Soon to be Atty. Abigail D.

Rosos, CPA

PFRS for SMEs

BASIC CONCEPTS

The International Accounting Standards Board defines "small and medium-sized

entities" or SMEs as entities that:

 Do not have public accountability, and

 Publish general purpose financial statements for external users.

An entity has public accountability if:

 Its debt or equity instruments are traded in a public market or it is in the

process of issuing such instruments for trading in public market.
 It holds assets in fiduciary capacity for a broad group of outsiders as one of
the primary businesses.

This is typically the case for banks, credit unions, insurance entities, securities
dealers or brokers, mutual funds and investment banks.

The Philippine Securities and Exchange Commission defines medium-sized

entity as an entity:

 With total assets between P100,000,000 and P350,000,000, OR with total

liabilities between P100,000,000 and P250,000,000.
 That is not required to file financial statements under SRC Rule
68.1. This SRC Rule 68.1 pertains to "listed entities" or entities whose
securities are traded in an exchange market, and entities with assets of at
least P50,000,000 and have 200 or more holders each holding at least 100
shares of a class of equity securities.
 That is not in the process of filing financial statements for the purpose of
issuing any class of instruments in a public market.
 That is not a holder of secondary license issued by a regulatory
agency such as a bank (all types of banks), an investment house, a finance
company, an insurance company, securities broker or dealer, a mutual fund
and pre-need company.
 That is not a public utility.
Soon to be Atty. Abigail D. Rosos, CPA

The Philippine Securities and Exchange Commission defines small

entity as an entity:

 With total assets between P3,000,000 and P100,000,000, OR with total

liabilities between P3,000,000 and P100,000,000.
 That is not required to file financial statements under SRC Rule
68.1. This SRC Rule 68.1 pertains to "listed entities" or entities whose
securities are traded in an exchange market, and entities with assets of at
least P50,000,000 and have 200 or more holders each holding at least 100
shares of a class of equity securities.
 That is not in the process of filing financial statements for the purpose of
issuing any class of instruments in a public market.
 That is not a holder of secondary license issued by a regulatory
agency such as a bank (all types of banks), an investment house, a finance
company, an insurance company, securities broker or dealer, a mutual fund
and pre-need company.
 That is not a public utility.

EXEMPTIONS FROM APPLYING PFRS FOR SMEs

The Philippine SEC in a meeting on October 7, 2010 resolved to exempt from the
mandatory adoption of the PFRS for SMEs small and medium-sized entity that
meets any of the following criteria:

1. It is a subsidiary of a parent reporting under full PFRS.

2. It is a subsidiary of a foreign parent that will be moving toward full IFRS
pursuant to the foreign country's published convergence plan.
3. It is a subsidiary of a foreign parent that has been applying the standards for a
non-publicly accountable entity for local reporting purposes and is considering
moving to full PFRS instead of the PFRS for SMEs.
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.
5. It is part of a group, either as a significant joint venture or an associate, which
is reporting under full PFRS.
6. It is a branch office of a foreign entity reporting under full IFRS.
7. It has concrete plans to conduct an initial public offering within the next two
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.

TRANSITIONS

If an SME that uses the PFRS for SMEs in a current year breaches the floor and
ceiling size criteria at the end of the current year, the entity shall be required to
transition to full PFRS in the next year if the ceiling threshold is breached or another
acceptable accounting basis if the floor threshold is breached.
Soon to be Atty. Abigail D. Rosos, CPA

On the other hand, if an SME ceases to qualify as an SME because of its

total assets or liabilities falls below the floor of the size criteria, such entity
may transition to another acceptable accounting basis also in the next accounting
period, unless the micro entity opts to still adopt the PFRS for SME.

MICRO-BUSINESS ENTITIES

Micro -business entities are entities whose total assets or total liabilities are below
the P3,000,000 floor threshold.

Micro-business entities have the option to use any of the following bases of
accounting in the preparation of financial statements:

a. Full PFRS
b. PFRS for SMEs
c. Another acceptable basis of accounting, such as income tax basis of
accounting or cash basis of accounting.

COMPARISONS

PFRS for SMALL

FULL PFRS PFRS for SMEs
ENTITIES
CONCEPTUAL FRAMEWORK
1. Qualitative Characteristics
• More detailed • Less detailed • None
2. Measurement
• Historical Cost and • Historical Cost and • Historical Cost and Fair
Updated Value Fair Value Value
FINANCIAL STATEMENTS PREPARATION
3. Presentation of additional statement of financial position (third balance sheet)
• Required to be prepared
• Not applicable • Not applicable
under certain circumstances
4. Presentation of statement of comprehensive income
• Under PFRS for SME, if
• Under PAS 1, statement of an entity has no items of • PFRS for Small Entities
comprehensive income is other comprehensive does not have the concept
always presented as part of income it may present only of other comprehensive
the complete set of financial an income statement, or income and does not
statements, either as a present statement of require entities to present a
single or two-statement comprehensive income in statement of
presentation which the bottom line is comprehensive income.
labelled profit or loss
5. Components of OCI and OCL
PAS 1 enumerates the The following are the • NOT APPLICABLE
following components of components of OCI under
OCI: the PFRS for SMEs:
Soon to be Atty. Abigail D. Rosos, CPA

• Changes in revaluation
surplus
• Unrealized gain and losses
on changes in fair values of
FVOCI investments
• Remeasurements of the
net defined benefit liability
(asset)
• Gains and losses arising
from translating the financial
statements of a foreign
operation
• Effective portion of gains
and losses on hedging
instruments in a cash flow
hedge
• Changes in fair value of a • Changes in revaluation
financial liability designated surplus
at FVPL that are attributable • Some actuarial gains and
to changes in credit risk losses
• Changes in the time value • Some changes in fair
of option when the option’s values of hedging
intrinsic value and time instruments
value are separated and • Some gains and losses
only the changes in the arising from translating the
intrinsic value is designated financial statements of a
as the hedging instrument foreign operation
• Changes in the value of
the forward element of
forward contracts when
separating the forward
element and spot element of
a forward contract and
designating as the hedging
instrument only the changes
in the spot element, and
changes in the value of the
foreign currency basis
spread of a financial
instrument when excluding it
from the designation of that
financial instrument as the
hedging instrument.
6. Minimum line items of statement of financial position
• Explicitly stated under
• Explicitly stated under
section 4 of PFRS for • Not explicitly stated
PAS 1
SMEs
Soon to be Atty. Abigail D. Rosos, CPA

7. Prescribed order of presentation of items in the statement of financial position

• Current-Noncurrent • Current-Noncurrent
presentation or order of presentation or order of •Not explicitly stated
liquidity liquidity
8. Earnings per share
• Required presentation • Omitted under PFRS for • Omitted under PFRS for
under PAS 33 SME Small Entities
9. Presentation of Statement of Changes in Equity
• If the only changes to • If the only changes to
equity in the current period equity in the current period
or any comparative period or any comparative period
presented in the financial presented in the financial
statements arise from profit statements arise from profit
• PAS 1 requires that a
or loss, payment of or loss, payment of
statement of changes in
dividends, corrections of dividends, corrections of
equity shall always be
prior period errors, and prior period errors, and
presented as part of the
changes in accounting changes in accounting
complete set of financial
policy, the entity may policy, the entity may
statements.
present a single present a single
statement of income and statement of income and
retained earnings in retained earnings in
place of statement of place of statement of
changes in equity. changes in equity.
10. Preparation of statement of cash flows
• PFRS for SMEs does not • PFRS for Small Entities
• PAS 7 encourages the use explicitly stated its does not explicitly stated
of direct method. encouragement of the use its encouragement of the
of direct method use of direct method
11. Notes to financial statements
• Numerous, detailed and
• Reduced and simplified • Simple and minimal
complex
• With disclosures of • No disclosures of
• With disclosures of
judgments and key judgments and key
judgments and key
estimates estimates
estimates
REVENUE RECOGNITION
12. Recognition of revenue
• PFRS for SMEs • PFRS for Small Entities
• PFRS 15 requires
requires a simpler principle requires a simpler principle
application of a FIVE-STEP
of “transfer of risk and of “transfer of risk and
principle for revenue
rewards” for revenue rewards” for revenue
recognition
recognition recognition
NON-CURRENT ASSET HELD FOR SALE
13. Recognition and measurement of NCAHFS
• NCAHFS is accounted for • No similar classification • No similar classification
Soon to be Atty. Abigail D. Rosos, CPA

are provided under PFRS are provided under PFRS

under PFRS 5.
for SMEs. for Small Entities
OPERATING SEGMENTS
14. Disclosure of Operating segments information
• Since PFRS for SMEs • Since PFRS for Small
• PFRS 8 require listed does not apply to listed Entities does not apply to
entities to disclose such entities, it does not require listed entities, it does not
information. disclosure of such require disclosure of such
information. information.
INTERIM FINANCIAL REPORTING
15. Condensed financial statements
• PAS 34 provides guidance
in the preparation of • PFRS for Small Entities
• PFRS for SMEs does not
condensed financial does not include similar
include similar provisions.
statements for interim provisions.
reporting.
FINANCIAL INSTRUMENTS
16. Classification of financial instruments
· Under PFRS 9, financial • Under PFRS for SMEs, • Under PFRS for Small
instruments are classified as financial instruments are Entities, financial
either amortized, FVOCI or classified as either basic or instruments are classified
FVPL non-basic. Under PFRS as either basic or non-
for SMEs, examples of basic.
basic financial instruments
are:
1.Cash
2.Demand and fixed term
deposits in bank
3.Trade accounts and
notes receivable
4. Loans receivable
5. Commercial papers
6. Investments in
nonputtable ordinary
shares
7. Investments in
nonconvertible and
nonputtable preference
shares
8. Commitment to receive
a loan if the commitment
cannot be net settled in
cash
9.Accounts payable in local
and foreign currency
10. Loans from bank and
Soon to be Atty. Abigail D. Rosos, CPA

other third parties 11.

Bonds and similar debt
instrument
12. Loans to or from
subsidiaries or associates
that are due on demand.
17. Subsequent measurement
•Debt instruments - • Debt instruments -
Amortized cost Equity Amortized cost Equity
instruments instruments
•FVPL – FV
• Publicly traded or FV can • Publicly traded or FV can
• FVOCI – FV
be measured reliably- Fair be measured reliably- Fair
• FAC – Amortized Cost
value value
• Others – cost less • Others – cost less
impairment impairment
18. Designation of financial assets to be measured at FVPL
• Entities are permitted to
designate financial assets to • PFRS for Small Entities
• PFRS for SMEs does not
be measured at FVPL if does not include an such
include an such option.
doing so eliminates option.
accounting mismatch
INVESTMENT IN ASSOCIATE AND JOINT VENTURE
19. Choice of accounting policy
• Cost model
• At Cost less impairment
•Equity Method •Fair value model
• At Equity method
•Equity method
20. Implicit Goodwill – Subsumed in Investment Account
• Goodwill is recognized • Goodwill is recognized
and shall be amortized and shall be amortized
over its estimated useful over its estimated useful
•Included in the carrying
life. life.
amount and not accounted
• If the useful life cannot • If the useful life cannot
for separately. Neither nor
be determined, the life be determined, the life
separate impairment testing
shall base on shall base on
of the goodwill is permitted.
management’s estimate management’s estimate
but shall not exceed 10 but shall not exceed 10
years. years.
21. Difference in reporting periods
•Under PAS 28, the
difference between the end
•The PFRS for SME does •The PFRS for Small
of reporting period of the
not provide such similar Entities does not provide
associate and that of the
provision. such similar provision.
investor shall not exceed 3
months.
INVENTORIES
Soon to be Atty. Abigail D. Rosos, CPA

22. Subsequent Measurement

•Lower of cost or market
value. The market value is
defined as the current
replacement cost of the
inventory, as long as the
•Lower of cost and net •Lower of cost and net market price does not
realizable value (NRV) realizable value (NRV) exceed net realizable
value; also, the market
price shall not be less than
the net realizable value,
less the normal profit
margin.
AGRICULTURE
23. Bearer plants
• Bearer plants are excluded
• There is no equivalent •There is no equivalent
from the scope of PAS 41
provision under PFRS for provision under PFRS for
and are classified as PPE
SME Small Entities
under PAS 16
24. Measurement of biological assets
• An entity that is engaged
in agricultural activity has
an option to measure its
•PAS 41 requires biological • If the fair value of a class biological assets applying
assets to be measured at of biological asset is either CURRENT PRICE
fair value less cost to sell. readily determinable MODEL or COST MODEL.
• There is a rebuttable without undue cost or • An entity shall measure a
presumption that fair value effort, use the fair value biological asset on initial
can be measured reliably for through profit or loss recognition and at each
a biological asset. Only model. reporting date at its current
when that presumption is • If the fair value is not market price or the
rebutted on initial recognition readily determinable, or is probable selling price to
that an entity is permitted to determinable only with willing buyers as of
measure its biological asset undue cost or effort, reporting date.
at cost less accumulated measure the biological • Under cost model, The
depreciation less assets at cost less and entity shall measure a
accumulated impairment accumulated depreciation biological asset at cost less
losses. and impairment. any accumulated
depreciation and any
accumulated impairment
losses.
INTANGIBLE ASSETS
25. Accounting for research and development costs
• Under PAS 38, R&D costs • Under PFRS for SMEs, • Under PFRS for Small
are generally expensed. R&D costs are recognized Entities, R&D costs are
However, development costs as expenses. The standard recognized as expenses.
Soon to be Atty. Abigail D. Rosos, CPA

The standard does not

may be capitalized as does not provide
provide conditions for
intangible asset if certain conditions for capitalization
capitalization of R&D
conditions are met. of R&D costs.
costs.
26. Amortization of intangible assets
• Under PFRS for SMEs, • Under PFRS for Small
all intangible assets shall Entities, all intangible
be considered to have a assets shall be considered
finite life. to have a finite life.
• Under PAS 38, only
• If the life cannot be • If the life cannot be
intangible assets with finite
established reliably, the life established reliably, the life
life are amortized.
shall be determined based shall be determined based
on management’s best on management’s best
estimate but shall not estimate but shall not
exceed 10 years. exceed 10 years.
27. Annual review of depreciation or amortization, useful life and residual value.
• Under PFRS for SMEs, • Under PFRS for Small
• PAS 16 and PAS 38 entity shall review only if Entities, entity shall review
requires an entity to review there are indicators that only if there are indicators
at least at each financial there have been changes that there have been
year-end. since the most recent changes since the most
annual reporting. recent annual reporting.
28. Accounting for Goodwill
• Under PFRS for Small
• Under PFRS for SMEs,
Entities, after initial
after initial recognition, the
recognition, the acquirer
acquirer shall measure
shall measure goodwill
goodwill acquired in a
acquired in a business
business combination at
• Under PAS 36, goodwill combination at cost less
cost less accumulated
arising from a business accumulated depreciation
depreciation and
combination shall not be and accumulated
accumulated impairment
amortized but rather tested impairment losses.
losses. · If the useful life
for impairment at least • If the useful life cannot
cannot be established
annually. be established reliably, the
reliably, the life the life
life the life shall be
shall be determined based
determined based on
on management’s best
management’s best
estimate but shall not
estimate but shall not
exceed 10 years.
exceed 10 years.
GOVERNMENT GRANTS
29. Classification of government grants
• Under PAS 20, government
grants are classified as • The standard does not • The standard does not
either grant related to asset provide such classifications provide such classifications
or grant related to income
Soon to be Atty. Abigail D. Rosos, CPA

30. Recognition of government grants

• Under PFRS for Small
• Under PFRS for SMEs,
Entities, an entity shall
an entity shall recognize
recognize monetary
monetary government
government grants as
grants as follows:
follows:
a) A grant that does not
a) A grant that does not
impose specified future
impose specified future
performance conditions on
• Under PAS 20, a performance conditions on
the recipient is recognized
government grant is the recipient is recognized
in income when the grant
recognized in income over in income when the grant
proceeds are receivable.
the periods necessary to proceeds are receivable.
b) A grant that imposes
match it with the related b) A grant that imposes
specified future
costs for which it is intended specified future
performance conditions on
to compensate, on a performance conditions on
the recipient is recognized
systematic basis. the recipient is recognized
in income only when the
in income only when the
performance conditions are
performance conditions are
met.
met.
c) Grants received before
c) Grants received before
the revenue recognition
the revenue recognition
criteria are satisfied are
criteria are satisfied are
recognized as a liability.
recognized as a liability.
BORROWING COSTS
31. Core principle
• Under PAS 23, borrowing
costs that are directly
• Under FPRS for SME, all • Under FPRS for Small
attributable to the
borrowing costs are Entities, all borrowing costs
acquisition, construction or
recognized as expense in are recognized as expense
production of a qualifying
the period they are in the period they are
asset form part of the cost of
incurred. incurred.
the asset. Other borrowing
costs are expensed
IMPAIRMENT OF ASSETS
32. Value in use computation
• Under PAS 36, when
computing value in use,
cash flow projections shall
• PFRS for SMEs does not • PFRS for SMEs does not
cover a maximum period of
state a specific time limit state a specific time limit
5 years, unless a longer
before extrapolation is before extrapolation is
period can be justified. Cash
required. required.
flow assumptions beyond
the 5-year limit shall be
extrapolated.
33. Presentation of Impairment Loss
• Recognized in P&L, • Recognized in P&L, • Recognized in P&L
Soon to be Atty. Abigail D. Rosos, CPA

unless carried at revalued unless carried at revalued

amount amount
34. Reversal of impairment loss on goodwill
• Reversal of impairment
• No reversal is allowed • No reversal is allowed loss on goodwill in profit or
loss is allowed
·
EMPLOYEE BENEFITS
35. Defined contribution plans
•Under PAS 19, obligations
•Under PFRS for SMEs,
under defined contribution • There is no defined
obligations under defined
plans may be discounted if contribution plan under
contribution plan need not
they do not full due wholly PFRS for Small Entities.
be discounted.
within 12 months.
36. Measurement of defined benefit plan
• An entity should account
• Under PFRS for SMEs,
for the post-employment
the projected unit credit
benefit plan using the
method shall be used only
accrual approach in
if the entity is able to do so
• PAS 19 requires the use of accordance with the
without undue cost or
the projected unit credit minimum retirement
effort.
method when measuring its benefits required under
• Actuarial gains and
obligations on a defined Republic Act (RA) No.
losses are recognized fully
benefit plan. 7641, otherwise known as
either in profit or loss or
The Philippine Retirement
other comprehensive
Pay Law, or company
income. There is an
policy if superior than that
accounting policy choice.
provided by RA 7641
LEASES
37. Classification of leases
• Operating and Finance • Operating and Finance • No classification
Lease Lease provided
38. Accounting for leases by lessee
• Under PFRS 16, a lessee
• Under PFRS for SME,
accounts for a lease by • Under PFRS for Small
lessee classifies a lease
recognizing a right-of-use Entities, lease payments
into a finance lease or an
asset and a lease liability are recognized as expense
operating lease and
(general recognition – by lessee.
account them accordingly.
finance lease classification)
39. Sale and leaseback
• Under PFRS 15, both the •Uses the concept of PAS • No provision for sale and
seller-lessee and buyer- 17, the old lease standard. leaseback transaction
lessor determine if the
transfer of asset qualifies as
Soon to be Atty. Abigail D. Rosos, CPA

a sale.
EVENTS AFTER THE REPORTING PERIOD
40. Declaration of dividends after the reporting period
• Non-adjusting event and • Non-adjusting event and
disclosed only but the disclosed only but the
entity has an option of entity has an option of
presenting dividend as a presenting dividend as a
• Non-adjusting event and
segregated component of segregated component of
disclosed only.
retained earnings at the retained earnings at the
end of reporting period end of reporting period
(appropriation of retained (appropriation of retained
earnings) earnings)
RELATED PARTY DISCLOSURES
41. Key management personnel compensation
• Under PAS 24, an entity is
required to disclose key
management compensation
• Under PFRS for SMEs, • Under PFRS for Small
in total and for each of the
an entity is required to Entities, an entity is
following categories: short-
disclose key management required to disclose key
term employee benefits,
personnel compensation in management personnel
post-employment benefits,
total only. compensation in total only.
termination benefits, other
long-term benefits, share-
based payments.