Financial Reporting Framework

• The financial statements that shall be prepared and filed by entities covered by rule shall be in accordance
with the financial reporting framework. Presented below are the quantitative threshold of financial
reporting framework based on SEC memorandum circular No. 5, series of 2018:
Companies Total Assets Total Liabilities Framework
Publicly- Is the reporting entity any of the following? Philippine Financial Reporting Standards (PFRS),
accountable 1. Required to file FS under Part II of SRC rule 68 (e.g.
entities publicly traded entities) or
2. In the process of filing its FS for the purpose of issuing any
class of instrument in a public market Financial Reporting Framework applicable to Banks,
3. Holder of secondary license (s) issued by regulatory Insurance Companies or Pre-need, as allowed by the SEC
agencies (e.g. banks, trust companies, investment houses) or the appropriate regulatory agency

No quantitative criteria
Large entities More than P350 Million or More than P250 Million Philippine Financial Reporting Standards (PFRS),

or

Financial Reporting Framework applicable to Banks,

Insurance Companies or Pre-need, as allowed by the SEC
or the appropriate regulatory agency
Medium-sized More than P100M to P350M or More than P100M to P250M PFRS for SMEs
entities
Small entities P3M to P100M or P3M to P100M PFRS for Small Entities
Micro entities Below P3M and Below P3M Income tax basis or PFRS for Small Entities

SRC Rule 68
The Rule is now divided into the following parts:

Part I: General Financial Reporting Requirements

This deals with the general financial reporting requirements of the SEC to the following public and non-
public entities:

• SRC Rule 68, as amended states the requirements applicable to the form and content of financial
statements required to be filed with the SEC by corporations which meet the threshold, as follows:

Covered Entity Thresholds

a. Stock corporations paid-up capital stock of P50,000 or more
b. Non-stock corporations total assets of P500,000 or more, or
gross annual receipts of P100,000 or more
c. Branch offices assigned capital in the equivalent amount of P1,000,000 or more
(of stock corporation)
d. Branch offices total assets in the equivalent amount of P1,000,000 or more
(of non-stock
corporation)
e. Regional operating total revenues in the equivalent amount of P1,000,000 or more
headquarter of foreign
corporation
 • Financial statements of branch offices of foreign corporations licensed to do business in the Philippines
by the Commission shall comply
with the requirements of this Rule
unless otherwise determined by the
Commission as not applicable.

Part II: Additional Requirements for

Issuers of Securities to the Public
In addition to the financial reporting
requirements under the Part I of the
Rule, the following issuer of securities
to the public must comply with the
requirements under this part of the
Rule:
a. Issuer which has sold a class of
their securities pursuant to a
registration under Section 12 of
the SRC;
b. Issuer with a class of securities
listed for trading on an
exchange; and,
c. Issuer with asset of at least P50 million and has 200 or more holders each holding at least 100
shares of its equity.

OTHER TOPICS

BUSINESS COMBINATIONS

An integrated set of activities an assets that is capable of being conducted and managed for the purpose of
providing a return in the form of dividends, lower costs or other economic benefits directly to investors or
other owners, members or participants.

Acquisition date and identifying the acquirer

Full PFRS PFRS for SMEs PFRS for SEs
Acquisition date is the date on which Same as full PFRS. Same as full PFRS.
the acquirer obtains control over the
acquire. The acquirer is the
combining entity that obtains
control of the other combining
entities or businesses. As compared
to PFRS for SME and PFRS for SEs,
full PFRS includes more extensive
guidance on indicators to identify
the acquirer.

Purchase accounting
Full PFRS PFRS for SMEs PFRS for SEs
An entity shall account for each Same as full PFRS except that any Same as PFRS for SME.
business combination by applying directly attributable costs form part
the acquisition method, which of the cost of acquisition.
requires:
• Identifying the acquirer;
• Determining the acquisition
date;
 • Recognizing and measuring the
identifiable assets acquired, the
liabilities assumed and any non-
controlling interest in the
acquire; and
• Recognizing and measuring
goodwill or a gain from a
bargain purchase.

Adjustment to the cost of a business combination contingent on future events (contingent

consideration)
Full PFRS PFRS for SMEs PFRS for SEs
Contingent consideration is Contingent consideration is Same as PFRS for SME.
recognized initially at fair value as included as part of the cost at the
either a financial liability or equity date of the acquisition if it is
regardless of the probability of probable (that is , more likely than
payment. The probability of not) that the amount will be paid
payment is included in the fair and can be measured reliably.
value, which is deemed to be
reliably measurable. Financial If such adjustment is not
liabilities are re-measured to fair recognized at the acquisition date
value at each reporting date. but becomes probable afterwards,
Changes in the fair value of the additional consideration adjusts
contingent consideration that are the cost of the combination.
not measurement period
adjustments are recognized either
in profit or loss or in other
comprehensive income. Equity-
classified contingent consideration
is not re-measured at each
reporting date; its settlement is
accounted for within equity.

Allocating the cost of a business

Full PFRS
As of the acquisition date, the
acquirer shall recognize, separately
from goodwill, the identifiable
assets acquired, the liabilities
assumed and any non-controlling
interest in the acquire.
The acquirer shall measure the
identifiable assets acquired and the
liabilities assumed at their
acquisition-date fair values except
for measurement of reacquired
rights, replacement of share-based
payment awards, deferred tax,
employee benefits, indemnification
assets, and assets held for sale.
PFRS for SMEs
The acquirer shall, at the
acquisition date, allocate the cost
of a business combination by
recognizing the acquiree’s
identifiable assets and liabilities
and a provision for those
contingent liabilities that satisfy
the recognition criteria at their fair
values at that date except for
deferred tax and assets and
liabilities arising from employee
benefits.
PFRS for SEs
Same as PFRS for SME except that:
a. Fair value exceptions under full
PFRS and PFRS for SME are not
listed in the framework; and
b. An entity should make an
accounting policy choice to
account for intangible assets
acquired in a business
combination either by:
• separately recognizing the
intangible asset as an
identifiable asset; or
• not separately recognizing
the intangible asset as an
identifiable asset and
subsuming into goodwill the
value of the intangible
asset.

Non-controlling interest
Full PFRS
Non-controlling interests in an
acquire that are present ownership
interest and entitle their holders to
a proportionate share of the entity’s
PFRS for SMEs PFRS for SEs
Fair value method is not available. Same as PFRS for SME.
Non-controlling interest in the
acquire is measured at the non-
controlling interest’s proportionate
 net assets in the event of liquidation share of the recognized amounts of
are measured at either fair value the acquiree’s identifiable net
(fair value method) or the present assets or proportionate share
ownership instruments’ method.
proportionate share in the
recognized amounts of the
acquiree’s net identifiable assets
(proportionate share method).

Goodwill
Full PFRS
The option provided by full PFRS to
measure the non-controlling
interest using either fair value
method or proportionate share
method on each transaction may
result in a different goodwill
amount.
Amortization of goodwill is not
permitted. Goodwill is subject to an
impairment test annually and when
there is an indicator of impairment.
PFRS for SMEs PFRS for SEs
After initial recognition, the goodwill Same as PFRS for SME.
is measured at cost less
accumulated amortization and any
accumulated impairment losses.
Goodwill is amortized over its useful
life. If the useful life of goodwill
cannot be established reliably, the
life shall be determined based on
management’s best estimate but
shall not exceed ten (10) years.

Gain on bargain purchase

Full PFRS PFRS for SMEs PFRS for SEs
Gain on bargain purchase is Same as full PFRS. “Negative Same as PFRS for SME
recognized in profit or loss goodwill” is used instead of “Gain
immediately. on bargain purchase”

Common control business combination

Full PFRS PFRS for SMEs PFRS for SEs
No guidance included in PFRS 3. No guidance in the framework but No guidance in the framework but
However, Philippine Interpretation can refer to PIC Q&A Nos. 2011- can refer to PIC Q&A Nos. 2011-
Committee (PIC) issued PIC Q&A Nos. 02, 2012-01 (amended by 2015- 02, 2012-01 (amended by 2015-
2011-02, 2012-01 (amended by 01). 01).
2015-01) to provide guidance on
accounting for common control
business combinations. Policy to
account for common control business
at:
• fair value (or in accordance
with PFRS 3); or
• cost (predecessor’s cost
method).
In selecting a policy, accounting for
prior similar transactions should be
considered.

Note: The requirements of PFRS for SME for business combination are generally based on an earlier version
of PFRS 3, resulting mainly to differences in the measurement of non-controlling interest (fair value method
vs. proportionate share method) and treatment of transaction costs (capitalized vs. expensed). One of the
notable differences among the frameworks is the subsequent measurement of goodwill, which under PFRS for
SME, and PFRS for SEs, are subject to amortization.

Policy options are available for common control business combinations. However, choosing the recognition of
acquired assets and liabilities at fair value would require a discussion about commercial substance of the
transaction, since the transaction is generally viewed as a mere reorganization within group of companies.
CONSOLIDATION

Definition of control
Full PFRS PFRS for SMEs PFRS for SEs
An investor controls an investee Control is the power to govern the Same as PFRS for SMEs.
when it is exposed, or has rights, to financial and operating policies of
variable returns from its an entity to obtain benefits from its
involvement with the investee and activities.
has the ability to affect those
returns through its power over the Only currently exercisable
investee. convertible instruments can be
considered in the control
Potential voting rights that are assessment.
currently exercisable or convertible
are included in the assessment.

Consolidated financial statements.

Full PFRS PFRS for SMEs PFRS for SEs
Parent entities should prepare Parent entities prepare An entity should make an
consolidated financial statements consolidated financial statements accounting policy choice to:
that include all subsidiaries. that include all subsidiaries. An • Consolidated its subsidiaries;
exemption applies to a parent or
A parent need not present entity that is itself a subsidiary • Account for its subsidiaries
consolidated financial statements if and the intermediate or ultimate using equity method. If the
it meets all the following conditions: parent produces consolidated parent is itself a subsidiary of
• It is a wholly-owned subsidiary general purpose financial an entity whose investments in
or is a partially-owned statements that comply with full subsidiaries are either
subsidiary of another entity and IFRS/PFRS or with IFRS/PFRS for consolidated or equity-
all its other owners, including SMEs. accounted, it may present
those not otherwise entitled to separate financial statements
vote, have been informed An entity is exempt from as its only financial
about, and do not object to, the consolidation when the entity’s statemetns.
parent not presenting only existing subsidiary is
consolidated financial acquired and held with the
statements. intention of selling or disposing
• Its debt or equity instruments within one year from its
are not traded in a public acquisition date. Such a
market (a domestic or foreign subsidiary is accounted for in
stock exchange or an over-the- accordance with the requirements
counter market, including local in Section 11 Basic Financial
and regional markets); Instruments of PFRS for SMEs.
• It did not file, nor is it 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; and
• Its ultimate or any
intermediaries parent produces
consolidated financial
statements that are available
for public use the comply with
PFRS or IFRS. For Philippine
financial reporting purposes,
other financial reporting
standards that are converged
with IFRS, or are conceptually
similar to IFRS, are deemed
acceptable in applying the
 exemption from the
preparation of consolidated
financial statements.

A parent that is an investment

entity shall not present consolidated
financial statements if it is required,
in accordance with paragraph 31 of
PFRS 10, to measure all of its
subsidiaries at fair value through
profit or loss.

Consolidation process
Full PFRS PFRS for SMEs PFRS for SEs
Consolidated financial statements Same in full PFRS. Same in full PFRS.
are prepared by using uniform
accounting policies for like
transactions, and events in similar
circumstances, for all of the entities
in a group. In addition, intra-group
balances and transactions are
eliminated in full.

Reporting periods
Full PFRS PFRS for SMEs PFRS for SEs
Specifies the maximum difference The consolidated financial Same as PFRS for SMEs
of the reporting periods (three statements of the parent and its
months) and the requirement to subsidiaries are usually drawn up at
adjust for significant transaction the same reporting date unless it is
that occur in the gap period. impracticable to do so.

Separate financial statements

Full PFRS PFRS for SMEs PFRS for SEs
When an entity prepares separate When separate financial An entity has the option to select
financial statements, it shall statements of a parent are prepare, accounting policy for investments
account for investments in the entity choses to account for all in subsidiaries in separate financial
subsidiaries either: of its investment in subsidiaries, statements either:
• At cost less impairment, or jointly controlled entities and • At cost less impairment, or
• In accordance with PFRS 9; or associates either: • At equity method
• Using the equity method as • At cost less impairment, or
described in PAS 28. • At fair value through profit or
loss; or
Investments accounted for at cost • Using the equity method
or using the equity method shall be
accounted for in accordance with
PFRS 5 Non-current Assets Held-
for-Sale and Discontinued
Operation when they are classified
as held for sale or for distribution
(or included in a disposal group
that is classified as held for sale or
for distribution). The
measurement of investment
accounted for in accordance with
PFRS 9 is not changed in such
circumstances.

Disposal of a foreign operation

Full PFRS PFRS for SMEs PFRS for SEs
 On the disposal of a foreign
operation, the cumulative amount
of the exchange differences relating
to that foreign operation,
recognized in other comprehensive
income and accumulated in the
separate component of equity, shall
be reclassified from equity to profit
or loss ( as a reclassification
adjustment) when the gain or loss
on disposal is recognized.
PFRS for SMEs prohibits the Entities who have operations or
cumulative amount of exchange investments that are based or
differences relating to a foreign conducted in a different country
operation, that were previously cannot apply the framework.
recognized in other comprehensive
income, from being reclassified
from equity to profit or loss (as a
reclassification adjustment) when
the gain or loss on disposal is
recognized.

Note: All the Frameworks use “control: to determine entities that meet the definition of a subsidiary. However,
the definition of control under PFRS for SMEs and PFRS for SEs are based on earlier version of PAS 27. In
practice, this may lead to differences, particularly in light of the impact of potential voting rights in control
assessment, as provided above. Also notable from the summary above is the simplification introduced by PFRS
for SEs by providing an option to equity-account subsidiaries rather than consolidating them. The equity-
accounted financial statements can be the investor’s lone financial statements and eliminates the need to
maintain and prepare both stand-alone and consolidated financial statements for statutory filing.

INVESTMENT IN JOINT ARRANGEMENT

Definition
Full PFRS
A joint arrangement is a contractual
arrangement where at least two
parties agree to share control over
the activities of the arrangement.
Unanimous consent towards
decisions about relevant activities
between the parties sharing control
is a requirement in order to meet
the definition of joint control.
PFRS for SMEs PFRS for SEs
Concept is generally the same as Same in full PFRS.
full PFRS, except that the term
“joint arrangement” does not exist
in PFRS for SMEs. Instead, “joint
venture” is used to refer to a
contractual arrangement whereby
two or more parties undertake an
economic activity that is subject to
joint control.

Types of joint arrangement

Full PFRS
Joint arrangement can either be
joint operations or joint ventures.
The classification is principle-based
and depends on the parties’ rights
and obligations in relation to the
arrangement.
When the parties’ exposure to the
arrangements only extends to the
net assets of the arrangement, the
arrangement is a joint venture. On
the contrary, joint operators have
direct rights to assets and direct
obligations for liabilities of the
arrangement.
PFRS for SMEs PFRS for SEs
PFRS for SME distinguishes between Same as full PFRS.
three types of joint venture:
• Jointly controlled entities, in
which the arrangement is
carried on through a separate
entity (company or
partnership);
• Jointly controlled operations in
which each venturor uses its
own assets for a specific
project; and
• Jointly controlled assets, which
is a project carried on which
assets that are jointly owned.

Accounting for joint ventures

Full PFRS PFRS for SMEs PFRS for SEs
A joint venturer shall recognize its Classification not available in PFRS A venture has the option to account
interest in a joint venture as an for SMEs. for its investments using one of the
investment and shall account for following:
 that investment using the equity • Cost model, or
method in accordance with PAS 28 • Equity method
Investment in Associates and Joint
Ventures unless the entity is
exempted from applying the equity
method as specified in that
standard.

Accounting for joint operations

Full PFRS PFRS for SMEs PFRS for SEs
A joint operator accounts for rights Classification not available in PFRS Same as full PFRS.
and obligations by recognizing its for SMEs
own assets, liabilities, revenue, and
expenses, as well as its share of
assets, liabilities, revenue, expenses,
held/earned/incurred jointly from the
joint operation.

Accounting for jointly controlled entities

Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full A venturer shall account for all of Classification not available in PFRS
PFRS. its interests in jointly controlled for SEs.
entities using one of the following:
• The cost model;
• The equity method; or
• The fair value model

Accounting for jointly controlled operation

Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full Requirements are similar to jointly Classification not available in PFRS
PFRS. controlled entities without an for SEs.
incorporated structure. A venturer
recognizes in its financial
statements:
• The assets that it controls;
• The liabilities its incurs;
• The expenses it incurs; and
• Its share of income from the
sale of goods or services by the
joint venture.

Accounting for jointly controlled assets

Full PFRS PFRS for SMEs PFRS for SEs
Classification not available in full A venture accounts for its share of The entity shall adopt in its separate
PFRS. the jointly controlled assets, financial statements a policy of
liabilities, income and expenses, accounting for its investments in
and any liabilities and expenses it joint ventures:
has incurred. • At cost less impairment, or
• At equity method

Separate financial statements

Full PFRS
Investments accounted for at cost
or using the equity method shall be
accounted for in accordance with
PFRS 5 Non-current Assets Held for
Sale and Discontinued Operations
when they are classified as held for
sale or for distribution (or included
in a disposal group that it classified
PFRS for SMEs PFRS for SEs
When separate financial An entity has the option t elect
statements of a parent are accounting policy for investments
prepared, the entity choses to in subsidiaries in separate financial
account for all of its investments in statements either:
subsidiaries, jointly controlled • At cost less impairment, or
entities and associates either: • At equity method
• At cost less impairment, or
 as held for sale or for distribution).
The measurement of investment
accounted for in accordance with
PFRS 9 is not changed in such
circumstances.
• At fair value through profit or
loss; or
• Using the equity method.

Note: In a nutshell, full PFRS and PFRS for SEs are largely aligned, except that PFRS for SEs allows the use
of cost model in both consolidated and separate financial statements. Full PFRS was used as basis in developing
guidance for joint arrangements in PFRS for SEs and it is viewed to provide a more simplified classification of
arrangements with clear guidance.

PFRS for SMEs is generally based on PAS 31 (superseded by PFRS 11) except that it permits use of one of three
different models the equity method, the cost model and the fair value model, which was previously not available
under PAS 31.

HEDGING

General
Full PFRS
There have not been many changes
to the hedging instruments that are
eligible under PFRS 9. In
consolidated financial statements,
derivative financial instruments can
still be designated as hedging
instruments, provided they are
entered into with an external party.
In addition, if non-derivative
financial instruments are measured
at fair value through profit or loss
they are also allowed for hedging
risks for foreign exchange risk.
PFRS for SMEs PFRS for SEs
For entities that elect to apply Same as PFRS for SMEs applying
Section 11 and 12 of PFRS for Section 11 and 12
SMEs
An entity may designate a hedging
relationship between a hedging
instrument and a hedged item in
such a way as to recognize gains
and losses on a hedged item and a
hedging instrument in profit or loss
at the same time.
For entities that elect to apply
PAS 39

Derivative embedded in financial Same as full PFRS

assets are no longer accounted for
separately under PFRS 9.
Therefore, only derivative
embedded in financial liabilities or
non-financial contracts (and that
are accounted for separately) are
allowed to be designated as
hedging instruments.

Criteria for hedge accounting

Full PFRS PFRS for SMEs PFRS for SEs
Under PFRS 9, formal designation For entities that elect to apply Same as PFRS for SMEs applying
and documentation of: Sections 11 and 12 of PFRS for Section 11 and 12.
• Risk management objective and SMEs
strategy
• Hedging instrument In order to apply hedge accounting,
• Hedged item management prepares
• Nature of risk being hedged documentation at the inception of
• Hedge effectiveness (including the relationship. This
sources of ineffectiveness and documentation clearly identifies the
how the hedge ratio is risk being hedged, the hedging
determined). instrument, and the hedged item.
 Hedging relationship consists only of
eligible hedging instruments and
eligible hedged items. However,
some items that were not eligible as
hedged items or hedging
instruments under PAS 39 are now
eligible under PFRS 9.
Only certain risks and hedging
instruments are permitted, as
described in more detail below.
In addition, management should
expect the hedging instrument to
be highly effective in offsetting the
designated hedged risk in order to
apply hedge accounting.

For entities that elect to apply

PAS 39

PAS 39 is similar to PFRS 9 except

for certain differences explained.

Risks for which hedge accounting is permitted

Full PFRS PFRS for SMEs PFRS for SEs
PFRS 9 broadly retains the three For entities that elect to apply Same as PFRS for SMEs applying
hedge accounting models within PAS Sections 11 and 12 of PFRS for Sections 11 and 12.
39 detailed as follows with changes SMEs
under PFRS 9 discussed:
• Fair value hedge – changes in Hedge accounting is permitted for
fair value of hedging instrument the risk hedged as:
accounted for at FVOCI are • An interest rate risk of a debt
recorded in other instrument measured at
comprehensive income (OCI) amortized cost;
without recycling to profit or • A foreign exchange or interest
loss. rate risk in a firm commitment
• Cash flow hedge – For cash flow or a highly probable forecast
hedges of a forecast transaction transaction;
which results in the recognition • A foreign exchange risk in a net
of a non-financial item (such as investment in a foreign
a fixed asset or inventory), or operation, or
where a hedged forecast • A price risk of a commodity
transaction for a non-financial
asset or a non-financial liability For entities that elect to apply
becomes a firm commitment for PAS 39
which fair value hedge
accounting is applied, the PAS 39 permits three types of
carrying value of that item must hedging relationship:
be adjusted for the accumulated • Cash flow hedges.
gains or losses recognized • Fair value hedges.
directly in equity, and allows net • Hedges of a net investment in
position to be designated as the a foreign operation.
hedged item. PAS 39 restricts the risk or portions
• Net investment hedge- no in a financial instrument that can be
major changes introduced. hedged based on a principal that
those risks or portions must be
separately identifiable components
of the financial instrument, and
changes in the cash flows or fair
value of the entire financial
instruments arising from changes in
the designated risks and portions
must be reliably measurable

A broader array of risks is therefore

eligible for hedging under PAS 39
(for example, equity price risk and
one-sided risks).

Hedging instruments for which hedge accounting is permitted
Full PFRS PFRS for SMEs
There have not been many changes For entities that elect to apply
to the hedging instruments that are Sections 11 and 12 of PFRS for
eligible under PFRS 9. SMEs
PFRS 9 permits hedging instruments
to be:
• Derivatives
• Non-derivative financial
instruments continue to be
allowed for hedging foreign
currency risk. In addition, if
non-derivative financial
instruments are measured at
fair value through profit or loss
they are also allowed for
hedging risks other than foreign
currency risk.
• Derivatives embedded in
financial assets are no longer
accounted for separately.
• Where the time value of an
option is excluded from the
designation as hedged item,
changes in time value are
accounted for in OCI.
• An additional alternative for
recognizing fair value changes
of forward points is introduced.
• Currency basis spread may be
considered as costs of the
hedge relationship, in which
case changes in them can be
recognized through OCI.
Effectiveness testing
Full PFRS
PAS 39 allows a group of similar
items to be designated as a hedged
item.
PFRS for SEs
A hedging instrument:
• Is an interest rate swap, a
foreign currency swap, a
foreign currency forward
exchange contracts, or a
commodity forward exchange
contract.
• Involves a party external to the
reporting entity.
• Has a notional amount equal to
the designated amount of
principal or notional amount of
the hedged item.
• Has a specified maturity date no
later than the maturity of the
hedged item, the expected
settlement of the commodity
purchase or sale commit, or the
occurrence of the highly
probable forecast transaction.
• Has no pre-payment, early
termination or extension
futures.
For entities that elect to apply
PAS 39
PAS 39 permits hedging instruments
to be:
• Derivatives
• Non-derivative instruments are
only allowed for hedging foreign
currency risk.
• Embedded derivatives that are
separated are allowed as
hedging instruments.
• If not designated as hedged
item, changes in the time value
of an option are recognized in
profit or loss.
• Two alternatives are provided
for recognizing fair value
changes of forward points –
forward rate or spot rate.
• No specific accounting
treatment is prescribed for
currency basis spreads.
PFRS for SMEs PFRS for SEs
 PFRS 9 does not prescribe a specific For entities that elect to apply Hedge of variable interest rate risk
method for assessing whether a Sections 11 and 12 of PFRS for of a recognized financial
hedging relationship meets the SMEs instrument, foreign exchange risk
hedge effectiveness requirements. or commodity price risk in a firm
An entity must use a method that PFRS for SMEs does not require commitment or highly probable
captures the relevant quantitative assessment of hedge forecast transaction – effective
characteristics of the hedging effectiveness. portion recognized in hedging
relationship, including the sources reserve (equity account) while
of hedge ineffectiveness that are For entities that elect to apply ineffective portion is recognized in
expected to affect the hedging PAS 39 profit or loss.
relationship during its term. A
qualitative assessment is always The entity is required to perform
necessary and, depending on the quantitative retrospective and
characteristics of the hedge prospective effectiveness test at
relationship, entities might also least once per reporting period. A
need to perform a quantitative specified method for testing
assessment. effectiveness is not defined, but the
entity documents its chosen
The assessment relates to method as part of the hedging
expectations about hedge documentation.
effectiveness, and so is only
forward looking. Such an One of the more onerous
assessment should be performed at requirements of PAS 39 is that the
inception and on an on-going basis hedge relationship should be
at each reporting date or on a expected to be highly effective (i.e.
significant change in entities are required demonstrate
circumstances, whichever come that actual results of the hedge are
first. PFRS 9 relaxes the within a range of 80% - 125%
requirements for hedge effectiveness).
effectiveness, removing the 80%-
125% bright line.

Note: Derivative financial statements with a related party may be designated as hedging instruments in
separate financial statements. While reference on accounting for complex financial instruments involving
derivatives and hedging are available under PFRS for SEs, it is not expected to be widely used since SEs are
less likely to engaged into arrangements that would involve derivatives and hedging.

FOREIGN CURRENCIES

Functional and presentation currency

Full PFRS PFRS for SMEs PFRS for SEs
Functional currency is the currency Same as full PFRS. Same as full PFRS.
of the primary economic
environment in which the entity
operates.

Presentation currency is the

currency in which the financial
statements are presented.

Functional currency
Full PFRS PFRS for SMEs PFRS for SEs
All components of the financial Same as full PFRS. Same as full PFRS.
statements are measured in the
functional currency. All transactions
entered into in currencies other than
the functional currency are treated
 as transactions in a foreign
currency.

Foreign currencies transactions

Full PFRS PFRS for SMEs PFRS for SEs
A transaction in a foreign currency is Same as full PFRS. Same as full PFRS.
recorded in the functional currency
using the exchange rate at the date
of transaction (average rates may be
used if they do not fluctuate
significantly).

At the end of each reporting period,

foreign currency monetary balances
are translated using the exchange
rate at the closing rate.

Non-monetary balances
denominated in a foreign currency
and carried:
• At cost: reported using the
exchange rate at the date of the
transaction.
• At fair value: reported using the
exchange rate at the date when
the fair values were determined.

Recognition of exchange differences

Full PFRS PFRS for SMEs PFRS for SEs
Exchange differences on monetary Same as full PFRS except that Same as PFRS for SME, except that
items are recognized in profit or recycling through profit or loss of the translation requirements for
loss for the period except for those any cumulative exchange foreign operation does not apply
differences arising from a monetary differences that were previously since entities with operations or
item that forms part of an entity’s recognized in equity on disposal of investment that are based or
net investment in a foreign entity a foreign operation is not conducted in a different country
(subject to strict criteria of what permitted with different functional currency
qualifies as net investment). In the are outside the scope of the
consolidated financial statements, framework.
such exchange differences are
recognized as a separate
component in equity.

Exchange differences on a
monetary item that forms part of a
net investment in a foreign
operation are reclassified from
equity to profit or loss on disposal
of the foreign operation.

Change in functional currency

Full PFRS
A change is justified only if there are
changes in underlying transactions,
events and conditions that are
relevant to the entity.
PFRS for SMEs PFRS for SEs
Same as full PFRS. No specific requirement in the
standard. Guidance under full PFRS
or PFRS for SME may be followed.

The effect of a change in functional

currency is accounted for
prospectively from the date of the
change.
Presentation currency
Full PFRS PFRS for SMEs PFRS for SEs
An entity may choose to present its Same in full PFRS. Same in full PFRS.
financial statements in any
currency. If the presentation
currency differs from the functional
currency, an entity translates its
results and financial position into
the presentation currency.

Translation to the presentation currency

Full PFRS PFRS for SMEs PFRS for SEs
The assets and liabilities are Same as full PFRS. No specific requirements in the
translated at the closing rate at the framework regarding the rates to
date of the statement of financial be used in the translation to
position; income and expenses are presentation currency. Guidance
translated using the exchange rates under full PFRS or PFRS for SME
at the dates of the transactions may be followed.
(average rates may be used if they
do not fluctuate significantly). All
resulting exchange differences are
recognized in other comprehensive
income.

Note: For entities whose operations are mainly in the Philippines, the three framework will not likely result to
significant differences. Only when the entities have investments or operations outside the country (of which
PFRS for SEs does not apply) will full PFRS and PFRS for SME likely result to differences in the amounts
recognized in the financial statements. In the case of a change in functional currency, the company shall file
with Securities and Exchange Commission a notice indicating the proposed change, among others, before an
entity could apply the new functional currency in its statutory financial statements.