CPA REVIEW SCHOOL OF THE PHILIPPINES Manila FINANCIAL ACCOUNTING AND REPORTING VALIX/SIY/VALIX/ESCALA/SANTOS/DELA CRUZ. SMALL ENTITIES DEFINITION The Philippine Securities and Exchange Commission defines Small Entities (SEs) as those entities: a. With total assets between P3,000,000 and P100,000,000, or total liabilities between P3,000,000 and 100,000,000. b. That are not required to file financial statements under SEC SRC Rule 68. SRC Rule 68 pertains to listed entities or entities whose securities are traded in a public market. ¢. That are not in the process of filing financial statements for the purpose of issuing any class of instruments in a public market. 4. That are not holders of secondary license issued by a regulatory agency, such as bank, investment house and other financial institutions, Entities with operations or investments based or conducted in a different country with different functional currency shall not apply the PFRS for Small Entities but instead apply PFRS for SMEs. Exemptions from PFRS for SEs The following small entities are exempted from the mandatory adoption of PFRS for Small Entities and instead may apply full PFRS or PFRS for SMEs, whichever is appropriate: 1. A small subsidiary of a parent under full PFRS or PFRS for SMEs. 2. A small subsidiary of a foreign parent moving toward full IPRS or IFRS for SMEs. 3. Part of a group either as a significant joint venture or associate reporting under full PFRS or PFRS for SMEs. 4. A small branch office of a foreign company reporting under full IFRS or IFRS for SMEs. 5. A small entity with short-term projection that shows it will breach the quantitative threshold and the breach is expected to be significant and continuing due to its long-term effect on the entity’s asset or liability size. 6. Asmall entity which has been preparing financial statements under full PFRS or PFRS for SMEs and has decided to liquidate. Components of financial statements ‘Acomplete set of financial statements of a small entity shall include all of the following: Statement of financial position ‘Statement of income Statement of changes in equity Statement of cash flows Notes to financial statements payer A small entity does not recognize other comprehensive income. All items of income and expenses are recognized in profit or loss The statements of income and changes in equity can be combined if the only changes arise from: Profit or loss Payment of dividend Correction of prior period errors Changes in accounting policy pe oe 6779Page 2 ‘Change in accounting policy, accounting estimate and prior period errors Same as full PFRS, except that comparative information shall not be restated for a small entity. Basic financial instruments Under PFRS for Small Entities, the basic financial instruments are: Cash Bank deposits Trade receivables and payables Loans receivable and payable Notes receivable and payable Investments in nonconvertible preference shares and nonputtable ordinary shares av eepe Basic financial instruments of small entities are initially measured at transaction price including transaction costs. Subsequent measurement 1. Debt instruments are measured at amortized cost using the effective interest method. 2, Investment in shares shall be carried at cost less impairment. 3. However, investment in shares traded in an active market shall be measured at the lower of cost or fair value, with changes in fair value recognized in profit or loss. Impairment 1. Ifthe financial asset is measured at amortized cost, the impairment loss is the excess of carrying amount over the present value of cash flows. If the financial asset is measured at cost, the impairment loss is the excess of carrying amount over the best estimate of selling price. Inventories Inventories are initially measured at cost determined by using FIFO, weighted average and specific identification. Inventories are subsequently measured at the lower of cost or market value. The market value is determined as the probable selling price to willing buyers at reporting date. ‘The lower of cost or market value is applied individually to each item of inventory or to group of similar items. If the market value is lower than cost, the difference is accounted for as an impairment loss. SME - Inventories an measured at the ower of cost and estimated selling price less cost of disposal. Any inventory writedown is an impairment loss, Full PFRS ~ Inventories are measured at the Jower of cost and net realizable value. Any inventory writedown is recognized as component of cost of goods sold. Investment in associates ‘An investor shall account for all of its investments in associates using one of the following: 1. Cost model 2. Equity method SME - Accounting policy choice of cost model, equity method or fair value model applied to all investments in accounts Full PFRS — equity method only 6779Page 3 Investment property Investment property is initlally measured at cost. After recognition, a small entity shall choose as its accounting policy either the cost model or falr value ‘model and shall apply that policy to all of its investments property. Under the cost model, the investment property is carried at cost less accumulated depreciation and any accumulated impairment losses. Under the fair value model, the investment property is carried at fair value at each reporting date with changes in fair value recognized in profit or loss. Itreliable measure of fair value is no longer available without undue cost or effort for an item of investment property, the investment property is accounted for using the cost model. Carrying amount at the date of change becomes the cost of the investment property. SME - Fair value model if fair value can be reliably measured. Otherwise, cost model. Full PERS - Either cost model or fair value model. There is a choice. Property, plant and equipment An entity shall measure property, plant and equipment initially at cost. Subsequently, a small entity shall choose as its accounting policy either the cost model of fair value model and shall apply that policy to an entire class of property, plant and equipment. Under the cost model, a small entity shall measure the property, plant and equipment at cost less accumulated depreciation and any accumulated impairment losses. Under the fair value model, a small entity shall measure property, plant and equipment at fair value at each reporting date with any changes in fair value recognized in profit or loss. If fair value is no longer available without undue cost or effort, the property, plant and equipment shall be accounted for using the cost model. The carrying amount of the property, plant and equipment on that date becomes the cost. SME - Either cost model or revaluation model. There is a choice Full PFRS — Either cost model or revaluation model. There is a choice. Recognition of monetary government grant a. A grant that does not impose specified future performance conditions is recognized in income when the grant proceeds are receivable. b. A grant that imposes specified future performance conditions is recognized in income only when the performance conditions are met. c. Grant received before the revenue recognition criteria are met is recognized is liability. SME - Same as small entity Full PFRS — A government grant is recognized when there is reasonable assurance that the entity will comply with conditions. Moreover, grant related to asset may be treated as ¢jther deferred income or reduction of the carrying amount of asset. Recognition of nonmonetary government grant ‘The small entity has an accounting policy choice using either: a, No recognition . Recognition at fair value 6779Page 4 Intangible assets other than goodwill ‘A small entity shall initially measure an intangible asset at cost. Subsequently, the intangible asset shall be measured using the cost model. Under the cost model, the intangible asset shall be measured at cost less accumulated amortization and any accumulated impairment losses. All intangible assets of a small entity shall be considered to have a finite life. All intangible assets including goodwill are amortized over the usefil life. Ifthe small entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be determined based on the best estimate of management but shall not exceed ten years. SME - Same as small entity Full PFRS — Either cost model or revaluation model. There is a choice. Impairment of assets If the recoverable amount of an asset is less than carrying amount, an impairment loss is recognized by reducing the carrying amount to recoverable amount. The recoverable amount of an asset is the higher between fair value less cost of disposal and value in use. ‘SME - Same as small entity Full PFRS ~ Same as small entity Biological assets A small entity engaged in agricultural activity has an option to measure biological asset applying either: a. Cost model ». Current market price model Under the cost model, the biological asset is measured at cost less any accumulated depreciation and any accumulated impairment losses. Under the current market price model, the biological asset is measured on initial recognition and at each reporting date at current market price. Any changes in current market price shall be recognized in profit or loss. The current market price is the probable selling price to willing buyers as of reporting date. SME — Biological assets are measured at fair value less cost of disposal if fair value is readily determinable. Otherwise, cost model. Full PFRS — Biological assets are measured at fair value less cost of disposal. Measurement of agricultural produce Agricultural produce harvested from an entity’s biological asset shall be measured at current market price at the point of harvest. Such measurement is the cost at that date when the harvested agricultural produce is accounted for as inventory. ‘SME — Agricultural produce is measured at fair value less cost of disposal at the point of harvest. Full PFRS — Harvested agricultural produce is measured at fair value less cost of disposal at the point of harvest. Agricultural produce growing on bearer plant is measured at fair value less cost of disposal. Provision and contingent liability ‘A small entity shall recognize a provision only when: a. The entity has an obligation at the reporting date as a result of past event, b. Itis probable that the entity will be required to transfer economic benefit in settlement. cc. The amount of the obligation can be estimated reliably. Provision is both probable and measurable, The provision shall be measured at the best estimate of the ‘amount required to settle the obligation at the reporting date, Contingent liability is not recognized but only disclosed when either probable or measurable but not both. ‘No need for disclosure if the contingent liability is remote. SME — Same as small entity Full PFRS - Same as small entity 6779Page 5 Leases : ‘A small entity shall apply the operating lease model. There is no finance lease for a small entity. All rental receipts shall be recognized as rent income and all rental payments shall be recognized as rent expense. ‘SME — Operating lease or finance lease depending on the transfer of risks and rewards of ownership. Full PFRS — Lessee accounting is finance lease, However, operating lease if short-term or low value. Lessor accounting is either finance or operating lease depending on transfer of risks and rewards. Income Tax A small entity shall make an accounting policy choice using either. a. Taxes payable method - The small entity shall recognize a current tax liability for the tax payable on taxable income for the current and past periods. If this method is adopted, the small entity does not recognize a deferred tax asset or liability. b. Deferred income taxes method - The small entity shall recognize a deferred tax liability for future taxable amounts and deferred tax asset for future deductible amount in addition to current tax SME and full PFRS — Both current tax and deferred tax are recognized. For small entity, SME and full PERS, the deferred tax asset is presented as noncurrent asset and the deferred tax liability is presented as noncurrent liability. Employee benefits ‘The accrual method is used in calculating the benefit obligation in accordance with the minimum retirement benefits under R.A. 7641 or the Philippine Retirement Pay Law. This means that only the defined contribution plan is followed. However, any company poli xy is followed if superior or higher than R.A.7641, ‘The accrual approach is applied by calculating the expected liability as of reporting date using the current salary of the employees and the years of service. No consideration is made for changes in future salary and service period. Moreover, there is no recognition of actuarial gains and losses. SME and Full PFRS — Both defined contribution and defined benefit plan are followed. Equity Equity is the residual interest in the assets of an entity after deducting all its liabilities. a. An entity shall measure the equity instruments at the amount of cash received. b. Ifthe payment is deferred and the time value of iaoney is material, the initial measurement shall be on a present value basis. c. If the equity instruments are exchanged for resources other than cash, the equity instruments shall be recognized at the fair value of the resources. 4. An entity shall account for the transaction cost as a deduction from equity, net of any related income tax benefit. An entity shall reduce equity for the amount of distributions or dividends to owners, net of any related tax benefit SME and Full PFRS — Practically the same principles as small entity in accounting for equity instruments. 6779Page 6 Share-based payments A small entity distinguishes between cash settled and equity settled arrangements, For equity settled share-based payment transactions, a small 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. Net asset value is derived by dividing the total assets less liabilities by the number of shares outstanding at measurement date, Actually, this is equivalent to the book value per share. For cash settled share-based payment transactions, a small entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. The entity shall remeasure the fair value of the liability at each reporting date with any changes in fair value recognized in profit or loss for the period, ‘SME — Equity settled transactions are measured at fair value on the date of grant and cash settled transactions are measured at the fair value of liability and remeasured at every year-end. Full PFRS — Equity settled transactions are measured at the fair value on the date of grant or intrinsic value at every year-end. Cash settled transactions are measured at the fair value of liability and remeasured at every year-end, Revenue The recognition criteria include the following: 1. The probability that the economic benefits associoted with the transaction will flow to the entity. 2. The revenue and costs can be measured reliably. Measurement of revenue A small entity shall measure revenue at the fair value of the consideration received or receivable. The fair value of the consideration received or receivable is after deducting the amount of any trade discount, prompt payment settlement discount and volume rebate. ‘The fair value also takes into account the time value of money. ‘SME - Same as small entity Full PFRS ~ IFRS 15 Revenue from contracts with customers Transition to PFRS for Smal! En ies In its opening statement of financial position at transition date, the smell entity shall: a, Recognize all assets and liabilities whose recognition is requited by PFRS for Small Entities. b. Not recognize assets and liabilities if PFS for Small Entities does not permit such recognition. ©. Reclassify items that it recognized under the previous accounting framework as one type of asset, liability or component of equity but are a different type of asset, liability or component of equity under the PERS for Small Entities. d. Apply PFRS for Small Entities in measuring recognized assets and liabilities, ‘The date of transition to PFRS for Small Entities is the beginning of the earliest period for which full comparative information is presented in accordance with PFRS for Small Entities. END 6779CPA REVIEW SCHOOL OF THE PHILIPPINES Manila FINANCIAL ACCOUNTING AND REPORTING VALIX/SIY/VALIX/ESCALA/SANTOS/DELA CRUZ MULTIPLE CHOICE - SMALL ENTITIES . Which is not within the definition of a small entity? a. With total assets or total liabilities between P3,000,000 or P100,000,000. b. Listed in a public market. a . ©. Not in the process of filing financial statements for the purpose issuing equity instruments in a public market. 4. Holder of a secondary license issued by regulatory agency. . Which small entity is not exempted from the mandatory adoption of PFRS for Small Entities? A small subsidiary of a parent under full PFRS ‘A small subsidiary of a foreign parent moving toward full IFRS A small joint venture under full PFRS os ‘A small entity preparing financial statements under full PFRS and has not decided to liquidate. pose ‘The financial statements of a small entity include all, except a. Statement of financial position b. Statement of income c. Statement of retained earnings 4. Statement of cash flows The statements of income and changes in equity of a small entity can be combined if the only changes arise from all, except Net income Payment of dividend Change in accounting estimate Change in accounting policy aege . Which is an adjustment of the opening balance of retained earings? a. Change in accounting policy b. Change in accounting estimate c. Change in accounting policy and prior period error 4. Change in accounting estimate and prior period error . Which is not a basic financial instrument of a small entity? Cash in bank Accounts receivable Note payable Investment in convertible preference shares pe ee . Basic financial instruments are initially measured at a. Transaction price including transaction cost b, Transaction price excluding transaction cost c, Amortized cost d. Present value of future payments .. Which statement is incorrect about subsequent measurement of basic financial instruments of a small entity? a. Debt instruments are measured at amortized cost using effective interest b. Investment in untraded shares are carried at cost less impairment c. Investment in traded shares are measured fair value 4. Investment in traded shares are measured at the lower of cost or fair value, 67809. For debt instrument at amortized cost, the impairment loss is a. Excess carrying amount over the present value of cash flows b. Excess of present value of cash flows over carrying amount ¢. Excess of carrying amount over fair value 4. Excess fair value over carrying amount 10. For financial asset measured at cost less impairment, the impairment loss is the excess of a. Carrying amount over the best estimate of selling price b. Best estimate of selling price over carrying amount c. Carrying amount over fair value d. Fair value over best estimate of selling price 11. Inventories of a small entity are initially measured at cost and subsequently measured at a. Fair value b. Market value c. Lower of cost or market value d. Lower of cost or net realizable value 12. All investments in associate of a small entity are accounted for using. a. Cost model b. Equity method c. Either cost model or equity method. 4. Fair value model 13, All investments property of a small entity are subsequently measured using a. Cost model b. Fair value model ¢. Either cost model or revaluation model 4. Either cost model or fair value model 14, A small entity shall apply which accounting policy for property, plant and equipment? a. Cost model b. Fair value model c. Either cost model or fair value model 4. Either cost model or revaluation model 15, Which statement is incorrect with respect to government grant of a small entity? a. Unconditional monetary grant is recognized in income when receivable. b. Conditional monetary grant is recognized in income only when condition is met. c. Monetary grant is recognized as liability before recognition criteria are met. d. Nonmonetary grant shall not be recognized. 16. What is the treatment of borrowing cost of a small entity? a. Expensed as incurred b. Capitalized ©. May be expensed or capitalized depending on circumstances . Not recognized 17. A small entity shall measure intangible asset using Cost model Fair value model Revaluation model Either cost model or fair value model Bose Page 2 6780Page 3 18, How is impairment loss of an asset recognized? a. Excess of carrying amount over recoverable amount bb. Excess of recoverable amount over carrying amount c. Excess of carrying amount over fair value less cost of disposal d. Excess of carrying amount over value in use 19. Biological asset of a small entity is measured using 20. 21. 22. 23. 24 25. 26. a. Cost model b. Current market price model c. Either cost model or fair value model d, Either cost model or current market price model Agricultural produce of a small entity is measured at Current market price at the point of harvest Current market price less cost of disposal at the point of harvest Fair value at the point of harvest Fair value less cost of disposal at the point of harvest Bo oP ‘What is the measurement of a provision? Best estimate at reporting date Best estimate at settlement date Present value of future payment Midpoint of the range aegp A small entity shall account for lease using Operating lease model Finance lease model Either operating lease or finance lease Operating lease for lessee and finance lease for lessor peop A small entity shall account for income tax using Taxes payable method Deferred income taxes method Either taxes payable method or deferred income taxes method ‘Neither taxes payable method nor deferred income taxes method Bese Deferred income taxes are measured at a. Current tax rate b. Expected future tax rate c. Enacted future tax rate d. Average annual tax rate A small entity shall account for postemployment benefits using ‘Accrual method Cash method Either accrual method or cash method Either accrual method or projected benefit method pose The benefit obligation of small entity is calculated under RA. 7641 Company policy Company policy if higher than R.A. 7641 | Qualifying insurance policy Bese 6780Page 4 27. Equity instruments are measured at a. The amount of cash received b. Present value for deferred payment ©. Fairvalue of noncash consideration received 4d. All of these are used in measuring equity instruments 28. Equity settled transactions of a small entity are measured at a. Netasset value b. Pair value c. Liquidation value d. Assessed value 29. Cash settled transactions of a small entity are measured at a. Fair value of liability at reporting date b. Net asset value of liability at reporting date c. Fair value of liability at reporting date and remeasured at date of settlement d._ Net asset value of liability at reporting date and remeasured at date of settlement 30. The revenue of small entity from sale of goods is measured at a. Fair value of consideration received b. Fair value of consideration received less trade discount, prompt payment discount and volume rebate c. Cash received less trade discount . Present value of consideration 6780