Centre
J.P. Laurel Avenue, Davao City 8000
Philippines
T +63 82 221-1498 to 99; 221-1500
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R RR RRamilito L. Naola amilito L. Naola amilito L. Naola amilito L. Naola amilito L. Naola
Partner-in-charge
T +63 2 887-9497
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E Ramil.Nanola@ph.gt.com
Joy G. P Joy G. P Joy G. P Joy G. P Joy G. Politico olitico olitico olitico olitico
Senior Manager
T +63 82 221-1498 to 99;
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2010 Accounting Alert - PFRS For SMEs

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