PFRS FOR SMALL ENTITIES

SEC MEMORANDUM CIRCULAR NO. 5, series of 2018

 PFRS for Small entities

 It does not have an international equivalent

 Effective January 1, 2019

 Was developed in response to feedback of small entities that PFRS for SMEs is too complex to apply

 The adoption is in line with the SEC’s Ease of Doing Business initiatives.

 REASONS FOR ADOPTING PFRS FOR SMALL ENTITIES:

a) To reduce disclosure requirements

b) To reduce choices for accounting treatment

c) To simplify methods for recognition & measurement

d) To eliminate topics that are not generally relevant to small entities

e) To allow small entities to comply with the financial reporting requirements without undue cost or burden

4 Categories of Entities in the Philippines

MICRO SMALL MEDIUM LARGE

-Asset & Liability is below
P3M.
-They use:
A. Income Tax Base or
B. They can use PFRS for
small entities, or
- use PFRS for Small entities
-Asset: P3M - P100M
-Liability: P3M - P100M
- this is the previous PFRS for - Use FULL PFRS
SMEs, so if you see in a
-ASSET: > P350M
question using SME it refers
to MEDIUM entity. -Liability: > P250
-Asset: >P100M - 350M
-Liability: >100M-250M

C. They can use any other

basis only if acceptable for
that type of entity

- Cash Basis

- PFRS for SMEs

- Full PFRS

 What if the framework of an entity is a dual standard?

- Example: Asset exceeds P350M (Full PFRS), while liability is P250M (PFRS for SMEs)

 In this case the lower amount will adjust, that means the entity will use the FULL PFRS.

 The higher PFRS cannot adjust due to lot of requirements.

 Whoever is higher in amount will be the bases of what PFRS will be use.

 Example: At the end of the prior reporting period, the total assets of an entity amounted to P120M,
while its total liabilities amounted to P90M. Considering the thresholds alone, what basis should be the
entity use in preparing its financial statements for the current reporting period.

 The Asset is P120M, that’s a Medium Entity; Liability is P90M, that’s a Small Entity.
  Using the concept of whichever is higher will be the bases:

ANSWER: PFRS for SMEs (Medium Entity)

 For an entity to be MICRO, SMALL & MEDIUM:

 They should NOT be listed (listed means that their stocks are sold at the Philippine Stock Exchange), or not
in the process of being listed (listing)

 If an entity is listed, even how small it is, it will automatically under FULL PFRS.

 Not a holder of secondary license.

 If holder of secondary license (e.g. Bank, because they are highly regulated) this will be under
FULL PFRS.

 Does not file FS under Security Regulation Code (SRC) Rule No. 68

 Highly regulated entities are only entities that file FS under SRC Rule No. 68.

 Highly regulated entities are under FULL PFRS.

 Micro Entities may used income tax basis or PFRS for Small entities provided that the FS shall be accompanied by at
least:

a) Statement of Management’s Responsibility

b) Auditor’s report

c) Statement of Income

d) Notes to the FS

BASIS FOR FINANCIAL REPORTING

 Entities who have operations or investments that are based or conducted in a different country with different
functional currency shall NOT apply PFRS for Small Entities. Instead, they shall apply either:

A. Fulls PFRSs; or

B. PFRS for SMEs

 Entities under the following situations may use FULL PFRS, PFRS for SMEs or PFRS for Small Entities:

A. A small entity which is a subsidiary of a parent company reporting under the Full PFRS or PFRS for
SMEs.

B. A small entity which is a subsidiary of a foreign parent company which will be moving towards IFRS or
IFRS for SMEs pursuant to the country’s published convergence plan.

C. A small entity, either as a significant joint venture or associate, is part of a group that is reporting
under Full PFRS or PFRS for SMEs

D. A small entity is a branch office or a regional operating headquarter of a foreign company reporting
under Full PFRS or PFRS for SMEs

E. A small entity that has been preparing FSs using Full PFRS or PFRS for SMEs and has decided to
liquidate.

F. Such other cases that SEC may consider valid exceptions from the mandatory adoption of PFRS for
Small entities

 A small entity availing of the exemption shall provide a discussion in its Notes to the Financial statements of the
facts supporting its adoption of the Full PFRS or PFRS for SMEs instead of the PFRS for Small Entities.
BREACH OF THRESHOLDS

 ACTUAL BREACH: If a Small Entity that uses PFRS for Small Entities in a current year breaches the floor or ceiling
at the end of the current year, the entity shall have the transition to the applicable financial reporting framework
in the next accounting period.

 The breach must be significant, at least 20% or more of the total assets or total liabilities

 It is continuing, and not expected to be a one-time event.

 Breach of Floor Threshold - the entity shall transition to:

a. Income tax base of accounting; or

b. Any other bases assessed as acceptable by management; or

c. The entity may still use PFRS for Small entities

 Breach of Ceiling Threshold - the entity shall transition to:

a. PFRS for SMEs - if total assets exceeds P100M but does not exceed P350M or total
liabilities exceeds P100M but does not exceed P250M; or

b. Full PFRS - if total assets exceeds P350M or total liabilities exceeds P250M

 PROJECTED BREACH: the transition is in the current year.

 The entity can be EXEMPTED

 The breach must be significant, at least 20% or more of the total assets or total liabilities

 It is continuing, and not expected to be a one-time event.

 Applicable only to MEDIUM entity.

 PROJECTED INITIAL PUBLIC OFFERING (IPO)

 They will be listed, thus will be under LARGE and use FULL PFRS

 It must happen within 2 years.

 Applicable only to Medium Entity

KEY SIMPLIFICATIONS:

1. Inventories are subsequently measured at the lower of cost & market value.

2. For investment properties, the entity has a choice of adopting cost model or fair value model.

3. There is no concept of finance lease. All lease receipts are recognized as income when earned, and all lease
payments are recognized as expense when incurred.

4. There is no accounting for onerous contracts.

5. For equity-settled share-based payments, an entity shall measure the goods or services received, and the
corresponding increase in equity, with reference to the net asset value of the equity instruments granted.

i. Net asset value is derived by dividing the total assets of the entity less any liabilities, by the number of
shares outstanding at measurement date.

6. Accrual approach is required in calculating benefit obligations in accordance with R.A 7641, the Philippine
Retirement Pay Law, or company policy (if superior than R.A 7641)

7. Entities are given a policy choice of not recognizing deferred taxes in the financial statements.

8. The entity has the choice of adopting as its policy for its biological assets the cost model or the current market price
model.

9. Correction of prior period error are capture in opening balance of the current year, but with appropriate disclosures.
Comparative information shall not be restated.